Why inequality doesn't matter

The Economist has a great story on the growth of the economies of the developing world (via Johan Norberg). It really goes a long way in explaining why global inequality is irrelevant.

Indeed, it is likely to be the biggest stimulus in history, because the industrial revolution fully involved only one-third of the world’s population. By contrast, this new revolution covers most of the globe, so the economic gains—as well as the adjustment pains—will be far bigger. As developing countries and the former Soviet block have embraced market-friendly economic reforms and opened their borders to trade and investment, more countries are industrialising and participating in the global economy than ever before.

An the funny thing is that it also proves what Libertarians have always said that the economy is not a zero sum game. Just because people are winning doesn’t mean there has to be loosers. The developing world is not winning at the expense of the developed world as many demagogues from both the left and right claim.

This increased vitality in emerging economies is raising global growth, not substituting for output elsewhere. The newcomers boost real incomes in the rich world by supplying cheaper goods, such as microwave ovens and computers, by allowing multinational firms to reap bigger economies of scale, and by spurring productivity growth through increased competition. They will thus help to lift growth in world GDP just when the rich world’s greying populations would otherwise cause it to slow. Developed countries will do better from being part of this fast-growing world than from trying to cling on to a bigger share of a slow-growing one.

Yet the response from the developed world is still the same:

Faster growth that lifts the living standards of hundreds of millions of people in poor countries should be a cause for celebration. Instead, many bosses, workers and politicians in the rich world are quaking in their boots as output and jobs shift to low-wage economies in Asia or eastern Europe. Yet on balance, rich countries should gain from poorer ones getting richer. The success of the emerging economies will boost both global demand and supply.

If you travel in the developing world you can see this. The growth is not an abstract growth that only reaches the rich. Not at all like the scare picture that the media here in Denmark and elsewhere try to depict. People eat much better than before, have better clothes (Panama imported about 8 million shoes from Vietnam last year), better housing, better gadgets, a louder voice (due to the Internet) and many other benefits.

An interesting side effect in the developing world. In particular in relative open economies such as the US, the UK and Denmark has been lower inflation:

Central bankers like to take the credit for the defeat of inflation, but emerging economies have given them a big helping hand, both by pushing down the prices of many goods and by restraining wages in developed countries. This has allowed central banks to hold interest rates at historically low levels. But they have misunderstood the monetary-policy implications of a positive supply shock.

Great article and highly interesting.