Inequality…is it really increasing?

These days, it seems, every morning brings news that some far right party in Europe is making electoral gains. In Britain, there is a similar swing towards isolationism or anti-foreignerism but it is more focussed on the European Union and the desire of many to be shot of it. In the US there is, of course, a long standing political debate about immigration, especially from Mexico, and I wouldn’t claim it is worse now that it has been, but no one objects to the wall being built between Mexico and the US.
 
The right-thinkers of the world, of course, deplore all this as racism and intolerance while worrying vocally about a return of fascism, especially in Europe. Now, I would not like to see a return to fascism, and while I worry that integration of immigrants, especially in Europe, is failing, I would not want a world in which the huddled masses are excluded from the shores of wealthy nations-for many reasons. Nevertheless, these people who are helping Marine Le Pen and her ilk progress are all onto something, just not exactly the right thing.
 
About 15 years ago, I read a piece of economic analysis that had to do with the benefits of open economies and the results of the integration of places like Korea and Taiwan into the Western system back in the 1980’s and 1990’s. The basic thrust of what I read was that the Western system, which at that point comprised about 650 million people in the US and Europe had gained by integrating economies like South Korea and the absorbed economies, South Korea here, had gained even more. The idea was that the integration was resulting in overall gains, the whole yielded total GDP higher than the sum of the original parts. There would, of course, be a convergence of wages between the two areas, but given the huge size of the West, that would be negligible effect on Western wages. But by bringing in cheaper Korean labor, and applying cheaper Western capital, the theory (and practice) was that while huge gains could be had in Korea, the West would benefit from new markets and source of cheaper goods. A true win-win with nary a loser in sight.
 
Moreover, when it came to distribution, everyone was a winner too. For example say a country of 20 million people with a per capita GDP of 5000 USD was to be absorbed into the Western system of 650 million people and a per-capita GDP of 30000 USD. If the net gain to the combination was 0.5% of the original GDP, even if all of the gain went to Korea, their GDP per capital would roughly double, while the West would see no change but would still benefit from cheaper production.
 
The thing about this approach is that if you try the same thing with China, which is what has been happening for almost 20 years now, it does not give at all the same results. To be clear, there have been huge economic gains overall, GDP growth of the combined West+China, has been massive. However when it comes to sharing, it is the Chinese poor moving up to become middle class that will take not only the lions share of the gains, but in fact may take more than all the gains. We’d expect to see a convergence in wages (adjusted for productivity) between Chinese and Western workers. That process is clearly well underway and will continue for some time. Because the Chinese labor force is larger, perhaps double, that of the West, those gains will have come not only from the growth in the overall pie but also at the expense of Western workers.
 
That effect will exacerbate perceived national inequality in another direction, namely by making the rewards of success in many domains even larger. Quite simply, for the maker of a successful product, the market is now at least 3 times what it was in the 1980’s. So Apple has access to more iPhone buyers, google to more searchers, pop stars to more audience and so forth. Even national sports teams have flourished due to this effect-Machester United has a huge Chinese fan base who pay satellite subscriptions to watch them. (Let’s be realistic, I am not saying that there are as many high income buyers of products in China as in the US, but if you include India, Russia and the emerging markets, the markets, even at relatively high incomes are huge. Also, there is the fact that many products and services are purchased even by the relatively poor-music and entertainment generally fall into this category. So naturally the success stories, the top 0.1% or whatever they are called, are even more sparkling today than in the past and even further away from the middle class than ever.
 
So there is a reason why Western wages are stagnant, why Western living standards are not rising any longer. There is a reason why the wealthy are much wealthier. And so, clearly there is a reason for massive disenchantment among the masses in the wealthy West today. But it is not the Turkish in Germany or the EU regulations that apply in the UK that are causing the problem, it is simple trade and globalisation. In fact, I posit that global inequality including all the world’s population has decreased markedly since 1990, even though it is increasing in the individual Western countries simply because so many previously extremely poor people in China, India and other places have become much, much richer.
 
So now the problem is one of politics. How long can this perdure without the masses electing protectionists? How long with the elites benefitting form this arrangement be able to influence events so as to keep it going? Not that it is bad. If we look at it form the point of view of the whole human race, things have likely never been fairer. As John Gray points out, it is not likely that a European form of social capitalism can continue to exist in a world go globalised free trade, they will either have to accept convergence towards poorer countries or build strong barriers against the free market.
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