Globalization Has Increased Poverty In A Developing Nation Economics Essay

Nowadays, the term ‘globalization’ is the main focus of attention. It is often described as a process of internationalization – easy communication regardless of geographical boundaries due to advance technologies, easy and fast financial capital flow across the globe and countries become more interdependent particularly in economy. It is believed that globalization provides consumers with variety of choices with affordable price. So, is the globalization reducing or increasing poverty? This study will attempt to briefly answer this question.

Though both the United Nations and India have celebrated fifty years, they have been criticized for failing to translate the stated mandate for the disadvantaged millions. Half a century after Independence, as of now, we have the largest population of poor people in the world, one third of our rural population is below the poverty line and despite the UN agencies’ massive aid projects, the development assistance of the World Bank, bilateral aid, the Center and State governments’ intervention, the gap between the rich and the poor has doubled in the last three decades – fifteen years ago the lowest 20 per cent of global population received 2.5 per cent of global wealth whereas at present, the share has been reduced to less than 1.3 per cent. For example, the 1999 UNDP Human Development Report records that the gap between the rich and the poor among nations as well as within nations has widened. Even the World Bank in its Report for 1999 concedes that raising the GNP is not enough to improve human development, other social measures are needed. The trickle-down theory of economic development cannot bring out the desired results. It has also pointed out that India is ‘a country of stark contrasts and disparities.’ Among the widening contradictions some seem to be glaring. Undoubtedly food grain production has increased fourfold but 653 per cent of children under four remain undernourished; literacy has doubled, yet half the population is illiterate, life expectancy has improved but only 927 females survive for every 1000 males. As we have entered into the twenty-first century, it is imperative on our part to look at the scenario with bare facts and figures.

The problem statement

Does Globalization increase or reduce poverty.

Objective and scope

Poverty in India is widespread with the nation estimated to have a third of the world’s poor. According to a 2005 World Bank estimate, 42% of India’s falls below the international poverty line of $1.25 a day (PPP, in nominal terms Rs. 21.6 a day in urban areas and Rs 14.3 in rural areas); having reduced from 60% in 1980. According to the criterion used by the Planning Commission of India 27.5% of the population was living below the poverty line in 2004-2005, down from 51.3% in 1977-1978, and 36% in 1993-1994

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Among the causes ascribed for the high level poverty in India are its history under British rule, large population, and low literacy. Also important is India’s social structure, including the caste system in India, and the role of women in Indian society. Economic growth has in the past been dampened by a dependence upon agriculture, and the economic policies adopted after its independence.

Since the 1950s, the Indian government and non-governmental organizations have initiated several programs to alleviate poverty, including subsidizing food and other necessities, increased access to loans, improving agricultural techniques and price supports, and promoting education and family planning. These measures have helped eliminate famines, cut absolute poverty levels by more than half, and reduced illiteracy and malnutrition.

(I) Defining globalization and poverty (II) Does Globalization reduce poverty, (III) Does Globalization increase poverty, (IV) What are the other reasons contributing to poverty, (V) What role The World Bank, IMF and WTO play in developing countries, (VI) Who benefit the most from globalization.

Defining Globalization and Poverty

“Globalization” has been defined in various dimensions. Among many established definitions, these are some of them. ‘Globalization as internationalization’ in which is viewed “as simply another adjective to describe cross-border relations between countries”; ‘Globalization as liberalization’ which refers to “a process of removing government-imposed restrictions on movements between countries in order to create an ‘open’, ‘borderless’ world economy”.

Defining poverty is controversial. Definition of poverty in developed countries may not be applicable to the one in developing countries. However, United Nations and World Bank define poverty line as living on less than a $1 and $2 a day for low income countries. Sociologists define poverty “a lack of essential items – such as food, clothing, water, and shelter – needed for proper living” .

Since “Globalization and Poverty” is a huge and very broad topic, this short paper is to attempt looking at one of the heated debate questions on whether globalization reduces or increase poverty. Numerous studies on this issue have been carried out. However, the findings are conflicting.

(II) Globalization Reduces Poverty

Neoliberal economists widely believe that globalized trade benefits not only the affluent but also the poor through trade integration. “Neoliberal economic theory–more open economies are more prosperous, economies that liberalize more experience a faster rate of progress” Wade (2004, p-567). The belief is that as countries open up their economy such as by slashing down the trade barriers for instance tariff, custom duty and quotas, price of imported goods will be affordable for the poor; foreign direct investments come in and create jobs in local economy. Consequently, this increases export growth and GDP. Millions of poor people’s living standard improves because of jobs created. China, India and Vietnam are often cited as good examples for success of globalized economy.

