HoustonChronicle.com -- http://www.HoustonChronicle.com | Section: Business

Aug. 17, 2002, 6:35PM

'A new world middle class' is rising

Economist says globalization critics using misleading numbers

New York Times

To critics of economic liberalization and international trade, it is an article of faith that the rich are getting richer and the poor, poorer.

Antiglobalization activists are not just making up this idea. They have taken it from seemingly authoritative sources, notably the 1999 United Nations Human Development Report.

That widely cited report stated: "Gaps in income between the poorest and richest countries have continued to widen. In 1960, the 20 percent of the world's people in the richest countries had 30 times the income of the poorest 20 percent -- in 1997, 74 times as much." It added that "gaps are widening both between and within countries."

Fortunately, this scary portrait is highly misleading.

"When I started looking at the numbers, I saw a lot of mistakes," says Xavier Sala-i-Martin, an economist at Columbia University. Some were departures from standard economic procedures, like not correcting for price levels from country to country.

"Some agencies didn't adjust for the fact that Ethiopia is cheaper than the U.S.," he said. "Some of them were hiding numbers that we know exist." For instance, the report included data from only 19 of the 29 industrialized countries then in the Organization for Economic Cooperation and Development.

But the biggest problem was not so technical. It was hidden in plain sight. The U.N. report and others looked at gaps in income of the richest and poorest countries -- not rich and poor individuals.

That means the formerly poor citizens of giant countries could become a lot richer and still barely show up in the data.

"Treating countries like China and Grenada as two data points with equal weight does not seem reasonable because there are about 12,000 Chinese citizens for each person living in Grenada," writes Sala-i-Martin in a report, The World Distribution of Income (Estimated from Individual Country Distributions). That is one of two related working papers for the National Bureau of Economic Research.

Counting by countries misses the biggest economic advance in history, distorting the record of the "globalization period."

Over the past three decades, and especially since the 1980s, the world's two largest countries, China and India, have raced ahead economically. So have other Asian countries with relatively large populations.

The result is that 2.5 billion people have seen their standards of living rise toward those of the billion people in the already developed countries -- decreasing global poverty and increasing global equality. From the point of view of individuals, economic liberalization has been a huge success.

"You have to look at people," says Sala-i-Martin. "Because if you look at countries, we do have lots and lots of little countries that are doing very poorly, namely Africa -- 35 African countries." But all of Africa has only about half as many people as China.

In a report, The Disturbing `Rise' of Global Income Inequality, he estimates the worldwide distribution of income by individuals rather than countries. The results are striking. It is easy to forget just how widespread extreme poverty was only a few decades ago.

In 1970, the global income distribution peaked at about $1,000 in today's dollars, a common measure of poverty ($2 a day in 1985 dollars). In 1998, by contrast, the largest number of people earned about $8,000 -- a standard of living equivalent to that of Portugal.

"That's what I call a new world middle class," says Sala-i-Martin. It is mostly made up of the top 40 percent of Chinese and Indians, and the effect of their rise is big.

What about the charge that income gaps are widening within these rapidly advancing countries? With a few exceptions, it is true, but still misleading.

The rich did get richer faster than the poor. But for the most part, the poor did not get poorer. They got richer, too. In exchange for dramatically rising living standards, a little more internal inequality is not such a bad thing, writes Sala-i-Martin.

There is, however, one large country where the poor really are getting poorer while the rich grow richer: Nigeria, the most populous country in Africa.

While most Nigerians were falling further into destitution, the political and economic elite grew richer. The problem is not too much liberalization but too little, a politicized economy with widespread corruption.

Nigeria is typical of its continent, which is growing ever poorer. Fully 95 percent of the world's "one-dollar poor" live in Africa, and in many countries they make up the vast majority of the population. That poverty, not the rising wealth of Asian countries, is the global economy's real problem.

"The welfare implications of finding how to turn around the growth performance of Africa are so staggering," he writes, "that this has probably become the most important question in economics."

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