Humanity’s Stairway to Paradise I

May 10, 2009

Democracy can be defined in several ways. Politics, society, education, health, economics, to name a few. Let’s pick out the economic angle. Does a substantial part of the population have access to the common wealth ? For this purpose, an Italian named Corrado Gini invented the Gini coefficient in 1912. If this Coefficient is 0, then everybody would have the same part of the wealth. The nearer the number is towards 1, the more the money is concentrated in the hands of a minority.  You can find lists of countries ordered by their Gini coefficient on Wikipedia.

Unequality in the USA

From these mathematical facts we can conclude two things : in the USA wealth is distributed unevenly. Unlike Europe or Japan, but very similar to developing countries. And the Gini coefficient of the US is rising steadily. What does this increase mean ? It tells us that in the past 40 years, the flow of capital has been from the lower income classes to the top earners. A bottom-to-top redistribution.

Definition of trade balance

Now lets expand the view to the world economy. Countries have trade balances. A country has a positive balance if it exports more than it imports. The reason being the benefit from exports, while imports create a trade deficit. Foreign exchange reserves increase and decrease accordingly.
Countries therefore can be characterized as economically solid if they produce a trade surplus. Which countries are on the positive side ? The first 5 are China, Germany, Japan, Saudi Arabia and Russia. The first three due to their strong export industries, the latter two due to oil exports. Now lets look at the last 5 countries on the list : Italy, Australia, United Kingdom, Spain and as the number 181, the United States of America. Italy and Spain suffer from overall bad management, while the others are main players in the globalized economy.

Sustainability of Debt

The national debt must be considered in relation to the GNP and the ability to pay it back. Therefore absolute figures say little about the effective burden imposed on an economy by this debt. World Bank and IMF hold that “a country can be said to achieve external debt sustainability if it can meet its current and future external debt service obligations in full, without recourse to debt rescheduling or the accumulation of arrears and without compromising growth.” One measure is the ratio between the debt and the GNP. Examples : Zimbabwe 218.20, Lebanon 186.60, Japan 170.00, USA 60.80. Another useful information is the absolute debt of a country.

Relation between rich and poor countries

To assess the relation between the first and the third world, the net capital flow is a useful parameter. The world bank asks : why doesn’t capital flow from rich to poor countries ? You guessed it : it flows towards the rich countries. In poetical terms : When Rivers Flow Upstream.

How is the GNP and GDP evolving in comparison of industrialized and third world countries ?
World bank in 1995 : GDP and GNP growth rates in developing countries are on average higher than those in developed countries. Moreover, the difference became even larger in recent years because GNP growth in developed countries slowed from more than 3 percent a year in the 1980s to about 2 percent a year in the first half of the 1990s. Low-income countries, by contrast, appear to have performed much better during this period, with GNP growing by almost 6 percent a year in 1980-95. So, will the poor countries soon catch up with the rich? Unfortunately, the economic growth patterns described above do not mean that the world is on its way to “convergence”- that is, to the gradual elimination of the economic gap between rich and poor countries. Much faster population growth in most developing countries is offsetting comparatively faster GNP growth, causing GNP per capita growth rates in these countries to be low or even negative.

People in developing countries are not improving their economic situation. Accordingly, the gap between high-and low income nations is growing worldwide. Again a bottom-to-top redistribution.  And population growth is only a part of the explanation, it has something to do with the system itself.

The causes of inequality between industrialized and developing world are complex. Colonization and it’s sequels are fundamental, I will skip enumerating them.

Definition of the Bretton Woods institutions :

World Bank : The World Bank Group (WBG) is a family of five international organizations responsible for providing finance and advice to countries for the purposes of economic development and eliminating poverty. The World Bank’s activities are focused on developing countries, in fields such as human development (e.g. education, health), agriculture and rural development (e.g. irrigation, rural services), environmental protection (e.g. pollution reduction, establishing and enforcing regulations), infrastructure (e.g. roads, urban regeneration, electricity), and governance (e.g. anti-corruption, legal institutions development).
IMF : The IMF describes itself as “an organization of 185 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty”

WB and IMF have a strong control over developing economies (DE). Due to the mentioned trade imbalance, GNP of DE often cannot finance the external debt. Money is borrowed from the IMF. The universal currency being the US $ and DE often having high inflation rates, they risk enormous growth of the debt, if expressed in $ (Mexico, Argentina, Zimbabwe). They are also exposed to fluctuations of trade, agricultural production and of interest rates. Some countries were driven into bankruptcy. Several countries received debt reliefs. This interaction makes DE vulnerable to external pressure. IMF and WB being under US control, they usually exert pro-US political and economic pressure. According to a former „Hit-Man“, governments were removed with the help of manipulated IMF debts. It is probable that, apart from these extreme cases, pressure is being exerted regularly to enforce acceptance of global trade, agricultural and other policies.

As a result, there is a generalized aversion against these institutions among poor countries. Emerging countries like China and Brazil are actively pushing for a thorough reform to lessen the power of industrialized countries and increase democracy for poorer members. The moment is auspicious, due to the present crisis.

Consequences of trade policies

The financial measures of the IMF seem value-free. In fact, the IMF often enforces austerity measures to reduce debt and inflation. The consequences for the civil populations can be dramatic. Due to massive amortizations, no new investments are possible, even basic food and medicine might suffer shortage. One prominent critic is Prof. Joseph Siglitz (read the extensive collection of excellent papers).

Parallels

There is a remarkable correlation between the Gini coefficient of developing countries and the USA. Moreover, the income gap is widening worldwide. This seems independent of particular political systems, it seems to be related primarily to the globalized economy.

In the US, the middle class functions much like the developing countries in relation to industrialized countries. Due to inequitable conditions imposed by politics and the economic establishment, there is a continuous redistribution from bottom to the top. The US middle class is experiencing increasing poverty.
Between the richest 10 % in the US and their middle class we see the same functional relationship as the one between a developed and a developing country. The US middle class plays the same role within the US as Zimbabwe plays in world economy. There are more similarities in economic terms between rich US and Zimbabwean upper class citizens than vertically within each of the two societies. Economic stratification or class belonging is independent of national borders and follows a universal pattern determined by the actual overall economic rules.

Part 1 of 2

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