Globalization and the Social Responsibility of the State in by eux11083


									Globalization and the Social Responsibility of the State in Developing

                                                              Prof. Dr. Gülten Kazgan*
Dear Colleagues, ladies and gentlemen,

As a starter, I would like to express my deep feelings for my election as the “Dan
Sanders lecturer” in the closing session of this meeting. I feel greatly honored and I
hope that the topic I have chosen as well as the contents of my paper pay due regard
to his thoughts, to his philosophy.

The topic of my paper is globalization and the Social Responsibility of the State in
developing countries. Succinctly what I try to say in this paper is that the Western
World led by the US, has initiated a liberalization movement, beginning with the
1980s, entitled as “globalization”. This movement involves at the same time the
marketization of activities that were formerly considered to be included under the
social responsibility of the state in developing countries. For most of them, the last
two decades have resulted in adverse consequences at the economic level, restricting
further the already stringent finances that developing country governments can
allocate to fulfil their social responsibilities.

My presumption is that democracy is a regime that, by its nature, involves the social
responsibility of the state. In developing countries, the run of events is currently such
that, this responsibility is on one hand constrained by marketization, on the other hand
by the economic effects of globalization. But internationally determined movements
in favor of marketization and globalization determine by and large government
policies without the endorsement of the nationals of developing countries; for, such
decisions are taken in institutions where developing countries are either not
represented at all, or if they are members, they have no say in the decision making
bodies of these institutions. I conclude that developing countries should search for

 Prof. Dr. Gülten Kazgan, Istanbul Bilgi University, Head of Economics Department and the Research

solutions at the international level, so as to produce solutions to preserve the social
responsibility of the state, hence democracy.

I Shall divide my lecture between 4 main topics:

    1) First, I would like to discuss at the historical and theoretical levels, the nature of the term “the
         Social Responsibility of the State.”
    2) My second subtopic will be confined to the relationship between political democracy and the
         current policies oriented to enhancing globalization and marketization in developing countries
         (DCs) I presume here that the first and foremost social Responsibility of the State is the
         substantiation of democracy, that I consider to lie at its core.
    3) Third, I shall argue that in DCs, it is not very meaningful to distinguish the economic
         Responsibility of the State from its Social Responsibility, but that globalization introduces
         serious contradictions between these two categories.
    4) Finally, I shall propose some policies that may help improve the current economic problems
         DCs have been facing over the last two decades in the process of globalization and

I – The Social Responsibility of the State : a historical and theoretical overview;
The term “Social Responsibility of the State” is a normative concept, which sounds somewhat elusive
when one tries to define it or to delimit it. As observed in the case of all normative concepts, its
connotation varies widely over time and space, depending on the ideological setting defining the period
and the country or group of countries; in theory, it is however fairly well formulated in verbal terms,
though somewhat difficult to estimate statistically. I would first like to give a brief historical overview
of the change in the coverage of this concept in the western world as related to globalization; then, I
shall do the same across countries at different levels of development, with a view to show how it varies
over space within the same period and how irrelevant it is to place all economies in the same box, as is
currently done under the globalization ideology. The relativity, with respect to time and space, of the
contents and the limits of the Social responsibility of the state, is indeed highly telling about the
difficulties encountered by its students.

    a)   Any historical overview of the Social Responsibility of the State in the Western countries
         reveals the ebbs and tides it has witnessed over the last two centuries as well as its close ties to
         globalization. The period starting with the Industrial Revolution at the end of the 18th century
         and ending with the start of the First World War marks the first period of the globalization
         process under laisser-faire, laisser - passer capitalism. This is the period of the free movement
         of goods, services, human beings as well as of capital in all its varieties; it is also the period of
         the colonization of poor countries and their integration with the Western metropoles.
         Underlying this movement were the uprooting technological changes in transportation and
         telecommunications together with the harnessing of steam power for running the machines
         that multiplied by several fold labor productivity, hence output. The ideology of the period

was expressed by Adam Smith’s “invisible hand”, placing the attainment of social welfare to
the hands of global free markets. The responsibility of the state was reduced to its classical
functions whereas the solution of social questions were expected to be found in market
determined equilibria. That is, the state was to carry no social responsibility, though in
expanding markets to overseas poor lands, it rendered a crucial service to private capital.
Government expenditures in GNP in the advanced Western states hovered around 10-11%
until the outbreak of the First World War. The state had little social responsibility aside from
the generalization of educational services to its nationals and none to the peoples living in the
colonies. But, the period was also marked by violent labor strikes, social upheavals, and
nationalist wars while socialism, the major opposing ideology, helped introduce a totally
different approach to the “social responsibility of the state” in the literature.

