The Benefits of Globalization

Frontier Centre, Globalization, Publications, Uncategorized

Poverty

At the very centre of the globalisation debate is the concept of poverty. Protesters and sceptics are very much driven by the fact that they have rediscovered that there exists deep poverty in the world. From that their natural conclusion is that globalisation and free markets – the system they see around them – is the cause of this poverty.

Now I think that this attention to poverty is extremely important. Poverty is a terrible condition, one that we in wealthy countries really can’t understand. I think we have to remind us of the horrors of misery. In a poor country, the average person works 12-13 hours per day, six days a week, in terrible working conditions, in dirt and danger. There is no clean water and sanitation, and people throw garbage and excrement out on the streets. If children survive the first year, they are soon put to work because parents have to rely on their work to feed the family. Farmers and entire societies are in constant fear of a failure of crops, because that would mean hunger and starvation.

This could be a description of an African country. But it’s not, it is from my own country, Sweden, not more than 130 years ago. Then, Sweden had a failure of crops. People had to make bread from bark, lichen and straw to survive. Bones from fish and other animals were minced to meal, on which people made porridge. 15 000 people died of starvation.

In 1870, Sweden was poorer than Congo is today. People lived twenty years shorter than they do in developing countries today, and infant mortality was twice as high as in the average developing country.

The biggest misconception in the debate on globalisation is that poverty is supposedly something new. And that things are getting worse. It is not. One hundred years ago, every country was a developing country. The new thing in our modern world is not poverty, but wealth. The fact that some countries and regions have escaped that poverty.

The West

The West grew rich in the 19th and 20th century because people here had the rule of law, property rights, the freedom to start a business and the freedom to trade. And because we had a free market, people and companies had to think of new and better ideas, and get more efficient in what they did – otherwise consumers would turn to someone else. The market encourages and rewards long term investments in ever better production.

This is what happened in Sweden. Even if you had levelled out all property in the middle of the 19th century, it would still have given everybody a life in poverty, of the levels of today’s Mozambique. Instead, Sweden was saved by liberalisation. In a few decades, a couple of classical liberal politicans gave Sweden religious liberty, freedom of speech, and economic liberty, so that people could start their own business and buy and sell freely on the market. Free trade made it possible for Sweden to specialise in what we did best, such as the timber and iron industries, and exchange it for that which we produced less well, such as food and machinery. This specialisation – and the competition that comes with it – is still today the rationale for free trade. The increased production gave Swedes the possibility to feed themselves. It gave us economic growth and made it possible to increase well-being and invest in education and health care.

By 1950, before the Swedish welfare state was built, the Swedish economy had quadrupled. Infant mortality had been reduced by 85 per cent and life expectancy had increased with a miraculous 25 years. We were on our way to abolish poverty. Trade and capitalism saved my forefathers. It was the moment I realised this that changed my mind politically, and embraced industrialisation and liberalisation. And since then I can’t rest until the world’s poor get the same chances and freedoms.

Inequality

So the anti-globalists are wrong in assuming that globalisation is creating poverty. But they are right in that it creates inequality. 20 % of the world population consumes 80 % of the world’s resources. That’s true. But this does not mean that they, that is, us in the North, take these resources from the rest of the world. No, we create 80 % of the output, of the new resources every day. And this isn’t to do with us being smarter or more hard-working than the rest. This has to with the fact that we happen to have the liberty to use our intelligence in the way we see fit, and that we have the freedom to work for our own benefit – freedoms people in the South have to a much lesser degree.

There is an unequal distribution of goods and capital in the world, but that is because of the unequal distribution of capitalism. Those who have capitalism grow rich; those who don’t stay poor.

Poverty in the 18th century was much the same on every continent. According to highly uncertain estimates, Europe was only 20 per cent wealthier than the rest of the world. Because capitalism gave us freedom, we could escape poverty.

Without capitalism, we would still be equal – and poor. When the protesters explain that they want to fight this inequality, they have to decide whether it is poverty – or wealth that they are against. Because we can fight inequality in two ways, by bringing the wealthy down to poverty and misery. Or by lifting the poor, to wealth.

