Capital in the Twenty-First Century (12 page)

Per capita GDP in Asia-Africa went from 37 percent of world average in 1950 to 61
percent in 2012.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

The general pattern just described is well known, but a number of points need to be
clarified and refined. First, putting Europe and the Americas together as a single
“Western bloc” simplifies the presentation but is largely artificial. Europe attained
its maximal economic weight on the eve of World War I, when it accounted for nearly
50 percent of global output, and it has declined steadily since then, whereas America
attained its peak in the 1950s, when it accounted for nearly 40 percent of global
output.

Furthermore, both Europe and the Americas can be broken down into two highly unequal
subregions: a hyperdeveloped core and a less developed periphery. Broadly speaking,
global inequality is best analyzed in terms of regional blocs rather than continental
blocs. This can be seen clearly in
Table 1.1
, which shows the distribution of global output in 2012. All these numbers are of
no interest in themselves, but it is useful to familiarize oneself with the principal
orders of magnitude.

The population of the planet is close to 7 billion in 2012, and global output is slightly
greater than 70 trillion euros, so that global output per capita is almost exactly
10,000 euros. If we subtract 10 percent for capital depreciation and divide by 12,
we find that this yields an average per capita monthly income of 760 euros, which
may be a clearer way of making the point. In other words, if global output and the
income to which it gives rise were equally divided, each individual in the world would
have an income of about 760 euros per month.

The population of Europe is about 740 million, about 540 million of whom live in member
countries of the European Union, whose per capita output exceeds 27,000 euros per
year. The remaining 200 million people live in Russia and Ukraine, where the per capita
output is about 15,000 euros per year, barely 50 percent above the global average.
²²
The European Union itself is relatively heterogeneous: 410 million of its citizens
live in what used to be called Western Europe, three-quarters of them in the five
most populous countries of the Union, namely Germany, France, Great Britain, Italy,
and Spain, with an average per capita GDP of 31,000 euros per year, while the remaining
130 million live in what used to be Eastern Europe, with an average per capita output
on the order of 16,000 euros per year, not very different from the Russia-Ukraine
bloc.
²³

The Americas can also be divided into distinct regions that are even more unequal
than the European center and periphery: the US-Canada bloc has 350 million people
with a per capita output of 40,000 euros, while Latin America has 600 million people
with a per capita output of 10,000 euros, exactly equal to the world average.

Sub-Saharan Africa, with a population of 900 million and an annual output of only
1.8 trillion euros (less than the French GDP of 2 trillion), is economically the poorest
region of the world, with a per capita output of only 2,000 euros per year. India
is slightly higher, while North Africa does markedly better, and China even better
than that: with a per capita output of 8,000 euros per year, China in 2012 is not
far below the world average. Japan’s annual per capita output is equal to that of
the wealthiest European countries (approximately 30,000 euros), but its population
is such a small minority in the greater Asian population that it has little influence
on the continental average, which is close to that of China.
²⁴

To sum up, global inequality ranges from regions in which the per capita income is
on the order of 150–250 euros per month (sub-Saharan Africa, India) to regions where
it is as high as 2,500–3,000 euros per month (Western Europe, North America, Japan),
that is, ten to twenty times higher. The global average, which is roughly equal to
the Chinese average, is around 600–800 euros per month.

These orders of magnitude are significant and worth remembering. Bear in mind, however,
that the margin of error in these figures is considerable: it is always much more
difficult to measure inequalities between countries (or between different periods)
than within them.

For example, global inequality would be markedly higher if we used current exchange
rates rather than purchasing power parities, as I have done thus far. To understand
what these terms mean, first consider the euro/dollar exchange rate. In 2012, a euro
was worth about
$
1.30 on the foreign exchange market. A European with an income of 1,000 euros per
month could go to his or her bank and exchange that amount for
$
1,300. If that person then took that money to the United States to spend, his or her
purchasing power would be
$
1,300. But according to the official International Comparison Program (ICP), European
prices are about 10 percent higher than American prices, so that if this same European
spent the same money in Europe, his or her purchasing power would be closer to an
American income of
$
1,200. Thus we say that
$
1.20 has “purchasing power parity” with 1 euro. I used this parity rather than the
exchange rate to convert American GDP to euros in
Table 1.1
, and I did the same for the other countries listed. In other words, we compare the
GDP of different countries on the basis of the actual purchasing power of their citizens,
who generally spend their income at home rather than abroad.
²⁵

