Is globalization making the rich, richer and the poor, poorer? Have developing countries made progress in recent years, or are they falling further behind? The noisy and sometimes violent demonstrations that accompany international summits, ministerial gatherings, and the meetings of multilateral organizations, such as the World Trade Organization, International Monetary Fund and World Bank, have focused fresh attention on questions such as these.
Corporate leaders in high income countries, especially managers of firms with global operations, have a keen interest in the answers. Corporations are a driving force and important beneficiaries of global economic integration. They are also the ultimate targets of anti-globalization demonstrators, who blame multinational corporations for ills ranging from deforestation to child labor. If development efforts have failed and globalization is further impoverishing the world’s poorest people, then corporations surely deserve part of the blame. If, on the other hand, global poverty is declining and global integration is helping people to escape poverty, then corporations are presumably part of the solution.
While there have been both successes and failures, the overall trend in development is clear: Global poverty is declining. By whatever measure you choose, development is working, and the rate of improvement is accelerating. In terms of per capita incomes, the mid- to late-1990’s saw the developing countries grow at their fastest rate since the mid-1970s, thanks to major improvements in policies and institutions. For the 1990s as a whole, per capita income in developing countries grew at 1.9 percent per year, nearly double the rate in the 1980s. Inflation, which has an especially pernicious effect on the poor, and at high levels inhibits economic growth, fell from an average of 25 percent among developing countries in the 1980s to just five percent today.
Education and health standards are also improving. Between 1980 and 1999, low-income countries reduced adult illiteracy among women from 65 percent to 48 percent, and among men from 43 percent to 29 percent.
Additionally, enrollment of girls in primary school has risen dramatically. Over the same period, infant mortality declined by nearly a third, and life expectancy increased, notwithstanding the horrific setbacks from HIV/AIDS. Despite significant progress, the magnitude of the challenge of overcoming global poverty is daunting. Of the world’s six billion people, 1.2 billion people live on the equivalent of less than one U.S. dollar a day. Each year, about 10 million children under the age of five die from preventable diseases. More than 113 million children do not attend school, and about half a million women die each year during pregnancy and childbirth from complications that could have been overcome with access to appropriate care.
Beneath these global aggregates lie very different regional and country experiences that shed light on the role of private firms and global economic integration. Poor countries that have worked to create a positive investment climate for local entrepreneurs, especially small- and medium-sized businesses, while also opening their markets to trade and foreign investment have experienced more rapid reductions in poverty. Those countries that have been unable to improve their investment climate for their own people and have not opened their doors to international commerce have stagnated economically and been unable to reduce poverty.
Success has been most striking in East Asia. Because of successful reform programs in China, Vietnam and other countries, the proportion of people living in extreme poverty (less than $1 U.S. per day) declined from 28 percent of the population in 1987 to 23 percent in 1998. In China alone, the number of desperately poor people fell from 250 million in 1978 to around 34 million in 1999, the largest single poverty reduction event in world history.
Many countries outside East Asia have also been successful at reducing extreme poverty. India, home to the largest number of poor people, grew very rapidly in the past decade, thanks to its efforts to lift the heavy hand of state control over the economy in the 1980s and 1990s. In Africa, Uganda has shown that even a country ravaged by dictatorship and civil war, and burdened with a widespread AIDS epidemic, can recover and achieve sustained, high growth and significant reductions in poverty. Uganda has reduced its poverty from 56 percent in 1992 to 35 percent today.
Among the distinctive features of the developing economies that experienced higher growth are an improving domestic investment climate and greater participation in international trade and investment. Conversely, the large number of countries that had very slow growth or a decline in incomes in the 1990s—such as Pakistan and Nigeria—were unable to put in place the policies and institutions necessary for robust private-sector growth. In short, in every country that achieved rapid, sustained progress in the 1990s, the private sector was the engine of wealth creation. This should hardly be surprising: In recent years annual foreign direct investment in the developing world was more than three times larger than all forms of foreign aid combined.
However, these flows are mostly confined to a small number of developing countries, many of which are already middle income. Even in poor countries, private flows rarely finance investments in education, health or roads that are crucial to providing the basis for sustained growth.
Fortunately, the effectiveness of foreign aid has also been increasing. World Bank research has shown that foreign aid provided to poor countries that put in place sound policies and effective institutions contributes to more rapid economic growth and faster reductions in poverty. Aid provided to countries that lack these prerequisites, no matter how pressing the human need, has been much less effective. These findings strengthened the determination of the bank and bilateral donors to focus large-scale financial assistance on countries where conditions for effective aid are favourable. And the number of such countries has been growing.
