Government 1B: Lesson 18 – Poverty

Reading: “How Globalization Conquers Poverty.” (Text below the video.)


How Globalization Conquers Poverty

By Johan Norberg

In 1870, Sweden was poorer than Congo is today. People lived twenty years shorter than they do in developing countries today, and infant mortality was twice as high as in the average developing country. My forefathers were literally starving.

But reforms for liberalization at home and free trade abroad changed all of this. A trade agreement with England and France in 1865 made it possible for Swedes to specialize. We couldn’t produce food well, but we could produce steel and timber, and sell it abroad. For the money we made, we could buy food.

In 1870, the industrial revolution began in Sweden. New companies exported to countries across the world, and production grew rapidly. The competition forced our companies to become more efficient, and old industries were closed so that we could meet new demands, such as better clothes, sanitation, health care and education.

By 1950 — when the Swedish welfare state was no more than a glint in the social democrat’s eye — the Swedish economy had quadrupled. Infant mortality had been reduced by 85 per cent and life expectancy had increased by a miraculous 25 years. We were on our way to abolishing poverty. We had globalized.

Even more interesting is that Sweden grew at a much faster rate than the developed countries it traded with. The wages in Sweden grew from 33 per cent of the average wage in the US in 1870 to 56 per cent in the early 1900s, even though American wages soared at the same time.

This shouldn’t surprise anyone. Economic models predict that poor countries should have higher growth rates than affluent ones. They have more latent resources to harness, and they can benefit from the existence of wealthier nations to which they export goods and from which they import capital and more advanced technology, whereas affluent countries have already captured many of those gains.

It’s a clear-cut case. Except for one small problem. This relationship does not exist.

Most poor countries grow more slowly than the industrialized countries. The reason is simple: most developing countries cannot make use of these international opportunities. And the two most significant reasons for this are man-made: domestic and external obstacles. Domestic barriers such as a lack of the rule of law, a stable climate for investment, and the protection of property rights. External barriers such as rich country protectionism in goods of particular importance to the third world — textiles and agriculture — that (according to UNCTAD) deprives developing countries of nearly $700 billion in export income a year — almost 14 times more than they receive in foreign aid.

But when we look at the poor countries with good institutions, and which are open to trade, we see that they are making rapid progress, much faster than the wealthy countries. A classic study by Jeffrey Sachs and Andrew Warner of 117 countries in the 1970s and 1980s showed that open-developing countries had an annual growth rate of 4.5 percent, compared with 0.7 per cent in closed-developing countries and 2.3 percent in open industrialized countries. A recent World Bank report concluded that 24 developing countries with a total population of 3 billion are integrating into the global economy more quickly than ever. Their growth per capita has also increased from 1 per cent in the 1960s to 5 per cent in the 1990s (compared to a rich country growth of 1.9 per cent). At the present rate, the average citizen in these developing countries will see her income doubled in less than 15 years.

This points to the conclusion that globalization, the increase in international trade, communications and investments, is the most efficient means in history of extending international opportunity. The anti-globalists are correct when they claim that large parts of the world are left out, especially Sub-Saharan Africa. But that also happens to be the least liberal part of the world, with the most controls and regulations, and the weakest tradition of property rights. When anti-globalists blame globalization for African misery, it rings just as bizarre as the North Korean officials who once explained to a visiting Mongolian politician that the average North Korean is unhappy and miserable because he is sad about American imperialism.

On the whole, official statistics from governments, the UN and the World Bank all point in the direction that mankind has never before seen such a dramatic improvement of the human condition as we’ve seen in the last three decades. We have heard the opposite view repeated so many times, that we take it for granted, without examining the evidence.

During the last 30 years, chronic hunger and the extent of child labour in the developing countries have been cut in half. In the last half century, life expectancy has gone up from 46 to 64 years and infant mortality has been reduced from 18 to 8 per cent. These indicators are much better in the developing world today than they were in the richest countries a hundred years ago.

In a generation, the average income in developing countries has doubled. As the United Nations Development Programme has observed, in the last 50 years global poverty has declined more than in the 500 years before that. The number of absolute poor — people with less than $1/day — has according to the World Bank been reduced by 200 million in the last two decades, even though world population grew by about 1.5 billion during the same time.

Even those encouraging findings, however, probably overestimate world poverty, because the World Bank uses survey data as the basis for its assessments. This data is notoriously unreliable. It suggests that South Korean is richer than the Swedes and British, for example, and that Ethiopia is richer than India.

Furthermore, surveys capture less and less of an individual’s income. The average poor person at exactly the same level of poverty in surveys in 1987 and 1998 had in reality seen her income increase by 17 per cent. Former World Bank economist Surjit S Bhalla recently published his own calculations supplementing survey results with national accounts data (in the book Imagine There’s No Country, Institute for International Economics, 2002). Bhalla found that UN’s goal of lowering world poverty to below 15 percent by 2015 has already been achieved and surpassed. Absolute poverty had actually fallen from a level of 44 percent in 1980 to 13 percent in 2000.

Bhalla also shows that the GDP per capita of the developing countries taken as a whole (not as individual countries) grew by 3.1 percent 1980-2000, compared to the industrialized world’s 1.6 percent. These countries are now repeating the Swedish experience from the late 19th century, only faster. From 1780, it took England almost 60 years to double its wealth. A hundred years later, Sweden did it in about 40 years, and another century later it took South Korea just a bit more than 10 years.

The world has never been a better place to live in than it is today. Poverty has never been this low, and living standards so high. And the era of globalization has created the setting for an even faster growth of opportunities and wealth creation.

Hold on to your hat.