Globalization and Inequality

September 2011

Arvid Lukauskas

Columbia University

COMFAMA Program

Globalization

• Increased integration of national economies so that economic activity is less affected by national borders

• Manifested in more open economies characterized by:• higher levels of trade• greater capital mobility • increased levels of migration

World GDP per Capita, 1950-2005

GDP Growth, by Income Group

Growth has been very high in this era of globalization,

with all income groups and regions taking part

Within Country Distribution of Income, by Country

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The Ten Countries with the Highest Gini Coefficient

Determinants of Inequality

• Level of development (income)

• Demand for factors of production• Technological progress• Effects of integration

• Political, social, and economic institutions

• Economic geography

• Government policy, especially extent of redistribution

Distributional Concerns

Increased growth in the era of globalization has not necessarily meant that the benefits have been shared equally

• How has globalization affected the distribution of income across countries?

• How has it shaped the distribution of income within countries?

• How has it affected the level of poverty?

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Distribution of Income on a Global Level

Increase Inequality

• Globalization increases inequality across nations because countries grow at vastly different rates

• In particular, it widens the gap between the rich and poor

• Open markets favor more productive firms from developed countries

• Forcing developing countries to open their markets exposes them to unfair competition and results in the exploitation of the poor by the rich

Decrease Inequality

• As economic integration increases, income across countries should converge

• First, factor prices, then productivity levels, then income converges

• Economic theory says that small developing countries benefit more from international trade and capital flows than large developed countries

Distribution of Income Within Countries

Increase Inequality

• Economic forces benefit some social groups much more than others, creating “haves” and “have-nots”

• The “exit threat” of mobile asset holders augments their political power at the expense of labor

• The capacity of state officials to redistribute income across social groups diminishes

No Direct Effect

• It is impossible to determine a priori what the impact of globalization will be on inequality within countries:

• Globalization leads to higher levels of trade and growth, but there is no systematic relationship between these variables and the degree of income inequality

• Depends of relative abundance of factors of production

• The ultimate impact will depend on a variety of factors, including the national distribution of infrastructure and equality of access to education and other public goods

Stopler-Samuelson Theorem

Advanced Industrial Countries•Tend to have a comparative advantage in capital, skilled-labor, and knowledge intensive goods•Increased trade will benefit those factors at the expense of low-skilled labor and increase income inequality

Emerging Markets

•Tend to have a comparative advantage in labor intensive goods – especially low-skilled labor intensive goods in many countries•Increased trade should benefit labor and decrease income inequality

The Level of Poverty

Increase Poverty

Globalization will increase poverty by contributing to a greater increase in income inequality within countries than can be offset by any trickle down from faster growth (if any) The poor are least prepared

to succeed in an integrated global economy, so they will fall further behind

Decrease Poverty

•Globalization will decrease the level of poverty by increasing growth within developing countries

•Higher growth will result from more trade and increases in overall productivity

•Higher levels of growth = higher income per capita for all income segments, including the poor

•It is possible, but unlikely, that increases in income inequality could be great enough to negate the positive effects of higher growth on poor incomes

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There is a strong consensus on the impact of globalization on levels of poverty

There is little consensus on the effect of globalization on income equality across and within countries

Empirical Evidence

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Source: Bourguignon and Morrison (2002) as found in Lindert and Williamson (2003)

Trends in Global Inequality of Individual Incomes

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Divergence, Big Time: 1820-1992

Source: Pritchett (1997)

Source: Dowrick and DeLong (2003)

The “Convergence Club”

Globalization, Growth and Poverty: Building an Inclusive World Economy

• World Bank study published in 2002

• Comprehensive effort to measure the effects of globalization on the distribution of wealth and poverty

• The study divides developing countries into two main groups:• Developing countries that have become

more integrated into the global economy• Developing countries that have not done

so

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Globalizing Developing Countries

* The 24 developing countries that increased their integration into the world economy from 1980-2000 have seen:• significantly higher growth• slightly less inequality within

countries• lower levels of absolute

poverty• longer life expectancy and

better schooling

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Less Globalized Developing Countries

The 49 developing countries that have not integrated into the global economy have struggled.

These countries are found primarily in Sub-Saharan Africa, the Middle East and the former Soviet Union

As a group, these countries actually grew at a negative rate (about –1.0%) in the 1990s.

The number of people in absolute poverty rose by 4% to 437 million in the 1990s. Life expectancy and school enrollments declined in many countries.

