The Hindu Business Line : Does globalisation hurt the poor?

Globalisation is not necessarily the enemy of the poor. It opens up opportunities for everybody. But if the poor has to benefit, a host of pro-poor initiatives in the domestic policy sphere that will help them overcome both the endowment and the connectivity problems, need to accompany globalisation, says ALOK RAY.

Does globalisation benefit or hurt the poor? The most popular apprehension about globalisation is that even when it increases overall prosperity of nations, the poor gets the stick. The tide of globalisation, instead of raising all boats, may sink some — especially those of the poor.

To unravel the truth in this context, one needs to understand the possible mechanisms by which globalisation affects the poor.

But, first, a definitional problem. The term ‘globalisation’ means different things to different people. For our purposes, we would define globalisation as free international trade and long-term capital flows (or direct foreign investment). In other words, we are ignoring the issues connected with short-term speculative capital flows, which even strong supporters of globalisation such as Professor Jagdish Bhagwati want to avoid, as far as possible. This is because many financial crises (like the East Asian crisis) have allegedly been triggered by volatile short-term capital movements.

Two-step link

Basically, there is a two-step link between globalisation and poverty. Those who believe globalisation reduces poverty argue that liberalisation of trade and FDI (foreign direct investment) helps economic growth, which reduces poverty. The available empirical evidence broadly supports the second link but the first link remains controversial.

Globalisation has been accompanied by a big surge in the growth rate in China and India as well as significant reduction in the percentage of population below poverty line. However, how much credit should go to globalisation and how much to other factors — such as land reforms, anti-poverty programmes, Green Revolution, investment in infrastructure, abolition of the licence-permit raj, social political movements, and so on — is not clear.

By contrast, in sub-Saharan Africa, during the same period (1980-2000), poverty ratio has gone up along with continuing stagnation in overall economic activity. But, then, one may argue that other factors such as civil war and political instability rather than globalisation are responsible for this state of affairs. In fact, political instability may have led to less globalisation in such countries, as foreign investors and traders have been scared off the region. So, globalisation — unless supplemented by a lot of other factors — is no guarantee for either faster growth or sharper reduction in poverty. However, higher economic growth over a long period — whatever be the underlying causes — has usually been accompanied by significant reduction in poverty, along with a rise in inequality of income and wealth in many cases, at least in the initial phase, which usually gets reversed later (known as Kuznet’s ‘Inverted-U’ hypothesis).

Measures of openness

There have also been sophisticated studies using cross-country regression analysis which try to link growth or poverty estimates to measures of ‘openness’. Broadly speaking, they conclude that openness promotes growth and reduces poverty. But, again, the problem is that by ‘openness’ the authors mean a comprehensive policy package involving many different domestic policy measures, in addition to lowering barriers to international trade and investment. So, it does not prove much about the link between poverty (or growth) and ‘globalisation’.

Hence, empirical evidence is not conclusive. How about the processes at work?

One may look at the impact of globalisation on the poor in their several capacities — as consumers, self-employed workers, wage earners and recipients of public services. As consumers, poor people may gain to the extent the relative prices of goods they consume most (like basic food) fall. But, if trade liberalisation means that the export of basic foodgrains goes up — which raises the domestic price of food — while the import of scotch whiskey increases pulling down its price, the poor may lose (and rich may gain) as consumers.

Many poor people work as marginal farmers, artisans or petty entrepreneurs in small shops or firms. Even without globalisation, they face enormous difficulties in facing competition from better endowed domestic producers. Unless the domestic policy constraints which limit their access to finance, marketing, technology etc are removed, greater exposure to international competition may ruin their livelihood. Of course, some poor producers of specialty products such as handicrafts, which have a good export market, may gain, provided their products can reach global markets.

Though the standard international trade theory suggests that the wages of unskilled poor workers in the populous low-wage countries such as India, China and Mexico would go up as a result of more trade with capital-abundant high-wage countries such as the US (and the opposite would take place abroad), this is by no means certain.

Level of development

There is a huge difference in the level of development among the so-called developing countries. For example, a developing country such as Mexico may import labour-intensive products from an even lower wage country such as China, Vietnam or Bangladesh. In that case, the wages in Mexico would go down as a result of globalisation.

Further, to meet international product standards, some firms even in labour-abundant developing countries may switch to more machine- and technology-intensive methods of production which may increase the demand for more skilled labour at the expense of the less skilled.

As a consequence, the wages and employment of the poor unskilled workers may suffer. The increasing competition from lower wage, less unionised foreign workers has weakened the power of trade unions in many countries which may further hurt the poor wage workers.

The ways in which the agenda of globalisation has been pushed in developing countries by international agencies such as IMF and World Bank may have hurt the poor.

For example, the expenditure cuts to reduce fiscal deficits (as part of the so-called IMF macro-stabilisation program) has fallen more on the subsidies (like food) for the poor than for the rich (like petrol and higher education).

More generally, the power of the multi-national corporations (MNCs), international institutions and foreign governments may tilt domestic policies more in favour of the rich and powerful and against the poor — especially in small and weak states. This is because all countries are in fierce competition to attract investment from all over the world.

More opportunities

The bottomline is: Globalisation is not necessarily the enemy of the poor. It opens up opportunities for everybody. But if the poor has to benefit, a host of pro-poor initiatives in the domestic policy sphere — expansion of credit and marketing facilities, land reforms, public works programmes, social security, provision of basic education, health and sanitation, guaranteed access to food at affordable prices to the poor — needs to accompany globalisation.

Basically, the poor are poor for two reasons. They have little marketable assets including skills. This is the problem of the lack of endowment. But even when they may have some marketable goods or skills, they may be so far away from the market that they are not able to sell at sufficiently remunerative prices. This is the problem of connectivity.

Globalisation, by itself, is not going to solve these problems. However, if domestic policies help the poor to overcome both the endowment and the connectivity problems (by, say, providing better education, finance, roads and communication facilities in the rural areas), then these people can make use of much larger global market opportunities. But, at the same time, they would face stiffer global competition.

So, even with the right kind of domestic policy reforms, some of the poor people — depending on their specific occupations (say, textiles versus handicrafts) and countries of residence (say, Vietnam versus Mexico) — would benefit while others may lose as they become exposed to more global opportunities as well as competition.

(The author, a former Professor of Economics at IIM Calcutta, is currently a Visiting Professor at University of Pittsburgh, US. He can be reached at alokray15@yahoo.com)