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Inequality, Growth and Poverty in the Era of Liberalization and Globalization

Inequality, Growth and Poverty in the Era of Liberalization and Globalization. Policy Brief No. 4, UN WIDER, 2001 By Giovanni Andrea Cornia and Julius Court Presentation by Dan Prud’homme. Outline. 1) Thesis, methods, why important? 2) Traditional causes of rising inequality

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Inequality, Growth and Poverty in the Era of Liberalization and Globalization

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  1. Inequality, Growth and Poverty in the Era of Liberalization and Globalization Policy Brief No. 4, UN WIDER, 2001 By Giovanni Andrea Cornia and Julius Court Presentation by Dan Prud’homme

  2. Outline • 1) Thesis, methods, why important? • 2) Traditional causes of rising inequality • 3) New causes of rising inequality • 4) Implications for growth and poverty • 5) Recommendations to reduce inequality

  3. Thesis • Intra-country inequality has RISEN since the early/mid 1980s • Traditional causes of inequality DO NOT adequately explain recent trends • Higher the level of inequality= less impact growth has in reducing poverty • High levels of inequality depress the rate of growth • Rising inequality is not inevitable amidst globalization

  4. Methods • Measures national income inequality—distribution of income among people within a country—using UN World Income Inequality Database (WIID)

  5. Why important? • Policymakers accept growth as anti-poverty strategy but largely ignore inequality • MDG #1- cut income poverty from 30-15% by 2015

  6. Traditional vs. New causes of inequality TRADITIONAL Explain most of the variation in cross-country inequality • But, with the exception of education in Africa and L. Am., don’t explain recent surge in intra-country inequality NEW • Best at explaining recent trends in increasing intra-country inequality

  7. …traditional causes • 1) Land concentration (*) • 2) Increasing influence of mineral sector on GDP

  8. …traditional causes • 3) Rising inequality due to changes in access to education* • Need at least 6.5 years

  9. …traditional causes • 4) Increasing urban bias • Some evidence points to persistent urban bias, but no overall trend for within-country rural-urban inequality since 1980s in developing and transitional countries

  10. New causes of inequality • 1) New technology • Favors high-skilled workers; replaces labor; only explains part of inequality • 2) Trade liberalization (*) • Mixed results; only explains part of inequality • Doesn’t explain rise in inequality where manufactured X and M hardly changed

  11. …new causes • 3) Stabilization and adjustment programs in developing countries • Force single-digit inflation • Deficit reduction is too fast • At times, reduce fiscal deficit via cuts in pro-poor expenditures • Interest rate hikes inappropriate

  12. …new causes • 4) Financial liberalization- THE MAIN FACTOR • Increase in interest rates • Combined with weak financial markets= big problems • 5) Privatization and distribution of industrial assets • Privatization often = clientelism

  13. …new causes • 6) Changes in labor market institutions (*) • 7) State tax and transfer system • Trend toward lower progressivity in both developing and developed countries

  14. Implications for growth and poverty • 1) Negative effects if inequality is too low • 2) Negative effects if inequality is too high • 3) High inequality= social tensions • 4) Growth alone doesn’t reduce poverty • 5) Higher level of inequality= lower rates of poverty reduction at any given rate of growth

  15. Recommendations to address inequality • 1) Acknowledge it isn’t an inevitable by-product of growth (Note: China, Taiwan) • 2) Address both traditional and new causes • Land reform where applicable- distribute costs wisely • Project evaluation unit to ensure efficient public investment from mineral resources • Improve education • Develop int’l mechanism to dampen volatility of commodity prices and short term k flows • Regulate privatization to make sure equitable • More progressive tax policies- if will spend revenue on pro-poor plans

  16. SOME ways for improving IMF and WB policy packages • (iii) achieve the deficit reduction through increasing progressive taxation rather than through cuts of pro-poor public expenditures • (vi) whenever possible, rely more on devaluation and other export promotion measures rather than on fiscal and monetary expansion. • (iii) include distributional concerns in the design and regulation of privatization and domestic financial liberalization, and include them in tool-kits for World Bank teams using PRSPs; • (iv) support policies (including capital controls) to reduce the output volatility caused by financial shocks; • (v) set up new, permanent mechanisms that would support the poor during periods of structural reform; social funds have not been satisfactory in this regard

  17. Re-cap • Intra-country inequality has RISEN since the early/mid 1980s • Traditional causes of inequality DO NOT adequately explain recent trends • Higher the level of inequality= less impact growth has in reducing poverty • High levels of inequality depress the rate of growth • Rising inequality is not inevitable amidst globalization

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