Globalisation, poverty and inequality

1

Introduction

Globalisation is undoubtedly one of the most significant current topics in political economic

discussion. Although its first appearance can be traced back to over two thousand years ago in

the form of trades between Chinese and European on the Silk Road, the process of ‘globalisation’

has been accelerated enormously by various post-war advancements in communications,

technology and transportation. Aided by the invention of the Internet, globalisation’s impact is

today evident in all aspects of our lives: purchases of goods made online by credit cards in

different currencies to be delivered to virtually anywhere; the new shiny iPhone at an Apple

showroom around the street corner that was made in China but designed in America; tasty cuts

of Scottish Angus beef at a local fine-food store that come from a Singaporean merchants.

For many, however, a chief question remains: at what costs? China’s child labour employed to

produce the iPhone; or starving Vietnamese residents begging right outside the doorstep of a

first-class restaurant where the country’s wealthiest population dine? For many consumers,

globalisation represents an obvious form of development. It would have been impossible,

however, for us to benefit from products or services moving rapidly across borders without the

involvement of international regulatory and free-trade organisations such as the WB (World

Bank), the WTO (World Trade Organisation) and the IMF (International Monetary Funds)

(Guttal, 2007). The policies imposed by those institutionshave in many ways been responsible

for the course that globalisation has followed over the past several decades. Major cultural,

social, political and economic change has followed, often raising huge controversies over the

effects of policies that are designed to aid developing nations as well as the West. By offering a

brief introduction to the post-war history of economic globalisation and the policies

underwriting it, this paper attempts to critically examine the growing claim that globalisation

(as promulgated by these institutions) is more an agent of global poverty and inequality than of

an improved standard of living for less developed countries (LDCs).

The Bretton Woods institutions and Neoliberalism

It is necessary to look back at the recent history of globalisation to gain a better understanding

of its impact onto the global economy (see Appendix F for full history).

After WWII and thecatastrophic worldwide economic slump during the Great Depression,

Western industrialised nations recognised the need to stabilise international relations in order

to restore international order and to prevent such events from recurring. The US then came up

with a concept that a liberal international economy would be crucial in maintaining world peace

and economic stability, based on its own experience during wartime. Other developed countries

agreed to this initiative but not without Government intervention, which promptly led to the

2

establishments of the ‘Bretton Woods’agreement and a number of institutions including: the UN

(United Nations), the WB, the IMF and the BIS (Bank of International Settlements).In 1995, the

WTO was officially inaugurated from what had previously been knowned as GATT (General

Agreements on Tariffs and Trade). Along with the IMF and the WB, they have formed a

triangular body of global authority whose explicit function is to facilitate the development of a

global ‘level playing field’ free from governmental intervention (Wade, 2011:373).

The next section will discuss the achievements in economic growth as well as reduction of

poverty and inequality that the IMF, the WB, the WTO and defenders of neoliberalism claim to

have aided by administering the neoliberal doctrine.

Only free trade can end global poverty

Influenced by Adam Smith’s 18th century concept of ‘the invisible hand’, a group of actors

championing a neoliberal economic theory emerged during the 1980s, forming what is now

often referred to as the ‘Washington Consensus’. Their most basic agenda was to cure the illness

they saw in the economies of what they consider to be LDCs, or least developed countries. This

neoliberal agenda was basically a set of policies built upon the foundation personal freedom,

liberalisation of trades, removal of trade barriers to allow FDI (Foreign Direct Investment)

flows, freezing wages, decentralisation, privatisation of national resources and devaluation of

local currency to make export cheaper. Wade (2007:375) defined these actors as global policy

makers that strongly believed that they were in a position to think for the world. Chief among

these policy makers were the WB, the IMF, the WTO, powerful national agencies such as the US

treasury and the UK treasury and well-known neoliberal economists/politicians like Friedrich

Hayek, Ronald Reagan, Martin Wolf or J.Bradford DeLong. The main argument presented by

these actors wasthat, since the introduction of the ‘Washington Consensus’, the global economy

had been growing rapidly and there has been significant improvements in terms of poverty and

inequality within LDCs that had turned to a global free-trade system. A few achievements

claimed by proponents of neoliberal globalisation include:

1) Massive economic growths of

the LDCs, particularly the BRIC

(Brazil, Russia, India and China)

between 1992 to 2012, when

China rose from the tenth to the

second largest economy, India

from thirteenth to third and

Brazil and Russia climbed to the

top ten (IMF, 2012).

