Globalization Impacts on the Poor and Inequality - Research Paper Example

Globalization Impacts On The Poor And Inequality The impact of globalization on poverty is one of the crucial concerns of globalization’s critics today (Harrison, 2007). Apparently, globalization has several benefits for the poor; in the last two decades, with increased economic integration of developing countries, poverty rates have decreased by half. The World Bank’s annual statistical report, World Development Indicators 2004 (WDI) reveals that the number of people living in extreme poverty has declined from 40 percent to the 21 percent of the global population (WTO, 2008). Moreover, due to the reduction and elimination of restrictions on international trade and financial transactions, capital can flow freely to the poorest countries and, thus, enhance their economic growth (WTO, 2008). In addition, massive international migration allows overseas workers to support their countries with a substantial share of national income. However, comprehensive studies in the field suggest that globalization “ is not working for many of the worlds’ poor” (Dinopoulos, 2008). There are several issues regarding the impact of globalization on the poverty and inequality around the world. First, contrary to the popular view, poor and unskilled workers in labor-abundant countries do not benefit from trade liberation (Harrison, 2007). Furthermore, country studies reveal that trade liberation should be accompanied with complementary policies, such as access to credit, technical know-how and social safety nets in order to enable the poor to benefit from globalization (Dinello & Squire, 2005, Harrison, 2007). To reduce poverty, countries should also develop their export and incoming foreign investments. Such policies allow to maintain employment and wage levels even at times of economic difficulty. Another problem concerns the high cost of financial crises resulting from unrestricted capital flows. Thus, financial integration should be accompanied with the pursue of macroeconomic stabilization policies. When it comes to inequality, both traditional and modern trade theories suggest that gains from the free trade will not be distributed equally within economies. The World Bank studies several ways in which globalization affects inequality within and across countries. A very important factor in the distribution of income is the initial income of the country. However, the empirical literature reveals that free trade contributes only to 20% of the world inequality, being less important than such factors as technological innovations or demographic changes. The economists use the term globalization to refer to international integration in capital, commodity and labor markets. The crucial economic features of the two most recent periods of globalization (1950-73 and 1974-2007) involve increased integration in trade, international capital flows and movement of labor. However, as we can see in table 1 (WTO,2008), there are differences in the importance of these factors in each period. Table 1: Globalization waves in the 19th and 20th century Source: WTO,2008 During the entire 1950-2007 period, the trade expanded by 6.2 per cent. In the first decades after World War II (WWII), due to the reconstruction of the country economies, the most dynamic traders were the Western European countries and Japan. In the latest globalization wave, from 1974 to 2000, newly industrialized Asian economies (NIEs) were the main beneficiaries of globalization, with their merchandise exports comprising raising from 2.4 percent to 9.7 percent within only two decades. Globalization involves also significant changes in the composition of world merchandise trade, with a strong rise in the share of manufactures and a decline in agricultural products and non-fuel materials (WTO, 2008). The share of developed countries in world exports of manufactures has been severely diminished due to increased competition from China and, recently, to the boom in merchandise prices, which enabled such exporters of primary goods as Africa, Middle East and South/Central America to increase their shares. When it comes to international capital flows, the most important factors for the expansion of international trade were the Marshall Plan, the European Payments Union, and United States’ foreign direct investment. FDI flows increased significantly in the mid 1980s due to economic reforms involving a change in trade policy orientation, debt forgiveness and a partial liberalization of capital markets (WTO, 2008). As a result, since 1980 there has been a constant increase in FDI flows, with a peak level of US$ 1.4 trillion in 2000. Finally, massive cross-border migration has been an inseparable feature of globalization since the beginning of the process in the 19th century. In many developing countries, high population growth rates are not followed with corresponding economic growth rates, which results in migration pressures. Since the mid 90s, apart from traditional immigration countries, such as United States, Canada, Australia and New Zealand, a new wave of immigration has also been observed in several Western European countries. The influence of globalization on poverty is one of the most controversial areas of the globalization debate. Jagdish Bhagwati, the most influential academic in the field, explores several links between globalization and poverty reduction. He advocates such aspects of globalization as free trade and foreign direct investment, claiming that these factors enable developing countries to benefit from a closer integration into the world economy (Bhagwati, 2004). However, there are several issues that need to be taken into account when discussing the impact of globalization on the poor. First, free trade does is not always beneficial for the poor in labor-abundant countries. Many economists use the Hecksher-Ohlin model (HO) in international framework to claim that trade liberation will