Globalisation as a Cause of Poverty and Inequality - Essay Example

?Globalisation as a Cause of Poverty and Inequality Introduction Advocates of globalisation stick to the view that it is a positive force necessary for the future acceleration of economic development, improving living standards, making enhancement of increased production, as well as efficient allocation of resources. On the other hand, those against globalisation are of the view that globalisation results in increased poverty and worsens income distribution among households (Forbes 2000:867). Many developing countries in Africa and Asia embarked on a process to integrate their economies with the world economy via liberalisation of its trade system and investments. Bevan and Fosu (2003:9) assert that these nations expected to harness the integration to fuel economic growth and development as well as uplifting the quality of living for the poor. This paper agrees with the claim that globalisation is a cause of inequality and poverty. Globalization has led to economic prosperity among most states, but non-uniformly (Hirst, Thompson and Bromley, 2009). Deregulation of the financial transactions has led to scavenging of the global south. This has led to unbalanced distribution of wealth with the South being disadvantaged. Northern countries benefit economically while the South lose. Global speculators take advantage of this imbalance to exploit banking and financial regulations; making unreasonable profits from emerging markets in developed countries. This has worsened the labour standards and enhanced ecological discretion. However, the international capital inflows can be reversed to create boom-and-bust cycles that can be detrimental to the social welfare of the affected regions. Globalization encourages labour mobility (Lecher and Boil, 2012). However, skilled and specialized labour force may take advantage of the global market to access markets with high demand and low skill supply. Globalization may also enhance immobility; unskilled workers are prevented from migrating to developed nations. Currently, globalization poses a scenario based on the idyllic view of the general globe where technology and capital have a free flow in a market where access to knowledge and information is vast, efficient markets, and where there is equity in market participation capacities among the households. Globalisation can partially be attributed to the increasing improvements made in the technological field, minimised costs of transportation, as well as due to some deliberate choosing on behalf of many nations to further integrate their economies with the global economy. In essence, globalisation refers to capital market liberalisation, trade restrictions’ removal, for instance, quotas and tariffs, and free movements of human resources. All these can be considered to be economic globalisation’s indicators. The 80s and 90s saw many countries open up their borders leading to reduced restrictions on direct foreign investment as well as curtailing quantitative controls on imports which reduced the tariff rates. In general, the process of liberalisation and globalisation leads to reduced poverty and high economic growth and development. Globalisation comes in many facets hence a mixed set of outcomes. The argument brought about by anti-globalists is that globalisation has adverse effects on poor people in LDCs. Countries such as the US had thrived in managing the process of globalisation incisively proving that globalisation can be a driving force to economic growth and development and those incapable of managing the process ended up with dismal economic growth and development as well as increased poverty and high inequality in income distribution, showing the adverse effects globalisation can have. A number of issues have been highlighted linking globalisation to inequality: i. Inequality rates have increased since the 80s. ii. This high inequality rates are caused by other factors other than the traditional factors i.e. urban bias, education inequality, and concentration of land. iii. High inequality levels can decrease the growth rate of economies as well as have adverse effects on social and political lives of the people. iv. Doggedness of inequality at high levels incapacitates the process of reducing poverty. Modern causes of inequality are recognised as the way in which governments perform reformation of their economic policies and the liberal economic policy systems; a system which globalisation is the strong hold. Frankel and Roomer (1999) argue that increased global inequality is as a result of inequality between countries rather than inequality within the country. Inequality within a country could be as a result of non-democracy and poor governance and not globalisation but inequality between countries can largely be attributed to globalisation. Africa is mainly concentrated with developing nations where skilled labour is scarce. In these countries, globalisation resulted in increased inequality levels due to immigration and opening up borders to international business. According to TED website, one way in which globalisation can impact the rates of poverty and growth is via investment. In a study conducted on Nigeria, Uganda, and Tanzania, Alemayehu (2003) argues that trade liberalisation can lead to a decrease in total investment as well as a change in its composition. A reduction in growth in Africa can be seen from the period 1980 to 2001 