Why Global Inequality Matters

Taking the perspective of a development economist, and reflecting on issues raised by participants in this forum, this paper elucidates why inequality (and not just poverty) matters, among individuals and across countries, and why global inequality matters in the context of globalization. The focus is on the current asymmetries in how global integration affects poor versus rich countries (and people within countries), and on the resulting limits to poor countries' (and poor people's) ability to capture the potential benefits of globalization. These asymmetries reflect and reinforce existing levels of inequality across and within countries, and raise the risk that globalization will leave some countries and some poor people behind.

Why Inequality Matters

Among economists concerned with developing countries two decades ago, inequality was virtually a taboo subject. The "development" issue that mattered was "absolute poverty." For example, the 1990 World Development Report on poverty refers only briefly to inequality, making the distinction between inequality and absolute poverty.¹ This forum is a reminder of what has been a dramatic, decade-long burst of new research on income inequality and its causes and consequences in an increasingly integrated global economy.

Moreover, now economists take it almost for granted—at least, that has been the case in this forum—that inequality matters not only because it affects growth or other economic variables but in and of itself. That seems to break another conventional taboo. From the new research on happiness, for example, comes the sense that people care about inequality—in their own communities, in their countries, in the world.² Different societies tolerate different amounts of inequality, but beyond some level, inequality enters as a "bad" in utility functions.

Regarding inequality among individuals, people not only care about their relative standing (in terms of income) but about the expected change in their standing. To put it in more conventional terms, they care about the opportunities they and their children face and how those opportunities will affect their future relative income. With respect to the future, they care, as Albert Hirshman illustrated with his metaphor of being stuck in the tunnel while those in the other lane are moving ahead, about fairness—where others like them are likely to get to.³ They may care more about their expected future, in the context of what seems fair compared to others in some self-defined ("horizontal") category, than about anything economists can measure today.

Actually, and to complicate matters further, with respect to expected changes in their position, people may not care about change in their relative standing in the way that economists tend to think about and measure it. Economists view change in relative standing in proportionate terms: by what percentage did my income versus her income increase? (Or by how much did the ratio of my versus her income to the mean change?) Yet people may care more about change in the absolute difference between their and their counterparts' income—what Martin Ravallion, citing Serge Kolm, calls "absolute inequality."⁴ This term absolute inequality is confusing since inequality is, by definition, a relative term. Perhaps it should be called "difference" inequality, to distinguish it from "ratio" inequality.

Difference inequality is especially important in the context of globalization. Even with similar rates of income growth across countries, absolute differences in income between the rich and the poor continue to increase. Even if growth is just as good for the poor as the rich in terms of the growth rate, the poor may feel increasingly worse off and thus, as Carol Graham suggests, frustrated despite their income gains.⁵ The annual average income of a Mexican in the second quintile of the income distribution was about $1,300 in 2000 (in constant 1995 U.S. dollars). If she shared proportionately in a healthy overall growth rate of the economy of 5 percent, her absolute gain would be $65. But her rich neighbor's proportionate gain, starting from $20,000, would be $1,000, widening the absolute gap in...