A Perfect Crime: Inequality in the Age of Globalization Author(s): James K. Galbraith Source: Daedalus, Vol. 131, No.

1, On Inequality (Winter, 2002), pp. 11-25 Published by: The MIT Press on behalf of American Academy of Arts & Sciences Stable URL: http://www.jstor.org/stable/20027734 . Accessed: 10/05/2011 10:12
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James K. Galbraith A perfect crime: inequality in the age of globalization

of the world's leaders IVlost political economic have embraced globalization on two : that open markets and grounds are transnational networks production unstoppable surely flow ;and that the benefits will out to all the world's people,

Genoa.

countries, globalization and for imperialism synonym the word evokes colonialism ;generally rather than common collapse gain. All in is the new

In poor

and rich and poor. Leading economists the logic journalists agree, convinced by of laissez-faire, comparative advantage, and technology transfer. Accordingly, they declare, class conflict and competi tive struggle are obsolete. Yet, outside elite circles, conflict and to disappear. In rich struggle refuse and pressure electorates countries, and proreg groups remain protectionist in parts of Europe ulation, even socialist there iswide sympathy for the (nonvio of Seattle, Davos, and lent) protestors

of deregulation, all, if the imposition pri free trade, and free capital has in fact raised living stan mobility vatization, is devilishly dards worldwide, gratitude hard to find. So what are the facts? Has globaliza tion hurt or helped? Oddly, researchers not ask. do not know; mostly they do as it is For the doctrine of globalization understood curious the that the global mar assumption ket is itself beyond reproach. The formu lae for success in that market from in elite circles contains

to sound and transparency openness to investment in education finance of national responsibili countries that fail have only their ty ; own deficiencies to blame. In line with this view, most research has focused on conditions and national poli or the cies, and not on global conditions as such. effects of globalization Whether such a national focus is or whether a global view appropriate, would be better, is a question of great To resolve it, we would importance. need new efforts to measure economic and social progress across development countries in effect, around the world national remain matters

James K. Galbraith is a professor at theLyndon B. Johnson School of Public Affairs, theUniversity

of Texas at Austin, and a senior scholar at the

Levy Economics Institute of Bard College; in the early 1980s, he served as executive director of the congressional Joint Economic Committee. His recent academic work emphasizes practical issues of measurement and data quality as the key to progress on important questions of economic poli cy.His books include "Created Unequal" (1998) and "Inequality and Industrial Change: A Global View" (2001).

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11

James K. Galbraith on inequality

we would

need

to write

carcj# gut official notably theWorld

a global report in this vein, initiatives Bank's Human Devel

rural divide. deepened, ty would

But as industrialization the center

of economic gravi shift to the cities. To live in

opment Report, are caught in contradic tions between the cheerful predictions of globalization theory and what the evi unem of epidemics, illiteracy, is actu and poverty suggests ployment, that contradictions ally happening have driven several senior figures (most former chief economist famously, Joseph dence the Stiglitz) out of the Bank. Meanwhile, International Monetary Fund (imf) and World Trade Organization (WTO) are sealed off from today closed societies, most forms of serious critical discussion. what can independent research con So, of the state tribute to an understanding of the global economy today? Not much, evi the fragmentary perhaps, beyond dence of case studies and field reports. usually lack new bring together on a information scale. global Still, one broader area has attracted attention: economic inequality and its scholars

cities, to work for wages, requires free labor and that every family have some access to cash. The larger the share of basic consumption goods provided the more equal through the marketplace, incomes must become. Eventual money and social-welfare systems ly, democracy would toward the emerge ;progress social democratic of West frameworks ern and North America was a Europe as well as an ideal. pragmatic possibility Kuznets offered an optimistic vision, to that of John Maynard Keynes more austere in though style. Properly could be civi development managed, similar lead to the misery and that Karl Marx had earlier fore upheaval seen. But in recent years, as the Marxian lized; it need not threat disappeared, Kuznets's vision also unions in disorder and receded. With welfare states now in disrepute, the 'Kuznets serves mainly as a