2) According to the WB

estimation of poverty head

count, only 21% of the LDCs’

population was living under

poverty in 2012, down from

43% in 1990 and 52% in 1982

(The World Bank, 2012). This

number is also projected to be

as low as 3% in 2030.

3) The global income

distribution gap between

developed countries and LDCs

has been closing between 1960

and 2012, in terms of the Gini

coefficient, the world income

Gini index had decreased from

0.62 in 1960 to 0.52 in 2012

(The World Bank, 2012).

3

The Bretton Woods institutions have also claimed that financial aid from developed countries

would never be sufficient for the development of health, education, water and sanitation in all

those LDCs and that world trade is the best source of income to improve living standards for

their population (The WTO, 2013). This belief led to the establishment of the WTO ‘Aid for

trade’ programme in 2005 to provide the regulatory framework to ensure that all LDCs can

effectively participate and benefit from world trade, conveniently through the development

assistance of the WB and the IMF (The WTO, 2013). Prior to that point, the IMF had also created

a division called PRGF (Poverty Reduction and Growth Facility) in 1999 to co-operate with the

WB with the aim of eliminating poverty via long-term loans, which must be used for their SAPs

(Structural Adjustment Programme)(The IMF, 2009). Their general objectives can be outlined in

the model in Appendix A.

To summarise, these institutional actors’ contention, ultimately, has been that economic growth

in LDCs can only be achieved by restructuring their political and economic system to allow

private foreign investments and free trade. Economic growth, they theorised, will reduce

poverty and narrow the wealth distribution gap within and between countries. After reviewing

these claims to support globalisation from those actors, certain questions have emerged. Are the

Bretton Woods institutions as good as they portray themselves to be? Do all their members

equally benefit from their system and neoliberal policies? Are all parties in these tranformations

winners, or are there losers too? Such concerns will be addressed in the following section,

where this paper will look at arguments from anti-globalisation economists and organisations

that neoliberal globalisation and Bretton Woods institutions have not improved the world

poverty and inequality, but instead, severely worsened the situation.

The Western Hegemony and the WB misrepresentation of data

“In the coming days, we are going to finish with the capitalism that has caused us much suffering.”

This statement was made by Henri Dikoumé, a member of the Federation of Civil Society

Organisations of Cameroon, one of numerous global NGOs (Non-Governmental Organisations)

that rejected neoliberalism or the ‘Washington consensus’ and demanded development aids for

Sub-Sahara LDCs in the 2007 World Social Forum in Cameroon (IPS, 2006). Alongside anti-

globalisation economists and activists, this group of NGOs have formed a network of actors that

claim neoliberal globalisation being in favour of the Western advanced capitalist countries,

especially the upper class and the MNEs (Multi National Enterprises). Furthermore, these actors

have also accused the Bretton Institutions of manipulating and concealing the official statistics

of global poverty and inequality in order to legitimise their policies (Wade, 2011:373). This

section aims to examine these arguments in detail.

4

A. The Western Hegemony

Going back into history where the first experiment of ‘economic shock therapy’ was done in

1973 to Chile. A group of young Chilean economists known as the ‘Chicago boys’, educated by

the famed Chicago economist, Milton Friedman, were able to take up key positions in the

Chilean military Government immediately after the 1973 military coup backed up by the US.

They then restructured the Chilean economy from an isolated, nationalised economy into a free

market, decentralised economy in accordance to the neoliberal theory (Ritter, 1990:159). This

was not done by themselves but with the backing of the IMF and the WB, as the implementation

of this programme is a condition for Chile’s future loans from them.According to Ritter (1990:

161), although the results were clearly devastating as it immediately left 85% of the Chilean

population struggling with poverty, the experiment was hailed by the US Government as a big

success, although the the Western upper-class was, to outside observers, clearly the group that

benefitted the most (see Appendix D for full case study).

