globalization, growth and inequalities. · 01.03.2018 · globalization, growth and ......

Globalization, growth and inequalities.

What world our grandchildren will inherit?

D. Acemoglu, MIT

Pier Francesco Asso, Università di PalermoFrancesco.asso@unipa.it

Our starting point, our objectives

What are the engines of growth? Different theories

• We distinguish between “economic factors” …

– Savings, thriftiness, accumulation of resources (Smith);

– Investment in physical capital (Ricardo-Keynes)

– Foreign trade, integration, market enlargement (Smith)

– Innovations: new ways to produce, trade, manage … technical and social construction of innovations (Schumpeter)

Our starting point, our objectives

What are the engines of growth? Different theories

… and “non economic factors”

- Social capital (trust, cooperation, networks, institutions)

- Human capital (education, infant care, knowledge building)

- Political capital (property and political rights, voice, exit)

The mistery of growth … it depends on many factors, both economic and non economic

Our starting point, our objectives

• What were some of the main features of the XXc?

Emphasis on the 10 most important trends

Political rights; technology; trade and integration; growth; inequalities; labor market; war casualties; population; health; environmental standards …

4 steps:

- the rise of political rights … people choosing leaders, increase participation, contribute to society decisions …

- 9 trends affecting economic change

- how the rights revolution affected the other trends

- what are our expectations regarding these trends.

I. The rights revolution• What do we measure? The global trend towards democracy

• Impressive changes since 1945 in most indexes of democracy + political participation

– They range from 0 (no democracy) → 1 (full democracy);

– small increase until WWII: 0,15 (1900) → 0,2(1940)

– Big increase afterward: 0,2(1940) → 0,8 (2010)

• More widespread political rights bring about more …

→ investment in public goods and services (health, infant care,

infrastructures etc.)

→ inclusion of minorities … women, migrants, etc.

→ attention for redistributive policies and society mobility

• Expansion of rights is incomplete: authoritarian regimes …

• Vibrant demand for rights still going on nowadays

Impressive rise of political rights

Level of democracy for independent states: the polity IV index

The world in 2013: from autocracies to full democracies

II. Technology + III. Growth

• Spectacular rise of technology and more widespread access to technology – beginning with consumers’ goods, but also information, medical, ordinary life

• Technological and other innovations have increased factors productivity and, consequently, overall production

• Different sources of innovation: product; process; organization; marketing; packaging.

• Growth: average citizen has a much higher income today than was the case 100 years ago (8 times richer than our grandparents)

• What are some main features of economic growth in a long term perspective?

II. Technology + III. Growth

1. Uk – Us – World … trends from 1820 to 2000 of GDP per capita in constant dollars: US: from $2000 to $40,000; World: from $1000 to $6,500; .

2. Uk loses its leadership at the eve of WW1, but its growth trends after 1950s are quite similar to the US

3. Average income always rising – except WW2 and the great crash (1929-1933).

4. The gap between the US and the World increases after 1970

5. Average world income stagnated in the 1970s

Unrelenting growth of GDPp.c. since the industrial revolution

IV. Inequalities

• Spectacular rise of growth has been uneven both between and within countries. We see 2 increasing gaps …

– between rich and poor nations

– between rich and poor classes of each nation

• Things changed several times in the last 2 centuries …

– In 1820 within country inequality accounted for 70% of global inequality: it was crucial to be born in the right family, rather than in the right country

– In 1950-60 this proportion was more than reversed: 80% of total global inequality reflected between countryinequality: the country of birth was very important

– Post-1980s: between country inequality, although very high, has begun to lose relevance to within country inequality

IV. Inequalities• Focus on within country inequalities

• Increase of inequalities affect the various layers of society in a different way …

• Sharply increasing … if we measure the gap between the very rich (top 10%) and the very poor (bottom 10%): from 9 to 35.

• Moderately increasing … if we measure the gap between the moderately rich (top 25%) and the moderately poor (bottom 25%): from 2 to 5

• The picture is slightly different if we look at population-weighted numbers … in this case the ratio between the 75 and the 25 percentiles shows a declining trend.

• This is due to the recent growth of several very much populated nations such as Brazil, India and China.

