Our Word is Our Weapon

In a world of increasing human mobility and inter-connectedness, poverty, instability and oppression loom large as threats to the security and well-being of everyone, not just those in ‘developing’ countries. We the rich minority cannot ignore the misery on our doorstep, the misery we have helped create and perpetuate and which fuels resentment and violence throughout the world.

It should be surprisingly simple to make gigantic strides in combating poverty, disease and illiteracy throughout the world. In 2000 the world agreed on a global action plan to do this and more: together, the Millennium Development Goals set out a clear path away from the abyss and towards a better world. Nobody denies that they are achievable, but we won’t get there with business as usual. Money shouldn’t be an issue - only around �100 billion a year in aid is needed, peanuts in a world that spends ten times that on armaments.

But it isn’t all about money. The world is set up to benefit a minority, a minority which holds the vast majority of wealth and political power. This elite is blocking the economic and political reforms fundamental to a freer and fairer world. A world that made meeting the Millennium Development Goals its priority would look very different to ours, and this page collects together some policy proposals for how to get there. Feel free to have your say.

Increase aid for development
Simple, this. Increase development aid to the level of at least 0.7% of GNP like we promised to over thirty years ago. Reduce the use of ‘tied’ aid that brings more benefits to the donor than to the recipient. Through simple monitoring arrangements, ensure that aid is spent on poverty reduction, improvements in health and education and in promoting economic growth. Do not impose arbitrary economic conditions that have more to do with our wants than the needs of the poor.

Cancel debt for development
After nearly 25 years, the world is still refusing to seriously face up to the causes and consequences of the debt crisis, which continues to cripple dozens of countries around the world and transfers several times more every year from the South to the North than goes the other way in aid. The first priority is to cancel 100% of HIPC debt so that these countries can meet the internationally agreed Millennium Development Goals. Arrangements must be put in place to make creditors take their share of the costs for reckless or corrupt lending in the past. Impartial debt arbitration tribunals should be set up to stop rich-country puppets like the IMF and World Bank bleeding the poor dry in the interests of the rich.

Identify and stem capital flight
Developing countries need capital for investment in production and research, but lose billions every year in ‘flight capital’ transferred - legally and illegally - to accounts in rich countries. If this money can be traced - which will require the assistance of bankers in rich countries - it could be returned or taxed to provide some income for the countries of origin.

Prevent and manage currency crises
Contagious currency crises wracked groups of developing countries at regular intervals during recent decades. Malaysia survived the worst of the late 1990s East Asian financial crisis by imposing capital controls, contrary to the conventional wisdom of the International Monetary Funds. This policy should be encouraged during financial crises so that it is the citizens of the developing country, rather than wealthy foreign investors, who are afforded the most protection.

Tax foreign exchange trade
Another policy that may help avoid sudden currency-related crises is the Tobin Tax, a tiny percentage tax on all foreign exchange transactions that could raise tens of billions of dollars a year while dampening damaging speculation in a market worth around a trillion dollars a day.

Reform the global institutions
Democratise the IMF and World Bank so that they really begin working in the interests of the poor rather than the rich. At the moment, leadership elections are a stitch-up and voting rules prevent the poor having any real say in policy, with the result that their economies are basically run from Washington. Establish clear and transparent procedures in the World Trade Organisation to prevent stitch-ups.

Reform trade
End agricultural and other export subsidies that drive down world prices and impoverish farmers in developing countries. Billions spent on subsidies in the North could be transferred to the South to boost global commodity prices and ensure food security for the world. Allow developing countries to selectively protect and nurture their industries, just as every one of today’s rich countries has done in the past. Open rich-country markets to exports from the South.

Increase access to ‘intellectual property’
Onerous laws on intellectual property force developing countries to hand over billions in royalties to the rich while starving them of the technology transfer essential for development. Poor people are denied access to essential drugs because of patent enforcement or because the conditions covering compulsory licensing are so excessive. Repeal the WTO agreement that imposes rich-country copyright rules on the whole world - after all, America became rich in part by stealing ideas from everyone else.

Declare war on preventable disease
Spend a lot more money on treatable diseases such as malaria, tuberculosis and AIDS. Quite apart from the suffering they bring for individuals and families, they destroy the social and economic fabric that countries need to prosper.

