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Discuss the connection of export processing zones (EPZs) to the growth of what McMichael calls “the globalization project”. Why are EPZs consistent with the logic of neoliberal globalization? How has the growth of these zones been encouraged by the actions of key governing institutions in the globalization project? What was the relationship between the debt crisis of the early 1980s, the growth of structural adjustment programs and the growth of EPZs? Moshe Lokshin 209476169 Globalization, Export Processing Zones, and Beyond Prepared for Political Science 1090 Course Globalization – the first historical system to include the entire globe within its geography” – Immanuel Wallerstein (1997) We live in an age of global visions, where differences in time, space, nationality, and culture seem to have melted away, and globalization has become a defining term for the current era. It is the massive chain of events, a comprehensive global movement primarily concerning international economic growth, development, and integration of markets that has helped raise the standard of living for many people worldwide.
It has also, however, driven many deeper into poverty. McMichael, in his book “Development and Social Change”, expands on critical events that led to the spark of the globalization project such as the rise of Export Processing Zones (EPZ), the debt crisis, the neo-liberal approach, and many others. This paper reviews the rise of Export Processing Zones in the developing world as a widespread aspect of the current trend of economic globalization. This economic globalisation is providing immense wealth to arious multinational companies, also known as transnational corporations. However what impact do these EPZs have on their host countries? Do they assist to, or hinder, development in the developing countries? In this paper it will be argued that the existence of the EPZ has been a key aspect in the rise of the globalization project, fostered by the IMF & The World Bank, and induced by the debt crisis of the 1980s. While the growth of the EPZs may appear as a contributing one in the short-run for economic growth, it has insidious bad effects in the long-run
In the past the developing countries were able to make their own policies and had the flexibility and the space to determine their own economic and social paths unhindered by international pressures such as globalization. Since the debt crisis Third World Countries had come under the World Bank and IMF “conditionality” in order to avoid debt default. Countries that are members of the WTO have also come under many policy obligations and constrains, not only in a sense of trade but also in sense of other agreements such as TRIMs, TRIPs, etc.
Thus, the developing countries were bound by a constrained legal framework – Structural Adjustment Programs (SAPs) that are directly related to the growth and the development of Export Processing Zones. Development has been a major aspect in our lives throughout the years. We are always looking for ways to advance ourselves technologically, economically, intellectually, socially, etc. Globalization is viewed as another step in development of humankind. The first step of global development had been seen during the end of the colonial era and was called “The Development Project”.
It was a political response to the condition of the world at the era of decolonization (McMichael 46). McMichael has described the change as a switch of the policy of the hegemonic power from promotion of the “development project” launched in the late 1940s and early 1950s to promotion of the “globalization project” under the neoliberal Washington Consensus of the 1980s and 1990s. The development project promised to increase standards of living based on freedom of enterprise. However, this development has been brought at a very high social price that involved poverty, unemployment and inequity.
Once this project had failed, the elites still strived for development, and it was renamed globalization. Globalization project is a global development strategy, focusing on global international development, unlike the development project that focused on national development throughout the world. In other words, globalization is the integration of markets – free movement of capital, labour, and goods across nations. The globalization project was born as a result of the failure of the development project which was marked by the debt crisis (explained in detail later on in this essay).
However, the accompanying fragmentation of the Third World enabled global elites in the Bretton Woods institutions and the First World to argue that the international economic order was not responsible for the crisis. They claimed that the experience of the Asian New Industrializing Countries (NICs) was the proof of this pudding. In other words, “debt stress and economic deterioration in the poorer zones of the world”, they said, “stemmed from a failure to copy the NICs’ strategy of export diversification in the world market” (McMichael 128).
The new ideology of global integration was consistent with the logic of neoliberalism which is a political ideology that propagates the “belief that states ought to abstain from intervening in the economy, and instead leave as much as possible up to individuals participating in free and self-regulating markets” (Lie and Einar 2) or as defined in the Oxford English Dictionary (1989a) “a modified or revived form of traditional liberalism, [especially] one based on belief in free market capitalism and the rights of the individual”.
