On Chavez's Proposed Gas Cartel

♠ Posted by Emmanuel in ,, at 3/24/2007 09:49:00 PM
It had to happen sooner or later. Seeing how OPEC has, in certain circumstances, been able to affect world prices of petroleum, one of the natural gas producers would eventually follow suit with proposing a gas cartel. What is unusual is that Venezuela would take the lead as its natural gas production is comparatively small. In fact, nearly all of its production is domestically consumed--it'd be a stretch to even call it a gas exporter at the current time. What many commentators downplay while pointing this fact out, though, is that Venezuela has substantial natural gas reserves. The Economist estimates that Venezuela has the most natural gas reserves in the region in an article assessing the prospects for a regional gas pipeline (see chart below):


Hugo Chavez and Argentina's President Nestor Kirchner--another Latin leader who has lukewarm relations with "el Diablo" (US President Bush)--first proposed a "Great Pipeline of the South" linking gas producers to consumers in Latin America. However, this project has (literally) not gotten off the ground so far. Being Hugo Chavez, he nonetheless enlisted the support of Argentina and Bolivia, two of the three leading gas producers in the region, in forming Organización de Países Productores y Exportadores de Gas del Sur (OPEGASUR) together with Brazil. Further, he wants to recruit other countries in the Gas Exporting Countries Forum (GECF) such as Algeria, Brunei, Egypt, Indonesia, Iran, Libya, Malaysia, Nigeria, Oman, Qatar, Russia, Trinidad & Tobago, and the United Arab Emirates. These countries have 73% of the world's gas reserves and account for 42% of production. (Argentina and Brazil are not part of GECF.) Chavez will push the issue in the upcoming meeting of GECF on April 9 in Doha, Qatar. So far, GECF has been characterized as more of a "talk shop" than a formal organization. OPEGASUR will be keen on Russia, Iran, and Qatar coming on board as they have 57% of global reserves and 26% of production.

As large producers, Russia and Iran may also have designs of their own on creating a gas cartel. Whether their interests are congruent with those of Venezuela remains an open question, though they are all are inclined to use energy as a political tool particularly against the US and would probably like nothing better than to spite it by forming a cartel. Nonetheless, several questions arise over a gas cartel's usefulness for its members. As most gas is transported via existing pipelines and not via ships (like petroleum), it is not easy to reroute supplies--buyers and sellers are largely predetermined. Contracts written up tend to be long-term as well, many lasting a decade or longer. Hence, short-term price movements are harder to influence. As a result, it is more of a case of having several regional gas markets and not a global market per se. 59% of global oil demand is met through imports, whereas only 18% of gas demand is accounted for this way. Nearly all of US gas demand is met by local production, for example, though this may change as recent searches there for gas have yielded little. Just as the Economist suggests that it may be cheaper to liquify natural gas (LNG) and ship it instead of using pipelines in Latin America, advances in shipping LNG may give a cartel more leverage by developing a spot market facilitated by maritime delivery.
Read More

Is Liberation Theology History?

♠ Posted by Emmanuel in , at 3/23/2007 03:34:00 AM
No discussion of Latin American political economy is quite complete without mentioning liberation theology. Like dependency theory, liberation theology is concerned with Marxist themes of domination and a quest for radical change. Whereas the West is the bogeyman in the former theory, prevailing local structures are the villains in the latter. Jesuit priests in Latin America were the main exponents of liberation theology, which gained a following mostly in the seventies and eighties in the poverty-stricken and largely Catholic region. In fact, I was taught liberation theology in college as I attended a Jesuit university, though I had misgivings even then. Unsurprisingly, the Vatican has had even larger misgivings about incorporating Marxist elements into church teaching. After all, how is it to reconcile the atheistic Marx who proclaimed religion to be the "opiate for the masses" with Catholicism? Moreover, the well-established institution of the Vatican is precisely the sort of status quo organization that liberation theology lashes out against. Here is a brief primer on liberation theology:

Liberation theologians agree with Marx's famous statement: "Hitherto philosophers have explained the world; our task is to change it." They argue that theologians are not meant to be theoreticians but practitioners engaged in the struggle to bring about society's transformation. In order to do this liberation theology employs a Marxist-style class analysis, which divides the culture between oppressors and oppressed. This conflictual sociological analysis is meant to identify the injustices and exploitation within the historical situation. Marxism and liberation theology condemn religion for supporting the status quo and legitimating the power of the oppressor. But unlike Marxism, liberation theology turns to the Christian faith as a means for bringing about liberation. Marx failed to see the emotive, symbolic, and sociological force the church could be in the struggle for justice. Liberation theologians claim that they are not departing from the ancient Christian tradition when they use Marxist thought as a tool for social analysis. They do not claim to use Marxism as a philosophical world view or a comprehensive plan for political action. Human liberation may begin with the economic infrastructure, but it does not end there.

