‘The Globalization of Inequality’ — a primer for the layman

The road to protectionism will hurt developing nations

HE Globalization of Inequality” has just been published in a paperback edition with a new preface by the author. Written by Frenchborn Francois Bourguignon, former director at the Paris School of Economics and chief economist and senior vice president of the World Bank, this book sheds light on the complex role of globalization in the rise of inequality.

The subject of globalization is still a source of discord. Some believe it has brought wealth to emerging nations while others blame it for a surge in inequality in the world over the last 20 years. The title of this book has two meanings, explains Bourguignon: “On the one hand, it is a reference to questions of global inequality. The importance that is given in international economic debates to effectively re-equilibrating standards of living between countries is the clearest sign of this. But the title also resonates with the feeling that a rise in inequalities affects all countries on the planet and is becoming a matter of grave concern.”

According to the World Bank, the number of people living on less than $1.25 a day, the threshold of extreme poverty, was 1.3 billion in 2008 which corresponds to 20 percent of the world population. If we make the same calculation with $2.50 per day, the total number of poor people reaches 3 billion which is equivalent to nearly half of humanity.

However, the remarkable economic development of China, India and emerging countries especially in East Africa since the 2000s has led to a dramatic reduction in inequality and poverty in the world. This economic growth is due to a set of factors including organizational and technological innovations, as well as material factors such as production equipment and infrastructure or non-material factors such as education, jobtraining and scientific or technical knowhow. The access to the technology and to the markets of the Northern countries has spearheaded the growth of the developing countries in the global South. Furthermore, the increasing volume of SouthSouth trade is also contributing to a sustained growth in that part of the world.

What about inequality within countries? Is it rising? Inequality has strongly increased in the US where the top 10 percent has acquired nearly half of all the gains from growth over a period of 30 years. Income inequality has also taken place in the United Kingdom, Germany, Netherlands, and Italy and even in the Scandinavian countries reputed for their egalitarianism. This phenomenon is also prevalent in China, India, Indonesia and Bangladesh.

The extraordinary development of information technology has not only transformed the modes of production of goods and services but it has also created a growing need for IT technicians. The author believes that these technological innovations, rather than the income or profit they generate, are to a certain extent responsible for the “explosion of very high incomes” that can be seen all over the world. For example, the development of communications technology has widened the audience for artists. The Italian opera singer Enrico Caruso, thanks to the invention of the record, became an international star. He sold around a million records. A century later, another Italian opera singer, Luciano Pavarotti sold more than 100 million records. In the world of publishing, J. K. Rowling, the author of the Harry Potter books, receives a yearly income $ 300 million when 90 percent of English language authors earn less than $ 80,000 annually. The salaries of CEOs are also directly linked to the size of the companies they manage. The heads of the 10 biggest American companies are paid four times as much as the CEOs of smaller companies.

“The question of whether these salaries reflect real talent is open to debate. The argument that enormous salaries of several million of euros or dollars are necessary incentives for CEOs to perform at a higher level seems rather specious…It is also possible that, over time, these practices have become established as new social norms, weakening the link between remuneration and true executive productivity,” writes Bourguignon.

One of the most effective institutional changes was without any doubt the deregulation of markets and the economic liberalization implemented in the US during the Reagan administration and in the United Kingdom by the Margaret Thatcher government. This would later spread to the rest of the world.

Financial liberalization facilitated the allocation of funds, thus improving the efficiency of the economy as a whole and contributed to the development of sectors and businesses that were initially deprived of access to credit.

“Should we conclude from this that financial liberalization, whatever it might be, contributes to income equality? Far from it. The deregulation in question was of a very specific kind and was neither directly related to the development of new financial products nor connected with the explosion in the international mobility of capital,” writes Bourguignon.

The main question is how to maintain the trend toward global equality while curbing the rise in national inequalities. Bourguignon believes that it is not clear whether taxation and current income redistribution is the best way of tackling inequality. In the preface to the paperback edition, he says “there may not be other choices, at least in the short term, if inequality is likely to increase further due to the pressure of automation and artificial intelligence on jobs.” This book warns against protectionism as this will have a negative impact on the global economy and it will also prevent poor and emerging countries from catching up with developed countries. The antiglobalization rhetoric in Europe and the US is largely caused by the flow of migrants.

“It is important to stress in particular, that the evidence that unskilled migrants cause wage inequality among native workers, or increase their levels of unemployment, is weak, contrary to the relentless assertions of the anti-immigration party leaders in advanced countries. It is vital that these facts, and global progress toward development-friendly migration policies are publicly discussed without the debate being hijacked by populist figures.”

Although Francois Bourguignon was rather confident that globalization was leading us to a more unequal world, he now believes that most Asian economies will continue to catch up with the rest of the world.

Incidentally, a few weeks ago, the conspicuous absence of lettuce and zucchini in supermarkets across Britain highlighted the advantages of globalization. Although some might have been tempted by the idea of returning to homegrown spinach and Brussels sprouts and the ubiquitous apple, most people pleaded for the return of a glorious choice of fruit and vegetables. The scarcity of lettuce and courgette was simply due to bad weather in Spain and Italy. However, the global horticulture supply chains are among the marvels of our time and in a matter of a few days lettuces were back in the supermarkets. Efficient transport offers diversity of supply and food security. If Britons can enjoy a healthy salad every day, they should be grateful to the globalization of food.

“The Globalization of Inequality” has been written for the layman and it remains one of the best books on the subject.