Evidence from Pakistan

Does globalisation benefit the poor?

"Gains from trade-openness divide naturally into two major parts, that pertaining to the opening of trade and relating to autonomous variations in the prices facing a small developing economy. In the first part, states of autarky are compared with the stares of free trade; secondly, comparisons are made of alternative states of free trade and in long run open economies perform better than closed economies" (Murray, 2001, pp.21 and Winters, 2005)

By Mohammad Shahbaz
The process through which goods and services, capital, people, information & ideas flow across globe is called globalisation; which leads to greater integration of economies and societies. Therefore, the world has discovered new trade routes and improved the technology of transport to acquire the gains from the process of openness.

Openness to foreign direct investment, for instance, can contribute to economic growth by stimulating domestic capital formation and improving efficiency and productivity, as a result of greater access to new technologies. At the same time, openness to capital flows may also increase opportunities for portfolio risk diversification and consumption, smoothing through borrowing and lending. The producers who are able to diversify risks on world capital markets may invest in riskier (and higher-yield) projects, thereby raising the country’s rate of economic growth. Increased competition and access to the domestic financial system by foreign banks may improve the effectiveness of the intermediation process between savers and borrowers, thereby lowering mark-up rates in banking, as well as the cost of investment, and again raising growth rates. Finally, financial openness helps to lessen asymmetric information problems and to reduce the fixed costs associated with small-scale lending. It can enhance the opportunities for the poor to access the formal financial system.

The last two decades of the twentieth century observed a remarkable movement in the pace of openness or globalisation. Globalisation conveys access to goods that are either new varieties of products that already exist in the absence of trade (i.e. new brands of rice) or they may be entirely new products. The integration of economies through flows of goods and services, financial assets, technology and cultural interaction has reached unprecedented levels. Now it is widely accepted that openness has long been seen as important element of good economic policy and trade liberalisation as necessary step for achieving it. So world is becoming more integrated, goods and trade in services are crossing borders in the line with globalisation and regionalisation processes.

Trade liberalisation process often works as an instrument to combat poverty: it usually tends to increase not only income (poor segments of society) but also provide some additional resources. While it will generally effect income distribution, it does not do so in systematic adverse way. Most trade liberalisation will hurt some one, and that some reforms may increase overall poverty even while they boost incomes in total. In case of studies of India and Columbia; Globalisation favours the poor segments of society if reforms in trade sectors are implemented along with the reduced restrictions to labour mobility. But inverse situation is observed in Ethiopia and Mexico. Osmani (2005) concluded that the forces of globalisation have contributed positively to poverty reduction in Bangladesh. It has done so by increasing the scope of remunerative employment opportunities of the poor. The net direct impact on employment opportunities in the tradable sectors has been positive, as the new opportunities have outweighed the job losses that inevitably occurred through structural changes brought about by globalisation. Biswass and Sinszingre (2006) argued about the relationship between export promotion, import substitution and poverty management at the regional level, during the post-reform years. It is shown that an admixture of export-promotion and import-substitution policies can help to manage its poverty situation better, rather than a solely inward or outward looking policy. Since the states that have adopted either of these two (or both) policies, have done better in poverty management compared to the others. Another argument in favour of the beneficial effects of trade on poverty reduction is put forward by Bhagwati and Srinivasan (2002); who pointed out that if a country wants to maintain an export-led development strategy, that is, if a country wants to rely on free trade, it must maintain a framework of macroeconomic stability. Because stability implies low inflation, it is another channel through which trade affects the poor positively, since the poor tend to be hardest hit by high inflation.

Winters (2000) concluded that globalisation or trade liberalisation in general is being found to increase economic opportunities for consumers and producers and to raise earnings for workforce. On the other hand it is ridiculous to pretend that liberalisation never pushes anyone into poverty, nor even that liberalisation cannot increase the extent or the depth of poverty in some particular conditions. Literature also suggests that more economic integration (measured with a range of different indicators such as the presence of capital control, tariffs and membership of the WTO) does not have any systematic effect on domestic levels of inequality. They therefore conclude that growth is good for the poor.

