The End of the Easterlin Paradox?

Remember the Easterlin Paradox? At a given point in time, the rich are happier than the poor. But as countries get richer, they don’t become happier, because everyone gets richer. It says only relative income matters.

In a new paper, Sacks, Stevenson and Wolfers suggests the paradox does not hold. They show that absolute income matters for happiness. The relationship holds across individuals in a given country, across countries at a moment in time, and across time in a given country. Moreover, their results suggest this relationship is very stable across time, countries and income. You can see their figure for the cross section of countries here. For their numerous figures on the time series of happiness and growth, follow the link to their paper.

"Across each of these countries, the relationship between income and satisfaction is remarkably similar. Our graphical analysis suggests that subjective well being rises with the log of income. This functional form implies that a 20 percent rise in income has the same impact on well-being, regardless of the initial level of income: going from $500 to $600 of income per year yields the same impact on well-being as going from $50,000 to $60,000."

Daily Chart : make trade, not war

Over the past 50 years, trade has increased proportionally more than GDP, and the world now trades three times more its output than before. At the same time, military spending, as a percent of world GDP, also fell significantly.

Is there a relationship between the two? Montesquieu saw that the effect of trade was to bring peace, already in the 18^th century. Certainly, if war disrupts trade and its benefits, then those retaining the rents from trade should invest ressources in preventing war and in cooling down tempestuous leaders.

But does trade really reduce war? This paper by Philippe Martin et al shows that an increase in trade between two countries reduces the probability of a conflict between them. As world trade is booming, are we heading towards world peace?

Alas, no. If small neighbors trade more with a distant third, they have less to lose from a war between themselves. Trade matters, but the pattern of trade matters even more. Take India and Pakistan. Both of them are trading more with the outside world. Hence, they have less to lose from going to war with each other. Globalization reduces global wars, and the distance of conflicts, but it also reduces the opportunity cost of local conflicts. Regional trade agreements, by creating strong trade links, bind countries together, and promote a regional peace.

Daily Chart: the rise of the developing countries

"Center vs Periphery", was the worldview of some developing economists in the 1960s. Today, the view is no longer valid. The graph above shows three important facts.

Over the last 20 years, the share of developing countries trade over total world trade increased from less than 20% to 30% (bars). This rise in trade could mean developing countries are ever more dependent on rich countries for their trade, but the following points show the exact opposite is happening.

Rich countries are becoming less important for the developing ones, as the latter are trading more with each other (in relative terms). Today, 40% of their imports are coming from other developing, up from 18% in 1990. Finally, the total value of South-to-South trade, which accounted for 2.5% of world trade in 1990, is now worth 13%.

The "multipolar world" is not going to happen. It is already here.