Globalization, Poverty, and Inequality || Comments and Discussion

Comments and DiscussionAuthor(s): Michael Kremer and Catherine PattilloSource: Brookings Trade Forum, , Globalization, Poverty, and Inequality (2004), pp. 212-221Published by: Brookings Institution PressStable URL: http://www.jstor.org/stable/25063194 .

Accessed: 28/06/2014 09:29

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].

.

Brookings Institution Press is collaborating with JSTOR to digitize, preserve and extend access to BrookingsTrade Forum.

http://www.jstor.org

This content downloaded from 46.243.173.151 on Sat, 28 Jun 2014 09:29:49 AMAll use subject to JSTOR Terms and Conditions

http://www.jstor.org/action/showPublisher?publisherCode=brookings

http://www.jstor.org/stable/25063194?origin=JSTOR-pdf

http://www.jstor.org/page/info/about/policies/terms.jsp


Comments

and Discussion

Michael Kremer: The papers by Nicholas Sambanis and Carol Graham not only are very interesting but also raise some very important questions, and it makes

sense that the two were paired together in the session. Sambanis discusses the

quite complicated relationship between economic status and political violence.

Many high-income countries are stable democracies, but the relationship between

income and stability seems much more complicated among lower-income coun

tries. For example, although civil war seems to decline as income rises, that is

not necessarily the case for terrorism. Obviously, the September 11 hijackers were

not poor or uneducated.

Carol Graham looks at the relationship between income mobility and satis

faction, or happiness, within countries. She finds some expected relationships but also discovers a large group of frustrated achievers who, though having appar

ently risen in socioeconomic status, express unhappiness and sometimes

discontent with democracy. I will discuss Sambanis's work first. I have mixed views about the idea that

state capacity is critical to avoiding violence. On the one hand, it has a lot of intu

itive appeal. For example, the Kenyan state functions much more effectively than

Zaire did. Soldiers follow orders in Kenya and put down rebellion when instructed

to do so. This presumably has something to do with Kenya's relative stability.

However, that type of explanation risks being circular: How does one know that

the state capacity is high? Because the state maintains law and order.

The idea of looking at regional inequality or inequality between other salient

groups is a very good one. What matters for violence may not be the variance of

212



Broader Indicators of Weil-Being: Comments and Discussion 213

income in society but rather the inequality between different ethnic groups or

religious groups or geographic areas.

The finding that terrorists are highly educated is not so surprising. That may be partly the production function for terrorism. It is amazing how many terror

ist plots fail, for example, in Israel. Perhaps terrorists need to be educated to be

effective. Another good point made by the author is that low-level violence often

precedes war and may have economic consequences, making it very difficult to

disentangle the relationship between violence and economics.

There are a couple of points I would like to add. A lot of the discussion

approaches the question of violence by asking when the disadvantaged will rebel.

However, it would be informative to look more carefully at the behavior of the

powerful. For example, just as the Romans did not find it worthwhile to pacify northern Britain, the Ugandan and Kenyan governments may not have big incen

tives to pacify the remotest regions of the country where people are nomadic. It

is expensive and the rewards may be minimal. To take another example, the U.S.

government does not have much incentive to pacify Liberia or Haiti.

In terms of an ultimate policy conclusion, Sambanis is skeptical of the notion

that putting a lot of money into poor countries will help reduce the violence there.

I agree with the author that pouring in money to redress grievances is not a panacea.

However, the alternative strategy of military intervention to control violence does

not seem to be all that effective either, as currently demonstrated in Iraq. Given

that the impact of economic aid is limited and long term, it may still be a more

cost-effective way of buying security than invading a country or putting air mar

shals on planes. It may be na?ve to think that if we just pour money into violence-plagued

regions, such as the Middle East, then the people there will no longer have griev ances. However, money can be used to get leaders to act in ways that serve U.S.

security interests. Aid can be provided to leaders who make the kinds of changes that reduce the risk of violence, and it can be provided to bolster democratic lead

ers against violent opponents. I liked the paper by Graham. Of course, it is obviously difficult to rule out

the possibility that frustrated achievers were frustrated from the beginning. It

is also difficult to know the independent effect of happiness on economic out

comes. In part, this is because happiness is not necessarily exogenous, even if

it is exogenous to income.One of the things that can make people happy, for

instance, is if their spouse is alive, but obviously the death of a spouse could

affect income in many ways other than through happiness. It is quite possible that a major cause of poverty in the United States could be depression and other

mental illness. It might be worthwhile to offer screening for depression as part



214 Brookings Trade Forum: 2004

of welfare benefits and also to offer treatment for depression, including drugs, where appropriate.

