Assessing the Impact of Globalization on Poverty and Inequality: Using a New Lens on an Old Puzzle

A persistent puzzle in the debate over globalization is the gap between economists' assessments of the aggregate benefits of the process and the more pessimistic assessments that are typical of the general public—or at least typical of the debate among the vocal subset of the public that expresses opinions on the topic. Study after study confirms the benefits for poor countries of integrating into the world economy, albeit placing different degrees of emphasis on the importance of initial conditions and institutional endowments in achieving growth and poverty reduction.¹ Yet public perceptions of the globalization process—reported in opinion polls and reflected in public demonstrations in cities such as Seattle, Prague, and Porto Alegre—are much more negative.²

Analyses of trends based on aggregate, income-based measures provide important benchmarks for assessing the impact of globalization on poverty and inequality. The research presented in this paper complements these benchmarks by using alternative measures to highlight different trends. These trends include short-term movements in and out of poverty, changes in the distribution over the life or earnings cycle, distributional shifts at the sector and cohort level, the role of relative as well as absolute differences, and changes in reported well-being. One objective of this analysis is to shed light on the disconnect between economists' assessments based on income measures and those of the average (or at least vocal average) layman.

These efforts are exploratory rather than comprehensive. They attempt to provide an initial picture by analyzing surveys of income mobility and reported well-being in two countries in the process of integrating into the global economy: Peru and Russia. This analysis reveals significant discrepancies between reported measures of well-being and income measures. It relies on the more general framework provided by the economics of happiness to explain these findings and their linkages to the globalization process. At minimum, the findings provide a new lens for examining at an old puzzle, suggest some tentative links to policy, and highlight new questions that need to be answered before the effects of globalization on poverty and inequality can be fully understood.

Why a New Lens?

There are many reasons for the discrepancy between economists' assessments of globalization's impact and those of the average layman. One is the differences among the benchmarks that are used to assess the effects of the globalization process as well as the complexity of the analysis that is required. Even the concept of globalization defies simple definition. Most economic studies focus on the effects of globalization on trends that are quantifiable and readily measured, such as economic growth, poverty headcounts, and Gini coefficients. These studies tend to evaluate the effects of the process on overall efficiency and average welfare, while the general public tends to focus on the impact of the process on identifiable classes of workers who incur welfare losses.³ And even among experts, there is a great deal of debate on the design of the measures and the underlying data that they are based upon.⁴ The debate over the effects of globalization on inequality is even more complex than that over poverty—and there is much less consensus.⁵

Most publics do not have the analytical tools or the patience to disentangle the complexities of the debate over how to measure poverty and inequality in poor countries, much less the more difficult problem of assessing the effects of globalization on these measures. In sharp contrast to the detailed and technical debate on the topic that takes place among experts, most public assessments are often poorly informed and influenced by anecdotes that link cause and effect without analytical rigor or empirical evidence.

Yet simple misinformation is only part of the story. The problem runs much deeper. Globalization, defined here simply as the increasing integration of economies and peoples of different...