2min+ Book Summary: Bourguignon's The Globalization of Inequality
The Point: In recent decades, global inequality across countries has been decreasing, while inequality within many countries has been increasing. Francois Bourguignon discusses these two facts in relation to one another and wonders whether or not we need to worry about a world where cross-border inequalities are being "internalized."
The Quote: "Over the last decade, roughly 20% of the drop in inequality between countries has been compensated for by an increase in within country inequality. A process of "internalizing" global inequality within national communities may thus take place; inequality between Americans and Chinese would be partly replaced by more inequality between the rich and the poor in America and China." (38)
The Author: Francois Bourguignon is a professor at the College de France in Paris. From 2003 to 2007 he served as the World Bank's chief economist and senior vice president.
Introduction: Globalization and Inequality
Bourguignon raises the question of whether or not globalization has caused a precipitous rise in inequality over the last twenty years.
He makes a distinction between inequality between countries and within countries.
He explains that he chose the title for the book (The Globalization of Inequality) to reference two points: his interest in global (or between) country inequality, which appears to be decreasing, but also the fact that across the globe, inequality seems to be becoming a greater issue.
Bourguignon suggests that rising inequality is a concern, because it affects the stability of societies (p.6).
Chapter 1: Global Inequality
In this chapter, Bourguignon defines global inequality and describes the various considerations that go into measuring it.
What is global inequality? Bourguignon tells us that global inequality is "the level of inequality between all inhabitants of the world" (p.9). Levels of global inequality are much higher than levels of inequality within nations, but have been decreasing in recent decades.
How to Measure it: Bourguignon looks at the global inequality of 'standards of living' across the globe. As a measurement for standards of living, he uses household income data and considers household income per member of a household.
Two Databases: Bourguignon uses data from two databases: the Povcal database from the World Bank and the OECD Database on Household Income Distribution and Poverty. Combining data from these two sources he has household data from 106 countries (34 developed and 72 developing countries).
Tweaking the data: There are a number of adjustments that need to be made to make data from the various countries and databases compatible with each other. These include adjusting local currency figures for purchasing power and accounting for the slightly different ways that the two databases define household size (Povcal divides household income by the number of household members, but the OECD defines household income per equivalent adult and weights each household by the age and number of household members). Different national surveys also employ different definitions of household income. Some countries include 'virtual income,' and/or taxes and transfers in their data, while other countries leave these elements out of their definition of income. Some scholars have chosen to ignore these differences and just work with reported figures, but Bourguignon considers both household survey means and also adjusts the survey figures so they match GDP per capita figures in that country (the intuition is that national accounts are more consistent across countries). Bourguignon admits that there are both advantages and disadvantages to adjusting survey figures in this manner (see p. 13-14).
In order to understand the dynamics of global inequality, Bourguignon tells us that it's helpful to break global inequality into two parts: inequality between countries and inequality within countries.
Measuring inequality between countries presents a problem; it isn't abundantly clear what statistical units should be used when you try to measure inequalities between countries. Most studies of inequality between countries line up the average standard of living of various countries, but it's still debatable whether a researcher ought to attribute different weights to different countries according to their population. Here, Bourguignon gives the example of measuring the inequality between China and Luxembourg. If you simply compare the average standard of living in each country you will see a large discrepancy, but if you weight each country according to its population by creating an income distribution that attributes the average household income of each country to each country's citizens, then the two countries will appear equal on account of Luxembourg's relatively tiny population. In order to address these issues, Bourguignon distinguishes between the three following concepts:
Global Inequality: Bourguignon describes 'global inequality' as what you would get if you lined up every individual on the planet according to their income and calculated some measure of inequality.
Between Country Inequality: Between country inequality is the same as global inequality, but instead of assigning each individual his or her actual income you assign each individual of a country the average income of their country. By assigning each individual their country's average income, you are, by virtue, weighting each country according to its population.
International Income Scale: An international income scale, according to Bourguignon, compares the average standards of living in countries and gives an equal weight to each country. (*These definitions get a little confusing especially because other scholars have provided different terms for these concepts).
