Financial Times - February 25, 2000
COMMENT & ANALYSIS: The truth about global inequality: Mattias Lundberg and Branko Milanovic argue that the benefits of economic integration are not always distribute:
Globalisation and inequality have received a great deal of attention lately. (Martin Wolf, The big lie of global inequality, February 8). We believe the discussion has been clouded by a lack of terminological and conceptual clarity.
Proponents of globalisation claim that the process brings universal benefits, while opponents equate it with social and environmental destruction. This dichotomy obscures more than it reveals.
There are at least three distinct concepts of inequality. First, there is inequality within countries. It is what people mean when they argue that globalisation may have widened income disparities in Brazil, or in the UK.
Second, there is international inequality, that refers to differences between countries' average per capita incomes, or gross domestic products. This is what people mean when they describe the effects of globalisation on countries' economic growth rates.
The third concept - global inequality - combines the two previous concepts. It refers to income differentials between all individuals in the world. However, the significance of the global inequality yardstick is not always clear. For example, a decline in global inequality may obscure widening disparities within countries - if the latter are compensated by growing average incomes in poor countries.
Besides conceptual problems, there are substantive issues. Just because inequality rises, or falls, against the backdrop of globalisation, this does not mean that the two phenomena share a causal link. Rather, one has to come up with a plausible explanation as to how globalisation affects inequality.
Martin Wolf argues that global inequality has decreased over the past two decades. He refers to the work of Andrea Boltho and Gianni Toniolo showing that the world Gini coefficient fell from 54, in 1980, to 50 in 1998. A measure of income distribution, the Gini coefficient ranges between 0 (complete equality) and 100 (complete inequality).
Messrs Boltho and Toniolo base their calculations on a cross-country comparison of average per capita GDP, weighted by population size. This is a measure of international, rather than global, inequality. , Their measure appears to be inaccurate.
Three recent studies by Schultz, Firebaugh and Milanovic estimate that international inequality is between 10 and 20 per cent higher than the Gini coefficient calculated by Boltho and Toniolo. In fact, the international Gini coefficient is shown to have increased from 55 to 58 between 1988 and 1993. Boltho and Toniolo seem to have relied on a relatively small sample of 49 countries.
Moreover, an international inequality measure hardly gauges the real extent of global income disparity, for it assumes that every Chinese, and every American, has the same national mean income. By combining domestic and international inequality measures, one arrives at a more accurate global picture - and a higher Gini coefficient. Mr Milanovic has done this, showing a world Gini coefficient increase from 63, in 1988, to 66 in 1993.
As for globalisation, most economists agree that the process is inevitable, and that it carries costs as well as benefits. After an initial adjustment period, developed countries are likely to see an increase in manufacturing jobs. At the same time, the wage gap between low and high-skilled workers may increase, largely as a result of globalisation. This is true for developing as well as developed countries.
Yet what of the poor? In a recent World Bank paper, Lundberg and Squire find that greater openness to trade is negatively correlated with income growth among the poorest 40 per cent of the population, but positively related with income growth among the remaining 60 per cent. The costs of adjusting to greater openness are borne exclusively by the poor, regardless of how long the adjustment takes.
The poor are far more vulnerable to shifts in relative international prices. And countries' openness to trade is clearly exacerbating this vulnerability. Poor farmers, who have never heard of the World Trade Organisation, are affected by changes in the prices of their inputs and products. Given that the prices of non-oil commodities have uniformly declined since the beginning of the 20th century, poverty is likely to increase.
The debate on the effects of globalization needs greater conceptual clarity and more rigorous empirical testing. Global income inequality is much greater than the international inequality, as calculated by Boltho and Toniolo, with recent trends pointing toward increasing inequality. Moreover, the benefits of increased global integration are not necessarily evenly distributed.
It will be impossible to convince opponents of globalisation of the benefits of increased integration, unless discussions are based more on the evidence and less on ideology.
References at www.ft.com Mattias Lundberg is a consultant and Branko Milanovic an economist at the World Bank.