excerpts from the book
No-Nonsense guide to
by Wayne Ellwood
New Internationalist / Verso,
... around 1980 things began to change with the emergence of fundamentalist
free-market governments in Britain and the US and the later disintegration
of the state-run command economy in the former Soviet Union. The
formula for economic progress adopted by the administrations of
Margaret Thatcher in the UK and Ronald Reagan in the US called
for a drastic reduction in the regulatory role of the state. Instead,
government was to take a back seat to corporate executives and
money managers. The overall philosophy was that companies must
be free to move their operations anywhere in the world to minimize
costs and maximize returns to investors. Free trade, unfettered
investment, deregulation, balanced budgets, low inflation and
privatization of publicly-owned enterprises were trumpeted as
the six-step plan to national prosperity.
Hand-in-hand with the spread of free trade
in goods and services came the deregulation of world financial
markets. Banks, insurance companies and investment dealers which
had been confined within national borders were suddenly unleashed.
Within a few years the big players from Europe, Japan and North
America expanded into each other's markets as well as into the
newly-opened and fragile financial services markets in the South.
Aided by computer technology and welcoming governments, the big
banks and investment houses were keen to invest surplus cash in
anything that would turn a quick profit. In this new relaxed atmosphere
finance capital became a profoundly destabilizing influence on
the global economy.
Instead of long-term investment in the
production of real goods and services, speculators make money
from money, with little concern for the impact of their investments
on local communities or national economies. Governments everywhere
now fear the destabilizing impact of this global financial casino.
Recent United Nations (UN) studies show a direct correlation between
the frequency of financial crises and the increase in international
capital flows during the l990s.
The Bretton Woods Trio
As World War II was drawing to a close,
the world's leading politicians and government officials, mostly
from the victorious 'Allied' nations (Britain, Canada, Australia,
New Zealand and the United States) began to think about the need
to establish a system of rules to run the postwar global economy.
Before the widespread outbreak of the
war in 1939 trading nations everywhere had been racked by a crippling
economic depression. When the US stock market crashed in 1929
nations turned inward in an attempt to pull themselves out of
the steep skid. But without a system of global rules there was
no coherence or larger logic to the 'beggar-thy-neighbor' polices
adopted worldwide. High tariff barriers were thrown up between
countries with the result that world trade nose-dived, economic
growth spluttered and mass unemployment and poverty followed.
As a result the 1930s became a decade of radical politics and
rancorous social ferment in the West as criticism of laissez-faire
capitalism and an unchecked market economy grew.
Scholars like Karl Polanyi helped to reinforce
a growing suspicion of a market-based economic model which put
money and investors at the center of its concerns rather than
social values and human well-being. 'To allow the market mechanism
to be the sole director of the fate of human beings and their
natural environment... would result in the demolition of society,'
Polanyi wrote in his masterwork, The Great Transformation.
Polanyi was not alone in his distrust
of the market economy. Other thinkers like the influential Cambridge-educated
economist John Maynard Keynes were also grappling with a way of
controlling global markets, making them work for people and not
the other way around. Keynes both admired and feared the power
of the market system. With the memory of the Great Depression
of the 1930s still fresh in his mind he predicted that, without
firm boundaries and controls, capitalism would be immobilized
by its own greed, and would eventually self-destruct. As it happened
only World War Two turned things around. The War set the factories
and farms humming again as millions of troops were deployed by
all sides in the conflict. Armaments manufacturers, aircraft factories
and other military suppliers ran 24-hour shifts. Years later,
as the war wound down, government policy makers began to think
about how to ensure a smooth transformation to a peacetime economy.
It was Keynes' radical notion of an 'interventionist'
state to which governments turned in an effort to set their economies
back on a steady keel. Until the worldwide slump of the 1930s
the accepted economic wisdom had been that unemployment was a
'normal condition' of the free market. The economy might go up
and down according to the normal business cycle but in the long
run, growth (and increased global trade) would create new jobs
and sop up the unemployed.
Keynes was skeptical of this orthodoxy,
suggesting that the economy was a human-made artifact and that
people acting together through their government could have some
control over its direction. Why not act now, he suggested, since
'in the long run we're all dead. His approach offered a way out
for governments who found themselves helplessly mired in economic
In The General Theory of Employment, Interest
and Money published in 1936, Keynes argued that the free market,
left on its own, actually creates unemployment. Profitability,
he said, depends on suppressing wages and cutting costs by replacing
labor with technology. In other words profits and a certain amount
of unemployment go hand-in-hand. So far so good, at least for
those making the profits. But then Keynes showed that lowering
wages and laying off workers would inevitably result in fewer
people who could afford to buy the goods that factories were producing.
As demand fell, so would sales, and factory owners would be forced
to lay off even more workers. This, reasoned Keynes, was the start
of a downward spiral with terrible human consequences.
To 'prime the economic pump' Keynes suggested
governments intervene actively in the economy. He reasoned that
business owners and rich investors are unlikely to open their
wallets if the prospects for growth look dim. When the economy
is in a tailspin then it is up to government to step in - by spending
on public goods like education, health care, job training, roads,
dams, trams and railways. And by wading in with direct financial
support to the unemployed.
Even if governments had to go into debt
to kickstart economic growth Keynes advised politicians not to
worry. The price was worth it. By directly stimulating the economy,
government could rekindle demand and help reverse the downward
spiral. Soon companies would begin to invest again to increase
production to meet the growing demand. This would mean hiring
more workers with more money in their pockets. As jobs increased
so would taxes. Eventually, the government would be able to pay
back its debt from increased tax revenues raised from a now healthy,
Desperate Western governments were quick
to adopt the 'Keynesian' solution to economic stagnation. In the
US the 'New Deal' policies of the Roosevelt administration were
directly influenced by Keynes. The American Employment Act of
1946 accepted the federal government's responsibility 'to promote
maximum employment, production and purchasing power'. The British
Government, too, in 1944 accepted as one of its primary aims 'the
maintenance of a high and stable level of employment after the
Other countries like Canada, Australia
and Sweden quickly followed. Keynes' influence spread and people
began to believe that economics was finally a manageable science
in the service of human progress.
The aim of the Bretton Woods Conference
[July 1944 ] was to erect a new framework for the postwar global
economy - a stable, cooperative international monetary system
which would promote national sovereignty and prevent future financial
crises. The purpose was not to bury capitalism but to save it.
The main proposal was for a system of fixed exchange rates. In
the light of the depression of the previous decade floating rates
were now seen as inherently unstable and destructive of national
Keynes' influence at Bretton Woods was
significant. But despite his lobbying and cajoling he did not
win the day on every issue. In the end the huge military and economic
clout of the Americans proved impossible to overcome.
The Conference rejected his proposals
to establish a world 'reserve currency' administered by a global
central bank. Keynes believed this would have created a more stable
and fairer world economy by automatically recycling trade surpluses
to finance trade deficits. However his solution did not fit the
interests of the United States, eager to take on the role of the
world's economic powerhouse. Instead the Conference opted for
a system based on the free movement of goods with the American
dollar as the international currency. The dollar was linked to
gold and the price of gold was fixed at $35 an ounce (28g). In
effect the US dollar became 'as-good-as-gold' and in this one
act became the dominant currency of international exchange.
Three governing institutions emerged from
the gathering to oversee and coordinate the global economy. These
were not neutral economic mechanisms: they contained a powerful
bias in favor of global competition and corporate enterprise.
And each had a distinct role to play:
INTERNATIONAL MONETARY FUND (IMF)
The IMF was born with a mission: to create
economic stability for a world which had just been through the
trauma of depression and the devastation of war. As originally
conceived it was supposed to 'facilitate the expansion and balanced
growth of international trade' and 'to contribute to the promotion
and maintenance of high levels of employment and real income'.
A major part of its job was to oversee
a system of 'fixed' exchange rates. This was supposed to stop
countries from devaluing their national currencies to get a competitive
edge over their neighbors - a defining feature of the economic
chaos of the 1930s.
Another part of the Fund's mandate was
to promote currency 'convertibility' - to make it easier to exchange
one currency for another when trading across national borders
and in this way to encourage world trade.
And finally the new agency was to act
as a 'lender-of-last-resort' supplying emergency loans to countries
which ran into short-term cash flow problems. Keynes' idea was
to set up an International Clearing Union which would automatically
provide unconditional loans to countries experiencing balance-of-payments
problems. These loans would be issued 'no strings attached' and
their purpose would be to support domestic demand and maintain
employment. Otherwise countries feeling the pinch would be forced
to balance their deficit by cutting off imports and smothering
their domestic economy.
Keynes argued that international trade
was a two-way street and that the 'winners' (those countries in
surplus) were as obligated as the 'losers' (those countries in
deficit) to bring the system back into balance. In fact, Keynes
suggested that pressure be brought to bear on surplus nations
so they would be forced to increase their imports and recycle
the surplus to deficit nations.
