How to End Poverty with Globalisation

Stephen Kinsella & Gavin Hassall

Economists have been thinking about the economics of trade for at least two centuries. In fact, it’s 201 years since David Ricardo taught us that we should specialise in what we’re good at, or at least have lots of, and trade with the rest of the world for what you lack. The result is better, cheaper stuff for all, and a lifting out of poverty for most.

There is a greater share of unskilled workers in the labour force of developing countries than in advanced economies, on average. Given this, developing countries have a comparative advantage in unskilled labour: it makes economic sense for them to specialise in production that requires unskilled labour. As they begin to trade, income flows from advanced economies to them, helping people out of poverty and reducing inequality.

We have close-to natural experiments of when a country was not open to trade, and then starts trading. In macroeconomics, pseudo-natural experiments are about as good as you are going to get. We can reach some idea of how globalisation affects the poor by comparing how the wellbeing of the poor changed over this period.

This is how Rudra & Tobin (2017) investigate the impact of globalisation on poverty. Perhaps surprisingly, they find that globalisation on its own is not necessarily the best way to reduce poverty. There are some types of government intervention can help the poorest gain from globalisation. But when might unassisted globalisation hurt the poor?

Globalisation sometimes presents as a sectoral shock. For example, about 75% of people in developing countries work in agriculture. A sudden openness to international agriculture markets could displace low-skilled workers. Whilst they may be able to find work elsewhere in the future, the short-term impact is likely negative. And how to compare losses in income when many such workers are at subsistence levels?

Government intervention could help reduce some of this negative impact on the poor. Safety nets, readjustment policies, and redistributive taxation/transfers are possible solutions. Cash transfers of $12 a month in Brazil have helped to reduce the poverty rate by one-third over five years.

Despite evidence that “pro-poor” policies help reduce poverty as countries begin to trade, they are not always used. It is often suggested that the left/right leaning of the government in power affects decisions to help the poor. But in developing countries, it is difficult to classify governments in this way.

These governments often pursue both typically regarded left and right-wing policies at the same time. Instead, Rudra & Tobin suggest the willingness of the government to use pro-poor policies depends on the attitudes of the “elite” (who they define as those in the top 20% of the income distribution).

They show that when the elites think of those in poverty as having had bad luck or society having let them down, versus thinking they are lazy or unmotivated, measures of living standards (infant mortality, life expectancy and literacy rates) increased the most after trade liberalisation. The political environment matters if it affects the likelihood of pro-poor policies being implemented. This could suggest the likely impact on the poor as countries begin to trade more.

If the views of the elites are more empathetic towards the poor, pro-poor policies are more likely. Here Rudra & Tobin urge caution: It’s not so much that these governments take an active role in helping the poor, but rather they are less prone to block channels that help the poor.

History gives a mixed record on how globalisation affects poverty. The “East Asian miracle” in the 60s and 70s followed a wave of openness to international trade from several developing countries. These East Asian economies experienced strong growth and reduced inequality. This observation agrees with the 201-year old argument: trade liberalisation helps the poor.

Other cases include India, which experienced low growth and reduced inequality. Brazil experienced high growth and increased inequality. The variety of experiences suggests the impact of globalisation on poverty depends on other factors. It’s not only trade.

The lesser political influence of the poor is why elite ideology matters in developing countries. The poor tend to be geographically dispersed, less organised, and lack political power. Around 18% of labour in developing countries belongs to a union, and these people are likely to have some political influence. The problem is, the absolute poor make up a small proportion of this 18%.

The extent trade can help people out of poverty depends on the attitudes of social elites. This is because of how they shape government policies, which then impacts poverty. The right mechanisms before liberalisation also help spread out the gains from globalisation. During liberalisation, government intervention can help smooth the transition process to reduce poverty. An open research question for Rebuilding Macroeconomics is what form these interventions should take.

Ricardo was not naive. 201 years ago, political attitudes in the world’s largest economy – the UK – determined the likelihood of a policy’s success. In today’s world, focusing on elite ideas and their evolution is a key measure of whether a policy might succeed, as Rudra and Tobin show. Have the opinions of the elites changed following the Brexit result and the election of Donald Trump?

REFERENCES

Jennifer Tobin and Nita Rudra, “When Does Globalization Help the Poor?” (May 2017), Annual Review of Political Science, Vol. 20, pp. 287-307, 2017.

Available at SSRN: ssrn.com/abstract=2968066