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Globalization

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Neoliberalism and Economic Globalization
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The goal of neoliberal economic globalization is the removal of all barriers to commerce, and the privatization of all available resources and services. In this scenario, public life will be at the mercy of market forces, as the extracted profits benefit the few, writes Rajesh Makwana.


23rd November 06 - Rajesh Makwana, STWR

The thrust of international policy behind the phenomenon of economic globalization is neoliberal in nature. Being hugely profitable to corporations and the wealthy elite, neoliberal polices are propagated through the IMF, World Bank and WTO. Neoliberalism favours the free-market as the most efficient method of global resource allocation. Consequently it favours large-scale, corporate commerce and the privatization of resources.

There has been much international attention recently on neoliberalism. Its ideologies have been rejected by influential countries in Latin America and its moral basis is now widely questioned. Recent protests against the WTO, IMF and World Bank were essentially protests against the neoliberal policies that these organizations implement, particularly in low-income countries.

The neoliberal experiment has failed to combat extreme poverty, has exacerbated global inequality, and is hampering international aid and development efforts. This article presents an overview of neoliberalism and its effect on low income countries.

Introduction 

After the Second World War, corporate enterprises helped to create a wealthy class in society which enjoyed excessive political influence on their government in the US and Europe. Neoliberalism surfaced as a reaction by these wealthy elites to counteract post-war policies that favoured the working class and strengthened the welfare state.

Neoliberal policies advocate market forces and commercial activity as the most efficient methods for producing and supplying goods and services. At the same time they shun the role of the state and discourage government intervention into economic, financial and even social affairs. The process of economic globalization is driven by this ideology; removing borders and barriers between nations so that market forces can drive the global economy. The policies were readily taken up by governments and still continue to pervade classical economic thought, allowing corporations and affluent countries to secure their financial advantage within the world economy.

The policies were most ardently enforced in the US and Europe in the1980s during the Regan–Thatcher–Kohl era. These leaders believed that expanding the free-market and private ownership would create greater economic efficiency and social well-being. The resulting deregulation, privatization and the removal of border restrictions provided fertile ground for corporate activity, and over the next 25 years corporations grew rapidly in size and influence. Corporations are now the most productive economic units in the world, more so than most countries. With their huge financial, economic and political leverage, they continue to further their neoliberal objectives.

There is a consensus between the financial elite, neoclassical economists and the political classes in most countries that neoliberal policies will create global prosperity. So entrenched is their position that this view determines the policies of the international agencies (IMF, World Bank and WTO), and through them dictates the functioning of the global economy. Despite reservations from within many UN agencies, neoliberal policies are accepted by most development agencies as the most likely means of reducing poverty and inequality in the poorest regions.

There is a huge discrepancy between the measurable result of economic globalization and its proposed benefits. Neoliberal policies have unarguably generated massive wealth for some people, but most crucially, they have been unable to benefit those living in extreme poverty who are most in need of financial aid. Excluding China, annual economic growth in developing countries between 1960 and 1980 was 3.2%. This dropped drastically between 1980 and 2000 to a mere 0.7 %. This second period is when neoliberalism was most prevalent in global economic policy. (Interestingly, China was not following the neoliberal model during these periods, and its economic growth per capita grew to over 8% between 1980 and 2000.)

Neoliberalism has also been unable to address growing levels of global inequality. Over the last 25 years, the income inequalities have increased dramatically, both within and between countries. Between 1980 and 1998, the income of richest 10% as share of poorest 10% became 19% more unequal; and the income of richest 1% as share of poorest 1% became 77% more unequal (again, not including China).

The shortcomings of neoliberal policy are also apparent in the well documented economic disasters suffered by countries in Latin America and South Asia in the 1990s. These countries were left with no choice but to follow the neoliberal model of privatization and deregulation, due to their financial problems and pressure from the IMF. Countries such as Venezuela, Cuba, Argentina and Bolivia have since rejected foreign corporate control and the advice of the IMF and World Bank. Instead they have favoured a redistribution of wealth, the re-nationalization of industry and have prioritized the provision of healthcare and education. They are also sharing resources such as oil and medical expertise throughout the region and with other countries around the world.

The dramatic economic and social improvement seen in these countries has not stopped them from being demonized by the US. Cuba is a well known example of this propaganda. Deemed to be a danger to ‘freedom and the American way of life’, Cuba has been subject to intense US political, economic and military pressure in order to tow the neoliberal line. Washington and the mainstream media in the US have recently embarked on a similar propaganda exercise aimed at Venezuela’s president Chavez.  This over-reaction by Washington to ‘economic nationalism’ is consistent with their foreign policy objectives which have not changed significantly for the past 150 years. Securing resources and economic dominance has been and continues to be the USA’s main economic objective.

