World Institute for Development Economics Research

August 2000 No. 1/2000

IT and Economic Growth WIDER lessons on IT by Matti Pohjola Visual Communications Group he popular view is that information technology will Tchange the world by boosting productivity and income. But while IT has many visible effects on the modern economy—the growth in electronic commerce for example—its impact on productivity and economic growth has been surprisingly difficult to detect. Although there is increasing evidence that IT investment is associated with an improvement in company perform- ance in industrial countries, studies that look at the bigger macroeconomic picture find little correlation between IT investment and overall productivity—and some studies even find a negative correlation. Explaining the Productivity Paradox How can we explain this discrepancy between the micro and macro pictures? The table on page 2 sheds new light on this paradox by displaying results from a UNU/WIDER study for three countries—Finland, Singapore and South rofessor Hans van Ginkel, Rector of the Korea—and comparing them with findings for the United PUnited Nations University, Professor Matti States economy by Daniel Sichel (see the references at the Pohjola, Principal Academic Officer and Acting end of this article). All these countries have invested large Director of UNU/WIDER, Professor Danny amounts in IT over the past two decades; computer capital Quah, London School of Economics, Mr Jason (hardware etc.) has grown at annual rates ranging from 25 Dedrick, Center for Research on Information per cent in Finland to 40 per cent in South Korea. Technology and Organizations (CRITO) Economists measure the contribution of computers to GDP University of California Irvine, and Mr growth by first multiplying the growth rate of computer Veli-Pekka Niitamo, Director Global Resourcing capital by the share in national income of the return on Nokia made presentations at a UNU panel on computer investment. In doing so we find that computers ‘Information Technology, Economic Growth and have accounted for the greatest share of GDP growth (32 Development’ on 5 May 2000 at the UN per cent) in South Korea, and the smallest share (8 per Headquarters in New York. This was one of the cent) in the United States. These estimates measure the panels organized as part of the preparatory impact of computers and peripherals as a factor of process for the high-level segment of ECOSOC production, and do not measure the effect on GDP of their 2000 on the theme ‘Development and manufacture. International Cooperation in the XXI Century: The Role of Information Technology in the The last two rows in the table show that the growth Context of a Knowledge-based Economy’. contribution of computers in the United States has doubled in recent years. At the same time the growth rate of GNP in Over 100 people attended the meeting, the United States has also doubled, so the relative share of including delegates, UN officials and NGO IT in growth has been virtually unchanged. It does seem, representatives. The articles in this issue of however, that IT investment has become more profitable. WIDER Angle are based on the presentations made at this policy panel session. The increased productivity of IT investment may be a

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The United Nations University (continued from page 1) result of networking—the fact that all of the world’s computers can be linked to each other via the Internet. In this way enterprises and house- holds that use IT benefit from the investments made by others. Moreover, enterprises may have learnt to modify their organizations and practices so that the return on these investments has risen. The table (below) also suggests that the ‘productivity paradox’ has been largely an American phenomenon. IT’s growth contribution has been much greater in other countries for which data is available. In Finland Source: International Data Corporation and World Bank the stock of computers has grown at practically the same rate as in the Countries: Australia (AUS), China (CHN), Denmark (DNK), Finland (FIN), United States. Computers have had India (IDN), South Korea (KOR), Malaysia (MYS), Singapore (SGP), a bigger impact on GDP growth in South Africa (ZAF), Sweden (SWE), Thailand (THA), Turkey (TUR), Finland (16 per cent) because they United Kingdom (UK), United States (USA). account for a larger share of national income in Finland than in the United IT investment has been almost as investment share in GDP is very States. This does not, however, great as the effects of all other fixed high in such fast growing economies imply that IT investment is more investment combined. On the other as China, South Korea, and productive in Finland. Rather, hand there has been no corresp- Thailand. But the IT content of Finland has a more capital-intensive onding growth effect in our sample investment is low. However, in economy than the United States— of developing countries. It would develped countries such as Finland partly because of greater intervention therefore seem that developing and the United States, the in the labour market—so that countries have not yet invested investment ratio is low but the share capital produces a greater proportion sufficiently in physical infrastructure of IT investment in total investment of Finland’s national income. and human capital to make is high. IT investment worthwhile. Conse- IT in Developing Countries quently, from a historical perspec- Policy Priorities According to UNU/WIDER’s cross- tive, IT does not yet seem to offer the Investment in infrastructure, country comparison of a larger developing countries a shortcut to physical capital, and education sample of 23 OECD countries in prosperity. is still the key to economic 1980-95, investment in computers The figure above illustrates the development. This is, of course, a and software is strongly correlated basic difference between developed long-standing recommendation. with economic growth. The effect of and developing countries. The But it needs to be updated for a world economy in which the use of IT is spreading fast, so that no country—rich or poor—can ignore the need to invest in IT. Thus, the UNU/WIDER study concludes that the IT content of investments in infrastructure, physical capital, and education must be raised. The old policy recommendation is therefore given a new twist. Besides providing IT education and training for their citizens, govern- ments can themselves become sophisticated users of information technology. By developing advanced applications of IT—and by Source: Matti Pohjola becoming a model for the private

