Poverty and Inequality–Is Globalization Benign?

February 27, 2013

The question presumes agreement that there has been a reduction in poverty and inequality attributable to globalization. To the contrary, there is significant dispute among scholars and policymakers as to the direction and the degree of change in poverty and inequality across the period of recent rapid globalization. The debate extends to the importance of inequality in the matter of growth.  Certain measures will support findings of convergence, and others of divergence. The influence of globalization on the trends is yet another matter of disagreement. Finally, there is dispute about whether anything should be done or what should be done about the trends.
There is a body of argument supporting the statement as entirely true. Believers include Thatcher, Reagan, and economists who support their policies—Friedrich Hayek, Milton Friedman, Jeffrey Sachs, and others. There is a body of argument and another group who believe the statement is at best misleading and that if the proper indicators are used, the findings are increased poverty and inequality. Joseph Stiglitz, Shamsul Haque, and Branko Milanovic are among these.
I argue that there has indeed been a reduction in poverty across the years since 1980, but the trends in inequality are much less clear. I argue globalization has been good for poverty reduction, but globalization should and can be managed more effectively by IGO’s and nation states in order to deliver benefits to a large segment of the world’s population which has not seen improvement.
I will assume globalization to be focused on the period of recent acceleration, 1980 to the present. Due to the space limitations of this paper, I will assume poverty is measured primarily by income per capita. The term “good” may mean different things in different cultures (e.g., income, freedom from oppression, access to health services, education, etc.). I will assume income per capita to be the measure of good for this paper. Doing so, I do not concede to income as the best measure for all purposes. I will primarily rely on the widely used “GINI” coefficient in regard to inequality, also without conceding that this measure fully addresses the concept. I will review the criticality of methodological choices for both poverty and inequality. Reference will be made to schools of thought which perhaps bias the choices of methodology and the findings.
A good place to begin is with the work of Bob Sutcliffe who describes five different methodological decisions which must first be taken by any serious student of change in poverty and inequality: (1) what is to be studied (wealth, life expectancy, etc.); (2) inequality between whom (between countries, within countries, etc.); (3) how to deal with currency differences; (4) choosing from among many sources of data; and, (5) what types of measures (integral, ratios, etc.). (Sutcliffe 2005:1-20) Choices among these methodologies can yield radically different conclusions.
Depending on the variables chosen, one can either confirm the essay statement or refute it. Poverty has been reduced if we include India and China, but has increased if we do not.  Similarly, there is decreased inequality between population weighted countries, based on income, but greater inequality within countries, based on income (Sutcliffe 2005:1-20). 
Two widely respected economists are examples of the dramatic divide that exists over the choices and interpretation of data: Jagdish Bhagwati, in his best seller, In Defense of Globalization, states clearly, “[…] as it happened, the proponents of globalization have it right,” when speaking of the poverty reducing policies associated with free trade (Bhagwati 2004:52). To the contrary, Joseph Stiglitz, excepting China, Vietnam, and a few Eastern European countries, says, “poverty has soared as incomes have plummeted” (Stiglitz 2012:214). Both scholars can easily defend their views with data and methods selectively chosen. One can only wonder whether an ideological predisposition determines the selection of methodologies, or the thoughtful choice of methodologies determines the attitude of an unbiased scholar toward the benefits of globalization. Too often, it may well be the former.
Poverty and inequality do not necessarily track together. It is possible one is improving and the other not. Also, most widely used poverty measures use a fixed measure for poverty, such as $1.25 PPP per day, whereas inequality is a relative measure. Sutcliffe reports that while poverty is a major focus of concern among economists in recent years, inequality has been “systematically avoided” (Sutcliffe 2005:14). Underscoring his point, the focus of the Millenium Development Goals is on poverty reduction. Inequality is not mentioned in the MDG’s, except in the context of gender.
What was it that the advocates of free trade, opening borders, and globalization were expecting as Thatcher and Reagan launched the explosion of neoclassical economic policies in the early 1980’s? Globalization was expected to result in convergence of real incomes between wealthy and poor countries, for the following four reasons: (1) Poor countries would get foreign direct investment because low wages would attract capital expecting big returns; (2) poor nations would import technology from the wealthy world, and thus inexpensively copy the advancements the rich world had already paid dearly to develop; (3) poor countries could specialize in whatever they do best, import the rest from other countries; and (4) the poor countries could take all the policies, laws, and institutions that were successful elsewhere, and painlessly institute them (Milanovik 2011:104-5).
What was actually delivered? Neoliberals feel actual experience since 1980 validates the policies administered by the World Bank, the IMF, and the WTO in driving the developing world toward less poverty and greater equality (Wade 2004:567-8). By the measures of the World Bank, we are headed to reaching the poverty goal in the MDG’s. They argue that the countries which chose to fully adopt the free market theory indeed advanced, and the countries whose growth was stagnant simply failed to sufficiently free their markets of constraining influences.
