Commentary | Trade and Globalization

Rethinking the Global Political Economy

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Opinion pieces and speeches by EPI staff and associates.

THIS SPEECH WAS GIVEN AT THE ASIA-EUROPE-U.S. PROGRESSIVE SCHOLAR’S FORUM: GLOBALIZATION AND INNOVATION OF POLITICS, JAPAN, HELD ON APRIL 11-13, 2002.

Rethinking the Global Political Economy

by Jeff Faux

For a quarter of a century, it has been conventional wisdom among policy makers, academics, and journalists that the neo-liberal policies that have governed the global economy are a great success. We have been assured that the costs of global deregulation of capital, labor and commodity markets – including the dislocation of workers and communities – are “transitional” and more than compensated by the benefits in overall economic growth, rising standards of living and a narrowing of the income gap between rich and poor. Indeed, poor nations have been told that their only hope for prosperity lies in opening all national markets and pursuing an export-led growth strategy.

Yet there is no convincing proof that the so-called “Washington Consensus” has delivered on its promises. Most of the claims are based on anecdotal evidence and typically count just the benefits and ignore the costs. More systematic efforts to find a positive net impact by comparing economic performances of countries according to some crude assumptions of “openness” have met with skepticism from honest professionals (Rodriguez and Rodrik 2000).

On the other hand, there is a strong prime facie case that the net impact of neo-liberalism has been negative. For example, in a study for the United Nations, British economist John Eatwell (1996) pointed out that financial liberalization of the 1970s was supposed to:

  • move savings from developed to developing companies
  • lower the costs of borrowing
  • increase economic growth

Instead, by 1992:

  • savings flowed from developing to developed countries
  • interest rates generally rose
  • economic growth slowed down

Since Eatwell’s study, we have experienced the Mexican peso collapse, the East Asia financial crisis and, now a worldwide recession, all of which have diminished performance of the neo-liberal regime even further. One recent study compared the rate of growth in real GDP from 1960-1980, with the growth from 1980 to 2000 for 116 countries divided into quintiles according to per capita income. It found that the growth rate fell for every quintile from the earlier to the later period. Among the poorest countries in the lowest quintile, the 1980-2000 growth rates turned negative (Weisbrot et al. 2001). Ironically, those nations that have grown the fastest over this period, were those that most resisted the advice of the “Washington Consensus.”

Inequality has also gotten worse. As Christian Weller, Robert Scott, and Adam Hersh (2001) have shown, the median income of the richest ten countries was 77 times that of the poorest ten countries in 1980, and 149 times in 1999. The incomes of the richest 10% of the world’s people were 70 times that of the poorest 10% in 1980, and 122 times in 1999. Within nations, inequality also seems to have worsened. Certainly in the countries where the data are most reliable, the trend is clearly toward more inequality (Faux and Mishel, 2000).

Even World Bank president James Wolfensohn in 1999 was moved to admit, “At the level of people, the system isn’t working.”

Inadequate Global Institutions
The history of successful national economies tells us that markets need to be regulated by political institutions in order to work effectively. Government regulation is necessary to enforce contracts, assure transparency, and protect citizens from the brutalities of the unrestrained market. Central banking and discretionary fiscal policy are essential to maintain macroeconomic growth and stability.

But today, the leadership of the world’s advanced nations, driven by multinational financial interests and rationalized by an extremist “free market fundamentalism,” are attempting to create a global marketplace without the political institutions needed to make it work.

The International Monetary Fund (IMF), for example, is not a central bank for nurturing global growth and stability. It is rather a lender with an ideological agenda, conditioning its loans to troubled nations with austerity and anti-labor policies aimed at giving priority to debt repayment through exports rather than domestic growth. Although it demands that individual client nations open their financial markets to competition, the IMF itself is the center of a credit cartel; it has agreements with other financiers to assure that projects it does not like will be blacklisted from receiving assistance from the World Bank and other international lending institutions, as well as governments and large private lenders. Like all cartels, the IMF uses its oligopolistic power to pursue political objectives. It therefore has a decided bias toward countries whose leaders are in sync with the bank’s major supporters. A former chief economist of the IMF has openly acknowledged that the staff of the IMF make no important decision without checking with the U.S. Treasury.