Protect the environment and compensate the victims of global warming
Implement the Kyoto Treaty. Take major steps to halt and reverse the process of global warming, which will hit hardest those least able to protect themselves. Recognise that polluters owe a debt to those who suffer from the resulting environmental change.

Following on from an earlier discussion on the problem of concentration among world food companies, here’s a bit more on the coffee industry in particular. Details are drawn from Food, Inc. Corporate concentration from farm to consumer, by Bill Vorley for the UK Food Group.

There are 25 million coffee farmers around the world, and the countries most dependent on earnings from coffee exports are among the poorest in the world Burundi, Ethiopia, Uganda, Rwanda and Honduras. Unfortunately for them, the global coffee industry is extraordinarily concentrated at the trading, roasting and retailing stages: those 25m farmers are faced by four companies who control 39% of the trading market, three companies who control 45% of the roasting market, and 30 companies who together control 33% of the global retail market. Here’s a graphical representation of the global coffee market structure (click for the full-size image):

The end result is farmers receive only a tiny percentage of the price of retailed coffee, with the vast bulk of the profits going to roasters and retailers: out of every kilogramme of coffee retailing at $3.57, farmers get less than $0.05 and the roaster and retailer get over a dollar each. They’re now getting a tiny percentage of an even smaller total, as global overproduction has led a two-thirds fall in global coffee prices since 1997. The World Bank reports that “Since 1970, coffee prices have declined by an average three percent a year
for arabica coffees and five percent for robusta after adjusting for inflation”. The inevitable consequence is that the incomes of millions of coffee farmers “have plummeted to the point that in many cases what you find now is that they have entered extreme poverty”.

The World Bank has done a fairly large report into the global coffee market, available here.

The Economist article I discussed earlier implied that China and India became “a lot less poor” by freer trade, while developing countries that “repudiated international liberal trade” and continued to hide behind high tariffs “stayed poor”.

Wow, seems to me that if it was that obvious that trade liberalisation led to riches, all those develpoing countries would be signing right up. In fact, they have been (but not necessarily because it’s all that great an idea in itself) - and they’re still poor. In 1999 the 43 least developed countries in the world were, on average, less ‘trade-restrictive’ (the IMF’s measure of a country’s policy openness to trade) than China and India, with trade-restrictiveness scores of 4.3, 5 and 8 respectively. For sources, see p. 106 here for the LDCs and p. 40 here for India and China.

Furthermore, a detailed analysis of the effects of trade liberalisation on poverty in the LDCs showed that

poverty is increasing unambiguously in those economies that have adopted the most open trade regime and in those that have continued with the most closed trade regime. But in between these extremes, there is a tendency for poverty to be declining in those countries that have liberalized their trade regime to a lesser extent, and for poverty to be increasing in those countries that have liberalized their trade regime more
(UNCTAD LDC report 2002).

As for China and India, not only are they still less open to trade than the poorest countries in the world, but their current rates of high growth began way before they liberalised even this much, as Dani Rodrik shows. The chart below (full-size version here)tracks the changes in China’s import tariffs (the most basic measure of how ‘free’ its trade policy was) against its GDP growth per capita.

Not only does this show that China was growing extremely fast before it began to seriously liberalise trade in the early 1990s, it also shows that China’s growth actually slowed down (though still remaining impressively high) as restrictions on imports were relaxed. Does this prove freer trade is bad for growth? No. Does it provide any support whatsoever for the argument that freer trade promotes higher growth? Not a scintilla. In fact I’ve yet to see any robust evidence that actually does support that case.

On the editorial pages of its March 11th Edition, The Economist carries an article entitled “A question of justice?”. The Economist, it seems, is deeply disturbed by the concern shown by so many people about the incredible inequality in the world. It regards those who speak out against inequality with a weary pity:

They are quite right, these champions of the world’s poor, that poverty in an age of plenty is shameful and disgusting. But they are quite wrong to suppose, as so many of them do, that the rich enjoy their privileges at the expense of the poor—that poverty, in other words, is inseparable from a system, capitalism, that thrives on injustice. This way of thinking is not just false. It entrenches the very problem it purports to address.

