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Globalization North and South: The Road to Nowhere.


Frank Lee

‘We must sell more to strangers yearly than we consume of theirs in value’
Thomas Mun, 1571-1641, Director of the East India Company.
Author of English Treasure by Foreign Trade.

It was the same Thomas Mun who became the architect of what we might now call strategic trade policy. This was a development strategy based upon a number of economic policy inputs aimed at a systematic upgrading and development of the national economy to give it a system of competitive advantages in its trade with other nations. He postulated the following policies.

  • Imported goods that can be produced domestically should be banned.
  • Reduce luxurious imported goods by making Englishmen have a taste for English goods.
  • Reduce export duties on goods produced domestically for foreign markets.
  • If no alternatives are available to its neighbours, England should charge more money for its exports.
  • Cultivate wasteland for higher production and to reduce the amount of imports needed from abroad.
  • Shipping should be completed solely on English vessels.

Policies such as these, though never openly admitted, came to serve as the generally accepted development strategy for aspiring nations in both the 19th and 20th centuries, enabling these states to move from low value-added agricultural and mineral production to higher value-added manufactured goods and service industry. Britain was first in the game[1] but was followed in short order by Germany, the USA and a number of other nations in Western Europe and North America. This clutch of dominant or developed states were able to open up a productivity and technology gap with the rest of the world which is still in evidence. Although other non-European nations – mainly in East Asia and led initially by Japan – used essentially the same policies and are beginning to close the gap and in some instances have already closed it.

However, in the contemporary world and international trade terms what is called ‘free-trade’ is at the heart of the system – a system which was to become known as ‘globalization’ packaged and sold as an irresistible force of nature. Globalization is more-or-less neo-liberalism writ large. It has become an article of faith that free-trade was always and everywhere the best policy in spite of the fact that it was the mercantilist policies of a prior era which formed the basis of current liberal trade policy (see below). Globalization was codified in what became known as the ‘Washington Consensus.’ The new conventional wisdom was conceived of and given a legitimating cachet by political, business, media and academic elites around the world.

However, many of the elements – if not all – of the Washington Consensus were hardly new, many dating back to the 18th and 19th centuries and perhaps beyond. It could be said that the newly emergent mainstream orthodoxy represented a caricature of an outdated and somewhat dubious political economy of yesteryear.

The theory that free-trade between nations would maximise output and welfare was first mooted by Adam Smith, but its final elaboration was constructed by David Ricardo in his famous work The Principles of Political Economy and Taxation first published in 1817. Briefly, he argued that nations should specialise in what they do best and in this way world output would be maximised. The hypothetical example he used was England and Portugal and the production of wine and cloth, where he calculated that although Portugal had an absolute advantage in both cloth and wine production, England had a comparative advantage in cloth and should produce cloth, whereas Portugal should simply produce wine. It was asserted – though, since it was simply a model, no evidence was ever presented – that all would gain from this international division of labour.

This was yet another instance where economists were fixated with the model, but even a cursory glance at economic history, and particularly the transition from agrarian to industrial societies, demonstrates the weaknesses, and indeed, serves to falsify the whole Ricardian paradigm. The brute historical fact is that every nation which has successfully embarked on the transition from developing to developed economy has done so adopting policies which were the exact opposite of those advocated by the Ricardian free-trade school, and which, moreover, had a great deal in common with Mun’s prescriptions.

In the world of actually existing capitalism, free-trade is the exception rather than the rule. Contemporary world trade is mainly a matter of intra-firm trading, that is, global companies trading with their own affiliates and subsidiaries in different countries mainly for tax avoidance purposes – e.g., transfer pricing. Next there are regional trading blocs like the EU or Mercosur, which erect tariff barriers to non-members. Finally, with the virtual elimination of tariffs there has been created a whole array of Non-Tariff-Barriers (NTBs).

These include manipulation of exchange rates, subsidies to export industries, tax exemption and subsidies to R&D, publicly funded research which inter alia enabled the Internet to come into existence, procurement policies whereby public expenditure and goods were purchased in the home market by government departments, quotas, embargoes, sanctions, export licences, the list is extensive.

