BRADFORD CENTRE

FOR
INTERNATIONAL
DEVELOPMENT

2007/2008

Issues in Development Theory

Greater globalization, rather than less, could promote economic growth

UB
07014568

By
Aboubaker Suleiman A. BADI

word count: 3,542

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The worldwide extension of international trade after linking the General Agreement of

Tariffs and Trade (GATT) into the World Trade Organisation (WTO) in 1995 has

produced the world economy. The integration of the economies of many countries

was the main reason for creating a new situation in the world which is called

globalisation. It has become one of the most debated issues in this era, and the

overriding concern in contemporary societies, and attracting the attention of

governments, institutions, researchers and media. In today’s economic world, as

both developing and developed countries are more and more integrated into the

process of globalisation, economists are naturally becoming more and more

sensitive to this word-“globalisation”, especially when its negative and positive

effects on economic growth, as well as poverty reduction. In general, globalisation

poses a strong impact not only on the worldwide economy but also on individual

state, and both developed and developing countries, especially those poor and third

world countries that have taken opportunities as well as risks through globalisation

become sensitive to this process. However, the positive effects of globalisation on

economic growth in developing countries may aid to decrease the level of poverty as

a result of that.

From the perspective of this essay, one key question should be raised: If

globalisation promotes economic growth, does it reduce poverty. Thus, this paper, by

analyzing the conceptual framework of Globalisation, will discuss critically its impact

in Economic Growth and Poverty. This will also show how globalisation and growth

may lead to reduce poverty, depending on the Key facts which help to achieve that

such as equality, education, and health care.

The conceptual framework and literature about Globalisation

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Before talking about the impact of globalisation on economic growth and poverty, it is

necessary and important to make a good analysis of the conceptual framework and

review the literature about Globalization. Kiely et. al (1998) point out that

“Globalisation refers to a world in which societies, cultures, policies and economies

have, in some sense, come closer together.” (Kiely et. al, 1998, p.3). However, is it

the communications revolution and superhighway transportation? Or the internet?. In

other words is it the transfer of intellectual, and scientific knowledge between

people?. Or rather, is it a blessing or a curse?. According to Harris (1993)

globalisation is the growing process in the international flows of goods, services,

capital, technology and information. While Lodge (1995) has provided an inclusive

definition of globalisation, as the process which makes the world’s people become

more interrelated in all facets of their lives economically, politically, culturally, and

technologically.

However, a successful control of globalisation will have several effects, which reflect

a positive change on economic growth, as seen in a number of countries in East and

South East Asia such as China and Korea, and some people with high-skills are

considered as great beneficiaries of globalisation, while certain regions such as

Africa and those low-skilled and low-educated people are victims of globalization.

According to a recent study by the World Bank (2002) called “Globalisation, Growth,

and Poverty”, which shows that China is the best successful example in reducing

poverty through the application of globalisation, with over 300 million people lifted out

of absolute poverty since 1978. Simultaneously, it has a negative impact as well.

There is no doubt that the loss of control on globalisation may result in destruction

rather than reform; This is a problem that exists in many parts of Africa (Mittelman

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1997). Today, in spite of improving situations, more than three quarters of countries

have poverty estimates, and more than two thirds have plans for reducing poverty.

In the context of literature review, as far as the impact of globalisation on poverty is

concerned.The Globalist perspective is based on the hypothesis that economic

globalisation reduces poverty and countries that have globalised have experienced

faster economic growth. For globalists such as Kothari et. al (2002) they argue that,

“globalisation offers the potential for living standards to rise with the spread of new

technologies as the latter can increase productivity levels and alleviate poverty

problem.” (Kothari et. al, 2002, p.23). In other words, when the question concerning

why poverty decreases under the age of globalisation is taken into account,

globalists believe that since spread of new technologies can advance productivity

level and boost economy, it helps to raise living standards which consequently

alleviates poverty problem. Furthermore, globalists also mention that globalisation is

particularly beneficial for developing countries, while global pessimists present that

globalisation makes the poor and the marginalized become more impoverished and

worse as it represents a new form of colonialism.

To sum up, based on different perspectives of globalisation, the answer to the

question of the impact of globalisation on poverty in developing countries is different,

and globalisation is viewed as a complicated concept. That is why Kothari said that

“globalisation is a highly contested concept in terms of its meaning form and

implications, with more fundamental questions being raised about the extent to which

globalisation is actually taking place and, if it is occurring, the nature of it genealogy.”

