economic liberalization and poverty in the developing countries

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Economic liberalization and poverty in the developing countriesMohammed Nuruzzamana

a Dept. of Political Science, University of Alberta, Edmonton, Canada

To cite this Article Nuruzzaman, Mohammed(2005) 'Economic liberalization and poverty in the developing countries',Journal of Contemporary Asia, 35: 1, 109 — 127To link to this Article: DOI: 10.1080/00472330580000071URL: http://dx.doi.org/10.1080/00472330580000071

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109

Economic Liberalization and Poverty in the Developing Countries

M o h a m m e d Nuruzzaman*

[Abstract: In recent years the neoliberal economists have sought to establish the claim that economic liberalization unfailingly promotes growth and reduces poverty in the developing countries. Liberalization of markets in the developing countries, according to them, promotes economic perfection by intensifying competition between domestic and external economic actors and exposing management and workers to improved practices. Thay also claim that liberalization of trade and investment regimes by the developing countries has attracted more direct foreign and portfolio investment which, in turn, has accelerated the rate of economic growth and lifted the poor out of poverty. This article contends this neoliberal claim and argues that the post-Cold War neoliberal regime of global economic liberalization ensures the production of poverty in the developing countries by shrinking their prospects of economic growth. It pursues a structural explanation to explore how the neoliberal regime fosters conditions that make possible the continued production of poverty in the developing South and arrives at the conclusion that the neoliberai regime of economic liberalization was not designed to promote growth in the developing countries, rather it was initiated to facilitate capital accumulation by transnational capitalist class at the global level. As its consequence, the poverty situation has not improved; rather there has been a rise in absolute poverty in many developing countries.]

In recent years, the neoliberal economists (for example, Berg and Krueger, 2002; Bhagwati, 1994; Dollar and Kraay, 2001; Edwards, 1998; Henry, 2002; Hussain, 1996; Krueger, 1997; Krugman, 1994; Vasquez, 2002) have sought to establish the claim that economic liberalization unfailingly promotes growth and reduces poverty in the developing countries. The argument goes that liberalization of markets promotes perfection in economic organization and management which, in turn, push forward growth and human welfare. An impetus to and achievement of growth eventually reduce or allevi- ate poverty, improve the standard of living, close the gap between the rich and the poor and bring about convergence between states through faster growth in the poorer countries. The best way to achieve economic growth, they argue, is to abandon protectionist policies and seek rapid integration into the global capitalist economy. They further c laim that l ibera l iza t ion of capi ta l accounts, t rade and inves tment reg imes and privatization of national economies, in the long run, will attract more foreign direct and portfolio investment and thus create more employment opportunities for the poor. La-

Dept. of Political Science, University of Alberta, Edmonton, Canada Journal of Contemporary Asia. Vol. 35 No. I (2005)

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bor is the primary asset of the poor and the establishment of labor-intensive industries reduces unemployment, promotes living conditions and thus breaks down the vicious circle of poverty. Referring to the declining trend in the incidence of poverty in East Asia and some Latin American countries, the neoclassical economists claim that the percentage of poor people under neoliberal economic liberalization is declining as a whole with a steady down turn on the world poverty curve.

This article, contrary to the neoliberal claim, argues that the post-Cold War neoliberal regime of liberalization fosters conditions that instead of alleviating poverty, ensures its continued production in the developing countries by shrinking their prospects of economic growth. It further contends that the neoliberal claim is an exaggeration of the benefit s global economic liberalization is supposed to sprinkle across the vast swathes of territories and peoples in the developing world. There are, indeed, hard economic data that rule out the benefits of globalization to reduce poverty. In the decade of 1990s, in particular, there has been a rise in the incidence of poverty in the developing world. Michael W. Doyle (2000:81), for example, mentions that the total number of the poor living below the "absolute poverty" line in 1992 was 1.4 billion; in 1977 the figure stood at 1 billion. Shaohua Chen and Martin Ravallion (2001: 283-300) find no significant decrease in the number of the poor people in the 1980s and early 1990s. The World Bank (1998), the global institutional arm of neoliberalism, also notes an upward mobil- ity in poverty incidence in the 1990s; especially by 1998, the total number of poor people rose to a figure as high as 1.3 billion who earned and consumed less than $1 per day. This figure, judged by the criterion of $2 a day, stood at 3 biilion. In another study, the World Bank (2001:3) mentions that in spite of a decline in poverty in the developing countries from 28.3% in 1987 to 24% in 1998 based on US $1/day, a significant number of 40 developing countries with 400 million people failed to register any increase in per capita income growth from 1970 to 2000. The Bank study further notes that "...the absolute number of poor have continued to increase in all regions except East Asia and the Middle East. Overall, despite impressive growth performance in many large developing countries, absolute poverty worldwide is still increasing" (The World Bank, 2001:3).

The rise in absolute poverty goes side by side with the growing participation of the developing countries in neoliberal regime of economic liberalization. David Greenaway et al (2002: 230) inform us that over the past twenty years from 1980 to 2000 some hundred plus countries have undertaken trade liberalization measures either voluntarily or under pressures from the World Bank.

It is important to ask: Why is not poverty reduced in most of the developing countries in the South, despite their growing participation in neoliberal economic globalization? What explains the persistent incidence of poverty in these countries? Were trade liberalization and structural economic reforms really meant to allleviate the poverty situation in the developing countries across Asia, Africa and Latin America?

