China and Wal-Mart: the true champions of equality
Christian Broda | Saturday, 14 June 2008
THE US presidential campaign has sometimes sounded like a contest to prove who despises trade the most. Media reports of job losses to China and the destructive effect of Wal-Mart on local businesses are ubiquitous. In recent weeks, Lawrence Summers and Martin Wolf have in the Financial Times both highlighted the dangers of having highincome countries turn against globalisation. This public debate has taken for granted that inequality in these countries has risen as a result of globalisation.
But has it really? In a recent paper*, co-authored with John Romalis from the University of Chicago, I argue that it has not. The reason is simple. How rich you are depends on two things: how much money you have, and how much the goods you buy cost. If your income doubles but the prices of the goods you consume also doubles, you are no better off. Unfortunately the conventional wisdom on US inequality is based on official measures that look only at the first half, the income differential. National statistics ignore the fact that inflation affects people in different income groups unevenly because the rich and poor consume different baskets of goods.
Inflation differentials between the rich and poor dramatically change our view of the evolution of inequality in the US. Inflation of the richest 10 per cent of US households has been 6.0 percentage points higher than that of the poorest 10 per cent in the period 1994-2005. This means that real inequality in the US, if measured correctly, has been roughly unchanged.
The reason is just as dramatic as the result. Why has inflation for the poor been lower than that for the rich? In large part it is because of China and Wal-Mart.
Poor families in America spend a larger share of their income on goods whose prices are directly affected by trade - such as clothing and food - than wealthier families. By contrast, the higher a person's income, the more they spend on services, which are less subject to competition from abroad. Since 1994 the price of goods in the US has risen much less than the price of services - and, yes, this includes the recent surge in food prices. Focusing on the past few quarters of high relative food prices misses the fact that the main trend we have observed for decades is exactly the opposite.
This trend can partly be explained by China. Prices of consumer goods in US stores have fallen most heavily in sectors where the Chinese presence has increased most. In canned seafood or cotton shirts, for example, where China's exports to the rest of the world have increased dramatically this decade, inflation has been negative. In sectors where there is no Chinese presence, inflation has been more than 20 per cent. Moreover, as China produces goods of relatively low quality, sectors that have a strong Chinese presence are disproportionately consumed by the poor.
The expansion of superstores - such as Wal-Mart and Target - has also played an important role in accounting for the inflation differentials between rich and poor. Superstores sell the same products as traditional shops but at much lower prices. Today the poor buy roughly twice as much of their non-durable goods in these stores as the rich do. Poor consumers have therefore been the biggest beneficiaries of Wal-Mart's coming to a town.
What is really worrying is that, in spite of these facts, we have had a backlash against China and Wal-Mart in the US. Trade sceptics who suggest that there is no point in buying cheaper goods if you have lost your job should check America's unemployment rate again. It is about 5.0 per cent, close to its record low.
We need to remind politicians and the public that the gains from trade are broadly shared. Every time the discussion of trade is diverted towards problems facing specific producers - from farmers in France to textile workers in the US - the central point is missed. Trading allows everyone, and especially the poor, to buy things that they could not otherwise afford.
Without better public understanding of these facts governments will not only keep supporting policies that are aimed against China and Wal-Mart but may receive the uninformed support of many consumers who are benefiting from trade.
* Inequality and Prices: Does China benefit the Poor in America? (mimeograph) University of Chicago, Christian Broda and John Romalis
(The writer is associate professor of economics at the University of Chicago, Graduate School of Business.)
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Under syndication arrangement with FE
But has it really? In a recent paper*, co-authored with John Romalis from the University of Chicago, I argue that it has not. The reason is simple. How rich you are depends on two things: how much money you have, and how much the goods you buy cost. If your income doubles but the prices of the goods you consume also doubles, you are no better off. Unfortunately the conventional wisdom on US inequality is based on official measures that look only at the first half, the income differential. National statistics ignore the fact that inflation affects people in different income groups unevenly because the rich and poor consume different baskets of goods.
Inflation differentials between the rich and poor dramatically change our view of the evolution of inequality in the US. Inflation of the richest 10 per cent of US households has been 6.0 percentage points higher than that of the poorest 10 per cent in the period 1994-2005. This means that real inequality in the US, if measured correctly, has been roughly unchanged.
The reason is just as dramatic as the result. Why has inflation for the poor been lower than that for the rich? In large part it is because of China and Wal-Mart.
Poor families in America spend a larger share of their income on goods whose prices are directly affected by trade - such as clothing and food - than wealthier families. By contrast, the higher a person's income, the more they spend on services, which are less subject to competition from abroad. Since 1994 the price of goods in the US has risen much less than the price of services - and, yes, this includes the recent surge in food prices. Focusing on the past few quarters of high relative food prices misses the fact that the main trend we have observed for decades is exactly the opposite.
This trend can partly be explained by China. Prices of consumer goods in US stores have fallen most heavily in sectors where the Chinese presence has increased most. In canned seafood or cotton shirts, for example, where China's exports to the rest of the world have increased dramatically this decade, inflation has been negative. In sectors where there is no Chinese presence, inflation has been more than 20 per cent. Moreover, as China produces goods of relatively low quality, sectors that have a strong Chinese presence are disproportionately consumed by the poor.
The expansion of superstores - such as Wal-Mart and Target - has also played an important role in accounting for the inflation differentials between rich and poor. Superstores sell the same products as traditional shops but at much lower prices. Today the poor buy roughly twice as much of their non-durable goods in these stores as the rich do. Poor consumers have therefore been the biggest beneficiaries of Wal-Mart's coming to a town.
What is really worrying is that, in spite of these facts, we have had a backlash against China and Wal-Mart in the US. Trade sceptics who suggest that there is no point in buying cheaper goods if you have lost your job should check America's unemployment rate again. It is about 5.0 per cent, close to its record low.
We need to remind politicians and the public that the gains from trade are broadly shared. Every time the discussion of trade is diverted towards problems facing specific producers - from farmers in France to textile workers in the US - the central point is missed. Trading allows everyone, and especially the poor, to buy things that they could not otherwise afford.
Without better public understanding of these facts governments will not only keep supporting policies that are aimed against China and Wal-Mart but may receive the uninformed support of many consumers who are benefiting from trade.
* Inequality and Prices: Does China benefit the Poor in America? (mimeograph) University of Chicago, Christian Broda and John Romalis
(The writer is associate professor of economics at the University of Chicago, Graduate School of Business.)
.............................
Under syndication arrangement with FE