7 The Global Economy and the Poor Pranab Bardhan ‘The majority of people I know outside the world of economics and business are opposed to globalization; in this they a8 often particularly swayed by their eencers for the world’s poor. Economists who generally support glob- vfeation have to address these concerns. Of course, in most contentious public debates, different people have different things in mind when they refer fo globalization. A large part of the ‘widespread opposition to globalization elves to three different aspects of its impact: 1. The fragility of valued local and indigenor® cultures of masses of people in the world facing the ‘onslaught of global mass production rent cultural homogenization (through Jobal brand-name products, movies, music, fast food, soft drinks, Internet, etc.) ‘The devastation caused to fragile economies by billions of dollars of volatile short-term capital stampeding around the globe in herd- like movements . The damage caused to jobs, WaBes> and incomes of poor people by the dislocations and competition of jnternational trade and foreign investment, and the weakening of the ability of the state to com- pensate for this damage ‘and in general to alleviate poverty- While I am personally in favor of some restrictions on the full fury of globalization in connection with the first two and can even provide some economic justification for such restrictions, gn this essay I shall confine myself to a discussion mainly of the third issue: “Thus I shall interpret conven to mean openness to foreige trade and long-term capital flows! and try £0 Pr 99 Scanned with CamScanner |the causes of poverty , cies in POOF 00 overty alleviation te For this el economic integratl ffect the ternational h globalization may-@ ‘cant by which i which the policies ™ si conditions of the poor and then analyze the ways ie I constraints. In gener : to relieve those conditions are hemmed in by alo hips for the poor, but it I believe that globa jon can cause many hards ea utilize and others also opens up opportunities that some conn iMal and economic institu- cannot, largely depending on their domestic political an + always context- tions. The net outcome is often quite complex and almost globalization dependent, belying the glib pronouncements for or against g! made in the opposing camps. = When we refer to poverty, we shall limit ourselves to absolute (as oppos measured by some absolute minimum living standards. statements on the impact of globalization on such pov- erty, both in academic discussion and in the media, essentially concern cor- relations rather than causation, Pro-globalizers point to the large decline in Poverty in China and India in the recent decades of international economic cietation. However, we stil lack convincing demonstrations that this de- cline is not to a large extent due to internal factore such as expansion of infrastructure or the massive 1978 land reforms or the relaxation of restric- Hons on rural-to-urban migration in China, or to the spread of the green | understand the possible difficult countries may face from such in cs we need first to look at the processe to relative) poverty, Most of the general evolution in agriculture, large antipoverty programs, or social movements in India. Those who are more dubious of global procesees Point out that in the same decades poverty has remained stubbornly high in sub-Saharan Af. 1ica. But this may have little to do with globalization, and moce + do with | unstable or failed politcal regimes, and wars and eivl confines that have afflicted several countries in Africa If anything, such instability only reduced | their extent of globalization, because it scared off many foreign investors and | Going beyond correlations the causal processes through which intern tional economic integration can affect poverty considered, this paper pri. marily involve the poor in their capacity as workers and as repo era services or users of common property resources. will thus be ignoring the ne as consumers. Whether they guin a consumers fom teade aeeens Poo" whether they ate net buyers of tradable goods—for example, the no" laborers in east or south India who are net buyers of rice may gain frac | imports of cheaper rc fom Thailand, but may lose from highet pag ot | medicine as the Indian drug market becomes intemationatized agg nopolite retail market structure often blocks the pass-through fom born | prices to domestic prices. For example, in Mexico after NAFTA, the cane 1 toni sector largely maintained prices even with the avalbily ot ches North American corn. | Scanned with CamScannersacoway 20 the Poor «ot got AS SELF-EMPLOYED Wonks sder the case of po fi comet IBE IS oar Wray at 9 Ty or wage carers. The Self-employeq Ate ty, canto as and petty entrepreneurs in smal On the as i Pee oes they saree face are in credit, Sloraye Ops cot new techOlOGY, Extension services, jug Ming Omg « weet ports telecommunication, and ittigationy, ete rr ‘se . i i , mh a wipe caving venal inspectors oF policemen,» Bem bf ing nese constraints often requires substan Land sh, 3 . lomess My, and foreign traders and investors are not directly a ent, ete) ay sometimes hep in relieving some of the by FE fn and