6.3: Theories and Concepts - Contemporary Drivers of Global Inequality

Learning Objectives

By the end of this section, you will be able to:

• Understand contemporary drivers of global inequality
• Analyze how neoliberal policies have driven contemporary global inequality
• Understand the impact of Structural Adjustment Programs (SAPs) in debt-ridden countries
• Examine the effects of austerity measures in the European Union

Introduction

What drives global inequality in the contemporary era? While much of today's global inequality can be attributed to the direct effects of colonialism, there are a number of recent factors that have either reinforced or exacerbated that inequality. These are the direct consequences of certain neoliberal policies, particularly those of Structural Adjustment Programs of the 1980s and 1990s; and the spread of technological advancements throughout the Global South. The first driver has its roots in what is referred to as political economy. Political economy is a subfield of political science that considers various economic theories (like capitalism or socialism), effect the practices and outcomes either within a state, or among and between states in the global system. In its simplest form, political economy is the study of the relationship between the market and powerful actors, such as a country’s government (Bozonelos, et. al, 2022).

Political economy can help us understand the causes of and possible solutions for the issue of domestic and global inequality. In the simplest terms, asymmetrically/disproportionately distributed political and economic power affects inequality both domestically and globally. More generally speaking, the rules of economic activities are set by the political world. When one can shape the rules of the game to their advantage, it is very likely that those who set the rule will gain disproportionately more than those who had no say in setting the rule. While the discussion on the topic of global inequality is dominated by the economic issues, it is critical to simultaneously examine the political world as well. While some political and economic factors have contributed to the betterment of global economic conditions in general, they have also contributed to the widening of global inequality. The following examples will illustrate how this works.

Neoliberal Policies: The Lingering Effects of Structural Adjustment Programs (SAPs) & Austerity Measures

As discussed in Chapter Three, neoliberalism embraces market-orientated practices that are focused on economic development. It takes the classical liberal arguments of private property, legal enforcement of contracts and the ‘invisible hand’ of the market along with the principles of free market capitalism within a country and makes them global. Through identified policy proposals, including “deregulation (of the economy), liberalization (of trade and industry) and privatization (of state-owned enterprises)”, this D-L-P formula was promoted worldwide by leading international economic institutions (Steger and Roy, 2021).

For example, in the 1980s dozens of developing countries faced serious debt burdens, to the point where many of them feared bankruptcy and the collapse of their financial systems. These countries, such as Mexico, turned to international institutions, namely the International Monetary Fund (IMF) and the World Bank, for loans that could stabilize their economies. The IMF and the World Bank, also backed by the United States, provided these loans with stipulations and conditions that these loan-receiving countries embrace neoliberal policies. The desire was for them to structurally adjust their economies to prevent reoccurring debt crises, which at the time was seen as a major threat to the global economy. This is referred to as the Washington Consensus, where countries were expected to embrace free market systems and reduce state involvement in their economies as the solution to financial challenges.

One of the primary policy tools recommended through the Washington Consensus was the use of Structural Adjustment Programs (SAPs). SAPs refer to comprehensive economic programs that major international lenders, such as the IMF and the World Bank, require as a condition for granting loans. SAPs mandate economic liberalization to facilitate market functioning and increase openness to foreign investment. The programs also require the loan-seeking countries to dramatically shift financial resources to address the balance of payment issues. Overall SAPs did not have the intended effect as promised by the Washington Consensus. Often the programs resulted in either negligible or in some cases, negative impacts on the economies and societies of the loan-recipient countries. Indeed, one of the major consequences of SAPs involved the dramatic reduction of social spending. The IMF and the World Bank demanded that countries shift their financial resources from these programs as a means of stabilizing their economies. The idea was that countries needed to get their spending under control and begin to pay down their debt. While this approach may have helped avert an economic collapse, the costs were borne by the most vulnerable segments of the society. Governments slashed spending on areas like healthcare, education, subsidies on food and energy, and police forces. 

Additionally, governments were expected to implement policies that reformed their economies. These included deregulating their economies to allow for foreign competition, such as allowing for foreign hotel companies to operate within their borders. It also involved the privatization of state-owned sectors of the economy, such as oil and natural gas, fisheries, transportation, and communications. While these macroeconomic structural shifts prevented the collapse of the economic system, it was not without consequences. One major consequence involved the weakening of labor protections, including safe working environments, guaranteed retirement benefits, protected contract and collective bargaining rights, and workers' compensation protections. Furthermore, increased foreign competition negatively impacted local employment patterns by displacing local industries. In sum, the compound effect of these structural changes contributed to the general instability of the national economy. Additionally, the deregulation of a country's natural resources industry unintentionally damaged the environment, both locally and transnationally.  

