Policymakers, development organizations, and advocacy groups often express concern about the impact of globalization on poverty. Their concern is understandable, given globalization’s wide-ranging effects. Globalization may spur higher income growth due to increased specialization, more efficient capital and labor flows, and wider diffusion of technology. But globalization’s impact on poverty hinges on the extent to which the poor participate in the income-growth process, something that cannot be guaranteed.
The post-World War II period has coincided with unparalleled increases in global standards of living. In most developing countries, incomes grew faster in the second half of the 20th century than at any previous time. But living standards around the world have changed in ways attributable not just to income growth. Strides in health and longevity, for example, have resulted from transfers of medical and public-health technologies, quite independent of growth in incomes. The human development indices (HDI) of the United Nations Development Program (UNDP) encapsulate achievements in education, health, and income that are now higher in most developing countries than they were in the now-developed countries when they had similar income levels in the 19th century.
Although historical trends in the correlation between globalization and overall standards of living provide reason for optimism, recent co-movements in globalization, income growth, and poverty have been more confounding, fueling policymakers’ concern. This brief discusses the interplay of some of the key factors that link globalization to poverty alleviation. It suggests that effects on poverty, especially in the short term, are determined by the quality of domestic policy, the state of the international economy, and the adjustment pains that are inevitable when trade, investment, and financial barriers are dismantled.
The last 50 years have seen a significant reduction in trade barriers, although the proliferation of non-tariff barriers complicates measurement. Restrictions on capital flows have been lifted as well. The world ratio of trade to non-service gross domestic product (GDP) jumped from 24 percent in the 1960s to 58 percent in the 1990s, with the biggest increase in East Asia (from 9 to 50 percent). Developed countries and Sub-Saharan Africa have the largest trade/GDP ratios, but all developing regions showed increases.
International capital flows are less uniform, however, and are concentrated in developed countries and a few, mostly middle-income, developing nations. Net capital flows as a share of GDP were higher in the 1970s than in the 1990s in Africa (4.8 percent compared to 2.0 percent) and Latin America (3.2 percent as compared to 2.5 percent). For Asia, the percentage was higher in the 1990s until the 1997 Asian financial crisis, with the final average for the decade (1.4 percent) similar to that in the 1970s (1.3 percent). In all regions, net flows fell during the debt crisis of the 1980s. Foreign direct investment emerged in the 1990s as the largest component of external financing for many developing countries.
Despite persistent barriers, international labor migration has grown. From 1965 to 1990, the proportion of the world labor force that worked outside of their country of birth increased by half.
In general, post-World War II globalization has been most pronounced in industrialized countries, and developing regions have shown a clear variation in the degree and chronology of their integration into the global economy.
Income growth rates. Average annual incomes in Africa, Latin America, and the more populous countries in Asia (China, India, Indonesia) grew faster in the last five decades than at any time in the past. Between 1950 and 1996 real GDP per capita in Africa rose from US$830 to $1,309 (in purchasing-power-adjusted 1990 prices). In the same period, in East Asia GDP per capita jumped from $765 to $5,587 and in Latin America from $2,487 to $5,155. Yet performance within this period was mixed. Between the 1960s and 1990s, income growth rates fell in Latin America and the Caribbean (from 5.3 percent to 3.2 percent) and in Sub-Saharan Africa (from 4.9 percent to 1.9 percent), while they increased in East Asia (from 4.6 to 7.3 percent) and South Asia (4.2 to 5.4 percent). Growth rates also became more volatile.
Inequality. World income distribution has become more unequal in the last 150 years. This divergence continues to expand, fueled almost entirely by increases in between-country inequality: rich countries, which by most measures are more globalized than the rest of the world, maintained or increased their lead over poor countries. While trends in within-country inequality are more ambiguous, some evidence shows income inequality, especially in transition countries and some large developing countries, to have worsened since the 1980s. UNDP’s HDI, on the other hand, shows global convergence in standards of living, with the gap between the richest and poorest countries narrowing since 1950. However, life expectancy, an important component of the index, has shortened since the 1980s in Sub-Saharan Africa and in some former republics of the USSR.
