Trailblazer THE NO-NONSENSE GUIDE TO GLOBALIZATION

Wayne Ellwood (2001)

Ellwood sees globalization as a current buzzword that is perhaps the least understood of everyday concepts. He describes it as the ‘entanglement of diverse cultures and economies’ which is centuries old. But the rapid technological changes of the last 25 years and particularly the micro-electronics revolution leading to the Internet and World Wide Web has irrevocably changed the essence of human contact on Earth. New channels of communication mean that business is more efficient and commercial culture spreads more quickly. Ellwood sees this process of change as unstoppable and potentially the seeds of a better future for all the world’s people … if we come to recognise the common thread of humanity that ties us together. (p9)

He notes the belief, drawn from the Western liberal humanism of the Enlightenment, that economic globalization, meaning trade powered by the free market, will liberate human potential and lead to universal democracy and human rights, thus making the world a better place. While he recognises the power of the argument that industrial capitalism has produced fabulous wealth, goods and opportunity for some, he also sees that globalization has become identified with wealth creation to the exclusion of social, democratic and environmental goals. For some peoples, cultures, biological species, and environments the results of economic globalization are disastrous. But there is a measure of optimism: Ellwood believes we could alter the present economic system and overcome inequality, injustice, and environmental degradation.

Ellwood doesn't put it as simply as what follows, but his analysis leads me to suggest that there have been four stages so far to economic globalization.

The first stage of globalization was one of exploration and bringing home discovered wealth. Wealth was acquired (rather than created) in Europe by capital investment in exploration, the expropriation (ie stealing) of goods and the exploitation of slave labour. Ellwood refers to Christopher Columbus's single-minded concentration on extracting as much wealth as possible from [the Americas] and the people. (p13) It was the beginning of the colonisation of much of the world by the European powers. But by then the second stage of globalization had begun - the era of international trading which had been described by David Ricardo in 1817 in his Principles of Political Economy. Ricardo argued that nations should specialise in producing goods in which they have a natural advantage and trade should benefit both buyer and seller. To this end there must be a balance of trade in and out of a country.

Earlier, Adam Smith in The Wealth of Nations (1776) had insisted that markets work most efficiently when neither buyer nor seller is large enough to influence the market price so that all get a fair return and society as a whole gains through the best use of both human and natural resources. Smith had also argued that capital was best invested locally so that owners could keep in touch with their investments and manage their use.

In the second stage of globalisation, typically raw materials flowed into the industrial countries and flowed out as manufactured goods. In most countries the government endeavoured to maintain the balance of trade by imposing tariffs. As national economies grew the balance between the demand for goods and the supply became crucial to national economic stability. The accepted wisdom of the 19th and early 20th centuries was of business cycles where the economy went up and down. Unemployment was considered to be a normal condition of the free market, but there was an expectation that growth would create new jobs and reduce unemployment. Predominantly wealth was created by local labour and by return on investment of capital within countries.

In 1929 the ‘business cycle’ got out of hand and the US stock market crashed, with repercussions around the world for the next decade. Nations turned inward and threw up high tariff boundaries to protect their economies. World trade nose dived - economic growth spluttered and mass employment and poverty followed.

In The General Theory of Employment, Interest and Money, published in 1936, John Maynard Keynes argued that the free market, left on its own to pursue profit, actually creates unemployment and this reduces the demand for goods because the unemployed and low waged can’t afford them. Keynes not only gave a theoretical account of how economic depression occurs but also offered a practical approach to climbing out of it through government expenditure on public goods which could be recovered in taxation when the economy recovers. These ideas were adopted by many Western governments. In the early 1940s the global depression of the 1930s came to an end as factories and farms worked hard to support the troops and home populations engaged in World War II.

The third stage of globalisation began in 1944 at Bretton Woods in New England, when delegates from 44 nations came together to try to create a stable, co-operative international monetary system which would promote national sovereignty and prevent future financial crises. Ellwood says that the purpose was not to bury capitalism but to save it. Three global institutions emerged from this conference.