2 sector—governments can change the attitudes of workers, firms and The Weightless Developing Economy consumers and lower their costs of adopting IT. It is the use of by Danny T. Quah information technology, not necessarily its production, which or the last fifty years, economists of a paper blueprint, or even an idea matters for economic development Fand development practitioners in someone’s mind. The form that in this new century. have viewed the accumulation of they take is largely immaterial to References: physical capital—machines, their value. Hence, intellectual buildings, and highways—as central property is more difficult to protect Pohjola, M. (ed.) Information to economic growth. However, the in the new weightless economy. Technology, Productivity and evidence shows that technological Moreover, these information strings Economic Growth: International advance, reflecting the accumula- do not simply plug into a Evidence and Implications tion of knowledge, is more production process as before. for Economic Development, important. Today, there are new Instead, consumers deal with them Forthcoming Oxford University opportunities to use knowledge for directly; from your PC you can Press publication. faster development; outsourcing download computer software, software construction and data Sichel, D.E. ‘Computers and Aggre- digital entertainment, or use the entry to workers in emerging gate Economic Growth: An Web to purchase health consulta- economies (such as India) is just one Update’. Business Economics 34, tions, financial instruments, and example. April 1999. other valuable items. And the The author is the Principal Economic progress has been knowl- enjoyment of these products by one Academic Officer and Acting edge-driven since the Industrial consumer does not preclude their Director of UNU/WIDER and Revolution of the late 18th century, consumption or use by anyone else. director of research on and you could argue that the ancient This is qualitatively different from the economics of IT. Further Sumerians started the process when the way consumers interacted with information at www.wider.unu.edu. they first carved financial records the old manufacturing economy. onto clay tablets, some 5,000 years Policies for a Weightless IT and Growth ago. Indeed, many of today’s worries—job destruction and rising Economy Although IT has many inequality—were evident when Obviously, encouraging ongoing visible effects on the spinning jennies and steam engines technological development is modern economy, its first came into use. critical to the growth of a weight- impact on productivity The Weightless Economy less economy. Less obviously, systems for managing intellectual and economic growth However, the present revolution in assets must be changed—sometimes has been surprisingly information and communications radically. Protecting intellectual difficult to detect technology (ICT) does raise fresh property (and thus the incentive to questions. Today’s weightless innovate) without at the same time No country can avoid economy consists of ICT together creating socially harmful mono- heavy investment in IT if with intellectual assets—patents polies is a key issue in the it wishes to preserve and together with copyrights, trade- weightless economy, whether it is raise its living standards marks, images and so forth—as well software or the DNA profile of as electronic libraries, databases and Iceland’s population. Access is also It is the use of information biotechnologies. We are seeing the critical: worldwide there are technology, not necessarily emergence of an economy that is potentially six billion users for the its production, which qualitatively different from the one products of the weightless economy, that dominated the 20th century. matters for development but getting them hooked up to the Knowledge workers generate the new economy is not straightforward. Investment in physical technological base of a Thus governments and collective capital, and education is manufacturng economy. Intellectual bodies should contribute more to the property rights such as patents fixed costs that would otherwise still the key to economic inhibit global access, and to development. But the protect their ideas. In contrast, the new weightless economy is built on encouraging the spread of IT content of these strings of information; these may knowledge about (and desire to use) investments must be raised exist on the hard disk of a PC or on these exciting, but sometimes an Internet server, they may consist complex, knowledge products. (continued on page 4)

3 (continued from page 3) Lessons from Ancient Protecting the Incentive to China Innovate The Weightless At the end of the Sung dynasty in The weightless economy is a new the 14th century, China stood at the form of the knowledge-based Economy brink of an industrial revolution— economy. Historically, societies 400 years before the industrial developed intellectual property revolution arrived in late-18th rights to protect the incentive to Economic progress is century Europe. China’s output of innovate. At times this meant lost now knowledge driven iron per capita was higher then than efficiency, but the spur to Intellectual property is that of 18th century Europe—the innovation was worth it. As ICT and other technologies drive economies more difficult to protect in the weightless Photo by Martti Lintunen economy Governments must encourage the spread of knowledge and increase access Ancient China shows that science alone is not enough; supportive institutions are critical

IT investment is boosting productivity across the world, including Africa result of its lead in blast-furnace to become progressively weightless, Danny Quah is a Professor of technology. Yet, the next five so protecting innovation incentives Economics at the London School of centuries saw dismal economic becomes even more important—but Economics, and a participant in the decline, instead of sweeping old systems for achieving this are UNU/WIDER project on Informa- economic change. Why was this so? now less effective. The challenge is tion Technology and Growth led by a crucial one if the weightless Professor Matti Pohjola. This Fundamentally, China’s failure to economy is to prosper. accelerate its growth was a failure article is based on his presentation of demand. In 14th century China, Societies must also develop the skills to the UNU panel on IT, Economic technological knowledge was tightly and attitudes that are necessary to Growth and Development (UN controlled—scholars and bureau- consuming and appreciating ECOSOC 2000 preparatory crats kept the secrets to complex technologies. Because process) in New York on 5 May themselves and it was said that the participation matters—not just 2000. Emperor ‘owned’ time itself. A large access—openness to new ideas is Further details of UNU/WIDER customer base never developed, and crucial to societies seeking to research on information technology technological development develop a weightless economy. and its economic impact can be languished after its early and China in the 14th century is a found on our Web site at: promising start. A European of the dramatic case in point. It was www.wider.unu.edu. Danny Quah’s eighteenth century was, in contrast, insufficient scientific knowledge home page at the LSE is: eager to use the products of the new among the general population and http://econ.lse.ac.uk/staff/dquah/ spinning jenny and steam engine within the governing elite about the and strong consumer demand benefits of science—not inadequate encouraged more technological scientific knowledge itself—that progress. So, Europe took the lead, crippled an entire nation’s prospects and China languished until the late for economic growth and develop- twentieth century. ment.

