Globalization, growth, and poverty: the missing link

The Authors

Ibrahim F. Akoum, Arab Monetary Fund, Abu Dhabi, United Arab Emirates

Abstract

Purpose – To review the literature on the relationship between growth, globalization, and poverty, and present empirical evidence on whether countries registering high growth rates do necessarily succeed in reducing the incidence of poverty.

Design/methodology/approach – Notwithstanding data and methodological problems cited in the literature, this paper makes an effort to quantitatively examine the issue of statistical correlation between growth and poverty variables, through regressing the share of population in poverty on growth rates of countries for which data is available from World Bank surveys.

Findings – The paper concludes that countries registering high growth rates do not necessarily succeed in reducing poverty, thereby, holding that a wide-ranging policy approach could be more effective in poverty reduction than the broad-based growth policy approach.

Originality/value – The debate among academics and practitioners over the causal relationship between growth and poverty has not rendered any conclusive evidence that growth is a sufficient condition for reducing poverty, hence the difficulty facing policy makers on the most effective approach for poverty reduction. This paper is an attempt to contribute to this debate and assessing whether to embrace the broad-based growth or pro-poor growth policies.

Article Type:

Research paper

Keyword(s):

Poverty; Globalization; Economic growth.

Journal:

International Journal of Social Economics

Volume:

Number:

Year:

2008

pp:

226-238

Copyright ©

Emerald Group Publishing Limited

ISSN:

0306-8293

Introduction

Poverty amid plenty is the world's greatest challenge (James D. Wolfensohn, Former World Bank President).

Eradicating poverty is an ethical, social, political and economic imperative of humankind (UN General Assembly, 1996).

Many first-rate globalizers have fifth-rate records on poverty reduction (Watkins, 2002).

Growth and poverty reduction are supposedly the ultimate goals of all development endeavors. International development, financial, and trade organizations, as well as practitioners and academics in this field attest to this assertion. For example, the World Bank holds that its mission is to fight poverty and put it at the center of all the work it undertakes (World Bank, 2001, p. v). On its part, the World Trade Organization (WTO, 2005) contends that its goal is to improve the welfare of the peoples of the member countries, through promoting trade liberalization, the result of which is a more prosperous, peaceful, and accountable economic world.

Even the International Monetary Fund (IMF), which is supposedly a monetary rather than a development institution, has commenced actively working toward poverty reduction in the past few years, through the provision of financial support via its concessional lending facility, the Poverty Reduction and Growth Facility (PRGF), and debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. In most low-income countries, IMF's support is underpinned by Poverty Reduction Strategy Papers (PRSP), which are prepared by country authorities to describe a comprehensive framework that is being implemented to promote growth and reduce poverty in the country (IMF, 2006).

As is the case in most economic fields of study, there have been varying assessments of the progress made so far on poverty eradication, and of the adequacy of varying approaches advocated by academics and practitioners towards achieving this goal. The literature is ample with studies supporting both differing schools of thought. Yet, there is limited scientific consensus on the causes and the appropriate policies needed to help achieve growth and poverty reduction (Bird, 2004). This paper reviews some of the literature and empirical research on this subject and presents quantitative evidence that growth by itself is not a sufficient condition for poverty alleviation.

The paper will present in the next section a quick overview of the contrasting claims on the progress in poverty reduction. It will then present the broad-based growth and pro-poor growth approaches to poverty, followed by a section containing a quantitative analysis of the causal relationship between growth and poverty. The paper concludes with some policy implications.

Poverty eradication record: contrasting claims

Different claims have been heard within the development community about how just much progress has been made against poverty (Ravallion, 2003). As a matter of fact, research has presented conflicting arguments and estimations, with some claiming that overall poverty is on the decline, while others claim otherwise.

The World Bank's (2001, p. 21) figures show that between 1987 and 1998 the share of the population in developing and transition economies living on less than $1 a day fell from 28 percent to 24 percent. Further, it is estimated that the number of the poor in the world were 200 million fewer in 1998 than in 1980 (World Bank, 2002). The millennium development goals (MDGs) web site portal's estimates reveal that the proportion of people living on less than $1 a day has fallen to about 19 percent in 2002 from nearly 28 percent, its level in 1990, and that in 2001 there were 100 million fewer people living in poverty than in 1990. Chen and Ravallion (2004, p.1) estimate that there were almost 400 million fewer people living in poverty in 2001 than 20 years earlier, adding that if the trends over 1981-2001 continue then the aggregate $1 per day poverty rate for 1990 will be almost halved by 2015.