(Kothari et. al, 2002, p.17).

GLOBALISATION AND ECONOMIC GROWTH

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The world economy in the past few decades became more integrated, while some

states especially the developing countries has purposely reduced the trade tariffs

and barriers, and removed the obstacles on the direct foreign investment. But does

it work to reduce poverty?.

Globalisation is the process that help to increase global economic integration

through the transfer of technological improvement and the sophisticated

communications, which make the trade connections more practical. However, a work

by Seitz (2002) suggests that global economy has brought more affluence to the rich

and poor countries together; many globalists confirmed that globalisation has a

positive impact on growth through free trade. A research study by Sachs and Warner

(1995) argues that 4.5 per cent a year, is the growth rate in developing countries that

opened their economies in the period between 1970s and 1980s against just 0.7 per

cent a year for countries with closed economies.

For instance, under the encouragement of the IMF, Korea, the Asian miracle in 1993,

pursued an export based development strategy that led to its downfall in four years.

In 1995 the sum of exports to imports was 56% of its Gross Domestic Product (GDP)

(Adelman and Nak, 2001:89). The eleventh largest trading economy, Korea, suffered

the contagion effects of the economic recession in Japan and Europe. World prices

for Korea’s exports products nose-dived in 1996 affecting 50% of Korea’s exports

and fuelling economic meltdown, low wages and poverty. (Adelman and Nak, 2001).

According to the World Bank report (2000/01) economic growth improves the living

level of poor people and everyone else. This part will highlight a report submitted by

David Dollar and Aart Kraay (2000) of the World Bank Development Research

Group, under the title “Growth is Good for the Poor”, which supported the world Bank

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and noted that economic growth is able to reduce poverty. The study included 92 of

the industrialized nations and developing countries as well over the past four

decades. And the result of the study says that “Growth is good for the poor” and

argues that the current impacts of globalisation are in fact good for poverty reduction.

The opinion of Dollar and Kraay is that the successful macroeconomic policies, for

instance, the stable monetary policy, openness to international trade, and the

moderate size of the government are the most effective ways to poverty reduction.

These types of policies are good for the poor in terms of raising incomes and without

any negative effects on the income distribution. The study discovered that these

factors benefit the poor as well as the other strata of the society. The study also

confirmed that the relationship between growth and poverty has not changed in the

end, and does not vary during crises, and it is generally the same ones in both rich

and poor countries. The conclusion of the study gives the explanation showing that

the growth of enhancing policies of good rule of law, fiscal discipline and openness

to international trade should be at the centre of any effective poverty reduction, and

finally, explaining clearly that growth generally helps the poor as much as anyone

else in society (Dollar and Kraay, 2000).

But the WDR (2000/01) found that there are still differences in poverty outcomes

between both the developed and the developing countries pointing out the role of

economic growth in poverty reduction, which generally causes these differences in

poverty outcomes the countries over the long term. But the question here is what

drives economic growth?.

For advancing economic growth, the policies and institutions of the state must be fair

and understandable for a sustainable economic growth to improve the situation of

the poor (WDR, 2000/01); besides that, the government must provide good

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education and health services. According to a study by Barro (1997) the

experimental result for a panel of around 100 countries from the 1960s to 1990

strongly support that growth depends on education and life expectancy, especially at

lower incomes. The World Development Report asserts that the institutional factors

are also important for economic growth. In addition, a good government and good

governance are undoubtedly the basic crucial conditions for the development and

growth process, together with a good investment climate as well (Dollar and Kraay,

2000).

A recent study by World Bank in (2002) entitled “Globalisation, Growth, and Poverty”

shows that 24 developing countries, with a total population of 3 billion, and with more

and more liberal trade policies, are increasingly integrating into global economy.

Therefore, as the WB pointed out in the globalisation report, global integration is

already a powerful force for poverty reduction. But how can globalisation be good for

the poor. According to a WDR the impact of growth on poverty depends on equal

distribution of income generated by this growth, for giving rate of economic growth,

poverty will fall faster in countries where the distribution of income becomes more

less equal. A recent survey by Appleton et al (1999) for the period between 1992-

1997 found that there has been a dramatic decline in poverty in Uganda. Appleton et

al, provide an analysis of the issue of poverty reduction in Uganda due to the growth

with rising equality. Reduction in inequality made growth effective in reducing poverty

in Uganda, and poverty fall as twice as fast for the country as a whole (Appleton et

al, 1999). on the other hand, a study by Wodon (1997) shows that the increase in the

proportion of inequality in Bangladesh tempered the poverty reduction from growth,

the study shows that the per capita in the GDP has grewn at about 2 per cent a year

during 1990s, and that poverty declined quite slowly, because of rising inequality.

