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University Of Antwerp Seminar Diversity In The Third World Ken Lawrence


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University Of Antwerp Seminar Diversity In The Third World Ken Lawrence

  1. 1. Table of contents 1. Introduction 2 2. International organisations propagating globalisation 3 2.1 Introduction: Joseph Stiglitz 3 2.2 The IMF: the right organisation on the wrong track 4 2.2.1 An ideology gone haywire 4 2.2.2 The Washington Consensus 4 2.2.3 Western hypocrisy 5 2.2.4 Theory versus practice 6 2.2.5 The democratic deficit 8 2.2.6 Power relations 9 2.3 Case study – Argentina 11 3. Impact of globalisation on industrialised countries 13 3.1. Larger markets but lower employment 13 3.2. Looking beyond the economy 14 4. Conclusion 16 5. Bibliography 17 1
  2. 2. 1. Introduction Globalisation can be defined as a political and economic term indicating the continuous process of the global division of labour. Production takes place in those countries that are most advantageous in terms of overall costs. This process is only possible because of the removal of state-imposed trade limitations, new communication technologies and the worldwide mobility of capital. The search for the lowest costs not only takes place on the level of the final product, but also on the level of each individual part of this final product. Therefore globalisation increases the pressure on individual companies to produce as cost- effective as possible. What this can lead to will be discussed in this paper. A paper on the negative aspects of globalisation can not be complete without sufficient attention given to the international organisations propelling us all into a more globalised world. The focus will lie on the International Monetary Fund because of its impact on the countries who are left out of the benefits of globalisation. I will discuss the role of the IMF and the criticism it receives from the prominent economist Joseph Stiglitz. Moreover I will give a case study of Argentina, one of the IMF’s worst interventions. The second chapter will shift the focus to the negative aspects of globalisation for the industrialised countries. We will see how globalisation can cause a severe backlash even in those countries which in monetary terms gain the most from globalisation. 2
  3. 3. 2. International organisations propagating globalisation This chapter deals with the institutions at the heart of globalisation. The last few years they have been subjected to a huge amount of criticism. I have chosen to focus on the issues put forth by Joseph Stiglitz as he is a recognized authority on the subject. First I will briefly discuss why Joseph Stiglitz’ book “Globalisation and its Discontents” caused so much uproar. For the first time the IMF saw its actions criticised by someone whom they could not designate as an uneducated anti-globalist. 2.1 Introduction: Joseph Stiglitz Joseph Stiglitz was a member on the advisory board of president Bill Clinton. Later Stiglitz joined the World Bank as chief economist and vice-president. This position gave him the opportunity to witness firsthand the difficult coordination between the IMF, World Bank and World Trade Organization. Stiglitz often felt that the efforts of the World Bank were “sabotaged” by the IMF. In 1997 Stiglitz could no longer deny his feelings toward the IMF. He openly criticized the way the Fund was handling the Asian crisis. The IMF did not tolerate his behaviour and exerted a great deal of pressure on the head of the World Bank, James Wolfensohn, to fire Stiglitz. Just a few months before his contract was to end the World Bank did fire Stiglitz. Since then he has been teaching at Colombia University. In 2001 Stiglitz and two colleagues were awarded the Nobel price for economy for their work on the information economy. It is important to note that Stiglitz is not against globalization as such. He believes that it can be used as a force to do much good in the world. According to him it has the potential to make everyone in the world better off. However : he strongly criticizes the way globalization is implemented today. In his book “Globalization and its Discontents” ( a pun on Sigmund Freud’s “Civilization and its Discontents” ? ) he calls for a fundamental reform of the institutions which are the instruments of globalisation : IMF, World Bank and World Trade Organization. Stiglitz’ aim is to remove the mistakes from the neoliberal system. While working for the World Bank Stiglitz was often appalled by the fact that its sister organization the IMF did more harm than good. 3
  4. 4. 2.2 The IMF: the right organisation on the wrong track 2.2.1 An ideology gone haywire Stiglitz points out the shift in ideology which the IMF underwent. Originally the ideas from Keynes were implemented in IMF policy decisions. This economist stressed the need for the government to stimulate national expenditure using monetary or fiscal policy. If a monetary policy is ineffective the government can always lower taxes or increase government expenditure. The eighties changed the ideology of the IMF. Ronald Reagan and Margaret Thatcher were at the head of the most powerful nations on earth. Both were convinced of the marvels of a free market approach to society. By replacing the people at the highest level in both the IMF and the World Bank both institutions propagated the same neoliberal message. The impact of neoliberalism led to marketfundamentalism. Markets