My task is to talk about globalization and inequality in developing countries, with emphasis on Latin America. I have a simple point to make: globalization puts developing countries at risk of increasing income inequality. The increase in inequality in the United States over the last 25 years (during which the income of the poorest 20 percent of households has fallen in real terms by about 15 percent) has been blamed, rightly or wrongly, on changes in trade, technology and migration patterns associated with increasing economic integration with other countries. For developing countries, any risk of increasing inequality associated with active participation in the global economy is even ...view middle of the document...
Thisconstructive inequality provides incentives for mobility and rewards high productivity. Some would say constructive inequality is the hallmark of the equal opportunity society the U.S. symbolizes. Increases in this constructive inequality may simply reflect faster growth in income for the rich than the poor – but with all sharing in some growth. But of course it can also be true that inequality is destructive, when for example it reflects deep and persistent differences across individuals or groups in access to the assets that generate income – including not only land (which is extremely unequally distributed in Latin America) but, most important in today’s global information age, the asset of education. Obviously this destructive inequality undermines economic growth and efficiency, by reducing the incentives for individuals to work, to save, to innovate and to invest. And it often results in the perception if not the reality of injustice and unfairness – with the political risk in the short term of a backlash against the market reforms and market institutions that in the long term are the critical ingredients of shared and sustainable growth.
I have three parts to my remarks: first, on inequality and market reforms; second, on inequality and the recent financial crisis; third, on what to do, or more grandly on policy implications.
On Inequality and Market Reform
Consider some examples of how the market reforms associated with globalization can affect inequality in developing countries.
First, trade liberalization. On the one hand, trade liberalization makes economies more competitive and thus is likely to reduce disequalizing rents to insiders. The end of import substitution programs and associated rationing of access to foreign exchange has probably been the greatest single factor in reducing the corrosive effects of corruption and rent-seeking in Latin America. Trade liberalization can also generate new labor-intensive jobs in agriculture and manufacturing – raising the incomes for example of the rural poor. And trade liberalization implies cheaper imports, reducing the real costs of consumption for the urban poor – who after all unlike the rich use most of their income for consumption.
On the other hand, recent evidence shows that trade liberalization leads to growing wage gaps between the educated and uneducated, not only in the OECD countries but in the developing countries. Between 1991 and 1995 wage gaps increased for six of seven countries of Latin America for which we have good wage data. The exception is Costa Rica, where education levels are relatively high. Apparently the combination of technology change with the globalization of markets is raising the demand for and the wage premium to skilled labor faster than the educational system is supplying skilled and trainable workers. In Latin America education levels have been increasing, but painfully slowly – with for example only 1.5 years of additional education added to the...