Globalization and Inequality: the Perspective from Southeast Asia1 Engage
Analyze
2 Sethaput Suthiwart-Narueput
Inform
Introduction
I
n the well-known ancient Indian
on factory closures and outsourcing see
parable, several blind men touch an
globalization as causing job losses and
elephant to learn what it is like. The
lower wages in the developed world. Those
one who feels a leg thinks an elephant is
who focus on factory disasters such as
like a pillar. The one who feels the tail
those in Bangladesh see it contributing to
thinks it is like a rope. Another who feels
unsafe conditions and poor labor standards
the trunk thinks it is like a tree branch.1
for workers in developing countries.
Conversations about globalization often2
But taken as a whole, globalization—the
share this characteristic. Those who focus
integration of national economies into the international economy through flows of
Paper based on remarks presented at Jeju Forum for Peace and Prosperity 2014 "Designing New Asia", Jeju, Korea in June 2014. The author gratefully acknowledges the Friedrich Naumann Foundation for making his participation at the forum possible. 2 Executive Chairman, Thailand Future Foundation. 1
trade,
investment,
capital,
and
even
people—has promoted growth, reduced poverty and raised living standards. The
THAILAND FUTURE
empirical evidence is ample and does not
But just because inequality is rising does
bear repeating here.
The anecdotal
not mean that it is being caused by
evidence is even starker: witness the
globalization. Most empirical studies find
contrasting experiences of North v. South
a weak relationship between the two, if any.
Korea, or Myanmar v. Thailand.
The overall picture that tends to emerge is
Yet globalization still gets blamed for a variety of ills, including inequality. Media and popular attention to inequality has risen sharply as of late, stoked by the “Occupy Wall Street” movement and driven by
stories
bonuses.
about
But
what
outsized is
the
corporate evidence
underlying the link between globalization and inequality? And what implications does this have for the agenda that should be pursued in these two areas?
globalization tends to raise it.5 The findings of an IMF study are fairly typical: the main factor driving the increase in inequality across
countries
by
far
has
been
technological progress, not globalization.6 The latter has had a small—and in the case of developing Asia, a beneficial—impact on inequality.
Things which really drive inequality may have little or nothing to do with
Inequality has been on the rise in many both
developed
and
developing. Gini coefficients, a commonly used measure of inequality, rose in most regions.
lower inequality, but increased financial
This result is not altogether surprising.
The facts countries,
that increased trade globalization tends to
In
Asia,
representing
82%
11 of
economies— the
region’s
population—saw an increase in inequality
globalization. Consider country studies of what
drives
national
inequality.
In
Thailand, as in many countries in the region, differences in income stem largely from things like family characteristics and access to quality education. One can try to blame many things on globalization, but not
over the past 2 decades.3 Those seeing the largest increases were China, Indonesia, and Lao PDR. If anything, actual inequality levels are likely to be significantly higher than typically reported due to data and survey limitations.4
ADB (2012), Asian Development Outlook Take the case of Thailand. Official inequality figures are computed from the socioeconomic household survey (SES), which understate household incomes by nearly 1 trillion baht, 3 4
compared to equivalent figures in the GDP accounts. But much of this missing income is likely to reside among the richest, whose data are underreported. An example: the very richest household surveyed in the SES had a total net worth of only 205 million baht, while the average net worth of those on the Forbes 50 list for Thailand was 52 billion baht. 5 Trade globalization works to reduce inequality by increasing relative demand for lower skilled workers per the Stolper-Samuelson effect. Financial globalization can increase inequality through (i) foreign direct investment which increases wage differentials and the demand for higher skilled workers and (ii) higher likelihood of financial crises. 6 IMF (2008), World Economic Outlook, “Globalization and Inequality”
2
THAILAND FUTURE
who our family is! Education access and
income inequality.” (Emphasis added.) As
quality in Thailand remain poor because of
noted previously, empirical studies have
our
undertake
tended to find that trade globalization has
This in
helped to reduce inequality, not make it
perennial
inability
to
meaningful educational reform.
turn has much more to do with our longstanding problems of political economy and governance, and much less to do with globalization per se.
worse. It has been increasingly common when discussing
inequality
to
distinguish
between inequality of outcomes (like
One can even argue that globalization
income or wealth) and of opportunity. The
has reduced inequality. Most discussions
former is typically addressed through the
of inequality focus on national inequality,
tax system, and the latter through better
which has increased. But global inequality,
access to quality public services like health
which looks at differences in income across
and education and meritocratic systems in
people regardless of what country they are
the public and private sector. The Growth
in, has dropped because many more
Report (2008) notes that
Chinese and Indians now have higher incomes,
in
significant
part
due
to
globalization and freer markets.