The half a century long period, beginning with the great depression (1929) and ending with
the mid 1970s, in the wake of the oil crisis (1974), marks the emergence and adoption of an
altogether different ideology and government policies. It is over these years that the social
responsibility of the state came to the fore; Western countries began to refer to themselves as
“mixed economies”, attributing heavy responsibility to the state in sustaining full –
employment, raising social welfare by institutionalizing the social security system, providing
free education and enhancing public health services etc. Laisser-faire capitalism concurrently
with globalization, was pushed aside as governments intervened in all markets in the name of
preserving social welfare. This was also the period of decolonization and of substantial
financial as well as technological support given to the emerging states of the new DCs. The
social responsibility of the state as it was expanded, resulted in the hike in the share of
government expenditures in GNP in Western countries: it had reached on the average 40% by
the 1980s. The social responsibility of the state hiked, however, under many influences, the
most important being the presence of the USSR on one hand and the strengthening of labor
unions with socialist tendencies on the other hand. The bipolar-world with the USSR as the
center of attraction for the DCs, helped tame the wild exploitation practices of capitalism in
their case, for, the greater the number attracted to the Western pole, the weaker would be the
Eastern pole.

Beginning with the early 1980s, with respect to the social responsibility of the state, the
pendulum started to swing back to its original place in the 19th century. the threat assumed to
come from the presence of the USSR had considerably weakened in the electronic age.
Additionally, the huge amounts of accumulated capital called for new policies on an
international scale to raise its profitability prospects. The role of the state had to be reversed
and it was to be confined to its classical functions. The “mixed economy” term disappeared
from the literature. The social responsibility of the state was to be reduced to the minimum,
while markets with their invisible hand, were to be introduced as substitutes. This was to be
the age of globalization and marketization, driven by new technological discoveries in
telecommunications and genetics. The economic development literature that attributed a
crucial role to the state in DCs was shelved and foreign capital was advocated to replace it.

     With the collapse of the Berlin Wall (1989) and the disintegration of the USSR (1991), DCs
     also were integrated to the globalization and marketization movements.

     In brief, the social responsibility of the state over the last two centuries started first from a
     minimum then went up to a maximum and is now in the process of being pushed back to its
     original minimum.

b) The Social Responsibility of the state has varied not only over time, but it varies also between
     the advanced and developing countries. This is primarily because to perform social functions,
     governments must be able to allocate funds for this purpose; if priority in the allocation of
     funds is elsewhere, that is in an area displaying higher social benefits, the strictly social
     functions may be delayed for some time. In effect capital expenditures by the government, in
     total budgetary expenditures take up a larger share in most DCs than in advanced economies.
     But perhaps more important is the source of the use of state power and the mentality or
     ideology defining the government in office; it is by and large in the democratic regimes that
     social functions come to the fore as the responsibility of the state. In dictatorial regimes,
     usually, the social needs may easily be overlooked. For, governments, not being elected to
     take office to use state power and carrying no direct responsibility to the electorate, are much
     less motivated to carry social responsibilities for the nationals at large. However, the pro-
     globalization ideology as well as policies are now in effect to reduce them everywhere to the
     minimum, disrupting the links between democracy and the social role of the state.

     A study of international indicators, no matter what the underlying cause my be, reveals wide
     disparities in this respect between the advanced and the developing countries: Whereas in the
     former government budget expenditures in the 1990s stood on the average at 45% of GNP, in
     the latter category it hardly reached half of this figure; the difference turns out to be even
     higher in the case of social services which cover education, health, social security, welfare,
     housing and community amenities, (WB, Selected World Development Indicators 2000) The
     percentage share in GDP of social security expenditures in the former, for example was
     around 20% but only 5% in the latter, on the average, in the same period; not with standing
     the pressing social requirements in DCs to be performed by the state, however, the
     globalization movement is sweeping across the board, irrespectively of the underlying
     structural set-up.

