Economic development - smaller world, greater wealth, growing divide

From north to south, east to west, the nations of the world, and the economies of those nations, are more closely connected today than they have been at any other time in history.

Expanding global markets, burgeoning international trade, rising cross-border investment, increased freedom of movement of capital, goods and labor - all have served to blur the lines between national economies and draw people together into what Canadian philosopher Marshall McLuhan once termed "the global village."

This inexorable process of "globalization" - a concept that encompasses not simply economic fusion, but ever-strengthening political, social and cultural ties as well - is not in itself a new phenomenon.

The great European capitalist expansion of the 16th Century, when countries such as Spain, Britain, Portugal and Holland built worldwide trading empires, was an early example of global economic inter-connection.

Similarly, the free-trade policies and monetary liberalism of the late 19th and early 20th centuries led to what many have described as The First Age of Globalization, an era that came to an abrupt end with the First World War and subsequent Great Depression.

Integrated global economy

If it has its historical forerunners, it is only in the last 60 years that the concept of a truly integrated world economy has achieved full realization.

It has been made possible, firstly, by the creation of specific international institutions to manage and regulate economic relations between nations.

The Bank for International Settlements, The General Agreement on Tariffs and Trade (forerunner of The World Trade Organization), The World Bank, The International Monetary Fund, were all established in the wake of World War II to help restore economic stability after the turmoil of conflict, and all have been fundamental in driving and shaping modern global capitalism.

Equally if not more important have been the dramatic advances in communications technology, the latter facilitating the exchange of information and currency at a speed, and with an ease, that would have been unthinkable a hundred years ago - the "decoupling of space and time" as sociologist Anthony Giddens once described it.

Finally, the harnessing of groups of countries into geographical free trade areas - The European Union (EU), The North American Free Trade Association (NAFTA), The Asia-Pacific Economic Co-Operation (APEC), the Common Market For Eastern and Southern Africa (COMESA) - has served to dissolve trade barriers, open markets and knit disparate economies ever tighter together.

The result has been a degree of global economic interaction unprecedented in human history.

"The scale of globalization that we see today is utterly unique," confirms Dr. Richard Tarasofsky of Chatham House. "The world has never been connected to this extent before."

Winners and losers

This post-war global order has brought, for many, substantial benefits.

For the countries of the industrial north, who first established, and continue to control the institutional machinery of globalization, it has fuelled a protracted period of steady economic growth - at an average rate of 2-3 percent per annum - and an attendant increase in the prosperity of a majority of their citizens.

Several developing nations, too, are reaping the rewards of increased global integration, especially those in East and South Asia, where the economies of countries such as China, Thailand, Malaysia and Indonesia are now expanding faster than those of most developed nations - at an average of 7 percent per annum, according to the World Bank - and wages and living conditions are gradually inching upwards.

Perhaps the greatest beneficiaries have been the large, trans-national corporations, who have seen profits rocket in this era of global markets - according to Bloomberg the average annual pay for the CEO of a major US company is now $12 million - and, also, the highly educated, highly skilled workers in developing countries such as India and China who have enjoyed massive wage increases as economic liberalization has created an ever-greater demand for their services.

While there have been winners, however, there have also been some very obvious losers.

At a time when some countries are forging ahead economically, others, especially the developing nations of sub-Saharan Africa, are falling further and further behind, their economies either stagnating or contracting, their citizens sinking ever deeper into the mire of poverty.

According to the United Nations Development Programme (UNDP), the already meagre share of the world's wealth going its poorest citizens has over the last 40 years fallen still further, from 2.3 percent in 1960 to 1.4 percent today (for the same period the share going to its richest citizens has risen from 70.2 percent to 89 percent).

There are currently 49 counties classified by the U.N. as "least developed" -- double the number of 30 years ago. Such is the extent of the economic divide that the total GDP of those 49 poorest nations is now less than the combined wealth of the world's four richest citizens - Bill Gates, Warren Buffett and the Albrecht brothers, Karl and Theo.

"Unfortunately globalization has lead to widening disparities of income among countries," says Terry McKinley of the UNDP. "Some developing countries have been able to take advantage of it, a majority haven't."

