"Finance ministers and international bureaucrats...shape the world economy to make the rich richer and the poor poorer....those holding power continue to impoverish and oppress the majority of the world's peoples"

Mobilization for Global Justice

"In every case where a poor nation has significantly overcome its poverty, this has been achieved while engaging in production for export markets and opening itself to the influx of foreign goods, investment and technology -- that is, by participating in globalization."

Ernesto Zedillo, former president of Mexico

"We need to be clearer about what the international economy can and cannot do for national economic development, about the complementary policies and institutions required domestically to sustain international economic integration.....in other words, we need to know how to make openness work"

Dani Rodrik, professor of international political economy at Harvard University

Recent street protests against the World Trade Organization in Seattle, against the World Bank and the International Monetary Fund in Washington, D.C., and outside the Republican and Democratic party conventions this summer have focused attention sharply on the issue of globalization. At the heart of this anti-globalization movement is the notion that global markets -- particularly global capital markets -- are destructive and exploitative. More specifically, these self-proclaimed opponents of globalization argue that global integration is increasing poverty and inequality -- both within and between nations. Such critics thus propose "progressive solutions" including slowing down, controlling, and even reversing the globalization process.

However, a closer look at the evidence shows that the anti-globalization case is based largely on false assertions. The wealth of evidence available shows that international trade and investment, when accompanied by other development policies, are powerful engines of economic growth. Moreover, this research shows that economic growth, on average, raises incomes for both the rich and the poor. It helps to lift the poorest in society out of absolute poverty and does not automatically increase inequality.

Perhaps more importantly, no country has managed to lift itself out of poverty without integrating into the global economy. Indeed, the countries that have experienced high and rising levels of poverty (and low growth rates) are more often than not the developing countries that have been marginalized from the process of globalization. Think of North Korea or many countries in sub-Saharan Africa. Such countries have insufficient levels of international trade and investment -- not too much. Here there is a legitimate question of causality: are poor countries poor because they do not trade enough? Or, does poverty prevent countries from engaging in the global economy? In other words, is trade a cause or an effect of economic growth? Either way, less globalization is generally associated with less development.

This evidence has an important bearing on policy deliberations. If integrating into the global economy is associated with higher growth rates and lower poverty, cutting off trade and investment and retreating from globalization is not a progressive policy approach. Rather, the lesson is clear:Reducing poverty and stimulating growth will require increased trade and foreign investment for the poorest nations, in conjunction with other development policies such as investments in education and infrastructure and institutional reform.

What is Globalization?

Economic globalization (hereafter simply globalization) refers to the process by which an increasing share of the economic activity in the world is taking place between people from different countries, rather than within the same country.¹ It encompasses international trade (exports and imports), foreign direct investment (when a firm or individual in one country owns or controls a firm in another country), portfolio investment (the sale of stocks, bonds, and other financial instruments to buyers overseas) and immigration. Assessing the impact of globalization on poverty and inequality (or any other variable for that matter) is a complicated process as each of these forces associated with globalization may be pushing in a different direction.²

Before outlining the evidence related to globalization and its impact on the poor, it is useful to consider why economic theory since the time of Adam Smith has consistently underscored the benefits of international trade and investment. Simply put, the international exchange of goods and services allows a more efficient use of the world's limited resources, thereby creating more output to be shared among the population. Consider this fact: the world economy produced more output in the twentieth century alone than it produced in total over the entire preceding years of recorded human history.³ (In terms of the graph below, the area under the GDP line after 1900 exceeds the area under the line prior to 1900).

