Globalization, Poverty, and Inequality since 1980

Author(s): David Dollar

Source: The World Bank Research Observer, Vol. 20, No. 2 (Fall 2005), pp. 145-175
Published by: Oxford University Press
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 Globalization,Poverty,and Inequality
since 1980

DavidDollar

One ofthemostcontentiousissues ofglobalizationis theeffect ofglobal economicintegra-

tionon inequalityand poverty. This articledocuments five trendsin themodernera ofglo-
balization,startingaround 1 980. Thefirsttrendis thatgrowthrates in poor economies
have acceleratedand are higherthan growthrates in richcountriesfor thefirsttimein
modernhistory.Developingcountries9 per capita incomesgrew more than 3.5 percenta
year in the 1 990s. Second,the number ofextremelypoorpeoplein theworldhas declined
significantly by 375 millionpeople since 1981 - for the timein history.The share of
-
peoplein developing economieslivingon less than$la day has beencutin halfsince 1981,
thoughthe declinein the share livingon less than $2 per day was much less dramatic.
Third,global inequalityhas declinedmodestly,reversinga 200-year trendtowardhigher
inequality.Fourth,within-country inequalityin generalis notgrowing,thoughit has risen
in severalpopulous countries(China, India, the UnitedStates). Fifth,wage inequalityis
risingworldwide.This may seem to contradictthefourthtrend,but it does not because
thereis no simplelinkbetweenwage inequalityand householdincomeinequality.Further-
more,the trendstowardfastergrowthand povertyreductionare strongestin developing
economiesthathave integratedwiththeglobaleconomymostrapidly,whichsupportsthe
viewthatintegration has beena positiveforceforimprovingthelivesofpeoplein developing
areas.

Globalization
has dramatically betweenand within
increasedinequality
nations.
-Jay Mazur(2000)
issoaringthrough
Inequality theglobalization within
period, and
countries
Andthat'sexpected
acrosscountries. tocontinue.
- NoamChomsky

Presson behalfoftheInternational
The Author2005. PublishedbyOxfordUniversity and
BankforReconstruction
Development/theworldbank.Allrights
reserved. pleasee-mail:journals.permissions@oupjournals.org.
Forpermissions,
doi:10.1093/wbro/lki008 20:145-175

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 Allthemainparties
support nonstop
expansioninworldtradeandservices
we
although allknow it... makes
rich richer
people andpoorpeoplepoorer.
- WalterSchwarz,TheGuardian
Weareconvinced thatglobalization
isgoodandit'sgoodwhenyoudoyour
homework... keepyour fundamentals in lineon theeconomy, buildup
highlevelsofeducation,
respectruleoflaw. . . whenyoudo yourpart,we
areconvincedthatyougetthebenefit.
- President Vicente
FoxofMexico
Thereis no wayyoucan sustaineconomicgrowthwithout
accessinga big
andsustainedmarket.
- President
YoweriMuseveni
ofUganda
Wetakethechallenge ofinternational
competitionina levelplayingfield
as
an incentive
todeepenthereform for
process the overall sustaineddevelop-
mentoftheeconomy, wtomembership workslikea wrecking ball,smashing
whateverisleftintheoldedifice
oftheformerplannedeconomy.
- JinLiqun,ViceMinister ofFinanceofChina

Thereisan odddisconnect between debatesaboutglobalization indeveloped econo-

miesand developing economies. Amongintellectuals in developed
areasoneoften
hearstheclaimthatglobaleconomicintegration is leadingtorisingglobalinequal-
- thatis,thatintegration
ity benefitsrichpeopleproportionally morethanpoorpeo-
ple. In the extremeclaimspoorpeopleare actuallymade out to be worseoff
absolutely (as in theepigraphfromSchwarz).In developing economies, though,
intellectualsandpolicymakers oftenviewglobalization as providing
goodopportuni-
tiesfortheircountries andpeople.To be sure,theyarenothappywiththecurrent
stateofglobalization. Theepigraph fromPresident YoweriMuseveni, forexample,
comesfrom a speechthatblastsrichcountries fortheirprotectionism againstpoor
countries andlobbiesforbetter market access.Butthepointofthesecritiques isthat
-
integrationthrough trade,foreign
foreign investment, -
andimmigrationis basi-
a for
cally goodthing poor countries and thatrich countries coulddo a lotmoreto
facilitate -
integrationthatis,makeitfreer. Theclaimsfrom antiglobalization intel-
lectualsinrichcountries, however, leadinescapably totheconclusion thatintegra-
tionis bad forpoorcountries and thattherefore tradeand otherflowsshouldbe
morerestricted.
Thefirst goalofthisarticleis todocument whatis knownabouttrends in global
inequality andpoverty overthelongtermandduringtherecentwaveofglobaliza-
tionthatbeganaround1980. Globalinequality is usedtomeandifferent thingsin

146 TheWorldBankResearchObserver,
vol.20, no.2 (Fall 2005)

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different - distribution
discussions amongall thecitizens oftheworld,distribution
within distribution
countries, amongcountries,distributionamongwageearners -
all ofwhichare usedin thisarticle.A secondgoal ofthearticleis to relatethese
trendstoglobalization.
Thefirst discusses
sectionbriefly thegrowing integrationofdeveloping economies
withindustrialized andwitheachother,
countries startingaround 1980. The opening
oflargedeveloping suchas ChinaandIndia,isarguably
countries, themostdistinctive
featureofthiswaveofglobalization.
Thesecondsection, theheartofthearticle, pre-
sentsevidenceinsupport in
offivetrends inequality
andpoverty since1980:
Growth ratesin poorcountries have acceleratedand are higherthangrowth
ratesinrichcountries timeinmodern
forthefirst history.
Thenumber ofextremely poorpeople(thoselivingonlessthan$1 a day)inthe
worldhas declinedsignificantly- by 375 millionpeople- forthefirst
timein
history,though thenumber livingon lessthan a
$2 day has increased.
Globalinequality has declinedmodestly, a 200-yeartrendtoward
reversing
higher inequality.
Within-country inequalityisgenerallynotgrowing.
Wageinequality is risingworldwide. Thismayseemto contradict thefourth
trend,butitdoesnotbecausethereis no simplelinkbetweenwageinequality
andhousehold incomeinequality.
Thethirdsectionthentriestodrawa linkbetweentheincreased integrationand
acceleratedgrowthandpoverty reduction.
Individual cases,cross-country statisti-
cal analysis,and micro-evidence fromfirmsall suggestthatopeningto tradeand
directinvestment has beena goodstrategy forsuchcountries as theChina,India,
Mexico,Uganda,andVietnam. Theconclusions forpolicyin thefourth sectionare
very much in the of
spirit the comments fromPresidents Fox and Museveni. Devel-
opingeconomies havea lottodo todevelopin generalandtomakeeffective use of
as
integrationpart oftheirdevelopment strategy.Richcountries coulddo a lotmore
withforeign aidtohelpwiththatwork.AsMuseveni accesstomarkets
indicates, in
richcountries isimportant.A lotofprotections
remaininOrganisation forEconomic
Co-operationandDevelopment (oecd)markets
from thegoodsandpeopleofdeveloping
economies,andglobalization wouldworkmuchbetter forpoorpeopleifdeveloping
areashadmoreaccesstothosemarkets.

GrowingIntegrationbetween Developed and Developing

Economies
Globaleconomic hasbeengoingonfora longtime.In thatsense,global-
integration
izationis nothing
new.Whatis newinthismostrecentwaveofglobalization is the

DavidDollar 147

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way developingcountriesare integrating
withrichcountries.As in previouswaves
thischange is drivenpartlyby technologicaladvances in transport
ofintegration,
and communications and partlybydeliberatepolicychoices.

