Transcript Document

Current Issues in Economics
New Era of Inequality
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New Era of Inequality
• Trends:
– exporting jobs does not reduce by itself inequality
between developed and developing nations, but
– symmetrically reduced jobs for lower middle class in
developed countries increases inequality within
developed countries
• Do we witness return to the inequality of chances
in addition to the inequality of wealth?
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New Era of Inequality
Trade channels of transferring inequality
• In 1990, 60 percent of trade in goods was among the
high income economies, another 34 percent was
between high income and emerging market
economies, and just 6 percent was among emerging
market economies. By 2012, these ratios were 31
percent, 45 percent, and 24 percent, respectively.
• Before World War I, the big opportunity was to
incorporate undeveloped land, particularly in the
Americas, into production for the global market. This
time, the biggest opportunity is incorporating billions
of previously isolated people as workers and then
consumers and savers.
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New Era of Inequality
Income convergence?
• China has become a middle-income country with a
GDP per capita at PPP forecast to be higher than
Brazil’s by 2019.
• India, too, has registered convergence, though on a
more modest scale.
• Indonesia and Turkey have also done quite well.
• Brazil and Mexico are forecast to be poorer relative to
the United States in 2019 than they were back in 1980.
• Seizing the opportunities afforded by globalization
turns out to be a hard task
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New Era of Inequality
Globalization and inequality
• The age of globalization has brought an extraordinary
decline in mass poverty, again largely due to China.
• In east Asia and the Pacific, the proportion of the
population living on less than $1.25 a day (at PPP) fell,
astonishingly, from 77 percent in 1981 to 14 percent in
2008.
• In south Asia, the proportion in extreme poverty declined
from 61 percent in 1981 to 36 percent in 2008.
• In sub-Saharan Africa, however, the share of people in
extreme poverty was 51 percent in 1981 and still 49
percent in 2008.
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New Era of Inequality
• Globalization has been associated with complex shifts
in the distribution of incomes across and within
countries.
• The degree of inequality among individuals across the
globe has stayed roughly constant in the era of
globalization, with rising inequality within most
economies offsetting the success of some large
emerging economies in raising their average incomes
relative to those in rich countries.
• The explanations are complex, but globalization was
surely among them.
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New Era of Inequality
• The top 5 percent of the global income distribution enjoyed
large increases in real income and the top 1 percent very
large increases between 1988 and 2008.
• Those in the 10th to the 70th percentiles from the bottom
also did quite well.
• Two groups, however, did relatively badly—the bottom 10
percent, the world’s poorest, and those in the 70th to the
95th percentiles from the bottom, who are the middle- to
lower income groups in high-income countries.
• Thus, a globally beneficial rise in real incomes was
associated with rising inequality within many high-income
countries.
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New Era of Inequality
Sharing the pie - politics
• Income inequality has risen significantly over the past few
decades.
• Globalization and technological advances have lifted
billions out of poverty but also contributed to the rise in
income inequality.
• There are many reasons to believe that income inequality
will persist, given its inertia and the interplay between
inequality and political polarization, which makes
consensus on redistributive policies all the more difficult.
• Persistent inequality threatens growth and macroeconomic
stability
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New Era of Inequality
Inequality and growth
• Mechanisms linking inequality and growth, including
the effect of inequality on the ability of the poor and
middle class to accumulate human capital; on political
stability and thus incentives to invest; on social
cohesion and the ability to resist and forcefully adjust
to shocks; and on political pressures for redistribution,
which may dull incentives and thus slow growth.
• If countries tend to try to redistribute such
redistribution (higher tax rates, subsidies) may weaken
incentives to work and invest, then redistribution is not
a “treatment” for inequality but part of the problem, at
least when it comes to growth.
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New Era of Inequality
Three broad conclusions on inequality and growth:
• First, more unequal societies tend to redistribute more,
not just rich countries, but also (though to a generally
lesser extent) those whose economies are just
developing.
• Second, lower net inequality is robustly correlated with
faster and more durable growth, for a given level of
redistribution.
• And third, redistribution— measured as the difference
between market and net inequality—appears generally
benign in terms of its impact on growth. Only in
extreme cases is there some evidence that it may hurt
growth.
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New Era of Inequality
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New Era of Inequality
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New Era of Inequality
Inequality of chance
• While higher education gives graduates median earnings 79
percent higher than those with high school degrees, most
students and families “are having a harder time affording
college. College costs rising faster than income have
become especially burdensome for households in the
bottom half of the earnings distribution, while student
loan debt has quadrupled since 2004 to $1.1 trillion.
