July-August 2003 - VOLUME 24 - NUMBER 7 & 8
G ro t e s q u e I n e q u a l i t y
By By Robert Weissman
There is something profoundly wrong with a world in which the 400 highest income earners in the United States make as much money in a year as the entire population of 20 African nations -- more than 300 million people.
Global inequalities persist at staggering levels. The richest 10 percent of the world's population's income is roughly 117 times higher than the poorest 10 percent, according to calculations performed by economists at the Economics Policy Institute, using data from the International Monetary Fund. This is a huge jump from the ratio in 1980, when the income of the richest 10 percent was about 79 times higher than the poorest 10 percent.
Exclude fast-growing China from the equation, and the disparities are even more shocking. The income ratio from the richest 10 percent to the poorest 10 percent rose from 90:1 in 1980 to 154:1 in 1999.
Despite these numbers, there is a significant debate among economists about whether overall global inequality is growing in the era of corporate globalization. That is due to the influence of China and India, huge countries which have been growing (very rapidly, in the case of China) while most of the developing world has been stagnant or shrinking economically and most of the rich world has been growing slowly.
Economic inequalities between the richest and poorest people in the world are clearly growing rapidly, however. And, in most parts of the world, inequality within nations is growing -- this is true in the rich countries of the United States and the European Union, most (but not all) of the transition economies of the old Soviet bloc, China and India -- or persisting at very high levels, as in Latin America and Africa.
Much of the blame for this state of affairs can be laid at the doorstep of corporate globalization -- the rules of the global economy as established by organizations like the World Trade Organization, the imposed market fundamentalist demands of the International Monetary Fund (IMF) and World Bank, the dynamics of unregulated global financial and other markets.
There are other factors at work as well, most importantly domestic power struggles over everything from national tax policy to corruption to decisions over investment in healthcare and education.
And not every aspect of corporate globalization pushes in the direction of more inequality. For example, despite the many and varied hardships corporate globalization imposes on women, in many circumstances it may open up opportunities for independence and economic self-sufficiency that traditional arrangements denied to women.
But these caveats notwithstanding, corporate globalization in many ways does generate, contribute to and reinforce rising and persistent grotesque inequalities, both between and within countries. Here is a review of a dozen mechanisms by which this occurs:
1. Financial liberalization and economic instability
Deregulation has also made it easier to move money out of countries. Because so much foreign investment is lodged in financial instruments (as opposed to real property, such as factories), it can easily flee developing countries. Deregulation has displaced capital controls, including, for example, those that might have required foreign investment to remain in a country for a certain period of time. Such rules make it legal for foreign investors to flee.
When things seem uncertain in a country, foreign investors do flee, routinely. Even if the country's objective economic circumstances are not in crisis, the fact of foreign capital flight regularly plunges countries into crisis, or at least crises worse than they would otherwise experience. This has been the case over the last decade in Thailand, Indonesia, South Korea, Russia, Brazil and Argentina, among other countries.
Financial crises in developing countries exacerbate global inequalities -- Argentina, for example, has seen its economy sink rapidly in recent years, while Russia suffered a 42 percent decline in Gross Domestic Product. They also tend to increase domestic inequality, since the rich have various ways to protect themselves, including by joining the capital flight out of the country and housing their money in foreign banks. For most of the middle class, however, such options may not be available, and they may find themselves joining the ranks of the poor.
The developing countries collectively owe $2.3 trillion to foreign creditors. Sub-Saharan African nations owe more than $200 billion to foreign creditors. Developing countries must pay interest on these loans and pay back the principal.
Where loans are directed to sound investments in projects that generate foreign exchange -- which is needed to pay back the loans that are made in foreign currencies -- taking on debt obligations may make sense. But the history of the last 25 years is replete with large-scale lending operations from official donors and private banks that have been allocated to boondoggle projects (example: an unopened nuclear power plant on an earthquake fault in the Philippines), wasted on military spending or siphoned off by corrupt government officials.
Unfortunately, even bad loans have to be repaid. Debt repayments suck money out of poor countries, denying them monies that could be used for everything from healthcare to delivery of clean water. Sub-Saharan Africa alone doles out more than $10 billion annually in debt payments.
