Construction of Poverty - Essay Example

Construction of Poverty Introduction There are three senses where poverty can be best understood. In the material sense, poverty is used to de the "deprivation of essential goods and services" which can include basic necessities like food, clothing, shelter, and health care. In terms of social need, poverty implies "social exclusion, dependency, and the [in]ability to participate in society. It is also in this sense that poverty is interpreted as the lack of formal education and information. The most commonly used meaning of poverty is the "lack of sufficient income and wealth (Poverty 2006)."1 Throughout the centuries, poverty has become a problem in the global economy. It is irrefutable that countries have not been totally successful in the alleviation of poverty. During 2001, The World Bank reports that one-third of the world population or less than three billion people live on less than $2 a day. What is also notable is a huge income inequality in the world as the three richest people in the world are seen to have more wealth than all 600 million people thriving in the world's poorest nations. It is also reported that 50, 000 people die each day due to poverty related causes (Millennium Campaign n.d.). These, together with a lot of empirical evidences show how the world thrives in poverty. There are a lot of factors which are directly linked with poverty. In fact, there is a continuous debate on the underlying causes of poverty making it a politicized issue. Some critics argue that poverty ensues from personal choices or preferences while the other end associates poverty with factors beyond a person's choice. The last view poverty as "the result of many systemic factors" like the lack of opportunity which, is traced to the lack of education which, in turn, is due to the lack of government intervention and provision (Poverty 2006). This report will look at the causes of poverty, specifically how poverty is constructed or heightened by factors beyond personal choices and preferences. This paper will focus on how different organizations, both public and private contribute to poverty. Institutions to be looked at are the International Monetary Fund, World Bank, World Trade Organizations, and multinational corporations. This report will conclude with its findings. World Bank and International Monetary Fund (IMF) Both the World Bank and IMF are agencies which aspire to alleviate global poverty. The mission of World Bank (2006) reads "Our mission is to help developing countries and their people reach the goals by working with our partners to alleviate poverty. To do that we concentrate on building the climate for investment, jobs and sustainable growth, so that economies will grow, and by investing in and empowering poor people to participate in development." On the other hand, IMF (2006) claims that it "provides low-income countries with policy advice, technical assistance, and financial support" and that "low-income countries receive more than half of the technical assistance provided by the Fund, and financial support is extended at low interest rates and over relatively long time horizons." However, critics argue that these two institutions through their various policies cause poverty in many developing nations. These organizations have also been criticized as they promote poor countries' dependency on richer nations. This section will briefly examine the policies of these agencies which are seen to heighten, instead of alleviate, poverty. The IMF and World Bank's primary program in reducing poverty is the extension of financial assistance to impoverished nations. However, this financial aid is coupled with "neoliberal"2 ideology or agenda which is a prerequisite for the fund. Examples of these conditions are "cutbacks" or "liberalization" of the economy, opening markets for trade, minimization of government intervention, privatization which causes the reduced protection of domestic industries, currency devaluation, mounts in interest rates, "flexibility" of the labor market, elimination of subsidies, and incentive for foreign investors (Shah 2005). Joseph Stiglitz, the former head of World Bank, expressed the same sentiment in the interview conducted by Observer. He stated that the bank hands the same four-step program to any country assisted-privatization, capital market liberalization, market based pricing, and free trade. These policies bring about structural change in the aided countries. As countries have to pay the debt extended by either the IMF or World Bank, the government starts to think of ways on how to raise money. Commonly, economies resort to increasing revenue by exportation of goods and services. However, since there are countries which are not economically and socially stable and ready to participate in the global trade, they are told to concentrate in the production in a number of similar cash crops. These then lead to huge price wars over nations aiming to capture a significant share in the world market. Logically, importing nations prefer commodities which are more competitively priced forcing indebted economies to sell their products at a lower price than others. This mechanism "cheapens" the resources of poor countries to the advantage of developed nations. It also puts the burden on the government which aims to raise more funds in order to pay off their debts