But Keynes' view did not prevail. Instead
a proposal put forward by US Treasury Secretary Harry Dexter White
became the basis for the IMF. The International Clearing Union
idea disappeared. IMF members would not automatically receive
loans when they tumbled into deficit. Instead members would have
access to limited loan amounts which were to be determined by
a complex quota system.
When a country joins the IMF it is assigned
a quota which is calculated in Special Drawing Rights (SDRs),
the Fund's own unit of account. 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.
Balance-of-payments loans are at less
than the prevailing rate and members are supposed to use and repay
them within five years. The issue of whether the IMF could attach
conditions to these loans was lost in the verbiage of the original
Bretton Woods agreement. But Harry Dexter White was very clear
six months later when he wrote in the journal Foreign Affairs
that the Fund would not simply dole out money to debtor countries.
The IMF would force countries to take measures which under the
old gold standard (see p34) would have happened automatically.
While the framers of the Bretton Woods
agreements supported a gradual reduction of trade barriers and
tariffs they were less enthusiastic about allowing the free movement
of capital internationally.
Keynes, Britain's delegate to the meeting,
advocated a balanced world trade system with strict controls on
the movement of capital across borders. He held that the free
movement of all goods and capital, advocated most powerfully by
the US delegation, would inevitably lead to inequalities and instabilities.
WORLD BANK (INTERNATIONAL BANK FOR RECONSTRUCTION
One of the other key goals of the Bretton
Woods Conference was to find a way to rebuild the economies of
those nations that had been devastated by World War Two. The International
Bank for Reconstruction and Development (IBRD) was created to
spearhead this effort. The Bank is funded by dues from its members
and by money borrowed on international capital markets. It makes
loans to members below rates available at commercial banks. Its
initial mandate was to provide loans for economic 'infrastructure'
which included things like power plants, dams, roads, airports,
ports, agricultural development and education systems. The Bank
poured money into reconstruction and development in Europe after
World War Two. But it was not enough and it was not fast enough
to satisfy the United States whose booming industries were in
need of viable markets. In response the US set up its own, much
looser, Marshall Plan which directly provided dollars to European
nations, largely in the form of grants rather than loans.
As Europe gradually recovered in the 1950s
the IBRD turned its interest to the newly-independent countries
of the Third World where it became widely known as the World Bank.
As Southern countries sought to enter the industrial age the Bank
became a major player throughout the region. 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. So in the late 1950s
the Bank was pressured into setting up the International Development
Association (IDA). This wing of the Bank was to provide 'soft
loans' with very low interest or none at all - and so head off
attempts by the new countries of the Third World to set up an
independent funding agency separate from the Bretton Woods institutions
which could operate under UN auspices. The Bank also established
two other departments: the International Finance Corporation which
supports private-sector investment in Bank-approved projects,
and the Multilateral Insurance Guarantee Agency, which provides
risk insurance to foreign corporations and individuals who decide
to invest in one of the Bank's member countries.
GENERAL AGREEMENT ON TARIFFS AND TRADE
(GATT)/WORLD TRADE ORGANIZATION (WTO)
The GATT established a set of rules to
govern global trade. Its aim was to reduce national trade barriers
and to stop the competitive trade policies that had so hobbled
the global economy prior to World War Two. Seven rounds of tariff
reductions were negotiated under the GATT treaty - the final 'Uruguay
Round' began in 1986.
March 1994, following completion of the
final round of talks, politicians and bureaucrats gathered in
Marrakech, Morocco, to approve a new World Trade Organization
(WTO) which was to replace the more loosely-structured GATT. The
WTO, unlike the GATT, has the official status of an international
organization rather than a loosely-structured treaty. It 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 in Services (GATS) which potentially affects more than
160 areas including telecommunications, banking and investment,
transport, education, health and the environment.
From the outset GATT was seen as a 'rich
man's club' dominated by Western industrial nations which were
slow to concede their position of power. The WTO continues this
tradition of rich world domination.
The WTO pursues its free trade agenda with the single-minded concentration
of the true believer. Nonetheless there is a growing unease about
the organization's globalizing agenda. Critics are especially
wary of the new Dispute Settlement Body (DSB) which gives the
WTO the legal tools to approve tough trade sanctions by one member
against another, especially on nations which might disagree with
the organization's interpretation of global trade rules. Any member
country, acting on behalf of a business with an axe to grind,
can challenge the laws and regulations of another country on the
grounds that they violate WTO rules.
All nations have the right to use the DSB to pursue their own
economic self-interest. But the fact is that the world's major
trading nations are also its most powerful economic actors and
so the tendency is for the strong to use the new rules to dominate
The 'national treatment clause' basically
says that a country may not discriminate against products of foreign
origin on any grounds whatsoever. And in so doing it removes the
power of national governments to develop economic policy which
serves the moral, ethical or economic interests of their citizenry.
For example, if goods are produced by children in sweatshop conditions
that doesn't enter the equation. And the same is true if a foreign
factory fouls the air and poisons the water, if poverty wages
are paid to the workers who produce the stuff, or if the goods
themselves are poisonous and dangerous.
According to WTO rules any country that
refuses to import a product on the grounds that it may harm public
health or damage the environment has to prove the case scientifically.
So Canada, the world's biggest asbestos producer, has petitioned
the WTO's dispute panel to force the European Community to import
the known carcinogen once again. And when the European Union (EU)
refused imports of hormone-fed beef from North America, the US
took the case to the WTO arguing that there was no threat to human
health from cows fed hormones. The EU ban on hormone-fed beef
applied to their own farmers as well as foreign producers but
that made little difference. The WTO panel decided in favor of
the US, effectively ruling that Europeans had no right to pass
laws that supported their opposition to hormones. The EU was ordered
to compensate producers in the US and Canada for every year of
lost export earnings. And in retaliation the US imposed 100 per
cent tariffs on a range of European imports including mustard,
pork, truffles and Roquefort cheese.
Meanwhile, the giant US-based shipping
company, United Parcel Service (UPS), has been lobbying Washington
to take Canada's government-run postal service to the WTO dispute
panel. UPS says that Ottawa is unfairly subsidizing Canada Post
and therefore poaching potential customers. Ottawa in its turn
has announced its intention to prohibit the export of fresh water
from Canada by a California-based company.
And so it goes in the topsy-turvy new
world of economic globalization. Those institutions which first
emerged from the Bretton Woods negotiations half a century ago
have become more important players with each passing decade. It
is their vision and their agenda which continue to shape the direction
of the global economy. Together, they are fostering a model of
liberalized trade and investment which is heartily endorsed by
the world's biggest banks and corporations. A deregulated, privatized,
corporate-led free market is the answer to humanity's problems,
they tell us. The proof, though, is not so easily found.
Debt and structural adjustment
The world has changed so dramatically
in the last half century that it's hard to believe that only four
decades ago the newly emerging colonies of Africa and Asia were
joining with their nominally independent brethren in Latin America
to push for a 'new international economic order' (NIEO). Throughout
the 1960s and early 1970s an insistent demand for radical change
burst forth from the two-thirds of the world's people who lived
outside the privileged circle of North America and Western Europe.
There was a powerful movement to shake off the legacy of colonialism
and to fight for a new global system based on economic justice
Some Third World nations began to explore
ways of increasing their bargaining power with the industrialized
countries in Europe and North America by taking advantage of their
control over key resources. Groups like the Organization of Petroleum
Exporting Countries (OPEC) hoped to cooperate together to control
the supply of petroleum and ratchet up the price of oil, thereby
increasing their share of global wealth and bringing prosperity
to their populations. There was heady talk of 'producer cartels'
to raise the price of exports like sugar, coffee, cocoa, tin and
rubber. That way poor countries that were critically dependent
on one or two primary commodities could gain more income and more
control over their own development. There was also strong and
vocal opposition to the growing power of transnational corporations
who were seen to be remaking the world in their own interests.
But when poor countries did try to force up the price of their
primary exports they often found themselves faced with near-monopoly
control by Western corporations of processing, distribution and
marketing. When the declaration of principles for an NIEO was
issued in 1974 it was the culmination of a new 'solidarity of
the oppressed' which had spread throughout the developing nations.
Galvanized by centuries-old colonial injustices
and sparked by the radical ideas of Fanon in Algeria, Nkrumah
in Ghana, Gandhi in India, Sukarno in Indonesia, Nyerere in Tanzania
and Castro m Latin America, these 'Third World' nations set out
to collectively challenge the entrenched power of the United States
and Western Europe. The NIEO was not a grassroots movement. It
was a collection of progressive intellectuals and politicians
who believed correctly that, left on their own, free markets would
never reduce global inequalities. Instead these leaders argued
for improved 'terms of trade' and a more just international economic
system. When bargaining failed producer countries began to form
trade alliances based on specific commodities.
