Globalization and Liberalization: Effects of International Economic Relations on Poverty - UNCTAD - 1996

Agreed Conclusions of the agency participants

1. In terms of its implications for trade, productive investment and finance, globalization is an increasingly important dimension of international economic relations. Spurred by reduced transport costs and advances in communications and other technologies, globalization has fostered greater interdependence and cross-border linkages between the countries of the world. Countries that seek to delink, and opt instead for isolationism, risk paying a high price in future economic growth. In response to the trade and foreign investment opportunities resulting from globalization, a large and growing number of developing countries have embarked on the liberalization of their trade and foreign investment regimes, as well as the adaptation of their domestic economic structures and strengthening of their export capacity.

2. Although there will be short-term transitional costs for many developing countries as they adopt more outward-oriented liberalization policies, globalization provides hope of significant poverty reduction over the long term through its contribution to economic growth, productivity and consump- tion benefits. The significance of globalization to economic growth and poverty, however, can be expected to vary for different categories of developing countries. While most developing countries will gain from the globalization process, some will benefit more than others, and a number of countries with initial conditions that make them less suited to take advantage of globalization will lose out and become more marginalized in relation to other countries. However, it is expected that total benefits for the developing countries as a whole will be greater than total costs, and that absolute poverty will as a result decline in global terms.

3. East Asia has gained the most to date from globalization, while the situation of much of Latin America, though still fragile, appears promising. Sub-Saharan Africa, on the other hand, shows little sign of being able to benefit at this time. In view of their share of absolute poverty in the world and their capacity to benefit from globalization, most of the absolute poverty reduction associated with globalization is likely to occur in East, South and South East Asia, where close to 70 per cent of the world's absolute poverty is concentrated.

4. One of the main benefits of globalization is its role in promoting trade in the world. Since the mid- 1980s, there has been a 10 per cent annual expansion of trade of the developing countries with the industrialized countries, and a 12 per cent increase in intra-developing-countries trade. The Uruguay Round agreement and regional trade arrangements will facilitate continued trade growth through their effects on the extent and security of access to international markets. On the consumption side, import liberalization should make more affordable the purchase of manufactured goods which, reflecting world prices, are likely to be less expensive than under economic regimes that shelter domestic production from competition. The expansion of international trade is important for poverty reduction, as fuller utilization is made of low-cost labour that is the main comparative advantage of developing countries.

5. As illustrated by China's displacement of Brazil as the world's leading footwear exporter, the entry of more developing countries into export markets has led to increased price-based competition for global market share in goods for which demand elasticity is low. Such competition, of course, creates hardships and uncertainty for workers in the declining industries of higher-cost, usually middle- income developing countries. However, to the extent that lower labour costs play a significant role in this competition between countries, there will be a net reduction worldwide in absolute poverty as a result of the shift in competitive advantage to countries where absolute poverty is greater.

6. A country's comparative advantage, however, need not be static. As the experience of East Asia in particular suggests, countries can move up the trade hierarchy and export more sophisticated products. Incomes go up in the process and the competitive advantages of those countries' exporting firms in labour-intensive manufacturing may be eroded. In such cases, countries lower down the ladder replace those that have graduated from labour-intensive export production. In this manner, absolute poverty is substantially reduced in the countries that have reached the higher rungs and begins falling in countries having footholds on the lower rungs.

7. Another pillar of globalization is foreign direct investment (FDI). FDI has financed productive investments, created instant export markets, increased overall productivity and competitiveness, and enabled developing countries to capture economies of scale through international production systems. FDI during the past 15 years has grown rapidly in terms of absolute dollar volume and as a share of GDP in all developing regions except the Middle East and Africa. Although FDI is concentrated on a relatively small number of developing countries, China and, to a lesser extent, Indonesia are significant recipients of FDI and, between them, account for a large share of the world's absolute poverty. A shortcoming of most FDI, however, is that its backward and forward linkages to the local economy are often weak, which means that the economic growth and employment generated through multiplier effects can be relatively low. While there are outflows as well as inflows associated with FDI, unlike debt financing, profit repatriation only takes place if the investment generates positive returns, and it should be noted that those remittances are net of tax payments and profit reinvestment. In terms of net job creation that helps reduce poverty, FDI that is directed at labour-intensive export sectors has been preferable to FDI that competes with domestic enterprises for local market share.

8. Greater openness of the financial sector has encouraged increased portfolio investment flows into a number of middle-income countries, which has helped ease their foreign exchange constraint, augmented the marginal efficiency of capital in the countries concerned, and encouraged economic discipline while punishing policy failure. By contributing to the appreciation of the real exchange rate, such inflows have also helped dampen inflation. However, except when offset by other measures such as a reduction of export taxes, this appreciation has been detrimental to export-promotion strategies and, if the inflows are not dampened, may necessitate high interest rates having fiscal tightening implications that negatively affect economic growth and poverty reduction objectives in the short term. Domestic macroeconomic management has also been made more difficult by the procyclical nature and contagion effects of these flows, as well as by fluctuations in world interest rates.

