Is globalization a blessing or a curse? A rise in living standards

The real incomes of ordinary people in most parts of the developing world have improved substantially, often dramatically, over the last 50 years. The evidence indicates that rapid globalization has helped.

Economic globalization is the integration of national economies into the international economy through rising trade in goods and services and growing cross-border movements of capital investment, people, ideas and technology.

The world has been globalizing rapidly since 1950. Latin America’s exports have increased sixteenfold since 1950, while Asia’s exports shot up even more rapidly, by an astounding 55 times. Meanwhile, developing countries’ imports and foreign direct investment in their economies have both grown by leaps and bounds.

Around 1950, for the first time in human history gross domestic product per person – a measure of economic performance closely related to people’s real incomes – started rising rapidly in most of the underdeveloped world. Between 1950 and 2001, GDP per person increased fivefold in developing Asia, while in Latin America it more than doubled. On the other hand, in sub-Saharan Africa – where globalization has proceeded slowly – GDP per person continued to stagnate.

It is no coincidence that rapid globalization and rapidly growing GDP per person have occurred at the same time. Evidence strongly indicates that globalization contributed to the rapid growth.

Now for the evidence. If globalization does contribute to rapid GDP growth, then we should find that rapidly globalizing countries have especially high growth. And they do. David Dollar and Aart Kraay of the World Bank studied data for the 1960s through the 1990s for the 24 developing countries that have globalized most rapidly and for 48 countries that have globalized slowly. They found that by the 1990s, the average growth rate of GDP per person for the “rapid globalizers” was 5 percent per year while for the “nonglobalizers” it was less than 2 percent.

The stories of economic growth in India and China, the two largest developing economies, drive this message home. In 1991, India dramatically reversed its previous policies: It cut its tariffs by 60 percent within a few years and strongly encouraged foreign trade and investment in other ways. Growth of GDP per person jumped from 2 percent per year to almost 5 percent.

We all know about China’s economic miracle. In the early 1980s, China began de-regulating its internal markets and encouraging foreign direct investment and international trade. It cut import tariffs almost in half. Its trade grew rapidly and its GDP per capita growth rate accelerated from 3 percent before 1983 to almost 7 percent. Dani Rodrik, an economist who sometimes supports anti-globalization positions, writes that “from the mid-1980s on … China’s growth was fueled and sustained by the opportunities that the world market offered.”

If foreign investment helps raise people’s real incomes, we would expect foreign companies in developing countries to pay higher wages than domestic companies. Several studies find that this is indeed the case; the difference is often around 12 to 30 percent.

Some analysts argue that assessments of people’s well-being should rely less on GDP per person data and more on measures of social well-being such as literacy rates, school enrollment and average life expectancy. Fortunately, the U.N.’s Human Development Index includes these other measures as well as GDP.

The HDI data actually strengthen our analysis. These data are available for 1975 to 2004 for the seven largest developing countries – China, India, Indonesia, Brazil, Pakistan, Bangladesh and Nigeria. In every case, the index was higher in 2004 than in 1975. Six of these seven countries are globalizers, according to the Dollar-Kraay study. The only nonglobalizer, Nigeria, had the lowest HDI score in 1975, the lowest score in 2004, and the smallest increase between the two years.

For Latin America, the HDI data are available back to 1980 for 23 countries – and for all 23 the index has risen. For Brazil and Mexico, the two biggest Latin American countries, the increase was large.

Some globalization critics argue that even if globalization boosts average incomes, it also increases poverty among those people earning below-average incomes. But many studies show the opposite: Higher average incomes are strongly associated with poverty reduction. A study of 16 Indian states found that higher average incomes were associated with poverty reduction in every state.

The United Nations’ Millennium Development data show that the proportion of people living in extreme poverty is falling in most developing regions. It has fallen most rapidly in eastern and southeastern Asia, two rapidly globalizing regions where GDP per capita growth also has been especially strong. In sub-Saharan Africa, where GDP per capita and globalization have both been stagnant, poverty has barely changed.

Admittedly, as I noted recently in these pages, though globalization has benefited most countries, a few seem not to have benefited. Further, millions upon millions continue to live in extreme poverty, despite recent progress.

But it is important to recognize what the big picture reveals: For the first time in human history living standards are rising rapidly in most of the developing world. This unprecedented progress should be celebrated and globalization’s contribution acknowledged.

Edwin Dean, a seasonal resident of Vinalhaven, writes monthly about economic issues.