MKT3000:  Development, Capitalism & Free Markets

Some preliminaries:

The Future of Capitalism is generating considerable discussion - e.g. Financial Times & also their 'in crisis' page; Pew Research Centre US Poll 2012; OECD Future of Capitalism Forum, 2010; Ed Milliband's take on Davos (World Economic Forum), and the Economist on the same.

As a working definition of what is meant by capitalism, the Economist suggests:
"The winner, at least for now, of the battle of economic 'isms'. Capitalism is a free-market system built on private ownership, in particular, the idea that owners of CAPITAL have PROPERTY RIGHTS that entitle them to earn a PROFIT as a reward for putting their capital at RISK in some form of economic activity. Opinion (and practice) differs considerably among capitalist countries about what role the state should play in the economy. But everyone agrees that, at the very least, for capitalism to work the state must be strong enough to guarantee property rights. According to Karl MARX, capitalism contains the seeds of its own destruction, but so far this has proved a more accurate description of Marx's progeny, COMMUNISM."

Much of this discussion reflects four major themes: 
a)    The credit crunch and consequent debt crisis and sustained recession in the western economies -> the failures of the finance (capital) markets; 
b)    The failure of the system to deal adequately with the dangers of climate change and environmental destruction -> the market failures of externalities and public goods, especially associated with natural resources. 
c)     There is also a third strand to at least some of the criticisms and concerns - the apparent rising inequalities in the system, now more apparent within countries (US and UK especially), though also persistent (if somewhat smaller than historicially) between countries and regions (comments from readers on the Economist's special feature on inequality (Oct. 2012)).
d)   The problem (or opportunities) generated by an ageing population (not dealt with here), and the growing cost of the 'welfare state'

However, as yet there is no rival model system which carries any substantive support - socialism has been effectively sidelined since the collapse of the Berlin Wall and the USSR, with even Cuba beginning to move towards a version of the mixed and modestly 'capitalist' society. There is, apparently, no viable alternativecapable of challenging the general system of more or less governed markets and more or less private capital (ownership), with more or less 'democratic' government (where the quotes might also include governments such as China, which has clearly to take considerable account of the extent to which it can continue to persuade its constituents to believe in and abide by its socialist principles). In effect (my words), we have a range of 'capitalisms' being exhibited around the world, from State Capitalism (China) through 'Frontier Capitalism' (Russia) and Private Capitalism (US) to Social Capitalism (Sweden and Norway).

As a consequence, most of the critiques are not actually of the capitalist/market system itself, but about how and by whom this system should be governed - whose long arm of what law is to be attached to Adam Smith's invisible hand?  Furthermore, much of the criticism is actually about the failure of states and national governments to reach sensible coooperative agreements, especially about climate change - so (although not often termed as such) - the problem is not market failure but political failure (see Buchannan, 1988, for some erudite and theoretical discussion of these issues).  However, once phrased like this, why stop at political, why not also social failure, cultural failure .......

Notice that the models of the Climate Change, especially the current specification of the basic Scenarios and particularly the difference between the '1' and '2' scenarios, presumes both that the 'capitalist' (i.e. present) systems will persist, and will do so either (1) at the globalised and intergrated level, or (2) at more localised, isolated and self-sufficient levels (which is some denial of at least the globalised capitalist system. 

Notice, too, that the localised system is expected in these scenarios to: grow more slowly, 'sustain' higher polulations, and generate greater GHG emissions and global warming than the globalised counterparts.  That is, these scenarios reflect the 'global concensus' that free(ish) markets and trade generate more efficient use of resources and higher standards of living (incomes in terms of real purchasing power) than closed and isolated markets.  This happens both because of the comparative static logic of comparative advantage - see earlier notes; and also and probably far more importantly because of the innovations and technical advances sponsored and cultivated by competition and immitation. In addition, the impacts of extreme events (droughts, floods etc.) can be more easily mitigated through trade and aid (+capital) flows in a globalised world than in a localised and isolated world.

The rest of these notes consider the notion of 'development' and the question of whether or not globalisation (here taken to be practically equivalent to 'capitalism and free markets') implies inequalities (which seem at least possibly to undermine the social legitimacy of the present versions of capitalism, as they did for communism). There are also some notes on whether or not growth (more incomes) really generates happiness (improved welfare?). It concludes with some key questions, and my own (necessarily idiosyncratic) take on the 'crisis of capitalism'.

What is development?

What does it mean to be underdeveloped?
How do we recognise Development (what is growth) - increasing scores on all the above dimensions  See, e.g. UN Human Development Index (HDI)? See also, Commission on Measurement of Economic performance and Social Progress (report, 2009) A picture of the development process ('sustainable livelihoods')
There is no unique and commonly accepted version of the development process.  One framework has been developed by the Department for International Development (UK), DFID, called the sustainable livelihoods framework (DFID, Sustainable Rural Livelihoods, ed. Diana Carney, 1998).  This approach has now taken over, in the international development field, from the the earlier Integrated Rural Development approach, which, interestingly, still seems to dominate much of the developed (European Union) discussion of rural development. (See here for the official DFID Guidance sheet on Sustainable Livelihoods approach).

The starting point is a definition of sustainable livelihoods (following from Robert Chambers and Gordon Conway):

"A Livelihood comprises the capabilities, assets (including both material and social resources) and activities required for a means of living. A Livelihood is sustainable when it can cope with and recover from stresses and shocks and maintain or enhance its capabilities and assets both now and in the future, while not undermining the natural resource (NR) base."
The following outline is a summary (and revision) of this SLF framework.

Sustainable LivelihoodsThe focus of this approach is the concept of CAPITAL ASSETS on which people draw to build their livelihoods. Natural Capital comprises land, water, biodiversity, environmental resources etc. - (the natural circumstance of the community); Social Capital includes the social institutions (rules and habits) and associated trust and networks (the history and culture of the community); Human Capital includes the skills training and education of the people (as workers) as well as their health (the character of the community, as the way in which it acts); Physical Capital includes the infrastructure (transport, housing, water, energy, communications) as well as production equipment: factories, machines and tools - the physical circumstance of the community; Spatial Capital includes the spatial relationships between this community or region and its neighbours and traders, the geography or context of the community. [Note:  DFID suggests that the fifth element of capital is Financial - however, the finances of a community are essentially associated with the ways in which it manages to transform and augment its fundamental stocks of natural, social, physical, human and spatial capitals, and hence can be regarded as one way of measuring each of the fundamental capitals].  The access which this community has to each of these fundamental capital stocks is measured (at least conceptually) along an axis from the centre of the pentagon - which produces a web profile of the community's STRENGTHS (household, group, region, parish, village etc.).  Generally, the further any group lies from the central point of the pentagon ("The Black Hole?"), the more robust is it likely to be in the face of shocks and stresses.  However, this is only a snap-shot of the current status of the community.
Structures (organisation and pattern of both markets and governments) and Processes (mechanisms of transactions and negotiations) are critical in developing the asset base (see Hirschman's contribution on processes - exit versus voice):

The Outcomes include both the aspirations of the community itself as well as indicators of the social, economic and natural sustainability of the their activities and behaviours, which in turn will influence the value and use of the asset base, and hence the viability and vulnerability of the community.