Symptomatic of this mindset is the widespread and debilitating preoccupation with “global inequality” … It is not bad enough, apparently, that enormous numbers of people have to subsist on less than a dollar a day. The claim that this makes in its own right on the compassion of the West for its fellow men is deemed, apparently, too puny. The real scandal, it seems, is that much of the world is vastly richer than that. The implication, and often enough the explicit claim, is that the one follows from the other: if only we in the West weren’t so rich, so greedy for resources, so driven by material ambition—such purblind delinquent capitalists—the problem of global poverty would be half-way to being solved.

Isn’t the Economist actually perpetuating a modified version of the zero-sum myth by appearing to argue that ANY attempts to address inequality will reduce the size of the overall cake? The evidence, after all, suggests that high national inequality levels actually depress growth. This shouldn’t be surprising: high and enduring inequality signify a society that rewards not hard work but social position and inherited advantage. Social safety nets (funded by redistribution) encourage the kind of risk-taking enterprise that feeds into innovation and growth. At the very least, gross national and global inequality does nothing to reduce the poverty that the Economist professes to find so “shameful and disgusting” and may even perpetuate it. That the Economist - supposedly a fan of the equality of opportunity that must be a key ingredient in fair and competitive markets - is so supremely untroubled by the depth and persistence of world inequality is itself pretty disturbing.

The article is filled with dubious assertions and questionable logic. As is par for the course when extreme inequality is defended, we are told that trying to reduce it risks the ‘totalitarian tyranny’ of ‘perfect economic equality’. The fact that nobody I’ve ever heard of is arguing for total equality of economic outcomes does not matter - it’s a good straw-man to argue against and that’s the main thing. And by equating the idea of ‘economic “justice”‘ (note the disdainful quotation marks) with failed socialist experiments and ‘totalitarian tyrannies’, the Economist seems to hope to remove the term completely from the debate.

The Economist rails against the “planning, state monopolies, punitive taxes, grandiose programmes of public spending, and all the other apparatus of applied economic justice” that apparently keep developing countries in grinding poverty, conveniently ignoring the fact that the Europe countries who during the latter half of the 20th Century had tax and spending regimes the Economist would probably consider punitive and grandiose are today among the richest and least poverty-ridden in the world.

Ridiculously, the article even implies that the GATT concessions enabling poor countries to keep some tariff barriers up may have stymied their development, before going on to praise China and India for ‘embracing capitalism’. The problem is that China and India have higher trade tariffs and more protected economies than most of the world’s least developed countries countries. Either the Economist doesn’t know this, or it is deliberately deceiving its readers.

The Economist is in principle correct when it says that “the industrialised countries do not need to become any less rich before Africa can become a lot less poor”. But historically the rich countries have become rich at the expense of the poor, and in future they may have to become a little less rich for poverty to be relieved. Endless debt repayments, unchecked capital flight and the exorbitant profits from dominance of global food markets are examples ways in which we increase our wealth by reducing that of the poor. These and other flows of wealth must be stemmed and even reversed if real poverty reduction is ever to happen.

Anyone reading the The Economist’s article would be forgiven for thinking that the world’s poor simply live on a different planet, one with really dumb economic policies. If only they would embrace capitalism! The article says next to nothing about the links between rich and poor. It says less about the relationships between poverty, inequality and growth. It says nothing whatsoever on the effects of inequality on the political will to tackle poverty. And It says nothing of value about how today’s rich countries became rich and how, in many cases, the poor became poor. It says very little, in fact, except that we should stop talking about inequality at all.

More evidence of the terrible distortions in the UK house market: a report by the Centre for Economics and Business Research (news story here says that by 2020 Britain will have almost 2 million millionaires, compared to 230,000 in 2001. Most of the new millionaires will get there not through any great effort on their part, but through their ability to purchase a home and watch the value rise through the roof. At the same time, we will probably see continuing increases in homelessness, overcrowding and housing unaffordability for those not lucky enough to have bought a place on the property ladder, which is starting to look more and more like a property escalator to me.

