Dr. Neelam Gupta
Deptt of Political Science
Globalization has been a tool for growth and poverty eradication. It is defined as the growing integration of economies and societies around the world as a result of flows of goods and serv ices, capital, people, and ideas. Integration accelerates development. Workers with the same skills are less productive and earn less in developing economies than in advanced ones. Integration through trade in goods, foreign investment, international telecommunications, and migration reduces these gaps by raising productivity in developing world. In this way globalization can be a powerful tool for poverty eradication.
More than one billion people live in extreme poverty, which is defined by the World Bank as subsisting on less than one dollar a day. In 2001, fully half of the developing world lived on less than two dollars a day. Yet poverty rates are much lower today than twenty years ago. In the last two decades, the percentage of the developing world living in extreme poverty has been cut in half (#). While poverty rates were falling, developing countries became increasingly integrated into the world trading system. Poor countries have slashed protective tariffs and increased their participation in world trade. Most of the world’s people live in countries where markets do not work properly and resources are not efficiently allocated. The notion that liberal economics has “failed” misses the point that in many areas of the world it has not really been tried. Poverty is the most virulent killer on our planet. Many continue to believe that increased government regulation and control, particularly when it comes to international trade, is the best way to combat poverty, ignoring the fact that real liberalization-truly free and competitive markets-is in fact the agenda of the world’s poor.
This paper provides a perspective on how globalization affects poverty in developing countries by drawing from various reports and studies such as Winters, McCulloch, and McKay(2004), Ravallion (2004), Chen and Ravallion(2000), and Hertel and Winters(2005), on both international trade and poverty .It also tries to answer questions like : Does globalization reduce poverty? Will ongoing efforts to eliminate protection and increase world trade improve the lives of the world’s poor? How has global economic integration affected the poor in developing countries? Has increasing financial integration led to more or less poverty?
Globalization produces both winners and losers among the poor. It should not be surprising that the results defy easy generalization. Within the same country or even the same region, a trade reform may lead to income losses for rural agricultural producers and income gains for rural or urban consumers of those same goods. Although the issues are complex, yet some broad themes that emerge are:
The poor in countries with an abundance of unskilled labor do not always gain from trade reform. Many economists argue that trade liberalization should raise the incomes of the unskilled in labor- abundant countries. To increase the incomes of the unskilled, they need to be able to move out of contracting sectors and into expanding ones. Another reasons why the poor may not gain from trade reforms is that developing countries have historically protected sectors that use unskilled labor, such as textiles and apparel. Trade reforms may result in less protection for unskilled workers, who are most likely to be poor finally, penetrating global markets even in sectors that traditionally use unskilled labor requires more skills than the poor in developing countries typically possess.
The poor are more likely to share in the gains from globalization when there are complementary policies in place. The studies on India and Colombia suggest that globalization is more likely to benefit the poor if trade reforms are implemented in conjunction with reducing impediments to labor mobility. Other policies are needed to ensure that the benefits of trade are shared across the population. Relying on trade reforms alone to reduce poverty is likely to be disappointing.
Export growth and incoming foreign investment have reduced poverty. Poverty has fallen in regions where exports or foreign investment is growing. In India, opening up to foreign investment has been associated with a decline in poverty. The study on Zambia suggests that poor consumers gain from falling prices for the goods they buy. Poor producers in exporting sectors benefit from trade reform through higher prices for their goods. In Colombia, increasing export activity has been associated with an increase in compliance with labor legislation and a fall in poverty. In Poland, unskilled workers-who are the most likely to be poor-have gained from Poland’s accession to the European Union.
Financial crises are costly to the poor. In Indonesia, poverty rates increased by at least 50 percent after the currency crisis in 1997. While recovery in Indonesia has been rapid, the Mexican economy has yet to fully recover from its 1995-peso crisis. Poverty rates in Mexico in the year 2000 were higher than they had been ten years earlier. Financial
globalization leads to higher consumption and output volatility in low-income countries.
One implication is that low-income countries are more likely to benefit from financial integration if they also create reliable institutions and pursue macroeconomic stabilization policies (including the use of flexible exchange rate regimes).
