CHAPTER 3: ECONOMIC PERFORMANCE, POVERTY
AND INEQUALITY |
58. The impact of globalisation on economic performance
varies across countries. We begin by focusing on the poorer countries
and considering the evidence in relation to globalisation and
its effect on poverty and inequality.
59. Many witnesses expressed concern about the level
of poverty and income inequality that remains in the world. Dr
Noreena Hertz, for example, said:
in this period of globalisation we are
seeing greater inequality between countries in seven out of the
eight measures on inequality. We see, and this is pretty much
undisputed, that inequality has increased over this period between
. The distance between richer and poorer countries
over the past 30 years, in terms of GNP, has more than doubled,
so rather than seeing inequality between countries decrease we
are seeing it increase over this period
" (Ev II, Q
Furthermore, "the poorest percentile in many
societies are actually worse off today than they were" (Q
1642). And the Catholic Agency for Overseas Development (CAFOD)
"In general, NGO
and civil society concerns [about globalisation] stem from the
realisation that while globalisation has led to benefits for some,
it has not led to benefits for all. The benefits appear to have
gone to those who already have the most, while many of the poorest
have failed to benefit fully and some have even been made poorer."
(Ev I, p 338).
60. In this chapter we consider the evidence about
the current levels of global poverty and inequality. We then turn
to the more difficult question of whether there is a causal relationship
between globalisation, on the one hand, and poverty and inequality
on the other. Finally, we consider what actions might be taken
to assist those countries which remain very poor.
61. The commonly used poverty measure is population
living below $1 a day (although reference is sometimes made to
a poverty measure of $2 a day).
A distinction can be drawn between the poverty rate and
the poverty headcount: the first is relative to the size
of the total world population and is, therefore, the proportion
of the world's population who live below the $1 a day poverty
line; and the second is the absolute number of people in the world
that live in poverty. It is an important distinction because the
increase in world population means that a decline in the poverty
rate will not necessarily be accompanied by a decline in the poverty
62. According to World Bank figures,
during the 1990s the proportion of people living on less than
$1 a day - the poverty rate - fell significantly (from 29% of
world's population to 23%). As regards the poverty headcount,
Nicholas Stern of the World Bank told us:
the absolute numbers in poverty have
gone down in the last 20 years or so. Those living at less than
one dollar a day were in number around 1.4 billion or so in 1980
and the number is around 1.2 billion now. That is in a period
when population in developing countries grew by around 1.5 billion
people, so that reduction is a big change." (Ev II, Q 1820).
63. A recent study by Xavier Sala-i-Martin of Columbia
University drew the same conclusion: "world poverty has declined
substantially over the last thirty years. This is true if we use
the one-dollar-a-day or the two-dollar-a-day definition and whether
we use poverty ratios or poverty counts". His figures varied,
however, from those given by Nicholas Stern. According to Xavier
Sala-i-Martin, "using the one-dollar-a-day definition, the
overall number of poor declined by over 400 million people: from
close to 700 million citizens in the peak year of 1974, to less
than 300 million in 1998".
64. Although the general level of world
poverty appears to be decreasing, this improvement is not evenly
spread and some countries continue to suffer a very high concentration
of poverty. Xavier Sala-i-Martin makes this point in his study:
"the fact that the world is improving does not mean that
all is good. Actually, one disturbing fact
is that more
than 95% of the 'one-dollar poor' live in Africa". He draws
the conclusion that "the massive concentration of poverty
in the African continent suggests that the lack of economic growth
of Africa is the most serious economic problem we face today".
There remains, in our view, a shameful level of poverty in
the world. We are appalled at the sheer waste of human potential
that such poverty implies.
65. "Inequality" is a more complicated
concept than "poverty". Whereas poverty and increases
in poverty are incontestably bad, not only is some level of inequality
inevitable but an increase in inequality does not necessarily
imply harm (as when all individuals become better off but the
rich disproportionately so). It also appears from the evidence
we received that the measurement of global inequality - as opposed
to global poverty - is contentious.
Measurement of global inequality
66. There are a number of ways of measuring and describing
inequality, each measure tending to produce different results.
Lord Desai, although clear that the numbers in poverty had reduced
over the last 30 years, thought that assessing whether inequality
had increased or decreased was a more difficult question to answer
because of these different measurements: "
I have still not been able to make up my mind. The way people
cite statistics, they are either in terms of inequalities between
countries' per capita income or the richest 50 people have so
much wealth compared to the income of so many nations and so on.
I have not seen any hard and fast evidence about this." (Ev
II, Q 1727). Professor Bulmer-Thomas suggested that, "on
the crucial question of the gap between rich and poor countries,
the jury is still out" (Ev I, p 52).
67. An important distinction in this debate is made
between between-country inequality and within-country
inequality. They are not necessarily related. Between-country
inequality is based on international comparison of average income
levels in each country, whereas within-country inequality looks
within each country separately. It is possible that between-country
inequality measures show improvement at the same time as some
or all within-country measures are deteriorating. We note also
that an increase in within-country inequality frequently accompanies
a period of rapid economic development. A global inequality measure
combines within- and between-country information to give an indication
of inequality across individuals in many countries.
68. Martin Wolf suggested that "there
has been some reduction in global inequality because of the relative
growth of a few very successful countries" (Ev II, Q 1589).
