WIDER Annual Lecture 9: The World is not Flat: Inequality and Injustice in our Global Economy by Nancy Birdsall

1. 1
2005 WIDER Annual Lecture
Why Inequality Matters in a Globalizing World
Helsinki, October 26
Nancy Birdsall
President
Center for Global Development
Washington, D.C.

2. 2
“Holy mackerel, the world is becoming flat.
Several technological and political forces have
converged, and that has produced a global, Web-
enabled playing field that allows for multiple forms
of collaboration without regard to geography or
distance - or soon, even language.”
-Thomas Friedman

3. 3
“But the world is not flat. Those of us on the top,
with the right education and in the right countries,
can easily overlook the countries and the people
stuck in deep craters across the global landscape.”
-Nancy Birdsall, this lecture
. . which is about why they are in craters, why that
matters, and what we need to do about it.

4. 4
The message
Inequality matters to people. It is often a sign of
injustice.
Global markets by their nature generate inequality.
We need to manage the downside of
globalization if we are to sustain its upside. We need
a global polity to complement our global economy.
Constructing that global polity is a key challenge
of this 21st century.

5. 5
The message in three parts:
1. Inequality Within Developing Countries: Why
It Matters
2. “Globalization” is Disequalizing
3. Constructing a Global Polity for Our Global
Economy

6. 6
1. Inequality Within Developing Countries:
Why It Matters
Definitions and facts
1.A. Inequality inhibits growth
1.B. Inequality undermines good public policy
1.C. Inequality undermines collective decision
making and social institutions critical to
health societies

7. 7
1. Inequality Within Developing Countries:
Why It Matters
Definitions and facts
Poverty
Inequality (money inequality)
Inequity (process not outcome)

8. 8
. . Poverty and inequality are not closely related. . .InequalityRatio(Q5/Q1)
Poverty Headcount Ratio, <1$/day
0 50 100
0
10
20
30
40
SSA
BRA
BGR
CHL
CHN
COL
CRI
CIV
CZE
DOM
ECU
EGY
EST
GTM
GNB
HND
INDIDN
JAM
JOR
KEN
KGZ
LSO
MDG
MYS
MRTMEX
MDA
MAR
NPL
NIC
NER
NGA
PAK
PAN
PHL
POL
ROM
RUS
RWA
SEN
SVK
SVN
ZAF
LKA
THA
TUN
UGA
UKR
VEN
ZMB
ZWE
(Bivariate Correlation of $1 poverty measure/ (Q5/Q1) = .33)
Source: Birdsall (2001) “Why Inequality Matters.”

9. 9
. . .inequality varies across regions and changes
little within regions/countries over time
Inequality by region and decade
Eastern Europe
Latin America & Caribbean
Sub-Saharan Africa
East Asia & Pacific
South Asia
OECD & High Income
Source: Birdsall (2001) “Why Inequality Matters.”

10. 10
…high in Latin America and rising in Eastern Europe...
Inequality across regions
Source: Reproduced from Kalwij and Verschoor (2005).

11. 11
1. Inequality Within Developing Countries:
Why It Matters
Definitions and Facts
1.A. Inequality inhibits growth
1.B. Inequality undermines good public policy
1.C. Inequality undermines collective decision
making and social institutions critical to
health societies

12. 12
There is no strong relationship between inequality
and growth in rich countries…
Australia
Canada
Denmark
Finland
France
Germany
Italy
Japan
New Zealand
Norway
Sweden
United Kingdom
United States
11.522.53
PeriodaverageGDPpercapitagrowth1970-2000(real,percent)
25 30 35 40 45
Gini coefficient
Per capita growth and inequality in rich countries 1970-2000
Source: WIID2a, WDI (2005) and author’s calculations.

13. 13
…but developing countries with high inequality
tend to grow more slowly
Argentina
Bangladesh
Bolivia
Botswana
Brazil
Chile
China
ColombiaCosta Rica
Ivory Coast
Ecuador
El Salvador
Honduras
Hong Kong
Hungary
India
Indonesia
Israel
Jamaica
Malaysia
Mexico
Nigeria
Pakistan
Panama
Peru
Philippines
Singapore
South Africa
Sri Lanka
Thailand
Turkey
Uruguay
Venezuela
Zambia
-202468
PeriodaverageGDPpercapitagrowth1970-2000(real,percent)
30 40 50 60 70
Gini coefficient
Per capita growth and inequality in developing countries 1970-2000
Source: WIID2a, WDI (2005) and author’s calculations.

