2005 WIDER Annual Lecture Why Inequality Matters in a Globalizing - - PowerPoint PPT Presentation

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2005 WIDER Annual Lecture Why Inequality Matters in a Globalizing World

Helsinki, October 26 Nancy Birdsall President Center for Global Development Washington, D.C.

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“Holy mackerel, the world is becoming flat. Several technological and political forces have converged, and that has produced a global, Web- enabled playing field that allows for multiple forms

• f collaboration without regard to geography or

distance - or soon, even language.”

• Thomas Friedman

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“But the world is not flat. Those of us on the top, with the right education and in the right countries, can easily overlook the countries and the people stuck in deep craters across the global landscape.”

• Nancy Birdsall, this lecture

. . which is about why they are in craters, why that matters, and what we need to do about it.

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The message

Inequality matters to people. It is often a sign of

injustice.

Global markets by their nature generate inequality. We need to manage the downside of

globalization if we are to sustain its upside. We need a global polity to complement our global economy.

Constructing that global polity is a key challenge

• f this 21st century.

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The message in three parts: 1. Inequality Within Developing Countries: Why It Matters 2. “Globalization” is Disequalizing 3. Constructing a Global Polity for Our Global Economy

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• 1. Inequality Within Developing Countries:

Why It Matters Definitions and facts 1.A. Inequality inhibits growth 1.B. Inequality undermines good public policy 1.C. Inequality undermines collective decision making and social institutions critical to health societies

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• 1. Inequality Within Developing Countries:

Why It Matters Definitions and facts

Poverty Inequality (money inequality) Inequity (process not outcome)

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. . Poverty and inequality are not closely related. . .

Inequality Ratio (Q5/Q1) Poverty Headcount Ratio, <1$/day 50 100 10 20 30 40

SSA BRA BGR CHL CHN COL CRI CIV CZE DOM ECU EGY EST GTM GNB HND IND IDN JAM JOR KEN KGZ LSO MDG MYS MRT MEX MDA MAR NPL NIC NER NGA PAK PAN PHL POL ROM RUS RWA SEN SVK SVN ZAF LKA THA TUN UGA UKR VEN ZMB ZWE

(Bivariate Correlation of $1 poverty measure/ (Q5/Q1) = .33)

Source: Birdsall (2001) “Why Inequality Matters.”

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. . .inequality varies across regions and changes little within regions/countries over time

Inequality by region and decade

Eastern Europe Latin America & Caribbean Sub-Saharan Africa East Asia & Pacific South Asia OECD & High Income Source: Birdsall (2001) “Why Inequality Matters.”

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…high in Latin America and rising in Eastern Europe...

Inequality across regions

Source: Reproduced from Kalwij and Verschoor (2005).

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• 1. Inequality Within Developing Countries:

Why It Matters Definitions and Facts 1.A. Inequality inhibits growth 1.B. Inequality undermines good public policy 1.C. Inequality undermines collective decision making and social institutions critical to health societies

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There is no strong relationship between inequality and growth in rich countries…

Australia Canada Denmark Finland France Germany Italy Japan New Zealand Norway Sweden United Kingdom United States 1 1.5 2 2.5 3 Period average GDP per capita growth 1970-2000 (real, percent) 25 30 35 40 45 Gini coefficient

Per capita growth and inequality in rich countries 1970-2000

Source: WIID2a, WDI (2005) and author’s calculations.

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…but developing countries with high inequality tend to grow more slowly

Argentina Bangladesh Bolivia Botswana Brazil Chile China Colombia Costa Rica Ivory Coast Ecuador El Salvador Honduras Hong Kong Hungary India Indonesia Israel Jamaica Malaysia Mexico Nigeria Pakistan Panama Peru Philippines Singapore South Africa Sri Lanka Thailand Turkey Uruguay Venezuela Zambia

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2 4 6 8 Period average GDP per capita growth 1970-2000 (real, percent) 30 40 50 60 70 Gini coefficient

Per capita growth and inequality in developing countries 1970-2000

Source: WIID2a, WDI (2005) and author’s calculations.

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1.A. Inequality inhibits growth – in developing countries, where markets and governments are weak

Growth Equity Growth Equity Brazil South Africa

Constructive inequality (perfectly competitive markets) Destructive inequality (market and government weakness)

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Latin America is an example

Factors of aggregate growth 1960s-1990s (contributions to variations in GDP, percentage)

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1 2 3 4 5 6 Capital accumulation Education and asset equity Total Contribution to growth

OECD Latin America East Asia

Source: Birdsall and Londono (1998) "No Tradeoff: Efficient Grow th Via More Equal Human Capital Accumulation."

