Brookings Trade Forum 2004 (2004) 271-284
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The Impact of Globalization on the Poor
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A raging issue of academic and public debate, one that has spilled over into the streets in noisy demonstrations in recent years, concerns the impact of globalization on the well-being of the world's poor. Of course, as is common in most contentious public debates, different people mean different things by globalization: some interpret it to mean the global reach of new technology and capital movements, some refer to outsourcing by domestic companies in rich countries, and others protest against the tentacles of corporate capitalism or U.S. hegemony (economic, military, or cultural). In this paper, globalization is interpreted simply as openness to foreign trade and long-term capital flows. I shall ignore here the important issues arising from the devastation caused to fragile economies by billions of dollars of volatile short-term capital stampeding around the globe in herdlike movements, or the substantial poverty-reducing potential of international (unskilled) labor flows from poor to rich countries (even in temporary and regulated doses).
In this paper, I mainly provide a brief analytical account of the various processes through which globalization, as defined above, affects the lives of the poor. ("Poverty" here primarily refers to absolute poverty in low-income countries.) In general, globalization can cause many hardships for the poor in these countries, but it also opens up opportunities that some countries utilize and others do not, largely depending on their domestic political and economic institutions. Thus the net outcome is often quite complex and almost always context dependent, belying the glib pronouncements for or against globalization made in the opposing camps.
There have been attempts to positively relate trade liberalization with economic growth and relate growth with poverty reduction on the basis of cross-country regressions. The former relation has been found controversial whereas [End Page 271] the latter is more sturdy.1 In any case, there are deep methodological-econometric flaws in such cross-country regressions. Most of the general statements one sees in popular presentations on the impact of globalization on poverty are essentially those of correlation. Pro-globalizers point to the large decline in poverty in China and India in the recent decades of international economic integration. It is estimated that between 1981 and 2001, the percentage of people living below an international poverty line of $1.08 a day (at 1993 purchasing power parity) declined from about 64 percent to about 17 percent in China, and from about 54 percent to about 35 percent in India.2 But no one has yet convincingly demonstrated that this decline is mainly attributable to globalization. Instead it could be, to a large extent, due to internal factors such as expansion of infrastructure, the massive 1978 land reforms, or the relaxation of restrictions on rural-to-urban migration in China, or the spread of the green revolution in agriculture, large antipoverty programs, or social movements in India. Those who are more dubious of global processes point out that in the same decades poverty has remained stubbornly high in sub-Saharan Africa: it is estimated that between 1981 and 2001 the percentage of people living below the poverty line of $1.08 a day (at 1993 purchasing power parity) increased in sub-Saharan Africa from about 42 percent to about 46 percent.3 But this may have little to do with globalization and more to do with unstable or failed political regimes, wars, and civil conflicts that afflicted several countries in Africa. If anything, such instability only reduced their extent of globalization, as it scared off many foreign investors and traders.
If one goes beyond correlations, the causal processes through which international economic integration can affect poverty primarily involve the poor in their capacity as workers, recipients of public services, or users of common property resources. I ignore here the case of the poor as consumers. Whether they gain as consumers from trade depends on whether they are net consumers of tradeable goods; on how important nontradeables...