9. It is not just the pace of economic growth that matters for poverty alleviation, but also the kind of growth. Certain East Asian economies, for instance, proved successful in achieving a rapid expansion of output and employment in labour-intensive industries geared to exports, with consequent rises in real wages spread across a large section of the labour force. Governments helped make possible these accomplishments through the adoption of trade and industrial policies that boosted exports, disciplined investors and curtailed domestic consumption. This success in industrial policies, however, was not matched by other developing regions. Import substitution practices in many developing countries instead emphasized capital- and technology-intensive investment rather than investment making fuller utilization of low-cost labour. Moreover, due to weak institutional and implementational capacity, a large number of developing countries allowed industrial policies to benefit rent-seeking interests disproportionately. Furthermore, some policies toward the private sector have been counter-productive in terms of their direct effects on poverty. Government regulatory harassment of the urban informal sector, for instance, has constrained the growth of micro- entrepreneurship in many developing countries.

10. Reaping the benefits and mitigating the transitional costs of global-ization and liberalization presuppose good governance at the level of the state and civil society. Good governance is associated with the rule of law, equity, democracy, participation, and the provision of basic services. In its absence, undesirable by-products of globalization and liberalization can take hold, including widespread non-compliance, corruption and organized crime and drug trafficking. Good governance has grown mainly from within each society and has corresponded to firm policy commitments on the part of society. International organizations have played only a secondary, complementary role in facilitating exchanges of experience, policy concertation, goal setting and, in some cases, conditionalities in connection with the observance of good governance.

11. The growth effects of globalization and liberalization affect both absolute poverty, through poverty reduction, and relative poverty, through changes in a country's income distribution. If economic growth is initially slow and, at the same time, inequality grows, absolute poverty may not decline and conjunctural poverty could increase. Without structural change, moreover, existing elites are likely to be better positioned to benefit from externally oriented liberalization policies. This is particularly true of persons holding scarce and internationally tradeable assets. On the other hand, globalization has helped supplement, through corporate savings and investment, the role of household savings in fueling investment. In such circumstances, poverty has declined as a result of the jobs created. In fact, to the extent that the globalization process has encouraged the reinvestment rather than the consumption of profits, a worsening of functional income distribution has not necessarily aggravated household income inequality.

12. A critical question is how the aggregate gains of globalization are translated into net benefits for the poorer segments of the population in the gaining countries. While economic growth is the main transmission channel, there are many other factors to take into account which makes the analysis especially complicated. In general, international trade and investment-related liberalization policies, through financial and exchange rate policies, affect the incomes and consumption of the poor in terms of employment, output growth, curb lending rates and, in general, shifts in relative prices. However, the effects also depend, among other things, on the size of the countries concerned, their degree of economic openness, their per capita income, the composition of their output growth and trade, and the efficiency and equity of their policy and institutional environment. There are also intertemporal effects to consider in which the secondary and indirect effects often offset or reverse the first order effects.

13. Whereas globalization is largely exogenous and inexorable, developing countries have a certain degree of discretion and control over the liberalization policies that they adopt. Such policies are seldom neutral in their effects on different income groups and, in fact, may involve transitory effects that are directly detrimental to some groups of the population, ranging from vocal and well organized middle-income groups to certain categories of the excluded, powerless poor. While the economic policies responsible for these effects may be short-term in nature, the poor whose health and well- being are affected may become incapacited or destitute and thus unable to recover when economic conditions eventually improve. Such negative effects may occur when countries implement sweeping liberalization policies before macro-economic stability is assured. Damaging results can also occur when liberalization policies are not properly phased and sequenced, as when externally oriented financial and import liberalization policies are pursued simultaneously. The simultaneous combination of improperly sequenced liberalization measures and macroeconomic imbalance poses the greatest risk of policy failure and massive social hardship.

14. With the benefits of globalization unevenly spread between as well as within developing countries, global income distribution is likely to become more skewed, even as the aggregate incidence of poverty in the world gradually declines. With respect to the variety of poverty groups that are better or worse off as a consequence of globalization and liberalization, distinctions can be made, among others, between poor persons engaged in agriculture and manufacturing production, and between the conjuncturally and chronically poor.

15. As concerns those poor whose incomes place them around the poverty line and who depend on agriculture directly or indirectly for their livelihood, the net effects of globalization and liberalization could be favourable in the long term throughout much of Sub-Saharan Africa and in some parts of Asia where land tenure is not concentrated and agricultural production is labour-intensive. This is because relative prices for farm output can be expected to rise as a result not only of the removal of exchange rate distortions and price controls on farm products, but also of the effect of the Uruguay Round agreement on world prices in the cases of food-importing countries. On the other hand, food-deficit, extremely poor rural households can be expected to be worse off, although for some a rise in food prices will be offset by higher incomes from increased farm labour opportunities. Lower prices for manufactured goods -- a likely outcome of import-liberalization policies -- should help redress the terms-of-trade imbalance between rural and urban areas, as well as make incentive goods available to rural households. As for the urban areas, in certain Asian countries the creation of new export-oriented jobs should help reduce urban poverty. Higher food prices, however, will negatively affect the poorest of urban households, unless food aid of some sort is provided. As concerns Latin America where land ownership is more concentrated and farming has become increasingly mechanized in response to growing export markets, rural poverty could increase and lead to further rural outmigration. However, in the rural areas of many of the countries of the region, most working-age poor households have already migrated to the cities. As for the urban areas, because of the evolution of subregional trade arrangements, export-oriented jobs are being created that are helping absorb some of the urban labour surplus in a number of Latin American cities.