David Robinson of the International Monetary Fund agrees. "There has been tremendous divergence in the way in which global economic growth has been shared among nations. If you look at the numbers, during the 20th Century the richest quarter of the world's population has seen incomes rise six-fold, whereas the poorest quarter has only seen incomes rise three-fold. That has left a large gap between those at the top and those at the bottom."

Widening wealth gap

It is not simply the gulf between the wealthiest and poorest nations that is expanding. Within nations, too, there is an ever-growing divide between those who have benefited from economic growth, and those whom it has bypassed.

"There are growing inequalities within countries, between the richest and the poorest," confirms Dr. Linda Yueh of the London School of Economics.

"There is some mobility within middle-income countries, especially in South-East Asia, where a country like Taiwan has actually experienced a fall in inequality.

"In general, however, the increase in globalization has not contributed to a closing of the rich-poor gap. Brazil, for instance, has one of worst income distributions in the world."

It is an economic faultline that is becoming as stark in some countries of the developed world as it is in those of the developing. According to pressure group United For a Fair Economy, for instance, the average CEO in the U.S. now earns over 400 times as much as the average worker (two decades ago it was 44 times as much).

While the cheap labor pools of Asia and South America have been a boon for some, the outsourcing of jobs and production - "off-shoring" as it is sometimes termed - has left many in the industrial world struggling for their livelihoods (according to the AFL-CIO, the umbrella organisation for America's labor unions, 3.3 million U.S. white-collar jobs will have moved overseas by 2015).

"There are some countries, notably in continental Europe, where inequality has changed very little over the past 20 years," says Francois Bourguignon, Chief Economist at the World Bank. "There are others, however, where it has increased quite substantially, among them the U.S. and the UK."

Global instability

It is a situation that is a source of growing concern to governments, economists and many business leaders, and not simply for ethical reasons.

"I would say this growing divergence is dangerous," says Dr. Linda Yueh.

"Having countries that feel left behind as the world is getting richer it is not a situation we should stand by and watch. It could be a source of considerable instability."

Her views are echoed by Richard Tarasofsky. "It is hard to imagine that the increasing inequality caused by globalization will not create increasing social unrest. It is not the only factor, of course, but it is definitely a driver," he says.

Benjamin Mkapa, the President of Tanzania, made the point even more bluntly in a recent interview. "Countries with impoverished, disadvantaged and desperate populations are breeding grounds for present and future terrorists," he said.

How exactly to tackle this growing wealth divergence, and to ensure that the benefits of economic development are spread wider and more fairly, both within and between nations, is the subject of intense and often fraught debate.

Some argue that the entire concept of a free market and integrated global economy is inherently flawed and needs to be re-thought; others that the problem is not globalization per se, but rather the nature of the institutions and rules that frame it; others still that what is needed is actually more globalization - that only by pursuing a policy of unfettered economic liberalism can sufficient wealth be created to significantly improve the lot of the world's poor.

While the issue has generated a maelstrom of arguments and counter-arguments, there are nonetheless certain fundamental strategies that it is broadly agreed are essential if a more equitable distribution of the fruits of economic growth is ever to be achieved.

On a national level, a more progressive tax system is generally regarded as the most effective mechanism for narrowing the divide between rich and poor, coupled with improved provision for those at the very bottom end of the scale, in particular a workable minimum wage system.

"In order to achieve a more equal distribution of wealth you need taxation at the top end," says Francois Bourguignon, "And at the bottom end powerful minimum income schemes to prevent people falling too far behind. "In places like the U.S. inequality is growing because the redistribution system is not that strong."

Debt relief, increased aid, fairer trade

On an international level, there are three key areas on which policy-makers are currently focusing in order to try to improve the lot of regions such as sub-Saharan Africa, and enable their citizens to claim a larger slice of the global economic cake.

The first is Third World debt relief. In many, if not most, developing countries, infrastructure improvement and economic growth are being stymied by the massive burden of international debt with which those countries are saddled. "The most indebted poor countries in the world currently owe a total of $375 billion," says Caroline Pearce of The Jubilee Debt Campaign.

"Sub-Saharan Africa, the poorest region in the world, pays out $10 billion a year in debt servicing, about $27 million a day. In human development terms there is a desperate need for these countries to be able to spend their money on their own populations and infrastructure rather than paying it out to the rich world."

