Saturday, May 9, 2009

Exposing the Myths of Globalisation

 Globalisation like free trade is considered a natural historical process, which has evolved into its current form due to the interconcectness of the world that has made national borders irrelevant. In economic terms, globalisation refers to the growing integration of the world, as trade, investment and money increasingly cross international borders. Economic "globalisation" is always described as a natural historical process, the result of human innovation and technological progress. For this to work all barriers to the free flow of finance and trade require removing so the world acts as one global village.

Pro-globalisation thinkers argue Globalisation has been a centuries long process. Earlier forms of globalisation existed according to them during the Mongol Empire, when there was greater integration along the Silk Road. Global integration continued through the expansion of European trade, as in the 16th and 17th centuries, when the Portuguese and Spanish Empires reached to all corners of the world. Globalisation became a business phenomenon in the 17th century when the first Multinational was founded in The Netherlands. During the Dutch Golden Age the Dutch East India Company was established as a private owned company. Because of the high risks involved with the international trade, ownership was divided with Shares. The Dutch East India Company was the first company in the world to issue shares, an important driver for globalisation. Liberalisation in the 19th century is often called "The First Era of Globalisation", a period characterised by rapid growth in international trade and investment, between the European imperial powers, their colonies, and, later, the United States.

The term globalisation was coined in order to describe the activities of the large American companies in the mid-1990s. The end of the cold war put the US in a conundrum; Ronald Reagon funded the arms race with the USSR from influential financial circles around the world. With the collapse of the USSR the inflow of such large sums of money resulted in the rise of the dollar relative to other currencies resulting in an expensive dollar that in turn made the climate for US multi-nationals to export their goods virtually impossible. US companies found it too expensive to maintain a competitive position overseas when it was costing them so much making the products at home. Hence cheaper foreign markets had to be found.

During Bill Clinton's reign, Congress agreed to the NAFTA (North America Free Trade Agreement), which eventually George W. Bush signed, with Canada and Mexico. The agreement enabled American and Canadian companies to manufacture whatever commodities they wanted to in Mexico, where the workers' wages are extremely low, and sell them in American and Canadian markets.

The setting up of production facilities in a foreign country making use of the cheap labour, with very little labour laws and often-outright abuse was termed globalisation. Hence globalisation is merely a cover for the industrialised world to use cheaper production facilities of the third world when their own markets are too expensive.

There are a number of other myths to globalistaion which are outlined below.

1. Globalisation reduces poverty

Since the 1960s, the prevailing theory of economic development has been the opening of markets to global compitition and the exporting of goods known as modernisation theory, The Asian tiger economies of China, South Korea, Taiwan, Singapore and Hong Kong are held as successful products of the theory, advocates of this theory maintain that industrialisation and the diffusion of liberal economic ideas would transform traditional economies and societies. These influences would place poor countries on a path of development similar to that experienced by Western industrialised nations during the Industrial Revolution. However very little has changed, consider the following: Poverty is the state for the majority of the world's people. 3 billion people in the world live on fewer than two dollars a day, another 1.3 billion people live on less than one dollar a day; the third world owes over $1.2 trillion in debt, 1.3 billion have no access to clean water; 3 billion have no access to sanitation and 2 billion have no access to electricity. The developing world now spends $13 on debt repayment for every $1 it receives. The third world has 75% of the world's population, however it consumes only 20% of the worlds foodstuff and minerals and accounts for around 7% of global trade.

The World Bank and IMF have been at the forefront of implementing liberal policies, which is meant to remedy the situation. However their structural adjustment policies have ensured Africa remains impoverished and its people are unable to even live beyond 5 years of birth in some parts. The basic assumption behind structural adjustment was that an increased role for the market would bring benefits to both poor and rich. This is built upon the classical economic theory that the market allocates resources better, in the Darwinian world of international markets, the strongest would win out. This would encourage others to follow their example. The development of a market economy with a greater role for the private sector was therefore seen as the key to stimulating economic growth.

