How Has Globalization Benefited the Poor?

Q: Is there a way to describe, in a broad sense, what impact globalization has had on the poorest people in underdeveloped countries?
I first want to clarify what I mean by “globalization.” It’s an all-encompassing concept, and the aspect of globalization that I focus on in my work is international trade. If you look back over the past 30 years, developing countries had very high levels of trade protection — so they had high barriers on imports in terms of taxes, and they restricted imports quantitatively, by quotas or licenses. During the 1980s and 1990s, many countries decided to abandon these protectionist policies and implemented large-scale trade reforms. For example, India implemented trade reforms in 1991, and its average tax on imports dropped from over 80% to an average of 30% in the late 1990s. Colombia went from 50% to around 13%. We observed big increases in trade flows as a result.

Economic growth is the main channel through which globalization can affect poverty. What researchers have found is that, in general, when countries open up to trade, they tend to grow faster and living standards tend to increase. The usual argument goes that the benefits of this higher growth trickle down to the poor. It has been a bit trickier, especially with aggregate data, to pinpoint how exactly the poor have been benefited. One challenge is that when trade or globalization happens, many other factors are changing, such as technology and macroeconomic conditions. Another challenge is that high-quality data on the well-being of the poor is often not available. It is thus really hard to tease out the effects of globalization on poverty in a broad sense.

But, that said, it is virtually impossible to find cases of poor countries that were able to grow over long periods of time without opening up to trade. And we have no evidence that trade leads to increases in poverty and declines in growth.

Q: When you look at particular countries, how much variation are you finding in the effect of increased trade?
It’s very country-specific, and it depends on where countries started off and on the nature of trade reform. Oftentimes, when we try to look at what globalization has done for the poor, we focus on workers in developing countries: what types of factories they work in, and what wages they earn. We often find that wages are lower than similar workers would be making in a country like the United States and working conditions are worse. But another way of looking at the consequences of globalization for poor countries is to actually look at how workers in these countries were doing prior to globalization and compare that to how they are doing now.

Recent research has focused on how trade can affect inequality and poverty by affecting relative prices of goods and wages of individuals. And what that literature has found in India and in many Latin American countries is that inequality between the more educated and less educated has increased. The extent of the increase varies somewhat from country to country, but the evidence suggests that the more educated are benefiting more from the trade reforms than the less educated.

But greater inequality doesn’t necessar­ily mean greater poverty. The effect that trade has on less educated laborers in these developing countries depends in part on where they are employed and how mobile they are across sectors. Workers, both educated and less educated, in export-oriented sectors tend to benefit. However, workers who were employed in sectors that were initially shielded by higher tariffs experienced a drop in relative wages as tariffs were eliminated. Many countries, such as Mexico and Colombia, had shielded industries that employed a high share of less educated workers. When the tariffs were eliminated, these unskilled workers were disproportionately affected by declines in industry wages. These are short-term costs of globalization, and over time you would hope that these workers would be able to move toward the exporting sectors and share in the benefits of globalization. But that is not occurring as fast as we would like because worker mobility in many of these countries is quite constrained.

Q: What factors keep people from moving?
Moving is costly. Oftentimes, it goes beyond the financial cost of moving. For example, the poor in these countries often don’t have access to formal insurance and a social safety net, so they rely on family networks for these services. This might impede mobility across regions.

Q: Could you describe who the poorest people are in these countries?
Many studies focus on the consequences of globalization for less educated workers in manufacturing. But there are other parts of the population in developing countries who are even poorer: individuals who live on less than a dollar a day — often small-scale rural farmers. These households spend a large share of their budget on food and other essential items. They are less likely to send their children to school. They are more prone to health risks.

Q: How do they end up being reached by globalization?
For the rural areas, it really depends on how much globalization involves agriculture and that varies country to country. One example where the poor who were in agriculture benefited substantially was Vietnam. In the mid-1990s, Vietnam liberalized its trade. Prior to that, Vietnam limited the amount of rice that farmers were able to export abroad. When the government eliminated that quota, demand for Vietnamese rice increased and prices of rice in Vietnam increased. This led to higher standards of living for Vietnamese rice farmers. Globalization helped lift many of them out of poverty. Conversely, if you are a country that imports a majority of the food stock, farmers might be made worse off by trade liberalization because prices of agricultural products will fall. You can see how the result depends on the underlying structure of the economy prior to trade liberalization.

