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Globalization—Myths and Reality

Brian Campbell
Date Published: 
July 14, 2002

“There is no alternative” Margaret Thatcher and Ronald Reagan declared in the 1980s when explaining why globalization was the wave of the future. They told the world that a prosperous and harmonious future could only be had if nations opened their borders to the free market, governments privatized all state-held assets and generally withdrew from all economic and social activity. Twenty years later the reality has turned out to be very different.

Defenders of capitalist globalization argue that those countries that are lagging behind economically are doing so because their governments have failed to follow this advice. These countries have, they argue, failed integrate themselves into the world economy.

This is how they explain the dire social and economic situation of sub-Saharan Africa. On every conceivable measure, life in this part of the world is miserable: 48.5% of the regions’ 630 million people “live” on less than $1 a day; 25.3 million are infected with HIV/AIDS; nation-states such as Somalia, Liberia and Sierra Leone have totally collapsed.

However, a close look at the African continent shows that it is actually the most economically integrated area in the world. The economist Samir Amin has calculated that in 1990, the ratio of extra-regional trade to GDP for Africa was 45.6%. For Europe it was 12.8%, for North America 13.2%, for Latin America 23.7% and Asia 15.2%.

How can we explain such a contradiction—here is a continent that is the most integrated in the world economy and at the same time the poorest?

The reality for Africa is that far from having too limited a relationship with the world economy, it has suffered from too much. Africa has suffered over 500 years of globalization, starting with the slavery in the 16th Century. As capitalism progressed and early trade gave way to large scale industrial manufacture, one of the British architects of early globalization (colonialism), Cecil Rhodes explained in the 1880s the role Africa was destined to play in the world economy: “We must find new lands from which we can easily obtain raw materials and at the same time exploit the cheap slave labor that is available from the natives of the colonies. The colonies [will] also provide a dumping ground for the surplus goods produced in our factories.”

Today African nations are still producing the same commodities that they did one hundred years ago—diamonds, copper, gold, food beverages and fibers. Unfortunately for the people of Africa, the world economy has changed and demands less of these goods or has found alternate suppliers who do not suffer from the political instability that ravages the region.

When confronted with hard facts and figures of a country’s underdevelopment, economists will say that the problem is too much government intervention. The economist Paul Krugman even goes as far as to say, “the raw fact is that every successful example of economic development this past century, every case of a poor nation that worked its way up to a more or less decent, or at least dramatically better, standard of living has taken place via globalization.”

It’s an incredible statement for an economist to make as it is totally untrue. Usually, Krugman and his ilk will point at South East Asia, particularly Japan and South Korea, as examples of how countries have joined the rich nations by adhering to the recipe of minimal government. However, Japan achieved this only through massive government intervention in the economy. Japan in the post-1945 period carefully nurtured its infant industries behind high tariff walls that kept foreign produced goods out. South Korea did exactly the same—the state heavily subsidized its nation’s industries to make them competitive on the world market. One account of South Korea’s economic development comments, “No state outside the socialist bloc came anywhere near this measure of control over the states investible resources.”

Similarly, free-market advocates are strangely silent about the role of the United States government, not just in the US economy—where it regularly slaps heavy tariffs on other countries goods (like the 30% steel tariff imposed by President Bush), but also in the world economy at large. The fact that the US government spends more on its military than the next 16 nations’ arms budgets combined, and has the ability to intervene militarily in any part of the world, makes any talk of a free market nonsense. US military presence in the Middle East, for example, gives it the ability to dictate to other countries the terms of international trade.

State and capital

Economists go even further and argue that multinational companies today are independent of nation states entirely. Again, this is patently false. Not only do companies depend on the military wing of their governments, they rely on generous helpings of “corporate welfare” from the state so that taxpayers in effect finance the research and development that companies then turn into private profits. The Internet, touted as the invention that has enabled the growth of globalization, was not developed in a suburban garage by some hard-working entrepreneur but by the publicly funded Pentagon.

