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Globalization Must Work for the Poor, Says New Research Report

World Bank study proposes seven-point action plan
Available in: 日本語, 中文, Français, Español
Press Release No:2002/132/S
Contact Person:
Caroline Anstey (202) 473-1800
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Also available: Full text of the report

WASHINGTON, December 5, 2001—Globalization has helped reduce poverty in a large number of developing countries but it must be harnessed better to help the world's poorest, most marginalized countries improve the lives of their citizens, says a new World Bank research report published today. This is especially important in the wake of September 11 and the world-wide economic slowdown, which is expected to hit poor people particularly hard.

The study, Globalization, Growth and Poverty: Building an Inclusive World Economy, shows that 24 developing countries that increased their integration into the world economy over two decades ending in the late 1990s achieved higher growth in incomes, longer life expectancy and better schooling. These countries, home to some 3 billion people, enjoyed an average 5 percent growth rate in income per capita in the 1990s compared to 2 percent in rich countries.

 

But not all countries have integrated successfully into the global economy. The report says that some 2 billion people – particularly in sub-Saharan Africa, the Middle East, and the former Soviet Union – live in countries that are being left behind. These countries have been unable to increase their integration with the world economy. On average, these economies have contracted and poverty has risen.

The studyputs forth a seven-point plan to help all developing countries better take advantage of the benefits of globalization while managing the risks. It calls on poor countries to improve their investment climates and put in place better social protection to support poor people in adapting to and taking advantage of opportunities in a changing economic environment. It also calls upon rich countries to open their markets to exports from developing countries and to slash their large agricultural subsidies, which undercut poor country exports. The report argues for a substantial increase in development assistance, particularly to address problems in education and health.

"Globalization often has been a very powerful force for poverty reduction, but too many countries and people have been left out,"says Nicholas Stern, the World Bank's chief economist. "Important reasons for this exclusion are weak governance and policies in the non-integrating countries, tariffs and other barriers that poor countries and poor people face in accessing rich country markets, and declining development assistance."

"Some anxieties about globalization are well-founded, but reversing globalization would come at an intolerably high price, destroying the prospects of prosperity for many millions of poor people," says Stern. "We do not agree with those who would retreat into a world of nationalism and protectionism. That way leads to deeper poverty and it is fundamentally hostile to the well-being of people in the developing countries. Instead, we must make globalization work for the poor people of the world."

Integration is starting to cut global poverty

The growing integration of economies and societies around the world as a result of flows of goods and services, capital, people, and ideas is starting to reduce poverty in countries as diverse as China, India, Mexico, Uganda, and Vietnam. Hopes for continued progress got a boost with the recent World Trade Organization (WTO) agreement to launch a new round of talks focused on the needs of developing countries, Bank officials said.

"We must build on the success of the WTO talks in Doha to ensure that rich countries dramatically reduce the barriers that prevent poor countries from living up to their potential – including taking action on agricultural subsidies," says Paul Collier, a co-author of the research report. "As low-income countries enter global markets for manufactured goods and services, poor people can move from the vulnerability of grinding rural poverty to better jobs, often in towns and cities. Workers with the same skills – be they farmers, factory workers, or pharmacists – are less productive and earn less in developing economies than in advanced ones. Integration reduces these gaps."


The report says that globalization has come in three major waves. The first phase lasted from 1870 to 1914 and saw global per capita incomes rising fast but not enough to prevent the numbers of poor people from rising. The second wave, which went from 1950 to 1980, enabled rich countries to become much more integrated, but left poor countries dependent on primary commodities.

The current wave of globalization started around 1980. For the first time, many poor countries succeeded in breaking into global markets for manufactured goods. Manufactures jumped from just 25 percent of developing country exports in 1980 to more than 80 percent by 1998. At the same time, there has been a growing divergence between developing countries that are integrating into the world economy and those that are not. The report identifies two groups of developing countries:

· "More Globalized" 24 developing countries, such as China, India, Hungary and Mexico, have adopted domestic policies and institutions that have enabled people to take advantage of global markets and have thus sharply increased the share of trade in their GDP. These countries, accounting for 3 billion people, have been catching up with the rich countries – their annual growth rates increased from 1 percent in the 1960s to 5 percent in the 1990s. People in these integrating countries saw their wages rise, life expectancy and schooling levels reach those of the rich countries in 1960, and the number of people in poverty decline.


