By Michel Chossudovsky (posted April 11,2000)

The late 20th Century will go down in World history as a period of global impoverishment marked by the collapse of productive systems in the developing World, the demise of national institutions and the disintegration of health and educational programs. This "globalization of poverty" – which has largely reversed the achievements of post-war decolonization – was initiated in the Third World coinciding with the onslaught of the debt crisis. Since the 1990s, it has extended its grip to all major regions of the World including North America, Western Europe, the countries of the former Soviet block and the Newly Industrialized Countries (NICs) of South East Asia and the Far East.

In the 1990s, local level famines have erupted in Sub-Saharan Africa, South Asia and parts of Latin America; health clinics and schools have been closed down, hundreds of millions of children have been denied the right to primary education. In the Third World, Eastern Europe and the Balkans there has been a resurgence of infectious diseases including tuberculosis, malaria and cholera.

Impoverishment - An Overview

Famine Formation in the Third World

From the dry savannah of the Sahelian belt, famine has extended its grip into the wet tropical heartland. A large part of the population of the African continent is affected: 18 million people in Southern Africa (including 2 million refugees) are in "famine zones" and another 130 million in 10 countries are seriously at risk. In the Horn of Africa, 23 million people (many of whom have already died) are "in danger of famine" according to a UN estimate.

In South Asia in the post-Independence period extending through the 1980s, starvation deaths had largely been limited to peripheral tribal areas. In India, there are indications of widespread impoverishment of both the rural and urban populations following the adoption of the 1991 New Economic Policy under the stewardship of the Bretton Woods institutions.

In India, more than 70 percent of rural households are small marginal farmers or landless farm workers representing a population of over 400 million people. In irrigated areas, agricultural workers are employed for 200 days a year, and in rain-fed farming for approximately 100 days. The phasing out of fertilizer subsidies (an explicit condition of the IMF agreement) and the increase in the prices of farm inputs and fuel is pushing a large number of small and medium sized farmers into bankruptcy.

A micro-level study conducted in 1991 on starvation deaths among handloom weavers in a relatively prosperous rural community in Andhra Pradesh sheds light on how local communities have been impoverished as a result of macro-economic reform. The starvation deaths occurred in the months following the implementation of the 1991 New Economic Policy: with the devaluation and the lifting of controls on cotton yarn exports, the jump in the domestic price of cotton yarn led to a collapse in the pacham (24 meters) rate paid to the weaver by the middle-man (through the putting-out system). "Radhakrishnamurthy and his wife were able to weave between three and four pachams a month bringing home the meager income of 300-400 rupees for a family of six ($12-16), then came the Union Budget of July 24, 1991, the price of cotton yarn jumped and the burden was passed on to the weaver, Radhakrishnamurthy's family income declined to Rs. 240-320 a month ($9.60-13.00)". Radhakrishnamurthy of Gollapalli village in Guntur district died of starvation on September 4, 1991. Between August 30 and November 10, 1991 at least 73 starvation deaths were reported in only two districts of Andhra Pradesh. There are 3.5 million handlooms throughout India supporting a population of some 17 million people.

"Economic Shock Treatment" in the former Soviet Union

When assessing the impact on earnings, employment and social services, the post-cold War economic collapse in parts of Eastern Europe appears to be far deeper and more destructive than that of the Great Depression. In the former Soviet Union (starting in early 1992), hyperinflation triggered by the downfall of the ruble contributed to rapidly eroding real earnings. "Economic shock treatment" combined with the privatization program precipitated entire industries into immediate liquidation leading to the lay-off of millions of workers.

In the Russian Federation, prices increased one hundred times following the initial round of macro-economic reforms adopted by the Yeltsin government in January 1992; wages on the other hand increased ten-fold; the evidence suggests that real purchasing power had plummeted by more than 80 percent in the course of 1992.

The reforms have dismantled both the military-industrial complex and the civilian economy. Economic decline has surpassed the plunge in production experienced in the Soviet Union at the height of the Second World War, following the German occupation of Byelorussia and parts of the Ukraine in 1941, and the extensive bombing of Soviet industrial infrastructure. The Soviet GDP had by 1942 declined by 22 percent in relation to pre-war levels. In contrast, industrial output in the former Soviet Union plummeted by 48.8 percent and GDP by 44.0 percent between 1989 and 1995, according to official data, and output continues to fall. Independent estimates, however, indicate a substantially greater drop and there is firm evidence that official figures have been manipulated.

While the cost of living in Eastern Europe and the Balkans was shooting up to Western levels as a result of the deregulation of commodity markets, monthly minimum earnings were as low as ten dollars a month. "In Bulgaria, The World Bank and the Ministry of Labor and Social Assistance separately estimated that 90 percent of Bulgarians are living below the poverty threshold of $4 a day". Old age pensions in 1997 were worth two dollars a month. Unable to pay for electricity, water and transportation, population groups throughout the region have been brutally marginalized from the modern era.