It proposes that human well-being can best be promoted by liberating individual entrepreneurial spirit and skills within an institutional framework characterized by strong private property rights, free markets and free trade. Thus, the possibility of a ‘self-regulating market’ and the very basis laissez-faire are very consistent with the perspective of globalization, and this possibility is the core assumption of neo-liberalism itself (Lie and Einar 8)
To follow the successful pattern of growth of the Asian countries which was based solely on Export Oriented Industrialization (EOI), it was directed by the Bretton Woods Institutions and the elites of Transnational Corporations to shape all systems of development on a global model – one that emphasizes specialization of production, comparative advantage, export-oriented growth, monoculture, and homogenization of economic, cultural and political forms, as illustrated by the International Forum on Globalization (IFG) in their report summary “A better World is Possible” (P 13).
McMichael points out that the justification for this strategy of market opening derives from David Ricardo’s concept of comparative advantage – “prosperity derives from maximizing advantage in international trade through specialized production reflecting a nation’s relative resource endowments. When countries exchange their most competitive products on the world market, national and international economic efficiency results” (McMichael 159). The natural effect of removing trade barriers and allowing specialization was global competitiveness that emerged as soon as the globalization process started.
The direct result of this course was not only lower prices of goods and services, but also lower prices of labour. It was clear that the comparative advantage of the Third World was cheap disorganized labour. However, there was no incentive for an investor to invest in China, rather than in Mexico for example. To provide this incentive for the economic development, nearly every developing country established export processing zones (EPZs) as they were the means of attracting foreign investment.
EPZs created new employment, generated foreign exchange, expanded national revenues and increased export flows (Rondinelli 90-91). The major characteristic of such a zone is the lack of environmental, social, and tax regulations. Hooshang and Weiping in their article “Export Processing Zones in Asia”, defined EPZ as an “industrial enclave that engages in export manufacturing with the assistance of foreign investment and enjoys preferential treatment that is not generally available in the rest of the country” (P 828).
Later, EPZs became perhaps the most common form in which the strategy of development has been implemented. Thus, free trade zones were instrumental to the growth of the globalization project. Starting in East Asia, EPZs have spread throughout the developing world. Probably the most famous instance of these zones is the free economic zones of the Peoples Republic of China. John Devereux, in his paper “Export Zones and Welfare: Another Look”, explains that export zones are important for many economies. One such economy, he elaborates, is Mexico.
In 1990, the maquiladoras program in Mexico employed over 400,000 workers and produced $12 billion in exports (P 704). However, The Growth of EPZs was not as natural as one might think. This growth was fostered by several institutions such as Bretton Woods Institutions (BWI), United Nations (UN), and the policies they formed. The aftermath of World War II had been an extraordinary period. Even before the war ended, victorious allies realized that the mistakes of the interwar period should not be repeated.
In 1944, they met in Bretton Woods, New Hampshire, to develop a new international system to promote world trade and prosperity after the war. In this conference two financial institutions (IFIs) were created: The International Monetary Fund (IMF), whose job was to facilitate trade between countries, and the International Bank for Reconstruction and Development (IBRD), which became known as the World Bank, whose job was to provide long-term loans for government projects. While both focusing on aiding nations in financial needs.
The international system was then dominated by the Bretton Woods arrangement of fixed but adjustable exchange rates, limited capital mobility (capital control), and autonomous monetary policies. Another governing body arose from the former meeting, but not established until 1947: General Agreement on Tariffs and Trade (GATT), whose role was to regulate the conduct of trade between countries. In 1995, this organization evolved into the World Trade Organization (WTO). (Mishkin 4-5). Those organizations were created to promote growth in Europe and Japan after the Second World War, and in this they were extremely successful.
However, in the early 1950s, growth and promotion was redirected towards Third World Countries and did not result with the same success. The WTO was created to monitor and enforce the GATT and other agreements formed by it. The first agreement hence formed was the General Agreement on Trade in Services (GATS). The GATS potentially pertains to trade in all service sectors, including water distribution, health, and education, and under the GATS there is a push towards the entrance of private, non-domestic companies into social service sectors from which they had previously been excluded (Zajda xxvi).
