January 18, 2018
Dear Friends and Family,
In the first segment of the series, I was shocked by the magnitude of poverty and income inequality in the world. That left me with the question: How did we get there? This segment will answer that question to some degree.
My Takeaways from the Excerpts:
The Industrial Revolution in the later part of the 19th century and the early part of the 20th century was a major contributor. It spread from England to the European continent and then to some of the “Western Offshoots” – United States, Canada, Australia, and New Zealand – but nowhere else. This resulted in the world economy splitting between an industrial core and a raw material periphery. The industrial core economies grew substantially, and wealth was accumulated, but the rest of the world stood still, particularly those countries colonized by European countries. As new technologies were developed, the industrial core further profited, and the rest didn’t.
After World War II the “rich” Western nations continued to progress. Most colonized countries gained their independence but had neither the skills, knowledge nor political stability to progress economically. A few East Asian countries were successful in joining the industrial core – Japan, South Korea, Taiwan, China, India. So, the income gap between the “rich” vs. “poor” nations continued to widen. Additionally, the individual income gap within most “rich” nations; between the upper 10% and the lower 20-30% continued to widen fueled by differences in education, access to work (agrarian vs. industrial), race, entrepreneurship, and hard work.
In “poor” countries that were rich with natural resources (oil, diamonds, etc.) corruption tended to reign as a few seized power and maintained it through force as they greedily captured the profits from the country’s resources for themselves. Such dictatorial regimes kept the rest of the citizenry poor, so that a group of people has seen little economic improvement for centuries. Poor country’s that had no natural resources for the most part saw little or no improvement as they tried to maintain their agrarian economy with an increasing population. In sum, the evolution of global economic improvement touched a good portion of the world’s population but over 40% have seen little improvement and today live on less than $2/day.
Given the advances in communication (TV, the Internet, mobile phones, etc.) and travel over the past 50 years, the differences in the global community between the Haves and Have Nots is becoming well known. There are three ways we as individuals can enhance our standard of living: (1) obtain higher skills and/or via hard work, (2) hope our country does well economically and piggyback on that gain, or (3) move to a country that has a higher standard of living then where we reside. If we lived in a poor country as one of the 40%, and desperately wanted to enhance our standard of living, the most probable way to achieve that is via (3). Hence, migration in the world is going to become an increasingly difficult problem.
I am exceeding fortunate and grateful to live in the United States.
Happy Learning,
Harley
Dear Friends and Family,
In the first segment of the series, I was shocked by the magnitude of poverty and income inequality in the world. That left me with the question: How did we get there? This segment will answer that question to some degree.
My Takeaways from the Excerpts:
The Industrial Revolution in the later part of the 19th century and the early part of the 20th century was a major contributor. It spread from England to the European continent and then to some of the “Western Offshoots” – United States, Canada, Australia, and New Zealand – but nowhere else. This resulted in the world economy splitting between an industrial core and a raw material periphery. The industrial core economies grew substantially, and wealth was accumulated, but the rest of the world stood still, particularly those countries colonized by European countries. As new technologies were developed, the industrial core further profited, and the rest didn’t.
After World War II the “rich” Western nations continued to progress. Most colonized countries gained their independence but had neither the skills, knowledge nor political stability to progress economically. A few East Asian countries were successful in joining the industrial core – Japan, South Korea, Taiwan, China, India. So, the income gap between the “rich” vs. “poor” nations continued to widen. Additionally, the individual income gap within most “rich” nations; between the upper 10% and the lower 20-30% continued to widen fueled by differences in education, access to work (agrarian vs. industrial), race, entrepreneurship, and hard work.
In “poor” countries that were rich with natural resources (oil, diamonds, etc.) corruption tended to reign as a few seized power and maintained it through force as they greedily captured the profits from the country’s resources for themselves. Such dictatorial regimes kept the rest of the citizenry poor, so that a group of people has seen little economic improvement for centuries. Poor country’s that had no natural resources for the most part saw little or no improvement as they tried to maintain their agrarian economy with an increasing population. In sum, the evolution of global economic improvement touched a good portion of the world’s population but over 40% have seen little improvement and today live on less than $2/day.
