Globalization and Inequality

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Globalization and Inequality
Issar Alhindi
Political Science 329
November 20, 2017
Professor McKenzie
Globalization became the cornerstone to the international world in the 20th century, and it
remains as such today. Trade, commerce, investment, and cultural exchanges have been major
influences on how leaders in the politics and business have been making their decisions.
Neoliberal policies suggested by international organizations by have been the principal force for
the justification of continued globalization. A question that may should be considered would be
to what extent has globalization under the neoliberal agenda creates or further perpetuates
socioeconomic inequality within nations who have no role in the World Trade Organization.
Globalization is an asymmetrical process in which some governments, companies, and
individuals within a country gain more than others. Consequently, wages in less developed
countries have not risen, even though the amount of capital flowing into the country and the
amount of trade being done have increased.
Although globalization and inequality have been heavily researched my political scientist
and economist alike, there is an area that requires a more in-depth analysis. With countries and
private company is continuing to grow, globalization is an ever -changing phenomenon. The
lines between the private sector and the government have become blurred, due to mutual
dependency and common interest amongst the different entities. With the amount of information
available, globalization, and aggregate level can be set up with greater ease. Globalization,
however, is an asymmetrical process in which some governments, companies and individuals
within a country get more than others. Generally speaking there are two types of inequality;
horizontal being inequality between nations and vertical being inequality with the nations
themselves. The focus of this paper will be on the latter of the two, the vertical and the quality of
nations. More specifically, the vertical inequality created in advanced as a result of the current
neoliberal perspective the world has adopted with less developed countries. To advance the topic
one must understand what a neoliberal perspective is. “Neoliberalism involves both a set of
theoretical principles and a collection of socio-political practices, all of which are directed
towards extending and deepening capitalist market relation and most spheres of our social lives”
(Saad-Filho & Johnston 2005.) In other words, Neoliberalism approaches globalization a
inevitable and vital, therefore it should be advanced despite whatever the repercussions may be.
Neoliberal policies include having countries openly trade with one another, typically without
tariffs, privatizing state-owned enterprises, deregulation, and other economic policies meant to
promote a free and competitive market. Inequality within a nation is inherent, but the argument is
that within some countries it is not only exploited, but the level of inequality is avoidable.
Beyond its avoidance, and central to the argument it that current world organizations like the
World Bank, International Monetary Fund, and World Trade Organization are perpetuating and
have increased inequality within these nations with their influence and neoliberal regulations.
The working of the international organizations have made high levels of inequality in countries
possible, as they create an attractive environment for foreign governments and industry leaders to
exploit. Less developed countries in particular have a surplus of low skilled workers due to their
lack of infrastructure, and ability to provide education and trade. This in turn makes these
workers expendable and the policies set forth by the aforementioned groups have influenced the
leaders of the country’s economy to keep wages low in the hopes of bringing more business
(products ) to the countries’ in question.
In order to address the question of increasing vertical inequality within nations, there
must be a definition of what is being addressed. Generally speaking, there are two types of
inequality; horizontal being inequality between nations and vertical being inequality being within
nations themselves. A review of the literature demonstrates that there are divergent results on the
topic of globalization and inequality that political scientists have focused on. The political
scientists that have focused on the scholarship of horizontal income inequality claim that
increased economic market integration has led to a decline of global income inequality
(Firebaugh and Goesling 2004). Glenn Firebaugh used the Gini coefficient index to measure the
change in horizontal income inequality from 1978 to 1998, and discovered that horizontal
income inequality has fallen by 4.9% (2004). The driving force behind this occurrence has been
the increased economic development that China and India have experienced since 1970’s. Hofung Hung and Jaime Kucinskas state “these two countries constitute nearly 40 percent of the
world’s population and experienced average income growth rates three to four times the world
average over the past quarter century,” (2011).
However, those who focused on the scholarship of vertical income inequality claim that
income inequality within nation has increased. In 1942, Wolfgang Stopper and Paul Samuelson
postulated their Stolper- Samuelson’s “Trade Theorem” which stated the effects that increased
economic globalization market integration would have on the unskilled workforce of both
developed and less developed nations. The theorem states that developed countries would export
high skilled intensive good and import low skilled intensive goods and import high skilled
intensive goods, thus raising wages of low skilled labor (Michael 2016). The former has held
true since the average Gini coefficient of OECD countries rose from 29 in the mid-1980’s to 31
in the late 2000s and the “household incomes of the richest 10% grew faster than those of the
poorest 10%, so widening income inequality” (DIvided We Stand 2011). THe latter, however has
proven to be false.
Current literature on the effects of economic policies suggested by the IMF, WTO and
World Bank has primarily focused on inequality and poverty. Studies have shown a correlation
between the IMF’s lending programs and increased inequality in the participating countries
(Oberdabernig 2013). In addition to this, the three international organizations have successfully
negotiating with many countries into adopting economic policies that would make them a
competitive in a global market. As a result, wealthy companies gained the ability to purchase
cheap labor and goods from other countries in which wages and prices have decreased in order to
become globally competitive. Consequently, leading to an overall redistribution of wealth, where
only the rich have become significantly wealthier. (Harvey 2005).
