James K. Galbraith: Global Finance and Global Inequality - An Analysis Built on Global Measurement

⬤ What is your background and how did you become interested in global inequality?

I am a professional economist, raised in the historical, institutional and political tradition of my father, trained formally the University of Cambridge and at Yale in the 1970s, with an early career on the staff of the US Congress, ultimately serving as Executive Director of the Joint Economic Committee in the early 1980s. In that capacity I organized one of the first modern-day hearings to inquire into rising inequality in the United States. Having moved to the University of Texas at Austin in 1985, I was drawn into the formal study of inequality in the early 1990s by a request from a foundation for a monograph on the then-burgeoning economic literature. I found that to make a useful contribution, it was necessary first to develop better measures of inequality than were then available. That work first surfaced in a book on the United States, Created Unequal, in 1998. By then, I had begun to attract a talented group of PhD students, including from Brazil, Portugal, China, Korea and Mexico as well as the US, and with backgrounds in physics, operations research, political science and budgeting. So we set out to extend our reach, in informal weekly research meetings that developed into the “University of Texas Inequality Project,” now in its third decade. Our technique is based on measuring the inequality across groups – which may be geographic units such as provinces, states or counties, or industrial units such as standard industrial classification categories, or broader economic sectors. This approach has the great advantages of being very fast, very cheap, and very accurate as we have demonstrated in numerous studies. Eventually we developed two major data sets that span almost the entire world for the years 1963 to 2014. One of them measures inequalities in industrial pay structures, based on data from the United Nations, while the other, the “Estimated Household Income Inequality” (EHII) data set, translates those measures in the familiar format of the “Gini coefficient.” These data sets, with over 4,000 country-year observations for over 150 countries, are the largest of their kind that are consistent in the specific income concept that they measure, and that are calculated without filling gaps by averaging across years or between countries. They are widely used for applied research into movements of inequality over time, into comparative levels of inequality between countries, and into common patterns of change that affect the world economy as a whole.

⬤ What is global inequality?

That is a complex question, and you may be sorry you asked. There is no simple or single answer. Early researchers concentrated on the inequalities of income between rich and poor countries, using  measures of average country income – a very primitive approach. Others modified that approach by weighting countries by their populations, which gives a very heavy weight to developments in China and India, with between them about 40 percent of the world's population. Others have tried to measure the inequality of incomes across persons or households, irrespective of nationality, in the world economy. And then there are attempts to measure differences and inequalities in wealth, a much more challenging and problematic task that we have not engaged with. Our approach is to measure household income inequalities of a particular type – including in income government transfer payments (such as pensions) but not subtracting direct taxes (such as income taxes). We chose this concept because it can be estimated consistently for the largest number of countries and across the longest span of years, and therefore provides (in our view) the best basis for comparisons. Income is far from being a perfect measure! It is not a perfect synonym for well-being or happiness, and it does not perfectly predict health or life chances or freedom. Indeed, there are many aspects of the inequality of global economic life that mere income measures cannot capture. But in our view there are advantages to sticking with something that can be defined and measured reliably, as this permits one to interrogate the data, to find common trends and consistent patterns, and so to understand the whys and hows of economic change. And it is reasonably clear that differences in income inequalities are associated with other kinds of inequalities as well, including inequalities of race and gender.

I have lived in India as a child, in France and the UK as a student, and I married into the People's Republic of China. I have traveled extensively in Europe including Russia, moderately in Latin America, some in China, and not nearly enough in the rest of Asia or Africa. I served for four years, 1993-1997, as Chief Technical Adviser to the State Planning Commission of the People's Republic of China for Macroeconomic Reform, and I assisted the Ministry of Finance of the Hellenic Republic during the debt-and-austerity struggles of the early SYRIZA government in 2015. I maintain academic connections in Moscow, and am the only American member, so far as I know, of the Free Economic Society of the Russian Federation, chartered by Catherine the Great in 1765.  I am an elected member of the Accademia Nazionale dei Lincei, the Italian scientific academy established in 1604, and I have maintained extensive academic contacts in Italy in recent years. But most of my work on inequalities has been carried out in Texas, where my true exposure to the world has come from bringing students into the UTIP project.  In addition to the countries mentioned above that were represented in the first cohort, students from Spain, Sudan, India, Iran, France, Belarus, Poland, and Argentina have made important contributions, and their perspectives have illuminated and enriched our work. I have also had the opportunity to present this work around the world on many occasions, including in South Africa, Korea, Germany, Italy, France, the UK, Argentina, Norway, Mexico, Brazil, Russia and China. A very wide group of international scholars and students have come into contact with our work over the years, and have helped me to improve my understanding of both general trends and particular cases and also anomalies and puzzles that have cropped up from time to time.