Given the advances in communication (TV, the Internet, mobile phones, etc.) and travel over the past 50 years, the differences in the global community between the Haves and Have Nots is becoming well known. There are three ways we as individuals can enhance our standard of living: (1) obtain higher skills and/or via hard work, (2) hope our country does well economically and piggyback on that gain, or (3) move to a country that has a higher standard of living then where we reside. If we lived in a poor country as one of the 40%, and desperately wanted to enhance our standard of living, the most probable way to achieve that is via (3). Hence, migration in the world is going to become an increasingly difficult problem.
I am exceeding fortunate and grateful to live in the United States.
Happy Learning,
Harley
GLOBALIZATION – SEGMENT 2
GLOBAL INCOME INEQUALITY -- EXCERPTS
HISTORY: The Industrial Revolution spread from England to the European Continent and to some of the lands of recent settlement (North America, Australia, and New Zealand), but did not go much further. The world economy soon split between an increasingly industrial core and a largely raw material – producing periphery. Those parts of the world which proved receptive to the forces of the Industrial Revolution shared two advantages. They had a large enough stock of relatively educated and skilled workers that could fill up and run the new factories. They also had sufficiently good institutions – well functioning legal systems, stable politics, and restraints on expropriations by the state – to generate incentives for private investment and market expansion. With these pre-conditions, much of Continental Europe was ready to absorb the new production techniques developed and applied in Britain. Chalk up one for globalization. Elsewhere industrialization depended on "importing" skills and institutions. Intercontinental labor mobility was a tremendous advantage here. Where Europeans settled in masse, they brought with them both the skills and the drive for more representative, market-friendly institutions that would promote economic activity alongside their interests. The consequences were disastrous for the native populations, who perished in large numbers of countries of European aggression and germs. But the regions of the world that the economic historian Angus Maddison has called "Western offshoots" -- the United States, Canada, Australia, and New Zealand – were able to acquire the necessary prerequisites thanks to large immigrations. Supported also by sizable capital flows from Europe, these economies would eventually become part of the industrial "core." Chalk up two for globalization.
Colonization's impact on the other parts of the world was quite different. When Europeans encountered inhospitable conditions that precluded their settlement in large numbers or began to exploit natural resources that required armies of manual workers, they set up institutions that were quite different from those in the Western offshoots. They entailed vast inequalities in wealth and power, with a narrow elite, typically white and European, dominating a vast number of natives or slaves. Colonies built on the extractive model did little to protect general property rights, support market development, or stimulate other kinds of economic activity. Studies by economists and economic historians have established that this early experience with institutional development – or lack thereof – has produced a debilitating effect on economies in Africa and Latin America that is still felt today. Chalk up one against globalization. Once the lines were clearly drawn between industrializing and commodity-producing countries, there were strong economic dynamics that reinforced the demarcation. The countries of the periphery not only failed to industrialize they actually lost whatever industry they had. They deindustrialized. The cause of de-industrialization in the Third World lay in the massive influx of European manufactured goods, especially textiles, on the markets of those countries. Chalk up two against globalization.
Source: The Globalization Paradox by Dani Rodrick (2011)
Whatever the causes of the Industrial Revolution, we know what its consequences are: first, higher incomes, and second, an inequality transition from within a nation to between nation income inequality. Because industrialization took root first in richer nations, the spread of industrialization historically has boosted inequality across nations.
Source: Global Income Inequality by Glenn Firebaugh (2003)
INCOME INEQUALITY IN THE WORLD TODAY: There are three types of inequality. Inequality among individuals within a single community – typically a nation. This is the type of inequality that most of us will easily recognized because it is the type of inequality that we are likely to think of first when we hear the word inequality. The second type is inequality in income among nations – which is also intuitively close to most of us because it is the sort of thing we notice when we travel, or when we watch the international news. In some countries most people appear poor to us, while in others most people seem very affluent. Global inequality is inequality among all citizens of the world. This third inequality is the sum of the previous two inequalities: that of individuals within nations and among nations. It is a new topic because only with globalization have we become used to contrasting and comparing our own fortunes with the fortunes of individual people around the globe. Yet, it is probably a type of inequality whose importance will, as the process of globalization unfolds, increase the most.