On the issue of frustrated achievers, the relationship between income growth and happiness may be difficult to disentangle because expected income growth is different for different people. A fifty-year-old bus driver, for example, who

experiences a sharp rise in income may be pretty pleased. On the other hand, a

thirty-five-year-old assistant professor at a prestigious university, who is turned

down for tenure and winds up taking a tenured position at a much less presti

gious institution, might well show up in a survey as having high-income growth but may be frustrated because this income growth was smaller than expected. Such a person would show up here as a frustrated achiever.

One way to try to clarify the relationship between income growth and happi ness would be to look within age and occupation cells. It would not be perfect, but if the author could demonstrate that this relationship held within age and occu

pation cells, that would help. Another concern is that the low correlations in the data might be a mechani

cal effect of measurement error. This is discussed in the paper.

Perhaps what is important for happiness, and for some political discontent, is

the gap between economic status and people's sense of what is appropriate or

expected. The problem is that we do not have a very good sense of what the lat

ter is. It may depend on how people look at the past and compare themselves to

it, but it may also be affected by much more complex interactions. It is not nec

essarily inequality that upsets people but rather perceived lack of fairness.

Perceptions of fairness may not correspond well to the degree of inequality in

society. For example, the person I know to be most unhappy with his economic

status, or at least who has expressed that most strongly to me, is actually a finance

professor. There is a big gap between this person's income and that of some class

mates who went into business or on to Wall Street. This fact may be particularly bothersome to this person because the individual buys into the academic ideol

ogy that salary should be linked to merit, and that merit in academics is academic

ability and creativity, of which this person has a great deal. However, that might not be what is rewarded in business.

One of the hallmarks of economic reform or change of any kind is that it will

alter the income distribution, particularly in the short run before factor supplies

adjust (to pick up on a point that Abhijit Banerjee made earlier in this volume).

For example, look at two farmers in India who start out in fairly similar circum

stances. One of them, who happens to be growing rice when India opens up to

exports from Thailand, suddenly experiences a large decrease in income. The

other, who happens to have land suitable for another crop, experiences a large




increase in income. These changes in income probably do not correlate with their

notions of what is just. Such horizontal inequality can be particularly annoying for people because

there is not likely to be an ideology supporting this as there often is with verti

cal inequality. Furthermore, people who benefit from the change are likely to

attribute their gains to their desirable personal characteristics whereas those who

lose are likely to see it as a mark of unfairness. People pick their reference groups.

My friend could have chosen the people on Wall Street as a reference group and

then felt underpaid in comparison. He also could have chosen game theorists or

mathematicians as a reference group and then felt overpaid. One very interesting point that Graham makes is that ideology, institutions,

and income distributions all influence each other. Certain combinations may con

stitute an equilibrium. A very unequal society?a feudal society, for example?

may exemplify one kind of equilibrium. The prevailing ideology is that inequal

ity is the natural order of things. When this breaks down, violence can as easily ensue from the top against the bottom as the reverse. There may be another kind

of equilibrium that underlies a rich, liberal democratic society. However, the fact

that a rich, liberal democratic equilibrium exists does not necessarily tell very much about how to transform one equilibrium to another?a point that can be

derived from both of these papers. I would like to conclude by saying something about why I think globalization

may actually be relevant for both of these papers. I do not think that unhappiness and violence arise when poor people in Africa watch television and see they are

poorer than the characters on "Dynasty." Rather, the people most likely to be

affected by globalization are the elites, who are more likely to compare them

selves across countries. With globalization, societies that were once in equilibrium now no longer are because their mid-level elites are no longer willing to accept the status of their countries. This can lead to a constructive push for economic

reform, or it can lead to the destructive ideologies of an Osama Bin Laden.

Catherine Pattillo: The Sambanis paper is an excellent introduction to the grow

ing economic and political science literature on political violence, particularly civil wars. The review focuses on the relationship between levels of income

(across countries, groups, or individuals) and civil war. Sambanis's reading of

the literature is that while there is strong evidence that low income increases the

risks of civil war, evidence on the effects of economic growth, education, and

inequality (related to relative deprivation theories) is mixed, insufficient, or incon

clusive. He argues that findings that low per capita income increases the risks of

civil war are hard to interpret, and that it is important to try to sort out the causal




mechanisms, particularly to distinguish the "state strength" versus "opportunity cost" theories of civil war. Sambanis also stresses his preliminary finding sug

gesting no significant effect of income in explaining civil war onset within

countries over time.

