To be relatively rich and absolutely poor or absolutely rich and relatively poor?

Discussing the results of a thought experiment conducted in Econ 24: Development Economics.

Spring term is off to a wonderful start; my culminating experience in industrial organization is sure to expand my knowledge frontier of the subject, my formal logic course is quite challenging and pushes my deductive reasoning to its absolute limits, and my development economics professor posed an illuminating thought experiment to me and my classmates from the jump.

The question: Is it better to be rich in a poor country or poor in a rich country?

Empirically, the correct answer to this question is entirely contingent on the wealth disparities between the people within each country and the gap between the rich and poor nations. Therefore, either answer can be defended robustly.

Nonetheless, I believe the gut reaction from my classmates was informative. Two thirds of the class raised their hands for “rather be rich in a poor country” while a minority raised our hands for “poor in a rich country.” Given current inter- and intranational wealth disparities, the correct answer, at least, in terms of PPP-adjusted income, was the latter. Prof. Novosad provided the following data to quantitatively substantiate this conclusion:

Slide 3 from Prof. Novosad’s PowerPoint. (Thank you, Professor!)

The key takeaway is that the 90th percentile of earners in the ≈10th (12th, precisely) percentile country (by GDP/capita) of Ethiopia enjoys a PPP-adjusted income of $1,610 per annum. Conversely, the 10th percentile of earners in the ≈90th (94th, precisely) percentile country of the US enjoys $7,500 per annum.

The long and short of it is this: the bottom decile of Americans make over four and a half times the annual income of the uppermost decile of Ethiopians. Clearly, then, it is significantly better to be relatively poor in a rich country than relatively rich in a poor one.

Nonetheless, my peers who had voted oppositely did not seem so ready to change their minds or their answers to Prof. Novosad’s question. Rather perplexed by their stubbornness, I tried to think of an explanation. My mind went immediately (OK, perhaps there was an interval of chin-scratching and eyebrow-furrowing) to Adam Smith’s Theory of Moral Sentiments. Specifically, Smith’s explanation of why we really pursue wealth:¹

“[I]t is the vanity, not the ease, or the pleasure, which… compensates all that toil… [I]t is chiefly from this regard to the sentiments of mankind, that we pursue riches and avoid poverty.”²

Understood through this Smithian lens, the majority response makes perfect sense; for those who toil not to enjoy the absolute pleasures of wealth, but the increased sympathy that one’s relative rank elicits from his fellow man, then one would surely be better off as a rich man in a poor country than a poor man in a rich country. Yet another perverse conclusion arrived at by the men of vanity. To avoid such masochistic and backwards determinations, we should endeavor to be men of pride.

1. For a detailed exposition of this matter, see the linked post.

2. Adam Smith, Theory of Moral Sentiments, I.iii.2.1