Globalization and Poverty
Globalization and Poverty
Globalization is the latest buzzword that has come to dominate the world of business since the early nineties. The forces that have been reshaping the global economy like progressive globalization of trade and finance have integrated the world economy which surpass the peak levels reached during the pre-World War I period. The Merriam-Webster dictionary defines globalization as the development of an integrated global economy which is reflected by free movement of capital across the borders, free trade, and easy access to global labour markets. Many academic researchers have attempted to define globalization in a variety of ways with relative success. The result of this was that globalization became a term with multiple definitions and meanings. Many economists now view globalization as the inescapable feature of the world economy today. There are a lot of potential benefits of globalization. For example, it is well noted that globalization and the foreign investments it brings in contributes to the growth by stimulating domestic investment, improving productivity through efficient manufacturing practices, and greater access to new technologies. Frankel and Romer (1999) have shown in their study that countries that are open to trade have higher income levels. But there is a school thought which argues that all is not well with globalization. It is also increasingly recognized that globalization entails significant economic and social costs. Openness of financial markets has also led to volatility in domestic financial markets, large scale reversals in short-term cash flows, reduced demand for unskilled labour, lower real wages, etc.
THEORETICAL FRAMEWORK
There is large scale evidence pointing out to the negative effects of globalization. Economics literature is littered with theoretical as well as empirical evidence relating to several ill effects of globalization. A proper understanding of the negative effects of globalization leading to poverty and income differentials entails a thorough review of the existing literature. This report builds its arguments by drawing from the existing economics literature on globalization and its unpleasant effects.
GLOBALIZATION AND ITS EFFECTS
The advancements in technology have accentuated the pace of globalisation in the recent past. Globalization is generally credited by many researchers to be contributing to the growth of the world economy and improve the living standards of people. Globalization throws out new opportunities for developing countries to compete with companies in developed countries and grow faster. But some economists argue that these benefits of globalization was mostly limited to the rich developed countries. Aided by their access to advanced technology, developed countries have benefited from globalization and increase their wealth. Large MNCs which have their bases in the developed countries were the main driving forces behind this change.
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Poor countries on the other hand were not able to take advantage of globalization and improve the standard of living of their citizens. The ‘anti-globalization’ argument proclaims that poverty and inequality have been rising instead of falling due to the globalization forces. Often facing scarcity of capital, small countries are not able to update their technology as much as their richer cousins could do. Latest advancements in technology, which is mostly patented, are beyond the access of smaller countries. Small businesses in third world countries can’t compete effectively with bigger companies due to limited access to scarce capital. As a result, they are not able to compete with MNCs on the global stage and are forced to do business locally.
Role of MNCs
The activities of MNCs drive the globalization process to a great degree. Deepening of worldwide economic integration has increased the flow of FDI between the countries over the last two decades. MNCs have played a key role in the flow of FDIs as they now increasingly invest in other countries and grow rapidly. MNCs also aided in the growth of globalization by facilitating the free transfer of knowledge and technology across the borders (Lane 1998). Transfer of such knowledge made developing countries to effectively compete with developed countries by producing world class goods and services. A clear evidence for the growth in the transfer of such technology is the growth in royalties and licensing fees flowing from developing countries to MNCs in developed countries. For E.g. Transfer of crucial technology from MNCs is now enabling Indian companies to compete successfully in the international markets in sectors like manufacturing of automobile components.
Advantages of MNCs in Globalization
- Leads to faster growth of developing countries due to increased flow of capital from MNCs.
- MNCs bring in latest technology to the developing countries.
- MNCs train the local smaller companies from whom they need to acquire the rawmaterials and components.
- Rather than investing directly in developing countries, MNCs partner with local companies which can drastically increase their competency levels.
Disadvantages of MNCs in Globalization
- MNCs coming with FDIs crush the local businesses.
- MNCs entering developing countries try to influence business policy in their favour.
- MNCs pull out their investments even in the case of any slight instability in the host countries.
- Huge lands acquired by MNCs while entering developing countries leads to a loss of living for farmers and tribals.
- Entry of MNCs due to globalization can lead to a damage to the environment due to their operations in rural areas.
Below are some of the ways in which globalization can hurt the poor by increasing poverty and widening income differentials:
Globalization, Poverty, and Income Inequality
Globalization and Resource Allocation
There are some very good number of arguments which claim that globalization (through trade liberalization) will improve resource allocation in the short term, raise growth rates permanently and thus benefit the poor. But the views of some economists actually suggest the opposite. They argue that globalization and the resulting opening up of a country’s market to MNCs will reduce the market power of local firms, increase competitive pressure on them and eventually drive them out of business. With the entry of foreign firms, poor countries might become more efficient in utilizing its productive resources, thereby increase growth rates and decrease poverty levels in the long term. But in the short term, the inability to compete with big MNCs, and the existence of labour market rigidities like imperfect mobility and wage setting behaviour by firms can hinder the reallocation of labour resources between the tradables and nontradables that globalization normally necessitates(Agenor, 2002). This results in poverty and unemployment increasing and persisting over time.