Moreover, the staff is inadequate for its task. Stanley Fischer (1997), then first deputy managing director of the IMF, told the New York Times in December 1997 that his agency – despite its army of a thousand economists – did not have the capacity to monitor the global banking system effectively: “The amount of detailed knowledge it takes to understand a system is beyond the capacity of a single multinational organization to deal with.”

The assumption that the G-3, the G-7, or the G-8 can some how provide overall management for the global economy is likewise misplaced. The leadership of these advanced countries have even less capacity to plan for global stability than does the IMF or World Bank. Thus, despite the expressed concern of the world’s great economic powers after the Asia crisis of the 1997 that a new financial “architecture” was needed, very little reform has taken place.

In reality, the global financial system is governed by ad hoc crisis management, characterized by late-night phone calls from U.S. Treasury officials to the world’s financial tycoons, IMF officials flying to Third World capitals in disguise, and Wall Street lectures to recalcitrant politicians in developing nations. The crisis-management style has one big advantage for those who attempt to manage the global economy. It avoids the politically difficult questions of accountability and sovereignty. When the world faces a crisis, issues of fairness, economic sustainability, and democracy are brushed aside as secondary to the emergency task at hand: restoring investor confidence. When the crisis is over, the global policymakers turn to other issues, and the opportunity for serious public debate is lost – until the next crisis, which must be managed again at still higher levels of risk.

In the absence of institutions that can maintain and stabilize global demand, the deliberate encouragement of export-led development strategies places the fate of the global economy on the willingness and ability of the large advanced economies – Japan, the European Community and the United States – to provide the markets and capital investment needed to accelerate growth in the rest of the world.

With the Japanese economy currently mired in its crisis of finance and consumer confidence, it is an unlikely source of economic stimulus. Indeed, it well may be that in order to solve its problems; Japan will have to go through a financial restructuring that in the near term will further reduce its domestic growth.

Europe is in better shape. It has idle capacity and its capital account is in balance. But the Euro zone is constrained by a macroeconomi
c conservatism that is built into the Maastricht Treaty and other political arrangements and will be hard to dislodge in the near term. Moreover, for now, Europe’s economic policies will focus on easing its eastward expansion.

This leaves the task to the United States, which during the 1990s, particularly the last half, has provided much of the stimulus for world demand.

Prospects for the U.S. Economy
The U.S. economy appears to be at the end of a mild recession. The recession was in large part a natural outcome of the ten-year economic expansion that ended in March of 2001.

During its first five years, this expansion was at best ordinary. After having fallen in 1991, the GDP rose at an average of a little above 3% annually through 1996, about the same as the previous two expansions and considerably less than earlier upturns. What made this recovery different was its “second wind,” averaging 4% for the first quarter 1996 to 2001.

The most important contributor to this second wind was what did not happen: an inflation shock that would have induced the Federal Reserve Board to raise interest rates. The absence of inflation in the 1990s should not have been such a surprise. In modern times, all significant bouts of inflation have been generated by a war or exogenous oil price shocks, not by a peacetime economy that expanded beyond its sustainable limits. The last price flare-up was generated by a short-lived panic in oil markets when the 1990 Gulf War was launched. Global oil prices also sparked the inflation of the 1970s. The previous price run-up was kicked off in the late 1960s by then President Lyndon Johnson’s refusal to raise taxes to pay for the Vietnam War. The inflation spell before that was ignited by the Korean War, the one before that by the lifting of price controls after World War II, and the one before that, by the impact of World War I (Faux 2001).

The absence of price inflation in the 1990s allowed the Federal Reserve to accommodate economic growth. But the prospect of continued growth and the availability of cheaper credit fueled an inflation in financial asset values, causing the U.S. stock market to rise over 350% between October 1990 and January 2001(Council of Economic Advisers 2002). Despite the obvious speculative excess, the Federal Reserve declined to use its ability to impose credit restrictions targeted at the stock market. Instead it waited until 1999, when it tightened credit in the entire economy and helped precipitate a recession.

