Have you ever wondered why discount stores all locate in the same parts of the city, and are typically right next to one another? This is also true of car dealers, bookshops, furniture stores, antique dealers, and fast-food restaurants. Travel to other countries and you observe the same phenomenon. What does this clustering of similar stores have to do with candidates in two-party elections espousing almost identical positions? Among the major candidates who ran for US president in the 2000 primary campaign, it was virtually impossible from listening to their positions – if they bothered to reveal one – to know their party affiliations. Is John McCain a Republican or a Democrat? The same question could be asked about Bill Bradley. Party labels have become less descriptive of candidates' positions. This is not only true in the United States; for example, is Britain's Tony Blair a Tory or a Labour Party member? The field of public choice, which applies economic methods to the study of political science, addresses the convergence of candidates' platforms as well as myriad other questions. These questions include the following. Does a multiparty system provide more choice than its two-party counterpart? Does logrolling serve a useful purpose, or does it lead inevitably to too much government as vote trading allows for the passage of more spending programs? Can majority rule lead to the efficient provision of public goods?

Suppose that the bodies of three great political economists – Adam Smith, Thomas Robert Malthus, and David Ricardo – had not decayed into dust, but had instead been frozen and preserved through the ages. How would these three philosophers view economic thought and methods today if they were reincarnated? It would be an amusing sight to see Adam Smith wandering a modern campus muttering to himself, clad in Reeboks, blue jeans, and a baseball cap, rather than his usual buckle shoes, knee breeches, and beaver hat. Ricardo and Malthus would delight in seeing one another and renewing their lifelong debate over the principles of political economy, now by e-mail. As a gifted businessman and stock trader, a reincarnated Ricardo would be apt to exercise his astute business acumen and amass a fortune as an entrepreneur of space technology or as a day trader. Malthus would look at the growth of population in the less-developed countries (LDCs) and feel partly vindicated. For advanced industrial countries, he would point to the second edition of his Essay on the Principle of Population as It Affects the Future Improvement of Society, in which he recognized the exercise of moral restraint from marriage and childbearing. Nevertheless, he would marvel at the Earth's ability to support six billion people, about six times the world population at the time of the first edition of Malthus's essay in 1798.

Each of these great economists would have to reassess some of his key predictions and policy prescriptions.

One morning I awoke to find that I had changed. Although I had not grown a shell and turned into a beetle, as in Kafka's story, I had experienced a fundamental metamorphosis in my views of economics and my role as an economist. I could no longer fathom why I had followed my fellow economists in making my writing accessible to so few. I realized that economics had taken root because the writings of Adam Smith and David Ricardo could be read by any educated person, including policy makers. So I decided then and there to write more general-interest pieces and to communicate more widely. If I succeeded, then maybe even my brothers and sisters would finally understand what I study and do. I began this task with Global Challenges: An Approach to Environmental, Political, and Economic Problems, which showed how basic game theory could enlighten us on a host of exigencies confronting humankind. This book opened doors previously shut to me, thus reinforcing my revelation that being understood by people in international organizations, students in universities, and others among the general population had its rewards. But Global Challenges was only a halfway house, because many of the game concepts remained abstruse.

The success of Global Challenges emboldened me to go further with my venture. Thus, I coauthored The Political Economy of NATO with Keith Hartley. This book was written for an interdisciplinary audience that included political scientists.

In this chapter, we examine the comovement of macroeconomic variables, similarities, and dissimilarities of industrial structure, as well as patterns of similarity and dissimilarity in the movement of inequality in manufacturing earnings. This information can illuminate the degree of economic integration across countries in a region, and it can highlight important differences between Europe and Asia. We then examine the relationship between financial crisis and the movement of inequality. We show that crises typically generate increases in inequality, but more so in less developed countries and more so in regions that are more liberal in their policy regimes.

Introduction

In this short chapter, we examine the comovement of macroeconomic variables, similarities and dissimilarities in industrial structure, and the movement of inequality in manufacturing earnings, on which we have annual information for much of the global economy over the past thirty years. We argue that this information can illuminate the degree of economic integration across countries in a region and that it can highlight important differences between Europe and Asia. We then examine the relationship between financial crisis and the movement of inequality.

Macroeconomic Comovement and Regionalization

Was there an Asian crisis? Or again, was there an Asian crisis? Was the financial crisis that swept across the Pacific Rim in the summer of 1997, with a cascade of stock market crashes, currency devaluations, and regime changes, notably in Indonesia, specifically Asian, reflecting distinctive characteristics of the Asian region?

