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G in thedeveloping world because it creates an environment conducive to faster economicgrowth and transmission of knowledge. However, structural factors and policieswithin the world economy and national economies have impeded the fulltransmission of the benets of the various channels of globalization for povertyreduction.

World income distribution continues to be very unequal and many poorcountries particularly in Africa are stagnating. Moreover, there is much empiricalevidence that openness contributes to more within-country inequality. China is agood example with coastal provinces as opposed to inland provinces reaping themajor benets of globalization.

Progress on poverty reduction has also been uneven. Although the share of thepopulation of developing countries living below US$1 per day declined from 40per cent to 21 per cent between 1981 and 2001, this was mainly achieved by thesubstantial reduction of the poor in Asia, in particular in China. Notwithstandingthe drop in relative poverty, the total number of people living under US$2 per dayactually increased worldwide. In particular, poverty has increased signicantly in

Africa in both absolute and relative terms.Te risks and costs brought about by globalization can be signicant for fragile

developing economies and the worlds poor. Te downside of globalization is mostvividly epitomized at times of global nancial and economic crises. Te costs of therepeated crises associated with economic and nancial globalization appear to havebeen borne overwhelmingly by the developing world, and often disproportionatelyso by the poor who are the most vulnerable. On the other hand, benets fromglobalization in booming times are not necessarily shared widely and equally in theglobal community.

Tough any trend in poverty and income inequality observed so far cannot beexclusively or even mainly attributed to globalization without rigorous analyses, even

the most optimistic estimates cannot dismiss concerns that the globalization process,as it has proceeded to date, may have had some adverse effects on poverty and incomedistribution. Tese concerns have generated a passionate debate worldwide as well asa powerful anti-globalization movement.

,

Overview

While the economic opportunitiesoffered by globalization can belarge, a question is often raised asto whether the actual distributionof gains is fair, in particular,whether the poor benet less thanproportionately from globalizationand could under some circumstancesbe hurt by it. This Policy Briefsummarizes and examines thevarious channels and transmissionmechanisms, such as greateropenness to trade and foreigninvestment, economic growth,

effects on income distribution,technology transfer and labourmigration, through which the processof globalization affects differentdimensions of poverty in thedeveloping world.

Written by Machiko Nissankeand Erik Torbecke

United Nations University, 2007ISBN 978-92-808-3035-4ISSN 1814-8026Licensed under the Creative CommonsDeed Attribution-NonCommercial-NoDerivs 2.5

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Channels Linking Globalizationto Poverty

What are the transmission mechanismsthrough which the process ofglobalization affects poverty directlyand indirectly? Te rst and mostimportant of these mechanisms is thegrowthinequalitypoverty channel.Other channels operate, respectively,through changes in relative prices offactors of production (labour andcapital) and commodities, movementsof capital and labour migration acrossborders, the nature of technologicalchange and technological diffusion, theimpact of globalization on volatilityand vulnerability, the worldwide owof information, global disination, andinstitutions.

The GlobalizationGrowth InequalityPoverty Causal Chain

o analyze and understand theimpact of openness on poverty, the globalizationopennessgrowthinequalitypoverty causal chainhas to be scrutinized link by link.Te rst link of the chain is fromglobalization via openness to growth.Te main manifestation of openness isthrough trade and capital movementliberalization, which in turn is presumedto affect growth directly throughincreased exports, imports, and capitalinows: rade liberalization policies encourage

exports, which benet exportindustries and contribute directly toGDP growth.

Switching from import substitutionto opening up the domestic economyto imports leads over time to moreefficient resource allocation and ahigher growth path.

Foreign direct investment raises theproductive capacity of the receivingcountries, and is often the conveyerbelt for transferring technology andknow-how.Te second link in the causal

chain from openness to poverty is theinterrelationship between growth andinequality. While it is most likely thatthe poor will benet from growth, theultimate poverty-reduction effects willdepend on how the growth patternaffects income distribution. If growthleads to an increase in income inequality,the poor may benet only slightly or,

in some instances, actually be hurt bythe globalization process. Indeed, thegrowthinequality link is much morecomplicated than what the classicalapproach postulated with its emphasis

on the growth-enhancing effectsof inequality (the rich save a largerproportion of their incomes than thepoor so that the impoverishment ofthe masses is a precondition to higherinvestment and growth). Inequality isresponsible for many consequences ofand phenomena that, at least potentially,could reduce future growth and hencefuture poverty alleviation, notablythe diffusion of social and political

instability and conict that coulddampen investment because of greateruncertainty.

