The Impact of Globalization on the Poor in Latin America
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The Impact of Globalization on the Poor in Latin America

In 2004 the World Institute for Development Economic Research (WIDER) at the United Nations University initiated a large-scale research program entitled “The Impact of Globalization on the World’s Poor,” for which we served as codirectors. The main objectives of the project were to produce a set of rigorous theoretical and empirical economic studies, which would deepen our understanding of how conditions facing the world’s poor have been evolving under globalization and provide a framework yielding the elements of a strategy that would induce the globalization process to become more pro-poor. In addition to the methodological and conceptual conference held in Helsinki at the end of 2004, the project organized three regional conferences to explore the impact of globalization on Asia, Africa, and Latin America, respectively, in 2005 and 2006.

Because of very significant differences in initial conditions (including natural resource endowments, the quantity and quality of human capital, the institutional framework, and the quality of governance), as well as in internal dynamics of institutional and sociopolitical conditions, globalization has different effects on the poor in different regions of the developing world. Generally speaking, the poor in sub-Saharan Africa were essentially bypassed by the forces of globalization, while most of the Asian poor benefited—none more so than in China. Latin America occupies an intermediate position in [End Page 153] this continuum.1 In addition to broad intercontinental differences, the effects of globalization on the poor can be very diverse within each regional bloc and can even vary from region to region within a country.

This paper consists of four parts. The next section analyzes and describes the main channels (or transmission mechanisms) through which the process of globalization affects poverty both directly and indirectly.2 The paper then reviews the major effects of globalization on the Latin American economy, although few generalizations can be made with much certainty. A subsequent section reviews the findings of eight selected case studies, undertaken under the auspices of the WIDER project. We use these case studies to illustrate and analyze the critical role institutions can play in mediating the impact of globalization on poverty within different Latin American settings. These studies reveal, first, how key institutions can strengthen the positive effects of globalization on poverty reduction and moderate some of the negative effects and, second, how sensitive the link from globalization to poverty, via institutions, is to initial conditions and the specific context. The final section concludes.

Channels Linking Globalization to Poverty

The globalization-poverty nexus is complex, involving many different channels. The link between globalization (openness) and poverty can be visualized as a large river fed by a variety of economic tributaries. Figure 1 illustrates schematically the various critical links of the causal chain running from globalization (openness) to poverty, focusing on the most critical tributaries and abstracting from several feedback effects among the constituting elements. Increased openness is the primary manifestation of globalization. The major transmission mechanisms from globalization to openness are listed in figure 1 and include changes in the relative prices of factors of production (labor and capital) and commodities; movements of capital and labor across borders and within countries; the nature of technological change and technological diffusion; the impact of globalization on volatility and vulnerability; the worldwide flow of information; global disinflation; and institutions. These mechanisms affect poverty through two different paths: first, through their contributions [End Page 154]

Figure 1. The Globalization-Poverty Nexus
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Figure 1.

The Globalization-Poverty Nexus

to the growth channel (shown in the upper part of the diagram) and, second, through their impact on income distribution and poverty (in the lower part of the diagram), since globalization creates winners and losers directly and affects vertical and horizontal inequalities.3 The links shown in figure 1 are from openness to growth, from openness to income distribution (inequality), from growth to income distribution and vice versa, from growth to poverty, and from income distribution to poverty, respectively. In turn, the two main channels of globalization—the growth and distribution channels—further interact dynamically over time to produce a growth-inequality-poverty triangular relationship...