Thus, modernisation and industrialisation, wherever it took place, consisted of a smorgasboard of interventionist procedures involving a joint business/state system of economic planning which was directed from above by institutions such as the Japanese Ministry of International Trade and Industry (MITI). Both Japan and South Korea made extensive use of import controls to protect specific industries. Additionally, both countries discouraged rather than promoted inward FDI.

A century earlier during its period of industrialisation the United States erected tariff walls to keep out foreign (mainly British) goods with the intention of nurturing nascent US industries. US tariffs (in percentages of value) ranged from 35 to almost 50% during the period 1820-1931, and the US itself only became in any sense a free-trading nation after World War II, that is once its financial and industrial hegemony had been established. In Europe laissez-faire was also eschewed. In Germany in particular tariffs were lower in the US, but the involvement of the German state in the development of the economy was decidedly hands on. Again, there was the by now the standard policy of infant industry protection, and this was supplemented by and range of grants from the central government including scholarships to promising innovators, subsidies to competent entrepreneurs, and the organisation of exhibitions of new machinery and industrial processes. Moreover, during this period Germany pioneered modern social policy, which was important in maintaining social peace – and thus promoting investment – in a newly unified country …”[2]

It has been the same everywhere, yet the Ricardian legacy still prevails. But this legacy takes on the form of a free-floating ideology with little connexion to either practical policy prescriptions or the real world. It has been said in this respect that “…practical results have little to do with the persuasiveness of ideology.” [3] This much is true, but it rather misses the point: the function of ideology is not to supply answers to problems in the real world, but simply give a Panglossian justification to the prevalent order of things.

Turning to the real world it will be seen that “…history shows that symmetric free-trade, between nations of approximately the same level of development, benefits both parties.” However, “Asymmetric trade will lead to the poor nation specialising in being poor, while the rich nation will specialise in being rich. To benefit from free trade, the poor nation must rid itself of its international specialisation of being poor. For 500 years this has not happened anywhere without any market intervention.”[4]

This asymmetry in the global system is both cause and consequence of globalization. It should be borne in mind that the Least Developed Countries (LDCs) are suppliers of cheap raw material inputs to the industrialised countries of North America, Western Europe and East Asia. In technological terms the LDCs find themselves locked into low value-added, dead-end production where no discernible development or technology transfer takes place. Thus, under-development is a structural characteristic of globalization, not some unfortunate accident. Put another way:

…if rich nations (the North) as the result of historical forces, are relatively well endowed with the vital resources of capital, entrepreneurial ability, and skilled labour, their continued specialisation in products and processes that use the resources intensively can create the necessary conditions for their further growth. By contrast LDCs (the South) endowed with abundant supplies of cheap, unskilled labour, by intentionally specialising in products that use cheap, unskilled labour … often find themselves locked into a stagnant situation that perpetuates their comparative advantage in unskilled, unproductive activities. This in turn inhibits the domestic growth of needed capital, entrepreneurship and technical skills. Static efficiency becomes dynamic inefficiency, and a cumulative process is set in motion in which trade exacerbates already unequal trading relationships, distributes benefits largely to the people who are already well-off, and perpetuates the physical and human resource under-development that characterises most poor nations.”[5]

Case Study 1. The cocoa-chocolate industry (hereafter CCI) of the West African nations, Cameroon, Ghana, Ivory Coast and Nigeria are a case in point. These countries produce the majority of the world’s raw cocoa beans. But of course, the industry as a whole is controlled by western multinationals such as Hershey, Nestlé and Cadbury-Schweppes (now Kraft). The structure of this industry – vertically integrated – is very typical of the relationship between the LDCs and the developed world. The low value-added part of the industry – growing and harvesting the beans – is left to individual farmers in West Africa. Buying agencies, either very close to, or in fact subsidiaries of multinational companies (MNCs), then buy the raw material at prices usually dictated by the MNCs. This asymmetrical relationship between supplier and sole buyer is termed ‘monopsony’ in the economics jargon. It should be understood that large companies not only over-price their products to the final consumer, but also under-price their purchases from their captive suppliers. From then on, the various stages of the processing supply chain are in the hands of the parent company. From raw beans, to roasting, milling, refining, manufacturing of chocolate or cocoa, shipping and packaging, branding and advertising – all of these stages add value to the product, value which is garnered by the MNC. The exporting African nations are left with the low or no value-added end of the operation, a technological cul-de-sac.

