Globalization at a Crossroads

00.25

President Luiz Inácio Lula da Silva of Brazil 1703

In recent years, throughout Latin America, the political barometer has swung to the Left. Elections have delivered victory for presidential candidates who seek reform. Reform of the economic principles, which have for the past quarter of a century been at the heart of globalization.

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2520 Hugo Chavez President of Venezuela

Here in Latin America, we can't continue to be colonies of the United States, countries dependent on Washington or the IMF. We have to be free. Our vision of the economy, is a caring economy, an economy where the State has to be the fundamental engine, not the market.

01.18

Chavez meets the people

Some countries, which have not experienced a rising living standard for the masses, now doubt the moral basis of the modern capitalist model.

  01.28

Chavez supporter 1252

We truly love the President because he governs for the poor!

01.34

In this film, we examine some of the key principles at the core of global economics, and assess their impact on developing nations.  

01.47

The Many Faces of Globalization

02.12

For some economists the essence of globalization is a process of delocalization, the scattering of manufacturing processes across the globe. Globalization is certainly characterized by the enormous expansion of multinational corporations and their investments in foreign lands.

02.37

3721 sunrise over Kenyan farm

But the term "globalization" can be emotionally charged. For some it means "ruthless exploitation by corporations."

02.47

Yet for others, globalization means "bringing economic development to the peoples of the world." For Mark, a laborer on the Sunripe organic farm in Kenya, globalization means he has some money trickling in. 

03.02

Mark Machewa

What I can say is that finding work in Kenya is not easy. So we appreciate what we have.

03.11

The economic processes of globalization can be split into two broad categories: free trade and financial globalization.

03.21

Free trade means a nation opens up its markets to imports, increases its exports and reduces or eliminates tariffs. Free trade has the potential for creating real economic growth, by drawing resources into industries where the country has a comparative advantage. There are many nations where such gains have been seen over recent decades, such as China, India, Brazil, Chile and South Korea.

03.52

Financial globalization, on the other hand, is the global trade in currencies, and investments in foreign stock markets and in foreign-currency projects.  Before the East Asian financial crisis of 1997-98, freeing up capital markets was seen as necessary for poor nations to attract foreign direct investment (FDI). FDI usually involves investments in real assets, such as factories.

04.23

In contrast, financial trading does nothing to increase the productivity of the nation affected.  In particular, foreign portfolio investment (FPI), short-term speculation based on the value of a nation's currency, cannot be used to build an industry or create jobs. When investors pull a large amount of such capital out of an economy in trouble, it can wreck that economy and allow a financial crisis in one country to ricochet to another.

04.55

The 1980s saw the rise of the most radical free market economic policies ever implemented. These so-called neoliberal policies - in economic parlance, liberal means free from government interference - stressed free trade and the unhindered flow of capital, with minimal government spending, taxation and regulation. Neoliberal principles are still at the heart of global lending institutions, especially the International Monetary Fund (IMF). The IMF was set up to give financial aid to countries in serious economic difficulty, using funds from its 185 member countries.

05.37

491 Prof. Paul Krugman, Princeton University

Economic collapse can have terrible effects, and you can't prove that the IMF has been a buffer against economic collapse, but I think it has.

05.46

But some economists blame the policies of institutions like the IMF for exacerbating crises. One of the main problems of the IMF approach is that fundamental economic changes are introduced all at once, before supportive legal and social frameworks are in place. We will examine what the lack of those frameworks meant for East Asia, Bolivia and Russia. We will also look at how China developed its own safeguards against some of the social dislocations arising from the rapid implementation of free market policies.

06.23

Market Liberalization

06.44

By the early 1990s East Asia had been so wildly successful at liberalizing its economies, its growth had become known as the "East Asian miracle". Yet by 1997,  East Asia would experience the worst economic depression downturn the world had known since the 1930s. It underlined the "contagion" that is inherent in uncontrolled globalization.