The world is a very unequal place, but that is also unequal in a very particular way, that today most of its inequality stems from very different average incomes among countries. One's income thus crucially depends on citizenship, which in turn means place of birth. All people born in rich countries receive a location premium or location rent; all those born in poor countries get a location penalty. Levels of income in different countries are vastly different, and they are the main factor that explains global inequality. A large part of a person's income in the world comes from only two factors, both of which are given at birth: his citizenship and the income class of his parents. These two factors explain more than 80% of a person's income. The remaining 20% or less is therefore due to other factors over which individuals have no control (gender, age, race, luck) and to the factors over which they do have control (effort and hard work). Thus, one's own efforts, one's country doing well, and migration are three ways in which people can improve their global income position. The role a person's effort plays is small, he cannot influence his country's growth, so the only alternative is migration.
Source: The Haves and the Have Nots by Branko Milanovic (2011)
The proximate cause of poverty is low productivity. Poor people are poor because their labor enables them to produce too little to adequately feed and house themselves, let alone provide for other needs such as health and education. Low productivity, in turn, has diverse and multiple causes. It may be the result of lack of credit, which prevents producers from making the investment that would increase their output and hence incomes. It may be the result of lack of access to new and better technologies. It may be due to lack of skills, knowledge, or job opportunities. It may be the consequence of small market size, which depresses the profitability of acquiring new equipment and technologies. Or it may be due to exploitative elites, typically in cahoots with the government, who block any improvement in economic conditions that would threaten their power. The ultimate reasons for poverty can be traced to one or more of these causes.
Source: The Globalization Paradox by Dani Rodrik (2011)
The average household in poor nations is more than twice as large as the average household in rich nations, so poor nations enjoy an economy of scale effect due to the collective use of resources at the household level. Second, children constitute a higher percentage of the population in poor nations, so poor nations require less food per capita than do rich nations. The poor in the West often own television sets and cars and most often live in dwellings with wood floors and indoor plumbing, while the poor in poor nations are more likely to have only transistor radios and bicycles and to live in dwellings with dirt floors and no plumbing. Moreover, adults and children in poor nations tend to eat less food, and cheaper foods, than do the poor in the West. Source: Global Income Inequality by Glenn Firebaugh (2003)
MEANS TO REDUCE INCOME INEQUALITY: Manufacturing: Until recently, most of the world's people were engaged in agriculture. So, the world's workforce is barely post agricultural. The primary engine driving the growth in world production is manufacturing. Industrialization was important in the nineteenth century, it was important in the twentieth century, and it remains important in most regions of the world in the twenty-first century.
Education: If one’s ability to get a good education strongly depends on one’s parents’ wealth, this is equivalent to depriving society of the skills and knowledge of a large segment of its members (the poor). Discrimination according to inherited income is not, in that sense, different from any other discrimination, such as gender or race. In all cases, society decides that the skills of a certain group of people will not be used. Economically, such societies are unlikely to be successful.
Technology: Technology is all-important for economic development and is exchanged more easily when borders are open. The primary beneficiaries of technological transfers are also poor countries. They have to pay little or nothing in order to imitate the technology invented in the rich world. While the developed countries have to invest a lot to make technological break throughs and create inventions, it is relatively easy for poor countries to benefit from these inventions by coping them.
