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Interview with David Dollar: Globalizing countries provide evidence of faster growth, rising incomes for poor

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2001
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Loungani: “The rich are getting richer, and the poor are getting poorer.” True?

Dollar: Not true. You hear statements like that from some in the antiglobalization movement, but their rhetoric is at odds with the evidence. Since 1980, world inequality has stopped increasing and may have started to fall. More important, the number of extreme poor (those living on less than $1 a day) has dropped by about 200 million; most of this has been due to faster growth in China and India. But even if you take those cases away, there are other low-income countries that have done well, such as Bangladesh, Uganda, and Vietnam. The trend between 1820 and 1980 was for the number of poor in the world to increase. Starting around 1980, that trend reversed

Loungani: If the evidence is so clear, why is there so much confusion about the facts on inequality?

Dollar: Sometimes people are talking about inequality within countries, which in some instances has gone up. The United States is one prominent example; many of the activists live there and are aware of that example. Among the developing countries, China has seen an increase in inequality between its rural areas and the rising urban centers. But it is not true in general that inequality is rising within countries—there are just as many counter examples.

Loungani: Let’s take another slogan: “A rising tide sinks the poor.” Many activists claim the benefits of growth go disproportionately to the rich.

Dollar: The title of my paper last year with Aart Kraay was Growth Is Good for the Poor. With data from 137 countries, we looked at what growth does to the share of income going to the poorest 20 percent of the population. There is simply no evidence that growth leaves these people behind: their income generally goes up in step with the average growth in the economy. You may say, “that’s not good enough; I want growth to be pro-poor, I want it to help the poor more than the rich.” So do I. But let’s get away from the notion that there is any systematic tendency for growth or globalization to hurt the poor. Without growth in low-income countries, there’s no chance of further reductions in poverty.

Loungani: You have a new paper with Kraay on globalization and growth. I’m going to guess the title is “Globalization Is Good for Growth.”

Dollar: Actually, it’s Trade, Growth, and Poverty. It compares the experiences of a group of globalizing countries with those of other developing countries. The globalizers, such as China, India, Mexico, and Brazil, have seen a big increase in the ratio of trade to GDP over the past two decades—that is, they became more integrated into the world economy by importing and exporting more. While the globalizers doubled their trade to GDP ratio in the past 20 years, the rest of the developing world actually trades less of its income today than two decades ago.

The globalizers have seen their incomes rise 5 percent a year over the last decade, compared with 2 percent a year for the rich countries and 1 percent a year for the nonglobalizers among the developing countries. So, yes, globalization seems to be good for growth, as you put it. And globalization is not increasing the gap between the globalizers and the rich countries; that gap is shrinking. What’s happening is that there is a growing divergence within the developing countries because some are embracing globalization and others are not.

Loungani: How do we know that it’s openness to trade that’s leading to the higher growth?

Dollar: You’re right. It’s not just openness to trade that has led to faster growth in the globalizing countries. Countries are carrying out other domestic reforms, and these are important too. Aart and I find that trade helps growth even after we control for the effect of these other factors. I should add that our econometric techniques also control for the possibility that higher growth leads to more trade, rather than vice versa. But if the thrust of your question is that it’s difficult to make up one’s mind about these things based solely on regression analysis, I would agree. I put a lot of weight on case studies to complement the statistical analysis.

Photo credits: Henry Ray for AFP, page 293; Denio Zara, Padraic Hughes, Pedro Marquez, and Michael Spilotro for the IMF, pages 293-295,298, 300 and 301; Darren Whiteside for Reuters, page 308.

Loungani: Which example comes to mind?

Dollar: Though China and India are the most visible successes, let me pick Vietnam. I worked on Vietnam for six years as a country economist (before moving to the World Bank’s Research Department); whenever I go back, I want to see whether reforms are making a difference. Vietnam has been doing a lot of reform—much of it outside the trade area—so, not every improvement can be traced back to integration. But you see concrete examples of how trade has helped. Take some of the poorest—the small-scale rice farmers. With access to world markets, they now get a higher price for their rice and pay less for their main input, fertilizer.

Or look at the footwear industry. The wages of many people working in footwear have gone up from $9 a month to $50 a month over the past decade. Some might still view that as a tragic case of low wages and exploitation, but Vietnamese footwear workers are likely to see a fivefold increase in wages and a big increase in the number of jobs as a good thing.

There has been a broad-based improvement in fortunes. We can be sure about this in Vietnam, because the government did a survey of 5,000 households at the start of the reform process in 1992-93 and went back and visited the same households six years later. And this was a representative survey—that is, the results can be taken to apply to the Vietnamese population as a whole. We found that the level of absolute poverty had been cut by one-third in just six years. Even among the poorest 5 percent of households, virtually all were better off in 1998 than at the start of the reforms.

