One of the early promises of neoliberal globalization was that it would bring prosperity to poor countries, drive development, and reduce inequalities, ultimately helping poor countries gradually converge with rich countries. But exactly the opposite has happened. Globalization has made inequality worse, both between countries and within them. Harvard Economist Lant Pritchett has called this pattern “divergence, big time.”
We can see how this trend works over time. During the colonial period, the gap between the richest countries and the poorest countries widened from 3:1 to 35:1, as European powers extracted massive amounts of wealth and resources from the Global South. That’s a huge gap. Yet over the past thirty years the gap has grown much bigger, to the point where it is now about 80:1. This makes colonialism seem petty by comparison.
How has this happened?
To understand what’s going on, we have to begin with the international debt system. Ravaged by colonialism and in desperate need of capital, particularly after the oil crisis of 1973, countries in the global South had to seek out loans from the World Bank and the International Monetary Fund (IMF). But there was a catch: these loans gave the donor agencies the power to determine economic policy in the recipient countries, overriding the will of local elected leaders.
By leveraging debt, the World Bank and the IMF – which are controlled by rich countries – force developing countries to liberalise their markets, sell off their public assets, and open their doors to multinational corporations. Western economists once assured us that these policies, known as “structural adjustment programs,” would stimulate development. But in reality they have done exactly the opposite, cutting income growth rates in half and causing mass poverty.
This same dynamic operates in the international trade system. Through the World Trade Organization (WTO) and various bilateral “free trade” agreements, rich countries offer access to their markets on the condition that developing countries open their borders to Western competition, which almost always overpowers local industries. In other words, “free trade” is usually very unfair. Even more troubling, most trade agreements include “investor-state dispute resolution” clauses that give corporations the power to sue poor countries for any legislation – such as labour laws or environmental laws – that compromise their profits.
Because of these policies, economists estimate that developing countries lose roughly $500 billion in potential GDP every year. But the system has worked brilliantly for rich countries and their corporations, as they get unprecedented access to cheap labour, raw materials, and new markets. As a result, we’re seeing a torrential flow of wealth from poor countries to rich countries.
As if this were not bad enough, multinational corporations that operate in the global South have devised ways to extract their profits without paying local taxes. Every year, more than $900 billion is stolen from developing countries and funneled into tax havens around the world, using legal loopholes such as trade mispricing.
Debt service comprises another primary flow of wealth from poor to rich. Developing countries have to pay about $600 billion each year to rich countries, much of it on the compound interest of loans accumulated by dictators long since deposed.
For another example, we can look at the World Trade Organisation’s agreement on intellectual property (TRIPS), which has armed corporations with unprecedented rent-seeking powers. As a result of TRIPS, developing countries have been forced to pay around $60 billion each year in extra patent licensing fees for the use of technologies and pharmaceuticals that are often essential to development and public health.
All together, these flows vastly outstrip the international aid budget, which trickles in at about $135 billion per year. It’s no wonder, then, that our world has become so unequal, to the point where the richest 85 people on earth have come to accumulate more wealth than the poorest 3.5 billion.
If we want to put an end to poverty and extreme inequality, we need to dismantle the global wealth extraction system that draws our planet’s wealth to the rich at the expense of the poor. We need to democratize the institutions that control global economic policy. We need to put control of money creation and the money supply back in public hands. We need to dismantle the tax haven system and establish a global minimum corporate tax. We need to organise a global debt-resistance movement. We need to roll back the patent laws under TRIPS. And we need to freeze all “free trade” agreements and renegotiate them under conditions of transparency and public debate.
If we can change these rules, we can create a more democratic economy that shares prosperity fairly, and harness the power of the global economy to promote justice and well-being for all people rather than just for a tiny few.
- By “neoliberal globalization” we mean the phase of globalization that began in the early 1970s, when Western powers began to forcibly liberalise the markets of developing countries, while maintaining protectionist measures in their own.
- Bad Samaritans
- Contours of Descent