Once the recession began the Federal Reserve quickly reversed itself and lowered interest rates 11 times, driving short-term rates down from 6.5% in June 2000 to 1.8% by December 2001. Long-term rates fell as well, but much less. Moreover, the Bush Administration, despite its conservative rhetoric, was quick to apply a Keynesian fiscal stimulus in the form of a tax rebate. The result was that consumer spending, after a temporary drop in the wake of the September 11 attacks, was maintained. By early 2002 it appeared that a slow recovery was beginning.

No one can predict the future. Nevertheless, current conditions allow some educated guesses about the capacity of the U.S. economy to act as the locomotive for the revival of rapid global economic growth.

In the short term (one year), we can expect the U.S. unemployment rate – which is a lagging economic indicator – to rise, even in the face of a recovery. The unemployment rate in February 2002 was 5.5%, up from a low of 3.9% in October 2000. Based on past history we can expect the rate to rise to somewhere around 6% by the end of the year.

The impact of a rising unemployment rate will be felt on consumer incomes – particularly for those at the bottom of the wage distribution. The U.S. experience shows that below 5% to 5.5% the labor markets tighten and the benefits of growth begin to be shared by those at the bottom. Thus, the end of the 1990s expansion, earnings for low-wage workers were rising faster than those for high-wage workers.

Similarly, when the unemployment rate rises, real income growth among U.S. workers slowed down. Chart 1 shows the estimated losses among family income quintiles of a rise in the overall unemployment rate from 4% to 6.5%.

 

In the medium term (2-4 years), even with a recovery, it is not likely that the United States will return to the growth rates that it enjoyed in the late 1990s.

First, the impact of the recent stock market decline will dampen a return to what Alan Greenspan called the “irrational exuberance” of those years. Some $5 trillion in U.S. households’ financial assets evaporated between third quarter 2000 and third quarter 2001. (U.S. Federal Reserve System 2001) and it will take time for the small investors to forget the pain of that loss, and for new money to come into the financial markets. Moreover, the price-earnings ratios in the U.S. stock markets are still above historical averages.

Second, the impact of the Enron and related scandals has yet to run through the economy. Banks, for example, have become more conservative in their lending. And the easy financing through the stock market that U.S. companies enjoyed over the last decade has diminished. Together with the collapse of the “dot.com” sector of the stock market, the Enron scandal is having a negative impact on the confidence of investors – particularly small investors and workers with defined contribution pension plans. Already it is estimated that U.S. companies will have to come up with cash for about $30 billion in convertible securities coming due in the next 18 months that they had assumed they would be able to pay for with stock.(Business Week 2002).

We also know now that the profits of a number of large corporations in the technology sector were overstated. For example, Enron’s profits between July 2000 and October 2001 were overstated by at least one billion dollars, or 78% of the total profits claimed (Madrick 2002). Estimates are that that the profits of all U.S. corporations in the late 1990s were falsely inflated by between 20% and 25%. If so, this suggests that the stock market bubble was even larger than we thought.

Third, overcapacity in a number of technology sectors will continue.

Fourth, new cost pressures on U.S. companies will come from rising health care costs. After several years for stability, these costs are now expected to accelerate once again.

Fifth, the capacity of American consumers to spend faster than they earn may be reaching its limit. As Chart 2 shows, relative to disposable income, both domestic consumption and consumer debt in the U.S. are at their highest levels since the end of World War II. The risingvalue of residential real estate is now the consumer sector’s main support. If the United States were to experience a deflation in housing prices, consumers would be forced to retrench.

 

Finally, the long-term problems of U.S. manufacturing will persist. There is, of course, a tendency in most advanced countries for manufacturing’s share of total employment to shrink because of higher productivity rates in manufacturing relative to the service and commercial sectors. But the weakness in the U.S. manufacturing sector does not reflect a simple secular trend. As Chart 3 shows it is directly connected to the chronic and persistent trade deficit.

