Transcript of an IMF Economic Forum -- "Is Global Inequality Rising?"
October 8, 2002Transcript of an IMF Economic Forum
Is Global Inequality Rising?
International Monetary Fund
Washington DC, October 8, 2002
View this Economic Forum using Windows Media Player.
MR. STARRELS: Well, good afternoon, everybody. My name is John Starrels of the External Relations Department, and welcome to the International Monetary Fund and our third Economic Forum in this series. I think today's event will be educational, hopefully provocative, and I'm going to turn the floor over to Ratna Sahay after making two very brief housekeeping announcements.
Number one, we do have some literature which is available to you as you come through the right-hand door. Please avail yourself of it.
Secondly, we welcome participation during the question and answer period. We know there will be good questions, lots of them, we gather. Please avail yourself of the microphone to your right and identify yourself and, if it's okay, your affiliation.
And on that note, again, welcome, delighted to see you. And, Ratna, the floor is yours.
MS. SAHAY: Thank you, John.
I'm very pleased to welcome you all this afternoon to our Forum on global inequality. The topic, as you know, is "Is Global Inequality Rising?"—a burning question in this era of globalization that our distinguished panel will discuss and debate.
While they may not need any introduction, allow me to remind you who they are. John Cavanagh to my left, John is Director at the Institute of Policy Studies, coordinating programs, outreach, and organizational development. He worked as an international economist for the UNCTAD and the WHO. He directed the Global Economy Project at the IPS from 1983 to 1997. He also wrote several books and articles on the global economy.
John recently co-authored a book called "Field Guide to the Global Economy" which is critical of globalization and of the Bank and the Fund, and which I must say that I have read with deep interest. I am particularly eager to get his perspective.
I have Martin Ravallion to my right. Martin is our distinguished colleague from the World Bank. He's Senior Adviser and Research Manager in the Development Research Group. He is an authority on poverty, measurement, trend, or reduction policies. He has written extensively, books as well as innumerable papers, and has advised many governments and international agencies.
Let me just mention two of his recent, very interesting new papers: "Inequality Convergence" and "Growth Inequality and Poverty: Looking Beyond the Averages," which are on his website, I presume.
Then to my extreme right we have Surjit Bhalla. Surjit is Managing Director of Oxus Research and Investment. It's an economic research, asset management, and emerging markets advisory firm based in New Delhi, India. He is very prolific, having mastered many diverse areas during his tenure at the World Bank, Brookings Institution, Rand Corporation, Goldman Sachs, and Deutschebank. He is what we call a household name in India, contributing regularly to newspapers and magazines on economics, politics, and cricket.
The topic of this Forum was much inspired by his hot-off-the-press book, "Imagine There Is No Country"—no doubt inspired by John Lennon—"Poverty, Inequality and Growth in an Era of Globalization," which is published by the IIE and already getting pretty wide press coverage.
Now, let's get into the discussion. One thing you'll notice is the seating arrangement here is not a coincidence. To my left is John.
MS. SAHAY: Who believes that global inequality has risen with increased globalization. To my extreme right is Surjit, who swears by the virtues of globalization in reducing inequality. Then we have Martin somewhere in the middle, who would say, well, it depends. If your economy starts out with a highly unequal income distribution, that distribution will become more equal over time, and vice versa. That is, there's a tendency for inequality levels to converge over time.
I'm not going to tell you where I stand, but you know where I'm sitting.
MS. SAHAY: I'm expecting a very lively debate today precisely because we've chosen a panel that has fairly different perspectives on the same issue. It is amazing that people can differ even on the facts, as you'll see. But apart from how you see the facts on which we would, of course, like to hear from the panel, I would request the panel to answer two further questions.
First, if you believe that sustained growth matters for poverty reduction—and there seems to be enough evidence on that—the question is: Why has the global debate shifted so much from growth to inequality? That is, if China and India have seen lots of poverty reduction with growth, why don't we focus on growth in Africa?
You know, just a small incident. I recall growing up in India in the 1960s and 1970s when government policies seemed to be guided by the political slogan called "garibi hadao" (ph), which meant "reduce poverty." And guess what happened? Poverty levels remained the same.
Then came the 1980s and the 1990s, and the emphasis shifted to raising growth rates. And guess what happened then? The percentage of people living below the poverty line declined by, I would say, about 20 percent. Even on the facts, I think Martin and Surjit would differ. But I'm taking an average.
The second question is policy related. If there is a tradeoff between reducing inequality faster on the one hand versus raising growth and reducing poverty faster, what would you choose? And, specifically, is there any message that you, the panel, would want to give us, the Fund? Keeping in mind what our mandate is, should we be in the business of reducing inequality per se? And remember that we have to care about the sovereignty of our member countries.
Okay. Let me just quickly get into the format of the discussion. I'm going to give each speaker ten minutes, and I'm going to be a pretty tough moderator. Then we will open the floor for questions for about 20 minutes or so. Finally, at the end I'm going to give all speakers about five minutes each to respond to the audience as well as to each other.
So I'm going to begin from the left and then go on to the extreme right. John, you have the floor.
MR. CAVANAGH: Okay. Thank you very much. It's a great pleasure to be here. I'm a big advocate of this form of discussion, of debate, of open debate, of respectful debate, and I've already been able to spend a little bit of time with the other panelists and have already learned a great deal.
I'm also happy to say here that, even though I am a co-author of a book that's just about to come out that calls for the abolition of the IMF, I'm very happy to be in this room while it still exists.
MR. CAVANAGH: And that also, two weekends ago when I was out on the streets protesting the IMF, I found myself in a very interesting moment of some agreement around the proposals that were being hotly debated right in this building around a sovereign debt management facility that could replace the very bad way—we all, I think, agree—that debt crises are being handled right now. And I think there's an interesting possibility for some policy convergence.
Let me just say my institute, the Institute for Policy Studies, works with the broader social movements that are taking on economic globalization. We do research and writing that is in sympathy with social change and these social movements. But we try to be one step removed so that we can do work that really tries to look at what's going on.
And, finally, let me just say—I mentioned the book. I'm also one of the founders of a group called the International Forum on Globalization. We are putting out a book next month called "Alternatives to Economic Globalization," and I have some fliers out back. But it lays out, I think, an emerging consensus among many in the global justice movement for ways in which rules and institutions could be shifted to better serve people and human rights and democracy and the environment.
On the issue of equality and inequality, inequality, I would say, is one of the four central issues to the critique of the current set of rules of economic globalization that our side has, up there with the adverse impact of policies on workers, on the environment, and on democracy. I would say inequality is up there at the top. And our concerns are really at three levels, and I think this debate will focus more on one, but let me mention what the three are.
We would suggest or we believe that the evidence shows that the kind of globalizing policies, the focus on trade liberalization, on privatization, on deregulation that has been at the center of the so-called Washington Consensus for the past 20 years has increased inequality at three levels: one is between countries, the second is within countries, and the third is among different groupings within countries, in particular, there's a very strong argument on the gender side that women have suffered more than men.
So let me say a word about the first two, first between countries. Well, let me start actually—a lot of—two very good people on our side—I won't claim credit for much of what I'm about to say—have been looking at these specific issues of inequality. One is someone who worked at the World Bank before, a person named Robert Wade, who's now at the London School of Economics, and another is a very good economist who's up at the Canadian Center for Policy Alternatives called Mark Lee.
And let me start with an indictment from Robert Wade. I'll read you three sentences that he has recently written.
"The World Bank and the IMF have paid remarkably little attention to global inequality"—present company excluded here where they've paid a lot of attention, clearly.
"The World Bank's World Development Report 2000 attacking poverty says explicitly that rising income inequality `should not be seen as a negative,' provided the incomes at the bottom do not fall and the number of people in poverty falls or does not rise. But incomes in the lower deciles of world income distribution have probably fallen absolutely since the 1980s, and no one should accept the Bank's claim that the number of people living on less than $1 a day remained constant at 1.2 billion between 1987 and 1998, because the method used to compute the figure for 1998 contains a downward bias relative to that used to compute the figure for 1987."
