|Globalization of the World Economy: JAMES GALBRAITH
Remarks to the
American Philosophical Society, November 14, 1998
James K. Galbraith
My concern is with pay. It is with the
distribution of pay, with the economic and social relationship between the well-paid and
the poorly paid, between the working prosperous and the working poor. Since the early 1980
inequality of pay has risen sharply, both within nations and between them. Everyone knows
this. The issue that divides the economics profession is: why?
We live in a global economy but we rarely analyze it as a global unit. This is partly
habit, partly necessity. Economic policy analysis remains primarily a national sport. And
data at the global level are often scarce, inconsistent, unreliable. We dont have
good figures on unemployment outside the developed countries, and for a topic like
inequality the situation is very much worse.
As a result, though inequality is clearly a global issue, the economics literature treats
it largely as a phenomenon to be explained in national and even in American terms.
According to a view that once confidently called itself mainstream, the rise in inequality
is mainly a matter of relative gains for workers who possess higher levels of skill. Since
skill is related to pay through a market evaluation of productivity, there are only two
possible ways that differentials can increase. One would be an increase in the effective
supply of less-skilled workers, related to the expansion of trade. The other would be an
increase in the effective relative demand for the highly skilled, related to technological
Most economists are now satisfied that North-South trade is a secondary factor in rise of
inequality in the North. The effect is not negligible, as some claimed when inequality
first surfaced as a major issue. But it is also not the whole or even the main story. That
leaves technological change, and the question becomes, which technological change? Some
researchers have stipulated computerization as the new technology specifically
responsible. This argument has been widely taken up in the press and by policymakers,
notably publications like Business Week that make a fetish of information
technology. Others, notably the Economist, have tied the argument to the conditions
of Europe, arguing that where wages of the less-skilled failed to fall, high unemployment
rather than rising inequality would be the principal result.
It is a tidy story, well-grounded in contemporary economic theory. In broad outline it is
easily grasped, intuitive, plausible. It conveys an appealing appreciation of larger
market forces at work. Rising inequality may seem distressing at first, but becomes less
so when it is realized that markets are working effectively to reward each person in line
with the true productivity of their skills. And this story points in a reassuring way
toward an ultimate resolution of our difficulties. As more people acquire the requisite
skills, then the premium earned by those skills will decline; education would catch up
with technology, as Claudia Goldin has phrased the matter.
The story suffers from one difficulty. It lacks the support of the facts. Indeed on close
examination almost nothing of it survives. It is clear, for instance, that computers are
made to be easy rather than difficult to use; in most applications they are not
skill-enhancing. It turns out that much of the rise in inequality occurs within sectors
only weakly affected by computers, and that the greatest increases in computer use come
too late to be a principal cause of rising inequality.
It is also not true that unemployment rises uniformly with rigid wage structures in
Europe, and not true that the rise of unemployment in Europe affected the less-skilled
more heavily than other groups. While it is true that other things equal computer users
earn more than non-computer users, it turns out that the same is true of pencil users and
those who work in chairs. We are not seeing in those results the effect of computer use on
productivity, but rather the effect of status on perquisites of the job.
I claim to have seen these realities earlier than most. But, I have to acknowledge, the
body of mainstream researchers have moved with surprising speed over the past few months
to reject the "skill-biased technological change" explanation of rising
inequality that so dominated the literature just a year ago. Like the natural rate of
unemployment, this notion is now on the ropes; if not yet quite down for the count. And
here as there, we economists are now confronted with the stark question of what to put in
The approach I offer is fully formed in theory. It rests on a combination of the views of
Joseph Schumpeter with those of John Maynard Keynes. I argue that Schumpeterian process of
technological change -- those gales of creative destruction -- are coordinated through the
Keynesian macromanagement of the business cycle. The effect of a shift from full
employment policy in the United States after 1970 was to destabilize the balance of forces
between machine makers and machine users, and that the largest single impetus behind
rising inequality in the wage structure comes along the fault line that separates the
monopolies and would-be monopolies who generate new technologies from the oligopolies who
There are other forces of course. By sorting industrial wage data into the major patterns
of wage change, it becomes possible to identify them: an effect of rising interest rates
and the high dollar, especially in the early 1980s, on the wage differential between
monopolistic exporters and competitive import-competers, and the rise and then decline of
the military budget. But an accelerating instability in the uptake of new investment, and
therefore of new technologies broadly speaking, is the main thing I find in the data for
the United States.
