Globalization Trade Growth
This paper takes a closer look at globalization, trade and growth and its impact on the poverty, focused in Latin America. Some countries (regions and economic sectors) have, by and large, managed to take full advantage of globalization, getting the benefits while minimizing the downside risks, while others have not been so fortunate, they have partaken more of the costs than they have received of the benefits. The first part of this document shows differing views on current globalization and their impact on Latina America. Second part aims to explain how Latin America is being affected by its international trade and regional integration and how this dynamics (Globalization and Trade) has impacted different groups differently: while some have benefited enormously, others have borne more of the costs. And, third part reviews the institutional reforms adopted in Latin America (selected countries) in order to reduce negative impacts of Globalization and Trade and its effectiveness.
Globalization and trade, views from Latin America (LA).
At the moment we are living a process on increasing changes at economic, social and cultural level. The globalization offers opportunities for development but challenges for LA economies characterized to have a productive heterogeneity with a high inequality in the income distribution. The globalization is done through pro active national
policies, still more in as heterogeneous economies as ours, because it is incomplete, partial, and unbalanced. (Ffrench Davis, 2002).
Globalization has not been a recent phenomenon; this would date for five centuries already (Ferrer, 1996, Helleiner, 2000), this process is commonly divided in four waves. First wave would include from 1492 to 1870, characterized by colonialism and mercantilism; second wave from 1870 to 1913, characterized by great mobility of financial capitals and labor force, a commercial height based on the reduction of the transport costs, rather than by free trade . The third wave includes from 1945 to 1973, and it was characterized by the effort to develop international institutions of financial and commercial cooperation, and by a remarkable expansion of trade of goods between developed countries, the existence of different models of economic organization and one limited mobility of capitals and labor force. The fourth wave would begin in the las quarter of the 20th century, characterized by a generalization towards the free trade, greater presence of transnational companies, expansion and flood mobility of capitals although it persists the restrictions to the movement of labor force.
Let us turn now to the historical evidence on the impact of Globalization and economic openness on LA inequality, we will look at 20th Century and the third and fourth waves of globalization. The year 1870 marks the start of a phase of increasing integration of post independent Latin America in the Atlantic economy and more generally marks the beginning of the era of “modern economic growth” in the region . Sustained rates of economic growth and an accelerated pace of technological change, demographic growth and urbanization completely transformed the traditional outlook of the Latin American economies.
Since 1870 the average annual per capita growth rates were considerably higher than in the period 1820 1870, with the exception of two decades in the 1930's and 1980's. Consequently, in 2001, the regional average per capita income level was approximately 4.5 times as large as in Sub Saharan Africa (Maddison 2003). According to the World Bank only Haiti and Nicaragua at present should be considered as low income countries, rather than middle income countries (World Bank, World Development Indicators 2006). Therefore, Latin America's growth performance since 1870 has been described in the recent literature as “fairly well” (Bértola and Williamson 2006: p. 11).
On the other hand, the expansion in international trade was remarkable with the ratio of exports to world GDP rising from 3.4% in the period 1870 - 1913 to 45% in 2005. In turn, the flows of Foreign Direct Investment (FDI) in developing countries increased from 4% to 40% between 1950 and 2005. (UNCTAD, 2006; Maddison 1997: Table 13; WDI, 2006). In LA exports grew
In the golden age period (1950 1973), the best performers in terms of rates of growth of GDP per capita were Japan (8.1%), Taiwan (6.7%), South Korea (5.8%), Hong Kong (5.2%), Singapore (4.4%), Germany (5%), Italy (5%), France (4.1%). Convergence of per capita income operated for these countries. In this period there was considerable convergence among western European economies and the OECD with Japan jumping to the group of advanced capitalist economies. For Latin America, the golden age period was the most dynamic in terms of rates of growth GDP compared to previous periods and also compared with the fourth wave of globalization (post 1973). In fact, the average annual rate of growth of per capita GDP in Latin America was 2.6% in 1950 1973 compared with 2.1% between 1974 - 2000.
Globalization has increased the average levels of trade, productivity and income worldwide, if total Latin American national income in the year 2000 would have been evenly distributed among its population, poverty (according to the monetary definition of the World Bank) would have been completely eradicated. In reality more than 129 million people, that is 25% of the total population, were living under the poverty line of two dollar a day, of which nearly 52 million had to survive on less than one dollar a day (World Bank, WDI 2006). Indeed, the problem of poverty in Latin America is intertwined with the problem of income inequality (see charts 1 - 2)
Growth tends to be less pro poor in poor and unequal countries
The classic argument for believing that inequality will rise, more or less inevitably, as poor economies grow is the Kuznets hypothesis (KH), based on pioneering research by Simon Kuznets in the 1950s. This hypothesis states that inequality increases during the early stages of growth in a developing country but begins to fall after some point.