Concerning inequality, If only the predominant measure is used to determine inequality, PPP income inequality between population weighted countries (intercountry), then it is widely accepted that income inequality has improved–constant or falling since 1980 (Wade 2004: 576).
Summarizing the neoclassical view, if only these two widely used measures are selected to answer the question, one can accurately claim that globalization has delivered improvement in both poverty and inequality across the last thirty years of accelerated globalization. 
Of course, all such claims assume that the key elements of what constitutes globalization are agreed and that we disregard other forces (outside globalization) which may have had influence on the results. As Wade explains, we may simplify by saying globalization is everything that occurred in the period loosely called the period of globalization (1980 to the present), but we know there are elements in the period other than “[…] just those things which really did expand global interchanges of goods, capital and people” (Wade 2004: 17).
Writing in the Asian Journal of Social Science, Shamsul Haque describes the opposite view of poverty resulting from the policies during the globalization period:
In terms of poverty, after the neoliberal reforms since 1980, about 100 countries have experienced economic decline or stagnation, 1.6 billion people have seen their incomes dropped, 70 countries have average incomes lower than they were in 1980, and 43 countries have incomes lower than they were in 1970. In a study of 28 countries in 2000, it was reported by the World Bank that between 1981 and 1997 (a period of neoliberal structural reforms), the levels of income, poverty, and life expectancy deteriorated in 54 percent of these countries (Hague 2008:20).
Chen and Ravallion agree by pointing out that if China is excluded, the developing world is an entirely different story—not likely to achieve MDG goals (Chen and Ravallion 2008: 20). This is because the preponderance of poverty alleviation worldwide has occurred in the world’s largest country, and many other areas have regressed.
Intercountry population weighted PPP poverty reduction over the 30 years since 1980 may well be offset in value by the dramatic intracountry inequality measured by the GINI index. Joseph Stiglitz argues that in the US, we have allowed too much political power to be dominated by the top 1%, and that the result has been joblessness, stagnant wages, lower social benefits, and dangerously rising inequality within America (Stiglitz 2012).
Bloomberg (2012) reports that across the period since January 1978, the cost of higher education in the US has increased 1,200%, medical care 600%, and shelter 400%. During this period, CEO pay in the US grew by 725% while worker pay grew by only 5.7%, notwithstanding significant improvements in productivity—the surplus went to corporate profits and to top management (Huffington Post 2012). These are staggering developments which should concern us.
Wealth interests can survive and gain more from the financial crises of globalization. Hedge fund manager John Paulson made $3.5 billion betting on the current financial crisis coming, and is now buying foreclosed homes from banks, with potential to make billions on both sides of the crisis. (Economist: 01 December 2012:81) The middle income and poor do not have the information or capital resources to profit from such volatility.
The world’s second largest economy has been experiencing similar rising levels of inequality. The Chinese state immediately suppressed internet access to recent reports from the NY times, in the immediate aftermath of the Bo Xilai scandal, that the family of Premier Wen Jiabao had amassed wealth amounting to some $2.7 billion. The Atlantic reported observing growing Chinese reading of DeToqueville, who believed that revolution is more likely to occur when things are improving than when declining, an ominous observation in regard to a country which has a reported 500 organized protests per day (The Atlantic January 2012).           
There is now a growing debate over whether inequality reduces growth. Stiglitz says, “The bottom line […] that higher inequality is associated with lower growth—controlling for all other relevant factors—has been verified by looking at a range of countries and looking over longer periods of time” (Stiglitz 2012:117).  He adds that globalization (“as it has been managed”) is almost certainly worsening inequality (Stiglitz 2012:63-4). If true, there is a strong argument to the politically powerful to address inequality—this could actually benefit the wealthy economically in the long run. Reflecting recent growing concern for inequality, the UNDP introduced the Inequality HDI (“IHDI”) in 2011, with inequality factored into each of the three components of the index: income per capita, life expectancy and education.
What is behind the dramatic rise in the Gini coefficient in many countries (U.S., China, and others) across the period discussed, and what, if anything, should we do about it? Classic explanation for the behavior of inequality in economic growth is based on the work of Simon Kuznets (1955), who theorized that within country income divergence occurs at intermediate levels of development as people move to cities and power shifts to different factors of production, and decreases as greater country wealth is attained (Kuznets 1955: 2) In this view, things might naturally get better over time.
However, theories based on the work of Joseph Schumpeter see capitalism as involving continuous transformation, upheavals, such that any hope for stability is vain and instead, there is “a constant drive toward inequality” (Korzeniewicz: 579-80).  Korzeniewicz reports in 2007 that there has been a lot of focus on methodology and determinations of the degree of change inequality, but relatively little attention to effective theorizing as to underlying processes that lead to the trends (Korzeniwicz 2007: 563-592).  So, we really do not yet understand well the nature of the progression of inequality.
