Recently, a growing number of policy
makers have touted the potential for global economic integration to combat
poverty and economic inequity in the world today. On September 24, 2001,
for instance, U.S. Trade Representative Robert Zoellick (2001), arguing
for new "fast track" trade promotion authority, cited a World
Bank study claiming that globalization "reduces poverty because integrated
economies tend to grow faster and this growth is usually widely diffused"
(World Bank 2001a, 1). Yet the empirical evidence suggests that reductions
in poverty and income inequality remain elusive in most parts of the world,
and, moreover, that greater integration of deregulated trade and capital
flows over the last two decades has likely undermined efforts to raise
living standards for the world's poor.
In 1980, median income in the richest 10% of countries was 77 times greater
than in the poorest 10%; by 1999, that gap had grown to 122 times. Inequality
has also increased within many countries. Over the same period, any gains
in poverty reduction have been relatively small and geographically isolated.
The number of poor people rose from 1987 to 1998, and the share of poor
people increased in many countries—in 1998 close to half the population
were considered poor in many parts of the world. In 1980, the world's
poorest 10%, or 400 million people, lived on 72 cents a day or less. The
same number of people had 79 cents (nominally) per day in 1990 and 78
cents in 1999.
While many social, political, and economic factors contribute to poverty,
the evidence shows that unregulated capital and trade flows contribute
to rising inequality and impede progress in poverty reduction. Trade liberalization
leads to more import competition and to a growing use of the threat to
move production to lower-wage locales, thereby depressing wages. Deregulated
international capital flows have led to rapid increases in short-term
capital flows and more frequent economic crises, while simultaneously
limiting the ability of governments to cope with crises. Economic upheavals
disproportionately harm the poor, and thus contribute to the lack of success
in poverty reduction and to rising income inequality.
The world's poor may stand to gain from global integration, but not under
the unregulated version currently promoted by the World Bank and others.
The lesson of the past 20 years is clear: it is time for a different approach
to global integration, whereby living standards of the world's poor are
raised rather than jeopardized.
Deregulated global trade and capital markets as the culprit
Over the past decades international capital mobility has grown as capital
controls were reduced or eliminated virtually everywhere. Consequently,
capital flows to developing countries have grown rapidly, from $1.9 billion
in 1980 to $120.3 billion in 1997, the last year before the global financial
crisis, or by more than 6,000%. Even in 1998, in the wake of the financial
crisis, capital flows remained remarkably high at $56 billion. A substantial
share of these capital flows (e.g., 36% in 1997) consisted of short-term
portfolio investments (IMF 2001b).
Faster capital mobility in a relatively deregulated environment leads
to rising inequality, both within countries and between countries, and
to less poverty reduction or even increasing poverty.The probability of
financial crises in developing countries rises in direct relation to increases
in unregulated short-term capital flows (Weller 2001; Easterly and Kraay
1999). Rising short-term capital inflows result in increased speculative
financing and, subsequently, rising financial instability. Financial crises
reduce the likelihood for the poor to escape poverty through economic
growth because they are ill-equipped to weather the adverse macro-economic
shocks (Bannister and Thugge 2001; Lustig 1998, 2000). Financial crises
also lower short-term growth rates, and it is estimated that poverty increases
by 2% for every percent decline in growth (Lustig 2000).
The burdens of financial crisis are disproportionately borne by a country's
poor. Since higher-income earners have better access to insurance mechanisms
that protect them from the fallout of a crisis (including capital flight),
macro-economic crises lead to a more unequal income distribution within
countries (Lustig 2000). Thus, economic crises increase the need for well-functioning
social safety nets. Yet unfettered capital flows limit governments' abilities
to design policies to help the poor when they need it most—in the middle
of a crisis. The International Monetary Fund often opposes increased government
expenditures to assist the poor during economic crises, and investors
withdraw their funds following increased government expenditures (Blecker
1999).
