How it Works Now and How it Could Work

Margaret Legum

The globalisation of the world economy seemed a natural progression from what has worked before. The global market could spread the benefits now largely limited to the developed world; capital could be used to open new areas and enhance people’s lives; we could all have access to the fruits of the earth throughout the earth. All this was made possible by astonishing advances in technology. It seemed not only obviously beneficial to humanity but also inevitable. What has gone wrong? Why are so many people protesting against the globalisation of our world’s economy? Why is it being described as a force for evil and not a force for good? The answer is that new factors have entered the equation which have rendered the old assumptions false. So we need to think again about how globalisation could serve, and not undermine, the interests of humanity.

Technology and the Culture of Abundance / Scarcity

Modern technology enables production on a virtually unlimited scale. We live in an era in which we could produce in the Biblical imagery of an hundred fold practically everything we need. The snag is that it sheds jobs. As the electronic technology produces more and more goods, fewer people have jobs. Fewer people can buy the product of the machines that have made them redundant. In order to compete successfully all employers must use state-of-the-art technology, which involves downsizing and all the other jargon that means making people redundant. In the past, technology which created unemployment also created new jobs. No longer on a large enough scale. Now we lose jobs exponentially faster than we create them. And where they are created they are highly skilled people.

That is the first NEW FACTOR.

The second is that we still behave as though we live in a world of scarcity. We run the economy as though the only thing that matters is efficiency in terms of cost - cheapness. We behave as though there were no greater good than cheap production - a lower price to the consumer. Everyone must compete to offer the buyer the cheapest possible product. If we limit their efforts at cheapness we will distort the market in some unspecified dangerous way. It is as though we lived in a world of famine, post disaster trauma or terrible fear that resources will not go round. Yet the opposite is the truth. We live with abundance which we don’t know how to distribute. Machines do not go shopping. And unemployed people do not have the means to buy the product of the machines that have made them redundant.

That is the second NEW FACTOR: our problem is distribution, not scarcity. We have lived for so long with the latter that we can’t move on. Ironically, by making that mistake we have created various degrees of scarcity for more and more people. In the interests of cheapness more people work for longer hours and less pay than before the market was globalised. Increasing millions live and die in extreme poverty, even starvation. In the midst of plenty their numbers rise. The elasticity of the possibility of growth. Current political/economic thinking assumes that the problems globalisation has thrown up are part of the transition to universal wealth, and can be solved by slowly spreading high consumption levels from rich to poor as they become developed. But our planet cannot absorb the toxins created by current levels of growth, let alone more.

This is the third NEW FACTOR.

Growth is not the way out

Report after scientific report has told us we are now at the limit of the Earth’s capacity to absorb our exploitation of its resources. The astro-physicists Swimme and Berry (The Universe Story) put the psychological and physical dimensions of the problem in this way:

“We are unable to move from a conviction that as humans we are the glory and the crown of the Earth community to a realisation that we are the most destructive and the most dangerous component of that community…The crash that faces us is not the crash simply of the human, it is a crash of the bio-systems of the Earth: indeed it is in some manner the crash of the Earth itself.”

No one denies the dangers. Yet those in charge of our international financial institutions continue to talk as though economic growth were the solution. It is not. The economists and the politicians will have to get out there with the scientists to say so.

The global movement of capital

Capital is now by far the most valued factor of production. Not because it is more productive than before, but simply because it is able to move virtually at will. It has the power of the coquette. Woo me, or else… …there are plenty of others. Labour cannot move internationally. Land is fixed. Skills have limited mobility. But capital can move overnight electronically. This power to desert really does create vast distortions in the market for the different factors of production.

Imagine: Sorry boss, I’ll be in Accra next week, where they are paying more than you. I’ll just jump into the old space capsule. Imagine if at the same time boss had his/her capital captive where it sits. Might s/he begin to bid up the price of labour to keep it in one place? Might we hear some complaints about labour’s mobility distorting the market?

This mobility of capital is the fourth NEW FACTOR.

It has given those who own capital a power over everyone else that has never been present before. The result is that capital can call practically all the shots and engage in economic activities on its own terms. Shareholders interests overwhelm those of all other stakeholders. Banks and other institutions admit that their mergers are in the interests of shareholders, that employees will suffer and so will customers. They are expressing a fact of life rather than an overtly Marxist idea that their operation is not really about customers, but about the profits of owners of capital. The largely unnoticed result of this new power of capital is that some 98% of the movement of capital around the world is not linked to trade or investment. It is purely about buying and selling shares and currencies and hedge funds in that connection. This has huge implications for the real economy on earth. It means that profits are being sucked out of that real economy, thus further reducing purchasing power for the goods and services produced. If it is profitable for capital to invest in that speculative realm, why should they go to the trouble and risk of setting up factories and employing people?

