It is impossible to eliminate disparities in wealth and development. ~ Discuss.

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1 KITTY WONG 12.3 It is impossible to eliminate disparities in wealth and development. ~ Discuss. Disparity in Geography can be defined as the difference or inequality between regions measured in terms of economic, social and political development with indexes such as the KOF. Wealth, which we will define as the GNI or GDP of a country, is part of the indicators for development. Although it plays a big part, to measure globalisation in detail, other indices should be included as well, such as: the HDI (Human Development Index) of a country, its years of schooling (education), healthcare and nutrition, income, infant mortality, life expectancy and marginalisation. With the income gap widening both internationally and regionally in some countries the U.S. alone experiencing this crisis as the income for its richest 1% population grows 150% while the bottom 90% becomes poorer from 1980 to 2012 (Puzzanghera J., 2014) steps to reduce disparities between the rich and the poor must be taken to improve the standard of living in the world. In the effort to achieve the Millennium Development Goals by 2015, current solutions to alleviate inequality are to promote and/or provide the following to low income countries: free trade and market access, farming subsidies, debt relief, aid, and remittances. However, although these programmes are being actively carried out in the world, it is ultimately impossible to completely eliminate disparities in wealth and development due to the limitations of the aforementioned methods. Encouraging free trade and enabling international market access is one of the solutions to tackle the existing economic disparities in export and import values. The Windward Islands and their banana industry is an example of a region who benefits from its fair trade system, WINFA. Having established WINFA and the beginning of the banana fair trade industry in the 1990s, the industry was able to continue competing internationally in the global market as 90% of their bananas are now exported through fair trade, where as it was only < 30% prior to the first year with the fair-trade suppliers. Earning around 46 million in 2009 (Fairtrade Foundation, 2012), the farmers were generally able to raise living standards and maintain a stable finance due to the fair price offered in the trade, earning around EC $7.00 a box of bananas more compared to non-fair trade suppliers. Other than this financial benefit, the government was also able to invest in medical accessibility (assistance to 600 farmers, EC$250,000), health funds, farming subsidies, educational projects, technological research, and retirement funds etc. as the GDP of the Islands raised by 10% from the banana industry. By introducing the fair trade system in the Windward Islands, the raise in GNI allows the region to become more competitive internationally, and allow economic development in terms of infrastructure, income, increase in domestic jobs, and training through Myrdal s Cumulative Causation Model PAGE 1

2 education to sustain the rate of growth. Social relations can also improve connections between countries, promoting social development as it makes more ties with others; while increasing market access can also attract foreign direct investments to create new jobs and infrastructures. In short, free trade is able to produce a long-term solution of cumulative causation and hence globalising the region in an upward spiral following the economic incline. Free trading can also encourage countries to import other goods from other regions that were not available locally. This, again, makes the country more international as it can access more materials. However, the restraint of utilising free trade as an inequality reducer lies in its social limitations with the countries importing the goods. Two dangers are possible in this scenario: the first is when complete free trade destroys the local businesses. Since this type of trading indicates that the price of the goods will not be subject to the tax revenue of the country, it will sell very cheaply. As a result, locals will buy these cheap imported products and neglect the actual production from its original community, causing the country to lose its competitiveness in comparison to others. To protect its own industries, MICs will usually employ protectionism laws to prevent complete free trading in the world. However, this leads to the second problem for the LICs who are exporting the raw materials, since this act will limit their share of the world market and have the potential to crumble their export rates. For example, in 1993, the European Union had to impose tariff and quota arrangements for the importation of bananas. Due to the cost of 176 euros per tonne of bananas to be exported, the Windward Islands participation in the banana imports of Europe dropped from 40% in 2009 to 8.6% by The falling market price and increased costs of agriculture lead to a large reduction in banana farmers, dropping from 27,000 in 1992 to only 3,500 left in The social and economic impact of this resulted in 25-30% of the population living under the poverty line in St. Lucia and Dominica in 2009 until the issue was resolved with a new deal to be honoured in 2017 (Fairtrade Foundation, 2012). Therefore, although free trade and market access can aid wealth in terms of contributing to its GNI, increasing years of education through government funding, local income and medical accessibility in the HDI; the need for local product demand within a country creates a barrier between trading partners, preventing complete free trade in the world and not allowing LICs to get out of the control MICs have over the global market. Which, according to the Rostow Model of the Stages of Economic Development, stops the LIC from reaching stage 3 as it lacks the money from selling agricultural products to invest in infrastructure and industrialise. PAGE 2

