Approaches to Poverty Eradication and Economic Development VIII
Empty bellies have no ears
The global contest between the different development models also entails a dispute about the overall impact of the process of globalisation. There are many who argue that in general, this process has expanded human welfare throughout the globe. These advance the view that the hopes of the poor and underdeveloped countries of the world for a better life lie in their integration within the global economy.
In an article published in the 'Financial Times' on 24 January 2001, entitled "Growth makes the poor richer", its well known columnist, Martin Wolf, says "One thing, above all, is quite clear: if the world is to become less unequal through raising the bottom, rather than collapsing the top, and still more if mass poverty is to be eliminated, it can only be via successful integration, not its opposite." We must however counterbalance this prayer to the future with global experience to date. For an account of this experience, we shall rely extensively on a May 2001 paper written by Professor Robert Hunter Wade of the London School of Economics, entitled "Is Globalisation Making World Income Distribution More Equal?" He writes: "If we are interested in world income distribution from the point of view of most of the issues that concern the world at large.the conclusion is unambiguous: world income distribution became much more unequal over the past quarter century, whether we use decile distributions or an average coefficient like the Gini and whether we weight individuals or countries equally.
"Moreover, the gaps in 'real' well-being are probably bigger than the income figures suggest.Those in the bottom half of the world income distribution have incomes that are not only lower but also more insecure, and they have probably faced rising insecurity over the 1990s (much of the new employment in low income areas is in jobs subject to short-term contracts and immediate dismissal.). "Most of the increase in inequality reflects the increase in the proportion of the world's households located at the extreme rich end and the extreme poor end of the world income distribution. On the one hand, population growth adds disproportionately to numbers at the poor end. On the other hand, technological change results in disproportionately fast increase in the numbers of households at the rich end, without shrinking the distribution at the poor end. "The prices of the industrial goods and services exported from high-income countries are increasing relatively faster than the prices of goods and services produced in low-income countries that do not enter into international trade. These price trends mean that the majority of the population of poor countries are able to buy fewer and fewer goods and services that enter into the consumption patterns of high-income country populations.
"The poorer countries and the poorer two thirds of the world's population suffer a double marginalisation: once through slower growing output, again through falling relative prices. "The capital inflows tend to occur when economic growth is relatively fast, and the combination of fast growth and capital inflows together tends to boost asset prices, which benefits mainly the rich (asset owners). The benefits to the poor take much longer to accrue through higher employment and government spending on services. So the capital inflows tend to widen national income inequality. "When a shock hits (as a result of financial crisis in a situation of financial liberalisation).the crisis ricochets around the economy, causing layoffs, falls in demand, rises in inventories, bankruptcies, cuts in government services, unrest. While the benefits of the capital inflows are shared 'oligarchically', the costs of the crisis are shared 'democratically', with immediate impacts on the poor and on the middle class which had taken on lots of debt during good times.
"The crises cause not only instability of developing country growth rates; they also cause a tendency to lurch towards another set of economic policies - even though there may be no good evidence that the previous policies caused the crisis. The most dramatic case in point is the wholesale revulsion towards 'import substitution' in Latin America in the wake of the 1980s debt crisis, and the embrace of neo-liberalism. The crisis was due largely to mismanagement of the capital structure (the debt structure) - the governments borrowed too much and the lending banks, mostly American, lent too much relative to the countries' capacity to pay. "But instead of seeing this as the cause of the crisis, the governments, encouraged by the IMF and the World Bank and the US Treasury, abandoned a set of economic policies that had in fact generated high growth in the 1960s and 1970s, and put in place a standard package of neo-liberal market opening measures. These have not delivered high growth, and they have resulted in high levels of (corporate, household and sovereign) indebtedness.Even 'The Economist', no foe of income inequality, agrees that rapid market liberalisation is likely to widen income inequalities.(5 November 1994).
