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Does Globalization Help or Hurt the World’s Poor

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1Does Globalization Help or Hurt the World’s Poor?ByPranab Bardhan Globalization and the attendant concerns for poverty and inequality have captured publicimagination and become a focus of international discussion in recent years in a way fewother topics (except for international terrorism or global warming) have. The eventsaround the theme often have their own drama and also a touch of irony. Just to take anexample from two reports in the newspaper on the same day (The New York Times,January 30) at the beginning of 2005: at the fifth annual World Social Forum at PortoAlegre, Brazil---held as a counterfoil to the gathering of the capitalist globalistas at theWorld Economic Forum at Davos, Switzerland---the Brazilian President Lula da Silva,the hero of the working class, was booed for ‘selling out’ to global capital; shortlythereafter he flew to the Forum at Davos, where around the same time a Hollywoodactress, Sharon Stone, deployed her star power in a highly globalized business to rallyattending corporate magnates at a poverty seminar to pledge just in five minutes $1million to fight malaria in Tanzania.Most people I know have a strong opinion on globalization and all of themare concerned with the well-being of the world’s poor. The strength of conviction is oftenin inverse proportion to the amount of robust factual evidence they have. I have alsonoted that the confidence with which officials of international financial institutions andopinion-makers in influential newspapers and magazines assert their belief in the value ofglobal free markets in expanding the horizons for the poor is only matched by thepassionate intensity with which activist-protesters hold their opposite belief. Of course, asis common in contentious public debates, different people mean different things byglobalization. Some interpret it to mean the global reach of new technology (particularly2in information and communications) and capital movements, some refer to outsourcingby domestic companies in rich countries, others protest against the tentacles of corporatecapitalism or US hegemony. So it is better to be clear at the outset that in this article Ishall primarily refer to economic globalization in the sense of expansion of foreign tradeand investment, and analyze how this affects the wages, incomes and access to resourcesfor the poorest people in the world (they live mostly in the developing countries inAfrica, Asia and Latin America). These countries, for the quarter century after the WorldWar II, mostly adopted more or less autarchic policies that largely blocked the forces ofglobalization in our sense. In the last quarter century, however, unilaterally as well asunder multilateral auspices, most of these countries have opened up. Taking the examplesof the two largest countries of the world, both of which were pretty much insulated up tothe middle 70’s or so, trade in goods and services as a share of GDP (gross domesticproduct) rose from 23 to 46 per cent in China between 1980 and 2000, and it rose from19 to 30 per cent in India in the same period. In general I intend to show thatglobalization can cause many hardships for the poor in these countries but it also opensup opportunities which some countries can utilize and others do not, largely depending ontheir domestic political and economic institutions, and the net outcome is often quitecomplex and almost always context-dependent, belying the glib pronouncements for oragainst globalization made in the opposing camps. Mainstream economists are lessdivided on the issues, compared to the rest of the scholarly community and the generalpublic, since the majority of the former believe in the validity of the theory ofcomparative advantage and gains from trade which has underpinned internationaleconomics for the last 200 years, since classical economists like Adam Smith and DavidRicardo wrote on the subject. But even among economists there are serious differences ofopinion on the relative value of those gains from trade and the importance of socialprotection for the poor. Free-trader economists believe that the gains from the rising tideof international specialization and investment has the potential of lifting all boats(including those of the poor) in the long run. Others point out that in the absence of thecapacity of many poor people to adjust, retool and relocate with changing marketconditions, at least in the short run some redistributive policies are necessary, so that thewinners from the policy of opening the economy actually share their gains with the3losers. Much of the theory of comparative advantage is about the long run when peopleand resources are assumed to be fully mobile between activities, whereas much of thepain of adjustments is in the short run.I should also make clear that by international investment I shall refer tolong-term movements of capital (invested largely in durable plant and equipment andtechnology), not to the speculative short-term capital (invested in shares, bonds, currency,hedging instruments, etc.) that, often at the click of a mouse, stampedes around the globein herd-like movements, sometimes causing massive damage to the lives of poor peoplein fragile economies. For example, the speculative attack against the Thai currency bahtin 1997 led to events as a result of which the percentage of poor people in rural Thailandjumped about 50 per cent in just one year. In Indonesia, in the first year of the Asianfinancial crisis, real wage in manufacturing dropped 44 per cent. Many economists (eventhose who otherwise support free trade) now believe in the need for some form of controlover short-term capital flows, particularly if domestic financial institutions and bankingstandards are weak, though there are differences on the specific form such control shouldtake and on the assessment of the effects of the rise in the cost of capital this may entail.It is widely believed that China, India, and Malaysia largely escaped the severe impact ofthe Asian financial crisis because of their stringent controls on capital flights. I shall alsodesist from discussing globalization in the form of international labor flows or moreemigration of workers from poor to rich countries. If larger numbers of unskilled


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