Truly independent to the resources

to economic In this growth. relationship as we shall see area, data (collated, below, from many sources) independent are already available. A rich (but inex can be to econometrics brought pensive) bear. And much For, while are hardly the only issues in growth litera world development life, health, the and peace are more cy, important these between relationship perceived two economic opment policy variables underlies ways. devel in profound on the findings. hinges and economic inequality

hypothesis' research whipping boy of development at length, ers, to be raised, sometimes as discon but usually to be dismissed tinued by modern data, generally by economists who see no contradiction

between and development. inequality In a 1993 report entitled the East Asian Miracle referred to as EAM), (hereafter economists alternative at the World Bank offered an theory. They argued that of land redistributions, early especially were precondi and primary schooling, tions for industrial rea, Taiwan, China, and Thailand. This widely cation success in Japan, Ko Singapore, Malaysia, argument has been a case for edu cited to underpin as a development tool, to support

economist Simon -L/ong ago, the great Kuznets linked equality to (1901 -1985) ar the development process. Kuznets as industrialization began, it gued that at lead to an increasing inequality might first: would the rough parity among farmers an emerging urban give way to
12 D dalus Winter 2002

in the early stages, redistributive policies to argue that development and especially can be market-friendly, the provided and in "right" pattern of endowments centives exists at the outset.

pre By emphasizing market-friendly conditions for growth, the EAM team undermined the presumption that devel and rising equality normally - even together though the Asian evidence did suggest that this was in fact the case inmost places. The team also the policy activism of many downplayed Asian states, especially their commit ments to planning, industrial policy, opment occur financial control, and the development - all cornerstones of social welfare of a as under normal development process stood by Keynes and Kuznets in their day. The EAM's striking hypothesis also to the in called attention, indirectly, of information about in completeness equality had been many at the national equalities around the world. While efforts to measure there in

fers nearly 750 country/year observations on which dozens of papers have been based. The scent result has been into confusion. an unintended As scholars de

A perfect cnme

sought in between relationships and growth in the equality, income, World Bank's data, no consistent pat tern emerged. Some seemed to confirm systematic the Kuznets instead Others hypothesis. argued that inequality first falls and then rises with rising income :the oppo a rela finding of low inequality and first supported, and on the that the ground seemed to rest on conti EAM between Latin

site pattern. The tionship between later growth was then questioned,

relationship differences nent-specific America and Asia. Meanwhile, came under associated servative nomic

level, no one measurements to had brought those a gether in single global data set. As a one result, it remained unclear whether from the East Asian lessons it really true set the stage ex the apparent Was scale ? policies

challenge, with older

viewpoints pro-equality from a quarter theories was and con eco itself the views. In Victorian

policy

could generalize perience. Were valid on awider that redistributive for growth? To help answer

that question, Klaus and Lyn Squire of theWorld Deininger to mine Bank decided the economic de literature for surveys of in velopment come of thousands inequality. Finding in scores of studies, such measures they evaluated each data point on three crite ria. Did the study focus on households, rather than persons ?Did it attempt to measure all forms of income, including in-kind incomes ? Did it attempt to cov er all parts of the society, including rural as well as urban areas ? In 1996 re they the data satisfying these three published criteria as a "high-quality" data set on income inequality household since 1950. The Deininger-Squire data set is now a standard reference ;a recent version of

thought, inequality spur of growth. Growth required capital and itwas the accumula accumulation, tions made possible by concentrating incomes that justified an unequal class structure. The Victorian system worked - so well enough as, in practice, long class growth did occur and the working es enjoyed the benefit of a steadily rising living standard. But, as Keynes particu all this had died larly well understood, with World War I. And then, after sixty years, the very same idea was born again. Let the rich - so wrote econo rule the supply-side mists who came to power behind Ron in America ald Reagan and Margaret Thatcher in Britain. Tax cuts would the incentives im

to of the wealthy prove and invest." High interest "work, save, rates would reward saving and quash inflation. And a fetish of the entrepre neur ness and busi spread through political that implicitly culture, a doctrine
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James K. Galbraith
on

inequality

the concept of value in innova t^on an(j ieacjership, rather than in labor . . r i i or consumers. or even in the happiness rooted a similar doctrine finds expres Today, sion in models that emphasize syner returns, technological increasing in part Two good educations, are more than twice as good as nership, gies, change. should concentrate one, so the educated into enclaves. Technical development of the the relative productivity the skilled well trained therefore, pay more and the unskilled less. In these as clusters cases, inequalities expressed will foster of privileged opportunity raises more rapid growth. an empirical basis for such Seeking Kristin Forbes uses the Dein claims, inger and Squire data set to find that in are followed by in creases in inequality creased growth rates. If valid, these find ings would restoring reverse lost luster the EAM idea without to Simon Kuznets.1

change. success

Inequality may well rise, but the of a growth strategy makes the sacrifice worthwhile.