⬤ What are the main historical causes of global inequality?

Current global inequalities are the historical byproduct of conquest, imperialism, colonialism and dependency. They emerge out of the dynamics of capitalist expansion and the industrial revolution in the 18th and 19th centuries, out of the outcome of the Second World War and the end of the old European empires, out of socialist revolutions and their aftermath, and out of the financial hegemony of the United States in the postwar world. Importantly, in our measures, the wealthy industrial countries in the 1960s, being possessed of a large working and middle class, were also much more egalitarian than the newly-independent, agrarian and mining countries of the tropical zones. In the past forty years, movements of inequality as we have measured them are closely associated with changes in the global financial regime. A first turning point occurred with the turmoil of the early 1970s; following which in many developing countries inequalities declined with rapid growth and good export prices. A second, and more important global turning point occurred around 1981, with the rise of Reagan in the United States, Thatcher in Britain, the first postwar global debt crisis and the triumph of austerity and free-market economics, imposed through debt peonage. We observe a vast rise in inequalities around the world that begins in Latin America, Africa and parts of Asia. It continued in the early 1990s with the collapse of the socialist bloc and of the USSR, which generated chaotic increases in inequalities in Eastern Europe and the post-Soviet states. Then the pattern of rapidly rising inequalities moved to Asia, where liberalizations notably in India began in 1992, while those in Korea, Indonesia and Thailand culminated in the financial crisis of 1997. By our measures the general level of income inequalities around the world now broadly resembles that of the tropical regions in the 1960s; only a handful of countries in northern and eastern Europe have preserved income inequality levels close to those of sixty years ago. However since 2000 the pattern of increasing inequalities has been mixed, and broken by periods of improvement, notably in Latin America and in parts of Africa, where the neoliberal policies were eventually resisted and replaced, and also in Russia, which recovered (to a large degree) from the chaotic depression of the 1990s. In China, which was never a neoliberal economy and never (in recent times) subject to financial domination from abroad, the rise in inequalities of the early 1990s gave way to a broadening and deepening of prosperity, especially across provinces, that has reduced inequalities, somewhat, beginning in the middle 2000s.

⬤ What are the most pressing contemporary challenges concerning global inequality and how do we deal with them?

The topic of inequalities is fraught with myths; a key challenge lies in disabusing ourselves of mistakes and falsehoods. The broad movement of economic inequalities in the world is not due to mysterious forces of technology, it is not the product of developments in so-called “labor markets.” It is not driven by the relative demand for and supply of an unmeasurable quantum called “skill.” Still less is it the fault of migrant workers; it is not much influenced by trade, and it cannot be remedied by education, training or similar faux-policies that place the burden of action on the victims and not the perpetrators. In a world of financial capitalism, the supply of inequality is governed by the conduct and misconduct of finance, working through debt, interest burdens and speculations in international currency markets.  Controlling the rapacity of global finance and its ideological circuit-riders, the neoliberal economists, is the most pressing challenge facing those who would like to get inequality in world incomes under control. Dealing with that challenge is, of course, a daunting proposition. Large countries like China, Russia, Iran, India should it so choose, and (to a degree) Brazil have the capacity to handle their internal affairs without reliance on external finance. With finance under control, they can then pursue programs of social development, affecting housing, health care, education, communications, water, power and other vital services for achieving what is known in some advanced development circles as “the good life” or “buon vivir.” For smaller countries the problem is more difficult; the temptations of easy credit are great, and divide and rule has always been an effective tactic. Without the cooperation of the countries in the financial center – cooperation which is not to be expected – the smaller countries of the wider world need to band together, probably best on a regional basis, to create zones of global financial regulation and stability. Certain small countries have actually made progress in this direction at certain times in recent decades – Ecuador is an example, as are Bolivia, Uruguay, and certain countries of East Africa. The challenge for them is to learn from effective examples, to expand the coverage of the successful cases, and ward off the predatory attentions of false friends and ideologues. The challenge for those in the rich countries who care about this issue is to try to get our own financial sectors under effective regulation and control, and to support progressive forces where and as they emerge in the developing regions.

To cite this source, kindly cite as follows:

James K. Galbraith, “Global Finance and Global Inequality: An Analysis Built on Global Measurement,” in Key Questions on Global Inequality, edited by Christian Olaf Christiansen, Mélanie Lindbjerg Guichon, Oliver Bugge Hunt & Priyanka Jha, online version March 22nd 2021, http://global-inequality.com/interview-series-james-k-galbraith/

⬤ What is global inequality?