Poverty and Unemployment in the West

Already during the Reagan-Thatcher era, but more significantly since the beginning of the 1990s, harsh austerity measures are gradually contributing to the disintegration of the Welfare State. The achievements of the early post-war period are being reversed through the derogation of unemployment insurance schemes, the privatization of pension funds and social services, and the decline of Social Security.

With the breakdown of the Welfare State, high levels of youth unemployment are increasingly the source of social strife and civil dissent. In the United States, political figures decry the rise of youth violence, promising tougher sanctions without addressing the roots of the problem. Economic restructuring has transformed urban life, contributing to the "thirdworldization" of Western cities. The environment of major metropolitan areas is marked by social apartheid: urban landscape have become increasingly compartmentalized along social and ethnic lines. Poverty indicators such as infant mortality, unemployment, and homelessness in the ghettos of American (and increasingly European) cities are in many respects comparable to those prevailing in the Third World.

Demise of the "Asian Tigers"

More recently, speculative movements against national currencies have contributed to the destabilization of some of the World's more successful "newly industrialized" economies (Indonesia, Thailand, Korea), leading virtually overnight to abrupt declines in the standard of living.

In China, successful poverty alleviation efforts are threatened by the impending privatization or forced bankruptcy of thousands of State enterprises and the resulting the lay-off of millions of workers. The number of workers to be laid off in State industrial enterprises is estimated to be of the order of 35 million. In rural areas, there are an estimated 130 million surplus workers. This process has occurred alongside massive budget cuts in social programs, even as unemployment and inequality increase.

In the 1997 Asian currency crisis, billions of dollars of official Central Bank reserves were appropriated by institutional speculators. In other words, these countries are no longer able to "finance economic development" through the use of monetary policy. This depletion of official reserves is part and parcel of the process of economic restructuring leading to bankruptcy and mass unemployment. In other words, privately held capital in the hands of "institutional speculators" far exceeds the limited reserves of Asian central banks. The latter acting individually or collectively are no longer able to fight the tide of speculative activity.

THE CAUSES OF GLOBAL POVERTY

Global Unemployment: "Creating Surplus Populations" in the Global Cheap Labor Economy

The global decline in living standards is not the result of "a scarcity of productive resources" as in preceding historical periods. The globalization of poverty has indeed occurred during a period of rapid technological and scientific advance. While the latter has contributed to vastly increasing the potential capacity of the economic system to produce necessary goods and services, expanded levels of productivity have not translated into a corresponding reduction in levels of global poverty.

On the contrary, downsizing, corporate restructuring and relocation of production to cheap labor havens in the Third World have been conducive to increased levels of unemployment and significantly lower earnings to urban workers and farmers. This new international economic order feeds on human poverty and cheap labor: high levels of national unemployment in both developed and developing countries have contributed to depressing real wages. Unemployment has been internationalized, with capital migrating from one country to another in a perpetual search for cheaper supplies of labor. According to the International Labor Organization (ILO), worldwide unemployment affects one billion people or nearly one third of the global workforce.

National labor markets are no longer segregated: workers in different countries are brought into overt competition with one another. Workers rights are derogated as labor markets are deregulated.

World unemployment operates as a lever which "regulates" labor costs at a World level: the abundant supplies of cheap labor in the Third World (e.g. China with an estimated 200 million surplus workers) and the former Eastern block contribute to depressing wages in the developed countries. Virtually all categories of the labor force (including the highly qualified, professional and scientific workers) are affected, even as competition for jobs encourages social divisions based on class, ethnicity, gender, and age.

PARADOXES OF GLOBALIZATION

Micro-Efficiency, Macro-Insufficiency

The global corporation minimizes labor costs on a World level. Real wages in the Third World and Eastern Europe are as much as seventy times lower than in the US, Western Europe or Japan: the possibilities of production are immense given the mass of cheap impoverished workers throughout the World.

While mainstream economics stresses efficient allocation of society's scarce resources, harsh social realities call into question the consequences of this means of allocation. Industrial plants are closed down, small and medium sized enterprises are driven into bankruptcy, professional workers and civil servants are laid off, and human and physical capital stand idle in the name of "efficiency". The drive toward "efficient" use of society's resources at the micro-economic level leads to exactly the opposite situation at the macro-economic level. Resources are not used "efficiently" when there remain large amounts of unused industrial capacity and millions of unemployed workers. Modern capitalism appears totally incapable of mobilizing these untapped human and material resources.