The paper covers a lot of ground. In my comments I suggest areas that seem

important for the literature to sort out and explain, and point out areas that seem

not so important. The first topic that the civil war literature needs to better address is the endo

geneity of economic variables, particularly economic growth, in empirical civil

war models. Sambanis's paper touches on this important issue but does not dis

cuss it. It is difficult to convincingly establish that there is a causal relationship between economic growth and civil wars, rather than correlations, when endo

geneity is not addressed. Simultaneity appears clear: low growth increases risks

of civil war, but wars lower growth. Use of lagged economic growth variables

would not seem adequate to address endogeneity.1 Another point is that there is

some danger of conflicting effects of economic growth in large pooled data sets,

depending on how influential observations on postconflict periods are and how

they are handled. The years immediately after a conflict has ended typically reg ister high growth rates (reconstruction, from low bases), but there is a high risk

that war will reemerge. The endogeneity issue would also seem important for understanding the effect

of per capita income. Low-income countries have much higher risks of civil war,

and civil wars, particularly the conflict cycles in which countries become

entrapped, contribute to lower per capita income. Studies need to try many dif

ferent ways to address this endogeneity, ranging from models that drop repeat war observations (to leave out the conflict cycles) to full instrumental variable

approaches.

In a recent study of African civil wars, Miguel, Satyanath, and Sergenti use

rainfall variation as an instrument for growth.2 There is no strong evidence that

rainfall affects conflict through other channels, so it is a good instrument. They find that growth, instrumented in this way, is strongly negatively related to civil

conflict. In particular, a negative growth shock of 5 percentage points increases

the likelihood of conflict by half. These are very sizable effects. Sambanis notes

that there is no consensus in the literature on whether economic growth variables

are significant in civil war models. Addressing endogeneity and comprehensively

exploring this issue in different civil war models, with all the variations in civil

1. Sambanis does not use lagged values for growth in the present paper, although he and oth

ers do so in other papers in the literature.

2. Miguel, Satyanath, and Sergenti (2004).




war data, conditioning variables, and methodologies, should be a priority for

research. Using rainfall to instrument growth would not seem feasible for other

regions less dependent on agriculture, but there may be other clever ways to

address endogeneity in global samples. If country-specific shocks to growth induce such very large increases in conflict risks, this raises other research ques tions and could point to important policy implications. For example, what policies or structural characteristics of countries help mitigate the impact of economic

growth shocks on increased risks of civil conflict? Can policies and international

assistance to smooth the effects of shocks help? The second and related topic that seems important for the literature to explore

is the extent to which factors affect civil war risks across countries or within coun

tries over time. Sambanis stresses his finding that income does not significantly affect the within-country variation in the onset of civil wars. However, given the

nature of the data, it seems difficult at this point to isolate risk factors primarily

affecting within-country risks of civil war. Note that a fixed effect regression can

not include countries where the dependent variable does not vary over time. Since

the majority of the countries in the datasets experienced only peace, the sample for fixed effect regressions is much smaller and consists of only those countries

that had a civil war at some point. Note also that per capita income is very per

sistent, changing only slowly over time. Given the persistence of the income

variable and the smaller variation of income between countries in samples includ

ing only countries that have experienced war, it is not very surprising that income

is not significant in the regressions. In fact, in Sambanis's fixed effect regres

sions, anocracy and instability are the only frequently significant variables, again related to limited time variation of many of the variables typically used in civil

war models. Rather than per capita income, it would be more appropriate for

Sambanis to use economic growth in the fixed effects regressions. This approach, combined with a strategy for addressing endogeneity, would be a big step for

ward in analyzing how shocks to economic growth influence the risks of civil

war.

