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Global Economic Inequality and International Trade

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Global Economic Inequality and International Trade EMPLOYMENT PAPER 2001/12 Global economic inequality and international trade Ajit K. Ghose Senior Economist Employment Strategy Department Employment Sector International Labour Office Geneva Copyright © International Labour Organization 2001 ISBN 92-2-112460-6 Publications of the International Labour Office enjoy copyright under Protocol 2 of the Universal Copyright Convention. Nevertheless, short excerpts from them may be reproduced without authorization, on condition that the source is indicated. For rights or reproduction, or translation, application should be made to the ILO Publications Bureau (Rights and Permissions), International Labour Office, CH-1211 Geneva 22, Switzerland. The International Labour Office welcomes such applications. Libraries, institutions and other users registered in the United Kingdom with the Copyright Licensing Agency, 90 Tottenham Court road, London W1P 9HE (Fax:+44 171 436 3986), in the United States with the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923 (Fax:+ 1 508 750 4470), or in other countries with associated Reproduction Rights Organizations, may make photocopies in accordance with the licences issued to them for this purpose. The designations employed in ILO publications, which are in conformity with United Nations practice, and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the International Labour Office concerning the legal status of any country, area or territory or of its authorities, or concerning the delimitation of its frontiers. The responsibility for opinions expressed in signed articles, studies and other contributions rests solely with their authors, and publication does not constitute an endorsement by the International Labour Office of the opinions expressed in them. Reference to names of firms and commercial products and processes does not imply their endorsement by the International Labour Office, and any failure to mention a particular firm, commercial product or process is not a sign of disapproval. ILO publications can be obtained through major booksellers or ILO local offices in many countries, or direct from ILO Publications, International Labour Office, CH-1211 Geneva 22, Switzerland. Catalogues or lists of new publications are available free of charge from the above address. Foreword This paper is an output of the work on “global economic integration and employment policy” being carried out by the Employment Strategy Department. It focusses on the recent trends in global economic inequality and on the nature of linkage between these trends and the recent developments in the area of international trade. These are subjects of considerable current interest for international organisations, national policy makers, the academic community and the civil society organisations. The main findings of the paper are as follows. Since the beginning of the eighties, inter- country income inequality has certainly been increasing but international income inequality (population-weighted inter-country income inequality) has actually been declining. Moreover, while the rising inter-country inequality represents a continuation of a long-term trend, the declining international inequality represents a break from the long-term trend. The reason for the diverging trends in the two types of inequality is that although only a small number of low- income countries achieved substantially higher growth of per capita income than high-income industrialised countries, these low-income countries account for a majority of the population of the developing world. The effect of trade liberalisation on the two types of inequality was rather complex. The evidence shows that growth of trade orientation had a positive impact on economic growth, and that the impact was larger for more populous countries. But trade liberalisation did not always increase trade orientation. Many low-income countries actually experienced a decline in trade orientation in the wake of trade liberalisation; economic growth in these countries was adversely affected. Thus trade liberalisation contributed to the growth of inter-country inequality. But because it helped increase the trade orientation of some populous low-income countries, trade liberalisation also had the effect of reducing international inequality. Rashid Amjad Officer-in-Charge Employment Strategy Department Contents Page Foreword 1. Introduction ............................................................... 1 2. Global economic inequality: an analysis of recent trends ........................... 2 Some preliminaries ......................................................... 2 Recent trends in global inequality ............................................. 6 3. Trade and global inequality ................................................. 11 The issues ............................................................... 11 The evidence ............................................................. 13 4. Conclusions .............................................................. 20 Appendix Table 1: List of 96 countries included in the sample ........................ 23 Appendix Table 2: Basic data .................................................. 24 Appendix Table 3: Indices of global inequality .................................... 28 Appendix Table 4: Indices of global inequality, trend equations ....................... 29 Appendix Table 5: List of 37 countries in the ‘convergence club’ ...................... 30 References: ..................................................................... 31 GLOBAL ECONOMIC INEQUALITY AND INTERNATIONAL TRADE Ajit K. Ghose* 1. Introduction Global economic inequality has for long been a subject of much interest to economists. Of late, however, it has also become a subject of much popular interest. Underlying this interest is a perception that income inequality among nations and people of the world has been growing, at least over the last two decades. The perception derives from some well-known facts. It is widely recognised, for example, that the gap in per capita income between the richest and the poorest countries increased substantially over the past two decades. In fact, there is evidence to suggest that, in general, the growth of per capita income has tended to be slower in the poorer countries. Some recent studies have also indicated a tendency for income inequality to grow in a number of countries. Thus there certainly are reasons to wonder if income distribution may have been worsening not only among nations but also among the world’s population. Recently, moreover, the alleged growth of income inequality has been linked to globalization. The current popular opposition to globalization stems in large part from a widely shared belief that globalization hurts the poor and benefits the rich. Yet a review of the relevant literature shows that the empirical evidence, available so far, does not unambiguously indicate growth of global economic inequality. There is little doubt that the gap between the richest and poorest countries in terms of per capita income has been widening, but this does not necessarily imply a deterioration in income distribution among nations or the world population. On the other hand, there is in fact no consensus among researchers as yet that income distribution has worsened in a significant number of countries in recent years. In any case, no straightforward conclusion about the trend in world income distribution can actually be deduced from observed trends in income distribution in individual countries. There exist a few empirical studies which attempt to construct sophisticated indices of global economic inequality, but these do not produce unambiguous evidence of its growth. In short, the empirical evidence on trends in global economic inequality, available so far, remains inadequate and inconclusive. The issue of a possible linkage between global economic inequality and trade performance or openness of economies also remains controversial in the economic literature. In this case, standard economic theory does predict that growth of world trade would lead to a reduction of income disparities across the trading nations. It also predicts that, under certain circumstances, income distribution would worsen in richer nations but would improve in poorer nations. But these predictions, apart from being based on some dubious assumptions, do not tell us much about what happens to global economic inequality. In the first place, there is no reason to suppose that all nations must emerge as successful trading nations when world trade expands. We know, for example, that during an earlier period of globalization, only a small number of nations of Europe and the “new world” emerged as important trading nations.1 We also know that while these nations showed remarkable convergence among themselves, the income-gap between them * Employment Strategy Department. The author gratefully acknowledges the invaluable assistance provided by Makiko Matsumoto, particularly in carrying out the statistical exercises. Thanks are due to Peter Richards and David Kucera for helpful comments. The author alone is responsible for the views expressed. 1 The “new world” consisted of countries often referred to as European “outposts” - the USA, Canada, Australia, New Zealand and Argentina. 2 and the rest of the world widened very sharply. Secondly, economic theory only tells us that when trade expands, income distribution improves in some countries and worsens
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