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LIBERALISATION
AND GLOBALISATION 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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
Switzerland
Fax (4122) 798 85 31
E-mail: southctr@gatekeeper.unice.org
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