Johan Fourie's blog

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What recession?

with 2 comments

Too much has been made of the Great Recession. While global growth has slowed in 2008 and 2009, we are still living in an age where most of the world population’s income is increasing. These increases translate into millions of people being lifted out of extreme poverty every year. This year, 2012, the average person’s income will rise, not fall, which also means that their standards of living will probably increase. In fact, the income of the average person on earth has never been as high as it is today.

How is this possible in the face of what is now generally accepted as the greatest recession since the Great Depression? Why can I be so sure when the European Union is in a severe debt crisis and US politics makes it nearly impossible to boost the fragile economy? With all the noise in the North, most have missed that the rest of the world is, in fact, booming.

The graph, for example, shows the average person’s GDP growth rate across all countries of the world for which data is available. (For all my calculations, I use the 2011 World Development Indicators which can be downloaded online.) This is not the same as the average GDP per capita growth rate, which is weighted by the income of each country (regardless of how many people live in that country) and the most widely used as an indicator of global prosperity. Here, I weight by population of each country. Thus, in the new measure, China and India contribute much more to the growth rate than they would if total income is used as weight. In contrast, the US would weigh only 4.5% (in 2010), even though it represents a much greater share of global income (23% in 2010).

What does the graph tell us? It suggests that the first decade of the new millennium has been the most prosperous for the average person in the world, ever. The 2008/2009 recession certainly had a negative impact, but different to the negative global growth rate reported of 3.4% in 2009, the average person’s income actually increased by 1.5% in 2009. And this dip seemed to be short-lived: in 2010, the average person’s income growth rate rebounded to a high 3.1%, the third highest recorded growth rate for the last 40 years! (I should add that earlier growth rates should be even lower, but because data is not available for many smaller countries early on, they are excluded.)  How is it possible that GDP per capita weighted by income is negative while GDP per capita weighted by population is positive? Well, a disproportionate number of people in rich countries’ incomes fell, while the incomes of most people in poorer countries (that would contribute little to global income) increased. So, while the fall in incomes were larger in absolute terms than the increases (in 2009, that is), a greater number of people’s incomes increased (and considerably so) rather than declined.

Why is this important? The crisis – for the first time – is mostly a developed country phenomenon. So, too, are the pundits and the media that report their daily dosage of pessimism about the future. Even in South Africa, where I live, the woes of European and US markets dominate financial news. We hear about China’s staggering 9.8% growth rate, yes, but don’t know about Uruguay and Ethiopia’s 8% growth rates, nor discuss the 7% growth of Turkey, Turkmenistan and Thailand (all 2010). Sure, some of these rates are from a very low base. That’s not the point. Growth is essential for these countries’ citizens to partake in the global economy. A growing middle-class will buy more goods, creating new markets and perhaps offer the fragile developed world economic salvation (if they can fix their own internal struggles).

The message should be that the world is growing, even if some regions are struggling. The tide is lifting, but not from its usual source. Economic Armageddon is not near. Capitalism is safe. In fact, the future looks quite bright for the average global citizen.

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Written by Johan Fourie

January 31, 2012 at 16:40

2 Responses

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  1. This is very well done Johan. It is good to see the whole picture and the share difference in the experience between the developed and some parts of the developing world. But that is enough for your opening claim to be correct: “Too much has been made of the Great Recession”. You don’t have to downplay the real hardships brought about for a large number of people in the developed world to make your point that there is much more dynamism elsewhere.

    Stan du Plessis

    January 31, 2012 at 21:25

  2. People may be making more money now than they have in past history but pay has not increased at what it should of to of kept up with the cost changes in essential things you need.

    ThePoulTrend

    January 31, 2012 at 18:39


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