Before becoming Pope Benedict XVI, Cardinal Joseph Ratzinger was already very critical of liberation theology as John Paul II's point man on doctrine. In 1984, he gave it a rough going-over. In addition to the points I mentioned, Ratzinger added that liberation theology was excessively concerned with structural fetters and placed those of sin in second place, whereas he believed it should be the other way around. Since he became Pope, Benedict XVI has, if anything else, become harsher on liberation theology. Father Jon Sobrino, one of the remaining architects of liberation theology, is now set to be disciplined by the Vatican:
Still, many saw a message in the criticism of one of the last champions of liberation theology, a political and sometimes radical interpretation of Roman Catholicism that emphasizes justice for the poor. The controversial school of thought was despised by the conservative church hierarchy, which believed it departed from core dogma.

The order against Sobrino will be issued by the Vatican's watchdog arm, the Congregation for the Doctrine of the Faith [which Ratzinger previously headed], and will carry the approval of Pope Benedict XVI who, as Cardinal Joseph Ratzinger, led efforts to stamp out liberation theology.

The move comes just two months before Benedict is to make his first trip to Latin America as pope. He will visit Brazil, another onetime bastion of liberation theology.

A Spanish-born Basque, Sobrino was assigned to El Salvador half a century ago.

He was part of an intellectual team of Jesuit priests based for many years at the University of Central America. Some believed in liberation theology, but all preached Catholicism with a social conscience in a country that descended into civil war in the 1980s.
Elsewhere in the article it is suggested that the current archbishop of San Salvador, Fernando Saenz Lacalle of the arch-conservative Opus Dei organization, had a role in bringing about this measure. Papal politics are at play. Nevertheless, it will be interesting to see if liberation theology can outlast current efforts to stamp it out, or even if it will fade away through lack of a following.
Read More

Political Economy of Pronouns

♠ Posted by Emmanuel in at 3/23/2007 01:36:00 AM
I still remember a professor of mine from way back who was keen on writing mechanics complimenting me on a presentation I made--except for referring to a manager as a "he." Her advice as an academic was to get rid of this habit. "Think what a female reviewer would make of your political incorrectness in a journal submission," she effectively said. After that incident, I thought I wised up during a subsequent presentation by referring to the archetypal manager as a "she." I was slightly crestfallen when she was not happy with this substitution, either. Her next bit of advice was to use plural forms (they are managers; you don't have to assign gender to them).

Fast forward a couple of years and one of the well-regarded authors in our department has the custom of adding [sic] to quotations that use he / him / his in reference to generic individuals like citizens, workers, and public servants. In this age of political correctness, it is common to see writing that bears the marks of gender neutralization in subtle and not-so-subtle ways. Unlike many other languages, the English language doesn't have gender-neutral pronouns when referring to individuals. Thus, the battleground has been set among traditionalists who see nothing wrong in using he / him / his and those who find reference to them inappropriate. Perhaps I stand accused of not being a sensitive new-age guy (SNAG), but I am largely indifferent to those who use the older convention. Though I have followed my professor's sage advice to use plural forms to avoid this trap--after all, I am just starting out and it would be dumb of me to offend potential reviewers of my work with un-PC terminology--I do not expect the same from my students. Many of them are international students and I believe that I should not burden them with following PC conventions in addition to learning to write in English.

While doing basic research for this post, I found this hilarious rant from Terry Watkins of the controversial Dial-the-Truth Ministries, who believes, among other things, that rock music is the work of Satan [cue up the Rolling Stones' "Sympathy for the Devil"]. Though I have several difficulties with his beliefs, he did raise some though-provoking points about possible PC overreach. He got apoplectic over the gender-neutralization of Today's New International Version (TNIV) of the Bible, which is available online:
By far the most extensive damage performed by the inclusive-perversions is the extermination of the "generic" masculine pronouns, such as "he / him / his".