on time. As they have no control on the prices of their traded commodities, they often seek to increase the volume of their exports in order to keep the stability of their currencies. These economies see their need to earn foreign currencies from trade which will be used as debt payments. Having a government which is concentrated on its debt obligation to the World Bank and IMF, therefore must spend less, reduce consumption, and eliminate financial regulations, thus, leading to what Stiglitz called capital market liberalization. This capital market liberalization, together with the significantly lower value of labor in the poor country and foreign investment incentives facilitate the flow of capital in the economy. However, just when the economy becomes so dependent on foreign investors it will face hardships in stabilizing the value of its currency to the discouragement of investors who will readily pull out their assets and interests. Meanwhile, when exchange rates are kept in favor of the IMF donors, receiving countries consequently become poor and even poorer. A good illustration of the above discussion is the global economic crisis which occurred from 1997-1999. The worldwide collapse of the capital market is attributed to "unregulated free markets, lack of protection for emerging economies, and debt (Debt and the Global 2001)." The resulting economic and financial crisis saw how stock market and economies collapse while raising the rate of unemployment and poverty. The impact of the crisis was felt almost all over the world from Asia, Russia, Latin America, and Africa. Debt is seen to cripple third world economies' development. The increasing debt owed by developing countries to the World Bank and IMF is apparently increasing. During 1970, the world's poorest countries owed $25 billion in total debt. This mounted to $523 billion in 2002 with Africa accounting for $295 billion (The Scale of Debt). The implication of this is devastating. As poor countries strive to fulfill their debt obligations, it sacrifices health and education spending which makes them even poorer. The Progress Report of Nations (1999) report by UNICEF states that debt is killing children. Though debt and children's death are not directly related, it can be seen that debt servicing is a way that "countries are diverting resources away from social provisions to repay debt." Thus, this situation adversely affects the poor especially women and children as the financial resources which could have been used to provide necessities for the poor was channeled to pay the country's financial aid from World Bank or IMF. Debt and environmental hazards, which at first may seem to be two separate issues, are related.3 According to Shah (2001), "the more the developing countries stay in debt, the more they will feel that they need to milk the earth's resources for hard cash they can bring in an also cut back on social, health, environmental conservation, employment and other important programs." For instance, Brazil was "forced" to abandon a key project in protecting the Amazon project in order to comply with the IMF's regulation. Brazil cut its spending particularly in social services and environmental programs. World Trade Organization (WTO) The WTO is an institution which goes beyond promoting free trade in the world economy. The goal of WTO to eliminate trade barriers and promote the mobility of goods and services in the countries' borders are its ways of creating a global village, thus, becoming a catalyst for globalization. The website of WTO reads "the World Trade Organization (WTO) is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible." However, the smooth and free flow of trade can also be linked to a number of issues which ends in poverty. It is argued that the WTO policies will only be beneficial to the wealthy nations but are generally detrimental for the poor. It is also acknowledged that it will not just be the poor in developing countries but also the poor in the highly industrialized and developed nations. To see free trade and globalization as the integration of goods market is misleading. Free trade also involves the integration of economies financial markets leading to the creation of a global financial system. However, we can see that the current global financial system benefits only the "core"4 but is detrimental to the "periphery."5 According to George Soros (2002) The international financial system is broken down in the sense that it fails to provide adequate capital to countries that need it most and qualify for it. Global financial markets suck most of the world's savings to the centre, but fail to pump money back out to the periphery. Indeed, since 1997, there has been a reverse flow of capital from countries on the poor periphery of the world economy to those in the wealthy centre. ...In practice, of course, international financial markets never have been left to their own devices. Rich countries, led by the US, are in charge. Their primary task is protecting their own interests. When these nations get into trouble, their authorities intervene forcefully. Countries that cannot borrow in international markets in their own currency lack that power. They must turn to the International Monetary Fund (IMF), and the fund is more concerned with international financial stability than with enabling developing countries to pursue the