Globalisation, the process of increasing interconnectedness between the economies of the world, has played a major role in reducing inter-country inequality. However, it can be argued that it has had the opposite effect on intra-country inequality, for both developed and developing economies. This essay will focus on and analyse the extent to which inequality has risen in developing countries, and the main causes of this rise. These include globalisation, the structural reforms of an economy, the labour market of a country, the level of education its population has access to and the implications of taxes. In this essay it will be argued that the leading cause of inequality in developing countries is in fact globalisation.
Firstly, it is important to analyse the extent of inequality in developing nations, and explore how widespread this problem actually is. In Asia, there are primarily four countries which have experienced rising inequality over recent years; China, India, Indonesia and Bangladesh, with China’s Gini coefficient rising from 0.28 to 0.42, on the other hand, there has been limited alterations to inequality in the rest of Asia (Bourguignon, 2015). It is important to note that this most certainly does not mean that inequality in the rest of Asia is low, in fact in most cases it is considered to be the opposite, just that it has not been rising.
Furthermore, in Africa there are countries in which income inequality has also been relatively stable; Cameroon and Uganda, or even been reduced; Senegal (Bourguignon, 2015). Finally, Brazil is experiencing an inverted U-shape curve for inequality, having had one of the highest Gini coefficients in South America, and indeed the world, inequality is now rapidly reducing.
Despite not being the case for each and every nation, there seems to be an inclination towards increasing inequality in the developing world, which can be attributed to a number of causes, as will be discussed in this essay.
One main cause of rising income inequality in developing countries is of course globalisation. There are two theoretical arguments which state that globalisation should in fact have the opposite effect on levels of inequality. The first being that globalisation will increase an economy’s output in GDP, which will lead to the trickle-down effect, ensuring that income and wealth are distributed evenly. However, globalisation doesn’t necessarily mean an increase in a country’s output, and the effectiveness of trickle-down economics has proven to be very ineffective (Stiglitz, 2012). The second theory is that the increase in global trade resulting from globalisation means emerging economies who specialise in the production of goods requiring unskilled labour begin exporting these goods, and so demand increases for the goods, increasing demand for unskilled labour, and thus increasing the wages of unskilled workers and so reducing the wage gap between skilled and unskilled workers. However, the rise in inequality in countries exporting these goods directly contradicts this theory; globalisation has resulted in a shift of jobs from unskilled agricultural sectors to skilled industrial sectors, resulting in a greater concentration of income (Bourguignon, 2015). Eric Maskin’s theory goes some way to explaining this; before globalisation skilled and unskilled workers would work together in developing countries, however improvements to transport and communication links have allowed skilled workers in developing countries to work and interact with workers from developed nations, and are able to pick up jobs which would be deemed unskilled in a developed nation when they are outsourced to developing countries by multinational corporations (The Economist, 2014). As a result, demand for skilled workers instead of unskilled workers in developing countries actually increases, resulting in higher wages and increasing inequality. However, while I certainly agree with his premise, Maskin does not provide any data to back up his theory, meaning its credibility may be somewhat limited.
Furthermore, Stiglitz points out that improvements to transport and communication links, both a cause and indicator of globalisation, results in capital being highly mobile, this allows the firm operating in the developing country to say to their unskilled workers that if they don’t accept lower wages then the firm will just relocate (2012). This in turn drives down the wage of unskilled workers in developing countries, thus increasing inequality of wealth and income.
Stiglitz also notes that trade liberalisation and the opening up of developing countries to international trade, especially those whose economic growth is commodity production led, can expose it to the risks such as the volatility of the global commodity markets (2012). If a developing economy has a high concentration of primary commodities, globalisation will result in that country’s output becoming reliant on the export of said commodities, and with greater volatility and uncertainty, firms are more inclined to partake in safer and more certain activities which often makes everybody worse off.
Globalisation is a process which inevitably results in both winners and losers, and inequality arises from it as the winners usually don’t compensate the losers. In fact, globalisation dictates that they can’t, as the taxes that would have to be levied on the largest firms and the upper classes would make the country less competitive, which simply can’t be allowed in our increasingly interconnected global economy.
As well as globalisation, the structural reforms that an economy goes through can also be a major cause of inequality within developing nations. China is an economy in ‘transition’ as in recent decades it has been moving away from a centrally planned economy towards a market based economy. With these economic reforms; opening up to trade and foreign investment and the emergence of the private sector, inequality was inevitably going to rise (Bourguignon, 2015). As part of these reforms and opening up to the world, China also introduced Special Economic Zones in Shantou, Shenzen, Zhuhai and Xiamen, which had special economic policies and flexible government measures in order to attract foreign direct investment from multinational corporations (Yeung, Lee and Kee, 2009). However, despite extremely high levels of economic growth, the favour shown to these areas has obviously resulted in a great deal of regional disparity and income inequality between the rural areas, mostly inland, and urban areas and Special Economic Zones, mostly on the coast.