services and in the supply of essential patts, wa inate, we? oy te Lange ti. sr trent). If these changes are not made and the eran tnd eaip constrained, then of course itis difficult for ther 4 4 oor rem, 'M tO withstand competis turing fs (focige from large agribusiness companies or manufac ° eign OF do. mestc). When smal perducet are heavily involved in exports ( roducers in Uganda, rice growers in Vietnam, i fedesh of Cambodia), the major hurdle ieee wi deat globalization but to less. As is by now well known, devloped county ro tectionism and subsidization of farm and food products and simple nn factures (such as textiles and clothing) severely ret the export prospects for poor countries. Another increasingly important barrier to trade that many small fame in developing countries face in world markets i that rich counties now shut out many of these imports under a host of safety and sanitary regulations (sometimes imposed under pressure from lobbyists of impor-competing farms in those countries). This actually increases the importance ofits tich-country global companies in marketing poor-country produ Tes companies can deal with the regulatory and lobbying mains countries far better than the small producers in poor runt the same time can provide consumers with credible BORNE marketing safety. Of course, these companies will charge hety * est, but te sl service (usually much larger than the total eye i" farmers will usually be better off with them rat Simi, it may be very dificult, cos a Tt Producers of manufactures or services in deve, wi brand name and reputation in quality and me ules OM Sutey crucial in marketing, particularly im nt wade MR ad than comparative costs of production ha! TT ainsi Mente sizes), This is where multinational marian 8 her they om names, mediating between domestic SUPE cyeting helpful for a long time, and paying the High opi May sometimes be worth it. At the same for example, cofce Scanned with CamScanner102 veloping countries, with tecl tions, to build international quality cet i ucts should be a high priority, Those who are just extremely high marketing margins the monopoly mu currently charge the poor producers should agitate Mo! ot antitrade action. There should also be more energetic tempts to certify codes against international restrictive busines Woe lish an international antitrust investigation agency> P WTO auspices, ‘ yen when ined 8 alse important to keep in mind that trade liberalization, their val nesabtiae he #eaM incomes of the poor producers, may heighten theit WA” nevability, particularly by increasing the variance of prices or income ple t0 The evidence on this is mixed, but itis clear that the poor are less able Cope with adverse shocks than the rest of the population.? sitination® t re for antitrust je internatio’ tic internatio xg practices a ly under sossibl THE POOR AS WAGE WORKERS Tuming to poor wage earners, the literature on how international trade affects the absolute level of the real wages or employment of unsiilled workers is muceBer compared with the one on wage inequality (which, though an im- Portant issue, is not directly relevant to my concern with absolute poverty here). Empirically, it is hard to disentangle the effects of trade reform on wages from those flowing from macroeconomic policy changes or other on- going deregulatory reforms and technological changes. Traditional international trade theory suggests that the workers in a poor country (presumably with abundant supplies of unskilled labor) having a comparative advantage in products intensive in unskilled labor should benefit from trade liberalization. The improvement in’ wages and employment of garment workers in Bangladesh or Mauritius with expanding exports is an obvious example. The matter is, of-course, complicated by the fact that de- veloping countries (say, Brazil or Mexico or Turkey) may import labor. intensive products from even poorer countries (say, China, Indonesia, or Bangladesh), so that trade, consistent with the traditional theory, may lead to lower wages in the former set of developing countries, for which there seems to be some evidence.’ Similarly, if @ poor country has large supplies of other factors of production (such as land or mineral resources), trade liberalization may not benefit the labor-intensive sectors. What about the presence in poor countries of. large and powerful multj- national companies that hire pegple with low bargaining power? There is , Fl skilled workers get lower wages (or fewer jobs) little evidence that poor, ui - ared with what they will pet in the presence of those companies, comp: ny wil get in ° ining the same.