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Globalization and Economic Inequality

by MATT VIDAL

The integration of economic activities across national borders that goes under the name of globalization is effected primarily by economic actors in the private sphere (mainly multinational corporations) and government actors. The former are concerned only with profit, while the latter are severely constrained by the needs of the former. Key institutions of neoliberal or free-market globalization such as the North American Free Trade Agreement (NAFTA) and similar trade agreements are negotiated primarily to benefit employers and investors, as is clear to anyone familiar with the lack of labor, environmental and other social protections in such agreements.

Supporters of the free-market version of globalization, however, blithely repeat the mantra that free trade is win-win, everyone benefits. A recent apology comes from David Brooks’ New York Times column.[1] Brooks cites a recent report by the World Bank showing that strong economic growth in certain parts of the developing world has produced dramatic reductions in extreme poverty.[2]

Brooks claims that this reduction in poverty “supports the argument that we are seeing a drop in global inequality” and goes on to make the oversimplified, unqualified and unwarranted (by the data cited) argument that globalization “explains all this good news.” Let us examine this news in a bit more detail.

 

A closer look at the numbers: world poverty and inequality continue to grow

Chiding leftists for being overly pessimistic, Brooks vaunts his optimistic reading of the data: “In its report, the World Bank notes that economic growth is producing a ‘spectacular’ decline in poverty in East and South Asia. Less dramatic declines in extreme poverty have been noted around the developing world, with the vital exception of sub-Saharan Africa.”

Reading the same table as Brooks presumably did, I find less reason to be optimistic. To begin with, despite the impressive overall global economic growth, there was little decline in overall extreme poverty in the world. In 2001 there remain 1.1 billion people in the world living on less than $1 per day, down just slightly from 1.2 billion in 1990, hardly a noteworthy achievement after the most prosperous decade in world history.[3]

In fact, Brook’s interpretation of the data ­ dramatic declines in extreme poverty everywhere except sub-Saharan Africa ­ is wrong on its face. In Europe and Central Asia, the number living on $1 per day increased dramatically from two to 17 million, while in Latin America and the Caribbean (certainly part of the “developing world”) the number in extreme poverty remained essentially unchanged, increasing by one million to a total of 50 million people in extreme poverty in 2001.

If China is excluded, the number of people in the world living in extreme poverty actually increased slightly from 1990 to 2001, from 844 to 877 million. And if we take the $2/day indicator (also in Table 1.5 of the World Bank report), overall world poverty increased from 2.65 billion in 1990 to 2.74 billion in 2001.

Based on these data Brooks contends that globalization is having “a wonderful effect on world poverty, because when regions grow, that growth is shared up and down the income ladder.” While it is true that the benefits of economic growth are pulling some people out of extreme poverty ­ and this is certainly a good thing ­ it is also the case, again contrary to Brooks, that these benefits are captured disproportionately by a very few at the top of the income distribution. In order to see this it is necessary to move beyond measures of absolute poverty and examine income inequality.[4]

There are two main ways of measuring global income inequality: inequality within individual countries and inequality between countries. To see the uneven effects of economic growth, it is important to look at between-country inequality. Using World Bank data on 121 countries between 1965 and 1992, sociologists Roberto Korzeniewicz and Timothy Moran conclude that the data “indicate a prevalence of profound inequality with the most pronounced increase taking place in the 1980s.”[5]

Korzeniewicz and Moran use two standard measures of inequality, the Gini coefficient and Theil’s T. The Gini coefficient is a number between 0 and 1, where 0 indicates perfect equality and 1 indicates extreme inequality. The Gini coefficient for the world in 1965 stood at .658 and moved to .739 by 1990, denoting a quite extreme level of global income inequality. Theil’s T produces a similar result.

Is growth in fact shared “up and down the income ladder” under globalization? According to Korzeniewicz and Moran’s analysis of World Bank data, “The share of world income accruing to the poorest 40% of the world’s population diminished over the 1965-1990 period from 5.1% to 3.2%.”

During the same period, the top 20% of the world’s population increased its share of world income from 69.5% to 83.4%. What’s more, in 1990 the richest 10% of the world received 56.1% of world income.

To repeat: in 1990 the bottom 40% of the world population received only 3% of total world income, while the top 10% received fully 56%. So much for evenly spreading the benefits of remarkable economic growth.

 

Globalization: uneven development and diverse forms

“Over the past decades,” Brooks continues, “many nations have undertaken structural reforms to lower trade barriers, shore up property rights and free economic activity. International trade is surging. The poor nations that opened themselves up to trade, investment and those evil multinational corporations saw the sharpest poverty declines. Write this on your forehead: Free trade reduces world suffering.”

In this view globalization is an undifferentiated force of good identified with global financiers and multinational corporations, responsible for rising economic growth and reduced poverty and inequality the world over. But the data presented above paint a picture of highly uneven development, with a few winners and many losers, pockets of wealth and privilege surrounded by poverty and misery.

As I noted at the beginning, governments are also important agents of globalization and they (along with “anti-globalization” social movements and NGOs) can have an important say in exactly what forms globalization takes. Indeed, this is the struggle: it is not anti-globalization versus globalization, but what form of globalization? Will it be the neoliberal version favored by global corporations, financial capital, and Brooks, or will it be a more worker- and environment-friendly version of global integration?

