Blaming Globalisation

This is an interesting analysis of the complex factors that are leading to increasing inequality throughout the world. A factor that should be clear but is not much discussed is the decreased power of labor internationally. Because of decreased power labor is unable to wrest much of the economic pie from its capitalist or quasi-capitalist masters.

Web| Oct 15, 2007

Opinion

Blaming Globalisation

A report from the Asian Development Bank states
that economic inequality in Asia now nears the
levels of Latin America. Many analysts point
their fingers at Globalisation. Are they right?

PRANAB BARDHAN
BERKELEY
Economic inequality is on the rise around the
world, and many analysts point their fingers at
Globalisation. Are they right?

Economic inequality has even hit Asia, a region
long characterized by relatively low inequality.
A report from the Asian Development Bank states
that economic inequality now nears the levels of
Latin America, a region long characterized by
high inequality.

In particular, China, which two decades back was
one of the most equal countries in the world, is
now among the most unequal countries. Its Gini
coefficient - a standard measure of inequality,
with zero indicating no inequality and one
extreme inequality - for income inequality has
now surpassed that of the US. If current trends
continue, China may soon reach that of
high-inequality countries like Brazil, Mexico and
Chile. Bear in mind, such measurements are based
on household survey data - therefore most surely
underestimate true inequality as there is often
large and increasing non-response to surveys from
richer households.

The standard reaction in many circles to this
phenomenon is that all this must be due to
Globalisation, as Asian countries in general and
China in particular have had major global
integration during the last two decades. Yes, it
is true that when new opportunities open up, the
already better-endowed may often be in a better
position to utilize them, as well as
better-equipped to cope with the cold blasts of
increased market competition.

But it is not always clear that Globalisation is
the main force responsible for increased
inequality. In fact, expansion of labor-intensive
industrialization, as has happened in China as
the economy opened up, may have helped large
numbers of workers. Also, the usual process of
economic development involves a major
restructuring of the economy, with people moving
from agriculture, a sector with low inequality,
to other sectors. It is also the case that
inequality increased more rapidly in the interior
provinces in China than in the more globally
exposed coastal provinces. In any case it is
often statistically difficult to disentangle the
effects of Globalisation from those of the
ongoing forces of skill-biased technical
progress, as with computers; structural and
demographic changes; and macroeconomic policies.

The other reaction, usually on the opposite side,
puts aside the issue of inequality and points to
the wonders that Globalisation has done to
eliminate extreme poverty, once massive in the
two Asian giants, China and India. With global
integration of these two economies, it is pointed
out that poverty has declined substantially in
India and dramatically in China over the last
quarter century.

This reaction is also not well-founded. While
expansion of exports of labor-intensive
manufacturing lifted many people out of poverty
in China during the last decade (but not in
India, where exports are still mainly skill- and
capital-intensive), the more important reason for
the dramatic decline of poverty over the last
three decades may actually lie elsewhere.

Estimates made at the World Bank suggest that
two-thirds of the total decline in the numbers of
poor people - below the admittedly crude poverty
line of $1 a day per capita - in China between
1981 and 2004 already happened by the mid-1980s,
before the big strides in foreign trade and
investment in China during the 1990s and
later.Much of the extreme poverty was
concentrated in rural areas, and its large
decline in the first half of the 1980s is perhaps
mainly a result of the spurt in agricultural
growth following de-collectivization, egalitarian
land reform and readjustment of farm procurement
prices - mostly internal factors that had little
to do with global integration.

In India the latest survey data suggest that the
rate of decline in poverty somewhat slowed for
1993-2005, the period of intensive opening of the
economy, compared to the 1970s and 1980s, and
that some child-health indicators, already
dismal, have hardly improved in recent years. For
example, the percentage of underweight children
in India is much larger than in sub-Saharan
Africa and has not changed much in the last
decade or so. The growth in the agricultural
sector, where much of the poverty is
concentrated, has declined somewhat in the last
decade, largely on account of the decline of
public investment in areas like irrigation, which
has little to do with Globalisation.

The Indian pace of poverty reduction has been
slower than China's, not just because growth has
been much faster in China, but also because the
same 1 percent growth rate reduces poverty in
India by much less, largely on account of
inequalities in wealth - particularly, land and
education. Contrary to common perception, these
inequalities are much higher in India than in
China: The Gini coefficient of land distribution
in rural India was 0.74 in 2003; the
corresponding figure in China was 0.49 in 2002.
India's educational inequality is one of the
worst in the world: According to the World
Development Report 2006, published by the World
Bank, the Gini coefficient of the distribution of
adult schooling years in the population around
2000 was 0.56 in India, which is not just higher
than 0.37 in China , but higher than that of
almost all Latin American countries.

Another part of the conventional wisdom in the
media as well as in academia is how the rising
inequality and the inequality-induced grievances,
particularly in the left-behind rural areas,
cloud the horizon for the future of the Chinese
polity and hence economic stability.

Frequently cited evidence of instability comes
from Chinese police records, which suggest that
incidents of social unrest have multiplied nearly
nine-fold between 1994 and 2005. While the
Chinese leadership is right to be concerned about
the inequalities, the conventional wisdom in this
matter is somewhat askew, as Harvard sociologist
Martin Whyte has pointed out. Data from a 2004
national representative survey in China by his
team show that the presumably disadvantaged
people in the rural or remote areas are not
particularly upset by the rising inequality. This
may be because of the familiar "tunnel effect" in
the inequality literature: Those who see other
people prospering remain hopeful that their
chance will come soon, much like drivers in a
tunnel, whose hopes rise when blocked traffic in
the next lane starts moving. This is particularly
so with the relaxation of restrictions on
mobility from villages and improvement in roads
and transportation.

More than inequality, farmers are incensed by
forcible land acquisitions or toxic pollution,
but these disturbances are as yet localized. The
Chinese leaders have succeeded in deflecting the
wrath towards corrupt local officials and in
localizing and containing the rural unrest.
Opinion surveys suggest that the central
leadership is still quite popular, while local
officials are not.

Paradoxically, the potential for unrest may be
greater in the currently-booming urban areas,
where the real-estate bubble could break. Global
recession could ripple through the
excess-capacity industries and financially-shaky
public banks.With more internet-connected and
vocal middle classes, a history of massive worker
layoffs and a large underclass of migrants, urban
unrest may be more difficult to contain.

Issues like Globalisation, inequality, poverty
and social discontent are thus much more
complicated than are allowed in the standard
accounts about China and India.

Pranab Bardhan is professor of economics at the
University of California, Berkeley, and co-chair
of the Network on the Effects of Inequality on
Economic Performance, funded by the MacArthur
Foundation. He was the editor of the Journal of
Development Economics for many years. Rights: ©
2007 Yale Center for the Study of Globalization.
YaleGlobal Online
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