2005 WIDER Annual Lecture
Why Inequality Matters in a Globalizing World
Helsinki, October 26
Nancy Birdsall
President
Center for Global Development
Washington, D.C.
1
“Holy mackerel, the world is becoming flat.
Several technological and political forces have
converged, and that has produced a global, Webenabled playing field that allows for multiple forms
of collaboration without regard to geography or
distance - or soon, even language.”
-Thomas Friedman
2
“But the world is not flat. Those of us on the top,
with the right education and in the right countries,
can easily overlook the countries and the people
stuck in deep craters across the global landscape.”
-Nancy Birdsall, this lecture
. . which is about why they are in craters, why that
matters, and what we need to do about it.
3
The message
Inequality matters to people. It is often a sign of
injustice.
{
{Global
markets by their nature generate inequality.
We need to manage the downside of
globalization if we are to sustain its upside. We need
a global polity to complement our global economy.
{
Constructing that global polity is a key challenge
of this 21st century.
{
4
The message in three parts:
1. Inequality Within Developing Countries: Why
It Matters
2. “Globalization” is Disequalizing
3. Constructing a Global Polity for Our Global
Economy
5
1. Inequality Within Developing Countries:
Why It Matters
Definitions and facts
1.A.
Inequality inhibits growth
1.B.
Inequality undermines good public policy
1.C.
Inequality undermines collective decision
making and social institutions critical to
health societies
6
1. Inequality Within Developing Countries:
Why It Matters
Definitions and facts
{
Poverty
{
Inequality (money inequality)
{
Inequity (process not outcome)
7
. . Poverty and inequality are not closely related. . .
(Bivariate Correlation of $1 poverty measure/ (Q5/Q1) = .33)
40
Inequality Ratio (Q5/Q1)
ZAF
GTM
PAN
30
GNB
BRA
LSO
20
KEN
CHL
THA
COLVEN
MEXDOM
CRI
MYS
SSA
MRT
NGA
ZWE
HND
NIC
SEN
PHL
ECU
10
TUN
JOR
MAR
CHN
JAM
KGZ
POL
CIV
EST
MDA
BGR
RUS EGY
LKAIDNPAK ROM
SVN
CZE
UKR
SVK
NER
MDG
UGA
ZMB
IND
RWANPL
0
0
50
Poverty Headcount Ratio, <1$/day
Source: Birdsall (2001) “Why Inequality Matters.”
100
8
. . .inequality varies across regions and changes
little within regions/countries over time
Inequality by region and decade
Latin America & Caribbean
Sub-Saharan Africa
East Asia & Pacific
South Asia
OECD & High Income
Eastern Europe
Source: Birdsall (2001) “Why Inequality Matters.”
9
…high in Latin America and rising in Eastern Europe...
Inequality across regions
Source: Reproduced from Kalwij and Verschoor (2005).
10
1. Inequality Within Developing Countries:
Why It Matters
Definitions and Facts
1.A.
Inequality inhibits growth
1.B.
Inequality undermines good public policy
1.C.
Inequality undermines collective decision
making and social institutions critical to
health societies
11
There is no strong relationship between inequality
and growth in rich countries…
Period average GDP per capita growth 1970-2000 (real, percent)
1
1.5
2
2.5
3
Per capita growth and inequality in rich countries 1970-2000
Norway
Japan
Finland
Italy
United States
United Kin gdom
Canada
France
Swe de n
Germany
Denmark Australia
New Zealand
25
30
Source: WIID2a, WDI (2005) and author’s calculations.
35
Gini coefficient
40
45
12
…but developing countries with high inequality
tend to grow more slowly
Period average GDP per capita growth 1970-2000 (real, percent)
-2
0
2
4
6
8
Per capita growth and inequality in developing countries 1970-2000
Chi na
Botswana
Singapore
Hong Kong
Thailand
Ind on esia
Hungary
Pakistan
Malaysia
Sri Lanka
Chile
India
Israel
Uruguay
Brazil
Me xico
Colombi a
Panama
Ecuador
Phi lippines
Hon du ras
El Salvador
Bolivia
PeruSouth Africa
Nigeria
Jamaica
Turkey
Costa Rica
Bangladesh
Argentina
Venezuela
Ivory Coast
Zambia
30
40
Source: WIID2a, WDI (2005) and author’s calculations.
50
Gini coefficient
60
70
13
1.A. Inequality inhibits growth
– in developing countries, where markets and
governments are weak
Constructive inequality
(perfectly competitive markets)
Growth
Destructive inequality
(market and government weakness)
Growth
South
Africa
Brazil
Equity
Equity
14
Latin America is an example
Factors of aggregate growth 1960s-1990s
(contributions to variations in GDP, percentage)
6
OECD
5
Latin America
Contribution to growth
4
East Asia
3
2
1
0
-1
-2
Capital accumulation
Education and asset equity
Total
Source: Birdsall and Londono (1998) "No Tradeoff: Efficient Grow th Via More Equal Human Capital Accumulation."