4 National IT Policies for Developing Countries by Jason Dedrick and Kenneth L. Kraemer

nformation technology (IT) and well-developed supplier base are the IT industry (see table on page Ithe Internet present opportunities likely to succeed in hardware, and 6), and present many opportunities for developing countries to improve only a few developing countries are for new entrants. productivity, support development, in such a position. and participate more fully in the National Capabilities Fortunately, there is an option world economy. Countries that fail available to developing countries In order to support both IT use and to adopt these technologies risk that encourages IT use while also production, countries need to isolation from international markets creating opportunities to develop a develop human resources and and from the wealth of information local industry. This option, which information infrastructure. At one and communication resources we call ‘production close to use’, level, there is a need to develop available via the Internet. includes IT services such as system basic capabilities through general Developing countries face integration, custom programming, education and broad infrastructure challenges in three areas as they and web design and hosting, as well investments. However, focused attempt to construct effective IT as some kinds of packaged software. investments in high level policies: IT use, national IT capabilities are also important. industries, and national capabilities. These segments offer specific These can include the training of

IT Use Photo by Martti Lintunen Research shows that IT investments result in increased productivity for developed countries, but does not find this relationship in developing countries. However, it is likely that sustained investments in IT and in complementary assets such as human resources, physical capital and telecommunications infrastruc- ture will eventually lead to produc- tivity gains in developing countries as they have in developed countries. Globalization makes it more urgent to develop IT capabilities. High-tech industries such as computers and electronics are moving quickly to integrate global supply chains The Internet reaches southern Namibia electronically. Even low-tech advantages for developing countries. IT professionals, investment in industries such as textiles and First, there are opportunities to specialized information infrastruc- footwear are adopting electronic develop niche products that meet the ture, and the creation of advanced commerce. Companies and needs of local languages and technology institutions. countries need to be able to use IT business cultures, and to provide to take part in these global services to local customers. Such Such investments will create the production networks. markets have relatively low entry foundation for building broader capabilities. For instance, National IT Industries costs, so local companies can start small and grow at a pace that can professionals with advanced The computer industry is a major be supported by their own resources. training are needed to support IT use source of output, exports and jobs and production, and are also needed in countries such as Singapore, Next, IT services can serve as a link to develop IT education programs Taiwan, South Korea, China, between use and production, at local schools and universities. Mexico and Malaysia. Creating a helping users apply IT more Likewise, specialized high-speed national IT industry is not a simple effectively, and creating business research networks can provide the matter, however. Only those in close opportunities for domestic entrepre- infrastructure for widespread proximity to a large market and to a neurs. Finally, software and services Internet use. are the fastest growing segments of (continued on page 6)

5 (continued from page 5)

The most effective IT policies are ally involves some combination of quality. Finally, technology capabili- those that promote use and financial incentives, export process- ties must be upgraded. This means production close to use, and those ing zones, infrastructure, and creating institutions to evaluate, that build national capabilities. worker training. Promoting software adapt and diffuse imported technolo- These policies work best if developed and services is more gies and eventually create original in cooperation with the private complex, but three policies are likely R&D capabilities. sector, and if the efforts of related to be effective. In summary, IT use pays off when agencies are coordinated so that they First, promoting IT use among small investments are sustained and complement, rather than compete, businesses is essential. These combined with investments in with each other. usually rely on local vendors for complementary assets, such as Promoting IT Use IT services, and provide a valuable human resources. While some source of revenue and countries may be able to develop A key step is to lower IT costs. Any opportunities to develop new computer hardware industries, policy that makes computers more products and services. Second, ‘production close to use’ of software expensive will discourage use, so provide direct support. Govern- and services offers the best oppor- lowering taxes and tariffs on IT ments can provide low-interest loans tunities for most developing coun- products will help promote use. and grants in amounts that are tries. Government policy can make Public sector use must also rise. appropriate for small companies, a difference by promoting use, Governments can become sophisti- and can create incubators for new stimulating production close to use, and developing national capabili- ties. Mr Jason Dedrick and Professor Kenneth L. Kraemer are with the Center for Research on IT and Organizations (CRITO), University of California, Irvine (www.crito.uci.edu). They are participating in UNU/WIDER’s research on IT and Economic CAGR = Compound Annual Growth Rate Growth, led by Professor Matti Pohjola. This article is based on cated IT users, developing useful companies. They need to work with their presentation to the UNU panel applications and becoming a model private sector experts who can judge on IT, Economic Growth and Devel- for the private sector. Putting the viability of plans and act as opment (UN ECOSOC 2000 pre- computers and Internet access in mentors to those selected. Third, paratory process) in New York, 5 schools and providing necessary create partnerships between local May 2000. support for teachers not only can firms and multinationals. Working improve education, but will also with world-class companies helps Promoting IT use nurture a new generation of children local firms develop the skills to grow who are comfortable using IT. and compete. Governments can By lowering costs, increas- Moreover, we need more develop- offer incentives to multinationals to ing IT use by government, ment-orientated applications. work with local companies. and creating development Many IT applications are well-suited Developing Capabilities orientated applications to the development process. For instance, geographical information The final set of tasks are amongst By developing national IT systems can help protect natural the most important. These include capabilities through resources and support land use expanding IT skills by training expanding IT use among planning, while distant learning can people locally and sending the best small businesses, providing support education in countries with abroad for advanced degrees. Then direct support, and creating remote rural populations. ensure that there are opportunities partnerships between local Governments and development to do interesting work, so that firms and multinationals agencies can work with the private talented people will stay or return. sector to deploy such applications. In addition, it is vital to develop By developing capabilities through training people Developing National IT information infrastructure, by Capabilities encouraging competition in locally, and sending the telecommunications and Internet best abroad for advanced Promoting hardware production usu- access to reduce prices and improve degrees