There is, however, one area of government that has been radically slashed over the past 20 years under the name of promoting economic efficiency. The late French sociologist Pierre Bourdieu explained it well when he said that what we have seen is the erosion of the left-hand of the state—that is the arm of the state that’s responsible for providing social services—while the right-hand, the imprisonment, policing and military arm of the state, has been strengthened. In New York State, for example, a recent study revealed that there has been an exact transfer of funds, to the penny, from education to prisons.

The privatization of state-run companies has been one of the main ways in which governments have reduced their role in the economy. The end result has been loss of income for governments who then drastically reduce their spending on social benefits combined with the deterioration of wages and conditions for workers lucky enough to keep their jobs. But it has also meant massive profits for the private companies that buy up state-run enterprises, usually at rock bottom prices.

Nowhere has this been more true than in Russia and Eastern Europe. With the collapse of the Communist regimes in the early 1990s, state assets were sold at fire-sale prices. Chubais, who oversaw the process of privatization in Russia, said at the time, “They steal and steal and steal. They are stealing absolutely everything and it is impossible to stop them. But let them steal and take their property. Then they will become owners and decent administrators of this property.” Unfortunately, they did not become decent by any measure—they lined their pockets by holding on to what’s profitable, such as raw materials (particularly oil and gas), and allowing the rest of the economy to disintegrate.

So after 10 years of the “creative destruction” by the invisible hand, the UN Development Program Report of 1999 declared, “A human crisis of monumental proportions is emerging in the former Soviet Union.” Manufacturing output fell by 50% while agricultural output lost 20%. The net result has been a decline of 6 years in male life expectancy. It has been calculated that 10 million people have died in excess of the normal death rate since 1990. A slogan on a Polish street reported in the New York Times summed up Eastern Europe’s experience with the neoliberal model—“Free markets, enslaved people.”

According to the neo-liberal model, If countries successfully reduce the role of government and open their countries to the market, foreign investment will pour in and living standards will rise. Foreign investment in countries takes two forms. The most sought after is Foreign Direct Investment (FDI), which is long-term investment in productive activity. The second is Foreign Portfolio Investment (FPI), short-term speculative investment in local stock exchanges looking for a quick profit.

The reality for most underdeveloped countries is that the bulk of foreign investment takes on the latter form—this money then becomes a major source of instability. This is what happened in Southeast Asia crisis of 1997-98. The root cause of crisis was overproduction—countries in the region were producing far too many goods than could be profitably sold. When it became clear that giant companies in the region were in financial trouble, money invested on the local stock exchanges quickly exited. The end result was the devastation of once-thriving economies—output in some countries fell by 16%. In Indonesia alone, 20 million workers lost their jobs and were forced into the countryside to survive.

Unfortunately, even those countries that are lucky enough to receive FDI find that it is no guarantee that living standards will increase. First, it must be recognized that most FDI flows to the rich economies—only 16.5% finds its way to underdeveloped nations, and most of that ends up in a single country, China. Between 1989 and 1996, Russia and the former Eastern Bloc countries received $44 billion in FDI. This sounds quite impressive until you consider that Britain received $88 billion between 1991 and 1995 alone. Most foreign investment goes into Export Processing Zones (EPZs), which have been estimated to employ 27 million people worldwide and produce $250 billion worth of trade.

In her book No Logo, Naomi Klein documented what life is like inside an EPZ. “Regardless of where the EPZs are located, the workers stories have a certain mesmerizing sameness: the workday is long [up to 14 hours]. The vast majority of the workers are women, always young, always working for contractors or subcontractors from Korea, Taiwan or Hong Kong. The management is military style, the supervisors often abusive, the wages below subsistence and the work low-skill and tedious.”

Economists such as Paul Krugman argue that people tolerate these conditions because it is better than traditional forms of employment. However, most of those employed in the EPZs are there because they have no choice—traditional forms of employment have disappeared, usually because land has been used to build the EPZ or to construct tourist attractions such as hotel complexes and golf courses.