EarlierWavesof Globalization

From 1820 to 1870 the worldhad alreadyseen a fivefold increasein the ratioof
trade to gross domesticproduct(gdp)(table 1). Integrationincreasedfurtherin
18 70-1 914, spurredbythedevelopment ofsteamshippingand byan Anglo-French
tradeagreement.In thisperiodthe worldreached levels of economicintegration
comparablein manyways to thoseoftoday.The volumeoftraderelativeto world
incomenearlydoubledfrom10 percentin 1870 to 18 percenton theeve ofWorld
WarI. Therewerealso largecapitalflowsto rapidlydeveloping partsoftheAmericas,
and theownershipofforeignassets(mostlyEuropeansowningassetsin othercoun-
tries)morethan doubledin thisperiod,from7 percentofworldincometo 18 per-
cent. Probablythe most distinctivefeatureof this era of globalizationwas mass
migration.Nearly10 percentofthe world'spopulationpermanently relocatedin
this period (Williamson2004). Much of this migrationwas frompoor parts of

Table 1. MeasuresofGlobalIntegration
CapitalFlows TradeFlows andCommunications
Transport Costs(constant
US$)
Sea Freight TelephoneCall
(averageocean AirTransport (averagepricefora
Assets/
Foreign freight andport (averagerevenue 3-minutecallbetween
Year Worldgdp(%) Trade/
gdp(%) charges perton) perpassengermile) NewYorkandLondon

1820 - 2 - - -
1870 6.9 10 - - -
1890 - 12 - - -
1900 18.6 - - - -
1914 17.5 18 - - -
1920 - - 95 - -
1930 8.4 18 60 0.68 245
1940 - - 63 0.46 189
1945 4.9 - - - -
1950 - 14 34 0.30 53
1960 6.4 16 27 0.24 46
1970 - 22.4-20 27 0.16 32
1980 17.7 - 24 0.10 5
1990 - 26 29 0.11 3
1995 56.8 - - - -

Source:Crafts(2000) forcapitalflows;Maddison(1995) and Crafts(2000) fortradeflows;WorldBank (2002)

fortransport
and communications costs.
- notavailable.

148 TheWorldBankResearchObserver,
vol.20, no.2 (Fall 2005)

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EuropetotheAmericas. Buttherewas alsoconsiderable migration from Chinaand
India(muchofitforced in
migration India). While globalindicators showed consid-
erableintegrationin 1870-1914,thiswas alsotheheydayofcolonialism, andmost
oftheworld'speopleweregreatly restrictedintheiropportunities tobenefit from the
expanding commerce.
Globalintegration tooka bigstepbackwardduringthetwoworldwarsand the
GreatDepression. Somediscussions ofglobalizationtodayassumeitwas inevitable,
butthisdarkperiodisa powerful reminder thatpoliciescanhaltandreverse integra-
tion.Bytheendofthisdarkerabothtradeand foreign assetownership wereback
closetotheirlevelsof1870- theprotectionist periodundid50 yearsofintegration.
The era offreemigration was also at an end,as virtually all countries imposed
onimmigration.
restrictions
FromtheendofWorldWarII to about1980, industrialized countries restored
muchoftheintegration thathad existedamongthem.Theynegotiated seriesofa
mutualtradeliberalizations undertheauspiceoftheGeneralAgreement on Tariffs
andTrade.Butliberalization ofcapitalflowsproceeded moreslowly,and notuntil
1980 didthelevelofownership offoreign assetsreturned toits1914 level.Overthis
period therewas also modest liberalization ofimmigration in manyindustrialized
countries,especiallytheUnitedStates.In thispostwar periodofglobalization, many
developing economies chose to sit on the sidelines.
Most developing areas in Asia,
Africa,andLatinAmericafollowed import-substitutingindustrializationstrategies,
keeping theirlevelsofimportprotection farhigher than inindustrialized countriesto
encourage domestic production of manufactures and usuallyrestricting foreign
investment bymultinational firms toencourage thegrowth ofdomestic firms. While
limitingdirect investment,several developing economies turned to the expanding
internationalbankborrowing sectorinthe1970s andtookon significant amounts
offoreigndebt.

RecentWaveofGlobalization
Themostrecentwaveofglobalization startedin 1978 withtheinitiationofChina's
economicreform and openingto theoutsideworld,whichroughly coincideswith
thesecondoil shock,whichcontributed to externaldebtcrisesthroughout Latin
Americaand in otherdeveloping economies.In a growing numberofcountries in
LatinAmerica,SouthAsia,andSub-Saharan Africa political leaders
andintellectual
begantofundamentally rethinkdevelopment strategies. partofthis
Thedistinctive
isthatthemajority
latestwaveofglobalization ofdevelopingeconomies(interms of
population)shiftedfroman inward-focused strategyto a moreoutward-oriented
one.
Thisalteredstrategy can be seenin thehugeincreasesin tradeintegration of
developingareasoverthepasttwodecades.China'sratiooftradetonationalincome

DavidDollar 149

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has morethandoubled,andcountries suchas Mexico,Bangladesh, Thailand,and
Indiahaveseenlargeincreases as well(figure1). Butseveraldevelopingeconomies
tradelessoftheirincomethantwodecadesago,a factthatwillbe discussed later.
The changehas notbeenonlyin theamount,butalso in thenatureofwhatis
traded.Twentyyearsago, nearly80 percentofdeveloping country merchandise
exportswere primary the of
products: stereotype poor countries exportingtinor
bananashada largeelement oftruth. Thebigincreaseinmerchandise exportsinthe
pasttwo decades, however,has been ofmanufactured products,so that80 percent
oftoday'smerchandise from
exports developingcountriesaremanufactures (figure 2).
Garments from CD
Bangladesh, players from China, from
refrigerators Mexico, and
computer from
peripherals Thailand- thesearethemodern faceofdevelopingeconomy
exports.Serviceexports fromdeveloping areashave also increasedenormously -
bothtraditional suchas tourism,
services, andmodern ones,suchas software from
Bangalore,India.
Manufactured exportsfromdeveloping economies areoften partofmultinational
production networks. Nikecontracts withfirmsin Vietnamto makeshoes;the
"worldcar" is a reality,
withpartsproducedin different locations.So partofthe
answertowhyintegration has takenoffmustliewithtechnological advancesthat

Figure 1. ChangeinTradeas a Shareofgdp,SelectedCountries,

1977-97 (%)

Source:WorldBank(2002).

150 TheWorldBankResearchObserver,
vol.20, no.2 (Fall 2005)

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Figure2. Developing
Country bySector,1965-99 (% oftotal)
Exports

Manufactures
^f

^i*^
20- ^^^^ ^^Minerals

Agriculture V '

^ "i I I I I I l
1965 1970 1975 1980 1985 1990 1995

Source: World Bank (2002).

makeintegrated production feasible(seetable1 forevidence ofthedramatic declines

in thecostofair transport and international communications). But partofthe
answeralso liesin policychoicesofdeveloping economies.Chinaand Indiahad
almosttotallyclosedeconomies, so theirincreased integrationwouldnothavebeen
without
possible stepstogradually liberalize
tradeanddirect foreign investment.
Somemeasureofthispolicytrendcan be seenin averageimport tariff
ratesfor
developingeconomies. Since1980 averagetariffs have declinedsharplyin South
Asia,LatinAmericaandtheCaribbean, andEastAsiaandPacific, whereasinAfrica
andtheMiddleEasttherehasbeenmuchlesstariff-cutting (figure3). Thesereported
averagetariffs,
however, captureonlya smallamountofwhatis happening with
tradepolicy.Often themostpernicious impediments are nontariffbarriers: quotas,
schemes,
licensing restrictions
onpurchasing exchangeforimports,
foreign andthe
like.Chinastarted to reducethesenontariff impediments in 1979, whichledto a
dramaticsurgeintrade(figure 4). In 1978 external tradewasmonopolized bya sin-
glegovernment ministry.1Specific measuresadoptedin Chinaincludedallowinga
growing number offirms,including privateones,totradedirectly andopeninga for-
eignexchangemarket tofacilitate
thistrade.
Anothermajorimpediment to trade inmanydeveloping areasis inefficient
ports
andcustomsadministration. Forexample, itis muchmoreexpensive toshipa con-
taineroftextiles
from a Mombasa,Kenya,porttotheEastCoastoftheUnitedStates

DavidDollar 151

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 Tariff
Figure3. AverageUnweighted Rates,byRegion,1980-98 (%)

^^
|=31986"90
1980-85

EU 1991-95

South Latin
AmericaEastAsia Sub- Middle
EastandEuropeand Industrialize
Asia andthe andthe Saharan North
Africa Central economies
Caribbean Pacific Africa Asia

Source:WorldBank (2002).

andVolumesinChina,1978-2000
Figure4. TradeReforms

Trade/GDP
(log) tariff
Average
201 V '5
^ rate
tariff
Average

1.6- . ^ / "-4
^- **'^'/

1.2- Trade/GDP^ ^/ ! ' . 0.3

j

0.8 - I | 'i988 8,000trading

companies' 0.2
j
! ! ! 1986 Foreignexchangeswapmarket
j
' i '1984 800trading
companies
0.4- ! ! i -1
! !1979 Openspecialeconomiczones toFDI,foreign
exchangeretention
M i i i
i1978 Trade monopolized fForeignEconomicRelationsand Trade
byMinistry
0-4- i- , , i 1 ' , , , . . r-L0
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Source:Dollarand Kraay(2003).