About the Authors

Machiko Nissanke is

Professor of Economics atthe School of Oriental and

African Studies, University

of London. She previously

worked at Birkbeck College,

University College London

and the University of Oxford.

Erik Thorbecke is the

H.E. Babcock Professor

of Economics, Emeritus,

Graduate School Professorand former Director of the

Program on Comparative

Economic Development

at Cornell University. The

Foster-Greer-Thorbecke

poverty measure has

been adopted almost

universally by international

organizations.

Globalization affects poverty throughmany different channels: growth, inequality,international capital movements andlabour migration, technology, information,vulnerability, and institutions

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Te nal link in the globalizationpoverty nexus captures the combinednet effect of growth and a change inincome inequality on poverty. A higheraggregate growth rate of GDP is goodfor poverty reduction, while increasedinequality acting as a lter dampens thepositive effects of growth on povertyreduction. Consequently, policymakersshould focus on the pattern (structure)of growth and development ratherthan the rate of growth per se. Inshort, poverty reduction requires acombination of higher growth and amore pro-poor distribution of the gainsfrom growth.

Empirical Evidence

Te Impact of Globalization on theWorlds Poor provides empirical evidenceregarding the crucial importance ofthe pattern of growth on the extentof poverty reduction. In terms ofeconomic sectors, evidence shows thatin early development stages the growthof agriculture has a far greater impacton poverty than the growth of othersectors. For example, the bulk of thepoverty reduction in China occurredduring the phase of agricultural

de-collectivization and increases infood prices procurement before 1980,rather than in the subsequent trade-opening phase. Regional characteristicsalso play a dominant role on howinequality and poverty are affected bydifferent globalization components.And inequality in the initial incomedistribution affects poverty indirectlyand diminishes prospects for pro-poorgrowth.

Te great majority of the poor live inrural areas. As consumers, whether the rural poor

gain or lose from openness depends onwhether they are net buyers of tradablegoods (such as rice). It also depends onthe extent to which the retail marketstructure is monopolistic, blocking thepass-through from border prices todomestic prices. As recipients of public services,globalization can affect the poor intwo ways, rst, through budget cutsmandated by international agenciesto reduce budget decits and achievemacroeconomic stabilization, andsecond, through falls in tariff revenuesfollowing trade liberalization.Governments often nd it politicallymore expedient to cut publicexpenditures for the voiceless poor.At the same time it is easy to blamethe globalization process for domesticinstitutional failures that could at leastpartially be remedied through an attackon corruption and insisting on greateraccountability by domestic institutions. As users of common propertyresources, the rural poor can potentiallybe hurt if trade liberalization encouragesoverexploitation (such as massivedeforestation) of fragile environmentalresources. Te dilemma is that it may

be difficult and even counter-productivefor a country to adopt environmentalregulations while its competitorsdo not adopt them at the same timeand thereby are able to undercut theformer in world markets. Te policyrecommendation that suggests itself isgreater coordination of environmentalregulations on an international scale.

In addition, many small farmers areheavily dependent on multinationalmarketing chains for establishing afoothold in global markets, as theseproducts require new storage and

The Impact of Globalization onthe Worlds Poor: Transmission

Mechanisms

Edited by Machiko Nissankeand Erik Thorbecke

(hardback) 0230004792

December 2006

Studies in DevelopmentEconomics and Policy

Palgrave Macmillan

Poverty reduction requires a combination of higher growth anda more pro-poor distribution of the gains from growth

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transport infrastructure, large set-up costs, and marketing connections.Such circumstances require protectingthe poor through new legal rules andinstitutional structures that facilitatecontract farming and agro-processingwithout exposing small producersto exploitation by large marketingchains. More energetic internationalattempts might be called for to certifycodes against international restrictivebusiness practices and to establish aninternational anti-trust investigationagency, possibly under W O auspices.