Amazingly, although the Third World debt crisis has been a fixture of the financial press since the 1980s, little has been done to address the problem. In better-off countries that received large infusions of foreign loans which they are unable to repay -- such as Mexico, Argentina, Brazil, Korea and Thailand -- private lenders have written down the debts, accepting less than full repayment, or extending repayment periods. For the poorest indebted countries, a group of 42 Heavily Indebted Poor Countries (HIPC), mostly concentrated in Africa, which owe most of their debt to official creditors, the IMF and World Bank have fashioned a modest debt relief program.
Both the public and private efforts have treated the debt problem as one that requires financial restructuring so that countries can continue to pay back debts -- even if the debts were illegitimately contracted (e.g., via loans to dictators), even if there is no prospect of them ever being paid back in full, and irrespective of the impact of payment on the debtor country.
In the case of the HIPC plan, the 42 countries that owed $218 billion in 1996 now owe $180 billion. Countries' annual debt payments -- the thing that matters most, since it is the amount they actually pay, rather than the total amount they owe, which is likely never to be repaid -- have fallen very modestly under the HIPC plan, by about a quarter. A little more than half of the HIPCs have received some relief under the debt relief plan -- but about half of them maintain debt obligations that even the World Bank defines as unsustainable, according to Jubilee Research of the UK.
The benefits flowing from the stingy levels of debt relief that have been granted show what could be done with full debt cancellation.
"While the money released so far is modest -- much more is needed through deeper debt cancellation and increased aid -- on a local level, the difference it is making to individual people is tangible," concludes "Reality Check," a report by Drop the Debt, a debt campaigning group, issued in 2001. "With scarce resources, not everything can be done at once. In Uganda, new schools have been built, and primary education is now free, which has prompted a huge rise in attendance rates, but the country desperately needs more teachers and materials to maximize the benefits. In Mozambique, there are more health clinics and nurses, but still a lack of drugs for them to work with."
3. Elevated interest rates
Although rich countries have steadily reduced interest rates over the last decade, globalized financial markets have led developing countries to maintain high rates. Given the greater risk in developing countries, free-flowing capital demands a higher rate of return. Particularly in the wake of financial crises or near-crises, developing country interest rates have risen to extremely high rates -- all in an effort to keep capital from fleeing.
On top of these market demands comes pressure from the International Monetary Fund on developing countries to maintain high interest rates, and not to take steps that could stem capital flight while enabling interest rate reductions. Under such pressures, the new Brazilian government of Lula is maintaining interest rates of 26 percent.
The impacts of high interest rates on inequality -- both between and within countries -- are severe.
The elevated global rates in the 1980s plunged Latin America into the debt crisis, as interest rate payments on its foreign debt soared.
The high rates that developing countries have maintained have led to a steady flow of interest payments out of the Third World; and, when it has appeared that countries cannot continue to meet foreign debt payments, foreign capital has fled, throwing nations from Thailand to Argentina into crisis.
High interest rates have dramatically slowed economic growth in developing countries. In Brazil, now led by a populist president, high interest rates have left growth rates near zero.
And, within countries, high rates have significantly exacerbated wealth inequalities.
"We know that the distribution of assets in each country is very skewed, and the rate of interest is the return on the assets," says Branko Milanovic, a World Bank economist, in the interview in this issue. "So within each country the rich gained from higher interest rates. On the world level too, rich countries which are by definition capital-rich gained from it. It is of course the rich people in rich countries who gained the most."
4. Trade Liberalization I -- Expanding Wage Gaps
Trade liberalization has heightened differences among wage earners. Unskilled workers in developing countries and industrialized countries alike have been particularly hard hit by international competition. The UN Conference on Trade and Development (UNCTAD) reported in its 1997 Trade and Development Report that "in almost all developing countries that have undertaken rapid trade liberalization, wage inequality has increased, most often in the context of declining industrial employment of unskilled workers and large absolute falls in their real wages, of the order of 20-30 percent in some Latin American countries."