• Higher education has been and remains a potent source of
economic opportunity in America but I fear the large and
growing burden of paying for it may make it harder for
many young people to take advantage of the opportunity
higher education offers.
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New Era of Inequality
Political economy of inequality
• The share of the top 1 percent may be a more
useful measure partly because it gauges a
particularly important feature of the income
distribution for some purposes, such as the
ability of the fabulously rich to capture the
political process.
• As the late U.S. Supreme Court Justice Louis
Brandeis once observed: “We may have
democracy, or we may have wealth concentrated
in the hands of a few, but we can’t have both.”
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New Era of Inequality
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New Era of Inequality
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New Era of Inequality
• Global inequality (between world citizens) is
some 70 Gini point today (Brazil 54. China 47,
Denmark 24, Poland 34, Korea 31, US 48)
• Global inequality shows no clear trend in the
last 20 years although China’s and India’s
growth are globally equalizing
• This is almost certainly the highest level of
relative, and certainly absolute, global
inequality at any point in human history
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New Era of Inequality
• The composition of global inequality has changed
from being driven by income differences within
countries (“class” differences) to income
differences between countries (“locational”)
• More than 75% of global inequality due to
between country differences
• About 60% of income dispersion “explained” by
country of citizenship
• This was not the case in the past (around 185070) when within-national inequalities “explained”
most of global inequality
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New Era of Inequality
What does Gini of 70 imply?
• To get to ½ of total income you need almost
92 percent of the poorest or about 8 percent
of the richest
• The bottom 50% of the population receives
6.6 percent of total income the top 1% of
population receives about 13 percent of total
income, thus 6 million top people receive as
much as 3+ billion poorest (ratio 500-1)
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New Era of Inequality
To reduce significantly global inequality (and
poverty) and citizenship rent there are two ways:
• A slow and sustainable way: higher growth rate of
poorer countries
• A fast and possibly politically tumultuous way:
increase migration
Either poor countries will have to become richer
and close the gap or poor people will move to rich
countries.
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New Era of Inequality
Inequality has long hidden life…
• The Ebola crisis holds a lesson. One reason that the disease
spread so rapidly in Liberia and Sierra Leone is that both
are war-ravaged countries, where a large proportion of the
population is malnourished and the health-care system has
been devastated.
• Moreover, where the private sector does play an essential
role – vaccine development – it has little incentive to
devote resources to diseases that afflict the poor or poor
countries. It is only when advanced countries are
threatened that there is sufficient impetus to invest in
vaccines to confront diseases like Ebola.
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New Era of Inequality
Inequality of income vs inequality of consumption
• The link between work and consumption has been critical
to maintaining market discipline. “If anyone is not willing
to work, let him not eat” Paul the Apostle
• However, given that government transfers are the fastest
growing part of household income in the developed
economies, the link between work and consumption has
already been loosened.
• The productive capacity is so large that society needs
people to consume more than it needs people to work
• Wealth and income disparities are much greater than the
disparity of consumption.
Result is social erosion
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New Era of Inequality
Solutions out-of-the-box: Bolsa Familia
• A social welfare program of the Brazilian
government. Bolsa Família provides financial aid
to poor Brazilian families; if they have children,
families must ensure that the children attend
school and are vaccinated.
• The program attempts to both reduce short-term
poverty by direct cash transfers and fight longterm poverty by increasing human capital among
the poor through conditional cash transfers.
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New Era of Inequality
Solutions out-of-the-box: micro credit/finance
• Microcredit is the extension of very small loans
(microloans) to impoverished borrowers who typically lack
collateral, steady employment and a verifiable credit
history. It is designed not only to support entrepreneurship
and alleviate poverty, but also in many cases to empower
women and uplift entire communities by extension. In
many communities, women lack the highly stable
employment histories that traditional lenders tend to
require. Repayment success rates are between 95 and 98
percent.
• Microcredit is part of microfinance which provides a wider
range of financial services, especially savings accounts, to
the poor.
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New Era of Inequality
Solutions out-of-the-box: guaranteed income
• Guaranteed minimum income is a social welfare provision
that guarantees that all citizens have an income sufficient
to live on, provided they meet certain conditions:
citizenship, a means test, and either availability for the
labor market or a willingness to perform community
services
• If citizenship is the only requirement, the system turns into
a universal basic income. It is a proposed system in which
all citizens regularly receive an unconditional sum of
money, either from a government or some other public
institution, in addition to any income received from
elsewhere.
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