Globalization, Inequality and Poverty Nexus
Globalization – Inequality – Poverty Nexus
In this essay I will discuss the relationships between globalization and inequality, globalization and poverty and how the growth channel impacts openness, growth-inequality relationship and inequality-poverty-link. This essay will also discuss other channels in the globalization-inequality-poverty nexus like including the factor mobility, technological progress and diffusion, how the information flows, the role of institutions and the volatility and vulnerability.
While discussing the above, this essay will also answer different important issues, like whether the actual distribution of wealth is fair. It will also tackle the disadvantages of globalization and who bears the most costs and if variations of inequality between countries and with in countries, are related to globalization. Finally, this essay will answer the question of why are we still arguing about whether globalization is good or bad or the big debate between the pro-globalization and the skeptics. Above all, this essay will discuss how the developing countries have controlled globalization and its adverse impacts.
Globalization is the interconnectedness, in the perspective of international economy; it is the increase in volume and value of international trade and financial transactions. It is the interaction of people, culture, and faster communication, flow of goods, services and labor across the boarder, thus linking world economies together through international markets.
Where as Inequality is the lack of equality or fair treatment in the sharing of wealth, distribution of economic assets and income, between different groups in a society.
While poverty is the condition of being extremely poor, lack of something or when the quality of something is extremely low:
Globalization gives countries that are involved new opportunities to move faster, for growth and development, however, on the one hand, globalization also poses a difficult job to, and imposes limits on policymakers in the control of national, regional and global economic systems (Alastair & Hulme 2007). While one cannot fail to recognize the benefits of globalization, the question is still posed as to whether the actual distribution of these gains are fair, in the sense of how the benefits are being shared equally between those who have and have not or if this force is really hurting some and rewarding the rest (Mandle 2003)
Globalization has brought costs and risks that are significant for the delicate developing economies and the third or developing countries. This is mostly associated with the down side of globalization in the times of global financial and economic crises (Stiglitz 1998). As noted by Stiglitz, in times of crises the costs are borne overwhelmingly by the developing countries who are vulnerable to shocks, therefore, when its time for boom the benefits are not shared widely and equally with in the global community (Stiglitz 1998).
As noted by OECD (2001), there is the fear that globalization has bypassed and is hurting the poor, and as what Nissankey & Thorbecke (2006) stated that all this point towards to the increasing inequality in the world income distribution, but also assert that the lack of convergence in the involved national economies and regions as the waves of globalization sweeps through, and thus these two assert that inequality acts as a sieve of growth and poverty.
Sklair (1999) and Woods (1998) discussed competing conceptions in Nissanke, & Thorbecke (2006). They assert that the link between globalization-inequality and poverty is intense, and further still, that globalization is expected to reduce poverty through faster growth in more integrated economies, but the level of this integration on the side of developing world leaves less to admire.
Relationship Between Globalization And Inequality
For that fact, economic growth has been given a priority in measuring poverty (OECD 2001).Sometimes it’s not the case; the negative links of growth and inequality have been left out largely by policy makers. These negative links are the traditional common factors causing inequality. Cornia (2000) explained that these factors such as land concentration, inequality in education and urban bias can be counteracted by things like land reform, providing education equally and this will reduce inequality.
Also to note, the debate that world inequality is much more driven by between countries than within countries and vice versa. Globalization has different implications, the liberal argument is that increases in the world inequality above moderate levels may limit world demand and there by world economic growth, thus producing a vicious circle of rising world inequality and lower world growth. This will result in a high marginal propensity to import sophisticated goods and services from rich countries by developing countries, there by widening income inequality (Held & Kaya 2007).
In addition, the relationship between openness-growth and inequality, this openness through liberalization of trade and investment have been supported worldwide for the growth that come with it, this is associated with many theories like the famous comparative advantage, where the main growth enhancing effects are assumed to filter through as noted by Kaplinsky (2005). According to World Bank (2002), openness to growth is presumed to be achieved in three sub channels, which are exports, capital inflows and imports.
