The economic freedom to reduce inequalities

Vincent Geloso

Monday, 17 July, 2017 15:28

UPDATE
Monday, 17 July, 2017 15:34

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During the 1970s, China started a gradual liberalisation of its economy in order to open it to international competition. During the 1990s, India has followed suit. Since then, the inhabitants of these countries have seen their standards of living increase rapidly, which is not to say that there was no further progress can be made. But since these economies represent more than a third of the world’s population, this great catch was made so that the inequality on the planet have declined significantly since the 1970s.

Indeed, even if inequality is increasing within western countries, the inequalities between the different countries, they are decreasing rapidly. Thus, if we compare the revenue of all the inhabitants of the Earth, we realize that those of poorer countries have grown faster than those of richer countries. According to a recent study by the Institute of Labor Economics, the measures of income inequality and wages have in effect decreased by about 14% since 1970.

And these measures overestimate the differences in well-being between countries. In fact, there has been a catching-up was even more pronounced by the poor countries in terms of life expectancy and education than in income.

This great catch-up, led largely – but not exclusively – by the enrichment of China and India, is explained by the fact that these countries are open economies. Since the 1970s, China has opened itself to international trade, while liberalizing its domestic economy. During the 1990s, India has reduced the regulations and restrictions that restricted access to certain trades or professions (known as under the name of the License Raj). These reforms have helped unleash the economic potential of these countries. And yet, these liberalizations were modest : India and China remained in the bottom of the ranking of countries by the degree of economic freedom.

If these two countries could further liberalize their economy, the gains could be even larger, thus leading to a further reduction of global inequalities. It is the same for Africa and Latin America, where most of the poorest countries are located : if the countries of these two regions were to follow, if only modestly, for examples, indians and chinese, they could get rich quickly and contribute to reduce global inequalities.

As what the increase of economic freedoms is the best vehicle of inequality reduction.