Is Globalisation Causing World Poverty? Martin Wolf, Chief Economics Commentator, Financial Times...

Is Globalisation Causing World Poverty?Martin Wolf, Chief Economics Commentator, Financial Times

Leverhulme Globalisation Lecture

Nottingham University, February 25, 2002

2

Is globalisation causing world poverty?

1 The charge sheet

2 The current state of world inequality and poverty

3 How the world became this way

4 Inequality and poverty in the 1980s and 1990s

5. Globalisation - winners and losers

6. Conclusion

3

1. The charge sheet

• “Globalization has dramatically increased inequality between and within nations” Jay Mazur, “Labor’s New Internationalism”, Foreign Affairs, January/February 2000.

• “So far, the current wave of globalization, which started around 1980, has actually promoted economic equality and reduced poverty.” David Dollar and Aart Kraay, Foreign Affairs, January/February 2002

• Who is right?

4

2. Current state of world inequality and poverty

• This is indeed a remarkably unequal world:

– The rich countries with less than a sixth of world population generate 55 per cent of world real income

– Low income countries, with 41 per cent of world population, generate 11 per cent of world incomes

– The average real incomes of the top sixth are 14 times bigger than those of the 41 per cent in the poorest countries

– Average incomes in the US (the richest country) are 75 times greater than those of Sierra Leone (the poorest)

5

2. How the world’s population is divided

SHARES IN WORLD POPULATION IN 2000 (millions)

2,459

2,046

647

903

Low income Lower middle income Upper middle income High income

The world’s population in 2000 was 6,055m, of which only 903m lived in high-income countries and 4,505m lived in low-income and lower-middle income countries.

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2. How the world’s income is divided

SHARES IN WORLD GROSS INCOME 2000($ billions, at purchasing power parity)

$4,892

$9,374

$5,930

$24,781

Low income Lower middle income Upper middle income High income

But the high-income countries generated 55 per cent of the total world income, at purchasing power parity, of $45 trillion

7

2. What this means for world average incomes

RICHER AND POORER(Gross National Income per head, 2000, at purchasing power parity)

$1,989

$4,582

$9,165

$27,443

$7,428

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000

Low income

Lower middle income

Upper middle income

High income

World

Source: World Bank

The globalised world is, as a result, deeply divided in its living standards

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2. Income inequality among countries is starker

FROM RICHEST TO POOREST(Gross National Income per head at PPP, 2000)

$460

$790

$1,650

$2,390

$3,940

$7,320

$9,030

$17,340

$23,550

$34,260

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000

Sierra Leone

Nigeria

Bangladesh

India

China

Brazil

Poland

South Korea

UK

US

Sierra Leone’s real income per head today is roughly where the world’s was in 1500. It is at the subsistence minimum and ravaged by civil war. The US is the most productive country today.

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2. 1.2bn people on less than a dollar a day

NUMBERS LIVING ON LESS THAN A DOLLAR A DAY, 1998(millions of people, at purchasing power parity)

522

291

278

78

24

6

30

South Asia Sub-Saharan Africa East Asia and Pacific

Latin America and Caribbean Europe and Central Asia Middle East and North Africa

The extremely poor are defined as those on less than a dollar a day, at purchasing power parity. There were 1.2bn in 1998, concentrated in south and east Asia and in Africa.

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2. Highest incidence in Africa and South Asia

SHARES OF PEOPLE LIVING ON LESS THAN A DOLLAR A DAY, 1998(at PPP)

46.3%

40.0%

15.6%

15.3%

5.1%

1.9%

24.0%

20.2%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%

Sub-Saharan Africa

South Asia

Latin America and Caribbean

East Asia and Pacific

Europe and Central Asia

Middle East and North Africa

Developing country population

World population

Source: World Bank

Almost half the population of Sub-Saharan Africa is destitute. The incidence of extreme poverty is almost as high as this in South Asia, though falling.

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3. How the world became this way

• The path to world inequality has been a long one

– Today’s unequal world did not arrive in 1980. It has been emerging progressively over 200 years

– The big divergence today is between countries that have sustained growth in incomes per head over long periods and those that have grown more slowly and unevenly

– Relative economic growth has been the principal determinant of long-term changes in global inequality and poverty

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3. How the world became this way

– The rise in global inequality was fastest in the 19th century. It seems to have ended in the 1980s and 1990s, though absolute income gaps keep growing

– Numbers in poverty also peaked in the 1980s, but the proportion of the world’s population in extreme poverty has been falling for 200 years

– The world’s poorest are those left behind by growth

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3. “Small” differences add up over time….

