TWO WORLDS
The gap is closing but more can be done: the rule of law and education of the poor, the lifting of trade barriers by the rich

At the recent Milken Institute Annual Conference, American financier Michael Milken asked three Nobel laureates in economics -- Kenneth Arrow, Myron Scholes and Gary Becker -- to suggest how the gap between the rich and poor worlds might best be closed. Kenneth Arrow, professor emeritus at Stanford University, was awarded the Nobel prize in economic science in 1972. Gary Becker, professor of economics and sociology at the University of Chicago, was awarded the Nobel prize in economic sciences in 1992. Myron Scholes, an emeritus professor at Stanford University, was awarded the Nobel prize in economics in 1997.

MICHAEL MILKEN: Fifteen percent of the world’s population has 85 percent of the world’s economy. Eighty-five percent of the world’s population has 15 percent of the world’s economy. The issues of terrorism, AIDS, SARS and others diseases compel us to recognize how small our planet is today.

If we take as a given that quality of life or prosperity, in the developed world, is highly dependent upon opportunity for prosperity for all the people on the planet, what are the two or three things that you could suggest that we have learned from history and that we might be able to apply in the future?

MYRON SCHOLES: Changing the world begins at home. Infrastructure -- not just physical but financial and legal -- is very crucial. Decisions over what infrastructure to set in place will affect everything, from property rights to the ability to make long-term investments.

If you have no rule of law, then investments are going to be very short. If you have the Yakuza or the Mafia or whatever in control, everything is going to be just a spot transaction. There can be no sustained growth or development in such an environment. So creating an environment of rule of law with all that implies, including property rights, is the first critical element.

The second critical element is not only general education -- especially of women -- but specialization. A country needs to figure out what it is most productive at doing and then develop that capacity.

India has come to life in certain regions because it has education, it has computer programmers, and can add a lot of wealth by specialization. But if you have specialization, you must also rely on the government to hedge country risks as a whole, because, if you specialize, your country is subject to shocks from the global marketplace changing.

The United States is diversified. We have many activities. If some industries are in bad shape, other industries are not in so bad a shape. And it creates an ability for us to survive. So countries have to understand how to hedge their risks by paying attention to risk management.

GARY BECKER: If you look at the degree of world inequality, not across countries but across individual families, then you find a much more optimistic development in the last 30 years.

The Columbia University economist Xavier Sala-i-Martin has calculated world inequality and income on an individual family basis rather than a country basis. And he finds significant declines in world income inequality over the last three decades.

Partly that is due to growth in China and India, but it is not entirely so.

Also, we are often too mesmerized by national income accounts which are an imperfect measure of people’s well being -- a highly imperfect measure. They leave out, for example, leisure. But they also leave out improvements in life expectancy.

In the last 40 years, the poorer parts of the world’s life expectancy has improved more rapidly than the richer parts of the world. Along with a couple of colleagues, I have made an adjustment to national income accounts by putting value on the improvements in life expectancy, using what economists call ‘‘Willingness to Pay’’ or ‘‘Value of Life Estimates.’’

We did this for different countries to see if we would get considerable convergence. We indeed found significant convergence after we adjusted a national income account to include the improvements in mortality.

The fact is that the poorer parts of the world have benefited enormously lately, in good part from technologies developed in the rich parts of the world. Their life expectancy, while lagging still, has improved and narrowed the gap.

MILKEN: In the last 50 years, life expectancy has increased about 10 years in the wealthier countries and about 20 years in the poorer countries. The gap today, thus, is about 10 years difference.

KENNETH ARROW: Even by conventional measures, there has been some convergence -- and this after a century of increasing divergence. Clearly, a reversal of the historic trend has taken place over the last 20 years or so.

This is not universally true, of course. Sub-Saharan Africa is a disaster area, where things are getting worse in virtually every dimension.

As for how to close the gap further, the question of the infrastructure in a broad sense -- social, cultural and legal -- is certainly important. I think the responsibility of the developed countries is not entirely ended by that question, however. I am thinking particularly of trade. Protection, for agriculture, particularly, in the most advanced countries, and I mean all of them -- Japan, the United States and Europe -- is really a very serious block. It impedes a significant possibility of export earnings for many of these countries, which would be a big kick-start in their development, particularly for Africa.

So, while the poorer countries have to reform their own structures, the rich nations also have plenty of responsibilities to fulfill.

(c) 2003, Milken Institute/Nobel Laureates. Distributed by Tribune Media Services.
For immediate release (Distributed 5/15/03)