The impact of globalization on poverty and inequality has always been a heatedly discussed topic in recent times. Globalization itself has been an important topic as it changes the way nations, businesses, companies, organizations, and people around the world interact and arguably has significant impacts on poverty and inequality. Generally, the mainstream view asserts that globalization is a benign force, but that is not necessarily the case, as argued by various other economists, stating that globalization also has a negative and malignant face, which is usually neglected.
According to Madison (2001), the richest region was 1.8 times richer than the poorest region in 1500 (Sweden to Africa), 3.1 times richer in 1700 (U.K. to Africa), 9.4 times richer in 1913 (U.S. to Africa) and 20 times richer in 1998 (U.S. to Africa). This trend shows that global regional inequality has risen quite exponentially for the past few centuries and more so in the last few decades.
For another perspective, Basu (2006) also stated in his paper that in 2002, Tanzania, which has a population of 35 million, had a GDP of $10.15 billion. The 10 richest people in the same year, together, had a net worth of $217 billion. If we make a simple calculation, assuming that they earn a return of 5% on their assets, they would earn around $10.85 billion in one year, which is around the same as the total annual earnings of the whole of Tanzania’s population.
These two facts, one comparing data across centuries, the other comparing 21st century data between two groups or entities, indicate how staggering this issue is. In addition, Wade (2004) has criticized the often-cited between the 1980s and 1998’s extreme poverty rate as non-valid and non-comparable due to different methodologies adopted, while the number of people in poverty was made to look lower than it really was, making the trend look optimistic.
The issue of the impact of globalization on poverty and inequality is significantly relevant to development due to globalization’s arguable positive and negative impacts on sustainable human development, poverty and inequality. One argument is framed around its contribution to rising living standards and the reduction of extreme poverty across the world, while the counterargument stated that world poverty and inequality have been increasing not decreasing due to forces released by globalization. To summarize some of the studies, Basu (2006), argues that globalization and global inequality are interconnected and discusses interesting alternative policies to counter extreme poverty and inequality. Wade (2004) reviews and questions the empirical basis of a neoliberal argument which asserts the positive impact of globalization on poverty and inequality. In addition, Milanovic (2003) thinks that the two contrasting views can be both correct because globalization is a huge and multifaceted process that presents different faces to different people.
Some of the drivers of globalization (among many others) are trade liberalization, technological advancements, market and political elements. On the other hand, the consequences of globalization generally can be classified into growth, development and human welfare. I want to point out the impacts of globalization on poverty and inequality in three aspects derived from these drivers and consequences: global trade, technological advancement and human welfare. I hope this will put a light on the question of whether globalization is good or bad for poverty alleviation and inequality.
Globalization and Trade
The most important part of globalization is how globalization expands the trade system of the world. Since the intense effort of the free trade market after World War II, most developing countries are able to insulate their economy by the means of globalization. To put it into perspective, between 1980 and 2000, trade in goods and services grew from 23 per cent to 46 percent of GDP in China alone; that is doubled in twenty years (Zhang, K. H., 2001). With bigger and higher GDP, meaning the growth of the nation’s economy is healthy, and this can bring many effects on the livelihood of the people.
The phenomenon of globalization itself is integrating the world economy at an extraordinary pace. Worldwide governments regulated many policies to enhance economic activities to open up a wider arena of foreign investments. They liberated their trade and financial markets so that they would be able to intensify the international flows of goods, capital and services. By today, about one-fourth of the total global production is made to be exported for national economic growth (Ortiz-Ospina & Beltekian, 2018).
The demand and need for more products to be imported are opening up many opportunities for countries to venture into goods and services that they are fluent to produce. For instance, more technologically advanced countries like Japan and South Korea are focusing on manufacturing electrical equipment as their main exported goods; while there are also many other countries that produce raw materials that their land can give out to be exported. Like Malaysia, who are championing in terms of exporting palm oil to the rest of the world.
Other than that, certain countries are focusing on human capital and services as their international trade product. For instance, a huge GDP contributor to Thailand is their tourism industry; on average 16.4 percent per year (pre-covid) of their GDP annually (S. Nonthapot, 2013). Also, countries like Bangladesh whose economy is dominated by the services sector. A big chunk of 56.5 per cent of their income is accounted for from their services sector in 2015 (Asian Development Bank, 2016). All this growth and big numbers is because of how globalization enables them to grow. The big question is what effect does globalization bring to the poor people of the country? Does globalization only benefit the top section of the people of the country?
