Voice of Electricity Workers April-June 2002 Index
INEQUALITY OF WORLD INCOME DISTRIBUTION:
Robert Hunter Wade
Does it matter what is happening to the world income distribution (among all 6.2
billion people, regardless of where they live)? Amartya Sen, the recent Noble
laureate in economics, warns that arguing about the trend deflects attention
from the central issue, which is the sheer magnitude of inequality and poverty
on a world scale. Regardless of the trend, the magnitude is unacceptable. He is
right, up to a point. The concentration of world income in the wealthiest
quintile (fifth) of the world's population is indeed shocking and cannot meet
any plausible test of legitimacy. The chart shows the distribution of world
income by population quintiles. Ironically, it resembles a champagne glass, with
a wide, shallow bowl at the top and the slenderest of stems below.
Many
champions of free trade and free capital movements say that world income
distribution is becoming more equal as globalisation proceeds, and on these
grounds they resist the idea that reducing world income inequality should be an
objective of international public policy……Indeed, the neo-liberal paradigm-which
has supplied the prescriptions known as the Washington Consensus-says that all
national economies gain from more integration into international markets
(relative to less integration), and lower -cost, capital-scarce
economies(developing countries) are likely to gain more from fuller integration
than higher-cost, capital - abundant economies(developed countries). Developing
countries wishing to catch up with standards of living in the West should
therefore integrate fully into international markets(by lowering tariffs ;
removing trade restrictions, granting privileges to foreign direct investment,
welcoming foreign banks, enforcing intellectual property rights and so on)…
Fortunately the self-interest of the wealthy Western democracies coincides with
this integrationist strategy for developing countries….The World Bank, the IMF,
the World Trade Organisations, and the other global supervisory organisations
are therefore… seeking to enforce maximum integration on developing countries
for the good of call.
What does the evidence show?
It depends on
(1) the measure of inequality (2) the unit of inequality (countries weighted
equally, or individuals weighted equally and countries weighted by population),
and (3) the method of converting incomes in different countries to a common
numeraire (current market exchange rates or purchasing power parity exchange
rates). Treating these as either/or choices yields eight possible measurers,
each with some plausibility for certain purposes. Then there is the further
question of what kind of data is used-the national income accounts or household
income and expenditure surveys.
None of the eight alternative measurers
clearly shows that world income distribution has become more equal over the past
twenty years. Seven of the eight show varying degrees of increasing inequality.
The eighth-the one that uses the Gini coefficient, countries weighted by
population, and purchasing power parity shows no significant change in the world
income distribution. This is because the Gini coefficient gives excessive weight
to change at the extremes….using market exchange rates show that world income
distribution has become much more unequal.
Causes of increasing
inequality
What are the causes of the rise in world income inequality?
Differential population growth between poorer and richer countries is one cause.
The fall in non-oil commodity prices-by more than half in real terms between
1980 and the early 1990s-is another , affecting especially the poorest
countries. The debt trap is a third. Fast growing middle income developing
countries , seeking to invest ands consume more than can be covered by domestic
incomes, tend to borrow abroad; and they borrow on terms that are more
favourable when their capacity to repay is high and less favourable when as in a
financial crisis -their capacity to repay is low. We saw repeatedly during the
1980s and 1990s that countries that liberalized and opened their financial
systems and then borrowed heavily even if to raise investment rather than
consumption-ran a significant risk of costly financial crisis. A crisis pulls
them back down the world income hierarchy. Hence the debt trap might be thought
of as a force in the world economy that is some what analogous to gravity.
Another basic cause is technological change. Technological change might be
thought of as distantly analogous to electromagnetic levitation-a force in the
world economy that keeps the 20 percent of the world's population living in the
member countries of the Organisation for Economic Cooperation and Development
(OECD) comfortably floating above the rest of the world in the world income
hierarchy.
Consequences
Income divergence helps to explain
another kind of polarization taking place in the world system, between a zone of
peace and a zone of turmoil. On the one hand, the regions of the wealthy pole
show a strengthening republican order of economic growth and liberal tolerance
(except toward immigrants), with technological innovation able substitute for
depleting natural capital. On the other hand, the regions of the wealthy pole
show a strengthening republican order of economic growth and liberal tolerance
(except toward immigrants), with technological innovation able to substitute for
depleting natural capital. On the other hand, the regions of the lower-and
middle income poles contain many states whose capacity to govern is stagnant or
eroding, mainly in Africa, the Middle East, Central Asia, the former Soviet
Union, and parts of East Asia. Here, a rising proportion of the people find
their access to basic necessities restricted at the same time as they see others
driving Mercedes.
The result is a large mass of unemployed and angry young
people, mostly males, to whom the new information technologies have given the
means to threaten the stability of the societies they live in and even threaten
social stability in countries of the wealthy zone. Economic growth in these
countries often depletes natural capital and therefore future growth potential.
More and more people see migration to the wealthy zone as their only salvation,
and a few are ridden to redemptive terrorism directed at the symbolic centers of
the powerful.
Reorienting international organisations
The World
Bank and the IMF had paid remarkably little attention to global inequality. The
Bank's World Development Report 2000: Attacking poverty says explicitly that
rising income inequality "should not be seen as negative," The Bank's view that
….inequality should not be seen as a negative ignores the associated political
instabilities …-a notions of justice and fairness and common humanity aside-can
harm the lives of the citizens of the rich world and the democratic character of
their states.
The global supervisory organizations like the Bank, the IMF,
the WTO, and the United Nations system should be giving the issue of global
income inequality much more attention. If we can act on global warming - We
should start by rejecting the neo-liberal assumption of the Bretton Woods
institutions over the past two decades, now powerfully reinforced by the
emergent WTO.
International public policy to reduce world income inequality
must include a basic change in the policy operation of the world bank, the IMF,
and the WTO so as to allow them to sanction government efforts to impart
directional thrust and nourish homegrown institutional innovations.
DISTRIBUTION OF WORLD GDP, 1989
(percent of total, with quintiles of
population ranked by income)
RICHEST 20%
82.7%
SECOND 20% 11.7%
THIRD 20%
2.3%
FOURTH 20% 1.9%
POOREST 20% 1.4%
Each horizontal band
represents an equal fifth of the world's people.
(Source: Human Development
Report 1992)
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