History & Economic Globalisation

Jeffrey Williamson gave an annual lecture to the UN WIDER community in 2002, titled: "Winners and Losers in two centuries of globalisation", which provides a useful framework and reference for a recap of the political economy processes of globalisation.  He outlines a decomposition of "the centuries since 1492 into four distinct globalization epochs."  He adopts a simple measure of 'globalisation' - do commodity prices converge?  Remember our comparative advantage and gains from trade story - trade tends to equalise prices between countries, and the 'price gap' between exporters and importers (the cif/fob price difference) depends on transport costs and barriers to trade, such as tarrifs (import taxes). 
Proposition:   Economic Globalisation => Commodity Price Convergence between countries. (Trade may still happen for other reasons - consider the basic analysis. This analysis does NOT say that increased trade is necessarily associated with price convergence - all sorts of other things can lead to increased export supply or import demand, which can easily lead to more trade without price convergence - e.g. increased incomes (GDP per head), population growth, expansion of territory, exploitation of mineral and fuel resources, technical innovation etc. will tend to increase both import demands and export supplies. )
"History offers two enormously important historical cases where the world leader going open had completely different effects: pro-global liberalization in nineteenth century Britain was unambiguously egalitarian at the national and, in the short run at least, the world level—American liberalization in the late twentieth century was not." ( p 16/24)

Epoch I: Anti-global mercantilist restriction 1492-1820: - European growth and expansion did not lead to globalisation as indicated by price convergence. No evidence of falling (reducing) price gaps - so "Thus, ‘discoveries’ and transport productivity improvements must have been offset by trading monopoly markups, tariffs, non-tariff restrictions, wars, and pirates, all of which served in combination to choke off trade" (note, increased trade should have closed the price gaps).
This epoch was clearly associated with rising inequality, "between the sixteenth and the eighteenth centuries the landed and merchant classes in England, Holland, along with France pulled far ahead of everyone—their compatriots, the rest of Europe, and probably any other region on earth. This divergence was even greater in real than in nominal terms, because luxuries became much cheaper relative to necessities ...While we will never have firm estimates of the world income gaps between 1500 and 1820, what we do have suggest unambiguously that global inequality rose long before the first industrial revolution. Thus, industrial revolutions were never a necessary condition for widening world income gaps. It happened with industrial revolutions and it happened without them." (p 14).  "The migration of people and capital was only a trickle before the 1820s. True globalization began only after the 1820s." (p 15).

Epoch II: The first global century 1820-1913: - Peace, post Napoleonic wars, Pax Britannica, falling transport costs, reduced (British) protection - especially for food + mass migration to the 'new world', and associated major capital investment and integrated capital markets.  "The 1820s were a watershed in the evolution of the world economy. International commodity price convergence did not start until then. Powerful and epochal shifts towards liberal policy (e.g. dismantling mercantilism) were manifested during that decade. In addition, the 1820s coincide with the peacetime recovery from the Napoleonic wars on the continent, launching a century of global pax Britannica. In short, the 1820s mark the start of a world regime of globalization. Transport costs dropped very fast in the century prior to World War I. These globalization forces were powerful in the Atlantic economy, but they were partially offset by a rising tide of protection. Declining transport costs accounted for two-thirds of the integration of world commodity markets over the century following 1820, and for all of world commodity market integration in the four decades after 1870, when globalization backlash offset some of it" (p, 5/13)

"Factor markets also became more integrated worldwide. As European investors came to believe in strong growth prospects overseas, global capital markets became steadily more integrated, reaching levels in 1913 that may not have been regained even today. International migration soared in response to unrestrictive immigration policies and falling steerage costs, but not without some backlash: New World immigrant subsidies began to evaporate toward the end of the century, political debate over immigrant restriction became very intense, and, finally, the quotas were imposed. In this case, it is clear that the retreat from open immigration policies to quotas was driven by complaints from the losers at the bottom of the income pyramid, the unskilled native born" (p 6/14)

"The big gainers from nineteenth century British trade liberalization were British labor—especially unskilled labor—and the rest of Europe and its New World offshoots, while the clear losers were British landlords, the world’s richest individuals. ..Workers—especially unskilled workers—gained because Britain was a food importing country and because labor was used much less intensively in import competing agriculture than was land. [Labor would not have gained much from free trade on the continent since, among other things, agriculture was a far bigger employer, so big that the employment effects (the nominal wage) dominated the consumption effects (the cost of living).] (p 15/23).

"Inequality fell and equality rose in land-scarce and labor-abundant Europe either due to trade boom, or to mass emigration, or to both, as incomes of the abundant factor (unskilled labor) rose relative to the scarce factor (land). In addition, those European countries which faced the onslaught of cheap foreign grain after 1870, but chose not to impose high tariffs on grain imports (like Britain, Ireland and Sweden), recorded the biggest loss for landlords and the biggest gain for workers. Those who protected their landlords and farmers against cheap foreign grain (like France, Germany and Spain) generally recorded a smaller decline in land rents relative to unskilled wages. To the extent that globalization was the dominant force, inequality should have fallen in labor-abundant and land-scarce Europe. And fall it did. However, these egalitarian effects were far more modest for the European industrial leaders who, after all, had smaller agricultural sectors. Land was a smaller component of total wealth in the European industrial core where improved returns on industrial capital, whose owners were located near the top of the income distribution, at least partially offset the diminished incomes from land, whose owners tended to occupy the very top of the income distribution." (p 16/17).

"Globalization (price convergence) had a powerful inegalitarian effect in the land-abundant and labor-scarce New World, and for symmetric reasons. Not surprisingly, Latin America, the United States, Australia, Canada and Russia all raised tariffs to defend themselves against an invasion of European manufactures and the deindustrialization it would have caused. Indeed, the levels of protection in the United States, Canada, Australia, Latin America and the European periphery were huge compared to continental Europe. In the 1880s the US and Latin America had tariffs five to six times higher than western Europe, and the European periphery had levels three times higher!" (p 17/18) (but offset with both capital widening and capital deepening and major migrations.)

"In short, and whether they liked it or not, Asia underwent tremendous improvements in their terms of trade by this policy switch [from trade protection to freer trade, forced by Britain and the US), and it was reinforced by declining transport costs worldwide." (p 19)  "An improving terms of trade (price of exports/price of imports) augmented long-run growth in the center. However, the same terms of trade improvement was growth reducing in the periphery (agricultural). It appears that the short-run gain from an improving terms of trade was overwhelmed by a long-run loss attributed to deindustrialization in the periphery; in contrast, the short-run gain was reinforced by a long-run gain attributed to industrialization in the center." (p 20)

"North-North migrations between Europe and the New World involved the movement of something like 60 million individuals. We know a great deal about the determinants and impact of these mass migrations. South-South migration within the periphery was probably even greater, but we know very little about its impact on sending regions (like China and India), on receiving regions (like East Africa, Manchuria and Southeast Asia), or on the incomes of the 60 million or so who moved. The South-North migrations were only a trickle—like today, poor migrants from the periphery were kept out of the high-wage center by restrictive policy, by the high cost of the move, and by their lack of education." (p21).  "The labor force impact of these migrations on each member of the Atlantic economy in 1910 varied greatly. Among receiving countries, Argentina’s labor force was augmented most by immigration (86 percent), Brazil’s the least (4 percent), with the United States in between (24 percent). Among sending countries, Ireland’s labor force was diminished most by emigration (45 percent), France the least (1 percent), with Britain in between (11 percent). At the same time, the economic gaps between rich and poor countries diminished: real wage dispersion in the Atlantic economy declined between 1870 and 1910 by 28 percent, GDP per capita dispersion declined by 18 percent and GDP per worker dispersion declined by 29 percent. (p 22)

These results have been used to conclude that migration was responsible for all of the real wage convergence before World War I and about two-thirds of the GDP per worker convergence." (p 23).  In addition, and not included in these calculations, "In the absence of the mass migrations, real wage dispersion between members of the Atlantic economy would have increased by something like 7 percent, rather than decrease by 28 percent, as it did in fact. In the absence of mass migration, wage gaps between Europe and the New World would have risen from 108 to something like 128 percent when in fact they declined to 85 percent. The migrants themselves typcially substantially improved their own incomes, contributing to greate equality as a result.

"Capital accumulation was rapid in the New World, so much so that the rate of capital deepening (increasing capital per worker, as opposed to capital widening, which involves increased capital investment at the same rate as increases in the labour forces) was faster in the United States than in any of its European competitors, and the same was probably true of other rich New World countries. Thus, the mass migrations may have been at least partially offset by capital accumulation, and a large part of that accumulation was being financed by international capital flows which reached magnitudes unsurpassed since."  

