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NUMBER 3, 2010

Overview Despite the enormous potential of Linking to Poverty in globalization in accelerating economic growth through greater integration into the world economy the impact of Asia, Latin America and Africa globalization on poverty reduction has been uneven. Asia has been the major benefi ciary of globalization where high growth rates and its labor-intensive pattern contributed to a spectacular reduction in poverty. In contrast, the LOBALIZATION AND POVERTY, ALONGSIDE THE ISSUE OF integration process in Latin America did G change epitomize two of the most pressing contemporary not contribute to accelerating growth international development issues. Despite the enormous potential and employment and even led, in some of globalization in accelerating economic growth and development through instances, to an informalization of the labor force. In spite of opening up, the greater integration into the world economy, the spread and transfer of failure of sub-Saharan Africa to diversify technology, and the transmission of knowledge, the impact of globalization and undergo structural transformation on poverty reduction has been uneven and even marginal in some regions, has led to the persistence of low growth such as in much of sub-Saharan Africa (SSA). Both the prevalence and depth and debilitating poverty. While the of poverty in many parts of the developing world remain unacceptably high. impact of globalization on poverty is context-specifi c, we argue that countries A question often raised is whether the actual distribution of gains intent on benefi tting from globalization from globalization is fair and, in particular, whether the poor benefi t need to adopt a pro-active stand in proportionately less from globalization and could actually be hurt by formulating regional and national it under some circumstances. The risks and costs brought about by strategies to enhance the potentially positive effects of globalization and globalization can be signifi cant for fragile developing economies and the moderate the negative effects. world’s poor. The downside of globalization is most vividly illuminated during times of periodic global fi nancial and economic crises. The costs Written by MACHIKO NISSANKE AND of repeated fi nancial crises fuelled by the globalization process, at least ERIK THORBECKE until the present major recession, have been borne overwhelmingly by the © United University, 2010 developing world and often disproportionately so by the poor who are the ISBN 978-92-808-3080-4 most vulnerable. On the other hand, the benefi ts from globalization during ISSN 1813-5706 boom times are often not equally shared within the global community. Licensed under the Creative Commons The fear that the poor have been bypassed, or actually hurt, by globalization Deed “Attribution-NonCommercial- was highlighted by the fi ndings from a number of recent studies, which NoDerivs 2.5” point towards a continuing prevalence of high inequality in the world income distribution, and limited income convergence among participating national economies and across regions. The progress on poverty reduction has also been uneven. The share of the population of developing countries living below US$1.25 per day declined from 52 per cent to 25 per cent between 1981 and 2005, but this was www.unu.edu

mainly achieved by the substantial is not purely driven by new About the Authors reduction of the poor in Asia, in technological innovations and particular in China. Furthermore, progress or by ‘neutral’ forces over the period 1981–2005, the and other inescapable sociopolitical total number of people living forces, as often depicted in popular under US$2 per day has actually writings. In particular, the current increased worldwide by about 2 phase of globalization is, to a certain million to 2.53 billion in 2005. There extent, an outcome emerging is a clear disparity in regional trends from the global acceptance and in poverty reduction. While East diffusion of the economic policy Asia and the Pacific experienced paradigm, emphasizing benefits and the sharpest reduction in the positive features of the liberalized proportion of poor living below policy regime characterized by the Machiko Nissanke is US$1.25 per day from 78 per cent Washington Consensus. Professor of Economics at to 17 per cent, between 1981 and As the process of economic the School of Oriental and 2005, the poverty headcount ratio integration has intensified since African Studies, University remained very high in sub-Saharan the 1990s, the question of how Africa (around 52 per cent) and the globalization affects the world’s of London. She previously number of poor almost doubled poor has become one of the central worked at Birkbeck from 212 to 388 million. issues in international political College, University Though any observed trend in economy and international relations. College London and the poverty and income inequality However, the precise nature of cannot be exclusively or the various mechanisms through University of Oxford. even mainly attributed to the which globalization has altered the ‘globalization’ effect as such, these pattern of income distribution and various estimates cannot dismiss the conditions facing the world’s the concerns raised that the poor are yet to be carefully analysed. globalization process may have This is because the globalization– had adverse effects on income poverty relationship is complex, distribution and on poverty non-linear, and heterogeneous, among some segments of the involving multifaceted channels. population. Indeed, while most Besides the ‘growth’ effects of objective observers would argue globalization on poverty (that Erik Thorbecke is the that globalization is likely to have is, the effects of globalization contributed to poverty alleviation on poverty transmitted through H. E. Babock Professor on a net basis, it is also known to economic growth), the integration of Economics, Emeritus, have created winners and losers process is known to create winners Graduate School at numerous levels throughout and losers directly through other Professor and former modern history. These concerns channels, affecting both vertical have generated a passionate debate and horizontal inequalities. Because Director of the Program worldwide as well as a powerful these multifaceted channels interact on Comparative Economic anti-globalization movement. dynamically over space and time, Development. The extent of controversy the net effects of globalization on surrounding this debate reflects the poor can only be judged on the the fact that globalization is not a basis of context-specific empirical process, proceeding neutrally in a studies. Cross-country studies policy vacuum; rather, it is a policy requiring precise measurements induced condition. Globalization and definition of the two key

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concepts—globalization and of globalization and channels poverty—tend to fail to give robust through which they affect This Policy Brief is published insights into this critical nexus. Both poverty, these case studies within the UNU-WIDER concepts are multidimensional, and cover the spectrum from broad research project ‘Impact not easily captured in a composite macroeconomic regional and of Globalization on the index that may be used in a country analyses to micro-oriented World’s Poor’ directed by meaningful manner in cross-country village studies on each of the three Erik Thorbecke and Machiko comparative studies or regressions. continents. These case studies Nissanke. More detailed Building on earlier research projects, illustrate clearly that the impact findings are set out in a series UNU-WIDER initiated a project of globalization on poverty is of working papers (available to on ‘The Impact of Globalization extremely context-specific. download free at: on the World’s Poor’ in 2004, to Significant differences in initial www.wider.unu.edu): deepen our understanding of how conditions as well as distinct conditions facing the world’s poor internal dynamic processes of have been evolving under the forces institutional and sociopolitical of globalization with emphasis on change triggered by the forces the economic manifestations of of economic integration have those forces. Various channels and influenced the poor in Asia, transmission mechanisms were Latin America, and Africa in identified and explored through quite dissimilar ways. There are which the process of globalization distinctive characteristics, specific affects different aspects and to each of the three developing dimensions of poverty in the regions, shaping the ways in which developing world. This was the main globalization has affected the poor. theme of the first methodological This merits a comparative analysis and conceptual conference held of each region’s experiences with under the auspices of this project in globalization and integration. Helsinki in 2004. Naturally, any attempt at Subsequently three regional estimating rigorously the impact conferences focusing, respectively, of the globalization process on on Asia (held in Tokyo), Latin socioeconomic performance (and America (Rio de Janeiro), and Africa more specifically on poverty) (Johannesburg) were organized faces the almost insurmountable to help identify and illustrate the obstacle of the lack of a plausible differential effects of globalization counterfactual scenario. In order on growth, inequality, and to derive robust inferences, one poverty in the three continents. would have to compare the Approximately sixty specific performance under the present case studies were initiated and forces of globalization to an completed under the auspices alternative scenario of no or limited of this project. These studies are globalization. Within limits, this incorporated in the three published could be done very approximately volumes, three special issues of and roughly within a computable journals and other publications general equilibrium model for a resulting from this project (the given country or region of a country complete list of publications is given but this task is clearly infeasible for at the end of this policy brief). continents as large and diverse as Focusing on distinct manifestations Asia, Latin America, and Africa.

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Instead, we first attempt to describe some major recent socioeconomic globalization—operating through trends on each of these continents these channels—on the poor that one can legitimately claim were in the three different regions. influenced by the globalization Finally, Section 4 suggests a process even if they were, in fact, policy framework that could make the net consequences of a whole globalization more pro-poor. series of factors with some of them independent of the forces of 2 Channels Linking Globalization globalization. Further, while there to Poverty are clear intercontinental differences in the effects of globalization on the poor, it is also true that significant What are the transmission differences can prevailwithin each mechanisms through which the regional block as well. Hence, the process of globalization affects general picture we paint with a poverty directly and indirectly? broad brush can usefully serve as a The first and foremost of these backdrop to the sixty specific case mechanisms is the growth- studies generated by this project. inequality-poverty channel. Figure. The next section presents a 1 is our attempt to illustrate brief summary of our analysis of schematically the various critical the channels and transmission links of the causal chain running mechanisms through which the from globalization (openness) process of globalization affects to poverty, focusing on the most different aspects of poverty in critical links and abstracting from the developing world. Section 3 some feedback effects. provides a comparative analysis Globalization, as defined in this of the differential impact of project, means greater economic integration manifested through increased openness via numerous Transmission Channels: The transmission mechanisms such as trade and investment liberalization, Globalization-Openness-Growth- movements of capital, labour migration across borders and Distribution (Inequality)-Poverty Nexus within countries, the nature of Growth technological change and diffusion + - of knowledge and technology, worldwide information flows, and Classical + Globalization Openness Kuznets Poverty institutional environments. These Modern - mechanisms, in turn, affect poverty + + through two different paths: first, through their contribution to the Distribution Trade growth channel (in the upper part (Inequality) Capital of the diagram in Figure 1) and, Labor second, through their impact on Technology income distribution (in the lower Knowledge part of the diagram). The specific links shown in this Figure are from openness to growth, from openness to income

