Globalization, Poverty and Inequality

By: Yiagadeesen (Teddy) Samy

Published by The Institute of Public Administration of Canada in their Magazine: Public Sector Management Volume 25, Issue 2, Public Service Without Borders

Over the last three decades or so, rapid economic growth in China, India and several other countries in East Asia drove the decline in absolute poverty around the world. The achievement of the first Millenium Development Goal, namely the halving of the proportion of people living on less than $1.25 a day between 1990 and 2015, would not have been possible had it not been for impressive growth rates in these outward-oriented economies, and especially in China and India.

However, a group of so-called fragile states, many of which are located in sub-Saharan Africa, have been left behind as they failed to embrace and/or take advantage of globalization when compared with more successful regions and countries. Consider the following: sub-Saharan Africa’s shares of world trade and foreign direct investment remain very small and despite falling poverty rates, it is also the only region in the world where the number of poor people has increased in absolute terms (from 205 million in 1981 to 414 million in 2010).

Indeed, the World Bank goal of eliminating extreme poverty by 2030 will be difficult to achieve as poverty will be increasingly concentrated in fragile countries where growth and poverty reduction have been the slowest historically. Many of these countries are stuck in a fragility trap and will need increased assistance from the international community over the next several years, if not decades.

There is no question that globalization – increased international economic integration as a result of the cross-border movement of goods, services and capital, that is, trade and investment[1] – has led to increased growth and poverty reduction. As pointed out by Ann Harrison several years ago, poor people are more likely to benefit from globalization (resulting from trade and international capital flows) when complementary policies such as investments in human capital and infrastructure, policies to promote credit and technical assistance to farmers, and policies to promote macroeconomic stability are present. Most mainstream economists, including myself, armed with the theory of comparative advantage and gains from trade, believe that gains from international specialization and investment will benefit everyone in the long run, even if short-run compensation may be required so that winners can share their gains with the losers.

The relationship between globalization and income inequality has been more controversial, and partly because inequality itself is hard to define. Furthermore, it is difficult to know how much income inequality we are willing to tolerate (there is no such thing as an ideal Gini coefficient), and given the strong link between growth and poverty reduction, should the focus not be on growth, rather than inequality or redistribution?

Inequality matters for development, and from a poverty reduction perspective, income distribution has immediate consequences. In other words, the impact of growth on poverty reduction is higher when the distribution of income is more favorable. We also know that inequality between countries is still much higher than inequality within countries, but as pointed out by Branko Milanovic in his recent book, “The Haves and the Have-Nots”, inequality among all individuals in the world has been declining slightly in the last 10 to 15 years mostly because of very high growth rates in China and India.

While I have a lot of sympathy for Milanovic and others in their attempts to examine worldwide inequality, I would argue, however, that comparing all individuals in the world in such a way, is meaningless. Even in an increasingly interconnected world, a Zambian farmer, for example, is not interested in how an American farmer compares to his/her situation. Most individuals are only interested in how their neighbors or members of their community or nation state are doing. In fact, most people worry about inequality in their “immediate vicinity” even when their own incomes are rising.

So, to the extent that we focus on within-country inequality, it is not clear that globalization is the only factor that can explain the increase in inequality observed in some countries, as the anti-globalizers would have you believe. Indeed, inequality is not an inevitable byproduct of globalization, and can be the result of several factors that include not only globalization, but also technological change, increasing returns to education, the reduced power of trade unions or changes in tax rates.

In a recent paper with my colleague Jean Daudelin[2], we argue that the relationship between globalization – through trade liberalization – and inequality is in fact unclear. The Stolper-Samuelson theorem, which is a standard result in trade theory, does not offer a clear answer as globalized economies with an abundance of unskilled labor have seen inequality both worsen (as in China and much of Asia), and improve, as in Latin America. The famous Kuznets inverted-U hypothesis which suggests that as economic growth takes place, inequality will first increase and then decline after a turning point, does not make sense either as inequality has been declining in poorer Latin America, and increasing in richer OECD countries.

Our view is that to the extent that trade liberalization has an impact on inequality, it is consistent with growing inequality in rich countries (where returns to education are high) and declining inequality in Latin America (where returns to education are declining), but cannot be reconciled with growing inequality in China and India. We argue that the key to these anomalies has to do with the association of growth with de-industrialization that is driven by globalization. In particular, the Kuznets relationship is conditional on the role of (de)industrialization and may flip into a straight U, which enables us to make sense of current patterns in inequality.

The implications of our results, for globalization and inequality, thus point in the direction of managing structural pressures rather than an obsession with social policies that seek to redistribute income. Managing these structural pressures (and redistribution) require resources, thus making the case for embracing globalization even more compelling.

Yiagadeesen (Teddy) Samy is an Associate Professor at the Norman Paterson School of International Affairs, Carleton University, and a Distinguished Research Associate with the North-South Institute.

 

[1] I have in mind long-term capital movements rather than short-term speculative capital flows that even economists in support of free-trade think should be regulated.

[2] “Globalization and inequality: insights from municipal level data in Brazil”, Indian Growth and Development Review 6(1): 128-147.

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