This chapter introduces in nontechnical terms the principal techniques used in this book: Theil's T statistic, cluster analysis, and discriminant function analysis.

Introduction

How does one measure whether one society is more equal than another? Or whether an economy is more equal than it had been in the past? Equality is a broad concept with many layers of meaning: There is equality and inequality in legal rights, in social and political standing, and in many matters of culture. And even within the economic dimension, one may focus on inequalities of wealth, of family income, of individual earnings, and of wage rates. Each of these has its own importance, and each is measured from different sources of data and in slightly different ways.

Most of the theoretical literature on economic inequality is concerned with the determinants of pay: with wage rates and employment prospects, which together determine earnings in particular industries and occupations. Pay rates and job openings are a characteristic of the employer and the workplace. Yet most of the empirical work on inequality derives from surveys whose focus is on employees and their households, which are aimed mainly at assessing the distribution of family or household income. This is an important, even vital, issue, obviously: The distribution of household income is a key social fact. Yet data sources based on household surveys of income only indirectly provide information about the distribution of wage rates.

For most of Latin America, the 1970s were a decade of growth, though with political upheaval in Argentina and Chile. The 1980s were a disaster. The 1990s saw economic reform, liberalization, a return to democracy, and financial turmoil. This chapter reviews the three decades as one piece through an analysis of the evolution of earnings inequality from year to year in eight major Latin American countries and one Caribbean nation. We find that changes in earnings inequality are a sensitive indicator of slump, repression, political turmoil, civil war, natural disaster, and – on the positive side – occasional periods of growth and stability in Latin America. Indeed, almost the whole recent history of Latin America can be summarized in the movement of industrial inequality statistics.

Introduction

This chapter focuses on the relationship between industrial earnings inequality and the political history of Latin America. First, we offer a word on the data and the method used to construct a measure of the movement of industrial earnings inequality for each of the countries under study. Second, we investigate the relationship between political regimes and changes in earnings inequality for each of the countries, including orthodox and heterodox stabilizations and the transition from closed to open trading systems. Third, we examine the relationship between economic growth and our measurement of inequality and present the report card for each of the regimes of the countries studied. Conclusions stressing policy implications complete the chapter.

In this chapter, we use industrial data to derive estimates of the pattern of change in wage inequality in Mexico and Brazil. Using the group decomposition of Theil's T statistic, we present monthly changes in the dispersion of industrial wages for Brazil (1976 through 1995) and for Mexico (1968 through 1998). Both countries show increases in wage dispersion over time, and we find a strong negative correlation with the rate of real economic growth. Other things being equal, the later Brazilian heterodox stabilization plans seem to have reduced inequality in the short run.

Introduction

A great many things have been written about inequality on the basis of evidence that may charitably be described as thin. As the recent work of Deininger and Squire (1996a) makes clear, the measurement of household and personal income inequality for most countries has been sporadic and of uneven quality. Even where these authors judge the data to be of acceptable quality, the number of observations is generally too few to permit useful time-series analysis. Over the quarter century from 1970 to 1995, Deininger and Squire find only fourteen acceptable estimates for Brazil and only five for Mexico.

This chapter presents measurements of change in the dispersion of industrial wages for Brazil from 1976 through 1995 and for Mexico from 1968 through 1998.

This chapter presents a brief review of the relationship between various forms of state violence–including war, revolution, civil violence, and coups d'état–and a measure of inequality of manufacturing earnings in countries around the world over the period 1960 to 1995. We find evidence of several systematic relationships, of which the strongest and most striking is that coups precede a long period of rising inequality with a very high probability.

Introduction

This chapter asks whether there exist systematic relationships between levels of state violence and changes in economic inequality in countries around the world. The question is, of course, quite natural. Entire lexicons exist that describe economic relationships in terms that evoke violence; exploitation, dependency, unequal exchange, and class struggle are but prominent examples. And the case histories of war, revolution, repression, and coups d'état are loaded with what seem – transparently – to be efforts either to rectify gross inequalities or to impose them.

Yet from the standpoint of an empiricist interested mainly in the search for patterns in data, substantial obstacles stand in the way of definite observations. First of all, there is the difficulty that reliable measures of short-term change in economic inequality, measures that are both consistent and consistently available, particularly in countries that have been wracked by violence, have not existed. Second, there is the problem of arriving at a consistent categorization of types of violence, so that one may define the predicted effect of each type on economic inequality and vice versa.