Loungani: Are there examples of failure?

Dollar: You do have examples of countries that have lowered tariff rates without much good happening subsequently; but in those cases the lowered tariffs have not translated into increases in the amount of trade. Kenya is one example. It lowered tariffs, but because of corruption, poor customs administration, and inefficient ports, it hasn’t seen an increase in trade in relation to GDP. And to turn your question around: no country has improved its performance in the post-World War II period by turning isolationist.

Loungani: But the message that integration with the global economy is good for growth and the poor doesn’t seem to be getting through to many.

Dollar: If you’ve been working on the nonglobalizing developing countries for 10-15 years, and nothing seems to change, you can end up with a very different and somewhat pessimistic view of the world. A lot of people look at conditions in these countries and say, “Globalization has not benefited these countries.” But I would say: “That’s because they haven’t really integrated with the global economy!”

Growth has accelerated for post-1980 globalizers

percent, per capita GDP growth

Data: David Dollar and Aart Kraay, 2001, Trade, Gowth and Poverty

Poverty drops as Vietnam’s economy opens

percent in poverty

Data: World Bank,1999, Vietnam: Attacking Poverty

And even in the case of the globalizing countries, it is important to recognize that within these countries there are winners and losers from globalization. A lot of people just take for granted that the losers are mainly the poor, but our research indicates that’s not correct. In many developing countries, the opposition to globalization comes from workers in the formal sector, who often do stand to lose. These workers are not the poor in developing countries, but still it is important to complement trade liberalization with good social protection policies so that more people are winners. Another group that can sometimes get hurt by globalization is the domestic capitalists in protected industries.

Loungani: What policy agenda emerges from your research?

Dollar: The obvious conclusion is that it is extremely difficult for a developing country to reduce poverty if it shuts itself out of the global economy; globalization, for all its risks and challenges, has been a force for poverty reduction. So it is desirable to lower trade barriers—both the barriers that the rich nations maintain against the poorer ones and the barriers that the developing countries maintain against one another. It may surprise some people to know that 70 percent of the tariff burden that developing countries face comes from tariffs imposed by other developing countries. Developing countries could gain a lot by integrating with each other. But as trade barriers are lowered, it is critical to have a social safety net in place to help those who might lose out in the short run.

Loungani: Any other policy recommendations?

Dollar: The other recommendations come from our larger research program on globalization. For example, we are helping countries collect data from private firms more systematically so that they can evaluate and improve the investment climate. In India, we worked with the Confederation of Indian Industries to survey 1,200 firms in ten states. What’s interesting there is that you can see large differences in the investment climate across states in terms of the reliability of power, the quality of their transport infrastructure and government regulation, and the degree of corruption. The states with relatively good investment climates—Karnataka is an example—attract more investment, have higher growth rates, and achieve greater poverty reduction than states with relatively poor investment climates, such as Uttar Pradesh. This work highlights the importance of complementing open trade policies with good institutions and policies at the local level.

We also make policy recommendations concerning migration. Right now, migration is the missing flow in globalization. Many people live in difficult locations. Migration—including south-north migration—can help reduce absolute poverty. Migration from poor to rich nations tends to raise the wages of the migrant. It also benefits those staying behind, either by taking some of the pressure off the labor market or through the money the migrants send home. Did you know that each year Indian workers abroad send back six times the amount India receives in foreign aid?

The main barrier to increased migration is political opposition in the rich countries. But the aging of the labor force in many rich nations may make them more receptive to young foreign workers. I’m not talking about the open borders of 100 years ago, but more liberal immigration policies in OECD [Organization for Economic Cooperation and Development] countries could be “win-win” for both poor countries and rich ones.

Loungani: What role can the World Bank and the IMF play in pushing forward this agenda for greater integration?

Dollar: Increasingly, the Bank and the IMF are dealing with democratic regimes in the developing countries, and it is they who should be pushing this agenda if they agree with its elements. And many of them do. Successive Indian governments have chosen to integrate, and not because of lectures from the Bank and the IMF, but because they have concluded that, on net, integration is better for the country. President Vicente Fox of Mexico was just here in Washington preaching the virtues of globalization, provided that developing countries “do their homework,” as he put it. We shouldn’t shy away from spelling out the benefits and costs of alternate policy actions as we see them. But we should not have an exaggerated sense of our importance in pushing this or that agenda. It is up to developing countries to decide to what extent they want to integrate with the global economy.

For further reading, please see the September issue of Finance & Development, which features an article by David Dollar and Aart Kraay, “Trade, Growth, and Poverty.”

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