Third World nations came together in political
organizations like the Non-Aligned Movement which was initially
an attempt to break out of the polarized East/West power struggle
between the West and the Soviet Bloc. In the United Nations, developing
countries formed the 'Group of 77' which was instrumental in creating
the UN Conference on Trade and Development (UNCTAD). Within UNCTAD
poor countries pushed for fairer 'terms of trade'. Many newly-independent
countries of the South still relied heavily on the export of raw
materials in the 1950s and 1960s. But there was a faltering effort
and a stronger belief in the need to build local industrial capacities
and to support the push for a 'new international economic order'.
Why was it, they asked, that the price of everything they imported
from the West, whether it was manufactured goods, spare parts
or foodstuffs, seemed to creep ever upwards while the prices they
received for their agricultural exports and raw materials remained
the same - or even decreased?
The transparent injustice of this enraged
and frustrated leaders like Tanzania's Julius Nyerere who referred
to declining terms of trade as constantly 'riding the downward
escalator'. Between 1980 and 1991 alone non-oil-exporting developing
countries lost nearly $290 billion due to decreasing prices for
their primary commodity exports. In response to this economic
discrimination Third World nations also began agitating for an
increase in 'untied aid from the West; for more liberal terms
on development loans; and for a quicker transfer of new manufacturing
technologies from North to South.
In addition most developing countries
favored an active government role in running the national economy.
They quite rightly feared that in a world of vast economic inequality
they could easily be crushed between self-interested Western governments
and their muscular business partners. That was the chief reason
that many Third world nations began to take tentative steps to
regulate foreign investment and to maintain at least minimal trade
Latin American nations were especially
successful at encouraging 'import substitution as a way of boosting
local manufacturing, employment and income Countries like Brazil
and Argentina used a mix of taxation policy, tariffs and financial
incentives to attract both foreign and domestic investment. American
and European auto companies set up factories to take advantage
of import barriers. The development goal was to stimulate industrialization
in order to produce goods locally and to boost export earnings.
This had the added benefit of reducing imports, which both cut
the need for scarce foreign exchange and kept domestic capital
circulating inside the country. Unfortunately, the era of import
substitution was short. Latin American nations were soon bullied
into dismantling import barriers so that by the late 1960s there
were no local producers of cars, TVs, iceboxes/fridges or other
major household goods. Still, this was a brief but important step
in trying to shift the balance of global power to poor countries.
New economic order
But even before the clamor for a new world
economic order, momentous changes were beginning to unfold that
would dramatically alter the fate of poor nations for decades
to come. By the late 1960s the Bretton Woods dream of a stable
monetary system of fixed exchange rates with the dollar as the
only international currency was collapsing under the strain of
American trade and budgetary deficits.
The United States' economy was firing
on all cylinders and beginning to dangerously overheat. As the
war in Vietnam escalated, the Federal Reserve in Washington pumped
out millions of dollars to finance the conflict. Inflation edged
upwards and the US foreign debt ballooned to pay for the war.
World Bank President Robert McNamara also
leapt into the fray and contracted huge loans to the South during
the 1970s - both for 'development' (essentially defined as basic
infrastructure to bring 'backward' economies into the market system)
and to act as a bulwark against a perceived worldwide communist
threat. The Bank's stake in the South increased five-fold over
At the same time a guarded optimism took
hold in the South, fueled by moderately-high growth rates and
a short-term boom in the price of primary commodities particularly
oil. The Organization of Petroleum Exporting Countries (OPEC)
was the first, and ultimately the most successful, Third World
'producer union'. By standing together and controlling the supply
of oil they were able to increase the price of petroleum three-fold
to over $30 a barrel. The result was windfall surpluses for OPEC
members - $310 billion for the period 1972-1977 alone. This 'oil
shock' rippled through the global economy, triggering double-digit
inflation and a massive 'recycling' problem.
What were OPEC nations to do with this
vast new wealth of 'petrodollars'? Some of it they would spend
on glittering new airports, power stations and other showcase
mega-projects. But much of it eventually wound up as investment
in Northern financial centers or deposited in Northern commercial
banks. This was the birth of the 'eurocurrency' market - a huge
pool of cash held outside the borders of the countries that originally
issued the currency. The US dollar was the main 'eurocurrency'
but there were also francs, guilders, marks and pounds.
Western banks, flush with this new OPEC
money, then began to search for borrowers. They didn't have long
to look. Soon millions in loans were contracted to non-oil-producing
Third World governments desperate to pay escalating fuel bills
and to fund ambitious development goals. At the same time the
massive increase in oil prices helped inflation soar around the
world. Prices skyrocketed while growth slowed to a crawl and a
new word was added to the lexicon of economists: 'stagflation'.
In the midst of this economic chaos US President Richard Nixon
moved unilaterally to de-link the dollar from gold. As a result
the world moved to a system of floating exchange rates. Nixon
also devalued the greenback (US dollar) against other major world
currencies and jacked up interest rates, a move which had an enormous
impact on the global economy.
By slashing the value of the dollar Washington
effectively reduced the huge debt it owed to the rest of the world.
The US had been running a large deficit in order to pay the costs
of the war in Vietnam. As interest rates shot up, those countries
reeling under OPEC oil-price hikes had the cost of their eurodollar
loans (most of which were denominated in US dollars) double and
even triple, almost overnight. The debt of the non-oil producing
Third World increased five-fold between 1973 and 1982, reaching
a staggering $612 billion. The banks were desperate to lend to
meet their interest obligations on deposits so easy terms were
the order of the day. Dictators who could exact payments from
their cowering populations with relative ease must have seemed
like a good bet for lenders looking for a secure return.
Sometimes the petrodollar loan money was
squandered on grandiose and ill-considered projects. Sometimes
it was simply filched - siphoned off by Third World elites into
personal accounts in the same Northern banks that had made the
original loans. Often it was both wasted and stolen.
The experience was similar across the
South. 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 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
Examples of these foolish loans to corrupt
leaders are well known. In the Philippines, dictator Ferdinand
Marcos along with his wife Imelda and their cronies are estimated
to have pocketed in the form of kickbacks and commissions a third
of all loans to that country. Before he was forced out of office,
Marcos' personal wealth was estimated at $10 billion.
Meanwhile, there are no records for 80
per cent of the $40 billion borrowed by the Argentinean military
dictatorship from 1976 to 1983. Argentineans are demanding that
their Government either produce accounts or have the debts declared
illegal. It seems that New York banks knew money was being misused,
that there had been kickbacks and fraudulent loans to companies
linked to the military, and that the IMF allegedly connived with
the fraud. It is also clear that the military used some of the
loans to buy weapons for the Falklands/Malvinas War.
Deeper in debt
From 1997 to the first year of the millennium,
the 'Jubilee 2000' citizens' movement led a worldwide campaign
to cancel the debts of the world's poorest countries. Jubilee
researchers found that almost a quarter of all Third World debt
(nearly $500 billion) is the result of loans used to prop up dictators
in some 25 different countries. ~
The money flowed free and fast through
the 1980s and early 1990s. But eventually the soaring tower of
debt began to creak and sway. One government after the next began
to run into financial trouble. The loans they had raised and squandered
on daft projects or salted away in private bank accounts became
so large their foreign exchange earnings and tax revenues couldn't
keep up the payments.
During this period the IMF became an enforcer
of tough policy conditions on poor countries that were forced
to apply to the Fund for temporary balance-of-payments assistance.
During the 1970s and early 1980s the IMF's loans were conditional
on governments following the advice of the Fund's economists who
had their own take on what Southern nations were doing wrong and
how they could fix it. The Fund's demands were woven into the
deals worked out with those countries that required an immediate
transfusion of cash. Essentially, the agency argued that the debtor
country's problems were caused by 'excessive demand' in the domestic
economy. Curiously, the responsibility of the private banks who
made most of the dubious loans in the first place (with their
eyes wide open it should be noted) was ignored.
The IMF prescription
According to the Fund this excessive demand
meant there were too many imports and not enough exports. The
solution was to devalue the currency and cut government spending.
This was supposed to slow the economy and reduce domestic demand,
gradually resulting in fewer imports, along with more, and cheaper,
exports. In time, the IMF argued, the balance-of-payments deficit
would be eliminated. Countries were more or less forced to adopt
these austerity measures if they wanted to get the IMF 'seal of
approval'. Without it they would be ostracized on the fringes
of the global economy. Both the IMF and the World Bank also urged
debtor nations to take on deeper 'structural adjustment' measures
as early as the 1970s but borrowing countries refused to go along
with the advice.
Then in 1982 Mexico told its creditors
it could no longer pay and a full-fledged Third World 'debt crisis'
emerged. Northern politicians and bankers began to worry that
the sheer volume of unpayable loans would undermine the world
financial system. Widespread panic began to sweep through the
world of international finance as scores of Southern nations teetered
on the brink of economic collapse. In response both the Bank and
the IMF hardened their line and began to demand major changes
in the way debtor nations ran their domestic economies. Countries
like Ghana were forced to toe the line and enforce tough adjustment
conditions as early as 1983.