15
1. Inequality Within Developing Countries:
Why It Matters
Definitions and Facts
1.A.
Inequality inhibits growth
1.B.
Inequality undermines good public policy
1.C.
Inequality undermines collective decision
making and social institutions critical to
health societies
16
1.B. Inequality undermines good public policy
– for example educational opportunities are
probably not equal in many developing countries
Average years of schooling (15-24), 2000-20031,2
poorest 20% of households
richest 20% of households
Colombia
2.4
9.8
Guatemala
2.0
8.9
Peru
5.0
9.8
Cambodia
2.4
7.4
Philippines
6.2
10.2
Vietnam
5.2
10.3
Ethiopia
0.9
5.2
Kenya
4.9
9.0
Nigeria
3.5
9.9
Notes:
1. Average years of schooling are the years of formal schooling received on average, by adults aged 15-24.
2. Data is for the latest year available during the period 2000-2003, except for Colombia (1995), Guatemala
(1995), Peru (1996) and the Philippines (1998).
Source: World Bank EdStats (2005).
17
1B. Inequality undermines good public policy
Inequality encourages self-defeating economic
policies to “protect” poor and near-poor households,
e.g.
trade protectionism, overvalued exchange rates and
price controls that hurt poor rural producers and poor
urban consumers
{
job “protection” (high cost of layoffs) that
discourages job creation
{
underpricing of water and electricity that leads to
rationing that hurts the poor
{
18
1. Inequality Within Developing Countries:
Why It Matters
Definitions and Facts
1.A.
Inequality inhibits growth
1.B.
Inequality undermines good public policy
1.C.
Inequality undermines collective decision
making and the social institutions critical
to healthy societies
19
1.C. Inequality undermines collective decision making
{
The middle class seems to matter for social
capital, for democracy, and for the blessings of a
common shared “civic” life in communal domains
{
But high concentration of income in unequal
societies implies a missing middle class
{
The middle class is mostly missing at the global
level and within many developing countries
20
The well-off middle class
Joachim Beuckelaer, The Four Elements: Earth, National Gallery London
21
1.B. Inequality undermines collective decision making
– few countries today are “middle class”
Distribution of world population by 1998 GDP per capita
Population share
Bangladesh, Nigeria, India
China, Indonesia
Western Europe,
Japan
GDP per capita (PPP)
Source: Milanovic (2005) Worlds Apart: Measuring International and Global Inequality.
United States
22
1.B. Inequality undermines good public policy
– few people are “middle class”
Population
World income distribution (based on household survey data; year 1993)
Income (PPP)
Source: Milanovic (2005) Worlds Apart: Measuring International and Global Inequality.
23
In Brazil, median household income per capita
was about a third of average national income in
the 1990s
Brazil
300
250
200
150
100
50
0
85
86
88
89
Average Monthly Per Capita Income US $ PPP
Poverty Line US $2 per day
Source: Birdsall (2002).
91
94
96
Median Monthly Per Capita Income US $ PPP
24
In Chile, median income has been about half of
average income
Chile
300
250
200
150
100
50
0
87
89
Average Monthly Per Capita Income US $ PPP
Poverty Line US $2 per day
Source: Birdsall (2002).
92
94
Median Monthly Per Capita Income US $ PPP
25
In Peru in the 90s, almost 20 % of children under
5 in middle-income households were stunted
Rates of stunting for children < 3 (Bolivia and Ghana); < 5 (Peru)
(in %)
50
45
40
35
30
Poorest Quintile
Middle Quintile
Richest Quintile
25
20
15
10
5
0
Peru
Source: DHS.
Bolivia
Ghana
26
1. Inequality Within Developing Countries:
Why It Matters
Definitions and Facts
1.A.
Inequality inhibits growth
1.B.
Inequality undermines good public policy
1.C.
Inequality undermines collective decision
making and social institutions critical to
health societies
27
The message in three parts:
1. Inequality Within Developing Countries: Why
It Matters
2. “Globalization” is Disequalizing
3. Constructing a Global Polity for Our Global
Economy
28
2. “Globalization” is Disequalizing
Definitions, debates, facts
2.A.
Global markets work—and reward
those with productive assets
2.B.
Global markets are imperfect—and hurt
most the poor
2.C.
