The globalization of inequality François Bourguignon Paris School of Economics Public lecture, Canberra, May 2013 1
"In a human society in the process of unification inequality between nations acquires the same meaning as inequality among classes in the past. Standards of living differ today between continents or between countries more than they ever did. At the same time, the perception of inequality increases whereas resignation to poverty and to destiny is disappearing. " Raymond Aron "Studying income inequality is like watching grass grow" Henry Aaron 2
Facts and Questions The double reversal in the evolution of world inequality - Global inequality declines - National inequality increases in many countries Is the present wave of globalization the common cause of those reversals? Does the rise in inequality within nations threaten the general economic gains from globalization? How to promote more global equality while preventing inequality to grow at national level? 3
1. The historical double reversal in gobal inequality A) Measuring global inequality Inequality among world citizens Combines inequality between countries (e.g. GDP per capita) and inequality within countries (as observed in household surveys) Historical series based on Maddison data and proxies of income distribution in main countries (or groups of countries) Recent series data based on OECD + World Bank data 4
The historical rise in global inequality Source: Bourguignon and Morrisson, 2002 5
Per cents (Gini) The reversal in global inequality trend Figure 1. Evolution of global inequality : 1910-2010 (various measures) 80 75 Historical series Recent period 160.0 70 1989 1997 140.0 65 Gini Coefficient 2006 120.0 2010 60 55 50 45 40 Top 10% to bottom 10% income 1989 1997 2006 2010 100.0 80.0 60.0 Income ratio 35 P90/P10 quantile ratio 40.0 30 20.0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 6
B. Within country inequality : the recent increase in developed countries Change in the Gini coefficient : mid 1980s to mid 2000s, developed countries Finland Portugal New Zealand United Kingdom Norway Italy Germany United States Netherlands Sweden Austria Canada Belgium Luxembourg Japan Denmark Korea, Rep. Australia Greece France Ireland Spain -3-2 -1 0 1 2 3 4 5 6 Source: OECD Percentage points 7 Source: Oecd, disposable income per CU
Per cents Top (market) incomes in developed countries: a trend reversal 40 Share of top 5% income in total income: 1920-2009, selected developed countries 35 USA 30 25 UK Japan France 20 15 Sweden 10 5 0 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source: Source: Top incomes Top incomes Year 8
Per cent The drop in the labor share Labor share in GDP, selected OECD countries, 1985-2011 0.8 Italy 0.75 France 0.7 Germany UK USA 0.65 Japan 0.6 0.55 0.5 1985 1990 1995 2000 2005 2010 Source: Oecd Year 9
Inequality change in developing countries (excluding LAC) Change in the Gini coefficient : mid 1980s to mid 2000s, Other emerging and developing countries China urban Poland Kyrgyz Republic Ghana Botswana China rural Albania Philippines Indonesia Slovenia Mozambique Vietnam Tajikistan India urban Morocco Tunisia India rural Slovak Republic Madagascar Hungary Mongolia Moldova South Africa Yemen, Rep. Panama Pakistan Lesotho Algeria Iran, Islamic Rep. Malaysia Kenya -10-8 -6-4 -2 0 2 4 6 8 10 Source: World Bank, Povcal 10
2. Globalization as the common cause of inequality trend reversals Between countries Catching up of emerging countries partly based on opening up: expanded trade and foreign investments Favorable spillover on other developing countries of record growth in China and Asia The acceleration of growth Latin America and Africa since the mid 1990s 11
Globalization as the common cause Within countries Unskilled labor hurt in de-industrializing developed countries; gains of skilled workers and capital owners. Offshoring of services to emerging countries (accounting, call centers, computer code writing,..) affects more skilled workers Heterogeneity of exporting firms in terms of productivity and wages Restructuring of the international value chain benefits capital owners and managers The spread of technical progress (skilled labor bias, economies of scale, 'winner takes all') Somewhat parallel effects in emerging countries 12
Globalization as the common cause Other unequalizing factors within and across countries Generalized increase in competition and deregulation Privatisations Deregulation: financial sector, labor market Less progressive tax systems; cuts in the Wefare State "Financiarisation" 13
3. Policies to correct global inequality: a) global level Catching-up by emerging countries likely to continue But.. concern about growing gap between poor and emerging countries International redistribution to the poorest countries from rich and emerging countries through: Official Development Assistance Cutting trade restrictions Capital flows (FDI) Migration Technological transfer 14
b) Controlling national inequality Forces towards more globalization and more inequality unlikely to disappear Is protectionnism a solution? Justified to a limited extent in poor countries, but less and less so in emerging countries Increased protection by developed (and emerging countries) likely to stop the global equalizing trend without correcting national inequalities Positive distributional impact of solid growth at some stage in developing countries (China, Kuznets curve?) Reversing some aspects of deregulation (finance, labor, ) 15
The key role of redistribution policies More progressive tax policies in developed countries (but problem of coordination) Development of taxing capacity and efficient social protection in emerging countries The spread of cash transfer programs as the proof that cash redistribution is possible in developing countries Financial development makes it easier to monitor individual incomes and to tax them Equalizing 'opportunities': Human capital policies (Education, health care,..) Taxing bequests Fighting discrimination 16
Conclusion Globalization is a positive sum game, with potentially adverse distributional effects at national level Growing national inequalities may have a huge economic cost at both the national and the global level No reason to be passive: Correcting market failures through regulation is efficiency enhancing and often egalitarian A more equal distribution of opportunities is efficiency enhancing: It may increase the competitiveness of countries It improves the distribution of economic outcomes (including incomes) This is true even if it has to be financed through distorting taxes. 17
Gini coefficient * 100 A good example! 640 The trend reversal of inequality in Brazil: 1975-2009 620 Inequality 600 Trend 1977-2002 580 560 540 520 1975 1980 1985 1990 1995 2000 2005 2010 Year 18
Gini coefficient * 100 A good example! 640 The trend reversal of inequality in Brazil: 1975-2009 20 620 Inequality 15 10 600 Trend 1977-2002 5 580 0 560 GDPpc growth rate -5-10 540-15 520-20 1975 1980 1985 1990 1995 2000 2005 2010 Year 19
Thank you 20
Theil coefficient Remark 1: Inter- and Intra country global inequality Decomposition of global inequality into Between and Within components (Theil coefficient) 1.000 0.900 0.800 Global inequality 0.700 0.600 0.500 0.400 Inequality within countries International inequality 0.300 0.200 0.100 0.000 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010 21
Remark 2: Inter-country inequality keeps increasing 22
Per cents A related phenomenon: the drop in extreme poverty (developing countries) 60 Evolution of global extreme poverty (1.25$ ppp a day): 1980-2008 2000 50 Number of poor people (right axis) 1800 1600 40 30 Proportion of poor people (left axis) 1400 1200 1000 800 20 600 10 400 200 Source: World Bank 0 0 1980 1985 1990 1995 2000 2005 2010 Year 23
Inequality change in LAC countries Change in the Gini coefficient : mid 1980s to mid 2000s, LAC countries Peru Argentina Uruguay Ecuador Jamaica Colombia Costa Rica Dominican Republic El Salvador Venezuela, RB Trinidad and Tobago Chile Honduras Nicaragua Guyana Guatemala Mexico Brazil -8-6 -4-2 0 2 4 6 8 Source: World Bank, Povcal 24 Percentage points
Per cents Top incomes in emerging countries: a trend parallel to developed countries? Share of top 1% income in total income: 1920-2009, emerging countries + USA 30 25 20 15 Argentina USA 10 Indonesia India 5 China Source: Top incomes 0 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Year 25