‘ Contrary to the impressioy . things remaining the same. oatrak nf n their absence, other main affluent countries against “sweatshops” run by poor countries, it can be pointed out that the created by the campai gates ofthese sweatshops for a chance of entry, multinational companies in poor are often banging at the Scanned with CamScannerthe Global Economy and the Poor since these are far better than theie gy pations with inferior work conditions aoe Alterna an argument against éfforts to improve «,.2 “™Ployina, “tin not in favor of the totally indefensibte their work cont unsafe work conditions)? But it does 0! forced | (an, reality of the severely limited opportuni ee that oP or han intended consequences of trying to neers? °& by tye ul shop” products because of the harm thst H&t'- sistence (nontraded) crop (such as roots and tubers). The economy may have a comparative advantage in tree crops. In this case an increase in import substitution leads to an expansion of cultivated land under the land-intensive crop as well as a shortening of the fallow.period, leading to depletion of natural vegetation and biomass. Trade liberalization in this context, through encouraging the production of the less land-intensive tree crop, can signifi- cantly improve the natural biomass, as has been shown by Lopez (2000) for Céte d'Ivoire in the latter part of the 1980s, using the data from the Living Standards Survey and remote sensing data from satellite images. One reason why land-intensive crops may lead to overuse of land and depletion of natural vegetation (or that expansion of the agricultural frontier in general leads to deforestation) is the lack of well-defined property rights or lack of their enforcement on public or communal land. In such cases the private cost of expanding production is less than the social cost, and there is overuse and degradation of environmental resources. If the country exports such resource-intensive products, foreign trade may make this misallocation worse. International trade theorists point out that trade restriction is not the first-best policy in this situation; correctitig the property rights regime is. But the latter involves large changes in the legal-regulatory or community insti- tutional framework, which take a long time to implement. Given the thresh- old effects and irreversibilities in environmental degradation (a forest regen- inimum stock, for example), fe may not be able to ‘at case, some program of (time-bound) trade restriction, atord a 5 is attempts to overhaul the domestic instaionsl frame- be necessary. In other cases, domestic policy changes can be im- pomeiea vy icky, and restricting trade is unnecessary and un- ed much more ene ered underpricing of precious environmental e, administer pre in India, energy in Russia, timber concessions in forests eS, 5 cick the daily livelihoods d mere trade restriction 1S eration requires a m! plemente desirable. For exampl resources (irrigation water Scanned with CamScannerjoval Economy and the Poor ne Gl ja, etc.) is a major one o ie Donec’ "U4 should not t ae ae OMEStIC vesteg i Pleton, 1 ponsible for the prolongation of such, 56%, hts na Coney In the case of some Fesource-intensivg gy amayin Bhai to adopt exvionmental regulations if jy, hee it cies Mate the same ti Mati fn adopt them at ime and have the Ona ¢ ra ny ability tg unde Peto a ional markets. Here is jn internatio there is an Obvious need grt Hl 1 tnvironmental regulation policies in the eqn elasticity of demand for many Fesource-intensh oneerned a ination oy ties from developing countries in the world market pont gg acd not lead to a decline in export revenue, SY" otdinga A common charge against multinational compani developing country “pollution havens" to take adhe wd tal standards. In one of the very few careful emptial st ii - Eskeland and Harrison (2003) examine the pater of fen im, Mexico, Venezuela, Morocco, and Céte d'Ivoire, They find’ investment in foreign investment in these counties i related to polation m= in ich countries. They also find that within a gien industry fon are significantly more energy-efcient and use cleaner ype: of een pared with their local peers. yom 5 that they lock ¢ of lax emean CONCLUSION In general, debates on globalization often involve a clash of counteracuas On one side, those who are against the pace of business-as-usual plbal ade and investment are making a plea for doing something about the jobs and entrepreneurial opportunities for the poor and for small enterprise tht ae being wiped out; they also oppose the monopolistic practices of giant mul- tinational companies and the environmental damage caused by their e0- nomic expansion. Thus their counterfactual is the world of mor scl j= tice and less dominant trading and investment companies, which e821" more breathing space tothe poor producers and workers. On the oh the counterfactual for pro-plobaliersis the case when thee CET, trade or foreign investment, a world that may be worse for FT is in the extreme cases of the closed economies of North Mt a The way out of this clash of counterfactuals isto insist sndera which may attempt to help the poor without neces jim forces of globalization. In this essay we have -_ worse off f to-long run, globalization need not make the PO MN opie Propriate domestic policies and institutions aré in pl ‘Hf the institution ordination among the involved parti ies can be = ‘door for som Prerequisites can be managed, globalization OPER ution opportunities even for the poor. Of course, domme nai aot easy—it requires political leadership, POPU Fe. istrative capacity that are often lacking in poo Scanned with CamScannerre the causes! id 108 ies a0 . pane cies onal 0" tries Deep the fi agitating against rutin pose COMM ne we keep the focus on aos the