In the 1990s the UN formed 8-millennium development targets to attain with a timelimit of 2015. The first goal on the list was to reduce poverty which is the condition characterized by severe deprivation of basic human needs, including food, safe drinking water, sanitation of facilities health, shelter, education and information. According to the World Bank (2018), the poverty rate has been reduced by half since 1990 up to 2015. Many factors have helped the reduction of poverty such as better access to education and humanitarian aids, but the most powerful contributor is globalization and international trade.
The emerging of markets worldwide has provided opportunities for the poor by creating a dynamic environment for them (Stern, 2002). Moreover, nearly all developing countries are seeking foreign direct investment (FDI) to enlarge their economic growth which might help to alleviate the poverty rates in many countries. Thus the World Bank encourages developing countries to go through market reform and radical changes using large loans to alleviate poverty to keep up with the economic growth of developed countries.
Many developing countries have taken a step forward and changed their policies to attract more foreign direct investment, and they have concentrated on restoring trade relations with other countries through the general agreement on tariffs and trade (GATT) (Stern, 2002). As a consequence, greater opportunities for firms in industrialized countries were created to take an advantage by shifting their operations to a foreign country, allowing them to reach more and larger markets around the world using low cost labour.
In order to reduce poverty, countries should achieve a higher economic growth and make sure that the poor benefit from the growth. Nonetheless, the most recent wave of globalisation which started around 1980 till today, stimulated many developing countries to enhance their investment climates and to open up to foreign direct investment seeking economic growth. This has led to many global companies shifting their production and manufacturing overseas, searching for new markets and opportunities in countries with low wages and softer environmental regulations (Stern, 2002).
Examples of this shift are global companies such as Apple, Samsung, Microsoft and Canon which all manufacture products in Shenzhen. Moreover, it is believed that Shenzhen might have been the world’s fastest growing city in human history. Furthermore, those companies have created job opportunities and decreased the unemployment rate and reduced the price of goods and services which may affect the purchasing power of the poor (Why Manufacturing Wins, 2017).
This point is supported by economist David Henderson whose recent research shows that globalization benefits the poor by lowering the costs of goods they typically consume. Today Shenzhen is the electronics manufacturing capital of the world. The role of foreign direct investment in Chinese industrial production has become more important since the 1990s when China entered into the World Trade Organization (WTO). China was the developing country that attracted the largest FDI by the end of 2001. China had attracted 390,484 foreign-invested enterprises and had actually utilized US$395.5 billion in foreign capital. Foreign-invested enterprises have played an increasingly important role in China’s economy, and the percentage of their contribution to China’s total export value is continuously rising. In 2001 the value of their exports was US$147.5 billion, accounting for 55.4 percent of China’s total exports. The exports of foreign-invested enterprises have become an important force in impelling China to achieve rapid growth in the export of its industrial products.
It is claimed that with China’s membership in the WTO, it is expected that the foreign-invested enterprises will continue to expand their investment (Fung, Pei ; Zhang, 2006, p.86). Emerging countries are taking part in the global economy by manufacturing goods, and providing services. As a result, production rose from less than a quarter of developing country exports in 1980 to more than 80 percent by 1998. Countries such as Brazil, China, Hungary, India, and Mexico have participated in the global trade in order to maximize their capita growth rate. The potential for global integration to reduce poverty is well illustrated by the cases of India, China, Uganda, and Vietnam (Stern, 2002). Poverty reduction boosted in the early 2000s at a rate that has been maintained throughout the ten past years, even during the dark recesses of the financial disaster. It is claimed that around 820 million people are living on less than $1.25 a day. This means that the primary target of the Millennium Development Goals to halve the average of global poverty by 2015 from its level in1990 – was supposedly achieved approximately three years ago. In contrast, it took 25 years to decrease poverty by half a billion people up to 2005; the same feat was likely achieved in the six years between then and now. Never before in the history have so many people been lifted out of poverty over such a short period (Yale University, 2011).
Ekmekçio?lu, (2012, pp. 142-143) disputes this claim by stating that the flow of foreign direct investments into the developing countries has been established to create or widen inequality levels in some countries. The reason being that transfer of capital from the wealthy nations to the developing ones is equivalent to the outsourcing of activities which according to the views of the developed nation, are low skilled labour intensive and vice versa for the developing countries. This massive transfer of capital to the third world nations has created a huge request for skilled labour which proportionately has pushed up the equal wages obtained by this skilled labour force. Yet the relative wages earned by the unskillful workforce has deteriorated in the developing country which therefore means that inequality has significantly increased. Important is that this fact was proved in the study accomplished in Mexico over the period 1975- 1988.
A further study by also affirms that increased penetration of foreign direct investment which is a product of globalisation has proceeded to stretch the gap of inequality among the developing nations. The issue is that besides multinational companies outsourcing activities that depend heavily on low competent low labour, they also introduce new technologies that previously never existed in the developing nations. Therefore, initially, the introduction of these new cutting edge technologies will create a demand for highly skilled workers to operate these machines leading to an increase in their wage levels, and consequently, this creates inequality as well as market segmentation. This research study was finally proved in Ireland between1979 till 1995 in which the evidence found supported the so-called inverted-U shape relationship among wage inequality and inward outflow of foreign direct investment. This certainty is supported by studies from who located that diffusion or transfer of technology from the developed nations to the less developing only remains to extend inequality levels in revenue distributions in the medium income of developing countries, due to the fact that these countries are known for higher absorption capacity for modern technologies compared to their low income developing counterparts.
Chandy, L., and Gertz, G., (2011). With Little Notice, Globalization Reduced Poverty. Retrieved from https://yaleglobal.yale.edu/content/little-notice-globalization-reduced-poverty
Ekmekçio?lu, E. (2012). The Effect of Globalization on World Income Inequality. HRMARS, 2(4), 142-143.
Fung, H., Changhong, P., ; Zhang, K. (2006). China and the Challenge of Economic Globalization (p. 86). Armonk, New York: M.E.Sharpe.
The World Bank Group. (2018, April, 11). Poverty. Retrieved from http://www.worldbank.org/en/topic/poverty/overview#1
Wendover Productions, (2017, August 8). Why Chinese Manufacturing Wins. Retrieved from https://www.youtube.com/watch?v=E7Jfrzkmzyc