This article pursues a structural explanation to explore an answer to these ques- tions. First, it briefly elaborates a structural definition of poverty and then proceeds to explain how the structural composition of the global economic order buttressed by the


Economic Liberalization 111

neoliberal liberalization regime ensures the production of poverty in most of the developing countries.

A Structural Def'mition of Poverty

The pursuit of a structural explanation of the production of poverty requires a look at how we define poverty in the first place. Recognizably, poverty is a highly debated concept, not a received reality. While attempting a definition of poverty from their particular perspectives, many scholars reject the World Bank approach to poverty that defines it in terms of income and consumption levels. The World Bank focuses on the inability of people to generate sufficient income to purchase the basic necessities for daily life. Poverty is said to be reduced or eliminated when a people achieve a minimum standard of living (The World Bank, 1996). The problem with this definition is that it is highly focused on economic aspects of social life and sidetracks crucial issues of inequalities in income distribution, social marginalization and resultant social and political conflicts. To better capture these associated ramifications, some scholars view poverty as a political rather than an economic problem (Kothari, 1995). Poverty, according to this view, initially originates out of the unequal and exclusionary process of economic development and is accentuated due to the absence of distributive justice in society. Capitalist development without a human face leads to wealth accumulation by few individuals in the society who enjoy unlimited social power and exert political influence to promote their individual interest. As its consequence, social inequalities are exacerbated and the disadvantaged people are pushed to the margin of survival.

Scholarly attention has, therefore, been increasingly recast and refocused around concepts like ,marginalization," "social polarization," "gender relations" and so on. Durfee and Rosenau (1996: 523), for example, define poverty as "realities and fears of substandard living conditions - of woefully insufficient disposable income, housing, clothing and employment - experienced at both macro level of collectivities and the micro level of individuals, that may lead to social unrest and instability. Mittelman and Tambe (2000:171) view poverty as "the experience and perception of marginalization that have been locked in through structural pressures." Marginalization, according to them, should be understood as a process of decreasing returns from increasing efforts that are linked up to work relations in the global economy. Both low-skilled employed workers and unemployed people experience marginalization in their everyday life.

This article recognizes the process of marginalization arising out of work relations in the capitalist global economy and views poverty more as a structural outcome put into effect by the very composition and operational regime of the global economic order. The structural composition of the global economy rests on three main pillars. First, global institutional arrangements built around the World Trade Organization (WTO), the International Monetary Fund (IMF) and the World Bank. These three institutions underwrite the basic rules and regulations of economic, monetary and trade relations between states. Secondly, the massive capital accumulation drive by international capital under the leadership of transnational corporations (TNCs) which are


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often characterized as, "footlose" global economic actors. The structural adjustment programs (SAPs) engineered and implemented by the World Bank and the IMF are well connected to this drive for capital accumulation. And thirdly, the unequal participation of Southern developing countries, who may better be labelled as "junior partners," in the global capitalist order that breeds and consolidates structural imbalances between the industrial North and the undeveloped South.

This structural composition of the global economic order has been in operation quite for a long time but what has assumed greater salience in the post-Cold War world is the enforcement of the rules and regulations of economic relations in unequivocal neoliberal terms. The disintegration of the former Soviet Union in the early 1990s largely set the stage for an ideological upsurge of neoliberalism that has gradually brought almost all states within its operational fold. The neoliberal regime principally determines the pattern of interactions between participating actors and also specifies the type of and limits to role each actor may play under its broad parameters. Since the economically much advanced northern countries dominate the global economic and financial institutions, the rules and regulations crafted by these institutions suit the interests of these countries more than that of the developing countries. Poverty, as an economic and social outcome, has its roots in the structural composition of the global economic order. It can neither be eliminated nor significantly reduced worldwide under the neoliberal regime of economic liberalization. The reasons are explained in the subsequent pages.

The Neoliberal Regime of Free Trade and the Developing Countries

The neoliberal regime is defined in this article as the binding rules and regulations designed to promote a global market economy and global free trade. As noted above, the institutional arrangements that uphold and implement the neoliberal regime are spear- headed by the WTO, the World Bank and the IMF. While the WTO is engaged in the task of eliminating all barriers to global free trade, the World Bank and the IMF exclusively look after the liberalization of domestic capital accounts and privatization of the national economies in the Southern developing countries. Here we begin with an ex- amination of the prospects free trade under WTO offers the developing countries to stimulate their economic growth. First of all, it is imperative to note that as participants in the current global economic order the developing countries are committed to adopt and implement liberal trading policies. The Uruguay Round Accord (URA), now codi- fied under the WTO, reflects this commitment to economic liberalism as it specifically mentions that all participating states, developed as well as developing, "... recognize the contribution that liberal trading policies can make to the healthy growth and development of their own economies and of the world economy as a whole" (quoted in Adams, 1997: 178).