"(Another cause of the growing income inequality is) the continuing redistribution of income in the OECD countries through the tax system and the welfare state, which in the case of the UK in 1992 reduced the ratio of the income of the top 20 percent of Britons to the poorest 20 percent from 25:1 before taxes and transfers to 7:1 afterwards. This welfare state system prevents anyone living in the OECD countries from falling very far down the world income distribution. And of course it gives a huge incentive for people living elsewhere to try to enter the OECD world by whatever means possible. "The richest 10 percent of the world's population is pulling up from the median, and the poorest 10 percent is falling away from the median; the world middle class, so to speak, remains tiny, while the gulf between the 15 percent of the world's population living in the richest countries and the three quarters living in the poorest countries remains huge.
"Income divergence helps to explain another kind of polarisation taking place in the world system, between a zone of peace and a zone of turmoil.At least for those in the top half of rich country income distributions, this is a blissful time to be alive. On the other hand, the regions of the lower and middle income pole contain many states whose capacity to govern is stagnant or eroding, mainly in Africa, the Middle East, Central Asia, Russia, and parts of East Asia. Here a rising proportion of the people find access to basic necessities restricted at the same time as they see people driving Mercedes - on television if not outside their own windows. "World inequality matters as an indicator of global political strain. But it also matters for more directly economic reasons, as an indicator of the limits of growth of the rich countries. Marginalisation of poor country populations robs rich country producers of customers. "The US after World War Two realised that its own growth would be imperilled if it did not redistribute massively to Europe, including the defeated states. The Marshall Plan redistributed around 4 percent of US GDP for several years in order to generate in Europe the purchasing power needed to buy US goods, as well as to keep communist movements from state power.
"Today, resource transfers from rich countries to poor, and downwards redistribution within poor countries (including via the mechanisms used in the West, such as collective action by the poor and slowly rising legal minimum wages or earned-income credits), are in the collective interests of the rich countries as the Marshall Plan was to the United States. Those who respond to evidence of rising world inequality by saying, 'pulling up the poor still remains a nobler calling than pulling down the rich', overlook this. Without downwards redistribution, the rich may not remain rich. "It might be argued (as did Martin Wolf), that since the biggest increase in poverty came in Africa, central Asia, rural India and rural China - places not connected to the global economy - this shows that globalisation works to reduce poverty. The solution for these areas is fuller integration into the world economy - more globalisation rather than less. (This position) begs the question of the conditions for 'successful integration'.
"People in the bottom deciles suffer from the weakness of capitalist development in the regions where they live. The question of development policy is whether this weakness can be cured mainly by opening up their markets, investing in infrastructure, removing price distortions, and strengthening the rule of law. Many economists say that the positive correlation between average incomes and countries' integration into the world economy (high trade to GDP, for example) supports the case for a development strategy based on maximum integration. "But this argument obscures the distinction between the policies that the richer countries followed while they were getting rich and those they followed once rich. The East Asian states achieved great economic success.by creating national economic space that was partially separate from the world economy, within which resources could be combined and made to produce nationally-marketable products even when those products would not have been able to compete against import substitutes; at the same time as they gave strong incentives for producers to export to world markets. "They recognised - as did the World Bank and even the US government in those days - that if they just concentrated on 'levelling the playing field', the players might not show up and those who did might include few of their nationals. Their strategy for creating self-generating development and integrating into the world economy in a strategic way fits neither of the two alternatives - full-scale integration or isolation - that Martin Wolf, among others, pose.
"In particular, they were careful about the terms on which they allowed foreign capital to enter (whether in the form of direct foreign investment or loans), and about the liberalisation and opening of the financial system. In the 1990s Korea abandoned its earlier caution as it came under heavy US pressure to open its financial markets in return for US support of its OECD membership. It was rewarded by being far more adversely affected by the Asian crisis of 1997-98 than nearby Taiwan, which remained more cautious about financial liberalisation and opening. "In African conditions today, what possibility is there of national populations which are 50 percent functionally illiterate and innumerate getting access to the productivity gains of new technologies? In open competition with labour forces and infrastructures elsewhere, they will always lose, however low the exchange rate (except where high transport costs give natural protection).