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distribution (inequality), from Publications from the Project growth to income distribution ‘Impact of Globalization on the World’s Poor’ and vice versa, from growth to poverty, and from income distribution to poverty, respectively. The Impact of Globalization on the World’s Poor: Tranmission Mechanisms In turn, the two main channels of Edited by Machiko Nissanke and Erik Thorbecke globalization—the ‘growth’ and Basingtoke Palgrave Macmillan, 2006 ‘distribution’ channels—further Chapter 1 Overview interact dynamically over time Machiko Nissanke and Erik Thorbecke to produce a growth–inequality– Chapter 2 Channels and Policy Debate in the Globalization–Inequality–Poverty poverty triangular relationship, Nexus which is captured by the right Machiko Nissanke and Erik Thorbecke hand side triangle of the Figure Chapter 3 The Relationship between Income Inequality, describing the arithmetic-statistical Poverty and Globalization relationship among growth, Almas Heshmati inequality, and poverty. Chapter 4 Globalization and Poverty Trends across Regions: The Role Each subset of links embedded of Variation in the Income and Inequality Elasticities of Poverty Adriaan Kalwij and Arjan Verschoor in the globalization (openness)– growth–income distribution–poverty Chapter 5 Looking Beyond Averages in the Trade and Poverty Debate Martin Ravallion nexus, schematically illustrated in the Figure, can be contentious Chapter 6 Globalization and Rural Poverty and controversial. For example, Pranab Bardhan the direction of causality in the Chapter 7 Globalization, Production and Poverty openness–growth link is still being Rhys Jenkins debated (the consensus view is Chapter 8 The Role of Information in Technology Adoption under Poverty that trade contributes to growth Jinhua Zhao rather than vice versa) as well as Chapter 9 Trade Openness and Vulnerability in Central and Eastern Europe how trade and capital flows could Pierluigi Montalbano, Alessandro Federici, Umberto Triulzi and Carlo Pietrobelli be interlinked into a virtuous circle. Chapter 10 Globalization, Poverty, Inequality and Insecurity: Some Insights In this context it can be argued that from the Economics of Happiness the positive openness–growth link Carol Graham is neither automatically guaranteed Chapter 11 Explaining Threshold Effects of Globalization on Poverty: nor universally observable, as the An Institutional Perspective growth-enhancing effects of trade Alice Sindzingre openness depend critically on the Chapter 12 Globalization, Poverty and Inequality: What Is the Relationship? way and extent to which a country is What Can Be Done? integrated into the global economy. Kaushik Basu Indeed, a greater integration/ openness process does not necessarily ensure uninterrupted growth spells. Rather, it also entails accepting greater downside risk of the contagion effects of crises, as demonstrated by the globally synchronized slowdown that has engulfed all the economies in the developing world since September 2008. Further, relating the causal chain

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Publications from the Project from income and wealth inequality ‘Impact of Globalization on the World’s Poor’ to growth (the ‘inequality–growth’ link), there are two conflicting theoretical strands: the traditional Globalization and the Poor in Asia: Can Shared Growth be Sustained? (classical) approach and the ‘new’ Edited by Machiko Nissanke and Erik Thorbecke political economy of development Basingstoke Palgrave Macmillan, 2008 theories (modern). Whilst the former emphasizes the growth-enhancing Chapter 1 Globalization and Poverty in Asia: Can Shared effects of income inequality and Growth be Sustained? wealth inequality through the Machiko Nissanke and Erik Thorbecke saving-enhancing effects (the rich Chapter 2 Pro-Poor Growth: The Asian Experience save proportionately more than Nanak Kakwani and Hyun H. Son the poor) as well as the existence Chapter 3 How Does Vietnam’s Accession to the of investment indivisibilities and Change the Spatial Incidence of Poverty? incentive effects, the latter links Tomoki Fujii and David Roland-Holst greater inequality to reduced growth through various conditions. Chapter 4 Trade, Migration, and Poverty Reduction in the Globalizing These conditions include the Economy: The Case of the Philippines diffusion of political and social Yasuyuki Sawada and Jonna P. Estudillo instability leading to greater Chapter 5 Threshold Estimation on the Globalization-Poverty Nexus: uncertainty and lower investment, Evidence from China unproductive rent-seeking Zhicheng Liang activities, high transaction costs, Chapter 6 Economic Development Strategy, Openness and Rural Poverty: and increased insecurity of property A Framework and China’s Experiences rights. The Kuznets hypothesis of Justin Yifu Lin and Peilin Lin the inverted U-shaped relationship between growth and inequality Chapter 7 Vulnerability to Globalization in India: that examines the opposite causal Relative Rankings of States Using Fuzzy Models flow (i.e., the ‘growth–inequality’ K. S. Kavi Kumar and Brinda Viswanathan link) is also challenged by a number Chapter 8 Resource-Poor Farmers in South India: of recent studies. Thus, the new On the Margins or Frontiers of Globalization political economy of development Rimjhim M. Aggarwal approach suggests that growth Chapter 9 Credit Constraints as a Barrier to Technology Adoption patterns yielding more inequality by the Poor: Lessons from South Indian Small-Scale Fisheries would, in turn, engender lower Xavier Giné and Stephan Klonner future growth paths resulting in less of a growth-induced poverty Chapter 10 Trade Liberalization, Environment and Poverty: reduction, as Figure 1 illustrates. A Perspective Thus, we argued that while Mahvash Saeed Qureshi globalization-induced growth may benefit the poor, the ultimate poverty reduction effects depend on how the growth pattern affects income distribution, as inequality acts as the filter between growth and poverty reduction. Effective poverty reduction requires some combination of higher growth and a more pro-poor distribution of the

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gains from growth. about the increased vulnerability In addition, several specific features of the poor to globalization forces associated with the current phase that generate greater fluctuations of globalization have contributed in income and expenditure caused to possible adverse effects on by global shocks, such as the the poor. These include: (a) the various financial crises that have nature of technical changes biased hit Latin America and Asia in the in favour of capital and against last two decades or the ongoing unskilled labour, the asymmetrical global financial crisis and food crisis. access to new technology and There is significant evidence that knowledge, and the uneven these repeated shocks have hurt process of technology diffusion; the poor disproportionately. Thus, (b) the often perverse pattern of while globalization can be a major international migration which tends engine for growth, it is critical to to encourage a migration of skilled put in place strong institutions that labour from developing countries mediate the various channels and to developed countries, while mechanisms through which the unskilled labour migration tends globalization process influences to be strictly controlled by legal poverty. Indeed, institutions act as Globalization and poverty, alongside , epitomize two of the most pressing contemporary international development issues restrictions in developed countries; a filter intensifying or hindering the (c) the perverse movements of positive and negative pass-through capital, such as in the form of between globalization and poverty capital flight from developing or and can help explain the diversity, emerging market economies to heterogeneity, and non-linearity safe havens in the rich countries or of outcomes. Examples of such diversification finance characterizing institutions, operating as safety nets, portfolio capital flows conducted are discussed in the comparative through asset swapping for risk analysis that follows. hedging and shedding, which results in global macro imbalances 3 How did Globalization Affect and periodical financial crises, and; the Poor in Asia, Latin America, (d) uneven, skewed foreign direct and Africa? investment (FDI) flows, which have Emerging empirical evidence not necessarily guaranteed host on the recent increase in world developing countries access to income disparity between the potential benefits of management rich and the poor can at least be and knowledge transfer. These partially attributed to the forces features have affected, in a number shaping the current process of of instances, the functional income globalization. In particular, the distribution between labour and observed ‘big time’ divergence in capital against the former. inter-country income levels (when Concerns are particularly strong each country is weighted equally)

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calls into question the validity of have not succeeded in reaching the openness-induced income the take-off point necessary for convergence thesis. The reality is benefiting from the positive forces that the mere adoption of open of globalization. Above all, countries trade and investment regimes need to have reached the take-off does not guarantee, or necessarily point, as the effects of international promote, developing countries’ trade on growth are critically entry into the ‘income convergence dependent on the structure of club’. It can be argued that the growth and pattern of specialization conundrum of the persistent and integration. In terms of the ‘non-convergence’ of world per inter-sectoral growth pattern, capita income should be explicitly evidence shows that in early addressed in terms of structural development stages the growth of features of the global economic agriculture has a far greater impact relationships as they evolved on poverty than the growth of other over time and institutional and sectors. For example, the bulk of sociopolitical conditions found in poverty reduction in China occurred participating countries. The income during the phase of agricultural convergence trend among de-collectivization and increases The risks and costs brought about by globalization can be significant for fragile developing economies

states, to the extent that it has been in food prices procurement before observed historically, is likely to be 1980, rather than in the subsequent explained more effectively by the trade-opening phase. As will be specific nature of the integration seen in the comparative analysis, and specialization process followed countries that went through by subgroups of countries, rather an early and smooth structural than by the degree of openness of transformation, as in most of Asia, the trade and investment regimes were much more successful in per se, as often claimed. generating a shared-growth process A theoretical study undertaken benefitting the poor than countries under the auspices of the present that delayed or failed their structural project and based on a ‘human transformation process, as is typical development trap model’ showed of SSA. that in the presence of multiple In terms of patterns of specialization equilibria, development and a country specializing in an industry underdevelopment can coexist as endowed with a larger positive steady states under globalization. externality would experience a This study concluded that faster growth rate compared with globalization is a necessary, but a trading partner that specializes in not a sufficient, condition for an industry with weaker spillover convergence to development. effects. Thus, the growth rates Indeed, many poor countries that of two trading countries could have opened their economies since differ considerably, depending the 1980s have fallen behind, and on the pattern of specialization. A