On his analysis, between-country inequality, measured by
comparing the relative average income of countries, is reducing
(because of the relative growth of China and, to a lesser extent,
India) (Ev II, Q 1588).
On the other hand, as regards within-country inequality, he argues
that "income inequalities in the developed world have increased"
and "there has been an increase in inequality in developed
countries" (Ev II, Q 1589). He went on to suggest, however,
that neither of these descriptions of inequality - within-
and between-country - reflected the popular notion of inequality:
when most people talk about inequality what they
is the proportionate or absolute gaps in absolute
income between the very poorest countries in the world and richest
countries in the world", and he asserts that "there
is absolutely no doubt at all that
those gaps have continued
to rise in the last 20 years, as they have done absolutely consistently
for two centuries." (Ev II, Q 1589).
69. A number of other witnesses gave their views
on the inequality debate. Save the Children expressed a concern
that in the current period of globalisation there was not only
a concentration of the gains from globalisation producing an imbalance
between countries (in favour of developed countries) but that
there has also been a concentration producing an imbalance within
(both developed and developing) countries: quoting UN Special
Rapporteur Jose Bengoa, they said, "this twofold process
of concentration is one of the characteristics of the current
process of globalisation".
UNCTAD shared this view:
"The promise of fast and stable growth in the
South along with greater equality within developing countries
and diminishing income gaps with the North has not materialised.
The world economy has, since the early 1980s, been characterised
by rising inequality and slow growth. Income gaps have widened
between North and South with only a handful of East Asian economies
managing to sustain growth rapid enough to narrow the gap, or
even in some cases to catch up, with the North.
among countries has been accompanied by increasing income inequality
within countries. ... In more than half of the developing countries
the richest 20 per cent today receive over 50 per cent of the
national income. Those at the bottom have failed to see real gains
in living standards, and in some cases have had to endure real
losses." (Ev I, p 361).
70. The World Bank, in Globalization, Growth and
Poverty, distinguishes between the developed countries, the
new globalisers and the weak globalisers: "During the second
wave of globalisation the rich countries diverged from the poor
countries, a trend that had persisted for a century. During the
third wave the new globalisers have started to catch up with the
rich countries, while the weak globalisers are falling further
The report concludes:
"Among rich countries there has been convergence:
the less rich countries have caught up with the richest, while
within some rich countries there has been rising inequality. Amongst
new globalisers there has also been convergence and falling poverty.
Within China there has also been rising inequality, but not on
average elsewhere. Between rich countries and the new globalisers
there has been convergence. Between all these groups and the weak
globalisers there has been divergence."
Nicholas Stern gave us an indication of the numbers
of people involved. Countries which the Bank termed "new
globalisers" accounted for a total population of about 3
billion and since 1980 income per capita of these countries had
grown by about 5% a year. Those countries which the Bank describes
as "weak globalisers" account for a total population
of about 2 billion and these have seen a fall in income per capita
(Ev II, Q 1820).
71. Xavier Sala-i-Martin, in his study on global
income inequality, reviewed seven income inequality indexes.
He concluded that "income disparities during the last two
decades have declined substantially" as a result of the decline
in inequality between (rather than within) countries (which is
largely a result of the significant growth rates in China and
to a lesser extent India),
but that within-country inequalities have increased slightly over
the last 30 years (although "this increase has been so small
that it does not offset the substantial reduction in across-country
72. It appears, therefore, that between-country
inequality is reducing (largely because of the economic growth
of China and, to a lesser degree, India), but within-country inequalities
(both in developing and developed countries) are in some cases
poverty, inequality and globalisation
73. We now turn to the question whether there is
a causal link between globalisation and the changes in the levels
of poverty and inequality: has globalisation caused the
significant economic growth of China and India? Is globalisation
responsible for the poverty of sub-Saharan Africa?
74. Richard Kozul-Wright of UNCTAD, noting that "large
parts of the developing world seem to be more marginal today than
they were 20 years ago", asked "[but] what would have
happened if you had not moved into this world of liberalisation?
Would things have got worse? It is a difficult debate to enter."
(Ev II, Q 1162). Martin Wolf similarly commented on the difficulty
of comparing the present world to one in which none of the developments
associated with globalisation had happened; it was he said "almost
impossible to imagine" - although he speculated that "
quite a significant number of developing countries would have
grown more slowly than they did, particularly some very big ones
like China and India." (Ev II, Q 1588).
75. The debate about the consequences of globalisation
on the economic success of countries is a complex one. We found
it helpful in our deliberations to consider the debate in terms
of the following four propositions:
- Globalisation has created opportunities that
some countries have successfully exploited.
- Countries that have not been successful would
not have performed better if they were closed economies.
- Many countries that have not been successful
have failed to adapt to the globalised economy.
- There are aspects of globalisation that have
harmed some countries.
We now turn to the evidence that we received in relation
to these propositions.
GLOBALISATION HAS CREATED OPPORTUNITIES THAT SOME
COUNTRIES HAVE SUCCESSFULLY EXPLOITED.
76. The analysis of the World Bank (see paragraph
70 above) of why some countries are successful and others are
not supports the view that those developing countries which are
now seeing convergence in average incomes with developed countries
are doing so because of integration with the global economy. Nicholas
Stern said to us:
"Let us look at what we may call the globalisers,
for want of a better word. In our recent work we defined these
countries in a very specific way. They are the top third of developing
in terms of increases in trade to GDP ratios since the 1980s.
you get 24 countries with a population of around
three billion. In the last 20 years that three billion has grown
in terms of income per capita by about five per cent per annum,
which is phenomenally fast by historical standards." (Ev
II, Q 1820).
