Every fall, I start my lectures by provoking my students with the following question: is it better to be poor in a rich country or rich in a poor one? That question usually provokes a significant but inconclusive debate. However, we can develop a better structured and limited version of the question, to which there is an unambiguous answer.
Let's concentrate on income and assume that people only care about their own level of purchasing power (ignoring inequality and other social conditions). The "rich" and "poor" are those in the top or bottom 5 percent of the income distribution. In a typical rich country, the poorest 5% of the population receives about 1% of the national income. Data for poor countries is much less, but it would not be far from the truth if we assume that the richest 5 percent receive 25% of the national income.
In the same way, let's assume that rich and poor countries are those in the top or bottom 5% of all countries, classified by income per capita. In a typical poor country (such as Liberia or Nigeria), this is about US$1.000, while in a typical rich country (say, Switzerland or Norway) it is US$65.000. (These incomes are adjusted for differences in the cost of living or purchasing power so they can be directly related.)
Now we can calculate that a rich man in a poor country has an income of $5.000 ($1.000 x 0,25 x 20), while a poor man in a rich country earns $13.000 ($65.000 x 0,01 x 20). If we look at the material level of living standards, a poor man in a rich country is more than twice as wealthy as a rich man in a poor country.
This result surprises my students: most of them expect the opposite to be true. When they think of rich people in poor countries, they imagine tycoons living in mansions with servants and parking lots full of expensive cars. But regardless of the fact that such people undoubtedly exist, the representative of the top 5% in very poor countries is most often a middle-ranking government official.
The more important point of this comparison is to emphasize the importance of income differences between countries, compared to inequality within countries themselves. In the dawn of modern economic growth, before the industrial revolution, global inequality arose almost exclusively due to inequality within countries. The difference in income between Europe and the poorer parts of the world was not great. But as the West developed in the XNUMXth century, the world economy experienced a "great divergence" between the industrial core and the periphery that produces primary, basic products. For much of the post-war period, the income gap between rich and poor countries accounted for a large part of global inequality.
Since the end of the 1980s, two trends have begun to change that picture. First, in many parts of the backward regions, led by China, significantly faster economic growth has begun than in rich countries. For the first time in history, typical residents of developing countries became richer and at a faster pace than the same residents of Europe or North America.
Secondly, in many countries with a developed economy, inequality began to grow, especially in those with a less regulated labor market and weak social policy. The growth of inequality in the USA was so sudden that it is no longer possible to say with certainty that the standard of living of the American "poor" is higher than the standard of the "rich" in the poorest countries (we define rich and poor as already stated earlier in the text).
Those two trends went in neutralizing directions, so from the point of view of general global inequality, one direction reduced that inequality and the other increased it. But both trends increased the level of inequality within the country as a whole, reversing a continuous trend observed since the XNUMXth century.
Taking the data into account, we cannot be sure of the appropriate proportion of inequality within a country and between countries in the contemporary world economy. But in an unpublished paper, based on data from the World Inequality Database, Lucas Chancel of the Paris School of Economics believes that as much as three-quarters of today's global inequality can be caused by inequality within individual countries. The historical evaluations of two financial economists, François Bugignon and Christian Morrison, show that inequality within countries has not been so pronounced since the end of the XNUMXth century.
Those estimates, if correct, assume that the world economy has crossed an important threshold that requires us to reconsider our political priorities. For a long time, economists like myself said that the most effective way to reduce global income inequality would be to accelerate economic growth in low-income countries. Cosmopolitans from rich countries - who are usually well-off and qualified professionals - can claim to hold the moral high ground when they minimize the concerns of those who complain about internal inequality. But the rise of populist nationalism across the West has been driven in part by tensions between the goals of equality in rich countries and higher living standards in poor countries. The increased trade of developed countries with low-income countries has led to wage inequality within that country.
Probably the only way to raise incomes in the rest of the world would be to allow a massive influx of labor into the labor markets of rich countries. But for less-educated, low-paid workers in rich countries, that would not be good news.
In addition, politics in countries with a developed economy, which insists on internal, domestic fairness, does not have to harm the poor population of the world, even in international trade. Economic policy that increases incomes at the bottom of the labor market and reduces economic instability is good both for domestic justice and for supporting a healthy world economy that gives poor economies the opportunity to grow.
The author is a professor of international political economy at the John F. Kennedy School of Government at Harvard University
Copyright: Project Syndicate, 2019.
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