Guest Contribution: “Inequality Falls Globally, Even as it Rises Within-Country”

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers..

There are lots of measures of inequality. If we are interested only in income distribution within the United States, it doesn’t matter much which one we look at: They all show rising inequality, as noted in my preceding blogpost. But when we look at inequality internationally, which measure we look at makes all the difference.

What if we are interested in purely global inequality, if we want to treat everybody as a citizen of the world rather than a citizen of their own country? As Xavier Sala-i-Martin pointed out some years ago (2002, 2006), estimates of the global income distribution show a reduction in inequality. This may seem paradoxical since income has become more unequal in most countries. But the ongoing reduction in global inequality is no mystery: China, India, and some other developing countries have raised their per capita incomes at historic speeds since the 1980s, raising many millions out of poverty. The narrowing of the gap between these large poor countries and the rich countries has reduced global income inequality, by more than anything going on within countries.

Which measure of inequality?

There is a basic philosophical question whether one wants to look at “spread” measures such as the difference between the upper decile and bottom decile or a more comprehensive measure of income distribution such as the Gini coefficient. They often give different answers internationally.

How should we judge China if growth lifts a majority of the poor out of poverty, but benefits the rich even more, while leaving a minority of the poor relatively untouched? The high-low spread increases while the Gini could go down. (China’s Gini in fact peaked at 0.533 in 2010 and then fell to 0.495 in 2014.)

And what if the poverty rate goes down a lot? That seems to me the most important single statistic, even though it is not, strictly speaking, a measure of inequality. Between 1981 and 2010 China lifted 680 million people out of poverty. That alone constituted about ¾ of the big global fall in extreme poverty during these years.
The global poverty rate was cut in half in two decades:

  • 1990, 43% of the population of developing countries lived in extreme poverty (then defined as subsisting on $1 a day); the absolute number = 1.9 billion people.
  • By 2010 it was 21% = 1.2 billion. (The poverty line was then $1.25, the average of the 15 poorest countries’ own poverty lines in 2005 prices, adjusted for differences in purchasing power.)

Is China’s Gain America’s Loss?

Lots of factors no doubt underlie the growth miracle of China and other developing countries, from rural-urban migration to high rates of saving and education. But globalization is high on the list. Views differ. Sorting out the causality is difficult. My own perspective is that one can use geography to isolate exogenous determinants of trade; such analysis suggests that trade has indeed been an important cause of the economic success of Asia and therefore of some convergence with the West.

From the viewpoint of an “American Firster” like the current occupant of the White House, the proposition that trade explains China’s success immediately suggests the proposition that this success has come at the expense of the US. This zero-sum approach to trade was of course a feature of the mercantilist theory that reigned three centuries ago, before Adam Smith and David Ricardo pointed out that trade normally would benefit both partners. Their classical theory of comparative advantage said that everyone would benefit from the opportunity to consume goods produced in whichever country had the ability to produce them relatively more cheaply.

My preceding column noted that the trade model relevant for addressing the distribution of income between unskilled workers and everyone else was the Heckscher-Ohlin-Stolper-Samuelson model. That model could explain the rising wage gap within rich countries, but is at a loss to explain why the wage gap has also risen within developing countries. Evidently something else explains the world-wide phenomenon of rising within-country inequality, something like skill-biased technological change.

This post written by Jeffrey Frankel.

15 thoughts on “Guest Contribution: “Inequality Falls Globally, Even as it Rises Within-Country”

  1. Rick Stryker

    Very nice set of posts on trade and inequality.

    On a less serious note, it’s often alleged on this blog that the current Administration does not pay enough attention to economists. However, a prominent economist was just awarded first placein President Trump’s highly anticipated first annual news competition. The recipient has certainly worked hard for this honor over the years and it’s difficult to say he doesn’t deserve it.

    1. pgl

      “The New York Times’ Paul Krugman claimed on the day of President Trump’s historic, landslide victory that the economy would never recover.”

      Only a couple of problems with this award: (a) this is not what Krugman wrote; and (b) Krugman has already written a correction for what he did write. I judge this a “Fake Award”.