Turning to the developing countries which have not
done well, he said: "Then you have got the
people in countries which have not globalised so rapidly and where
income per capita is declining. Those countries have not seen
these increases in trade to GDP ratios
" (Ev II, Q
77. We received a range of evidence that supported
the proposition that for some countries at least globalisation
had presented opportunities which had led to their economic success.
Professor Paul Krugman, Professor of Economics at Princeton University,
for example, noted the breakdown in the traditional division between
the developed and developing world. He suggested that this change
was driven by trade, as a result of which developing countries
now fell into two categories: those which were converging with
the developed world and those which remained very poor:
a lot of the protests presume that before
we had this increase in financial trade, before the great increase
in international investment, we had, basically, good conditions
in the developing countries, and they compare that idealised state
with what you actually see. I am old enough now to remember what
development economics was like in the mid-1970s and it was, essentially,
non-development economics; it was the study of countries that
failed to develop. There had been no cases of transitions from
third world to first world since, maybe, Japan. There seemed to
be a permanent division of the world into a club of richer countries
and a club of poor countries, and in much of the developing world
the question was not 'would they develop?' but 'how long until
the Malthusian crisis?' Now, we at least have seen since then
a number of graduation cases: South Korea would be the outstanding
case of a country that went from subsistence level to, essentially,
first-world living standards. A number of countries have made
significant progress - enough so that at least we can say that
that permanent division of the world into rich countries and the
other quarter is not, in fact, the case
All of the success
stories are export-led growth. All of them are by getting into
the global economy." (Ev II, Q 1880. Italics added).
78. Professor Joseph Stiglitz, although critical
of the way in which globalisation has been managed by the international
financial institutions to the detriment, he argued, of many developing
countries, none the less took the view, "very strongly",
that globalisation had had "a very positive effect on a number
of countries in the developing world" - "If you look
around the most successful countries, far more successful than
anything we had ever anticipated, are the countries of East Asia.
Their growth has been based on taking advantages of exports, it
has been export-led growth." (Ev I, Q 711). Professor Bulmer-Thomas
also referred to the "opportunities for export-led growth"
(along with "the rise in real wages associated with the absorption
of labour") as "the main benefit" of globalisation
for developing countries (Ev I, p 52). Donald McKinnon, Commonwealth
Secretary General, told us that, in the view of the Commonwealth,
"global trade expansion" provided "the most viable
route out of poverty for the world's poor" (Ev I, Q 778).
79. A recent study by Centre for Economic Policy
Research, Making Sense of Globalization, attributes the
success of China as "partly a consequence of opening to trade
and FDI" and "thus partly a result of the globalization
COUNTRIES THAT HAVE NOT BEEN SUCCESSFUL WOULD NOT
HAVE PERFORMED BETTER IF THEY WERE CLOSED ECONOMIES.
80. We received no evidence to support the proposition
that countries which remain very poor would have faired better
had they become closed economies. Neither would such a proposition
be supported by economic theory. The Secretary of State for International
Development, Clare Short, said that she had no doubt that openness
was beneficial to a country's development and that the closed
economies (such as North Korea) "get left behind" (Ev
II, Q 2016). Martin Wolf said: "It seems to me quite difficult
to argue and I am not convinced there are any clear cases where
you can show that as a result of policies of clear attempted integration
countries are unambiguously poorer, on average (as opposed to
some people within them which is certainly true), than they would
have been if they had remained autarchic which many of them were."
(Ev II, Q 1590). And Dr Hertz similarly took the view that "countries
that have de-linked from globalisation completely - like Cuba
or North Korea - are worse-off" (Ev II, Q 1647). When asked
whether the issue was not so much globalisation but, instead,
"better globalisation", Dr Hertz agreed (Ev II, Q 1649).
MANY COUNTRIES THAT HAVE NOT BEEN SUCCESSFUL HAVE
FAILED TO ADAPT TO THE GLOBALISED ECONOMY.
81. For more countries the problem has not been deliberate
delinking but rather a failure to succeed in participating effectively
by adapting to the globalised economy. There is an important distinction
to be recognised between countries who have failed to adapt because
of decisions they have taken themselves, and countries who have
suffered because of forces outside their control. Peter Sutherland
of Goldman Sachs International referred to globalisation as having
passed sub-Saharan Africa (and other economies) by - "perhaps
through the deliberate fault of their own governments who have
simply failed to become part of it" (Ev I, Q 500). He argued
that the response to the marginalisation of sub-Saharan Africa
was not to attack the concept of globalisation but rather to enable
Africa "to partake in it" (Ev I, p 203). Dr Supachai
Panitchpakdi also referred in his evidence to the marginalisation
of low-income countries and similarly argued that their marginalisation
was "not because of the globalisation process, but mainly
because low-income countries are not adequately involved in the
process of globalisation":
[low-income countries] are left out
of the [globalisation] process because they cannot gain access
for their products in the more advanced countries, they cannot
gain access to sources of finance, of foreign direct investment.
They are being left out of or being marginalised. It is not really
because globalisation has not given the opportunities, but it
has not reached them in a way that they should be able to take
advantage of." (Ev I, Q 562).