Other than GATS, there were several more agreements such as the Agreement on Agriculture (AoA), Trade-Related Investment Measures (TRIMs), Trade-Related Aspects of Intellectual Property Rights (TRIPs), and other Regional Free Trade Agreements (FTAs) among the unionized nations – North America, European Union, Asian-Pacific Economic Cooperation, Greater Arab Free Trade Agreement, etc. The WTO uses those many agreements to manage the cross-border movement of goods production, services, and investment and farther to promote the adjustment programs as a response to the debt crisis of 1980s.
As one proponent argues (qtd. In McMichael: 172), “The multinational corporate community would then be able to rationalize their regional and global sourcing strategies on the basis of productivity, quality, and cost considerations in place of the political dictates that now disrupt their operations. ” From a profit maximization perspective, certain investor protection sections in NAFTA are giving business owners upper hand over sovereign nations and providing a broader new definition of property rights.
Chapter 11 of NAFTA, allows a corporation to sue a government, contains a particularly disturbing “regulatory takings” from company’s potential to make a profit (William Greider). It is becoming comprehensible how the actions of the TNCs elites and the key governing institutions fostered the growth of EPZs. Countries like Ireland, which have focused on high-value added export activities, and attracted more than 1,000 TNCs, have proven this growth (Rutledge Mitchell IV). In the “Irish model” – used as a paradigm and was copied by other nations, it was illustrated that the reduction of government egulations generating nearly 100,000 jobs. Furthermore, it is also clear how agreements such as TRIMs that are created to attract foreign investment, encourage EPZs, whose sole domestic comparative advantage is labour, by attempting to regulate export platforms to preserve this comparative advantage. Over the years since the inception of those institutes, their original roles and the ways in which they operate changed markedly. By the early 1980s, followed by the Debt Crisis, much of the developed world was open to cross-border capital flows.
The World Bank along with the IMF understood that it was necessary to have cooperation from the Third World Nations in order to affect the debtors (i. e the developing countries), and from such understanding “Global Governance” arose. While the most efficient way to guarantee compliance is by establishment of rules that will be reinforced on the states. The global governance became the officials of the multilateral institutions (IMF, World Bank), G-7 political elites (The Group of the 7 richest countries), executives of TNCs, and global bankers. Global governance is not simply an external force; it shapes national strategies for repositioning producers in the global market” (McMichael 154). Taking in account what Third World Countries have in common, most were colonies or occupied territories and their resources had not been developed to meet their own population’s requirements, but rather those of the colonizing power. Therefore their economies tended to be based on commodity production and raw materials for the colonizers.
The assumption of what qualified as a developing country is one that is still developing its capacity to ensure that its citizens have a reasonable access to decent standards of living and the satisfaction of basic human needs (Developing countries, MiMi. hu). The role of the IFIs, as it was mentioned before was to provide financial aid to the needy countries, however donor nations held up a single model of development as the norm. The assumption was that non industrialized nations must be necessarily underdeveloped and the key for development was industrialization.
From the beginning, international assistance has been based on national self-interest of the nations involved with the IFI’s and related global governing institutions. Most of the aid was provided to countries that the United States were afraid that they will fall into communism or to countries in which the TNCs would see a strategic interest, perhaps countries that can produce oil. The countries that were most in trouble were the neediest countries that do not have a strategic or economic value and they were least likely to receive this international aid (Biplab 1094).
International development assistance plans, however, had a fine print. It allowed someone else, the donor, to define the course of development in the recipient nation. And thus developing countries have had less control over their sovereignty than wealthier countries had. Aid was available only by the types of developments that were approved by the donor nations. However, the assistance plans intended only to initiate the change and direct the Third World Countries towards the road of development.
Afterwards, the nations were expected to continue this development out of their own resource base which was not as realistic expectation since they lack the money and the knowledge to do so. Without financial assistance, the nations had to find a way to continue the process of industrialization. Until they were able to meet their needs internally, the only way the process could persist was by purchasing goods and services from richer countries. However, in order to do that they required foreign exchange ??? the ability to purchase materials and goods from another country.