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• 1. Inequality Within Developing Countries:

Why It Matters Definitions and Facts 1.A. Inequality inhibits growth 1.B. Inequality undermines good public policy 1.C. Inequality undermines collective decision making and social institutions critical to health societies

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1.B. Inequality undermines good public policy – for example educational opportunities are probably not equal in many developing countries

poorest 20% of households richest 20% of households Colombia 2.4 9.8 Guatemala 2.0 8.9 Peru 5.0 9.8 Cambodia 2.4 7.4 Philippines 6.2 10.2 Vietnam 5.2 10.3 Ethiopia 0.9 5.2 Kenya 4.9 9.0 Nigeria 3.5 9.9

Notes: Source: World Bank EdStats (2005).

• 1. Average years of schooling are the years of formal schooling received on average, by adults aged 15-24.
• 2. Data is for the latest year available during the period 2000-2003, except for Colombia (1995), Guatemala

(1995), Peru (1996) and the Philippines (1998).

Average years of schooling (15-24), 2000-20031,2

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• 1B. Inequality undermines good public policy

Inequality encourages self-defeating economic policies to “protect” poor and near-poor households, e.g.

trade protectionism, overvalued exchange rates and

price controls that hurt poor rural producers and poor urban consumers

job “protection” (high cost of layoffs) that

discourages job creation

underpricing of water and electricity that leads to

rationing that hurts the poor

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• 1. Inequality Within Developing Countries:

Why It Matters Definitions and Facts 1.A. Inequality inhibits growth 1.B. Inequality undermines good public policy 1.C. Inequality undermines collective decision making and the social institutions critical to healthy societies

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1.C. Inequality undermines collective decision making

The middle class seems to matter for social

capital, for democracy, and for the blessings of a common shared “civic” life in communal domains

But high concentration of income in unequal

societies implies a missing middle class

The middle class is mostly missing at the global

level and within many developing countries

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The well-off middle class

Joachim Beuckelaer, The Four Elements: Earth, National Gallery London

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1.B. Inequality undermines collective decision making – few countries today are “middle class”

Distribution of world population by 1998 GDP per capita

Population share GDP per capita (PPP) Bangladesh, Nigeria, India China, Indonesia United States Western Europe, Japan

Source: Milanovic (2005) Worlds Apart: Measuring International and Global Inequality.

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1.B. Inequality undermines good public policy – few people are “middle class”

World income distribution (based on household survey data; year 1993)

Population

Source: Milanovic (2005) Worlds Apart: Measuring International and Global Inequality.

Income (PPP)

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In Brazil, median household income per capita was about a third of average national income in the 1990s

Brazil

50 100 150 200 250 300 85 86 88 89 91 94 96

Average Monthly Per Capita Income US $ PPP Median Monthly Per Capita Income US $ PPP Poverty Line US $2 per day

Source: Birdsall (2002).

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In Chile, median income has been about half of average income

Source: Birdsall (2002).

Chile 50 100 150 200 250 300 87 89 92 94

Average Monthly Per Capita Income US $ PPP Median Monthly Per Capita Income US $ PPP Poverty Line US $2 per day

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In Peru in the 90s, almost 20 % of children under 5 in middle-income households were stunted

Rates of stunting for children < 3 (Bolivia and Ghana); < 5 (Peru)

(in %)

5 10 15 20 25 30 35 40 45 50 Peru Bolivia Ghana Poorest Quintile Middle Quintile Richest Quintile

Source: DHS.

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• 1. Inequality Within Developing Countries:

Why It Matters Definitions and Facts 1.A. Inequality inhibits growth 1.B. Inequality undermines good public policy 1.C. Inequality undermines collective decision making and social institutions critical to health societies

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The message in three parts: 1. Inequality Within Developing Countries: Why It Matters 2. “Globalization” is Disequalizing 3. Constructing a Global Polity for Our Global Economy

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• 2. “Globalization” is Disequalizing

Definitions, debates, facts 2.A. Global markets work—and reward those with productive assets 2.B. Global markets are imperfect—and hurt most the poor 2.C. Global rules naturally reflect market power and interests of the rich

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Definitions, debate, facts Globalization is the increasing integration of economies and societies – through flow of goods, services, capital and of ideas, norms, and peoples. In popular use, globalization often refers to the increasing influence of global market capitalism and of global corporate and financial interests.

