Globalisation:What goes wrong?
Some thoughts and links for discussion, and for further development!

Globalisation, Liberalisation and Structural Adjustment are clearly the routes which the ruling hegemony or Washington Concensus (World Bank, IMF, WTO etc.) think most favour development. Yet there is a substantial resistance to this general prescription. It is clear both that things go wrong, and that not everyone is convinced that 'all is for the best in this best of all possible worlds'. One of the most pungent and well-informed criticisms, especially of the IMF, is the recent book by Jo Stigletz (a winner of the Nobel Prize for Economics), who was Chair of the US Council of Economic Advisors to the US President, 1993 - 1997; Chief Economist, and Senior Vice President at the World Bank, 1997 - 2000):  Globalisation and its Critics.  This book chronicles what Stiglitz sees as the major shortcomings of, especially,  the IMF's behaviour and operation, especially with respect to the Asian Crisis (when a number of Pacific Rim countries suffered major economic crisis beginning in 1997), and to  the liberalisation programmes followed in Russia after the collapse of the Berlin Wall.

The major shortcomings of the framework so far outlined can be grouped under three major headings  (not so identified by Stiglitz, though frequently illustrated by his and other accounts):
  1. Economic Caveats
  2. Institutional & Political Failures - the rules and conventions of the game.
  3. Other Views.
First, though, a prior question: 
1.    Does globalisation reduce or increase inequalities?

Good question, though probably too early to tell:  See, for example, Lindert & Williamson (2001)  for an account of the evidence. They conclude:
"Sources of World Inequality 1500-2000: The Big Picture:  Some patterns have emerged through the complexity of history which suggest a tentative answer to the question posed by this essay’s title: Does globalization make the world more unequal?  The patterns cluster around two observations. One is that the gainers from globalization were never all rich and the losers were never all poor, or vice versa. The other is that participants in globalization pulled ahead of non-participants. This was true both for excluded or non-participating groups within countries as well as for excluded or non-participating countries. How these patterns emerge from five centuries of diverging world incomes and a shorter period of globalization is summarized in Table 5." 



Lindert and Williamson also ask: How Unequal Would a Fully Integrated World Economy Be?
"What if we had a huge world economy, even bigger than the world economy back at the mid-twentieth century, with a unified currency and only negligible barriers to trade, migration, and capital movements? Would such an economy be more unequal than the world of today? We have good examples today of huge integrated economies, at least as big as the world economy in 1950. One obvious example is the United States. Japan is another, and the European Union is moving toward becoming the third giant integrated economy. How unequal are incomes within these already-globalized economies? Less unequal than in today’s only partly globalized
world economy where the gini coefficient of inequality in income per capita at international (PPP) prices in 1992 was .663. The gini for the more integrated United States economy, by contrast, was only .408 in 1997 and that for Japan was only .249. There is nothing inherently less egalitarian about a large integrated economy compared with our barrier-filled world. One might still fear that a truly globalized world would have vast regions with inferior education and chaotic legal institutions, so that the future globalized world would be more unequal than the United States or the European Union today. If so, then the source of that inequality would
be poor government and non-democracy in those lagging countries, not globalization."

NOTE The Gini coefficient is a number between 0 and 1, where 0 corresponds with perfect equality (where everyone has the same income) and 1 corresponds with perfect inequality (where one person has all the income, and everyone else has zero income).

[Source:  DOES GLOBALIZATION MAKE THE WORLD MORE UNEQUAL? by  Peter H. Lindert, University of California, Davis, and,  Jeffrey G. Williamson,  Harvard University,  A revision of the paper presented at the NBER Globalization in Historical Perspective conference in Santa Barbara, California, May 3-6, 2001. [The authors thank François Bourguignon andChristian Morrisson for the chance to use pre-publication estimates from their ongoing work on global inequalities. We also acknowledge with thanks the detailed comments of Alan Taylor on earlier drafts, discussions with David Dollar and Andy Warner, as well as comments made by participants at the NBER Globalization in Historical Perspective conference. Williamson gratefully acknowledges the financial support of the National Science Foundation SES-0001362.]

