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“Globalization, Poverty and Inequality: What is the Relationship? What can be done?” Kaushik Basu 2006

Basu makes three main points in this article. First, he gives a brief historical overview of global inequality. Second, he describes the channels to which income inequality increases due to globalization. Last, he proposes the bottom quintile income of a poor country as a focus for policy makers and calls for a new international organization that helps coordinate inter-country anti-inequality policies

On the one hand, the world has become more globalized and much more prosperous in the last 5 centuries. On the other hand, inter-regional inequality has grown. If one tracks per capita GDP of the large regions of the world, the growing disparity is obvious; The richest region was 1.8 times richer than the poorest half a millennium ago, whereas, currently, the richest region has a per capita income that is 20 times the income of the poorest region.

Basu uses the Gini Coefficientto explore income inequality. He finds different results depending on the way the Gini is computed; if we compare per capita income the Gini increased over the last decades. If we compare the income of countries as whole the Gini has been declining almost monotonically since the late 1960s. The latter is driven in large measure by the strong economic growth in China since the late seventies and India since the early nineties.

Basu states that one of the biggest problems of rapid globalization is that the wages of unskilled labor in poor countries will lag behind the wages of skilled labor. Therefore, income inequality within poor nations increases as a consequence of globalization.

He criticizes the traditional objective of policymakers to maximize each country’s per capita income. He proposes another normative criteria which he calls the ‘quintile axiom’. That is, policy makers should be concerned about the income of the poorest 20% of the population. Evaluating an economy using the bottom quintile income makes a large difference in absolute numbers and changes rankings of countries sharply (table below). The first column shows the annual per capita income. The third column shows the annual per capita income of the poorest 20% of the country. For example, using per capita income yields a similar picture for Norway and the US. But the bottom quintile income of the US is almost half that of Norway indicating that the poor in Norway are better off than the poor in the

His defense against critics that this measure, unlike the UNDP the Human Development Index, does not consider the non-income aspects of development is that, in general, quintile incomes will have a closer relation to other wellbeing-indicators, like infant mortality, life expectancy and so on, than per capita incomes. Basu is interested in suggesting a measure that is simple and easy to understand.

Basu urges the need for a new international organization or a division of an existing international organization that helps coordinate inter-country anti-inequality policies. Achieving greater global equality may require the use of policy interventions that are coordinated across countries. “Unilateral effort by a country is likely to cause flight of capital and skilled labor from the country and impoverish those who stay behind”. Economic Game Theory calls this a ‘Prisoner’s Dilemma’. That is, for each country it is individually rational to stay away from actions to reduce global inequality, although the world as a whole would benefit. WTO, ILO, UNEP are agencies designed to reduce such coordination problems. But there is no such agency for anti-poverty and anti-inequality issues.

Kaushik Basu (2006), ‘Globalization, Poverty and Inequality: What is the relationship? What can be done?’ World Development, vol. 34 .

Summary by Christian Lehmann