  2. pgl

    Interesting column. This was the part that I found very profound:

    ‘the Heckscher-Ohlin-Stolper-Samuelson model. That model could explain the rising wage gap within rich countries, but is at a loss to explain why the wage gap has also risen within developing countries.’

    Of course we know that this model does not capture all of the reality of international trade but its predictions with respect to relative input prices are to me at least its most powerful features. Wages have flourished during China’s development but so have profits.

  3. PeakTrader

    In the U.S., we offshored higher paying manufacturing jobs and imported lower skilled workers. Only 8% work in manufacturing today compared to 22% in 1970. It seems, many more American workers compete with tens of millions of poor immigrants and their children. Moreover, the Information Revolution created many high paying jobs, including millionaire employees, while the real national minimum wage declined substantially and low wage workers apparently captured none of the productivity gains.

  4. Bruce Hall

    I’ll offer a strawman here: the shift in worldwide manufacturing has reduced income opportunities for the less skilled and educated in the U.S. while increased the opportunities for less skilled and educated in low wage countries such as China, India, Vietnam, and even Mexico.

    Manufacturing in the U.S. accounts for about 12% of U.S. GDP directly and then nearly triples that with the addition of associated purchases of goods and services. This has been dropping for decades, so it’s not new in the U.S., but the rise of manufacturing in less developed nations has certainly brought large portions of the people in those countries out of poverty.

    The “maldistribution” of income/wealth in the U.S. is nothing more than the decline of manufacturing employment opportunities in the U.S. versus the developing world. This has not been offset by upgrading the technological skills of much of the U.S. population. Income disparity is technological skill disparity because technology development and application has been the engine of income growth (Amazon, Apple, Microsoft, Facebook, high speed trading, automation of factories, etc.) which favors those who own or develop high-tech related assets versus 20th century style manufacturing skills and assets (Tesla versus Ford?).

    Okay, have at it.

  5. Erik Poole

    Thank you Jeffrey Frankel for another terrific post on trade and inequality.

    Some might have reached for the corporate fascist analogy when characterizing the America FIRST policy stance of the current US president but I like the analogy with mercantilism much better.

    Skill-biased technological change is an important challenge for rich-country welfare states that seek to help domestic citizens in poverty. Outcomes appear determined more by life skills than material wealth as measured by money.

    People can be “poor” but live well live well if human capital, home production and social capital can adequately compensate. An example close to home would be the bohemians and leftovers of the counter-culture in many regions of North America who are poor but are also healthy, educated and live well. I can think of examples from Vermont to the Slocan Valley in British Columbia.

    An example farther from home would be Norway in the post-war period, pre-North Sea oil development. Perhaps this is a bad example because Norway boasts a level of social cohesion and cooperation that appears impossible in President Trump’s USA.

    Teaching poor people how to live well is a tough challenge. In many instances, getting poor people to cooperate better amongst themselves is hard.

  6. Erik Poole

    Bruce Hall wrote:
    “Manufacturing in the U.S. accounts for about 12% of U.S. GDP directly and then nearly triples that with the addition of associated purchases of goods and services. ”

    Be careful with literally taking popular special interest group use of poorly understood Input-Output multiplier effects. Otherwise, you will end up accounting for well in excess of 100% of US GDP.

    As for the rest of your thesis, technology and economic innovation have driven capital intensification in the US manufacturing industry, similar to what has happened to the resource sector in Canada and to many other sectors in countries around the world. It is but a partial explanation of the stagnation of some American workers’ wages.

    The question is why have some American workers adapted so well and others have not adapted. Similarly why do some groups of Americans sport excellent health results while other groups of Americans exhibit such poor health results.

