Who benefits from globalisation?

An interesting editorial in The Business on Sunday with which I largely agree:

The evidence from across the globe is overwhelming: governments that “protect” their industries hurt their economies and their people. .. Countries that really believe in free trade should simply make a unilateral declaration to scrap their tariffs without condition on the goods and services of developing nations …

 But I disagree with their criticism of David Cameron:

David Cameron, soon-to-be 20th leader of the Conservative party, can also be counted out. “The poor are getting poorer,” he claimed on a television debate last week, demonstrating his utter ignorance of the subject. The poor are being lifted out of poverty faster than at any time in world history, thanks largely to free trade. More progress has been made in the last 50 years than in the previous 500 years.

Credit where it is due: David Cameron is the first would-be leader that I can remember to speak about our responsiblity to tackle poverty.  Here he is in the Telegraph:

when the Conservative Party talks about international affairs, it can’t just be Gibraltar and Zimbabwe – we’ve got to show as much passion about Darfur and the millions of people living on less than a dollar a day in sub-Saharan Africa who are getting poorer while we are getting richer.

But are The Business and the Adam Smith Institute right, or is David Cameron right? Have the poor got poorer?  As ever, it depends who you mean, and over what time period. 

Here is GDP per capita, in real terms, over the last 30 years.  As you will see, GDP per capita in sub Saharan Africa is 8 percent lower today than 30 years ago; in OECD countries it is 86 percent higher.  But if you look only at the last decade, then incomes in sub Saharan Africa have begun to recover, as governance has improved, conflict abated and aid increased.  Within the region, some countries have grown faster, and some have continued to stagnate.  But broadly speaking, David Cameron’s claim is right: sub Saharan Africa is poorer now than it was 30 years ago.

Graph of GDP per capita - OECD and sub Saharan Africa

GDP per capita (constant 2000 US$) Indexed to 1974=100
Source: World Bank national accounts, and OECD National Accounts.

But I think the question of whether the poor have got poorer is largely irrelevant. The more profound point, which I would like to have seen The Business, the Adam Smith Institute, this week’s Economist, and David Cameron all make, is this. Globalization makes the world richer, on average.  We should have more of it, not less of it.  The way to acclerate globalization is to distribute the gains of globalisation more fairly.  In the last thirty years, the gains have largely gone to the richer countries.  This is not surprising: the rich and powerful are able to capture more of the benefits than the weak and vulnerable.  But this cannot continue.  Let us ensure that in the next decade of deeper and faster globalisation, the benefits are mainly enjoyed by the poor.

22 thoughts on “Who benefits from globalisation?”

  1. What do you see as the main redistributive mechanisms that would make this possible? Because this seems to me to be the major weakness of globalization as currently conceived. There are no agreed mechanisms to spread the benefits more evenly to the poor, and even relatively modest proposals – such as a “Tobin tax” or increased ‘aid for trade’ funding – receive little or no support from the big players.

  2. It looks to me as though the Business are misquoting DC who was talking about Sub-Saharan Africa. The Business are, IIRC, correct with respect to the global situation. But that was not what DC was talking about.

  3. If you are seeking to distribute the gains from globalisation more fairly between nations count me in. If you are seeking to dictate to democratically elected governments how to run their economies I don’t think you are right.

    Wealth redistribution seems more often than not to disincentivise wealth creation. Those countries that have oppressive tax regimes end up creating capital flight and brain drain. Growing the cake is more important than slicing it more evenly.

    The Tobin tax is regressive and would hit poorer countries harder. Its also a barrier to trade. Never mind that it would be avoided by financial institutions with great ease.

  4. I’d have a lot more faith in that graph if it has not, as it does, sub-Saharan Africa, but all those countries which were “poor” 30 years ago. Some of those can be longer be considered to be poor and most of them are less poor than they were.

    We do know that the area given has not benefitted. But by using only that area as our comparison we might end up (might I add!) draw the wrong conclusions.

    Which countries were, 30 years ago, at x level of poverty and are not now. And what did they do differently from those who are at x -8%?

    Owen replies: Tim – your point is right, that if you pick countries that are poor ex post, and compare them with the average for all countries, then almost by definition you will see that they do less well (that is why they are poor).

    I picked sub-Saharan Africa because that is the group of countries to which David Cameron referred in his article in the Telegraph.

    But I think the general point is right: poor countries have secured a smaller share of the benefits of globalisation than rich countries. So far.

  5. Have you read any of Robert Wade’s stuff? I’m genuinely interested because Wade to my mind seems to argue, pretty convincingly, that globalisation has been bad for the poor.