The Royal Academy of Engineering suggested that the
"losers" from globalisation included "those developing
countries that have poor financial, political and commercial infrastructure
and are unattractive for inward investment and the manufacture
of labour intensive components" (Ev II, p 372).
82. Barry Coates, Director of the WDM, argued that
many of the poorest countries - such as sub-Saharan Africa - were,
in fact, "deeply engaged in trade", with sub-Saharan
Africa exporting a total of around 30% of its GDP (compared with
about 19% amongst countries belonging to the Organisation for
Economic Co-operation and Development). However, these countries
suffered because their exports were concentrated in the commodities
market, a market in which prices were falling (Ev I, Q 892). Lord
Desai made a similar point: "It is not that African countries
do not trade, but they have been stuck in the primary commodities
trade." (Ev II, Q 1728). Dr Caroline Lucas suggested that
this demonstrated that integration in the world economy was not
sufficient for economic success but, rather, it depended on the
"terms of that integration" (Ev II, Q 1421).
THERE ARE ASPECTS OF GLOBALISATION THAT HAVE HARMED
83. We received some evidence that suggested that
the globalisation process has acted to the detriment of some countries.
The World Bank, in Globalization, Growth and Poverty, posed
the question: "Could globalisation itself have contributed
to the economic marginalisation of some countries?" One way
in which it suggests that it could is through capital flight resulting
from liberalisation of the capital markets: "By 1990 Africa,
the region where capital is most scarce, had about 40 per cent
of its private wealth held outside the continent, a higher proportion
than any other region. This integration was not a policy choice:
most African governments erected capital controls, but they were
Destabilising movements of short-run capital have also damaged
other countries, a recent example being Argentina. We consider
this issue in more detail in Chapter 7.
84. Willem Buiter of the EBRD identified five strands
to what he describes as "pathological globalisation"
- "the unambiguously negative dimensions of globalisation":
international spread of contagious diseases;
the threat of international contagion in financial markets; crime;
terrorism; and threats to national or regional cultures (Ev I,
Conclusion: is globalisation a threat or an opportunity?
85. Although no witnesses suggested that globalisation
has no harmful features or effects at all, most thought globalisation
had the potential to do more good than harm. Peter Sutherland,
for example, said that "there is little doubt that the results
of globalisation overall are overwhelmingly good" (Ev I,
p 203). A number of witnesses used the language of "positive-sum
game". Willem Buiter described globalisation as potentially
"a blessing": "[Globalisation] is first and foremost
about increasing opportunity, choice and freedom. The simple but
fundamental proposition that is the cornerstone of this positive
judgement, is that trade - voluntary exchange - is not a zero-sum
but a positive-sum game." (Ev I, p 84). Professor Greenaway
told us that, although there would be losers - in the short run
especially - "
in the long run, for any economy, globalisation
is not a zero-sum game: international exchange improves living
standards through some combination of higher wages, better employment
prospects and access to a wider array of cheaper goods and services."
(Ev I, p 98). Gerry Rodgers of the ILO also described globalisation
"as a positive-sum game", and said that the issue was
to ensure "that those who lose are either compensated or
helped to become winners" (Q. 1240). And Andrew Crockett,
General Manager of the Bank for International Settlements (BIS)
and Chairman of the Financial Stability Forum, in the same vein,
said that "the globalisation process is not a zero-sum game.
The world as a whole stands to benefit from it" (Ev I, p
156). A dissenting view was expressed by the Green Party for England
and Wales which suggested that international competitiveness is
"a zero-sum game - it depends on there being losers"
and this "is an essential feature of globalisation"
(Ev II, p 84).
86. While there are negative aspects to globalisation,
the weight of the evidence suggests that the opportunities
created by globalisation outweigh the dangers. Effective integration
in the global economy is a major part of the explanation why some
developing countries, such as China and India, have enjoyed significant
economic growth in recent years and a failure to integrate effectively
is at least part of the explanation why other developing countries,
such as sub-Saharan Africa, remain very poor.
87. The evidence also suggests, however, that, to
be effective, globalisation requires management at the national
and international level. In the White Paper on globalisation -
Eliminating World Poverty: Making Globalisation Work for the
Poor - it is stated that whether globalisation works well
or works badly will depend on policy intervention:
"Managed wisely, the new wealth being created
by globalisation creates the opportunity to lift millions of the
world's poorest people out of their poverty. Managed badly and
it could lead to their further marginalisation and impoverishment.
Neither outcome is predetermined; it depends on the policy choices
adopted by governments, international institutions, the private
sector and civil society."
A similar point was made by the TUC. They concluded
that "the balance of economic evidence suggests
greater participation in world trade and direct investment can
help reduce poverty in developing countries", but went on
to say that "this does not mean that trade and investment
should take place on any terms
the right policies and regulatory
framework need to be in place to help ensure that the benefits
are fairly shared" (Ev I, p 38). Willem Buiter also emphasised
the need for intervention:
"The key political issue of our time is to ensure
that institutions are created, at all levels, local, national,
regional and global, to ensure that [the] potential aggregate
gains are realised and shared widely and fairly.
from globalisation will not be reaped without active institution-building
efforts at all levels." (Ev I, p 85).
