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Foreign Affairs
Spreading the Wealth
By David Dollar and Aart Kraay
David Dollar and Aart Kraay are economists at the World Bank's Development Research Group. The views expressed here are their own.
A Rising Tide
One of the main claims of the antiglobalization movement is that globalization is widening the gap between the haves and the have-nots. It benefits the rich and does little for the poor, perhaps even making their lot harder. As union leader Jay Mazur put it in these pages, "globalization has dramatically increased inequality between and within nations" ("Labor's New Internationalism," January/February 2000). The problem with this new conventional wisdom is that the best evidence available shows the exact opposite to be true. So far, the current wave of globalization, which started around 1980, has actually promoted economic equality and reduced poverty.
Global economic integration has complex effects on income, culture, society, and the environment. But in the debate over globalization's merits, its impact on poverty is particularly important. If international trade and investment primarily benefit the rich, many people will feel that restricting trade to protect jobs, culture, or the environment is worth the costs. But if restricting trade imposes further hardship on poor people in the developing world, many of the same people will think otherwise.
Three facts bear on this question. First, a long-term global trend toward greater inequality prevailed for at least 200 years; it peaked around 1975. But since then, it has stabilized and possibly even reversed. The chief reason for the change has been the accelerated growth of two large and initially poor countries: China and India.
Second, a strong correlation links increased participation in international trade and investment on the one hand and faster growth on the other. The developing world can be divided into a "globalizing" group of countries that have seen rapid increases in trade and foreign investment over the last two decades — well above the rates for rich countries — and a "nonglobalizing" group that trades even less of its income today than it did 20 years ago. The aggregate annual per capita growth rate of the globalizing group accelerated steadily from one percent in the 1960s to five percent in the 1990s. During that latter decade, in contrast, rich countries grew at two percent and nonglobalizers at only one percent. Economists are cautious about drawing conclusions concerning causality, but they largely agree that openness to foreign trade and investment (along with complementary reforms) explains the faster growth of the globalizers.
Third, and contrary to popular perception, globalization has not resulted in higher inequality within economies. Inequality has indeed gone up in some countries (such as China) and down in others (such as the Philippines). But those changes are not systematically linked to globalization measures such as trade and investment flows, tariff rates, and the presence of capital controls. Instead, shifts in inequality stem more from domestic education, taxes, and social policies. In general, higher growth rates in globalizing developing countries have translated into higher incomes for the poor. Even with its increased inequality, for example, China has seen the most spectacular reduction of poverty in world history — which was supported by opening its economy to foreign trade and investment.
Although globalization . . .