This is the fifth NEW FACTOR.

Far from trickling down, the accumulation of new galactic wealth derived from capital is suctioning up and out the money that would otherwise be connecting producers and consumers - which is supposed to be its function. People must be forced to work through seeking paid employment The cruelty of this injunction is concealed by its apparent logic. But we cannot at the same time insist that paid employment is the only acceptable form of work and source of income, and then fail to provide it. The availability of jobs can never again be taken for granted in any country. People must be enabled to have or make a livelihood in other ways than asking others for jobs. The old style full employment regime is a thing of the past. Even in the United States jobs are casual, short-term, insecure, inhuman as a source of fulfilment. We need new definitions of work.

That is the sixth NEW FACTOR.

Given our new abundance we could begin to define as work child-rearing, community care, art and craft, mutual support - all the activities whose value is undoubted but which we could not afford to pay for. Before globalisation, actually, some democratic European countries were beginning to do so: today their governments cannot afford what used to be taken for granted in the way of child allowances, health provision and free education. In the new global arena we need to find innovative ways to give livelihoods to people for whom we do not have jobs, and who are highly valuable to society. We need to find ways to pay people for work that is not jobs.

The result of ignoring these new factors is that the globalised economy has some highly toxic effects.

The result of all this on the ground world-wide is:

Effects in Africa

African experience of globalisation - which takes the form of structural adjustment programmes - graphically illustrates the general dynamics described above. African countries came to independence in conditions which created a need for capital investment. Those conditions included the fact that for climatic and cultural reasons an inventive and entrepreneurial culture had been less developed than it was in Europe. The colonial period had demoralised populations, broken up previous political units, monopolised mineral resources and land areas and focused economies on raw materials needed in Europe. Given that state of undevelopment and a relative lack of local capital, the question was how to overcome this state. The advice given by the international financial institutions, supported by Western governments, amounted to four injunctions.

1. Export-led growth

The best and most sustainable growth comes from exports: that way you can import capital. Forget self-sufficiency, that is not the modern way – get into the global market. You do not have to produce your own food: you can probably buy it cheaper with the product of your export sales. Maximise your comparative advantage. Concentrate on producing what we rich countries want to buy. To do that you will compete with other African countries, which will give you an incentive to keep prices down. Thus you must ensure your workers don’t demand too much; therefore beware of trade unions. Production should be as capital-intensive as possible to reduce costs; therefore you must import our technology. Don’t be sentimental about your environment - you can’t afford it - except where it will enhance tourism which will bring you foreign exchange.

2. Free your exchanges and trade; drop tariffs

Allow capital - yours and ours - to come in and go out freely, otherwise you will frighten off foreign capital. Be careful about taxing capital that comes in - they can get better terms elsewhere - be content with the employment they create. Compete with other countries by a high interest rate. Allow your own capital to leave so that it can get the best rate of return. Allow your exchange rate to float, even if this involves some risk of instability - owners of capital don’t like regulation.

Abolish your tariffs. Protected industry is always inefficient, and the sooner yours becomes efficient in the harsh winds of competition the better. Meantime you can import from us. We will reduce our tariffs to your goods just as soon as our political circumstances allow us: meanwhile you must be patient. We will try to give you some aid to tide you over the period during which your natural advantages - cheap labour -begin to take effect.

3. Reduce Government expenditure to 3% of GDP

In our experience that is the correct figure, and most of us are aiming for it. End food and other subsidies; they distort the market and feather-bed your farmers. Cut your civil service: you employ too many people. You cannot afford a luxurious health and education service in your state of poverty, so cut them to your budget. The same applies to roads, water, power supplies and other infrastructure - except where they are directly relevant to income earning activities like tourism. You may not be able to afford current levels of family planning services, either; and welfare services are a luxury even for rich countries. You simply have to cut your cloth to suit your circumstances. We will do our best to provide aid in extreme circumstances of poverty.

4. Encourage entrepreneurship and privatisation of all enterprise

While your entrepreneurship is developing use our people as partners. We will train your people through our consultants. Create tax havens and business zones to encourage entrepreneurs. Low taxes and high interest rates will help to attract people with money. High income differentials also help in this way. Do not prevent import of luxury goods: they provide an incentive for the rich in your country. Privatise your utilities and outsource government activities to private enterprise. We will help you do all this by providing advisers and trainers through our aid programme - provided you show us you are adopting sound fiscal policies and free market principles.

