When discussing globalization, advocates of the free economy usually start by stressing the large number of people who have risen out of extreme poverty in the last three decades. This period of poverty reduction showed a parallel growth in globalization. But it has not been even.
Those who try to prove that we are living in the best of times usually use monetary statistics – they count the number and percentage of people who earn less than $1.90 per day. Thanks to progress and some inflation, the threshold for extreme poverty is being revised upward to $3 and even to $5 per day. “Optimistic” economists also provide statistics for factors such as access to clean water, access to electricity, and better and cheaper communications. In most countries human development indices have also improved. Their message is often summarized as “we never had it so good.”
It is only during the last three decades that we have seen think tanks, NGOs, and international bodies introduce indices that measure economic freedom, globalization and respect for the rule of law. Surprising as it might seem, we still do not have reliable international poverty statistics. It seems shocking that the World Bank and its multimillion-dollar bureaucracy – which states that poverty reduction is one of its main goals – can’t come up with up-to-date comparable figures. Most countries use different measures and thresholds and do not report on a yearly basis.
Globalization and Extreme Poverty rates, globalization scores from KOF; % Extreme Poverty/GDP from ... [+]
One of the oldest measurements of freedom was produced by Freedom House, but with a heavy bias on political freedom. Twenty five years ago we saw the creation of the Index of Economic Freedom, produced by the Heritage Foundation, and the Economic Freedom of the World, produced by the Fraser Institute in Canada. On the topic of justice, we saw the creation and evolution of the Corruption Perception Index, produced by Transparency International, and more recently the Rule of Law Index, produced by the World Justice Project. There is a longer history of measurements of economic performance, such as GDP, per capita income, or unemployment. Efforts to measure economic factors took a big leap forward after the growth of Keynesianism and macroeconomics. John Maynard Keynes promoted a vision of economics that relied on aggregates, or “macro,” analysis. The World Bank, the International Monetary Fund, and many other international agencies were founded when macroeconomics was becoming dominant. Although not without its problems, as through their overuse we might lose sight of personal actors and interactions, aggregates have helped increase economic knowledge in many areas, such as how the monetary supply (an aggregate) impacts the price level (another macro figure).
Venezuelan scavengers dig through trash at a landfill, in Pacaraima, Roraima State, Brazil, on the ... [+]
Another widely used measurement, the Doing Business Index, was inspired by the work of Peruvian economist Hernando de Soto and his team of researchers at the Institute for Liberty and Democracy. In research conducted in the 1980s, they showed how an overregulated economy creates such high costs for entry into the market that it ends up excluding the poor from just opportunities. As part of this research, De Soto and his team created a small textile company and tested how long it would take to establish it formally. Five people spent the equivalent of 289 man hours to fulfill requirements for 11 procedural steps, where on 10 occasions they were asked for bribes (and had to pay two of them in order to proceed). The cost was equivalent of 32 monthly minimum-wage salaries. In the words of Fr. Robert Sirico, a strong defender of the morality of a truly free economy, these regulatory barriers position the poor against “the un-scalable wall of corporate-government cronyism masquerading as a free market.”
The Doing Business Index ranks countries by the quality of the legal framework affecting businesses both big and small. Other efforts that help us get a better picture and that incorporate elements of freedom, justice and the economy are the Human Prosperity Index produced by the Legatum Institute in London and the Human Freedom Index produced by the Fraser Institute and Cato.
These indices are getting better each year. They are still imperfect pictures of reality, but they allow us to judge which types of economic arrangements lead to greater prosperity and poverty reduction. The studies based on this data show that a strong respect for property rights, allowing free trade and free prices in most sectors of the economy, and sound money are the main ingredients of successful economies and help people leave poverty.
Of these, two are relatively easy to analyze and implement: trade and sound money. The most difficult one is rule of law and respect for private property. While the indices have shown progress in money and trade, they have shown stagnation in rule of law. Measurements of corruption are improving, but we lack measurements of cronyism, which in many countries is more prevalent than corruption.
