Is Inequality Really Increasing from Globalisation?

The Weekend Herald of November 10, 2007 devoted three pages, to a Newsweek article which was strong on anecdote and opinion and weak on analysis and facts. I submitted the following note. They took a fortnight to tell me they had more important things to deal with.

Keywords: Distributional Economics; Globalisation & Trade;

The Newsweek article “The Wealth Divide”, which argued that globalisation is increasing inequality, tells too simple a story. (Weekend Herald November 10, B1) Historically globalisation has increased inequality, but the same statistics also report that while the rich economies increased their real per capita incomes by 17 and more times in the last 200 years, Africa and India, the poorest regions, have increased their incomes by over three times. Thus while the gap between them and the rich has increased dramatically, nevertheless the poor economies are better off in material terms.

Suppose that the growth of the world economy has been driven largely by globalisation, a case I make in my book Globalisation and the Wealth of Nations, observing that there was hardly any economic growth in the 2000 years before globalisation began in 1800. Then Africans and Indians were beneficiaries in absolute terms from globalisation. It is just that they did not get as much benefit as some of the other regions.  Had there been no globalisation they would be so much the poorer – we all would.

That seems to makes globalisation a sort of caucus race where, as the Dodo said, `Everybody has won, and all must have prizes’ (albeit of different value). But even that is not quite true. In 1950 China’s per capita income was lower than it was in 1800. It is only recently that its economy began to really gain from globalisation (although probably not as much as the statistics it promulgates claim).

Newsweek says that ‘income inequality is on the rise throughout the world’. No evidence is given but the statement is probably not true. (For various reasons the data is damned hard to interpret.) Inequality may be rising within China and the United States. (Ignore the Bush tax cuts which were outrageously favourable to the rich. This is about before-tax incomes.) But it is probably falling in the world as a whole. The main mechanism seems to be the offshoring of jobs from America to China, which increases wages in China and stagnates them in America. The resulting closing gap between Chinese wages and American wages reduces overall inequality.

Of course inequality is rising between China and Africa which is not greatly benefiting from this offshoring. If globalisation sometimes seems to be a lolly scramble, the lollies are not shared equally. Indeed it is possible that Africa wont get many lollies until next century, which makes it all the more important that we should take an active interest in promoting its welfare. That  requires our understanding what globalisation actually is about. .
Globalisation is a good example of the principle that there are many statements about social phenomenon which are short, simple, clear and wrong. Anecdotes – the diet of such statements – can be misleading. Consider Newsweek’s story of the elderly Tsang Wing-on who is finding it a real struggle to survive in Hong Kong. Are we allowed to ask where she was born? Probably a village in China. I dont want to speculate whether she would be better off to still be in her birth village. What is important here is the transition from rural to urban living is more significant to her life than the income statistics tell. Globalisation is transforming all our lives in ways which make the income inequality debate of much less significance than it is portrayed.

Yet, we should not ignore the inequality. It is a matter of record that rich economies sometimes use the power which comes from their wealth to take actions – notably trade restrictions – which make poorer nations worse off. That is unconscionable and needs to be corrected. But before we get onto high moral horses we need understand the phenomenon we are criticising.