However, many others take issue with these findings and present contrary estimates to support their argument that the international community seems incapable of coming to grips with the poverty menace and thereby reach the goal of halving poverty by 2015, as agreed in 2000 by the United Nations, as a main component of the MDGs.

Questioning the empirical basis of the neoliberal argument, Wade (2004, p. 572) considers that the World Bank's poverty estimates contain a large margin of error for a number of reasons mainly that poverty headcount is very sensitive to the precise level of the international poverty lines and to the reliability of household surveys, especially that the bank introduced a new methodology in 1990, making comparisons with previous estimates unreliable. Deaton (2002) presented a similar argument.

The United Nations Conference on Trade and Development (UNCTAD, 2006, p. 31) suggests that the incidence of poverty did not decline in the 1990s in the least developed countries (LDCs) as a group and has remained at 50 percent of the total population, and that if this trend continues, the number of people living in poverty in the LDCs will increase from 334 million in 2000 to 471 million in 2010.

The Human Development Report 2005 (UNDP, 2005, pp. 3-4) offers a more somber picture stating that about 2.5 million people live on less than $2 a day (40 percent of the world's population), 10.7 million children every year do not make it to their fifth birthday, and in 2003 the HIV/AIDS pandemic claimed three million lives and left five million more people infected, and the MDG target of universal primary education will be missed on current trends. On its part, the World Health Organization (WHO, 2006, p. 16) estimates that some diseases associated with a lack of access to safe drinking-water and inadequate sanitation results in nearly 1.7 million deaths annually.

Beyond statistics

These essential arguments with respect to just how much poverty has been reduced have been associated with equally vital discussions on what economic policies are most effective in combating poverty and achieving the MDGs goal of halving extreme poverty by 2015. There are primarily two main strands of thought, one of which presents globalization and economic growth as the ultimate answer for poverty reduction, while the other contends that growth alone has not been a panacea.

It would be expedient here to emphasize the fact that both sides acknowledge the shortcomings of the data, statistics, and methodologies used and that underpin their policy inferences, hence the need for a more focused approach on such an important matter. And regardless of the various statistics on the number of people still in poverty, all agree that more ought to be done in this regard. Eradicating poverty is an ethical, social, political and economic imperative of humankind (UN General Assembly, 1996). It is only in this spirit that the issue of poverty eradication can be adequately tackled, for economic theory alone can neither explain nor come to grips with poverty and inequality. It is not simply scarcity of resources that is plaguing the poor, but it is rather the misuse of resources and their improper distribution.

Nevertheless, the scope of this paper is limited to the economic aspect of poverty alleviation, in particular, the forces of globalization and growth, with regard to their impact on poverty.

Broad-based growth advocates

The broad-based growth proponents claim that poverty is on the decline, due primarily to the forces of globalization and the growth it engenders. In other words, they accord great importance to globalization as a prime and cogent force behind growth and in the fight against poverty.

To them, the process of globalization is considered as a crucial engine of growth and unprecedented gains in human welfare over the past 50 years, through the spread of knowledge, better division of labor, increased productivity, and access to foreign direct investment (Köhler, 2002). It is argued that globalization, in way of free trade and open capital markets has been instrumental in producing an optimal allocation of the world's resources (Krueger, 2002), and that it has boosted incomes and helped raise living standards in many parts of the world (Aninat, 2002). A large body of the IMF literature backs this opinion (Masson, 2001).

The World Bank (2000, p. 5) espouses an identical view holding that globalization, through its impact on growth, has played an important catalytic role in global prosperity and in lifting more people out of poverty in the past century, than in all of human history. It asserts that it is not openness, but rather the lack of it is what increases inequality between countries, citing that closed developing economies have performed much more poorly than more open ones.

The World Development Report maintains that growth in the 1980s and 1990s was a powerful force for reducing income poverty (World Bank, 2001, p. 47) and that evidence confirms that economy-wide growth improves the incomes of poor people and, in the longer run, reduces non-income poverty (World Bank, 2001, p. 32). The World Bank (2004, pp. 2-3) later on repeats this argument with a caveat, that is economic growth will not be enough to reach the MDGs and that greater resource transfers to the developing countries, along with better policies and institutions in these countries, are needed to enhance productivity of domestic and external resources.

In the same line of reasoning, Dollar (2005, p. 155) argues that poverty reduction in low-income countries is very closely related to growth rates and that the accelerated growth rates in these countries have led to unprecedented poverty reduction. Likewise, Berg and Krueger (2003, p. 3) affirm that changes in average per capita income are the main determinants of changes in poverty. Emphasizing the impact of trade, the WTO (2000) affirms that trade liberalization is generally a strongly positive contributor to poverty alleviation.