Wade concludes—and this gets into the issue of inequality between countries—that of eight alternative measures out there in the literature, seven of eight show increasing inequality between rich and poor countries over these relevant decades.
I think something I'd say that's less controversial, I have often used the term that we are in a period of global economic apartheid, and it would be based on this contention, and I'm curious if the other panelists would disagree with this: that in these past two decades, you've had among the richer countries—let's take, say, the OECD 29—you've had growth, slow growth; you've had among ten, the old phrase in the Clinton administration was "big emerging markets," the ten big emerging markets, quite rapid growth, led by China and India; and then the rest of the developing world you've had either very slow growth or in the cases of Sub-Saharan Africa you've had negative growth.
So it's not to say that if you aggregate all developing countries—if you aggregate them all, you get a lot of confusion. If you break out those ten where most of the foreign investment from overseas has come in, you get a picture of apartheid of ten countries that are growing fast enough so that they're slowing—they're closing the gap with the rich countries, but well over 100 countries where the gap is rising.
Certainly the gap is rising between Africa and the rich countries, and the gap is also increasing at a slower rate between Latin America and the Caribbean and the rich countries. So that's the first point.
Now, a slight addendum on this. I find in all these debates when you get into the specifics, clearly two countries which have been closing the gap are China and India, and then the big next question is: Well, why? And the World Bank and IMF will argue it's because they've been pursuing the policies of freer trade, more open markets that the Bank embraces, and our side would argue it is precisely because these countries built up domestic markets, pursued certain policies that dealt with issues of equality, although that's much more the case in China than India, and that they certainly aren't pure globalizers.
There's a great debate in a recent Foreign Affairs where Jamie Galbraith of the University of Texas says this, and I'll just, again, read two or three sentences: "It's extraordinary that India, China, and Vietnam should be offered as three of the five major examples of globalizing success stories. India's relative success began in the 1980s, partly because of strict capital controls, and long-term official development assistance helped protect it from the debt crisis that occurred in Latin America and elsewhere. China grew at first on the strength of agricultural reform, and then through a program of industrialization, financed mainly by internal savings."
And then, finally, within countries, this is—in many ways, for the movements that I work with, the issue of rising inequality within countries is much more important than what's happening in the world overall; that we see as perhaps the greatest indictment of the globalizing policies or the particular set of globalizing policies that income inequality is growing so rapidly within countries, probably the best data recently that I've seen on this are in the most recent UN Development Program Human Development Report, where they look at 73 countries with pretty good data, and in about five times more countries, income inequality is growing in those countries in recent decades, 48 up, nine down, the rest about the same. And the nine that are down are what you'd expect, and it represents a very small portion of the world's population.
And here, again, it gets at the heart of our assertion on, I would say, both—I mean, we would make the assertion that in the period where the World Bank and IMF have had most influence, where the globalizing policies have been pushed the most, that growth has both been slower—this is the last two decades—and inequality has risen fastest within countries, and we would pin it on the so-called Washington Consensus policies, in particular, the tighter fiscal and monetary policies, the cutting of public spending that often hurts the poor. We would pin it on financial liberalization and say that the poor were hurt most in the financial crises of the late 1990s. We would pin it on privatization of industrial assets that often increases income at the top.
We would certainly pin it on an issue that I've had a long fight with the Bank and Fund on, and that has to do with what they call labor market flexibility, but policies which erode the power of workers, and we would pin it on tax systems that have become more regressive in this period.
Therefore, in conclusion, we come together behind a set of rules and institutions and policies which put the reduction of inequality right at the center of the goals of what the rules and institutions should be, up there with democracy and ecological sustainability and so on.
And I would end by just pointing to, I think—and I could be wrong. Who knows what's going to happen in Brazil in two and a half weeks? But if a steelworker whose nickname is Lula is elected, I think you will see a set of policies which break from the consensus, which reject the rapid opening of markets that is being proposed, for example, right now in the Free Trade Area of the Americas, which is pro-respect for worker rights, which is supportive of the landless poor and their acquisition of land, which is pro-participatory budgets which help the poor, which is more careful on financial liberalization, which has more progressive taxation, and which I think will do a good job of addressing the core problem of inequality that the policies of the Bank and Fund have, I think, either ignored or explicitly worsened.
MS. SAHAY: Thank you, John, especially for keeping to the time.
I'll hand over the floor to Martin.
MR. RAVALLION: Thank you.
One of my jobs at the Bank is, with a lot of help of others, to count the number of poor in the world. We've been doing this for many years now and are using a methodology that essentially started in 1989 and 1990 for the 1990 World Development Report. And we've continued pretty much on that same methodology, some refinements, over this period.
We're really used to criticism. We're not used to not being criticized. We get critics from the left and we get critics from the right. John mentioned Robert Wade. He claims that we underestimate poverty today, the extent of poverty, and we overestimate how much it is falling. And Surjit claims the exact opposite; we're overestimating the extent of poverty today and we're underestimating how much it is falling.
I thought in preparing for this I would talk about measurement issues and the details of this, because the devil really is in the details. You have to know a lot about what you're talking about. You have to know about the data you're using. You have to know a lot about how household surveys work and so on, prices that are used.
I thought actually I'd take a step back—I'm not sure that that level of detail is going to be terribly interesting to this audience—and talk just a bit about the broader debates, why these measurement issues are so important. And there is an important debate going on. In fact, in many ways it's an old debate in economics going back many years. I could roughly characterize two sides of the debate with some quotes. One of them comes from The Economist last year: "Growth really does help the poor. In fact, it raises their incomes by about as much as it raises the incomes of everybody else. Globalization raises incomes, and the poor participate fully."
The Economist is actually summarizing the results of some research done by colleagues of mine in the Research Department of the Bank, David Dollar and Art Kraay.
Another quote, from Surjit's book: "Evidence suggests that no one has lost out to globalization in an absolute sense." This is really an extraordinary comment. And another one, "Growth is sufficient."
The opposing view—I can give you many examples of this, but here's a quote from Justin Forsyth, the Policy Director of Oxfam, also published in The Economist: "There's plenty of evidence that current patterns of growth and globalization are widening income disparities and, hence, acting as a brake on poverty reduction."
Well, who's right, if either? I'm going to argue there's some truth on both sides, but we have to be very careful. Both sides have also got some issues or some points that I'd take issue with.
A few observations. First, I think we're pretty much in agreement, at least for now. We find very little convincing evidence that the changes in income distribution that we observe within countries are correlated with growth or are correlated with openness. Roughly speaking, you can find some significant effects if you struggle with the data, but I don't think anybody looking at the results we've got so far would seriously claim there is any systematic correlation between changes in distribution and openness. I can think of other examples just by looking at spells between household surveys which we've been doing for some time now. We find virtually zero correlation between the changes in inequality and the growth rates between surveys.
Similarly, when we add controls on schooling, financial development, urbanization, black market premia and so on, there's not much sign of any correlation. And the Dollar and Kraay paper I think showed that quite convincingly.
The implication of that is clear. If there's no change in distribution with growth, then what's going to happen to absolute poverty? Absolute poverty, meaning the poverty line is fixed in real terms over time. That's obviously going to fall with growth, and that's also what we see. It falls at a reasonable rate. I mean, the overall elasticity would be about minus two. That's using our data, where you're comparing spells of poverty reduction between household surveys and looking at growth rates either from national accounts or from household surveys. You don't get the same elasticity when you use national accounts. You get a somewhat lower elasticity, basically because of an attenuation bias in regressions based on national accounts.
There are biases galore in all of this, and Surjit's fond of showing—in his book he argues that growth is even more poverty reducing than we'd thought before. I take some issue at how he's shown that.
