Discuss the impact of globalization on global poverty and inequality

Essay, 2010

17 Pages, Grade: 1,7


1. Introduction

The period from the end of the World War II to the mid-1970s saw world-wide sustained and high economic growth. Within a generation Western European society was transformed from predominantly agrarian to post-industrial. Latin America, Asia and Africa also were heading towards higher growth rates.[1] During the 1980s, a new period of integration of national economies led to the intensification of international economic interconnectedness and developing economies were expected to overcome the between-country income gap through openness-growth link. This was seen as the manifestation of neoliberalism as new forms of international economic relations emerged such as industrialisation and the new international division of labour. However, as recent studies point towards increasing world poverty and inequality, scholars have re-examined the validity of the neoliberal argument. After years of implementing prescribed reforms, some developing countries and regions, such as Sub-Saharan Africa, have not experienced the expected growth. Chapter 2 summarizes the implications of the policy-paradigm inspired by the Washington Consensus. Chapter 3 identifies current trends in global poverty and inequality with attention to the different measures used to interpret world economic well-being. The next chapter analyses the openness-growth-inequality-poverty nexus. The final chapter seeks to recognize causes of poverty and inequality transmitted by the globalization process. The factors of poverty and inequality path dependence are grouped in four categories: economic openness and technological progress; macroeconomic policies; financialisation of the economy; and international financial institutions.

2. The Policy-Paradigm Inspired by the Washington Consensus

The prevailing view in critical international political economy (IPE) of globalization as more of a neoliberal political project initiated by the Washington Consensus in the late 1980s than ‘the global release of an immanent desire of individuals and businesses to truck, barter and exchange’[2] led to a strong critique of the ineffectiveness of the promoted instruments for reducing international poverty and inequality and the inefficiency of global actors and institutions. The neoliberal argument derives from the postulates of neoclassical economic theories such as the Ricardian comparative advantage theory, the Heckscher-Ohlin-Samuelson model for predicting patterns of commerce and production based on the factor endowments of a trading region, and the Stolper-Samuelson theorem of international trade. The centrality of the neoliberal argument stems in the link between openness and growth. It presumes that after implementing a set of liberalization policies, such as privatization and removing protectionist measures, countries will attract new sources of capital and enhance specialization (comparative advantage) and this will ultimately lead to economic growth and income convergence. In parallel, the delegitimation of the scope of state functions in the economy, promoted by neoliberalism, essentially ‘freeing up’ the market, will allow the ‘invisible hand’ to adjust the domestic economy to the international economy. Thus, Leys underlines this trend stating that ‘by the end of the 1980s, the only development policy that was officially approved was not having one’.[3] Wade argues that this anti-state bias is further reinforced by the implicit assumption that ‘developing country governments are all of a type - a ‘neo-patrimonial’ type in Weberian theory’.[4] The manifestation of the neoliberal paradigm led to the consolidation of the practices of international institutions and global actors under the formula aid-liberalisation conditionality, which in some cases resulted negatively to pro-poor growth. After implementing ‘quite bold [liberalization] activities’,[5] some developing countries failed to receive an enhanced influx of foreign direct investment (FDI), which led to doubts about the feasibility of the neoliberal path.

3. Recent Trends in World Poverty and Inequality

Poverty, understood as lack of economic well-being, in many parts of the world represents a major threat for overcoming global problems. There are two definitions of poverty, namely the absolute and the relative concept. The absolute concept is a defined poverty line of purchasing power which is used as a standard international extreme poverty line fixed at PPP $1. The relative poverty is determined as a fixed proportion of the main income of the population.[6] Current indicators of poverty rates show that the proportion of the absolute poor is falling, but the absolute number is likely to be rising.[7] This claim is in controversy with official data from the World Bank,[8] which indicates both falling rate and absolute number. However, a large margin of error is observed. Wade explains this by identifying three possible factors: the reliability of household surveys, which vary in quality and in choice of measures; China and India poverty lines are measured by econometric regressions rather than real observations due to their refusal to participate in the International Comparison Project; and the estimation of poverty headcount is sensible to the precise level of poverty rates. [9]

There are also disagreements about the current inequality trends, which stems mainly from the variety of methods for estimation. Recent studies point out that after 1980s, income inequality has undergone a steep rise. Inequality between countries is estimated to be considerably greater than inequality within countries.[10] However, other surveys confirm the reverse trend. Wade argues that these contradicting results are due to the different choice of measures, as well as due to China and India: ‘First, take out China and the falling disappears; take out India as well and the trend is clearly increasing. Hence falling inequality is not a generalised feature of the world economy in the third (post-1980) wave of globalisation.’[11] By analysing intercountry population-unweighted inequality from 1950 to 2000, Milanovic estimates that between 1965 and 1982 the Gini coefficient is almost unchanged at 47, but after 1982 there is an inexorable tendency for inequality to increase and a growing divergence in economic performance between rich and poor countries is observed with Gini amounting at 54.5.[12] The increase of overall world inequality after the early 1980s is due to a ‘locomotive’ effect, caused first by the GDP per capita stagnation and decline in Latin America during the ‘lost decade’ of 1980s; then by the same, but more dramatic phenomenon occurred in the transition economies of Eastern Europe and the former Soviet Union. Also in 2000 twenty-four African countries had a GDP per capita smaller than twenty years ago.[13] This decline of growth rate in Africa, Latin America, and Eastern Europe and the former USSR contrasted with the ‘club of rich countries’ and led to the rising overall world inequality. Cornia et al. estimate that inequality in the 1990s has increased in fifty-three of the seventy-two counties analysed in comparison with 1960s.[14]