"The wealth bias that Lucas and others have noticed (see below) was just as powerful a century ago, and it is explained by the fact that capital chased after abundant natural resources, youthful populations, and human-capital abundance. It did not chase after cheap labor. International capital flows were never a pro-convergence force. They drifted towards rich, not poor, countries; they raised wages and labor productivity in the labor-scarce and resource-abundant New World, not the labor-abundant Third World. And what was true of the first global century has also been true of the second. But this does not imply that the Third World has been losing capital by export. Rather, it implies that there has always been a churning of capital among richer countries outside of Asia and Africa. Nor does it imply that global capital markets have been at fault for failing to redistribute world capital towards poor countries. Instead, it implies that, for other reasons, the poor countries have never been the best place to make investments." (p 24/25)


Epoch III: Beating an anti-global retreat 1913-50: Immigration restrictions and import tariffs, associated with reduced international capital flows (and two world wars and a great depression) -> major retreat from globalisation.  Openness => growth arguments appear to be dominated by this period, since there is no substantive relationship between openness (low tariffs) and growth prior to 1913, if anything, the reverse (protection => growth) (p.26).  "There is growing evidence suggesting that the benefits of openness are neither inherent nor irreversible but rather depend upon the state of the world. When considering the move to openness, heads of state are facing a game, not an isolated decision. The low-level equilibrium of mutually high tariffs is only as far away as some big world event that persuades influential leader countries to switch to anti-global policies. Feedback ensures that the rest must follow in order to survive. Thus, today’s low-tariff equilibrium was only as far away as OECD coordination in the early postwar years, and the creation of transnational public institutions whose express purpose was to impede a return to interwar anti-global autarky. But what sparks such shifts from one equilibrium to another? Why did it happen in the 1920s and 1950s? Could it happen again?" (p 27)

The protecting country has to have a big domestic market, and has to be ready for industrialization, accumulation, and human capital deepening if the long-run tariff-induced dynamic effects are to offset the short-run gains from trade given up." (p 27) but, notice, for large countries, modest 'import protection' can be 'optimal', improving terms of trade, by depressing import prices, and also raising funds for national government.  - problem is, retaliation by other countries, and their reduced ability to purchase 'our' exports - the 'prisonners' dilemma' - each would be better off without the trade restrictions, but once one protects, the other is also likely to protect, since otherwise they lose on both counts.

Epoch IV: The second global century 1950-2002: Falling trade barriers (GATT and, importantly, rapidly falling transport costs - containers) - effects on inequality ambiguous.  More restrictions on migration and, to a lesser extent, capital flows -(which have become much more open in the last 25 years).  Free trade, but generally restricted factor mobility (labour and capital). "Competition from other low-wage countries was far less intense when the Asian tigers pulled down their barriers in the 1960s and early 1970s compared with the late 1970s and early 1980s when the Latin Americans opened up." (p 12). Nevertheless, income gaps within the emergining economies - China, India, Indonesia and Russia, for instance - all tended to widen as their economies were liberalised and began their strong industrialisation - as in Britain in the 19th C.

"As young adult shares shrink in the elderly OECD, and while they swell in the young Third World going through demographic transitions, perhaps the pressure will become too great to resist the move to a more liberal OECD immigration policy, especially in Europe and Japan. The educational revolution in the Third World (Easterlin 1981; Schultz 1987) has helped augment this pressure, as potential emigrants from poor countries are better equipped to gain jobs in the OECD" (p 29) "It would help erode between-country North-South income gaps, and it would improve the lives of the millions of poor Asians and Africans allowed to make the move. And it would help eradicate poverty among those who would not move, making their labor more scarce at home and augmenting their incomes by remittances, forces that were powerful in pre-quota Europe a century ago." (p 30)

Processes:
What should trade and factor mobility do to factor earnings (labours' wages, capital returns and landlord rents)?  - Trade according to comparative advantage raises the prices of exports and reduces the prices of imports - exports are those goods (and services) which use most of the most abundant factors (which have the lowest earnings/unit under autarky - no trade), and use least of the scarce factors (which have the highest earnings/unit under autarky) - so export price increases reward the most abundant factor (labour in highly populated countries, land in sparsely populated countries). "Under a simple model, globalization should benefit the poor in poor countries and reduce inequality in poor countries, and within the developing world the poorest countries and least educated workers should have the greatest opportunity to benefit from globalization. The argument goes as follows. Suppose there are two countries, the North, with a high ratio of skilled to unskilled workers, and the South, with a low ratio. Under autarky the wage of skilled workers will be relatively low in the skill-abundant North and relatively high in the skill-scarce South. Opening trade will equalize factor prices in the two countries. Hence, the wage of skilled workers will rise in the North and fall in the South, while the wage of unskilled workers will fall in the North and rise in the South. Thus inequality will rise in the rich country and fall in the poor country. The extent of, and gains from, trade will typically be greater the scarcer are skills in the South." (Kremer and Maskin, Globalisation and Inequality, 2006, p2). But, these authors go on: "In summary, the empirical evidence does not suggest that globalization consistently has the expected Heckscher-Ohlin effects of reducing inequality in poor countries. In fact there is some evidence that trade can sometimes increase inequality in developing countries." (p.6)  These authors' review (outlining, briefly, several different economic models (stories) of the various economic theories suggests that the predictions about the effects of trade openness on inequality in either ich or poor countries is ambiguous at best, and contradictory at worst. (The rest of this paper, however, is spent detailing a rather restrictive model of one good, two countries and 4 different skill levels, - claimed to represent much of what now counts as trade -  to conlcude that trade can generate increasing inequalties in both rich and poor countries).

Furthermore, simple economics suggests that countries previously most 'closed/isolated' should gain more from opening up than countries already fairly open to trade. In fact, GATT tariff reductions largely applied to OECD, Developed countries, not to LDCs, who were largely excused their obligations to open trade. "However, these facts do not suggest that late twentieth century globalization favored rich countries. Rather, they suggest that globalization favored all (rich industrial) countries who liberalized and penalized those (poor preindustrial) who did not. There is, of course, an abundant empirical literature showing that liberalizing Third World countries gained from freer trade after the OECD leaders set the liberal tone, after the 1960s" (p. 9/17)  Openness is associated with economic growth - suggesting that openness (freer trade) fosters growth) or vice versa.


Alfaro et. al, 2006, Why doesn't capital flow from rich to poor countries? "The standard neoclassical theory predicts that capital should flow from rich to poor countries. Under the usual assumptions of countries producing the same goods with the same constant returns to scale production technology using capital and labor as factors of production, differences in income per capita reflect differences in capital per capita. Thus, if capital were allowed to flow freely, new investments would occur only in the poorer economy, and this would continue to be true until the return to investments were equalized in all the countries. However, in his now classic example, Lucas (1990) compares the U.S. and India in 1988 and demonstrates that, if the neoclassical model were true, the marginal product of capital in India should be about 58 times that of the U.S. In face of such return diferentials, all capital should flow from the U.S. to India. In practice, we do not observe such flows. Lucas questions the validity of the assumptions that give rise to these differences in the marginal product of capital and asks what assumptions should replace these. According to Lucas, this is the central question of economic development." (p 1) 

"Theoretical explanations for the “Lucas Paradox” can be grouped into two categories. The first group includes differences in fundamentals that affect the production structure of the economy, such as technological differences, missing factors of production, government policies, and institutional structure. The second group of explanations focuses on international capital market imperfections, mainly sovereign risk and asymmetric information. Although capital has a high return in developing countries, it does not go there because of the market failures. According to Lucas, international capital market failures, or “political risk” as he puts it, cannot explain the lack of flows before 1945 since most of the “third world” was subject to European legal arrangements imposed through colonialism during that time. Hence, investors in the developed countries, such as the U.K., could expect contracts to be enforced in the same way in both the U.K. and India. However, the British institutions in India do not necessarily have the same quality as the British institutions in the U.S. and Australia. As shown by Acemoglu, Johnson, and Robinson (2001, 2002), if European settlement was discouraged by diseases or if surplus extraction was more beneficial, then European colonizers set up an institutional structure where the protection of property rights was weak." (p 2)

"Our objective in this paper is to investigate the role of the different theoretical explanations for the lack of flows of capital from rich countries to poor countries in a systematic empirical framework. We show that during the period 1970-2000 low institutional quality is the leading explanation for the “Lucas Paradox.” The ordinary least squares (OLS) estimates show that improving the quality of institutions to the U.K.’s level from that of Turkey, for example, implies a 60% increase in foreign investment. The instrumental variable (IV) estimates imply an even larger effect: improving Peru’s institutional quality to Australia’s level implies a quadrupling in foreign investment.

