Neocolonialism: How the Poor Finance the Rich

The economic hegemony exerted by the trade regime — and related financial structures — mirrors and extends old colonial patterns of exploitation and dispossession. Its policies represent our “normal.” They have been taking their toll on the Global South for decades, though often manifested in the vulnerability of the marginalized majority to other events — from climate disruptions to pandemics (like Ebola and COVID-19) and food crises. As Arundhati Roy recently said, nothing could be worse than a return to “normality.”

Nobel economist Joseph Stiglitz estimated that rich countries cost poor ones three times more in trade restrictions alone than their total official development assistance (ODA). In the agricultural sector, the North’s policies have been estimated to cost the Global South five times the level of ODA for agriculture. Over the last couple of decades Africa has become a net importer of food and agricultural products, despite its vast agricultural potential. Other financial outflows from developing countries far outweigh incoming ones, with the result that poor countries are effectively developing rich ones. Among them are unrecorded and illicit capital flight to tax havens or secrecy jurisdictions via “trade mis-invoicing,” and debt servicing. Finally, austerity and liberalization enforced by “structural adjustment” have inflicted long-term damage to developing economies, marginalizing the poor and diverting profits to rich countries.

The Global Trade Regime

Wealthy nations consistently deploy the banner of “free trade” to insist on “reciprocity” in trade relations with poorer ones, pressuring them to liberalize their markets in tandem with the World Trade Organization (WTO), the structural adjustment regimes of IFIs, and bilateral and regional “Free Trade Agreements” (FTAs).

On the one hand, reciprocity in trade agreements between countries with vastly different levels of economic development mostly serves the interests of the wealthy ones with highly developed manufacturing and service sectors while denying poor countries the flexibility to develop their own industries. On the other hand, even reciprocity is not observed in sectors like agriculture where the Global South has an advantage and could profit greatly from export. Europe and the United States maintain a highly protectionist agriculture policy, enforced by a battery of measures like farm subsidies and tariff and nontariff trade barriers. In other words: protectionism for the rich, liberalization for the poor.

The EU currently spends a whopping €60 billion per year on farm subsidies via its Common Agricultural Policy (CAP). The United States has been stepping up its farm subsidies, which reached their highest level in fourteen years at $28 billion over the 2019–20 period. These subsidies enable producers to keep prices artificially low, often below production cost. They spur overproduction and dumping of cheap surplus grain, sugar, dairy, meat, and other products on world markets, making it impossible for small farmers in the Global South to compete, often even within their own markets.

Agriculture generates just 1.6 percent of EU GDP and employs about 5 percent of the population. In the United States it contributes even less to GDP and employs less than 2 percent of the population. On the other hand, agriculture employs on average 60 percent (ranging from 20 to 90 percent) of the population in developing countries. Of the world’s poorest billion people, 70 percent are small farmers and agricultural laborers in the Global South. Skewed tariff and nontariff trade barriers imposed by the EU and the United States have further marginalized these farmers, as have IFI conditionalities demanding lower import tariffs and the dismantlement of assistance measures. Their marginalization has led to hundreds of thousands of farmer suicides as well as unsustainable urbanization in the Global South, where some fifty million leave rural areas every year in search of alternative livelihoods.

Contrary to reasonable expectation, the main beneficiaries of EU and US farm subsidies are not domestic small farmers but the largest landowners, highly mechanized industrial farms and agribusiness. In the US, the top 10 percent of recipients receive about 78 percent of the payments while the top 1 percent  receive 26 percent . The EU pays 80 percent  to about a quarter of recipients, those with the largest holdings. Subsidies for factory farms and agribusiness have spurred input- intensive and energy-intensive agriculture, leading to high greenhouse gas emissions, soil and water depletion, eutrophication, deforestation and biodiversity loss. Deforestation also increases the risk of pandemics.

But agriculture is not the only area where trade injustice prevails. While agriculture remains the main source of income for the world’s most underdeveloped regions, these regions also urgently need to diversify into processing, manufacturing and other value-adding activities — in light of climatic uncertainties and ecological impact, as well as economic advantage.

Most remain dependent on imports for manufactured goods, and many still have no service sector.

Their “infant industries” need protection in order to get off the ground. But IFI structural adjustment regimes and WTO regimes (like Non-Agricultural Market Access or NAMA and the General Agreement on Trade in Services or GATS) compel developing countries to open up their still fragile manufacturing and service sectors to global competition under “reciprocity” conditions. Bilateral and regional FTAs between the Global North and the South are even more demanding: the EU’s Economic Partnership Agreements (EPAs) with ACP countries (Africa, Caribbean and Pacific) and that of the US with Central America or DR-CAFTA (Dominican Republic-Central America Free Trade Agreement) are prime examples. FTAs have been deemed even worse for developing countries than the WTO since the latter still offers them some flexibility against further tariff reduction on imports.

