Sino-ASEAN Relations

December 2003

China’s relationship with ASEAN is peaceful at present with potential for territorial conflict and economic competition in the future. Despite the good relations shared, there still exists the perception of China as a looming threat. Herein lies one of the biggest challenges to improved relations, and China’s actions in the future will impact on whether this view is aggravated or alleviated. Overall, China and ASEAN share similar views on issues such as human rights, security, economic policy and the desire to have regional stability and prosperity. Their desire for security cooperation has somewhat muffled the potential for armed conflict for disputed territory and this is proven in the diplomatic manner in which they have negotiated ways to alleviate tensions. Furthermore ASEAN states believe that China does indeed have an important role to play in the region, and have therefore welcomed it as a security and economic consultant in the ASEAN Regional Forum (ARF). It is mutually recognised therefore, that the normalisation of ties facilitates the best interests of all parties involved, and this is largely reflected in current Sino-ASEAN relations.

Sino-ASEAN relations have markedly improved after the Cold War, following reconciliation with Indonesia and Vietnam in the 1990’s 1. ASEAN states have also believed that China is presently no longer interested in exporting its socialist ideology and that stability in the region is of greater importance and benefit2. Premier Li Peng confirmed this in his summary about the principles of China-ASEAN ties3. Furthermore, ASEAN states are aware that stability in the region would be in China’s best interests since it would allow for the government to concentrate on other issues of importance like economic progress, the integration of Taiwan into the mainland and the growing threat of muslim fundamentalism in the post-Soviet Union Central Asian republics4. It is mutually understood therefore, that relations between China and ASEAN, depend on continued peace in the Asia-Pacific region, and that maintaining stability contributes significantly to their interests.

In addition to this China has expressed its desire for a multipolar world where major powers could cooperate to preserve peace and prosperity5. The reasons for believing this include the dissatisfaction with US hegemonic actions (such as in the NATO bombing of Kosovo)6, and more importantly, the aspiration to play a greater role in Asia, which ultimately translates into the desire for a reduced and more balanced role for Japan and the USA. Chinese officials view ASEAN as a means of securing a quadrangular relationship (between ASEAN, Japan, USA and China) therefore balancing power in the region7. This desire is also reflected by many ASEAN states especially those who are deeply suspicious of a more powerful Japanese presence8 and/or a greater US role in the region9. Malaysia is an example of such a state10. This view however is not shared by Singaporean officials who prefer a stronger US role for military and security reasons11. Filipino leaders have also expressed the desire for a continued US presence in the Asia-Pacific region12. Therefore, China’s preference of achieving a multipolar world and a shared balance of power in the region is yet another foundation on which strong ties between many ASEAN states and China may develop.

China and ASEAN states also share similar socio-political values and norms such as the view on human rights and identity. This is further strengthened by the shared belief that the standard perception of human rights is western based and reflects an attempt at controlling the governments of developing states13. Dr Mahathir is an outspoken critic of this predominantly western model of human rights and therefore shares this view with Chinese officials14. The Asian model of human rights places economic rights above political and social rights which is at odds with the western model of placing socio-political rights above economic rights15. As a result, ASEAN criticism of China’s human rights abuses have been somewhat muted in comparison to other states16. In addition to agreement over human rights, China and ASEAN states share the outright condemnation of interference in internal affairs of a state. The justification used by American spokespeople for NATO, claiming that humanitarian intervention could be considered legal under international law is not supported by those who argue that such actions could be used by powerful states to interfere in the affairs of a sovereign state17. In opposition to this, many ASEAN states are against a precedent allowing for the violation of state sovereignty since such actions undermine the fundamental tenet of ASEAN’s formation which firmly stipulates the prohibition of interference of any ASEAN state in the internal affairs of another ASEAN state18. And so, such shared interests and views in socio-political organisation and management along with some beliefs on how international relations should be carried out, have added to a strengthened relationship between China and ASEAN.

Despite the shared interests and mutually beneficial nature of Sino-ASEAN relationship, there are some potential sources of conflict. This is worsened by general mistrust of China. There is the recognised ability for China to become immensely powerful and thus there appears to be the possibility for Chinese officials to abuse this power19. Such mistrust stems from the pre-Cold war period when China played an important role in the communist insurgencies within ASEAN states like Malaysia and Indonesia20. Despite reconciliation, these states are not overly comfortable with the apparent looming China threat. As Whiting states “No ASEAN member has had a positive record of relations with China sufficient to outweigh the negative memory”21. Suspicion of the intentions and capabilities of China as a major power therefore, does pose a problem in China-ASEAN relations.