were thought to be able to solve all problems. The government needed to tighten its belt. This approach lead to devastating effects on the economies of developing nations as they were forced to cut down on expenditure while at the same time increase the taxes and the interest. Keynes would be heartbroken if he saw the policies which the IMF advocates and which go directly against his theories! According to Stiglitz the neoliberal belief in the wonders of the market is fundamentally flawed when adapted to the economies of developing countries. Adam Smith’s invisible hand will be of no use in situations where his assumptions have not been fulfilled. Developing countries struggle with two of the most important assumptions of Smith : consumers do not have access to complete information and markets are not fully developed. Therefore basing policy decisions on Smith’s inaccurate ( for developing countries ) model is sheer madness. 2.2.2 The Washington Consensus Under heavy fire from Stiglitz is the Washington Consensus. This is a policy formed by the IMF, World Bank and the American Ministry of Finance originally designed to bail out the Latin-American countries during the disastrous eighties. The Washington Consensus rests on 3 pillars: deregulation, privatisation and liberalisation. Theoretically speaking these measures assure that consumers can benefit from increased competition which brings the prices down. 4
  5. 5. Moreover, the government is no longer encouraged to maintain a structure of public enterprises which often operate inefficiently. Stiglitz doesn’t contest the value of these policies. He criticises two factors. First of all he points out that the Washington Consensus was not used as a blueprint for setting goals and the means by which to reach them. Instead the conditions worked out to help the Latin-American countries were plainly and unashamedly copied to other struggling countries without taking into account the diversity which exists between countries! A second point of criticism centres around the speed with which countries were forced to adopt the measures contained in the Consensus. For many developing countries this one-size-fits-all-procedure has had devastating effects. The particular needs and problems of these countries were never properly addressed. According to Stiglitz the underlying, fundamental problem leading to this “copy-paste”policy of the Washington Consensus is that certain indicators are seen to be an end in itself instead of a means to a higher end. Let us take the example of inflation. Traditional macroeconomics teaches us that high inflation leads to low growth and low growth leads to high unemployment. Therefore we can deduct that combating high inflation is in fact a means of lowering unemployment. Stiglitz shows how the IMF has been responsible for focussing to such an absurd degree on the factor “inflation” that for years it has awarded an “A-rating” to Argentina for its work on tackling inflation…at a time when unemployment was reaching dramatic heights! The Bundeszentrale für politische Bildung is very clear when it comes to assessing the Washington Consensus : “Allerdings ist es kaum gelungen, die wichtigsten Ziele des "Konsens von Washington" zu erreichen: Weder gelang eine deutliche Senkung der weltweiten Armut noch hat er wenigstens zu einer Steigerung des Wirtschaftswachstums in den Entwicklungs- und Schwellenländern geführt” 2.2.3 Western hypocrisy Stiglitz also criticises the way industrialised countries forget their own gradual development process. Moreover, these countries tend to ignore the role their government played in securing durable economic growth. The US for example could never have reached their current state of dominant economic power if the federal government had not intervened efficiently. 5
  6. 6. During the 19th century the US went through a transition which can be compared to the globalisation process taking place for the last decennia. The communication and transportation costs decreased, markets expanded and new companies emerged intent on doing business at a national level. Stiglitz reminds the reader that the American government did not automatically assume that markets produced the best possible outcome. For certain market failures the government intervened and installed for example rules regarding minimal working conditions, safety precautions and wages. Moreover, during the 19th century transition the American government supported the agricultural industry and installed a wide scale of programmes to raise the productivity of other sectors. How strange it is to witness the way the United States treat developing countries! Policy measures are copied without taking into account the diversity between countries and are rashly implemented at a rate unsuitable for developing countries. As was mentioned before, the market fundamentalism contained in the Washington Consensus pours out in three processes: deregulation, privatisation and liberalisation. The IMF advocates that developing countries throw open their borders and accept competition on local markets from the most efficient world players. The IMF insists that the government reduces and eventually abolishes any measures designed to protect certain sectors of the economy. The IMF promotes the privatisation of state-owned enterprises. In the vision of market fundamentalism these measures will lead to durable growth. We should look beyond the fairy tales of the market ideology. Liberalisation favours the efficient companies from the industrialised countries; local “competitors” are wiped out. Without protective – even protectionist – measures certain key industries of the developing countries will wither away when confronted with dominant outsiders. The social cost of privatisation can be so high that the efficiency-gain is almost immediately destroyed. In the following paragraphs I will further explain the objections one can raise when confronted with the common theories of market fundamentalism. 2.2.4 Theory versus practice The theory according to market fundamentalism is that liberalisation will lead to new jobs with a higher productivity. In practice liberalisation does not create enough new jobs to compensate for the amount of lost jobs! Local producers in developing countries invariably 6