In perhaps the most comprehensive study of poverty to date to date, Scorecard on Globalisation 1980-2000, Mark Weisbrot, Dean Baker and other researchers at the Centre for Economic and Policy Research documented that economic growth and rates of improvement in life expectancy, child mortality, education levels and literacy all have declined in the era of globalisation (1980-2000) compared to the years 1960-1980. From 1960-1980 many countries maintained protectionist policies to insulate their economies from international markets in order to nurture their domestic industries and allow them to become competitive. Those policies are the same ones on which US economic prosperity was built.

Hence this survey is very clear that Globalisation was the direct cause of poverty for the third world, the free market in no way helped alleviate poverty, so any continuation of liberal economic policies in the third world will result in the poor getting poorer.

2. Free Markets are the only means for allocating resources efficiently

Free markets have a proven record of ensuring the rich get richer and the poor get poorer. This was confirmed in December 2006 which saw the culmination of a global study - from the World Institute for Development Economics Research of the United Nations. Some of its findings are staggering; by gathering research from countries all over the world the study's findings concluded that the richest 1% of the world owns 40% of the planet's wealth and that only 10% of the world's population owned 85% of the world's assets.

Richard Gobbins in his award winning book ‘Global Problems and the Culture of Capitalism' confirmed this, he said "The emergence of capitalism represents a culture that is in many ways is the most successful that has ever been deployed in terms of accommodating large numbers of individuals in relative and absolute comfort and luxury. It has not been as successful, however, in integrating all in equal measure, and its failure here remains one of its major problems."

The disparity in wealth allocation is not just a phenomenon in the developing world but rather a huge problem even the developed world suffers from. This was highlighted in a 2005 report by Harvard in which it was calculated that 60% of earned income in the US was by the top two highest earning brackets. This means the majority of people in the US only received 40% of income that was generated.[1] Similar to the US is the UK where the wealthiest own 25% of the nation's wealth but the poorest, which is half of the UK population, they share in only 5% of the UK's wealth.[2] The UK's richest 10% have more then 50% of the nation's wealth.

3. Globalisation requires the removal of trade barriers, which inevitably leads to development

The world's industrial nations have used the cloak of globalisation to protect there own economies from any foreign competition whilst the developing world is forced to leave them open in the name of globalisation.

The US historically has provided ample protection to its industries in its infant stages ensuring infrastructure was developed completely throwing the ‘free market' model out of the window.

Today the US intervenes in the health sector with huge subsidies as well as steel ensuring no foreign companies can enter the US market. The US ensures its agriculture remains competitive globally by splashing out over $4 billion in subsidies. Similar to the US is the European Union who under its CAP (common agricultural policy) spends more then 50% of the EU budget on subsidizing European farmers.

Many economists have exposed the British and American approach historically to free trade. Dr Ha Joon Change expert in economic history at Cambridge mentioned ‘it was only after WW2 that the USA - with its industrial supremacy unchallenged - finally liberalized its trade and started championing the cause of free trade.' [3] Similarly Britain only espoused free trade to halt the move to industrialisation on the continent by enlarging the export market for British agriculture. Before reaching a position of eminance in commerce Britain protected its industries from foreign competiotn by making use of high and long lasting tariff barriers. The overall liberalisation of the British economy was a highly controlled affair overseen by the state and not achieved through a laissez-faire approach.

Below is a list of current barriers to trade the world's rich nations impose on the world in order to protect their economies:-

  1. The United States spends over $4 billion in subsidies to America's 25,000 cotton farmers.
  2. Japan imposes a 490 percent tariff on foreign rice imports to protect its own rice farmers.
  3. The average cow in Switzerland earns the annual equivalent of more than $1,500 in subsidies each year as the Swiss government seeks to protect its dairy industry from foreign competition.
  4. The EU is spending €3.30 in subsidies to export sugar worth €1. In addition to the 1.3bn in export subsidies recorded annually in its budgets, the EU provides hidden support amounting to around €833m on nominally unsubsidised sugar exports.
  5. Corn subsidies are more than $85 billion per year in the European Union.
  6. Imports of leather shoes from China and Vietnam face tariffs of 16.5%, and 10% levy into Europe. This was agreed in October 2006 in order for European shoemakers to compete internationally.

