Globalization, Poverty, and Economic Equality: A Complex Debate

Globalization, poverty, equality and economic growth are some of the highly debated topics in today`s literature. While there are various studies showing that globalization increases poverty, there are also many studies claiming that poverty reduces with globalization. Researchers in favour of globalization assert that significant steps have been taken in efforts to reduce poverty globally and increase equality while this achievement has been attributed to economic policy liberalization and globalization (Scholte, 2005). On the other hand, other critics have claimed that globalization is responsible for the increase in inequality and poverty. The rich are said to be getting richer while the poor are getting poorer (Fujita & Thisse, 2013). However, in both cases, claims have been reinforced with facts but rather than having a clear debate leading to conclusions, there has been a number of heated debates on these topics. The World Bank is one of the key contributors to this debate. A research report by the World Bank (cited in Goldman, 2006) claimed that, generally, globalization reduces poverty as economies that are integrated tend to grow faster and the growth is normally widely diffused. As such, the following paper provides a discussion of the relationship between poverty, equality, economic growth, and globalization while providing my opinion as to whether globalization works.

Globalization has been considered as a modern way of describing changes occurring in the international economy as well as in the world of politics (Scholte, 2005). It refers to the free movement of capital, labour, goods and services across borders. Globalization arises from reduced communication and transportation costs, faster communication, lower trade barriers, increased competition, rising capital flows, migration and standardization among other factors. The process of globalization is said to have brought the developed economies closer together (Dollar, 2005) and strengthening their interrelation. Thus, there has been a new era of increasing integration of societies and economies, corporation and individuals making them to further reach the world faster and more economically compared to the past. Individuals and states are subjected to developed market forces that are more intense by initiating rapid changes in financial flows, trade relations, and labour mobility across the world. However, over time, a large heterogeneity is said to exist in the globalization process across regions and countries as well as within countries (Mishkin, 2009). The heterogeneity results in development disparities particularly in negative effects such as increasing inequality both within and between nations, and calls for the need to find the disparity sources, its magnitude quantification and the impact it has on the world population`s living conditions.

Generally, globalization is expected to significantly reduce poverty through faster economic growth in more integrated countries. According to Kaplinsky (2013), studies on the causal links between globalization and inequality in the developing countries during pre-globalization indicate that no structural relationship exists between economic growth and inequality while income inequality levels were immobile and trendless. Some of the ways through which globalization affects world inequality include factor price convergence, commodity price equalization, marginal product and capital return rates differentials among countries, capital mobility as well as per capita income growth dynamic convergence (Kaplinsky, 2013).

Various studies have found that there is a close link between globalization and poverty. In his study to examine the extent to which globalization affects poverty in developing countries, Akoum (2008) focused on the ways and channels through which financial integration and trade openness may adversely affect poverty. The results of this investigation suggested an “inverted U-shaped” relationship (Akoum, 2008) between globalization and poverty. This indicates that at low levels of globalization, there is an increase in poverty level while globalization at higher levels tends to reduce poverty. Kaplinsky (2013) estimates that global levels of poverty in developing countries will decrease by almost one-half by 2020. However, this will happen on the condition that there will be continuous improvement in aid effectiveness in lagging areas and implementation of quality economic policies. Significant policy reforms will also be essential to achieving this decrease as they will provide a conducive environment for effective aid and hence poverty reduction. Aid inefficiency hinders the reduction of poverty and makes such goals uncertain. The World Bank (as cited in Goldman, 2006) also carried out a study to find out the effect that economic integration has on the lives of poor people in developing countries. Three major findings were made. First, poor states such as India, China, Vietnam and Bangladesh, which in the past exported primary commodities, have gained entry into the manufacturing and services global market hence significantly lowering their poverty. Second, there has been an increase in efforts to include countries like Congo and Afghanistan into the global economy. Third, institutional and cultural homogenization or standardization has been achieved through the integration of diverse economies. Thus, in general, economic integration of various states across the globe has played a significant role in poverty reduction. However, as stated by Basu (2006), inclusiveness should be adopted to avoid bypassing the newly globalized and marginalized countries. A number of factors, as listed by Nissanke and Thorbecke (2006), enhance the economic growth of both rich and poor countries. They include human capital, labour, research and development investment, agglomeration effects, total factor productivity increase as well as institutions and externalities that minimize transaction costs and secure rights (Nissanke & Thorbecke, 2006).

Over the past century, global inequality is said to have been on an increasing trend. According to Korzeniewicz and Moran (2005) at the end of the nineteenth century, the average income ratio of the richest country to the poorest in the world rose from 9 to 1, to 30 to 1 in 1960 and further more than 60 to 1 at present. This implies that an average family in the United States is about 60 times richer than one in Bangladesh or Ethiopia in terms of their purchasing power. Most of the today`s rich countries are those that made huge gains from the Industrial Revolution resulting in rapid economic growth and have continued being richer to date (Korzeniewicz & Moran, 2005). Most of the poorest countries in the world today are concentrated in Africa and parts of South and Central Asia. However, as a result of continued globalization, some of these poor countries have experienced growth. For instance, China and some of its neighbours in East Asia and most recently India. These countries have experienced growth at a faster rate compared to the already rich countries (Harrison, 2006). Nevertheless, it would take Indian and China more than a century of growth, at faster rates, to reach the current levels of the United States. Also, the gap that existed between the advanced economies and the developing countries, in terms of income, is narrowing. This has been referred to by some economists as “convergence” (Harrison, 2006).

