Dear Bill Gates

We have never met, but I hope you won’t mind my writing since your recent open letter on what you describe as development might did seem addressed to me.  You begin by referring to books with titles like ‘why some nations are rich but most remain poor’ and I did write a book with exactly that subtitle.  You go on to say ‘fortunately these books are not best sellers because what they say is not true’.   I am afraid you are right when you say that my book is not a best seller, but I am also afraid you are wrong when you say that what they say, at least in this respect, is not true.

Let me spell out the proposition which justifies my subtitle.  It is that if we order the countries of the world by how rich or poor they are, the distribution appears U-shaped.   There is a group of rich countries (with about a billion people in total), a group of poor countries, and many states in between.  These intermediate states – Japan and Italy in the immediate post war years, South Korea and the Czech Republic more recently – tend to be on a trajectory to join the countries which operate at, or close to, the frontier of current technological possibility.  When countries reach that frontier, they tend to stay there – Argentina is the classic and most significant, example of a country that did not.

In my book, I demonstrated that there are two different methods of assessing how rich a country was.    One was to measure the market value of its per capita output – its productivity – and the other was to compare the average consumption of the inhabitants.  The two rankings differ, though not by very much – in my assessment for 2001, Switzerland was the country with the highest productivity and the United States the country whose inhabitants had most to spend (or chose to spend it).

You suggest that my proposition might have been true fifty years ago, but not now.  My book was published ten years ago, so I thought it was time to update the calculations, and the results have not changed much.  The distribution still has these twin peaks.  I noticed two differences.  One is that the dispersion among already rich countries has widened.  At one end of the productivity scale, Norway and Switzerland have surged ahead – one due to its oil wealth, the other as a result of the growing and seemingly price insensitive demand for Switzerland’s speciality exports.  At the other, the ‘poor rich’ such as Britain and – particularly – Italy – have experienced a disappointing decade.  More encouragingly, some more countries, in Eastern Europe and in Asia, seem on course to join the rich.

Although the growth performance of China and India has been exceptional, both are still dependent poor countries by the standards of Switzerland or Norway, even if that recent performance ____ and the gap will take many generations to eradicate.  It is easy to be misled by the photographic evidence you provide, showing the transformation of Nairobi over fifty years.  One effect of globalisation is that the centres of major cities look similar whatever the city – an office of KPMG or a branch of HSBC looks much the same anywhere in the world.  But you do not have to venture far from the centre of Nairobi or Shanghai to see sights unimaginable in Norway or Switzerland:  places that have not changed much, and that change necessarily not for the better, in many decades.

There is a striking elision, Bill (if I may), in the stylised figure which is the other piece of evidence you use to support your case.  The distribution of individual incomes across the world is a very different concept – and has a very different shape – from the distribution of average incomes across states.  Even when the distribution of income within a country is very uneven, it tends to follow a power law, or Pareto distribution – every king needs his courtiers, every computer billionaire creates a slew of computer millionaires when his company IPOs.  And an aggregate of many such distributions is likely to hold the shape of the original.

The major part of my book, Bill, was devoted to a description of the economic and social institutions which enable some countries to operate at the technological frontier – and whose absence condemns most of the world to levels of productivity and living standards far below what is possible with existing knowledge and techniques.   I’m disappointed it wasn’t a best seller, but perhaps your critique might even do a little bit to propel it in the direction.

Best wishes

John

John Kay’s book, The Truth about Markets, was published in 2003 – and in the US in 2004 as Culture and Prosperity)