If the poor could survive on arguments about the level of poverty there would be no poverty
Foreign Affairs magazine has recently run a biggish story by David Dollar and Aart Kraay arguing that globalisation has reduced poverty within and between countries. Unfortunately it isn't available in full online, but they do provide this 500 word summary:
David Dollar and Aart Kraay are economists at the World Bank's Development Research Group. The views expressed here are their own.
A RISING TIDE
One of the main claims of the antiglobalization movement is that globalization is widening the gap between the haves and the have-nots. It benefits the rich and does little for the poor, perhaps even making their lot harder. As union leader Jay Mazur put it in these pages, "globalization has dramatically increased inequality between and within nations" ("Labor's New Internationalism," January/February 2000). The problem with this new conventional wisdom is that the best evidence available shows the exact opposite to be true. So far, the current wave of globalization, which started around 1980, has actually promoted economic equality and reduced poverty.
Global economic integration has complex effects on income, culture, society, and the environment. But in the debate over globalization's merits, its impact on poverty is particularly important. If international trade and investment primarily benefit the rich, many people will feel that restricting trade to protect jobs, culture, or the environment is worth the costs. But if restricting trade imposes further hardship on poor people in the developing world, many of the same people will think otherwise.
Three facts bear on this question. First, a long-term global trend toward greater inequality prevailed for at least 200 years; it peaked around 1975. But since then, it has stabilized and possibly even reversed. The chief reason for the change has been the accelerated growth of two large and initially poor countries: China and India.
Second, a strong correlation links increased participation in international trade and investment on the one hand and faster growth on the other. The developing world can be divided into a "globalizing" group of countries that have seen rapid increases in trade and foreign investment over the last two decades -- well above the rates for rich countries -- and a "nonglobalizing" group that trades even less of its income today than it did 20 years ago. The aggregate annual per capita growth rate of the globalizing group accelerated steadily from one percent in the 1960s to five percent in the 1990s. During that latter decade, in contrast, rich countries grew at two percent and nonglobalizers at only one percent. Economists are cautious about drawing conclusions concerning causality, but they largely agree that openness to foreign trade and investment (along with complementary reforms) explains the faster growth of the globalizers.
Third, and contrary to popular perception, globalization has not resulted in higher inequality within economies. Inequality has indeed gone up in some countries (such as China) and down in others (such as the Philippines). But those changes are not systematically linked to globalization measures such as trade and investment flows, tariff rates, and the presence of capital controls. Instead, shifts in inequality stem more from domestic education, taxes, and social policies. In general, higher growth rates in globalizing developing countries have translated into higher incomes for the poor. Even with its increased inequality, for example, China has seen the most spectacular . .
Even though this is all you get online, they do at least publish
three responses in full, and then a response to the responses by the original authors, also in full.
The responses are interesting, but the whole argument about levels of poverty within and between countries--which I think is central to any discussion of 'globalisation'--is incredibly confused and difficult to get to the bottom of.
One of the respondents,
James Galbraith, says this:
In "Spreading the Wealth" (January/ February 2002), David Dollar and Aart Kraay make the provocative claim that global inequality has declined since 1975, mainly due to rapid growth in India and China, and that "globalizing" countries have performed far better in per capita growth than "nonglobalizers."
It is extraordinary that India, China, and Vietnam should be offered as three of the five major examples of globalizing success stories. India's relative success began in the 1980s, partly because strict capital controls and long-term official development assistance helped protect it from the debt crisis that occurred in Latin America and elsewhere. China grew at first on the strength of agricultural reform and then through a program of industrialization financed mainly by internal savings; it has to this day not liberalized its capital account. Vietnam and China remain under the control of their communist parties; these are not "Washington consensus" countries by any means.
This is a point that needs to be made, illustrating as it does the bogusness of the term 'globalisation'. What do they mean by it? Galbraith too, is less than clear in his use of the term and seems to be implying that it means something along the lines of 'neo-liberal' reforms, including privatisation, deregulation, labor market 'flexibility' as well as an increase in international trade. But Kraay and Dollar (K&D) seem to mean something closer to just 'more international trade'.