That is a complex question, and you may be sorry you asked. There is no simple or single answer. Early researchers concentrated on the inequalities of income between rich and poor countries, using  measures of average country income – a very primitive approach. Others modified that approach by weighting countries by their populations, which gives a very heavy weight to developments in China and India, with between them about 40 percent of the world's population. Others have tried to measure the inequality of incomes across persons or households, irrespective of nationality, in the world economy. And then there are attempts to measure differences and inequalities in wealth, a much more challenging and problematic task that we have not engaged with. Our approach is to measure household income inequalities of a particular type – including in income government transfer payments (such as pensions) but not subtracting direct taxes (such as income taxes). We chose this concept because it can be estimated consistently for the largest number of countries and across the longest span of years, and therefore provides (in our view) the best basis for comparisons. Income is far from being a perfect measure! It is not a perfect synonym for well-being or happiness, and it does not perfectly predict health or life chances or freedom. Indeed, there are many aspects of the inequality of global economic life that mere income measures cannot capture. But in our view there are advantages to sticking with something that can be defined and measured reliably, as this permits one to interrogate the data, to find common trends and consistent patterns, and so to understand the whys and hows of economic change. And it is reasonably clear that differences in income inequalities are associated with other kinds of inequalities as well, including inequalities of race and gender.

I have lived in India as a child, in France and the UK as a student, and I married into the People's Republic of China. I have traveled extensively in Europe including Russia, moderately in Latin America, some in China, and not nearly enough in the rest of Asia or Africa. I served for four years, 1993-1997, as Chief Technical Adviser to the State Planning Commission of the People's Republic of China for Macroeconomic Reform, and I assisted the Ministry of Finance of the Hellenic Republic during the debt-and-austerity struggles of the early SYRIZA government in 2015. I maintain academic connections in Moscow, and am the only American member, so far as I know, of the Free Economic Society of the Russian Federation, chartered by Catherine the Great in 1765.  I am an elected member of the Accademia Nazionale dei Lincei, the Italian scientific academy established in 1604, and I have maintained extensive academic contacts in Italy in recent years. But most of my work on inequalities has been carried out in Texas, where my true exposure to the world has come from bringing students into the UTIP project.  In addition to the countries mentioned above that were represented in the first cohort, students from Spain, Sudan, India, Iran, France, Belarus, Poland, and Argentina have made important contributions, and their perspectives have illuminated and enriched our work. I have also had the opportunity to present this work around the world on many occasions, including in South Africa, Korea, Germany, Italy, France, the UK, Argentina, Norway, Mexico, Brazil, Russia and China. A very wide group of international scholars and students have come into contact with our work over the years, and have helped me to improve my understanding of both general trends and particular cases and also anomalies and puzzles that have cropped up from time to time.

⬤ What are the main historical causes of global inequality?

⬤ What are the most pressing contemporary challenges concerning global inequality and how do we deal with them?

The topic of inequalities is fraught with myths; a key challenge lies in disabusing ourselves of mistakes and falsehoods. The broad movement of economic inequalities in the world is not due to mysterious forces of technology, it is not the product of developments in so-called “labor markets.” It is not driven by the relative demand for and supply of an unmeasurable quantum called “skill.” Still less is it the fault of migrant workers; it is not much influenced by trade, and it cannot be remedied by education, training or similar faux-policies that place the burden of action on the victims and not the perpetrators. In a world of financial capitalism, the supply of inequality is governed by the conduct and misconduct of finance, working through debt, interest burdens and speculations in international currency markets.  Controlling the rapacity of global finance and its ideological circuit-riders, the neoliberal economists, is the most pressing challenge facing those who would like to get inequality in world incomes under control. Dealing with that challenge is, of course, a daunting proposition. Large countries like China, Russia, Iran, India should it so choose, and (to a degree) Brazil have the capacity to handle their internal affairs without reliance on external finance. With finance under control, they can then pursue programs of social development, affecting housing, health care, education, communications, water, power and other vital services for achieving what is known in some advanced development circles as “the good life” or “buon vivir.” For smaller countries the problem is more difficult; the temptations of easy credit are great, and divide and rule has always been an effective tactic. Without the cooperation of the countries in the financial center – cooperation which is not to be expected – the smaller countries of the wider world need to band together, probably best on a regional basis, to create zones of global financial regulation and stability. Certain small countries have actually made progress in this direction at certain times in recent decades – Ecuador is an example, as are Bolivia, Uruguay, and certain countries of East Africa. The challenge for them is to learn from effective examples, to expand the coverage of the successful cases, and ward off the predatory attentions of false friends and ideologues. The challenge for those in the rich countries who care about this issue is to try to get our own financial sectors under effective regulation and control, and to support progressive forces where and as they emerge in the developing regions.