Does Globalization Reduce Poverty?

Summary

Nowadays, the term ‘globalization’ is a buzzword. It is often described as a process of internationalization – easy communication regardless of geographical boundaries due to advance technologies, easy and fast financial capital flow across the globe and countries become more interdependent particularly in economy. It is believed that globalization provides consumers with variety of choices with affordable price. So, is the globalization reducing or increasing poverty? This paper will attempt to briefly answer this question in the following orders.

The paper includes (I) defining globalization and poverty (II) globalization reduces poverty, (III) globalization increases poverty, (IV) other reasons contribute to poverty, (V) roles of The World Bank, IMF and WTO in developing countries, (VI) who benefit the most from globalization? and (VII) conclusion.

(I) Defining Globalization and Poverty
“Globalization” has been defined in various dimensions. Among many established definitions, these are some of them. ‘Globalization as internationalization’ in which is viewed “as simply another adjective to describe cross-border relations between countries”; ‘Globalization as liberalization’ which refers to “a process of removing government-imposed restrictions on movements between countries in order to create an ‘open’, ‘borderless’ world economy”.

Defining poverty is controversial. Definition of poverty in developed countries may not be applicable to the one in developing countries. However, United Nations and World Bank define poverty line as living on less than a $1 and $2 a day for low income countries. Sociologists define poverty “a lack of essential items – such as food, clothing, water, and shelter – needed for proper living” .

Since “Globalization and Poverty” is a huge and very broad topic, this short paper is to attempt looking at one of the heated debate questions on whether globalization reduces or increase poverty. Numerous studies on this issue have been carried out. However, the findings are conflicting.

(II) Globalization Reduces Poverty
Neoliberal economists widely believe that globalized trade benefits not only the affluent but also the poor through trade integration. “Neoliberal economic theory––more open economies are more prosperous, economies that liberalize more experience a faster rate of progress” Wade (2004, p-567). The belief is that as countries open up their economy such as by slashing down the trade barriers for instance tariff, custom duty and quotas, price of imported goods will be affordable for the poor; foreign direct investments come in and create jobs in local economy. Consequently, this increases export growth and GDP. Millions of poor people’s living standard improves because of jobs created. China, India and Vietnam are often cited as good examples for success of globalized economy.

(III) Globalization Increases Poverty

On the contrary, many economists are unconvinced by the neoliberal economists’ view that globalization reduces poverty. Pilger (2001) in his TV report on Indonesia presents that despite investments from multinational corporations (eg. Nike, Levis, Reebok Classic, Calvin Klein Jeans, Adidas, Gap Inc.), poverty remains unchanged in Indonesia. On average, Indonesian workers are paid only slightly over Rupiah 9,000 (US$1) per day which is just over half of a living wage.

Harrison (2006) finds similar situation in Mexico. Mexico is a member of North American Free Trade Agreement (NAFTA) signed in 1993 with Canada, Mexico and USA. If trade integration is to reduce poverty and benefit the poor as neoliberal economists suggest, poverty in Mexico should be declined. But, Harrison (2006, p-7) concludes that “poverty rates in Mexico in the year 2000 were higher than they had been ten years earlier.” This reinforces that neoliberal economists’ view on decline of poverty is unconvinced.

(IV) Other reasons contribute to poverty

Wade (2004, p-571) states that more than 1.2 billion people are still living on less than US$1 a day. The followings are some of the most recognized reasons contribute to poverty: lack of natural resources, natural disaster – long period of draught, corruption and sanctions imposed against specific country.

For example, according to United Nations, Cape Verde is one of the most stable democratic countries in Africa and the government is relatively mild in corruption. It ranks 49 out of 179 in Transparency International’s “2008 Corruption Perceptions Index ”. But due to cycles of long-term drought, lack of natural resources, shortage of water supply and lack of foreign investments, the state is still among the poorest nations on earth despite its good governance.

Countries with rich endowment of nature resources also remain in poverty due to wide spread corruption, bad governance, political instability and economic sanctions imposed by powerful countries. For example, my country, Myanmar (Burma) is still among the world’s poorest countries despite rich endowment of natural resources from oil to various gem stones. It is due to political instability, severe corruption, lack of reliable judiciary system, basic infrastructures and economic sanction imposed by The US. Consequently, unemployment rate is remarkably high and chance of economic success for big majority of population is slim unless economic and political reform take place.