In The Paradox of Agricultural Subsidies, Timothy Wise argues that trade liberalisation and the elimination of export subsidies are unlikely by themselves to significantly improve the lot of farmers in developing countries. “Instead, policy reforms should focus on ending agricultural dumping, reducing global commodity overproduction in key crops, and reducing the market power of agribusiness conglomerates”. The paper is good on the market power wielded in world agricultural markets by a small number of very powerful firms, capturing an increasing share of profits from sales while keeping prices for their supplies down.

“the most trade-distorting aspect of international trade may be the oligopolistic nature of the market. Vertically integrated conglomerates are involved in all aspects of production and distribution, and all are internal to the company’s operation. This leaves little room for the market to set prices for the different stages of production, since there is limited competition …”

“When vertically integrated corporations can use their market power to depress the prices for inputs and simultaneously raise the prices for final products, oligopoly can be an important factor in explaining low commodities prices. When that same market power can be used politically to win government subsidies that help keep prices down and resist policies that might raise agricultural prices, the effect can be decisive.”

For more on oligopoly in world agricultural markets, see:

Food, Inc. Corporate concentration from farm to consumer, by Bill Vorley for the UK Food Group.
Market power in agricultural markets: some issues for developing countries, by Sophia Murphy for the South Centre.

According to the BBC:

The US has put forward a United Nations resolution seeking to freeze the assets of Liberia’s former President, Charles Taylor, his family and his allies. It says they could be used to undermine peace and stability in Liberia.

This is a good thing. If, as is commonly believed, Taylor enriched himself through illegal trading in diamonds and arms and then smuggled the proceeds abroad, this money should be confiscated whether or not it might ‘undermine peace and stability in Liberia’. Similarly, the tens of billions of dollars stolen from their home countries by dictators in Africa, Asia and Latin America should also be traced, confiscated and returned. The US and other rich countries - frequently the recipients of the stolen money - have not been very helpful in this wider cause. For a good article on the complexities of returning dictators’ loot, see here.

As promised, here’s a bit more on the UK’s proposed International Finance Facility (IFF).

The IFF was originally proposed last year, and I wrote about it then. More recently, Gordon Brown has been promoting the idea in the press as part of “a New Deal for the world’s poor”. The basic idea of the IFF is for the rich countries who give the vast majority of the world’s development aid to commit to a series of payments to the IFF, at which point the IFF would go off and issue bonds on the basis of this predicted income stream. So it’s basically a form of borrowing in order to increase aid now, and diverting some portion of future aid to pay off the debt. The UK Treasury expects the borrowing-and-spending period to last around fifteen years, with a subsequent fifteen years spent paying it all back. Hopefully, using the IFF will enable the rich countries to effectively double their aid spending in the first fifteen years, which is coincidentally around the level of funding thought to be required to meet the Millennium Development Goals (MDGs). As things stand, the IFF does not seem to have enough support from the countries that matter.

I’ve posted on the IFF before, and my thoughts remain broadly the same as before. What’s good about the IFF is that it could provide increased, early and predictable aid funding, which could go a long way towards meeting the MDGs. My over-riding quibble is that there would be no need (or at least, much less need) for the IFF if the rich countries were each to raise their aid spending to 0.7% of national income, as they promised to do in the 1970s. When he talks about using the IFF to ‘double aid to meet the MDGs’, Gordon Brown is implicitly admitting that the IFF is a short-cut for countries unwilling to spend any more on development, high-falutin’ rhetoric notwithstanding.

This is not a trivial point, since there is a danger that the IFF would be counter-productive: the same logic that describes the IFF as ‘doubling aid’ could be used by some countries to reduce their aid commitments while appearing to keep them at current levels. There is also concern at what comes after the 15 years of IFF spending - at this point, according to the plan, a large proportion of OECD development aid will be diverted to pay off the IFF bonds. But nobody is pretending that there will be no need for aid after (say) 2020 - in fact around 1 billion people will remain in poverty . And because (i) it seems likely that the IFF will cover only a minority of OECD donors if it takes off at all, and (ii) there is no other prospect of aid being doubled, it is still very unlikely that the MDGs actually will be met. The IFF would effectively commit countries to a reduction in aid regardless of the level of existing need.