Te investigation of global valuechainshorticulture, garments,and textilesin Bangladesh, Kenya,South Africa, and Vietnam providesevidence on the impact of globalizationon employment and economicopportunities for poor people. Tisanalysis makes a clear conceptualdistinction between non-globalizer andunsuccessful globalizer countries.

Kenya is categorized as anunsuccessful globalizer, while Vietnamis considered to have been successfulin integrating into the world economyin terms of outcome though remainingrelatively closed in terms of policy.Further, the impact of increased exportson employment has been much moresignicant in Bangladesh and Vietnam,where unskilled labour intensiveindustries accounted for 90 per cent and60 per cent of manufactured exportsin the late 1990s, respectively, than inKenya and South Africa, where thecorresponding gures were 16 percent and 10 per cent respectively. Inthese two African countries, skilledworkers (as proxied by educationlevels) beneted from globalizationwhile unskilled workers were adverselyaffected.

Te value chains of horticultureexports in Kenya and garment exportsin Bangladesh and Vietnam show thatthe growth of labour intensive exports

does create employment opportunities,particularly for low income women andmigrants from rural areas. However,the requirements of global value chainsmean that these jobs often demand ahigh degree of labour exibility, longhours of work, and poor workingconditions, making workers vulnerableboth in terms of employment securityand income. Opening up to globalcompetition has also led to job lossesand deterioration in working andemployment conditions, as the caseof textile industries in South Africaillustrates. Another relevant nding isthat the gains from globalization arelikely to be more widely distributedwhere the initial structure of assetsand entitlements is more equitable. Inany case since only a minority of thepoor are engaged in global production,integration with the global economy canhelp but is not a substitute for an anti-poverty strategy.

The GlobalizationCapital andLabour MobilityPoverty Channel

According to economic theory, theimpact of globalization on developingcountries well endowed with unskilledlabour should lead to a decline inincome inequality through an increaseddemand for unskilled labour, whileunskilled labour in developed countrieswould lose out with an adverse effecton equity. However, the empiricalevidence reveals that wage gaps betweenskilled and unskilled labour have beenincreasing in many developing countries,particularly in Latin America andAfrica.

Several specic features associatedwith the current phase of globalizationexplain why the theoretical predictiondoes not hold. For example, thenature of technical progress and newtechnology is heavily biased in favour ofskilled and educated labour, as technicalchange emanates from R&D activities

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in the developed (industrialized)countries in response to local conditions.Hence, technical change tends to belabour-saving and skill-biased, and newtechnology is complementary to capitaland skilled labour, while it is a substitutefor unskilled labour and tends toincrease inequalities in both developedand developing countries. Furthermore,technological diffusion and accessto new technology is not universaland spontaneous, while intensiedprivatization of research (e.g. in bio-technology) may have adverse effects onaccess to new technology by developingcountries and the poor. Te resultingwidened productivity differences explaincross-country wage/income inequality.

Perverse factor movements couldprovide another explanation. Capitaland skilled labour do not migrate topoor countries as much as amongdeveloped countries. Rather, there is atendency for skilled labour to migratefrom developing countries to developedcountries, as the massive migration ofAfrican nurses and Philippine and otherAsian medical doctors to the US andEurope testies, while unskilled labourmigration tends to be strictly controlled.With capital market liberalization,there is a propensity for capital ightfrom developing to developed countries,particularly during periods of instabilityand crisis.

Income convergence among theglobalizing countries during the rstwave of modern globalization was drivenprimarily by migration. Sixty millionpeople, including largely unskilledworkers, migrated from Europe toNorth America and other parts of thenew world between 1870 and 1914.In contrast, the extent of cross-bordermobility differs signicantly betweenskilled and unskilled labour in thecurrent phase of globalization. Unskilledworkers from developing countries faceincreasing obstacles in their attempts

to migrate to developed countries. Inconsequence, wage equalization doesnot take place through labour migration,as was the case in the previousglobalization era. Some workers loseout as de facto labour mobility takesplace through the increasingly freecross-border capital mobility as well asto transnational corporations ability tore-locate production sites in responseto changes in relative labour costs. Infear of driving away these corporations,governments of developing countries areless likely to enact regulations to protectand enhance labour rights.

