Why globalisation may not reduce inequality in poor countries
Inequality should fall when developing countries enter global markets. Yet in many countries it hasn't
By C.W.
GLOBALISATION has made the planet more equal. As communication gets cheaper and transport gets faster, developing countries have closed the gap with their rich-world counterparts. But within many developing economies, the story is less rosy: inequality has worsened. The Gini index is one measure of inequality, based on a score between zero and one. A Gini index of one means a country’s entire income goes to one person; a score of zero means the spoils are equally divided. Sub-Saharan Africa saw its Gini index rise by 9% between 1993 and 2008. China’s score soared by 34% over twenty years. Only in a few places has it fallen. Does globalisation have anything to do with it?
Usually, economists say no. Basic theory predicts that inequality falls when developing countries enter global markets. The theory of comparative advantage is found in every introductory textbook. It says that poor countries produce goods requiring large amounts of unskilled labour. Rich countries focus on things requiring skilled workers. Thailand is a big rice exporter, for example, while America is the world's largest exporter of financial services. As global trade increases, the theory says, unskilled workers in poor countries are high in demand; skilled workers in those same countries are less coveted. With more employers clamouring for their services, unskilled workers in developing countries get wage boosts, whereas their skilled counterparts don’t. The result is that inequality falls.
But the high inequality seen today in poor countries is prompting new theories. One emphasises outsourcing—when rich countries shift parts of the production process to poor countries. Contrary to popular belief, multinationals in poor countries often employ skilled workers and pay high wages. One study showed that workers in foreign-owned and subcontracting clothing and footwear factories in Vietnam rank in the top 20% of the country's population by household expenditure. A report from the OECD found that average wages paid by foreign multinationals are 40% higher than wages paid by local firms. What is more, those skilled workers often get to work with managers from rich countries, or might have to meet the deadlines of an efficient rich-world company. That may boost their productivity. Higher productivity means they can demand even higher wages. By contrast, unskilled workers, or poor ones in rural areas, tend not to have such opportunities. Their productivity does not rise. For these reasons globalisation can boost the wages of skilled workers, while crimping those of the unskilled. The result is that inequality rises.
Other economic theories try to explain why inequality in developing countries has reached such heights. A Nobel laureate, Simon Kuznets, argued that growing inequality was inevitable in the early stages of development. He reckoned that those who had a little bit of money to begin with could see big gains from investment, and could thus benefit from growth, whereas those with nothing would stay rooted in poverty. Only with economic development and demands for redistribution would inequality fall. Indeed, recent evidence suggests that the growth in developing-country inequality may now have slowed, which will prompt new questions for economists. But as things stand, globalisation may struggle to promote equality within the world’s poorest countries.