THE MIRACLE OF COMPOUND INTEREST:ANNUAL RATES OF GROWTH IN REAL INCOMES PER HEAD, 1820-1998

1.91%1.75%

1.51%

1.22%1.06%

0.92%

0.67%

1.67%

0.95%

1.21%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

Japa

n

Wes

tern

offs

hoot

s

Wes

tern

Eur

ope

Latin

Am

erica

Easte

rn E

urop

eAsia

Africa

Advan

ced

coun

tries

Devel

oping

Cou

ntrie

s

Wor

ld

Source: Angus Maddison

There has been growth almost everywhere, but rates of growth have differed substantially over the last 180 years. This is not surprising. Opportunities are never exploited evenly. Some get there first.

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3. And create chasms in cumulative growth

UNEVEN GROWTH:RATIO OF GDP PER HEAD IN 1998 TO GDP PER HEAD IN 1820

30.5

21.8

14.5

8.76.5

5.13.3

19.0

5.4

8.6

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Japa

n

Wes

tern

offs

hoot

s

Wes

tern

Eur

ope

Latin

Amer

ica

Easte

rn E

urop

eAsia

Africa

Advan

ced

coun

tries

Develo

ping

Count

ries

Wor

ld

Source: Angus Maddison

Over 180 years, small differences in growth in output per head - that is, in productivity growth - become huge chasms in living standards.

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3. Similar starting points, different endings

DIVERGENCE BIG-TIME(GDP per head at PPP, 1990 dollars)

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

1820 1870 1913 1950 1973 1998

US Japan China India Africa Latin AmericaSource: Angus Maddison

What steady growth has done for US GDP per head over 180 years.

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3. How relative growth rates have changed

A TALE OF THREE COUNTRIES:DIVERGENCE AND CONVERGENCE IN THE LONG RUN, 1820-1998 (GDP

per head at PPP, 1990 dollars)

$100

$1,000

$10,000

$100,000

1820 1870 1913 1950 1973 1998

US Japan China

Slopes indicate growth rates. Note Japan’s remarkable catch up in the 1950-73 period and China’s in the latest period. US growth has been fairly steady.

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3. Yawning chasm between richest and poorest

While the frontier countries have grown richer, some countries have remained at a subsistence minimum. So ratios of income per head have become steadily wider.

RATIO OF GDP PER HEAD IN FRONTIER COUNTRY TO THAT IN SUBSISTENCE MINIMUM COUNTRY - 1500-1998

2.4 3.04.7 4.7

7.1

11.8

21.2

37.1

60.7

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

1500 1600 1700 1820 1870 1913 1950 1973 1998Source: Angus Maddison

Italy Netherlands Britain

USA

Note: subsistence minimum country taken at $450 per head

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3. This has created global household inequality

WORLDWIDE INCOME INEQUALITY, 1820-1995 (Mean deviation between a typical individual and average income per head,

as per cent of average income per head)

42.2%

48.5%54.4%

61.0%66.8% 69.0%

77.5%

88.1%

81.4%77.7%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

1820 1850 1870 1890 1910 1930 1950 1970 1990 1995Source: Dollar and Kray, Foreign Affairs, January/February 2002

Global household inequality increased fastest in the 19th century and peaked in 1970. The big reason for the declining inequality was fast growth in east Asia and, more recently, in India.

191820 1840 1860 1880 1900 1920 1940 1960 1980 2000

800

1,000

1,200

1,400

Poverty has dropped by 200 million over past 20 years, despite the world’s population increase of 1.6bn.

3. Numbers of people on less than a dollar a day

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3. But declining proportions of people in poverty

PROPORTION OF PEOPLE LIVING ON A DOLLAR A DAY IN WORLD POPULATION, 1820-1998

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1820

1830

1840

1850

1860

1870

1880

1890

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

1998

Source: World Bank and US Bureau of the Census

Extreme poverty has been in decline as a share of world population since 1850. It has fallen fastest in the last half century. It fell from 31 per cent of the world’s population in 1980 to 20 per cent in 1998.

