An article over at the Washington Post's Wonkblog is reporting the results of a new study, Global Inequality of Opportunity: How Much of Our Income Is Determined by Where We Live?, by University of Maryland economist Branko Milanovic that about half of any given person's income is determined by two factors: country of residence and the income distribution of that country. As the Post reports Milanovic's findings:
Life is a lottery, and the most important part isn't how smart you are or even who your parents are. It's where you were born.
That, at least, is what economist Branko Milanovic found when he broke down how much people in different countries make at different income percentiles. That lets us figure out, for example, that the bottom 1 percent in Germany are better off than all but the top 40 percent in China. And that more than half of what you — yes, you — earn is determined by the country you live in. But really, when you consider the fact that only 3 percent of the world's population are immigrants, it's determined by the country you were born in.
The cost of living varies by country, so Milanovic tries to control for this using purchasing power parity dollar calculations. PPP calculations try to …
… adjust for the fact that local goods, like, say, a haircut, cost less in some countries than in others. In other words, that you don't always need as much money to live the same way. This changes the picture, but not that much. The poorest Germans, as you can see below, are still better off than 40 percent of Brazilians, 60 percent of Chinese and more than 90 percent of Indians.
As far as I can tell Milanovic does not try to explain the "geographic" differences income levels between countries. In fact, the differences are not mostly geographic, they are institutional. If a country adopts the rule of law, strong property rights protections, free markets, and open trade, then its citizens will be well on the way to achieving prosperity. For example, owing to our relatively better economic and governance institutions Americans per capita enjoy access to more than $500,000 of intangible wealth compared to Nigeria's $2,700 per capita intangible wealth.
In my article, "Globalization Is Good for You!", in the June issue of Reason I reported on numerous studies that strongly bolster the conclusion that good institutions enable the creation of wealth.
The Wonkblog article notes that one quick way to enable more people to become rich is to let them to immigrate from poor (basket case) countries to rich (free) countries. As I reported:
The economic gains from unfettered immigration are vastly more enormous than those that would result from the elimination of remaining trade restrictions. Total factor productivity (TFP) is the portion of output not explained by the amount of inputs used in production. Its level is determined by how efficiently and intensely the inputs are utilized in production. In other words, it is all those factors—technology, honest government, a stable currency, etc.—that enable people to work "smarter" and not just harder.
A 2012 working paper titled "Open Borders," by the University of Wisconsin economist John Kennan, found that if all workers moved immediately to places with higher total factor productivity, it would produce the equivalent of doubling the world's supply of laborers. Using U.S. TFP as a benchmark, the world's workers right now are the equivalent of 750 million Americans, but allowing migration to high TFP regions would boost that to the equivalent of 1.5 billion American workers.
Think of it this way: A worker in Somalia can produce only one-tenth the economic value of a worker in the United States. But as soon as she trades the hellhole of Mogadishu for the comparative paradise of Minneapolis, she can immediately take advantage of the higher American TFP to produce vastly more. Multiply that by the hundreds of millions still stuck in low-productivity countries.
Assuming everybody moved immediately, Kennan calculated that it would temporarily depress the average wages of the host countries' natives by 20 percent. If emigration were more gradual, there would be essentially no effects on native-born wages.
In a 2011 working paper for the Center for Global Development, "Economics and Emigration: Trillion Dollar Bills on the Sidewalk?," Michael Clemens reviewed the literature on the relationship between economic growth and migration. He concluded that removing mobility barriers could plausibly produce overall gains of 20–60 percent of global GDP. Since world GDP is about $78 trillion now, that suggests that opening borders alone could boost global GDP to between $94 and $125 trillion.
As the Wonkblog article concluded:
There's nothing more valuable than a U.S. passport. And there's nothing that would reduce global inequality more than issuing a few more of them.