Sunday, June 5, 2011

Old Europe in terminal decline? Nah.

Just spotted this alarming image from the blog of Dr. Mark J. Perry, professor of economics and finance at the University of Michigan, a graph comparing large economic regions by their share of world GDP.

In 1969, the EU15 had by far the biggest share, about 36% of the world's total, with the US in second place at about 28%.

Over the next forty years the world economy changes dramatically. The US stays about stable, maintaining a share of around 26% of the world's total economy. Asia and Oceania soars from 15% to 26% and the EU15 plunges from 36% to 26%.

The implication is that the US is holding its own, East Asia has boomed, and the EU15 are dwindling down to irrelevance.

Yet I knew something was wrong with this graph. Despite periodic right-wing claims of European decline, standards of living have still risen and most European economies have continued growing. Wondering why this graph looked so dramatic, I realised that 'share of GDP' tells us nothing about standards of living because an economy can grow simply by increasing its population. Mass-immigration or natural population growth would bloat a country's GDP without necessarily increasing the GDP per capita.

In this case the EU15 countries have experienced relatively lower fertility rates so their natural population growth is low or negative, and relatively lower immigration rates compared with the US. I turned back to the data, taken from the United States Department of Agriculture Economic Research Service, this time looking at GDP per capita.

United States GDP per capita
1969: $21,021
2010: $42,517
Percentage Growth 1969-2010: 102%

EU15 GDP per capita
1969: $15,383
2010: $32, 531
Percentage Growth 1969-2010: 111%

Far from lagging behind, the average citizen of the EU15 would have experienced faster income growth than their American equivalent. This is a little misleading because higher percentage growth from a lower starting point can produce lower actual growth compared with low percentage growth from a high starting point. In fact the gap between the EU15 and the US increased slightly. Nonetheless, EU15 growth has been sustained and faster than American growth.

(By comparison, Asia and Oceania experienced a whopping 216% growth per capita. Impressive, but this leaves them with a GDP per capita of only $3,534. Had they not also experienced massive population growth their share of global GDP would be pathetic.)

So is the earlier measure - share of global GDP - useless? Not quite. In military terms a larger economy supports a larger military. Rising populations offer a population resource for the army: more soldiers. So various countries in Asia have probably experienced economic conditions that give them greater military and diplomatic punching power.

But the average individual is still a hell of a lot better off in Denmark (GDP per capita, 2010: $48,193) than China (GDP per capita, 2010: $2,802).

2 comments:

  1. What about unemployment rates? Look at where Asia is vs. Europe... http://www.nationmaster.com/graph/lab_une_rat-labor-unemployment-rate&date=2010

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  2. A fair point, indeed. I suppose looking at just one economic indicator at a time can give us a flawed impression of reality.

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