According to Maria Páez Victor:

“Since 1846 the United States has carried out no fewer than 50 military invasions and destabilizing operations involving 12 different Latin American countries. Yet, none of these countries has ever had the capacity to threaten US security in any significant way.  The US intervened because of perceived threats to its economic control and expansion.  For this reason it has also supported some of the region’s most vicious dictators such as Batista, Somoza, Trujillo, and Pinochet.”

As a result of corporate and US influence, the key international bodies that developing countries are forced to turn to for assistance, such as the World Bank and IMF, are major exponents of the neoliberal agenda. The WTO openly asserts its intention to improve global business opportunities; the IMF is heavily influenced by the Wall Street and private financiers, and the World Bank ensures corporations benefit from development project contracts. They all gain considerably from the neo-liberal model.

So influential are corporations at this time that many of the worst violators of human rights have even entered a Global Compact with the United Nations, the world’s foremost humanitarian body. Due to this international convergence of economic ideology, it is no coincidence that the assumptions that are key to increasing corporate welfare and growth are the same assumptions that form the thrust of mainstream global economic policy.

However, there are huge differences between the neoliberal dogma that the US and EU dictate to the world and the policies that they themselves adopt. Whilst fiercely advocating the removal of barriers to trade, investment and employment, The US economy remains one of the most protected in the world. Industrialized nations only reached their state of economic development by fiercely protecting their industries from foreign markets and investment. For economic growth to benefit developing countries, the international community must be allowed to nurture their infant industries. Instead economically dominant countries are ‘kicking away the ladder’ to achieving development by imposing an ideology that suits their own economic needs.

The US and EU also provide huge subsidies to many sectors of industry. These devastate small industries in developing countries, particularly farmers who cannot compete with the price of subsidized goods in international markets. Despite their neoliberal rhetoric, most ‘capitalist’ countries have increased their levels of state intervention over the past 25 years, and the size of their government has increased. The requirement is to ‘do as I say, not as I do’.

Given the tiny proportion of individuals that benefit from neoliberal policies, the chasm between what is good for the economy and what serves the public good is growing fast. Decisions to follow these policies are out of the hands of the public, and the national sovereignty of many developing countries continues to be violated, preventing them from prioritizing urgent national needs.

Below we examine the false assumptions of neoliberal policies and their effect on the global economy.

Economic Growth

Economic growth, as measured in GDP, is the yardstick of economic globalization which is fiercely pursued by multinationals and countries alike. It is the commercial activity of the tiny portion of multinational corporations that drives economic growth in industrialized nations. Two hundred corporations account for a third of global economic growth. Corporate trade currently accounts for over 50% of global economic growth and as much as 75% of GDP in the EU. The proportion of trade to GDP continues to grow, highlighting the belief that economic growth is the only way to prosper a country and reduce poverty.

Logically, however, a model for continual financial growth is unsustainable. Corporations have to go to extraordinary lengths in order to reflect endless growth in their accounting books. As a result, finite resources are wasted and the environment is dangerously neglected. The equivalent of two football fields of natural forest is cleared each second by profit hungry corporations.

Economic growth is also used by the World Bank and government economists to measure progress in developing countries. But, whilst economic growth clearly does have benefits, the evidence strongly suggests that these benefits do not trickle down to the 986 million people living in extreme poverty, representing 18 percent of the world population (World Bank, 2007). Nor has economic growth addressed inequality and income distribution. In addition, accurate assessments of both poverty levels and the overall benefits of economic growth have proved impossible due to the inadequacy of the statistical measures employed.

The mandate for economic growth is the perfect platform for corporations which, as a result, have grown rapidly in their economic activity, profitability and political influence. Yet this very model is also the cause of the growing inequalities seen across the globe. The privatization of resources and profits by the few at the expense of the many, and the inability of the poorest people to afford market prices, are both likely causes.

Free Trade

Free trade is the foremost demand of neoliberal globalization. In its current form, it simply translates as greater access to emerging markets for corporations and their host nations. These demands are contrary to the original assumptions of free trade as affluent countries adopt and maintain protectionist measures. Protectionism allows a nation to strengthen its industries by levying taxes and quotas on imports, thus increasing their own industrial capacity, output and revenue. Subsidies in the US and EU allow corporations to keep their prices low, effectively pushing smaller producers in developing countries out of the market and impeding development.

With this self interest driving globalization, economically powerful nations have created a global trading regime with which they can determine the terms of trade.