Part of this increase in measured output per capita reflects the shift away from subsistence agriculture and production in the home (both of which are not measured in Gross Domestic Product (GDP) because they are not sold on a market). Yet, the rest of this explosive growth in output has come from technological progress: scientific advances, better production, organization, and management methods, and improved forms of transportation and communication. In particular, the specialization of production has occurred as people have increasingly focused on specific economic activities and traded with others for the goods and services they need. Importantly, that trade could be with the neighboring town, country, or continent. Indeed, trading with another country is much the same as trading with the local store. The local store never buys anything from its customers (and so runs a huge trade surplus with them) and yet it clearly enhances overall welfare by providing its customers with food and other products that they do not have to produce themselves. International trade and investment is simply the international extension of this division of labor and specialization, which is a key driving force behind economic growth.

Source: Bradford DeLong Estimating World GDP, One Million BC to Present

Recognizing this connection between trade and economic growth is the key to the debate. Proponents of globalization argue that trade expansion is a necessary (but not sufficient) policy for expanding the global economic pie. In contrast, many of those lined up against trade expansion focus intently on inequality and poverty and imply that redistributing the global economic pie is more important. Yet, if we were to share the world's output evenly among the world's population today, everyone would have an annual incomeof $4,890.⁴ This is approximately the same level of per capita income as countries like Brazil, Chile, Croatia, and Trinidad and Tobago. While such redistribution would clearly benefit millions of people in poorer developing countries, it would be an unpleasant shock to virtually everyone in the United States, Europe, Japan and other developed countries, as well as large numbers of people in many developing countries.⁵ Clearly, we need to find ways to expand the world's total wealth if we are to both alleviate poverty and reduce inequality. Trade expansion is part of that strategy.

The Evidence on Poverty

Turning now to specific claims made against globalization, one of the most common is that it increases world poverty. Often this claim is supported with a statistic showing the high rates of poverty in a given developing country or one highlighting the meager incomes on which many people survive. Yet, poverty is not a new phenomenon -- it did not emerge with the onset of this new phase of globalization. More importantly, the significant economic growth witnessed this century has raised incomes and reduced the number of people living in poverty. For example, rapid economic growth in Japan after World War II helped raise per capita income from $4,672 in 1960 (one third of the level in the United States) to $21,158 in 1990 (higher than many Western European countries and close to that of the United States).⁶ Similarly, average manufacturing wages in developing countries have increased from 10 percent of the U.S. level in 1960 to nearly 30 percent of the U.S. level in 1992, showing that average workers in developing countries are benefitting directly from economic growth and development.⁷ The real question, therefore, is whether the most recent phase of globalization has increased poverty in today's developing countries.

The table below shows that the total number of people living on less than a dollar a day in the developing world has remained roughly constant over the past ten years, at 1.2 billion. Since the population in developing countries has been rapidly growing over the same period, the proportion of the developing country population living below the poverty line has actually fallen, from 28 percent in 1987 to 24 percent in 1998.⁸ In other words, more people have moved out of poverty than were born into poverty over the past decade. Thus, blanket claims that globalization increases world poverty simply do not match the evidence.

Poverty in Developing Countries - Millions of People Living on Less than $1 a day

Yet, while such a reduction in poverty is laudable, it has not been rapid or deep enough. The number of people living on the slightly higher amount of $2 a day is almost 3 billion, approaching half of the world's population. This suggests that many of those moving out of dire poverty have not moved far up the income scale. Moreover, World Bank estimates based on a "business as usual" scenario of slow growth, predict that 1.2 billion people will still be living on less than $1 a day in 2008. The number of people living below that poverty line in sub-Saharan Africa is predicted to increase by nearly 40 million over the same period. Clearly, much more needs to be done to accelerate poverty reduction in the coming decades.

Regional Patterns

There are vast regional disparities in the experiences of developing countries in reducing poverty over the past decade. In East Asia, the number of people living in poverty fell by a third -- from 418 million to 278 million. This represents one of the largest and most rapid reductions in poverty in history and reflects the rapid growth rates in the "East Asian Tigers" and China.⁹ Even excluding China (where more than 100 million people have risen above the poverty line over the past decade), the number of people living on less than a dollar a day almost halved, from 114 million in 1987 to 65 million in 1998. This net reduction in poverty occurred despite an increase of roughly 10 million in the wake of the Asian financial crisis. Indeed, even at the height of the Asian crisis in 1998, a smaller proportion of the population was poor in South Korea than in India.