On the other hand, at the local level at least, there is evidence that globalisation (read multinationalism perhaps) does have an effect on local communities which is not all good- e.g. the Wal-Mart® and Rural Poverty study by Goetz and Swaminthan.  There appears to be a dichotomy between the aggregate, average effects of globalisation, and at least some local effects. It does not seem implausible that  multinationals, conglomerates and multiples opening up in previously semi-independent communities will have the effect of eroding the previous socio-economic networks and social capital (See, for example, the idea of Keystone sectors, by Kilkenny et. al.- You will need to use your "Browser back: button to return here)

The Other Question: Does Inequality Reduce Growth & Development? 
For some interesting insights into this question, see: William Easterly, "Inequalility does cause under-development: new evidence", Working Paper No. 1, Centre for Global Development. 2002. Peter and Ashley Timmer also make some pertinant points on this question, in relation to the launch of three books from the World Institute of Development Economics Research (WIDER) of the United Nations University (UNU) on the subject in 2004: 5 pages which are well worth reading:
Wider Angle: “Reflections on Launching Three Books about Poverty, Inequality, and Economic Growth”
2.   Economic Caveats

a)    The Macroeconomic Policy Trilemma:  Capital Market Liberalisation
The critical lesson from Macroeconomics is the so-called policy trilemma. The following account of this trilemma is taken from Obstfeld and Taylor (2002) with additional comment by DRH in italics
"The macroeconomic policy trilemma for open economies (also known as the “inconsistent trinity” proposition) follows from a basic fact: An open capital market deprives a country’s government of the ability simultaneously to target its exchange rate and to use monetary policy in pursuit of other economic objectives. The trilemma arises because a macroeconomic policy regime can include at most two elements of the “inconsistent trinity” of three policy goals:
(i) full freedom of cross-border capital movements;
(ii) a fixed (or managed) exchange rate (see (Note); and
(iii) an independent monetary policy oriented toward domestic objectives.

If capital movements are prohibited (meaning regulated in practice, since no country can afford to eliminate all capital movements), in the case where element (i) is ruled out, a country on a fixed exchange rate can break ranks with foreign interest rates and thereby run an independent monetary policy (though in so doing, it runs the risks of chronic balance of payments difficulties if the fixed or managed rate is inconsistent with international capital markets, in which case it will need to manage its own capital inflows and outflows, through currency reserves government loans etc.). Similarly a floating exchange rate, in the case where element (ii) is ruled out, reconciles freedom of international capital movements with monetary-policy effectiveness. But monetary policy is powerless to achieve domestic goals when the exchange rate is fixed and capital movements free, the case where element (iii) is ruled out, since intervention in support of the exchange parity then entails capital flows that exactly offset any monetary-policy action threatening to alter domestic interest rates.

Recognition of the trilemma leads to our central proposition, that secular movements in the scope of international lending and borrowing may be understood in terms of this trilemma. Capital mobility has prevailed and expanded under circumstances of widespread political support either for an exchange-rate-subordinated monetary regime (for example, the gold standard), or for a monetary regime geared mainly toward domestic objectives at the expense of exchange-rate stability (for example, the recent float). The middle ground in which countries attempt simultaneously to hit exchange-rate targets and domestic policy goals has, almost as a logical consequence, entailed exchange controls or other harsh constraints on international transactions.
Note: The choice between fixed and floating exchange rates should not be viewed as dichotomous; nor should it be assumed that the choice of a floating-rate regime necessarily leads to a useful degree of monetary-policy flexibility. In reality, the degree of exchange-rate flexibility lies on a continuum, with exchange-rate target zones, crawling pegs, crawling zones, and managed floats of various other kinds residing between the extremes of irrevocably fixed and freely floating. The greater the attention given to the exchange rate, the more constrained monetary policy is in pursuing other objectives. Indeed, the notion of a “free” float is an abstraction with little empirical content, as few governments are willing to set monetary policy without some considerations of its exchange-rate effects. If exchange rates are subject to pure speculative shocks unrelated to economic fundamentals, and if policy makers are concerned to counter these movements, then monetary control will be compromised.

