5000 is a magic number

$5000 per person per year, that is.

I was playing with Gapminder and noticed that a lot of the interesting relationships between levels of income and other development variables have noticeable kinks at about $5000 per capita. Fertility, for example, bottoms out at about $5000. The number of girls in school attains parity with the number of boys in school at about that income level and life expectancy might kink at five grand, too.

That analysis is across countries in the year 2000. 5000 is a magic number even when you look within a country over time. Check out Korea from 1975 to today (hit the play button to see a cool animation).

Apparently, then, 5000 is a magic number in development. Once countries hit that income level, good stuff seems to start happening. Reading Friedman’s Moral Consequences of Economic Growth, I see that 5000 is a magic number for the environment, too:

Empirical investigation … has mostly supported the conclusion that the consequences of economic development for … pollution are … negative up to levels of per capita income of between $2000 and $8000, but then become positive … In cross-country comparisons, sulfur dioxide, nitrous oxide, carbon monoxide, smoke, and lead from automotive emissions all show increasing atmospheric concentration up to some income level, but a decreasing concentration thereafter … [Similarly for] fecal contamination in rivers, … lead, arsenic, cadmium, mercury, and nickel … Deforestation at first increases with economic development …, but there is even some evidence that it too reverses as living standards rise further.

(page 382, emphasis added)

Why would $5000 be the magic number?

Well, what do you get for 5000 bucks. I’ll assume into existence a wife for myself (I can do that, I’m an economist). My wife and I make $10,000 a year. With that money, we can buy a $500 a month apartment in Atlanta Georgia. We could also budget about $50 a week for food and have $1500 leftover for other living expenses.

This isn’t a great living. There would be absolutely NO luxuries. That said, its not abject poverty. Both my wife and I have a roof over our heads and food to eat. Because we don’t have to continuously worry (too much) about the bare necessities, we’re free to concern ourselves with things that don’t involve the here and now. Besides consumption luxuries (honey, maybe we can have an ice cream next month if we start saving today) we might worry about aesthetic things like the look of our house or the garbage on the streets. We have time to worry about equal rights for girls and we might start to notice all the smoke billowing from the factory next door.


10 Responses to “5000 is a magic number”

  1. 1 SWong August 2, 2006 at 9:58 pm

    Just try to not get sick or injured, ever. You might also look into not aging.

  2. 3 Will August 2, 2006 at 10:03 pm

    “Just try to not get sick or injured, ever. You might also look into not aging.”

    Damn spambots… Oh wait. You’re real. 🙂

    What’s your point? $5,000 per person per year seems to be where lots of these charts make a turn for the better, no? It’s interesting to speculate as to why that’s the case. Any ideas?

  3. 4 SWong August 3, 2006 at 11:56 pm

    That looks like the break-out point where a household is no longer in 100% day-to-day survival mode.

    Below a certain income, you are forced to deal with every problem as it comes up. You life depends more on the mercy of your physical and social environment; the weather, the local crime rate, the local pollution rate, the corruption level in your local government, etc.

    You have very little flexibility to make the kinds of investments that would prevent or let you avoid those problems.

    Investments like, oh,
    -a healthy diet
    -routine medical examinations
    -good clothing and shelter
    -financial investments
    -capital goods, etc.

    The more of these kinds of things that you have, the more successful your household will tend to be at supporting itself.

    I think your real question is why growth rates don’t increase in a strictly linear fashion with available resources.

  4. 5 Will August 4, 2006 at 12:34 am

    Yep, the kink is what’s interesting.

    You see similar kinks in incomes during the industrial revolution. Historians usually find macro explanations for this:
    – the right institutions (democracy, private property, etc)
    – some instantaneous and ubiquitous change in preferences towards more savings (rather than consuming)
    – populations have some critical mass relative to resources such that after met, incomes explode

    I think you’re positing micro causes to growth. I think that’s right.

  5. 6 SWong August 7, 2006 at 5:06 pm

    Well, not in every case. Institutions are an excellent example. My understanding of the politial climate in many African nations is that the frequent famines are caused by ridiculous corruption and gross mismanagement rather than environmental conditions. It looks like local leaders are trying to build on a variant of the hydraulic empire concept. Tweaking loan interest rates isn’t going to help in that sort of situation.

    Likewise, in Somalia, the Libertarian Paradise, the economic, social, and political environments aren’t exactly inspirational to potential investors. A poppy farmer in northern Afghanistan might make well over $5k/annually, but that country’s growth is going to cap out until a bunch of other things change there. The value of money is only as good as your choice of purchases.

  6. 7 Will August 8, 2006 at 6:20 am

    I don’t see how the ‘right institutions’ explain a kink at $5k.

    Why would the ‘right institutions’ have a discontinuous impact at that income level?

  7. 8 SWong August 8, 2006 at 11:13 pm

    Maybe the $5k is an effect of the growth? I propose that you wouldn’t necessarily see most of those kinks if you were just sending each household a $417 check every month.

    We can probably agree that as an economy matures, different factors that aren’t directly related will tend to reinforce each other. More girls in school lead to more women in the workforce, leading to stronger labor pools and larger consumer and tax bases. I don’t think it’s the cash, directly, that’s making the difference; I think it’s the structures that grant that level of income.

    Maybe that ~$5000/capita is the region where some of these factors are strong enough to start coming together.

  8. 9 Will August 9, 2006 at 7:46 am

    agreed. $5k doesn’t cause ‘those things’ but it seems to occur together with them. Is this a completely spuriuous correlation (like the sun coming up and the stars dissappearing) or is there something causing both things to happen?

  9. 10 SWong August 9, 2006 at 10:10 pm

    Looks like there is a tipping point in a human socioeconomic system somewhere around there. We’re back to agreeing that there probably isn’t a specific single cause. Per-capita income just makes a handy index value.

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