Liberalization, Globalization and Income Distribution

Recent mainstream analyses of changes in income distribution over the post World War II period have concluded that income inequality within countries tends to be stable, that there is no strong association between growth and inequality and that, therefore, poverty is best reduced through growth oriented, rather than distributive, policies.This paper challenges this view. It argues that while income inequality declined in several nations between the 1950s and 1970s, this trend has been reversed during the last twenty years in two-thirds of the countries with adequate data. This conclusion is based on an econometric analysis of inequality trends for 77 countries accounting for 82 per cent of world population and 95 per cent of world GDP-PPP. Weighing the results by these two variables further strengthens these conclusions, which are supported also by a host of country and regional studies.This paper also suggests (without testing formally) that the traditional causes of income inequality (land concentration, unequal access to education, urban rural gap, and so on) are unlikely to explain its rise over the last two decades. Such an increase is more likely to be related to shifts towards skill-intensive technologies and, even more so, to the adoption of the unfettered liberalization of domestic and international markets. Easy generalizations are obviously not possible, as the impact in each nation depends on specific policy mixes and country circumstances. Yet, recurrent factors associated with the recent increase in inequality include: the decline in the labour share during structural adjustment; trade liberalization (in both the North and South); the ’financialization’ of the economy and the rise in the financial rent between 1982–96; erroneous approaches to the privatization of state assets; changes in labour institutions (reduced regulation, erosion of the minimum wage and of the trade unions, and higher labour mobility); and, in some countries, the erosion of the redistributive role of the state following the changes introduced over the last twenty years in the tax and transfer systems.Since the early 1990s, the international community has made the eradication of poverty its foremost development objective. Yet, the decline of poverty in the years ahead depends also on trends in income inequality, a fact which still attracts little concern by the policymakers. Much of the recent rise in income inequality must thus be viewed with alarm, as it may well prove to be incompatible with poverty reduction objectives.