6 Making Information Accessible and Affordable for All by Veli-Pekka Niitamo

Photo supplied by Nokia reat challenges must be over Gcome if the emerging ‘mobile information society’ is to be affordable and accessible worldwide. Otherwise, the digital divide will persist—and widen— between countries that have access to the new technologies and those that do not. But financial, institutional, political, and human factors are the main barriers for developing countries—not the technology itself. Mobile Telephony Traditional IT companies dominated the digital economies of the 1990s. They focused on the PC—in both hardware and software. But the Internet challenged this business paradigm by providing information and software at low cost. And now the telecommunica- tions industry is bringing more change. Mobile telephony will soon challenge PCs as the preferred terminal for Internet access. Mobile Old and new technologies meet in China terminals are both cheaper than PCs, were eased. A large domestic preferred mode of voice trans- and they will increasingly offer data, market for wireless telephony is the mission. China will soon become the image, and video transmission in result. world’s biggest market for mobile addition to voice transmission. By the mid-1990s, foreign terminals. Some estimates predict No single company, technology, or companies were engaged in fierce 250 million mobile phone users by even business sector will dominate competition in the Chinese market. 2005 of which 50 per cent will have the mobile information society. During the late 1990s, China Internet access. And China is one Innovative companies regardless of expanded local manufacturing to of the first countries to develop size or location can become create employment and skills, and third-generation broadband wireless successful—including those located encouraged more knowledge technology with access to the in developing countries. transfer from foreign investors. Internet backbone. It is also access- ing rural areas with radio links and China’s Success Building research and development capacity in leading-edge mobile bypassing expensive infrastructure China has a long history of telephony became a top priority in investments for fixed-line telephony. fostering technical innovation. From the late 1990s. Domestic companies Mobile coverage will soon extend to being a primarily rural-based started competing with foreign the least developed areas. economy, China has transformed companies—first at home, and then India and Venezuela itself into one of the leading worldwide. markets for mobile information. There are also positive develop- The economy’s strong growth— And its record in fostering talent for ments in India, a country long which is increasingly led by technical innovation is unmatched known for its good quality engineer- consumer demand, especially in the developing world. Markets ing and technical education. among the expanding middle were opened to high technology Government initiatives to attract class—has helped the national investment in the early 1990s, a high technology investment are technology policy. China has over strong national technology policy starting to bear fruit, and multina- 50 million mobile phone users and was introduced, and price controls tionals are investing in India-based the mobile phone is becoming the research and development facilities. (continued on page 8)

7 Asia Latin America Africa 2% 3% 1% East Europe 3%

OECD (excluding United States USA) 24% 67%

Internet Users 1999, % Population

Source: NUA Internet Surveys This has led to a reversal of India’s recent developments have yet to longstanding brain drain. make much impact in many parts Bridging the Expatriate Indian engineers are of Africa. Still, the new technolo- Digital Divide returning home to become gies open up better—and often entrepreneurs or to work with cheaper—possibilities. Thus, in The mobile information foreign investors in India. India’s areas where fixed-line telephony is society must be made own technology companies have nonexistent, a viable option is to use affordable and accessible succeeded in global markets and radio link technology and 400-470 for all new economy start-ups are getting MHz digital radio technologies. global attention and funding. Mobile telephony will China has shown that with the right soon challenge PCs as Venezuela has also had some technology choices and investment the preferred terminal success. A lively market in mobile in education and training, develop- for Internet access telephony has been created and ing countries can match developed penetration rates and business have nations in their use of leading-edge Innovative companies been growing. Venezuela began technologies. But, overcoming the regardless of size or liberalization in 1992, resulting in digital divide, and making global location can become fierce competition among five information affordable and accessi- successful mobile operators. Competition has ble for all, is not just a matter of made mobile companies efficient technology—the biggest challenges China is matching and flexible compared with fixed- are human, especially in education. developed countries line telephony. There are now more Veli-Pekka Niitamo is Director of in the use of leading- mobile lines than fixed-lines, prices Global Resourcing, Nokia. This text edge technologies are cheaper in mobile telephony, and is based on his presentation to the consumers have benefited from this India's own technology UNU panel discussion on ‘IT, Eco- competition. companies are succeeding nomic Growth and Development’ in global markets The Human Factor (UN ECOSOC 2000 preparatory process) in New York on 5 May Similar changes are underway in 2000. Nokia’s Web site is at: several other Asian and Latin www.nokia.com American countries. But these

