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Changes in the Wealth of Nations (P Federal Reserve Bank of Minneapolis Spring 1993 Changes in the Wealth of Nations (p. 3) Stephen L. Parente Edward C. Prescott Early Progress on the "Problem of Economic Development" (p. 17) James A. Schmitz, Jr. Federal Reserve Bank of Minneapolis Quarterly Review Vol. 17, No. 2 ISSN 0271-5287 This publication primarily presents economic research aimed at improving policymaking by the Federal Reserve System and other governmental authorities. Any views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Editor: Arthur J. Rolnick Associate Editors: S. Rao Aiyagari, John H. Boyd, Warren E. Weber Economic Advisory Board: R. Anton Braun, John Geweke, Edward J. Green, Ellen R. McGrattan, James A. Schmitz, Jr. Managing Editor: Kathleen S. Rolfe Article Editor/Writers: Kathleen S. Rolfe, Martha L. Starr Designer: Phil Swenson Associate Designer: Beth Leigh Grorud Typesetters: Jody Fahland, Correan M. Hanover Editorial Assistant: Diane M. Sanborn Circulation Assistant: Cheryl Vukelich The Quarterly Review is published by the Research Department Direct all comments and questions to of the Federal Reserve Bank of Minneapolis. Subscriptions are available free of charge. Quarterly Review Research Department Articles may be reprinted if the reprint fully credits the source— Federal Reserve Bank of Minneapolis the Minneapolis Federal Reserve Bank as well as the Quarterly P.O. Box 291 Review. Please include with the reprinted article some version of Minneapolis, Minnesota 55480-0291 the standard Federal Reserve disclaimer and send the Minneapo- (612-340-2341 / FAX 612-340-2366). lis Fed Research Department a copy of the reprint. Federal Reserve Bank of Minneapolis Quarterly Review Spring 1993 Changes in the Wealth of Nations Stephen L. Parente* Edward C. Prescott* Assistant Professor of Economics Adviser Northeastern University Research Department Federal Reserve Bank of Minneapolis and Professor of Economics University of Minnesota In his book The Wealth of Nations, Adam Smith (1776) the development facts are, we should have a better idea challenges the mercantile view that a nation becomes what features belong and don't belong in a model of eco- wealthier as its stocks of gold and silver increase. He ar- nomic development. gues that the wealth of a nation is not measured by its We emphasize that this study is factual rather than em- supply of precious metals, but by the productivity of its la- pirical. We have no underlying probability models here, bor force. An increase in the amount of gold bullion in a and we draw no inferences to larger populations. We simp- country may make its currency worth more than another ly report what happened over the time periods for which country's, but the gold increase will not increase the rela- we have been able to find useful data. Our approach is thus tive worker productivity in the two countries. Accepting in the tradition of Simon Kuznets (1966). His reporting of Smith's definition of a nation's wealth leads naturally to the growth facts was important in Robert M. Solow's per-capita gross domestic product (GDP) as the appropri- (1970) development of the neoclassical growth theory. ate measure of that wealth. This theory was a major advance in economics. It has In this article, we use per-capita GDP data to deter- proven useful not only in accounting for the growth facts, mine what we call the economic development facts. We but also in accounting for business cycle fluctuations and systematically examine the nature of the distribution of determining the welfare consequences of economic poli- wealth across nations and describe how this distribution cies. We hope that our study will stimulate the creation of has evolved over specific historical periods. We also de- theories that will prove as useful in analyzing the area of scribe the wealth mobility of nations, that is, the changes economic development. in the relative wealth of individual nations. Our study reveals that the most prominent features of Such a systematic report is important for two reasons. the data over the time periods examined—primarily, 1960- First, data serve as a test of theory. Any theory inconsis- 85—are wealth disparity and wealth mobility. These fea- tent with the development facts cannot help us understand tures can be summarized as four development facts: the differences in the wealth of nations—or evaluate eco- • In every year studied, there is great wealth disparity nomic policies that might help reduce those differences. (For a description of the successes and failures of existing theories, see the article by James A. Schmitz, Jr., in this issue.) Second, data can play an important role in the crea- •The authors acknowledge the financial support of the National Science Founda- tion, and they thank R. Anton Braun, John Geweke, and particularly Fernando Alvarez tion and evolution of successful theory. If we know what and James A. Schmitz, Jr., for constructive comments. 