The Social Impact of Globalization in

the Developing Countries

(“Globalization”)

SUBMITTED BY:
Morta, Van Zoilo
Cagabcab, Jocel
Llorado, Justin
Orillo, Kyllie
  ABSTRACT

The Social Impact of Globalization in the

Developing Countries
An ex-post measurable definition of globalization has been used in this paper, with the goals of increasing FDI
and trade openness. The general result is that the optimistic Heckscher Ohlin/Stolper-Samuelson predictions do
not hold true. This means that increasing trade and FDI does not automatically guarantee the creation of jobs
or the reduction of inequality within a country. The following are the other main findings of the paper: 1)
concentration and marginalization are exacerbated by the diversity of the employment effect across the globe;
2) Increasing trade and FDI do not appear to be the primary causes of growing income disparity within a
country in DCs; however, there is some evidence that the import of capital goods may indicate a rise in
inequality as a result of skill-biased technological change; 3) Even though there are some significant
counterexamples, increasing trade appears to encourage economic growth and complete poverty alleviation.

 Introduction
This paper is one of the results of a four-year economic research program that was conducted at the
International Labour Office (International Policy Group) and funded by the UK's Department for International
Development (DFID). The project's overarching objective is to fill a theoretical and empirical understanding gap
of globalization's impact.
The global economy has become increasingly "connected" and "integrated" since the 1980s; While gross trade,
foreign direct investment (FDI), capital flows, and technology transfers have all significantly increased, the
concept of "distance" has been rapidly downgraded due to the spread of information and communication
technologies and the decreasing costs of transportation. The current wave of "globalization" has been
accompanied in the majority of nations by growing concerns regarding its effects on employment and income
distribution.
The current debate is characterized by an acrimonious dispute between globalization supporters and
opponents, regardless of the definitions and indicators that are selected (see the following section).
Even though this is true for the effects on employment and income distribution in developed nations, opinions
on the effects on developing nations (DCs) diverge even more strongly. For instance, the optimists draw the
conclusion that trade is beneficial to growth and growth is beneficial to the poor (in terms of job creation and
poverty alleviation) by emphasizing the connection between increased trade and economic expansion.
Pessimists, on the other hand, argue that the impact of globalization is uneven and has negative counter-
effects on previously protected sectors, marginalization of entire regions of the global economy, and potential
increases in income inequality within countries (WCII). The debate over poverty indicators is another
illustration of this diversity of viewpoints: Critics of globalization demonstrate that this result is almost entirely
due to statistical artifacts and the rapid growth of China, while absolute poverty has increased in many DCs
and relative poverty has increased in the majority of countries. However, supporters of globalization
emphasize that absolute poverty has decreased worldwide over the past two decades.
The following sections will attempt to delve deeper into these subjects and offer some theoretical and
empirical responses to the question of whether globalization is beneficial to employment, alleviation of
poverty, and redistribution of income within the DCs. The remainder of the paper is organized as follows in
greater detail: Some definitions and options for the method will be discussed in Section 2; Recent theoretical
and empirical findings regarding the effects of globalization on employment, WCII, and poverty in DCs will be
critically analyzed and contrasted. In the subsequent sections. Section 6 will conclude with a summary of the
main findings and some suggestions for policy implications.

 Definition and methodology

The topic of "globalization" is currently a hotly debated one, despite frequently remaining a vague and unclear
concept. The term is sometimes used too broadly to include things like lower transportation costs and
technology transfer as well as increases in trade and liberalization policies. When discussing globalization's
impact, it is common to discuss both its effects on economic growth, employment and income distribution—
often without distinguishing between countries or within-country disparities—and other social impacts like
opportunities to alleviate poverty, human and labor rights, environmental consequences, and so on.
Furthermore, the interactions between history, economics, political science, and other social sciences
frequently cause methodological confusion in the debate. The current debate is marked by a sharp divide
between those who support and those who oppose globalization. Both groups appear to be ideologically
committed and tend to use anecdotes (either successfully or unsuccessfully) rather than sound, comprehensive
empirical evidence to support their cause, which is partly due to the lack of clear definitions and
methodological choices.
One of the goals of this contribution is to select some precisely defined topics and provide an account of
theories and applied approaches that have really contributed to the understanding of the social impact of
globalization in developing countries (DCs), as the debate appears to be quite confused and the issues overlap.
In light of this, it is essential to make the limitations of the discussion presented in the following sections clear.

