Hellebrandt Tomas - World on the move: consumption patterns in a more equal global economy

Peterson Institute for International Economics

World on the Move

Consumption Patterns in a
More Equal Global Economy

POLICY ANALYSES IN INTERNATIONAL ECONOMICS 105

Tom Hellebrandt and Paolo Mauro

Assisted by Jn ilinsk

Tom Hellebrandt was research fellow at the Peterson Institute for International Economics from 2013 to 2015. Before that he was an economist at the Bank of England from 2007 to 2013. He is the author of Income Inequality Developments in the Great Recession (PIIE Policy Brief, January 2014).

Paolo Mauro is assistant director in the African Department of the International Monetary Fund (IMF). He was senior fellow at the Peterson Institute for International Economics and visiting professor at the Johns Hopkins University Carey Business School in 201416. Before that he held various managerial positions in the IMFs research and fiscal affairs departments. His articles have been published in journals including the Quarterly Journal of Economics and have been highly cited in academia and leading media outlets such as the Economist and Wall Street Journal. His previous books are Emerging Markets and Financial Globalization (Oxford University Press, 2007) and Chipping Away at Public Debt (Wiley, 2011).

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Library of Congress Cataloging-in-Publication Data

Names: Hellebrandt, Tom, author. | Mauro, Paolo, author. Title: World on the move : consumption patterns in a more equal global economy / Tom Hellebrandt and Paolo Mauro. Description: Washington, DC : Peterson Institute for International Economics, 2016. | Includes bibliographical references. Identifiers: LCCN 2016027392 (print) | LCCN 2016040777 (ebook) | ISBN 9780881327168 | ISBN 9780881327175 Subjects: LCSH: Income distribution. | Consumption (Economics) | Population-Economic aspects. | Globalization-Economic aspects. Classification: LCC HC79.I5 H45 2016 (print) | LCC HC79.I5 (ebook) | DDC 339.2-dc23 LC record available at https://lccn.loc.gov/2016027392

This publication has been subjected to a prepublication peer review intended to ensure analytical quality. The views expressed are those of the authors. This publication is part of the overall program of the Peterson Institute for International Economics, as endorsed by its Board of Directors, but it does not necessarily reflect the views of individual members of the Board or of the Institutes staff or management. The Peterson Institute for International Economics is a private nonpartisan, nonprofit institution for rigorous, intellectually open, and indepth study and discussion of international economic policy. Its purpose is to identify and analyze important issues to make globalization beneficial and sustainable for the people of the United States and the world, and then to develop and communicate practical new approaches for dealing with them. Its work is funded by a highly diverse group of philanthropic foundations, private corporations, and interested individuals, as well as income on its capital fund. About 35 percent of the Institutes resources in its latest fiscal year were provided by contributors from outside the United States. A list of all financial supporters for the preceding six years is posted at https://piie.com/sites/default/files/supporters.pdf.

Contents

Tables

Figures

Boxes

Preface

The public discourse about inequality in the United States and some other advanced economies is understandably dominated by concerns about the rising income share of a relatively few rich individuals relative to the vast majority of working families. Yet in a historic shift, growing incomes in emerging markets are allowing hundreds of millions of people to join the consumer class. Ignoring national borders, individual incomes of the entire worlds population are becoming more, not less, equal. Beginning around the turn of this century, global inequality has gradually declined for the first time since todays advanced economies pulled ahead of the rest of the world during the Industrial Revolution. In this study, Tom Hellebrandt and Paolo Mauro painstakingly combine consensus forecasts of the longterm growth of output and population with detailed information on the distribution of incomes and consumption from surveys of thousands of households worldwide to show that, under reasonable assumptions, this hopeful trend will continue during the next two decades.

How incomes are distributed among the worlds citizens matters for the types of good and services people will buy, because spending choices depend on income levels. People are becoming more equal not only in incomes but also in the items they spend on, as emerging-market economy residents are increasingly able to afford goods and services previously available only to rich-country residents. Using the projected global distribution of incomes as a stepping stone, and novel estimates of the link between individual incomes and consumption of items such as food and transportation, the authors project what people will spend on twenty years from now. They find, notably, that expenditure on transportation will rise fourfold in China, India, and Sub-Saharan Africa. These are exciting developments: Greater consumption indicates rising well-being and provides opportunities for businesses and investors located not only in emerging markets, but also in advanced economies.

For this scenario to occur, however, the necessary investment in infrastructure in many emerging-market economies such as India will be massive. By drawing on information about the distribution of individual incomes, Hellebrandt and Mauro find larger investment needs than previous studies. Beyond mobilizing their own fiscal resources, governments will need to attract financing from the private sector on an unprecedented scale. The authors also show that investment needs are greatest in countries with weak institutions, so they offer suggestions to enhance transparency and strengthen budgetary processes to ensure both that public money is not wasted and that the public sector is not saddled with fiscal risks from excessive guarantees to private providers.

Moreover, rising consumption on the projected scale will put strains on natural resources and the climate. Malthusian doomsday scenarios have previously proven unwarranted, as human ingenuity and private profit incentives have made it possible to increase productivity. But this time may be different, because climate change causes powerful international spillovers. Global cooperation will be key to avoiding catastrophe, and the authors point to priority areas of expenditure in that regard.