Policies for inclusive development in a globalizing world

François BourguignonParis School of Economics

Islamabad, July 2012

1

The inequality dimension of globalized development

Globalization, growth and inequality over the last 20 years:

Prior to the present crisis, globalization seen as the world engine of growth and a major force for South-North catching-up

At the same time, inequality is increasing in a large number of countries (both developed and emerging/developing) and slowing down poverty reduction in emerging countries

Such an evolution raises several questions…2

The inequality dimension of globalized development: questions

Is globalization and/or growth really the main cause for the observed increase in inequality?

Is there any kind of tradeoff between growth (in a globalized world) and the degree of equality?

What are the likely consequences of an increase in inequality for poverty reduction and further development?

What scope for domestic policies: in fostering growth? In controling inequality?

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Outline

1. Evidence on global and national inequalities World distribution and the South-North catching-up National distributions

2. The globalization-growth-inequality link The diversity of country experiences Globalized growth: equalizing and unequalizing factors Country specific circumstances

3. The design of domestic policies

4. Some implications for Pakistan4

1. Evidence on global and national inequalitiesa. World distribution and the South-North catching-up

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0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

0.300

0.350

0.400

0.450

0.500

0.550

0.600

0.650

0.700

0.750

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Gini

coe

ffici

ent

Global inequality: the 1990 trend reversal

80/20 ratio

Source: Bourguignon (2011)

The South-North catching up

6-5

-3

-1

1

3

5

7

9

GDP per capita: annual growth rates (%)

Source: World Bank

High Income countries

Developing countries

Poverty reduction in developing countries

7Source: World Bank

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

1600.0

1800.0

2000.0

0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010

Propotion and number of people with less 1.25 $ ppp a day in developing countries ( %)

Number (right axis)

Proportion (left axis)

Evolution of world income distribution: summary

Trend Reversal in global inequality and South's catching-up

Continuous drop in absolute poverty Main drivers of these evolutions:

Asian growth itself closely linked to globalization Global imbalances fostering US growth Spillovers onto other countries

Crisis did not modify the equalizing trend

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b. The unequalizing of national income distributions

Trend reversal in post-redistribution inequality in developed countries

More diversity in emerging and developing countries Yet, inequality did increase in a majority of countries,

including among big Asian fast-growers

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Generalized increase of inequality in developed countries

10-3 -2 -1 0 1 2 3 4 5 6

Spain

Ireland

France

Greece

Australia

Korea, Rep.

Denmark

Japan

Luxembourg

Belgium

Canada

Austria

Sweden

Netherlands

United States

Germany

Italy

Norway

United Kingdom

New Zealand

Portugal

Finland

Change in the Gini coefficient : mid 1980s to mid 2000s, developed countries

Percentage pointsSource: OECD

Much more diversity among developing countries …

11-10 -8 -6 -4 -2 0 2 4 6 8 10

KenyaMalaysia

Iran, Islamic Rep.Algeria

LesothoPakistanPanama

Yemen, Rep.South Africa

MoldovaMongoliaHungary

MadagascarSlovak Republic

India ruralTunisia

MoroccoIndia urban

TajikistanVietnam

MozambiqueSlovenia

IndonesiaPhilippines

AlbaniaChina rural

BotswanaGhana

Kyrgyz RepublicPoland

China urban

Change in the Gini coefficient : mid 1980s to mid 2000s,Other emerging and developing countries

Source: World Bank, Povcal

Inequality changes in Latin America

12-8 -6 -4 -2 0 2 4 6 8

Brazil

Mexico

Guatemala

Guyana

Nicaragua

Honduras

Chile

Trinidad and Tobago

Venezuela, RB

El Salvador

Dominican Republic

Costa Rica

Colombia

Jamaica

Ecuador

Uruguay

Argentina

Peru

Change in the Gini coefficient : mid 1980s to mid 2000s,LAC countries

Percentage pointsSource: World Bank, Povcal

Inequality change in selected Asian countries

13-2 0 2 4 6 8 10 12 14 16

Pakistan

India Rural

Vietnam

Indonesia

India Urban

Bangladesh

Sri Lanka

China Rural

China Urban

Change in the Gini coefficient from mid 1980s to mid 2000s (%)Selected Asian countries

2. The economic relationship between globalization, growth and inequality

a) The diversity of country experiences

Contemporaneous Asian fast-growers ( China, India, Indonesia) with fast increases in inequality

Contemporaneous Asian fast-growers with no or little change in inequality (Vietnam)

Asian fast-growers of the 1970s (dragons) with no change in inequality

Asian medium growers with no big change in inequality (Pakistan)

Fast LAC growers with drop in inequality (Brazil) Etc…

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b) Globalized growth: equalizing and unequalizing common factors

Trade openness favors the relatively abundant factors (Heckscher-Ohlin) and hurts the relatively scarce factors E.g. unskilled labor hurt in developed countries, but 'favored' in

developing countries Yet implications for inequality differ according to how markets

work (e.g. labor surplus economies) Capital as a (often hidden) big winner

Technical progress and demand/supply gap for skilled labor

"Contagion" through highly skilled labor mobility Pressure on commodity prices "Financiarization"

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c) Country specific circumstances

Elasticity of labor supply to modern sector (Kuznets U-curve)

Overall growth rate Domestic vs. foreign market focus of development

strategy Pace and modalities of human capital accumulation Redistribution Geographical distribution of economic activity, population

and public expenditures (infrastructure) Others (fertility)

Overall, many reasons why a common force (globalization) may have different distributional impacts! 16

3) The design of domestic policies in the field of (income) distribution

Inequality slows down poverty reduction for given growth and inequality is bad for growth beyond some level

Preventing inequality to grow beyond some limit is an important objective

How to do it without slowing down, and possibly with speeding up growth? a) Correct inequality increasing market distortionsb) Redistribute through the accumulation of productive

assets (education, health care, access to credit, infrastructure, …) among the poor rather than current income

c) Actually, combinations of both types of redistribution are to be used (as with conditional cash transfers) 17

4. Some implications for Pakistan

Relatively slow growth, moderate and rather stable inequality

Missing growth engine must be found in crisis-prone macro-management, limited openness, governance deficit, limited infrastructure, ...

Unclear whether the removal of any of these obstacles to growth would and really increase inequality, except maybe for openness

At the same time, broad scope for growth and equality through accumulation of human capital among the poor

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520

540

560

580

600

620

640

1975 1980 1985 1990 1995 2000 2005 2010

Gini

coe

ffici

ent *

100

Year

The trend reversal of inequality in Brazil: 1975-2009

Trend 1977-2002

Inequality

Final remark:the case of Brazil

Final remark:the case of Brazil

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520

540

560

580

600

620

640

1975 1980 1985 1990 1995 2000 2005 2010

Gini

coe

ffici

ent *

100

Year

The trend reversal of inequality in Brazil: 1975-2009

Trend 1977-2002

Inequality

-20

-15

-10

-5

0

5

10

15

20

520

540

560

580

600

620

640

1975 1980 1985 1990 1995 2000 2005 2010

Gini

coe

ffici

ent *

100

Year

The trend reversal of inequality in Brazil: 1975-2009

Trend 1977-2002

Inequality

GDPpc growth rate

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Thank you