The World Resources Institute has published a report [i] on the 4 billion people who live on or below the poverty line - at the bottom of the pyramid (BOP). They dwell not so much on the poverty, but on the fact that the BOP population segments are, for the most part, not integrated into the global market economy and do not benefit from it.

They write there is no proper market economy, either local or global, they have access to. Without access to larger trade markets they are disadvantaged and likely to remain in poverty. In local markets they are often exploited by their employers, or through middlemen. They do not have access to the basic economic resources, that we have in the West, for example, bank accounts, communication media, information libraries.

As a result - and this is surprising - they are likely to pay more for basic goods and services then wealthier people, either in cash or in the effort they must extend to obtain them.

Take coffee. The West does not grow coffee, we import it mostly from places in South America or Africa. We pay little to the local farmer for the coffee bean that he grows. We pay according to local conditions, and that means a low wage. We do not pay the environmental cost that is a result of extensive farming in these areas. We are not paying the full cost of health insurance for the farmer and his family, nor do we pay for his pension when he retires.

We get our goods cheap.

[i] http://www.wri.org/publication/content/7791

The free market ideology has spread to many countries around the world. It has increased prosperity for many in the developing countries.

What is this prosperity? It is an improvement in living conditions - in well-being and material goods. People are paid for their work, and they use this money to buy goods and services that they need, and want - goods and services produced by other people. The free market is the means by which these goods and services are transferred around the world.

To be able to continue this, we need to consume. If we consume more we need to produce more, which means that more people are assured their jobs. If consumption decreases, production will decrease too and there will be less work around. So we are told to consume more and more by our political and business leaders. These people determine their success by an increase in the Gross Domestic Product. This is a measure of how much activity - how much goods and services are being produced. As long as it is increasing, society is succeeding.

We have trained our workforce well. Our education system is the way in which the system propagates itself. We are training our young to a world of work.

How did we get here? An essay by Jeffrey Kaplan in The Gospel of Consumption traces a history of how we came to be the consumers we are,

President Herbert Hoover’s 1929 Committee on Recent Economic Changes observed in glowing terms the results: “By advertising and other promotional devices . . . a measurable pull on production has been created which releases capital otherwise tied up.” They celebrated the conceptual breakthrough: “Economically we have a boundless field before us; that there are new wants which will make way endlessly for newer wants, as fast as they are satisfied.”

Here was "a strategic shift for American industry—from fulfilling basic human needs to creating new ones." By encouraging people to want more, more work would need to be done, and the machines would not be idle.

There were some critics to this new policy of increasing consumption to allow more people to work. Because machines were now able to produce more in less time, a few argued that people should therefore work less - a four-day working week. As early as 1932, Arthur Dahlberg, in his book Jobs, Machines, and Capitalism,

By not shortening the working day when all the wood is in, the profit motive becomes both the creator and satisfier of spiritual needs. For when the profit motive can turn nowhere else, it wraps our soap in pretty boxes and tries to convince us that that is solace to our souls.

Kaplan makes the point that what was going on was a political movement by government and business leaders to build a system that kept people employed. We were persuaded by these people, and although the machinery offered an opportunity to work less,

.. we have allowed the owners of those machines to define their purpose: not reduction of labour, but “higher productivity”—and with it the imperative to consume virtually everything that the machinery can possibly produce.

The J. Walter Thompson advertising agency told readers that under “private capitalism, the Consumer, the Citizen is boss. He doesn’t have to wait for election day to vote or for the Court to convene before handing down his verdict. The consumer ‘votes’ each time he buys one article and rejects another.”

This was and still is the American way, Kaplan,

We can break that cycle by turning off our machines when they have created enough of what we need. Doing so will give us an opportunity to re-create the kind of healthy communities that were beginning to emerge with Kellogg’s six-hour day, communities in which human welfare is the overriding concern rather than subservience to machines and those who own them. We can create a society where people have time to play together as well as work together, time to act politically in their common interests, and time even to argue over what those common interests might be. That fertile mix of human relationships is necessary for healthy human societies, which in turn are necessary for sustaining a healthy planet.

There is politics and there is economics. Sometimes the two don’t meet. Food is a policy issue. Governments are required to ensure the supply of basic food to its population.

Agricultural subsidies have been a very important part of government policy in developed economies. This is not going to change. This is why the opening up of markets around the world to labour and technologies, did not include opening markets to agriculture. The Washington Post,

With food, significant subsidies and other barriers meant to protect farmers — particularly in Europe, the United States and Japan — have distorted the real price of food globally, economists say, preventing the market from normal price adjustments as global demand has climbed.

Richard Feltes, senior vice president of MF Global, a futures brokerage, "We can see now that the world has largely failed in its attempt to create an integrated food market."