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The debate about globalization

“No country has developed successfully by turning its back on international trade and long term capital flows.”

• Stanley Fischer, former Sr. Deputy Managing Director, IMF

“If you're totally illiterate and living on one dollar a day, the benefits of globalization never come to you.”

• Jimmy Carter, former President, USA

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The debate about globalization and inequality Globophobes: Global inequality is high and rising Globophiles: Global inequality is declining

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Inequality between rich and poor countries is increasing, because the rich are growing faster – “divergence big time”

Mean Median Percentage negative "Old OECD" 1.9 2.0 17 Middle income countries 1.0 1.8 33 LLDCs 0.1 0.8 43

Source: Milanovic (2005).

Annual per capita growth rates 1980-2002

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At the same time, high growth in China and India is reducing inequality across all people in the world

Inequality across world population Inequality across countries

Source: Milanovic (2005).

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Globophobes and globaphiles are both right

Inequality between the richest and poorest

countries is high and continues to grow.

But thanks to rapid growth in China and India,

global poverty is declining and so is global inequality across all people.

(Globalization is not the cause of deep poverty

and destructive inequality but neither is it the

• solution. Indeed, where globalization is reducing

poverty, e.g. China, it is also associated with rising inequality – planting seeds of future problems.)

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• 2. “Globalization” is Disequalizing

Definitions, debates, facts 2.A. Global markets work—and reward countries and people with productive assets 2.B. Global markets are imperfect—and hurt most the poor 2.C. Global rules naturally reflect market power and the interests of the rich

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2.A. Global markets work The most commodity dependent countries have participated in global trade for decades

Trade to GDP Ratios for the Most and the Least Commodity Dependent Countries

10 20 30 40 50 60 70 80 90 100 1960-1964 1965-1969 1970-1974 1975-1979 1980-1984 1985-1989 1990-1994 1995-1999 2000-2003 Openness (sum of exports and imports as share of GDP, percent) Least Commodity Dependent Most Commodity Dependent

Note: There are 72 "least commodity dependent" countries and 34 "most commodity dependent" countries. Trade to GDP ratios are unweighted averages. Source: World Development Indicators, 2005 and author's calculations.

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But commodity prices have been falling

Source: UNCTAD. 2005. Commodity Price Bulletin.

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And manufacturing prices have been rising

Unit Value Index of Manufactures 1965-1998

20 40 60 80 100 120 1965 1970 1975 1980 1985 1990 1996 1998 Unit value index of manufactures (1990=100) Unit Value Index of Manufactures (1990=100)

Note: Unit value index of manufactures exports from G-5 to developing countries. Source: World Bank. 2001. Global Economic Prospects.

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The wrong asset: Open, globalizing countries dependent on commodity prices have not grown

• 2%
• 1%
• 1%

0% 1% 1% 2% 2% Average annual growth rate of real GDP per capita (mean, percent) Least commodity dependent countries Most commodity dependent countries 1980s 1980s 1990s 1990s

Source: Birdsall and Hamoudi (2002) “Commodity Dependence, Trade, and Growth: When “Openness” is Not Enough.”

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Despite having comparable tariff rates to other countries

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 Tariff rates 1985-1989 and 1995-1997 (mean, median, in percent) Most commodity dependent countries Least commodity dependent countries Mean tariff rates 1985-1989 1985-1989 1985-1989 1985-1989 1995-1997 1995-1997 1995-1997 1995-1997 Mean tariff rates Median tariff rates Median tariff rates

Source: Birdsall and Hamoudi (2002) "“Commodity Dependence, Trade, and Growth: When “Openness” is Not

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2.A. Global markets work – and reward those with productive assets

1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1990 1991 1992 1993 1994 1995 1996 1997 1998 Secondary education relative to primary

Relative log wage

Higher education relative to secondary Higher education relative to primary

Source: Behrman, Birdsall and Szekely (2003) “Economic Policy and Wage Differentials in Latin America.”

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2.A. Global markets work – encouraging emigration of those with more skills

5 10 15 20 25 30

Mexico Philippines India Pakistan Egypt Sri Lanka

Emigration rates by education level in 2000, population 25 years or older (percent) Primary Secondary Tertiary

Source: Kapur and McHale (2005). Give Us Your Best and Brightest. The Global Hunt for Talent and Its Impact on the Developing World.

