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The Globalization of Poverty

Basil Enwegbara

The two major reasons that tend to attract multinational companies to most developing economies are their cheap labor and weak environmental protection laws. Even being a huge market no longer forms the basis for being chosen as a manufacturing location. Thus countries that want to improve people’s living standards through higher wages, increase social responsibilities of the government through higher taxes, or increase environmental standards tend to get punished. In other words, the labor-intensive and pollution-driven multinational companies tend to migrate to those other countries that still can guarantee cheaper labor and loose environmental control.

The Asian financial crises in the mid-1990s completely highlighted the economic danger a growing number of developing countries are today exposed to as they become completely coupled into the global economic system. The increase in labor costs and environmental awareness in South Korea and Thailand as the fastest-growing economies in Asia, coupled with the devaluation of China’s currency in 1994, triggered multinational businesses to leave their shores en masse for the lower-income and less pollution-stringent China and India for their competitiveness. At the same time, Malaysia, based on the same logic, lost its production heavens for computer hardware to neighboring Indonesia. Indonesia later lost its gains to the Philippines, where salaries and pollution control seemed much lower. As the race continues, even the Philippines is being replaced by Cambodia and Vietnam for labor-intensive and pollution-driven industries.

The story is no different in Latin America, where most Western manufacturing giants move from one location to another in search of cheap labor and loose environmental control. One good example remains the speed with which most multinational companies moved production from Argentina to Brazil once wages and social costs of production became cheaper in Brazil. Even Mexico, with its outstanding policy of holding down wages and social benefits since the early 1980s with the opening of its economy to the world, is now losing that privileged position to neighboring Central American and Caribbean countries that have far lower wages and weaker environmental protection laws. As has been the case in other globally coupled developing economies, these countries now witness immense industrial growth without real economic growth, trickle down, multiplier or accelerator effects.

In fact, in this race to the bottom in most of these so-called developing world’s superstar countries, real wages have lagged far behind productivity growth. For example, between 1994 and 1997 Indonesia witnessed an 11.5 percent wage decline; the Philippines 6.0 percent; and China 5.4 percent including the loss of their once guaranteed wage. Even Mexico’s wages, which had been rising with productivity at 6.6 percent annually between 1988 and 1993, were dragged far lower than productivity was adjusted to the inflation rate during the same period. At the same time, the governments of most of the so-called Asian tigers, particularly Malaysia and Singapore, have compulsory savings schemes. Tax policies are also put in place to drive down consumption, particularly to discourage the use of imported goods. For example, as of 1996 Indonesia had a 35 percent vehicle tax, Brazil 36 percent, Thailand 45 percent, and Malaysia 65 percent in the form of excise duties. These policies are not new. They were successfully adopted in Japan for it to emerge as an economic superpower.

With 770 million people, Africa will no doubt soon be joined in this league that globally exports poverty. While the ongoing World Bank and IMF visits to Africa are being undertaken to discover ways to ensure that Western multinational companies involved in extracting African mineral resources are not harmed by the so-called era of democracy sweeping the continent, the recent presidential and congressional visits to Africa translated into the passage of an African Growth Opportunity Act to prepare the ground for the inevitable landing of multinational companies to African shores. In fact, South Africa, with its advanced infrastructure and industrial parks, is already enjoying the growth of multinational companies on shore. But the presence of the radical Mbaki, the president of South Africa, has not made life easy for these multinational companies. Making Nigeria and Ghana the new heavens for the multinational companies has become inevitable, especially given the growing confrontational posture of China in the recent U.S.-China military relations.

As a result of this race to the bottom -- a race that is guaranteed by cheap labor and weak environmental protection -- the highly industrialized countries in North America and Europe are losing their former industrial power to these less-industrialized countries. The consequences have been loss of jobs, Social Security benefits, and quality of life. As a result, most Western governments are highly indebted from efforts to fill the financial gaps left by the new industrial gap. The fear of this trend has generated a lot of anti-globalization protest across the West, from Seattle to Washington D.C. and recently to Quebec. Unfortunately, the battle is being lost. To the extent that multinational companies have been able to finance elections and have their candidates elected, they have been able to penetrate very powerfully into the Western political system.