World Poverty and Economic
Growth
John Wallis
Department of Economics
University of Maryland
wallis@econ.umd.edu
Modern Economic and Political Development
• The two graphs that follow plot very rough
estimates of real income per capita over the
last 3,000 years and the level of world
population over the last 11,000 years.
• The two graphs show the same pattern: a
rapid increase in both income and population
after 1800, and not much before.
• They are often called “hockey stick” graphs.
Greg Clark, Farewell to Alms
World Population
Source: R.W. Fogel, “Catching Up with the Economy,” AER (1999)
• Something obviously changed about 200 years
ago.
• Before then, the long run rate of per capita
income growth was very close to zero, and
most increases in income were taken up in the
form of population.
Per capita Income
• Per capita income in the United States in
2012, in 2012 dollars, was roughly $50,000
• Over the very long run, since 1840, per capita
income in the United States has grown at
roughly 1.5% per year.
• Using the “rule of 72” that means per capita
income in the US doubles about every 50
years.
Per Capita Income in US, 2012$
•
•
•
•
•
•
•
2012
$50,000
1962
$25,000
1912
$12,500
1862
$ 6,250
1812
$ 3,125
1762
$ 1,062.50
In 2012, 12 countries had per capita income of less
than $1,062.50; and an additional 19 countries had per
capita income less than $2,000; and another 16
countries had incomes less than $3,125.
• 47 countries have lower per capita incomes than the
United States in 1812!
• A significant part of the world’s population still
lives at a standard of living consistent with the
flat part of the hockey stick graph. These
societies are extremely poor.
China or Mexico?
• I often ask my students, where would you
rather live, China or Mexico
• The majority usually say China.
• Then I ask them where they would have
higher incomes?
• The majority usually say China, but…
– $9,055
China
– $15,363
Mexico
• China grows faster now, but Mexico is richer.
Which grow faster?
Rich or poor countries?
• It seems obvious that rich countries grow
faster over the long term than poor countries,
and in a sense that has to be true.
• But do rich countries grow faster when they
are growing than poor countries do when they
are growing?
Per Capita
Income
in 2000
Average
Positive
Growth
Rate
Average
Negative
Growth
Rate
Percent
Positive
Years
Over $20K No oil
0.0388
-0.0233
0.84
$15 to $20K
0.0559
-0.0425
0.76
$10 to $15K
0.0527
-0.0407
0.71
$5 to $10K
0.0525
-0.0459
0.73
$2 to $5K
0.0539
-0.0475
0.66
$.3 to $2K
0.0537
-0.0538
0.56
Per Capita
Income
in 2000
Average
Positive
Growth
Rate
Average
Negative
Growth
Rate
Percent
Positive
Years
Over $20K No oil
0.0388
-0.0233
0.84
$15 to $20K
0.0559
-0.0425
0.76
$10 to $15K
0.0527
-0.0407
0.71
$5 to $10K
0.0525
-0.0459
0.73
$2 to $5K
0.0539
-0.0475
0.66
$.3 to $2K
0.0537
-0.0538
0.56
Per Capita
Income
in 2000
Average
Positive
Growth
Rate
Average
Negative
Growth
Rate
Percent
Positive
Years
Over $20K No oil
0.0388
-0.0233
0.84
$15 to $20K
0.0559
-0.0425
0.76
$10 to $15K
0.0527
-0.0407
0.71
$5 to $10K
0.0525
-0.0459
0.73
$2 to $5K
0.0539
-0.0475
0.66
$.3 to $2K
0.0537
-0.0538
0.56
• Rich countries grow more slowly than poor
countries when they grow.
• The difference over time is not the rate of
growth,
• The difference is the speed with which poor
countries shrink when they are not growing
and the proportion of years in which they
shrink.
• The poorest countries grow and shrink at
almost the same rate, and they only grow in
56% of years.
Two Development Problems
• How can we explain this?
• We need to understand that there are two
development problems.
• The first development problem is how did
countries like the United States manage to
grow so steadily after 1800 or so. This process
applies in about 25 countries with roughly
15% of the world’s population.
The second Development problem
• The second development problem is how do
societies (or countries) acquire the ability, or the
institutions, that enable them to avoid the
shrinking problem? How do they get to the point
where the United States probably was in roughly
1850, where they are able to grow steadily?
• The second development problem is getting from
China (or Congo) to Mexico, the first
development problem is getting from Mexico to
the US.
• The US had a civil war in 1861, what about the
developing world?
Violence and Social Orders: A Conceptual
Framework for Interpreting Recorded
Human History
Douglass North, John Wallis, and Barry
Weingast, Cambridge University Press,
2009.
17
The Concept of Social Orders
• The concept of the social order provides:
- A framework for understanding how violence is
contained.
- A framework within which we can
simultaneously understand the operation of the
political, economic, and other social systems.
There have been three social orders in human history,
the foraging order, natural states, and open access
orders. We want to focus on the last two.
18
The Logic of the Natural State
• The Natural State political system creates
economic rents through limited access and
then uses the rents to sustain order.
• The Natural State is a solution to endemic
violence.
19
Rents
• Rents are a return to an action or choice that
is above the amount necessary to get a person
to perform the action or make the choice.
• If your best job opportunity pays $10 an hour,
and you get a job that pays you $15 an hour,
then you make a rent of $15.
• As long as you are paid more than $10 you will
be willing to work, and anything you make
over $10 an hour is gravy (a Rent).
Natural States/Limited Access Orders
• Natural states create incentive-compatible
agreements among powerful individuals and
groups by recognizing the privileges of each
individual to control valuable resources,
activities, and organizations.
