Capital in the Twenty-First Century (13 page)

To simplify the exposition, the discussion thus far has assumed that the national
income of each continental or regional grouping coincided with its domestic product:
the monthly incomes indicated in
Table 1.1
were obtained simply by deducting 10 percent from GDP (to account for depreciation
of capital) and dividing by twelve.

In fact, it is valid to equate income and output only at the global level and not
at the national or continental level. Generally speaking, the global income distribution
is more unequal than the output distribution, because the countries with the highest
per capita output are also more likely to own part of the capital of other countries
and therefore to receive a positive flow of income from capital originating in countries
with a lower level of per capita output. In other words, the rich countries are doubly
wealthy: they both produce more at home and invest more abroad, so that their national
income per head is greater than their output per head. The opposite is true for poor
countries.

More specifically, all of the major developed countries (the United States, Japan,
Germany, France, and Britain) currently enjoy a level of national income that is slightly
greater than their domestic product. As noted, however, net income from abroad is
just slightly positive and does not radically alter the standard of living in these
countries. It amounts to about 1 or 2 percent of GDP in the United States, France,
and Britain and 2–3 percent of GDP in Japan and Germany. This is nevertheless a significant
boost to national income, especially for Japan and Germany, whose trade surpluses
have enabled them to accumulate over the past several decades substantial reserves
of foreign capital, the return on which is today considerable.

I turn now from the wealthiest countries taken individually to continental blocs taken
as a whole. What we find in Europe, America, and Asia is something close to equilibrium:
the wealthier countries in each bloc (generally in the north) receive a positive flow
of income from capital, which is partly canceled by the flow out of other countries
(generally in the south and east), so that at the continental level, total income
is almost exactly equal to total output, generally within 0.5 percent.
³²

The only continent not in equilibrium is Africa, where a substantial share of capital
is owned by foreigners. According to the balance of payments data compiled since 1970
by the United Nations and other international organizations such as the World Bank
and International Monetary Fund, the income of Africans is roughly 5 percent less
than the continent’s output (and as high as 10 percent lower in some individual countries).
³³
With capital’s share of income at about 30 percent, this means that nearly 20 percent
of African capital is owned by foreigners: think of the London stockholders of the
Marikana platinum mine discussed at the beginning of this chapter.

It is important to realize what such a figure means in practice. Since some kinds
of wealth (such as residential real estate and agricultural capital) are rarely owned
by foreign investors, it follows that the foreign-owned share of Africa’s manufacturing
capital may exceed 40–50 percent and may be higher still in other sectors. Despite
the fact that there are many imperfections in the balance of payments data, foreign
ownership is clearly an important reality in Africa today.

If we look back farther in time, we find even more marked international imbalances.
On the eve of World War I, the national income of Great Britain, the world’s leading
investor, was roughly 10 percent above its domestic product. The gap was more than
5 percent in France, the number two colonial power and global investor, and Germany
was a close third, even though its colonial empire was insignificant, because its
highly developed industrial sector accumulated large claims on the rest of the world.
British, French, and German investment went partly to other European countries and
the United States and partly to Asia and Africa. Overall, the European powers in 1913
owned an estimated one-third to one-half of the domestic capital of Asia and Africa
and more than three-quarters of their industrial capital.
³⁴

In theory, the fact that the rich countries own part of the capital of poor countries
can have virtuous effects by promoting convergence. If the rich countries are so flush
with savings and capital that there is little reason to build new housing or add new
machinery (in which case economists say that the “marginal productivity of capital,”
that is, the additional output due to adding one new unit of capital “at the margin,”
is very low), it can be collectively efficient to invest some part of domestic savings
in poorer countries abroad. Thus the wealthy countries—or at any rate the residents
of wealthy countries with capital to spare—will obtain a better return on their investment
by investing abroad, and the poor countries will increase their productivity and thus
close the gap between them and the rich countries. According to classical economic
theory, this mechanism, based on the free flow of capital and equalization of the
marginal productivity of capital at the global level, should lead to convergence of
rich and poor countries and an eventual reduction of inequalities through market forces
and competition.

This optimistic theory has two major defects, however. First, from a strictly logical
point of view, the equalization mechanism does not guarantee global convergence of
per capita income. At best it can give rise to convergence of per capita output, provided
we assume perfect capital mobility and, even more important, total equality of skill
levels and human capital across countries—no small assumption. In any case, the possible
convergence of output per head does
not
imply convergence of income per head. After the wealthy countries have invested in
their poorer neighbors, they may continue to own them indefinitely, and indeed their
share of ownership may grow to massive proportions, so that the per capita national
income of the wealthy countries remains permanently greater than that of the poorer
countries, which must continue to pay to foreigners a substantial share of what their
citizens produce (as African countries have done for decades). In order to determine
how likely such a situation is to arise, we must compare the rate of return on capital
that the poor countries must pay to the rich to the growth rates of rich and poor
economies. Before proceeding down this road, we must first gain a better understanding
of the dynamics of the capital/income ratio within a given country.