Reduce Demand for Unskilled Labour
Globalization can also lead to higher poverty in poor countries by decreasing the demand for unskilled labourers in the economy. During the 1980s and 1990s, trade liberalization lead to an increase in the demand for skilled labourers relative to unskilled labourers, and deterioration in income distribution. Sophisticated technology (machinery) introduced by MNCs needs more number of skilled labourers to work on it. A disproportionate demand for skilled labourers leads to a wage gap between them and unskilled labourers (Figini and Gorg, 1999). Other than getting lower wages, reduced demand might also lead to an increase in unemployment among unskilled labourers. Many of the skills possessed by low skilled labourers become obsolete because of the entry of automated technologies. Worsening income gaps will hamper the ability of unskilled labourers to borrow finance for the acquisition of skills and escape from the ‘poverty trap’ (Galor and Zeira, 1993). There is a strong empirical support which suggests that human capital accretion in poor countries is subject to imperfections in credit markets.
Overexploitation of Natural Resources
Environmentalists argue that overexploitation of natural resources like fishery and forests can damage the livelihood of people depended upon them (Bardhan, 2004). MNCs need to acquire vast swathes of land when start their operations in poor developing countries. Businesses like mining and manufacturing acquire lands in villages with fertile soils and forests. Many people like agricultural labourers and tribal people are dependent upon these lands which are rich of minerals and other natural resources. The acquisition and conversion of these fertile lands into commercial hubs takes away the livelihood of people who are depended upon them. For E.g. the expected entry of Posco into the Indian market led to allegations of the MNC taking away the livelihood of tribals who are depended on the land. Similarly a common charge levelled by environmental activists is that big MNCs flock poor countries and take advantage of the slack environmental standards prevalent there (Eskeland and Harrison, 2003). Increased pollution resulting from the operations of MNCs further destroys the forest resources and deeply affects the lives of poor people. Presence of MNCs in mineral wealth rich African countries was also said to have caused conflit and civils wars due to their interference in domestic politics (Ikelegbe, 2005).
Financial Integration
Although there is some significant evidence pointing out that international financial integration brings significant benefits in the long run, it is increasingly felt that financial openness may also entail significant costs in the short-term too. Developing countries have recorded a high magnitude of capital flows followed by abrupt reversals leading to deep financial instability, economic crises, and marked increase in poverty rates. For E.g. stock markets in many developing countries are increasingly reliant on Foreign Institutional Investors (FIIs) which generally don’t stay invested in difficult times. This had also increased the volatility of financial markets in the developed world. A case to be noted in this regard is the 1997 Asian financial crisis The closed financial integration of poor countries’ economies with the global financial system that globalization brings impacts the poor people during the times of financial turmoil. Developing countries can generally borrow from the world financial markets only during the ‘good times’, whereas ‘bad times’ bring credit constraints (Agenor, 2002). Access to capital for poor countries is procyclical. Procyclicality can have an adversely impact macroeconomic stability. Favourable times attract large capital inflows and improve consumption and bring in consumption levels which are unsustainable in the long-term. Capital reversals during bad times may force poor countries to over adjust and hit the purchasing power of people living in them.
Income Inequality Due to Growing Wage Gap
Rising income inequality has been widely proclaimed over the past twenty years of globalization. Many critics see the three decades starting from 1980s as decades of greed with concern on the high incomes earned on the financial markets due to globalization. Wage inequalities in both poor and rich countries have changed substantially over the past few years of rapid globalization (Wood 2002). Rich countries like USA and UK try to keep the gap between the white collared and unskilled workers. This is achieved by keeping a tab on the immigration of low skilled workers into the country. While highly skilled workers like software programmers are allowed to migrate into the country freely, semi-skilled and unskilled workers like data entry operators are not given work permits or permanent citizenships. This helps in maintaining a good level of demand for low skilled labourers and as a result in a lower wage gap between high skilled and low skilled labourers. But globalization made it possible to offshore many semi-skilled jobs to the developing countries as these jobs are done for a fraction of the cost that is incurred in rich countries. For e.g. a lot of semiskilled jobs like data entry and call centre jobs have been moved from the west to low cost countries like India and Philipines resulting in job losses in the developed world.This made many semi-skilled workers in the rich countries to lose their bargaining power in wages or even to totally lose their jobs. According to Tang and Wood (2000), another reason for the growing wage inequalities due to globalization is the falling cost of moving know-how across the countries. They suggest that cheaper travel and communication, and improved policies and institutions, enable workers in developing countries to visit developed countries frequently and complete projects there. For E.g. Indian software professionals work on a number of projects in US and Europe by visiting the clients’ locations frequently and through the Internet. This reduces the demand for qualified professionals in developed countries and a fall in their wage levels.
DISCUSSION AND CONCLUSION
From the above discussion it is clear that globalization is a double edged sword. It will have both positive as well as negative effects on the economies of both developing and developed countries. Globalization has a number of harmful effects in the form of its impact on the global poverty and the rising inequalities in developing and developed countries. Despite the negative effects that globalization has on the world economy, it is an accepted fact that globalization will continue and is literally unstoppable due to advancements in technology and the shift of many countries to capitalism. There are some analysts who point out that the growing inequalities in developing countries are due to some factors which are unrelated to globalization like domestic constraints on equality of opportunity and unequal access to technology. The most robust policy message for the governments of both developing and developing countries is that of caution. The direction and nature of change that globalization will bring to the global economy is also impossible to be predicted with any degree of accuracy. Optimism against the impact of globalization on poverty and inequality stems out from the fact that some jobs like that of a shop assistant can never be outsourced as easily as that of a job of a financial analyst. Governments should strive hard to minimize the bad effects of globalization while taking advantage of its benefits.