For Exceptional Proff 2

22 Incensed about Inequality Martin Wolf

Economic Growth and Glob alization

In the mid-1970s I was the world Bank's senior divisional economist on India durine the country's worst post-independence decade. After a spurt of growtfi in the early phase of its inwardJooking development, growth in incomes per head had grounj virtually to a halt. Hundreds of millions ofpeople seemed, as a result, to be mired in hopeless and unending poverry In a book published in 196g, a well_krow environ, mentalist doomsayer, Paul Ehrlich, had written the country off altogether. For a young man fiom the UK, work in India as an economist was both fascinatins and appalling: so much poverty; so much frustration; so much complaccncy. yet i was convinced then, as I am now, that, with perfectly feasible policy changes, this vast country could generate rapid rates of economic grouth and reductions in poverw. No iron law imposed levels of real output (and so real incomes) per head ar oniy l 0 p e r c e n r o f t h o s e i n h i g h - i n c o m e c o u n r r i e s .

Since those unhappy days, India has enjoyed the fruit ofrwo revolutions: the sreen revolution, which transformed agricultural productivity; and a liberal izing .cuohr=rion, rvhich begar, haltingly, under $iv Gandhi,s leadership, in rhe l9g0s and then took a'great leap firrward'in 1991, in response to a severe foreign exchange crisis, under the direction of one of the country's most remarkable public servants, Manmohan Singh, the then finance minister. Slowly, India abandoned the abs.rdities of its pseudo-Stalinist 'control ra.i' i' favour of individual enterpdse and the market. As a result, between 1980 and 2000, India,s real GDp per head more than doubled. Sragnation lras become a rJring of rhe pasr.

original publication details: Marrin wolE from "Incensed about Ircqu.rity," in w Gr,batiz,arion warr6,Yalc University Prcss, 2004, pp. 140 4, 150, ISt 2, 156 7, 158 9, 160, 164_6. Repnnted with pcrmission of Yalc Univcrsity Press.

Tlle Gkh&li.&tion Redrt r, Fourth Edition. Edited by Frank I. Lcchncr and Iohn Boli Editorial matcrial ard organization @ 2012 John Wiley & Sons. Ltci. lublished 2012 by lohn Wilcy & Sons. Ltd.

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Incersed. about Inequd.lit! \81

India was not alone. On the contrary, it was far bel.rind a still more dynamic and even bigger liberalizing country - China, which achieved a rise in real incomes per head ofwell over 400 per cent between 1980 and 2000. China and India, it should be remembered, contain almost wo-fifths of the world's population. Cl.fna alone contains more people than Latin America and sub-Saharan Africa together. Many other countries in east and south Asia have also experienced rapid growth. According to the 2003 Haman Development Report from the United Nations DeveloPment Programme, between 1975 ar.rd 2001, GDP per head rose at 5.9 per cent a year in east Asian developing countries (with 3l per cent of the world's population in 2000). The corresponding figure for grorth ofGDP per head for south Asia (with alotller 22 per cent of the world's population) was 2.4 Per cent a year. Between 1990 and 2001, GDP per head rose at 5.5 per cent a year in east Asia, while growth rose to 3.2 per cent a year in south Asia,

Never before have so many people - or so large a proportion of the world's population - enjoyed such large rises in their standards of living. Meanwhile, GDP per head in high-income countries (with 15 per cent of the world's population) rose by 2.1 per cent a year between 1975 and 200I and by only L7 per cent a year between 1990 and 2001. This, then, was a period of partial convergence: the incomes ofpoor developing countries, with more than halfthe world's population, grew substantially faster than those of the world's richest countries.

