Joseph Joyce, professor of economics at Wellesley College wrote and interesting piece to day on capital liberalization and inequality.
I’m glad to see that so much attention is being fawned on Piketty’s most excellent book, “Capital in the 21sr Century.” It’s sure to go down as a classic in the economics literature, but the debate and discussion surrounding the book couldn’t come at a better time.
I don’t think it’s an accident that Piketty’s book, would top the NYT best seller list just a week after appearing, that a sitting President of the US would mention that inequality is one of the most important issues of our time, or that Christine LaGarde, head of the IMF would make a case that we need to address inequality at a global level.
They (Florence Jaumotte, Subir Lall and Chris Papageorgiou) analyzed the effect of financial globalization and trade as well as technology on income inequality in 51 countries over the period of 1981 to 2003. They reported that technology played a larger role in increasing inequality than globalization. But while trade actually reduced inequality through increased exports of agricultural goods from developing countries, foreign direct investment played a different role. Inward FDI (like technology) favored workers with relatively higher skills and education, while outward FDI reduced employment in lower skill sectors. Consequently, the authors concluded, while financial deepening has been associated with higher growth, a disproportionate share of the gains may go to those who already have higher incomes.
This is a scenario we’re all mostly familiar with, though the broad effects are still debatable. Increasing investment by giants like the US in overseas manufacturing push down wages on domestic unskilled labor, but it’s hard to say whether this had a major effect on overall employment. Unemployment remained steady even after Clinton signed NAFTA, and continues to remain well under European levels today, though the lowest level of workers feel the worst pain. I’m not sure if I can really advocate for protectionist measures to keep capital at home or dissuade foreign investment on principle alone, but it is true that the worst effect of foreign competition has been the erosion of labor’s political power.
Jayati Ghosh of Jawaharlal Nehru University of New Delhi has examined the role of capital inflows in developing countries. She maintains that the inflows appreciate the real exchange rate and encourage investment in non-tradable sectors and domestic asset markets. The resulting rise in asset prices pulls funds away from the financing of agriculture and small firms, hurting farmers and workers in traditional sectors. Eventually, the asset bubbles break, and the poor are usually those most vulnerable to the ensuing crisis.
Well, this is somewhat more interesting. Foreign investment in developing countries appreciates the exchange rate, leading domestic investors to put their money into, say, real estate assets. This is certainly the case all over Africa. Land and building developments are occurring at a breakneck pace, with the hopes that expensive properties will be bought up by foreign companies and individuals. It’s certainly the case that no common African could ever afford some of these places (or would even want to buy them if they could). Nairobi, Dar es Salaam and Luanda, Angola are all in the middle of a real estate bubble. The problem, of course, is that domestic investors are hoping to make a quick buck, rather than attempting to create long term, profitable industries. No wonder Africa imports the lion’s share of it’s manufactured goods. No local will invest in the infrastructure to create it locally since urban real estate is so absurdly profitable right now. This, of course, means that money flows directly into the pockets of the urban elite and then sent back out to bank accounts and retailers in France and England, further entrenching the poorest of the poor.
Without the development of local industries, domestic economies can’t function and opportunities for revenue collections are missed. and countries like Tanzania and Kenya, for example, will continue to be beggar economies which depend on the good graces of the international community to support domestic social programs.
Which isn’t suprising, given that’s what he does for a living. The NYT this morning had an interesting interview with Milanovic this morning, where he discussed issues of inequality both within and between countries, globalization, national policy and the simultaneous rise of a global economic elite and growing populism around the world.
The context here is that while inequality is rising in wealthy countries like the United States, on a global level, inequality in incomes and lifestyles is shrinking quickly, most due to the rise of China and India.
Inequality calculated among all individuals in the world, as if they were part of one single nation, has been edging slightly downward over the past 10 to 15 years, mostly thanks to very high growth rates in China and India. These relatively poor giants (particularly India) have pulled quite a lot of people out of poverty and into something that can be called “the global middle class.”
That is the key factor behind the decline of global inequality: The distance between their incomes and the rather stagnant incomes of the middle class in rich countries has diminished. Yet global inequality is still extremely high by the standards of any single country. It is, for example, significantly higher than inequality in South Africa, which is the most unequal country in the world.
Obviously, we still have work to do. Many African countries, due to an unfortunate poor hand of geography, internal ethnic struggles and an unforgivable failure of government still sit in the same mess they sat in around the time of independence. For these countries, the future continues to look bleak.
The contrast is between a globalized economy that largely determines our employment and income level, and political systems that remain national. This contrast was not nearly as strong before the 1980s, when national economies were not as interdependent and capital could not flow easily across the borders. Then, countries could more or less design the economic policies that suited them. Today this is no longer the case.
