Ken Rogoff

We should all be worried about rising inequality, correct?

Are massive income and wealth differences an inevitable outcome of fast growth? By and large, the answer from history is "yes".

Hmm. Maybe actually we have to work out why inequality is rising first? If it is a side effect of that growth (and more controversially, if curbing the inequality led to a slow down in the growth) then perhaps we don\’t actually want to curb it?

Let\’s think of it another way. Currently the global distribution of income is hugely skewed. The World Gini is somewhere above 0.8. Global GDP, if we could share it out equally (which we can\’t, but still) would be around the $8,000 per person mark. So, I think we would agree that the world is not currently producing enough income each year for all humans to live rich and satisfying lives: that\’s why we want the growth to carry on.

Good. Now, if it is a side effect of such growth that inequality increases (remember though, we\’re not saying here that the poor get poorer: rather that the rich get richer faster than the poor do, leading to higher living standards all around, but greater inequality), is that a price worth paying for that increased growth?

I would argue yes but then agree that others differ.

We can also get into the nitty gritty of just what sort of inequality we\’re talking about. Branko Milanovic is the person to go to here. (Try this book, I\’ll review it properly sometime soon (to the extent that this isn\’t already) and thanks to Jim for recommending it and the publishers for a copy.)

We can first talk about inequality within a country. I think it\’s pretty much a given that this is increasing as a result of globalisation. Ginis are certainly going up in every country. We can then talk about international inequality in a number of different ways. Concept 1 is that we take the average income in each country and then compare them. On this measure inequality is increasing. However this isn\’t taken all that seriously any more. In our 192 or so numbers, we\’ve got 54 for Africa and only 2 for India and China. We\’re thus measuring Djibouti as being as important as China in our calculations.

So we move on to Concept 2 inequality (this is associated with Xavier Sala-i-Martin) where we weight said country averages by population. We thus have a crude, but better than Concept 1, idea of changes in international inequality. This is falling, as the rise of India and China, with one third of the world\’s population between them, would make you think would happen.

However, this is a crude measure. Milanovic\’s work attempts to measure Concept 3 inequality. It\’s not an easy thing to do as we don\’t have the raw statistics but he\’s made a stab at it. Instead of using countries as a proxy and their associated averages, we actually want to measure the real inequality between the various people in the world. We obviously get much higher numbers, but that\’s not the point, we\’re interested in the direction. More or less?

Here the evidence is more mixed. Milanovic showed that in the 5 year period up to 1992 (this is from memory, so apologies if out by a year or two) global Concept 3 inequality increased. In the period following that it decreased. It\’s important to note that Concept 2 and 3 moved in different directions in that first period, which is why the distinction needs to be made between the two.

So if global inequality were indeed what we worry about, what does this tell us? I agree that my economic history is not entirely up to scratch but I seem to recall that the late 80s and early 90s contained a stuttering in both the Chinese and Indian growth rates. Certainly, in 1991, India had very serious problems: so serious that they at last led to the breaking of at least some of the Licence Raj.

So I\’m able to come back to my default position, the one I had before reading Milanovic: that it\’s the growth or not of India and China, at a respectable clip, which is reducing global inequality (ie, that if those two are growing fast enough then Concept 2 and Concept 3 point in the same direction).

All of which leads us to an interesting conclusion. Is globalization increasing inequality? Well, it depends what you mean. Within a country, almost certainly yes. Across the globe, as long as Indian and Chinese growth is high enough, probably not, it decreases it. Which means that we might be sensible to put up with the national inequality in the name of the lesser international such.

Unfortunately, that\’s not a question "economics" can answer, whether we should or not. That\’s a moral value that you bring to the table before the economic analysis. If you are an egalitarian, are you a national one (and there\’s good reason to be so: people do compare ther living standards with those around them, not with someone on the other side of the world) or an international one?

Myself, I worry far more about absolute poverty than relative. That we\’ve still got hundred of millions living on less than a $ a day, hundreds million more on $ to $2 a day, tells me that we want more economic growth and bugger the side effects on inequality. But your view might differ,

 

 

3 comments on “Ken Rogoff

  1. The other thing to look at is the cause of the inequality. In a system of perfect competition everyone would be paid the same except for the costs of things like further or Higher Education. The difference is, presumably, rent seeking of one sort or another. When this involves the Government legislating special favours for their friends this is a bad thing. However it might also include things like patents. Innovation must drive inequality because whoever invents a new gizmo gets a couple of decades competition-lite if not exactly free. c.f. Bill Gates. Innovation is inherently a good thing I’d think. So you could reduce inequality by reducing government rent protection – both for the doctors of the NHS for instance, but also for that nice Mr Dyson and everyone else. A stagnant society would slowly become more and more equal. Do we want that?

    By the way, this article is flagged at the Guardian’s Comment in Free section. Nice to see people pay attention.

  2. At least Geonomics charges people for rent seeking, by creating a market for the property owners right to stop others using it.

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