UNIT 5 Bardhan- Globalisation & POOR PDF

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UNIT 5: BARDHAN- GLOBAL ECONOMY AND POORI. INTRODUCTION● Raging issue of academic & public debate = impact of globalization on well-being of world’s poor. ● Large part of widespread opposition to globalization relates to 3 different aspects of its impact: 1. Fragility of valued local &am...

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UNIT 5: BARDHAN- GLOBAL ECONOMY AND POOR I.

INTRODUCTION ● Raging issue of academic & public debate = impact of globalization on well-being of world’s poor. ● Large part of widespread opposition to globalization relates to 3 different aspects of its impact: 1. Fragility of valued local & indigenous cultures of people facing onslaught of global mass production + cultural homogenization via global brand products, movies, music, internet etc. 2. Crisis caused by volatile short-term capital movement due to globalization. 3. Damage caused to jobs, wages & incomes of poor by dislocations & competition of international trade & foreign investment & weakening of ability of state to compensate for this damage & in general to alleviate poverty. ● Bardhan focuses on 3rd point & interprets globalization to mean openness to foreign trade & long-term capital flows + examines possible difficulties facing poverty alleviation policies in poor countries from such international economic integration. ● To examine this, understand processes by which globalization may affect conditions of poor. ● In general, believed that globalization causes many hardships for poor, but it also opens up opportunities that some countries can utilize & others can’t, depending on their domestic political & economic institutions => Net outcome often quite complex & always context-dependent. ● Most attempts at generalization, on basis of cross-country regressions, on impact of globalization on poverty (absolute) are those of correlation, not causation ● Pro-globalizers point to large decline in poverty in China & India in recent decades of international economic integration. ➔ Though, we still lack evidence that this decline isn’t mainly due to internal factors like expansion of infra or 1978 land reforms or relaxation of restricts on rural to urban migration in China, or spread of green revolution in agri, anti-poverty programs, social movements in India. ● While those dubious of global processes, point that in same decades poverty has remained stubbornly high in Sub Saharan Africa- but author says, this may have little to do w/ globalization & more w/ unstable or failed political regimes, wars, civil conflicts etc. that in fact reduced extent of globalization in these countries by scarring off many foreign investors & traders ● If one goes beyond correlations, causal processes through which international economic integration can affect poverty primarily involve poor in their capacity as (a) workers; (b) recipients of public services or; (c) users of common property resources. (thus ignores poor as consumers) ● Whether poor gain as consumers from trade depends on whether they are net consumers of tradable goods or how important non-tradable like subsistence sector produce & services are in their consumption pattern, or how monopolistic is the retail market structure which blocks pass-through from border prices to domestic prices.

II.

POOR AS SELF EMPLOYED WORKERS ● Let us first take case of poor workers- are mainly either self-employed or wage earners. ● Self-employed work on own tiny farms or as artisans, petty entrepreneurs in small shops & firms. ➔ Major constraints faced = credit, storage, marketing, insurance, access to new tech, extension services, infra (roads, power, irrigation, etc) & Govt regulations (insecure land rights etc) ➔ Relieving these constraints requires substantive domestic policy changes, & foreign traders + investors aren’t directly to blame- in fact they sometimes help in relieving bottlenecks ● If these changes aren’t made & self-employed poor remain constrained => difficult for them to withstand competition from large agri-business or mfg firms, both foreign & domestic. ● When small producers are heavily involved in exports (eg: rice growers in Vietnam, coffee producers in Uganda), major hurdle often due to not more globalization but less. ➔ Developed country protectionism & subsidization of farm & food products & simple manufactures severely restrict their export prospects for poor countries.

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III.