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THE GLOBALISATION AND POVERTY REDUCTION

This part of the essay will critically analyze how the growth in the globalisation era

benefits the poor, by presenting various examples from several states where the

current growth and globalisation are further widening disparities in income, which are

described as obstacles to poverty reduction.

From the World Bank perspective, “growth really does help the poor”. It is clear that

the policy of the World Bank is Globalisation, then, is growth promoting, and Growth,

in turn, reducing poverty (WB, 2002). The WDR 2000/01, argues that growth is a

central element of poverty reduction and all of the reforms and measurement which

are recommended in the report are for growth and liberalization rather for poor or

poverty reduction ( Oxfam, 2000). For instance, the promotion of education is often

tuned to growth and it is seen as an important issue to prepare people for the market

potential (Genugten and Bustillo, 2001).

Indeed, for the World Bank:

"poverty eradication is now the menu, but the main dish is still growth and market
liberalisation, with social safety nets added as a side dish, and social capital
scattered over it as a relish”. ( The Nation Bangkok, 20001)

1 Comments on Ravi Kanbur’s resignation from his position as WDR 2000/01 lead author

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According to (Genugten and Bustillo, 2001) the problem is that the growth with the

current market form is not the way to remove poverty because it is also a main

promoter of inequality and poverty as well.

In addition, the World Bank's model "Growth is good for the poor" does not focus on

whether growth are generally benefits the poor, and according to a recent study by

Weisbrot, Naiman, and Kim (2000) shows that there is a decline in the rate of growth

in the 1990s, compared to the rate of growth in 1960s.

Figure 1 shows the growth of GDP per capita in different countries in the developing

world for the period between 1960-1980, and comparing with GDP per capita growth

for the period between 1980-1998. For example, In Latin America the GDP per

capita grew by 75 per cent from 1960-1980, while from 1980-1998 it has only risen 6

per cent. For Sub- Sahara Africa, GDP per capita grew by 36 per cent in the first

period, and after that it has since fallen by 15 per cent.

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Even if it were true that economic growth raises the average income of the poor as

much as the rich, policy makers with an interest in poverty reduction should be

concerned with the share of the poor in national wealth. This is because for any

given level of average income, the extent of poverty will depend on how income is

distributed. In other words, the distribution of any increment to growth will determine

the rate at which growth into poverty reduction.

The different experiences in each of the countries in Latin American and East Asia

clarify the point. Latin America achieved in the period between 1990-1998 a real per

capita economic growth rates of just under 2 per cent a year. But in spite of this good

economic performance, the number of people who were living below the poverty line

increased by 4.4 million, while the rate of poverty fell by just over 1 per cent. By

contrast, the growth in East Asia have 174 million people out of poverty, the per

capita income has been rising at 6 per cent yearly. The percentage of growth in Latin

America is 1:0.08 per cent, compared to 1:0.03 per cent in East Asia. Every

percentage point of growth in East Asia reduces the incidence of poverty at four

times the rate achieved in Latin America. These results indicate the importance of

the income distribution for poverty reduction (Watkins, 1998).

Whereas, Oxfam’s policy paper (2000) argues that the world bank's model is anti

poor because it fails to address the key question of how to share the benefits of

growth more equitably. It is anti growth as well because of the high level of inequality

is not just bad for poverty reduction, but also for economic efficiency.

The World Bank claims that “globalisation reduces poverty because integrated

economics tends to grow faster and this growth is usually widely diffused” (WB,

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2001a, p. 1). yet, the observed facts suggest that reductions in poverty and income

inequality still is far too elusive in most parts of the world (Christian et al, 2002).

The bank as a defender of the current system of globalisation acknowledges that

inequality has increased within countries.

According to Zhang et al (2003) China is regarded as a big beneficiary of

globalisation. The link between globalisation and Chinese economic growth and

poverty reduction has started Since the introduction of the reform and opening up in

1979, in this period China has experienced unprecedented economic growth.