The growing gap in wages between skilled and unskilled workers maybe explained in part by extremely intense global competition to perform unskilled work (think of the apparel and shoe companies that switch from sweatshops in Mexico to El Salvador to Indonesia to Bangladesh and China in constant search of cheaper labor).
"As a result of increased participation of several highly populated, low-income countries in world trade in recent years, as much as 70 percent of the labor force employed in sectors participating in world trade is low-skilled," reports the 2002 UNCTAD Trade and Development Report. But because there remains so much surplus labor in developing countries, and because many large countries, notably China and India, are still not fully integrated into the global economy, downward pressure in low-skilled wages is likely to continue for the foreseeable future, UNCTAD concludes.
5. Trade Liberalization II -- Dividingthe Pie Between Capital and Labor
Some of the increased share for capital is going to corporations in developing countries, exacerbating domestic inequality. Much of it is collected by corporations and their owners in industrialized countries, both from the share they are taking from workers in rich countries, and from those in the Third World. While multinational corporations have taken advantage of freer trade regimes to locate production facilities in developing countries, they maintain control of all of the high value-added design and technology.
6. Agricultural dumping and agricultural trade liberalization
"Below-cost imports drive developing country farmers out of their local markets," notes a February 2003 report from the Institute for Agriculture and Trade Policy (IATP). "If the farmers do not have access to a safety net, they have to abandon their land in search of other employment. This is happening around the world, in places as far apart as Jamaica, Burkina Faso and the Philippines."
The IATP report documents widespread and extreme levels of dumping by the United States. IATP researchers report the cost of production for a bushel of wheat in 2001 was $6.24, while the export price was only $3.50 -- a 44 percent level of dumping. In 2001, U.S. exporters dumped corn at 33 percent, soybeans at 29 percent, cotton at 57 percent and rice at 22 percent.
Hypothetically, WTO rules should prevent such dumping, but poor countries generally do not have the capacity to bring complicated cases before the world trade body, and dumping cases in particular turn on very elaborate and empirical economic arguments.
Instead, free trade rules have significantly contributed to the problem of dumping. Global trade rules, and especially International Monetary Fund and World Bank conditions, have required developing countries to remove tariffs on agricultural imports. That has left them vulnerable to accepting the international market price -- even if it is the product of a rigged system, and even if it impoverishes the countries' farmers and drives them out of their livelihoods.
Along with the command to open their markets to food imports, the IMF and World Bank have pressured developing countries to orient their agricultural sector (along with the rest of their economies) to exports. Instead of growing food for local consumption, the Fund and Bank instruct, developing countries should encourage farmers (with subsidies, technical advice and other assistance) to grow produce and other agricultural products -- from coffee to flowers -- for sale in rich country markets.
In practice, exports usually favor plantations and large-scale farmers. Small farmers often cannot meet the quality standards demanded by rich country supermarkets; they cannot get their products to market fast enough to serve consumers thousands of miles away; and they do not produce in great enough quantity to make it economically rational for multinational food traders to deal with them.
7. Labor market "flexibility"
Undermining worker power and protections does give employers more room to maneuver, but there is little evidence that this translates into economic dynamism rather than greater worker exploitation -- taking money from workers and giving it to management.
In fact, as even the World Bank has noted in formal statements that do not translate into policy, unionization not only tends to enhance worker earnings and reduce wage inequalities, it enables a more stable and productive workforce that provides the foundation for a faster-growing economy.
An April 2003 statement by the International Confederation of Free Trade Unions (ICFTU) notes numerous Bank and IMF interventions to undermine worker protections:
ï "In Croatia, the Bank and the Fund have been pressing the government to reduce worker protection on the grounds that, as the Bank's country director has stated publicly, reduced protection will automatically result in higher economic growth rates."
ï In Colombia, the IMF complained in January 2003 that labor market reforms do "not go far enough" because the minimum wage is still indexed to the cost of living.
ï Even for Germany, the ICFTU notes, the IMF has recommended "wage moderation," an "aggressive elimination of spending on active labor market policies" and reduced unemployment benefits. In the context of government employment, IMF and Bank policies often explicitly favor inequality, as they urge nations to pursue a policy of "wage decompression," especially in the public sector. That translates into expanding the gap between low-paid and high-paid employees, on the grounds that higher level officials need to be paid more to retain talented and well-educated staff. In the case of poor countries, where the public sector often represents a significant portion of formal employment, such wage decompression policies can have a discernible impact on domestic inequality.