The North American Free Trade Agreement (NAFTA) between the US, Canada, and Mexico is an example of free-market fundamentalism that gives corporations legal rights at the expense of national sovereignty. Since its implementation it has caused job loss, undermined labour rights, privatized essential services, increased inequality and caused environmental destruction.

In Europe only 5% of EU citizens work in agriculture, generating just 1.6% of EU GDP compared to more than 50% of citizens in developing countries. However, the European Common Agricultural Policy (CAP) provides subsidies to EU farmers to the tune of £30 billion, 80% of which goes to only 20% of farmers to guarantee their viability, however inefficient this may be.

The General Agreement on Trade and Services (GATS) was agreed at the World Trade Organization (WTO) in 1994. Its aim is to remove any restrictions and internal government regulations that are considered to be "barriers to trade". The agreement effectively abolishes a government’s sovereign right to regulate subsidies and provide essential national services on behalf of its citizens. The Trade Related agreement on International Property Rights (TRIPS) forces developing countries to extend property rights to seeds and plant varieties. Control over these resources and services are instead granted to corporate interests through the GATS and TRIPS framework.

These examples represent modern free trade which is clearly biased in its approach. It fosters corporate globalization at the expense of local economies, the environment, democracy and human rights. The primary beneficiaries of international trade are large, multinational corporations who fiercely lobby at all levels of national and global governance to further the free trade agenda.

Liberalization

The World Bank, IMF and WTO have been the main portals for implementing the neoliberal agenda on a global scale. Unlike the United Nations, these institutions are over-funded, continuously lobbied by corporations, and are politically and financially dominated by Washington, Wall Street, corporations and their agencies. As a result, the key governance structures of the global economy have been primed to serve the interests of this group, and market liberalization has been another of their key policies.

According to neoliberal ideology, in order for international trade to be ‘free’ all markets should be open to competition, and market forces should determine economic relationships. But the overall result of a completely open and free market is of course market dominance by corporate heavy-weights. The playing field is not even; all developing countries are at a great financial and economic disadvantage and simply cannot compete.

Liberalization, through Structural Adjustment Programs, forces poorer countries to open their markets to foreign products which largely destroys local industries. It creates dependency upon commodities which have artificially low prices as they are heavily subsidized by economically dominant nations. Financial liberalization removes barriers to currency speculation from abroad. The resulting rapid inflow and outflow of currencies is often responsible for acute financial and economic crisis in many developing countries. At the same time, foreign speculators and large financial firms make huge gains. Market liberalization poses a clear economic risk; hence the EU and US heavily protect their own markets.

A liberalized global market provides corporations with new resources to capitalize and new markets to exploit. Neoliberal dominance over global governance structures has enforced access to these markets. Under WTO agreements, a sovereign country cannot interfere with a corporation’s intentions to trade even if their operations go against domestic environmental and employment guidelines. Those governments that do stand up for their sovereign rights are frequently sued by corporations for loss of profit, and even loss of potential profit. Without this pressure they would have been able to stimulate domestic industry and self sufficiency, thereby reducing poverty. They would then be in a better position to compete in international markets.

Deregulation

Access to new markets and foreign resources is not enough. To fulfill the corporate agenda of increasing profits, a corporation must seek out favourable regulatory conditions that reduce costs and increase productive capacity. Regulations restrict profitability. Thus, the corporate call for liberalization is accompanied by a demand for deregulation in all sectors of commerce nationally and globally. Removing these restrictions allows corporations to have greater access to and use of resources and labour, and to move freely across borders. Whilst countries such as many in South America and Asia offer just such conditions, corporations actively engage in the influencing and changing of domestic and international law that can potentially create these favourable conditions universally. In order to achieve this, corporations have, over the past 150 years, secured their political influence in local, national and international governance structures and regulatory bodies.

Regulations and regulatory agencies exist to monitor corporate activities, protect human rights and safeguard the environment. In recent years corporate lobbying has seen governments cut budgets for regulatory agencies and regulatory laws have been repealed, allowing corporations free reign to operate with fewer public safeguards. Overall, regulatory bodies have shifted their focus from protecting the consumer to protecting the industry, as the neoliberal model is progressively assimilated at all levels of government and economic policy in developed countries.

Enron lobbied very effectively to deregulate the electricity market, then to deregulate the trading of energy futures, then to prevent the disclosure of futures contracts, then to repeal the regulated-auction requirement. This enabled it to trade without revealing any trade or financial details to regulators or the public. It proceeded to make record profits through illicit activities which soon lead to its collapse. The economic collapse in Argentine in 2001 is also widely attributed to extensive deregulation, enforced by the IMF and World Bank’s neoliberal development policies, which destroyed industry and caused mass unemployment.

