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The Great Deception

This article draws from a recent policy research paper prepared by the South Centre. The Centre is the intellectual arm of the G77 or the alliance of 130 South or developing country governments. Its President and founder is Julius Nynere and is based in Switzerland. Its research and analysis is of a high quality.

The most recent report from the Centre "Liberalisation and Globalisation - the Issues at Stake for the South and for UNCTAD" reveals in considerable detail the fallacies embodied in conventional wisdom regarding the benefits of economic liberalisation and globalisation.

The truth is that the growth rates predicted from economic liberalisation are not being attained. Rather, increased social, environmental and cultural degeneration is the outcome. Were these factors included in economic analysis, the world balance sheet would show substantial and unsustainable deficits.

The 60 page report contains detailed information of this great deception. The World Bank, representing the interests of the owners of international capital, is the main protagonist of globalisation and neo-liberal economics centred on free trade, a minimal role for the state and removal of restraints on direct foreign investment flows. The bank has been producing reports extolling the virtues of these policies by pointing to their alleged successes in countries of both the North and South. It is these claims that the South Centre is questioning.

The South Centre study is based on thorough research, whereas the World Bank papers are based on fiction or misinterpretation of the facts.

The paper makes the following points:

  1. Liberalisation and globalisation both in industrial and developing countries have been cumulative and uneven processes extending over many years. However, at a practical level, there can be deemed to have been more or less free trade with respect to manufactures and free capital movements between leading industrial countries in the last ten to fifteen years. This is especially so, not only in comparison with the developing countries, but also, more significantly, in comparison with the situation in these economies themselves in the 1950s and 1960s. During these earlier decades most countries not only enforced international capital controls under the Bretton Woods regime, but also their domestic product, capital and labour markets were subject to a wide range of rules and regulations, in keeping with social and economic and political objectives.
  2. The liberal regime in advanced industrial countries over the last fifteen years with respect to trade and capital movements provides an important vantage point for assessing the expectations of current conventional wisdom that liberalisation will lead to improved economic performance and prospects. These expectations are not justified by the evidence: the liberal economy has failed to deliver in many important respects.
  3. The period since the 1980s in industrial economies has been characterised by slow and fluctuating economic growth, mass unemployment and consequent social disintegration. The trend rate of growth of output and productivity has been only half of what these countries experienced during the 1950s and 1960s. The more dynamic period in industrial countries was therefore prior to deregulation of internal and external markets.
  4. The mass unemployment characterising European countries in the post-1980 period is an extremely important failure of the liberal economy. Unemployment at high levels, with the associated poverty and social degradation and marginalization, threatens the continuation of the liberal order itself, by fuelling demands for protection. Thus, it is not so much that liberalisation and globalisation lead to faster economic growth, but rather that higher rates of economic growth and employment are necessary for such a regime to be sustained.
  5. In view of this poor record of industrial countries in the last 15 years, a degree of scepticism and caution with respect to liberalisation and globalisation would appear to be appropriate. The euphoria, even herd instinct, among analysts and policy-makers emphasises the positive aspects and shuts a blind eye to evidence on the negative side which may overwhelm the positive benefits.
  6. The failings of the post-1980 OECD economies cannot be attributed to exogenous factors such as technology. The important question, therefore, is why the actual outcomes under a liberal regime have been so different from the theoretical expectations? The main conclusion is that freely functioning capital and financial markets have harmed the growth and economic prospects of advanced industrial countries through two distinct but inter-related channels. First, the volatility of markets has raised the cost of capital and discouraged investment (both directly and indirectly through the large increase in real rates of interest). Secondly, the financial markets have in general obliged governments to follow low growth or even deflationary policies.
  7. Under a liberal economic regime, these countries are unlikely to be able to raise their trend rate of growth using current policies based on labour market flexibility. This approach is not only unlikely to be helpful in terms of economic growth and employment; it is also likely to be divisive for workers within industrial countries. In addition, it will further exacerbate strife between industrial country and developing country workers.
  8. The paper argues that it is not the case that labour market flexibility is the only feasible strategy currently available to industrial countries, but that there is indeed an alternative strategy, based on rather different principles, which is superior both for people in industrial and in the poor countries. This alternative strategy for demand growth is based on co-operation between countries, and between employers, workers and governments within countries. This contractual approach involves institutional renewal and the building of fresh institutions, both at the national and at the international level.
  9. Turning to the developing economies, both liberalisation and globalisation have occurred at a slower pace in these countries as compared with advanced countries. However, the pace quickened in the 1980s, often under the structural adjustment programme of the multilateral financial institutions. Despite the widespread implementation of trade policy reforms in developing countries since 1980, it is significant that the extent of liberalisation implemented by these countries is still quite limited. Liberalisation of capital flows in developing countries has proceeded further than trade policy reform, largely in order to attract foreign direct investment and so-called "non debt-creating" equity flows.
  10. The policies of liberalisation and globalisation, market ascendancy and diminished role of the state (policies similar to those which have been unsuccessful in industrial countries in the recent period) are recommended by the multilateral financial institutions for developing countries. It is claimed that such policies have proved highly successful in East Asian economies (including post-1945 Japan) and in post-Mao China.