This, in a nutshell, is why flabor leader Jay] Mazur and the many people who think like him are wrong. Globalization has not increased inequaliry It has reduced it, just as it has reduced the incidence of poverty. How can this be, critics will demandf Are absolute and proportional gaPs in living standards betlveen the world's richest and poorest countries not rising all the timef Yes is the answer. And is inequality not rising in most of the world's big countriesl Yes, is again the answer. So how can global inequality be fallingl To adapt Bill Clinton's campaign slogan, it is tl.re growth, stupid. Rapid ecor.ron.fc growth in poor countries rvith half the rvorld's population has powerful effects on th€ only sort of inequality which mat- ters, that among individuals. It has similarly dramatic effects on world poverty. The rise of Asia is transforming the world, very much for the better. It is the 'Asian

drama' ofour times, to plagiarize the title of a celebrated rvork by a Nobel-laureate economist, the late Gunnar Myrdal.

What, the reader may ask, has this progress to do with international economic integrationf In its analysis ofglobalization, published in 2002, the World Bank divided seventy-three developing countries, with aggregate population, in 1997, of4 billion (80 per cent ofall people in developing countries), into two groups: the third that had increased ratios oftrade to GDP, since 1980, by the largest amount and the rest. The former group, with an aggregate population of 2.9 billion, managed a remarkable combined increase of 104 per cer.rt in the ratio oftrade to GDP Over the same period, the increase in the trade ratio ofthe high-ilcome countries was 7I per cent, while the 'less globalized' two-thirds of countries in the sample of developing countries experienced a decline in their trade ratios.

The average incomes per head of these twenty-four globalizing countries rose by 67 per cent (a compound rate of 3.I Per cent a year) between 1980 and 1997. In contrast, the other forty nine countries malaged a rise of only 10 per cent (a com- pound rate of 0.5 per cent a year) in incomes per head over this period. These more

182 Globalization and tbe Worhl Econoruy

globalized countries did not have particularly high levels ofeducation in 1980. At that time, they were also a litde poorer, as a group, than the rest. Subsequently the new globalizers, as the World Bank calls them, cut their import tariffs by 34 percentage points, in average, against I1 percentage points for t}te ottrer group. They also achieved a better reading on the rule of law than the others. The World Bank's conclusion is that, 'as they reformed and integrated with the world market, the "more globalized" developir.rg countries started to grow rapidly, accelerating steadily from 2.9 per cent in the I970s to 5 per cent in the 1990s'.

l\4iile what the Bank says is both true and important, it should be observed that its notion ofa group of wenty-four countries is something ofa fiction. China and India contain, between t}lem, 75 per cent ofthe group's combined population. With Brazil, Bangladesh, Mexico, the Philippines ard Thailand, one has 92 per cent ofthe group's population. Moreover, Asian countries dominate: they make up 85 per cent of the popularion of t-his group of globalizing countries.

I44rat, then, do we learn from the success ofthe countries picked out as globalizers by dre World Bankf We can say, with confidence, that the notion that international economic integration necessarily makes the rich richer and the poor poorer is non sense. Here is a wide range ofcountries tiat increased their integration with the world economy and prospered, in some cases dramatically so. A subder question is precisely what policies relatively successful developing countries have followed. Critics are right to argue that success has not required adoption of the full range of so-called 'neo-liberal' policies privatization, free trade and capital-account liberalization. But, in insisting upon this point, critics are wilfully mistaking individual policy trees for the market-oriented forest. What dre successful counties all share is a move towards the market economy, one in which private property rights, free enterprise and competi- tion increasingly took the place of state ownership, plaming and protection. They chose, however haltingly, the path of economic liberalization and international integration. This is the heart ofthe matter. All else is commentary. [...]

Growth and Inequality

Thirty years ago, China and India were among the world's poorest countnes. Today, the poorest seems to be Sierra Leone, a country with a population of only 5 million. China's average real income per head is now some ten times higher than Sierra Leone's. The largest very poor country today is Nigeria, with a population of 127 million in 2000 and a real income, at PPP, just a fortieth ofthat ofthe US (and a fifth ofChina's). Again, this means that rising ratios between the average incomes ofthe world's richest and poorest countries are consistent with declining inequality among countries, weighted by their populations. Moreover, it is also perfectly pos- sible for inequality to have risen in every single country in the world (as Mazur alleges, wrongly) while global inequality has fallen. Unless the increase in inequality among individuals within countries offsets the reduction in population-weighted inequality among countries, not only inequality among (population weighted) countries, but also inequality among individuals will have declined.

