Globalization, Wealth Inequality…then Protectionism

By: Andrea Gorga

Is it fair to trade-off less local inequality for more global inequality?

The links between globalization, wealth inequality, and protectionism are readily apparent from recent trends and findings. An analysis of those trends shows how globalization is likely to have increased inequality within countries (local inequality), while facilitating the economic convergence of poor and developing countries, i.e. lowering global inequality.  Protectionist pressures increase in response to the rise of inequality. People call for protectionism to improve their conditions, often ignoring the side effect, the hindering of global economic convergence. Economic convergence is the idea that poor economies will tend to grow at a faster pace than rich economies and in the long run will catch up. Globalization is supposed to ease this process through trade, migration, and capital flows. These movements should slowly erode the differences in productivity and technological progress. The key question is: Is it fair to prioritize the fight against local inequality over global inequality? This article uses the word inequality to refer to a disparity in outcome (e.g., income, wealth), rather than inequality of opportunity (access to education, healthcare). The data used refer mostly to inequality of income, but the argument is the same for wealth.

Local inequality

Local inequality measures the disparities in outcome within a country. These disparities have been rising sharply in recent decades and the public has taken notice. The middle class, generally, is shrinking and the share of wealth is increasing for the top 10% and especially the top 1%. One third of total wealth in the U.S. is held by the top 1% of the population and has increased by about 4 percentage points in 3 decades. Even Sweden observed an increase in its net Gini index of 13% between 1960 and 2005 (Debla-Norris et al 2015). Although the extent of this phenomenon varies widely across countries, inequality has a global scope. During a speech in 2013, former U.S. President Obama defined inequality as the “defining challenge of our time”. A wide, interdisciplinary corpus investigates reasons for such a trend and identifies globalization as one of the main causes. The channels through which globalization heightens inequality are debated and can be summarized in two ways.

The first hypothesis is that globalization directly affects income distribution in a variety of ways. Less-developed countries have an abundance of low-skilled labor employed in manufacturing at low costs. This competition puts downward pressure on the wages of unskilled workers in developed countries. Economic theory therefore, prescribes an increase in wages of workers in developing countries. Yet, other factors sometimes suppress developing country wages as well. One of the multiple explanations is that the increasing global mobility of capital and goods lead to a loss of bargaining power of workers (Hung et al. 2011).

The second hypothesis concerns the indirect effect of globalization. This effect is caused by a retrenchment of public intervention, regulation and redistribution caused in turn by the declining power of nation states in a globalized world (Hung et al. 2011). This hypothesis is supported by the collapse of socialism and the welfare state in western countries. Whether we give more credit to one or the other hypothesis, many recognize globalization has a significant effect in widening local inequality.

Global inequality

Global inequality measures the differences in income among all people on the planet. Measuring its trend is extraordinarily challenging. We can divide global inequality in two components: local inequality (previously described) and between-country inequality. In recent years there has been increasing consensus on the proposition that global inequality has been declining. There are empirical studies showing a downward trend driven by the rapid growth of developing countries accounting for a large share of the global population, e.g., China and India (Sala et al. 2002, Hung et al. 2011).

Stating that global inequality is declining is overly simplistic though. There are winners and losers from globalization and the graph above by Milanovic and Lakner (2015) helps us understand this phenomenon. On the vertical axis there is the cumulative growth of income from 1988 to 2008 and the horizontal axis represents the distribution of global population from the poorest to the richest. The biggest losers of globalization are clearly the global upper-middle class (between the 75^th and the 95^th percentile) which is largely represented by the lower and middle class of developed countries. The income of these people stagnated for 20 years and is the primary cause of the rise in local inequality. On the other hand, the biggest winner of globalization is the global middle class (between the 30^th and the 70^th percentile) which mainly represents the middle class of developing countries like China, India and Brazil. On the two tails of the distribution we observe a steep rise in income of the richest on one side and an ongoing stagnation of the income of the very poorest (the first 5 percentiles). One of the possible measures of the overall trend of inequality is the Gini coefficient which goes from 0 (full equality) to 1 (one person owns all the income). In 1988 the global Gini coefficient was 0.69 and it fell down to 0.64 in 2008 (Milanovic et al. 2016).

