In Other Words

That Silly Inequality Debate

Finance & Development, December 2001, Vol. 38, No. 4, Washington, D.C. Most analyses and studies of trends in global income inequality usually end up on one side or another of a rather silly debate. In one camp we find the globalists, who invariably see the last 15 or 20 ascendant years of market-driven integration of ...

Finance & Development, December 2001, Vol. 38, No. 4, Washington, D.C.

Most analyses and studies of trends in global income inequality usually end up on one side or another of a rather silly debate. In one camp we find the globalists, who invariably see the last 15 or 20 ascendant years of market-driven integration of economies as the cause of declining global inequality (and poverty) and improving levels of human welfare. This view is shared by most mainstream economists, heads of state, ministers of finance, and officials of the United Nations, World Bank, and International Monetary Fund (IMF). On the opposite side are the antiglobalists, who regard the extension of international markets and corporate and financial interests as the cause of increasing global inequality (and poverty) and declining levels of human welfare. This view prevails among social justice activists in the developed and developing world, some members of faith-based groups, and a small subset of the economics profession.

Robert Hunter Wade nicely explains how easy it is for people to disagree on the facts in his recent opinion essay "The Rising Inequality of World Income Distribution," appearing in Finance & Development, an IMF quarterly magazine. A professor of political economy at the London School of Economics, Wade uses recent trends in global inequality to judge whether globalization (along with market-oriented reforms such as trade liberalization and privatization) has helped or hurt the world’s poor.

Wade shows that any conclusions about global inequality depend on how analysts measure inequality and the question they wish to ask. He points out that, by several measures, global inequality has actually increased within many countries, across countries, and across people if everyone’s income is converted into U.S. dollars without considering differences in local purchasing power. Indeed, of the eight possible measures he lists, Wade concludes that "seven of the eight show varying degrees of increasing inequality" over the past two decades. He blames this rising inequality on differing rates of population growth between rich and poor countries, the fall in non-oil commodity prices, excessive debt, and the pressures of technological change.

However, by the measure that best reflects people’s true welfare (i.e., the measure based on lining up all households in the world according to their income, standardized for their local purchasing power), inequality is probably not rising. Indeed, in a 2001 study using this approach, World Bank economist Branko Milanovic found a small increase in inequality between the late 1980s and the early 1990s, but not one that is statistically robust (a caveat Wade overlooks). And though inequality of average incomes across countries has increased, that is mostly because today’s richest economies have had such strong growth, leaving the poorest countries that have hardly grown at all further and further behind. But the recent growth success of India and China — two of the most populous nations in the world — means that finally, in absolute terms, the number of people living below the World Bank’s absolute poverty line of $1 a day actually fell during the 1990s.

Ultimately, no amount of technical analysis of trends in inequality will help us decide whether we ought to be globalists or antiglobalists. In reality, globalization is not the key factor explaining changes in international inequality, and more or less globalization will not accelerate or halt the underlying trends. What really matters to both finance ministers and social activists is the terrible gap in average incomes between rich and poor countries and the growing gaps in income across people within countries such as China, Mexico, South Africa, and Thailand. What really matters to citizens in poor nations are the corruption and waste that too often undermine their countries’ growth prospects and their own children’s opportunities. And what should really matter to citizens in the rich economies of Europe and North America is the impact of their countries’ trade, immigration, and finance policies on the prospects of their neighbors in Africa, South Asia, and the poorest parts of Latin America.

Nancy Birdsall is the founding president of the Center for Global Development.

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