The Debate On Globalization Poverty Reduction And Inequality Economics Essay

The head of a Chinese family recently said to a BBC interviewer, ‘You in the West all have washing machines and refrigerators and TVs. Why shouldn’t we Chinese have the same?’ This paper moves towards an answer to his question, but with reference to the whole human race. It does so by assessing the free market argument, also known as the globalization or the neo-liberal argument, which promises substantial gains in living standards for ordinary people provided the world community sticks largely to free market policies.

The world has experienced a significant move towards free market policies since the 1980s; economic integration across borders has increased; a very large part of the world has started to function as a single economy. What have been the associated trends in growth, poverty and income inequality?

The neo-liberal argument reads the evidence as positive: falling poverty and global inequality, rising standards of living for ordinary people, and erosion of patron-client dependency. Globalization thus brings ‘mutual benefit’. The interest of rich countries and poor countries, dominant classes and subordinate classes, are broadly aligned in favour of free markets, contrary to the standard ‘conflicting interests’ assumption of the left. The divides between North and South, core and periphery, and rich and poor are lags in the catch-up of the poor world to the prosperity of the rich world, not structural segmentations of world markets.

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The global economic multi-laterals such as the World Trade Organization (WTO), the World Bank, the International Monetary Fund (IMF), the Asian Development bank, are rightly mandated to implement the Washington Consensus to free up trade and investment across borders, deregulate markets, and harmonize national regulations, to give economic actors a global ‘level playing field’ undistorted by state restrictions. The gains will be at risk if countries start to backslide on policy liberalization.

A lot is at stake. Here I reviewed general discourses around the impact of economic globalization on poverty reduction and inequality.

Since there are other dimensions in globalization with different impacts, I will focus on the impact of ‘economic’ globalization.

GLOBALIZATION AND POVERTY

GLOBALIZATION CAUSES AND DEEPENS POVERTY?

Ravallion (2005) examines more specifically the relationship between trade openness and poverty, using three different lenses and techniques: 1) a macro aggregate cross-country regression of the impact of trade on poverty; 2) a macro time series analysis of China; and 3) a micro lens based on a Computable General Equilibrium model scrutinizing, respectively, the impacts on households of WTO accession in China and cereal de-protection in Morocco. Both the macro and micro approaches cast doubt on some widely heard generalizations from both sides of the globalization debate. In particular, he points to the inadequacy of the conventional “macro lens” for revealing strong and robust trade-poverty relationship. Ravallion also show that the link between trade openness is a powerful force for poverty reduction in developing countries. However, the tenuous nature of the trade-poverty relationship cannot necessarily be generalized to all cases. The data presented are more suggestive of diverse (and noisy) impacts of trade openness on poverty. Under a set of specific conditions trade opening could clearly be very effective in alleviating poverty.

Globalization can have a negative effect on society and contribute towards increased poverty in the world. For example, according to Robert Reich, a political economist, “national economies” are disappearing. By this he means that large, foreign multinational companies are setting up their businesses in developing countries and taking away business from the domestic competitors. Thus, since “multinationals locate most of their assets, owners, top managers, and research and development activities in their home countries” local companies are going out of business and people are becoming poorer.

According to its critics, globalization leaves the poor behind; it causes and deepens poverty. In their view, this result is due to several and interrelated reasons. First, without capital, you cannot gain from economic integration. The poor have next to no capital, partly due to lack of entitlement rights and destitution. Second, due to uneven development, globalization exacerbates social and economic gaps within and among states by reinforcing a process of “creative destruction” (Shumpeter, quoted in Weede 2000:9). Third, from a structural point of view, dependency theorists argue that the poverty of the developing countries is caused by the affluence and exploitation of the rich countries. According to this logic, the very structure and process of globalization perpetuate and reproduce unequal relationships and exchange between the “core” of industrialized countries of the international economic system and its periphery. Fourth, globalization has increased inequality by having significant and uneven effects upon various types of social stratification, including class, country, gender, race, urban/rural divide, and age, both between and especially within nations.

How does globalization produce poverty? From a dependency or radical perspective, the adoption of the liberal ideology of globalization and the restructuring of the world economy under the guidance of the Bretton Woods (liberal) institutions increasingly deny developing countries the possibility of building their national economies. Thus, the internationalization and globalization of macro-economic policies transforms poor countries into open economies and “reserves” of cheap labour and natural resources (Chossudovsky 1997:33).

GLOBALIZATION CAN REDUCE POVERTY?

According to David Dollar, he introduces evidence in support of five trends since 1980, those are:

Growth rates in poor countries have accelerated and are higher than growth rates in rich countries for the first time in modern history.

The number of extremely poor people (those living on less than $1 a day) in the world has declined significantly-by 375 million people- for the first time in history, though the number living on less than $2 a day has increased.

Global inequality has declined modestly, reversing a 200-year trend toward higher inequality.

Within-country inequality is generally not growing.

Wage inequality is rising worldwide. This may seem to contradict the fourth trend, but it does not because there is no simple link between wage inequality and household income inequality.

According to the liberal “globalization thesis,” a quantum leap in human affairs has taken place as the cross-border flow of large quantities of trade, investment, people, and technologies has expanded from a trickle to a flood. These processes are bringing about a brave new world of increasing prosperity and international cooperation and will eventually lead to greater equality and convergence in the performance of national economies across the world. As has become evident over the last three decades, participation and integration in the world economy has been highly beneficial for developing nations, including China, India, and the NICs of East and South-east Asia (see Gilpin 2000:19, 293, 299-303; Dollar and Kraay 2002; and especially Wolf 2004).

