February 27, 2013
The question presumes agreement
that there has been a reduction in poverty and inequality attributable to
globalization. To the contrary, there is significant dispute among scholars and
policymakers as to the direction and the degree of change in poverty and
inequality across the period of recent rapid globalization. The debate extends
to the importance of inequality in the matter of growth. Certain measures
will support findings of convergence, and others of divergence. The influence
of globalization on the trends is yet another matter of disagreement. Finally,
there is dispute about whether anything should be done or what should be done
about the trends.
There is a body of argument
supporting the statement as entirely true. Believers include Thatcher, Reagan,
and economists who support their policies—Friedrich Hayek, Milton Friedman,
Jeffrey Sachs, and others. There is a body of argument and another group who
believe the statement is at best misleading and that if the proper indicators
are used, the findings are increased poverty and inequality. Joseph Stiglitz,
Shamsul Haque, and Branko Milanovic are among these.
I argue that there has indeed
been a reduction in poverty across the years since 1980, but the trends in
inequality are much less clear. I argue globalization has been good for poverty
reduction, but globalization should and can be managed more effectively by
IGO’s and nation states in order to deliver benefits to a large segment of the world’s
population which has not seen improvement.
I will assume globalization to be
focused on the period of recent acceleration, 1980 to the present. Due to the
space limitations of this paper, I will assume poverty is measured primarily by
income per capita. The term “good” may mean different things in different
cultures (e.g., income, freedom from oppression, access to health services,
education, etc.). I will assume income per capita to be the measure of good for
this paper. Doing so, I do not concede to income as the best measure for all
purposes. I will primarily rely on the widely used “GINI” coefficient in regard
to inequality, also without conceding that this measure fully addresses the
concept. I will review the criticality of methodological choices for both
poverty and inequality. Reference will be made to schools of thought which
perhaps bias the choices of methodology and the findings.
A good place to begin is with the
work of Bob Sutcliffe who describes five different methodological decisions
which must first be taken by any serious student of change in poverty and
inequality: (1) what is to be studied (wealth, life expectancy, etc.); (2)
inequality between whom (between countries, within countries, etc.); (3) how to
deal with currency differences; (4) choosing from among many sources of data;
and, (5) what types of measures (integral, ratios, etc.). (Sutcliffe 2005:1-20)
Choices among these methodologies can yield radically different conclusions.
Depending on the variables
chosen, one can either confirm the essay statement or refute it. Poverty has
been reduced if we include India and China, but has increased if we do
not. Similarly, there is decreased inequality between population weighted
countries, based on income, but greater inequality within countries, based on
income (Sutcliffe 2005:1-20).
Two widely respected economists
are examples of the dramatic divide that exists over the choices and
interpretation of data: Jagdish Bhagwati, in his best seller, In
Defense of Globalization, states clearly, “[…] as it happened, the
proponents of globalization have it right,” when speaking of the poverty
reducing policies associated with free trade (Bhagwati 2004:52). To the
contrary, Joseph Stiglitz, excepting China, Vietnam, and a few Eastern European
countries, says, “poverty has soared as incomes have plummeted” (Stiglitz
2012:214). Both scholars can easily defend their views with data and methods
selectively chosen. One can only wonder whether an ideological predisposition
determines the selection of methodologies, or the thoughtful choice of
methodologies determines the attitude of an unbiased scholar toward the
benefits of globalization. Too often, it may well be the former.
Poverty and inequality do not
necessarily track together. It is possible one is improving and the other not.
Also, most widely used poverty measures use a fixed measure for poverty, such
as $1.25 PPP per day, whereas inequality is a relative measure. Sutcliffe
reports that while poverty is a major focus of concern among economists in
recent years, inequality has been “systematically avoided” (Sutcliffe 2005:14).
Underscoring his point, the focus of the Millenium Development Goals is on
poverty reduction. Inequality is not mentioned in the MDG’s, except in the
context of gender.
What was it that the advocates of free trade, opening borders, and
globalization were expecting as Thatcher and Reagan launched the explosion of
neoclassical economic policies in the early 1980’s? Globalization was expected
to result in convergence of real incomes between wealthy and poor countries,
for the following four reasons: (1) Poor countries would get foreign direct
investment because low wages would attract capital expecting big returns; (2)
poor nations would import technology from the wealthy world, and thus
inexpensively copy the advancements the rich world had already paid dearly to
develop; (3) poor countries could specialize in whatever they do best, import
the rest from other countries; and (4) the poor countries could take all the
policies, laws, and institutions that were successful elsewhere, and painlessly
institute them (Milanovik 2011:104-5).
What was actually delivered? Neoliberals feel actual experience since 1980
validates the policies administered by the World Bank, the IMF, and the WTO in
driving the developing world toward less poverty and greater equality (Wade
2004:567-8). By the measures of the World Bank, we are headed to reaching the
poverty goal in the MDG’s. They argue that the countries which chose to fully
adopt the free market theory indeed advanced, and the countries whose growth
was stagnant simply failed to sufficiently free their markets of constraining
influences.
