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GLOBAL ECONOMY & INCOME DISTRIBUTION.
Term Paper ID:24791
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Essay Subject:
Evolution of global economy & financial institutions & their successes & failures in distributing income between creditor & debtor nations & between social classes in Latin Amer.... More...
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Paper Abstract:
Evolution of global economy & financial institutions & their successes & failures in distributing income between creditor & debtor nations & between social classes in Latin Amer.
Paper Introduction:
This research will examine the successes and failures of the expansion of the global economy at income distribution between creditor and debtor nations and between social classes in Latin America. The origins of the “global economy" will be discussed and its eventual transformation from a purely liberal perspective to today’s neoliberal perspective will be charted. Finally, the current impact of the neoliberal global economy on income distribution in Latin America will be assessed.
The expansion of the global economy--especially as guided by the neoliberal perspectives of the creditor countries and the International Monetary Fund--has had a dramatic, albeit less than successful, impact on economic growth in Latin American countries. The philosophy of creditor countries to promote economic growth in Latin America and elsewhere in the Third World
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New York:Norton.Meller, P. In the meantime, however, the Bretton Woods institutions areattempting to give neoliberalism a "human face" in order to lessen anygrowing doubts in Latin America. Indeed,developing countries resented discussion of such issues. Governments promulgated laws tocontrol foreign investment. On a temporary balance of payments situation, such as a cyclicaldecline in export earnings, the nation need only cautiously work throughthe cycle normally. The adjustment programs adopted in response to the crisis sought tocorrect the imbalance of supply and demand. Further, theseprograms could result in price adjustments which may ultimately benefit thepoor (World Bank, 1996, pp. 14). Public enterprises, which played a significantrole in the import-substitution model, have also been modified by themarket through privatization, reduction or abolition of subsidies, andother streamlining measures (Phillips, 1988, pp. Liberalizationof external trade typically included reduction of high tariffs, eliminationof quotas and import licenses, abolition of export duties and licenses,devaluation of the currency (hence reducing the price of exports), andproduct diversification. The expansion of the global economy--especially as guided by theneoliberal perspectives of the creditor countries and the InternationalMonetary Fund--has had a dramatic, albeit less than successful, impact oneconomic growth in Latin American countries. Not surprisingly, the World Bank's recent report on poverty providesan extensive review of recent studies evaluating the impact ofstabilization and structural adjustment programs on the conditions of thepoor. Trade policies and developing nations. 167). The origins ofthe "global economy" will be discussed and its eventual transformation froma purely liberal perspective to today's neoliberal perspective will becharted. Increasingly frustrated developing countries claimed that theprevailing global order perpetuated economic inequality among nations. xvi-xvii). Both strategies emphasized the state as a defender of economicsovereignty. New York: Dodd, Mead.Killick, T., & Malik, M. WashingtonD.C.: World Bank. The debt crisis along with the disintegration of the Soviet Union andthe socialist bloc in Eastern Europe have led to widespread implementationof "market friendly" policies. (1986). In a world with floating exchange rates, sometimesvolatile money markets, and growing "privatized" economic sectors, the IMFis critical to the successful modulation of the world economy. In most cases, governments reduced demand bycutting public expenditures, devaluing the country's currency, and reducingthe money supply. The IMF and the World Bank would respond that theirmandates already address intra-country income distribution, if indirectly.In their view, poverty and inequality are more effectively addressedthrough a development paradigm stressing (i) market-based economic policiesdesigned to promote economic growth, (ii) limited social safety nets forcountries undergoing structural adjustment to achieve such policies, and(iii) long-term investment in human capital (e.g., health and education).Although the IMF and the Bank do take into account distributional issues inthe course of their policy advice, member states are ultimately responsiblefor shaping policy relating to income equity. The peasants of Mexico have foundthemselves in a sharp relative decline in terms of income distribution(Pierre Beaucage). An important theoretical consensus has enabled the World Bank and theIMF to all but officially adopt a "growth with equity" approach todevelopment. Sothey adopted two strategies to remedy the perceived inadequacies ofliberalism. 