8. Intellectual Property Protections
Since the overwhelming amount of research and development occurs in the rich countries, the vast majority of patents are filed by inventors in rich countries, and most important patents are controlled by rich country corporations. In Mexico in 1996, for example, 389 patents came from domestic residents, while more than 30,000 came from foreign residents, mostly in the United States and European Union.
Patents enable the owners to extract royalties and monopoly profits from users -- irrespective of whether they are industrial users or consumers -- of the patented product. Given the disparity in patent filings, global patent rules force a transfer of royalty payments from poor to rich countries. The World Bank estimates the United States will net an additional $19 billion a year thanks to WTO-required patents and Japan an additional $5.6 billion, with most of Europe gaining a considerable amount as well. The Bank projects WTO-required patents will cost China more than $5 billion a year, Mexico $2.5 billion annually, and Brazil $500 million a year.
Copyright protection is also increasingly important, as it applies to the content provided over the Internet, as well as movies, books, records and computer programs. The disparities work in the same fashion as for patent privileges, with copyright creating a steady stream of royalty payments from developing countries to the industrialized world.
The costs of intellectual property protections cannot all be measured in static dollar figures. Patent protections for pharmaceuticals are contributing to the denial of essential medicines for millions in developing countries, including for HIV/AIDS treatment. And WTO rules will block developing countries from emulating the example of the United States and most of the industrialized world, which sped their technological development by copying inventions from elsewhere.
9. Privatization -- Converting public wealth to private property
But the reality of privatization in the developing world has rarely matched the sanitized story told in theory. The norm has been undervalued sales, so that public assets are transferred to new private owners -- sometimes multinationals, frequently local elites -- at prices far below market value. In some cases, privatization has been marked by extreme corruption that has created a small class of billionaires who simply looted the public wealth.
Russia is perhaps the most extreme case. The Russian gas giant Gazprom was privatized for $250 million. Three years later, Gazprom's market valuation was $40 billion. Based on its reserves, if it were valued as a company would be in the United States, where property rights are more secure, it would be worth between $300 billion and $900 billion. Oil, mining, electricity and other companies were privatized at prices sometimes less than a twentieth of their subsequent market value.
Thus were created the handful of Russian oligarchs who came to dominate the national economy, even as the nation sunk into an economic decline of epic proportions. Rising oil prices have helped the national economy recover since the late 1990s, but the country remains marked by a spectacular concentration of wealth. The country now has 17 billionaires. Writes Paul Klebnikov of Forbes magazine, "Considering the modest size of the Russian economy these days, Russia may well have the highest billionaire-to-GDP ratio in the world."
The likely runner up in the billionaire-to-GDP contest is Mexico, which claims 11 spots on Forbes' list of billionaires. As in Russia, the Mexican billionaire class saw its fortunes rise thanks to a series of large-scale privatizations that took place under shady circumstances, many under the corrupt Salinas regime.
Looking at the global experience with privatization but relying especially on data analysis of Eastern Europe and Latin America, two former World Bank officials conclude in a Center for Global Development report that "privatization programs appear to have worsened the distribution of assets and income, at least in the short run."
10. water and other Service privatization
There are two key flaws in the Bank's devotion to privatization. First, it ignores the alternative: effective public sector water delivery. As the UN Development Program's Human Development Report 2003 points out, a number of developing countries operate successful public sector water systems. Most rich countries rely on the public sector for water delivery.
The second flaw in the Bank's disposition to privatization is that improving and expanding water services to poor people is not profitable. The global water companies that are supposed to improve water service provision in developing countries have no interest in providing water to rural communities. These communities need boreholes and community delivery, not connections to central water systems. The costs are too high and the paying capacity of the people there too low to interest the water multinationals. Nor do the water companies generally care to expand pipe systems in urban settings, for the same reason -- costs are too high, and the urban poor who are typically not connected to the piped system can't pay enough.
