PovertyEducation.org
Chapter Six: International Policy Reform
In previous chapters, we have learned that there exists an enormous disparity between Earth's richest and poorest societies. While some nations prosper with abundant food, outstanding health care, high literacy rates and an overall excellent quality of life, many of Earth's poorest people continue to die in the millions simply because they are too poor to feed themselves or treat curable illnesses. Recently, several economies within Asia -including the extremely populous nations of China and India- have begun to grow wealthier at an unprecedented rate; in just 40 years their citizens will be as rich as the residents of prosperous nations such as Canada and the United States. Yet there still exists a large populous of one billion people -mostly in Africa- who are barely progressing at all, whose economic development is severely hindered by a perfect storm of poverty traps which prevent them from getting a large boost in agricultural production or significant amount of foreign investment. They remain unable to obtain sufficient money to make the investments in health, education, infrastructure and technology needed to boost productivity and enter into the Cycle of Prosperity.
In the last chapter, I discussed international aid as a means of giving the world's most impoverished nations the boost in wealth needed to escape the poverty trap and enter the second stage of development; I finally concluded that although aid has several problems, it can still play a major role in promoting economic development (as was the case with Korea, Taiwan, India and several other Asian nations). But there are also other ways in which the rich world can help give the impoverished an extra boost in wealth. In this chapter, we'll explore how globalization affects the poor and examine others means of promoting development in extremely impoverished societies. I'm going to focus on four additional ways in which Western can help break the poverty traps; rich nations can help promote better governance through creating several international charters, promote health by changing international patent legislation to make life-saving drugs more affordable, pardon the perpetual cycle of excessive debt to allow the poor to retain more of their own money, and create currency mechanisms to allow for greater investment in impoverished societies.
In the last chapter, I discussed international aid as a means of giving the world's most impoverished nations the boost in wealth needed to escape the poverty trap and enter the second stage of development; I finally concluded that although aid has several problems, it can still play a major role in promoting economic development (as was the case with Korea, Taiwan, India and several other Asian nations). But there are also other ways in which the rich world can help give the impoverished an extra boost in wealth. In this chapter, we'll explore how globalization affects the poor and examine others means of promoting development in extremely impoverished societies. I'm going to focus on four additional ways in which Western can help break the poverty traps; rich nations can help promote better governance through creating several international charters, promote health by changing international patent legislation to make life-saving drugs more affordable, pardon the perpetual cycle of excessive debt to allow the poor to retain more of their own money, and create currency mechanisms to allow for greater investment in impoverished societies.
Globalization and Economic Development
The term "globalization" is used to describe the general integration of the various economies of the world. Specifically, it deals with greater trade, foreign investment, immigration and spread of technology and culture among sovereign nations. In terms of trade, globalizing one's economy involves significantly decreasing one's tariff barriers (taxes on imports) in order to "open up" your country to a flow of imports and exports. When every country does this, multinational companies from around the world can begin selling to a wider market. As corporations the begin competing with each other more diligently, the increase in competition will cause the companies to become more efficient and learn to produce goods at a cheaper cost. In addition, a larger market means that each company can "specialize" and cater to the needs of niche markets, further increasing global productivity. The basic idea behind globalization is that each country has a special "talent" or "comparative advantage"; low income countries such as Bangladesh are best at producing cheap goods such as clothes and sneakers because they have such a large unskilled labor force; countries such as India are best at manufacturing computers and software since their Technology Institutes gave them a large population of workers familiar with computer technology; a nation like Singapore is best at refining petrochemicals since it is conveniently located on a major trade route; and so on. When the market is given the freedom to discover each country's special talents, then everyone begins doing what they are best at and a more efficient global economy is created.
In recent years, globalization has become a hotly contested political issue in the rich Western world, with large-scale protests and intense debate centering around issues such as the transfer of jobs overseas, the health issues associated with products from foreign companies (such as the toy produced in China which have been found to contain large amounts of poisonous lead) and concerns over the exploitation of impoverished "sweatshop" workers from poor countries such as Haiti and Nigeria. Citizens of both rich and poor regions of the planet often argue that globalization is a huge burden to their economy; residents of the rich Western world generally view globalization as a negative force which is sucking the jobs out of rich world nations and transferring them to poorer countries, while the residents of poorer nations complain that they are being exploited and overwhelmed by intense corporate competition from rich Western industry.
So is globalization inherently good or bad for the impoverished developing world? Some activists have looked at the exploitation of cheap third world labor and proclaimed that globalization is inherently evil; for example, I recently heard one protester mention that globalization was "essentially the rich world swindling the poor". These misinformed activists seem to think that global integration is something which harms the poor, but as we have seen, components of globalization such as greater foreign direct investment play key roles in the progression of impoverished economies by giving them the money to invest in better health, education, infrastructure and rich world technology which can boost their productivity and catapult them into the second stage of economic development. The debate now is no longer pro- and anti-globalization. Economists have realized the enormous benefits of a globally integrated economy; almost half of humanity -including extremely populous nations such as China and India- is now growing at unprecedented rates thanks to the opportunities which globalization has created. The debate now centers on how to best manage the global economy; how to adjust the rules and fix central problems in order to promote the economic development of Earth's poorest regions. Through understanding which rules benefit the poor and which seriously hurt them, we can help the world's impoverished countries share in the fruits of global economic integration and begin the climb up the ladder of development.
In recent years, globalization has become a hotly contested political issue in the rich Western world, with large-scale protests and intense debate centering around issues such as the transfer of jobs overseas, the health issues associated with products from foreign companies (such as the toy produced in China which have been found to contain large amounts of poisonous lead) and concerns over the exploitation of impoverished "sweatshop" workers from poor countries such as Haiti and Nigeria. Citizens of both rich and poor regions of the planet often argue that globalization is a huge burden to their economy; residents of the rich Western world generally view globalization as a negative force which is sucking the jobs out of rich world nations and transferring them to poorer countries, while the residents of poorer nations complain that they are being exploited and overwhelmed by intense corporate competition from rich Western industry.
So is globalization inherently good or bad for the impoverished developing world? Some activists have looked at the exploitation of cheap third world labor and proclaimed that globalization is inherently evil; for example, I recently heard one protester mention that globalization was "essentially the rich world swindling the poor". These misinformed activists seem to think that global integration is something which harms the poor, but as we have seen, components of globalization such as greater foreign direct investment play key roles in the progression of impoverished economies by giving them the money to invest in better health, education, infrastructure and rich world technology which can boost their productivity and catapult them into the second stage of economic development. The debate now is no longer pro- and anti-globalization. Economists have realized the enormous benefits of a globally integrated economy; almost half of humanity -including extremely populous nations such as China and India- is now growing at unprecedented rates thanks to the opportunities which globalization has created. The debate now centers on how to best manage the global economy; how to adjust the rules and fix central problems in order to promote the economic development of Earth's poorest regions. Through understanding which rules benefit the poor and which seriously hurt them, we can help the world's impoverished countries share in the fruits of global economic integration and begin the climb up the ladder of development.
Comparative Advantage in the Global Economy
There is a perception in the rich world that when it comes to globalization, poor countries have a huge advantage in attracting foreign investment; Western citizens believe that major companies from the rich world will always want to move overseas because foreign nations have numerous people willing to work for just a few dollars per day. Because of this, citizens of North America often argue that globalization unfairly favors the poor, and (as a means of combating unemployment) that the government should immediately put measures in place to stop impoverished nations from "stealing our jobs".
There are a few things wrong with this train of thought. The first is a false belief that there are a fixed amount of jobs in the world, and thus the rich and the poor countries must be engaged in an epic battle to see who can attract the most employment. In the view of anti-globalization advocates, there is a zero-sum struggle between the West and the third world, in which any gains made by one side must be matched by losses on the other side. But of course, there are not a fixed number of jobs in the world (I emphasize this point because many people struggle with the concept of new jobs being created out of nothing). The transfer of jobs overseas also benefits the rich world too; when companies can make their products for less money, they can sell the products for cheaper prices to Western consumers. Since the Western consumers now have extra money in their pockets, they can spend money on other things; this extra spending tends to create new jobs in Western countries. In chapter two, I used the example of auto manufactures moving overseas: Say my car has just broken down and I have to buy a new engine. Because this engine is made using cheap labor from poor countries overseas, I save $4500. I now have more money in my pocket, so I decide to renovate my house, hiring a construction worker to build a deck. As you can see, the construction worker now has a job which would not have existed if I had not saved the money; the overseas transfer of the engine-building company has thus created a new job in Canada. This new job has sprung up not because someone else has lost their job, a but simply because the overseas job transfer has created a more efficient system in which engines can be created for cheaper cost; the Canadian job is replaced, the auto manufacturer gets a larger profit, and the foreign worker now has the option of working at a car parts factory instead of on his farm in the blistering heat. Thus overseas job transfer is not a zero-sum struggle pitting one nation against the other; globalization can benefit everyone.