Economic relations between China and ASEAN poses as one of the likely sources for conflict and/or cooperation. Despite the magnitude of trade benefits, there still exists potential for friction. Many ASEAN states have a positive view of China’s emergence as a major economic player in the region along with Japan22. Malaysian leadership has expressed views of China as a developing economic leader in the ASEAN region23. Trade between ASEAN and China has increased from US$14.29 billion in 1994 to US$25.04 billion in 199724, and has increased more than 25 times since 197525. Furthermore, in 1998 China became ASEAN’s fourth largest trading partner26. Singapore is also the biggest ASEAN investor, accounting for 77.5% of total investments (from ASEAN)27. Moreover, this is set to increase in the future since both states are keen to develop greater economic ties such as the US$36 billion that Singaporeans have agreed to invest in China as of April 200128. Tourism has also flourished with more people from China visiting ASEAN states and vice-versa29. Improved trade relations depend on increased peace, prosperity and stability in the region, and the importance of this fact is recognised and maintained by China and ASEAN states. This is best exemplified by China’s actions during and after the Asian financial crisis which has helped extinguish fears of China using the situation to secure its own interests at the expense of weakened ASEAN economies30. The success of China’s economic policies to alleviate the effects of the financial crisis has far superseded that of Japan, which has furthered this favourable view of China as an economic leader31. Trade and economic cooperation are thus important factors in the growing improvement of relations.

However despite economic cooperation, there is also the possibility for economic and trade competition. ASEAN economies rely on manufactured products and labour intensive goods like clothing and textiles, which constitutes a large portion of China’s exports as well32. There is concern that China’s market will be more attractive given the sheer sise and the lack of controls over cheap labour; and that China will saturate the region with cheap manufactured goods leaving the ASEAN economies unable to cope33. Competition is thus set to increase unless ASEAN states diversify their exports. According to Wong, the expanding Chinese economy could disrupt many ASEAN economies34. There exists therefore, the potential for economic competition to sour relations between China and ASEAN.

In addition to economic competition, there is the prospect of China and ASEAN becoming competitors for foreign direct investment. ASEAN’s leading economic partners such as the US and European Union might be drawn to investment deals in China35. Singapore has claimed that China could become “a big ‘vacuum cleaner’ that could suck up a lot of foreign investment”36. Such a possibility is economically threatening to ASEAN states especially after the Asian financial crisis. In addition to this, there are many local born and overseas Chinese in ASEAN states who have secured economic advantages and privileges37. Many of these overseas Chinese have originated from the coastal provinces of China38. In addition to this, Chinese businesses have been extremely successful. For example, in Malaysia about forty of them have capital of over US$200 million each39. Such economic success has exacerbated nationalistic anti-Chinese sentiment and has not been viewed approvingly by many local communities especially in Malaysia and Indonesia. The onslaught of the Asian financial crisis, for instance, resulted in Chinese Indonesian’s becoming the victims of ethnic riots40. Such instability and potentially dangerous activities have prompted Chinese in ASEAN to move investments, assets and capital to other countries, including China41. This will exacerbate tensions within ASEAN states especially when coupled with the aforementioned economic competition. However, China has been careful not to offer support for these Chinese communities or condemn the anti-Chinese riots42 since such actions would drive a wedge in the workings of a good relationship and dredge up memories of the past experiences with communist insurgencies. Furthermore, China’s actions during the financial crisis has restored mutual respect and trust. Competition for foreign investment, the current anti-Chinese sentiment, their economic status and the use of their success to invest outside of ASEAN states will thus serve to exacerbate relations with China.

ASEAN’s relationship with Taiwan is another issue that has served as an irritant to China. Singapore, in particular has strong ties with Taiwan economically and militarily43. Singaporean troops train in Taiwan where the terrain is best suited for combat preparation44 while trade and investment exchanges between the two states are extremely mutually beneficial45. Taiwan also imports about US$7.3 billion from Malaysia (1997) and is its fourth largest trading partner46. ASEAN states have no desire to risk economic relations with Taiwan just to please Chinese officials but their recognition of the Peoples Republic of China’s government as the sole legitimate government of China, has helped soften the friction over this issue47. And so while Taiwan-ASEAN relations are not detrimental to Sino-ASEAN relations, they can have negative repercussions.

Territorial claims in the South China Sea appears to be the biggest threat to Sino-ASEAN relations. The situation has the potential to cascade into armed conflict, and relations with the Philippines and Vietnam has been particularly volatile48. The Spratly islands have significant resource and strategic advantages to whoever secures them thus resulting in the unwillingness of claimants to give up their demands49. This is coupled with the fact that to give up claim to the islands is to give up sovereignty which, to all parties, is non negotiable50. This dispute over the Spratly islands, therefore, presents a test case where China’s actions will determine how relations will develop. Contingency plans have been underway to prepare for conflict in the region by enhancing the capabilities of the navy (SSF) and engaging in training exercising around the islands51. Furthermore, China has made moves to occupy and claim parts of the archipelago by occupying Mischief Reef in 199552 and contracting an American oil exploration company to survey the resource potential53. Such activities can be construed as threatening especially given the military capability and might of the Chinese military compared to ASEAN forces54. Furthermore, Storey believes this to be an example of ‘creeping assertiveness’ – an interesting description of the gradual increase of a Chinese presence in the South China Sea without the implication of armed conflict55. The result of such actions is increased suspicion amongst ASEAN members as to China’s intentions and resolve to resort to violence.

