The Rise of an Alternative to Free Trade

We’ve spent the last few weeks talking about the impact of globalization on developing countries, but this final blog is going to examine an alternative to free trade. Many people have argued that free trade has allowed producers in developing countries, especially in the market for agriculture, to suffer from insufficient wages and safety hazards. The theory of Fair Trade attempts to solve these labor issues by encouraging local production of goods through government assistance.

The main mechanisms for Fair Trade, as explained in the Journal of Economic Perspectives:

  • A price floor is set so that there is a minimum price that a Fair Trade buyer can buy from a Fair Trade producer. Prices can be negotiated higher when considering the quality and other aspects of the goods. This price floor also acts a cushion for when economic recession occurs and there may be cause for worry about being able to sell goods. Only in very recent years has the market price actually exceeded the fair trade price for coffee.
  • There is a Fair Trade premium that is paid from the buyer to the cooperative in addition to the price of the good being sold. The premium is supposed to be used by cooperatives in a democratic style to determine how to enhance production or community infrastructure.
  • Fair Trade buyers gain stable access to credit by agreeing to a long-term contract of at least one year and must “provide some advance crop financing to producer groups (up to 60 percent if requested”.
  • “Free Trade workers must have the freedom of association, safe working conditions, and wages at least equal to the legal minimum. Some forms of child labor are prohibited.”
  • Farmers are encouraged to organize democratic associations or cooperatives that can facilitate sales and manage the premium received from sold products.
  • Fair Trade production prohibits harmful chemicals from being used in food production to maintain a healthier environment. Producers are required to provide basic environmental reports that describe their impacts on the environment. Genetically modified crops are not allowed.
  • For a product to be sold under the mark of Fair Trade, both the buyer and seller must be Fair Trade certified. Standards vary on the particular crop being produced and are analyzed by different Fair Trade leaders such as Fairtrade International and FLO-CERT. Organizations obtain a Fair Trade certification by successfully applying to FLO-CERT and passing an initial inspection. Certifications can only be maintained by renewing with FLO-CERT and allowing for another inspection of the Fair Trade organization. (Dragusanu et al., 219-221)

The Institute for the Study of Labor, a non-profit project that allows scholars to engage in research about labor economics, conducted a study on the economic impact of Fair Trade. The findings, although still in its earliest stages, suggest that there is a positive impact on the prices and income of producers. In contract, the Fair Trade premiums were only earned on a fraction of the producers’ output due to the limited world demand of Fair Trade buyers, and thus the average amount of premium per producer is fairly small. Unfortunately, many other attempted empirical findings from the study were said to come inconclusive, which has become standard due to the inconsistency of studies trying to quantify the negative and positive effects internally and externally of Fair Trade policies and the growth of cooperatives (Dammert and Mohan, 24-25).

Fair Trade has been on the rise over the past couple of decades. In 2006, consumers spent $2.2 billion on Fair Trade certified products, which was a 42% increase over the previous year, ultimately benefitting over seven million producers in developing countries. 3.3% of all coffee sold was Fair Trade certified in 2006 which was eight times the amount sold in 2001 (Downie). Mexico examined its own use of Fair Trade policies and determined the main obstacles to the economic reform are its lack of power in the current world market, its lack of participation from small farmers, unawareness by consumers, and a necessity for more government aid. Regardless, Mexican farmers have expressed optimism in regards to the implementation of Fair Trade throughout the country, which has already developed largely in its market for coffee (Godoy).

Fair Trade is definitely an innovative way to challenge some of the labor issues that plague the current neoliberal practices in agricultural markets. The word of certified Fair Trade companies and foods has spread all over the world, and it has become part of a growing discussion in development and labor economics. If there were enough room in this blog post, I would’ve described a real life example of how Fair Trade has been implemented in the coffee industry for decades and how it compared to similar markets that participated in Free Trade. Thank you for taking a look at the impact of globalization on developing economics with me over the last few weeks.

Sources:
Dammert, Ana C., and Sarah Mohan. “A Survey Of The Economics Of Fair Trade.” Journal of Economic Surveys 29.5 (2014): 855-68. Web.

Downie, Andrew. “Fair Trade in Bloom.” NY Times. 2 Oct. 2007. Web.