"They should put up partial barriers as the East Asians did, behind which partly different rules apply, so as to balance (a) the benefits of comparative advantage and competitive discipline, against (b) the benefits of putting resources to work that could not be profitably put to work in a fully open economy. They should have a partly closed capital account, and should take care to minimise the 'inverse correlation' in their capital structure (minimise the extent to which repayment obligations are lower than capacity when capacity to repay is higher and higher when capacity to repay is lower). Hence they should pay more for foreign loans during good times, by hedging or by indexing them to the price of their main exports or by denominating them in domestic currency; and they should also hedge the price of their main commodity products.
"China is in the midst of perhaps the fastest and most far-reaching transformations seen anywhere in the past two hundred years - but doing so in a 'gradualist' way in line with the broadly dirigiste strategy of pre-1970 Japan and pre-1990 South Korea and Taiwan; and thereby violating many current World Bank precepts about how countries should develop. Russia and most of the Soviet empire have followed a Big Bang strategy of full-scale integration and privatisation (with Harvard-based American advisers and the World Bank playing the leading role in devising and implementing the Big Bang). The result? Large parts of the former Soviet Union are more impoverished than they were in 1989, and the most profitable assets have fallen into the hands of economic gangsters. In the comparison, China easily wins. "The great danger of the state governing the market is wholesale corruption and incompetence.A development strategy focused on building up the institutional infrastructure of markets, investing in infrastructure on roads, schools, health systems, and promoting the rule of law, may be about the best that can be hoped for.
"In the longer run, building up organisational capacity outside the state is important. 'Non-governmental organisations' can constitute a form of social mobilisation through which governments can be made more accountable.But NGOs tend to be single-interest and therefore politically divisive. They have to be balanced by political parties and the state itself, organisations where different interests can be aggregated, brought to a point of convergence, compromises struck, priorities established. "By and large, stronger markets need stronger states, and stronger states need both stronger markets and stronger civil societies.The Marshall Plan's programmes in post-war Europe recognised that redistributive flows had to be accompanied by measures to build state capacity to manage the national economy and regulate markets, financial markets especially. "Concerted strategies to strengthen states, industries, and civil societies in low income parts of the world have to be complemented by more open markets in Europe, North America and Japan for exports from these areas; and by increases in the flows of cheap, low cost resources from rich countries to poor, to be invested in many sectors (like water treatment, universities) where private financiers have no interest. Without a big push, we can expect world income distribution to continue widening, especially between Subsaharan Africa and parts of South Asia, on the one hand, and the rest of the world. This will generate more global political turbulence and more economic crises - not only in the low income world but in the rich world as well.
"It is remarkable how unconcerned are the World Bank, the IMF, and other agenda-setting global organisations about world income inequality. The Bank' s World Development Report for 2000 even said that rising income inequality 'should not be seen as a negative' provided that the incomes at the bottom do not fall and the number of people in poverty falls. "It is striking that most of the organised opposition, as well as much of the support, for more globalisation comes from North America, western Europe and Oceania. Why have elites from developing countries for the most part subscribed to the globalisation agenda that western states, businesses, and multilateral organisations have been promoting, if a plausible case can be made that the gains of free markets for goods and capital tend to be concentrated in the top levels of the income distributions of their countries?...
"Part of the reason may be that elites in developing countries, like their counterparts in the rich world, are content to believe either that world inequality is falling, or that inequality is good because it is the source of incentives. They, like the intergovernmental economic organisations, worry about poverty. But they see no link between widening world income distribution and poverty; and they think that poverty can be fixed by providing the poor with welfare and opportunities without changing income and asset distributions or mounting an active state industrial policy. "The growing inequality in world income distribution is like global warming. Its effects are diffuse and long term, and there is always something more pressing to deal with. We don't seem to be able to rely on leadership and appeals to humanity to generate action. "The question is how much more unequal world income distribution can become before the resulting political instabilities, migration flows and social disruption reach the point of harming the rich world enough to move it to action.