A smaller point here is that there may be scope for "looking beyond the aver

ages" in terms of the elasticities of conflict risk to economic growth.3

Cross-country correlations can mask significant differences across countries. For

example, Sambanis argues, quite reasonably, that the reason many studies have

not found inequality measures significant in civil war models is that they are meas

uring the wrong type of inequality?regional inequalities are more likely to ignite rebel movements. It may also be, however, that inequality does not directly

3. Ravallion (2001) uses this phrase in the context of the literature on the elasticity of poverty to growth.




increase the risk of war but rather that the effect of growth on civil war risk varies

across countries depending on inequalities of different types (skewed distribu

tion of growth, as well as income, land, and regional inequalities). This would

imply that the effect of the lack of opportunity for traditional economic activi

ties is compounded when there are significant inequities, particularly in the extent

to which the poor share in overall economic growth.4 A third issue that warrants further attention is the specific channels through

which natural resource dependence can increase the risks of civil wars. It is a bit

unfair to mention this, as Sambanis notes that his paper does not cover this topic.

However, since it is an important economic variable closely related to the growth,

volatility, income, and inequality effects that Sambanis is interested in, it is hard

to see how it cannot be discussed. In addition, high-level policy recommenda

tions for international actions to reduce the risks of civil war are moving forward

quickly, so it would be helpful to have more consensus on empirical support for

these high-profile policy initiatives.5 Natural resource rents could increase the

risk of conflict because of boom-bust price cycles that contribute to economic

volatility, or through corruption, or they could contribute to incentives for regional secessions or provide finance that prolongs rebel movements. Initiatives aimed

at improving the governance and transparency of natural resource revenues, such

as the Extractive Industries Transparency Initiative, could contribute to reducing conflict to the extent that corruption and regional secessions are significant chan

nels through which natural resource dependence increases war risks.6 If the

volatility associated with commodity price shocks increases war risks, this pro vides additional support for the need for international facilities to cushion the

effects of these shocks.

One topic that Sambanis dwells on extensively that does not seem particularly

important is empirically distinguishing whether the opportunity cost model or

the state strength model is the better underlying theory of civil war. I very much

agree with Sambanis that there are conflicting interpretations of variables, such

as income and growth, due to the lack of a close fit between the empirical proxy and the theoretical construct. In this case, however, it does not seem that data on

better empirical proxies is currently available. In addition, according to Samba

4. This type of interaction may also be important for other noneconomic variables such as eth

nic and religious fractionalization that have not been found to directly increase war risks.

5. Collier and others (2003). See also Paul Collier and Anke Hoeffler, "The Challenge of Reduc

ing the Global Incidence of Civil War," 2004 Copenhagen Consensus Challenge Paper

(www.copenhagenconsensus.com/Files/Filer/CC/Papers/Conflicts_230404.pdftSeptember2004]). 6. The Extractive Industries Transparency Initiative is a current campaign supported by a range

of G8 governments, international financial institutions, and nongovernmental organizations aim

ing to establish guidelines for both corporate and government disclosure of natural resource rents.



Broader Indicators of Well-Being: Comments and Discussion 219

nis, extensive country-specific case studies can be interpreted as providing sup

port for both theories; so this sensible route of trying to distinguish the theories

has not been successful. In addition, the indirect methods suggested by Samba

nis for distinguishing between the alternative models can be questioned. For

example, he argues that if income measures labor supply and the opportunity cost argument, then income levels should be less significant determinants of eth

nic as opposed to nonethnic wars. It may be very difficult to identify ethnic wars,

however, as many civil wars have some ethnic dimension, and limited employ ment opportunities could also fuel ethnically based tensions to a similar degree as nonethnically based ones. It can also be argued that the opportunity cost and

repressive state capacity models can be viewed as complements. Weak-state

repressive capabilities are background conditions faced by poor young men who

choose between fighting in wars and traditional employment opportunities.7 Rather than seeking separate explanations for types of war such as ethnic and

nonethnic wars, it seems useful for the literature to continue examining the dif

ferential war risks of different types of countries?low-income versus

middle-income countries or recent postconflict countries?as well as factors

affecting the duration of wars as distinct from those influencing the onsets of

wars. In addition, although Sambanis uses the term poverty to refer to countries

with very low per capita income, good quality panel data on poverty measures

is becoming available, and that would allow more direct testing of the relation

ship between poverty and civil conflicts.8

What would appear to be useful new directions for the civil war literature?

Research has reached a state where more country-specific, microlevel informa

tion would greatly help our understanding of the relationship between poverty,

inequalities, and conflict. One idea may be to use poverty mapping, spatial

descriptions of the distribution of poverty in any given country, which is a new

technique at the forefront of poverty research.9 It may be possible to combine

poverty mapping or other household survey data with more regional information

on civil wars in order to better understand the linkages between income distri

bution and conflict risks.