  11. This claim unfortunately is also not valid. The experience of Japan and South Korea shows that these countries have adopted policies during their periods of industrialisation and fast economic growth which are quite the opposite of those recommended by the multilateral financial organisations. For example, in the relevant periods, the two countries have implemented wide-spread import controls, discouraged foreign investment and followed a vigorous state-directed industrial policy. Yet they have achieved extensive structural change and raised the standard of living of their peoples to European levels.
  12. Instead of close and unfettered integration with the world economy, these countries only integrated to the extent and in directions in which it was beneficial for them to do so, pursuing what, in the paper, has been termed "strategic integration". Further, it is noted that the potential benefits of trade liberalisation go much beyond traditional comparative advantage and opportunities for exchange. However to derive the maximum potential benefit for the country, the government needs to play a leading role.
  13. The spectacular economic performance of China in the post-Mao period provides no support for the World Bank's developmental paradigm that privatisation and free and flexible competitive markets are essential for achieving fast economic growth. Although there has been a large-scale introduction of markets into China, these markets are far from being either flexible or competitive. Moreover, in many important areas (labour, capital and land) such markets can hardly be seen to exist at all. None of these market deficits have prevented the Chinese economy from recording extraordinary economic growth over the past fifteen years.
  14. The question of why Latin American economic growth collapsed in the 1980s, resulting in the "lost decade", while the Asian countries continued to prosper is a controversial subject. The international financial institutions (the World Bank) and other orthodox economists attribute Latin American failure to, among other things, insufficient integration of the Latin American countries with the international economy and too pervasive a role of the state in these economies. Thus they ascribe Latin American poor performance in the 1980s to mainly internally determined factors rather than to external factors -- economic shocks over which they had no control. The World Bank theses on this subject have been seriously questioned by independent economists who argue that, although the Latin American governments made mistakes, the main reason for their economic failure was the debt crisis. This, they suggest, was caused largely by major changes in the world economy and by external forces over which these countries had no control. The Latin American countries were particularly hard hit by the capital supply shock which is either ignored or not properly examined in the mainstream analyses.
    With respect to the question of openness, the Bank's critics point out, the Latin American countries were in fact much more open to the international economy, at least on one important dimension, than the Asian economies. The former generally had larger degrees of currency convertibility and practised a far greater degree of financial openness than the latter. Most Asian countries had fairly strict exchange controls. An analysis of economic structures of countries in the two regions provides very little evidence in support of the World Bank's hypothesis.
  15. As for the role of the state, governments have been no less interventionist in East Asia than in Latin America, although for historical reasons the governments in Latin American countries such as Mexico and Brazil have not had as much "autonomy" as the East Asian governments did. The long-term development record of the former over the post-war period until the debt crisis of the 1980s, has overall been a highly creditable one.
  16. It is argued, in conclusion, that the neo-liberal policies adopted by Latin American governments under the tutelage of the Bretton Woods institutions in the last decade are not necessarily the best ones. Such policies have invariably involved further financial liberalisation and often of international competition even when large segments of the national industry are in a weak state, due to protracted insufficient investment as a consequence of the debt crisis. The net long-term economic outcome of this strategy for Latin American countries may therefore unfortunately be negative rather than positive.
  17. With respect to the African economies, the conventional story is that they have suffered from being marginalized from the international economy and therefore need to rectify the situation. The implied suggestion is that this marginalization of African countries is their own fault and the burden of correction lies with them. However, the observed marginalization is due to their poor economic performance, despite being more integrated into the world economy than they were previously. These countries have been subjected to severe external shocks as a result of rising interest rates and a catastrophic fall in real terms of commodity prices during the 1980s. African countries in this situation, it is suggested, may do better by more considered integration into the world economy.
  18. The present international economic environment is much less favourable for developing countries than the situation in 1964 when the G77 was formed. Mass unemployment in industrial countries could lead to protectionist pressures. The demise of the Soviet Union has meant that, in the post-Cold War era, industrial countries no longer have to provide competitive aid to keep developing countries in the western camp.
    Instead, in the current policy climate, all developing countries, irrespective of individual circumstances, are told to liberalise and to integrate as quickly and fully as possible into the world economy, in order to achieve what aid and other policies have ostensibly failed to do. Indeed developing countries are told that they are privileged to be given the opportunity to do so.
  19. This paper argues that, in this post-Cold War economic environment, the need for collective action by the South to meet the evolving challenges are more important than ever. No individual developing country on its own, no matter how large and relatively developed, can expect to be able to influence the new rules of the evolving world economic order. Collectively, however, they have some chance of doing so.
  20. Moreover, the foregoing analysis suggests that, irrespective of their level of development and degree of integration into the world economy, almost all developing countries in all regions have a number of broad common interests in relation to global economic matters and to the issues of liberalisation and globalisation. Together, they provide a strong negotiating platform for developing countries. The elements of such negotiations, in summary, should include:

