Globalization has been taking place for centuries, moving from the colonization of the inhabited parts of the world to the appearance of nations, from conquests to independent countries, from sailboats and caravans to steamboats, truck fleets and cargo planes, from trade in a few commodities to global production and distribution networks and to the present explosion of international flows of services, capital, and information. Based on Maddison’s recent estimates on the world economy over the past millennium, it is possible to calculate that world merchandise exports amounted to approximately US$40 per capita—at today’s purchasing power—in 1870. This figure had tripled to US$120 by 1913. After a slowdown due to the two consecutive world wars it was then multiplied by almost 10 between 1950 and 2000, to reach approximately US$1,000 per capita today. Seventeen percent of world output is being exchanged today against less than 5 percent a century ago, and this figure is rising rapidly.
The sheer size of today’s global economy is a testament to the speed of change: In 2005, world economic output total US$35 trillion—an amount likely to double by 2030, assuming modest continued growth.
Faced with such a dramatic evolution, the issues that arise are whether it is good or bad for humankind, whether it must be encouraged or, on the contrary, curbed and, if so, by what means. Globalization may be judged by many criteria, but the most important one is undoubtedly development in all its forms and, in particular, poverty reduction. This is the theme of Ian Goldin and Kenneth Reinert’s fascinating book.
We are today at a crucial point in the history of our fight against poverty in its various dimensions. Probably for the first time in history, the absolute number of people living on less than $1 a day in the world has dropped, from 1.5 billion in 1981 to 1.1 billion in 2002. It is true that the proportion of people living in extreme poverty in the world has been falling more or less continuously since the beginning of the Industrial Revolution. But the pace accelerated considerably over the past 20 years. During that period, the global income poverty rate dropped by almost half. Much of this progress on the global front was concentrated in Asia. By contrast, income poverty rose in Sub-Saharan Africa, both in relative and absolute terms, a region somehow left at the margin of several crucial aspects of globalization. Health gains in the world have also been impressive and more widespread. Infant mortality rates in poor countries are far lower than those of countries at the same income level 25 years or 50 years ago, and life expectancy at birth increased to 65 years in 2004. Unfortunately, there have also been major reversals of progress, in particular the tragedy of HIV/AIDS in Africa. The developing world has also made major strides in education—with the average number of years of education completed among adults steadily increasing (though it is still a meager five years on average) and the number of adults with no schooling falling from half of the developing world’s population to just over one-third.
Although progress has been steady and in some instances rather dramatic, global imbalances in the distribution of income and wealth are huge, and the awareness of these imbalances grows as information flows ever more quickly in tandem with globalization. People everywhere can compare themselves to the richest developed societies and are anxious to reduce the yawning gaps in income and consumption. The possibility that Africa will lag behind is a particular concern.
Looking ahead, another source of concern is that many countries may face widening inequality, thus partly muting the poverty-reducing effects of growth and possibly sparking social tensions. Population growth, the pace of urbanization, and educational opportunities influence how this plays out in each country. Trade alone exerts no systematic effects on income distribution. The most important factors are the initial conditions of inequality and the extent to which growth is driven by highly-skilled sectors of the economy.
The main contributor to global inequality within and between countries is the widening difference in earning potential between skilled and unskilled workers—between people and companies with technological skills and connectivity needed to enhance productivity versus workers and enterprises slowed by low educational levels, dated production techniques, and inhospitable business climates.
We face a brief window of opportunity during which these global imbalances can be tackled. The opportunity is to put into practice within countries what we have learned about increasing development potential, reducing poverty, and cushioning the impact of restructuring and globalization. Current trends in technology, economics, demographics, and even geopolitics should make that possible.
In addition several other tasks urgently need to be tackled. In trade, developed countries must follow through on their commitments to give developing countries greater market access. In aid, donor countries must scale up their assistance in ways commensurate with the Millennium Development Goals, reinforcing and accelerating the mild progress of the past few years. In governance, developing countries must continue to move toward greater accountability, transparency, and efficiency. And all countries need to work together to address such disasters as HIV/AIDS and climate change.
In this impressive volume, Ian Goldin and Kenneth Reinert provide a comprehensive introduction to key aspects of globalization—trade, finance, aid, and migration—and their complex linkages with poverty and development.
To prepare a volume accessible to a large audience requires clarity and synthesis. Too often, however, clarity and synthesis invite naive truisms and open the door to ideological statements. Goldin and Reinert have successfully avoided both. Indeed, they provide readers with an understanding of globalization that is rich in its complexity. Beginning with an overview of the dimensions of poverty, Goldin and Reinert explain how trade can reduce poverty by increasing labor-intensive production, human capital accumulation, and technological learning; they examine how foreign direct investment and debt and equity instruments can help finance development; and they consider how migration can allow workers and their families back home to escape poverty through remittances.
At the same time, Goldin and Reinert observe that each of these aspects of globalization can fail to reduce poverty or even harm development. Trade without public investment, without safety nets, and without access to developed-country markets diminishes or even negates the gains for the poor. Volatile capital flows can cause financial crises. Aid can be ineffective when governance is poor or when donors have geopolitical motives. Migration can also involve brain drain, which can harm developing countries and can even harm global efficiency if the positive externalities created by skilled workers are large and are higher in poor countries than in rich ones.
This book also helps to shatter a false dichotomy that holds that policies that favor the poor cannot be pro-market. There is an enormous set of pro-poor and pro-market policies that allow for more equal market competition among and within countries, and that ask that policy take account of externalities as much as possible.
Having a nuanced view of development is humbling and sometimes disappointing. There is so much we do not know, and we must acknowledge our knowledge gaps. Yet, Goldin and Reinert show that our understanding of development has substantially improved. And they strongly encourage us to use that new knowledge to get the best out of globalization for development and poverty reduction.
François Bourguignon
Senior Vice President and Chief Economist
The World Bank