They write in their
response:
Our point is simply that countries that have become more globalized, in the sense of becoming more open to trade and direct foreign investment, have grown faster.
Both sides need to be clearer on this, though it isn't really the main point. We still don't know if poverty went up or down or stayed the same. In fact, the term 'poverty' is also a problem:
One of the other respondents,
Andrew Wells-Dang, writes:
David Dollar and Aart Kraay's claim that "globalization ... has actually promoted economic equality and reduced poverty" is based on a selective use of data and dubious assumptions about causality. Indeed, their evidence remains far short of convincing.
To defend their views, Dollar and Kraay play fast and loose with the economics of inequality. The "mean log deviation" measure they use to claim a global reduction in inequality since 1975 is not a particularly good indicator. All it measures is the relative difference in distribution among the rich compared to the poor. To take an extreme example, a society with half of its members earning $50,000 and half earning $500 would have a mean log deviation of zero. Surely this is not what Dollar and Kraay mean by perfect equality.
K&D counter at least part of this effectively:
Wells-Dang is...incorrect to suggest that a country in which half the population earns $50,000 and the other half earns $500 would show zero inequality according to the mean log deviation measure of inequality we use. The correct figure is 1.6, which is roughly twice as high as the global inequality we measure.
But it doesn't answer the question fully, as K&D seem to think. Wells-Dang also points out:
[K&D]then proceed to confuse the issue of inequality with poverty reduction. It is indisputable that absolute poverty has declined dramatically in countries such as China and Vietnam following market reforms, and that millions of people are better off as a result. Nevertheless, relative inequality has risen just as dramatically, creating a host of social problems.
Surely this is a major point? (Even though notice that Wells-Dang use the expression 'market reforms' presumably as a synonym for 'globalisation'.) K&D overlook it, I think, because they don't really consider inequality a problem in itself. This is at the basis on the anti-egalitarianism of various third ways, especially the Giddens/Latham variety. And it is a whole other argument as to whether inequality matters or whether we should just be concerned about poverty, which I'll take up some other time.
So from K&D's article, it is hard to tell whether they mean globlisation has reduced poverty or inequality, and whether 'globalisation' actually means simply more international trade and foreign investment or if it means deeper sorts of neo-liberal reforms. My guess is that K&D mean both because they would obviously consider both desirable, though such a definition would again pin them under Galbraith's arguments that the examples they choose (China, India, Korea) don't really fit yer standard definition of 'neo-liberal reforms'.
On this point, the other respondent to K&D's article,
Joe W. Pitts, adds an interesting morsel:
David Dollar and Aart Kraay's argument that globalization is a "powerful force for equality" is strange in light of widely accepted empirical evidence that inequality within and between countries has increased over the last 200 years. Although they claim that inequality has leveled off or started to decrease in the last two decades, the evidence on this topic remains unclear. To make their case, Dollar and Kraay rather arbitrarily classify a certain group of nations as "globalizers" and point to a decrease in inequality. However, as Harvard economist Dani Rodrik and others have pointed out, using more objective criteria (such as tariffs) for selecting the globalizers suggests that economic growth peaked in the 1960s and 1970s. Indeed, the latest World Bank report on globalization, of which Dollar was a principal author, backed away from the claim that the most globalized countries were those that had adopted the most protrade policies.
So why, as authors of a World Bank report do they say one thing, while as authors of Foreign Affairs (FA) article they say another? Is it the difference between fact and opinion? Is the FA article being used as an assertion of their membership of the 'pro-globalisation' club?
Anyway, without knowing whether they are arguing that poverty or inequality has decreased, we can't really judge the efficacy of the figures they provide.
And even if we could, the figures themselves are a real problem.
Galbraith says:
However, the source on which they base this assertion, the World Bank's inequality data set, is riddled with gaps and implausible measurements. According to these measures, for instance, inequality declined in Canada from 1971 to 1991 and in Mexico from 1975 to 1994, Spain is one of the most egalitarian countries in Europe, and India and Indonesia have general measures of inequality similar to that of Norway.