Concerning inequality, If only
the predominant measure is used to determine inequality, PPP income inequality
between population weighted countries (intercountry), then it is widely
accepted that income inequality has improved--constant or falling since 1980
(Wade 2004: 576).
Summarizing the neoclassical view, if only these two widely used
measures are selected to answer the question, one can accurately claim that
globalization has delivered improvement in both poverty and inequality across
the last thirty years of accelerated globalization.
Of course, all such claims assume that the key elements of what
constitutes globalization are agreed and that we disregard other forces
(outside globalization) which may have had influence on the results. As Wade
explains, we may simplify by saying globalization is everything that occurred
in the period loosely called the period of globalization (1980 to the present),
but we know there are elements in the period other than “[…] just
those things which really did expand global interchanges of goods, capital and
people” (Wade 2004: 17).
Writing in the Asian Journal of Social Science, Shamsul Haque describes
the opposite view of poverty resulting from the policies during the
globalization period:
In terms of
poverty, after the neoliberal reforms since 1980, about 100 countries have
experienced economic decline or stagnation, 1.6 billion people have seen their
incomes dropped, 70 countries have average incomes lower than they were in
1980, and 43 countries have incomes lower than they were in 1970. In a study of
28 countries in 2000, it was reported by the World Bank that between 1981 and
1997 (a period of neoliberal structural reforms), the levels of income,
poverty, and life expectancy deteriorated in 54 percent of these countries
(Hague 2008:20).
Chen and Ravallion agree by
pointing out that if China is excluded, the developing world is an entirely
different story—not likely to achieve MDG goals (Chen and Ravallion 2008: 20).
This is because the preponderance of poverty alleviation worldwide has occurred
in the world’s largest country, and many other areas have regressed.
Intercountry population weighted
PPP poverty reduction over the 30 years since 1980 may well be offset in value
by the dramatic intracountry inequality measured by the GINI index. Joseph
Stiglitz argues that in the US, we have allowed too much political power to be
dominated by the top 1%, and that the result has been joblessness, stagnant
wages, lower social benefits, and dangerously rising inequality within America
(Stiglitz 2012).
Bloomberg (2012) reports that
across the period since January 1978, the cost of higher education in the US
has increased 1,200%, medical care 600%, and shelter 400%. During this period,
CEO pay in the US grew by 725% while worker pay grew by only 5.7%,
notwithstanding significant improvements in productivity—the surplus went to
corporate profits and to top management (Huffington Post 2012). These are
staggering developments which should concern us.
Wealth interests can survive and gain more from the financial crises of
globalization. Hedge fund manager John Paulson made $3.5 billion betting on the
current financial crisis coming, and is now buying foreclosed homes from banks,
with potential to make billions on both sides of the crisis. (Economist: 01
December 2012:81) The middle income and poor do not have the information or
capital resources to profit from such volatility.
The world’s second largest economy has been experiencing similar rising
levels of inequality. The Chinese state immediately suppressed internet access
to recent reports from the NY times, in the immediate aftermath of the Bo Xilai
scandal, that the family of Premier Wen Jiabao had amassed wealth amounting to
some $2.7 billion. The Atlantic reported observing growing Chinese reading of
DeToqueville, who believed that revolution is more likely to occur when things
are improving than when declining, an ominous observation in regard to a
country which has a reported 500 organized protests per day (The Atlantic
January 2012).
There is now a growing debate over whether inequality reduces growth.
Stiglitz says, “The bottom line […] that higher inequality is associated with
lower growth—controlling for all other relevant factors—has been verified by
looking at a range of countries and looking over longer periods of time”
(Stiglitz 2012:117). He adds that globalization (“as it has been
managed”) is almost certainly worsening inequality (Stiglitz 2012:63-4). If
true, there is a strong argument to the politically powerful to address inequality—this
could actually benefit the wealthy economically in the long run. Reflecting
recent growing concern for inequality, the UNDP introduced the Inequality HDI
(“IHDI”) in 2011, with inequality factored into each of the three components of
the index: income per capita, life expectancy and education.
What is behind the dramatic rise in the Gini coefficient in many
countries (U.S., China, and others) across the period discussed, and what, if
anything, should we do about it? Classic explanation for the behavior of
inequality in economic growth is based on the work of Simon Kuznets (1955), who
theorized that within country income divergence occurs at intermediate levels
of development as people move to cities and power shifts to different factors
of production, and decreases as greater country wealth is attained (Kuznets
1955: 2) In this view, things might naturally get better over time.
However, theories based on the work of Joseph Schumpeter see capitalism
as involving continuous transformation, upheavals, such that any hope for
stability is vain and instead, there is “a constant drive toward inequality”
(Korzeniewicz: 579-80). Korzeniewicz reports in 2007 that there has been
a lot of focus on methodology and determinations of the degree of change
inequality, but relatively little attention to effective theorizing as to
underlying processes that lead to the trends (Korzeniwicz 2007: 563-592).
So, we really do not yet understand well the nature of the progression of
inequality.
The answer seems to be in the middle—globalization has been good, but it
is clear we cannot rest while so many still fail to benefit from globalization.
