Globalisation and inequality

Year 2, Lecture 1Douglas McWilliams

Mercers School Memorial Professor of Commerce Gresham College

Centre for economics and business research ltd

Unit 1, 4 Bath Street, London EC1V 9DXt: 020 7324 2850 f: 020 7324 2855 e: advice@cebr.com w: www.cebr.com

© Centre for economics and business research ltd, 2013

To disentangle the relationship between globalisation and inequality;

To understand the forces driving changes in inequality

To consider the impact of globalisation on world poverty

Objective

© Centre for economics and business research ltd, 2013

The background to the debate

Inequality within countries

Inequality between countries

The process of economic development

Technology v globalisation

The role of industrial organisation

Football – the example of soccer salaries

What has happened to poverty

Conclusions

Overview

© Centre for economics and business research ltd, 2013

Implications of global shift

Intense international trade competition – the new economies are not just competitive but ‘supercompetitive’ because they have an entirely new cost basis

Rising real prices of natural resources – food, energy, fuel, materials

Slower growth in the Western world and faster growth in the emerging economies

Lower interest rates as a result of savings glut (see currencies and interest rate section later)

More volatile international economy

© Centre for economics and business research ltd, 2013

19131917

19211925

19291933

19371941

19451949

19531957

19611965

19691973

19771981

19851989

19931997

20012005

20090

2

4

6

8

10

12

14

16

Shares of total income received by wealthy groups % of total income USA

100 to 50 50 to 10 10 to 5 5 to 2 Top 0.1% Top 0.01%

© Centre for economics and business research ltd, 2013

19131917

19211925

19291933

19371941

19451949

19531957

19611965

19691973

19771981

19851989

19931997

20012005

20090

2

4

6

8

10

12

14

16

18

Shares of total income received by wealthy groups % of total income USA

100 to 50 50 to 10 10 to 5 5 to 2 Top 0.1% Top 0.01%

© Centre for economics and business research ltd, 2013

19131917

19211925

19291933

19371941

19451949

19531957

19611965

19691973

19771981

19851989

19931997

20012005

20090

2

4

6

8

10

12

14

16

18

Shares of total income received by wealthy groups % of total income USA

100 to 50 50 to 10 10 to 5 5 to 2 Top 0.1% Top 0.01%

© Centre for economics and business research ltd, 2013

19131917

19211925

19291933

19371941

19451949

19531957

19611965

19691973

19771981

19851989

19931997

20012005

20090

2

4

6

8

10

12

14

16

18

Shares of total income received by wealthy groups % of total income USA

100 to 50 50 to 10 10 to 5 5 to 2 Top 0.1% Top 0.01%

© Centre for economics and business research ltd, 2013

19131917

19211925

19291933

19371941

19451949

19531957

19611965

19691973

19771981

19851989

19931997

20012005

20090

2

4

6

8

10

12

14

16

18

Shares of total income received by wealthy groups % of total income USA

100 to 50 50 to 10 10 to 5 5 to 2 Top 0.1% Top 0.01%

© Centre for economics and business research ltd, 2013

19131917

19211925

19291933

19371941

19451949

19531957

19611965

19691973

19771981

19851989

19931997

20012005

20090

2

4

6

8

10

12

14

16

18

Shares of total income received by wealthy groups % of total income USA

100 to 50 50 to 10 10 to 5 5 to 2 Top 0.1% Top 0.01%

© Centre for economics and business research ltd, 2013

OECD data on trends in income inequality

© Centre for economics and business research ltd, 2013

Possible causes of the recent trend towards increasing inequality

OECD Topics

Globalisation (but which aspect?)

Skill biased technical change (SBTC)

Labour market changes

Product market and regulatory changes

Household specific issues – eg increasing single parent households

Others

Changed relationship between owners and managers

Emergence of a ‘winner takes all’ star system

© Centre for economics and business research ltd, 2013

Definitions of different income groups for countries

© Centre for economics and business research ltd, 2013

Poor Lower middle incomes

Upper middle incomes

Rich0

1

2

3

4

5

6

7

Per capita income annual percentage real (PPP) growth 2000-10

Source: World Bank

What has happened to income inequality between countries?

© Centre for economics and business research ltd, 2013

Source: James H Chan-Lee and Helen Sutch Profits and Rates of Return OECD

© Centre for economics and business research ltd, 2013

Time series of profits share – UK 1920 to 1980

Source: James H Chan-Lee and Helen Sutch Profits and Rates of Return OECD

© Centre for economics and business research ltd, 2013

1929

1933

1937

1941

1945

1949

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

2009

0

5

10

15

20

25

30

35

40

US gross operating surplus share of GDP

Source: US Department of Commerce Bureau of Economic Analysis

the prospects service

Manchester United revenues 2006-10

the prospects service

How Manchester United’s revenues have changed

1968/69 1987/88 2012/130

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

310,000 7,577,000

320,000,000

Income in current £

the prospects service

How Manchester United’s revenues have changed in 2010 £

1968/69 1987/88 2012/130

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

4,200,00016,000,000

290,000,000

Income in 2010 £

the prospects service

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000Average weekly wages in 1st Division/Premier League

How Premier League footballers’ weekly salaries have changed

the prospects service

Average earnings Lower league Top league0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Annual pay in 1971

In 1971 a top footballer was paid just over 4 times what a player in the lower leagues earned (who earned less than average earnings!)

the prospects service

In 2012 an average Premier League footballer earns nearly 50 times what a player in the lower leagues gets

Average earnings Lower league Top league0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

Annual pay in 2012

the prospects service

the prospects service

According to Brookings, the millennium anti-poverty goal may already have been achieved

Source: ‘Poverty in Numbers: The Changing State of Global Poverty from 2005 to 2015’

Laurence Chandy and Geoffrey Gertz, The Brookings Institution, January 2011

the prospects service

According to Brookings, by 2015 the number of poor will have fallen from 1.4 billion people in 2005 to fewer than 600 million

Source: ‘Poverty in Numbers: The Changing State of Global Poverty from 2005 to 2015’

Laurence Chandy and Geoffrey Gertz, The Brookings Institution, January 2011

the prospects service

Conclusions

• In recent years, income inequality in most countries has risen

• But the effects of this have been offset by a fall in income inequality between countries

• Globalisation is one of the causes but others include information technology and the impact of shareholders trying to incentivise better performance from managers

• In the early 1970s, top footballers earned 4 times the earnings of lower league footballers while stars earned twice the top league average, today top footballers earn 50 times the earnings from lower leagues while stars earn 10 times the top league average. This has been driven by TV technology and globalisation

• But while all this has been going on at the top end, poverty has been reduced dramatically. The number of people in poverty by 2015 is set to be down by three quarters from the number in 1990.

• The main cause of the fall in poverty has been globalisation and economic growth, not aid

the prospects service

The sophisticated economic policy of the San Francisco Occupy movement

the prospects service

Globalisation and inequality

Douglas McWilliams, Mercers’ School Memorial Professor of Commerce at Gresham College and Chief Executive of Cebr