Finally, developing countries are prone to experience more severe economic
crises with greater frequency than are developed economies (Lustig 2000;
Lindgren, Garcia, and Saal 1996), leading to greater inequality between
countries.Trade liberalization—the complement to deregulated capital markets
in the global deregulation agenda—also plays a significant role in raising
inequality and limiting efforts at poverty reduction. By inducing rapid
structural change and shifting employment within industrializing countries,
trade liberalization leads to falling real wages and declining working
conditions and living standards (Bannister and Thugge 2001; Scott et al.
1997; Scott 2001a; Scott 2001b; Mishel et al. 2001).
Trade liberalization also gives teeth to employers' threats to close plants
or to relocate or outsource production abroad—where labor regulations
are less stringent and more difficult to enforce—and undermines workers'
attempts to organize and bargain for improved wages and working conditions
(Bronfenbrenner 1997, 2000). This trend fuels a race to the bottom in
which national governments vie for needed investment by bidding down the
cost to employers (and livings standards) of working people.
The connection between rapid trade liberalization and inequality appears
to be universal, indicating downward wage pressures and rising inequality
following trade liberalization in industrializing and industrialized economies
(USTDRC 2000). A report by UNCTAD (1997) found that trade liberalization
in Latin America led to widening wage gaps, falling real wages for unskilled
workers (often more than 90% of the labor force in developing countries),
and rising unemployment.
Rising inequality is common within many countries
Defenders of the current regime of global deregulation, including the
World Bank, acknowledge that inequality has increased within countries.
But in its most recent and rather comprehensive document on globalization
and poverty (World Bank 2001a), the Bank raised two issues that supposedly
mute the fact of rising intra-country inequality. First, data for China
dwarfs observations for all other countries, thereby suggesting that rising
inequality in globalizing countries does not exist outside of China (World
Bank 2001a, 47). However, data for other countries show that growing inequality
is indeed a widespread trend. Second, the World Bank also claimed that
rising inequality is not a result of increasing poverty, which thus makes
it presumably less troubling (World Bank 2001a, 48). While this claim
may hold true in China, it does not describe the trend in many other parts
of the world.
There is a broad consensus that income inequality has risen in industrialized
countries since 1980. The World Bank reports that there was a "serious…increase
in within-country inequality in industrialized countries reversing the
trend of [the period 1950-80]" (World Bank 2001a, 46). Similarly,
Gottschalk and Smeeding (1997, 636) found that "almost all industrial
economies experienced some increase in wage inequality among prime-aged
males" in the 1980s and early 1990s. Further, data from the Luxembourg
Income Study (LIS 2001) show that, among 24 countries, 18 experienced
increasing income inequality, five (Denmark, Luxembourg, the Netherlands,
Spain, and Switzerland) experienced declining inequality, and one (France)
saw no change.
Income inequality is also rising in industrializing countries. There was
been an unambiguous rise in inequality in Latin America in the 1980s and
1990s (Lustig and Deutsch 1998; IADB 1999; UNCTAD 1997; ECLAC 1997). Other
areas also saw inequality rise in the 1980s and 1990s (Faux and Mishel
2000; Ravallion and Chen 1997). Deininger and Squire (1996) found rising
inequality in East Asia, Eastern Europe, and Central Asia since 1981,
and growing polarization in South Asia. Only sub-Saharan Africa shows
a trend toward more income equality since the 1980s.
While a widening gap between the rich and the poor within countries is
not universal, it appears to have occurred at least in the majority of
countries, and is affecting the income of the majority of people around
the globe, contrary to claims by the World Bank that rising inequality
within countries has been rare.
Poverty remains a large and widespread problem
The World Bank tries to divert attention from rising inequality by emphasizing
its analyses of poverty reduction. It argues that "the long [term]
trends of rising global inequality and rising numbers of people in absolute
poverty have been halted and perhaps even reversed" due to greater
globalization (World Bank 2001a, 49). However, the purported success in
poverty reduction is elusive: the number of poor people is on the rise,
relative poverty shares remain high in many parts of the world, and poverty
shares are rising in many regions.
In assessing global poverty trends, the World Bank relies on a study that
highlights the World Bank's Global Poverty Monitoring database and provides
an overview of poverty trends from 1987 to 1998 (Chen and Ravallion 2001).
