Globalization and Inequality-Becker

A report to be issued this coming week by the IMF (the technical analysis was released early) shows that greater globalization during the past two decades contributed significantly to rising inequality during this period in most developing as well as developed countries. The media greeted this conclusion about the connection between inequality and globalization with claims that the new report is "handing critics of globalization a powerful weapon" and "The report is an unusual admission by the IMF of the downsides of globalization" (Wall Street Journal, October 10, p.9). Yet a careful evaluation of the report's findings on income and inequality provides in most respects an optimistic assessment of the effects of globalization on developing nations. The report analyzes what happened to incomes and inequality in over 50 countries. It finds that essentially all these countries had large increases in per capita incomes since the early 1980's. While the growth was positive at different income levels, including those at the very bottom, income growth was not uniform among different skills, or at different parts of the income distribution. Incomes grew faster for the more skilled and in higher income quintiles, which implies that various measures of inequality typically increased in developing nations. To explain these results, the IMF authors divide the effects of greater globalization into expanded world trade, greater foreign investment, and increased transfers of modern technologies. They find that all three dimensions of globalization tended to increase per capita incomes of both developing as well as developed countries. International trade theory implies that trade by a poorer country would increase the relative earnings of its lower skilled workers because richer countries want products from poorer countries that use relatively large quantities of unskilled workers, such as textiles. The report's evidence quite strongly supports this building block of trade theory: greater trade alone would have lowered earnings inequality within developing countries. However, the most powerful effect on inequality from globalization is due to transfers of modern technologies. The evidence from developed economies has been that modern technologies, like the computer and Internet, favor more educated and other skilled workers; in economic parlance, that these technologies are skill biased. This effect of technological progress has been used to explain the sharply rising gap in earnings between college graduates and others during the past three decades in the United States (see my discussion of inequality in the blog entries for April 23 and December 10, 2006). Not surprisingly, the IMF's study finds that a similar skill bias applies to international technology transfers, that they raised the earnings gap between more skilled and less skilled workers in developing countries. In other words, foreign direct investment has a skill bias too, so that its sharp growth over the past 25 years raised inequality in developing countries. Better capital markets had a similar effect on inequality. However, the evidence in this report indicates that the effects on inequality due to foreign investment and capital market liberalization, while not minor, were much smaller than the effects of technology transfers. Is this greater gap between the earnings of more and less skilled workers a good or bad result of globalization? Let us accept that greater inequality is not good, other things the same, but other things are different in the IMF results on inequality. The increased earnings gap between persons with more and less education in developing countries reflects that the earnings of more educated individuals rose faster than the earnings of the less educated. The IMF report clearly shows that generally the poorer and less educated in developing nations also became better off in that they have more to spend on food, shelter, health, automobiles, and the other goods that they desire. This improvement in wellbeing at the lower end of the income distribution surely should count as a benefit of globalization. The larger earnings gap by education essentially means that the returns on investments in schooling increased. Few critics of globalization would claim that its effects were bad if globalization significantly raised the returns to financial or physical capital owned by local investors in developing countries. So how can one complain that globalization is bad because it raises the returns on the education of local human capital investors? Higher returns to human capital investments as well as greater returns to plant and equipment mean that the economy is more productive, which should be a welcome development to poorer as well as richer countries. Yet intellectuals and politicians in many countries of Latin America, Africa, and even parts of Asia have heavily criticized globalization and its effects. I believe that developing countries in which the criticisms are strongest are generally countries that have done a bad job of educating its population. Higher returns on investments in education and other human capital are small comfort to the children of poor families who often do not have easy access to secondary schools, let alone to universities and other forms of advanced investments in human capital. The lesson of the IMF report and other studies is that globalization is not the source of these serious problems. Rather, the lesson is that many developing countries have to do much more to open up access to better and greater education for children coming from lower income families. Only then would these families be able to take advantage of the higher returns to education produced by greater trade and the inflow into their economies of modern technologies and foreign capital.

Comments

[Jack]

Jack: "somehow (divination?) today's rightwinger seems to KNOW the precise "value" of low paid employee's production right down to whether the "affordable" and "proper" min wage cost of living increase should be one cup of cheap coffee per hour or two cheap cups of coffee per hour. "

This rightwinger doesn't claim to know the value of any worker. As an employer, I know how much I can pay for a certain task. The potential employee knows how much he or she is willing to work for. The two of us decide the value of the worker in the particular job.

............ As mentioned and taught in econ courses the world over the low paid worker we are discussing has very little bargaining power, so naturally, we, employers tend to like it that way.

Jack: "But my answer would be that a taxpayer subsidy to remedy this situation is fine with me and about the only rational policy possible. What would you say? "

I'd say the same thing I said at 3:53 am this morning: We should abolish our systems of wealth redistribution.

.............. And? how would YOU handle the problem of compensating the handicapped person who you say is not worth either the pay of the non-handicapped or anything approaching a living wage?????