     There is thus clear evidence to support the argument that the social responsibility of the state
     is not a stable category across time and space, and that it displays wide variation over both.
     But, surprisingly, under globalization the pressure to contract the social responsibility of the
     state is no less in the developing economies than in the advanced countries, where its
     overexpansion has become the center of controversies.

c)   At the theoretical level, however, the social responsibility of the state is more clearly
     definable. Social benefit and social cost concepts may be introduced to indicate its extent.

Both concepts have a coverage that goes beyond private profitability, to include the overall
effects of investment or other expenditures on GNP and social welfare at large. We may
assume that as such expenditures expand, the associated social benefits will decline whereas
the related social costs will start to climb. Where the negatively sloped social benefit curve
intersects with the positively sloped social cost curve, equilibrium will be struck. At this
intersection point marginal social benefit will be equal to marginal social cost. This, therefore
will be the limit of the social services supplied, based on the criteria of “social” magnitudes.
These simple theoretical tools help show that so long as the former exceeds the latter, there
will be net social gains from increased state social expenditures whereas net losses will accrue
where the converse is true.

Globalization is now heading for the substitution of markets, hence the profit criterion, in lieu
of net social benefits. The economic development literature of the half century between 1930-
80 when the social responsibility of the state came to the fore in the Western world, taught us
one very important lesson; namely that, due to their structural and institutional weaknesses,
developing economies should rely more on the criterion of net social benefit in resource
allocation rather that the profit criterion. We may, hence expect that the approach of
globalization to resource allocation will be inimical to socio-economic development
specifically in the poorer members of the international community. The protests staged
against globalization definitely rely on firm theoretical foundations.

II- Democracy, marketization and globalization
Globalization is proceeding currently on two fronts: at the political level it is the adoption of
democracy, at the economic level it is marketization that are its driving forces, assuming that
they complement each other as both are the fruits of the liberal philosophy. But in a
globalizing world where the peoples of high income advanced economies enjoying high
purchasing power meet in the supposedly free markets, with the low income peoples of DCs,
to what extent will democracy be substantiated?

First, democracy is said to be a political regime “of the people, for the people, by the people”.
It is by and large in the context of democracy that the social responsibility of the state can
meaningfully be discussed, as democratically elected governments are responsible to their
nationals, and owe their use of state power to their votes. In election times, democracy entitles
each person in the electorate to cast one vote, irrespectively of income and of certain social
traits such as gender, religion, race, ethnicity. Hence, the majority enjoys the right to vote into
office the political party that will serve its economic as well as social interests. But, as
marketization proceeds, it takes away whatever social activity of the state is marketable from
the voting power of the individual.

In developing economies, both marketization and globalization are externally determined
policies, introduced by governments in times of economic crisis under the supervision of the
IMF and the WB bureaucrats, as conditions attached to their credits. These bureaucrats have

never been elected by the votes of developing country electorates nor their policies endorsed
by them; they are policies designed to serve the enhancement of the profit prospects of the
internationalizing “big capital”. There is absolutely no theoretical or practical reason for the
overlap of DC development requirements with such policies. That is, marketization on one
hand takes away the power of the developing country electorate to vote into office parties that
pledge to fulfil the social functions that are related directly to the economy; on the other hand
this process is externally determined in their case, being managed by unelected bureaucrats
that enter the scene in hard times with other purposes underlying their mandates.             As
discussed in the following paragraphs, under globalization, such hard times have become
more frequent and have created more disastrous consequences than erstwhile. Therefore, at
each instance, the disruption of the basic tenets of democracy becomes more evident and turns
into one of the hottest issues discussed in the media of the DCs while the government
implementing the mandated policies faces landslide defeat at the elections. But the case is
hopeless, for, the incoming new government also has to abide by the same mandates.

Secondly, free markets are very undemocratic, for, they allocate economic resources between
various economic activities according to the purchasing power of consumers; the higher the
number of votes cast by consumers, as determined by their purchasing power, the more the
economic resources that they can divert to their own requirements and vice versa. The
equilibrium price for example of some food staple, tells us nothing about what social
consequences are taking place in the case of consumers that remain in the part of the demand
curve below the equilibrium price; at that level, the majority of the poor may well be going
hungry, deprived of the food staple. Consequently, the further the markets encroach upon the
domain previously considered to be included within the social responsibility of the state, the
less the democratic nature of elected governments.