Andrew Crockett suggested that the benefits of globalisation
were "by no means automatic" - there would be losers
in the process and "this calls for appropriate policy initiatives
to manage the process" (Ev I, p 156). And Diane Coyle made
the point to us that the reason why globalisation was viewed with
such suspicion was that "global flows, of goods, capital
or people, can
have adverse results whenever there are
market failures of regulatory weaknesses", and therefore,
"policy needs to help limit or reduce the costs of globalisation"
(Ev I, p 268).
88. The process of globalisation requires appropriate
national policies (dealing, for example, with political and administrative
reform) and a strengthened international governance infrastructure
so that its potential may be maximised. Only then can markets
to reduce poverty and inequality
89. Many witnesses gave evidence about why very poor
countries have failed to integrate effectively in the global economy.
A number of reasons were put forward. Some focus on the international
environment (and, in particular, the operation of the international
financial institutions and the financial markets) and on the regulation
of the global trading system. (We consider these in Chapters 6
and 7 below.) Other explanations were specific to a country (for
example, governance problems, the absence of an adequate civic
infrastructure and a poor investment climate). We consider this
second set of reasons in this section.
Governance , infrastructure and investment climate
90. In its report, Globalization, Growth and Poverty,
the World Bank emphasises the importance of developing countries
strengthening their domestic institutions and policies:
"Those developing countries that are successfully
integrating with the global economy are doing so not just because
of relatively open trade and investment policies, but also because
of effective policies and institutions in other areas. Whether
closed or open, developing economies need such policies and institutions.
The investment climate for firms, and labour market and
social protection policies for workers
will effect the
extent to which a developing economy integrates with the world
and the benefits it receives from this integration".
And Nicholas Stern suggested to us in evidence:
"It is important to ask why [sub-Saharan Africa]
has suffered. I do not think that it has got much to do with openness
to trade, although they are, in fact, quite open to trade. It
has more to do with governance issues, with conflict, with weakness
of infrastructure, corruption, the tragedy of HIV/AIDS, malaria
and TB and so on." (Ev II, Q 1820).
Professor Krugman argued that "relatively small
amounts (from our point of view) invested in health and in some
very basic infrastructure could make a huge difference" in
sub-Saharan Africa (Ev II, Q 1882). And Ignazio Visco of the OECD
said that, in addition to aid flows, "
policies in [poor countries] to create a stable macroeconomic
environment and structural policies to spur private sector development
are essential to achieve the much needed growth in output and
living standards." (Ev I, p 172).
91. "Investment climate" is defined by
the World Bank as "the regulatory framework for starting
up firms and expanding production, the quality of supporting infrastructure
(including financial services, power, transport, and communications),
and the overall economic governance (such as contract enforcement,
fair taxation, and control of corruption)".
We received a range of evidence about the importance of promoting
a good investment climate as a means to enable poor countries
to improve their indigenous production and attract foreign direct
investment by transnational corporations. (We consider the effects
of FDI in more details in Chapter 5.)
92. Andrew Crockett suggested that:
"There is a general consensus that structural
preconditions are necessary to reap the benefits of both trade
and financial integration. Obvious examples include a system of
well-defined property rights and the rule of law, but there are
other more specific requirements relating to market practices
and regulatory oversight. Unless all these preconditions are in
place, a country risks either being marginalised, or else succumbing
to dislocations brought about by market malfunctioning."
(Ev I, p 156).
Peter Sutherland, in his agenda for reform of the
globalised economy, put "address[ing] the marginalisation
of the world's least developed countries" at the top. He
suggested that the focus should be to help these countries "build
the capacity to participate in global commerce" by assisting
them to create the institutional and physical infrastructure necessary
to enable them to attract foreign direct investment (Ev I, p 206).
93. In its submission, the Department for International
Development indicated its awareness of the need to build up the
infrastructure of poor countries by setting out the measures that
the Government is taking to improve the domestic institutions
and policies of developing economies as a means, in turn, to improve
private investment flows. These include, for example, support
for the Financial Sector Reform and Strengthening Initiative which
was launched in April 2002 (by a group of bilateral donors, the
IMF and World Bank) and which provides technical assistance to
low- and middle-income countries to implement internationally
agreed financial standards and codes. In relation to "the
massive need for" infrastructure investment, the Government
is also supporting a $305 million Emerging Africa Infrastructure
Fund which was launched in January 2002 and which provides long-tern
debt financing for private sector infrastructure companies in
sub-Saharan Africa by using public funds to lever private finance.
94. We welcome the measures that are being taken
internationally to assist developing countries to improve their
investment climate. Although this is principally a responsibility
of the developing countries themselves, efforts should be made
through multilateral and bilateral agencies and agreements to
facilitate developing countries in making such improvements.
We were pleased therefore to receive the evidence of Commissioner
Solbes, EU Commissioner for Economic and Monetary Affairs, who
told us that in their agreements with developing and emerging
markets, they "try to introduce [the] idea of improving governance
as a key element of future relations", a policy complemented
by efforts also to encourage transnational corporations to reinforce
improvements in the investment climate of the developing countries
in which they operate (Ev II, QQ 2003 and 2006).
95. A number of witnesses expressed concern about
developing country economies which are dependent on commodity
exports. Sir Andrew Large, for example, noted the difficulties
of those countries "that have been particularly dependent
on commodities of one sort or another" (Ev I, Q 775) and
suggested that the "losers" from globalisation included
"countries which are heavily reliant on commodity products
without the benefit of economic value adding activity, such as
Zambia for copper and Ghana for cocoa" (Ev I, p 292). He
referred, on the other hand, to Malaysia as an example of a country
which had responded by diversifying into the service and high-technology
sectors (Ev I, Q 775). Nicholas Stern also suggested that the
falling commodity prices "are part of the story" underlying
the continuing poverty of sub-Saharan Africa (Ev II, Q 1820).
