End global inequality: become a Luddite
Saturday, 10 November 2007
Clive Crook
In its new World Economic Outlook the International Monetary Fund looks at the politically freighted question of globalisation and inequality. Scanning press accounts of the document I thought for a moment there must be two such publications. The study I had read was not what others were writing about. Instead it turns out that we all read the same report, and that I do not know a story when I see one.
"IMF Fuels Critics of Globalisation," was the headline in the Wall Street Journal. "Technology and foreign investment are making income inequality worse around the world, the IMF said in a new report, handing critics of globalisation a powerful argument to use in their political battles," the article began. Subtracting a little from that powerful argument are the study's main findings. First, incomes of the poor are rising around the world, in industrial and developing countries alike. Second, liberal trade reduces inequality - again, in poor countries as well as in rich countries. Third, technology not globalisation in its own right is the principal driver of inequality. If this report helps the critics of globalisation, you have to wonder what it would take to shut them up.
If you wanted to criticise the report, you could say that separating globalisation from technological progress is questionable. Especially in developing countries, the diffusion of technology through trade and foreign investment binds innovation and globalisation together in a single process. It would have been good, too, if the report had looked at inequality across the globe viewed as a single economic unit, and not just at aggregated within-country inequalities. It is possible for inequality to be rising in every country in the world and yet for global inequality to be falling, so long as incomes in poor countries with big populations are rising faster than incomes in rich countries. So they are, thanks to India and China. Global inequality in that "one world" sense is almost certainly falling.
But taking the document at face value, the economic and ethical case for globalisation only looks stronger than before. The report does show that within-country inequality has been rising in most regions of the world, including, on average, in the developing countries. Worldwide, globalisation's total contribution to that trend is roughly zero. Much the most powerful force is technology, which worsens inequality by driving up the wages of the skilled relative to the wages of the unskilled.
The IMF splits globalisation into two components of economic openness: trade and foreign investment. Trade openness actually tends to reduce inequality and financial openness tends to increase it, the report finds. For the developing countries, the two roughly cancel out: their net effect is slightly pro-equality. For the rich countries, the balance is anti-equality: the disequalising influence of cross-border investment outweighs the equalising influence of trade. So although these numbers do provide a rationale of sorts for curbing cross-border flows of investment -- harmful as that would be for growth -- they offer no support for trade barriers. There is nothing here for the anti-trade lobby. Trade barriers inhibit growth and worsen inequality, in rich countries and in poor countries, says this report.
How is it that outward foreign direct investment can tend to worsen inequality in rich countries and inward FDI tend to worsen it in poor countries? The report's answer is that many low-skilled workers in rich countries would qualify as high-skilled workers in poor countries. So when FDI shifts the demand for labour towards developing countries, it reduces the demand for low-wage workers at home and increases the demand for high-wage Workers abroad. This tends to worsen , inequality in source and host country alike. As for the appropriate policy response, you can either try to stamp out FDI (with disastrous implications for growth in developing countries), or aim to improve education and hence reduce the supply of low-skilled workers. Tough choice.
In thinking about the effects of technological progress on inequality, the issue is the same. One can retard the process that powers growth, or encourage wider participation in the benefits by helping people to acquire's kills. Critics of globalisation need to rethink. In saying this, I want to be constructive. Let us agree that reducing inequality is the overriding goal -- more important than lifting people out of poverty (which globalisation is doing), more important than raising living standards in the aggregate (which globalisation is doing). Let us also agree that efforts to improve education are useless palliatives, not worth discussing, liberal trade, we are now forced to admit, is the wrong target. On the whole it is a leveller. On the whole, it is our friend. It is surely time to name the real enemy and face it without flinching. Instead of critics of globalisation the world needs critics of technological progress. If we can only stop or slow that, we can have more equal societies.
An impossible dream? By no means. Here are some practical first steps. Punitive taxation is a no-brainer. Include a surtax on scientists and engineers. Restrict postgraduate education to the arts, humanities and the law. In fact, make postgraduate study in those fields compulsory. And dismantle all the legal protections of intellectual property.
Ned Ludd was right. The world has put up with progress and its consequences too long. The IMF agrees. It is all there in its report.