Dragusanu, Raluca, Daniele Giovannucci, and Nathan Nunn. “The Economics of Fair Trade.” Journal of Economic Perspectives 28.3 (2014): 217-36. Web.

Godoy, Emilio. “Fair Trade Will Become Major Trend, Say Mexico Growers.” Banderas News. Inter Press Service, 12 Oct. 2009. Web.

Poland: A Developed Nation’s Path to Development

When you think of international development, you usually wouldn’t initially consider the European countries currently undergoing development, yet there are many European nations currently partaking in trade liberalization in hopes to increase their economic activity and boost general welfare. Poland is a perfect example of this, as the country demonstrates aspects of developed and developing countries. As a developed nation, Poland is part of the EU, significantly integrated in trade and capital flows, puts little emphasis on agriculture, and maintains a relatively well educated labor force. However, as a developing nation, Poland relies on productivity growth from imports and exports, as well as reaching high levels of emigration (Gradzewicz et al.). In this blog post, we are going to examine how Poland transitioned from a closed to an open economy, as well as how this engagement in globalization effected the country’s labor from an emigration standpoint.

By the time that Poland had broken off from the communist economic system and embraced open markets in the 1980s, the country was already in massive financial distress. Between 1984 and 1985, Poland’s trade surplus with the West had fallen from $1.5 billion to $1.08 billion. This was almost half of the government’s target for the surplus, which was hoped to be at $2 billion. Then in 1986, national debt to the West rose dramatically from $2 billion to $31.3 billion, mostly due to changing exchange rates. The inflation problem in Poland contributed to these altering exchange rates, considering the increase in retail prices by 18% and wages by 19.5%, yet labor productivity had only increased by 5%. And if that wasn’t enough, the Polish government estimated that $40 million to $50 million of its food exports to Western Europe were lost due to the contamination of food from a nuclear plant that had exploded in May of 1986. This also led to a decrease in confidence of the Polish food export market, in which food sales ran 10% lower in 1987 (Gilette).

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In the 1990’s, Poland began to liberalize its markets and establish itself as a member of the global economy. The effects of this could be observed by a rise from 49% in 1991 to 82.9% in 2006 in trade openness (a measurement of the ratio of exports and imports to GDP). Foreign direct investment and imports have been the largest contribution to the Polish economy’s growth in productivity over the last couple of decades. Also, as trade has become more liberalized, the price of imports has begun to decrease, leading to more inexpensive inputs for sophisticated goods, and has caused a more competitive export market (Gradzewicz et al.).

As always, we must take a look at the negative impacts that result from globalization. Domestic food sellers in Poland have been forced to challenge the supermarkets of global corporations, ultimately leading to the closing down of 3,000 Polish grocery stores in 2007. The domestic grocery stores are unable to supply as many goods at the same prices as these supermarkets and are left unable to compete (Krakow Post). Also, as wage differences began to widen, a considerable population of the Polish labor force began to emigrate to other EU countries. The Centre for Migrations Research of University of Warsaw concluded in 2006 that roughly 3% of the workforce had emigrated. The majority of these migrants tend to be educated, ultimately causing a shortage of educated workers in Polish firms. In 2007, the National Bank of Poland acknowledged the country’s largest barrier to growth as the absence of skilled labor. Many of the emigrants do send back remanences to households in Poland which had risen to as much as 1.2% of the nation’s GDP (Gradzewicz et al.).

Poland is an interesting case study in the topic of globalization because it acts as both a developing and developed country. It has been able to reap the benefits of globalization over the last couple of decades by increasing its imports and exports, but it has fallen victim to the usual problem of income inequality and emigration of skilled labor. The country’s domestic markets have struggled as a result of acting in a global economy, but the average consumer is able to obtain goods for cheaper prices, and the average worker is able to make more money. I personally believe that the initial transition into globalization was a good step for the Polish economy because it was able to handily reduce the country’s debt and increase the per capita income, but the long run problems of globalization do still persist and make it difficult to determine the success of trade liberalization.

Sources:

Gillette, Robert. “Poland’s Economy Shows Few Signs of Progress : Nation Fails to Reach Modest Targets in Most Sectors During 1st Half of Year.” Los Angeles Times, 02 Aug. 1986. Web. 08 Apr. 2016.

