Much of the Third World was better off forty years ago than it is today. Growth collapses, as the World Bank now refers to them occurred in many areas. Per capita income plunged. Today, nearly fifty percent of the world’s population lives on less than two dollars per day. The UN’s millennium development goals are not so much development targets as targets for survival.
And this understates the problem as hundreds of millions of people are forced off the farm and into cities where more of life is monetized and less well-being is available in the non-monetized economy.
Why is Global Poverty a market failure? The free market apologists are already calling. It is the ABSENCE of free markets, they say, not their presence which is the root of global poverty. Often they mention corruption in the governments of those countries in the next breath. Government functionaries are interfering with the free market actors.
This situation has occurred in the presence of globalization. Globalization was supposed to move capital from the richer countries to the poorer. It has done the opposite. Open markets were supposed to bring a rising tide that would lift all boats. Income disparity in all countries, rich and poor has increased. Free flow of capital was supposed to bring stability, it has brought crisis.
The benefit in well-being of a tiny investment in poor nations puts to shame many of the mega-million capitalist shrines. Who can argue for a market that has missed the mark by such a margin?
Half the world — nearly three billion people — live on less than two dollars a day.
The GDP (Gross Domestic Product) of the poorest 48 nations (i.e. a quarter of the world’s countries) is less than the wealth of the world’s three richest people combined.
Nearly a billion people entered the 21st century unable to read a book or sign their names.
Less than one per cent of what the world spent every year on weapons was needed to put every child into school.
But it is the imprimatur of free market fundamentalism as espoused and enforced by the International Monetary Fund on behalf of the developed nations that is the mark of the free market here , and the cause of so much failure and poverty.
Over the past three decades the international institutions such as the IMF and World Bank have aggressively promoted the Washington Consensus, an informal designation for a program of opening markets to the free movement of capital, promoting privatization and facilitating export-based industry.
The results were a calamity in Russia, as we noted in Market Failure V. They were no less ineffective in Africa, where schools and water supplies have been privatized and draconian budget balancing has deprived whole populations of the education and infrastructure they need to be effective.
From Joseph Stiglitz: The Promise of Global Institutions, Chapter 1 of Globalization and its Discontents
The IMF and the World Bank both originated in World War II as a result of the UN Monetary and Financial Conference at Bretton Woods, New Hampshire, in July 1944, part of a concerted effort to finance the rebuilding of Europe after the devastation of World War II and to save the world from future economic depressions. The proper name of the World Bank -- the International Bank for Reconstruction and Development - reflects its original mission; the last part, "Development," was added almost as an afterthought. At the time, most of the countries in the developing world were still colonies , and what meager economic development efforts could or would be undertaken were considered the responsibility of their European masters.The passage goes on to describe how the IMF’s original mission has been turned on its head. It now espouses a program of free market fundamentalism – open capital markets, privatization and budget austerity. It intimidates and cajoles nations in crisis to adopt wholly inappropriate policies in order to obtain the loans they need to overcome the crisis.
The more difficult task of ensuring global economic stability was assigned to the IMF. Those who convened at Bretton Woods had the global depression of the 1930s very much on their minds. Almost three quarters of a century ago, capitalism faced its most severe crisis to date. The Great Depression enveloped the whole world and led to unprecedented increases in unemployment. At the worst point, a quarter of America's workforce was unemployed. The British economist John Maynard Keynes, who would later be a key participant at Bretton Woods, put forward a simple explanation, and a correspondingly simple set of prescriptions: lack of sufficient aggregate demand explained economic downturns,; government policies could help stimulate aggregate demand. In cases where monetary policy is ineffective, governments could rely on fiscal policies, either by increasing expenditures or cutting taxes. While the models underlying Keynes's analysis have subsequently been criticized and refined, bringing a deeper understanding of why market forces do not work quickly to adjust the economy to full employment, the basic lessons remain valid.
The IMF was charged with preventing another global depression. It would do this by putting international pressure on countries that were not doing their fair share to maintain global aggregate demand, by allowing their own economies to fall into a slump. When necessary it would also provide liquidity in the form of loans to those countries facing an economic downturn and unable to stimulate aggregate demand with their own resources.
Larger, advanced nations such as the United States have no qualms about ignoring IMF advice. Smaller, more vulnerable economies are caught by their need for crisis funding.
A single example from Ethiopia, one of the poorest countries in Africa. The banking sector of that nation was about the size of a single regional bank in suburban America. IMF conditions pried open the banking sector for multinationals and liberalized banking laws. Within three years fourteen new banks had grown up and failed. Meanwhile, the multinational banks had moved in, attracted the capital, but focused their lending not on the small to medium-sized domestic companies, but to the larger operations. The result was not pretty. This illustrates that while the IMF preaches a free market fundamentalism, the application is hardly market-friendly.
To be brief, there are several elements hidden here:
- The free market policies have not been applied on the basis of evidence they work, but from political bias. That realization is sinking in. Those countries which resist the IMF are those which prosper.
- Successful development in the West proceeded from demand side policies, not the radical opening of capital markets and enforcement of monetary and budget austerities.
- The free market experienced by these nations has come in the form of large corporations building large-scale projects or siting big factories. This is as appropriate as playing baseball with a shot put. It has also produced enormous debt. This top-down development contradicts the bottom-up development of all successful market economies.
- Third world nations are not necessarily blessed if they have abundant resources. Without the basic democratic institutions, too often an oppressive elite rules in combination with the resource extraction corporations.
- Corruption in government is not a function of government, but often a function of military or corporate power. The United States has often provided aid in the form of military hardware. Many countries are saddled with debt that ought to be considered illegitimate from this practice, as military dictatorships signed up for big arms deals to subjugate their populations. When they were thrown out by popular uprising, the debt remains, and those formerly oppressed are now on the hook for the cost of the weapons once used against them. Some debt relief has occurred, but not enough, and not without conditionality that may be even more burdensome than the debt itself.
- In the context of trade treaties, Western developed nations have pursued a colonial-style agenda, using their huge economies to pry open the smaller, more delicate economies for exploitation by multinationals.