Why isn't the rest of the world as rich as the United States and Switzerland, the world's two wealthiest countries? The income gap between the handful of wealthy nations and everyone else is wide. Brad de Long, economist at the University of California, Berkeley, illustrates the chasm this way: Less than 15% of the world's population live in countries where the average level of gross domestic product is greater than $16,000. Nearly 70% of the world's population lives in countries where the average level of GDP is less than $4,000 a year.

What makes living standards improve is the most fundamental question in economics. Economists are also very uncertain of the answer. Yet there are grounds for some optimism at this moment in history. Despite the collapse of the global trade summit in Seattle last year, and the anti-globalism street theater of Washington D.C. and Prague, free trade agreements are being signed around the world by the European Union, the U.S., Jordan, Vietnam, South Korea, Mexico, China, Japan, and other countries. In a new book, Barriers to Riches, economists Stephen Parente and Edward Prescott offer a compelling argument why this move toward open borders is an essential step toward reducing poverty.

High-tech innovations and organizational knowledge recipes for creating wealth are easily transferable in a global economy linked by trade, immigration, and the Internet. But they argue that in many poor countries, industry insiders benefit from government-sanctioned monopolies that stymie technological creativity and organizational change. Thus, the worldwide move toward open borders not only transfers economically useful ideas. It breaks down monopolies by introducing competition into a market. Yes, a free trade regime is tumultuous. But it does appear to be a necessary condition for living standards to improve.

 


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