96. Although few witnesses argued that falling commodity
prices have been caused by globalisation,
it is, none the less, the case that falling commodity prices have
created a harsher world for those economies dependent on commodity
exports. We consider that efforts should be made through multilateral
and bilateral agencies and agreements to encourage developing
countries to diversify their production, while not undermining
the areas of production where those countries have a distinct
An educated and healthy workforce
97. We asked Niall FitzGerald, Chairman and CEO of
Unilever plc, what factors determined whether a transnational
corporation would invest in a country. He suggested four: political
stability, good macroeconomic management, attractive financial
returns and "finally, but most important of all, a healthy,
educated and skilled population" (Ev II, Q 1552). The Report
of the Commission on Macroeconomics and Health also argued:
"investments in health work best as part of
a sound over-all development strategy. Economic growth requires
not only healthy individuals but also education, and other complementary
investments, an appropriate division of labour between the public
and private sectors, well-functioning markets, good governance,
and institutional arrangements that foster technological advance.
We are not claiming that investments in health can solve
development problems, but rather that investments in health should
be a central part of an overall development and poverty reduction
On the practical reasons why a healthy workforce
is so important for economic (as well as humanitarian) reasons,
the report went on:
"Healthier workers are physically and mentally
more energetic and robust, more productive, and earn higher wages.
Their productivity makes companies more profitable, and a healthy
workforce is important when attracting foreign direct investment.
They are also less likely to be absent from work due to illness
(or illness in their family) and to be more productive on the
job. The effect is especially strong in developing countries,
where a higher proportion of the workforce is engaged in manual
98. One aspect of globalisation and poverty which
was drawn to the Committee's attention in particular is the problem
of employment of school age children.
In a recent ILO report, A future without
child labour, it was estimated that in the year 2000, 186
million children aged 5-14 and 59 million children aged 15-17
were engaged in child labour.
Although child labour is not solely a feature of developing countries,
"the problem is most critical in developing countries".
Gerry Rodgers of the ILO referred to villages in poor developing
countries where "you have the absurd situation where the
parents are unemployed and the children are working" (Ev
II, Q. 1246). A satisfactory explanation of why this is so has
not emerged from the evidence. As a matter of theory the reason
must be that, given what they are paid relative to their productivity,
it is more profitable to employ children than adults. We have
to ask: are the children actually more productive? Or is it that
adults demand more pay than children? And if the latter is the
case, is that a matter of convention (because otherwise it would
99. In the modern world, not only is an economy based
on working children and unemployed adults ethically unacceptable,
it does not make economic sense. Economic advance demands an educated
and trained labour force. That means that children must be in
school, both for a basic education and, for many of them, a good
deal more than that.
100. Our conclusion is straightforward. We welcome
the United Nations' commitment in the second of its Millennium
Development Goals to "achieve universal primary education"
and the UK Government's support for this. 
An education strategy which takes school age children out of
the labour market should be at the centre of any development plan.
Far from creating an economic burden, this is a prerequisite
to a successful economy. We note with interest the views of
Dr Supachai Panitchpakdi, who said, referring to his experience
in Thailand, that "the most effective means against child
labour, which is one of the key areas of labour rights violation,
is to extend compulsory education
" (Ev I, Q 565).
101. We believe the labour market works and, therefore,
in many cases adults will be employed to replace working children,
albeit at a higher wage. Since all the employers who have spoken
to us have expressed their commitment to good business practice,
the payment of decent wages, and the enhancement of the quality
of the workers they employ, we feel they deserve the strongest
encouragement from our own government and from governments in
the host countries. An aid programme to assist in keeping children
in school is the best path to economic development which can eventually
generate its own momentum and be self-financing.
Political stability and combating bribery and
102. In George Soros on Globalization it is
argued that bad governance is a significant cause of poverty in
developing countries: "By far the most important causes of
misery and poverty in the world today are armed conflict, oppressive
and corrupt regimes, and weak states - and globalization cannot
be blamed for bad governments."
In evidence, Mr Soros developed this point further: "
it is a remarkable fact that countries which are rich in natural
resources are among the poorest and most miserable because they
are disrupted by civil war, strife, oppressive and corrupt governments"
(Ev II, Q 1927). This was, he suggested, true both of Africa and
Central Asia. Clare Short also referred to how conflict "delays
investment and breaks up infrastructure" and to the "very
corrosive" effect of corruption (Ev II, Q 2042).
103. Whilst not alleging that corruption is a phenomenon
of globalisation per se,
the view was expressed by a number of witnesses that corruption
is a factor which has contributed to the failure of some developing
countries to achieve potential benefits of globalisation.
Willem Buiter told us: "I have become very impressed with
the cost inflicted on society by the creation of opportunities
for corruption and bribery" (Ev I, Q 200). The point is also
made in the White Paper Eliminating World Poverty: Making Globalisation
Work for the Poor:
"More effective government and greater benefits
from markets require tougher action - by developing and developed
countries - to deal with corruption. The evidence suggests that
investment levels are lower in countries with high levels of corruption,
due to the uncertainty created, the cost of bribes and time-consuming
104. Corruption involves two parties: the one who
pays the bribe and the one who receives it. It is, by its
very nature, a hidden activity. It is, therefore, difficult to
comment conclusively on the issue. Many of our witnesses, however,
had no doubt that corruption exists - on the part of both governments
and companies - and that it exists to a non-trivial extent.
