Global Trends: Economics:

Is Globalization Causing Increased Poverty and Income Inequality?

by Professor Ali M El-Agraa, PhD, DSc
Faculty of Commerce, Fukuoka University, Japan

I. Introduction

Globalization, the ongoing process of enhanced interdependence among nations and their citizens, is lively and intensively debated, often passionately, and at times violently. The debate is unstructured and many economists would question its relevance to their profession, but they cannot ignore it since it contains views and attitudes, which will color public policy, hence impact on future economic growth and everyone’s welfare.

Globalization is both intricate and multidimensional. Many of the problems attributed to it by its critics are real, but only some are economic, with the non-economic relating to no less important facets of life. Yet only a few of these problems stem from the process of global integration.

The economic dimension of globalization is reflected in:

1. the increasing amount of cross-border trade in goods and services (trade thrived prior to 1914, was set back by the two world wars and the Great Depression, but by 1973 world trade as a percentage of world income – GDP – was back to its 1913 level, and it has continued to grow almost yearly ever since);
2. the increasing volume of international financial flows (today, the gross volume of international capital flows exceeds the level reached in the period before 1913, although net flows of foreign direct investment – FDI – have not yet attained the extraordinary levels of the decade before World War I); and
3. the increasing labor mobility (a glance at only the legal immigration into the US is enough to show this).

The key economic issues in the debate are about whether:

1. poverty and inequality are increasing;
2. integration into the global economy is good for growth;
3. the international financial system is too crisis prone and capital flows need banning or regulating;
4. the global trading system is unfair and the aid flows inadequate; and
5. the IMF is doing the right thing.

There is also a host of other economic issues that feature in the debate and its consequences, such as whether globalization: results in unfair labor practices in the developing countries; damages the environment; allows multinational corporations to become too powerful to the detriment of both the citizens and governments of the developing countries; and gives rise to tax competition that undermines the capacity of governments to raise revenues, thus to provide the necessary services to their citizens. There are also the questions regarding whether intellectual-property protection is damaging the health of the citizens of the developing countries and the World Bank and World Trade Organization are doing the right thing. These are vital issues, some critical and some do not have simple answers, but they are being seriously analyzed by economists (see, inter alia, Bourguingnon et al., 2000; the world Bank, 2002a; and Bhagwati, 2002 on trade issues). However, space limitations bar me from considering all of them, so here I confine myself to only poverty and inequality.

 

II. Poverty

Adopting the World Bank’s measure of absolute poverty, defined as living on a real income of less than on $1 a day, it was believed that the proportion of people living in poverty worldwide has been declining, but that their absolute number has been increasing. There is no consistent fully reliable set of data reflecting longer-term developments in poverty, but one estimate (Bourguinon/Morrisson, 2002) shows global poverty to have declined from 55% in 1950 to 23.7% in 1992 and to have continued to decline ever since.

The data most often used in discussing recent developments come from the World Bank, but are based on national estimates of poverty rates, thus likely to be subject to significant error, as the recent debate over the Indian poverty data illustrates. Adjusting them to cater for inconsistencies (Fischer, 2003), recent data show the global poverty rate falling sharply from 29.6% in 1990 to 23.2% in 1999, with the absolute number of the poor declining by 123 million people, or 10%, during this period. The number of poor in China alone fell by 150 million, which may be surprising, but the data show that the major decline is accounted for by Asia, with the absolute number of poor in sub-Saharan Africa (and also in the transition economies) rising significantly.

China and India comprise 38% of the world’s population, and in 1990 they accounted for 60% of the world poor. It is therefore hardly surprising that the global poverty rate fell sharply in a decade in which China grew at more than 9% and India at 6%. It may be argued that what happened in China and India is atypical, but that would be true only if the unit were the country, not the individual. Moreover, there can be little doubt that in both countries the growth policy during the period was pro-globalization, pro-entry into the global economy.

Beyond the data on per capita income, most social indicators have also shown considerable improvement since the end of World War II. Adult literacy has risen in all regions of the world in the past 25 years, and infant mortality has declined significantly. Life expectancy has risen in most regions, but under the impact of the HIV/AIDS pandemic, it has begun to decline in sub-Saharan Africa, with particularly large and tragic impact in Botswana, Kenya, South Africa and Zimbabwe.