Globalisation

I have made up my mind, I hate poverty, I don’t hate wealth. I want the poor and starving to get chances and a decent life. If millionaires became billionaires in the process, that’s not a problem. Therefore, I love globalisation, the process which is lifting the poor towards wealth. Because it spreads markets, technology and ideas to parts of the world where it didn’t exist before. Hard facts shows that it works. As UNDP has noted, during the last 50 years, global poverty has been reduced at a quicker pace than it had been in the 500 years before. In the last 30 years, the average income in developing countries has been doubled. In only the last two decades, the proportion in absolute poverty – that is people with an income below $1/day – has been reduced from 31 to about 20 per cent. During that time, world population has grown by 1,5 billion people, but we have still seen a reduction in the numbers of absolute poor, with about 200 million people. Never before in world history have we seen such a dramatic betting of the human condition.

The world is not improving thanks to economic redistribution. It’s improving thanks to economic growth. If we have 3 per cent growth per annum, this means that the economy, our capital and our incomes double every 23 years. If growth is twice as fast, these things double about every 12 years. This is an unparalleled growth of prosperity, compared with which even vigorous government measures for the redistribution of incomes take on a puny aspect. And not just puny, but downright dangerous, because high taxes to finance these measures can jeopardise growth. If so, great long-term benefits for everyone are sacrificed for small immediate gains for a few.

Globalisation critiques say that you can’t eat GDP, but what does that matter as long as you can buy food with GDP? During the last 30 years chronic hunger in the developing countries has been reduced from almost 40 to 17 %. Child labour has been cut in half. During the last 50 years illiteracy has been reduced from 70 to 25 %. Life expectancy has gone up from 46 to 64 years and infant mortality has been reduced from 18 to 8 %.

In other words, these indicators are better in the developing countries today, than they were in the richest countries a hundred years ago. Why? Because several things that used to be the exclusive property of Western countries have begun to spread over the world in the last decades, such as wealth, investments, corporations, ideas, means of communication, science, technology, medicines, aid, and so on. The funny thing is that this is exactly what is being called, a bit carelessly perhaps, globalisation. So when people blame globalisation when they see problems, they make the same mistake as some 19th century Russian peasants. They saw that villages with smallpox had more doctors’ visits. Therefore they thought that the doctors created the smallpox. And they shot the doctors. They didn’t realise that the doctors were in town only to solve the problems. Globalisation does the same thing right now.

Good neighbours

One of the reasons why globalisation is good for poor countries, is that they get to benefit from the fact that others are rich.

It is not a problem for the developing countries that there are rich countries, as the anti-globalisation movement seems to suggest. Inequality is not an obstacle, on the contrary, can be a great opportunity. 130 years ago Sweden was helped by the fact that countries such as England and France were much richer and more industralised.

It meant that we could use ideas and technology directly, which cost them much in time and money to develop from the beginning. We could borrow their capital to invest and develop our production and infrastructure, we could sell them more goods, and could in our turn buy more advanced goods. And how did we repay them? By having much higher growth rates!

Statistics clearly show that open poor economies grow faster than open rich countries. About twice as fast. Free trade makes the rich richer – and the poor richer – but the rich do not benefit as quickly as the poor!

The possibilities for quick growth for poor countries are much bigger the more evolved the rest of the world is. When England began to double its wealth from 1780, it took 58 years, when Japan did the same a hundred years later it took only 34 years, and when South Korea did the same another hundred years later, it took only 11 years.

When countries are linked to each other with trade and capital movements, the poor seem to gain most. As UN Secretary-general Kofi Annan said after the demonstrations against the WTO in Seattle: The main losers in today’s very unequal world are not those who are too much exposed to globalisation. They are those who have been left out.

Multinational corporations

Do you know what is Canada’s biggest export to Europe? It is not aluminium, crude petroleum or natural gas. It is left-wing activist Naomi Klein. In her global bestseller book No Logo she claims that multinationals such as Nike exploits poor people with slavelike jobs for almost no pay in the third world.

I would oppose her, and say that multinational corporations is one of the solutions to our problems, they are one of the best ways of giving developing countries the benefits of globalisation.