(III) Globalization Increases Poverty

On the contrary, many economists are unconvinced by the neoliberal economists’ view that globalization reduces poverty. Pilger (2001) in his TV report on Indonesia presents that despite investments from multinational corporations (eg. Nike, Levis, Reebok Classic, Calvin Klein Jeans, Adidas, Gap Inc.), poverty remains unchanged in Indonesia. On average, Indonesian workers are paid only slightly over Rupiah 9,000 (US$1) per day which is just over half of a living wage.

Harrison (2006) finds similar situation in Mexico. Mexico is a member of North American Free Trade Agreement (NAFTA) signed in 1993 with Canada, Mexico and USA. If trade integration is to reduce poverty and benefit the poor as neoliberal economists suggest, poverty in Mexico should be declined. But, Harrison (2006, p-7) concludes that “poverty rates in Mexico in the year 2000 were higher than they had been ten years earlier.” This reinforces that neoliberal economists’ view on decline of poverty is unconvinced.

(IV) Other reasons contribute to poverty

Wade (2004, p-571) states that more than 1.2 billion people are still living on less than US$1 a day. The followings are some of the most recognized reasons contribute to poverty: lack of natural resources, natural disaster – long period of draught, corruption and sanctions imposed against specific country.

For example, according to United Nations, Cape Verde is one of the most stable democratic countries in Africa and the government is relatively mild in corruption. It ranks 49 out of 179 in Transparency International’s “2008 Corruption Perceptions Index “. But due to cycles of long-term drought, lack of natural resources, shortage of water supply and lack of foreign investments, the state is still among the poorest nations on earth despite its good governance.

Countries with rich endowment of nature resources also remain in poverty due to wide spread corruption, bad governance, political instability and economic sanctions imposed by powerful countries. For example, my country, Myanmar (Burma) is still among the world’s poorest countries despite rich endowment of natural resources from oil to various gem stones. It is due to political instability, severe corruption, lack of reliable judiciary system, basic infrastructures and economic sanction imposed by The US. Consequently, unemployment rate is remarkably high and chance of economic success for big majority of population is slim unless economic and political reform take place.

(V) Role of World Bank, IMF and WTO on development in poor countries

The World Bank, International Monetary Fund (IMF) and World Trade Organization are widely known as driving forces of trade liberalization. Pilger (2001) interviews several former executive officials of The World Bank and IMF in his TV report on Indonesia. Those officials explain that the roles The World Bank and IMF have played in Indonesia’s economy and various criteria a country to comply with order to get loan from them.

World Bank and IMF are supposedly to help poor countries. In reality, powerful countries use the two institutions as tools to suck up resources from developing countries via multinational corporations, according to the TV report. To get loans from the institutions, a country has to reform its economy which mainly means to open up markets and allow multinational corporations to access to country’s resources and privatize industries. Thus, complying with the criteria implies serving the best interests of multinational corporations.

In addition to opening up markets for multinational corporations, the loans also come with so called ‘technical experts’ or ‘consultants’. So, significant sum of the loans go back to developed countries as salaries of those ‘experts’.

To get loan from the institutions, a country also has to have a good relationship with the US because it controls 16.77% of total votes in IMF and 16.39% of The World Bank’s total vote. For instance, N-Korea and Cuba cannot get loans from the institutions because of sour relationship with The US.

World Trade Organization (WTO) is another driver of trade liberalization. It forces member countries to open up their markets and eliminate trade barriers. New members are also required to fulfill these criteria. Members are required to comply with intellectual property laws which were mainly written by the big corporations.

WTO is widely criticized for being ineffective to protect the interests of developing nations. When trade disputes occur, chance of getting success in legal battle for poor country is very slim even if it has a good ground because the mechanism is so expensive and complicated. Besides, it cannot force developed countries to stop subsidizing agricultural industry because farmers from poor countries are unable to compete with those heavily subsidized farmers in developed countries. Thus, poor countries always have less advantage in global trading system.

(VI) Who benefits the most from globalization?

There is no doubt that globalized trades/economy benefits all the parties concerned. However, various studies show that advanced countries are benefiting from the trades more than poor countries. Yotpoulos and Romano (2007, P-21) state that free markets and free trade work best if there are supported by extensive institutional structure such as business infrastructures, reliable legal system and political stability. Thus, globalization is more likely to favour the countries which are wealthy and institution rich, at the expense of those that are poor.