A ‘human development index’ (HDI) has been developed by the United Nations Development Program to capture these elements. (The Human Development Report). It is based on three equally weighted factors: life expectancy, education and (the logarithm of) a purchasing-power-parity estimate of per capita GDP. HDI reveals improvements in all regions over the past two decades. Note in particular that the HDI is inherently an index of relative performance, so that the improvements in all regions represent a convergence of this more general measure of economic and social progress across the regions.

In addition, (as the 2002 Human Development Report shows) democracy has been spreading, including in the developing world. By one classification, the number of authoritarian regimes declined from 67 to 26 between 1985 and 2000 (hardly surprising given the transition in the former soviet bloc and the changes in Latin America), while the number of nations categorized as ‘most democratic’ rose from 44 to 82 (United Nations Development Program, 2002, fig 1.1).

There is therefore considerable evidence that on average conditions have been improving in the developing countries. However, that does not mean that everyone in the developing countries is doing better. In particular, conditions in most sub-Saharan Africa, where per capita growth has been negative in nearly half the countries in the last quarter century, have been deteriorating, and Latin America has not done well in the last decade.

The discussion of trends in global poverty is a significant part of the globalization debate, but it does not directly address the globalization issue of whether these trends have been caused by increasing integration into the global economy. However, logic dictates that there is no way of lifting the populations of poor countries out of their poverty (say, on the scale that has been achieved in East Asia) without sustained growth. Globally, the decline in poverty has been fastest where economic growth has been fastest (in developing Asia) and slowest where growth performance has been worst (in Africa). Nor (despite the early results of Kuznets, 1966) does there appear to be any inevitable association between growth and inequality. Rather, it depends on the details of the policies, including distributional, that accompany the growth strategy. Using data from 92 countries, two related studies (Dollar and Kraay, 2001a,b) conclude that, on average, the income of the lowest fifth of the income distribution rises one-for-one with aggregate income, and that this relationship holds for growth that is induced by trade liberalization.

Note that to say that, on average, growth or opening to trade does not adversely affect the incomes of the poor is not to say that the impact of policy changes on income distribution should be ignored when any particular policy change is being considered. The opening of trade is designed to affect domestic relative prices and most likely will affect the distribution of income in each case. If these effects are judged to be adverse, transitional compensatory measures and gradual liberalization may help mitigate them (Scheve and Slaughter, 2001, pp 94-6). It is also the case that a small economy tends to be more vulnerable to fluctuations in the terms of trade when it is open than when it is closed, and that the poor may be the most vulnerable in this regard.

 

III. Inequality

Focus on inequality is needed not only because, for many, great inequality is undesirable per se, but also because growing inequality may have powerful political consequences. For instance, in the first era of globalization, changes in the income distribution that affected real wages and the returns to land and capital led to pressure to limit economic integration. That could happen again, as globalization creates losers as well as winners in the short run.

Inequality among national average incomes appears to have been increasing for at least four centuries, since before the rapid increase in economic integration that took place in the 19^th century. However, this long-term rise in inequality seems to have slowed down during the past two decades.

The convergence debate in macroeconomics was based on purchasing-power-parity estimates of national average incomes. It is well known that the raw data on country average incomes show divergence, not convergence. The early results (see, inter alia, Barro, 1997) supported conditional convergence. Provided the conditioning variables do not change in an offsetting direction, conditional convergence implies that the inequality among country average incomes would eventually decline, but that could take a very long time. The weight of the evidence appears now to have moved away from the initial conclusion of conditional convergence towards the twin-peaks view of a convergence club among the high-income OECD countries, while lower-income countries are converging to a lower income level (Quah, 1996).

Developments in inequality within countries may be politically more important than changes in inequality among countries. There was a rise in inequality in the US and UK from the start of the 1980s until well into the last decade. Inequality during that period did not increase markedly in continental Europe. One study (Katz and Autor, 1999) concludes that trade explains at most 20% of the rise in inequality in the US and that skill-biased technological changes explain 80% of the rise. There are also instances of increasing inequality within some poor countries, including China and India, even though incomes have increased at both the top and bottom of the scale. In the transition economies of the former Soviet bloc, inequality increased sharply in the 1990s.