  7. 7. have to admit their defeat when a multinational imposes itself on local markets. Those who lose their jobs can not easily find a new one because of two reasons. First of all there can be a shortage of entrepreneurship caused by insufficient educational opportunities. Secondly, starting up a new company does not only depend on qualified personnel but also on the availability of capital. When for example IMF programmes stimulate the raising of the interest then taking out a loan is no longer an option. Those who are indoctrinated in the market ideology would use this very moment to remind us of the theory of comparative advantage from David Ricardo. The Bundeszentrale für politische Bildung points out that for too long Ricardo’s theory was thought to indicate how international trade was always beneficial to all parties. The theory holds its validity when two countries of approximately the same economic level trade with each other. The Bundeszentrale für politische Bildung gives the example of Germany and France who in their mutual trading in the context of the European Union have both reaped benefits. Much more controversial is whether the theory of comparative advantage still holds its own in trading between an industrialised country and a developing country. Trade between Germany and Burkina Faso could leave the latter with a huge amount of external debt. Burkina Faso needs to pay more for the consumer goods and machines from Germany than it receives from Germany for the sale of its raw materials. Moreover, developing countries can often not benefit from the ideas expressed in this theory because of the way industrialised countries prevent them from utilising their comparative advantages. At trade negotiations the industrialised countries endeavour to lower trade barriers on for example cars and machines. However, they strongly resist the abolishment of these types of barriers for agricultural products and textile. These are two sectors in which developing countries often have such a comparative advantage! Thus, the theory of comparative advantage looses its significance when faced with Western hypocrisy. A country such as Brazil pays on average 30 percent customs toll for its 15 mayor export-products. The United States on the other hand only pay 14 percent customs toll for their 15 mayor export- products! This hypocrisy is all the more evident in the way industrialised countries continue to subsidize certain industries whereas they boldly exclaim that developing countries should refrain from giving such aid, all in the spirit of honest competition! 7
  8. 8. It can be enlightening to see just how significant these subsidies are. Every day the industrialised countries grant their farmers subsidies for a value of about one billion US- dollars. On a yearly basis this brings us to about 350 billion US-dollars, or seven times the expenditure of these countries on development aid. Privatisation is another pillar of market fundamentalism which can have a devastating outcome. It is assumed that privatisation leads to more efficiency in the economy of a country. The government no longer wastes its resources on a structure of badly managed state-owned enterprises but can instead dedicate those resources to providing essential public facilities. Moreover, unproductive employees are fired which makes the companies more efficient and eventually profitable. This is a very narrow view of efficiency! The efficiency of individual companies may be raised through privatisation, but the high social costs negatively effect the total efficiency of the country concerned. Here we get a prime example of what happens if for example the IMF insists on privatisation at a rapid pace. If the government of a developing country has not been given enough time to install a sufficient level of social security in its country, then the ensuing costs of a rash privatisation can be very high. Examples of social costs can clarify what is meant. If only one relative manages to keep his or her job after mass- dismissals a huge burden rests on his or her shoulders. Even more catastrophic is the decision to remove children from school in order for them to go and work to supplement the family income. 2.2.5 The democratic deficit An important criticism levelled at the IMF is its built-in democratic deficit. The IMF is a public institution yet never reports directly to its financers, you and me. Even the inhabitants of the countries for which the IMF develops a set of programmes and the conditions to be fulfilled are never directly approached. The IMF only reports to the finance ministers and to the presidents of the central banks. There are other elements which also demand a more democratic input-process. First of all the IMF makes most of its decisions behind closed doors. Secondly, the way these decisions get voted is also highly undemocratic: the impact of a country on the voting process depends on that country’s economic importance at the end of the Second World War. Thus the United States have a veto-right! Moreover, this system makes it impossible for the developing countries to work together and get a decision pushed 8
