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Global Economic Growth Will Bring New Challenges

Paolo Mauro and Tomas Hellebrandt discuss their new book, "World on the Move," which argues that a projected reduction in the income gap between the rich and poor across the globe in the next 20 years will bring many new challenges to policymakers. As incomes rise, consumers worldwide are projected to spend proportionately less on food and more on transportation, energy, and services, which will in turn strain the global infrastructure and accelerate climate change. The largest income gains will be made in poorer parts of the world, chiefly sub-Saharan Africa and India, followed by China and the advanced economies. Mauro and Hellebrandt warn policymakers to prepare for the coming profound effects on the world economy and the planet.

Paolo Mauro (PIIE) and Tomas Hellebrandt (PIIE)

Unedited transcript

Pedro da Costa: Hi, I'm Pedro da Costa and this is Peterson Perspectives. I'm joined today by Paolo Mauro and Tomas Hellebrandt, and we're here to talk about their new book, which is called World on the Move: Consumption Patterns in a More Equal Global Economy. Thank you so much for joining me guys.

Paolo Mauro: Thank you.

Tomas Hellebrandt: Thank you.

Pedro da Costa: So, just a little background on the authors, Paolo is now at the International Monetary Fund, but until recently, he was a senior fellow here at the Peterson Institute for International Economics and Tomas is a former research fellow here at the Institute. And they did this very ambitious joint project while here at PIIE.

So, first of all, if you could tell me a little bit about the motivation behind the book, what propelled you to undertake this fairly large statistical project?

Paolo Mauro: Indeed. It's a pretty ambitious project. It was a lot of work. And the reason we started is that there was a lot of discussion about inequality, but the discussion had been primarily about inequality within countries. And we wanted to be more ambitious. We wanted to really go global.

Let's look at the global income distribution. Let's line up everybody in the world from the very poorest person to the very richest person and let's see how unequal they are today. And then let's take the consensus view of the economics profession for projections of economic growth, for population and so on, and let's see what that global income distribution is going to look like 20 years from now. That's an interest of itself.

But also we wanted to take a next step, which is to try and figure out what do these changes in global income distribution mean for what people would spend on in the next 20 years. So, 20 years from now, what will be the main consumption, goods and services, where will we see the largest growth in markets worldwide.

Pedro da Costa: And so, Tomas how does the research fit into the broader discussion about inequality, because the debate seems to have swung in both directions. At first, you had [inaudible 00:02:16] coming out and focusing on high levels of income inequality, but of course we're talking about within country income inequality.

And then, you had Branko Milanovic's favorite famous elephant chart that talks about how actually globalization forces inequality within countries and outside countries. Where in that spectrum does your research fall?

Tomas Hellebrandt: So, we're definitely closer to Branko Milanovic. As you mentioned, a lot of the discussion has been about inequality within countries. And in fact, at least in the English language literature has been focused on the US and the UK where inequality has been rising and particularly at the top of the distribution, the share of income going to the top 1%.

But when you look at the distribution from a global perspective, what you see is the opposite pattern. In fact, we're living through on unprecedented change wherein global inequality is falling. And this difference is partly because the US and the UK are not quite representative, because when you look at countries, you see quite a mixed picture. Some countries have seen inequality rising, some countries have seen it falling, but also because the changes within countries are swamped by the effect of convergence in average standard of living between the fast-growing emerging-market countries and the advanced economies.

Pedro da Costa: And so, given all of the work that you did, can you talk about what some of the contrasts were and how it affects popular perception? Because it seems easy to tell the story about how global inequality is decreasing, but if people like they're getting poor vis-à-vis their immediate neighbors that might exacerbate their negative sentiment and lead to potentially populist and political movements that take different directions. So, can you talk about how that affects popular perception?

Paolo Mauro: Yeah, absolutely. I mean, I think it's natural for people to care more about domestic inequality. Politics and policies are mostly nationally in scope and in a democracy it's natural for people to be concerned about how resources and opportunities are distributed amongst their fellow citizens.