    Owen replies Jeremy I have only read a few things by Robert Wade – mainly his writing in the press. I think I should probably read some more. But my impression of what I have read is that his view is more that globalisation has not benefited the poor, rather than that it has been bad for them. But, as I say, I haven’t read much of his stuff so that could be wrong.

    Owen

  6. Paul – I’m not particularly going in to bat for the Tobin tax, although I think it is a proposal that is worth exploring for establishing funding for development, but how is it regressive? Poor country transactors and currencies are least likely to be involved in the transactions it would address, so how would it take proportionally more from low income countries?

    The adjustment costs of trade liberalization however, clearly are going to fall more heavily on low income countries. And there is still not enough indication that rich countries recognize this, and are offering adequate compensating measures – such as increased aid for trade, longer time frames and greater flexibility for poor country liberalization and unconditional cuts in their own agricultural subsidies and tariff barriers.

    Further, I would simply repeat the findings of the 2005 Human Development Report that social progress and economic growth are not automatically correlated.

    China and India both saw a fall in the rate of decline of child mortality during a period of accelerating economic growth, while Bangladesh saw an increase in the rate of decline of child mortality during a period of low growth. Internal policies (including redistibutive ones) matter if the benefits of globalisation are to reach the poor.

  7. “poor countries have secured a smaller share of the benefits of globalisation than rich countries”

    That’s also a function of the ex-post selection.

    Equally obviously those countries which were poor and now are not have gained a greater share of the benefits of globalization than either those countries which were rich to start with or those that remain poor.

    So the question becomes again, what did they do right and what did the others do wrong?

    Owen replies: Tim – you are right that there are many explanations for why some countries are now rich and some poor. (Some of it may just be random variation on the bell curve). You are right that the ex-post selection of poor countries should not confuse us in thinking about explanations.

    In the famous comparison of Ghana and S Korea (Ghana had marginally higher income per capita at independence than Korea at the same time – Korea has since grown and Ghana stagnated), part of the reason Korea did so well was that it was flooded with aid from the US and (later) Japan. And other factors – eg governance, climate, geography, etc also play a huge role in explaining the difference.

    But – and this is a big but – it is ALSO true that, aside from all that, the allocation of the gains from trade depends in part on economic strength of the stakeholders (in game theory terms, the allocation of benefits depends on the value of outside options). So you would expect that a large share of the gains from trade liberalisation would be captured by the countries that enter the negotiations in a position of relative economic strength. For example, the US can walk away from multilateral trade negotiations and do bilateral deals instead, if it chooses, because countries want to trade with the US more than the US wants to trade with them. This give the US huge bargaining strength in the multilateral arena. Western Samoa cannot do the same, so it is less likely to be able to ensure that it benefits from a partial trade liberalisation.

    This means that there might be a self perpetuating virtuous circle for the rich, and vicious cycle for the poor, in terms of share of the benefits captured. Unless something happens to spread the benefits more evenly, there might be a pure hysteresis effect in which countries that start off relatively rich are able to capture a large and growing share of the benefits of globalisation, and countries that start off relatively poor capture a small and falling share of the benefits – thus entrenching and exaggerating whatever disparities exist at the beginning.

  8. “So you would expect that a large share of the gains from trade liberalisation would be captured by the countries that enter the negotiations in a position of relative economic strength. For example, the US can walk away from multilateral trade negotiations and do bilateral deals instead, if it chooses, because countries want to trade with the US more than the US wants to trade with them. This give the US huge bargaining strength in the multilateral arena. Western Samoa cannot do the same, so it is less likely to be able to ensure that it benefits from a partial trade liberalisation.”

    Not sure this works. We (or at least I) are claiming that the gains to trade come from the lovely cheap imports you get. Tariffs are therefore under the direct control of the importing country. The claims about game theory and negotiating power only have merit if it is in fact the exports that are the good thing, the small country being dependent upon what the powerful allow them. A rather mercantilist view?

    Owen replies: Tim – I think you are thinking in partial equilibrium. Your model would be true for a small, price-taking country that liberalises unilaterally. (Which it should, etc.) But you are ignoring the terms of trade effects arising from the change in relative prices that would result of global liberalisation and which affect what each country receives and pays for traded goods. For example, many developing countries are net importers of food, for which global trade liberalisation may produce price increases, and exporters of primary commodities for which liberalisation may result in price decreases. So countries might want to avoid or delay a liberalisation which results in a change in relative prices which reduces the value of their exports. In other words, the impact of trade liberalisation is not just the benefit of lovely cheap imports if the market value of your exports goes down at the same time.