Source: The Haves and the Have Nots by Branko Milanovic (2011)
POOR NATIONS THAT ARE RESOURCE RICH: It is no accident that so many resource-rich countries are far from democratic. The riches breed bad governance. Governments that come into power by grabbing resources and using force have a markedly different sense of responsibility toward their citizens and their country’s resources than from governments that emerge through the will of the people. In democracies a leader stays in power by enhancing the well-being of the citizenry. In undemocratic resource-rich countries, dictators use strength and weapons to remain in power. The political dynamics of resource-rich countries often lead to high levels of inequality. Source Making Globalization Work by Joseph E. Stiglitz. (2007)
The unabbreviated version of the above can be found in the pdf document below.
GLOBAL INCOME INEQUALITY -- EXCERPTS
HISTORY: The Industrial Revolution spread from England to the European Continent and to some of the lands of recent settlement (North America, Australia, and New Zealand), but did not go much further. The world economy soon split between an increasingly industrial core and a largely raw material – producing periphery. Those parts of the world which proved receptive to the forces of the Industrial Revolution shared two advantages. They had a large enough stock of relatively educated and skilled workers that could fill up and run the new factories. They also had sufficiently good institutions – well functioning legal systems, stable politics, and restraints on expropriations by the state – to generate incentives for private investment and market expansion. With these pre-conditions, much of Continental Europe was ready to absorb the new production techniques developed and applied in Britain. Chalk up one for globalization. Elsewhere industrialization depended on "importing" skills and institutions. Intercontinental labor mobility was a tremendous advantage here. Where Europeans settled in masse, they brought with them both the skills and the drive for more representative, market-friendly institutions that would promote economic activity alongside their interests. The consequences were disastrous for the native populations, who perished in large numbers of countries of European aggression and germs. But the regions of the world that the economic historian Angus Maddison has called "Western offshoots" -- the United States, Canada, Australia, and New Zealand – were able to acquire the necessary prerequisites thanks to large immigrations. Supported also by sizable capital flows from Europe, these economies would eventually become part of the industrial "core." Chalk up two for globalization.
Colonization's impact on the other parts of the world was quite different. When Europeans encountered inhospitable conditions that precluded their settlement in large numbers or began to exploit natural resources that required armies of manual workers, they set up institutions that were quite different from those in the Western offshoots. They entailed vast inequalities in wealth and power, with a narrow elite, typically white and European, dominating a vast number of natives or slaves. Colonies built on the extractive model did little to protect general property rights, support market development, or stimulate other kinds of economic activity. Studies by economists and economic historians have established that this early experience with institutional development – or lack thereof – has produced a debilitating effect on economies in Africa and Latin America that is still felt today. Chalk up one against globalization. Once the lines were clearly drawn between industrializing and commodity-producing countries, there were strong economic dynamics that reinforced the demarcation. The countries of the periphery not only failed to industrialize they actually lost whatever industry they had. They deindustrialized. The cause of de-industrialization in the Third World lay in the massive influx of European manufactured goods, especially textiles, on the markets of those countries. Chalk up two against globalization.
Source: The Globalization Paradox by Dani Rodrick (2011)
Whatever the causes of the Industrial Revolution, we know what its consequences are: first, higher incomes, and second, an inequality transition from within a nation to between nation income inequality. Because industrialization took root first in richer nations, the spread of industrialization historically has boosted inequality across nations.
Source: Global Income Inequality by Glenn Firebaugh (2003)
INCOME INEQUALITY IN THE WORLD TODAY: There are three types of inequality. Inequality among individuals within a single community – typically a nation. This is the type of inequality that most of us will easily recognized because it is the type of inequality that we are likely to think of first when we hear the word inequality. The second type is inequality in income among nations – which is also intuitively close to most of us because it is the sort of thing we notice when we travel, or when we watch the international news. In some countries most people appear poor to us, while in others most people seem very affluent. Global inequality is inequality among all citizens of the world. This third inequality is the sum of the previous two inequalities: that of individuals within nations and among nations. It is a new topic because only with globalization have we become used to contrasting and comparing our own fortunes with the fortunes of individual people around the globe. Yet, it is probably a type of inequality whose importance will, as the process of globalization unfolds, increase the most.