An excellent example for the role of institutional quality in attracting foreign capital is Intel’s decision to locate in Costa Rica in 1996.6 In the final stage of the decision process, the short list included Mexico and Costa Rica. The two countries have similar GDP per capita in U.S. dollars (close to $3000 at that time), albeit Mexico is a much larger country. Both countries have similar levels of adult literacy rates. However, given the overall size of Intel’s investment relative to the size of the economy, one important concern in the decision process was the absolute availability of engineers and
technically trained graduates, which favored Mexico. Hence, one cannot argue that human capital was a defining issue in Intel’s final choice. Instead, Costa Rica’s stability and lower corruption levels tilted the balance in favor of the country. As noted by Spar (1998), Mexico’s offer to make “exceptions” to the existing rules for Intel only in contrast to Costa Rica’s approach of making any concession made to Intel available to all other investors, was an important reason in the final decision.

Another example is the recent boom in foreign direct investment (FDI) in Turkey. This boom is similar to what Portugal and Greece observed after joining the EU. Turkey became an official accession country on October 3rd, 2005, and started entry negotiations. In a recent article, Champion and von Reppert-Bism from 15 to 3 for foreign investors. Multinational companies such as Metro AG, PSA Peugeot Citroen, Vodafone PLC, and France Telekom, are increasing their FDI to Turkey arguing that the investor protection and overall investment climate improved considerably as a result of these reforms. As a result, FDI flows has boomed from an average of well under $1 billion in the 1990s to $2.6 billion in last year and more than $5 billion projected for 2005.arck (2005) argue that these official entry negotiations would force Turkey to become more like the “EU countries” in its banking sector, its antitrust laws, regulations, and policies, which in turn will attract foreign investment. Turkey has undertaken major institutional reform and constitutional change in the past two years, including the 2003 FDI law that cuts official procedures" (p3/4)

"Our empirical evidence shows that for the period 1970-2000, institutional quality is the leading causal variable explaining the “Lucas Paradox.”

Alfaro et al, Figure 3

"Our findings also generate implications for the patters of international flows during the last century. Obstfeld and Taylor (2004) characterize four different periods in terms of the “U-shaped” evolution of capital mobility. An upswing in capital mobility occurred from 1880 to 1914 during the Gold Standard period. Before 1914, capital movements were free and flows reached unprecedented levels. The international financial markets broke up during World War I. In the 1920s, policymakers around the world tried to reconstruct the international financial markets. Britain returned to the gold standard in 1925 and led the way to restoring the international gold standard for a short period. Capital mobility increased between 1925 and 1930. As the world economy collapsed into depression in the 1930s, so did the international capital markets. World War II was followed by a period of limited capital mobility. Capital flows began to increase starting in the 1960s, and further expanded in the 1970s after the demise of the Bretton Woods system. In terms of the “Lucas Paradox,” Obstfeld and Taylor (2004) argue that capital was somewhat biased towards the rich countries in the first global capital market boom in pre-1914, but it is even more so today.
If the “Lucas Paradox” characterized to a certain extent the pre-1914 global capital market, and if it persists today to the extent that poorer countries receive even less flows than during the pre-1914 boom, what is the explanation? We argue that it is differences in institutional quality among the poor and rich countries.
The “Lucas Paradox” has received a lot of attention as the different explanations behind the puzzle show different and sometimes opposite policy responses. Our results suggest that policies aimed at strengthening the protection of property rights, reducing corruption, increasing government stability, bureaucratic quality and law and order should be at the top of the list of policy makers seeking to increase capital inflows to poor countries. Recent studies emphasize the role of institutions in achieving higher levels of income, but they remain silent on the specific mechanisms. Our results indicate that foreign investment might be a channel through which institutions affect long-run development." (p 47/8)

Footnote - don't forget the value of remittances from ex-patriates to their homelands (Economist, November, 2012), and aid flows.  See, also, public trust in government (the Nordic example)

Does Globalisation reduce in-equality? 
In simple theory, economic growth is almost necessarily inequitable - some sectors grow much faster than others (manufacturing versus agriculture and related sectors); some firms succeed and others fail; initial accumulations of savings/wealth generate advantages and allow the rich to get richer while the poor, though not necessarily becoming poorer in absolute terms, fail to keep pace and become relatively poorer -> the Marxian argument that the Capitalists will continue to pay subsistence wages to the workers so long as they can get away with it, and that the marginal rate of profit (return on capital) will decline as there is more and more of it, concentrated in fewer and fewer hands - capitalism contains the seeds of its own destruction.

However, enlightened Marxian capitalists (i.e. humans) have shown that they: a) appreciate that there is both merit and (non-pecuniary) reward in improving the lot of workers, providing them with better housing, health, education and wages; b) understand that markets for their goods and services can only grow if the incomes of their workers grow, as well as their numbers.  Sustained depressions, and sustained low or depressed wages, are not supposed to happen in 'properly functioning' market systems (even though Japan is frequently cited as being stuck in a low or no growth state for the lost decade (1990 - 2001), unemployment is low and GDP/head in Japan has actually grown faster over the 2001/10 period than both the US and the Euro Area (Economist, 19.11.11)).

Furthermore - the owners of capital are supposed to look for opportunities to increase investment - find opportunities for building plant and factories where returns are high (which we would expect to be in places where there is not yet much capital investment - in developing countries). However, investment opportunities also require a healthy and educated workforce looking for work; a secure and reliable government/governance system to protect their property rights and contracts (as indicated in the reasons for the Lucas paradox above).  These are typically missing in the early stages of development.

One enduring characterisation of the debates about development is the contrast between: [See, as a recent account of how inherent and internal deficiencies lead to plunder of the planet: Paul Collier: The Plundered Planet (Oxford UP, 2010), (Blackwell Podcast)  and his video lecture on the topic. See, also, the Oxfam blog on this book, and the World Bank blog, and also the Natural Resource Charter site which seeks to encourage and promote good practice with respect to natural resource exploitation and use]

A background report for the OECD Development Centre by Fosu (2010) concludes that global and regional poverty levels have declined over the period 1981 -2005 period, with all regions except the Middle East and North Africa (MENA) showing greater reductions in the 1995 - 2005 period. "Qualitatively, the observed patterns of poverty decline at the regional level appear to correspond well with the GDP growth over both sub-periods. ..Furthermore, those regions experiencing higher GDP growth also tended to exhibit greater declines in poverty. The rate at which GDP growth was translated to poverty reduction, however, appears to differ across regions. ..As the two most populous nations and ‘emerging giants’, the performance of China and India has received special attention in the present study. While both countries have registered substantial poverty reductions since 1981, the rate of decrease is much larger for China than for India. ..
We find that there is a wide range of observed relationships between income growth and poverty reduction, that is, even if GDP growth correctly reflected income growth. For the majority of the countries, income growth seemed to be a reasonable reflection of the observed poverty reduction. A number of countries, however, exhibited strong income growth but low poverty reduction, and conversely. Apparently, income inequality was a major mediating factor for these countries. Also of importance was the level of income (relative to the poverty line), which tended to increase the responsiveness of poverty reduction to both income and inequality changes."   See, also, Gapminder's Human Development Trends, 2005

(Why might income growth be different from GDP per head growth? - because there are other claims on GDP besides national peoples' incomes - payments to foreign capital owners, for instance, or building national reserves, or paying off foreign debts, or simply through 'investment' of GDP abroad, ranging from productive investment in real capacity to spiriting it away in Swiss (or other foreign) bank accounts)

"Despite major differences in the roles of income and inequality in changes in the poverty picture since the mid-1990s, some generalities seem in order.
(but) the present study does indeed find that there are substantial cross-country differences in the transformation of GDP or income growth to poverty reduction, depending on the income and inequality profiles of countries. Understanding these country-specific profiles is, therefore, crucial in crafting appropriate polices for most efficiently achieving poverty reduction globally."

