Yale’s Pinelopi Koujianou Goldberg on reducing poverty amid rising inequality

Friday, February 21, 2020
Pinelopi Koujianou Goldberg

Millions of poor people in developing countries in East Asia have escaped the threat of hunger by leaving the fields to work in factories producing manufactured goods to sell in the West. So, what happens to the prospects of the world’s poor when the West stops buying?

Pinelopi (Penny) Koujianou Goldberg, the Elihu Professor of Economics at Yale and outgoing chief economist of the World Bank Group, has thought deeply about it. Her recent research explores the extent to which cross-border trade reduces poverty in developing countries and the effects the current trade war with China is having on the U.S. economy.

In advance of her Feb. 27 delivery of the 30th annual Kuznets Lecture, Goldberg spoke with YaleNews about how changes in world politics affect approaches to reducing poverty, particularly in Africa — and how Simon Kuznets’ best known theory, about a tradeoff between growth and inequality in the early stages of development, may be affected by recent developments in a world marked by inequality.

Kuznets (1901-1985), a Nobel laureate in economics instrumental in founding the Yale Economic Growth Center, studied the interactions among growth, inequality, and poverty reduction. Goldberg’s lecture is titled “Poverty Reduction in the Era of Waning Globalization.”

Economic growth is often cited as the tide that will lift all boats — and China and India’s roles in reducing total world poverty are often seen as important testaments to that. Yet, many fast-growing Asian countries are also seeing the gap widen between the very rich and very poor. Looking ahead, how do you see the relationship between growth, inequality, and poverty evolving?

It is true that growth is highly correlated with poverty reduction. It would be hard to deny that, even though we have examples where growth did not generate poverty reduction. Usually that happens where growth is associated with huge inequalities. There are plenty of examples, especially in African countries, where wealth is concentrated in the hands of a few. In such cases, even when the tide rises, only very few boats rise. Growth doesn’t trickle down and doesn’t improve the lot of the poor.

Kuznets was most famous for the Kuznets Curve, which posits that there is a tradeoff in the early stages of development between growth and inequality. One point I want to make in the lecture is that we live at a very different time, when the world is changing rapidly, retreating from globalization. Many fear that the old model of export-led industrialization is no longer going to be relevant. And I want to make the point that in this new world, a certain degree of equality and growth may be complements and not substitutes. To put it in a different way, you cannot have growth unless you have a certain degree of equality.

The Kuznets Curve. See below for description.
The Kuznets curve posits that economic inequality – the gap between rich and poor – is relatively low when a country is at a low level of development. Inequality then follows an “inverted U” path as income per capita rises, decreasing again at the most advanced stages of development. The curve was first proposed by Simon Kuznets, an economics Nobel laureate who was instrumental in founding the Economic Growth Center at Yale.

How would you defend the benefits of trade to someone who feels that they have become poorer as a result of globalism?

This is a very good question, because economists have argued for centuries that trade is good for the economy as a whole — it is good for the aggregate. However, economists have also argued that trade generates winners and losers. So, saying that someone has lost from trade is perfectly consistent with the claim (and evidence) that the average citizen in an economy has benefitted from trade.

So, what do you say to a person who actually has lost from trade? First, I would not deny the fact that they may have lost because of trade — I would acknowledge the evidence rather than trying to discredit it, as some do. Second, I would tell them that the proper response is not to shut down trade. The proper response is to try to compensate those who were impacted negatively by trade. One of the big insights that economists have provided is that there are sufficient gains generated by open trade that the winners can compensate the losers and still be better off. That is the concept of what we call “Pareto improvement” in economics. So, when people think they lost from trade, what they should push hard for is compensation and redistribution, not closing off the economy and returning to protectionism.

You recently returned from a trip to Kenya. There seems to be growing consensus that the methods that worked in China to spur growth and reduce poverty won’t work in Africa. Have you seen promising ideas for what can work?

I think we’re at a point in time when we need a new vision or a new model of what might work in places like Africa, and I’m afraid at this point, there’s no consensus of what this vision is.

My personal view is that Africa needs to rely on itself more than ever. The idea that export-led industrialization as it happened in China or East Asia is going to lead growth in Africa becomes less and less plausible as time goes by, for many reasons. Protectionism is on the rise — industrialized countries are less open to imports from developing countries. In addition, there is by now a lot of competition. So there is Kenya, there is Ethiopia, there is Bangladesh, there is Vietnam; there are many countries competing in this space. There are also new technologies and automation threatening low-wage jobs — the traditional comparative advantage of developing countries.

We need countries to push for a more equitable distribution of resources within their borders… [T]he domestic market power generated by a healthy middle class [generates] growth that does trickle down and translates to poverty reduction.

On the other hand, the African market is a very large market with incredible potential. It has not been developed yet. So, regional integration might be one path forward. Rather than opting for global integration, which may be very hard to achieve these days when countries are retreating from multilateralism, it might be more feasible to push for regional trade agreements and create bigger regional markets for countries’ goods and services.

We are still a very long way from there because most counties are averse to this idea — they see their neighbors as competitors rather than countries they can cooperate with. So, more than anything else, we need a big change in mindset; we need policymakers to embrace the idea of regional cooperation.

And, as I will argue in the Kuznets Lecture, we need countries to push for a more equitable distribution of resources within their borders. If trade with rich countries is no longer the engine of growth, it will be more important than ever to rely on the domestic resources, and particularly the domestic market power generated by a healthy middle class, to generate growth that does trickle down and translates to poverty reduction.

What has the shift from an academic to a policy position been like?

Taking a policy position is a very interesting and rewarding experience, and it’s something I would recommend that every academic does from time to time.

There are three big differences between policy and academia. The first is that you get exposed to questions you’re not exposed to as an academic. Or, in some cases, you’re exposed to these questions much earlier than academics — usually the questions come to academics with a lag of months if not years. So, you are on the front line and you know what’s really relevant. That comes with a drawback, which is the second big difference: Policymakers need answers right now! In academia, we strive to give the most rigorous answer possible, so we take the time to collect and analyze the data and provide robust evidence. As a policymaker you don’t have this luxury, so you often have to give advice based on your best judgment. A third difference, that I truly appreciate now, is that in academia we have the freedom to say what we really think. You have many more constraints when you enter a policy post.

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