IMF managing director Christine Lagarde is in the country, so I figured I’d post this little something I wrote last year on inequality—specifically, globalisation’s role in it.
In a policy brief derived from his book Imagine There’s No Country: Poverty, Inequality and Growth in the Era of Globalization, Surjit S. Bhalla wonders for the sanity of any critic who would suggest that globalisation creates poverty. Why anyone would argue so, he says, ‘is more a question for a psychiatrist to answer, rather than an economist.’ Perhaps a better indicator of lunacy would be accepting the chairman of an emerging-markets investment advisory firm’s opinion on free market policy as disinterested—but could he be right?
Martin Ravallion, research manager of the World Bank’s Development Research Group, certainly doesn’t think so; unsurprising, as it was chiefly his organisation’s data that Bhalla avouched was flawed. But the discrepancies between the Bank’s and Bhalla’s poverty numbers primarily reflect methodological choices; the divergence in opinion between the two is largely due to the definition of divergence.
The World Bank uses the term divergence to describe the trend in the distribution of unweighted per capita incomes across countries, and by this definition, country income levels have undoubtedly diverged. Bhalla’s numbers refer to population-weighted per capita income levels, which yield completely different results because developing Asia—the world’s fastest-growing region for the past 50 years—is home to over 60% of the world’s population.
Cowell, Karagiannaki and McKnight tell us that when studying divergence in global individual incomes, population-weighted per capita incomes are more informative than unweighted per capita incomes. Changes in global inequality can be attributed to within-country, pure cross-country, or aggregation effects that result from some countries being much larger than others. Population-weighted income averages merge the last two. Bhalla is right to emphasise that aggregation effects matter, but his use of the term convergence, usually understood to refer to the pure cross-country effect, is misleading. Bhalla has not refuted divergence; rather he confuses the between-country component of inequality with mean-income divergence across countries. The former is naturally population weighted, while the latter is not.
Kaushik Basu suggests that if we take a very long run view, the answer is fairly transparent. Over the last five centuries, the world has become more globalised and much more prosperous, but, ‘if we consider inter-regional inequality (in contrast to inter-personal inequality), it is clear that inequality has grown.’ According to the calculations of Maddison, if we track per capita GDP of large regions of the world, the trend, viewed over a long stretch of time and measured as the ratio between the richest and the poorest, seems to be an unequivocal deterioration. Others, such as former World Bank chief economist Joseph Stiglitz, suggest GDP bears no relation to how well the average citizen is faring. Robert Wade proposes GNP as a better indicator, but notes that it, too, is imperfect.
Reaching a verdict on whether Bhalla or (as he puts it throughout Imagine) ‘the conventional wisdom’ about globalisation is correct may well be a hopeless proposition. First of all, it is too broad a term and can therefore be good or bad, depending on what aspect of it we are examining, in which epoch and at which location.
Indeed, for every article suggesting globalisation has been pro-poor, there seem to be three to refute it. This is not helped by the official documents from the international agencies involved with the Millennium Development Goals (‘Goals, Targets & Indicators’ 2013) not including a precise definition of pro-poor growth.
There is no denying the perceptions held by the critics of globalisation that poverty and inequality are rising. For example, Mander, Baker and Korten confidently claim on the International Forum on Globalization website that ‘globalisation policies have contributed to increased poverty, increased inequality between and within nations.’ Whether this is a valid generalisation, or even a valid characterisation for any specific group of countries, is another matter.
Neo-liberal economic policies, such as the ‘Washington Consensus’ in the late 1980s, have meant that Third World countries have been forced to adopt free market policies as a condition of debt rescheduling and in the hope of attracting new investment. It is a strategy that has the fingerprints of Adam Smith’s ‘invisible hand’ all over it. Although, as Stiglitz points out, ‘the reason that the invisible hand often seems invisible is that it is often not there.’ And Ricardo’s Comparative Advantage Theory is all well and good, provided everybody has the capacity to specialise. Neo-liberalism relies on the market for growth, but when a large percentage of the population cannot participate in the economy because of AIDS or other health problems, how much growth can be achieved? And who will be the beneficiaries of this growth?
Most in the West recognise democracy as meaning one vote per person, but there is a democratic deficit at the global-decision-making level benefitting corporate interests over citizens. Institutions like the WTO, IMF and World Bank are aristocratic, with voting power determined in proportion to the wealth of the country. And not their current wealth, either, but their levels of wealth when these institutions were created, with minimal adjustment since then—the nouveau riche hold no sway here. Countries like China have been growing for 30 years, but are vastly underrepresented in the voting rights they have.