result in increased incomes of the unskilled and the poor (Dinopoulos, 2008). However, the HO model assumes that the crucial factor to achieve this goal is the mobility of workforce. Unfortunately, many workers lack skills to requalify and move into expanding employment sectors. Moreover, due to the reallocation of resources to expanding sectors, some individual workers may lose their jobs (WTO, 2008). Thus, trade liberalization should be followed with both income support for the unemployed and active labor market policies (ALMPS), aimed at re-integration of the unemployed into the labor market. As we can see in table 2, active labor market policies have become important policy tools in transition countries, where the economic restructuration in the early 1990s resulted in crucial changes to the composition of employment by sector and branches and, consequently, a rise in unemployment (Auer, Efendioglu, & Leschke, 2005). Table 2: Participation in LMPs in selected transition countries. Source: Auer, Efendiouglu & Leschke, 2005 Moreover, the liberalization of the sectors which have been protected by tariffs, quotas, and other trade barriers, may expose vulnerable economies of developing countries to fierce export competition. For example, under the Multifiber Agreement (MFA), used by developed countries to set quotas for textiles and apparels imported from developing countries, African economies were protected from competition with Asian producers, who, under free market conditions, could have exported beyond their quotas (Nnadozie, 2003). Thus, some African countries have protested against reductions of the MFA tariff rates. Furthermore, trade reforms should be followed with complementary policies, such as access to credit and investment , technical know-how, and other complementary inputs (Harrison, 1997). As an example, banks in India opened branches in rural areas and lowered collateral requirements (Bhagwati, 2004). However, this solution resulted in a significant number of debts. There were two policies implemented to solve that problem: a system of microcredit programs for tiny investments and the “monitoring” system, which enabled each borrower to monitor other borrowers (Bhagwati, 2004). It is also important to provide the poor with social safety nets. In East Asia the importance of supporting the process of economic growth with adequate social services became visible during the financial crisis in 1997 (Dinello & Squire, 2005). Before, the governments had not provided any safety nets, as it was thought that economic growth alone would “bridge any gap”. However, due to the lack of distribution channels and information, as well as declining fiscal revenues, it was difficult for the government to respond adequately to the crisis. Thus, countries launched new social programs, aimed at creating new workplaces, protecting social expenditures, cushioning the impact of increased cost of food and medical services, and encouraging parents to provide education to their children despite hard times (Dinello & Squire, 2005). Social safety nets operate at three levels, al of which were implemented in East Asia: creation of new workplaces, income maintenance, and basic spending maintenance. Country studies reveal the effectiveness of these solutions for most East Asian countries. Due to a governmental public works program in South Korea, 400 000 people benefited from new workplaces. When it comes to income maintenance, countries modified their severance schemes and implemented unemployment schemes as well as wage-subsidy program. Finally, countries tried to maintain basic health and educational spending with such measures as education scholarships (Indonesia) and low-income health insurance programs (Thailand). Another important factor for reducing poverty is growth of export and incoming foreign investments (Harrison, 2007). In Bangladesh and Sri Lanka, due to the large expansion of the export-orientated, labor-intensive garment manufacturing sector, rural female employment and manufacturing exports managed to keep employment and wage levels were maintained even at a time of economic difficulties (Dinello & Squire, 2005). The growth in this sector was enhanced by more open trade regimes and more pro-FDI policies, which attracted foreign visitors. As we can see in table 3 (Dinello & Squire, 2005), both countries experienced a decline in poverty as well as an increase in consumption during the last twenty years. Furthermore, financial crises, which are an inseparable part of the process of economic globalization, are very costly to the poor. As an example, the financial crisis in East Asia in 1997, due to such factors as the deterioration of macroeconomic fundamentals, short-term capital surges, overvalued exchange rates and weak domestic financial systems, resulted in sharp economic contractions in several countries (Dinello & Squire, 2005). The country most seriously affected by the crisis was Indonesia, where economy plunged 13.2 per cent. Other affected countries were Thailand (-10.8 percent), Malaysia (-7.4 per cent), South Korea (-5.3 per cent), Hong Kong (-5.3 per cent) and the Philippines (-0.6 per cent). Cross-country evidence reveals that financial globalization often results in higher consumption and output volatility in poor countries. Thus, these countries should create reliable institutions and pursue macroeconomic stabilization policies to benefit from financial integration (Harrison, 2007). When it comes to inequality, numerous studies have focused on the contribution of trade to wage inequality and changes in income distribution (WTO, 2008). Trade liberalization provides the companies with more limited access to imported cheaper and different goods. However, these imports may be in competition with local production and, thus, many local producers may lose their source of income. Moreover, trade liberalization, which involves new export opportunities and wider access to import, often results in the