The Kuznets and Keynes view implies that is the normal out increasing equality come of a process of rising incomes whether fast or slow and that social are normal welfare policies outgrowths to an urban industrial of the transition economy. This perspective that redistribution ; it only decline does not pre should

suppose cede growth equality will process

pre implies that in as the development and

matures. were

But if Kuznets

Keynes right, then strategies of im industrial diversification, planning, financial substitution, control, and port state are a legitimate part of the welfare tool kit; they do not the development contradict the fundamental project. is The Scotch verdict "not proven" to that development be unrelated may in any inequalities This is the fallback posi systematic way. tion of some who argue for growth as the sole development objective. social and economic Plainly, different many
ses are,

matters have i\s stand, economists four different possibilities, broached for the each with different implications : of economic strategy development The redistributionist view holds that egal are a precondition itarian social policies for growth and points to the Asian mira cle before the crash of 1997 as prime land This view emphasizes but tends to resist and education, once inmarket processes intervention have been successfully preconditions evidence. reform
met.

the world

things of these four conflicting

actually, correct? At

is complex. Many could be true. But how hypothe

most, one.2

Which
answer.

one ?A great deal rides on the

v_>Jne reason why the question is that the evidence unresolved views which the modern ed the Deininger-Squire unreliable.

remains

against have been test - is data set

The should
sources

neoliberal view is that policymakers re go for growth, concentrating

on comparative advantage, ex

2 To Kuznets

see

the

contradiction

between

the

ports,

and the fostering

of technological

hypothesis consider hypothesis, identical levels with If both then Kuznets But can grow

and, say, the Forbes two countries that of to a income and

start

inequality.

i See Kristin of the "A Reassessment Forbes, and Growth," Between Relationship Inequality Review American Economic 90 (3) (September 869-887. 2000):

under both. country

income level, higher in decline should inequality model its growth short run. suggests rate by It follows that one

the Forbes raise in the

inequality

increasing that later

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but admire the effort of and Squire to bring some or Deininger der to the chaotic history of income-in Still, a compari equality measurement. son of coefficient values from their data set quickly reveals "high-quality" fundamental problems. in First, in many parts of the world Africa most of all, but also in Latin America, Asia, and even in parts of Eu
rope measurements are sparse, sepa

One

cannot

the affluent member Organization and Development

countries

of the

Cooperation (this is true of the Forbes study, for example). A simple effort to compare changes from the the decades for 1980s to the 1990s which the Bank reports the most obser vations shows no data for most of Africa, West Asia, and Latin America. And where observations exist, they are : falls for about questionable inequality in this exercise, in a half the countries decade marked by wide protests against data and com rising inequality! When mon perception clash so sharply, which

for Economic

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rated in time by many years or even dec some of the rank ades. Second, while - one seem reasonable expect ings might low inequality readings from Eastern years Europe during the communist others are, to put itmildly, implausible. in India, Pakistan, and In Is inequality donesia really in the same general league as in Norway? in Spain Is inequality Is inequali really lower than in France? in the United States and Australia ty or the to, say, Nigeria really comparable Sudan? It is doubtful that any Sudanese thinks so. these re The thin coverage on which amore serious sults are based becomes still when one tries to compute problem in theWorld Bank's inequality changes time period. data over some consistent One where is rapidly reduced to a data set are from half of all observations

is to be believed?
V Ve clearly need more and better data. A new data set should, ideally, approach coverage of the global comprehensive
economy on a year-to-year basis, per

of changes mitting comparison to changes in inequality in GDP. It should be based on data that are reason consistent ably accurate and reasonably
across countries.

detailed

This as one

so turns out to be possible, long to narrow the focus and iswilling to return to official sources of informa - sources tion that are very rich, but

on

that

country higher

will income

have, and

other at least

things equal,

equal,

being or per

The downward-sloping haps higher, inequality. no relation Kuznets will longer be observed, in time series or panel either data. Similarly, the EAM model reducing same case, inequality income if growth level then is correct, in the then short a country run will be

of house Inequalities widely neglected. hold income the focus of Deininger - are to meas and Squire very difficult we do have and the measurements ure, often come from unofficial surveys.3 Levels of pay, on the other hand, may be measured
if

many

easily and accurately countries. Pay is, of course,

for a large

observed at lower inequality but initially the

as one that does not. In this accelerates in the redistrib be re may be observed not be re

3 The only consistent formal definition of

income whose treatment It is tax salaries not, that we code have comes from the income tax, the precise allowable specifies of each type of inflow and outflow. law that specifies and that wages income, but that reimbursements and of are gifts received of business expenses Since tax laws nation is therefore

the Kuznets country, pattern uting not stored after a time. But it will during the transition, and it may to

are

stored at all ; the EAM hypothesis does not

clearly growth specify what accelerates. happens inequality after

should vary,

be deducted, the concept

so on.

