NATIONAL AND GLOBAL POLICY RESPONSES

Globalization brings enormous benefits, but in its wake it also brings significant risks. The risk of rising inequality has been ever present in the recent globalization discourse, where the concern has been that far from delivering “growth with equity,” as it seems to have done for East Asia in the 1970s and 1980s, the more recent push to global integration has been accompanied by rising inequality.

Indeed, those parts of the world that have avoided rising inequality, such as Latin America, seem to have done so through purposive policy intervention. What, then, are the policy implications of the association between globalization and rising inequality? To answer this question, bear in mind that as discussed in previous sections, our understanding of the effects of globalization on inequality, let alone of the quantitative magnitudes, is limited. This hampers policy formulation.

It helps to begin by accepting that inequality is indeed a legitimate concern for policy makers. Although not universal, there appears to be a broad consensus that rising inequality lowers social welfare directly because societies are inequality averse, and it lowers social welfare indirectly because higher inequality can impede investment and growth through a number of channels.^[358] This is true of standard interpersonal inequality, as well as inequality between broadly defined groups such as gender, regions, or ethnicities. Policy makers appear to be well aware of and concerned about inequality. For example, in a survey of more than 500 Asian policy makers 44% rated concern in their country about inequality as being “high” or “very high,” while 36% rated the concern as being “medium.” On the question of whether higher income inequality is acceptable so long as poverty is declining, 52% disagreed or strongly disagreed. Finally, when asked how important it is to have policies in place to prevent rises in inequality in order to maintain stability and sustain growth, 95% said it was “important” or “very important.”^[359]

The next step in the argument is to understand that the inequality of market outcomes depends on structural inequality and on how these inequalities interact with market processes to exacerbate or mitigate these inequalities.

Thus, policy can affect the inequality of final outcomes in three ways—by addressing structural inequality premarket, by addressing the operation of market processes, and by redistributing income generated by structure and market. Viewed in this way, the component parts of globalization—opening up of trade, capital, and labor flows—can be seen as dimensions of market processes. Reversing these processes in order to manage inequality is neither desirable, because it also blocks off a major route to economic growth and efficiency, nor feasible given the instruments that policy makers actually have. Of course, to the extent that the market processes are themselves distorted, for example, preferential access to foreign markets for monopolies or for politically favored groups, then addressing these can improve efficiency and equity.^[360] However, policy could fruitfully focus on addressing structural inequalities and redistributing market income more equitably. Sometimes these can be combined, and redistribution of market income can be done in such a way as to mitigate structural inequalities as well.

A good entry point into policy is provided by the contrasting experiences of Asia and Latin America in the last 20 years, when both regions have faced the same global economy and increases in global integration. During the 1990s and 2000s, Asia saw sharp increases in inequality. During this period, 83% of developing Asia’s population lived in countries with rising inequality, and if the high growth that occurred had taken place without rising inequality, nearly one-quarter of a billion more people would have been lifted out of poverty, according to one estimate.^[361] On the other hand, Latin America, which has long been a byword for high inequality, managed to have a remarkable period of declining inequality from the late 1990s onward. This is true of all the major Latin American economies. For example, in Brazil between 1998 and 2009, without the fall in inequality, the same level of poverty reduction would have required a growth rate higher by 4 percentage points^[362] Of course, the levels of inequality in Latin America were and still are much higher than those in Asia.

However, the difference in trends is remarkable.

Sections 20.3 and 20.4 of this chapter discussed the skill bias that characterizes technical progress today. Demand for skilled labor is rising globally, and openness in trade and investment is transmitting this global demand to the country level. In the absence ofpol- icy intervention, these market processes will lead to rising inequality within countries. As discussed earlier, closing off economies in order to block this channel of inequality increase is neither feasible nor desirable. However, Asian economies have tended not to counteract these pressures, either by addressing structural inequalities in skill levels, or by redistributing market income sufficiently to mitigate inequality. However, Latin American economies have purposively redistributed income through cash transfers and have done it in such a way as to help the buildup of human capital through conditioning these transfers on keeping children in school. This is not the place for a full-blown assessment of conditional cash transfers (CCTs), but it does seem as though Latin American countries have found an appropriate intervention to address rising inequality in general but also for the current conjuncture of globalization-led pressures in rising inequality through a rising demand for skilled labor.^[363]

The additional expenditure on conditional cash transfers requires revenues, and the progressivity of the tax system is another major determinant of how globalization related increases in inequality can be mitigated. Progressivity is also important in addressing the rise in very high incomes the world over, especially in Asia. Asian tax systems do not generally score highly on progressivity. In fact, it is argued that raising progressivity of taxation would have a greater impact on inequality in Asia than elsewhere in the world.^[364]

The policy discussion above is pertinent to rises in inequality associated with globalization, and it is also valid for increases in inequality from any source.

What globalization brings, however, is the easier movement of capital and labor across borders, and this may well constrain government’s abilities to raise revenues to address structural inequalities and to redistribute market incomes. There is now vast literature on tax competition and the globalization’s role in intensifying the “race to the bottom.” Kanbur and Keen (1993) show that tax rates are (i) suboptimal with lack of tax coordination when the tax base is mobile across borders and (ii) the suboptimality increases with the ease of movement of the tax base. With such revenue effects, questions are naturally raised about the sustainability of redistributive expenditure like CCTs in a globalized world. As the title of one paper asks, “Will social welfare expenditures survive tax competition?” (Hines, 2006).^[365] ^{^[366] The basic intuitions of the analysis can be applied to progressive income taxation as well as in the context of international migration. The discussion in Section 20.7 of this chapter showed that international migration was unequivocally good for poverty reduction in developing countries, and while there were possible short-term effects raising inequality, these were turned around in the medium term. This would argue for greater freedom of international migration of labor to match the greater ease of movement of goods and capital. However, there is a catch. The possibility of international migration, especially of skilled high-income labor, could constrain the government’s abilities to redistribute income within the country through progressive taxation.
The early work of Mirrlees (1982) concluded that “it may well be desirable to institute substantial income taxes on foreign earnings.” While this was the solution for a single country’s tax design problem when faced with cross-border migration, it also contains within it the seeds of a solution to the coordination problem, whereby countries follow one another down the path of reduced progressivity, exacerbating the inequality impact of greater openness.
A similar logic applies to a race to the bottom on labor standards, where countries lower standards or enforcement to gain competitive advantage (Chau and Kanbur, 2003, 2006). The issue has already been alluded to in the context of gender inequality in industries that employ mainly women. Coordination on labor standards is typically conducted through the International Labor Organization, and this mechanism can be strengthened further to address the inequality increasing forces that globalization can bring (Chau and Kanbur, 2001). Indeed, Basu (2006) goes so far as to propose an international agency to address this issue:
That there may be coordination problems in trade is well recognized and we have the WTO to help mitigate such problems. That labor market policies need coordination is known and we have the ILO to address this. For environmental problems we have the UNEP or the GEF. But there is nothing comparable to these for anti-poverty and anti-inequality policies. Yet...this is an area where the coordination problem may be no less acute. Hence, there is clearly a perceived need for a coordinating agency. (p. 1371)
Leaving to one side the political feasibility or operational practicality of such an agency, the fact that it is being contemplated highlights like nothing else the challenges that globalization poses to policy makers concerned with its effects on inequality.
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Source: Atkinson Anthony, Bourguignon François. Handbook of Income Distribution. Volume 2B. North Holland, 2014. — 2366 p..

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