8 Policy Brief country with an initial comparative Publications from the Project advantage in ‘non-dynamic’ sectors ‘Impact of Globalization on the World’s Poor’ may end up in a low equilibrium trap through the evolving patterns The Poor Under Globalization in Asia, Latin America and Africa of production and trade. Similarly, the effects of FDI on host economies Edited by Machiko Nissanke and Erik Thorbecke diverge enormously, depending on Oxford University Press, 2010 the sectors into which transnational Chapter 1 Comparative Analysis of the Globalization–Poverty Nexus in Asia, corporations (TNCs) are attracted Latin America and Africa to move in and invest. Low‑income Machiko Nissanke and Erik Thorbecke developing countries tend to Chapter 2 Globalization and the Human Development Trap attract natural resource-based FDI David Mayer-Foulkes in extracting mineral resources or Chapter 3 Globalization, Levels and Economic Development FDI geared towards the lower end Alok Bhargava of TNCs’ vertical integrated global Chapter 4 Asia’s Labour-Driven Growth, Flying Geese Style: Types of Trade, operations (their global value FDI and Institutions Matter for the Poor chain) such as simple assembly Terutomo Ozawa line operations. These sectors and Chapter 5 Globalization, Growth and Poverty in India activities are characterized by N. R. Bhanumurthy and Arup Mitra limited dynamic externalities, as well Chapter 6 Globalization and Rural Poverty: Perspectives from a Social as knowledge and skill spillovers. Observatory in the Philippines Yujiro Hayami Chapter 7 Globalization and the Urban Poor in China In general, globalization Yin Zhang and Guanghua Wan experiences in the South tend to Chapter 8 Trade Liberalization, Employment Flows and Wage be very heterogeneous. In this Inequality in Brazil context, we argue that developing Francisco H. G. Ferreira, Phillippe G. Leite and Matthew Wai-Poi countries have to undergo Chapter 9 Globalization and the Urban Poor substantial changes in their trade Janice E. Perlman and production structures, so as Chapter 10 Globalization, Crop Choice and Property Rights in Rural Peru, to be able to reap more benefits 1994-2004 from the dynamic forces unleashed Alfred J. Field and Erica Field by globalization and experience Chapter 11 Globalization, Growth, Inequality and Poverty in Africa: income convergence. Indeed, sharp A Macroeconomic Perspective divergences have emerged in the Jeffrey I. Round development paths followed by Chapter 12 Globalization and Marginalization in Africa: Poverty, Risk, different countries in the South over and Vulnerability in Rural Ethiopia Stefan Dercon recent decades. Chapter 13 Inequality and Poverty in Africa in an Era of Globalization: These divergences can be explained Looking Beyond Income to Health and Education by the distinct internal patterns David E. Sahn and Stephen D. Younger of economic growth and forms Chapter 14 Post-Apartheid South Africa: Poverty and Distribution Trends of integration adopted. As a in an Era of Globalization consequence some countries in the Servaas van der Berg, Ronelle Burger and Megan Louw South were able to benefit from virtuous cycles of globalization- induced growth, while others were left behind in vicious cycles of globalization-induced decline. Not only did the growth rates diverge

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widely but there emerged a most Asian countries. In particular, marked difference in the ways following aggressively an ‘outward- the benefits of economic growth oriented development strategy’, trickled down to the poor as most East Asian economies had these developing economies not only managed the process of were integrating into the global integration into the world economy economy. The sharp differential much earlier than other developing impact of the forces of globalization countries, but also improved their on the poor in the developing form of linkages to the global world can be analysed by focusing economy in the years of their rapid on the integration experiences of economic growth. Prior to the three broad regions (continents): financial crisis of 1997–8, many of Asia, Latin America, and Africa, the East Asian economies registered respectively. spectacular growth performances 3.1 Impact of Globalization on accompanied by a substantial Poverty in Asia reduction in poverty—through Globalization is not a process, proceeding neutrally in a policy vacuum; rather, it is a policy induced condition

dynamically evolving changes in Asia is the region widely regarded their socioeconomic structures. A as having benefited most from the number of earlier studies attributed dynamic growth effect of the recent this successful growth performance wave of globalization, which has to an appropriate set of economic also resulted in a very substantial policies and institutions well suited reduction in abject poverty in to the conditions prevailing in many economies. Furthermore, the East Asia during that period. The growth pattern achieved through relatively quick turnaround of many increased trade and FDI in East emerging economies in East Asia Asia in the 1960s and 1970s was in the years following the severe especially seen as highly inclusive, crisis of 1997–8 is often attributed and often viewed as a model of to their strong export performance ‘shared growth’. Yet, there is growing and renewed adaptability and evidence that in the last three flexibility in responding swiftly decades, inequality has been rising to new opportunities offered by as part and parcel of the integration globalization. process in many parts of Asia. Second, the structural Hence, it is critically important to transformation of most economies examine the mechanisms at work in in East Asia has been facilitated the globalization–poverty nexus in considerably by the integration/ Asia. globalization process. The catch- First, there is very little disagreement up process and associated growth over the powerful growth dynamism in Asia, as a whole, enhancing effects of openness can be examined in terms of the through trade and FDI in the case of ‘flying geese paradigm’, wherein a

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sequence of staggered catch-up maximize the benefits from dynamic growth episodes has successively externalities. Their increasing taken place in the region since the specialization in sectors with large end of the Second . More spillovers and dynamic externalities specifically, poverty alleviation has was conducive to engendering a been occurring, in flying geese pattern of equalizing growth. style (i.e., in tandem with growth) Third, in most of East Asia, the pro- among these rapidly catching up poor pattern of public expenditure Asian economies. The incidence in favour of the rural poor at early of poverty (based on the US$1.25 stages of development produced poverty line) is estimated to have and sustained the ‘shared’ growth dramatically declined from 78 per process at least until the 1970s. cent in 1981 to 17 per cent in 2005 There were concerted efforts in East Asia including China, and on the part of governments to from 60 per cent to 40 per cent in facilitate building primary assets of South Asia during the same period. the poor through such measures Globalization is likely to have contributed to poverty alleviation on a net basis

Thus, the high growth as an equitable distribution of performance—accompanied land (through appropriate land by a substantial reduction of reforms), extensive public provision abject poverty—in East Asia of free and universal primary can be explained in terms of the education, promotion of small‑scale region‑wide comparative advantage enterprises and development recycling in the production of rural infrastructure—roads, and export of labour intensive irrigation, schools, agricultural goods. The process involves a support outposts, health stations, strong demand for unskilled and irrigation systems. In this and semi-skilled labour, driven context, the observed pro-poorness by exporting labour-intensive of growth in East Asia is not purely goods and attracting pro-trade a manifestation of market-driven FDI, bringing about effective growth effects. technology, knowledge, and skill Fourth, notwithstanding the transfer. Most of the East and ongoing urbanization process, South-East Asian economies have the great majority of the poor in successfully gone through the Asia continue to reside in rural structural transformation of their areas—63 per cent at last count. production and trade structures The accelerating rural to urban with continuous upgrading of migration in response to the rapid their human skill endowments expansion of job opportunities and technology/knowledge base. has contributed both to economic By relying on their fast evolving growth in urban areas and to the dynamic comparative advantages alleviation of poverty in rural areas these countries were able to by (i) reducing surplus labour in