The results have been asymmetric at best, antagonistic at worst. While China and India’s GDP may have skewed the data by faring quite well (despite receiving comparatively fewer perks of globalisation than the already-well-to-do countries), the poorest people in the world were actually worse off. This Cobden-style win-win interdependent global system looks decidedly like a Wallerstein-style win-lose dependent one.
Advanced industrial countries demanded poorest countries open up their markets, and eliminate their subsidies, but the advanced industrial countries did not reciprocate, especially in the area that is of most importance to developing countries: agriculture. 70% of the people live either directly or indirectly off of agriculture. Europe, the United States and Japan kept their enormous subsidies, kept their markets closed, and the result of this was to lower the income of the poorest people in the world.
As with intranational economic decisions, the problem with global economic decisions is that economists make them. Special interest groups are making decisions that benefit the interests of said special interest groups. The IMF has pushed central banks of countries to focus solely on inflation, the result of which is lower inflation but much higher unemployment.
Perhaps Stiglitz puts it best in the Making Trade Fair chapter of his book when he notes that ‘It appears that it is better to be a cow in Europe than to be a poor person in a developing country’. The average European cow receives subsidies to the tune of about $2 a day. The World Bank defines poverty as earning less than $2 a day. Approximately 40% of the world’s (human) population lives on less than $2 a day.
Sure, globalisation has the potential to help everyone. The thing is, it doesn’t.
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Basu, Kaushik. 2006. ‘Globalization, Poverty, and Inequality: What Is the Relationship? What Can Be Done?’ The Impact of Globalization on the World’s Poor 34 (8) (August): 1361–1373. doi:10.1016/j.worlddev.2005.10.009.
Bhalla, Surjit S. 2002a. ‘Imagine There’s No Country: Poverty, Inequality and Growth in the Era of Globalization.’ Economics.
———. 2002b. Imagine There’s No Country: Poverty, Inequality, and Growth in the Era of Globalization. Peterson Institute.
‘Biography: Surjit S. Bhalla.’ 2013. Peterson Institute for International Economics. Accessed October 1. http://www.piie.com/staff/author_bio.cfm?author_id=137.
Chen, Shaohua, and Martin Ravallion. 2000. ‘Policy Research Working Paper’. Washington, D.C.: World Bank. http://wdronline.worldbank.org//worldbank/a/c.html/mediaview/world_development_report_2000_2001/chapter_overview_amp_x2013_attacking_poverty_opportunity_empowerment_security/poverty_unequal_world/WB.0-1952-1129-4.cha.sec2#WB.0-1952-1129-4.cha.sec2.fig2.
Cowell, Frank A., Eleni Karagiannaki, and Abigail McKnight. 2013. ‘Accounting for Cross-country Differences in Wealth Inequality’. Centre for Analysis of Social Exclusion, LSE. http://www.lisdatacenter.org/wps/lwswps/13.pdf.
Mander, Jerry, Debi Baker, and David Korten. 2001. ‘Does Globalization Help the Poor?’ IFG Bulletin 1 (3). http://www.thirdworldtraveler.com/Globalization/DoesGlobaliz_HelpPoor.html.
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Stiglitz, Joseph E. 2007. Making Globalization Work. New York: W.W. Norton & Co.
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Wade, Robert Hunter. 2004. ‘Is Globalization Reducing Poverty and Inequality?’ World Development 32 (4) (April): 567–589. doi:10.1016/j.worlddev.2003.10.007.
Watkins, Kevin. 2007. Human Development Report 2007: Climate Change and Human Development–Rising to the Challenge. Palgrave Macmillan.
Zhu, Xiaodong. 2012. ‘Understanding China’s Growth: Past, Present, and Future.’ Journal of Economic Perspectives 26 (4): 103–124.
 Dr Surjit S. Bhalla is the Chairman of Oxus Investments, a New Delhi-based economic research, asset management, and emerging-markets advisory firm. (‘Biography: Surjit S. Bhalla’ 2013)
 (‘Asia Population 2013’ 2013)
 UNDP, World Bank, UNICEF, IMF, UNESCO and 30 others. (‘United Nations Millennium Development Goals’ 2013)
 At an average of 8 per cent per year since 1978. (Zhu 2012:1)
 More than 80 per cent of the world’s population lives in countries where income differentials are widening. (Watkins 2007)
 According to World Bank data. (‘Agriculture & Rural Development’ 2013)
 (‘Poverty Headcount Ratio at $2 a Day (PPP) (% of Population)’ 2013)