Comments: Irma Adelman

Ke-young Chu, Sanjeev Gupta, and Vito Tanzi
Published Date:
May 1999
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When I was asked to this conference, I had almost the same reaction that Amartya Sen had when he received his invitation, and realized both the subject and the auspices of the conference. Thanks to Stanley Fischer’s remarks, I have become convinced that perhaps my initial incredulity was due to being misinformed about some of the changing concerns in the IMF. I hope that the IMF is not using those concerns merely in a division-of-labor sense, by delegating a lot of their implementation to its sister institution—the World Bank—and just tolerating its work, rather than fundamentally addressing the poverty issues in its own programs.

I have three groups of comments. I will begin by underscoring three points in Anthony Atkinson’s excellent paper; then amplify these points by relating them to globalization and inequality in developing countries. I will end by raising some questions—questions to which I have no answers but which require serious thought.

First, I agree with Atkinson that it is highly doubtful that the divergent and large changes in income distribution he reports in his paper can be attributed to the effects of globalization alone. For one thing, globalization, in the sense of free and enhanced trade in both commodities and factors, is still incomplete. Part of the period under consideration has, in fact, seen a retrogression from globalization: in the actual trade policies of the OECD countries—and the United States is a large sinner along these lines—and the increasing attempts to use nontariff barriers, such as voluntary quotas and various other import regulations, to impede the free flow of goods and services.

Moreover, the growth rate in world trade has decreased since the golden era of economic development of the 1950s and 1960s. World trade is still growing at a much faster rate than world income is rising, but at about half the rate that it did in the 1950s and 1960s. In the OECD countries covered in Atkinson’s paper, the 1970s and 1980s saw the economic policy goals shift from growth to macroeconomic stabilization. This shift occurred in response to the two oil shocks as well as to inflationary pressures generated by wage increases that had exceeded the growth of productivity in the 1970s. In addition, the exchange rate regime also changed from fixed exchange rates to managed floats. The risks of trade and capital investment, therefore, increased, because exchange rate risk was added to the other risks attendant upon foreign trade and foreign investment. The result was a reduction in the rate of growth of world trade, compared with the previous two decades. So, viewed through the perspectives of the definition of globalization, the degree of globalization has been only moderate.

My second point is that the magnitude of year-to-year changes in the Gini coefficients Atkinson reports is surprisingly large—in fact, shockingly large. To give you two benchmarks, some very daring economists—not I—calculated the Gini coefficient prior to and after the 1848 revolution in France, and others have calculated the magnitude of change in the Gini coefficient before and after the Communist revolution of 1917. These were heroic attempts. These economists found that the changes in Gini were less than 10 percent. As Atkinson reports in his paper, the magnitude of change in Ginis for the OECD countries has truly been more than revolutionary by comparison. This is another reason for doubting that globalization alone is responsible for these shifts in trend.

Third—and this point is almost explicit in Atkinson’s paper—like all theorems in economics, the Heckscher-Ohlin and the Stolper-Samuelson factor price equalization theorems hold “other things being equal,” and very little has been truly unchanged over the period represented in the data. Thus, for all these reasons, I agree with Atkinson that one must look to other explanations for these divergent trends.

Now let me go to the situation in developing countries. One can take the period since 1973 and divide it into three different policy regimes. The first period, the 1970s, was a period of debt-led growth, as far as developing countries were concerned. For reasons I will not dwell upon, the early 1970s, which saw a recycling of petrodollars, involved a shift from borrowing from the IMF and the World Bank to borrowing from commercial banks in industrialized countries. This borrowing was mostly short term rather than long term, and mostly at variable interest rates rather than long-term fixed rates. Although the debtled growth continued, developing countries actually performed much better than industrialized countries; there was both growth and structural change in developing countries, although the situation of income distribution varied among countries, depending on the development strategies the countries chose.

In the second period, the 1980s, the boom deflated in developing countries. During the debt crisis, commercial sources of lending dried up, and there was no choice but to turn to the two international financial institutions, the IMF and the World Bank, which became the only games in town. This enabled these institutions to impose strong conditionality on countries that really had no choice. The aims of conditionality were macroeconomic stabilization and implementation of the policy and institutional changes leading toward globalization. This period continued in most developing countries up to the beginning of the 1990s. As a whole, for most developing countries, except those in East Asia, this period was one of economic disaster, both for the overall economy and for equity and poverty. This structural adjustment period is now referred to as “the lost development decade,” which indeed it was.

The third period, which some—though not all—Latin American countries and a very few African countries have entered, is the post-structural-adjustment period. In this period, it seems there has been some resumption of growth and some reduction in the trend toward increased inequality. But these reductions in inequality have not brought us below the levels that existed in developing countries in the 1970s.

Thus, in both developing and industrialized countries, the verdict on the relationship between income distribution and globalization is inconclusive: in industrialized countries, because of the variety of country experiences; in developing countries, because of the variety of phases and shortness of the postadjustment time.

Finally, I would like to raise some questions that require serious thought. As a result of my 25 years of work on income distribution and poverty, I have come to realize that the course of inequality and poverty is mostly determined by development strategies rather than by transfers and antipoverty programs, and that it is affected by macroeconomic variables only in the short run. But, if one indeed achieves globalization, then countries lose their ability to affect development strategies because they lose three major instruments of policy. First, they lose their ability to control exchange rates. With roughly $2 trillion of footloose capital ready to pounce daily on anticipated changes in the exchange rate, the latter can no longer be an instrument of policy, as we have learned from the recent futile attempts to stabilize exchange rates in East Asia. Second, with globalization of capital markets, countries lose interest rates as an instrument of policy. If domestic rates are set below world market rates, capital flows out of the country and domestic growth rates plummet, as in Japan during the 1990s. If domestic rates are set above world markets, foreign capital flows into the country excessively, and generates a cycle of overoptimism followed by overpessimism, as it did in the rest of East Asia. Third, with increased international competition resulting from increased trade liberalization, countries lose, to a large degree, the instruments of social expenditure, social transfer, and wage policy if they exist. So, what instruments can they use to reduce poverty and inequality, accelerate their growth rates, and achieve increased industrialization? Under the new global policy regime, will we find ourselves in the position of a doctor who discovers a virulent, mutated strain of an old curable disease and has no effective medicines to recommend?

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