(Ann Harrison and Margaret McMillan: WB Growth & Development Commission): More than 1 billion people live in extreme poverty, which is defined by the

World Bank as subsisting on less than $1 a day. In 2001, fully half of the developing world lived on less than $2 a day. And yet if Sub-Saharan Africa and Eastern Europe are excluded, extreme poverty rates are lower today than they were 20 years ago. In the last two decades, the percentage of the world’s population living in extreme poverty has fallen from 33 percent to 17 percent. While poverty rates were falling, developing countries were becoming increasingly integrated into the world trading system. If analysts use the share of exports in the gross domestic product (GDP) as a measure of “globalization,” then developing countries are now more “globalized” than high-income countries (see Harrison and Tang 2005).
Does globalization reduce poverty? Will ongoing efforts to eliminate protection and increase world trade improve the lives of the world’s poor?

There is surprisingly little evidence on this question. Winters, McCulloch, and McKay (2004), Goldberg and Pavcnik (2004), and Ravallion (2004) survey the recent evidence. But in all three surveys the authors acknowledge that they review only the indirect evidence on the linkages between globalization and poverty. Almost no studies have tested for the direct linkages between the two. Yet one of the biggest concerns of globalization’s critics is its impact on the poor. This chapter begins by summarizing some key findings from the 2007 book Globalization and Poverty (Harrison 2007).3 The 15 studies and accompanying discussions that make up the book are part of a National Bureau of Economic Research (NBER) project that asks the following questions: How has global economic integration affected the poor in developing countries? Does trade reform that reduces import protection improve the lives of the poor? Has increasing financial integration led to more or less poverty? How have the poor fared during currency crises? Do agricultural support programs in rich countries hurt the poor in developing countries? Or do such programs in fact provide assistance by reducing the cost of food imports? Finally, does food aid hurt the poor by lowering the price of the goods they sell on local markets?

What do we mean by “globalization”? We focus on two aspects: first, the international trade in goods and, second, the international movements of capital, including foreign investment, portfolio flows, and aid. The “orthodox” perspective on trade and poverty, based on the writings of
David Dollar, Anne Krueger, and others, is that openness to trade is good for growth, and growth is good for the poor. According to the orthodox view, it follows that openness to trade should reduce poverty. But what if openness to trade is associated with increasing inequality? If so, then average income may increase, while those at the bottom of the income distribution become poorer. Krueger and Dollar argue that increased globalization will in fact reduce inequality in poor countries. The reason is that these countries have a comparative advantage in producing goods that use unskilled labor.
The most important lesson that emerges from the NBER volume is that orthodox perspectives on the linkages between globalization and poverty are misleading, if not downright wrong. Results from the 15 studies that make up the volume suggest that the gains from trade are highly unequal and that the poor do not always benefit from globalization. This chapter begins by summarizing five lessons that emerge from Globalization and Poverty. The second part of the chapter turns to some unresolved issues and topics for further research.

Six Lessons on the Linkages between Globalization and Poverty
The chapters that make up the NBER volume are creative but careful attempts to find answers to the questions just listed. Although the topics and countries of analysis vary widely, they all seek to provide insight into the impact of globalization on poverty. Thus, it is possible to draw some general lessons from these studies.
The poor in countries with an abundance of unskilled labor do not always gain from trade reform. One of the most famous theorems in international trade derived from the Heckscher-Ohlin (HO) model of international trade is the Stolper-Samuelson (SS) theorem. In its simplest form, this theorem suggests that the abundant factor should see an increase in its real income when a country opens up to trade. If the abundant factor in developing countries is unskilled labor, then this framework suggests that the poor (unskilled) in developing countries have the most to gain from trade. Krueger (1983) and Bhagwati and Srinivasan (2002) have used this insight to argue that trade reform in developing countries should be pro-poor, because these countries are most likely to have a comparative advantage in producing goods made with unskilled labor.
In their contribution to the NBER volume, Don Davis and Prachi Mishra (2007) challenge the assumptions behind Stolper-Samuelson.
Davis and Mishra argue that applying trade theory to suggest that liberalization will raise the wages of the unskilled in unskilled-abundant countries is “worse than wrong—it is dangerous.” They show that such arguments are based on a very narrow interpretation of the Stolper- Samuelson theorem. In particular, SS holds only if all countries produce all goods, if the goods imported from abroad and produced domestically
are close substitutes, or if comparative advantage can be fixed in relation to all trading partners.

In addition, the country studies on India and Poland show that labor is not nearly as mobile as the HO trade model assumes; for comparative advantage to increase the incomes of the unskilled, they need to be able to move out of contracting sectors and into expanding ones. Davis and Mishra, as well as the empirical case studies in the volume, suggest that the real world is not consistent with an HO world. The assumptions necessary for HO to work in reality are simply not present; there are too many barriers to entry and exit for firms and too many barriers to labor mobility for workers.

Another reason the poor may not gain from trade reform is that developing countries have historically protected sectors that use unskilled labor, such as textiles and apparel. This pattern of protection, although at odds with simple interpretations of HO models, makes sense if standard assumptions (such as factor price equalization) are relaxed. Trade reform may result in less protection for unskilled workers, who are most likely to be poor. Finally, penetrating global markets even in sectors that traditionally use unskilled labor requires more skills than the poor in developing countries typically possess.

The poor are more likely to share in the gains from globalization when complementary policies are in place. The studies on India and Colombia suggest that globalization is more likely to benefit the poor if trade reform is implemented in conjunction with reducing impediments to labor mobility. In Zambia, poor farmers are expected to benefit from greater access to export markets only if they also have access to credit, technical know-how, and other complementary inputs. The studies also point to the importance of social safety nets. In Mexico, if poor corn farmers had not received income support from the government, their real incomes would have been halved during the 1990s. In Ethiopia, if food aid had not been well targeted, globalization would have had little impact on the poor. The fact that other policies are needed to ensure that the benefits of trade are shared across the population suggests that relying on trade reform alone to reduce poverty is likely to be disappointing.