    1. Bruce Hall

      Erik Poole,

      “Manufacturing industries generated $2.1 trillion in GDP (12.5 percent of total U.S. gross domestic product) in 2013. But even these figures do not fully capture manufacturing’s role in the economy. Manufacturing provides a significant source of demand for goods and services in other sectors of the economy, and these sales to other industries are not captured in measures of manufacturing sector GDP but are counted in the broader measure of its gross output. U.S. manufacturing had gross output of $5.9 trillion in 2013, more than one-third (35.4 percent) of U.S. GDP in 2013. Manufacturing is by far the most important sector of the U.S. economy in terms of total output and employment. The manufacturing sector supported approximately 17.1 million indirect jobs in the United States, in addition to the 12.0 million persons directly employed in manufacturing, for a total of 29.1 million jobs directly and indirectly supported, more than one-fifth (21.3 percent) of total U.S. employment in 2013.”

      I’ll admit that I haven’t attempted to replicate the analysis. Perhaps you have something to refute it. I’d be interested to read your source.

  7. joseph

    Jeffrey Frankel might want to do just the tiniest bit of self-examination if his posting has attracted the admiration of some of the most wacko right wing commentators on this site.

  8. Erik Poole

    joseph: Would you prefer the conversation be restricted to liberal freemarket economists of similar education and world view?

    Besides, Rick Stryker and PeakTrader, assuming those are indeed the posters you refer to/insult, have been on since “Christ left Moose Jaw” and their general attitudes are well known.

    If thoughtful and insightful policy analysts such as Jeffrey Frankel manage to reach across the ‘divide’, I reckon that is a good thing.

    Besides, my general impression that is that international trade, international finance and trade policy experts generally recognize that there have been winners and losers from both technology and trade and recognize that solutions for the losers are not always readily apparent. Compensating losers has a long tradition in modern economic policy analysis.

  9. 2slugbaits

    Another problem that Angus Deaton highlights in his book “The Great Escape” is the tendency for economic winners to pull up the ladder at the intra-country level. For example, cuts to public education is one way that upper income parents who can afford private education ensure their mediocre children have a leg up. It’s the old story of being born on third base and thinking you’ve hit a home run. Does Donald Trump know anyone like that?

    There’s also a serious moral question concerning immigration of high skilled foreigners. At least in the short run it is to the advantage of advanced economies to encourage high skilled immigrants; e.g., doctors, computer programmers, scientists, engineers, etc. But those policies also drain talent from undeveloped countries. That’s a difficult moral problem. Maybe we should encourage low-skilled immigrants and discourage high skilled immigrants.

    Rick Stryker As pgl noted, Paul Krugman was quick to correct his forecast of a Trump market collapse. Offhand I can’t remember any case in which Team Trump ever corrected one of their many, many errors and lies. As to the firing of the three CNN reporters, your GOP site has things a little wrong. CNN did not fire the reporters because they misreported something that was not true. Indeed, CNN was pretty clear that they believe the story was true. The reporters were fired because they didn’t follow the networks requirement for a minimum number of corroborating sources. The reporters had sources and evidence; they just didn’t have enough at the time to satisfy CNN’s internal policies. That sounds like an effort by CNN to be overly cautious, which is hardly consistent with Trump’s characterization of CNN being a “fake news” outlet. For example, there were plenty of news organizations that had solid evidence that Trump committed adultery in 2006 with a porn star and that Trump’s lawyer paid her $130K to keep her mouth shut. There’s even a hardcopy of the agreement. And back in 2011 there was an “In Touch” interview describing the encounter. Incidentally…based on Stormy Daniels’ story we should also question Trump’s claim of having big hands. But I digress. My point is that Fox News and Slate and the WaPo all sat on the story during Oct 2016 because Ms. Daniels recanted the story despite the hardcopy evidence and confirmation from several contemporaneous sources. So why didn’t Trump praise Fox News and Slate and the WaPo for responsible journalism in their decision to spike the story despite the significant evidence?

    1. pgl

      “there were plenty of news organizations that had solid evidence that Trump committed adultery in 2006 with a porn star and that Trump’s lawyer paid her $130K to keep her mouth shut. ”

      It appears the affair lasted a year. It also seems Stormy suggested that Marla’s claim that the Donald was great in the sake was “fake news”.

    1. baffling

      rick stryker has already taken the position that donny trump is allowed to lie if it allows him to achieve his goal. no need to retract a statement if one is permitted to lie, as advocated by rick.

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