Supporting these findings (Dollar and Kraay, 2001, p. 27), confirm that there is no evidence that more openness and trade is associated with increased inequality. Maintaining that there is no systematic relationship between changes in trade volumes and changes in household income inequality, they conclude that the evidence supports the view that open trade regimes lead to faster growth and poverty reduction in poor countries. This is also affirmed by Berg and Krueger (2003, pp. 37-9) who examined the impact of trade policy on poverty reduction and concluded that trade openness does not have systematic effects on the poor beyond its effects on overall growth, and that evidence supports the view that trade openness contributes greatly to growth. Hence, the relationship between poverty and openness is determined through growth.

Pro-poor growth advocates

In contrast with the broad-based growth views, the pro-poor growth proponents, while recognizing the necessary role played by openness and growth, maintain that this does not constitute a sufficient condition for poverty reduction. They suggest a broader approach which includes social, economic, and political dimensions, arguing that focusing exclusively on economic growth and income generation as a development strategy is ineffective as it deepens the poverty of many and does not acknowledge intergenerational transmission of poverty (United Nations, 2005, p. 1).

Klasen (2005, p. 5) concurs that while economic growth is the basis for increasing national income, it does not necessarily result in poverty reduction since policies that merely concentrate on growth may only be looking at a part of the development problem. Laying emphasis on the significance of equity in this regard, the UNDP (2005, p. 53) asserts that extreme inequality is not just bad for poverty reduction but it is also bad for growth, and long-run efficiency and greater equity can be complimentary.

The World Development Report (World Bank, 2004, p. 2) maintains that although the world as a whole is on track to eradicate extreme poverty, primarily in China and India, the world is off track in reaching the other goals related to non-income poverty.

Further, the World Bank's MDGs portal, despite its estimates showing reduction in the numbers of the poor, it concedes that in many regions the number of hungry people continues to grow, and progress in eradicating hunger and reducing rates of undernourishment have been too slow in most regions to reach the MDGs target (MDGs portal, http://ddp-ext.worldbank.org/ext/GMIS/gdmis.do?siteId=2&goalId=5 &menuId = LNAV01GOAL1).

Thus, advocates of pro-poor growth generally question the wisdom that trade liberalization and greater openness is the way towards greater growth and poverty eradication. Examining the financial integration aspect of openness, Prasad et al. (2003, p. 5) concludes that “if financial integration has a positive effect on growth, there is as yet no clear and robust empirical proof that the effect is quantitatively significant.”

Stiglitz (1999) argues that too often the benefits of development have not been evenly shared in countries during the boom and growth periods and that economic growth does not help the poor much in countries where distribution of wealth is highly unequal. Accordingly, Stiglitz (2002, p. 8) faults the way globalization has been managed, arguing that in too many instances, its benefits have been less than its advocates claim. Further yet, Stiglitz (2002, p. 248) warns that if globalization continues to be conducted in the way that it has been in the past, then it will not only fail in promoting development but it will also continue to create poverty and instability.

Elaborating on this argument, an UNCTAD study (Rowthorn and Kozul-Wright, 1998, p. 31) takes issue with the “Washington Consensus” and the claim that globalization has rendered domestic determinants of growth subordinate to international economic forces and that it is the primary factor of income convergence across the global economy. The study concludes that empirical evidence in support of the globalization thesis is very weak. The report concludes that:

… the successful economies of East Asia, far from illustrating the virtue of rapid liberalization and unfettered global market forces, confirm the complexities of policy making in an interdependent world.

Some has been more blunt in their criticism of the negative repercussions of globalization, stating that current practices in international trade are reinforcing income inequalities. For instance, Watkins (2002) holds that realities in some Latin American and Asian countries do not fit well with the argument that globalization is working for the poor. Citing Latin America as a striking example, he notes that the region have liberalized imports far more rapidly than in any other region, turning as a model of trade openness, but the returns in terms of poverty reduction have been abysmal. As insightfully put by Watkins:

Countries such as China, Thailand, and Vietnam may be premier globalizers. They also have a strong record on economic growth and poverty reduction. Yet, they have liberalized imports very slowly and still have relatively restrictive trade barriers. Conversely, countries such as Brazil, Haiti, Mexico, Peru, and Zambia have been world-beaters when it comes to import liberalization, but have a weak record on growth and poverty reduction. In short, many first-rate globalizers have fifth-rate records on poverty reduction.

