My task is to talk about globalization and inequality in developing countries, with emphasis on Latin America. I have a simple point to make: globalization puts developing countries at risk of increasing income inequality. The increase in inequality in the United States over the last 25 years (during which the income of the poorest 20 percent of households has fallen in real terms by about 15 percent) has been blamed, rightly or wrongly, on changes in trade, technology and migration patterns associated with increasing economic integration with other countries. For developing countries, any risk of increasing inequality associated with active participation in the global economy is even greater, if only because of the greater inherent institutional weaknesses associated with being poor. Latin America has a special disadvantage: its historical legacy of already high inequality. Inequality that is already high complicates the task of effective conflict management, which Dani Rodrik has just reminded us is a critical input to managing open economies. In the past, for example, high inequality combined with the politics of redistribution led to periodic bouts of populism in Latin America – ineffective and counterproductive efforts to manage the conflicts provoked by the dangerous combination of high inequality and hard times.
Let me start with two prefatory remarks. First, globalization – that is the trend of increasing integration of economies in terms not only of goods and services, but of ideas, information and technology – has tremendous potential benefits for developing countries. Nothing I say should suggest otherwise. The challenge is to realize the potential benefits without undertaking huge offsetting costs. Second, not all inequality is a bad thing Some inequality represents the healthy outcome of differences across individuals in ambition, motivation and willingness to work. Thisconstructive inequality provides incentives for mobility and rewards high...