As inequality between countries has fallen, inequality within countries is rising -- with worrying consequences.
- By Daniel AltmanDaniel Altman is the owner of North Yard Analytics LLC, a sports data consulting firm, and an adjunct associate professor of economics at New York University’s Stern School of Business.
There’s good news about inequality. If we treat the entire world as one society — hey, why not? — then inequality is falling. Hundreds of millions of poor people across the globe have entered the global middle class. But looking at inequality this way also blinds us to one of its biggest costs.
As World Bank economist Branko Milanovic and others have shown, income inequality at the global level is most certainly falling. It’s true that people who consider themselves middle class in rich countries may not have moved up much in the past few decades, yet many more people from poor countries have. This is undoubtedly good news, but it’s not the whole story.
To understand why, it helps to consider why poor people have been getting richer in the first place. The short answer is globalization. Poor countries — especially big ones like China, India, Nigeria, Vietnam, Brazil, Turkey, and Indonesia — have been opening their doors to the global economy and taking advantage of the opportunities it has to offer.
Hundreds of millions of people have moved off of farms and into cities to take jobs in big factories and service operations. These businesses have adopted technology from around the world in an enormous feat of economic leapfrogging. They’ve packed a century of industrial development into just a few years.
At the same time, urbanization has made it easier to deliver public services to the masses: health care, education, sanitation, and safety. And they’ve also received better access to information, energy, and even democracy. These benefits haven’t arrived everywhere at the same time and to the same degree, but absolute living standards have undoubtedly risen for a huge number of people.
That’s not to say it has been replaced with luxury. Rural subsistence may have been replaced with something a little less precarious, but it many cases these conditions resemble the tenements of Chicago or Glasgow a century ago. That’s not too surprising when you consider what’s happening at the other end of the spectrum.
The people best able to exploit the opportunities of globalization are those who already have money, education, and connections that reach beyond their countries’ borders. They live by the mantra "buy low locally, sell high globally." Compatriots who work in their mines, sweatshops, and call centers may be slightly better off, but the newly globalized super-rich are off the charts.
Countries that used to be poor with a ruling elite are now slightly less poor with an elite of globalized super-rich. They look like the United States in John D. Rockefeller’s heyday, complete with light regulation and conglomerates that would be an antitrust regulator’s nightmare. All over the world, the Gilded Age has returned.
As we know now, the Gilded Age was not necessarily the most productive period for the United States. Calculations by economists Louis Johnston and Samuel Williamson suggest that the cumulative annual growth rate of real gross domestic product per capita was about 1.8 percent between 1870 and 1910, compared with 2.2 percent in the postwar boom from 1947 to 2007.
That difference of 0.4 percent may not seem like much, but over a span of decades it really adds up. Eventually, we found that competition and meritocracy worked better than robber barons and trusts. This hasn’t just been true for the United States over time; it’s also a global phenomenon. Countries with less inequality tend to grow faster, all other things being equal.
And it stands to reason. As I’ve written before, inequality — particularly the inequality of wealth — disrupts the efficient allocation of opportunities in an economy. When a stupid rich kid gets a job that a smart poor kid could have done better, the economic pie shrinks for all of us.
As long as inequality within countries persists, so will these inefficiencies. The drop in inequality between countries won’t do much at all to mitigate the situation. After all, the fact that a poor Burundian is now closer in income to a poor Bulgarian won’t help his chances of winning a seat in parliament or a place at the national university if the incomes of rich Burundians have risen exponentially. These opportunities continue to have a limited supply for specific groups of people, and access to them depends on relative wealth — as well as absolute living standards. As a result, they are allocated in ways that fail to maximize economic growth.
We don’t need a global wealth tax to solve this problem. For one thing, national taxes might work better, since their rates would depend on local rather than global levels of wealth. But if we don’t want any new taxes at all, there’s a clear alternative: stop wealth from influencing access to opportunities. Of course, getting money out of politics and giving every child an equally strong start in life is easier said than done.
None of this is to say that the drop in global inequality is a bad thing. It’s definitely a positive consequence of the rapid growth that the world has been experiencing in the past few decades. But the consequence has been rising inequality within countries — and if left unchecked, it will keep preventing the world from fulfilling its true economic potential.