8 UNU/WIDER Research on IT

Information Technology economy. The project identified the services, electronic databases and and Growth (1998 - 1999) components of such national libraries, media entertainment and strategies. A key policy is to balance Internet delivery of goods and his project, led by Professor IT investment with investments in services. The thesis of de- TMatti Pohjola, empirically education, and training. materialiation is that economic assessed the common view that value will increasingly be created by information technology radically Production, Employment producing and distributing bits of changes productivity and economic and Income Distribution in logic rather than atoms of physical growth. IT certainly has many the Global Digital material. effects on the modern economy; the Economy (2000 - 2001) The new project therefore confines growth in electronic commerce is its attention to the economic effects one example. However, its produc- his project is the sequel to of the ‘digital’, ‘Internet’, ‘weight- tivity and growth effects have been T the 1998 - 1999 project on IT less’ or ‘new’ economy. The aim is surprisingly difficult to establish. and growth. The new project is also directed by Professor Matti Pohjola. to derive the implications of digital By surveying previous studies and technology for productivity and by presenting new micro- and mac- In his contribution to the earlier growth, location of production, firm roeconomic evidence, this project project, Danny Quah argued and industrial structure, employ- demonstrated that in recent years IT forcefully that the most profound ment and income distribution, and investment has exerted a strong impact of the IT revolution is that it economic development at the influence on productivity and makes modern economies global level. Economic policies for increasingly weightless or promoting the new economy will Photo by Martti Lintunen also be analyzed. Forthcoming Book on IT Information Technology, Produc- tivity and Economic Growth: International Evidence and Implications for Economic Growth, Edited by Matti Pohjola, Oxford University Press. Other publications such as working papers are available as PDF documents on the Institute’s site at: www.wider.unu.edu Working Papers on IT WP 173 Information Technology The Net expands to cover Latin America and Economic Growth: A Cross- Country Analysis, Matti Pohjola, economic growth in many industrial dematerialized in the sense that an January 2000 and newly industrialized countries. increasingly greater fraction of gross Admittedly, however, developing domestic product comes to reside in WP163 On the Regulation of countries seem to have neither economic goods with little or no Telecommunications Markets invested in IT nor benefited from physical manifestation (see the Manfred J. Holler, August 1999 such investments to the same extent. article by Danny Quah in this issue of WIDER Angle). WP155 The Weightless Economy There is concern that information in Economic Development is becoming a factor, like income Such a weightless group of Danny Quah, January 1999 and wealth, by which countries are commodities includes all products WP153 Information Technology classified as rich and poor. To and services that can be expressed and Economic Development: An prevent this from happening, in digital form—encoded as a Introduction to the Research governments need to formulate stream of bits—such as computer Issues, Matti Pohjola, November national IT strategies to promote software, telecommunications, 1998 participation in the information biological algorithms, financial

9 BY INVITATION How Great is World Inequality? By Branko Milanovic

ssues of income inequality have Irecently gained prominence. Increasing inequality in North America and Western Europe in the 1980s, an ‘explosion’ of inequality in transition economies in the 1990s, improvements in the economic theory of inequality, and more and better data, have all stimulated a new interest in inequality. In the policy debate, as well as in the media, rising inequality has become linked to the phenomenon of globalization. But the issue is more complex than it first appears. Globalization is eroding the importance of national borders to Source: World Bank economic life. So, we need to know half fell from 9.6 per cent to 8.5 per whether world inequality is rising. us to compute world income cent (see Table on page 11). For even if within-country distribution for two ‘benchmark’ Overall, the richest 1 per cent of inequalities are rising, world income years: 1988 and 1993 (sufficient people in the world (50 million inequality need not increase, or may data is not yet available to cover later people) receive as much as the even decline, if the poor (and years). Details of how we compare bottom 57 per cent (2.7 billion populous) countries grow faster than the real welfare of people from people). the rich (and less populous) different countries in US dollars at countries. Therefore, even if purchasing power parity ($PPP), as Why is World Inequality globalization can be shown to raise well as further methodological High and Rising? within-country inequalities, discussion, is contained in a World income inequality is high globalization may still lessen working paper posted on the Web because the greatest contributors to income differences between site of the World Bank (details are the world Gini are countries with individuals in the world. at the end of this article). large populations that are at the two World income distribution must be The world Gini coefficient was 65.9 poles of the income distribution distinguished from inter-national in 1993, an increase on 62.5 in 1988 spectrum. One poor pole consists of income distribution, which is based (in $PPP). The implied increase of 2.4 billion people who live in coun- on differences in mean incomes about 0.7 Gini points per year is very tries whose mean income is less than between countries (weighted by high. For example, during the $PPP 1,000 per year (see figure population). But the latter does not 1980s, inequality in the US and UK above). They include many African take into account income inequality increased by about ½ a Gini point countries, both rural and urban within countries. This is what world per year—a rapid rise by historical India, rural and urban Indonesia, income distribution does. standards. Remarkably, the increase and rural China. The rich pole is from an already very high level Calculating the World consists of ½ billion people who live of inequality (and is present when in countries which have an income Income Distribution we use either PPP dollars or current level of over $PPP 11,500. They dollars, and when we use the Theil To make our calculation we need include France, Japan, Germany, the index which is another measure of household-survey data for most UK, and the US. The poor pole inequality). countries. Fortunately, we now have accounts for 42 per cent of the 216 household surveys from The bottom 20 per cent of the world’s population and 9 per cent countries that together account for world’s population received only 2 of world $PPP income; the rich pole over 90 per cent of the world’s per cent of total world $PPP income accounts for 13 per cent of world population and more than 95 per in 1993, down from 2.3 per cent in population and 45 per cent of world cent of world GDP. This data allows 1988, while the share of the bottom $PPP income. Populous countries

10 World Income Inequality Household survey data now permits the calculation of the world income distribu- tion for the first time The Gini coefficient for world income inequality is 65.9 The richest 1% of people in