Finally, carry this analysis to international markets. Currently, about 75% of global GNP is
controlled by advanced countries that make up 15% of global population. That is, to
developing economies which make up more than 80% of global population accrues only 25%
of global income, hence purchasing power. Laisser-faire type of marketization and
globalization, have therefore serious economic implications that engender undemocratic
consequences: in the global arena, the consumers of advanced countries enjoy the power to
divert the greater part of global resources to their own requirements, depriving the poor
majority of the resources to meet their basic needs.

The high inequality in income distribution observed at the scale of the globe, does not exist in
any individual economy whether developed or developing; hence the foregoing argument is
no where as valid as it is in the case of global markets. The anyway undemocratic nature of
markets, added onto the drastic global income inequality plus the ongoing marketization of the
social responsibility of the state are conducive to the following argument: Democracy is being
transformed into a virtual one in the age of virtual reality via marketization and globalization.
Therefore, the first and foremost social responsibility of the state in DCs is to save democracy

by way of fighting against the encroachment of both of these processes on the social domain.
For, the remaining items coming under its social responsibility can be meaningful if and only
if real democracy can be instituted. For the people of DCs, one of the pillars of globalization,
namely, marketization, is destroying the other pillar, namely democratisation, or transforming
democracy into an empty box.

In DCs, it is not only democracy that becomes virtual, it is also the state itself that is losing its
significance. When nationals of a country come to realize that markets are beyond the control
of their states and that governments are unable to implement policies to meet their crushing
economic and social needs, the pertinent questions will be the following: is this a sovereign
state or only a cosmetic one? In a world where even the judiciary power of the state, a
classical state function, is coming under the control of international capital and international
organizations, what is really the true function of the nation state? At the present, with some
advanced countries currently taking over, by their own decisions, the responsibility to
intervene in local conflicts between poor countries, aren’t even the classical functions of the
state questioned? That is, it is not only the social responsibility of the state which is under
attack, but in the developing world its many classical functions are also gradually being
encroached upon.

III- Economic consequences of globalization and the enhanced
requirements for the social responsibility of the state.
Under this heading, I shall first argue that, in the case of the developing economies, it is quite
difficult to distinguish the social responsibility of the state from its economic responsibilities,
given the observed results of globalization. My second argument will be that globalization
introduces or aggravates economic problems that are conducive to the enhancement of the
responsibilities of the state in both the economic and the social domains. My third argument
will be that globalization, while enhancing the demand for the increased responsibilities of the
state, at the same time conduces to a reduction in its financial capacity to produce adequate
solutions. Since, however, all the three arguments are closely intertwined, in the analysis here
below, they will be elaborated upon simultaneously.

a) Economic development issues
i)       First, let us take up some issues related to economic development. In the wake of the
         liberalization of the current and capital accounts of the balance of payments,
         competition between domestic and foreign products plus domestically produced
         products of transnational companies has intensified. But the protection of domestic
         products via higher tariffs and / or subsidies is currently at an all time low level, as
         called for by the globalization ideology. The basic tool, in coping with this context, is
         raising the efficiency level in the relevant industries, concomitantly with spurring
         Research and Development for the same purpose; this is to be achieved by raising the
         general level of educational attainment as well as labor skills. Here, obviously, the
         economic, that is raising the efficiency level, overlaps with the social, that is

                    providing higher educational attainment opportunities, a basic social responsibility of
                    the state. But developing only the latter while ignoring the former is highly unlikely
                    to be adequate; for, in case the economy is not growing at a reasonably high rate so
                    as to provide gainful employment for the educated population, the end result will be
                    the unemployment of the surplus over demand. Since learning by doing and on the
                    job training are the other means of acquiring skills as formal education in most cases
                    turns out to be inadequate in this sense, then the aim to raise the efficiency level will
                    hardly be met.