  9. Tim

    I think you are still confusing the decision by one country to liberalise, irrespective of what other others do; and the impact of general liberalisation by the rest of the world.

    In the first case, you can take prices as given, and the benefits are the more efficient use of national resources (efficiency gains occur because resources released from sectors that contract in the face of cheaper imports are redeployed into export sectors where they earn a higher return).

    In the case of world liberalisation, relative prices are not fixed. I don’t think any economist disagrees that these changes in the terms of trade would result in several countries being overall losers (though NOT the world as a whole).

    For example, liberalisation of the sugar regime may well benefit non ACP sugar producers like Ethiopia, Malawi and Mozambique by increasing market access. It will certainly benefit western consumers who will pay less for their sugar. But for countries like Mauritius, Fiji, Swaziland, Guyana and Jamaica, a reduction in world sugar prices will definitely be bad news. There is no mechanism to transmit the benefit to western consumers to the poor countries that lose. Hence in the multilateral negotiations, these countries might rationally hold out for compensation.

    Owen

  10. Liberalization of the ACP will not lower world sugar prices. It will raise them.
    Those ex-colonies you mention will indeed lose their privileged access to the EU market (at the EU price set three times above world prices) and the EU is indeed offering compensation to make up for this (although perhaps not enough).
    But world prices should rise as there will no longer be dumping of highly subsidized EU sugar.
    But overall it would be, as you agree, a Pareto improvement and the general rule is that these should go ahead rather than be delayed in squabbles over compensation.

    I’m also less than taken by arguments that we should not have or delay trade liberalization because of the effects of unpicking the previous distortions.

    Finally, to return to the game theory thing. The way you’ve described it, in the one country one vote WTO system, it looks like the small countries (like the ACP) have the power, not the large ones like the US.

  11. Tim, “a Pareto improvement, overall” is meaningless. Something is only a Pareto improvement if it makes nobody worse off. If some countries suffer uncompensated losses as a result of liberalisation then it’s not a Pareto improvement.

  12. Tim

    Whether you think the price of sugar will rise or fall as a result of changes to the sugar regime, the point is a general one. The terms of trade impact of a general liberalisation can, without some compensation, make some countries poorer (ie it is not necessarily a pareto improvement).

    I am not sure why you think this is controversial. It is analgous to the proposition – undisputed as far as I know – that some individuals in an economy may lose as a result of trade liberalisation (eg farmers if agricultural subsidies are removed). If the relative price of the product in which they have a comparative advantage falls, they may be worse off.

    We both agree that a country unambiguously benefits if it reduces its trade barriers, other things equal, because this leads to a more efficient use of its resources. But that view takes relative prices as given (which is generally reasonable for a single country making a unilateral decision).

    But I do not know anyone who thinks that, once you allow relative prices to change, and so assume shifts in the terms of trade, an uncompensated general liberalisation is necessarily a pareto-improvement.

    It does not make sense in theory (think of a country with no tariffs that exports only one product and imports everything it else it needs, and think of a liberalisation that reduces the relative price of its export: how could it not be worse off?). Furthermore is unlikely to be true in practice, as there are some countries whose exports are concentrated in products whose relative world price will fall after liberalisation.

    Or am I misunderstanding your argument?

    Owen

  13. “(think of a country with no tariffs that exports only one product and imports everything it else it needs, and think of a liberalisation that reduces the relative price of its export: how could it not be worse off?).”

    This is exactly the trade immiseration argument I mention above. It’s possible but rare. Actually identified once I believe?

    I may well be misusing the phrase “Pareto Improvement”. My apologies.

    My point is that if the sum of wealth is increased by trade liberalisation (which I think we agree) and that there will also be some losers, (which I agree is possible) then let’s go ahead and have the liberalisation and worry about the compensation afterwards, not not have the liberalisation because we’re worried about how to compensate the losers.

  14. Tim

    I think we may be getting to the bottom of this misunderstanding.

    It is a while since I read Wealth and Poverty, but as I recall Bhagwati’s point was that trade can be immiserating if a country has a comparative advantage in the production of a commodity for which external demand is both price-inelastic and income-inelastic, and which is traded globally. In these cases, a country would see a progressive deterioration in its terms of trade, because demand for its exports falls over time, and competition by reducing prices (eg devaluation) is ineffective at restoring lost revenues. In this case, trade can be immiserating over time. Brazil’s coffee exports could well be an example of this.

    This does not deal with the point I was making that a general trade liberalisation can make some countries poorer. It seems to me to be self-evident that (a) general trade liberalisation will lead to a change of relative world prices; (b) some countries will suffer from a deterioration in the terms of trade as a result of that change in relative prices; and (c) the welfare loss in some countries from the deterioration in their terms of trade will be bigger than the efficiency gains from liberalisation.

