The globalization of markets can benefit—and has benefited—rich and poor alike. But the integration of the global economy is outpacing the development of a healthy global polity. To realize the values and rules critical to a secure and just world—and to make the full benefits of a global market available to all—will require a better global politics.
The debate about the implications of market-led globalization for the poor has taken on new urgency in the past several years. On one side are most mainstream economists, international institutions such as the United Nations and the World Bank, most finance ministers and central bank governors in poor and rich nations alike, and most professional students of development. They argue that globalization is not to blame for any increase in world poverty and inequality—and point out that the world’s poorest people, those living in rural Africa and South Asia, are those least touched by globalization. On the other side of the debate are most social activists, members of nonprofit civil society groups who work on environmental issues, human rights, and relief programs, most of the popular press, and many sensible, well-educated observers. To them, the issue seems self-evident. Globalization may be good for the rich countries and the rich within countries, but it is bad news for the poorest countries and especially for the poor in those countries.
One central issue is whether the current distribution of economic and political power in the world is just or fair—whether it provides for equal opportunities to those who are poor and, in global affairs, relatively powerless. On this score, I believe it is time for the first group to internalize the arguments of the second and recognize the need for an improved global politics, in which more democratic and legitimate representation of the poor and the disenfranchised in managing the global economy mediates the downside of more integrated and productive global markets.
Globalization, Poverty, Inequality
Most developing countries began to be tied into the world economy only in the 1980s. Before that, although they participated in some multilateral trade agreements, special preferences permitted them to protect their own markets. In the 1980s, however, and increasingly in the 1990s, most developing countries took steps to open and liberalize their markets. In addition to reducing and eliminating tariffs and nontariff barriers, they made fiscal and monetary reforms, privatized and deregulated their economies, eliminated interest rate ceilings, and, in the 1990s, opened capital markets—a package that came to be known as the Washington Consensus. These market reforms and accompanying, often socially painful, structural changes were encouraged and supported by the International Monetary Fund, the World Bank, and the U.S. Treasury with large loans typically conditioned on countries’ adopting and implementing agreed policies. The increasing reliance on markets in the developing world and, in the 1990s, in the countries of the former Soviet empire is with good reason seen as part and parcel of globalization. And because of the conditioned loans, many opponents of globalization today see the turn to the market—and thus to global capitalism—as imposed on the developing countries. (Ironically, the loans often were disbursed even when agreed conditions were not implemented.)
With the growing influence of markets in the past two decades have come changes in global inequality and world poverty. Over the past century, global inequality by most measures has been growing. At the end of the 19th century, the ratio of the average income of the richest to the poorest country in the world was 9 to 1. Today the average family in the United States is 60 times richer than the average family in Ethiopia or Bangladesh (in terms of purchasing power). The increase in inequality is the result of a simple reality. Today’s rich countries, already richer 100 years ago (thanks to the Industrial Revolution), have been blessed with economic growth and have gotten a whole lot richer. Poorer countries, poor to start with, have grown little if at all.
In the past two decades, the picture has changed a bit. Some developing countries, including China and more recently India, have grown faster than the already rich countries. Incomes in China and India will not soon equal those in rich countries—it would take them almost a century of faster growth even to reach current U.S. levels. Still, some developing countries have done some dramatic catching up.
And the rapid growth in India and China has caused world poverty to decline. Between 1987 and 1998, the share of the world’s population that is poor (using World Bank figures and the Bank’s poverty line of $1 a day in 1985 dollars) fell from about 25 percent to 21 percent; the absolute number fell from an estimated 1.2 billion to 1.1 billion. The decline was concentrated in India and China; elsewhere in the developing world, numbers rose.
Measured in yet another way—by a “world” distribution of income that ranks all individuals or households around the world according to income, giving each person (or household) the same weight in the distribution—world inequality is extremely high but is leveling off. Although today the richest fifth of world households is about 25 times richer than the poorest fifth, in the past 20 years the rapid growth of India and China has slowed increases in world inequality. (The world distribution of course gives much greater weight to these high-population countries.)
