Copyright 2003 Globe Newspaper Company
The Boston Globe
January 5, 2003, Sunday ,THIRD EDITION
SECTION: IDEAS; Pg. D1
By Laura Secor, Globe Staff
Professor Dani Rodrik is Rafiq Hariri Professor of International Political Economy at the JFK School of Government and a Faculty Associate at the CID.
Mind the gap the debate over global inequality heats up
WHEN TRADE BARRIERS BEGAN to fall in the late 1970s, politicians and pundits boasted that economic globalization would usher in a capitalist utopia: The circle of prosperity would widen, allowing poor countries at last to catch up with rich ones. But ever since the Seattle World Trade Organization summit of 1999, a growing anti-globalization movement has contended just the opposite: The world's rich and poor are more unequal than ever, and neoliberal free trade policies are to blame. Which is the real story?
It sounds like a simple question - one an economist could briskly answer. But if you want a brisk answer, don't ask an economist. Specialists fiercely debate nearly every aspect of global inequality. Is it rising or falling? How should inequality be measured? And what, if anything, do free trade and globalization have to do with it? Writing in The New York Review of Books last August, Harvard economist Benjamin Friedman cited a study claiming that global inequality was falling. In Foreign Affairs last February, World Bank economists David Dollar and Aart Kraay observed a similar trend toward greater equality and tied it to the success of globalization. Both articles met with a flurry of controversy in the letters pages. How can economists assess the impact of globalization if they can't even agree on the last three decades' basic trends? The nub of the statistical dispute, which has become surprisingly fierce, has less to do with numbers than definitions. There are at least three plausible ways to define global inequality. The first way compares average income or Gross National Product per capita across countries. By that measure, economists agree that the gap between rich and poor countries has been steadily widening since the late 1970s. Rich countries like the United States have grown richer, while poor ones like Malawi have mostly stagnated or become poorer.
But some economists contend that this observation isn't particularly meaningful. It takes countries as its unit of analysis, rather than people-and as a result, the 1.28 billion citizens of China count for no more than do the 448,569 citizens of Luxembourg. When economists weight each country's average income by population, they find that global inequality is in fact decreasing.
Why? Because China and India, which between them house about 38 percent of the world's population, have experienced dramatic economic growth. "Whether global inequality will rise or fall depends by and large on what happens to average incomes in the big poor countries like China and India," says Dani Rodrik, an economist at the John F. Kennedy School of Government.
And yet this finding hardly settles the argument. While China's economic growth may have reduced inequality worldwide, economists agree that inequality within China has actually increased. "Clearly China is getting richer compared to the rest of the world, and many people in China are getting richer," says World Bank economist Branko Milanovic. "But within China there are also widening disparities."
Milanovic concludes that measuring global inequality by comparing the average incomes of different countries-even weighted by population-is deeply inadequate, in that it presumes that all of a nation's citizens earn the same income. Saudi Arabia and Slovenia, for instance, rank closely in GNP per capita, but Slovenia has one of the world's most equal income distributions, and Saudi Arabia one of the world's most unequal. Milanovic hopes that if we account for income distribution within countries as well between them, we can then measure the extent of inequality among individuals rather than countries. Essentially, this would be like lining up all the people of the world from richest to poorest, regardless of nationality, and then assessing changes in income distribution overall.
Can this be done? Two of the economists who have attempted it, Milanovic and Columbia University's Xavier Sala-i-Martin, have arrived at sharply conflicting results. According to Sala-i-Martin, who wrote the paper Friedman cited in The New York Review of Books, inequality across the world's individuals is declining. According to Milanovic, it has either remained steady or risen slightly. The dispute between Milanovic and Sala-i-Martin has grown so heated that a personal email exchange between them, rife with insult and umbrage, has been making the rounds among colleagues. (In it, Sala-i-Martin suggests that he will tell Milanovic's superiors that he has behaved unprofessionally. "When arguments are scarce, one uses threats," Milanovic replies.
The devil here is in the data, and the data on income distribution within countries are frustratingly thin. Actual household income is systematically surveyed only by national governments, and those governments measure different things, differently, at different times and under different conditions. The World Bank has compiled the best of the world's household survey data into a single set of figures on inequality. "The result is just nonsense," charges James K. Galbraith, an economist at the University of Texas. "It's not consistent across countries, it's not consistent through time - it fails every reasonable standard of reliability, it seems to me."
