The Main Policy Options For Reducing Global Inequalities

Global inequality describes the economic and social disparities between countries or individuals in the world. This includes income and wealth differences as well as access to education, sanitation and the freedom to make economic and social choices. Although it can be conceived that progress has been made towards closing the observable inequalities between nations and individuals, there have been notable divergences in the developing world between the extent to which inequalities have fallen (or risen) over the past decades due to the strength (or weakness) of the social and institutional infrastructure base adopted within these countries (Eunyoung, 2002). In what follows it will be argued that the main policy options, notably foreign aid, financial restructuring and the encouragement of equitable international trading practices, still have significant potential to mitigate the astonishing expanse of worldwide poverty and further improve the monetary and non-monetary factors for low-income citizens of developing nations. Finally, it will be made evident that, in order for said policies to fulfil their intended goal, an assessment will be made of the current mismanagement of the International Monetary Fund, whose main purpose is focused towards global monetary cooperation and global financial stability, as well as the World Trade Organisation, and how they are clear victims of corporate lobbying efforts, who ensure that the advanced western economies benefit unduly from globalisation and trade (Stiglitz, 2002).

Foreign Aid is a form of international monetary assistance carried out between official institutions which intends to improve the living conditions and reduce national inequalities of outcomes for impoverished citizens in developing nations. Capital inflows have the capacity to smoothen the transition of an economy through three key phases of economic growth characterized by the Chenery-Strout model (J. C. H. Fei and G. Ranis, 1968). This line of thought, known as the Modernist Theory approach, proposes that at each phase of growth, a country is constrained by an economic variable; whether this be related to the levels of skills and education accessible to the majority population, domestic savings rates or levels of foreign currency reserves. The role of foreign aid at each of these stages focusses on eliminating the constraint through providing an economy’s public and private institutions access to the funds necessary for investment purposes. The accumulation of physical capital resulting from investment expenditure in fixed assets like transport networks allows for the creation of internal markets through facilitating the interaction of consumers and producers, enabling producers of locally sourced goods to expand their operations and achieve economies of scale and thus improve their own incomes, whilst providing consumers access to goods and services that previously may have been scarce, thus improving not only their expected living conditions but also expand their access to the labour market (Mikic, et al. ASEAN Economic Community: A Model for Asia-Wide Regional Integration? Palgrave Macmillan US, 2016).

Nonetheless, this policy is fraught with downfalls that have earned it its poor reputation amongst policymakers. Firstly, we have assumed that foreign aid is fast acting and reaches those who are most in need of it, however as seen in countries such as Nigeria and Venezuela, the absence of a reliable political and regulatory framework has had the unintended consequence of impeding structural improvements from financial assistance through generating corruption endemics and monopoly exploitation that actually creates new barriers to economic development. Figure 1 supports this claim by representing the negative correlation between Aid as a percentage of GDP and Growth per Capita (Oxford University Press 25.02.2010, Mavrotas) (Review of ADB’s Policy-Based Lending). In order to mitigate the possibilities of this, development and macro-economists broadly hold the consensus that development assistance should be given conditional on the implementation of internally generated reforms that foster inclusive economic growth to reduce the disparities of income and opportunity.

Additionally, contesting the degree of global inequality will greatly depend on the International Monetary Fund’s responsiveness and adaptation to the requirements of developing nations. In its recent history, the IMF has championed the Washington Consensus that advocates a form of free-market capitalism. In this respect, many emerging markets of developing countries have been forced to comply with the Structural Adjustment Programmes so as to gain access to IMF loans (Emeagwali G. (2011) The Neo-Liberal Agenda and the Imf/World Bank Structural Adjustment Programs With Reference To Africa. In: Kapoor D. (eds) Critical Perspectives on Neoliberal Globalization, Development and Education in Africa and Asia. SensePublishers). In most cases, this involves the irresponsible liberalisation and deregulation of domestic financial and export-oriented markets, at a time where these countries lack the institutional infrastructure to protect domestic industries from the threats of global market forces. The East Asian financial crisis of 1997 was triggered in part due to the over indebtedness of domestic firms, overexposed to risky loans issued by western banks, which was in some measure due to the IMF’s commitment to ensure the accelerated opening of Asian capital markets to overseas institutions. The resulting economic instability led to the IMF insisting upon widespread tightening of monetary and fiscal policy across East Asia with the sole purpose of preventing rising inflationary pressures, before these countries were able to access its emergency bailout facility (Stiglitz, 2002). As demonstrated in Figure 2, the resulting demand derived unemployment shock experienced across East Asia and the corresponding real wage declines were to some extent consequences of many governments not being able to adequately respond through introducing sufficient employment protection measures, given the crippling fiscal constraints imposed on them (Social Consequences of the East Asian Financial Crisis, Tamar Manuelyan Atinc and Michael Walton, 1998.).

