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Saturday, July 07, 2007

Inequality, Globalization, and Economic Growth

Christian Weller at The Center for American Progress takes issue with the argument that progressive redistribution harms economic growth:

Productive Dialogue vs. Name Calling, by Christian E. Weller, CEPR: In his June 26th piece, Rob Atkinson presents a caricature of progressives' positions, inappropriately implying that we see pro-growth and a more equitable income distribution at odds with one another. This is not an either-or discussion, however, since innovation and a more equitable income distribution are complementary. A more equitable income distribution allows families to build more wealth, achieve more economic security, and take more risks, thereby contributing to an innovative society.

Chris Dillow at Stumbling and Mumbling adds more:

Inequality and growth, by Chris Dillow: Tyler Cowen says no intelligent left-winger could agree with this:

Redistribution of wealth has some role in maintaining a stable democracy and preventing starvation.  But the power of wealth redistribution to produce net value is quite limited.  The power of wealth creation to produce net value is extraordinary...We should be putting our resources, including our advocacy and our intellectual resources, into wealth creation as much as we can.

One reason we can't agree with it is that it might be a false dichotomy. There's some evidence that inequality is bad for growth, and so redistribution might help the wealth creation process. See for example this paper (whence the chart) or this. There's also evidence that inequality is bad for growth in both rural India and China.

Dillow7707

Of course, the evidence isn't all one way. This paper finds a positive relationship between inequality and subsequent growth in US cities. And this finds that any change in inequality (up or down) hurts growth. And this finds that it's only inequality after redistribution that's bad for growth.

Nevertheless, it's worth considering the possible mechanisms through which inequality can hurt wealth creation, for example:

1. Poverty causes credit constraints. This stops the poor investing in businesses or education; the low aspirations caused by poverty can have the same effect.

2. Inequality can create the threat of redistribution which can blunt incentives to invest. Or it can lead to state interventions ... that harm wealth creation. The backlash against wealth-creating processes such as globalization, offshoring and private equity in the UK and US are founded in the view that they create inequality. If we had better redistribution mechanisms ... such backlashes would be reduced, and the wealth creation process enhanced.

3. Equality can encourage investment in infrastructure, such as transport or secure property rights, that helps growth - because such infrastructure is seen to benefit all, not just the rich.

There's something else I'd add. One reason why wealth creation is a good thing is that it fosters increased respect for liberty and autonomy... But this also implies that a group of people who feel poor won't respect freedom so much. So perhaps more egalitarian societies are more likely to respect freedom. Are civil and social liberties really less secure in egalitarian northern Europe than in the more inegalitarian US?

And, in another post, he adds:

Globalization and equality, by Chris Dillow: Tom Miller points to evidence that globalization is increasing inequality, and asks what if anything the left can do to resist the tendency.

Plenty. A fantastic place to start is this paper by the great Sam Bowles, called Does globalization preclude egalitarian redistribution?

There are ... ways in which globalization is compatible with egalitarianism.

1. Egalitarian redistribution can attract inward investment by increasing the security of property rights. You get fewer riots, revolutions and less corruption in countries where workers are better off. ...

2. Spending on infrastructure, such as health and education, can attract inward investment by improving the quality of the workforce. ...

3. Higher wages can induce greater effort, thus allowing firms to save upon middle-managers who can extract rents at the expense of shareholders. "Supervisory labour input is strikingly lower in countries with more equal earnings distributions" says Bowles, pointing to Sweden and Japan. I suspect a key mechanism here is trades unions rather than a minimium wage. Unions (at least in their traditional continental form) can help police workers and scrutinize or legitimate management. ...

Certainly, there are many examples of how countries have successfully integrated into the global economy whilst having lowish inequality; think of Sweden, South Korea or Japan.

    Posted by on Saturday, July 7, 2007 at 03:24 AM in Economics, Income Distribution, Policy, Politics | Permalink  TrackBack (0)  Comments (27)

          

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