The IMF and the World Bank approached these economic crises with an SAP "cookie-cutter" template. They did not account for the socio-political and cultural factors in the implementation process. For example, many major structural changes disproportionally affected the most vulnerable populations. Economic volatility often led to dramatic price swings in basic necessities, such as food and energy. Due to the stipulations of the SAPs, governments were limited in their ability to respond to these disruptions. Often, policy choices were significantly narrowed or often prescribed or dictated by the loan conditions. Consequently, the worsening economic conditions brought on by SAP policies encouraged mass migration in the Twentieth Century.  Many of the these economic migrants left their home in search of a better life, including job opportunities, access to education, and for general financial stability.

Rippling Effects of Neoliberalism: Austerity Measures in Europe in the 2010s

Similar to SAPs were the austerity measures imposed on member-states of the European Union (EU) in the 2010s. Austerity occurs when a country implements a wide range of economic reforms to balance a country's budget or meet certain debt ratios. These reforms center on major reductions in government social spending. Austerity has its roots in the 2008 Global Financial Crisis, often referred to as the Great Recession in the United States. A number of EU countries, including Cyprus, Greece, Ireland, Portugal and Spain found themselves unable to pay back their sovereign debts and were in danger of defaulting. Sovereign debt is the accumulated amount of money that a country's government has borrowed and has yet to pay back. These governments accepted bailouts from the IMF, the EU, and the European Central Bank (ECB), to prevent delinquencies in payments and/or defaults.

Unlike SAPs which primarily affected countries in the Global South, austerity measures impacted countries in the Global North. However, the effects were quite similar. Austerity measures led to a dramatic drop in the standard of living for a number of the affected countries. The adoption of neoliberal reforms as conditions of the bailouts severely weakened pre-existing social protections. Pensions were reduced, spending on health care dried up and many citizens, especially in Spain, defaulted on their mortgages. The public sector shrank, leading to economic contractions that created the conditions for hundreds of thousands of educated citizens to emigrate to other EU countries. In this way, EU austerity mirrored the experiences of SAPs in the Global South. Governments were restricted in responding to public demands and had little control over internal economic policies.

A good example is in Greece where the European debt crisis was most severe. The size of the Greek economy in 2008 shrank by as much as 25.9 percent. Greece’s relative living standards peaked at 85.4 percent of the EU average in 2009 and plummeted to 64.9 percent in 2016 – a level unseen since the early 1960s! Greece experienced an economic crisis on the scale of the U.S. Depression of the 1930s. Unemployment reached as high as 28 percent, the youth unemployment rate was as high as 60 percent and 45 percent of pensioners received monthly payments below the EU poverty line, which was €665 a month. From 2008-2013, Greeks became on average 40 percent poorer and one out of five Greeks experienced severe material deprivation. The industrial sector of country collapsed. As the Greek government had adopted the Euro as it currency, economic officials were unable to devalue their currency, which could have made Greek exports cheaper. Interest rates and currency printing are controlled by the European Central Bank (ECB), which tends to serve the interests of the larger economies. In addition, tourism, a major segment of the Greek economy, also suffered during the Global Financial Crisis as people were financially unable to travel for leisure. Many Greeks returned to the fields/orchards for work, on lands inherited from their parent or grandparents.

The Greek government accepted three rounds of bailouts from the IMF, the EU, and the European Central Bank to stabilize their economy: €110bn in 2010; €109bn in 2011; and €86bn in 2015. The bailout consisted of some of the most intense austerity measures ever imposed as Greece had to achieve budget cuts of €30bn over three years. The goal of austerity was to cut Greece's public deficit to less than 3 percent of GDP. Each round of bailouts came with new austerity measures. Active and retired public sector workers bore the brunt of the budget cuts. Since Greece could not devalue its currency, the main solution was to engineer an export-led recovery through ‘internal devaluation’. This is a policy-driven compression of wages via labor market deregulation, including a drastic cut in the minimum wage. Essentially, Greek exports were made cheaper by cutting the wages of Greek workers. This in turn made the Greek depression worse. In the short-run, austerity hurt more than it helped. However, some would argue that these cuts set up the Greek economy to rebound and it is currently in a growth stage, with forecasts predicting that 2024 will bring it back to pre-crisis levels.