07.12

forest of real estate Bangkok

3674 shopping district

Before the 1990s, Thailand had strict controls on how much money banks could lend for real estate investment. Then Thailand gave in to IMF demands and rescinded these regulations. and Sskyscrapers sprouted like mushrooms after a monsoon rain. Soon capacity was reached and builders defaulted on their loans: the housing bubble burst. In 1997 foreign investors panicked and withdrew their funds from Thailand. The baht plummeted, the Thai stock market crashed and the economy collapsed.

07.49

11.46 Dr. Anthony Venables, London School of Economics

International capital mobility can be destabilizing if it goes into countries whose financial systems are really not very well developed, and that's what happened in the Asian crisis.

08.03

South Korea highways, department store 78 shipyard, factories 78

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beggars, Hyundai protests

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South Korea had grown since the 1950s essentially without foreign investment, because it used the savings of its citizens to finance growth. As in Thailand, the IMF and US treasury put pressure on South Korea to deregulate its financial sector to permit foreign investment. By the mid-1990s South Korean firms began to borrow heavily from US banks. But in late 1997 rumours began to circulate on Wall Street that South Korea was in financial trouble. Entirely unfounded, the rumours became a self-fulfilling prophesy as capital flew out of Korea.

08.45

As soon as foreign banks cut off credit to South Korea and Thailand devalued its currency, the contagion spread to other East Asian nations. Losses from investments, defaults and contracting trade brought Thailand's neighbours down with it. In response the IMF put together a bailout loan of about $95 billion, in theory to back the Thai currency with sufficient dollar reserves and stabilize the exchange rate. However, most of the loan was used to service Thai debt to foreign banks.

09.25

491 Prof. Paul Krugman, Princeton University

Of course these packages end up, to some extent, rescuing private lenders from the consequences of their own actions.

09.33

The loans also came with conditionalities: raising interest rates, draconian cutbacks in government spending and increasing taxes.

09.43

Indonesia riots 425

By 1998 the disease had spread to Wall Street and the New York Stock exchange crashednosedived, as did exchanges in Europe and other parts of the world. Only after riots erupted in Indonesia did the IMF allocate money for food and lift the ban on government help to the poor.

10.04

491 Bijan Aghevli, InternationalMonetary Fund

It used to be that if you had the IMF programme, you had the seal of approval, Markets would always react positively. That's not the case anymore.

10.15

Indonesians scavenge on rubbish heaps

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The IMF's policies both initiated the East Asian crisis by forcing capital market liberalization, and exacerbated it by enforcing policies which worsened the situation. The crisis shook confidence in the IMF itself and helped supported the case for arguing that economic globalization has actually increased international instability.

10.40

Klepto-capitalism

11.02

When the Soviet Union collapsed in 1991, Russia began moving from a planned economy where production was owned and controlled by the communist state, to a more open, free market economy. President Boris Yeltsin announced that Russia would proceed with "shock therapy": radical, market-oriented reform as recommended by the US and IMF. However, this policy resulted in economic collapse in Russia, with millions being plunged into poverty. The privatization of industry resulted in massive asset stripping and the lack of regulation of the financial sector was a recipe for monumental theft.

11.49

Jack Blum, United Nations Consultant 995

The  notion that you might have, out of the blue, out of this communist period a government system that effectively regulates the banks, and at the same time, banks that behave in ways that are acceptable by Western norms, was mad, absolutely mad.

12.07

Privatization

Between 1992 and ‘94, more than ¾ of Russia's industries were privatized, before a proper tax system could be implemented. often In many cases they were sold to factory or bank managers who stripped their assets and sent the wealth overseas. Russia defaulted on its IMF debt and devalued the ruble. Oligarchs stole billions in IMF bailout money.

12.43

Nauru 995

This modest building in Nauru (pronounced Nauroo) in the Pacific, became a licensing agent for around 400 Russian banks. In 1998 alone, more than $70 billion exited Russia via this building.

12.59

Congressman James Leach,

House Banking Committee 995

These are banks that are set up to launder money and so they're money-laundering platforms rather than institutions to serve society.

13.10

Beggars

995

In 1989 only 2% of Russians lived below the poverty line, by 1998 it was a quarter.

