Today's date:
Spring 2007

Global Outlook: The Poor Will Get Richer

François Bourguignon is the chief economist and senior vice president, development economics, of the World Bank. The following piece is based on the World Bank's recently published report Global Economic Prospects 2007: Managing the Next Wave of Globalization.

Washington — Despite a robust global economy and unprecedented growth in developing countries in recent years, anxiety about globalization is on the rise. Debates over who gains, who loses and what policymakers should be doing about it have fueled best-sellers and helped politicians win—or lose—elections. The debate is intensifying with signs that globalization will likely accelerate in the near future, propelled by technological innovations and the push for global economic integration.

Several factors are fueling the unease. First are concerns over the widening wage gap between the world's vast lower and lower middle class and the earnings of the very wealthy. Second is the worry in rich and many developing countries alike over stiff trade competition from China, Brazil and India. Third is disquiet over growing job insecurity among low-skilled workers and increasingly among employees in white-collar service positions whose jobs are being outsourced.

While understandable, today's pessimism should be tempered by a realization that continuing globalization offers unmatched opportunities to increase productivity and raise incomes in both rich and poor countries, provided precautions are taken to mitigate the hardship of transition.

Developing countries are seizing those opportunities in unprecedented ways. Led by China, India and other high-performing emerging economies, real growth performance over the past five years has been strong for middle- and low-income countries overall. Developing economies grew on average 6 percent during that period, twice the level of high-income countries.

This robust performance signals—for the first time in decades—significant convergence in average incomes of developing and developed countries. Indeed, for low-income countries, the past five years are the first period since the 1960s during which their per capita growth has been substantially higher than average rich-country growth. This may point to the start of a sustained "catching up" period and a turning point in the divergence in the income levels of high- and low-income countries.

Will that evolution continue, and will poor people benefit from the continuing globalization? On the first point, the outlook seems favorable. According to a World Bank scenario based in part on productivity trends observed over the past decade, global economic output could rise from $35 trillion in 2005 to $72 trillion in 2030. This is equivalent to an average annual increase of about 3 percent (2.4 percent for high-income countries and 4.0 percent for developing countries). Though the incomes of developing countries will still be less than one-quarter of those in rich countries in 2030, some convergence toward wealthy countries will occur. Countries as diverse as China, Mexico and Turkey would have average living standards roughly comparable to Spain today.

The poor will benefit as well: By 2030, the number of people living on less than $1 a day could fall by half from 1.1 billion today to 550 million, even while the world's population increases by 1.5 billion people.

On the downside, globalization's benefits are likely to be uneven—both across regions and countries. Not all countries will be able to close the gap with rich countries. The possibility that Africa will lag is a particular concern. And within nations, despite the growing size of a "global middle class," some social groups may be left behind or may not benefit as much as others from globalization. Unskilled workers, in particular, are at risk.

Two-thirds of developing countries may face widening within-country inequality, thus muting the poverty-reducing effects of growth and possibly sparking social tensions. For example, in Egypt, Pakistan and Nigeria, the gaps between "haves" and "have-nots" may increase in the future. Population growth, the pace of urbanization and educational opportunities will influence how this plays out in each country. Trade alone exerts no systematic effects on income distribution. The most important factors are the initial conditions of inequality and the extent to which growth is driven by highly skilled sectors of the economy.

The main contributor to global inequality within and between countries is the widening difference in earning potential between skilled and unskilled workers—people and companies with technological skills and connectivity needed to enhance productivity versus workers and enterprises slowed by low educational levels, dated production techniques and inhospitable business climates.

To cushion the impact of required restructuring, governments need to support dislocated workers and provide them with new opportunities. This may require effective safety nets as well as worker retraining.

Creating new opportunities for poor people through additional investments in education is also required to narrow inequality. In many countries, investing in girls' education can be a vital complement to reducing gender discrimination in the workplace—too often, keeping girls out of school consigns them to the world's unskilled labor force. More funding for education and other pro-poor investments might be sought from a tax base centered on a growing middle class in developing countries.

Governments and donors should target development aid to lagging regions and to the poorest countries, and make sure that such assistance is spent effectively. Investments to overcome infrastructure are essential, particularly in Africa. Increasing the access of poor countries to global markets is essential for these countries to avoid lagging behind. Completing trade negotiations that could accomplish this—specifically, the Doha round—would be a first step in that direction. Measures to expand trade should be combined with aid to overcome supply-side constraints choking off trade of poor countries. But for these measures to be effective, counter-productive domestic policies must be dealt with as well.

With the right policies and with multilateral cooperation to widen the benefits of global integration, unprecedented improvements in living standards could be realized in the next quarter-century. To a large extent, these policies are already overdue. In addition, there is a risk that progress might be slowed, and even reversed, if global warming and other environmental constraints are not properly taken into account.

For globalization to raise the welfare of the world's population, national policymakers, together with the entire international community, must work together not only to ensure that the opportunities of global integration are broadly shared, but also that growth and poverty reduction achieved today do not cause irreversible harm to future generations.