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Publications from the Project agriculture, and (ii) through the ‘Impact of Globalization from migrant workers Latin America occupies an on the World’s Poor’ that presently 10.65Indeed, despite intermediate position in its the sharp reduction in the incidence integration experience compared

of extreme poverty (less than to the other two regions. Like World Development US$1.25 a day), poverty remains countries in sub-Saharan Africa, 34 (8) 2006, Special Issue high in many developing countries many economies in Latin America ‘The Impact of Globalization in Asia if it is measured on the basis on the World’s Poor’ have been historically natural of the US$2 a day poverty line. Guest Editors Machiko Nissanke resource-based in their linkage It is estimated that the latter and Erik Thorbecke to the global economy through declined from 86 per cent in 1981 primary commodity exports. Introduction: The Impact of to 73 per cent in 2005 in South Globalization on the World’s Poor Though the economies in the Erik Thorbecke and Machiko Asia and from 92 per cent to 38 region are much more diversified Nissanke per cent in East Asia (dominated in their production and trade by China) over the same period. Channels and Policy Debate structures than those in SSA, they in the Globalization-Inequality- The reduction in this measure is have been largely susceptible to Poverty Nexus remarkable (in particular in East the ‘global development cycle’, Machiko Nissanke and Erik Asia), but poverty is still widespread dominated by external shocks. Thorbecke in Asia as a whole, and the challenge Many countries in the region were Globalization, Poverty facing policymakers in the region in exposed to a deterioration in their and Inequality: What is the attacking poverty of this magnitude ‘terms of trade’ caused by the sharp Relationship? What can be done? Kaushik Basu is still daunting. The ‘inequality drop in the prices of a number of increasing’ effect of globalization primary commodities in the 1980s. Looking Beyond Averages in the should be attenuated by public Trade and Poverty Debate In addition, as main recipients Martin Ravallion policy measures to ensure that of commercial loans based on benefits from globalization-induced Globalization and Rural Poverty abundant petrodollars in the 1970s, Pranab Bardhan growth are shared more equally and middle income countries in the equitably. region suffered from the sudden Globalization, Local Ecosystems and the Rural Poor In this context, it is worth hike in real interest rates at the Rimjhim M. Aggarwal remembering that the pattern of end of the 1970s. Resulting from shared growth from wealth‑sharing Globalization’s Bystanders: the ensued severe debt crisis, the Does Trade Liberalization Hurt policy measures provided region had to endure a ‘lost decade’ Countries that do not Participate?’ legitimacy for governments to of economic growth in the 1980s Alan V. Deardorff and Robert M. pursue pro-growth and pro- characterized by negative external Stern business economic policy in the resource transfer and stagnant Agricultural Biotechnology early drive for rapid industrialization growth rates in per capita income. and Poverty Reduction in Low- in East Asia. Sustaining the shared The annual average growth of GDP Income Countries growth process is hence critical Gregory Graff, David Roland-Holst in the 1980s for the Latin American and David Zilberman for ensuring economic growth region was barely above 2 per cent. to continue under this era of Poverty and the Welfare After the belated market-based debt Costs of Risk Associated globalization. Alternatively, restructuring under the Brady Plan with Globalization growing inequalities can and the sweeping policy reforms Ethan Ligon weaken social cohesion and risk of liberalization and deregulation, reducing the momentum for middle-income economies in the economic growth and integration region reintegrated into the global in the region. economy as emerging market 3.2 Impact of Globalization on Poverty in economies in the early 1990s. Yet, Latin America the region’s economic integration,

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spurred by the liberalization and Multinational corporations in privatization drive and based Mexico and the Caribbean tend on the premise of large ‘growth’ to specialize in low technology dividends from globalization, manufactures, mainly operating has not delivered the promised assembly plants with little potential benefits of sustained economic of technology and skill transfers. growth to these economies. The Thus, during the recent spell of average annual growth of GDP in globalization, there is evidence that Latin America during the 1990s ‘South America has experienced was only around 3 per cent. A well- premature deindustrialization, while known Latin American specialist Mexico and Central America avoided summarizes the prevailing view on this trend by specializing in high the region’s performance over the import intensive manufacturing last two decades, by noting that exports, but with limited benefits ‘Latin America has wholeheartedly in terms of growth’. It remains to be embraced the faith in open trade seen if the growth spurt starting in and freer capital markets and yet, 2004 (yielding an annual growth subsequent growth is well short rate of GDP of around 5 per cent of expectation’. On the whole, the a year until 2008), largely fuelled globalization induced economic by temporarily rising commodity growth in the region has been much prices, is sustainable. Clearly the more precarious and fragile than growth transmission channel has, at least until very recently, been much Each subset of links embedded in the globalization (openness)–growth–income distribution–poverty nexus can be contentious and controversial that recorded in Asia throughout too weak to play a significant role in the last three decades. reducing poverty in the region. Under the impetus of highly volatile In contrast to Asia, the Latin portfolio capital flows, economic American region has experienced growth has been interrupted by the a very low rate of formal job creation in the tradable sector periodic crises in capital accounts under globalization. In some cases, of since the economic growth was ‘jobless’, with mid 1990s. Much of the eagerly a negative rate of creation of formal anticipated increase in FDI took the jobs. Keen observers have noted form of asset acquisition of newly the sharp disparities in performance privatized public utilities rather than between large (often operated that of green field investment in by TNCs) and small enterprises in productive capital. Operating within the region: large scale enterprises the global production network, recorded high rates of productivity TNCs in the manufacturing sector growth with a shrinking labour in the region have adopted new force, while the number of small production technologies with and informal low-productivity enterprises continues to grow. little new employment created. Thus, labour markets in the region

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are characterized by a high degree at the very top end of the world of segmentation in parallel with inequality ranking according to the an increasing ‘casualization’ of the World Bank’s World Development workforce. Indicators (WDI) dataset—with a As firms operating in the formal median Gini coefficient of almost 57 sector are subject to increased per cent and a mean of just under international competition as 55 per cent. Between the mid-1990s liberalization proceeds, the informal and mid-2000s, inequality rose in sector has expanded by absorbing negative income shocks as workers nine LAC countries, while it fell in in the formal sectors are laid off. only two countries and remained This process has given rise to the essentially the same in four fear of ‘social exclusion’ of the countries. The lethal combination of self-employed, operating almost low growth and increased income entirely in the informal sector. One inequality resulted in little overall of our case studies notes that the poverty reduction. While the self-employed now account for headcount ratio for the LAC region one-third of the labour force in as a whole (based on the US$1.25 the Mexican economy and are one a day poverty line) fell from almost of the most vulnerable groups. 13 per cent in 1981 to 8 per cent in This process of ‘casualization’ and 2005, the number of poor rose from Institutions act as a filter intensifying or hindering the positive and negative pass-through between globalization and poverty

‘informalization’ of the workforce 366 million to 550 million during the can help explain the reduction in same time span. open unemployment in Mexico and Yet it is important to note that the other Central American countries aggregate statistics hide the good during the 1990s, while open performance of some individual unemployment was rising steadily in countries. The best performer Argentina, Brazil, and Colombia, and in terms of growth and poverty other Latin American countries. The share of the informal sector in urban alleviation was Chile, where the employment rose significantly in US$1.25 a day poverty has been most countries of the region. practically eradicated, and Brazil and While the distribution of income Mexico succeeded in reducing both and assets in this region is known inequality and poverty substantially to have historically been the most since the mid-1990s despite unequal in the developing world, unspectacular growth, at least prior many empirical studies confirm that to 2004. income and asset inequality has The increased income inequality is continued to rise significantly during often explained by the widening the integration process after 1980. income gaps between skilled In the second half of the 1990s, and unskilled workers as well as all Latin American and Caribbean between the formal and informal (LAC) countries were grouped sectors reflecting the differences

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in human capital endowments. effect of a modest growth Brazil’s experience since the performance. late 1980s provides a revealing Paradoxically, while the evidence is counterevidence marked by a persuasive that income inequality falling wage inequality and income is high and rising and contributing inequality (after 2000) as one of to perpetuate poverty in the region, our case studies makes clear— much of the development literature illustrating thereby the risk of ignores the fact that income blanket generalizations. inequality and income-based However, some economists have poverty are not necessarily the only challenged the power of these or even best measures of economic explanations of the pattern of and social well-being. Poverty and income distribution, exclusive of inequality are multidimensional other factors, arguing that the concepts that can only be effects of globalization on income imperfectly reflected by money- distribution in the region are metric measures. In this context, and most pronounced at the extreme to further muddle the development ends of the income distribution. performance picture, one of our In other words, they argue that studies finds that during the 1980s Latin America is characterized by and 1990s, inequality measured in Asia is a region regarded as having benefited most from the dynamic growth effect of the recent wave of globalization a rising income polarization. In the health and education dimension turn, this polarization trend can fell in Latin America and that this be explained by the way the LAC decline contributed to a substantial economies have integrated into the improvement in health and global economy, as evidenced by education indicators. the Mexican case where the share This evidence of socioeconomic of wages fell from 40 per cent of development in Latin America GDP in 1976 to just 19 per cent in would have been missed through 2000. Wages in low technology a narrow focus on money-metric manufacturing sectors, in which measures alone. Mexican ‘maquila’ enterprises Poverty incidence is much higher in specialize, stagnated, while large rural areas than in cities, although productivity gains were reflected there is an ongoing increasing by a sharp rise in profit margins. In urbanization of poverty trends short, globalization, at least partially due to rural-urban migration. through its technology transmission While some major efforts have channel, appears to have shifted been in place in recent years the functional income distribution to redress income inequality against labour in the region and through such schemes as the the rising income inequality further Brazilian Bolsas and the Mexican dampened the poverty alleviation Progresa and Opportunidades

