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World Bank’s Top Economist Picks a Fight with Inequality

Despite rising inequality at the national level, World Bank chief economist Kaushik Basu remains optimistic about a global recovery.

As chief economist of the World Bank, Kaushik Basu thinks about how to achieve the institution’s two strategic goals: ending extreme poverty and promoting shared prosperity within nations. A native of Kolkata, India, who earned a Ph.D. at the London School of Economics under Nobel Prize–winning development economist Amartya Sen, Basu gained firsthand experience in the antipoverty struggle in his previous role as chief adviser to India’s Finance Ministry from 2009–’12. But combating income inequality is a new mission for him and the World Bank, which added it as a central objective for 2013. Basu, 61, admits that this task won’t be easy because globalization widens the gap between high- and low-skill earners. He recently discussed his ideas with Senior Contributing Writer Craig Mellow by telephone from Sydney.

What has been the fate of the world’s poorest people over the past five years? Has the crisis held back progress in bringing people out of poverty?

Fortunately, the latest numbers would not show a very big dent. In India, which has the largest numbers of poor, there has been a sharp decline in poverty over the last five years. Sub-Saharan Africa over the last ten years has seen a steady decline. A little bit of concern is the last year or two, when the global crisis that began in developed countries started straining a whole range of developing countries. Part of the decline in poverty we have seen in Africa also has to do with the region’s trade and other economic relations with China. So the Chinese slowdown can affect poverty in sub-Saharan Africa.

This remains a blot on all of us. The World Bank sets the extreme poverty level very low, $1.25 per day, yet 1.2 billion people still live below it. That is not something we should collectively feel proud of.

Investors are shifting very strongly back to the developed world. Can we question the assumption that emerging markets will drive global economic growth for the next generation?

I would not make an extrapolation to long-term trends in global investment. What is happening is that interest rates are rising in the U.S. in anticipation of the withdrawal of quantitative easing, and money is being pulled out of developing countries into U.S. bonds. In the longer run, investments will still go into the developing countries that organize themselves better. Even now the fastest-growing major economies in the world are still China, Indonesia, India and other developing countries.

Can the U.S. wean itself more or less painlessly off the huge monetary stimulus?

The recovery is genuine, but it is going to be slow. U.S. unemployment, although the rate is much lower than Europe’s, has one worrying feature: Close to 40 percent of the unemployed people have been unemployed for six months or more. This is very unusual. With so much long-term unemployment, there tends to be a skill erosion.

It seems that income distribution has become more unequal almost everywhere. Is that a fact of modern life?

Global inequality is probably not increasing because developing countries are catching up from the bottom end. But inequality within countries is increasing, with very few exceptions. With modern technology labor markets tend to become global. So the highly skilled people in developing countries are no longer isolated in their own nations, and they become richer. At the same time, the bottom end of the skill spectrum in rich countries is coming under competition from poorer countries.

Globalization gives us so many other benefits that we should not begrudge it per se. But we need to think about this increasing gap within each country because it will create political tensions of a type that we don’t want to see. My own view is that in today’s world we need a global coordination of policy to manage inequality. For instance, countries have gotten caught up in using their corporate tax laws to attract capital. These things need centralized coordination so you don’t get into a war of tax regimes. I would personally love to take the World Bank right into the center of this.

Markets have swung from optimism to pessimism about your own country, India. What is really going on?

I just spent ten days in India, and the pessimism is deeper inside the country than outside. That is partly connected with a vibrant free media competing for attention. Even with the slowdown, India is among the five or six fastest-growing big economies, at about 5 percent. What is worrying is that with the election coming up [next year], the decision-making and bureaucratic process, where India was already very weak, is beginning to tell even more. But if there can be reforms to speed up the governance process, India will release a lot of energy that is locked up now.

It’s important to remember that during a boom, we don’t anticipate that gloom is around the corner. In the same way, we should be aware that we may be overdoing this moment of gloom. I do believe things will turn and the global economy will get better.

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