Globalization and Poverty
edited by Ann Harrison
University of Chicago Press, 2007
Cloth: 978-0-226-31794-6 | Electronic: 978-0-226-31800-4


Over the past two decades, the percentage of the world’s population living on less than a dollar a day has been cut in half. How much of that improvement is because of—or in spite of—globalization? While anti-globalization activists mount loud critiques and the media report breathlessly on globalization’s perils and promises, economists have largely remained silent, in part because of an entrenched institutional divide between those who study poverty and those who study trade and finance. 

Globalization and Poverty bridges that gap, bringing together experts on both international trade and poverty to provide a detailed view of the effects of globalization on the poor in developing nations, answering such questions as: Do lower import tariffs improve the lives of the poor? Has increased financial integration led to more or less poverty? How have the poor fared during various currency crises? Does food aid hurt or help the poor?

Poverty, the contributors show here, has been used as a popular and convenient catchphrase by parties on both sides of the globalization debate to further their respective arguments. Globalization and Poverty provides the more nuanced understanding necessary to move that debate beyond the slogans.


Ann Harrison is professor of agricultural and resource economics at the University of California, Berkeley, and a research associate of the NBER.


IV. Other Outcomes Associated with Globalization


- Ann Harrison
DOI: 10.7208/chicago/9780226318004.003.0001
[globalization, trade, poor, poverty, capital flows]
This book shows that globalization has been linked with rising inequality, and that the poor do not always share in the gains from trade. The poor in countries are more likely to share in the gains from globalization when there are complementary policies in place. Additionally, globalization produces both winners and losers among the poor. This book addresses some issues linked with measuring both poverty and globalization. The theoretical links between trade and poverty outcomes, and the results from the cross-country studies and the results of the country case studies are evaluated. Studies that address the influence of capital flows on the poor are summarized. A discussion of why globalization's critics seem all too aware of the costs of globalization and generally fail to see the benefits is then presented. Finally, an overview of the chapters included in this book is given. (pages 1 - 30)
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I. Global (Cross-Country) Analyses

- Emma Aisbett
DOI: 10.7208/chicago/9780226318004.003.0002
[globalization, poverty, inequality, trade reform, poor]
This chapter explains both the “what” and the “why” of common criticisms of globalization's record on poverty and inequality. It is argued that this continued criticism is due to several factors: the use of different methodologies in estimating poverty and inequality, the concerns of the critics of globalization about the short-term costs versus the longer-term gains from trade reform, their rejection of a perfectly competitive framework, and different interpretations regarding the evidence. The opinions of the poor seem to suggest that the influence of globalization on their lives is less positive than measures of changes in their average income would suggest. It appears that the difference of opinion between globalization's supporters and critics can be largely explained by differences in prior views and priorities, as well as current ambiguities in the empirical evidence. (pages 33 - 86)
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- Donald R. Davis, Prachi Mishra
DOI: 10.7208/chicago/9780226318004.003.0003
[trade, poverty, liberalization, wages, quasi-Stolper-Samuelson effects, economic geography, labor market]
This chapter explores theoretical linkages between trade and poverty. It is argued that applying trade theory to suggest that liberalization will raise the wages of the unskilled in unskilled abundant countries is “worse than wrong—it is dangerous.” Trade liberalization with respect to competing goods produces quasi-Stolper-Samuelson effects. Trade liberalization against a good that is a poor substitute for a local variety will affect local factor prices only weakly. Economic geography is one of the most important analytic developments in the study of trade of the 1990s. It is shown that there are dynamic gains even for the country that in the long run will have a lower per capita income as a result of trade. With markets imperfect, both the level and the location of innovation can be nonoptimal. Labor market rigidities may explain why declining industries find it hard to fire workers. (pages 87 - 108)
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- William Easterly
DOI: 10.7208/chicago/9780226318004.003.0004
[globalization, poverty, neoclassical growth model, poor country, trade, capital inflows, capital, land wealth, inequality]
This chapter investigates the theoretical linkages between globalization and poverty, but in the context of a neoclassical growth model. It shows that globalization could impact the incomes of the poor. Interesting interactions between trade and factor flows arise from the unconventional productivity view of comparative advantage. The poor country attracts capital inflows under globalization both because capital is scarce in the poor country and because land wealth implies a higher marginal product of capital. Globalization decreases world poverty if income differences are due to differences in factor endowments, while the effects of globalization are null or ambiguous if income differences are due to productivity differences. Trade reduces inequality in rich countries. The trade and inequality relationship requires understanding the productivity differences associated with trade. Globalization is less important for the well-being of the poor than the process of productivity growth. (pages 109 - 142)
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- Branko Milanovic, Lyn Squire
DOI: 10.7208/chicago/9780226318004.003.0005
[interindustry inequality, interoccupational wage inequality, globalization, tariffs, liberalization]
This chapter constructs some measures of both interindustry and interoccupation wage inequality using detailed information on wages across occupations and industries. It shows that globalization, measured using average tariffs, leads to rising inequality in poor countries and falling inequality in rich countries. The effect of liberalization may differ depending on the initial conditions of the liberalizing country. Decreases in protection and increases in occupational wage inequality may be related. Reduction of the average tariff rate will tend to contribute to interindustry inequality more in countries with higher trade union density. The empirical results provide weak support for the hypothesis that a reduction of tariffs tends to be associated with an increase in interoccupational wage inequality and somewhat stronger support that reduction in tariffs is associated with an increase in wage inequality between industries. (pages 143 - 182)
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- Margaret McMillan, Alix Peterson Zwane, Nava Ashraf
DOI: 10.7208/chicago/9780226318004.003.0006
[agriculture, poverty, Organization for Economic Cooperation and Development, support policies, poorest countries, U.S., Mexico, corn]
This chapter employs cross-country data to measure the impact of Organization for Economic Cooperation and Development (OECD) support policies for agriculture on poverty. The poorest countries are net exporters of all agricultural products. Depressed prices for food products may hurt middle-income countries but help the poorest and richest developing countries. There is no evidence in the regression analysis that OECD policies help or hurt the poor. It appears unlikely that U.S. corn subsidies are driving poverty in Mexico unless one takes the stand that U.S. corn farmers as an interest group were largely responsible for the North American Free Trade Agreement (NAFTA). The majority of the poorest corn farmers did not sell corn in the market prior to NAFTA. Although the price of corn is no longer directly supported by the Mexican government, transfer payments to corn farmers at all levels of income increased substantially between 1991 and 2000. (pages 183 - 238)
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II. Country Case Studies of Trade Reform and Poverty

