Does globalization lead to greater equality in the world, or does it tend to heighten existing inequalities and lead to increased disparities between rich and poor in society? This topical issue was addressed by speakers at the Annual Bank Conference on Development Economics, held at the World Bank on May 1-2.
In his opening remarks, World Bank President James Wolfensohn articulated this theme, stressing that “poverty is represented not just by dollars, but by social justice, opportunity, and safety.” In this climate, he said, it is essential to listen to the voices of the poor.
Noting that in the next 25 years the population of developing countries will increase by another two billion, Wolfensohn said that rising inequality represents a clear and immediate challenge to policymakers. Globalization is not a static consideration, he said, but a force that has been developing steadily over the years. In this environment, it is essential for the World Bank not to be making decisions solely on impressions formed in Washington, but to be operating actively in the countries and regions.
New strategy for development
In his keynote address, Nicholas Stern, World Bank Chief Economist, outlined a new framework for development institutions. Two pillars support the framework, he said: building the right climate for investment and empowering the poor to share in the growth. These pillars, in turn, are built on a complementary research agenda.
An investment climate, he explained, refers to a country’s policy, institutional, and behavioral environment, which affects not only the level of investment but also the productivity of current investment and the willingness to invest for the longer term. It depends on three factors: macroeconomic stability and openness, quality of infrastructure, and good governance and strong institutions. Governments build an effective investment climate not just to lure foreign investment and multinationals, Stern said. Most of the world’s poor are working on farms and in small and medium-sized enterprises, and if authorities don’t encourage investment there, strong growth and poverty reduction are unlikely. Not surprisingly, though, these policies are inclusive—what’s good for the poor also encourages foreign investment. It’s a self-reinforcing story, he continued: existing investment becomes more productive, rewards to productive behavior increase, entrepreneurs are encouraged, and the economy tends to attract more investment. Success breeds success (and failure breeds failure).
The central role of international financial institutions, in Stern’s opinion, is to promote and foster private sector—driven growth in ways that are pro-poor. Their projects not only create powerful demonstration effects, they enhance forces for changes in governance. Without such changes, economic decisions may continue to be dominated by those benefiting from (and who helped to create) the status quo. International financial institutions also need to collect and analyze data to help their clients develop the skills to evaluate the investment climate in their own countries. Research is needed as well, he added, on the effects of investment climate reforms.
But an improved, more inclusive investment climate is not enough to reduce poverty, Stern continued. A country must empower its people to participate in that growth, and to do so, it must invest in and promote education, social protection, and community participation—subjects for the research agenda as well.
Globalization and inequality
The dimensions of inequality were discussed in the opening panel, chaired by Johannes Linn, the Bank’s Vice President for Europe and Central Asia. The historical links between trade, migration, and capital flows, on the one hand, and inequality, on the other, were explored by Kevin O’Rourke of Trinity College, Dublin. Taking a deliberately long-term view, O’Rourke said that overall, inequality between countries had increased dramatically since the 1820s. The world economy was well integrated in 1914, he said, but later retreated into protectionism during the inter-war period. To a large extent, integration after 1945 can be seen as an attempt to recoup the losses of the inter-war period. O’Rourke also noted that globalization can have an impact on income distribution within a country, with the degree of inequality varying depending on the country being considered, the scale of globalization involved, and the distribution of endowments.
Daniel Cohen of the Ecole normale supérieur, Paris, traced how the private returns to human capital may be compared across poor and rich countries, how it has evolved over time, and how globalization might have affected them. He focused on changes in levels of education rather than on growth rates. Surprisingly, he found that the social returns to education do not appear to have risen in the rich countries; rather, they appear to have risen in poor countries. This finding challenges the conventional wisdom that technological progress has been biased in favor of skilled workers in rich countries, while poor countries would experience a decline in their returns to education, and that globalization raises the demand for low-skilled workers in the developing world.
Role of foreign trade and investment
Richard Cooper, of Harvard University, speaking at a panel chaired by Paul Collier, Director of the Bank’s Development Research Group, addressed the influence of foreign trade and investment on two of globalization’s outcomes: growth and inequality. Trade and income are intertwined with so many complex variables, he said—”Everything depends on everything else”—that it’s meaningless to search for the influence of one on the other. Surveying both theoretical and empirical work, he found no compelling reasons to believe that trade actually promotes growth (as distinguished from increases in real income). The theoretical case for foreign direct investment is greater, although he found evidence in the history of foreign investment inconclusive. Yet, he added, the last fifty years offered the best economic performance in human history, and the role of trade liberalization in that performance can’t be discounted.
Global inequality is a natural consequence of uneven growth, according to Cooper. Not all countries are ready to sustain growth at the same time, but uneven growth is better than none. It is the task of organized society, he said, to make sure the gainers outweigh the losers.
Issues in finance workshop
Participants in a parallel workshop looked at finance issues. Background papers included an assessment of different governmental approaches to bank regulation and supervision; an examination of the benefits of related lending, using a data set for Mexico; and a discussion of why the bond market matters for financial development. Other papers at the conference focused on health care, human capital, and economic development.
The ABCDE papers are available online at the World Bank’s website: http://econ.worldbank.org/abcde
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