Good news on globalisation

RECENT and continuing pro-tests against globalisation have pointed out a variety of supposed evils resulting from changes in the world economy. Common among these is that globalisation leads to a worsening of income inequality – the poor become poorer and the richer become richer.

This is true both for individuals and for countries. Is this just an article of faith among the converted or is there good reason to be concerned?

Globalisation means different things to different people. With the original protests being against the World Trade Organisation, it is clear that an increasingly essential ingredient is unrestricted international trade. More recent protests, though, have been against international financial institutions, such as the IMF and the World Bank, suggesting that international capital movements (and other factor movements) have become an important feature of globalisation.

In analysing the link between globalisation and income distribution, it is important to distinguish between the effect on the distribution within an advanced country such as Australia and the effects across all countries. In the case of the first, the argument is clear – an increase in international trade results in industrialised countries like Australia exporting mainly manufacturing jobs to poorer countries. We lose traditional middle-income jobs, gain high-tech jobs and finish up with a more dispersed income distribution.

The case for the second effect is less clear. The argument seems to be that Western industrialised countries and their multinational corporations are the more powerful party in international trade and exploit the weaker position of poor nations, thus worsening the international income distribution.

What are the facts? First, there is considerable evidence of worsening income distributions, both within and across countries. However, this is not as recent a phenomenon as the protests might suggest – income distri-butions have generally been widening since the early 19th century, both within and across countries.

A second fact is that globalisation has been going on for much longer than that – for 400 years at any rate, as far as we can tell.

Thus, from a long-term perspective, there must be a serious question about whether it is globalisation that drives the increasing inequality.

Closer to home, Professor Jeff Borland of the University of Melbourne recently surveyed the Australian evidence for the post-war period and confirmed the deterioration of the distribution of earnings in Australia. There was insufficient evidence, how-ever, to shunt this home to globalisation.

A competing hypothesis with equal credibility is that technical progress has increased the demand (and therefore the earnings) of the more highly-skilled relative to the unskilled.

On an international canvas, an evaluation of the evidence by two US economists, Peter Lindert and Jeffrey Williamson, led them to the conclusion that it is precisely those countries which have not participated in globalisation that have sunk to the bottom of the world income distribution.

This also is true for groups within countries – the poorest groups were not, by and large, disadvantaged by globalisation, they just didn’t take part in it.

Their message is clear: globalisation is good news as far as income disparities are concerned but “you’ve got to be in it to win it”.

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