The Effects of Globalisation on Less Developed Countries

Published: 2019/12/05 Number of words: 4089

What have been the main effects of globalisation on Less Developed Countries (LDCs)?

This paper will critically analyse globalisation and how it has disadvantaged most of the poor nations. Further, the essay will introduce economic policies that have been developed, and how the multinational corporations have taken advantage of these policies in order to increase their turnover and profit. The European Union maintains trade relations with African, Caribbean and Pacific countries. This essay will investigate how these relationships have enabled the poor nations to enter the global market without major constrains by the WTO. Cuba will be briefly discussed; its revolution, its comparison with other Third World countries and how its health care system has developed, despite being affected by globalisation after the Soviet Union collapsed.

In July 1944, a meeting was held in the Washington Hotel at Bretton Woods, New Hampshire, and was attended by 730 delegates from the 44 Allied nations. The aim of the Bretton Woods meeting was to “establish an international financial and trading order among independent nation-states”. The purpose of the meeting was to rebuild the world’s economy after World War II. At this meeting, it was agreed that the participating countries would tie their currencies to the US dollar, thus placing the US in the most powerful position. As its hegemony grew, the USA controlled “70% of the world’s gold and foreign exchange reserves, which accounted for more than 40% of its industrial output while the war left Europe and Japan devastated. Meanwhile, the Third World was still trapped in the colonial power and had less than 1% of the world’s industrial capacity”. The meeting was attended by some prestigious economists, one of whom was John Maynard Keynes (a British economist and the founder of Keynesian economics). His influence was core to the development of macroeconomic ideology and he established the use of monetary and fiscal measures to control business cycles and reduce the effect of economic recessions. At the Bretton Woods conference, monetary rules were established to manage commercial and financial relations among the world’s major industrialised nations. The International Monetary Fund and the International Bank for Reconstruction and Development (IBRD,) which became part of the World Bank Group, was established at Bretton Woods; the purpose of these institutions was to regulate the global financial systems. Both institutions became operational in 1945 when the agreement was ratified by the Allied nations.

Even though Keynesian ideology stressed the ‘importance of productivity and the legitimate capital that will help support the activities and trade within the economy, instead of the ‘speculative financial movements”, Keynes disagreed with the deregulation of finance. He insisted that capital should not be moved from one place to another, as capital was needed to stimulate economic growth.

In the late 1950s, when most Third World countries were gaining independence from their colonial rulers, their governments adopted the structuralist theory of development, described by Prebisch. Nkrumah (Ghanaian president, 1960 – 64) used Nationalism Theory (or so-called ‘African socialism’) to develop the economy. In order to increase productivity and create employment, Nkrumah realised that the country needed to be industrialised by substituting development for and he and Imports nationalised raw materials. Major projects, such as roads, schools and hospitals were built in Ghana. Nkrumah believed that electricity was needed for industrialisation to take place and was responsible for the Volta River project, which was one of the biggest projects in a Third World country in the 1960s. The project was funded by Valco, an aluminium company, and a loan of US$30 million from the World Bank.

There have been many studies supporting the idea that globalisation started in the late 1970s. Milton Friedman and Friedrich Hayek’s ideas led to financial deregulation and their ideas were supported by international business elites that wanted financial deregulation. By the late 1970s, as capital could now be moved freely, the doors were opened to MNCs to control the global world.

The OPEC oil crisis caused a downturn in the global economy because the of the falling value of the US dollar. However, billions of ‘petro-dollars’ were finding their way into the private banks that were part of the Eurodollar market (Lambie, 2009). The OPEC oil crisis precipitated a boom in the economy of Nigeria, this country being the fourth largest oil producer in the world. It could be argued that the corruption of the government and the ongoing military coups in Nigeria were the reasons that the economy could not be stabilised. However, the most of the LDCs were not affected by the OPEC oil crisis until it was over when most of the bankers wanted their money back from the poor countries.

During the 1980 Debt Crisis, the reason that many LCDs were in debt and desperately poor was due to the policies established by the International Monetary Fund and the World Bank. The LDCs became more dependent on the developed nations in terms of trade and employment; the sweatshops in Bangladesh are an example of this. The IMF claimed that it would reduce poverty and increase living standards in these poor nations through a programme spelled out in its Millennium Development Goals. The reason for the Debt Crisis was because most of the LDCs’ governments were not paying back their loans. The bankers gave the IMF permission to intervene and in the late 1980s, they introduced the Structural Adjustment Policy; the aim of this policy was to restructure the LDCs’ economies. During the Debt Crisis, corporate banks such as “Citicorp and Bankers Trust earned up to 80% of their profits from the loan they had given the LDCs”.

“Structural Adjustment Policies (SAPs) have been imposed to ensure debt repayment and economic restructuring”. In order for the SAPs to work, the IMF had to take action. It urged LDCs’ governments to reduce national government spending on health and education and it set conditions that the LDCs had to follow.