Things might get better, but we cannot count on it.
The answer to further relieving poverty and inequality could lie
partially in expanded freedom of migration between countries—letting people go
freely to where the work is, as they are now permitted to do within the
European Union, for example. However, the political mood of most developed
countries does not welcome immigration, especially in the aftermath of a
crisis, when jobs in developing countries are scarce. Michael Teitelbaum of
Harvard Law School and the Alfred P. Sloan Foundation summarizes for one
country this way: “US policy on immigration is emotional, stalemated, and full
of contradictions” (Teitelbaum: 2012:10). For many other OECD countries,
immigration is similarly problematic in recent years. See the Pew Study of
Global Attitudes in 2007 (Pew 2007:25). Respondents in most countries surveyed
were at 75% or higher in opposition to increased immigration.
Recognizing the immigration stalemate, Milanovic (2011: 163) has a
suggestion:
The trilemma of globalization, to use a phrase
coined in a somewhat different context by Harvard economist Dani Rodrik, is how
to continue with (1) globalization while (2) the differences in mean incomes
among countries are huge, and increasing, and (3) the international mobility of
labor remains very limited.” The key issue here is the political resistance to
immigration, thus the better answer if this cannot be allowed, it to try to fix
differences between countries—to help improve the poor countries.”
To improve the poor countries in respect to poverty and all in terms of
inequality, the prescription of those on the left is mainly that we need a
tightening, in a variety of different ways, to the public policy limits, which
have given market forces virtually free rein across the last 30 years (Wade
2004: 568). Observing the success of China in reducing poverty while
controlling market forces, this makes sense.
Stiglitz has a number of prescriptions in chapter 10 of his new book:
controls on cross border capital flows; revisions of tax codes; redirecting the
Fed to focus on full employment; willingness to use fiscal policy to accompany
monetary policy; measures to gradually restore trade balance; greater support
for labor and improved social policies; governmental engagement in re-training
workers; changes in the legal system to return greater protections to workers;
focus on elimination of discrimination; focus on greater access to good; tax
breaks only for those who invest; government investment in infrastructure,
technology, and education; campaign finance reform, and other such methods of
moving focus from the wealthy to the betterment of the entire population
(Stiglitz 2012:265-290).
Paul Collier has recommendations especially for developing countries in The
Bottom Billion. He is essentially calling on the wealthy world to put
the plight of the lowest billion in the world at the top of its agendas,
calling for such as military aid in warring states, more aid focused on high
risk areas, and trade protections for poor countries from the “Asian Giants.”
He sees little hope for such countries from continued globalization, as it is
now (Collier 2007:175-92).
Then, there is the perspective that world governance may be inevitable
in the long run, and may be for the good: In his Worlds Apart, Milanovic
argues that the world will eventually become a global community with global
rule. Seeing the struggles of the European Union as a harbinger of the
challenges, he nevertheless projects the growing international collaboration of
governments to portend a future of increased cooperation resulting in such a
union—and he urges us to move ahead to address the left out—because they are
citizens of the one world of our future (Milanovic 2005:162).
A potential for improvement is offered by Dic Lo in his 2012 book, in
which he describes egalitarian improvements undertaken by Chinese state
authorities since 2000, affecting this estimated 25% of the world’s labor
market. He suggests these kinds of state interventions could spread to the
remainder of the world worker class and result in a more humane world (Lo
2012:16708).
Space limitations do not permit thorough examination of policy
alternatives to enable a more widely effective globalization ahead, but these
are a few of the better understood factors, all of which do seem to offer
potential for improvement.
Conclusion:
Assuming the use of population
weighted PPP country comparisons, it is true that poverty and inequality have
been improving and stabilizing. See Chart 1. If we assume for simplicity that
there are no significant influences other than globalizing influences, we can
say globalization has been good for poverty and inequality.
However, as shown above, there
are major issues with this choice of methodology and this conclusion. Most
significant in regard to poverty is the fact that the inclusion of China and India
on the population weighted indices dominates the conclusion. If these two
nations are removed, then poverty has not improved across the period.
In regard to inequality, if focus
is given to intracountry GINI comparison, inequality has been rising rapidly in
many countries across this period. See Chart 2. These two negative findings are
significant enough to cause any reasonable observer to conclude that
globalization may well require some significant adjustments to meet the needs
of the large segment of world population who are not experiencing improvement.
It is important for recent concerns with inequality to result in more focus and
understanding. There are potential dangers we cannot dismiss.
The force of globalization may be unstoppable, and does bring vast
opportunity, but we must not allow the next thirty years to simply be an
extrapolation of the current trends in poverty and inequality for those who
were born in the wrong situations. There are opportunities of significant
promise in the realm of state actions and controls and international
governance.
Postnote: As mentioned at the
beginning, the length of this paper does not allow adequate justice to
alternate measures of “poverty,” such as the HDI, but trying to measure and
understand progress in education, life expectancy, and measures of human
freedom is another rich opportunity to understand how the world is progressing,
and to find specific options for different countries.
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