16/07/2017 Why globalisation may not reduce inequality in poor countries

The Economist explains

The Economist explains

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

The Economist explains Sep 3rd 2014 | 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

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16/07/2017 Why globalisation may not reduce inequality in poor countries

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.

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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
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16/07/2017 Why globalisation may not reduce inequality in poor countries

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.

Dig deeper:
Globalisation does not boost wages for all
(http://www.economist.com/news/finance-and-economics/21613280-why-
globalisation-not-reducing-inequality-within-developing-countries-revisiting)
(August 2014)
(http://www.economist.com/news/finance-and-economics/21613280-why-
globalisation-not-reducing-inequality-within-developing-countries-revisiting)
Growing inequality is not inevitable (http://www.economist.com/node/21564414)
(October 2012)
(http://www.economist.com/node/21564414) The world can take a billion people
out of extreme poverty by 2030
(http://www.economist.com/news/briefing/21578643-world-has-astonishing-
chance-take-billion-people-out-extreme-poverty-2030-not)  (June 2013)

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