Why is there a First World and a Third World?

Asking why economics can't explain why there's massive wealth inequality between countries and exploring a theory that might.

I’ve always been one of those sanctimonious wankers progressives that cares a lot about being on the “right side of history”, and what more enlightened people in the future will think of our time.

 If they recover from the horror of contemplating the thousands upon thousands of chicken and pig Auschwitzes we’ve built, the next thing that might scandalise them could be that we’re presiding over the most extreme global wealth inequality in world history.

Billions of people, most of the global population, live in abject poverty. While at the same time in the First World, a minority of the world’s population live (I guess passably) pleasant lives.

The disparity in wealth between First and Third World countries is stark. The world’s wealthiest country (Luxemburg) is about 100x richer, per capita, than the world’s poorest country (Burundi), and it’s not uncommon for third world countries to be 20-50x poorer than the First World average.

Around a billion people live on less than $1 a day.

Global wealth inequality really is one of the most tragic facts about the world in the 21^st century. Only really rivalled by my romantic life and Ricky Gervais’ existence.

Future people will (hopefully) think of this period of history as the time when inequality was at its height and the last time that most of the world was still poor. 

I’d like to know why the divide between the worlds’ rich and the worlds’ poor is so stark.

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Broadly the world is divided into First and Third World countries.

The geographic distribution of First World countries is a striking phenomenon. They cluster in a handful of regions, something like this:

(That’s the resolution we’re working at, apologies to any middle-income countries reading this.)

Most First World countries are Western-European, or colonial societies descended from Western-Europe, the rest are East-Asian or oil states.

How did these countries specifically get into the richer-than-everybody-else club?

That Western Europe is wealthy maybe isn’t that surprising, since it’s where the Industrial Revolution started.

But why Japan and South Korea? But not China or South-East Asia? Why not India, or Africa? Why Australia and Canada but not Argentina and South Africa? Why Saudi Arabia but not Iran or Venezuela? Why North America, but not South America. Why Europe in the first place? And why Western Europe in particular?

Economic theory really struggles to explain anything about this global distribution of First World nations. There’s no simple theory involving institutions or developmental history that gives you a pattern like this. (I’ll elaborate on that claim a bit later.)

There’ll be historical explanations for how each individual country became wealthy. Japan had the Meiji Restoration, Singapore had Lee Kuan Yew etc.

But apart from maybe Australia and Singapore, you don’t find lone First World countries in regions that are otherwise Third World. Or lone Third World countries in First World regions.

If becoming a First World country is some complex process that depends on lots factors (the correct geography, the correct institutions, historical path dependency etc.) it seems like we should see more random variance in which countries become Third World.

Since the distribution is so non-random, it strongly suggests there’s a more general underlying factor.

As I’ve said, I don’t think there’s a simple theory about economic history or institutions that fits this distribution well.

But I do think there is a parsimonious theory that fits this distribution of First World countries almost exactly, if we consider factors outside of economics.

And that theory is…

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No country will have a First World standard of living unless:

1.      It’s in the US sphere of influence.

AND

2.      The majority of its population is of European or East Asian descent.

               OR

3.      It controls some valuable resource, typically oil.

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So the logic is: 1 && (2||3). Requirement 1 is necessary and you also need to meet either 2 or 3.

A list of First World countries and which requirements they meet:

·         US: 1,2

·         Western Europe: 1,2

·         East Asia (Japan, South Korea, Singapore etc.): 1,2

·         Arab oil states: 1,3

“In the US sphere of influence” is a vague category, the US is the global hegemon, to some extent all countries are in its sphere of influence. My map of the American Empire that sphere looks roughly like this:

Western Europe, Canada and Australia are firmly inside, as are Japan, South Korea, Taiwan, Singapore, most of Latin America and parts of the Middle East. Africa, India and South-East Asia are mostly grey zones but you can include them if you want.

You can take it to include most of the world, apart from the countries that are blatantly hostile to US interests. Such as North Korea, Russia, Cuba, Iran and Venezuela. China before 1972 was firmly outside, and has been in a grey area since, but I still wouldn’t include it.  Eastern Europe is also a bit of a grey area, I’ll exclude it for now, but it’ll come up again later.

[Hopeful that’s not too contentious a description of the current geo-political order. If it is, the rest of this essay is going to be even less convincing.]

And here’s a helpful map of the parts of the world with a majority European or East Asian population.