One of the problems in this is that we have a problem of—we end up regressing noisy data on noisy data. That's always a problem. And when you've got a noisy right-hand side variable in a regression, alarm bells ring, if you've studied any econometrics. Here you have a special problem that the measurement between the dependent variable and the independent variable are correlated. In household surveys, which are full of measurement errors, no question about it. If we're using household surveys to measure poverty, we're using household surveys to measure average incomes, we're going to get a correlation. If you overestimate the mean from the survey, you're going to underestimate the poverty measure.
And Surjit has exactly the same problem. He works with poverty measures and national accounts, assuming that the household survey mean is entirely wrong and the national accounts is right, and that the distribution is right from the surveys. I'd question whether there's any basis for that assumption. Normally we think that surveys are—surveys are typically designed to measure the mean and not designed to measure distribution. To assume that the survey would get the mean wrong but the distribution right is really hard to defend, I would argue. But whichever way you look at it, I think we do agree that poverty tends to fall with economic growth.
There are a number of caveats you can make about that, but a couple of points. One is the extent to which growth is pro-poor has varied enormously between countries and over time. It's really a mistake, I think, to think of one number, and that is something else we've learned from a lot of research on this over about the last ten years.
For example, dealing carefully with that measurement error problem I just talked about, using instrumental variables estimates, in fact, using national accounts as an instrument for the household survey mean and, similarly, Surjit could do—he's known as using the survey mean as an instrumental variable for the national accounts data. When we do that, we find a 95 percent confidence interval for—if you'd ask what a 1 percent rate of growth will do to poverty, the 95 percent confidence interval goes from 0.6 percent reduction in poverty to 3.5 percent. So with 95 percent probability, we know the number is somewhere between 0.5 and 3.5 percent rate of poverty reduction from a rate of growth of 1 percent in the mean.
That's a huge variance. You have to understand that variance, and a lot of our research has been trying to do that.
When we look at spells of growth, we find inequality increasing about half the time and decreasing about half the time, and that's the (?)-ality point that I made before. There's very little correlation, we find, between growth and changes in inequality.
But when we look at specific countries—and I'm fond of the case of China and India, because a lot of what we're talking about here is really driven by China and India, that the weight of the population just means that, you know, pretty much—it's an exaggeration, but pretty much what happens in those two countries carries enormous weight in your overall assessments.
I did a little exercise thinking back to the beginning of the 1990s, and, of course, this can be a little deceptive because I'm not at the beginning of the 1990s. But I did an exercise to try to figure out what would we have expected the rate of poverty reduction to be in China and India over the last ten years if we had to sort of model the poverty reduction like Surjit has.
We would have expected a rate of poverty reduction in China of about 4 percent. We would have expected a rate of poverty reduction four percentage points per year reduction in the head count index. That's huge. And in India, about two percentage points.
What did we actually observe? About half that in China, and a little bit more than half that in India. In India, the numbers have been highly problematic. We've only just really gotten, I think, a credible fix on what's been happening to poverty in India, and we're pretty confident that India's now back on track to its historical rate of poverty reduction since about 1970s, which is about one percentage point per year. And that's quite respectable. We don't think there's been an acceleration, but we think it's doing okay.
Why is that a disappointing outcome for China and India? Rising inequality in both countries. Actually, the distribution in India seems to be deteriorating—if anything, deteriorating slightly more, slightly faster than in China.
But even if inequality is not rising, another thing we've learned from research on this is that inequality is an important impediment to pro-poor growth. Even if inequality is not rising in your country, to understand that variance in the impact of a given rate of growth on poverty, the first proximate thing you've got to look for is inequality. That's not a very exciting conclusion. If growth—if inequality changes are roughly (?) growth, then it's no surprise, in effect, that the initial level of inequality is hugely important to how much impact a given rate of growth will have on poverty.
In fact, another way of thinking about this, it's not the rate of growth per se. It's the distribution corrected rate of growth, something we've been monitoring on a country basis for some time.
But looking beyond that, what is it about it? I mean, I can give you examples, for example, a country growing at two—with a rate of growth of 2 percent per capita income and a head count index of 40 percent. A low inequality country, Gini index about 0.3 will halve its poverty rate in about 12 years in expectation. A high inequality country with a Gini rate of about 0.6, South Africa or Brazil, will take about twice as long to halve its poverty rate.
But we have to—that's not very interesting in a way. You have to unpack inequality. You have to understand what it is about inequality. I think it's not very interesting to say inequality in consumption is important to the rate of pro-poor growth. You have to understand what it is about inequality. For example, in our work for India, we try and understand where was that loss of poverty reduction in the 1990s. India is back on track, but we haven't seen an acceleration. We haven't seen a higher rate of poverty reduction given the higher rate of growth. Why did that happen? The economic geography of what happened to growth in India, essentially that the growth wasn't occurring in the places where it would have the most impact on poverty. There's been a growth divergence within India. That's pretty marked and well established now from the empirical literature. But the growth has been happening in places where it would have less impact on poverty. It's the Bihars of India that have not had the kind of growth that has been necessary for rapid poverty reduction.
And, by and large, it also depends on the sector you're talking about. Within the non-farm sector, which remains important to poverty reduction in India, the enormous heterogeneity across India in terms of the impact of non-farm economic growth on poverty. In some parts of India, it's the Bihars that—in Bihar, you're getting low non-farm economic growth, low agricultural growth, but also in Bihar, low elasticity of poverty to that growth. In other words, Bihar would not only need a much higher rate of growth, but there's something about Bihar that means that growth is having less impact on poverty than elsewhere. What is it about Bihar? What is it about the differences, say, between Kerala and Bihar which determine this?
We've looked into this. I think there are a number of issues. Social and physical infrastructure is key. If there's one single factor that can explain that difference between Bihar and Kerala, it's actually initial levels of literacy, of huge importance. That would explain about half of the long-run difference in poverty reduction performance between these two states. But there are other factors, too: the extent of dualism between the urban and rural sectors, the extent of initial rural development. These are absolutely crucial.
Finally, I'm running out of time, but a couple of points. Surjit claims growth is sufficient, in a literal sense, if we say that growth is going to reduce poverty, we say, yes, well, we agree in one sense. But in a way, the point here is that Surjit's actually missed the point. The point—we're not saying growth is not going to reduce poverty. That's not at issue. Rather, we're seeing that it's going to have heterogeneous impacts on poverty. It's going to depend a lot on the initial circumstances in the country, and that fact has important implications for long-term policy. Combining growth-promoting policy reforms with the sorts of investments in social sector programs and policies which are generally pro-poor—and that's a big if; I mean, there's a lot of things that are done in this area that are not particularly pro-poor—it's really going to allow poor people to participate fully in that growth process, to unleash their own opportunities. And that's the real message, the synergy between these two strands of poverty reduction policy.
MS. SAHAY: Thank you, Martin.
MR. BHALLA: Thank you, Ratna.
Let me start with basically the results that I reached, and then on the second half of the presentation, I will document as to why these results are more likely to be accurate than the others that have been presented by the two speakers.
If you look at—and I'll divide up the discussion and the periods of analysis very loosely between 1960 to 1980 and 1980 to 2000, just to give one a perspective.
Essentially, regarding growth, what we find is that the developing countries grew at about one percentage point lower than the developed countries during 1960 to 1980, and the numbers are 2.1 and 3.3, respectively. But during 1980 to 2000, the developing countries far exceeded the growth rate of the industrialized West and grew at 3.6 percent rather than 2 percent for the West.
So first piece of evidence, and these are national accounts data, which is what the World Bank uses, the IMF uses, the countries themselves use, that growth rates of the poor countries far exceeded the growth rates of the West during the so-called globalization period. So that's evidence number one.
Number two, what happened to inequality? I find that inequality has been on a steady decline—world inequality has been on a steady decline, reversing almost a 200-year trend, peaking in the mid-1970s, and today inequality in the world is at its lowest level for possibly 100 years.