The neoliberal position holds that all nation-states, developed and developing alike, are poised to accrue benefits from global free trade that will accelerate the growth rates of their respective economies every year. As noted in the introductory section, the neoliberal scholars (see especially Berg and Krueger, 2002; Henry, 2002; Krueger, 1997) find a positive correlation between openness to trade and economic growth. Opening



up domestic trade, according to them, means intense competition between local and foreign firms that exposes management and workers to improved practices. It thus spurts an awareness to acquire latest industrial technologies and attract foreign investment which is crucial to promote economic growth. A number of other scholars (see, for example, Greenway et al, 2002; Greenaway et al 1997; and also Rodriquez and Rodrik, 1999) conclude that the association between trade openness and higher GDP (gross domestic product) growth is inconclusive. It is important to note that the advocates of free trade emphasize the elimination of tariff and non-tariff barriers to external trade while remaining blind to other important factors that can significantly promote the rate of economic growth of the developing countries. Some of these factors include, but are not necessarily restricted to, investment in education and health, development of infrastructure and sound economic institutions. Neither the World Bank nor the WTO has emphasized the significance of these internal factors in the economic growth of the developing countries.

Theoretically, the benefits of free trade sound good but the actual practice in free trade has been quite frustrating. The unfair practices of the so-called neoliberal developed states in the West have largely undermined the promise of benefits from free trade for all countries. Despite the call for free trade under WTO, biased and skewed policies have become a common practice rather than an exception in global trade. The developed countries usually follow discriminatory policies in their export - import trade with their developing counterparts. The discrepancies are highly visible in the pattern of tariff and non-tariff barriers to industrial goods from the developing countries that restrict their access to developed countries' markets. Under the new trade regime, the developed countries - the United States (US), the European Union (EU), Japan and Canada - have reduced their tariff levels by half in their mutual trade with each other but with regard to the developing countries, the tariff levels have declined by less than one-third. Moreover, the tariffs are significantly high for primary and labour-intensive goods, in which the developing countries specialize, compared to capital and high technology-intensive manufactures. The average tariffs to imports from developing countries are still high even after the full implementation of the Uruguay Round Accord (URA) under the WTO (Adams, 1997: 177-192). This may rather be seen as an exten- sion of the trade restriction techniques frequently applied by the developed countries in the 1970s and 1980s under different rounds of the General Agreement on Trade and Tariffs (GATT) negotiations. Taking advantage of article XIX of GATT, the developed countries used the provisions of safeguards, anti-dumping legislations, the multi-fibre agreement (MFA), voluntary export restraints (VERs) etc., to keep exports from developing countries out. This severely restricted and still restricts the developing countries' access to markets in the developed West (Dasgupta, 1998:151-162).

Similar discriminatory policies also dominate the agriculture sector. Traditionally, the agricultural sector in the US, Japan and the EU has been heavily protected against competitive onslaught from the developing countries. High subsidies and strong import control measures have been frequently applied by the US and the EU to protect their farmers (Dasgupta, 1998:180-189). When GATT was established in 1955, the US more


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or less stayed outside the agricultural provisions of GATT with the freedom to exercise protectionist agricultural policies. Indeed, the fear of loss in agricultural sector debarred the US from signing the Charter of the International Trade Organization (ITO) designed on the original ideas put forward by John Maynard Keynes. Keynes envisioned the ITO as a multilateral organization aimed at promoting stability in the prices of agricultural products of developing countries. He proposed to create buffer-stocks to intervene between declining and rising prices of agri-products and thus stabilize the prices of primary products. The ITO Charter that was completed at the end of Havana Conference in 1948 was handed in to the US for ratification but it never reached the floor of the US Congress (Low, 1995: 36-42).

The EU, on the contrary, followed a unified protectionist policy known as the Com- mon Agricultural Policy (CAP). Initiated in 1962, the CAP has acted as a shield to protect EU agriculture through subsidies and variable levy system that make foreign agricultural products more expensive in the EU market. Since 1962 up to the initiation of the Uruguay Round (1986-93) of GATT negotiations, the EU has resisted the inclu- sion of CAP into negotiations on the plea that it was essential to maintain unity between its members. M. Atkin (1995: 26-28) notes that the EU agricultural subsidies went so high in the 1980s that they claimed as high as 60-70% of the EU common fund. As a result of high agricultural subsidies and other protectionist measures, the developed countries, including Japan, by 1992 accounted for 80% of world trade in cereal; and the developing countries, once the major exporters of cereal, became the net buyers of 55% of the cereal produced in the developed countries (OECD, 1993: 13).

Under the Uruguay Round, of negotiations agriculture remained a highly divisive issue. While the US favoured the phasing out of subsidies in agriculture, Japan and the EU, France in particular, opposed reduction in agricultural subsidies. The protracted negotiations eventually resulted in considerable exemption of subsidies in agriculture and a separate agreement was worked out to deal with agricultural matters. The agreement outlines specific measures to reduce subsidies in different phases which are appli- cable to both developed and developing countries. The elimination of important safeguards including price stabilization, procurement prices and minimum guranteed prices that damage the interests of farmers and peasants in the developing countries are speed- ing up under the World Bank-IMF advocacy (Adams, 1997:183). While the developing countries are forced to reduce subsidies in agriculture the developed countries continue to allocate money to subsidize their agriculture under different excuses. The US defi- ciency payments and the EU compensation payments were exempted from the agreement on agriculture as these were deemed not to create any trade distortions or make any effects on production. Furthermore, the EU, under the MacSharry Plan, continued to subsidize farms with less than 30 acres of land (Watkins, 1992: 122). The agreement on agriculture also permits the developed countries to impose control on agricultural imports from developing countries on sa,,itary and phytosanitary grounds to "protect human, animal or plant life or health." Under changed circumstances the sanitary and phytosanitary measures have been used by the powerful developed states many times to keep away exports from developing countries (Dasgupta, 1998:185).



