Globalization still hurting poor nations

By Dr. Ravinder Rena
Eritrea Institute of Technology

Globalization is a buzzword gaining increasing importance all over the world. Today, the world appears radically altered. A very significant feature of the global economy is the integration of the emerging economies in world markets and the expansion of economic activities across state borders. Other dimensions include the international movement of ideas, information, legal systems, organizations, people, popular globetrotting cuisine, cultural exchanges, and so forth.

However, the movement of people, even in this post-1970s era of globalization, is restricted and strictly regulated in the aftermath of the 9/11 attacks. More countries are now integrated into a global economic system in which trade and capital flow across borders with unprecedented energy. Nonetheless, globalization has become painful, rather than controversial, to the developing world. It has produced increasing global economic interdependence through the growing volume and variety of cross-border flows of finance, investment, goods, and services, and the rapid and widespread diffusion of technology.

A World Bank study: "Global Economic Prospects: Managing the Next Wave of Globalization," succinctly discusses the advantages of globalization. Driven by 1974-onward globalization, exports have doubled, as a proportion of world economic output, to over 25 percent, and, based on existing trends, will rise to 34 percent by 2030.

World income has doubled since 1980, and almost half-a-billion people have climbed out of poverty since 1990. According to current trends, the number of people living on less than 1-purchasing power-dollar-a-day, will halve from today's 1 billion by 2030. This will take place as a result of growth in Southeast Asia, whose share of the poor will halve from 60 percent, while Africa's will rise from 30 percent to 55 percent.

The scale, benefits, and criticism of globalization are often exaggerated. On the contrary, compared to the immediate post-war period, the average rate of growth has steadily slowed during the age of globalization, from 3.5 percent per annum in the 1960s, to 2.1 percent, 1.3 percent, and 1.0 percent in the 1970s, 1980s, and 1990s respectively.

The growing economic interdependence is highly asymmetrical. The benefits of linking and the costs of de-linking are not equally distributed. Industrialized countries - the European Union, Japan, and the United States - are genuinely and highly interdependent in their relations with one another. The developing countries, on the other hand, are largely independent from one another in terms of economic relations, while being highly dependent on industrialized countries. Indeed, globalization creates losers as well as winners, and entails risks as well as opportunities. An International Labor Organization blue-ribbon panel noted in 2005 that the problems lie not in globalization per se but in the deficiencies in its governance.

Some globalization nay-sayers have vouched that there has been a growing divergence, not convergence, in income levels, both between countries and peoples. Inequality among, and within, nations, has widened. Assets and incomes are more concentrated. Wage shares have fallen while profit shares have risen. Capital mobility alongside labor immobility has reduced the bargaining power of organized labor. The rise in unemployment and the accompanying "casualization" of the workforce, with more and more people working in the informal sector, have generated an excess supply of labor and depressed real wages.

Globalization has spurred inequality - both in the wealthiest countries as well as the developing world. China and India compete globally, yet only a fraction of their citizens prosper. Increasing inequality between rural and urban populations, and between coastal and inland areas in China, could have disastrous consequences in the event of political transition. Forty of the poorest nations, many in Africa, have had zero growth during the past 20 years. Their governments followed advice from wealthy nations and World Bank consultants on issues ranging from privatization to development, but millions of people suffer from poverty. Ironically, the wealthiest people benefit from the source of cheap labor. Western policies reinforce the growing divide between rich and poor.

Nearly three-quarters of Africa's population live in rural areas in contrast with less-than-10-percent in the developed world. Globalization has driven a wedge between social classes in the rich countries, while among the world's poor, the main divide is between countries - those that adapted well to globalization and, in many areas, prospered, and those that maladjusted and, in many cases, collapsed.

As the Second World collapsed and globalization took off, the latter rationale evaporated and a few countries, notably India and China, accelerated their growth rates significantly, enjoying the fruits of freer trade and larger capital flows. Although the two countries adapted well to globalization, there is little doubt that their newfound relative prosperity opened many new fissure lines. Inequality between coastal and inland provinces, as well as between urban and rural areas, skyrocketed in China.

Another large group of Third World countries in Latin America, Africa, and former Communist countries, experienced a quarter-century of decline, or stagnation, punctuated by civil wars, international conflicts, and the onslaught of AIDS. While rich countries grew on average by almost 2 percent per capita annually from 1980 to 2002, the world's poorest 40 countries had a combined growth rate of zero. For large swaths of Africa, the income level today is less than 1-dollar-per-day.

