(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?
Export growth and incoming foreign investment can reduce poverty. In the countries studied, poverty has fallen in regions where exports or foreign investment is growing. In Mexico, the poor in the most globalized regions have weathered macroeconomic crises better than their more isolated neighbors. In India, opening up to foreign investment has been associated with a decline in poverty. The study on Zambia suggests that poor consumers gain from falling prices for the goods they buy, while poor producers in exporting sectors benefit from trade reform through higher prices for their goods. In Colombia, increasing export activity has been associated with an increase in compliance with labor legislation and a fall in poverty. In Poland, unskilled workers—who are the most likely to be poor—have gained from Poland’s accession to the European Union.
Financial crises are costly to the poor. In Indonesia, poverty rates increased by at least 50 percent after the currency crisis in 1997. Although recovery in Indonesia has been rapid, the Mexican economy has yet to recover fully from its 1995 peso crisis. In 2000, poverty rates in Mexico were higher than they had been 10 years earlier. Cross-country evidence also suggests that financial integration leads to higher consumption and output volatility in low-income countries. One implication is that low-income
countries are more likely to benefit from financial integration if they also create reliable institutions and pursue macroeconomic stabilization policies, including the use of flexible exchange rate regimes. However, foreign investment flows have very different effects from other types of capital flows. Unrestricted capital flows are associated with a higher likelihood of poverty, whereas foreign direct investment (FDI) inflows are associated with a reduction in poverty. The poverty-reducing effects of
FDI are clearly documented in the case studies on India and Mexico.
Globalization produces both winners and losers among the poor. The heterogeneity in outcomes associated with poverty-globalization linkages is one theme that emerges from various country case studies in the NBER volume. Even within a single region, two sets of farmers producing the same good may be affected in opposite ways. In Mexico, some small and most medium corn farmers saw their incomes fall by half in the 1990s, whereas large corn farmers gained. Across different countries,
poor wage earners in exporting sectors or in sectors with incoming foreign investment gained from trade and investment reforms. Conversely, poverty rates increased in previously protected sectors that were exposed to import competition. Within the same country or even the same region, trade reform may lead to income losses for rural agricultural producers and income gains for rural or urban consumers of those same goods.
Different measures of globalization are associated with different poverty outcomes. How globalization is measured determines whether globalization is good for the poor. Measures of export activity and foreign investment are generally associated with poverty reduction, while removal of protection (an ex ante measure of globalization) or import shares (an ex post measure) are frequently associated with rising poverty. These different effects are consistent with short-run models of international trade (such as the specific sector model) in which factors of production cannot move easily from contracting or import-competing sectors to expanding or export-oriented ones.
The case study on Colombia prepared by Penny Goldberg and Nina Pavcnik (2007) illustrates this heterogeneity of outcomes. Goldberg and Pavcnik investigate the impact of a large reduction in average tariffs in Colombia between 1984 and 1998 on a variety of urban labor market outcomes: the probability of becoming unemployed, minimum wage compliance, informal sector employment, and the incidence of poverty. The Colombian experience suggests that individuals in sectors with increasing import competition are likely to become poorer, while those in sectors in which exports are growing are less likely to be poor.
This is exactly the conclusion reached by Petia Topalova (2007), who estimates the impact of trade reform in India on poverty. In the 1990s, India
embarked on remarkable trade reform, reversing decades of protectionist policies that had led to average tariffs in excess of 90 percent. Using household data that spans the period before and after reform, Topalova relates changes in tariffs to changes in the incidence of poverty. She finds that the rural poor gained less from the trade reform than other income groups or the urban poor. Topalova also discusses why the rural poor gained less than other groups from liberalization: restrictions on labor mobility in rural areas have impeded adjustment. She finds that the negative impact of trade policy on poverty is reduced or eliminated in regions with flexible labor laws.
Unresolved Issues: A Research Agenda
The series of papers in the NBER volume present the most comprehensive evidence to date on the linkages between globalization and poverty. However, this is a relatively new area of research for economists, and many questions remain unanswered. In this section, we draw on the new evidence uncovered in the NBER project and describe what we believe to be the most important areas for further research.
How can countries integrate the poorest of the poor into the world trading system? One-sixth of the world’s population lives in extreme poverty. Figuring out how to lift these people out of that poverty is arguably the most pressing issue. But it also is the most difficult. The poorest of the poor tend to be untouched by globalization. This is evident among the poorest Mexican corn farmers, who report that they never sell corn, and among the poorest Ethiopian farmers, who are net buyers of food. The number of the extreme poor in Sub-Saharan Africa has nearly doubled over the last two decades, growing from about 170 million to 310 million.
Roughly half of Sub-Saharan Africa lives in extreme poverty, and this number has increased over the last two decades. This region has seen very little in the way of foreign investment and still exports primarily unprocessed agricultural products.
More research is needed to identify the critical interventions required to lift these poor out of poverty. What are the key constraints? How important is outside intervention? In light of the scarcity of resources available, creating a ranking of which complementary investment or reform is needed most to allow the poor to access world markets would be very useful.
What are the central issues in measuring poverty? As acceptable definitions of poverty shift over time, one question that must be addressed by poverty researchers is why they are focusing primarily on one aspect of the entire distribution of income. Presumably, focusing on the entire distribution of income-and thus income inequality-should become increasingly important. Once one focuses on the fact that poverty lines are constantly changing across countries and also within the same country over time, it becomes puzzling why poverty researchers do not focus more on broader measures of income distribution as well.
In addition to explicitly focusing on the entire distribution of income, researchers should focus on issues related to measuring the absolute numbers of poor versus the incidence of poverty. As discussed by Emma Aisbett (2007) in her chapter in the NBER volume, the incidence of poverty has generally declined, but the number of individuals who are living on less than $2 a day has actually increased. Elsewhere, Ravi Kanbur (2001, 2004) discusses this issue in more detail. He also emphasizes the need to use other outcome measures, such as health and mortality, in assessing the lives of the poor (Kanbur 2004). Those issues are also emphasized by Duncan Thomas and Elizabeth Frankenberg (2007) in the NBER volume.
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