- Pinelopi Koujianou Goldberg, Nina Pavcnik
DOI: 10.7208/chicago/9780226318004.003.0007
[tariffs, Colombia, urban labor market, minimum wage compliance, poverty, Colombian trade reforms, Colombian economy, unemployment, informal-sector employment]
This chapter examines the impact of a large reduction in average tariffs in Colombia between 1984 and 1998 on a variety of urban labor market outcomes: the probability of becoming unemployed, minimum wage compliance, informal-sector employment, and the incidence of poverty. The Colombian trade reforms indicate that the cross-sectional variation in tariff changes provides an appealing policy experiment to study how trade policy changes have affected the Colombian economy. Poverty in urban Colombia is highly correlated with unemployment. The chapter shows that the trade policy affected the probability of becoming unemployed. The poverty reduction observed between 1986 and 1994 cannot be attributed to trade-policy-induced changes in informality or to minimum wage compliance. Thus, the descriptive results establish that poverty in urban areas is highly linked with unemployment, employment in the informal sector, and noncompliance with minimum wages. (pages 241 - 288)
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- Petia Topalova
DOI: 10.7208/chicago/9780226318004.003.0008
[trade reform, India, poverty, trade liberalization, tariff, labor laws]
This chapter evaluates the impact of trade reform in India on poverty. It suggests that the rural poor gained less from the trade reforms than other income groups or the urban poor. It also illustrates that trade liberalization led to an increase in the poverty rate and the poverty gap in the rural districts where industries more exposed to liberalization were concentrated. In addition, the differential tariff changes across industries between 1991 and 1997 were as unrelated to the state of the industries as can be reasonably hoped for in a real-world setting. The most pronounced effects on poverty occurred in areas with inflexible labor laws (those that saw no change in industrial structure in response to trade liberalization) while inequality rose as a result of trade liberalization in areas with flexible labor laws. (pages 291 - 336)
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- Chor-ching Goh, Beata S. Javorcik
DOI: 10.7208/chicago/9780226318004.003.0009
[trade protection, tariff, wages, Poland, workers, industry, employment, private sector]
This chapter explores the link between tariff changes and the wages of workers in Poland. The data indicate that workers in sectors that experienced the largest tariff declines experienced the highest increases in wages. Workers in industries with lower tariffs tended to have higher wages. In addition, industries with a greater reduction in tariffs are those with higher proportions of the unskilled. Industry tariffs are negatively correlated with workers' hourly wages, controlling for an individual worker's characteristics, geographic variables, and employment in the private sector. Lower trade protection in Poland has been associated with higher wages for the employed. In general, the results show that a worker's wages are higher in industries with a larger reduction in trade protection, after controlling for the individual worker's characteristics, such as age, education, gender, marital status, geographic variables, and employment in the private sector. (pages 337 - 369)
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- Jorge F. Balat, Guido G. Porto
DOI: 10.7208/chicago/9780226318004.003.0010
[wages, Zambia, trade, poverty, cotton, tobacco, maize, rural employment, market agriculture]
This chapter states that wages in Zambia accounted for only 6 percent of income for the rural poor in 1998. It specifically examines the links between trade, complementary policies, and poverty observed in Zambia during the last decade, and explores how new trade alternatives may bring about poverty alleviation in the future. Significant differences in the poverty rates across the regions are shown. As in the cases of cotton, tobacco, and maize, the magnitudes of the gains observed suggest that rural employment in commercial farms could be a good instrument for poverty alleviation. Moreover, the increase in market agriculture is associated with the observed increase in exports of nontraditional agricultural products. Rural Zambians would gain substantially from expanding world markets, particularly in terms of cotton, tobacco, and maize income as well as wage income. (pages 373 - 412)
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- Gordon H. Hanson
DOI: 10.7208/chicago/9780226318004.003.0011
[globalization, Mexico, labor income, labor earnings, wage poverty]
This chapter investigates the different outcomes for individuals born in Mexican states with high exposure to globalization versus individuals born in states with low exposure to globalization between 1990 and 2000. High exposure to globalization does not indicate high exposure to emigration. In Mexico regions, more exposed to globalization have done better in terms of income growth. During Mexico's globalization decade, individuals born in states with high exposure to globalization appear to have done much better than individuals born in states with low exposure to globalization. Thus, they did relatively well in terms of their labor earnings. Labor income in low-exposure states fell relative to high-exposure states by 8–12 percent, and the incidence of wage poverty increased in low-exposure states relative to high-exposure states by 7 percent. (pages 417 - 452)
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III. Capital Flows and Poverty Outcomes

