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Debt is an efficient tool. It ensures access to other peoples’ raw materials and infrastructure on the cheapest possible terms. Dozens of countries must compete for shrinking export markets and can export only a limited range of products because of Northern protectionism and their lack of cash to invest in diversification. Market saturation ensues, reducing exporters’ income to a bare minimum while the North enjoys huge savings. The IMF cannot seem to understand that investing in … [a] healthy, well-fed, literate population … is the most intelligent economic choice a country can make.
— Susan George, A Fate Worse Than Debt, (New York: Grove Weidenfeld, 1990), pp. 143, 187, 235
Many developing nations are in debt and poverty partly due to the policies of international institutions such as the International Monetary Fund (IMF ) and the World Bank.
Their programs have been heavily criticized for many years for resulting in poverty. In addition, for developing or third world countries, there has been an increased dependency on the richer nations. This is despite the IMF and World Bank’s claim that they will reduce poverty.
Following an ideology known as neoliberalism, and spearheaded by these and other institutions known as the “Washington Consensus” (for being based in Washington D.C.), Structural Adjustment Policies (SAPs ) have been imposed to ensure debt repayment and economic restructuring. But the way it has happened has required poor countries to reduce spending on things like health, education and development, while debt repayment and other economic policies have been made the priority. In effect, the IMF and World Bank have demanded that poor nations lower the standard of living of their people .
This web page has the following sub-sections:
A Spiraling Race to the Bottom
As detailed further below, the IMF and World Bank provide financial assistance to countries seeking it, but apply a neoliberal economic ideology or agenda as a precondition to receiving the money. For example:
- They prescribe cutbacks, “liberalization” of the economy and resource extraction/export-oriented open markets as part of their structural adjustment.
- The role of the state is minimized.
- Privatization is encouraged as well as reduced protection of domestic industries.
- Other adjustment policies also include currency devaluation, increased interest rates, “flexibility” of the labor market, and the elimination of subsidies such as food subsidies.
- To be attractive to foreign investors various regulations and standards are reduced or removed.
The impact of these preconditions on poorer countries can be devastating. Factors such as the following lead to further misery for the developing nations and keep them dependent on developed nations:
- Poor countries must export more in order to raise enough money to pay off their debts in a timely manner.
- Because there are so many nations being asked or forced into the global market place—before they are economically and socially stable and ready—and told to concentrate on similar cash crops and commodities as others, the situation resembles a large-scale price war .
- Then, the resources from the poorer regions become even cheaper. which favors consumers in the West.
- Governments then need to increase exports just to keep their currencies stable (which may not be sustainable, either) and earn foreign exchange with which to help pay off debts.
- Governments therefore must:
- spend less
- reduce consumption
- remove or decrease financial regulations
- and so on.
- Over time then:
- the value of labor decreases
- capital flows become more volatile
- a spiraling race to the bottom then begins, which generates
- social unrest. which in turn leads to IMF riots and protests around the world
- These nations are then told to peg their currencies to the dollar. But keeping the exchange rate stable is costly due to measures such as increased interest rates.
- Investors obviously concerned about their assets and interests can then pull out very easily if things get tough
- In the worst cases, capital flight can lead to economic collapse. such as we saw in the Asian/global financial crises of 1997/98/99, or in Mexico, Brazil, and many other places. During and after a crisis, the mainstream media and free trade economists lay the blame on emerging markets and their governments’ restrictive or inefficient policies, crony capitalism, etc. which is a cruel irony.
- When IMF donors keep the exchange rates in their favor. it often means that the poor nations remain poor, or get even poorer. Even the 1997/98/99 global financial crisis can be partly blamed on structural adjustment and early, overly aggressive deregulation for emerging economies.
- Millions of children end up dying each year .
Competition between companies involved in manufacturing in developing countries is often ruthless. We are seeing what Korten described as “a race to the bottom. With each passing day it becomes more difficult to obtain contracts from one of the mega-retailers without hiring child labor, cheating workers on overtime pay, imposing merciless quotas, and operating unsafe practices.”
— John Madeley, Big Business Poor Peoples; The Impact of Transnational Corporations on the World’s Poor, (Zed Books, 1999) p. 103
This is one of the backbones to today’s so-called “free” trade. In this form, as a result, it is seen by some as unfair and one-way, or extractionalist. It also serves to maintain unequal free trade as pointed out by J.W. Smith.
As a result, policies such as Structural Adjustments have, as described by Smith, contributed to “the greatest peacetime transfer of wealth from the periphery to the imperial center in history”, to which we could add, without much media attention.
Maintaining Dependency and Poverty
One of the many things that the powerful nations (through the IMF, World Bank, etc.) prescribe is that the developing nation should open up to allow more imports in and export more of their commodities. However, this is precisely what contributes to poverty and dependency.