 Definition
An ex-post measurable and objective definition of globalization has been used, focusing on expanding trade
flexibility and foreign direct investment (FDI). The discussion's objective is to determine whether the actual rise
in trade and FDI flows favors or disadvantages developing countries participating in globalization. We will not
discuss liberalization policies in this setting; These are ex-ante proposals that may be announced but not
carried out, or they may be carried out but have no effect. The real impact of the actual increase in measurable
globalization indexes like trade openness and FDI, rather than the impact of (often ineffective) policies, is what
really matters when assessing the impact of globalization. The fact that some aspects of globalization will not
be addressed or will only be briefly discussed (for instance, financial and portfolio flows) is a significant
limitation of the subsequent analysis.

 Countries and Period

We will only talk about the effects of globalization on DCs over the past two decades, as defined above. We
will only concentrate on DCs here, despite the fact that there is a lot more economic literature on the impact of
globalization on developed nations.
  Methodology
Although this topic could also be studied in a useful way from a political, historical, sociological, or
demographical perspective, the adopted method will only be economic, with a focus on the applied methods.

 Scope
The impact of increasing trade and FDI on domestic employment, within-country income inequality (WCII), and
poverty reduction are the only specific aspects of the social consequences of globalization in DCs that will be
addressed.

The following are additional and more in-depth purposes of this paper in light of this general
framework:
1) to provide a comprehensive analysis of the most recent theoretical and empirical economic research
examining the aforementioned three effects of globalization;

2) to address the pertinent research questions that have emerged from the existing literature, which are as
follows: a) If a DC decides to open up to globalization or becomes exposed to it, how likely are local
employment and income distribution to change? b) Which channels affect employment, income distribution
within a country, and poverty reduction through trade and FDI? c) What roles do a DC's level of development
and institutional framework play?

3) to come up with potential policy implications that can be useful for national and international policymakers
who are interested in the social effects of globalization in DCs.

 Results and Discussions

 Globalization and employment
Trade and FDI should both take advantage of the abundance of labor in DCs, triggering a trend toward
specialization in domestic labor-intensive activities and resulting in an increase in local employment, according
to the theory of relative comparative advantages.
However, in contrast to this Heckscher-Ohlin (HO) prediction, recent research supports the conclusion that
expanding trade has a negative effect on employment in developing nations. Particularly, if the hypothesis of
homogeneous production functions across nations is relaxed, multiple equilibria (Grossman and Helpman,
1991) or distinct employment trends in evolutionary "catching-up" models can be considered (Fagerberg, 1988
and 1994; Dosi and others, 1990; 1995, Cimoli and Dosi; 1997, Verspagen and Wakelin; 1997, Targetti and
Foti; 2005, Montobbio and Rampa). In point of fact, the employment-enhancing competitive effect must be
contrasted with the direct labor-saving effect of imported technologies when "total factor productivity" rises in
DCs as a result of globalization (see Haddad and Harrison, 1993; Coe et al. 1997; 1999, Aitken and Harrison;
2001, Kathuria). To put it another way, the final employment impact of increasing trade in a developing nation
depends on how productivity and output growth in traded goods and non-traded goods sectors interact. For
various reasons, the final outcome cannot be evaluated prior to the event.
While export may result in demand-driven economic and employment growth, import may result in the
displacement of previously protected domestic firms and the resulting layoff of labor.
For instance, Lall (2004) makes the observation that, despite the fact that there is abundant evidence to
suggest that opening to trade and FDI has resulted in growth in exports and employment in a number of
developing countries (DCs) (see also UNIDO, 2002), doubts can be expressed regarding the belief that
globalization ought to always contribute to employment growth within a DC; Indeed, the positive employment
impact of globalization can be amplified by different "national absorptive capacities" (or "social capabilities,"
see Abramovitz, 1986 and 1989) in terms of institutional setting, labor skills, technological capabilities, and the
competitiveness of domestic firms.
According to Gros (2004)'s framework, opening to trade necessitates an increase in both labor productivity and
value added, making it impossible to anticipate the impact on employment; According to empirical data, the
"non-globalizing" DCs and the "slowly globalizing" DCs, which are characterized by a labor-friendly balance
between output and productivity trends, produce the best employment growth results. The author comes to
the conclusion that in 21 of the 39 sampled DCs, an increase in the volume of trade resulted in an increase in
employment by comparing the labor intensities of exported, imported, and non-trade goods; However, in
contrast to the HO theorem, increased integration resulted in a decrease in employment in the second group of
18 nations.
It is essential to collect data on these relationships and empirically investigate the direct and indirect effects of
globalization on domestic employment in a globalizing DC because the overall employment impact of trade
and FDI is theoretically uncertain. He emphasizes that, despite the fact that expanding trade and FDI have only
been relevant in a small number of newly industrialized nations, expanding trade in manufactured goods has
had a significant positive impact on manufacturing employment in those nations.
When a developing nation opens its borders to foreign capital, FDIs create positive employment impacts both
directly and indirectly through the creation of jobs within suppliers and retailers, as well as a tertiary
employment effect through the generation of additional incomes and thus increasing aggregate demand (see
Lall, 2004).