- Eswar S. Prasad, Kenneth Rogoff, Shang-Jin Wei, M. Ayhan Kose
DOI: 10.7208/chicago/9780226318004.003.0012
[capital flows, economic growth, poverty, macroeconomic volatility, poor households, financial globalization, developing countries]
This chapter states that both developed and developing countries have become increasingly open to capital flows, measured using either policy instruments such as capital controls or ex post capital flows. Economic growth has been the most reliable source of poverty reduction. An increase in macroeconomic volatility tends to decrease the well-being of poor households. The data shows that countries that are in the early stages of financial integration have been exposed to significant risks in terms of higher volatility of both output and consumption. The composition of capital inflows and the maturity structure of external debt appear to be linked with higher vulnerability to the risks of financial globalization. The data generally support the importance of employing various complementary policies to increase the benefits of globalization for the poor. (pages 457 - 509)
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- Duncan Thomas, Elizabeth Frankenberg
DOI: 10.7208/chicago/9780226318004.003.0013
[financial crisis, poor, Indonesia, poverty, wages, household, income distribution, human capital, Indonesia Family Life Survey]
This chapter explores the impact of financial crisis on the poor in Indonesia. It demonstrates that in the first year of the crisis, poverty rose by between 50 and 100 percent, real wages declined by around 40 percent, and household per capita consumption fell by around 15 percent. The crisis affected the poorest, the middle-income households, and households in the upper part of the income distribution in Indonesia. The financial crisis was accompanied by large changes both in the absolute price level and in relative prices. The evidence on human capital investments indicates that as the crisis unfolded, several dimensions of education and health were deleteriously affected, with the poorest and most vulnerable paying the biggest price in several important dimensions of human capital. The empirical evidence in the Indonesia Family Life Survey (IFLS) indicates that the crisis led in a dramatic decline in the standard of living. (pages 517 - 560)
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- James Levinsohn, Margaret McMillan
DOI: 10.7208/chicago/9780226318004.003.0014
[food aid, Ethiopian rural grain, rural poor, households, income, wheat, food prices]
This chapter provides a study on Ethiopian rural grain producers. It examines the effect of food aid on both consumption and production by the rural poor. The data show that households at all levels of income benefit from food aid and that the benefits go disproportionately to the poorest households. Additionally, the net buyers of wheat are poorer than net sellers of wheat. There are also more buyers of wheat than sellers of wheat at all levels of income and the proportion of net sellers is increasing in living standards. The net benefit ratios are higher for poorer households, indicating that poorer households benefit proportionately more from a drop in the price of wheat. Although households at all levels of living standards benefit from a reduction in food prices, the benefits are proportionately larger for the poorest households. (pages 561 - 596)
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- Ethan Ligon
DOI: 10.7208/chicago/9780226318004.003.0015
[globalization, household welfare, China, estimated model, economy, consumption inequality, Lorenz curves]
This chapter discusses the consequence of globalization on household welfare in China. It also uses evidence on changes in the cross-sectional distribution of consumption to draw inferences about the welfare of households. The estimated model predicts that inequality will continue to increase in China through 2025, but at a relatively slow rate. The risk borne by households depends much more on households' resources than it does on the year—even though there are enormous changes in China's aggregate economy over this period, idiosyncratic risk is much more important than any aggregate shock in determining household welfare and in determining the evolution of inequality over time. The estimates of the law of motion governing the Lorenz curves for urban China permit the predictions about future consumption inequality. (pages 599 - 628)
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- James Levinsohn
DOI: 10.7208/chicago/9780226318004.003.0016
[globalization, incomes, South Africa, speaking English, economy, Whites, Blacks, Coloreds, language]
This chapter addresses a different approach to measuring the impact of globalization on incomes in South Africa. South Africa quickly implemented a policy of macroeconomic stabilization to reassure the international financial community. It is shown that the return to speaking English increased for Whites over the period during which South Africa reintegrated with the world economy. There is also less evidence that the return to speaking English increased among Blacks and Coloreds. On the whole, the return to speaking English increased, but within racial groups the pattern is not consistent. Even if language is an accurate way to isolate the impact of globalization on wages, it may simply be that globalization has differing impacts on differing segments of a population. (pages 629 - 644)
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Author Index

Subject Index