Yet the actual experience since 1980 contradicts almost every one of theseclaims. Indeed, the free-trade/free-capital formula has led to slower growth andmore vulnerability for poor countries--and to greater income disparity amongindividuals. In 1980 median income in the richest 10 percent of countries was 77times greater than in the poorest 10 percent; by 1999 that gap had grown to 122times. Progress in poverty reduction has been limited and geographicallyisolated. The number of poor people rose from 1987 to 1998; in many countries,the share of poor people increased (in 1998 close to half the population in manyparts of the world were considered poor). In 1980 the world's poorest 10 percent,or 400 million people, lived on the equivalent of 72 cents a day or less. Thesame number of people had 79 cents per day in 1990 and 78 cents in 1999. Theincome of the world's poorest did not even keep up with inflation.
Why has the laissez-faire approach worsened both world growth and world incomedistribution? First, the IMF and the World Bank often commend austerity as aneconomic cure-all in order to reassure foreign investors of a sound fiscal andbusiness climate--but austerity, not surprisingly, leads to slow growth. Second,slow growth itself can mean widening income inequality, since high growth andtight labor markets are what increase the bargaining power of the poor.(Economists estimate that poverty increases by 2 percent for every 1 percent ofdecline in growth.) Third, the hands-off approach to global developmentencourages foreign capital to seek regions and countries that offer the cheapestproduction costs--so even low-income countries must worry that some other, evenmore desperate workforce will do the same work for a lower wage. Finally, smalland newly opened economies in the global free market are vulnerable to investmentfads and speculative pressures from foreign investors--factors that result ininstability and often overwhelm the putative benefits of greater openness. All ofthese upheavals disproportionately harm the poorest.
Capital and Trade
Because capital controls were reduced or eliminatedvirtually everywhere over the past 20 years, the flow of capital to developingcountries increased rapidly, from $1.9 billion in 1980 to $120.3 billion in 1997(the last year before the global financial crisis). Even in 1998, in the wake offinancial crisis, the flow of capital remained remarkably high at $56 billion(although a substantial share of this money consisted of short-term portfolioinvestments).
Unfortunately, faster capital mobility in a deregulated environment means anincrease in speculative financing and, thus, greater financial instability. Undersuch conditions, the poor are unlikely to escape poverty through economic growthbecause they are ill equipped to weather the macroeconomic shocks.
Moreover, higher-income people can protect themselves more effectively fromthe fallout of a crisis. They have capital that they can move overseas. At thesame time, in the IMF/World Bank formula, a crisis invariably calls for areduction in public spending--at precisely a moment when the poor are moredependent on social safety nets. So on both counts, laissez-faire widens the gapbetween rich and poor.
Trade liberalization--the complement to deregulated capital markets in theglobal deregulation agenda--also plays a significant role in expanding inequalityand limiting efforts to reduce poverty. It induces rapid structural change aswell as a decline in real wages, working conditions, and living standards. Italso gives teeth to employers' threats to close plants or to relocate or"outsource" production abroad, where labor regulations are less stringent andmore difficult to enforce--thus undermining workers' attempts to organize andbargain for improved wages and working conditions. This trend fuels a race to thebottom in which governments vie for needed international investment byscrambling to offer employers the cheapest body of laborers.
The connection between rapid trade liberalization and inequality is reflectedin downward wage pressures and rising inequality in industrializing as well asindustrialized economies. A 1997 report by the United Nations Conference on Tradeand Development, for instance, found that trade liberalization in Latin Americaled to widening wage gaps, falling real wages for unskilled workers (often morethan 90 percent of the labor force in developing countries), and risingunemployment.
Evidence is overwhelming that income inequality is rising inindustrializing countries. But there is also a broad consensus--even amonglaissez-faire cheerleaders--that income inequality has risen in developed nationsas well since 1980. In a 1997 paper for the Journal of Economic Literature,Peter Gottschalk and Timothy M. Smeeding found that "almost all industrialeconomies experienced some increase in wage inequality among prime-aged males" inthe 1980s and early 1990s. Further, data from the widely respected LuxembourgIncome Study show that among 24 such countries, 18 experienced a rise in incomeinequality, only 5 experienced a decline in inequality (Denmark, Luxembourg, theNetherlands, Spain, and Switzerland), and 1 (France) saw no change.