 Globalization and within-country income inequality

On the one hand, the Stolper-Samuelson (SS) theorem states that trade and FDI should both take advantage of
the abundance of low-skilled labor in DCs, resulting in an increased demand for low-skilled domestic labor and
a reduction in wage disparity and income inequality within countries (Stolper and Samuelson, 1941; See Wood,
1994 and 1997 for a recent reexamination of the potential equalizing effect of trade in newly industrialized
nations; Milanovic, 2002a, for a critical perspective. The SS theorem is open to significant theoretical criticism.
First, is the theorem true globally or in relation to the so-called "cones of diversification" (Davis, 1996; a cone
of diversification is a group of countries with similar endowment proportions, very similar production functions,
and providing the same range of goods)? If the SS theorem holds true for a particular cone of diversification
rather than the global economy, it could be the case that countries with a high concentration of unskilled labor
have higher concentrations of capital and skilled labor than other countries in the same cone; For instance, in
Mexico, the equalizing effect of trade and FDI with the United States may be more than compensated by the
dis-equalizing effect of competition by China and other newly industrialized Asian countries;
this suggests that a straightforward North-South interpretation of the SS theorem may have very different
distributional consequences than expected. Wood, 1997, and Wood and Ridao-Cano, 1999, respectively).
Second, the model developed by Feenstra-Hanson (1996 and 1997) demonstrates that the recipient DC's labor
market may be skill-intensive despite what is unskilled intensive in a developed nation. As a result, shifting
production from developed countries to developing countries through import/export trade and FDI may result
in an increase in inequality in the former as well as the latter. For example, if production is outsourced to
Mexico through FDI, plants in the United States that used a lot of unskilled labor would be more skilled in
Mexico (with a higher ratio of skilled/unskilled labor than domestic plants), which would raise relative wages
and income inequality in both countries (Zhu and Trefler, 2001).
Thirdly, a potential "skill biased" nature of technologies embodied in both FDIs and other forms of foreign
direct investment (see Findlay, 1978; Wang and Blomstrom, 1992) and in capital goods imports. Following
liberalization, capital equipment and intermediate goods make up the majority of DCs' growing imports (see
Acemoglu, 1998; 1999 (O'Connor and Lunati). We can separate FDI and importation for clarity's sake.
In addition to the direct effect, if we consider foreign direct investment (FDI) as a vehicle for new technologies,
there are additional pathways by which skilled-biased innovation spills over from foreign firms to local ones:
the demonstration effect (Piva, 2003; local businesses adopt new technologies by imitating and reverse
engineering); the vertical spillovers (backward and forward linkages result in technology advancements within
and between industries):
see 1999 Saggi); Worker turnover and spin-offs (Kinoshita, 2000, citing workers trained in foreign-owned
businesses, who may transfer significant know-how to local businesses by switching employers or starting their
own business); and the effect of competition (see Bayoumi et al. Using a framework based on the
unconditional Kuznets' curve, Higgins and Williamson (1999) find no significant relationship between economic
openness and inequality; Spilimbergo and others 1999) find that trade openness reduces income inequality in
skill-rich nations, but when they restrict their analysis to DCs, they discover no significant link between
inequality and trade.
Capital goods imports, which embody technological innovations, are more significant than other imports due
to their role in capital upgrading and, more broadly, DCs' economic growth (Xu and Wang, 2000; 2001, Eaton
and Kortum; Mazumdar, 2001), as well as due to the fact that they started the so-called "skill enhancing trade"
(see Robbins, 1996 and 2002; Navaretti, Barba, et al., 1998; 2000 and 2004 by Berman and Machin; 2004
(Vivarelli). In point of fact, it is reasonable to expect that transferred technologies are relatively skill-intensive,
i.e. more skill-intensive than those utilized domestically prior to trade and FDI liberalization, even if it is not
necessarily assumed that developed countries transfer their "best" technologies to the DCs.
However, Birchenall (2001) comes to the conclusion that, in the case of Colombia, wage inequality,
polarization, and increased labor mobility were brought about by liberalization interpreted as a skill-biased
technological change. Therefore, on the theoretical side, allowing capital deepening and skill-biased
technological change (SBTC) and relaxing the HO hypothesis of technological homogeneity opens the door to a
significant potential counter-effect in terms of the distributional impact of globalization. Lastly, Vivarelli (2004)
finds that FDI inflows and trade openness have no significant distributional effect; However, his study provides
some evidence that, during the initial stages of trade openness, importation may be associated with an
increase in WCII (possibly via SBTC).
The most common conclusion drawn from these empirical studies is that, while theoretical considerations do
not necessarily contradict the widespread notion that greater economic integration across nations is
associated with an increase in inequality within DCs, recent empirical evidence does not significantly support
this claim. According to Cornia (2004), globalization by itself does not appear to be the primary cause of the
current rise in WCII in DCs. However, recent evidence supports the hypothesis that the spread of SBTC from
developed to developing nations may, at least temporarily, result in an increase in inequality within countries.