Source: World Bank the world (50 million people) received as much as Photo UNICEF the bottom 57% (2.7 billion) To reduce world income inequality, the populous and relatively poor countries must grow faster than the world’s rich countries

large, and seem to be increasing. To reduce world income inequality we need the populous and relatively poor countries—China, India, Indonesia, Bangladesh, and Nigeria—to grow faster than the world’s rich countries. This, moreover, has to occur without any (or much) increase of their within-country inequality. This is the challenge that policymakers face today. Dr Branko Milanovic is Principal Economist in the World Bank’s Development Research Group and the author of ‘True World Income Raising the income of women is crucial to ending poverty in Africa Distribution, 1988 and 1993: First that have ‘middling’ per capita in- by 14 per cent in Bangladesh, and Calculation Based on Household comes (for example Brazil, Mexico, by 21 per cent in rural China. Surveys Alone’, World Bank Policy and Russia) do contribute to inequal- Meanwhile, mean current $PPP Research Working Paper No. 2244 ity but less so than the two polar sets. incomes rose by 24 per cent in the November 1999), available from the US, 60 per cent in Japan, and 43 Web site: www.worldbank.org/ Much of the rise in world income per cent in Germany. The rest of the research/transition/. inequality between 1988 and 1993 increase in world inequality is is due to the fact that income growth This article is based on Dr accounted for by widening in the developed OECD countries Milanovic’s UNU/WIDER public differences within China between exceeded income growth in the lecture delivered in Helsinki on May urban and rural areas (current $PPP rural areas in large South Asian 18, 2000. UNU/WIDER’s World incomes in urban China rose by 70 countries (India and Bangladesh) Income Inequality Database per cent) and between urban China and in rural China. Thus, mean per (WIID), together with further papers and rural India. capita rural income in India on poverty and inequality can be increased by 5 per cent in current Thus, we are left with a bleak pic- accessed through our web site $PPP terms between 1988 and 1993; ture; the differences are extremely (www.wider.unu.edu).

11 New UNU/WIDER Web Site at www.wider.unu.edu

UNU/WIDER launched a new Web Therefore UNU/WIDER’s Web site of reports including working papers, site in July 2000. An increasing is designed for users with slow policy briefs, the research for action number of people in the developing connections as well as small series and the WIDER Angle, all in world are now connected to the computer displays. PDF format for downloading. World Wide Web (although still too The UNU/WIDER Web site offers a The webmaster invites comments few in Sub-Saharan Africa). But comprehensive range of material on and suggestions in order to improve their use of the Web is often a development issues, including accessibility and service. Please frustrating experience since poverty, conflict and transition. e-mail: telecommunications infrastructure is still very underdeveloped. This Web site publishes a wide range [email protected]

12 News and Events WIDER 2000 Annual Lecture Series Integration of Small Vulnerable Lecture Economies’. UNU/WIDER research staff teach a Mr Erkki Viitanen, Computer Jagdish N. Bhagwati range of courses at the University Information Systems Assistant, of Helsinki and the Helsinki School separated in April. of Economics and Business Administration as well as at Dr Stefan Dercon, Katholieke institutions outside Finland. These Universiteit Leuven/Centre for the courses are offered to full-time Study of African Economies, registered students in the respective University of Oxford, was appointed universities. in April 2000 as a Research Fellow/ Project Director for the project Forthcoming courses ‘Insurance Against Poverty’. Dr Steve Kayizzi Mugerwa, The Economics of the Information Göteborg University, was appointed Society at the Helsinki School of in May 2000 as a Research Fellow/ Economics and Business Project Director for the project on Administration, 12 September - 26 'Institutional Capabilities, Reform October), Professor Matti Pohjola. Ownership and Development in The Economics of Development Sub-Saharan Africa'. at the University of Helsinki, main Professor Sebastiano Fadda, building, lecture room 6, University of Rome III, participated Globalization and 31 October - 7 December 2000. in the Short-term Sabbatical Appropriate Governance Lecturers Dr Steve Kayizzi Programme between May and June. Mugerwa, Dr Mansoob Murshed, His research on 'Poverty, Economic Monday 27 November, 2000 and Dr Laixiang Sun. Development and Institutional WIDER Annual Lecture by Change: Towards a New Framework Professor Jagdish N. Bhagwati, Staff Movements for Analytical and Policy Purposes' Arthur Lehman Professor of Dr Vladimir Mikhalev, Project was attached to the programme on Economics and Professor of Director for the project on ‘Income 'Institutional, Poverty and Political Science, Columbia Distribution and Social Structure’ Distributive Issues'. University, New York, United States. completed his assignment in Dr Pramila Krishnan, Centre for Further details available at: February and is now a Senior the Study of African Economies, www.wider.unu.edu Economist at Oxford Policy University of Oxford, joined the Project Meetings Management Ltd, UK. Short-term Sabbatical Programme 2000 Professor Beealasing Dabee, The on 1 June 2000 for a period of four University of Mauritius, participated months. Her research work relates 6-7 October, Helsinki, ‘The Social in the Short-term Sabbatical to the project on 'Insurance Against Impact of Privatization and the Programme between March and Poverty'. Regulation of Utilities in Latin April. His research on Professor Ashwani Saith, Institute America’, Project Co-Directors ‘Globalization and Economic of Social Studies, The Hague, and Dr Cecilia Ugaz and Professor Performance in Island States in the the London School of Economics Catherine Waddams. South West of the Indian Ocean’ was was appointed in June 2000 as an attached to the project on External Project Director for the 20-21 October, Helsinki, ‘Why ‘Globalization and the Obstacles to project on 'Privatization, Some Countries Avoid Conflict the Successful Integration of Small Unemployment and Welfare in While Others Fail’ Project Vulnerable Economies’. China'. Co-Directors: Dr Tony Addison and Mr Djono Subagjo, UNU/INTECH, Dr Mansoob Murshed. Dr Stephany Griffith Jones, participated in the Internship University of Sussex and Dr Programme between March and 17-18 November, Helsinki, ‘New Ricardo Ffrench Davis, June. His research on ‘Prudential Fiscal Policies for Growth and UNECLAC, Santiago joined in June Regulation of Banks in Vulnerable Poverty Reduction’ Project Director as External Project Co-Directors for Developing Economies’ was related Dr Tony Addison. the project on 'Capital Flows to to the project on ‘Globalization and Developing Countries since the the Obstacles to the Successful

