(c) Copyright 1998: Graham Strachan
In the same way that economic rationalism in the domestic marketplace forces small/medium sized locally owned businesses and investors to compete with global big business and finance on the same terms, so in the global context under the guise of ‘free trade’ it compels small, economically weaker nations, to compete with the rich and powerful. The result is predictable: a net siphoning-off of wealth and power from the weaker to the stronger [see Paul Vallely ‘Bad Samaritans’ (1990)].
As Vallely says, at p.92: “In theory....the free market system should work to the benefit of all; in practice, when the system is imposed from a starting point where all nations are unequal, what free trade and market forces do is to magnify those inequalities.”
According to the free market theory of international trade as originally developed by David Ricardo, no country should produce to satisfy its own requirements. It should concentrate on producing those things it can produce more cheaply than any other country, products with respect to which it has a “comparative advantage” over other nations. It should export those things and use the export earnings to import its other requirements, which in turn have been produced by other nations pursuing their own comparative advantage.
To facilitate the system, trade between the various nations should be free from tariffs and other barriers, but again the reason for this has been obscured. It was not to make life easier for global investors, it was so that production and prices could respond freely to market signals and forces. Trade needed to be unobstructed so the price system could function.
When the theory was originally proposed in 1776, nothing like today’s world order existed. Even the great colonial empires of the late 19th century lay well in the future. The theory was conditional upon a very important requirement. Paul Ormerod, in ‘The Death of Economics’ (1994) puts it this way at p.17: “Ricardo was careful to point out that his theory was dependent upon the assumption that funds available to invest in industry (‘capital’ for short) did not flow freely from one country to another....In contrast, at the end of the twentieth century, capital is for the most part highly mobile.”
In fact capital can and does flash around the globe in milliseconds, which should render ‘free trade’ theory inapplicable. Applied out of context however, free trade theory again becomes a false theory which furthers the interests of those who control the capital. The plight of the Third World provides an example of what happens then.
Third World countries exercising their ‘comparative advantage’ produced ‘cash crops’ for export. These had to be sold on the world commodities markets where their price was determined not by supply and demand as the theory said, but by the activities of speculators who produce nothing, but trade in commodities futures. A mere 5% of deals actually involve the delivery of goods. Says Vallely, at p.107: “Speculation on this scale perverts free market trends which....are already biased against the poor commodity producers.”
Over time the Third World became dependent upon imports which continued to rise in price, while it had to pay for them with exports which were continually going down in price. Economists call this “deteriorating terms of trade”. If the Third World commodity producers tried to produce more to pay for imports from the industrialised nations, they tended to drive down the prices of their own goods through market oversupply.
In fact a serious question exists as to whether market forces are the appropriate basis for the planning of agricultural production anyway. The problem was identified by Geoffrey Lawrence in ‘Economic Rationalism in the Countryside’ (1987) (see my book) and echoed by Vallely at p.107: “[Coffee] bushes cannot....be dug up and replanted to fit in with the monthly or even annual vagaries of the international commodity market.”
Progressively the Third World sank further into debt. Then the international debt collectors in the form of the International Monetary Fund (IMF) moved in, imposing economic rationalism in the form of Structural Adjustment Programmes (SAPs). SAPs involved reduced government spending and services; lower taxes on high income earners (the local elites); privatisation of state-owned industries; increasing agricultural exports; lower tariffs on imports [see D. Smith in The New Internationalist August 1993, p.12]. If the country was not prepared to implement these measures, IMF assistance was to be withheld [observe Indonesia at the moment].
Cutbacks in government spending invariably meant reductions in medical and educational services. Cash crop production was stepped up at the expense of food production. People began dying from starvation and lack of medicine while economic rationalism was concentrating on producing record export earnings with corresponding profits for foreign investors.
“The....structural adjustment programmes, proved a lot more ‘workable’ for the big international banks who got their interest payments than it did for the laid-off public sector workers of Latin America, or for the African families who can no longer send their kids to school because of SAP-related ‘user-fees’. These ordinary people are the ones who had to do the ‘adjusting’” [The New Internationalist, op.cit.,p.6].
IMF and World Bank-supported agribusiness moved in, taking the best land from the peasants, who were thereby deprived of the means of supporting themselves and their families. According to economic rationalism ‘the market’ would create jobs for these people as seasonal agricultural labourers, but mechanisation was progressively eliminating the need for labour. Most of them gravitated towards larger centres where they now squat in shanty towns, unemployed, undernourished, and unhealthy.
Another scheme offered was called “debt for equity”, whereby the Third World country was induced to sign over the rights to its natural resources forever, in return for the cancellation of some of its debt. Goodbye ‘comparative advantage’.
As part of the SAPs’ “privatisation” requirements, Third World nations have been forced by the IMF to sell off state-owned enterprises at bargain-basement prices. In 1990 more than 70 countries had privatisation programmes in place and sold state firms worth $185 billion [The New Internationalist August 1993, pp.18-19]. Anything which might enable debtor countries to trade their way out of debt had to be sold.
Even so, the SAPs did not succeed in reducing the debt. Total Third World debt actually rose from $751 billion in 1981 to $1,355 billion in 1990. In the meantime the forecast “growth” had not materialised, and unemployment had risen. But as the New Internationalist points out, [July 1994 ‘Squeezing the South’] the purpose of structural adjustment is to get the global bankers their money, not to create livlihoods for people.
In the world today phony ‘free market’ theory (economic rationalism) insists that strong nations have a ‘right’ to ‘free trade’. Correspondingly, weak nations are under a duty to allow their territories to be exploited, while their people literally die from starvation. This freedom of the strong to exploit the weak is now to be made official in the forthcoming Multilateral Agreement on Investment (MAI).