income

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James K. Galbraith inequality

of income. Levels of manufactur - an subset of all pay important ingpay have been measured with reasonable as amatter of official routine in accuracy subset most for data nearly resulting sector have payrolls by manufacturing indus been placed in a single systematic trial accounting framework by the Unit forty years. The ed Nations Organization International (UNIDO), Development which makes both easy and countries around the world

an using inequality metric in the 1960s by the late econo developed metrician Henri Theil.5 The application to UNIDO's of this technique industrial information, set permits us to generate large of inequality measures that can across countries be compared and data numbers through time. The year 2000 release of the UNIDO data set alone contains suffi cient information for nearly 3,200 coun between 1963 and try/year observations than four times the coverage 1998 more of Deininger and Squire.
4 The siveness measurement main and trade-off is between comprehen accurate

cross-country comparison relatively reliable. In short, if one iswilling

to look at the
: we accuracy of a limited

relationship through growth-inequality the narrow lens of pay rates and earnings to get the picture it is possible structures, into focus.4 of the University of (UTIP) has been Inequality Project to compute consistent measures of man xhe contribution pay inequality from this

emphasize

Texas

manufactur domain, over measure ing pay inequality, implausible ment of a comprehensive income one, inequali pay inequalities ty. However, manufacturing are in their own interesting right. First, many economic the important problems, particularly effects Kuznets tion of trade, technological itself, than and the change, concern the distribu of concept includes taxes, Second, and

ufacturing

hypothesis of pay, rather income the household

the broader which

household

distribution, effects of

ally specific,well defined only where precise

accounting laws. Differences ments across conventions are codified in the tax tax in accounting and countries will produce incomes. In countries treat

confounding

transfers,

changing there is nevertheless tion between

differences sub

composition. a strong correla apparent our measures of manufacturing

in measured stantial

where

pay inequality and the (we believe, reliable)

measures of income for a limited

or are unrecorded, parts of income or hidden in kind, from delivered tax, or where are vague, of standards accounting problems valuation and aggregation rapidly mount. There be consistent to to expect measurements time or across surveys. through the project of comparing facts make across countries and years inequality in practice even to arrive requires data. is no reason

but inequality reported of countries range only by the Income This Studies. is, of course, Luxembourg : countries with highly plausible strongly egali are com to have both tarian values likely and strong welfare pay structures pressed states. Thus we believe that the UTIP way to approach approxi for many micro a very

These income

and difficult, doubly at moderately reliable meticulous examination

provides mate rankings

inexpensive of income

comparisons of micro-level

where detailed countries, data are not available.

inequality and reliable

Such a project has been undertaken with

in recent Studies, wealthiest researchers, their years by the Luxembourg but it is restricted mainly countries. on The World hand, quality done the other had on over Income to the Bank's

skill
5 To be precise, we groups component a set of industrial twoto three-digit compute of Theil's the between T statistic across at the

to base summary a half cen

categories, generally standard international

of data judgments about work information in far-flung

industrial classification
statistic inequality entropy mation desirable is the best-known measures

(isic)

levels. Theil's T
of

tury

surveys. pendent is not their fault coefficients are

often inde locales, through and It cannot be surprising that the resulting inequality problematic.

of a class example as "generalized on infor based measures," originally have all the Such measures theory. known mathematical characteristics of the

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A map averaging values of an inequali from these data ty coefficient computed

(see figure 1) graphically displays the key

as findings. Over the 1963 -1998 period, these data reveal, manufacturing pay in was lowest in the social democ equality racies of Scandinavia and in Australia and under Eastern the communist Europe, China cause of the boundary Russia here exclude the Soviet regimes of and Cuba (be changes, data for

years). Southern Europe and North America form a second group of countries with

low levels of pay inequality. relatively countries The wealthier of Latin Ameri ca (such as Argentina, and Venezuela, and West Asia (Iran) form a Colombia) middle group; Russia (after 1991) and

and food, and the weakest development and the producof mass manufacturing tion of capital goods. are in These findings striking accord with Kuznets's basic hypothesis. Higher are incomes and lower pay inequality Because associated. this is true, strongly there is no reason to expect a systematic between relationship today inequality and growth later, and none can be found. Redistribution in either direc or down - is not a tion up apparently for economic ; in precondition growth and redistribu stead, successful growth tion tend to go hand in hand. the Kuznets hypothesis Although to levels of levels of inequality relating or income is corroborated pay broadly some doubts about his by these findings, views do remain. example, Kuznets It is debatable, for if inequality must increase, in the earliest as