where exports coming from the Sub-Saharan Africa (SSA) dropped from about 15% per annum to 3% per annum. The current levels of economic growth and development is far below the regular growth for the other regions of the world. In addition, the period has seen a reduction in the total share of the world export market by more than half. African exports structure is characterised by overreliance on raw material production exposing them to global shocks. In addition, such products are associated with volatility, reduced income of elasticity of demand, as well as a secular decrease in prices. These sectors of economy have a limited scope of technically progressing. Most of the SSAs have a number of primary commodities for export deriving an approximate 50% of the total exports while countries with mineral ores have a higher dependence of about 80%. Of the 43 SSA countries, 8 have an export structure that is diversified. They include Gambia, Liberia, Djibouti, Sierra Leone, Lesotho, Swaziland, Sudan, and Mauritius (Collier and Gunning 1999:77). With such a narrow base of exportation combined with inferior domestic capacities, there is an increased deterioration of the trade balance due to a less response to export supply as compared to the import demand response (from the trade liberalisation context). Globalisation results in openness and freeing up of trade thus in Africa, most people have a free choice to hold their assets (capital flight) in a preferred country. A study conducted by (Collier and Gunning 1999:64) revealed that close to 39% of private investors from Africa held their portfolios in advanced countries. These results were the highest compared to Middle East countries. Furthermore Collier and Gunning (1999:67) believe if Africa could pull back the component of private property, the continents private stock would augment by an approximate 64%. In addition, the estimate of private wealth or capital flight from countries with severe poverty levels, believed to be in the regions of $22 billion, is approximately half of what the countries need to outsource in order to reduce or fight against poverty (Collier and Gunning 1999:71). Since the globalisation era began, the debt held by Africa to external financial institutions increased from $14 billion in 1971 to over $300 billion in 2003 (Alemayehu 2003:81). Outstanding long term debt obtained on terms of allowances was the major component. Over time, credits from the IMF were increasingly used resulting in a hefty debt for the African countries as a result of the arrears accumulating from the financial flows. The debt burden resulting from Africa is extremely huge as compared to the capacity of the continent or rather its exports. Africa’s debt increased from $3.6 billion in 1985 to $12.5 billion in 1998 where most of the grants were given to technical experts, most of who originated from the donor nations (Alemayehu 2003:83). Debts can be mitigated via reorganisations thus cannot typically be a representation of a country’s economic problem (Bata and Bergesen 2002a:3). Additionally, the size of the debt accumulated as compared to the capacity of the nation or in this case the developing countries of Africa and their subsequent effects on the economy pose a serious threat to the economy of the continent (Alemayehu 2003:84). When a country is over-indebted, it generates a debt overhang problem that has the capability of undermining the investors’ confidence in the country/continent both domestically and internationally, hence, the decline in the levels of Foreign Direct Investment (FDI) as well as domestic private investment as a share of the continent’s GDP commencing from the late 70s (Alemayehu 2003:87). Normally, a reduction in levels of investments by the public has direct effects on social and physical infrastructure; which are fundamental to economic and social development. As a result, African countries have a hard time servicing their debts, attaining a sound growth and development, as well as addressing the problems to do with poverty reduction and/or elimination and social development (Greenway, Morgan and Wright 2002:231). A study by Alemayehu (2003:59) revealed that there is a higher occurrence of poverty in countries heavily dependent on commodities mostly in Africa In LDCs exporting minerals, those living below the $1 per day mark increased from 61% to 82% between the periods 1981 to 1983 and 1997 to 1999 (Ajayi 2003:120). A study on Tunisia shows that the reduction of subsidies on agricultural exports had a decreasing effect on the welfare of the households. These findings were attributed to the shift in demand from locally produced goods to imports as well as a shift in supply from local production to foreign production or rather from domestic consumption and/or production to international consumption and/or production. The elimination and/or reduction of internal support for domestic production, mainly the agricultural sector, lead to increased cost of production. As a result, suppliers were forced to allocate ‘cheap’ resources of production as compared to the initially subsidized inputs. This of course results in reduced quality production and as a result generating harsh consequences to the rural households since it has a direct negative impact on their income as well as their power of spending. Some documented negative impacts of globalisation are presented by (Winters, McCulloch, and McKay 2004:72) review. For instance, in