For these latter countries, the promised benefits of globalization never arrived. Social services were often taken over by foreigners. Western experts and technocrats arrived on their jets, stayed in luxury hotels, and hailed the obvious worsening of economic and social conditions as a step toward better lives and international integration.

Indeed, for many people in Latin America and Africa, globalization was merely a new, more attractive label, for the old imperialism, or worse - for a form of re-colonization. The left-wing reaction sweeping Latin America, from Mexico to Argentina, is a direct consequence of the fault lines opened by policies designed to benefit Wall Street, not the people in the streets of Asmara or Kampala.

The rapid growth of global markets has not seen the parallel development of social and economic institutions to ensure their smooth and efficient functioning, labor rights have been less diligently protected than capital and property rights, and the global rules on trade and finance are unfair to the extent that they produce asymmetric effects on rich and poor countries.

The deepening of poverty and inequality has implications for the social and political stability, among and within, nations. It is in this context that the plight and hopes of developing countries have to be understood in the Doha Round of trade talks. Having commenced in 2001, the Doha Round was supposed to be about the trade-led and trade-facilitated development of the world's poor countries. After five years of negotiations, the talks collapsed because of unbridgeable differences among the EU, the US, and developing countries led by India , Brazil , and China.

From the developing world's perspective, the problem is that the rich countries want access to poor countries' resources, markets, and labor forces at the lowest possible price. Some rich countries were open to implementing deep cuts in agricultural subsidies, but resisted opening their markets, others wanted the reverse. Developing countries like India, China, and Eritrea, among other things, are determined to protect the livelihood of their farmers. In countries like India, farmer suicide has been a terrible human cost and a political problem for India's state and central governments for some time, as well as a threat to rural development. Protecting farmers' needs, therefore, is essential for social stability as well as the political survival of governments in the developing world.

The rich countries' pledges of flexibility failed to translate into concrete proposals during the Doha negotiations. Instead, they effectively protected the interests of tiny agricultural minorities. By contrast, in developing countries, farming accounts for 30 to 60 percent of the Gross Domestic Product and up to 70 percent of the labor force. This is why labor rights protection is at least as critical for developing countries as intellectual property rights protection is for the rich.

Developing countries were promised a new regime that would allow them to sell their goods and trade their way out of poverty through undistorted market openness. This required generous market access by the rich for the products of the poor, and also reduction-cum-elimination of market-distorting producer and export subsidies, with the resulting dumping of the rich world's produce on world markets.

Thus Europe launched its "Everything but Arms" initiative whereby it would open its markets to the world's poorest countries. The initiative foundered on too many non-tariff barriers, for example in the technical rules of origin. The US seemed to offer so-called EBP - Everything But what they produce. Under its proposals, developing countries would have been free to export jet engines and super-computers to the US, but not textiles, agricultural products, or processed foods.

Elimination of rich country production and export subsidies, and the opening of markets, while necessary, would not be sufficient for developing countries to trade their way out of underdevelopment. They also have a desperate need to institute market-friendly incentives and regulatory regimes and increase their farmers' productivity, and may require technical assistance from international donors to achieve this through investment in training, infrastructure, and research.

The failure of the Doha Round is also, finally, symptomatic of a much bigger malaise, namely the crisis of multilateral governance in security and environmental matters, as well as in trade. In agriculture, as in other sectors, problems-without-passports require solutions-without-borders.

To convince Africans about the benefits of globalization, we must take a more enlightened view of liberalizing trade, services, and labor intensive manufacturing in which African countries are competitive. Trade is not only a means to prosperity, but also a means of peace-building. We need to devise an enlightened approach in negotiations over the reduction of harmful gas emissions, intellectual property rights, life saving drugs, and the transfer of technologies toward combating poverty. Ultimately, globalization broadens the gap between rich and poor. It also creates distortions in the global economy. Therefore, it is not a panacea for world economic development.
Ravinder Rena currently working as Associate Professor of Economics at the Eritrea Institute of Technology. His most recent books published by the New Africa Press in December 2006 are:
1] A Handbook on the Eritrean Economy: Problems and Prospects for Development;
2] Financial Institutions in Eritrea .


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Copyright Africa Economic Analysis 2005