The Widening Gap between Rich and Poor

Jayati Ghosh

We all know that the world is an unequal place, both across and within countries. We also know that across the world, people are expressing their anger and disgust at this inequality. This is increasingly revealed in extreme and often paradoxical political results. In the USA, a vote against the establishment has just delivered to power the ultimate crony capitalist, Donald Trump. In the United Kingdom people voted to leave the European Union in the false expectation that curbing migration will improve their own life chances. In India the poor, disgusted by a corrupt self-enriching elite, support a bizarre and drastic demonetisation that leads to their own further impoverishment while leaving the supposed targets, the corrupt rich, relatively unscathed.

But here’s the thing: inequality has been a hot topic of international discussion for around a decade, but in that time, it has got worse, not better! Since the time when international organisations took up this issue and Thomas Piketty published his global bestseller on inequality, the evidence is that the problem has intensified, not reduced.

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The Global Economy Today, Part 1

Arthur MacEwan is professor emeritus of economics at the University of Massachusetts Boston and a co-founder and associate of Dollars & Sense magazine. This is the first part of a three-part series on the era of economic globalization, the distribution of power worldwide, and the current crisis. It was originally published in the January/February issue of Dollars & Sense, commencing the magazine’s year-long “Costs of Empire” project.

How We Got Here and Where We Need to Go

Arthur MacEwan

Globalization has run into a backlash.

There has long been opposition to the efforts of governments and large corporations in the high-income countries—especially the United States—to establish new rules of global commerce. This opposition appeared in the protests against the North American Free Trade Agreement (NAFTA) in the early 1990s and against the World Trade Organization (WTO) in the later 1990s. Remember the Zapatistas in 1994 and Seattle in 1999?

In 2016, however, the backlash against globalization became especially formidable. It emerged as a dominant theme in Donald Trump’s ascendency to the U.S. presidency, and also was a major factor in Sen. Bernie Sanders’ strong campaign for the Democratic nomination. In the United Kingdom, the Brexit vote to take the country out of the European Union was also in part a reaction against globalization, as has been the growing strength of right-wing politicians elsewhere in Europe. Globalization has become the focal point for the reaction of many to a wide range of social and economic ills, a reaction that has also been fueled by latent—and not so latent—xenophobia and racism.
Whatever other factors are involved, the backlash against globalization is based on the very real damage
that has been done to economic equality, security, and the overall well-being of many people by the way
international commerce has been organized. How did we get here—what’s the history of our current situation?
Could international commerce be organized differently? Are there alternatives?

Not a New Phenomenon

At least since people began walking out of Africa tens of thousands of years ago, humans have been expanding the geographic realm of their economic, political, social, and cultural contacts. In this broad sense, globalization is nothing new, and it might reasonably be viewed as an inexorable process. To oppose it would be little different than trying to stop the ocean tides.

Globalization, however, is not one, well-defined phenomenon. It has taken different forms in different periods and has been connected to political power in different ways. It will certainly take new and different forms in the future. Colonialism, for example, has been a predominant form of globalization for thousands of years, and only disappeared—well, not entirely (consider Puerto Rico)—in the second half of the 20th century. Neo-colonialism, a system in which major powers exercise de facto control over the policies of lesser powers but without the formal, de jure controls of colonialism, often came into force as colonialism waned. From the 16th through the 18th century, under the ideology of mercantilism, European powers explicitly regulated their own countries’ foreign commerce through import restrictions and export promotion. Mercantilism often went along with colonialism, and colonial powers also put economic restrictions on the countries they controlled. In the second half of the 20th century, the increasing integration of countries in Western Europe, leading to the formation of the European Union and creation of a common currency, is still another example of the varied forms of globalization.