Capital flows and their control seen as vital:  UNCTAD, in their 2004 World Development Report, also emphasise the importance of stability of world capital markets, especially as these affect exchange rates, and also advocate some regulation of exchange movements.
UN World Development Report, 2004  highlights:  So, a Tobin Tax?  James Tobin, Nobel Laureate, proposed a tax on foreign exchange transactions to a) reduce the volume of (mostly speculative) foreign exchange dealings, and hence reduce volatility of the market,  b) raise considerable funds for development purposes.  This tax was originally proposed in 1972, and then largely forgotten or ignored, but has recently been put back on the Agenda by the Association for the Taxation of financial Transactions for the Aid of Citizens (ATTAC) with the added rider, not endorsed by Tobin himself, that the funds raised should be used for development purposes.  (See, also, the Tobin Tax Initiative).  [The question of the disbursement of tax revenuse for development raises the issue of who should be responsible for this, presumably the present international agencies - the IMF and theWorld Bank, which might not be the best channel, in view of the criticism of these insitutions].

The idea is very simple: at each exchange of a currency into another a small tax would be levied - lets say, 0,5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis, often on very small margins (though very large volumes). So a very low tax would dissuade these small margin traders, without discouraging the trade-related or long term (investment) capital movements across the exchanges.

The problem is that short-term capital movements across exchanges (speculating on future movements of exchange rates) can be destabilising - if the market thinks a currency is going to devalue, then currency traders all sell, and the exchange rate does depreciate, encouraging further sales in a speculative bubble (or hole, in this case), and vice versa - so short-term market  sentiments govern exchange rates, rather than longer term fundamentals (as reflected in the Purchasing Power Parity rate - see Macro Notes).

The counter-argument often used is that liquidity (i,e, volume of forex trading) is very important in these markets, otherwise the low (thin) volumes of trades in forex can lead to even more volatility - and therefore any restriction on forex trading is a bad thing - speculation is good because it allows traders to spot and chase misaligned (disequilibrium) forex prices, buying cheap and selling dear, and hence encouraging prices to achieve their equilibrium levels quickly.  All this is fine, so long as the markets are well informed and intelligent - one would not expect much speculative activity since a little of it would quickly return to their 'equilibrium' levels. However, when the forex volumes become large (very liquid markets), the equilbria tend to be very short-term - lots of specualtive activity, and small discrepancies appear and disappear continuously, encouraging further speculation - which can produce waves in exchange rates - too much liquidity - too much fluidity - the flows need baffling, much as liquid cargoes in large ships need baffling or buffering to prevent instability.

 
b)    What the Free Market CANNOT deliver

Institutional Framework:  The textbook free market (specialisation and trade) requires that there is a socio-economic foundation of accepted norms, rules, codes and conventions (North and Williamson etc. call these things 'institutions') which both accept and support the activities of private enterprise in seeking to provide what the market (consumers) require and are prepared to pay for. 

If the market works effectively, it is supposed to ensure that no one can be made better off without making someone else worse off - the Pareto welfare criterion, as demonstrated by the principles of general equilibrium. But this market system presupposes a framework of Common law (government) to provide:
The invisble hand of the market (Adam Smith) is inevitably and critically joined to the long arm of the law - otherwise it cannot possibly work properly. The lack of a well developed institutional infrastructure to support markets is bound to lead to substantial misfunction, if not outright disaster. With no effective laws and associated police and judicial systems, contracts will not be honoured, property will be stolen, funds mis-appropriated - the market system will fail.  Many of the difficulties experienced in the liberalisation of the former Soviet Union were to be expected in the absence of these vital institutions (and the associated lack of any common social acceptance of and legitimacy for the market system). Russia itself was always going  to be especially problematic, since it had never operated effectively as a market system (unlike most the Central and Eastern European satelites) having been dragged almost directly from a Feudal system by the Communist Revolution in 1917.  There was no folk memory or history of market systems to draw on in Russia, whereas there was in the Central European countries.

