TFF logoFORUMS Power Columns

The World's Income Distribution Is Worsening,
Thanks to Globalization and Liberalization



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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