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Foreign Affairs
By the Numbers
By James K. Galbraith
In “Spreading the Wealth” (January/ February 2002), David Dollar and Aart Kraay make the provocative claim that global inequality has declined since 1975, mainly due to rapid growth in India and China, and that “globalizing” countries have performed far better in per capita growth than “nonglobalizers.”
It is extraordinary that India, China, and Vietnam should be offered as three of the five major examples of globalizing success stories. India’s relative success began in the 1980s, partly because strict capital controls and long-term official development assistance helped protect it from the debt crisis that occurred in Latin America and elsewhere. China grew at first on the strength of agricultural reform and then through a program of industrialization financed mainly by internal savings; it has to this day not liberalized its capital account. Vietnam and China remain under the control of their communist parties; these are not “Washington consensus” countries by any means.
Missing from Dollar and Kraay’s list of successes are the true globalizers of recent times, including Argentina, until just a few months ago the leading neoliberal poster child, or Russia, now attempting to recover from the collapse that followed shock globalization. So too are the erstwhile “Asian tigers” who liberalized in the early 1990s and failed before the end of the decade. Nor are these examples isolated. World growth rates were systematically higher under the structured international financial regime of Bretton Woods from 1945 to 1971 than they became in the era of deregulation after 1980.
Dollar and Kraay assert that there is no general pattern of rising inequality under globalization. However, the source on which they base this assertion, the World Bank’s inequality data set, is riddled with gaps and implausible measurements. According to these measures, for instance, inequality declined in Canada from 1971 to 1991 and in Mexico from 1975 to 1994, Spain is one of the most egalitarian countries in Europe, and India and Indonesia have general measures of inequality similar to that of Norway.
My own work, in contrast, shows a clear and severe global pattern of rising inequality in industrial pay, beginning in the early 1980s. This is based on the United Nations data that permit about 3,000 data points to be estimated, roughly five times as many as in the published editions of the World Bank data set (and more than three times as many as in a forthcoming edition).
Rising inequality after 1980 is the rule in this data, with limited exceptions mainly in Scandinavia and in Southeast Asia before 1997. The patterns strongly suggest that forces of globalization, including high global interest rates, debt crises, and shock liberalizations, are associated with rising inequality in pay structures. Pay is, of course, the major component of income, and if pay inequalities are rising, it is a good bet that broader income and social inequalities are rising too.
James K. Galbraith is Professor of Public Affairs and Government at the Lyndon B. Johnson School of Public Affairs at the University of Texas, Austin.