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Incomes Are Diverging
Mainstream economic thought promises that globalization will lead to a widespread improvement in average incomes. Firms will reap increased economies of scale in a larger market, and incomes will converge as poor countries grow more rapidly than rich ones. In this "win-win" perspective, the importance of nation-states fades as the "global village" grows and market integration and prosperity take hold.
But the evidence paints a different picture. Average incomes have indeed been growing, but so has the income gap between rich and poor countries. Both trends have been evident for more than 200 years, but improved global communications have led to an increased awareness among the poor of income inequalities and heightened the pressure to emigrate to richer countries. In response, the industrialized nations have erected higher barriers against immigration, making the world economy seem more like a gated community than a global village. And although international markets for goods and capital have opened up since World War II and multilateral organizations now articulate rules and monitor the world economy, economic inequality among countries continues to increase. Some two billion people earn less than $2 per day.
At first glance, there are two causes of this divergence between economic theory and reality. First, the rich countries insist on barriers to immigration and agricultural imports. Second, most poor nations have been unable to attract much foreign capital due to their own government failings. These two issues are fundamentally linked: by forcing poor people to remain in badly governed states, immigration barriers deny those most in need the opportunity to "move up" by "moving out." In turn, that immobility eliminates a potential source of pressure on ineffective governments, thus facilitating their survival.
Since the rich countries are unlikely to lower their agricultural and immigration barriers significantly, they must recognize that politics is a key cause of economic inequality. And since most developing countries receive little foreign investment, the wealthy nations must also acknowledge that the "Washington consensus," which assumes that free markets will bring about economic convergence, is mistaken. If they at least admit these realities, they will abandon the notion that their own particular strategies are the best for all countries. In turn, they should allow poorer countries considerable freedom to tailor development strategies to their own circumstances. In this more pragmatic view, the role of the state becomes pivotal.
Since the rich countries are unlikely to lower their agricultural and immigration barriers significantly, they must recognize that politics is a key cause of economic inequality. | |
Bruce Scott |
Why have economists and policymakers not come to these conclusions sooner? Since the barriers erected by rich countries are seen as vital to political stability, leaders of those countries find it convenient to overlook them and focus instead on the part of the global economy that has been liberalized. The rich countries' political power in multilateral organizations makes it difficult for developing nations to challenge this self-serving world-view. And standard academic solutions may do as much harm as good, given their focus on economic stability and growth rather than on the institutions that underpin markets. Economic theory has ignored the political issues at stake in modernizing institutions, incorrectly assuming that market-based prices can allocate resources appropriately.
The fiasco of reform in Russia has forced a belated reappraisal of this blind trust in markets. Many observers now admit that the transition economies needed appropriate property rights and an effective state to enforce those rights as much as they needed the liberalization of prices. Indeed, liberalization without property rights turned out to be the path to gangsterism, not capitalism. China, with a more effective state, achieved much greater success in its transition than did Russia, even though Beijing proceeded much more slowly with liberalization and privatization.
Economic development requires the transformation of institutions as well as the freeing of prices, which in turn requires political and social modernization as well as economic reform. The state plays a key role in this process; without it, developmental strategies have little hope of succeeding. The creation of effective states in the developing world will not be driven by familiar market forces, even if pressures from capital markets can force fiscal and monetary discipline. And in a world still governed by "states' rights," real progress in achieving accountable governments will require reforms beyond the mandates of multilateral institutions.
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Excerpted with permission from Foreign Affairs, January/February 2001
LOOKING AHEAD
Increased trade and investment have indeed brought great improvements in some countries, but the global economy is hardly a win-win situation. Roughly one billion people earn less than $1 per day, and their numbers are growing. Economic resources to ameliorate such problems exist, but the political and administrative will to realize the potential of these resources in poor areas is lacking. Developing-nation governments need both the pressure to reform their administrations and institutions, and the access to help in doing so. But sovereignty removes much of the external pressure, while immigration barriers reduce key internal motivation. And the Washington consensus on the universality of the rich-country model is both simplistic and self-serving.
The world needs a more pragmatic, country-by-country approach, with room for neomercantilist regimes until such countries are firmly on the convergence track. Poor nations should be allowed to do what today's rich countries did to get ahead, not be forced to adopt the laissez-faire approach. Insisting on the merits of comparative advantage in low-wage, low-growth industries is a sure way to stay poor. And continued poverty will lead to rising levels of illegal immigration and low-level violence, such as kidnappings and vigilante justice, as the poor take the only options that remain. Over time, the rich countries will be forced to pay more attention to the fortunes of the poorif only to enjoy their own prosperity and safety.