"If today's inequalities continue to increase, if social policy continues to move in the direction of 'risk is an opportunity for individuals to profit from' and away from 'society has a responsibility to protect individuals from certain kinds of risks', if the operational norm of world elites continues to shift towards 'grab what you can and the devil take the hindmost as quickly as he can', opposition to the things called 'globalisation' will continue to spread. "We in the rich world should mobilise our governments, the multilateral organisations, and international NGOs - the actors who have the power to change the norms and rules of the world economy - to establish as an overarching priority a more equal world economic distribution, and not just, as now, fewer people in poverty." The realisation of the goal of a more equal world economic distribution requires that both domestically and internationally, countries and human society as a whole must implement comprehensive and integrated development programmes informed by the objective mentioned by Professor Wade, in favour of the "protection of the individual from certain kinds of risks", away from the concept "grab what you can and the devil take the hindmost as quickly as he can". Without this protection from the risks that Amartya Sen described as "unfreedoms", it will be impossible for South Africa, Africa and the rest of the developing world to succeed in the struggle against poverty and underdevelopment. That protection requires a conscious, determined and sustained transfer of development resources from the rich to the poor as well as a focused and effective use of such transferred resources to extricate the poor from the condition of dehumanising human backwardness.
And as Professor Wade has said, "Today, resource transfers from rich countries to poor, and downwards redistribution within poor countries (including via the mechanisms used in the West, such as collective action by the poor and slowly rising legal minimum wages or earned-income credits), are in the collective interests of the rich countries as the Marshall Plan was to the United States." Overwhelmingly, the bulk of the resources to which he refers are in the rich countries that constitute 15 percent of the world population. Within these countries, the development resources we are talking about, including the all important capital, are in private hands. Consistent with a fundamental law of the capitalist mode of production, the capitalists who own or control these resources put them to such uses as provide them with profit. However, the pursuit of this objective may not be consistent with the global goal of the defeat of poverty and underdevelopment, and the achievement of the objective of a more equitable distribution of income and wealth. Objectively, as we respond to the development challenge, we are obliged to focus on two critical matters. One of these is the role of the state in development. The other is access to the enormous resources in private hands, without which successful development will not take place.
In its 1999/2000 World Development Report, the World Bank said: "Mutual funds, hedge funds, pension funds, insurance companies, and other investment and asset managers now compete with banks for national savings.Institutional investors have taken advantage of the easing of restrictions in many industrial countries to diversify their portfolios internationally, enlarging the pool of financial capital potentially available to developing and transition economies. In 1995 these investors controlled $20 trillion, 20 percent of it invested abroad." At the same time, we must bear in mind that the bulk of foreign investment flows among the developed countries. The same World Bank Report said: "In 1997 developing countries accounted for 30 percent of the foreign direct investment stock, or $1.04 trillion, 90 percent of which originated in industrial countries. Five countries - Argentina, Brazil, China, Mexico, and Poland - received half the total for developing countries."
These World Bank observations highlight three important matters:
- there are huge volumes of capital in the developed countries which the developing countries need to access to achieve their development goals;
- this capital is in private hands and responds to market developments to seek the most profitable opportunities; and,
- these market possibilities draw this capital to a limited number of developing countries, partly drawn to these countries by the size of the domestic population.
This leads to the inevitable conclusion that the majority of the developing countries cannot rely on the market to gain adequate access to the capital available within the world economy. Other interventions must therefore be made to increase such access - hence the relevance of the correct call made by Professor Wade, that "We in the rich world should mobilise our governments, the multilateral organisations, and international NGOs - the actors who have the power to change the norms and rules of the world economy." to effect the resource transfers from the rich to the poor. Consistent with this, the 1999 UNDP Human Development Report said "Pro-poor growth is needed.An important step would be to establish an international transfer mechanism to encourage resource flows to poor countries - through private investment and through purposeful allocation of global revenues derived from taxing pollution or charging for use of the global commons."
