discussion- Globalization

© Koninklijke Brill NV, Leiden, 2012 DOI: 10.1163/156914912X620725 PGDT 11 (2012) 38-49 brill.nl/pgdt PERSPECTIVES ON GLOBAL DEVELOPMENT AND TECHNOLOGY The Wealth (and Want) of Nations: The Impact of Economic Globalization on the Developing World Dwight Haase, PhD Department of Sociology and Anthropology University of Toledo Email: [email protected] Abstract In this article I review the literature on four outcomes of economic globalization: growth, wages, poverty, and inequality. Special attention is given to the importance of these outcomes for people of developing nations. Findings in the literature show a correlation between economic globaliza- tion and economic growth, but the relationship is much stronger for some nations than for oth- ers. Evidence on wages also shows uneven benefijits from economic globalization. The evidence on poverty is inconclusive, while several authors note growing inequality within nations. These studies highlight the need for more research that includes extraneous factors, such as foreign aid and remittances. Further research also should refijine the unit of analysis and gather extensive data from the informal sector.

Keywords Globalization, free trade, liberalization, poverty, inequality Introduction There has been much debate about whether economic globalization is good or bad for people in their daily lives. Of course, disagreement among academ- ics is by no means nothing new, but rarely do we see such polemic views on what appears to be a fairly simple question. Marber (1998) claims, “Multi- nationals are helping the poor get richer and the rich stay rich,” (p. 87) while Isaak (2007) in his title asserts, “the rich get richer and the poor get left further behind.” At least they agree about the rich. So the real debate seems to be about the poor, and that will be the focus of this article. More precisely, I will look at four outcomes of economic globalization for people in developing nations: growth, wages, poverty, and inequality. I will not offfer a defijinitive assessment of those four outcomes; but with a fresh look at the data available, D. Haase / PGDT 11 (2012) 38-49 39 I hope to contribute to a broader and deeper understanding of the social impact of economic globalization.

Part of the problem with the debate on economic globalization is that peo- ple agree on what exactly it is, but much less on what efffect it has. But at least there is a common understanding that economic globalization involves freer trade and investment between nations, as well as a certain set of policies sup- posedly designed to make each nation more adept at trading and more attrac- tive to investors. In this article I will begin with that simple defijinition and look at how it has been operationalized and correlated with the aforementioned four outcomes in a variety of studies. This is not an exhaustive review of the literature; nor will it delve into the intricate details of each study. Rather the objective of this article is to concisely assess the state of research on economic globalization.

Economic Growth Several works have found that increased foreign direct investment (FDI) cor- relates with economic growth (Bhagwati 2004; Borensztein et al. 1998; Frankel and Romer 1996; Dollar 1992; and Dollar and Kraay 2001). 1 The correlation between free trade and economic growth also has been well documented (Lee and Sohn 2010; Sachs and Warner 1995; Wacziarg and Horn Welch 2008; World Bank 2002).

Sachs and Warner’s (1995) piece is seminal; but their fijindings are based on a simplistic dichotomous measure of trade liberalization, which shows no cor- relation with growth in later years (Wacziarg and Horn Welch 2008). The World Bank (2002) study uses a measure of globalization based on rates of change in trade/GDP, which thus exaggerates the extent to which China and India have globalized economically. Indeed, those two nations are changing rapidly, but they started at such low levels of trade/GDP that for most of the timeframe covered by the research China and India’s trade/GDP ratios actually were low compared to many other nations. Meanwhile, Wacziarg and Horn Welch’s (2008) research shows remarkable heterogeneity in the experi- ences of trade liberalization from one nation to the next. Wacziarg and Horn Welch fijigure such erratic outcomes reflect countries’ diffferent macroeconomic situations and non-trade policies that were enacted in concurrence with trade 1 The fijindings of Borensztein et al. (1998) come with a caveat: the correlation holds only so long as a minimal threshold stock of human capital is maintained. 40 D. Haase / PGDT 11 (2012) 38-49 liberalization, but more research is needed to verify if indeed those factors are at play.

Other studies use capital account openness as their indicator of economic globalization, and fijind no correlation between that indicator and economic growth (Rodrik 1997; Alesina et al. 1994). Chanda (2005) uses the same indica- tor to show that more developing nations sufffer than benefijit. Meanwhile, Edwards and Ginn (2011) fijind that regional free trade agreements could make nations more vulnerable to market volatility.