The answer seems to be in the middle—globalization has been good, but it is clear we cannot rest while so many still fail to benefit from globalization. Things might get better, but we cannot count on it.
The answer to further relieving poverty and inequality could lie partially in expanded freedom of migration between countries—letting people go freely to where the work is, as they are now permitted to do within the European Union, for example. However, the political mood of most developed countries does not welcome immigration, especially in the aftermath of a crisis, when jobs in developing countries are scarce. Michael Teitelbaum of Harvard Law School and the Alfred P. Sloan Foundation summarizes for one country this way: “US policy on immigration is emotional, stalemated, and full of contradictions” (Teitelbaum: 2012:10). For many other OECD countries, immigration is similarly problematic in recent years. See the Pew Study of Global Attitudes in 2007 (Pew 2007:25). Respondents in most countries surveyed were at 75% or higher in opposition to increased immigration.
Recognizing the immigration stalemate, Milanovic (2011: 163) has a suggestion:
The trilemma of globalization, to use a phrase coined in a somewhat different context by Harvard economist Dani Rodrik, is how to continue with (1) globalization while (2) the differences in mean incomes among countries are huge, and increasing, and (3) the international mobility of labor remains very limited.” The key issue here is the political resistance to immigration, thus the better answer if this cannot be allowed, it to try to fix differences between countries—to help improve the poor countries.”
To improve the poor countries in respect to poverty and all in terms of inequality, the prescription of those on the left is mainly that we need a tightening, in a variety of different ways, to the public policy limits, which have given market forces virtually free rein across the last 30 years (Wade 2004: 568).  Observing the success of China in reducing poverty while controlling market forces, this makes sense.
Stiglitz has a number of prescriptions in chapter 10 of his new book: controls on cross border capital flows; revisions of tax codes; redirecting the Fed to focus on full employment; willingness to use fiscal policy to accompany monetary policy; measures to gradually restore trade balance; greater support for labor and improved social policies; governmental engagement in re-training workers; changes in the legal system to return greater protections to workers; focus on elimination of discrimination; focus on greater access to good; tax breaks only for those who invest; government investment in infrastructure, technology, and education; campaign finance reform, and other such methods of moving focus from the wealthy to the betterment of the entire population (Stiglitz 2012:265-290).
Paul Collier has recommendations especially for developing countries in The Bottom Billion. He is essentially calling on the wealthy world to put the plight of the lowest billion in the world at the top of its agendas, calling for such as military aid in warring states, more aid focused on high risk areas, and trade protections for poor countries from the “Asian Giants.” He sees little hope for such countries from continued globalization, as it is now (Collier 2007:175-92).
Then, there is the perspective that world governance may be inevitable in the long run, and may be for the good: In his Worlds Apart, Milanovic argues that the world will eventually become a global community with global rule. Seeing the struggles of the European Union as a harbinger of the challenges, he nevertheless projects the growing international collaboration of governments to portend a future of increased cooperation resulting in such a union—and he urges us to move ahead to address the left out—because they are citizens of the one world of our future (Milanovic 2005:162).
A potential for improvement is offered by Dic Lo in his 2012 book, in which he describes egalitarian improvements undertaken by Chinese state authorities since 2000, affecting this estimated 25% of the world’s labor market. He suggests these kinds of state interventions could spread to the remainder of the world worker class and result in a more humane world (Lo 2012:16708).
Space limitations do not permit thorough examination of policy alternatives to enable a more widely effective globalization ahead, but these are a few of the better understood factors, all of which do seem to offer potential for improvement.
Assuming the use of population weighted PPP country comparisons, it is true that poverty and inequality have been improving and stabilizing. See Chart 1. If we assume for simplicity that there are no significant influences other than globalizing influences, we can say globalization has been good for poverty and inequality.
However, as shown above, there are major issues with this choice of methodology and this conclusion. Most significant in regard to poverty is the fact that the inclusion of China and India on the population weighted indices dominates the conclusion. If these two nations are removed, then poverty has not improved across the period.
In regard to inequality, if focus is given to intracountry GINI comparison, inequality has been rising rapidly in many countries across this period. See Chart 2. These two negative findings are significant enough to cause any reasonable observer to conclude that globalization may well require some significant adjustments to meet the needs of the large segment of world population who are not experiencing improvement. It is important for recent concerns with inequality to result in more focus and understanding. There are potential dangers we cannot dismiss.
The force of globalization may be unstoppable, and does bring vast opportunity, but we must not allow the next thirty years to simply be an extrapolation of the current trends in poverty and inequality for those who were born in the wrong situations. There are opportunities of significant promise in the realm of state actions and controls and international governance.
Postnote: As mentioned at the beginning, the length of this paper does not allow adequate justice to alternate measures of “poverty,” such as the HDI, but trying to measure and understand progress in education, life expectancy, and measures of human freedom is another rich opportunity to understand how the world is progressing, and to find specific options for different countries.
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