[I]f a society spends one hundred dollars to manufacture a product within its borders, the money that is used to pay for materials, labor and, other costs moves through the economy as each recipient spends it. Due to this multiplier effect, a hundred dollars worth of primary production can add several hundred dollars to the Gross National Product (GNP) of that country. If money is spent in another country, circulation of that money is within the exporting country. This is the reason an industrialized product-exporting/commodity-importing country is wealthy and an undeveloped product-importing/commodity-exporting country is poor. [Emphasis Added]
…Developed countries grow rich by selling capital-intensive (thus cheap) products for a high price and buying labor-intensive (thus expensive) products for a low price. This imbalance of trade expands the gap between rich and poor. The wealthy sell products to be consumed, not tools to produce. This maintains the monopolization of the tools of production, and assures a continued market for the product. [Such control of tools of production is a strategy of a mercantilist process. That control often requires military might.]
— J.W. Smith, The World’s Wasted Wealth 2, (Institute for Economic Democracy. 1994), pp. 127, 139.
As seen above as well, one of the effects of structural adjustment is that developing countries must increase their exports. Usually commodities and raw materials are exported. But as Smith noted above, poor countries lose out when they
- export commodities (which are cheaper than finished products)
- are denied or effectively blocked from industrial capital and real technology transfer, and
- import finished products (which are more expensive due to the added labor to make the product from those commodities and other resources)
This leads to less circulation of money in their own economy and a smaller multiplier effect. Yet, this is not new. Historically this has been a partial reason for dependent economies and poor nations. This was also the role enforced upon former countries under imperial or colonial rule. Those same third world countries find themselves in a similar situation. This can also be described as unequal trade:
At first glance it may seem that the growth in development of export goods such as coffee, cotton, sugar, and lumber, would be beneficial to the exporting country, since it brings in revenue. In fact, it represents a type of exploitation called unequal exchange. A country that exports raw or unprocessed materials may gain currency for their sale, but they lose it if they import processed goods. The reason is that processed goods—goods that require additional labor—are more costly. Thus a country that exports lumber but does not have the capacity to process it must then re-import it in the form of finished lumber products, at a cost that is greater than the price it received for the raw product. The country that processes the materials gets the added revenue contributed by its laborers. (Emphasis is original)
— Richard Robbins, Global Problems and the Culture of Capitalism, (Allyn and Bacon, 1999), p. 95
Exporting commodities and resources is seen as favorable to help earn foreign exchange with which to pay off debts and keep currencies stable. However, partly due to the price war scenario mentioned above, commodity prices have also dropped. Furthermore, reliance on just a few commodities makes countries even more vulnerable
to global market conditions and other political and economic influences. As Gemini News Service also reports, talking to the World Bank:
More than 50 developing countries depend on three or fewer commodities for over half of their export earnings. Twenty countries are dependent on commodities for over 90 percent of their total foreign exchange earnings, says the World Bank.
— Ken Laidlaw, Market Cure Proposed For Third World’s Battered Farmers. Gemini News Service, December 4, 2001 (Link is to reposted version on this web site)
Almost four years after the above was written, Oxfam reveals that things have not changed for the better: more than 50 per cent of Africa’s export earnings is derived from a single commodity ; numerous countries are dependent on two commodities for the vast majority of their export earnings; and there are a number of other countries in Africa heavily dependent on very few commodities.
In addition, as Celine Tan of the Third World Network explains:
Falling [commodity] prices have meant that large increases in export volume by commodity producers have not translated into greater export revenues, leading to severely declining terms of trade for many commodity producing countries. When the purchasing power of a country’s exports declines, a country is unable to purchase imported goods and services necessary for its sustenance, as well as generating income for the implementation of sustainable development programs.
A vast majority of developing countries depend on commodities as a main source of revenue. Primary commodities account for about half of the export revenues of developing countries and many developing countries continue to rely heavily on one or two primary commodities for the bulk of their export earnings.
— Celine Tan, Tackling the Commodity Price Crisis Should Be WSSD’s Priority. TWN Briefings for WSSD No.14, Third World Network, August 2002
Tan also highlights in the above article that “a fall in commodity prices have [sic] also led to a build-up of unsustainable debt.” The lack of greater revenues from exports has knock-on effects, as described further above. The irony is that structural adjustments were prescribed by the IMF and the World Bank due to debt repayment concerns in the first place.
As debt-relief and trade became major topics of discussion during the G8 Summit 2005. Yaya Orou-Guidou, an economist from Benin (a small African country), also noted that exporting raw materials and agricultural products would not help fight poverty. Those raw materials have to be processed in the same poor country to help create a multiplier effect:
Orou-Guidou believes Benin will need to start processing the raw materials it produces if it is to escape the poverty trap.
“A prime material kept in Africa for processing in our factories is one less thing for Western factories to earn money on,” he notes. But, if “we content ourselves with selling our agricultural or mining products in their raw states, they will always feed Western factories which provide jobs for (the West’s) own people.”