Viewing globalization as an uneven process that leads to a growing gap between the rich and the poor, (Khor, 2000) faults it for engendering economic losses, social dislocation, growing inequalities, and even the erosion of independent national policy-making capacity.

Fortunately, the debate over the impact of globalization and growth on poverty and income inequality has not been entirely polarized. For example, between the extreme view insisting that globalization, through growth, has increased world prosperity and reduced poverty, and the opposing extreme view blaming globalization for increasing poverty and perpetuating economic dependence of poor countries, there is a large continuum, along which numerous points of views belong. Globalization is not in itself a folly (Sen, 2001); it can be a force for good and has the potential to benefit all, including the poor (Stiglitz, 2002).

The following section attempts to empirically examine the extent to which economic growth is associated with poverty reduction indicators.

Methodology

It is expedient at the outset to lay emphasis on the intricate conceptual and methodological problems, as well as data limitations confronting researchers and statisticians in their attempts to devise estimates of the number of people below poverty lines. The significance of this issue stems from the fact that it greatly influences the researchers' inferences and policy recommendation. Ravallion (2003) attributes the differing views in this debate to differences in the concepts and definitions used, as well as differences in data sources and measurement assumptions.

For instance, the quality of poverty estimates reported in the WDR 2000/2001, was questioned by many researchers. For example, (Pogge and Reddy, 2006) contended that the bank's estimates of the extent, distribution and trend of global income poverty are neither meaningful nor reliable and that the systematic distortions introduced in the measurement methodology likely leads to a large understatement of the extent of global income poverty and to an incorrect inferences that it has declined. Dollar and Kraay (2001, p. 27) admit that there are substantial difficulties in comparing income distribution data across countries, along with a variety of econometric difficulties. Milanovic (2002) presents similar difficulties. Arguing that world poverty may or may not have increased since the 1990 and that this assessment is critically dependent on the assumptions made, Reddy and Minoiu (2006) conclusions highlight the importance of improving global poverty statistics.

Notwithstanding data and methodological problems, this paper makes an effort to answer some questions related to the issue of correlation between growth and poverty variables. In particular, I will investigate the patterns of poverty incidence and GDP growth by answering the following three questions:

Do countries with higher real GDP growth rates have lower shares of population in poverty than countries that register negative or low growth rates?
Do countries that register real GDP growth rates reduce the share of population in poverty over time?
Does economic growth impact urban and rural poverty differently?

The evidence presented in this study indicates that the answer for the three above stated questions is negative.

As shown in Figure 1, I regressed the share of population in poverty on growth rates in countries for which data are available for both variables. The results did not show any evidence that countries with higher GDP growth rates have lower percentages of the population living in poverty. In this exercise, I used the poverty data reported in the world development indicators (WDI) of the World Development Report 2000/2001, which summarize the results of surveys conducted to measure the share of the population living below the national poverty line. And since poverty surveys for different countries have been conducted at different years, I regressed the share of population living below poverty in each particular country on the average annual GDP growth of the country during the last five years preceding the year in which the poverty survey had been conducted. Gross domestic product data series was obtained from the online database of the WDI of the World Bank.

The results indicate that many countries with relatively high average annual GDP growth rates have had relatively higher shares of the population in poverty than many countries with low growth rates or even countries that registered significant decline in gross domestic product. For instance, countries like India, Honduras, Malawi, Niger, Vietnam, Guatemala, Lesotho, Nepal, and El Salvador registered relatively high average annual GDP growth rates ranging between around 3.5 percent (Niger) and 6.9 percent (Vietnam), while the share of population in poverty in these countries was high with a range between 41 percent (India) and 63 percent (Niger).

By contrast, countries like Ukraine, Russia, Moldova, Estonia, and Belarus with GDP declining at an average rate ranging between 7.4 percent (Estonia) and 16.7 percent (Ukraine) have much lower shares of population in poverty such as 31.7 percent in Ukraine and as low as 8.9 percent in Estonia.

Likewise, Figures 2 and 3 show a similar pattern in the rural and urban areas, showing that economies with higher growth rates do not have lower shares of population in poverty in rural or urban areas.

Regarding the question of whether countries that register GDP growth rates tend to witness reduction in the share of population in poverty over time, Figure 4 shows that there is no indication that this is the case. Using the World Development Report 2000/2001 data on poverty for countries for which two poverty surveys are available, I plotted each country's average annual GDP growth rate registered between the two surveys against the percentage point change of population in poverty. The results of this exercise show that in some countries growth has been associated with a reduction in the share of population in poverty, while in others growth has been associated with an increase in the share of population in poverty.

