Globalization and Poverty: Who wins, who looses?

The consequences of growing globalization are nowadays a lot discussed in the media, academia and politics. While some are afraid of its negative impacts, others advocate it is the path every economy should follow. One of the many important questions to ask is how globalization affects the most deprived individuals in the implicated economies. The World Bank, recognising the importance of the question, has launched a specific study program aiming at assessing whether growth is pro-poor (Operationalizing Pro-Poor Growth). Many NGOs are also concerned with this aspect of globalization (for instance Oxfam).

In an article published in 2007 in the Journal of Economic Inequality, A. Harrison and M. McMillan survey the evidence on the linkages between globalization and poverty. They focus on two aspects of globalization: international trade in goods and international movements of capital. The general picture coming out of their analysis is that it is not evident at all whether the aggregate growth gains from globalization reach the poor or not.

The authors point out that the “orthodox perspective on that issue, based on contributions made by D. Dollar and A. Krueger, is that openness to trade is good for growth and that growth is good for the poor.”[1] Typically it is argued that globalization will reduce inequality in poor countries because these countries have a comparative advantage in producing goods that use unskilled labor, a typical sector where the poor are employed.  

The authors challenge this view and argue that inequality and poverty could even increase in developing economies the more open they become to foreign trade. They provide as an example the fact that developing countries have historically protected sectors using unskilled labor (textiles, apparel, etc.). This pattern of protection is usually not taken into account by the models used in the orthodox approach (which often assume factor price equalization). Since in reality, trade reforms may result in less protection for unskilled workers in those sectors, the poor can be hurt by those measures.

But this does not mean that globalization only hurts the poor: export growth and incoming foreign investment can sometimes reduce poverty. The study suggests that in Zambia, thanks to increased openness of the economy, poor consumers have gained from falling prices for the goods they buy while  poor producers in exporting sectors enjoyed higher prices for their goods.

The authors also point out the importance to implement trade reforms in conjunction with complementary policies that make more likely that the poor share the gains from the reforms. Reducing the impediments to labor mobility (rigid labor laws discouraging intersectoral reallocation of labor and capital) is one such measure. It would help workers to move out of contracting sectors and into expanding ones.

The overall picture that emerges from the study is that “globalization produces both winners and losers among the poor”[2]. It has generally produced benefits for the poor in exporting sectors and sectors that receive foreign investment. However, parts of the poor population is made worse off by the consequences of globalization, and this, as the authors argue, “underscores the need for carefully targeted safety nets”**.

In their conclusion, the authors remind us of a remark François Bourguignon made once in a lecture at the World Bank: “If we have made tremendous strides in understanding how to measure poverty, we still have limited understanding of the impact of different economic policies on poverty outcomes.”[3] Better diagnostic of an illness is a necessary but far from sufficient condition for its cure.

[1] A. Harrison and M. McMillan, 2007, On the links between globalization and poverty, Journal of Economic Inequality, Vol. 5, p 124, 125.
[2] p 123, ibid.
[3] p 133, ibid.

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