(a) Independent assessment of world economic conditions

It is therefore of the utmost importance that UNCTAD (UN Conference on Trade and Development) be mandated to develop its monitoring and analytical capacities sufficient to make a major contribution in this field, in particular in the fields of trade, finance and money, investment, technology, and environment, focusing in particular on the development implications, and including studying the forecasts made by other international organisations.

Note: There is continuing pressure from the World Bank, IMF and the US Government to silence UNCTAD, which is the UN agency providing independent economic policy analysis often in line with that of the South Centre.

(b) A forum for global policy dialogue

UNCTAD is the appropriate forum for global policy dialogue, as also for dialogue on issues on which greater North-South co-operation should be sought.

(c) Globalisation and development strategies

The development problem is far from resolved and the debate on development is far from over. It is essential for the South that UNCTAD is able to articulate new approaches and development strategies for developing countries in the context of globalisation.

(d) "First-best" policies and other options

The essential conclusion of this paper is that for developing countries, the "first best" policy with respect to liberalisation and globalisation is not to seek rapid and close integration but rather to define careful policies of selective integration or what has earlier been called strategic integration. If the "first step" policies are to be no longer permissible under the Uruguay Round Agreements, UNCTAD has to be prepared to spell out useful alternatives -- second, third or fourth best policies. These policies would require to be custom-made to suit local circumstances. This work will be particularly demanding in the case of least developed countries, most of which have only rudimentary industrial development and whose production units have a long distance to travel to reach any semblance of international competitiveness or be strong enough to survive from competition in their home markets.

(e) Uruguay Round: monitoring and "adaptation"

In helping to devise effective new development strategies for developing countries, there will be a need to monitor and assess the impact of various aspects of the Uruguay Round Agreements. If, following careful assessment, any part of the agreements appear to be inimical to development, UNCTAD should prepare the ground for discussions to achieve the appropriate revisions.

(f) Foreign investment

Not all FDI is equally beneficial. Historical and empirical evidence strongly suggest that it is not so much the quantity of foreign investment which counts but the nature of the investment and the sorts of linkages that are made with the local economy. A renewed and strengthened UNCTAD is needed to devote a significant part of its analytical capacity to issues relating to foreign investment and technology transfer before it can be said with any objectivity whether an international or multilateral agreement (being urged by the rich countries) would serve the interests of developing countries.

(g) Competition policy

Another important role for UNCTAD in the evolving world economy concerns competition policy. There clearly is no level playing field when a large multinational competes with local domestic firms, large or small. There arise important questions of predation and strategic behaviour by multinationals (whereby for example instead of competing with each other the latter divide up developing country markets between themselves), mergers and take-overs by multinational firms and abuse of market power by dominant firms. This clearly is an important area in which UNCTAD should further develop its expertise. It should also be prepared to make detailed proposals for negotiation in the field of competition policy.

(h) Regionalism, multilateralism and developing countries

The increasing number of regional groupings involving special trade and investment arrangements, among other things, between member countries raises a number of important questions. These require detailed study and monitoring by UNCTAD.