In contrast, both the number and percentage of people living on less than a dollar a day increased in Europe and Central Asia. This reflects the difficult transition to a market-based economy being experienced by many former Soviet bloc countries. The collapse in output and the disappearance of social safety nets have raised the specter of poverty in countries that were (at least officially) virtually free of poverty under communism. Similarly, sub-Saharan Africa and Latin America have experienced increases in the number of people in poverty. Indeed, almost half of the population of sub-Saharan Africa live on a dollar a day and this proportion has not changed in 15 years. These divergent regional trends raise questions about increasing inequality between countries: some regions of the world appear to benefit from the global economy, while others are left behind.

Finally, it is important to note that poverty is a multidimensional phenomenon and is not simply the same as an insufficient level of monetary income. Other determinants of poverty include access to basic sanitation, education, and health services. This distinction is important because some developing countries have converged or almost converged with developed countries in areas such as life expectancy, even though they have much lower income levels. For example, in Latin America and the Caribbean life expectancy averages 70 years and average per capita income is only $6,868. In contrast, average life expectancy in developed countries is 78 years, while average per capita income is $23,741.¹⁰ Even countries as poor as India have a life expectancy (63 years) that was not possible anywhere in the world a hundred years ago.¹¹ This shows that the worldwide dissemination of new technologies and knowledge, such as medical advances, reduces some aspects of poverty in developing countries even while monetary incomes only slowly increase.¹²

The Evidence on Inequality Between Countries

There is no doubt that income inequality between countries has increased significantly over the past half century at the same time that globalization has been accelerating. The graph below shows that, while income per capita has increased in both rich and poor countries since the turn of the century, income has risen much faster in the rich countries. Indeed, according to the United Nations, the gap between the richest and poorest countries increased from 44 to 1 in 1973 to 72 to 1 in 1992.¹³

Inequality between rich and poor countries increases essentially because the rich are getting richer faster than the poor. In Western Europe, income per capita trebled between 1950 and 1992. In contrast, GDP per capita has only increased by 70 percent in Latin America over the same period. Thus, GDP per capita in Western Europe now stands at $18,000, compared to $7,000 in Latin America. The picture in Africa is even worse. Per capita GDP has only increased 50 percent since 1950 -- and then from a very low base. Per capita GDP has actually fallen in many African countries since 1970.

Source: Maddison Monitoring the World Economy 1820-1992, Table 1-3

It is important to note the changing role of population dynamics in driving this inequality in income per person. In the nineteenth century, economic growth went hand in hand with population growth. Hence, per capita incomes steadily increased. In contrast, many developing countries more recently have faced rapid population growth without equivalent increases in their overall economic growth rates. For example, in sub-Saharan Africa, output growth has not been able to keep pace with population growth in 15 countries, resulting in a contraction in per capita incomes in these countries and for the region as a whole.

To establish that the gap between incomes in the rich developed world and those in developing countries has been increasing as globalization has been accelerating does not prove that the process of globalization is driving the divergence. In fact, one recent study by the World Trade Organization concluded that countries that trade extensively with one another tend to converge to similar income levels. More importantly, these countries have converged on higher and steeper growth paths -- trade drags countries up not down.¹⁴ Yet, as noted above, income inequality between countries more generally increases, largely because rich countries grow faster than poor ones. The inequality question is really question of why growth has been so slow in some developing countries.

Is Globalization to Blame for Slow Growth?

