The Failure of “Globalisation”

As noted in most recent postings on this blog, the world economy has been beset – at least since the start of the global financial crisis (GFC) of 2008 – with multiple problems at all levels and in virtually all countries. At the same time there have been widespread political upheavals and outbreaks of civil disorder, many of which are clearly linked to economic distress. Viewed as a whole, this state of affairs has seemed to justify the view that the world order is in a state of disintegration.

It should be observed that this disastrous conjuncture – which has prevented any meaningful recovery from economic stagnation, or consequently deepening social misery, over the past nine years – comes at the end of a period of some 40 years in which the so-called neo-liberal ideology (otherwise referred to as the Washington Consensus) has been increasingly dominant. This tendency has only been accentuated by the total collapse of the rival Soviet model of centralised state planning in the 1980s. Allied to this ideology – supposedly favouring maximum encouragement of private enterprise, low taxes and minimal state intervention in the economy – has been what is termed “globalisation”, which in official parlance is understood to mean enabling the maximum freedom of cross-border movement of goods, services, capital and labour.

In the early phase of neo-liberal dominance – reflected in the rise of Thatcherism and Reaganomics in the 1980s – official propaganda centred on the notion that lowering tax rates and “rolling back the frontiers of the state” would stimulate faster rates of economic growth and, ultimately, higher living standards overall. But already by around 1990 this belief could be said to have proved hollow as the only result of all the tax cuts and market liberalisation was a huge rise in public debt (doubling as a proportion of GDP from 1980 levels in the US) and a rise in speculative investment – while growth rates of GDP itself remained stuck at close to 1980 levels.

In this context the impact of so-called globalisation has been quite different – and arguably far more significant. This is because, while it has failed to have a net positive effect on the overall rate of output growth, it has facilitated important shifts in the shares of output and income as between different countries and interest groups. Thus it has enabled certain countries to secure a much greater share of overseas markets for their goods and services at the expense of previously dominant suppliers including domestic enterprises. The most conspicuous example of such a shift has been the success of China and other East Asian “tiger” economies in capturing a large share of the world market for manufactured goods since the 1980s.

It is important to note, however, that this trend has impacted not only on the already industrialised (OECD) countries which have traditionally accounted for most of the global productive capacity of the manufacturing sector but for most of the demand as well; it has also inflicted damage on the poorer countries of the Third World which have always struggled to establish their international competitiveness in this field. Such pressure is all the more intense in a period when rapid technological change – controlled by and for developed country interests – is putting them at a further disadvantage (as it is on workers and communities throughout the world that are suffering consequent destruction of jobs on an unprecedented scale). The result has been the weakening of basic industries such as textiles and garment manufacture in many low- or middle-income countries, which find themselves unable to compete either with China or countries having even lower labour costs such as Bangladesh.

At the same time many of these less developed countries (LDCs) have been exposed to greater competition from agricultural exports from the OECD countries, notably the US and western Europe, which has hit those countries – the majority in the developing world – where the rural sector comprises a high proportion of the population and of economic activity. The inevitable consequence has been the impoverishment of many rural communities in these countries where local producers are generally unable to compete with often heavily subsidised imports from industrialised countries. Their plight is often made even worse by the insistence of foreign donor organisations – which are invariably controlled by OECD country interests – that aid in support of local farmers’ efforts to compete (such as the creation of cooperatives or state-supported marketing boards) should be disallowed, even though such institutional assistance to the farming sector is commonplace in the developed countries.

A 19th Century Dogma

Enthusiasts for globalisation (and indeed for neo-liberalism) like to suggest that it is an expression of “modernisation” – a progressive alternative to the more controlled, statist economic order that was seen as having dominated Western economic policy in the post-war era but is now considered anathema by proponents of the “Washington consensus”. In reality, however, it clearly harks back to the laissez faire ideology expounded by the early classical economists who dominated economic thinking in the 19th century. Thus it encompasses the so-called theory of comparative advantage, first formulated by the British economist Ricardo 200 years ago, which seeks to justify maximum freedom of trade on the basis that it facilitates the most efficient utilisation of all productive factors. Since, however, it has long been recognised that in the real world full employment of such factors (particularly labour) can never be achieved – so that in practice a high proportion of the population would be condemned to impoverishment – it has always been hopelessly unrealistic to make such an abstract theory the basis of trade policy.