 

Despite the persistent U.S. trade deficit, there is a widespread assumption that the U.S. economy is highly competitive. The heart of this claim is that the relative unregulated state of U.S. markets, especially labor markets, has led to a productivity “miracle.” A closer look at the productivity makes this proposition doubtful.

As Table 1 shows, real GDP per worker has grown faster in the United States than in the Euro zone. But output per worker is not as accurate a measure as output per hour worked. When that adjustment is made, the U.S. performance still leads, but by a smaller
margin.

Table 1

Productivity
(1996-2000)
U.S. Euro zone
GDP/worker 2.5 1.2
GDP/hours worked 2.1 1.6
Net domestic product / hours worked 1.8 1.5
Productivity
(1993-2000)
U.S. Euro zone
Net domestic product / hours worked 1.4 1.8

Moreover, as a recent report by Credit Suisse (2001) First Boston points out, international comparisons of Gross Domestic Product are distorted by differences in the way depreciation is measured. Therefore Net Domestic Product, which subtracts capital depreciation from the calculation of GDP, is a better measure of economic progress. When the two economies are compared on that basis, the1996-2000 performances narrow considerably. When the longer period, 1993-2000, is examined, the Euro zone performance is superior.

It should also be noted that by 1997, at least five European economies (Belgium, Norway, France, West Germany, and the Netherlands) had reached productivity levels that were at or above more of the United States (Mishel, et al 2001). The illusion of faster U.S. productivity growth may have contributed to the willingness of the Federal Reserve to keep monetary policy loose even as the unemployment rate reached and went below “NAIRU” levels.1

In the long term, the U.S. economy is clearly headed for a financial crisis. In 2000, the U.S. current account deficit was a record $450 billion, 4.5% of GDP. The recession reduced the current account deficit in 2001, but it was still above $400 billion. When the economy recovers, the deficit will continue its relentless expansion because U.S. consumers and businesses now have an inordinate propensity to import as income rises. According to last year’s report of the U.S. Trade Deficit Commission (2000), “For an equal increase in national income in the United States and foreign countries, the United States increases its purchase of imports proportionally more than foreigners increase their exports.”

Nobel prize-winning economists Franco Modigliani and Robert Solow (2001) recently characterized the large and growing deficit in the U.S. international trade balance as “the greatest potential danger facing the economy in the years to come.”

In order to finance this deficit, the United States has had to borrow from other countries and sell them more of its assets. Thus, each year its economy must devote more of its income to interest on the debt and the transfer of profits to investors in other countries. After 1988, these payments began to exceed foreigners’ remittances to the United States.

This net foreign “debt” is now 22% of GDP. Assuming a recovery, the U.S. economy is on a trajectory to a debt burden of roughly 40% of GDP within five years.

The United States is, of course, not Argentina. The dollar is the world’s most important reserve currency and America has better credit and more assets to sell. But it is a matter of simple arithmetic that it cannot forever borrow in order to buy more from the rest of the world than it sells. The interest burden will eventually be so heavy that foreign investors will be unwilling or unable to keep financing the rising debt. When that happens, the dollar will drop and interest rates will spike upward. The United States will then be forced to run a trade surplus with a drastic devaluation of the dollar and/or a draconian deflation in real incomes in order to reduce demand for imports and make U.S. goods cheap enough to run a surplus in world markets. The costs of balancing trade through deflation would be considerable; according to an earlier calculation, bringing a 2% current account deficit into balance would require a 10% drop in GDP and a jump of 5 full percentage points in the unemployment rate (Godley 1995). At today’s deficit share of 4% and more the required contraction is even greater.

Getting to a trade balance will be even more difficult because U.S. manufacturing capacity may well have shrunk below the level needed to eliminate the trade deficit through expanding exports. Given the relentless import competition, investors are reluctant to make long-term capital available to medium-sized and small manufacturing firms – and some large ones as well. The grim outlook for manufacturing also reduces the incentive for young people to invest in becoming skilled workers.

