It Won’t Fit on a Bumper Sticker: Determining the Benefits of Globalization is a Complex Story
Most issues in life are not black and white, but fall into the large gray middle. Take globalization, for instance: Does it result in more inequality because the rich gain more than the poor? It turns out that the answer largely depends on what one means by "inequality."
There are at least four definitions of inequality we can use. The most common, Concept zero, is inequality between all individuals within a given nation. Concept 1 is inequality between countries or average incomes of all countries in the world. Concept 2 is the same as Concept 1 except that we weigh each country’s income by the number of people who live there. Concept 3 inequality finally is inequality between all individuals in the world.
The last quarter of the 20th century has been quite an interesting period. Consider the changes it has brought to each of these concepts of inequality. Within-national inequalities (Concept zero) have gone up in all major countries in the world. Reagan-Thatcher periods of rising inequality in the US and UK are well known; so is the dramatic increase in inequality in Russia and Eastern Europe after the collapse of Communism, as well as in China after the introduction of market reforms. India too has recently seen rising inequality. Are these increases related to globalization that was unfolding at the same time? The evidence is mixed. It seems that greater openness to trade has raised wage differentials between highly skilled and unskilled workers, but that skill-biased technological progress might have also contributed to rising inequality too.
With respect to Concept 1, differences between average incomes of rich and poor countries have markedly increased over the last 20-25 years. Generally speaking, rich countries have done better than poor countries. But the question is whether this unevenness in performance is due to some countries’ espousing globalization while others have not, or did it happen because globalization has not been equally kind to all? In other words, are poor countries in Africa not growing because they cling to old-fashioned protectionism or because they have been marginalized by globalization? Here, too, the answer is complicated. Some countries have failed to grow because of globalization (as their competitors have undercut them at every step), while others have failed to grow for the opposite reason: because they remained closed. The first are often thought to include Latin American countries that found themselves between the Scylla of highly skill-intensive economies like the U.S. and the Charybdis of low skilled and cheap labor provided by China and India. They seem to have lost both ends of the market and much in between. But there are also countries that have not grown because they have remained closed. The examples include Burma, Laos, Cambodia, and the most dramatic of them all, North Korea.
Inequality measured by Concept 2 declined at the same time that Concept 1 inequality grew. These two facts are not unrelated. In the late 1970s, China started its reforms which led to a six-fold increase in its average income during the next quarter of a century. At the same time, Latin America entered its debt crisis, begun its "lost decade" of growth, and its recovery might have been impeded by the arrival of cheap competitors like China on the world economic stage. Africa, too, started its decline in the 1980s; and economies of Eastern Europe and the former USSR collapsed in the 1990s. Thus, the number of poor and middle income countries with nil or negative growth vastly exceeded the number of those with positive growth, which explains the increase in Concept 1 inequality. But those that grew included China and India—poor countries that contain almost 40 percent of the world’s population. Hence, Concept 2 inequality, which adjusts countries’ GDPs per capita for population size declined.
Yet Concept 2 inequality is not important per se. It is important because it gives the first approximation of what happens to inequality between all individuals in the world. Most—around 2/3—of inequality between individuals in the world is explained by inequality between (population-weighted) average incomes of countries. That is, today, it is one’s birth place, which determines people’s income much more than his or her social class. In contrast, prior to the industrial revolution, aristocrats in France and India and the Ashanti kingdom all had similar incomes, while peasants all likewise lived barely above subsistence. Since the industrial revolution, today’s industrialized countries pulled ahead of the rest of the world, such that today’s poor in France have the same incomes as the rich in India or Ghana.
If Concept 2 provides a good approximation of global inequality between individuals, does this mean that the latter must have gone down too? Not necessarily. While the (population-weighted) average incomes between countries have converged, within-country inequalities have exploded. The global inequality-reducing effect of China’s per capita incomes catching up with that of the U.S. was partly or perhaps fully offset by the increasing income inequality within China and within the U.S. What we know for sure, though, is that Concept 3 inequality is extremely high, that the income ratio between the richest and the poorest 5 percent in the world is 170 to 1, that the richest quarter of world population consumes three quarters of the world’s output. However, we are much less sure about the direction of change. This is because the change, in whatever direction, is small relative to the sheer magnitude of global inequality — and our measurement tools are rather blunt.
Different types of inequality have moved in different directions. Average incomes of countries are more different today than 20 or 30 years ago; so are inequalities within countries. But fast growth of poor and populous countries has reduced distances between many people in those countries and in industrialized countries. Concept 3 inequality is the outcome of all these movements.
Measurement is one reason why linking overall inequality between citizens of the world to globalization is so difficult. Another has to do with the fact that globalization does not have uniform effects in all countries, that when globalization spurs growth in China and India it does much more for reducing global inequality than when it spurs growth in Chad and Bolivia, and that globalization has measurable effect on inequalities within countries.
So, what will you put on your bumper-sticker?
Branko Milanovic is a senior associate with the Carnegie Endowment for International Peace and World Bank.
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