Economics moderator Gustavo
Bamberger enlivens the dismal science at eRaider’s
Theory
and Practice of Investing message
board.
What’ve you got?
I’m a bit
puzzled by the protests against Jean-Marie Le Pen that
swept across France in the last week. What is it that
the protesters were upset about, exactly? That Le Pen is
a hate-filled, xenophobic neo-Nazi? That can’t be
it—he’s been that way for years. That he received almost
17 percent of the first-round vote, indicating an
upswell of support? Le Pen garnered nearly that much of
the vote in prior presidential elections.
I
suspect that a fair number of the protesters were people
who voted for one of the Trotskyite or Green candidates
(or stayed home) and now feel like Ralph Nader
supporters in Florida who insisted that there would be
no difference between a Bush and Gore presidency. (By
the way, what is that Trotskyites are in favor of? I’ve
never been clear.) Just to take one example, a 50 year
old lawyer, quoted by The New York Times,
explained, “I did not vote in the first round because I
was in the middle of a move. If I had, I would have
voted for Jospin. But now I will vote for Chirac. I
must. You cannot avoid taking responsibility.” (Unless
you’re moving, that is.)
The more interesting
protest, though, is the Le Pen vote itself. If nothing
else, Le Pen seems to have a relatively coherent
worldview: the problems with the world today (or at
least France), he argues, are caused by globalization,
both of goods (trade) and people (immigration). As I’ve
mentioned before (in Anti-Globalization
and the New York Yankees), exactly what the
anti-globalization brigade is for remains a
mystery to me, but it seems to draw adherents from
across the political spectrum. Le Pen and his ilk bemoan
its effect on France, but the United Nations—not a
hotbed of Le Pen support—also seems to believe that
globalization is bad news (without apparent
irony).
It’s a poor world after
all?
According to the United Nation’s Human
Development Report:
National and international economic
policies shifted sharply in the 1970s and 1980s
towards more reliance on the market diminishing the
role of the state… Driven by technocrats, the changes
were supported by the IMF and the World Bank as part
of comprehensive economic reform and liberalization
packages. Conditions for membership to the WTO were
important incentives. Country after country undertook
deep unilateral liberalization, and deepened the
interactions among people. The new rules of
globalization focus on integrating global markets,
neglecting the needs of people that markets cannot
meet. The process is concentrating power and
marginalizing the poor, both countries and
people. There are two things we can probably
all agree on: (1) globalization harms some
people, because it increases competition—the less
competitive are harmed by having to compete with the
more competitive; and (2) increases in poverty are bad.
But does globalization increase the number of poor
people? According to a recent study, the answer seems to
be a clear no.
Economist Xavier Sala-i-Martin
estimates the world poverty rate using two alternate
measures of poverty: (1) income of less than $1 per day
(which is the World Bank’s official definition of
“absolute poverty”); and (2) income of less than $2 per
day. Based on the $2 a day definition, about 45 percent
of the world’s population was poor in 1970; that
percentage has declined consistently since then,
reaching about 18 percent in 1998. Using the $1 a day
definition, about 16 percent of the population was poor
in 1970. That grew to almost 20 percent in 1974, but
then declined to under 6 percent in 1998. In terms of
numbers, about 1.5 billion people were below the $2 per
day threshold in 1970, dropping to about 1 billion in
1998; about 550 million people were below the $1 a day
level in 1970 (reaching almost 700 million in 1974), but
less than 300 million people in 1998. However you
measure it, the number of poor has fallen by hundreds of
millions since 1970, when “more reliance on the market
diminishing the role of the state” became more
important.
OK, but what about
inequality?
But it isn’t just poverty that
people worry about, there’s inequality as well. Most
people agree that inequality has been increasing in many
countries, including the US. (There’s a lot less
agreement about whether that’s such a bad thing; see I
Dream of Gini.) But what about inequality in the
world? Sala-i-Martin quotes a recent study that
concludes: “The evidence strongly suggests that global
income inequality has risen in the last twenty years.
The standards of measuring this change, and the reasons
for it, are contested—but the trend is
clear.”
Sala-i-Martin disagrees. The studies that
find increases in global inequality, he points out,
treat a country as the unit of observation—for example,
these studies find that countries’ per capita GDPs have
grown less similar over time. That means that China gets
treated as one data point, just like every country. But
China has a population of about 1.2 billion people. Why
would you want to give China as much weight as Haiti,
for example, when you estimate measures of world
inequality? If nothing else, the last 15 years or so has
taught us that a “country” can be a fairly arbitrary
unit of measurement. In fact, China seems to be a clear
natural experiment—it was almost completely isolated
from the rest of the world economy in 1970, and very
poor. (Remember what a big deal it was when US ping-pong
players went to “Red China”?) Today, China is a member
of the World Trade Organization and continues to post
some of the world’s top economic growth numbers. Based
on China alone—about 20 percent of the world
population—it would be hard to argue that globalization
increases poverty.
And inequality? It does seem
to be the case that inequality in China has been
growing. But when Sala-i-Martin calculates measures of
global inequality that take into account each country’s
population, he finds that world inequality has
fallen since 1970. In effect, the increase in
Chinese (and other countries’) inequality has been
offset by China’s (and to a smaller extent, India’s)
growth, which has allowed it to start to catch up with
the industrialized world.
Does the future hold
more of the same—increasing growth and declining
inequality? Not necessarily. Sala-i-Martin points out
that since 1970 there has been almost no growth in most
of Africa. If growth continues in China and India, while
stagnation remains the rule in Africa, global inequality
will begin to rise within the next 10 years. The list of
difficulties faced by African economies is a long
one—including wars, disease and corruption—but “more
reliance on the market” shouldn’t be at the top.
References
See Suzanne Daley,
Anti-Le Pen Protests Draw a Million Into Streets in
France, New York Times, May 2, 2002. An
abstract for the Sala-i-Martin’s study, The Disturbing
‘Rise’ of Global Income Inequality , NBER Working
Paper Series, April 2002—which includes the quote from
the UN report—is free; you can download the entire paper
from that web page for $5.
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