The difference between my macro-technological hypothesis and the micro-technological
hypothesis of the mainstream is straightforward. The mainstream approach focuses on the
divide between users and non-users of new technology, seeks to account for
perceived differences in their relative pay as a function of differences in their relative
productivity. My approach focuses on the divide between producers of technology and
users of technology, and views the large distributive shifts between these groups
as outcomes of shifts in monopoly power.
Through this research, I propose to bring an end to the historic division of economics
into macro- and micro- branches, and to do this in a manner quite different from the
recent fashion of producing "micro-foundations" for macroeconomics. Rather, my
work seeks the macroeconomic and policy sources of inter-sectoral change.
Sectors can be defined in many ways. My approach is rooted in numerical taxonomy, a
systematic method of classification, based on commonalities of historical behavior. It
leads to a belief that the essential division must be between, as I have said, machine
makers and machine users on one side, and between those who work with machines
(manufacturing), and those who do not (services), on the other. Taken together then it is
useful to begin the taxonomic exercise with three sectors: a knowledge-based or K-sector,
producing machines; a consumption-good producing or C-sector, using machines, and a
services sector that makes comparatively little use of machinery and by extension
participates comparatively little in international trade.
This sectorization tells us a good deal about the structure of trade. The United States
is, quintessentially, a K-sector presence on the global scene: we export aircraft,
communications systems, energy production networks and advanced pharmaceuticals; we import
clothing and toys and sporting goods and luxury cars. Next to us, the UK is perhaps the
leading K-sector economy in the world; France and Germany hold important niches. Europe as
a whole is, however, predominantly comprise of C-sector economies, and Japan is in the
dual role of being a C-sector provider with respect to the United States but a K-sector
exporter with respect to much of Asia. Most so-called developing or emerging economies are
C-sector producers and importers of K-goods. At the international level one has also to
consider the special role of oil.
With this underlying view in mind, it becomes clear that the "technology versus
trade" debate is artificial. Technology defines trade. The processes generating
inequality in the global economy are the same as those operating inside national
frontiers. In both cases they are macro processes. The differences are only that certain
arbitrary conventions, known as frontiers, cause certain transactions to be labeled as
exports and imports, and that in a global economy the stabilizing devices that operate at
the national level, including unemployment insurance, social security payments, and
stabilizing tax reductions and expenditure increases, do not apply.
Now, how do the movements of the global economy affect inequality, within countries and
between them? My answer is three-fold: investment favors the K-sector; consumption favors
the C-sector; political struggle determines the fate of the S-sector. Thus in an
investment boom, knowledge workers move ahead; in a period of full employment the
consumption-goods producers catch up. Bringing up the service workers requires specific
action on minimum wages, hours, and public employment.
Globally, these forces play out according to the sectoral structure of national economies.
In an investment boom, in the early phases of a global expansion, the advanced
countries gain on the poor. In the later phases, when consumption rises in the rich
countries, the C-sector states gain ground on average, and become more equal internally as
well. In a global crisis, the poorest countries fall farthest, while a slump in K-sector
exports for the advanced countries only has a large effect on inequality in those
countries when it becomes sufficiently large to drive down, through a multiplier process,
the consumption of consumption goods.
The next step is to look for data. The standard data set on global inequality, maintained
by the World Bank, is not adequate for our purposes. It focusses on income; we need a
measure of pay. But more important, coverage is sporadic, in many countries only a few
valid survey observations exist, and missing years cannot be filled in after the fact.
Without time-series data, one cannot adequately undertake historical analysis.
To deal with these difficulties, my students at the University of Texas and I have built
an alternative data set, which measures the evolution of inequality of pay in
manufacturing. It is based on data sets that are nearly ubiquitous on an annual basis in
countries of any industrial capacity. We also believe that these numbers are fairly
reliable indicators of the change in inequality for manufacturing pay, and limited
evidence so far makes us think they are fairly good at indicating what is going on in the
larger economy as well.
What do we find? First, the stylized facts for a K-sector economy appear to hold for the
U.S. and the U.K.: inequality rises with growth but falls with declining unemployment.