Beyond the inequalities among national average incomes and within countries, stands the concept of the distribution of global income among all the world’s citizens, of which there are now several estimates (e.g. Bhalla, 2002, Bourguignon and Morrisson, 2002, Milanovic, 2002a and Sala-I-Martin, 2002a,b). These are all based on data on the distribution of income within nations and some method (typically using purchasing-power estimates) for comparing income levels across countries. They find that inequality has been declining among nations, which is not surprising, given the graphic representation of a population-weighted convergence diagram, in which the dominance of China and India drives the relationship. Some (Bourguignon and Morrisson) conclude that the inequality of global income worsened from the start of the 19^th century and until the end of World War II and after that seems to have stabilized or to have grown more slowly. However, another study (Milanovic, 2002a) finds that global income inequality increased between 1988 and 1993, yet another (Bhalla, 2002) that in 2002 it was at its lowest since the post-World War II period and a third (Sala-I-Martin, 2002a,b) finds massive decreases at the individual level between 1980 and 1998.

 

IV. Conclusion

Where does that leave us on poverty and inequality? Poverty rates have been declining, especially in Asia. So very likely has the absolute number of those living below $1 a day. Increasingly, global poverty is being concentrated in Africa. At the same time, poverty rates have not declined much in Latin America in recent decades. Taking account of other social indicators, as reflected in the HDI, presents a more encouraging picture of the changing fortunes of the poorest, but the HIV-AIDS epidemic is taking a sad toll on longevity in Africa. Be that as it may, even where poverty has increased, it should be obvious from what has been stated that there is no basis for the allegation that globalization has been the culprit.

Income distribution developments are more mixed. There has been a growing divergence among national average incomes. Inequality has risen within many countries, but it is likely that it declined among the world’s citizens during the last decades of the 20^th century. However, we should not take too much comfort from that because unless Africa starts growing in the near future, income inequalities will start rising again (Sala-i-Martin, 2002a,b). Again, however, there is no basis for saying that increased inequality has been caused by globalization.

References

Bhagwati, Jagdish (2002), Free Trade, Princeton University Press.

Bhalla, Surjit (2002), Imagine There is No Country, Institute for International Economics, Washington DC.

Barrow, Robert J. (1997), Determinants of Economic Growth: A Cross-country Empirical Study, MIT Press, Cambridge MA.

Bourguignon, François and Morrison, Christian (2002) 'Inequality among world citizens: 1820-1992', American Economic Review, vol. 92(4), pp. 727-44.

Bourguignon, François et al. (2002) 'Making sense of globalization: a guide to the economic issues', Policy Paper No. 8, Center for Economic Policy Research, London, UK.

Dollar, David and Kraay, Aart (2001a) 'Growth is good for the poor', unpublished manuscript, The World Bank, Washington DC.

Dollar, David and Kraay, Aart (2001b) 'Trade, growth and poverty', unpublished manuscript, The World Bank, Washington DC.

Fischer, Stanley (2003) 'Globalization and its challenges', American Economic Review, vol. 93(2), pp. 1-30.

Katz, Lawrence F. and Autor, David H. (1999) 'Changes in the wage structure and earnings inequality', in Orley Ashtenfelter and David Card (eds), Handbook of Labor Economics, Vol. 3A, North-Holland, Amsterdam.

Kuznets, Simon (1966), Modern Economic Growth, Yale University Press.

Milanovic, Branko (2002a) 'True world income distribution, 1988 and 1993: first calculation based on household surveys alone', Economic Journal, 112(476), pp. 51-92.

Milanovic, Branko (2002b) 'The two faces of globalization: against globalization as we know it', unpublished manuscript (second draft), The World Bank, Washington DC, May.

Quah, Danny T. (1998) 'Twin peaks: growth and convergence in models of distribution dynamics', Economic Journal, 106(437), pp. 1045-55.

Sala-I-Martin, Xavier (2002a) 'The disturbing "Rise" of global income inequality', Working Paper No. 8904, National Bureau of Economic Research, Cambridge MA, April.

Sala-I-Martin, Xavier (2002b) 'The world distribution of income', Working Paper No. 8933, National Bureau of Economic Research, Cambridge MA, May.

