The End of IPE Class 24 – Thursday, 7 May 2009 J A Morrison 1 Adam Smith, Karl Marx, Joseph Schumpeter, JM Keynes

Agenda: End of IPE I.Globalization’s Winners & Losers II.Evaluating Globalization III.Course Evaluations 2

Agenda: End of IPE I.Globalization’s Winners & Losers II.Evaluating Globalization III.Course Evaluations 3

Before we evaluate globalization normatively, it’s worth investigating its distributive effects. As globalization increases, who wins and who loses? 4

We’ll look at differences in income distribution across time and across space. Then we’ll consider the role globalization plays in influencing these changes. 5

II. Globalization’s Winners & Losers 1.Income Distribution: Cross-Temporal Variation 2.Income Distribution: Cross-Sectional Variation 3.The Role of Globalization

The Recent Increase of American Incomes

Comparative GDP per capita of Selected Countries:

So, GDP per capita is rising virtually everywhere. But how are these gains distributed? 9

The Gini Index Index is one way of capturing the distribution of wealth Income is uniformly distributed; no inequality Income is completely concentrated; total inequality

US Income Inequality, Income listed by Household. Source: US Census Bureau

Share of US Aggregate Income 12 Income listed by Household. Source: US Census Bureau

 The size of the middle class has shrunk upwards of 10%! 13

So, the US has become less equal over time. Where have the increases in income gone? Surely the poor must have gotten richer—if only more slowly than the rich have. 14

Percentage increase in Average After-Tax Income: Source: Center on Budget and Policy Priorities, 2003

So, globalization is increasing American wealth, but those increases fall into the hands of a very, very small group. This causes income inequality to rise in the US. Is globalization causing this rise? 16

Let’s examine the US in a global context. Keep the following question in mind: is there high correlation between the level of globalization and the level of income inequality? 17

II. Globalization’s Winners & Losers 1.Income Distribution: Cross-Temporal Variation 2.Income Distribution: Cross-Sectional Variation 3.The Role of Globalization

The World’s Most Equal Countries Country 2005 Gini Coefficient Gini Rank (out of 136) 2007 Globalization Rank (out of 122) Sweden23 13 Denmark Slovenia Iceland Austria26 52 Czech Republic Finland26 79 Luxembourg Slovakia Sources: CIA Factbook; Foreign Policy Magazine

The World’s Least Equal Countries Country Gini Coefficient (Various Years) Gini Rank (out of 136) 2007 Globalization Rank (out of 122) Zimbabwe South Africa Paraguay Bolivia Haiti Central African Republic Sierra Leone Botswana Lesotho NA Namibia Sources: CIA Factbook; Foreign Policy Magazine

What about the United States? 21

The US and Some “Neighbors” Country Gini Coefficient (Various Years) Gini Rank (out of 136) 2007 Globalization Rank (out of 122) Nigeria Kenya Philippines Cameroon Côte d'Ivoire United States Uruguay Mexico Rwanda China Sources: CIA Factbook; Foreign Policy Magazine

II. Globalization’s Winners & Losers 1.Income Distribution: Cross-Temporal Variation 2.Income Distribution: Cross-Sectional Variation 3.The Role of Globalization

What patterns emerge? 24

Predictors of Income Inequality GDP per Capita – Higher GDP per Capita  Greater equality Continent: Europe vs Africa – Europe: Most equal – Africa: Least equal Level of Globalization – More globalization  Greater equality 25

But there is a conspicuous exception to these rules: the United States. The US has high per capita GDP and high globalization but considerable income inequality. What gives? What divides the US from Europe? 26

 Transfer payments. The United States has a much, much smaller “welfare state” than do the Europeans. 27

Social Expenditure as % of GDP 28 Source: OECD, “Welfare Expenditure Report” (2001)

Rodrik: Soften the Blow Most developed states have coupled integration with social safety nets – US is the exception to the rule Rodrik: this coupling is vital – Normative: spread the gains around – Positive: globalization will cease without this mollification (See Rodrik, “Sense and Nonsense”) 29

The story here is clear… 30

The last 40 years have seen radical increases in the wealth of the richest Americans. This has hollowed out the American middle class. And considerably increased income inequality. The US government has been reluctant to intervene and either slow these changes or counter their effects. 31

Now we’ll consider whether this is a good thing or a bad thing. 32

Agenda: End of IPE I.Globalization’s Winners & Losers II.Evaluating Globalization III.Course Evaluations 33

II. Evaluating GLOBALIZATION 1.Globalization’s Critics 2.In Defense of Globalization

What could be wrong with globalization? 35

Rodrik: Globalization not a Substitute for Development Liberalization can distract from actual development policy – Education, public health, social cohesion, &c Liberalization can hurt development – Africa, Aids Drugs, & TRIPS “High Tariffs Don’t Mean Low Growth”  Remember: Developed states didn’t follow the Washington Consensus 36

Stiglitz More people are impoverished than before; markets aren’t any more stable Globalization benefits developed countries the most – Terms of trade – Vital products (pharmaceuticals) Institutions are designed to serve the developed world Institutions have tried to reinvent themselves, but they have failed 37

II. Evaluating GLOBALIZATION 1.Globalization’s Critics 2.In Defense of Globalization

Williamson: Convergence with Inequality Examines influence of globalization on income inequality within countries and between North & South Globalization causes convergence between N & S But it also exacerbates inequality within the N This produces potent political backlash  Does globalization sow the seeds of its own destruction? 39

Freeman: It’s not So Bad Investigates apparent immiseration of low- skilled labor in North – US: lower wages – Europe: higher unemployment Results – Demand for unskilled labor is down all around – Technology and other factors matter more than trade 40

Krugman, et al: Bad Jobs are Jobs Rural poverty vs “jobs” in export industry “biggest beneficiaries are…Third World workers” “A policy of good jobs in principle, but no jobs in practice, might assuage our consciences, but it is no favor to its alleged beneficiaries.” 41

Another Perspective Postwar order was designed to prevent WWIII – Lesson from Versailles: create integrated order acceptable to major powers  This order has been remarkable successful! Unclear, new-fangled model for North/South – Development was much lower priority than reconstruction – Self-determination: political independence  guilt free economic domination  We need to rethink our model of int’l organization. (PS 0456!!!) 42

Agenda: End of IPE I.Globalization’s Winners & Losers II.Evaluating Globalization III.Course Evaluations 43