Great increase of inequalities since 1900rich vs poor; moderately rich vs moderately poor

V. The transformation of work and wages in advanced countries

• General trend in the XXc: secular decline in agriculture and manufacturing, replaced by services (also in LDC)

• Disappearance of middle skill, manual and routine jobs

• Main reason: growth of technology

• Changes in the last 20 years : services and managers go up everywhere at almost the same rate (fig. 4)

• More unequal and polarized distribution of income. Wages increase more rapidly for high income groups since the 1980s (fig. 5)

• We witness a disparity between nations and within nations. Data on wages show greater inequalities if compared to the 70s (fig. 6)

• The wealth of nations has become more unequal

Changes in professions, advanced countries, 1990-2010

Services and professional managers vs clerks and workers

Widening gaps between rich and middle, low incomes, since 1965

General increase in the quota of wages going to the rich, 1970 vs 2008

VI. Convergence in the health of nations at a global level

Health

• Striking improvements in life expectancy since 1900 (fig. 7)

• Growth in life expectancy at birth is a common feature, affecting most countries and different parts of the world

• Considerable narrowing of the differences between Asia and Latin America vs the Western world

• Improvements in sub Sahara is more limited

Health of nations is improving at a similar pace

VII. Stronger integration at a global level: from exports to investments

Economic integration

• Spectacular growth of integration due to communicationtechnologies and more open trade policies (fig. 8)

• Internationalization occurs not only in trade but also for outsourcing (outside resourcing to another party) and offshoring (relocating a business function to a distant country)

• Also SME become multi-national and acquire cheap labor or produce abroad to gain easier access to faster growing markets

• During the recent crisis, internationalization has become a strategy for survival and renewed growth prospects

Spectacular increase in international trade and factors mobility after 1945

VIII. War and Peace

• 3 trends: i. deaths from WW; ii. Civil Wars; iii. Violence (homicides)

• Deaths from international wars: favourable trend

• Fig. 9: n. deaths/year/100.000p. + 10year moving average (more useful to see the direction of the current trend).

• Fig. 10: n. deaths etc. from civil wars: less favourable trend, though declining despite conflicts (Rwanda and the Balkans)

• Fig. 11: homicide rates, developed world: strong increase in the 1960s and 1980s; decline after 1990

• XXc.: Most deadly conflicts and most peaceful decades

• On the whole, the trend is towards less violence

Century of war, century of peace

Trends and peaks in civil war casualties

Trend in homicide rates is mixed, though recently declining

IX. One dangerous trend: population

• XXc. Extraordinary growth of population mostly in poor countries

• XXIc. UN Forecasts: World population reaches 9.5bn (2050) and 12bn by 2100 (mid fertility)

• Increase in population with some decline in population growth rate

• UN+PRI: Scepticism in overpopulation and resource scarcity

family sizes are declining worldwide due to higher living standards, increased availability of contraception and better economic opportunities for women.

Demographic changes

An interpretative framework

General Idea

• Institutions explain historical development (technological change and Growth). Institutional quality is related to:

– government effectiveness; defense of property rights; friendly bureaucracy; impartial and efficient courts; safeguard of monetary stability; degrees of trust and cooperation etc.

– “ease of doing business”; low level of “transaction costs”; efficient rules and regulations; enforcement procedures; efficiency of the tax system.

– pluralism in politics; participation to economic activity; promotion of talents and capabilities; freedom of choice.

• Institutional quality implies an “optimal” degree of state intervention that stimulates investment and exchanges

An interpretative framework

How can we measure IQ?

Doing business in the world (WB Index): efficiency of regulations + quality of the business environment

- N. of days for: starting a business; dealing with permits; getting electricity; registering property;

- getting credit; protecting (small) investors; paying taxes (number, methods, total etc.);

- Respect of contracts; resolving insolvencies (time, costs, %); bankruptcy laws; promotion of (young) entrepreneurship; transparency etc.

Doing business in Italy, 2016 a comparison with OECD countries

IQ depends on values, habits and cultural beliefs

How can values, habits and beliefs affect economic performance? (A. Smith, J.S.Mill, T. Veblen etc.)

• Higher trust and cooperation lower transaction costs increase investment, exchange and integration

• More civic behavior and public consciousness lower rent seeking, free riding + search of windfall gains higher supply of public goods and investments

• Different levels of cooperation, networks, civicness, emulation of good practices etc. are drivers to innovation and may explain income differences between nations

• Some evidence from a backward economy …

The value of cooperation in times of crisis, 2013-2014

33

Cooperative firms have a higher performance and a greater financial

stability. Are more innovative, invest more in R&D, and have a higher

export propensity.

0 10 20 30 40 50 60 70 80

ROI

Utile /VA

Variazione ricavi

Utile al netto della gestione finanziaria/VA

ROE

Autofinanziamento/VA

Internazionalizzate

Ricerca e Sviluppo

Innovative

Imprese collaborative Imprese non collaborative

Performance indicators

Strategic options

The reward of cooperation and the market for cooperation:

external agents and «family ties»

34

Firms that cooperate with external agents (other firms, banks,

associations etc.) perform much better than firms that cooperate

only on the grounds of «strong connections» (friends, relatives etc.)