What does appeal to the multinationals is providing service to the urban middle class, and charging them higher fees. Indeed, the Bank and other privatization purveyors often want private companies to take over water systems in part so that they can raise prices.
And they do. "Privatization in water and sanitation has led to much higher fees, sometimes overnight -- and sometimes with disastrous consequences," says the Human Development Report 2003.
The significant impact on inequality from privatization is not due to the profits extracted by the multinationals that take over developing country systems. These are inconsequential on a global scale. What does matter in global terms is the reduction in quality of water service, and the lost opportunity for investments in a public system that could raise efficiency and expand access. Reduced quality water service contributes to the spread of avoidable disease among the poor, but not better-off groups that can afford to pay for clean water, either from the piped system or from private water vendors. It imposes enormous time and labor burdens on poor families -- overwhelmingly borne by women and children -- to collect water from far-off points and carry buckets back home. No well off person ever experiences such hardships.
11. User Fees
User fees deter usage. "User fees have great potential for impoverishing users and deterring people from using badly needed services," concludes the UN Development Program's Human Development Report 2003. School fees deter families from sending their children to school. Clinic fees keep sick people at home, and away from treatment or preventative services. Even very small charges have a major deterrent effect on poor people's access to primary healthcare and education.
"In Ghana, two-thirds of rural families cannot afford to send their children to school consistently," according to the Human Development Report 2003, "and for three-quarters of street children in Accra (the capital) the inability to pay school fees was their main reason for dropping out."
There are endless examples of the same phenomenon in healthcare. In Papua New Guinea, for instance, the introduction of user fees led to a decline of about 30 percent in the average monthly attendance at outpatient health centers; in Kenya, introduction of small fees for a sexually transmitted disease clinic in Nairobi led to a decline in attendance of 40 percent for men and nearly two-thirds for women.
One attempted remedy to these problems are exemptions from charges for the poor. But these have proved to be administratively difficult and have failed to ensure access for the poor.
Removing user fees has an immediate and tremendously beneficial effect. With the Bank's recent reversal on education user fees -- which followed a U.S. Congressional mandate for the U.S. representatives to the IMF and Bank to oppose loans that included user fees on primary education or healthcare -- countries are beginning to change policy. Tanzania, Uganda and Kenya have all recently eliminated school fees -- and have seen a massive surge in school attendance. In Tanzania, three quarters of a million children -- mostly girls -- previously barred from the classroom because they could not pay charges are now attending school.
User fees create disparities between rich and poor in access to basic services -- better off families are able to pay the charges -- and in basic life conditions. Children who do not go to school will, on the whole, be consigned to a much more difficult future than those who are educated. User fees leave poorer people sicker and weaker. They are left to suffer from avoidable pain and suffering, to live shorter lives, and to live their lives with diminished earning capacity due to physical limitations.
12. Unequal Disease burdens and economic inequality
To a considerable extent, the disparity is a reflection of wealth inequalities. Diarrhea kills more than a million children a year in developing countries, simply because their families lack access to clean drinking water.
Undernourishment would ideally be solved by ensuring everyone has access to an adequate food supply; but just the supply of micronutrients could have huge benefits. According to the U.S. advocacy group Results, "Vitamin A supplementation, in the form of a capsule costing two cents given to a child two to three times a year can cut child deaths by 23 percent. There are initial indications that giving vitamin A to pregnant women in developing countries could reduce maternal death rates by 40 to 50 percent. Iodine deficiency is the largest preventable cause of mental retardation worldwide; salt iodization could prevent this at a cost of five cents per person."
Economic disparities also affect the incentives for private parties to take action to redress health inequities. One particularly important example is in the area of disease prevention and treatment. Rich country governments tend to invest in research and development to prevent and treat diseases that affect their own people; developing countries have minimal resources to invest in R&D. Private drug companies have no incentive to invest R&D funds in vaccines or drugs for diseases endemic to poor countries, because even though there is great need, there is no sizeable market for such products. MSF/Doctors Without Borders calls this the problem of "neglected diseases," and points to the 90/10 problem -- 90 percent of medical research is devoted to diseases that affect only 10 percent of the population. Virtually no research is devoted to diseases, such as sleeping sickness, Chagas' disease and visceral leishmaniasis, that only affect developing country populations.