The GlobalizationTechnology Poverty Channel

Te nature of technical progress andtechnological diffusion can be a furtherchannel through which globalizationaffects income distribution and poverty.As indicated, technological change tendsto be highly capital and skill-intensive

and unskilled labour-saving, as betsthe resource endowment of the richindustrialized countries where mostinnovations originate.

Even though much of the newtechnology does not conform to theresource endowment of poor countries,the potential exists for globalizationto confer signicantly higher foodproductivity and rural incomes ondeveloping countries via the mechanismof NorthSouth technology transfer.For example, to realize the potentialpositive effects of biotechnology onpoverty reduction, the public and privatesectors must: establish institutions with localcapacity for technology innovation andadaptation, reduce transaction costs in the processof international transfer of technology,and provide standardization, transparency,and access to information for propertyrights over technologies.

In addition to signicant investment

World Development

Volume 34, Issue 8(August 2006)

WIDER Special Issue:The Impact of Globalizationon the Worlds Poor

Edited by Machiko Nissankeand Erik Thorbecke

Elsevier

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in higher education and researchcapacity in low-income countries,a new type of institution (namelythe Intellectual Property RightsClearinghouse) might be capableof overcoming the lack of access tointellectual property rights and theburden of high royalty paymentsfor small and poor farmers in thedeveloping world.

Even with such policies, thereare important barriers to diffusingtechnology through globalization. Evenif a new technology can potentiallyincrease the income level of smallfarmers, its diffusion may be slow due tosunk costs of adoption and uncertaintiesabout net payoffs of the technology inquestion. Te lack of capital, credit,and risk-sharing possibilities as wellas limited access to information aboutnew technologies hinders technology

adoption and diffusion. Adoption ofnew technologies can be slowed byuncertainties about their efficiency.For example, without independentexternal information sources, farmers indeveloping countries have to rely heavilyon their neighbours (leaders who havealready adopted the technologies) to

obtain vital information about newmethods.

Other Channels: Vulnerability,Information Diffusion, andInstitutions

Beyond increasing aggregate income,globalization increases uncertaintyvia greater variation in income andexpenditure caused by global shocks,such as the various nancial crises that

have hit Latin America and Asia in thelast two decades. It was found that theextremely high volatility of consumption

observed in Central and East Europesince the early 1990s is strongly relatedto trade shocks encouraged by tradeliberalization. Consequently tradeliberalization, as implemented in the1990s, may have actually worsenedgrowth and welfare performance inEastern Europe. Furthermore, theanalysis indicates that the per capitaincome of the poorest populationquintile is most vulnerable to thesetrade shocks. Tese results point tothe need for emerging and transitioneconomies to adopt forward-lookingnational policies to support tradeliberalization, that is, policies to mitigatethe impact of trade shocks, and enhancecoping mechanisms. A new cultureof prevention with mechanisms forlimiting the size and frequency of shocksat the international level might also becalled for.

Te economics of happiness is a wayto address the noticeable differencesobserved between standard measuresof poverty and inequality and peoplessubjective assessments. Tat is, it canhelp explain discrepancies betweeneconomists assessments of the benetsof globalization for the poor and

individuals real and perceived welfareoutcomessuch as vulnerability tofalling into poverty among the nearpoor; distributional shifts at the local,cohort, and sector leveland changes inthe provision and distribution of publicservices. Te latter factors play a majorrole in determining public perceptionsabout the benets and fairness of theglobalization process.

It can be argued that while

globalization is a major engine forgrowth in aggregate, it introduces orexacerbates other trends that affect

The provision and distribution of public services play a major rolein determining public perceptions about the benets and fairnessof globalization

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peoples well-being as much as if notmore than income, for example, throughthe increasing ow of informationabout the living standards of others,both within and beyond countryborders. Tis ow of information canresult in changing reference normsand increased frustration with relativeincome differences, even amongrespondents whose own income isrising. For example, individuals in a

given developing country comparetheir incomes increasingly with thoseof relatively similar individuals indeveloped countries rather than withintheir own country. Increased insecurity,and the very real threat of falling intopoverty for the near poor and lowermiddle classes, contributes to negative

perceptions of the globalization process,particularly in countries where socialinsurance systems are weak or whereexisting systems are eroding.