A perfect cnme

South Africa rank slightly higher. The

are found regions of highest inequality a broad in equatorial belt, from Peru and Brazil through central Africa and south ern Asia, the largest gaps be reflecting tween city and countryside, between oil
more Gini known widely are additive addition they that inequality (meaning inequality between coefficient, and and in

supposed, of industrial development. ismoot inmost question

stages Yet that so far places, as modern times and data are con are past the ear cerned: most countries ly stages. Itmay also be that inequality rises slightly in a few of the very richest as income grows, due countries partly to sectors - a in technology capital gains

for the combined inequality population). This makes tool for work them a very flexible data, and we have ing with semi-aggregated meas in that changes shown between-group ures are often a very robust of indicator

plus total

decomposable a set of groups within sums to the groups

changes in the whole distribution

the unobserved Use es of of industrial international of of within-groups category

(including

component). for purpos schemes is the principal For further dis the and

pattern of interest for students of the United States and the United Kingdom, but not broadly relevant to the study of economic development. On within the whole, of pay inequalities tend to be lower manufacturing

innovation cussion technical Maureen

comparison the UTIP project.

technical

appendices Berner, eds.,

consult details, please in James K. Galbraith Inequality Pedro Purcell

and Industrial

Change (Cambridge :Cambridge University

Press, I thank 2001). sub Kum, and George Concei?ao, especially, Hyun from

among the UTIP team, for diligent help with

and with calculations ; the present concepts world data set in particular is Kum's handi are at The UTIP measurements work. <http ://utip.gov.utexas.edu>.

in rich countries than in poor. That means that inequality almost surely de clines as industrialization and deepens as incomes rise. This is consis finding tent over the globe, with limited excep run of an tions, over a thirty-five-year in the early 1960s. nual data, beginning that Kuznets's -Besides confirming view of the relationship between growth remains basically and inequality correct,
D dalus Winter 2002

17

Galbraith
inequality

James

K.

Figure

Global Inequality
1963 1997
of manufac Inequality

turing pay computed by the University of Texas from Inequality Project 2000 edition the UNIDO of Industrial Statistics over 1963 and averaged ranked 1997 ; countries into

Figure

as in six quantiles the high 3. Note and geographic coverage

of inequality consistency in the OECD patterns and across the develop for ing regions. Data Russia only start are ; those post-Soviet for China for

in 1979. Data the Czech Republic,

(Theil Inequality <=O.Ol8,

^HF ^^
^^^^^^^?^

i^^^^^^^^B^^*. ^^^^^^^^^^^^^^^B|
^^^^^^^v ^^^^^^?

and the post Slovakia, states begin Yugoslav with the formation of those states in the 1990s.

3 0.036-0.052 4 D 0.052-0.074

5 I 0.074-0.099 i^^fl^^^Hr 6 H 0.099 -0.893, most inequality ? No data available ISB^^Kr

Least China Cape Verde Latvia Cuba Sweden Czech Republic Denmark Seychelles Romania Macau Norway Australia Finland Germany Netherlands Poland Luxembourg Hong Kong Hungary Slovakia Malta Britain Taiwan Slovenia France Austria

inequality 0.002510 0.002604 0.002916 0.004644 0.005988 0.006639 0.007344 0.007539 0.008529 0.009058 0.009170 0.009634 0.010957 0.011076 0.011777 0.012012 0.013181 0.013624 0.014684 0.015137 0.015548 0.015610 0.015858 0.016014 0.016278 0.017799 Canada Bulgaria Italy Algeria Croatia Nicaragua Afghanistan New Zealand Ireland Belgium United States Mexico Iceland Bangladesh South Korea Ethiopia Egypt Bosnia & Herz. Iraq Japan Namibia Moldavia Spain Malaysia Ukraine Greece 0.018428 0.019515 0.019734 0.020126 0.020982 0.022988 0.023208 0.025219 0.025589 0.025629 0.025646 0.027479 0.028083 0.028631 0.028825 0.029650 0.029919 0.030493 0.030966 0.031031 0.031425 0.031845 0.033788 0.034413 0.034697 0.035561

^#^?ff|5f
Gambia Colombia Burkina Faso Azerbaijan Costa Rica Portugal Nigeria Libya Turkey Iran Burma Senegal Madagascar Cyprus Macedonia Israel 0.037424 0.037912 0.038420 0.038456 0.038469 0.039110 0.040251 0.040600 0.040697 0.040782 0.041626 0.042025 0.042821 0.043173 0.043215 0.044112 0.045027 0.045361 0.045504 0.045698 0.045894 0.048402 0.048610 0.048952 0.051577 0.051952