Global rules naturally reflect market power
and interests of the rich
29
Definitions, debate, facts
Globalization is the increasing integration of
economies and societies – through flow of
goods, services, capital and of ideas, norms, and
peoples.
In popular use, globalization often refers to the
increasing influence of global market capitalism
and of global corporate and financial interests.
30
The debate about globalization
“No country has developed successfully by turning its
back on international trade and long term capital flows.”
-Stanley Fischer, former Sr. Deputy Managing Director, IMF
“If you're totally illiterate and living on one dollar a day,
the benefits of globalization never come to you.”
-Jimmy Carter, former President, USA
31
The debate about globalization and inequality
Globophobes: Global inequality is high and rising
Globophiles: Global inequality is declining
32
Inequality between rich and poor countries is
increasing, because the rich are growing faster
– “divergence big time”
Annual per capita growth rates 1980-2002
Mean
Median
Percentage
negative
"Old OECD"
1.9
2.0
17
Middle income
countries
1.0
1.8
33
LLDCs
0.1
0.8
43
Source: Milanovic (2005).
33
At the same time, high growth in China and India is
reducing inequality across all people in the world
Inequality across world population
Inequality across countries
Source: Milanovic (2005).
34
Globophobes and globaphiles are both right
{
Inequality between the richest and poorest
countries is high and continues to grow.
{
But thanks to rapid growth in China and India,
global poverty is declining and so is global
inequality across all people.
{
(Globalization is not the cause of deep poverty
and destructive inequality but neither is it the
solution. Indeed, where globalization is reducing
poverty, e.g. China, it is also associated with
rising inequality – planting seeds of future
problems.)
35
2. “Globalization” is Disequalizing
Definitions, debates, facts
2.A.
Global markets work—and reward
countries and people with productive
assets
2.B.
Global markets are imperfect—and hurt
most the poor
2.C.
Global rules naturally reflect market power
and the interests of the rich
36
2.A. Global markets work
The most commodity dependent countries have
participated in global trade for decades
Trade to GDP Ratios for the Most and the Least Commodity Dependent Countries
Openness (sum of exports and imports as share of GDP, percent)
100
90
80
Least Commodity Dependent
70
Most Commodity Dependent
60
50
40
30
20
10
0
1960-1964 1965-1969 1970-1974 1975-1979 1980-1984 1985-1989 1990-1994 1995-1999 2000-2003
Note: There are 72 "least commodity dependent" countries and 34 "most commodity dependent" countries. Trade to GDP ratios
are unweighted averages.
Source: World Development Indicators, 2005 and author's calculations.
37
But commodity prices have been falling
Source: UNCTAD. 2005. Commodity Price Bulletin.
38
And manufacturing prices have been rising
Unit value index of manufactures (1990=100)
Unit Value Index of Manufactures 1965-1998
120
100
80
60
Unit Value Index of Manufactures (1990=100)
40
20
0
1965
1970
1975
1980
1985
1990
1996
1998
Note: Unit value index of manufactures exports from G-5 to developing countries.
Source: World Bank. 2001. Global Economic Prospects.
39
The wrong asset: Open, globalizing countries
dependent on commodity prices have not grown
Average annual growth rate of real GDP per capita (mean, percent)
2%
1990s
2%
1980s
1%
1%
Most commodity dependent countries
0%
1990s
Least commodity dependent countries
-1%
-1%
1980s
-2%
Source: Birdsall and Hamoudi (2002) “Commodity Dependence, Trade, and Growth: When “Openness” is Not Enough.”
40
Despite having comparable tariff rates to other
countries
Tariff rates 1985-1989 and 1995-1997 (mean, median, in percent)
0.35
Median tariff rates
Mean tariff rates
0.30
1985-1989
1985-1989
Mean tariff rates
0.25
Median tariff rates
1985-1989
1985-1989
0.20
1995-1997
1995-1997
1995-1997
0.15
1995-1997
0.10
0.05
0.00
Most commodity dependent countries
Least commodity dependent countries
Source: Birdsall and Hamoudi (2002) "“Commodity Dependence, Trade, and Growth: When “Openness” is Not
41
2.A. Global markets work
– and reward those with productive assets
Relative log wage
1.7
1.6
Higher
education
relative to
primary
1.5
Higher
education
relative to
secondary
1.4
1.3
1.2
Secondary
education
relative to
primary
1.1
1
1990
1991
1992
1993
1994
1995
1996
1997
1998
Source: Behrman, Birdsall and Szekely (2003) “Economic Policy and Wage Differentials in Latin America.”