Despite the apparent volatile nature of the Spratly dispute, ASEAN members and China have recognised the need to maintain peaceful relations and have engaged in various diplomatic measures to diffuse tensions. For example, the workshop on ‘Managing Potential Conflicts in the South China Sea’, the ASEAN-China Dialogues, and the signing of the Treaty of Amity and Cooperation in Southeast Asia have all proven the desire to maintain peace and stability in the region despite territorial disputes56. In addition to this, China’s decision to use international law and the UNCLOS57 to investigate the dispute has calmed tensions. The diplomatic handling of the Spratly dispute can be seen to work towards China’s best interests because it implies significant and far-reaching consequences. An armed conflict over the islands will inevitably draw the Japanese and Americans into the region since it threatens their interests – the sea route being an economic lifeline for Japan in particular58. Furthermore, a conflict, by concentrating resources and military presence in the region, might work against Chinese interests if it sparks conflict in the Taiwan Strait. In other words, if Taiwan decides to move for independence with American support, China will not be in a position to fight two wars on the opposite ends of the Asia-Pacific region59. And so while there does exist potential for armed conflict over the islands, it is in China’s best interests not to escalate tension and therefore, for the time being, the status quo is maintained.

In brief, it can be deduced that relations between China and ASEAN are calm for the moment. Despite having suspicions about the intentions and capabilities of such a large power, ASEAN states are aware of China’s desire to promote peace and stability in the region. They therefore share similar interests and views that a peaceful Asia-Pacific region will secure economic benefits for all concerned. Furthermore, a greater presence will help counter the hegemonic activities of the US and Japan. Shared interests coincide with shared values and beliefs about socio-political management, such as the ASEAN model of human rights as opposed to the Western model. Meanwhile, economic competition, while an important area of contention might work as a ‘wake up call’ for ASEAN states to diversify exports. Relying on manufactured products and other narrow sources of income is not sustainable long term. Moreover, China’s responsible actions during and after the Asian financial crisis can be taken as evidence that stifling ASEAN economies is not a viable option for maintaining good relations anyway. The greatest challenge to Sino-ASEAN relations therefore, lies in the disputed territory of the South China Sea. While this has the potential to erupt into armed conflict, it is recognised that this is not in the best interests of China at present. As stated by Dr You Ji, “It is only a potential flashpoint, however, as all the claimants are under real constraints that prevent them from taking any action”60. It is unlikely therefore, that a military confrontation will emerge in the near future, especially after the engagement of various negotiations and diplomatic dialogues. For the time being, ASEAN and China have agreed to disagree on the dispute in the interests of maintaining the status quo in the region. And so it can be concluded that it is the importance of securing peace and stability that maintains and drives Chinese foreign policy when dealing with ASEAN, leaving it unlikely for conflict to erupt.

BIBLIOGRAPHY

Ahmad, Reme, “ASEAN must latch on to China’s growth”, http://straitstimes.asia1.com.sg/home, May 8, 2002.

Association of Southeast Asian Nations: An overview, http://www.aseansec.org/menu.asp?action=2&content=2, May 21, 2002.

Antolik, Michael, “The ASEAN Regional Forum: The Spirit of Constructive Engagement”, Contemporary Southeast Asia, September 1994, (16)2, pp. 117-135.

Bodansky, Yossef, “Beijing and the Kosovo crisis: Learning from the NATO war against Yugoslavia, the PRC polishes the skills needed to fight asymmetrical wars”. Defense and Foreign Affairs Strategic Policy, May/Jun 1999, 27(5/6), p. 4-12.

Cheng, Joseph, “ASEAN policy in the 1990’s: Pushing for Regional Multipolarity”, Contemporary Southeast Asia, (21)2, pp. 176-204.

Ganeson N., “ASEAN’s Relations with Major External Powers”, Contemporary Southeast Asia, August 2000, (22)2, pp. 258-271.

Hall, S. ‘NATO campaign was legal’, Human Rights Defender , September, 1999, 8, pp. 26-28.

Hau Boon Lai, “From Inertia to initiative”. http://straitstimes.asia1.com.sg/home, May 8, 2001.

Lee Lai To, “ASEAN and the South China Sea Conflicts”, The Pacific Review, 1995, (8)3, pp. 531-543.

Lee Lai To, “East Asian Assessments of China’s Security Policy” International Affairs, 1997, (73)2, pp. 251-262.