152 TheWorldBankResearchObserver,
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thanfrom Asianportssuchas Mumbai,Shanghai,Bangkok, orKaohsiung, Taiwan
(China),even though Mombasa is closer (Clarkand others2004). The extra cost,
equivalentto an 8 percent exporttax,is duetoinefficiencies andcorruption in the
port.Long customs delays often
act as and
import export taxes. Developing econo-
miesthathavebecomemoreintegrated withtheworldeconomyhavereasonably
well-functioningportsandcustoms, andtheirimprovement has oftenbeena delib-
eratepolicytarget.Severalcountries, includingKenya,tradelessoftheirincome
today than 20 yearsago; this
surely is the
partly tradepolicies,
resultofrestrictive
definedbroadly toinclude inefficient
ports and customs.
Thus,one keydevelopment in thiscurrent wave ofglobalizationis a dramatic
change inthewaymanydeveloping countries relate
tothe globaleconomy. Developing
economies as a wholearea majorexporter ofmanufactures - manyof
and services
whichcompete withproducts
directly madeinindustrialized Thenatureof
countries.
tradeandcompetition between richandpoorcountries hasfundamentally changed.

AcceleratedGrowth Reduction
and Poverty
in DevelopingEconomies
Someofthedebateaboutglobalization concernsitseffectson poorcountries and
poorpeople.The introductionquotes severalsweeping statementsthat assertthat
globaleconomicintegrationis increasing
poverty and inequalityin theworld.But
-
isfarmorecomplex andtosomeextent
thereality runsexactlycounter towhatis
beingclaimed Thus,
byantiglobalists. thissectionfocuseson the trends in global
poverty and thefollowing
and inequality, sectionlinksthemto globalintegration.
Thetrendsofthelast20 yearshighlightedhereare:
Growth ratesofdeveloping economieshave accelerated and are higherthan
thoseofindustrializedcountries.
Thenumberofextremely poorpeople(thoselivingon lessthan$1 a day)has
declinedforthetimeinhistory, thoughthenumber ofpeoplelivingon lessthan
$2 a dayhasincreased.
Measuresofglobalinequality havedeclined
(suchas theglobalGinicoefficient)
modestly, a
reversinglong trend
historical toward greaterinequality.
Within-country ingeneralisnotgrowing,
inequality thoughithasriseninsev-
eralpopulouscountries (China,India,theUnitedStates).
Wageinequality in generalhas beenrising(meaninglargerwageincreases for
skilled
workers thanforunskilled workers).
Thefifthtrendmayseemtoruncountertothefourth trend;whyitdoesnotwillbe
explainedhere.
The fifth
trend is for
important explaining about
someoftheanxiety
in
globalization industrialized
countries.

DavidDollar 153

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 Ratesin Developing
Growth HaveAccelerated
Economies

Reasonablygooddataoneconomic growth since1960 forabout100 countries that

accountforthevast majority ofworldpopulationare summarized in thePenn
WorldTables(CenterforInternational Comparisons 2004). Aggregating data on
growth rates
for industrialized
countriesand developingeconomies forwhich there
aredatasince1960 showsthatingeneralgrowth rateshavedeclinedinrichcoun-
trieswhileaccelerating in developingcountries(figure5). In particular,in the
1960s growth ofOECD countrieswas abouttwiceas fastas thatofdeveloping areas.
Percapitagrowth ratesinrichcountrieshavegradually declinedfrom about4 per-
centin the1960s to 1.7 percentin the 1990s- closeto thelong-term historical
trendrateoftheoecdcountries. Therapidgrowthin the 1960s was stillto some
extenta reboundfromthedestruction ofWorldWarII as wellas a payoff to eco-
nomicintegration amongrichcountries.
In the1960s andearly1970s,thegrowth rateofdevelopingeconomies waswell
belowthatofrichcountries, a paradoxwhoseoriginhas beenlongdebated.The
slowergrowthofless developedeconomieswas a paradoxbecauseneoclassical
growth theorysuggested thatotherthingsbeingequalpoorcountries shouldgrow

Figure 5. GDP
perCapitaGrowth Type,1960s-1990s (%)
Rate,byCountry

Industrialized
countries

4 - ^^H

lh
^^^B Developing

1960s 1970s 1980s 1990s

Source:CenterforInternational
Comparisons(2004).

154 TheWorldBankResearchObserver,
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faster.
Thispattern finallyemerged inthe1990s,withpercapitagrowth indevelop-
ingcountriesofabout 3.5 percent- morethan twice therateofrichcountries.
Thishighaggregate growth dependsheavilyon severallargecountries thatwere
the
among poorest in the world in 1980 but thathave grown wellsince then.Ignor-
ingdifferencesin population and averaginggrowthratesin poorcountries over
1980-2000 resultin an averagegrowthofaboutzeroforpoorcountries. China,
India,and severalsmallcountries, in Africa,
particularly are amongthepoorest
quintileofcountriesin 1980. Ignoring population, theaveragegrowth ofChadand
Chinais aboutzero,and the averagegrowthofIndia and Togo is aboutzero.
Accounting fordifferences inpopulation,though, theaveragegrowth ofpoorcoun-
trieshasbeenverygoodinthepast20 years.Chinaobviously carriesa largeweight
inanycalculation ofthegrowth ofpoorcountries in 1980,butitisnottheonlypoor
country thatdid well: Bangladesh, India,and Vietnam also grewfasterthanrich
countriesinthesameperiod.SeveralAfrican economies, notablyUganda,alsohad
acceleratedgrowth.

TheNumber PoorPeopleHas Declinedby375 MillionGlobally

ofExtremely
Themostimportant pointinthissection isthatpoverty reduction inlow-income coun-
tries
isveryclosely related tothegdpgrowth rate.Theaccelerated growth oflow-income
countries has ledto unprecedented poverty reduction.Bypoverty I meansubsisting
belowsomeabsolute threshold. Mostpoverty analysesare carried out withcountries'
ownpoverty whicharesetincountry
lines, contextandnaturally differ.
China,forexample,uses a poverty linedefined in constantChineseyuan.The
poverty lineis deemedtheminimum amountnecessary tosubsist.In practice, esti-
matesofthenumber ofpoorin a country suchas Chinacomefrom household sur-
veys carried out by a statisticalbureau. These surveys aim to measure what
households actuallyconsume.Mostextremely poorpeoplein theworldare peas-
ants,and theysubsistto a largeextenton theirown agricultural output.To look
onlyat theirmoneyincomewouldnotbeveryrelevant, becausetheextremely poor
haveonlylimited involvement in themoneyeconomy. Thusmeasuresaskhouse-
holdswhattheyactuallyconsumeandattacha valuetotheirconsumption basedon
thepricesofdifferent commodities. So a poverty lineis meantto capturea certain
reallevelofconsumption. Estimating the extent ofpoverty is obviously subjectto
error,butinmanycountries themeasuresaregoodenoughtopickup largetrends.
In discussing it is
poverty important to be clearon thepoverty linebeingused.In
globaldiscussions international poverty linesofeither$1 day $2 a day,calcu-
a or
latedatpurchasing powerparity, areused.Fordiscussions ofglobalpoverty a common
lineshouldbeappliedtoallcountries.
ChenandRavallion(2004) usedhouseholdsurveydatatoestimate thenumber
ofpoorpeopleworldwide basedon the$1 a dayand $2 a daypoverty linesbackto

DavidDollar 155

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1981. Theyfoundthattheincidence ofextreme poverty (consuming lessthan$1 a
day) was basicallycut in halfin 20 years, from 40.4 percent of thepopulation in
developing economiesin 1981 to 21.1 percent in 2001. It is interestingthatthe
declinein $2 a daypoverty incidence was notas great,from66.7 percent to 52.9
percent,overthesameperiod.
Povertyincidence has beengradually declining throughout modern history, but
in generalpopulation growth has outstripped thedeclinein incidence so thatthe
totalnumber ofpoorpeoplehasactually risen.Evenin 1960-80,a reasonably pros-
perousperiodfordeveloping economies, thenumberofextremely poorpeoplecon-
tinuedto rise(figure6).2Moststriking in thepast20 yearsis thatthenumberof
extremelypoorpeople declined by 3 75 whileatthesametimeworldpopula-
million,
tionroseby1.6 billion.Butthedeclinewas notsteady:in 1987-93 thenumber of
extremelypoorpeople rose, as growth slowed in China and India underwent an eco-
nomiccrisis.
After 1993 growth andpoverty reductionaccelerated inbothcountries.
The1981-2001 declineinthenumber ofextremely poorpeopleisunprecedented
inhumanhistory. Atthesametimemanyofthosewhoroseabovetheverylow$1 a
daythreshold arestilllivingon lessthan$2 a day.Thenumberofpeoplelivingon
lessthan$2 a dayincreased between1981 and2001 bynearly300 million. About
halftheworlspopulation stillliveson lessthan$2 a day,anditwilltakeseveral
moredecadesofsustained growth tobringthisfigure downsignificantly.