  9. 9. through as the industrialized countries always have a larger voting impact. One could wonder when developing countries on the fast track of industrialisation such as China and India will finally be awarded a larger share of the voting weights. We could turn a blind eye towards these shortcomings if for example the IMF-employees would work for a long time in a certain country in order to familiarize themselves with the specific needs of that country. Unfortunately IMF-employees usually get sent to these countries for about three weeks. In this short period the Ministry of Finance and the Central Bank of that specific country present them large sets of data. The number-crunching can begin and on returning the IMF-employees are supposed to take sound policy decisions! I am sure it is needless to say that the input of local, higher-educated citizens should be valued much higher than a set of figures provided by the ruling classes. Locals have a better knowledge of the case specifics. Including them creates a broad social basis leading to the necessary support for measures collectively agreed upon. 2.2.6 Power relations One of the largest problems with globalisation is that a single institution – the IMF – dominates the way official government aid is distributed towards developing countries. This monopoly creates the unhealthy situation that complying with what the IMF enforces has nothing to do with free will, but more with common sense and a desperate need for survival. Most developing countries do not only receive funds directly from the IMF, but also from the European Union, the World Bank and private investors. However, all these sources of loans pass directly or indirectly through the IMF! Both the European Union as well as the World Bank base their decisions whether or not to provide loans to a certain country on the advice given by the IMF. When faced with a negative assessment by the IMF, private investors too will reconsider their options. Therefore a country often does not have the choice whether or not it accepts the conditions posed by the IMF in order to lend money. Refusing would lead to total economic isolation. 9
  10. 10. This photograph caused quite some commotion a few years ago. We see the managing director of the International Monetary Fund, Michael Camdessus, with his arms crossed and towering above the Indonesian president Suharto who saw himself forced to sign the IMF- documents. Many considered this to be the perfect illustration of how the lending country is in a powerless situation compared to the IMF. Many countries see no other choice but to accept the term the IMF poses in order to get at the necessary funds. These terms are often collected under the heading “conditionality” and represent the three pillars of the Washington Consensus and all the problems connected to them which I have extensively discussed. Intuitively we can all agree that when someone borrows money there are certain conditions that need to be fulfilled. A contract needs to be signed which includes – among other things – the instalments that need to be paid and the period over which the payments will be spread. The conditions which the IMF imposes however are – for all the reasons discussed in previous paragraphs – entirely counterproductive; the repayment of the loans by the developing country is often impeded because the economy of the country has taken a turn for the worse. Stiglitz proposes that globalisation should get a more human face. Institutions such as IMF, World Bank and the World Trade Organization need to be reformed. Of equal importance is the need to involve inhabitants in the decision-making process. 10
  11. 11. 2.3 Case study – Argentina Until the beginning of the 20th century Argentina was one of the richest countries on earth. At the beginning of the nineties however the country was faced with a disastrous economic outlook. There was the huge budgetary deficit. Protectionist measures had been taken, but for all the wrong reasons. Instead of supporting key industries to protect them from devastating international competition we can safely say that these measures were a covert way of making the consumers pay far too much for their goods. Adding to these problems was the issue of hyperinflation menacing the country. The inflation rate between 1983 and 1992 was on average a whopping 350 percent per year. The national economic policy had failed to correct the shortcomings and durable economic growth looked impossible. The Washington Consensus seemed to have all the answers.Faced with the absolute bankruptcy of their country Argentinean officials saw no other option but to adhere to the measures from the Washington Consensus. In 1991 they agreed to implement the policy. The Argentinean peso was put in a system of fixed exchange rates with the US-dollar and state- owned enterprises were privatised at an alarming rate. Nevertheless the IMF was obliged to lend 45 billion US-dollars to Argentina at the beginning of 2002 in order