14. 14
1.A. Inequality inhibits growth
– in developing countries, where markets and
governments are weak
Growth
Equity
Growth
Equity
Brazil
South
Africa
Constructive inequality
(perfectly competitive markets)
Destructive inequality
(market and government weakness)

15. 15
Latin America is an example
Factors of aggregate growth 1960s-1990s
(contributions to variations in GDP, percentage)
-2
-1
0
1
2
3
4
5
6
Capital accumulation Education and asset equity Total
Contributiontogrowth
OECD
Latin America
East Asia
Source: Birdsall and Londono (1998) "No Tradeoff: Efficient Grow th Via More Equal Human Capital Accumulation."

16. 16
1. Inequality Within Developing Countries:
Why It Matters
Definitions and Facts
1.A. Inequality inhibits growth
1.B. Inequality undermines good public policy
1.C. Inequality undermines collective decision
making and social institutions critical to
health societies

17. 17
1.B. Inequality undermines good public policy
– for example educational opportunities are
probably not equal in many developing countries
poorest 20% of households richest 20% of households
Colombia 2.4 9.8
Guatemala 2.0 8.9
Peru 5.0 9.8
Cambodia 2.4 7.4
Philippines 6.2 10.2
Vietnam 5.2 10.3
Ethiopia 0.9 5.2
Kenya 4.9 9.0
Nigeria 3.5 9.9
Notes:
Source: World Bank EdStats (2005).
1. Average years of schooling are the years of formal schooling received on average, by adults aged 15-24.
2. Data is for the latest year available during the period 2000-2003, except for Colombia (1995), Guatemala
(1995), Peru (1996) and the Philippines (1998).
Average years of schooling (15-24), 2000-20031,2

18. 18
1B. Inequality undermines good public policy
Inequality encourages self-defeating economic
policies to “protect” poor and near-poor households,
e.g.
trade protectionism, overvalued exchange rates and
price controls that hurt poor rural producers and poor
urban consumers
job “protection” (high cost of layoffs) that
discourages job creation
underpricing of water and electricity that leads to
rationing that hurts the poor

19. 19
1. Inequality Within Developing Countries:
Why It Matters
Definitions and Facts
1.A. Inequality inhibits growth
1.B. Inequality undermines good public policy
1.C. Inequality undermines collective decision
making and the social institutions critical
to healthy societies

20. 20
1.C. Inequality undermines collective decision making
The middle class seems to matter for social
capital, for democracy, and for the blessings of a
common shared “civic” life in communal domains
But high concentration of income in unequal
societies implies a missing middle class
The middle class is mostly missing at the global
level and within many developing countries

21. 21
The well-off middle class
Joachim Beuckelaer, The Four Elements: Earth, National Gallery London

22. 22
1.B. Inequality undermines collective decision making
– few countries today are “middle class”
Distribution of world population by 1998 GDP per capita
Populationshare
GDP per capita (PPP)
Bangladesh, Nigeria, India
China, Indonesia
United StatesWestern Europe,
Japan
Source: Milanovic (2005) Worlds Apart: Measuring International and Global Inequality.

23. 23
1.B. Inequality undermines good public policy
– few people are “middle class”
World income distribution (based on household survey data; year 1993)
Population
Source: Milanovic (2005) Worlds Apart: Measuring International and Global Inequality.
Income (PPP)

24. 24
In Brazil, median household income per capita
was about a third of average national income in
the 1990s
Brazil
0
50
100
150
200
250
300
85 86 88 89 91 94 96
Average Monthly Per Capita Income US $ PPP Median Monthly Per Capita Income US $ PPP
Poverty Line US $2 per day
Source: Birdsall (2002).

25. 25
In Chile, median income has been about half of
average income
Source: Birdsall (2002).
Chile
0
50
100
150
200
250
300
87 89 92 94
Average Monthly Per Capita Income US $ PPP Median Monthly Per Capita Income US $ PPP
Poverty Line US $2 per day

26. 26
In Peru in the 90s, almost 20 % of children under
5 in middle-income households were stunted
Rates of stunting for children < 3 (Bolivia and Ghana); < 5 (Peru)
(in %)
0
5
10
15
20
25
30
35
40
45
50
Peru Bolivia Ghana
Poorest Quintile
Middle Quintile
Richest Quintile
Source: DHS.

27. 27
1. Inequality Within Developing Countries:
Why It Matters
Definitions and Facts
1.A. Inequality inhibits growth
1.B. Inequality undermines good public policy
1.C. Inequality undermines collective decision
making and social institutions critical to
health societies

28. 28
The message in three parts:
1. Inequality Within Developing Countries: Why
It Matters
2. “Globalization” is Disequalizing
3. Constructing a Global Polity for Our Global
Economy

29. 29
2. “Globalization” is Disequalizing
Definitions, debates, facts
2.A. Global markets work—and reward
those with productive assets
2.B. Global markets are imperfect—and hurt
most the poor
2.C. Global rules naturally reflect market power
and interests of the rich

30. 30
Definitions, debate, facts
Globalization is the increasing integration of
economies and societies – through flow of
goods, services, capital and of ideas, norms, and
peoples.
In popular use, globalization often refers to the
increasing influence of global market capitalism
and of global corporate and financial interests.