Figure6. Extreme intheWorld,1820-2001 (millions

Poverty ofpeoplelivingon lessthan$1
a day)

1,500-j

andMorrisson I
,|4QQ_ Bourguignon

1,300- / ^/ I

1,200- / Y'

1,100- s^ i^
yS ChenandRavallion

1,000- /

900- r
1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

Source: andMorrisson
Bourguignon (2002);ChenandRavallion
(2004).

156 TheWorld
BankResearch vol.20,no.2 (Fall2005)
Observer,

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 Although theoveralldeclinein extreme poverty is positivenews,performance
has variedbyregion.SouthAsiaandEastAsia and Pacificgrewwelland reduced
poverty,butSub-Saharan Africahadnegative growth between1981 and2001 and
a riseinpoverty:
thenumber ofextremely poorpeople there from164 mil-
increased
lion(41.6 percent
ofthepopulation) to316 million(46.9 percent ofthepopulation).
Two-thirds ofextremely
poorpeople still
liveinAsia,but ifstronggrowththerecon-
tinues, willbeincreasingly
globalpoverty concentrated inAfrica.

GlobalInequalityHas DeclinedModestly
Globalinequality is casuallyusedtomeanseveralthings, butthemostsensibledefi-
nitionis thesame as fora country: lineup all thepeoplein theworldfromthe
poorest to the richest and calculatea measureofinequality amongtheirincomes.
Thereareseveralmeasures, ofwhichtheGinicoefficient is thebestknown.Bhalla
(2002) estimates that the globalGini coefficientdeclined from0.67 in 1980 to
0.64 in 2000 afterrisingfrom0.64 in 1960. Sala-i-Martin (2002) likewisefinds
thatall thestandardmeasuresofinequalityshowa declinein globalinequality
since1980. BothBhalla and Sala-i-Martin combinenationalaccountsdata on
incomeor consumption withsurvey-based data on distribution. Deaton(2004)
discussestheproblems ofusingnationalaccountsdata forstudying poverty and
inequality, notingamongotherthingsthatthegrowth ratesin nationalaccounts
data forChinaand India are arguablyoverestimated. Thisbias wouldtendto
exaggerate thedeclineinglobalinequality overthepast25 years.Hence,thereis a
fairdegreeofuncertainty aboutthemagnitude oftheestimated declinein global
inequality.3
Forhistoricalperspective, Bourguignon and Morrisson(2002) calculatethe
global Gini coefficient back to 1820. Althoughconfidence in theseearlyesti-
matesis nothigh,theyillustrate an important point:globalinequalityhas been
on therisethroughout moderneconomichistory. Bourguignon and Morrisson
estimatethattheglobalGinicoefficient rosefrom0.50 in 1820 to about0.65
around1980 (figure7). Sala-i-Martin (2002) estimates thatithas sincedeclined
to0.61.
Othermeasures ofinequality suchas meanlogdeviation showa similar trend,ris-
ing untilabout 1980 and then declining after
modestly (figure 8). Roughlyspeak-
ing,themeanlogdeviation isthepercent differencebetweenaverageincomeinthe
worldandtheincomeofa randomly chosenindividual whorepresents a typical
per-
son.Averagepercapitaincomeintheworldtodayis around$5,000,butthetypical
personliveson 20 percent ofthat,or$1,000. Theadvantageofthemeanlogdevia-
tionis thatitcan be decomposed intoinequality betweencountries in
(differences
percapitaincomeacrosscountries) andinequality withincountries. Thisdecompo-
sitionshowsthatmostinequality intheworldcanbe attributed toinequalityamong

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Figure7. GlobalGiniCoefficient,
1820-1997

0.70-

0.65- -~- -*-* *"

0.60- /"
/ Bourguignon-Morrisson Sala-i-Martin

0.55- y/

0.50- S

0.45-

0.40-1] , , , , , , , , ,
1820 1850 1880 1910 1940 1970 1976 1982 1988 1994

Source:Bourguignonand Morrisson(2002); Sala-i-Martin

(2002).

countries.Globalinequality rosefrom1820 to 1980, primarily becausealready

richcountries
relatively (thoseinEuropeandNorthAmerica)grewfaster thanpoor
ones.As notedin the discussionofthe firsttrend,thatpatternof growthwas
reversedstarting around1980, and thefastergrowthin suchpoorcountries as
Bangladesh, China,India, and Vietnam accounts for the modest declinein global
inequalitysincethen.4(Slowgrowth in Africatendedtoincreaseinequality, faster
growth in low-income Asia tended to reduce it, and Asia's growth modestly out-
weighed Africa's.)
Thinking aboutthedifferent experiences ofAfrica andAsia,as inthelastsection,
helpsgive a clearerpicture ofwhat is likely happeninthefuture.
to Rapidgrowth in
Asiahasbeena force forgreater globalequality becausethatiswherethemajority of
theworld'sextremely poorpeople lived in 1980 - and they benefitedfrom growth.
Butifthesamegrowth trends persist, theywillnotcontinue tobe a forceforequal-
ity.Sala-i-Martin (2002) projectsfutureglobalinequality ifthe growthratesof
1980-98 persist: globalinequality will continue to decline untilabout2015, after
whichglobalinequality willrisesharply (seefigure 8). A largeshareoftheworld's
poorpeople still
lives in India and other Asian countries, so thatcontinued rapid
growth therewillbe equalizing foranotherdecadeorso. Butincreasingly poverty
willbeconcentrated inAfrica, so thatifslowgrowth persists there,globalinequality
willeventually riseagain.

158 TheWorldBankResearchObserver,
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Figure8. GlobalHouseholdInequality,
1820-2050 (meanlogdeviation)

1.2-1

1.0- /

0.8- Sala-i-Martin y^
^^^X^^^

0.6-
/
>^ Bourguignon-Morrisson
0.4-

0.2-

0.0[- ,,,,,, , , , , , , , , , , ,
1820 1986 1994 2001 2010 2018 2026 2034 2042 2050
1978
185O87189O91%2995197O

Source: Bourguignon and Morrisson (2002); Sala-i-Martin (2002).

InequalityIs in GeneralNot Growing

Within-Country
Theprevious analysisshowsthatinequality withincountries small
has a relatively
rolein measuresofglobalincomeinequality. Butpeoplecareabouttrendsin ine-
qualityintheirownsocieties(arguably morethantheycareaboutglobalinequality
and poverty). question whatis happeningto incomeinequality
So a different is
withincountries.Onecommonclaimaboutglobalization is thatitleadsto greater
inequalitywithincountries
and thus fosters
social
and polarization.
political
To assessthisclaimDollarandKraay(2002) collected incomedistribution data
frommorethan100 countries, in somecasesgoingbackdecades.Theyfoundno
generaltrendtowardhigherorlowerinequality withincountries. Focusingon the
shareofincomegoingtothebottom anothercommonmeasureofinequal-
quintile,
ity,theyfound in
increases inequality forsome countries(forexample,Chinaand
theUnitedStates)inthe1980s and 1990s anddecreasesforothers. Theyalsotried
to use measuresof integration to explainthe changesin inequalitythathave
occurred,butnoneofthechangeswererelatedtoanyofthemeasures. Forexample,
countriesin whichtradeintegration increasedshowedrisesin inequality in some

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cases and declinesin others(figure9). Theyfoundthe same resultsforother
measures, suchas tariff ratesandcapitalcontrols. Particularly inlow-income coun-
muchoftheimport
tries, protection benefited rich
relatively and powerful groups,so
thatintegration withtheglobalmarket wenthandinhandwithdeclines inincome
inequality.It is widelyrecognized thatincomedistribution datahavea lotofmea-
surement error,whichmakesit difficult to identifysystematic relationships,but
giventheavailabledata,thereis no robustevidencethatintegration is systemati-
callyrelatedto higher inequality within countries.
Therearetwoimportant caveatstothisconclusion. First,inequality has risenin
severalverypopulouscountries, notably China, India,and the United States.This
meansthata majority ofcitizensoftheworldliveincountries inwhichinequality is
rising.Second, thepicture of inequality is not so favorablefor richcountriesin the
past decade. The Luxembourg IncomeStudy,using comparable, high-quality
incomedistribution dataformostrichcountries, findsno obvioustrends ininequal-
itythrough the mid-to late 1980s. Over the pastdecade,through, inequality has
increasedinmostrichcountries. Becauselow-skilled workers inthesecountries now
compete more with workers in developing economies, global economic integration
can createpressure forhigherinequality in richcountries whilehavingeffects in
poor countries thatoften go the other way. The good news from the Luxembourg
IncomeStudyisthat"domestic policiesandinstitutions stillhavelargeeffects onthe
levelandtrendofinequality withinrichandmiddle-income nations, evenin a glo-
balizingworld Globalization doesnotforceanysingleoutcomeon anycountry"

Figure9. Correlation
betweenChangeinGiniCoefficient
andChangeinTradeas a Shareofgdp

15-

*
*


-.;.

