IMF Survey: Technology Widening Rich-Poor Gap
IMF News, October 10, 2007
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- Authors: Florence Jaumotte
- Published: October 10, 2007
Globalization, trade, and financial integration — context and key statistics
- World trade has grown fivefold since 1980, and its share of world output has risen from 36 percent to 55 percent.
- Total cross-border financial assets more than doubled as a share of output between 1990 and 2004, from 58 percent of global GDP to 131 percent.
- Trade integration accelerated in the 1990s as the former communist countries entered the global trading system and developing countries in Asia dismantled trade barriers.
- Advanced economies continue to lead financial integration, but other regions are beginning to catch up.
Regional patterns in inequality and income levels
- Inequality (as measured by the Gini coefficient) has risen over the past two decades in most regions, including: developing Asia, emerging Europe, Latin America, the newly industrialized economies of Asia, and the advanced economies.
- Inequality has declined in sub-Saharan Africa and the Commonwealth of Independent States.
- Per capita incomes have risen across virtually all regions for all segments of the population, including the poorest; in most cases incomes have risen faster for those already better off.
- Exceptions and notable variations:
- In sub-Saharan Africa and the former Soviet Union, incomes of the poorest have risen faster than other population segments.
- In Latin America, incomes of the poorest in some countries were adversely affected by economic crises, although they have since begun to recover.
Four main research findings on drivers of inequality
- Technology is driving force
- Technological progress alone explains most of the increase in the Gini coefficient from the early 1980s.
- New technology increases the premium on skills and substitutes for relatively low-skill inputs.
- Among developing countries, the effect of technological progress is stronger in Asia than in Latin America, possibly reflecting a greater share of technology-intensive manufacturing in Asia.
- Globalization's smaller, mixed role
- Globalization has had a much smaller effect relative to technological change, due to opposing influences of trade and financial globalization.
- Contrary to common belief, trade globalization has helped reduce inequality rather than increase it—particularly through agricultural exports in developing countries where agriculture still employs a large share of the workforce.
- Tariff reductions
- The net impact of tariff reduction played a positive role in reducing income inequalities.
- For advanced economies, rising imports from developing countries are associated with declining income inequality, presumably via substitution of lower-paying, low-end manufacturing jobs with higher-paying service sector jobs such as retailing and consumer finance.
- FDI and financial globalization
- Foreign direct investment (FDI) has had a mainly negative effect on the distribution of income.
- Higher FDI inflows have increased the demand for skilled labor in developing countries.
- Outward FDI in advanced economies has reduced demand for relatively lower-skilled workers in those countries.
- Financial development has contributed to rising inequality because higher income groups have been better able to take advantage of increased opportunities to borrow.
- Because financial globalization expanded more rapidly in advanced economies while trade globalization expanded more rapidly in developing economies, the net contribution of globalization to the increase in the Gini coefficient has been more important in advanced countries; in developing countries technology is the main driving factor, with globalization providing a small counterweight.
Policy considerations and recommendations
- Do not suppress FDI or technological change; instead:
- Make increased access to education an important priority to enable less-skilled and lower-income groups to capitalize on opportunities from technological progress and globalization.
- Broaden access to finance—e.g., by improving institutions that promote pro-poor lending—to help improve income distribution while financial development supports overall growth.
- Support growth in agricultural exports in developing countries, given their positive role in improving income distribution.
- Improve access to markets in advanced countries for agricultural exports from developing countries to support a more equal distribution of income in both developing and advanced economies.
IMF Survey: Technology Widening Rich-Poor Gap — By Florence Jaumotte, Subir Lall, Chris Papageorgiou, and Petia Topalova; IMF Research Department; October 10, 2007