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not yet managed to redistribute and notwithstanding the progress income to the poor significantly. noted above, inequality in non- Mitigating the negative effects of income measures such as education, globalization on inequality and the nutrition, health, and access to poor is of particular importance in utilities remains persistent. The the LAC region, where there is today poor are particularly disadvantaged widespread dissatisfaction with the in accessing these public goods. social injustice associated with high While a claim has been made that poverty and inequality. increasing international remittances A strong case can be made that could become a massive resource high vulnerability to external transfer mechanism to reduce shocks—a direct consequence poverty levels by increasing the of the way the LAC economies income of poorer households, have integrated into the global a study undertaken under the economic system—has considerably auspices of this project shows impaired the institution-building that remittances are not going process towards a more equitable to the poorest members of rural society. Governments have faced communities in Mexico. serious constraints both on the During the 1990s, there were fiscal front and monetary policy some noticeable surges in social choices for sustaining public expenditures channelled through transfer programmes or other social public transfers and human capital The process of integration of many Asian economies into the global economy has generated such a strong growth impact that the poor were not left out

formation in many countries. In policies in order to address growing a rigorous empirical analysis of inequality and the unacceptable the relationship between growth prevalence of poverty. patterns, poverty, and inequality in The previously noted achievements Brazil, one of our studies provides of Mexico and Brazil, as well as an important insight into the crucial Chile, contrast with an overall role of incomes derived from social picture of little progress in the security and other government provision of safety nets to reduce transfers in cushioning the effects the vulnerability of the poor to of macroeconomic shocks triggered shocks in the LAC region. It is also by the forces of globalization, clear that the inconsistent (stop specifically among the poorest and go) and populist economic segments of Brazilian society during and monetary policies followed by the period, 1995–2004. Another many LAC regimes have contributed study examines the performance in no small measure to the mixed of various public transfer schemes socioeconomic performance in eight countries in the region. described above. There appears little It concludes that, on the whole, doubt that with sounder policies public transfers in the region have and governance, the net and overall

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impact of globalization would have been more favourable to most segments of the population.

3.3 Impact of globalization on the poor in sub-Saharan Africa

Following largely an inward- oriented development strategy in the early decades of the post-independence period, the majority of SSA countries failed to take advantage of the potential provided by the dynamic growth spurt that characterized the global economy starting in the 1970s. The region was largely marginalized and experienced slow growth and stagnation. Publications from the Project With growing recognition of their ‘Impact of Globalization on the World’s Poor’ disadvantageous position, most economies in SSA significantly liberalized their trade and African Development Review, 20 (1) 2008 investment policy regimes as part of Special Issue Structural Adjustment Programmes since the mid 1980s. Today, SSA ‘Globalization-Poverty Channels and Case Studies from sub-Saharan Africa’ is not behind other developing Edited by Machiko Nissanke and Erik Thorbecke regions in trade openness, as conventionally measured through Globalization–Poverty Channels and Case Studies from sub-Saharan Africa Machiko Nissanke and Erik Thorbecke a trade intensity index (imports and exports relative to GDP). In spite Gains from Trade: Implications for Labour Market Adjustment and Poverty of the increase in trade intensity, Reduction in Africa however, Africa’s share of total world Augustin Kwasi Fosu and Andrew Mold trade has fallen over the last two The Effect of the Liberalization of Investment: Policies on Employment decades. Many countries in SSA and Investment of Multinational Corporations in Africa have also intensified their efforts to Elizabeth Asiedu and Kwabena Gyimah-Brempong attract FDI with the help of various fiscal and other incentive measures. Gender Dimensions to the Incidence of Tariff Liberalization However, FDI flows to the region Reza C. Daniels have so far been largely limited Market Participation and Rural Poverty in Ghana in the Era of Globalization to the extraction of oil and other Abena D. Oduro and Isaac Osei-Akoto natural resources. Distributional Impact of Globalization-induced Migration: Evidence Thus, SSA presents a clear example from a Nigerian Village in support of the argument that Steve Onyeiwu, Raluca Iorgulescu Polimeni and John M. Polimeni the shift to an open policy regime alone is not sufficient to bring about Changing Land Tenure Arrangements and Access to Primary Assets economic growth and consequently under Globalization: A Case Study of Two Villages in Anglophone Cameroon poverty reduction. After two Francis Menjo Baye

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decades of reforms dominated that the beginning of the debt by liberalization, privatization, crisis in many countries in SSA in and deregulation, the economies the late 1970s coincided exactly of SSA have not yet been able to with that of the ‘commodity crisis’. escape from the ‘growth tragedy’ The demand management of syndrome—the term popularly used commodity‑dependent economies in characterizing the region’s dismal governed by external shocks should economic performance in the be countercyclical to the commodity comparative growth literature. The price movements. Yet, at times of recent upturn in economic growth an externally induced balance of recorded in many natural resource- payment crisis accompanied by a rich economies in SSA was closely sharp drop in domestic demand, associated with the temporary price these countries, in the absence of hike of oil and mineral commodities alternative financial facilities, have in world markets. The sustainability been forced to adopt stabilization of these high growth rates appears policy measures that aim at a further most questionable in the light of contraction in aggregate domestic the free fall of commodity prices demand. Effective and flexible observed immediately after the facilities of contingency financing to events in September 2008 that deal with external shocks on an ex In contrast to Asia, the Latin American region has experienced at a very low rate of formal job creation and informalization of the labour force

triggered the global financial crisis. ante basis have been largely absent Highly competent macroeconomic in debt relief mechanisms including management over the commodity the Heavily Indebted Poor Countries price cycle is required to avoid the (HIPCs) Initiative. The debt crisis of ‘Dutch disease’ often associated HIPCs ended only when a near total with commodity booms. Otherwise, debt cancellation was achieved the foundation for long‑term under the Multilateral Debt Relief economic development of these Initiative in 2005. natural resource-rich economies The failure of SSA economies to would remain fragile. Indeed, diversify and undergo structural the high primary commodity transformation, and hence, to dependence remains one of the benefit from the technology- most conspicuous characteristics driven, highly dynamic aspects of of the trade linkage of countries the ongoing globalization process in SSA with the rest of the world. has led to major drawbacks in Low‑income countries dependent terms of low economic growth and on primary commodity exports and persistent poverty. The incidence a natural resource-based structure of poverty by some measures has could be locked in an international worsened in the region. According poverty trap through integration. to recent estimates, the number It is not a mere historical accident of poor below the US$1.25 a day

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international poverty line almost the poor not only in terms of its doubled in SSA from about 212 ability to deliver the required (high) million in 1981 to 388 million in growth rate to ensure that the 2005, while the proportion of poor poor could benefit from economic (the headcount ratio) in SSA fell growth, but also in terms of its marginally during this same period pattern. Economic growth in SSA, from about 53 per cent to 51 per where it has occurred, has not cent—by far the highest relative been translated into significant incidence among the major regions poverty reduction. Critically, the in the world. Poverty in SSA is both combination of three factors, i.e., the most prevalent and severe in rural nature and pattern of integration areas. of the SSA economies into the Countries in SSA display a relatively global economy, the slow rate of high intra-country inequality. structural transformation and the This can be seen as a puzzle as neglect of the agricultural sector, Africa should be a low inequality has precluded the generation of continent according to the Kuznets virtuous cycles of globalization hypothesis because according to induced growth and poverty an authority on income distribution reduction. issues, ‘African countries are poor Governments in SSA have Major efforts have been in place to redress income inequality through such schemes as the Brazilian Bolsas and the Mexican Progresa and Opportunidades and agriculture-based, and also systematically ignored (if not because the main productive exploited) their agricultural asset—agricultural land—is sectors—failing to undertake pro- relatively evenly distributed in poor public investment in rural most of SSA (except the region of areas; rather, tending to extract a Southern Africa) in part thanks to surplus from agriculture at an early the tradition of communal land stage of development. It has also holding’. Notwithstanding these been argued that divisive fiscal conditions the degree of income instruments such as subsidies or inequality in Africa has increased preferential credits were more sharply between the 1980s extensively used by politicians and the 1990s. in SSA than other regions as the While it has become almost favoured mechanism to buy universally accepted that sustained political support or to appease poverty reduction requires various interest groups. economic growth, the pattern of Furthermore, with the advent of growth, as discussed in Section 2, the debt crisis in the 1980s, fiscal does significantly affect the rate of retrenchment (hence reduced poverty reduction. In this context, spending on rural infrastructure) it can be argued that Africa’s has been consistently pursued growth has been distinctly against as part of the stabilization-cum-

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Publications from the Project ‘Impact adjustment policies. Governments of Globalization on the World’s Poor’ were typically left with little capacity and resources to undertake public