Case Study of Đổi Mới (Vietnam Economic Reform 1986)
Vietnam is one country that is abundant with natural resources and is located excellently for shipping routes of international trade. They do have a big potential to grow with the good nature of land to benefit from. With their unification in 1975, they were one of the poorest countries in the world with GDP per capita only USD200 (Griffin, 1998). They were exploring and engaging with a new economic model to develop their country so they would be able to produce a healthy economic cycle. It was in the early 1980s when Vietnam’s economy developed from the grassroots level, focusing on the production and business establishments (Anh V.T, 1994).
The 7th Party Congress conducted in 1991 redirected to the renovation in the external economic field. The contents of the congress discussed an open-door policy, including among others, trade (import and export), cooperation and investment, labour exchange, and others (Anh V.T, 1994). As a result of this open-door policy, they saw a huge economic transformation and high GDP growth from 4.4 percent to 6.5 percent per year in the early stage of transformation from 1991 until the Asian Financial Crisis 1997 (World Bank, 2020). This growth is lifting up their living standards, including the poorer section of the countries.
The rural provinces of the country are pioneering and championing the agriculture industry in Vietnam. Because of the external demand, agriculture activities are able to grow rapidly and the money flow is healthier than before. The government is responsible for diverting a lot of tax revenue resulting from the expanded economic activities to the underdeveloped area (K. Bhattarai, 2019). The underdeveloped areas are able to receive adequate investment from the government to improve their infrastructures and welfare. From the International Monetary Fund, World Economic Outlook Database, April 2019, the graph shows a clear decline in the unemployment rate from the 1990s until 2019.
Since the economic reform started, Vietnam has shown impressive social and economic changes that are able to improve millions of livelihoods throughout the country. The Millennial Development Goals (MDG) were set for the poverty rate to be halved when it was first tabled, with the timeline from 1990 until 2015. However, Vietnam was able to slim down the poverty rate from 58.1 percent in 1993 to only 19.5 percent in 2004 (Vietnam Poverty Update Report, 2006). Another social improvement that the country will be able to bring is to include school enrolment rate, healthcare system and insurance coverage, and access to amenities (clean water, electricity, and sanitary facilities).
The success story of Vietnam is to look at the action of enabling economic growth through globalization. It has been able to produce a comprehensive economic cycle where rural areas are able to actively participate in the national growth and are able to enjoy the privilege of the growth as well. The rather flexible goods flow and labour force have attracted international investment and also technology growth hand-in-hand. All of this is being able to contribute to expanding a healthier social system including the education system, healthcare benefits, infrastructure, and many more.
Vietnam is a good case to look at how the high economic growth can be related to globalization and it also brings an effect to the fast poverty reduction pace. The good relations established with the international market and maintaining a business conducive environment can attract foreign direct investments (FDI) and international trade. The government is able to promote economic growth and at the same time focus on poverty reduction throughout the nation.
Globalization and Technological Advancement
When it comes to technological advancement, it cannot be denied that it is able to grow because of globalization. Especially in developing countries, knowledge and technological transfers boosted productivity and innovation, even when the world was paralysed due to the COVID-19. The pandemic has shown how innovations proliferate and become more integrated.
The globalization of technology matters as it boosts technological development and has been one of the sources of improvement of living standards and household or individual incomes. A country can benefit from technology transfer through access to foreign knowledge and international competition. Especially in developing countries, the increasing access and use of foreign knowledge, expertise, and technology have boosted their innovation capabilities and labour productivity.
One of the key drivers for developing countries heightening up their incentive to innovate is the increasing involvement in global supply chains with multinational companies (MNCs). Although, MNCs also typically distribute the innovation activity to the other side of the global value chain. For example, Taiwan semiconductor companies (TSMC) allocate innovation activities in developed and developing countries. One typically participates in R&D and design development activities, and the other engages in the downstream market, i.e., assembly, testing, and packaging activities, respectively. This business practice has somewhat offset the impact of technology innovation slowdown due to the pandemic while at the same time has helped boost the economy of many developing countries.