Excluding oil states and tax havens (which are rich for fairly obvious reasons, although, interestingly, they do still need to meet requirement 1), the areas of overlap between these two maps corresponds exactly to the map of First World countries. 

Which… probably doesn’t impress you very much.

We’re working with a very small dataset here, there just aren’t that many countries in the world, and there are lots of confounding variables (similar countries share similar histories, have similar economic policies etc.).

There must be lots of simple sets of rules that match the roughly 10 unique data points available. Right?

No, I don’t think there is another theory that’s this parsimonious and that fits the evidence so exactly.

Let me point out where I think the most common alternate theories conflict with the data.  

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Countries that industrialised early have had longer to develop and are consequently wealthier now:

This theory matches the data for Europe, Canada, Australia and the US. Also Japan to some degree.

But it can’t explain why every country that has managed to develop since 1945 has been in East Asia. South Korea, Singapore, Hon Kong all prove that rapid catch up is possible, and raise the question as to why it hasn’t happened in India, Africa and Latin America, and is only now taking place in China.

South Africa is another awkward exception for this theory.

Capitalist vs socialist countries:

Isn’t “in the US sphere of influence” just code for “is capitalist”? Obviously capitalist economies will outperform socialist ones, right?

 Unfortunately there aren’t any socialist countries within the US sphere of influence (for obvious reasons), so we don’t have a clear test case that disambiguates the effects of “being in the US sphere of influence “from just “being capitalist”.

There are plenty of capitalist countries outside the US sphere of influence, and they definitely don’t follow a simple “be capitalist become a First World country” law. Most of the former Soviet Union is on a worse growth trajectory now, after having adopted capitalism, than they were on under socialism, and certainly they’re not close to reaching Western levels of wealth. Yes, the West was richer than Soviet Russia, but modern Russia is an extremely awkward data points for this theory.

And most countries within the US sphere of influence that don’t have the right demographics, like India, South-East Asia and Africa are poor, despite often following Western advice on economic policy.

Also, most countries that have managed the transition from Third to First World country, like Japan and South Korea, made use of lots of state intervention in the economy.

And, within First World countries, the more successful ones are more socialist. Places like Denmark and Sweden. The UK and US also used to be more successful when they were more socialist.

There’s a lot more that could be said here, and I don’t expect everyone will accept that interpretation of recent economic history, but overall I just can’t see any clear law to do with economic institutions that explains the distribution of First World countries convincingly. Certainly not one that centred on capitalism.

Poor countries were colonised:

Colonialism by itself explains very little. Zambia and Botswana were both British colonies, but only Zambia is a sad story. Many of the places with the highest GDP per capita in the world are ex-colonies: Hong Kong, Taiwan, Singapore, South Korea, and Macau. Also, by some definitions, Ireland and the Baltic States. Meanwhile, some poor countries had only a brief colonial experience, e.g. Ethiopia.

People in some countries are cleverer than in others:

This is the first theory that actually gets reasonably close to matching our map of First World countries. Roughly 70% of the differences in wealth between countries can be explained by average national IQ.

National IQ is the Best Predictor of Economic Growth

The world IQ looks fairly similar to the map of First World countries.

The big problems for this theory are China, Russia and Eastern Europe. Another anomaly is why parts of East Asia aren’t richer than the West?

It’s certainly not an exact fit.

What if it’s lots of small, variable factors? Industrial policy, educational practices, trading relations etc.?:

Firstly, I think the non-random distribution of First World countries strongly suggests that there’s some broader underlying factors at play.

Also, as mentioned, we’re working with really poor data here, and it’s very rare that we actually get to test any predictions. If the real explanation is strongly multifactorial we’ll never know. It’s beyond the scope of anything we can call science.  

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Mixing those ideas, the composite-theory I can think of that most closely fits the evidence would be:

First World countries need to have been capitalist for at least about 70 years (to include South Korea, Singapore etc. but exclude China and Russia) and have intelligent populations (which excludes all the poor capitalist countries, i.e. most countries).

Which fits the evidence, and also China looks like it might be converging on First World living standards now that it’s been capitalist for about 45 years.

Unfortunately Russia, and most of Eastern Europe, show no signs of becoming First World countries despite having been capitalist for 30+ years.

Still, I think this is probably the second most likely theory overall. But it feels ad hoc to me.

A simpler version of this theory would have been possible before 1991 (“just be clever and capitalist”), and I doubt its proponents would have predicted that Russia would stay poor. I’m not sure anyone predicted that China would grow so rapidly either.

