INCOME GAPS BROADEN
BEYOND ALL REASON

Amidst this growing affluence inequality has worsened. Neo-liberal doctrines have failed to deliver on their promises and the weak have been forced into an increasingly desperate position. The following figures illustrate how stark this problem is:

• In 1960 the richest fifth of the world’s population earned 30 times more per capita than the poorest fifth. By 1990 this difference had become 60-fold and by 1995 it had reached 74-fold.
• In over 80 developing and transition economy countries per capita incomes were lower at the end of the 1990s than they had been ten years earlier, and in 20 countries they had fallen below the 1960 level.
• Over ten years the number of people living on one US dollar a day increased from less than one billion to 1.3 billion.

Inequality has extended - or has been stretched - so far that the combined wealth of world's three richest people exceeds that of the 600 million people living in the 48 poorest countries.

Shortness Of Life

While people in the industrialised countries are enjoying an unprecedented high standard of living, a large proportion of those in the developing countries continue to lack the human basic rights afforded in the affluent countries. In the most severe cases this difference even affects the right to life itself.

Income Differentials
Also Broaden in the North

Since 1980 the income gap has also become wider in most industrialised countries. The UN Children's Fund UNICEF estimates that in the richest countries one person in eight is living in poverty, and the proportion of children is even higher.

In Britain Prime Minister Margaret Thatcher's neo-liberal policies tripled the number of children living in poverty. In the United States one child in four lives in poverty.

In June 2000 the Organisation for Economic Cooperation and Development – OECD warned that its member States were endangering the intellectual development and health of their children by devoting too little of the growing wealth of these countries to meeting their needs.

Income differentials in Finland began to grow in the 1990s.

The poor have not become poorer, but the wealth of low and middle-income groups has grown only slightly while the real incomes of the well-to-do have risen considerably.

Regions Become More Unequal

The European Union finances outstanding programmes in an effort to smooth out developmental differences between its various regions, and especially to prevent any further worsening of these differentials. The progress made by Ireland and Portugal, for example, testifies to the success of this work. However, strict international competition rules impose significant limits on the potential of regional policy.

Income Gaps Worst
in the Developing Countries

Income differentials are greatest in the developing countries. According to the World Bank, in 11 African and 15 Latin American and Caribbean countries the highest fifth grabs more than half of all income for itself. On the other continents Russia, Ukraine, Jordan and Papua New Guinea have found their way into this group of countries.

The widest income gap prevails in South Africa, and the next worse is in Brazil. Income distribution in Finland is one of the most egalitarian in the world. The United States is somewhere between these extremes.

Broad Income Gaps Enforced

The absurd inequity of global income distribution is a reflection of the concentration of well-paid, highly skilled jobs in the northern part of the globe and of low pay rates and labour-intensive jobs in the South. This income distribution cannot become more equitable without levelling out - by some means or other - the global division of labour or without major social income transfers from the rich regions to poor areas on a quite unprecedented scale.

Inequality is exacerbated by most of the world's one billion unemployed and underemployed living in the developing countries.

The unjust distribution of labour and incomes is partly due to former colonial policies. Britain, France and the other colonial powers used force to limit the role of their colonies to serving the colonising countries with raw materials and other labour-intensive goods.

Since the developing countries secured their independence those in the affluent part of the globe have protected their privileged position through protectionism. Access to the markets of industrialised countries for agricultural goods of the developing countries and the products of its growing industrial sector has been limited in many ways.

The rulers and élites of the newly independent developing countries also bear a heavy responsibility for the South's exacerbated problems when they have been primarily guided by the motives of private profit and personal power with little regard for the destinies of their fellow countrymen.

A Massive Increase
in Currency Speculation

While much of people's daily life is a local matter, an intensive drive for internationalisation has continued for many years. Since the mid-1970s, in just over two decades:

• exports of goods and services have tripled,
• the proportion of foreign trade in global GDP has grown from 17 to 21 per cent (while this GDP grew at an annual average rate of about two per cent),
• foreign direct investment has increased by a factor of seven,
• the volume of daily international currency transactions has grown from USD 10-20 billion to USD 1,500 billion, signifying a one hundred fold increase, and
• lending by international financial institutions has grown by a factor of 16 (in 1975-1994).

Foreign direct investment
overtakes development aid

In 1999 the developing countries received over EUR 200 billion in foreign direct investment (FDI). This sum is almost four times as much as the development aid donated by the industrialised countries. The situation changed radically in the 1990s, as the aid regressed and there was an explosive increase in FDI. In the early 1990s aid expenditure still clearly exceeded the value of FDI.

In spite of this, the affluent world has remained the largest recipient of FDI. In the 1990s the industrialised countries received twice as much in FDI as the developing countries in which a large majority of mankind lives. Well over 90 per cent of this FDI was made by the enterprises and investors of industrialised countries.

China the Most Attractive Target

Competition among third world countries for investment capital from multinational enterprises has been unequal. In the 1990s about a dozen countries received some 80 per cent of all FDI targeted at the developing world. The most attractive countries were China and the other rapidly industrialising, developing countries of the Far East, together with Mexico, Brazil, Argentina and Chile in Latin America.