Poverty. The number and percentage of people living in poverty in developing countries declined considerably during the 1960s and 1970s. Data since the mid 1980s show further, but slower, reductions. While the share of population living on less than one US dollar a day fell from 28 percent in 1987 to 23 percent in 1998, the absolute number of poor diminished only slightly (by 9 million persons). If China is excluded, however, poverty actually increased by about 80 million people in developing countries. The percentage of underweight children under five in developing countries, another indicator of absolute poverty, also declined between 1980 and 2000, from 37.4 percent to 26.7 percent, as did the absolute number. Yet, the number of underweight children increased in Sub-Saharan Africa, while the incidence of undernutrition is still very high there and in South Asia.
The surge in globalization in the latter half of the 20th century went hand-in-hand with significant increases in standards of living. While it is difficult to separate the effects of globalization on poverty from the effects of technological progress or domestic policies, the causal link appears to be positive. Closed economies, which rely on small domestic markets and import substitution, tend to foster low-employment, capital-intensive growth patterns. They suffer from recurrent balance-of-payments crises and appear biased against agriculture, in which most poor people work. Further, protectionism may nurture monopolies, shelter rent-seeking and corruption, and weaken the rule of law.
But why are the links between globalization and poverty in the short term, especially since the mid 1970s, less clear, at least at the broad regional levels? Possible explanations are the following:
- Changes in product and factor prices triggered by opening up an economy inevitably produce both winners and losers in the short term. The timing, scale, and sequencing of policy reforms, as well as pre-existing domestic conditions, have a bearing on where and how these gains and losses occur. Further, the relationship between globalization, growth, income distribution, and poverty is likely to evolve as an economy changes in structure. Hence, short-term data, aggregated at the regional level, are likely to be muddled by the wide diversity in country-specific situations and experiences.
- A country’s performance in terms of growth and poverty alleviation is tied to the overall functioning of the international economy at a given time. For example, during the 1960s and 1970s, high growth, negative real interest rates, and high inflation reduced poverty in the relatively resource-abundant, primary exporters of Africa and Latin America, which also received much of the international capital flows. But then, the collapse in world commodity prices after the 1980s, mostly due to changed economic policies in industrialized countries, negatively affected their growth rates and poverty levels.
- Structural shifts in international markets matter. The recent entry of China in world markets with its vast reservoir of low-skilled workers has changed the configuration of comparative advantage among developing nations. Further, high-skill-biased technological change, in part spurred by globalization itself, has affected developing countries’ economic performance and income distribution. Finally, world economic volatility may have increased, mostly linked to gyrations in world capital markets. If the probability of crises increases with openness, the poor may face additional risks.
Ultimately, globalization’s effects on poverty depend on the extent to which the poor are able to participate in the expanding sectors. Where the poor live in rural or other areas that lack infrastructure and are detached from the global economy, uneven progress across sectors or geographical regions may result (as China’s policy-induced segregation between urban-rural and coast-hinterland suggests). Further, a vast majority of the poor will simply be unable to take advantage of globalization while trade barriers remain on products in which the poor have comparative advantage.
The last wave of globalization has raised incomes and standards of living in the developing world to levels not seen before. However, the advances have been uneven and some developing countries, in regions like Sub-Saharan Africa, are experiencing painful declines in human welfare. Also, inequality appears to be increasing, giving rise to domestic and international tensions.
Increasing the pace of poverty alleviation requires that policies that further integrate developing countries into the global economy be complemented by domestic pro-poor policies and institutional development that cushion adjustment shocks and enable the poor to take advantage of the new opportunities offered by globalization. Developed countries must do their part by rectifying policies such as agricultural and textile protectionism. Strengthening international institutions to ensure transparency and fair play and to reduce potential economic instability remains crucial, not only to speed up poverty alleviation, but to induce developing countries to embrace global partnership in the first place.
For further reading see N. Crafts, Globalization and Growth in the Twentieth Century, IMF Working Paper WP/00/44 (International Monetary Fund, 2000); R. Kohl and K. O’Rourke, “What’s New About Globalisation: Implications for Income Inequality in Developing Countries,” paper for Organisation for Economic Cooperation and Development Conference on “Poverty and Income Inequality in Developing Countries,” Paris, 2000.
Manohar Sharma (m.sharma@cgiar.org) is a research fellow in IFPRI’s Food Consumption and Nutrition Division; Sam Morley (s.morley@cgiar.org) is a visiting research fellow and Eugenio Díaz-Bonilla (e.diaz-bonilla@cgiar.org) is a senior research fellow in IFPRI’s Trade and Macroeconomics Division