A few years later, the US Treasury Secretary
James Baker decided to formalize this new strategy to force Third
World economies to radically 'restructure' their economies to
meet their debt obligations. The 'Baker Plan' was introduced at
the 1985 meeting of the World Bank and the IMF when both agencies
were called on to impose more thorough 'adjustments' to the economic
policies of debtor countries.
The Bank and the Fund made full use of
this new leverage. Together they launched a policy to 'structurally
adjust' the Third World by deflating economies and demanding a
withdrawal of government - not only from public enterprise but
also from compassionate support of the basic health and welfare
of the most vulnerable. Exports to earn foreign exchange were
privileged over basic necessities, food production and other goods
for domestic use. Y
The Fund set up its first 'formal' Structural
Adjustment Facility in 1986. The World Bank soon followed, so
that by 1989 the Bank had contracted adjustment loans to 75 per
cent of the countries that already had similar IMF loans in place.
The Bank's conditions both extended and reinforced the IMF prescription
for financial 'liberalization' and open markets. They included
'privatizing' state-owned enterprises; reducing the size and cost
of government through massive public sector layoffs; cutting basic
social services and subsidies on basic foodstuffs; and reducing
barriers to trade. This restructuring was highly successful from
the point of view of the private banks who siphoned off more than
$178 billion from the South between 1984 and 1990 alone. Structural
adjustment programs (SAPs) were in fact an extremely effective
mechanism for transforming private debt into public debt.
The 1980s were a 'lost decade' for much
of the Third World. Growth stagnated and debt doubled to almost
$1,500 billion by the decade's end. By 1999 it had reached nearly
$3,000 billion. An ever-increasing proportion of this new debt
was to service interest payments on the old debt, to keep money
circulating and to keep the system up-and-running. Most of this
debt had shifted from private banks to the IMF and the World Bank
- though the majority was still owed to rich countries and Northern
banks. The big difference was that the Fund and the Bank were
always first in line so paying them was a much more onerous prospect.
Taking more out
The stark fact that the Fund and the Bank
began operating with reverse capital flows (in other words they
were then taking more money out of the Third World than they were
putting back in) was sobering for those who believed those institutions
were there to help.
In six of the eight years from 1990 to
1997 developing countries paid out more in debt service (interest
plus repayments) than they received in new loans: a total transfer
from South to North of $77 billion. And most of the increase was
used to meet interest payments rather than for productive investment.
After 1998 the balance changed again as a result of massive bailout
packages to Mexico and Asia. However, this will likely set the
stage for negative flows again in the near future.
The 'conditionalities' of structural adjustment
meanwhile diverted government revenues away from things like education
and healthcare, towards debt repayment and the promotion of exports.
This gave the World Bank and IMF a degree of control that even
the most despotic of colonial regimes rarely achieved.
Even former enthusiastic supporters of
structural adjustment were forced to reconsider their faith in
this 'neo-liberal' recipe for economic progress. In 1999, Harvard
University's 'economic shock-therapy' advocate Jeffrey Sachs wrote:
'Many of the three billion of the world's poorest live in countries
whose governments have long since gone bankrupt under the weight
of past credits from foreign governments, banks and agencies such
as the World Bank and the IMF. These countries have become desperate
wards of the IMF... Their debts should be canceled outright and
the IMF sent home.
The situation has remained essentially
unchanged ever since. In nations as far apart as Yugoslavia, Rwanda
and Peru, the privations suffered in the name of debt repayments
lay concealed behind outbreaks of violent civil unrest. All attempts
to organize relief for the South were rebuffed on principle until
1996, when the 'Heavily Indebted Poor Countries Initiative' was
launched to make debt repayments 'sustainable'. Within a decade,
the 'cold' war which ended in 1989 was replaced by a 'financial'
war that is still being fought.
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. A 1999 study by the Washington-based group, Development
Gap, looked at the impact of SAPs on more than 70 African and
Asian countries during the early 1990s. The study concluded that
the longer a country operates under structural adjustment the
worse its debt burden becomes. SAPs, Development Gap warned, 'are
likely to push countries into a tragic circle of debt, adjustment,
a weakened domestic economy, heightened vulnerability and greater
So we are left with a bizarre and degrading
spectacle. In Africa, external debt has ballooned by 400 per cent
since the Bank and the IMF began managing national economies through
structural adjustment. Today in Ethiopia a hundred thousand children
die annually from easily preventable diseases, while debt repayments
are four times more than public spending on healthcare. In Tanzania,
where 40 per cent of people die before the age of 35, debt payments
are 6 times greater than spending on healthcare. From the whole
of Africa, where one in every two children of primary-school age
is not in school, governments transfer four times more to Northern
creditors in debt payments than they spend on the health and education
of their citizens.
Structural-adjustment programs may not
have put Third World countries back on a steady economic keel
but they have certainly helped undermine democracy in those nations.
Joseph Stiglitz, former World Bank Chief Economist, is candid
about the record of bureaucrats in both agencies undermining the
ability of nominally independent nation states to govern their
own affairs. In an article written shortly after his resignation
Stiglitz said there are 'real risks associated with delegating
excessive power to international agencies... The institution can
actually become an interest group itself, concerned with maintaining
its position and advancing its power.' If we believe in democratic
processes he continues, 'countries must make the decisions for
themselves, and the responsibility of economic advisors is only
to appraise them of prevailing views.
The debt load on all governments, but
particularly those of the Third World, has crippled their capacity
to look after their citizens. Capital moves so freely that it
is often impossible for governments to find, let alone tax.
With the disintegration of the Soviet
Union, the impoverishment of Africa and the resurgence of an unfettered
market system in Asia and Latin America the triumph of capitalism
seems complete. Indeed, SAPs really only make sense when seen
through the lens of economic globalization. They 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 emerging in this
seemingly uniform consensus. People in the South are resisting
structural adjustment through violent opposition and grassroots
organizing. Protest too is coming from the millions uprooted by
World Bank mega-projects, particularly the building of massive
hydroelectric dams. Rejection of all things Western is on the
rise. Fundamentalism and the politics of ethnic exclusion (from
Somalia to Kosovo to India) are turning political costs into military
ones. And, as the Seattle protests of December 1999 illustrated,
powerful and unaccountable institutions like the World Trade Organization
are coming under direct pressure from citizens' groups, community
activists, students, trade unionists and environmentalists. Many
are calling for reform. Others are going much farther and demanding
the outright abolition of these agencies and a complete restructuring
of &e global financial architecture.
One of the corporate sector's greatest political victories in
recent decades has been to beat down corporate taxes. In Britain,
the corporate tax rate fell from 52 per cent in 1979 to 30 per
cent in 2000 and Labor Prime Minister Tony Blair has boasted that
British business is subject to even fewer strictures than corporations
in the US. Corporate tax rates have declined in virtually every
OECD country over the last two decades as governments rely more
and more on personal income taxes and sales taxes for revenues.
In 1950 corporate taxes in the US accounted for 30 per cent of
government funds; today they account for less ~ than 12 per cent.
Their sheer size, wealth and power means
that multinationals and the business sector in general have been
able to structure the public debate on social issues and the role
of government in a way which benefits their own interests. They
have used their louder voices and political clout to build an
effective propaganda machine and to boost what the great Italian
political theorist Antonio Gramsci called their 'cultural hegemony'.
Through sophisticated public relations, media manipulation and
friends-in-high-places the neo-liberal economic perspective has
come to be accepted as the 'common sense' approach to running
a country. This radical paradigm shift has occurred in the short
space of 30 years.
A corporation's ultimate responsibility
is to its shareholders, as Chief Executive Officers (CEOs) constantly
reassure their investors at annual general meetings. It is enhanced
value for shareholders which drives and structures corporate decision-making
- without regard for the social, environmental and economic consequences
of those decisions. Unless obligations to the public good are
imposed on companies the business agenda will continue to ride
roughshod over national and community interests.
Public disillusionment with the WTO is now well known and opposition
is growing to the organization's bottom-line brand of globalization.
But if activists hadn't stumbled across the MAI in 1997, efforts
to inject human values into the debate on the global trading system
could have been severely curtailed. After the WTO came into being
in 1994, the globe's major corporations began to put together
a plan for codifying the rules of world trade in a way that would
give them complete freedom. They found it in the MAI, an agreement
which was drafted by the International Chamber of Commerce (a
'professional association' of the world's largest companies) and
presented to the rich-nation OECD members for discussion and,
it was assumed, rubber-stamp approval.
Once passed, the next stop was to be the
WTO. Third World governments were rightly suspicious of the MAI
and many saw it as 'a throwback to colonial era economics'. But,
with the weight of the OECD behind it, supporters of the MAI reckoned
it would be speedily adopted as an official WTO document.
Delegates from OECD countries began discussing
the MAI in early 1995 behind closed doors. By early 1997 most
of the treaty was down on paper and the public was none the wiser.
In fact, most politicians in the OECD's 29 member countries weren't
even aware of the negotiations. It was only when activists in
Canada got their hands on a copy of the MAI and began sending
it around the world via the Internet that the full scope of the
document became clear.