— Ali Idrissou-Toure, Debt Cancellation No Panacea for Benin. Inter Press Service, July 7, 2005
This concern also applies to larger economies. The global financial crisis that started in 2008 resulted in Brazil’s exports to US falling by some 42%, while it increased with China by 23%. However, almost 75% of Brazil’s export to the US were industrial products, whereas the opposite — about 25% — was for China. Vice president of the Brazilian Foreign Trade Association explained why this is a concern to IPS :
- When dealing in commodities, “the importer decides and controls the quantity and prices, making an unstable market,” in contrast to the situation with manufactured goods.
- Commodities also generate low-grade jobs, whereas manufacturing employs skilled personnel for higher wages, creates a multiplier effect on employment as the production chain is longer, and expands the domestic market.
These concerns are not new.
Political economist Adam Smith also provided some insights in his 1776 classic, The Wealth of Nations. which is regarded as the Bible of capitalism. He was highly critical of the mercantilist practices of the wealthy nations, while he recognized the value of local industry and the impact of imported manufactured products on local industries:
Though the encouragement of exportation and the discouragement of importation are the two great engines by which the mercantile system proposes to enrich every country, yet with regard to some particular commodities it seems to follow an opposite plan: to discourage exportation and to encourage importation. Its ultimate object, however, it pretends, is always the same, to enrich the country by the advantageous balance of trade. It discourages the exportation of the materials of manufacture, and of the instruments of trade, in order to give our own workmen an advantage, and to enable them to undersell those of other nations in all foreign markets ; and by restraining, in this manner, the exportation of a few commodities of no great price, it proposes to occasion a much greater and more valuable exportation of others. It encourages the importation of the materials of manufacture in order that our own people may be enabled to work them up more cheaply, and thereby prevent a greater and more valuable importation of the manufactured commodities. (Emphasis Added)
— Adam Smith, Wealth of Nations, Book IV, Chapter VIII, (Everyman’s Library, Sixth Printing, 1991), p.577
Reading the above, we can say that structural adjustment policies are also mercantilist. We are constantly told that we live in a world of global capitalism, and yet we see that while free markets are preached (in Adam Smith’s name), mercantilism is still practiced!
Of course, today it is a bit more complicated too. We do have, for example, products being exported from the poorer countries (albeit some facing high barriers in the rich nations). But exporting rather than first creating and developing local industry and economy, means the “developing” country loses out in the long run, (hardly “developing”) because there is little multiplier effect of money circulating within the country, as mentioned above. Furthermore, with labor being paid less than their fair wages in the poorer nations, wealth is still accumulated by—and concentrated in—the richer nations.
The Luckiest Nut In The World is an 8 minute video (sorry, no transcript available, as far as I know), produced by Emily James. It is a cartoon animation explaining the effects of loans, structural adjustment and cashcrops, and their impacts on poorer countries. It traces how Senegal was encouraged to grow nuts for export. In summary,
- As a poor nation without many resources, it took out loans to help develop the industry.
- Other nations saw this was going well, so they followed suit.
- The price of nuts started to drop and Senegal faced debt repayment problems.
- Structural adjustment policies were put in place, cutting spending and reducing government involvement in the nut industry and elsewhere.
- However, things got worse.
- At the same time rich countries, such as the US, were subsidizing their own nut (and other) industries, allowing them to gain in market share around the world.
- Rich countries have tools such as trade tariffs and the threat of sanctions at their disposal to help their industries, if needed.
Thus we are in a situation where the rich promote a system of free trade for everyone else to follow, while mercantilism is often practiced for themselves.
- “Free trade” is promoted by the rich and influential as the means for all nations to achieve prosperity and development.
- The wealth accumulated by the richer countries in the past is attributed to this policy to strengthen this idea.
- That such immense wealth was accumulated not so much from “free” trade but from the violent and age-old mercantilism or “monopoly capitalism” is ignored.
- Such systems are being practiced again today, and even though they are claimed to be Adam-Smith-style free trade, they are the very systems that Adam Smith himself criticized and attacked.
In 1991 Larry Summers, then Chief Economist for the World Bank (and US Treasury Secretary, in the Clinton Administration, until George Bush and the Republican party came into power), had been a strong backer of structural adjustment policies. He wrote in an internal memo:
Just between you and me, shouldn’t the World Bank be encouraging more migration of dirty industries to the LDCs [less developed countries]?… The economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable, and we should face up to that… Under-populated countries in Africa are vastly under-polluted; their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City… The concern over an agent that causes a one in a million change in the odds of prostate cancer is obviously going to be much higher in a country where people survive to get prostate cancer than in a country where under-five mortality is 200 per thousand.
— Lawrence Summers, Let them eat pollution, The Economist, February 8, 1992. Quoted from Vandana Shiva, Stolen Harvest, (South End Press, 2000) p.65; See also Richard Robbins, Global Problems and the Culture of Capitalism (Allyn and Bacon, 1999), pp. 233-236 for a detailed look at this.
When looked at in this light, poverty is more than simple economic issues; it is also an ideological construct.