Jack: "Somehow the right wing vision appears to fail when looking upward as today's CEO pay having soared by 2,000 percent while median and lower wages have been FLAT or in the case of min wage down."

I don't see that as a failure. The owners of modern corporations - the shareholders - decide through their elected board how much the CEO should be paid. I think they are overpaying most CEO's, and I let those boards know it. But it is not entirely my decision.

.............. Gee, do you think so? 2,000% since 1980 is quite a run! But! as most shares are held in mutual funds the lone stockholders voice is not louder than a whisper in a hurricane.

The current minimum wage is meaningless for all but a tiny percentage of American workers. And that's how it should be.

.......... So many of the "right" claim, however it should not have been allowed to fall so far behind. 20 years ago and many years of productivity increases ago a min wage equal to $10 in today's purchasing power did not break the country and GDP growth was similar to that of today.

An employer and a potential employee should decide the wage in Mt. Pleasant, Texas. It should not be decided in Washington, D.C.

.......... I'll reserve comments regarding the wealthy Lone Star State having higher percentages of folks living in poverty than most state.

Median wages have not been flat for the past 15 years. Real hourly median wages have been growing since 1996.

........Yes! In this graph one can clearly see tiny uptick you mention. Median is the blue line rather near the bottom. The next two, even lower, quintiles are the ones resembling the Bonneville Salt Flats since 1965.

http://en.wikipedia.org/wiki/Image:United_States_Income_Distribution_1967-2003.svg

............ Ah! for another President who would at least talk in terms of a strong economy and productivity gains "lifting all the boats".

real wage growth

[Jack]

Whoops use this link:

http://en.wikipedia.org/wiki/Income_inequality_in_the_United_States

[Duncan Sharp]

We need to start producing reportable measurements on other forgotten variables within an economy, not just the ones sanctioned by law in order to allow greater and understanding of cause and effect results. Seems its a lot of guess work right now. We can study the effects- so there's our answers, but what are the questions?

What meaning does monetary units have for rich or poor if the air they breathe is polluted for instance. What is the cost created to 'consumers' of air. What health costs, what life style costs? What cost is involved in solving the greater current crises we have, that neoclassical economics and free market capitalism have created?

Can anyone argue that these costs do not exist.

The gap between high and low income earners may be widening, but the things they share a eroding at the same pace for both.

If we attempt to narrow our experience inside an out-dated system we are hiding from the truth, that is documented everyday about the social costs, environmental costs, cultural costs and costs experienced by the individual.

Until we have legislated value assigned to such things that we really couldn't do without, then they will taken for free without consideration.

The old system needs an up-grade. Not everything stays the same forever and if we don't allow for some sort of change in the economic measuring now then we are just putting off the inevitable.

We all know this, so what do we do.

We read and add to the debate and create discussion.

Participatory Economics is a proposed economic system that uses participatory decision making as an economic mechanism to guide the production, consumption and allocation of resources in a given society. Proposed as an alternative to contemporary capitalist market economies and also an alternative to centrally planned socialism and co-ordinatorism. Wikipedia 2007.

[John Dewey]

Duncan Sharp: "What meaning does monetary units have for rich or poor if the air they breathe is polluted for instance. ... Until we have legislated value assigned to such things that we really couldn't do without, then they will taken for free without consideration."

Why invent problems that do not exist? The U.S. Environmental Protection Agency has been measuring air quality for 36 years. The total amount of pollutants emitted in the U.S. has declined 55% over those 36 years. That's total pollutants - not per capita pollutants. That's a 55% reduction at the same time that the U.S. population increased 46% - at the same time total miles driven in the U.S increased 177%.

http://www.epa.gov/oar/airtrends/sixpoll.html

Duncan Sharp: "The old system needs an up-grade. ... We all know this"

No, sir. We don't all "know" this.

[Duncan Sharp]

Thanks John,

The problem of air would exist if you lived in a neighborhood that had air pollution problems, but that was an example attempting to express the absolute importance of these things that go unaccounted for.

Its interesting stats and while seeming positive they show total amount. I'm not learned in chemistry and can not unfortunately find the time just now to investigate- But I imagine certain chemicals have risen, while others have declined due to synthetics. I understand that technology may counter some balance here, but is it not possible that those that have risen are considered more harmful? I have to research that for my own interest.

And eh, yeah you're right we don't all know the economic system needs an up-grade. And I will look forward to any future debate as to why it doesn't and it's perfection. I will find time soon to put my case forward, but not today.

[John Dewey]

duncan sharp: "The problem of air would exist if you lived in a neighborhood that had air pollution problems"

You are correct, of course. Air pollution can be a problem at a local level even if not one globally.

I will also concede that the EPA's measurement may need to be updated. They have been moitoring the six pollutants which were known in 1971 to be most harmful nationwide.

Although our Supreme Court has somehow determined that CO2 is a pollutant, it was not a pollutant based on the definition that has existed for all of my lifetime (56 years).

[Tommy]

http://www.amazon.com/gp/product/0767924320

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