Gorynia, Marian, Jan Nowak, and Radoslaw Wolniak. Foreign Direct Investment in Central and Eastern Europe. Print.

Gradzewicz, Michal, Jan Hagemejer, and Zbigniew Zolkiewski. Globalization and the Polish Economy: Stylized Facts and CGE Model Simulations. National Bank of Poland. Web.

“Trade Sector Grows Rapidly in Poland | Krakow Post.” Krakow Post. 15 Feb. 2008. Web.

Globalization: The Harbinger of The End of Poverty in Argentina?

Many people know Argentina for being a Latin American country rich with history and culture, but there is also much to be learned from the Argentinian economic system over the past several decades. The impact of globalization on this nation remains fairly consistent with South Korea and Bangladesh, but the main difference that occurred here was the political instability that arose from imposed economic reforms. This week we will be looking at the influence of globalization on poverty, income inequality, and debt in Argentina.

Between 1945 and 1975, the Argentinian government attempted to control the manufacturing of several industries, such as iron, oil, and petrochemical products. The government “established strong regulations and an intricate scheme of taxes and subsidies over the private activity”. As this form of development failed, the country began to open its financial and commercial markets, as well as dispose of previous governmental reforms that hindered international trade. After struggling with inflation for several years, in the 1990’s Argentina actively deregulated private activity and diminished the country’s inflation, allowing per capita income to rise by more than 50%. However, like many countries that gain financial success from globalization, national income inequality began to grow (Bebczuk and Gasparini, 3).

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(GBA = Greater Buenos Aires)

The above table demonstrates the rising level of inequality in Argentina throughout the early-mid 1990’s, which although GDP growth had been at its highest in decades for the country, there seems to be a connection between inequality and the country’s liberalization of trade and investment. Income gap decreased throughout the 1980’s for college graduates and high school graduates, but then the necessity for skilled labor in newly privatized fields began to increase that gap once again and lead towards income inequality that would only rival the peak of the hyperinflation crisis of Argentina in earlier decades (Bebczuk and Gasparini, 23).

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From 1999 to 2002, Argentina faced a major financial crisis in which the “GDP declined by more than twenty percent, the country defaulted on its large external debt, the peg to the dollar was abandoned, and unemployment and poverty reached record highs” (Chudnovsky, 41) The result of the crisis was 39 Argentinians murdered my police and bank securities, as well as 30,000 people injured and over 50% of the population plunged into poverty and grief (Dabes).  The country had successfully attempted to further liberalize trade and expand its production of exports by negotiating with the FTAA and WTO (Chudnovsky, 41-42).

If you are interested in learning more about the 2001 economic crisis in Argentina that resulted from failed neoliberal policies, there are several sources you may examine. Memoria del Saqueo is a documentary that shows the political corruption that was very prominent in Argentinian culture as multinational corporations were able to deplete the countries resources. The Take, as we watched in our own ID 120 class, demonstrates the labor side of the economic reforms in Argentina throughout the past couple of decades and the protests that ensued when the government was ready to shut down manufacturing factories. One more documentary that would be recommended is the Argentina Experience in which Greek filmmaker Yorgos Avgeropoulos recounts his firsthand experience of the crisis, as well displays parallels between Argentina from a decade ago and its current form (Dabes).

Argentina has become one of the world’s leading beef and soybean exporters, while also remaining a prominent producer of sunflower seeds, Yerba mate, lemons and soybean oil. With the economic success that has resulted from performing as a global exporter, the Argentinian government has invested heavily in health and education over the last decade. There have also been improvements in reducing poverty, considering the incomes of the bottom 40% have increased annually at about 11.8% in the last decade. Even with such success, 12.7% of the population lived in poverty in 2014, and about one-third of the nation lives on the edge of poverty by living on between 4 and 10 dollars a day (The World Bank).

In an effort to clear Argentina’s default on its debts in 2001, Argentina agreed to pay $1.35 billion to Italian creditors in February of 2016. There has been no progress on a deal between the country and the New York hedge firms that it owes money to, as the national government does not have the funds to pay the amount that the companies have bitterly waited for during the last decade. Argentinian officials desired to exchange new bonds for the bonds it defaulted on, but because these new bonds would be worth significantly less, the firms were not compliant. Currently, Argentina is in a tricky situation because a Manhattan court has ruled that Argentina had to pay all of its creditors at once, but it does not have the capability to pay the Italian firm and New York hedge firms at the same time with full repayment and interest (Stevenson).