(i) Preparations for multilateral negotiations and agreements

The above has served to illustrate a number of highly critical areas where UNCTAD should be expected to play an important role in analysis and policy work, possibly in preparation for multilateral negotiations leading to international strategies, targets, broad policy agreements, codes of conduct, and other international legal instruments.

(j) Providing technical advice

There is also a strong case for UNCTAD becoming a significant provider of technical advice in the main fields of its work, where appropriate.

(k) South-South co-operation

Globalisation can hardly merit its name if it does not involve greater economic links between developing countries themselves, in contrast to increased interdependence between the North and the South. UNCTAD needs to ensure that, in all aspects of its work, all possible opportunities are taken for strengthening South-South contacts and South-South flows of trade, knowledge, information etc.

(l) North-South Co-operation

In conclusion, on the eve of the new millennium, the world economy stands at an important crossroad. The end of the Cold War, the new information technology revolution, together with liberalisation and globalisation provide great potential for the economic well-being of the people of the world. Yet, this promise is not being realised, either in rich countries or in large parts of the Third World. The reasons for this paradox do not lie on the supply side, but rather in the inadequate growth of the real world demand.

However, to raise the level in growth of world demand will require international co-operation in a number of key areas, principally: (a) macro-economic policy co-ordination; (b) the regulation of speculative capital flows; (c) the regulation of commodity prices. North-South co-operation is ever more essential today, both because of the greater interdependence between economies in the North and South and also because of the increasing weight in the world economy of developing economies, particularly that of the fast growing ones in Asia. Thus North-South co-operation and UNCTAD are required today not just by the South, but equally by the North.

One final extract:

To sum up, it is true that current growth rates are not out of line with the long-term record of developed capitalist economies, bar the golden age of the 1950s and 60s. Nevertheless, in relation to the real needs of the people today, they represent an extremely important failure. Most analysts agree that, at such low growth rates, the problem of mass unemployment in European countries cannot even be dented let alone resolved. The United States claims a much lower unemployment rate than the Western European countries. This is in part due to the fact that there is a much lower level of publicly provided social provision for unemployment in that country than in Europe, so that workers are obliged to take up any job however unremunerative it may be. Real wages of United States workers have not increased in most years since 1973. Therefore, the need in the US is for creating well-paid jobs not just any jobs. This in turn requires faster economic growth in the US economy. In general, therefore, full employment, let alone full employment with rising real wages, will only be possible in industrial countries if they can achieve much higher rates of growth than the liberal economy has been able to deliver.

In the light of this poor record of industrial countries in the last fifteen years, one would have expected a degree of scepticism and caution among analysts and national and international policy-makers. Instead, one finds a euphoria, even herd instinct, which emphasises the positive aspects and shuts a blind eye to evidence on the negative side which may overwhelm the positive benefits. How can this be explained?

A leading US economist has aptly described in a slightly different context, the formation and dynamics of a new conventional wisdom in such economic matters. He refers to a sociological self-reinforcing process, and "the endless round of meetings, speeches, and exchanges of communiqués that occupy much of the time of the economic option of leaders. Such interlocking social groupings tend at any given time to converge on a conventional wisdom, about economics among many other things. People believe certain stories because everyone important believes them. Indeed, when a conventional wisdom is at its fullest strength, one's agreement with that conventional wisdom becomes almost a litmus test of one's suitability to be taken seriously (Krugman, 1995.)."

Krugman was referring specifically to the euphoria about emerging markets and the "Washington consensus" until the Mexican financial and subsequent economic and social crisis. His description is as applicable to the hype concerning liberalisation and globalisation in general.

Contrary to the conventional wisdom, economic analysts and the lessons from economic history would suggest that it is not so much that liberalisation and globalisation lead to faster economic growth, but rather that higher rates of economic growth and employment are necessary for such a regime to be sustained. This was the experience of the 1930s. Faced with mass unemployment and the possibility of using import restrictions to reduce it, even the UK liberal economist John Maynard Keynes was persuaded to abandon his belief in free trade. Stanley Fischer, the present Deputy Director of the IMF, notes in this context that, in the 1930s, protection enabled the UK economy to achieve a better employment record than the more liberal US economy.

These observations with respect to the 1930s are today echoed by large parts of public opinion in industrialised countries and increasingly given political voice, especially in their election campaigns.

A copy of the full report can be obtained from:

The South Centre
Chemm Du Champ - d'Anier, 17
Case Postale 228
1211 Geneva 19

Fax (4122) 798 85 31

E-mail: southctr@gatekeeper.unice.org

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