Can Globalisation Cure Poverty and Global Inequality?

 

In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal interdependence of nations.  (Marx and Engels : The Communist Manifesto)

 

Globalisation, its nature and effects, have become pivotal to the study of world poverty and inequality. Globalisation refers to the "process enabling financial and investment markets to operate internationally, largely as a result of deregulation and improved communications,"  the term itself is used to encompass the ever expanding movement of capital, goods and services through increased global trade and investment aided by rapidly improving technology. Despite a barrage of criticism, globalisation is considered by international monetary forces such as the World Bank and the International Monetary Fund as a critical part of the solution to the problems of inequality and global poverty. Neo-liberalist thought, the doctrine for this band of thought, insists on the benefits of free-trade and economic liberty for increased growth, globally. Increased global economic growth is expected, and is considered by many, to reduce poverty, and by association, inequality. The following will consider development goals put in place by the IMF, and the methods deemed appropriate to meet them, shall be explored before looking towards the data provided by the World Bank and the fund pointing towards the success story of the neo-liberalist systems.

However, there is a body of thought which directly opposes neo-liberalism. Here, as in many other texts, it shall be considered as anti-globalization. Thought on the effects of globalization here ranges from little or none to adverse. Initially, this essay will look at the perceived problems in both defining poverty and inequality, and in the techniques and methods used for measuring the poor. The reality of frequent estimation and guesswork in providing the numbers for certain countries will be shown to create a huge margin of error particularly in China and India.

The final two subsections will concentrate on the cases of China and Africa and the regional inequality which is so prevalent between them, and the cases of China and India where more recent and accurate data has revealed large discrepancies in the World Bank economy and poverty statistics. The first case stems from the anti-globalization camp which suggests that positive changes in poverty and inequality are almost entirely the result of significant progress in China and India, suggesting that elsewhere, little, no, or negative progress has been made. Finally, research statistics from the Asian Development Bank in 2005 will show data on China and India, and will highlight the extent of World Bank miscalculation, showing in fact that China is neither the competitor or threat that it had been considered, and that globalisation has not been the success story it was once considered as a result of substantial growth estimated in the PRC and India.

It will then be concluded that despite very strong indication from the World Bank and the IMF that globalization is a major factor and hugely decisive in the quest to reduce poverty and inequality on a global scale, there is such solid evidence which undermines the findings that it is impossible to establish a firm conclusion on the effects of globalisation. It is however possible to see that a reliance on the superficial successes of China and India was too extensive, and that new evidence will force a change in figures provided. Furthermore, it will be seen that even with some great progresses being made in Asia, little has been made elsewhere, particularly not in Sub-Saharan Africa. It will be concluded that globalisation cannot be considered a successful method to reduce poverty and inequality, globally.

 

The Neo-Liberalist Argument.

‘Globalization’, said Alan Greenspan, ‘in addition to its myriad material benefits, needs to be seen as a reflection of human freedom in economic terms by a vast majority of its participants. It needs to be seen as offering opportunities to raise the standards of living of all participants in the world trading system.’ And so goes the doctrine of neo-liberalism. Although considered to be a political movement, neo-liberalism stresses the benefits of free trade and economic liberty in the quest for greater economic growth, globally: Globalization is considered by neo-liberalists to be the single most important factor in the reduction of global poverty and inequality. Over the last two decades, it has been possible to forge a link between increased levels of trade and positive changes in global poverty and inequality for the first time in over a century. Market-driven strategies appear on some level to have opened up barriers to trade and hugely augment the size of the international market, exploiting the world’s resources to a greater extent, and placing rich and poor on the same playing field, or rather making them play the same game, not necessarily on the same pitch. Growth rates in developing countries have risen, says the World Bank, not only in terms of average income, but the income of those in the lower deciles as well.  So, to continue on Greenspan’s line of argument, poor nations “need more globalisation, not less”. He said that dismantling trade barriers to encourage greater third world trading would be the best single action that could be taken to combat world poverty. It is considered that Globalization has mutual benefit for both rich and poor, that, contrary to leftist argument, economic liberty pushes developed and developing closer to equity. As a result, debt refinancing in the developing world has been made possible on the condition of Structural Adjustment Programmes which insist on economic overhaul and the introduction of more liberal economic policies. So the developing world has been pushed onto the world markets, open to global competition, in a move which apparently seeks to pull developing nations out of poverty through increased globalisation.  The continuing split seen between rich and poor, North and South is not a trait of Globalization, but a time delay in the levelling of rich and poor fuelled by the IMF, the World Bank and the WTO.           