For Data on World Poverty, see:
Millenium Development Goals (MDGs) & their Beta version of an interactive Gapminder chart facility for progress towards the Goals (under 'Data'  Tab: 'Gapminder MDG Chart') - which you will need to spend a little time with to get the full benefit of these data. See, also, FAO's MDG page
Oxford Poverty and Human Development Initiative, and their interactive map of current poverty rates, and an overview of changes in poverty rates since 1981.

Overseas Development Institute (ODI): 2012, review of MDG progress, and on the development of a new agenda post 2015 (the target date for the MDGs)

Measurement of Poverty?
A problem associated with measuring poverty by expenditure levels (typical) rather than income is that income sources tend to be under-researched, yet are clearly critical for any analysis and understanding (as opposed to measurement) of poverty.  In addition, today's static measure of poverty incidence, depth or severity tells us little or nothing about the dynamics - the changes in individual or household poverty levels over time. What, for instance, happens to our measures of poverty when family members are sent away, or choose to migrate, to other  locations and activities?  What do they tell us about gender differences in the effects of poverty?
Chambers (1983) made a distinction  between poverty  types (as an illustration of the aspects which can only be discovered through  more intensive research methods than conventional household surveys):
    * poverty proper:  lack of income and assets (resources);
    * physical weakness: under-nutrition, illness, disability etc.
    * isolation: locational or social marginalisation or exclusion from access to goods and services
    * vulnerability: exposure to risk, stress, and hunger
    * powerlessness: lack of access to social capital - exclusion from political, social and cultural structures and networks.
It is, perhaps, obvious that interpretations of  measurement of poverty will depend heavily on what is measured, when it is measured (during what season), and  even on who is actually doing the measuring (and for what purpose). For a thoughtful reflection on what poverty actually means, see Chambers, 1995, "Poverty and livelihoods: whose reality counts?", Environment and Urbanization, Vol. 7, No. 1, April, 173 - 204.
More recently, Sumner (IDS, Sussex, 2010) notes that "the global poverty problem has changed because most of the world’s poor no longer live in low income countries (LICs). Previously, poverty was viewed as an LIC issue predominantly; nowadays such simplistic assumptions/ classifications are misleading because some large countries that graduated into the MIC category still have large numbers of poor people. In 1990, we estimate 93 per cent of the world’s poor lived in LICs; contrastingly in 2007–8 three quarters of the world’s poor approximately 1.3bn lived in middle-income countries (MICs) and about a quarter of the world’s poor, approximately 370mn people live in the remaining 39 low-income countries – largely in sub-Saharan Africa. This startling change over two decades implies a new ‘bottom billion’ who do not live in fragile and conflict-affected states, but in stable, middle-income countries. Such global patterns are evident across monetary, nutritional and multi-dimensional poverty measures. This paper argues the general pattern is robust enough to warrant further investigation and discussion."  - [The University Library subscribes to the IDS In Focus Policy Briefing series - which includes a 2 page brief based on this paper] - Sumner concludes this brief:
"According to the World Bank, there will be almost one billion poor people in 2015, even if the MDGs are met. Most of those remaining poor people will be in MICs and will be the very poorest or the ‘hardest to reach’ of all, as UNICEF has noted. As debates start on a post-MDG framework with a view to the September 2013 UN high-level summit, new approaches will be needed. Any new global agreement needs to pay attention to the changing nature of global poverty as well as difficult issues such as climate change and adaptation, demography and urbanisation. The New Bottom Billion raises a very different set of challenges for policymakers in the run up to 2015, from those they faced during the run up to 2000 and the adoption of the Millennium Declaration."

Evidence of Inequality?
US experience of widening inequality (and UK) might suggest that more trade increases inequality within countries - import competition reducing returns in domestic industries, and domestic companies outsourcing (and off shoring) labour intensive activites to cheaper labour markets, and reducing employment, and wages, at home.  But what of skills and technological change?  [See OECD, "Divided We Stand", 2011.  "The Gini coefficient, a standard measure of income inequality that ranges from 0 (when everybody has identical incomes) to 1 (when all income goes to only one person), stood at an average of 0.29 in OECD countries in the mid-1980s. By the late 2000s, however, it had increased by almost 10% to 0.316. Significantly, it rose in 17 of the 22 OECD countries for which long-term data series are available (Figure 1), climbing by more than 4 percentage points in Finland, Germany, Israel, Luxembourg, New Zealand, Sweden, and the United States. Only Turkey, Greece, France, Hungary, and Belgium recorded no increase or small declines in their Gini coefficients." (Overview, p22/2)
OECD Figure 1 (p.24) - rising inequality within OECD countries.

P3/23 - 4/24) "While growing dispersion of market income inequality – particularly changes in earnings inequality – has been identified as one of the key drivers, the question remains open as to the major underlying, indirect causes of changes in inequality. Is globalisation the main culprit? To what degree were changes in labour and product market policies and regulations responsible? Do changes in household structure matter? Finally, what can governments do to address rising inequality?
These and other questions are addressed in detail in the present report which identifies key drivers and possible policy measures for tackling inequality trends among the working-age population.
Globalisation has been much debated as the main cause of widening inequality. From a political point of view, protectionist sentiments have been fuelled by the observation that the benefits of productivity gains in the past two decades accrued mainly – in some cases, exclusively – to highly skilled, highly educated workers in OECD countries, leaving people with lower skills straggling.
However, evidence as to the role of globalisation in growing inequality is mixed. A number of international cross-country studies find trade integration to have increased inequality in both high-wage and low-wage countries, which is at odds with traditional trade theory. Other studies, by contrast, suggest that rising imports from developing countries are actually associated with declining income inequality in advanced countries (Jaumotte et al., 2008). Recently, some leading trade economists, such as Krugman (2007) or Slaughter (Scheve and Slaughter, 2007) have changed tack from their earlier views that the effect of trade on inequality was modest at best: they now consider that globalisation may have had a more significant impact on the income distribution in the United States through trade and other channels, such as foreign direct investment (FDI) and offshore activities.

P 5/25: Next to globalisation, there are, however, other equally plausible explanations for the growing inequality in the distribution of market income. Technological progress in particular is often cited. For example, advances in information and communication technology (ICT) are often considered to be skill-biased and, therefore, an inequality-increasing factor. Some studies put the ICT revolution at the forefront of their explanation of inequality: the IMF (2007), for example, found that “technological progress had a greater impact than globalisation on inequality within countries”, while an OECD report (OECD, 2007) suggests that “technical change is a more powerful driver of increased wage dispersion than closer trade integration”.
In practice, however, it is very difficult to disentangle technological change from globalisation patterns that also increase the value of skills. Advances in technology, for instance, lie behind the fragmentation of economic activities and the offshoring of production. As Freeman (2009) puts it, “offshoring and digitalisation go together”.

Finally, policy choices, regulations, and institutions can have a crucial impact. They can shape how globalisation and technological changes affect the distribution of income. They can also influence income distribution directly, e.g. through deregulation in product markets, changes in social transfers, wage-setting mechanisms, or workers’ bargaining power. However, connecting these factors with overall earnings inequality and household income inequality is not straightforward, as regulatory and policy reforms may have counteracting effects on employment and wage inequality among workers.

Regulatory Reform towards more 'liberal' and openly competitive product and labour markets - reducing minimum wages, encouraging product competition, reducing labour market 'imperfections' - what effects?