                    Additionally, the global demand for highly qualified labor is extremely high; when
                    enough jobs at satisfactory wage levels and work conditions cannot be generated by
                    the market mechanism, the highly qualified people can easily emigrate to developed
                    countries, taking away also the capital invested in them. In times of economic crises
                    when droves of white-collar workers are laid off, concomitantly with blue-color
                    workers, the tendency to emigrate becomes a visible phenomenon: queues before the
                    embassies or consulates of advanced countries become longer day by day. That is,
                    unless governments of DCs can ensure constant high growth, the universally
                    accepted social responsibility of the state in providing general formal education may
                    only help add new numbers to the “educated but unemployed or emigrant”

                    Under globalization conditions, governments in DCs have been pressured to assign
                    priority to privatization and liberalization; in the meanwhile, the result has been to
                    push to the second rank the importance of promoting economic growth. However, the
                    private sector whether domestic or foreign, can often reach greater profitability by
                    speculative games in financial markets; transnational companies are more interested
                    in buying local companies, be it public or private, at a pittance in times of economic
                    crises or investing in the highly profitable trading activities. This is one of the
                    reasons why the average annual growth rate of GDP which attained 4.4% between
                    1980 and 1990, went down to 2.4% in the following decade (1990-1999) in the low
                    income countries. It should be recalled that this latter figure barely allows a thin
                    margin above the average yearly population growth rate 1 ; a similar outcome is
                    observable in the case of lower middle income countries: the figures are in their case
                    respectively, 4% and 3.4 percent. (WB, Selected World Development Indicators ,
                    2000) Similarly, for the research and development efforts           to support private
                    enterprise to raise its efficiency. If fixed investmentment incentives in production are
                    lower than profitability rates in financial games, the results of these efforts may go
                    unutilized; even the motivation on the part of the private enterprise to participate in
                    research and development efforts promoted by the government may be absent.

    When China and India are excluded, this positive thin margin disappears and turns negative.

                 Additionally, the state must be able to ensure satisfactory economic growth if it is to
                 improve the great inequalities in income distribution; for, this can be ameliorated
                 only in the course of economic development as employment opportunities expand in
                 the relatively higher value-added sectors and as the better educated and more skilled
                 workers find the opportunity to be gainfully employed in such activities. In
                 stagnating economies and in economic crisis periods, income distribution inevitably
                 worsens; it is by and large the majority of the poor that suffer from the brunt of GNP

                 Moreover, as growth rates recede, the financial capacity of the state to perform
                 social functions also plummets under increasing marketization and globalization.
                 Obviously, if the state is to meet its social responsibilities, it must dispose of
                 adequate funds to allocate for social purposes. If it is to maintain its fiscal deficits
                 within acceptable limits, that is below 3% of GDP, it will have to raise its tax revenue
                 and keep in check its other expenditures. This is easier said than done, on account of
                 the expenditure raising effects engendered by globalization.

                 Outstanding external debts of DCs, went up between 1990-98 from $1.5 trillion to
                 $2.5 trillion. The greater part of this debt is dissociated from increased domestic
                 fixed investment, hence growth, but is largely associated with international financial
                 capital movements:         the increased necessity to hold large gross international
                 reserves, capital-flight, interest rate arbitrage etc. account for the greater part of the
                 external debt increase. Note that, also, what is known to be private debt is under
                 government -guarantee in a large number of cases. Similarly, in most countries
                 internal borrowing has supplemented government tax revenues as monetary
                 expansion has to be curtailed to keep price increase in check. Additionally, currency
                 convertibility has entailed a hike in domestic real interest rates so as to impede
                 capital flight and / or promote capital inflows. The end result of these three changes
                 has been to raise the proportion of state funds allocated to interest payments on
                 domestic and external debt; that is, globalization via its effects on government
                 finances, restricts the capacity of the DC state to render the services associated with
                 its social responsibility, let alone their enhancement. It has been statistically proved
                 that more open economies have bigger governments; this is probably because the
                 economic and social responsibility of the state is enhanced to meet the risks
                 introduced by greater openness. But in the case of DCs, this is seriously limited, one
                 of the causes being the increasing debt burden. Turkey is a typical example of the
                 adverse change in this direction.

  Between 1990-1998 in low income countries and lower – middle income countries the resource
balance improved, almost striking equilibrium: In the former it was reduced, as percent of GDP, from
-3 to – 1 and in the latter it went from –1 to + 3; in the upper – middle income countries, there was
anyway a surplus, on the order of 3% of GDP in 1990, which came down to 0 by 1998.