Q: Why have some regions, such as parts of Africa, not benefited as much from globalization?
In some countries in Africa, there are so many factors that work against trade. One of the reasons why many companies don’t go into some of those countries is lack of political and economic stability. The risks of doing business are much higher. That precludes them from benefiting from globalization. Trade, alone, won’t lift those countries. Many other changes need to occur.

Q: Another issue associated with glob­alization is child labor. Does buying a sweatshirt in the United States encourage child labor in the country where that was manufactured?
The usual concern that we have about glob­alization leading to child labor focuses on the fact that globalization might generate employment opportunities in poor countries. In particular, consumers in developed coun-tries tend to import a lot of products, such as t-shirts, sweatshirts, and toys, that are made with low-skilled labor. By increasing the demand for these products, we are increasing employment opportunities for children in poor countries and this discourages them from going to school.

But to understand the link between child labor and international trade, we really need to think about why children work. And one reason why children might work is the story I just told. But another reason children work is because their families can’t survive without the help of child work. Studies suggest that the main reason why children are working is the poverty of their household and the main channels through which trade is affecting whether children work is the effect of trade on household poverty. In circumstances where trade increases living standards of poor households, as was the case in Vietnam, households pulled their children away from work and children started going to school. The liberalization in Vietnam also created greater earning opportunities for children, but because of improved economic conditions these families no longer had to rely on children to work.

Q: This suggests that the knee-jerk response of banning children from working in any factory may not be the most effective way to improve their welfare.
When you look at the images of children working in not-very-safe factories, that is the knee-jerk reaction. What we need to be asking is, if we banned child labor, if we shut down these factories, what would these children be doing? We would like to see them attend school, but that might not be the alternative for these children. They might take a job that is even more hazardous, like prostitution or stone quarrying, or work in parts of the economy that are even more informal than sweatshops.

Q: Are there gender differences in which kids are sent to work or school?
Yes. Boys are more likely to work in market work, that is, work for wages, work for a family farm, or work for a household business. Girls are more likely to participate in domestic work, such as fetching firewood, taking care of younger siblings, cooking, sewing. Trade affects boys and girls differentially because it affects these types of work differently. That’s one difference. The other thing that we found, in India, is that families on the losing end of globalization were more likely to take girls out of school than boys in response to this economic hardship.

Q: How do you think about the long-term implications of whether children forgo school for work?
Better-educated individuals tend to do better in life on many dimensions. We also know that countries that have higher human capital accumulation tend to do better. Another factor is that children who are working can be vulnerable to injury and occupational hazards for a longer period of time. Child labor has longer-term implications for these countries in its effects on health and human capital accumulation. But we also have to keep asking ourselves, if children are not doing this particular job, what is their alternative?

Q: For a consumer in the developed world, what actions are actually effective in trying to bring the benefits of globalization to some of the people who are getting left out?
Many of us, as we benefit from cheaper goods made in China or Vietnam, or goods that have been made by child labor, worry about what we are doing. But perhaps the best way to help the poor in poor countries is for them to have the employment opportunities that arise when there is demand in rich countries for products that they produce.

However, globalization generates winners and losers. For those people who are made worse off, those are real costs, and we have to help them deal with those costs. Even in a country like the United States, it’s pretty tricky to compensate the losers from this process, and it’s even trickier in the developing countries, where government assistance is not as readily available. There are a lot of benefits for all of us that can be had by promoting globalization, but government policy needs to make sure that those left behind share in these gains.

Q: Are poverty and inequality threats to globalization?
If you look at polls that ask people for their opinions of globalization, there is less opposition in poorer countries than there has recently been in the United States. But I think the threat can grow if more people feel as if they are left out of this process or hurt by this process.