Table 1: Elements of Recent Trade Liberalizations

Country

South Asia Bangladesh (1989, 1992) India (1990, 1993) Pakistan (1987, 1990) Sri Lanka (1985, 1992)

East Asia China (1986, 11992) Philippines (1985, 1992)

Indonesia (1985, 1990) Korea (1984, 1992) Thailand (1986, 1990) Average

Sub-Saharan Africa Cote d'Ivoire (1985, 1989) Ghana (1983, 1991) Kenya (1987, 1992) Madagascar (1988, 1990) Nigeria (1984, 1990) Senegal (1986, 1991) Tanzania (1986, 1992) Zaire (1984, 1990)

Average

Latin America Colombia (1984, 1992) Peru (1988, 1992) Costa Rica (1985, 1992) Brazil (1987, 1992) Venezuela (1989, 1991)

Chile (1984, 1991) Argentina (1988, 1992) Mexico (1985, I987) Average

Average Nominal Tariffs

Current

94 50 128 71 69 65 31 25

43 24

22 10 11 25

33 17 34 36 33 90 33 25

38

61 12 57 17 53 15 51 21 37 19

35 11 29 12 29 10 44 15

Pre-reform

38 28

27 24 13 29

26 30 40 46 35 98 30 24

41

Ratio

0.53 0.55 0.94 0.81

1.13 0.88

0.81 0.42 0.88 0.82

1.27 0.57 0.85 0.78 0.93 0.92 1.10 1.04

0.94

0.20 0.30 0.28 0.41 0.51

0.31 0.41 0.34 0.35

Source: Greenway, David et. al., (2002), "Trade Liberalization and Growth in Developing Countries" in Journal of Development Economics, Vol. 67, p. 232 * Years given in parenthesis are pre-reform and current. (This table is presented in an abridged form).


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It would be of considerable interest to take some stock of the performance the developing countries have made in international trade in this era of free trade. The World Bank (2002: 24) writes that the developing countries - particularly, the "new globalizers" - have made dramatic progress in the export of manufactures in the last two decades recording a rising share from 25% in 1980 to 80% by the end of the millennium. This tremendous progress in the export of manufactures has not, however, followed a corre- sponding rise in the share of the developing countries in total world exports. Here we first present a table reporting elements of trade liberalizations in a selective group of countries in Asia, Africa and Latin America and then proceed to produce some other statistical information to mark the impacts of trade liberalization for the developing countries as a whole. Table - 1 reports the levels of unweighted average nominal tariffs in the pre-reform and reform periods and shows that the level of trade liberalizations for all countries except China, Cote d'Ivorie, Tanzania and Zaire has resulted in considerable tariff reductions to faciliate trade at the global level. But the share of developing countries in global trade, particularly export share, has not increased proportionately. Table - 2 and Table - 3 show the percentage shares of different countries in global trade based on different income categories and geographic regions. It is noticeable that compared to imports, the exports of the developing countries have not marked any significant upward trend in the decade of the 1990s- the decade of high economic liberalization. By contrast, the industrial countries as a group have maintained a rising share in total global export trade while their share of import trade began to decline from the second half of the 1990s. It should be noted that despite the implementation of major economic reforms by most of the developing countries, many of them are still far away from accruing benefits from trade liberalization. The share of Africa in global export- import trade is a point at hand. In brief, the much expected benefits from free trade and a major push in economic growth to reduce poverty, as propagated by the neoliberal economists, are far from translating into reality. Many of the reasons for poor economic performance by most of the developing countries lie in understanding the new capital accumulation process under TNCs' leadership in this age of globalization.

Table 2: Exports of the World to and from the Countries Listed (% distribution)

1980 1985 1990 1995

Industrial countries 67.7 69.8 72.1 65.0 Developing countries 29.3 27.0 26.6 33.4 Africa 3.9 2.9 2.2 1.9 ~_sia 8.3 10.2 12.8 18.5 Europe 4.7 3.9 4.4 5.1 Vliddle East 6.0 5.5 3.3 2.9 ~restern Hemisphere 6.4 4.5 3.9 4.9 Dther countries n.i.e. 3.1 3.1 .1 .1

1997

63.9 34.8

1.8 18.5 5.8 3.1 5.7

.1

1999 2001

68.2 66.4 30.9 32.7

1.7 1.8 15.9 16.9 4.9 5.3 2.9 2.9 5.4 5.7

.1 .1

Source: International Monetary Fund, Direction of Trade Statistics Yearbook ! 987, 1995 & 2002 (Washington, D.C.: IMF)



Table 3: Imports of the World to and from Countries

1980 1985 1990 1995 1997 1999

Industrial countries 64.7 68.8 70.9 66.6 64.7 65.2 Developing countries 33.5 28.8 28.2 32.4 34.3 34.0 a.frica 4.6 3.7 2.5 1.9 2.1 1.9 Asia 7.5 9.4 12.9 17.6 18.4 18.8 Europe 3.3 3.5 3.8 4.9 4.9 4.7 middle East 12.4 6.3 4.5 3.2 3.6 3.2 !Vestern Hemisphere 5.7 6.1 4.5 4.8 5.4 5.8 Other countries n.i.e. 3.1 3.1 .1 .1 includes the former USSR till 1990)

Listed (% distribution)

2001

61.2 37.8

2.2 20.1

4.5 4.1 6.0

Source: International Monetary Fund, Direction of Trade Statistics 1987, 1995 & 2002 (Washin The IMF).