The empirical evidence as to the key drivers of inequality remains largely inconclusive and is made more so by a lack of precise definitions and concepts used in different studies.
OECD Analytical Framework.
OECD Analytical Framework.
Apart from these different interpretations and associated measures of 'inequality' "The second term that requires clarification is “globalisation”. There are different aspects to economic globalisation and they are likely to impact on trends in wage, earnings and income inequalities in different ways and in possibly opposing directions:
● Trade integration (goods and services mobility).
● Financial integration (capital mobility).
● Technology transfers (information mobility).
● Production relocation (firm mobility).
● International migration (labour mobility).


P9/29: This report finds that neither rising trade integration nor financial openness had a significant impact on either wage inequality or employment trends within the OECD countries.
"The wage-inequality effect of trade appears neutral even when only the effects of increased import penetration from emerging economies are considered – a finding that runs counter to the expectation that trade flows should drive down wages of workers in manufacturing and/or services in OECD countries. However, increased imports from low-income countries do tend to heighten wage dispersion, although only in countries with weaker employment protection legislation.
The study also shows, however, that increased financial flows and technological change had an impact on inequality. Growing outward FDI was associated with increases in wage dispersion, albeit only in the upper half of the wage distribution, while technological progress contributed to the increase in overall wage dispersion, chiefly in the upper half of the distribution."

P 11/31: "Combining the employment and wage effects reveals that they tend to cancel each other out and that the net effect of regulatory reforms on trends in “overall earnings inequality” remains indeterminate in most cases."

"The results from the study highlight the central role of education. The rise in the supply of skilled workers considerably offset the increase in wage dispersion associated with technological progress, regulatory reforms and institutional changes. The upskilling of the labour force also had a significant impact on employment growth. The growth in average educational attainment thus appears to have been the single most important factor contributing not only to reduced wage dispersion among workers but also to higher employment rates."

OECD 2011, Table 2 Summary.
OECD 2011, Table 2 Summary

P 12/32 - 12/33: "Average annual hours worked per person in dependent employment fell slightly in most OECD countries between the late 1990s and 2008. However, more working hours were lost among low-wage than among high-wage earners, again contributing to increasing earnings inequality. In many countries, there was a trend towards an increasing divide in hours worked between higher- and lower-wage earners. Variations in hourly wage rates still explain the largest part of the level of gross earnings inequality among all workers in most countries (55-63% on average). However, changes in earnings inequality over time seem to be driven as much by the trends in hours worked."

P16/36:  Gross versus Net Incomes - the effects of redistribution (Figure 9) "In most countries, the extent of redistribution has increased over the period under study as a whole. As a result, tax-benefit policies offset some of the large increases in market-income inequality, although they appear to have become less effective at doing so since the mid-1990s. Until the mid-1990s, tax-benefit systems in many OECD countries offset more than half of the rise in market-income inequality. However, while market income inequality continued to rise after the mid-1990s, much of the stabilising effect of taxes and benefits on household income inequality declined."
OECD Figure 9

P19/39:  Share of top earners versus rest (Figure 12).
: Share of top earners versus rest (Figure 12)

Who should be paid less, and who more? Underpaid Bosses - they really do exist (Economist, 11/02/12), and (related) - what should our business leaders be doing?


Lindert & Williamson "Does Globalisation make the world more unequal? (2001) conclude:

Inequality picture"Sources of World Inequality 1500-2000: The Big Picture:  Some patterns have emerged through the complexity of history which suggest a tentative answer to the question posed by this essay’s title: Does globalization make the world more unequal?  The patterns cluster around two observations. One is that the gainers from globalization were never all rich and the losers were never all poor, or vice versa. The other is that participants in globalization pulled ahead of non-participants. This was true both for excluded or non-participating groups within countries as well as for excluded or non-participating countries. How these patterns emerge from five centuries of diverging world incomes and a shorter period of globalization is summarized in Table 5."

Lindert and Williamson also ask: How Unequal Would a Fully Integrated World Economy Be?
"What if we had a huge world economy, even bigger than the world economy back at the mid-twentieth century, with a unified currency and only negligible barriers to trade, migration, and capital movements? Would such an economy be more unequal than the world of today? We have good examples today of huge integrated economies, at least as big as the world economy in 1950. One obvious example is the United States. Japan is another, and the European Union is moving toward becoming the third giant integrated economy. How unequal are incomes within these already-globalized economies? Less unequal than in today’s only partly globalized world economy where the gini coefficient of inequality in income per capita at international (PPP) prices in 1992 was .663. The gini for the more integrated United States economy, by contrast, was only .408 in 1997 and that for Japan was only .249. There is nothing inherently less egalitarian about a large integrated economy compared with our barrier-filled world. One might still fear that a truly globalized world would have vast regions with inferior education and chaotic legal institutions, so that the future globalized world would be more unequal than the United States or the European Union today. If so, then the source of that inequality would be poor government and non-democracy in those lagging countries, not globalization."

NOTE The Gini coefficient is a number between 0 and 1, where 0 corresponds with perfect equality (where everyone has the same income) and 1 corresponds with perfect inequality (where one person has all the income, and everyone else has zero income).

[Source:  DOES GLOBALIZATION MAKE THE WORLD MORE UNEQUAL? by  Peter H. Lindert, University of California, Davis, and,  Jeffrey G. Williamson,  Harvard University,  A revision of the paper presented at the NBER Globalization in Historical Perspective conference in Santa Barbara, California, May 3-6, 2001.]


The World Bank has several linked pages relating to the question, drawing on a review paper by Lopez (2004), available at this link, which concludes" "On the growth-to-inequality link, while the theoretical literature is divided as to whether there is a causal relationship, the empirical literature is quite unanimous that growth does not have a systematic impact on inequality."  "The inequality to growth link:  both the theoretical and empirical literature are divided with some studies concluding that inequality leads to faster growth, and some others suggesting that inequality is likely to lower growth."


A 2010 WIDER Policy Brief: Linking Globalization to Poverty in Asia, Latin America and Africa (by Machiko Nissanke and Erik Thorbecke):  "Despite the enormous potential of globalization in accelerating economic growth through greater integration into the world economy the impact of globalization on poverty reduction has been uneven. Asia has been the major beneficiary of globalization where high growth rates and its labor-intensive pattern contributed to a spectacular reduction in poverty. In contrast, the integration process in Latin America did not contribute to accelerating growth and employment and even led, in some instances, to an informalization of the labor force. In spite of opening up, the failure of sub-Saharan Africa to diversify and undergo structural transformation has led to the persistence of low growth and debilitating poverty. While the impact of globalization on poverty is context-specific, we argue that countries intent on benefitting from globalization need to adopt a pro-active stand in formulating regional and national strategies to enhance the potentially positive effects of globalization and moderate the negative effects."

And The Global Impact of the Southern Engines of Growth: China, India, Brazil and South Africa, WIDER policy brief, 2010, which "focuses on links between the developing countries of Brazil, India, China and South Africa and the global economy, with a special emphasis on the implications of China’s spectacular growth on developing economies and the rest of the world. The issues considered include changing patterns in trade, capital flows, and commodity prices. Both positive and negative impacts are identified and implications for international governance and foreign policies of various nations are explored."

See, also, Linking Globalization to Poverty, WIDER policy brief, 2007, "While the economic opportunities offered by globalization can be large, a question is often raised as to whether the actual distribution of gains is fair, in particular, whether the poor benefit less than proportionately from globalization and could under some circumstances be hurt by it. This Policy Brief summarizes and examines the various channels and transmission mechanisms, such as greater openness to trade and foreign investment, economic growth, effects on income distribution, technology transfer and labour migration, through which the process of globalization affects different dimensions of poverty in the developing world."
NOTE - written before the Credit Crunch - asserting that "The risks and costs brought about by globalization can be significant for fragile developing economies and the world’s poor. The downside of globalization is most vividly epitomized at times of global financial and economic crises. The costs of the repeated crises associated with economic and financial globalization appear to have been borne overwhelmingly by the developing world, and often disproportionately so by the poor who are the most vulnerable." - which is not demonstrably true of the present crunch and recession - "On the other hand, benefits from globalization in booming times are not necessarily shared widely and equally in the global community."