232-233). Today, the richest 2 percentof the global population captures 85 percent of global income; theremaining portion is shared by three-quarters of the world'spopulation,living in developing countries (Speth, 1995, p. 77-79). Other studies argue that, in the longterm, these social classes will benefit from neoliberalism. Thus far, each regime has not been successful in terms of avariety of different measures, such as growth in overall gross nationalproduct, economic independence among Latin American nations, and thedistribution of income among creditor countries and debtor countries aswell as among social classes within Latin America. WorldDevelopment, 15, 25 -26 .Phillips, L. The rural Mayans of Guatemala have suffered in terms ofincome distribution from neoliberalism (Linda Green). But this was mostly an illusion. The report challenges critics of neoliberalism, claiming that "thepotential gains can far outweigh the costs" associated with short-termadverse effects of the World Bank-supported programs. New York: PrenticeHall.Kreuger, A. If, however, the problems necessitating borrowing arecaused by deep-seated trends such as excessive domestic demand, persistentdeterioration in terms of trade, or cost-price distortions including theover-valuation of the nation's currency, then the conditions requirechanges in national policy. Similarly, Killick and Malik (1992) analyze datafrom 17 countries which implemented adjustment programs in 1979-1989. This research will examine the successes and failures of theexpansion of the global economy at income distribution between creditor anddebtor nations and between social classes in Latin America. No progress was made on distributional issues(whether inter- or intra-country) under the NIEO. Because the NIEO dwelled on economic relations among developed anddeveloping countries, issues regarding domestic economic equity--e.g.,intra-country income distribution--received less attention. The IMF and the World Bank, along withindependent actions by creditor countries, pressured Latin Americancountries to adopt such strategies. Moreover, the principle of sovereign equalityamong nations gave developing countries the right to determine domesticpolicy independently. Theyconclude that these programs had mixed effects on income distribution. He claims that traditional analysis of neoliberalismignores variations in several important macrovariables, such asunemployment and the real wage rate. Reductions of the moneysupply by tightening and imposing ceilings on public sector credits reducedinflation. IMF's internationalfinancial reserves are supplemented by Special Drawing Rights as of 1967(valued with reference to a "basket" of several national currencies). Many studies highlight the detrimentalimpact of neoliberal stabilization and structural adjustment programs onpeasants, Mayans, women and the poor. This goal is allegedlyto be reached through an enabling environment for social development. Growth presumably will be led by the private sector, facilitated by a political environment structured around the goals of trade liberalization and minimal state in the market (Phillips, 1988, pp. 59-63). All these sorts of vehicles have addressed specificsectors in international economic relations. Focusing on poor economic performances under neoliberal policies, on the social costs of neoliberalism, and on the extent to which the state has been (contrary to neoliberal rhetoric) highly interventionist in implementing neoliberal policies, these empirically based studies have been extremely important for documenting the gap between neoliberal rhetoric and neoliberal reality (p. (1995). Central banks manipulated exchange controls andfinanced state-guided investments. They argued thatdomestic inequalities could not be remedied without first transformingrelations among nations. The idea behind stabilization is that a drop in demand will result ina reduction of the current account deficit, a major cause of a debtorcountry's financial crisis. xiii-xv). Observers notedthat, although living standards in developing countries have improved overthe past two decades, disparities within countries are likely to rise, withthe largest gaps occurring in South Asia, Latin America, and the Caribbean.Given the great and persistent inequalities within (and between) countries,the Summit's participants pledged to create a framework for action thatwould promote the equitable distribution of income. They asserted that import-substitution policies resulted in aworsening of income distribution as well as dependence on transnationalcorporations and foreign technology (Phillips, 1988, pp. 383). The emerging internationaleconomic order. The World Bank was to mobilize economic resources for long-term socio-economic development. Both failed to make any significant progress with respect topoverty or income distribution. Summers and Pritchett (1993) have responded to a wide range ofcritiques about neoliberal stabilization and structural adjustmentprograms. (1994). 