Finance ministers, bankers, and businessmen will gather in Washington DC this week for the annual Fall Meetings of the International Monetary Fund and World Bank. As is customary, the IMF is publishing its analysis of the world economy, and this year it has released some research that is sure to cause controversy and provide some fuel for its critics.
The IMF found that foreign investment and technology (but not trade) were associated with an increase in inequality in developing countries.
But there is much less here than meets the eye. What the Fund has missed - and has pretended not to notice for the last quarter century - is a much more profound change in the world economy that has accompanied the set of economic reforms, including "globalization," that the Fund has forcefully advocated. Over the last twenty-six years there has been a sharp slowdown in the growth of income per person in the vast majority of low-and-middle income countries (PDF).
As would be expected when growth rates fall off, these countries have also seen substantially reduced progress on major social indicators, including life expectancy and infant and child mortality.
The Fund is taking advantage of the generalized lack of knowledge of economics and economic trends among its audience. Although the distribution of income gains is an important determinant of economic and social well-being, if income does not grow, then there is nothing to distribute. In a country as rich as the United States, one could argue about how much we might reduce poverty and unemployment, and improve the quality of life through redistribution and policy changes such as universal health care - although politically it is generally more difficult to accomplish much in these areas if the economy is stagnating. But, for the poorest countries, increasing productivity is a matter of survival, and for developing countries generally it is a necessity if they are going to be able to provide education and health care to their citizens.
Especially these days, as countering global climate disruption takes its rightful place as an urgent priority, economic growth is often seen as a problem rather than a solution. But increasing productivity - and that is basically what we are talking about when economists refer to growth in income or GDP per person - is not inherently environmentally destructive. The Internet, for example, has increased productivity while expanding the potential for environmentally-positive outcomes through telecommuting and reduced paper usage. At a more basic level, technical, organizational, and distributional changes - including land reform, and the provision of credit and seeds -- that allow poor farmers to produce more food per acre and per labor hour are also not necessarily environmentally destructive. Growth is also what the IMF and its affiliated institutions have promised that their policies would deliver - not redistribution. All the pain and "creative destruction" associated with privatizations, indiscriminate opening to trade and capital flows, more restrictive monetary and fiscal policies, and other generally unpopular reforms were supposed to increase economic growth.
But, the typical country in the middle quintile of the world income distribution (per capita income only $2,364-$4,031 in 2000 dollars) in 1960 could expect its income per person to increase by 67 percent in two decades. A similarly situated country in 1980 could expect an increase of only 22 percent over the same time period.* This growth collapse has had a vastly greater effect on most people in the countries affected than any measurable impact of globalization on inequality.
There are a handful of countries that actually did grow faster in the post-1980 era of "globalization." But these countries - such as China, India, and Vietnam - did not follow the policy formula prescribed by the IMF.
Fortunately, most countries have voted with their feet and have paid off the IMF, thus avoiding having to take its advice. The Fund's loan portfolio has shrunk from $105 billion in 2003 to just $17 billion today, with most of this owed by Turkey and Pakistan. This has freed most middle-income countries, but the poorest countries remain under the tutelage of the Fund and its allied institutions, which are dominated by the US Treasury Department. These countries, too, will have to become more independent if they are to reach their development potential.