Wednesday, July 22, 2015

“The Globalization of Inequality”, by François Bourguignon

This is an excellent companion to the books on inequality by Piketty, Milanovic, Deaton, Bowles and Stiglitz. It focuses on the impact of globalization on the relationship between inequality within countries and inequality between countries. It describes the process of increasing within country inequality in developed nations, and the process of decreasing inequality between developed and developing nations, especially thanks to the growth in very large developing countries such as India and China. Both processes are related to globalization: global market integration causing gradual convergence between countries and at the same time increased labour demand from unskilled workers in developing countries depressing the earnings of their competitors in developed countries, whilst at the same time skilled producers in developed countries facing increased demand for their services. Political forces à la Piketty also push in a similar direction. Although today between country inequality is still much higher than within country inequality, the danger is that the gains in international rebalancing are offset by increasing differences at the national level. If this happens, we will end up seeing next door the huge inequalities that today are largely invisible in the developed countries. Bourguignon thinks that it would not be ethical to stop global market integration (for example through protectionism), because this is the best hope for the populations in poor countries, but that within country inequality must be tempered with stronger redistributive policies. The book has also interesting parts on the coexistence of market imperfections and inequality, and the equity-efficiency trade-off. Specifically, many examples of market imperfections that reduce efficiency (for example, monopolies) also produce inequalities. By fighting this kind of problems, both efficiency and equity are improved, turning the trade-off upside-down.

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