Another target area is the provision of foreign aid to developing countries. The amount of aid has been dropping steadily over the past few decades, and is according to the World Bank now at its lowest level since 1947 (0.22 percent of donor countries' GDP).

The US, one of the world's wealthiest countries, contributes just 0.1 percent of its GDP to foreign assistance, with a sizeable proportion of that taking the form of military aid to Israel and Egypt.

"More financial aid is absolutely essential if we are to improve both human and physical infrastructure in these places," says Francois Bourguignon . "We need to make sure that more resources are made available to the developing world, and that those resources are used in an effective way."

Finally, there is a growing acceptance that economic liberalization and free trade have been unfairly weighted in favour of the world's richer nations, who have been able to exploit global markets while at the same time resisting similar exploitation of their own markets.

In the U.S., for instance, the huge subsidies paid by the government to native cotton farmers - subsidies that, according to Oxfam, total more than the entire GDP of a country such as Burkina Faso - are denying the cotton producers of Africa and South America a level economic playing field on which to perform, driving many of them out of business.

"If you're going to have globalization it needs to be a two way street," says Terry McKinley. "Developing countries are opening up, but a lot of developed countries aren't. They have strong lobbies, especially in the agricultural sector, that are forcing governments to deny the liberalization to poorer nations."

Francois Bourguignon agrees. "We need to give developing countries far easier access to all global markets," he says, "Which is not necessarily the case today. Subsidies and market protection by high income countries are having a very negative impact."

The private sector

While taxation, debt relief, increased aid and fairer trade all have a role to play, however, there is also an awareness that the public sector alone cannot provide all the answers.

The role of the private sector is seen as equally if not more important in the struggle against inequality, helping to drive economic transformation from the bottom up rather than vice versa.

The Grameen Bank micro-credit system, for example, is a private sector initiative that has had an enormous effect on economic development by extending small loans to poor people - predominantly women - to enable them to start up and maintain their own businesses.

First established in Bangladesh in the 1970s by Mohammed Yunus, a U.S.-educated Professor of Economics, the scheme has to date helped more than 16 million of the world's most disadvantaged people, both in developed and developing countries.

"The able-bodied poor don't want or need charity," Yunus has said. "All they need is financial capital."

Such has been the scheme's impact that the U.N. has declared 2005 The International Year of Micro-Credit.

"The private sector is the single most influential factor in all of this," says Richard Tarasofsky. "There is a huge market of people at the bottom of the social and economic pyramid who could be better served by businesses.

"What is needed is more innovative thinking about business models aimed at that sector of society."

His opinion is shared by Professor Abhijit Banerjee, an expert in development economics at the Massachusetts Insitute of Technology.

"Getting the domestic private sector to be aggressively looking for, and exploiting new opportunities is going to be very important for developing countries," he says.

"There are huge opportunities for these places to diversify into non-traditional exports. Flowers and organic fruits, for instance, are two products that would be ideally suited to East Africa. You need the basic infrastructure, of course, but the private sector can play a huge role in the regeneration of struggling economies."

Even with increased private sector involvement, however, there is considerable pessimism about whether any real change - "convergence" as it is sometimes called - will be achieved in the foreseeable future.

Vested interests in the developed world and chronic misgovernment and institutional weakness in many countries of the developing are just two of the factors hampering any attempt to create a fairer economic order.

"There have been some successes," says Gerard Walsh of the Economist Intelligence Unit. "If you look at Asia, Eastern Europe and South America poverty levels have improved quite significantly. For the countries of Africa, on the other hand, it's going to take a huge amount of time to get anywhere close to the developed world."

External Links

Chatham House - http://www.riia.org/
The Economist Intelligence Unit - http://www.economist.com/countries/
The International Monetary Fund - http://www.imf.org/
Jubilee Debt Campaign - http://www.jubileedebtcampaign.org.uk/
London School of Economics - http://www.lse.ac.uk/
Massachusetts Institute of Technology - http://web.mit.edu/
United Nations Development Programme (UNDP) - ttp://www.undp.org/
The World Bank - http://www.worldbank.org/

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