How is inequality in the united states related to globalization?

Birdsall has written and spoken extensively on the relationship between globalization, inequality, and development. A new CGD initiative, Globalization and Inequality, provides an overview of the issues and brings together recent work by Birdsall and others on this important topic. On Friday, March 30th at 11:00 a.m. EST, Birdsall will answer questions live online about globalization and inequality via Ask CGD.

In a recent article in the Boston Review, Inequality Matters: Why Globalization Doesn't Lift All Boats Birdsall begins by describing how high inequality in Latin America has undermined growth and poverty reduction. She contrasts this with East Asia, where lower inequality was an important ingredient in the East Asian miracle of rapid, sustained, poverty-reducing growth.

Excerpts from Inequality Matters:

After spending the late 1980s working on Latin America for the World Bank, I became involved in a major study of East Asia's postwar growth. The contrast between the two regions was notable: Latin America was stagnating while East Asian economies were growing rapidly, with tremendously high rates of private and public investment and savings. The emphasis on exports and the pressure to compete in global markets seemed to have worked…

For economists… inequality has typically represented at worst a necessary evil and at best a reasonable price to pay for growth. So, for the most part, they have not been concerned with the apparent trend of rising inequality. Development economists in particular have focused instead on the reduction of absolute poverty. But in East Asia the textbook story seemed altogether wrong. One key to East Asia's success seemed to be its low initial levels of inequality, which were associated with the legacy of postwar redistribution of farm land in the northern economies and with subsequent high public investments in education, agricultural extension, and other programs in rural areas.

In 1993 I left the World Bank to become the executive vice president at the Inter-American Development Bank. By then I was persuaded that Latin America's high inequality was an economic problem, slowing its growth, as well as a social problem. I advocated more research on the issue…

Subsequent work by many economists has strengthened my conviction that while inequality may be constructive in the rich countries--in the classic sense of motivating individuals to work hard, innovate, and take productive risks--in developing countries it is likely to be destructive. That is especially true in Latin America, where conventional measures of income inequality are high. It also may well apply in other parts of the developing world, where our conventional indicators are not so high but there are plentiful signs of other forms of inequality: injustice, indignity, and lack of equal opportunity.

Now globalization is creating pressures that tend to increase inequality. We need to understand what those pressures are and how they operate as today's increasingly integrated global economy raises the bar of competitiveness. How might they best be managed, within countries and at the global level, to avoid their potentially destructive effects on growth?

We have a potentially powerful instrument to increase wealth and welfare: the global economy. But to support that economy we have an inadequate and fragile global polity. A major challenge of the 21st century will be to strengthen and reform the institutions, rules, and customs by which nations and peoples complement the global market with collective management of the problems, including persistent and unjust inequality, which markets alone will not resolve.

We are living in a time of mounting societal discontent and political divisiveness—a “fractured world,” as captured in the theme of the recent World Economic Forum meeting in Davos. In many countries, social disaffection with economic outcomes is up sharply, roiling the political landscape and stoking populist and nationalist sentiment. Brexit and the outcome of the 2016 United States presidential election are but the more dramatic examples of these socio-political dynamics that hold wider sway.

What explains the rising tide of socio-economic unhappiness? The world has not become less prosperous. It is true that the global financial crisis caused major setbacks, but economic growth has recovered. The economic pie is growing—although not as fast as before, as economic growth is being held down by a longer-term decline in productivity growth. The increasingly unequal sharing of the economic pie lies at the heart of the rising social discontent.

Income and wealth inequalities have risen practically in all major economies, and sharply in several of them. In the U.S., for example, the income share of the richest 1 percent has more than doubled since the early 1980s to around 22 percent, with the wealth share rising to almost 40 percent. Those with middle-class incomes have been squeezed and the typical worker has seen largely stagnant real wages. In the “land of opportunity,” social mobility has been stalling. Even as economic growth gathered steam in 2017, economic disparities continued to mount. According to a report released on the eve of the Davos meeting, 4 out of 5 dollars of the increase in global wealth in 2017 accrued to the top 1 percent.

In the cauldron of political debate, much of the blame for the rise in inequality is heaped on globalization—often from both ends of the political spectrum. The popular backlash against globalization has been fed by a negative political crescendo. Another factor blamed is technological change—digitization, the rise of robots, artificial intelligence—that is seen to favor capital and higher-level skills at the expense of ordinary workers. More and more, we hear calls to throw sand in the wheels of technological change, reflecting an ascendant neo-Luddism.

Most dynamic economic change inevitably creates winners and losers. Globalization and technology are no exceptions. They are key forces that drive innovation, productivity, and economic growth. But they also have been important factors behind the rise in inequalities we have witnessed—with technological change playing a stronger role. The distributional consequences of these forces, however, are not pre-ordained. Outcomes that are more inclusive are certainly possible. Much depends on policies. Sadly, policies for the most part have not risen to the new challenges. Indeed, they have often exacerbated rather than ameliorated the outcomes.

Attempting to inhibit globalization or technological change would be the wrong response to the rising popular discontent with their distributional outcomes. Instead, policies must do better to ensure that the economic gains are more widely shared. This means improving the enabling environment for firms and workers—to broaden access to opportunities that come with globalization and technological change and to enhance capabilities to adjust to the new challenges. Fresh, out-of-the box thinking is needed to bring policies in step with today’s economic transformations.

Competition must be strengthened in industry and finance to check the growth of monopolistic structures and abuse of market power. Competition policies must be revamped for the digital age marked by the rise of winner-take-all technology giants. Technology policies must be reformed so that they promote innovation and wide diffusion rather than serve primarily to lock in incumbents’ advantages as under the current patent systems.

Access to quality education and training must be greatly improved, including putting in place stronger and smarter programs for worker upskilling and reskilling and lifelong learning to respond to the shifting demand for skills. New models of public-private partnerships and technology-enabled solutions must be explored. Labor market policies and social protection systems must be adapted to the realities of a dynamic job market with more frequent shifts between jobs and more diverse work arrangements.

Governments must reorient expenditure priorities and find the fiscal space to restore public investment programs in infrastructure and research and development that have been allowed to run down. They must also review tax and transfer systems that have seen erosion of their redistributive role.

Reforms are needed at the international level as well, so that rules of engagement between countries in trade and other areas are fair. But the dominant part of the agenda to make globalization work better and for all rests with policies at the national level. A few years ago, Richard Haass wrote a book entitled “Foreign Policy Begins at Home.” In the same vein, globalization begins at home. Rather than decry globalization, politicians should exert more to put national policy houses in order.

The political debate needs to shift from frenzied rhetoric to take up the cudgels against primal forces to a calmer and more serious focus on policies that matter. The aphorism “it’s the economy, stupid” captured the political zeitgeist of the not too distant past. “It’s the policies, stupid” would be an apt renewal of that exhortation for our time.

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