42
2.A. Global markets work
– encouraging emigration of those with more skills
Emigration rates by education level in 2000, population 25 years or older
(percent)
Emigration rates to all OECD countries by education level
30
25
Primary
Secondary
Tertiary
20
15
10
5
0
Mexico
Philippines
India
Pakistan
Egypt
Sri Lanka
43
Source: Kapur and McHale (2005). Give Us Your Best and Brightest. The Global Hunt for Talent and Its Impact on the Developing World.
Sub-Saharan African nurses registering in the United Kingdom annually
Nurse flows from Sub-Saharan Africa to the
United Kingdom
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1996/97
Source: UK NMC (2005).
1997/98
1998/99
1999/00
2000/01
44
2. “Globalization” is Disequalizing
Definitions, debates, facts
2.A.
Global markets work—and reward those
with productive assets
2.B.
Global markets are imperfect—and hurt
most the poor
2.C.
Global markets naturally reflect market
power and the interests of the rich
45
2.B. Global markets are imperfect
– and hurt most the poor.
Financial crises and changes in income concentration
Income share poorest 80%
pre-crisis
Income share poorest 80%
post-crisis
Income share richest 20%
pre-crisis
Income share richest 20%
post-crisis
Income shares of poorest 80% and richest 20% pre- and post crises
70
60
50
40
30
20
10
0
Korea
Philippines
Thailand
Brazil
Note: East Asian financial crisis 1997/1998, Brazil crisis 1999, and Mexico crisis 1994/1995.
Source: Reproduced from Birdsall (2005) “Stormy Days on an Open Field: Asymmetries in the Global Economy.”
Mexico
46
2.B. Global markets are imperfect
– and hurt most the poor
Financial crises and Inequality
Pre-crisis
Post-crisis
Gini
Gini
Korea
32.6
37.2
Philippines
46.2
49.5
Thailand
57.5
58.5
Brazil
60.2
61.2
Mexico
52.9
53.7
East Asian financial crisis 1997/1998, Brazil crisis 1999, and Mexico
crisis 1994/1995.
Pre-crisis data for Thailand, Korea and Brazil are from 1996, for the
Philippines from 1994 and Mexico 1992. Post-crisis data are from 1996
for Mexico, 1998 for Korea, 1999 for Thailand, 2000 for the Philippines,
and 2001 for Brazil.
Source: WIDER WIID 2.0a.
Source: Reproduced from Birdsall (2005) “Stormy Days on an Open Field: Asymmetries in the Global Economy.”
47
Message in three parts.
The connection between 1 and 2?
1. Inequality Within Developing Countries: Why
It Matters
2. “Globalization” is Disequalizing
3. Constructing a Global Polity for Our Global
Economy
48
2. “Globalization” is Disequalizing
Definitions, debates, facts
2.A.
Global markets work—and reward
those with productive assets
2.B.
Global markets are imperfect—and hurt
most the poor
2.C.
Global rules naturally reflect market
power and the interests of the rich
49
2.C. Global rules naturally reflect market power
and the interests of the rich
Design of rules favors rich country interests:
•Current trade regime
•International migration
•International property rights (TRIPS)
And implementation of reasonable global rules often
reflects interests of more powerful rich
I.e. just global rules and fair implementation
50
2. “Globalization” is Disequalizing
Definitions, debates, facts
2.A.
Global markets work—and reward
those with productive assets
2.B.
Global markets are imperfect—and hurt
most the poor
2.C.
Global rules naturally reflect market
power and the interests of the rich
51
3. Constructing a Global Polity
{
Because markets work:
A global social contract to address unequal endowments
across countries – foreign aid, aid for trade, World Bank,
aviation taxes and so on.
{
Because global markets are imperfect:
New and improved global rules and regulatory arrangements
to provide for public goods (Green Revolution), protect the
global environment against global bads (Kyoto and beyond),
manage global financial risks (IMF, Sovereign Debt
Financing Facility), discourage anti-competitive processes (a
global anti-trust agency), and so on.
{
And. . . .
52
3. Constructing a Global Polity
Because global rules tend to reflect the interests of the rich
(With costs for all who seek a more secure, prosperous and
just world):
{
More voice and more votes for poor countries and poor
people in global fora ... in the IMF, the World Bank, the UN
Security Council, the Basle Committee for Banking
Regulation and Supervision, the G-8, and so on;
{
and more emphasis on surveillance of rich countries’
commitments and adherence to fair rules; new efforts to
complete the Doha as a development round; an
International Migration Authority …
53
A Global Polity for Our Global Economy
Most global inequality is destructive – reflecting unequal
endowments and opportunities across countries and peoples.
In the face of that inequality, global justice will remain a
constant theme in the 21st century.
Our global market system has tremendous potential benefits –
but only if we construct a more robust and representative
global “polity.”
. . .with a mission to secure a less divided, more just and more
development-friendly world.
54