Accumulation of Wealth, Distortion of Production

This global economic restructuring promotes stagnation in the supply of necessary goods and services while redirecting resources towards lucrative investments in the luxury goods economy. Moreover, with the drying up of capital formation in productive activities, profit is sought in increasingly speculative and fraudulent transactions which in turn tend to promote disruptions on the World's major financial markets.

In the South, the East and the North, a privileged social minority has accumulated vast amounts of wealth at the expense of the large majority of the population. The number of billionaires in the US alone increased from 13 in 1982 to 149 in 1996. The "Global Billionaires Club" (with some 450 members) has a total Worldwide wealth well in excess of the combined GDP of the group of low income countries with 56 percent of the world's population.

Moreover, the process of wealth accumulation is increasingly taking place outside the real economy divorced from bona fide productive and commercial activities. According to Forbes: "Successes on the Wall Street stock market [meaning speculative trade] produced most of last year's [1996] surge in billionaires." In turn, billions of dollars accumulated from speculative transactions are funneled towards confidential numbered accounts in the more than 50 offshore banking havens around the World. The US investment bank, Merrill Lynch, conservatively estimates the wealth of private individuals managed through private banking accounts in offshore tax havens at $3.3 trillion. The IMF puts the offshore assets of corporations and individuals at $5.5 trillion, a sum equivalent to 25 percent of total world income. The largely ill-gotten loot of Third World elites in numbered accounts is placed at $600 billion, with one third of that held in Switzerland.

Increased Supply, Reduced Demand

The expansion of output in this system takes place by "minimizing employment" and compressing workers' wages. This process in turn backlashes on the levels of consumer demand for necessary goods and services: unlimited capacity to produce, limited capacity to consume. In a global cheap labor economy, the very process of expanding output (through downsizing, lay-offs and low wages) contributes to compressing society's capacity to consume.

The tendency is therefore towards overproduction on an unprecedented scale. In other words, expansion in this system can only take place through the concurrent disengagement of idle productive capacity, namely through the bankruptcy and liquidation of "surplus enterprises". The latter are closed down in favor of the most advanced mechanized production: entire areas branches of industry stand idle, the economy of entire regions is affected, and only a part of the World's agricultural potential is utilized.

This global oversupply of commodities is a direct consequence of the decline in purchasing power and rising levels of poverty. Oversupply contributes in turn to further depressing the earnings of the direct producers through the closure of excess productive capacity. Contrary to Say's law of markets, heralded by mainstream economics, supply doesn't create its own demand. Since the early 1980s, overproduction of commodities leading to plummeting (real) commodity prices has wreaked havoc particularly among Third World primary producers, but also (more recently) in the area of manufacturing.

Global Integration, Local Disintegration

In developing countries, entire branches of industry producing for the internal market are eliminated, the informal urban sector - which historically has played an important role as a source of employment creation - has been undermined as a result of currency devaluations and the liberalization of imports, including primary commodities. In Sub-Saharan Africa, the informal sector garment industry has been wiped out and replaced by the market for used garments (imported from the West at 80 dollars a ton).

Against a background of economic stagnation (including negative growth rates recorded in Eastern Europe, the former Soviet Union and Sub-Saharan Africa), the World's largest corporations have experienced unprecedented growth and expansion of their share of the global market. This process, however, has largely taken place through the displacement of pre-existing productive systems, i.e. at the expense of local-level, regional and national producers. Expansion and "profitability" for the World's largest corporations is predicated on a global contraction of purchasing power and the impoverishment of large sectors of the World population.

Survival of the fittest: the enterprises with the most advanced technologies or those with command over the lowest wages survive in a World economy marked by overproduction. While the spirit of Anglo-Saxon liberalism is committed to "fostering competition", G-7 macro-economic policy (through tight fiscal and monetary controls), has in practice supported a wave of corporate mergers and acquisitions as well as the bankruptcy of small and medium-sized enterprises.

In turn, large multinational companies (particularly in the US and Canada) have taken control of local-level markets (particularly in the service economy) through the system of corporate franchising. This process enables large corporate capital ("the franchiser") to gain control over human capital, cheap labor and entrepreneurship. A large share of the earnings of small firms and/or retailers is thereby appropriated while the bulk of investment outlays is assumed by the independent producer (the "franchisee").

A parallel process can be observed in Western Europe. With the Maastricht treaty, the process of political restructuring in the European Union increasingly heeds to dominant financial interests at the expense of the unity of European societies. In this system, State power has deliberately sanctioned the progress of private monopolies: large capital destroys small capital in all its forms. With the drive towards the formation of economic blocks both in Europe and North America, the regional and local-level entrepreneur is uprooted, city life is transformed, individual small scale ownership is wiped out. "Free trade" and economic integration provide greater mobility to the global enterprise while at the same time suppressing (through non-tariff and institutional barriers) the movement of small local level capital. "Economic integration" (under the dominion of the global enterprise), while displaying a semblance of political unity, often promotes factionalism and social strife between and within national societies.