What is the counter-evidence to that? There are two or three sets of studies, one which states that basically inequality flattened out during the last 30, 40 years, and another one from the World Bank which states that inequality increased at an absolutely unprecedented pace between 1988 and 1993. I find, as I said, just the opposite.
Third, what about poverty defined as $1 a day? Well, the World Bank, and Martin, actually, has the study on it, and he shows that basically between 1987 and 1999, poverty declined by five percentage points, from 28 percent of the population to 23 percent. I also find a decline, but the decline is almost three times as much. So rather than five percentage points, it declined by about 16 percentage points, from 29 to 13 percent in the year 2000. So, therefore, while we agree on the direction—and, really, everybody agrees on the direction, and I think—I don't know whether it was Martin or Ratna who said that it's all about the magnitudes. That is where the difference is.
Do the magnitudes matter? I believe they matter a lot because magnitudes determine interpretation, determine perception, and that determines policy response, whether from the World Bank or from the IMF or from the developing countries themselves.
So my plea here is, you know, if you are confused by the various three estimates coming—middle of the road, no change, or worsening—and I'm saying just the opposite, you should be confused, because what I think is happening is that each party has a vested interest in confusing the interest, perhaps even me, you know, just throw some numbers around and say just listen. So it becomes a matter of he said/she said, and, you know, who's going to bother to read let alone do the research, et cetera? And we can all go along our merry ways.
Now, I think what is very, very important for all of us is to establish what the facts are. Now, that is, we'll never be able—I don't want to get metaphysical. There is an underlying truth over there. All of us are trying to approximate that truth. I'm saying that the emphasis should be does the truth that comes out from each speaker, is it credible? And if it is credible, then clearly you should accept what he or she states.
Let me now start off with some of the facts that have been thrown around. First—and this is a popular refrain—basically the story is China and India. Okay. It turns out China and India have 2.3 billion people. Asia has 3.2 billion people. So countries, excluding China and India, in Asia have about as many people as all of Latin America and Africa, Sub-Saharan Africa combined. So, therefore, in my view, it is not a China and India story. It's an Asia story. That's point number one.
Number two, if you look at the developing world, these three regions essentially nothing has happened in Latin America for 20 years—no growth, no poverty reduction. But according to the World Bank line of $1 a day, there are relatively few people poor in Latin America, and certainly in the aggregate sense. Obviously, for Latin America, there are lots of poor people, but I'm saying in an aggregate sense, which is what we're talking about, the world inequality, we're not talking about Bolivian inequality or Indian inequality.
In Sub-Saharan Africa is where the real problems are. There's universal agreement. Indeed, my estimates of poverty in Sub-Saharan Africa are even higher than what the World Bank states is poverty there. And the incomes have not only not increased, they've actually declined by about 10 percent. And I think when I conclude, there are real lessons to be learned from the rest of the world, and particularly in Asia, which can be applied to Africa.
Okay. Now, coming to some of the statistics that get thrown out, Martin just told you about how Bihar has shown no poverty decline. Indeed, in the most recent estimate, according to the Government of India, the surveys which Martin so believes in, Bihar has had the largest poverty decline of any area. Kerala, one of the most unequal states in India, urban areas of Kerala are the third most unequal in the country.
Then there was a shocking statistic—and I'm really shocked, coming from Martin, because he has looked at these numbers—about increasing inequality in India. There is not a single survey, not one survey, which is what Martin relies on, which is what I rely on for inequality, which shows any deterioration in inequality, let alone deterioration faster than China, which I thought I heard him say. India is actually, along with Indonesia and Vietnam, one of three or four countries that has shown high growth without any change in inequality. This is government data. This is World Bank data. This is IMF data. This is not my data. So let's get our facts right.
Then, you know, coming to—and Martin was the one talking about measurement problems. We've got a real problem.
What I think—look, World Bank results and my results on poverty are exactly the same for 1987. The real problem comes in after 1987. According to him, developing countries grew at a total rate, between '87 and '99, by about 10 to 11 percent. According to me, developing countries grew, growth rate of 26 percent. That's a huge difference.
Well, we don't know all these countries. You have to get into details. You really have to worry about it. Well, there's very little disagreement that China grew and India grew. Everybody agrees there. Okay? So here I'm talking about only about the means. I'm not talking about the distribution.
Well, China and India by all accounts grew at an average rate of at least 5 percent, and I'm taking a lower bound to that. If you allow India and China to grow at 5 percent, it will be the case that in order to be consistent and reach an 11 percent average growth rate, the rest of the developing world would have to show a decline of 25 percent over the last 20 years. You believe that, you believe—over the last 12 years, sorry. You'll believe the rest of the results.
Coming to now what John said about inequality, let me just—you know, here again, because there are hundreds of countries in the world, who's going to measure inequality in all of them, let alone pool it all together? Let me just give you the following heuristic example.
Assume—and, really, it's not much of a stretch—that basically in 1980—that's before any of the reforms took place in China—that the Chinese population was at the bottom end of the distribution. China's mean income, including the rich of China, has grown by something like 350 percent over the last 20 years. That alone is enough, and the point is how much did the rest of the world grow. Well, the industrialized world grew at about a total rate of about 60 percent during the last 20 years. So here is the bottom 20 percent of the population—and I don't even need to add the other rest of the developing world—which has grown at 300 percent and the top end of the population has grown at only 60 percent. It does not take rocket science or details to come out with a simple conclusion that inequality has to have incontrovertibly decreased.
Indeed, I find the decline in the last 20 years, both in poverty—and the same logic applies to poverty, if you want to—for poverty, as well as for inequality, you have just witnessed the golden age of development. The developing countries never had it so good as a whole, and as I pointed out before, there are regions, particularly in Africa, that we need to concentrate on.
To conclude, and to come up with answers to—and I'll just take a minute. I know my time has run out. Basically my plea is that rather than institutions, researchers, et cetera, going about trying to find out that what went wrong in the last 20 years, because of—and all this angst certainly suggests that a lot of it went wrong—that why don't we concentrate on some simple home truths, what worked, and let's find out what worked. Let's do the research. It's not at all clear we know what worked, but, clearly, for the largest portion of humanity, the largest decline in history was just observed, let's find out what worked and apply it to Africa.
Thank you. Sorry I took a minute more than I was supposed to.
MS. SAHAY: Thank you, Surjit.
As you can see, it's very easy to get confused, even on the facts. But I'd like to take questions now from the floor, and the way it's going to work is just so that it doesn't get too confusing, we'll take one question at a time, and please direct your question to a particular speaker here. If it's to anybody, then just say anybody can answer, and one of the panelists will then respond, and then we'll go on to the next question.
MR. ROWDEN: Thanks. I'm Rick Rowden from Results Educational Fund. My question for Surjit is: Are you familiar with the recent research by World Bank researcher Branko Milanovic, and could you speak to that?
And then the other quick point was that you said that it's important for us to get clear on the differences in magnitude because those in turn reflect the interpretations which informs the policy response. But it seems like that's a very apolitical understanding, and if you could talk more about maybe some of the political influences from the Finance Ministries on the Boards.
MS. SAHAY: Surjit?
MR. BHALLA: I am very familiar with Branko's work. Indeed, I discuss it in great detail in the book. I again use the simple (?) as a principle. Does it make any sense? According to his data, Korea in 1993 was considered to be richer than both the United Kingdom and Sweden in per capita income terms, again, no distribution. And the Central Africa Republic and Ethiopia were both richer than India. I think I'll stop there as far as Branko's work is concerned. Basically it doesn't pass the smell test. I'm quite willing to have my work challenged by the smell test, obviously.
As far as the political influences, I think you're absolutely right, and I think most of the time I've argued, for example, in India, the biggest obstacle to privatization is from the Indian private sector, and this is where things get in. Basically policies are determined by the rich, often for the rich. And I think the only ally of the poor is to get growth, and growth in a very, very democratic sense, that is, where it is not hijacked by the interest groups, whether they be in the government or they be in the private sector.