 


· "Less Globalized" In the rest of the developing world the ratio of trade to GDP either remained flat or actually declined. This group includes many countries in Africa and the former Soviet Union, aswell as such medium-sized countries such as Algeria, Egypt, Iran, Myanmar, Pakistan and Venezuela. A total of 2 billion people live in these countries. On average, per capita income in these countries shrank in the 1990s, the numbers in poverty rose. Education levels have risen less rapidly than in the more globalized countries.

Seven-Point Plan of Action

The Bank study puts forward a seven-point plan of action that aims to strengthen the benefits of globalization for poor people and to help those countries that have been left out of the benefits of globalization.

"For the two billion people in the non-integrating countries, globalization is not working as well as it should," says David Dollar, a co-author of the research report. "Some of these countries have been handicapped by weak policies, institutions, and governance, or by civil unrest and even civil war. Others have been handicapped by unfavorable geography, such as being land-locked and prone to disease. Both global and national action is needed to help those people who have been marginalized."

The seven-point plan of action calls for:

· A 'Development Round' of Trade Talks – Developing countries would gain enormously if rich nations make the WTO Doha Development Agenda a reality and agreed to bring down their trade barriers. Poor workers in developing countries today face tariffs twice as high as workers in rich countries. This must change. Rich countries must also take action to reduce dramatically their agricultural subsidies – which currently stand at $350 billion a year, roughly seven times what rich countries spend on development aid. These subsidies not only hurt poor people in developing countries, they also mean higher taxes and higher prices for people in rich countries. Developing countries would also benefit from better access to each other's markets – barriers between them are still higher than the barriers they face in rich countries.

· Improving the Investment Climate in Developing Countries – Encouraging investment and creating jobs requires good economic governance – measures to combat corruption, better-functioning bureaucracies and better regulation, contract enforcement, and protection of property rights. This is especially important for small and medium-sized firms and farms which are key to job creation and to raising living standards of the rural poor.

· Improving Delivery of Education and Health Services –The developing countries that have gained the most from integrating into the world economy have shown impressive gains in primary education and infant mortality. This suggests that many countries have made investments in education and health services that enable the poor to benefit from growth.

· Provide Social Protection to a Changing Labor Market – Tailoring social protection to the needs of a changing economy helps individual workers adjust to the challenges of a more open economy. Better social protection enables workers and entrepreneurs to take more risks and to avail themselves of new opportunities.

· Rich Nations Should Increase Foreign Aid – Evidence shows that private investors can be slow to respond when low-income countries improve their investment climate and social services. It is precisely at this stage when large-scale aid can have a great impact on growth and poverty reduction. Aid should also address the serious health and geographic problems of the most marginalized countries. Foreign aid has fallen to 0.22 percent of donor countries' GDP--its smallest proportion since it was first institutionalized with the Marshall Plan in 1947.

· Support Debt Relief for Reformers – Reducing the debt of the most marginalized countries, especially in Africa, will enable them to participate more in globalization and the benefits it can bring. Debt relief is particularly powerful for those countries that improve their investment climate and social services. Debt relief packages are now in place for 24 countries under the enhanced HIPC Initiative for which total committed assistance is estimated at more than US$36 billion. It is critical, though, that further debt relief should not come out of the shrinking pie of foreign aid, which would simply move aid resources around. Debt relief must come in addition to foreign aid.

· Tackling Greenhouse Gases – There is broad agreement among scientists that human activity is leading to potentially disastrous global warming, and that these changes in climate will be especially burdensome for poor countries and poor people. The report urges more effective international cooperation to address these problems.





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