Combined with “tariff escalation” in the Global North (whereby import tariffs increase along the processing chain), these policies undermine value-adding industries in the Global South, confining their exports to cheap raw material for feeding Northern industry while ensuring dependence on expensive finished products from the North, along old colonial lines. Resource extraction and destruction of local industries were the main weapons in the colonial arsenal, deployed for centuries to capture and control the wealth of the Global South.

Both Haiti and West Africa, for instance, which count among the world’s poorest regions, could greatly benefit from exporting processed chocolate instead of cocoa beans for processing in the EU or US. Local value addition would enable enhanced income for rural producers while reducing financial flows out of poor countries, ecological pressure on arable land, and greenhouse gas emissions from transporting large quantities.

The trade regime also blocks access to affordable medicine and public health in the Global South. Before the WTO agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) came into force, national governments could choose whether to grant patents on pharmaceutical products. The TRIPS agreement effectively handed over all exclusive patents to Big Pharma as of 2005, obliging all WTO members to protect patents for a minimum of twenty years, including those registered in other countries. Médecins Sans Frontières (MSF) report that TRIPS jeopardizes millions of lives in the Global South by treating life-saving medicines as consumer goods and ignoring the devastating impact of high prices.

Public outcry over TRIPS among developing countries came to a head at the 2001 WTO ministerial meeting in Doha, Qatar. Developing countries’ demands that the primacy of public health be emphasized over commercial interests were finally accommodated in the Doha Declaration. It reaffirmed countries’ right to use TRIPS safeguards such as compulsory licenses to overcome patent barriers to access to medicines. The deadline for granting and enforcing pharmaceutical patents was extended for least-developed countries from 2006 to 2016.

However, when developing countries make use of TRIPS concessions, they invariably face international pressure from Big Pharma and major drugs-producing countries to eliminate — or limit the scope of — these concessions. This happened when India upheld a compulsory license for Bayer’s cancer drug Nexavar, effectively allowing generics firms to copy it and bringing the price down from more than $5,500 per month to about $175. Likewise, when Malaysia used its compulsory license for producing the drug sofosbuvir (patent owner Gilead) for Hepatitis C treatment, reducing the price of the full course from $68,000 to about $227 for the generic substitute.

Finally, even the progress achieved in Doha has been obliterated in recent years. MSF report that, despite the Doha Declaration, developing countries have been pressured to implement even tougher conditions in their patent laws than are required by the TRIPS Agreement.

Examples of these “TRIPS-plus” provisions include extending the term of a patent beyond the twenty-year minimum (called “evergreening” — interesting newspeak for a measure causing deaths among the poor), and introducing provisions that limit the use of compulsory licenses or restrict generic competition. Data exclusivity is another “TRIPS-plus” feature whereby a pharmaceutical company can profit from a period of market monopoly, charging artificially high prices even for medicines not protected by a patent. Though not obligatory by international law, these “TRIPS-plus” provisions are frequently pushed in free trade agreements between developed and developing countries — and the latter often have no choice but to adopt them.

Small Farmers and Food Security

The world produces enough food for twelve to fourteen billion people, yet around two billion worldwide suffer from chronic hunger or malnutrition. Even more ironically, roughly 70 percent of these are food growers: small farmers and agricultural laborers in the Global South. The problem is one of access and distribution; agribusiness controls national, regional, and global supply chains that bypass traditional local markets where smallholders sell their produce.

And yet small-scale farming is best equipped for meeting the double challenge of hunger eradication and climate change while sustaining livelihoods. It delivers higher long-term yields of more nutritious food, and more equitable growth than large-scale capital-intensive factory farms.

The environmental costs that factory farms generate — by causing soil and water depletion, biodiversity loss, and climate change — render food supply unsustainable. They also generate socioeconomic costs by marginalizing small farmers. This has caused poverty, malnutrition, and the loss of valuable knowledge on locally optimal and sustainable farming, further undermining food security while rural migrants augment the ranks of the urban poor. Those remaining in rural areas are dependent on global agribusiness for providing inputs (seeds, fertilizer, etc.), buying produce, and accessing markets. Agribusiness dictates prices and conditions, leaving small farmers indebted and often compelled to abandon or sell their land to factory farms. These long-term costs of industrial farming are not accounted for; they’re “market externalities,” a consequence of market failure whereby the pursuit of private interest hinders the equitable use of resources and the fair distribution of public goods.

More than half the food produced globally ends up as biofuel or animal feed, or is wasted on the journey from factory farms to traders, food processors, stores, and supermarkets. Enough to feed the world’s hungry six times over, much of it rots on garbage heaps and landfills, producing substantial amounts of greenhouse gas emissions.

