Rich Economy, Poor Management

Economic globalization in the sense of expansion of foreign trade and investment is, of course, somewhat anaemic, reflecting the impact of global recession, although still vigorous in the sense of continuous international transmission of technology, information, ideas and social media.

But in the world of politics and policymaking a cold wind is blowing, dimming earlier enthusiasm for global integration and market liberalization. The Doha round of trade negotiations is moribund. Economic integration in Europe is in disarray. Not merely is the fuming against imports from China and immigrants from Mexico now a staple of American electoral politics, the populist anger in all countries, rich or poor, against the galloping rise in inequality is often directed at the dark forces of global intrusion and competition.

To economists, however, it’s unclear how much of the rise in inequality within a country is due to foreign competition and how much to the inexorable forces of ongoing technological progress which contribute to considerable churning in the labour markets in any case: Computers, robots and ATMs would have displaced secretaries, welders and bank-tellers, respectively, even in a trade-restricted regime. Such technology, by raising the demand for skilled and educated labour, turns the scale against the masses of unskilled workers. There are usually many other forces operating on the state of income or wealth distribution in a country. As economic growth itself raises the value of scarce resources like land, minerals, or oil and gas fields, those lucky to have ownership rights or enough political connections to influence public allocation in their favour, have large windfall gains from rental income, skewing the income distribution in a way that’s not directly connected with globalization. It’s been estimated, for example, in India that of the total wealth of its 46 billionaires, in terms of US dollars, in 2012 60 percent is derived from what’s been called “rent-thick” sectors, like real estate, construction and infrastructure.

Even in China, which globalized quickly, in three decades turning from one of the most egalitarian countries into one of the most unequal, it’s not clear that globalization is mainly responsible for this rise of inequality. If it were, one would have expected a larger rise in inequality in the globally more exposed coastal provinces than in the remote interior provinces, yet the data show that the rise has been more in the latter. To the extent the Chinese export success in the initial years has been in labour-intensive products, it contributed in fact to the large reduction in poverty. Global markets for labour-intensive products like garments have also enabled many young workers, mostly women, from poor families in Bangladesh, Cambodia or Vietnam to climb out of poverty.

In contrast, expansion of exports of mainly skill-intensive products in India, like pharmaceuticals or software, may have raised inequality. So the sectoral composition of production matters. Even without globalization, the usual structural transformation of a developing country has a substantial impact on inequality. As poor agrarian countries move away from low productivity but the low-inequality agricultural sector to high productivity but the high-inequality manufacturing and services, aggregate inequality rises, largely independent of globalization. In rich countries the disproportionate development of the financial sector, helped by but not rooted in globalization, has made a small number of people extremely wealthy. This inequality persists through their grip on politics with lobbying power and campaign finance. In China some of the rumoured excessive wealth of “princelings” and other relatives of Communist Party officials is derived from private equity firms, apart from real estate. Also, the Chinese financial sector worsens income distribution by underpaying bank deposits from ordinary households and using that money for subsidized loans to business.

In general, the impact of globalization on a country’s inequality depends on the state of its mass education, physical infrastructure, and labour-market conditions and institutions. Education enables workers to be more flexible in adjusting to market demand across tasks and occupations. In Latin America, an area of traditionally high inequality, a surge in public secondary education over the last two decades has improved the skill level of poor workers; the wage gap with better-off workers has started shrinking, even in a period of trade expansion. According to World Bank estimates, inequality of opportunity is declining in some Latin American countries, partly helped no doubt by the successful conditional cash-transfer programs, inducing poor children to continue schooling.  Studies show that Latin America now spends a larger share of GDP on the poorest 20 percent of children than the United States.

Better infrastructure like roads, railways, power and telecommunication enables the poor in remote rural or backward regions to share in gains from expanding jobs in the global sectors and may thus reduce regional and urban-rural inequalities, which constitute a major part of a developing country’s overall inequality.

Domestic labour-market conditions also shape the way the workers adjust.  For example, in India there’s some evidence that workers in the low-productivity informal manufacturing sector bore much of the brunt of the increased market competition from trade liberalization in manufacturing. Many of these displaced workers may have then crowded into the non-traded sectors, usually self-employed service, and their conditions may have contributed to increased inequality in a country where the overwhelming majority of the workforce is informal. The relatively few organized workers in India are better situated than the informal workers, but the labour movement there is highly decentralized and fragmented, reducing collective-bargaining strength.

In the world market as a whole the advent of developing countries pushing exports of labour-intensive products has raised the effective global supply of labour, whereas the credible threat of capital to locate elsewhere – and outsource – has increased relative bargaining power of business and eroded viability and influence of labour unions, causing upward pressure on inequality. For a long time unions in rich countries enabled workers to share in the rent from market power of the companies, but with increased global competition such rental income declined. The share of immobile, usually unskilled, workers suffered a disproportionate decline, compared to that of internationally mobile capital.

Countries where labour unions are centralized and workers have a strong safety net of public welfare and job retraining, there is better bargaining by workers and less resistance to globalization, as in Scandinavian countries, compared to US or India where labour unions are usually anti-globalization, with decentralized labour movements and patchy safety nets.

In some countries globalization may also lead to overexploitation of fragile local environmental resources – forests, fisheries, water and more – on which livelihoods of the rural poor depend. But administered underpricing of some of these resources – like irrigation water in India, energy in Russia, timber concessions in Indonesia – is a major factor in resource depletion; domestic vested interests are often responsible for continuation of such damaging policies.

In general, globalization can cause many hardships for poor people, but it also opens up opportunities which some countries can utilize and others do not, largely depending on their domestic political and economic institutions. The net outcome is often complex and almost always context-dependent. Serious obstacles to redistributive policies are often domestic – landlords, corrupt politicians and bureaucrats, and the currently subsidized rich – and closing the economy does not usually reduce the power of these interests.  

All this means that globalization is often not the main cause of our problems, contrary to critics’ claims, just as globalization is often not the main solution of our problems, contrary to the claim of some overenthusiastic free-traders.

Pranab Bardhan is professor of the Graduate School at the Department of Economics, University of California, Berkeley. Of his 12 published books the latest is Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India (Princeton University Press). Rights:Copyright © 2012 Yale Center for the Study of Globalization. YaleGlobal Online