Lee Lai To, “China’s Relations with ASEAN: Partners in the 21st Century?”, Pacifica Review, February 2001, (13)1, pp. 61-71.

Ong Hwee Hwee, “China ‘must stay friendly with S E Asia’, http://straitstimes.asia1.com.sg/home, May 8, 2002.

Smith Jr, Esmond D., “China’s Aspirations in the Spratly Islands”, Contemporary Southeast Asia, December 1994, (16)3, pp. 274-291.

Storey, Ian James, “Creeping Assertiveness: China, The Philippines and the South China Sea Dispute”, Contemporary Southeast Asia, April 1999, (21)1, pp. 95-114.

Teo, Larry, “China’s V-P ‘will forge closer ties with S’pore”, http://straitstimes.asia1.com.sg/home, May 1, 2002.

Whiting, Allen S., “ASEAN eyes China: The Security Dimension”, Asian Survey, April 1997, (37)4, pp. 299-322.

Wong, John, “An overview of ASEAN-China Economic Relations”, in Chia Siow-Yue and Cheng Bifan (eds.), ASEAN-China Economic Relations: Trends and Patterns, Institute of Southeast Asian Studies, Singapore, 1987, p. 1-20.

You Ji, “A Test Case for China’s Defence and Foreign Policies”, Contemporary Southeast Asia, March 1995, (16)4, pp. 375-397.

You Ji, Lecture for POLS5127, 17 April 2002.

1 Cheng, Joseph, “ASEAN policy in the 1990’s: Pushing for Regional Multipolarity”, Contemporary Southeast Asia, (21)2, p. 179.

2 Ibid., p. 178.

3 Ibid., 179.

4 Ibid., p. 181.

5 Ibid., p. 182-183.

6 Bodansky, Yossef, “Beijing and the Kosovo crisis: Learning from the NATO war against Yugoslavia, the PRC polishes the skills needed to fight asymmetrical wars”. Defense and Foreign Affairs Strategic Policy, May/Jun 1999, 27(5/6), p. 6.

7 Ganeson N., “ASEAN’s Relations with Major External Powers”, Contemporary Southeast Asia, August 2000, (22)2, p. 271.

8 Cheng, op. cit., p. 186-187.

9 Lee Lai To, “China’s Relations with ASEAN: Partners in the 21st Century?”, Pacifica Review, February 2001, (13)1, p. 65.

10 Cheng, op. cit., p. 187.

11 Lee Lai To, op. cit., p. 71.

12 Storey, Ian James, “Creeping Assertiveness: China, The Philippines and the South China Sea Dispute”, Contemporary Southeast Asia, April 1999, (21)1, p. 113.

13 Antolik, Michael, “The ASEAN Regional Forum: The Spirit of Constructive Engagement”, Contemporary Southeast Asia, September 1994, (16)2, p. 129.

14 Cheng, op. cit., p. 187.

15 You Ji, Lecture for POLS5127, 17 April 2002.

16 Antolik, op.cit., p. 129.

17 Hall, S. ‘NATO campaign was legal’, Human Rights Defender , September, 1999, 8, pp. 26-27.

18 Association of Southeast Asian Nations: An overview, http://www.aseansec.org/menu.asp?action=2&content=2, May 21, 2002.

19 Whiting, Allen S., “ASEAN eyes China: The Security Dimension”, Asian Survey, April 1997, (37)4, p. 302.

20 Ibid., p. 302.

21 Ibid., p. 303.

22 Lee Lai To, op. cit., p. 65.

23 Whiting, op. cit., p. 311.

24 Cheng, op. cit., p. 193.

25 Lee Lai To, op cit., p. 66.

26 Ibid., p. 66.

27 Cheng, op. cit., p. 193.

28 Teo, Larry, “China’s V-P ‘will forge closer ties with S’pore”, http://straitstimes.asia1.com.sg/home, May 1, 2002.

29 Lee Lai To, op. cit., p. 67.

30 Ibid., p. 68.

31 You Ji, ibid.,

32 Wong, John, “An overview of ASEAN-China Economic Relations”, in Chia Siow-Yue and Cheng Bifan (eds.), ASEAN-China Economic Relations: Trends and Patterns, Institute of Southeast Asian Studies, Singapore, 1987, p. 16.

33 Ibid., p. 16.

34 Ibid., p. 10.

35 Lee Lai To, op. cit., p. 67.

36 Lee Lai To, op. cit., p. 67.

37 Cheng, op. cit., p. 196.

38 Ibid., p. 195.

39 Ibid., p. 195.

40 Ibid., p. 196.

41 Ibid., p. 196.

42 Ibid., p. 196.

43 Whiting, op cit., p. 308.

44 Ibid., p. 308.

45 Cheng, op. cit., p. 198.

46 Ibid., p. 198.

47 Ibid., p. 198.

48 Smith Jr, Esmond D., “China’s Aspirations in the Spratly Islands”, Contemporary Southeast Asia, December 1994, (16)3, p. 275.