This chapter presents an analysis of the evolution of industrial wages in a selection of Organization of Economic Cooperation and Development (OECD) countries, using data drawn from the structural analysis database and a sequence of techniques that apply cluster and discriminant analysis to time series of wage change by industry. The principal finding is that a small number of well-defined groups of industries usually exist whose cross-group differences account for almost all interindustry wage variation. While the specific structure of groups varies according to patterns of natural resources, comparative advantage, and trade union organization within each country, the between-group variation across time usually reflects the movement of macroeconomic variables, some of them internal and other external, such as inflation and exchange rates.

Introduction

Since the time of Slichter's (1950) groundbreaking work, the literature on wage structures has often used the concept of rent sharing to explain differences in pay between similar workers in different industries. In a recent article, Blanchflower, Oswald, and Sanfey (1996) reaffirm Slichter and Lester's (1952) analysis, which shows that the distribution of profits to workers accounts for almost a quarter of interindustry wage differentials. And yet, although (as Blanchflower et al. delicately put it) rent sharing is inconsistent with conventional competitive models, the literature continues to rely largely on the competitive framework to interpret changes in the distribution of pay.

This chapter provides a summary of information in the UTIP data set on the evolution of industrial earnings inequality in the global economy. At this writing, the data set covers over seventy countries, with annual observations going back to 1972 in most cases and to 1963 in many. Our measure of changing inequality, based on the groupwise decomposition of the Theil statistic across industrial categories, appears to be a sensitive barometer of political and economic conditions in many countries, and the percentage change in this index appears to be meaningfully comparable across countries.

Measurement of Inequality Around the World

As the previous chapter made clear, the work of Deininger and Squire (1996a) has greatly advanced our knowledge of the state of research into income inequality around the world. By assembling a vast amount of past research, these authors have brought us as close as we are likely to get to having a comprehensive set of Gini and quintile estimates of the distribution of household or personal income across countries and through time. Yet, it is not enough to permit an authoritative examination of the effects of economic change on inequality in the world economy. Specifically, the effects of growth and globalization on wage inequality cannot be elucidated using these data, and, we argue, attempts to do so are likely to produce more perplexity than they are worth.

This chapter uses industrial wage data to examine changes in the interindustry structure of wages between 1920 and 1947. We first sort among the available data on wage changes by industry and occupation to identify blocs that exhibit common patterns of wage change over time. We then analyze the sources of wage variation across groups and through time. We identify four such forces that together explain 97 percent of the variance in wage change across groups, and we identify variables in the historical record that appear to correspond to these forces. In a reversal of the usual notions of micro-to-macro causality, we argue that a small number of macroeconomic variables thus account for a large proportion of distributional changes.

Introduction

Impressed by the sweeping implications of the mind–body problem, the German philosopher Arthur Schopenhauer referred to that famous conundrum as the Weltknoten, the “World Knot.” Economic history is more prosaic. Yet the economic experience of the United States between World War I and the end of World War II did generate one problem with nearly as sweeping repercussions in its field: the behavior of wages.

This period spans the slump following World War I, the Roaring Twenties, the Great Depression, the New Deal, and World War II – times of turmoil encompassing every form of economic, technological, political, and social change. Studies of wage determination during this time can therefore illuminate many competing hypotheses, perhaps more effectively than studies of the allegedly more tranquil postwar period.

In a recent book on the determinants of economic growth, Robert Barro (1997) argues that global capitalism is characterized by conditional convergence: Poorer countries tend to grow more rapidly and thus to catch up with their developed neighbors and trading partners, provided that they equip themselves with appropriate institutions and policies. Barro points to significant statistical associations between schooling, public health, and democratic political institutions, on the one hand, and subsequent periods of strong economic growth on the other. He also argues that economic development tends to yield progress toward democracy over time.

Barro's work may be questioned on many empirical grounds. His data are heterogeneous and sometimes obscure, involving efforts to assign quantitative measures to qualitative phenomena (why, for instance, is South Africa's “index of democracy” three times higher than Tanzania's for 1975?). His casual remark that “non-democratic places that experience substantial economic development tend to become more democratic. Examples are Chile” (p. 61) suggests a perhaps tenuous grip on modern political history. And one can't help noticing that his predictions of high-growth “winners” for the period 1996–2000, including South Korea, Thailand, the Philippines, and Hong Kong, have been overtaken by the Asian crisis and its aftermath. Decidedly, statistical prediction in economic development can be a dangerous affair.