3 The second method considered to be a solution to reducing disparities is farming or agricultural subsidies. As a form of financial support from the government, farming subsidies are usually given to farmers to help them increase supply by lowering the cost of production. The idea lies in that a higher supply of food in the market will lower the prices as demand will not be as high. Like free trade, however, farming subsidies has its advantages and disadvantages. For the countries that implement these supports, it will help young farmers to get started more efficiently and reduce the cost of living for agricultural based families with funds to buy land, machinery and equipment for farming. When the European Union s Common Agricultural Policy was introduced in 1962, an average family had to spend 30% of their monthly income on food. This has now halved to only 15% in 2011, which allows the family to make more money and therefore lift themselves out of poverty. Because of the new low cost of production, more food can also be produced by a region: For CAP, production has risen from 3 tons of food per hector to 7 tons of food per hectare during 1962 to By 1984, the production was far beyond expected, and more crops and research can be spent in medicine, cosmetics, handicrafts etc. which opens up new markets for other exports. The use of farming subsidies (depending on how they are implemented) can also be used to train farmers to use the latest technical production methods, promoting environmental preservation as well as technological advancement. Unfortunately, the method of farming subsidies have to be directly pursued by a country itself rather than relying on others, like free trade. Therefore, LICs that does not employ farming subsidy methods whose deep dependence in agricultural production (around 38% of GDP) make them vulnerable to slight changes in global markets can easily lose the advantage to those who do have the privileges. This negative effect is caused when subsidised MICs produce so much crops that the demand for the LICs production is not needed. The distortion in trade will harm other farmers in other countries and thereby their exports and its value. As a result, farming subsidies are good for solving disparities between local or geographically close regions (e.g. US gives around $148m as a farming subsidy to Brazil for their cotton (Grunwald M., 2010)) through lowering the costs of production for farmers and closing the supply and demand ratio by mass production hence increasing its wealth (GNI) and better living standards; however, it does not necessarily take into account the international influences that may further the inequality between LICs and MICs. One of the major problems with finance in LICs is that they cannot repay the debt they have borrowed in the post-colonial era for development. These indebted countries therefore cannot puts its economic focus into its own development, but rather to repay a huge amount of money that is growing every year due to interests. As a result, heavily indebted poor countries (HIPCs) emerges as regions who cannot hope to repay the large amount of money they owe to (mostly) HICs. The HIPC initiative was then introduced for debt relief, in which an HIPC should it fit the criteria will be able to alleviate its debt up to a 100%. The benefits in receiving the HIPC debt relief mainly lies in the fact that there will be no new debt by interest, or other loans to pay off the original loan. The reduction of debt burden allows the economy of the country to become more PAGE 3

4 sustainable, and hence can choose to spend its income (GNI) on social spending, funding programmes such as healthcare, education, women s rights and sustainable environmental policies. For example, Zambia, having completed the programme in 2005 for $3.8 billion debt relief, was able to allocate 30% of its GNI towards social sector needs in This included recruiting personnel in education and health sectors, infrastructure and development, and provision of food supplements. Its debt service payments each year has dropped from $500m per year to $125m. However, criticisms of the HIPC Initiative also exist, again making it only a partial solution to disparity. Firstly, the HIPC is a slow progress. Only 4 countries received debt relief after 3 years the programme had begun. The indebted countries also have to agree to a series of economic reforms in order for the debt relief programme to follow through, which may take a long time. Zambia, for example, applied in 2000, but only completed it in 2005 due to its opposition to certain structural reforms. These reforms are often similar to the SAPs, which are Eurocentric ideals that is not necessarily what a country needs, hence they don t always work. Another problem with debt relief is that it is not always 100%, and cannot fully aid a country if their GNI itself is below government expenses or in the case that the debt is not in the simple form of money. Zambia still continues to borrow money in order to finance a budget deficit due to its poor terms of trade in the global market. Lastly, the countries eligible for the HIPC initiative (although little compared to the rest of the world) will require around $200 billion US dollars to fully cancel their debt. This is simply unrealistic to achieve at least not without a certain passage of time. Debt relief, therefore, is a plausible method in terms of alleviating a country of its immediate debts, and can offer an easier start into social reform and development; however, it does not fully take care of the downward spiral that these HIPCs may be experiencing in another form of economy (not just physical money), which does not help them leave the negative cumulative causation cycle of poverty. Aid can be a good and bad form of helping countries in need to reduce disparity. The advantages of aid is that it is not dependent on the country itself, and is offered freely. This (theoretically speaking) allows LICs to get help from other countries without a price in return. Firstly, during disasters or emergencies, aid is immediate and can be used to help the country to stabilise after the event. For example, 213m euros were sent to Haiti from ECHO (NGO organization) after the earthquake in 2010, helping displaced people to PAGE 4