Now to turn to the defense of neoliberal globlisation, the most significant evidence that

neoliberal proponents provided was impressive economic growth of the BRICs, SEA and

Eastern Europe economies, which they argue that would lead to reduction in poverty and

narrowing the wealth gaps. However, the major source of this growth comes from export

activities of FDI on cheap labour. As neoliberal policies of Bretton Woods institutions have been

applying to the rest of the world from 1980s until now, under the form of loan conditions (i.e.

SAPs), MNEs have also been able to outsource their production to LDCs to cut down costs. For

instance, Nike investments in manufacturing site in Indonesia; Apple production moving to

Foxconn Technology, China; or British Banks call centres relocated to India. According to

Harrison & Scorse (2010), the term for this type of labour is ‘sweatshops labour’ as working

conditions have been revealed to be absolutely terrible, wages are unacceptably low, workers

have to work for upto sixteen hour per day and, in the case of China Foxconn, children as young

as thirteen year old have been employed (See Appendix E for detailed examples). If the workers

demand better labour conditions and higher wages, MNEs would just have to shift production to

another country with more compliant workers to maintain profitability, thanks to the IMF and

the WB policies. This globalisation of disposable andcheap labour force has resulted in soaring

concentration of the world wealth in the hand of the wealthiest group. A NGO called The Tax

Justice Network (2012) reported that this group of global super rich individuals had

accumulated $21 trillion USD in unreported private financial wealth in 2010, equivalent to the

sum of both the US and Japan GDP and more than the total GDP of all LDCs combined.

Access to higher education and proper healthcare are the primaryrequirements for the

‘sweatshop’ workers or their children to move up the income ladder. Interestingly, this is often

5

denied by the SAPs because of complete privatisation of the education and healthcare sectors

for profits or massive budget cuts to ensure repayment for the IMF and the WB loans. In the

case of Chile, hundreds of thousands students have been protesting since 2011 for free

education as middle and upper class students have access to the best universities in the region,

whilst the working class can not afford any of them asall free public university has been

eliminated since the economic shock therapy in 1973 (BBC, 2013).SAP’s deregulation of

financial systems has also caused the Mexican peso crisis in 1995 or the Thai Baht crisis in 1997,

which spreaded across the whole SEA region. More than $1.5 trillion was moving across border

daily, mostly on short term financial speculation in real estates or stocks market. Consequently

driving those countries into economic bubbles, allowing Western financial organisations to

make massive profits. Eventually when those bubbles bursted, the IMF and the WB came in to

bail out the economywith the debts later on the Government had to pay for the bankers.(Global

Exchange, 2013)

As a final note, it can be claimed that the voting system of the WB and the IMF is seriously

flawed as the majority of voting power belong to the EU, the US and Japan as demonstrated in

Appendix B. This flawed system indicates that interests of Western financial organisations and

MNEs are put above all the needs of the LDCs as they have absolutely no participation in

designing the SAPs – the policies that change their political economy entirely.

B. The falsehood of the World Bank data

Chossudovsky (2003:28) argued that neoliberal argument is justified by the illusion that

globalisation reduces poverty and inequality, and this illusion has been sustained by the WB’s

blatant manipulation of social and economic data as it is the only body collecting these data,

thus making it the monopoly provider.

The WB measures its data by using PPP (Purchasing Power Parity) in order to adjust the

exchange rate between countries to be equivalent to each national currency’s purchasing

power, usually with the US dollar. The justification is that goods and services are much cheaper

in LDCs and PPP adjustments can effectively raise their income level relative to the developed

nations. However, there are certain errors in PPP numbers, as pointed out by Wade (2011:377):

1) The calculation of PPP is based on the assumptions that goods and services are comparable

across countries and it does not take into account the availibility and quality factors. 2) Some

important countries such as China and India, Governments had refused to participate in PPP

survey until 2005. 3) There are two series of PPP data, the WB and PWT (Penn World Tables)

and the PWT series provide more details on more countries for longer periods.