The frantic rush to China by the multinationals is illustrated by the establishment of as many as 300,000 subsidiaries and joint ventures in this country. Of these about 150 belong to Nokia and other multinational enterprises based in Finland.

In the 1990s the poorest countries attracted less than one per cent of FDI.

Even as far back as in the 1970s multinational enterprises had transferred a significant portion of their textile, garment, leather and many other light industry production operations to the developing countries. This tendency has been accelerated by relocating automobile, chemical and electronics industry production lines in the rising developing countries.

Growing Investment
Flows Within the Third World

The growth in FDI also includes capital transfers between the developing countries. The motives here are the same as those governing investments in the third world by industrialised countries. Labour-intensive industrial enterprises seek countries with lower labour costs, provided that they meet other requirements for profitable production. These additional conditions concern the quality of the workforce, transport connections and several other factors.

The global sports shoe brand Nike is a typical example of this. In the late 1990s Nike's South Korean and Taiwanese subcontractors enlarged their production in Vietnam because the cost of production there was lower than in most other Far-Eastern countries.

Nowadays enterprises in the former developing countries of the Far-East - Singapore, Hong Kong, Taiwan and South Korea - make sizeable investments in the Far-East and Latin America.

No Reversal in Sight

The trend towards globalisation of the economy and many other sectors is likely to continue. It could be slowed down by a trade war between the United States, the European Union and Japan, or by an armed conflict on a much larger scale than any recent war. An unusually extensive environmental catastrophe could also disrupt the drive for internationalisation.

The Borders of Finland
have been Softened

Internationalisation progressed rapidly in Finland in the 1990s, and especially during the latter half of this decade. The percentage of exports of goods and services in GDP grew significantly. Foreign investors took the lead in the Helsinki Stock Exchange. An increasing number of Finns now work in enterprises based abroad. By the end of 1998 the value of FDI in Finland was more than EUR 14 billion. Finnish enterprises escalated their overseas investments. The number of immigrants and foreign tourists increased. More Finns made business and holiday trips abroad.

Foreign Enterprises Begin
to Tender for Public Services in Finland

One novelty in the Finland of the 1990s was also that foreign enterprises began to tender for public services and win some of them. This unsettled the situation of public sector employees and led to several cases of industrial action in local bus transportation and solid waste management services. Many local authorities also provided opportunities for foreign companies to tender for public procurement contracts.

The tenders submitted by foreign enterprises for publicly financed services increased the efforts by the public sector to improve competitiveness and aroused debate on public service quality standards.

New Trade Rules Jeopardise
Public Health Care and Education

Until 1994 world trade agreements were limited to trade in goods. In the talks known as the Uruguay round the range of agreements was extended so that the rules could also be applied to services, investment and intellectual property rights. This led to mounting pressure to open up health care and education as multinational enterprises sought profits.

The World Trade Organisation – WTO estimates that USD 2,200 billion is spent on health care annually. The United Nations trade and development organisation UNCTAD makes an even larger estimate at USD 3,300 billion. The public sector invests over USD 1,000 billion a year on education.

Multinational enterprises in the health care and education sectors have pressured policymakers to permit free international competition for these huge budgets. The strongest advocate of this policy at the World Trade Organisation – WTO has been the United States.

The Public Services International organisation – PSI regards further opening up of the health care and educational sectors in search of private profit as a dangerous development. Globally this threatens to undermine both the services available to low-income groups and the position of public service staff.

However, PSI believes that international trade in public services will increase because many of the world's countries committed themselves to tendering services in the Uruguay round. Finland is one of these countries.

Changes in Both Directions

In Winter 2000 the Helsinki Metropolitan Area Co-operation Council – YTV put out 25 regional bus lines to competitive tendering. The winner of the previous round of tendering, a foreign-owned enterprise, lost 17 lines, while the municipal HJL-Bus transport company won nine more lines.

At the beginning of the year 2000 Säkkiväline, a company owned by the Finnish Lassila & Tikanoja Group, bought WM Ympäristöpalvelut (environmental services) from its American owners for about EUR 100 million. The American company withdrew from the Finnish market after almost ten years of tendering and operations because of the problems of it’s parent company in the United States.

These cases illustrate that orders may not only be lost by Finnish organisations to foreign ones and by local authority service institutions to private enterprises, but that such changes can also occur in the opposite direction.

Foreign Capital Rushes
into Catering Services

The strongest players in competition for catering services are the French Sodexho and Amica, which is owned by the Finnish family enterprise Fazer. In December 1999 the foreign attack on this industry continued when of the world's largest enterprises in the sector, the Compass Group, arrived in Finland. At that time Eurest Finland, owned by an enterprise with nearly 200,000 employees, purchased the Ateria Henkilöstöravintolat staff canteen business. "The arrival of Eurest in Finland further increases the fierce competition for staff restaurants", wrote journalist Riitta Korhonen in the weekly business newspaper Talouselämä. Helsinki Catering, which is owned by the City of Helsinki, joined the competition in 1999.

