Geoscience Reference
In-Depth Information
Unlike in the past, it is now widely acknowledged that income and wealth
inequality clearly inhibits future growth [see, among others, Nissanke and
Thorbecke (
2010
)]. Inequality is often associated with inadequate property rights,
lowering investment. This is common knowledge. But the uncertainty created by
the diffusion of political and social instability caused by inequality also tends to
raise rent-seeking and dampens investment. All this challenges the standard
argument for Kuznets' U-hypothesis.
10
Thus, if regional integration does lead to
greater inequality within a country, growth and the prospect of improved welfare is
diminished.
9.2.3 Welfare as the Goal and the Importance of Unilateral Policies
Like any policy and strategy, the goal of integration must be an improvement in
welfare and quality-of-life—especially for the largest segment of society. Indeed,
welfare measures must go beyond just consumption-based utility. Take trade
integration. The volume and composition of trade are standard indicators in
evaluating whether or not an FTA advances regional integration. But this is just
part of the story. How those indicators change will either improve or weaken some
socio-economic indicators matters as well. While these may not be on the FTA
agenda, they must be taken into account from the perspective of overall develop-
ment. Ignoring them could lead to misguided policies.
The policy response to a crisis caused by integration-driven contagion can
damage welfare, especially when governments are belt-tightening. According to
one Organisation for Economic Co-operation and Development (OECD) report,
some 20 million jobs in both developed and developing countries disappeared since
the 2008/2009 global financial crisis and 21 million jobs must be generated in G20
countries just to match the pre-crisis employment rate.
11
The report also says this is
impossible in the near term. If anything, there is a risk the unemployment rate could
increase. In a crisis, a crippled financial sector is bad enough; but nothing is worse
than the true crisis costs to welfare when speaking about the risk of integration.
The environmental impact of a contagion-driven crisis poses another serious
welfare risk. While a crisis can reduce pollution and resource consumption through
reduced economic activity, a weakened economy also tends to lower environmental
priorities.
While collective regional policies have their merit, unilateral policies can benefit
both individual countries and the region. It may be true that some collective
regional policies are superior to unilateral national policies. But that does not
10
Inequality can also affect poverty by way of determining the growth-poverty elasticity. Added
by the well-known effect of growth on poverty, a triangular relation between growth, inequality,
and poverty is established [see (Bourguignon
2004
)].
11
OECD and International Labour Organization (ILO) 2012. Joint statement by ILO Director-
General Juan Somavia and OECD Secretary-General Angel Gurr´a on the occasion of the G20
Labour and Employment Ministers Meeting. Guadalajara, Mexico, 17 May.
