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The Economy of the Plundered South

The panacea of export orientation that the International Monetary Fund and the World Bank promoted in the last 25 years for the South has led to absolute disaster. There is certainly an alternative. First of all, the export ori-entation must be abandoned & domestic demand strengthened.

The Failure of the Development Prescriptions of the West

A Conversation with Yash Tandon

[This conversation published in GLOBAL TOTAL is translated from the German on the Attac website, Sand im Getriebe Nr. 38,  http://www.attac.de.]

Yash Tandon, an economist from Uganda, brought Africa's often marginalized perspective on globalization to the ESF (European Social Forum). Under the watchword "We don't need Fair Trade - We need Justice", he grappled with the fatal consequences of western development strategies.

Mr. Tandon, US president Truman proclaimed the beginning of the "Age of Development". The unequal distribution of wealth as one of the causes of war should be finally removed. Today more than a half century later, the situation of developing countries is more desperate than ever. The distance between the center and the periphery has not decreased but has become greater. The South is three times poorer than 30 years ago. What are the reasons for the failure of this development policy inspired by the West?

The western capitalist system was never really focused on advancing the South. In the pre-capitalist era, the South represented only an area of exploitation and oppression. The slave trade reinforced this system. History shows that the South was always only the instrument of the North in advancing its own economic development. If there were occasional advances in the South, they were mostly the result of resistance against this policy of the North. Therefore it is not surprising that the basic model of North-South relations is still the same after the phase of de-colonialization. Economic inequality continues to grow. The accumulation of power and wealth on one side and poverty on the other lies in the nature of the capitalist system.

One of the standard prescriptions of the West for development is foreign direct investment. Why hasn't this accomplished what it promised?

The term "foreign" direct investment means that national resources are taken over by foreign investors. Consider the example of Zimbabwe or Zambia. In the last 10 or 15 years, state enterprises like mining and public services were massively privatized and sold to multinational corporations. These corporations are obviously interested in their own profits, not in the development of their host countries. When the profitability does not correspond to their expectations, they pack up and go to countries where they expect better returns. The host countries for this kind of investment are in a position of weakness. The instrument of private direct investment emerged historically at the moment when credits and state development aid were less available and the debt crisis had caused great problems in the South. Recourse to private capital appeared as a welcome alternative since countries could hardly afford credits. Private investors would choose corporations that could work profitably for themselves and for the host countries. However these expectations were not fulfilled. Direct investments have worsened the situation of the South because they nearly always involve package solutions. Transnational corporations bring their money, their technologies, their consulting firms and their patents, a whole conglomerate of instruments and products aiming at the value creation of a joint venture outside the host country. This intensifies problems connected with the debt crisis today. Direct investments praised as a panacea are only a more modern instrument for expropriating our resources.

While these development strategies have failed in the task of making prosperity possible everywhere for as many people as possible, several countries are regarded as positive exceptions. Ghana, Chile, Mexico and the Asian tigers are named again and again as examples of a relatively successful development. What is the development policy in these individual success stories?

In Ghana, the structural adjustment programs of the International Monetary Fund and the World Bank were carried out. A positive investment climate for foreign investors was created. However the living conditions of people have clearly deteriorated. The macro-economic statistics, for instance the gross domestic product, do not really reflect the quality of life in a national economy. Rather they veil the real conditions under which the majority of people must live and work. This is also true for Mexico. There can be no talk of a success story in Mexico. Millions flee over the border to the US because of the mass unemployment. The process of de-industrialization is far advanced. Agriculture is also affected now. More and more jobs are lost in agricultural production. Foreign investments displace the remaining native workers in the low-wage sector. Better paying jobs are moved to the US.

In east Asia, things are different. In the time of the Cold War, it was politically important for the United States to support the economy of the so-called four Asian tigers. In South Korea, Hong Kong, Taiwan and Singapore, an economic counter-model to the People's Republic of China arose that allowed these countries to develop a certain military strength. These are special cases dependent on the ideological conflict with communism that can hardly be repeated.