The IMF and World Bank insisted that the poor nations had to lower their living standards (Shah, 2010). The aim of the IMF was to adopt neo-liberal ideology in order to develop the LDCs’ economies so that they could compete with the world’s major industrial nations.

The conditions laid down by the IMF’s Structural Adjustment Policy for LCDs were: (1) minimizing the state’s role in the economy, (2) privatising the state-owned companies and (3) attracting foreign investments by reducing most of the regulations which had led to the rise of the multinational corporations (MNCs). However, the result was that the poorer nations became dependant on the richer nations; they exported cheaper raw materials that benefited the corporations in the West. The LCDs had to export more; for example, in 2009, Nigeria cocoa exports rose to “72% producing 43,585 tonnes”. This meant that Nigeria was building up its foreign reserves by exporting more, and, by following the rules, could borrow money from the IMF.

The smaller nations that had a lower GDP (Gross Domestic Product) were forced into the global market, even though the IMF knew that they could not compete with the developed nations. They were instructed by the IMF to focus on earning foreign exchange by increasing exports to stabilise their currencies.

Ann Pettifor and Joseph Hanlon have argued that SAPs have increased corruption and undermined democracy, because the LCDs’ governments have had to be accountable to the IMF and World Bank instead of their own people (Shah, 2010). Further, LCDs can only compete in the global market if they have adequate education and healthcare systems and better infrastructures, but since the IMF imposed the SAPs, governments have had to cut spending in order to decrease national deficits. It became impossible for poorer nations to compete with the global corporations as they had limited resources.

The MNCs control the global markets and have power over the poorer nations. Due to the deregulation of finance, the MNCs can move capital and operate anywhere in the world. Supported by the international financial institutions, they choose to ignore most basic human rights and health and safety procedures in the factories where their products are manufactured. The MNCs do not care about the poverty of its workers as long as productivity increases and consumer demands are met. Their most important consideration is that the shareholders are kept happy and that profits soar. In Bangladesh, Disney and Wal-Mart employ “1.8 million garment workers from the ages 16 – 25 in 600 factories and sewing 900 million garments for the West”. The working conditions are horrifying; the standard length of a shift at the factory is 15 hours a day. Half of the workers in these garment factories are women when they make minor errors, they are tortured. The wage for an average worker at the factory is $5.28 a week. Sometimes they are not paid on time or given their full pay. According to the employees, this is a starvation wage.

The living standard in Bangladesh is low and most of the population lives in unhygienic conditions. There are diseases such as malaria and cholera. Healthcare is not affordable as the cost of healthcare is more than an average weekly wage. Workers in Bangladesh have suggested that 34 cents a day could feed their families and relieve the misery caused by poverty. This exemplifies the power that the MNCs wield. They have control over the governments and virtually control the economies of poor nations. They can dictate to governments and threaten to destroy their economies by withholding foreign investment. It would be difficult for a country like Bangladesh to get a loan from the World Bank. The MNCs are not concerned with the poverty of their workers; they maintain that the poverty is caused by corruption within the governments and that this is applies to Bangladesh.

The way the MNCs operate is a form of slavery, because the conditions are similar to that faced by slaves in the 16th century. Why can the MNCs not give the workers a minimum wage that will help them climb out of poverty? The MNCs care less about these workers than their sales and profits. Even though Wal-Mart makes US$405 billion a year, which is fifty-five times more than Bangladesh’s GDP it does not pay taxes to the Bangladesh government. The MNCs are given the authority by the international financial institutions to control the poorer nations’ economies as the MNCs increase employment in the country. This reduces poverty because the workers have an income to spend, which, in turn, boosts economy growth. If Wal-Mart makes that amount of profit a year then it should be asked why it could not help the workers in Bangladesh climb out of poverty and have better living conditions. In the ‘Hidden Faces of Globalisation’ video, it is explained how the IMF directs Bangladesh, advising the government and the people to stop certain basic industries. This allows the MNCs and financial institutions to start new industries and the MNCs to set up so-called ‘sweatshops’ or garment shops.

The same scenario was played out in Jamaica, in the free zone area. The free zone was funded by the World Bank in the late 1970s and was designed to promote foreign investment and international trade to help the Jamaican economy grow. The free zone employs local citizens to work for corporations like Tommy Hilfiger, the Brook Brothers and others. The workers were misled after their hopes were raised by speculation that they were going to be paid in US dollars rather than in the Jamaican currency. When this did not happen and the workers complained, they lost their jobs and were replaced by Chinese workers. The Chinese workers were paid in dollars. The piece-rate system, which calculates the wage according to the number of garments sewn, was used to pay the workers. This demonstrates that the MNCs are unfair to underdeveloped countries. They do not realise that if their employees lose their jobs, they will not have any money to feed their families and poverty will increase. It is impossible for the government to intervene as the economy is mostly controlled by the MNCs. In Jamaica, the manufacture of foreign products in favour of local products was a setback for many of the farmers, because it destroyed most of the food industries such as the dairy industry. Fresh dairy milk was replaced by milk powder from the US. This is another example of how the SAPs have had an impact on the economies of poorer countries.