Equitable Outcomes:  The free market relies on the pursuit of self-interest - profits and earnings to make a living, and consumption spending to have a life.  Furthermore, the workings of the system practically guarantee that incomes (and especially wealth - see below) will become concentrated - those that do best will prosper more than those who do not, and will manage to pass on their gains to their heirs and successors. Even in the most equitable world possible, the simple necessities of providing for childhood and old age would ensure some significant concentration of wealth (savings).  Suppose that everyone earns the same wage, and that this wage stays constant throughout the working life (21 - 60), and that everyone lives to be 70, and that everyone is responsible for providing  for the upkeep of one child (their replacement!), and their own retirement (at the same constant level of consumption as everyone else). Ignoring any compound interest, the necessary savings to finance this entirely equitable system would concentrate 50% of the population's wealth amongst less than 30% of the people, and  30% of the wealth amongst less than 20% of the people.

In practice, the pursuit of self-interest rewards the innovative (and lucky) more than the also rans, and the  protection of private property ensures that these gains will be largely preserved (unless dissipated by either altruistic patriarchs or stupid and incompetent successors). Although the market system is supposed to ensure (if working effectively) that no pure or supernormal profits can persist - everyone is rewarded in the long run according to the  contribution their resources make to  social welfare - in practice it is pursuit of profit which drives the supply side of the economy, and pure or excess profits will be the result for some, even if  difficult to preserve indefinitely in the face of competition. These  temporary profits concentrate wealth amongst  the lucky and the innovative, and can be preserved in ownership of capital and other assets.

Furthermore, nothing in the free market guarantees that the initial endowments of the factors of production (land; labour skills, expertise, capacity; capital or management) of people will be equitable. The free market is only efficient (could not be bettered in the Pareto sense) in using these resources given their initial distribution amongst the population.  This initial distribution (whenever we decide this should be) will not be equitable.  Those with few resources (low education, little or no capital, no land) are likely to remain poor, while those unable to contribute to the economy, for whatever reason, will be destitute.

Civilised societies recognise this, and do something about it through their governments. Approximately half the total tax revenues raised by the UK government are used to support the less well-off in one form or another (pensions, unemployment benefit,  social security etc.) through transfer payments.  Another substantial part of tax  revenues is used to provide merit goods:  especially education and health, where ability to pay is not regarded as an appropriate or civilised way of distributing these goods and services. Another part is used to support local and regional development initiatives (and planning controls), to alter an otherwise free market distribution of development and growth geographically to better meet the wishes of society.

One Person, One Vote:  Market signals are provided by prices - the votes about who gets what and what is produced are pound notes. The rich consumers are necessarily more powerful (as individuals) than the poor, and have more say in the outcomes of the free market. However, as Karl Marx observed, if the rich capitalists only pay attention to their own (rich) needs, which tend to become more concentrated (though see below), then their markets will shrink, and the foundation of their own income and wealth will collapse. So, enlightened markets can be expected to try and develop their own customers, which involves encouraging and  assisting (within reason) as many people as possible to become richer consumers. By the same token, providing there is freedom of complete information (see below), one would expect enlightened firms not to poison or harm their customers (otherwise theywill loose their livelihoods) or to harm their workers (or they loose their capacity to produce).


c)    Market Failures
Economic Textbooks typically list the assumptions of the competitive market to be:
 In addition to these typical assumptions of the competitive market as it might be when in equilibrium (balance with the prevailing  conditions), the theory says little or nothing about the costs and difficulties of transition or dynamic change. When trade is opened up between two previously isolated communities, or  within a community previously governed by central planning and command and control systems, competition says that there will have to be substantial resource reallocation - people will have to stop doing what they were doing before, and do something else.  This takes time, effort, and resource, and will  tend to be resisted unless people believe in the benefits. Unless these benefits are quickly apparent,  credibility and legitimacy of the reforms and liberalisation are likely to be resisted. It is not hard to believe that many in Russia remain to be convinced that either the market system is demonstrably better than the previous Communist system, or that the process of liberalisation is not simply a backdoor method by which the rich and powerful (especially the US) can take control of their lives.


