Globalization: Golden Age
Breakdown
Rise and Fall of the Third World

Third World in the Golden Age• Following Marshall Plan + “Dodge Plan” – US policy for
Third World development was promote markets,
democracy and free trade• Free trade based on theory of “comparativeadvantage” where countries specialized in economic
activity where they held “factor advantage”• By mid-1960s – evident that development
characteristic of the dominant capitalist states was notoccurring in Third World• Economic Commission for Latin America (ECLA)
advocated Third World seek MNC investment todiversify their economies with import substitution
industrialization (ISI) supported by state policy

POPULATION OF THE WORLD
THE MODERN WORLDTechnologically advanced but
ideologically ambiguous

THE
FIRST WORLDTechnologicallyadvanced; free ofideological
impediments toutilitarian thinking,and thus thenatural world

THE SECONDWORLDTechnologicallyadvanced but
burdened with
an ideologicalelite blocking
free access toscience andutilitarianthinking

THE THIRD WORLD
Underdeveloped
economically andtechnologically , with a
traditional mentality
blocking access to scienceand utilitarian thinking

Demise of the Golden age• By 1970s EU and Japan not only reindustrialized but began to gain a competitiveedge over US business• Misallocation of resources in US economy due
to global military adventures of 1960s-70s
along with domestic wage-price spiral fuelled
vicious inflation• With dollars as world money US inflation
exported across globe

Inflation

Third World in a Borrowers Paradise• US spurred global dollar inflation + flood ofpost oil price hike OPEC dollars into global
banks created borrowers paradise with
abundant capital offered at negative realinterest rates• 1970 – 1980 provided brief opportunity forThird World to fulfill ISI dream• Third World states particularly in Latin
America were being dubbed economic“miracles” in 1970s

“Volcker Coup” + US Seeking NewInternational Orientation• Inflation eroded value of dollar and increased
pressure to redeem dollars for gold
• 1971 Nixon unilaterally closes gold window• New “Dirty Floating” monetary regime initiated• But US economy continued to weaken + inflation
running rampant through 1970s –• 1980 – FED Chair Paul Volcker unilaterally raises
dollar interest rates to astronomical heights• As dollar appreciated over 50% against othermajor currencies global money began to stream
into dollar denominated assets re-cementing
dollar power backed only by T-Bill IOUs

Interest Rates

Global Debt Crisis• Volcker coup fomented global debt crisis
which almost destroyed US banking systemand completely destroyed Third World dreamof ISI development• Mexico first to declare bankruptcy in August1982• By 1983, 27 other countries followed• Mexico, Brazil, Venezuela and Argentina werethe most indebted amongst the defaulters andresponsible for 74 percent of third world debtWhat About the Banks?
• US banks most exposed to Third Worlddebt• Loans = 50 percent of their net worth in1977 + well above their net worth in1987• In 1983 25 percent of the debt of thefour major Latin American debtors wasowed to the eight largest US banks andequaled 147 percent of their net worth

Reconfiguring of Global Finance• High interest rates created absurd situation inadvanced capitalist world where not only werereal interest rates over twice the rate of growth ofrespective GDP but exceeded returns on
productive investment in the real economy• This drove money away from long term
productive investment toward short term
speculative arbitrage• Exposure of US commercial banks to Third World
debt shocked global financial system into lending
through securitization with its smorgasbord of
new-fangled financial instruments• Securitization places debt onus on the shoulders
of debtors

Washington Consensus to the Rescue• FED, Treasury and IMF leaped in with immediate
debt service + expectation Third World debtors
would make painful choices necessary to fully
meet obligations• Followed by “quick disbursing” WB structuraladjustment loans (SALs) that were “tranched” topay as debtors enacted specific reforms• IMF demanded “exchange rate realignment”
which leads to currency devaluation• This produces the initial “shock” as domestic
prices explode upwards overnight.
• Subsequent spiraling inflation brings on IMFs next
demand that the money supply be frozen forcing
third world governments to slash spendingStructural Adjustment Programs (SAPs)• Third World central banks losing control overmonetary policy with SAL reforms + currency
devaluations pushed interest rates up• With state development banks eliminatedthrough privatization, and high interest rates
preventing commercial banks from offering
low cost credit, domestic banking sectors wereeffectively cut off from the real economy ascredit flows to domestic industry andagriculture are curtailed