Technology also improves the livelihood of the rural poor. One case study from Yunus (1998) studies how microlending alleviated poverty in the rural area of Bangladesh, Jobra. Microlending has helped Jobra women, the borrowers, rise above the poverty line as it improved their entitlement. The study found that microlending has improved the borrowers’ nutritional status, access to food, clean water, sanitation, healthcare, and housing. The microlending also has allowed the community to “take advantage of the technological innovations, particularly in energy, communications, and information technology.” Through this technological innovation, the community in Jobra improved agriculture production and market information. For example, the Internet helped farmers learn the current market prices for their food products, which eventually increased their economy.
However, while globalization boasts its contribution to global growth, it is also the reason behind the rising inequality. Since the beginning of globalization, inequality has maintained the most negative impact on society. Globalization of technology is the root of inequality (Archibugi & Pietrobelli, 2003; Jaumotte et al., 2013; Tica et al., 2021). Tica et al. (2021), a recent study on this issue confirms that technological changes significantly affect inequality. Technological progress does not improve inequality despite a nation’s economic growth and higher levels of GDP per capita.
Furthermore, a paper done by Jaumotte et al., 2013, observed a rising inequality in both developed and developing countries. It also confirms that technological integration has widened inequality, particularly because technological progress increases the demand for skills and education. It is also noted in Archibugi and Pietrobelli, 2003, that scientific papers and new knowledge mainly concentrated in much more developed countries (or in Authors’ word — “the North”), and a minuscule amount of participation from the developing countries (or “the South”), except the “East Asian Tigers.” The East Asian Tigers represent Hong Kong, Singapore, South Korea, and Taiwan. The low contribution of scientific publications from developing nations shows that they are not bridging the scientific and technological gap. The gaps have further caused income inequality between countries because one is seen as “high-skilled” and the other “low-skilled.”
Countries that are keen to host FDI might see more negative effects rather than positive ones. While FDI is a great tool for economic growth, it increases the inequality gap (Archibugi & Pietrobelli, 2003). For example, the developed countries are most likely to be the ones to drive the technological agenda and steer the direction of research and technological development for their own interest. And they are seen as high-skilled workers.
While the developing countries will be doing the hard labour, which is seen as the low-skilled workers. Hence, policy reform and strict implementation of the policies are very crucial to seriously bridge inequality. In the long run, without proper inequality remedies, technological globalization might further widen inequality to unsustainable levels. Tica et al. (2021) suggest that policymakers should increase investment in the education sector, particularly in science and technology, and minimum wage policies. Furthermore, policymakers can “upgrade” or improve the existing policies on the microlending, financial market, and labour market, increasing employment-to-population ratios.
All in all, technological globalization is important to boost knowledge and technology expansion which will help the growth of a nation’s economy. However, technology innovation alone is not enough. The integration of foreign knowledge and the incentive to innovate often requires scientific and engineering expertise. Investments in education, research and development, and human capital, are thus essential. Policymakers must ensure that technological innovation can offer positive outcomes and are shared widely across the population.
Globalization and Human Welfare
Besides trade and technology, globalization also impacting the human welfare. Veltmeyer and Rushton (2012) stated that from a human rights perspective, human welfare is about education, health, income, housing and security. This is in line with the Human Development Index (HDI) which was introduced by the United Nations Development Program (UNDP) in 1990. The HDI measured the human development in purchasing power parity (PPP) through the 3 social welfare variables; a long and healthy life which relates to health, acquisition of knowledge which relates to education and a decent standard of living which relates to income (GDP per capita).
The impact on human welfare by globalization has always been debated among economists and social scientists in recent years. There are both positive and negative perspectives that could happen. First, from a positive perspective, Bourguignon (2002) stated that globalization will increase the integration of social, political and economic. Following that, globalization is able to improve the quality of life (QOL) of the nation.
The QOL is actually related to the HDI in which the HDI is the comprehensive measure of QOL. Sapkota (2011) mentioned that globalization managed to enhance QOL by encouraging gender-related and human development as well as reducing poverty. In terms of gender-related issues, the study found globalization helps to minimize the gender inequality in human development. While for human development, globalization increases human development which improves the QOL in many ways. As for poverty, the study found globalization has developed the lives of the poor citizens in developing areas and countries.
Furthermore, economic globalisation is due to the rise of trade volumes and this will impact the income aspect of human welfare. According to Dollar and Kraay (2004), the trade volume of developing countries such as China and India has increased significantly, bringing up the Gross Domestic Product (GDP) from 16% to 32% in 20 years. Besides that, the globalizing developing countries grew at 5.0% per capita where it enabled them to catch up with the rich countries.
