Globalization: Poorest 10% of Consumers to Lose 63% Purchasing Power on Closed Borders-Lagarde

October 11, 2017

By InvestAdvocate

Lagos (INVESTADVOCATE)-A recent study shows that the poorest 10 percent of consumers would lose as much as 63 percent of their purchasing power if all borders were closed, Christine Lagarde, managing director (MD) of the International Monetary Fund (IMF) said on Wednesday in her opening remarks at the RES Conference on Globalization at the Fund’s headquarters in Washington DC.

“By contrast, people on high incomes would lose “only” 28 percent—still a lot, but less devastating if you are well off,” she said.  

Enumerating some of the benefits of globalization, she said   the world is highly interconnected through a constant flow of goods, services, capital, people, and ideas.

According to the IMF chief, globalization has delivered tremendous prosperity to the world and has fostered a sharp decline in global income inequality— that is inequality between countries. “It has also, over the past two decades, helped reduce by about half the share of the world’s population living in extreme poverty,” she added.

Lagarde said through economic integration,  living standards have been boosted in all countries, including in advanced economies, where consumers and businesses are benefiting from lower prices and a greater variety of goods. “Trade is particularly important for poorer consumers, because they buy relatively more low-price imports. That is also why they are most affected by trade restrictions,” the IMF MD affirmed.

She noted that trade also promotes the spread of innovative technologies and production processes across borders. “People learn from each other through trade.
Billions of people now enjoy longer, healthier, and more prosperous lives, largely because of our ability to harness the power of trade and innovation,” Lagarde said.

She said despite the benefits of globalization, it has its challenges,  for advanced economies, a key challenge has been competition from lower-wage countries. 

According to the IMF MD, almost three decades ago, China, India, and the former communist countries started to engage more deeply with the global trading system.

The process she said had far-reaching effects such as the size of the global workforce doubled effectively, putting downward pressure on wages, especially for lower-skilled workers in advanced economies.

The IMF chief says this has contributed to a decline in manufacturing employment in the advanced world, although here, labor-saving technology improvement has played a bigger role.

Lagarde further affirmed that at the same time, many advanced economies have been facing stagnating median wages and higher income inequality—all driven by a range of factors besides trade, but occurring as trade has expanded.

While for emerging and developing countries as well, trade has come with negative side-effects. These include rising income inequality, increasing wage premia for skilled workers, and the need to support displaced workers who are looking for new jobs in other industries.