The low savings rate also contributes to the current account problem but it is now a function of a deficiency in private rather than public savings. This is a much harder problem to solve. In fact, we do not know how to raise the private savings rate. And under current conditions increasing the saving rate would reduce consumer demand, upon which the U.S. economy – and the world – depends.

Another imbalance driving the trade deficit is the overvalued dollar, whose price against other major currencies may be as much as 25% too high. By making U.S. exports more expensive and imports cheaper, the high-value dollar has been a major cause of the erosion of U.S. manufacturing capacity.

Whether one believes that the trade imbalance is caused by low savings, a high dollar, slower growth in Japan and Europe or some combination of all of these factors, the fact is that the U.S. government is not attempting to solve any of these problems. Indeed, the Bush Administration is deliberately moving in the opposite direction on all fronts. Its ten–year, $1.3 trillion tax cut will further reduce the national savings rate, and it has repeatedly declared opposition to any effort to significantly reduce the value of the dollar. Neither does it have a credible industrial strategy; its recent decision to raise tarriffs on steel imports will do little to solve the industry’s fundamental problems. It has also been unwilling to use its political clout to pressure Europe and Japan into faster growth. The need for allies in the War Against Terrorism makes it unlikely that it will make any effort to address this issue in the near future.

Slower U.S. growth in the near term and the eventual need to reverse the macroeconomic imbalances will also have a negative effect on Mexico and Canada, who have staked their future growth on exports to the United States. Slower U.S. growth will also compound the problems in Latin America, which is in its second recession since 1998. Indeed, the proposed Free Trade Agreement of the Americas, which would expand The North American Free Trade Agreement (NAFTA) to the rest of the hemisphere, would make Latin America even more dependent on U.S. markets.

The Politics of Global Governance
The failure of the neo-liberal policy regime and the doubtful capacity of the U.S. economy to act as a sustained engine of growth leaves the current system of global economic governance at a dead-end. Unfortunately, the political structure of that system is at present incapable of creating a new and different path to global prosperity.

Markets do not exist in a state of nature. They are social constructs, with defined customs and regulations that are established through political struggle and compromise. The generation and distribution of income, wealth, and power is as much a political as an economic phenomenon. In the famous words of one political scientist, politics is the art of “who gets what” (Lasswell 1936). Therefore, eve
ry market has a politics.

The expanding global market system is no exception. Thus, according to a former director-general of the World Trade Organization, the WTO represents the “constitution” of the new global economy. This may be an overstatement. But the policies of the WTO, the IMF, the World Bank, and other global regulators, represent the dominance of the investor class in the politics of the emerging global economy.

No one can deny the existence of a global investor class. Electronic technologies and modern transportation and communications system allow for extremely effective business and financial networking. Increasingly, the top echelons of transnational business are managed by multinational personnel, who have little or no loyalty to the country whose passport they happen to hold.

A global investor class implies a global working class, even though the international organization of workers is far behind that of investors. Therefore we cannot fully judge the impact of globalization without reference to the share of benefits and costs going to capital and labor. The questions of “who wins?” and “who loses?” from particular policies of the global institution cannot be answered on the basis of separate national identities alone because every country has an investor and a working class, i.e., there are rich people in poor countries and poor people in rich countries. In 1996, for example, 22% of the world’s billionaires were from the developing nations.

In most cases, international agreements are negotiated by elites that have more in common with each other than with working people in the countries that they represent. As a retired U.S. State Department official put it to me bluntly a few years ago, “What you don’t understand,” he said, “is that when we negotiate economic agreements with these poorer countries, we are negotiating with people from the same class. That is, people whose interests are like ours – on the side of capital.”

Accordingly, the fundamental purpose of the neo-liberal polices of the past 20 years has been to discipline labor in order to free capital from having to bargain with workers over the gains from rising productivity. Although labor is obviously better served when it is organized into trade unions to bargain with a unified voice, the bargaining between labor and capital goes on even if workers are unorganized. The bargaining between labor and capital is what makes up the “social contract” that is required in order to legitimize the unequal distribution of income, wealth, and power that a free market generates.

