Philippe Legrain

Globalisation isn’t working, according to Robert Wade (July). If you exclude China—a mere 1.3bn people—it has not made much
of a dent in global poverty or inequality, he claims. And if you ignore
the boom years since 2000—why bother using up-to-date statistics?—it
hasn’t delivered faster growth either. This is a weak argument, which
appears to stand up only by excluding evidence that contradicts it—but
even on its own terms it isn’t correct. In fact, developing countries
that have embraced globalisation are growing faster than before; so
fast that they are closing the gap with rich countries, slashing
poverty and reducing global inequality for the first time since the
industrial revolution catapulted Europe forward. Globalisation is
working.

Wade claims that, “If the liberal argument holds, we would expect the
global shift towards free markets in the past 25 years to have raised
the rate of world economic growth. Instead, there has been a slowdown
in developed and developing countries. Between the era of managed
capitalism (roughly 1960-78) and the era of globalisation (roughly
1979-2000), the growth rate of world output fell by almost half, from
2.7 per cent to 1.5 per cent.”

Not so. According to the latest IMF figures, the world economy grew by
3.3 per cent a year from 1986-95 and by 3.9 per cent a year from
1996-2005. Better still, while in 1986-95 emerging economies grew only
fractionally faster than advanced economies (3.7 per cent a year
compared with 3 per cent), in 1996-2005 they grew over twice as fast
(5.5 per cent a year compared with 2.7 per cent). Far from stagnating,
the world economy is booming—and developing countries are outpacing
developed ones.

But in any case, Wade’s methodology is shoddy. Even if global growth
had slowed since 1979, one could not deduce from such aggregate figures
that globalisation wasn’t working. Contrary to what he asserts, there
has not been a global shift towards free markets, let alone one that
can be dated to 1979. Countries have opened their markets to varying
degrees and at different times; some have failed to liberalise at all
or have even become more protectionist. What’s more, globalisation is
not the only economic change of the past 40 years, and so cannot necessarily be
considered responsible for any particular change in economic
performance. The right way to judge whether globalisation is working is
to look at individual economies’ performance before and after they
liberalised, controlling for other changes that might affect the
picture—and one finds a mountain of evidence that it is indeed
delivering the goods.

For instance, World Bank studies of 19 countries over four decades
conducted in the early 1990s showed that liberalisation boosts economic
growth. More recently, Romain Wacziarg and Karen Welch of Stanford
University have found that between 1950 and 1998, “countries that have
liberalised their trade regimes have experienced, on average, increases
in their annual rates of growth on the order of 1.5 percentage points
compared to pre-liberalisation times.”

Consider China. Since 1978, it has gone from a system where trade was
determined by the central government’s five-year plan to one where a
huge number of private companies engage in foreign trade, import
licences have largely been abolished, industrial tariffs have fallen to
single figures and service sectors are being opened up too. The volume
of China’s trade has risen seventy-fold, trade’s share in the economy
fivefold and the country’s share in world trade has jumped from 0.8 per
cent to 7.7 per cent. Over the same period, Chinese living standards,
as measured by GDP per person at purchasing power parity, have risen
fivefold—and the country has witnessed the fastest fall in poverty ever
recorded.

China’s great leap forward has certainly helped reduce global
inequality since 1980, as Wade now concedes: “the Gini coefficient has
indeed fallen since 1980, meaning that international income
distribution has become more equal.” (Four years ago, in his Prospect debate
with Martin Wolf on global poverty and inequality, Wade hotly disputed
this.) Yet Wade dismisses this fall in inequality by claiming it is
solely due to China. Even if this were true, it would surely still be
very welcome: it is no small matter if the Chinese, who account for one
in four of the developing world’s population, are catching up with
Americans and Europeans. But the fall in inequality is not just due to
China. India, home to more than a fifth of the developing world’s
population, is also catching up with the west. Indeed, the income share
of the poorest 70 per cent of the world’s population has increased
significantly since 1980. The countries that are continuing to fall
behind are mostly in sub-Saharan Africa. It is a tragedy that some very
poor countries are doing very badly. But it is not an indictment of
globalisation—by and large, the poorest countries are victims not of
globalisation, but of a lack of it—nor does it alter the fact that
global inequality is falling overall. 

Wade points out that absolute income gaps are widening and argues that
this is a matter for concern. Really? Consider again his example of
economy A, where the average income is $10,000, and economy B, where it
is $1,000. Their relative income is 10:1 and the absolute gap between
them is $9,000. Suppose B grows at a racy 10 per cent a year. Its
income will rise by $100 to $1,100. If the absolute gap between A and B
is not to widen, A can add at most $100 to its income of $10,000, which
means growth cannot exceed 1 per cent. In short, because A starts off
so much richer than B, even if B booms the absolute gap between them
will initially widen unless A stagnates—and if A stagnates, B is
unlikely to boom, since A’s demand for its exports will also stagnate.
Perhaps Wade wants the gap between rich and poor to shrink through
economic stagnation in rich countries—if so, he should say so
explicitly. But surely what is happening now is preferable: rich
countries are growing steadily, but poor countries are growing faster,
and thus catching up in relative terms. If this continues, they will
eventually narrow the absolute gap too. For example, if B grows at 10
per cent a year for 30 years, its income will rise to $17,449; while if
A grows at 2 per cent a year over the same period, its income will rise
to $18,114.

Wade also dismisses the huge fall in global poverty since 1980, by
saying its scale “depends entirely on China.” In fact, while the
proportion of people in developing countries living in extreme poverty
almost halved between 1981 and 2001, from 39.5 per cent to 21.3 per
cent—a huge achievement, regardless of whether those who escaped
poverty were Chinese or Congolese—even (arbitrarily) excluding China,
the poverty rate fell from 31.5 percent to 22.8 per cent. Wade calls
this “only 9 per cent”: in fact, this 9 percentage-point fall means the
poverty rate fell by over a quarter. Extreme poverty edged down in
Latin America and the Caribbean, fell by two fifths in south Asia and
more than halved in north Africa and the middle east.

There’s no doubt about it: globalisation is working. We need to do more
to help everyone reap its benefits, not misguidedly try to protect the
poor from trade-led development.