The MAI was a corporate dream come true.
Essentially the agreement set out to give private companies the
same legal status as nation-states in all countries that were
party to the Agreement. But more importantly it set out a clear
set of rules so that corporations would be able to defend their
new rights against the objections of sovereign governments. The
MAI was so overwhelmingly biased towards the interests of multinationals
that critics were quick to label it 'the corporate rule treaty'.
For example, under MAI provisions corporations
could sue governments for passing laws that might reduce their
potential profits. They could make their case in secret with no
outside interest groups involved and the decision would be binding.
The MAI also allowed foreign investors to challenge public funding
of social programs as a distortion of free markets and the 'level
playing field'. If a government chose to privatize a state-owned
industry it could no longer give preference to domestic buyers.
In addition, governments would be forbidden to demand that foreign
investment benefit local communities or the national economy.
They could not demand domestic content, local hiring, affirmative
action, technology transfer or anything else in return for allowing
foreign companies to exploit publicly owned resources. And there
were to be no limits on profit repatriation.
Once the text became public, citizens'
groups around the world began vigorous education campaigns on
the potentially-damaging impact of the MAI. Two influential activists,
Tony Clarke and Maude Barlow, summed up the feelings of citizens'
groups everywhere. The MAI, they wrote, 'would provide corporations
with the right to directly enforce an international treaty to
which they are not party and under which they have no obligations.
It would be entirely one-sided; neither citizens nor governments
could sue the corporations back. The MAI would provide foreign
investors with new and substantive rights with which they could
challenge government programs, policies and laws all over the
In a few months public anxiety about the
deal came to a head. In France, Australia, Canada and the US politicians
at all levels were drawn into the debate and governments were
forced to enter 'reservations' to protect themselves from certain
of the MAI's provisions. By the May 1998 deadline it was clear
that the talks were at a standstill and that public opposition
had torpedoed further progress on the Agreement.
This was a stunning victory for a growing
international citizens' movement. But the end of the MAI as such
did not spell the end of the corporate agenda for an unregulated,
global investment treaty. The focus would now shift to the WTO
and other global venues where multinationals could lobby for the
MAI-like investment provisions.
Fueled by a strong dollar and a vastly-overvalued stock market,
the American economy continues to suck in cheap imports from the
rest of the world. The result is colossal domestic debt and record
trade deficits. In 1999 the US trade deficit soared to nearly
$300 billion, almost triple the deficit of 1995.
Over the past decade the UN has documented a\ steady shift of
global income from wages to profits throughout the world. Even
so investors are no longer satisfied with five or six per cent
annual returns. As barriers to the free movement of capital started
to crumble around the world, corporations, banks and other major
investors began to cast around anxiously for other surefire means
of maximizing their returns. The solution was quick at hand. From
the 'real' economy of manufacturing and commodity production investors
turned to the world of international finance. Speculation and
gambling in international money markets seemed an easier path
than competing for fewer and fewer paying customers in the old
goods and services economy. The era of the 'global casino' had
... the biggest and most dangerous change over the past 30 years
has been in the area of global finance. The volume of worldwide
foreign exchange transactions has exploded as country after country
has lowered barriers to foreign investment. In 1980 the daily
average of foreign exchange trading totaled $80 billion; today
it is estimated that more than $1,500 billion changes hands daily
on global currency markets.
That is an unimaginable sum of money,
but it is all the more stunning when you realize that most of
this investment has virtually nothing to do with producing real
goods and services for real people. In 1998 the annual global
trade in merchandise and services was $6.5 billion - equal to
only 4.3 days of trading on foreign exchange markets. '
Money chasing money has eclipsed productive investment as the
motor of the global economy.
Critics of corporate-led globalization charge that \ unregulated
flows of capital pose a major threat to the stability of the global
economy, turning the world into a 'global financial casino'. This
free flow of capital has also had a direct political impact, leaving
national governments hostage to market sentiments. Any departure
from the received wisdom is instantly , punished. This threat
leads to a massive degree of self-censorship and a serious loss
And crises we've seen ~ from 1973 to 1995 there were 11 major
global financial blow-ups. All of them required active intervention
by international financial institutions and national governments
to keep the world system from collapsing. 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.
As the UN Development Program commented
in its 1999 Human Development Report: 'The East Asian crisis in
not an isolated accident, it is a symptom of general weakness
in global capital markets.' The UN agency was not alone in its
assessment. Even the stridently pro-business magazine, The Economist,
was forced to admit that abrupt reversals in capital 'have challenged
the conventional wisdom that it is a good thing to let capital
move freely across borders'. Others likeJagdish Bhagwati were
less equivocal. He noted that 'the Asian crisis cannot be separated
from excessive borrowings of foreign short-term capital... It
has become apparent that crises attendant on capital mobility
cannot be ignored.'
The Southeast Asian economy went into freefall in the summer of
... The set-back for development was so severe that non-governmental
agencies estimated it would take a decade or longer to make-up
the lost ground. Oxfam analyzed the situation as follows:
'The crisis now gripping East Asia bears
comparison in terms of its destructive impact with the Great Depression
of 1929. What started as a financial crisis has been allowed to
develop into a full-fledged social and economic crisis, with devastating
consequences for human development. Previously rising incomes
have been reversed and unemployment and underemployment has reached
alarming levels. Rising food prices and falling social spending
have further aggravated the social conditions of the poorest.'
The human impact of the crisis was stunning.
According to the UN's International Labor Organization (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
There was also a frightening resurgence
of racial 'scape-goating' and inter-communal violence throughout
the region. Malaysia's autocratic leader Mahathir Mohamad blamed
Jewish financiers for destabilizing his Muslim country, while
in Indonesia the shops of ethnic-Chinese merchants were looted
and burned and hundreds of Chinese brutally beaten and killed.
There were, however, some clear winners
that emerged from the Asian meltdown. The big ones were the Western
corporate interests that rushed in to snap up the region's bargain-basement
assets after the economic collapse. As former US Trade Representative
Mickey Kantor said at the time, the recession in the Tiger Economies
'was a golden chance for the West to 'reassert' its commercial
interests. 'When countries seek help from the IMF,' he said, 'Europe
and America should use the IMF as a battering ram to gain advantage.'
That was certainly true in South Korea
where the IMF agreement lifted restrictions on outside ownership
so that foreigners could purchase up to 55 per cent of Korean
companies and 100 per cent of Korean banks. Years of effort by
the Korean elite to keep businesses firmly under control of state-supported
conglomerates called chaebols were undone in a matter of months.
In January 1998 the French investment firm Credit Lyonnais estimated
that just 87 of the country's 653 non-financial firms were safe
from foreign buyers. Rudi Dornbusch, a US economist, accurately
summed up the overall impact of the economic crisis. 'Korea is
now owned and operated by our Treasury,' he crowed. "That's
the positive side of this crisis."
The original Bretton Woods agreement did not fulfill Keynes' dream
of giving 'every member government the explicit right to control
capital movements' but the policies did give members some controls.
Unfortunately, even these limited tools have been gradually eroded
over the years by the growing insistence on deregulation. US Treasury
official Lawrence Summers criticized efforts by Malaysia, Hong
Kong and others to hobble the movement of overseas capital. He
called controls a 'catastrophe' and urged countries to 'open up
to foreign financial service providers, and all the competition,
capital and expertise they bring with them'. Given the damage
inflicted on millions by the fickle nature of short-term speculators,
Summers' fundamentalism comes across as both short-sighted and
As people from Mexico to Russia see their
lives wrecked by the whipsaw effect of one global financial crisis
after another it is becoming painfully evident that the old ways
no longer work. The world has been led to the brink of financial
chaos too often in the last decade. Solutions are needed urgently
to ensure that money markets, bond traders and currency speculators
are brought under the control of national governments in the interest
of the public good.
One of the most cogent critiques of the downside globalization
came from the UN Development Program in its 1999 Human Development
Report. 'When the market goes too far in dominating social and
political outcomes, the opportunities and rewards of globalization
spread unequally and inequitably - concentrating power and wealth
in a select group of people, nations and corporations, marginalizing
The UN agency backed its analysis with
hard-hitting figures on what it called a 'grotesque and dangerous
polarization' between those people and countries benefiting from
the system and those that are merely 'passive recipients' of its
Even on its own terms economic globalization
is not working. In 1960, the fifth of the world's people who live
in the richest countries had 30 times more income than the fifth
living in the poorest countries. By 1997 the income gap had more
than doubled to 74:1. Income inequalities within countries have
also increased over the past two decades. Another UN study, this
one on income inequality in OECD countries, concluded that in
the 1980s real wages (adjusted for inflation) had fallen and income
inequality increased in all countries except Germany and Italy.