Over the long haul in the United States, -- and we have constructed an ersatz inequality
series back to 1920 -- the movement of unemployment dominates the movement of inequality
as a whole. And the stylized facts for a C-sector economy appear to hold for Brazil and
Mexico, where we are especially confident of our data: strong growth reduces inequality
and weak growth increases it.
Beyond this, we are still working on statistical relationships. We are increasingly
confident, however, that inequality within countries moves in regional patterns --
something that by itself suggests the importance of macroeconomic co-determination. We
believe that the politics of macroeconomic policy matters to the evolution of inequality.
We believe this, because in many cases we can see in the movement of inequality what
appear to us to be traces of the politics of the time. An especially vivid example occurs
in Chile: inequality falls through 1973 and then rises, following the bloody coup that
installed Augusto Pinochet and his "Chicago boys." Inequality also rises
following coups in Argentina, Pakistan, Bangladesh, and elsewhere. In the case of China,
where we have measurements no one else has made, the codetermination of the larger
mainland economy with those of Hong Kong and Macau, and even perhaps Taiwan, emerges from
our analysis; inequality in China rises very rapidly in the early 1990s following
Tiananmen. In just a few cases, notably Iran and Nicaragua and the relatively non-violent
examples of Zimbabwe and Portugal, all in the 1970s, revolutions accomplish what
revolutions are intended to accomplish, namely a leveling of income differences.
Over the sweep of the 1970s across the globe, we think that the oil boom played a key role
in distinguishing decreases from increases in inequality. The major oil consumers,
including North America and Europe, but also India, suffered recessions and increasing
inequality during these years, while the inequality fell sharply in the major oil
exporters. During the debt crisis and oil bust of the 1980s, inequality increased much
more systematically and drastically throughout the globe; the biggest increases were in
Latin America, hardest hit by the crisis. India and China, isolated by choice from the
world financial system, grew rapidly during these years and did not experience large
increases in inequality. Figures 1 and 2 provide a global snapshot of changing inequality
in the ages of oil and debt.
The 1990s are, then, the era
of liberalization. And our data give a very clear picture of the effect of global
financial liberalization on inequality. The picture is not pretty: rapid increases in
inequality now occur in Korea, in China, in Africa and in the Middle East, and of course
in the radically liberalized economies of Eastern and Central Europe. (Certainly the
extreme case is Russia, where we do not have continuous time-series data because of the
break-up of the USSR.) Figure 3 presents the information we have on the years up to 1995,
while Figures 4 and 5 give a detailed view of Europe and Southern Asia.
The implications of the present global economic crisis become quite clear as one examines
these patterns in the data. Not only are the Asian and Russian economies most severely
affected undergoing a sharp reduction in their average living standard relative to us.
They are also undoubtedly becoming radically more unequal internally. Countries which
entered the global economy also made themselves vulnerable to the rise in pay inequalities
that were pioneered twenty years earlier by the United States. These rises were masked for
much of the present decade in a few countries -- Indonesia, Malaysia -- by construction
and export booms that increased employment in middle-wage occupations. Thus the emergence
of the "Asian middle class." But the underlying inequalities will now reemerge
with extreme virulence as employment in these sectors collapses, which it is doing. The
implications for the security of these regions, and by implication of ourselves, are deep
The dimensions of the tragedy overtaking Russia, Asia and perhaps now also Latin America
cannot be overstated. History has, unfortunately, returned. One advantage of the research
techniques presented here is that they can help us to watch it unfold. Perhaps also they
may motivate us to do something about it. But genuine progress toward stronger growth and
greater equality will require very serious change in the simple-minded beliefs in weak
government, deregulation, privatization and free global capital flows that have
characterized recent years, and that are now responsible in no small measure for the havoc
that we now observe.
James K. Galbraith is
Professor at the Lyndon B. Johnson School of Public Affairs, the University of Texas at
Austin, and Senior Scholar of the Jerome Levy Economics Institute. His new book is Created
Unequal, The Crisis in American Pay. I thank Lu Jiaqing especially for the
computations that underlie this paper; these are reported in detail a separate,
co-authored paper entitled "Measuring the Evolution of Inequality in the Global
Economy," available from the authors.
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