13.18

Woman from Pekhora 995

During the Khrushev era, you turned on the TV and the first picture would be a tractor moving across the field, it made you feel so good because you knew harvest was just about to start. But now when you turn on the TV the only news you see is about bankruptcy and financial operations.

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What happened in Russia demonstrated that across the global economy, legitimate and illegitimate streams of wealth proceed as if along two rails of the same track.

13.49

Jonathan Winer, Formerly State Department

995

The ships, the electronics, the communication systems, the telephone systems, the banking systems -- they move a ton of goods and services every day - many, many tons - that serve the billions of people on this earth. But there is a dark side. And there is illicit stuff moving through the same network, without barriers.

14.29

Russian oil installations

Russia's economy is now growing. It is using oil to raise itself out of the economic black hole, but it has not yet regained the economic strength it had before communism collapsed.

14.44

Who Owns the Rain?

15.02

2499 Burundian army

Like the IMF, the World Bank's stated aim is poverty reduction. It works in areas as diverse as building infrastructure and financial systems, tackling corruption and post-conflict rehabilitation. In Burundi, for example, the World Bank oversaw the creation of a united army.

15.25

But some critics claim the Bank has imposed neoliberal policies on developing countries, which have been destructive and anti-developmental, such as the privatization of strategically vital national resources.

15. 47

Bolivia poverty

The poorest country in Latin America, Bolivia became a lot poorereven more impoverished in the 1990s after a disastrous program of privatization imposed by the World Bank and the IMF.

16.04

In 1999, the Bolivian government tried to privatize the water system of Cochabamba, the third largest city in Bolivia, to help finance a huge dam. In this community water was already expensive, and everyone knew the price would rise even further.

16.24

3547 Berna Cabrera

If I work, thank God I have a little money, but some people here don't have any. They can't buy even a jug of water. That's how extreme the poverty is here.

16.52

When Cochabamba's water system was privatized, most households saw their water bills rise from $5 a month to more than $20. It became illegal to dig a well, or even to collect rain in a barrel. The outraged people erupted.

17.13

Cochabamba riots 3359

After more than three months of protests the government gave in and returned the water system to the people's control. It was a disastrous experiment in privatizing a basic resource for profit, but now the people, once again, owned the rain.

17.33

Bolivian president Evo Morales was later elected on a promise to give indigenous people a greater share in the nation's natural resource wealth. In 2006 he nationalized the country's gas industry.

17.46

President Evo Morales of Bolivia 3589

What we need is investment money  to explore and to exploit, to industrialize, that's what we need. We need partners not bosses, not owners of our natural resources!

18.05

His actions turned theirhis country's  back on the neoliberal principles that had failed the Bolivian masses, and set what many multinational companies saw as a very dangerous precedent.

18.20

Controlled Transition

18.38

Wine industry, ski industry

China is on track to become the world's largest and most successful economy. The trappings of newfound wealth are everywhere: the wine and ski industries have boomed here in the past decade.

18.54

Vineyard workers

Most of China's growth comes from its exports and an abundance of low-wage labor. Because China's communist government controls the economy it could undertake gradual market reform: homegrown, rather than neoliberal, economics. China proves the theory that trade liberalization has the most positive impact on countries entering the global fray from a strongly protectionist economy.

19.24

Mao archive Deng Xiaoping 1433

With Mao Zedong's death in 1976, China realised that his socialist central planning was no longer sustainable. Moderate Communist leader Deng Xiaoping began to reform agriculture. Farmers could sell crops in excess of their government quota on the open market and keep the profits. In the early 1980s China turned to reforming its industries.

19.51

Slowly, state-subsidized prices were phased out without inflation or wiping out peoples' savings.

20.00

industry Coastal city

When the East Asian financial crisis hit, the Chinese government poured $1.2 trillion into infrastructure projects to stave off unemployment.

20.12

2465

Over the last twenty years, more than one hundred and fifty million people have been lifted out of absolute poverty. For most, this economic miracle has been an undeniable achievement of Communist China. But the way reform was implemented has created a deeply troubled society.

20.33

Zhou latai, Lawyer 2465

Some entrepreneurs simply seek economic profits. They only want to pursue economic development and neglect the protection of workers.

