Is Globalisation Causing World Poverty? Martin Wolf, Chief Economics Commentator, Financial Times

1. Is Globalisation Causing World Poverty?Martin Wolf, Chief Economics Commentator, Financial Times Leverhulme Globalisation Lecture Nottingham University, February 25, 2002

2. Is globalisation causing world poverty? • The charge sheet • The current state of world inequality and poverty • How the world became this way • Inequality and poverty in the 1980s and 1990s 5. Globalisation - winners and losers 6. Conclusion

3. 1. The charge sheet • “Globalization has dramatically increased inequality between and within nations” Jay Mazur, “Labor’s New Internationalism”, Foreign Affairs, January/February 2000. • “So far, the current wave of globalization, which started around 1980, has actually promoted economic equality and reduced poverty.” David Dollar and Aart Kraay, Foreign Affairs, January/February 2002 • Who is right?

4. 2. Current state of world inequality and poverty • This is indeed a remarkably unequal world: • The rich countries with less than a sixth of world population generate 55 per cent of world real income • Low income countries, with 41 per cent of world population, generate 11 per cent of world incomes • The average real incomes of the top sixth are 14 times bigger than those of the 41 per cent in the poorest countries • Average incomes in the US (the richest country) are 75 times greater than those of Sierra Leone (the poorest)

5. 2. How the world’s population is divided The world’s population in 2000 was 6,055m, of which only 903m lived in high-income countries and 4,505m lived in low-income and lower-middle income countries.

6. 2. How the world’s income is divided But the high-income countries generated 55 per cent of the total world income, at purchasing power parity, of $45 trillion

7. 2. What this means for world average incomes The globalised world is, as a result, deeply divided in its living standards

8. 2. Income inequality among countries is starker Sierra Leone’s real income per head today is roughly where the world’s was in 1500. It is at the subsistence minimum and ravaged by civil war. The US is the most productive country today.

9. 2. 1.2bn people on less than a dollar a day The extremely poor are defined as those on less than a dollar a day, at purchasing power parity. There were 1.2bn in 1998, concentrated in south and east Asia and in Africa.

10. 2. Highest incidence in Africa and South Asia Almost half the population of Sub-Saharan Africa is destitute. The incidence of extreme poverty is almost as high as this in South Asia, though falling.

11. 3. How the world became this way • The path to world inequality has been a long one • Today’s unequal world did not arrive in 1980. It has been emerging progressively over 200 years • The big divergence today is between countries that have sustained growth in incomes per head over long periods and those that have grown more slowly and unevenly • Relative economic growth has been the principal determinant of long-term changes in global inequality and poverty

12. 3. How the world became this way • The rise in global inequality was fastest in the 19th century. It seems to have ended in the 1980s and 1990s, though absolute income gaps keep growing • Numbers in poverty also peaked in the 1980s, but the proportion of the world’s population in extreme poverty has been falling for 200 years • The world’s poorest are those left behind by growth

13. 3. “Small” differences add up over time…. There has been growth almost everywhere, but rates of growth have differed substantially over the last 180 years. This is not surprising. Opportunities are never exploited evenly. Some get there first.

14. 3. And create chasms in cumulative growth Over 180 years, small differences in growth in output per head - that is, in productivity growth - become huge chasms in living standards.

15. 3. Similar starting points, different endings What steady growth has done for US GDP per head over 180 years.

16. 3. How relative growth rates have changed Slopes indicate growth rates. Note Japan’s remarkable catch up in the 1950-73 period and China’s in the latest period. US growth has been fairly steady.

17. 3. Yawning chasm between richest and poorest While the frontier countries have grown richer, some countries have remained at a subsistence minimum. So ratios of income per head have become steadily wider.

18. 3. This has created global household inequality Global household inequality increased fastest in the 19th century and peaked in 1970. The big reason for the declining inequality was fast growth in east Asia and, more recently, in India.

19. 3. Numbers of people on less than a dollar a day 1,400 Poverty has dropped by 200 million over past 20 years, despite the world’s population increase of 1.6bn. 1,200 1,000 800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

20. 3. But declining proportions of people in poverty Extreme poverty has been in decline as a share of world population since 1850. It has fallen fastest in the last half century. It fell from 31 per cent of the world’s population in 1980 to 20 per cent in 1998.

