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Of globalization’s promises and perils

Swati Mishra's picture

As a student in 2003, I had an opportunity to interview a social activist about food security in India. Among other things, she blamed globalization for the slow demise of the local food industry. She went a step further and labeled globalization as depriving people (small scale farmers and workers) of their livelihoods. Her solution for India to become a leader in the food industry was by staying local, small, and forming cooperatives rather than fostering large agribusiness. This was quite a contrasting view at a time when India was starting to see benefits from its economic liberalization. In retrospect, I was interviewing someone who was ahead of a trend where activists were increasingly wary about the downsides of globalization and its impact on development.

Since then, globalization has sped up and contentious debates over who ultimately benefits have grown. And just as finance ministers from various countries were converging on Washington to discuss vital issues like extreme poverty, global macroeconomic prospects, jobs creation, and inclusive growth, revisiting globalization seemed germane to tackling development challenges.

How can globalization be leveraged to achieve better development outcomes, was the question World Bank Chief Economist Kaushik Basu asked three eminent thought leaders last week. Kaushik moderated a panel with Eric Maskin, Nobel-laureate economist and Harvard professor known for his fundamental contributions to mechanism design theory, political economy, and welfare economics; Ory Okolloh, Kenyan activist and current Google Policy Manager for Sub-Saharan Africa; and Amartya Sen, Nobel laureate, known for groundbreaking work on the logic of social choice, moral philosophy, and the concept of human development, and the room was packed.

Much was said regarding the promises of globalization and whether it is being harnessed to increase prosperity in poorer countries and reduce inequality. In many respects, while it has delivered on the first promise – China and India being good examples of individual growth and economic development– globalization has failed to reduce the gap between rich and poor. As Branko Milanovic’s research shows, in the past two decades, the top 1%, and to a lesser extent, the top 5%, have gained significantly, while the next 20% in the global income distribution have either gained very little or faced almost stagnant real incomes.

“Should we be surprised by this?” pondered Eric Maskin. He said we should be, as it goes against the theory of comparative advantage.  Citing the hypothetical thought experiment with just two countries in the world (one rich and the other poor) consuming only two goods (corn and software), Eric explained how prior to trade, both the countries would have produced both the goods they consumed: software and corn. Production of software requires high-skill workers -- such workers are more abundant in rich countries than in poorer ones. The poorer country would have more low-skilled workers, so to the extent that the poor country is producing software, is actually going to seek out high-skilled workers and pay them more than agricultural workers.  But with trade, the rich country will be specializing in software and the poorer one in producing corn, thereby balancing the demand for low-skilled and high-skilled workers within each country and significantly reducing the wage gap. But that hasn’t happened, because this thought experiment doesn’t take into account the globalization of production: the proliferation of international supply chains and international labor markets. “For example, computers that are designed in North America are programmed in Europe and assembled in China.  So, the very nature of production has been globalized, and this has had a profound effect on wages,” Eric explained.  If one were to consider a new thought experiment with the inclusion of a production-oriented view of globalization, we would see that high-skilled workers would be particularly attractive to global companies.  As Eric said, “They now have international job opportunities, but the workers down at the bottom with no skills are left to their own devices.” 

This particular aspect of globalization has tended to keep low-skilled workers at a disadvantage and at the same time has facilitated informal sector businesses in developing regions, since small scale businesses, subsistence farmers or micro-entrepreneurs face many barriers to entering the globally connected formal sector. “You can't talk about the private sector in Africa without talking about the informal sector,” said Ory Okolloh. Around 55 percent of Africa’s GDP is actually generated by the informal sector and yet there is very little understanding of what the sector encompasses. That dimension of economic life is not captured in the popular notion of “Africa rising” or “Africa booming,” she observed, stressing that too often Africans are not rising. “A lot of the companies that are making money with this growth, how much are they --particularly multinationals-- contributing, perhaps, to taxes and things like that rather than just extracting [natural resources from Africa]?” Ory’s question hit the right policy chord because, as established by the World Development Report 2013, the private sector plays a strong role in creating jobs and jobs are vital to spurring sustainable development.

The remedy certainly isn’t to stop globalization but to make it inclusive. “If there can be special investment in workers’ skills, in fact globalization then turns out to be an advantage [for them],” added Kaushik Basu. The complication, though, is that job training or skill enhancement is expensive, and the question is who is going to do it. It has to be a combination of the private sector and the Government to make the benefits of globalization more equitable. “If the question was can you rely on the private sector alone to eliminate poverty, no, you cannot.  Can you get a lot of help from the private sector in eliminating poverty if it is part of a bigger system that is well-thought-out, yes, you could.” stated Amartya Sen.

Echoing some of the suggestions and feedback received via #OryTellTheWB, Ory stressed the need for the World Bank Group and other international agencies to intensify engagement with the private sector in Africa and perhaps encourage them to play a bigger role in delivering public goods.

Along with globalization of trade, commerce, and movement, there is also globalization of ideas, whether they are generated in the private or public sector.  In the context of development, that’s an extremely important thing to bear in mind, “because it's not only that we expand trade, we also can learn something from each other's experience, and globalization of ideas is absolutely central,” concluded Amartya.

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