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Globalization, Poverty and Inequality

by Kaushik Basu

1. Forbes Online, 27 February 2003 (1), offers some information about the world’s ten richest people. Much of the information would cause little surprise. The list shows that big money comes from software innovation, economies of scale in retailing, the business of oil, investment luck, and inheritance. What is, however, really striking is just how rich these ten people are (2). Together they had, in 2002, a net worth of $217 billion, ranging from Bill Gates in the lead with $40.7 billion to John Walton (son of Sam Walton, founder of Walmart) with $16.5 billion.

To understand how staggering this is, note that in the same year Tanzania, with a population of 35 million, had a GDP of $10.15 billion. In other words, if one assumes that the ten richest people earn a return of 5% on their assets, their earning in one year would be roughly equal to the total annual earnings of the entire population of Tanzania.

If we leave out individuals and turn to nations, the gaps of course shrink but are still striking. Take the richest and the poorest countries (in terms of per capita income) from the list of the 152 nations for which data are provided in the World Development Indicators 2004. These are, respectively, Norway and Sierra Leone. Each of these countries has a population of 5 million. Sierra Leone has a per capita income of $140 and Norway $38,730. If we make purchasing power parity corrections on these, they get a bit closer: Sierra Leone $500, Norway $36,690. But still a person picked at random in Norway is 73 times as wealthy as a person chosen randomly in Sierra Leone.

​I do not present these numbers to advocate any obvious normative proposition, such as how bad governments are in the Third World or how little governments of industrialized nations are willing to share with the poor but to draw our attention to the fact that, even though the debate on whether global inequality has risen or fallen in recent times may be unresolved, the amount of inequality is staggering; the hiatus between the richest and the poorest people on earth is unacceptable by any moral standard.

2. As globalization occurred with rapidity in recent decades, has inequality in the world increased? The answer is mired in debate. If, however, we take a very long run view, the answer becomes much more transparent. Over the last five centuries, the world has become more globalized and much more prosperous, and, if we consider inter-regional inequality, it is clear that inequality has grown as well. Some of the basic information is on display in Table 1. Though there is scope for debate about how global, inter-regional inequality has gone over the last two or three decades, the overall trend, viewed over a long stretch of time and measured as the ratio between the richest and the poorest regions, is that of unequivocal deterioration. Using a specific carving of the world, the richest region was 1.8 times richer than the poorest region half a millennium ago, whereas, currently, the richest region has a per capita income that is 20 times the income of the poorest region. And viewed in large strides of time the deterioration has been monotonic.

What has happened in recent times remains more controversial but no matter how that debate is settled, it seems easy to argue that there is reason for concern. First, if a sizable population feels increasingly marginalized because it finds itself becoming poor relative to global wealth, this is bound to stoke political volatility. Second, no matter what has been the trajectory and no matter what its connection to globalization, the level of inequality that we see today, is far too large for complacency.

3. During a field visit to the village of Jakotra, in a remote corner of Gujarat, India, I found a palpable concern among the poor villagers about what globalization might do to them. The villagers, who earn their livelihood largely from handicrafts and embroidery work on textile, were concerned that their livelihood could get wiped out by competition from an international producer, who may manufacture embroidered clothing in large factories and export this to India. Talking to the villagers I realized what a double-edged sword globalization is. On the one hand, they have clearly benefited in the last decade because of globalization and their ability to sell their products in faraway lands. On the other hand, they rightly fear that this prosperity may not last. And these people are still sufficiently poor that the end of prosperity for them could mean acute poverty and destitution.

In the full paper I construct a simple model to illustrate some of the policy dilemmas and risks associated with globalization. But I should emphasize that the message of this must not be read as one against globalization. The potential benefits created by the easier flow of goods, services, software products and labor are enormous and to stop these would be an error. At the same time, the fear of these getting stopped must not lead us to praise all aspects of globalization. By pointing to its negative fall-outs, we can encourage policies to counter them and to distribute better the spoils of globalization. Not only should this be viewed as a moral imperative, to ignore the marginalization of groups is to risk political instability and even war.

4. In crafting policy that is concerned with the conditions of the poor and the disadvantaged and at the same time is dynamic and not unmindful of growth, I would suggest that governments set themselves a simple normative objective. Where traditionally we associated each country’s welfare with its per capita income, the normative criteria that I propose would require us to associate it, instead, with the per capita income of the poorest 20% of the population. I call this the ‘quintile income’ of a country. What is being suggested is that in evaluating a country’s well-being we should focus on the country’s quintile income.

The quintile income measure, viewed as an equity-conscious measure of welfare has several normative advantages. Unlike a policy that tries to minimize poverty or minimize inequality, the objective of maximizing the quintile income has a natural dynamism, because it is a moving target. In a country with gross inequalities, this measure will suggest that we focus on the conditions of the poorest people. But if the better off people are ignored totally and for too long, they will soon be a part of the bottom quintile of the society and so deserve attention. If there is full equality in society, this measure does not allow the policy-maker to sit back. Since in such a society the quintile income coincides with the per capita income, the aim now will be to raise the per capita income.

Also, a focus on the quintile income does not mean that the growth rate is to be ignored. It is simply that the growth rate should be measured in terms of the growth rate of the quintile income.

There is also the advantage of directness in this new measure. Instead of saying that we should aim to increase income and expect the benefits to reach the poorest sections, this measure says that we should aim to increase the growth rate of the quintile incomes.​

India’s recent experience speaks to this. By all accounts inequality in India has risen in recent decades, especially the last one, and detailed studies show that one particular segment that has contributed to this significantly is the better-off segment of the population. It is very likely that this segment is the one that is benefiting most from globalization, since it belongs to the part of the economy that is most open and linked to the world. Under this circumstance, if India were to individually try to tackle this, it would amount to a futile and in the end, self-defeating resistance to globalization.

What is needed instead is coordination of policy across countries on matters of poverty-removal and equity-enhancement. From this theoretical understanding to move to real-world policy is not an easy task. Countries are at different levels of development and policy instruments are many more than choosing tax rates and immigration rules. How can countries coordinate policies in such a world? What is needed is a new global organization or a new initiative in some existing global institution that concentrates on coordinated anti-poverty policies. We have today central coordinating organizations for labor market policies and labor standards (ILO), for trade policies (WTO), for environmental policies (UNEP), but on anti-poverty and equity policies, although there are many pronouncements from the United Nations and other organizations, there is no vehicle, at the supranational level. Maybe the time has come to consider this.

(1) See www.forbes.com/lists/2003/02/26/billionaireland.html

(2) Another striking commonality among these people that may interest students (especially those who find college a grind) is that three of these ten are university drop-outs (Bill Gates, Harvard; Paul Allen, Washington State University; Lawrence Ellison, University of Illinois).

Kaushik Basu is a Professor of Economics and C. Marks Professor, Department of Economics, Cornell University and Visiting Professor of Economics, Department of Economics, Harvard University.

This article is an abstract of a paper written for the UNU-WIDER project on ‘Impact of Globalization on the World’s Poor’, directed by Machiko Nissanko and Erik Thorbecke, Helsinki, 29-30 October 2004.