Regulating corporate activity protects the public. Removing these regulations protects corporate profits. This battle for legal protection is rigged in favour of corporations, even though they represent a fraction of the global population. Corporations are able to have their own way on these matters as they have almost limitless financial resources to rally to their cause and close relationships with the political elite.

Global deregulation has created the transnational corporation, as business operations are increasingly moved abroad in the search of cheaper labour, tax incentives and less red tape. In effect, unemployment rises in the affluent countries that lose jobs, while corporations outsource these same jobs to sweatshops in developing countries where wages are relatively insignificant, employment standards are often irrelevant and there are very low environmental standards. Thus corporations increase their profits. In order to win back these corporations and create more jobs, the US and other countries also lower their standards and cut regulation. Thus the logical conclusion of liberalization and deregulation is a race to the bottom, where the lowest possible standards are sought after and legislated for globally, with little regard for individual workers, employment conditions, the community or the environment.

Deregulation also encourages monopolization. Corporations, whilst falsely quoting the free market and open competition that Adam Smith envisaged, form virtual monopolies through acquisitions and mergers. This allows them to manage competition through strategic alliances that exist between all major players. As such, an estimated 60% of US GDP is provided by the largest 1000 corporations, and the remaining 11 million companies account for the other 40% of GDP.

Privatization

Privatization is the transfer of ownership or control over the production and distribution of state-owned resources or services to private companies. This process is essential to increasing corporate profit and opportunity, and is currently the focus of much attention. The progressive privatization of the global commons has been the primary focus of neoliberal or free market policy since the 1980s. Until this very recent period in history, public resources were largely in the hands of local communities and nations who would distribute their benefits throughout society without an overriding profit imperative.

With key commodity, agricultural and manufacturing markets already dominated by a handful of corporations, privatization has opened up a seemingly endless array of profitable opportunities. Agricultural land, airwaves, water sources, energy sources, healthcare, banking, indigenous knowledge, plants, seeds and even ideas are now increasingly controlled and supplied by corporations for profit.

Of great concern is the recent privatization of education. The US education system is valued at around £800 billion, and it is estimated that 10% of this will be in corporate hands within the next 8 years. In the UK, 59 learning academies are replacing existing schools, most under direct sponsorship from the corporate community who provide substantial donations to the government. All these academies “give sponsors and governors broader scope and responsibility for ethos, strategic direction and challenge”. As a result, they have a substantial emphasis on business, enterprise and commerce, and are not accountable to the public in the same manner as ordinary schools. This is just one example of the corporate takeover of public services in the UK as part of the Private Finance Initiative (PFI). Government spin has ensured that the PFI is never referred to as privatization, although it plainly hands over substantial control of public services and resources in exchange for corporate financial aid.

Neoliberals claim that privatized services are more efficient than those run by the state. They believe that market competition and corporate efficiency can drive prices down for consumers. These arguments are used as a sales tool to convince the public and their governments, and privatization is rapidly advancing throughout the developed and developing world. However, these assumptions are basically incorrect and often irrelevant when considering the functions and purposes of public utilities. Essential services are provided to citizens by their governments to meet basic public welfare needs such as the provision of energy, water and healthcare. The provision of these services is a human right, and whether they are profitable is not a concern for the vast majority of people around the world.

There are many relevant arguments against privatization, and little empirical evidence that privately run services are either more efficient or better value to their customers. For example, privatization usually creates a natural monopoly, removing the possibility of competition that can benefit the consumer. In many sectors, such as energy, multinational corporations hold the reigns to the market, and through their strategic alliances they control critical aspects of the market such as price – again removing any theoretical market benefits. And when consumer prices are reduced or a corporation tries to increase profit levels, it often comes at the expense of decent wages, labour standards and the environment. The resulting economies of scale and efficiency gains come at too high a cost to society.

The main issues are those relating to human rights, democracy, ownership, control and accountability. The provision of essential services is a human right, although many in the developing world go without basic services. Where services are available, it is in the community’s interest that an accountable government body manages the utility. But corporations are not accountable to the public, only to shareholders – whose priority is profit, not service. The profit motive does not influence government facilities; it can run services at a loss if the social need demanded it. If a government cannot provide a service efficiently, they may be voted out of office by the public.

