Luddites, Technology, and the Gini Coefficent




Luddites  A recent article in the January 26th edition of The Economist, "Briefing: The world’s silver lining",  cited interesting data on globalization and the contribution of technology to rising inequality in developing countries.  The data is drawn from the IMF’s World Economic Outlook October 2007 and focuses on something called the Gini coefficient, an unfamiliar concept to me prior to reading the article.

Gini_pic What is the Gini coefficient?  According to Wikipedia, "The Gini coefficient is a measure of statistical dispersion most prominently used as a measure or inequality of income distirbution or inequality of wealth distribution. It is defined as a ratio with values between 0 and 1: the numerator is the area between the Lorenz curve of the distribution and the uniform distribution line; the denominator is the area under the uniform distribution line. Thus, a low Gini coefficient indicates more equal income or wealth distribution, while a high Gini coefficient indicates more unequal distribution. 0 corresponds to perfect equality (everyone having exactly the same income) and 1 corresponds to perfect inequality (where one person has all the income, while everyone else has zero income). The Gini coefficient requires that no one have a negative net income or wealth."

One of the most interesting points to me in The Economist article is that the influx of new technology into developing countries initially exacerbates inequality in those countries.  Why? Because initially only a small number of local people in those countries are sufficiently educated to take advantage of the technology to make money.  Local elites continue to grab the low hanging economic fruit with new technology tools, and you experience an immediate greater concentration of wealth as the whiole economic pie also grows, or, in economic parlance, a higher Gini coefficent.

This reality only reinforces my view that we are still in the early innings of the globalization game.  21st century Luddites who claim to be looking out for the welfare of the least advantaged ignore the fact that technology, by catalyzing change, also contributes to the initial socio-economic dislocation that will ultimately erode the economic status quo.

As The Economist points out "technology in its broadest sense– the flow of new ideas– is the only way of getting growth rates up to 5-10% a year, the rate which enables poor countries to catch up with the West.  Without it, growth would be dependent on labour and capital inputs, and growth would be just a few percent.  To reduce technological progress– even supposing one could do it– would be to condemn poor countries to stay poor."

Those who decry globalization and the transfer of technology to developing countries are missing at least two key points: (1) that the absolute income level of the bottom fifth of these countries is rising steeply and has been since the mid-1990s (coincidentally the dawn of the Internet age); and (2) that this overall increase in income from sustained high economic growth rates will reach a tipping point that reverses the initial negative readings from the Gini coefficient. 

So much for the Luddites, again.

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