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The Poor under Globalization in Asia, Latin America and Africa

by Machiko Nissanke, Erik Thorbecke

Machiko Nissanke and Erik Thorbecke

Despite the enormous potential of globalization in accelerating economic growth and development through integration into the world economy, the transfer of technology, and the transmission of knowledge, the impact of globalization on poverty reduction has been uneven and even marginal in some regions, such as in much of sub-Saharan Africa (SSA). As the process of economic integration has intensified since the 1990s, concerns have been raised as to why globalization, as it has proceeded so far, has not contributed more to poverty reduction.

The globalization–poverty relationship is non-linear and heterogeneous, involving multifaceted channels. Besides the positive 'growth' effects of globalization on poverty, the integration process creates winners and losers directly through other channels, affecting both vertical and horizontal inequalities. The recent UNU-WIDER publication, 'The Poor under Globalization in Asia, Latin America and Africa' (Machiko Nissanke and Erik Thorbecke, editors) presents a comparative analysis of how the economic forces of globalization affected the lives of poor people around the developing world based on 12 case studies covering the spectrum from broad macroeconomic regional and country analyses to micro-oriented village studies on each of the three continents. This article draws on some of key findings from our comparative analysis of the regional experiences with the globalization-poverty relationships.

The Comparative Globalization Experiences

The two main transmission channels of globalization—the 'growth' and 'distribution' channels—interact dynamically over time to produce a complex growth–inequality–poverty triangular relationship. Our case studies show how diverse and context specific the effects of globalization on poverty are. Distinct processes of institutional and socio-political change, as well as significant differences in initial conditions, such as natural resource endowment, the quantity and quality of human capital, institutional framework, and the quality of governance, have led to significantly different effects on the poor in and even within these three regions.

Whilst the forces of globalization as such are not inherentlybeneficial or deleterious for development prospects, our study shows that globalization is a necessary, but not sufficient, condition for convergence to sustained development and poverty reduction. Indeed, many poor countries that have opened their economies since the 1980s have fallen behind, and have not succeeded in reaching the take-off point necessary for benefiting from the positive forces of globalization. In particular, countries that went through an early structural transformation, as in most of Asia, were much more successful in generating a shared-growth process benefitting the poor than countries that delayed or failed their structural transformation process, as is typical of much of SSA.

At the same time, the effects of globalization on the poor depend critically on the nature and pattern of the economic integration process. A country specializing in an industry endowed with a larger positive externality would experience a faster growth rate, while a country with an initial comparative advantage in 'non-dynamic' sectors may end up in a low equilibrium trap. Similarly, the effects of FDI on host economies diverge enormously, depending on the sectors into which transnational corporations (TNCs) are attracted to invest. Countries that attract only natural resource-based FDI or FDI geared towards the lower end of TNCs' vertical integrated global operations such as simple assembly line operations tend to be left out because of limited dynamic externalities and knowledge and skill spillovers from these types of FDI.

In this context, we argue that developing countries have to undergo substantial changes in their production and trade structures, so as to be able to reap more benefits from the dynamic forces unleashed by globalization and experience income convergence. The sharp divergences emerging in the development paths of different countries in the South can be explained by both the distinct patterns of economic growth and forms of integration adopted: some countries in the South were able to benefit fromvirtuous cycles of globalization-induced growth, while others were left behind. Not only did growth rates diverge widely but there emerged a marked difference in the ways the benefits of economic growth trickled down to the poor.

In particular, globalization works best for the poor through the 'growth' channel when globalization‑induced growth generates secure employment opportunities. On the whole, the employment creating effect of growth has been most pronounced in East Asia, where globalization has brought about a substantial reduction in poverty due to vigorous growth despite increasing inequality. The process of poverty reduction in East Asia has followed closely the waves of employment creation for unskilled labour and the poor in tandem with the evolution and shifts of comparative advantages within the region in the ever‑accelerating integration process. In contrast, such a poverty reduction process could not be achieved in SSA and in many ECLAC countries, where liberalization of trade and investment regimes failed to produce strong employment creating growth. Instead, the pattern of growth in these two continents has tended to result in 'jobless' growth, 'casualization' of employment and 'informalization' of their economies. It appears that the employment creation effect is a most direct and powerful channel through which globalization can make a noticeable dent on poverty.

Policy Implications and Concluding Remarks

While the potential of substantial poverty reduction is realized only when economic growth is characterized by a high 'employment elasticity', such a growth outcome cannot be necessarily guaranteed whenever globalization/integration is embraced on its own as a passive development strategy. Instead, the dynamic integration experiences in Asia point to the need for policies of active strategic integration, not of passive integration.Such an active strategic stand should, first of all, aim at facilitating the transformation of production and trade structures from the narrowly based commodity dependence that increases the exposure of economies to external shocks. Thus, whether global market forces result in a virtuous circle or vicious circle depends not only on the initial conditions but also crucially on the effective design and implementation of policies to manage the integration process. The issue confronting policymakers is notwhether to integrate into the global economy but how to integrate so as to establish a stable foundation for sustainable and equitable growth.

Governments of developing countries need to pursue both strategic integration and an active domestic development agenda to ensure that the poor benefit as much as possible from globalization while they are protected from the worst negative impacts. What is called for is that integration be accompanied by a comprehensive policy package for enhancing the capability of the poor and instituting appropriate safety nets for those poor households who could be exposed to increasing vulnerability engendered by the globalization process. Hence, in order to make globalization work for the poor, the first imperative is to strengthen the capacity of the nation states, so that an institutional environment conducive to the design and implementation of strategic integration and a pro-poor programme can be fostered. Furthermore, in addressing adverse distributional consequences of global market forces at both the national and global levels, a new system of global governance based on a concept such as a 'global social contract' should be actively considered to ensure a delivery of global public goods for the world's poor that would counteract the asymmetric risks and costs of global market failures.

Erik Thorbecke, Machiko Nissanke, and Charles Gore at the Book Launch: The Poor Under Globalization in Asia, Latin America, and Africa, Helsinki, Finland
Erik Thorbecke, Machiko Nissanke, and Charles Gore at the Book Launch: The Poor Under Globalization in Asia, Latin America, and Africa, Helsinki, Finland
 
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