Andrea Boltho of Oxford University and Gianni Toniolo of Rome University have computed populatior.r-we ighted inequality among forty-nine countries that contain

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Incensed' about InequttlitY 183

80 per cent ofthe world's population, back to 1900 To compute their measure of

inequality, the gini coefficient, the authors v/eight the average income, at purchasing

power parity (in order to compare standards ofliving), ofeach country by its popula

iion. Th"y cott.lode that inequality among countries, weighted in this way, reached

its ma-rimum in 1980, at a value of 0.54, but has fallen by 9 per cent since then, to

0.50, a level not seen since some six decades ago This decline in inequality among

countries, weighted by their population size, is exacdy what one would expect'

The reason for weighting distribution among countries by population is drat it is

people who matter, not countries. Then the right thing to do must be to take account

of .h*g"t in distribution of income within countries as well A paper by Frar.rgois

Bourguilnon and Cbristian Morrison, for the World Bank, has aftempted this heroic

t"* 6t i8ZO to f992. [...] The most imPortant conclusion is that, since the begin-

ning of the nineteenth century, changes in inequality among the world's individuals

havi been driven by changes in the relative wealth ofnations. In particular, the steeply

rising inequality among the people ofthe world in the nineteenth and first halfofthe

t "riti.th

.ento.y *as driven by the divergent performance ofEurope and the British

offshoots, on the one hand, and Asia, on the other' [4rat matters then is relative rates

of economic growth over extended periods Consequendy, Asia's improved growth

performance, and especialty that ofthe Asian giants, has started to reverse this picture

ofrising inequality over tie Past two decades. This World Bank study suffers from two defects: to take the analysis so far back, it

had to rely on highly limited, indeed sketchy, data; and it ended in 1992, at dre begin-

ning ofyet another decade of rapid grouth in Asia, not least in China More recent

studies, on similar lines, remedy these defects. These are by another group of tfuee

authors at the World Bank, by Surjit Bhalla' formerly a World Bank economist, and by

Xavier sala-I-Martin of columbia University. All tlllee reach a very similar conclusion;

globat inequality among households, or individuals, peaked in the 1970s, whereupon

it rt"rt"d to f"[. This decline happened not because ofgreater equality within countries,

but because of greater population-weighted equality among them [ "] The bottom line is that it is plausible that inequality among individuals across the

world has been falling over the past two decades, because of the relatively rapid

growth of the Asian giants. This is consistent with rising inequality within mary

iountries, rising relative gaps between the average incomes of the richest and very

poorest countries, and increasing absolute gaps between the average incomes in the

Ligh irl.o-" countries, on the one hand, and virtually all developing countdes) on

thi other. But the latter simply shorvs the tyranny of history By 1980' inequality

among countries was so large that it was impossible for absolute gaPs to close, until

there was much greater convergencc ofrelative incomes Yet this ignores the fact tiat a great many countries have not enjoyed rapid growth,

most notably in Africa, but also, to a lesser extent, in Latin America, the Middle East

and,inthelgg0s,thecountriesintransitionfromcommunism,especiallytheformer SoJet Union. In the 1990s, for example, according to the Human Developmer.tt

Report, fifty-four countries, with 12 per cent ofthe world's population, had negative

gro\l]th r"t", in real incomes per head, while another seventy-one countries, witi

26 pa. ."rrt of the world's population, had grorth of between zero and 3 per cent

a year in real incomes per head. Similarly, in the World Bank's study of globalization,

countries containing l.l billion people had virtually stagnant real incomes between

