The World's
Income Distribution Is Worsening,
Thanks to Globalization and Liberalization
By JONATHAN POWER
GENEVA Switzerland--The U.S. president, Bill Clinton and
British prime minister, Tony Blair are a source of danger
for similar reasons. They are riding high. They look good.
They smile a lot and they owe much of their success to the
remarkably prolonged era of economic expansion and renewed
sense of prosperity they preside over. And, since they
dominate the ubiquitous anglo-saxon press, they are
spreading their globalizationmessage with enormous
effect.
But they mislead us into a state-of-unaware-being. A new
United Nations report, published by its Conference on Trade
and Development (UNCTAD), makes plain the real situation.
The world economy is growing slowly. World output growth has
averaged only 2% this decade of liberalization, compared to
the near 3% of the turbulent years of the 1980s. If the
razzmatazz about globalization is put to one side and the
underlying trends more soberly analyzed we will observe that
there is also another big untold story--since the early
1980s the world economy has been characterized not just by
slow growth but by rising inequality-- and this is as true
for the U.S. and Britain as it is for most of the rest of
the world.
Despite high rates of growth in many Third World
countries only a handful of economies--those of East
Asia--have actually managed to narrow the gap with the
northern, industrialized countries. Moreover, increased
polarization between the richer and poorer countries has
been accompanied by a rising trend in income inequality
within countries. The income share of the richest 20% has
grown almost everywhere, while those in the lower ranks have
experienced no rise in incomes to speak of. (Although they
have benefitted in kind through much improved educational
and medical provisions.) Even the middle classes have
experienced little improvement.
What is most worrying is that this widening gap between
the top 20% and the rest is apparent not just in the less
promising developing countries but in the more successful
ones too. Even in east Asia, with the exception of Taiwan
and South Korea, inequality has increased.
At work is a common set of negative influences, unleashed
by over-rapid liberalization. In almost every developing
country that has undertaken rapid trade liberalization wage
inequalities have increased, just as it has in many
industrialized countries. Capital has gained. Profit shares
have risen.
Does this lop-sidedness really matter? Students of
economics have been taught for decades that the rich getting
richer is usually a prelude to rapid growth and the
trickling down of income gains to the poor. This theory
holds less water by the year. The evidence is accumulating
that concentrating national income in the hands of the few
does not lead to higher investment and faster growth.
But don't think the socialists have the answer either.
What matters is not inequality per se, but the manner in
which incomes of the rich are used. We have no rational
reason for minding about the wealth of Bill Gates, however
grand the new house is, when he is investing the greater
portion of what he earns. If the capitalists use their
fortunes mainly to invest it is indeed a form of social tax
on their profits and deserves all the approval we can
muster.
In South Korea and Taiwan, where the rich receive less
than 50% of national income, private savings and investment
are one third of Gross Domestic Product. But in many
countries it is as little as 15% and the rich absorb more
than 50% of the income pie.
The pace of financial liberalization has fed this
self-interested phenomenon. The premium that global finance
now places on liquidity and the speedy entry into and exit
from financial markets in search of quick gains has
undermined longer-term commitments to investment in newly
created productive assets. In a world of sluggish growth
that results labor shedding and wage regression are
inevitable. The slambang attack on this situation by
Malaysian prime minister Mahathir Mohamad, speaking at the
joint World Bank/IMF meeting in Hong Kong this week, was
right on the mark.
To turn this around is going to require a lot of
imagination and much political courage, particularly if
policy makers are going to avoid the temptation to regress
to socialism and the circumscribing of the role of the
markets and private property. What we need is not socialism
with a human face but capitalism with a human face.
The key is profits, harnessing the animal spirits of the
entrepreneur, to encourage high rates of saving and high
rates of investment from profits earned. Taxes and subsidies
are tools for this, together with an array of trade,
financial and competition policies. A political and social
culture that discourages luxury consumption and closes
unproductive channels of wealth accumulation are necessary
ancillary tools. The IMF should also be applying the "Tobin
tax" of 0.5% on international currency transactions,
proposed by a Nobel Prize winning economist. This would curb
excessive speculation while yielding about $1.5 trillion a
year for health and education development.
This would be the "economy of the brave." Without it we
could well see, despite the smiles and elan in Washington
and London, an awesome backlash against globalization and
liberalization, one that will be all the more ferocious
because its reach will be world-wide.
September 24,
1997, GENEVA
Copyright © 1997 By JONATHAN POWER
Note: I can be reached by phone +44 385 351172
and e-mail: JonatPower@aol.com
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