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Foreign Affairs
Inequality Is No Myth
By Joe W. Pitts
David Dollar and Aart Kraay’s argument that globalization is a “powerful force for equality” is strange in light of widely accepted empirical evidence that inequality within and between countries has increased over the last 200 years. Although they claim that inequality has leveled off or started to decrease in the last two decades, the evidence on this topic remains unclear. To make their case, Dollar and Kraay rather arbitrarily classify a certain group of nations as “globalizers” and point to a decrease in inequality. However, as Harvard economist Dani Rodrik and others have pointed out, using more objective criteria (such as tariffs) for selecting the globalizers suggests that economic growth peaked in the 1960s and 1970s. Indeed, the latest World Bank report on globalization, of which Dollar was a principal author, backed away from the claim that the most globalized countries were those that had adopted the most protrade policies.
Even if Dollar and Kraay had not made faulty assumptions in choosing their globalizers, their breathtaking conclusion that “greater openness to international trade and investment has . . . helped narrow the gap between rich and poor countries rather than widen it” confuses correlation with causation. When average national income is examined, the fact that China and India have had higher growth and relatively fewer poor people distorts the picture because of the size of those two countries. In addition, higher growth in these nations preceded more open trade. Almost everywhere else, growth has slowed or (as in sub-Saharan Africa) reversed. Moreover, as illustrated by rising inequality within China and India, just because growth also raises the incomes of the poor does not mean that it reduces inequality, since the poor start from a radically lower position than the rich. Indeed, if incomes of both the rich and poor increase at a similar rate, inequality is increased, not reduced. Another study published in January by another World Bank economist, Branko Milanovic, evaluates household survey data, which is arguably a more relevant measure of inequality. This work shows that global inequality (as measured between individuals, with the world as one “nation”) actually increased, at least in the five-year period examined (1988-93).
Inequality is no myth. According to well-known statistics produced by the World Health Organization and the un Development Program, the net worth of the world’s richest 200 individuals exceeds that of the world’s poorest 2.5 billion people. And if, as Dollar and Kraay acknowledge, 82 million of the 83 million people added to the world each year are in poor countries, global equality will not be easily advanced.
Globalization and progrowth policies do reduce poverty. But as competitive systems that produce winners and losers, they do not necessarily reduce the inequality that is increasingly visible in a globalized world. Policies such as greater and more effective foreign aid; investment in developing countries’ education, infrastructure, and technological capacity; enhanced access to rich-country markets; and international financial reforms are also vital in achieving a more stable, just, and sustainable system.
Joe W. Pitts III is a Dallas-based entrepreneur and former Chief Legal Officer of Nokia, Inc.