Despite this, and the reality that the game of international trade is and always must be played on an extremely uneven playing field, the powers that be (spearheaded by the World Trade Organisation, OECD, IMF etc.) continue to try and insist that any form of trade protection is inadmissible – even while turning a blind eye to the application of double standards by the industrialised countries, notably in respect of agriculture (as noted above). Rather than recognise reality these institutions and the major industrialised countries that effectively control them have sought to continue pursuing trade liberalisation on the traditional basis of a series of “rounds” of multilateral tariff reductions, much as they had done under the General Agreement on Tariffs and Trade (GATT – precursor of the WTO) throughout the post-war period. This might not have mattered if the world economy had continued to grow at the relatively rapid rates (3.5–4 percent a year in real terms) recorded prior to 1980 rather than averaging a mere 2-2.5 per cent achieved since then. As it is, this decline starkly reflects the gathering pressure on the economies of developed and developing countries alike to seek a greater share of world markets for themselves while resisting demands for other countries to have greater access to their own domestic markets. This explains why it has proved impossible to reach agreement on a further round of trade liberalisation since the conclusion of the Uruguay Round in 1994, leading to the ultimate abandonment of the Doha Round in 2015 after 14 years of fruitless negotiations.

Race to the bottom

This effective collapse of the system of multilateral trade negotiations amounts to a de facto admission that the ideal of non-discriminatory free trade supposedly created after World War II under the GATT is no longer seen as tenable. In truth this reality had already been recognised by the growing practice from the 1990s of establishing bilateral trade deals between countries, which are by definition discriminatory. As noted, however, this has not prevented the dominant economic forces (in the shape of the US, EU, other rich country governments and transnational corporations) from persisting with their efforts to break down any barrier to the free cross-border movement of goods, services, labour and capital as long as this appears desirable from the perspective of rich country governments and the corporate interests that they represent.

The net result of these developments is that the world economy, so far from being based on orderly, rules-based structures, increasingly resembles an anarchic jungle in which the big beasts seek to impose their will on the weaker entities (such as LDCs) by whatever means, irrespective of equity or legality. In the absence of anything like genuine democratic accountability or the rule of law in most countries competition for markets – which has never been free of non-commercial considerations – has become ever more distorted by factors that have nothing to do with genuine free markets based on common rules or criteria of cost-effectiveness. This phenomenon, widely referred to as a “race to the bottom”, is manifest in a competitive lowering of regulatory standards – often in contravention of internationally established norms and codes of conduct – concerning:-

  • Lowering of corporate tax rates in order to attract foreign investors;

  • Weak adherence to tax laws and financial regulations – e.g. restrictions barring payment of subsidies by host governments;

  • Labour terms and conditions – e.g. employment of children;

  • Environmental / health and safety standards – e.g. failure to prevent industrial or agricultural pollution levels which exceed established norms and threaten public health.

As might be expected, such tendencies have over time operated to the detriment of the weakest and most vulnerable economic players and strata of society while further enriching those already enjoying a disproportionately large share of wealth and power. The latter group, it should be stressed, includes the ruling élites of impoverished countries who corruptly enrich themselves at the expense of their fellow citizens, not to mention that of taxpayers of rich countries unwittingly co-opted to finance the corrupt transactions involved. Yet by far the biggest beneficiaries of such crimes are such “respectable” corporations as Siemens, Rolls Royce, Volkswagen and Wells Fargo, where the senior executives who are the chief perpetrators have enjoyed effective impunity while the huge cost of the fines imposed on their companies have been passed on to shareholders.

A telling illustration of the long-term impact of this downward spiral of abuse is the fact that, according to the independent US-based Tax Foundation, world-wide average corporate tax rates have declined from 30 per cent to 22.5 per cent since 2003 while at the same time the overall tax burden has stayed the same – which would obviously mean that the tax burden borne by the mass of the public has increased as a share of the total. The grotesque perversity of this outcome is apparent when seen in the context of the global trend recently revealed in an UNCTAD report that the share of profits in overall value added (GDP) has been steadily rising since 1980 at the same time as the corresponding share of fixed investment – for which the profits are supposedly required – has been in decline.