Measuring income distribution and inequality can lead to disagreements on trends due to the different usage of methodology and technical problems incorporated into measurements. Commonly used roadblocks for measuring inequality are: (1) the choice of currency: incomes measured at market exchange rates or in terms of Purchasing Power Parity (PPP); (2) should the population be included in the equation: population-weighting; (3) between-country or within-country inequality; (4) inequality measured as an average (the Gini coefficient) or as a ratio of top to bottom (such as top decile to bottom decile). Measuring distribution of the world’s population by the average income can be useful for determining regional trends in income inequality. Milanovic points out to the trend of ‘missing middle’ as the population is dispersed at low or high income levels. Two consequences conflicting with the neoliberal argument are observed by Milanovic. The first consequence is that ‘the missing middle’ reinforces the already strong domination of Western countries and second it reduces the number of possible contenders for positions in the top income distribution.[15]

Another useful measure for determining world economic convergence is country mobility. Country mobility is a measure of how countries move in the income hierarchy. Milanovic distinguishes four income categories: rich, contenders, ‘Third World’ and ‘Fourth World’ and compares the mobility of the countries comparing two periods for 1960-78 and 1978-2000.[16] His findings indicate that the majority of states remained in the same income category, especially in the case of the extremes virtually no states rose in a higher category. This also confirms the immobility of developing counties towards economic well-being and a ‘stickiness’ at one of the above-mentioned income categories.

4. The Openness-Growth-Inequality-Poverty Nexus

The interrelationship of openness, growth, inequality and poverty is useful for analysing how economic liberalization affects inequality and poverty and how the two notions are related. The first link between openness and growth is the main argument of classic theories of international trade as growth is expected to be achieved through resource allocation and specialization of national economies and through exports, imports and capital inflows. However, it has been debated whether economic openness is the necessarily condition for growth. China and India have been pointed out as examples of countries under substantial trade protection and capital controls, which have experienced economic growth in the last decade.

The second link of the openness-poverty nexus is the interrelation between growth and inequality. There are two contradictory stances. The classical view argues that a higher marginal propensity to save among the rich implies that a high rate of initial inequality will yield higher aggregate savings, capital accumulation and growth.[17] The other view suggests that the inequality-growth relation is concave, thus too low or too high inequality is detrimental to growth and remains invariant in the intermediate range.[18] When inequality is too low, such as where artificial compression of earnings exist (for example former USSR), income is not optimally distributed and problems such as rent-seeking and free-riding contribute to the negative effect on growth. Reversely, when inequality rises from a given threshold, it has a negative effect on growth.

The third interrelation is between inequality and poverty. Nissanke and Thorbecke argue that inequality serves as a filter between growth and poverty. Increase in inequality is considered detrimental to the objective of poverty reduction, because at any given GDP growth rate, poverty falls less rapidly when income distribution is unequal. However, it is more important how this growth is distributed among the population or in other words if it leads to pro-poor growth. The concept of pro-poor growth has recently received a growing attention. Pro-poor growth implies that the pattern of economic growth rather than the growth per se may have a significant impact on a country’s income distribution and poverty profile. The absolute definition of pro-poor growth is determined as any increase of GDP that reduces poverty,[19] while the relative definition emphasizes on the change of inequality whereas the distributional effects of GDP would favour the poor more than the non-poor.[20]

5. Causes of Inequality and Poverty

Cornia et al. raises the question whether the recent rises of inequality can be explained by intensification of the ‘traditional’ causes of high inequality, responsible for inequality in the early 1970s, such as high land concentration, unequal access to education, countries endowed with abundant natural resources, and urban bias of public policy. While these structural factors remain important for cross-country differences in inequality, Cornia argues that the recent increase in global inequality is more attributable to contemporary globalization effects such as the nature of technological change and policy reform measures. A further outdated perception of the causes of global income imbalances is the view of inequality as ‘a normal side-effect of the unwinding of socialism’s artificial compression of earnings’[21]. While this factor has been important to explain the increase of income inequality in the 1990s, the ‘unwinding of socialism’ per se cannot explain recent trends in income disproportions. Recent studies identify the causes of rising poverty and inequality to more contemporary transmission mechanisms of globalization such as: trade liberalization and technological progress; the rise of financial rents following financial liberalization and privatization; the rising importance of finance on a global scale; erosion of the redistributive role of the state; macroeconomic policies aiming stabilization; volatility and vulnerability of markets; the ineffectiveness of the IFIs. In this chapter, the above-mentioned factors are grouped in four sections: economic openness and technological progress; macroeconomic policies; financialisation of the economy; and international financial institutions.


[1] Wade (2008), p. 375

[2] Harrison (2004), p.157

[3] Leys, (1996), p. 42.

[4] Wade (2008), p.404

[5] Harrison (2004), p.157

[6] Nissanke and Thorbecke (2007), p. 22

[7] Harrison (2004), p.158

[8] World Bank (2007)

[9] Wade (2008), p.383

[10] Wade (2008), p.375

[11] Wade (2004), p.166

[12] Milanovic (2007),p. 39

[13] Milanovic (2007), p.44

[14] Cornia (2004),p.8

[15] Milanovic (2007), p. 61

[16] Milanovic (2007), p. 69

[17] Nissanke and Thorbeck (2007), p.27

[18] Cornia (2004), p. 9

[19] Ravaillon(2004), p.33

[20] Nissanke and Thorbecke (2007), p.31

[21] Cornia (2004), p.3

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Discuss the impact of globalization on global poverty and inequality
King`s College London
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globalization, global political economy
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Veronika Minkova (Author), 2010, Discuss the impact of globalization on global poverty and inequality, Munich, GRIN Verlag, https://www.grin.com/document/179301


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