In this, exports are encouraged through trade liberalization, which in turn will benefit export industries and thus add to the total GDP, but the argument here is if exports themselves influence growth or vice versa (Nissanke and Stein 2003).
Furthermore, when a country does import substitution in favor of trade liberalization which is encouraged by openness-to growth; it is likely to hurt the previously protected home industries in a short run. In addition, its fiscal revenues will fall due to lower in tariffs, though because of competition it is likely to achieve some growth due to proper allocation of resources which these resources in a developing country are not properly allocated or equally distributed thus it hard to achieve growth (Nissanke and Stein 2003).
Further more, these poor countries moreover have no say with the current account liberalization as it was imposed on them by World Bank and IMF as a conditionality for financial assistance so as these poor countries face the speculative attacks on their currency, as was the example of East Asia, can devastate the economy especially these vulnerable ones (Mandle 2003).
Also to note, is the impact of foreign direct investment (FDI), in here it is assumed that FDI will take on the form of building new factories and creating jobs, rather than merger and acquisition (Mandle 2003). If the above is true then, most of the capital flows from the transnational corporations is directly injected to the factories producing new products (Dollar & Kraay 2001a, 2001b). However this sometimes is not the case, apart from the high price of foregoing corporate tax a developing country has to do, the transfer of technology and know-how assumed to accompany the FDI is not automatic. And as Sachs and Warner (1995) put it this short term capital flows contribute to the increased vulnerability to external shocks of the recipient developing country. Thus it is difficult to establish a strong positive causal relationship between financial globalization and economic growth, Sachs and Warner.
Other Channels In The Globalization-Inequality-Poverty Nexus
The other channel in the globalization-inequality-poverty nexus is the shift in relative product prices, which induces income distribution, in the process of opening up of trade (Bhargava 2006). Besides this, globalization influence or affect poverty straight away through relative price changes in factor markets and goods markets (Ravallion 2004).
Another important factor to consider regarding the relationship of globalization, inequality and poverty is the impact of globalization towards the workers. This is because there is an ongoing debate about how globalization makes the rich, richer and the poor, poorer. One of the major disadvantages of globalization towards the workers is the low wages or labor costs. This can be connected on the absolute advantage theory or the international trade history which asserts individuals or nations trade with accordance to their superior productivity in a specific industry. With accordance to the said theory, nations must produce, at the same time, export different goods which they posses an absolute advantage, as well as import from other nations which posses an absolute advantage (Economic Professor n.d.).
As of now, the global environment is facing major changes in terms of competition, that is, whoever country that can manufactures product in better and faster manner will win. As a result of globalization, each and every country in the world is competing in order to get to the finish line, and as of now, the most advantaged country in terms of cheaper labor cost is China, which enables the country to be one of the most favorite destinations of different companies in the world, especially now, during the massive impact of global financial crisis. According to the Peoples Daily Online (2007), in Europe, hourly rate of individual worker is US$30, while US$ in the US, but it can be offered by US$1 in China. Therefore, 1 hour of operation in Europe will be equivalent to 30 hours in China. Thus, the issue about the negative impact of outsourcing will also be noted. Due to the low labor cost in China, companies in Europe and the US will tend to focus in investing in China, thus, Bhagwati (2004) explained that labor unions in different countries will fear that their trade with the poor countries with low wages can drive down the real wages of their own workers, thus result to paupers in their midst (p. 122). Meaning, globalization can also drive disadvantage on the part of rich countries, because employees from America will lose their job, while those workers in India will gain (Bardhan n.d.).
