0.3 Globalization  (Page 9/9)

Globalization and inequality

Overall, global inequality has declined with globalization, in that the distribution of income has narrowed as between rich and poor nations. At the same time, globalization gains come with costs. These include:

• Global inequality has declined with globalization. That is to say, only that the distribution of income has narrowed as between rich and poor nations. ^{Effects of globalization on income distribution are discussed more fully in the next chapter (4).}
• First, a mixed picture as to income distribution within poor nations. While there is some evidence that globalization has helped reduce income inequality within poor nations, there is also evidence that from 1998-2008 income growth in the middle percentiles (35 ^th to 70 ^th ) was materially faster than for the lowest 4 deciles). Branko Milanovic and Christopher Lakner, “Global Income distribution: from the fall of the Berlin Wall to the Great Recession,” World Bank Working Paper #6719 , Washington, DC: World Bank, 2013.
• Second, there has been some rising inequality of income within rich countries, such as the U.S. and Britain, due only partly to declining income of the bottom of the income distribution (see Chapter 4).

Interesting fact: The number of (U.S. dollar) billionaires in the world rose from 400 to 1996 to 1,000 in 2010 (Forbes). But after 1996 the fastest growth of billionaires was in the BRICs (Brazil, Russia, India, and China). This group of nations had about 220 billionaires in 2010, compared to almost NO billionaires in 1990. ^{Forbes Magazine .}

Within emerging nations consider experience with China and Mexico. Globalization (greater economic openness) has apparently contributed to rising inequality in some nations, including China and Mexico. Recall:

The Gini Index (coeffiencies) for both countries has risen. In China, it rose from 30 in 1982 (beginning of reforms leading to more openness) to 40 in 2005.

The increase in Mexico was slight. Gini was 45 in 1982. By 2005 it was 46.

The biggest winners in both countries: skilled workers, the biggest losers in both countries: unskilled workers.

What about developed nations?

In the past 35 years the share of the top decile in the income distribution in most of continental Europe (except France) and Japan increased hardly at all. But in 3 Northern-Hemispheric, English-speaking nations: Britain, Canada and the U.S. the share of the top decile increased notably.

In the U.S. the top deciles share was 33% in 1972, then rose to 42% in 2008.

And significantly, the share of top 0.1% of income earners in all the English speaking nations rose sharply from 2% of income to 5.5% of income. See Thomas Piketty, Capital in the 21 ^st Century

What caused this? Lower taxes on the rich? More income to capital owners? According to some, the cause has been sharply increased rewards to the “Working Rich.” This group includes professional athletes, plaintiff lawyers, CEOs of fortune 500s). This group replaced capital income earners at the top of income distribution in English speaking nations. ^{Piketty, Ibid.}

The reasons for this development are still unclear, though globalization does seem to be part of the answer. Technological change is also part of the answer. Globalization is part of the answer. Technological change is also part of the answer. But much is still unexplained? One possibility is “Tournament Economics”, wherein the “winner takes all” in competition for top global positions, may also play a role. Robert H. Frank, Philip J. Cook, (1996 September 1), The Winner-Take-All Society: Why the Few at the Top Get So Much More Than the Rest of Us, New York, NY:Penguin Books

Economists Sudhir Anand and Paul Segal conclude there is no consensus regarding the direction of changes in the Gini worldwide. Anand, Sudhir&Paul Segal (2008, March). “What Do We Know about Global Income Inequality?” Journal of Economic Literature, 46(1): 57-94. DOI: 10.1257/jel.46.1.57. In the future, we will need to consider closely how globalization limits the ability of nations to reduce income inequality in the future . Also we will later consider effects of the rebirth of state capitalism on income distribution, when we consider state-owned enterprises in the economies of emerging nations.

Globalization and future income redistribution

Why might globalization make future redistribution more difficult? That is, can nations do much to reduce inequality in a globalizing world?

Redistribution in the coming years will be more difficult if only because of the high degree of international mobility of capital. This makes it harder for governments to increase taxes on capital, because capital can migrate. Individual countries therefore lose some degree of freedom in policy-making.

But income redistribution will continue to be an important political issue, at least in democracies at least. Alexis de Tocqueville, a Frenchman long ago presented interesting arguments about redistribution in his 1838 book, Democracy in America . Alexis de Tocqueville, "The Project Gutenberg EBook of Democracy in America", Volume 1 (of 2). (External Link)

He wrote: “Democracy is safe until the politicians discover you can bribe people with their own money”.

Globalization: the continuing rise of china

Globalization has coincided with the emergence of China as a major importer from, and foreign investor in, emerging nations. In the past decade Chinese firms have been, by far, the largest investors in natural resource sectors in Sub-Saharan Africa. This was in fact a major issue in Ghana’s Presidential elections in 2012. In the past 5 years, Chinese investment in Latin American oil and gas, copper and other hard minerals has been accelerating very rapidly.

We are witnessing something never seen before, a giant country half very prosperous, and half very poor, moving rapidly toward technological military and economic parity with the west, so that within a few years China may again have the world’s largest economy, reclaiming the rank it had in 1820.

More generally, between from 1820 and 2000, the ratio of per capita income between the richest and the poorest countries increased by almost a factor of five .

In recent years, as noted earlier, this ratio has been declining. By the end of this collection it is hoped that you will understand a great deal about how this came about.

Finally, we will see in later modules that globalization has meant that economic shocks in one part of the globe travel much faster to the rest of the world than even 25 years ago. This makes the conduct of all economic policies even more difficult now than in past.