In its new World Economic Outlook the International Monetary Fund looks at the politically freighted question of globalisation and inequality. Scanning press accounts of the document I thought for a moment there must be two such publications. The study I had read was not what others were writing about. Instead it turns out that we all read the same report, and that I do not know a story when I see one.
"IMF Fuels Critics of Globalisation," was the headline in the Wall Street Journal. "Technology and foreign investment are making income inequality worse around the world, the IMF said in a new report, handing critics of globalisation a powerful argument to use in their political battles," the article began. Subtracting a little from that powerful argument are the study's main findings. First, incomes of the poor are rising around the world, in industrial and developing countries alike. Second, liberal trade reduces inequality - again, in poor countries as well as in rich countries. Third, technology not globalisation in its own right is the principal driver of inequality. If this report helps the critics of globalisation, you have to wonder what it would take to shut them up.
If you wanted to criticise the report, you could say that separating globalisation from technological progress is questionable. Especially in developing countries, the diffusion of technology through trade and foreign investment binds innovation and globalisation together in a single process. It would have been good, too, if the report had looked at inequality across the globe viewed as a single economic unit, and not just at aggregated within-country inequalities. It is possible for inequality to be rising in every country in the world and yet for global inequality to be falling, so long as incomes in poor countries with big populations are rising faster than incomes in rich countries. So they are, thanks to India and China. Global inequality in that "one world" sense is almost certainly falling.
But taking the document at face value, the economic and ethical case for globalisation only looks stronger than before. The report does show that within-country inequality has been rising in most regions of the world, including, on average, in the developing countries. Worldwide, globalisation's total contribution to that trend is roughly zero. Much the most powerful force is technology, which worsens inequality by driving up the wages of the skilled relative to the wages of the unskilled.
The IMF splits globalisation into two components of economic openness: trade and foreign investment. Trade openness actually tends to reduce inequality and financial openness tends to increase it, the report finds. For the developing countries, the two roughly cancel out: their net effect is slightly pro-equality. For the rich countries, the balance is anti-equality: the disequalising influence of cross-border investment outweighs the equalising influence of trade. So although these numbers do provide a rationale of sorts for curbing cross-border flows of investment -- harmful as that would be for growth -- they offer no support for trade barriers. There is nothing here for the anti-trade lobby. Trade barriers inhibit growth and worsen inequality, in rich countries and in poor countries, says this report.
How is it that outward foreign direct investment can tend to worsen inequality in rich countries and inward FDI tend to worsen it in poor countries? The report's answer is that many low-skilled workers in rich countries would qualify as high-skilled workers in poor countries. So when FDI shifts the demand for labour towards developing countries, it reduces the demand for low-wage workers at home and increases the demand for high-wage Workers abroad. This tends to worsen , inequality in source and host country alike. As for the appropriate policy response, you can either try to stamp out FDI (with disastrous implications for growth in developing countries), or aim to improve education and hence reduce the supply of low-skilled workers. Tough choice.
In thinking about the effects of technological progress on inequality, the issue is the same. One can retard the process that powers growth, or encourage wider participation in the benefits by helping people to acquire's kills. Critics of globalisation need to rethink. In saying this, I want to be constructive. Let us agree that reducing inequality is the overriding goal -- more important than lifting people out of poverty (which globalisation is doing), more important than raising living standards in the aggregate (which globalisation is doing). Let us also agree that efforts to improve education are useless palliatives, not worth discussing, liberal trade, we are now forced to admit, is the wrong target. On the whole it is a leveller. On the whole, it is our friend. It is surely time to name the real enemy and face it without flinching. Instead of critics of globalisation the world needs critics of technological progress. If we can only stop or slow that, we can have more equal societies.
An impossible dream? By no means. Here are some practical first steps. Punitive taxation is a no-brainer. Include a surtax on scientists and engineers. Restrict postgraduate education to the arts, humanities and the law. In fact, make postgraduate study in those fields compulsory. And dismantle all the legal protections of intellectual property.
Ned Ludd was right. The world has put up with progress and its consequences too long. The IMF agrees. It is all there in its report.