UNCTAD warns of political backlash to globalization

The polarizing effects of globalization resulting in rising inequality and a widening rich-poor gap if left unchecked, could ultimately give rise to a political backlash. This warning has been provided by UNCTAD in its Trade and Development Report 1997.

by Chakravarthi Raghavan

GENEVA: Globalization is polarizing the world economy, among and within countries and between rich and poor, and if corrective measures are not taken, it may produce a political backlash that may wipe out several of the benefits of economic reforms, and even rollback the achievements of economic integration, the UN Conference on Trade and Development (UNCTAD) warned on 15 September in its Trade and Development Report (TDR), 1997.

As in the 1920s and 1930s, public faith in markets and openness could be quickly overwhelmed by political events, and there should be no doubt that (as in the Great Depression of the 1930s), "the burden of such international economic disintegration would once again be borne by those who can least afford it."

The common set of forces unleashed by rapid liberalization, UNCTAD says, is favouring certain income groups over others resulting in greater wage inequality between skilled and unskilled workers, both in the North and the South, capital gaining everywhere at expense of labour and the middle classes, finance gaining an upper hand over industry and rentiers over investors, and everywhere, increased job and income insecurity.

The rising rich-poor gap, among countries and within countries, cannot be bridged without accelerating growth, and capital accumulation must be put at the top of the policy agenda, UNCTAD says.

The association of rising profits with stagnant investment, rising unemployment and reduced pay, is already widely resented and threatens to raise questions about the acceptability of placing an ever-increasing share of national product in the hands of a few and "unless incomes of this minority are used to create more general prosperity, they may lose their social justification," the report warns.

The view that unfettered global market forces will generate a process of catching up by developing countries, accompanied by improved income distribution has little historical or theoretical support and "a much greater role needs to be played by governments in the South in accelerating growth and reconciling it with greater equality - but a role fundamentally different from the misguided interventions that pervaded many developing countries in the past."

Basic policy challenge

"The basic policy challenge in the South," the TDR-97 said, "is how to translate rising profits into investment at a pace sufficient to underpin a social contract whereby initial inequalities can be justified - eventually reduced - by the resulting rise in incomes and living standards of the mass of the population."

"To meet this challenge," the report adds, "some basic truths must be faced. In the first place, no economic law exists that will make developing economies converge automatically towards the income levels of developed countries. Secondly, growth and development do not automatically bring about a reduction in equality. Even the fast growing economies of East Asia have been confronted with distributional challenges."

UNCTAD Secretary-General, Rubens Ricupero drew attention to what the report calls "seven stylized facts" of effects of globalization - another UNCTAD economist, Detlef Kotte, according to an Inter-Press Service (IPS) report from Brussels, called them the "seven sins" of globalization.

Ricupero drew particular attention to the redistribution of incomes to the rich, and the "hollowing out" of the middle classes everywhere, and said: "These results may represent temporary adjustment, but could also become permanent features of the world economy, and to avoid that governments have to adopt right policies and the right management of the world economy."

"UNCTAD's position," Ricupero added, "is neither one of uncritical acceptance of current trends nor one of rejection of a historical trend, but trying to see how this historical trend can be managed in a better way. It depends ... on governments, whether to make trade a success or failure."

Ricupero said that the concerns about the polarizing effects of globalization was not merely that of UNCTAD, but even of the IMF in a recent report.

The association of increasing profits with speculations and rising unemployment will become more and more a cause for concern. If this situation continues there is a real threat of backlash, Ricupero warned.

Asymmetries of globalization

Reconciling accelerating growth with greater equity depends on how countries manage their integration into the world economy, by a carefully managed and phased integration, Ricupero added. But for policy efforts of developing countries to yield benefits, there is a need for a more accommodating global environment.

"However," says Ricupero in an overview, "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 discriminating against areas in which they can achieve comparative advantage."

"Liberalization of trade in goods has proceeded more slowly in those sectors where developing countries are more competitive. Thus, free trade in textiles will be achieved only in the first years of the next century and the major trading blocs continue to protect their agricultural sectors. New forms of protection against exports of manufactures from the South are being sought as a remedy for labour market problems in the North. While many restrictions have been lifted on the freedom of capital and skilled labour to move to where it is best remunerated, no attention has been paid to abolishing the many restrictions on the freedom of movement of unskilled labour. Progressive redressing of these biases remains an important challenge facing the international community if an enabling global environment is to be created."

"Global efforts to help developing countries could still come to nought if the slowdown in economic growth in the North is not reversed," Ricupero adds in his overview. "Thus, a return to faster growth and policies of full employment is not only a pre-requisite for resolving the twin evils of high unemployment and increasing wage differentials in the North, but is also essential for defusing the threat of a popular backlash against globalization which might put the gains of global economic integration at risk."

Ricupero recalled his own statement at the July high-level segment of the ECOSOC (where he had drawn on the TDR's conclusions) that the world economic scene was a picture of light and shadows.

"Many opportunities have been created by the recent trends (of liberalization and globalization)", but to take advantage of these opportunities, "it is necessary for governments to have right and enlightened policies and a proper management of the world economy"

Profit-investment nexus

The TDR argues that 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. What distinguishes the successful late industrializers from other developing countries is the high animal spirit of their business class, reflected in exceptionally high rates of savings and investment from profits. This experience shows that policies designed to manage profits so as to accelerate growth can also serve to manage distribution."

A strong profit-investment nexus to manage profits, TDR says, does not emerge spontaneously from greater global competition. And while certain basic conditions such as political stability and secure property rights must be fulfilled, this is not enough.

"Policies must be actively pursued that are designed to provide incentives to private firms to retain profits and invest them in the enhancement of productivity, capacity and employment. Fiscal instruments, both taxes and subsidies, can be important tools in this respect. But there is also an array of trade, financial and competition policies that can help raise profitability and investment in key industries above what might be attained under free market conditions. Closing unproductive channels of wealth accumulation and discouraging luxury consumption are essential ingredients of such a strategy."

As for managing integration into the world economy, the report comes out against the "big bang" now being pushed on developing countries, or adopted by some of them.

Carefully managed and phased integration

"The quality and quantity of investment can be improved by means of closer linkages with the world economy through trade and capital flows, including FDI," the TDR says. "But these external linkages must be complementary to, and not a substitute for the domestic forces of growth through capital accumulation and technological capacity- building. This can be achieved only through a carefully managed and phased integration into the world economy, tailoring the process to the level of economic development in a country and capacity of existing institutions and industries. Such a strategy contrasts sharply with the 'big bang' liberalization adopted by some countries in recent years."

As for managing distribution, the report says that a necessary condition for strengthening the forces making for greater equality in the South is the rapid absorption of surplus labour. Where it is in the rural sector, land reform, agricultural policies and public investment can check the rising inequality typical of the growth process in economies with surplus labour. The challenge, however, is more daunting if the surplus labour simply shifts to urban areas. As countries move along the development path, industrial policies to support upgrading become vital for sustaining rises in real wages. It is at this stage that an adequate supply of educated labour is particularly important to prevent skill shortages leading to wider wage differentials.

"Throughout the process, taxes designed to discourage distribution of profits as personal incomes, as well as to restrain luxury consumption, serve not only to accelerate investment and job creation, but also to reduce inequalities in personal incomes. Profit-related pay, which has been widely used in East Asia, can also help strengthen the social fabric surrounding the profit-investment nexus." (Third World Economics No.170, 1-15 October 1997.)

The above article was originally published in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.