Globalisation with Growth and Equity: can we really have it all?

Abstract

As plentiful and productive as recent empirical work has been, we still know very little about globalisation's long-run impact on economic development. This is only partly because of data limitations. At least as important, this article suggests, have been theoretical limitations: economists and political scientists have yet to resolve a number of key conceptual points. This article brings these remaining theoretical puzzles to the surface, starting with the link between openness and growth. It then turns to the relationship between trade and inequality. Both links—the one from trade to growth, the other from trade to inequality—have been subjects of heated debate among development economists. By contrast, the main focus of this article is the relationship between these two strands of research. How growth and equity interact is a theoretical puzzle which, though no less basic than the others, has to date received far less attention. The article concludes by laying out a back-to-basics research agenda for future-oriented globalisation research in which this growth/equity trade-off is restored to its rightful place at the theoretical centre of the wider development literature.

Notes

1 Arthur Okun's work offers the clearest statement of the earlier view. See especially A Okun, Equality and Efficiency: The Big Tradeoff, Washington, DC: Brookings Institution, 1975. While Okun's view has been challenged over the years by numerous scholars, the critiques levelled by Adam Przeworski and Michael Wallerstein were among the earliest and most forceful. See, for example, A Przeworski & M Wallerstein, ‘Democratic capitalism at the crossroads’, Democracy, 2, 1982, pp 52–68. The Przeworski–Wallerstein critiques also proved influential, filtering as they did into policy debates of the time. See R Kuttner, The Economic Illusion: False Choices between Prosperity and Social Justice, Boston, MA: Houghton Mifflin, 1984.

2 Two noteworthy exceptions are RR Kaufman & A Segura-Ubiergo, ‘Globalization, domestic politics, and social spending in Latin America’, World Politics, 53(4), 2001, pp 553–587; and N Rudra, ‘Globalization and the decline of the welfare state in less-developed countries’, International Organization, 56(2), 2002, pp 411–445.

3 Another means of transmission, only slightly less direct, is through the process of emulation. Here the new technology is not transferred so much as stolen or, less pejoratively, borrowed from its originators in other countries. See A Gerschenkron, Economic Backwardness in Historical Perspective, Cambridge, MA: Belknap, 1962; and RH Wade, Governing the Market, Princeton, NJ: Princeton University Press, 2003.

4 See E Helpman & P Krugman, Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition, and the International Economy, Cambridge, MA: MIT Press, 1985; and Helpman & Krugman, Trade Policy and Market Structure, Cambridge, MA: MIT Press, 1989.

5 The rationale for opening global capital markets has a similar ‘new trade’ flavour. The larger the pool of investment capital, the easier it is for investors to spread risk. And with lower risks and greater diversification come lower interest rates and less chance of productive investments going unfunded. (A large pool of cheap capital could also encourage unproductive investments, of course, as a handful of forward-thinking economists—chiefly Nouriel Roubini and Robert Shiller—were cautioning well before the subprime mortgage crisis of 2008 made it an obvious point.)

6 While the concern here is with developing economies becoming trapped in low-spill-over industries, the idea that having a comparative advantage in resource-intensive activities can impede a country's economic progress also has a monetary dimension. On the political economy of so-called Dutch Disease, see, among others, M Ross, ‘The political economy of the resource curse’, World Politics, 51, 1999, pp 297–322.

7 See, for example, Wade, Governing the Market; and A Kohli, State-Directed Development, Cambridge: Cambridge University Press, 2004.

8 Not that a large North–South divide, or the possibility that globalisation may be working systematically to widen it, isn't itself a cause for concern. See, for example, RH Wade, ‘Globalization, poverty, and inequality’, in J Ravenhill (ed), Global Political Economy, Oxford: Oxford University Press, 2005.

9 See, for instance, D Rodrik, ‘Getting interventions right: how South Korea and Taiwan grew rich’, Economic Policy, 20, 1995, pp 55–107.

10 The notion that these consequences are invariably positive, and that globalisation is therefore ‘good for growth’, is certainly not the view of Paul Krugman, for instance, who, mere moments after having helped formulate the new-trade logic in his work with Elhanan Helpman (see note 4), began calling attention to its potentially negative growth implications in P Krugman (ed), Strategic Trade Policy and the New International Economics, Cambridge, MA: MIT Press, 1986. See also P Krugman & AJ Venables, ‘Globalization and the inequality of nations’, Quarterly Journal of Economics, 110(4), 1995, pp 857–880.