As in any bargaining, both sides are constantly maneuvering for advantage. But labor is typically at a disadvantage because it usually bargains under conditions of excess supply of unemployed workers. Moreover, the forced liberalization of finance and trade provides enormous bargaining leverage to capital, because it can now threaten to leave the economy altogether.

Moreover, unregulated globalization in one stroke puts government’s domestic policies decisively on the side of capital. In an economy that is growing based on its domestic market, rising wages help everyone because they increase purchasing power and consumer demand – which is the major driver of economic growth in a modern economy. But in an economy whose growth depends on foreign markets, rising domestic wages are a problem, because they add to the burden of competing internationally.

Both the international financial institutions and the WTO have powers to enforce protection of investors’ rights among nations, the former through the denial of financing, the latter through trade sanctions. But the institution charged with protecting workers’ rights – the International Labor Organization (ILO) – has no enforcement power.

Until recently, the politics of the global economy has been largely viewed as “international,” i.e., focussed on the questions of “which nation gets what,” with the central conflict between countries that are rich and poor, developed and developing, oil haves and oil have-nots, etc. From this perspective, the institutions of international economic governance (e.g., the International Monetary Fund, the World Bank, the World Trade Organization) are presented to the global public as a sort of legislature of different geographic interests; those representing the poor countries from the South argue for redistribution and those representing rich nations from the North argue for fiscal discipline. Geographic conflicts are certainly a primary feature of global politics – as they are of national politics. But the underlying political conflicts in the global economy are not exclusively among nations. Borderless finance and production, administered by an international managerial class, has crippled the ability of most nation-states to regulate their own markets for social purposes. Increasingly, the people of any given country cannot rely on their corporations or their banks to promote their interests. The worker in Brazil, the worker in Japan, and the worker in the United States may well have more in common with each other than they have with those that manage and prosper from enterprises that are nominally Brazilian, Japanese, or American.

Although one can find a mass of data on the financial interests of the relatively tiny investor class, the mainstream media carries little systematic information on what is happening to the huge class of the world’s workers as a whole. But a look at the trends within countries shows a general deterioration of the position of labor relative to capital – in both developing and developed economies.

The Global Policy Network, a new group of non-profit research organizations linked to national trade unions movements has so far posted reports on labor conditions in 27 countries on its web site (www.gpn.org). The countries examined include those among the poorest (e.g. Lesotho, Zambia), the most rapidly developing (e.g. Korea and Ireland) and the most developed (Canada, United States). The exact manifestation of labor’s shrinking share of income differs from country to country but there is a common pattern in the concentration of economic growth in the “informal” sector – where workers are unorganized, contingent, and unprotected. That is, where they have little or no bargaining power with capital.

Argentina is, of course, the latest example of this relentless downward pressure on workers’ living standards. No other country has embraced the neo-liberal paradigm as much as Argentina. The suicidal tying of the peso to the dollar was for years celebrated as the example of what a developing country had to do in order to gain the confidence of foreign investors. One result has been the nearly doubling of the share of the population in extreme poverty as capital relentlessly squeezed labor’s income share. As a report from the Institute de Estudios y Formacion in Buenos Aires shows, labor productivity among Argentina’s 500 largest firms – which dominates Argentina’s international trade – rose 50% from 1993 to 1998, while real wages rose only 20%. So where did the benefits of increased efficiency go? Within those firms the share of income going to labor dropped from 35% to 28% in five years, while capital’s share rose from 65% to 72% (Lozano 2001). Moreover, much of this capital found its way overseas. Many so-called “foreign” investors are in fact Argentines who have been buying high-interest Argentine bonds with accounts in banks in the United States and Europe.

Another vivid example of how neo-liberalism negatively affects workers at all levels of development is the North American Free Trade Agreement. Like most recent agreements, NAFTA protects investors at the expense of workers and the environment. Seven years after its implementation, the political protectors of capital in all three countries judge NAFTA a great success, and support the efforts to expand it to all of the Western Hemisphere through the Free Trade Agreement of the Americas.