4. The development of Japan and China is evidence of globalisation's success

Japan historically is advocated as a success story by the liberal movement, who adopted the free market, reduced trade barriers and entered the global economy and has in less than half a century become one of the largest economies in the world. Similar tales are also made as the cause for China's recent rise to fame however the reality is very much different.

Japan's development has evolved from policies, which are the complete opposite to liberalism and globalisation. The Japanese government wanted key sectors to develop and protected them from foreign competition. The government retained the right to allocate foreign exchange, and by this it was able to restrict inward investment, to manage the acquisition of foreign technology by Japanese firms and to influence the composition of foreign trade. The export bank of Japan and Japan development bank were set up to become the main vehicles for expanding the flow of finance to government targeted industries.

Central to the development of Japan has been the role of Ministry of International Trade and Industry (MITI) which was a ministerial department. This central government department regulated production and the distribution of goods and services. It developed plans concerning the structure of Japanese industry, controlling Japan's foreign trade; ensuring the smooth flow of goods in the national economy; promoting the development of manufacturing, mining, and distribution industries; and supervising the procurement of a reliable supply of raw materials and energy resources. Hence Japanese development was centrally driven and not left to the free market to allocate resources.

China has managed to achieve phenomenal economic growth and industrialization by not adopting the rules of globalisation but by remaining deeply authoritarian, Global liberal values have not featured remotely in China's economic rise. China's president Hu Jintao said in 2004 ‘We will never blindly copy the mode of other countries political system. History indicates that indiscriminately copying western political systems is a blind alley for China.' [4] This shows there is very little likelihood that China will adopt liberal values in the near future secure in the knowledge that it has achieved success without the Western model of development.

Economically China has utilised and retained its centrally driven and interventionist approach similar to Japan and Nazi Germany. China has extensive levels of government involvement across all market sectors. By being centrally driven China has been able to direct its resources in one direction, which has propelled it into a regional power and the largest economy in the world after the US. China has received little assistance from the western world mainly due to its historic communist credentials and has shown that an independent, nation first policy driven centrally can attain economic success, which is completely at odds with the proponents of globalisation.

5. The various financial crisis in the last two decades were primarily a result of nations not being integrated into the international economy (Globalised)

In reality all the crisis in the last two decades were a direct result of economies being liberalised (left open) due to globalisation and the problems were compounded due to the economies of the nations concerned being unable to control the flow of wealth due to globalisation, a few examples prove this: -

  • - Argentina was considered by the IMF to be a model country in its compliance to policy proposals by the Bretton Woods institutions; however it experienced a catastrophic economic crisis in 2001, which was caused by IMF-induced budget restrictions - which undercut the government's ability to sustain national infrastructure in crucial areas such as health, education, and security. The IMF intervened to ensure its loans would be repaid and enforced a set of liberal reforms in order that Argentina integrates into the global economy. Argentina was ordered to structurally change its economy to concentrate on exports in order to raise enough money to pay off their debts. It was also forced to remove all barriers to foreign trade and foreign capital. What Argentina witnessed was a speculative attack on its currency by large finance houses who wanted to make a killing on the peso; this was easily achieved as Argentina had removed all restrictions on capital flight in order to be part of the globalisation movement. Argentina was unable to stop capital flight as such tools where abandoned on behest of the IMF. In December 2001 on the verge of economic meltdown Argentina defaulted on its $93 billion debt.