An inescapable choice

A striking conclusion to emerge from the above analysis is that the competitive forces unleashed or amplified by globalisation as the global struggle for markets intensifies often tend to create outcomes that are perverse and the very opposite of the enhanced cost-effectiveness and rising general prosperity which the theory tells us is supposed to result from the operation of competitive markets. The large-scale corruption practised by major transnational corporations referred to above is an obvious case in point. Equally exposure to brutal competitive forces in a world subject to accelerating technological change creates pressures to engage in market distortion made all the more damaging through being covert and non-transparent – which in turn can lead to a costly misallocation of resources to the creation of ever more excess industrial capacity or blatantly wasteful projects such as HS2 railway and the London Olympic Park. Yet where economic agents – such as small / medium enterprises and governments of poor countries – lack the strength or resources to defend themselves with similar non-market methods the results are typically still more dire, in the shape of intensifying mass poverty and economic and social breakdown.

Perhaps the most damning symptom of all the disastrous consequences of applying this bogus laissez-faire dogma is the quite sudden and catastrophic economic and social breakdown of so much of the “developing” world that has occurred since around 1990 – and particularly following the onset of the GFC in 2008. Defenders of the neo-liberal / globalisation model such as the World Bank are fond of claiming that it has “lifted a billion people out of poverty” in these countries over recent decades – although they are not surprisingly unable to substantiate this rather meaningless assertion with concrete evidence. Far more telling are the manifestations of breakdown in so many countries, particularly in the Middle East and Africa, leading to widespread civil disorder, revolution, war and the creation of record numbers of refugees fleeing their countries in desperation. In fact the President of the World Bank himself has now conceded that “if there’s no opportunity to achieve [their aspirations for a better life], frustration may well lead to fragility, conflict and violence and eventually migration.”

The “Arab Spring”, which erupted in 2010-11 and may be seen as the most concentrated expression of this discontent to date, has had a profoundly disruptive political, social and economic impact on the entire Mediterranean region and most of Europe. It has undoubtedly left European and other world leaders at a loss as to how to respond to a development that they never anticipated – particularly the seemingly unstoppable flood of refugees and other displaced persons into Europe.

What is most striking – and depressing – about this catastrophic failure of the globalised / neo-liberal economic order is that no mainstream voices have been allowed to express recognition of the obvious and profound flaws in the model that have been revealed or of the need for fundamental change. Thus in Britain even the trade unions, who might seem to have least natural affinity with neo-liberal ideology, have been silent over any inherent flaws in “the system”; indeed they have become the most die-hard supporters of one of the most conspicuously failed elements of the capitalist economy: the increasingly bankrupt funded pension schemes which have failed to deliver adequate pensions for millions of trade unionists and have only benefited the vastly overpaid fund managers of the City.

The only explanation for such a supine response to the manifestly terminal failure of the status quo would seem to be a perception that the kind of reforms that are needed would likely lead to the total extinction of the vested interests of the entire political establishment (not just the ruling élite) and that they would consider this too high a price to pay for achieving some semblance of global peace and stability. Whatever the reason, the continuing failure of any mainstream parties or interest groups to offer a fundamental challenge to the intolerable status quo has created an enormous vacuum. If this is not to be filled by ever more extreme outbreaks of violence – ultimately threatening the very survival of human civilisation – voices of reason, integrity and humanity must now be allowed to be heard amid the rising pandemonium. So far from this there appear to be no limits to the degree of misinformation, market manipulation and outright fraud that the authorities will resort to in order prevent this happening. This reality and its frightening consequences will be considered in more depth in our next posting.

2 thoughts on “The Failure of “Globalisation”

  1. Thank you for your very thoughtful analysis. The modern economy has run out of easy to obtain energy. Without easy energy the industrial economy cannot grow. Without growth, governments cannot provide citizens with perceived benefits to ensure their trust. Renewable energy is part of the problem. It is expensive and complex. Since the 70’s oil shock, economic growth has been replaced with unsustainable increases in private and public debt. The linkages in debt obligations cause a breakdown in the functioning of the political economy and nations withdraw from globalization politics as a result because of escalating tensions between competing interests. Neoliberalism is a curse for the situation we have faced since the oil shock of the 70’s.

  2. Very interesting. Keep up with good work. I would like you in the next blogpost to present a bit more concrete examples or to offer other sources to back up claims such as developed countries agricultural subsidies, foreign donor aid conditionality etc…

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