There are a few things wrong with this train of thought. The first is a false belief that there are a fixed amount of jobs in the world, and thus the rich and the poor countries must be engaged in an epic battle to see who can attract the most employment. In the view of anti-globalization advocates, there is a zero-sum struggle between the West and the third world, in which any gains made by one side must be matched by losses on the other side. But of course, there are not a fixed number of jobs in the world (I emphasize this point because many people struggle with the concept of new jobs being created out of nothing). The transfer of jobs overseas also benefits the rich world too; when companies can make their products for less money, they can sell the products for cheaper prices to Western consumers. Since the Western consumers now have extra money in their pockets, they can spend money on other things; this extra spending tends to create new jobs in Western countries. In chapter two, I used the example of auto manufactures moving overseas: Say my car has just broken down and I have to buy a new engine. Because this engine is made using cheap labor from poor countries overseas, I save $4500. I now have more money in my pocket, so I decide to renovate my house, hiring a construction worker to build a deck. As you can see, the construction worker now has a job which would not have existed if I had not saved the money; the overseas transfer of the engine-building company has thus created a new job in Canada. This new job has sprung up not because someone else has lost their job, a but simply because the overseas job transfer has created a more efficient system in which engines can be created for cheaper cost; the Canadian job is replaced, the auto manufacturer gets a larger profit, and the foreign worker now has the option of working at a car parts factory instead of on his farm in the blistering heat. Thus overseas job transfer is not a zero-sum struggle pitting one nation against the other; globalization can benefit everyone.
International Patent Legislation
As we have so far seen, many elements of globalization can greatly improve economic development; when corporations from rich world economies are allowed to invest in cheap labor from the third world, they often build large factories in impoverished countries. These factories benefit the poor nation through hiring large amounts of workers and giving the government tax revenue; this new wealth can be invested in greater health, education, infrastructure and technology, allowing the poor nation to enter into the Cycle of Prosperity. The transfer of jobs overseas also benefits the rich world, since Western consumers can now buy products at a cheaper cost and will therefore be able to save money and create a greater demand for domestic products (thus creating new domestic jobs to replace the old ones transferred overseas).
Given the sizable benefits of globalization, impoverished nations throughout Africa, Asia and South America are understandably eager to make free trade agreements with rich world economies like the United States; agreements in which both parties consent to lower their tariff barriers, promoting greater import and export between the two nations. Small businesses in impoverished regions -say for example, a Bangladeshi family making luxurious rugs- want to gain access to the vast ocean of wealthy consumers in Western nations. Doing so would broaden their consumer market (increase the number of people who they are allowed to sell to), thus increasing demand for their product (in this case crafted rugs) and allowing them to sell it for a higher price.
Yet when impoverished nations sign onto these free trade agreements, they are often forced to adhere to standards which are detrimental to their health and well-being. Case in point: the impoverished countries must recognize and abide by international patent legislation.
Within countries such as the United States and Canada, there exists a legislative system concerned with "intellectual property rights"; when somebody invents something new, such as the light bulb or the VCR, the inventor is allowed to file a "patent" which gives him or her a temporary monopoly on the selling rights to their product for the next 20 years. This is true of inventions like microwave ovens which are useful household appliances, but it is also true of life-saving drugs which are able to cure serious diseases. A twenty year monopoly on the selling rights to a new medicine able to cure illnesses such as cancer would be a very valuable commodity worth tens of billions of dollars, since everyone with cancer would have to buy the drug from you (the monopoly holding inventor) at whatever price you wish. Understandably, such as system makes it very expensive for sick patients to get better; the price of such patented drugs is often more than ten thousand dollars. So why is this system in place? Well, to try and gain such vast wealth, entire companies have been created in order to conduct experiments and attempt to find cures for serious diseases like cancer. Defenders of intellectual property rights argue that without the awarding of patents, private researching firms would have no motivation to spend money experimenting, and the cures for many diseases would never have been discovered in the first place.
Traditionally, the rich world has been the great inventor of modern medicines, including cures and treatments for diseases like Cancer, AIDS, Diabetes (with insulin being the invention of the great Canadian medical scientist Frederick Banting), Polio, Small Pox, Malaria, and much more. Some of the research needed to create such drugs was funded by the private sector, but most was funded through government financing in public laboratories (this was certainly an excellent investment, since the cures and treatments for such diseases must have done wonders to improve productivity). For those diseases which were cured through private sector research, Western citizens had to pay a high price to use the drugs (since drugs created by private companies are very expensive due to patent legislation). Yet in most foreign countries, governments simply chose to not recognize the intellectual property legislation of the rich world; they used the drugs without paying the monopoly holder. The actual ingredients to make the life saving drugs are actually quite inexpensive (perhaps fifty cents per dose), so these nations got away with spending almost nothing to cure horrific diseases.
Bothered by this refusal to acknowledge patent legislation, rich world nations such as the United States, Japan and the countries of the European Union introduced the Agreement on Trade-Related Aspects of Intellectual Property Rights (or TRIPs for short). This 1994 agreement was a form of international legislation, enforced by the World Trade Organization, which essentially forced developing economies to recognize Western standards of intellectual property rights. Among a variety of standards put forth, the legislation included international laws which enforced patent rights on a variety of cures for serious illnesses.
Impoverished nations were very disgruntled; TRIPs legislation meant that they would now be forced to pay high fees for patented medical drugs, or else be cut off from international aid flows and free trade agreements. This legislation was unbearable for some of Earth's poorest nations; since these countries could no longer produce generic drugs, their citizens were forced to pay extraordinarily high prices for medical cures to treat illnesses such as HIV/AIDS. This price increase put these drugs out of reach for many of the most impoverished people, causing them to die of perfectly treatable illness. Thankfully, with the 2001 Doha Agreement, TRIPs legislation was revised; a new provision was added which stated that TRIPs should not prevent states from dealing with public health crises. By 2004, the United States (under its PEPFAR program) began personally distributing generic drugs to Africans dying of AIDS, arguing that generic drugs can be a component in stopping the spread of AIDS throughout Africa (to date, this AIDS prevention program has saved the lives of more than one million people).
Yet I would argue that the revised legislation did not go far enough in freeing impoverished nations from the burden of expensive drugs. One of the simplest ways for Western countries to help the developing countries is to not force them to recognize international patent legislation as a condition for receiving aid or taking part in free trade; in other words, extremely impoverished nations would not recognize any patents created in the West, allowing them to purchase only generic products from foreign countries (the impoverished country would continue to enforce its own domestic patent legislation, just not patents from foreign countries in the West). Even when patents don't prevent Africans from receiving drugs altogether, these international patent laws significantly drive up the cost of medicine, forcing already impoverished governments to waste money on drugs which are artificially expensive; with their limited budgets, the cost of medicine matters enormously, since a dollar spent on these drugs is a dollar not spent on investments in better education, infrastructure and technology which can help developing nations escape from their poverty traps. This reform would cost the rich world almost nothing while greatly improving the life quality of poorer nations.
Given the sizable benefits of globalization, impoverished nations throughout Africa, Asia and South America are understandably eager to make free trade agreements with rich world economies like the United States; agreements in which both parties consent to lower their tariff barriers, promoting greater import and export between the two nations. Small businesses in impoverished regions -say for example, a Bangladeshi family making luxurious rugs- want to gain access to the vast ocean of wealthy consumers in Western nations. Doing so would broaden their consumer market (increase the number of people who they are allowed to sell to), thus increasing demand for their product (in this case crafted rugs) and allowing them to sell it for a higher price.
Yet when impoverished nations sign onto these free trade agreements, they are often forced to adhere to standards which are detrimental to their health and well-being. Case in point: the impoverished countries must recognize and abide by international patent legislation.
Within countries such as the United States and Canada, there exists a legislative system concerned with "intellectual property rights"; when somebody invents something new, such as the light bulb or the VCR, the inventor is allowed to file a "patent" which gives him or her a temporary monopoly on the selling rights to their product for the next 20 years. This is true of inventions like microwave ovens which are useful household appliances, but it is also true of life-saving drugs which are able to cure serious diseases. A twenty year monopoly on the selling rights to a new medicine able to cure illnesses such as cancer would be a very valuable commodity worth tens of billions of dollars, since everyone with cancer would have to buy the drug from you (the monopoly holding inventor) at whatever price you wish. Understandably, such as system makes it very expensive for sick patients to get better; the price of such patented drugs is often more than ten thousand dollars. So why is this system in place? Well, to try and gain such vast wealth, entire companies have been created in order to conduct experiments and attempt to find cures for serious diseases like cancer. Defenders of intellectual property rights argue that without the awarding of patents, private researching firms would have no motivation to spend money experimenting, and the cures for many diseases would never have been discovered in the first place.
Traditionally, the rich world has been the great inventor of modern medicines, including cures and treatments for diseases like Cancer, AIDS, Diabetes (with insulin being the invention of the great Canadian medical scientist Frederick Banting), Polio, Small Pox, Malaria, and much more. Some of the research needed to create such drugs was funded by the private sector, but most was funded through government financing in public laboratories (this was certainly an excellent investment, since the cures and treatments for such diseases must have done wonders to improve productivity). For those diseases which were cured through private sector research, Western citizens had to pay a high price to use the drugs (since drugs created by private companies are very expensive due to patent legislation). Yet in most foreign countries, governments simply chose to not recognize the intellectual property legislation of the rich world; they used the drugs without paying the monopoly holder. The actual ingredients to make the life saving drugs are actually quite inexpensive (perhaps fifty cents per dose), so these nations got away with spending almost nothing to cure horrific diseases.
Bothered by this refusal to acknowledge patent legislation, rich world nations such as the United States, Japan and the countries of the European Union introduced the Agreement on Trade-Related Aspects of Intellectual Property Rights (or TRIPs for short). This 1994 agreement was a form of international legislation, enforced by the World Trade Organization, which essentially forced developing economies to recognize Western standards of intellectual property rights. Among a variety of standards put forth, the legislation included international laws which enforced patent rights on a variety of cures for serious illnesses.