The evidence suggests that identifying globalization as the primary cause of slow growth in developing countries is false on several counts. First, the majority of economic research suggests that international trade and investment positively affect economic growth -- in all countries. For example, in a recent paper analyzing 63 countries, Frankel and Romer (1999) calculated that increasing the ratio of trade to GDP by one percentage point raises income per person by 0.5-2 percent.¹⁵ Moreover, careful analysis of even some of the world's poorest countries suggests that trade and investment liberalization affects them in the same way as other, more advanced economies. Harvard economist Dani Rodrik notes "[T]he basic lessons for economic policy....apply equally well to the African countries. Because most of the African economies are small, they cannot afford to close themselves off from the world economy -- perhaps more than any region, Africa needs imports of capital goods, intermediate inputs and ideas."¹⁶ Similarly, many other cross-national studies have identified positive relationships between measures of "openness" and economic growth, suggesting that liberalizing trade and investment has a positive impact on growth.¹⁷

Second, globalization in its broader sense (increasing economic activity between people living in different countries) brings additional positive spillover effects that will disproportionately benefit developing countries. As noted above, some developing countries measure up very well when compared to the developed world on indicators such as life expectancy. These improvements are driven by the spread of technologies, processes and ideas -- fostered through foreign investment, trade, and other forms of contact with the developed world. The transfer of specific medical advances made in developed country laboratories will probably do more to help fight the spread of AIDS in Africa than an increase in average GDP growth rates in the region. Similar exchanges of ideas, information, and technologies brought about by globalization will continue to improve the lives of many of the poorest people in the world in ways not captured by purely monetary measures.

Slow and Fast Integrators

There is growing evidence to suggest that developing countries should not be treated as one bloc because their experiences and success rates differ so widely. For example, the 48 countries classified by the United Nations as the "least developed countries" (LDCs) experienced a decline in their share of global exports from 0.8 to 0.4 percent between 1980 and 1990 and it has remained at that share since -- a low figure even when compared to their 0.8 percent share of world output.¹⁸ In contrast, the East Asian Tigers account for 12 percent of global exports, while they represent less than 4 percent of global output. Similarly, while the amount of foreign direct investment flowing to developing countries has exploded over the past two decades, two thirds of this capital flows to only eight developing countries.¹⁹ A more accurate picture of the global economy is therefore one in which globalization provides an opportunity for economic growth, while the specific policies and characteristics of individual countries determine whether they can and will capitalize on those opportunities.

There are at least three broad groups of developing countries -- fast integrators (those doing well in the global economy), moderate integrators (those performing reasonably), and weak or slow integrators (those countries being left behind by globalization). According to a recent World Bank study that divided the developing countries in this way, the fast integrator developing countries averaged growth of 2 percent per annum between 1984 and 1993. In contrast, the weak or slow integrators had a median growth rate of -1 percent a year.²⁰ The fast integrators also had more stable growth rates.

Identifying the various factors that contribute to -- or indeed retard -- economic growth in developing countries is beyond the scope of this paper. Indeed, it is the focus of the entire realm of "development economics." The important point to note here that, all other things being equal, high levels of international trade and investment are associated with rapid economic growth. The direction of causation is most likely two-way. Rapid economic growth increases the demand for imports, pushing countries to sell exports to finance those imports. At the same time, increased exports and foreign investment provide a boost to economic growth at home.

Yet, more importantly, all other things are not equal. Those countries being left behind in international trade and investment are also being left behind in other areas such as education, basic health care, and the adoption of new technologies. Thus, to improve the growth rates in those failing economies, we need to look beyond broad claims about the destructive nature of globalization to factors such as investment (in both machinery and people), macroeconomic stability, natural resources and infrastructure, and political and institutional stability. Focusing on, and blaming, international trade and investment diverts attention away from these more important determinants of poverty and slow growth.

The Evidence on Inequality Within Countries

One final criticism leveled at the process of globalization is that it is increasing inequality within societies. Critics argue that the wealthy accrue the benefits of growth, while the poorest groups suffer, threatening a backlash against the process. The theoretical economic benefit of opening an economy to international trade and investment is that it enables the economy to reallocate its resources into the activities that it does best. This process of economic change will reduce output and employment in some sectors, while increasing output and employment in others. Economic theory concludes that the total gains to the winners more than offset any losses in specific sectors or regions of the economy. The political economy question, however, is how to ensure that as many people as possible share in the benefits.