At the world level, then, it is fair to say that poverty is declining and inequality is not increasing. Today’s global inequality is mostly a matter of differences between rich and poor countries in past rates of growth. That brings us back to the main argument of globalization’s proponents: countries that have successfully entered the global market and participated in globalization have grown most. Historically, that included Japan, beginning in the Meiji era between 1868 and 1912, the poorer countries of Western Europe during the 19th century and then again after World War II, and the so-called miracle economies of East Asia between about 1970 and 1998. More recently, it has included China and India, as well as Bangladesh, Brazil, Malaysia, Mexico, Mozambique, the Philippines, Thailand, Uganda, and Vietnam. Poverty remains highest in the countries, including many in Africa and some in South Asia, and among people, especially in the rural areas of China, India, and Latin America, that are marginal to global markets. To the extent that globalization has “caused” increasing inequality, it is not because some have benefited a lot—a good thing—but because others have been left out altogether.
Globalization Is Not the Solution
But if globalization is not the cause, neither is it the solution to the world’s continuing poverty and haunting inequality. Consider the plight of many of the world’s poorest countries. Highly dependent on primary commodity and natural resource exports in the early 1980s, they have been “open” for at least two decades, as measured by their ratio of imports and exports to GDP. But unable to diversify into manufacturing (despite reducing their own import tariffs), they have seen the relative world prices of their commodity exports fall—and have been left behind. Despite rising exports, tariff reductions, and market-oriented reforms including greater fiscal and monetary discipline and the divestiture of unproductive state enterprises, they have been unable to increase their export income, failed to attract foreign investment, and grown little if at all.
Many of these countries in sub-Saharan Africa, as well as Haiti, Nepal, and Nicaragua, seem trapped in a vicious circle of low or unstable export revenue, weak and sometimes predatory government, terrible disease burdens (the HIV/AIDS pandemic being only one recent example), and failure to deliver to their children education and the other services that are critical to sustainable growth. For these countries, despite efforts by their governments to enter global markets, globalization has not worked. Success in global markets might come with success in growth and development itself, but it is not likely to come on its own.
For better-off emerging market economies, globalization has failed to work in a second way. For them global trade has been generally a boon, but global financial markets pretty much a bust. In the past decade, Mexico, Korea, Thailand, Indonesia, Russia, Brazil, Ecuador, and Turkey, and this year Argentina, were all hit by financial crises triggered or made worse by their exposure to global financial markets. Weak local financial markets and wary local and foreign creditors made these countries highly vulnerable to the panicked withdrawal of capital typical of bank runs. And the resulting financial instability was especially costly for the working poor and the emerging middle class. In Turkey, Argentina, and Mexico, hit repeatedly by inflation and currency devaluations in the past two decades, wealthy citizens move substantial financial assets abroad, often simultaneously acquiring bank and corporate debt that is then socialized and paid by taxpayers, worsening inequality—and certainly appearing unfair. In parts of Asia and much of Latin America, inequality had already increased during the mid-1990s boom as portfolio inflows and high bank lending fueled demand for assets, such as land and stocks, owned by the rich.
In both regions the poor and working class gained the least during the boom and then lost the most, certainly relative to their most basic needs, in the post-crisis bust. The high interest rates that the affected countries used to stabilize their currencies also hurt most small capital-starved enterprises and their low-wage employees. The bank bailouts that often follow financial crises create public debt that again implies a transfer from taxpayers to rentiers. China and India, whose capital markets remained relatively closed, survived the financial crises of the late 1990s better than did Mexico, Argentina, and Thailand. More open trade is good for growth and benefits the poor, but the effects of the rapid and near-complete opening of capital markets pushed by the IMF and the U.S. Treasury throughout the 1990s were not so benign. No wonder social activists are suspicious of corporate and financial influence in global markets.
A third problem with globalization has been that privatizing and liberalizing financial markets in the absence of adequate regulatory institutions and banking standards and supervision invite corruption. Russia is only the most visible example. Open capital markets make it easier for corrupt leaders to burden their own taxpayers with official and private debt while padding their own foreign bank accounts. Unregulated markets make money laundering and tax evasion easier and raise the costs asymmetrically for poor countries to defend their own tax systems. Global capital markets do not cause all these problems, but like an occasion of sin they increase the likelihood that human failings will corrupt the system, usually at a cost to the poor and powerless.
Not all the suspicions of the activists are necessarily warranted. But the activists are right in one important respect. The opportunities in the global economy are not equal.