Furthermore, if we look at the historical record, it does not appear that capital
mobility has been the primary factor promoting convergence of rich and poor nations.
None of the Asian countries that have moved closer to the developed countries of the
West in recent years has benefited from large foreign investments, whether it be Japan,
South Korea, or Taiwan and more recently China. In essence, all of these countries
themselves financed the necessary investments in physical capital and, even more,
in human capital, which the latest research holds to be the key to long-term growth.
³⁵
Conversely, countries owned by other countries, whether in the colonial period or
in Africa today, have been less successful, most notably because they have tended
to specialize in areas without much prospect of future development and because they
have been subject to chronic political instability.

Part of the reason for that instability may be the following. When a country is largely
owned by foreigners, there is a recurrent and almost irrepressible social demand for
expropriation. Other political actors respond that investment and development are
possible only if existing property rights are unconditionally protected. The country
is thus caught in an endless alternation between revolutionary governments (whose
success in improving actual living conditions for their citizens is often limited)
and governments dedicated to the protection of existing property owners, thereby laying
the groundwork for the next revolution or coup. Inequality of capital ownership is
already difficult to accept and peacefully maintain within a single national community.
Internationally, it is almost impossible to sustain without a colonial type of political
domination.

Make no mistake: participation in the global economy is not negative in itself. Autarky
has never promoted prosperity. The Asian countries that have lately been catching
up with the rest of the world have clearly benefited from openness to foreign influences.
But they have benefited far more from open markets for goods and services and advantageous
terms of trade than from free capital flows. China, for example, still imposes controls
on capital: foreigners cannot invest in the country freely, but that has not hindered
capital accumulation, for which domestic savings largely suffice. Japan, South Korea,
and Taiwan all financed investment out of savings. Many studies also show that gains
from free trade come mainly from the diffusion of knowledge and from the productivity
gains made necessary by open borders, not from static gains associated with specialization,
which appear to be fairly modest.
³⁶

To sum up, historical experience suggests that the principal mechanism for convergence
at the international as well as the domestic level is the diffusion of knowledge.
In other words, the poor catch up with the rich to the extent that they achieve the
same level of technological know-how, skill, and education, not by becoming the property
of the wealthy. The diffusion of knowledge is not like manna from heaven: it is often
hastened by international openness and trade (autarky does not encourage technological
transfer). Above all, knowledge diffusion depends on a country’s ability to mobilize
financing as well as institutions that encourage large-scale investment in education
and training of the population while guaranteeing a stable legal framework that various
economic actors can reliably count on. It is therefore closely associated with the
achievement of legitimate and efficient government. Concisely stated, these are the
main lessons that history has to teach about global growth and international inequalities.

{TWO}

Growth: Illusions and Realities

A global convergence process in which emerging countries are catching up with developed
countries seems well under way today, even though substantial inequalities between
rich and poor countries remain. There is, moreover, no evidence that this catch-up
process is primarily a result of investment by the rich countries in the poor. Indeed,
the contrary is true: past experience shows that the promise of a good outcome is
greater when poor countries are able to invest in themselves. Beyond the central issue
of convergence, however, the point I now want to stress is that the twenty-first century
may see a return to a low-growth regime. More precisely, what we will find is that
growth has in fact always been relatively slow except in exceptional periods or when
catch-up is occurring. Furthermore, all signs are that growth—or at any rate its demographic
component—will be even slower in the future.

To understand what is at issue here and its relation to the convergence process and
the dynamics of inequality, it is important to decompose the growth of output into
two terms: population growth and per capita output growth. In other words, growth
always includes a purely demographic component and a purely economic component, and
only the latter allows for an improvement in the standard of living. In public debate
this decomposition is too often forgotten, as many people seem to assume that population
growth has ceased entirely, which is not yet the case—far from it, actually, although
all signs indicate that we are headed slowly in that direction. In 2013–2014, for
example, global economic growth will probably exceed 3 percent, thanks to very rapid
progress in the emerging countries. But global population is still growing at an annual
rate close to 1 percent, so that global output per capita is actually growing at a
rate barely above 2 percent (as is global income per capita).

Before turning to present trends, I will go back in time and present the stages and
orders of magnitude of global growth since the Industrial Revolution. Consider first
Table 2.1
, which indicates growth rates over a very long period of time. Several important
facts stand out. First, the takeoff in growth that began in the eighteenth century
involved relatively modest annual growth rates. Second, the demographic and economic
components of growth were roughly similar in magnitude. According to the best available
estimates, global output grew at an average annual rate of 1.6 percent between 1700
and 2012, 0.8 percent of which reflects population growth, while another 0.8 percent
came from growth in output per head.

Such growth rates may seem low compared to what one often hears in current debates,
where annual growth rates below 1 percent are frequently dismissed as insignificant
and it is commonly assumed that real growth doesn’t begin until one has achieved 3–4
percent a year or even more, as Europe did in the thirty years after World War II
and as China is doing today.

In fact, however, growth on the order of 1 percent a year in both population and per
capita output, if continued over a very long period of time, as was the case after
1700, is extremely rapid, especially when compared with the virtually zero growth
rate that we observe in the centuries prior to the Industrial Revolution.