Scheve, Kenneth and Slaughter, Matthew (2001), Globalization and the Perceptions of American Workers, Institute for International Economics, Washington DC.

United Nations Development Program (various years), Human Development Report, New York, Oxford University Press.

The World Bank (2002a), Globalization, Growth, and Poverty, World Bank Policy Research Report, Washington DC.

The World Bank (2002a), A Case for Aid, Washington DC.

The World Bank (various years), World Development Report, New York, Oxford University Press.

 

BWW Society member Ali M. El-Agraa is a Professor of International Economics at Fukuoka University's Department of International Trade. His education includes the Sudan School Certificate, Division One, awarded by the University of Cambridge (UK), B.Sc. (Econ.) Honours, Upper Second, Khartoum University (Sudan), externally examined by UK universities, M.A. (Economics), Distinction, the University of Leeds (UK), Doctor of Philosophy, awarded by the University of Leeds (UK) for “Theoretical and Policy Aspects of Protection and International Economic Cooperation”, a thesis based on a selection of works published while employed by the University of Leeds, and a Higher Doctorate (Ronbun Hakase), Kyushu University (Japan) for “Regional Integration: Experience, Theory and Measurement” (London: Macmillan; New York: Barnes and Noble). His academic career includes service as a Professor of “International Economic Integration” and “EU Studies” at the undergraduate level, and of “International Economics” and “Japan’s Trade Relations” at the Graduate School (1999-present); 1988-99 Professor of “European and American Economies” at the undergraduate level, and of “International Economics” and “Japan’s Trade Relations” at the Graduate School, 1997-98; Visiting Professor of Economics, Vanderbilt University, Nashville, TN (USA), 1984-86; Visiting Professor of International Economics and Middle Eastern Studies, International University of Japan (Japan), 1985, February/March; Visiting Professor of EC Studies, Fudan University, Shanghai (People’s Republic of China), 1981; promoted to Senior Lecturer, University of Leeds (UK), 1971-81; Lecturer in Economics, University of Leeds (UK), 1980-81; Visiting Lecturer in EC Economics, University of York (UK), 1967-72; Lecturer in Economics, University of Khartoum (Sudan), 1964-67; Senior Scholar (Assistant Lecturer) in Economics, University of Khartoum (Sudan). Professor El-Agraa also served as a consultant in the following capacities: General Consultative Advisor to the Anglo-Japanese Economic Institute, London, from 1996 and until the Institutes’ discontinuation in 2002 and Senior International Consultant to the United Nations’ Economic Commission for Africa (UNECA), summer of 2001. His administration experience includes Head, office of The University Adviser to Overseas Students, the University of Leeds (1979-82), a half-time secondment from the School of Economic Studies of the same University; Invited Member of Senate, the University of Leeds (1979-82); Elected Member of Council, the University of Leeds (1980-84); Member of the Senate Sub-Committee on Scholarships and Studentships, the University of Leeds (1977-82); Member of the Senate Sub-Committee on Scholarships and Studentships’ Travel Bursaries Group, the University of Leeds (1978-82); Member of the Senate Sub-Committee on Teaching Research, the University of Leeds (1972-80); Member of the Joint Committee of Senate and Council on Overseas Students, the University of Leeds (1979-1987); Member of the Library Periodicals Sub-Committee, the University of Leeds (1983-8); Elected Member of Senate, the University of Leeds (1983-86); Elected Member of Council, the University of Leeds (1987-90); Founder Chairperson, IUJ Debating Society, International University of Japan (1986-86); In the School of Business and Economic Studies, the University of Leeds: (a) Chairman, Periodicals Sub-Committee (1974-79); (b) Member of the Executive (1978-81); (c) School Representative on the Senate Sub-Committee on Teaching Research (1974-84); (d) School Representative for the Freshers’ Conference (1971-78); (e) School Open Day Organizer (1980-83); and School Staff CV Entries. At Fukuoka University, he was a member of several committees including Future Planning Committee of the Faculty of Commerce, and is involved in various capacities. He is also the winner of two First Prizes for his performance in two subjects in the Sudan School Certificate, awarded by the University of Cambridge (UK), 1959. In 1990 he was awarded a “Lifetime Professorship” by Wuhan University (People’s Republic of China).