Globalization and Income Inequality

1. Globalization and Income Inequality

2. One Perspective • Protester before the meeting of the WTO in Doha in 2001, “Globalization leads to the North getting richer, and the South getting poorer… This is a direct consequence of globalization, and we need to stop this from continuing…”

3. Questions of Interest • What is the relationship between “globalization” and income inequality? • Activists say that globalization has resulted in further impoverishment of the poorest – is this true?

4. TradeFDICapital FlowsMultilateral Institution(rules, structural adjustment)Food AidMigration TradeHow does an increase in trade affect income? Many Factors1. starting conditions2. comparative advantage3. trade policy4. domestic policy and governance Some answers may be_______. Measurement of Income– data– definitions FDI andOther Issuessame typeof analysis Define “Globalization”

5. Economic integration from… • Trade (goods and services) • Level of trade, scope (more services) • Rules for trade • Foreign Direct Investment • Multinational Corporations • Capital Flows • Importance of Multilateral Institutions • Providing rules • Implementing structural adjustment programs

6. Three Waves of Globalization Source: Foreign capital stock/developing country GDP: Maddison (2001), table 3.3; Merchandise exports/world GDP: Maddison (2001), table F-5; Migration: Immigration and Naturalization Service (1998).

7. Importance of Trade • Share of international trade in total output (exports plus imports of goods relative to GDP): • Developed countries: 32 to 38% between 1990 and 2001 • Developing countries 34 to 49% (same period) • Varies a lot between countries

8. Currently, trade is deeper, different • Merchandise trade to merchandise production – almost 36% for the United States, • 3 times pre-WWI • Share of imports/exports as percent of production greater • Price convergence greater • i.e., 1870 Liverpool price of wheat greater than Chicagoby 60%, now difference 15% • Increase in multinational corporations (MNCs): • Trade is often transfers between subsidiaries • Firms draw on suppliers on a world-wide basis for manufactured inputs • Includes trade in services

9. What Are MNCs? • An international corporation with headquarters in one country and branches in a wide range of developed and developing countries. • Examples include General Motors,Coca-Cola, Firestone, Philips, Volkswagen, British Petroleum and Exxon.

10. Role of Multinationals • Important since the East India company • 1914 only a few MNCs – even in 1970 not as important • 60,000 parent operations and 500,000 foreign affiliates account for 25% of global output, 1/3 in host counties • US based MNCs account for 19% of US GDP • Account for 63% of U.S. goods exports and 40% imports

11. U.S. Foreign Direct Investment (as percent of U.S. GDP) Source: Bordo et al. (1999)

12. Foreign Direct Investment • Mostly FDI complements trade in goods (does not substitute) – MNCs are conduitsfor trade • 1994 36% of U.S. exports were intra-multinational transactions • Exposes services to international competition • Can deliver services through sales by foreign affiliates • Increases competition in sectors difficult to exchange across borders

13. FDI to Developing Countries is Resilient(US$ billions) FDI to Developing Countries Global FDI Sources: World Bank staff estimates; UNCTAD, World Investment Report 2001.

14. International Capital Flows • Motivations: • Reduced barriers • Desire of investors to diversify • New financial instruments • Categories: • Foreign direct investment (less volatile) • Portfolio (stocks and bonds) • Bank lending

15. Huge Increase • Cross border transactions in bonds and equities: • 9% U.S. GDP in 1980, 223 % in 1998 • Average daily turnover was $1.5 trillion in April 1998, compared to $0.6 trillion in April 1989 • Overstates changes in ownership (trading and retrading of same securities) • FDI is about ¼ of international capital flows

16. Lets Look at the Connections… • How will foreign direct investment affect incomes? (micro side) • Employment • Development of human capital • Wages • Evidence

17. MNCs and wages • New research that has evaluated wages of all MNCs in Chile, Mexico, Colombia, Taiwan, Venezuela, and Turkey • “foreign-owned plants pay higher, often substantially higher, wages than locally owned firms.” • Relevant comparison is with locally owned firms, not U.S. firms • No evidence of spilloversto increase wages of local firms

18. Graham argues that: • Ratio of compensation of foreign affiliates to the average domestic manufacturing wage: • All countries – 1.5 • High income countries – 1.4 • Middle income countries – 1.8 • Low income countries – 2.0