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4. Poverty and inequality in the 1980s and 1990s

• The record of the 1980s and 1990s on inequality and poverty has been quite encouraging:

– At the world level, household inequality has declined, as growing between-country equality has more than offset growing within-country inequality

– The number of absolute poor has fallen a little, while the proportion of the poor in world population has fallen substantially

– There have been particularly big declines in numbers in poverty in East Asia

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4. Declining inequality among rich countries

Mean log deviation

0

0.1

0.2

0.3

0.4

1960 1965 1970 1975 1980 1985 1990 1995

Figure 18.Household inequality within rich countries

Between countriesWithin countries

Source: David Dollar, “Globalization: Who wins, who loses and what the world can do about it”, July 17, 2001, World Bank

Inequality has risen within rich countries, but fallen among them

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4. Plus oscillations in the developing world

Figure 20.Household inequality in the developing world

0.0

0.2

0.4

0.6

1960 1965 1970 1975 1980 1985 1990 1995

Mean log deviationBetween countriesWithin countries


Inequality has risen slightly within developing countries since 1985 and first fallen then risen among them

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4. Create modest declines for the world

Figure 17.Worldwide household inequality, 1960-1999

0%

20%

40%

60%

80%

1960-64 1965-69 1970-74 1975-79 1980-84 1985-89 1990-94 1995-99

Mean log deviation Between countriesWithin countries


If one adds the two together, one finds that worldwide household inequality has been falling, not rising in the last two decades. Falling inequality between countries (largely because of growth by China and India) has offset modest increases in inequality inside them.

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4. And proportion of the absolute poor has fallen

NUMBER OF PEOPLE ON LESS THAN A DOLLAR A DAY AND PROPORTION OF WORLD POPULATION (millions and per cent)

1,1991,183

1,2761,304

1,191

23.6%

24.2%

23.6%

20.6%

20.2%

1,120

1,140

1,160

1,180

1,200

1,220

1,240

1,260

1,280

1,300

1,320

1987 1990 1993 1996 1998

18.0%

19.0%

20.0%

21.0%

22.0%

23.0%

24.0%

25.0%

Total Proportion of world population

Since 1987, the number of people on one dollar a day has oscillated, but the proportion in the world’s population has fallen

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4. The regional incidence of poverty, 1987-1998

NUMBER OF PEOPLE ON LESS THAN $1 A DAY(at purchasing power parity)

474 495 505 532 522

418452 432

265 278

217

242 273

289 291

64

74 71

76 78

0

200

400

600

800

1,000

1,200

1,400

1987 1990 1993 1996 1998

South Asia East Asia and Pacific Sub-Saharan Africa

Latin America and Caribbean Middle East and North Africa Europe and Central Asia

The decline in poverty has been fastest where growth was fastest - in east Asia

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5. Globalisation, the winners and losers

• Globalisation affects these trends largely through its impact on country growth:

– The world’s markets for goods and services are now more integrated than ever before. The same is not so true for capital and, above all, labour

– Countries have varied dramatically in their ability to take advantage of these opportunities

– Developing countries with combined populations of 2.4bn have done well. This group includes China and India.

– Globalisers have liberalised more and their trade has also grown more than non-globalisers

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5. Globalisation - winners and losers

– Fast growth in globalising developing countries has benefited the poor in those countries and also reduced global inequality

– Trade has, as always, been the handmaiden of growth. But rapid growth requires much more than economic integration.

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5. The world is now more integrated than ever

Table 1.Measures of global integration

Capital flows Trade flows

Foreignassets/worldGDP ( in percent)

Trade/GDP(in percent)

Sea freight(average ocean freight

and port charges per ton)

Air transport(average revenue per

passenger mile)Telephone call( 3min NY/London)

Computer(index 1990=100)

1820 - 2a - - - -1870 6.9 10a - - - -1890 - 12b - - - -1900 18.6 - - - - -1914 17.5 18ab - - - -1920 - - 95 - - -1930 8.4 18a 60 0.68 245 -1940 - - 63 0.46 189 -1945 4.9 - - - - -1950 - 14a 34 0.3 53 -1960 6.4 16b 27 0.24 46 125001970 - 22.4a-20b 27 0.16 32 19471980 17.7 - 24 0.1 5 3621990 - 26ab 29 0.11 3 1001995 56.8 - - - - -

Source Crafts (2000) a.Maddison (1995) UNDP (1999) UNDP (1999) UNDP (1999) UNDP (1999)b.Crafts (2000)

Transport and communications costs (constant US $)


Measured by trade and foreign assets, the world economy is now more integrated than ever. Falling costs of transport and communications and liberalisation have been the driving force. Movement of people is far less than in the late 19th century.