Although Argentina shares similar success from globalization to South Korea and Bangladesh, there have been many issues of the government being able to handle the national debt that resulted from the economic policies that had been instated by the government. It’s difficult to determine the exact effects of globalization on Argentina due to the numerous instances of political corruption that I did not have the chance to describe in this blog post. Also, I find it hard to determine whether the poverty levels would’ve been higher if the country had never embraced the privatization of its industries. Similarly, to the other case studies we’ve looked at, Argentina might be another case of having to wait and see in order to truly examine the results. If the country can rebound from defaulting on its debt and improve the national levels of poverty, then the introduction of globalization to enhance GDP might’ve been worth it in the long-run, even if there were some setbacks in the short-run.

Sources:

Bebczuk, Ricardo, and Leonardo Gasparini. Globalisation and Inequality. The Case of Argentina. Departamento De Economía. Universidad Nacional De La Plata, July 2001. Web.

Chudnovsky, Daniel. Globalization and the Environment: Lessons from the Americas. Global Development and Environment Institute at Tufts University, June 2004. Web.

Dabes, Cintia. “Want to Know More About the 2001-2 Crisis?” The Argentina Independent. 03 Jan. 2012. Web.

Stevenson, Alexandra. “After 14 Years at Odds, Argentina Aims to Settle Debt With Hedge Funds.” NY Times. 2 Feb. 2016. Web.

World Bank. “Argentina Overview.” Argentina Overview. The World Bank, 28 Mar. 2016. Web.

Can the Bangladeshi Textile Industry Elevate the Country Out of Poverty?

Bangladesh, a South Asian country that can be found bordering India and Myanmar, has caused a circulation of debate around the successes and failures of utilizing globalization as the primary form of modern development. The country had been born into poverty upon its separation from Pakistan but slowly became more financially independent as years went on. The Bangladeshi economy has steadily rose 6% per year since 1996 through its highly important service and agricultural sectors, even though the country has struggled with “political instability, poor infrastructure, corruption, insufficient power supplies, slow implementation of economic reforms, and the 2008-09 global financial crisis and recession”. Much of this economic growth can be attributed to the nation’s export of garments, which has accounted for more than 80% of total exports and exceeded $25 billion in 2015 (CIA).

The origin of the Bangladeshi textile industry can be traced back to as early as the official independence of Bangladesh in 1971 when the nation’s newly formed government took control of the textile factories and organized them under the Bangladesh Textile Mills Corporation (Islam et al., 32). Aside from the organizational struggles that resulted from the national takeover of the textile production, there were “problems such as low productivity in the labor force, lack of planning, indiscipline, lack of accountability, and poor machine maintenance and operation resulted in a lack of profit”. This led to the privatization of textile manufacturing, strengthening the quality of fabric being used by factories, and ultimately increasing the global demand for Bangladeshi garments. Rapid growth followed as Bangladesh led an export-oriented garment industry that had originated during the early 1980’s (Islam et al., 33).

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In a policy paper written by the Danish International Development Agency in 2013, the problems of the Bangladeshi economy were examined, even in the midst of what seemed to be economic success from its booming service and manufacturing sectors. The agency notes that, although the country was successfully able to reduce poverty levels from 57% in 1991-92 to 31.5% in 2010, the country is still considered one of the poorest countries in the world, ranking 146 out of 186 on the 2011 United Nations Human Development Index. Along with the economic growth that has gradually occurred, there has also been an increase in inequality, as well as disparity in wealth between the majority and the minority ethnic groups. Roughly 25%, around 40 million people, are in such poverty that they spend almost all of their income on food and are still unable to fulfill their own basic nutritional requirements. This leads to the next startling statistic that about 40% of children and 30% of women are malnourished, which becomes especially troublesome for households that are led by a female or have no parental care at all (DANIDA, 6).