The International Monetary Fund (IMF) was: to oversee a system of ‘fixed’ exchange rates between countries (to prevent countries from devaluing their national currencies to get a competitive edge over others); to facilitate the exchange of one currency into another in order to encourage world trade; and to act as a ‘lender-of-last-resort’ with emergency loans to countries running into short-term cash flow problems. But this last would not be automatic, as Ellwood explains:

Quotas are assigned according to a country’s relative position in the world economy which means that the most powerful economies have the most influence and clout. The US for example has the largest SDR quota at about 27 billion. The size of a member’s quota determines a lot, including how many votes it has in IMF deliberations and how much foreign exchange it has access to if it runs into choppy financial waters. (p29)

The World Bank was created to try to rebuild the economies devastated by World War II by making cheap loans for power plants, dams, roads, air ports, ports, agricultural development and education systems. Europe recovered slowly and by the end of the 1950s the World Bank turned its interest to the newly-independent countries which were striving to enter the industrial age. Ellwood explains:

According to the ‘stages of growth’ economic theory popular at the time, developing nations could achieve economic ‘take-off’ only from a strong infrastructure ‘runway’. It was part of the Bank’s self-defined role to build this ‘infrastructural capacity’ and this it did enthusiastically by funding hydroelectric projects and highway systems throughout Latin America, Asia and Africa. But despite the Bank’s concessional lending rates it was clear early on that the very poorest countries would have difficulty meeting loan repayments. (p31)

The General Agreement on Tariffs and Trade (GATT) was set up to reduce national trade barriers and this was done through seven rounds of tariff reduction followed by, in 1994, the establishment of the World Trade Organization. Ellwood describes it in these terms:

[The WTO] has 137 member states and 30 ‘observers’ and vastly expands GATT’s mandate in new directions. The text of the WTO agreement had 26,000 pages: its sheer physical size is a hint of both its prolixity and its complexity. It includes the GATT agreements which mostly focus on trade in goods. But it also folds in the new General Agreement on Trade and Services (GATS) which potentially affects more than 160 areas including telecommunications, banking and investment, transport, education, health and the environment. (p32)

The WTO has a single-minded commitment to free trade and is seen as a ’rich man’s club’ in which the industrial nations dominate. It now has a Dispute Settlement Body (DSB) which gives it the legal tools to approve tough trade sanctions by one member against another. Ellwood reports that:

a country may not discriminate against products of foreign origin on any grounds whatsoever. And in so doing [the WTO] removes the power of national governments to develop economic policy which serves the moral, ethical or economic interests of their citizenry. (p36)

Ellwood notes that these three global institutions have become increasingly significant in world economics and politics in promoting a deregulated, privatized, corporate-led free market which they see as the answer to humanity’s problems. The rest of his book is devoted to challenging this view.

Ellwood shows how from the 1960s onwards the poorer nations in the world struggled for fairer rules but were bedevilled by debts and the consequent structural adjustments to their policies demanded by the IMF and World Bank. These policies favoured cheap exports and (inadvertently) spread poverty, maladministration and corruption.

From the mid-1960s to the mid-1980s, despotism pervaded Latin America and employed an ingenious variety of scams wherever it went. In Asia and Africa, megalomaniacs with powerful friends and large appetites for personal wealth were often financed with enthusiasm by the international banking fraternity. Indeed, it seemed to work so well that the credit lines became almost limitless - particularly if the governments in question were fighting on the right side of the Cold War and buying large quantities of armaments from Northern suppliers. (p43)

And then the soaring tower of debt began to creak and sway. Governments began to run into financial trouble , being unable to repay their debts. By 1999 Third World debt had reached $3,000 billion and much of the debts had been transferred from private banks to the IMF and the World Bank. These institutions, in terms of structural adjustment … diverted government revenues away from things like education and healthcare, towards debt repayment and the promotion of exports. Ellwood comments:

Two decades of structural adjustment has not only failed to solve the debt crisis, it has caused untold suffering for millions and led to widening gaps between rich and poor. … The [structural adjustment programmes] are an integral part of the free-market orthodoxy which aims to give free rein to private corporations to trade, invest and move capital around the globe with a minimum amount of government interference. But there are cracks appearing in this seemingly uniform consensus. … Many are calling for reform. Others are going much farther and demanding the outright abolition of these agencies and a complete restructuring of the global financial architecture. (p50-2)

