Policies for inclusive development in a globalizing world

1. Policies for inclusive development in a globalizing world François Bourguignon Paris School of Economics Islamabad, July 2012

2. The inequality dimension of globalizeddevelopment Globalization, growth and inequality over the last 20 years: • Prior to the presentcrisis, globalizationseen as the world engine of growth and a major force for South-Northcatching-up • At the same time,inequalityisincreasingin a large number of countries (bothdeveloped and emerging/developing) and slowing down povertyreduction in emerging countries Such an evolutionraisesseveral questions…

3. The inequality dimension of globalizeddevelopment: questions • Is globalization and/or growthreally the main cause for the observedincrease in inequality? • Is thereanykind of tradeoffbetweengrowth (in a globalized world) and the degree of equality? • What are the likelyconsequences of an increase in inequality for povertyreduction and furtherdevelopment? • What scope for domesticpolicies: in fosteringgrowth? In controlinginequality?

4. Outline • Evidence on global and national inequalities • World distribution and the South-Northcatching-up • National distributions • The globalization-growth-inequalitylink • The diversity of country experiences • Globalizedgrowth: equalizing and unequalizingfactors • Country specificcircumstances • The design of domesticpolicies • Some implications for Pakistan

5. 1. Evidence on global and national inequalitiesa. World distribution and the South-Northcatching-up Source: Bourguignon (2011)

6. The South-Northcatching up

7. Povertyreduction in developing countries Source: World Bank

8. Evolution of world income distribution: summary • Trend Reversal in global inequality and South'scatching-up • Continuous drop in absolutepoverty • Main drivers of theseevolutions: • Asiangrowthitselfcloselylinked to globalization • Global imbalancesfostering US growth • Spillovers onto other countries • Crisisdid not modify the equalizing trend

9. b. The unequalizing of national income distributions • Trend reversal in post-redistribution inequality in developed countries • More diversity in emerging and developing countries • Yet, inequalitydidincrease in a majority of countries, includingamongbigAsianfast-growers

10. Generalized increase of inequality in developed countries

11. Much more diversity among developing countries …

12. Inequality changes in Latin America

13. Inequality change in selected Asian countries

14. 2. The economicrelationshipbetweenglobalization, growth and inequality • The diversity of country experiences • Contemporaneous Asian fast-growers ( China, India, Indonesia) with fast increases in inequality • Contemporaneous Asian fast-growers with no or little change in inequality (Vietnam) • Asian fast-growers of the 1970s (dragons) with no change in inequality • Asian medium growers with no big change in inequality (Pakistan) • Fast LAC growers with drop in inequality (Brazil) • Etc…

15. b) Globalizedgrowth: equalizing and unequalizingcommonfactors • Trade openness favors the relatively abundant factors (Heckscher-Ohlin) and hurts the relatively scarce factors • E.g. unskilled labor hurt in developed countries, but 'favored' in developing countries • Yet implications for inequality differ according to how markets work (e.g. labor surplus economies) • Capital as a (often hidden) big winner • Technical progress and demand/supply gap for skilled labor • "Contagion" through highly skilled labor mobility • Pressure on commodity prices • "Financiarization"

16. c) Country specificcircumstances • Elasticity of labor supply to modern sector (Kuznets U-curve) • Overall growth rate • Domestic vs. foreign market focus of development strategy • Pace and modalities of human capital accumulation • Redistribution • Geographical distribution of economic activity, population and public expenditures (infrastructure) • Others (fertility) Overall, many reasons why a common force (globalization) may have different distributional impacts!

17. 3) The design of domesticpolicies in the field of (income) distribution • Inequality slows down poverty reduction for given growth and inequality is bad for growth beyond some level • Preventing inequality to grow beyond some limit is an important objective • How to do it without slowing down, and possibly with speeding up growth? • Correct inequality increasing market distortions • Redistribute through the accumulation of productive assets (education, health care, access to credit, infrastructure, …) among the poor rather than current income • Actually, combinations of both types of redistribution are to be used (as with conditional cash transfers)

18. 4.Some implications for Pakistan • Relatively slow growth, moderate and rather stable inequality • Missing growth engine must be found in crisis-prone macro-management, limited openness, governance deficit, limited infrastructure, ... • Unclear whether the removal of any of these obstacles to growth would and really increase inequality, except maybe for openness • At the same time, broad scope for growth and equality through accumulation of human capital among the poor

19. Final remark:the case of Brazil

20. Final remark:the case of Brazil

21. Thank you