The widening gap
In the US the top ten per cent of families
increased their average income by 16 per cent during that decade,
while the top five per cent increased theirs by 23 per cent and
the top one per cent by a whopping 50 per cent. This trend was
echoed elsewhere. In Latin America the top 10 per cent of wage-earners
increased their share of total income by 10 per cent while the
poorest 10 per cent saw their income drop by 15 per cent, wiping
out what meager improvements they had made in the previous decade.
Income inequality also grew in Thailand, Indonesia, China and
other Asian nations even though the region enjoyed healthy economic
growth throughout the decade. In sub-Saharan Africa the situation
was worse: after two decades of IMF and World Bank structural
adjustment not only is income inequality growing but average per
capita incomes are falling. They are now lower than they were
This shift in wealth and income from bottom
to top is part of the logic of globalization. In order to be 'competitive'
governments adopt policies which cut taxes and favor profits over
wages. The economic argument is simple: putting more money into
the pockets of corporations and wealthy individuals (who benefit
most from tax cuts: the higher the income the greater the gain)
will lead to greater investment, jobs, economic growth and good
times for all.
Unfortunately, there is no evidence that
improvements in public well-being result from tax cuts for the
rich or lower wages for the rest of us. If tax cuts were directed
towards those at the bottom of the income ladder there might be
some impact since the money would almost certainly be spent on
basic necessities. But this isn't part of the globalization game
plan. In every country that has taken up the 'reduce-taxes-cut-the-deficit'
mantra the majority of tax cuts benefit wealthy individuals and
corporations. What happens to the money is perhaps predictable:
some goes into high-priced consumer baubles - a phenomenon which
is glaringly visible amongst the elite in cities from Bangkok
to Los Angeles. But most winds up in the stock market or in other
sorts of non-productive speculative activity.
Despite ... worrying warning signs, neo-liberals are reluctant
to abandon their beliefs: 'Give the private sector the resources,'
they say, 'and it will do the job.' But the proof is hard to find.
Surplus capital which doesn't get funneled into currency markets
zips straight into overseas tax havens where both rich individuals
and globe-trotting multinationals have been squirreling away their
cash for decades.
There are nearly 70 tax havens scattered
around the world. These 'offshore financial centers' include places
like the Bahamas, the Cayman Islands, Liberia and Bermuda. Investors
can store their wealth secretly, no questions asked - thus escaping
any social obligations to the country where they may have earned
As corporate profits boom and real wages stagnate, the glue that
holds us together is losing its strength. We're told there is
no longer enough money to pay for 'public goods'. In exchange
for a few hundred dollars in tax cuts we sacrifice our schools,
reduce state support for community parks and recreation facilities,
hobble our public transport and weaken our healthcare system
In Western Europe, Canada, Australia and
New Zealand (Aotearoa) public education and healthcare systems
have seen repeated budget cuts as the state retreats and makes
way for private, profit-oriented ventures. Welfare and unemployment
benefits have been 'rationalized', slashing the number of those
eligible. Senior citizens and those nearing retirement are fearful
that promised pensions will evaporate as governments become more
desperate for funds. Individuals are frantically scraping together
whatever savings they have and heading towards the stock market
in the hope that they too will ride to old-age security on the
coattails of the FTSE, the Nasdaq and the Dow Jones. Government
funding for the arts and for environmental protection has also
been steadily eroded. This failure to protect these 'public goods'
diminishes us all, makes us less capable of caring for each other
and prohibits us from advancing together as a cohesive, mutually
Globalization has also derailed development
in the South where the poor continue to pay the highest price
of adjustment. In order to boost exports and maintain their obligations
to creditors, developing countries must divert money away from
things like healthcare, education and aid to small-scale farmers.
There have been countless studies detailing the social impact
of structural adjustment and the findings are depressingly similar.
Those with the least suffer the most.
The litany of suffering and chaos spawned by harsh l market reforms
is repeated across the developing world. A 1999 joint study by
the Washington-based Development Gap and Friends of the Earth
confirmed this damage in five different poor countries.
In Senegal, which has endured 20 years
of IMF programs, the report found 'declining quality in education
and health' combined with a growth in 'maternal mortality, unemployment
and child labor'. In Tanzania the research found that globalization
had successfully redirected agriculture towards exports but had
also 'expanded rural poverty, income inequality and environmental
degradation'. Food security decreased housing conditions deteriorated
and primary-school enrollment dropped while malnutrition and infant
In Mexico the report noted that globalization
led to 'economic depression'. Millions of farmers were pushed
out of agriculture and thousands of small businesses went bankrupt
- 'drastically slashing jobs and wages' in the process. In Nicaragua,
whose mildly leftist Sandinista government was destabilized by
the US in the 1980s, IMF policies drove the country into further
poverty. Financial deregulation attracted capital to 'short-term,
high interest deposits' and 'away from productive investment in
small-scale domestic agriculture and manufacturing'. In Hungary,
the IMF advised introducing liberalized trade, a tight money supply
and rapid privatization of state assets. But the report found
the policies deflected money away from education and social services
and into the wallets of wealthy bond holders.
But it was in Russia that the orthodox
prescription for economic reform did some of its greatest harm.
Supported by billions in Western aid, subsidized loans and rescheduled
debt, the plan was to turn Russia into a capitalist success story
overnight. Instead the 'shock therapy' threw the economy open
to the winds of corruption. Privatized state assets ended up in
the hands of a small group of powerful insiders (often the same
people who ran the former communist state apparatus) while ordinary
Russians were saddled with colossal debts. At the same time an
estimated $150 billion left the country, most of it permanently.
Poverty in Russia
In the absence of price controls and the
guaranteed employment of the Soviet era, average Russians endured
poverty unknown for decades. It is estimated that 70 per cent
of Russians now live below the poverty line while capital investment
is barely 10 per cent of what it was in 1990. The country has
experienced the steepest fall in peacetime living standards in
modern history. According to the UN inequality doubled from 1989
to 1996. The income share of the richest 20 per cent of Russians
is 11 times that of the poorest 20 per cent. Much of the economy
has returned to barter while male life expectancy dropped from
65 to 60 years (two years less than the average for developing
countries) and the under-five child mortality rate jumped to 25
per thousand live births - the same as Libya or Venezuela
The IMF does not exist in a vacuum. Governments fund it and in
return receive votes based on a 'one dollar, one vote' principle
- in contrast to the UN's 'one country, one vote' system. As a
result, industrialized countries account for over 60 per cent
of the voting strength at the IMF and World Bank, compared with
just 17 per cent in various UN bodies.
The chief beneficiary is the U.S. which
is the only country with a large-enough slice of the votes to
enjoy an effective veto of major IMF decisions. That, and the
Fund's location in Washington, has helped give the US disproportionate
power in using the IMF to pursue its own international agenda.
In 1995 more than one hundred nations endorsed an agreement that
will have profound impacts on biodiversity, climate change and
virtually every other major environmental issue. The agreement
is binding and is armed with powerful enforcement measures to
ensure that every member lives up to its obligations under the
The bad news is that this international
treaty will be an environmental disaster.
Can't guess which agreement this is? Here
are more clues. The treaty wasn't established under the UN Environment
Program (UNEP). In fact, it was the product of highly secretive
negotiations conducted by public officials working hand-in-glove
with the world's largest corporations. Nor is it explicitly about
the environment. In fact the treaty rarely mentions the word and
never even refers to biodiversity, climate change or desertification.
This international 'environment' treaty
is, of course, the World Trade Organization's General Agreement
on Trade and Services (GATS). While its proponents deny that it
is anything more than a commercial agreement, their protests betray
the dangerously myopic perspective they bring to economic and
trade policy. The WTO's environmental relevance has also been
obscured behind a smoke-screen of jargon. In 'tradespeak' environmental
standards become 'technical barriers to trade', food-safety regulations
are 'sanitary and phytosanitary measures' while the genetic commons
becomes a system of 'intellectual property rights'. This also
explains why its backers have been successful in denying the link
between trade agreements and environmental concerns.
In broad terms, the WTO is designed to
entrench 'grow-now, pay-later' globalization by removing the power
of governments to regulate corporate activity in the public interest.
The result is that it will undermine our capacity to redirect
current economic, development and trade policies towards a truly
Clear evidence of its impact can be seen
in a number of successful trade challenges to environmental, conservation
and food-safety regulations. Since the WTO was founded four years
ago we have watched (its rules prohibit public participation)
as the treaty's enforcement machinery has been wheeled into action
to punish governments that flout its rules. The growing list of
casualties now includes European and Japanese food-safety measures,
US clean-air regulations and marine mammal conservation laws,
aid and development treaties between Europe and a few impoverished
former colonies, and Canadian cultural programs. And the list
is likely to grow.
These trade disputes represent only the
most visible conflicts between free-trade rules and the environment.
Indeed, the most damaging effects of this new global regime occur
out of sight, as governments quietly abandon environmental, conservation,
worker and consumer protections rather than become embroiled in
international trade disputes.