countercyclical policies needed to avoid recession. Another criticism to free trade and globalization are the imbalance and inequality of the terms of trade. It should be noted that as highly industrialized nations require their less developed trading partners, they employ protectionist measures to protect their domestic industries. This causes an imbalance in favor of industrialized nations. Akyz, notes: Developing countries are once again facing intense pressure to liberalize trade in industrial products even though the extravagant benefits claimed from the Uruguay Round [of trade talks] have been belied by subsequent experience. According to one estimate, the Uruguay Round's combined liberalization increased global economic welfare by $75 billion, of which almost $70 billion went to developed countries, $5 billion to Newly Industrialized Economies (NIEs; Korea, Singapore and Taiwan), and none to developing countries taken together. Despite this, recent years have seen a proliferation of similar exercises, claiming large benefits from further trade liberalization for the world economy in general and for developing countries in particular. The gains estimated by various studies from full liberalization of goods and services trade, or trade in goods alone, range from a couple of hundred billion dollars to more than $2.000 billion. On some accounts, the incidence of gains to developing countries reaches as much as 65 per cent of the total. Multinational Corporations Multinational corporations (MNCs) are not exempt in contributing to overall global poverty. Due to the further opening up international markets, these MNCs can gain access on countries where they can operate profitable. Logically, MNCs would choose to locate on countries where operation costs are reduced. Since developing countries often lack capital but abound in cheap skilled labor, large corporations produce their labor intensive products in such countries. Business process outsourcing is a current trend, where corporations source specific jobs or processes where there is cheap labor. Multinational corporations are seen to intensify competition on developing economies' industries. However, this intense rivalry drives out less efficient domestic firms in the long run. As developing nation's firms are not as technologically equipped and knowledgeable than MNCs, they cannot price competitively to attract price sensitive consumers. The result is an MNC capturing substantial market share at the expense of local firms. A very good example on how an MNC "exploited" a developing country is the case of Shell's operation in Nigeria. Nigeria, although one of the poorest countries in the world is abundant in oil resources. Shell takes advantage of it by setting up its oil production plant in Nigeria saying that the project will benefit the whole economy by generating employment and revenue. However, in reality, Shell only hired 88 people in the locality of Ogoni which represents 2% of its workforce. Aside from that, Shell is also criticized because of environmental degradation and employment issues since its operations. According to environmental activists "Ogoni villages have no clean water, little electricity, few telephones, abysmal health care, and no jobs for displaced farmers and fisher persons, and adding insult to injury, face the effects of unrestrained environmental molestation by Shell everyday (Shell in Nigeria n.d.)." Conclusion Poverty is borne out of interdependent factors in the economy. The World Bank, IMF, WTO, and MNCs state their aim of alleviating poverty in developing countries. However, as shown above, the policies that they currently implement do not conform to their stated missions and goals. In fact, it is shown these can further cripple economic development. The impact of policies should be carefully examined before implementation. There are always two sides of policies, one which is beneficial and the other detrimental. Looking at the perceived benefits often hide the potential dangers to poor nations. In a world where poverty is a reality, a thorough understanding and review of policies to alleviate it should be considered. References International Monetary Fund. (2006). How the IMF Helps Poor Countries. Retrieved May 18, 2006, from http://www.imf.org/external/np/exr/facts/poor.htm Millennium Campaign. (n. d.) Retrieved May 18, 2006, from http://www.millenniumcampaign.org/site/pp.aspc=grKVL2NLE&b=185518 Palast, G. (2001). The Globalizer Who Came in from the Cold. Observer, London. Retrieved May 18, 2006 from http://www.gregpalast.com/detail.cfmartid=78&row=1 Poverty. (2006). Retrieved May 18 2006, from http://en.wikipedia.org/wiki/Poverty Shah, A. (2001). Debt and the Global Economic Crisis of 1997/98/99. Retrieved May 18, 2006 from http://www.globalissues.org/TradeRelated/Debt/EconomicCrisis97.asp --. (2005). Structural Adjustment-a Major Cause of Poverty. Retrieved May 18, 2006 http://www.globalissues.org/TradeRelated/SAP.asp --. (2005). The Scale of Debt Crisis. Retrieved May 18 2006, from http://www.globalissues.org/TradeRelated/Debt/Scale.asp Shell in Nigeria. (n. d.) Retrieved 19 May 2006, from http://www.essentialaction.org/shell/issues.html World Bank. (2006). Challenge. Retrieved May 18 2006, from http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,contentMDK:20040 565menuPK:34563pagePK:34542piPK:36600theSitePK:29708,00.html Read More