11 In addition to the works by Helpman and Krugman cited above, the discussion here draws on, among others, G Grossman & E Helpman, Innovation and Growth in the Global Economy, Cambridge, MA: MIT Press, 1991; RC Feenstra, ‘Integration of trade and disintegration of production in the global economy’, Journal of Economic Perspectives, 12(4), 1998, pp 31–50; and D Trefler & SC Zhu, ‘Trade and inequality in developing countries: a general equilibrium analysis’, Journal of International Economics, 65, 2005, pp 21–48. Although these economists start from different methodological premises, their conclusions about global capitalism and its hard-wired inegalitarian tendencies are strikingly similar to those reached by dependency theorists decades earlier. See, for example, AG Frank, Capitalism and Underdevelopment in Latin America, London: Penguin Books, 1971.

12 W Stolper & P Samuelson, ‘Protection and real wages’, Review of Economic Studies, 9(1), 1941, pp 58–73.

13 In theory, governments can always top up the market incomes of individuals who find themselves at the bottom of an increasing earnings gap. Then, too, redistribution can also fall. Both possibilities are theoretically equivalent, though—as I elaborate in my concluding section—their theoretical implications deserve closer scrutiny than they have received thus far. For present purposes the point to emphasise is simply that most economic theorising about globalisation, from H–O to S–S and even H–K (Helpman–Krugman), is concerned with the impact of trade and capital liberalisation on market earnings—or, as here, earnings inequality—rather than on post-market disposable incomes.

14 At least at first: if we waited long enough, the gap would reappear, only now—thanks to globalisation—with the (initially) rich and the (initially) poor having changed places in the earnings distribution. Though consistent with the Stolper–Samuelson logic, however, this possibility has received little attention in the trade-and-inequality literature to date, thanks, I suspect, to questions about whether globalisation's long run could ever be long enough to permit such a fundamental role reversal to take place.

15 Exhibit A is the much-lamented ‘financialisation’ of the OECD economies, a process that has accompanied the removal of their barriers to trade and capital over the past 20 years. It is only natural (so the Heckscher–Ohlin story would go) that the industrialised world has concentrated on its comparative advantage in capital-intensive production, including the skill-intensive work of managing investments and providing financial services. Nor should it come as any surprise that, as the OECD specialised in its comparative advantage, holders of these economies' abundant factor—capital—enjoyed staggering increases, both absolute and relative, in their assets' market returns.

16 Taking the second point, the correspondence between the H–O model's predicted dynamics for industrialised countries and the empirical reality could simply be a fluke. Perhaps these dynamics, although they exist, are overwhelmed by some other non-H–O, but still globalisation-related, set of forces. It is also possible that the H–O framework just needs to be refined or the concept of ‘factor’ broadened to include aspects of the institutional environment in which firms operate. On this last point, see N Nunn, ‘Relationship-specificity, incomplete contracts, and the pattern of trade’, Quarterly Journal of Economics, 122(2), 2007, pp 569–600.

17 See E Helpman, O Itskhoki & S Redding, Wages, Unemployment and Inequality with Heterogeneous Firms and Workers, Centre for Economic Performance Working Paper, London School of Economics, 2008, for a recent argument along these lines. Although I do not address it here, the resulting inequality would have an important spatial component, with the cities and regions containing each country's global monopolist growing rapidly, high rents and all, while other parts of the country stagnate.

18 Although he emphasises the substituting-workers threat far more than the going-out-of-business threat, Rodrik provides a particularly lucid account of the underlying logic. See esp D Rodrik, Has Globalization Gone Too Far?, Washington, DC: Institute for International Economics, 1997, pp 16–19.

19 Nor do some political scientists. See D Vogel, Trading Up: Consumer and Environmental Regulation in a Global Economy, Cambridge, MA: Harvard University Press, 1997; and L Gruber, Ruling the World: Power Politics and the Rise of Supranational Institutions, Princeton, NJ: Princeton University Press, 2000.