6

For poverty headcount, the WB uses PPP term to convert the average poverty line of a set of

LDCs to US dollar, then they draw an international extreme poverty line (IEPL) to conduct

household surveys to estimate the population living below that threshold. When the first

measurement was done in 1985, the IEPL was at PPP $1 per day ($370 per annum) and in the

WB’s latest report in 2013, it has increased into PPP $1.25 (The World Bank, 2013). Key world

poverty statistics are shown in Appendix C, it can be seen here that there has been a downward

trend in poverty headcount. However, the WB poverty theory of PPP $1 per day is subjected to

many errors and distortions, which debatably bring the results downward. These errors and

bias are demonstrated in the table below:

Source: (Wade, 2011:385-389)

Wade(2004:573) claimed that if the WB switched from the IEPL to one reflecting the purchasing

power necessary to achieve sound living conditions, it would rise the poverty headcount

extensively thus nullifying the neoliberal argument of dropping poverty numbers.

The WB uses the Gini coefficient index to monitor the trend of world income distribution and it

stated that world income inequality had fallen alongside poverty headcount since 1980s (Wade,

2004:575). There are three concepts of inequality measurement: 1) Inter-country by using GDP

or GNP per capita (unweighted by population). 2) Inter-country weighted by population 3) The

Errors Downward bias

Poverty headcount is highly sensitive to the

IEPL. For instance, if the line moved to $1.10,

there would be a 20% increase in the headcount

in China.

The PPP $1 a day underestimates the income or

expenditure needed for basic physiological needs

such as food, water, shelter and clothing.

Healthcare. It also does not take into account

unpriced public goods such as clean water or

health care.

Poverty headcount is also sensitive to the

reliability of household surveys. There is no

standardised survey used for all the countries,

thus it is not simple to merge the results. In

India, if the surveys were to conducted on a 7

days reporting period instead of the standard 30

days reporting period, the headcount would

decrease by 50% as shorter period yields more

reported income or expenditure.

The PPP $1 per day also failed to take into account

poverty in developed countries, it also contradicts

with methodologies Western overnments define

and measure poverty in their countries. e.g. the US

where the poverty threshold for a person was set

by the SSA (Social Security Administration) at $11

per day in 1999, effectively putting 13.7% of the

US population living in poverty (Chossudovsky,

2003)

The two most populous countries which account

for a third of the world population, China and

India had refused to participate in the survey

until 2005. Thus their PPP – adjusted income

data is largely based on assumptions.

As globalisation liberalised the commodity

markets, accomodation, food and clothing prices

in LDCs have also rised to reach world market

levels. The IEPL ignored this change in order to

bring down the headcount numbers.

7

world as one country. The neoliberal claims of falling inequality adopted the second construct,

highlighting a decline of the world Gini index from 0.62 in 1960 to 0.52 in 2012 (The World

Bank, 2012). According to Wade (2011:391), ‘this is the case where the global Gini conceals as

much as it reveals’. This is due to two reasons, illustrated in the following table:

The China factor The global falling inequality trend is largely attributed to China

economic performance in recent years, if China was to be taken out

then the Gini would see a rise between 1980 and 2000 (See appendix

G). So it can be said that the falling trend is a result of China growth

since 1980 and not a generalised tendency of the world system.

PPP variable The results is dependent on PPP series from the PWT, which has a bias

on underestimating inequality. Furthermore, if market exchange rate

is used instead of PPP then the Gini index would also see a rising trend

(See appendix G).

Source: (Wade, 2011:389-395)

Barro (2000) also stated that there is no clear relation between economic growth and inequality

although higher inequality often hinders growth in LDCs and promote growth in developed

nations. This lack of evidence contradicts the neoliberal argument that economic growth would

lead to a fall in global inequality.

Conclusion

Returning to the question posed at the beginning of this paper, it is now possible to say that

although there is evidence that globalisation has great potential to eliminate poverty and

narrow the world’swealth inequality, its course has been abnormally shaped by neoliberalism

and the Bretton Woods institutions. By being international bodies, these institutions have to

maintain a neutral stance and their explicit purpose must be to promote growth equally without

being in favour of any member country or corporate power. However, the dominant power of

the Western developed nations in the IMF as well as the WB have greatly influenced the policies

that they impose on LDCs in exchange for development or imbalance of payments loans, namely

‘the Washington Consensus’. This paper has shown that their real outcome (if not purpose) of

these global actors is is to allow MNEs and wealthy investors to enter LDCs, make massive

profits and then leave the local Governments struggling to pay for the mistakes and greed of

others. Finally, it can be concluded that the principle of globalisation is not at fault, but the best

outcomes can only be achieved by cooperation and equal share of power between countries,

which have never been the case in reality and Bretton Woods institutions do have a negative

impact on poverty and inequality.