The studies cited so far focus solely on one indicator of economic glo- balization. Dreher (2002) argues that not including other dimensions of global- ization as variables in the analysis could severely bias the estimated economic globalization coefffijicient. So Dreher collapses twenty-three variables related to globalization into three sub-indexes (economic, political and social), and com- pares more economically integrated countries to less integrated countries. He fijinds that the former grew faster in every fijive-year period. Since changes in the globalization index over time might to some extent reflect missing data instead of real changes in globalization, Dreher adds more variables related to black markets, balanced national budgets, political instability, inequality, and bank- ing and institutional quality. But the fijindings remain robust. Dreher concludes that globalization does foster growth, but not enough to eliminate current lev- els of poverty around the world.

Meanwhile, Milanovic (2003) questions whether such growth is even attributible to globalization. His longitudinal analysis reveals that countries like China actually grew more strongly before economic integration, not after.

These works offfer essential contributions to our understanding of globaliza- tion, but they share a common problem in that they do not control for non- trade revenues such as remittances and foreign aid. As a result, those studies might be exaggerating the benefijits of free trade for the economies of many developing countries.

According to the World Bank, recorded workers’ remittances to developing countries reached three hundred and twenty-fijive billion dollars in 2010. This is less than one percent of world GDP, but those remittances are heavily concen- trated in certain areas. For example, in Mexico remittances are second only to oil exports in terms of income earned abroad (MPI 2007). Meanwhile, there is persuasive evidence of the positive social impact of remittances (Page and Plaza 2006). Thus the economic benefijit of remittances could be quite substan- tial in certain nations, and should be factored into analyses of the impact of economic globalization.

Aid is another source of non-trade revenue. Over one hundred billion dol- lars annually is being allocated to developing nations around the world to D. Haase / PGDT 11 (2012) 38-49 41 facilitate growth. This is only a fraction of a percent of world GDP, but still it could have substantial multiplier efffects for the poor in many countries via various social services and economic development projects. However, it is important not to assume such services and projects always are benefijicial. A number of authors have shown that political imperatives and cultural misun- derstandings can beget undesirable outcomes for aid recipients (Easterly 2006; Hancock 1989; Klein 2008; Maren 1997; Moyo 2009). As an example of this, CARE International, one of the world’s biggest aid distributors, announced in 2007 that it would no longer accept forty-fijive million dollars in annual US food aid because those donations were stifling developing economies (Dugger 2007).

Finally, another problem with most studies of growth and economic global- ization is that they use the nation as the unit of analysis, thus treating the data as if growth is distributed evenly within nations. Of course, there is good rea- son to doubt that, so we need smaller units of analysis—industries or regions within countries—to better ascertain who exactly benefijits from economic growth within a given nation. We will see below that this problem of units of analysis is a recurring theme throughout this article.

Wages The basic expectation in mainstream economic theory is that economic glo- balization will allow for increased competition around the world, which in turn will lead to increased productivity and then higher wages. This assumes an active and efffective civil society that can monitor the corporations and make sure they share the fruits of increased productivity with their workers.

That is a big assumption for many countries, so we should not be surprised to see the evidence on wages is mixed.

Starting with the good news, Bhagwati (2004) correlates gains in wages with free trade policies and FDI in various countries. Hanson and Harrison (1999) show that in Mexico foreign and export fijirms on average pay higher wages than domestic and non-export fijirms. Flanagan (2006) fijinds that on average there is a three- to fijive-percent increase in wages for people working for multi- national corporations, but no spill-over efffect to other fijirms. However, it is not clear if this wage premium is simply a case of selection bias because exporting fijirms tend to hire workers with more human capital, and those persons get higher wages.

Other studies tell a diffferent story. For example, using longitudinal house- hold surveys, Arbache et al. (2004) show a fall in real wages over time in Brazil. 42 D. Haase / PGDT 11 (2012) 38-49 Furthermore, wages in the traded sector fell relative to the non-traded sector after trade liberalization. More precisely, what happened was an immediate drop in wages with trade liberalization, with a slight comeback, but never a full return to pre-liberalization wages. Arbache et al. say the efffect is particularly harsh for less educated workers. Bittencourt (2010) concurs, and calls for greater investment in human and physical capital for Brazil’s poor urban households. In Mexico Robertson (2005) fijinds the increase in border enforce- ment that followed NAFTA has efffectively depressed wages; and Squires (2011) argues that neoliberal reforms accompanying NAFTA decreased Mexican nurses’ wages. Meanwhile, Waldkirch (2010) fijinds the efffect of FDI on Mexican wages is negative or zero at best since the start of NAFTA.

At least in part, the discrepancies in fijindings might lie in the fact that studies like Flanagan’s (2006) treat all multi-national corporations and all sectors of the economy as if they are the same. In fact, there is evidence that the impact of free trade varies by sector (Ferreira and Ravallion 2008). So again, as with the studies of growth, smaller units of analysis are necessary to ascertain variations in wages within countries.

