The Globalization of Poverty

by Michel Chossudovsky

By Michel Chossudovsky

Zed Books Ltd. London and New Jersey. 1997. Paperback. 288 pp. ISBN: 1856494020.

Reviewed by Leo Vox

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In countries as diverse as Russia, India, and Rwanda, Michel Chossudovsky’s The Globalization of Poverty takes severely to task the structural adjustment programs of the World Bank and International Monetary Fund. Readers uninitiated in criticism of the International Financial Institutions might perhaps be put off by Chossudovsky’s polemical treatment of the Bank and the Fund. They would be mistaken, for the author joins with his rhetorical style truly remarkable insights into the workings of Bank and Fund adjustment programs in 10 countries over more than a decade.

Chossudovsky’s thesis– that Bank and Fund loan programs create economic strait jackets, which do more to impoverish the recipients and cast them in the yoke of international division of labor than to promote economic growth– is not entirely new to Bank and Fund criticism. The strength of the book is the diversity and detail of the country studies and the author’s seeming first-hand experience in several of them.

A structural adjustment loan is a quick disbursing loan in foreign exchange, usually used to repay prior international debt, and for which a number of economic policy reforms are most often required. Balancing domestic tax receipts and spending, freeing prices from government control, freer labor markets and a private sector-oriented investment code are some of the reforms frequently required and which are thought to make the economy more efficient.

Meant to balance national budgets, rectify market imbalances and make the economy more competitive, the real effect of these policies, according to Chossudovsky, is to impoverish the working and middle classes and cause the economy to plunge into a serious economic depression due to shrinking internal demand. In example after example, the book explores the deleterious effects of structural adjustment programs on the working poor through the mechanism of rising prices, falling exchange rates, higher taxes and reduced welfare programs, which Chossudovsky claims result ineluctably from the very reforms insisted upon by the World Bank and International Monetary Fund. The raising of taxes to “balance” the budget, the reduction in social programs for the same fiscal reasons resulting in disinvestment in education and health, rising market prices as a result of “freeing” them, are some of the policy effects Chossudovsky documents and criticizes.

In addition to the more direct effects of Bank and Fund “reforms,” the author accuses the institutions of promoting anti-labor policies by “freeing” up wages, as they argue for reduction or abolition of the minimum wage in the guise of enhanced competition, and for “freeing up” labor markets through anti-union provisions in local laws. As the author documents, rather than the more “efficient” use of labor that they ostensibly promote, more often than not these programs result in greater exploitation of children, women, migrants, and the poor, generally.

Alliances of local elites with the lender community often result in acceptance of the international prescriptions with otherwise scant domestic constituencies. Chossudovsky documents cases so egregious that even national policies are drafted at Bank and Fund headquarters before being forwarded for local signature. All this would seem to result from the burden of debt from which countries are unable to escape, which Bank and Fund programs caused in the first place, and which, under structural adjustment, now provide not relief but modest downsizing. Under structural adjustment the book explains how old debt is replaced with the new debt of a structural adjustment program, with its additional burden of all the externally imposed conditions on the local economy. According to Chossudovsky, many of these conditions are hardly appropriate to local conditions, have no local base of support, certainly not among the poor or middle classes, and serve more to impoverish the country and create cheap labor for export of wealth to the developed countries than to extract the country from its situation.

In one of its few failings of insight, the book does not complete its critique of the international lending mechanism. It is not the claim that legitimate debt should be repaid, which is at the core of this critique, but the legitimacy and soundness of the debt itself. Unlike mortgage debt or business debt, created by two parties privy to risk and gain with limited liability as a fence around the transaction, with Bank and Fund debt there is no collateral, no structured investment, and a sovereign guarantee of repayment. Such conditions all too often imply that international institutions will insist upon loan repayment by the mass of working poor.

