Globalization and Poverty in Developing Countries

Introduction

Globalization has been simply described by Watkins (1997) as the “revolutionizing of economic relations between different countries”. It involves deregulating the markets to achieve optimal economic growth and human welfare. In addition, global financial markets have allowed different nations to conduct trade at a global level. According to Bigman (2007:87), the idea of whether globalization impacted positively or negatively the developing countries has always been a subject of intensive debate. Over the last three decades, the world has seen one of the most revolutionizing times with economic liberalization, technological advancement and political transformation taking place. Indeed, Watkins (1997) notes that the years of mid-1990s have been characterized as having the worst poverty and inequality situation leading to political instability in most of the developing countries. Globalization has over the years led to the liberalization of world economies by enhancing international trade (multinational entities and foreign direct investment initiatives, value chain and labor mobility. These are the same factors that have influenced the advancement in technology, cultural integration and literacy levels.

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The impact of globalization on the developing countries has been both positive and negative. When analyzing these effects some of the aspects that come into consideration are the impact of globalization on economic development and stability, unemployment levels, consumer and market behaviors and government expenditure. The benefits derived from globalization include but are not limited to expansion of free trade, capital markets integration and promoting diplomatic relations. These have influenced major economic and social aspects in the developing countries such as reduction of poverty, redistribution of wealth and enhance economic stability Watkins, 1997). Moreover, Prasad et al (2003) claim that financial globalization has led to increasing in the capital flow from the industrialized to the developing countries.

On the other hand, negative impacts have arisen from globalization. Watkins (1997) claims that the gap between the rich and the poor has not only expanded, but has also created massive unemployment, increased poverty, and inequality. In addition, Bigman (2007:87) describes the differentiation level between the haves and the have-nots which in turn influences the efficiency of income distribution.

Generally, liberalization of economies involves bringing in some changes and adjustments that influence the economic activities in the developing countries. The effect of globalization on developing countries’ poverty levels can be explained by analyzing the aspects of financial globalization and trade liberalization. This paper focuses on unearthing the effects/impacts of globalization on developing countries.

Effects of globalization on economic growth

In most the developing countries, the level of economic development tends to reflect the magnitude of poverty (Bigman, 2007:88). In general terms, poverty may describe on the basis of consumption and household spending or real income. According to Winter, McCulloch and McKay (2004:73), economic development is a factor of trade liberalization through increased productivity. On the other hand macroeconomic volatility which is part of trade liberalization may have an opposing effect on economic growth. According to Bigman (2007:88) the measure of how economic growth relates to poverty levels is through the analysis of the changes in poverty that have been brought about by the changes in economic growth – “poverty elasticity of economic growth”. This measure of elasticity of poverty to economic growth tends to explain the ratio between the changes in means incomes of the poor and the mean income changes of the general population. Trade liberalization, which is an element of globalization, affects economic growth by increasing the flow of goods from one country to another. Through the openness of trade has led to establishment of transnational and multinational entities which act as conduits for capital flow to developing countries and facilitating the participation of developing countries in global production and global consumption (Watkins, 1997). Simply put, globalization has made it easy for the developing countries to access modern technology and skilled manpower, both of which have contributed significantly to the increasing investments in these economies.

The accessibility of modern technology in production has uplifted the levels of production the developing countries. For instance, the use of technology in agriculture has increased the amount of farm produce and therefore increasing the food basket in the developing countries. In addition, most of the developing countries are able to access the most effective information on how to improve production by accessing the skilled labor from the developed countries, which come in as expatriates with vast knowledge. The increased production affects income distribution in these countries favorably and therefore leading to the rise in absolute income of the households.

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Movement of labor and capital from the developed countries to the developing countries has been described as a contributing factor to the growth of investments, which in effect improves the economic efficiency as savings and productive projects get enhanced (Moin, 1998).

Developing countries are now able to export their products to the other parts of the world through the openness of the markets. Flexible trade barriers have made it easy for developing countries, majority are agricultural-oriented to export their produce to international markets. This in effect, boosts the nation’s Gross Domestic Products (GDP) and also enhances income distribution, an ingredient of poverty alleviation. According to Watkins (1997), the GDPs of the East Asia countries including China have tremendously improved in the last few years due to the liberalization of trade which has attracted a lot of investments in these countries making them some of the most rapidly developing countries in the world. In addition, the developing countries are able to import goods that they are not well endowed with. The accessibility to imports at favorable prices boosts trade activities in the developing countries thereby boosting income levels in the economy. In addition trade liberalization, where barriers have been removed has been seen as leading to increased productivity, mostly due to competition in the import market (Winter, McCulloch and McKay, 2004:82)

Winter, McCulloch and McKay (2004:83), trade volatility tends to positively affect trade growth in developing countries as it raises general output. In addition, trade liberalization affects specialization towards primary commodities, making primary commodity prices more volatile. In this case, openness of trade makes the countries more stable as their commodities are able to fetch good prices in the global market.