MS. SAHAY: Yes, Art?
MR. KRAAY: I'm Art Kraay in the Research Department of the World Bank. Ratna wrapped up the discussion by saying there was a great deal of confusion about facts, so I thought it might be helpful to take maybe two minutes, if I could, to put some of the facts that have been discussed in a little bit more perspective that I think is useful.
The first thing, I want to start by actually somewhat uncomfortably citing myself with Surjit, and we've been arguing over things for the last year or so, but there are some things we agree on. The figures cited by Robert Wade—that John Cavanagh cited are nonsense. Seven out of eight estimates show increases in global inequality. That's silly. Seven out of the eight measures that he looks at have no conceptual basis. The important thing to look at is measures of income inequality that are based on incomes adjusted for differences in purchasing power. And when you reduce yourself to that set of sensible measures, you have a range of estimates.
We have Branko's work that's cited that shows an increase of three Gini points from 63 to 66 Gini points. We have Surjit's work which shows over a slightly longer period pretty much exactly the opposite increase and, interestingly, the same magnitude, from 66 to 63. And then we have a couple of other studies—studies by Bourgignon, Morrison that Surjit cited, also a study by Xavier Sala-i-Martin at Columbia University which shows a decline on the same order of magnitude as Surjit's.
So I want to say two things about interpreting them. First of all, a three-Gini-point decline or increase, are these shocking? Are these dramatic? Are these a big deal in the way that both people at the extreme right of Ratna and at the extreme left of Ratna say that they are?
I think the answer is no. The answer—well—
MS. : Different time periods.
MR. KRAAY: Well, (?) is reminding me they're different time periods, but the more important thing is how big an increase or a decrease is a three-Gini-point increase?
If you read Branko's paper carefully, he reports in a footnote that doesn't get a great deal of attention standard errors associated with the levels of the Ginis in the two years. The standard error for the Gini in 1988, which is the first year he looks at, is three Gini points. The standard error in 1993 is 2.7 Gini points. Is a 2.7 or 3 percent Gini increase or decrease a big deal? The answer is unquestionably no, and all the more so when one starts thinking about the technical details of Gini coefficients the fact that they have unbounded influence on statistics, which makes them very sensitive and so on.
The second thing that I wanted to point out is the extent to which the differences—and here Surjit makes a very strong point that the differences in the trends in inequality that people see are driven by differences in methodology. Surjit correctly points out that there's a big difference between household survey means and national accounts means.
Now, there's two things on this that are important. First of all, simply looking at what the levels of household surveys tell you is probably not that informative. Surjit gave, treated us to one of his favorite sound bites comparing levels of income comparisons you get from household surveys.
I think that misses the point. If we care about what is going on in global inequality, what matters crucially is what is happening to mean incomes in two big countries—China and India. India I know nothing about, so I'm not going to say anything about India.
China, the interesting thing is that there's surprisingly little difference in how household survey means and national accounts behave. Over the last 20 years, from 1980 to 2000, in nominal local currency terms, there's absolutely no difference in the growth rate of the household survey and the growth rate of national income in local currency terms. All of the ostensible differences that show up is simply from the fact that different users of this data apply different deflators. National income, you deflate using the national income deflator, which grew at a couple of—at about 1.5 percent per year over 20 years, slower than the Consumer Price Index, which is commonly used to deflate income from the household survey. When you combine this difference of 1 to 2 percent over 20 years, you get a difference between a four-fold and a three-fold increase in real per capita incomes.
The reason why I raise this example is because if you listen to a lot of the discussion between Surjit, Martin, and others, you'd think that, you know, there are really deep conceptual or fundamental issues that we need to think about. You know, are household surveys conceptually measuring something very different? Should we think about these concepts? Is that why we're coming to different conclusions about global inequality?
And I would say that the example from China says that, well, maybe not such a big deal. Remember, in current local currency units, the household survey in China and national accounts tell us exactly the same thing. Rather, the difference is thinking about what the right trends in deflators are in China, and anyone who has worked on China knows that this is a very messy question. There's a lot of interesting issues. But it doesn't have to do with deep conceptual differences between national accounts and household surveys.
And I'm supposed to direct that at someone, so it's for everybody.
MS. SAHAY: Do any of you want to respond to that?
MR. BHALLA: Just very briefly on the survey versus national accounts, I'm glad Art has emphasized it. That is, if you will, the key thing.
In China, as you well know, most likely the reason the survey and national accounts match is because one is used to estimate the other. In other countries, it's not. And what is most interesting is that this decline in the survey capture as to how much surveys are capturing of the national accounts, it is not only happening in developing countries with all kinds of perhaps old systems. It's happening right here in the U.S.
For example, over the last 20 years, the difference is about twice. That is to say, mean income as measured by surveys in the U.S. over the last 20 years is 30 percent; mean income as measured—personal disposable income per capita over the last 20 years is about 56 percent.
What that means is the following: that according—if you use the survey method, and what is most interesting is that the survey method began collapsing precisely at the time Martin started using it or the World Bank started using it. What it means is that between '87 and '99—and you can take out China, and it will still apply to the rest of the world in big time. That what happens is that the poor's income has to grow by about 20 percent in order for the surveys to determine that incomes did not grow at all. So you're missing out 20 percent, which is the approximate number, in the last 20 years on pure basis of using the surveys exclusively.
What I do is adjust the surveys for various things, which we can discuss, but I think it is incorrect to state that it is just a straightforward difference of deflators or whatever. The conceptual difference is this: Do you take as an indicator of how much growth that took place, whether in the U.S. or in the developing world, the surveys or the national accounts of the mean? Nothing I'm saying is about distribution. We can then come to the distribution. Just on the mean, how much growth took place?
Do you believe that over the last ten years mean incomes in the U.S. only went up by about 10 or 15 percent? If you believe that, you should believe the surveys.
MS. SAHAY: John?
MR. CAVANAGH: You go first.
MR. RAVALLION: Just on the same issue, surveys versus national accounts, I looked at the numbers in Surjit's book on the ratio of the two, and I really have a hard time reconciling our database, and I figured out why in the end. Surjit basically—there's a whole lot of issues here. We know there's enormous heterogeneity in surveys, and we have to—we look very carefully at surveys, and we actually exclude many surveys. I figure Surjit has used 2,500 surveys. That's what you normally quoted.
MR. BHALLA: Nine hundred.
MR. RAVALLION: No, it's—
MR. BHALLA: Of the original, 2,500; 900 we chose after they passed several tests.
MR. RAVALLION: Right. Well, that's about three times the number we use on quality grounds.
Now, as soon as you open the floodgates on surveys this way, you're going to get a deterioration. No question. We find on our database—I have a paper coming out in the Review of Economic Statistics on just this question. But we find in our database that consumption surveys deliver a mean which is about 95 percent of the private consumption component of national accounts. I'm surprised by that. I thought the difference would be larger. I think it should be larger because they're not measuring the same thing.
Income surveys don't do nearly as well. Income surveys are a real problem. They give about 75 percent. But, equally well, that's actually not the point here. The issue is not estimating the mean. We are not trying to estimate the mean. We're trying to estimate a poverty measure.
When you focus on the poverty measure, the issue—there's no reason whatsoever—no reason why you need to correct the mean, the survey mean, unless you believe that the distribution is right from the survey. How can you believe that the mean is so wrong but the distribution is right? It just doesn't make much sense and flies right in the face of everything we do know about underreporting in surveys.
I don't think—I think surveys do underreport. We underestimate the mean from surveys. I am quite confident of that, particularly income surveys. I don't think anything like that difference with the national accounts is attributable to that because I think also there are problems in national accounts.
But even so, that's not the thing we're trying to measure. We're trying to measure poverty. There's no reason why using an incorrect mean in the poverty—for measuring poverty within an incorrect distribution won't give you the right poverty measure. It's simply a mistake conceptually to focus on the mean here. It's estimating the poverty measure you're trying to do.