Lately, many environmentalists have come
to realize that while they were plodding down the hallways of
conference centers trying to negotiate international agreements
to combat climate change, protect biodiversity or reduce hazardous-waste
trade to poor nations, the ink was drying on an agreement that
would only heap fuel on these ecological fires.
This is discouraging, but it is also instructive.
The WTO's authority depends on powerful enforcement machinery
and in this regard it offers a model for environmental treaties.
It proves that when governments are motivated they will sign on
to truly binding international agreements.
Any government that violates WTO rules
is vulnerable to sanctions - often too severe for even the wealthiest
nation to ignore. In the organization's first trade complaint
(a challenge by foreign gasoline refiners to US Clean Air Act
regulations) the Environmental Protection Agency was given two
options. Either remove the offending statute or face trade sanctions
in the order of $150 million a year.
A similar fate befell European food-safety
regulations last year when the WTO ruled that a European Community
(EC) ban on hormone-treated beef violated several rules. The Organization
ordered the EC to remove its import controls and, when it refused,
authorized trade sanctions worth more than $125 million as the
price of its defiance. Moreover, sanctions can be imposed against
unrelated products - wherever they will be felt most.
In addition, WTO cases are routinely heard,
decided, appealed and resolved within a year. It would be impossible
to find any other legal sanctions against government initiatives
that are as quick and effective as these. In contrast, international
environmental agreements rarely use trade sanctions. Even where
they do exist they represent only a pale imitation of the powerful
enforcement regime built into the WTO.
Agreements like the Framework Convention
on Climate Change and the Biodiversity Convention don't include
any enforcement mechanism other than moral persuasion. This lack
of teeth explains why governments have so resolutely ignored commitments
they made when they signed these agreements at the UN's Earth
Summit in Rio back in 1992.
Ultimately, nation states must face legally
binding obligations if international environmental goals are to
be met. This is where we need to tear several pages from the WTO
text concerning enforcement.
Consider, for example, the enforcement
provisions of the WTO Agreement on Intellectual Property Rights
which were written to promote the interests of global pharmaceutical,
biotechnology and media firms. Then imagine environmental goals
being taken as seriously as patent rights. If the WTO were transformed
into an organization that was as concerned about climate change
as it is about the growth of transnational drug companies, we
could have an Agreement on Trade-Related Measures To Combat Global
Warming. Such an Agreement could require all WTO members to:
* adopt domestic laws to stabilize greenhouse-gas
emissions at 1990 levels.
* provide for customs inspection, seizure
and disposal of goods that were produced in ways that violate
* establish criminal sanctions for any
breach of the legislation or regulations mandated by the Agreement.
* authorize the use of trade sanctions,
including cross-retaliatory measures - such as prohibiting the
export of energy or energy products - against any jurisdiction
that was in breach of its obligations under the Agreement.
It is a measure of how much work lies
ahead that a proposal to treat climate change as seriously as
pharmaceutical patents would no doubt be greeted with complete
incredulity by the WTO. That's why it's critical that governments
be pressed to explain why they consider patent protection a higher
priority than global warming or biodiversity loss.
But what then do we do with trade and
investment deals that are currently exacerbating ecological crises?
Does the WTO need to be fundamentally overhauled? Or do proposals
to delegate environmental issues to a new UN organization, such
as a Global Environmental Organization, make sense?
The answer depends on whether you believe
that the environment can be isolated and protected from the main
thrust of free-trade policies. In fact, they are cut from the
As conflicts between environmental and
trade policy became too obvious to deny, free-traders have pushed
the environment debate to the margins within the WTO or isolated
Current WTO head Michael Moore suggests
that environmental issues don't belong in his agency and should
be left to 'specialized institutions' with the expertise to address
them. He is hoping that most people won't appreciate how intimately
interrelated trade and environmental issues really are.
Of course we do need to strengthen the
mandates of the international environmental institutions. But
it is naive to imagine that this can happen outside the framework
of international economic relations. Indeed, the isolation of
these organizations from UN agencies like the World Bank and the
WTO explains the marginal influence they have had.
The WTO is as much an environmental agreement
as the Basel Convention on Transboundary Waste Shipments is a
trade agreement. The distinction is artificial and serves only
to defeat efforts to build a sustainable and integrated model
for human development.
Trade agreements must serve the goals
of combating climate change, preserving biodiversity, assuring
food security and protecting diversity. By the same token, international
environmental agreements must integrate economic and environmental
strategies if they are to be effective and durable.
The need for fundamental reform of the
WTO is undeniable. But a supranational Global Environment Organization
(GEO) could also play a supportive role by legitimizing the use
of trade and economic sanctions. A GEO will have to be equipped
with enforcement mechanisms very much like those of the WTO. Noncompliance
would be greeted with sanctions every bit as certain, swift and
substantial as those meted out by the WTO. Economic and trade
sanctions might not always be necessary, but they'd have to be
available just in case.
It is unlikely that Michael Moore can
imagine a GEO to rival the power and influence of the WTO he now
heads. Indeed, the challenge of establishing an effective international
environmental regime will be no less daunting than transforming
the WTO. Ultimately, this is because both agendas have precisely
the same end point - a treaty to promote ecological and economic
security for all peoples, rather than some grotesque notion of
international trade built on perpetual growth.
[Robin Round directs the Tobin Tax campaign of the Halifax Initiative,
a coalition of Canadian NGOs.]
What is the Tobin Tax?
In 1978 Nobel Prize-winning economist
James Tobin proposed that a small worldwide tariff (less than
half of one per cent) be levied by all major countries on foreign-exchange
transactions in order to 'throw some sand in the wheels' of speculative
flows. For a currency transaction to be profitable, the change
in value of the currency must be greater than the proposed tax.
Since speculative currency trades occur on much smaller margins,
the Tobin Tax would reduce or eliminate the profits and, logically,
the incentive to speculate. The tax is designed to help stabilize
exchange rates by reducing the volume of speculation. And it is
set deliberately low so as not to have an adverse effect on trade
in goods and services or long-term investments.
How would a Tobin Tax benefit the global
It could boost world trade by helping
to stabilize exchange rates. Wildly fluctuating rates play havoc
with businesses dependent on foreign exchange as prices and profits
move up and down, depending on the relative value of the currencies
being used. When importers and exporters can't be certain from
one day to the next what their money is worth, economic planning
- including job creation - goes out of the window. Reduced exchange-rate
volatility means that businesses would need to spend less money
'hedging' (buying currencies in anticipation of future price changes),
thus freeing up capital for investment in new production.
Tobin's proposed tax would not have stopped
the crisis in Southeast Asia, but it could help prevent future
crises by reducing overall speculative volume and the volatility
that feeds speculative attack.
In what way would the Tobin Tax benefit
It is designed to reduce the power financial
markets have to determine the economic policies of national governments.
Traditionally, a country's central bank buys and sells its own
currency on international markets to keep its value relatively
stable. The bank buys back its currency when a 'glut' caused by
an investor sell-off threatens to reduce the currency's value.
In the past, most central banks had enough cash in reserve to
offset any sell-off or 'attack'.
Not any longer. Speculators now have more
cash than all the world's central banks put together. Official
global reserves are less than half the value of one day of global
foreign-exchange turnover. Many countries are simply unable to
protect their currencies from speculative attack.
By cutting down on the overall volume
of foreign exchange transactions, a Tobin Tax would mean that
central banks would not need as much reserve money to defend their
currency. The tax would allow governments the freedom to act in
the best interests of their own economic development, rather than
being forced to shape fiscal and monetary policies according to
demands of fickle financial markets.
How would the Tobin Tax benefit people?
By making crises less likely, the tax
would help avoid the social devastation that occurs in the wake
of a financial crisis. It could also be a significant source of
global revenue at a time when foreign aid is decreasing and strong
domestic anti-tax sentiments are reducing the ability of governments
to raise revenue. In the face of increasing income disparity and
social inequity, the Tobin Tax represents a rare opportunity to
capture the enormous wealth of an untaxed sector and redirect
it towards the public good.
Conservative estimates show the tax could
yield from $150-300 billion annually. The UN estimates that the
cost of wiping out the worst forms of poverty and environmental
destruction globally would be around $225 billion per year.
Who will be taxed ?
The majority of foreign-exchange dealing
is by 100 of the world's largest banks. The top ten control 52
per cent of the market and are mostly American, German and British.
Citibank tops the list with a 7.75 percent market share and a
1998 volume of foreign exchange transactions which, at $8.5 trillion,
exceeded the GDP of the US. These banks operate in their own interest
and on behalf of large corporate and private investors, insurance
companies, hedge funds, mutual funds and pension funds.
What will be taxed ?
Only specialized financial transactions
known as 'spots', 'swaps', 'futures' and 'forwards' will be taxed.
With the exception of spot transactions, these instruments are
known as 'derivatives' because their value is derived from the
value of an underlying asset which is not bought or sold in the
Tourists exchanging dollars to pay for
their holidays abroad would not be subject to a Tobin Tax. Debate
continues as to whether the tax should apply to any transaction
less than a million dollars.