Impoverished nations were very disgruntled; TRIPs legislation meant that they would now be forced to pay high fees for patented medical drugs, or else be cut off from international aid flows and free trade agreements. This legislation was unbearable for some of Earth's poorest nations; since these countries could no longer produce generic drugs, their citizens were forced to pay extraordinarily high prices for medical cures to treat illnesses such as HIV/AIDS. This price increase put these drugs out of reach for many of the most impoverished people, causing them to die of perfectly treatable illness. Thankfully, with the 2001 Doha Agreement, TRIPs legislation was revised; a new provision was added which stated that TRIPs should not prevent states from dealing with public health crises. By 2004, the United States (under its PEPFAR program) began personally distributing generic drugs to Africans dying of AIDS, arguing that generic drugs can be a component in stopping the spread of AIDS throughout Africa (to date, this AIDS prevention program has saved the lives of more than one million people).
Yet I would argue that the revised legislation did not go far enough in freeing impoverished nations from the burden of expensive drugs. One of the simplest ways for Western countries to help the developing countries is to not force them to recognize international patent legislation as a condition for receiving aid or taking part in free trade; in other words, extremely impoverished nations would not recognize any patents created in the West, allowing them to purchase only generic products from foreign countries (the impoverished country would continue to enforce its own domestic patent legislation, just not patents from foreign countries in the West). Even when patents don't prevent Africans from receiving drugs altogether, these international patent laws significantly drive up the cost of medicine, forcing already impoverished governments to waste money on drugs which are artificially expensive; with their limited budgets, the cost of medicine matters enormously, since a dollar spent on these drugs is a dollar not spent on investments in better education, infrastructure and technology which can help developing nations escape from their poverty traps. This reform would cost the rich world almost nothing while greatly improving the life quality of poorer nations.
Foreign Debt Relief
Impoverished countries often face a huge burden of national debt. In some cases, half or more of their annual government revenue is used to pay off the interest of this debt, taking away from money that could have been used to build hospitals, schools, and vital infrastructure needed to catapult the economy into the second stage of development.
Organizations such as the International Monetary Fund (IMF) and World Bank often encourage developing economies to borrow large amounts of money; they believe that if the impoverished governments need the money to make investments in health, education and infrastructure, they should not be given this money, but rather should borrow it (similar to how a small business borrows money to get its feet off the ground and then repays the bank once it becomes successful). The country manages on its own until disaster strikes; it may suddenly experience a nationwide famine and must spend large amounts of money on emergency food; perhaps the country breaks out into civil war and the government is forced to increase funding to the military in order to protect itself; maybe a dictatorial government (such as Mobutu Sese Seko of Zaire or Saddam Hussein of Iraq) comes into power and wastefully overspends government revenue on corrupt programs; perhaps the natural resource on which the economy was based (say oil) suddenly nose dives in value, dramatically lowering government revenue; there might be a sudden dramatic rise in national debt interest rates (as seen in the 1980s throughout South America). Whatever the case, the debt soon becomes enormous, and the economy is buried under a mountain of unpayable loans. As a result, foreign investors immediately pull their money out of the impoverished economy (a process known as capital flight) which further decreases government revenues and raises unemployment. The debt in now completely unpayable, and the government is forced to "default" (refuse to pay) its loan and refinance it debts in order to avert further economic collapse.
Whenever a country defaults on its debt, it must first undergo "Structural Adjustment" to help repay as much of the loan as possible. The loaners (the IMF and the World Bank) seek to strip the government of most of its spending power through prescribing enormous cutbacks to government spending programs (such as Social Security); they use the money saved to help pay off the national debt. These cutbacks often significantly increase poverty, creating political instability which may lead to massive rebellious revolt (civil war) and momentous uprisings such as coup d'etats. In addition, the IMF rapidly privatizes state assets (such as a state-owned oil company) and uses the money earned through the selling of those assets to once again pay off the debt. As a result, the government is decimated; its valuable assets are now in the hands of private companies, meaning that it will be unable to generate large amounts of revenue in the future to invest in health, education and infrastructure.
Foreign debt should not be a major hindrance to economic development; those impoverished nations which are struggling under the crushing weight of national debt should have the debt canceled by the IMF and pardoned by rich world countries. Allowing debt cancellation would free up the budgets of impoverished governments, allowing them to invest in their own economy instead of continuously wasting money on interest payments. Some have argued that impoverished countries should not receive debt pardons because in the future, their horrendous history of debt repayment will make them uncreditworthy (future banks will not want to give them loans, believing them to be too much of a risk). But in reality, the opposite is true; only once a nation regains its economic footing and achieves political stability can it be seen as creditworthy, and a pardoning of debt can help them achieve that stability.
Back in 2000, an enormous political movement was launched (under the leadership of a non-governmental organization known as Jubilee 2000) which called for the debt cancellation of Earth's most heavily indebted poor countries. The movement brought together many activist groups championing the rights of the poor, as well as political support from several entertainers such as Bono and religious heads such as Pope John Paul II. The movement leaders eventually presented a petition signed by an astounding 22 million people which called for debt reduction or elimination of debt in Earth's poorest countries. It eventually was successful, resulting in the cancellation of debt in the world's 18 poorest nations. The success of this movement stands as a testament to how activism can fundamentally better life in Earth's extremely impoverished regions.
Yet more should be done. Several African leaders, including President Olusegun Obasanjo of Nigeria and Bishop Desmond Tutu of South Africa, have called on rich world nations (especially the United States) to forgive greater amounts of debt, enabling impoverished nations to make critical investments in their economies. I'm going to focus on just one form of debt forgiveness: "Odius Debt", which is debt that a nation acquires under the rule of a malevolent dictator. Nations such as Democratic Republic of Congo (under Mobutu Sese Seko), Iraq (under Saddam Hussein), and Nicaragua (under Anastasio Somoza Debayle) often rack up huge sums of debt when a dictator takes over and spends extravagant amounts of money on either himself or his political friends. The vast majority of this money is not used to benefit the nation's citizens, even though it is those impoverished citizens who end up paying off the debt incurred by military dictators after the tyrant is overthrown.
Many Non-Governmental Organizations, including Jubilee 2000 and odiusdebts.org, have called on the IMF to completely forgive all debts accumulated by governments which were not democratically chosen; those dictators which borrowed money to help their oppressive regime stay in power and left their citizens to fit the bill. They argue that it is not moral to force newly liberated societies to continue to be hindered by the debts of past dictators. Nobel Prize-winning economist Joseph Stiglitz has also pointed out that this simple solution not only solves the problem of the current debt overhang but also will stop future recurrence of Odius Debts; if major banks realize that they will likely not be paid back by dictatorial regimes, then they will be less likely to lend money to them. In fact, "Credit Sanctions" may be much more effective than "Trade Sanctions" in pressuring oppressive governments to treat their citizens fairly. Forgiveness of Odius Debts is therefore an excellent idea and should be adopted by the International Monetary Fund as well as the G8 nations.
Organizations such as the International Monetary Fund (IMF) and World Bank often encourage developing economies to borrow large amounts of money; they believe that if the impoverished governments need the money to make investments in health, education and infrastructure, they should not be given this money, but rather should borrow it (similar to how a small business borrows money to get its feet off the ground and then repays the bank once it becomes successful). The country manages on its own until disaster strikes; it may suddenly experience a nationwide famine and must spend large amounts of money on emergency food; perhaps the country breaks out into civil war and the government is forced to increase funding to the military in order to protect itself; maybe a dictatorial government (such as Mobutu Sese Seko of Zaire or Saddam Hussein of Iraq) comes into power and wastefully overspends government revenue on corrupt programs; perhaps the natural resource on which the economy was based (say oil) suddenly nose dives in value, dramatically lowering government revenue; there might be a sudden dramatic rise in national debt interest rates (as seen in the 1980s throughout South America). Whatever the case, the debt soon becomes enormous, and the economy is buried under a mountain of unpayable loans. As a result, foreign investors immediately pull their money out of the impoverished economy (a process known as capital flight) which further decreases government revenues and raises unemployment. The debt in now completely unpayable, and the government is forced to "default" (refuse to pay) its loan and refinance it debts in order to avert further economic collapse.
Whenever a country defaults on its debt, it must first undergo "Structural Adjustment" to help repay as much of the loan as possible. The loaners (the IMF and the World Bank) seek to strip the government of most of its spending power through prescribing enormous cutbacks to government spending programs (such as Social Security); they use the money saved to help pay off the national debt. These cutbacks often significantly increase poverty, creating political instability which may lead to massive rebellious revolt (civil war) and momentous uprisings such as coup d'etats. In addition, the IMF rapidly privatizes state assets (such as a state-owned oil company) and uses the money earned through the selling of those assets to once again pay off the debt. As a result, the government is decimated; its valuable assets are now in the hands of private companies, meaning that it will be unable to generate large amounts of revenue in the future to invest in health, education and infrastructure.
Foreign debt should not be a major hindrance to economic development; those impoverished nations which are struggling under the crushing weight of national debt should have the debt canceled by the IMF and pardoned by rich world countries. Allowing debt cancellation would free up the budgets of impoverished governments, allowing them to invest in their own economy instead of continuously wasting money on interest payments. Some have argued that impoverished countries should not receive debt pardons because in the future, their horrendous history of debt repayment will make them uncreditworthy (future banks will not want to give them loans, believing them to be too much of a risk). But in reality, the opposite is true; only once a nation regains its economic footing and achieves political stability can it be seen as creditworthy, and a pardoning of debt can help them achieve that stability.
