Does Globalization Hurt the Poor?

Abstract

Agenor attempts to examine analytically and empirically the extent to which globalization affects the poor in low- and middle-income countries. He begins with a description of various channels through which trade openness and financial integration may have an adverse effect on poverty. However, the author also stresses the possible nonlinearities involved - possibilities that have seldom been recognized in the ongoing debate. Agenor then presents cross-country regressions that relate measures of real and financial integration to poverty. The regressions control for changes in income per capita and output growth rates, as well as various other macroeconomic and structural variables, such as the inflation tax, changes in the real exchange rate and the terms of trade, health and schooling indicators, and macroeconomic volatility. The author uses not only individual indicators of trade and financial openness but also a "globalization index" based on principal components analysis, and tests for both linear and nonlinear effects.

The results suggest the existence of a nonmonotonic, Laffer-type relationship between globalization and poverty. At low levels, globalization appears to hurt the poor; but beyond a certain threshold, it seems to reduce poverty - possibly because it brings with it renewed impetus for reform. So, globalization may hurt the poor not because it went too far, but rather because it did not go far enough.

This paper - a product of the Poverty Reduction and Economic Management Division, World Bank Institute - is part of a larger effort in the institute to study the impact of globalization on the poor in developing countries.