Naomi Klein is right that poor countries have poor jobs. No matter what her young fans think, she’s actually not the first in world history to get that. It has to do with low productivity, if a worker can’t produce much, he can’t earn much, if his wages were much higher, no one could afford to hire him. It is pointless to compare their conditions with those in developed countries, because our productivity is so much higher. The interesting thing is to compare the conditions for those who work for a foreign multinational in a poor country with the alternatives they have, with other people in the same country. And then we see that in the least developed countries these multinationals paid their workers twice as much as domestic employers in the same line of business. And then we should remember that workers who produce exports have the highest salaries in any country. Those working for an American company in the least developed countries receive 8 times the average wage in that country!

Recently I visited Vietnam, a socialist country that has had second thoughts. When they faced starvation in the mid-80’s they opened the economy and liberalised markets. Since then the country´s economy has doubled, and poverty has been halved. Growth triumphed where prohibition had failed: 2,2 million children have gone from child labour to education in ten years.

The most important reason is Vietnam’s surge in exports. And the introduction of foreign multinationals has been an essential element, because it gave Vietnam access to the benefits of globalisation – foreign ideas, capital and technology. Nike is often branded an enemy of the poor. But when I visited Nike’s supplier in Saigon the local union leader told me that even the communist party officials use the factories as positive example, of good business, where workers get high wages and a good and healthy work place.

When Nike started there ten years ago, the workers walked for hours to the factories, three years later they could afford bicycles, three years later they all drove scooters to work. Today, the first workers can afford to buy a car.

I visited Tsi-Chi, a young Vietnamese woman. Her work at Nike has made it possible for her to leave the heavy and unhealthy work on the family farm, where she had to be outdoors all the day, in burning sun and during the rain period. Now she earns five times what she did, and earns more than her husband – which of course makes independence possible. A generation ago, she would have to put her son to work on the farm from an early age. But Tsi-Chi told me she want to give him a good education, so that he can become a doctor.

She is not an exception. Local Vietnamese factory owners visit Nike to get ideas on how to improve their factories to attract the workers, who all want to work for Nike, which provides superior standards.

But corporations like Nike don’t act that way because they are more generous. It is not altruism that is at work here, it is globalisation. With their investments these multinationals bring poor countries new machinery, better technology, new management skills and production ideas, a larger market and education of workers. That is exactly what raises productivity, and wages. That is why wages in third world countries during the last 40 years have risen from 10 % of the American industrial wage, to 30% of it.

If this is exploitation – then the problem in our world is that the poor countries aren’t sufficiently exploited.

The critics call globalisation ”corporate globalisation”. They think that corporations rule the world. Of course they are right that many corporate leaders would like to rule the world, and they would like to have our money. That is why we need competition and free trade. Corporations have their biggest power in closed societies, with privileges and tariffs where other corporations can’t compete and consumers can’t chose. In such societies, such as Latin America after the Second World War, corporations can make bad and expensive products – the people are forced to go there and work for them anyway.

Globalisation is a way of giving corporations more freedom to trade and invest but at the same time giving them less power. If they want our money, they have to give us something we value more than our money. On a free market, corporations are like waiters, they are free to offer you the menu, but if you are not interested you can go somewhere else. Free trade means that other waiters, even foreign ones, can offer competing menus! You are in charge. It might be corporations and banks that transport goods and capital over the borders, but if it weren’t for the fact that there was a popular demand for them to do that, they would not do it.

Globalisation is controlled by us, the people!

A tale of two countries

It is no surprise that development is the quickest in countries who have invested in globalised politics, where markets have been opened, where foreign investments are welcome. After Europe and North America, it happened first in the East Asian economies. Taiwan was just as poor as Kenya 50 years ago. There were two differences between the countries, one was that Kenya had natural resources which Taiwan didn’t, and therefore many economists thought Kenya had the brighter future.

The other difference was political. Kenya preferred collectivism and privileges, Taiwan private property – Kenya chose government controlled monopolies, Taiwan entrepreneurship. Kenya followed the normal African pattern with monopolised markets and self-sufficiency, where they produced everything they needed themselves. Taiwan followed the normal East Asian pattern, and specialised only in the industries they were best at and imported the rest. That way they could create more on a larger scale. The decision to go global resulted in their economic miracle. In just ten years, the number of small and medium-sized businesses more than tripled, and poverty was cut in half. Until today, Taiwan’s foreign trade grew 400-fold, and real wages 10-fold.