1995 human development report. However, they also notethat, during recessionary periods (i.e., the initial phase of theadjustment), living standards of the poor deteriorated (Summers &Pritchett, 1993, p. ReferencesCarrasco, E. Althoughthe components of such programs differed from country to country, theyshared two themes: liberalization of domestic and foreign trade, andprivatization of often large and inefficient public enterprises. Supporters of the model stressed that the region'sgross domestic product (GDP) grew at an annual average rate of 5.5 percentin the 197 s; total economic activity quintupled during the same period.Industrial production, capital formation, and investment also rosesubstantially. This approach seeks several objectives, such as: to convert centralized command economies into market economies; to stabilize the growth of developing country economies in ways that facilitate further expansion and access to global markets; and to enhance continued growth and financial stability of the postindustrial economies. Other areas where the World Bank saidit supports Social Summit commitments are: (i) expanding work on labor-intensive patterns of growth, participation, gender issues, and problems ofthe family; (ii) paying greater attention to participatory povertyassessments, country assistance strategies, and other Bank instruments toensure a broader perspective; (iii) helping governments to increasedomestic revenues and savings to meet priority needs; and (iv) increasingthe efficiency and effectiveness of poverty reduction programs on theground. The World Bank engaged in policy-based lendingthrough structural adjustment loans (SALs) and sector adjustment loans(SECALs), medium- to long-term loans which support structural changes toimprove supply and prevent the recurrence of a crisis. 31-45). Impact of Neoliberalism on Income Distribution The impact of neoliberal stabilization and structural adjustmentprograms (SSAPs) on income distribution and poverty in developing countrieshas been a hotly debated issue for the past 1 years. Conditions vary depending on the sate of each nation's economichealth. Purpose of the IMF and World Bank To avoid economic disruption after World War II, Great Britain andthe United States convened a conference on international monetarycooperation at Bretton Woods, New Hampshire, in 1944. At the Social Summit citedabove, the World Bank announced that it would increase its social spendingby 5 percent over the next three years. (1982). Almost no progress was made in addressing economic and socialinequalities (Kreuger, 1995, p. Other studies, however, suggest thatneoliberalism positively affects key macroeconomic variables and improvesthe conditions of the poor when successfully implemented. New York: United NationsDevelopment Program.Summers, L., & Prichett, L. Although both strategies were critical of postwar liberalism, theNIEO and the import-substitution model of development stressed economicgrowth as a necessary (but not sufficient) condition for equitabledevelopment. Among these are theCompensatory Finance Facility (1963), the Buffer Stock Facility (1969), theSpecial Oil Facilities (1974 and 1975), and the Supplementary FinancingFacility (1979-82). Finally, the current impact of the neoliberal global economy onincome distribution in Latin America will be assessed. Expanding spheres ofinfluence as well as taming a growing revolutionary zeal in Latin Americaprompted refining the liberal perspective of the global economy to takeinto account the Third World. Law, hierarchy and vulnerable groups in LatinAmerica. Using the data of 18 Latin American countries for the 1965-1981period, his empirical analysis indicates that "the strongest and mostconsistent effect of IMF programs [has been] absolute and relativereductions in labor share of income" (Pastor, 1987, p. The state erected hightariffs and nontariff barriers (such as import quotas and licensingrequirements) to protect infant industries. Between 195 and 1992,world income increased from $4 trillion to $23 trillion. From these origins, additional international financial institutionshave emerged to ease economic relations among nations. As one might expect, other studies paint a completely differentpicture of the stabilization and structural adjustment programs' effects onincome distribution. Inparticular, they argue, while these programs seem to have an importanteffect on distribution of income, their impact varies from one country toanother (Killick & Malik, 1992, p. The IMF's stabilizationprograms applied short-term "emergency" demand reduction measures (IMFstandby arrangement). The IMF'sworld-views on taxes, trade, and related economic issues are promotedthrough its technical assistance and training. Whether the World Bank and the rest of the Bretton Woods institutionsare serious about this new effort remains to be seen. (1988). Domestic regulatory law, rather than international law (the NIEOapproach), implemented import-substitution policies. Conclusion: Spread of the Global Economy The results of the impact of neoliberalism on income distribution--among creditor and debtor nations as well as among social classes withinLatin America--are not yet in. 259). From thesedeliberations at Bretton Woods, the "World Bank" (formally theInternational Bank For Reconstruction and Development) and theInternational Monetary Fund (IMF) emerged. Poverty reduction and the World Bank. For instance, Solimano (199 ) provides an assessmentof stabilization programs implemented in Argentina, Chile, and Uruguayduring the mid-197 s and early 198 s. 599). Meller's thesis finds support in the work of other economistsstudying the effects of adjustment programs. (1995). Long-term economic progress throughindustrialization was key, via replacement of imported manufactured goodswith domestically produced goods. In the meantime,neoliberalism continues to dominate the global economy and Latin America. The philosophy of creditorcountries to promote economic growth in Latin America and elsewhere in theThird World has undergone several transformations over the last halfcentury, ranging from