Now, that said, we think that we have a lot of work going on to try to understand the kind of biases that arise in compliance, survey compliance and underreporting, how they affect poverty measures. The country we're starting off with here is the United States. We're trying to actually figure out how much compliance bias is influencing poverty measures in the United States.
We find there is a strong—or our evidence suggests, and it's tricky. But we're pretty sure there's a strong compliance income effect. Rich people do not comply with surveys. There are opportunity costs to their time. Both people are working. You can't get them to answer, to participate in the survey. We think it's quite strong. There's a strong income effect.
Equally well, we think—and the evidence is not surprisingly not so clear in the United States. We think in other circumstances that it's very hard to get very poor people to participate in surveys. Compliance for the very poor is a serious problem. It's very hard to do. Household surveys are very, very poor for catching the incomes of the homeless. In fact, it's a non-starter. People who try to measure the incomes of the destitute I don't think should use conventional household surveys, the same way that people who try to measure incomes of the rich do not generally use conventional household surveys.
MR. CAVANAGH: Sure, let me just take a crack at this by referring back to a point that Rick Rowden made earlier. He referred to this recent study by Branko Milanovic of the World Bank, which concluded looking at household income surveys in 88 countries that—an interesting thing. He concluded that trade and investment liberalization policies promote income inequality only—no, promote income equality among middle-income and rich countries, but among poor countries, those with per capita incomes of less than $5,000 a year, it increases inequality.
Clearly, Surjit doesn't think this work is very interesting, but if it is interesting, that's a very strong condemnation of the policies.
And that gets me back to another point. Sure, if you were sitting here and knew nothing about any of this and heard these three sets of figures—one showing inequality increasing, one quite nuanced and showing different things, and one showing it decreasing—what would you conclude? And I think the more interesting question—I think everyone here in this room would agree that there is stunning and morally unacceptable inequality in Brazil, in Nigeria, and in many parts of the world, and that it is wrong and bad for economic reasons but also for reasons that get at the core of what democracy is.
And, therefore, the key question for us—yes, the debate about numbers is interesting, but the key question is: What policies promote growth? Good growth, I would say. And, by the way, the big distinction I would make was I think the overall approach of the Bank and Fund is I would certainly not look at growth in an undifferentiated way, especially with the information we now have about climate change. We now need to rethink our whole approach to growth with a very green lens. So we want good growth. We want green growth. But what policies promote that and what policies promote the reduction in inequality? And our basic conclusion is in neither case is it the liberalizing policies of the so-called Washington Consensus. That ought to be the central issue of debate, I think.
[Inaudible comment/question off microphone.]
MR. RAVALLION: Thanks for that question. I hate it when people say they haven't read my papers, and then they—
MR. RAVALLION: —blasting me. I hate it when people say they haven't read my papers, full stop, let alone when they criticize me.
I think, you know, your characterization of IMF policy, I'd say IMF policy is wrong from that point of view. I actually think you've mischaracterized it. But if you think about it is as—you're thinking about it as, you know, policies that are good for growth, growth is good for poverty reduction, all we need is policies good for growth. You know, that's just—that's not correct. I mean, you've got a whole lot of other things that are influencing poverty besides growth. And if those policies are influencing those things, then you're wrong. So if that's the policy position, you've got it wrong.
I think you've oversimplified it, though. I think we have to look at policies quite broadly. We've known this for a long time. We have to look at how policy affects the levels of distribution of living standards in a country, and we might have some social welfare function defined on that. Poverty is one simple kind of way of thinking about it, but in a way it's far too simple. But let's think about it as poverty. We want to know how to—the policies we pursue, how do they influence poverty?
If you just tell me the impact on growth, I can't tell you the impact on poverty because I have to know the distribution. And that's really what we're talking about here.
I think this links up—you know, Ratna's question I think was a good one. Why has the debate shifted so much to inequality? That's a good question. I think I'd basically address that that I think it's really understanding—I don't see inequality as in any way having any primacy over poverty. I think we're interested in inequality because we're interested in poverty reduction and only that. I don't see it as a sort of separate thing that stands on its own.
Other people, again, readily entertain a debate about that. I think the position I'm taking others would disagree with, and I sympathize in some ways. But that's my position. I say poverty is the objective. I don't care about growth per se. I care about poverty reduction. I don't care about inequality per se. I care about poverty reduction. And that's, if you like, my personal social welfare function.
Why do I care about inequality? Specifically, I care about what rising inequality could mean, may mean, may not mean, that the poverty reduction is stagnating. It's entirely possible. I don't think China could have achieved its rate of poverty reduction without rising inequality. So in the case of China, I'd say, yeah, China has done brilliantly in poverty reduction. Actually, record-breaking going back 30 years now, going back to Deng's reforms in 1978. So there's no question on that. I mean, in my view, the inequality rise was worth it. It couldn't avoid it.
I think basically what's happening is a lot of countries like China, the controls on those countries were being used to keep inequality artificially low and inequality is rising and it's good for poverty reduction.
There are other countries where the controls on the economy, the neoliberal regime and so on, was use to keep inequality artificially high, and inequality is starting—I wouldn't be too confident about this, but starting to fall in a lot of those countries. And so we'll see a kind of inequality convergence associated with policy convergence.
This is a long answer, but I think the bottom line is don't think about it as exactly the way you think about it. Think about it as how do we improve the distribution of living standards, the levels of distribution of living standards, not relative, relativity, levels, and start from that position, and then think about policy.
MS. SAHAY: Thank you, Martin.
MR. BHALLA: Since everybody is offering advice, let me also. I think I just want to point out—come back again to getting the facts right.
If one uses exactly Martin's data which is posted on the website and wants to identify whether growth has been pro-poor or not—so before we get into it, that's what we should concern ourselves with. Why don't we find out what has happened to the incomes of the poor versus the incomes of the non-poor over the last 20 years? And the poor that I take is I keep fixed the proportion of the poor as observed in 1980. So, in other words, that fraction which is about 44 percent of the population. So I'm now looking at what happened to the bottom 44 percent aggregate for an individual country, for China it could be the bottom 60 percent, for somebody else it could be the bottom 20 percent, et cetera.
According to Martin's data, the poor's income—consumption, actually—went up by 75 percent. The non-poor's consumption went up by 43 percent. In other words, the elasticity, far from being one for one, was about 1.8 to one. And that is actually, in terms of growth, more or less the same results that I get—actually, I get a lower elasticity than given by his data.
So my plea again, let's find out why this all happened. This is, if you will, fantastic news whether you're concerned about poverty or you're concerned about growth or you're concerned about inequality. Find out why is it that a large mass of people grew faster than at any other period in history and why more people got reduced—not grew faster but more people got removed from poverty than any period in history. As a matter of fact, the standard deviation—and Art was mentioning about Ginis, which I don't want to get into. But the standard deviation of what happened in the last 20 years was more than two times the standard deviation of whatever has happened before from 1820 onwards.
MS. SAHAY: Thanks, Surjit.
Before we proceed, I just want to address one question. I can't resist this. The issue that Martin raised about the IMF getting it wrong in response to Jeromin (ph), I don't blame Martin. I just want to distance myself from Jeromin. In some sense, I don't blame Jeromin, too. He works on emerging markets. But what is indeed true in this institution, let me just say that the policies that we are designing for the low-income countries very much take into account the impact on the poor, and even in emerging markets, when there are crises, very carefully the economists, especially the fiscal affairs economists, design social safety nets during that crisis. I just wanted to say that for the record.
MR. BHALLA: And so that the IMF doesn't go out of existence.
MS. SAHAY: No comments on that.