The debate about Globalisation/Capitalism and inequality has moved on in the last 10 years, and now refers frequently to Developed countries, especially the US (and to a lesser extent in the UK), as much as to the emerging economies. The recent period of apparent prosperity over the 2000s did not result in much of an improvement at all in the incomes of the average person (e.g. Arrow, Boston Review, Nov. 2012 and Rogoff, Project Syndicate (Nov. 12) as opposed to the average GDP/head). - the 'Occupy Movement' around the world is clearly an expression of a commonly felt irritation that those most rewarded by the recent boom (the financiers) have now been at least instrumental in the collapse of fortunes and prospects for the rest of us - this sort of inequality is likely to be especially damaging.

Meanwhile, real (purchasing power) wages are rather more equal than nominal wage differences would suggest.

DOES INEQUALITY MATTER?
The Spirit Level: Why Equality is better for everyone,  by Richard Wilkinson and Kate Pickett,  (Penguin  2009, pbk, February 2010) argues strongly that inequality does matter - the more equal society, the better is our social and economic well being. An excellent overview of the argument, illustrated with the data used, is on TED: Richard Wilkinson: How economic inequality harms societies (July/October, 2011).  The publication of the book coincided with the foundation of the Equality Trust to promote the ideas and consequent policy propositions. (Thought:  What about all the other determinants of well-being, including levels of GDP/hd, Political Stability, etc. - what, then, might be the role of equality?)
However, as might be expected, this view and interpretation of the data is not unanimously agreed. See here for example, for a spirited counter-argument by Christopher Snowdon, a freelance journalist, who has written: The Spirit Level Delusion: Fact-checking the Left's New Theory of Everything (2010), as a response to and critique of The Spirit Level. Or, for a congratulatory review of Snowdon's book - the Institute for Economic Affairs (right wing), or a perhaps more thoughtful review in Spiked Online.  

Oct. 2012 Economist Special Report: The World Economy - for richer, for poorer -"Growing inequality is one of the biggest social, economic and political challenges of our time. But it is not inevitable". Inequality between countries has been falling, as emerging economies begin to catch up the rich west, but (except in South America, where it was very great and has been falling) inequality has been rising within many countries (especially the rich west, including Sweden) over the last decade. "Many economists, too, now worry that widening income disparities may have damaging side-effects. In theory, inequality has an ambiguous relationship with prosperity. It can boost growth, because richer folk save and invest more and because people work harder in response to incentives. But big income gaps can also be inefficient, because they can bar talented poor people from access to education or feed resentment that results in growth-destroying populist policies. ..The widening gaps within many countries are beginning to worry even the plutocrats. A survey for the World Economic Forum meeting at Davos pointed to inequality as the most pressing problem of the coming decade (alongside fiscal imbalances). In all sections of society, there is growing agreement that the world is becoming more unequal, and that today’s disparities and their likely trajectory are dangerous. .. The unstable history of Latin America, long the continent with the biggest income gaps, suggests that countries run by entrenched wealthy elites do not do very well. Yet the 20th century’s focus on redistribution brought its own problems. Too often high-tax welfare states turned out to be inefficient and unsustainable. Government cures for inequality have sometimes been worse than the disease itself. ..

This special report explores how 21st-century capitalism should respond to the present challenge; it examines the recent history of both inequality and social mobility; and it offers four contemporary case studies: the United States, emerging Asia, Latin America and Sweden. Based on this evidence it makes three arguments.
First, although the modern global economy is leading to wider gaps between the more and the less educated, a big driver of today’s income distributions is government policy.
Second, a lot of today’s inequality is inefficient, particularly in the most unequal countries. It reflects market and government failures that also reduce growth. And where this is happening, bigger income gaps themselves are likely to reduce both social mobility and future prosperity.
Third, there is a reform agenda to reduce income disparities that makes sense whatever your attitude towards fairness. It is not about higher taxes and more handouts. Both in rich and emerging economies, it is about attacking cronyism and investing in the young. You could call it a “True Progressivism”." - refers to the "Great Gatsby Curve" (in  'Having your cake") - which concludes: "Exaggerated claims of the damage from inequality have themselves done damage by reinforcing caricatures in an already highly charged debate. Quite legitimately, different people have different notions of what is fair, and what is the right balance between fairness and efficiency. But whatever their views, there is a reform agenda which both sides should embrace, one that both boosts efficiency and mitigates inequality."
See, too, CEO pay versus the workers (May, 2012), and, are they worth it (versus company performance)?


Is GDP Growth Really Necessary? Does it make us happy?

The Sustainable Development Commission (UK) produced a potentially influential report:  Prosperity without Growth in 2009, since updated by the Economics Commissioner (Tim Jackson) and published by Earthscan. "Prosperity without growth analyses the relationship between growth and the growing environmental crisis and 'social recession'. In the last quarter of a century, while the global economy has doubled, the increased in resource consumption has degraded an estimated 60% of the world’s ecosystems. The benefits of growth have been distributed very unequally, with a fifth of the world’s population sharing just 2% of global income. Even in developed countries, huge gaps remain in wealth and well-being between rich and poor.
While modernising production and reducing the impact of certain goods and services have led to greater resource efficiency in recent decades, our report finds that current aspirations for 'decoupling' environmental impacts from economic growth are unrealistic. The report finds no evidence as yet of decoupling taking place on anything like the scale or speed which would be required to avoid increasing environmental devastation.
Prosperity without growth? proposes twelve steps towards a sustainable economy and argues for a redefinition of "prosperity" in line with evidence about what contributes to people’s wellbeing."
The report/book asks the following basic quesitons:
Is growth a necessary condition of social evolution?  If we stop growing, do we necessarily decline, regress, dissipate, collapse, die?
Is growth (in incomes or GDP) closely corerelated with entitlements - health, education, life expectancy, infant mortality etc. - or with 'happiness'?
Is growth necessary for stability and security?
And answers no to each. The argument is that we exist (in the west) as islands of plenty amid oceans of poverty, and that, furthermore, we are rapidly exhausting the carrying capacity of the planet - something has to change, and the most obvious thing to change is our apparent dependence on ever more marterial goods. "The truth is that there is as yet no credible, socially just, ecologically sustainable scenario of continually growing incomes for a world of 9 billion people." (Jackson, Earthscan, 2009, p86). The argument asserts that "Only in modernity has this wealth of material artefacts been so deeply implicated in so many social and psychological processes" (p 99). - though note, e.g. the UN Environment Programme's call for a Green stimulus package (2009).  See, also, the Centre for the Advancement of the Steady State Economy.

How much of GDP is defensive - necessary simply because we are wealthy?  If every stands up (gets richer) no one sees any better (feels any better) - spending on 'positional' goods.
Is Japan already telling us how to live well without sustained increases in total GDP? (see economist link above).

For an economic assessment of the pursuit of happiness and its implications for policy, see Layard, 2006, "Happiness and Public Policy: a Challenge to the Profession", Economic Journal, 116 (March)" "The most obvious explanations come from three standard findings of the new psychology of happiness:
First, a person’s happiness is negatively affected by the incomes of others (a negative externality).
Second, a person’s happiness adapts quite rapidly to higher levels of income (a phenomenon of addiction).
Third, our tastes are not given – the happiness we get from what we have is largely culturally determined."