That is what was being advised. The result of the fact that African governments took that advice -voluntarily or not - was of considerable benefit to the rich countries and to the disadvantage of Africa.

For the Rich Countries

Competition between primary producers resulted in lower prices for imports and easier access to them. African countries became open markets for Western goods which already had a definite head-start. Wages were kept low in poor countries and that impacted on wage levels in rich countries. Currency speculation in Africa became available. Low tax and high interest regimes boosted profits for Western entrepreneurs. The natural environment in Africa was left unprotected and unregulated. Opportunities opened up for Western trainers, educators, consultants and other professionals. Western influence - ideological, political and social - was expanded; and Western culture seen as superior. More tourist opportunities opened, without a reduction in levels of luxury.

For the Poor Countries

Although GDP expanded in some countries, unemployment remained high everywhere. Growth was jobless. Infant industries in labour-intensive production, such as shoes and textiles, failed because of competition from highly developed countries. Average incomes fell over a twenty year period by about 20%. Some individuals became rich, the rest became poorer. The dependence of these countries on Western aid and loans increased. Local economies were undermined. Food crop production declined as land was put under export-oriented cash-crops. Local cultures gave way to the homogenised international culture.

Could Globalisation Work Better?

There is no doubt that globalisation of markets has some benefits - potentially for the poor as well as the rich. Clearly some products must have an international market, because they cannot be produced in all countries - minerals, heavy vehicles, shipbuilding come to mind at once, and there are others. And in principle there is value in international price competition. How can we hold these advantages without the concomitant destructiveness?

Here are some alternative injunctions:

Limit Speculative Footloose Capital

The speed and volume of capital flight around the world not only removes money from the real world; it is also highly dangerous to the economies, the trade and the currencies of every nation, and hence to world economic and political stability. George Soros has warned that this aspect of capitalism renders it more dangerous to the future of the free enterprise system than communism. But we learn nothing, because each time we experience a national or regional crash, we are given post facto rationalisations by the financial authorities as to why the flight of capital reflected previously unnoticed underlying flaws - and was, in effect, positive, if painful. The prescriptions they offer are in effect more of the same. The rationalisations are untrue. Capital is invested in the expectation of profit. A major contributor to the chance of profit is what other speculators are thinking and planning to do. Speculative capital is essentially sheep-like. The underlying economic health or sickness is of no interest compared to the opinions of other speculators. The Asian crash happened – virtually overnight - not because anything had changed in those economies, but because of what speculators believed about the behaviour of others.

Speed bumps

There are various ideas to place speed-bumps in the path of such speculative capital. The simplest is a Tobin Tax - named after a Swedish economist - which would place a small tax on all international financial transactions. The value of the tax would depend upon how much discouragement was wanted. A 0.01% tax would stop transactions aimed at making less profits than that. It would also - because of the volume of these transactions - raise enough funds to finance all the operations of the UN. Higher taxes would slow the process even more and raise even more money.

In principle this should be done by international agreement. But the interested vested in the present system make that a distant prospect. Can individual governments make a start? Certainly it would constitute a marvellous source of taxation that would hurt virtually no one and raise a lot of money. But would the international markets punish a country which took unilateral action?

In the past year, the Malaysian government - responding to the devastation caused by the Asian speculative flight closed its exchanges altogether - without suffering the expected boycott by foreign investors. On the contrary, less than a year later its growth rate was higher than those of its more obedient neighbours, and investors were coming into the economy. Speculative capital had of course been excluded. Similarly the government of Chile succeeded two years ago in discouraging short-term investment, without putting off direct productive capital, by a series of interventions in defiance of the theory that only totally free capital exchanges were acceptable to international capital. It turns out that serious investors are interested in stability, not in creaming overnight profits.

It is objected that a Tobin tax or equivalent would be hard to enforce. So is anything that puts limits on the freedom of very rich people. It is not a reason not to do it - any more than we would consider removing laws against murderers or terrorists because they are hard to enforce.

Invest in poor countries

Within the boundaries of a single nation it is considered normal to invest in a part of the country which is not currently doing a well as other parts. If, instead of structural adjustment programmes to force poor countries into the unfettered global market, the international development and financial agencies had invested in Africa, their actions and the results would have been very different. First, the image of investment is very different. from that of either aid or advice. The vision would be of the Marshall Plan, of post-war recovery assistance , of the New Deal, of response to disaster - even of restitution for past imperial mistakes. The developed countries would see it as in their interests to develop Africa - just as we would see investment within a country as self-interested, or at least enlightened altruism. The purpose would have been to create self-respecting and equal trading and political partners. It is a different mind-set. So the mechanisms would be different.