In the global market, those without the right training and equipment can easily lose. That is because markets that are bigger and deeper reward more efficiently those countries and those people who already have productive assets. For people the relevant assets include financial, physical, and, perhaps most crucial today, human capital. For countries what matters are healthy and stable country institutions—established political systems, secure property rights, adequate banking supervision, reasonable public services. It is no accident that 80 percent of all foreign investment occurs among the industrialized countries—and that just 0.1 percent of all U.S. foreign investment went to sub-Saharan Africa last year.
At the individual level, the best example of how healthy markets can generate unequal opportunities is the rising returns to higher education throughout the world. In the high-tech global economy, the supply of university-educated people has not been keeping up with ever-increasing demand, leading to wage gains for college graduates and wage losses for those with high school education or less. Just about everywhere in the world (Cuba, China, Kerala state in India, all socialist entities being exceptions), education reinforces initial advantages instead of compensating for initial handicaps.
The global market for skilled and talented people is another illustration of the asymmetrical effect of markets. The highly skilled are highly mobile. Indian engineers can quadruple their earnings by moving from Kerala to Silicon Valley. For the individuals concerned, this “brain drain” is a good thing, and eventually it can generate offsetting remittances and return investments if the institutional and policy setting in India and other poor countries improves. But in the short run, it makes it harder for the poorer countries to build those institutions and improve those policies. The annual loss to India of its brain drain to the United States is estimated at $2 billion. The farmers and workers whose taxes finance education in poor countries are subsidizing the citizens of the rich countries—whose tax revenues are boosted by the immigrants’ contributions.
The efficiency gains and increased potential for growth of a global market economy are not to be disdained. Rising wage gaps in open and competitive markets should not surprise or alarm us: they may be the short-term price worth paying for higher long-run sustainable growth. They create the right incentives for more people to acquire more education, in principle eventually reducing inequality. But in modern market economies, a well-defined social contract tempers the excess inequalities of income and opportunity that efficient markets easily generate. Progressive tax systems provide for some redistribution, with the state financing at least minimal educational opportunities for all and some social and old-age insurance. There is no global analogue.
When the Market Fails
Global market failures also raise new costs for the vulnerable and compound the risks faced by the already weak and disadvantaged. The rich countries that historically have the highest per capita greenhouse gas emissions have not internalized the costs of their pollution but have imposed them on the poor countries, whose citizens have few resources to protect themselves.
Financial contagion across countries, affecting even those emerging market economies with relatively sound domestic policies, can also hit hardest the already vulnerable. Financial contagion has not only brought instability and slower growth to Latin America and East Asia; it has weakened their capacity to develop and sustain institutions and programs to protect their own poor. With global market players doubting the commitment of nonindustrialized countries to fiscal rectitude at the time of any shock, countries are forced to tighten fiscal and monetary policy to reestablish market confidence, rather than stimulate their economies to combat recession. These austerity policies are the opposite of the policies the industrial economies implement—reduced interest rates, unemployment insurance, increased availability of food stamps and public works employment. All these are fundamental ingredients of a modern social contract. And the effects of unemployment and bankruptcy can be permanent for the poor. In Mexico, increases in child labor that cut school enrollment during the 1995 crisis were not reversed: some children did not return to school when growth resumed.
Contagious diseases, transnational crime, and potentially beneficial but risky new technologies such as genetically modified foods also entail asymmetric costs and risks for poor countries and poor people. Similarly, poor countries that protect global resources such as tropical forests and biological diversity are paying the full costs but are unable to capture the full benefits of these global goods. Within countries, governments temper market failures through regulations, taxes and subsidies, and fines; and they share the benefits of such public goods as security, military defense, management of natural disasters, and public health through their tax and expenditure decisions. Ideally those decisions are made in a democratic system with fair and legitimate representation of all people, independent of their wealth. In nations, such political systems seldom work perfectly. In the global community, a comparable political system just barely exists.
Economic Power and Global Rules
Unequal opportunities for the poor, and the risk they bear when the market fails, are not the whole story. In the global game, economic power matters. The rich and powerful can influence the design and implementation of global rules to their own advantage. Political constraints in rich and powerful countries dominate, for example, the design of global trade rules. The resulting protection in the United States and Europe of agriculture and textiles—both sectors that could generate jobs for the unskilled—locks many of the world’s poorest countries out of potential markets. The U.S. African Growth and Opportunity Act and the European Union’s recent initiative to eliminate all barriers to imports from the world’s 49 poorest countries are steps in the right direction—but very small steps indeed since the countries that can benefit make up only a minuscule proportion of all world production. And even those initiatives were watered down considerably by domestic political pressures and include complicated rules that create uncertainty and limit big increases in poor-country exports.