5U;a %%**
s

*.'' * *
i
* *
%

-10-

-15-

Chanae in trade to GDP

Source:Dollarand Kraay(2002).

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(Smeeding 2002, p. 179). In otherwords,somerichcountrieshave maintained
stableincomedistributionsinthiseraofglobalization
through socialandeco-
their
nomicpolicies(ontaxes,education, andthelike).
welfare,

WageInequalityIs RisingWorldwide
Much of the concernabout globalization in richcountriesrelatesto workers,
wages,and otherlabor The
issues. most comprehensive examination ofglobaliza-
tionand wages used International Labour Organization data from the pasttwo
decades(Freemanand others2001). Thesedata lookacrosscountries at whatis
to for
happening wages veryspecific occupations (forexample, bricklayer,primary
schoolteacher,nurse,autoworker). The studyfoundthatwages have generally
been risingfastestin moreglobalizeddevelopingeconomies,followedby rich
andthenlessglobalized
countries, developingeconomies(figure 10). Moreglobal-
izeddeveloping economiesare thetopthirdofdeveloping economiesin termsof
increasedtradeintegration overthepast20 years(Dollarand Kraay2004). Less
globalizeddeveloping economiesare the remaining developing economies.The
fastestwage growthis occurringin developingeconomiesthat are actively
increasingtheirintegrationwiththeglobaleconomy.
Although general in wagesis goodnews,thedetailed
the rise findingsfrom Free-
manandothers(2001) aremorecomplex andindicate thatcertain typesofworkers
morethanothers.
benefit First,increasedtradeis relatedto a declinein thegender

Figure 10. WageGrowth Type,1980s-1990s (%)

byCountry

30- . .

20-
^^^^^^

10- ^^^^^^H

oJ I 1 ^^^^^^H I
Less globalized Richcountries Moreglobalized
developingcountries countries
developing

Source:Freemanand others(2001).

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wage gap. Moretradeappearsto lead to a morecompetitive labormarketin which
groupsthathave been traditionally discriminatedagainst women,forexample-
-
fareespeciallywell(Oostendorp 2002). Second,thegainsfromincreasedtradeappear
to be largerforskilledworkers.Thisfinding is consistentwithotherworkshowinga
-
worldwidetrendtowardgreaterwage inequality thatis, a largergap betweenpay
foreducatedworkersand pay forlesseducatedand unskilledworkers.Galbraithand
Liu (2001), forexample,finda worldwidetrendtowardgreaterwage inequality
among industries.Wages in skill-intensive such as aircraftproduction,
industries,
havebeengoingup faster thanwagesin low-skill suchas garments.
industries,
Ifwage inequalityis goingup worldwide, how can incomeinequalitynotbe rising
in mostcountries?Thereare severalreasons.First,in the typicaldevelopingecon-
omywage earnersmake up a small share ofthe population.Even unskilledwage
workersare a relatively elitegroup.Take Vietnam,forexample,a low-incomecoun-
trywitha surveyofthesamerepresentative sampleofhouseholdsearlyin liberaliza-
tion(1993) and fiveyearslater.The majorityofhouseholdsin thecountry(and thus
in the sample) are peasants.The householddata show thatthe priceofthe main
agriculturaloutput(rice) went up dramaticallywhile the priceof the main pur-
chasedinput(fertilizer) actuallywentdown.Bothmovementsare relateddirectly to
globalizationbecause overthe surveyperiodVietnambecame a majorexporterof
rice(raisingitsprice)and a majorimporter offertilizer
fromcheaperproducers(low-
eringitsprice).Poor familiesfaceda muchbiggerwedgebetweenrice'sinputprice
and outputprice,and theirrealincomewentup dramatically (Benjaminand Brandt
2002). So, one ofthe mostimportantforcesactingon incomedistribution in this
low-incomecountryhad nothingto do withwages.
Severalruralhouseholdsalso senta familymemberto a nearbycityto workin a
factory forthefirsttime.In 1989 thetypicalwage in Vietnamesecurrencywas the
equivalentof $9 a month.Today,factoryworkersmakingcontractshoes forU.S.
brandsoftenmake $50 a monthor more. So the wage fora relativelyunskilled
workerhas gone up nearlyfivefold. But wages forsome skilledoccupations,for
example,computerprogrammers and Englishinterpreters,may have gone up 10
timesormore(Glewweand others2004). Thus,a carefulstudyofwage inequalityis
likelyto showrisinginequality.Buthow wage inequalitytranslatesintohousehold
inequalityis verycomplex.For a surplusworkerfroma largeruralhouseholdwho
obtainsa newlycreatedjob in a shoe factory, earningsincreasefrom$0 to $50 a
month.Ifmany new wage jobs are created,and iftheytypicallypay much more
than peopleearn in the ruralor informalsectors,a countrycan have risingwage
inequalitybut stableor even decliningincomeinequality.(The Ginicoefficient for
household income inequalityin Vietnam actually declinedbetween 1993 and
1998, accordingto Glewwe2004b.)
In rich countriesmost household income comes fromwages, but household
incomeinequalityand wage inequalitydo nothave to movein thesame direction. If

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thereare changesin theway thatpeoplepartnerand combineintohouseholds,
household inequalitycanriseevenifwageinequality staysthesame.Another point
aboutwageinequality andhousehold incomeinequality relevant torichcountries is
thatmeasures ofwageinequality areoften madebefore taxesaretakenoutofearn-
ings.Ifthecountry has a strongly progressive incometax,inequality measuresfrom
household data(whichareoftenmadeafter taxesaretakenoutofearnings) do not
havetofollow pretaxwageinequality. Taxpolicycan offset someofthetrends inthe
labormarket.
Finally, households can respondtoincreased wageinequality byinvesting more
in theirchildren's education.A highereconomicreturnto educationis nota bad
as
thing, long as there is equal accessto educationforall. Vietnamsaw a tremen-
dousincreaseinthesecondary schoolenrollment ratein the1990s- from32 per-
centin 1990-91 to 56 percent in 1997-98 (Glewwe2004a). Thisincreasepartly
reflectssociety'sand the government's investment in schools(supported by aid
and
donors) partly reflects households' decisions. Iflittleor no return to education is
perceived (thatis,nojobsattheendoftheroad),itismuchhardertoconvince fami-
liesin poorcountries tosendtheirchildren to school.Wherechildren havedecent
accesstoeducation, a higherskillpremium stimulates a shiftofthelaborforcefrom
low-skilltohigher-skill occupations.
Itshouldalsobenotedthattherehasbeena largedeclineinchildlaborinVietnam
sincethecountry startedintegrating withtheglobalmarket. Thereis ampleevi-
dencethatchildlaboris drivenprimarily bypoverty and educational opportunities.
Childlaboris moreprevalent in poorhouseholds, butbetween1993 and 1998 it
declinedforall incomegroups(figure 11). The changeresulted fromthefactthat
everyone was richerthan they were fiveyears earlier and from theexpansionof
schooling opportunities.
Fromthisdiscussion ofwagetrends, itiseasytoseewhysomelaborunionsinrich
countries areconcerned aboutintegration withdeveloping economies. Itisdifficultto
that is
prove integrationincreasing wageinequality, but itseems that
likely integration
isonefactor. Concerning theimmigration sideofintegration, Borjasandothers (1997)
estimate thatflowsofunskilled laborintotheUnitedStateshavereducedwagesfor
unskilled laborby5 percent from wheretheyotherwise wouldbe.Immigrants whofind
newjobsearnmuchmorethantheydidbefore (10 timesas much,according toWorld
Bank 2002), but theircompetition reducesthe wages of U.S. workersalready
doingsuchjobs.Similarly, imports ofgarments andfootwear from countries suchas
Bangladesh and Vietnam create jobs forworkers that pay far more than other opportu-
nitiesinthosecountries butputpressure onunskilled wagesinrichcountries.
Thusoveralltheeraofglobalization hasseenunprecedented reduction ofextreme
poverty and a modest decline in globalinequality. But ithas put realpressure onless
skilledworkers -
inrichcountriesa keyreasonwhythegrowing integration iscon-
troversial inindustrialized countries.

