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The impact of globalization on the poor

Pranab Bardhan
University of California at Berkeley

Bureau for Research in Economic Analysis of Development (BREAD)

July 2004

SARPN acknowledges the Bureau for Research in Economic Analysis of Development (BREAD) as a source of this Policy Paper.
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Abstract

In this paper we provide an analytical account of the mechanisms through which globalization, in the sense of increased foreign trade and long-term capital flows, affects the lives of the poor in developing countries (in their capacity as workers, recipients of public services or users of common property resources). Globalization can cause many hardships for the poor, but it also opens up opportunities which some countries can utilize and others do not, largely depending on their domestic political and economic institutions, and the net outcome is often quite complex and almost always context-dependent, belying the glib pronouncements for or against globalization made in the opposing camps.

Executive Summary

Taking globalization in a limited sense of openness to foreign trade and long-term capital flows, and looking at only absolute poverty, this paper provides a brief analytical account of the various processes through which globalization affects the lives of the poor in low-income countries. We consider the poor in their capacity as (a) workers, (b) as recipients of public services, and (c) as users of common property resources. As workers they are mostly either self employed (on their tiny farms or shops or firms in the informal sector) or wage-employed. The major constraints the self-employed face are in credit, marketing, extension services for new technology, infrastructure and government regulations. These often require substantial domestic policy changes, and foreign traders and investors are not directly to blame (in fact they may sometimes help in relieving some of the bottlenecks in infrastructure and services and in essential parts, components and equipment). If these changes are not made and the self-employed poor remain constrained, then, of course, it is difficult for them to withstand competition from large agri-business or firms (foreign or domestic).

When small producers are heavily involved in exports (for example, coffee producers of Uganda, rice growers in Vietnam, garment producers in Bangladesh or Cambodia) the major hurdle they face is often due to not more globalization but less. As is by now well-known, developed country protectionism and subsidization of farm and food products and simple manufactures (like textiles and clothing) severely restrict their export prospects for poor countries.

On the wage-employed, the paper discusses different mechanisms through which the opening of the economy can affect wages and employment, in some cases positively and in other cases negatively. The latter cases are particularly important to keep in mind for poor countries, where there is very little effective social protection available from the state. Rich countries have better social safety nets and some programs in place helping displaced workers to adjust (like the federal adjustment assistance program in the US). International organizations that preach the benefits of free trade should take the responsibility of funding and facilitating such adjustment assistance programs in poor countries that can help workers in coping with job losses and getting retrained and redeployed.

Until issues of general economic security for poor workers in developing countries are satisfactorily resolved, globalization is bound to raise anxiety and hostility among workers worried about their job security. If mass politics in a country is organized, as it usually is, in such a way that the nation-state is the primary political forum for demanding and getting the necessary redistributive and insurance functions of a society (rendered more important by the economics of international specialization), to the extent that nation state is weakened by forces of international economic integration, it is a matter of serious concern. Much depends, of course, on a society’s institutions of conflict management and coordination. It is not a coincidence that countries that have a better record in building these institutions have coped better with the dislocations brought about by international trade: the major example is the case of Scandinavian countries where in spite of a strong tradition of organized labor movement and worker solidarity over many decades of the last century, the unions there in general have been in favor of an open economy.

In the case of the poor as recipients of public services (like health and sanitation, education, etc.) the low quantity and quality of public services that reach the poor is often due to domestic institutional failure, not largely an external problem. The major effor required here is to trengthen the domestic institutions of accountability. In the case of the poor as users of common property resources (like, forests, grazing lands, irrigation water, fishery, etc.), the relationship withtrade and foreign investment liberalization is rather complex and closing the economy is not a solution. Large changes in the legal-regulatory or community institutional framework are often necessary.

In general I believe that globalization can cause many hardships for the poor in these countries, but it also opens up opportunities which some countries can utilize and others do not, largely depending on their domestic political and economic institutions, and the net outcome is often quite complex and almost always context-dependent, belying the glib pronouncements for or against globalization made in the opposing camps. In many countries poverty alleviation in the form of expansion of credit and marketing facilities or land reform or public works programs for the unemployed or provision of education, training, and health need not be blocked by the forces of globalization. This, of course, requires a restructuring of existing budget priorities and a better and more accountable political and administrative framework, but the obstacles to these are often largely domestic (particularly in countries where there are some coherent governance structures in place). In other words, for these countries, globalization is often not the main cause of their problems, contrary to the claim of critics of globalization; just as globalization is often not the main solution of these problems, contrary to the claim of some gung-ho free traders.

All this, of course, does not absolve the responsibility of international organizations and entities in helping the poor of the world, by working toward a reduction of rich-country protection on goods produced by the poor, by energetic anti-trust action to challenge the monopoly power of international (producing and trading) companies based in rich countries, by facilitating international partnerships in research and development of products (for example, drugs, vaccines, crops) suitable for the poor, and by organizing more substantial (and more effectively governed) financial and technology transfers and international adjustment assistance for displaced workers, and help in (legal and technical) capacity building for poor countries in international negotiations and quality certification organizations. Globalization should not be allowed to be used, either by its critics or by its proponents, as an excuse for inaction on the domestic as well as the international front when it comes to the matter of relieving the poverty that oppresses the life of billions of people in the world.



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