Also drawing parallels to the growth research, another problem with the studies of wages is that they do not consider the impact of aid. The exponential growth of the NGO sector, along with the programs it promotes, might reduce overall unemployment and thus raise wages in the formal sector. Aid also might strengthen civil society, thus empowering workers to demand higher wages.

Wage studies also are problematic since they do not factor in the income lost in terms of government revenue. Remember that economic globalization, as defijined in this article, includes not only the volume of trade and invest- ments, but also the policies made to attract such trade and investments. Typi- cally, those policies have included cuts to public spending, which could have been used for health care, better infrastructure, and food subsidies. When gov- ernments cut such spending, it could efffectively raise the price of various goods and services—and thus the cost of living. Scheper-Hughes’ (1992) monograph about an impoverished Brazilian barrio details the personal trials and traumas of what she calls “the violence of everyday life” during such budget cuts.

Furthermore, the focus on wages has distracted our attention from volatility in the costs of daily living often attributable to economic globalization. In the past few years we have seen impressive gains in wages offfset by rapid price hikes in grains and fuel in many countries. Most disturbing was the 2008 food crisis, when prices of grains more than doubled in many countries, efffectively pulling over one hundred million people into extreme poverty (Ivanic 2011).

Finally, another problem with the current research on wages and economic globalization is that it typically does not include workers in the informal D. Haase / PGDT 11 (2012) 38-49 43 sector—that part of the economy unregulated by the government. And yet the informal economy accounts for fijifty to seventy-fijive percent of non-agricultural employment in developing countries, as well as anywhere from twenty-seven to forty-one percent of nonagricultural GDP in developing countries (Carr and Alter Chen 2001; ILO 2002).

Given these conditions, more research on the informal sector is imperative.

Unfortunately, gathering data on the informal sector can be much more labor intensive and costly than gathering data on the formal sector. The Interna- tional Labor Organization (ILO) has made impressive progress in gathering data, but more resources should be made available so the ILO can be more thorough and comprehensive in its work.

Poverty The outcome of economic globalization that is most difffijicult to measure is poverty. Evidence of this difffijiculty resides in the exceptionally large margin of error in global poverty estimates. In part this phenomenon is a function of the fact that so many people live on the edge of poverty, a slight change in the poverty line begets a huge change in the number of people in poverty (Wade 2004). This problem could be dealt with by not relying on one strictly defijined poverty line. But there are other problems that are not so easily resolved. First and foremost, international poverty estimates typically are reported in pur- chasing power parity (PPP) dollars. PPP dollars control for diffferences in prices between nations by estimating the value of a basket of goods and services for each nation and then converting those values into one international standard, the PPP dollar. It is an ingenious concept, but since China and India did not participate in past projects to establish PPP indicators, their PPP values are to some extent guesses. Even for those countries that did actively participate in the project to establish PPP indicators, their baskets sometimes include prod- ucts that may not even be relevant to their country; so global price fluctuations in a commodity that is not even sold in a given country could give the appear- ance of people in that country pulling themselves out of poverty, or falling back into poverty (Srinivasan 2004; Reddy 2004).

Given these problems, Srinivasan (2004) concludes that it simply may be preferable to abandon our attempts to create an international standard for measuring poverty. Reddy (2004) does not give up on the endeavor; instead he calls for more detailed data gathering. This idea sounds quite appealing, but it would require a massive (and unlikely) fijinancial and logistical commitment from governments around the world. As an alternative, Reddy (2004) also men- tions the possibility of returning to calorie-based measures that already have 44 D. Haase / PGDT 11 (2012) 38-49 been used in many countries. But such measures only tend to capture the nutritional impact of poverty; they tell us much less about access to shelter, health care, education or human rights. Calorie-based measures cannot help us to understand protests over fuel prices and other incidents of civil unrest that have occurred in recent years. Nor do they offfer any insight on what policy- makers should do to address those problems.

Wade (2004) suggests we use exchange rate dollars instead of PPP dollars.

This indicator we can see changing daily, so it is more capable of measuring rapid market dynamics. Using exchange rate dollars, Wade shows inequality actually is increasing between nations. Wade’s critics would argue that exchange-rate values are irrelevant since most poor people around the world are not directly engaged in the global economy. But Wade contends exchange rates are indeed important because Third World nations need to import tech- nology and consultants to foster their own development, and those purchases depend on exchange rates. A viable solution is to employ PPP dollars and exchange-rate dollars together, as well as calories where appropriate, to check for robustness of fijindings between these various measures. This could give us a more well-rounded perspective of the status of poverty around the world.

Another option is simply to look at countries individually as case studies.

Borras (2007) does this for the Philippines, and fijinds that free-trade and liber- alization policies fail to address rural poverty and inequality in the Philippines.

