Wednesday, May 16, 2007

Globalization and Economics!

It is an article of faith on the left that the gap between rich and poor has now widened to a dangerous chasm, as global capitalism has enriched rich countries and impoverished poor ones.

But its not quite like that.

It is true that Burundi and other countries in sub-Saharian Africa remain desperately poor, while living standards in the West have risen dramatically, so the gap between the two extremes has widened.

But there is a big group of previously poor countries whose average citizens are now much better off as a result of globalization.

China, India, Indonesia, Chile, South Korea, Chile, Brazil have all moved up, and they are highly populous countries.

Inequality is only unambiguously worse if you ignore the countries where the bulk of the world's population live.

A new Gilded Age?

It's within countries rather than between them that inequality has grown starker.

Shopping mall Garuda, Bangalore, India
Affluence has come to urban areas in developing countries
In China and India, those left on the land remain dirt-poor, but those who've been sucked into the global market have seen their incomes rise substantially.

In the United States, too, the gap between the super-rich and even the middle class has widened.

There is now talk of a new Gilded Age in America, reminiscent of the previous ones in the 1920s and at the end of the 19th century when millionaires bought mansions by the ocean from the mountains of money the had made on railroads or steel or oil, while the poor looked on from outside.

Rising inequality

According to Princeton economist Paul Krugman, the incomes of the middle class and poor in America have barely risen in a quarter of a century,but those at the top have gone up by about 150%.

"It really is a new Gilded Age. If you look at the distribution of income, at least pre-tax, it is the same as it was in the 1920s, and the 1920s looked the same as pre- World War One - so we are in a new gilded age of inequality," he says.

In Britain, the country's thousand richest people now have wealth of about $300bn (£150bn), three times the figure of ten years ago.

That's partly because London has attracted some of the world's super-rich. from the Russian oligarchs to steel magnate Lakshmi Mittal, but also because bonuses in the City of London have gone through the roof.

Trade union for the rich?

Finance people all over the world have found a way of securing more money that any trade unionist of old would recognize: play one employer off against another in a very competitive market.

Finance professionals around the world are getting rich. Professor Stephany Griffith-Jones of the Institute of Development Studies at Sussex University says the habit isn't confined to Wall Street and London's Square Mile:

"We can see it in the City of London but also in very poor developing countries. They have this curious habit of saying that 'we have to be paid very well because our peers in other countries are being paid well and we will leave if you don't pay us ridiculous salaries and bonuses' that pushes up their levels of income," she says.

$400m yachts

The signs of inequality are now large - literally so on the jetties of Antibes or Florida.

Where it used to be the "haves and the have-nots", now it's the "haves and the have- yachts".

Twenty-five years ago, a top of the range vessel would have cost about $8m (£4m).

Today, it would be $400m, according to Jonathan Beckett, the chief executive of the Nigel Burgess company which sells the grandest vessels to the super rich.

So what do you get for your $400m?

"Nothing is impossible", he said.

"You would have a yacht with two or three helicopter landing facilities. You would have discotheques and cinemas. You would probably have a submarine with opening doors in the bottom of the boat., so you get into the submarine and you get into the hatch and then flood the compartment and you slip away quietly".

Politics of envy

Of course, it's easy to sneer and play the politics of envy, perhaps easier in Britain than in America where affluence is more often seen as a reward for success.

Can you begrudge Sir Martin Sorrell his salary of about $5m a year when he built an advertising company operating in 106 countries out of a shoe-string operation in a damp garage?

Or should George Soros really hand back his billions from his hedge funds when he made them from nothing after surviving the Nazis and the Soviets?

He says there is a duty on the rich but you can't expect them to sort out inequality:

"I do think there is something slightly obscene in the degree of inequality that prevails in the world and to that extent I feel an obligation, but to expect inequality to be taken care of by philanthropists is barking up the wrong tree because some philanthropists feel it and others are not philanthropic. So it really needs social regulation." he says.

In other words, it's for governments elected by the people to determine rates of taxation on the rich and social provision for the poor.

And any sensible policy would recognise that success does merit reward. The question is: how much?

Is equality good for you?

So are there any real, objective consequences to inequality apart from firing up cheap resentment?

Poverty has risen in the US along with affluence
It does seem true that more equal countries tend to have healthier populations than unequal countries of the same over-all economic standards.

Perhaps the crucial question is whether unequal countries grow faster.

If they do, might a bigger cake, with unevenly divided slices, be better for the poor than a tiny cake cut into equal but tiny pieces?

After all, the most conspicuously successful economy of our times is that of the relatively unequal United States.

The academic evidence isn't clear-cut, and it may vary between countries.

Inequality in desperately poor countries might stifle growth, but promote it in richer ones.

Generally, though it seems true that some inequality in a country accompanies high growth, but too much may destroy social cohesion.

The two previous Gilded Ages ended with a bump - the Panic of 1893 and the Crash of 1929.

How will the third one end?
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