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5. The winners and losers

More globalised (24) Less globalised (49)Population 1997 (billions) 2.9 1.1GDP per head 1980 $1,488 $1,947GDP per head 1997 $2,485 $2,133rule of law index -0.04 -0.48

Source World Bank

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5. The winners and losers in trade policy

Figure 7.Decline in average import tariffs:

mid-1980s to late-1990s

Non-globalizers Globalizers

11 points

34 points


The winners have liberalised trade by more than the losers.

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5. The winners and losers in trade

ZambiaEgyptNigeriaSenegalHondurasTogoKenyaPakistan

BrazilIndia

ThailandBangladesh

MalaysiaPhilippines

ArgentinaMexicoChina

-1 0 1Log difference

Figure 5.Change in trade/GDP, 1977-97 (selected countries)


The winners have also increased their trade in relation to GDP, while the losers have seen their trade shrink.

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5. The winners and losers in trade again

Figure 6.Increase in trade/GDP: 1970s to 1990s

0%

25%

50%

75%

100%

Non-globalizers Rich countries Globalizers

-18%

71%

104%


The difference in trade performance is stark at the aggregate level.

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5. Trade does not harm the poor

Figure 12..Increased trade has no correlation with

changes in inequality

-15

-10

-5

5

10

15

-0.4 -0.2 0.2 0.4

Change in trade to GDP

Chan

ge in

Gin

i coe

fficie

nt


And rises in trade ratios have not increased inequality. So if trade raises growth, it also normally helps the poor.

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5. Winners in trade are also winners in growth

Figure 8. Per capita GDP growth rates:

post-1980 globalizers

1.4%

2.9%

3.5%

5.0%

0%

2%

4%

6%

1960s 1970s 1980s 1990s


These globalisers have indeed grown faster and faster.

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5. But losers in trade are losers in growth

Figure 10. Per capita GDP growth rates:non-globalizers

2.4%

3.3%

0.8%

1.4%

0%

2%

4%

1960s 1970s 1980s 1990s


The non-globalisers have performed poorly

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5. And fast growth benefits the poor

Figure 11.Growth is good for the poor

y = 1.185x - 0.0068R2 = 0.4935

-0.2

-0.1

0.1

-0.1 0.1

Average annual changein log (per capita income)

Average annual change in log(per capita income in poorest quinti le)

0.2


The poor tend to share in economic growth, which is why the poorest people live in the poorest countries

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5. This is true everywhere

GDP GROWTH AND POVERTY REDUCTION(1992-98, per cent a year)

3.8% 4.4%6.4%

9.9%

-5.9% -7.1% -7.5% -8.4%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Uganda India Vietnam China

Growth rate of GDP per head Rate of poverty reductionData for India are for 1993-99


Where growth has been very fast, so has been the pace of poverty reduction

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5. Better off people keep children from work

20%

30%

40%

6.54 6.64 6.74 6.84 6.94 7.04 7.14 7.24 7.34 7.44 7.54

Per capita household consumption 1993 (log scale)

Share of 6-15 year olds working

1993

1998

Figure 15. Child labor and household consumption levels in Vietnam


And richer people keep children from work.

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5. Trade as the handmaiden of growth

• “As far as we can tell, there are no anti-global victories to report for the postwar Third World. We infer that this is because freer trade stimulates growth in Third World economies today.” Peter Lindert and John Williamson

• This conclusion is consistent with the weight of evidence. But multi-collinearity between trade and other policies makes it difficult to demonstrate the causal connection

• Contrast North and South Korea or West and East Germany

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6. Conclusion

• Globalisation is not guilty of causing growing poverty and inequality worldwide

• Overall, there has been declining inequality and poverty in the age of globalisation. This breaks a trend that goes back almost two centuries

• But far too many countries have become less globalised and grown poorly.

• This is the only sense in which globalisation causes inequality: some seize opportunities and others do not

• The challenge is to help the failures do better

Is Globalisation Causing World Poverty? Martin Wolf, Chief Economics Commentator, Financial Times...

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