3.    Institutional & Political Failures
A recent (2000) economic analysis of Structural Adjustment programmes by Dollar and Svensson using World Bank data on 220 reform programmes, examines two hypotheses: 1) that success of reform programmes depends "largely on political-economy factors within the country attemtping reform."  They use the phrase "commitment technology" to indicate that signing up for structural adjustment assistant can "provide an opportunity for reformers to tie their own hands, in the same way that membership of the WTO commits governments to "good" policies and insulates it from domestic special interests (though they cannot test this proposition with their data); 2) "whether the donor community's effort increases the probability of success or failure of a reform programme"

They find, through econometric analysis, that the World Bank's efforts do not (by and large) affect the success or failure of the reform (hypothesis 2 fails), while 1 is largely supported - "The key to succesful adjustment lies in finding good candidates to support".  They are restricted by their data to judging success and failure of reforms by using the Bank's own (though mostly arm's length) Operations Evaluation Department's (OED) judgements of success and failure - has trade become more liberal, have enterprises been privatised? - and these turn out to be well correlated with other (western developed) indicators of success - lower inflation, and reduced government budget deficits (budget control).

The International Food Policy Research Institute has a number of resources adressing the issues of globalisation and world's poor - see, in particular: Narayanan & Gulati:  Globalization and the Smallholders: A Review of Issues, Approaches, and Implications (2000)- who find that there are no substantive generalisations that can be made either in favour or against the impact of globalisation on smallholders - it all depends on the associated enabling factors: "greater vertical coordination, removing credit constraints, reducing transactions costs, building social capital, greater role for public sector in providing infrastructure and facilitating institutions and also greater initiatives for international capacity building" and on coping strategies: "provision of credible safety nets and risk coping instruments, promoting exit options particularly through promotion of opportunities in the rural non-farm sector, guarding against harmful monopolistic competition, and focused research on technologies for small farmers."  They conclude that: "Needless to say, the relative importance of these factors would vary across regions. It is thus important to identify which battery of policies is appropriate depending on the unique circumstances of each region. It is equally important to draw lessons from the several success stories to be able to replicate these successes on a larger scale in a meaningful way. Only then can small farmers make big gains from globalization." 

Robert Paarlberg concludes his review of Governance and Food Security in an age of Globalisation (IFPRI 2020 brief no. 72) as follows:
"We are often told we must “think globally, act locally.” This is good advice for some truly global issues (such as HIV or climate change) but in the area of food security, thinking globally has its limits. Despite globalization, most hunger today is still highly localized and locally generated. Local problems such as poor rural infrastructure, little access to health services or education, gender or ethnic or caste discrimination, landlessness, governmental weakness or corruption, and violent internal conflict, are problems difficult to address at the global level. Most of these local problems must be corrected through improved governmental performance at the national level, one state at a time. So for the purpose of improving food security today, our first governance motto should be “think locally, then act nationally.” "

Rosengrant and Hazell conclude their review of Transforming the Rural Asian Economy: the unfinished revolution (IFPRI 2020 brief 69):
"Good governance is another key to sustained growth. Transparent and responsive governments must increase the level of investment made in rural infrastructure, agricultural research and extension, education, and health, and expand the reach of social safety-net programs. Some countries could meet a significant part of these costs by reducing wasteful public expenditures in rural areas, particularly on input and credit subsidies, and by improving the efficiency of public institutions. Natural resources should be better managed as well. Completion of the rural transformation, radical reduction in poverty, and improvement in food security in rural Asia are attainable if governments resist complacency."

Garrett concludes his appraisal of . Challenges to the 2020 Vision for Latin America: Food and Agriculture Since 1970. James L. Garrett, IFPRI - IFPRI 2020 brief 48,  1998, as follows;

"Achieving the 2020 Vision for Latin America requires: All these informed and authoratative assessments of policy reform emphasise 'good governance' - the need for strong institutions and stable, effective government for reforms to be effective.

