Transcript Distribution of Income Within Countries Increase Inequality

COMFAMA Program
Globalization and Inequality
September 2011
Arvid Lukauskas
Columbia University
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
The Ten Countries with the Highest Gini
Coefficient
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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
Emerging Markets
• Tend to have a
comparative
advantage in capital,
skilled-labor, and
knowledge intensive
goods
• Increased trade will
benefit those factors
at the expense of lowskilled labor and
increase income
inequality
•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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Empirical Evidence
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
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Trends in Global Inequality of Individual Incomes
Source: Bourguignon and Morrison (2002) as found in Lindert and Williamson (2003)
Divergence, Big Time: 1820-1992
Source: Pritchett (1997)
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The “Convergence Club”
Source: Dowrick and DeLong (2003)
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
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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
1990
2000 (estimate)
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
48
56
11.0
10.8
5
8
2.1
2.8
6
24
1.4
4.2
1237
1100
28.3
21.6
Latin America
Middle
East/N.Africa
Europe & Cent.
Asia
Total
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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
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Source: OECD 2008
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Changes in Within Country Inequality
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
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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 knowledgeintensive 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 winnertake-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
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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 services
 Expand physical infrastructure and provide more
equal access
 Improve social services and make them more
equitable
 Reduce transaction costs
 Enhance 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
o
o
o
Embrace trade
Improve the investment climate
Remove labor market rigidities
Improve educational opportunities,
especially for women
o Improve infrastructure
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