Sunday, December 17, 2006

The Inequality and Poverty Dodge

I'd like to turn your attention to this post on world inequality by Gary Becker at the Becker-Posner Blog. What Becker is mainly championing is the standard neo-liberal argument concerning global inequality. Simply put, over time global inequality has decreased. And it has decreased in large part because countries have opened up their economies. This is a huge bone of contention in international economics. Unfortunately, Becker has only told one side of the debate. That in itself is not uncommon--those voices are the ones that get most of the print.

Let me take a stab at contributing to this debate:

First, I feel a little background on the inequality-poverty-globalization debate is in order here.
The common, liberal argument (the one espoused by Becker and others) holds that over the last 25 years or so, historic trends in poverty and inequality have been reversed. This is the view held by the leading international financial organizations and the other influential illuminati (Martin Wolf, Wolfensohn, Xavier Sala-I-Martin, etc). Additionally, the main driver for this historic turn of events is seen to have been economic globalization—the phenomenon marked by increasing economic integration marked by the liberalization of trade, finance, and open markets. The success of neo-liberal globalization—as evidenced by the trends in poverty and inequality—therefore reinforces and legitimizes globalization along neo-liberal economic frames.

Much of the debate centers on arguments concerning the political economy of statistics—how is globalization measured, how is inequality measured, how is poverty measured? Because the metrics chosen generally determine the outcome of the trend, it is vitally important to know the rationale behind those metrics—there are potentially huge implications.

Let's look at poverty first. The World Bank (which is almost the monopoly supplier of figures) uses $1/day and $2/day lines for measuring the poverty headcount (both are PPP adjusted). Using these numbers the WB holds that both the absolute number of people and the proportion of people living at absolute poverty has declined over the last 20 years. Critics have taken issue with both the metrics they've chosen and with the methodologies of their studies.

1. The $1/day figure, while intuitive, is also rather arbitrary. Additionally, small changes in that base figure lead to huge changes in the headcount. Ex: if it is $1.20 there are hundreds of millions more people that need to be included even though 20¢ is not a huge amount of change for someone living on the edge of survival.
2. The figures are based on household surveys which tend to have fairly large margins of error and hence there is a real uncertainty of accuracy—this is especially true of China and India—the largest countries in the world did not faithfully dedicate themselves to participation in the relevant WB studies (China missed both, India missed one).

1. The WB says poverty went from 1.4BB in 1980 to 1.2BB in 1998. However the methodologies used to find those numbers changed midstream and the earlier figures were not calculated back with the new formulae. This makes it almost impossible to speak knowledgeably about poverty trend lines.
2. The figures are based on a basket of goods and services, not a "basic needs line" that might have been more accurate if one were really interested in measuring the plight of those at the absolute poverty line. This would incorporate things like clean drinking water and calorific intake—not stuff like the price of haircuts.

Almost without exception the World Bank has chosen numbers and methodologies that, while of some limited use, tend to skew the poverty trends in the best possible light. Thus the true poverty figures are likely less rosy, if still rather hazy.

Now let's turn to the inequality trends. Well, what is the trend on world income distribution? It depends. And it is a heated argument. There are a number of ways of measuring global inequality—most show inequality increasing. The World Bank calculates its figures in a way that shows inequality has decreased in the last 20 years. Common ways of calculating inequality include:

1. The WB Method: Uses Per Capita GDP by PPP, using a coefficient like the Gini for income distribution, with countries weighted by population. This measures person-to-person inequality worldwide. By this measure inequality is decreasing.
2. B/n Country Inequality w/States Weighted Equally: measures country-to-country inequality. Useful for comparing state-level economic policy effectiveness. By this measure inequality is increasing.
3. Income Polarization: Uses decile measurements rather than the Gini Coefficient (or similar). Ex: Compares income growth for richest 10% of population vs. income growth for poorest 10%. By this measure inequality is increasing.
4. International Purchasing Power: Uses market exchange rates, not PPP. Useful for assessing geopolitical influence, power, and prestige. By this measure inequality is increasing.

There is nothing wrong with measuring inequality the way that the World Bank and the "usual elite" measure it. However, the conclusions they draw from that measurement are hugely contentious at best, and purposefully misleading at worst. The WB insists that its measure reflects the true overall inequality—fine—but it takes that person-to-person result and equates it with an economic policy result. This is misleading on two fronts. First it is not a generalized trend—the WB's figures are wholly dependent on the incredible performance of a single country—China. Secondly, by weighting by population instead of equally by country, the respective country performance is made irrelevant and thus extending the argument to respective economic policies (which the WB does) is ridiculous.

There are also two other huge factors to keep in mind when assessing inequality figures:

1. With-in country inequality has been increasing in almost every country in the last 20 years. Both in DCs and in ACs—from China and Zambia, to the US and Britain. (look at the work of Milanovich, Krugman, Galbraith, UN Industrial Development Org, among others.)
2. Even if relative income gaps are closing, absolute income gaps are still increasing. If a country with $1000/Capita grows at 6% and a country with $30,000/Capita grows at 2%--the absolute income gap still widens for generations.

Now let us turn to globalization. Or, what is the relationship between globalization and inequality and poverty? The standard liberal argument holds that the perceived positive trends in poverty reduction and inequality are the result of the rising integration of poorer economies into the world system—i.e. liberalizing, globalizing countries have performed better. The WB (look at the Dollar and Kraay 2000/2001 study) measures "globalizing" countries by the change in the ratio of trade to GDP. This skews the results in a number of ways:

1. Relatively closed economies like China and India are counted as globalizers
2. Countries that were already quite open when the data set began, say in 1980, can be counted as non-globalizers. Think of extractive economies.
3. This study glosses over the chain of causation. It assumes open markets lead to growth, but couldn't growth have led to open-markets?