20 But see A Sen, Development as Freedom, New York: Knopf, 1999; and Sen, The Idea of Justice, Cambridge, MA: Harvard University Press, 2009. At issue here is not just inequality and economic deprivation but the neglect of human rights more generally. On this point, see I Khan, The Unheard Truth: Poverty and Human Rights, New York: WW Norton, 2009.

21 RG Wilkinson & K Pickett, The Spirit Level: Why Greater Equality Makes Societies Stronger, London: Bloomsbury, 2009. See also AE Clark, N Kristensen & N Westergård-Nielsen, ‘Economic satisfaction and income rank in small neighbourhoods’, Journal of the European Economic Association, 7(2–3), 2009, pp 519–527.

22 For further investigation of these points, see L Gruber & S Kosack, ‘The tertiary tilt: education, inequality, and the politics of development’, paper presented at the Annual Meetings of the American Political Science Association, Washington, DC, 2010.

23 While the literature here is vast, Robert O Keohane's work is surely the place to start. See esp Keohane After Hegemony, Princeton, NJ: Princeton University Press, 2005; and Keohane, ‘Governance in a partially globalized world’, American Political Science Review, 95(1), 2001, pp 1–13.

24 Gruber, Ruling the World; and Gruber, ‘Power politics and the free trade bandwagon’, Comparative Political Studies, 34(7), 2001, pp 703–741. See also SD Krasner, ‘State power and the structure of international trade’, World Politics, 28(3), 1976, pp 317–347; and T Moe, ‘Power and political institutions’, Perspective on Politics, 3(2), 2005, pp 215–233.

25 The implication here is that globalisation is a choice and, as such, could be un-chosen if, out of concern for the future, today's policy makers ever wanted to change course. For a different view, see TL Friedman, The World is Flat, New York: Farrar, Straus, and Giroux, 2005.

26 Cf D Dollar & A Kraay, ‘Spreading the wealth’, Foreign Affairs, 82(1), 2002, pp 120–133.

27 L Gruber, ‘The interdependence tradeoff: does international integration inhibit domestic integration?’, paper presented at the Annual Meetings of the American Political Science Association, Boston, MA, 2008.

28 Not that such a retreat would have to take us all the way back to the pre-globalisation status quo ante. That would be impossible. As noted earlier, however, it would also be a mistake to assume that globalisation in its current form is here to stay. It is precisely because globalisation differs from the ‘truly’ exogenous variables in the economists' earnings equations—technological change leading the list of usual suspects—that it merits special attention.

29 And speaking of the future, one can legitimately ask whether the surging earnings inequality we have recently been seeing will prove to be a self-limiting, hence transitory, phenomenon. This is possible, but so, too, is the opposite extreme: countries could find their domestic earnings gaps widening at an accelerating rate. With China's entry into global markets, the labour-scarce economies of the North have been administered a powerful new earnings depressant. It is a drug whose effects are unlikely to wear off in the near future, whatever aggressive steps President Obama might take to lift the spirits and, more importantly, the bargaining power of organised labour in the US. A better—though (in my view) still tenuous—case for optimism lies on the redistribution side, as I elaborate here.

30 AH Meltzer & SF Richard, ‘A rational theory of the size of government’, Journal of Political Economy, 89(5), 1981, pp 914–927. More recent ‘classics’ include A Alesina & D Rodrik, ‘Distributive politics and economic growth’, Quarterly Journal of Economics, 109(2), 1994, pp 465–490; B Milanovic, ‘The median-voter hypothesis, income inequality, and income redistribution: an empirical test with the required data’, European Journal of Political Economy, 16, 2000, pp 367–410; L Kenworthy & J Pontusson, ‘Rising inequality and the politics of redistribution in affluent countries’, Perspectives on Politics, 3(3), 2005, pp 449–471; and T Besley, Principled Agents? The Political Economy of Good Government, Oxford: Oxford University Press, 2007.

31 See, for example, P Krugman, The Conscience of a Liberal, New York: WW Norton, 2007; T Frank, The Wrecking Crew: How Conservatives Rule, New York: Metropolitan Books, 2008; and L Bartels, Unequal Democracy: The Political Economy of the New Gilded Age, Princeton, NJ: Princeton University Press, 2008.