Economics 101

Does Globalization Harm the Poor?

Is Globalization a Force for Poverty Alleviation, or a Driver of Inequality?
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Does globalization negatively or positively impact poverty alleviation?

According to economist Pranab Bardhan,

Antiglobalizers’ central claim is that globalization is making the rich richer and the poor poorer; [while] proglobalizers assert that it actually helps the poor.

By definition, globalization is the increasing integration of world economies through the expansion of trade, investment, technology, labor, and knowledge.

The impact of globalization on the poor is not a black or white issue. Making a direct causal impact between globalization and poverty reduction is difficult.

According to economic and political writer Doug Bandow,

Some critics of globalization have contended that the process has helped the rich and hurt the poor. However, the best research indicates that this is not accurate: ‘Poverty is falling rapidly in those poor countries that are integrating into the global economy.’

In order to understand how globalization can positively affect the poor, we must understand recent changes to poverty and inequality. We must also understand how individual countries’ domestic policies impact globalization’s effects.

Global Poverty Reduced

Poverty rates around the world are decreasing as more countries continue integrating into the global economy.

In 2011 Yale Global reported:

Today, we estimate that there are approximately 820 million people living on less than $1.25 a day. This means that the prime target of the Millennium Development Goals… was probably achieved around three years ago.

Globalization opens markets, spreads the use of new technology, and expands division of labor.

Division of labor helps societies grow economically. When countries become a part of a more globalized economy, they are able to more finely tune their comparative advantage. This leads to greater productivity and unlocks flourishing in the long run as countries are able to trade goods and services with one another freely.

Large numbers of people have been raised out of extreme poverty over the past few decades, particularly in India, China, and Indonesia. Bardhan states,

Between 1981 and 2001 the percentage of rural people living on less than $1 a day decreased from 79 to 27 percent in China, 63 to 42 percent in India, and 55 to 11 percent in Indonesia.

Globalization has helped these countries develop by integrating their economies with the rest of the world. The openness of these countries has provided their poor with greater access to capital, knowledge, and opportunities.

While Bandow acknowledges that economists find it difficult to prove causation between international openness and economic growth, he quotes economists Jeffrey Sachs and Andrew Warner’s research stating:

We find strong association between openness and growth…within the group of developing countries, the open economies grew at 4.49 percent per year, and the closed economies grew at 0.69 percent per year.

Industries and jobs may be displaced in the short run as a result of globalization and trade as economies begin to experience growth, but, in the long run, both employment opportunities and consumption will increase.

Economist David Henderson’s recent research  shows that globalization benefits the poor by lowering the costs of goods they typically consume.

Countries taking part in the global economy are experiencing more economic growth and poverty reduction than those countries which remain in isolation.

What about Inequality?

What about inequality? Critics of globalization argue that it increases inequality in poorer countries.

In the Economist, an article arguing that globalization does not reduce inequality uses the Gini index to measure inequality.

[The Gini index is] based on a score between zero and one. A Gini index of one means a country’s entire income goes to one person; a score of zero means the spoils are equally divided. Sub-Saharan Africa saw its Gini index rise by 9% between 1993 and 2008. China’s score soared by 34% over twenty years. Only in a few places has it fallen.

This means that inequality in developing countries has generally risen over the past two to three decades.

While it has been challenging for economists to make a direct correlation between globalization and poverty reduction or increases/decreases in inequality, the Economist article provides one theory for how globalization creates high inequality:

Outsourcing—when rich countries shift parts of the production process to poor countries. Contrary to popular belief, multinationals in poor countries often employ skilled workers and pay high wages. One study showed that workers in foreign-owned and subcontracting clothing and footwear factories in Vietnam rank in the top 20% of the country’s population by household expenditure. A report from the OECD found that average wages paid by foreign multinationals are 40% higher than wages paid by local firms… By contrast, unskilled workers, or poor ones in rural areas, tend not to have such opportunities… For these reasons globalization can boost the wages of skilled workers, while crimping those of the unskilled. The result is that inequality rises.

From this point of view, we can see how globalization may be a contributor to inequality. However, there are two things that we should keep in mind: (1) the impact tends to be relatively small, and (2) income inequality is not necessarily a negative thing.

Studying the impact of technology, trade, and financial globalization on income inequality, the IMF found that:

The contribution of increased globalization to inequality has in general been relatively minor. This reflects two offsetting effects of globalization: while increased trade tends to reduce income inequality, foreign direct investment tends to exacerbate it.

Bandow tells us that according to the World Bank, changes in inequality are usually small and globalization contributes to positive changes in the developing world:

Most of the globalizing developing countries have seen only small changes in household inequality, and inequality has declined in such countries as the Philippines and Malaysia. Moreover, greater economic openness to the world has tended to reduce gender inequality.

Anne Bradley argues that income inequality can actually be a sign of a robust economy. It’s not, of course, when inequality forms as a result of exploitation, but when it comes from trade that means greater specialization from markets and more trading partners.

In an article on poverty and inequality, Bradley states,

Income inequality deals with how income is held over a society. Unless everyone is exactly equal, there will always be a top and a bottom. What matters is how the folks at the bottom fare and whether they have opportunities to use their God-given creativity and skills to give them income mobility.

Globalization can allow just that: an expansion of opportunities for those at the bottom which provides greater economic and social mobility.

Additionally, where inequalities do arise, the gap is typically not the result of globalization, but rather domestic government policies that dampen the positive impacts globalization could have brought.

Why Domestic Policies Matter

A concern for those looking at the impact of globalization is that while countries in Asia seem to be doing well in terms of poverty reductions, countries in places such as sub-Saharan Africa are not performing as well. Bardhan presents us with the following data:

Between 1981 and 2001 the fraction of Africans living below the international poverty line increased from 42 to 47 percent.

This result has less to do with globalization’s negative impacts and more to do with the country’s political regime and domestic policies.

Ann Harrison, a research associate with the National Bureau of Economic Research, states,

The poor will indeed benefit from globalization if the appropriate complementary policies and institutions are in place.

Bardhan points out that,

Opening markets without relieving these domestic constraints forces people to compete with one hand tied behind their back. The result can be deepened poverty.

Countries where regimes are unstable, the poor lack rule of law (land rights, justice in the court, freedom to start a business), and corruption is widespread create major limitations for the poor across the world.

In order for globalization to work, countries need to introduce domestic reforms and actually implement them. Reforms in areas such as rule of law would benefit countries seeking to gain from globalization and would help reduce poverty.

Bandow states,

Without sound domestic policies, it will be difficult to attract foreign investment and generate long-term economic growth…Still, greater foreign openness is likely to encourage greater domestic reform.

Often times those that say globalization negatively impacts the poor believe that the best way to improve the impact of globalization is through greater global regulatory arrangements. However, Bardhan would argue that opening up a country to globalization itself is what will help a country improve. He states,

If we keep the focus on agitating against transnational companies and international organizations like the WTO, attention in those countries often gets deflected from the domestic institutional vested interests, and the day of politically challenging them gets postponed… [Instead] opening the economy may unleash forces for such a challenge… [global competition] may be a force bringing about improvements in accountability of hitherto elite-dominated governance institutions.

Countries opening up to trade will be influenced by trade, technology, and ideas. These factors challenge the status quo and can lead to significant reform.

While income inequalities may arise from increased global competition, income mobility will be positively affected by globalization providing the poor with more opportunity. Additionally, the long-term effects of globalization provide the poor with better standards of living as they gain more access to improved market goods.

When a country opens itself up to the world market, globalization can become a positive mechanism for increasing economic opportunity and unleashing flourishing for the least of these.

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