Back in 2000, an enormous political movement was launched (under the leadership of a non-governmental organization known as Jubilee 2000) which called for the debt cancellation of Earth's most heavily indebted poor countries. The movement brought together many activist groups championing the rights of the poor, as well as political support from several entertainers such as Bono and religious heads such as Pope John Paul II. The movement leaders eventually presented a petition signed by an astounding 22 million people which called for debt reduction or elimination of debt in Earth's poorest countries. It eventually was successful, resulting in the cancellation of debt in the world's 18 poorest nations. The success of this movement stands as a testament to how activism can fundamentally better life in Earth's extremely impoverished regions.
Yet more should be done. Several African leaders, including President Olusegun Obasanjo of Nigeria and Bishop Desmond Tutu of South Africa, have called on rich world nations (especially the United States) to forgive greater amounts of debt, enabling impoverished nations to make critical investments in their economies. I'm going to focus on just one form of debt forgiveness: "Odius Debt", which is debt that a nation acquires under the rule of a malevolent dictator. Nations such as Democratic Republic of Congo (under Mobutu Sese Seko), Iraq (under Saddam Hussein), and Nicaragua (under Anastasio Somoza Debayle) often rack up huge sums of debt when a dictator takes over and spends extravagant amounts of money on either himself or his political friends. The vast majority of this money is not used to benefit the nation's citizens, even though it is those impoverished citizens who end up paying off the debt incurred by military dictators after the tyrant is overthrown.
Many Non-Governmental Organizations, including Jubilee 2000 and odiusdebts.org, have called on the IMF to completely forgive all debts accumulated by governments which were not democratically chosen; those dictators which borrowed money to help their oppressive regime stay in power and left their citizens to fit the bill. They argue that it is not moral to force newly liberated societies to continue to be hindered by the debts of past dictators. Nobel Prize-winning economist Joseph Stiglitz has also pointed out that this simple solution not only solves the problem of the current debt overhang but also will stop future recurrence of Odius Debts; if major banks realize that they will likely not be paid back by dictatorial regimes, then they will be less likely to lend money to them. In fact, "Credit Sanctions" may be much more effective than "Trade Sanctions" in pressuring oppressive governments to treat their citizens fairly. Forgiveness of Odius Debts is therefore an excellent idea and should be adopted by the International Monetary Fund as well as the G8 nations.
Creation of International Charters
In Chapter Three, we saw how terrible governance can prevent a nation from entering the second stage of economic development; bad governance can repel foreign direct investment through banning trade with rich world economies, and waste tax revenue (such as those obtained through resource revenues) through corrupt practices (for example by awarding contracts based on bribery instead of competitive auction). Because of this, the negative actions of one corrupt government can cost as much as $100 billion. Governance in extremely poor countries such as Africa is especially corrupt, since poor citizens often lack the media awareness needed to make correct electoral decisions and choose the best leaders. Impoverished governments therefore lack checks and balances to their power.
So is there a way rich nations can help improve African governance through introducing stronger checks and balances, thereby pressuring nations throughout Africa into reforming their political system and reducing corruption? I believe there is. Although we cannot manually change these societies ourselves, citizens of rich world nations can help the heroic political reformers within corrupt societies who are struggling and are usually failing to initiate change. We can do this through creating various mutual systems of support for governance in the form of international charters.
In this section, I'm going to focus on three international charters proposed by development economist Paul Collier which he believes will be the catalysts in creating political reform in impoverished societies. The simple proposal is that we will have some international standards (voluntary for each nation to sign onto) which would spell out the key reforms needed to improve governance. Obviously, many governments throughout Africa will not want to sign onto the charters, but they will at least give the political reformers something very concrete to demand: either the government adopts the charters or it must explain why it won’t. This can help reformists unite in opposition, increasing their effective political pressure.
First, the international community should create a natural resource charter. Resource revenues (money obtained through exporting oil and diamonds) are pumping unprecedented amounts of money into many (but not all) of the extremely impoverished nations, including Nigeria (rich in oil), Uganda (oil), Guinea (iron ore), and Angola (oil). The total wealth flowing into Africa because of resource exports completely dwarfs aid flows. To give you an idea of this, Angola alone obtains about $50 billion per year in oil revenue; the total aid flows to the entire developed world last year was $34 billion. If all of this resource wealth were invested in the impoverished economies (through investments in health, education and infrastructure) then the impact would be huge. Unfortunately, these resource rich countries still remain extremely poor because the wealth generated from resource exports is usually used to fuel civil war, for example with warlords taking over diamond mines, selling the jewels on the black market and using the money to buy guns and ammunition to fight the government. In addition, resource revenues are often wasted by government corruption. In the rich world, governments award contracts to resource extraction companies (oil and diamond corporations) based on competitive auction; all the companies offer to dig up the resource for a certain price, and the government awards the contract to the highest bidder. This step has usually been a disaster in impoverished countries; instead of competitively bidding, companies simply bribe their way into contracts. To quote Collier in a lecture, "You know how resource extraction rights are being sold at the moment? How they have been sold over the past forty years? A company flies in, does a deal with the minister; and that's great for the company, and it quite often great for the minister (audience laughter). But its not great for the country." As a result, countries with large amounts of natural resources are just as poor (or even worse off) than those without the resource wealth.
So is there a means of bettering the way natural resources contracts are done, giving more of the resource wealth to impoverished citizens instead of corrupt officials and the extraction companies? In 2002, Prime Minister Tony Blair of England sought to do just that by creating a resource charter known as the Extractive Industries Transparency Initiative. Any government which signs on to this treaty is required to report to their citizens what resource revenues they have, and where the money is going. You might think that no government in Africa would ever sign onto this treaty, since they would be forced to expose their own corruption. Yet no sooner was it proposed than reformers in Nigeria, who had happened to win the last election, adopted it and published the information in the newspaper; these Nigerian reformists devoutly cared about the well being of their citizens and wanted to change the corrupt way oil was being sold. As soon as the information was published, Nigerian newspaper circulation spiked; people wanted to know what their government was getting in terms of revenue. Incredibly, the transparency initiative was wildly successful; since 2002, twenty one of Africa's resource rich economies, including Central African Republic, Democratic Republic of Congo, Liberia, Gabon, Mozambique, Sierra Leone and many others had signed onto the treaty, forcing the government to show what revenues they were receiving and where the money was going. It seems that there are plenty of elected reformers throughout Africa willing to make efforts to achieve more responsible governance; they just need to have a firm focus on where to direct their efforts.
So now that we have learned that these international standards can work, we'll examine two other possible charters which can create better governance throughout Africa. The first is a Democracy Charter. This would center around three things; (1) a government which is elected democratically in a free and fair election, with the United Nations (or another independent panel chosen by Africans) judging whether the election was truly fair, (2) a free medium (usually radio) uncontrolled by the government, and (3) campaign finance reform which would drastically lower the amount of money a politician needs to run for office, which is currently enormously high. Look, for example, at Nigeria; just to get elected as a senator (never mind the presidency) costs around half a million dollars. With spending like that, no wonder their politics is so corrupt. By limiting the amount of money an official can receive from lobbyists (and putting the necessary mechanisms in place to enforce such rules) we can seriously reduce the need for political bribery.
The second additional charter would revolve around budget transparency, examining how governments spend their money. Present spending by governments in impoverished nations is often atrociously wasteful; some surveys tracking spending on health clinics in Chad found that 99% of the money did not even reach the clinic (although this is not typical). Practical measures of scrutiny and accountability can make a big difference. For example, simple tracking surveys like the one just mentioned, when implemented, have been shown to increase the amount of money reaching poor citizens significantly–in one study the spending effectiveness was shown to increase from 20 percent success to 90 percent, more effective than quadrupling aid. Comparing results to neighbors has also been a reliable way of judging success.
If say there is a government of the bottom billion seeking political reform, which through some miracle got elected, it can quickly sign onto these three charters as a means of “locking in” reform. Again, many governments would not want to adhere to these standards, but it would at least give the reformers something to focus their efforts on. Governments who refuse to comply with these standards will signal that they are corrupt to their neighbors, and are more likely to reform as a result of peer pressure.
Those countries which do not adhere to these charters should be demonized by consumers; for example, if Angola refused to adopt the charter, then consumers in the West would boycott gasoline from Angola. As a result, Angolan oil would be harder to sell (except at a discount), creating a strong financial incentive for the Angolan government to reform. Another simpler means of creating a financial incentive would be to put a uniform tax on all resources from regions which have not signed onto the charters, with the tax revenue being used to offset income tax. This seems like a foolproof way of getting African nations to enact such charters, but unfortunately, Westerners are not the only consumers of Africa's oil and other resources. With their rising economies, both China and India are becoming major consumers of Africa's resources. Both China and India have taken the political position of "Not asking Questions" when it comes to buying oil abroad; they'll essentially buy it anywhere, including nations of corrupt governance such as Angola and Sudan (home of the Darfur crisis). Their willingness to buy oil from corrupt regimes will cancel out any pressure that a Western boycott may put on African governments. Can anything be done about this? Well, I believe that if rich world nations enacted one important reform (which it should do anyways), then it can persuade China and India to refuse to buy oil from corrupt and malevolent regimes. That important new reform has to do with the currency exchange system, and is the subject of the section below.
