Globalization and Poverty

"The evidence strongly suggests that export growth and incoming foreign investment have reduced poverty everywhere from Mexico to India to Poland. Yet at the same time currency crises can cripple the poor."

Does globalization, as its advocates maintain, help spread the wealth? Or, as its critics charge, does globalization hurt the poor? In a new book titled Globalization and Poverty, edited by NBER Research Associate Ann Harrison, 15 economists consider these and other questions. In Globalization and Poverty (NBER Working Paper No. 12347), Harrison summarizes many of the findings in the book. Her central conclusion is that the poor will indeed benefit from globalization if the appropriate complementary policies and institutions are in place.

Harrison first notes that most of the evidence on the links between globalization and poverty is indirect. To be sure, as developing countries have become increasingly integrated into the world trading system over the past 20 years, world poverty rates have steadily fallen. Yet little evidence exists to show a clear-cut cause-and-effect relationship between these two phenomena.

Many of the studies in Globalization and Poverty in fact suggest that globalization has been associated with rising inequality, and that the poor do not always share in the gains from trade. Other themes emerge from the book. One is that the poor in countries with an abundance of unskilled labor do not always gain from trade reform. Another is that the poor are more likely to share in the gains from globalization when workers enjoy maximum mobility, especially from contracting economic sectors into expanding sectors (India and Colombia). Gains likewise arise when poor farmers have access to credit and technical know-how (Zambia), when poor farmers have such social safety nets as income support (Mexico) and when food aid is well targeted (Ethiopia).

The evidence strongly suggests that export growth and incoming foreign investment have reduced poverty everywhere from Mexico to India to Poland. Yet at the same time currency crises can cripple the poor. In Indonesia, poverty rates increased by at least 50 percent after the 1997 currency crisis in that country, and the poor in Mexico have yet to recover from the pummeling of the peso in 1995.

Without doubt, Harrison asserts, globalization produces both winners and losers among the poor. In Mexico, for example, small and medium corn growers saw their incomes halved in the 1990s, while larger corn growers prospered. In other countries, poor workers in exporting sectors or in sectors with foreign investment gained from trade and investment reforms, while poverty rates increased in previously protected areas that were exposed to import competition. Even within a country, a trade reform may hurt rural agricultural producers and benefit rural or urban consumers of those farmers' products.

The relationship between globalization and poverty is complex, Harrison acknowledges, yet she says that a number of persuasive conclusions may be drawn from the studies in Globalization and Poverty. One conclusion is that the relationship depends not just on trade or financial globalization but on the interaction of globalization with the rest of the economic environment: investments in human capital and infrastructure, promotion of credit and technical assistance to farmers, worthy institutions and governance, and macroeconomic stability, including flexible exchange rates. The existence of such conditions, Harrison writes, is emerging as a critical theme for multilateral institutions like the World Bank.

Harrison adds that more research is needed to identify whether labor legislation protects only the rights of those few workers who typically account for the formal sector in developing economies, or whether such legislation softens short-term adjustment costs and helps the labor force benefit from globalization. Anti-sweatshop activism suggests that selective interventions may be successful in this regard.

Harrison next notes that while many economists predicted that developing countries with great numbers of unskilled workers would benefit from globalization through increased demand for their unskilled-intensive goods, this view is too simple and often inconsistent with the facts. Cross-country studies document that globalization has been accompanied by increasing inequality within developing countries, suggesting an offset of some of the reductions in poverty.

Globalization and Poverty yields several implications. First, impediments to exports from developing countries worsen poverty in those countries. Second, careful targeting is necessary to address the poor in different countries who are likely to be hurt by globalization. Finally, the evidence suggests that relying on trade or foreign investment alone is not enough to alleviate poverty. The poor need education, improved infrastructure, access to credit and the ability to relocate out of contracting sectors into expanding ones to take advantage of trade reforms

Information technology and globalization

Information technology and globalization

Recent advances in our ability to process and share information in digital form are reshaping the economies and social infrastructures of many countries around the world.

Information Technology (IT) is a driving factor in the process of globalization. Improvements in the early 1990s in computer hardware, software, and telecommunications have caused widespread improvements in access to information and economic potential. These advances have facilitated efficiency gains in all sectors of the economy. IT provides the communication network that facilitates the expansion of products, ideas, and resources among nations and among people regardless of geographic location. Creating efficient and effective channels to exchange information, IT has been the catalyst for global integration.

Recent advances in our ability to communicate and process information in digital form - a series of developments sometimes described as an "IT revolution" - are reshaping the economies and social lives of many countries around the world.

Products based upon or enhanced by information technology are used in nearly every aspect of life in contemporary industrial societies. The spread of IT and its applications has been extraordinarily rapid. Just 20 years ago, for example, the use of desktop personal computers was still limited to a fairly small number of technologically advanced people. The overwhelming majority of people still produced documents with typewriters, which permit no manipulation of text and offer no storage. Fifteen years ago, large and bulky mobile telephones were carried only by a small number of users in just a few U.S. cities. Today, half of all Americans use a mobile phone, and in some developing countries, mobile phones are used by more people than the fixed line telephone network.

