Re-distributing inequality

Signs of what McKinsey called “The Great Rebalancing” are all around us. I smiled when I read about the messages of solidarity sent by Egyptians to the Occupy protesters in Europe and the USA. Time was when students in cold countries passed motions and sent messages of support to protesters in hot countries. Now, it seems, it’s the other way round.

I’m old enough to remember comedians making jokes about Latin American debt: ‘My bank called me today and said, “There are three accounts we are worried about; Mexico’s, Argentina’s and yours!”‘ Doesn’t sound quite so funny now, does it?

The G20 summit showed just how far things had changed. As recently as twenty years ago, the dominance of the European nations and their colonial offspring seemed unassailable. But this autumn, Europe held out the begging bowl and even the Americans seemed less sure of themselves than usual. Britain, the country that was, 100 years ago, the most powerful in the world, looked like a passive observer. Only China emerged from the summit looking stronger. The old G7 countries carry on meeting, as though they still run the show, but the other major economies go on their way regardless. Power is slipping away from them by the day.

As the OECD notes:

[T]he world has undergone a shift of historical significance over the past decade, with the centre of economic gravity moving towards the East and South. The figures speak for themselves: in 2000, OECD countries represented around 60% of global GDP but by 2010 this was down to 51%, and it will be only 43% by 2030. In fast-growing economies, per capita growth rate was more than double that of high-income OECD countries over the last decade.

Is this a good thing or a bad thing? Some argue that the rising power of Asian and Latin American countries can only be a good thing. People have been lifted out of poverty and wealthier consumers in the rest of the world will generate more business opportunities and provide new markets for British exports. Others say that the loss of power and prestige will eventually impoverish us as we are forced to compete against low wage countries which are rapidly catching up with us technologically. China will eat your lunch and India will eat your dinner, they say.

But are these scenarios mutually exclusive? What if they both happen?

When we ask the question, “What does this mean for us?” it depends who we mean by ‘us’. Usually, when commentators write about economics, ‘us’ means the British economy. What would the Euro’s collapse do to Britain? Is immigration good for the economy? Will the UK gain or lose from the rise of China? That sort of thing.

The trouble is, to paraphrase our former prime minister, there is no such thing as the economy. It is simply a concept we use to aggregate all the economic activity in the country. So, to give a crude example, if the off-shoring of low paid jobs makes four people £250 a week better off and six people £100 a week worse off, we could say that the economy has gained by £400 a week. The six people who are worse off are unlikely to see it that way though.

It is therefore possible that the British economy, and indeed most economies, could gain from the Great Rebalancing yet many people could still find themselves relatively poorer. There is no guarantee that the fruits of globalisation will be equally shared. In fact, it’s looking much more likely that they won’t be.

A recent study by the OECD noted that, while the gap in incomes between countries is, in many cases, falling, the gap in incomes within countries is increasing. (Click on the picture for the free preview.)

Perspectives on Global Development 2012 | OECD Free preview | Powered by Keepeek Digital Asset Management

Shifting wealth ushered in the beginnings of a reversal in long-term trends in inequality between countries. At the same time, inequality has grown within some developing countries and particularly in a number of large economies, as shifting wealth has reconfigured the global economy.

[T]he period 1820-1950 showed a clear trend where inequality between countries increased, while falling within many countries thanks in large part to the expansion of social safety nets and redistribution.

In other words, the rich western economies had a huge share of the world’s wealth but chose to redistribute it more evenly among their citizens.

The report goes on to note that, since the 1980s, the rise of India and China began to reverse this trend. Inequality between countries has fallen as non-OECD economies have developed. Over the same period, though, inequality within countries has risen both in the BRICS and in the OECD.

It is clear that per-capita GDP is rising much faster in China (10%) and India (7%) than it is in the USA (2%) or the UK (1%). It could therefore be argued that the ‘average Chinese’ and the ‘average Indian’ is catching up with the ‘average American’ and the ‘average Briton’. But rising inequality levels suggest that more people in every country are pulling away from the average. So it may be true that the gap between rich Britons and rich Indians is narrowing. It is probable too that the gap between middle-class Britons and middle-class Indians is narrowing. In time, as development lifts more poor Indians out of poverty, the gap between the poor in India and Britain will reduce too. But the OECD data suggests that the gap between rich, middle-class and poor in most continues to grow.

Last year, McKinsey drew a similar conclusion:

[O]ver the past 100 years, an income inequality gap split the world into two large camps—Western economies buoyed by an increasingly prosperous middle class, and other nations caught in a seemingly endless cycle of poverty. Now, while inequality among nations (and across this former divide) is thankfully shrinking, the gaps between rich and poor within individual nations are widening.

While overall standards of living have risen across the globe, the gap between rich and poor has grown in almost three-quarters of OECD countries over the past two decades. Inequality is rising even faster in emerging markets: in China, it is increasing more quickly than in any Western economy.

The Great Rebalancing, then, is restoring equality between the regions of the world. Military, political and economic power is gradually being redistributed. The share of global wealth, too, is becoming less geographically concentrated. But that doesn’t mean that the people of the world are becoming more equal. The gaps between rich and poor are widening even in the hitherto egalitarian societies of the West. Inequality too, it seems, is being redistributed.

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2 Responses to Re-distributing inequality

  1. Pingback: Re-distributing inequality - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. It’s a distopian future, where every nation has an excluded underclass. These people will not be needed, even as consumers, since the size of the global market will be sufficient to satiate the profit requirements of the global companies in whose hands economic power will be concentrated. Keynesian expansion, which since the 1930s has rescued the economically disenfranchised via demand management policies, will not longer be pursued in a fully globalised economy.

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