Fiji
Ecuador North Yemen Pakistan Uruguay Argentina Sudan Somalia El Salvador Venezuela

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~*** s"^^ *&t--

' "5*s=^^_

A perfect
crime

4
Haiti Zimbabwe Botswana Sri Lanka Singapore Chile Russia South Africa Zambia Tonga Neth. Antilles Philippines Suriname Panama Barbados Ivory Coast Syria Cen. African Bolivia Nepal Am. Samoa U. Arab Emir. Mauritius Eritrea Albania Rep. 0.052814 0.054305 0.055032 0.056491 0.058459 0.058507 0.058517 0.058699 0.061265 0.061392 0.061593 0.061596 0.062061 0.062894 0.063116 0.064147 0.065215 0.066105 0.066374 0.068082 0.069093 0.069918 0.071762 0.072629 0.073632 Benin India Yugoslavia Brazil Rwanda Domincan Tanzania Lithuania Tunisia Burundi Jordan Peru Indonesia Kyrgystan Liberia Morocco Kenya Togo Papua N. Guinea Honduras Eq. Guinea Mauritania Thailand Bhutan Malawi Guatemala Bahamas 0.074386 0.075959 0.076278 0.077607 0.078161 0.079278 0.079455 0.080079 0.080430 0.082687 0.082940 0.082944 0.084083 0.085131 0.085607 0.085982 0.086183 0.086519 0.086716 0.086866 0.089228 0.092261 0.094014 0.095370 0.095639 0.097286 0.098721

Most
Lesotho Belize Gabon Swaziland Armenia South Yemen Uganda Oman Ghana Puerto Rico Cameroon & Tobago Mozambique Saudi Arabia Niger St. Vincent & Gren. Congo Trinidad

inequality
0.105516 0.105935 0.106911 0.106922 0.108136 0.109596 0.109652 0.113724 0.118893 0.121705 0.129300 0.136999 0.145823 0.149679 0.184693 0.188703 0.194245 0.201428 0.206362 0.230317 0.253880 0.312738 0.403546 0.404105 0.442336 0.892605

Rep.

Angola Cambodia Kuwait Sierra Leone Jamaica Bahrain Qatar Mongolia Paraguay

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James K.

Galbraith on inequality

Figure 2 A regression income and set. The downward relation toward ty over a similar matched

on of inequality time, UTIP data a reflects regression drift

sloping Kuznets as a as well global

sharply higher inequali time. (Color scales have but are not gradient to previous graphs.)

&*

o.?

Year 63
O.OO -0.05 -O.lO 11

65

67

69

71

73

75

77

79

81

83

85

87

89

91

93

95

97

I ?

-0.201

-o.30?J? -0.35 -0.40

UUilU IMI|||

Figure Panel wide

5 estimates time pattern of the world

of rising in for coun controlling effects and the ef try-specific in per capita re fect of changes of al income levels. The method equality, estimates permits of a year-to-year inequality. calcu pattern

panel lation

in changing

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A perfect
crime

? S

1981 to 1987 Change -42.4 to -1.09 -1.09 to 0.65 to 3.42 3.42 to 9.14 9.14 to 24.74 [~] N.A. 0.65 /

Figure

s (above) in the Age of Debt. in inequality from 1981 Changes to 1987. Dark gray indicates the Inequality in largest increases (notably Latin America and among oil at this time of col producers ;blue indi lapsing oil prices) cates declines ; light gray is "neutral." Almost the only cas es of in this declining inequality are in countries insulat period

Figure 4 (below)
ed from the global financial sys tem (China, India, Iran). Greece and Turkey showed very large increases their con following over in the frontation Cyprus 1970s may ;declines be a return in the 1980s to normality, in Greece after rule. of rising inequality the age of globalization. in inequality from Changes 1988 to 1994. The rise is extreme. The only significant Patterns in

in Russia

including policy the end of military

is region of declining inequality in the boom countries of South - more east Asia evidence of the Kuznets effect.

n
?

1.77to 5.5
5-5 to 11.82 %. 11.82 to 78.83 N.A.

