Scholars who believe in the theories put forward by Adam Smith predict that globalization started in the late 15th century. Some believe that it stretches back even further (O’Rourke 2002). The third view argues that the world was completely de-globalized at the start of the 19th century. However, we can be certain of one thing – globalization aimed to integrate and engage with people, companies and governments all across the globe. As the process of globalization began, theory suggested that the inequalities shall reduce both between and within countries. However, evaluating globalization in the 21st century, proves that this was not the case.
A rather simple but important question that economists often ask to gauge the degree of inequalities that exist across the world is – “would you be rich in a poor country or poor in a rich country?”. It might be tempting to think of being a rich person in a poor country, but the answer is somewhat counterintuitive. It is actually the poor populations in the rich country who are relatively better off. Economists follow a methodological approach to back up this claim – consider that a rich person is defined as someone who is a part of the top 5 per cent of the population while a poor person is in the below 5 per cent. And we define how rich or /poor a country is in terms of their per capita income. In a typical poor country, such as Liberia or Mozambique, that would be approximately $1,000, whereas for a typical rich country such as Ireland or Norway, it would be $65,000. Hence, the average rich person in a poor country earns $5,000, while a poor person in a rich country, $13,000 (Rodrik 2019). Even though all of these numbers do not account for the differences in healthcare, education and other facilities in these two countries, viewing this from a purely materialistic perspective, a poor person in a rich country is twice as much better off than an average rich person in a poor country.
For a fact, the disparities are much larger across countries than they are within countries (Rodrik 2011). But globalization was meant to be an engine for economic growth. Then why does the reality seem paradoxical? One reason for this is the existence of international trade. The primary cause of poverty is low productivity. Poor people are unable to sufficiently feed themselves, hence the low productivity. Most of the poor populations are caught up in the poverty trap. Because of this they do not have easy access to capital markets, which holds them back from investing in themselves, and hence, preventing higher outputs and incomes. Globalization is the key to solving all this by making capital, markets and technology readily accessible. However, international trade poses a hurdle in this process.
As the economies became more connected, the volume of international trade increased exponentially, however this exchange of goods and services was only limited to the industrial economies. The rise in demand for skilled workers has led to investments focused towards improving the quality of life (improved outputs), which helps sustain technological progress— further enhancing the comparative advantage of the industrial countries towards specializing in skill intensive goods (Galor 2008). Contrary to this, in nonindustrial economies, due to the same comparative advantage, they have specialized in production of non-industrial goods. This has led to a lack of investment in human capital. This shows that there exists what is called the Malthusian Trap, which means that all the gains from trade are utilized towards increasing the population of the economy rather than making the existing population better off. This causes the Great Divergence between the two types of economies. The lack of investment towards the non-industrial countries delays the demographic transition, consequently, all of this investment is diverted towards the already rich and powerful economies. This divergence directly impacts the per capita income, and the gap between the richest and poorest economies of the world has been increasing since the advent of the Industrial Revolution.
Another perspective while viewing international trade as a barrier, is that it creates a supply chain. After the Industrial Revolution, the world was divided between the core and the periphery — the former consists of industrial economies and the latter is the non-industrial economies which provide raw materials and other basic goods to the advanced countries. As all the economies specialize in the production of goods that they have comparative advantage in, it creates a global supply chain. And disrupting this supply chain is difficult and costly. Disruption can be caused when a country starts investing in the sector that it does not have a comparative advantage in. For instance, when less developed countries start investing in industrial sectors, they want to develop their economy as much as possible, but their production of industrial goods will not be efficient because they can export the same goods from foreign countries at cheaper prices. Hence, they cannot overcome the already existing advantage of the advanced countries in industrial goods. Because of this, even though the world is more integrated as a result of globalization, there will exist large gaps between rich and poor countries and and over time they will diverge in terms of income per capita.
Second reason that supports this ultimate paradox is the unwillingness of the state to grow, through the benefits of globalization. Although the divergence theory holds true for most small countries, there are some exceptions. Japan motivated the commodity-dependent countries by breaking the curse of the globalization paradox. Japan exported mostly raw materials — yarn, tea and raw silk — for the trade of industrial goods. According to the divergence theory, Japan also like other periphery countries, should be unable to globalize completely. However, Japan was able to break away from this because it developed an economy which had an apt combination of state and markets (Rodrik 2011). The government heavily invested in the public companies, and these investments were designed to assist the private enterprises. Moreover, it also depends on how much an economy globalizes, not just whether it does or does not. Mirroring this, a number of East Asian countries were able to grow at exponential rates— South Korea, Taiwan, Hong Kong, Malaysia, Singapore, Thailand and Indonesia. The state played a crucial part in helping these economies globalize efficiently. At the end of the day, if so many countries have been able to globalize, why can’t the others? Why are countries in Africa so poor, and unable to reap the benefits of a global world? In most situations, the government or the /state is unwilling to take initiative for development. All in all, if a country can manage to climb the ladder in procuring commodities and producing manufactures, it may converge with the world’s richest economies. In principle, globalization is the key to growth and development for an economy if it has the tools to alter the supply chain of international trade, and a brave and supportive state, that can help facilitate the private sector towards building a strong, integrated and connected global economy. So, does globalization lead to convergence? Yes, it does but under certain conditions and in particular environments. A push from the government and a holistic approach towards international trade can help a country use globalization as an engine for growth.
O’Rourke, Kevin H. When Did Globalization Begin? 2002, http://www.tcd.ie/Economics/staff/orourkek/offprints/EREH2002.pdf.
Rodrik, Dani. “Is It Better to Be Poor in a Rich Country or Rich in a Poor Country?” World Economic Forum, 2019, http://www.weforum.org/agenda/2019/09/truth-income-gaps-in-between-countries/.
Galor, Oded. “Did Globalisation Cause the ‘Great Divergence’ between Rich and Poor.” Did Globalisation Cause the ‘Great Divergence’ between Rich and Poor Economies? | VOX, CEPR Policy Portal, 2008, voxeu.org/article/did-globalisation-cause-great-divergence-between-rich-and-poor-economies.
Rodrik, Dani. The Globalization Paradox. Oxford University Press, 2011.
Abhinav Saggar is an undergraduate student at Ashoka University of Economics and Finance