8

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September 2013].

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National Library of Canada Cataloguing in Publication.

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September 2013].

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Economic Review, [Online] March, 100(1), p. 247. Available from:

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http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/index.aspx[Accessed 12

September 2013].

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Available from: http://www.ipsnews.net/2006/12/world-social-forum-cameroon-ngos-long-

on-vision-short-on-detail/[Accessed 20 September 2013].

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from:http://www.huppi.com/kangaroo/L-chichile.htm[Accessed 20 September 2013].

Ritter, A., 1990. Development strategy and structural adjustment in Chile, 1973-1990. Canadian

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américaines et caraïbes [Online]15(30), p. 159-195. Available from:

http://www.jstor.org/stable/41799738 [Accessed 21 September 2013]

Ruggie, J. G., 1982. International Regimes, Transactions, and Change: Embedded Liberalism in

the Postwar Economic Order. International Organisation,[Online]36(2), p. 393. Available from:

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Available from: http://www.imf.org/external/np/exr/facts/prgf.htm

[Accessed 20 September 2013].

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The Tax Justice Network, 2012. The Price of Offshore revisited. [Online]

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Appendix A:

Appendix B:

Source:(The World Bank, 2008)

11

The IMF voting shares in 2009:

Source: (Weisbot & Johnston, 2009)

Appendix C:

Source: (Wade, 2011:384)

12

Appendix D:

The first experiment of ‘economic shock therapy’ was done in 1973 to Chile. A group of young Chilean

economists known as the ‘Chicago boys’, educated by the famed Chicago economist – Milton Friedman,

were able to take up key positions in the Chilean military Government immediately after the 1973

revolution backed up by the US. They then restructured the Chilean economy from an isolated,

nationalised economy into a free market, decentralised economy in accordance to the neoliberal

theory. This was not done by themselves but with the backing of the IMF and the WB, as the

implementation of this programme is a condition for Chile’s future loans from them. (Harvey,2007:9)

In less than a year in Chile food prices increased thirty six times, while wages were being frozen in

accordance to the programme, leaving85% of the population to fight with poverty (Chossudovsky,

2003). The revival of the Chilean Economy then began from 1976 until 1982, the period when Milton

Friedman called it the ‘Chilean Economic Miracle’ with average GDP growth rate of 6.6% per

year(Ritter, 1990:171). However, 80% of this amount is growth that came from speculation in the

financial sector. Therefore, when the debt crisis hit Latin American nations in 1982, Chile’s economy

was completely destroyed due to artificial growth in previous years and they had to be bailed out by

the IMF with the enormous debt of $7.7 billion(Ritter, 1990:185). Nevertheless, during the booming

period, profitable firms were privatised by Western MNEs and when those firms failed, their debts

were socialised, effectively insulating foreign investment from loss. In either case the Western upper

class is clearly the winner (Kangas, 2000). This ‘economic shock therapy’ was then applied to other

Latin American nations, e.g. Peru, Argentina, or Bolivia but to a lesser extent compared to that of Chile.

However, they all led to the same outcomes: declining minimum wages, national wealth being

concentrated at the top 10% of the society, continual hunger and devastating environmental pollution

(Chossudovsky, 2003).