The options are still open, and the choices made matter. As James K. Galbraith, a leading expert on global inequality, has argued the best examples of “true globalizers” following the neoliberal path are Argentina, whose recent economic collapse is the worst in recent memory; Russia, which saw unprecedented deindustrialization and surges in inequality as it opened its economy in the 1990s; and “the erstwhile ‘Asian tigers’ who liberalized in the early 1990s and failed before the end of the decade.”[6]

Galbraith has criticized the World Bank data on within-country inequality as being inconsistent and discontinuous, thus producing unreliable estimates. His research team at the University of Texas Inequality Project (UTIP) has compiled their own data set on global inequality based on what they argue to be more reliable data on industrial wages.[7]

Among the preliminary conclusions of the UTIP data set are the following.[8] First, while wage inequality rose in most countries of the world throughout the 1980s, a few countries succeeded in maintaining or reducing inequality levels in the 1990s, “irrespective of their patterns of trade.” These are the social democratic countries like Germany, the Scandinavian countries, Holland, Austria and Denmark, that have maintained a commitment to reduce inequality through strong welfare states and systems of social protection.

Second, “developing countries that liberalized and globalized were subjected to larger swings in inequality than countries that did not . In most cases, identifiable liberalizations are followed by rising inequality in wages.” In short, while strong economic growth can help reduce poverty, neoliberal globalization produces increased income inequality.

 

Globalization for the people

Triumphantly concluding, Brooks admonishes, “if you really want to reduce world poverty, you should be cheering on those guys in pinstripe suits at the free-trade negotiations and those investors jetting around the world.” But their version of globalization is not the only form possible.

In fact, it is not neoliberal globalization, as such, that has helped produce the slight decrease in global poverty that Brooks cites, but simply that fact of strong economic growth. The relationship between economic growth and neoliberalism is a whole other topic, but as Galbraith notes, world growth rates have been lower under the era of deregulation since the 1980s than during the more regulated years from 1945 to the early 1970s.

More generally, the data overwhelmingly demonstrate that the benefits of globalization have gone largely to the very few, leaving the masses to fight over the crumbs. And while there are more crumbs to fight over when growth is strong, inequality is most extreme in the cases were globalization takes a more neoliberal form. This is the case in developing countries and also in the most neoliberal of the developed countries, the USA, which has seen more consistently rising inequality than any other industrialized country.

The United Nations Human Development Report 2004 (UNHDP) ranks countries on a number of indicators, including the Gini index. Of the 30 members of the Organization for Economic Cooperation and Development (OECD), a group of all the major industrialized countries, the USA ranked second highest in inequality (.408) beaten only by Mexico (.546). For reference, the lowest countries were Hungary (.244), Denmark (.247) and Japan (.249).[9]

The UNHDP presents indicators of relative poverty, such as the percentage of the population living below 50% of the median income. [10] On this measure, the USA places first among the 23 OECD countries for which there are data, with 17% of its population below 50% of the median income. Coming in at less than 7% are the Czech Republic, Finland, Luxemburg, Norway, Sweden, and Hungary.

These data demonstrate that even “under globalization” there is much that can be done by governments to reduce inequality. This includes defending systems of social protection including welfare state programs that are the target of neoliberals. Indeed, it is the form of globalization itself that is at stake, and globalization for the people will be accomplished only if women and men in regular clothes continue to chant for democracy in the streets while “guys in pinstripe suits” make decisions for the world behind closed doors.

MATT VIDAL is pursuing his doctorate at the University of Wisconsin in Madison. He can be reached at: mvidal@ssc.wisc.edu

1. David Brooks, “Good News About Poverty,” New York Times November 27, 2004.

2. World Bank, Global Economic Prospects 2005: Trade, Regionalism, and Development.

3. The specific World Bank estimates for 2001 and 1990, respectively are 1,089 million and 1,218 million, respectively.

4. Brooks writes that “Economists have been arguing furiously about whether inequality is increasing or decreasing. But it now seems likely that while inequality has grown within particular nations, it is shrinking among individuals worldwide.” He cites the work of economist Xavier Sala-i-Martin in support of this claim, but Sala-i-Martin’s estimates of inequality have been questioned by, among others, World Bank economist Branko Milanovic (see Milanovic’s “The Ricardian Vice: Why Sala-i-Martin’s calculations of world income inequality are wrong,” ). More generally, my own reading of the academic literature on world inequality is that while there are many problems of data quality and comparability, there is overwhelming evidence of consistent and continuous increases in both between- and within-country inequality. These results have been vigorously questioned by a few of the ardent faithful such as Sala-i-Martin.

5. Roberto Patricio Korzeniewicz and Timothy Patrick Moran, “World-Economic Trends in the Distribution of Income, 1965-1992,” American Journal of Sociology 102,4: 1000-1039 (1997).

6. James K. Galbraith, “By the Numbers,” Foreign Affairs July/August 2002.

7. These data sets include the Annual Survey of Manufacturers in the USA and OECD data for most other countries. See their website at http://utip.gov.utexas.edu/.

8. James K. Galbraith, Lu Jiaqing and William A. Darity, Jr., “Measuring the Evolution of Inequality in the Global Economy,” UTIP Working Paper Number 7 (1999).

9. Because of differences in underlying surveys, these data are not strictly comparable across countries.

10. The median is the value that lies exactly in the center of the income distribution.

 

 

Matt Vidal is Senior Lecturer in Work and Organizations at King’s College London, Department of Management. He is editor-in-chief of Work in Progress, a public sociology blog of American Sociological Association, where this article first ran. You can follow Matt on Twitter @ChukkerV.

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