FIGURE 1.4.
   Exchange rate and purchasing power parity: euro/dollar

In 2012, 1 euro was worth
$
1.30 according to current exchange rate, but
$
1.20 in purchasing power parity.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

The other advantage of using purchasing power parities is that they are more stable
than exchange rates. Indeed, exchange rates reflect not only the supply and demand
for the goods and services of different countries but also sudden changes in the investment
strategies of international investors and volatile estimates of the political and/or
financial stability of this or that country, to say nothing of unpredictable changes
in monetary policy. Exchange rates are therefore extremely volatile, as a glance at
the large fluctuations of the dollar over the past few decades will show. The dollar/euro
rate went from
$
1.30 per euro in the 1990s to less than
$
0.90 in 2001 before rising to around
$
1.50 in 2008 and then falling back to
$
1.30 in 2012. During that time, the purchasing power parity of the euro rose gently
from roughly
$
1 per euro in the early 1990s to roughly
$
1.20 in 2010 (see
Figure 1.4
).
²⁶

Despite the best efforts of the international organizations involved in the ICP, there
is no escaping the fact that these purchasing power parity estimates are rather uncertain,
with margins of error on the order of 10 percent if not higher, even between countries
at comparable levels of development. For example, the most recent available survey
shows that while some European prices (for energy, housing, hotels, and restaurants)
are indeed higher than comparable American prices, others are sharply lower (for health
and education, for instance).
²⁷
In theory, the official estimates weight all prices according to the weight of various
goods and services in a typical budget for each country, but such calculations clearly
leave a good deal of room for error, particularly since it is very hard to measure
qualitative differences for many services. In any case, it is important to emphasize
that each of these price indices measures a different aspect of social reality. The
price of energy measures purchasing power for energy (which is greater in the United
States), while the price of health care measures purchasing power in that area (which
is greater in Europe). The reality of inequality between countries is multidimensional,
and it is misleading to say that it can all be summed up with a single index leading
to an unambiguous classification, especially between countries with fairly similar
average incomes.

In the poorer countries, the corrections introduced by purchasing power parity are
even larger: in Africa and Asia, prices are roughly half what they are in the rich
countries, so that GDP roughly doubles when purchasing power parity is used for comparisons
rather than the market exchange rate. This is chiefly a result of the fact that the
prices of goods and services that cannot be traded internationally are lower, because
these are usually relatively labor intensive and involve relatively unskilled labor
(a relatively abundant factor of production in less developed countries), as opposed
to skilled labor and capital (which are relatively scarce in less developed countries).
²⁸
Broadly speaking, the poorer a country is, the greater the correction: in 2012, the
correction coefficient was 1.6 in China and 2.5 in India.
²⁹
At this moment, the euro is worth 8 Chinese yuan on the foreign exchange market but
only 5 yuan in purchasing power parity. The gap is shrinking as China develops and
revalues the yuan (see
Figure 1.5
). Some writers, including Angus Maddison, argue that the gap is not as small as it
might appear and that official international statistics underestimate Chinese GDP.
³⁰

Because of the uncertainties surrounding exchange rates and purchasing power parities,
the average per capita monthly incomes discussed earlier (150–250 euros for the poorest
countries, 600–800 euros for middling countries, and 2,500–3,000 euros for the richest
countries) should be treated as approximations rather than mathematical certainties.
For example, the share of the rich countries (European Union, United States, Canada,
and Japan) in global income was 46 percent in 2012 if we use purchasing power parity
but 57 percent if we use current exchange rates.
³¹
The “truth” probably lies somewhere between these two figures and is probably closer
to the first. Still, the orders of magnitude remain the same, as does the fact that
the share of income going to the wealthy countries has been declining steadily since
the 1970s. Regardless of what measure is used, the world clearly seems to have entered
a phase in which rich and poor countries are converging in income.

FIGURE 1.5.
   Exchange rate and purchasing power parity: euro/yuan

In 2012, 1 euro was worth 8 yuan according to current exchange rate, but 5 yuan in
purchasing power parity.

Sources and series: see
piketty.pse.ens.fr/capital21c
.