My own work, in contrast, shows a clear and severe global pattern of rising inequality in industrial pay, beginning in the early 1980s. This is based on the United Nations data that permit about 3,000 data points to be estimated, roughly five times as many as in the published editions of the World Bank data set (and more than three times as many as in a forthcoming edition).
Rising inequality after 1980 is the rule in this data, with limited exceptions mainly in Scandinavia and in Southeast Asia before 1997. The patterns strongly suggest that forces of globalization, including high global interest rates, debt crises, and shock liberalizations, are associated with rising inequality in pay structures. Pay is, of course, the major component of income, and if pay inequalities are rising, it is a good bet that broader income and social inequalities are rising too.
To this, K&D counter:
Second, the data used to measure inequality matter. There is only one comprehensive source of data on income inequality within countries: representative household surveys carried out by countries' statistical agencies. Although such data certainly have flaws, they are the best we have, and so we use them. Moving from comprehensive measures to narrow measures such as intersectoral pay differences in industry (as advocated by Galbraith in his letter) seems inappropriate for our purposes. In most developing countries, only a small fraction of income consists of wages in the formal manufacturing sector, and most poor people work in agriculture and the informal sector. So it seems unlikely that trends in manufacturing-wage inequality will provide a reliable picture of overall inequality trends, which are often dominated by rural-urban and regional income gaps (as is the case in China, for example).
Whether or not the narrow or broad figures are more appropriate (and you'd think you'd need both to get a proper picture, wouldn't you?), this doesn't really counter Galbraith's point about the unreliability of the figures they actually
do use.
Pitts is actually willing to concede some ground, but again, the difference between poverty and inequality is key:
Globalization and progrowth policies do reduce poverty. But as competitive systems that produce winners and losers, they do not necessarily reduce the inequality that is increasingly visible in a globalized world. Policies such as greater and more effective foreign aid; investment in developing countries' education, infrastructure, and technological capacity; enhanced access to rich-country markets; and international financial reforms are also vital in achieving a more stable, just, and sustainable system.
But even within this, we might argue about which elements belong to a definition of 'globalisation' and which don't, and which should be considered liberal policies and which should be considered 'statist' or 'welfare' policies.
Still, Pitts's braoder point is worth considering:
Even if Dollar and Kraay had not made faulty assumptions in choosing their globalizers, their breathtaking conclusion that "greater openness to international trade and investment has ... helped narrow the gap between rich and poor countries rather than widen it" confuses correlation with causation. When average national income is examined, the fact that China and India have had higher growth and relatively fewer poor people distorts the picture because of the size of those two countries. In addition, higher growth in these nations preceded more open trade. Almost everywhere else, growth has slowed or (as in sub-Saharan Africa) reversed. Moreover, as illustrated by rising inequality within China and India, just because growth also raises the incomes of the poor does not mean that it reduces inequality, since the poor start from a radically lower position than the rich. Indeed, if incomes of both the rich and poor increase at a similar rate, inequality is increased, not reduced. Another study published in January by another World Bank economist, Branko Milanovic, evaluates household survey data, which is arguably a more relevant measure of inequality. This work shows that global inequality (as measured between individuals, with the world as one "nation") actually increased, at least in the five-year period examined (1988-93).
Inequality is no myth. According to well-known statistics produced by the World Health Organization and the un Development Program, the net worth of the world's richest 200 individuals exceeds that of the world's poorest 2.5 billion people. And if, as Dollar and Kraay acknowledge, 82 million of the 83 million people added to the world each year are in poor countries, global equality will not be easily advanced.
Again, it starts to look like an argument about authority or sources and whose you want to trust.
What is likely to happen, however, in more general debates about these matters, is that all these nuances of meaning and arguments about the reliability of data are going to be lost. Those for 'globalisation' will quote K&D at length, and will implicitly accept their data, probably with no examination of it. Those more sceptical of 'globalisation' will quote Galbraith, Pitts and Wells-Dang as refutation of K&D and others, with an equally negligible consideration of these matters.
Surely we have to go all Socratic and ask, is there a
true answer? Because surely it matters if real people in the real world are living decent lives or might somehow have the possibility to thrive? More to come.
