Globalization, growth and poverty: building an inclusive world economy

Globalization, growth and poverty: building an inclusive world economy

Evidence that participation in a globalised economy leads to higher growth in incomes, longer life expectancy and better schooling

Report argues that a country's willingness to integrate into the world economy leads to large benefits for the poorest.

The study 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 enjoyed an average 5 percent growth rate in income per capita in the 1990s compared to 2 percent in rich countries. Many of these 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 have been catching up with the rich ones – 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, and the number of people in poverty declined.

Other countries have not integrated so 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, their ratio of trade to GDP either remained flat or actually declined. On average, these economies have contracted, poverty has risen, and education levels have risen less rapidly than in the more globalized countries

The report argues for a seven-point plan to help all developing countries better take advantage of the benefits of globalization while managing the risks, arguing for:

  • 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.
  • rich countries to open their markets to exports from developing countries and to slash their large agricultural subsidies, which undercut poor country exports
  • a substantial increase in development assistance, particularly to address problems in education and health.

The seven point plan consists of:

  • 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 25 countries under the enhanced HIPC Initiative for which total committed assistance is estimated at some 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.

The report is accompanied by a series of background papers (also available on the website).

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