Part of the scene in this stage of globalization is the growth of multi-national companies to be larger than many states and for business ethics of efficiency, competition and shareholders-take to dominate the world. Ellwood again:

Giant private companies have become the driving force behind economic globalization, wielding more power than many nation-states. Business values of efficiency and competition at all costs now dominate the debate on social policy, the public interest and the role of government. The tendency to monopoly combined with decreasing rates of profit drives and structures corporate decision-making - without regard for the social, environmental and economic consequences of those decisions. (p53)

In the fourth stage of economic globalization wealth is being created (and sometimes in vast amounts) by speculation and gambling on the international money markets.

Writing in 2001 Ellwood describes it (presciently) like this:The deregulation of global finance coupled with the micro-electronics revolution has sparked a surge in the flow of capital. This uncontrolled speculation has eclipsed long-term productive investment and poses a huge threat to the stability of the global economy. Recent financial crises caused suffering for millions and confirm the need for urgent action to control the money markets and rein in currency traders. (p72)

He points out that investors have little or no involvement in the countries in which their funds are invested and so at a few touches of buttons are able to remove their funds for a quick profit or if they sense financial trouble ahead. They are prone to herd behaviour and crises result if there are heavy withdrawals. He reckons there were 11 ‘major global financial blow-ups’ between 1973 and 1995, all requiring intervention by national governments and international financial institutions. He describes one in some detail.

The last major one began in Southeast Asia in mid-1997 when ’hot money’ panicked and fled as quickly as it had arrived. Although the IMF and the US Government eventually stepped in with an emergency bailout of more than $120 billion, the damage from the financial chaos was widespread. Currencies were devalued in Thailand, Indonesia, the Philippines and South Korea; factories were shut down, imports slashed, workers laid off and public sector services like healthcare, education and transport cut drastically. (p76)

Ellwood reports that various agencies saw the $120 billion bailout plan as making a bad situation worse. One key requirement of the rescue package was that governments guaranteed continued interest payments to the private sector in return for the agency persuading creditors to restructure their loans. Another requirement was that governments cut expenditure and produce a surplus. High interest rates were required, combined with cuts to both government expenditures and subsidies to basics like food, fuel and transport. The high interest rates were supposed to be the bait to lure back foreign capital. But it just did not work.

Oxfam saw the crisis as comparable in its destructive impact to the Great Depression of 1929. Certainly the human impact was horrendous. Ellwood again:

According to the UN’s International Labour Organisation (ILO) more than 20 million people in Indonesia were laid off from September 1997 to September 1998. UNICEF said that 250,000 clinics in the country were closed and predicted that infant mortality would jump by 30 per cent. The Asian Development Bank said that more than six million children had dropped out of school. And Oxfam estimated that more than 100 million Indonesians were living in poverty a year after the crisis - four times more than two years earlier. (p83)

How did this happen? Why were the countries involved so vulnerable? Ellwood explains it in these terms.

A key reason why the Asian economies were so vulnerable to currency destabilization was that they had gradually abandoned controls over the movement of capital. When a country cedes its control over capital flows it effectively removes any tools it may have for intervening in the market process, leaving itself at the mercy of speculators whose only concern is profit. More critically, nations lose the ability to control international economic strategies which lie at the heart of national sovereignty. How can a nation hope to determine its own social agenda and economic future if key policy areas are shaped by the self-interest of foreign investors and money markets? (p84)

Ellwood sums up much of his book in these words: Corporate-led globalization is a juggernaut, driven by greed and notions of economic efficiency, which is radically altering social relationships, impoverishing millions of fellow humans, stripping age-old cultures of their self-identity and threatening the environmental health of the Earth. (p107)

But he remains an optimist by noting that this is not inevitable for global systems are human-made. He says that there is a world-wide movement to rethink globalization and that day by day it grows stronger. And he sees this movement as premised on a central truth:

The only way to convince states to act in the interests of their people is to construct a system that will put humans back in control at the centre of economic activity. (p108)