Policy Research in Macroeconomics

Financialised globalisation enhances, not reduces, global inequality

Oxfam made the headlines today, on the eve of this year’s Davos World Economic Forum, with their claim that the world we live in is becoming ever more economically unequal and unjust:

Now just 62 billionaires own the same wealth as half the world’s population – that’s 3.6 billion people. This extreme inequality is being fuelled by a global network of tax havens.

Poor countries are losing at least $170 billion a year to tax havens – money that is desperately needed for vital services like healthcare and education.

It is generally agreed that the very, very wealthy are doing inordinately well out of the current economic system – and that economic inequality within countries has increased substantially in recent years. (Though the FT’s Economics Correspondent Chris Giles does his valiant best to question the basis of the Oxfam report – as he also tried to do, mainly unsuccessfully, with Thomas Piketty’s data – the general direction of growing inequality seems wholly solid).

We must also note this key point from Oxfam, which I haven’t seen being questioned:

The average annual income of the poorest 10% of people in the world has risen by less than $3 each year in almost a quarter of a century. Their daily income has risen by less than a single cent every year.

However, the proselytisers for financialised globalisation (or neoliberalism if one prefers the term) counter-claim that extreme poverty worldwide has never fallen so rapidly as in recent years.  The inference we are implicitly (sometimes explicitly) invited to draw is that it is in the general interest to accept vast wealth and income inequality as a necessary consequence of this greater good.

There is indeed evidence that, overall, extreme poverty (measured in $ per day to live on) has fallen in recent years – especially but far from only in China.  (Though the huge continuing shift from rural to more money-based urban economies has also to be taken into account). The following chart was offered today on Twitter by Oxford University researcher Max Roser as an obvious riposte to Oxfam (he tweeted “The share of the world population living in extreme poverty never declined faster than now”):

Declining global poverty: share of people living in extreme poverty, 1820-2015

 This and other useful charts at  http://ourworldindata.org/data/growth-and-distribution-of-prosperity/world-poverty/

But here we are faced with the old question of causation – was the fall in poverty due to neoliberal globalisation as a system, or is it something that, in general terms, was likely to have happened in any event?  The chart shows a classic curve, with the “global share living in extreme poverty” – after a slow start in the 19th century – falling rapidly between 1950 and 1970 at just as fast a rate as in the more recent separate data for those living on under $1.90 a day since 1980, i.e. the start of the age of financial deregulation.

The earlier period was one with different economic systems around the world – managed welfare states in the “developed” world, forms of socialist economy elsewhere, decolonisation and industrialisation in others… but what did not exist were uncontrolled capital flows.  And therefore the major, ongoing fall in poverty overall was not, in that era, associated with today’s form of kleptocratic inequality.

That the welcome fall in extreme global poverty is not caused by financialised globalisation, but is rather a product of wider longer-term processes led by scientific and technological change, is further evidenced by the global statistics for life expectancy in different parts of the world.  The next chart is also thanks to Max Roser’s. 

Global life expectancy (weighted average) and by world region, 1770-2012

As with extreme poverty, there has been rapid progress across the world since the era of globalisation began around 1980.  But even more rapid improvements had been made in previous decades, and again across continents and countrries with very different economic systems..  This positive change is driven by science and technological innovation and improvements, not by the particularities of the unstable economic-financial system we live under.

So when we are next told that “globalisation” – in the sense of unfettered finance and trade – is responsible for the global fall in extreme poverty (we leave aside the negatives of environmental problems and climate change due to the carbon-dependent economy) – please remember that this is untrue.  The trends were already well set, under different forms of economic system – and will continue once finance is again properly managed and used for its legitimate social purposes. 

But what is undoubtedly a direct result of today’s form of “globalisation” is the extreme and growing inequality in favour of a tiny number of mega-rich individuals and families who increasingly control our planet.  Which is why Oxfam’s reminder today is so timely.

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