Check out the World Values Survey site for cross time and country comparisons: (Fig LHS from World Values Survey - collection of graphs representing WVS data. - RHS from World Bank Global Monitoring Report, 2010.
Happiness and GDP/hd.on the other hand






Notice, however, that the correlation between Life Satisfaction and GDP (lhs above) is represented as linear - $1000 extra income (GDP/hd) would not be expected to generate the same increase in life satisfaction for someone (country) who already has $25,000 as for someone (country) who only has $5,000.  "All this chart realy shows is that an extra dollar is worth less to the rich than to the poor. The interesting question is whether the same percentage increase in income means as much to a rich country as to a poor one."  (Economist, 27.11.10: The Joyless or the Jobless)
Happiness

See, also:  OECD, European Commission and others:  Beyond GDP: Measuring Progress, true wealth and the wellbeing of nations,
and also the Commission on the Measurement of Economic Performance and Social Progress.  and their recent (2009) report. "The Commission’s aim has been to identify the limits of GDP as an indicator of economic performance and social progress, including the problems with its measurement, to consider what additional information might be required for the production of more relevant indicators of social progress, to assess the feasibility of alternative measurement tools, and to discuss how to present the statistical information in an appropriate way. ...Policies should be aimed at increasing societal welfare, not GDP. Choices between promoting GDP and protecting the environment may be false choices, once environmental degradation is appropriately included in our measurement of economic performance. This report, building on extensive earlier work, describes the additions and subtractions that can and should be made to provide a better measure of welfare."

See, also, the New Economics Foundation: Happy Planet Index, 2009. "The Happy Planet Index (HPI) provides that compass by measuring what truly matters to us - our well-being in terms of long, happy and meaningful lives - and what matters to the planet - our rate of resource consumption. The HPI brings them together in a unique form which captures the ecological efficiency with which we are achieving good lives.  This report presents results from the second global HPI. It shows that we are still far from achieving sustainable well-being, and puts forward a vision of what we need to do to get there."  A recent poll (2012) suggests that GDP/hd. is not a good predictor of (self-reported) happiness, which is hardly a surprise, is it? 'Finally', see Graham, 2005, World Economics, which examines "the gap between economists’ assessments of the aggregate benefits of the globalization process and the more pessimistic assessments that are typical of the general public. The paper summarizes research on some of these questions, and in particular on those relevant to globalization, poverty, and inequality."

What makes us happy?

Dan Gilbert (author of "Stumbling on Happiness") - The Surprising Science of Happiness. challenges the idea that we’ll be miserable if we don’t get what we want. Our "psychological immune system" lets us feel truly happy even when things don’t go as planned. In the same way that optical illusions fool our eyes -- and fool everyone's eyes in the same way -- Gilbert argues that our brains systematically misjudge what will make us happy - our experience simulators frequently get things wrong - the Impact Bias - tendency to (substantially) overestimate the hedoninc impact of future events. And these quirks in our cognition make humans very poor predictors of our own bliss, but enable us to synthesise our own happiness - how we 'rationalise' our actual condition, our actual choices (which we then pre-suppose are the right ones (sometimes - see Schwartz below)). Freedom to choose helps 'actual' happiness, but really hurts synthetic happiness - we find a way to be happy with what we cannot change (and conversely - Schwartz below - be less happy if we can change things).
- and a set of 8 other related mini-lectures on What Makes us Happy? including
Malcolm Gladwell (author of "Tipping Point") : Choice, happiness and spaghetti sauce.  - people can't tell you what they want, until and unless you give them a choice (Henry Ford - as people what they want, and they will tell you a faster horse; and also people won't necessarily admit to what they really like) - there is no single recipe to please all the people all the time - no universals - people are different, and have (identifiably different) tastes (and cultures?) - diversity is the key to happiness.
Mihaly Csikszentmihalyi: Flow, the secret to happiness - creativity is a central source of meaning in our lives. A leading researcher in positive psychology, he has devoted his life to studying what makes people truly happy: "When we are involved in [creativity], we feel that we are living more fully than during the rest of life." He is the architect of the notion of "flow" -- the creative moment when a person is completely involved in an activity for its own sake.
Michael Norton:  How to buy happiness - money can, indeed buy happiness -- when you don't spend it on yourself. Listen for surprising data on the many ways pro-social spending can benefit you, your work, and (of course) other people - positively encouraging philanthropy might be a genuine Pareto Improvement (nobody loses)?
Barry Schwartz: The paradox of choice - choice has made us not freer but more paralyzed, not happier but more dissatisfied - choice is not the same thing as freedom. Too much choice leads to -unreasonably high expectations, question our choices before we even make them and blame our failures entirely on ourselves (with every choice available, there is no rational justification for failure - other than you - the peculiar and specific problem of modern affluence) - Income redistribution makes everyone better off.
Graham Hill: Less stuff, more happiness
Matthieu Ricard: The habits of happiness - Biochemist turned Buddhist monk Matthieu Ricard says we can train our minds in habits of well-being, to generate a true sense of serenity and fulfillment.
Daniel Kahneman: The riddle of experience vs. memory - our "experiencing selves" and our "remembering selves" perceive happiness differently - being happy in your life is different from being happy with your life - and it is the remembering self which makes decisions (which thinks of the future as a set of anticipated memories). This new insight has profound implications for economics, public policy -- and our own self-awareness. Happiness is NOT a substitute for well-being.
Ron Gutman: The hidden power of smiling
The future of Convergence. Rodrik, 2011, Conclusions: "There is good news and bad news in this paper. The good news is that there is unconditional convergence after all. But we need to look for it in the right place: in manufacturing industries (and possibly modern services) instead of entire economies. The key to growth is getting the economy’s resources to flow into those “convergence industries.” The bad news is that this is not easy to accomplish. It would be nice if governments simply had to stabilize, liberalize, and open up and markets would do the rest. Alas, that is not how sustained convergence was achieved in the past. Continued rapid growth in the developing world will require pro-active policies that foster structural transformation and spawn new industries – the kind of policies that today’s advanced economies employed themselves on the way to becoming rich. Such policies have never been easy to administer. They will face the added obstacle over the next decade of an external environment that is likely to become increasingly less permissive of their use.
One of the paradoxes of the last two decades of globalization is that its biggest beneficiaries have been those countries that have flouted its rules – countries like China and India that have effectively played the game by Bretton Woods rather than post-1990 rules (controlled finance, controlled currencies, industrial policies, significant domestic maneuvering room). But as such countries become large players and turn into targets for emulation, the tensions become too serious to ignore. How we handle those tensions will determine not only the future of convergence, but the future of the world economy as well" (p 45/6).
The Seamy side of the Global Economy, Eckes, 2011:  Abstract:  "Revolutionary developments in technology and the deregulation of borders and economies have enhanced efficiency, stimulated growth, and expanded opportunities for four to five billion people around the world to join the market-oriented global economy over the last generation. But the global economy also has a seamy underside often neglected in academic discussions. This article offers a brief introduction to some of the problems that challenge governance and social stability in the generation ahead. It examines how globalization has multiplied opportunities for organized crime and terrorists; increased human trafficking, as well as forced and child labor; benefited sweatshops; expanded the flow of unsafe food and products; and contributed to environmental hazards. Because of the many complex and controversial issues involved, and the limited data publicly available, the author seeks only to survey current conditions, to identify relevant sources, and to encourage future scholarly research." 

Conclusions: "The dynamic and efficient global economy of the early twenty-first century presents many new challenges. Open borders have expanded opportunities for criminal activities – including trafficking in humans, forced labor, and organized crime. Also, in a highly integrated international economy national authorities responsible for maintaining health and safety confront daunting tasks. The quest for economic growth at times appears to pose conflicts between regimes such as the WTO intended to facilitate and regulate trade, and parallel efforts to reduce greenhouse gases and safeguard the environment. This article underscores some of the difficult problems of governance in an open economic system, where nation states have both common and conflicting interests." (p 26).

Worth asking two rather fundamental questions when considering these 'downsides' of globalisation - the counterfactuals:  a) what would conditions be like without (or before) global influences and processes?; b) what needs to be done to counteract the downsides - under what conditons would things be better?
Concluding questions:
Is Capitalism sustainable?
{draft paper relating to this question}
Is continual consumption increase sustainable?
Is sustained economic growth necessary?

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