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Trends in Inequality Among Countries

Globalized developing countries have gained ground on both developed and less globalized developing countries

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Different Measures of Inequality

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Robert Wade on Inequality

• Inequality using market rather than PPP exchange rates shows much greater inequality

• World PPP-income inequality using equal country weights has increased substantially

• World PPP-income polarization has increased dramatically

• World PPP-income inequality has been decreasing, but the result is largely due to China and India

Patterns of Inequality

Sala –I-Martin (2006)

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Wages Catching Up in Emerging Markets

(Percent of US manufacturing wages)

Source: IMF

Trends in Poverty

Absolute levels of poverty have declined in historical terms

From 1981 to 2001, the percentage of the world’s population living in poverty has declined from 40 to 21%

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Poverty Rates

Sala –I-Martin (2006)

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Overall Trends: Poverty Population living below US$1 per day in developing countries 1990 and 1998 Number of people below US$1 a

day (millions) Poverty Rate (%)

1990 2000 (estimate) 1990 2000 (estimate)

East Asia 470 261 29.4 14.5 Excluding China 110 57 24.1 10.6 South Asia 466 432 41.5 31.9 Sub-Saharan Africa 241 323 47.4 49.0 Latin America 48 56 11.0 10.8 Middle East/N.Africa 5 8 2.1 2.8 Europe & Cent. Asia 6 24 1.4 4.2 Total 1237 1100 28.3 21.6

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What is the Relationship between Growth and Poverty Reduction?

• Faster growth can lead to poverty reduction

• The pace of poverty reduction in different regions was closely associated with their growth rate

Source: OECD 2008

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Changes in Within Country Inequality

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What is the Relationship between Growth and Inequality?

• There is no systematic association between growth and inequality

• The fear that growth in poor countries is accompanied by higher inequality is not generally true

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What is the Relationship between Trade and Inequality?

• There is no simple association between trade and levels of inequality

• More trade openness tends to raise the income of the poor as much as overall per capita income

US Household Income Inequality

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Trends in US Income

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Levy and Temin 2007

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The Income of US Workers Has Stagnated

• Between 1980 and 2005, non-farm business productivity increased by 67.4%. Yet:• Median weekly earnings have increased only

14% (from $613 to $705)

• Median weekly compensation (earnings plus benefits) increased just 19% (from $736 to $876)

• College-educated women were the only group who saw their median compensation grow in line with productivity

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Demand for Labor• Skill-biased technical change has lowered demand for

low-skill (or mid-skill) workers and increased that for high-skill, better-educated workers

• Households demand more skill- and knowledge-intensive goods as national income increases

• The data generally show a widening income gap between skilled and unskilled workers

• But the income of most types of unskilled and skilled workers is not increasing in line with productivity

• Some new jobs, notably, in finance, have a winner-take-all character and people holding them have enjoyed huge increases in income

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Effects of Globalization• Globalization – notably, trade and outsourcing – has the

potential to hurt labor in advanced industrial countries because competing against lower-wage workers in developing countries puts downward pressure on developed country wages

• Trade and outsourcing probably have a relatively small impact on wage levels. Take the US case:• Trade only accounts for about 12-15% of US economy• Trade with low-wage countries is a very small percentage of US

trade• Estimates are that only 25% of variance in US wages is due to

effects of globalization• Developed country workers can compete with low-wage

workers in emerging markets if the wage differential is less than productivity differential

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Political Institutions• US created an institutional structure during the New Deal

and immediate post-war period (the “Golden Age”) that distributed gains broadly:• Labor unions were accepted

• “Treaty of Detroit”: unions agree to minimal labor disruptions and management control over production decisions in exchange for compensation adjusted for cost-of-living and productivity gains; government helps broker the deal

• High top-bracket income tax rate

• Meaningful minimum wage

• Resulted in rapidly rising wages that led to an expanding middle class and mass upward mobility

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Providing a Social Safety Net

• Traditionally, governments have provided social insurance, such as unemployment compensation and worker training, to those hurt by economic change, such as that brought about by external forces like globalization

• Today, there is growing concern:

Is globalization and economic fragility restricting governments’ ability to increase spending on social programs at a time when it is badly needed?

• Certainly, one of the principle tasks facing government moving forward is to find creative new ways to provide a social safety net at low cost

Pro-Poor Growth in Emerging Markets No improvements for the poor are possible if

growth is not high and sustained The key element: Connect the poor to markets

and social servicesExpand physical infrastructure and provide more

equal access Improve social services and make them more

equitableReduce transaction costsEnhance governance structures to improve voice

and accountability

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Develop Agriculture

• Improve rural infrastructure• Roads, irrigation, power supply, communications systems,

and social services, especially education and health• Allow agricultural prices to rise, increasing farmer

incomes• Does this still make sense today, when agricultural prices

are skyrocketing? Effects on urban poor?• Make every effort to target smallholders as well as

large agri-businesses• Many countries are characterized by dualism in the

agricultural sector• Some selective intervention to target smallholders is often

warranted – reduce risk and improve access• Strengthen property rights to land

• Develop agricultural processing industries

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Urban Sector

• Focus on enhancing employment opportunities in both the formal and informal sectors:o Embrace tradeo Improve the investment climateo Remove labor market rigiditieso Improve educational opportunities,

especially for womeno Improve infrastructure

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