1. Globalization and Inequality
COMFAMA Program
Globalization and Inequality
September 2011
Arvid Lukauskas
Columbia University
Today:
How is globalization affecting the prospects for growth of emerging market countries and what is the role of the state and public policy in promoting growth?

2. 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

3. World GDP per Capita,

4. GDP Growth, by Income Group
Growth has been very high in this era of globalization, with all income groups and regions taking part 4

5. Within Country Distribution of Income, by Country

6. The Ten Countries with the Highest Gini Coefficient

7. 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

8. 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?

9. 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

10. 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

11. 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

12. The Level of Poverty Increase Poverty Decrease 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

13. 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

14. Trends in Global Inequality of Individual Incomes
Source: Bourguignon and Morrison (2002) as found in Lindert and Williamson (2003)

15. Divergence, Big Time: 1820-1992 Source: Pritchett (1997)
To start the discussion of inequality, look at a basic stylized fact about growth divergence since 1820
The ratio of richest to poorest countries went from 6 to 1 in 1820 to 70 to 1 in Before the Industrial Revolution , the ratio was about 2 to 1.
The growth rate of developed countries shows convergence (their growth rates are bunched in a narrow group), but the growth rates between developed and developing countries show considerable divergence and there is divergence among developing countries:
Of 108 developing countries, 11 grew faster than 4.2% in countries had negative growth (Mozambique -2.2%); 28 had growth rates of less than 0.5% and 40 had growth rates of less than 1.0%
Divergence continued over the period from , but what has happened since?
Source: Pritchett (1997)

16. The “Convergence Club”
Source: Dowrick and DeLong (2003)

17. 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
I would like to report the findings of one of the most comprehensive and widely reported studies published by the World Bank.
Does not make a clear distinction between those that wanted to integrate and couldn’t and those that chose not to.

18. Globalizing Developing Countries
* The 24 developing countries that increased their integration into the world economy from have seen:
significantly higher growth
slightly less inequality within countries
lower levels of absolute poverty
longer life expectancy and better schooling
These countries included China, India, Hungary and Mexico and were home to some 3 billion people.
The sample is skewed toward Asia, which make up 85% of the group of globalizers.

19. 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.

20. Trends in Inequality Among Countries
Globalized developing countries have gained ground on both developed and less globalized developing countries

21. Different Measures of Inequality
Gini coefficient: how far does income distribution diverge from a perfectly equal distribution? Higher score indicates higher divergence.
Unweighted: each country’s GDP per capita is treated as one observation, regardless of size
Weighted: Each country’s GDP is weighted by its population, so more populous countries count more

22. 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

23. Patterns of Inequality
Need to be careful in interpreting this graph
This measures income inequality looking at all households in the world, by properly weighting each country by its population size.
Income inequality within China has increased, but the inclusion of Chinese households means that world income inequality declines because the large number of Chinese have caught up with the rest of the world.
Income inequality has also increased greatly in the US
In sum, the decline in across-country individual inequality, correctly waited by population, more than offsets the population-weighted average increase in within-country individual inequality.
Sala –I-Martin (2006)

24. Wages Catching Up in Emerging Markets (Percent of US manufacturing wages)
Source: IMF

25. 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%

26. Poverty Rates
Sala –I-Martin (2006)

27. Overall Trends: Poverty

28. 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

29. Source: OECD 2008

31. Changes in Within Country Inequality

32. 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

33. 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

34. US Household Income Inequality

36. Trends in US Income

38. Levy and Temin 2007

39. 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

40. 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

41. 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

42. 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

44. 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

45. 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

46. 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

47. Urban Sector
Focus on enhancing employment opportunities in both the formal and informal sectors:
Embrace trade
Improve the investment climate
Remove labor market rigidities
Improve educational opportunities, especially for women
Improve infrastructure