Emigration rates to all OECD countries by education level

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Nurse flows from Sub-Saharan Africa to the United Kingdom

1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 1996/97 1997/98 1998/99 1999/00 2000/01 Sub-Saharan African nurses registering in the United Kingdom annually

Source: UK NMC (2005).

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• 2. “Globalization” is Disequalizing

Definitions, debates, facts 2.A. Global markets work—and reward those with productive assets 2.B. Global markets are imperfect—and hurt most the poor 2.C. Global markets naturally reflect market power and the interests of the rich

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2.B. Global markets are imperfect – and hurt most the poor. Financial crises and changes in income concentration

Note: East Asian financial crisis 1997/1998, Brazil crisis 1999, and Mexico crisis 1994/1995. Source: Reproduced from Birdsall (2005) “Stormy Days on an Open Field: Asymmetries in the Global Economy.”

10 20 30 40 50 60 70 Korea Philippines Thailand Brazil Mexico Income shares of poorest 80% and richest 20% pre- and post crises

Income share poorest 80% pre-crisis Income share richest 20% pre-crisis Income share poorest 80% post-crisis Income share richest 20% post-crisis

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2.B. Global markets are imperfect – and hurt most the poor

Pre-crisis Post-crisis Gini Gini Korea 32.6 37.2 Philippines 46.2 49.5 Thailand 57.5 58.5 Brazil 60.2 61.2 Mexico 52.9 53.7

Source: WIDER WIID 2.0a. East Asian financial crisis 1997/1998, Brazil crisis 1999, and Mexico crisis 1994/1995. Pre-crisis data for Thailand, Korea and Brazil are from 1996, for the Philippines from 1994 and Mexico 1992. Post-crisis data are from 1996 for Mexico, 1998 for Korea, 1999 for Thailand, 2000 for the Philippines, and 2001 for Brazil.

Financial crises and Inequality

Source: Reproduced from Birdsall (2005) “Stormy Days on an Open Field: Asymmetries in the Global Economy.”

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Message in three parts. The connection between 1 and 2? 1. Inequality Within Developing Countries: Why It Matters 2. “Globalization” is Disequalizing 3. Constructing a Global Polity for Our Global Economy

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• 2. “Globalization” is Disequalizing

Definitions, debates, facts 2.A. Global markets work—and reward those with productive assets 2.B. Global markets are imperfect—and hurt most the poor 2.C. Global rules naturally reflect market power and the interests of the rich

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2.C. Global rules naturally reflect market power and the interests of the rich Design of rules favors rich country interests:

• Current trade regime
• International migration
• International property rights (TRIPS)

And implementation of reasonable global rules often reflects interests of more powerful rich I.e. just global rules and fair implementation

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• 2. “Globalization” is Disequalizing

Definitions, debates, facts 2.A. Global markets work—and reward those with productive assets 2.B. Global markets are imperfect—and hurt most the poor 2.C. Global rules naturally reflect market power and the interests of the rich

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• 3. Constructing a Global Polity

Because markets work:

A global social contract to address unequal endowments across countries – foreign aid, aid for trade, World Bank, aviation taxes and so on.

Because global markets are imperfect:

New and improved global rules and regulatory arrangements to provide for public goods (Green Revolution), protect the global environment against global bads (Kyoto and beyond), manage global financial risks (IMF, Sovereign Debt Financing Facility), discourage anti-competitive processes (a global anti-trust agency), and so on.

• And. . . .

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• 3. Constructing a Global Polity

Because global rules tend to reflect the interests of the rich (With costs for all who seek a more secure, prosperous and just world):

More voice and more votes for poor countries and poor

people in global fora ... in the IMF, the World Bank, the UN Security Council, the Basle Committee for Banking Regulation and Supervision, the G-8, and so on;

and more emphasis on surveillance of rich countries’

commitments and adherence to fair rules; new efforts to complete the Doha as a development round; an International Migration Authority …

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A Global Polity for Our Global Economy

Most global inequality is destructive – reflecting unequal endowments and opportunities across countries and peoples. In the face of that inequality, global justice will remain a constant theme in the 21st century. Our global market system has tremendous potential benefits – but only if we construct a more robust and representative global “polity.” . . .with a mission to secure a less divided, more just and more development-friendly world.