Case Study 2. The double-standard inherent in the trade liberalisation policies pushed by the west through its agencies the IMF and WTO. ‘Although “we” in this instance the United States ‘insisted the Lesser Developed Countries (LDCs) reduce barriers to our products and eliminate the subsidies for those products which competed against ‘our,’ (the US) kept barriers for the goods produced by the developing countries – and the US continued massive subsidies for its own producers. Agricultural subsidies encouraged American farmers to produce more, forcing down global prices for the crops that poor developing countries produce and depend upon. For example, subsidies for one crop alone, cotton, went to 25000 mostly very well-off US farmers, exceeding in value the cotton that was produced, lowering the global price of cotton enormously. American farmers who account for a third of total global output, despite the fact that US production costs are twice the international price of 42 cents per pound, gained at the expense of 10 million African farmers who depended on cotton for their meagre livings. Several African countries lost between 1 and 2 percent of their entire income, an amount greater than what these particular countries received in foreign aid from the US. The west African State of Mali, for example, received $37 million in aid but lost $43 million from depressed prices. (Joseph Stiglitz – The Roaring Nineties – p.207)

This is what happens when LDCs having been sternly lectured by the IMF-WTO try to play by the ‘Free-Trade’ rules.

Nor does it end there. MNCs can avoid much local taxation by shifting profits to subsidiaries in low-tax venues by artificially inflating the price which it pays for intermediate products purchased from these same subsidiaries so as to lower its stated profits. This means that the tax-take of the host countries is lower than it should be since MNC profits have been artificially manipulated downward. This phenomenon is known as transfer pricing and is a common practice of MNCs – one over which host governments can exert little control as long as corporate tax rates differ from one country to the next.

Bear in mind also that although the IMF and World Bank enjoin LDCs to adopt market liberalisation policies, they apparently see – or conveniently ignore – the past and current mercantilist practices of developed nations. Agriculture for example is massively subsidised in both NAFTA and the EU. But it really is a question of don’t do what I do – do as I say. This hypocrisy at the heart of the problem represents the elephant in the room. We know that countries which attempt to open their markets when they are not ready to do so usually pay a heavy price. The countries which protect their growing industries until they are ready to trade on world markets have been the successes – even in capitalist terms. The wave of development in the 19th century and the development of East Asian economies during the 20th bears witness to this.

But the object of the free-trade rhetoric and finger wagging posture of the developed world is precisely to maintain the status quo. We should be aware that:

…multinational corporations are not in the development business; their objective is to maximise their return on capital. MNCs seek out the best profit opportunities and are largely unconcerned with issues such as poverty, inequality, employment conditions, and environmental problems.”[6]

Given the regulatory capture of the political structures in the developed world by powerful business interests, it seems that this situation is likely to endure for the foreseeable future. Development will only come about when the LDCs take their fate into their own hands and emulate the nation-building strategies of East Asia.

…markets have a strong tendency to reinforce the status quo. The free market dictates that countries stick to what they are good at. Stated bluntly, this means that poor countries are supposed to continue with their current engagement in low productivity activities. But engagement in those activities is exactly what makes them poor. If they want to leave poverty behind, they have to defy the market and do the more difficult things that bring them higher incomes – there are no two ways about it.[7]

True enough, but if they defy western imposed trade austerity, they will inevitably face united and vicious opposition of the footloose MNCs and their respective states and global institutional backers. The crucial institutional command centres underpinning of the global system are provided by the troika of IMF, World Bank and WTO.

The Troika of Usury

The International Monetary Fund, the World Bank (International Bank for Reconstruction Development/IDA) and the General Agreement on Tariffs and Trade (GATT-Later to become the World Trade Organization 1995) were created in 1944, shortly before the end of World War II, during the conference in Bretton Woods, New Hampshire. Both the IMF and World Bank are now based in Washington, DC. The IMF was designed to promote international economic cooperation and provide its member countries with short term loans in order to trade with other countries (achieve balance of payments). Such was their original remit.

However, like most bureaucracies they needed to expand and justify their existence. Their responsibilities were to undergo deep changes which were both cause and effect in this change of policy. Thus, during the 1980’s, the IMF took on an expanded role of lending money to “bailout” countries during financial crisis.