 Globalization and poverty alleviation

While proponents of globalization maintain that current trends clearly indicate a decrease in global inequality
(Sala-i-Martin, 2002), critics demonstrate that this result is primarily attributable to China's exceptional
growth, while absolute poverty (also known as inequality) has increased in most countries and relative poverty
(also known as inequality) has increased in SSA (Milanovic, 2002b; Pogge and Reddy, 2002). In point of fact,
globalization has a significant impact on labor productivity, which may result in higher wages on the one hand
and job losses on the other; the need for skills (with a possible redundancy of low-skilled individuals primarily
living below the poverty line; see also Section 4); the need for macroeconomic stability (Bhagwati and
Srinivasan, 2002; since stability implies low inflation, trade should benefit the poor because the poor typically
suffer the most from rising inflation); As a result, Winters' (2000) overall conclusion sounds particularly wise:
Even though it is generally found that trade liberalization increases economic opportunities and potentials for
developing countries, it is absurd to believe that globalization never causes poverty, if any, due to the fact that
the poor are so diverse within a country and between poor countries.
Santarelli and Figini (2004 and 2005) were able to demonstrate the following with the help of data from 120
DCs:
1) Trade openness aids in the reduction of absolute poverty, which is defined as the number of people living
below the poverty line; 2) In conclusion, nothing can guarantee a one-to-one relationship between poverty
alleviation and globalization, as Dollar and Kray (2001a and 2001b) assert that "trade is good for growth,
growth is good for the poor, and so trade is good for the poor" implies. 3) This result is consistent with what
was discussed in the preceding Section 4, as there is no significant relationship between trade or FDI and
relative poverty, which is defined as individuals earning less than 50% of the mean.
Therefore, there is a strong correlation between possible increases in income inequality and the liberalization
of capital accounts, which may counterbalance the effect of trade and FDI on reducing poverty (Taylor, 2004;
2004 by Santarelli and Figini; See Kaminsky and Schmukler, 2003, for an opposing viewpoint highlighting the
welfare benefits of financial liberalization in the long run. Globalization and economic growth both contribute
to the reduction of poverty, but not necessarily in the same way: The complementary economic factors and
policies that are a part of the game can actually either increase or decrease (or even cancel) the final result in
terms of reducing poverty.
Last but not least, the UNCTAD report on low-income developing countries from 2002 emphasizes that the
current conventional wisdom that LDCs' persistent poverty is primarily attributable to their lack of trade
integration is oversimplified. Poverty can rise rapidly as a result of increased vulnerability, the occurrence of
generalized economic crises, and the contagion of "innocent victims," all of which can be related to rapid
financial liberalization (see Lee, 1998; 2004 Cornia (2004).
Dollar and Kraay (2001a and 2001b), focusing on empirical research, divide nations into globalizers and non-
globalizers based on how well they increase trade openness (export + import over GDP) and demonstrate that
the former group has experienced higher growth rates from 1977 to 1997. relative prices (with potential
negative or positive effects on the purchasing power of poor households based on changes in the terms of
trade and the reduction of the basket of tariffs); the relative competitiveness of domestic businesses, which
may be displaced by multinationals that are more effective, government revenues and expenditures, and other
factors.