World Development, 38 (6) June 2010 investment on a sustained basis. Special Issue Under such conditions, it is difficult to expect structural transformation ‘Globalization, Poverty and Inequality in Latin America’ to take place. The majority in rural Edited by Machiko Nissanke and Erik Thorbecke areas were de facto disenfranchised from the developing process. Private agents and rural farmers Globalization, Poverty and Inequality in Latin America: Findings were likely to have refrained from from Case Studies making forward looking productive Machiko Nissanke and Erik Thorbecke investments. Today, many parts of Trade Liberalization and the Self-Employed in Mexico SSA remain isolated from global Gurleen K. Popli markets and the global community Globalization and Smallholders: the Adoption, Diffusion and Welfare Impact as the region’s access to information of Non-traditional Export Crops in Guatemala and technology is limited. Calogero Carletto, Angeli Kirk, Paul Winters and Benjamin Davis On the whole, while globalization has made some contribution to Remittances and Vulnerability to Poverty in Rural Mexico economic growth in SSA, it has Alejandro de la Fuente not yet facilitated the process of Globalization and Formal Sector Migration in Brazil structural transformation required Ernesto Aguayo-Tellez, Marc-Andreas Muendler and Jennifer Pamela Poole for countries to reach the take-off Seasonal Migration and Early Childhood Development stage and accelerate the Karen Macours and Renos Vakis process of economic development and poverty reduction. Earnings Mobility in Times of Growth and Decline: Argentina Instead, the forces of globalization from 1996 to 2003 have increased intra-country Gary S. Fields and María Laura Sánchez Puerta inequality and done very little to Linkages between Pro-Poor Growth, Social Programmes and Labour Market: reduce poverty. The Recent Brazilian Experience Whilst the impact of Nanak Kakwani, Marcelo Côrtes Neri and Hyun H. Son globalization on poverty is Globalization and the Role of Public Transfers in Redistributing Income extremely context-specific, the in Latin America and the Caribbean limited scope of globalization Emmanuel Skoufias, Kathy Lindert and Joseph Shapiro in SSA appears to be, generally, the result of a combination of Minimum Wages, Globalization, and Poverty in Honduras poor initial conditions, such as T. H. Gindling and Katherine Terrell fundamental disadvantages of location (disease-prone tropical countries with a harsh environment), inadequate political institutions, poor governance, extremely underdeveloped physical infrastructure, and a related high risk investment climate.

Policies to Help Make

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Globalization more Pro-Poor process of poverty reduction in the Asia and Pacific region has 4.1Strategic national policies towards followed closely the waves of globalization employment creation for unskilled labour and the poor in tandem The empirical case studies from with the evolution and shifts of the three regions in this UNU- comparative advantages within WIDER research project support the the region in the ever‑accelerating contention laid out at the outset integration process. In contrast, that the effects of globalization on such a poverty reduction process poverty are diverse, and in many through globalization could not ways, context specific. Indeed, be achieved in SSA and ECLAC our studies confirm the view that regions, where liberalization of trade the forces of globalization as and investment regimes failed to such are not inherently beneficial produce either strong or significant or deleterious for development employment creating growth. prospects. At the same time, Instead the pattern of growth our comparative analysis of has resulted in ‘jobless’ growth, globalization experiences across ‘casualization’ of employment and the three developing regions shows ‘informalization’ of their economies. that the effects of globalization on This observation leads us to argue The failure of SSA economies to diversify and undergo structural transformation has led to low economic growth and persistent poverty

the poor depend critically on the that the employment creation effect nature and pattern of the economic achieved through globalization- integration process. induced economic growth is a In particular, our analysis suggests most direct and powerful channel that globalization works best for the through which globalization can poor through the ‘growth’ channel make a noticeable dent in poverty. when globalization‑induced While the prospect of substantial economic growth generates poverty reduction can be increased secure employment opportunities considerably wherever globalization continuously at a steady rate brings about job‑generating for a growing population and economic growth, this potential labour force. On the whole, the is realized only when economic employment creating effect of growth is characterized by a growth has been and continues relatively high ‘employment to be pronounced in East Asia, elasticity’. However, such a growth where globalization has brought outcome cannot be necessarily about a substantial reduction in guaranteed whenever globalization/ poverty due to vigorous growth integration is embraced on its own despite increasing inequality. The as a development strategy. Instead,

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the dynamic integration experiences same time, there is no place for in Asia point to the need for policies an old style, poorly designed and of active strategic integration, not implemented protection policy, of passive integration or de-linking which is mired in unproductive from the global economy. Such rent‑seeking activities, patron-client an active strategic stand should, relationships between governments first of all, aim at facilitating the and private agents or consolidation transformation of production and of ‘vested’ interests of the protected trade structures from the narrowly sectors. An import substitution based commodity dependence strategy can work only when that is bound to increase the protection is granted to firms with a exposure of economies to external clearly specified ‘graduation’ clause shocks. In terms of sustained in a performance-based system. economic growth, developing That is, protection should always countries that have successfully be seen as temporary and ‘time- diversified their exports structures bound’ by agents in return for better into manufactured goods, in performances. particular, increasingly into In particular, national integration medium and high technology strategies should be designed sectors, have systematically in the light of the skewed Effects of globalization on poverty are diverse, and in many ways context specific

outperformed those dependent on nature of the ongoing process primary commodities, and natural of globalization. First, dynamic resource‑based processing goods. externalities and rent-rich activities Thus, whether global market forces are increasingly concentrated in establish a virtuous circle or vicious high skill, knowledge‑intensive circle depends not only on the initial sectors. In short, the skill- and conditions at the time of exposure technology‑related divide has but also crucially on the effective become wider over recent decades. design and implementation of This trend is clearly reflected in policies to manage the integration the continuously declining terms process. The issue confronting of trade of less skill intensive policymakers is not whether to manufactured goods relative to high integrate into the global economy skill and technology intensive goods but how to integrate so as to have over recent decades. The markets a stable foundation for sustainable for many labour‑intensive products and equitable growth. have come to resemble those for Clearly, an active strategic position primary products. The entry of towards globalization cannot be China and India into global markets equated with a mere adoption for these products has depressed of liberal trade and investment and will continue to depress real regimes, or a simple fine-tuning wages and returns in these low‑ of the pace and sequence of technology and low‑skill sectors. liberalization measures. At the Given the sheer size of large surplus

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labour in rural areas, China and India less and less conducted at arm’s are likely to retain their comparative length relationships among firms. advantages in low‑skill-intensive Rather, a growing share of world sectors for some time to come while trade is accounted for by intra-firm gaining new capabilities in medium- trade undertaken within TNCs. to high-tech sectors. On the There has been a tremendous other hand, a number of primary growth in offshore outsourcing and commodities experienced a sharply global division of labour, dictated upward phase in their commodity by TNCs’ globally integrated price cycles of 2002-8, in the face production and marketing strategy. of the surge in demand for raw TNCs’ activities are strategically materials and other commodities organized and integrated either from fast growing economies in horizontally or vertically. In Asia. Consequently, many natural particular, with a sharp decline in resource-based economies in SSA transport and communication cost and Latin America did enjoy a over recent decades, TNCs have period of ‘growth spurts’ associated been aggressively organizing their with the ‘commodity’ boom. operations vertically by slicing up However, the subsequent sharp fall the production process finely into in commodity prices, as the world numerous separate operations and Globalization works best for the poor through the ‘growth’ channel

economy entered into a severe locating them in different parts of downturn phase starting in the the world according to the cost second half of 2008, has illustrated advantage of each location. the high vulnerability of these In this context, it should be noted economies to commodity price that considerable asymmetries shocks. This demonstrates once in market power and access to again the difficulties in sustaining information, technology and Publications from the Project economic growth that is capable other intangible knowledge assets ‘Impact of Globalization of creating job opportunities for between TNCs, on the one hand, on the World’s Poor’ a rising labour force, exclusively and local entrepreneurs, farmers on the basis of the primary and traders in developing countries, Erik Thorbecke and Machiko commodity boom. A broadly based on the other, have resulted in a Nissanke. ‘The Impact of development pattern for these hugely skewed distribution of gains Globalization on the Poor in economies would require a strategy from trade. This is reflected in the Latin America.’ Economía 9.1 of using resource rents and windfalls TNCs’ dominance in commodity (2009): 153-186. for economic diversification. and value chains of traded goods, Second, intra-firm trade in parts, as well as in frequently observed components and other intermediate conditions such as the sharp decline Machiko Nissanke and Erik goods, and intra-industry trade in real wages in export processing Thorbecke.‘Linking Globalization with highly differentiated products zones. Under this condition, to Poverty’, WIDER Policy Brief make up a predominant share the benefits of productivity No. 2 (2007) of contemporary global trade. In improvements, instead of going particular, international trade is to the fragmented producers and

