This series of World Bank Briefing Papers looks at how to define globalization and then assesses three leading questions about globalization by looking at the evidence from a large number of countries. 1. Is globalization increasing world poverty? 2. Is it worsening world inequality, perhaps by destroying jobs and lowering wages among the poor and unskilled? 3. Is it causing deterioration in environmental standards? Globalization is one of the most charged issues of the day. It is everywhere in public discourse – in TV sound bites and slogans on placards, in web-sites and learned journals, in parliaments, corporate boardrooms and labor meeting halls. Extreme opponents charge it with impoverishing the world's poor, enriching the rich and devastating the environment, while fervent supporters see it as a high-speed elevator to universal peace and prosperity. What is one to think? Progress on poverty reduction over the last decade was troublingly slow. The number of people living on US$1 a day or less fell slightly from about 1.3 billion in 1990 to 1.2 billion in 1998. (We concentrate on the income dimension of poverty.) Because the population of developing countries rose over this period, the proportion of the population living in poverty – the poverty rate – fell a little more quickly, from 29 percent to 24 percent. The trends for people living on less than US$2 a day were similar: absolute numbers rose slightly from 2.7 to 2.8 billion between 1990 and 1998, while the poverty rate fell from 62 to 56 percent. Poverty reduction performance was also extremely uneven. Poverty fell by most in East Asia, whose 1.8 billion people represent over a third of the population of developing countries. Here the poverty rate was almost halved, while the number of people earning US$1 a day or less was reduced by some 174 million, the largest and most rapid reduction in poverty in history. Though much of the reduction in poverty occurred in China, most countries in the region shared in the steep fall. Poverty rose in 1998 in the countries hit by financial crisis, but by less than had been initially feared. An unexpectedly strong rebound in growth in the region in 1999, raised hopes that poverty in East Asia would resume its historical decline. Poverty outcomes were much less cheering in other developing regions. Total numbers under US$1 a day increased in all other regions. South Asia, which contains over a quarter of the developing world's population, did experience a modest 4 percentage point decline in poverty rates. Poverty rates were broadly flat in Latin America, Sub-Saharan Africa, and the Middle East and North Africa. Both poverty numbers and poverty rates increased sharply in the Europe and Central Asia region, in particular among the countries making a difficult transition from socialism to a market economy. Why were there such large differences in poverty reduction around the developing world – and what do these differences have to do with globalization? Part of the answer to the first question is poverty is significantly affected by economic growth, the pace of increase in the total output of goods and services in the society. Poverty fell most in East Asia, the fastest growing region. It rose most in the Former Soviet Union, where per-capita income fell the most. A recent World Bank study of a large sample of countries estimates that on average growth in the income of the poor (defined as the bottom fifth of the population) rises about one-for-one with the growth rate of overall per-capita income in a country. (Dollar and Kraay, 2000) More open trade raises per capita incomes – and the incomes of the poor. There is a growing consensus in empirical studies that greater openness to international trade has a positive effect on country per-capita income. A recent study by Frankel and Romer (1999) estimates that increasing the ratio of trade to GDP by one percentage point raises per-capita income by between one-half and two percent. Numbers of other studies reach similar conclusions, though the estimated size and statistical significance of the effects vary. (See for example, Edwards (1998) or, for a more skeptical assessment, Rodrik (1999).) These results are consistent with economic theories about the effects of international trade going back at least 200 years. The oldest and most widely agreed is that trade lets an economy make better use of its resources, by allowing imports of goods and services at a lower cost than they could be produced at home. In particular trade enables developing countries to import capital equipment and intermediate inputs that are critical to long run growth, but which would be expensive or impossible to produce domestically. From this perspective exports are the price the economy pays to get access to these valuable imports. Other possible benefits include more intense competition, which obliges local firms to operate more efficiently than under protection, and greater awareness of new foreign ideas and technologies. What of the impact of freer trade on the incomes of the poor? As noted above, recent work suggests that higher average incomes in a country are generally associated one-for-one with higher incomes of the poor. The same work finds that this link applies to income increases caused by more trade: in other words, the impact of trade on the income of the poor is generally the same as that on per-capita incomes. Thus, for example, a 10 percent increase in the trade to GDP ratio could ultimately raise per-capita income by 5 percent (cautiously taking the lower bound of the estimates by Frankel and Romer), and one would in general also expect a 5 percent rise in the income of the poor. Trade liberalization 'works' by encouraging a shift of labor and capital from import-competing industries to expanding, newly competitive export industries. The unemployment caused by trade opening is therefore expected to be temporary, being offset by job creation in other sectors of the economy. The loss of output due to this transitional unemployment (called the social adjustment cost of trade opening) is also usually expected to be small relative to long run gains in national income due to opening. Or, put another way, these adjustment costs are expected to be small compared to the costs of continued economic stagnation and isolation without opening up. Though researchers differ about how far they attribute changes in demand for different groups of workers to international factors, most agree that restricting foreign trade and investment would be a very costly means of assisting affected workers. More direct forms of assistance that help workers adapt to new forms of work