L84 Globalization and the Worhl Econoruy

1980 and 1997. \\ihile the poor performance of so many countries may not have prevented global income distribution from improving (though it will tend ro do so once China's average incomes rise above the world average), it has certainly had a significant impacr on rhe scale and regional distribution ofworld poverty. [... ]

Growth and Poverty

From being universal, extreme poverty has become, if not rare, the affliction of less thal a quarter of a vastly increased human population. But, again, rr ls ncccssary ro look more closely at what has happened in the supposed period of globalizarion, the years since 1980. Here, the authoritative voice is that ofthe World Bank, the institu- tion whose 'dream is a world without poverty'. The numbers come from two recent World Bank publications. They reach tie following conclusions.

First, the number ofpeople in extreme poverry fell from 1.18 billion in 1987 to I.I7 billion in ).999, but not before jumping upwards to 1.29 billion in 1990.

Second, enormous declines in dte number of people in extreme poverty have occurred in dynamic east Asia, from 486 million in 1990 to 279 mllJton in 1999, including China, and from 114 million to 57 million, excluding China. In China itself, tlre decline, betvi'een 1990 and 1999, was from 376 million to 222 mrlkon. Rapid growth reduces poverty dramatically. This remains today, as it has been for two centuries, an abiding truth.

Third, d.re number of people in extreme poverty fell very modesdy in south Asia between 1990 and 1999, while it rose sharply in eastern Europe and central Asia (the former Soviet empire) ar.rd, above all, sub-Saharan Africa, from 277 million in 1987 to 241 million in 1990, and then 315 million in 1999.

Fourth, the regional incidence of poverty fell dramatically in east Asia, fron.r 30.5 per cent ofthe population in 1990 to just 15.6 per cer.rt in 1999. Excluding China, it fell fiom 24.2 ro 1.0.6 per cent. In China, it fell from 33 per cent of the population to.just under l8 per cent over nine years. This rvas, without doubt, the most rapid reduction in the incidence of extreme poverty anl.where, ever.

Fifth, the ilcidence ofpoverty also fell sharply in south Asia (domilrated by India) in t1le 1990s, from 45.0 per cent ofthe population in 1990 to 36.6 per cent in 1999. But it rose sharply in eastern Europe and celrtral Asia and also increased in sub-Sal.raran Africa, from 47.4 per ceDt ofthe population to 49.0 per cent. [...]

Poverty and lluman Welfare

In the developing world as a whole, life expectancy rose by four mondrs each year after 1970, from fifty-five years in l9Z0 to sixty-four years in 2000. It rose from forty- nine in 1970 to sixty-two in south Asia and from fifty-nine to sixty nine in east Asia. Tragically, life expectancy fell in thirty-two countries in the 1990s, mostly because of the AIDS epidemic, or the gross incompetence (or worse) of governments, as in North Korea and Zimbabwe. It also fell because of rvestern hysteria about DDT, which removed the only effective way of controlling drat dreadful curse, malaria. Improvements in life expectancy have meant a decline in global inequality as well.

I n 1 9 5 0 , in l.igl.r-ir it was 82

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Incensed. aboat Inequa.lity 185

In 1950, average life expectancy in developing countries was two-thirds ofthe levels in high-income countries ({rrty-four and sixty-six years ofage, respectively). By 2000, it was 82 per cent (sixty-four and seventy-eight).

Meanwhile, in the developing world as a whole, infant mortality rates have fallen from 107 per thousand in 1970 to eighty-seven in 1980 and fifty-eight in 2000. In east Asia, the region with the fastest-growing economy, tiey have fallen from fifty-six in 1980 to thirty-five in 2000. In south Asia, infant mortality fell ftom ll9 in 1980 to seventy-three in 2000. In sub Saharan Africa progress wasr once again, slower. But ir.rfant mortality fell even there, from I16 in 1980 to ninety one in 2000.