(V) Role of World Bank, IMF and WTO on development in poor countries

The World Bank, International Monetary Fund (IMF) and World Trade Organization are widely known as driving forces of trade liberalization. Pilger (2001) interviews several former executive officials of The World Bank and IMF in his TV report on Indonesia. Those officials explain that the roles The World Bank and IMF have played in Indonesia’s economy and various criteria a country to comply with order to get loan from them.

World Bank and IMF are supposedly to help poor countries. In reality, powerful countries use the two institutions as tools to suck up resources from developing countries via multinational corporations, according to the TV report. To get loans from the institutions, a country has to reform its economy which mainly means to open up markets and allow multinational corporations to access to country’s resources and privatize industries. Thus, complying with the criteria implies serving the best interests of multinational corporations.

In addition to opening up markets for multinational corporations, the loans also come with so called ‘technical experts’ or ‘consultants’. So, significant sum of the loans go back to developed countries as salaries of those ‘experts’.

To get loan from the institutions, a country also has to have a good relationship with the US because it controls 16.77% of total votes in IMF and 16.39% of The World Bank’s total vote. For instance, N-Korea and Cuba cannot get loans from the institutions because of sour relationship with The US.

World Trade Organization (WTO) is another driver of trade liberalization. It forces member countries to open up their markets and eliminate trade barriers. New members are also required to fulfill these criteria. Members are required to comply with intellectual property laws which were mainly written by the big corporations.

WTO is widely criticized for being ineffective to protect the interests of developing nations. When trade disputes occur, chance of getting success in legal battle for poor country is very slim even if it has a good ground because the mechanism is so expensive and complicated. Besides, it cannot force developed countries to stop subsidizing agricultural industry because farmers from poor countries are unable to compete with those heavily subsidized farmers in developed countries. Thus, poor countries always have less advantage in global trading system.

(VI) Who benefit the most from globalization?

There is no doubt that globalized trades/economy benefits all the parties concerned. However, various studies show that advanced countries are benefiting from the trades more than poor countries. Yotpoulos and Romano (2007, P-21) state that free markets and free trade work best if there are supported by extensive institutional structure such as business infrastructures, reliable legal system and political stability. Thus, globalization is more likely to favour the countries which are wealthy and institution rich, at the expense of those that are poor.

On the other hand, developing countries with strong infrastructure base, political stability, dependable legal system and abundant labor forces also benefit from globalization. China, India and Vietnam are often cited as ideal examples. Furthermore, United Nation (2007, P-23) asserts that countries with bargaining strength are more likely to benefit more from bilateral trade agreements and impose more onerous terms on the weaker parties.

“We must ensure that the global market is embedded in broadly shared values and practices that reflect global social needs, and that all the world's people share the benefits of globalization.” Kofi Annan .

(VII) Conclusion

In short, it is hard to find convincing data to support either globalization reduces or increases poverty. However, it is clear that globalization is more beneficial to developed countries than to developing countries mainly because of wide spread corruption, bad governance, lack of necessary business infrastructures.

Unless world leaders share Kofi Annan’s concern “We must ensure that the global market is embedded in broadly shared values and practices that reflect global social needs, and that all the world's people share the benefits of globalization.”, the following remarks are unfortunately likely to continue to be true.

George Monbiot (Environmentalist) summarizes, “Globalization is used to suggest a coming together of people of all races, all countries. It will relieve poverty and distribute wealth. What is actually happening is precisely the opposite. The Poor become markedly poorer and wealthy become staggeringly wealthier.”

United States Space Command (1997, p-6) remarks “The globalization of the world economy will also continue, with a widening between ‘haves’ and ‘have-nots’.”



References:

Ann Harrison, “GLOBALIZATION AND POVERTY” NATIONAL BUREAU OF ECONOMIC RESEARCH, Working Paper 12347, Cambridge, 2006. www.nber.org/papers/w12347

John Pilger, “Globalization: New Rulers of the World”, Carlton Production, 2001. (TV report)

Pan A. Yotpoulos and Donato Romano (editors), “The Asymmetries of Globalization”, Routledge, USA & Canada, 2007.

ROBERT HUNTER WADE, “Is Globalization Reducing Poverty and Inequality?” London School of Economics and Political Science, World Development Vol. 32, No. 4, pp. 567–589, UK, 2004.

United Nations, “The Employment Imperative: Report on the World Social Situation 2007” New York, 2007.