Inadequate healthcare systems in developing countries -- in part due to user fees and foreign debt payments that drain funds for public healthcare, both issues mentioned previously -- exacerbate the health challenges facing poor people.
Corporate globalization itself also in some circumstances contributes to problems of disease spread.
In the case of HIV/AIDS, for example, rural displacement and social disruption have been key vectors of the virus. With agricultural liberalization, imports undermine local farmers. Export-oriented policies have further discriminated against small farmers in favor of large plantations. The resultant displacement of the rural population has contributed to migration and urbanization. Many men leave rural villages for work in big cities or in mines, contract HIV/AIDS from casual sex partners or sex workers, and then spread the disease to spouses in their home village. The displacement of children and young women into the cities has led to a sharp increase in commercial sex work and heightened rates of HIV/AIDS.
So too has foreign investment in resource extraction created the social conditions to spread HIV/AIDS. For example, the construction of the Chad/Cameroon pipeline -- undertaken by a consortium of oil companies led by Exxon/Mobil -- is requiring the construction of roads and truck routes from Cameroon, where HIV prevalence rates are high, into Chad, where they are low. Experts funded by the World Bank concluded that the operation -- even if HIV/AIDS education programs are put into place and succeed in reducing transmission rates by 80 percent -- will result in 100 AIDS-related deaths per year. Trucking the pipe over 1,000 miles, "drivers were to pick up their loads, and stay with their truck -- including tractor and trailer -- for the duration of the trip which would involve three overnight stops," writes William Jobin, part of the expert team paid by the Bank to look at social and environmental concerns surrounding the pipeline, in the Bulletin of the World Health Organization. "This pattern is ideally suited for transporting the AIDS virus into the interior of southern Chad."
The HIV/AIDS pandemic is now so severe in many areas that it is itself becoming a cause of greater global inequality, as it decimates the most economically productive members of whole societies. "HIV/AIDS first took hold in countries in the [Southern African] region one to two decades ago and has been steadily targeting healthy, productive adults ever since -- especially the people who produce, transport and market crops and those who gather and prepare food for households," and especially women, write UN special envoys James Morris and Stephen Lewis in a March 2003 report. Morris and Lewis conclude that HIV/AIDS is a significant contributing cause of the food crisis now facing Southern Africa -- too many farmers, particularly women, are either too sick to plant and harvest, or have already died.
Corporate globalization -- in the form of the globalizing multinational tobacco companies -- is also contributing dramatically to the spread of cancer, heart disease and other tobacco-related disease from rich to poor countries. More than 4 million people die annually from tobacco-related disease worldwide; the World Health Organization estimates the total will rise to 10 million annual deaths by 2030. While tobacco-related disease has historically been concentrated in the rich countries, WHO estimates that 70 percent of the deaths will occur in developing countries within two-and-a-half decades time.
Smoking rates are historically high among men in many developing countries, and with greater wealth in Asian nations, tobacco consumption would rise on its own, without any external prodding.
But there is external prodding. And it is making things worse.
The tobacco multinationals' future rests on their ability to make sales in developing countries. As they have rushed into developing country markets, they have introduced slick marketing and promotion strategies that not only attract current smokers, but hook new ones. Smoking rates among men are very high in most of Asia, but very low among women. Entry of the multinationals has led to major surges in smoking rates among children and women. After the South Korean market was opened to U.S. companies, for example, smoking rates among girls quintupled in a single year.
The health-related burdens and suffering in developing countries that flow from absolute poverty, neglect and unequal processes of corporate globalization are cumulative. People get sick younger and more often. Often, there is no infrastructure to treat them or alleviate suffering. Where there is, it is frequently priced out of reach. Families spend down their savings or borrow, leaving them economically insecure. Or, they ration treatment among themselves, or forego it altogether, leaving them physically weaker and less able to care for themselves.
These are the ravages not just of poverty but of a system where unregulated, or corporate-regulated, global and domestic markets produce horrifying inequalities in the basic conditions of peoples' lives.