Sunday, April 21, 2024

Mind the return of the global income gap

Over the past quarter-century, the world has seen the deepest, most consequential decline in income inequality since the Industrial Revolution. And yet that progress is coming to an end, probably before many Americans had even realized it was occurring.

At issue is not income distribution among individuals but among the nations of the world. The economic gap between a small cluster of nations that began industrializing in the 19th century — the United States and Canada, those in Western Europe, Australia, New Zealand and Japan — and the rest has been shrinking since roughly the turn of the 21st century. The main cause of this convergence was fast gross domestic product growth in many Asian countries.

The progress was gradual but significant. Branko Milanovic, an economist at the Graduate Center at City University of New York, estimates that in 1988, only 4.5 percent of people in countries of the underdeveloped “periphery” had an income above $4,660, the median income in Portugal, the poorest rich country at the time, after adjusting for exchange rates. By 2018, 13.8 percent of people in peripheral nations made more than the median of $8,898 in Greece, which had taken Portugal’s place. But the positive trend halted after 2018 and even went slightly into reverse when covid-19 struck in 2020. Milanovic warns: “One cannot exclude the future reversal of the decline.”

To be sure, as welcome as the progress toward more equitable global distribution was, it was not dramatic. As Milanovic points out, it would have taken an additional 300 years for half of the population of peripheral countries to match or exceed the median income of the poorest country in the rich club.

Still, there’s a big difference between heading in the right direction — and not. A world inescapably divided between a small core of rich countries and a vast, poor periphery wouldn’t only be unjust. It might be less stable and prone to military conflict. It could be harder to mobilize against planetary challenges such as climate change. The very idea of a cohesive human community could be that much harder to maintain.

It doesn’t help that the United States’ protectionist turn — tariffs and local content rules; rejecting trade agreements — has put at risk the expansion of international trade that had helped poorer countries grow. And the push for clean energy is turning into a rationale for even more such industrial policy. As Rebeca Grynspan, secretary general of the United Nations Conference on Trade and Development, has noted, subsidized clean energy production in the European Union and the United States could box poor countries out of the energy transition. The E.U.’s planned external tariff based on the carbon emissions of imported products will impose disproportionate costs on developing countries.

Asia’s growth, with China leading the way, accounted for much of the shrinking global income gap. In 1988, no Chinese citizen made more than the median Portuguese citizen. In 2018, a quarter of them made more than the median in Greece. Ironically, though, global inequality has stopped shrinking now partly because China is so much better off that its continued growth would actually increase global inequality, rather than reduce it. If there is to be further reduction in inequality between rich and poor countries, much of it must happen in poorer big countries — such as India, Bangladesh or, notably, African heavyweights such as Ethiopia or Nigeria.

So far, few large African countries have sustained high growth for any consistent period of time. And headwinds have become more intense. Climate change threatens poor countries’ agricultural economies; a potentially long-lasting war in Ukraine roils commodity markets; and tension between China and the United States entangles global trade.

Washington’s less open approach to trade was not entirely unjustified and perhaps, in hindsight, inevitable. The surge in Chinese imports caused job losses in many U.S. communities over the past 20 years. Chinese catch-up came along with stagnating American real wages and rising inequality. President Biden is following the protectionist path blazed by President Donald Trump as a political response to the belief of working-class voters that globalization failed them.

And yet, to preserve the prospect of global cooperation, developed nations of the North must keep trade and investment sufficiently free to help the Global South along the path to prosperity. Climate change, for one, cannot be solved without the cooperation of poor and middle-income countries that today account for most of the world’s population. The fairest world, and the most stable, will be one in which the 5 billion inhabitants of the “periphery” can realistically hope to work their way toward economic parity.


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