Mind the growing gap

Inequality in the global economy
November 1, 2002

The growing gap between the world's haves and have-nots is one of the most pressing issues of our time. Recently, Prime Minister Chretien acknowledged the perils of the global divide, to the dismay of right-wing commentators, who have responded by denying the problem. Two things in this debate need to be pointed out: global inequality is extremely high and has been rising; and this trend is intimately connected to the laissez faire economic policies so promoted by those commentators.

The first part of the inequality puzzle is the divergence in the incomes between different countries around the world. While a handful of "economic miracles" have managed to catch up to Western standards of living, for the vast majority the distance to Western levels of income is ever-greater. A detailed historical study of the world economy by economist Angus Maddison finds that the rich countries of the West have amassed a growing lead over the poorest, with the exception of the so-called Golden Age period from the end of World War II to mid-1970s.

Inequality is also growing within many countries. Summarizing the results of a large research project on globalization and inequality, economists Giovanni Cornia and Julius Court note that inequality has risen over the past two decades in 48 out of 73 countries for which high quality data are available. Sixteen countries had constant levels of inequality, while only nine experienced falling inequality during this period.

Research by World Bank economist Branko Milanovic attempts to put together a picture of the global gap at the individual level by linking these two aspects of inequality. He finds inequality of jaw-dropping proportions. The top 10% of individuals captured over half of world income in 1993, and the richest 1% (50 million people) received as much income as the bottom 57% (2.7 billion people). And while the global rich have captured a greater share of the world's economic pie, the global poor have gotten fewer of the crumbs.

The contrary claim from the right-that inequality is falling worldwide-draws heavily on the work of economist Xavier Sala-i-Martin. His analysis hinges on the fact that China has experienced rapid growth in recent decades, and because it accounts for one-fifth of the world's population, it is implied that more than a billion people are approaching Western income levels-hence, global inequality is falling.

One problem with this is that while China has experienced rising incomes on average, inequality has grown within the country, a point not accounted for in the study. A full 80% of China's population are still peasant farmers, and the benefits of growth have been quite concentrated at the top. Moreover, if China is dropped from the statistical sample, inequality is no longer found to be decreasing.

A major force behind growing global inequality has been the collapse of the middle class in the "transition economies" of Russia and Eastern Europe after the fall of the Soviet Union. Sala-i-Martin does not include the transition economies in his study, a huge omission. The stagnation of countries in Latin America and Africa since 1980 is also a huge driver of increasing global disparity.

Besides growing inequality, these countries have something else in common. Most of them have been coerced by the International Monetary Fund to rapidly liberalize, privatize and deregulate their economies, moves increasingly locked in place by the World Trade Organization. These prescriptions have been dismal failures, leading to growing inequality and weak economic performance.

In contrast, China has not followed orthodox free market policies. It has moved slowly towards a more open economy, joining the WTO only after two decades of reforms. China still does not have a convertible currency, only weakly protects property rights, and has a massive state-owned sector.

Historically, no country has gotten rich by adhering to the free market playbook. The East Asian tigers flouted the orthodoxy by pursuing deliberate government-led industrial policies to strengthen the export sector, while opening up their domestic economies slowly. Early industrializing countries, such as Canada, the United Kingdom and the United States, also relied on government protection and intervention to develop their economies.

The real issue inside the statistical debate about rising inequality has to do with what will work to bridge the gap. It is about what kind of global economy we want to have. An alternative may lie in the post-WW II Golden Age, when inequality was falling both within countries and between countries. During this period, full employment policies were in fashion, and regions like Latin America and Africa benefited from import-substitution and other policies that have since been demonized by free marketeers.

It is possible to shrink the growing gap, but we must take a more balanced approach that does not glorify free markets, and that gives countries the flexibility they need to create vibrant domestic economies.

Marc Lee in an Economist in the BC Office of the Canadian Centre for Policy Alternatives.

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