Growth, Inequality, and Poverty

1. Growth, Inequality, and Poverty IPE – Week 14

2. Lecture Plan • Introduction: Globalization and Public Policy • World Income Distribution • Growth and Geographical Distribution • Poverty • Inequality • Globalization • Does Inequality Matter? • Conclusion

3. Introduction (1) • Globalization and Public Policy • Neo-liberal approach to public policy—based on idea that the market is the best mechanism for resolving societal problems—became prominent in the early 1980s • Neo-liberalism is associated with the idea that globalization has caused a worldwide convergence of incomes, reduced poverty and greater equality • Economists have oversold the idea the virtues of market liberalization & underemphasized the challenges of economic development

4. Introduction (2) • There is wide consensus on 4 observations: • Average living conditions have improved more in the last 50 years than in the previous 50 in most of the world • The number of people living in extreme poverty fell on a scale in China between 1981 and 2005 • Expansion of capitalism has been accompanied by a rise in inequality between countries • Income distribution has become more unequal within countries since the 1980s

5. Introduction (3) • New-liberalism • Also known as “neo-liberalism” or “Washington Consensus” • Based on ideas formulated by Adam Smith • Prosperity is a function of the expansion of the size of the market • Underpins the modern process of “globalization” • Market liberalization, and globalization, have been placed at the centre of economic policy agendas

7. Neo-Liberalism An approach to economics and social studies in which control of economic factors is shifted from the public sector to the private sector. Suggests that governments reduce deficit spending, limit subsidies, ‘reform’ tax law, remove fixed exchange rates, open up markets to trade by limiting protectionism, privatize state-run businesses, allow private property and back deregulation. (http://www.investopedia.com/ )

10. Globalization (1) • Empirical evidence does not support the argument that globalization has been driving falls in poverty and inequality • Globalization is understood as liberalizing policy shifts and/or rising trade and investment integration into the world economy • Empirical results are distortedby • the way globalization is measured • assumptions made about causality

11. Globalization (2) • Why does the globalization discourse have so much appeal? • The business community in the West that benefits from “open” economies supports its continued promotion • Supportsstudies • Fund political parties • Drives and influences the nature of policy discourse

14. World Income Distribution (1) “Twin peaks” • 70% of world’s population GDP per capita below PPP$7,500 • 14% of world’s population GDP per capita above PPP$26,000

17. World Income Distribution (2) • China’s Share of Global GDP increased rapidly but that of India grew more slowly while South Africa’s declined in the period 1980-2010

18. Growth & Geographical Distribution • Growth rate of world GDP per capita has declined • Large variations between regions • Stagnation in income levels in sub-Saharan Africa, Latin America, former Soviet-republics • Western Europe and North America grew faster than other regions • China and India have grown very fast from a very low base • Average income in the South is only about 15% of that of the North in PPP terms

19. Inequality (1) • The choice of several different plausible measures and samples can affect the conclusion we make about the trend of world income distribution • 3 core measures of inequality • Concept 1: average incomes between countries (unweighted) • Concept 2: average incomes between countries (weighted by population) • Concept 3: global income distribution

21. Inequality (2)

22. Inequality (3) • Key observations • Falling income inequality between countries a function of China’s fast growth since 1980s, nota generalized tendency of the world system • Unweighted between-country income distribution (Concept 1) has been widening • Inequality within China and India has increased substantially in recent decades • Inequality within all English-speaking industrialized economies has increased substantially by most measures

24. Inequality (4) • Factors that affect measurement/observation • How income figures are converted into a common number(market exchange rate or PPP) • The source of conversion factors • Sample of countries employed in calculations • The time period of measurement • Choice of statistic for calculation

26. Poverty (1) • Global poverty can be measured by summing the total number of people living below a standard international poverty line • Main source of data is the World Bank • There has been substantial reduction (about 25%) in the number of people living in extreme poverty between 1981 and 2005 • Many people still live on between PPP$1.25 and PPP$2.50 a day (3.1 billion or 32% of population of developing world in 2005)

28. Poverty (2) • “Health Warnings” of using World Bank data on poverty numbers • Large margin of error • Headcount is very sensitive to: • the precise level of the international poverty lines • the reliability of household surveys of income and expenditure • Surveys for China and India, accounting for over a third of world’s population, are not very reliable • Undercounting of agricultural, informal and black market activities

29. Poverty (3) • “Health Warnings” (cont.) • Downward bias • World Bank’s International Extreme Poverty Line underestimates the income or expenditure needed by individuals/household • Cost of living for an “average” consumption vs. costs of living to buy enough caloriesand other necessities vs. cost of living to enjoy a certain life expectancy • Statistical illusion due to changes in average consumption patterns as average incomes rise • The underestimation in World Bank data of the number of people living in poverty could be upwards of 25%

31. Inequality (1) • In China and India, economic growth has been accompanied by substantial increase in income inequality • Has led to a decline in social trust and a rise in crime and political conflict • In US and UK, substantial increase in income inequality in last 25 years • Taxation policies • Increasing cost of education & decline in social mobility

34. Inequality (2) • The case of Scandinavia suggests that a relatively equal income distribution is compatible with • relatively high economic growth • high labour productivity • entrepreneurial incentives

35. Inequality (3) • The case of Japan demonstrates that the turn towards new-liberal economics has contributed towards undermining: • a system of welfare-oriented capitalism • relatively equal distribution of income and wealth • good public services • good education • health services for the poor

36. Explaining the Globalization Consensus • Who Gains? Principal beneficiaries become key advocates: business community dominates public debate • Finances political parties • Controls substantial sections of the media

44. Conclusion • We need to question the argument that globalization and new-liberal policies will lead to better economic outcomes for all • We need to more closely scrutinize the evidence/statistics that are produced (how are they constructed? what are the underlying assumptions?) • Economics profession needs to give more consideration to ethical principles