Virtually everywhere among the now high income countries—the United Kingdom and the United States are prime cases—early industrialization was accomplished with high levels of government protection for manufacturing. At the same time, these countries’ governments used their power to extend their global economic engagement, to seek resources or markets or both. For example, Britain developed a far-flung empire, and also employed its powerful navy to assure that, in regions outside the empire, markets and resources were available for British commerce—for the sale of textiles in Latin America, opium in China, etc. The United States, late to the era of colonialism, extended its realm of control, over land and other resources, by expanding westward across the continent. But the United States became a colonial power at the end of the 19th century, taking Puerto Rico, the Philippines, Hawaii, and Guam (and Cuba for a two and a half year period). At the same time, this country increasingly became a neo-colonial power, using military strength especially in the Caribbean and Central American to protect U.S. financial and other interests.

Interruption and Reassertion

Globalization was severely interrupted in the first half of the 20th century by two world wars and the Great Depression. Furthermore, after the wars, two major areas of the world—the Soviet Union and its “satellite” countries, as well as China—were largely outside of the international capitalist system. In this context, the United States—with only 6% of the world’s population, but some 27% of the world’s output, became the undisputed leader of the “free world.” With this economic prowess, its extreme military strength, and the relative devastation of other economically advanced countries—was virtually able to dictate the terms, the rules of operation, in the international economic system.

The goal of the U.S. government in this regard was that U.S. firms would have access—indeed, they should have the right of access—to resources and markets throughout the international system. As one step toward accomplishing this end, the United States, with the acquiescence of other countries, established the dollar as the central currency of international commerce. Both directly and through its influence over international institutions (the World Bank, the International Monetary Fund, and the General Agreement on Tariffs and Trade), the U.S. government pushed for the minimization of countries’ barriers to foreign trade and investment—that is, “free trade.” Trade barriers were, however, slow to come down as other advanced countries sought to rebuild their industries after the war and many lower-income countries sought to protect their nascent industries. Nonetheless, governments and business interests in these other countries also wanted foreign investment, resulting in the great expansion of U.S.-based multinational firms from the 1950s onward.

But trade barriers would eventually come down. The United States, which had built its own industrial capacity behind tariff walls in the 19th century, now insisted in the latter half of the 20th century that low-income countries abandon similar walls. Having reached the top, the United States was pulling the ladder up. The International Monetary Fund (IMF) played a major role in pushing low income countries to lower their import restrictions. When these countries turned to the IMF for financial assistance (especially during the debt crisis of the 1980s), the condition for that assistance was “structural adjustment,” which included lowering import restrictions.

The efforts of the U.S. government began to achieve notable success in the 1990s, with NAFTA, which removed many trade barriers among the United States, Mexico, and Canada (and did a good deal more, as discussed below). Then it promoted the formation of the World Trade Organization (WTO), which, according to its own website, “is the only global international organization dealing with the rules of trade between nations.” (The U.S. government, however, failed in its effort to establish the Free Trade of the Americas Agreement (FTAA)— about which negotiations took place through the 1990s and which would have included virtually all countries in the Western Hemisphere.)

The U.S. government has established either bilateral or small group (e.g., NAFTA) “free trade” agreements with 20 countries, most put into effect since 2000. Even without such agreements, access to the U.S. market and U.S. access to foreign markets have expanded considerably. There are still regions of the world, China and Russia for example, where significant restrictions on foreign trade and investment still apply and with which the United States has no general trade agreements. Yet U.S. firms are nonetheless heavily involved in these countries as well. Compared to the situation after World War II, to say nothing of the 19th century, tariffs and other trade restrictions are now quite low.

The changes are illustrated, in Table 1, with data from the world’s twelve largest economies. It is not simply tariff changes, however, that have brought about a burgeoning of international commerce. Other sorts of restrictions on trade (e.g., quantitative import restrictions, or “import quotas”) have come down. And major advances in transportation and communications technology have also played a role. All in all, the rising role of international trade and investment has been huge—making the current age truly an era of economic globalization (at least in the broad sense).

MacEwan fig 1 tariffs

In the decade of the 1960s, world exports averaged 12% of world GDP, but in the recent ten-year span of 2006-2015, the figure was 30%. The international trade of the U.S. economy also grew over the same period, though at a much lower level. (Larger countries tend to have lower imports and exports, relative to the size of their economies, than small countries.) Foreign direct investment (FDI) has grown especially rapidly in recent decades, with annual net inflows of FDI in the world rising 100 fold between the 1970s, when the average was $21 billion, and the period 2006-2015, with an average of over $2.1 trillion. (FDI includes investment that establishes control or substantial influence over the decisions of a foreign business—such as a wholly owned subsidiary—plus purchases of foreign real assets such as land and buildings.)

