Globalization and Income Inequality

One Perspective

Protester before the meeting of the WTO in Doha in 2001, “Globalization leads to the North getting richer, and the South getting poorer… This is a direct consequence of globalization, and we need to stop this from continuing…”

Questions of Interest

What is the relationship between “globalization” and income inequality?

Activists say that globalization has resulted in further impoverishment of the poorest – is this true?

Define “Globalization”

Trade

FDI

Capital Flows

Multilateral Institution(rules, structural adjustment)

Food Aid

Migration

Trade

How does an increase in trade affect income?

Some answers may be_______.

Measurement of Income

– data– definitions

FDI andOther Issues

same typeof analysis

Many Factors

1. starting conditions2. comparative advantage3. trade policy4. domestic policy and governance

Economic integration from…

Trade (goods and services)– Level of trade, scope (more services)– Rules for trade

Foreign Direct Investment– Multinational Corporations

Capital Flows Importance of Multilateral Institutions

– Providing rules– Implementing structural adjustment programs

Three Waves of Globalization

Source: Foreign capital stock/developing country GDP: Maddison (2001), table 3.3;

Merchandise exports/world GDP: Maddison (2001), table F-5; Migration: Immigration and Naturalization Service (1998).

Importance of Trade

Share of international trade in total output (exports plus imports of goods relative to GDP):– Developed countries: 32 to 38% between 1990

and 2001 – Developing countries 34 to 49% (same period)– Varies a lot between countries

Currently, trade is deeper, different

Merchandise trade to merchandise production – almost 36% for the United States, – 3 times pre-WWI– Share of imports/exports as percent of production greater

Price convergence greater – i.e., 1870 Liverpool price of wheat greater than Chicago

by 60%, now difference 15% Increase in multinational corporations (MNCs):

– Trade is often transfers between subsidiaries– Firms draw on suppliers on a world-wide basis for

manufactured inputs

Includes trade in services

What Are MNCs?

An international corporation with headquarters in one country and branches in a wide range of developed and developing countries.

Examples include General Motors,Coca-Cola, Firestone, Philips, Volkswagen, British Petroleum and Exxon.

Role of Multinationals

Important since the East India company 1914 only a few MNCs – even in 1970 not as

important 60,000 parent operations and 500,000 foreign

affiliates account for 25% of global output, 1/3 in host counties

US based MNCs account for 19% of US GDP– Account for 63% of U.S. goods exports and 40% imports

U.S. Foreign Direct Investment

024

68

101214

161820

1914 1929 1960 1996

U.S. FDI AbroadFDI in U.S.

(as percent of U.S. GDP)

Source: Bordo et al. (1999)

Foreign Direct Investment

Mostly FDI complements trade in goods (does not substitute) – MNCs are conduitsfor trade– 1994 36% of U.S. exports were intra-multinational

transactions– Exposes services to international competition

Can deliver services through sales by foreign affiliates Increases competition in sectors difficult to exchange

across borders

FDI to Developing Countries is Resilient

(US$ billions)

0

50

100

150

200

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

0

400

800

1200

1600

Developing countries Global total

FDI to Developing Countries

Global FDI

Sources: World Bank staff estimates; UNCTAD, World Investment Report 2001.

International Capital Flows

Motivations:– Reduced barriers– Desire of investors to diversify– New financial instruments

Categories: – Foreign direct investment (less volatile)– Portfolio (stocks and bonds)– Bank lending

Huge Increase

Cross border transactions in bonds and equities:– 9% U.S. GDP in 1980, 223 % in 1998– Average daily turnover was $1.5 trillion in April 1998,

compared to $0.6 trillion in April 1989– Overstates changes in ownership (trading and retrading of

same securities) FDI is about ¼ of international capital flows

Lets Look at the Connections…

How will foreign direct investment affect incomes? (micro side)– Employment– Development of human capital– Wages

Evidence

MNCs and wages

New research that has evaluated wages of all MNCs in Chile, Mexico, Colombia, Taiwan, Venezuela, and Turkey– “foreign-owned plants pay

higher, often substantially higher, wages than locally owned firms.”

– Relevant comparison is with locally owned firms, not U.S. firms

– No evidence of spilloversto increase wages of local firms

Graham argues that:

Ratio of compensation of foreign affiliates to the average domestic manufacturing wage:– All countries – 1.5– High income countries – 1.4– Middle income countries – 1.8– Low income countries – 2.0

With FDI – an antidote of displacement of small agricultural producers

In middle income countries-hypermarkets From wet markets to supermarkets Supermarkets (Carre Four, Wal-Mart, etc.)

– Standards: food safety and quality– Volume and Seasonality– International supply chains

Impact on local producers– Consolidation: need for capital– Displacement

Trade

With trade several economic impacts– Resource Adjustment – transitions in the labor market

What kind of a social safety net exists? What impact high rates of unemployment?

– Import competing industries Can be displaced Sometimes with developed country subsidies

– Exporting industries Owners of capital versus labor Difficulties in competing in international markets

– Tariffs, standards

China

Accession to the WTO Small overall positive impact on mean income But:

– Rural families lose– Urban families gain

Competition from imports Geography matters

– North east looses – feed grain production (falling relative prices)

– Access to infrastructure and markets matter

Argument About Trade and Growth

World Bank argues that trade openness increases growth

Divide world into “globalizers” and non-globalizers

Evaluate the growth rates and other characteristics of these groups

Non-globalizers include failed states

Change in Trade/GDP for Selected Countries, 1977-97

Source: World Bank (2001)

Characteristics of More Globalized and Less Globalized Developing Economies

(population-weighted averages)

Source: Dollar (2001)

Rodrik: studies are flawed

“Open” and “closed” relate to indicators, not to policies, and correlated with macro-economic policies, geography, institutions

Once these controlled for, no correlation Relationship between trade openness and

growth depends on a host of factors India and China: growth before openness

Impact of “Globalization” on Income

Many factors may be affecting income Developing countries not uniformly involved

in the world economy Ravallion discusses that data and

measurement really matter

Popular View

“first, divergence in output per person across countries is perhaps the dominant feature of modern economic history. The ratio of per capita income in the richest versus the poorest country has increased by a factor of 6…”

Note: from Pritchett 2001 (Bhalla, pg. 23)

What did Pritchett measure?

