Poverty and Governance in a Global Frame
Many of the obstacles the poor face in turning their natural assets into wealth manifest themselves at the local and national levels. But these governance and economic obstacles often have their roots in policies and practices at the global level. The arenas of international trade, development aid, and international finance and investment influence global poverty trends, in as much as they influence the broad economic and political setting that poor people find themselves in.
Over the past five years, the controversy over the benefits and dangers of globalization has highlighted the power of international policies to affect poverty. This influence can be positive: inflows of capital, goods, and services to developing countries exceeded US$2.5 trillion in 2003 (World Bank 2005). Several East Asian countries like China, Korea, and Taiwan have used export-oriented trade to spur the economic growth that helped many of their citizens escape poverty. China has also attracted large quantities of foreign direct investment, another growth accelerant. Remittances that immigrants to industrialized countries send back home provide a vital source of funds for many developing nations. In addition, industrialized countries provide significant amounts of technical assistance and foreign aid to developing countries—more than US$76 billion in 2003 (World Bank 2005).
But the fact remains that just as national power is generally controlled by a limited group of powerful individuals and companies, international economics and politics are also dominated by a limited group of wealthier countries. Even when benefits to poor countries do occur, they tend to be restricted to a few countries with the ability to compete in the global marketplace. In 2003 only ten percent of all exports from developing countries originated in the 61 nations classified as "Low Income" by the World Bank (World Bank 2005).
The resulting inequality in global power can exacerbate the causes of rural poverty, dampen growth in developing nation economies, or encourage models of development that may be less effective at reducing poverty. This is why decisions made in industrialized countries are the focus of so much attention in the worldwide debate over poverty reduction.
The Effects of Private Investment Are Mixed
Foreign direct investment (FDI)—the acquisition of an ownership interest in a private enterprise—became the dominant route for money flowing from rich to poor countries after the liberalization of global financial markets in the 1970s (Oxfam 2002:11, 15). In 2002 the overseas investments of 64,000 corporations supported 53 million jobs worldwide (UNCTAD 2003:4).
Private investment does not necessarily benefit the poor, however. In the past decade, 80 percent of the private investment in developing countries has gone to just 15 countries—and they are not the world’s poorest countries (World Bank 2005). In 2003, for example, the 50 least-developed countries received only 4 percent of private investment to developing countries (UNCTAD 2004:48; World Bank 2005). The investment environment in poor countries is often unattractive, for they lack the economic stability, coherent legal system, and physical infrastructure that investors seek.
In addition, FDI is typically channeled into infrastructure and larger-scale investments, rather than small or medium-scale enterprises that might benefit the poor. Thus FDI investments may help the poor in the long term, but have not been proven to reduce poverty in the near term. In Latin America, foreign private investment has increased sixfold since 1981 due to expansion in the oil, gas, timber, water, and mining sectors. However, the percentage of the population living below the poverty line has not changed significantly, and the absolute number of poor people in Latin America actually increased from 200 million in 1990 to 225 million in 2003 (World Bank 2004; FAO 2004).
Private investment can help developing nations acquire capital to fund domestic projects, receive new technology and skills, and improve productivity. Without proper regulations, however, it can also increase economic volatility if investors lose interest and pull out. Economic volatility has historically hurt the poor. Since the 1970s, wages have declined in developing countries during economic contractions without expanding to previous levels during periods of growth. An analysis of 32 developing countries experiencing currency crises shows a total wage loss of $545 billion between 1980 and 1998; subsequent recoveries only offset about one-third of this loss (Oxfam 2002:33-36).
International Aid Can Miss Its Target
The international community plays an important role in providing technical and financial support to developing countries. From 1998 to 2003, official development assistance increased by more than one-third, to US$76 billion (World Bank 2005). There has been a concerted effort by donors in the last decade to focus more on poverty reduction in the broadest sense, and most aid agencies are now actively working to support the Millennium Development Goals (MDGs).
Accompanying this move towards a greater poverty focus has been a shift by donors away from funding individual projects and toward more programmatic support. While this is a welcome development, many countries still formally "tie" their aid, requiring it to be used to purchase goods or professional services from the donor country. This has been estimated to reduce aid effectiveness by roughly 25 percent compared to untied aid (World Bank 2005).
Technical assistance (TA) is earmarked in many aid packages to provide countries with the knowledge to utilize aid effectively; in 2003 it accounted for more than 25 percent of all aid transfers. While TA can build capacity in developed countries, it can also divert much-needed funds away from their intended recipients. For example, records from the United Kingdom Department for International Development reveal that the 34 largest recipients of its TA contracts are private firms in developed countries (Greenhill and Watt 2005:22).
There has been an ongoing international campaign to reduce the debt that many low-income countries have accumulated over the years. Some debt relief has been forthcoming, but many argue that more is needed (UNDP 2003:14-15, 49). Advocates of development assistance worry, however, that aid agencies measure debt relief in a way that exaggerates its importance relative to other types of aid, since it does not represent actual monetary transfers to a country or contribute directly to poverty reduction (Greenhill and Watt 2005:20).
Agricultural Trade Policy Favors Industrialized Countries
The world's existing trading system puts most developing countries at a disadvantage. Agricultural products, which make up the main exports of many developing countries, still face heavy tariffs in rich countries. It has been estimated that developing countries would gain well over US$100 billion a year from trade liberalization resulting in reduced tariffs—much more than they receive in current aid flows (Anderson 2004:14-15, 49).
At the same time, rich countries often subsidize their own farmers and the agricultural products they sell abroad. These subsidies enable the products to be sold on world markets at prices below the cost of production. Such "dumping" practices deprive developing countries of vital export markets and suppress world agricultural commodity prices (Murphy et al. 2004:2-5).
Agricultural subsidies are currently high on the agenda of the World Trade Organization (WTO), which provides a forum for negotiating global trade agreements. The WTO offers some advantages for developing countries in that each country has an equal vote, so developing countries comprise the largest group. Still, the world's largest trading nations have historically dominated the WTO's trade negotiations. That may be starting to shift, as shown by the coordinated action taken by developing nations at the WTO's meeting in Cancun in 2003, where they refused to back down from their demands (CAFOD 2003). Nonetheless, wealthy nations continue to hold enormous trade advantages. Using export credit agencies, they invest millions of dollars each year to build markets for their own exports (Maurer 2003:13). They also pursue bilateral trade agreements with individual or small groups of developing nations. In bilateral negotiations with strong trading powers such as the United States or the European Union, developing countries have a much weaker negotiating position than at the WTO.
This article was originally published by WRI as Box 1.4 in "World Resources 2005: The Wealth of the Poor—Managing Ecosystems to Fight Poverty," available online at http://population.wri.org/worldresources2005-pub-4073.html.