If one focuses solely on the period since the early 1990s, there are signs that a positive correlation is emerging between rising inequality and economic growth. It appears that the recent growth processes seen in many reforming economies have put upward pressure on inequality (data are drawn from the World Bank's PovcalNet and World Development Indicators, 2006). There are exceptions, however, in that growth since the early 1990s has accompanied falling inequality in some countries. Nor is the overall positive correlation in the data after 1990 robust to corrections for measurement errors. As a generalization across country experiences, it still appears that growth tends to be roughly distribution neutral on average.
Given that growth tends to be distribution neutral on average, it is not surprising that many empirical studies have found that measures of absolute poverty tend to fall with growth. The same rate of growth, however, can bring very different rates of poverty reduction. In trying to understand why this is so, it should first be noted that the rate of poverty reduction is the growth rate times the growth elasticity of poverty reduction, or the “growth elasticity” (GE) for short—that is, the proportionate change in the measure of poverty that results from a given rate. A large negative GE reveals that even a modest growth rate can bring rapid poverty reduction. For the US$1 a day poverty rate, the average GE is about -2, meaning that a growth rate of, say, 5 percent in mean household income per capita will reduce the share of the population living below the poverty line by 10 percent a year (in proportionate terms).
High initial inequality makes poverty less responsive to growth. This is intuitive; given that growth tends to be distribution neutral on average, the higher the initial inequality, the less the poor will share in the gains from growth. Unless there is sufficient change in distribution, people who have a larger initial share of the pie will tend to gain a larger share in the pie's expansion. Indeed, among the highest inequality countries, poverty incidence tends to be quite unresponsive to economic growth. Consider a country with a 2 percent rate of growth and a headcount poverty rate of 40 percent. In a low inequality country with a Gini index of 0.30, the poverty rate will fall by about 6 percent a year and be halved in 11 years, on average. By contrast, in a high inequality country with a Gini index of 0.60, growing at the same rate and with the same initial poverty rate, it will take about 35 years to halve the poverty rate. Because poverty responds more slowly to growth in high inequality countries, these countries need unusually high growth rates to achieve rapid poverty reduction.
Poverty incidence also tends also to be less responsive to growth in poor countries. The combined effect of high poverty and high inequality greatly attenuates the growth elasticity of poverty reduction. Recall that the average GE for developing countries is about -2. Among those countries with both high inequality (a Gini index over, say, 0.45) and a high incidence of poverty (a US$1 a day headcount index over, say, 25 percent), the median elasticity falls to about -1, implying that twice the rate of growth will be needed to achieve the same rate of poverty reduction. Contrast this with the set of developing countries fortunate to have both low inequality (a Gini index less than 0.35) and low poverty (a headcount index less than 10 percent). For this group the median elasticity is an impressive -3.4, and even modest growth can result in quite rapid poverty reduction.
2. Opening, Growth and Convergence
The relationship between openness and growth and openness and convergence has been studied in several cross country studies such as Sachs and Warner (1995), Rodriguez and Rodrik (1999), Edwards (1998, 1992), Dollar and Kraay (2001). Sachs and Warner find for the period 1970 1989 strong evidence of convergence in per capita GDP among the group of countries classified as open in their study according to several measures of trade policy including tariff levels, nontariff trade barriers, trade monopolies and foreign exchange black market premium. The authors find the average growth premium for economic opening to be 2.5%age points of additional, annual GDP growth. This is certainly a large number. Sachs and Warner (1995) argue that globalisation brings about accelerated growth for poor countries thereby fostering convergence.
This study (and others) have been criticized by Rodrik and Rodriguez (1999) in the sense that their indicators of openness are poor measures of trade policy and are highly correlated with other sources of bad economic performance. Dowrick and DeLong (2001) investigate the relationship between openness, globalization and convergence extending both the country sample and the time period of the Sachs and Warner study to include the 1990s. Besides they amend some aspects of the definition of openness adopted in Sachs and Werner (1995). For a sample of 96 countries in the period 1960 1998 Dowrick and DeLong find that open economies grew faster by 2%age points than closed economies in the period 1960 1980; this is a lower growth premium from economic openness than the one found in Sachs and Warner for the period 1970 1989. The study of Dowrick and DeLong finds that the growth premium of openness tends to be higher for poorer economies. However, when the exercise is carried out for the period 1980 1998 the growth premium of openness is smaller than in the previous 20 years (the growth premium falls to 1.3 percentage points of additional growth per year) and that poorer countries benefit less from openness than do rich countries, reversing the finding for the period 1960 1980.