         Also, under globalization, indirect tax revenues are anyway pressed downward as
         taxes on imports are reduced and export products benefit from tax redemption, that
         is, as external trade as a proportion of GDP climbs upward, the government’s indirect
         tax revenue from this source tends to go downward. As to direct taxes, governments
         have to be careful about heavily taxing private companies faced with keen
         competition from abroad; hence capital tax rates are kept low so as to keep the
         companies going. On the other hand, companies themselves, to keep their
         profitability at a satisfactory level in the face of keen competition, by and large opt
         for joining the unregistered economy. In this way they evade not only tax payments
         but also premium payments for social security. It is not surprising that under
         globalization, DCs have been witnessing the growth of their unregistered economy;
         for, this is one way for keeping their business going in the face of stiff competititon
         from abroad.

         Here, the contradiction is obvious: Under globalization, open economies call for
         bigger governments with greater social responsibility; but globalization also
         introduces such changes in the expenditure pattern and tax revenues of DC
         governments that their capacity finance the expected enhancement of their social
         responsibility can hardly be commensurately enhanced.

b) Financial crises:
Globalization exposes, in particular the so-called emerging markets, to the vagaries of
international markets, hence call for the enhancement of the social responsibility of the state if
social welfare is to be preserved. Beginning with the 1980s, the emerging markets have been
living through one economic crisis after another as they implemented policies to liberalize
their goods, services and capital markets. As the states in DCs ceded their economic
responsibilities to the markets, however, the frequency of economic crises increased while
corruption and social financial turmoil became pervasive. Crises are periods with dire
consequences for both small businesses and workers as well as for the banking system and
some large enterprises. Bankruptcies, in particular of small trading and manufacturing firms,
contraction of output in others that succeed to remain alive, lead to hikes in the unemployment
rate with serious social consequences, such as the hike in suicides, homicides, increased
violence in the family and in the society at large. That is, an economic disaster results in
serious social issues that enhance the social responsibility of the state. But        crises also
introduce drastic drops in the financial capacity of DC governments to cope with the
exploding social issues.

A financial crisis reveals itself with crucial changes in such key prices as the interest and the
foreign exchange rates, as well as the stock values in the capital market: the first two prices
hike while the third plummet. Thus, in terms of domestic currency, the burden of external debt
payments (yearly interest plus installment) increases in direct proportion to the rate of
devaluation of the domestic currency. This is paralleled by increased interest payments on

domestic debt. The result is to push up government transfer expenditures in the budget. To
meet this increase, if the government borrows in the domestic market, it will have to do it at
the going skyrocketing interest rates; if it tries to borrow in the international market, its
position will not be much better as international lenders will incorporate their higher risks in
the interest rate. In the course of privatization, as the shares of state enterprises are floated in
the capital market, the government will be faced with lower revenues from the sale of its
shares. This shows only one aspect of the diverging changes between government
expenditures and revenues in crisis periods.

Secondly, bankruptcies in the private sector, in particular bank failures, aggravate the
indicated divergence as tax revenues are constrained thereby. The government, additionally,
has to honor its guarantees with respect to bank loans given by external creditors or bank
deposits in cases where it has made such commitments. Note that in DCs where economic
crises and the consequent bank failures are frequent, the governments are pressured to make
such commitments so as to maintain the smooth functioning of the financial system. The
outcome is, obviously, an increased financial burden for the government, hence a further
expansion in non-social expenditures that are also conducive to income redistributing and
distorting effects. Such expenditures are manifold, depending on the institutional structure and
the perception of the degree of riskiness by lenders of the developing economy. This shows
that, the extent of the expansion in government expenditures is likely to vary widely over
time and space. But one outcome is certain: as the incidence of crises increases, so will the
crisis related expenditures, drastically contracting the funds available for social purposes and
distorting income distribution.

But, periods of economic crises also considerably enhance the social responsibility of the
state. This is primarily related to lay offs of blue and white collar workers from the industrial
sector, and the adversely changing terms of trade for the agricultural sector. Additionally,
intense social turmoil, and political upheavals are never absent from the scene in such periods
of falling living standards for the masses. But the government’s financial capacity is
constrained since tax revenues drop in real terms as output and employment drop, internal
and external finance can be provided at increasing real costs; and since monetary expansion is
held in check to control inflationary tendencies.