The issue of water privatization remains one of the most controversial, affecting even the most affluent countries. The UK, for example, is currently experiencing legal restrictions on public water usage, whilst the operators, Thames Water, waste 894 million litres a day through unfixed leaks alone. The company avoided regulatory penalties whilst announcing a 31% rise in pre-tax profits which totalled £346.5m. Water bills are expected to increase on average by 24% by 2010. This case highlights another point – corporations will not reinvest their profits in order to address a crisis. State owned suppliers on the other hand can reinvest profits to quickly improve standards.

Developing Countries

At the global level, the coercive influences of the WTO, IMF and World Bank have left little option for many developing countries other than to allow progressive privatization of their public goods and services. Through trade agreements and structural adjustment programs, the international financial institutions have secured a steady income for their corporate counterparts. Indeed, these ‘emerging markets’ are currently the prime targets for corporations who increasingly operate on a transnational scale, whilst maintaining strategic relationships with influential governments. Foreign investment in this way results in the foreign repatriation of profit – taking money out of a local system. This reduces industry in the country and undermines local social and economic development. In this situation, citizens are forced into dependency upon foreign companies and their goods and services, completing the vicious cycle.

Understandably, the privatization of basic services has mobilized widespread public protest - most famously in Bolivia in 2004/2005, which eventually led to the government rejecting the private water contract. Water privatization in Bolivia was enforced in 1997 as a condition to a loan by the World Bank, in partnership with private interests such as the French multinational Suez. Mass protest was sparked by a serious failure to extend water and sewage services to tens of thousands of impoverished families, and connection costs that exceeded more than half a year’s income for the average Bolivian.

This raises the question: ‘how can corporations profit from those who have little or no money to spend?’ Impoverished communities all over the world cannot afford to pay for water services; many live on less that 1 dollar a day. Almost one-fifth of the planet’s population lacks access to safe drinking water and 40 per cent lack access to basic sanitation. It is not profitable for a corporation to control water distribution in areas of deprivation; they have little incentive to supply to those most in need if they cannot pay for the service. Publicly owned and managed water facilities, with their primary focus on meeting welfare needs and not profit, is best placed to undertake this service.

The lobby for privatization often cites the presence of ‘corrupt’ governments as a major reason for the lack of global access to essential resources such as water, suggesting that in such cases government efforts must be superseded by private provision. However, it stands to reason that these ‘corrupt’ governments are not best placed to negotiate massive private contracts with transnational corporations, many of which command much larger economies than the developing country. These government failures must also be viewed in historical perspective and in terms of a country’s current level of impoverishment. Further analysis often reveals more complex causes to this impoverishment.

These range from unique environmental conditions, such as the lack of proximity to water in sub-Saharan Africa, to the cumulative effect of colonization, political interference and unfair trade structures imposed by dominant countries. In such countries, corporations can often reinforce corrupt practices. Commenting on a Transparency International survey, IPS reported in 2002 that “International conventions have not stopped multinational corporations from trying to secure valuable contracts by bribing government officials in the world's emerging economies - especially in the arms and defence, and public works and construction industries” and that such bribery was on the increase. In such cases international attention must focus on providing foreign assistance to create more efficient state controlled public services.

When essential services are privatized, a two-tier system is often created. Prices are set by the market and those who cannot afford to pay, go without. This is simply unacceptable when 45% of the global public struggle to survive on $2 a day. Poverty reduction and development can only occur when these basic services, which are often unavailable in poverty stricken areas, are guaranteed to all. Government commitment to provide basic human needs was affirmed in the UN Universal Declaration of Human rights, and as such governments must uphold their commitment and not succumb to neoliberal pressure to relinquish essential services to market forces and private interests.

Conclusion

Neoliberal ideology embodies an outdated, selfish model of economy. It has been formulated by the old imperial powers and adopted by economically dominant nations. Given the state of the global trade and finance structures, wealthy countries can maintain their economic advantage by pressurizing developing countries to adopt neo-liberal policies – even though they themselves do not. Understandably, many commentators have described this process as economic colonialism.

The ultimate goal of neoliberal economic globalization is the removal of all barriers to commerce, and the privatization of all available resources and services. In this scenario, public life will be at the mercy of volatile market forces, and the extracted profits will benefit the few.

The major failures of these policies are now common knowledge. Many countries, particularly in Latin America, are now openly defying the foreign corporate rule that was forced upon them by the international financial institutions. In these countries, economic ideologies based on competition and self interest are gradually being replaced by policies based on cooperation and the sharing of resources. Changing well-established political and economic structures is a difficult challenge, but pressure for justice is bubbling upward from the public. Change is crucial if the global public is to manage the essentials for life and ensure that all people have access to them as their human right.


Rajesh Makwana is the Director of Share The World’s Resources (www.stwr.org), an NGO campaigning for global economic and social justice. He  can be contacted at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it