49 Ibid., pp. 277-278.

50 You Ji, “A Test Case for China’s Defence and Foreign Policies”, Contemporary Southeast Asia, March 1995, (16)4, pp. 390.

51 You Ji, op. cit., p. 385.

52 Storey, op cit., p. 98.

53 Smith, op cit., p. 281.

54 Storey, op. cit., p. 113.

55 Ibid., p. 99.

56 Lee Lai To, op cit., p. 69.

57 Ibid., p. 69.

58 Smith, op cit., p. 287.

59 You Ji, op cit., Lecture.

60 You Ji, op cit., p. 390.

The IMF/World Bank and Structural Adjustment Plans (SAP)

 

Structural adjustment conditions challenge and change the political forces within developing countries by channeling income and wealth to foreign interests such as transnational corporations, foreign lenders, commercial farmers and private traders. In essence, foreign debt is socialised and the burden placed on small farmers and local industries. Overwhelmingly, their plight is compounded by the fact that as a means to facilitate debt repayment, state roles are redefined not only to stop/limit government expenditure and subsidisation of goods and services that are vital to their survival, but to also eliminate labour laws and standards such as trade union rights in an effort to offer comparative advantage over other developing countries. In sum, these activities result in the subjugation of farmers and workers, leaving the benefits of economic prosperity and power solely in the hands of multinational corporations, foreign investors and exporters, and private financiers.

THE ROLE OF GOVERNMENT

In order to understand the implications of structural adjustment plans on the political forces within developing countries, one must first look at the effect of these plans on the role of government. Structural adjustment programmes are indicative of neoclassical economic perceptions of how economies should run and the limitations of state intervention. They therefore tend to undermine the role of the state. Liberal economists believe that states should not interfere in the production and distribution aspects of the economy1. Market forces, in other words, should be allowed to act outside the realm of state intervention2. It is generally held that governments should only intervene in cases where unregulated economies have led to imperfect competition such as monopolies (where one corporation determines the price of goods/services as compared to consumer demand and market value3) and/or in the event of spillovers or externalities4 such as pollution. The role of government could be limited to that of correcting market imperfections5 but even so, the World Bank perception is that market failures are less costly than government failures and that government interventions in resource allocation is inefficient6. In general terms, the neoclassical belief is that there are limits to how much a government can spend especially if it is crippled by debt. Such is the position of many third world countries and it is believed that unrestrained expenditure would inevitably lead to even worsening conditions for the poor7. Structural adjustment programmes are therefore implemented to help governments deal with debt repayment by restructuring their economic infrastructure and redefining their roles8. Structural adjustment plans are thus reflective of neoclassical beliefs of how economies should function and how governments should behave9.

In keeping with the neoclassical beliefs on state intervention, one of the most important implications of structural adjustment plans in developing countries then, is the undermining of state roles. In some countries, the state is the facilitator of industrialisation. The state “[becomes] a surrogate for private enterprise that could drive modernization without challenging…entrenched interests…indeed would continue to protect them…and without turning the country completely over to foreign interests”10. In this sense, the state could be seen as supporting the development process and playing a vital role in economic progress, especially in the developing world11. By challenging the extent of state control and regulation, structural adjustment programmes seriously undermine the capability of states to protect the power and interests of social groups such as farmers and small businesses. As a result, the profits reaped from economic progress flows into the hands of political elite and foreign owned corporations.

These limitations of state regulation and intervention is highly criticised by Marx who sees the capitalist state as an agent of capitalism. Followers of Marx, are highly critical of such perceptions of economic theory, pointing to the idea that capitalist systems are unsustainable long term and that class struggle and revolutions are inevitable outcomes of such a system12. According to Marx, the capitalist state is an tool of the ruling classes to facilitate their exploitation of the working classes13. The state therefore acts in the interests of these ruling elites in two main ways. Firstly, it legitimises the capitalist system by punishing critics and by engaging in infrastructural projects to facilitate smooth functioning14 (such as roads and irrigation systems). The state may even be involved in conflict and wars in order to expand markets and promote capitalist ideals. Secondly, the state acts as arbiter between belligerent capitalists (eg. two or more transnational corporations). Again, this is done to maintain the smooth functioning of the capitalist system15. The limitations placed on state interventions, as criticised by Marx, can be seen in many cases by the conditions of structural adjustment programmes and their impact of governments and workers. Marx’s theory of the role of government is thus supported by the adjustment requirements of IMF loans.