In fact, says Galbraith, the World Bank data are so inconsistent that they produce measures that are obviously false, ranking Indonesia as less unequal than Australia, for example. "You can check that out by going to the capital city and driving in from the airport," he says. "You can see it ain't so." Nonetheless, this is the only data set of its kind. It's what Sala-i-Martin uses in his sarcastically titled paper, "The Disturbing 'Rise' of Global Income Inequality," which appears on his eccentrically playful Columbia University faculty website. Sala-i-Martin has to fill the holes in the World Bank's data set in order to reach his optimistic conclusions. For countries that show data for some years and not others, he extrapolates to cover the years without observations. For countries that have only one inequality measurement on record, he assumes that this figure remains constant over the nearly 30 years of his study (inequality within countries tends to shift relatively slowly over time). For countries where no data are present at all, he uses GNP per capita. Critics, including Milanovic, charge that these assumptions render Sala-i-Martin's calculations highly speculative. "I have incomparably more data than he does," says Milanovic. One reason for this is that Milanovic limits his study to the period from 1988 to 1993, on the assumption that we learn more from examining good data that cover a few years than from sparse data covering more time. "Basically it's a trade-off between quality and quantity, if you will."
But David Dollar, also of the World Bank, points out in a recent paper that Milanovic's limited time sample may also distort the picture. After all, writes Dollar, "the period from 1988 to 1993 was the one period in the past 20 years that was not good for poor people in China and India." India passed through a recession, and rural income growth in China briefly stalled.
Pro-globalization Columbia economist Jagdish Bhagwati laments that his younger colleagues are spending so much of their time chasing after figures that are both so elusive and, he believes, so meaningless. "I'm more worried about poverty because that's really much more critical," Bhagwati says. And here the news may be good: By many accounts, even where inequality is increasing, poverty is on the decline. The 2002 UNDP Human Development report notes that the proportion of the world's people living in extreme poverty dropped from 29 percent in 1990 to 23 percent in 1999. Says Friedman, "If it's inequality you're worried about, the world is becoming a less good place. But if it's poverty you're worried about, while we still have a ways to go, the world is becoming a better place."
Not so fast, say Sanjay Reddy and Thomas Pogge, also of Columbia, in a recent paper called "How Not to Count the Poor." Reddy and Pogge raise a strong objection to their colleagues' methods. To compare one country's poverty problem with another's requires converting currencies across vastly different economies. Economists get around this problem by using a measure called Purchasing Power Parity, or PPP, which bases conversion rates on the cost of goods and services within a given country as well as on overall consumption patterns inside that country. According to Pogge and Reddy, the use of PPP leads economists to mismeasure poverty. Services-say, manicures, drivers, and massages-cost a lot less in India than they do in the United States. Goods, including basic foodstuffs, also cost less in India than in the United States, but not as much less as services do. So as Indians become generally wealthier and consume more services, the dollar will appear to go farther than it used to in India. But for India's poor, who are mainly consuming food, the worth of the dollar, or the rupee, has not significantly changed. What looks like a drop in poverty may be a statistical illusion.
Identifying the trend in poverty or inequality is one thing, and it's hard enough. Tying such trends to the processes loosely known as globalization is harder yet - and this is the deeper issue that makes the statistical debate so contentious.
According to a March 2001 paper called "Trade, Growth, and Poverty" by Dollar and Kraay, developing countries that have embraced economic globalization and free markets are catching up with the rich world and leaving the non-globalizing developing countries behind. Dollar and Kraay include among their "globalizers" China, India, Brazil, Bangladesh, Thailand, Uruguay, Colombia, and others. But the Kennedy School's Dani Rodrik cautions that much of this analysis depends on how you define a globalizer. Can China's growth really be chalked up to globalization? Galbraith, who served as a technical adviser to the Chinese government on its macreoecomic reforms from 1994 through 1997, insists that China's growth has little to do with Washington's policies and much to do with the country's own internal reforms, many of them carried out in the late 1970s. "People have tried to take credit for the growth of China which really belongs, if it belongs anywhere, to the Chinese Communist Party, for God's sake," says Galbraith. "They run the place."
What troubles Rodrik is that China's growth spurt began about a decade before its liberalization. And though China has opened toward global markets, exports, and foreign investments, Rodrik says, "China is the last country that you want to think of when you think of countries that have played by the rules of the game." China was not a member of the WTO or its predecessor GATT until this year, Rodrik notes. And India? "India has had some of the world's highest trade restrictions and obviously has had capital controls." So it's misleading, Rodrik stresses, when globalization advocates point to the success of India, China, and Vietnam, but then push policies more like those of Bolivia, Haiti, and Argentina. Those countries have followed Washington's dictates much more closely, often to disastrous ends.
Milanovic recognizes that the debate over global inequality has become "emotional" because the fate of globalization hangs in the balance. Those in favor of free trade policies prefer to cite Sala-i-Martin's statistics; those opposed cite Milanovic. What's at stake is an entire economic worldview, even as the underlying data remain open to interpretation. "It's only an observation," Milanovic says of his own data as well as his rival's. And an observation is not an explanation. "We have not proven, neither Sala-i-Martin nor I nor anybody else, the causality."