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Why isn't the rest of the world as rich as the U.S. and Switzerland, the world's two wealthiest countries? Certainly, the income gap between the wealthy nations and the rest of the world is wide.
Brad de Long, an economist at the University of California, Berkeley, illustrates the chasm this way: Less than 15% of the world's population lives in countries where the average per capita level of gross domestic product is greater than $16,000 a year. Nearly 70% of the world's population lives in countries where the average per capita level of GDP is less than $4,000 annually. How to narrow the gap in living standards is among the most fundamental and important questions in economics.
Economists are deeply uncertain of the answer, although there is renewed interest in the wellsprings of growth following the global collapse of communism and the rise of the New Economy in the U.S. But most economists would agree that freer trade and more open borders are essential policy steps toward reducing global poverty.
ALL WRONG. If so, recent developments suggest some grounds for cautious optimism. Despite the failure of last year's global trade summit in Seattle and the antiglobalism street theater in Washington and Prague, the European Union, the U.S., Jordan, Vietnam, South Korea, Mexico, China, Japan, and other countries are signing free trade agreements around the world.
Indeed, while some of the antiglobalism protesters are raising critical issues, they're all wrong when it comes to open borders and poverty. A timely exploration into trade, the wealth of nations, and poverty, is Barriers to Riches. This slim book by Stephen Parente, an economist at the University of Illinois, and Edward Prescott, an economist at the University of Minnesota, reflects a decade of economic research and an intellectual odyssey on the part of the authors. Although many of the chapters with equations and technical terms are written for their peers rather than a general audience, the book is still worth checking out.
Their basic argument runs along these lines: Recipes for creating wealth, such as high-tech innovations and organizational knowledge, are easily transferable in a global economy linked by trade, immigration, and the Internet. "Poor countries do not need to create new ideas to increase their standard of living," they write. "They need only apply existing ideas to the production of goods and services."
The relevant question then, is why don't poor countries use the existing stock of economically useful knowledge more efficiently? In many poor countries, the authors say, domestic industry insiders benefit from government-sanctioned monopolies that stymie technological creativity and organizational change.
COMPETITION IS KEY. Thus, the worldwide move toward open borders is important not only because it transfers ideas and knowledge but because international trade can break down monopolies by introducing competition. "Even if the number of domestic firms in an industry is small, the competition from foreign firms, in either domestic or international markets, can be a strong enough force to eliminate the resistance to the adoption of better technologies and the efficient use of technologies," the authors argue.
Along the way, they touch on several intriguing history questions, such as why modern economic growth started in England and not on the Continent, and why the Industrial Revolution took off in Europe and not in China. To be sure, these fascinating issues have been dealt with in far greater depth in other books, such as Joel Mokyr's The Lever of Riches and David Landes' The Wealth and Poverty of Nations: Why Some Are So Rich and Some Are So Poor.
Nevertheless, after putting Barriers to Riches down, it's clear just what the phrase "New Economy" means. It's the promise and hope that technology and globalization will feed off each other and extend to most of the world the economic bounty that has been largely confined to a core group of modern industrial nations.
Farrell is contributing economics editor for Business Week. His Sound Money radio commentaries are broadcast over National Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BW Online Edited by Beth Belton
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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