The authors themselves, though, conclude that "[i]n the aggregate,
and for some large regions, all…measures suggest that the 1990s did not
see much progress against consumption poverty in the developing world"
(Chen and Ravallion 2001, 18). Also, the IMF (2000, Part IV, p. 1) reports
that "[p]rogress in raising real incomes and alleviating poverty
has been disappointingly slow in many developing countries."
The assessment of poverty trends by the World Bank suffers from several
problems. First, measuring poverty is a difficult undertaking that can
easily lead to errors. Different measures of poverty exist. The World
Bank's Global Poverty Monitoring database, for example, uses an international
poverty line of $1.08 per day in 1993 dollars based on purchasing power
parity (PPP) exchange rates (Chen and Ravallion 2001; World Bank 2001b).
But absolute poverty lines such as this one ignore regional or country-by-country
differences.
The evidence shows that the use of an international poverty line tends
to understate the share of people living in poverty, compared to other
poverty measures. For example, a method using individual national poverty
lines finds an additional 14% of the population to be considered poor
compared to a method using the international poverty line (World Bank
2001b). An alternative to both the national and international poverty
line methods is to use a relative poverty line based on mean consumption
or income levels in each country. Using such a relative poverty line instead
of the international poverty line shows on average an additional 8% of
the population to be considered poor (Chen and Ravallion 2001).
Second, poverty lines are often inadequate to measure the true hardships
people are facing in meeting the basic necessities of life. For instance,
a recent U.S. study showed that 29% of working families did not earn enough
to afford basic necessities, suggesting that a better approach to understanding
poverty may lie in measuring household budgets rather than simple poverty
lines (Boushey et al. 2001).
The third problem with the Bank's poverty assessment is that even the
poverty reduction gains it does find are small and geographically isolated.
In 1998, the share of the population living in poverty in industrializing
countries was 32%, under a relative poverty line. Although that percentage
was down from 36% in 1987, the actual number of people living in poverty
increased from 1.5 billion to 1.6 billion. In 1998, the share of the population
in poverty remained very high in some regions: over 40% in South Asia
and over 50% in sub-Saharan Africa and Latin America (Table 1). Since
1987, the share of the poor has stayed relatively constant in sub-Saharan
Africa and Latin America but more than tripled in Eastern Europe and Central
Asia.
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Another way to look at the global trends in poverty is to consider the
incomes of an absolute number of poor people. Take, for instance, the
poorest 10% of the population in 1980, consisting of about 400 million
people, based on average per capita GDP. The poorest 400 million lived
on a nominal $0.72 a day in 1980, $0.79 a day in 1990, $0.84 in 1996,
and $0.78 in 1999 (Table 1). In other words, the income of the world's
poorest did not even keep up with inflation. Clearly, the economic burden
worsened for a large number of people in the 1990s.
Fourth, since the data do not extend beyond 1998, the full impact of the
crises in Asia, Latin America, and Russia is not included, making it likely
that future revisions will show less progress in poverty reduction. Lustig
(2000) argues that frequent macroeconomic crises are the single most important
cause of rapid increases in poverty in Latin America. Consequently, future
revisions to the poverty trends in the late 1990s could show smaller average
reductions or larger increases in the crisis-stricken areas. In fact,
revisions to past data already show less success in poverty reduction
than previously assumed. Chen and Ravallion (2001), for example, show
that the reduction of people living below the poverty line between 1987
and 1993 was not four percentage points, as estimated in 1997 (Ravallion
and Chen 1997), but less than one percentage point.
Finally, the World Bank's conclusion that the lot of the poor has improved
during the era of increasing trade and capital flow liberalization relies
substantially on data from China and India, but the experiences of both
countries are anomalies. In reality, the facts in these countries undermine
the case for a connection between greater deregulation of capital and
trade flows and falling poverty and inequality. While in China the percentage
who are poor has fallen, there has been a rapid rise in inequality (World
Bank 2001a). Most notably, inequality between rural and urban areas and
provinces with urban centers and those without grew from 1985 to 1995.