So what are the conclusions on this (non)convergence? Well, if the World Bank figures are suspect on global poverty and inequality trends, what are the implications? They're potentially rather grim. For it then seems that the current structure and nature of the global economic system promotes uneven development. It could be plausibly argued that the global financial order that was ushered in after the collapse of the Bretton Woods system has re-ordered the value of various sorts of economic activities.

And indeed, some of the more recent advances in economic theory—perhaps not so coincidentally occurring precisely at the time of the most relentless pursuit of the Washington Consensus policies—have started to perhaps show some of the root causes of this uneven development. Building on earlier development and industrial theories espoused by List, Schumpeter, and Raul Prebisch, modern heterodox economists like Romer, Krugman, Stiglitz, and Arrighi have taken the field against modern global market fundamentalism. And they have identified new trends in industrial rewards and interesting implications resulting from global supply and value chains. However, just as important questions remain for political observers—why would the World Bank and other elites champion questionable trends? And perhaps even more importantly, what can we do about it?

Saturday, November 11, 2006

Lost in the General Euphoria

So, like, when does Donald Rumsfeld get his medal?

Sunday, October 22, 2006

What He Said

John Robb over at Global Guerrillas articulates the importance of energy in Baghdad that I hinted at in the earlier post:

"Infrastructure attacks, particularly on power/fuel/water, negate the ability of the government to deliver political goods (for example, in September Baghdad only received 2.5 hours of electricity a day). This halts economic activity and forces the population to rely upon primary loyalties for daily survival (families, neighborhoods, religious organizations, gangs, etc.)."

Read the whole thing.

Friday, October 20, 2006

No Juice

I've long thought that electricity generation in Baghdad would be an interesting variable to track for assessing the horrible and deteriorating situation. Thankfully, the Brookings Institute has done just that. Yep, it's grim: 2.4 hours a day.

OPEC Surprises No One

Well, as I hinted at in an earlier post it appears that OPEC will cut production in November and possibly again in December. This was impossible to predict, right?

The first cut looks like it will be in the neighborhood of 1.2MM bpd--about 4% of production capacity--with perhaps another .5MM to follow in December.

Saturday, October 14, 2006

Dollar Rising

The dollar has been on a recent rise against both the euro and the yen. Daniel Kruger's Bloomberg's article seems to take this as a good thing:

"The dollar advanced against the euro and yen for the third straight week as reports on retail sales and consume confidence suggest that the U.S. economy is more vibrant than analysts had forecast."

And indeed, a rising dollar has often been a good thing for the United States. During the last long-sustained period of US economic growth, the dollar was indeed very strong. However, there is a connection then that isn't being seen now. At that time the economy was growing and right now while the US economy is still growing, it's growing at a slower rate. And indeed the US economy is far softer than it appears. The housing market is already feeling slowing effects in most markets and is in retreat in others. The trade deficit is still far beyond historical trends--something that will only be exacerbated by a strong dollar. And the national debt is still growing.

And don't count on continued low crude prices to play a moderating role. I imagine they'll rise back above $60/barrel shortly after the November elections.

So, a rising dollar in this atmosphere? A suckers bet? A cash-out before a landing? It's rather strange, no?

Friday, October 13, 2006

Clutch Pitching

Josh Levin had an interesting article in Slate a few days ago extolling the clutchness of New York Mets lefthander Tom Glavine. The 40 year old southpaw certainly doesn't conjure the image most of us have when we think of playoff aces--in part because his playoff record is still below .500 and isn't nearly as compelling as his pursuit of 300 career wins (it's quite possible that Glavine will be the last member of that elite club). Additionally, most baseball fans debate clutch hitting, not pitching. Why?

"Bill James, the freelance researcher turned Red Sox executive, says there's a simple reason why everyone wonders about clutch hitters and no one talks about clutch pitchers. "For the same reason that there is more speculation about Bigfoot than there is about lizards," James says. "We know we have lizards."

Last night Glavine did indeed come up big for the Mets. He threw 7 shutout innings as New York took Game 1 of the NLCS by a score of 2-0. Of course, the two runs came courtesy of a Carlos Beltran home run--a player has garnered his own reputation for clutchness.


The term "Commanding Heights" goes back more then eighty years. In November of 1922, an ailing Vladimir Lenin addressed the Fourth Communist International in Petrograd in what was ultimately his penultimate public appearance. The year before, he had initiated what was known as the New Economic Policy and was being attacked by communist militants for compromising with capitalism and betraying the revolution. Lenin argued that this was far from the case and that the state would continue to control the "Commanding Heights," or the most important sectors of the economy.

During the interwar years, the Fabians and the British Labour Party quickly adopted the concept and it soon spread throughout the world. Of course, various interests adopted it to their own means in their own fashions. In the US, the government's control over the commanding heights was not so much through direct ownership, though that existed in places, but rather through regulatory enforcement. For most of the 20th Century, statist involvement in the economy's commanding heights was a given and accepted as general orthodoxy.

However, towards the end of the century, it was clear that a marked change of economic practice and been invoked and implemented. Government retreated and the market expanded. Catalyzed through the phenomenon of globalization, trade liberalization, the growth of capital markets, and increasing interdependence have been the hallmarks of this new age. But so too has been increasing economic inequality both between and among nations.

How do we manage the new dynamism and the new insecurity of this century's Commanding Heights? Are the confluence of economic and social forces so great as to challenge our collective ingenuity to effectively manage them? Can we solve the problems of the present and of the future? I believe it is possible.