The prevailing economic philosophy of the last few decades – Free Market Capitalism – has been based on the view that competition and a minimal level of government regulation is good for the whole economy, as this forces companies to become ever more efficient and innovative, which in turn leads to the dual benefits of economic growth and lower prices. Although inevitably those at the top will get very rich, the theory is that the wealth will filter down to everyone through job creation and spending. However, even if this theory were true, globalisation has compromised the whole philosophy.
One of the fundamental tenets of free market economics is that all companies should compete with each other on an equal footing under the same legal conditions. However as wages are higher in the West, there is an incentive for companies to re-locate their workforce East, to countries like India and China, where wages are much lower. (There have been frequent allegations that countries like China manipulate their currency to ensure this is the case). In addition in the West, companies are forced to comply with all sorts of employee protection and health and safety laws, as well as a minimum wage; in countries such as China and India such laws are weak and in many cases do not even exist at all. Therefore increasingly companies in the West look to shift their operations abroad, which cuts costs for them and increases their profits, but puts people here out of work, and additionally places a burden on the taxpayer in terms of all the unemployment benefits which then have to be paid.
Of course companies don’t always have to relocate abroad to use cheap foreign labour, as lots of that cheap foreign labour comes here voluntarily. Whether economic migration from troubled parts of the world, illegal immigrants working for less than the minimum wage, or the free movement of labour as enshrined in the EU constitution, there is a never-ending stream of people prepared to work for ever-cheaper wages and keeping unemployment at socially destructive levels. For more on Immigration click here.
The problem is then compounded because the extra money the wealthy now possess is used to buy things which are frequently also made abroad, so the wealth created no longer ‘filters down’ as it used to. Consequently the rich in this country get richer, as do the factory owners in China and India, while unemployment levels in the West steadily increase, and the Chinese and India workers are exploited, abused and underpaid.
Additionally, many third-world countries have dreadfully corrupt governments, who steal the country’s wealth from the people for their own benefit. (For example most African countries have colossal mineral resources, but only the elite benefit from it while the rest of country endure poverty, at sometimes unimaginable levels.) Western companies, following the ‘Free Market’ model, are not interested in human rights and only interested in what increases profits for them. Consequently they are more than happy to do business with these corrupt governments, the net result being rich Western companies, rich Third World elites, and vast populations of poor dispossessed people who are being openly robbed on a daily basis.
Is it any wonder that in some of these countries the people, with almost nothing to lose, form into armed groups which frequently then take on an anti-Western stance. For example in Somalia there has been a recent problem with piracy. However what many people don’t know is that many of those pirates were fisherman, who have had their livelihoods destroyed by western factory ships which have stripped all the fish from the sea. We’re reaping what we’ve sown there. It’s also all too easy for groups like Al Qaeda to recruit people to attack the West, when it is the West which is implicitly involved in raping their counties and keeping them in poverty. Islamic fundamentalism may be a problem, but a significant contributory factor is the cynical economic system which puts profit before people, and we in the West cannot blame their dreadful corrupt governments, when we are deeply involved in keeping them in power, and sharing in the gains of their corruption. What makes it even worse is that most of the riches extracted from those areas stays in the hands of our own wealthy elites, but when things get so bad that the people rise up and military intervention is required, it is our own poorer classes who form the ‘boots on the ground’, which then get sent off to get killed. A very cynical system indeed.
In this increasingly globalised world there is a new mechanism by which corporations and wealthy elites hide their money and avoid tax, and that is by use of Tax Havens. Tax Havens are countries which deploy very low tax rates, often with great levels of secrecy, in order to attract money and allow wealthy individuals and corporations to ‘steal’ the tax revenue from the countries where that money was generated. This is an absolutely massive problem and for more about it click here.
One final problem from globalisation is the issue of Regulatory Arbitrage. This is when multinational companies play countries off against each other in order to get the most preferential deals. An obvious way is tax, where companies will offer to set up in whichever country has the lowest tax rates. Countries will then ‘compete’ to see who will charge the least tax – the so-called ‘race to the bottom’, where the only losers are ordinary people, who have to suffer austerity to make up for the lost tax-revenue. However there are also some far more insidious things that happen. For example many corporates like to set up factories in third world countries where employee protection and health-and-safety legislation is weakest, as it’s cheaper for them. The welfare of the workers is of course to them irrelevant – profit before people is all that they care about. This leads to situations such as the recent deaths in Bangladesh, where hundreds of people died in fires and building collapses at dangerous factories, all so that Western companies can manufacture clothes more cheaply and increase their profits.
As well as health-and-safety of their employees, other areas where corporates will head for whichever jurisdiction benefits them the most include animal welfare, use of dangerous chemicals, anti-pollution legislation, and environmental destruction. Again in these areas governments are incentivised to minimise their legislation in order to attract investment, to the benefit of the multinationals and to the detriment of ordinary people and the world around us.