19. With FDI – an antidote of displacement of small agricultural producers • In middle income countries-hypermarkets • From wet markets to supermarkets • Supermarkets (Carre Four, Wal-Mart, etc.) • Standards: food safety and quality • Volume and Seasonality • International supply chains • Impact on local producers • Consolidation: need for capital • Displacement

20. Trade • With trade several economic impacts • Resource Adjustment – transitions in the labor market • What kind of a social safety net exists? • What impact high rates of unemployment? • Import competing industries • Can be displaced • Sometimes with developed country subsidies • Exporting industries • Owners of capital versus labor • Difficulties in competing in international markets • Tariffs, standards

21. China • Accession to the WTO • Small overall positive impact on mean income • But: • Rural families lose • Urban families gain • Competition from imports • Geography matters • North east looses – feed grain production (falling relative prices) • Access to infrastructure and markets matter

22. Argument About Trade and Growth • World Bank argues that trade openness increases growth • Divide world into “globalizers” and non-globalizers • Evaluate the growth rates and other characteristics of these groups • Non-globalizers include failed states

23. Change in Trade/GDP for Selected Countries, 1977-97 Source: World Bank (2001)

24. Characteristics of More Globalized and Less Globalized Developing Economies(population-weighted averages) Source: Dollar (2001)

25. Rodrik: studies are flawed • “Open” and “closed” relate to indicators, not to policies, and correlated with macro-economic policies, geography, institutions • Once these controlled for, no correlation • Relationship between trade openness and growth depends on a host of factors • India and China: growth before openness

26. Impact of “Globalization” on Income • Many factors may be affecting income • Developing countries not uniformly involved in the world economy • Ravallion discusses that data and measurement really matter

27. Popular View • “first, divergence in output per person across countries is perhaps the dominant feature of modern economic history. The ratio of per capita income in the richest versus the poorest country has increased by a factor of 6…” • Note: from Pritchett 2001 (Bhalla, pg. 23)

28. What did Pritchett measure? • U.S. taken as a representative “rich” economy • Took the poorest economy as a reference • Average American 50 times richer in 1950 and 1960 • Today more than 70 times as rich • Also measured against the 10th poorest country

29. Ratios of Mean Income of the United States and of the Poorest Country Note: Mean incomes are in constant purchasing power parity (PPP) dollars, 1993 base. The poorest and 10th-poorest countries were chosen on the basis of per capita income, 1993 PPP, for the selected years. Sources: World Bank, World Development indicators, CD-ROMs, 1998, 2001; Maddison (2001); Penn World Tables, various years

30. Convergence or Divergence? It Depends Note: For each year, the unshaded bar represents the income ration of the mean-to-20 poorest countries in that year. Sources: World Bank, World Development Indicators, CD-ROMS, 1998, 2001; Maddison (2001); Penn World Tables, various years.

31. Gini Coefficient • Equal to one if all income in the world accrued to one person • Equal to zero is incomes are equally distributed

32. Distribution of Income or Consumption

33. World Individual Income andConsumption Inequality Soruce: Deniger and Squire 1996 World Income Inequality Database www.wider.unu.edu/widl

34. Regional Estimates of Inequality

35. Head Count for Extreme Poverty Soruce: Deniger and Squire 1996 World Income Inequality Database www.wider.unu.edu/widl

36. Growth reduces absolute poverty • However, proper policies increase participation • of the poor in growth

37. Poverty Rate Percentage In Developing Countries Source: World Bank (2003)

38. Population Living below US$1 per Dayin Developing Countries Source: World Bank (2003)

39. What Do We Know? • No studies on global income inequality, trends and causes widely accepted • Ravallion and others: no correlation growth and income inequality • Lots of action: hidden by averages • Data and measurement really matter (Ravallion) • Less absolute poverty than before • Are the poor poorer?

40. What’s Important • Connections • Carefully define aspect of globalization • Identify connections to income growth • Remember lots of factors at play • Initial starting conditions matter • These caveats don’t mean current trade rules are acceptable

41. TradeFDICapital FlowsMultilateral Institution(rules, structural adjustment)Food AidMigration TradeHow does an increase in trade affect income? Many Factors1. starting conditions2. comparative advantage3. trade policy4. domestic policy and governance Some answers may be_______. Measurement of Income– data– definitions FDI andOther Issuessame typeof analysis Define “Globalization”