105. Professor Victor Bulmer-Thomas, for example,
referred to oil companies paying large amounts of tax to governments
which are "very often corrupt" and "therefore money
is diverted to private bank accounts"(Ev I, Q 83). George
Soros gave the example of British Petroleum wanting to disclose
payments to the Angolan Government on a voluntary basis, only
to be threatened by Angola with expulsion. Dr Axel Gietz, Corporate
Affairs Director of DHL, also referred to government corruption:
"A lot of challenges you face are not brought
in by the multinationals: they are indigenous challenges that
result from under-developed economic structures, practices and
traditions. Corruption is an example; it is not brought into developing
countries by the multinationals; it is the result of the state
of development of a given country." (Ev II, Q 1812).
And we note that, in the United States, the National
Bureau of Economic Research (NBER) Programme on the Development
of the American Economy this year launched a new initiative on
"the roots of reform in America", an initiative "motivated
by current concern with corruption in transition and developing
106. Matthew Taylor MP suggested that TNCs "had
a very dubious track record" as regards corruption (Ev II,
Q 1375). And Barry Coates of the WDM told us that: "
on the World Bank's 52 black-listed companies for corruption,
34 are British. We have to understand that this form of corruption/destabilisation
often has some element of involvement from Britain" (Ev I,
Q 922). In May 2002, Transparency International, the global anti-corruption
organisation, published its Bribe Payers Index which measures
perceptions within the business community in 15 emerging market
countries about the use of bribery by corporations from OECD member
states. It found that "corporations from OECD member nations
are seen to continue to use bribes even though all OECD countries
have passed laws prohibiting foreign bribery", especially
in the construction and arms industries. It also found, however,
that the problem is perceived to be even greater outside the OECD,
with companies from Taiwan, China and Russia being seen as more
likely to use bribes than OECD members. Furthermore, there is
a perception that domestic companies are more likely to use bribes
than foreign firms.
107. We asked those of our witnesses who represented
TNCs about the prevalence of corruption. Not surprisingly, each
of them - Niall FitzGerald of Unilever, Lord Browne of BP and
Dr Gietz of DHL - stressed their opposition to their companies
engaging in corrupt practices (Ev II, QQ 1551, 1278 and 1812).
Patricia Hewitt said that in her experience "most of our
companies do not pay bribes" (Ev II, Q 1863). Clare Short
was asked however about the general allegation that some TNCs
are engaged in corrupt practices in developing countries and elsewhere.
Referring to the recent implementation of the OECD convention
making it a crime to offer a bribe to a public official abroad,
she said: "You can be sure if we need a convention like that
there must have been malpractice." (Ev II, Q 2042).
108. It is not our wish to point fingers, and we
are certainly impressed by the commitment to good business behaviour
and ethical practice expressed by the firms who gave evidence
to us. But the matter cannot rest there. Part of the solution
lies in greater transparency of business operations, the financial
side of which also involves the banks. If bribes are paid, these
must go through the accounts which are, in turn, supposed to be
audited. George Soros also focused on the need for greater transparency,
particularly in relation to payments by TNCs to developing country
He has proposed a scheme called "publish what you pay",
a measure which would require oil companies and mining companies
to disclose, by country, how much they have paid so as to counter
the siphoning-off of funds mentioned by Professor Bulmer-Thomas
(in paragraph 105 above). We note that the Prime Minister, Tony
Blair, endorsed this proposal in a speech following the Johannesburg
Summit on Sustainable Development in September this year.
The Chancellor of the Exchequer, Gordon Brown, also indicated
his support for both the international financial institutions
and businesses working towards greater transparency (Ev II, Q
109. Donald McKinnon referred to the role of government
in any strategy to combat corruption. It had, he said, to "begin
at the top in every country and it had to be a very strong commitment".
He went on: "
international institutions are looking
more rigorously at corruption and how it affects development in
all countries. It is a slow, steady pressure that is going to
work here but the commitment of leaders principally is what is
needed." (Ev I, Q 820). Commissioner Solbes, European Commissioner
for Economic and Monetary Affairs, argued that transparency was
at the core of tackling corruption in developing countries, but
advanced the more general point that "the best system to
fight corruption is to have good governance and good democratic
institutions and a good system of democratic control". For
this reason, he said, improving governance was "a key element
of future relations" in EU agreements with developing and
emerging markets - "trying to prohibit corruption by law
is nice but it is not enough" (Ev II, Q 2003). In its submission,
the Conservative Party advised "bearing down on corruption,
with a rigorous approach to withdrawing development assistance
where there is evidence of misuse
" (Ev II, p 292).
