What Do We Know About Globalization?: Issues of Poverty and Income Distribution
On the other hand, benefits from globalization in booming times are not necessarily shared widely and equally in the global community. The fear that the poor have in some instances been by-passed or actually hurt by globalization was highlighted by recent studies which point towards limited—if not a lack of—convergence among participating national economies and across regions as globalization has proceeded.
In particular, inequality may affect growth and thereby poverty alleviation in the future.
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However, this progress on poverty reduction was mainly achieved by the substantial reduction of the poor in China million fewer people were poor in China in , compared to the estimate in In particular, poverty has increased significantly in Africa in terms of poverty incidence as well as depth of poverty. These concerns have generated a passionate debate worldwide as well as a powerful anti-globalization movement.
The globalization-poverty relationship is complex and heterogeneous, involving multifaceted channels.
It is highly probable that globalization-poverty relationships may be non-linear in many aspects, involving several threshold effects. It may be futile to attempt to establish theoretically, on an a priori basis, the effects of globalization on poverty as universally observable conditions. Indeed, each sub-set of links embedded in the globalization openness -growth-income distribution-poverty nexus can be contentious and controversial.
These channels include changes in relative factor and good prices, factor movements, the nature of technological change and diffusion, the impact of globalization on volatility and vulnerability, the world-wide flow of information, and global disinflation. Policies of openness through liberalisation of trade and investment regimes and capital movements have been advocated worldwide for their growth-enhancing effects. However, the direction of causality between openness and growth is still debated and the positive openness-growth link is neither spontaneously achieved nor universally observable.
The conventional view is to emphasise the growth-enhancing effect of inequality through higher aggregate savings and capital accumulation as well as on the basis of existence of investment indivisibilities and incentive effects. The contrasting new political economy literature links greater inequality to reduced growth operating through a number of sub-channels, such as: unproductive rent-seeking activities that reduce the security of property; the diffusion of political and social instability leading to greater uncertainty and lower investment; redistributive policies encouraged by income inequality that impose disincentives on the rich to invest and accumulate resources; imperfect credit markets resulting in underinvestment by the poor— particularly in human capital, and the lower fertility rates that are associated with a larger share of total income accruing to the middle class see Figure 1.
The proponents of this new political economy approach argue that growth patterns yielding more inequality in the income distribution would, in turn, engender lower future growth paths. This would then also affect the potential for poverty alleviation. Thus, according to this school of thought successful poverty alleviation depends not only on favourable changes in average GDP per capita growth but also on favourable changes in income inequality.
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Inequality is an impediment to poverty-reducing growth, as the elasticity of poverty with respect to growth is found to decline with the extent of inequality. Indeed, in a world of interdependent evolution, openness is a necessary but not a sufficient condition for successful development.
All countries have to undergo a structural transformation throughout the process of development. While the proponents of free market supported an outward-oriented, export-led trade regime, trade protectionists advocated inward-oriented, import-substitution trade policies. The perceived dearth of entrepreneurial talent and low savings in the private sector led to the establishment of numerous state enterprises in the agricultural, manufacturing and services sectors.
On the external front Nkrumah embarked on an import-substitution strategy which required further controls. For this policy to work it was necessary to have an overvalued exchange rate to enable inputs to come in cheaply and to put restrictions on final goods imports to protect domestic industry.
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This was informed by the usual market failure argument but many development economists of the s felt that what was involved here was a much broader concept than the Marshallian-type external economies. Marshallian-type marginal economics was felt to be too static to be relevant to the essentially dynamic question of development Killick, It was believed at the time that greater self-reliance could be achieved only if the movement of goods, people and information was restricted and multinational enterprises were kept out in order to allow domestic infant industries to grow Streeten, Whatever minimal restrictions that existed were related to trade with nations outside the sterling area.
This period saw the accumulation of reserves following the commodity boom associated with the Korean War and the gradual drawing down of the reserves. However, there was a turnaround in the s when the government started industrialization with the import-substitution strategy contained in the Seven-Year Development Plan.
Nkrumah launched an ambitious programme of infrastructure building — the most prominent of which were the artificial harbour at Tema, the Accra-Tema motorway and the Akosombo hydro-electric dam. Such projects required a lot of resources which came partly from domestic sources and partly from foreign borrowing.
In the middle of s, there were widespread falls in primary product prices, especially cocoa, which impacted the economy of Ghana significantly. This and other reasons led to the failure of the import substitution approach to industrialization. The policy also required an exchange rate that was low enough to let in imported inputs accompanied by restrictions to discourage final goods imports.
In the process however exports were penalized. The problem largely persisted after the coup. The payment system remained unsustainable and the civilian government of Dr.
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Very little debt relief was forthcoming and the government devalued the currency by an enormous 44 percent This devaluation led to a big jump in prices of imported goods and thus the general price level. It did not go down well especially in urban areas and the government was toppled by a military coup in January There was a revaluation of the currency that resulted in a smaller overall devaluation of about 20 percent.