13 Asian Crisis: How to Manage their opportunity to spend 2-5 months in UNU Update Volatility.' 2001 (except July and August) in Helsinki, interact with the resident The United Nations University Professor Anis Chowdhury, academic staff and contribute to the launched an online newsletter in University of Western Sydney, UNU/WIDER research programme spring 2000. This news bulletin aims Macarthur, participated in the to disseminate the work and the with a paper to be included in a Short-term Sabbatical Programme research output of the UNU and its publication series. Applicants must between June and July. His research research centres and programmes arrange sponsorship to cover their on 'Politics, Society and Financial worldwide. cost of participation in the Sector Reform in Bangladesh' was programme. Financial support will Subscribe: www.update.unu.edu broadly related to the project on be provided to partially cover living The United Nations University and 'Financial Contagion'. its research centers and expenses. Three to four scholars will programmes include: Ms Maiju Perälä, University of be selected. Applications should Notre Dame, joined the Internship include detailed curriculum vitae, a UNU Centre Programme for Ph.D. students on 1 list of publications, the topics of the Tokyo, Japan August 2000 for a period of five proposed research and the preferred UNU/WIDER months. Her work relates to the time for the sabbatical. World Institute for Development project on 'Globalization and the Economics Research Research areas include: the Obstacles to the Successful in Helsinki, Finland economics of transition, long-term Integration of Small Vulnerable UNU/INTECH development prospects in Economies'. Institute for New Technologies in sub-Saharan Africa, institutional, Maastricht, The Netherlands Mr Robert Osei, University of poverty and distributive issues, UNU/IAS Nottingham, joined the Internship international, financial and growth Institute for Advanced Studies Programme for Ph.D. students on 1 issues, and national and global Tokyo, Japan August 2000 for a period of five governance. UNU/IIIST months. His work relates to the Information on UNU/WIDER and International Institute for project on 'New Fiscal Policies for details of the above programmes can Software Technology Growth and Poverty Reduction'. Macau, China be obtained at the Institute's Web site Announcement (www.wider.unu.edu). UNU/INWEH International Network on Water, RESEARCH INTERNSHIPS Applications for both programmes Environment and Health Hamilton, Canada provide Ph.D. students from should reach UNU/WIDER (attn: universities worldwide the Principal Academic Officer) by 31 UNU/INRA opportunity to conduct research for October 2000. Institute for Natural 4-6 months with the Institute's Resources in Africa 2000 Board Meeting Accra, Ghana faculty in Helsinki, commencing either in March or August 2001, on The sixteenth session of the Board UNU/ILA a topic related to the research of UNU/WIDER was held during International Leadership 19-20 June 2000 in Helsinki. Academy programme of UNU/WIDER. Amman, Jordan Special emphasis will be given to Board members present included: INCORE students from developing/ Dr Harris Mutio Mule, Dr Sylvia The Initiative on Conflict transitional countries. Travel grant Ostry, Dr Jukka Pekkarinen (Vice- Northern Ireland and stipend will be provided. Four Chairperson), Dr Ruben to five are expected to be selected. Yevstigneyev, Dr Masaru UNU/GTP Geothermal Training Programme Applications should include: a letter Yoshitomi. Professor Ramesh Reykjavik, Iceland of reference from applicants' Thakur, Vice-Rector, UNU, attended supervisor(s) and a formal the session on behalf of the Rector UNU/FTP Fisheries Training Programme agreement from the candidate's own of the UNU and Professor Matti Reykjavik, Iceland university authorities. Forms can be Pohjola attended in his capacity as downloaded from the UNU/WIDER the Acting Director of UNU/ UNU/BIOLAC Programme for Biotechnology in Web site, obtained by e-mail WIDER. Latin America and the Caribbean ([email protected]), or by writing to The Board heard a presentation of Caracas, Venezuela UNU/WIDER (contact details on UNU activities and deliberated on UNU Food and Nutrition Pro- the last page of this newsletter). the WIDER report on the 2000/2001 gramme for Human and Social SHORT-TERM SABBATICAL research programme and also on the Development PROGRAMME offers overseas concluding research programmes. at Cornell University NY, USA researchers and academics an

14 UNU/WIDER Publications New Titles

Books From Shock to Therapy: The Poverty and Undernutrition: Political Economy of Theory, Measurement, and War, Hunger, and Displacement: Postsocialist Transformation Policy The Origins of Humanitarian by Grzegorz W. Kolodko Emergencies, Volume 1 & 2 by Peter Svedberg Edited by E. Wayne Nafziger, Hardback, 0-19-829268-6, UK Frances Stewart and Raimo Price: £45.00 Väyrynen Publication date: September 2000 Oxford University Press