The New Capital Accumulation Process

ton, D.C.:

While the trade regime under WTO operates on a comprehensive basis and embraces almost all states, the World Bank and the IMF-sponsored regime of deregulation and privatization exclusively deals with the developing countries in the South. This deregulation and privatization regime is widely known as the Structural Adjustments Programs (SAPs). The policy package SAPs advocate comprises three important elements: dismantling the role of the state in economic development; liberalization of trade and investment regimes; and privatization of economic activities. The World Bank and the IMF usually present the SAPs as growth-oriented and business-friendly but, in essence, they are serious measures with far reaching consequences for the economic development of the Southern developing countries. The pattern of the evolution of SAPs in the 1970s and the factors that shaped that evolution appear to have largely determined and sealed the growth prospects of these countries. A brief odyssey of that evolution follows below.

The origins of SAPs boil down to the deep economic crisis of the 1970s which was a decade of turbulence and also of frustration for the developed countries in the West, particularly the US (Ould-Mey, 1994:319-336). After witnessing a long economic boom since the end of World War II the Americans were losing both on political and economic counts. On the political front, the US got itself deadly locked in with the former Soviet Union on many international issues and the stalemate resulting from their mutual rivalry rendered the United Nations Security Council dysfunctional. It created a unique opportunity for the developing countries to revive and revitalize the overshadowed General As- sembly which came to play a decisive role on many regional and international issues. Despite strong US opposition, the General Assembly succeeded in passing resolutions condemning Zionism in the Middle East and apartheid in South Africa. The economic success was also equally encouraging for many of the developing countries in this decade. A good number of these countries pursued policies of nationalization and exercised


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considerable control over capital movement within their respective national borders. The average gross national product (GNP) of the developing countries grew at a rate of 6% to 7% in the 1970s. The socialist bloc countries also followed semi-autarkic policies in the same decade. The protectionist policies of the developing countries coupled with the semi-autarkic policies of East European socialist states drastically reduced markets for industrialized countries posing a direct threat to the post-war boom in Western Europe and North America. The oil crisis of the 1970s further added to the decline in growth rates of the Western economies. Against this backdrop, the developed countries sharply re- acted to the economic crisis in their first ever G-7 summit in France in 1975. The summit declaration strongly warned against protectionist trading policies and vowed to use international institutions including the IMF to carry out necessary changes to stabilize the economies of the developing countries. By ! 977 the G-7 countries decided to devise a plan attaching the conditionality of policy changes to loan availability and agreed to use the IMF and the World Bank as the principal money lenders to the developing countries. The World Bank's first World Development Report published in 1978 laid the foundation for the global strategy of SAPs. In the subsequent decades of the 1980s and 1990s, the SAPs were carefully designed and implemented in tandem with the demands and interests of the transnational capitalist class under TNCs' leadership.

But how are SAPs linked to the process of capital accumulation by transnational capital at the global level? This requires a brief discussion of the growing economic clout of the TNCs in the global economy and an analysis of how SAPs broadly fit into the dynamics of economic globalization that promotes capital accumulation by the TNCs. It is hardly disputed that the TNCs are the primary vehicles and beneficiaries of economic globalization. The dominance of the TNCs in the global economy is growing with the passage of time. The number of TNCs operating in the global economy now exceeds 40,000 and in addition there are some 250,000 overseas affiliates running cross- continental businesses. The top 200 TNCs had a combined sale of US $ 7.1 trillion in 1995 which is equivalent to 28.3% of the world's gross domestic product. Headquar- tered in the US, Western Europe and Japan the top TNCs are capable of shaping the broad pattern and dynamism in global trade, production and financial transaction (Broad and Cavanagh, 2000: 192). The operational thrust of the TNCs is also backed by their parent countries as their interests are mutually interlinked. The TNCs are usually supported by the domicile governments to clinch deals with governments in the developing countries and also to resist attempts that might restrict their business. The US fight against oil nationalization in Iran in 1949 and the overthrow of the Allende government in Chile in 1973 that expropriated the US corporation AT&T are but a few examples of the convergence of interests between TNCs and their parent countries (Dasgupta, 1998: 196-197).

The drive for capital accumulation by the TNCs and the dynamics of economic globalization are much inter-related. It will become clear once the nexus between economic globalization and the TNCs is spelled out in clear terms. L. Amoore et. al. (2000: 12-28) have singled out four defining characteristics of economic globalization: protection of capital and capital accumulation on an expanded scale; the ascendancy of market



ideology that supposedly homogenizes state policies and thus facilitate global capital accumulation; the emergence of a "transnationalized institutional authority" that pen- etrates and bypasses the states for the purpose of capital accumulation; and lastly, insu- lation of the opposing societal forces from state decision-making processes. In brief, the four defining characteristics of economic globalization epitomize two overriding objec- tives the neoliberal regime seeks to materialize: (i) to bring about harmonization in state policies to facilitate capital accumulation and (ii) the creation of a "transnationalized institutional authority" to oversee the process of capital accumulation by transnational capital. The first objective is promoted by the SAPs and the second objective is deci- sively pushed ahead by the trade-related investment measures (TRIMs) and the trade- related intellectual property rights (TRIPs) institutionalized by the WTO.