Again, this would be much less of a problem if the UK and others would only increase their levels of aid spending. A bit of context might be useful here: this briefing from Development Initiatives shows that while income per capita in the UK has doubled since the 1960s, aid per capita has hardly increased at all. If the UK increased its aid to 0.7% of GNI it would release an extra $5 billion of funding for the MDGs. The US alone could provide the extra $50-55 billion needed to meet the MDGs if it met the 0.7% target.

There is not enough political pressure to meet the 0.7% target, but by appearing to let the rich countries off the hook, the IFF actually reduces what pressure there is. Of course, Brown would probably argue that a useful pragmatic compromise is preferable to a useless moral victory. If and when he is forced to abandon the IFF proposal, I sincerely hope he maintains his apparently genuine commitment to seeing that the MDGs are met.

One more thing: the IFF proposal seeks to impose a set of criteria on participating developing countries. They can’t be in long-term arrears with the IMF, and they have to be engaged in “a sequenced opening up of markets to global trade”. My question is, why all the conditions? Either meeting the MDGs is the priority, or it isn’t. Putting these unnecessary and possibly counter-productive obstacles in the way just reinforces the impression that the whole exercise is about our needs and wants rather than those who live in the poorest countries.

Y’know, I’m glad that here in the UK our conservatives aren’t nearly as vicious or as devious as the American variety. Example: Paul Krugman, writing in the NY Times, is almost admiring in his description of Federal Reserve Chairman Alan Greenspan’s long-term game designed to undermine the welfare state:

Mr. Greenspan pushed through an increase in taxes on working Americans, generating a Social Security surplus. Then he used that surplus to argue for tax cuts that deliver very little relief to most people, but are worth a lot to those making more than $300,000 a year. And now that those tax cuts have contributed to a soaring deficit, he wants to cut Social Security benefits.

Krugman finishes off with:

By using his office to promote a partisan agenda, [Greenspan] has betrayed his institution, and the nation.

Somehow I don’t think Greenspan sees ‘the nation’ as his natural political constituency.

There’s an interesting new book out looking at development from a different
angle. Amy Chua’s ‘World on Fire’ considers how the move towards free-market
democracies might not be as smooth in developing countries as it has been in the
North.

Conditions in the developing world make the combination of markets and democracy much more volatile than when western nations embarked on their paths to market democracy … the most formidable problem the developing world faces is one the west has little experience with. It’s the market-dominant minority - ethnic minorities which - for widely varying reasons - tend under market conditions to dominate economically impoverished “indigenous” majorities … When sudden democratisation gives voice to this previously silenced majority, opportunistic demagogues can swiftly marshal animosity into powerful ethno-nationalist movements that can subvert both markets and democracy.

[quoted from Chua’s article in the Guardian]

I’d be interested in seeing what those ‘various reasons’ are, and how strong the
pattern is across the South. One possible test of the theory would be whether
the ‘Newly Industrialised Countries’ (South Korea, Taiwan, Hong Kong, Singapore) of the 20th Century had similar ethnic divisions. So far as I know, two are basically small enclaves of mostly Chinese emigrants, Singapore is more of a melting pot, and South Korea was fairly ethnically homogenous.

Anyway, Chua now sees the same dynamic operating most spectacularly in Iraq but also - more tendentiously - on the global level.

One way to reduce the effect might be for the rich world to stop imposing such a
‘caricature’ of market-economies onto the South:

there are many different versions of free-market democracy and the US has been exporting the wrong version - a caricature. There is no western nation today with anything close to a laissez-faire system. Yet for the past two decades, the US, along with international institutions like the World Bank and IMF, has been pressing poor countries to adopt a bare-knuckle brand of capitalism - with virtually no safety nets or mechanisms for redistribution - that the US and Europe abandoned long ago.

The same has been true of democracy. Since 1989, the US has been pressing
developing countries (with the glaring exception of the Middle East) to
implement immediate elections with universal suffrage. This is not the path to
democratisation that any of the western nations took. Further, British and
American democracy started locally, not nationally.

Most important, even today democracy in the west means much more than
unrestrained majority rule. It includes protection for minorities and property,
constitutionalism and human rights. A lot more is needed than just shipping out
ballot boxes.

Okay, I know I said my next post would be about the International Finance
Facility, but that’s going to be a big one, so let’s take care of some other
stuff first.