* Wr (f'

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21

James K. Galbraith inequality

the UTIP data also permit us to detect in changes of inequality, global patterns to take a fresh look at the New World Order. This result. exercise For when produces disquieting the global trend is iso that in the last two de a

of the oil slump that followed. During rises most that time, inequality rapidly cone of Latin America in the Southern East. Second, and in parts of the Middle there was the collapse (in part induced, as in and Poland, by intract Yugoslavia able debts) of the communist world; the focus of ris these countries become in the late 1980s. By the ing inequalities as mid-1990s, figure 4 reveals, almost the countries with declining inequality only were the countries of Southern booming Asia (even if the crash after 1997 almost some of them in another surely took direction). - as as any This pattern shows clearly one indicator to do - the ser might hope ial failure of the global development to permit the build process as awhole of advanced industrial democracies ing states on which Kuznets and welfare and rested their hopes fifty years ago. Keynes Even so, the figures do not fully capture

lated, we find

cades, inequality has increased through out the world in a pattern that cuts across the effect of national income the decades that hap changes. During pen to coincide with the rise of neoliber of al ideology, with the breakdown and with the end sovereignties, in the global debt of Keynesian policies rose crisis of the early 1980s, inequality curve In effect, the Kuznets worldwide. national to income shifted inequality the upward slope This finding upward. of the plane in figure 2 points to influ ences on of a global order. inequality that there is a common The finding global upward trend in inequality pro for one of two vides strong evidence relating is that na One possibility propositions. have almost tional economic policies raised inequality independ universally ent of income changes but for what itmay be that reason? Alternatively, economic alone do not national policies and cannot entirely control national pay and that there is a common, structures, pernicious,
economy.

(though they do reflect) the deepening

ex whose dissolution of nation-states, treme cases lead to war, as in Bosnia, the eastern Croatia, Kosovo, Macedonia, Aceh, southern Co Congo, Chechnya, all of them and even Chiapas lombia, the poorest parts of their parent among states. But as inequality deepens, more of this is surely on the way. Oince passed out of fashion, fallen into have generally two camps :those who believe that redis on the one tribution fosters growth, hand, and those who believe on the con Kuznets economists

global

element

in the global

to ask, what some Is there, perhaps, is that element? the process of global laissez thing about faire itself And that created this outcome ? if so, is it an inherent feature of Or is it only an artifact "globalization?" of the particular policies under which the global market recent years? Figures has been liberalized in

In the latter case we have

3 and 4 illustrate the regional of increasing patterns inequality during two key episodes. First, there was the early 1980s, the years of debt crisis and
22 D dalus Winter 2002

is a price trary that rising inequality These worth paying for development. statements about national are, however, with the UTIP data conditions. Working set to isolate a different set, it is possible in of factors :those factors that co-evolve the world economy through of the movement annual pattern time, inde of national of these

pendently income. The

time effects, presented in figure 5, gives us an essential so far clue lacking: the precise turning point in inequality element and started to rise.6 at which ceased the global declining

technological accelerating change explain the pattern. The story case is often hinted at for the American that the rapid spread of computers after "skill-biased 1980 made technological a change" driving force behind rising But the UTIP (and all pay differentials. data clearly show rising inequali other)

Nor

can

A perfect cnme

As figure 5 shows, the common global in pay inequalities declines element slightly through the late 1970s. It then turns around in 1981 -1982, just as Ron ald Reagan took office in the United States. At this time, a shift in the global the of real interest rates brought latter from near o to 5 percent or higher for completely riskless assets and much higher for most countries with currencies. The result was depreciating a to precipitate global debt crisis in the course of which many poorer nations were forced first to cut imports and capi climate and then were pressured tal spending, abandon trade and wel long-standing to

ty in theUnited States beginning in the

1970s, long before the personal comput er revolution. And after 1980, inequality rises more sharply in poorer countries, where of course new technologies a spread the least. In country like Fin in Internet penetration, rose at all. inequality hardly can a sequence of events What explain that affects an almost universal spec trum of poorer countries after 1980, ex cluding only India and China in that de eco cade and a handful of the booming nomies of South Asia in the 1990s? The evidence of timing points toward the effect of rising real interest rates and the debt crisis. For this, the stage was set in 1973 of the Bretton by the dissolution Woods framework able exchange of fixed-but-adjust rates and international land, a leader

fare policies. The years since 1980 have test of the second thus seen an empirical of view: an extraordinary, system point atic increase in inequality. It has not followed by any increase in the glo bal rate of economic expansion. For a cause of worldwide rising in one must look to events that equality, been characterize not before. Worldwide the period after 1980, but of trade will not do. Growth

trade grew very rapidly " the period of stabilizing devel through (the Mexican term) that began opment" in 1945 and ended in the 1970s ; it is not a af peculiar feature of the environment
ter 1980.

of capital flow. As figure 5 supervision framework shows, the collapse ofthat ended a period of relatively stable and stable pay structures. growth a short There then followed period of boom, with fueled by commer declining inequality cial debt. But this was unsustainable, and it came to a crashing end in the worldwide financial shock that was ini in 1980 -1981 by the United States, as the U.S. Federal Reserve interest rates past 20 pushed nominal tiated percent. The rise in interest rates pro cuts in duced dramatic and continuing with devastating results for the imports, of poorer coun prospects development tries. Many
ered.