• The interaction of these incentives both
orders the dominant coalition and limits the
use of violence.
• All natural states are limited access orders.
21
The Nature of Rents
• By enabling the formation of larger and better
coordinated groups and organizations, the
natural state creates rents from increased
output and productivity through greater
coordination and scale.
• This is not about maximizing the rents the rich
and powerful receive, it is about creating rents
that are affected by violence or lack of
coordination, and therefore serve as means of
limiting violence and promoting coordination.
22
The Logic of the Open Access Order
• Open access orders control violence by
consolidating control of violence in a single or
small number or organizations: military and
police and placing control of the military in a
political organization.
• The subjecting control of the political
organization to political and economic
competition through open access.
23
Three pieces
• Consolidated control of military and police
• A competitive polity that controls the military, but is
(as a result) potentially very dangerous
• A competitive economy capable of disciplining the
polity.
• Open access – the ability to form organizations at will
– is the key to sustainable political and economic
competition and, therefore, to the dynamics of the
whole social order.
24
The Idea of the Double Balance
• Open access requires that access to economic
and political organizations be open, so entry in
economics disciplines the political process, and
entry into politics disciplines the economic
process. In natural states, limited access to
economic and political organizations is similarly
self-enforcing.
• The idea of a double balance is that economic
and political arrangements must be consistent
with one another, and if they are not, dynamic
forces will be set in motion to “restore” (or affect)
the balance.
The Double Balance
• The close connections between economics
and politics in developing countries is often
perceived as corruption, when it is an inherent
part of the social order.
• The seeming independence of economics and
politics in developing countries is something
of an illusion, since it ignores the deep
connections between the two in an open
access society.
Back to the Two Development Problems
• For most of the last 60 years, development policy
has focused on solving the first development
problem: how to make societies like the US and
Western Europe. By and large those policies have
failed to work, in the sense that they have not
produced measurable improvement.
• We think it is because policies that work in the
developed world are consistent with the logic of
open access, but not consistent with the logic of
natural states.
Impersonal rules
• The question of why the institutions of developed
societies do not work very well, or more
accurately, the same way in natural states is a
deep and complicated one. These include
elections, representative governments, courts,
and free markets.
• Impersonal rules, rules that treat everyone the
same, are an important feature of open access
societies (although not all rules in open access
societies are impersonal), yet they seem to be
very difficult for developing societies to
implement.
Elites and Corruption
• All societies have elites, including the United
States, Russia, and Congo.
• In open access societies elites are subject to
the same rules and the same enforcement as
everyone else. In natural states, elites are
often subject to different rules, and even
when the rules apply to them, they are often
able to subvert the enforcement of the rule.
• We usually call this corruption.
Why can’t natural state enforce impersonal
rules?
• NWW lay out the logic of how societies are
able to limit violence and order relationships
between powerful organizations through the
creation and manipulation of rents.
• To see how the logic of the natural state
works, think of two groups that always fight
(this is a too simple example, but it works).
• How can leaders emerge that can credibly
promise not to fight?
A
B
a
b
a
a
b
b
• In these arrangements, A and B are clearly
better off, they get a large share of the rents.
• But the a’s and b’s are also better off, in the
sense that there is less violence (a big benefit)
and they are more productive because their
society is larger and better organized.
• In fact, the benefits from coordination also
serve to limit violence, by making the
agreement between A and B not to fight more
credible.
A
B
a
a
a
Rents
support
Rule enforcement
• We usually think of rules as being enforced by
a person (or organization) with a monopoly on
violence. Max Weber’s famous definition of
the state is the organization in society with a
monopoly on the legitimate use of violence.
• The monopoly on violence is a characteristic
of open access societies, but not of natural
states.
• A and B are both potentially violent, and
neither has a monopoly on violence.
Third-Party Enforcement
• The logic of the natural state provides a
theoretical framework for understanding how
third party enforcement emerges, without
beginning with a single-actor endowed with a
monopoly of violence.
• A can serve as the third-party enforcer for rules
in B’s organization, and B can serve as the thirdparty enforcer in A’s organization.
• Note, however, that the rules will differ in
different organizations! They are not
impersonal rules.
Identity Rules
• In fact, the relationship between A and B
depends on the fact that A and B are treated
differently from the a’s and b’s, and also that A
and B themselves are treated differently. The
rents that keep the relationship between A and B
credible are usually called privileges,
• A and B cannot share the same privileges, they
must have unique identities.
• In fact, the only rules that natural states can
credibly enforced are based on people’s social
identity. They are identity, not impersonal rules.
Identity Rules
• The oligarch’s in Putin’s Russia have privileges and
operate under a different set of rules. This is not
just because they are powerful, they are powerful
because they are part of a coalition, what NWW
call a dominant coalition, that limits violence and
provides social order.
• If the oligarchs were treated the same as
everyone else, the rents holding the coalition
together would fall apart and the result would be
violence.
The Second Development Problem
• Serious poverty at the level of societies is
associated with “failed states.”
• Failed states are societies where
arrangements between elites have broken
down. Whether civil war is active or not,
these societies, indeed all natural states, live
in a shadow of violence.
• Impersonal rules won’t work in a natural state,
because they are inconsistent with the logic of
the social order.
The second development problem
• The real problem for most developing
countries is not how to make the transition
from Mexico to the US, from being a natural
state to an open access order.
• The real problem is figuring out how to
organize their societies in ways that provides
for order and stability, at the same time that it
enables elites to find it in their interest at
some point to move toward impersonal rules
(the first development problem).