WTO, attention FaterestSs and iB nal organizations stich a ste en often is deflected from the domestic institutional vest. 1 cases OP: day of politically challenging them is postponed. In facts es i ing the anata may unleash force tor such a challenBe ot theories i? Av in the debates several decades ago around “depens OY of the development sociology, there is often a tendency to attri the internation@ Problems of underdevelopment to the inexorable forces of tl ted interests- fconomic and political order, ignoring the sway of domestic Ves feredit an Im many countries poverty alleviation in the form of expansion o loyeds marketing facilities land reform, public works programs for the ney not be and provision of education, vocational trai ing, and health need als blocked by the forces of globalization, This, of course, requires a restrUC ical ig of existing budget priorities and a better and more accountable politi ; and administrative framework, but the obstacles to these are often largely domestic (particulaely in countries where there are some coherent gover- qance structures in place). In other words, for these countries, globalization is offen not the main cause oftheir problems, contrary to the claim of critics Of globalization—just as globalization is often not the main solution of these Problems, contrary to the claim of some gung-ho free traders. . All this, of course, does not Temove the responsibility of international Organizations and entities to help the poor of the world by working toward 8 reduction of rich-country protection on goods produced by the poot, by Cnergetic antitrust action to challenge the monopoly power of international (Producing and trading) companies based in rich countries, by facilitating international partnerships in research and development of products (for ex. ample, drugs, vaccines, crops) suitable for the poor, by organizing more substantial (and more effectively governed) financial and technology tranafere and international adjustment assistance for displaced workers, and by help in building (legal and technical) capacity for poor countries in international negotiations and quality certification organizations. Globalization should not be allowed to be used either by its critics or by its proponents as an excuse for inaction on the domestic as well as the international front when it comes, to relieving the poverty that oppresses the life of billions of people in the world. NOTES / ; 1. I shall also ignore the substantial poverty-educing potential of international il from poor to rich cduntries. ee a or the empirical literature on this question, see Winters . For etal (2004). evidence from Colombia, see Goldberg and Pavenk (2005), 3. For detail itken et al. (1996). 4, See, for example Same between unsafe oF hazardous work con. 5. Conceptual om an the one hand, and low-wage jobs, on the other. Under ditions and forced labor, Scanned with CamScanner1 willing 10 sell ee as serfs are not 09 ondition that can cause oily injury are to jy Permitted to eens from accepting, low-wage job « strictly repul do lated, wor pring Oe i, * sy (197 Rod (199% ea i ee and Scheve “6 the Oyetie Yor some firm-level evidence that, controll . i ‘ . in roars in fndonesia ate associated wi 18 for firm char. ig “ 4 a ec operations than domestic plants, sce Bene g aiiy 'd and Sjohol im rkers so be noted that in the WTO each member couse has Ho each decisions by “consensus"), whereas inthe Toner eee tet ye World Bank) voting is ollar-weighted, But tae MF aunties (and thet age corporate lobhits) exacie str Mpenaa-seting and “veioncmaking of the WTO, a they do in he ‘Woods institutions. fect Bretton pis tioGRAPHY Aitken, Brian, Ann E- Harrison, and Robert Lipsey. “Wages and Foreign Ownesip: comparative Study of Mexico, Venezuela, and the United States.” Journal of ics 40 (3/4) (1996): 345-371. International Econori pernard, Andrew, and Fredrike joholm. “Foreign Owners and Plant Survival” Na- ronal Bureau of Economic Research working paper 10039, 2003. Ccunnie,Janet, and Ann E. Harrison. “Sharing the Costs: The Impact of Trade Reform ‘on Capital and Labor in Morocco.” Journal of Labor Economics 15 (3) (1997) SH STi. tsteland, Gunnar, and Ann E. Harrison. “Moving Greener Pastures? Multination: an fhe Pollution Haven Hypothesis.” Journal of Development Economies70 (2003): 1-24. Goldberg, Penny, and Nina Pavenik. “Trade, Wages, ‘and the Political Economy of Trade Protection: Evidence from the Colombian trade Reforins” Journal of ternational Beonomics 66 (1) (2005): 75-106. Leamer, Edward E. “In Search of Stolper-Samue’ Trade and Lower Wages.” In Imports, Exports, A M. Coline, 141-202. Washington, D.C Brook pez, R. “Trade Reform and Environmental Externalit ‘Analysis for an Archetype Poor ‘Tropical Countt Sree 4 (4) (2000): 337-404. ¢ Dani. Has Globalization Gone Too Fa gations Economics, 1997 Pa Ken F,, and Mathew J. Slaughter. “Bconomic Insect Wine, one National Bureau of Economic Research i Porern, lan L.y Neil McCulloch, -and Andrew Mel a Poverty The Evidence So Far.” Journal of Beano" national ween Inter! sean Werke, edited DY ngs Institution Pre ties in Gener 2 Washington security and king Pape je Liber®! erature 42 Scanned with CamScanner