There are three available ways to acquire a foreign exchange: Sell domestic currency in exchange for the foreign one. This option was not accessible since nobody would buy one of the currencies of the developing countries as it was not stable. The second way was to earn it by continuing to produce what the richer countries desired. Yet, due to global competitiveness a downward pressure was put on world prices of commodities, while simultaneously due to growing demand for machinery its prices rose.
The only way that was left for the developing countries was borrowing. In 1973 the price of oil went up, the petroleum exporting countries realized that they are producing the commodity that the rest of the world is depended on (Oil Shock). Together they formed the Organization of Petroleum Exporting Countries (OPEC) followed by the 1974 proposal to the United Nations (UN) General Assembly by the G-77 (Group of 77 Third World Countries) under the New International Economic Order (NIEO).
With no other competition OPECs could raise the price of oil world wide. In response, the First World Countries went into recession, and even deeper recession happened in the NOPECs of the Third World (Non Oil Power Exporting Countires) (Biplab 1093) As the OPECs started depositing the increasing amounts of Petro-Dollars into their bank accounts in the west, banks started taking a hit as they have to pay interest on this money in the OPECs’s saving accounts. The only way to avoid bankruptcy was to lend the money at a higher interest rate.
The recipients were the developing countries that needed the money to repay their previous debts. Due to this arrangement, inflation became unavoidable. The bonanza lasted only for a few years. With the interest payments on the accumulated debt, the total amount of financial aid received by the developing world was less than the interest that they owed the First World Countries ??? meaning that money flow would be reversed ???the money would flow from the poor countries to rich ones (Ritzer 204). The chosen course of action was debt management that took several forms.
Initial stabilization measures focused on financial management (lowering imports to reduce imbalance of payments), and more important Structural Adjustment Programs (SAPs) ??? conditions (“conditionalities”) for getting new Structural Adjustment Loans (SAL) from the World Bank or reducing interest rates on current loans. Under this regime, as countries adopted the rules and restructured their economies, they reversed the path of the development project and stepped in into the globalization project (McMichael 130-134).
Within the framework of globalization, rescheduling “conditions” were brought up: Structural Adjustment Programs, formulated by the Bretton Woods organisations that would operate exclusively in the less developed countries. The goal was to fix economic upheavals, prompted by two oil crises – in 1973 and in 1979-80. The ‘Adjustment’ was expected to bring less developed countries imports in balance with their foreign exchange earnings from exports and whatever other assistance they could get from outside (Biplab 1094).
Adjustment measures (also known as Washington Consensus) included the following (and others): – Cutting social expenditures, also known as austerity – Focusing economic output on direct export and resource extraction – Devaluation of currencies – Trade liberalization, or lifting import and export restrictions -Balancing budgets and not overspending -Removing price controls and state subsidies -Privatization, or divestiture of all or part of state-owned enterprises Enhancing the rights of foreign investors vis-a-vis national laws (Structural Adjustment, Wikipedia) The core of the idea is that economic management should be left to the market. The prices determined by the interaction of demand and supply forces -whether for commodities, labour power, capital, land, or foreign exchange – should be flexible in either direction and thus capable of clearing the market. Most of these measures were felt the hardest on the poorest and least powerful social class, explains McMichael (133-138).
Governments sold state assets under privatization pressure along with the rise of global competitiveness – TNCs were able to negotiate favorable conditions and prices resulting in exploitation of the cheap and disorganized labour, deeper poverty, and stronger inequity. Recognizing the limitations of SAPs, the IFI started with the Heavily Indebted Poor Countries (HIPC) Initiative and were compelled to come up with a Social Emergency Fund (World Bank) and a new Compensatory and Contingency Financing Facility (IMF).
These actions of the IFI are ones motivated by an attitude of self-preservation. Over the years, IFI have become increasingly depended on the repayment of their loans as First World countries reduced their financial contribution. In order to secure their legitimacy they proposed not only financial help but also strategic based help on which debt rescheduling, and debt forgiveness can be made ??? known as Poverty Reduction Strategy Papers (PRSPs).