In a globalized world, local inequality tends to increase and global inequality tends to decrease due to the declining between-countries inequality. The more societies and economies are integrated, the more developing countries tend to converge to higher levels of average income. This effect comes at the expense of the lower-middle class in advanced economies, which suffer from increasing international competition. It is important to note that global inequality is much greater than inequality in any other single country in the world. With its Gini index of 0.64, it is almost twice as big as U.S. income inequality and it is likely to be underestimated due to the lack of reliable data from the poorest countries in the world. It is also greater than inequality in a country that is often mentioned as an example of great disparities among the social classes, Brazil (Milanovic 2013). Brazil’s Gini is about 0.51 (World Bank).

Inequality and protectionism

The two factors of inequality and globalization are linked to a third: protectionism. Countries with higher levels of inequality have increasing protectionist pressures (Mayda and Rodrik 2005). In troubling times, people have historically sought shelter in the form of political pressure for protectionist policies. In October 2008 for example, a steep rise of online searches for the word “protectionism” evinces a public interest in at least the concept of protectionism (ECB 2009). Measuring protectionist pressures can be difficult, but overwhelming evidence of calls for protectionist policies shows a widespread trend in this direction in western countries. Apart from the unanticipated wins of Trump and Brexit, examples of protectionist leaders and political groups include Geert Wilders in Holland, the Northern League in Italy, the Front National in France, and Orban in Hungary. One of the frequently-cited causes is rising local inequality. The hypothesis is that stagnant incomes of the lower- and middle-classes result in a clamor for higher tariffs, which some believe transfer partial gains of globalization from capital owners and skilled workers (the higher percentiles) to unskilled workers (the global upper middle class, largely represented by the lower and middle class of developed countries). The oft-ignored fact in the debate is, even if such policies might really advantage the lower middle class in advanced economies, they would ultimately hinder global economic convergence. Especially considering that inequality in absolute values is much more pronounced at the global level than at the local level, is it fair to trade less local inequality for more global inequality?

The causal relation between globalization and local inequality is widely accepted, even though there is uncertainty on the magnitude of the correlation. On the other hand, definitive data have not yet resolved arguments about the causal relation between globalization and global inequality. The effect of protectionism on global inequality is also somehow controversial. But data on actual impact may not save the use of protectionism from moral reprobation. If we find global inequality to be morally relevant, then it is unethical to intend for protectionist policies to reduce inequality within advanced economies at the expense of global economic convergence.

Does Global Inequality Matter?

There must be a reason why we are mostly concerned with inequality in our own countries while disregarding more significant inequality at the global level. There is a double ethical standard as applied to local and global justice. When we think about inequalities in our own country we usually feel somehow obliged to do something about it. We do not feel the same way about people who live in a country not our own. The existence of some kind of social relationship is necessary for arguing the moral obligation of distributive justice (Cullity 2004). Globalization and its implications have to be taken into account while evaluating social relationships. The process of globalization has shaped the way we see the world and it has to shape our moral beliefs. Indubitably, the world is becoming more interrelated. Many of the problems a nation-state has to tackle are global problems (environment, security, among others.) The integrated economy cannot be managed by single countries and we have international institutions like the IMF and WTO capable of handling specific issues globally. Countries are increasingly multi-ethnic and multicultural and this is changing the way we see each other. All these factors force us to share at least a little part of our lives with people from very different cultural backgrounds. With globalization, it is rare to find people who can claim to live in complete isolation from communities of different cultures (Singer 2002).

Another common argument concerns the risk of oppressive relationships. Wellman (2000) argues we should mostly be concerned with local inequality because this problem can lead to political domination. Between countries, inequality would not entail the same risk because it does not involve common institutions. From this view, political oppression would only be possible inside a nation. Yet, in a globalized world we observe exploitation by developed countries on a daily basis. Political oppression of the poor by the rich exists because western countries have much greater power in the decision-making process. Wellman then strengthens his point claiming inequality only matters at a comparative level. People only perceive it as an issue when they observe significant differences of lifestyle with others. If a person lives in a poor village in Congo, she will never desire the level of wealth of a person living in New York. However, this argument is refutable. The internet gives us the opportunity to get information from around the world in real time. People in developing countries are now well aware of the standard of living in advanced economies and often desire the same quality of life. Without ignoring the tragic effects of wide local inequality, the same issue at the global level deserves at least the same care.

