Reviving the Globalization and Poverty Debate: Effects of Real and Financial Integration on the Developing World

Around the turn of this century there were concerns about the possible adverse effects of globalization which led to a polarized debate on the plight of the world’s poorest. This paper attempts to answer the question of whether or not the billions of people who still live on less than $1 a day are sharing in the benefits of greater integration among economies. The first part of the paper summarizes the channels and transmission mechanisms, such as greater openness to trade and foreign investment, through which the process of globalization could affect poverty in the developing world. Using a panel data of 35 developing countries from 1990 to 2004 an empirical examination is carried out of the impact of real and financial integration on the head count ratio and poverty gap. Results suggest that, on an aggregate level, capital flows via FDI have had an adverse effect and real trade-induced income growth had a favorable effect on the incidence of poverty. On the other hand, a policy of excessive openness to external trade without complementary support mechanisms was found to be negatively related to the depth of poverty in developing countries.