But as a recent collaborative study by economists in Canada, Mexi
co, and the United States (Faux et al. 2001) shows from the perspective of the working people in all three countries, NAFTA has been a failure. All three countries saw a decline in real wages, an upward redistribution of income and a dramatic expansion of the informal sector jobs characterized by insecurity, low pay and no bargaining power.

This upward redistribution of income, wealth, and power reflects a fundamental contradiction in the global political economy:

  • A global social contract must be enforced by global economic institutions
  • Global economic institutions, in the absence of global democratic government, will be captured by global business interests
  • Global business interests will prevent the brokering and enforcement of a global social contract.

Global Class Politics
The annual meetings in Davos (this year in New York) of the World Economic Forum are in some ways the convention of the global party of capital. We might call it the Investors’ Protection Party. Their convention in New York was paid for by the world’s largest multinational corporations and was dominated by 1,000 corporate executives, along with 250 government officials, including 20 heads of state. They were accompanied by lawyers, consultants, journalists and academics who did business with each other at the receptions and dinners and in the corner of hotel lobbies, just as in any political convention.

The meeting of the World Social Forum in Porto Alegre, Brazil at the same time was in many ways a convention of a global political party in opposition, which is now searching for a common program with which to oppose the investor’s agenda. The difference between these two “parties” is not, as the media would have it, the difference between globalizers and anti-globalizers. Globalization – in the sense of people exchanging goods and ideas with each other has been going on for several thousand years and will continue. Neither is it a concern with “social” as opposed to the “economic” issues. The meeting in Porto Alegre was also about economics – an economics that serves society, rather than one that is served by society. In that sense, the core contention between Davos/New York and Porto Alegre is over the rules of the global marketplace – and who will set them.

Because the Investor Protection Party dominates the global financial institutions, the party in opposition has little real access to forums, which might force those institutions to seriously consider alternatives. Demonstrators can temporarily obstruct the workings of the global institutions’ managers. But as the WTO showed by moving its last meeting to Doha, international agencies have the resources and the will to circumvent street demonstrators.

As a consequence, the leaders of the NGOs, trade union, anti-poverty and religious groups in opposition find themselves drawn into largely fruitless efforts to achieve social justice by lobbying the IMF, the WTO, the World Bank, and other finance and development institutions, which have no intention of making significant change in their program. NGOs may be put on public advisory committees, but the real work goes on in private where representatives of multi-national businesses negotiate the rules.

The Party of Opposition is thus constantly forced back into a defense of national sovereignty as the only available instrument for achieving social justice. Yet sovereignty is steadily eroding under the relentless pressure of global markets. Moreover, a nationalist politics undercuts the cross-border cooperation needed to balance the cross-border political reach of business and finance. Nationalism perpetuates the myth that national identity is the only factor in determining whether one wins or loses in the global economy. It obscures the common interests of workers in all countries when faced with the alliances of investors in rich and poor nations that now dominate the global marketplace.

Still, human rights and social justice will become part of the “constitution” of the global marketplace only when enough nation-states demand it. Therefore, if the global opposition is to develop an alliance of its developing and developed country wings, it must pursue a common global program for working people of all nations that reinforces their national struggles for economic and social equity.

Such a program would support national democratic movements and leaders who understand that national social contracts cannot be maintained in a global market that lacks one of its own, and that a global social contract cannot be established in the absence of effective social democracy at the national level. The global opposition cannot demand “democracy” at the IMF and not within the nations that belong to it.

The strategy for labor must change the framework of current global political debate in which the investor class pursues its interest across borders, while the working class is constricted by those borders. The creation of a true global alternative requires a perspective through which the interests of workers in all countries are linked. In a global marketplace, workers’ living standards increasingly rise and fall together. When workers in Brazil win a wage increase, it raises the bargaining power of workers in Germany. When workers in Indonesia improve their working conditions, workers in Nigeria benefit. Likewise, when the social safety net is strengthened in one country it helps those struggling for human economic and social rights in other countries as well.