Jenkins (2005) notes that income inequality in the United States has seen a steady increase since the early 1970s but points out that this increase did stabilize in the last decades. China has also experienced an income inequality increase in the last couple of years where income growth is a phenomenon that has been profoundly concentrated in the country`s urban areas. In most Eastern Europe countries and the former Soviet Union (Kose, Prasad & Terrones, 2006) where minimal growth has been experienced, income inequality has also increased with those who are currently poor being worse than they were in the past before the fall of Communism (Prasad et al., 2005). A similar case is experienced in Panama, Peru and Mexico in Latin America, a region where inequality heightened in the 1980s, years of low growth, and failed to decrease in the 1990s with the return to modest growth (Scholte, 2005). As argued by Fujita and Thisse (2013), the rising income inequality cannot be specifically associated with the increase in global integration and the author terms an effort to do so as an “exaggeration”. Other factors such as inflation have previously been suggested as a possible cause of the increased inequality levels. In fact, Fujita and Thisse note that in a majority of countries, there have not been a change in the levels of income inequality and adds that in some of the industrialized countries such as Canada, Italy, and Japan, there has a decrease in income inequality. Similarly, equality has seen some growth in a few developing countries like Ghana, Philippines, and Bangladesh, as a result of globalization (Dollar, 2005).

Recent studies have shown that in the last two decades, the long-term problem of income inequality has been moderated (Basu, 2006). As a result of the integration of economies through globalization, two of the largest poor countries in the world, India, and China have experienced a decrease in the rate of inequality hence achieving equality to some extent. According to a study by Luo, Xue, and Han (2010) the average income of the poorest population in China, about 20 percent, which is mainly located in rural households, has had rapid growth despite the fact that income in urban households in china has been growing rapidly. On the other hand, India`s urban income has been on the rise including that for the India`s urban poor. Therefore, if a close comparison is done, not on the basis of average income changes between the poorest and richest countries, but rather based on the average income changes between the initially 20 percent richest and 20 percent world`s poorest households, a conclusion that is less grim is arrived at: though extremely high, world inequality is leveling off (Luo, Xue & Han, 2010). This has an implication that though at a slow pace, globalization is playing a key role towards achieving equality. In support of this, based on their research findings, Laanti, Gabrielsson, and Gabrielsson (2007) concluded that openness of economies to the global market can be associated income disparities reduction. This followed from their study of the impact of embracing globalization on a country`s income inequality while using China as the case study.

Further, globalization is said to be related to economic growth in a number of ways. In some countries, globalization has been considered to serve as a catalyst for economic growth. The fact that globalization involves increased movement of people across various territorial borders indicates that globalization allows for knowledge, labour and expertise transfer. Trade across border means an increase in sale opportunities for various goods and services and hence globalization promotes international trade that results in the growth of the participating economies. As stated by Kaplinsky (2013), globalization has significantly increased the accessibility of various commodities and technologies, which were previously rare in the market, from the country of origin by other countries.

One of the key links between economic growth and globalization is the fact that, with integrated economies, it is easier for people from different countries to relocate to other countries in search of careers, trade, and livelihoods amongst other purposes. When such people move to a new country, the host country benefits from the much-needed knowledge, expertise, and labour that can be used to boost the country`s economic development and growth. For instance, a country that is in the need of skilled doctors, nurses, architects and engineers may greatly benefit from immigrants who possess the skills. Kaplinsky (2013) claims that most countries are faced with the problem of skilled health care professionals’ shortage and that often, such people are given more consideration when it comes to immigration policies terms. As such, these professional are instrumental in the development of the host country`s economy through the utilization of their diverse expertise and gifts. This is in agreement with the results of a study by Brady, Beckfield, and Seeleib-Kaiser (2005) that indicate that globalization has a positive effect on the economy of a country whose workers are better educated and whose financial systems are well developed.

Another connection between globalization and economic growth is that globalization results in an increase in international trade. Through globalization, it is now possible for countries to sell their goods and services to other countries located in various parts of the world while also purchasing needed commodities and goods from other countries (Brady, Beckfield & Seeleib-Kaiser, 2005). For example, a country in the west without crude oil can purchase the commodity from the Middle East and African countries with huge oil reservoirs. As a result, the countries exporting this commodity will gain financial benefits due to increased financial resources and hence a growth in their economies. As stated earlier, technology transfer between countries is another depiction of the relationship existing between globalization and economic growth. For instance, as a result of the impact of globalization, new technology from the leading countries such as the United States is soon made available in different parts of the world with the other countries benefiting from it. The development of a wide range of smartphone brands serves as a perfect example of such technology. When these brands are released into the market of the manufacturing country, they are then soon made available to other markets.

From my own point of view, globalization does work. This is because as depicted in this paper, various aspects of globalization are evident in various countries and different parts of the world. For instance, as described earlier, “globalization involves free movement of capital, labour, goods and services across borders”, something that is clear apparent in today’s world. Furthermore, the economic integration that constitutes globalization has also been evident, as countries across the globe reduce and eliminate tariff barriers to enable the free flow of goods and services.

In conclusion, as demonstrated herein, a close relationship exists between poverty, equality, economic growth, and globalization. While different views exist in relation to the effects of globalization on equality, it is evident that the effect on poverty and economic growth is positive. Further, after a close comparison of what constitutes globalization and the actual situation in the global market in terms of trade and integration, it can be said that globalization is working. This is also supported by the fact that many countries have been able to experience the effects of globalization such as poverty reduction, the introduction of equality to some extent and economic growth, which is a strong indication that globalization really works.

References

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