Known as the "generic he", generic masculine pronouns are the standard method used in the English language when addressing an "indefinite" or "undefined" individual. Masculine pronouns, such as "he / him / his" are utilized to address both male and female when the gender is unknown. The "generic he" has been the accepted method, literally, since the beginning of the English language.

In favor of the convention of using he / him / his, Watkins cites writing authorities such as Strunk and White and the Associated Press stylebook:

How does Strunk and White advise concerning that mean, sexist, "generic he"? "Do not use they when the antecedent is a distributive expression such as each, each one, everybody, every one, many a man. Use the singular pronoun [he, him, his]."

Strunk and White also state concerning the "generic he": "It [the generic he] has no pejorative [derogatory, or belittling effect, negative, sexist] connotations; it is never incorrect."
(William Strunk, Jr., and E.B. White, The Elements of Style, p. 60)

How does the AP Stylebook instruct the journalists on the "generic he"? "Use the pronoun his when an indefinite antecedent may be male or female: [Example] A reporter attempts to protect his sources."
(Norm Goldstein, The Associated Press Stylebook and Libel Manual, 2000, p. 114)

Nor does using plural forms to avoid PC hazards get a free pass from either William Zinsser of On Writing Well fame or Strunk and White:

Author William Zinsser, in the best-selling, On Writing Well, warns of the effects of converting the singular "he" with the plural "they": "A style that converts every ‘he’ into a ‘they’ will quickly turn to mush. . . I don’t like plurals; they weaken writing because they are less specific from the singular, less easy to visualize."
(William Zinsser, On Writing Well, p. 123)

"Alternatively, put all controversial nouns in the plural and avoid the choice of sex altogether, you may find your prose sounding general and diffuse [not concentrated, indirect]."
(Strunk and White, Elements of Style, p. 61)

I will stick with plural forms despite potential costs to writing clarity. The benefits of avoiding PC-related snafus probably outweighs these costs, though things may change if I ever become Mr. Big Shot Author. As with many things, the political economy of gendered pronouns is largely about power--editorial power in this case. Let those editors have their way, for now.
Read More

China Crisis Caused by Accounting?

♠ Posted by Emmanuel in , at 3/21/2007 11:31:00 PM
Here's the darndest thing to gain my attention in a while. Forbes suggests that regulations to make Chinese accounting comparable to--but not exactly of the same standard as--worldwide standards (e.g., IASB) may cause stock market turmoil. Skeletons in the closet brought out into the sunlight by firms which have performed bookkeeping sleights of hand may shock. After all, the Chinese are famous for "creative accounting" in keeping three sets of books: one for the tax man, one for the external auditor, and one for internal use. Although moving towards international accounting conventions is of course a worthwhile long-term goal, expect some fireworks in the meantime. With the average P/E ratio in China being a whopping 63 according to Forbes, things are bound to get interesting:
Behind the recent, gut-clenching stock market volatility in China is a disquieting reality: China's rotten accounting. If you thought the Shanghai index's 8.8% drop in late February was bad, wait until a bunch of rickety Chinese companies collapse.

That's the dour outlook from ace China-watcher Brian Hamilton, who runs stock research firm Sageworks in Research Triangle Park, N.C. "Investors in China tend to buy and sell according to price movements, not fundamentals," Hamilton says. "But too often with China's stocks, there are no fundamentals to be found..."

But Hamilton thinks that move still won't stop market swings. That's because investors are about to see much more detail on China's corporate earnings, and the picture may not be pretty. With its accession to the World Trade Organization in 2001 China promised to open up its accounting sector to foreign accounting firms. China decreed Jan. 1 that its listed companies must book their profits under a new set of accounting rules. But what's eventually unearthed just might set off panics among small investors.

The new rules are based on--but not identical to--the international accounting standards increasingly used in most markets. That means much more detail in a secret economy, where even the most basic line items like debt and development costs were hard to come by, says Stephen Chipman, an expert on China's financial systems at Grant Thornton. Now companies will have to do things like quickly write off obsolete inventory and uncollectible receivables. That's a novel concept there.

