Monday, April 27, 2015

Bourguignon, The Globalization of Inequality

Inequality not only seems to be an intractable problem, it also seems to be a slippery concept, hard to define with any precision and tricky to measure. Normally we talk about inequality within a national economy, and that’s difficult enough to deal with. But Fran├žois Bourguignon goes a step further. He is interested in global inequality, “a rather complex combination of inequality between nations and inequality within nations.” (p. 9).

In The Globalization of Inequality (Princeton University Press, 2015), an updated, expanded version of the book that first appeared in French in 2012, “the central question is whether the increase in inequality observed in the United States, in some European countries, and in some emerging countries may be considered the consequence of a globalization process, which, at the same time, has drastically reduced income differences between developed and developing countries. Does diminishing inequality among countries feed rising inequality within nations?” (p. 5) The short answer to the first question is, by and large yes. To the second, not necessarily, if the right kinds of policies are implemented.

Bourguignon carefully wends his way among the definitions of inequality and its multiple, sometimes conflicting measures. For instance, do you normalize to GDP per inhabitant, do you take redistribution into account? Here I am going to ignore these important methodological issues to cut straight to some of the empirical findings.

Over the last two decades a large majority of high-income OECD countries, including the lauded egalitarian Scandinavian countries, have experienced rising income inequality. Among the countries that have seen inequalities in wages and standards of living drop significantly since 1990 are Belgium, Spain, and Italy. In France, inequality decreased steadily until the mid-1990s, reaching a level that was low relative to other developed countries, and has increased since then, but to a much lesser extent.

A large number of developing countries, most notably China, India, Indonesia, and Bangladesh, have seen a rise in inequality between the mid-1980s and the end of the 2000s. The same holds true for some of those countries in Africa that have seen the strongest and steadiest growth—Ghana, Kenya, Nigeria, and the Ivory Coast prior to the 2002 crisis. In Latin America, inequality levels rose significantly in the 1980s and then dropped throughout the 2000s.

Contrary to popular claims, it should be obvious from these statistics that growth in and of itself is not the remedy for inequality.

Globalization has “most likely,” Bourguignon suggests, played a role in increasing inequality in most countries because the main beneficiary of “the globalization of trade and the resulting acceleration in economic growth that has taken place over the last two decades” has been capital. “In developed countries, this evolution has contributed to a greater specialization in goods whose production requires more capital, increasing both its relative scarcity and its remuneration. … [C]apital may also have been the main beneficiary in emerging countries that are exporting labor-intensive manufactured products. As for the majority of developing economies that, despite the globalization process, keep exporting mostly raw materials, whether agricultural or mineral, it is again capital- and large property-owners (sometimes the state) who profited from rising demand and prices for these basic commodities.” (p. 84)

But globalization has not been the only force at work in modifying the distribution of income. Bourguignon also points to the “vertiginous development of communication and information science and technology” (p. 85), which, to cite but a single example, has “made it possible for a single person to manage a huge portfolio, often worth a few billion dollars, and to generate larger profits. This has catapulted a relatively large percentage of traders into the very high income bracket.” (p. 88)

Governments have also had a role to play in the rising inequality within nations. They cut progressive income taxes, arguing that “the marginal tax rates on the highest incomes were practically confiscatory and were discouraging entrepreneurship and investment,” and, in some cases, introduced regressive value added taxes. For instance, in the very first year of the Thatcher government the highest marginal tax rate fell from 83% to 60% while VAT rose from 6% to 15%. And governments began distinguishing, for tax purposes, between income from capital and savings and income from labor. “As the share of income from capital tends to increase as income increases, average tax rates for the very high income brackets ended up actually falling.” (p. 93) At the other end of the scale, helping to level things out a bit, “the percentage of GDP going to social programs has increased in the majority of OECD countries.” (p. 94)

Economic policies, Bourguignon suggests, “are generally justified in the name of two very different principles: efficiency and/or equality. Over the last few decades, it would seem as if the first principle has generally won out over the latter. In the name of economic efficiency, a number of reforms have been undertaken that were intended to improve the competitiveness of national economies…. But these very reforms have often contributed to a rise in inequality, without necessarily having a major effect on efficiency.” Are there policies, the author asks, “that could simultaneously serve to promote equality and efficiency, at both the national and international levels”? (p. 116) Or will there “inevitably be trade-offs between equality and efficiency”? Is it the case that “the simple fact of dividing the cake more equally will shrink the size of the cake, because it will distort the behavior of agents and the operation of markets”? (pp. 129-30)

In the final chapters of his book Bourguignon outlines some policies that can increase efficiency and reduce inequality within individual national economies as well as some that can lead to a global convergence of standards of living and a reduction in poverty. Many of these policies have been bandied about by politicians, but few have been introduced.

This book is written for the layman but is nonetheless intellectually rigorous. It sets out the causes of and some remedies for a problem that urgently needs to be solved if we are to avoid what the book’s title warns again, the globalization of inequality.

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