October 2001
Globalization, Trade, & the Poor
by Fred McMahon
The summer is over. It’s time to get back to work. For the anti-globalization crowd, that means planning the new marching season, which is to culminate this year in Canada with the G-8 summit in Kananaskis, Alberta—that is, if they can get there.
Regardless, there will be lots of excuses for protests elsewhere. The protesters will march, throw rocks, vandalize cars and shops, shout obscenities, and all the rest for the sake of the world’s poor. As Lori Wallach, organizer of the Seattle protest—the great-grand-daddy of the anti-global protests—said, "Wages in many countries have declined, and wage inequality has increased both within and between countries."
The anti-globalization movement has been built on these beliefs —that globalization is increasing poverty and inequity. Yet save for one exception, there is no empirical evidence that these beliefs are correct, and a great deal of evidence that they are simply wrong. And that evidence keeps on growing, as a recent study by David Dollar and Aart Kraay of the World Bank reveals.
Yet, as mentioned, Wallach is right about one thing. It is true that over the last 40 years, the poorest fifth of nations has grown poorer in relation to the rest of the world. But these are the very nations that, by Wallach’s viewpoint, should be doing well; these nations reject international trade, keep their borders closed, and refuse market reforms. They include states such as North Korea and other, still socialist nations, primarily concentrated in central Asia and in Africa.
Nations that were once poor, but opened their borders to trade and adopted market reform — for example, South Korea and Taiwan — have emerged from national poverty. Anti-globalists, who complain about the poorest fifth, are actually highlighting the success of the global economy in improving the welfare of people in nations that have accepted trade and market reform. The anti-globalists are also underscoring the failure of their own economic prescription by pointing to the poverty of nations that have kept their borders closed.
To understand the bizarreness of the anti-globalization argument about the poorest fifth, think of it in medical terms. It’s like arguing a medicine is no good because those who refuse to take it keep getting sicker.
Nonetheless, two questions arise about those nations that have joined the global economy. Are they really gaining in wealth? And, if wealth is increasing, are the gains being equally shared?
The answer to the first question has been available for decades. Study after study has shown that market-oriented reforms—reducing government, opening to trade, promoting the rule of law as a limit on government power—are potent stimulants for growth (see, for example, Barro and Sala-i-Martin).
There’s a deeper message behind these reforms—they all promote economic freedom. When people can transact freely, the wealth of nations and individuals grows. The ground breaking World Economic Freedom Index, a joint project, headed by The Fraser Institute, of 55 think tanks around the world, has shown itself to be a powerful indicator not just of economic growth, but also of broad-based social improvements.
The best and most obvious example here is the differing economic evolution of North and South Korea, but it is also evident in less extreme examples. Thailand, where market reforms have been hesitant, may not have grown as quickly as South Korea, but it is miles ahead of next-door Laos, where market reforms have been rejected.
The relationship between market reforms, openness, and increased wealth hardly depends on anecdotal evidence. It shows up consistently and strongly in statistical testing across the broad array of nations.
What about inequality within growing nations? Many credible economists had speculated that inequality might well increase during growth. But until recently, little hard research had been undertaken. If the anti-globalization protests have had one beneficial result, it’s that they have focused attention on the question of income distribution in developing nations. The results of this research are now emerging.
Dollar and Kraay’s work adds another page to the research. Their paper focuses on the income of the poorest fifth in developing nations. They show that in reformed nations, the income of the poorest fifth grows at almost exactly the same rate as the growth of national income. In other words, they show that economic growth raises the income of poor and rich alike, but that it neither increases, nor decreases, inequality in income distribution; growth improves the welfare of all income groups.
This is consistent with earlier research which showed that economic growth boosted the incomes of the poor but that, in about half the nations, incomes of the poor grew somewhat more slowly than average incomes, while in the other half, the incomes of the poor grew faster than average income (Ravallion and Chen).
Evidence from the last era of globalization— roughly from the mid-nineteenth century to the opening years of the twentieth century—paints an even rosier picture. Poor nations that opened their borders to trade saw the incomes of their poorest members grow much faster than average income, and income inequality in those nations decreased (Williamson), which is exactly what economic theory would suggest.
When capital is scarce and labour plentiful— as it is in poor nations—capital, as the scarce resource, gains a relatively higher return than labour, benefiting the richest who hold capital and weakening the prospects of workers. When borders are opened to trade, new investment opportunities are created and the openness allows capital to flow in to take advantage of these opportunities. Capital becomes relatively more plentiful and labour relatively scarcer. Economic theory predicts the wages of the poor will increase, as it did in the last era of globalization.
In fact, Dollar and Kraay’s work contains tantalizing hints that this is happening now. Their statistical estimates suggest the income of the poor in growing, low-income nations may be increasing 7 to 19 percent faster than average income.
However, at this point, these statistics are more suggestive than conclusive. The good news is that market policies and economic growth boost the income of the poor. However, many would prefer that the poor gain even more from economic growth. So, Dollar and Kraay test a number of policies to see if they can isolate "super pro-poor" policies.
Here the results are somewhat surprising. Increased social spending, for instance, has no statistically significant impact on either growth or the income levels of the poorest fifth in society. The authors suggest that this may mean that social programs are badly targeted and tend to favour middle-income groups. Spending on primary education does boost growth, but has no impact on income distribution. Cutting back on government spending also boosts growth, but does not affect income inequality. All income levels equally share the gains from reduced government spending.
The only "super pro-poor policy" the research identified was anti-inflation policy. This, too, is expected. Poor workers see their incomes eroded during periods of high inflation while more affluent members of society are often able to protect their incomes against inflation, or even benefit from it.
The evidence continues to build that trade and economic growth benefit the poor who, in non-trading nations, have become further mired in poverty. As the new anti-globalization marching season approaches, we should understand that the anti-globalists—despite all their rhetoric—are actually protesting against policies that have been shown to benefit the poorest of the poor.
References
Barro, Robert, and Xavier Sala-i-Martin (1995). Economic Growth. New York: McGraw-Hill.
Dollar, David, and Aart Kraay (2001). "Growth is Good for the Poor." The World Bank: Washington, D.C.
Gwartney, James, and Robert Lawson (2001). Economic Freedom of the World: Annual Report 2001. Vancouver: The Fraser Institute.
Ravallion, Martin, and Shaohua Chen. (1997). "What Can New Survey Data Tell Us about Recent Changes in Distribution and Poverty?" The World Bank Economic Review, vol. 11, no. 2. Washington: The World Bank, May.
United Nations Secretariat (2000). Public Sector Indicators. New York: United Nations.
Williamson, Jeffrey (1997). "Globalization and Inequality: Past and Present." World Bank Research Observer, vol. 12, no. 2. Washington: The World Bank, August.
Fred McMahon (fredm@fraserinstitute.ca) is Director of the Social Affairs Centre at The Fraser Institute. Formerly with the Atlantic Institute for Market Studies, his most recent book is Retreat from Growth: Atlantic Canada and the Negative Sum Economy.
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