7. Miguel, Satyanath, and Sergenti (2004). 8. Household survey based poverty data is available for a wide range of countries, although the

number of observations per country is often low.

9. See World Bank, "Poverty Research: Small Area Estimation Poverty Maps" (econ.world

bank.org/programs/poverty/topic/14460/ [September 2004]).




Discussion: Erik Thorbecke focused on Michael Kremer's point that the frus

trated achievers tend to compare their standard of living and future prospects to

those of the rich and other elites in the developing and developed countries, rather

than to those of the poor or even those of middle-income levels. He noted that in

his experience in Peru in the 1960s, the elites were surprisingly cosmopolitan. Their reference group was the rich in Miami and Paris, and not people in devel

oping countries. He suggested that this might be an important element underlying the frustrations of the achievers.

In a related point, Sylvia Ostry noted the role of the Internet and global infor

mation in explaining the frustrations that were discussed by both authors. She

quoted Caliban, in Shakespeare's The Tempest, saying to his master Prospero, "You taught me language; and my profit on't is, I know how to curse." She drew

an analogy between language in Shakespeare's quote and technology in today's

global economy. Ostry noted that the decline in respect for democratic institu

tions that is cited in the recent Global Values Survey, as well as the existence of

many violent episodes, may be related to technology's ability to spread infor

mation. This is a trend that extends well beyond discussions among elites in poor countries.

J. David Richardson raised the issue of locational or geographic mobility in

addition to income and occupational mobility. He cited studies that found that

globalization had differential effects on geographic mobility as opposed to other

kinds of mobility, which in turn had distributional effects. Women, for example,

might be less mobile at certain age spans because of child-rearing responsibili

ties, and that could affect how they fare with globalization-related changes. He

asked if there was any way to measure the effects of geographic mobility on hap

piness and on the disjuncture between perceived and actual outcomes.

Bill Easterly noted that the frustrated achievers might be confusing levels and

changes when they were asked if their situation was improving or deteriorating.

People are very much likely to be influenced by the level at which they end up. Thus even though the poor are likely to have bigger percentage increases in their

incomes than the rich, they still end up at a much lower level. Thus he questioned whether the frustrated achievers were not people who started out very poor and

had a large percentage increase in income, but were still quite poor. He noted

that it is difficult to disentangle change from levels in a subjective survey. On questions of civil violence, Easterly praised the paper's honesty about the

mixed results in the literature. He commented that there was a major disjuncture between this mixed empirical evidence and the confident policy prescriptions

made in some institutions such as the World Bank. He questioned whether econ



Broader Indicators of Well-Being: Comments and Discussion 111

omists or political scientists had, as yet, discovered the formula for peace on earth

and good will toward men.

Abhijit Banerjee cited some new work on the fate of rice farmers during the

Indonesian crisis. The point of departure is that rice farmers fare differently from

everyone else because their crop is not tradeable. The analysis then uses the ex

ante composition of villages?rice farmers and everyone else?to sort the poten tial for civil violence among different groups. The study finds that incidents of

civil violence were much higher in villages that were not growing rice and suf

fered large income shortages, and which, in addition, already had mosques. The

mosques were the distinguishing feature, and they spurred those who had become

poorer to organize. Banerjee used this simple example of controlling for unob

servables as a way to tackle some of the endogeneity problems in the civil violence

literature.

Ben Klemens asked both authors whether absolute or relative inequality mat

tered most to happiness and civil violence. Carol Graham responded that absolute

inequality, which highlights absolute rather than proportional income differences

among people, was probably more visible and important to the frustrated achiev

ers. Nick Sambanis noted that horizontal inequality, in general, and interregional

inequality, in particular, mattered the most to secessionist conflicts.

References

Collier, Paul, and others. 2003. Breaking the Conflict Trap: Civil War and Development Policy. Washington and New York: World Bank and Oxford University Press.

Miguel, Edward, Shanker Satyanath, and Ernest Sergenti. 2004. "Economic Shocks and Civil Conflict: An Instrumental Variables Approach." Journal of Political Economy

112, no. 4: 725-53.

Ravallion, Martin. 2001. "Growth, Inequality and Poverty: Looking beyond Averages." World Development 29, no. 11: 1803-15.



Documents

Globalization, Poverty, and Inequality || Comments and Discussion