Policies for inclusive development in a globalizing world François Bourguignon Paris School of Economics Islamabad, July

The inequality dimension of globalized development Globalization, growth and inequality over the last 20 years:  Prior to the present crisis, globalization seen as the world engine of growth and a major force for South-North catching-up  At the same time, inequality is increasing in a large number of countries (both developed and emerging/developing) and slowing down poverty reduction in emerging countries Such an evolution raises several questions… 2

The inequality dimension of globalized development: questions  Is globalization and/or growth really the main cause for the observed increase in inequality?  Is there any kind of tradeoff between growth (in a globalized world) and the degree of equality?  What are the likely consequences of an increase in inequality for poverty reduction and further development?  What scope for domestic policies: in fostering growth? In controling inequality? 3

Outline 1. Evidence on global and national inequalities  World distribution and the South-North catching-up  National distributions 2. The globalization-growth-inequality link  The diversity of country experiences  Globalized growth: equalizing and unequalizing factors  Country specific circumstances 3. The design of domestic policies 4. Some implications for Pakistan 4

1. Evidence on global and national inequalitie s a. World distribution and the South-North catching-up 5 Source: Bourguignon (2011)

The South-North catching up 6

Poverty reduction in developing countries 7 Source: World Bank

Evolution of world income distribution: summary  Trend Reversal in global inequality and South's catching- up  Continuous drop in absolute poverty  Main drivers of these evolutions:  Asian growth itself closely linked to globalization  Global imbalances fostering US growth  Spillovers onto other countries  Crisis did not modify the equalizing trend 8

b. The unequalizing of national income distributions  Trend reversal in post-redistribution inequality in developed countries  More diversity in emerging and developing countries  Yet, inequality did increase in a majority of countries, including among big Asian fast-growers 9

Generalized increase of inequality in developed countries 10

Much more diversity among developing countries … 11

Inequality changes in Latin America 12

Inequality change in selected Asian countries 13

2. The economic relationship between globalization, growth and inequality a) The diversity of country experiences  Contemporaneous Asian fast-growers ( China, India, Indonesia) with fast increases in inequality  Contemporaneous Asian fast-growers with no or little change in inequality (Vietnam)  Asian fast-growers of the 1970s (dragons) with no change in inequality  Asian medium growers with no big change in inequality (Pakistan)  Fast LAC growers with drop in inequality (Brazil)  Etc… 14

b) Globalized growth: equalizing and unequalizing common factors  Trade openness favors the relatively abundant factors (Heckscher-Ohlin) and hurts the relatively scarce factors  E.g. unskilled labor hurt in developed countries, but 'favored' in developing countries  Yet implications for inequality differ according to how markets work (e.g. labor surplus economies)  Capital as a (often hidden) big winner  Technical progress and demand/supply gap for skilled labor  "Contagion" through highly skilled labor mobility  Pressure on commodity prices  "Financiarization" 15

c) Country specific circumstances  Elasticity of labor supply to modern sector (Kuznets U- curve)  Overall growth rate  Domestic vs. foreign market focus of development strategy  Pace and modalities of human capital accumulation  Redistribution  Geographical distribution of economic activity, population and public expenditures (infrastructure)  Others (fertility) Overall, many reasons why a common force (globalization) may have different distributional impacts! 16

3) The design of domestic policies in the field of (income) distribution  Inequality slows down poverty reduction for given growth and inequality is bad for growth beyond some level  Preventing inequality to grow beyond some limit is an important objective  How to do it without slowing down, and possibly with speeding up growth? a)Correct inequality increasing market distortions b)Redistribute through the accumulation of productive assets (education, health care, access to credit, infrastructure, …) among the poor rather than current income c)Actually, combinations of both types of redistribution are to be used (as with conditional cash transfers) 17

4. Some implications for Pakistan  Relatively slow growth, moderate and rather stable inequality  Missing growth engine must be found in crisis-prone macro-management, limited openness, governance deficit, limited infrastructure,...  Unclear whether the removal of any of these obstacles to growth would and really increase inequality, except maybe for openness  At the same time, broad scope for growth and equality through accumulation of human capital among the poor 18

19 Final remark: the case of Brazil

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21 Thank you