Political constraints also affect the way trade rules are implemented. Complicated negotiations and dispute resolution put countries with limited resources at a disadvantage. The use of antidumping actions by U.S. producers, even when they are unlikely to win a dispute on its merits, creates onerous legal and other costs to producers in developing countries and chills new job-creating investment in affected sectors. About half of antidumping actions are directed against developing country producers, who account for 8 percent of all exports.
International migration too is governed by rules stacked against the developing countries, especially their poor and unskilled citizens. Permanent migration has slowed because higher-income countries restrict immigration. In the 25 years before World War I, 10 percent of the world’s people changed their permanent country residence; in the past 25 years, that figure has fallen to 2 percent. Yet just as the huge influx of Europeans to the Americas in the 19th century reduced inequality, more migration today would do the same. An auto mechanic in Ghana can quintuple his income just by moving to Italy. During the recent information technology boom, the United States allowed highly skilled workers to enter with temporary visas—a boon, no doubt, for the beneficiaries, but also a drain on the working taxpayers in poorer countries who helped educate them and yet another example of the capacity of the already rich to exploit their power.
Economic power also affects the rules and conduct of the international institutions. The International Monetary Fund is meant to help countries manage macroeconomic imbalances and minimize the risks of financial shocks. But in the 1990s the IMF, heavily influenced by its richer members, was too enthusiastic in urging developing countries to open their capital accounts. Even when the policies supported by the IMF and the World Bank have made sense—and I believe for the most part they have—the policymakers have no real accountability to the people in developing countries most affected by them. Developing countries are poorly represented in these institutions’ voting and other forms of governance.
A New Agenda of Good Global Politics
That poverty is declining worldwide and inequality is leveling off are not signs that all is well in our new globalized economy. Proponents of market-led globalization must recognize that the global economy is not addressing the problems of poverty and inequality and is ridden with asymmetries that add up to unequal opportunities. Social activists must rethink their demands for dismantling the limited institutions for managing globalization’s downside. Both groups must join forces to push a new global agenda, aiming for a new global politics to accompany the global economy.
Statements of social and economic rights in the United Nations and relatively minor transfers of financial and technical resources from rich to poor countries are as close as we have come to anything like a global social contract. Anyone arriving from another planet into our highly unequal global economy would have to conclude that rich countries have no interest in doing anything much to help the poor in poor countries—surprising given what could be their enlightened self-interest in a more secure and prosperous global economy. The logic of a global social contract is clear, but it cannot be constructed out of nothing. As is the case within countries, a social contract involves some transfers—for investments in the human capital and the local institutions that can ensure equal opportunities for the poor.
Past mistakes in foreign aid policy—multiple and onerous standards of different donors, conditionality that doesn’t work—should not be an excuse for the rich countries’ minimal spending on foreign aid. With many poor countries consolidating reforms, their ability to spend resources productively now far exceeds the amount of aid available. In the industrialized economies, domestic social contracts—public transfers for investing in education, health, and housing and for social-safety-net programs such as unemployment and disability insurance and welfare and pension programs—usually amount to more than 10 percent of GDP. Foreign aid for a global social contract is below 0.5 percent of rich countries’ combined GDPs.
Most important, the global and regional institutions that are the world’s most obvious mechanisms for managing a global social contract must be reformed, not dismantled. It is ironic that the World Bank and the IMF have been the lightning rods for antiglobalization protests. Accused of being too powerful, they may well be too limited in their resources and insufficiently effective to manage a global contract that would bring equal education, health, and other opportunities to the poor in poor countries. Making these institutions more representative and more accountable to those most affected by their programs, and thus more effective, has to be on the agenda of better global politics.
That agenda must also include opening rich-country markets to developing countries and rethinking the rich world’s restrictions on immigration of the unskilled. Developing countries should also be more fully and fairly represented in international institutions, especially the financial institutions, whose policies and programs are so central to their development prospects.
Those concerned with global justice, whether economists and finance ministers or activists, face a daunting problem of global collective action. They need to make a common agenda for a global social contract. In practical terms that means working together in the short run to build a more level playing field in global governance. It means insisting that a new global development architecture be based on good global politics and not just expanded global markets.