In September 2000, 189 countries endorsed a set of eight goals, built on ‘agreements made at United Nations conferences’ which represent commitments by all countries involved to reduce poverty, hunger, ill-health, gender inequality, lack of education, lack of access to clean water and environmental degradation. The first ‘goal’ is to eradicate extreme hunger and poverty, halving the number of starving and the number of people living on less than 1$ per day by 2015. The eighth ‘goal’ is to “develop a global partnership for development.” Further development of this eighth goal exemplifies the UN, taking on board the neo-liberal stance of the World Bank, striving for poverty reduction through the opening of international trade and financial systems. Further integration and globalisation is considered by the UN among others as the formula to reduce poverty and inequality. These goals have taken the neo-liberalist point of view to the United Nations, who joins the IMF and the World Bank among others in taking the opinion that further integration will help to reduce poverty and inequality.

I will now refer to data and statistics which support the Neo-liberalist case, supporting globalisation as the key to ending poverty and inequality. Already, World Bank data shows that living standards have dramatically risen in recent decades and that the proportion of the developing world's population living in extreme economic poverty (defined as living on less than $1 per day ($1.08 in 1993 dollars, adjusted to account for differences in purchasing power across countries) has fallen from 28 percent in 1990 to 21 percent in 2001. Social indicators are also said to be substantially improved.

Table 1 shows data on each region for the percentage of country population living in households with income below the absolute poverty line which confirms improvements in every region, except Latin America and the Caribbean, since 1990, with particular improvements made in East Asia and the Pacific. The rapidly growing economies in both China and India have been fundamental to the success of

the neo-liberalist argument.

Table 1 : % of population living below

Absolute poverty line.

1981

1993

1999

2004

Region

%

East Asia and Pacific

57.73

25.23

15.40

9.07

Europe and Central Asia

0.70

3.61

3.60

0.95

Latin America and Caribbean

10.77

8.24

9.60

8.63

Middle East and North Africa

5.08

2.12

2.08

1.47

South Asia

49.57

36.86

35.04

31.08

Sub Saharan Africa

47.39

45.73

46.07

41.09

 

The WB poverty website states that living standards have risen ‘dramatically over the last decades.’ Substantiating the claim with data showing that the proportion of the developing world’s population living in extreme poverty (as previously defined has fallen from 28%in 1990 to 21% in 2001, a fairly significant assertion. Indeed, whilst World Bank data does show improvement in all regions, China is the Magnum Opus of the Neo-liberal argument. This will be addressed in greater detail further on.

            On inequality, the World Bank admits greater ambiguity lies in the relationship with increased growth, although the website states that living standards have improved on all levels and not just the upper deciles. There is a great deal more variation in neo-liberalist thought on inequality. Starting with the Kuznets hypothesis which suggests that income distribution becomes more unequal in the first stages of an economy’s development. They also acknowledge that through development of new technologies during economic growth, demand for skilled labour would be likely to raise inequality. On the other hand, Dollar and Kraay suggest that growth does not have an impact on inequality. In response to anti-globalist opinion which found globalisation to increase inequality, Martin Wolf stated very strongly that globalization had by no means caused a ‘horrifying rise in inequality’. He found this to be not only wrong, but an example of a ‘big lie’ ‘a proposition that is the opposite of the truth’. There is no united opinion on inequality in the Liberalist camp. In many cases it appears to have been either easier or more appropriate to ask not what growth does to inequality, but what inequality does to growth. As inequality has been seen to prevent sustainable growth, the reduction of inequality is vital to neo-liberalist thinking.

Essentially, Neo-liberalism, with the World Bank at its helm, paints a positive picture of globalisation, backed up by sets of data provided by the World Bank itself which support the claim that globalisation and by association increased economic liberation, freer trade and increased economic growth, have all led to enormous success in the reduction of global poverty. They admit that some regions have done a lot better than others, but maintain positive results in all regions since 1981. Whilst inequality remains less explicitly evaluated, and it has been accepted by Neo-liberalism that the early stages of growth are likely to lead to greater inequality, this is considered to be a temporary state, with the trickle-down effect benefiting all parts of society over a longer time-scale, levelling the economic profile of the developing nation.

 

Anti-globalization.

On The Problem of Defining and Measuring Poverty and Inequality

The data used to provide statistics on the current state of inequality and global poverty, and how they are measured, is fundamental when assessing how globalization has affected the world. The accuracy and credibility of WB data has come under a great deal of attack, the following will explain why.