21. 4. Poverty and inequality in the 1980s and 1990s • The record of the 1980s and 1990s on inequality and poverty has been quite encouraging: • At the world level, household inequality has declined, as growing between-country equality has more than offset growing within-country inequality • The number of absolute poor has fallen a little, while the proportion of the poor in world population has fallen substantially • There have been particularly big declines in numbers in poverty in East Asia

22. 4. Declining inequality among rich countries Inequality has risen within rich countries, but fallen among them Source: David Dollar, “Globalization: Who wins, who loses and what the world can do about it”,July 17, 2001, World Bank

23. 4. Plus oscillations in the developing world Inequality has risen slightly within developing countries since 1985 and first fallen then risen among them Source: David Dollar, “Globalization: Who wins, who loses and what the world can do about it”,July 17, 2001, World Bank

24. 4. Create modest declines for the world If one adds the two together, one finds that worldwide household inequality has been falling, not rising in the last two decades. Falling inequality between countries (largely because of growth by China and India) has offset modest increases in inequality inside them. Source: David Dollar, “Globalization: Who wins, who loses and what the world can do about it”,July 17, 2001, World Bank

25. 4. And proportion of the absolute poor has fallen Since 1987, the number of people on one dollar a day has oscillated, but the proportion in the world’s population has fallen

26. 4. The regional incidence of poverty, 1987-1998 The decline in poverty has been fastest where growth was fastest - in east Asia

27. 5. Globalisation, the winners and losers • Globalisation affects these trends largely through its impact on country growth: • The world’s markets for goods and services are now more integrated than ever before. The same is not so true for capital and, above all, labour • Countries have varied dramatically in their ability to take advantage of these opportunities • Developing countries with combined populations of 2.4bn have done well. This group includes China and India. • Globalisers have liberalised more and their trade has also grown more than non-globalisers

28. 5. Globalisation - winners and losers • Fast growth in globalising developing countries has benefited the poor in those countries and also reduced global inequality • Trade has, as always, been the handmaiden of growth. But rapid growth requires much more than economic integration.

29. 5. The world is now more integrated than ever Measured by trade and foreign assets, the world economy is now more integrated than ever. Falling costs of transport and communications and liberalisation have been the driving force. Movement of people is far less than in the late 19th century. Source: David Dollar, “Globalization: Who wins, who loses and what the world can do about it”,July 17, 2001, World Bank

30. 5. The winners and losers Source World Bank

31. 5. The winners and losers in trade policy The winners have liberalised trade by more than the losers. Source: David Dollar, “Globalization: Who wins, who loses and what the world can do about it”,July 17, 2001, World Bank

32. 5. The winners and losers in trade The winners have also increased their trade in relation to GDP, while the losers have seen their trade shrink. Source: David Dollar, “Globalization: Who wins, who loses and what the world can do about it”,July 17, 2001, World Bank

33. 5. The winners and losers in trade again The difference in trade performance is stark at the aggregate level. Source: David Dollar, “Globalization: Who wins, who loses and what the world can do about it”,July 17, 2001, World Bank

34. 5. Trade does not harm the poor And rises in trade ratios have not increased inequality. So if trade raises growth, it also normally helps the poor. Source: David Dollar, “Globalization: Who wins, who loses and what the world can do about it”,July 17, 2001, World Bank

35. 5. Winners in trade are also winners in growth These globalisers have indeed grown faster and faster. Source: David Dollar, “Globalization: Who wins, who loses and what the world can do about it”,July 17, 2001, World Bank

36. 5. But losers in trade are losers in growth The non-globalisers have performed poorly Source: David Dollar, “Globalization: Who wins, who loses and what the world can do about it”,July 17, 2001, World Bank

37. 5. And fast growth benefits the poor The poor tend to share in economic growth, which is why the poorest people live in the poorest countries Source: David Dollar, “Globalization: Who wins, who loses and what the world can do about it”,July 17, 2001, World Bank

38. 5. This is true everywhere Where growth has been very fast, so has been the pace of poverty reduction Source: David Dollar, “Globalization: Who wins, who loses and what the world can do about it”,July 17, 2001, World Bank

39. 5. Better off people keep children from work And richer people keep children from work. Source: David Dollar, “Globalization: Who wins, who loses and what the world can do about it”,July 17, 2001, World Bank

40. 5. Trade as the handmaiden of growth • “As far as we can tell, there are no anti-global victories to report for the postwar Third World. We infer that this is because freer trade stimulates growth in Third World economies today.” Peter Lindert and John Williamson • This conclusion is consistent with the weight of evidence. But multi-collinearity between trade and other policies makes it difficult to demonstrate the causal connection • Contrast North and South Korea or West and East Germany

41. 6. Conclusion • Globalisation is not guilty of causing growing poverty and inequality worldwide • Overall, there has been declining inequality and poverty in the age of globalisation. This breaks a trend that goes back almost two centuries • But far too many countries have become less globalised and grown poorly. • This is the only sense in which globalisation causes inequality: some seize opportunities and others do not • The challenge is to help the failures do better