Postrel on liberalization

[Alan G Isaac <aisaac@xxxxxxxxxxxx>]

I do not expect this to surpise anyone.

Cheers,
Alan Isaac

http://www.nytimes.com/2002/08/15/business/15SCEN.html

The Rich Get Rich and Poor Get Poorer. Or Do They?
By VIRGINIA POSTREL

To critics of economic liberalization and international
trade, it is an article of faith that the rich are getting
richer and the poor poorer.

"Inequality is soaring through the globalization period ?
within countries and across countries," Noam Chomsky told a
conference last fall, summarizing this common view.

Antiglobalization activists are not just making up this
idea. They have taken it from seemingly authoritative
sources, notably the 1999 United Nations Human Development
Report.

That widely cited report stated: "Gaps in income between the
poorest and richest countries have continued to widen. In
1960 the 20 percent of the world's people in the richest
countries had 30 times the income of the poorest 20 percent
? in 1997, 74 times as much." It added that "gaps are
widening both between and within countries."

Fortunately, this scary portrait is highly misleading.

"When I started looking at the numbers, I saw a lot of
mistakes," says Xavier Sala-i-Martin, an economist at
Columbia. Some were departures from standard economic
procedures, like not correcting for price levels from
country to country.

"Some agencies didn't adjust for the fact that Ethiopia is
cheaper than the U.S.," he said. "Some of them were hiding
numbers that we know exist." For instance, the report
included data from only 19 of the 29 industrialized
countries then in the Organization for Economic Cooperation
and Development.

But the biggest problem was not so technical. It was hidden
in plain sight. The United Nations report and others looked
at gaps in income of the richest and poorest countries ? not
rich and poor individuals.

That means the formerly poor citizens of giant countries
could become a lot richer and still barely show up in the
data.

"Treating countries like China and Grenada as two data
points with equal weight does not seem reasonable because
there are about 12,000 Chinese citizens for each person
living in Grenada," writes Professor Sala-i-Martin in "The
World Distribution of Income (Estimated from Individual
Country Distributions)." That is one of two related working
papers for the National Bureau of Economic Research. (The
papers are available on Professor Sala-i-Martin's Web site
at www.columbia.edu/~xs23/home .html.)

Counting by countries misses the biggest economic advance in
history, completely distorting the record of the
globalization period.

Over the last three decades, and especially since the
1980's, the world's two largest countries, China and India,
have raced ahead economically. So have other Asian countries
with relatively large populations.

The result is that 2.5 billion people have seen their
standards of living rise toward those of the billion people
in the already developed countries ? decreasing global
poverty and increasing global equality. From the point of
view of individuals, economic liberalization has been a huge
success.

"You have to look at people," says Professor Sala-i-Martin.
"Because if you look at countries, we do have lots and lots
of little countries that are doing very poorly, namely
Africa ? 35 African countries." But all Africa has only
about half as many people as China.

In his paper, "The Disturbing `Rise' of Global Income
Inequality," he estimates the worldwide distribution of
income by individuals rather than countries. The results are
striking.

In 1970, global income distribution peaked at about $1,000
in today's dollars, a common measure of poverty ($2 a day in
1985 dollars). In 1998, by contrast, the largest number of
people earned about $8,000 ? a standard of living equivalent
to Portugal's.

"That's what I call a new world middle class," says
Professor Sala-i-Martin. It is mostly made up of the top 40
percent of Chinese and Indians, and the effect of their
economic rise is big.

What about the argument that income gaps are widening within
these rapidly advancing countries? With a few exceptions, it
is true, but still misleading.

The rich did get richer faster than the poor did. But for
the most part the poor did not get poorer. They got richer,
too. In exchange for significantly rising living standards,
a little more internal inequality is not such a bad thing.

"One would like to think that it is unambiguously good that
more than a third of the poorest citizens see their incomes
grow and converge to the levels enjoyed by the richest
people in the world," writes Professor Sala-i-Martin. "And
if our indexes say that inequality rises, then rising
inequality must be good, and we should not worry about it!"

There is, however, one large country where the poor really
are getting poorer while the rich grow richer: Nigeria, the
most populous country in Africa.

Nigeria's economy has actually shrunk over the last three
decades, and the absolute poverty rate ? the percentage of
the population living on less than $1 a day in 1985 dollars
? skyrocketed to 46 percent in 1998 from 9 percent in 1970.

While most Nigerians were falling further into destitution,
the political and economic elite grew richer. The problem is
not too much liberalization but too little, a politicized
economy with widespread corruption.

"The rich guys are doing well, therefore reforms will not
come," says a pessimistic Professor Sala-i-Martin. He has
begun studying Nigeria, trying to come up with ways around
the political problem.

That country is typical of Africa, which is growing ever
poorer. Fully 95 percent of the world's "one-dollar poor"
live in Africa, and in many countries they make up the vast
majority of the population. That poverty, not the rising
wealth of Asian countries, is the global economy's real
problem.

"The welfare implications of finding how to turn around the
growth performance of Africa are so staggering," he writes,
"that this has probably become the most important question
in economics."