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Poverty & Inequality

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Global Inequality: Beyond the Bottom Billion
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The latest data shows that rising inequality between and within countries is responsible for worrying dysfunctions across societies, from health and social problems to political instability. It’s time to place equity at the centre of development efforts, says a report by UNICEF.

Link to UNICEF working paper: Global Inequality - Beyond the Bottom Billion

Widening Gap - Jayati Ghosh, Frontline

5th May 2011


Widening Gap

May 2011 - Jayati Ghosh, Frontline

This was supposed to be the period of economic convergence. Global interconnectedness and the reduction of the impact of distance in physical terms was supposed to lead to the reduction of economic distance as well, creating much greater convergence in per capita incomes. And the catching up was supposed to extend beyond cross-country patterns to reduce divergences within countries as well. The often-repeated idea was that trade and investment openness would create new employment opportunities and make the poor (especially in the developing regions) better off.

But, despite the much-heralded success of the Chinese economy in terms of rapid growth, global (or inter-country) convergence is not really all that evident for the vast majority of countries in the world. And within-country inequality has mostly increased rather than decreased except in a few countries where there has been active state intervention directed at reducing poverty. The result is that the world is more unequal possibly than ever before, with social and political implications that are becoming evident as in the growing unrest in the developing world.

A new research report from the United Nations Children's Fund (UNICEF) brings out, with almost frightening clarity, the most recent trends in inequality, which must come as a surprise even to those who were cynical about the positive claims of corporate-driven globalisation (Isabel Ortiz and Matthew Cummins; “Global Inequality: Beyond the Bottom Billion – A Rapid Review of Income Distribution in 141 Countries”; UNICEF Social and Economic Policy Working Paper, April 2011).

Most comparisons of income across countries tend to use purchasing power parity (PPP) exchange rates, which adjust for some estimate of prices of a common basket of goods in different countries. This is argued to be necessary because of the widely observed reality that currencies command different purchasing power in different countries than is suggested by the nominal rates. This is because of the well-known fact that exchange rate comparisons of less-developed economies consistently undervalue the non-traded goods sector, especially labour-intensive and relatively cheap services, and therefore underestimate real incomes. In some cases this underestimation of real incomes can be quite significant. As of 2007, the top 20 per cent of the world controlled about 70 per cent of total income compared with just 2 per cent for the bottom 20 per cent. In terms of change over time, the poorest 40 per cent of the global population increased its share of total income by a paltry 1.7 per cent between 1990 and 2007.

However, there are some serious problems with using PPP exchange rates in inter-country comparisons of income. One significant problem is choosing comparable baskets of goods. The poor quality of the data on actual prices prevailing in the different countries (including large developing countries such as China and India) used in such studies affects the reliability of such calculations.

The most recent revision of the Penn World Tables, based on new information on prices in some important countries, shows how dramatically PPP estimates can change with more accurate data. For example, the 2005 PPP-adjusted per capita income for China in dollar terms shows a 20 per cent decline compared with the 2000 estimate. This is because the new PPP for China is estimated to be around half the nominal rate, whereas the previous estimate (dating from 1993) had suggested it was only around one-fourth the nominal rate. This downward revision of per capita income in China also adds significantly to the estimate of poverty using the standard dollar per day definition, more than doubling the estimated number of poor people in China.

There is also the problem that the PPP estimates refer to a relatively unchanging basket based on the United States' consumption norms, which are usually inappropriate to developing countries. This may understate the true cost of necessities for the poor because the basket tends to include a range of non-necessities found in the “average” consumption of a rich country such as the U.S.

There is a less talked about but possibly even more significant conceptual problem with using PPP estimates. In general, countries that have a high PPP, that is, where the actual purchasing power of the currency is deemed to be much higher than the nominal value, are typically low-income countries with low average wages. It is precisely because a significant section of the workforce receives a very low remuneration that goods and services are available more cheaply than in countries where the majority of workers receive higher wages.

Therefore, using PPP-modified gross domestic product data may miss the point, by seeing as an advantage the very feature that reflects the greater poverty of the majority of wage earners in an economy. In other words, a country's exchange rate tends to be “low” or the disparity between the nominal value of the currency and its “purchasing power” tends to be greater because the wages of most workers are low. So it is particularly inappropriate to use this yardstick to measure incomes across countries.

When nominal exchange rates are used, it turns out that global inequality is even more intense than is generally supposed. As the authors of the report point out, the data “reveal an incredibly unequal planet. As of 2007, the wealthiest 20 per cent of mankind enjoyed nearly 83 per cent of total global income compared to the poorest 20 per cent, which had exactly a single percentage point under the global accounting model. Perhaps more shocking, the poorest 40 per cent of the global population increased its share of total income by less than 1 per cent between 1990 and 2007.”

At this rate of progress, it will take more than 800 years for the bottom billion to achieve even as little as 10 per cent of global income. There are many reasons for this trend towards dramatically increased inequality. Perhaps foremost among them is that the nature of recent corporate-driven globalisation, in particular the role of finance, has not just changed relations between countries and forced a “race to the bottom” for workers everywhere; it has also changed political equations within countries. Economic inequalities keep increasing because those in power want it that way, and that is so because the wealthy have an inordinate and growing power even in democracies, which should depend on wider public legitimacy.

This results substantially from the fact that progressive forces have become hostage to the caprices of international capital. Cross-border capital flows swiftly punish most policy attempts at redistributive change within countries, even to the point of creating financial crises that then require large bailouts with taxpayers' money, further intensifying inequalities. This makes would-be progressive governments much more cautious in implementing policies that would reduce inequality or at least prevent it from increasing.

Even in the few countries where inequality has decreased slightly in the recent past – such as in Latin America – governments have been able to achieve these minor victories (which still leave these economies in the list of the most unequal in the world) by entering into a devil's pact with finance. In return for the limited ability to raise minimum wages and provide some social protection measures in the form of cash transfers to the poor, these countries have had to offer finance many policy sops and sweeteners in the form of protected profits, which are akin to the “protection money” extracted from small businesses by the Mafia.

This increasing inequality at the global level, as well as within nations, is more than just disturbing and wrong from an ethical standpoint. It is also, as the authors of this study point out, deeply dysfunctional. They argue that inequality results in slower and less sustainable economic growth, creates health concerns and other social problems, generates political tensions and instability, and has cross-generational effects on social inequalities because of the adverse impact on poor children.

We have been through – and seem to be continuing in – a rather extraordinary phase of global history, in which winners keep taking all even as they destroy the system that feeds them at so much cost to itself. It is becoming increasingly obvious in many countries that such a system has political limits that are rapidly being reached as no social contract will tolerate such blatant economic injustice indefinitely. These changes within national boundaries cannot but have their effects on the global scene as well. For better or worse, the global economic system is in for significant change in the near future.

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