In those countries where the necessary conditions are not yet in place, the bank and other development agencies work with the government and civic organizations to foster informed discussion about policy alternatives and possible approaches to building more effective institutions, thereby helping to create an environment conducive to change.
Recent years have also seen rising expectations about the public role of the private firms. Of course, a company’s foremost contribution to growth and poverty reduction continues to be going about its business: providing goods and services which society needs, and in so doing creating jobs and paying taxes. In addition, foreign-backed firms have long been an important—if sometimes unintentional—conduit for the transfer of technology and management expertise.
Today many companies understand that their long-term investment goals can be achieved only within stable, healthy and free social and financial environments. These firms also recognize that sustainable success depends on good relationships with investors (institutional and private), customers, employees (including retirees and families), business partners (joint venture partners, franchisees, trade distributors, suppliers), governments (regulators and funding agencies), and communities (neighbourhoods, charities, non-profits, issue groups and educational institutions). Multinational corporations must maintain these relationships at the global, national and local level.
To do so, firms are increasingly supporting development initiatives that go beyond the basics of providing goods and services that the market demands, creating jobs, paying taxes and occasionally transferring technology. Examples of such activities at the local level in developing countries include serving as a role model and trend-setter in the fair treatment of employees, providing medical care and educational opportunities to employees and their families, and assisting with local sanitation and infrastructure needs. At the national and international level, private firms can take the additional steps of supporting policies in high-income countries that will make it easier for poor people and poor countries to share in the benefits of globalization—policies such as easing barriers to market access for poor countries and increasing foreign aid.
The time for such initiatives has never been better. The trends I have described in this article—improved policies and institutions, more rapid growth and poverty reduction, better health and education, and increased aid effectiveness—offer rich countries an unprecedented opportunity to demonstrate their commitment to a better world for all. Debt relief must go hand in hand with opening up lucrative markets to exports from developing countries. It is simply hypocritical to give debt relief with one hand, and then deny poor countries the ability to export their way out of poverty with the other.
Rich countries should lift, once and for all, the trade barriers and subsidies that prevent developing-country products from reaching their markets. Although average tariffs in the United States, Canada, European Union and Japan range from only 4.3 percent in Japan to 8.3 percent in Canada, their tariffs and trade barriers remain much higher on many products exported by developing countries. Products with tariffs exceeding 100 percent in some of these countries include: major agricultural staple food products; textiles, clothing and footwear; and fruits and vegetables. All these are sectors in which developing countries have a comparative advantage.
World Bank research shows that tariff and non-tariff barriers imposed by rich countries, together with the agricultural subsidies that they give their farmers, cost developing countries over $50 billion U.S. a year. Corporations can help the poor people in developing countries—and often pro mote their own interests at the same time—by supporting the reduction of tariffs and quotas in their home markets.
Corporations in rich countries can play a crucial role in promoting improved labour and environmental standards by the examples set by their subsidiaries in developing countries. They should insist that their governments facilitate the adoption of improved standards in developing countries through the provision of technical assistance, and not by imposing new conditions for market access.
Businesses headquartered in rich countries can also encourage their governments to honour the commitment to devote 0.7 percent of their annual GNP to overseas aid. Development assistance to Africa has fallen from $36 U.S. per head in 1990 to just $20 in 1999, despite an increase in the number of countries that have put in place the policies and institutions necessary for effective aid. On average, rich countries contribute just 0.22 percent of their yearly GNP. Canada, at 0.25 percent, is somewhat above average, but still short of the 0.7 percent target. The United States, with only about 0.10 percent of GNP going to aid, contributes a smaller share of its national wealth to development assistance than any of the high-income countries.
The difference between current aid levels and the professed goal of high-income countries is worth a hundred billion dollars a year. For millions of children, this is the difference between life and death. Around 1.2 billion people live on less than $1 U.S. a day. And many of the gains made in life expectancy and infant and maternal mortality are now being threatened by the global tragedy of AIDS. Among the countries that emerged from the breakup of the former Soviet Union, deep recession, a surge in poverty and unemployment, and sharp reductions in life expectancy remind us that progress can be fragile indeed; just as Africa reminds as that progress can be just too slow.
Experience tells us that these daunting problems can be overcome. Foreign aid helps countries that are ready to help themselves to improve their investment climate by strengthening institutions such as property rights, legal systems, capital markets, and public investment in health, education, environmental management and more. These improvements in investment climate are good for both domestic and international firms—and these businesses acting in their own enlightened self-interest are in turn good not only for their own bottom line but also for economic growth and for improvements in the lives of poor people.