IMPACT OF STRUCTURAL ADJUSTMENT PLANS: STEP BY STEP ANALYSIS

To get a better grasp of how structural adjustment programmes impact upon the political forces within developing countries, it is important to look at the various conditions imposed and see how they affect the different power relationships within developing countries. The conditions placed by structural adjustment plans are, reduced government spending by way of food and health subsidies, cutbacks in government personnel and trimming employment in government sectors, increased interest rates, the elimination of labour laws and standards, elimination of tariffs and opening up of economy, reform of agricultural sector that favours growing of cash crops, and the devaluation of the local currency. A brief step by step analysis of who benefits from these conditions can clarify what interest groups are favoured over others thus impacting on the political forces within respective developing countries.

Firstly, one of the most controversial conditionalities of structural adjustment programmes is reduced government spending on subsidizing services essential to the wellbeing of its citizens. The elimination of these subsidies is promoted because governments in debt can no longer afford high social expenditure. The result on the poor, is the lack of access to basic needs such as clean water, basic healthcare, immunisation and cooked food. A ‘user pays’ system was thus developed by governments and promoted by the IMF and World Bank16. Basically this system entails charging the poor for services which were previously available as basic human rights17. Coupled with devaluation, the poor are unable to afford food and healthcare while foreign lenders secure their repayments. Furthermore, the argument for the removal of food and healthcare subsidies lay in the assumption that they are abused by the middle classes who use them more than the poor18. However, where the ‘user pays’ system was introduced, the middle class could be in a better position to afford such services since the poor are no longer able to afford access. And so what the removal of food subsidies has done is push the poor further into poverty while securing benefits for the middle class and foreign lenders. This then facilitates the transfer of wealth and power into foreign hands.

Cutbacks in personnel and government bureaucracy is another condition placed by the IMF/World Bank. It is suggested that cutbacks in high-paying government jobs can generate more employment opportunities and even encourage people to seek employment in private firms19. The social costs of maintaining jobs within the government bureaucracy is unsustainable long term and therefore needs to be controlled. These cutbacks spell two main benefits for transnational companies and foreign investors. Firstly, less government employees reduces the number of politically active citizens who may voice concerns over ecological and social impacts of TNC activities20. Secondly, the savings from the cutbacks could be used to facilitate debt repayment21. However, as a result of these cutbacks, the number of unemployed skilled workers has increased22. The condition for cutbacks in government employees therefore serves to enhance the interests of transnational corporations and foreign lenders at the expense of the growing unemployed and political capacity of local citizens.

The relaxation of labour laws and standards in developing countries is linked to the need for comparative advantage in attracting foreign investment. By supplying comparative advantage, they are more attractive to transnational corporations. In return, transnational corporations pump foreign investment into the country while technology becomes available to the host country. In addition to this, overseas markets are opened up for the LDC exporters23. However, the relaxation of labour laws has resulted in the increase of poverty amongst even the employed. For example, in Chile, minimum wages in 1990 were 20% lower than ten years beforehand24. Such a decrease in wages is advantageous for transnational corporations and employers in that they can reap higher profits by securing access to cheap labour, but these profits are not distributed evenly between workers and companies. In addition to this, trade union rights have either been diminished or brutally repressed. Ghana, Mexico and the Philippines provide examples of countries where trade union rights have been eroded25 while General Pinochet’s regime in Chile exemplifies the extent of brutal repression of critics26. The abolition of laws and standards decreases the bargaining power of citizens while making them more vulnerable to exploitation by transnational companies and other foreign owned enterprises. Again, this sees the placing of wealth and power in employers and transnational companies at the expense of workers.

The elimination of tariffs and the opening up of local economies to foreign markets exposes local industry to foreign competition. Local industries suddenly find themselves in competition with foreign owned companies which have easier access to capital funds and better technology. Unable to compete, many of these industries have shut down resulting in deindustrialisation27 at a time when the opposite should be happening. This has also worsened unemployment. In Zambia, many textile industries have collapsed resulting in mass unemployment in urban areas28. However, this works to the advantage of transnational firms who secure the elimination of competition and reap the benefits of mergers and acquisitions. In other words, by buying local industries (merger and acquisition), transnational firms reduce the initial costs of setting up business locally and reduce competition at the same time. In as far as foreign exchange flowing into the country from privatisation and reducing tariffs, it is important to note that it is usually captured by foreign firms. In Zambia, for example, 90% of the foreign exchange went to foreign owned firms29. Foreign exchange, in other words ends up in the hands of foreign entrepreneurs rather than the in the hands of local government and this comes at the expense of local commercial industries.

Currency devaluation is another condition placed on states undergoing structural adjustment plans. While it can attract foreign investment and promotes a more favourable exchange incentive to importers in foreign countries30, it also threatens to worsen the import/export relationship in a country because exports are sold at a cheaper price while imports are bought at a higher price31. To counterbalance this, peasants and workers are paid less while exporters are rewarded with reimbursements, such as those in Africa who are protected by produce marketing boards32. In addition to this, exporters are remunerated with foreign exchange while farmers and labourers are paid meager wages in the form of devalued local currency. Devaluation therefore distorts the power relationships between exporters and farmers/labourers.