An economy may obtain both static and dynamic gains from openness to trade. Conventional theory of trade emphasised that under greater openness to trade, resources tend to be reallocated towards productive activities and away from less efficient activities. Relevant literature on endogenous growth has paid attention on the existence of various channels through which trade may produce dynamic gains and obviously economic growth of an economy particularly in long run. By allowing easier imports of capital goods, greater allocative efficiency, technological and knowledge spill-over as well as increased competition, trade can enhance growth and also lead to availability of greater variety of goods to consumers at cheaper prices. The rewards from exploiting globalisation can be substantial, openness to international trade and investment facilities the acquisition of inputs and technologies which strength growth and increased efficiency. Access to wider markets and more diverse exports reduce the risks of trade volatility and exclusion by particular country markets. Franket and Romer (1999) and Irwin and Tervio (2002) showed that more open economies have higher economic growth rates and incomes per capita as compared to closed ones.

Foreign Direct Investment (FDI) is well attracted by openness to the free flow of capital, which then stimulates domestic investment and contributes to employment generation activities and economic growth. Financial openness also helps to increase the depth and breadth of domestic financial markets, leading to increase efficiency in financial markets through lower costs and improved resource allocation. Countries benefit from opening markets in many ways, one is technological: foreign direct investment brings with innovations in product, processes, and organisational technologies, while importation of goods embedded technologies and access-lower cost production inputs and consumer goods. Another benefit is greater efficiency; competition from abroad spurs domestic industry to make productivity improvement, promoting growth and employment in medium term. In developing economies financial systems is not well-developed and economic policies lack credibility.

Therefore, process of openness particularly in capital markets may generate greater volatility in domestic financial markets. So, severe financial crisis can emerge due to larger reversals in capital and sharp deterioration in situations of unemployment and poverty in short span of time.

Understanding the impact of trade liberalisation on poverty is important because of the vulnerability of the poor as a group in developing countries. It is widely argued by many commentators that in short run; globalisation harms poor actors in the economy through reducing demand for un-skilled labour and even in long run successful
open regimes may have some people behind poverty line.

To investigate the relationships between trade openness, growth and poverty is to consider first’s effects on total factor productivity. For the sustained economic growth and development, improved productivity is necessary by universal agreement. It may not be sufficient and because of its distributional implications, its beneficial effects on poverty could be less than those of growth emanating from other sources. For example, if higher productivity reflected declining inputs rather than increasing outputs, its short-run effects could be to reduce employment and exacerbate poverty. More over, despite the strong presumption in modern growth theory, its inferences to increased competition, access to new technologies, better immediate goods and so on, the response of productivity to openness is ultimately ambiguous.

A sceptical view of the early literature on this link is Pack (1988). An influential study by Coe, Helpman and Hoffmaister (1997), constructed an index of the total knowledge capital (measured by accumulated investment in R&D) in each industrial country. Using import-weighted sum of industrial countries ‘knowledge stocks to reflect developing countries access to foreign knowledge, they find that, interacted with importing countries openness, latter has a significant positive effects on total factor productivity. Lumenga-Neso Ollarreaga and Shiff (2001), advance that indirect knowledge flows offer a better explanation of TFP. Historically, there has been significant debate about whether agricultural improvements are good for the poor, but recently the tendency has on the optimistic side-see, for example, Datt and Ravallion (1998). Coe, Helpman and Hoffmaister (1997) accomplished that trade flows provide a mouthpiece through which modern techniques and technological knowledge are transferred across counties. Wacziarg (1998) argued that investment is the most important channel through which trade-openness improves economic growth. Empirical evidence also suggests that learning by doing and growth affects of these spillovers are largest with higher level of education.

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