16. There will be people who, though not initially poor in an absolute sense, may be severely affected by the transition process resulting from globalization and liberalization. These include in particular retrenched workers in the public and parastatal sector, privatized firms, and import-competing enterprises. In middle-income developing countries that are enjoying positive per capita growth rates, many of these people -- given their educational background -- should be able to find work in other formal-sector enterprises, including firms set up in conjunction with foreign capital. In low-income developing countries in particular, however, the absorption of redundant workers is likely to be more difficult, particularly in countries where there is little or no economic growth over the short and medium term. Many retrenched formal sector workers who are unable to find other comparably paying work will join the ranks of the "new poor" that started in much of Africa and Latin America with the debt crisis of the 1980s.

17. The majority of the absolute poor, many of whom are functionally illiterate, or are from different ethnic or language groups than the dominant class, or live in remote backward areas, are likely to be little affected by globalization and liberalization since they are already marginalized. However, in cases where the insertion of the country in the globalization process brings about long-term economic growth, these groups should also eventually be able to benefit from the spread effects of growth. Such effects are likely to be felt both in terms of income gains and, due to the increased fiscal resources made possible for social expenditure, in principle in terms of basic needs consumption as well.

18. Public revenue and expenditure in most of Africa and Latin America have declined since the 1980s. Per capita real expenditure on basic education and health has likewise fallen. With respect to government revenue, the effects of globalization-related liberalization policies have been indeterminate. The tariffication process has tended to raise the import trade tax share in total taxes, while the reduction of tariffs and export taxes has had an offsetting effect. Investment inflows associated with privatization schemes have provided one-off sources of revenue that have helped certain countries partly reduce their external debt. Sizeable financial inflows in the cases of some countries have been a factor in driving up interest payments, but have also helped ease the liquidity constraint created by the debt crisis of the 1980s. In general, servicing payments on foreign and domestic debt is the primary reason for reduced public expenditure in other sectors. Increased reliance has been placed on regressive consumption taxes to generate the necessary revenue. Given the difficult circumstances, commendable efforts have been made by many developing countries to protect the share of social expenditure for primary education and health care. The World Bank has played an important role in this respect by increasing its volume of lending to primary education and health care, and by making the protection of those sectors a conditionality in structural adjustment lending. However, user charges which some international organizations have advocated for primary health clinics, for instance, have provided only limited cost recovery while deterring the poorest of the poor, in particular women and children, from availing themselves of necessary care.

19. Globalization and liberalization are but one possible approach to reducing poverty in the world. The impact of this approach on poverty is likely to differ between countries and could be insignificant in countries where trade and foreign investment are not sizeable. Moreover, since rural households who benefit directly from globalization and liberalization generally own land, and since workers in export industries typically have at least a primary education, the immediate benefits of globalization and outward liberalization are more likely to accrue to people close to the poverty line than to people in extreme poverty. Well targeted social programmes have proved essential for reaching and benefiting the latter group. In this connection, the World Summit for Social Development made clear that sustainable development, and in particular a successful attack on poverty, must be multisectoral and holistic, emphasizing social and cultural as well as economic approaches to reducing poverty.

20. The economies in transition of Central and Eastern Europe and of the former Soviet Union are also confronted with the challenges and opportunities associated with globalization and liberalization. Starting with a more egalitarian structure than most developing countries, these countries have experienced growing income inequality and conjunctural poverty, even as liberalization policies foster private entrepreneurship and bolster the prospects of structural change leading to sustained economic growth. According to World Bank estimates, the number of absolute poor in the economies in transition of Eastern Europe and Central Asia grew from 2.2 million in 1987 to 14.5 million, or 3.5 per cent of the population, in 1993. This increase has been due to the erosion in real wages and entitlements in recent years. The capacity of these countries to adjust to globalizing forces has been hindered by the fact that a substantial part of their productive capacity remains tied up in what is, or recently used to be, a state sector that is often inefficient and overdependent on subsidy support but which remains important as a producer of basic goods as well as a significant employer of the labour force. In countries where state enterprises have been privatized on a massive scale, their change in ownership status has not yet led to significant changes in the ways that they function, which can be partly attributed to the weak market enviroment in which they operate. On the other hand, the economies in transition generally compare favourably with developing countries in terms of human capital and physical infrastructure. Because of these endowments and their geographical proximity and historical ties to Western Europe, some have received substantial inflows of foreign direct investment which have helped increase their share of international trade and competitiveness in world markets.

Last updated on 7 February 1997.

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