Millions of poor people in developing East Asia have escaped the threat of hunger by leaving the fields to work in factories producing manufactured goods for sale in the West. So what happens to the prospects of the world’s poor when the West stops buying?
Pinelopi (Penny) Koujianou Goldberg, Elihu Professor of Economics at Yale and outgoing Chief Economist of the World Bank Group, thought about it at length. His recent research explores the extent to which cross-border trade reduces poverty in developing countries and the effects of the current trade war with China on the US economy.
Ahead of his February 27 presentation of the 30th Annual Kuznets Conference, Goldberg spoke with YaleNews about how changes in global politics are affecting approaches to poverty reduction, especially in Africa – and how the best-known theory of Simon Kuznets, on a trade-off between growth and inequality in the early stages of development may be affected by recent developments in a world marked by inequality.
Kuznets (1901-1985), Nobel laureate in economics who helped found the Yale Economic Growth Center, studied the interactions between growth, inequality and poverty reduction. Goldberg’s lecture is entitled “Poverty Reduction in the Age of Declining Globalization”.
Economic growth is often cited as the tide that will lift all boats – and the role of China and India in reducing total global poverty is often seen as an important testament to this. Yet many fast-growing Asian countries are also seeing the gap widening between the very rich and the very poor. For the future, how do you see the relationship between growth, inequalities and poverty evolving?
It is true that growth is strongly correlated with poverty reduction. It would be hard to deny this, even though we have examples of growth do not generate poverty reduction. This usually happens when growth is associated with huge inequalities. There are many examples, especially in African countries, where wealth is concentrated in the hands of a few. In such cases, even when the tide is rising, only very few boats come up. Growth does not trickle down and improve the lot of the poor.
Kuznets was most famous for the Kuznets curve, which postulates that there is a trade-off in the early stages of development between growth and inequality. One point I want to emphasize in the conference is that we live in a very different time, where the world is changing rapidly, retreating from globalization. Many fear that the old model of export-oriented industrialization is no longer relevant. And I want to stress that in this new world, a certain degree of equality and growth can be complements and not substitutes. To put it another way, you can only have growth if you have some degree of equality.
How would you defend the benefits of trade with someone who feels they are getting poorer as a result of globalism?
That’s a very good question, because economists have argued for centuries that trade is good for the economy as a whole – it’s good for the whole. However, economists have also argued that trade generates winners and losers. So, saying that someone has lost trade is perfectly consistent with the claim (and proof) that the average citizen in an economy has benefited from trade.
So what do you say to a person who has actually lost trade? First, I wouldn’t deny the fact that they may have lost through trade – I acknowledge the evidence rather than trying to discredit it, as some do. Second, I would tell them that the correct answer is not to close the trade. The correct answer is to try to compensate those who have been negatively affected by the trade. One of the big ideas provided by economists is that there are enough gains generated by open trade that the winners can make up for the losers and be even better off. This is the concept of what we call “Pareto improvement” in economics. So when people think they have lost through trade, what they should be pushing is compensation and redistribution, not shutting down the economy and reverting to protectionism.
You recently returned from a trip to Kenya. There seems to be a growing consensus that the methods that have worked in China to boost growth and reduce poverty will not work in Africa. Have you seen any promising ideas for what can work?
I think we’re at a time when we need a new vision or a new model of what might work in countries like Africa, and I’m afraid that at this point it won’t. there is no consensus on what this vision is.
My personal opinion is that Africa needs to rely on itself more than ever. The idea that export-led industrialization, as it happened in China or East Asia, will drive growth in Africa is becoming less and less plausible over time, for many. reasons. Protectionism is on the rise – industrialized countries are less open to imports from developing countries. In addition, there is now a lot of competition. So there is Kenya, there is Ethiopia, there is Bangladesh, there is Vietnam; there are many countries competing in this space. New technologies and automation also threaten low-wage jobs – the traditional comparative advantage of developing countries.
In contrast, the African market is a very large market with incredible potential. It has not yet been developed. Regional integration could therefore be a way forward. Rather than opting for global integration, which can be very difficult to achieve in these days when countries are withdrawing from multilateralism, it might be more feasible to push for regional trade agreements and create more regional markets. great for goods and services of countries.
We are still very far from it because most countries are opposed to this idea – they see their neighbors as competitors rather than countries with which they can cooperate. So, more than anything else, we need a big change in mindset; we need policy makers to embrace the idea of regional cooperation.
And, as I will argue in the Kuznets conference, we need countries to push for a more equitable distribution of resources within their borders. If trade with rich countries is no longer the engine of growth, it will be more important than ever to rely on domestic resources, and in particular on the domestic market power generated by a healthy middle class, to generate growth that spills over and translates into poverty reduction.
How did the transition from an academic position to a political position go?
Taking a political position is a very interesting and rewarding experience, and it is something that I would recommend every academic to do from time to time.
There are three big differences between politics and academia. The first is that you are exposed to questions that you are not exposed to as an academic. Or, in some cases, you are exposed to these questions much earlier than academics – typically, questions come to academics with a lag of months or even years. So you are on the front line and you know what is really relevant. This has a downside, which is the second big difference: Decision makers need answers now! In academia, we strive to give the most rigorous response possible, so we take the time to collect and analyze the data and provide strong evidence. As a policy maker, you don’t have this luxury, so you often have to give advice based on your best judgment. A third difference, which I really appreciate now, is that in academia we have the freedom to say what we really think. You have a lot more constraints when entering a political position.