Fifteen years ago, large and bulky mobile telephones were carried only by a small number of users in just a few U.S. cities. Today, half of all Americans use a mobile phone, and in some developing countries, mobile phones are used by more people than the fixed line telephone network.

But perhaps most dramatically, just ten years ago, only scientists were using, or had even heard about, the Internet, the World Wide Web was not up and running and the browsers that help users navigate the web had not even been invented yet. Today, of course, the Internet and the Web have transformed commerce, creating entirely new ways for retailers and their customers to make transactions, for businesses to manage the flow of production inputs and market products, and for job seekers and job-recruiters to find each other. The news industry has also been dramatically transformed by the emergence of numerous Internet-enabled news-gathering and dissemination outlets. Websites, chat rooms, instant messaging systems, e-mail, electronic bulletin boards and other Internet-based communication systems have made it much easier for people with common interests to find each other, exchange information, and collaborate with each other. Education at all levels is being transformed by communication, educational, and presentational software and by Websites and other sources of information and analysis on the Internet.

The IT revolution has been driven by the extraordinarily rapid decline in the cost and rapid increase in the processing power of digital technologies. The digital device whose technological advance has perhaps been most crucial to the IT revolution is the microprocessor, the collections of millions of tiny circuits that serve as the "brains" of personal computers and that are being embedded in an ever-expanding number of products, from video games to cars to refrigerators. Over the past two decades, the processing power of microprocessors has doubled roughly every six months.

Fiber optics technology enables data, including voices captured in digital form, to be converted into tiny pulses of light and then transmitted at high speeds through glass fibers wrapped into large capacity telecommunication cables. Hundreds of thousands of miles of these cables have been installed over the past ten years, boosting the speed and capacity of telecommunications networks.

Another set of advances that has been critical to the IT revolution has occurred in fiber optics. Fiber optics technology enables data, including voices captured in digital form, to be converted into tiny pulses of light and then transmitted at high speeds through glass fibers wrapped into large capacity telecommunication cables. Hundreds of thousands of miles of these cables have been installed over the past ten years, boosting the speed and capacity of telecommunications networks.

Advances in microprocessors, fiber optics, and a number of other complementary technologies, such as telecommunications switching devices and memory chips, have dramatically increased the speed, processing capacity, and storage space of computers and dramatically increased the speed and carrying capacity of telecommunications networks.

A key reason why these advances in IT have spread so quickly is that they have progressively reduced the cost of a unit of computing power or the transmission of a message. For less than $2000, Americans without any advanced technical training can purchase and use a desktop computer whose data processing power far exceeds the room-sized computers that powered the spacecraft that carried astronauts to the moon and back in the late 1960s and early 1970s.

The decline in computing prices has been a factor in spurning the growth of computers in the developing world (See graphic). Countries such as China, Russia, Indonesia, India and Brazil experienced tremendous growth in the number of personal computers. Between 1993-2000 the growth rate of personal computers per capita exceeded 500% for each of these nations.

The spread of digital technologies has also been spurred by several unique attributes of information, the principal input and product of many IT industries. In contrast to more tangible products, like consumer goods, one person's "consumption" of a piece of information does not necessarily reduce or eliminate the possibility that another person might benefit from the same piece of information. Furthermore, networks built upon the exchange of information, like the Internet, tend to become more valuable to existing participants as new participants link up with them. Finally, the cost of using digital technologies, such as Internet service providers, decreases as the number of users increases. All of these factors have worked together to promote rapid growth in the demand for and supply of IT products and services. During the second half of the 1990s, as more people bought computers and went on-line, the average cost of the equipment and services necessary to access the Internet declined.

In contrast to more tangible products, like consumer goods, one person's "consumption" of a piece of information does not necessarily reduce or eliminate the possibility that another person might benefit from the same piece of information. Furthermore, networks built upon the exchange of information, like the Internet, tend to become more valuable to existing participants as new participants link up with them.

Advances in IT are producing many changes in our society. These changes have produced many benefits, but they have also raised several concerns. Innovations in IT have created new jobs, promoted the growth of new markets, and increased international trade and investment. However, the expansion of IT also introduces costs. Workers in certain sectors of the economy lose their jobs as innovations in IT create a greater demand for high-tech workers and introduce efficiencies that make jobs obsolete. Another negative consequence of the IT revolution is the inequitable distribution of access to IT, called the digital divide.

If the new technologies are to fulfill their promise, these costs and concerns will need to be addressed. Experience with previous technologies suggests that prudent policies can help us effectively manage the risks associated with new technologies without harm to their benefits. Experience also suggests that the required policies must be developed through close consultation between government and private sector experts and stakeholders.