Taiwan was just as poor as Kenya 50 years ago. Today Taiwan is 20 times richer than Kenya.

Asia’s reputation for miracles is growing even more today, when giants such as China and India liberalise and grow rapidly, and reduce poverty rates. But at the same time we can see that the exceptions in that Asian region, Burma and North Korea with their anti-globalisation policies, have not followed the region’s success. Instead they are stuck in the deepest misery. And we can see that Kenya’s African neighbours that tried a more pro-market, pro-globalisation approach, countries such as Botswana, Uganda and Mauritius, have seen economic progress and reductions in poverty.

I don’t believe that poor countries fail because people are stupid, or not hard working. I have been to Kenya, and I saw the Kenyans working extremely hard and being incredibly innovative – the problem is that they had to devote all that energy – not to production – but to avoid regulations, restrictions, license requirements, trade restrictions and corruption. I met Simon, a poor farmer who grew cabbage. His dream was to improve the farm, to get irrigation, and build a house. But how can he do that, when the government doesn’t give him the property right to his land? Because he isn’t recognised as a property owner, he can’t borrow the capital to invest. And if he would invests and improve the land, he wouldn’t reap the rewards, the government would.

I met Pamela in the slums of Kibera, who explained to me that she can’t sell her samosa food without a government license. Without it she can’t borrow money or expand. To get a license takes 11 bureaucratic procedures, 68 days and half a year’s income. Want to start a business to become rich? Forget it, you have to be rich to start a business. As a result almost two thirds of all the jobs in Kenya are estimated to be in the informal sector!

And this is only the official costs. If a bureaucrat decides your fate, he will demand bribes. And of course, if you don’t get a license, the police can extort you for bribes every time they see you. As someone said about the slums: “It’s not safe to carry money around, there´s too many policemen”.

This is unfortunately common in third world countries. Production as a result, is small scale for the local market, often hidden from potential customers because they have to hide from the authorities.

Protectionism

These are the domestic obstacles. But there are also external obstacles.

Over the last 50 years, we in the west have liberalised trade all over the economic spectrum. But we made two major exceptions – textiles and garments and agriculture. This is precisely the sort of labour intense goods a poor country is able to produce in the early stages of development. And the goods we don’t stop with tariffs and quotas, we stop with anti-dumping measurements, bureaucratic rules of origin, the precautionary principle, environmental protection measures and so on. When we talk about free trade and globalisation all the time, we are by and large hypocrites.

The UNDP calculates that the developing countries could export for $700 billion more/year if they weren’t shut out with tariffs and quotas. That is 14 times more than they get in foreign aid. So we distort the incentives completely.

Trade encourage poor countries to increase production and develop ideas. Foreign aid is instead sent to the leaders who do not develop their countries, and get them stuck in poverty. They who can show least development and most poverty are sent more resources. Since the development assistance is sent to the government, it is often more profitable to try to gain power in these countries, than to produce and trade. It has strengthened the central state, enabling it to exploit the countryside and destroy agriculture and potential industries. Development assistance has in many cases helped corrupt dictators to cling onto power.

The most bizarre thing with this protectionism is of course that we hurt ourselves with this protectionism, which only benefit a small special interest, and deny the consumers competition and freedom of choice, and costs the tax payers billions.

An average cow in the European Union gets $2,5 dollars in support every day. So a European cow has a higher salary than 3 billion people in the developing countries.

The OECD-countries barriers and support for agriculture and horticulture amounts to 360 billion dollars. Such a large sum is large enough to pay for a business class, round-the-world air ticket for each of the 56 million cows in these countries, and they could still have $2 800 spending money for their stopovers in the US, Europe and Asia.

And they could have this sort of trip every year. This much we spend to destroy free trade, and the possibilities for poor countries to develop their own economies.

The true problem in the world today is not that Western countries are trying to trick the developing countries into some sort of neo-liberal globalisation, but that we are shutting them out from it. We need freer trade and freer markets, if we really want to give developing countries a chance.

Conclusion

That is the reason for the title of my book. We have some sort of capitalism in our part of the world, when we have freedom to own, choose and trade without government intervention. But we will have global capitalism only the day when the rest of the world has the same liberties. The stand taken by you and me in the globalisation debate will decide whether the world’s poor are going to share in this development.