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farmers, are largely appropriated by agrarian economies, as a necessary the TNCs and global supermarket condition for successful integration. chains. This uneven distribution of The importance of this critical step market power points to the need to in relation to the globalization– improve the negotiating positions poverty nexus is underscored by of developing country governments the fact that in many developing vis-à-vis TNCs, aiming at a strategic, countries the majority of the poor targeted approach to FDI, so still reside in rural areas. Further, that FDI could facilitate skill and there are critical thresholds that technology transfer and generate need to be reached before the strong positive productivity positive effects of globalization spillovers benefiting domestic firms. on poverty reduction can be Generally, given the observed realized. The non-linear Laffer-type Globalization offers new trends towards inequality both relationship between globalization opportunities for accelerating globally and within many nations, and poverty shows that openness development and poverty developing countries have to helps those with basic and higher reduction, but also poses new take strategic steps to position education, but reduces the income challenges for policymakers. And themselves more favourably in share of those with no or little there is much concern about the globalization process in order education and it is only when basic the distribution of benefits; in to derive greater benefits from education becomes the norm for particular whether the poor gain globalization’s dynamic forces. the poor that openness exerts an from globalization, and under They need a long‑term vision income equalizing effect. what circumstances it may for upgrading their comparative The human development trap actually hurt them. To meet this advantages towards high value model also points to the possible important agenda, the project added activities by climbing coexistence of development on the ‘Impact of Globalization the technology ladder rung by and underdevelopment under on the World’s Poor’ aimed at rung through ‘learning-by-doing’ globalization, and hence producing rigorous theoretical and adaptation. To succeed, underscores the critical importance and empirical analysis of the developing country governments of national policies to enhance poverty impact of globalization, should consciously engage in human capital endowments and thereby providing a framework building institutional capacities for develop technological capabilities. upon which to build strategies integration, including a capable Thus, sizable public investment for ‘pro-poor globalization’. The nation state that is ready to take on in skill upgrading, as a specific project has been particularly the enormous challenges posed by pro-poor measure, is the key for interested in understanding globalization. The positive benefits ensuring positive benefits from better the mechanisms through which globalization ultimately from globalization are neither globalization for the poor. In affects poverty. It has also automatic nor guaranteed, whilst conjunction with building assets evaluated how different poor passive liberalization would risk of the poor in their human capital groups are affected in different perpetual marginalization. base, there is a complementary ways by globalization (the rural Furthermore, since openness need to invest in rural physical and versus urban poor for example). could potentially benefit the poor social infrastructures and create The project has produced in countries which have already market supporting institutions, so thematic papers as well as reached the take-off stage, it is that the poor can be connected country and case studies of very critical that in addition to and networked beyond isolated globalization’s poverty impact a long‑term vision for strategic communities and villages. In terms in Asia, sub-Saharan Africa and integration, low‑income countries of inter-sectoral flows, a continuing Latin America. should embark on the path towards gross flow of resources should structural transformation of their be provided to agriculture—

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irrigation, inputs, research, and All in all, our comparative analysis credit—to increase this sector’s of the three regions suggests productivity and potential capacity that governments of developing of contributing an even larger return countries need to pursue both flow to the rest of the economy and strategic integration and an active hence provide a net agricultural domestic development agenda to surplus to finance the subsequent ensure that the poor benefit from development of the rest of the globalization while they are also economy. adequately protected from negative Finally, our project case studies impacts. What is called for is that unequivocally point to the integration be accompanied by a need for instituting safety nets comprehensive policy package for and appropriate regulations to enhancing the capability of the poor protect the poor from the large and instituting appropriate safety downside risks associated with nets for people who could otherwise globalization. Clearly, globalization lose from the globalization process. has significantly increased the This requirement is a tall order vulnerability of the poor in for any government, let alone all three developing regions for a fragile state typically found through channels such as: (i) the in most low-income developing increased scale and frequency countries. Hence, in order to make Pro-poor globalization can be defined as the inclusive process of globalization of macroeconomic shocks, as globalization work for the poor, most vividly demonstrated by the the first imperative is to strengthen global financial and economic the capacity of the nation states, so crisis of 2008-9; (ii) larger exposure that an institutional environment to changes in the ecosystem conducive to the design and potentially resulting from new implementation of a pro-poor technologies with often uncertain programme could be fostered. pay-offs and costs; and (iii) deteriorating working conditions 4.2 A quest for pro-poor globalization and weakening bargaining Our comparative analysis of the powers for the unskilled and ‘globalization–poverty relationships’ the poor in global value chains. inevitably raises a critical question Thus, governments should take whether the present form of a pro-active and pro-poor stance globalization/integration is in instituting various schemes of conducive to a process of growth- public transfers and safety nets cum-structural transformation to shelter the poor from these of developing economies that adverse conditions. Indeed, the is capable of engendering and distributional issue raised in the sustaining pro-poor debate should be seen growth with favourable as a strong case for pro-active public distributional consequences. With programmes to protect the poor. the current wave of globalization,

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‘within country’ income inequality pro-poor globalization leads us has been steadily rising. A number to revisit the debate concerning of our project studies, focusing the relationships between equity/ on specific settings, suggest inequality, on the one hand, and that globalization indeed can growth/efficiency on the other. The produce adverse distributional traditional view held by economists consequences at both the national on the growth–inequality nexus and global levels. As ‘global markets emphasizes the existence of a are inherently disequalizing’, fundamental trade-off between market driven globalization and the objectives of productive growth tend to increase inequality efficiency/growth and social everywhere. Asia is no exception justice represented by equity/ to this trend. Hence, we should equality considerations, often on search for ways to influence the the grounds that too much equity globalization process so that it is would discourage incentives to more effective in improving the lot innovate and reap the rewards of of the poor—hence, our quest for successful entrepreneurship. In forms of pro-poor globalization. contrast, the alternative recent Pro-poor globalization can be political economy of development defined as the inclusive process literature suggests instead that of globalization, wherein sharing there is a long‑run complementarity opportunities for growth and between the two within some development take place ex ante, range that does not stifle incentives. encompassing the poorer segments If there is no clear trade-off on of population on a global scale. As economic grounds, equitable and the tidal waves of global growth shared growth should be good for lift all boats, it should also lift the efficiency and future growth as well. canoes of the unskilled. Pro-poor Indeed, ‘if equality is conducive to globalization could remain an growth, it then becomes a means elusive concept, if the process towards economic development is left entirely to market forces and future poverty alleviation’, alone. In order to make pro-poor and hence, ‘the conflict between globalization a realistic perspective, the ethical objective (norm) of there is a need for instituting viable egalitarianism and the economic mechanisms to insure that the poor conditions required for growth share in the distribution of assets disappears’. In this new paradigm, and income generated by the forces wealth redistribution (particularly of of globalization and are adequately human capital) to the less endowed protected against the vagaries of is, on the whole, growth enhancing, global shocks. because redistribution is the key Ideally, under pro-poor to creating a virtuous circle in the globalization, it should be possible growth–equality nexus. to make equity and efficiency Notwithstanding the long‑run interact dynamically ex ante so complementarity between the twin that a virtuous circle of growth and objectives, growth and equity, a equity/equality could be created in practical policy choice exists over the process of globalization. the actual weight given to the Defined as above, our quest for ‘equity’ consideration against the

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‘efficiency’ consideration. Such a effects of the immutable forces policy choice would be ultimately of globalization. Hence, a form of determined by the social norms passive integration into the global prevailing in a society. However, economy through liberalization and we should bear in mind, in deregulation cannot be viewed as evaluating the optimal weight a reliable substitute for a domestic to be assigned to each of these development strategy. Indeed, it objectives that market forces is now widely acknowledged that alone would not lead even to a there is no universally applicable Pareto efficient equilibrium in the ‘one-size‑fits‑all’ development presence of imperfect information model. Therefore, there should be and imperfect competition, more room for open discussion and as demonstrated by recent debate on the merits of different advancement of economic theories. development models, not just one As Stiglitz infamously remarked, ‘an based on following the dictates of invisible hand is not visible, because totally free and unregulated markets it does not exist’. Therefore, not and the Washington Consensus. only is there a moral case on ethical Yet, it can be argued that under grounds but also a strong rational the current wave of globalization, economic case on ‘efficiency’ the feasible policy space related grounds for breaking away from the to development strategy has A more effective globalization process requires a new system of present mode of globalization. been shrinking for developing In making globalization more countries. In particular, the policy inclusive and truly pro-poor, space of nation states has been we should search for pro-active eroded considerably in the name ways to create a more inclusive of financial globalization. It is development path for the poor known that policymakers in open in the process of integration of economies face a macroeconomic developing countries. It is also trilemma (the ‘inconsistent trinity’ necessary to restructure governance thesis). The thesis stipulates that mechanisms over economic policies whilst policymakers typically at both national and global levels. have three desirable objectives Despite the ever-accelerating pace (exchange rate stability, free of globalization, the nation state international capital mobility, and remains a critical political unit monetary policy independence within which citizens can express to engage domestic economic democratically their choices over goals), they are in practice forced Policy Briefs are distributed free economic policies and development to give up one objective, since of charge. Please address orders strategies. Hence, at the national only two out of the three can be and inquiries to: level, policymakers need to mutually consistent. Financial UNU-WIDER Publications design and implement an active globalization has also led to a loss Katajanokanlaituri 6B development strategy not only to of fiscal autonomy under ‘fiscal FI-00160 Helsinki benefit from globalization, but also termites’, when financial openness [email protected] to help counteract the negative makes it hard to tax internationally