Dollar and Kraay (2001) develop a classification of “post 1980 globalisers” that include countries such as China, India, Mexico, Thailand, Malaysia, the Philippines, and found that these countries (after cutting tariffs and integrating effectively to the world economy) have experienced a significant increase in their growth rates in the 1980s and 1990s.19 In contrast, developing countries that do not belong to the “globalising” group had a lower growth performance in the last two decades. The authors use decade over decade changes in trade volumes (as proxy for changes in trade policy) and decade changes in GDP growth rates to investigate the effects of openness on growth. In a data set spanning 100 countries, the authors find that changes in growth rates are positively and highly correlated with changes in trade volumes after controlling for other determinants of economic growth. In addition, the authors find a one to one relationship between the rate of growth of income of the poor (bottom 20% of the population) and the growth rate of per capita income, although with considerable variability in the estimated coefficient. In other words, the changes of share of income of the poorest fifth quintile are not correlated with the rate of growth of mean income. Another important result, is their finding of no systematic relationship between changes in trade and changes in inequality (see figure 7) measured both through the Gini coefficient and the income share of the poor. In summary, these cross country empirical studies find a positive correlation between economic openness and growth and find a sizeable growth premium for countries integrating to international trade. However, the growth premium of openness is not stable over different time periods and becomes weaker for poor countries. No systematic direct relationship between trade and national inequality is found in the analysis.
F. Globalisation and Wage Inequality at National Level
Let's turn now to the impact of globalisation and economic openness on domestic wage inequality. There is considerable empirical documenting a widening of wage differentials in favour of skilled labour and higher income individuals in the 1980s and 1990s in the U.S. and the U.K. This is also a period of increased international economic integration in both economies suggesting a positive correlation between openness and wage inequality. Atkinson (1999) refers as the “Atlantic Consensus” the view that increased import competition from low wage developing countries, coupled with technical change biased to skill labour, has led to a decline in the demandfor low skill labour in industrialized countries mainly the U.S. and U.K.20 and a widening in wage inequality in these economies. The issue has been in subject of much analysis and controversy. Authors like Borjas (1994, 1999) stress the fact that immigration of unskilled labour (from Mexico, Asia and other countries) explains around two thirds of the widening of wage differentials for unskilled workers in the U.S. in the 1980s and 1990s. The other third is explained by a combination of import competition and unskilled labour saving technical change (e.g. the information and computer revolution of the 1990s). Another hypothesis for widening wage inequality is a change in social norms and wage setting patterns away from redistributive payment. Part of the observed wage inequality is socially generated (see Atkinson, 1999).
For developing countries, Wood (1997) contrasts the experience of East Asia in the 1960s and 1970s with that of Latin America in the 1980s and early 1990s to assess the empirical validity of the view that an increase in economic openness in developing countries tend to raise the demand for unskilled labour and thus reduce wage inequality (contrary to the case of industrialized economies we just discussed). The Wood study shows that while East Asia confirms the conventional wisdom and wage inequality declined with increased economic openness, the experience of Latin America points to the contrary. Wage inequality widened in Latin America in the 1980s and early 1990s. The author attributes the differences between the two regions to various factors: differences in the two time periods selected, and structural differences between the two regions regarding natural resource endowments and other characteristics of their respective economic structure. The author highlights two important developments starting in the 1980s that shift the content of trade towards more skilled labour intensity in Latin America. First, the entrance of China and other low income, large Asian economies into the world market for labour intensive manufactures shifting the comparative advantages of middle income countries (e.g. several Latin American countries) into goods of medium skill intensity. As a result, the effect of increased economic openness in Latin America is to reduce the relative demand of low skill labour as sectors of low skill intensity contract. Second, as mentioned before, technical change is biased against unskilled workers.