For example, as shown in Table I, in Bangladesh two surveys were conducted the first of which in 1990-1991 and the second in 1995-1996. Despite the fact that real average annual GDP growth rate was about 4.6 percent during the period between the two surveys (1990-1996), the share of population below national poverty line rose drastically from 24.7 percent to 35.6, that is nearly 11 percentage points higher in 1995-1996 than it was in 1990-1991. On the other hand, in Jordan two surveys were conducted in 1991 and 1997, and during this period an average annual GDP growth of about 6.3 percent was associated with a decline in the share of population below national poverty line from 15 percent to 11.7 percent, respectively, which represents a decline of about 3.3 percentage points.

Table I also shows that, out of the twenty countries for which data was available for this exercise, I found that only in 11 countries an increase in GDP growth has been associated with a reduction in the share of population below the national poverty line. On the contrary, in Algeria, Bangladesh, Colombia, Honduras, Morocco, and Zambia, growth was associated with an increase in the share of population below the national poverty line.

Conclusion and policy implications

It is important to note that the lack of enough data on poverty, in addition to the substantial technical problems associated with measuring poverty in the first place, do not allow one to make conclusive statements regarding the results of this study, or any similar study for that matter. To avoid falling in the fallacy of composition, definite and more accurate answers require in depth country-specific case studies. Nevertheless, simple statistical methods used in this paper support the arguments that higher economic growth rates are not necessarily translated into lower poverty rates.

What is of great significance though is that due to the lessons imparted by the financial crises, notably the ones erupted in South East Asia in the late 1990s, most observers and concerned parties have narrowed the theoretical gap with regard to the impact of unfettered financial and trade liberalization on overall economic stability. The IMF, a staunch proponent of financial and trade liberalization, has itself published research questioning the wisdom of pushing for unfettered capital flows, concluding that empirical evidence casts doubt on the theoretical models claiming that financial globalization promotes economic growth in developing countries. The research found that it is difficult to establish a strong causal relationship between financial globalization and economic growth (Prasad et al., 2003, p. 5).

Echoing this growing line of reasoning (Khor, 2000) calls for a selective approach to liberalization as a more appropriate method than rapid liberalization, highlighting the importance of a country's level of development and preparedness to take on the challenges of subjecting local production units to foreign competition. While globalists vehemently argue the case for globalization and growth and their positive impact on poverty, anti-globalists still consider globalization as a tool and a new form for perpetuating the interests of the rich countries at the expense of the poor. Yet others do not fault globalization itself, but rather the unfair distribution of its fruits (Sen, 2001). This does not make the life of policy makers any easier. A significant body of research (Jenkins, 2004) does not support any simple generalization about the impacts of globalization on poverty as these impacts are highly context specific, which should be a warning to policy makers against generalized policy advice.

Globalization seems to be irreversible. Thus, the question that needs to be addressed is how we can better govern this process to make it more inclusive and fairer than the current state of affairs. That is, it is not globalization as a process that ought to be rejected, but rather it is poor governance of globalization is what needs to be contested. If managed properly and fairly for the benefit of all, globalization could be a remarkably positive force. Naturally, this requires fundamental alteration of the global status quo, starting with a genuine political commitment of the developing and developed countries alike to conceive an improved global financial and economic landscape.

As many experiences in the past have shown, it is not such an impossible task for the international community to act together in an effort to make available the resources necessary to wage a war against a menace. For instance, the whole international community has been galvanized to fight terrorism in the past few years. This is a rightfully pursued cause. But had the same enthusiasm, commitment, and resources been given to the fight against an equally abhorring global calamities, namely poverty and inequality, the world would have been a much better place (Akoum, 2004). By reducing, and hopefully eventually eliminating, abject poverty, the international community increases the purchasing power of billions of people, thereby enlarging markets and increasing global aggregate demand for goods and services. It is not just a moral case; it is beneficial economically.

Data and methodological limitations facing researchers in this field imply that country-specific case studies could prove better suited to help policy makers devise poverty reduction policies. It is essential, too, to improve the accuracy and quality of poverty data and refrain from using it as a tool to support preconceived ideas and economic theories. Questioning the integrity of data collected by the World Bank, due to political economy consideration, (Wade, 2004) calls for a coordinated world project to get better data on poverty and inequality.

Figure 1GDP growth and share of population in poverty

Figure 2GDP growth and urban poverty

Figure 3GDP growth and rural poverty

Figure 4GDP growth and poverty reduction

Table IGDP growth and poverty

References

Akoum, I. (2004), Governance and Globalization: An Economic and Financial Approach, Union of Arab Banks Publication, Lebanon, available at: www.uabonline.org, .