The policy package SAPs advocate originates out of the theoretical foundations of neoclassical economics. The neoclassical economists begin with the assumption that human beings are homo-economicus guided by rational deductivity and axiomatic reason- ing. Hence the neoclassical economic model focuses on methodological individualism and accepts equilibrium as a natural state. The concepts of homo-economicus and the methodological individualism accord the neoclassical economists the freedom to formu- late two broad generalizations: that economic growth is not culture-specific, and that liberalization of markets is the prime route to achieve economic growth. Naturally the attack has been directed to the state, which is viewed as predatory and mostly engaged in promoting rent-seeking activities. The failure of economic development in the developing world is projected as the failure of the state, not of markets since markets can do no wrong. The neoclassical economists hold that the imposition of barriers to free trade by the states has led to distortions in growth, keeping foreign capital out and misallocating resources to unproductive sectors. Getting prices right through trade liberalization, invita- tion to foreign capital through deregulation and privatization of the economies, they argue, are the appropriate measures to boost up growth. Stabilization through adjustments accompanied by a shrinking role of the government is considered the best economic man- tra. The World Bank and the IMF, which are awefully staffed by ardent believers in neoclassical growth model, have over the past years attempted to stabilize and adjust the economies of the developing countries through various measures, with a universal conditionality of policy changes attached to loan availability. The liberalization and deregulation package imposes floating exchange rate with no government controls, low interest rate banking, across the board trade liberalization with progressive dismantling of tariffs, and removal of protectionism for industrial development. Howard Stein (2000:3) contends that all these measures meant "attempting to impose American style institutions and policies (or at least idealized forms)." The IMF-World Bank policy package has arduously tried to create American style institutions in the developing countries defying their dis- tinct social institutions, cultural values, historical contextualities and local specificities.

The real task of TNCs' operations in the developing world is, however, effectively carried out by the TRIMs and the TRIPs. During the Uruguay Round the developed countries argued that restrictions to foreign investments are trade-distorting and trade- constraining. The developing countries, until the signing of the URA, exercised control


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over foreign investment in the form of "local content requirements" which required foreign companies to use a certain percentage of local manpower and material, to balance foreign exchange, transfer technology, accept local equity requirements and sell products to specific markets, etc. Except a few provisions including national health and security issues and balance of payments safeguards, the rest of "local content requirements" under the newly negotiated TRIMs are gone; the TNCs are now free to operate outside the rules and regulations of government (Dasgupta, 1998:167).

The TRIPs, on the other hand, enact an international patent regime with clear-cut provisions for copyright, trademark and patent protection for a specified number of years. The argument used to expedite negotiations on TRIPs was that unless the inven- tor gets a reward for invention he/she will not take interest in further invention and as its consequence technological development will suffer. The individual private firms that apply invention through practical measures often involving high R&D (Research and Development) expenditures need assurance that the fruit of invention be exploited by them for a certain period of time and that other competitive firms must be debarred from copying the newly developed product. The Uruguay Round Accord not only ac- cepted this position, mainly put forward by the TNCs, but also contained enforcement provisions to protect TRIPs. It imposes binding responsibilities on member states to establish civil judiciary procedures to facilitate patent protection and to punish those responsible for willful copyright piracy. A council has also been established to monitor the violation of the patent regime and any aggrieved country can formally lodge com- plaint with the WTO seeking redress for the violation of its patent by another country (Baldwin, 1995: 157).

According to many Western scholars, the TRIPs promote "good behavior" in international trade, others argue that they allow monopoly business by largeTNCs and un- dermine free flow of scientific information and dissemination of scientific knowledge (see, for example, Baldwin, 1995:159 and Dasgupta, 1998:172). Whichever way scholars look at it, the fact remains that both TRIMs and TRIPs free the TNCs from the clutch of governmental control and allow them to penetrate local markets and enjoy benefits as much as the local capital does. As a whole, the TRIMs and the TRIPs under WTO and the SAPs sponsored by the World Bank and the IMF have been devoted more to serve the interests of the TNCs than that of the developing countries. Even if the TRIMs are violated by any country to prevent operations by TNCs, the US can resort to Super 301 to force the reluctant country to comply with the demand of the TNCs. The Super 301, which is a powerful section of the US Trade Act, allows the US president to take actions against 'unreasonable and unjustifiable' trade practices by other states that are supposed to hurt US commercial interests. Practices like denial of market opportunities, failure to establish intellectual property rights laws, violation of workers' rights, anti- competitive behavior etc., are deemed to constitute "unreasonable and unjustifiable" practices. Under the provisions of Super 301, the US puts countries on a watch-list for pursuing the above practices. Actions have already been taken against the EU, Japan, Canada, Brazil and Argentina while many others are watched closely (Low, 1995: 89- 91). The WTO provides mechanism for settlement of trade disputes but the US still



continues to apply Super 301 to intimidate other countries. The notices served to countries allegedly violating trade norms under Super 301 take "the form of summons in criminal proceedings and the entire procedure of investigations by the United States smacked of a trial of another country for violation of trade norms" (Dasgupta, 1998: 160). It promotes a kind of unfortunate unilateralism in neoliberal free trade regime (Srinivasan, 1999: 1054).