Malaysia is also stylized as a success story. The irony is that only 7% of investments come from foreign countries; 93% is made up of capital saved at home. The development in the People's Republic of China is also registered as a success because China attracts foreign capital. Still 99% of all investments in China comes from the domestic capital market.

Thus western economic experts spread a false doctrine lacking any scientific basis. All the statistical figures show very clearly that success depends on capital accumulation in the national economies themselves, not on the influx of foreign capital. In Africa, there is practically no indigenous savings because these countries must service their enormous foreign debts. The lack of an appreciable domestic capital market is the real reason for the continuing underdevelopment in Africa.
In this connection, how do you interpret the Asian crisis? Was it a symptom of an unsustainable development on shaky foundations?

The crisis began in Thailand in August 1997 after nearly a decade marked by the massive influx of foreign capital. Speculative capital was mostly bound only for a short term to the Thai capital market. The local banks extended long-term agreements to domestic industry. When the Thai currency lost half its value through currency speculation, this capital was hurriedly called back by US pension funds. The Thai banking system was thrown into a crisis since it could not call back its own credits in the short-term. In this example, one can see very well how the nervousness of international capital contributes directly to the instability of national economies in the South. Some would distinguish between speculative capital and real direct investments for production. But this distinction does not exist! In the negotiations of the World Trade Organization in Geneva in 2003, the US with the liberalization of capital markets insisted on not distinguishing between speculative capital and genuine investments in industrial production. This distinction does not exist. The nervousness of foreign capital is another reason why foreign investments are not a suitable means for creating development in our countries.

In the nineties, there were massive shifts of jobs from the North to the South. In the South, the hope arose that the unhappiness of the North could bring about the happiness of the South. Can you explain why this hope was not fulfilled?

The crisis of the North had an economic aspect and a political aspect. Economically, there were declining profits. The statistics. particularly from 1995 and 1996, show that a large number of businesses accepted declining profits. In the North, this was compensated to a certain extent by business mergers, acquisitions of new technologies, cost reductions and flexibilization of the labor market. However opening up new markets in the South was by far the most important instrument for solving the problems of falling profit margins. Thus helping to solve our problems was not really central to the North. The political pressure to liberalize the markets in the South was completely selfish. The North wanted to sell its goods and services and create the most profitable investment possibilities for its capital. On the political plane, this crisis led to a considerable increase of power for the United States and strengthened its hegemonial position. The Anglo-American empire rose at that time to a domineering position enabling it to enforce its will in the South today. Obviously Europe also has imperial ambitions in Africa. However Europe cannot equal the political and military strength of the US. The crisis of the North not only did not help us; the crisis aggravates our problems. We have become politically weaker. At the same time, our national economies are misused again to solve the economic problems of industrial countries.

What happened to the jobs transferred from the North to the South? Have they contributed in any way to development?

A completely false picture is drawn concerning the often cited transfer of jobs from the North to the South. A transfer obviously occurred for individual branches. Jobs in data processing were moved from the North to India. However when a total balance is drawn, the liberalization of the markets in the South led to a massive de-industrialization with extreme unemployment. The agreement signed in Cotonou between the European Union and the AKP states that should have helped combat poverty in Africa and the Caribbean had the opposite effect. The free trade zone between Europe and Africa gave an access to the South African market to European grain- and candy industries that they never had. In the candy industry, Europeans in two short years increased their market share to 17%. This created jobs in Europe while massive unemployment was the result in South Africa. In a similar way, European meat products subsidized by the European Union pressed on the South African market. This imported meat creates unemployment in Namibia and Botswana since cattle breeding is in crisis there. Thus the migration of labor from North to South is described very incorrectly by the media in industrialized countries. In reality the opposite happens.

Isn't this a temporary phenomenon, an interim phase as many western economists claim, that could lead to a more sustainable development in the South?