Overall, the literature that has been reviewed has pointed to the idea that globalization
has decreased horizontal inequality among nations, and has increased vertical inequality. It is
also evident that the aforementioned international organization have had a role in a perpetuating
globalization through the implementation of neoliberal socioeconomic reforms. What was found
lacking in literature is the relationship between a particular country’s role or membership in an
international organization, and their respective economic policies. None of the literature that was
came across discussed whether or not prior membership in the international organizations
influences what the organizations advocated a country to do, and whether or not the country
actually follows through with it . This is significant because advocating for and adopting
different socio-economic policies can greatly fuel or diminish vertical inequality.
WTO Membership’s Impact on Socio-economic Policy
International organizations such as the IMF, WTO, and World Bank consist mostly of
highly developed countries, and as a result are inherently more concerned with improving the
standard of living and the economy of their respective highly developed countries. The reasoning
behind helping developing countries better their economics is not purely humanitarian , it is done
in order to benefit developed countries economically in the long run. The mission of these
international organizations is to develop a competitive, free global economy in which
governments, corporations and individuals can purchase the goods and labor that they need at the
lowest prices that the market allows.
The theory that countries that were members of the WTO’s predecessor GATT prior to
the implementation of neoliberal policies in the 1980’s, such as the liberalization of their market
and privatization of state enterprises either implement policies less extreme than those that are
advocated to non-members or do not implement them at all. The reasoning behind this is that a
completely liberalized market does not protect individual countries from the struggles that come
along with a competitive market. For instance, tariffs are implemented on imported in order to
encourage consumers to buy products from their own country, in order to keep money circulation
within the country. It would fall within reason reason for a country who is a member of the WTO
to advocate that they themselves do not totally liberalize their market, because that would be in
their best interest.
On the other hand, a country who is not a member of the WTO would have no initial say
in what policy the WTO or other international organizations may tell that country to adopt.
Therefore, the country who is not a member will be told to adopt true neoliberal policies, since
this will greatly benefit those countries who are already members. This may bring some benefits
to the non-member country, such as increased trade and foreign investment are the corporations
and government, not the middle class or the working poor. In fact, the neoliberal policies
designed to make foreign investment attractive generally bring wage cuts, loss of benefits and
harsher working conditions through deregulation. The theory that absolute inequality within a
country who was not a member of the WTO or GATT prior to being told to adopt neoliberal
policies will be greater than the inequality within a country who was a member.
Globalization is a broad term that needs to be narrowed for the purpose of the analysis.
As a standard four elements are used, which takes into account foreign money trade,
technological advances, and potentially the most influential, political integration (Acemoglu
2006). A sample of ten countries will further analyze the question. These countries are
differentiated by being either developed or less developed countries, and by their membership or
absence of membership in the World Trade Organization (WTO) and its predecessor General
Agreement on Tariffs and Trade (GATT). A membership in the IMF and World Bank may also
affect a country’s economic policies, but given the fact that most developed countries joined
decades before the rise of neoliberalism, it would be difficult to have diverse case studies. For
the less developed countries the United Nations provides a better sample. Their criteria are based
on three distinct principles; first, a low-income criterion based on per capita income, second a
human weakness, and economic vulnerability (Nationsonline.org). I2n choosing the case studies
both developed, and less developed countries were included. Given that there are only a handful
of developed countries in the world the study only included a few while the others are
developing countries. Neoliberal policies and procedures were not introduced until the 1980’s so
having half of the selected countries be members throughout the transition allows us to compare
the countries rooted in the neoliberal agenda set forth by theses organizations and those whom
are new to the process as in the case of Russia.
To find out what if any effects these organizations have on the absolute inequality within
these nations, the focus will be on absolute inequality. This depends on the absolute differences
between incomes, which is a better gauge of the income gap that a country has (Ravallion 2004).
To measure the absolute inequality amongst the population of the country the Gini index
provides the data required. The Gini index is a standard measurement tool for income inequality
among and within nations therefore for the purpose of the study it is the best representation of
the principal question. The idea of the Gini index is a simple one, it is a number scale system that
denotes a society’s income inequality. A country that scores a 0.0 would have a perfect income
equality with the nation, the further the number is from 0.0 the higher the level of inequality.
Five countries that were chosen that were previously in the GATT to allow for a good sample of
countries that were current members when the policies shifted to a neoliberalist approach. The
next five were countries that joined the WTO after 1995 and the policies were the norm and
entrenched in the organization. Drawing the data from the World Bank and the World Fact Book
it was examined that the Gini indexes of the targeted countries to see if inclusion into the WTO
and the vertical inequality of a nation were correlated and if so to what extent.
Ultimately, what will be measured is the absolute inequality within a country before and
after implementing neoliberal policies as suggested by the international organizations. This will
be accomplished by looking at how the Gini index of each of the case studies changes through
time.