Zambia, domestic markets were distorted and eventually destroyed as a result of trade liberalisation. Rural households benefited from the maize marketing monopsony which allowed them to buy large volumes of maize; but this was abolished. Consequently, households were isolated leading to reduced income. Another study conducted by Deininger, Klaus and Olinto (2000, cited in Winters, McCulloch, and McKay 2004:77) revealed that Zambia’s agricultural productivity reduced as a result of the external liberalisation policies since it constrained access to key productive assets. Other studies in South Africa and Tanzania regarding the EU’s cutting back on importation of canned fruits and fish respectively declined the income of households in these nations, with Tanzania recording a massive 80% decrement in fish income (Alemayehu 2003). These studies reveal that female employees had to work more time as opposed to previous time. Due to this factor, there was a reported increase in child malnutrition due to lack of care. Opening up of international borders resulted in immigration and as a result of the shortages of labour due to the inability of women to work for elongated hours; human resource was available from different countries (Ajayi 2003:122). This caused a large pool of labour forces which had a direct consequence on wages as they drastically reduced hence resulting in poverty increment as well as reduced investment due to lack of capital and consequently leading to reduced economic and social development. Many African countries opted for the production of cash crops instead of food crops due to the liberalisation of markets. Many poor families spend most of their income on food thus; liberalisation of trade will have adverse impacts in their lives (Winters, McCulloch and McKay 2004:88). Much of the research presented about inequality and poverty as a result of globalisation have based their arguments on cross-country comparisons data. This approach has key issues: income and inequality data of different countries is not usually the same due to the differences in variable definition and methods of data collection, and difficulty in controlling for the differences in institutions and cultural practices/beliefs as well as the legal system of a country which also influences the growth of a country or inequality in the country. In China, the past two decades has seen a significant rise in income inequality yet there is increased growth of the Chinese economy. According to a WB report, China’s Gini coefficient rose by 10% from 28.8% to 38.8% in 1981 and 1995 respectively (Bhagwati and Srinivasan 2002:180). On the other hand, China’s poverty levels are believed to have significantly decreased since the beginning of the new wave of globalisation. The poverty levels of China and the globe in general may be headed one way, but the inequality levels may be headed a different way as well, probably the opposite direction (Bata and Bergesen 2002b:146). According to TED website, there are claims that policies of globalisation lead to increased income inequality and poverty levels between and within a country. One expert comments that the share of income that goes to the poor is not directly proportional to growth hence, the rise in income of the poor with respect to growth instigated by globalisation is not proportional to everybody else’s. In China, the rich may have an income gain which is higher than four times that gained by the poor leaving behind a great gap between the rich and the poor despite the fact that all are gaining. Income inequality in China is widespread between urban and rural areas as compared to income inequality within a rural or urban area. Openness of Hong Kong means that the income is higher as compared to other rural areas in the country, hence comparing the highest income earner in a major city and a rural area will result in a huge difference (Winters, McCulloch and McKay 2004:92). A number of cities, including Beijing, Shanghai, and Tianjin were selected as special economic zones with other fourteen as coastal open cities. These cities were allowed to conduct some types of market reformations ahead of the rest of the country. Consequently, there is a disparity in the level of income distribution within the country since more investments were directed towards the selected cities leaving behind the other cities thus widening the income gap between rural and urban residents. In conclusion, the trends in developing countries of Africa and those reported in China reveal that some policies in globalisation can result in monumental income disparity and increased poverty levels where these governments fail to integrate the correct measures or policies to embrace globalisation. Unequal distribution of investments in China has been the main causal agent of income inequalities while Africa’s overdependence on commodities has seen trade policies reduce their levels of income, increased labour supply due to immigration leading to poor wages, and financial restrictions by International Financial Institutions, hence; there is a high level of poverty in African developing nations as well as disparities in income distribution as a result of increased globalisation. References “Hans Rosling: New insights on poverty.” TED Ideas Worth Spreading (2007) Available at: http://www.ted.com/talks/hans_rosling_reveals_new_insights_on_poverty.html Ajayi, S.I. 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