According to a recent study provided by Khan et. al (2001), as compared to 5.5 per

cent during the 1970s, the average annual rate of growth of GDP was 10.2 per cent

during the 1980s and 12.8 per cent during the first half of the 1990s. Furthermore,

Khan et. al (2001) also pointed out that per capita GDP almost quadrupled over the

same period and people are living better and better and gradually getting rid of

poverty. No doubt, China’s rapid economic growth and poverty relief are greatly

caused by its integration with the global economy.

To sum up, evidences have proven that China is a typical example showing that

globalisation indeed has two-side nature. On one hand, (Khan et. al, 2001)

concluded that thanks to its economic reforms, globalisation has successfully played

a significant role in China’s economic development and part of China’s population

has achieved positive results of per capita income and poverty reduction. At the

same time, as far as specific regions and specific group of people are concerned,

owing to adverse effects of globalisation on unemployment growth and a worsening

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of income distribution, living standards are lowered and poverty increases. In a word,

globalisation brings in both benefits and misfortune for China.

Whereas, Stiglitz (2006) pointed out that globalisation may have contributed to raise

the level of GDP and services in some countries, but it has not helped most people,

even in these countries where the dilemma is that globalization may have made the

country rich, but with poor people.

As Stiglitz points out “The advocates of globalisation have claimed that everyone will

benefit economically, there is plenty of evidence from developing and developed

countries that there are many losers in both”.

The World Bank exemplified that globalisation has helped a large number of

developing countries, but it must be harnessed better to help the world’s poorest.

Most marginalized countries have improved the level of their citizens, according to

the report, “Globalisation, Growth and Poverty: Building an Inclusive World

Economy” (World Bank, 2002). In contrast, the Human Development Report under

the United Nations Development Program (UNDP, 1992) estimated that 20 per cent

of the world’s population in the developed countries receive 82.7 per cent of total

world income, while 20 per cent of the people in the poorest countries receive only

1.4 per cent (UNDP, 1992).

The same Human Development Report (1996) shows that over the past three

decades, only 15 countries have enjoyed high growth, while 89 countries were worse

off economically than they were 10 or more years earlier. In 70 developing countries,

the present income levels were less than those in the 1960s and 1970s. As the

report said “Economic gains have benefited greatly a few countries at the expense of

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many”. Clearly, poverty and inequality are rapidly accelerating since 1980 with rising

of globalisation ( UNDP, 1996).

To sum up, the double-sided nature of globalisation illustrates that it is good for

developing countries, but to which extent it is good for those countries is the key

issue, it is easy to see that for different areas and different groups of people,

globalisation either alleviates or exacerbates poverty problem. Some developing

countries such as China are great beneficiaries of globalisation and people there are

gradually getting rid of poverty, while, by the beginning of the 1990s, most people in

Sub-Saharan Africa were poorer than they had been thirty years before.

Overall, some economists argued that globalisation brings in economic prosperity,

which is a source of improvement of living standard and poverty reduction. While

others have expressed concern that globalisation is not making life better for those

who most need its promised benefits. Actually, to some extent, both these two

viewpoints are reasonable and the two-side impact of globalisation on poverty relief

is not contradictory.

Conclusion

As every coin has two sides, globalisation itself has two-side nature. As far as

different regions and different groups of people are concerned, globalisation poses

different impacts. Therefore, this paper attempted to examine such impact by

analyzing firstly the conceptual framework and literature about globalization. Then,

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the relation between globalisation and economic growth. Finally, The impact of such

economic growth engendered by globalisation, in poverty reduction .

Thus, it could be concluded that the WB report (2000/01) which was submitted by

the World Bank Development Research Group, David Dollar and Aart Kraay, with the

title “Growth is good for the poor”, argues that existing patterns of globalization are

inherently good for the poverty reduction, and countries more globalised have a

better record of economic growth, poverty reduction and inequality reduction than the

less globalised ones. While Simultaneous report by the United Nations Development

Programme (UNDP, 1998) found that inequalities between the rich and the poor

within and among countries are quickly expanding, due to globalization and

liberalization.

Furthermore, the third world was made marginal. Although advances have been

made for some countries, the problem of global poverty still remains and even

grows. As Bhalla said, “Poverty in the poor countries of the world is one of the most

crucial issues of our time. Hundreds of millions of human beings exist on standards

of living that would be unthinkable in the rich countries.” (Bhalla, 2002, p1).

It seems clear that, globalization has been rising while income inequality and poverty

have not been falling. However, there are two main groups in the literature. One

group stressed that globalization reduces poverty while the other emphasized that

economic globalization is a main cause of inequality and poverty.

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