So is there a way rich nations can help improve African governance through introducing stronger checks and balances, thereby pressuring nations throughout Africa into reforming their political system and reducing corruption? I believe there is. Although we cannot manually change these societies ourselves, citizens of rich world nations can help the heroic political reformers within corrupt societies who are struggling and are usually failing to initiate change. We can do this through creating various mutual systems of support for governance in the form of international charters.
In this section, I'm going to focus on three international charters proposed by development economist Paul Collier which he believes will be the catalysts in creating political reform in impoverished societies. The simple proposal is that we will have some international standards (voluntary for each nation to sign onto) which would spell out the key reforms needed to improve governance. Obviously, many governments throughout Africa will not want to sign onto the charters, but they will at least give the political reformers something very concrete to demand: either the government adopts the charters or it must explain why it won’t. This can help reformists unite in opposition, increasing their effective political pressure.
First, the international community should create a natural resource charter. Resource revenues (money obtained through exporting oil and diamonds) are pumping unprecedented amounts of money into many (but not all) of the extremely impoverished nations, including Nigeria (rich in oil), Uganda (oil), Guinea (iron ore), and Angola (oil). The total wealth flowing into Africa because of resource exports completely dwarfs aid flows. To give you an idea of this, Angola alone obtains about $50 billion per year in oil revenue; the total aid flows to the entire developed world last year was $34 billion. If all of this resource wealth were invested in the impoverished economies (through investments in health, education and infrastructure) then the impact would be huge. Unfortunately, these resource rich countries still remain extremely poor because the wealth generated from resource exports is usually used to fuel civil war, for example with warlords taking over diamond mines, selling the jewels on the black market and using the money to buy guns and ammunition to fight the government. In addition, resource revenues are often wasted by government corruption. In the rich world, governments award contracts to resource extraction companies (oil and diamond corporations) based on competitive auction; all the companies offer to dig up the resource for a certain price, and the government awards the contract to the highest bidder. This step has usually been a disaster in impoverished countries; instead of competitively bidding, companies simply bribe their way into contracts. To quote Collier in a lecture, "You know how resource extraction rights are being sold at the moment? How they have been sold over the past forty years? A company flies in, does a deal with the minister; and that's great for the company, and it quite often great for the minister (audience laughter). But its not great for the country." As a result, countries with large amounts of natural resources are just as poor (or even worse off) than those without the resource wealth.
So is there a means of bettering the way natural resources contracts are done, giving more of the resource wealth to impoverished citizens instead of corrupt officials and the extraction companies? In 2002, Prime Minister Tony Blair of England sought to do just that by creating a resource charter known as the Extractive Industries Transparency Initiative. Any government which signs on to this treaty is required to report to their citizens what resource revenues they have, and where the money is going. You might think that no government in Africa would ever sign onto this treaty, since they would be forced to expose their own corruption. Yet no sooner was it proposed than reformers in Nigeria, who had happened to win the last election, adopted it and published the information in the newspaper; these Nigerian reformists devoutly cared about the well being of their citizens and wanted to change the corrupt way oil was being sold. As soon as the information was published, Nigerian newspaper circulation spiked; people wanted to know what their government was getting in terms of revenue. Incredibly, the transparency initiative was wildly successful; since 2002, twenty one of Africa's resource rich economies, including Central African Republic, Democratic Republic of Congo, Liberia, Gabon, Mozambique, Sierra Leone and many others had signed onto the treaty, forcing the government to show what revenues they were receiving and where the money was going. It seems that there are plenty of elected reformers throughout Africa willing to make efforts to achieve more responsible governance; they just need to have a firm focus on where to direct their efforts.
So now that we have learned that these international standards can work, we'll examine two other possible charters which can create better governance throughout Africa. The first is a Democracy Charter. This would center around three things; (1) a government which is elected democratically in a free and fair election, with the United Nations (or another independent panel chosen by Africans) judging whether the election was truly fair, (2) a free medium (usually radio) uncontrolled by the government, and (3) campaign finance reform which would drastically lower the amount of money a politician needs to run for office, which is currently enormously high. Look, for example, at Nigeria; just to get elected as a senator (never mind the presidency) costs around half a million dollars. With spending like that, no wonder their politics is so corrupt. By limiting the amount of money an official can receive from lobbyists (and putting the necessary mechanisms in place to enforce such rules) we can seriously reduce the need for political bribery.
The second additional charter would revolve around budget transparency, examining how governments spend their money. Present spending by governments in impoverished nations is often atrociously wasteful; some surveys tracking spending on health clinics in Chad found that 99% of the money did not even reach the clinic (although this is not typical). Practical measures of scrutiny and accountability can make a big difference. For example, simple tracking surveys like the one just mentioned, when implemented, have been shown to increase the amount of money reaching poor citizens significantly–in one study the spending effectiveness was shown to increase from 20 percent success to 90 percent, more effective than quadrupling aid. Comparing results to neighbors has also been a reliable way of judging success.
If say there is a government of the bottom billion seeking political reform, which through some miracle got elected, it can quickly sign onto these three charters as a means of “locking in” reform. Again, many governments would not want to adhere to these standards, but it would at least give the reformers something to focus their efforts on. Governments who refuse to comply with these standards will signal that they are corrupt to their neighbors, and are more likely to reform as a result of peer pressure.
Those countries which do not adhere to these charters should be demonized by consumers; for example, if Angola refused to adopt the charter, then consumers in the West would boycott gasoline from Angola. As a result, Angolan oil would be harder to sell (except at a discount), creating a strong financial incentive for the Angolan government to reform. Another simpler means of creating a financial incentive would be to put a uniform tax on all resources from regions which have not signed onto the charters, with the tax revenue being used to offset income tax. This seems like a foolproof way of getting African nations to enact such charters, but unfortunately, Westerners are not the only consumers of Africa's oil and other resources. With their rising economies, both China and India are becoming major consumers of Africa's resources. Both China and India have taken the political position of "Not asking Questions" when it comes to buying oil abroad; they'll essentially buy it anywhere, including nations of corrupt governance such as Angola and Sudan (home of the Darfur crisis). Their willingness to buy oil from corrupt regimes will cancel out any pressure that a Western boycott may put on African governments. Can anything be done about this? Well, I believe that if rich world nations enacted one important reform (which it should do anyways), then it can persuade China and India to refuse to buy oil from corrupt and malevolent regimes. That important new reform has to do with the currency exchange system, and is the subject of the section below.
Reforming the International Currency Reserve System
In this section, I'm going to try to explain the ideas of economist Joseph Stiglitz (in his book Making Globalization Work), focusing on an innovative plan which can help to dramatically increase the amount of wealth pouring into emerging market economies such as China, Malaysia and Thailand. To understand this plan, we must first discuss what the currency reserve system is and why it is in place.
Each country has its own form of currency; Canada has the "Canadian Dollar", the United States has the "US Dollar", the Chinese have the "Yuan", Japan has the "Yen", Brazil has the "Peso", and so on.
The value of each country's currency changes based on international trade; that is, how much a country imports and exports. Whenever someone whats to buy something from a foreign country, they have to exchange their currency for the foreign country's. For example, let's say that I live in Hamilton, Ontario and want to buy a radio from Japan. To do this, I have to buy a few hundred Japanese Yen using Canadian dollars, then use that Yen to buy the Japanese radio. By buying some Yen, I'm increasing the demand for this currency; I therefore increase the value of the Yen. By selling my Canadian dollars, I'm decreasing the demand for my currency; thus I decrease the value of the Canadian dollar. So whenever a country, like Canada, imports a product from another country (such as Japan), the value of the Canadian dollar decreases, and the exporting country (Japan) has the value of its currency increased. Thus, countries which export many products tend to have highly valued currencies, whereas countries which import a lot of stuff tend to have low-valued currencies.
Each country wants to keep its currencies at a relatively stable level. If say, the value of the Canadian dollar got too low, then it would become very expensive to import foreign products from countries such as Japan and the United States. This is because with a low-valued Canadian dollar, one would have to trade more Canadian Dollars to get the same amount of foreign currency. So with the value of the Canadian Dollar worth say 70 cents of an American Dollar, then the price of exports from the United States would be very expensive.
At the same time, a country doesn't want the value of its currency to get too high. If say, the Canadian Dollar got to be worth $1.10 US, then it would become too expensive for Americans to buy Canadian products. As a result, US consumers would import less stuff from Canada, hurting the Canadian economy. To summarize, every country wants to keep the value of its currency relatively stable, since if its currency got too low then it would become too expensive to import foreign products (like oranges from the United States), and if it got too high then it would be very hard to export materials too consumers in foreign countries.
To help stabilize the value of their currencies, all countries keep what known as "Foreign Currency Reserves". This is essentially a pile of foreign money which the government can spend in times of emergency. Say the value of the Canadian Dollar got to be very low (perhaps 60 cents on the American Dollar); as a result, products from the United States (such as oranges) become expensive to buy and Canadian consumers suffer. In order to increase the value of the dollar, the Canadian government uses the money in its Foreign Currency Reserve -a pile of currencies from countries like Japan, the United States, China and others- to buy Canadian Dollars. The government has essentially traded a large amount of foreign currency for Canadian Dollars, increasing the demand (and thus the value) of Canadian currency. In this way, the government has fixed the problem; the value of the Canadian Dollar has risen thanks to the money in the Foreign Currency Reserve.