expansion of some employment sectors and the reduction of others. Thus, while some individuals will definitely benefit from this process, others, especially those who are not able to move into expanding sectors, may lose their jobs (WTO, 2008). A traditional trade model (HO) assumes that trade flows are determined by comparative advantage, which depends on each country’s resources. This model suggests the export of low-skill labor –intensive goods from developing countries to the industrialized world. Consequently, as a result of trade with developing countries, demand for low-skill workers would decrease in developed countries, thus increasing inequality between high-skill and low-skill workers. Along the same line, increased demand for low-skill workers in developing countries would lead to a significant decline in inequality (WTO, 2008). However, the classical theory does not predict the distributional effects of trade among industrialized countries. Several studies in this field have suggested how this kind of trade may affect factor prices. For example, Matsuyama states that international trade will result in an increased demand for the workers skilled in such areas as international business, foreign languages and maritime insurance (WTO, 2008). Epifani and Ganue state that skilled workers can benefit from access to larger markets. While trade models suggest different predictions about the distribution of the gains from free trade, all of them suggest that these gains will not be distributed equally within an economy. However, while trade benefits gains to economy as a whole, the economic situation of the whole population may improve if supported with adequate domestic policies. Nevertheless, the impact of economic globalization and free trade on inequality has received much attention in the empirical trade literature. The World Bank examines several ways in which globalization affects inequality (Dinello & Squire, 2005). First, while globalization resulted in a decreased inequality between OECD member countries, inequality increased in some countries due to domestic policies. Moreover, there was a decline in overall economic inequity for both OCED countries and the new globalizers. However, the increased inequality in China, the population of which comprises one third of the whole population of the new globalizers, has contributed to a significant increase in inequality in these countries (2.93% in Central/Eastern Europe and CIS, see table 4). Finally, while in general openness for trade does not affect inequality, in developing countries it is associated with greater inequality. The impact of free trade on income distribution is also dependent on the country initial income levels. In low-income countries the rich benefit from trade reforms, which contributes to an increase in inequality. However, as in the cases of Chile, Colombia, and Czech Republic, the rise of income level results in a relative increase of income of the poor and the middle class when compared with the reach. Thus, even though trade reform initially leads to inequality, finally it contributes to more equality within an economy (WTO, 2008). Table 4: Economic Integration and Income Inequality Source: Dinello and Squire, 2005 The Gini coefficient (table 4) is a measure of statistical dispersion, defined as a ratio with values between 0 and 1, which gives complex information on the entire income distribution of households within an economy. A low Gini coefficient indicates more equal wealth or income distribution, while a high Gini coefficient indicates unequal distribution (WTO, 2008). As inequality has been increasing in most regions of the world (table 5) theorists wondered whether free trade is the main driver of an increase in inequality or just one among many others. Empirical trade literature states that international trade only contributes to about 20 per cent of wage inequality. The studies reveal that such factors as technological and institutional innovations, demographical changes and cyclical fluctuations play a more important role than trade in the increase of inequality. Table 5: Evolution of Gini coefficients by region, 1970-2000 Source: WTO, 2008 Finally, it is important to realize that globalization produces both winners and losers in poor countries. We cannot generalize its impact on poverty and inequality as even within the same economy or region, every individual can be affected in a different way. While free trade may be beneficial for those countries which can increase their exports and import investments, for weaker countries it means less protection and increased competence. Governments should follow economic growth with adequate complementary policies as well as pursue macroeconomic stabilization policies to overcome high costs of financial crises. There are many factors affecting the influence of globalization on inequality between and within country economies. However, with adequate domestic policies the whole population can benefit from economic growth. References: Auer, P, Efendioglu, U & Leschke, J (2005) Active labour market policies around the world: dealing with the consequences of globalization. Geneva, International Labor Office Bhagwati, J. (2004) In defense of globalization. New York: Oxford University Press Dinello, N. & Squire, L (ed). (2005) Globalization and equity: perspective from the developing world. Glos: Edward Elgar Publishing Limited. Dinopoulos, E. (2008) Trade, globalization and poverty. New York: Routledge Harrison, A. (2007) Globalization and poverty. Chicago: University of Chicago Press Nnadozie, E. (2003) African economic development. London: Academic Press UNCTAD (2008) World Investment Report 2008- Investment Report 2008 - Transnational Corporations, and the Infrastructure Challenge. Retrieved from www.unctad.org on the 11th of November, 2009 WTO (2008) World Trade Report 2008- Trade in a Globalizing World. Retrieved from www.wto.org on the 11th of November, 2009 Read More