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The Undisclosed Air Pollutants

Sunita Narain

Policy can be perverse. This much we know. What we should be amazed about is how policy can be counterproductive, retrograde and deadly, but still remain undisclosed and undiscussed. But what am I ranting about, you would ask? Allow me to take you through my journey over the last few months, all to unravel a key cause of air pollution.

Some months ago, sitting in a meeting of solar energy entrepreneurs, I heard them say that concentrated solar power (CSP) plants were not viable. But why? After all, solar prices have crashed and government is keen to subsidise and incentivise this growth of clean energy. Yes, solar prices have crashed, but so have prices of oil, and today, cheap furnace oil (FO) use is growing. FO is a bottom of the barrel product—it is the last grade of oil that refineries produce; it is high in sulphur and so is highly polluting. This issue rankled me as Delhi slipped into its worst pollution episode. We choked, suffocated and could not breathe. Could FO be one of the causes of pollution?

So, I asked: is FO being used in Delhi or in its vicinity? What is the quality of FO? Who uses it and for what? Suddenly, it seemed that the answers dried up. It was literally a black hole. What was clear was that way back in 1996, the Delhi Pollution Control Committee (the city’s pollution control agency) had notified a list of “acceptable fuels”. This did not include FO, but it did say that fuel with low sulphur—in those defined as 18,000 parts per million (ppm) of sulphur (today diesel has 50 ppm of sulphur)—could be used.

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2017 – Expect a Bumpy Year Ahead

Martin Khor

The new year has dawned. Everyone agrees 2017 will be very interesting.

It will also be most problematic. From politics to economics and finance, we’ll be on a roller-coaster ride.

With his extreme views and bulldozing style, President-elect Donald Trump is set to create an upheaval, if not revolution, in the United States and the world.

He is installing an oil company chief as the Secretary of State, investment bankers in key finance positions, climate sceptics and anti-environmentalists in environmental and energy agencies and an extreme rightwing internet media mogul as his chief strategist.

US-China relations, the most im­­por­­tant for global stability, could change from big-power co-existen­ce, with a careful combination of competition and cooperation, to outright crisis.

Trump, through his phone call with the Taiwanese president and after, signalled he could withdraw the longstanding US adherence to the One China policy and instead use Taiwan as a negotiating card in overall relations with China. The Chinese perceive this as an extreme provocation.

He has appointed as head of the new National Trade Council an economist known for his many books demonising China, including Death by China: Confronting the Dragon.

Trump seems intent on doing an about-turn on US trade policies. Measures being considered include a 45% duty on Chinese products, extra duties and taxes on American companies located abroad, and even a 10% tariff on all imports.

Thus 2017 will see protectionism rise in the United States, the extent still unknown. That is bad news for many developing countries whose economies have grown on the back of exports and international investments.

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Age of Uncertainty

C.P. Chandrasekhar and Jayati Ghosh

On 14 December 2016, in a widely predicted move, the US Federal Reserve announced that it is raising the federal funds rate by one quarter of a percentage point, taking its target band for short term interest rates to between 0.5 to 0.75 per cent. More importantly, it signalled a change in the stance of monetary policy, by suggesting that there are likely to be three more rate hikes over 2017, and predicting that the long term interest rate, which has been in decline, would rise to 3 per cent.

There has in recent times a growing consensus that the US Fed has continued with a loose monetary policy, with near zero interest rates and ample liquidity, for far too long. Low interest rates and large scale bond buying had led to asset price inflation that increased inequality and threatens another melt down in financial markets. Yet, each time the Fed was expected to reverse the low interest policy, it held back claiming that it feared it would abort a halting recovery from the Great Recession.