With these, the growth rate of income of the poor increases by approximately 2.6 percentage points in which 2.2 percentage points come from the rise of openness to trade. From that outcome, globalization causes a reduction in poverty. Furthermore, the health and well-being of the people can also be the determinant on human welfare. Deaton (2011) stated that globalization enables the transmission of health technology and health knowledge. With globalization, it lowers the trade cost which increases the speed rate of new therapies for treatment established in a country. With this, it will be beneficial for medical items such as cardiac units, kidney analysis equipment and screening equipment which resulted in lower mortality in a country.
In terms of a negative perspectives, globalization can also negatively impact the income and security aspects of human welfare. Agenor (2004) highlighted that globalization involves opening a country’s market to foreign firms i.e., trade openness. By this, the domestic firms will be forced out of their business as the foreign firm involvement will increase the competitive pressure on domestic firms and reduce their market power. Even though, in the long run, the country may have lower poverty and higher growth rates as they are more efficient in utilizing their productive resources.
However, in the short run, poverty and unemployment may rise and continue to maintain over time. This is due to the labour market rigidities, presence of mobility across sectors and segmentation of minimum wage by firms, and incapable to compete with foreign firms which might obstruct the reallocation of labour between the tradable and non-tradable that tariff declining normally happens.
Moreover, trade liberalization can lead to higher poverty by deteriorating the income distribution and lowering the unskilled labour demand. This can be explained as the trade liberalization is related to the high-level technology introduction in which skilled labour is required to man the technology. Following that, the demand for skilled labour is higher than unskilled labour which occurred in a number of countries from the 1980s to 1990s, especially in Latin America.
Knowing that globalization can directly impact human welfare, there is another component that can influence the impact of globalization whether positively or negatively on human welfare, that is the human capital. Specifically, the human capital may facilitate the extent of the welfare gains that can be distributed across different groups of the society from globalization (Olagunju et al., 2019).
According to Newfarmer and Sztajerowska (2012), the employment and potential income gains from economic globalization are not automatic in which these gains can only be achieved by providing the platform for cultivating the human capital stock of a country. If the skill level of a country is not enough to absorb and utilize the technologies, the technology transfers from globalization where it can boost income per capita may be unachievable.
There are a few policies that can be suggested to mitigate this impact on human welfare which involve the infrastructural and general economic development, and the human capital development. Olagunju et al. (2019) stated that human capital development promotion and supporting activities on globalization should be essential components in the policy mix as it can improve in lowering the child mortality rate and poverty gap.
For example, expanding the government expenditure on health and education as well as signing more international treaties. The second recommendation would be the infrastructural and general economic improvement as they are the main components to improve welfare in developing countries. This includes stabilizing environmental and economic climates for low inflation, as well as rising government spending on public goods as these policies will improve the economic sectors’ productivity and building infrastructure.
From the argumentative discussion moving to real-world policy suggestions is not easy. This is due to the specific nature of each case and country and the countries’ varying levels of development and policy instruments. Therefore, we can only speculate and come up with rather conjectural policy options or recommendations based on the literature review and the evidence presented in the research papers and articles studied.
From the studies, we can say that a certain degree of fair regulation (not complete deregulation) and protection in the process of trade and financial liberalization, as well as labour law enforcement may balance out the negative effects of globalization.
Secondly, an open-door policy should be complemented by a policy that divert a considerable proportion of tax revenue to develop the infrastructures and welfare in the underdeveloped areas, to ensure that growth is lifting the living standards of the poorer section of countries. In addition, there should be an effective plan to mitigate the negative effect of the affected economic sector due to the open-door policy through a proper incentive system for the said sector or alternative sector.
Thirdly, a policy which allows even distribution of talent, technology and knowledge transfer is important to ensure that the technological and skill gap is bridged by having sufficient investment and government expenditure in education and research.
Fourthly, a policy that develops human capital and welfare should be pursued to ensure the decrease in child mortality rate and poverty gap, such as expanding government expenditure on health and education and signing more mutually beneficial international treaties. In terms of infrastructural and general economic improvement, stabilizing economic climates and increasing government spending on public goods will improve the economic sectors’ productivity.
I would say, we can safely state that globalization is neither good nor bad in itself, but it depends on various factors such as those discussed above. In addition, huge parts of the world may not be benefiting yet from the potentials and opportunities offered by globalization, especially in moderating inequality and alleviating poverty.