  • - The fall of communism in 1990 and the break-up of the Soviet Union represented a wonderful opportunity for capitalist institutes to transform a huge centralist economy to a market orientated one. A total of $129 billion poured into Russia with the IMF and the World Bank implementing a number of its development schemes. The Russian economy was opened to foreign investment and industry was sold to foreigners leaving the country vulnerable to swings in world prices. In 1997 due to a loss on confidence in Russia speculators begun to withdraw their money and Russia couldn't even defend itself as liberalisation required there to be no restrictions on capital flow. The crisis raised poverty from 2 million to 60 million, a 3000% increase. UNICEF noted that this resulted in 500,000 'extra' deaths per year. Russia is a clear example that globalisation directly allowed the crisis to reach the peak it did.

  • - By 1997, Asia attracted almost half of total capital inflow to developing countries. The economies of Southeast Asia maintained high interest rates attractive to foreign investors looking for a high rate of return. As a result the region's economies received a large inflow of hot money and experienced a dramatic run-up in asset prices. At the same time, the regional economies of Thailand, Malaysia, Indonesia, the Philippines, Singapore, and South Korea experienced high growth rates, 8-12% GDP, in the late 1980s and early 1990s. This achievement was broadly acclaimed by economic institutions including the IMF and World Bank, as the Asian economic miracle. But then the story turned sour.

From 1985 to 1995, Thailand's economy grew at an average of 9% per year. In May 1997, the Thai baht was hit by massive speculative attacks as investors tried to cash in on their money. By withdrawing their cash in large sums the currency collapsed, this set of a domino affect where financers lost confidence in the region and began moving their money out in large sums leading to the infamous Asian financial crisis. The only country in the region to survive the fall out was Malaysia as it was not under the control of the IMF's structural adjustment program and had placed restrictions on capital withdrawal from its country which meant speculators could not affect the country. The rest of the region left their economies open hence they were unable to do anything when speculators withdrew their capital, thus proving globalisation was the problem. This problem was aptly encapsulated by Economic expert Paul Krugman of Princeton University "As long as capital flows freely, nations will be vulnerable to self-fulfilling speculative attacks, and policymakers will be forced to play the confidence game. And so we come to the question of whether capital should really be allowed to flow so freely." [5]

  • - Turkey in 2001 faced the brunt of the IMF's globalisation policies as US investors withdrew large amounts of their capital. Turkey was ordered to peg its currency to the US dollar, a peg works on the basis that a currency is linked to another currency by ensuring the exchange rate remains within agreed bands on the open market. If the currency moves out of the bands then the government would literally sell or buy currency to bring it within the bands. As investors scrambled to buy foreign currency, the Turkish central bank reached the point where it could no longer support the exchange rate, hence it abandoned it and was about to default on its loans. The peg to the dollar was realistically never sustainable and by liberalising the economy it was only a matter of time before foreign investors cashed in and moved out. The currency peg, which controlled the movements of the lira, was the centrepiece of the IMF-backed financial reform package designed for Turkey. By removing restrictions on capital flight Turkey was unable to defend itself. Akyüz and Boratav, well-known economists from Turkey (Akyüz is Director of the UNCTAD Division on Globalisation and Development Strategies and Boratav is Professor of Economics at the University of Ankara) at the time commented, "In many respects the Turkish economy today is in a worse shape than it was on the eve of the December 1999 stabilization programme." They went on "the policies advocated were based on a poor diagnosis of economic conditions in the country and the Fund was experimenting with programmes that lacked sound theoretical underpinnings."

1 David H, K Lawrence, Kearney M, ‘The Polarization of the U.S. Labour Market,' Harvard University and NBER, January 2006, site accessed 3rd Nov 2006,

Carvel J, ‘Super-rich have doubled their money under Labour,' The Guardian, December 8th 2004, Site Accessed 3rd Nov 2006,,11499,1368919,00.html and HMRC \distribution of personal wealth', site accessed 3rd Nov 2006,

Joon Chang H, (2003) ‘Kicking away the ladder; development strategy in historical perspective,' Anthem Press

Mary Hennock ‘China's graft: Tough talk, old message,' 27th Sep 2004,

Paul Krugman, MIT Professor of Economics, Princeton University, How Washington Worsened Asia's Crash; The Confidence Game, and

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