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Globalisation and inequality: 'The Economist' gets it wrong

About the author
James K. Galbraith is director of the University of Texas Inequality Project.He writes a regular column on economic and political issues for the Texas Observer.

Stanley Fischer is a formidable economist, and it is a pity to see The Economist stoop to extracting a piece of his 2003 Ely lecture to make a distorted point. Fischer is certainly familiar with the rebuttal about to be delivered; indeed he alludes to much of it in passages and footnotes that The Economist chooses not to quote.

Economist charts showing trends in the world economyEconomist charts showing trends in the world economy

The relevant extract is summarised in two charts. The first shows growth from 1980 to 2000 plotted against original income level, with a point for each country. The scatter slopes upward, indicating increasing inequality. The second chart weights each point by population; it reveals that two of the largest countries, China and India, grew among the fastest. Hence the claim is that if one considers people rather than countries, worldwide inequality has been falling. The chart qualifies this conclusion by noting that sub-Saharan Africa is a counter-trend, with low and declining incomes in the past twenty years.

What is wrong with the picture?

Economist charts showing trends in the world economyEconomist charts showing trends in the world economy

  1. It ignores developments within countries. Yes, China’s average income grew, but not every Chinese got the average increase. We know that inequality inside China grew dramatically in the 1990s. (Fischer concedes this; The Economist ignores it.) Looking over the broad range of developing countries, the University of Texas Inequality Project finds rising inequality in most of them, falling inequality in only a few.

  2. It is not reasonable to treat sub-Saharan Africa as apart from globalisation. These countries have always been suppliers of minerals, oil, coffee and cocoa to the west; they are not isolated and have become less so since the end of apartheid in South Africa. They are victims of debt crises and so-called Structural Adjustment Programs. Treating them as special cases is advice to evade globalisation’s greatest failures.

  3. The charts cover the period 1980-2000. But the relevant comparison is between this period and what came before, the “pre-globalisation era”. For most developing countries, growth was higher in the 1950s and 1960s, under the regulated international monetary system known as Bretton Woods.

  4. Also, countries created after 1980 must be excluded from those charts, including the successor states to the Soviet Union and Yugoslavia. But what happened to income in these areas as they globalised? (Stanley Fischer notes this, The Economist ignores it.)

  5. Anyway, neither China nor India is an exemplar of free-market globalisation. Both steered free of western banks in the 1970s, and spared themselves the debt crisis; both maintained capital controls; both have large state sectors in heavy industry. China continues to be run by the Communist Party. Fischer concedes that “not every detail policy in either country followed the Washington Consensus.” The Economist chose to overlook this fine bit of understatement.

  6. It is finally not true that “more globalization” – for instance the reduction of trade barriers to goods from ‘third world’ countries – will solve the development problems of the poorest countries. Some tropical products (sugar, orange juice) face severe protection; most do not. What the poorest countries need perhaps most of all is sustainable finance. But this requires placing the financiers under a degree of regulation and control. That, of course, is not on The Economist’s agenda.

Misleading charts are easier to peddle, especially when supplied by an economist who not only ought to know better, but demonstrably does. One of the few sensible statements in The Economist’s treatment of Stanley Fischer’s speech is the advice to read it.

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