110. Financial regulators, the international financial
institutions, the World Trade Organisation, professional bodies
and governments, either separately or together, should establish
a centre of responsibility with the aim of tackling corruption
(both in connection with development programmes and the operation
of the global economy). We believe the UK Government has an important
part to play here, preferably in co-operation with our European
Union partners. Transnational corporations and other businesses
must accept responsibility for scrutinising their agents and other
business associates with regard to corrupt practices on their
part. Reinforced action by business organisations would also be
27 Non-governmental organisation. Back
These rates are set in constant 1985 US $, so as to be unaffected
by inflation. They therefore correspond to levels of more than
$1 or $2 in current US $. To apply them in particular countries
requires conversion from US $ to local currency, and this is typically
undertaken using purchasing power parity exchange rates. We are
bound to say that the "$1 a day" criterion is more a
symbol or a metaphor than a rigorous measure of poverty in any
sense. The evidence we cite is more fundamental than that, but
the main conclusion (in paragraph 64 below) - that there have
been a fall in the numbers in poverty but that there are many
people still desperately poor - certainly holds. Back
World Bank, World Development Indicators 2002 (2002), p
Xavier Sala-I-Martin, The Disturbing "Rise" of Global
Income Inequality, NBER Working Paper 8904, April 2002, p
19. (See also NBER Digest, October 2002, p 5.) Back
Ibid, pp 19- 20. Back
Professor Bulmer-Thomas thought that if China - "with its
huge population and spectacular growth rate" - were excluded
from a calculation of world inequality, "there is circumstantial
evidence that the income gap has in fact widened" (Ev I,
p 52). Back
The relationship between the enjoyment of human rights, in
particular economic, social and cultural rights, and income distribution,
Final Report of Special Rapporteur José Bengoa to the 49th
session of the UNHCHR Sub-Commission on Prevention of Discrimination
and Protection of Minorities, 30 June 1997, quoted in the written
submission of Save the Children (Ev I, p 336). Back
World Bank, Globalization, Growth and Poverty (2002), p
Ibid, p 50. Back
The Gini coefficient, the variance of log-income, two of Atkinson's
indexes, the Mean Logarithmic Deviation, the Thiel index and the
coefficient of variation. Back
"The reason for the decline in global income inequality after
1978 is that the most populated country in the world, China, experienced
substantial growth rates. Hence, the incomes of a big fraction
of the world' population (approximately 20%) started converging
towards the rich economies after 1978": Sala-i-Martin, op
cit, p 29. Back
Ibid, p 30. Back
Centre for Economic Policy Research, Making Sense of Globalization:
A Guide to the Economic Issues, Policy Paper No 8, July 2002,
p 60, section 4.2. Back
World Bank, Globalization, Growth, and Poverty (2002),
p 41. Back
In a report to the World Health Organisation by the Commission
on Macroeconomics and Health, Macroeconomics and Health: Investing
in Health for Economic Development (December 2001), it is
suggested that globalisation presents a number of policy challenges.
These include the increased pace of the international transmission
of diseases (p 76). Back
Professor Krugman's comment cited in paragraph 77 above is decisive
in this regard. Back
Eliminating Poverty: Making Globalisation Work for the Poor,
Cm 5006, December 2000, p 15, para 19. Back
World Bank, Globalization, Growth and Poverty (2002), p
Ibid, p 95. Back
Ev II, p 188. Back
In a memorandum submitted by the Green Party of England and Wales,
it is suggested that transnational corporations are responsible
for the adverse terms of trade affecting developing countries
dependent on trade in primary commodities such as tea, coffee
and bananas (Ev II, p 43). Back
Report to the World Health Organisation by the Commission on Macroeconomics
and Health, Macroeconomics and Health: Investing in Health
for Economic Development (December 2001), pp 25-6. Back
Ibid, p 34. Back
See, for example, the ILO at QQ 1245-53 and the written submission
of the UK Section of the Women's International League for Peace
and Freedom (Ev II, p 390). Back
International Labour Organisation, A future without child labour:
Global report under the Follow-up to the ILO Declaration on Fundamental
Principles and Rights at Work 2000 (2002), p 16. Back
Ibid, p 21. Back
See Eliminating Poverty: Making Globalisation Work for the
Poor, Cm 5006, December 2000, p 29. Back
George Soros on Globalization (2002), p 16. Back
Commissioner Solbes, European Commissioner for Economic and Monetary
Affairs, argued that the greater competition encouraged by globalisation
was, in fact, "helping to reduce corruption" (Ev II,
Q 2009). Back
See also, for example, Caroline Lucas MEP at Ev II, Q 1419. Back
Eliminating Poverty: Making Globalisation Work for the Poor,
Cm 5006, December 2000, p 25, para 60. Source: Worldaware/Commonwealth
Business Council Report Priorities for Action to Promote Investment
in the Commonwealth; Smarzynska B and Wei, Shiang Jin, March
2000, Corruption and Composition of Foreign Direct Investment
US National Bureau of Economic Research Report. Back
NBER Reporter, Summer 2002, p 3. We note rather wryly their
comment that "corruption was rampant in late nineteenth century
America and in 1900 most Americans were inured to political graft".
The NBER's Programme on the Development of the American Economy
investigates long-run economic development and growth, with specific
attention to the United States. Back
Press release: Transparency International, 14 May 2002. Back
Convention on Combating Bribery of Foreign Public Officials in
International Business Transactions. Back
transparency would be extremely helpful and knowing
what the governments are receiving would then enable both the
civil society, citizens, and indeed the national institutions
to hold governments accountable
" (Ev II, Q 1927). Back
Mr Blair said: "We want to work with developing countries
to ensure that revenues from natural resources are used effectively
to reduce poverty. So the UK is taking a leading role in bringing
together countries, businesses, development agencies and NGOs
to tackle the current lack of information available, and ensure
that all payments by companies are published openly." Back