While a widening gap between the rich and the poor within countries is notuniversal, it appears to have occurred in most countries and is affecting most ofthe world's population.
Problematic Poster Children
The World Bank's conclusion that the lot of the poor has improved during the era of increasing trade- and capital-liberalization reliessubstantially on data from China and India. But both countries are anomalies. Inreality, the facts in India and China undermine the case for a connection betweengreater deregulation and falling poverty and inequality. While in China thepercentage who are poor has fallen, there has nonetheless been a rapid rise ininequality--most notably, from 1985 to 1995, between rural and urban areas andbetween provinces with urban centers and those without them. Also, a large numberof China's workers labor under abhorrent, and possibly worsening, slave- orprison-labor conditions. This not only means that many workers are left out ofChina's economic growth; it also makes China an unappealing development model forthe rest of the world. Thus, improvements in China are not universally shared andleave many workers behind, often in deplorable conditions.
Using India to illustrate the benefits of unregulated globalization isequally problematic, since the country achieved its progress while remainingrelatively closed off to the global economy. Total "goods trade" (exports plusimports) was about 20 percent of India's gross domestic product in 1998, or 10percentage points less than in China and only about one-fifth the level of suchexport-oriented countries as Korea. Moreover, the IMF views India as something ofa laggard in deregulating its economy. IMF reports regularly recommend furtherliberalization of India's trade and capital flows--the only large developingeconomy for which this is the case.
More broadly, to use India and China as poster children for the IMF/World Bankbrand of liberalization is laughable. Both nations have sheltered theircurrencies from global speculative pressures (a serious sin, according to theIMF). Both have been highly protectionist (India has been a leader of the bloc ofdeveloping nations resisting WTO pressures for laissez-faire openness). And bothhave relied heavily on state-led development and have opened to foreign capitalonly with negotiated conditions. The Heritage Foundation, in its annual Indexof Economic Freedom, ranks India and China as tied for spot 121--among theleast economically open nations in the world. Yet by letting in foreign capitalin a limited and negotiated way, India and China have benefited from investmentwithout totally sacrificing economic sovereignty. There may be a larger lessonhere.
A Broader Perspective
The World Bank's assertion that "between countries,globalization is mostly reducing inequality" seems to contradict the IMF'sassessment that "the relative gap between the richest and the poorest countrieshas continued to widen" in the 1990s. Given this confusion, it is useful to takea global perspective that looks at the distribution of world income across allcountries and across all people.
Distribution among countries unambiguously worsened in the 1980s and 1990s.In other words, rich nations have gotten richer and poor ones have gotten poorer.The median per capita income of the world's richest 10 percent of countries was77 times that of the poorest 10 percent in 1980, 120 times greater in 1990, and122 times greater in 1999. The ratio of the average per capita incomes shows aneven more dramatic increase.
World-income distribution across people (rather than countries) witnessedequitable improvement to some extent in the late 1990s, after a dramatic rise ininequality during the previous years. While the richest 10 percent of the world'spopulation had, on average, incomes that were 79 times higher than those of thepoorest 10 percent in 1980, their incomes were 120 times higher in 1990. Thatratio dropped to 118 in 1999. The improvement in equality was somewhat morepronounced in terms of median incomes; yet even under this measure, incomedistribution was remarkably less equitable in 1999 than in 1980.
The few gains in the 1990s come solely from rising incomes in China. If Chinais excluded, there is an unambiguous trend toward growing income inequalityacross the remaining world population in the 1980s and 1990s. But since incomedistribution in the People's Republic has become substantially less equitable inthe 1990s, the inclusion of China's per capita GDP in the distribution of worldincome across all people exaggerates improvements in the world's incomedistribution in the 1990s. Put simply, inequality is a bigger problem at the endof the nearly 20-year experiment with unregulated global capitalism than it wasbefore deregulation became the rule.
Despite official claims to the contrary, the evidence clearly shows that thelaissez-faire era has been one of slower growth and greater inequality. And theapparent improvement of that trend in the 1990s is the result solely of risingper capita income in China, where the enormous population tends to distort worldaverages. Even so, income inequality within countries is also growing. Success inreducing poverty has been limited.
The promises of more-equal income distribution and reduced poverty around theworld have failed to materialize under the current form of unregulatedglobalization. It is time for multinational institutions and other internationalpolicy makers to develop a different set of strategies and programs to providereal benefits to the poor.