and acquire new skills are preferable. Facilitating this transition requires lifelong access to education, training and retraining for all workers. Safety nets based on cushioning workers during temporary periods of unemployment and a return to the same job are becoming increasingly outdated. Instead, workers need to be empowered to adapt to constant economic change, to succeed in multiple career paths and to choose periods of self employment. The development of efficient capital markets allows individual workers to build financial assets and independence, facilitating the movement between jobs and protecting incomes in times of crisis. Similarly, portable pensions, healthcare and other services will increasingly become part of the worker protection structure. Finally, policymakers need to foster productivity growth as this is the key driving force behind rising wages. Suitable policies include investment in research and development, efficient capital markets (particularly for venture capital) and high levels of education and training. Has globalization increased inequality between countries? The distribution of per-capita income between countries has become more unequal in recent decades. For example, in 1960 the average per-capita GDP in the richest 20 countries in the world was 15 times that of the poorest 20. Today this gap has widened to 30 times, since rich countries have on average grown faster than poor ones. Indeed, per capita incomes in the poorest 20 countries have hardly changed since 1960, and have fallen in several. But greater openness to trade is unlikely to explain why poor countries on average grew less quickly than rich ones, since, as noted above, openness fosters higher not lower incomes. On the contrary there is some evidence (Ades and Glaeser, 1999) that greater trade openness has tended to reduce inequality between countries. While rich countries have on average grown faster than poor ones, poor countries that are open to trade have grown slightly faster than rich ones, and a lot faster than poor, closed countries. If globalization promotes growth, won't that mean more environmental degradation? Some critics argue that since increased trade and foreign direct investment stimulate higher growth in developing countries, this must lead to more industrial pollution and environmental degradation. Some pollutants such as acid emissions or particulate matter are empirically observed to have an 'inverted U curve' relation with income: pollution first rises as countries advance from low to middle level incomes, before falling again as countries attain high incomes. Is pollution an inevitable price for economic development? It seems there is no hard and fast rule that a certain level of development will be associated with a certain level of pollution. Much depends on the environmental policies countries pursue. Indeed, many developing countries appear to have found that the benefits of pollution control outweigh the costs and are adopting innovative, low-cost strategies to limit pollution while also expanding economic growth. For example, new pilot projects based on public disclosure of information about factory pollution have had significant success in reducing pollution in Indonesia and the Philippines. Moreover, openness to trade and investment can provide developing countries with both the incentive to adopt, and the access to, new technologies, which may provide a cleaner or greener way of producing the good concerned. For example, much foreign investment is for export markets. The quality requirements in those markets encourage use of the latest technology, which is typically cleaner than old technologies. A World Bank study of steel production in 50 countries found that open economies led closed economies in the adoption of cleaner technologies by wide margins, resulting in the open economies being 17 percent less pollution-intensive in this sector than closed economies (Wheeler, Huq and Martin 1993). Will competition for investment cause developing countries to become 'pollution havens'? Another concern relates less to environmental outcomes and more to environmental regulation. It is argued that increased international competition for investment will cause countries to lower environmental regulations (or to retain poor ones), a "race to the bottom" in environmental standards as countries fight to attract foreign capital and keep domestic investment at home. However there is no evidence that the cost of environmental protection has ever been the determining factor in foreign investment decisions. Factors such as labor and raw material costs, transparent regulation and protection of property rights are likely to be much more important, even for polluting industries. In East Asia in the 1970s, for example,. the fast growing "Tigers" (Korea, Taiwan (China), Singapore and Hong Kong) began to export more of certain highly polluting sectors, while Japan began to reduce its exports in these sectors. However, this trend diminished in the 1980s, and a stable pattern emerged with the Tigers importing somewhat more than they export in the highly-polluting sectors. A similar pattern occurred in trade of polluting sector products between North America and Latin America. In China the share of the five dirtiest industries in total industrial output has fallen, while imports of pollution intensive products have actually increased. (World Bank, 1997). Countries do not become permanent pollution havens because along with increases in income come increased demands for environmental quality and a better institutional capacity to supply environmental regulation. One World Bank study of 145 countries identified a strong positive correlation between income levels and the strictness of environmental regulation (Figure 7. Dasgupta, Mody, Roy and Wheeler, 1995). Indeed the so-called "California Effect" in the US demonstrates that there is nothing inevitable about a 'race to the bottom.' After the passage of the US 1970 Clean Air Act Amendments, California repeatedly adopted stricter emissions standards than other US states. Instead of a flight of investment and jobs from California, however, other states began adopting similar, tougher emissions standards. A self-reinforcing "race to the top" was thus put in place in which California helped lift standards throughout the US. Vogel (1995) attributes this largely to the "lure of green markets" - car manufacturers were willing to meet California's higher standards to avoid losing such a large market and once they had met the standard in one state, they could easily meet it in every state. |
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