Globalization effects on reducing Poverty and Inequality. (PART 2)

Should we worry about rising inequality?

The neoliberal argument says that inequality provides incentives for effort and risk-taking, and thereby raises efficiency. As Margaret Thatcher put it, "It is our job to glory in inequality and see that talents and abilities are given vent and expression for the benefit of us all." We should worry about rising inequality only if it somehow makes the poor worse off than otherwise.

The counterargument is that this productive incentive effect applies only at moderate, Scandinavian, levels of inequality. At higher levels, such as in the United States over the past 20 years, it is likely to be swamped by social costs. Aside from the moral case against it, inequality above a moderate level creates a kind of society that even crusty conservatives hate to live in, unsafe and unpleasant.

Higher income inequality within countries goes with: (i) higher poverty (using World Bank data and the number of people below the Bank's international poverty line); (ii) slower economic growth, especially in large countries such as China, because it constrains the growth of mass demand; (iii) higher unemployment; and (iv) higher crime. The link to higher crime comes through the inability of unskilled men in high inequality societies to play traditional male economic and social roles, including a plausible contribution to family income. But higher crime and violence is only the tip of a distribution of social relationships skewed toward the aggressive end of the spectrum, with low average levels of trust and social capital. In short, inequality at the national level should certainly be a target of public policy, even if just for the sake of the prosperous.

The liberal argument is even less concerned about widening inequality between countries than it is about inequality within countries, because we cannot do much to lessen international inequality directly. But on the face of it, the more globalized the world becomes, the more that the reasons why we should be concerned about within-country inequalities also apply between countries. If globalization within the current framework actually increases inequality within and between countries, as some evidence suggests, increases in world inequality above moderate levels may cut world aggregate demand and thereby world economic growth, making a vicious circle of rising world inequality and slower world growth.

Rising inequality between countries impacts directly the national political economy in the poorer states, as rich people who earlier compared themselves to others in their neighborhood now compare themselves to others in the United States or Western Europe, and feel deprived and perhaps angry. Inequality above moderate levels may, for example, predispose the elites to become more corrupt as they compare themselves to elites in rich countries. They may squeeze their own populations in order to sustain a comparable living standard, enfeebling whatever norms of citizenship have emerged and preventing the transition from an "oligarchic" elite, concerned to maximize redistribution upward and contain protests by repression, to an "establishment" elite, concerned to protect its position by being seen to operate fairly. Likewise, rapidly widening between-country inequality in current exchange rate terms feeds back into stress in public services, as the increasing foreign exchange cost of imports, debt repayment and the like has to be offset by cuts in budgets for health, education, and industrial policy.

Migration is a function of inequality, since the fastest way for a poor person to get richer is to move from a poor country to a rich country. Widening inequality may raise the incentive on the educated people of poor countries to migrate to the rich countries, and raise the incentive of unskilled people to seek illegal entry. Yet migration/refugees/asylum is the single most emotional, most atavistic issue in Western politics. Polls show that more than two-thirds of respondents agree that there should be fewer "foreigners" living in their countries.

Rising inequality may generate conflict between states, and––because the market-exchange-rate income gap is so big––make it cheap for rich states to intervene to support one side or the other in civil strife. Rising inequality in market-exchange-rate terms––helped by a high US dollar, a low (long-run) oil price, and the WTO agreements on intellectual property rights, investment, and trade in services––allows the United States to finance the military sinews of its postimperial empire more cheaply.

The effects of inequality within and between countries depend on prevailing norms. Where power hierarchy and income inequality are thought to be the natural condition of man the negative effects can be expected to be lighter than where prevailing norms affirm equality. Norms of equality and democracy are being energetically internationalized by the Atlantic states, at the same time as the lived experience in much of the rest of the world is from another planet.

In the end, the interests of the rich and powerful should, objectively, line up in favor of greater equity in the world at large, because some of the effects of widening inequality may contaminate their lives and those of their children. This fits the neoliberal argument. But the route to greater equity goes not only through the dismantling of market rules rigged in favor of the rich––also consistent with the neoliberal argument––but through more political (nonmarket) influence on resource allocation in order to counter the tendency of free markets to concentrate incomes and power. This requires international public policy well beyond the boundaries of neoliberalism.