MR. : My name is Masood Kavusi (ph) with Howard University here in Washington. I had a question regarding globalization. I wonder if the panel can offer us a conceptually consistent definition of what is globalization, not necessarily from an economic point of view but, rather, in a very general integrated view on globalization. And on a follow-up, I'd like to perhaps—maybe we're looking or chasing around causology, if that's the situation that we're involved in; in other words, globalization or correlation of globalization and inequality or globalization and poverty. What about the perhaps weak or unequal distribution of civil society across the board, which is more fundamental and is less measurable economically that can cause and create and contribute to prolonged poverty and inequality rather than simply purely from an economic point of view?
MS. SAHAY: Let me take a couple more questions, and then, you know, at the end the speakers, when they're summing up, can discuss that point.
MR. : I noticed all the speakers talked about inequality assuming the word "money income," that that was the only inequality that was discussed in the panel. Martin talked a few minutes ago about how bad the numbers are on money income, particularly from household surveys. We have serious methodological problems.
Well, I would ask: Are there not other measures of well-being, of standards of living of poor people in poor countries that we can look at? And, frankly, looking at those other numbers, infant mortality rates, primary school enrollments, the evidence is absolutely clear that inequality in that regard has diminished dramatically. The access of poor people to health, to the health conditions that only rich people had a few decades ago has improved dramatically. Access to literacy, the inequality there is much lower than it was two or three or four decades ago. And looking at also agricultural or food intake levels, it appears from the FAO data that there has been a dramatic increase in average intakes of food by poor people or by people in poor countries, and that the distribution—that the world inequality of consumption has improved substantially. So I would ask the panel to address this question of whether or not we ought to be concerned only about money income in looking at inequality or whether broader measures are appropriate.
MR. : I think it's much better if the debate can be—
MS. SAHAY: Please identify yourself.
MR. : I'm Peter Balford (ph). I think it's much better for the debate if you can focus less on the numbers they can throw at each other and the methodology, because all of this, it seems to me, is a lot of propaganda from each side. But I'm not siding with any side. I just wonder if it may be more constructive and be more honest in revealing simply the ideological presumptions that each of you might have in relation to some specific economic issues, especially on the question, as the speaker at the beginning introduced it, the relationship between efficiency and equity and the potential tradeoff between them.
A lot of economists have been arguing for hundreds of years about these kinds of questions, including the very question about poverty reduction. And if you can be a bit more honest and blunt about your ideology that you are assuming, especially on the very issues of social institutions, number one; number two, on cultural (?) ; and, number three, on the economic principles that you endorse or condemn; and, finally, on the very question of human psychology and rationality, which are fundamental to understand all these issues about efficiency and equity. And then, actually, you have the honest conversation with each other on this, in other words, the ideology and the group that you are working for, and try to come up with some policy recommendations which can bridge the differences between the different ideologies and groups that each of you is fighting for. That is so much better for all of us to listen to.
Thank you very much.
MS. SAHAY: Okay. Last question.
MS. PULASKI: I'm Sandra Polaski from the Carnegie Endowment for International Peace. The conversation to some degree by the moderator as it was framed and by each of the panelists, certainly by much of the audience, keeps going between the level of does this data show that globalization is good or is globalization bad. Then it goes down to the level of methodology and the objections that everyone has to each other's methodology.
But I would argue that if you step back from this, everyone on the panel should be able to stipulate that there has been one big success story in terms of growth, in terms of poverty reduction, and not a terrible story in terms of inequality, and that was China. And if you look at the patterns, the only clear extreme that you see is a positive story with China.
Now, if you want to draw conclusions about policy, about globalization, and you're looking at China, I think it was Martin who mentioned that over 20 years it's had unprecedented growth rates and the poverty reduction has been a precedent, et cetera.
Over those 20 years, what is the policy story in China? The policy story in China is, yes, there was incredible liberalization compared to what existed before 1980, but if you compare the policies of China from 1980 until 2000 to the existing, if you want to call it, Washington Consensus or the typical policy prescriptions, it is radically, radically different. You had severe, strict capital controls beginning in 1980, maintained throughout the period, and still maintained at a much higher level than any country which is borrowing from the IMF would be allowed to maintain in terms of capital controls.
You had extremely slow privatization. Again, you're starting from no privatization, going toward privatization, much has been privatized, but in China much has not been privatized compared to the policy prescriptions that any other country which is trying to develop an end policy is facing.
You had significant restrictions on imports. China was a globalizer in a one-way direction. China globalized by hooking itself to the international economy, was extremely successful at doing that, and did it in a lot of ways that a lot of other countries would like to imitate, but maintained severe restrictions on imports throughout that time.
The atmosphere of protections for investors in China was very poor compared to the policies that are being advocated to countries now trying to develop.
The one thing that China did have that I think is consistent with the policy certainly of the World Bank and with at least what all of us are preaching was high initial levels of education and high levels of investment in education.
But if you look at all of the basic economic policies, the policies that China had throughout the period of high growth, and to a very great extent still maintains today, are exactly the opposite. So if you want to draw conclusions about globalization based on the one success story, then you have to draw some very different conclusions because the policies, in fact, were quite different and very often opposite of the ones which are being advocated.
I'd like to hear any of the panelists comment on that.
MS. SAHAY: Thank you.
Before I hand over the microphone to the panelists, I'd like to ask one question of John. John said that he does not like the IMF-World Bank policies, particularly the IMF, I guess, that the Washington Consensus, which I will take to mean market-oriented policies have failed. So I would like to know what alternatives is he suggesting. Is he suggesting that the countries close their economy, that they impose controls? What is the alternative policy that he has in mind?
In conclusion, I would like to go in reverse order, so I'll give our severest critic the last word. Surjit, could you go first, please? Three minutes.
MR. BHALLA: Let me start off in reverse order from the last question, last comment actually, which obviously evoked a lot of positive response from the audience, more than I thought it would.
You know, when you say it's just a China story, again, I hate to say it, it's just plain wrong, and that's what I've been trying to say for so long. Let's get our facts right.
If you look at India, that's 3.5 percent growth rate for 20 years. That is doubling in every 24 years. If you don't consider that a success story, I don't know what you consider a success story.
There's Vietnam growing at 5 percent a year. There's Indonesia that has grown at 4 percent a year. There's Bangladesh, there's Sri Lanka, there's Thailand, there's Chile, there's Mexico. So let us at least get our facts right before we just say—you know, it's been a very interesting—there was a comment raised about ideology. The motivation of this book, actually, was—not the motivation. The foundation of this book was a seminar that I gave over here two years ago, in June of 2000, which was called "Trends in World Poverty: Ideology and Research." So I completely agree with you that ideology is very, very important, and we should understand it, and I think we should understand ideology wherever it comes from, not necessarily from the speakers.
So the first thing is—and it's a very interesting change that I've observed over the last two years. First, if was there was no growth, then development really hadn't worked. Then it became—actually became a China and India story, and you've reverted back to just the China story. And it goes on and on. So we're making progress. Previously we thought nothing had happened, and now we suddenly think that at least in China.
You know, one other thing that I want to point out on the China debate is—or in the India debate, for that matter—you know, I thought somebody would bring up we're concerned with countries. I mean, my book is titled "Imagine There Is No Country," and there is a particular reason for that, and that is—other than I like the John Lennon song—that is how we, particularly those of us in—I was in the international organization of the World Bank a long time ago, but that's the way to look at the word. You know, we don't differentiate and should not differentiate on the basis of nationality, on the basis of color, on the basis of sex, on the basis of age, et cetera. We're concerned about people. And it takes—and if you were to take a country approach, it takes one hundred and—if you order all the countries according to their population, the lowest population first and go up, it takes 173 countries to get to 1 billion people.
So, in India, then, we can look at what has happened to the different states if we wanted to diversify into what has happened. So I think, you know, let us really find out what has worked, that's worked a lot in a lot of different countries, even according to the traditional definition.
Two quick points, one on the standards of living. I think it's an excellent point, often ignored. I do discuss it in a book that's called "Global Truths," and there's absolutely no question that inequality, according to a wide range of indicators, has improved.