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This one-size-fits-all approach taken by the IMF to ensure macroeconomic stability fails to assess the resulting burden faced by low-income individuals of these detrimental policy decisions. In another instance, the IMF required the government of Pakistan to scale back health and education subsidies in order to become viable for financial assistance, putting significant strain on the state of welfare of its low-income population, many of whom were no longer able to access its healthcare system without government assistance or receive a quality education, given cutbacks in per student spending (Isran, Manzoor Ali. “Economics of Austerity and Its Social Cost: A Critical Assessment of IMF Policies in Pakistan from 1988-2002.” Journal of Independent Studies &Amp; Research: Management &Amp; Social Sciences &Amp; Economics, vol. 12, no. 1, 2014, pp. 90–112). This has had the effect of reducing both the short-term inequality of outcomes and opportunity of those in the lower quartiles of the income distribution, given their greater dependency on state-funded services, as well as driving down the levels of human capital within the population resulting from poorer health and education services. This may not only narrow access to the labour market for these individuals in the long-term but also put downward pressure on wages given that a greater proportion of workers have to compete for low-skilled, low paid employment, thus worsening international inequality as average incomes in developing nations fall.

Alternatively, the IMF must now begin to take a country-specific approach to determine what policy choices are correct for supporting the financial and economic stability of low-income developing countries (Mavrotas, 2010). This should include debt cancellation programmes designed to bring countries into a state of recovery who have previously been burdened by economic austerity to guarantee that they meet their external debt payments. Restructuring of national debt is imperative now, due to current emerging market debt payment levels being at their highest since 2004 (Jubilee Debt Campaign, 18 March 2018). This is driven primarily due to interest rates beginning to rise in the United States, which has led to the increased cost of servicing US denominated sovereign debt. This trend may be set to continue if countries continue to roll over on their debts, creating a vicious cycle whereby new debt issuance is required to meet outstanding payments (Wernau, Julie. Wall street. Journal, 17 July 2018: B:11). Debt cancellation has the potential reduce the extent of international inequality through freeing up a nations fiscal and monetary position to allow the state to carry out a more active role in economic and social progress.

Evidence proves that countries that have been able to shift towards a Neo-Keynesian style policy combination aimed at supporting aggregate demand during recessionary periods as well as provide the means for supply-side improvements have also experienced rising average incomes. In the case of Ethiopia, where growth rates have averaged 10% since 2000 whilst income inequality remained relatively low, as noted by a Gini coefficient of 0.39 and a Palma ratio of 1.9 (United Nations Human Development reports, taken from World Bank Data). During this period Ethiopia has greatly reduced the overdependence it once had on commodity exports and transitioned to have a majority service and manufacturing base. This is the result of a prudently governed fiscal deficit averaging 2% of GDP per year over the past decade that has allowed the Ethiopian government to begin to invest in infrastructure reforms which is now starting to generate positive externalities for the Ethiopian population in the form of job creation as well as access to health and education services. This crucial development towards a more equal and equitable society perhaps would not have been possible under the guidance of IMF policymakers who throughout this period insisted that Ethiopia’s fiscal position would lead them towards political and social crises (Stiglitz, 2002).

Equally, from an international trade perspective, underdeveloped countries are often the victims of one-sided beggar-thy-neighbour-style trade agreements that are designed so that advanced economies absorb the majority of the returns from trade with developing countries (Mavrotas, 2010). As opposed to the expected pareto improving outcomes of international trade that involves all members deriving positive net gains, there is an apparent zero-sum game arising from the current international trade agenda. This can be assigned to the ineptness of the World Trade Organisation in regulating trade negotiations, in particular between developed and developing nations to ensure the conclusion of mutually beneficial agreements (Brown, C.P. (2004)“On the Economic Success of GATT/WTO Dispute Settlement.” Review of Economics and Statistics 86(3) pp. 811-823). Stiglitz (Stiglitz, Joseph E. Making Globalization Work. Penguin, 2007) highlights that such trade negotiations are asymmetric in nature, describing how developed countries maintain their own protectionist trade policies whilst they press developing countries to abolish their own trade barriers. Stiglitz uses the example of the trade distorting subsidies - which can be classified as a form of hidden protectionism, provided to large farming corporations in the United States to show the deadweight loss created through trade. He explores how small-scale local farmers of the developing world are usually the first to suffer from expanding global supply levels and falling prices resulting from such subsidies. It is often the case that domestic farmers are forced to accept lower incomes or face unemployment as a result given the absence of reliable social protection programmes in many of these countries. This of course carries negative externalities to the rest of society in terms of income diminution because primary sector employment in many low-income developing countries still comprises a large proportion of aggregate employment.

With this in mind, one could argue that in order to eliminate the apparent inequities of the current system, a multi-tiered system is necessary to end the underrepresentation of developing countries on the international stage. This approach includes the World Trade Organisation taking a greater responsibility in restricting the lobbying efforts of the elite powers of the western world by encouraging the formation of new value enhancing multilateral free trade deals rather than deadweight loss-inducing bilateral deals. Such arrangements encourage developing countries to harmonise their external trading practices so as to protect their common interests. It is a recurring issue that bilateral free trade deals often end up disproportionately favouring advanced economies (Bernard Hoekman, David Vines; Multilateral trade cooperation: what next? Oxford Review of Economic Policy, Volume 23, Issue 3, 1 October 2007, Pages 311–334) given the negligible negotiation power many emerging economies have in determining their own terms of trade during the deal making process (See Figure 4). Unfavourable Terms of Trade for these economies refers to the deficiency of export income that is generated relative to the value of import expenditure based on the fact that import prices are relatively more expensive than export prices.