The big story of the world economy since the early 1980s has been increasing integration through the unleashing of market forces. But there is also another story, one that is attracting increasing attention in the 1990s .... social and economic divisions among, and within, countries are widening.
This poses a serious threat of a political backlash against globalization, one that is as likely to come from the North as from the South. Such a backlash could reverse beneficial reforms achieved in developed and developing countries over the past decade. And, it may provoke a roll back of some of the more longstanding achievements of economic integration. The 1920s and 1930s provide a stark, and disturbing, reminder of just how quickly faith in markets and economic openness can be overwhelmed by political events.
Evidence is mounting that slow growth and rising inequalities are becoming more permanent features of the world economy. This conclusion from UNCTAD, documented in its Trade and Development Report 1997(1) (216 pages), is a wake-up call to policy-makers everywhere. UNCTAD, however, also argues that it is possible to design policies to manage integration into the world economy that can reconcile rapid growth and distributional objectives.
Amber lights switching on around the globe
The TDR 1997 documents, in detail, seven troublesome features of the contemporary global economy:
- Although there are significant exceptions at the country level, overall the world economy is still growing too slowly -- whether to generate sufficient employment with adequate pay or to alleviate poverty (see TAD/INF/PR/9713);
- Gaps between developed and developing countries, as well as within the latter, are widening steadily. In 1965, average GNP per capita for the top 20 per cent of the world´s population was 30 times that of the poorest 20 per cent; 25 years later, in 1990, the gap had doubled -- to 60 times;
- The rich have gained everywhere... and not just in comparison to the poorest sections of society; "hollowing out" of the middle-class has become a prominent feature of income distribution in many developing and developed countries;
- Finance has been gaining an upper hand over industry, and rentiers over investors. In some developing countries, debt interest payments have reached 15 per cent of GDP; trading in existing assets is thus often much more lucrative than creating wealth through new investment;
- The share of income accruing to capital has gained over that assigned to labour. Profit shares have risen in developed and developing countries alike. In four out of five developing countries, the share of wages in manufacturing value added today is well below that in the early 1980s;
- Increased job and income insecurity is spreading. As rising interest charges have eaten into business revenues, corporate restructuring, labour shedding and wage repression have become the order of the day in much of the North as well as parts of the South;
- The growing wage gap between skilled and unskilled labour is becoming a global problem. Already an established trend in many developed countries, absolute falls in the real wages of unskilled workers -- 20 to 30 per cent in some cases -- have been common in developing countries since the early 1980s.
There should be no doubt, UNCTAD warns, that the burden of internationa economic disintegration, if it were to take place, would -- as during the Great Depression -- be borne by those who can least afford it.
Managing countries´ entry into the world economy...
Contrary to much current economic thinking, UNCTAD says that increased global competition does not automatically bring faster growth and development. Nor do growth and development automatically bring about a reduction in inequality. No economic law exists that will make developing economies converge automatically towards the income levels of developed countries if they only open up.
Rather than the "big bang" approach widely adopted in recent years in many parts of the world, UNCTAD urges a carefully phased liberalization into the world economy -- tailoring the process to the strength of the economy concerned, as well as that of the country´s institutions. Government policies devised to manage integration into the world economy can also be put to good effect in reconciling rapid growth and distributional objectives, it argues.
...and managing profits for development
The prevailing notion that, faced with globalization forces, policy-makers in developing countries may have lost their room to pursue development objectives actively is not accepted by UNCTAD. Their role is as important as ever, the TDR 1997 says, as "growth and income distribution both depend on how profits are managed".
In this regard, the TDR extends UNCTAD´s existing work on the East Asian economies in new directions. In most of those countries, it reports, policies designed to provide incentives to private firms to retain profits and invest them in new equipment, capacity and jobs have been critical in establishing a strong profit-investment nexus. Closing unproductive channels of wealth accumulation and discouraging luxury consumption have also been essential.
Experience shows that policies designed to manage profits so as to accelerate growth can also serve to manage distribution. It is important, though, that efforts to manage emerging inequalities be included at the outset when designing development strategies, as was successfully done in some, although not all, newly industrializing East Asian countries.
Profits, investment and income inequality "If speculative talk about converging incomes and living standards is to cede place to a realistic policy agenda, it is necessary to have a firm grasp of what drives economic growth in a market economy. That role belongs to profits".
From this starting point UNCTAD offers a distinctive analysis of the links between profits, income levels and investment in today´s globalizing world.
Turning higher profits into general improvements in standards of living hinges on the creative energy of entrepreneurs. But, the "animal spirits" of the entrepreneurial class are not necessarily being unleashed on creating new productive assets. Instead, they are often buying and selling second-hand assets with an eye to large speculative gains.
Some of the factors making for greater inequality in a globalizing world at the same time deter investment and slow down growth. Rapid liberalization has delinked finance from trade and investment. An increased concentration of wealth in the hands of a few is associated with stagnant investment, rising unemployment and reduced pay.
Redressing trade liberalization biases
Effective economic reforms in the developing world are only one part of the equation required to close income gaps across the world economy. Another part is an enabling global environment.
"Among the asymmetries of globalization is the fact that liberalization of the world economy has proceeded so far in a lopsided way that tends to prejudice the growth prospects of developing countries by discrimination against areas in which they can achieve comparative advantage."
Progressive redressing of these biases remains an important challenge for the whole international community. In future trade negotiations, it is necessary to restore balance to the agenda in such a way that would speed up the liberalization of sectors of traditional interest to developing countries, and at the same time to identify new areas in goods and/or services capable of providing additional trading opportunities.