One of the most famous theorems in international trade is the Stolper-Samuelson theorem, which in its simplest form suggests that the abundant factor should see an increase in its real income when a country opens up to trade. If the abundant factor in developing countries is unskilled labor, then this framework suggests that the poor (unskilled) in developing countries have the most to gain from trade. Anne Krueger (1983) and Jagdish Bhagwati and T.N. Srinivasan (2002) have all used this insight to argue that trade reforms in developing countries should be pro-poor, since these countries are most likely to have a comparative advantage in producing goods made with unskilled labor. From this perspective, expanding trade opportunities should cut poverty and reduce inequality within poor countries.
Trade reform also affects the poor by changing the prices they face as consumers and producers. If imports and domestic goods (produced by the poor) are noncompeting, then the first-order effect of a trade reform would be to raise real incomes of the poor. Clearly, the poor gain from tariff reductions on goods that they buy. If globalization raises the prices of goods produced by the poor- such as agricultural products marketed by farmers- then poverty is also likely to decline.
Aart Kraay and his co-authors emphasize that globalization could raise the incomes of the poor by increasing long-run growth. This means that increases in trade or capital flows could increase incomes of the poor by raising productivity or through the accumulation of capital. imports of new goods embody new technology, which in turn raises productivity, while incoming foreign investment provides the possibility for technology transfer. If the income effects are fairly uniform, then the increase in aggregate income resulting from globalization-induced productivity gains should improve the incomes of the poor.
One of the most common claims today is that globalization typically leads to growing income inequality within countries, so that its benefits go primarily to the rich. This claim is simply not true. In fact, it is one of the big myths of the anti-globalization movement. In many developing countries, integrating with the international market has coincided with stable inequality or declines in inequality. When trade liberalization goes hand-in hand with stable or declining inequality, the benefits for the poor are quite powerful. Trade creates jobs which help for the poverty reduction. Here, the link from trade to poverty reduction is very clear. Even where inequality has increased, it is still the case that globalization has led to rapid poverty reduction. China is perhaps the best example of this. But the benefits of the globalization for the poor are particularly strong in the cases where inequality is stable or declining. There is ample evidence that the gap between the richest and poorest countries, and between the richest and poorest groups of individuals in the world, has increased. But inequality may increase without an increase in poverty rates, for example if globalization increases opportunities for the wealthy more rapidly than for the poor.
Many countries have made tremendous strides in reducing not only the percentage of the population living in poverty but also the absolute number of individuals living on less than $1 a day. During the last twenty years, developing countries increased their trade shares and slashed their tariffs. If export shares are one measure of globalization, then developing countries are now more globalized than high-income countries. To what extent is increasing globalization responsible for the fall in the incidence of poverty.
First, the relationship between globalization and poverty is complex. In many cases the outcome depends not Just on trade or financial globalization but on the interaction of globalization with the rest of the environment. Key complementary policies include investments in human capital and infrastructure, as well as macroeconomic stability and policies to promote credit and technical assistance to farmers. Financial globalization is more likely to promote growth and poverty reduction if it is accompanied or preceded by the development of good institutions and governance, as well as macroeconomic stability (including the use of flexible exchange rates).
The role of complementary policies in ensuring that globalization yields benefits for the poor is emerging as a critical theme for multilateral institutions. One related issue is that poor workers need to be able to move out of contracting sectors and into expanding ones. The country studies on India and Colombia suggest that trade reforms have been associated with an increase in poverty only in regions with inflexible labor laws. Consequently, any conclusions that do not take into account labor market institutions that could undermine labor mobility may be misleading. More research is needed to identify whether labor legislation protects only the rights of the small fraction of workers who typical1y account for the formal sector in developing economies, or whether such legislation softens short-term adjustment costs and helps the labor force share in the gains from globalization. The role of activists promoting the right to organize, improving working conditions, and raising wages suggests that selective interventions may be successful.
Second, the evidence suggests that globalization leads to clearly identifiable winners. Across different continents, export expansion has been accompanied by a reduction in poverty.