a purely liberal perspective to today's neoliberalperspective. The termgenerally describes tradition liberalism as modified to reflect market-based policies in today's global economy: intervention neoliberalism embraces traditional liberal economic development, updated to include the role of the new global economic forces. Policymakers believed growth would raisestandards of living for all citizens--i.e., wealth would trickle down tothe poorest segments of societies in developing countries. Structural adjustment programs attempted to complement stabilizationefforts by increasing economic efficiency and, therefore, supply. But thedistribution of that income is highly skewed. This consensus is the evolution of a 5 -year debate amongeconomists about the relationship between growth and inequality. (1993). Dependency theorists also focused onobstacles created by the unequal relationship between the periphery and thecenter. . Although researchershave used a variety of methods to evaluate stabilizations and structuraladjustment programs, current empirical evidence about their success is notconclusive. TheSummit's commitment to reduce income inequality raises an obvious andcritical question regarding the efforts of creditor countries: Can the IMFand the World Bank contribute effectively to the enabling environmentenvisioned at the Social Summit, especially as it relates to incomedistribution within countries ("intracountry income distribution")? (1996). In order to bolster thelegitimacy of neoliberalism, the World Bank and the International MonetaryFund have turned their attention to distributive issues and povertyalleviation. Theother strategy employed import-substitution policies to promote state-guided industrialization (Jacobson & Sidjanski, 1982, pp. The "structuralists" provided theoreticalsupport for the model'sinward-looking policies by underscoring a structural bias in the globaltrading system against developing countries exporting primary commodities.They believed industrialization could be achieved through backwardslinkages in the economy, starting with light industry and concluding withcapital goods production. Critics claimed thatthe stabilization/adjustment programs that brought about the transitionworsened income distribution in debtor countries. Neo-Marxists argued that"peripheral" (developing) countries were stuck in a state ofunderdevelopment and unequal exchange with the "center" (advancedcapitalist countries). Most Latin American countries not only made drastic cutsin capital outlays, such as infrastructure, but also took the politicallyriskier step of slowing or stopping the growth of current expenditures:freezing state employees' wages and slowing recruitment, reducing directconsumer subsidies, raising artificially low utility rates, and cuttinghealth and education expenditures. The effects of IMF programs in the Third World. Neoliberalism During the debt crisis of the 198 s, policymakers in developingcountries abandoned the import-substitution approach in favor of theBretton Woods institutions' neoliberal approach to economic law and policybased on an open, privatized, market-based economy. Import Substitution In the following decades, the Bretton Woods institutions increasinglyturned their attention to developing countries. Development at that time was a narrow conceptbased on economic growth. Adjustment and social costs in Chile during the198 s. (1991). Balance-of-payments problems soon became unbearable, andgrowth slowed in several countries. Critics of the Bretton Woods institutions have claimed that theactions of global economic development under the IMF and the World Bankhave perpetuated poverty and inequality in Latin America and otherdeveloping countries. For example, Pastor (1987)studied the impact of IMF-supported adjustment programs in Latin Americaneconomies. Domesticliberalizations included abolishing price controls, freeing interest rates,ending credit rationing, and establishing a capital market. While policymakers in developing countries adopted the neoliberalapproach, this perspective of economic development was imposed on them bythe Bretton Woods institutions. The World Bank and the InternationalMonetary Fund desire to see neoliberalism continue to spread throughoutLatin America and the rest of the Third World. More than 5 yearsago, the International Monetary Fund (IMF) and the World Bank were createdto promote a liberal order that would give rise to global prosperity. World Economics, 15, 59 -611.Korner, P. The distinctionbetween the IMF and the Bank programs often blurred in practice, however,because of the close collaboration between the two institutions and thecomplementary nature of their programs (e.g., the IMF's Enhanced StructuralAdjustment Facility). Regional trading among developing countries wouldprovide a springboard for global trade (Carrasco, 1994, pp. The term "neoliberal" has many definitions and connotations. At thecenter of the debate is Kuznets' "U-hypothesis," which posits that, whenlabor shifts from the preindustrial to the industrial sector, inequalityinitially rises and then stabilizes in later stages. While it may betoo early to draw solid empirical conclusions, one point is clear:neoliberalism is showing no signs of abatement in the global economy. Accordingto some observers, large countries, such as Brazil, Mexico, and Argentina,may have benefited. A socialist revolution was needed to capture theeconomic surplus for