The South is far removed from the possibility of accumulating capital. On the contrary, the South is plundered. Argentina, for example, was one of the richest countries of the South. In the meantime Argentina liberalized both its trade and its capital market. The whole industrial production and the service sector were taken over by US corporations. When the banking crisis intensified, it was suddenly clear that the whole production sector had long been transferred abroad. The profits in reality flowed into the treasuries of US firms with a few businesses that remained in the country. For 40 or 50 years, the economic experts in the North refused to recognize this connection. They never really understood what was happening in the South. Public opinion was also grossly deceived by these economists.

Would an approach oriented in Keynesianism and not directed at strengthening demand on the domestic market be more helpful in the economic realities of the South?

I differ from some of my friends in the South who understand themselves as neo-Keynesians. The Keynesian theory trusts the framework of an economic system dominated by the North. Keynes mainly tried to save the British Empire. There are certainly positive aspects. Everything is not left to the market. The state bears a certain responsibility for the economic well-being of people and therefore should actively support production when the private sector is too weak. However the Keynesian economic theory must fail in the task of development in the South. Our situation is marked by the boundless rule of the North. Our national economies, especially in Africa, have long been almost completely integrated in the world economic system. Do economic possibilities still exist for the governments of South Africa, Zimbabwe or Senegal against the dominant role of international capital? Does a Keynesian strategy have any meaning in Senegal? No, this approach has no meaning! We need a very different strategy, a strategy of severance from the West

Wouldn't higher wages in these countries produce a strengthened demand, in other words a kind of development?

Only multinational corporations can pay higher wages in our national economies. The domestic businesses would immediately lose their competitiveness. Their existence on the world market has long depended entirely on the low-wage level in the countries of the South. Only a special case like communist China can use the cheap workers to be successful on the world market and create a base for its own capital accumulation. For most other countries, an increase of the wage-level would mean the loss of market shares. Therefore the only alternative is the creation of our own regional market. The first step is avoiding the transfer of our resources. When these resources are used for the domestic market and not for export, they can increase domestic purchasing power. To that end, we have to develop a whole bundle of alternative economic strategies.

There is actually an enormous capital flow from the South to the North. Compared to that, so-called development aid is like a trickle. What are the causes for this capital loss in the periphery?

Most of this capital flows from the South to the North in the form of profits. Acceptable legitimate profits represent one part of this flow. However the power differential between North and South leads to excessive profits that are shocking. In Africa for example, the average profit of US corporations is between 30 and 40% compared with only 10% in their own land. Thus the conditions under which foreign firms operate in our countries and the return of excessive profits to the North is the first cause for the capital flow from South to North. Debt payments are the second cause. Africa alone must pay $400 billion in debts. The exchange relations in foreign trade are the third cause. The conditions on which we offer our goods on the world market constantly deteriorated in the past. We have lost more than the whole current development aid. Then the corruption in our administration plays a role and the transfer of illicit funds from the South to the North. However this is almost negligible compared to the first three causes that resulted in the considerable loss of financial resources endured by our countries.

What is the role of the profit transfers of transnational corporations?

That is the fourth main cause of the transfer of financial resources from the South to the North. The price structure of foreign businesses is not subject to any controls. Building materials or technologies for manufacturing are brought into developing countries at exorbitant prices. In this way, the net export profits of the South turn out very trifling. The value creation chain is almost completely in the hands of multinational corporations or their agents. They use these processes to plunder the South without any outward control or surveillance.

Would you say that the dominant export orientation of all these local economies in the global economic system is the main reason for the problems in the South?

The panacea of export orientation that the International Monetary Fund and the World Bank have promoted in the last 25 years for the South has led to absolute disaster. The resources were consumed only to compete for the hard-fought export markets without regard for the needs of people in the South. This began in the colonial age when colonial masters forced our farmers to grow exportable agricultural problems that were inedible like tobacco and cotton. Many countries in the South sought independence by developing industries to become independent of imports. Although there were problems in some regions, this was a relatively positive period for development. Brazil and India initiated a certain development at that time. However this policy of import substitution was suddenly and vigorously criticized by western economic experts in the eighties and nineties. The UNCTAD General Secretary Raoul Prebisch who supported this development strategy at that time was caught in the political pressure. Now everything should be sacrificed to competitiveness on the export markets. The final result was that developing countries compete with one another. On the world markets for sugar, tobacco and cotton, this export orientation has led to an oversupply and as a result the fall of prices. The South must pay the bill. The focus on exports had really fatal consequences for us.