Financial fraud has been plaguing China's effort to mingle freewheeling capitalism with its murky centrally planned economy. The country's police recently announced that they have uncovered 400,000 cases of economic crimes and arrested 370,000 suspects over the past seven years, recovering $12.9 billion. The harsh prison sentences meted out to Enron's Jeffrey Skilling and WorldCom's Bernard Ebbers are nothing compared with the sentences Chinese authorities handed two embezzlers: Zhou Limin, a former branch president of China Construction Bank, and Liu Yibin, an accountant, will be executed for filching $25 million.

Read More

Affluence, Poverty, and Deforestation

♠ Posted by Emmanuel in at 3/21/2007 12:10:00 AM
Here's yet more evidence that poverty is related to deforestation courtesy of the UN's Food and Agricultural Organization (FAO) in its State of the World's Forests 2007. From figure 67, you might gather that, among regions, Europe is least concerned with deforestation as it has designated the lowest percentage of forest area for conservation. You might be saying to yourself: "I knew it, those Europeans with their 'green parties' and 'leadership' on environmental issues really don't give a damn about deforestation. It's one big sham. Look at those Africans--they've set aside the most forest area for conservation. Africans--not Europeans--are those most concerned about deforestation."

However, figure 66 tells a different story altogether. In reality, Europe is second in the world in forest area gained percentage-wise from 2000 to 2005, whereas Africa lost more than anywhere else. The disparity between rhetoric and reality could not be starker in this instance; Africa's rate of loss is alarming.

The lesson is simple: setting aside forests for conservation is an entirely different thing from actually preserving forest cover. Poverty is associated with clearing for substinence agriculture, illegal logging and other environmentally-damaging practices that are difficult to discourage where poverty is rife. Resources required in monitoring designated areas for compliance and imposing sanctions on violators are harder to come by. While European countries may not mark off as much forest area for conservation, those that are marked off are subject to good monitoring and sanctioning. Nevertheless, there are success stories like Costa Rica that show developing countries too can begin winning the battle against deforestation if they focus on the problem in earnest.
Read More

Nail Sticking Out is Pounded Down

♠ Posted by Emmanuel in , at 3/20/2007 08:15:00 PM
This story exasperated me. Zheng Ming, a Chinese professor at Renmin University who served as the dean of political sciences at his school lost his post for writing the obvious about the Chinese educational system on his blog. He commented:
They told me that I should be punished for breaking the 'hidden rules.'

Universities have become an officialdom. The over-intervention and manipulation of academia by power definitely fetters its growth.

How is China's academia doing now? Does anybody overseas read papers written by Chinese scholars? Plagiarism and theft are rampant. Obedient kids are being taught to be minions.

My first reaction was surprise that they teach political science at all in China, albeit in watered-down form. While Marxist / Maoist thought you would expect to be taught even in these days of market socialism (whatever that is), straight-up political science would be something best avoided lest it encourage dangerously independent political thinking. My second reaction was, "well duh, did you expect to get away with making these statements?" Obviously, information dissemination is very tightly controlled in China--especially on the Internet. Mr. Zheng seems all too keen on breaking away from the Confucian tradition hinted at in this post's title. What he labels "hidden rules" and "obedient kids" are merely manifestations of a longstanding tradition in which you are supposed to listen patiently to the master's words of wisdom for the most part.

After thinking it over for a while, my third reaction was a measure of sympathy for Mr. Zheng since I too teach political science. The touchy subject that he brings up is controversial for good reason, and I ask my Chinese colleagues about it from time to time. China wants to be at the forefront of education to boost its human capital. Yet, at the same time, it wants to keep tight reins on freedom of expression. Now, you might say that political science is a fairly useless subject that does little to enhance national welfare unlike subjects such as math or engineering. However, consider that many of the high-technology clusters around the world like Silicon Valley and Bangalore have a freewheeling culture. Without such an attractive culture, creative minds may not be attracted to such a place--especially knowledgeable educators in these disciplines. Even tightly controlled Singapore is learning to give in a little after maintaining a tight grip for so long. In the words of former Singaporean PM Lee Kuan Yew:
The greatest challenge to Singapore today is to get our people to move away from the old model. Just being clean, green, efficient and cost-effective is not enough. You've also got to be innovative, creative, entrepreneurial.
How compatible is Confucianism with a dynamic learning culture where tacit knowledge thrives? We will see how this exciting story unfolds in China. I suspect that Confucius will have to give more way to Adam Smith if officials want to emphasize innovation and creativity.
Read More