Back to Comparative Advantage• SAPs were supposed to benefit agriculture most as thisis where the Third World purportedly maintained
comparative advantage• WB perceived state regulations as catering toeconomically distortive urban ISI interests• With agriculture advancing, pulling light manufacturing
in its wake, sufficient foreign exchange was supposed
to be generated to pay for durable goods and industrial
imports as well as debt service• But with public funding for infrastructure cut alongwith health and education + withdrawal of subsidies
for things like fertilizer or adoption of new technologies
agricultural competitiveness necessary to service debt
constrainedSAP Effect• SAPs pushed trade “liberalization” as in reduction
or elimination of tariffs, quotas, etc. that
allegedly “bias” resource flows toward thedomestic market as opposed to export sectors• Economic reorientation of agriculture away fromsubsistence food provisioning toward export ofone or two globally traded crops increased theoverall commercialization of agriculture• Strengthened powerful landed classes and led togrowing landlessness among small farmers while
spawning of an ever bloating casual workforce

Washington Consensus Outcome inAgriculture• Total value of global agricultural exports was only 20 %higher by 2002 than it was in 1980 when WB + IMF got
into the SAP business• Yet Third World public debt increased by 81% between
1983 + 1991 showing shameless hypocrisy of the wholedebt crisis enterprise• Between 1980 + 2002 Third World remits $4.6 trillion
to advanced economy banks = value of 50 MarshallPlans!
• With MNCs controlling world-wide sourcing, transport,
processing and marketing of agricultural goods – factthat a lower cost source of good may be discovered
does not bode well for countries specializing in one or
two crops for export to meet debt obligations

Making of MNC Paradise• Post-WWII economy – international production largely
involved FDI and “tariff jumping” by MNCs which
supplemented their national profit-making activities• In the 1970s and 80s MNCs began to transfer
production to “export platforms” to service globalmarkets• Internationalized production begins to replace
domestic activities and employment• Condition of Third World following 1982 debt crisis
opportune for MNC transfer – low wages, weakcurrencies and little government regulation• 1990s MNCs assisted by the information & computer
technology (ICT) revolution begin to disarticulate
production through global outsourcing or off-shoringNot-at-all-manufacturing• The disarticulating of production sliced, diced anddispersed manufacturing operations into globalvalue chains• Situation created where 60% of international
trade is trade in sub-products or components –“intermediate goods”• By the end of the 1990s and early 21st century
MNCs begin divesting themselves of the makingof things period fomenting rise of global “brands”• ICT revolution in MNC global logistics empowered
MNCs to exercise Stalinist-like centralized control
over dispersed networks of suppliersUS Morphs into Global Economy• US rides wave of global change as its “branded” MNCs
top of league• With dollar as world money – impacts of industrial“hollowing out” – swelling trade deficit, budget deficit
as tax base constricts, bloating national debt, emerging
capital account deficit – US not saddled by constraints
faced by other “national” economies• From early 1980s US fomented internal financial
expansion by depending on foreign financial flows in a
way unimaginable for other economy• At end 2002 from a world total of over $1.75 trillion ofUS dollar reserves the amount held in the US reachedover $1.13 trillion essentially constituting a “loan” tothe US equivalent to 10 percent of US GDP

Dollar Power as US de facto
Economic Policy• Flow of $ funds from savings countries to US
allows US to automatically borrow enough dollars
to finance its budget deficit• Budget deficit per se does not add to aggregate
spending and government sector need notcompete with private sector for funds• Domestic investment is stimulated without
having to raise long term interest rates fallingfrom 1990s and domestic savings near 0• US can spend more than its resources without
engendering price inflation

US as a “Global” Economy
US as global debtor– trade deficit,
current accountdeficit, budgetdeficit, capital
account deficit +negative savings
rate

Wall Street as
command center.
Washington Consensus
as “enforcer”

US borrows $savings at low
interest rates via Tbill IOUs

US “lends” money tothe rest of the world at
higher rates and whendebt increases thosestates are forced tosqueeze their real
economies

States like Japan,
China, South Korea
and others habitually
run surpluses with
the US to which theyexport material
goods

IMF, WB, WTO,
“structuraladjustment”, “policycredibility”

What Happened to the Jobs?
• 1980s General Motors – largest US employer
boasting a 500,000 plus workforce• 1994 – “temp” agency Manpower became thelargest US employer with 650,000 plus
registered in its system• 2003 – Wal-Mart became largest US employer
with workforce of 1.3 million Americans• US employment equation as with otheradvanced economies increasingly dominatedby service sector