The danger is that these dynamics could lead to populism — a sort of a Luddite reaction against globalization — or to plutocratic rule. We can already see some hints of the latter. Rule of the rich would ensure the continuation of globalization, but it would deprive political democracy of any meaning. If I wanted to be somewhat melodramatic, I would have said that the challenge is to navigate between the Scylla of populism, which would do away with globalization, and the Charybdis of plutocracy. Our defining challenge is how to maintain both globalization and meaningful national democratic systems.
I fear the erosion of political rights of low and middle class citizens that has occurred in the context of rising inequality. I believe that I fear populism and it’s myopic focus on short term solutions to complex problems even more. A response to rising inequality in the US or Europe is not to close the borders or embark on destructive protectionist policies which benefit only a small minority of people.
My feeling is that domestic (US) inequality is best handled through re-distributional policies such as income subsidies, the provision of health care and investments in education and infrastructure. International inequality should be attacked through a combined effort to increase opportunities of movement of people to areas which present economic opportunities, through the encouragement of policies of good governance which reduce onerous and bureaucratic restrictions on economic development within developing countries, an increase in access to capital by individuals and policies which encourage the granting of true democratic rights and protection for citizens, something we don’t see a whole lot of in African countries. Looking at this, I’m realizing the solutions to inequality in in wealthy countries seem much easier to implement.
I really have no idea what to write about…… but I’ll ramble about worldwide economic inequality for a while
If I don’t do this regularly, my lackluster skills become even more lackluster.
The NYT today (is it even useful for me to talk about the NYT when people can just read it themselves?) featured an op-ed from Economist Joe Stiglitz. Stiglitz, one might remember, wrote an excellent book on the 2008 financial crash. In it, he detailed point by point all the events that led to the worst economic crisis the US had seen since the Depression. “Freefall” is like “Inside Job” for people who read books.
Stiglitz has long been concerned about the growing divide between rich and poor in the US, so much so, that he wrote another great book “The Price of Inequality.,” mostly focusing on domestic issues. Policies which encourage loose markets disproportionately favor the wealthy, creating economic imbalances which marginalize the poor even further. While free market advocates claim that loosening markets liberates the citizenry from government, in fact, by freeing markets, politics shape the market itself, to the advantage of those who hold power. The market, then, becomes as tyrannical as all of those bed time baddies American right wingers keep warning us about. It’s worth noting that in the US, we allowed investment bankers to write banking policy for much of the run up to the crash.
We know that inequality is on the rise in the United States, but Stiglitz argues that America, as a global financial powerhouse, has encouraged a worldwide trend toward financial loosening, exacerbating economic disparities in other countries as well.
…widening income and wealth inequality in America is part of a trend seen across the Western world. A 2011 study by the Organization for Economic Cooperation and Development found that income inequality first started to rise in the late ’70s and early ’80s in America and Britain (and also in Israel). The trend became more widespread starting in the late ’80s. Within the last decade, income inequality grew even in traditionally egalitarian countries like Germany, Sweden and Denmark. With a few exceptions — France, Japan, Spain — the top 10 percent of earners in most advanced economies raced ahead, while the bottom 10 percent fell further behind.
I took issue with his listing Japan as an exception. Though Japan’s widening divide between rich and poor may not be as dramatic as in the US, Japanese people on the bottom rungs have watched their incomes fall over time. A slow down of the economy and the deflation era has disproportionately impacted low wage earners there.
Excessive financialization — which helps explain Britain’s dubious status as the second-most-unequal country, after the United States, among the world’s most advanced economies — also helps explain the soaring inequality. In many countries, weak corporate governance and eroding social cohesion have led to increasing gaps between the pay of chief executives and that of ordinary workers — not yet approaching the 500-to-1 level for America’s biggest companies (as estimated by the International Labor Organization) but still greater than pre-recession levels. (Japan, which has curbed executive pay, is a notable exception.) American innovations in rent-seeking — enriching oneself not by making the size of the economic pie bigger but by manipulating the system to seize a larger slice — have gone global.
He is entirely correct here. Just about every facet of life has been morphed into a commodifiable good worthy of investment and trade on financial markets. This has long impacted agricultural products and created a trend of increasing prices and violent price swings that do little to raise the lives of the international poor.
African countries, lacking the stabilizing effect of steady manufacturing sectors like those in Asia, depend almost entirely on the resource market. Though they experience significant growth when worldwide prices go up (as has been the case for the past decade), a sudden drop in the price of commodities can quickly wipe out last year’s gains. This is similar to the situation of very poor households in the US. One might have plenty of work this week, but be fired the next. Planning for the future is impossible one isn’t sure whether one will have the cash to eat next week.
I’d like to see a comparison of worldwide trends of inequality. Though it is true that African economies were left in the dust until the early 2000’s, and the continent is in a period of excellent growth at the moment, I’m wondering whether the pace of growth is slower than what it would be without loose international commodity markets and financialization.
Of course, one might also argue the the loosening of markets around 2000 is what caused the current trend in growth.
OK, I wrote something. Thanks.