High Sea Pirates Meet High Tech

♠ Posted by Emmanuel in at 3/19/2007 10:23:00 PM
Avast, ye scurvy dogs! While reviewing the current trends in maritime piracy (incidences are going down after a spike earlier in the decade), I came across a fascinating set of technologies that are being deployed to combat it. As pirates have increased their capabilities by using fast boats and advanced armaments, those on the defense have upped the ante in terms of technological sophistication as well. The International Maritime Bureau (IMB), which monitors piracy incidences, endorses three applications. According to its blurb:

The Inventus UAV (unmanned aerial vehicle) is a state-of-the-art reconnaissance system packaged in a highly efficient, highly stable flying wing form. Outfitted with cameras, the Inventus flies and covers a large ocean area and relays a real-time data link back to the ground station. This link provides real-time aerial surveillance and early warning of suspect or unauthorised craft movements to the coastal or law enforcement authority. Developed by Lew Aerospace, the Inventus is fully autonomous and can be launched and recovered even from a seagoing or patrol vessel. There are gas and electric formats and both fly in all weather conditions.

Secure-Ship is the most recent and effective innovation in the fight against piracy. It is a non-lethal, electrifying fence surrounding the whole ship, which has been specially adapted for maritime use. The fence uses 9,000-volt pulse to deter boarding attempts. An intruder coming in contact with the fence will receive an unpleasant non-lethal shock that will result in the intruder abandoning the attempted boarding. At the same time an alarm will go off, activating floodlights and a very loud siren.

The IMB endorses ShipLoc, an inexpensive satellite tracking system, which allows shipping companies, armed only with a personal computer with Internet access, to monitor the exact location of their vessels. In addition to its anti-hijacking role, ShipLoc facilitates independent and precise location of ships at regular intervals...

The ship security alert system regulation that will be put into place as of July 2004, requires ships of over 500 GT to be equipped with an alarm system in order to reinforce ship security. The system allows the crew, in case of danger, to activate an alarm button that automatically sends a message to the ship owner and to competent authorities. The message is sent without being able to be detected by someone on-board or by other ships in the vicinity. ShipLoc is contained in a small, discrete waterproof unit, which includes: an Argos transmitter, a GPS receiver, a battery pack in case of main power failure, and a flat antenna.

Together with increased patrolling, these technologies have reduced incidences of piracy as of late. However, pirates may up the ante once again by figuring out workarounds to these technologies or more ingenious ways of hijacking vessels. Vigilance and naval security go hand in hand.
Read More

The Infant Industry Which Never Grew

♠ Posted by Emmanuel in ,, at 3/19/2007 02:45:00 AM
The infant industry argument is a familiar one: Because global competition is intense, it may be necessary to block imports for some time until domestic industry can gain a competitive footing. Critics of this argument, however, point out that some of these infant industries never grow up. Here is a case in point: Proton Cars of Malaysia. It was set up in 1983 by then-Prime Minister Mahathir Mohamed as part of a plan to industrialize Malaysia by creating a car maker to promote technology, earn foreign exchange through exports, and spawn supporting industries. It has achieved none of these objectives. Not that these failures have kept it from expanding its model lineup and production capacity. According to the Economist:
...output never rose above 227,000 cars a year and exports never exceeded 20,000 units annually. In an industry dominated by a handful of global giants, each producing 3m-6m cars a year, Proton remains a minnow. Yet it has refused to scale down its ambitions. Proton has built factories capable of churning out 1m cars a year and has launched a range of models. But quality is poor and low volumes mean it is not able to compete on cost.
The troubles with Proton have accelerated lately as more choice was injected into the Malaysian auto market when the country lessened import tariffs in accordance with Asian Free Trade Area (AFTA) stipulations for cars manufactured in the region. Worse yet, Perodua, a local competitor whose majority owner is Toyota, eclipsed Proton in local sales for 2006:
In 2006, Perodua led national sales with 152,733 units, giving it a market share of 42 percent, up from 32 percent the year before, according to MAA data. Proton sales fell to 115,538 units for a market share of 32 percent, down from 40 percent in 2005. It had held the top sales spot since 1985. Japanese small-car maker Daihatsu Motor, a subsidiary of Toyota, owns a 51 percent stake in Perodua which has produced a series of attractive models well suited to the Malaysian market...