Also, I can’t help feeling that if Eastern Europe and China are still relatively poor in 25 years, more epicycles will need to be added.

Vietnam and Cambodia might also need special explanations if they remain middle-income countries.

Another thing is that, “has been capitalist for a while” and “is in the US sphere of influence” are very similar sets of countries.

Also, and I hope no one thinks this is an unkind thing to notice, the world IQ map corresponds closely to a “has a European or East Asian population” map.

So this theory and the one I’m suggesting, make very similar predictions about what the past economic history should look like. But, since most countries outside the US sphere of influence are now capitalist, they make increasingly divergent predictions about the future.

If the wealth gap between NATO members in Eastern Europe and Russian-aligned Eastern Europe continues to grow (i.e. Poland and the Baltics get rich and Belarus stays poor), or if China’s growth plateaus at a middle-income-country level, I’ll take that as evidence against this theory.

If Russia gets rich and, say… Britain (I’m giving the capitalism theory every chance here) falls below a First World standard of living, I’ll take it as evidence against my theory.

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Coming back to the original theory that First World countries: 1) are in the US sphere of influence, and 2) have European or East Asian populations.

Another objection would be to say:

“This is just some random correlation that coincidentally fits a very small data set. The same way that whether the American president has a beard or not follows a sequence.

But that’s just a coincidence, it doesn’t mean you can predict whether the next president will have a beard. “

We need some reason to think one observation caused the other.  

There are two possible reasons to suspect a correlation is causal:

1.       It makes accurate predictions. Unfortunately, for economic theories, this means waiting for new evidence to slowly trickle in over the course of human history.

2.       You can hypothesise some causal mechanism that fits in well with lots of other things we know about the world. “Natural selection created humans” is a theory that can’t easily be tested empirically, for example, but we still think it’s true because it’s a good logical fit with things like evolution and genetic inheritance.

I won’t lay out exactly what I think the causal mechanism is that links the US sphere of influence to economic development is in this post. It’s a really broad topic, and I think you need a more general sense that geopolitics matters a lot to national wealth for it to sound convincing.

But if you’d like one very obvious reason to think there’s a connection between the global distribution of wealth and geopolitical conflict, the term “Third World” originally referred to unaligned countries in the Cold War.

Maybe “capitalism promotes growth” fits better with your worldview, and the connection between countries being capitalist and being wealthy already feels intuitive. But as we’ve covered, that theory has limited explanatory power and isn’t very parsimonious.

Presenting a broader worldview where imperial might international relations matter a lot is one of my main aims for this blog. So if you’d like new insights from a source that’s not (quite) as tedious as waiting for world history to unfold… read some more of my posts (or just read Super Imperialism).

If I can avoid getting burned at the stake, I’ll also investigate exactly what’s so special about people of European and East Asian descent.

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To me, it’s very striking that the global divide between rich and poor follows such a simple pattern. I’m quite surprised I haven’t seen anyone mention it before.

On its own, it seems to suggest that the pattern reflects something real about the structure of the global economy. But it’s not definitive evidence, by any means.

I mostly just wanted to point out that this correlation exists and that it demands explanation. Apologies if that’s a disappointingly modest claim, realistically though I was never going to uncover a fundamental truth about the modern global economy in a 2000 word blog post (give it three or four 2000 word blog posts, at least.).

Personally I do still find this view convincing though, it fits in well with my broader understanding of how international trade has functioned historically. How the British Empire leveraged its military might into economic advantage, what the basic causes of the world wars were, how the financial system underpinning international trade has been structured since 1945, etc. Understandings that, if it wasn’t completely obvious yet, are generally Marxist.

But I can’t pretend this theory isn’t a bit bleak. It’s definitely not as optimistic as the view that institutions matter a lot, and that the Third World just needs more small businesses, women in education and entrepreneur promoting financial initiatives, or whatever.

Unfortunately, who people’s ancestors are is pretty immutable. And previous attempts to alter the relative proportions of the world’s ancestral groups haven’t been hugely successful, or all that humane, it has to be said.

And if there are big gains to be had from being the global hegemon, then that creates a huge source of conflict.

It implies powerful countries will compete for the position of hegemon.

What that kind of Great Power competition would look like in the modern world is hard to say. But off the top of my head though…. an emerging cold war between the US and China, maybe?