Many social and collective measuresshould be in place for globalization tohave positive effects on poverty. Teseinclude measures such as: public investments in health, institutions that can ensure adherence

to basic norms of equity and fairness,

and collective investments in socialinsurance to protect workers fromthe volatility that often accompanyintegration into global markets.

In the absence of these measures, theprocess of globalization may only createopportunities for those that are bestpositioned to take advantage of them,leaving behind large sectors of poor andvulnerable individuals.

Institutions mediate the variouschannels and mechanisms throughwhich the globalization process affects

poverty. Institutions act as a lterintensifying or hindering the positiveand negative pass-through betweenglobalization and poverty and can helpexplain the diversity, heterogeneity,and non-linearity of outcomes.For example, on the one hand, theimpact of globalization on the poor ismediated by domestic political economystructures and institutions such as socialpolarization, oligarchic structures, and

predatory regimes, which may bias,conscate or nullify the gains fromglobalization for particular groups ofpoor. On the other hand, the positiveeffects of globalization on growth andpoverty can be found when institutionalconditions are characterized by suchfeatures as political participation,

social cohesion and management ofsocial conict arising directly fromglobalization effects. Consequently,safety nets and appropriate socialprotection schemes that shelterthe assets of poor households (andparticularly the erosion of their humancapital) during crises triggered byglobalization should be given highpriority.

Proactive Development Policies toBenefit from Globalization

Te outcomes of globalization processesare highly context-specic, dependentboth on the institutional framework andgovernment policies that mediate globalprocesses. o benet from globalizationsdynamic forces, developing countriesneed to take strategic steps with along-term vision for upgrading theircomparative advantages towards high-

value added activities by climbingthe technology ladder. Tis can berealized by developing technological

capabilities through learning andadaptation. o succeed, developing-country governments should consciouslyengage in building institutionalcapacities for integration, including acapable nation-state that is ready totake on the enormous challenges posedby globalization. Tese institutionalstructures should be specic to andconsistent with each countrys initialconditions.

In short, policymakers need todesign and implement an activedevelopment strategy not only tobenet from, but also to help counteractthe negative effects of the immutableforces of globalization. Globalizationshould not be viewed as a reliablesubstitute for a domestic development

strategy. Governments cannot passivelywait for the fruits of the WashingtonConsensus and the market forces ofglobalization to pull them on a fast trackto development. Instead, governmentsof developing countries need to pursueboth a process of strategic integrationand active domestic pro-poordevelopment policies.

Safety nets and social protection schemes that shelter the assetsof the poor during crises should be given high priority

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The World Institute for Development Economics Research (WIDER)was established by the United Nations University (UNU) as its rstresearch and training centre and started work in Helsinki, Finland in1985. The Institute undertakes applied research and policy analysis onstructural changes affecting the developing and transitional economies,provides a forum for the advocacy of policies leading to robust,

equitable, and environmentally sustainable growth, and promotescapacity strengthening and training in the eld of economic and socialpolicy making. Work is carried out by staff researchers and visitingscholars in Helsinki and through networks of collaborating scholarsand institutions around the world.

www.wider.unu.edu

W o r l d I n s t i t u t e f o r D e v e l o p m e n t E c o n o m i c s R e s e a r c h o f t h e U n i t e d N a t i o n s U n i v e r s i t y K a t a j a n o k a n l a i t u r i 6 B F I N - 0 0 1 6 0 H e l s i n k i F i n l a n d T e l . + 3 5 8 - 9 - 6 1 5 9 9 1 1 i n f o 1 @ w i d e r . u n u . e d u

w w w . w i d e r . u n u . e d u

I N S I D E :

Policy Brief Linking

Globalization toPoverty

While globalization offersnew opportunities for

accelerating developmentand poverty reduction it also

poses new challenges forpolicymakers; in particularwhether the poor gain from

globalization, and under whatcircumstances it may actually

hurt them.