If the currency of a country (say Canada) gets too high, then Canada simply trades its money for large amounts of foreign currency (US dollars, Japanese Yen, etc). This decreases the demand for Canadian money and lowers the Canadian Dollar's value. The foreign exchange (US Dollars and Japanese Yen) generated from this transaction is put in the Canadian Foreign Currency Reserve to be spent if the Canadian Dollar's value gets too low in the future. In this way, the Canadian government can stabilize the value of the currency by countering fluctuations –buying Canadian currency when others are selling, or selling the Canadian money when others are buying.
* * *
In recent years, major emerging Asian economies such as China, Malaysia, Thailand and the Philippines have began becoming rapidly wealthier through foreign direct investment; corporations from the West come into these countries, hire factory workers and export cheaply-made materials to rich world consumers, thereby generating wealth throughout Asia. But as these countries began exporting more and more materials, their currencies started rising in value. The governments of these regions soon realized that if they simply let their currencies become very valuable, then it would become too expensive for Western consumers to buy their exports; the foreign companies would go back to rich world nations and leave their citizens impoverished. Something had to be done about this problem.
So in an effort to devalue their currencies, Asian nations such as China, Thailand and the Philippines started selling huge amounts of their currencies. This plan worked brilliantly; by selling off large amounts of currency, these Asian nations rapidly shrank demand for their money, thus lowering its value. With devalued currency, these Asian nations continued to export huge amounts of cheap materials to the rich world and keep the foreign factories in their country. When they sold all of their currency, these Asian nations had to replace it with something; they chose to buy large amounts of US dollars, since the American economy is widely considered rock solid and American currency quite stable. As a result, Asian export-based economies have in recent years bought huge amounts of US Dollars and used them to build enormous Foreign Currency Reserves; as of 2006, the value of these reserves has amounted to an extraordinary $3.4 trillion dollars.
In addition to devaluing their currency and making their export industries more competitive, these enormous currency reserves have other added benefits. For example, since acquiring these enormous reserves, the Southeast Asian economies are much better prepared to handle financial crises; back in 1997, when a deep recession wounded many of Asia's most prosperous economies, Asian governments needed large amounts of money to stimulate the economy and prevent further economic collapse. Unfortunately, at the time, they lacked the funds necessary to perform this task and had to borrow large amounts of money from the International Monetary Fund (IMF). In order to receive these loans, the IMF forced the prosperous Asian giants to enact huge cutbacks in governments spending; these disastrous policy changes eventually made the recession even worse. Since then, the Asian governments have become understandably distrustful of loaning institutions such as the IMF; now that they have these enormous currency reserves, the Asian governments have the means to stimulate their economy and buy emergency materials (such as emergency food) during an economic crisis without being forced to adhere to IMF standards.
Unfortunately, maintaining these enormous multi-trillion dollar Foreign Currency Reserves comes at a high price. I mentioned before that the Asian governments usually buy American Dollars to put in their reserves; they trade their Asian currency for American money or buy US bonds. These American bonds yield very low return; the Asian government makes only about 1-2% interest on their investment. As rising economies, these Asian governments could have invested the money into their own economy, lending to Asian small businesses or using it to build vital infrastructure; if they had invested in these projects, the Asian governments could have gotten 12-15% interest on their money. Therefore, by investing in US bonds instead of their own economy, the Asian nations are losing a difference of about 10% per year on their $3 trillion investment money (roughly $300 billion each year)! This cost is gargantuan, but the Asian governments are willing to pay this high price in order to keep their currency devalued and continue exporting goods.
Even though the Asian governments are losing enormous amounts of money, this set up is a great deal for the United States; because there is such a high demand for US bonds, the American government can borrow large amounts of money overseas while paying very low interest rates on their borrowed cash (as mentioned before, the US only has to pay about 1% interest). This has allowed the US government to sink deeper and deeper into debt without going bankrupt. Currently, the US national debt amounts to more than $11 trillion, yet it is always able to pay off the interest on this huge bill without severely hurting the economy because the high demand for US bonds allows them to pay very low interest rates. If the interest on this money rose by just 1%, then the annual US government interest payment would increase by $110 billion.
And so the United States wants to keep this system in place and continue paying very low interest on their national debt. But Asian economies such as China don't particularly like this system, since the money they invested in US bonds goes overseas and is used to fuel consumption in the United States instead of being invested in their own Asian economies. However, China is still willing to continue buying US Dollars and maintaining its large Foreign Currency Reserves since it keeps the value of Chinese currency unusually low and keeps China's export-driven businesses booming. But is there a way for China and other Asian states to keep large Foreign Currency Reserves without losing large amounts of money? Is there a way for China's huge Foreign Currency Reserves to decrease interest rates (and thus fuel consumption) within impoverished Asian nations instead of simply fueling consumption in rich countries such as the United States?
* * *
Nobel Prize-winning economist Joseph Stiglitz sees a remarkably simple way to make this happen. The International Monetary Fund would create a new kind of currency which can be used in Foreign Currency Reserves around the world; Stiglitz calls this currency "Global Greenbacks" (the great British economist John Maynard Keynes, who originally came up with this idea 70 years ago, called his money "Bancor"). A new Global Currency Reserve System would be created, available to any country that wanted to contribute to the reserves. Stiglitz describes how this system would work:
"Every year, each member of the club–the countries that signed up to the new global reserve system–would contribute a specified amount to a global reserve fund and, at the same time, the global reserve fund would issue global greenbacks of equivalent value to the country, which they would hold in their reserves. There is no change in the net worth of any country; it has acquired an asset (a claim on others) and issued a claim on itself. Something real, however, has happened: the country has obtained an asset (a claim on others) that it can use in times of an emergency. In a time of crisis, the country can take these global greenbacks and exchange them for euros or dollars or yen; if the crisis is precipitated by a harvest failure, it can use the money to buy food; if the crisis is precipitated by a banking failure, it can use the money to refinance the banks; if the crisis is precipitated by an economic recession, the money can be used to stimulate the economy."
-Economist Joseph Stiglitz, winner of the 2002 Nobel Prize in Economics
So instead of using US Dollars in their Foreign Currency Reserve, countries like China would keep these "Global Greenbacks" in reserve in order to decrease the value of their currency and create a lifeline of cash in times of emergency. The value of this new currency is the average value of all the currencies which are a part of the system (Dollars, Euros, Sterlings, Yuan).
Normally, China would buy US Dollars to put in its reserve system, increasing demand for US money and lowering interest rates for the United States. As a result of a more valuable currency and lower interest rates, Americans tend to spend more (consumption increases) and the American economy benefits. But under this new system, the decrease in interest rates would be felt in every country which is a part of the system, spreading the low interest rates out instead of concentrating them on the United States. As a result, consumption would increase all throughout Asia, and the emerging economies of China, Thailand, Malaysia and the Philippines would benefit.
In addition to increasing consumption throughout Asia, this new currency would decrease the need to buy US Dollars. As a result of lower demand for US bonds, the interest rates on the bonds would go up slightly. This would be great news for nations such as China which have invested heavily in American bonds; they would get higher interest rates on their American money. Since they have invested in trillions of dollars, this slight increase would mean that billions of additional dollars would be flowing into economies throughout Asia. This new money can help these developing countries make investments in health, education and infrastructure projects, speeding up their economic development.
And so life goes on normally in each country; everyone still uses their old currencies (Canadian Dollars, Japanese Yen, etc.) and countries still keep sizable Foreign Currency Reserves. But now, in addition to buying currencies from other nations, each country also has the option of buying "Global Greenback" money; the nations of Asia use this line of mutual credit in their reserves, increasing consumption throughout the developing world and slightly increasing the interest rates on US Dollars (thus benefiting the developing economies).
The rich world should certainly create this option for the benefit of the developing world. Yet such a system would not be nearly as strong without containing rich world currencies such as the Dollar and Euro; Asian nations such as China and Russia have already called on Western countries to
add their money to the Global Greenback System, but thus far, the leaders of Europe and the United States have refused to ratify such an option.
I suggest that these leaders add their currencies to the Global Greenback system, but only on several conditions. For example, the United States could add its powerful dollar to the fund only if China agrees to sign onto treaties (such as the ones stated above) which would force them to no longer buy oil from malevolent regimes such as the one in Sudan or Angola. In addition, emerging economies like China and India must agree to issue a tax on their carbon emissions to help curb global warming (more on this in the next chapter). Since the option of a Global Greenback Currency will benefit emerging economies disproportionately more than rich world economies, the West has enormous political leverage; it should seize this opportunity to force the governments of China and India to change their foreign policies so that they better match the interests of the extremely poor. Thus, instituting this new international system of currency reserves can possibly benefit both the emerging markets such as China and India, and also those economies stuck in a poverty trap.
Each country has its own form of currency; Canada has the "Canadian Dollar", the United States has the "US Dollar", the Chinese have the "Yuan", Japan has the "Yen", Brazil has the "Peso", and so on.
The value of each country's currency changes based on international trade; that is, how much a country imports and exports. Whenever someone whats to buy something from a foreign country, they have to exchange their currency for the foreign country's. For example, let's say that I live in Hamilton, Ontario and want to buy a radio from Japan. To do this, I have to buy a few hundred Japanese Yen using Canadian dollars, then use that Yen to buy the Japanese radio. By buying some Yen, I'm increasing the demand for this currency; I therefore increase the value of the Yen. By selling my Canadian dollars, I'm decreasing the demand for my currency; thus I decrease the value of the Canadian dollar. So whenever a country, like Canada, imports a product from another country (such as Japan), the value of the Canadian dollar decreases, and the exporting country (Japan) has the value of its currency increased. Thus, countries which export many products tend to have highly valued currencies, whereas countries which import a lot of stuff tend to have low-valued currencies.