It is high time long-standing proposals for making food security a global public good (GPG) were realized so that food production, distribution, trade, and pricing are no longer determined by rules of supply and demand or open to speculation, but made a structural objective of global governance based on societal, rather than monetary, value. However, the treatment of food security needs to be qualitatively different from that of other GPGs like water or clean air. Food is produced by people: the world’s poorest people. Food prices and conditions should therefore be fair to the producer as well as affordable and accessible for the consumer. This calls for global facilitation, rather than obstruction, of measures to strengthen the position and resilience of small farmers, including state support, land reform, and direct market access.

Structural Adjustment

Structural adjustment regimes and conditionalities imposed in exchange for loans from the IMF and World Bank have ravaged social welfare and public health infrastructure, domestic industries, and agriculture in the Global South. This has exacerbated poverty, inequality, social unrest, and dependency on aid as well as imported goods. Conditionalities include austerity, resource extraction, privatization, elimination of food subsidies, and currency devaluation.

Debtor countries are forced to align their economies to global demand, and to concentrate on exporting commodities and raw material whose price and quantity are determined externally. Poor countries’ resources are devalued further by price wars and currency devaluation, benefiting consumers in the Global North. Then commodity production has to be ramped up further to pay off debts at high interest rates, public spending and consumption reduced, and financial regulations removed. Domestic needs are disregarded and local industries wiped out. Volatile capital flows, low value for labor, and increased dependence on expensive finished products ensue. Privatization and commodity production divert profits to shareholders in the Global North at the expense of local farmers and laborers. Investors pull out, and capital flight has often led to economic collapse.

Where the Money Goes

Recent analyses of global financial flows conclude that developing countries have effectively served as net creditors to the rest of the world. The money they lose mostly ends up in banks in rich countries or in tax havens.

Unrecorded and illicit capital flight constitutes the largest chunk of these outflows, to which developing countries lost around $13.4 trillion between 1980 and 2012. Most of this occurred via “trade mis-invoicing”: corporations report false prices on their trade invoices to siphon money out of developing countries into tax havens or secrecy jurisdictions for tax-evasion purposes, money laundering, or dodging capital controls. In 2012, trade mis-invoicing alone deprived developing countries of $700 billion, a factor five times greater than the aid received during that period.

Companies that falsify their trade invoices are obviously at fault, but the question is how they get away with it. In the past, customs officials could hold up dodgy transactions, but since 1994 the WTO has restricted these powers on grounds of trade inefficiency, thus facilitating illicit outflows. However, these outflows would not be possible without tax havens, the vast majority of which are controlled by rich countries. Some of these are Delaware and Manhattan in the United States and the Benelux countries in Europe. The largest is concentrated around the City of London, from where it controls secrecy jurisdictions worldwide.

Debt servicing constitutes another major financial outflow. Amounting to $4.2 trillion, cash directly transferred from developing countries to big banks in the United States and EU since 1980, this again dwarfs the aid received during that period. In 2018, the total debt of developing countries reached 191 percent of their combined GDP, the highest level on record.

Then there is the income made by foreign companies on investments in developing countries that is repatriated back home. Examples are the profits extracted by British Petroleum from Nigeria’s oil reserves or by Anglo-American from South Africa’s gold mines.

Tax base spillovers are also a major source of revenue loss by developing countries and a fundamental driver of inequality. Governments engage in a race to the bottom, competing to attract globally mobile investment by offering increasingly lower corporate tax rates. This undermines not only the country’s own tax base, but also spills over to other countries. Developing countries are the biggest losers — in terms of spillover base effect as well as revenue loss, and the largest share comes from extractive industries.

Solidarity and Progressive Internationalism

Each of the above elements has played a deadly role in ravaging the Global South. Their collective impact, combined with the coronavirus pandemic and lockdown, is unprecedented. Over the last couple of weeks, income from trade has plummeted while capital flight and external debt have skyrocketed beyond already untenable levels. Debt servicing is an outrage in the context of the recent drastic currency devaluation with a debt largely denominated in foreign currency. Immediate mitigation measures like capital controls, special drawing rights (SDRs), and debt resolution for developing countries need to be deployed to get through the emergency.

But these are stopgap measures. As the world is released from limbo, a return to the status quo entails reviving a barbaric world order that has started to crumble. It must, instead, be dismantled.

It is high time that trade justice, sidelined for over a decade, took center stage in campaigns for global solidarity. The United Nations Conference on Trade and Development (UNCTAD) must take over as arbiter of global trade in coordination with UN bodies on development (UNDP), labor rights (ILO), environmental policy (UNEP), food security, (FAO) and health (WHO). The legitimacy of UNCTAD is recognized by the Global South, unlike that of the WTO and IFIs.

COVID-19 has opened a window that offers a glimpse of a far more devastating long-term crisis. But the risk is that this window will close as the pandemic ends. This is the moment to force it wide open, laying bare all facets of a grossly unjust regime. To repair old colonial and neocolonial exploitative relations between North and South. To realize a world where every human being can access nutritious food, clean water, health care, stable employment, and sanitary housing. It’s the moment for progressive internationalism. Let us not allow it to pass.