The increase of interest rates is imposed in order to help curb inflation. However, interest rate increases affect small farmers and businesses who cannot afford loans. As a result many go out of business, or in the case of small farmers, sell land to foreign owners and continue to work as labourers subject to wage decreases and worsening working conditions33. Small local businesses are also unable to secure loans necessary for growth resulting in eventual collapse. Interest rate increases therefore serve to enhance the financial growth of investors at the expense of small local businesses and firms.

Finally, agricultural changes that favour export oriented growth are another facet of structural adjustment plans. It is implied that the agricultural sector of developing countries should be reformed to constitute cash crops like coffee and tobacco34 in an effort to generate revenue, which would then facilitate debt repayment and balance of payments. However, because of the lack of redistributive intervention, commercial farmers and traders have benefited while the smallholder farmers and labourers35 have suffered. The benefits of agricultural production therefore flow towards traders who are then in a position to exploit poorer producers and labourers36. This is exemplified by the example of Somalia, where profits obtained from banana exports were not equally distributed between producers and exporters37, and where the biggest beneficiary of increased banana production and profits went to the Italian exporter, De Nadai38. The shift from subsistence farming to cash crop agriculture therefore, benefits exporters and traders at the expense of subsistence farmers and labourers.

In addition to this, there are packages available to farmers of cash crops that include increased prices of agriculture, credit availability and reduced taxation39. For example, farmers in Zimbabwe who grow cash crops such as cocoa, can reap more benefits than those who grow staple food to benefit the population40. These cost-saving packages are designed based on the premise that the transition from domestic crops to cash crops is not easy for small farmers as they require complex systems of irrigation, cultivation techniques and transportation41. Unable to access loans to finance such projects42 (partly due to high interest rates) many of the small farmers have gone out of business or continue to descend into spiraling debt43. In contrast, foreign agricultural businesses and local elites have cashed in on the rewards available to them. By having access to foreign capital and being eligible to government subsidies on export-oriented agriculture, they are better equipped to carry out the changes to infrastructure necessary for growing cash crops44. Not only have foreign owned agricultural businesses secured significant gains from the incentives and packages put together by structural adjustment plans, they have eliminated competition from the small farmers. Many of them have bought land from poor farmers therefore eliminating the chances of local farmers to compete or grow domestic food needed to feed the population45. Commercial farmers and large agricultural businesses are thus in a better position to finance the transition from domestic to export oriented cash crops than local farmers and smallholder producers. Gains secured from these packages thus benefit these foreign and large scale interest groups at the expense of small farmers and labourers.

Lastly, another consequence of concentrating on cash crops rather than subsistence agriculture is the dependence of the country on imports of food and grain necessary to feed the population. Many developing countries are unable to feed their populations because of the conversion of subsistence agriculture to export oriented agriculture46. As a result foreign agribusinesses who produce the food and grain necessary to feed the population (of developing countries) gain substantially from the ability to export their goods to the dependent country47. Again, foreign owned businesses gain from the dependent relationship caused by structural adjustment plans.

CONCLUSION

IMF loans and their respective conditions present investors and entrepreneurs of the developed world with the ability and capacity to transform the economies of developing countries in an effort to facilitate production and profit maximizing capability. This is done by eliminating protectionist barriers to goods and services from developed countries, hence creating new markets, and by maintaining the dependency of southern economies on those of the north48. Southern economies provide raw materials and cheap labour to transnational corporations based in the north and structural adjustment plans propagate this form of dependency. As such, they legitimise and facilitate the transfer of wealth and power from the marginalised in the south to the foreign-owned corporations of the north. This is reflective of the normative role of the IMF in promoting liberal internationalism49. Structural adjustment plans thus reflect the political interests of developed industrial states by maintaining predominantly liberal internationalist views of how an international economic system should be and how economic trade should be conducted50. This, it has achieved through the changing of political forces within developing countries to favour the transfer of wealth and power to multinational corporations and foreign lenders51.

In conclusion then, the structural adjustment plans help propagate and maintain an environment conducive to increasing profits for foreign corporations and lenders at the expense of marginalised social groups within developing countries. Farmers and labourers are often exploited while foreign exporters, commercial farmers and private traders are rewarded. Meanwhile, reduced government spending on the poor secures faster repayments for foreign lenders while the relaxation of labour laws and government cutbacks allow for transnational corporations to reap even more profits without the threat of political activism. Changes to the rural sector meanwhile, sustain dependency on foreign food imports (to be supplied by foreign producers) and benefit agricultural businesses rather than farmers and labourers. Finally, eventhough structural adjustment plans are geared towards attracting foreign investment, much of this investment flows back into foreign companies. By negating government ability to protect its citizens and by promoting conditions leading to economic dependency on transnational corporations and foreign creditors, structural adjustment programmes succeed in distorting the power relationships within developing countries.