Globalization and Schools

Globalization and Schools

BACK IN 1979, the average worker with a college degree earned 75 percent more than the average high school graduate. Because of technology and globalization, the gap has leapt to 130 percent. This rising "college premium" does much to explain the growth of inequality over the past generation, so any serious response to inequality must make access to college broader and fairer. It should be broader because a higher rate of college attendance would share the fruits of globalization more widely. It should be fairer because, if the prizes for attending college are growing, it's essential that everyone begin life with a decent shot at winning them.

Because education boosts economic growth, and because it threatens no powerful lobby, virtually everyone claims to support it. The question is how it should be improved. Some commentators, pointing to the fact that schools in low-income districts already spend more per pupil than schools in affluent ones do, argue that failures at poor schools reflect complacent management rather than a lack of resources. Signaling at least partial acceptance of that theory, the Bush administration has tried to improve schools by holding them accountable and subjecting them to competition. Choice and accountability are attractive in principle, but studies of voucher programs in New York City, Milwaukee and Cleveland have found negligible gains from them. Costlier interventions must also be part of the solution.

The first opportunity for extra investment in education comes when children are young. That's when they are most malleable and when poor children start to fall behind: Even at age 3, researchers find class-based differences in linguistic and emotional maturity. The federal Head Start program, bolstered by a variety of state preschool programs, has succeeded in reaching many poor 3- and 4-year-olds. In 2001, 49 percent of 4-year-olds whose mothers were high school dropouts attended some type of preschool program, up from 36 percent a decade earlier. But that participation was still way below the 70 percent rate for children of college graduates. And the quality of many preschool programs is poor.

Head Start requires that only half of its teachers have two-year college degrees. In contrast, a 1960s experiment in Michigan known as the Perry Preschool program provided a fully qualified teacher for every six or seven students, and teachers visited each child at home weekly. The program raised IQ test scores by eight to 10 times the increase achieved by Head Start. It also reduced the likelihood that a student would require special education (by 43 percent), drop out of high school (by 25 percent) or be arrested (by 50 percent). A range of other studies, including recent ones in Michigan and Chicago, confirms that high-quality programs have lasting effects on poor children. Upgrading the 900,000 children in Head Start programs to something like the Perry program might require around $2 billion a year, according to W. Steven Barnett of Rutgers University. But quality preschools reduce spending on special education, jails and welfare, saving money for society in the long term.

Early intervention would help schools from kindergarten through 12th grade do their job properly, since teachers would face fewer students who can't keep up. But it also makes sense to invest in K-12 education directly. Although it's true that low-income districts already spend more per pupil than do rich ones, this slight advantage is swamped by the challenge of teaching poor children, who on average have more discipline problems and require more remedial attention -- and will continue to do so even if preschool is improved. Because of the challenge of teaching poor children, the higher cost of special education and other factors, schools in low-income neighborhoods have less-experienced teachers and worse facilities than do schools in affluent ones, according to research by Cecilia Rouse of Princeton and Lisa Barrow of the Federal Reserve. These schools might spend more money per pupil, but they lack more money per pupil, too.

Which K-12 investments would be effective? Smaller classes are a leading candidate: A Tennessee experiment that divided pupils into classes of differing size in kindergarten and then returned them to regular-size classes in third grade found benefits from smaller classes that persisted to high school. Improving the quality of teachers is also likely to boost performance, though teacher quality is not necessarily linked to teacher certification. Publicly funded summer school could make a difference. The performance gap between privileged and poor children appears to be linked to the way they spend their summers, with the privileged attending enrichment programs while the poor are under occupied.

Nearly 30 years ago, Martin Luther King Jr. declared that the challenge for schools is "to teach so well that family background is no longer an issue." By increasing the rewards for education, globalization has added urgency to King's argument, but globalization paradoxically creates a temptation to ignore him, too. By driving down the cost of tradable goods such as cars and DVD players, it leaves untradeable ones such as education looking expensive. There's a tendency for policymakers to say that education spending is growing a bit faster than inflation -- isn't that generous enough? But inflation is low partly because globalization brings us goods from cheap foreign suppliers. The economic challenge posed by those cheap foreign suppliers is precisely the reason we should invest more in our children.

 

Globalization and culture

Culture

In The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor, Harvard University economic historian David S. Lands maintains that the reasons for different development rates were cultural. Lands admits that tropical regions like sub-Saharan Africa were bound to develop slowly because it was too hot for people to work during the day at certain times of the year, while temperate regions like Europe offered cooler conditions more suitable to productive activities like growing food and raising cattle.

Yet, says Lands, cultural factors such as religion have powerfully affected the pace of development. “If we learn anything from the history of economic development,” he says, “it is that culture makes all the difference.” In the year 1000, he says, no one would have predicted that Europe would dominate the world 500 years later. But starting in the 1500s, the Protestant form of Christianity promoted both literacy and concern for conservation of time, and both of these attributes led to higher productivity in societies such as Britain, Germany, the Netherlands, and, later, the United States. Likewise, in China and Japan, Buddhist beliefs emphasized labor and thrift, which led to faster social and economic development.