Stemming the backlash against globalisation

There is much speculation about a new round of protests at the upcoming meetings of the World Bank and the International Monetary Fund (IMF). The protestors contend that globalization is bad for poor people in poor countries. But the evidence suggests the opposite: that globalization provides the poor in developing countries with new opportunities for upward mobility. Yet it also introduces new vulnerabilities, particularly for those in the middle income strata, which cause even the upwardly mobile in these strata to negatively assess their economic progress. We propose three sets of policies for poor countries: increasing access to higher levels and better quality education; eliminating market distortions that block the upward mobility of the poor (including excessive levels of inequality); and providing more broadly available safety nets for people without steady incomes — that could help prevent these negative sentiments from growing into a broader backlash against globalization, which would ultimately hurt the poor in these countries the most.

With the spring meetings of the World Bank and the IMF taking place this month in Washington, D.C., there is much speculation about a possible repetition of the protests that plagued the recent World Trade Organization (WTO) meetings in Seattle and the World Bank/IMF meetings in Prague and D.C. Beyond the logistical nuisances posed by the protestors, a more fundamental question is the extent to which they represent more widely-held sentiments against globalization and market policies. Is there a looming backlash against globalization? In the United States and most industrialized economies, the main opposition to globalization and free trade stems from fears about job displacement. What do people in developing countries think?

The protestors claim that globalization is bad for poor people in poor countries. A wide body of evidence suggests the opposite. Why the discrepancy? In developing countries, market reforms, which are essential to countries' effective integration in the global economy and for poverty reduction, are part and parcel of globalization. Globalization is thus a convenient sounding board when particular policies result in dislocation for certain economic or social sectors.

My research on income mobility with Nancy Birdsall of the Carnegie Endowment for International Peace and Stefano Pettinato of Brookings suggests that globalization has brought substantial benefits and opportunities for upward mobility for large numbers of low-income individuals in the emerging economies. Yet these opportunities have been accompanied by new vulnerabilities and new risks of falling into poverty for others in both low-and middle income-brackets.

These trends have also affected public perceptions. While the protestors bemoan the harm that globalization has caused the poor, the most dissatisfied respondents in the developing countries for which we have data tend to be in the middle-income levels, rather than at the lowest. This does not mean that there is an inevitable backlash against globalization in these countries. Yet the strong negative perceptions of those in the middle and lower middle income brackets suggest that policymakers should pay attention to the insecurities of these groups in addition to those of the poor.

The Reform Record

A genuine backlash against globalization would not manifest itself in the form of angry teenagers on the streets of D.C. or Seattle, but instead through electoral outcomes in countries from Poland to Peru. In Latin America, the region that has led the world in implementing market reforms, a number of countries that were seemingly model performers are facing economic and political uncertainty. Argentines are bracing for the possible spillover effects of the Turkey crisis as they simultaneously contend with debilitating internal political squabbles. Bolivia is in its second year of political crisis and social unrest. Will voters in these countries throw out the baby with the bathwater and turn against markets and integration with the world economy?

The answer is probably not. In Latin America, there is widespread debate about how to make the market model more equitable and efficient, but, thus far, only one candidate has been elected to office promising to reverse integration into global markets—Hugo Chavez in Venezuela, where reform was not fully implemented. Still, there are some worrisome trends. In Peru, one of the countries that has gone furthest in implementing market reforms, a main contender in the June run-off election is former president Alan Garcia, notorious for his rejection of market principles in the late 1980s.

The Garcia experiment in Peru resulted in hyper-inflation, economic collapse, social unrest, and unprecedented increases in the incidence of poverty. Venezuelans today live in economic chaos. In the end, the turn to the market is much better for developing countries—and for their poor—than the alternative scenario of self-imposed isolation. Yet if the turn to the market has been so good for these countries, why is there so much debate about it?

In Latin America, reforms have delivered substantial benefits for a region that was plagued with inflation, economic instability, and daunting levels of external debt. Those countries that have fully implemented reforms have stabilized inflation, reestablished stable if not high levels of growth, liberalized trading regimes and expanded their level and diversity, and privatized public enterprises and social security systems that were draining fiscal coffers.

A common assumption, meanwhile, is that market reforms are bad for the poor. While the effects of these reforms on inequality are unclear at best, the positive effects of such reforms for the poor are quite clear. Eliminating high levels of inflation has important and positive effects for the poor, who are least able to protect themselves from its costs. And in many countries, part of the reform package was a reorienting of public expenditures to the poor, who were often excluded from the benefits of the expenditures prior to reforms.

In addition, by merely removing distortions that block the productive potential of the poor in a number of sectors, market reforms can increase equity—and already have in some countries. In many developing economies, market and government failures either introduce perverse incentives or block the ability of poor people to accumulate productive assets such as education. Reforms that remove such distortions — such as rationed credit due to negative real interest rates, and rigid and over-protective labor market regulations that discourage legally registered firms from employing new workers — have had positive effects for the poor in a number of countries.