Does globalization hurt the poor?

Abstract.

This paper examines analytically and empirically the extent to which globalization affects the poor in developing countries. I begin with a description of various channels through which trade openness and financial integration may have an adverse effect on poverty. I also stress the possible non-linearities involved – possibilities that have been seldom recognized in the existing literature. I then present cross-country regressions that relate measures of real and financial integration to poverty. The regressions control for changes in income per capita, as well as various other macroeconomic and structural variables, such as inflation, changes in the real exchange rate and the terms of trade, and schooling indicators. I use both individual indicators of trade and financial openness, and a “globalization index” based on principal components analysis, and test for both linear and nonlinear effects. The results suggest the existence of an inverted U-shape 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. Thus, globalization may hurt the poor not because it went too far, but rather because it did not go far enough.