Debate: Does Global Inequality Fade as Global Economy Grows? Hong Kong tops

January 24, 2007

Sala-i-Martin, Xavier. 2006.”Global Inequality Fades as the Global Economy Grows.” 2007 Index of Economic Freedom.

The report of 13th annual Heritage Foundation/Wall Street Journal Index of Economic Freedom 2007 was cited in the January 23, 2007 online version of The Economist under Business This Week. Economic Freedom of 161 countries is measured and ranked from 0 to 100 with 0 demarcating countries with the least freedom. The index designed for public policymakers and investors uses ten variables, such as tax rates, ability to do business, property rights, corruption, labour freedom and property rights. Some countries such as Iraq were excluded from the survey. Using a new formula this year liberty worldwide is on the rise compared to the entire period investigated (c.1995-2006) although slightly less in 2006(60.6%) as compared to 2005 figures. What is problematic about this index is the way in which market liberalism is confounded with a more inclusive concept of liberty.
This annual index cites Adam Smith‘s The Wealth of Nations in 1776 as its foundational theoretical framework and measures ten variables, such as the ability to do business, property rights, corruption and labour freedom. The average score (0 equals repressed, 100 equals free) was 60.6%, down slightly from last year but the second-highest since the survey began. North Korea remained rooted at the bottom (several countries, including Iraq, were not ranked).

According to Index of Economic Freedom 2007 Hong Kong, United States, Britain, Chile, Japan, Germany, Israel and Thailand are the best countries in the world to do business. North Korea, Zimbabwe, Nigeria, Russia, China, Turkey, Brazil and Italy are the worst places for free market trade.

Since the 18th century Smith’s theories have been used to explain capitalism asa means of promulgating peace since war interrupts trade between nations. In a recent article (2006) in Le monde diplomatique,sociologist Professor Alain Bihr, reveals how this concept of capitalism and freedom of the market as generator of peace, embedded in concepts of classical liberal economy, forgets the nature of production (Bihr 2006 citing Smith 1904 [1776]). Smith’s theories continue to inform investigations of the study of liberal thought and the history of capitalism, such as the Index of Economic Freedom.

Adam Smith’s arguments are used as a rebuttal to the United Nations Development Programme’s Human Development Report (1999) which decries the widening gap between the poorest and richest countries. In 1997 the upper quintile controlled 74 times the income of the lowest quintile, whereas in 1960 the figure was 30 times the income. (The extremes of wealth and poverty in Canada are discussed in )

What is too often ignored in liberal market theories is Adam Smith’s final concluding chapter in which he clearly indicates what must be done with surplus wealth in order to prevent the extremes of wealth and poverty. There is a responsibility on the part of the super rich to not simply accumulate their wealth as is the case of the ultra rich but to redistribute their wealth with an eye to hospitality.

When neither commerce nor manufactures furnish anything for which the owner can exchange the greater part of those materials which are over and above his own consumption, he can do nothing with the surplus but feed and clothe nearly as many people as it will feed and clothe. A hospitality in which there is no luxury, and a liberality in which there is no ostentation, occasion, in this situation of things, the principal expences of the rich and the great. But these, I have likewise endeavoured to show in the same book, are expences by which people are not very apt to ruin themselves. There is not, perhaps, any selfish pleasure so frivolous of which the pursuit has not sometimes ruined even sensible men. A passion for cock-fighting has ruined many. But the instances, I believe, are not very numerous of people who have been ruined by a hospitality or liberality of this kind, though the hospitality of luxury and the liberality of ostentation have ruined many (Smith 1902 [1776]: V.3.1).

In a future world individuals may well be entrusted with doing this voluntarily. But we are far from this state of equilibrium where the market balances itself. The Index of Economic Freedom cannot therefore be relied upon as a stand-alone tool measuring freedom. Concepts of hospitality and liberty need to be measured with the more sophisticated critical tools of the 21st century not with limited readings of brilliant texts of the 17the century.

In 2001 Peter Robinson invited Bruce Bartlett, Senior Fellow, National Center for Policy Analysis and Peter Orszag, Senior Fellow, Brookings Institution to debate questions concerning income inequality such as:

“How much does the gap between rich and poor matter? In 1979, for every dollar the poorest fifth of the American population earned, the richest fifth earned nine. By 1997, that gap had increased to fifteen to one. Is this growing income inequality a serious problem? Is the size of the gap between rich and poor less important than the poor’s absolute level of income? In other words, should we focus on reducing the income gap or on fighting poverty?” See the transcript or listen to the multimedia of Robinson, Peter. 2001. “Rich Man, Poor Man: Income Inequality.” Uncommon Knowledge. Filmed July 18, 2001 hosted by the Hoover Institution and funded by John M. Olin Foundation and the Starr Foundation, all pro-business think tanks.

Footnotes

While Canada now has a $4.8 trillion net worth, the lower quintile of the population have seen their net worth diminish while the net worth of the Ultra rich has increased.

Selected webliography

Bihr, Alain. 2006.“Aux origines du capitalisme: L’erreur fondamentale d’Adam Smith.” Le monde diplomatique online.November.
Flynn-Burhoe. 2007. “Rich Man Poor Man: Hospitality, Liberty and Measuring the Measurements.” Google Docs and Spreadsheets. January 24, 2007.

Heritage Foundation/Wall Street Journal Index of Economic Freedom 2007.

Robinson, Peter. 2001. “Rich Man, Poor Man: Income Inequality.” Uncommon Knowledge. Filmed July 18, 2001 hosted by the Hoover Institution.

Sala-i-Martin, Xavier. 2006.”Global Inequality Fades as the Global Economy Grows.” 2007 Index of Economic Freedom.

Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations. London: Methuen and Co., Ltd., ed. Edwin Cannan,1904. Fifth edition. complete online version

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