How does the Tobin Tax work?
The tax would target only speculative
currency transactions. Because it is not easy to determine which
types of transactions are speculative and which are associated
with legitimate trade in goods and services, the tax hinges on
the speed of a transaction. Speed is the primary difference between
speculative and legitimate trade. Productive investment works
on the medium to long term while speculators flip investments
like pancakes, profiting by the daily, hourly and minute-to-minute
fluctuations in interest rates and currency values. Eighty per
cent of all speculative transactions occur within seven days or
less - 40 per cent occur in two days or less.
A Tobin Tax would automatically penalize
short-term exchanges, while barely affecting the incentives for
commodity trading and long-term capital investments.
Won't speculators find ways to evade the
Inevitably. However, this has never dissuaded
governments from collecting taxes, particularly 'sin taxes' designed
to stem unacceptable behavior. The real question is, how do you
A Tobin Tax could be difficult to evade.
Because currency transactions are tracked electronically, in theory
the tax would be easy to collect through the computer systems
that record each trade. While the amount of money is enormous,
the number of centers where trading occurs and the number of traders
is not. Eighty per cent of foreign-exchange trading takes place
in just seven cities. Agreement by London, New York and Tokyo
alone would capture 68 per cent of speculative trading.
Won't speculators still operations to
offshore tax havens?
Agreement between nations could help avoid
the relocation threat, particularly if the tax were charged at
the site where payments are settled or 'netted'. Globally, the
move towards a centralized settlement system means transactions
are being tracked by fewer and fewer institutions. Hiding trades
is becoming increasingly difficult. Transfers to tax havens like
the Cayman Islands could be penalized at double the agreed rate
What is the biggest barrier to the Tobin
It's not technical or administrative.
It's political. The tax is seen as a threat by the financial community
and has met with stiff resistance by a sector with massive political
clout. The very idea of putting people ahead of markets challenges
the foundations of the current global economic model and those
who control it.
Can the opposition be overcome?
In the wake of recent global financial
crises governments everywhere are examining their faith in free
markets. Even the World Bank and the International Monetary Fund
praised Malaysia's use of capital controls to jump-start its battered
economy in 1997-8. This is a fundamental shift in attitude, unimaginable
The political appeal of this tax to cash-strapped
governments and multilateral agencies worldwide can't be underestimated.
At the UN Social Summit +5 in Geneva in June 2000, 160 governments
agreed to conduct a rigorous analysis on new and innovative sources
of funding for social development, including a currency transaction
tax. NGOs from around the world fought hard for this crucial study
and believe it will make a significant contribution to the intergovernmental
debate on a Tobin Tax.
Who supports the Tobin Tax?
The international trade union movement,
the Canadian Parliament, the Finnish Government and a growing
number of academics and elected representatives all support the
tax. The European Parliament, and parliamentarians in the UK and
France have held debates on the Tobin proposal and groups of parliamentarians
are active in Brazil and throughout Europe. Over 400 parliamentarians
from 21 countries have signed a World Parliamentarians Call for
a Tobin Tax and 160 economists from 29 countries signed a similar
appeal launched in June 2000. Citizens' movements for a Tobin
Tax are active around the world. These include: CIDSE in Europe,
the Halifax Initiative in Canada, KEPA in Finland, War on Want
in Britain, ATTAC in France and Brazil, CCEJ in Korea and the
Tobin Tax Initiative in the US. These and other groups have established
the International Tobin Tax Network to share information and coordinate
actions as they work to build public and political support for
This is only one aspect of the fundamental
reform of the global financial system and is not a panacea for
the world's financial ills and development woes. The democratization
of economic decision-making and the equitable redistribution of
wealth must become the central principles upon which governments
act in the new millennium.
The real work has just begun. Citizens
and politicians around the world must not let the powerful forces
who oppose the Tobin Tax stifle, manipulate and ultimately undermine
an essential public debate on controlling global financial markets.
The Tobin Tax deserves a fair hearing.
Only widespread popular support and public pressure can ensure
[Tony Clarke is Director of the Polaris Institute in Ottawa, Canada
and board member of the International Forum on Globalization.]
As a rich-nations club where most of the
'Global Fortune 500' - the biggest and wealthiest corporations
- are based, the Organization for Economic Cooperation and Development
(OECD) is not the place to construct an alternative treaty along
these lines. Nor is the World Trade Organization (WTO). Although
the WTO includes most of the world's nation states, its power
structure is heavily weighted against the developing countries.
The only appropriate place is the UN itself.
Despite disturbing signs of corporate infiltration in UN affairs,
the foundation for developing an alternative framework is located
there, along with more equitable decision-making. What is required
is leadership within UN circles to kick-start the process.
The main principles of an Alternative
Investment Treaty should include:
* Citizens' rights- Investment should
be designed to ensure that capital serves the basic rights and
needs of all citizens including: human rights (adequate food,
clothing, shelter); social rights (quality health care, education,
social services); labor rights (employment, fair wages, unions,
health and safety standards); environmental rights (protection
of air, waters, forests, fish, wildlife and nonrenewable resources)
and cultural rights (preservation of peoples' identity, values,
* State responsibilities - To ensure that
citizens' rights are respected governments have the right and
responsibility to regulate the national economy. These powers
should include the right to protect strategic areas of their economies
(finance, energy, communications) by establishing public enterprises.
And the right to protect sensitive areas known as the 'commons'
(the environment, health care, culture) through government-run
* Corporate obligations - Although foreign-based
corporations can expect fair treatment and a reasonable return
on investment (compensation for expropriation of assets) they
must maintain certain social obligations such as performance standards
designed to ensure citizens' basic needs and rights. They must
also recognize that governments have the right to protect and
enhance strategic areas of their economies and the 'commons'.
And they must contribute a portion of their capital to the 'commons'
by paying their fair share of taxes.
An Alternative Investment Treaty based
on these fundamental principles would include the following key
* Fair treatment - Foreign investment
would be welcome provided social obligations were met. The concept
of 'national treatment', which is used to force governments to
treat foreign corporations on the same terms as domestic companies,
should be discarded. Instead the 'stored value' of capital would
be the basis for establishing obligations for fair treatment of
* Social obligations - Governments would
have the legal right to require all corporations, both foreign
and domestic, to meet basic social obligations such as labor standards,
environmental safeguards and social-security contributions.
* Performance standards - To ensure that
foreign investment serves national-development priorities, governments
would be allowed to require standards such as job quotas, balancing
imports with exports, quotas on natural-resource exports or restrictions
on the repatriation of profits. In return for access to a country's
markets and resources, a government could require that a foreign
company create a specified number of new jobs in the community
or adhere to restrictions on the export of nonrenewable resources.
These initiatives are both feasible and practical. Canada's Foreign
Investment Review Act once provided the Canadian Government with
the policy tools to apply this kind of performance requirement
on foreign investments.
* Investment incentives - To ensure that
corporations keep these social obligations, governments may use
investment 'incentives' including: grants, loans and subsidies;
procurement practices; tax incentives and limits on profit remittances
for foreign companies that fail their social obligations. Governments
could decide, for example, to buy from either foreign or domestic
companies as a way of attracting productive investment.
* Public enterprises - All governments
have a responsibility to use tax revenues for protecting the 'commons'
through public investments. These could include exercising public
ownership over key sectors of the economy; establishing social
programs and public services; safeguarding ecologically sensitive
areas; and protecting cultural heritage.
* Expropriation measures - Fair compensation
should be paid to foreign corporations whose physical assets are
expropriated for public purposes. But not when social or environmental
regulations add to business costs. Compensation should be determined
by national law with due regard to the value of the initial investment,
the valuation of the properties for tax purposes and the amount
of wealth taken out of the country during the period of investment.
So a foreign corporation could not demand
compensation for an environmental law that placed a quota on the
export of a nonrenewable resource or a health ban on the sale
of toxic substances, on the grounds that such measures would reduce
the corporation's profit margins. Nor could a foreign company
claim compensation for loss of future profits because government
actions prevent a planned investment from going ahead.
* Financial transactions - All governments
have a right to require that foreign investment be used for productive
rather than speculative purposes; that foreign corporations deposit
a percentage of their profits in the central bank for a specified
minimum period; that foreign-exchange transactions be taxed in
order to slow down currency speculation. For example, to prevent
the sudden exodus of speculative capital from Chile, 'speed bump'
measures were introduced which required investment to remain in
the country for at least a year.
* Dispute settlement- In the event of
a dispute citizens, governments and corporations would all have
the right to be heard. Disputes filed by citizens would be heard
by national courts which would have powers to invoke injunctions
and award monetary compensation. Through this process any one
of the three parties with legal standing could bring a suit for
monetary compensation but not for violation of the investment
rules aimed at striking down national laws. To ensure that non-governmental
organizations (NGOs), native communities, environment and women's
groups, trade unions and others have equal access to the dispute-settlement
mechanism, national and international funds should be established
for citizen intervenors.