    I think you are mixing up two separate effects:

    – the efficiency gains of liberalisation – moving production from less productive sectors (import substitution) to more productive sectors (exports) must be good for the economy; this is a pure welfare gain;

    – a change in relative world prices, which may increase or reduce a country’s real income depending on how it affects the terms of trade. Ghana’s real income will fall if the world price of cocoa goes down relative to other prices.

    You and I agree that unilateral liberalisation by one country, taking the rest of the world as given, is almost always an welfare improvement for the liberalising country (though not necessarily for every citizen of that country, unless arrangments are made within that country for the winners to compensate the losers). The reason for this is that there are efficiency gains, but no change in the terms of trade (because world prices are assumed to be unaffected by one country’s liberalisation) so there is a benefit for the liberalising country.

    There might be rare counter-examples to this general rule – if a country is a major exporter of a commodity – that is, it is not a price taker in world markets – it is theoretically possible that its unilateral trade liberalisation could immiserate the country if it results in a change of world prices. In this case, it is possible that the the economic efficiency gains of moving to more productive activities is outweighed by the deterioration in the terms of trade that liberalisation causes. That, I think, is the very rare immiseration result that you mention.

    But you seem to be making a stronger claim that it is unlikely that a general liberalisation of world trade would not lead to a change in the terms of trade that would adversely affect some countries. I think most economists – even free traders like me – would think this is too strong a claim. A shift in the terms of trade, for example against countries with large exports of products for which world prices are artifically elevated, would surely make those countries worse off, even taking account of the efficiency gains from their own liberalisation. So general world trade liberalisation will result in changes in world prices that will, in general, result in winners and losers.

    Our views converge again when we note that the winners gain much more than the losers lose (the world is better off as a whole) from trade liberalisation. But it would be extraordinary to believe that, in the absence of some form of compensation, no countries could lose from such a general trade liberalisation.

    Apologies if I’ve misunderstood you, but I don’t think that it is a strong argument for general trade liberalisation that no countries will lose (or that losses will occur only in the most exceptional cases).

    Those of us who advocate free trade and want to make faster progress should accept that some countries will lose from general trade liberalisation, and that it is in the interests of the beneficiaries of liberalisation to acclerate it by being willing to compensate the losers.

    Owen

  15. In ‘Global Impacts of the Doha Scenarios on Poverty‘, Anderson and co. of the World Bank separate out the terms of trade effects of a likely Doha round on various countries (Table 17.1, p. 29). They estimate that the terms of trade effect is negative (ie a drop in income) for most developing regions, but that this is outweighed, though not greatly, by efficiency gains.

    I have no idea whether their analysis is realistic, but it might be worth referring to given the discussion here.

  16. “for example against countries with large exports of products for which world prices are artifically elevated”

    I can see that this would be true. These people would lose. But to be harsh about it I’m quite happy to say “Well, you’ve been getting a subsidy and now you’re not”. One person’s subsidy is, after all, another’s tax.

    “being willing to compensate the losers”.

    Sure, let’s have the liberalisation then the compensation. Not, we can’t have the liberalisation because we don’t want to lose our subsidy.

  17. “Sure, let’s have the liberalisation then the compensation.”

    And if the compensation isn’t going to be forthcoming, let’s not have the liberalisation, right?

  18. One problem I have with dogmatic application of free trade is that historically the US, Japan, S Korea and others mantained a great deal of protectionism for their industries and actually still do.

    Drucker and others proposed free trade regions and certainly small economies can’t produce a wide variety of things. I think given the complexity of existing trade agrements that we shouldn’t pretend free markets, but should try to tweak pragmatically while reducing complexity.

    I don’t know if the above makes any sense.

    Lots of us are hoping for partial solutions through technologies and the new organizations that accompany them. There really is some potential to the idea that in ways these may transcend existing systems.

    And third world countries may have potential advantages. They are connecting through increasingly internet capable cell phones, they are free to design entirely new ways of organization, production and distribution.

    I don’t think this will save the world, but I think it can help a lot. One blog I like which focuses on small projects in Africa is:

    http://timbuktuchronicles.blogspot.com/

  19. Tobin Taxes are regressive because outside the major currency crosses (EUR/USD/GBP/JPY) you often have to do two transactions to achieve the trade.

    So to buy minor currency A with minor currency C you have to buy USD with B and then sell USD for A.

    I have never heard any explanation for overcoming this which does not increase the opportunities for evading the tax.

    Anyway the tax raises the cost of doing business across borders – that seems counter-productive to me.

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