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 LevelsinVietnam,1993 and 1998
Figure11. ChildLaborandHouseholdConsumption

40%-
^^

ono/ '' N. /WW

30%-
^^^"Sv ^^4^

20%- ' 1998

6.54 6.64 6.74 6.84 6.94 7.04 7.14 7.24 7.34 7.44 7.54
Percapitahousehold 1993(logscale)
consumption

Source:Edmonds(2001).

Is Therea LinkbetweenIntegration Reduction?

and Poverty
To keeptrackofthewiderangeofexplanations thatareoffered
forpersist-
entpoverty in developing nations,it helpsto keeptwoextreme viewsin
mind.Thefirstisbasedonan objectgap:Nationsarepoorbecausetheylack
roads,and rawmaterials.
valuableobjectslikefactories, Thesecondview
invokesan idea gap:Nationsare poorbecausetheircitizens do nothave
accesstotheideasthatareusedinindustrial nationstogenerateeconomic
value. . .
Eachgapimparts a distinctive
thrust totheanalysisofdevelopment policy.
The notionof an objectgap highlights savingand accumulation. The
notionofan idea gap directsattention to thepatterns and
ofinteraction
communication between a developing country andtherestoftheworld.
-Paul Romer(1993)
Developingeconomieshavebecomemoreintegrated withtheglobaleconomy in
thepasttwodecades,andgrowth andpoverty
reduction A natural
haveaccelerated.
questioniswhether
thereis a linkbetween
thetwo.In otherwords,couldcountries

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suchas Bangladesh, China,India,and Vietnamhavegrownas rapidly iftheyhad
remained to
as closed foreign trade and investment as theywere in 1980?Thiscan-
notbe answered withscientificcertainty,butseveraldifferent typesofevidencecan
bebrought tobearonit.
Itisusefultobeginwithwhattoexpectfrom economictheory. As thequotefrom
Romersuggests, traditional growth theory focuses on accumulation andthe"object
gap"between poorcountries andrichones.Ifincreasing thenumber offactories
and
workplaces is the onlyimportant action, it does not matterwhether theenviron-
mentisclosedordominated bythestate.Thismodelwas followed intheextreme by
Chinaand theSovietUnion,and to a lesserextentbymostdeveloping economies,
whichfollowedimport-substituting industrialization strategiesthroughout the
1960s and 1970s.Thedisappointing results from thisapproachledtonewthinking
in
bypolicymakersdeveloping areas and economists studyinggrowth. Romerwas
one ofthepioneersofthenew growththeorythatemphasized how innovation
occursand is spreadand theroleoftechnological advancein improving thestan-
dardofliving.Different -
aspectsofintegrationsendingstudents abroadto study,
connecting to the Internet,allowing foreign firms toopenplants, purchasingthelat-
estequipment and components - can helpovercome the"ideagap"thatseparates
poorcountries from richcountries.
Whatis theevidenceon integration spurring growth? Someofthemostcompel-
lingevidencecomesfrom case studiesthatshowhowthisprocesscan workinpar-
ticularcountries. Amongthecountries thatwereverypoorin 1980, China,India,
Uganda,andVietnam providean interesting rangeofexamples:

China
China'sinitialreforms in thelate 1970s focusedon the agricultural sectorand
emphasized strengthening propertyrights,
liberalizing and
prices, creating internal
markets.Liberalizingforeign tradeand investment werealso partof the initial
reform and an
program played increasingly important rolein growth as the1980s
proceeded(seefigure4). Theroleofinternational
linksisdescribedina casestudyby
Eckaus(1997, pp.415-37):
China'sforeigntradebegantoexpandrapidly as theturmoil createdbythe
CulturalRevolution and newleaderscametopower.Thoughit
dissipated
wasnotdonewithout theargument
controversy, thatopeningoftheecon-
to
omy foreign tradewas necessaryto obtainnew capitalequipment and
new technology was made officialpolicy Mostobviously, enterprises
createdbyforeigninvestors
havebeenexemptfrom theforeigntradeplan-
ningand controlmechanisms. In addition,
substantialamountsofother
typesoftrade,particularly
thetradeofthetownship andvillageenterprises

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 andprivate havebeenrelatively
firms, free.Theexpansion
ofChina'spar-
in
ticipation international
tradesincethebeginningofthereform
move-
mentin 1978, has been one of the mostremarkable featuresof its
remarkabletransformation.

India
ItiswellknownthatIndiapursuedan inward-oriented intothe1980swith
strategy
disappointingresultsin growthand povertyreduction.
Bhagwati(1992, p. 48)
states
crisply the main and
problems failures
of thestrategy:
I woulddividethemintothreemajorgroups:extensive con-
bureaucratic
trolsoverproduction,
investment tradeandfor-
andtrade;inward-looking
eigninvestment and
policies; a substantial goingwellbeyond
sector,
public
theconventionalconfines and
ofpublicutilities infrastructure.
UnderthispolicyregimeIndia'sgrowthin the1960s (1.4 percenta year)and
was disappointing.
1970s (-0.3 percent) Duringthe1980s India'seconomic perfor-
manceimproved, butthissurgewas fueledbydeficit and
spending borrowing from
abroadthatwasunsustainable.Infact,
thespendingspreeledtoa fiscal
andbalanceof
payments crisis
that a
broughtnew, reform to
governmentpower in 1991. Srinivasan
(1996,p. 245) describes
thekeyreform measures
andtheirresults:
In July1991, thegovernment announceda seriesoffarreaching reforms.
Theseincludedan initialdevaluation oftherupeeandsubsequent market
determination ofitsexchangerate,abolition ofimport licensing withthe
important exceptions thatthe restrictions
on imports of manufactured con-
sumergoodsandonforeign tradeinagricultureremained inplace,convert-
(with
ibility some notableexceptions) oftherupee on the current account;
reduction in thenumberoftariff linesas wellas tariffrates;reduction in
excisedutieson a numberofcommodities; somelimited reforms ofdirect
taxes;abolition ofindustriallicensingexceptforinvestment in a few indus-
triesforlocational reasonsorforenvironmental considerations, relaxation
ofrestrictionsonlargeindustrial housesundertheMonopolies andRestric-
tiveTradePractices(mrtp) Act;easingofentryrequirements (including
equityparticipation) fordirectforeign investment; and allowingprivate
investment insomeindustries hithertoreservedforpublicsectorinvestment.
In general,
Indiahas seengoodresultsfrom itsreform withpercapita
program,
incomegrowth a yearinthe1990s.Growth
above4 percent andpoverty reduction
havebeenparticularly in
strong states
thathave made themost liberalizing
progress
theregulatoryframework andprovidinga goodenvironmentfordeliveryofinfra-
structure
services(Goswamiandothers2002).

166 vol.20, no.2 (Fall 2005)

TheWorldBankResearchObserver,

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Uganda
Ugandahas beenone ofthemostsuccessful in Africaduringthisrecent
reformers
waveofglobalization,
anditsexperiencehasinteresting
parallelswithVietnam's.It,
too,was a countrythatwas quiteisolatedeconomically in theearly
andpolitically
1980s.Theroleoftradereform initslargerreformcontext inCollier
isdescribed and
Reinikka(2001, pp.30-39):
has been centralto Uganda's structuralreform
Trade liberalization
program In 1986 theNRMgovernment inheriteda traderegimethat
includedextensivenontariff biased
barriers, government purchasing, and
highexporttaxes,coupledwithconsiderable smuggling. Thenontariff bar-
riershavegraduallybeenremoved sincetheintroduction in 1991 ofauto-
maticlicensingunderan importcertification scheme.Similarly, central
government purchasingwas reformed andis now to
subject opentendering
withouta preferencefordomestic firmsoverimports The averagereal
GDPgrowth ratewas 6.3 percent peryearduringtheentirerecovery period
(1986-99) and 6.9 percent in the 1990s. The liberalization
oftrade has
had a markedeffecton exportperformance. In the1990s exportvolumes
grew(at constantprices)at an annualized rate of15 percent, and import
volumesgrewat 13 percent. Thevalueofnoncoffee exports increasedfive-
foldbetween1992 and 1999.