development. It has once again become an important theme intoday's development debate--and for good reason, too. Phillips (1988) concludes: The social sciences have two paradigms for critiquing neoliberalism. And women in Peruhave lost substantial ground in terms of income (Linda Seligmann). WorldBank Observer, 5, 16 -171.Speth, J. (199 ) Inflation and the costs of stabilization. Several of the independent studies in Phillips' (1988) edited workfurther confirm that neoliberalism has had a devastating effect on incomedistribution throughout Latin America. The IMF and the debt crisis. Income inequality came under scrutiny during preparatory meetings forthe World Summit for Social Development (Social Summit). Defenders ofneoliberalism argue application of the same hypothesis to neoliberalism'simpact on income distribution. Adopted widely in Latin America, the "import substitution" modelarose from the work of economists who sought solutions to the problems of"underdeveloped" countries. One called for a New International Economic Order (NIEO), ahighly controversial effort to effectuate the principle of sovereignequality of nations by reforming international economic law and policy. One approach details the impact and implications of the neoliberal process. Both programs carried "conditionality," releasingfunds in installments and requiring recipients to meet performance criteriafor each installment (Korner, 1986, p. World Development, 19, 155 -1569.Pastor, M. Devaluations of overvalued currencieswere implemented in part to reduce consumption. Stanford Journal of International Law, 3 , 225-24 .Jacobson, H., & Sidjanski, D. His results indicate that "ingeneral, the effects of the programs on employment and income distributiondepend on the degree of slack or recession entailed by the stabilization inthe short run; how much real wages or employment are cut; theredistribution of assets that may take place with the stabilization"(Solimano, 199 , p. A number of studies show that neoliberalism adversely affectsincome distribution and poverty. Atfirst glance, their mission has been successful. faced heavy income losses through wage deindexation and unemployment"(Meller, 1991, p. More significantly, the liberal relationship between developed anddeveloping countries exacerbated the problems. Creating these commodityexploitation facilities seemed easy compared to the as yet untested, andstill unsettled, new "Global Environmental Facility." Under IMF's systems, as nations encounter valance of paymentsproblems, they can draw on IMF resources, initially free of conditions,but, once further credit is sought, "conditionality" is imposed in order toensure that the borrowing country will be able demonstrably to overcome itsbalance of payments difficulties. 1559). (1987). Failure to meet these conditions results in stiffer conditions orultimately a non-renewal of stand-by borrowing arrangements or limitationson future drawings. 9). The IMF established a multilateral system of nations'payments and reserves, of managing fluctuations in currency exchange rates,and of cooperation among states on monetary matters. Country experiences with IMFprograms in the 198 s. (1992). . 194). He concludes that, even though theChilean government created safety nets for the very poor during theimplementation of adjustment programs in the 198 s, these programs had anadverse effect on income distribution: "workers. These problems suggest that the earlysuccess of import-substitution policies was nothing more than a temporaryillusion. Income Distribution Income distribution is a politically explosive issue with a complexand troubled history. They claim evidence suggesting the conditions of the poor, onaverage, improved following the adjustment period. Import substitution yielded mixed results in Latin America. Both the World Bank and the IMF have playedsalient roles in constructing the neoliberal paradigm of development.Changes in economic law and policy have concentrated on measures describedin the preceding section: attempts at noninflationary growth, fiscaldiscipline, high savings and investment, trade and foreign investmentliberalization, privatization, and domestic market deregulation. A number of developingeconomies that depended heavily on import-substitution policies facedrecurrent balance-of-payments problems, throwing a shadow over the model'slong-run success. The Bank committed itself toproviding $5 billion for basic social needs, and a further $5 billion forwater supply and sanitation programs. Assistance from the Bretton Woods institutions was not forthcoming,however. As previously noted, the social costs resulting from implementationof these measures in developing countries have ignited heated criticisms ofthe programs of the Bretton Woods institutions. 148). Post-Colonial Attempts to Modify Liberalism Decolonization after World War II raised expectations amongdeveloping countries that industrialized countries would recognize theimportance of, and financially support, development in Latin America andother Third World countries. Meller (1991) has written critically of neoliberal stabilization andstructural adjustment programs, especially as they relate to unemploymentand real wages. The structural-adjustment debate.American Economic Review, 83, 375-39 .World Bank. Wilmington: Scholarly Resources Books.Solimano, A. The third wave of modernization in LatinAmerica.
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