Elsewhere, Bussolo and Niimi (2009) estimate the impact of CAFTA on Nicara- gua and fijind the impact on poverty is not too large, but see potentially greater benefijits if Nicaragua’s free-trade policies were expanded to include more countries. Meanwhile, Cardero et al. (2006) assert that Mexico has overvalued its currency as a part of its liberalization policies, which in turn has increased poverty in Mexico. Studies in other countries note an increase in inequality that comes with such policies (Babb 2005), which is the fijinal topic of this article.

Equality While wages and levels of poverty are necessary indicators of the impact of economic globalization, they are not sufffijicient. The question of equality remains. It is important not only for the sake of fairness, but also because inequality tends to beget increases in violent crimes, drug abuse, and psycho- logical problems, such as anxiety. Life expectancy declines with increased inequality, as does trust in civil society. Inequality also inhibits economic growth through its efffects on political institutions (Alesina and Perotti 1996). D. Haase / PGDT 11 (2012) 38-49 45 Finally, indicators of happiness and life satisfaction drop signifijicantly with increased inequality (Kahneman and Deaton 2010; Pickett and Wilkinson 2009).

The good news is that global inequality appears to be decreasing over the last thirty years if we weight countries by their populations. Becker et al. (2005) argue this trend would look even more impressive if we control for increased longevity in developing nations in recent years (and thus more years working per person). However, if we do not weight countries by their population, inequality actually is increasing. The diffference between these two fijindings lies in China and India’s rapidly developing economies. These two nations, with over two billion people, overshadow increasing inequality in smaller countries. Furthermore, if we look at the absolute diffference in dollars rather than the percentage diffference in GDP per capita between nations (subtract- ing a poor nation’s GDP per capita from that of a wealthy nation, rather than dividing), we actually see a widening gap (Wacziarg and Horn Welch 2008; Wade 2004).

Another complication is the fact that the studies cited so far use the nation as the unit of analysis. This means the diffferential impact of economic global- ization for various demographic groups within nations is overlooked. But case studies around the world suggest that globalization can benefijit some groups at the expense of others. For example, Niazi (2008) notes how ethnic minorities are losing control of lucrative resources while Pakistan’s economy globalizes.

And studies conducted in Mexico, Brazil, Taiwan and Indonesia show increased returns to education, thus begetting increased inequality within those nations (Bourguignon et al. 2005; Feliciano 2001; Cragg and Epelbaum 1996; Green et al.

2001). Other studies in Mexico, Costa Rica and Chile show a skill premium, so highly skilled labor benefijits more from free trade than do less skilled workers, again resulting in increased inequality among workers (Robbins 1994; Robbins and Gindling 1999; Feenstra and Hanson 1997). Meanwhile, Ferreira and Raval- lion’s (2008) longitudinal analysis of one hundred and thirty nations suggests that these cases are not isolated or ephemeral.

These studies suggest that globalization has widened class divisions. But of course class is only one of several possible statuses upon which societies are stratifijied. Researchers have only begun looking into gender-related diffferences in developing countries. Xiaoling et al. (2007) fijind that globalization only per- petuates gender inequalities in the Chinese manufacturing sector. And Arbache’s et al. (2004) study of Brazil fijinds that women continue to earn less than men, even after controlling for human capital.

More research delving into class and gender diffferences within countries and industries is necessary to better ascertain global trends. And this research 46 D. Haase / PGDT 11 (2012) 38-49 should be complemented with similar studies related to racial/ethnic, age and demographic diffferences that otherwise would not be apparent from studies that use the nation as the unit of analysis.

Conclusion The studies reviewed in this article offfer essential contributions to our under- standing of the outcomes of economic globalization. There is some impressive evidence of a correlation between economic globalization and economic growth, but that growth is not evenly shared by all nations. Some possible spu- rious factors such as aid and remittances might help to explain the unevenness of growth, but those factors have not been included in most analyses.

As with growth, gains in wages are not evenly distributed, with some work- ers enjoying higher wages while others lag behind. Furthermore, the evidence on wages tells us little about developments in the informal sector; nor does it tell us how families are afffected by dramatic price changes of basic commodi- ties, like fuel and grains.

As for the research on poverty, methodological complications so far have eclipsed the prospect of any defijinitive fijindings. The data on global inequality are clearer, showing some nations falling behind. Furthermore, using the nation as the unit of analysis obscures inequality within nations, which appears to be growing.

These fijindings leave us with many more questions, which highlight the need for new research that includes non-trade revenues at the macro level and mea- sures of income adjusted for rapid price changes in commodities at the micro level. Such research also should look at the impact of economic globalization not only in the formal sector, but also in the informal economy. Finally, we must consider smaller units of analysis to ascertain the diffferential impact of globalization for various demographic groups.

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