to avert bankruptcy of the country. Hardly a few weeks later it became clear that the fixed exchange rate with the US-dollar could no longer be sustained. A devaluation of 75 percent of the Argentinean peso was the result when the system was finally dropped. The country was unable to repay off its huge debt as it had a shortage of US-dollars, the currency of its debts. To put the situation in perspective : Hamburg in Germany with 1,8 million inhabitants produced a higher level of GDP than the 37 million Argentineans. Where does that bring the country today? Based on GDP per capita we can say that Argentina can be considered as one of the poorest “industrialised” countries. Many young Argentineans flee the country in the hope of finding better opportunities and a better life. Both Spain and Italy have seen a steady influx of Argentineans since the crisis in their home country. 11
  12. 12. Perhaps we should look at the future more positively and consider that through recent adaptations such mistakes will not be made anymore. In 1999 for example the IMF began its Poverty Reduction And Growth Facility ( PRGF ). This partially answers some of the criticism levelled at the IMF. Inhabitants are now consulted in order to put together a so- called Poverty Reduction and Strategy Paper ( PRSP ). It remains to be seen though if enough attention is paid to the input of the locals, but it is a step in the right direction. The former chapter dealt with the international institutions in particular the IMF. I gave an overview of the criticism surrounding these institutions. The following chapter will throw some light on the claim that globalisation always benefits industrialised countries even if it should harm developing countries. 12
  13. 13. 3. Impact of globalisation on industrialised countries 3.1. Larger markets but lower employment On one hand the global market has the advantage that large companies, the world players, have access to new and larger markets. On the other hand these companies need to accept inevitable competition on the traditional markets. This leads to pressure in two distinct domains. First of all there is the constant need to deliver efficient, high-quality goods to the consumer. Secondly this needs to be combined with a consistent lowering of production costs whenever possible. Therefore global competition can have far-reaching consequences for the industrialised countries. Let us take a closer look at Germany. At the beginning of the globalisation process Germany managed to increase the number of jobs through a higher level of exports. Currently however the country is struggling with the fact that more jobs are lost because of the migration of production facilities to low cost countries than there are created through the rise of exports! The explanation can be found in the fact that the German export-industry is mostly technology-based whereas the migration occurs in labour-intensive sectors. If we take a look at the Rhine-Main-region we see that the last ten years thousands have lost their jobs. This leaves them with one of three options: seek work in another region, further educate themselves in order to improve their value on the job market or plainly accept that they are unemployed if one can call that an option. The globalisation process owns its existence to continuous growth, not only of the entire economy but also of individual companies at micro-level. Therefore more and more companies decide to merge. The labour market suffers most from these mergers. The new head office quickly realises that certain tasks such as accounting, repairs and maintenance are performed twice. In the spirit of overall efficiency this boils down to cutting the unnecessary jobs. 13
  14. 14. 3.2. Looking beyond the economy I have discussed the negative points of globalisation on companies and the effect on employment. Nevertheless it is equally important to look beyond a mere economic evaluation of globalisation and to take a closer look at the impact of globalisation on society in general. We can observe that the single has become the prototype of globalised humanity. Long term relationships are out of the question if one wants to stay competitive in today’s job market. We can see a sharp rise in the amount of LAT-relationships ( Living Apart Together ) and weekend-affairs. We do not need to see our significant other all too often; that would only get in the way of all the work we have to do! Children become the ultimate obstacle of the flexible employee. This leads to a decline in the amount of newborns, but also to the phenomenon that people are older before they seriously consider having children. Initiatives such as day care centres at companies confirm this increasing difficulty of combining work and family. I personally attribute much of the current success of right-wing parties to certain aspects of globalisation. Many people fear the impact of globalisation on tradition and local culture. Many have the impression that important political decisions are taken by anonymous international organisations. Many are confronted with unemployment when a far-away head office decides to let people go on a massive scale. People feel powerless to turn the tide and direct their anger at scapegoats such as immigrants who “steal our jobs”. Others seek to counter the globalisation process by demanding rights for their region; the need for autonomy rears its head. Some desperately seek a return to what they call “traditional values”. These are all themes which we can easily find back in the programmes of many right-wing parties across the globe. When for example the Belgian government is unable to secure over one thousand jobs in Brussels in the context of the DHL-case, many loose their faith in the traditional parties and turn their attention to those who offer simple solutions to complex issues. I believe democracy is at the heart of what we are loosing with far-reaching globalisation. Yet it is not the only valuable asset of society that seems to be under considerable strain as a result of globalisation. The last few years expenses for social security have skyrocketed. 14