Also, a large number of China's workers labor under abhorrent, and possibly
worsening, slave or prison labor conditions (USTDRC 2000; U.S. Department
of State 2000, 2001). This situation not only means that many workers
are left out of China's economic growth, it also makes China an unappealing
development model for the rest of the world. Thus, improvements in China
are not universally shared and leave many workers behind, often in deplorable
conditions.
Using India to illustrate the benefits of unregulated globalization is
equally problematic to the World Bank's position, since India's progress
was accomplished while remaining relatively closed off to the global economy.
Total goods trade (exports plus imports) was about 20% of India's gross
domestic product in 1998, or 10 percentage points less than in China and
only about one-fifth the level of such export-oriented countries as Korea
(IMF 2001a). Moreover, that the IMF (1999, 2000) continuously recommended
further liberalization of India's trade and capital flows—the only large
developing economy for which this was the case—suggests that the IMF viewed
India as a laggard in deregulating its economy.
Continued income divergence across countries (besides
China)
The arguments on changes in income inequality between countries take a
few perspectives. The World Bank's conclusion that incomes between countries
are converging is based on differentiating between countries that have
embraced unregulated globalization and those that have not. The World
Bank's assertion that "between countries, globalization is mostly
reducing inequality" (World Bank 2001a, 1) seems to contrast directly
with the IMF's assessment that "the relative gap between the richest
and the poorest countries has continued to widen" in the 1990s (IMF
2000, Part IV, p. 1). Given this confusion, it is useful to take a global
perspective that looks at all countries and the distribution of world
income across all countries and across all people.
The distribution of world income between countries grew unambiguously
in the 1980s and 1990s. In other words, rich countries have gotten richer
and poor countries have gotten poorer (Table 2). The median per-capita
income of the world's richest 10% of countries was 76.8 times that of
the poorest 10% of countries in 1980, 119.6 times greater in 1990, and
121.8 times greater in 1999. The ratio of the average per capita incomes
shows a similar, yet more dramatic, increase.
The distribution of world income across people, rather than countries,
witnessed some equitable improvement in the 1990s after a dramatic increase
in inequality during the 1980s. While the richest 10% of the world's population
had, on average, incomes that were 78.9 times higher than those of the
poorest 10% of the world population in 1980, their incomes were 119.7
times higher in 1990. That ratio dropped to 117.7 in 1999. The improvement
in equality in the 1990s was somewhat more pronounced in terms of median
incomes, yet even under this measure the distribution of incomes was remarkably
more inequitable in 1999 than at the beginning of the period in 1980.
Furthermore, the gains in the 1990s come solely from rising incomes in
China. If China is excluded, there is an unambiguous trend toward growing
income inequality across the remaining world population in the 1980s and
1990s (Table 2). Without China, the richest 10% of the world population
had, on average, 90.3 times as much income as the poorest 10% in 1980,
135.5 times more in 1990, and 154.4 times more in 1999. However, since
China's income distribution has become substantially more unequal in the
1990s, including China's per capita GDP in the distribution of world income
across all people exaggerates improvements in the world's income distribution
in the 1990s. Thus, the world's income is significantly more unequally
distributed at the end of the almost 20-year experiment with unregulated
global capitalism than at the beginning of it.
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Conclusion
Criticism of the unregulated globalization agenda has been met with policy
makers' renewed adherence to the doctrine that greater global deregulation
of trade and capital flows helps to improve inequality between countries,
to raise equality within countries, and to accelerate poverty reduction.
But income distribution between countries worsened in the 1980s, and its
apparent improvement (or leveling off) in the 1990s is the result solely
of rising per capita income in China, where the enormous population tends
to distort world averages. Within-country income inequality is also growing
and is a widespread trend in countries with both advanced and developing
economies. Success in reducing poverty has been limited. The number of
poor people has risen, and the share of poor people has grown in many
areas, especially in Eastern Europe and Central Asia. And the share of
poor people remained high at 40-50% in Latin America, sub-Saharan Africa,
and South Asia.
The promises of more equal income distribution and reduced poverty around
the globe have failed to materialize under the current form of unregulated
globalization. Thus, it is time for multinational institutions and other
international policy makers to develop a different set of strategies and
programs to provide real benefits to the poor.