However, the more important attempt was to encourage non-government organizations (NGO) to take part in policy formation and thus IFI proposed “democratization” of SAPs, providing power players (elites of the TNCs) a clear political influence towards their interest (McMichael 187). While prior to the formation of SAPs the government consciously ignored the absence of regulations in the free trade zones, it is evident that with the SAPs and NGOs “helping” to form them, they are powerless to enforce their laws with regards to foreign investments of TNCs anywhere – almost turning the whole country into an Export Processing Zone.
In conclusion, although free trade zones have proven their effectiveness for increasing export in the host nation, and were used as a global model for development in the Third World, actions of the global governance (i. e. structural adjustment programs) did not have the same effect on the Global South. This paper has attempted to show that Structural Adjustments that have been formulated and implemented by the Bretton Woods Institutions, the growth of Export Processing Zones, and the debt crisis of the early 1980s are related to one another.
It has asked the question whether the growth of Export Processing Zones is associated with the globalization project, and what effects did the actions of key governing institutions have on this growth. With the rise of the OPECs and therefore, the massive increase in the price level of oil, First World countries along with the NOPECs dived into a recession. This recession led the world into the Debt Crisis (1980s). Unable to recover, Third World Countries had to pursue the “conditionalities” set by the IMF and the World Bank in order to pay the interest on their debts.
The global governance tried to duplicate the models of EPZ in order to achieve the same level of investment and growth in the entire less developed world – a clear indication of how important EPZ were to the economies of developing countries and that they have been the corner stone of the globalized economy. From the political standpoint, lending by the IMF has not made a significant contribution to arrange the balance of payment deficits in developing countries either in terms of the actual financial flow or in terms of any other financial need.
At a time when countries had severe payments difficulties, often associated with attempts to escape from the problem of external debt, the global governance and under the influence of the TNCs, took more money back from them than it made available in the form of new loans or investments. Unfortunately, this is the reality I discovered. “The poor complain, they always do, But that’s just idle chatter. Our system brings rewards to all, At least to all that matter. ” – Gerard Chaliand – Work Cited: – Biplab, Dasgupta. “SAP: Issues and Conditionalities: A Global Review. ” Economic and Political Weekly 32(1997): 1094. “Developing countries” 17 Feb 2005. MiMi. hu. 12 May 2009 . – Hooshang, Amirahmadi, and Weiping Wu. “Export Processing Zones in Asia. ” Asian Survey 35(1995): 828. – Greider, William. “The Right and US Trade Law: Invalidating the 20th Century. ” The Nation > Business 15 Oct 2001 Web. 19 May 2009. . – International Forum on Globalization (IFG). “A Better World is Possible! , Report Summary. ” Alternatives To Economic Globalization (2002): 13. – John, Devereux, and Chen. “Export Zones and Welfare: Another Look. ” Oxford University Press 47(1995): 704. – Lie, Amund and Dag Einar. What is Neoliberalism?. ” Department of Political Science University of Oslo 15 Jan 2006 2-3. Web. 15 May 2009. . – McMichael, Philip. Development and Social Change. 4. London: An Imprint of Sage Publications, Inc. , 2008. Print. – Mishkin, Frederic S. The Next Great Globalization. New Jersey: Princeton University Press, 2006. Print. – Rutledge Mitchell IV, Thomas. “Planning for the Knowledge Economy The Nicaraguan Strategy to Engage in the Global Trade of Business Services . ” Center for Global Initiatives – Carolina Papers on International Development 17(2007) 38. Web. 10 May 2009. . – Ritzer, George. Rethinking Globalization: Glocalization/Grobalization and Something/Nothing. ” Socioligical Theory 21(2003): 204. Work Cited (Continued): – Rondinelli, Dennis A. “Export Processing Zones and Economic Development in Asia: A Review and Reassessment of a Means of Promoting Growth and Jobs. ” American Journal of Economics and Sociology 46(1987): 90-91. – “Structural Adjustment. ” Wikipedia. 2009. Wikipedia / Free Encyclopedia. Web. 17 May 2009. . – Zajda, Joseph. International Handbook on Globalisation Education and Policy Research. New Jersey: Springer, 2005. Print. ———————– Globalization, Export Processing Zones, and beyond