The New Regionalism and the Future of Security and Development Edited by Björn Hettne, András Inotai and Osvaldo Sunkel Hardback ISBN 0-333-68713-2, UK Price: £50.00 Hardback, 0-19-829743-2, UK Paperback ISBN 0-333-68714-0, Price: £48.00 UK Price: £19.50 Publication date: April 2000 Publication date: April 2000 Volume 1, Hardback, 0-19- Oxford University Press Palgrave/Macmillan Press Ltd 829739-4, UK Price: £48.00 Publication date: September 2000 Restructuring the Global National Perspectives on the Volume 2, Hardback, 0-19- Military Sector New Regionalism in the Third 829740-8, UK Price: £55.00 Volume III: Global Insecurity World Publication date: September 2000 Oxford University Press Edited by Mary Kaldor Edited by Björn Hettne, András Inotai and Osvaldo Sunkel Hardback ISBN 0-333-68711-6, The Mortality Crisis in UK Price: £50.00 Transitional Economies Paperback ISBN 0-333-68712-4, Edited by Giovanni Andrea Cornia UK Price: £19.50 Publication date: April 2000 and Renato Paniccià Palgrave/Macmillan Press Ltd

National Perspectives on the New Regionalism in the North Edited by Björn Hettne, András Inotai and Osvaldo Sunkel Hardback ISBN 0-333-68709-4, ISBN 1-85567-644-3 pbk, ISBN UK Price: £50.00 1-85567-645-1 hbd Paperback ISBN 0-333-68710-8, UK Price: £12.99 pbk- £40.00 hbd UK Price £19.50 Publication date: July 2000 Publication date: April 2000 Palgrave/Macmillan Press Ltd Hardback, 0-19-829741-6, Continuum International UK Price: £55.00 Publishing Group Ltd Publishers’ Web sites Publication date: August 2000 Oxford University Press www.continuum-books.com www.macmillan-press.co.uk www.oup.co.uk

15 Working Papers

WP187 Hospital Efficiency in WP 179 The Impact of Sub-Saharan Africa: Evidence EMU on European Transition from South Africa Economies: Commitment, Eyob Zere, June 2000 Institutional Capacity and the Monetary-Fiscal Mix WP186 Price Scissors, Ration- David Begg, April 2000 ing, and Coercion: An Extended Framework for Understanding WP 178 Will the Emergence Primitive Socialist Accumulation of the Euro Affect World Laixiang Sun, June 2000 Commodity Prices? UNU/WIDER was established by UNU as John T. Cuddington and Hong WP185 Sex Workers in Calcutta its first research and training centre and Liang, March 2000 started work in Helsinki, Finland, in 1985. and the Dynamics of Collective Through its research and related activities, Action: Political Activism, WP 177 EMU and the UNU/WIDER seeks to raise unconventional Developing Countries Community Identity and Group and frontier issues and to provide insights Behaviour Benjamin J. Cohen, March 2000 and policy advice aimed at Nandini Gooptu, May 2000 WP 176 Will the Euro Trigger improving the economic and social WP184 Individual Motivation, More Monetary Unions in development of the poorest nations. Its Nature, Determinants and Africa? WIDER Angle is the newsletter of the World Consequences for within Group Patrick Honohan and Philip R. Institute for Development Economics Behaviour Lane, March 2000 Research of the United Nations University Sabina Alkire and Séverine (UNU/WIDER). Published twice a year, the WP 175 Globalization, Deneulin, May 2000 newsletter focuses on the Institute’s Marginalization and research activities. It is distributed free of WP183 Has the Coffee Development charge. The newsletter is also available on Federation Become Redundant? S. Mansoob Murshed, our Web site at: www.wider.unu.edu. Collective Action and the Market February 2000 in Colombian Development Editorial contents, design and layout by WP 174 Fundamental Economic Rosemary Thorp, May 2000 Tony Addison, ([email protected]) and Social Change: The Case of and Ara Kazandjian ([email protected]). WP182 Collective Action and Kyrgyzstan 1993-97, Georges Bilateral Interaction in Ghanaian Heinrich, February 2000 Entrepreneurial Networks UNU/WIDER WP 173 Information Technology Abigail Barr, May 2000 UNU/INTECH Helsinki UNU/INRA and Economic Growth: A Maastricht Finland Accra Netherlands WP181 The Currency Cross-Country Analysis Ghana Composition of Foreign Matti Pohjola, January 2000 UNU UNU/ILA Headquarters UNU/IAS Exchange Reserves: Amman Tokyo WP 172 Group Functioning and Tokyo, Japan Retrospect and Prospect Jordan Japan Community Forestry in South Barry Eichengreen and Donald J. Asia: A Gender Analysis and UNU/INWEH UNU/BIOLAC Mathieson, April 2000 Caracas Conceptual Framework Hamilton UNU/IIST Canada Venezuela WP 180 EMU Effects on Interna- Bina Agarwal, January 2000 Macau tional Trade and Investment Harry Flam and Per Jansson Printed copies USD 5.00 / FIM UNU/WIDER April 2000 20.00 Katajanokanlaituri 6 B 00160 Helsinki, Finland Tel. (+358-9) 6159911 WIDER Publications Fax (+358-9) 61599333 E-mail [email protected] Recent publications, newsletters, introductory chapters of new books, and Web site www.wider.unu.edu public lectures are available in PDF-format on the Institute’s Web site (www.wider.unu.edu) For further information on the Institute’s activities, please contact: Publications such as Working Papers are priced as indicated, postage Mr Ara Kazandjian, inclusive. Please address your orders to UNU/WIDER Publications at the tel. (+358-9) 61599210, mailing address given on this page, or by e-mail to [email protected]. e-mail [email protected]. Payments accepted by USD bank draft payable to UNU/WIDER, by credit card (Amex, Eurocard, MasterCard, OK, Visa), or by transferring the amount Printed at Oy Nord Print Ab in FIM/Euro or in USD to the Institute's bank account (please ask for Finland, 2000 details). An invoice will be provided on request. ISSN 1230-9544 Books are available from the respective publishers and their outlets at the list price plus postage and packing.

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