Extending the Benefits of Globalization to the Poor

Consider the impact of globalization on the lives of a Chinese migrant factory worker and a Mexican maize farmer. For the Chinese factory worker, instead of trudging the fields and praying for good weather, he now has the choice of more stable sources of income in a factory due to China’s export-driven growth. On the downside, however, rural-urban migration adds pressure on pre-existing infrastructure in cities, draining public service providers and causing over-crowdedness. For the Mexican farmer, the impacts of the North American Free Trade Agreement (NAFTA) are deeply felt. While liberalized trade has brought a wider variety of cheap imports, such benefits have not compensated the nearly 50 percent drop in maize prices and the close to 50 percent loss of rural employment. In both cases, there are gains and losses to globalization; these effects are specific to countries and regions, and differ across various economic activities.

The Problem of Inequality

Although global trade and capital flows have uplifted some large developing economies, notably BRICs – Brazil, Russia, India, and China – many countries remain poor. While the aggregate number of people living under absolute poverty declined by 501 million from 1980 to 2005, Sub-Saharan Africa (SSA) saw this measure doubled. The flow of foreign direct investment (FDI), a measure for infrastructural development, was also uneven during this period. In fact, although Asia earned a lion’s share of FDI to developing countries, Latin America and the Caribbean (LAC) saw their share declined from 67 to 25 percent. The 2006 Carnegie-sponsored study, Winners and Losers, characterize the benefits of globalization as unequal. Liberalized manufacturing trade would most raise income of China, but lower that of SSA; agricultural trade liberalization would primarily benefit existing advanced exporters but open few doors for new ones. These observations suggest a missing link in today’s globalization policies which assume that globalization alone can be the panacea to poverty. Instead, empirical evidence suggests that complementary policies are necessary to address the problems of low productivity and the lack of diversification to market-oriented exports among low-income countries. Otherwise, these countries will not reap benefits from globalization.

Productivity Gap

The outcomes of the recent rounds of globalization – intensified competition from import and reduced preferential market access – call for urgent productivity growth in developing countries. However, according to the World Bank’s World Development Indicators and Globalization for Development report, from 1980 to 2004 only East and South Asia experienced significant growth of productivity, measured as real output per unit labor, at an average rate of 6 and 3.4 percent. LAC and SSA suffered from negative productivity growth of 0.5 and 0.4 percent. Despite the rise of global capital flows, SSA has received practically no FDI except in extractive sectors such as petroleum and mining. With low savings, domestic investment growth in SSA and LAC has also been weak, at just 1.37 and 2 percent annually, compared to 9.2 percent in East Asia.

Further, the productivity gap in agriculture is especially wide. In Europe, productivity of rural labor has grown 4.6 percent annually; SSA countries, however, recorded close to zero growth in this area. Further, in a report by the Working Group on Development and Environment in the Americas, soy bean farmers in Bolivia were found to have lost 50 percent of purchasing power between 1985 and 1995 because their productivity failed to catch up with lowered sale prices. Investment in these poorly equipped producers will be necessary to introduce more productive practices and inputs.

Constraints to Market-Oriented Diversification

Globalization also leads to unequal gains due to a country’s inability to diversify into higher-return products for new potential buyers. A World Bank study, Globalization and Complementary Policies, for instance, indicates that Zambian subsistence farmers could benefit from market-oriented agriculture. The income gains from planting and selling cash crops such as cotton and hybrid maize could range from 20 to 130 percent of a rural household’s expenditure. Such unrealized gains remind policy-makers that globalization does not automatically create market access. Instead, the provision of extension services, irrigation, infrastructure, and credit access can reduce the transaction cost in marketing products and to expand farmers’ capacity to purchase modern farm inputs.

Further needs for diversification can be found in another World Bank study, The Role of Services in Rural Income, where regression analysis suggests rural Vietnamese households with access to electricity, high quality roads, daily markets and technical service agencies have enjoyed positive income growth. In these cases, the potential benefits of globalization can only be realized when open markets are complemented with targeted investments in appropriate infrastructure.

Recommendations

(1) Reevalute Policy Priorities. The experiences of SSA and LAC countries in the past decade of globalization call for international organizations, as well as developed and developing countries, to reevaluate their policy priorities. The World Bank, for instance, reduced development assistance in agriculture from 33 to just eight percent between 1981 and 2001. Developed countries and private businesses, viewing agricultural development as unattractive, also led the decline in investments in poor rural areas. This trend needs to be reversed and new investment opportunities in transport and storage infrastructure, microfinance alternatives, mobile banking, and value-adding industries should be explored.

(2) Flexibility for Low-Income Countries. Future trade negotiations should take into account the concerns and needs of the net losers to globalization. In at least the short and medium run, low-income countries would need policy space to mitigate the negative impacts of global competition. Bearing in mind that there is no panacea to alleviate poverty, least developed countries should be allowed to have a more flexible phase-out schedule for their trade protection instruments. This transition period would provide time for productivity growth and infrastructural development which allow infant industries and the agricultural sector to compete in international markets.

(3) Domestic Investment. Developing countries should strive to put in place the appropriate policies and institutions to meet the logistical, infrastructural and educational needs required for poor households to exploit new markets.

The key for the next rounds of globalization will be to look beyond current liberalization policies and to tackle the root causes of poverty. The obstacles to full participation in globalization, low productivity and lack of diversification, are apparent – it is now up to the international community to approach globalization and poverty with more holistic development policies.


Further Reading

Mamerto Perez, Sergio Schlesinger, and Timothy A. Wise. The Promise and the Perils of Agricultural Trade Liberalization: Lessons from Latin America. Working Group on Development and Environment in the Americas. June 2008.

Sandra Polaski. Winners and Losers: Impact of the Doha Round on Developing Countries. Carnegie Endowment for International Peace. 2006.

The Persistent Problem: Inequality, Difference and the Challenge of Development. Task Force on Difference, Inequality, and Developing Societies. American Political Science Association. July 2008.

Ian Goldin, and Kenneth Reinert. Globalization for Development: Trade, Finance, Aid, Migration, and Policy. World Bank. 2006

Jorge Balat, and Guido Porto. Globalization and Complementary Policies: Poverty Impacts in Rural Zambia National Bureau of Economic Research. March 2005.

Ataman Aksoy, and Aylin Isik-Dikmelik. The Role of Services in Rural Income: The Case of Vietnam. World Bank. March 2007.