Trade indicators, especially the percentage of an economy that depends on international trade, give us a good estimate of economic globalization. Foreign direct investment is another indicator here. There is also an index of globalization, produced by the KOF Swiss Economic Institute, which measures economic, social and political aspects. The current indicators show almost no poverty in the most globalized countries of the developed world, and considerable poverty in more closed economies.
In Table 1 I show the top 10 most- and least-globalized countries according to the KOF index; extreme poverty as measured by the World Bank; the 2019 index of economic freedom of the Heritage Foundation-Wall Street Journal; and the countries’ scores in Transparency International’s Corruption Perception Index.
TABLE 1: Top and bottom ten countries ranked by globalization (KOF think tank), and their ... [+]
As usual with statistics, there are exceptions or outliers. A few very small and very rich countries (such as the principalities of Liechtenstein and Monaco) appear with low scores of overall globalization due to their low degree of political globalization.
Correlations do not prove causation, but they raise questions. In the 70 countries with similar low degrees of globalization we see huge differences in extreme poverty rates. Countries like Gabon and Pakistan have globalization scores similar to those of Rwanda and Togo. The first two have low levels of extreme poverty, under 4%, while in the latter two the extreme poverty rate hovers around 50%.
Trumpeting statistics about the benefits of globalization in some of these countries will fall on deaf ears, with good reason. But the blame for poverty should not be placed on globalization but on other man-made factors – mainly the lack of economic freedom, corruption and a weak rule of law. The top-10 most globalized countries, with an average globalization score of 89.29, have an average economic freedom score of 74.10, while the lowest, with an average globalization score of 40.75, have an average economic freedom of 52.09. The difference is even wider when we look at transparency or lack of corruption. The 10 most globalized countries show a score of 80.8, while the bottom shows a dismal 27.4. Blame the elites of those nations, rather than globalization, for their plight. The benefits coming from large contracts and investments are being captured by the few who are in government or who have government connections.
When we account for population, the analysis of globalization and poverty is further complicated by the fact that the two most populous countries, China and India – with very weak rule of law, and with very different histories and traditions – are responsible for creating an economic environment that has helped lift the largest number of people out of extreme poverty. In the latest KOF rankings they also score near the middle in globalization – China ranks 80th and India 95th, out of 200 countries.
Globalization and Extreme Poverty in Latin America. The two best scores belong to Chile and Uruguay, ... [+]
In less developed regions of the world, only Latin America shows some correlation between globalization and poverty; more open countries there show lower levels of extreme poverty. Both China and India score lower than the average Latin American country in indices of rule of law, justice and corruption – and yet their rates of growth have been higher, much higher, than those of any Latin American country. Why is this? In most Latin American countries we see constant swings in the directions of economic policy. In China and India, by contrast, there have been fewer reversals in internal economic policies. Investors and producers do not require a perfect regulatory framework, but in order to jump in they do require a certain degree of stability in the rules.
Like other economists, I pay attention to numbers and use them, despite my doubts regarding macroeconomics. But macro numbers have the negative effect of obscuring the role of their main component: the human person. They also give rulers and experts an excuse to try to be social engineers, using improving scores as benchmarks. But in practice this can lead them to disregard the concrete ways in which large segments of the population feel powerless to climb the ladder of economic progress. Policy leaders who only look at numbers might end up unaware of problems brewing in their societies. What we see today happening in two countries with some of the best economic performances in human history, Chile and Hong Kong, helps prove the above point. Chile is the most globalized, freest, and least corrupt economy in Latin America. Hong Kong consistently ranks as the freest economy in both the Fraser Institute and Heritage/Wall Street Journal indices. Nevertheless, the future of a free economy is under grave threat in both countries.
Numerous other factors that go beyond economics – such as culture, power, global strategies of state actors, anarchist “cliques,” and others – play a prominent role in today’s revolts, though these noneconomic factors are routinely neglected by think tanks and “free-market academics.”. While I give utmost importance to understanding political and economic realities with the best empirical tools, I think that numbers are not enough to confront the stones, arsonists and mob movements of today. The information we have about the real world, however, does not provide ammunition for those who want to blame poverty on globalization. What it does provide is relevant arguments that lack of corruption and good legal and judicial institutions are necessary conditions for the benefits of globalization to reach the poor.
