The Globalization of Inequality

The Globalization of Inequality

The Globalization of Inequality

François Bourguignon

Translated by Thomas Scott-Railton

With a new preface by the author

Princeton University Press

Princeton and Oxford

Copyright © 2015 by Princeton University Press

Translated from the French La Mondialisation de l’inégalité

© Editions du Seuil et la République des Idées, 2012

Published by Princeton University Press,

41 William Street, Princeton, New Jersey 08540

In the United Kingdom: Princeton University Press,

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press.princeton.edu

Cover art courtesy of Shutterstock

All Rights Reserved

Fourth printing, first paperback printing, 2017

Cloth ISBN 978-0-691-16052-8

Paperback ISBN: 978-0-691-17564-5

Library of Congress Control Number: 2015932177

British Library Cataloging-in-Publication Data is available

This book has been composed in Garamond Premier Pro

Printed on acid-free paper ∞

Printed in the United States of America

5 7 9 10 8 6 4

CONTENTS

Preface to the Paperback Edition

vii

Foreword to the English Edition

xvii

INTRODUCTION

Globalization and Inequality

1

CHAPTER 1

Global Inequality

9

APPENDIX TO CHAPTER 1

Detailed Evidence on the Recent Changes in Global Inequality

41

CHAPTER 2

Are Countries Becoming More Unequal?

47

CHAPTER 3

Globalization and the Forces behind the Rise in Inequality

74

CHAPTER 4

Toward a Fair Globalization: Prospects and Principles

117

CHAPTER 5

Which Policies for a Fairer Globalization?

146

CONCLUSION

Globalizing Equality?

184

Index

191

PREFACE TO THE PAPERBACK EDITION

There have been no major changes in the world economy since the first publication of this book on inequality and globalization. Yet, several of the key issues it addresses have become increasingly prominent in public debate, highlighting the relevance and the timeliness of its analysis. This preface elaborates briefly on some points, while updating or clarifying others.

One of the most keenly debated issues today is the impact of globalization on inequality and increasing calls for protectionist policies. Even the most conservative commentators now recognize that while globalization has, on balance, had a positive impact on national economies, it has made some people in the bottom half of the income scale of the major developed countries less well off, thus contributing to increased inequality. This has led even the fiercest advocates of globalization to adopt a more nuanced approach. They now acknowledge that while globalization has contributed to progress at both the global and national level, its benefits must be fairly distributed within national populations, which may require the implementation of appropriate redistribution policies. This was one of the key arguments of the book, but, at the time of publication, there was not the consensus that now seems to exist on this point.

The realization that globalization had negative effects on the income share of the bottom and, subsequently, the middle of the income scale, reinforced protectionist political discourse. It is very striking how the popularity of parties from both the extreme right and the extreme left has grown over the last few years and with it support for closing down national economic and geographical borders. This is as true in Europe, where anti-globalization—or anti-EU sentiment—has become one of the dominant themes of the opposition to mainstream parties, as it is in the United States, where protectionist measures have been called for on all sides of the political spectrum, including by one of the presidential candidates. The danger that this book warned of is now very real—that rising inequality could exacerbate anti-globalization feeling and lead ultimately to the imposition of the protectionist measures. As is the fear that this will have a negative impact on global growth and the ability of poor and emerging countries to catch up with rich countries. Now, such an evolution is not completely unthinkable, as can be seen by the increasing support for populist parties in a majority of advanced countries. This makes it all the more urgent to identify and implement the right policies to address the situation where it is most critical, perhaps starting with taxation and redistribution policies.

One may wonder whether it is inequality per se that is increasing the appetite for extreme populist discourse, or whether it is slow economic growth or a combination of the two. In many countries, anti-globalization sentiment seems to be based on the fact that some of the least advantaged people and even parts of the middle classes have been badly affected by the slow-down that took place in the majority of advanced economies after the 2008–2009 crisis and again after the 2010 Euro crisis in Europe. The key point here being that for the last few years in Europe, and for a much longer time in the U.S., people in the lower part of the income scale have seen no, or very little, improvement in their standard of living. An interesting question here is whether the increased sensitivity to inequality would have been the same if economic growth had been faster, with everybody seeing significant improvement in their well-being and not just the people at the top of the income scale making rapid gains. In other words, how sensitive people are to inequality is likely to depend on the broader economic context: they are more aware of it in periods of austerity than in periods of rapid growth. As discussed in the book, we know little about the factors which influence the public perception and tolerance of inequality. We simply know that people’s perceptions may differ from what the statistics actually suggest. To identify the exact role of inequality in the kind of anti-globalization and populist movements observed today in many countries, it would be important to understand these mechanisms better.