I also point out in the book that inequality today, world inequality, is higher than that observed in any individual country. So by no means should we say that, listen, everyone is fine, but we should find out if we can indeed influence inequality. And I think my own perspective, if you want to phrase it in an ideological view, is that I think the study of inequality, especially since there's very little correlation between inequality and growth, is that it's the economics of envy, and it's one study that I don't want to do.
I want to end with—somebody had mentioned as to what is globalization, and, you know, this will prevent you from buying the book, but just a very, very quick quote on globalization, on its definition: "The exploitation of the world market has given a cosmopolitan character to production and consumption in every country, and as all established national industries have been destroyed or are daily being destroyed, they're dislodged by new industries whose introduction becomes a life and death question for all civilized nations. In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal interdependence of nations. And as in material, so also in intellectual production, the intellectual creations of individual nations become common property. National onesidedness and narrowmindedness become more and more impossible."
Now, it is in my book. I wish I'd written it. But it was actually written by Karl Marx and Engels in 1848.
MS. SAHAY: Thank you, Surjit.
MR. RAVALLION: Okay. I'm not going to answer everything, but the question about China, actually, I understood the question differently. I understood your point is that China is—you're not saying China's the whole story. You're saying China is not a globalization story. Correct?
MS. POLASKI: It's not the globalization story, I would argue, that the IMF would tell.
MR. RAVALLION: Yes. And, actually, I'm quite sympathetic. I think it's much more than a globalization story. I look at the economic history of China from the point of view of poor people, you know, the number one driving force in that huge poverty reduction was the household responsibility system, liberalization in agriculture was hugely important, being essentially a closed economy. The Bank was saying in the 1980s, bemoaning how little liberalization there had been on the external side. It was really domestically driven.
There's much more to it. I mean, China's had, for example, a huge reduction in poverty in the period 1993 to 1996, which I think largely came out of letting agricultural prices rise to market prices, which were being held down considerably in that period. So there's a lot more to it. I'm broadly in agreement.
On India, Surjit challenged me about the Indian numbers. Well, I don't think he's right, and I'm not the only one. I've written about this. We've also been looking very carefully at the comparison of the 1993-94 data with 1999-2000, which is a very difficult comparison to make, and we've done a lot of work on it. And also I'm talking about work by Sundram (ph) and (?) , Delhi School of Economics, and most recently by Jean Dreis (ph) and Angus Deaton (ph) in a recent paper in the Economic Political Weekly. They're all basically saying the same thing, that inequality is rising in India, inequality in terms of consumptions.
On that point, the measurement issue, money income only, two points. One of the definitions of a good quality survey that I'm using is that it isn't just money income. It isn't just cash income, if that's what you mean. It also must include—ideally, it's consumption and it's certainly must include imputed advice or consumption or income from our own production. In general, it should include imputed advice or income in kind. First point.
That relates to another issue. Surjit said that we just started doing it, measuring poverty this way just when the survey started to collapse. I'd actually argue we started just at the turning point of vast survey improvement in the world, although I'm critical of surveys and I'm pointing to the measurement areas and you have to, as any researcher using survey data, measurement issues and how you deal with it is key, measurement problems. But, nonetheless, I mean, survey—the quality of surveys has improved enormously in the last 15 years, and this is one of the respects in which it has.
And, thirdly, still on that same point, we always ask ourselves what's missing from a consumption—a good consumption aggregate which you're using to measure household living standards, what's missing from that? And I think there are important things that are missing. It doesn't tell you anything about intra-household distribution. It often doesn't tell you anything about access to public services, access to non-market goods. There are a lot of important things that are left out, and there we have to focus on—that's the key places to think about non-income dimensions of welfare. So, in a way, I'm sympathetic, but let's get it clear. What is consumption, what is consumption income measuring these days, and what is it not measuring, and look at those things.
Finally, I think a point that hasn't come up much at all but is another reason why the "growth is sufficient" story makes me so uncomfortable, that every time we look—another kind of data we're increasingly using is panel data where we look at the same households over time, longitudinal observations of the same households. And, increasingly, we're looking at that type of data in developing country settings and in transition country settings. And one of the things we're seeing is enormous churning. There are gainers and losers at all levels of living, and some of that is measurement error, we know, but a lot of it isn't measurement error. It's got systematic correlates, for example.
We know there's a lot going under the surface. When you say that the aggregate poverty rate has not changed in an economy, that's perfectly consistent with large numbers of losers amongst the poor, but large numbers of gainers amongst the poor, and we have to keep that in mind. It also speaks to the kind of debate on globalization where increasingly some critics of globalization will point to the losers amongst the poor, Surjit will point to the aggregate impact, others will point to the gainers amongst the poor. It's a little bit like ships passing in the night. There are losers amongst the poor, and we can't ignore that fact. It contains important implications for poverty even when poverty is falling, and in the aggregate that should be, I think, an important target. And that also contains implications for social protection policies, which I think can be very—well-designed social protection policies which can be quite synergistic with longer-term poverty reduction.
MS. SAHAY: Thank you, Martin.
And, finally, John?
MR. CAVANAGH: Yes, thank you very much. And I know our time is short, so I'll be brief. I was going to just make three points.
One was to mention a country that nobody mentioned but which is central to the debate around globalization in this country, and that is Mexico. Mexico pursued, perhaps more aggressively than any other country in this hemisphere, the market-liberalizing, trade- and investment-liberalizing policies, accelerated under the North American Free Trade Agreement. It got a lot of trade. It got a lot of investment. It grew faster. And both poverty and inequality have risen in that country. And so it becomes a kind of poster child now for our side on why those policies don't make sense and why the expansion of NAFTA into a Free Trade Area of the Americas doesn't make sense.
Second, on the issue of just measuring poverty by income, I would say, again, a lot of the stories from our side that have people upset about economic globalization are stories that capture a level of despair that have nothing to do with income. So if you take the example, say, of a peasant in Chiapas who's been displaced from the land because of the market policies, and he leaves or she leaves and goes to work in a maquiladora, their income has gone up. They've gone out of poverty. And yet their social fabric has been destroyed. Their worker rights are destroyed. They are not living in dignity, and it's, I think—a very important part of our critique is that the dislocations that have gone with globalization, some even that lead to an increase in income and make someone look good on the figures that you've all heard, don't necessarily lead to better lives. And I think an awful lot more work needs to go on that.
Then, finally, on this issue of China and what we'd be for, I guess I think Sandra's point is really a critical point here. If it is the case—and I hear the point that it's not just China and India, that there are a few other countries. But if the overwhelming reason why the numbers of people in poverty have fallen from either 28 to 23 percent or 29 to 13 percent, depending on who you believe, is because of China and India, then it's critical that we understand those stories. And I think Sandra's points were so central here. It's also true of India.
Neither of them are examples of free trade, free market economies. They are examples of countries that are experimenting with a wide range of different policies, and I don't want to fully endorse either country. Both are environmental nightmares, and I think the rising inequality in China is an important problem.
So, final thing, what would we do differently? The reason I ended at the beginning with Brazil is I do think a place that, yes, there will still be markets in Brazil, big time, but there will be a government that is trying to impose other values—environmental, social, democracy, equality—on that market. And we've already seen it locally in experiments like the participatory budgets, in the green city of Curitiba where, again, incentives are set by government to create a green outcome in a city. And I think that's—it's not that our side is against markets. It's not that we're against trade. It's not that we're against investment. It's that we're for setting rules and institutions so that a different set of values are made primary.
MS. SAHAY: Thank you very much, John. I cannot resist saying—and I think you said it at the end, which is something I guess we would all agree on China and India—that both these countries indeed were moving towards free trade and towards more market-oriented policies. We can dispute the speed with which one should be doing these things. And also just one last point, on the book that you wrote recently, I was trying to find a common ground for all of us, from all sides, and I did find one, and that was on fairer trade for all. And I think everybody agrees on that.
So thank you all for coming and participating.
[Whereupon, the meeting was adjourned.]