Negotiated Phased Globalisation

The economy would be assessed for the speed at which it could enter the globalised market. In particular tariffs protecting local industries would be maintained until those industries were able to compete internationally. Every developed country has protected their industries, and still does, being prepared to cut tariffs by negotiation only when they are good and ready. Until recently, Japan refused to allow unfettered imports of cars; its protection very nearly led to a trade war with the United States. European agriculture is still highly subsidised for the same reason. This continues for no better reason than that the rich governments concerned have enough clout to insist. The same applies to the floating of exchange rates.

The economy would be assessed also for those sectors which are obviously better globalised. Mining is an obvious example. These need a high technology focus to make them internationally competitive. They should get it - but without forcing the entire economy into that mould.

Subsidize human resource development

Investment would be primarily in the very areas Africans were told to reduce - health, education, family planning, skills development and food subsidy. A healthy and educated population would be seen as the sine qua non of economic take-off. Family planning would be given a high priority. Family-friendly and child-centred welfare policies would create the physical and psychological basis for human resource-based development.

Protect the Local, Globally

History shows economies develop best on the basis of local markets. Export-led growth produces huge inequalities of income and high rates of unemployment - as well as impressive but jobless growth rates. Stable and sustainable growth derives from economic activity based on expanding local markets. Food self-sufficiency in particular has at last been recognised by the international financial players as an essential part of a poor country’s economy, and this will be a focus for healthy development. Food security will be seen as a higher value than international dependence.

Similarly most small business will develop on the basis of supplying local needs in local markets at the available skills levels. If these make it internationally, well and good; but it is not the focus of all development. All of this means working to preserve the natural environment - a skill already available in poor countries but rapidly being lost. Aid to those ends will be small scale, local specific, designed for rapid transference to local people and based on grants.

The result of these policies would be sustainable growth based on whole population - egalitarian - development. Local entrepreneurship would develop naturally in a level playing field. Personal and business tax bases would rise. This scenario is not theoretical. Scepticism would be allayed by examining the history of Mauritius in the first thirty years of its independence. Against odds - a wildly expanding and racially diverse population, a nearly single-crop economy on a small island - the Mauritian government produced a prosperous people by focusing as here described, and eschewing the advice of the international economic advisers.

Implications for Rich Countries

All of the prescriptions described here need to form the mind-set of those who run the economies in rich countries as well. Even where the present dispensation is said to be successful - notably in the United States - there is a large and growing under-class, a growing proportion of children born into poverty, social and community disintegration, exponential growth in income inequality, insecurity and despair. In European slums TB is reappearing; so is rickets and other diseases and manifestation of poverty thought wiped out forty years ago. The New Economics movement recognises alternative ways in which our worlds economy can maximise sustainable human development within a restored natural environment. They include the following, which need separate treatment. Income Distribution People need to have access to income to live, even if they cannot find a job. They need to have access to satisfying work, even if that is not available through an employer. The creation of a system of basic income entitlement for all citizens, without a means test, is a practical and efficient way to do that. The effect will be to wipe out absolute destitution, provide purchasing power at a very low level, and enable people to work creatively in areas where pay is not available.

Tax the Way we subtract value, not the way we add it

Use the tax system to encourage people to do things (like providing goods and services and employing others) which are constructive; and discourage them from doing things that are destructive (like using up the Earth’s limited resources, polluting the atmosphere, poisoning foods with pesticides and moving speculative capital around the world). In other words stop taxing people for adding value, and start taxing them for using things that harm the rest of us. We already do this on a small scale - like taxing cigarettes and alcohol. The scope is still immense.

Encourage local economic activity through local currencies

The globalised market centralises economic activity. Resources and purchasing power - money - get sucked out of poorer areas to richer ones. Parts of cities, then whole regions - even continents - become blighted sources of inefficient and low-paid labour. Local currencies and the employment of social entrepreneurs - together with basic citizens income - can revive these areas by encouraging local economic activity within the area of the alternative currency.

End banks’ monopoly over money creation

Money is not a commodity. It was invented to oil the wheels of exchange of goods and services, as a replacement for pure barter. It has no value on its own: it can be made as scarce or plentiful as we like. But by allowing banks to create money we have turned it into a commodity, and allowed the banks to define its value. Rates of interest give the impression money has a value. Banks, like any other business, handle their product to suit their profit needs. They create money out of nothing and then charge us to use it. Our economies have become the by-products of an illusion.