3 among countries. In 1985, for example, the highest- In 1969,120 countries in the world had a population of output countries were 29 times richer than the lowest- at least 1 million. Of these 120 countries, complete data are output countries. not available for 18. Eliminating these countries reduces • Wealth disparity has not increased or decreased. The our data set to a total of 102 countries for the 1960-85 distance between the richest and poorest countries re- period. mained essentially the same throughout the 1960-85 • Other Data Sources period. Obviously, we would like to have data that extend over • The wealth distribution has shifted up: the richer got longer time periods. The problem is that the further back richer, but the poor did too. Therefore, no absolute we go, the set of countries for which data are available poverty trap exists. shrinks. The number of countries for which we have been • There have been development miracles and disasters. able to find observations dating back at least to the begin- During the 1960-85 period, 10 countries increased ning of the 20th century is 29. When possible, we will their wealth relative to the wealth leaders by a factor also consider this 29-country data set here. of 2 or more. These miracles were matched by an This longer data set comes from three different sources. equal number of development disasters: during the Observations for 16 of the 29 countries are those of Angus same period, the relative wealth of another 10 coun- Maddison (1991). These 16 countries are all advanced in- tries decreased by a factor of about 2. dustrialized countries, and observations on them begin in the year 1820. We supplement Maddison's data with data These are the facts that a theory of development must be from the work of J. Bradford De Long (1988) and Pierre consistent with if it is to be taken seriously. Van der Eng (1992). The De Long data begin in 1870 for Methodology Maddison's 16 plus 6 other countries. These others were, according to De Long, very similar to the Maddison 16 in Sources of Data their 1870 potential for development. The Van der Eng da- In the past, analyses of the evolution of the wealth distri- ta begin in 1900 and include data for Japan and for 7 other bution and wealth mobility have been restricted to a set of Asian countries not included in either the Maddison or the currently rich countries because these were the only coun- De Long data. A problem with combining data from these tries for which per-capita output data were available over three sources is that while the periods they cover overlap, a sufficiently long period of time. Today sufficiently long the specific years for which they actually have data differ. data series are available for most countries of the world. For a list of all the countries and years included in our We use one main data set, supplemented with data from study, grouped by the source of their data, see the Appen- three other sources. dix. • The Main Data Source Types of Comparisons Our primary data set is that of Robert Summers and Alan We compare the wealth of nations in two different ways: Heston (1991). They have compiled observations for 138 across different countries at one point in time and across countries for the nearly 40 years between 1950 and 1988. different points in time for individual countries.* Unfortunately, however, observations for all 138 coun- tries in the Summers and Heston data set are not available • At a Point in Time for all years. Because we want to consider the largest pop- To compare wealth across nations at a point in time, com- ulation of countries over the longest period of time, we parable measures of per-capita GDP must be constructed. use their data for just the 26 years between 1960 and 1985. All our data sources construct such measures using a com- As long as observations for a country are available for all mon set of prices. Summers and Heston, De Long, and years in the 1960-85 period and as long as that country Van der Eng use a common set of prices made up of the had a population in 1969 of at least 1 million, that country weighted averages across countries of the relative prices is included in our analysis. We exclude countries with pop- ulations smaller than 1 million because the wealth of such countries is too easily affected by external factors. Missing 1 Summers and Heston rate the quality of data for each country, in their survey. We data and small populations are the only reasons we exclude do not exclude countries based on these quality ratings because we think even the countries.1 poorest-rated data in the survey contain valuable information.
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