On the other hand, developing countries with strong infrastructure base, political stability, dependable legal system and abundant labor forces also benefit from globalization. China, India and Vietnam are often cited as ideal examples. Furthermore, United Nation (2007, P-23) asserts that countries with bargaining strength are more likely to benefit more from bilateral trade agreements and impose more onerous terms on the weaker parties.

“We must ensure that the global market is embedded in broadly shared values and practices that reflect global social needs, and that all the world’s people share the benefits of globalization.” Kofi Annan .

(VII) Conclusion

In short, it is hard to find convincing data to support either globalization reduces or increases poverty. However, it is clear that globalization is more beneficial to developed countries than to developing countries mainly because of wide spread corruption, bad governance, lack of necessary business infrastructures.

Unless world leaders share Kofi Annan’s concern “We must ensure that the global market is embedded in broadly shared values and practices that reflect global social needs, and that all the world’s people share the benefits of globalization.”, the following remarks are unfortunately likely to continue to be true.

George Monbiot (Environmentalist) summarizes, “Globalization is used to suggest a coming together of people of all races, all countries. It will relieve poverty and distribute wealth. What is actually happening is precisely the opposite. The Poor become markedly poorer and wealthy become staggeringly wealthier.”

United States Space Command (1997, p-6) remarks “The globalization of the world economy will also continue, with a widening between ‘haves’ and ‘have-nots’.”

References:

Ann Harrison, “GLOBALIZATION AND POVERTY” NATIONAL BUREAU OF ECONOMIC RESEARCH, Working Paper 12347, Cambridge, 2006. www.nber.org/papers/w12347

John Pilger, “Globalization: New Rulers of the World”, Carlton Production, 2001. (TV report)

Pan A. Yotpoulos and Donato Romano (editors), “The Asymmetries of Globalization”, Routledge, USA & Canada, 2007.

ROBERT HUNTER WADE, “Is Globalization Reducing Poverty and Inequality?” London School of Economics and Political Science, World Development Vol. 32, No. 4, pp. 567-589, UK, 2004.

United Nations, “The Employment Imperative: Report on the World Social Situation 2007” New York, 2007.

Significance of the study

India opened up the economy in the early nineties following a major crisis that led by a FOREX crunch that dragged the economy close to defaulting on loans. The response was a slew of Domestic and external sector policy measures partly prompted by the immediate needs and partly by the demand of the multilateral organisations. The new policy regime radically pushed forward in favour of a more open and market oriented economy.

Major measures initiated as a part of the liberalisation and globalisation strategy in the early nineties included scrapping of the industrial licensing regime, reduction in the number of areas reserved for the public sector, amendment of the monopolies and the restrictive trade practices act, start of the privatisation programme, reduction in tariff rates and change over to market determined exchange rates.

Over the years there has been a steady liberalisation of the current account transactions, more and more sectors opened up for foreign direct investments and portfolio investments facilitating entry of foreign investors in telecom, roads, ports, airports, insurance and other major sectors.

The Indian tariff rates reduced sharply over the decade from a weighted average of 72.5% in 1991-92 to 24.6 in 1996-97.Though tariff rates went up slowly in the late nineties it touched 35.1% in 2001-02. India is committed to reduced tariff rates. Peak tariff rates are to be reduced to the minimum with a peak rate of 20%, in another 2 years most non-tariff barriers have been dismantled by March 2002, including almost all quantitative restrictions.

Globalization has increased poverty, although there is a school of thought that it has reduced poverty.

India is Global:

The liberalisation of the domestic economy and the increasing integration of India with the global economy have helped step up GDP growth rates, which picked up from 5.6% in 1990-91 to a peak level of 77.8% in 1996-97. Growth rates have slowed down since the country has still bee able to achieve 5-6% growth rate in three of the last six years. Though growth rates has slumped to the lowest level 4.3% in 2002-03 mainly because of the worst droughts in two decades the growth rates are expected to go up close to 70% in 2003-04. A Global comparison shows that India is now the fastest growing just after China.

This is major improvement given that India is growth rate in the 1970’s was very low at 3% and GDP growth in countries like Brazil, Indonesia, Korea, and Mexico was more than twice that of India. Though India’s average annual growth rate almost doubled in the eighties to 5.9% it was still lower than the growth rate in China, Korea and Indonesia. The pick up in GDP growth has helped improve India’s global position. Consequently India’s position in the global economy has improved from the 8th position in 1991 to 4th place in 2001. When GDP is calculated on a purchasing power parity basis.

Globalisation and Poverty:

Globalisation in the form of increased integration though trade and investment is an important reason why much progress has been made in reducing poverty and global inequality over recent decades. But it is not the only reason for this often unrecognised progress, good national polices , sound institutions and domestic political stability also matter.

