South America's experience suggests a tantalizing possibility: that reaching $8,500 in income is the secret to sustainable growth.
- By Daniel AltmanDaniel Altman is the owner of North Yard Analytics LLC, a sports data consulting firm, and an adjunct associate professor of economics at New York University’s Stern School of Business.
What makes volatile countries settle down and grow in a stable way? Is it a change of institutions, opening the door to trade, or the end of a war? Perhaps it’s none of these. As crazy as it sounds, simply reaching a set level of income may be enough.
Economic growth can happen under almost any kind of government, though there are few models that seem to guarantee steady, equitable increases in living standards over the long term. Take South America. In the past century, countries there have tried just about every model there is, from disorderly Weimar-style democracy to dictatorship. Most often, they have swayed back and forth between various flavors of left-wing populism and right-wing authoritarianism. In the meantime, they have managed to grow, but only fitfully.
For some countries, however, the political pendulum has stopped swinging. In Brazil, Chile, Peru, and Uruguay, roughly the same sequence of events has resulted in relative stability. First, a center-right government has taken power and instituted the kinds of policies that warm the hearts of international investors: flexible exchange rates, fiscal balance, and tight monetary policy. Then, a center-left government has been elected. These new leaders have maintained the policies of their predecessors but, crucially, have also legitimized those policies by pursuing priorities that spread the gains of investment-led growth: education, health care, social programs, and other forms of redistribution.
It’s no coincidence that these four countries are now among the most promising on the continent, from an economic perspective. They and Colombia (more about it later) attracted the biggest inflows of foreign direct investment per capita in 2011, and the five are the only ones rated as "investment grade" by Standard and Poor’s. But why did this transformation happen when it did?
Here’s a theory. As people’s incomes rise, they’re less likely to be swayed by political extremists. Neither populist promises of a chicken in every pot nor severe measures to suppress dissent are particularly appealing. The people are too well off to be persuaded by advocates of revolution, which makes approval of undemocratic crackdowns similarly unlikely. They just want to hold onto what they’ve got and enjoy their civil and economic freedoms.
The question is: How much do people have to earn for their economic situation to anchor them in the political center? Remarkably, this question may have an answer in South America. In the four countries that made the transition to stability, the completion of the sequence outlined above occurred as average purchasing power reached $8,500 per year at 2005 prices, as computed by the World Bank. In those four cases, the first election after crossing the $8,500 threshold ushered in the center-left government that would confirm the country’s path of steady, equitable growth.
So, what does $8,500 buy you? The figure is a measure of an entire country’s GDP adjusted for differences in prices around the globe and divided by its population. It’s not a median income, nor is it for an entire household; a typical household in one of these countries might have something like $15,000 in total purchasing power every year. (As a guide, the United States has per capita GDP of about $48,000 and median household income of about $53,000, but households in the United States average about 2.5 people, versus more than 3.5 in Brazil.) That’s by no means a high-income family, but in most countries it represents middle-class, or at least working-class, respectability. Such a household might spend $1,500 a year on taxes, $400 a month on housing, $50 a week on food, and $120 a week on everything else.
The latest South American country to reach the $8,500 threshold was Colombia, in 2011. If it follows the same path as the other four, the election in 2014 will replace the center-right government of Juan Manuel Santos — and previously Álvaro Uribe — with a center-left government. A center-left government isn’t always easy to spot in South America; plenty of observers thought Brazil’s Luiz Inácio Lula da Silva might turn out to be a loose cannon or fellow traveler of Venezuela’s Hugo Chávez, but he was nothing of the sort.
In fact, Santos, who was elected in 2010, may himself qualify for the center-left distinction someday. He is already moderating some of Uribe’s harsher policies, and his coalition in Colombia’s congress commands support from left-wing liberals. In other words, the transition may already be happening.
Of course, not every country with more than $8,500 per capita in purchasing power has attained the magical combination of political and economic stability, even in South America. Though the World Bank’s figures don’t go back before the 1980s, it looks like Argentina crossed the $8,500 line sometime in the 1960s, coinciding with the progressive government of Arturo Illia. But Illia was elected by a flawed process and soon ousted in a military coup. Venezuela may have reached $8,500 even earlier and has had elected governments since the late 1950s. Yet as in Argentina, its living standards were essentially stagnant until the past decade or so.
The difference here may be as simple as one word: globalization. Brazil, Chile, Peru, and Uruguay have been able to bolster their growth with foreign investment to a degree that Argentina and Venezuela never could, not just in the extent of the investment but also in its diversity. Globalization has also made South American countries less isolated, both politically and culturally. It’s easier than ever for their people to compare the performance of their governments with others around the world.
With that in mind, could countries in other regions follow the South American example? Possibly, but the similar and shared histories in South America make the case for the $8,500 rule particularly compelling. And their story of development is by no means the only one; in East Asia, the narrative of state-organized industrial growth in Japan, South Korea, and Taiwan is equally notable. More likely, up-and-coming regions like South Asia and Sub-Saharan Africa will write their own stories of stability and success.