Global Policy Forum

By John Vandaele*

For the first time in decades, if not centuries, most of the so-called developing countries have seen their Gross Domestic Product (GDP) -- that is the sum of all incomes earned on their territory -- grow faster during the last five years than that of the so-called rich countries (EU, U.S., Canada, Japan, Australia...).

While rich countries had an average growth of 3 percent, developing countries on average realised 7 percent. Even income per head was growing faster in the South than in the North between 2003 and 2007. For East Asia and South Asia this is nothing new, but for Latin America and Africa it is a reversal after at least two decades of stagnation, or worse.

All in all, says the United Nations Conference on Trade and Development (UNCTAD) in its latest Trade and Development Report, there has been a moderate reduction in the gap between developing and developed countries. "In 1980 the real per capita GDP of developed countries was 23 times higher than that of developing countries, but it narrowed to 18 times in 2007," the report says.

East and South Asia are almost exclusively responsible for this. For Africa, Latin America and the so-called transition economies (former communist countries), the relative gap is much wider today then in 1980.

Nevertheless the last five years show a generalised improvement in the South. More and more, South-South relations play a role in the world's economy. India and China thrive because of their industrial and services success, but their boom drives up commodity prices, and so benefits even quite weak economies in Africa and Latin America. South-South interaction makes globalisation a tide that lifts almost all boats.

So, with a lot of goodwill, you could say that global or international inequality is diminishing a little bit. But that is only one side of the coin; the other is the 'nationalisation' or 'localisation' of inequality. Indeed, inside most countries, income inequality is on the rise.

The case of the U.S. is very well documented: the GDP growth of the last ten years has almost exclusively gone to the top 10 percent earners. Low skilled workers in the U.S. now earn 30 percent less than in the 1970s.

In the EU the effect is less outspoken: high taxes, strong trade unions and labour laws have softened the consequences of globalisation. But detailed studies in a country like Belgium show that, there too, inequality is rising, mainly because capital incomes have been doing quite well and capital (stocks, real estate...) is very unevenly distributed amongst the population.

In Belgium for instance, 62 percent of stocks are owned by the top 10 percent earners. That the value of Belgian stocks has risen 350 percent in just 15 years gives some idea who benefits most from high capital incomes.

Another factor contributing to inequality is that CEOs see their salaries rise strongly while the mass of workers have to restrain their salaries. In Germany the top 10 percent earners saw their income rise 31 percent between 1992 and 2006, while the bottom 10 percent took a 13 percent decline.

In most rich countries the labour share, the part of national income going to labour, is diminishing year after year, while capital share is rising.

Globalisation is one of the factors explaining this. Studies by the International Monetary Fund (IMF) have identified a link between the level of trade and immigration, and labour share. Other studies have shown that the effect is strongest in internationalised economic sectors: the negotiation position of workers, or their trade unions, is weakened because of international competition.

That dynamic also explains part of the inequality in developing countries, but there the difference between countryside and cities plays a major role too. Inequality has also risen strongly in most developing countries. The World Bank never saw a country where inequality rose faster than in China.

Of course the country started from the extreme equality of the Maoist era, but still some facts are startling. Between 2001 and 2003 the Chinese economy grew 10 percent each year, but the 10 percent bottom earners lost 2.5 percent in income, according to the World Bank. Official figures show that the difference between the top 20 percent and the bottom 20 percent grew 40 percent over the last three years.

Much the same thing has happened in India and Latin America. Some people win a lot through globalisation, others don't, or even lose. An Indian farmer losing his land for industrial development, without adequate compensation, is a loser of globalisation.

Internal inequality is much more visible than international inequality. People are more sensitive to their neighbour driving off in a fat car than to somebody doing the same 10,000 miles away. Hence, internal inequality creates more social tensions and political effects.

So when the Bharatiya Janata Party (BJP) government went self-assured into elections in 2005, boasting of high growth figures and with the slogan 'Shining India', millions of voters let them know they didn't feel any of that sunshine, and voted the government away.

In large parts of the enormous country poor people now resort to violence: the Naxalite movement is spreading. Aware of that danger, the new government enacted the National Rural Employment Guarantee Act (NREGA) which tries to do something about the glaring inequalities. NREGA guarantees 100 days of employment to adult members of any rural household willing to do unskilled manual work at the statutory minimum wage. This is, in effect, a kind of minimum income for the Indian countryside.

Though the Chinese government cannot be defeated in elections, people there have shown their dissatisfaction through countless manifestations and social conflicts. The central government consequently sent more money to the countryside and did away with most rural taxes. In the cities the minimum wage went up, the legal situation of migrant workers was reinforced, and new labour laws brought in to strengthen the position of workers. Whether all this will be enough is uncertain.

In Latin America most countries elected left or centre-left governments who made better redistribution of income one of their main objectives. In the U.S., any Democrat elected president will at least partly try to redistribute wealth by abolishing President George W. Bush's tax cuts which mainly benefited the rich. Striving towards universal healthcare will be another way of dampening the effects of income inequality.

In Europe, where redistribution of wealth is stronger than in other parts of the world, governments lately have in some ways been reinforcing income inequality: in country after country, corporate taxes and the highest tariff of income tax have been cut, when these are just the type of incomes that flourish under globalisation.

In some countries such as Germany and the Netherlands this has led to a rise of left-wing parties to the left of the traditional social democrats. Opinion polls in the U.S., France and Germany show that a majority of people now prefer protection of their own enterprises above more free trade, even if that choice would stifle growth.

One thing is clear: in many countries governments have been forced, or are under pressure, to redistribute the nation's wealth in a fairer way; this is like swearing in the neo-liberal church. But it is not only for moral reasons that governments make that choice; they realise that support for globalisation will wane if the opportunities it offers are not shared in a more equitable way.

About the Author: John Vandaele is journalist with the Belgian magazine Mo, and author of several books on globalisation, most recently The Silent Death of Neoliberalism, 2007.