The final consideration in measuring global inequality is to determine how you want to measure inequality. Bourguignon uses four measurements in the book: the share obtained by the richest 1%, 5% or 10%; the gap between extreme deciles (the top 10% and the bottom 10%); the Gini Coefficient, and the Theil coefficient (p. 18-20)
Before moving on, Bourguignon makes the point of differentiating between inequality and poverty. Inequality is relative, but it is useful to use an absolute standard of poverty when making cross-country comparisons of inequality he says. He references an income of $1.25/day in 2005 international purchasing power as the official poverty threshold.
"The gap between the standard of living of the richest 10% of the world and the poorest 10% was above 90 in 2008 [here he's talking about a ratio of the two decile's standard of living]! In absolute values, the poorest 600 million in the world have an average of $270 in disposable income per year, while the richest 600 million have a standard of living above $25,000." (p. 22)
Bourguignon uses the rest of the chapter to share some facts about degrees of global inequality over the last decade:
Some facts concerning within country inequality in 2008: In 2008, France had a Gini coefficient of 0.29. Per capita GDP in France was around $33,000 (in 2005 international purchasing power), while the average individual standard of living was $20,500. The richest 10% received 24.5% of total income and earned approximately $45,000 per year. In the United States in 2008, the average standard of living was $25,000 and the Gini coefficient was 0.39. In Brazil, GDP per capita was $10,000 and the Gini coefficient was 0.58. GDP per capita in Ethiopia was $850, the average standard of living was reported as $660, and the richest 10% of Ethiopians had an average income of $2,000 per person annually.
Some facts about poverty: In 2008, the number of people below the poverty threshold of $1.25/day was 1.3 billion. The percentage of people living below the poverty threshold has decreased, but due to population growth the absolute number of people living below the poverty line remains roughly the same as it was in 1929. The number of people living in poverty has decreased from around 2 billion people in 1980 to roughly 1 billion people today.
Global Inequality: Global inequality rose steadily over the last two centuries, but since the 1990s is now falling at a rapid pace (p.26/27). "In 1820, the richest 10% of the world enjoyed a standard of living twenty times higher than the poorest 10% (gini of 0.5). In 1980 the Gini was 0.66." Beginning in the 1990s, between country inequality began to drop dramatically, while average inequality within countries began increasing slightly.
"[I]nequality has very substantially increased in some countries, whereas it has declined in others. What is apparent at the global level is that the overall balance of this effect is positive." (38)
For now, the trend of decreasing global inequality overpowers the trend of overall increases in within country inequality.
The Effects of the Crisis: The crisis hasn't impacted the trend of developing countries catching up with developed nations, and so inequality between countries continues to decline.
Chapter 2: Are Countries Becoming More Unequal?
In this chapter, Bourguignon looks at recent trends of inequality within various countries. He shows that over the last two to three decades, inequality has increased in most developed countries. The trends in developing countries are more varied.
The Rise in National Income Inequality (48)
In the United States... Even taking into account redistribution, inequality has risen substantially over the last three decades. Low-end wages fell relative to median wages in the 70s and 80s and during the late 80s and 90s. Over the last thirty years, the top 10% of the distribution captured nearly half of the gains from growth.
In 75% of the OECD countries, the Gini coefficient has increased by at least 2 percentage points over the last two decades.
Inequality Changes in Developing Countries (53)
A mixed bag.
Inequality increased within many developing countries in the period beginning in the mid 1980s to 2010. In China, for example, the Gini increased from 0.28 to 0.42.
In Latin America, many countries have experienced Kuznets curve like drops in the last decades, but levels of inequality in these countries are still high.
The Capital-Labor Split (55)
There is an overall trend of rising capital income in developed countries. This trend is observable in China, South Korea, India, Mexico, and Turkey as well.
There is also a rise in the capital share of GDP
Wealth Inequality (58)
Wealth inequality is harder to measure, but we know that the concentration of wealth is far more pronounced than the inequality of wages or income.