Another imp barrier to trade facing many small farmers of developing countries in world markets = rich countries shutting out many of these imports under host of safety & sanitary regulations. ➔ This increases importance of involving rich-country MNCs in marketing poor-country products. ➔ They can deal w/ regulatory & lobbying machinery in rich countries far better than small producers of poor countries+ can provide to consumers credible guarantees of quality & safety. ➔ Of course, these companies charge hefty fees for this marketing service but small farmers will usually be better off w/ them rather than w/o. Similarly, difficult, costly & time-consuming for small producers of manufactures or services in developing countries to establish brand name & reputation in quality & timely delivery- are crucial in marketing, much more than comparative cost of production that traditional trade theory emphasizes ➔ This is where multinational marketing chains w/ global brand names, mediating b/w domestic suppliers & foreign buyers, helpful & paying high marketing margin they charge may be worth ➔ Plus, coordinated attempts by developing nations w/ technical assistance from international organizations to build international quality certifications institutions for their products needed ➔ Those outraged by high marketing margins charged by monopoly MNCs from poor producers should focus on antitrust action, not antitrade action. Important to remember that trade liberalization, even when increasing mean incomes of poor, may heighten their vulnerability, particularly by increasing variance of prices or income sources & it’s clear that poor are less able to cope w/ adverse shocks than rest of the population.

POOR AS WAGE WORKERS ● Turning to poor wage earners, theoretical literature on how international trade affects absolute level of real wage of unskilled workers is extremely small relative to one on wage inequality. ● Empirically, it’s hard to disentangle effects of trade reform on wages from those due to macroeco changes or other ongoing changes ● Traditional international trade theory suggests that workers in poor country (presumably having abundant supplies of unskilled labour) having comparative advantage in products intensive in unskilled labour should benefit from trade liberalization ➔ Improvement in wages & employment of garment workers in Bangladesh w/ expanding exports, obvious eg ➔ This is, though, complicated by fact that developing countries (say, Brazil or Mexico) may import labour-intensive products from even poorer countries (say, China or Bangladesh) => trade even in terms of this mechanism may lead to lower wages in former set of countries ➔ Also, if poor country has large supplies of other FoPs (like land or mineral resources), trade liberalization may not benefit labour-intensive sectors, consistent w/ traditional theory. ● If involvement of large MNCs in local labour market of poor country raises employers’ monopsony power, wages & employment may fall. ➔ But little evidence that poor unskilled workers get lower wages (or fewer jobs) in presence of those companies, compared to what they will get in their absence, ceteris paribus ➔ Contrary to impression created by campaign in affluent countries against ‘sweatshops’ run by MNCs in poor countries, poor often bang at gates of these sweatshops for chance of entry, as their current alternative are worse- inferior occupations/work conditions or unemployment ➔ Thus, look at reality of severely limited opportunities faced by poor & unintended consequences of trying to restrict rich-country imports of ‘sweatshop’ products in terms of harm it causes to displaced poor workers. ● Sometimes, large companies outsource their activities to smaller firms & HH enterprises, where wages & overhead costs are lower, to determinant of formal sector employees ➔ But net effect on workers of country should take into a/cc resultant improvement in wages & employment among usually much poorer informal sector workers.