The evidence suggests that there has indeed been a trend towards increased inequality within many countries over the 1980s and 1990s -- the period coinciding with the recent phase of globalization. In a recent report, the United Nations noted that inequality has increased in 9 out of 16 developed countries; all of the former Soviet bloc countries; and most of Latin America (except Uruguay and Bolivia).²¹ The record in Asia and Africa was mixed. Some African countries experienced a "leveling down" of incomes to a more equal distribution but with a lower average income, highlighting that falling inequality is not necessarily a positive step.

Is globalization to blame for rising inequality?

Evidence that rising inequality in some countries occurs at the same time as rapid globalization does not prove causation. In fact, the evidence on the causal relationship between globalization and internal inequality is mixed. One thing seems clear: there is no systematic relationship between openness to trade and inequality. For example, while both Thailand and Taiwan have witnessed rapid economic growth and integration into the global economy over the past thirty years, inequality increased in Thailand but not in Taiwan. Similarly, according to one World Bank study of countries integrating into the global economy, almost the same number of countries experienced a fall in inequality as experienced an increase. This led the authors to conclude that there is no simple relationship between openness and inequality.²²

In addition, growth in general (whether caused by trade or other factors) does not automatically increase inequality. A comprehensive study of 125 countries by the World Bank showed that a 1 percent increase in GDP is associated with a 1 percent increase in the incomes of the poor.²³ The study concluded that "there is no apparent tendency for growth to be biased against poor income households at the early stages of development." Thus, blanket claims about globalization or growth increasing inequality cannot be substantiated by a careful look at the evidence. Other factors -- such as domestic social and other policies -- clearly play a role in how economic growth and integration in the global economy affect the distribution of income.

Expanding the winner's circle of those benefitting from an open economy thus depends on a set of domestic policies and institutions to facilitate economic change and minimize the costs felt by those facing the brunt of the change. Given that most workers have highly specific skills that are tied to a specific job or company -- while capital is much more mobile (both domestically and internationally) -- there is a strong case for focusing public policy on workers. Suitable policies include lifelong access to high quality education and training; promoting worker empowerment through portable pensions, healthcare benefits and other wealth-building assets; and the creation of a rapid-reemployment system for dislocated workers. In developing countries, it may also involve the creation of minimal social safety nets through unemployment insurance and other social programs that do not yet exist.

Conclusion

"Globalization" has become a lightening rod for many legitimate concerns about modern society including poverty, inequality, unemployment, and environmental degradation. Yet, there is no clear evidence that globalization per se is to blame for rising global poverty or inequality. Indeed, higher levels of trade and investment tend to increase economic growth and bring other positive spillover effects (such as access to new, better technologies). Rather than blanket claims against globalization, there emerges a pattern in which some countries successfully reap the benefits of the global economy while others are being left behind. Those that fall behind (such as sub-Saharan Africa) fail on a range of indicators. The causes of their marginalization are more deep-seated and complex than simply globalization and include factors such as a lack of investment, poor education, weak infrastructure and institutions, and civil and political unrest. Focusing on globalization as a cause of poverty and inequality distracts policymakers from the real challenges of development. Yet, removing the blame from globalization does not justify a purely laissez-faire approach to the global economy. Countries need active policies to spread the burdens of adjustment and expand the winners circle if they are to maintain political support for globalization and reap the significant benefits it can bring.

Endnotes

1. Some authors have stressed a much broader definition of globalization -- including, for example, cultural aspects. However, since the focus of this paper is poverty and inequality, I will use an economic definition. See the World Bank Briefing Paper What is Globalization? For further discussion see http://www.worldbank.org/html/extdr/pb/globalization/paper1.htm

2. For a careful study of the impact of trade liberalization on poverty see Trade and Poverty: Is There a Connection?, Alan Winters, Special Studies 5, World Trade Organization, 2000.