As prices rise, governments are likely to become more protectionist over their food supply. This will harm the poor.

Globalisation is argued for on the basis that it expands the market for goods and services, so workers in all countries can benefit. Capital goes to where it can achieve the most profit. This means that investment goes to countries that have low costs, and so the rise of India and China due in large part to its cheap workforce. Lawrence Summers, Charles W. Eliot Professor at Harvard University, on globalisation,

But it is also true that the success of other countries, and greater global integration, places more competitive pressure on an individual economy. Workers are likely disproportionately to bear the brunt of this pressure.

Workers in America and the West are being priced out of their jobs. They are coming to realise that what may be good for business is not necessarily good for them. Protectionism is not an answer,

.. it would generate resentment abroad on a dangerous scale, hurt the economy as other countries retaliated, and make us less competitive as companies in rival countries continue to integrate their production lines with developing countries.

Summers argues that government policy should be to reduce inequality and increase the security of jobs. He suggests that to reduce inequality, governments should implement a progressive tax policy, where as more money is made, more taxes are paid. And to increase security, regulatory frameworks are put in place.

The problem with this is that the ‘cat is out of the bag’. Capital moves easily across national boundaries, and so money will go to where it can earn the most. Progressive taxation and more regulation will encourage people and businesses to move elsewhere.

There has been a huge increase in global trade of the past decade or so. As a result multinational corporations have grown bigger and more powerful. Because they enable trade between countries, these large international organisations have more power over global trends than most politicians.

The power they have is a result of their employing millions of people worldwide, providing them with a market for their goods and services, and a living. Politicians are happy to let them carry on - it just makes their job easier, and so these organisations can lobby governments against financial regulation - hence the credit crisis - and other restrictive measures. The US Congress voted against the Kyoto agreement because of successful lobbying by the oil companies.

The Washington Post,

On an ever-growing list of issues, the big decisions are being made or profoundly influenced by a little-understood international network of business, financial, government, cultural and military leaders who are beyond the reach of American voters. [..] The world’s biggest corporations, such as Exxon or Wal-Mart, have annual sales that rival the gross domestic product of all but the 20 or so wealthiest nations.

These corporations can invest where they choose, seeking out the most favourable conditions for their business. And this business is to increase shareholder value through the mechanism of the market.

There vision is narrow, their allegiance is to shareholders, and their competition forces them to conduct their business without regard to the environment. This raises questions about the future of global governance. The Post,

Will the global era be more democratic or less so? Will inequality continue to grow, as it has for the past three decades of this group’s rise, or recede? Will the few dominate because the government mechanisms that traditionally represent the views of the many are so underdeveloped on a global scale?

High food prices are here to stay, for three reasons: the rising world population, the growing economies of India and China and the increasing cost of energy. The countries of Africa are going to be hit the hardest. Oxford Professor, Paul Collier,

The sharp increase in the world price of staple foods is an inconvenience for consumers in the rich world, but for consumers in the poorest countries, especially in Africa, it is a catastrophe. […] Despite the predominance of peasant agriculture, most African countries are net food importers and food accounts for over half of the budget of low-income households.

His solution,

The most realistic way to raise global supply is to replicate the Brazilian model of large, technologically sophisticated agro-companies supplying for the world market.

This will require a concerted aid effort by the developed countries, and this is unlikely to happen.

There is a confused global food market right now, with all sorts of import and export restrictions, tariffs, agricultural subsidies, a distrust of genetically modified crops, various forms of aid, conflicts in countries, water and energy costs, and so on.

The easiest and quickest solution is to open up the markets. But agreements between countries to do this are going to be hard to come by.

The World Trade Organisation encourages free and unrestricted trade around the world. If people are able to sell their goods and services, they are able to earn a living. This is the economy.

However, increasing free trade round the world encourages more consumption, for example, in countries like India and China, and more use of natural resources. This is the environment.

If we seek to protect the environment, we will have to impose restrictions on carbon emissions, which will restrict trade. The UN led Bali talks on the global environment reached no decision for the simple reason that each country was concerned about the impact on its economy.

From the Environmental News Network,

worry has grown among U.S. and European industries—especially iron, steel, cement, glass, chemicals, and pulp and paper—that any new climate treaty would put them at a big disadvantage against their fast-growing competitors in China.

The US Congress is suggesting a system of trade sanctions that would levy import taxes on goods from other major greenhouse gas emitters, such as China. It is likely that the EU will also adopt some sort of green tariff system in the next few years.

Any kind of input tariff is a trade barrier.

Despite the threat of trade wars, trade sanctions could emerge as the most effective means of forcing international action on global warming.

Subroto Bagchi, Chief Operating Officer, Mind Tree consulting, to the Class of 2006 at the Indian Institute of Management, Bangalore.