An important dimension of the anti-globalization discourse in advanced economies, possibly even more important than the free movements of goods, services, and capital, has been concern about migration. In most countries, populist parties continue to loudly oppose the opening of borders to migrants, especially unskilled migrant workers from developing countries. This is demonstrated by Trump’s proposal—as shameful, as it is bizarre—to build a wall between Mexico and the United States; by the excessive role migration policy played in the Brexit debate; and by the electoral platforms of the Front National in France and the Austrian and Dutch Freedom Parties and the Danish People’s Party, which succeeded in imposing strong anti-immigration laws in Denmark. These anti-immigration attitudes have been aggravated in Europe by the flow of refugees from war-torn countries in the Middle-East and conflicts in several African countries.

This book makes the argument that restrictions imposed by advanced countries on migration from developing countries are economically inefficient at the global level. This is because they prevent potential migrants and their families from improving their own circumstances at the same time as contributing to their host countries’ aggregate income and possibly mitigating the effects of host countries’ declining demography. I may have been too willing to take for granted that the barriers set by advanced countries to restrict unskilled labor migration flows from developing countries were immovable. In addition, I might have said more about the overall benefits to the global community of lowering these barriers, and the clear trade-off between reducing global inequality through enhanced South-North migration and increasing inequality within host countries by fattening the lower tail of the distribution of wages and income with migrants. Yet, the relationship between migration and inequality is more complex than this would suggest. It raises difficult conceptual issues in relation to the actual status of migrants and whether they should be considered as belonging to their community of origin, as with temporary migration, or to their destination countries when migration is permanent. It is important to stress, in particular, that the evidence that unskilled migrants cause wage inequality amongst native workers, or increase their levels of unemployment, is weak, contrary to the relentless assertions of the anti-immigration party leaders in advanced countries. It is vital that these facts, and global progress towards development-friendly migration policies (possibly through temporary migration agreements), are publicly discussed without the debate being hijacked by populist figures.

In the hardback edition of this book I was rather confident that global progress was being made towards a less unequal world. How might new perspectives on the future and changes in the global economy since it was writtenmodify that view? As far as the emerging economies in Asia are concerned, the prospects seem unchanged. Even though the growth rate in China is decelerating, the differential between its growth rate and that of developed countries remains significant, and the same is true of most Asian economies, which makes it likely that part of the developing world will continue to catch up. As anticipated in the book, however, recent developments suggest that things are not so clear for poorer countries, in particular those in Sub-Saharan Africa.

The decline in the world prices of primary commodities that started at the end of 2014 had a big impact on the growth of the Sub-Saharan African economies. On average across the whole region, GDP per capita grew by less than 1 percent in 2015 and it is not forecast to accelerate much in 2016. For the first time since the early 2000s, rich countries per capita growth is higher, meaning that the gap between the rich and poor of the world has, for the time being at least, stopped decreasing.

Of course, some countries do better than others (especially in East Africa), but, overall, African economies have found it difficult to escape from their dependence on commodity cycles in world markets. These cycles can be quite long, so the present slowdown in the region, following on from that of the global economy, may last for several years. In the longer-run, it would also be unrealistic to believe that Africa could catch up with the rest of the world solely on the basis of its export of raw commodities. If Africa were to rely solely on the export of raw commodities, it would have, on average and over time, roughly the same rate of growth as the rest of the world. But, with much faster population growth, this would mean in effect that its standard of living would lag behind, pushing global inequality up and breaking down the equalizing trend observed in the last two or three decades. Exploring ways to help the whole of Africa find some autonomous engine of growth, besides traditional development assistance, even within the newly defined Sustainable Development Goals framework, appears even more urgent than was suggested in the book two years ago.

Another issue explored in the book is whether the pressures felt by many national economies leading to greater inequality would continue, thus justifying drastic anti-inequality policies, or whether they would weaken and progressively disappear. The view I expressed then was that globalization and biased technical change would continue to be significant factors in increased inequality. As far as globalization is concerned, this opinion may need revisiting. It is indeed the case that global trade, which was severely hit by the 2008–2009 crisis has slowed down considerably over recent years. A possible explanation for this could be that the global economy has reached saturation in terms of the overall efficiency gains to be had by relocating production lines to other (poorer) parts of the world and the fragmentation of the value chain. If this is the case, trade should grow more or less at the same speed as world economic activity, and not much faster as was the case in the recent past.