Each country wants to keep its currencies at a relatively stable level. If say, the value of the Canadian dollar got too low, then it would become very expensive to import foreign products from countries such as Japan and the United States. This is because with a low-valued Canadian dollar, one would have to trade more Canadian Dollars to get the same amount of foreign currency. So with the value of the Canadian Dollar worth say 70 cents of an American Dollar, then the price of exports from the United States would be very expensive.
At the same time, a country doesn't want the value of its currency to get too high. If say, the Canadian Dollar got to be worth $1.10 US, then it would become too expensive for Americans to buy Canadian products. As a result, US consumers would import less stuff from Canada, hurting the Canadian economy. To summarize, every country wants to keep the value of its currency relatively stable, since if its currency got too low then it would become too expensive to import foreign products (like oranges from the United States), and if it got too high then it would be very hard to export materials too consumers in foreign countries.
To help stabilize the value of their currencies, all countries keep what known as "Foreign Currency Reserves". This is essentially a pile of foreign money which the government can spend in times of emergency. Say the value of the Canadian Dollar got to be very low (perhaps 60 cents on the American Dollar); as a result, products from the United States (such as oranges) become expensive to buy and Canadian consumers suffer. In order to increase the value of the dollar, the Canadian government uses the money in its Foreign Currency Reserve -a pile of currencies from countries like Japan, the United States, China and others- to buy Canadian Dollars. The government has essentially traded a large amount of foreign currency for Canadian Dollars, increasing the demand (and thus the value) of Canadian currency. In this way, the government has fixed the problem; the value of the Canadian Dollar has risen thanks to the money in the Foreign Currency Reserve.
If the currency of a country (say Canada) gets too high, then Canada simply trades its money for large amounts of foreign currency (US dollars, Japanese Yen, etc). This decreases the demand for Canadian money and lowers the Canadian Dollar's value. The foreign exchange (US Dollars and Japanese Yen) generated from this transaction is put in the Canadian Foreign Currency Reserve to be spent if the Canadian Dollar's value gets too low in the future. In this way, the Canadian government can stabilize the value of the currency by countering fluctuations –buying Canadian currency when others are selling, or selling the Canadian money when others are buying.
* * *
In recent years, major emerging Asian economies such as China, Malaysia, Thailand and the Philippines have began becoming rapidly wealthier through foreign direct investment; corporations from the West come into these countries, hire factory workers and export cheaply-made materials to rich world consumers, thereby generating wealth throughout Asia. But as these countries began exporting more and more materials, their currencies started rising in value. The governments of these regions soon realized that if they simply let their currencies become very valuable, then it would become too expensive for Western consumers to buy their exports; the foreign companies would go back to rich world nations and leave their citizens impoverished. Something had to be done about this problem.
So in an effort to devalue their currencies, Asian nations such as China, Thailand and the Philippines started selling huge amounts of their currencies. This plan worked brilliantly; by selling off large amounts of currency, these Asian nations rapidly shrank demand for their money, thus lowering its value. With devalued currency, these Asian nations continued to export huge amounts of cheap materials to the rich world and keep the foreign factories in their country. When they sold all of their currency, these Asian nations had to replace it with something; they chose to buy large amounts of US dollars, since the American economy is widely considered rock solid and American currency quite stable. As a result, Asian export-based economies have in recent years bought huge amounts of US Dollars and used them to build enormous Foreign Currency Reserves; as of 2006, the value of these reserves has amounted to an extraordinary $3.4 trillion dollars.
In addition to devaluing their currency and making their export industries more competitive, these enormous currency reserves have other added benefits. For example, since acquiring these enormous reserves, the Southeast Asian economies are much better prepared to handle financial crises; back in 1997, when a deep recession wounded many of Asia's most prosperous economies, Asian governments needed large amounts of money to stimulate the economy and prevent further economic collapse. Unfortunately, at the time, they lacked the funds necessary to perform this task and had to borrow large amounts of money from the International Monetary Fund (IMF). In order to receive these loans, the IMF forced the prosperous Asian giants to enact huge cutbacks in governments spending; these disastrous policy changes eventually made the recession even worse. Since then, the Asian governments have become understandably distrustful of loaning institutions such as the IMF; now that they have these enormous currency reserves, the Asian governments have the means to stimulate their economy and buy emergency materials (such as emergency food) during an economic crisis without being forced to adhere to IMF standards.
Unfortunately, maintaining these enormous multi-trillion dollar Foreign Currency Reserves comes at a high price. I mentioned before that the Asian governments usually buy American Dollars to put in their reserves; they trade their Asian currency for American money or buy US bonds. These American bonds yield very low return; the Asian government makes only about 1-2% interest on their investment. As rising economies, these Asian governments could have invested the money into their own economy, lending to Asian small businesses or using it to build vital infrastructure; if they had invested in these projects, the Asian governments could have gotten 12-15% interest on their money. Therefore, by investing in US bonds instead of their own economy, the Asian nations are losing a difference of about 10% per year on their $3 trillion investment money (roughly $300 billion each year)! This cost is gargantuan, but the Asian governments are willing to pay this high price in order to keep their currency devalued and continue exporting goods.
Even though the Asian governments are losing enormous amounts of money, this set up is a great deal for the United States; because there is such a high demand for US bonds, the American government can borrow large amounts of money overseas while paying very low interest rates on their borrowed cash (as mentioned before, the US only has to pay about 1% interest). This has allowed the US government to sink deeper and deeper into debt without going bankrupt. Currently, the US national debt amounts to more than $11 trillion, yet it is always able to pay off the interest on this huge bill without severely hurting the economy because the high demand for US bonds allows them to pay very low interest rates. If the interest on this money rose by just 1%, then the annual US government interest payment would increase by $110 billion.
And so the United States wants to keep this system in place and continue paying very low interest on their national debt. But Asian economies such as China don't particularly like this system, since the money they invested in US bonds goes overseas and is used to fuel consumption in the United States instead of being invested in their own Asian economies. However, China is still willing to continue buying US Dollars and maintaining its large Foreign Currency Reserves since it keeps the value of Chinese currency unusually low and keeps China's export-driven businesses booming. But is there a way for China and other Asian states to keep large Foreign Currency Reserves without losing large amounts of money? Is there a way for China's huge Foreign Currency Reserves to decrease interest rates (and thus fuel consumption) within impoverished Asian nations instead of simply fueling consumption in rich countries such as the United States?
* * *
Nobel Prize-winning economist Joseph Stiglitz sees a remarkably simple way to make this happen. The International Monetary Fund would create a new kind of currency which can be used in Foreign Currency Reserves around the world; Stiglitz calls this currency "Global Greenbacks" (the great British economist John Maynard Keynes, who originally came up with this idea 70 years ago, called his money "Bancor"). A new Global Currency Reserve System would be created, available to any country that wanted to contribute to the reserves. Stiglitz describes how this system would work:
"Every year, each member of the club–the countries that signed up to the new global reserve system–would contribute a specified amount to a global reserve fund and, at the same time, the global reserve fund would issue global greenbacks of equivalent value to the country, which they would hold in their reserves. There is no change in the net worth of any country; it has acquired an asset (a claim on others) and issued a claim on itself. Something real, however, has happened: the country has obtained an asset (a claim on others) that it can use in times of an emergency. In a time of crisis, the country can take these global greenbacks and exchange them for euros or dollars or yen; if the crisis is precipitated by a harvest failure, it can use the money to buy food; if the crisis is precipitated by a banking failure, it can use the money to refinance the banks; if the crisis is precipitated by an economic recession, the money can be used to stimulate the economy."
-Economist Joseph Stiglitz, winner of the 2002 Nobel Prize in Economics
So instead of using US Dollars in their Foreign Currency Reserve, countries like China would keep these "Global Greenbacks" in reserve in order to decrease the value of their currency and create a lifeline of cash in times of emergency. The value of this new currency is the average value of all the currencies which are a part of the system (Dollars, Euros, Sterlings, Yuan).
Normally, China would buy US Dollars to put in its reserve system, increasing demand for US money and lowering interest rates for the United States. As a result of a more valuable currency and lower interest rates, Americans tend to spend more (consumption increases) and the American economy benefits. But under this new system, the decrease in interest rates would be felt in every country which is a part of the system, spreading the low interest rates out instead of concentrating them on the United States. As a result, consumption would increase all throughout Asia, and the emerging economies of China, Thailand, Malaysia and the Philippines would benefit.
In addition to increasing consumption throughout Asia, this new currency would decrease the need to buy US Dollars. As a result of lower demand for US bonds, the interest rates on the bonds would go up slightly. This would be great news for nations such as China which have invested heavily in American bonds; they would get higher interest rates on their American money. Since they have invested in trillions of dollars, this slight increase would mean that billions of additional dollars would be flowing into economies throughout Asia. This new money can help these developing countries make investments in health, education and infrastructure projects, speeding up their economic development.