When working out the headcount for extreme poverty, explains Robert Wade, the bank takes a ‘base’ year, from which they define an international poverty line by converting the average purchasing power of a group of low income countries into US$. This $1 Purchasing Power Parity (PPP) is defined as having the same notional purchasing power in the United States for that base year. For subsequent years, the bank uses the same PPP conversion to estimate the amount of local currency needed to have the same purchasing power in the US as the base year. The headcount rate is then calculated as

 

 

                                                                  Q           (number of poor)

(Headcount)                         H =         ---

                                                                 N           (size of population)      

 

My research has pointed out some major shortcomings in the nature of these calculations. Initially it must be noted that PPP calculations rely on household surveys for the income and expenditure levels. Wade quickly observes that whilst there is not necessarily a more reliable method, but that there is huge potential lying in both the availability of feedback, and its reliability. This two-fold potential increases margin of error hugely. Secondly, the introduction by the World Bank of a new methodology in the late 1990’s means that statistics prior to 1987 should not be comparable with those of more recent years, and yet the bank does rely on this comparison. It is astonishing that an establishment which is considered to be the forerunner in the calculation of poverty numbers should ignore such an enormous inconsistency. To take another perspective of the problem, this calculation of a poverty line, below which the income of individuals or households is said to be unacceptably low, does not show the extent of the poverty or the nature of the shortcomings below that line. This is so important to the case in hand as it proves the impossibility of assessing the impact of globalisation on poverty beyond the calculation of the poverty rate.  More alarming still is the potential here to quite simply lower the poverty rate by giving donations to the richest of the poor (a process known as cream-skimming). Such is the sensitivity of the poverty line, Wade points out that research in China carried out recently showed that a ten percent increase in the line raised the poverty count some twenty percent.

Finally, and perhaps more surprisingly still is the formation of statistics on China and India, the shining examples in the case for globalization. Yet the main PPP benchmark figures are based on calculations made in 1985 and 1993 for 60 and 110 countries respectively. China declined participation in both, and India in the latter. This means that poverty figures for the two countries have been based on “guesstimates” from ‘basket of good’ surveys in some cities, a method unlikely to reflect the genuine picture of a country’s economic profile.

IMF Debt Financing

The nature of IMF loans to developing countries was briefly considered, it was seen that developing countries had been swayed into adopting more liberal economic policies and opening up to the world market and globalisation as a condition for receiving debt financing. The critics have not. One of the biggest critics of globalisation is Joseph Stiglitz, formerly chief economist at the World Bank. Stiglitz finds that the biggest problem to developing nations is that they are not actually developing, and that the IMF and its policies are to blame. The requirement for ‘textbook’ economic conditions and liberal economic policies are both inappropriate and damaging to developing and irregular markets. By preventing loans if nations do not meet their criteria, the IMF states Stiglitz is ignoring conditions which have lead to economic disaster and huge human suffering. 

The Realities of FDI

It seems appropriate here to mention an essay by Alan Rugman which for the most part covers Foreign Direct Investment, but as FDI is ‘the engine of international business’ and that which can be said to use the growing nature of the world market, I feel that what he has to say is important for the question of globalisation as a whole. Rugman states that the vast majority of the world’s largest Multi National Enterprises operate regionally and not globally, that truly global firms are few and far between. He refers on multiple occasions to the trading triad of the USA, Europe and Asia, which experiences huge amounts of FDI and cross-border and cross-regional trade, whilst Africa, for example, does not. Much of Sub-Saharan Africa lacks the basic infrastructure which would make FDI a possibility. This is important when looking at the huge regional inequalities found in the developing world, particularly when considering of China and Africa.

 

The Case of China and the case of Africa

China and Africa, particularly Sub-Saharan Africa are key to the debate concerning inequality. Whilst the World Bank is able to provide data which suggests poverty is decreasing in all regions of the world, they are not able to do so in the case of inequality. Data and statistics exist which highlight what appears to be a growing problem in the support for globalization as a remedy for poverty and inequality. If I may refer back to Table 1, it is very easy to see that poverty rates vary greatly between regions.