Since you say western economists present a certain version of things oriented in the interests of developed countries, isn't it time for the South to establish its own economic school and develop its own economic capacities?

In the South there were always economists who questioned the dominant economic theory of the West. In the seventies when I taught at the University of Daressalam, we systematically criticized economic theories. This was done with much more vigor than the former economist of the World Bank Joseph Stiglitz who now admits that the development prescriptions of the Bretton Woods institutions were misguided. We predicted this a quarter of a century ago. The "School of the Undeveloped" to which the former Brazilian president Fernando Henrique Cardosa once belonged, pointed to the close connection between political and economic power. However the economic discipline is dominated by the West.

The universities in industrial countries still have a monopoly on the legitimation of scientific knowledge. The academies of the West determine the scientific canon even in our countries, especially in Africa. For three decades, we tried in vain to argue against this. We were branded an outsider group and could hardly publish our research. Today we are first being heard. The economic dogma of the West has completely failed. The neoliberal dogma belongs to the past. The neoclassical economic theory has broken down. Our minority opinion is now gaining greater attention internationally. We can finally build our own institutions. Perhaps UNCTAD has lost sight of its original goal. Nevertheless we challenge UNCTAD. If it cannot accept its task, we will assume this role as civil society. We offer alternative strategies to our governments and oppose the hegemony of one-dimensional economic thinking in the WTO process, the IMF and the World Bank.

Let me end this conversation with a question about the new conceptions of development that will be pursued by the civil society of the South and were presented at the WSF (World Social Forum) meetings in Porte Alegre and Bombay. Can you give examples for this new development policy? Should it be described with the term "protectionism"?

There is certainly an alternative. First of all, the export orientation must be abandoned and the domestic demand strengthened. The South must simply copy what the North demonstrated in its own economic history. A domestic market was first built in Europe, Japan and everywhere. The industrialization of the German economy was the very first priority when Bismarck came to power in Germany. When England complained about German protectionism and demanded an opening of the market, the unanimous opinion of German economists was that competition with the Brits would be impossible without protection for the new German industry. Therefore the German Reich pursued a strict protectionist policy between 1860 and 1914. Protectionism is an ideologically incriminated term today since it contains a development concept centered on the domestic market, an inadmissible restriction. Why should the recipe for success in the North be denied the South?

The second rule is that development may not be reduced to foreign direct investments. We can negotiate with foreign countries on certain technologies but not on technologies for which patent fees beyond the purchase price must be paid. We must always fall back on domestic capital. Therefore we must fill all the holes that lead to a capital transfer from South to North: debts, transfer costs and unfair foreign trade conditions.

Thirdly, we must resist regional free trade zones forced on us by the West. The "Cotonou agreement" is a disaster that has divided us. For example, "Cotonou" isolates South Africa from the rest of the African continent. The other countries attempt to conclude bilateral agreements with the European Union. The US tries to enforce the separation with the "African Growth and Opportunity Act". Zimbabwe is excluded because its regime does not suit the US and the land reform is criticized. Zimbabwe is punished with sanctions. We cannot allow a schism. We must advance our own regional integration projects and create independent regional institutions that also enjoin observance of human rights. Our governments will try to block this. However the civil society must exert pressure in this direction. Against the scourge of dictatorships, we must develop and implement our own standards of democracy and human rights. This cannot work if forced on us by the West. The African countries must accomplish this themselves. These are the four strategies that I propose and are genuine alternatives on which we can build.

Note: AKP states - an acronym for Africa, Caribbean and the Pacific. The term "AKP states" describes 71 countries in this region - mostly former colonies of France and Great Britain. The EU concluded the Lomo agreement with these states. The first agreement was signed in 1975 in Lomo, Togo and later renewed. The EU countries take into account their colonial past. The agreement is based on a system of tariff preferences that make easier access to the EU market. Resources are made available to stabilize the prices of the export goods of these countries.

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