Vietnam
Thesamecollection thatcontainsEckaus's(1997) studyofChinaalso has a case
of
study Vietnam, analyzinghowthecountry wentfrombeingone ofthepoorest
countriesin the1980s tobeingoneofthefastestgrowing economiesin the1990s
and
(Dollar Ljunggren 1997,pp.452-55):
ThatVietnamwas ableto growthroughout itsadjustment periodcan be
attributed to thefactthattheeconomywas beingincreasingly openedto
theinternational market. As partofitsoveralleffort
to stabilize
theecon-
omy,thegovernment unifieditsvariouscontrolled
exchangeratesin 1989
anddevaluedtheunified ratetothelevelprevailingintheparallelmarket.
Thiswas tantamount to a 73 percentrealdevaluation;combinedwith
relaxedadministrative procedures forimportsand exports,thissharply
increased theprofitability
ofexporting.
This. . . policyproduced strongincentivesforexportthroughout mostof
the1989-94 period.Duringtheseyearsrealexportgrowth averagedmore
than2 5 percent perannum,andexports werea leadingsectorspurringthe
expansion oftheeconomy. Riceexportswerea majorpartofthissuccessin

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 1989; and in 1993-94 therewas a widerangeofexportson therise,
including processed
primary products(e.g.,rubber,cashews,and coffee),
labor-intensive
manufactures,andtouristservices In responsetostabili-
zation,strengthenedproperty and
rights, greater to
openness foreign trade,
domestic savingsincreased
bytwenty percentage pointsofgdp,fromnega-
tivelevelsinthemid-1980sto16 percent ofgdpin 1992.

Are TheseIndividualCountry
FindingsGeneralizable?
Thesecasesprovide persuasive evidencethatopennesstoforeign tradeandinvest-
ment - coupledwithcomplementary reforms- canleadtofaster growth indevelop-
ingeconomies. Butindividual casesalwaysbegthequestion, howgeneralarethese
results?Does the typicaldeveloping economy that liberalizes foreign tradeand
investment getgoodresults? Cross-country statisticalanalysisisusefulforlooking at
thegeneralpatterns in thedata.Cross-country studiesgenerally finda correlation
between tradeandgrowth. To relatethistothediscussion inthefirst section,some
developing economies have had large increases in trade integration (measuredas
theratiooftradetonationalincome),andothershavehad smallincreases oreven
declines.In general, thecountries thathadlargeincreases alsohadaccelerations in
The of
growth. group developing economy globalizers identified by Dollar andKraay
(2004) hadpopulation-weighted percapitagrowth of5 percent inthe1990s,com-
paredwith2 percent inrichcountries and-1 percent forotherdeveloping countries
(figure12). Thisrelationship between tradeandgrowth persists aftercontrollingfor
reversecausalityfromgrowthto tradeand forchangesin otherinstitutions and
policies(DollarandKraay2003).
A third typeofevidence aboutintegration andgrowth comesfrom firm-levelstud-
iesandrelatestotheepigraph from Romer.Developing economies often havelarge
productivity dispersion acrossfirms makingsimilarthings:high-productivity and
low-productivity firms coexist,and in small markets there is ofteninsufficientcom-
petitiontospurinnovation. A consistent findingoffirm-level studiesisthatopenness
leadstolowerproductivity dispersion (Haddad 1993; Haddad and Harrison1993;
Harrison1994). High-cost producers exitthe market as pricesfall;ifthesefirms
werelessproductive orwereexperiencing falling productivity, theirexitsrepresent
productivity for the
improvements industry. Although the destruction andcreation
ofnewfirms is a normalpartofa well-functioning economy, attention is simplytoo
oftenpaidtothedestruction offirms - whichmisseshalfthepicture. Theincreasein
exitsis onlypartoftheadjustment - granted, itis thefirst andmostpainful part-
butiftherearenosignificant barriers toentry,therearealsonewentrants. Theexits
areoften front loaded,butthenetgainsovertimecanbesubstantial.
Wacziarg(1998) uses11 episodesoftradeliberalization inthe1980s toexamine
competition andentry. Usingdataon thenumberofestablishments ineachsector,

168 TheWorldBankResearchObserver,
vol.20, no.2 {Fall 2005)

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Figure 12. PerCapitagdpGrowth Type,1990s (%,basedongdpinpurchasing
Rates,byCountry
powerparityterms)

6"

4"

2 r^- - 1
*-,'*.''
....
0 1 - 1
^ Richcountries
^^^^^^^H Developing
^^^^^^^^ country
Otherdeveloping globalizers
r*riintrife

Source:Dollarand Kraay(2004).

he calculatesthatentryrateswere20 percenthigherin countries thatliberalized

thanincountries thatdidnot.Thisestimate mayreflect otherpoliciesthataccompa-
niedtradeliberalization,
suchas privatization
andderegulation, so thisislikelytobe
an upperboundoftheimpactoftradeliberalization. However, itis a sizableeffect
and indicatesthatthereis plentyofpotential fornewfirms to respondto thenew
incentives.
Theevidencealsoindicates thatexitratesmaybe significant, butentry
ratesareusuallyofa comparable magnitude. Plant-leveldatafrom Chile,Colombia,
and Moroccospanningseveralyearsin the 1980s whenthesecountries initiated
tradereforms indicatethatexitratesrangefrom6 percent to 11 percent a yearand
entryratesfrom 6 percentto 13 percent. Overtimethe cumulative turnover isquite
witha quartertoa thirdoffirms
impressive, havingturnedoverinfouryears(Rob-
ertsandTybout1996).
The higherturnover offirms is an importantsourceofthedynamicbenefit of
openness.In general,dyingfirms havefallingproductivityand newfirms tendto
increasetheirproductivityovertime(Awand others2000; Liu andTybout1996;
Robertsand Tybout1996). Aw and others(2000) findthatin Taiwan(China)
withina five-year periodthe replacement of low-productivity firmswithnew,
higher-productivity entrantsaccountedfor half or more of the technological
advanceinmanyTaiwaneseindustries.
Although thesestudiesshedsomelightonwhyopeneconomies aremoreinnova-
tiveand dynamic, theyalso showwhyintegration is controversial.Therewillbe
moredislocationinan open,dynamic economy- withsome firms closingandothers

DavidDollar 169

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startingup.Ifworkershavegoodsocialprotection andopportunities todevelopnew
skills,
everyone canbenefit.Butwithout thesepoliciestherecanbesomebiglosers.
Surveysoftheliterature
on and
openness growth generally findthetotalityofthe
evidencepersuasive.Winters for
(2004, p. F4), example, concludes: "While there
areseriousmethodologicalchallenges anddisagreements aboutthestrength ofthe
evidence,the most plausibleconclusion is thatliberalisationgenerally induces a
temporary (butpossibly increaseingrowth.
long-lived) A majorcomponent ofthisis
an increaseinproductivity." economic
Similarly, historians Lindertand Williamson
(2001, pp. 29-30) sumup thedifferent piecesofevidencelinkingintegration to
growth: "The doubtsthat one can retain about each individualstudy threatento
blockourviewoftheoverallforestofevidence. Eventhoughno onestudycanestab-
lishthatopennessto tradehas unambiguously helpedtherepresentative Third
Worldeconomy, thepreponderance ofevidencesupports thisconclusion."Theygo
ontonotethe"empty set"of"countries thatchosetobelessopentotradeandfactor
flowsinthe1990sthaninthe1960s androseinthegloballiving-standard ranksat
thesametime.As faras we can tell,thereareno anti-global victoriestoreportfor
thepostwar ThirdWorld.Weinfer thatthisisbecausefreer tradestimulatesgrowth
inThirdWorldeconomies today,regardless ofitseffectsbefore1940."

