Asia

Inequality, Globalization, and Economic Growth

By Dweep Chanana ⋅ October 16, 2007 ⋅  Email this post ⋅  Print This Post ⋅ Post a comment

YaleGlobal Online has an interesting article by Pranab Bardhan (professor of economics at UCB) that puts economic growth and income inequality in India and China under the scanner. It is notable for being an extremely balanced review of the true link to globalization, but is readable for it tests a number of related arguments.

One of the main arguments of those propogating economic growth has been that it reduces poverty. China is a frequently cited example. Yet, as Bardhan shows, economic growth may have less to do with poverty reduction in China than previously imagined, and conversely, that poverty declined less rapidly in India during the period of economic growth:

Estimates made at the World Bank suggest that two-thirds of the total decline in the numbers of poor people – below the admittedly crude poverty line of $1 a day per capita – in China between 1981 and 2004 already happened by the mid-1980s, before the big strides in foreign trade and investment in China during the 1990s and later. Much of the extreme poverty was concentrated in rural areas, and its large decline in the first half of the 1980s is perhaps mainly a result of the spurt in agricultural growth following de-collectivization, egalitarian land reform and readjustment of farm procurement prices – mostly internal factors that had little to do with global integration.

In India the latest survey data suggest that the rate of decline in poverty somewhat slowed for 1993-2005, the period of intensive opening of the economy, compared to the 1970s and 1980s, and that some child-health indicators, already dismal, have hardly improved in recent years. For example, the percentage of underweight children in India is much larger than in sub-Saharan Africa and has not changed much in the last decade or so. The growth in the agricultural sector, where much of the poverty is concentrated, has declined somewhat in the last decade, largely on account of the decline of public investment in areas like irrigation, which has little to do with globalization.

This contradicts what is now taken as an article of faith within the economic liberalization community. However, the article does not give much to the anti-globalization camp either, for it points out that the inequality cannot be directly ascribed to liberalization or globalization.

But it is not always clear that globalization is the main force responsible for increased inequality. In fact, expansion of labor-intensive industrialization, as has happened in China as the economy opened up, may have helped large numbers of workers. Also, the usual process of economic development involves a major restructuring of the economy, with people moving from agriculture, a sector with low inequality, to other sectors. It is also the case that inequality increased more rapidly in the interior provinces in China than in the more globally exposed coastal provinces. In any case it is often statistically difficult to disentangle the effects of globalization from those of the ongoing forces of skill-biased technical progress, as with computers; structural and demographic changes; and macroeconomic policies.

This may seem obvious, but is often forgotten. What causes inequality is not globalization. And what will reduce it or save people from poverty is not economic growth. Rather, it is what internal policies are taken to manage either – or both.

Tags: globalization, growth, inequality, poverty