This is a conclusion also reached by Dani Rodrik, "Globalisation, social conflict and economic growth".  World Economy, Mar 98, Vol. 21 Issue 2, p143 - 159, who considers the performance of several different economies during the past fifty years or so, and explores the relationships between economic performance and globalisation (openess to world trade and capital markets.  He concludes:  "It is not whether you globalise that matters, it is how you globalise. The world market is a source of disruption and upheaval as much as it is an opportunity for profit and economic growth. Without the complementary institutions at home - in the areas of governance, judiciary, civil and politicalliberties, social insurance, and of course education - one gets too much of the former and too little of the latter. The weakness of the domestic institutions of conflict management was the Achilles' heel of the development strategy pursued in Latin America,Middle East, and elsewhere, and this is what made these countries so susceptible to the external shocks of the 1970s.
This weakness persists. Reforms in the areas of macroeconomic policy, trade policy, deregulation and privatisation have not been matched by deeper reforms of political institutions, bureaucracies, judiciaries, and social safety nets. Meanwhile, the world economy has hardly become a safer place. This leaves developing countries highly vulnerable."


Several other of the IFPRI policy briefs are worth a look e.g.
42. Africa's Changing Agricultural Development Strategies. Christopher L. Delgado, IFPRI. 1997

In addition: see 2020 Focus 8: Shaping Globalization for Poverty Alleviation and Food Security. Edited by Eugenio Díaz-Bonilla and Sherman Robinson. (Thirteen Briefs). and
2020 Focus 4: Promoting Sustainable Development in Less-Favored Areas. Edited by John Pender and Peter Hazell. (Nine Briefs). November 2000 / 18 pages

Current Authorative Criticism of Structural Adjustment programmes. SAPRIN -the Structural Adjustment Participatory Review International Network (2002) has produced a thorough critique of SAPs, "The Policy Roots of Economic Crisis and Poverty", which makes interesting reading, especially since it cites very considerable World Bank resistance to their criticisms (see page 3).  The general lesson coming from these experiences seems to be that Sequencing and Fair Play are very important:
So, what is the conclusion? Are globalisation, liberalisation and the market system wrong?  Or are our current efforts and socio-political systems ill-equipped and poorly organised and managed to properly civilise the market?  Is it an accident that this indictment is titled: Policy Roots, rather than market system roots?

See also: FAO E-Journal of Agricultural & Development Economics: Vol 1 (2), 2004: Globalisation of Food Systems - Impact on Food Security and Nutrition, especially the article by  Peter Timmer: Food Policy in the era of supermarkets: what's different?  He says:
"The failures of globalization provide the analytical theme for the new food policy paradigm. Figure 2 characterizes this theme around the analytics of “exclusion”. At the national level, the question is why so many countries have been “non-globalizers”. The essence of the debate is whether the global economy, in the form of rich countries and transnational corporations, has excluded these countries from participating in trade and technology flows, or whether the countries themselves have been unsuccessful in the process because of domestic shortcomings in policies and governance (including corruption).
The debate has a local focus as well. Within an otherwise well-functioning and growing economy, many groups can be excluded from the benefits of this growth. Unskilled workers unable to graduate to higher technologies and uneducated youth unable to compete in a modern economy are a sizeable proportion of the work force in countries with poor labour and training policies and resources. Globalization makes it more difficult for these countries to compete for trade and investment flows that would provide the first steps up the ladder of higher productivity." (Don't know what the evidence or logic is for the last statement)
Timmer's conclusions, especially, are worth taking seriously.

4   Other Views

There are other points of view. For example, a recent press release/information pamphlet from the NuS, the World Development Movement, War on Want and Freinds of the Earth accuses the UK government of being part of the problem rather than part of the solution. "The government continues to espouse an economic model which promotes privatisation and liberalisation as the keys to poverty reduction and environmental protection, despite massive resistance from local communities across the world. Those on the receiving end – many of them partners of the organisations listed above – have stated clearly that the UK’s lead role in promoting privatisation, deregulation and ‘free trade’ has led to increased poverty and environmental degradation on a grand scale. We believe it is time for their voices to be heard."
Left versus Right?  For a more academic discussion of the Political agendas being pursued here, see, for example, Globalisation, the reformist Left and the Anti-Globalisation ‘Movement’, by T. Fotopoulos, Democracy & Nature, 7 (2), 2001.
Plenty of material here (and also elsewhere) for discussion!!

Comments and suggestions?
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