Linking Globalization to Poverty in Asia, Latin America, and Africa 27 www.unu.edu

footloose capital relative to labour threaten the stability of the world due to the competition for foreign economy–as evidenced by the sharp savings through tax incentives and hike in primary commodity and general financial arbitrage by poor food prices, and the global financial countries. This often results in fewer crisis.Soaring key commodity prices available resources to provide social hit the world economy during a safety nets to people adversely severe financial crisis, triggered affected by globalization. by the sub-prime mortgage crisis Besides providing more policy space in the US with the background of to allow developing countries to growing global macroeconomic manage the integration process at imbalances, which spread to major the national level, it is necessary industrial economies through to recognize that globalization has poorly regulated global financial also given rise to a set of cross- transactions and systems. The border economic issues that can be rapidly increasing prices of basic addressed only at the global level, goods such as fuel and food since they cannot, by nature, be sparked off temporary social dealt with effectively by individual and political disquiet and unrest nation states in isolation. These across the globe. The rising cost include addressing global negative of fuel and the shortages of food externalities such as greenhouse hit particularly hard the livelihood effects leading to a dramatic climate of the urban and rural poor in change, prevention of global developing countries. The financial financial crises or preservation of turmoil with a severe liquidity global security. They require an crisis and the credit crunch at first effective system of international appeared to be confined mainly to coordination and cooperation, as financial markets and institutions well as cross-border regulations based in the US and Western and enforcement mechanisms. Europe. The world economy, on A more effective globalization the whole, managed to maintain process requires a new system its momentum until mid-2008 on of global governance. Yet, over the back of the buoyant economic the last three decades, economic growth posted by emerging market globalization and integration have economies as well as resource- largely proceeded with increasing rich developing economies that intensity, relying on the presumed enjoyed a commodity boom.By self-regulatory capacity of markets mid-September 2008, however, the without adequate structures and events that hit the major financial systems in place to govern the institutions in the US had altered process. This has placed enormous radically the fate and the course of strains on the international the globalized economies. The fear economic and financial system and of accelerating inflation and of fuel may eventually bring globalization and food shortages worldwide was itself to a crossroads. In the last few overtaken by a greater fear of global years environmental challenges recession engulfing all economies posed by climate change and the in the developing world. No country appearance of large cracks in the could afford to remain a mere international financial system bystander in the fast evolving global

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financial crisis. In the last quarter of is becoming increasingly recognized 2008 and in the first quarter of 2009 that the governance structures the global financial crisis turned into prevailing within many multilateral a globally synchronized recession development institutions are and economic crisis at a pace antiquated and not appropriate for hitherto inconceivable to imagine, dealing with contemporary global as the magnitude of world trade fell issues. Various reform agenda have drastically. As the global financial been put forward and discussed at and economic crisis spread, the different international forums in the plight of the poor in the developing aftermath of the global financial and countries has been receiving much economic crisis of 2007-9. needed attention from policymakers It would be most desirable if the around the world. The poor started quest for pro-poor globalization to be recognized as innocent victims could be actively considered as of the large‑scale gambles taken a part of such a global reform by financial institutions in the West. agenda. For example, there is need Given the scale of financial turmoil to reappraise the prevailing system and the depth of its recessionary of rule-settings at the WTO. For effects felt worldwide, more open the WTO, or any other multilateral academic debates and policy agencies, to become a true discussions are currently taking development forum, it is important place, advocating the reform of the to recognize explicitly the hugely . However, asymmetrical unequal economic in order to avoid the repetition of power relationships existing Economic globalization has outpaced by a wide margin the catastrophic transmissions of among member countries. These the financial crises spilling over global agencies should endeavour into world trade and real economic to create a genuine ‘policy space’ activities, reforms are also required, to allow developing countries beyond the system of financial to engage in and promote their regulation and supervision, to development agenda within the governance structures over the context of the broader integration globalization process as a whole. and globalization process. The The present global crisis has current rules and governance demonstrated clearly that the structures should be critically world community is not currently reappraised in this light. A more equipped to deal with these global meaningful ‘level playing field’ can issues of enormous proportions in only be created if effective, fair a satisfactory and timely manner. and more development focused Economic globalization has ‘special and differential treatment’ outpaced political globalization by is legitimately instituted as a a wide margin. The current system guiding rule governing multilateral of global governance suffers from a negotiations and institutions. democratic deficit at many levels. It Furthermore, in order to address

Linking Globalization to Poverty in Asia, Latin America, and Africa 29 www.unu.edu

UNU-WIDER Policy and the distributional consequences Research Briefs 2005-2010 of globalization, a set of much more effective redistributional instruments may be required at Ravi Kanbur and Anthony both national and global levels. J. Venables. ‘Rising Spatial Globalization can bring about Disparities and Development’ increased volatility and insecurity WIDER Policy Brief for many cohorts, particularly those No. 03 (2005) that are not well positioned to take David Fielding. ‘What can the advantage of the opportunities European Central Bank learn created by the opening of trade and from Africa?’ WIDER Policy Brief capital flows. Indeed, the relevance No. 04 (2005) of ‘global income inequality’ as a valuable concept for measuring Tony Addison, Alan Roe, trends in world income distribution, and Matthew Smith. ‘Fiscal Policy for Poverty Reduction, should increase over time, as people Reconstruction, and Growth’. move from using national yardsticks WIDER Policy Brief to global ones when comparing No. 5 (2006) their income with that of others. While globalization is a major Andrés Solimano. ‘Mobilizing engine for growth in aggregate, Talent for Global Development’. globalization either introduces WIDER Policy Brief or exacerbates other trends that No. 7 (2006) affect people’s well-being as much, Machiko Nissanke and if not more, than income, for Erik Thorbecke.‘Linking example, through the increasing Globalization to Poverty’. flow of information about the living WIDER Policy Brief standards of others, both within No. 2 (2007) and beyond country borders. This David Clark and Mark flow of information can result in McGillivray. ‘Measuring Human changing reference norms and Well-being: Key Findings and increased frustration with relative Policy Lessons’. WIDER Policy income differences as one of the Brief No. 03 (2007) project studies demonstrates. It may be utopian at this stage to Wim Naudé and Marianne recommend that resource transfers Matthee. ‘The Significance of from the developed world to the Transport Costs in Africa’. WIDER Policy Brief developing world be more globally No. 5 (2007) progressive. Yet such a move would contribute to the forces of Ha-Joon Chang. ‘Stranger globalization becoming more pro- than Fiction? Understanding poor. The current system of foreign Institutional Changes and aid (the main existing form of global Economic Development’. resource transfers) is not the most WIDER Policy Brief efficient and progressive way to No. 6 (2007) mobilize and utilize resources as a redistributional instrument to address global income inequality.

30 Policy Brief www.wider.unu.edu

Globalization requires a set of new UNU-WIDER Policy and innovative instruments for financing Research Briefs 2005-2010 development as well as for provision of global public goods. In this context, the world community could Basudeb Guha Khasnobis. ‘Can be more open to evaluate various We Eradicate Hunger?’ WIDER radical proposals such as a global Policy Brief No. 1 (2008). social contract to finance equal Naudé Wim.‘Fragile States’, opportunity investments benefiting WIDER Research Brief No. 3 the weak and the disadvantaged; (2008) the creation of a new scheme Guanghua Wan. ‘Poverty of inter-country transfer using Reduction in China: Is High per capita income of the bottom Growth Enough?’ WIDER Policy quintile of the population as a Brief No. 4 (2008) yardstick (as recommended by another of the studies undertaken Wim Naudé, Amelia U. Santos- under this project); or instituting Paulino, and Mark McGillivray. global arrangements to minimize ‘Poverty. ‘Vulnerability in asymmetric risks and costs of Developing Countries’ WIDER global market failures. While these Research Brief No. 2 (2008) proposals require further careful Wim Naudé ‘The and critical scrutiny to Economic Crisis after One Year: determine their intrinsic merits Is a New Paradigm for Recovery and the political feasibility of in Developing Countries implementation, it is clear that Emerging? WIDER Policy Brief the world community should No, 2 (2009) give serious attention to more Augustin Kwasi Fosu and Wim enlightened global measures Naudé. ‘Policy Responses to benefitting the poor than those that the Global Economic Crisis in prevail today. Indeed, we should be Africa’. WIDER Policy Brief No. engaged in a fresh debate on how 3 (2009) the enormous potential benefits Wim Naudé. ‘Promoting of globalization can be steered Entrepreneurship in Developing towards a more equitable sharing of Countries: Policy Challenges. those benefits, while reducing the WIDER Policy Brief vulnerability of the poor to some of No. 4 (2010) the adverse consequences of global market forces.

Linking Globalization to Poverty in Asia, Latin America, and Africa 31 www.unu.edu www.wider.unu.edu

INSIDE: Policy Brief “Linking The World Institute for Development Economics Research (WIDER) Globalization to was established by the United Nations University (UNU) as its fi rst research and training centre and started work in Helsinki, Finland in Poverty in Asia, Latin 1985. The Institute undertakes applied research and policy analysis on structural changes affecting the developing and transitional economies, America and Africa” provides a forum for the advocacy of policies leading to robust, While globalization offers new equitable, and environmentally sustainable growth, and promotes opportunities for accelerating capacity strengthening and training in the fi eld of economic and social development and poverty policy making. Work is carried out by staff researchers and visiting reduction it also poses new scholars in Helsinki and through networks of collaborating scholars challenges for policymakers; in particular the extent to which the and institutions around the world. poor gain from globalization, and under what circumstances it may

actually hurt them

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