Countries in Southern and Eastern Asia are performing well, and Sub-Saharan Africa is not. When the World Bank calculates poverty rates for developing countries as a whole it includes data for all developing countries and therefore it does not show the extent of the disparities between countries, or indeed the depth of poverty in the countries performing less well. They back-up their policies which support globalization as a cure for poverty with data which does not show the full detail required for a situation of such complexity. One need only chart the inequality of the world (shown as a gini coefficient) against the inequality of the world without Africa to gage the extent and depth of global inequality.
 It is possible to say that African nations have not performed well on a global level, and that the rest of the world, particularly China and most of South East Asia have done very well in the last two decades. Thus, on a global level, it is seen that Globalization has not helped the devastating reality of inequality. Here perhaps is where the aforementioned Rugman essay is of greatest importance as we now know that most countries in Sub-Saharan Africa, where governments have been pushed into adopting liberal economic policies in order to receive debt refinancing arrangements, are not statistically reaping the benefits of globalisation. Indeed, it would appear that a group of developing nations, particularly those in South East Asia, are experiencing a reduction in poverty and to some extent inequality which can be seen in part to be a result of increased liberalisation and globalisation. But there is a much larger area which has not reaped these benefits, which could be seen to have suffered as a result of increased globalisation.

 

The Case of China and the Case of India

At this point, it should be possible to draw some conclusions from the various data and opinion sources, but there is one more study which is important to the question. A study published by the Asian Development Bank in the summer of 2007 which had collated official survey results from both China and India which will dramatically alter the PPP estimates of the World Bank.  Albert Keidel reported in the Financial Times that China’s economy will turn out to be 40 per cent smaller than previously estimated, whilst the number of people living below the $1/day mark will be three times the size, totalling 300 million. The same survey shows a similar case in India with poverty lying closer to 800 million, twice the current World Bank estimate. These findings will be hugely influential on the globalisation debate as they find fault in data produced for the two key candidates showing the potential benefits of globalisation on poverty and inequality. Whilst it will take some time for the data to be used statistically, and whilst there is no suggestion that the survey is more accurate than other PPP surveys, it does bring the country data in line with the rest of the world. China and India have both progressed at a level which outperforms other developing countries, but not to the outstanding extent that the guesstimates had provisioned.

Conclusions

It would be a great relief at this point to offer-up some piece of research which offers a suitable remedy to the enormous reality of global poverty and inequality, but this will not be the case. It is astonishing to uncover the depth of the global crisis which exists today and the potential dangers of misinterpretation and incorrect handling of the situation. The arguments for and against globalisation as a remedy to global poverty and inequality have been considered, and it seems quite clear that what may be considered the ‘mainstream opinion’ is in the wrong. Whilst World Bank data and its related statistics often show a positive link between globalisation and poverty reduction, with China and India seen to lead the developing nations into the developed world, the statistics are often either rather opaque or inaccurate. It has been seen that the United Nations has taken on Neo-Liberal policies in its Millennium Development Goals, advised by the World Bank, leaders and often creators of neo-liberal policies, in the hope of halving the number of starving by 2015, yet the reality of the evidence used to ‘back-up’ liberal economic methods within developing nations can be quite different when dissected a little further. Initially, it was seen that interregional disparity is vast, with East Asia doing very well whilst Sub Saharan Africa makes very slow progress often as a result of increased foreign competition coupled with very little Foreign Direct Investment. China was shown to be bringing up the statistics for the average developing countries, whilst Africa was seen to raise world inequality quite significantly. The methods used to measure poverty and inequality have come under attack, seen to be hugely sensitive, unreliable, subject to manipulation and largely based on guesswork, this is just reinforced by recent surveys in Asia which highlight the vast discrepancies in economy and poverty estimates for China and India. The World Bank and the IMF have suffered in this piece from a rather bad press, but I do not feel it unjust. This sensitive topic has lead frequently to the examination of the World Bank and its motivations for encouraging the entry of developing nations onto the world market, but that is another essay. It is quite impossible to state the exact effects of globalisation on global poverty and inequality. It is however apparent that globalisation has not had the very positive effects on poverty and inequality which are widely reported today. Indeed, it may be the case that the depth of poverty has increased as a result of globalisation, but there is no measure for poverty depth. Inequality has been seen to rise hugely in Africa and to a lesser extent in the world in the last 20 years, a bi-product, state the Neo-liberalists, of rapid growth, which will even-out in the future, but this has not been proven. I feel that given the evidence, there is little reason not to explore other means of curing the extreme poverty and inequality found in the world today. Finally it is worth noting that the technological advancements which go hand-in-hand with globalisation have made it possible for a greater number of people to be aware of the state of the developing world, if raised awareness is thus a product of globalisation then it is not an entirely negative force to be reckoned with.