For richer, for poorer

In this week's email exchange, Ann Pettifor and Philippe Legrain discuss whether globalisation can work for smaller countries

Saturday September 13, 2003

Dear Philippe,
Isn't it ironic that globalisation's most startling legacy is not to be fusion food, cheap flights or the web - but debt and deflation? That those of us who worried about the Third World debt crisis, are about to confront our own First World debt crises?

And would you agree that there is a certain irony in poor, developing countries going cap-in-hand to Cancun to beg favours from rich countries, when in fact these same countries are keeping the rich in pocket? According to the World Bank, developing countries are " net lenders to developed countries". "Globalisation" allows rich countries to live beyond their means (including their environmental means) and then to raid the piggy banks of poor countries for finance. The result: huge reserves of IOUs - or debt. Can we discuss how to moderate globalisaton's most damaging legacy: the coming first world debt and deflation crisis?
Ann Pettifor

Dear Ann,
I think fears of deflation are overblown: UK inflation is 3.1%. Where prices are falling - notably Japan - domestic policy failures, not globalisation, are mainly to blame. Japan is a net lender to the world - by over $100 billion a year - not a net borrower. Poor countries can, of course, choose not to tap foreign finance. Those with underdeveloped financial markets should certainly limit destabilising surges of speculative money. But long-term foreign investment in factories can do wonders for countries that are short of domestic savings and know-how.

The big issue in Cancun, though, is trade, not finance. The evidence that freeing trade boosts economic growth - and hence reduces poverty - is incontrovertible. Witness China's great leap forward since it started opening up. The average Chinese person is over six times richer than 20 years ago - the number living on less than a dollar a day fell by 150 million between 1990 and 1998, the fastest fall in poverty ever recorded. The Chinese clearly believe freeing trade is good: that's why they recently joined the WTO. Why don't you?
Philippe

Dear Philippe,
Where did I say I was against trade? Globalisation is not primarily about trade, despite smokescreens erected by "globalisers" and "anti-globalisers" alike. Globalisation is primarily about finance; about transforming the global economy, so that the "money-changers" - not the productive trading sector, now run the world.

The truth is neatly summed up in one statistic. In 1970, 90% of all international transactions were trade transactions, and only 10% were financial transactions. By 2000, 90% of all transactions were financial, and only 10% were trade transactions.

Philippe, be honest: the money-changers have taken over the temple. Trade is now just a small part of the global economy. And the result is devastating: de-regulating international capital has made it easier for rich countries to siphon off resources from poor countries.
Ann

Dear Ann,
I didn't say you were against trade: I said you were against freeing trade. Please correct me if you have changed your views. If so, it might explain why you have not contested my point that freeing trade boosts growth and reduces poverty.

Your assertion that globalisation is primarily about finance, not trade and investment, is incorrect: the volume of transactions on financial markets bears little relation to their importance. It is also beside the point. Developing countries can reap all the benefits of opening up to foreign trade and investment, while maintaining firewalls to protect them against the instability of global financial markets. That is what Vietnam has done under its policy of doi moi - and in the ten years after 1988, when it began to open up its economy, its poverty rate halved. Who said globalisation isn't good for the poor?
Philippe

Dear Philippe,
What do you mean the "volume of financial transactions on financial markets bears little relation to their importance"? This is like saying "volumes of money bear little relation to their importance". I repeat: globalisation is largely about those with money making even bigger volumes of money.

While some countries have become richer by designing, manufacturing and trading (and I am all in favour of that), it is countries (like the UK) that make money from money that have really thrived under globalisation. Of course it's good for poor countries to trade - fairly - but whether it has enriched them is open to question. China's growth numbers, as you know, are treated with great scepticism by all. And, anyway, China's is not a globalised economy - it maintains capital controls.
Ann

Dear Ann,
Do you really think it is City traders who make Britain rich? The wealth of nations springs mainly not from their financial turnover but from their ability to use technology productively. That is why globalisation in the form of international trade and foreign investment is such a good thing. New technologies spread faster; foreign competition keeps companies on their toes; countries specialise in what they do best and buy the rest for less from abroad. For sure, if you choose to define globalisation narrowly as just the free movement of hot money, it is a mixed blessing. But trade liberalisation has an outstanding record of raising living standards and reducing poverty.

Since 1980, an amazing thing has happened. Global inequality, which had been rising since the Industrial Revolution enabled the West to race ahead, has begun to fall. China, home to one in five of the world's people, is catching up with rich countries. India, where a further sixth of the global population live, has also begun to close the gap - as have many other Asian countries. Developing countries that embrace globalisation are making up ground on the West; those that reject it are falling further behind. One can quibble with the precise data, but the broad trend is not in doubt, as any visitor to Shanghai, a futuristic city that only 15 years ago was mostly marshland, can testify.
Philippe

Dear Philippe,
Of course City traders have helped make us rich. Our own goods exports are in decline, and now as a nation, we pay our way thanks to "invisibles" - making money from money. On global inequality, I profoundly disagree. Inequality numbers are very political. No institution collects numbers on income distribution. And the numbers that are collected are of incomes - not assets. The rich have assets, not incomes. The poor have incomes and debts, not assets. If you add in assets, as we do, then globalisation is generating wealth for the rich, and debts for the poor. This is the "hoover effect" - globalisation is sucking wealth from the poor, and concentrating it in the hands of the few.
Ann

Dear Ann,
Of course, the City contributes to Britain's prosperity, but it is not the main reason our country is rich. Financial services account for only 6% of the UK economy.

Global inequality is indeed hard to measure, but simple arithmetic suggests it is falling, as more sophisticated studies can confirm. Half the people in the developing world live in China and India. Both their economies are growing much faster than the US's, Europe's and Japan's. So the gap between rich and poor is narrowing. And as the poor's incomes rise, they will save and accumulate assets - just as we have done. To claim that "the rich have assets, not incomes" suggests that far from New Economics, you have no economics: assets are only valuable because they provide a stream of future income.
Philippe

Philippe,
In economics, defamation is the sincerest form of flattery. So thank you. To check the facts, read the New Economics Foundation's book, Real World Economic Outlook - which includes distinguished economists and a Nobel Prize Winner.
Ann

Dear Ann,
You ask poor readers to plough through your book. I shall be much briefer: if the world followed your prescriptions, we would all be much poorer. And let's not count Nobel prizes: as you know, the overwhelming majority of economics laureates are in favour of globalisation.
Philippe

Ann Pettifor is a director of the New Economics Foundation and was a co-founder of Jubilee 2000. Email: mailto:ann.pettifor@neweconomics.org. Philippe Legrain is the author of Open World: The Truth about Globalisation