THE ONGOING INTERNATIONALIZATION OF MACRO-ECONOMIC REFORM

The Debt Crisis

The restructuring of the global economic system has evolved through several distinct periods since the collapse of the Bretton Woods system of fixed exchange rates in 1971. Patterns of oversupply started to unfold in primary commodity markets in the second part of the 1970s, following the end of the Vietnam War. The debt crisis of the early 1980s was marked by the simultaneous collapse of commodity prices and the rise of real interest rates.

The balance of payments of developing countries was in crisis, the accumulation of large external debts provided international creditors and "donors" with "political leverage" to influence the direction of country-level macro-economic policy.

The Structural Adjustment Program

Contrary to the spirit of the Bretton Woods agreement of 1944 which was predicated on "economic reconstruction" and stability of major exchange rates, the structural adjustment program (SAP) has since the early 1980s largely contributed to destabilizing national currencies and ruining the economies of developing countries.

The restructuring of the World economy under the guidance of the Washington based international financial institutions and the World Trade Organization (WTO) increasingly denies individual developing countries the possibility of building a national economy: the internationalization of macro-economic policy transforms countries into open economic territories and national economies into "reserves" of cheap labor and natural resources. The State apparatus is undermined, industry for the internal market is destroyed, national enterprises are pushed into bankruptcy. These reforms have also been conducive to the elimination of minimum wage legislation, the repeal of social programs, and a general diminution of the state's role in fighting poverty.

"Global Surveillance"

The inauguration of the World Trade Organization (WTO) in 1995 marks a new phase in the evolution of the post war economic system. A new "triangular division of authority" among the IMF, the World Bank and the World Trade Organization (WTO) has unfolded. The IMF had called for more effective "surveillance" of developing countries' economic policies and increased coordination between the three international bodies signifying a further infringement on the sovereignty of national governments.

Under the new trade order (which emerged from the completion of the Uruguay Round at Marrakesh in 1994), the relationship of the Washington based institutions to national governments is to be redefined. Enforcement of IMF-World Bank policy prescriptions will no longer hinge upon ad hoc country-level loan agreements (which are not "legally binding" documents). Henceforth, many of the mainstays of the structural adjustment program (e.g. trade liberalization and the foreign investment regime) have been permanently entrenched in the articles of agreement of the new World Trade Organization (WTO). These articles set the foundations for "policing" countries (and enforcing "conditionalities") according to international law.

The deregulation of trade under WTO rules combined with new clauses pertaining to intellectual property rights will enable multinational corporations to penetrate local markets and extend their control over virtually all areas of national manufacturing, agriculture and the service economy.

Entrenched Rights for Banks and MNCs

In this new economic environment, international agreements negotiated by bureaucrats under intergovernmental auspices, have come to play a crucial role in the remolding of national economies. The 1997 Financial Services Agreement under the stewardship of the WTO, as well as the proposed Multilateral Agreement on Investment (MAI) under OECD auspices provide what some observers have entitled a "charter of rights for multinational corporations".

These agreements derogate the ability of national societies to regulate their national economies. The Multilateral Agreement on Investment (MAI) also threatens national level social programs, job creation policies, affirmative action and community based initiatives. In other words, it threatens to lead to the disempowerment of national societies as it hands over extensive powers to global corporations.

Conclusion

Ironically, the ideology of the "free" market upholds a new form of State interventionism predicated on the deliberate manipulation of market forces. Moreover, the development of global institutions has also led to the development of "entrenched rights" for global corporations and financial institutions. The process of enforcing these international agreements at national and international levels invariably bypasses the democratic process. Beneath the rhetoric on so-called "governance" and the "free market", neoliberalism provides a shaky legitimacy to those in the seat of political power.

The manipulation of the figures on global poverty prevents national societies from understanding the consequence of a historical process initiated in the early 1980s with the onslaught of the debt crisis. This "false consciousness" has invaded all spheres of critical debate and discussion on the "free" market reforms. In turn, the intellectual myopia of mainstream economics prevents an understanding of the actual workings of global capitalism and its destructive impact on the livelihood of millions of people. International institutions including the United Nations follow pace, upholding the dominant economic discourse with little assessment of how economic restructuring backlashes on national societies, leading to the collapse of institutions and the escalation of social conflict.

© Copyright 1998, Michel Chossudovsky

Michel Chossudovsky, Professor of Economics, University of Ottawa, is author of The Globalization of Poverty, Impacts of IMF and World Bank Reforms, TWN, Penang and Zed Books, London, 1997.