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There are 3 important reasons why opening economy may worsen conditions of workers: 1. Related to mobility of workers & their ability to relocate as market conditions change ➔ This often depends on state of available credit, info, social networks, infra facilities ➔ When latter absent/ deficient, workers stuck in declining sectors in open economy get hurt 2. Has to do w/ nature of technical change. ➔ Since much technical change in rich countries biased against services of unskilled labour, using those new techniques by MNC in poor countries cause employment & wages of unskilled labour to fall ➔ Global tenders to construction companies like Bechtel or Mitsui using labour-saving technology is rendering many construction workers unemployed in India. 3. Related to collective bargaining. ➔ Globalization often leads to weakening of unions ➔ As foreign competition lowers profit margins, old rent-sharing arrangements b/w employers & unionized workers come under pressure. ➔ Rents decline both for capital & labour, but labour may take larger cut as internationally less mobile labor faces more mobile capital ➔ Companies can more credibly threaten substitution of foreign FoPs, including intermediate inputs, for domestic factors ➔ This may lead to lower wages & increased risk of unemployment Even when poor, unskilled workers lose as result of international liberalization, possible to combine policy of liberalization w/ domestic policy of compensating losers at low cost Main issue here = credible commitment on part of politicians that losers will be compensated ➔ Recent history in many countries full of false promises by Govts to displaced workers. ➔ This is more important in poor countries where little effective social protection is available from state; rich countries have better social safety nets & programs to help displaced workers adjust. ➔ International organizations that preach benefits of free trade should take responsibility of funding & facilitating such adjustment assistance programs in poor countries that can help workers in coping w/ job losses & getting retrained & redeployed. ➔ There should be more of income support programs like Trabajar program in Argentina or programs to train & help unemployed in finding new jobs like Probecat in Mexico. Until issues of economic security for poor workers in developing countries satisfactorily resolved, globalization bound to raise anxiety & hostility among workers worried about their job security. If nation state is weakened by forces of international economic integration- serious concern ➔ Much depends on society’s institutions of conflict management & coordination ➔ Countries w/ better record in building these institutions coped better w/ dislocations brought about by international trade- major eg: scandanavian countries Issue of weakening of nation state is complex ➔ There’s possible loss of national policy options due to poor country’s participation in international trade & investment & in framework of global institutions & rules governing them ➔ Decision making process in these organizations have to be more transparent, responsive to lives of people their decisions crucially affect ➔ But protestors’ demand for abolition of international organizations is misplaced ➔ Serious efforts are needed to strengthen technical negotiation capacity of poor countries in international trade forums where they face well equipped & well funded team of lawyers & negotiators representing rich countries About issue of Govt’s fiscal options for taxing capital to raise revenue being limited in global eco ➔ While this limitation serious, one shouldn’t exaggerate its effects-most countries only collect small part of their revenue from capital taxation, even in relatively closed economies ➔ However, there can be SR problem in some developing countries whose public budgets are heavily dependent on custom duties, which decline w/ trade liberalization.

IV.

POOR AS USERS OF PUBLIC SERVICES & COMMON RESOURCES ● Let’s turn to case of poor as recipients of public services. ● In low-income developing countries, poor, particularly those who in informal sector, don’t receive much of effective social protection from state (making them particularly vulnerable in case of job displacement brought due to international competition), but public sector usually involved in basic services like education, health & public works programs. ● Cuts in public budgets on these basic services often attributed to globalization, as budget cuts to reduce fiscal deficits often part of package of macroeco stabilization prescribed by international agencies like IMF. ➔ While lot of scope for improvement in stabilization programs, remember fiscal deficit in these poor countries often due to domestic profligacy in matters of subsidies to rich, salaries for bloated public sector or military extravaganza. ➔ Faced w/ mounting fiscal deficits, Govts find it politically easier to cut public expenditures for voiceless poor, due to domestic political clout of rich who are disinclined to share in necessary fiscal austerity ➔ Always convenient to blame external agency for issue that’s essentially domestic in origin ● Low quality & quantity of public services like education & health in poor countries isn’t just due to their relatively low share in public budget. ➔ To large extent even limited money allocated in budget doesn’t reach poor because of all kinds of top-heavy administrative obstacles & bureaucratic & political corruption. ➔ Again this is a domestic institutional failure, not largely an external problem. ➔ Major effort required here is to strengthen domestic institutions of accountability. ● Apart from basic public services, poor also users of common property resources, decline in which not usually taken into account in standard estimates of poverty, as they are based on either household surveys of private consumer expenditure or national income accounts. ● Environmentalists argue that trade liberalization damages poor by encouraging overexploitation of fragile environmental resources (forestry, fishery, surface & groundwater irrigation, grazing lands, etc.) on which daily livelihoods of particularly rural poor crucially depend. ● Answers to this are complex & mere trade restriction is not the solution. ● Env effects of trade liberalization on rural eco depend on crop pattern + production methods ➔ Take, for eg, African rural econ where exportable product is capital-intensive tree crop (like coffee or cocoa), import-substitute is land-intensive crop (like maize), & there is labour intensive subsistence (non-traded) crop (like roots and tubers). ➔ Economy may have comparative advantage in tree crops. ➔ In this case increase in import substitution => expansion of cultivated land under land intensive crop + shortening of fallow period = depletion of natural vegetation & biomass. ➔ Trade liberalization in this context, through encouraging production of less land-intensive tree crop, can significantly improve natural biomass. ● One reason why land-intensive crops may lead to overuse of land & depletion of natural vegetation is lack of well-defined property rights or lack of their enforcement in public or communal land. ➔ In such cases private cost of expanding production < social cost => overuse & degradation of environmental resources. ➔ If the country exports such resource-intensive products, foreign trade may make this misallocation worse. ● International trade theorists point out that trade restriction is not first-best policy in this situation, correcting property rights regime is. ➔ But latter involves large changes in legal-regulatory or community institutional framework which takes long time to implement, & given threshold effects & irreversibilities in environmental degradation, can’t afford to wait. ➔ In that case some program of (time-bound) trade restriction coupled w/ serious attempts at overhaul of domestic institutional framework may be necessary.