That fear has not gone away. While there is talk that the US economy has recovered enough to approach near-full employment with a tight job market, that view does not take account of the large numbers who had dropped out of the labour market during the recession and need to be brought back to restore pre-crisis employment levels. The real reason that the Fed has chosen this time to go the way it should on the interest rate front is the conviction that political circumstances have shifted focus from monetary to fiscal policy when it comes to spurring growth. The source of this conviction is the Trump campaign that promised to cut taxes and boost infrastructural spending to stimulate growth.

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Lessons from the Demise of the TPP

Jomo Kwame Sundaram and Anis Chowdhury

President-elect Donald Trump has promised that he will take the US out of the Trans-Pacific Partnership Agreement (TPPA) on the first day of his presidency. The TPP may now be dead, thanks to Trump and opposition by all major US presidential candidates. With its imminent demise almost certain, it is important to draw on some lessons before it is buried.

Fraudulent free trade agreement

The TPP is fraudulent as a free trade agreement, offering very little in terms of additional growth due to trade liberalization, contrary to media hype. To be sure, the TPP had little to do with trade. The US already has free trade agreements, of the bilateral or regional variety, with six of the 11 other countries in the pact. All twelve members also belong to the World Trade Organization (WTO) which concluded the single largest trade agreement ever, more than two decades ago in Marrakech – contrary to the TPPA’s claim to that status. Trade barriers with the remaining five countries were already very low in most cases, so there is little room left for further trade liberalization in the TPPA, except in the case of Vietnam, owing to the war until 1975 and its legacy of punitive legislation.

The most convenient computable general equilibrium (CGE) trade model used for trade projections makes unrealistic assumptions, including those about the consequences of trade liberalization. For instance, such trade modelling exercises typically presume full employment as well as unchanging trade and fiscal balances. Our colleagues’ more realistic macroeconomic modelling suggested that almost 800,000 jobs would be lost over a decade after implementation, with almost half a million from the US alone. There would also be downward pressure on wages, in turn exacerbating inequalities at the national level.

Already, many US manufacturing jobs have been lost to US corporations’ automation and relocation abroad. Thus, while most politically influential US corporations would do well from the TPP due to strengthened intellectual property rights (IPRs) and investor-state dispute settlement (ISDS) mechanisms, US workers would generally not. It is now generally believed these outcomes contributed to the backlash against such globalization in the votes for Brexit and Trump.

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TRIPS: The Story of How Intellectual Property Became Linked to Trade, Part 7

This is the final part of a seven-part series with Peter Drahos, a Professor in the RegNet School of Regulation and Global Governance at the Australian National University. He holds a Chair in Intellectual Property at Queen Mary, University of London and is a member of the Academy of Social Sciences in Australia. In 2004 he and his co-author Professor John Braithwaite won the Grawemeyer Award in Ideas Improving World Order for their book Global Business Regulation. Prof. Drahos is interviewed by Lynn Fries, producer at The Real News Network. Find the whole series here.

Full text below the break.

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Goodbye 2016, a Strange and Difficult Year

Martin Khor

The year will be remembered for the West ending its romance with globalisation, and its impact on the rest of the world.

Just a few days before Christmas, it is time again to look back on the year that is about to pass.

What a strange year it has been, and not one we can celebrate!

The top event was Donald Trump’s unexpected victory. It became the biggest sign that the basic framework and values underpinning Western societies since the second world war have undergone a seismic change.

The established order represented by Hillary Clinton was defeated by the tumultuous wave Trump generated with his promise to stop the United States from pandering to other countries so that it could become “great again”.

Early in the year came the Brexit vote shock, taking Britain out of the European Union. It was the initial signal that the liberal order created by the West is now being quite effectively challenged by their own masses.

Openness to immigrants and foreigners is now opposed by citizens in Europe and the US who see them as threats to jobs, national culture and security rather than beneficial additions to the economy and society.

The long-held thesis that openness to trade and foreign investments is best for the economy and underpins political stability is crumbling under the weight of a sceptical public that blames job losses and the shift of industries abroad on ultra-liberal trade and investment agreements and policies.