The observations made by Professor Wade and the UNDP draw attention to the critical importance of the role of government in the struggle against poverty and underdevelopment. In this regard, the 1997 World Development Report of the World Bank said:
"The collapse of the Soviet Union - by then no longer an attractive model -sounded the death knell for a developmental era. Suddenly, government failure, including the failure of publicly owned firms, seemed everywhere glaringly evident. Governments began to adopt policies designed to reduce the scope of the state's intervention in the economy. States curbed their involvement in production, prices, and trade. Market-friendly strategies took hold in large parts of the world. The pendulum had swung from the state-dominated development model of the 1960s and 1970s to the minimalist state of the 1980s.
"The consequences of an overzealous rejection of government have shifted attention from the sterile debate of state versus market, to a more fundamental crisis in state effectiveness. In some countries the crisis has led to outright collapse of the state. In others the erosion of the state's capability has led nongovernmental and people's organisations - civil society more broadly - to try to take its place. In their embrace of markets and rejection of state activism, many have wondered whether the market and civil society could ultimately supplant the state. But the lesson of a half-century's thinking and rethinking of the state's role in development is more nuanced. State-dominated development has failed, but so will stateless development. Development without an effective state is impossible." All successful development initiatives since the Second World War confirm the conclusion of the World Bank - that development without an effective state is impossible. For the poor of the world, including our own, the importance of this observation is underlined by the fact that, despite its importance, the state does not own or control the huge volumes of capital available within the global economy.
The "resource transfers from rich countries to poor, and downwards redistribution within poor countries" of which Professor Wade spoke cannot and will not happen without the intervention of the state. If the state does not intervene, neither we nor the rest of the developing world will succeed to achieve the objectives of the eradication of poverty, underdevelopment and the inequitable distribution of income and wealth. Global poverty constitutes one of the greatest challenges facing humanity. To confront it will require the development of a strong world movement mobilised to oblige "the governments (of the developed countries), the multilateral organisations, and international NGOs - the actors who have the power to change the norms and rules of the world economy - to establish as an overarching priority a more equal world economic distribution, and not just, as now, fewer people in poverty." It also requires that the state everywhere, including in our country and the rest of Africa, should discharge its responsibilities to the people, fully understanding the observation made by the World Bank, that development without an effective state is impossible. Professor Wade expressed amazement that "elites from developing countries for the most part subscribed to the globalisation agenda that western states, businesses, and multilateral organisations have been promoting". Perhaps he should keep in mind the Turkish proverb - he who has no bread has no authority.
Perhaps the elites that lead peoples who do not have bread believe that they stand the greatest chance to persuade those who have authority to come to their aid by repeating the injunctions propagated by those who have. Perhaps they believe that, in any case, the age of revolutions is over, and that therefore they have no choice but accommodate themselves within the globalisation agenda set by the dominant voices in world politics and the world economy. But a Greek proverb says - you cannot reason with a hungry belly; it has no ears! Billions across the globe live with the reality of hungry bellies. Those who live in the comfort of wealth and prosperity may issue appeals to the poor to be patient because, in time, they too will enjoy lives of wealth and prosperity. They may go beyond this to close the doors to their countries to tell the poor of the world they should stay at home to await the arrival of a better life for themselves.
They will have to pay attention to what Professor Wade said, that "Without a big push, we can expect world income distribution to continue widening, especially between Subsaharan Africa and parts of South Asia, on the one hand, and the rest of the world. This will generate more global political turbulence and more economic crises - not only in the low income world but in the rich world as well." The rich world will need to remember that it cannot reason with a hungry belly; it has no ears! It will need to beware of the natives, whose only possession is hungry bellies without ears! In the era of globalisation, no country is an island.
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