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Globalisation’s litmus test: can it level world income distribution?

Many economists take it for granted that world income inequality is falling. Is there evidence this is actually happening? How does the answer depend on the way we measure world income distribution? Simpler versions of neoclassical growth theory assume that average productivity levels and average incomes will converge as capital moves from developed countries to capital-scarce countries of the south. How real is this scenario?

A study from the London School of Economics reports powerful evidence that global inequality is rapidly worsening. The report takes the World Bank and IMF to task for their failure to use their formidable research capacities to look at the trends and causes of world income distribution.

Most inequality in world income distribution reflects inequality between country averages rather than inequality within countries. With few exceptions (principally the UK and USA) income inequality in developed countries (after taxes and transfers) is not increasing. While the world average gap between the average income of the top quintile of people (top 20 per cent) and the average income of the bottom quintile within each country is about 5:1, the gap between the average income of the top quintile of states and that of the bottom quintile is of the order of 25-30:1.

Other key points include:

Reasons for increased inequality: faster economic growth in developed countries than developing countries; faster population growth in developing countries than in OECD countries; slow growth of output in rural China, India, and Africa; and rapidly widening income distributions within the biggest countries (India and China).
The absence of significant numbers of people living in countries with average income between US$5,000 and US$11,500 (as derived from household income/expenditure surveys). For every person in the Middle World there are two in the First World and ten in the Third World.
Household income and expenditure data from sampling 85 percent of the world’s population shows that between 1988 and 1993 the share of world income going to the poorest 10 percent of global population fell by over a quarter, while the share of the richest 10 percent rose by 8 percent.
The need to remember that East Asian states achieved economic success by creating national economic space (partially separate from the world economy) and setting conditions on the entry of foreign capital.
China’s current dirigiste strategy, similar to that of pre-liberalisation Japan and South Korea, is more likely to succeed than the World Bank’s model.
It is naïve to suppose that Africa, with large illiterate and innumerate populations, can access the productivity gains of new technologies in conditions of free trade and investment.

Elite western policymakers seem to regard the growing income equality gap as they do global warming. Its effects are diffuse and long-term and fears of political instability, unchecked migration flows and social disruption are regarded as alarmist. For some, inequality is good because it provides incentives for the poor to get richer.

Globalisation is likely to run up against greater opposition unless the goal of working towards equalisation of income is adopted. Recommendations include:

Developing countries should be cautious about financial liberalisation and should maintain partially closed capital accounts.
African states should erect partial economic barriers to balance the benefits of comparative advantage and competition against the benefits of exploiting resources that could not pay dividends in a fully open economy.
Building up organisational capacity outside the state: NGOs may have a role to play here, balanced by input from political parties and the state.
The World Bank should encourage governments to take direct productive-capacity-enhancing interventions of the kind that helped east Asian states.
Strategies to strengthen states, industries, and civil societies in low income nations must be complemented by more open markets in Europe, the US, and Japan, and investment by richer nations of low cost resources in areas (such as water treatment) of the south where the private sector has no interest.

Source(s):
‘Is globalisation making world income distribution more equal?’ by Robert Hunter Wade, May 2001
'Winners and losers', The Economist (p79-82) April 2001

Funded by: Robert Wade

id21 Research Highlight: 8 June 2001

Further Information:
Robert Hunter Wade
Development Studies Institute
London School of Economics and Political Science
Houghton Street
London WC2A 2AE
UK

Contact the contributor: wade@wiko-berlin.de

Development Studies Institute, LSE, UK

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