MakingGlobalizationWorkBetterforPoor People
So far,themostrecentwaveofglobalization startingaround1980 hasbeenassoci-
atedwithmorerapidgrowthand poverty reduction in developingeconomiesand
witha modestdeclinein globalinequality. Theseempirical findings froma wide
range of studies
helpexplainwhat otherwise
might appear paradoxical:opinionsur-
veys reveal that is
globalization more in
popular poor countriesthan in richones.In
particular,thePew ResearchCenterforthePeopleand thePress(2003) surveyed
38,000peoplein44 countries inalldevelopingregions.In general,
therewasa pos-
itiveviewofgrowing economic worldwide.
integration Butwhatwas striking inthe
survey was thatviewsof were more
globalization distinctly positive in low-income
countries thaninrichones.
Although mostpeopleexpressed theviewthatgrowing globaltradeandbusiness
tiesare goodfortheircountry, only percent peoplein theUnitedStatesand
28 of
Western Europethought thatsuchintegration was "verygood."Bycontrast, the
sharewhothought was
integration verygood was 64 in
percent Uganda and 56
percent in Vietnam.These countriesstoodoutas particularly but
proglobalization,
respondents fromdeveloping economiesin Asia (37 percent)and Sub-Saharan
Africa(56 percent) werealso farmorelikelyto findintegration "verygood"than
respondents fromrichcountries. a significant
Conversely, minority in
(2 7 percent)
richcountriesthoughtthat "globalization has a bad effect" on theircountry,

170 TheWorldBankResearchObserver,
vol.20, no.2 (Fall 2005)

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comparedwitha negligiblenumberofhouseholdsin developingeconomiesin Asia
(9 percent)or Sub-SaharanAfrica(10 percent).
Developingeconomiesalso had a morepositiveviewoftheinstitutions ofglobaliza-
tion.Some 75 percentofhouseholdsin Sub-SaharanAfricathoughtthatmultinational
corporations had a positive
influence on theircountry, comparedwithonly54 percent in
richcountries. Viewsoftheeffect oftheInternational Monetary Fund, theWorld Bank,
and theWorldTradeOrganization (wto)werenearlyas positivein Africa(72 percentof
householdssaidtheyhad a positive effecton theircountry). Bycontrast, only28 percent
ofhouseholdsin Africathoughtthatantiglobalization protestors had a positiveeffect
on
theircountry.Views of the protestors were more positivein the UnitedStatesand
Western 5
Europe(3 percent saidtheprotestors had a positiveeffect
on theircountry).
Althoughglobaleconomicintegration has thepotentialto spurfurther growthand
poverty reduction, whether thispotential is realizeddepends on thepoliciesofdevelop-
ing economiesand the policiesofindustrialized countries.True integration requires
notjusttradeliberalization butalso wide-ranging reforms ofinstitutions and policies,
as thecases ofChinaand Indiaillustrate so clearly.Manyofthecountriesthatare not
participating verymuch in globalizationhave seriousproblemswith the overall
investment climate,forexample,Kenya,Myanmar,Nigeria,and Pakistan.Some of
thesecountriesalso have restrictive policiestowardtrade.But even iftheyliberalize
trade,notmuchis likelytohappenwithoutothermeasures.Itis noteasytopredictthe
reformpaths of thesecountries.(Considerthe relativesuccessescitedhere: China,
India,Uganda,Vietnam.In each case theirreform was a startlingsurprise.)As longas
thereare locationswithweakinstitutions and policies,peoplelivingthereare goingto
fallfurtherbehindtherestoftheworldin termsoflivingstandards.
Buildinga coalitionforreformin theselocationsis not easy,and what outsiders
can do to helpis limited.Butone thingthatindustrialized countriescan do is makeit
easy fordeveloping areas that do choose to open up to join the club of trading
nations.Unfortunately, in recentyearsrichcountrieshave made it harderforpoor
countriesto do so. The GeneralAgreementon Tariffs and Tradewas originallybuilt
aroundagreementsconcerningtradepractices.Now, however,a certaindegreeof
institutionalharmonizationis requiredto join the wto, forexample,on policies
towardintellectualpropertyrights.The proposalto regulatelabor standardsand
environmental standardsthroughwto sanctionswould take thisrequirementfor
institutionalharmonization muchfarther. Developingeconomiessee theproposalto
regulatetheirlabor and environmental standardsthroughwto sanctionsas a new
protectionist toolthatrichcountriescan wieldagainstthem.
Globalizationwillproceedmoresmoothly ifindustrializedcountriesmakeiteasyfor
developing economiesto have access to theirmarkets.Reciprocaltradeliberalizations
haveworkedwellthroughout thepostwarperiod.Therestillaresignificant protectionsin
OECD countriesagainstagricultural and labor-intensive productsthatare important to
developing economies.It wouldhelpsubstantially to reducetheseprotections. At the

DavidDollar 111

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sametime,developing economieswouldbenefit from openingtheirownmarkets further.
Theyhavea lottogainfrommoretradein services. Also,70 percentofthetariff barriers
thatdeveloping areasfacearefrom otherdeveloping economies.So thereismuchpoten-
tialto expandtradeamongdeveloping areas,iftraderestrictions are furthereased.But
thetrendtousetradeagreements toimposean institutional modelfrom oecdcountrieson
developing economies makes itmore difficult
toreach trade agreements thatbenefitpoor
countries.Thecurrent Doha roundofwtonegotiations istakingup theseissuesofmarket
access,butitremainstobe seenwhether richcountries arewillingtosignificantly
reduce
theirtradebarriersinagriculture andlabor-intensive manufactures.
Anotherreasonto be pessimistic aboutfurther integration ofpooreconomiesand
richones is geography.Thereis no inherentreason why coastal China shouldbe
poor- or southernIndia,orVietnam,or northern Mexico.Theselocationswerehis-
toricallyheldback bymisguidedpolicies, and with policyreform theycan growvery
rapidlyand taketheirnaturalplace in theworldincomedistribution. However,the
same reforms are not goingto have the same effect in Chad and Mali. Some coun-
trieshave poor geographyin the sense that theyare farfrommarketsand have
inherently hightransport costs.Otherlocationsfacechallenginghealthand agricul-
turalproblems.So, itwouldbe naive to thinkthattradeand investment can allevi-
ate povertyin all locations.Much morecould be done withforeignaid targetedto
developingmedicinesformalaria,hiv/aids, and otherhealthproblemsin poorareas
and to buildinginfrastructure and institutions in theselocations.The promisesof
greater aid from Europe and the United States at the MonterreyConferencewere
encouraging,butitremainsto be seen ifthesepromiseswillbe fulfilled.
So integrationofpooreconomieswithrichones has providedmanyopportunities
forpoorpeopleto improvetheirlives.Examplesofthebeneficiaries ofglobalization
can be foundamongChinesefactory workers,Mexicanmigrants, Ugandanfarmers,
and Vietnamesepeasants.Lots ofnonpoorpeoplein developingand industrialized
economiesalikealso benefit, ofcourse.Butmuchofthecurrentdebateaboutglobal-
izationseemsto ignorethefactthatithas providedmanypoorpeoplein developing
economiesunprecedented opportunities. Afterall therhetoricabout globalizationis
strippedaway, many ofthe practicalpolicyquestionscome down to whetherrich
countriesare goingto make it easy or difficult forpoor communitiesthatwant to
integratewiththe worldeconomyto do so. The world'spoor peoplehave a large
stakein how richcountriesanswerthesequestions.

Notes
DavidDollaris countrydirectorforChinaand Mongoliaat theWorldBank;hisemailaddressis ddollar@
worldbank.org. This articlebenefited
fromthe commentsoftwo anonymousrefereesand ofseminar
at universities
participants and thinktanksin Australia,China,India,Europe,and NorthAmerica.

172 TheWorldBankResearchObserver,
vol.20, no.2 {Fall 2005)

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All use subject to JSTOR Terms and Conditions
 1. The phrasefreetraderefersto a situationin whichtradeis notmonopolizedbythegovernment,
butratheris permitted to privatefirmsand citizensas well- so China began to shiftto a policyoffree
tradein 1979.
toobtainsurvey-based
2. It is difficult estimatesofpovertybefore1980. Bourguignonand Morrisson
(2002) combinewhatsurveydata are availablewithnationalaccountsdata to provideroughestimates
ofpovertysince 1820. The broadtrendis clear:thenumberofpoorpeoplein theworldkeptrisinguntil
about 1980.
3. Bhalla (2002) and Sala-i-Martin(2002) also estimateverylarge reductionsin global poverty
based on the nationalaccountsdata, but Deaton (2004) makes a convincingcase that the survey-
based estimatesfromChen and Ravallion (2004) are a morereliableindicatorofchanges in global
poverty.
4. Milanovic(2002) estimatesan increasein theglobalGinicoefficient fortheshortperiodbetween
1988 and 1993. How can thisbe reconciledwiththeBhalla (2002) and Sala-i-Martin (2002) findings?
Globalinequalityhas declinedoverthepast two decades primarily because poorpeoplein China and
India have seen increasesin theirincomesrelativeto incomesofrichpeople(thatis,oecdpopulations).
As noted,1988-93 was theone periodin thepast20 yearsthatwas notgood forpoorpeoplein China
and India. India had a seriouscrisisand recession,and ruralincomegrowthin Chinawas temporarily
slowed.

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