0

10

20

30

40

50

60

70

Innovative R&S Exportstabile/increscita

ROE Variazionericavi

Utile

Strategic options Performance Indicators

Does Institutional quality (and growth) depends on resources?

• Public expenditure can become an obstacle to growth

because it takes the form of income transfersrathen than investments in goods and services thatmay foster innovation and the exploitation of comparative advantages

because resourses tend to be channelled towardspublic employees (health professions, forest guardsetc.) and reduce private entrepreneurship and a pro market / pro innovation culture

36

30,0

40,0

50,0

60,0

70,0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Public expenditure / GDP, Sicily, South, Rest of Italy

Sicilia Mezzogiorno Centro-Nord

Fonte: elab. su dati DPS/Conti pubblici territoriali

Public expenditure / GDP is much higher in the South:

more/better public goods, infrastructures, collective

services? The answer is NO

37

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

18.000

20.000

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Fig 8 - Bilancio della Regione Siciliana: spese(valore in milioni di euro, prezzi costanti 2007)

Spese totali Spese correnti Spese in c/capitale

How to waste public resources: trends in current and

capital expenditures, Sicily, 1970-2008

High income transfers (public employees) and low growth

of collective goods (infrastructures)

An interpretative framework. II

• There are two types of economic institutions – inclusive(↑) and extractive (↓)

• Definition of I.I.: “those institutions that allow and encourage participation by the great mass of people in economic activities that make the best use of their talents and skills”

• Examples of I.I. → “to be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services and rules that provide level playing field in which people can exchange and contract”

An interpretative framework. II

• Definition of Extractive institutions: Institutions that serve a small minority that uses its powers to extract resources from others.

• “institutions that help remove people from active participation in political or economic affairs”.

• Examples of Extractive institutions: elitist society; insecure property rights; lack of freedom; slavery, racism, barriers to entry; lack of opportunities; lack of collective goods and services; forms of gender discrimination; ghetto schools etc.

• State power is either excessive or lacking.

Extractive institutions: main features

• Political power is concentrated in the hands of few people (the élites) who extract resources from society for their own benefits and limit access to public goods

• EI: increase inequality and generate forces against technological innovations and growth

• EI are the natural complement of illiberal political systems and are vital for the survival of this system

• Growth may occur under E.I. (solid comparative advantages)

• The world dominated by E.I. is not static. There are inherent conflicts that may open the way to I.I.

Inclusive vs Extractive Institutions

Inclusive vs Extractive institutions

Extractive vs Inclusive institutions

A new interpretation of why the industrial revolution occurred in England

• The glorious (bloodless) revolution (1688) favored the spread of Inclusive Institutions

• It peacefully enabled Parliament to model England’s institutions.

• It contributed to generate a coalition of interests which limited the powers of the Sovereign

• It favored the participation of common people to the political life while maintaining a sufficient degree of State centralization

• New institutions favored trade, investment, innovations, defense of property rights and copyrights.

• All this occurred only in England favoring the increase of global inequalities: most countries chose E.I. (protectionism, colbertism, mercantilism with different forms of privileges and discrimination)

The century ahead: a wave of optimism

• The rights revolution will continue despite the war on terror and the increasing inequalities.

• Inclusive institutions have their own strength and have overcome challenges … the spread of Internet has added another pillar

• China, Russia must become more inclusive, reform their extractive institutions otherwise their economy will run out of steam

• The future of technology is bright and there is no evidence that innovations are running out … ideas + applications are generated

• Growth may recover again and become more widespread. Major inequalities will be cured as rights spread

• The rise in top-end inequality in the US and UK is largely unmatched elsewhere (F, D, NL ) because of different institutional and policy approach (tax policy + welfare systems) (Fig. 14 and 15)

Income inequality rises in the US and the UK, rather than in Europe

Divergence between the US and the rest

The century ahead

• Redistribution policies are needed, with a more progressive tax code, inheritance taxes and investments in education also at pre college level (infant care)

• The health revolution is likely to continue … more technology and more globalization in public health

• Integration will increase in other areas in life besides trade and investment … such as offshoring medical diagnoses

• International organizations and state centralization will foster peace prospects (warning: religious wars)

• Global population will continue to grow for a while then stop

• Climate change and fuel consumptions are the main threats. 1 solution: alternative clean energies (how expensive?, how politically feasible?) (see Fig. 16).

Environmental fragility

CO2 emissions, 1751-2015