In the US, the top decile has 71% of wealth, and the Gini coefficient for wealth is said to be 0.83.
In France, the top decile has 60% of wealth and the Gini is said to be 0.64.
Inequality of wealth appears to be rising in many developed nations.
Gini Coefficients for wealth at the turn of the 21st century are said to be 0.55 in China, 0.65 in India, and 0.78 Brazil.
Here, Bourguignon considers non-monetary forms of inequality: including inequalities of opportunity and inequalities of income adjusted for hours worked and individual preferences. The obvious problem here is that that these things are often hard or impossible to measure.
He writes: "Contrary to what we observed with income or standard of living inequality, the last two decades do not seem to have witnessed a substantial structural rise in inequality of chances or opportunities. But, once, again, I should emphasize that such trends would be difficult to identify, given the lack of data and the imprecision of the data we do have" (69)
Perceptions of Inequality
In 2010, a survey was conducted across 12 countries. In the US, less than 50% of Americans thought that inequality had increased. 80% of French respondents believed inequality had increased, and half of the Brazilians surveyed believed Brazil was becoming more unequal.
Chapter 3: Globalization and the Forces behind the Rise in Inequality
In chapter 3, Bourguignon states that globalization has been a major factor in causing the rise of within country inequality. He further considers how changes in institutions and changes in economic policies since the 1970s have exacerbated these negative trends.
Globalization helps explain the inequality trends of recent decades (115)
Bourguignon argues that economic policies since the 1970s have tended to favor 'efficiency' over 'equality,' and he advocates rethinking our economic policies, so that we can directly face and try to alleviate inequality.
On the whole, emerging countries could be said to be benefitting more from globalization than developed countries argues Bourguignon. Yet, in places like China and India, he asserts that globalization and deregulation of the economy has also led to an increase in within country inequality. (83-84).
Technological progress: Globalization and increased competition in international trade has also accelerated technological progress. Technological change has increased the incomes of many entrepreneurs, capital owners, and executives by enabling their products to reach a far wider audience or clientele than they had in the past. Thus, Bourguignon attributes the extreme salaries, at least in part, to "the acquisition of informational rents" rather than to talent. (89)
Institutional change: "The defining institutional change in the last quarter of the twentieth century," he writes "was undoubtedly the deregulation of markets and the process of economic liberalization launched in the 1970s." He discusses tax cuts, privatization, executive compensation, deregulation of the labor market, and structural changes in developing countries successively (92-112).
Income taxes on top earners dropped in the U.S. from 70% to 40% under Reagan and from 83% to 60% in the U.K. under Thatcher. In 1991, Sweden dropped the tax rate on the top earners from 70% to 45% and also cut corporate taxes.
Deregulation of the Labor Market: Out of 20 OECD countries 14 have deregulated employment legislation. Bourguignon also discusses changes in minimum wage laws, unions, collective bargaining, and unemployment benefits (99-109)
Structural adjustment in emerging economies: Bourguignon discusses the debt crisis in Latin America beginning in the early 80s and the response of international financial institutions now labeled the Washington Consensus, and also speaks of Argentina's 'autonomous response' to its on crisis in 2001. He writes: "[T]here is little doubt that several structural reforms typical of the Washington Consensus, in contrast to policies focused more directly on reestablishing macroeconomic equilibrium, such as those used by the Argentine government in response to the 2001 crisis, have had an inegalitarian effect on certain countries." (110) He contrasts the Latin American experience with deregulation and liberalization of many Asian economies over a similar time period and attributes differences in the two regions to the fact that countries such as China and India were transitioning from more heavily regulated states.
At the end of the chapter, Bourguignon discusses the Kuznets curve and describes how many developed countries are now characterized by increases in inequality rather than the decreases Kuznets predicted. He acknowledges that this increase has to do with many exogenous factors, but stresses that the right type of economic policies could help curb recent trends.