20.47

Migrant workers at station 3134

Family reunited

Chinese cities are crammed with 150 million (check) migrant workers, more than 10% of the population, who have left the impoverished west for the more prosperous east.

20.59

Li Yun 3134

I feel very bad that we leave our children behind. It's unbearable.

21.10

3146

high tech Chinese factories/

businessman toast each other

China's remarkable economic growth has many in the US worried. The US has a huge deficit, China has vast currency reserves. The US has an enormous trade deficit, China has a hugemassive trade surplus. While the US has traditionally believed that most government interference in the economy is anathema, the Chinese government has been proactive in guiding and growing the world's most dynamic economy, ensuring profits accrue to Chinese businesses.

21.45

3146 Michael Dunne

Auto Resources Asia

They're able to say you need our market so badly that this is the arrangement. You can come in, you can bring your money and your capital but by the way you can only own up to 50% and in the same city my other partner will be your competitor. Deal?

22.02

Outlook for the US Economy

22.23

Real estate auction

3637

Welcome to real estate auctions California style. On this day, houses are being knocked down  for 40% less than their owners paid just a few months ago.

22.35

The slowdown in the US economy, which began in 2007, has once again emphasized the contagious interconnections of globalization - both in terms of trade and capital markets - but on a scale that could dwarf the East Asia crisis.

22.52

3637 Prof. Robert Shiller, Yale University

The last time that we saw a home price fall as big as the one we have just seen, is 1941. And you're right, that was the year the US entered World War II.

23.13

3637

The so-called sub prime mortgage crisis will caused see millions scores of American families to lose their homes. It also sent world stock markets into a spin, caused panic in credit markets so banks were afraid to lend to each other, and forced central banks to pump hundreds of billions of dollars into the system to stop it from seizing up. It threatens to push America and possibly the rest of the world into recession.

23.41

3637 Satyajit Das, Risk Consultant

Now the analogy I always use is like a car engine: credit is the actual oil in the engine. Now there's a big crack and the oil's all flowing out of the engine, so the whole engine is ceasing up.

24.02

3637

After the World Trade Centre collapsed, the US Federal Reserve cut interest rates over the next two years to 1%, to lift the economy out of recession. With all this cheap money to lend, America's banks were desperate for customers. And so $1.3 trillion was lent in sub prime loans - given to people who wouldn't normally get credit - with whopping interest rates, often up to 16%.

24.28

3637 Satyajit Das, Risk Consultant

In the modern capital markets risk is diffused, it's everywhere. Different investors hold different pieces of the risk and we don't often understand the linkages fully.

24.42

The big Wall St banks put up the massive amounts of money that fuelled the huge lending surge and then sold the debt to investors all around the world. But some linkages started to become clear when hedge funds, which took big bets on sub prime loans, began to vaporize. Worried about their home being worth less than their mortgage, Americans began tightening their purse strings.

25.08

3851 Jared Bernstein

Economic Policy Institute, Washington

The US consumer has been not just driving our economy but the economies of many others and also some of the contagions in our debt instruments are affecting others are well.

25.28

The US owes more money to more countries than any other nation on earth. The US also has a huge trade deficit. By its own and IMF standards the US fiscal house is in serious disarray.

25.44

3637 Satyajit Das, Risk Consultant

85% of capital flows from Europe, the Middle East, and the Far East is into the US. And a good chunk of that has gone into the sub prime mortgage area, or the mortgage area in general. It's like the old saying about chaos theory: the flapping of the wings of a butterfly in the Amazon causes a Caribbean hurricane. And that's what we're seeing now.

(Outro)

26.10

New Chinese migrant leaves home

I have to leave now for Shanghai.

Child

Where is dad off to?

Mother

He is going to earn money...

26.26

Migrant disappears into bleak, empty landscape 3134

The credit crunch that began in 2007 forced the US, among others, to invest directly in banks for the first time since the 1930s. It became clear that the market had long been under-regulated and calls for a new banking system, where responsibility and stability were valued above risk-taking and profit, echoed around the globe.

ENDS