As we can see, the increase in garment exports has decreased the poverty levels in Bangladesh by a significant amount over the last couple of decades, but what about the humanitarian side of this movement? Recently, there have been major concerns regarding the safety and wages of factory workers, considering that only 5% of the workforce partake in trade unions. This is especially startling due to the lack of organization and power of these unions in contrast to the rigid structure of the factories’ management. Widespread corruption has allowed for unsafe buildings to be considered safely regulated due to the lack of staff and equipment by the government (DANIDA, 8).

The Spectrum and Rana Plaza factory collapses are the result of the unsafe working conditions for factory workers in Bangladesh. In 2005, the Spectrum sweater factory had caved in and killed 64 workers, yet there had been no upheaval in regulations after that incident. Then, in 2013, a fire at the Tazreen Fashions factory and a collapse of the Rana Plaza factory killed 112 and 1,129 workers respectively. The two main responses from the retailers that have factories in Bangladesh have been to call for more stringent safety codes for these buildings and to work closely with labor unions and workers to receive firsthand account of how to deal with these problems. The Bangladesh Accord for Fire and Building Safety and the Alliance for Bangladesh Worker Safety, each made up of Western private retailers, have begun to inspect the violations against labor in Bangladesh. These two organizations have been trying to institute better measures for worker safety in Bangladeshi factories and plan to ultimately inspect 2,000 of Bangladesh’s 5,000+ workshops. On the surface, this looks like a very altruistic plan of action, but the 3,000+ buildings not being inspected generally have worse conditions and there are many secret projects being done in those factories by Western brands (Greenhouse and Harris).

Even with these prevalent problems of worker safety in Bangladesh, the garment industry continues to dominate the country’s exports. In 2014, the textile and garment sectors accounted for $24 billion of the $25 billion total goods exported, but the leaders of the industry continue to want to expand its production and increase output. Tapan Chowdhury, President of Bangladesh Textile Mills Association, wants to raise Bangladesh’s ready-made garments and textile exports to $50 billion by 2021 (Ittefaq).

As we had done with South Korea last week, we should analyze whether globalization, specifically from the garment and textile industry, has ultimately benefitted the developing nation of Bangladesh. The economic growth is undeniable when looking at the substantial annual increase in GDP due to the dominance of the Bangladeshi textile and garment sectors. Another result of the boom of these exports is that poverty and unemployment rates have fallen. However, despite these benefits of globalization, there has also been an increase in inequality, especially when looking at the economic instability of minority groups which leads to social tension. There has been continuous need to revitalize the labor regulations in Bangladeshi factories, as was seen in the thousands of deaths from disasters that occurred to their workers. This leaves the question of whether the private companies should be the ones left to monitor the upheaval of these newly enforced codes.

Personally, I can’t denote whether Bangladesh can be deemed a development success or not due to all of the complications that surrounds its garment industry. Surely, there are many areas for improvement from a humanitarian and labor point of view, but the country has made strides in improving poverty even if there has been increase in inequality. We also will see over the next decade what impact these private retailing companies and development agencies will have on the economy and welfare of Bangladeshi workers. How do you think Bangladesh is going to progress over the next decade? Should it change its current plan to dominate as a garment-exporter?

Sources:

Denmark. DANIDA. Ministry of Foreign Affairs of Denmark. DANIDA. Sept. 2013. Web.

Greenhouse, Steven, and Elizabeth A. Harris. “Battling for a Safer Bangladesh.” NY Times. 21 Apr. 2014. Web.

Islam, Mazedul, Md., Monirul Islam, Md., and Adnan Maroof Khan. “Textile Industries in Bangladesh and Challenges of Growth.” Research Journal of Engineering Sciences 2.3 (2013): 31-37. ICSA. 15 Feb. 2013. Web.

“Bangladesh Plans to Raise Textile Export to $50b by 2021.” Ittefaq [Dhaka] 23 Mar. 2015. Web.

“South Asia :: Bangladesh.” The World Factbook. Central Intelligence Agency, 25 Feb. 2016. Web.

 

 

 

South Korea: An Economic Development Success Story?

As a development scholar, my primary interest resides within the influence of international trade on developing economies from a financial and humanitarian standpoint. The following blog posts will attempt to analyze examples of this dynamic by taking a closer look at case studies of developing economies that rely heavily upon exports, imports, or both. First, we will examine a success story of the rapidly developing country of South Korea throughout the past several decades and how it was able to successfully utilize its export-centered economy in a global setting.