31. 31
The debate about globalization
“No country has developed successfully by turning its
back on international trade and long term capital flows.”
-Stanley Fischer, former Sr. Deputy Managing Director, IMF
“If you're totally illiterate and living on one dollar a day,
the benefits of globalization never come to you.”
-Jimmy Carter, former President, USA

32. 32
The debate about globalization and inequality
Globophobes: Global inequality is high and rising
Globophiles: Global inequality is declining

33. 33
Inequality between rich and poor countries is
increasing, because the rich are growing faster
– “divergence big time”
Mean Median
Percentage
negative
"Old OECD" 1.9 2.0 17
Middle income
countries
1.0 1.8 33
LLDCs 0.1 0.8 43
Source: Milanovic (2005).
Annual per capita growth rates 1980-2002

34. 34
At the same time, high growth in China and India is
reducing inequality across all people in the world
Inequality across world population
Inequality across countries
Source: Milanovic (2005).

35. 35
Globophobes and globaphiles are both right
Inequality between the richest and poorest
countries is high and continues to grow.
But thanks to rapid growth in China and India,
global poverty is declining and so is global
inequality across all people.
(Globalization is not the cause of deep poverty
and destructive inequality but neither is it the
solution. Indeed, where globalization is reducing
poverty, e.g. China, it is also associated with
rising inequality – planting seeds of future
problems.)

36. 36
2. “Globalization” is Disequalizing
Definitions, debates, facts
2.A. Global markets work—and reward
countries and people with productive
assets
2.B. Global markets are imperfect—and hurt
most the poor
2.C. Global rules naturally reflect market power
and the interests of the rich

37. 37
2.A. Global markets work
The most commodity dependent countries have
participated in global trade for decades
Trade to GDP Ratios for the Most and the Least Commodity Dependent Countries
0
10
20
30
40
50
60
70
80
90
100
1960-1964 1965-1969 1970-1974 1975-1979 1980-1984 1985-1989 1990-1994 1995-1999 2000-2003
Openness(sumofexportsandimportsasshareofGDP,percent)
Least Commodity Dependent
Most Commodity Dependent
Note: There are 72 "least commodity dependent" countries and 34 "most commodity dependent" countries. Trade to GDP ratios
are unweighted averages.
Source: World Development Indicators, 2005 and author's calculations.

38. 38
But commodity prices have been falling
Source: UNCTAD. 2005. Commodity Price Bulletin.

39. 39
And manufacturing prices have been rising
Unit Value Index of Manufactures 1965-1998
0
20
40
60
80
100
120
1965 1970 1975 1980 1985 1990 1996 1998
Unitvalueindexofmanufactures(1990=100)
Unit Value Index of Manufactures (1990=100)
Note: Unit value index of manufactures exports from G-5 to developing countries.
Source: World Bank. 2001. Global Economic Prospects.

40. 40
The wrong asset: Open, globalizing countries
dependent on commodity prices have not grown
-2%
-1%
-1%
0%
1%
1%
2%
2%
AverageannualgrowthrateofrealGDPpercapita(mean,percent)
Least commodity dependent countries
Most commodity dependent countries
1980s
1980s
1990s
1990s
Source: Birdsall and Hamoudi (2002) “Commodity Dependence, Trade, and Growth: When “Openness” is Not Enough.”

41. 41
Despite having comparable tariff rates to other
countries
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
Tariffrates1985-1989and1995-1997(mean,median,inpercent)
Most commodity dependent countries Least commodity dependent countries
Mean tariff rates
1985-1989
1985-1989
1985-1989
1985-1989
1995-1997
1995-1997
1995-1997 1995-1997
Mean tariff rates
Median tariff rates
Median tariff rates
Source: Birdsall and Hamoudi (2002) "“Commodity Dependence, Trade, and Growth: When “Openness” is Not

42. 42
2.A. Global markets work
– and reward those with productive assets
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1990 1991 1992 1993 1994 1995 1996 1997 1998
Secondary
education
relative to
primary
Relative log wage
Higher
education
relative to
secondary
Higher
education
relative to
primary
Source: Behrman, Birdsall and Szekely (2003) “Economic Policy and Wage Differentials in Latin America.”

