Select Committee on Economic Affairs First Report


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 countries…. 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 1638).

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) suggested:

"In general, NGO[27] 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).[28] 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 headcount.

62. According to World Bank figures,[29] 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".[30]

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".[31] 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: "… on inequality 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).[32] 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 really mean … 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".[33] 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. … Polarisation 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 behind."[34] 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."[35]

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.[36] 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),[37] 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 disparities").[38]

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 increasing.

Relationship between 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.


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. Since 1980 … 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 … two billion 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 1820).

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 process."[39]


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).


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).


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 ineffective".[40] 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;[41] the threat of international contagion in financial markets; crime; terrorism; and threats to national or regional cultures (Ev I, p 84).

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.[42]

Managed globalisation

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."[43]

A similar point was made by the TUC. They concluded that "the balance of economic evidence suggests … that 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. … The gains 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 operate optimally.

Exploiting globalisation 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".[44]

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, "… adequate domestic 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)".[45] 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.[46]

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,[47] 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 comparative advantage.

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 strategy".[48]

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 labor".[49]


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.[50] 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.[51] Although child labour is not solely a feature of developing countries, "the problem is most critical in developing countries".[52] 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 look wrong)?

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. [53] 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 corruption

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."[54] 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,[55] 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.[56] 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 bureaucracy".[57]

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 economies."[58]

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.[59]

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 on corruption,[60] 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 governments.[61] 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.[62] 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 2092).

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 helpful.

27   Non-governmental organisation. Back

28   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

29   World Bank, World Development Indicators 2002 (2002), p 6. Back

30   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

31   Ibid, pp 19- 20. Back

32   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

33   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

34   World Bank, Globalization, Growth and Poverty (2002), p 50. Back

35   Ibid, p 50. Back

36   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

37   "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

38   Ibid, p 30. Back

39   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

40   World Bank, Globalization, Growth, and Poverty (2002), p 41. Back

41   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

42   Professor Krugman's comment cited in paragraph 77 above is decisive in this regard. Back

43   Eliminating Poverty: Making Globalisation Work for the Poor, Cm 5006, December 2000, p 15, para 19. Back

44   World Bank, Globalization, Growth and Poverty (2002), p 85. Back

45   Ibid, p 95. Back

46   Ev II, p 188. Back

47   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

48   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

49   Ibid, p 34. Back

50   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

51   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

52   Ibid, p 21. Back

53   See Eliminating Poverty: Making Globalisation Work for the Poor, Cm 5006, December 2000, p 29. Back

54   George Soros on Globalization (2002), p 16. Back

55   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

56   See also, for example, Caroline Lucas MEP at Ev II, Q 1419. Back

57   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

58   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

59   Press release: Transparency International, 14 May 2002. Back

60   Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Back

61   " … 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

62   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

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