Losing a child must inflict the sharpest grief humaa beings can suffer. The decline in infant mortality is thus a tremendous blessing in itself. So, too, is the rise in life expectancy. But these improvements also mean that it makes sense to invest in educa- tion. The world increasingly produces smaller families with much better-educated children. On average, adult literacy in developing countries rose from 53 per cent in 1970 to 74 per cerrt in 1998. By 2000, adult male illiteracy was down to 8 per cent in east Asia, though it was still 30 per cent in sub-Saharan Africa and (a real scandal this) 34 per cent in south Asia. Adult femaie illiteracy was more widespread than that for men, but was also improving. Between 1990 and 2000, female illiteracy fell from 29 per cent to 2l per cent in east Asia. In south Asia, it fell liom 66 per cent to 57 per cent (an even worse scandal than the low rate for men), while in sub-Saharan Africa it fell ftom 60 to 47 per cent. Illiteracy is much lower among the young. This guarantees that rates will continue to fall, as time passes.

The reduction in fertility rates has also been remarkable. In the developing world as a whole, births per woman (the fertility rate) have fallen from 4.1 in 1980 to 2.8 in 2000. In east Asia, the fertility rate, down ftom 3.0 to 2.I, is already at close to tie replacement rate. In Latin America, the fertility rate has fallen from 4.1 to 2.6. Even in south Asia it has fallen from 5.3 in 1980 to 3.3 in 2000. Again, progress has been slowest in sub-saharan Africa, where the birth rate has only fallen from 6.6 in 1980 to 5.2 in 2000. But, in all, tiese reductions tell us of improved control by women of their fertility, of fewer children with more Parental investment in each and of far stronger confidence that children will survive to maturity. The demographic transition that is now under way in the developing world is immensely encouraging. It is also arr indication - as well as a source - of rising welfare.

Now, let us look at hunger. Growth in food production has substantially outpaced that ofpopulation. Between 1961 and 1999, the average daily food supply per per- son increased 24 per cent globally. In developing countries, it rose by 39 per cent, to 2,684 calories. By 1999, China's average daily food supply had gone up 82 per cent, to 3,044 calories, from a barely subsistence level of 1,636 in 1961. India's went up by 48 per cent to 2,417 calorres, from 1,635 calories in 1950-I. According to esti- mates by the United Nations Food and Agricultural Organization, the average active adult needs between 2,000 and 2,310 calories per person. Thus the developing- country food supply has gone, on average, from inadequate to adequate. Hunger persists. But the FAO estimates that the number ofpeople suffering from chronic undernourishment fell from 920 million in 1969-7\ to 790 million in 1997-9, ot from 35 to 17 per cent of the population of developing countries. Trends in sub- Saharan Africa, the continent that did not grow, were far worse. Between 1979-81 and 1997-9, the share ofthe population that was undernourished declined from 38

186 Globalization. and tbe Wo d Econony

to 34 per cent, but absolute numbers, in a rapidly growing population, rose fiom 168 million to 194 million.

Now, turn to what has become one ofthe most controversial indicators: child labour. One would expect that more prosperous parents, with fewer children, who are also expected to live longer, would wish to see their children being educated rather than at work. So, happily, it has proved. The proportion ofchildren aged ten to fourteen in the labour force has, according to the World Bank, fallen liom 23 per cent in all developing countries in 1980 to 12 per cent in 2000. The fall in east Asia has, once again, been . astonishir.rg, from 26 to 8 per cent. In south Asia, it has fallen ftom 23 to 15 per cent. In sub-Saharan Africa, the decline has been less impressive, from 35 to 29 per cent. China's transformation has been breathtaking, with a fall liom 30 per cent in 1980 to just 8 per cent in 2000. In lagging India, the fall was from 2l to 12 per cent. Thus, just as one would expect, countries whose economies have done well in the era ofglobali- zation have been ones in which parents have chosen to withdraw their children from the labour force. Parents have never put their children to work out of indifference or malevolence, but only out of necessity. [ . . . ]

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