It is also the case that living standards do not rise overtime, but actually fall. Underdeveloped countries are forced to compete with each other to offer the lowest possible wages. That’s why most FDI today goes to China—Chinese workers are expected to live on 87 cents an hour. But in many cases, western companies can get away with paying only 13 cents.

Tax holidays

It is not only through poor wages that workers suffer from the investment of multi-national companies. In order to attract these companies, countries offer “tax-holidays,” where companies are exempt from tax payments, in some cases for up to 10 years. This means that cities that are home to the EPZs find their populations growing rapidly, but they lack the resources to provide the basic amenities of life—clean water, sewage processing, education and healthcare facilities. A mayor of one such city—Rosario in the Philippines, home to the Cavite EPZ—laments, “They [the companies] fold up before the tax holiday expires, then they incorporate to another company, just to avoid payment of taxes. They don’t pay anything to the government...”

Even the low wages and tax-holidays are not enough for many multinationals to relocate to underdeveloped areas of the world. The reality is that companies tend to move to the industrial, developed world. Japanese and South Korean companies move to Britain and other European nations so they can claim that their goods are produced in the host nation and thereby avoid paying European Union tariffs. Similarly, German automobile manufacturers relocate not to low-wage African or even East European countries, but to the Southern states in the US to avoid America’s trade tariffs. American companies that have relocated away from the North of America have usually only got as far as the Mexican border, where they can take advantage of low Mexican wages while remaining in close proximity to their main market, the US.

It is not difficult to demolish the globalizers’ theory. The stark truth is that after 20 years of the “Washington Consensus,” living standards throughout the world are more unequal today that ever: in 1945 the difference between the world’s top 20% and the bottom 20% was 30:1. Today it is 82:1 and rising. And that inequality has not only risen between nations, but within them also. If US workers’ wages had kept pace with their CEOs, the average worker would be earning $110,000 a year with a minimum wage of $22 per hour instead of today’s corresponding figures of $10,700 and $5.15.

How then do we explain the persistence shown in a model that has so clearly failed the world’s population? It is captured in the expression “The Washington Consensus.” The neoliberal model has been developed to ensure that the United States remains the strongest economic nation in the world. Susan George summed it up this way, “The US Treasury recognizes, quite correctly, that the combination of debt plus structural adjustment plus massive privatization is a far more efficient instrument than colonialism ever was for keeping countries in line.”

The theory of globalization should be seen not as a model for economic development, but rather an ideological argument to defend exploitation, environmental destruction and the devastation of large parts of the world for the sake of profit. The success of this ideological, offensive is based on two factors.

First, there have been real changes in the world economy over the past 30 years. Production has become more international and some industries (such as electronics ad textiles) have been able to relocate to the underdeveloped world. Although this is only a small percentage of world trade, it provides the grain of truth that the neo-liberals build their model on.

However, as we’ve shown above, most economic activity takes place between industrialized countries. On the whole, those countries that are not located in North America, Europe and Southeast Asia have been left to stagnate. The idea that by adopting the neoliberal model economic success would be ensured has allowed the rich nations to quietly abandon aid programs that did provide some form of economic relief.

The second factor that gives the argument its strength is the defeat suffered by progressive forces in the 1970s and 1980s. The ability to either co-opt or destroy social movements and trade unions meant opposition to the neo-liberal juggernaut was minimal. Progressives found themselves on the defensive and workers in the advanced countries were subjected to high levels of unemployment to intimidate them from taking action.

But the toll of neoliberalism in the form of widespread destitution has produced an equally global backlash. In the rich countries of the North, this has taken the form of besieging the gatherings of the neoliberals, discrediting the very institutions that have been busy spreading globalization into every corner of the globe. In the poor countries of the South, there have been repeated rebellions and strikes against privatization and structural adjustment. Both movements together have the potential to end this spiral of misery called globalization.