This gave the IMF leverage to begin designing economic policies – neoliberalism – for over 60 countries changes which were never part of the IMF’s original area of competence. (One particularly glaring example of just how far away the IMF’s responsibilities had moved from their original brief took place when it allowed Ukraine to avoid paying back a sovereign debt of $3 billion loan from Russia. This was a quite unprecedented violation of the IMF’s charter.) Countries in difficulties have to follow IMF policies to obtain the IMF’s “seal of approval” to obtain loans, international assistance, and even debt relief. Thus, the IMF has arrogated powers not only in structuring the global economy, but also on real-life issues such as poverty, environmental sustainability and development, which is part of the World Bank’s turf. The IMF is one of the most powerful institutions on Earth–yet few know what it is. The IMF has created a system of modern-day colonialism that Structural Adjustment Policies (SAPs) the poor to fatten the rich.

Many SAPs require changes in labour laws, such as eliminating collective bargaining laws and lowering wages in order to provide conditions favourable to attracting foreign investors. The IMF’s mantra of “labour flexibility” permits corporations to fire at whim and move where wages are cheapest. According to the 1995 UN Trade and Development Report, employers are using this extra “flexibility” in labour laws to shed workers, rather than create jobs. It goes without saying the machinations of the IMF and the US Treasury Department are carried out wholly in secret.

In the same vein much could also be said of the World Bank (WB) The World Bank was established at the same time as the IMF, during the Bretton Woods Conference in 1945. It was subdivided into the International Bank for Reconstruction and Development IBRD and the International Development Association IDA. Although conceived of as separate institutions the WB they began to merge and overlap, although the neoliberal consensus ensured an ideological conformity in both institutions. Its mission was supposedly to help developing countries to restructure and improve their economies with convenient loans. It also had the objective of helping the post-war recovery of Europe and Japan.

The world is very different today. The World Bank is said to aid developing countries to grow even more and faster than they otherwise would. Most experts, however, think that the Bank does this in an ineffective and unproductive manner because it is a bureaucratic institution itself and is also under the ideological tutelage of the Washington Consensus, a burden of ideological baggage which in fact acts as a barrier to growth and development. In many developing countries the World Bank and IMF impose very strict conditions concerning the issue and availability of loans, which as a policy, is not only counter-productive, but is harmful to the development needs of recipient states. The Bank pretty much openly cooperates very much with the interests of capital and seems unaware of its assigned remit, i.e., the needs of developing countries.

The Bank closely monitors indebted states along with the IMF and it is undeniably the case that the World Bank and many other international organizations are more concerned with promoting the interests of the few at the expense of the many. Like its partner in crime the IMF, the WB is very secretive in its activities involving hidden relationships and agreements with state and non-state actors. There are no disinterested mediators present, and the management of this institution has no obligation to inform any parliament or other democratic institution in the world about its closed meetings.

Finally, there is the World Trade Organization (formerly the General Agreement on Tariffs and Trade – GATT). The change of name was a function of an extended global remit of this third member of the triad. Established in 1995 The World Trade Organization (WTO) includes 153 countries and is headquartered in Geneva, Switzerland. The WTO was intended to replace GATT granting it a broader purview. It has been used to push an expansive array of policies on trade, investment and deregulation that has exacerbated the inequality between the North and the South, and among the rich and poor within countries. The WTO enforces some twenty different trade agreements, including GATTS, the Agreement on Agriculture (AoA) and Trade-Related Intellectual Property Rights (TRIPS).

Consistent with the other members of the club – IMF, WB – the WTO is inherently undemocratic.

Its trade tribunals, working behind closed doors, have ruled against a stunning assemblage of national health and safety, labour, human rights and environmental laws, which have been directly challenged as trade barriers by governments acting on behalf of their corporate clients. National policies and laws found to violate WTO rules must be eliminated or changed or else the violating country faces perpetual trade sanctions that can be in the millions of dollars. Since the WTO’s inception in 1995, the vast majority of rulings in trade disputes between member nations have favoured powerful industrialized countries. Consequently, many countries, particularly developing countries, feel enormous pressure to weaken their public interest policies whenever a WTO challenge is threatened in order to avoid costly sanctions.