Loss-making Proton is in the process of selecting a strategic partner to arrest its sharp decline and is in negotiations with US auto giant General Motors, Volkswagen of Germany and PSA Peugeot Citroen of France.
It appears that Volkswagen is keen on purchasing Proton, most likely to establish a beachhead in the Malaysian market. Whether Proton's existing production facilities can be retrofitted to produce VWs is an open question. Current Malaysian PM Abdullah Badawi and his predecessor Mahathir have been feuding over the fate of Proton. Badawi wants to rid the government of this loss-making burden, while Mahathir sees it as a move dismantling his legacy. However, as Proton slips further into the red and runs out of cash, Malaysia may have no other choice than to sell its 43% stake. The government says it will identify a buyer by month's end. I guess it's time Proton, well, grew up.
Read More

The Three Waves of Globalization

♠ Posted by Emmanuel in at 3/17/2007 07:12:00 PM
In a review of recent books by Rajan Menon and Daniel Drezner, the Economist seems to find novelty in the idea that globalization is not all it's cracked up to be. Menon champions a strong American unilateral policy in the belief that international organizations are pretty much useless in this day and age--just as the neoconservatives do (or is that did?) On the other hand, Drezner advocates that states use their powers to shape international organizations to better cope with problems with increasingly transnational dimensions like pollution and food safety. In this context, Drezner highlights the point that states--especially powerful ones--still make the rules. While I subscribe to this viewpoint, I must point out that there is a well-developed, chiefly English literature stream on globalization that has covered this ground much earlier. In it there are three waves of globalization:

The hyperglobalist view holds that we live during the "End of History" (Francis Fukuyama), where the "World is Flat" (Thomas Friedman), and the "End of the Nation-State" (Kenichi Ohmae) is at hand. Supposedly, it is now global finance and corporate capital--not states--that exercise decisive influence over the organization, location, and distribution of economic power and wealth.

The skeptical view cautions against making such sweeping claims about the totalizing nature of globalization. Most notable among those holding this view are Paul Hirst and Grahame Thompson who put "Globalization in Question." They point out that, actually, the volume of trade as a percentage of national income was higher in most European countries during the pre-WWI era than it is now. They further add that trade and FDI activity has largely been concentrated in North America, Europe, and East Asia--hence, what is called globalization is in reality just regionalization.

The transformationalist view propounded by the likes of David Held and Anthony McGrew as well as Colin Hay attempts to find a middle ground between the hyperglobalist and skeptical views. It puts current globalization trends in a longer-term perspective of what occurred well before our epoch--like slavery and the creation of nation-states. Power struggles among nation-states and with other actors such as terrorist organizations and multinational corporations are ongoing, but they are now conditioned by the time-space compression of modernity in its many guises. In this view, globalization is a contested arena where there is no teleological certainty that states will disappear or that states will maintain largely undiminished power over their internal affairs. Rather, in Colin Hay's apt description, globalization is "a tendency to which there are countertendencies."

Most likely, as Drezner points out, globalization is not a wholly unique phenomenon that is washing upon us to remove all else, but the latest in a series of events with far-reaching and uneven effects. I am wary of claims that "everything is different now" because they seldom are so. Here is an excellent summary of the globalization literature that was written by Held and McGrew for the Oxford Companion to Politics. It's a shame that the work of English academics sometimes gets overlooked, even by their own press (tsk tsk the Economist), but there is a lot of valuable work being done here across the Atlantic as well.
Read More

Is Global Inequality Rising or Falling?