Another important factor to consider is the inequality in wage which focuses on the trade-induced skill-biased technical progress. According to Wood and Theonig & Verdier (2003) there are some developing countries and some rich countries who are facing competition in terms of importing cheap unskilled labor-intensive products from the poorer countries, that may adopt skill-biased defensive innovations. The said subject is supported by the study of Attanasia, Goldberg & Pavcnik (2004) about the increase in demand for skilled workers in Colombia, shows that cheaper imports of different machines, office equipment and other capital goods that are complementary or direct connected with the skilled labor in different developing countries, offer the vehicle of skill biased technical change. Thus, firms that import machineries are more likely to employ a higher share of white-collar workers, than those firms that do not import the said inputs. As a result, it can be said that wage inequality is compatible or linked with a rise in absolute wage rate or wage income. Therefore, those workers in poor country with comparative advantage in products intensive in unskilled labor should benefit from trade liberalization (Bardhan n.d.).
On the other hand, globalization can also affect different industries of different countries because of global trade. For example, shoe industry in the Philippines is being affected by imported products from China and Korea which come in low price; as a result, it pushes industries, particularly those small players to close, therefore affecting the workers (Bardhan n.d.).
The result, the discrepancies between the 20% of the world’s population who live in developed countries, and the 20% in the third world countries was 30:1 by 1960 and grow to 74:1 by 1997 (UNDP 1999). In connection, according to the United Nations Development Report, the world poorest 2.5 billion people or more or less 45% of the entire population have collective income which is more or less equal to the wealth of the top 225 riches billionaires in the world (Ukpere & Slabbert 2007, p. 5). As a result, during 1990s, the 20% of the riches people in the world enjoyed about 86% of the global GDP, while the 20% poorest own less than 1%. While, the income of the 10% of the global households is more than 80 times the purchasing power of the 10% poorest (Amin 2004, p. 1). This situation shows the product of rich becoming richer and the poor becoming poorer; an important trend which affects developed countries but negatively affect the developing nations, focusing primarily on the Sub-Saharan Africa, East and South Asia and Latin America (Ukpere & Slabbert 2009).
The factors of income inequality can result to the form of increasing early mortality diseases, including malnutrition, prostitution, child labor, displacement and forced migration, the violence of social breakdown, state social control as well as fractional war, acute risk and uncertainty, environmental degradation and vulnerability, together with the existential material security (Amin, 2004, p. 1). In connection, it shows the inequalities in terms of health indicators. According to the World Development Report in 2006, the world including West Asia and North Africa, East Asia (excluding China and Japan), South Asia and sub-Saharan Africa – was below the world average, however, high rates of growth in life expectancy in the first three of these areas in the next 20 years was inequality-reduces globally, at the same time, the decline of life expectancy in sub-Saharan Africa in the 1990’s thus, increases the said inequality by stretching the bottom tail of the distribution. In 2000, only South Asia and sub-Saharan Africa were still below the world average. While health indicators are in general worse, when the incomes are low, differences in the income growth enables to explain the variation in improvements of life expectancy. Thus, major determinants mortality decline are clean water, systems of public health, sanitation and basic sanitary, knowledge, education of women. Thus, globalization failed in the aspect of health knowledge, drugs and technology. This is because, even with globalization, 10.5 million die different preventable deaths in poor countries; it is preventable because they would have leave, if they belong in the rich countries (Bardhan n.d.). This is happening due to the fact the South Africa has a great rate of poverty. As a matter of fact, in South Africa, more or less 20 million people are living on average, on les than R144 or about $21 per month, 40% of the entire poor population are female and lives in the rural areas; 60% of female headed-households are poor compare with 31% of male headed-households; 2 out of 3 children live in poverty; and there were about 3.1 million jobless African families during 1999, showing a great increase compare with 1.9 million in 1995. Therefore, it can be said that the rate will be increasing now, due to the global financial crisis. In addition, 38% of the working populations are unemployed, which put Africa as one of the most uneven societies in the globe (Adams 2006).
There are several studies, with the support of qualitative and quantitative reports from international and local organization, which shows that globalization had been able to help most of developing countries, particularly India and China. The main problem here is that not all of the poor countries are being benefited by the said changes, several studies explains and shows that globalization is connected to inequalities in the local settings and even in the relationship between the countries. The said inequalities focus on the access of the citizens towards education, health and employment. Thus, result to a universal problem, which is poverty.
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