Despite these suggestions that trade liberalization enhances economic growth, there have been suggestions that, actually trade liberalization may negatively affect economic growth in developing countries and in the process affect poverty alleviation. According to Winter, McCulloch and McKay (2004:83), some of the developing countries have been unable to cope with the ever-advancing rationalization in the global economy and therefore have experienced problems in competing for the imports. For instance, some of the African countries have been hampered by lack of preparedness by the firms for competition and failure by the governments to improve technological advancement as well as poor human infrastructure, and resulted in downgrading rather than upgrading, especially in garment and other manufacturing industries (Winter, McCulloch and McKay, 2004:82).

Effects of Globalization Consumer and market behavior

Consumers form the pillar of concern in poverty alleviation and their consumption behavior may be affected by trade liberalization, and more specifically the price of commodities. According to Winter, McCulloch and McKay (2004:87), market integration affects the competitiveness in the commodity market-making adjustments to the prices commodities in the global market favorable to the households. Global marketing has made it easier for the households to access a variety of commodities at favorable prices than they could have accessed in closed economies. In addition, trade liberalization opens avenues for increased opportunities to create new markets as a result of increased productivity.

The increased markets for commodities ids are always a motivating factor for households especially in agriculture to up their produce in order to fetch good prices in the competitive global market. Commercialized agricultural practices have been advanced in the developing countries where households have responded favorably to market integration.

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Liberalization may negatively affect the households and markets through elimination of policies that even out the prices of commodities in the local market. Mostly, this is brought about by the unfair competition in the global market making locally produced goods more expensive.

Effects of Globalization on employment

Global flow of capital from the developed countries to the developing countries has made it possible to establish industries that create employment for the households of these countries either directly or indirectly. According to Watkins (1997), developing countries have been able to tap the benefits of increased participation by the transnational corporations in the investment projects through increased opportunities for employment. In addition Winter, McCulloch and McKay (2004:97) claim that “employment is the surest way out of poverty”, and that liberalization has a positive effect in boosting wage rates and employment in that, the increase in the production of labor-intensive commodities enhance real wages. In this view, over the last few decades, developing countries have taken advantage of capital flows from developed countries to invest in the labor-intensive industry – which seems to be more efficient- and in the process created more employment.

Developing countries are more of raw materials exporters and finished goods importers. In liberalized market, the mare presence of available market has made employment in production of raw materials rise thereby boosting the real income of the people. According to Abiodun (2009) globalization has led to increased employment in the informal sector and also raised the incomes of most of those employed.

Although the levels of investment have been growing over the years, there is a sharp contrast between the economic growth and unemployment therefore affecting poverty alleviation. Watkins (1997) notes that the rise in international growth rate has gone hand in hand with the rise in unemployment. Generally, wages in developing countries are low compared to wages in developed countries. This tends to make poverty alleviation challenge for the developing countries.

Economic and Labour Market Analysis (2006), unemployment levels in most of the developing countries is alarming noting that, although a large number has been employed in formal and informal sector, their incomes are barely enough to sustain them. This has led to the concept of working poor. However, ILO (2006) establishes that the levels of the working poor population in developing countries have been declining in the last few years.

Winter, McCulloch and McKay (2004:100) view the ever-rising poverty in developing countries as being contributed wages inequality between the skilled and non-skilled. Most developing countries are known to produce a high number of non-skilled labor, who in turn earns low wages. The effect of this is aggravated poverty as the real income of this population is barely enough to allow them live decent lives.

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Government revenue and spending

Globalization has provided most governments from the developing countries with increased revenue, mostly emanating from taxes levied on imports, exports and investments. Where efficient collection policies are in place, the governments have been able to improve their balance accounts and increase income distribution.

However, trade reforms have allowed elimination of some tariffs, thereby denying the government revenue from trade. Although this may affect the government revenue, its effect on poverty alleviation may be positive considering that the resulting market prices of goods will be low and affordable for many households.

Conclusion

Globalization has been a blessing and a curse for many countries not only in developing countries, but also in some developed countries. The effect of globalization on poverty alleviation in the developing countries has been both positive and negative. It has led to increased investments in these countries, thereby reducing the level of unemployment. This in effect has led to increased purchasing power of the households in these countries. However, the economic growth witnessed in developing countries has not fully addressed the issue of unemployment and subsequently poverty due to the inequality existing in wages between the skilled and non-skilled labor.

Reference

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Winters, A et al (2004) Trade Liberalization and Poverty: The Evidence So Far. Journal of Economic Literature. (Online). 2009. Web.

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