The Western bid for TRIMs and TRIPs was, in fact, a response to the declining prospects of capital accumulation by the TNCs within the confines of the Western world. James Crotty et. al. (1998: 129-132) point out that changes in the nature of "competitive regime" that determines the availability of.economic rents for the giant corporations, the environment in which the corporations operate, and macroeconomic conditions in the Western world forced the corporations to search for additional avenues for capital accumulation. During the Golden Age (1945-70) in the industrial West, the giant corporations thrived well due to increasing rise in aggregate demand and absence of fierce competition from other external competitors. The availability of economic rents was sufficient to support large scale operations by giant corporations and there was little fear of a downfall in national aggregate demand and aggressive battles over market shares. High growth rates supported by massive savings followed; capital and labour struck out good understandings with the government playing the role of media- tor. But by the early 1970s the Golden Age came to an end with aggregate demand consistently falling coupled with growing competition between American, European and Japanese firms. These developments forced the corporations to get involved in fierce cost-cutting battles to capture markets for their products and to keep their finan- ciers happy with the rate of return for their investment. It ensued a reconsideration of the structures and strategies the corporations used in the Golden Age and many of them were forced to relocate their production sites in areas where labor was relatively cheap and the infrastructure relatively well developed. Corporate response in the US, for example, resulted in the breakdown of the existing relations between labor and capital and the rejection of the social 'contract' that guranteed full employment and adequate social wage. There was a demand for business-oriented government framework permit- ting free operation by the giant firms. Although it initially originated in the US, the new demand for shrinking government and business-friendly framework eventually spread out in other parts of the world. The TRIMs and TRIPs were devised against this back- ground to satisfy the demand of the TNCs.

The search for maximum profits by the TNCs has resulted in the dismantling of state economic powers in the South and the prevalence of a market ideology that is said to create a "borderless" world (Ohmae, 1990). Reference to the Mexican case may serve as an example to show how the TNCs got Mexico to open up its economy com- pletely in the aftermath of the t995 economic crisis. Michael Choussudovsky (1997) mentions that the sole purpose of the "rescue package" which the IMF, the World Bank and the Bank for International Settlements (BIS) devised to bail Mexico out of its second collapse in 1995 was more intended to serve the interests of international financial institutions and creditor banks than Mexico's own interests. The Mexican government,


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under the negotiated deal, agreed to open its national banks to foreign ownership and use the entire oil export revenue to service debts. The Mexican example, in subsequent years, has been used to tighten IMF-World Bank nose on other developing countries. The IMF-World Bank policies in more than 100 developing countries now follow the same menu of trade liberalization, privatization and deregulation across the board.

The Precarious "Junior Partners"

This state of affairs leaves the junior partners, the third component of the global structural edifice, in a very precarious condition. Most of the junior partners are gradually losing control over their macro-economic policies and social spending but keep re- sponding to the neoliberal rules and regulations. Why does it happen? Perhaps, Hamza Alavi (1982: 172-192) provides the readers with a good explanation to understand the behaviour of the junior partners in the international economic order characterized by massive liberalizations in the present context. He builds on the interactive process between domestic society and international capital and contends that the nature of linkages between local and international capital is primarily shaped by the contestations between internal social forces involving the state, capital and other civil society actors. The contestations at a certain stage produce a consensus between the state and capital, outlining the course of actions the national capitalist class will follow. The internal consensus thus produced is then influenced and further conditioned by external forces and thus a linkage between the internal and the external is established.

One may extrapolate from Alavi's explanation that it is this linkage that makes the national capitalist class look up to the dominant capitalist actor(s) and coalesce with it. Since the junior partners are dependent on the dominant actor(s) in varying degrees, they accept both new ideological moorings and economic prescriptions offered by the institutions of the dominant actor(s). Eventually business and entrepreneurial class ex- tend cooperation to globalization forces and even accept external dictates. This is ex- actly because the redeeming qualities globalization promises promote their interests. The business and entrepreneurial class enjoy the benefits of trade and capital liberalization, deregulation and privatization of national industries. This class is the buyer of privatized national industrial units, banks and insurance corporations under the regime of privatization. The opening up of national economies to foreign investment and liberalization of trade have helped them to establish growing linkages with international capitalist class and promote a kind of symbiotic relationship with international capital. The working class and poor people are hit hard by its consequences. The low skilled labor class who sell their labor to earn everyday bread has less value to the high-tech, high capital - intensive production systems. Low technology-based industries and small family businesses also suffer, and are gradually collapsing, in the face of the flood of new imports under trade liberalization schemes.

Many developing countries, indeed, embarked on liberalization under pressures from the IMF and the World Bank before creating the preconditions for liberalization. Their domestic financial markets are undeveloped and lack appropriate laws to enable



domestic financial institutions to withstand foreign competition. The administrative set-up, judicial systems and law enforcing agencies are generally ineffective to guaran- tee social discipline and political stability which are essential to promote a growth- friendly atmosphere. This explains why, despite widespread adoption of liberalization measures, most TNCs are investing in some selective geographic locations rather than spreading out to diverse locations. Table- 4 presents gross foreign direct investment in different categories of countries and geographic regions. It reveals that maximum foreign investment in the 1990s went to high income countries and a few geographic locations in the South like East Asia and Latin America. The share of low income countries (the World Bank in its 2002 World Development Indicators identifies 63 countries as low income countries) in direct foreign investment is insigficant; it rose from 0.5% in 1990 to only 1.6% in 2000. It is true that flow of foreign direct investment has consid- erably increased in the developing countries in the 1990s but unfortunately all developing countries are not the beneficiaries of such investment. A high percentage of foreign direct investment goes to a handful of lower and upper middle income developing countries in East Asia and Latin America where the rate of economic growth is increasing and the poor people are being lifted out of poverty (see Table - 5).