U.S. taken as a representative “rich” economy Took the poorest economy as a reference Average American 50 times richer in 1950 and 1960 Today more than 70 times as rich Also measured against the 10th poorest country

Ratios of Mean Income of the United States and of the Poorest Country

Note: Mean incomes are in constant purchasing power parity (PPP) dollars, 1993 base. The poorest and 10th-poorest countries were chosen on the basis of per capita income, 1993 PPP, for the selected years.

Sources: World Bank, World Development indicators, CD-ROMs, 1998, 2001; Maddison (2001); Penn World Tables, various years

47.0 48.3 47.1 47.4

51.6

71.3

22.5

27.631.0 31.3 32.5

44.6

0

10

20

30

40

50

60

70

80

1950 1960 1970 1980 1990 2000

ratio

United States / poorest country United States / 10th-poorest country

Le

soth

o

Le

soth

o

Gu

ine

a-B

issa

u

Nig

eria

Ta

nza

nia

Bh

uta

n

Ta

nza

nia

Bu

run

di

Sie

rra

Le

on

e

Za

mb

ia

Ca

mb

od

ia

Ta

nza

nia

Convergence or Divergence? It Depends

Note: For each year, the unshaded bar represents the income ration of the mean-to-20 poorest countries in that year.

Sources: World Bank, World Development Indicators, CD-ROMS, 1998, 2001; Maddison (2001); Penn World Tables, various years.

22.96

26.19 25.7

30.84

36.33

22.96

24.99

22.3

15.65

9.48

0

5

10

15

20

25

30

35

40

1960 1970 1980 1990 2000

ratio

Ratio of mean income of top 20 to bottom 20 countriesRatio of mean income of top 20 to bottom 20 countries (1960s set of countries)

Gini Coefficient

Equal to one if all income in the world accrued to one person

Equal to zero is incomes are equally distributed

Distribution of Income or Consumption

Percentage Share of Income or Consumption Economy

Gini Index

Lowest 20%

Second 20%

Third 20%

Fourth 20%

Highest 20%

Norway 25.2 10.0 14.3 17.9 22.4 35.3

Indonesia 36.5 8.0 11.3 15.1 20.8 44.9

United States 40.1 4.8 10.5 16.0 23.5 45.2

China 41.5 5.5 9.8 14.9 22.3 47.5

Nigeria 45.0 4.0 8.9 14.4 23.4 49.3

Russian Federation 48.0 4.2 8.8 13.6 20.7 52.8

Mexico 53.7 3.6 7.2 11.8 19.2 58.2

Brazil 60.1 2.5 5.7 9.9 17.7 64.2

Sierra Leone 62.9 1.1 2.0 9.8 23.7 63.4

World Individual Income andConsumption Inequality

Soruce: Deniger and Squire 1996 World Income Inequality Database www.wider.unu.edu/widl

Regional Estimates of Inequality

42.140.0

66.1

61.2

55.8

29.9

50.9

39.4

67.5

60.1

56.5

30.2

49.3

41.0

67.5

56.754.5

41.0

0

10

20

30

40

50

60

70

80

East Asia South Asia Sub-SaharanAfrica

Middle East andNorth Africa

Latin America Eastern Europe

Gini

1960 1980 2000

Head Count for Extreme Poverty

Soruce: Deniger and Squire 1996 World Income Inequality Database www.wider.unu.edu/widl

Growth reduces absolute poverty

However, proper policies increase participation

of the poor in growth

0

10

20

30

40

50

60

70

80

90

100

East Asia

ExcludingChina

SouthAsia

Sub-Saharan

Africa

LatinAmerica

MiddleEast/N.Africa

Europe &Cent. Asia

Per

cen

t

1990 2000 (estimate)

Poverty Rate Percentage In Developing Countries

Source: World Bank (2003)

0

100

200

300

400

500

East Asia

ExcludingChina

SouthAsia

Sub-Saharan

Africa

LatinAmerica

MiddleEast/N.Africa

Europe &Cent. Asia

Mil

lio

ns

of

Pe

op

le

1990 2000 (estimate)

Population Living below US$1 per Dayin Developing Countries

Source: World Bank (2003)

What Do We Know?

No studies on global income inequality, trends and causes widely accepted

Ravallion and others: no correlation growth and income inequality– Lots of action: hidden by averages

Data and measurement really matter (Ravallion)

Less absolute poverty than before Are the poor poorer?

What’s Important

Connections– Carefully define aspect of globalization– Identify connections to income growth – Remember lots of factors at play– Initial starting conditions matter

These caveats don’t mean current trade rules are acceptable

Define “Globalization”

Trade

FDI

Capital Flows

Multilateral Institution(rules, structural adjustment)

Food Aid

Migration

Trade

How does an increase in trade affect income?

Some answers may be_______.

Measurement of Income

– data– definitions

FDI andOther Issues

same typeof analysis

Many Factors

1. starting conditions2. comparative advantage3. trade policy4. domestic policy and governance