If it is broke, don’t fix it

It becomes increasingly clear that in the new epoch of neo-colonialism the position of many of the world’s poorest countries is highly marginal in terms of the global economy. The usual prescriptions of the IMF/World Bank ‘experts’ is that these countries should open up their economies more and by increasing their exports and liberalizing their regulatory structures. This is rather like applying leaches to the unfortunate persons suffering from haemophilia.

If I might digress for a moment. It rather reminds me of a passage in 1984 where Orwell’s hero, Winston Smith, is in conversation with a rather heterodox party intellectual, Syme. Unfortunately, both were in hearing range of another party member, a complete, droning party hack who was engaged in emitting a steam of verbiage, the usual shtick of the party line.

Orwell goes on: ‘Just once Winston caught a phrase – ‘complete and final elimination of Goldsteinism’ – jerked out rapidly as if it were all in one piece like a type cast solid. For the rest it was just a noise a quack-quack-quacking …’ Syme turns to Winston: ‘There is a word in Newspeak’ said Syme. ‘I don’t know if you know it – duckspeak – to quack like a duck.’

‘Duckspeak’ is basically the lingua franca of these institutions as it is of the MSM, politicians and other defenders of the faith. Its primary object is to obfuscate, not to clarify. We should expect nothing more. For these policy makers ensconced in their air-conditioned marble halls duckspeak comes naturally. However, even a cursory examination of both the theory and practise of their prescriptions confirms their duckspeak policies.

For policy-makers around the world the appeal to an opening up to global markets is based upon and simple but powerful promise. International economic integration will improve economic performance … The trouble with this is that there is no convincing evidence that openness, in the sense of low barriers to trade and capital flows, systematically produces these consequences. In practice, the links between openness and economic growth tend to be weak and contingent on the presence of complementary policies and institutions.”[8]

Open markets before a national economy is ready for it is in fact a disastrous policy a policy failure which was brutally confirmed in Russia during the 1990s. Openness might (and I emphasise might) work if the playing field is relatively level, which clearly it is not. Tariffs imposed by developed countries on imports from many developing countries remain very high. At the same time agricultural subsidies to domestic farmers make imports from developing countries uncompetitive. In short, the odds are stacked against the developing world.

Of course, the charade of liberal world trade and global dominance will carry on regardless; like the EU it can do no other. The fact that it is a system of neo-colonialism sustained by a bogus narrative and naked power may or may not have dawned on it, but now the neo-liberal virus has begun to enter the imperial heartlands. The Rules of the Game are changing. The effect of neo-liberal policies are beginning to spill over from the developing world to the developed countries in Europe and North America. How else are political phenomena like Trump, Brexit, Catalan and Scottish Independence, the Yellow Vests and euro-populism explicable? Domestic colonialism is now an increasing feature of the developed world and the reaction to it has been all too predictable.

The Greek historian Thucydides astutely noted that empires and democracy simply don’t mix; when democracies become empires and those empires begin to get out of control, the methods of supressing resistance in those empires will also be used back home at National HQ in the imperial state. As is already apparent this involves thought-control and moves on to other and cruder forms of suppression including incarceration and outright physical violence.

So, this is where we have arrived. All the promises of a Brave New World after the fall of the Berlin Wall did not come to pass, and the world seems to be drifting towards a divided, turbulent and ugly future.

NOTES:-

  • [1] ‘Under George the First, English Statesmen had long ago clearly perceived the grounds on which the greatness of the nation depended. At the opening of Parliament in 1721, the King is made to say by the Ministry, ‘that (echoing Mun) it is evident that nothing so much contributes to promote the public well-being as the exportation of manufactured goods and the importation of foreign raw materials.’ Quoted in Friedrich List – The National System of Political Economy (p 52)
  • [2] Ha-Joon Chang – Kicking Away the Ladder
  • [3] Charles Morris – The Trillion Dollar Meltdown
  • [4] Erik Reinert – How Rich Countries Got Rich and Why Poor Countries Stay poor
  • [5] Development Economics – Todaro and Smith
  • [6] Todaro and Smith – Ibid.
  • [7] Ha-Joon Chang – Bad Samaritans
  • [8] Dani Rodrik – The Globalization Paradox (pp136-137)