  15. 15. There are two reasons compelling many to debate whether or not the current social security system needs to be reformed. First of all people get consistently older and society’s birth rate ( as discussed previously ) diminishes. Therefore there will be less and less people working who have to support the social security system for more and more older, retired people. A second factor is the wage costs. These are incredibly high. If we have a look for example at Germany then we can see that where these costs represented 55,6 percent of gross wages in 1972, this figure had risen to 81,2 percent in 2001. This means that for every Euro an employer pays his employee the former also needs to pay 81,2 Eurocent for social security. Possible reforms include pressing people to pursue private means of securing a prosperous old age or forcing people to pay higher contributions to the current system. Whatever path is chosen it will be the socially weakest layers of the population who will suffer the most. Maybe we should accept a slight loss of social security if on a worldwide scale globalisation leads to better social norms? This is often advocated by the supporters of globalisation. They point, for example, to the incorporation of minimal social norms and work ethics into the WTO-treaty. This could put a stop to many sweatshop practices around the world. They forget to mention that many governments of developing countries themselves are against such regulations as they fear it might undermine the country’s competitivity. In globalisation’s pursuit of lower prices everything seems to be permitted. 15
  16. 16. 4. Conclusion Globalisation requires companies to provide consumers with high quality goods and services in order to secure sufficient market share and thus protect the many jobs at stake. Therefore companies need to be continuously on the lookout for new opportunities. Yet the economy alone is unable to confront the challenges which globalisation poses. An active government policy should stimulate the ongoing development of the skills and qualifications which employees need to survive in the globalised labour market. An active social policy to prevent people from becoming victims of globalisation is another necessity. The need for better international intervention is clear when we look at the problems developing countries and Newly Industrialized Countries ( NIC ) are confronted with. The three largest international organisations with which we readily associate globalisation are the International Monetary Fund, the World Bank and the World Trade Organisation. These institutions should take into account the diversity between countries. The Washington Consensus failed to do so and the case study of Argentina shows what the disastrous result of such an approach can be. Furthermore it would be refreshing if the international community of industrialized countries at the helm of the aforementioned organisations would admit the large disparity between the neoliberal theory and practice. They should also revise their policies towards developing countries by taking a good, long look at their own gradual development process. Last but definitely not least the power relations need to be more equal. One way of achieving this is solving the democratic deficit. It is of the utmost necessity to fine-tune the free market ideology currently being used by the followers of neoliberalism. There are far too many discrepancies between theory and practice for any well-educated being to promote market fundamentalism. Finally, it is important to include non-economic elements in the globalisation debate. Changing demographic patterns, outrage at decisions by largely anonymous organisations, a feeling of isolation and a reaction against migratory influx are just the tip of the iceberg. The glorification of tradition, the search for regional autonomy and the success of right-wing parties are visible manifestations of what the current form of globalisation produces. Solving its negative aspects could not be higher on our to-do list. The deconstruction of social security, the polarisation within the multicultural society and the demise of democracy are at hand. 16
  17. 17. 5. Bibliography Heribert, D., Chancen und Risiken für Entwicklungsländer, Bundeszentrale für politische Bildung <,0,0,Chancen_und_Risiken_f%FCr_Entwicklung sl%E4nder.html> Kathinka Dittrich van Weringh, Kulturen zwischen Globalisierung und Regionalisierung, Bundeszentrale für politische Bildung <,0,0,Kulturen_zwischen_Globalisierung_und_Regi onalisierung.html> Kessler, W., Gesellschaften unter Globalisierungsdruck, Bundeszentrale für politische Bildung <,0,0,Gesellschaften_unter_Globalisierungsdruck.h tml> Stiglitz, J., Globalization and its Discontents, 2002, W.W. Norton & Company, New York Suharto and Camdessus photograph <> 17