There is also the view that technological change may be leading to the repatriation of some production lines back to the advanced economies. The argument goes that progress in automation is allowing the production of the same volume of goods at home with many fewer workers, thus counterbalancing the original advantage of lower wages provided by off-shoring. Actually there is no strong evidence to support this claim. Moreover the impact of technological change on increased inequality, independent of the effects of international trade and globalization, may well be as strong, if not stronger than before. Which makes the prediction that 47 percent of jobs in the U.S. are at risk of being replaced by computers in the coming decades a bit frightening. Critics of this estimate and its devastating implications for the labor market may be right in pointing out that it probably overstates the possible impact of increased automation and artificial intelligence and that, as in previous major technological revolutions, jobs that disappear will be replaced by new ones.¹ But even if that is true, the substitution process or the transition to a new employment structure can take a very long time and in the meantime would make it very difficult for many workers to earn a living. And though the proportion of jobs under threat may be much smaller than 47 percent, the impact of technical change on employment, wages, and inequality may yet be very significant for some time to come. So despite the fact that the direct effects of globalization may be expected to weaken, technological change seems likely to remain a powerful factor in the distribution of income, raising the share of capital owners and highly-skilled workers in non-routine tasks.

This leads to the question: what policies are available to us that might reduce inequality or, at least, prevent it from rising further? As stressed in the book, it is not clear that taxation and current income redistribution is the best way of addressing inequality, given their potentially distorting effects on the economy and the constraints imposed by the cross-border mobility of companies, capital, and people. However, there may not be many other choices, at least in the short term, if inequality is likely to increase further due to the pressure of automation and artificial intelligence on jobs. In that case, international coordination that would give back some autonomy to national redistribution authorities may become increasingly necessary in the years to come, both in advanced and emerging economies. In this respect, the recent agreements on automatic exchange of financial information (AEOI) concerning the banking affairs of non-residents signed by 100 countries, modelled on the U.S. Foreign Account Tax Compliance Act, might represent significant progress when implemented in 2017–18. There is also some progress, although more modest, afforded by the G-20 initiative against Base Erosion and Profit Shifting by multinationals that will force the latter to report their operations country by country, forcing greater transparency as to how much profit they make in each country they operate in and highlighting any possible asymmetry with actual taxes paid.

To conclude, I would like to make a small but important technical point about the measurement of global inequality, discussed in some detail in the appendix to chapter 1. Several readers found the mean inequality within countries as measured by the Theil coefficient too small and wondered whether this might not contribute to under-estimating global inequality. They are right, and I should have explained the reason for that bias. It comes from the fact that the data I used for both the advanced economies—the OECD income distribution database—and for developing and emerging countries—the Povcalnet database at the World Bank—were reporting income distribution through the income shares of the deciles of the population—i.e. the successive 10 percent layers of income recipients. Such a measure fails to take account of the inequality taking place within those deciles and, in particular, at the very top of the distribution, in the 10th decile. The calculation of global inequality and average inequality within countries reported in the book is therefore based on the assumption that all the people in that decile have the same standard of living, which clearly underestimates the real level of inequality. Because of that particular constraint imposed by the available databases, it is likely that the figures reported in the book tend to underestimate the degree to which reduced inequality between countries is being replaced by more inequality within countries. In other words, more detailed data would only go to reinforce the fact that this change from between country to within country inequality is an even more important issue for the global economy than ever.

_____________________

¹ The 47 percent estimation was made by Carl Benedikt Frey and Michael A. Osborne, The future of employment: how susceptible are jobs to computerization?, Oxford Martin School, unpublished paper, 2013. For a less pessimistic view at employment and technical change see David H. Autor, Why are there still so many jobs: the history and future of workplace automation, Journal of Economic Perspectives, 26(3), 2015, p. 3–30.

FOREWORD TO THE ENGLISH EDITION

This book was first published in French in 2012 in the collection La république des idées, Le Seuil publisher. A requirement of that collection is for books to be accessible to the widest readership and to be short, not exceeding a limited number of characters. This English version sticks to this commitment to concision and non-technicality. As it is published two years later, however, it expands somewhat on the original French version. Some figures have been updated, two tables have been added, several references are made to important books or articles published since publication in France, and the discussion of several timely issues has been slightly lengthened. I thank three anonymous reviewers for helpful suggestions to expand the original French version. Yet, large portions of the text remain unchanged, and I thank Thomas Scott-Railton for rendering it so well in English.

The Globalization of Inequality

INTRODUCTION

Globalization and Inequality

There has been a great deal of debate around the subject of globalization. It has been depicted as a panacea, an instrument for modernization, and a mortal threat. Some believe it has contributed to the wealth of nations by making them on the whole more efficient. Others feel it has caused the majority of humanity to sink into poverty in order to benefit a privileged elite. Criticism has been heaped upon it. Globalization is said to be the cause of economic crises, the destruction of the environment, the excessive importance of finance and the financial sector, deindustrialization, the standardization of culture, and many other ills of contemporary society, including an explosive rise in inequality.

My goal is to shed some light on this debate by focusing on one of the above points in particular, one that has arguably drawn the most attention: inequality. Globalization is a complex historical phenomenon that has existed, in some form or another, since the beginning of human society, but which we can track with more precision over recent centuries.¹ No one denies that it exists, and there