Originally South Korea did not have the capability to compete in a global economy until the 1960s when it transitioned from a market focused on domestic products to an export-reliant economy. Prior to this change, the Korean economic system was heavily characterized by its agriculture and mining industries, while manufacturing only consisted of primary products that amounted to 3% of the country’s GNP. However, by expanding its manufacturing sector to simple products like textiles, and eventually sophisticated goods like automobiles and computers, total exports represented over 40 percent of Korean GNP. A result of this was that “the compound annual growth of per capita income was well in excess of 7 percent, making it one of the fastest growing economies in the world during this period” (Westphal 43).Screen Shot 2016-03-17 at 9.07.37 PM

South Korea has earned its rank as the eleventh largest global trading nation, exploding in trade value from $134.9 billion in 1990 to beyond $857.3 billion in 2008. Trading partners of the country originally included Japan, Europe, and the United States, but eventually a large percentage of total Korean exports ended up in China. By 2008, Korea had trade agreements with over 220 countries. The sophistication of the manufactured exports of Korea has increased over time, resulting in a current primary export market of chemicals, automobiles, computers, and other forms of high-level technology (Bark 24-36).

With the rise of corporate manufacturing in South Korea, many family-controlled conglomerates have risen with the aid of government policies that allowed them to benefit from tax advantages, exceptional loans, anti-labor policies, and various government contributions. A prime example of this consists of the dominant presence of Samsung in Korean economic activity and daily life. Aside from the penetration of Samsung in Korean education, electronics, amusement parks, life insurance, medicine, and housing, the company accounts for twenty percent of Korean exports and roughly seventeen percent of the annual GNP (Estrin).

When examining the success of Samsung in Korea, it is also important to assess the level of corruption that may be occurring within the realms of labor and management. In 2013, it was found that the Samsung Electronics factories had been contributing to various diseases of former employees. The corporation provided compensation to the workers who protested about this very issue, but Samsung refused to acknowledge any blame (Estrin).

Samsung demonstrates the power that multinational corporations have on an export-based economy like South Korea. “The former chairman of Samsung, Lee Kun-hee, was convicted of tax evasion and breach of trust in 2009, but he received a presidential pardon and returned to the chairmanship” (Estrin). The essentiality of Samsung to Korean economics can actually be deemed as frightening. It can be difficult for one to say that it is moral that the needs of the corporation outweigh the governmental law considering how fundamental Samsung is to Korean wealth.

Another problem that has emerged through the rapid development of South Korea is the massively increasing problem of income inequality. According to the IMF, forty-five percent of total income was being shared by the top ten percent of Korean earners. This percentage was the highest among its Asian-Pacific counterparts, with Singapore coming close at forty-two percent and Japan at forty-one percent (The Korea Economic Daily). This shouldn’t come as too much of a surprise considering most of the labor in South Korea is being focused in manufacturing while the top earners reside in the conglomerates that have been aided by government policies for decades.

This leaves the question then whether South Korea can be presented a successful model for export-driven developing economies. The empirical data demonstrates immense prosperity over the last three decades, especially when looking at the country’s change in GNP and global trade relations. However, when looking from a humanitarian lens, can we look past the increasing income gap, poor labor conditions, and the crippling power of large multinational corporations? It is important to assess all sides of the situation and weigh the pros and cons to international trade and its impact on developing economies. The blogs that follow will hopefully allow readers to examine the many outcomes, both expected and unexpected, of utilizing international trade as a method of participating in modern development.

Sources Cited:
Bark, Taeho. Ed. Byongwon Bahk and Gi-Wook Shin. Shorenstein APARC Working Papers. Stanford University, Feb. 2012. Web.

Estrin, James. “Samsung and the South Korean Success Story.” Web log post. NY Times Lens Blogs. NY Times, 13 Nov. 2015. Web.

“Korea’s Income Inequality Largest among Asian Nations…IMF Report.” The Korea Economic Daily. 16 Mar. 2016. Web.

Westphal, Larry E. “Industrial Policy in an Export-Propelled Economy: Lessons from South Korea’s Experience.” Journal of Economic Perspectives 4.3 (1990): 41-59. JSTOR. Web.