Despite this progress, poverty remains one of the most serious international challenges we face up to 1.2 billion of the developing world 4.8 billion people still live in extreme poverty.

But the proportion of the world population living in poverty has been steadily declining and since 1980 the absolute number of poor people has stopped rising and appears to have fallen in recent years despite strong population growth in poor countries. If the proportion living in poverty had not fallen since 1987 alone a further 215million people would be living in extreme poverty today.

India has to concentrate on five important areas or things to follow to achieve this goal. The areas like technological entrepreneurship, new business openings for small and medium enterprises, importance of quality management, new prospects in rural areas and privatisation of financial institutions. The manufacturing of technology and management of technology are two different significant areas in the country.

There will be new prospects in rural India. The growth of Indian economy very much depends upon rural participation in the global race. After implementing the new economic policy the role of villages got its own significance because of its unique outlook and branding methods. For example food processing and packaging are the one of the area where new entrepreneurs can enter into a big way. It may be organised in a collective way with the help of co-operatives to meet the global demand.

Understanding the current status of globalisation is necessary for setting course for future. For all nations to reap the full benefits of globalisation it is essential to create a level playing field. President Bush’s recent proposal to eliminate all tariffs on all manufactured goods by 2015 will do it. In fact it may exacerbate the prevalent inequalities. According to this proposal, tariffs of 5% or less on all manufactured goods will be eliminated by 2005 and higher than 5% will be lowered to 8%. Starting 2010 the 8% tariffs will be lowered each year until they are eliminated by 2015.

GDP Growth rate:

The Indian economy is passing through a difficult phase caused by several unfavourable domestic and external developments; Domestic output and Demand conditions were adversely affected by poor performance in agriculture in the past two years. The global economy experienced an overall deceleration and recorded an output growth of 2.4% during the past year growth in real GDP in 2001-02 was 5.4% as per the Economic Survey in 2000-01. The performance in the first quarter of the financial year is5.8% and second quarter is 6.1%.

Export and Import:

India’s Export and Import in the year 2001-02 was to the extent of 32,572 and 38,362 million respectively. Many Indian companies have started becoming respectable players in the International scene. Agriculture exports account for about 13 to 18% of total annual of annual export of the country. In 2000-01 Agricultural products valued at more than US $ 6million were exported from the country 23% of which was contributed by the marine products alone. Marine products in recent years have emerged as the single largest contributor to the total agricultural export from the country accounting for over one fifth of the total agricultural exports. Cereals (mostly basmati rice and non-basmati rice), oil seeds, tea and coffee are the other prominent products each of which accounts fro nearly 5 to 10% of the countries total agricultural exports.

Where does Indian stand in terms of Global Integration?

India clearly lags in globalisation. Number of countries have a clear lead among them China, large part of east and far east Asia and eastern Europe. Lets look at a few indicators how much we lag.

Over the past decade FDI flows into India have averaged around 0.5% of GDP against 5% for China 5.5% for Brazil. Whereas FDI inflows into China now exceeds US $ 50 billion annually. It is only US $ 4billion in the case of India

Consider global trade – India’s share of world merchandise exports increased from .05% to .07% over the pat 20 years. Over the same period China’s share has tripled to almost 4%.

India’s share of global trade is similar to that of the Philippines an economy 6 times smaller according to IMF estimates. India under trades by 70-80% given its size, proximity to markets and labour cost advantages.

It is interesting to note the remark made last year by Mr. Bimal Jalan, Governor of RBI. Despite all the talk, we are now where ever close being globalised in terms of any commonly used indicator of globalisation. In fact we are one of the least globalised among the major countries – however we look at it.

As Amartya Sen and many other have pointed out that India, as a geographical, politico-cultural entity has been interacting with the outside world throughout history and still continues to do so. It has to adapt, assimilate and contribute. This goes without saying even as we move into what is called a globalised world which is distinguished from previous eras from by faster travel and communication, greater trade linkages, denting of political and economic sovereignty and greater acceptance of democracy as a way of life.

Consequences:

The implications of globalisation for a national economy are many. Globalisation has intensified interdependence and competition between economies in the world market. This is reflected in Interdependence in regard to trading in goods and services and in movement of capital. As a result domestic economic developments are not determined entirely by domestic policies and market conditions. Rather, they are influenced by both domestic and international policies and economic conditions. It is thus clear that a globalising economy, while formulating and evaluating its domestic policy cannot afford to ignore the possible actions and reactions of policies and developments in the rest of the world. This constrained the policy option available to the government which implies loss of policy autonomy to some extent, in decision-making at the national level.

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