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RESPONSE

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2002
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KEVIN WATKINS’s article, “Making Globalization Work for the Poor,” contains much that is consistent with our article in Finance & Development (September 2001), which was based on our working paper, “Trade, Growth, and Poverty.” We agree with Watkins that globaphobia is unjustified and that international trade, rather than causing more poverty and inequality, can be a powerful catalyst for poverty reduction by providing poor countries with access to the markets, technologies, and ideas they need for faster and more equitable growth. And, although it is not the subject of our paper, we do agree with Watkins’s emphasis on the costs for poor countries of rich country protectionism—a view also expressed in the World Bank’s World Development Report 2000/2001: Attacking Poverty.

Although there is much that we agree on, naturally we do not agree with Watkins’s claim that our work is based on “dubious economics and a highly selective interpretation of data.” Our research on the links between trade, growth, and poverty reduction was partly stimulated by the globa-phobes’ claims that increased flows of foreign trade and investment were making poor countries and the poor people in them worse off. We took these popular claims—as well as academic critiques of the evidence on trade and growth—seriously. Contrary to what some critics have been saying, we found that integration of poor countries with the global economy is associated with faster growth and poverty reduction. This does not mean that we subscribe to the simplistic view that “a renewed commitment to liberalization holds the key to making globalization work for the poor,” as Watkins suggests. Rather, our finding is that increased participation in world trade, together with good economic and social policies, has worked well for a diverse group of poor countries. To quote from our paper,

It would be naïve to assert that all of this improvement in growth should be attributed to the greater openness of these globalizing economies: all of them have been engaged in wide-ranging economic reforms…. China, Hungary, India, and Vietnam … strengthened property rights and carried out other reforms…. Virtually all of the Latin American countries included in the grouping stabilized high inflation and adjusted fiscally….” (pp. 9–10)

Watkins criticizes our work on the grounds that our “implicit assumption is that trade liberalization is responsible for successful integration, with success in this case being defined as faster growth and poverty reduction.” This is somewhat puzzling. To be clear, we define increased integration as a rise in the ratio of constant-price exports and imports to constant-price GDP, and we show that increased integration is associated with faster growth and poverty reduction. We also recognize explicitly, in our paper and in our Finance & Development article, that these changes in trade shares are only an imperfect proxy for measures of trade policy. Our only claim is that changes in trade shares are likely to be better proxies for changes in trade policy than levels of trade volumes are for levels of trade policy. It is also undeniable that some of the countries that have lowered trade barriers have not seen increases in trade and growth or a reduction of poverty; we recognize this in our paper. But this brings us back to another point on which we do agree with Watkins: “openness in and of itself is not a poverty-reduction strategy.” We do not claim that it is. The evidence suggests that a more liberal trade regime is one part of a policy package for successful growth and poverty reduction.

Finally, Watkins argues that personal income inequality is widening worldwide and points to globalization as the main culprit. We disagree on both points. First, Watkins selectively cites just one estimate of an increase in the global Gini coefficient of 3 points between 1988 and 1993. But other estimates, including our own, which are cited in the Finance & Development article, show either little change in inequality between the 1980s and 1990s or even a modest decline. And, as discussed in our article, given the vast measurement problems one encounters in constructing such estimates, none of these small changes in either direction over relatively short periods is likely to be statistically robust. In our view, what can be said robustly about global inequality is that it clearly rose between 1820 and 1980 and then stabilized, with perhaps a modest decline, afterwards. Similarly, concerning extreme poverty—the term used to characterize those living on less than $1 a day—the number of poor people continued to climb historically, until about 1980. Since 1980, the number of poor people has declined by an estimated 200 million.

Second, the experience of the countries we identify as globalizers has in fact been a force for reduced global inequality since 1980. The vast majority of the world’s poor in 1980 lived in China, India, and a few other poor Asian countries, such as Bangladesh and Vietnam. Rapid growth in these countries has narrowed the gap in living standards relative to the developed world for a large fraction of the world’s population, and all of these countries have reduced poverty significantly as they have integrated with the global economy. Their success makes a mockery of the extreme claims of the antiglob-alization movement.

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