Globalization, Inequality and Poverty

Transcription

1 Globalization, Inequality and Poverty Ann Harrison University of California, Berkeley and NBER Commission on Growth and Development Workshop on Equity and Growth September 26-27, 2007 Yale Center for the Study of Globalization

2 Increasing Integration of Developing Countries Relative to High Income Countries (Exports/GDP) Developing countries High income countries Source: GEP 2003, World Bank data.

3 Measures of globalization (trade shares, FDI, tariffs, capital controls) indicate developing countries became much more open in the 1990s World Bank data shows percentage of people living on less than 1 or 2 dollars a day is falling Do these trends imply that globalization works as a strategy for poverty reduction? What about the linkages between globalization and inequality?

4 What is the relationship between globalization, inequality and poverty? New evidence from NBER book, Globalization and Poverty, under my direction Theory on poverty-inequality-trade linkages Cross-country evidence on poverty-inequalitytrade links Country case study evidence from micro data What do we mean by globalization? trade (tariffs/trade shares) capital flows (FDI, aid, capital flows)

5 Cross-country evidence on poverty-inequality-trade links Openness and inequality I (Milanovic and Squire) Openness and inequality II (William Easterly) OECD agricultural subsidies and LDC incomes (Navra Ashraf, Margaret McMillan, and Alix Zwane) Impact of Financial integration on consumption volatility (Prasad, Rogoff, Wei, and Kose) Relationship between openness, growth, and poverty reduction (Aisbett, Harrison, Zwane)

6 Cross-country results question existing orthodoxy Greater openness to trade is associated with higher inequality in developing countries Financial integration is associated with higher consumption volatility for less financially developed countries Agricultural support in rich countries helped in poor countries, because most poor countries are net food importers No robust impact of openness on poverty reduction

7 Milanovic and Squire: Falling protection raises inequality In panel setting with country fixed effects, Milanovic and Squire find that lower tariffs are associated with more inequality in poor countries (< 4000 ppp dollars per capital in 1995) and less inequality in rich countries Results strongest in unionized countries, as declines in union strength were accompanied by trade reforms and two effects reinforce each other Easterly confirms finding on developing countries in his study: openness is associated with rising inequality, using World Bank Ginis.

8 No direct linkages between globalization and poverty outcomes in aggregate data Openness associated with growth Biggest driver of poverty reduction is growth ( Growth is good for the poor ) But openness does not reduce poverty Why? Although increased openness to trade promotes growth, not pro-poor (inequality rises) Alternative possibility: aggregate data too sparse, noisy to allow us to measure relationship

9 No Relationship between Trade Policy and Poverty If We Add Country Fixed Effects (right-hand picture) -8 L og fraction -6of households -4 living on -2 $1 per day 0 Correlation between fraction of households living on $1 per day and average import tariff Average import tariff L og -4fraction of -2 households 0 living 2 on $1 per 4 day (residuals) 6 Correlation between fraction of households living on $1 per day and average import tariff controlling for country fixed effects Average import tariffs (residuals)

10 So when is globalization pro-poor?

11 Get more insights using Country Case Studies and Household Data India (Petia Topalova) Colombia (Penny Goldberg and Nina Pavcnik) Ethiopia (James Levinsohn and Margaret McMillan) Mexico (Gordon Hanson) Zambia (Jorge Balat and Guido Porto) South Africa (James Levinsohn) China (Ethan Ligon) Poland (Chor-Ching Goh and Beata Smarzynska) Indonesia (Duncan Thomas and Elizabeth Frankenberg) Comments: Irene Brambilla, Robin Burgess, Mitali Das, Esther Duflo, Susan Collins, Raquel Fernandez, Chang-Tai Hsieh, Doug Irwin, Aart Kraay, Rohini Pande, Xavier Sala-i-Martin, Matthew Slaughter

12 Results Challenge orthodox perspective on gains from trade for the poor Heterogeneity in responses BUT poor in expanding sectors gain Poor in previously protected sectors lose DFI and Aid help the poor Currency crises hurt the poor Bundling trade reforms with complementary policies is necessary

13 1. Why are conclusions based on Orthodox view wrong? What is the Orthodox view? Poor workers gain in developing countries from opening up to trade because these countries export goods that use a lot of unskilled labor (Anne Krueger) Why is this viewpoint wrong? Workers cannot easily relocate to expanding sectors (assumptions behind HO models not realistic) Countries protect sectors more that use unskilled labor Exporters/foreign firms use skilled labor even in unskilledlabor rich countries (Matsuyama) Getting goods produced by poor (or using their labor) to global markets requires many complementary policies (infrastructure, human capital development)

14 Exporters and foreign firms use skilled labor even in unskilled-labor rich countries

15 Getting goods produced by poor (or using their labor) to global markets requires many complementary policies..

16 2. Heterogeneity in responses makes generalization difficult Mexico: large corn farmers gain, medium corn farmers lose (from US corn imports), smallest gain (net consumers of corn). India: tariff reductions associated with slower rate of poverty reduction BUT Only true in regions with restrictive labor laws No impact on poverty reduction in regions with mobile labor

17 3. BUT generally true that poor in expanding sectors gain Unskilled in countries with a comparative advantage in exporting unskilled intensive goods to rich countries (Poland) Poor wage earners in sectors receiving DFI (Mexico, India, Poland) Poor wage earners in sectors with export growth (India, Colombia, Mexico)

18 4. Poor in previously protected sectors lose The poor in urban sectors with tariff reductions (Colombia) Farmers competing with higher imports (medium corn farmers in Mexico) Rural agricultural labor restricted from relocating due to rigid labor laws (India) Implication: possible to identify the poor who will be hit hardest by trade reforms, and provide social safety nets (Mexico)

19 Specific Sector Model Wins Fact that poor in expanding (export) sectors gain and Poor in contracting (import-competing) sectors lose suggests that Specific Sector framework a more accurate framework for predicting gainers and losers from trade among the poor, at least in the short run

20 5. Financial Integration: DFI and Aid help the poor, while currency crises hurt the poor Foreign investment reduces poverty (India, Mexico) Food aid benefits the poor, who are net consumers (rather than net producers) of agricultural goods (Ethiopia) Currency crises, premature capital account liberalization costly to the poor (Prasad et al, Indonesia, Mexico)

21 6. Bundling trade reform with complementary policies more likely to lead to gains for poor Importance of Complementary Policies Lack of labor mobility impedes adjustment. Workers need assistance moving from contracting (importcompeting) to expanding (exporting) sectors Exporters need educated workers even in labor-rich countries Lack of complementary inputs (infrastructure, technology, credit) inhibits movements from subsistence agriculture to cash crops Lack of domestic institutions, rule of law, capital market development restricts gains from access to international capital markets Income support carefully targeted can be an important safety net Market access to developed country markets critical (agriculture, textiles)

22 Conclusions Trade integration associated with higher growth, growth associated with less poverty, but no robust link between trade and poverty in aggregate data (see Ross Levine s study also) Trade reform associated with rising inequality Financial integration associated with higher consumption volatility in developing countries Simple interpretations of orthodox trade models need to be abandoned (Don Davis, Prachi Mishra) Poor in expanding (FDI/exporting) sectors gain Poor in contracting (import-competing) sectors lose largely a consequence of labor immobility Financial crises hurt the poor (Indonesia, Mexico) Complementary policies are critical