The period between and has been described as one in which there was little macro management. What happened to the budget and to monetary variables was the result of decisions taken on political rather than economic grounds by a regime that showed little understanding of their macro consequences Aryeetey and Harrigan, The poor economic conditions triggered coups in and Key among the policies contained in those programmes was trade liberalization. Trade policy under SAP included tariff adjustments, import liberalization, liberalization of foreign exchange, deregulation of domestic market prices and controls and institutional reforms that particularly affected revenue generating bodies such as the Customs, Excise and Preventive Service CEPS.
The main objectives of these reforms were to restore incentives for the production of exports and increase the overall availability of foreign exchange, and to improve foreign exchange allocation and channel it into selected, high-priority areas Republic of Ghana, The following subsections concentrate on reforms that eased restrictions and liberalised prices, involving reforms of tariffs, quotas and the exchange rate. Significant trade liberalization began with the adjustment of tariff rates in Rates were adjusted downwards from 35 percent, 60 percent and percent to 10 percent, 20 percent, 25 percent and 30 percent.
Tariffs were further simplified and lowered to 0 percent, 25 percent and 30 percent the following year to create a uniform pattern of protection although some import controls remained in place. Further reductions occurred in when the higher rates were lowered to percent. In addition, the authorities reduced the number of restricted imports. In there was a re-definition of import license categories with the introduction of a new exchange rate system.
Import licenses were divided into three categories. With the process of reforming the exchange rate system to a market-determined rate largely completed in , the import licensing scheme which was considered redundant was abolished and was replaced with a special tariff on imports. The structural adjustment programme was implemented in as the second phase of the economic reforms. From to there were major changes to the tariff structure. The tariff on luxury goods was lowered in but this was replaced with a super sales tax in which ranged from 50 percent to percent.
Imported fruits such as bananas, plantain, pineapples and guavas were subject to a tax of percent while vegetables such as onions, potatoes and beans were subject to a tax of percent. However this was reduced to the range of 10 to percent in Further liberalization occurred with the lowering of the import tax rate on raw materials and capital goods by 5 percentage points in The sales tax on imported basic consumer goods was also reduced between and However, protective duty rates were introduced for specified goods in and in to help some import-substituting industries such as those producing vegetable oil and soap, which were being subjected to intense competition.
In import duties on all goods which were imported under exemption were raised to 10 percent and goods classified as standard saw an increase from 20 percent to 25 percent Table 1. Thus by , Ghana had a relatively simple tariff structure, comprising three major rate categories:. In addition, there were a number of programmes under which imports could be exempted from duties and manufacturers could apply for permission to import raw materials and intermediate inputs at concessionary duty rates.
Table 1: Import duties structure in and In , as part of efforts to increase government tax revenue a 10 percent import duty was imposed on selected zero-rated and exempted goods regarded as non-essential. However all import duties except those on vehicles remained the same. The import sales tax was also revised in Table 2. In , a number of tariff rationalization measures were proposed. Some imported items lost their zero-rated status while the rates for some other items were lowered. With regard to sales tax on imports the rate on goods classified as concessionary was raised from 7.
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In a uniform tax of The VAT was adopted for several reasons. Secondly, this system of taxation was thought to be more efficient, less burdensome in terms of its incidence, and its overall impact more equitable than the sales tax GOG, Agricultural products WTO definition a. Non-agricultural products WTO definition b.
Not applicable. Initially the VAT rate was 10 percent but was subsequently increased to Since then a In , Ghana imposed an additional 0. Some 12 percent of tariff lines are duty-free. In agriculture all tariffs were bound mainly at the ceiling rate of 99 percent. Lower bound rates of 40 percent and 50 percent were set on a few agricultural products to apply from Very few industrial tariffs — 1percent of tariff lines were bound at ceiling rates of between 30 percent and 45 percent.
Bindings were limited primarily to agricultural inputs such as fertilizer as well as tools and equipment. Applied rates are, however, much lower, as shown in Table 3.
The reason for the big difference is to give the government some leeway in raising tariffs when, for instance, severe balance of payments problems arise without contravening the rules of the WTO. This raised the tariff on many consumer goods to 40 percent - well above the previous rate of 25 percent and consequently raised the average tariff to In February , the government imposed higher tariffs on imported rice and poultry but this was never implemented as development partners objected.
This applies to all goods except for some petroleum products which face specific tariffs. The average applied tariff is now The exchange rate was a very visible symbol of the large distortions in the Ghanaian economy and tackling this particular problem was thus a central part of the whole liberalisation process. To pursue this goal the government had four main objectives: firstly, to realign the official exchange rate, secondly, to achieve a convergence of official and parallel rates, thirdly, to absorb the parallel market into the legal market and fourthly, to allow demand and supply to determine the rate and allocation of foreign exchange Dordunoo, A straightforward devaluation was perceived by some to be politically damaging given that the Busia government had been overthrown in mainly for devaluing the currency and the governments that followed had consequently taken devaluation off the list of available policy options for several years.
Thus the whole process was done gradually and in phases. Thus, exporters were given bonuses that varied according to what was being exported while importers were surcharged according to what they imported. The effect was to institute a multiple exchange rate regime. The second phase involved a series of measures aimed at moving towards a market -determined rate.