What to do: The inequality agenda in Southeast Asia This does not mean that globalization and inequality is therefore a “non-issue” which can be ignored. Rising inequality is giving globalization a bad name. This is
“[People] care about both kinds of equality. But they understand that markets do not produce equal outcomes. They will tolerate this inequality, provided governments take steps to contain it…Inequality of opportunity…can be toxic. This is especially so if opportunities are systematically denied to a group due to its ethnicity, religion, caste or gender. Such injustices undermine social peace and spark political unrest. They will ultimately jeopardize buy-in and derail the economy’s growth strategy.”7 (Italics added.)
the
But if an important reason for avoiding
relationship between the two is widespread
inequality of opportunity is because it leads
and ingrained. A recent editorial in the
to feelings of injustice, then it also makes
International New York Times (21 April
sense to focus on it directly as a separate
2014) entitled “Getting Global Trade Right”
metric: inequality of justice, or to put it
confidently asserted that “Many critics are
more simply, a sense of fairness (or lack
because
misunderstanding
legitimately
concerned
about
about
more
outsourcing of jobs, and there is no doubt that trade, along with automation and financial deregulation, has contributed to
thereof). Commission on Growth and Development (2008), The Growth Report: Strategies for Sustained Growth and Inclusive Development, p. 62 7
3
THAILAND FUTURE
High inequality of income or wealth
countries. Countries which are in the upper
becomes all the more toxic when combined
right quadrant are more likely to experience
with high unfairness. Most people probably
unrest (high inequality, high unfairness),
didn’t begrudge Steve Jobs his great wealth
while those in the lower left quadrant are
because of the feeling that he earned it
less likely.
fairly. But if the top echelons of the top 1%
emerge.
are seen to earn their incomes in unfair,
America (MENA) tends toward quadrant 1;
nontransparent or even corrupt ways,
Latin America tends toward quadrant 2;
resentment and social unrest are more
Northeast
likely.
Southeast Asia sits in the middle.
Consider the analogy with running a race.
The priority to address in Southeast Asia
People can accept that not everyone can win
as part of its inequality agenda should be
the race. People are not equal; some are
improved
faster than others.
corruption) and greater competition not
Such inequality in
Some regional differences The Middle East and North
Asia
towards
governance
(control ilk.
of
redistribution
acceptable. But if some people are barred
inequality is and has been high for quite
from even competing, this is more jarring.
some time. It will be difficult to redress it
Such inequality of opportunity is much
through redistribution through the tax
harder to accept. Now suppose that you ran
system
faster and reached the finish line before
incentives
everyone else, but were still denied victory.
administration.
Such unfairness is probably the most
government
difficult to accept.
corruption
and
its
4.
outcomes (income or wealth) is quite
given
and
quadrant
deleterious
Income
impacts
limitations
on
on tax
Furthermore, given that
effectiveness relatively
is
high,
low
and
giving
the
government more taxes to play with might There is no clear way of measuring fairness, but higher degrees of fairness are likely to be associated with better governance such as greater rule of law, greater degree of accountability,
and
better
corruption
control. We construct a composite measure based on data from the World Bank Governance Indicators. Figure 1 plots inequality of income and fairness for several
not be the best use of people’s hard earned income. Inequality of opportunity also remains significant. While coverage fairly indicators
for
health
and
education
coverage are reasonable, quality remains an issue. But such quality improvements will also be difficult to address without better governance, which is the area where the region has clearly been lagging. 4
THAILAND FUTURE
Figure 1 – Inequality and fairness
Without improvements in governance it is also difficult to see how there would be proper incentives for the inequality agenda to be implemented. In Thailand, for example, inequality has been around a very, very long time. Some measures of inequality between urban and rural areas have remained virtually unchanged in nearly 50 years.
Freer markets and greater competition would also help. In Southeast Asia, unlike in Northeast Asia, wealth has tended to be concentrated in non-tradable or highly regulated sectors (e.g., banking, property, telecommunications). Non-tradable sectors account for over 70% of total market
Part of the reason it has not been more fully
capitalization of the stock exchanges in the
addressed has to do with voice and
ASEAN-5, compared to only 50% for the
accountability. We have 500 members of
Northeast Asia-5. The pattern is even
parliament (MPs) in Thailand. We normally
starker in the list of the top billionaires
think of MPs as representing the population
ranked by Forbes in the region. The top 50
rather broadly. But the average net worth of
billionaires
our 500 MPs is higher than that of 99.999%
overwhelmingly
of our population. They represent not
regulated sectors such as financial services
the1%, but the 0.001%!
or real estate, telecommunications opening
in
Southeast in
Asia
non-tradable
are or
up these sectors to greater competition 5
THAILAND FUTURE
could help reduce the high concentration of wealth. By contrast such as electronics and automobile. While the top 50 billionaires in Northeast Asia include many from tradable sectors. The region needs to do a better job of addressing inequality. Failure to address its worst toxic manifestation – unfairness – leads to resentment and unrest. Left unchecked inequality would also lead to policy responses where the supposed “cure” (e.g. a 70% increase in the minimum wage as occurred in Thailand) could be more damaging than the underlying illness. Most importantly, it risks undermining support for globalization and liberalization, the two engines which have been most instrumental in bringing prosperity to the region.
6
Thailand Future is a non-profit foundation set up to conduct research and engage leaders from the business, policy and academic communities in informed discussion about issues of importance for the country with a view towards formulating them into implementable recommendations.
Contact Info.:
Tel.: +66 (0) 2264 5481-3 Fax: +66 (0) 2264 5480
Email: network@thailandff.org
www.thailandfuturefoundation.org