♠ Posted by Emmanuel in ,, at 3/17/2007 12:20:00 AM
The question of global inequality is perhaps the linchpin of all IPE debates for it concerns, among other things, the benefits of economic globalization and the efficacy of development efforts. For obvious reasons, those leaning left tend to say that global inequality is increasing, whereas those leaning right say the opposite. Among work representative of the former viewpoint is Thomas Pogge and Sanjay Reddy's, while that of the latter is Xavier Sala-i-Martin's. (Oddly enough, all three are at Columbia University; Pogge in the political science department, and Reddy and Sala-i-Martin in the economics department.) For this post, I will briefly describe the work of Branko Milanovic, which I consider more neutral. Even so, he gains a measure of respect from both sides of the debate. His book, Worlds Apart, is my reference on the matter.

Milanovic starts by tackling the question of what sort of inequality we are measuring. Concept 1 inequality is among the mean incomes of individual countries; tiny Lithuania population-wise counts for the same as large Russia. Concept 2 inequality weighs inequality according to each country's population size; Lithuania's average income would be extended to its 3.5M citizens, while Russia's average income to its 143M citizens. In an ideal world, we would have enough data to measure Concept 3 inequality, wherein we have data on the income of each individual in existence. While such data is nearly available in Western countries through household surveys, it is sparse in developing countries, to say the least.

The most commonly used measure of income inequality is the Gini index, which ranges from 0 (perfect equality) to 1 (perfect inequality where a single person has all the income.) Three main considerations also need to be accounted for, namely:
  • Do we measure income at market exchange rates (usually against the US dollar) or on a purchasing power parity basis (PPP--what can actually be purchased locally)?
  • Do we use survey-based mean income (from household surveys) or GDP per capita (which is basically GDP per head)?
  • Do we measure income (what one earns) or expenditures (what one spends)? While Western and Latin American nations typically use income as an indicator, those in Africa and Asia typically use expenditures. The problem is that expenditures are fairly stable over time, presumably because basic needs have to be met, while income is more variable.
Let us move to Concept 1 inequality worldwide. In the graph above from p. 39 of his book, Milanovic uses GDP per capita in 1995 dollars and on PPP terms for 120 countries from 1950 to 2000. It is an open-and-shut case here: inequality among countries unweighted for population size is increasing. From 1982 onwards, Concept 1 inequality has been on the rise with poor countries doing worse on the average than rich ones. For what it's worth, this period coincides with the second oil shock caused by the fall of the Shah of Iran and rising interest rates worldwide as the US Federal Reserve took greater measures to curb inflation in America. Also, note the unfortunate boost given by African countries to the Gini index. Without them, the coefficient would be rather lower. Elsewhere, Milanovic highlights the contribution made to inequality by former Soviet-bloc countries for many of them became "downwardly mobile" in the wake of the Berlin Wall's fall.

The picture changes a lot when we consider the population weights of each country as in Concept 2 inequality using the same set of data previously described. The graph above from p. 87 depicts an improvement in the world Gini index, particularly over the last twenty years. Improvements in the economic performance of China and India mean that whereas they used to contribute to global income inequality, they now reduce it. As these two countries together account for over a third of the world's population with 1.3 and 1.1 billion persons respectively, their recent economic successes have made a large difference in these computations. However, critics note that China's GDP per capita may be inaccurate. To begin with, its GDP data is considered unreliable by many.

Given that China and India are such large countries, Milanovic considers whether Concept 2 results would differ if Chinese provinces and Indian states were substituted for simply "China" and "India" in the sample. Doing so makes sense. Consider what would happen if we used just one mean worldwide income to calculate the Gini index--there would be no inequality whatsoever. Segmenting the world population into finer groups would, all things equal, make measuring inequality a more accurate enterprise. That is, we would be moving towards Concept 3 and away from the more basic Concept 1. After doing so, Milanovic finds that "growing interregional inequality in China and India has a discernible and positive effect on world inequality," and that "as more Chinese (and Indian) provinces become rich while others stay behind, world inequality will rise" (p.99-100) . The Gini index is boosted by over five percentage points between 1980 and 2000 when Chinese provinces and Indian states are included in the sample.

Much, much more is to be found in Milanovic's masterful work. I cannot list more unless I intend to violate stipulations on fair use so I will end here. What Milanovic's work demonstrates to me at least is that inequality is a slippery concept that is highly sensitive to how you measure it. My ultimate take is that while China and India may have reduced Concept 2 inequality somewhat in recent years, this trend might be on the upswing again if regional inequalities in these two countries continue to grow. Sometimes the truth hurts, but it needs to be told.
Read More