13

Appendix E:

“Accounts of the appalling conditions of labour and the despotic conditions under which labourers

work in the sweatshops of the world abound. In China, the conditions under which migrant young

women from rural areas work are nothing short of appalling: ‘unbearably long hours, substandard

food, cramped dorms, sadistic managers who beat and sexually abuse them, and pay that arrives

months late, or sometimes not at all’.In Indonesia, two young women recounted their experiences

working for a Singapore-based Levi-Strauss subcontractor as follows:

We are regularly insulted, as a matter of course. When the boss gets angry he calls the women dogs,

pigs, sluts, all of which we have to endure patiently without reacting. We work officially from seven in

the morning until three (salary less than $2 a day), but there is often compulsory overtime, sometimes

––especially if there is an urgent order to be delivered––until nine. However tired we are, we are not

allowed to go home. We may get an extra 200 rupiah (10 US cents) . . . We go on foot to the factory

from where we live. Inside it is very hot. The building has a metal roof, and there is not much space for

all the workers. It is very cramped. There are over 200 people working there, mostly women, but there

is only one toilet for the whole factory . . . when we come home from work, we have no energy left to

do anything but eat and sleep . . .

Similar tales come from the Mexican maquila factories, the Taiwanese- and Korean-operated

manufacturing plants in Honduras, South Africa, Malaysia, and Thailand. The health hazards, the

exposure to a wide range of toxic substances, and death on the job pass by unregulated and

unremarked. In Shanghai, the Taiwanese businessman who ran a textile warehouse ‘in which 61

workers, locked in the building, died in a fire’ received a ‘lenient’ two-year suspended sentence

because he had ‘showed repentance’and ‘cooperated in the aftermath of the fire.”

Source: (Harvey, 2007:169)

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Appendix F:

After WWII and the catastrophic worldwide economic slump during the Great Depression, western

industrialised nations recognised the need to stabilise international relations in order to restore

international order and to prevent such events from reoccurring again. The US then came up with a

concept that a liberal international economy would be crucial in maintaining world peace and

economic stability, based on its own experience during wartime. Other developed countries agreed to

this initiative but not without Government intervention, which promptly led to the establishments of

the ‘Bretton Woods’ agreement and a number of institutions including: the UN (United Nations), the

WB, the IMF and the BIS (Bank of International Settlements). The core feature of this agreement is to

maintain fixed exchange rates between the US dollar and other currencies via the medium of gold, with

the IMF serving as the overseeing regulatory body. The goals of all states at that time were to achieve

full employment, economic growth, social welfare, and the Government has an absolute power over

the market in which key sectors were often owned by state companies. This form of political-economic

system was referred to as ‘Embedded Liberalism’ by Ruggie (1982:9), which was enforced under the

power of the US military and its only limit was the Soviet Union. The system delivered flourishing

economic growth in capitalist countries between 1950s and 1960s under the implementation of

‘Keynesian’ fiscal and monetary policies, until late 1960s when it started to collapse. Harvey (2007:12)

described the period that took place during 1970s as the ‘global stagnation phase’, where many

countries suffered from surging unemployment and emloyment rates, in addition to substantial fiscal

deficits that had to be bailed out by the IMF (e.g. the UK). As Embedded Liberalism and Keynesian

policies no longer worked out, the US Government began seeking for a more adequate economic

system. Conveniently it was done through a series of experiment of ‘economic shock therapy’ upon the

Latin American nations during 1970s, and they were widely hailed as a big success by the US

Government. In 1979, the US and the UK Governments at that time under the leads of Reagan and

Thatcher, had consequently decided to turn to neoliberalism. Harvey (2007:9) argued that the

movement had subsequently triggered the wave of neoliberal reforms that spread globally from late

1970s until now, that even China, a communist-ruled economy had to take a partial neoliberal path to

liberalise their market in some measure.In 1995, the WTO was officially inaugurated from what had

previously been knowned as GATT (General Agreements on Tariffs and Trade). Along with the IMF and

the WB, they have formed a triangular body of global authority to facilitate the development of a global

‘level playing field’ without any Government intervention (Wade, 2011:373). Whilst they have

somewhat helped their members of developing nations to achieve seemingly outstanding economic

growth, for instance: Turkey, Indonesia, South Korea or SEA (South East Asian) nations, one of the

most significant and recent results the world has seen since this formation was the disastrous Global

Economic Crisis in 2008, which greatly challenged neoliberal theory that unregulated markets would

generate the best outcome.

15

Appendix G:

Source: (Wade, 2011:390)

Source: (Wade, 2011:393)