And so life goes on normally in each country; everyone still uses their old currencies (Canadian Dollars, Japanese Yen, etc.) and countries still keep sizable Foreign Currency Reserves. But now, in addition to buying currencies from other nations, each country also has the option of buying "Global Greenback" money; the nations of Asia use this line of mutual credit in their reserves, increasing consumption throughout the developing world and slightly increasing the interest rates on US Dollars (thus benefiting the developing economies).
The rich world should certainly create this option for the benefit of the developing world. Yet such a system would not be nearly as strong without containing rich world currencies such as the Dollar and Euro; Asian nations such as China and Russia have already called on Western countries to
add their money to the Global Greenback System, but thus far, the leaders of Europe and the United States have refused to ratify such an option.
I suggest that these leaders add their currencies to the Global Greenback system, but only on several conditions. For example, the United States could add its powerful dollar to the fund only if China agrees to sign onto treaties (such as the ones stated above) which would force them to no longer buy oil from malevolent regimes such as the one in Sudan or Angola. In addition, emerging economies like China and India must agree to issue a tax on their carbon emissions to help curb global warming (more on this in the next chapter). Since the option of a Global Greenback Currency will benefit emerging economies disproportionately more than rich world economies, the West has enormous political leverage; it should seize this opportunity to force the governments of China and India to change their foreign policies so that they better match the interests of the extremely poor. Thus, instituting this new international system of currency reserves can possibly benefit both the emerging markets such as China and India, and also those economies stuck in a poverty trap.
Summary
In summary, other than increasing aid relief to impoverished nations, there are many things which rich world nations can do to help extremely poor societies achieve a boost in wealth and break out of their poverty traps. For example, Western countries can dramatically lessen the cost of medicine and technology simply by not forcing African consumers to recognize patent legislation as a condition for receiving aid or joining free trade agreements; the generic forms of drugs and technology are always much cheaper than those protected by patent legislation, since patenting a product gives the inventor a temporary monopoly on the product's selling rights. By allowing Africans to buy only generic materials from foreign countries, African citizens and governments would save enormous amounts of money on imported materials, enabling them to spend additional amounts of money on health, education and infrastructure.
Second, Western governments can forgive the so-called "Odious Debts" of impoverished nations; those debts accumulated under the rule of tyrannical dictators which was not used to help the impoverished society, but which the poor society must pay off after the dictator is overthrown. Often, 50% or more of government revenue is used to pay off the interest on previous debts, taking away money which could be invested in health, education and infrastructure; by forgiving these odious debts, we can give extremely poor countries a boost of wealth and help to make dictators uncreditworthy in the future.
Third, to help promote better governance throughout Africa, rich world nations can create several international charters which would give reformers in impoverished governments something to focus there efforts on. Such charters would be modeled after the enormously successful Extractive Industries Transparency Initiative, which 30 resource rich nations eventually signed onto. Additional charters include a charter for democracy and a charter for government budget transparency. Creating these documents would cost the rich world virtually nothing and should be done immediately.
Finally, rich world nations should create a new form of currency which would work along side our current forms of money. This new cash, called "Global Greenbacks", can act to replace US Dollars in the Foreign Currency Reserves of various emerging economies, especially those in Southeast Asia. In addition to increasing consumption within these countries, Global Greenbacks can help to raise interest rates on US bonds and give emerging markets a greater return on their investments. This system should be implemented upon several conditions; for example, every nation which is a part of the system must agree to boycott oil from destructive government regimes, and agree to tax their carbon dioxide emissions to help curb global warming. Such a system would benefit both emerging markets such as China and the Philippines, as well as extremely impoverished countries such as those in Africa.
Second, Western governments can forgive the so-called "Odious Debts" of impoverished nations; those debts accumulated under the rule of tyrannical dictators which was not used to help the impoverished society, but which the poor society must pay off after the dictator is overthrown. Often, 50% or more of government revenue is used to pay off the interest on previous debts, taking away money which could be invested in health, education and infrastructure; by forgiving these odious debts, we can give extremely poor countries a boost of wealth and help to make dictators uncreditworthy in the future.
Third, to help promote better governance throughout Africa, rich world nations can create several international charters which would give reformers in impoverished governments something to focus there efforts on. Such charters would be modeled after the enormously successful Extractive Industries Transparency Initiative, which 30 resource rich nations eventually signed onto. Additional charters include a charter for democracy and a charter for government budget transparency. Creating these documents would cost the rich world virtually nothing and should be done immediately.
Finally, rich world nations should create a new form of currency which would work along side our current forms of money. This new cash, called "Global Greenbacks", can act to replace US Dollars in the Foreign Currency Reserves of various emerging economies, especially those in Southeast Asia. In addition to increasing consumption within these countries, Global Greenbacks can help to raise interest rates on US bonds and give emerging markets a greater return on their investments. This system should be implemented upon several conditions; for example, every nation which is a part of the system must agree to boycott oil from destructive government regimes, and agree to tax their carbon dioxide emissions to help curb global warming. Such a system would benefit both emerging markets such as China and the Philippines, as well as extremely impoverished countries such as those in Africa.
Acknowledgement
This chapter draws substantially on previously published work by Joseph Stiglitz, especially his 2007 book
Making Globalization Work (see references below).
Making Globalization Work (see references below).
Sources
AIDS Education and Research Trust. What is PEPFAR? 2009. http://www.avert.org/pepfar.htm
Collier, Paul. Bottom Billion; Why the Poorest Countries are Falling Behind and What We Can Do About It.
New York: Oxford University Press, 2007.
Extractive Industries Transparency Initiative. Candidate Country. 2009. http://www.eiti.org/countries/candidate
International Desk. UN Pushes for a Global Reserve System. March 28, 2009.
http://finance.kalpoint.com/from-international-desk/special-reports/un-pushes-for-new-global-reserve-system.html
Jubilee USA Network. Why Drop the Debt? 2007. http://www.jubileeusa.org/truth-about-debt/why-drop-the-debt.html
Odiusdebts.org. President Obasanjo Appeals for Immediate Debt Relief for Nigeria. 2000.
http://www.odiousdebts.org/odiousdebts/index.cfm?DSP=content&ContentID=330
Plaut, Martin. “Has Bush Been Africa’s Best Friend?” BBC News. January 16, 2009. http://news.bbc.co.uk/2/hi/africa/7831460.stm
Ritcher, Ruthann. “Stanford First Ever Study to Show that US AIDS Relief Program Saved a Million Lives”. 2007.
http://www.eurekalert.org/pub_releases/2009-04/sumc-ssf040209.php
Sachs, Jeffrey. The End of Poverty: Economic Possibilities of Our Time. New York: Penguin Group, 2005
Seymour, Malcolm. “Not Just Immoral, But Illegal: Odious Debt.” 50 Years is Enough Network. 2002. http://www.50years.org/cms/ejn/story/84
Stiglitz, Joseph. Making Globalization Work. New York: W.W. Norton & Company, 2007.
Ted Talks Director. Four Ways to Improve the Lives of the Bottom Billion. 2008. http://www.youtube.com/watch?v=VhAD0dMslB8
Thoma, Mark. “Making Globalization Work”. Economist’s View, 2006.
http://economistsview.typepad.com/economistsview/2006/09/making_globaliz.html
World Trade Organization. Agreement on Trade Related Intellectual Property Rights.
http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm
Xiaochuan, Zhou. Reform the International Monetary System, 2009. http://www.pbc.gov.cn/english/detail.asp?col=6500&id=178
Collier, Paul. Bottom Billion; Why the Poorest Countries are Falling Behind and What We Can Do About It.
New York: Oxford University Press, 2007.
Extractive Industries Transparency Initiative. Candidate Country. 2009. http://www.eiti.org/countries/candidate
International Desk. UN Pushes for a Global Reserve System. March 28, 2009.
http://finance.kalpoint.com/from-international-desk/special-reports/un-pushes-for-new-global-reserve-system.html
Jubilee USA Network. Why Drop the Debt? 2007. http://www.jubileeusa.org/truth-about-debt/why-drop-the-debt.html
Odiusdebts.org. President Obasanjo Appeals for Immediate Debt Relief for Nigeria. 2000.
http://www.odiousdebts.org/odiousdebts/index.cfm?DSP=content&ContentID=330
Plaut, Martin. “Has Bush Been Africa’s Best Friend?” BBC News. January 16, 2009. http://news.bbc.co.uk/2/hi/africa/7831460.stm
Ritcher, Ruthann. “Stanford First Ever Study to Show that US AIDS Relief Program Saved a Million Lives”. 2007.
http://www.eurekalert.org/pub_releases/2009-04/sumc-ssf040209.php
Sachs, Jeffrey. The End of Poverty: Economic Possibilities of Our Time. New York: Penguin Group, 2005
Seymour, Malcolm. “Not Just Immoral, But Illegal: Odious Debt.” 50 Years is Enough Network. 2002. http://www.50years.org/cms/ejn/story/84
Stiglitz, Joseph. Making Globalization Work. New York: W.W. Norton & Company, 2007.
Ted Talks Director. Four Ways to Improve the Lives of the Bottom Billion. 2008. http://www.youtube.com/watch?v=VhAD0dMslB8
Thoma, Mark. “Making Globalization Work”. Economist’s View, 2006.
http://economistsview.typepad.com/economistsview/2006/09/making_globaliz.html
World Trade Organization. Agreement on Trade Related Intellectual Property Rights.
http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm
Xiaochuan, Zhou. Reform the International Monetary System, 2009. http://www.pbc.gov.cn/english/detail.asp?col=6500&id=178