Away from China, there was the debt crisis in Latin America during the 1970s and 1980s. Two unforeseen shocks in the oil price in the 1970s resulted in a current account deficit in many Latin American countries, and as a result had to borrow money from various money-centre banks in the United States, and by 1982 total debt had reached $327 billion dollars (Sims and Romero, 2013). In the aftermath of this crisis, international financial institutions, such as the IMF and World Bank, implemented ten structural reforms in the developing economies wracked by debt crisis, such as; fiscal discipline, tax reform, trade liberalization, a competitive exchange rate and privatisation (Williamson, 2004). As pointed out by Bourguignon, throughout the 1980s and 1990s we can observe a considerable increase in inequality within the countries most affected by these structural reform programmes (2015). However, he does state that it would be an error to accredit this rise in inequality in these countries completely to these programmes, as Latin America was in a tough economic circumstance desperately in need of some kind of reform, and it is likely that a rise in inequality would have occurred regardless of the reforms that were carried out (2015). In my opinion, it is easy to link these reforms and a rise in inequality to globalisation, especially with items in the Washington Consensus like ‘Trade liberalisation’, which results in the opening up of an economy to the global market, leading to a rise in inequality, much like can be attributed to globalisation, as was discussed earlier.
The labour market itself is also another root cause of inequality within developing countries. In a capitalist system, the wages of workers are determined much in the same way as a price of a good or service is, by the market forces of demand and supply. In developing nations there is an abundance of unskilled workers who are all competing against each other for jobs, and this competition drives down the wage. It is also true for the opposite, there are fewer skilled workers in developing countries, due to limited availability of education, and so this lack of competition between the employees and increased competition between the firms, usually MNC’s as a result of globalisation, drives up the wage for the skilled workers (Leung, 2015). These supply and demand interactions will therefore result in rising income and wealth inequality over time.
Labour markets in developing countries are known to be very segmented. This implies that, for a given skill level, some jobs are decidedly better than others, in terms of both pay and conditions (Fields, 2010). As a result, workers with equality of opportunity can easily end up with inequality of income and wealth due to the unpredictability and uncertainty of the labour market. It can be seen that developing countries do not have an unemployment problem, but a problem whereby large amounts of people in unskilled jobs remain in poverty due to the abundance of unskilled labour driving down the wage rate, resulting in rising inequality.
Another factor affecting inequality in developing nations is the availability of education, and also the standard of this education. Education ties in nicely with the labour market previously discussed as it directly affects skill level or workers; for example, someone with a greater standard of education is extremely likely to have a greater set of skills. In developing countries, the standard and availability of education is not on the same level as that of a developed country. For example, according to UNICEF’s January 2012 report, more than 226 million children in developing countries do not attend secondary school, 67 million primary school age children are denied the right to education and the African continent has areas with less than 50% literacy rates.
As some families will be too poor to afford education for their children, many generations are starting out with inequality of opportunity, with richer families able to send their children to school and get an education, and as a more educated person will have greater skills, they can demand a higher wage, which then results in increased income and wealth inequality in developing nations (Leung, 2015).
Due to the lack of availability and ability to afford education, the poorest of society in developing economies are increasingly likely to get poorer while the richer members of society will be able to afford an education, increase their skill set and then acquire a better job with a higher wage, thus getting richer, resulting in increased inequality.
One final reason for inequality in developing economies is the tax regime that is used by each country. A progressive tax system is one whereby, as the base amount of money that is taxable increase, the tax rate increases. Furthermore, progressive tax systems and expenditure policies can limit the extent of inequality (Stiglitz, 2012).
However, Bourguignon explains how the systems that are in place in developing countries to redistribute income are not very well developed, meaning the government’s ability to reduce inequality through a progressive tax system and transfer of income is limited (2015). As well as this, observing income in developing countries is tough, which can be seen by the weight of individual taxes on incomes as a percentage of GDP is much lower in developing countries than that of OECD countries; 2.5% in China, 1.6% in Latin America and 0.5% in India, compared with an average of 9% in OECD countries (Bourguignon, 2015). As a result, the poorest classes are being taxed at a rate too similar to the upper, richest classes, which contributes immensely to increasing inequality of wealth and standard of living.
To conclude, there are many reasons for rising inequality in many of the developing countries; globalisation, structural reforms, the labour market, education and taxes. However, in my opinion, this rising inequality can indeed be attributed to the process of globalisation, due to the fact that it can be linked to many of the aspects that have been discussed in this essay, and how the effects on inequality were largely unexpected as the economic theory suggests that globalisation should in fact cause inequality in developing countries to fall. This then poses the question as to whether globalisation has caused inequality to rise in developed nations as well.