As Joseph Stiglitz highlights “the majority of those living in the former Soviet Union,
economic life under capitalism has been worse than the old communist leaders said it would be.”
Through instructions from the IMF and World Bank, Russia rapidly transitioned from a
relatively isolated, communist nation to a capitalist country, engaged in the free world market.As
a direct result, artificial prices of necessities such as energy and food in Russia were quickly
replaced with the higher market valued prices. This led poorer Russians to spend all their money
on goods and services essential to survival. In the meantime, the wealthiest Russian had acquired
new customers across the globe that they could sell oil to. Russia quickly became an oligarchy.
(Stiglitz 2003) The Russian case is unique in that it was a former communist nation, and when it
opened its markets to the world some became unbelievably wealthy and others were forced into
extreme poverty. What is not unique is that Russia’s middle class deteriorated as a result of
wages not keeping up with inflation and real incomes falling. (Stiglitz 2003) The inequality in
Russia is most clearly seen when looking at the different regions that make up Russia, thus
isolating the agrarian sector from the industrial sector. In 1994, the gap between the minimum
and the maximum GRP per capita was a factor of 14, in 2005 it was a factor 38, and in 2012 it
was a factor of 17. In contrast, most developed nations in Europe have an economic gap a 23.8 in
1988, more than doubled to 48.4 in 1993 and has remained close to 40 to this day. It should be
noted that Russia did not join the WTO until 2012.
Prior to the 1980’s, China was very isolated. Its entrance into the world market was much
more gradual which is contradictory to what the IMF and World Bank had proposed. The
Communist party had decided that china’s development would rely heavily on foreign direct
investments. This was done in order to prevent powerful capitalist from popping up in china,
keeping the power of the state over its citizens intact. (Harvey 2005) China’s large population of
unskilled wage workers is very attractive to foreign investors, so much so that by the 1990s
China became the number one producer of consumer goods for the United States. However, even
though demand is very high wages are still extremely low. (Harvey 2005) The economic
inequality in China also seems to derive from regional differences in the country. China has
sectors called Economic and Technological Development Zones and High-Tech Industrial
Development Zones. These zones are located in cities that have policies that make foreign
investment attractive. Although income in these zones have risen, the incomes in outside regions
have either remained stagnant, or increase very slightly. (Valerio Mendoza 2014.) Thus the
absolute income gap in China has continued to increase. This can also be seen in the Gini index
which was at 30 in 1980, steadily rose to 41.5 by 200, which is when China joined the WTO.
Nevertheless, China’s Gini index continued to rise to 49,and has only recently begun to decrease
slightly.
Previous studies pin the cause of vertical inequality within Haiti as a result of its failure
to move beyond its colonial means of production. Haiti’s engine of production during colonial
times was plantation farming. However, instead of transitioning into capitalist farming, the rural
areas have regressed into subsistence farming, while the its primate city of Port-au-Prince has
transitioned into an industrial mode. The inequality between the rural and the primate city is
further exacerbated by the fact that the rural areas house 80 percent of the population (Maguire
1995). Two-thirds of those living in the rural areas made less than $40 annually, while those
living in Port-au-Prince made $289 more (Maguire 1995). Proposed solutions close the economic
gap between those in the rural sector and the urban sector is educational and agrarian reform.
With regards to agrarian reform the proposed solution has been the redistribution of land so that
each rural family has about 3 hectares of arable land (Jadotte 2006). However, agrarian reform
will not dampen the inequality because neoliberal policies implemented by Haiti at the behest of
the IMF make it economically impossible for local farmers to compete against foreign countries
selling agricultural products within Haiti. And thou increased educational spending will give rise
to a more educated work force the effects will be minimal in the rural areas because ninety-nine
percent of the industrial manufacturing is located in Port-au-Prince (Maguire 1995). Unless Haiti
manages to make its local agricultural products more competitive with foreign actors present
within their market and manage to disburse the industrial sector away from the city and into the
rural areas it will continue to see rising inequality between urban and rural areas.
In 1940, Mexico began to implement an import substitution economy by passing laws
that raised tariffs, created import licenses, and official reference prices. (Hanson and Harrison
1999; Pacheco-Lopez 2005). Subsequent administrations further strengthened these policies
(Hanson and Harrison 1999). These measures effectively kept foreign companies from entering
the Mexican market until 1985 (Hanson and Harrison 1999). However, under the Lopez Portillo
administration the protectionist policies began to be weakened. In 1977, President Portillo
initiated liberalization reforms that slightly reduced the number of import products that required
licenses. Two years later, Portillo signaled his intent to join GATT and participated in the Tokyo
round. In the Tokyo round Mexico was able to gain better entrance terms, than the ones afforded
to other less developed countries. Mexico would be allowed to keep 1,329 tariffs that totaled 2.6
billion dollars in 1976 currency, however, they would have to eliminate regulations on 328
products that totaled $503 million and accounted for 8.5 percent of the total value of that years’
imports (Story 1982). The following year Portillo postponed joining GATT because of internal
political strife, and Mexico di …
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