National Council of Applied Economic Research
Opinion: Shekhar Aiyar.
Westerners worried about growing disparities at home shouldn’t overlook the transformative effect of liberalization in India and China.
Imagine that across the length and breadth of America, working-class wages grew much faster than the incomes of millionaires. Rustbelt states started catching up with their more prosperous coastal counterparts. But these developments came with a caveat: greater income inequality in Beverly Hills. The pay cheque gap between Leonardo DiCaprio and his supporting cast increased. Superhero sequels crushed indie movies at the box office.
Taken as a whole, these developments would be cause for joyous celebration. Few would shed a tear for the Golden Globe nominees falling further behind their Oscar-winning colleagues.
Something analogous to this happy fiction has been happening at a worldwide level over roughly the past half century. While the public discourse focuses overwhelmingly on rising domestic inequality in western countries, global inequality has fallen sharply, primarily due to the rise of two Asian giants, China and India. In 1980, the two countries accounted for almost 40 per cent of the world population but only 5 per cent of world income. Today they still make up roughly the same share of global population, but account for a much larger 25 per cent of global income. The global income distribution remains unequal, but not nearly as unequal as it used to be.
Since they started liberalising their economies in the late 20th century, both China and India have been utterly transformed from the plodding and insular economies they used to be. In neither country was liberalisation a once-and-for-all event; reforms gathered speed at times and subsided or even went into reverse at others. Nonetheless, the overall trajectory has been unmistakable.
Both countries registered a step-increase in GDP growth post liberalisation compared with previous decades. More important, the new economic dynamism lifted all boats. Although both countries saw an increase in inequality after liberalising, there was nonetheless rapid income growth even at the bottom of the income distribution. The steep fall in the number of people living in absolute poverty in China and India must count as one of the most dramatic improvements in human welfare in the history of the world. Together, the two countries were responsible for lifting an astonishing 1.1bn people above the international poverty line over the past four decades.
Over the same period, income inequality rose sharply in the west, so much so that it now dominates the political discourse and is one of the chief culprits behind a resurgent populism on both sides of the Atlantic. In most OECD countries the labour share of income has declined substantially in recent decades, with the gains from economic growth accruing disproportionately to the owners of capital and the highly educated. A vivid illustration is provided by the US, where GDP per capita has more than doubled since the mid-1980s, but median household income has risen by only about 30 per cent.
These numbers are disturbing and politically consequential. They have fuelled populist attacks on what might be called the liberal economic order: a system of free(ish) trade and cross-border investment, substantial immigration from poor to rich countries, and a rules-based international order adjudicated by institutions such as the World Trade Organization. But they need to be put in perspective. The US and western Europe collectively comprise about 11 per cent of the global population. Their deteriorating domestic income distributions must be set against the gains made by much vaster numbers of much poorer people. The economist Branko Milanovic has pointed out that the Theil index — a standard measure of global income inequality — has shown considerable improvement since the 1980s, with widening within-country inequality more than outweighed by narrowing between-country inequality.
How should a universalist — somebody who holds that human life has equal worth irrespective of location — regard the overall trajectory of the past half century? The philosopher John Rawls suggested that questions about the just ordering of society should be considered from behind a “veil of ignorance”. If you knew nothing about your own attributes — whether you were rich or poor, male or female, Chinese or American — which society would you choose to inhabit: today’s world, or the world of 50 years ago? Given that your chances of being Chinese or Indian are roughly two-fifths, while your chances of being a westerner are about one-tenth, you would almost certainly choose the present. Trouble in Beverly Hills should not obscure the much wider progress of those who live on less elevated ground.
The writer is a Visiting Scholar at Johns Hopkins SAIS, a Non-Resident Fellow at Bruegel and a Visiting Professor at NCAER. He is currently writing a book entitled ‘A Defense of the Liberal Economic Order’.