Thus, 2016 which started with mega trade agreements completed (Trans-Pacific Partnership) or in the pipeline (the Transatlantic Trade and Investment Partnership between the US and Europe) ended with both being dumped by the President Elect, a stunning reversal of the decades-old US position advocating the benefits of the open economy.

2016 will be remembered as the year when the romance in the West with “globalisation” was killed by a public disillusioned and outraged by the inequalities of an economic system tilted in favour of a rich minority, while a sizeable majority feel marginalised and discarded.

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Trekking the Gold Trail: Misinvoicing in Primary Commodity Exports

Léonce Ndikumana


Exports of primary commodities are an important driver of growth in many developing countries. However, high resource endowment exposes these countries to the vagaries of large swings in commodity prices. And if “natural capital accounting” is applied so as to count the full cost of non-renewable resource depletion, the World Bank finds that 88 percent of African countries are net losers: the incoming profits and investment are less than the outgoing value of the minerals (World Bank, 2014). Moreover, resource-rich countries suffer from losses in foreign exchange and tax revenues resulting from under-reporting of export proceeds. Indeed, trade misinvoicing is a major concern in a global system characterized by lack of transparency and skewed distribution of gains from trade. Incentives for trade misinvoicing arise from the existence of opportunities for profit maximization and access to foreign exchange out of the control of the regulating authority. These opportunities are made possible by regulation of tariffs, customs procedures, export subsidies, and exchange controls, among others.

The issue of trade misinvoicing has been a long-standing concern in the economics profession since the seminal work by Jagdish Bhagwati in the 1960s.[1] The work was inspired by an even older strand of literature concerned with the consistency of partner data on international trade back in the 19th century.[2] Interest in the problem of trade misinvoicing gained momentum in the 1980s in the context of the debt crisis;[3] since then it has taken prominence in academia and in the policy arena.[4]

Trade misinvoicing is defined as either perverse discrepancies or excessive normal discrepancies in partner trade statistics estimated through the comparison of exports as reported by the exporter and imports as reported by the importer. There are perverse discrepancies when recorded imports are significantly lower than recorded exports plus the cost of transport, insurance, and duties. This could reflect either export overinvoicing or import underinvoicing.  Trade misinvoicing may be driven by factors associated with the country of origin or the destination of trade flows or both. Estimates of trade misinvoicing do not therefore permit to assign a priori the respective share of responsibility on the basis of the estimates of trade misinvoicing alone.

A recent report published by the United Nations Conference on Trade and Development (UNCTAD) (prepared by the author of this note) examines the extent of trade misinvoicing of primary commodity exports from five resource-rich developing countries—Chile, Côte d’Ivoire, Nigeria, South Africa, and Zambia (UNCTAD, 2016). The publication of the first version of the report in July 2016 generated interesting debates, partly motivated by the sheer values of export misinvoicing but also by what appears to be misconceptions regarding the nature of the data, the methodology and concepts used in the analysis. Some reactions to the report warrant a clearer exposition of the concepts and methodology of estimation of trade misinvoicing—which the new version of the report sought to clarify. Most fundamentally, there is a need for further improvements in the transparency of the reporting of trade statistics. The UNCTAD report and the debates that it has generated can be considered as a boost to further investment in knowledge generation in this area. This note presents some of the updated results using the case of gold exports from South Africa as an illustration, while responding to the main criticisms to the initial report. More detail is provided in the revised version of the report just published by UNCTAD (December 2016).

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TRIPS: The Story of How Intellectual Property Became Linked to Trade, Part 6

This is the sixth part of a seven-part series with Peter Drahos, a Professor in the RegNet School of Regulation and Global Governance at the Australian National University. He holds a Chair in Intellectual Property at Queen Mary, University of London and is a member of the Academy of Social Sciences in Australia. In 2004 he and his co-author Professor John Braithwaite won the Grawemeyer Award in Ideas Improving World Order for their book Global Business Regulation. Prof. Drahos is interviewed by Lynn Fries, producer at The Real News Network. Find the whole series here.

Full text below the break.

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