Third, it is also possible to identify the losers from globalization among the poor. Poor
workers in import-competing sectors-who cannot relocate, possibly due to the existence of inflexible labor laws-are likely to be hurt by globalization. Financial crises also affect the poor disproportionately.
Fourth, simple interpretations of general equilibrium trade models are likely to be incorrect Many economists predicted that developing countries with a comparative advantage in unskilled labor would benefit from globalization through increased demand for their unskilled-intensive goods, which in turn would reduce inequality and poverty. New theoretical and empirical ideas suggest that this interpretation of trade theory is too simple and frequently not consistent with reality.
– Integrating with the world economy is a powerful vehicle for growth and poverty reduction in developing countries, but 1t would be still more powerful if the rich countries further increased the openness of their own economies. It is in the interest of developing countries to enhance the openness of the trading regime and to participate in the WTO.
– Developing countries themselves can take action to ensure that they benefit more strongly from globahzat1on, in particular by building key institutions and policies that can support and complement the expansion of trade.
– Countries benefit from their own market-opening in many ways. Foreign direct investment brings with it innovations in product, process, and organizational technologies. While importation of goods brings embedded technologies and access to low cost production inputs and consumer goods. Competition from abroad spurs domestic industry to make productivity improvements, promoting growth and employment over the medium term.
– Open trade and investment policies will generate little benefit if other institution and policies are not in place. It is necessary to create sound investment climate. The investment climate is affected by a number of factors: macroeconomic stability; bureaucratic harassment, especially in the administration of regulations and taxes; the strength of financial institutions; the rule of law (including law enforcement) and corruption and crime; the quality of infrastructure ,including power and telecommunications; the effectiveness of the government in providing sound regulatory structures for the private sector; the effective provision of public services or the framework for such services; and the quality of the labor force.
The conclusions highlighted in this paper have several key implications for the globalization debate:
First, impediments to exports from developing countries exacerbate poverty in those countries. Developing countries need access to developed-country markets. The evidence shows a clear link between export activity and poverty reduction.
Second, the heterogeneity in outcomes suggests that careful targeting is necessary to
help the poor who are likely to be hurt by globalization. This includes the poor in countries hit by financial crises, as well as the smallest farmers who cannot compete with the more efficient larger farmers or with expanding import competition.
Finally, the evidence suggests that relying on trade or foreign investment alone is not enough. The poor need better education, access to infrastructure, access to credit for investing in technology improvements, and the ability to relocate out of contracting sectors into expanding ones in order to take advantage of trade reforms.
Developing countries can take steps to make globalization as a tool for poverty eradication. The three most important ways to do this are through basic education through social protection measures to deal with adjustments, and through ensuring that all regions of a country are connected to the globe.
The. poverty estimates in this paragraph are taken from the world Bank’s official poverty web site, at https://iresearch.worldbank.org/PovcalNet/jsp/index.jsp. The $1-a-day poverty line is actually $1.08 in 1993 purchasing power parity dollars.
– Bhagwati, Jagdish, and T.N. Srinivasan. 2002. Trade and poverty in the poor countries. AEA Papers and Proceedings 92(2): 180-83.
– Chen, Shaohua, and Martin Ravallion. 2000. How did the world’s poorest fare in the 1990s? World Bank Development Research Group Working Paper no.W2409. Washington, DC
– Aart Kraay. 2001. Trade, growth and poverty. World Bank Development Research Group Working Paper no.2615. Washington, DC; World Bank.
– Hertel, Thomas W., and L. Alan Winters, eds. 2005. Poverty and the WTO; Impacts of the Doha development agenda, New York: Palgrave MacMillian.
– Krueger, Ann.1983. Trade and employment developing countries. Vol. 3. Synthesis and conclusions. Chicago: University of Chicago Press.
– Ravallion, Martin. 2004. Competing concepts of inequality in globalization debate. In Brookings trade forum 2004, ed. Susan Collins and Carol Graham, 1-38. Washington, DC: Brookings Institution Press.
– Winters, Alan L, Neil McCulloch, and Andrew McKay. 2004. Trade liberalization and poverty: The evidence so far. Journal of Economic Literature 42 (March): 72-115.
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