The world is a very unequal place, but that is also unequal in a very particular way, that today most of its inequality stems from very different average incomes among countries. One's income thus crucially depends on citizenship, which in turn means place of birth. All people born in rich countries receive a location premium or location rent; all those born in poor countries get a location penalty. Levels of income in different countries are vastly different, and they are the main factor that explains global inequality. A large part of a person's income in the world comes from only two factors, both of which are given at birth: his citizenship and the income class of his parents. These two factors explain more than 80% of a person's income. The remaining 20% or less is therefore due to other factors over which individuals have no control (gender, age, race, luck) and to the factors over which they do have control (effort and hard work). Thus, one's own efforts, one's country doing well, and migration are three ways in which people can improve their global income position. The role a person's effort plays is small, he cannot influence his country's growth, so the only alternative is migration.
Source: The Haves and the Have Nots by Branko Milanovic (2011)
The proximate cause of poverty is low productivity. Poor people are poor because their labor enables them to produce too little to adequately feed and house themselves, let alone provide for other needs such as health and education. Low productivity, in turn, has diverse and multiple causes. It may be the result of lack of credit, which prevents producers from making the investment that would increase their output and hence incomes. It may be the result of lack of access to new and better technologies. It may be due to lack of skills, knowledge, or job opportunities. It may be the consequence of small market size, which depresses the profitability of acquiring new equipment and technologies. Or it may be due to exploitative elites, typically in cahoots with the government, who block any improvement in economic conditions that would threaten their power. The ultimate reasons for poverty can be traced to one or more of these causes.
Source: The Globalization Paradox by Dani Rodrik (2011)
The average household in poor nations is more than twice as large as the average household in rich nations, so poor nations enjoy an economy of scale effect due to the collective use of resources at the household level. Second, children constitute a higher percentage of the population in poor nations, so poor nations require less food per capita than do rich nations. The poor in the West often own television sets and cars and most often live in dwellings with wood floors and indoor plumbing, while the poor in poor nations are more likely to have only transistor radios and bicycles and to live in dwellings with dirt floors and no plumbing. Moreover, adults and children in poor nations tend to eat less food, and cheaper foods, than do the poor in the West. Source: Global Income Inequality by Glenn Firebaugh (2003)
MEANS TO REDUCE INCOME INEQUALITY: Manufacturing: Until recently, most of the world's people were engaged in agriculture. So, the world's workforce is barely post agricultural. The primary engine driving the growth in world production is manufacturing. Industrialization was important in the nineteenth century, it was important in the twentieth century, and it remains important in most regions of the world in the twenty-first century.
Education: If one’s ability to get a good education strongly depends on one’s parents’ wealth, this is equivalent to depriving society of the skills and knowledge of a large segment of its members (the poor). Discrimination according to inherited income is not, in that sense, different from any other discrimination, such as gender or race. In all cases, society decides that the skills of a certain group of people will not be used. Economically, such societies are unlikely to be successful.
Technology: Technology is all-important for economic development and is exchanged more easily when borders are open. The primary beneficiaries of technological transfers are also poor countries. They have to pay little or nothing in order to imitate the technology invented in the rich world. While the developed countries have to invest a lot to make technological break throughs and create inventions, it is relatively easy for poor countries to benefit from these inventions by coping them.
Source: The Haves and the Have Nots by Branko Milanovic (2011)
POOR NATIONS THAT ARE RESOURCE RICH: It is no accident that so many resource-rich countries are far from democratic. The riches breed bad governance. Governments that come into power by grabbing resources and using force have a markedly different sense of responsibility toward their citizens and their country’s resources than from governments that emerge through the will of the people. In democracies a leader stays in power by enhancing the well-being of the citizenry. In undemocratic resource-rich countries, dictators use strength and weapons to remain in power. The political dynamics of resource-rich countries often lead to high levels of inequality. Source Making Globalization Work by Joseph E. Stiglitz. (2007)
The unabbreviated version of the above can be found in the pdf document below.
| glo_2l_income_inequality_--_segment_2.pdf |