"We must therefore examine policies that target inequality more directly, and ask whether there are policies that could simultaneously serve to promote equality and efficiency, at both the national and international levels. This will be the task of the following chapters." (p. 116)
Chapter 4: Toward a Fair Globalization - Prospects and Principles
In this chapter, Bourguignon considers whether the trends in inequality that we observe today will continue in the mid to long term future. He then asks whether or not a decrease in global inequality must be accompanied by higher levels of inequality within countries.
Will the trends we observe today continue? Bourguignon's guess is that developed countries will continue to grow at a slower rate than the leading emerging economies for the foreseeable future. But, "after a certain point, the faster development of emerging economies relative to both developed economies and the global average is likely to increase rather than diminish global inequality." (121)
He is uncertain about growth in poorer regions of the world. He argues that recent growth in sub-saharan Africa is more likely related to rising prices of natural resources than any improvements in institutional structures and governance. "Over time," he says "it is the growth performances of these countries that will determine whether or not global inequality between countries will continue its historic decline" (123). And this is especially the case, because these regions represent a growing share of the world's population.
He mentions Piketty's theory of perpetual increase in the wealth/income ratio and claims that an increase in the capital share of income and rising inequality in developed nations seems inevitable for the time being. (125)
Are the trends we are seeing inevitable? Bourguignon says that we do not necessarily have to choose between increased efficiency (global economic growth) and lower levels of inequality. "Outside the restrictive theoretical framework of an economy in which all markets are perfectly competitive, the hypothesis that there is an inverse relationship between efficiency and equality is not very robust." (130) He further argues that high levels of inequality can lead to market imperfections, economic inefficiencies, and political instability (132-134).
Chapter 5: Which Policies for a Fairer Globalization?
In this final chapter, Bourguignon considers which policies to advocate in response to higher levels of within country inequality. He categorizes these policies into two categories: ex ante policy responses and ex post. He advocates the following:
International Redistribution: Bourguignon suggests increasing the amount of international redistribution (in the form of aid) to ensure the continued growth of poorer nations. He admits there have been problems with distribution of aid in the past and suggests that aid should be more heavily regulated to ensure that only 'development-oriented' governments rather than governments who behave in criminal and predatory manner" receive it.
Further liberalization of trade by increasing the access of developing and poor countries to markets of developed countries. (150)
More progressive taxation within countries, but he argues that this might be impractical or insufficient. "Even if the costs of a marginal tax increase do not seem excessive, the size of the increase that would be necessary to bring income inequality back down to where it was prior to the last two or three decades would be quite significant.. The United States is the most extreme case of this. The share of household income after taxes and transfers going to the richest 1% doubled between 1979 and 2007. With an effective tax rate of 35%, a simple calculation shows that at first estimate, this rate would have to increase to 67.5% in order for the share of disposable household income going to the top 1% to return to its earlier levels... Taxation as an instrument might therefore not be sufficient to return inequality to its pre-increase levels in the countries that have experienced the largest rises in inequality. Either inequalities will remain high...or other mechanisms for reducing inequality will have to be found" (163)
Taxing intergenerational transfers. He provides a caveat saying that we need to take into account the effect of mobility around the globe and of wealthy individuals moving to countries with lower tax rates. He therefore suggests some level of international coordination regarding such tax reform.
Financial regulation, and counteracting discrimination of all sorts in the job market
Conclusion: Globalizing Inequality?
"[W]e need a concerted international effort focused on redistributive policies and the fight against inequalities. Over the last three decades, there has been a kind of 'contagion' of tax reforms among developed countries, which have tended to decrease the progressiveness of redistribution from high incomes. It is urgent that we tip the scales back in the other direction, but this time through a concerted effort at the international level." (188-189)
"In our contemporary world, avoiding the globalization of inequality and making the most of the full benefits of globalization requires national and international action of the type I have tried to outline herein, before more equality between and within countries can be envisaged." (189)
Citation: Bourguignon, Francois. The Globalization of Inequality. Trans. Thomas Scott-Railton. Princeton: Princeton UP, 2015. Print.
Find the book on Amazon here.