Table 4: Gross Direct Foreign Investment (% of GDP)

Categories/regions Year 1990 1996" 2000

Low Income 0.5 1.0 t .6 Middle Income 1.0 0.9 3.8 a) lower middle income 1.1 0.6 3.5 b) upper middle income 0.9 1.3 4.0 East Asia & the Pacific 1.5 t .0 3.9 Europe & Central Asia 0.8 3.8 Latin America & the Caribbean 0.9 1.1 4.5 Middle East & North Africa 0.9 0.4 1.0 South Asia 0.1 0.2 0.6 Sub-Saharan Africa 1.0 0.4 1.8 High Income 3.0 2.7 10.1 Europe EMU 2.9 ... 14.2

Source: The World Bank, World Development Indicators 1998 & 2002 (Washington, D.C.: The World Bank). * Data for 1996 represent % ofPPP GDP.

The emerging scenarios, in a way, are creating a new global "economic apartheid" in the twenty-first century. The vast majority of the developing countries, almost 140, are registering very slow growth while the rich developed 24 and another 10 to 12 newly industrialized countries are enjoying the bulk of economic growth and prosperity (Broad and Cavanagh, 1995-96: 24). Poverty is ultimately remaining a characteris- tic feature for many people in majority of developing countries.


124 JCA 35:1

Table 5: Foreign Direct Investment in Some Selected Developing Countries (in millions US$)

Countries Year 1990 1996 2000

Argentina 1,836 4,285 11,665 Brazil 989 9,889 32,779 Chile 590 4,091 3,675 China 3,487 40,180 38,399 Egypt 734 636 1,234 India 162 2,587 2,315 Malaysia 2,333 4,500 1,660 South Korea 788 2,325 9,283 Nigeria 588 1,391 1,082 Philippines 530 1,408 2,029 Thailand 2,444 2,336 3,366

Source: The World Bank, World Development Indicators, 1998 & 2002 (Washington, D.C.: The World Bank).

Table 6: Real GDP Growth Rates 1950- 1998

Years World Industrial countries Developing countries Sub-SaharanAfrlca*

1950-73 n.a. 5.9 5.5 n.a. 1966-73 5.1 4.8 6.9 5.9 1974-80 3.4 2.9 5.0 2.5 1981-90 2.8 2.9 2.4 1.8 1990-98 2.4 2.1 3.3 2.2

Source: adapted from Howard Stein (2000). * data on SSA's performance in the period 1950-73 not men- tioned and the periods 1966-73 and 1974- 80 exclude South Africa.

Table-6 illustrates how the developing countries have performed in terms of overall GDP growth in the last four decades from 1950 to 1998. The table shows that the economic performances of the developing countries was much better in the period 1966- 1973 and still good in the 1974-t980 period but started to witness a downfall in their overall growth rates since 1981 when globalization is assumed to have set in full swing. This declining rate of growth under globalization brought about increasing miseries for many people in the developing countries and an increase in poverty for the low income peoples everywhere in the developing world. At the individual country level, the regimes of liberalization, deregulation and privatization of national economies in Sub- Saharan Africa and South Asia have produced negative results for many and positive consequences for few countries (see Khan, 1998: 103-124; Wangwe and Musonda, 1998: 149-167). In Africa the growth rates of countries like Algeria, Kenya, Lesotho, Malawi, Mauritius, Nigeria, Togo and Tunisia have declined in the 1980s and 1990s compared



to their individual performance in the 1970s. Only Benin, Ghana and Mauritania were able to improve their growth rates in the 1980s and 1990s. In South Asia, Bangladesh and Pakistan did not achieve a rising trend in economic growth in the 1980s while their performance in the 1990s was relatively modest. Moreover, efforts by these countries to seek integration into the global economy were not matched by safeguards for the poor that ultimately led to political protest movements and social conflicts.

Conclusion

This article has sought to present the argument that poverty is a structural outcome and its production in the developing countries in the present context is ensured by neoliberal regime and the structural composition of the global economic order. The current global economic structure is not something totally new under neoliberal economic globalization; what is new is the advent of the global free trade regime under WTO and the institutionalization of a new capital accumulation process well-orchestrated by the SAPs, the TRIMs and the TRIPs that reduces the growth prospects of the majority of developing countries. The argument here is that the liberalization and deregulation regime was not initiated to promote economic growth in the developing countries, rather it was designed to facilitate capital accumulation by transnational capital at the global level. In the last two decades of the 1980s and 1990s, economic growth under neoliberal regime has declined in the developing countries as a group. The promise of benefits from free trade stands unfulfilled; perhaps, a remote possibility to be translated into reality. The successful disintegration of state institutions through liberalization and deregulation, most importantly the application of TRIMs and TRIPs, put the poor developing countries into disarray with little prospects of development in the changed global context. And whatever benefits liberalization and deregulation bring to them under neoliberal regime of liberalization are capitalized by a few dominant social forces to the detriment of the poor. This subordinate capitalist class, which this article labels as junior partners, actively cooperate with international capital to take advantage of liberalization and deregulation measures. Alleviation of poverty in the poor developing countries, no doubt, depends on achieving high rates of economic growth. But most of them are nowhewre close to the high rates of growth under the neoliberal regime of economic liberalization.

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