The end of production-centered industrial
society?
Pre-capitalism
Capitalism“Post-capitalism” today?
% of labor force employed in 3 major sectors
Manufacture 10%
Services 10%

Agriculture 80%

Agriculture 20%
Services 30 %Manufacture 50%

Agriculture 10%
Manufacture 10%

Services 80%

Rise of the Two-tier Service Sector
TOP TIER Global Elite –high salary• Managers, lawyers,
accountants, bankers,
consultants, education
professionals, science
technicians at center ofglobal business
operations

BOTTOM TIER urban
residents – low salary• Waiters, cooks, retailworkers, hotel staff,
child care workers, lowlevel health care
workers, personal
services (massage,manicure) municipal
government workers

Bifurcated two tier consumption• High cost of urban lifemeans that professionals
require dual wage earners
to sustain upper middle
class life style• Necessitates elite support
systems – dry cleaners, elite
restaurants, sushi bars,
personal service salons,sports clubs• Lower tier also requires
dual income to survive
therefore array of necessary
services emerge to ensurefamily survival – fast foods(MacDonald’s, KFC, etc.)
budget retailers (Bi-way,Wal-Mart, K-Mart, etc.)

Industrialization No Longer a “Stage”of Global Development• On a world scale populations are shifting fromagriculture to services reversing the historic
shift from agriculture to industry thatcharacterized the modern era• Countries where manufacturing neverexceeded 10% of employment alreadyexhibiting signs of “prematuredeindustrialization”

A New Economy With New Jobs?
• Robert Reich, US President Clinton’s Secretaryof Labor argued in a book – Work of Nations –that globalization is dividing work into 3
categories:
1. Routine production work
2. “in person” services
3. “symbolic-analytic” services carried out by“symbolic analysts” (engineers, attorneys,scientists, professors, executives, journalists,consultants, etc.) who process information

Knowledge Work?
• Knowledge work – increasingly translated into
working knowledge• What is in minds of employees captured andcodified in digital software to be controlled bycompanies + deployed by “less skilled”
knowledge workers• Property rights in terms of ownership ofknowledge intensive assets are less clearly
defined than with things like factories andmachines

“Weightless” Services• Production globally disarticulated over decades –knowledge services can be moved “overnight”• “back office” functions – call centers, invoiceprocessing, basic data entry services could bedone in India or Vietnam in real time at a fractionof the price• “middle office” work – business processing
Reich’s symbolic analyst functions can beexported as secure communication networks andstandardized software came on line – for 5
analysts in New York you can get 15 in India

“Great Doubling”• Harvard economist Richard Freeman points outthat in the 1990s workers from China, India + exSoviet bloc joined the global labor force• This dramatically increased the size of the global
labor pool from approximately 1.46 billion
workers to 2.93 billion workers• Impact of entry - China, India, ex-Soviet bloc to
the world economy was reduction in capital tolabor ratio• This has shifted the global balance of power tocapital

Educational Doubling• Within a decade from early 1990s number ofuniversity entrants world-wide also doubled• China now has more students in university than US• New “knowledge wars” as competition ramped up
for quality higher education• Canada 1st country to achieve target of over 50% newentrants aged 24 to 34 in job market with college
education – Followed by Japan and then South Korea• 2007 figures for Canada, Japan and South Korea are
57%/55%/54% respectively – US – 40%, UK – 38%,Germany – 25%

Learning Focus Shift• Reduction in US/UK/EU in students studying
science, technology, engineering and math(STEM)• Asia – study of STEM subjects seen as key tonational development and road to goodcareer• China – 37% of students study engineering as
opposed to 27% in South Korea, 22% Germany, 7% - UK, 5% - US

War for Talent• Relationship between learning + earning beingreconsidered by companies world-wide• MNCs gravitate toward global elite universities
to secure top talent + next generation of highflyers• Widens income inequality among middle-classoccupations as those with similar education
have dissimilar salaries

High-Skill, Low Wage
• Confluence of several factors we have mentioned
create a global auction between high- + low-costworkers – no matter how skilled – in different
parts of the world• Are university professors threatened by cutpriced lecturers from India?
• No, but things like global rankings enhance theposition of elite academics in their field +because they contribute to “reputational capital”
of their institutions they expect special privileges