Governments, in such hard times often resort to the IMF for fresh funds, usually extended so
that external financial commitments may be duly honored. The higher the amount of the funds
received the heavier the conditions attached to the loan; conditions are by and large related to
the further liberalization of the economy, privatization of the major public companies and the
reduction to the minimum of the social expenditures of the state. This is also conducive to
the curtailment of the social responsibility of the state in providing financial support to the
agricultural producers suffering from adverse terms of trade, to the unemployed or
improverished families as privatization proceeds, together with real drops in payments to
government employees, workers and pensioners. That is , the government’s financial

constraints become a source of the improverishment of the labor force working for the public
sector. This, obviously, aggravates the worsening unemployment and underemployment rates
in the private sector of the economy. In brief, in crisis periods when the social responsibility
of the state should be enhanced, not only is its financial capacity limited to meet requirements,
but also, there are institutional constraints related to the IMF conditions, in cases where the
government resorts to the IMF for financial support.

It should be noted that, as the ratio of imports and exports in GNP or the ratio of foreign
capital in domestic capital increases under the effects of marketization and globalization, the
degree of effectiveness of financial crises increases in direct proportion. In advanced open
economies, it is the social responsibility of the state in such periods to provide social
protection by raising expenditures for social purposes. In DCs, as discussed above, the picture
is quite different and leads to the aggravation of the social consequences of economic

VI – What is to be done?
Although I abstained from going into discussing a crucial socio-political problem that affects
adversely government finances, it is in order at this point to tackle this issue briefly. The
problem I have in mind is corruption, a social illness that seems to have exploded over the last
two decades, parallel to the deepening of marketization, privatization and globalization. Why
such a parallel movement has mushroomed or how corruption can be avoided are topics
beyond the coverage of this paper or the expertise of its writer. But, definitely, corruption has
to be eradicated from the political arena and its avoidance will help enhance the financial
capacity of DC states to allocate larger sums to meet its social responsibilities.

The second point concerns the control to be administered over international financial flows.
This may be done on a national scale, as Mahathir did in Malaysia following the Asian Crisis
that burst out in 1997, or as Putin’s Russia has been doing in the wake of the 1998 crisis. Note
also that both abstained from resorting to the IMF for signing a stand-by agreement; both,
however, enjoy some administrative as well as economic capabilities that most DC
governments are deprived of. It is preferable that such controls be devised and implemented
at the international level. The so-called “Tobin tax”, proposed to be levied on international
financial flows by governments, represents an international attempt in this direction. It will not
only help rein those flows but will also yield an enormous tax revenue at the international
level at the disposal of the Third World.

Third, the pressure exercised on DCs via the advanced country governments, by manipulating
the international financial institutions, to further marketize, privatize and globalize should be
reduced. Historically, aside from Britain, neither any of the Western countries (Germany, the
USA, France etc.) nor Japan industrialized under the conditions expected of the DCs in the era
of globalization. The state, in their case, currently, fulfils both economic and social
responsibilities for enhancing social welfare; it also gives strong support to its

internationalized capital in restructuring the world economy to enhance their profitability. The
sole purpose of the drive to marketize and globalize originates in the expected benefits to
accrue to advanced economies. But, in contrast, the DCs are seriously suffering from the
consequences of marketization and globalization policies in terms of the drop in GNP growth
rate and as the economy is frequently buffeted by economic crises. In DCs, the first and
foremost social responsibility of the state is to see that in the framework of democracy social
welfare is enhanced over time and that this is evenly distributed. But under the pressure
coming from the advanced countries, this responsibility comes to be completely ignored, to
cede its place to other priorities.

Four, formation of regional economic blocks with regional banks set up by DCs, a movement
already in process, should be diffused to the whole of the Third World. Actually, the Third
World countries should institute an international forum themselves, for themselves to discuss
their common economic and social issues related to marketization and globalization pressures
so as to produce common solutions. Their motivation to act in unison has proved to be rather
low up till now. The presence of such a forum will also help invoke some democratic color to
international relations, currently manipulated by the most advanced states to serve the profit
accounts of their international companies. Obviously, underdevelopment has features that lead
to a quiet obedience to the patronage of the advanced states. If the first and foremost social
responsibility of the state is conceded to be the institution of democracy at the national level,
this has to be completed by this international enterprise; for, as discussed in this paper.
without the latter, the former is likely to remain as a lame luck.


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