The need for deliberate international redistribution is underlined by the evidence that world poverty may be higher in absolute numbers than is generally thought, and quite possibly rising rather than falling; and that world income inequality is probably rising too. This evidence suggests that the income and prosperity gap between a small proportion of the world's population living mainly in the North and a large proportion living entirely in the South is a structural divide, not just a matter of a lag in the South's catch-up. Sustained preferences for the South may be necessary if the world is to move to a single-humped and more narrowly dispersed distribution over the next century.

The political economy of statistics

Concerns about global warming gave rise to a coordinated worldwide project to get better climatological data; the same is needed to get better data on poverty and inequality. The World Bank is one of the key actors. It has moved from major to minor source of foreign finance for most developing countries outside of Africa. But it remains an important global organization because it wields a disproportionate influence in setting the development agenda, in offering an imprimatur of "sound finance" that crowds in other resources, and in providing finance at times when other finance is not available. Its statistics and development research are crucial to its legitimacy. Other regional development banks and aid agencies have largely given up on statistics and research, ceding the ground to the World Bank. Alternative views come only from a few "urban guerrillas" in pockets of academia and the UN system. Keynes' dictum on practical men and long-dead economists suggests that such intellectual monopolization can have a hugely negative impact.

Think of two models of a statistical organization that is part of a larger organization working on politically sensitive themes. The "exogenous" model says that the statistics are produced by professionals exercising their best judgment in the face of difficulties that have no optimal solutions, who are managerially insulated from the overall tactical goals of the organization. The "endogenous" model says that the statistics are produced by staff who act as agents of the senior managers (the principals), the senior managers expect them to help advance the tactical goals of the organization just like other staff, and the statistics staff therefore have to massage the data beyond the limits of professional integrity, or quit.

Certainly the simple endogenous model does not fit the Bank; but nor does the other. The Bank is committed to an Official View of how countries should seek poverty reduction, rooted in the neoliberal agenda of trade opening, financial opening, privatization, deregulation, with some good governance, civil society and environmental protection thrown in; it is exposed to arm-twisting by the G7 member states and international nongovernmental organizations (NGOs); it must secure their support and defend itself against criticism. It seeks to advance its broad market opening agenda not through coercion but mainly by establishing a sense that the agenda is right and fitting. Without this it would lose the support of the G7 states, Wall Street, and fractions of developing country elites. The units of the Bank that produce the statistics are partly insulated from the resulting pressures, especially by their membership in "epistemic communities" of professionals inside and outside the Bank; but not wholly insulated. To say otherwise is to deny that the Bank is subject to the Chinese proverb, "Officials make the figures, and the figures make the officials;" or to Goodhart's law, which states that an indicator's measurement will be distorted if it is used as a target. (Charles Goodhart was thinking of monetary policy, but the point also applies to variables used to make overall evaluations of the performance of multilateral economic organizations.) To say otherwise is equally to deny that the Bank is affected by the same pressures as the Fund, about which a former Fund official said, "The managing director makes the big decisions, and the staff then puts together the numbers to justify them." But little is known about the balance between autonomy and compliance in the two organizations, or the latitude of their statisticians to adjust the country numbers provided by colleagues elsewhere in the organization which they believe to be fiddled (as in the China case, above).

Some of the Bank's statistics are also provided by independent sources, which provide a check. Others, including the poverty numbers, are produced only by the Bank, and these are more subject to Goodhart's law. The Bank should appoint an independent auditor to verify its main development statistics or cede the work to an independent agency, perhaps under UN auspices (but if done by, say, UNCTAD, the opposite bias might be introduced). And it would help if the Bank's figures on poverty and inequality made clearer than they do the possible biases and the likely margins of error.

All this, of course, only takes us to the starting point of an enquiry into the causes of the probable poverty and inequality trends, their likely consequences, and public policy responses; but at least we are now ready to ask the right questions. Above all, we have to go back to a distinction that has all but dropped out of development studies, between increasing returns and decreasing returns or, more generally, between positive and negative feedback mechanisms. The central question is why, at the level of the whole, the increasing returns of the Matthew effect––"To him who hath shall be given"––continues to dominate decreasing returns in the third wave of globalization.