3. Bradford DeLong,Estimating World GDP, One Million BC - Present, University of Berkeley. Available on the web at http://econ161.berkeley.edu/TCEH/1998_Draft/World_GDP/Estimating_World_GDP.html

4. World Bank Data.

5. In addition, such an outcome would likely only be temporary. Highly productive workers and firms in developed countries would reduce their output and effort to match their greatly reduced incomes. This would result in a widespread reduction in output and enormous impoverishment for the whole world.

6. Bureau of Labor Statistics, Foreign Labor Statistics. On the web at www.stats.bls.gov/flshome.html

7. Gary Burtless et al., Globaphobia: Confronting Fears About Open Trade, Brookings Institution, Progressive Policy Institute, and Twentieth Century Fund, 1998.

8. World Development Indicators 2000, World Bank.

9. The economies of East and Southeast Asia that experienced rapid growth over the past few decades have been variously named the Asian Tigers, the Newly-Industrializing Countries and Emerging Markets. They include Hong Kong, South Korea, Singapore and Taiwan (the first wave) and Indonesia, Malaysia, Thailand and to a lesser extent the Philippines.

10. UN Human Development Report 1999, Human Development Index, pp. 134-137.

11. India's life expectancy has increased from 49 to 63 years since 1970.

12. The UN recognizes that health and other social aspects of poverty are not accurately reflected in monetary measures and thus constructs its own measure of poverty -- the human development index (HDI). This measure includes life expectancy, literacy, school enrollment and incomes. In 1997, more than half of the 174 countries measured by the UN had an HDI rank that was higher than their per capita income would predict.

13. United Nations Human Development Report 2000, P.6.

14. Ben-David, Nordstrom and Winters,Trade, Income Disparity and Poverty, World Trade Organization, 2000, P.5.

15. J. Frankel and D. Romer, Does Trade Cause Growth?, American Economic Review, June 1999.

16. Making Openness Work, Overseas Development Council Policy Essay No.24, 1999, Dani Rodrik. P104 (from the chapter "Is Africa Different?").

17. Two commonly-cited studies include: Economic Reform and the Process of Global Integration, Sachs and Warner, Brookings Papers on Economic Activity, 1995; and Outward Oriented Developing

Economies Really Do Grow More Rapidly: Evidence from 95 LDCs 1976-85, David Dollar, Economic Development and Cultural Change, 1992. These results linking trade policy to higher growth rates have been challenged by some economists but even these more skeptical economists accept that international trade itself, whether driven by policy or other factors, has a positive impact on growth.

18. Market Access for the Least Developed Countries:Where Are the Obstacles?, OECD, October 1997, OECD/GD(97)174.

19. The eight, in order, are China, Brazil, Mexico, Indonesia, Poland, Malaysia, Argentina, and Chile.

20. Global Economic Prospects and the Developing Countries, 1996

21. Trade and Development Report 1997, UNCTAD, New York and Geneva, 1997, pp.109-111

22.Assessing Globalization: Does More International Trade Openness Worsen Inequality?, World Bank Briefing Papers, Part 3, Figure 4. Available on the web at http://www.worldbank.org/html/extdr/pb/globalization/paper3.htm

23.Dollar and Kraay, Growth Is Good for the Poor, Development Research Group, World Bank, March 2000.

References

Bradford DeLong, J, Estimating World GDP, One Million BC to Present, available on the web at www.econ161.berkeley.edu/TCEH/1998_Draft/World_GDP/Estimating_World_GDP.html

Maddison, Angus Monitoring the World Economy 1820-1992, 1995, Organization for Economic Co-operation and Development, Paris.

Jenny Bates is international economist for the Progressive Policy Institute.