Morpheus: You take the blue pill - the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill - you stay in Wonderland and I show you how deep the rabbit-hole goes.
One of these countries has defaulted three times in the past thirty years, while the other is the richest country in the world. The blue line represents income growth adjusted for purchasing power in Argentina over the past seventeen years. The light red line measures the average income for Americans in the bottom 20% of the country; a measure that displays no growth from endpoint to endpoint. In fact since 1999, the bottom decile of Americans have seen their wages drop by 14.1%, while top decile earners have continued to increase their relative share of the pie.
That income inequality is growing in the US isn’t really new news. This story has a bit of a twist however, as an analysis of emerging market (EM) economies vs. developed market (DM) economies shows a disconcerting trend.
There’s been some talk recently in economic circles about the middle-income trap and how it might influence the next phase of China’s growth. The theory in a nutshell is that very few emerging market economies have ever been able to grow beyond a gross national income per person of $12,000; whilst a number of developed market economies have likewise had trouble growing gross national income per person at all over the past half century. While there’s an entire field of economics devoted to understanding the conditions required to break free of this trap, we’ll use our intuition to settle on technology and innovation as a necessary condition and drive on.
How events play out in China over the next few years is anyone’s best guess. What’s more interesting is the trend I reference above. EM economies have for the most part behaved as one might expect, with high rates of growth that begin to level off at the middle-income trap level (high-tech focused Asian economies like Singapore, Korea and Taiwan have managed to break through the trap). Meanwhile, a handful of DM economies, the US in particular, have not only exhibited a trend to increased income inequality, but now have entire sub-segments of their population that are economically on par with EM economies.
Argentina is a country of 42-million people and a GDP per capita of roughly $18,000. This just so happens to be roughly the percentage of the population in the US below the poverty line, with income levels also almost at par with one another. Put another way, it’s as though the US is now housing all of Argentina as a sub-segment of its population. Further, if EM economies are starting to converge with lower income DM populations (which are significant in size), is the theory of comparative advantage a strong enough economic argument for this phenomenon? Or are the lower income segments of DM economies bound to be caught by the same middle-income trap holding back the emerging market?