 Conclusions and policy implications

We asked some broad questions in Section 2, and the following discussion aimed to provide analytical and
empirical responses.
1) If a DC decides to open up to globalization (or becomes exposed to it), how will local employment and
income distribution likely change?
Both the theory and the empirical evidence did not yield clear-cut, black-and-white results, as was made clear
in the previous sections, but rather nuanced ones.
The optimistic HO/SS predictions do not apply to the current wave of globalization, if one is to be found;
Indeed, increasing trade and FDI does not automatically guarantee job creation or a reduction in inequality
within a country. On the other hand, the employment effect can be very different in different parts of the
world, which can lead to concentration and marginalization, and there is a lot of room for improving a social-
institutional system's "absorptive capacity."
In greater detail, the employment impact is influenced by the output effect, productivity effect, and initial labor
intensity of the traded goods and non-traded goods sectors, respectively. In terms of job creation, very
different outcomes may emerge depending on the values of these three parameters and the magnitude of any
potential constraints in the supply of capital, infrastructure, and skilled labor. The effects of FDI on
employment are subject to arguments that are very similar.
While SS's theorem does not hold true in terms of income distribution, it is also true that rising trade and FDI
do not appear to be the primary causes of rising within-country income inequality in DCs. However, there is
some evidence that, during the initial stages of trade liberalization, capital goods imports may be associated
with an increase in inequality within a country as a result of SBTC.
Finally, although there are significant counterexamples, particularly in Sub-Saharan Africa, increasing trade
appears to promote growth and complete poverty alleviation. Financial liberalization appears to have a
negative impact on relative poverty, whereas FDIs appear to have no effect on income distribution or poverty.
2) Which channels affect employment, income distribution within a country, and poverty reduction through
trade and FDI?
Increasing economic expansion serves as a steppingstone for the positive impact that expanding trade has on
reducing poverty. Overall, there is a decrease in poverty because overall trade (imports and exports) is neutral
in terms of income distribution and encourages economic growth.
Technology has a significant impact on employment and income distribution, according to numerous studies. If
trade (especially through the importation of machinery) and foreign direct investment (FDI) are characterized
by labor-saving and skilled-biased technologies, globalization will have effects that go against the HO/SS
predictions, such as a decrease in employment and an increase in income inequality within a country. In this
context, the preliminary theoretical and empirical findings discussed in Section 4 regarding the spread of SBTC
from developed to middle-income DCs pave the way for a very promising field of study.
The institutional organization of the labor market—which includes the informal sector—is another significant
mediator of the social effects of growing trade and FDI.
The positive employment impact of globalization may be quantified to be higher if the labor market is flexible
and informal labor is used a lot. However, there are serious and negative potential counter-effects that include
growing income inequality and social dumping (a globalization-induced "race to the bottom" and "beggar thy
neighbor" race). This regressive race may ultimately result in a significant decrease in a DC's socioeconomic
capabilities, ultimately affecting the country's "absorptive capacity" in terms of technological opportunities,
social cohesion, and political institutions.
3) What roles do a DC's institutional structure and level of development play?
In general, the level of human and economic development has an impact on the direction and impact of the
current globalization wave. For instance, in order to maximize the positive employment and distributional
effects of increasing trade and FDI, the role that the physical and human infrastructures within a DC play is
crucial. On the other hand, a country may be doomed to marginalization, exploitation, as well as high rates of
domestic unemployment and income inequality, if there are roadblocks in the supply of educated and skilled
labor as well as in public and private investments (including R&D).
The following are some straightforward examples and policy implications: the significance of training and
education; the organizations that oversee the capital and labor markets; the different kinds of "governance" at
the local, regional, and national levels (such as changing taxes and getting rid of corruption); policies for
industry and innovation that focus on new industries and products that are growing quickly; the development
of a welfare system capable of providing safety nets for potential globalization victims.
4) In light of the outcomes of the preceding points, what recommendations for DC policy can be made for a
globalizing DC?
It goes without saying that we are unable to conduct an in-depth analysis of the various national and
international policy options here; However, from the previous discussion, we can briefly highlight four main
policy options for enhancing the positive effects of globalization on domestic employment and income
distribution in a DC. a) The best way to encourage globalization is through "controlled liberalization," which is
prompted by market failures and disparities in the initial levels of economic and human development,
technological "absorptive capacity," and "social capabilities." Indeed, employment performance appears to be
best among cautious globalizers, whereas faster globalization may imply a wider income inequality as imports
rise. In particular historical contexts, financial liberalization ought to be even more restrained in conjunction
with some form of policy controls on trade and FDI. In point of fact, a sudden liberalization of the financial
system may come with an increase in poverty and vulnerability.

b) Regional, industrial, and innovation policies at the national level may take on a new role in light of the
importance of specific institutional, structural, and technological characteristics and the uneven distribution of
globalization's positive employment effects across nations and economic sectors.
c) National and local education and training policies must play a crucial role in increasing the supply of skills
because of the potential negative distributional effect of importing widespread SBTC. On the other hand, a lack
of skills leads to a reduction in output and an increase in wage disparity, both of which have negative effects
on employment in the country and income inequality within the country.
d) Because of the country-specific and heterogeneous effects on employment and income distribution,
adequate social, labor, and income multilateral policies are required at the international level for preventive
intervention (such as insurance programs and/or social safety nets).
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