As Chossudovsky’s very informed country case studies show, the Bank and Fund are not dupes to local elites but willing partners in this exchange. The exchange of non-performing loans for structural adjustment loans with their ensuing policy conditionality allows the International Financial Institutions (IFIs), through the mechanism of sovereign guarantee commitments, to extend the system’s dominion and consequently their own power through the structures of finance. A country that doesn’t repay a Bank or Fund loan, even for a totally bankrupt project, will be excluded from future international loans and trade. Here Chossudovsky’s examples, especially what happened to Peru in the late 1980s as a result of President Garcia’s policy of limiting debt repayments to what could be afforded, are particularly illustrative. IFI loans are the only types of loans for which such draconian practices prevail. For ordinary commercial bank loans, collateral is split at the end of the day, once a borrower is unable to repay. Under the “poor pay all” system of international lending, economic impoverishment, child labor and human suffering are, unfortunately, only too likely outcomes. There are many positive aspects to the structural adjustment programs as well, especially those providing enhanced economic freedoms, and these are among the aspects of the programs its defenders would stress. Unfortunately, by the time these are put in place it is very much too late for many to have very significant effects.

Where the average reader may have the most difficulty with the book’s thesis is in following the arguments to their implicit conclusion of willful intent. Michel Chossudovsky is Professor of Economics at the University of Ottawa. As many economists he seems to believe that individual and institutional acts can be treated as rational constructs with a particular purpose in mind. Alas, in dealing with the Bank and the Fund and their staffs the purpose he attributes to them as final arbiter of an international system of wealth, class and the transmission of political power is little understood generally and most significantly, little understood by those who are its primary agents. How does the system defend its actors from its own logic? Here we might be of some help.

The staffs of the IFIs are hardly the villains who deliberately promote child labor, wreak havoc with the fragile economies of Rwanda, India and Bangladesh, devalue currencies and force the repeal of minimum wage laws, as one might conclude from Chossudovsky’s analysis. The staffs of these institutions are for the most part hopelessly middle-class creatures who by dint of being somewhat overpaid have become zealous defenders of a system which they understand only in part. A system which goes in large measure to assure the wealth, power and its counterpart poverty, from which they profit, but of which they are also, to a lesser extent, the victims. Staffs and defenders of the IFIs would point to the good intentions of the programs, sound technical foundations, the moral soundness of debt repayment and that local corruption and mismanagement are not the fault of the Bank and the Fund. All this may be true at the same time that the IFIs have played an important role in the repartitioning of wealth between the industrialized and underdeveloped world.

Quite recently, the G-7 has pledged to forgive a portion of multilateral debt whose repayment has become increasingly onerous, as well as unlikely. While it remains to be seen whether our Congress will vote the funds to implement this accommodation, at a time when the system remains overwhelmingly intact, The Globalization of Poverty is a good reminder of where it has taken us.

Leo Vox is the pen-name for an economist from the United States Agency for International Development.

The following excerpt is from: The Globalization of Poverty; Ch. 6, pp. 125-35:

“India: The IMF’s “Indirect Rule”

World Bank structural adjustment loans and IMF loans were signed shortly after the assassination of Rajiv Gandhi in November, 1991. Earmarked for repayment of six months of debt servicing of India’s external debt totaling $80 billion, the loans helped stem a crisis of confidence on the part of international lenders. Policy conditionality on which the loans were predicated, while held tightly as a “state secret”, is reported to have been wide sweeping in its scope. Ensuing measures to address balance of payments difficulties, reduce the fiscal deficit and relieve inflationary pressures may have had just the opposite effect. The economy suffered from “stagflation”, the price of rice increasing by more than 50 percent in the months following the 1991 measures and the balance-of-payments continued to deteriorate as rising import costs were not able to be offset by a decline in imports of essential commodities or an increase in exports. The negative effects of the program on internal demand pushed a large number of firms into bankruptcy. The program resulted in dismissal of roughly one-fifth of the public sector work force with only a very modest “safety net”. More “liberal” labor legislation may have marginalized further lower wage employees and landless farm workers as wages for these groups came under pressure while consumer prices rose.

While in recent years India has returned to economic growth in the neighborhood of 5 percent per annum, the program may well have contributed to a two-tier economy of increasing poverty for some and growing opportunity for others.”

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