From a liberal perspective there seems to be a direct and positive relationship between globalization and poverty: the more globalization takes place, the less poverty there will be. At the same time, there is a growing recognition that globalization does not progress evenly, despite its overall positive effects for worldwide development (IMF 2000:4; World Bank 2002). According to this view, those countries that have become integrated into the global economy at a faster rate than others will themselves grow faster and manage to reduce poverty. For example, outward-oriented (export-led) economic policies brought about dynamism and greater prosperity for much of East Asia, transforming it from one of the poorest areas of the world 40 years ago into the most dynamic one nowadays. In contrast, the countries that pursued inward-oriented economic policies, such as Import Substitution Industrialization (ISI), saw their economies stagnate or decline, as happened in much of Latin America and Africa between the 1950s and the 1980s. In sum, adopting and joining the process of global economic integration, interdependence, and globalization can reduce and resolve the problems of poverty and inequality, both within and among nations. Through the promotion of free trade that sustains high-quality growth, globalization holds the promise of improved living standards for all the peoples of the world (Camdessus 1999:386; see also UNDP 2000:48). In this sense, economic opportunities in the Third World would be far greater, and poverty therefore vastly more reduced, except for the barriers to free trade-that is, restrictions on economic freedom, which are erected by rich and poor-country governments alike (Economist 2000:17).

GLOBALIZATION AND INEQUALITY

As regards the impact of globalization on income inequality, there is now a large literature with contributions from over 50 authors, most of whom conclude that globalization has increased income inequality within as well as between countries. Stiglitz (2003), for example, argues that, as actually practised, globalization tend to make poor societies more rather than less unequal. However, some contributors to the literature question these findings or argue that, though higher growth has been accompanied by increased inequality, poverty has still decreased.

Various early studies distinguished between the impact of economic globalization and the impact of technology changes, mostly concluding that the deteriorating income inequality was due to technological changes rather than globalization. However, Cornia and Court (2001) and Cornia and Kiiski (2001) showed that the widespread surges in inequality were linked to excessively liberal economic policy regimes and to the way in which economic reform policies were carried out.

Cornia and Kiiski (2001) reviewed the changes in within-country inequality over the past 20 years on the basis of an extensive review of the literature and of an analysis of inequality trends in 73 countries accounting for over four-fifths of world population and GDP. They found that over the past 20 years inequality rose in two-thirds of these countries – a clear departure from the inequality trends recorded since the end of the Second World War. The study also suggests that, with the exception of growing educational dispersion in Latin America, traditional causes of inequality (such as land concentration and urban bias) cannot account for the recent rise in income inequality. This appears to be related to a shift towards skill-intensive technologies and especially to the drive towards domestic deregulation and external liberalization. Of the six main components of this new paradigm, the factor most strongly contributing to rising inequality appears to have been capital account liberalization, followed by domestic financial liberalization, labour market deregulation and tax reform. Privatization was found to be associated with rising inequality in some regions but not in others, while trade liberalization had an insignificant effect on or only mildly contributed to rising inequality.

Similarly, Singh and Dhumale (2002) indicate that, with respect to developing countries, neither trade nor technology are necessarily the most important factors in increasing income inequality, though they agree that globalization (in the form of financial liberalization rather than trade) and technology are both likely to be significant factors accounting for the increased inequality in developing countries over the past 20 years. They conclude that, for developing countries, the most relevant factors are the social norms deemed acceptable, labour market institutions such as unions and minimum wages, and macroeconomic conditions.

Khan, Griffin and Riskin (1999), analysing changes in recent income distribution in urban China, conclude that increased income inequality is more likely to be due to economic reform policies (especially cuts in social protection provision) than to globalization; and that, at least in the more prosperous regions, by creating new jobs globalization has contributed to fairer income distribution. Thus, there may be some cases where the impact on income inequality can be derived from the Heckscher-Ohlin model. However, the overall consensus remains that globalization has led to increased income distribution both within and between countries, as long as technological changes are considered to be part of the globalization process.

Looking at the longer-term perspective, there is some agreement that income distribution deteriorated considerably during the twentieth century. According to the IMF (2000), the world Gini coefficient rose from 0.40 in 1900 to 0.48 in 2000. Bourguignon and Morrisson (2002), examining the combined effect of trends in disparities between countries increased significantly between 1820 and 1910, remained stable from 1910 to 1960 and grew again from 1960 to 1992. Concentrating on more recent experience, Milanovic (2002) also concludes that world income distribution became markedly more unequal between 1988 and 1993.

Burtless (2002) has argued that income may not be the best indicator to assess the impact of globalization on inequality and that indicators such as life expectancy would show that globalization had an equalizing impact. On the other hand, there is some indication that disparities in life expectancy are growing once again, because of the AIDS epidemic. Furthermore, the earlier periods of improved life expectancy may have been influenced by the spread of medical advances. Finally, life expectancy may not necessarily be a better indicator of the impact of globalization on inequality than income, especially as qualitative aspects of life are not taken into account if only life expectancy is considered.

Another important question that need to be answered is what effect globalization has had on international inequalities at the country level and on world poverty at the individual level. Depending on how we chose to measure relative poverty, however, we get dramatically different results. One way to measure the evolution of international inequalities is to measure the change in the number of times that the income per capita in the richest country exceeds the income per capita in the world’s poorest country, in the 10th poorest country, or in the 20 poorest countries as compared with the 20 richest countries in the world over time. Based on this measure, the United Nations (1999), World Bank (2000/2001), the IMF(2000) and many left-learning intellectuals, such as Pritchett(1997) and Stiglitz (2002) have asserted that globalization caused or resulted in increased income international inequalities and poverty in the poorest developing countries during the recent period of rapid globalization since 1980.