5 return to their neighbourhoods, reinforcing health institutions etc. (Humanitarian Aid and Civil Protection, 2013). Aid can also help to build expensive infrastructures to spur development, or to build schools and hospitals to increase education levels and health care. This type of aid is generally improving population well-being. Bottom-up aid in millennium villages can sometimes lead to a sustainable upward spiral, whereby (for example), the introduction of bank accounts allow farmers in a rural area to save their profits and get interests, hence getting a higher income and sustainable build of personal finance. However, aid can also fail as an inequality eradicator. Firstly, it can easily breed dependency. According to the Dependency Theory, LICs will become reliant on MICs to supply them with the resources, money, goods, food etc. that they need, and instead of using aid as a kick-starter for cumulative causation, destroys its own local market. Meanwhile, a corrupt government in which a top-down aid project sponsors may take the money and result in an ineffective usage. Indirect aid can also lead to the distribution of aid not being what is needed by the region or country. The existence of conditional and tied aid may force a country to carry out policies that are not necessarily beneficial. For example, the IMF and the World Bank both enforce their own SAPs when giving aid to a country as discussed before, SAPs may not be the best reforms to implement as it follows a Eurocentric ideal of development rather than focusing on what the country in need may actually require. Aid is also comparatively short-term compared to a self-sustaining Millennium Village. Even though long-term aids are present, they are projects that will have a deadline, which may or may not produce the desired development; whereas the upward spiral of a country on its own can ensure its sustainability of the rate of development. Lastly, a disadvantage of aid is that it is a form of reliant support on the giving side. If the economy of the donor side is unstable or falls, aid to the recipient country might halt as well. Consequently, aid is good for relatively short term needs. It will address the immediate distress that a country may face, and can sometimes create the start to a sustainable development; but in the long run, aid does not tackle the basic idea of the need for self-sustaining and self-initiated upward spiral that most LICs need. Last but not least, remittances is also a form of reducing disparities between countries. This is money that is sent back to a migrant s origin country when he or she works abroad. Remittances provide income for the country, which can ensure cumulative causation and therefore puts the country at an upward spiral. More of the population can be employed as they are looking for open spaces in other countries rather than competing in their own, and hence create a stronger economy from social benefits. For example, Filipinos come to Hong Kong to work as helpers and send back money to their families in Philippines, adding to make up 14% of their GDP. Remittances are also direct and reaches the migrants families and friends at a local level PAGE 5

6 therefore, unlike aid, the money sent back will avoid the chances of a corrupt government or diversion of the money. As part of the population leaves to work, the shift in demographic and the population pyramid can reduce pressure on schools, healthcare, infrastructures, and certain working cohorts depending on the size and profiles of the migrating population. Remittances also breed a certain sustainability whereby the migrants will return with new skills, knowledge, and parental education which they can pass on to their child. Remittances also have an advantage over internalised methods of reducing disparity, because (like aid) they come from a region other than its home country. Therefore, if a natural disaster hits the origin country, direct and immediate help can be sent from the migrant working abroad to his or her needing family and friends. However, there are also problems with remittances. Like aid, it could breed dependency from the migrants families and friends upon the migrated individuals. If the migrant can get enough money back, his or her family may choose to not enter the local market where the pay isn t as good. Moreover, it is also dependent upon the economy and financial status of the MIC where the migrant is at. If an economic recession occurs, remittances reduces, which would directly affect the receiving families in the LIC. For example, in 2012, there was a recession in the US. With its population made up of 1 migrated Mexican in 13 citizens, remittances flowing into Mexico decreased by 11.6% from August of 2011 to the August of 2012 (Pinoteau Q., 2012). Inflation at the origin country could also occur and cause prices to rise due to the rising economy, hence giving a disadvantage to those who do not have a family member abroad to offer them money from another country. Therefore, although remittances allow a direct and sustained economic growth, it cannot eradicate disparity in wealth and development as it could discourage participation in local markets, and the income factor is completely reliant upon another individual and another country s economy, which does not promote the technological and work sector development (Primary, Secondary, Tertiary, Quaternary) of the country itself. In addition to economy, disparity is also caused by a number of other factors that cannot be overcome with these methods who all tackle the problem at a socio-economic aspect. In reality, other disparities that can occur within or between countries can also result from their physical geographical location, ethnicity, parental education, formal or informal employment, land tenure, and the cultural practices or imbalances that may exist (e.g. Sexual discrimination). These external factors makes it impossible for the theories to be simply applied to real life, hence preventing the 5 proposed methods to be the only ones that are sufficient to completely eradicate inequality. We can definitely reduce disparity as each method does contribute to improving the GNI/GDP and HDI of a country, but it is hard to completely eradicate it due to the need for a country s individual competitiveness in the world. PAGE 6

7 Bibliography KITTY WONG 12.3 Common Agricultural Policy. (n.d.). In Wikipedia. Retrieved February 12, 2014, from en.wikipedia.org/wiki/common_agricultural_policy Fairtrade Foundation (Publication). (2012, January 15). Fairtrade Bananas Case Study. Retrieved February 12, 2014, from WINFA_FairtradeBananas_CaseStudy_Update_Jan2012.pdf Grunwald, M. (2010, April 09). Why the U.S. Is Also Giving Brazilians Farm Subsidies. Time. Retrieved February 12, 2014, from 0%2C8599%2C %2C00.html Humanitarian Aid and Civil Protection. (2013, May 15). Haiti. Aid in Action. Retrieved February 12, 2014, from Institute for Justice and Democracy in Haiti (Publication). (2006). The effect of the HIPC Initiative on heavily indebted poor countries. Retrieved February 12, 2014, from headline d.pdf Pinoteau, Q. (2012, October 15). Remittances are Down and Mexico Feels the Pain. Fusion. Retrieved February 12, 2014, from Puzzanghera, J. (2014, January 20). Oxfam report highlights widening income gap between rich, poor. Los Angeles Times. Retrieved February 12, 2014, from PAGE 7