the oil and commodities

6 Our fects

panel

technique data

here

estimation,

is a two-way which

fixed entails

ef cre

for each country and variables ating "dummy" The coefficient estimates year in the sample. on the dummies the pat then reveal country tern of national while the coeffi institutions, cient estimates course over of of the time dummies reveal the common economy income ed in the global for controlling effects are present

inequality

changes. in figure 5

the years, The time

of them have never

recov

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23

James K. Galbraith
on

Indeed, matters were made worse by the concurrent r triumph of neoliberal ism in the United Kingdom the debt crisis, the "magic of the market preached place" to the poor. No new financial chitecture was created from in these States and the United same years. Following the rich countries ar

Russia
Asia.

and Eastern

Europe,

and then

in

inequality

crisis ensued. Only where Everywhere, countries resisted the neo successfully - most liberal policy prescriptions in China, in Northern notably Europe, and in the United States itself after the did growth continue and mid-1990s remain under reasonable pay inequality
control.

the wreck

banks. In age left by the commercial Fund stead, the International Monetary and then financial preached austerity, and privatization sale of deregulation state assets at fire-sale prices to foreign
investors.

effects

that the then, by accident at a global level of neoliberalism resemble those of a coup d'?tat at a level. data the early analysis using UTlP's set, George Purcell and I calculated

It is not,

in Latin honing these policies were after 1989 in America, they applied After

national In an

Figure

6 before, during, : the case

Inequality and after Chile and

Inequality in Chile
of 300

tern. The tom

coups the general pat chart on the bot the change for up to five

o
of o s;

200 150

averages

inequality before and

years up to five years after a coup d'?tat ; the aver across twen age is calculated cases. historical ty-seven

50

63 65 67 69

71 73 75 77 79 81 83 Year

85 87 89 91 93 95

Change in Inequality: 27 Coups D'Etat

I I I
$before 1before 1 after 3 before 3 after 5 after 2 before 2 after 4 before 4 after Coup year

24 D

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coups average effects of twenty-seven of pay in d'?tat on our measurements a pattern of equality. We found striking After rising four and five consistency. years before the coup, inequality would decline sharply in the two years immedi In the year of the coup ately beforehand. in inequality would itself, the decline stop. And in the five repressive years that followed from (coups, as distinct are almost revolutions, invariably right occur sys rising inequality would wing), in each year, until overall tematically stood far higher than in the inequality before the coup. Figure 6 presents period case of Chile our data for the canonical and the curve that emerges from averag cases. ing effects over the twenty-seven Viewed pattern wide after 1975 strongly resembles this curve. Global characteristic inequality from a global perspective, the of time effects observed world

trade as such In sum, it is not increasing we should fear. Nor is that technology the culprit. To focus on "globalization" as such misstates the issue. The problem is a process of integration carried out since at least 1980 under circumstances in which of unsustainable finance, wealth has flowed upwards from the to the rich, and mainly to poor countries strata of the richest the upper financial
countries.

A perfect crime

In the course toward tolerable sustainable

of these events, progress levels of inequality and

stopped. and of debt dependence, periphery were reestablished, but with peonage, out the slightest assumption of responsi for the fate of bility by the rich countries itwould appear, a perfect crime. And while statistical forensics can a small role in this out, play pointing no mechanism to reverse the policy still less any that might repair the countries have damage. The developed the pretense abandoned of attempting to foster development in the world at exists, to substitute the rheto large, preferring ric of ungoverned for the hard markets work of stabilizing The prog regulation. nosis is grim :a descent into apathy, disaster, and despair, disease, ecological wars of separatism and survival in many of the poorest parts of the world. of course, the wise spirits of Unless, Kuznets and Keynes can be summoned back to life, to deal more constructively with the appalling disorder of the past twenty years. the poor. It has been,

virtually development Neocolonial patterns of center

fell in the late 1970s. In those years, poor countries had the benefit of low interest and high commod for oil. Indeed, in ity prices, especially the 1970s, the UTIP data shows that it was the lower-income in the workers poorer countries who made the largest in pay. But in 1980 -1981, the age of gains low interest rates and high commodity rates and easy credit,

prices ended. - a In 1982, the repression took hold to be sure, but not financial repression, while less real for having taken that form. And the debt crisis was not accompa nied by overt violence coups are, in often very limited in their overt deed, violence the effects were soon felt

and with a savage intensity worldwide, that has continued for two decades.

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