Economic Highlights

New Delhi, 14 September 2012

UNCTAD: Junk Globalisation

AGAINST GROWTH STRATEGY

By Shivaji Sarkar

Believe it or not, but the UN Conference on Trade and Development (UNCTAD) has scathingly criticised the globalisation process.  In its Trade and Development Report 2012 (TDR), the UN body has blamed globalisation for the present day world’s woes, particularly of developing countries.

This is not all. It calls for junking the World Bank-IMF supported structural reforms. As it is no substitute for a growth strategy given that it leads to wage cuts and weakening of collective bargaining. Whereby, developed countries put up barriers in agriculture or the labour markets. The labour surplus countries were doubly stuck with expensive finance and their labour not being allowed to move freely.

Besides, as finance was allowed to move anywhere, big countries benefitted the most. Wherein, foreign direct investment (FDI) was used as a tool to penetrate large markets of poor countries. Thereby, driving out indigenous firms for their inability to compete against the power of finance.

Undeniably, this has led to severe income inequality. The UNCTAD report states, “Expanding gaps in income and wealth around the world are not unavoidable by-product of globalisation and technological change”. It contends that the increasing concentration of income in fewer hands limits nations’ economic potential by dampening demand for goods and services. 

Further, it reduces educational prospects and social mobility of their populations and leads to under-exploiting of peoples’ talent and possible economic achievements. And calls for a reversal “by Government intervention” through fiscal and labour-market policies.

In fact, trends over the last 30 years, since the 1980s, show income inequality increasing both within countries and between them. Leading to the share of wages in total income falling in most developed and in many developing countries.

Interestingly, while wages fell by 5 percentage points and more in the US, Australia and UK, in France, Germany and Ireland it fell by 10 per cent. Also, in several countries including India, the rich one per cent population account for 10 to 20 per cent of national wealth.

Besides, there has been a similar broad shift between countries. In 1980, per capita income of the 15 richest nations was 44 times that of the poorest 15 countries. In 2009, the ratio fell marginally to 56 times. But has now increased to 62 times.

Since globalisation has advanced greatly over the last 30 years, the TDR quotes arguments by several economists that rising disparities in income is a direct fall-out. This has been further accentuated by rapidly growing international trade and financial flows and quick advances of technology.

Sadly, the global economy is not recovering. Trade, which was supposed to spur growth, has decelerated. According to the World Trade Organisation (WTO), from a growth of 13 per cent about seven years back it is now down to 4 per cent. Even China has started decelerating and the share of labour income has declined.

Additionally, as income inequality grows, there is also growing inequality in resources. Whereby, disparities are obstructing the smooth development process and leading to unequal bargaining power. Thus, the market, which was projected as the great leveller, has not been able to rebalance the trend.

Asserts, Director of RIS Prof Biswajit Dhar, “The failure of the market is further leading to yawning disparity.” This is reflected in the social consequence of the finance sector which results in record unemployment across the globe.

Adds the UN report, Governments world-wide could have checked this through increasing public spending but it has not happened. Instead spending on pension and other social benefits were drastically cut even as profits of large corporate increased.

Moreover, the Governments’ fiscal austerity measures affected the aggregate demand through wage compression. Whereby, the lower levels were totally marginalised. Worse, no effort for integrating them with the social system or the market was done. This resulted in reduced demand.

Notably, if the world economy wants to reverse the trend, it has to increase incomes at the lower levels. True, some efforts in Brazil and other Latin American countries by Government intervention and in India’s MNREGA have made some difference. But there is the question of long-term viability.

Furthermore, volatile capital flows are creating upheavals in developing countries leading to price volatilities, severe inflation and uncertainties. The UNTAD solution for containing fiscal deficit lies in an end to structural reforms as it stunts growth.

The world needs macro-economic policies that stabilise GDP growth, keep interest rates low and can contribute to securing fiscal space, the report argues. This in turn, would lead to achieving a sustainable public debt.

It criticises the European Union for again trying to push through “structural reforms”, which it dubs as “coded language for labour market liberalisation, including wage cuts, a weakening of collective bargaining and greater wage differentiation across sectors and firms”.

“The reasoning behind such structural reform agenda is flawed because it is based on micro-economic considerations (corporate profits) and ignores wage determination. A fixation on reforms of this kind can be dangerous in the current situation of rising unemployment and falling private demand. It might further undermine regional growth”, the TDR adds.

Pertinently, the major factor for today’s crisis is due to marginalisation of the Government. Which are led by bogies of export-led economies, necessitated by keeping wages low so that goods could compete in the international market. Thus, this gradually led to a fall in domestic demand and industrial production, as in India.

Significantly, the panacea is in the rise of wages and production along with stability in prices. In the 1980s and 1990s, householders were earning less but it did not lead to a slowdown in demand. Simply as finance was growing faster and people were resorting to debts. Resulting in imbalance of mortgage, debt and the eventual crisis 2007-08.

Not only individuals, even Governments were hit by the trend and resulted in severe fiscal deficit of many Governments. In the Euro zone, Greece, Ireland, Spain and Italy, the US and now it is even engulfing countries like India.

Think. Banks are flush with funds but unemployment is growing. On top of this, bank services have become expensive and not being utilised to spur growth. Corroborates Planning Commission member Prof Abhijit Sen, “The world economy is not suffering from supply shortage.”

The financial bail-outs have led to greater concentration of the financial sector and real assets. Understandably, this has a tenuous fall-out. Wherein, it has led to privileged participation in political decision-making.

Clearly, a beginning needs to be made with tax cuts, making more income available to the people, concessional lending and increase in Government spending, adds the TDR. This would lead to the necessary reversal the world is looking for. ----- INFA

(Copyright, India News and Feature Alliance)