The MNCs exploit poor nations and take over its resources. The Sweet Crudevideo explains the Nigerian oil industry. Of every barrel of oil that comes out of the River Delta, “60% goes to the Nigerian government, while 40% goes to the corporations”. Nigeria would like to control its own resources but most of the oil and gas companies are owned by MNCs. “The IMF and the World Bank have been instrumental in manipulating the government of Ghana into accepting the privatisation of water services. Bank loans are dependent upon compliance with the conditions of different types of policies including the privatisation of public utilities”. This shows how World Bank policies prevent governments from intervening. The World Bank has privatised the Ghanaian public water company which has been taken over by transitional corporations like RWE and Saur Suez Waters. This means that the citizens from the rural parts of Ghana cannot get water unless they pay for it.

Cuba is perceived as being a Third World country, but the Cuban revolution led by Fidel Castro in the 1970s brought a different dimension to the economy. Healthcare, food resources and security were all upgraded. Even though Cuba faced a trade blockade from the US after the collapse of the Soviet Union, which caused economic difficulties, it still improved its healthcare system. Cuba is now the world leader in bio-medicine .Furthermore, Cuba, as a Third World country, has cooperated with a Latin American country. It has helped Venezuela build a national healthcare system and set up a strong defence for the Chavez administration.

Agriculture is common to all the poorer countries and its produce has become the main trading commodity of the African, Caribbean and Pacific countries and their trading partners. The ACP comprises 72 countries that enjoy ‘special consideration’ trading terms with the EU, under the LOME Agreement of 1975. The Cotonou Agreement of 2000 was a treaty set up between both parties; the aim was poverty reduction, sustainable development and integration of the ACP countries into the global economy. However, the Cotonou Agreement was to be replaced by the Economic Partnership Agreement (EPA) in 2008, the aim of which was to provide a duty-free market and access to markets for both ACP and EU exports. However, most of the ACP countries have failed to come to an agreement with the EPA; the exception is the Caribbean.

The free trade concept was promoted by the World Trade Organisation (WTO) which draws up the international trading rules. Shah (2010) explains how corporations influence the WTO, and how some of the transitional corporations are closely linked to the decision-making policy within the WTO.

However, trade does bring development, according to the IMF, which can identify the ‘competitive sectors for exports and those sectors which can be supported with subsidies and protective tariffs’ (One World, 2010). Furthermore, the reasons why Africa has failed to capture a “commensurate share of the world trade lies in the immense logistical barriers typical across the continent”. These are: the poor infrastructure in Africa (poor roads and old-fashioned port facilities); the lack of shipping routes to Africa, with the exception of Nigeria and South Africa; the shortage of airline routes to Africa, compared with the rest of the world; and the shortage of internet connections in Africa (Appendix 1 explains and illustrates the shortage). Most of the poorer countries rely on one or two agricultural products (Ghana relies on cocoa exports, while Guinea Bissau relies on cashew nuts for “90 percent of its export sums” and rice exports destroyed due to flood). Poor farmers in the LDCs are affected by low food prices which result in lower incomes, leading to hunger.

The impact of trade liberalisation has been to reduce poverty, improve national economies and increase trade volumes, due to the reduced barriers to global trade. In 1995, when a new trade regime came into power, global import duties and other protectionist measures were reduced (One World, 2010). The trade liberalisation has transformed China’s trading volume since it became a member of the WTO in 2001. Its industrial economy is booming and 300 million people are employed. (One World, 2010). “The trade liberalization constrains the policy space of governments to react to hunger while it enlarges the scope of action of the private sector”. However, the new WTO round of negotiations was called ‘the development round’ and has drawn attention to the fact that the liberalised market is not benefiting the LCDs. Small farmers cannot compete on world markets due to limited land, cannot easily get credit and do not have access to sophisticated technology (Polaski et al, 2009).

In conclusion, this essay has illustrated the impact of globalisation on the LDCs. The Bretton Woods system started the fundamental shift of global economies towards Keynesian economics and neo-liberal thinking led to the acceptance of more integrated global economies. Arguably, the SAPs’ conditions contributed towards poverty in the poorer nations whereas the MNCs were accorded power to allocate capital to different parts of the world. They have created sweatshops where torture and imprisonment are practiced. However, corruption is the reason why most of the poor nations suffer from a lack of economic growth and there has been a distortion of foreign investment in poor nations; either the government spends the money on personal incentives or sells national infrastructure to MNCs without considering national interests., Cuba’s healthcare development shows that Fidel Castro’s democratic system was not corrupt; he instituted a system that could benefit its people. I recommend that most of the poor nations should look at the Cuban revolution to develop their economies. The trading agreements between the ACP and the EU have made significant differences to the ACP’s ability to integrate in the global market. However, the pressure from the WTO on the ACP to agree with the EPA has made the EU reluctant to trade with some members and not others. Globalisation has had an effect on the LDCs, because they are far from developing and the policies of the IMF have a greater impact on the development of their economies, even though the IMF claims to reduce poverty through various poverty reduction programmes.



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