And I think that between-country inequality, which is essentially about convergence or divergence in average standards of living, is often presented as a zero-sum game. So, if China is growing faster than the US, then we must be a loser. And I think that's very wrongheaded because you've got to ask yourself what would Europe or the US, what would be their growth rates if emerging-markets economies were stagnant? Our firms and workers benefit hugely from the opportunities created in emerging markets.

So, I think it's overall been a very positive trend over the past 15 years and we project that trend to continue over the next 20.

Pedro da Costa: And just to reiterate what Paolo said, just to give our viewers and listeners a sense of just what you did undertake. You were not only trying to project how demographic trends would evolve over this period, but also how this would affect consumption patterns and infrastructure, and these kinds of trends. And therefore, what kinds of needs government might have in terms of spending where they might need to allocate resources? And so, in that process, could you talk about some of what your more interesting findings were?

Tomas Hellebrandt: Well, on the inequality side, it's really striking to compare the distribution in 2015 with the projected distribution in 2035. If you look at where we are now, the distribution is very unequal, you have a large share of the world's population living on very meager incomes, half of the world's population is living on less than $2,500 a day over 70%--

Pedro da Costa: A year.

Tomas Hellebrandt: Sorry, a year. Over 70% of the world's population is below the US poverty line. So, people watching this video, most of them will be somewhere in the extreme right tail of the distribution. And if you look at the picture in 2035, what's really striking is the reduction in the share of the global population at very low incomes. So, we project the share of the world's population, which lives in poverty that is on less than $1.90 a day to fall by over half a billion people to around $400 million in 2035.

Pedro da Costa: In other words, the narrative, the panic narrative about ever increasing inequality needs to be moderated a little bit by the trends that you guys identified.

Tomas Hellebrandt: Yeah, certainly from a global perspective, the trend is down.

Pedro da Costa: And what about for you Paolo, what were some of the things that struck you as most --?

Paolo Mauro: Well, I guess the next step is to figure out we have these rising incomes and what does it mean for what people spend on? And, what we find is that if you look at household surveys of consumption, as people become richer, as their individual incomes rise, they spend less and less on food and they spend more and more on transportation. This is something that we find very striking result. You see it in all countries; it's very robust across cultures.

Initially, when people are increasing their incomes, they don't spend a whole lot more on transportation, but once they get to $5,000 a year, they start purchasing their first car. And then, when they get to $20,000 a year, they start flying internationally for tourism.

Pedro da Costa: We all want to go places.

Paolo Mauro: Exactly. And, you see it. You already see it. But what we see now if you go to tourist places around the world, you see it's a very diverse group of tourists. That's the tip of the iceberg. That's just going to increase massively.

So, when we do our estimates, what we find is that 20 years from now, spending on transportation in China, India, and so on will have quadrupled. So just think of the implications for the need for infrastructure and potentially the implications for climate change because we know transportation is an energy-intensive activity. So that's going to place an enormous burden on climate change if we don't do something about it in the meantime.

Pedro da Costa: And so, is that part of what concerns you the most? I mean, if you have to outline one of your biggest concerns about the future given what you found, what's the biggest source of deficiency? What might keep you up at night as far as global development is concerned?

Tomas Hellebrandt: Well, we estimate that in countries like China, India, the rest of Southeast Asia, Sub-Saharan Africa, there are going to be these massive needs for more infrastructure investments. And, the kinds of infrastructure that gets built now are going to influence climate change for the next 20, 50 years. So, the choices we make today are extremely important. My fear is that policymakers are not devoting enough attention to how we finance these infrastructure projects, how we make sure that the money is not wasted, and we need to provide incentives to make sure that instead of building more roads, we provide metro public transportation so that we don't fry ourselves to death through more climate change.

Pedro da Costa: As evidenced by the recent waft of smog that we've all been watching coming out of Beijing, it seems from pretty shocking stuff. Well, thank you guys so much for joining me and I look forward to the discussion at our event here at the Institute, which will also be available on our website, and thank you so much.

Tomas Hellebrandt: Thank you.

Paolo Mauro: Thank you very much.