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V.

In other cases domestic policy changes can be implemented more quickly & restricting trade is unnecessary + undesirable. ➔ For eg: administered underpricing of precious env resources (irrigation water in India, energy in Russia, etc) is major cause of resource depletion & correcting it shouldn’t take much time. ➔ Domestic vested interests, not globalization, responsible for prolongation of such socially damaging policies. In some cases of resource-intensive exports, difficult for a country to adopt environmental regulations by itself if its international competitors don’t adopt them at same time & have ability to undercut former in international markets. ➔ Obvious need for coordination in environmental regulation policies of countries concerned. ➔ Given low elasticity of demand for many resource-intensive primary export commodities from developing countries in world market, such coordinated policies, while raising prices & terms of trade need not lead to decline in export revenue. Common charge against MNCs = they flock to developing country ‘pollution havens’ to take advantage of lax environmental standards. ➔ In one of few empirical studies on the question Eskeland & Harrison (2003) examine pattern of foreign investment in Mexico, Venezuela, Morocco and Côte d’Ivoire. ➔ They find no evidence that foreign investment in these countries is related to pollution abatement costs in rich countries. ➔ They also find that within given industry, foreign plants significantly more energy-efficient & use cleaner types of energy compared to their local peers

CONCLUSION ● While globalization can constrain some policy options, wipe out few existing jobs & entrepreneurial opportunities for poor & small enterprises, in medium to long run it need not make poor much worse off, if appropriate domestic policies & institutions are in place & appropriate coordination among involved parties can be organized. ➔ If institutional prerequisites can be managed, globalization opens door for new opportunities even for poor. ● Of course, domestic institutional reform is not easy & it requires political leadership, popular participation & administrative capacity which are often lacking in poor countries ● Some also attribute problems of underdevelopment to inexorable forces of international economic & political order, ignoring sway of domestic vested interests ➔ In many countries poverty alleviation in form of expansion of credit, marketing facilities or land reform or public works programs for unemployed or provision of education, training, & health need not be blocked by forces of globalization. ➔ This requires restructuring of existing budget priorities & better + more accountable political & administrative framework, but obstacles to these are often largely domestic ➔ Thus, for these countries, globalization often not main cause of their problems, contrary to claim of critics of globalization; just as globalization often not main solution of these problems, contrary to claim of some gung-ho free traders. ● All this, of course, does not absolve responsibility of international organizations in helping poor of world, by working towards reduction of rich-country protection on goods produced by poor, by energetic anti-trust action to challenge monopoly power of international companies based in rich countries, by facilitating international partnerships in R&D of products (like drugs, crops) suitable for poor, & by organizing more substantial (& more effectively governed) financial & technology transfers & international adjustment assistance for displaced workers, & help in (legal and technical) capacity building for poor countries in international negotiations & quality certification organizations. ● Globalization should not be used, either by its critics or proponents, as excuse for inaction on domestic + international front when it comes to relieving poverty that oppresses life of billions...