Globalization and Inequality Roundup

♠ Posted by Emmanuel in , at 10/23/2007 12:30:00 AM
This is my final installment relating to the October 2007 IMF World Economic Outlook. It concerns the headline subject matter of the report, Globalization and Inequality. Now, some ink has been spilled on the report in the financial press. The Wall Street Journal makes much about the finding that rises in income inequality as measured by the Gini coefficient are being fueled by technology and foreign investment. Furthermore, the WSJ says this provides ammunition for the anti-globalization movement. On the other hand, the Financial Times' Clive Crook--a well-known globalization proponent--says that the WSJ and others have missed the more important finding from the report: Yes, inequality may be on the rise due to technology and foreign investment, but incomes of the poor are rising around the world, in industrial and developing countries alike. Second, liberal trade reduces inequality – again, in poor countries as well as in rich countries.

What are we to believe, then? As always, it pays to look at the source material. Figure 4.3 to the left (click for larger image) indicates that [i]nequality has risen in developing Asia, central and eastern Europe, the NIEs, and the advanced economies, while falling in the Commonwealth of Independent States and, to a lesser extent, in sub-Saharan Africa. Few except the most rabid pro-globalizers would probably contest this point. Inequality is rising throughout most of the world's regions.

Before making a wholesale indictment of globalization based on rising inequality, though, pay some heed to Figure 4.5 to the right (click for larger image). As the accompanying text notes, [i]ncomes have risen for all quintiles across all regions except for the poorest quintile in Latin America, related in part to the aftereffects of crises. This is the point Crook wants to make. To me, it is also the more important one. Yes, inequality is rising, but nearly everyone in various quintiles have higher incomes compared to the decade or so before.

I will make a statement that I suspect more left-of-center readers may not agree with: In a perfect world, we'd of course prefer it if incomes increased and inequality decreased at the same time. However, given a choice between rising incomes (+) and rising inequality (-) versus falling incomes (-) and falling inequality (+), I would likely prefer the former combination. Which, of course, is what these statistics indicate. There are many potential qualifiers that I can throw in. To think of three (there are too many to mention), the data may not be reliable especially in developing countries, income growth is not necessarily the best measure of human development, and environmental costs are not included in this analysis. Nevertheless, if the data compiled by the IMF is accurate and income growth has resulted in real welfare gains for the poor in various parts of the globe, this news is welcome indeed.

Lastly, have a look at Figure 4.10 to the left (click for a larger image). The IMF uses a regression model to determine how globalization--in the form of exports, tariff liberalization, and inward FDI--has affected income inequality. As Crook noted, trade narrows income inequality across all regions. Figure 4.9, which I do not show here, further illustrates that technology is the principal driver of inequality. Technology tends to increase the rewards for those skilled at harnessing technological innovations instead of the unskilled. As an aside, some of my research is on policymaking aimed at introducing technologies that benefit the unskilled more than the skilled, but that's a story for another day. Nevertheless, this WEO report introduces a whole bunch of other possible considerations regarding innovation: Why is it that the lion's share of innovations are geared towards rewarding those who have already been rewarded? (This is the so-called Matthew effect.) In any event, cheer up, free traders. It appears the evidence here is that trade narrows inequality and doesn't widen it.
[UPDATE: The IMF has a slideshow on globalization and inequality.]