REFORMS Globalización, Market and Economic Growth
the liberalizadoras reforms of markets that the great majority of the countries of the region undertook during the years 1980s and, particularly 1990s, have generated one decade of maintained growth. It is sure nevertheless, that this period of bonanza can stop if the solution of those problems does not face effective measures that are evident necks of bottle for the growth and, therefore, for the economic development of the country. * * This study leaves from three basic premises that,
although can be discussed, have been used as frame of reference in the analysis that follows. These premises are: ' the Latin American economies will be developed in the future on the base of a system of market like mechanism of allocation of resources and, therefore, the institucionalidad that the country must have will have to look for that this mechanism is most efficient possible and to avoid or to reduce the adverse effects derived from their faults ' the economies of the region will be inserted progressively in a system of globalizada economy, which implies that the countries of the region will have to develop the ability to benefit from this system and the capacity to defend of the possible problems that this globalización causes ' the development of the world wide economy will occur in an increasingly dynamic context and where the change will be the element most characteristic of the interaction between economic agents, industries, and countries. For that reason, the development strategy must privilege the creativity, the enterprise capacity, and the ability to adapt to them. In agreement with these premises, the objective of the study would demand to discuss a quite ample assembly of problems of operation of the economy, the regulations and the institucionalidad of the State. It would demand an exhaustive analysis that, naturally, exceeds the format this work. For that reason, we concentrated ourselves in the problems that, we create, are determining for the future economic growth.
MAJOR FINDINGS
The econometric evidence of cross country studies reviewed in this paper points to a positive association between economic openness and GDP growth and to convergence for open economies versus “closed” economies. However, the growth premium of openness is unstable across time periods (declining in the 1980s and 1990s) and convergence is weak for poor countries. Moreover, the cross country econometric evidence shows no significant effect of international trade on the income share of low income groups for a sample of over 80 developing countries. Methodological problems in measuring openness and controlling for other determinants of economic growth make difficult to establish strong causality from integration to growth in some of the studies reviewed. Individual country studies on the subject are clearly needed to settle some of these questions.
The data shows a widening of wage inequality in the U.S. and the U.K. in the globalization period of the 1980s and the 1990s (part of the anti globalisation constituency in industrialized economies is associated to this fact). Empirical studies for the U.S. find a strong effect of both immigration of unskilled labour and technical progress that saves low skill labour in explaining the most part of increased wage inequality besides import competition from low wage countries. Other explanations for the widening in wage inequality in the U.S. and U.K. point out to a shift in social norms away from redistributive pay in these countries. Studies on wage inequality and trade for Latin America that seek to explain the decline in unskilled wage to skill labour ratios highlight the stiff competition of trade in manufacturing coming from low wage Asian countries.
This paper suggests a simple but important message. That a narrowing of global inequality requires a sustained acceleration in the rates of economic growth of low and middle income regions such as Africa, Eastern Europe and former USSR and Latin America. In turn, rapid economy wide growth in GDP per capita must be accompanied by a decline in domestic inequality to improve the relative income and welfare position of the world's poorIs global income redistribution desirable? Is it feasible? How to redistribute globally? These are important questions. Global redistribution has fallen out of favour in the 1990s after the end of communism and is reflected in the drastic cut in the budget of foreign aid per capita directed to the developing world (by nearly a third in the last decade). A main issue is how to use productively foreign aid in receiving countries to raise their rate of economic growth and provide income support or low income groups rather than finance consumption (or eventually corruption). The whole issue of trade versus aid has to be reassessed stressing the potential complementarity between both concepts.
Global inequalities and slow growth in low income countries are international systemic failures. This requires collective action, at national and international levels, hopefully around a global development contract. A “ global contract” requires a clear agenda for growth and equity at global level, an identification of policy instruments to achieve those goals and the concrete mechanisms of global collective action.
Although national inequalities are particularly resilient and change very slowly over time, there is still room for domestic policies that promote greater equality without hampering economy wide economic growth. Narrowing domestic inequalities also contribute to reduce world inequality.
Conclusion
A sluggish pace of net poverty reduction does not occur because there is no movement out of poverty. It is a result of two large and frequently offsetting trends: large numbers of people are falling into poverty, even as large numbers make their escape. Until poverty prevention is more effectively targeted, poverty reduction will, at best, be a transient gain. These aspects of poverty's fundamentally dynamic nature have come to be understood only quite recently as a critical mass of studies has emerged to track households and individuals over time and examine movements in and out of poverty. As a result, it is now known that many poor people—the majority in some cases—were not born poor, nor have they always been poor. Many have become poor within their lifetimes. On the other hand, many others who were poor in the past have risen out of this state in recent times, and yet others are on the cusp of escaping poverty.
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[2] Esta fase se ve interrumpida por la primera guerra mundial y después por la depresión de 1929.
[3] Una de ellas es la profundización financiera para el desarrollo económico enfatizada por teóricos como Mckinnon (1973) y Shaw (1973). Ambos propiciaron los peligros de la “represión financiera” y pronunciándose por la máxima liberalización financiera.