43. 43
2.A. Global markets work
– encouraging emigration of those with more skills
0
5
10
15
20
25
30
Mexico Philippines India Pakistan Egypt Sri Lanka
Emigrationratesbyeducationlevelin2000,population25yearsorolder
(percent)
Primary Secondary
Tertiary
Source: Kapur and McHale (2005). Give Us Your Best and Brightest. The Global Hunt for Talent and Its Impact on the Developing World.
Emigration rates to all OECD countries by education level

44. 44
Nurse flows from Sub-Saharan Africa to the
United Kingdom
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
1996/97 1997/98 1998/99 1999/00 2000/01
Sub-SaharanAfricannursesregisteringintheUnitedKingdomannually
Source: UK NMC (2005).

45. 45
2. “Globalization” is Disequalizing
Definitions, debates, facts
2.A. Global markets work—and reward those
with productive assets
2.B. Global markets are imperfect—and hurt
most the poor
2.C. Global markets naturally reflect market
power and the interests of the rich

46. 46
2.B. Global markets are imperfect
– and hurt most the poor.
Financial crises and changes in income concentration
Note: East Asian financial crisis 1997/1998, Brazil crisis 1999, and Mexico crisis 1994/1995.
Source: Reproduced from Birdsall (2005) “Stormy Days on an Open Field: Asymmetries in the Global Economy.”
0
10
20
30
40
50
60
70
Korea Philippines Thailand Brazil Mexico
Incomesharesofpoorest80%andrichest20%pre-andpostcrises
Income share poorest 80%
pre-crisis
Income share richest 20%
pre-crisis
Income share poorest 80%
post-crisis
Income share richest 20%
post-crisis

47. 47
2.B. Global markets are imperfect
– and hurt most the poor
Pre-crisis Post-crisis
Gini Gini
Korea 32.6 37.2
Philippines 46.2 49.5
Thailand 57.5 58.5
Brazil 60.2 61.2
Mexico 52.9 53.7
Source: WIDER WIID 2.0a.
East Asian financial crisis 1997/1998, Brazil crisis 1999, and Mexico
crisis 1994/1995.
Pre-crisis data for Thailand, Korea and Brazil are from 1996, for the
Philippines from 1994 and Mexico 1992. Post-crisis data are from 1996
for Mexico, 1998 for Korea, 1999 for Thailand, 2000 for the Philippines,
and 2001 for Brazil.
Financial crises and Inequality
Source: Reproduced from Birdsall (2005) “Stormy Days on an Open Field: Asymmetries in the Global Economy.”

48. 48
Message in three parts.
The connection between 1 and 2?
1. Inequality Within Developing Countries: Why
It Matters
2. “Globalization” is Disequalizing
3. Constructing a Global Polity for Our Global
Economy

49. 49
2. “Globalization” is Disequalizing
Definitions, debates, facts
2.A. Global markets work—and reward
those with productive assets
2.B. Global markets are imperfect—and hurt
most the poor
2.C. Global rules naturally reflect market
power and the interests of the rich

50. 50
2.C. Global rules naturally reflect market power
and the interests of the rich
Design of rules favors rich country interests:
•Current trade regime
•International migration
•International property rights (TRIPS)
And implementation of reasonable global rules often
reflects interests of more powerful rich
I.e. just global rules and fair implementation

51. 51
2. “Globalization” is Disequalizing
Definitions, debates, facts
2.A. Global markets work—and reward
those with productive assets
2.B. Global markets are imperfect—and hurt
most the poor
2.C. Global rules naturally reflect market
power and the interests of the rich

52. 52
3. Constructing a Global Polity
Because markets work:
A global social contract to address unequal endowments
across countries – foreign aid, aid for trade, World Bank,
aviation taxes and so on.
Because global markets are imperfect:
New and improved global rules and regulatory arrangements
to provide for public goods (Green Revolution), protect the
global environment against global bads (Kyoto and beyond),
manage global financial risks (IMF, Sovereign Debt
Financing Facility), discourage anti-competitive processes (a
global anti-trust agency), and so on.
And. . . .

53. 53
3. Constructing a Global Polity
Because global rules tend to reflect the interests of the rich
(With costs for all who seek a more secure, prosperous and
just world):
More voice and more votes for poor countries and poor
people in global fora ... in the IMF, the World Bank, the UN
Security Council, the Basle Committee for Banking
Regulation and Supervision, the G-8, and so on;
and more emphasis on surveillance of rich countries’
commitments and adherence to fair rules; new efforts to
complete the Doha as a development round; an
International Migration Authority …

54. 54
A Global Polity for Our Global Economy
Most global inequality is destructive – reflecting unequal
endowments and opportunities across countries and peoples.
In the face of that inequality, global justice will remain a
constant theme in the 21st century.
Our global market system has tremendous potential benefits –
but only if we construct a more robust and representative
global “polity.”
. . .with a mission to secure a less divided, more just and more
development-friendly world.