The last argument to evaluate is Rawls’s argument. In The Law of Peoples, Rawls makes an argument against global redistribution, which does not consider globalization and its poorer outcomes. He builds on Mill’s definition of national self-determination (Mill 1859), rejecting a global principle of distributive justice. Rawls claims the only assistance due to poor and developing countries is help to achieve fair and democratic internal structures regulated by a public conception of justice. His approach in The Law of Peoples is radically different from his other book, A Theory of Justice. In The Law of Peoples, he gives the example of two societies. The poorest person in the first society is worse-off than the poorest in the second. He also assumes the two are well-structured democratic societies and there is a way to simply redistribute between the two countries. Should we reduce the gap between the poorest people in the two societies or should each society only care about its own income distribution? Rawls says we should be indifferent between the two options because “no people organized by its government is prepared to count, as first principle, the benefits for another people as outweighing the hardship imposed on itself” (The Law of Peoples p.40). It seems difficult to reconcile this position in international justice with his other book’s theory of justice inside national borders.

In A Theory of Justice, Rawls proposes a system in which people would never be disadvantaged by brute luck contingences. Under the veil of ignorance, we always would be maximizing the well-being of the worst-off. It is unclear how he would justify such different prescriptions for national and international justice. How is the place in which we were born not a brute luck contingency (Singer 2002)?

To strengthen his argument, Rawls conjures another example. Consider two countries that make different decisions: the first one industrializes while the second prefers a more leisurely society. After decades, the first country is twice as wealthy as the second one. Rawls says that it “seems unacceptable” to redistribute from one to the other. This argument fails for two reasons. It is implausible that poor and developing countries knowingly decide to grow at slow paces. Although economic theory has not achieved a good understanding of the reasons why one country becomes richer than another, geographical and cultural contingencies, factors not in one’s control, play a big role. And even if slow growth was a planned decision, how would Rawls reconcile his position with his national theory of justice? If redistribution is not permissible in this case, why should a person who worked hard her whole life be taxed in order to support someone who chose leisure over work? It seems clear that whatever the answer to this question, it needs to be the same for both national and international dimensions. There does not seem to be a convincing argument justifying protectionist policies that hinder global economic convergence. Whether tackling global inequality should be a priority or not, carrying out policies that can interrupt the economic catch-up process of developing countries seems to be deeply unfair. While there may be other reasons for employing protectionist policies in general, inequality reduction should not one of them.

Conclusion

There is a trade-off between local inequality and global inequality, especially when we address the former problem with protectionist policies. Such policies may not be morally permissible, but at a minimum, globalization has certainly changed the way we should think about global justice. The links between different countries are slowly removing cultural barriers and creating an integrated world economy. This integration needs to be taken into account while assessing issues concerning local and international justice. Rawls’ arguments against global redistribution use a double ethical standard at the national and international levels. The damage done to the Western middle class is an issue not to be ignored. The stagnation of wages of this population segment is likely to be one of the main causes for rising protectionism and is also one of the main concerns of our time. Despite that, the solution must not harm global convergence. Policies and further academic research should instead focus on how to make globalization more inclusive and sustainable for the middle class through redistribution and social protection measures (as has often been argued by Nobel Prize winner Michael Spence). Baker (2016), for example, conjectures that globalization has mainly affected poor people’s wages because professionals are protected by their political influence. While competition has increased for low skilled jobs, the same cannot be said for professionals (doctors, lawyers). This is because the latter are protected by domestic regulation (it is not easy for Mexican doctors to be doctors in the U.S.).

Finally, further research on nationalism is necessary to arrive at a solution for wealth inequality problems. In light of a globalized world, what value is left to nationalistic claims? Will we consider national and international justice on the same grounds? Globalization seems to be threatening the moral foundations of nationalism, especially when we speak of global justice. Future research aimed at defining the borders and evolution of nationalism is necessary if we are to comprehensively address issues of international justice.

Editor: Eric Witmer

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