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Bello, Walden and Cunningham, Shea, “The World Bank and the IMF”, 14 September 2002, http://www.zmag.org/zmag/articles/july94bello.htm.

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Budhoo, Davison, “IMF/Word Bank Wreak Havoc on Third World”, in Kevin Danaher (ed.), 50 Years is Enough: The Case Against the World Bank and the IMF, South End Press, Boston, 1994, pp. 20-23.

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http://www.developmentgap.org/forum2.html, 13 October, 2002.

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1 Fusfeld, Daniel, The Age of the Economist, 8th ed., Addison Wesley, Massachussetts, 1999, p.96.

2 Ibid,,p. 96.

3 Samuelson, Paul and others, Economics: Vol 2 Macroeconomics, McGraw-Hill, Sydney, 1992, p.56.

4 Ibid., p.56.

5 http://www.xrefer.com/entry.jsp?xrefid=610187&secid=.

6 Lall, Sanjaya, “Structural Adjustment and African Industry”, World Development, December 1995, (23)12, p. 201.

7 Stein, Leslie, “Structural Adjustment in Developing Countries”, International development issues, Australian International Development Assistance Bureau, Canberra, 1992, p. 19.

8 Ibid., p. 2.

9 Ibid., p. 4.

10 Bello, Walden and Cunningham, Shea, “The World Bank and the IMF”, 14 September 2002, http://www.zmag.org/zmag/articles/july94bello.htm,

11 Ibid.,

12 http://www.xrefer.com/entry.jsp?xrefid=610187&secid=.

13 Hunt, E.K, and Howard J. Sherman, Economics: An Introduction to Traditional and Radical Views, Harper, New York, 1978, p. 68.

14 Ibid., p. 69.

15 Ibid., p. 69.

16 Oxfam, “Structural Adjustment Programmes”, A Case for Reform: Fifty Years of the IMF and World Bank, Oxfam, London, 1995, p. 20.

17 Ibid., p. 19.

18 Stein, op. cit., p. 22.

19 Ibid., p. 23.

20 Third World Traveller, 13 October, 2002,

http://www.thirdworldtraveler.com/Global_Economy/Structural_Adjustment.html

21 Ibid.,

22 Ibid.,

23 Jenkins, Rhys, Transnational Corporations and Uneven Development: The Internationalism of Capital and the Third World, Methuen, London, 1987, pp. 20-21.

24 Oxfam, op.cit., p. 12.

25 Ibid., p. 13.

26 Gershman, John, “The Free Trade Connection”, in Kevin Danaher (ed.), 50 Years is Enough: The Case Against the World Bank and the IMF, South End Press, Boston, 1994, p. 26.

27 Oxfam, op. cit., p. 10.

28 Oxfam, op. cit., p. 11.

29 Stein, Howard, “Deindustrialization, Adjustment, the World Bank and the IMF in Africa”, World Development, January 1992, (20)1, p.89.

30 Stein L., op cit., p. 18.

31 Ibid., p. 14.

32 Ibid., p. 16.

33 Third World Traveller, op. cit.,

34 Lee, Christine, “All Pain, No gain: How Structural Adjustment Hurts Farmers and the Environment”, Global Pesticide Campaigner, April 2001, (11)1, http://panna.igc/org/resources/gpc/gpc_200104.11.1.08.dv.html

35 Oxfam, op. cit., p.14.

36 Ibid., p. 14.

37 Abdi Ismail Samatar, “Structural Adjustment as Development Strategy? Bananas, Boom and Poverty in Somalia”, Economic Geography, January 1993, Vol. 69, p. 38.

38 Ibid., p. 27.

39 Oxfam, op. cit., p. 14.

40 Ibid., p. 14.

41 Lee, op. cit.,

42 (Due to increased interest rates and high taxation)

43 Ibid.,

44 Ibid.,

45 Ibid.,

46 Ibid.,

47 Ibid.,

48 Bello, Walden, “Global Economic Counterrevolution: How Northern Economic Warfare Devastates the South”, in Kevin Danaher (ed.), 50 Years is Enough: The Case Against the World Bank and the IMF, South End Press, Boston, 1994, p. 17.

49 Pauly, Louis, “Promoting a Global Economy: The Normative Role of the International Monetary Fund” in Richard Stubbs and Geoffrey Underhill (eds.), Political Economy and the Changing Global Order, 1994, pp. 210-211.

50 Ibid., p. 207.

51 Global Exchange, http://www.globalexchange.org/wbimf/faq.html, 10/8/2002. p2.