Foreign Capital Takes the Lead
on the Helsinki Stock Exchange

By the end of April 2000 foreign investors owned 88 per cent of the value of Nokia stocks, 60 per cent of the Finland-based forest industry multinational Stora Enso and 57 per cent of its Finnish rival UPM-Kymmene.

Overall foreign investors controlled 70.5 per cent of the value of all stocks listed on the Helsinki Stock Exchange.

In the Service of Foreign Companies

According to the Bank of Finland, subsidiaries and branches of foreign multinationals in Finland employed 182,000 people in 1998. This number has tripled in half a decade. The largest employers were multinationals based in Sweden and the United States.

Foreign companies are already responsible for one sixth of the turnover of all enterprises operating in Finland.

The Finns Invest Abroad:
Input Doubled in 1999

The Finns have so far not been as eager as foreign investors to invest in foreign stocks and bonds on the Helsinki Stock Exchange.

By the end of 1999, according to a Bank of Finland report, the Finns owned just over EUR 30 billion in foreign securities. About EUR 17 billion was held in securities, EUR 13 billion was in stocks and EUR 1.3 billion was in financial instruments.

Up to 74 per cent of investments were made in other European Union Member States. The proportion of investment in the United States was 13 per cent, in non-EU European countries just over 5 per cent, and in Asia less than 5 per cent. The three most popular countries for investment were Germany, Sweden and the United States.

Employee pension funds were responsible for 36 per cent of Finnish security investments abroad, while the banks accounted for 17 per cent and other financial institutes such as insurance companies and investment funds made up 42 per cent.

Most of the Municipal
employee pension fund
resources in foreign stocks
and interest investments

At the end of June 2000 the book value of the Municipal employee pension fund was about EUR 10.7 billion. This sum grew in the 1990s. Until 1997 the institution's investment targets were mainly domestic, but following this the share of foreign targets grew rapidly.

By the end of June 2000 almost one third of these pension fund assets, or about EUR 3.5 billion, was invested in foreign stocks. A similar sum was bound up in interest investments.

Domestic stock, interest and real estate investments amounted for some EUR 3.7 billion.

"Decentralisation of investments reduces risks without compromising earnings expectations" argues Jari Sokka, Planning Director of the Municipal Employees Pension Fund. "The world stock index fluctuates more moderately than the small and concentrated Finnish investment market."

More than half of these pension fund foreign investments are targeted at the Euro region. Other investment targets include the UK, Switzerland, other Nordic countries, the United States and Japan.

The unfair distribution of labour
hampers world economic development

While the sharp division of labour between the South and the North is morally indefensible, the arrangement is not the only problem. The underdevelopment of a region populated by billions of people hampers world economic development as a whole. As its economy grows the South is not merely a threat to the industrialised countries, but it also offers new opportunities.

An illustration of this can be seen in Finland's foreign trade. The newly industrialised countries (NIC) of the Far East have rapidly become both important export targets and suppliers of goods to Finland.

Good for the Finns:
The Rise of the Developing Countries

In 1986, the share of Finland's exports taken up by the nine Far-Eastern NICs was 2.2 per cent, but by 1991 this had already grown to 4.8 per cent and was 8.0 per cent by 1995. Correspondingly Finnish imports from these economies grew briskly. Finland mainly imported products of labour intensive industries and exported products of high added value.

Both parties benefit from this and the process goes on in parallel. In Finland it maintains export industry employment while the consumer benefits from the cost-effective supply of consumer goods.

Trade with other third world regions does not give similarly positive examples of growing, mutual benefit. Finnish imports from Latin America, Southern Asia and Africa have been limited over the years to green coffee, fruits and other products of low added value. This stagnation of imports reflects serious problems in the economic development of a large region of the world. Finnish exports to regions suffering from economic problems have developed only slowly.

Surpluses

In the 1990s Finnish exports to the developing countries were clearly greater than imports from the third world. The largest surplus arose in trade with the Far-Eastern NICs, although their economic crisis considerably reduced this surplus. Finnish import growth continued but Finnish exports sank.

The Far-East Economic Crisis
Hampered the Finnish Economy

Over the last few years of the 1990s the overheated Far-Eastern economy was beset by a crisis. For a while its long-sustained growth turned into a steep fall. Ten million people in the region lost their jobs and tens of millions fell below the poverty line again.

The crisis also had a negative impact on the growth of the Finnish economy. The order books of the export industry became thinner. The damage was increased as the slump in the Far-East seriously injured the already otherwise weakened economy of the Russian Federation.

Competition Threatens Jobs

In labour intensive industries such as agriculture and the garment, textile and leatherworking sectors competition from the developing countries threatens enterprises and jobs in the industrialised countries. This threat has materialised in the light industry of the North and despite protectionism has led to the loss of millions of jobs.

On the other hand, these job losses have not merely signified a loss for the developed countries because consumers in the affluent countries have benefited from the low prices of products made in low-pay economies.

The South's Losses