So long as the struggle is seen as a struggle of nation against nation, the Party in Opposition will never be able to mount a credible alternative to the Neo-Liberal paradigm. Only when workers in all countries see that they ultimately have more in common with workers in other nations than they have with the owners of capital in their own country, will they be able to organize effectively. When investors are faced with similar demands for decent pay, healthy working conditions and human dignity at the workplace everywhere, they will be forced to have a serious debate about the economic future of the planet.

Trade Unions’ Role
The definition of the global working class cannot be restricted just to unions. Nonetheless, the free trade union movement – that is, the movement of unions democratically elected by workers and accountable only to their membership – play a crucial leadership role for the world’s workers. Labor unions are strategically important in part because they have the power to deny capital the human resource that is necessary for the generation of profits. The capacity to strike is the ultimate threat to the investor class.

And just as the Party in Opposition needs the support of organized labor, so labor needs the support of the NGOs and other organizations that rise in opposition to the neo-liberal program.

In recent years, trade unions and other parts of the Party in Opposition have been working closer together. The coalition of workers and environmentalists in Seattle in 1999 symbolized this effort. And in local struggles against multinational corporations around issues of privatization, pollution and injustice all over the world reflect similar partnerships. One recent example is the coalition of U.S. and Mexican union activists and university Students Against Sweatshops that forced a company producing for Nike to recognize an independent trade union whose leaders had been persecuted for protesting abominable working conditions.

Through the International Confederation of Free Trade Unions and its regional networks, unions have stepped up their efforts at global collective bargaining and joint organizing campaigns against multinational employers. The global trade union movement was crucial in the struggle against apartheid in South Africa and dictatorships in Korea and Indonesia. Today, unions all over the world are aiding in the struggle against oppression of workers’ voices, from Burma to Colombia to Zimbabwe.

To move the partnership
forward, the opposition will need to pay attention to areas that have sometimes divided trade unions and their allies in the developing and developed economies.

One example is the tension over labor rights and standards in international trade and investment agreements. Although virtually all trade unionists and their allies support such rights and standards, many in the Third World see the effort to enforce them with trade and financial sanctions as a vehicle for first-world protectionism.

As one Asian economist observed: “The U.S. Treasury runs the International Monetary Fund, and for years urged them to make loans to dictators who squandered the proceeds and are now dead, or retired in the South of France. Then the IMF tells us that the only way to pay their debts is to increase exports made with our cheap labor. When we do, U.S. unions complain that we are undercutting labor standards.”

On the other hand, trade unionists from developed countries see their third-world brothers and sisters as being too willing to align themselves with multinational capital in opposing social protections through trade and financial agreements. They are skeptical when those in developing countries who claim to be supportive of human rights resist economic sanctions – which, in practical terms, are the only way to preserve those rights.

One strategy for overcoming this disagreement is to design a “grand bargain” that gives the working people in both developed and developing countries what they need. The bargain starts with the distinction between rights and standards.

Collective bargaining is a right that every worker is entitled to, regardless of how rich or poor is his or her society. The wages and benefits that a union settles for, however, will depend on what the particular enterprise can pay. Likewise, all workers should have a right to a minimum wage. But the level of that minimum wage will depend on the economic development level of the country or region.

Once that distinction is understood, it may be possible for labor organizations and their allies in all countries to reach agreement that would provide enforceable labor rights in exchange for guaranteed commitments of long-term development aid and debt relief. Thus, the developed world would get protection for its social standards, and the developing world would receive the flexibility and capital investment it needs for growth. Incidentally, the issue of labor rights and standards is not just an issue for developing countries but developed ones as well.

This “grand bargain” that links development with broadly increasing living standards would be connected to planning for sustainable development to create the program elements for a global social contract. Other elements would include:

  • Flexible Development. The one-size-fits-all policies of the international financial agencies have not only failed to produce faster growth, they have allowed the leaders of recipient countries to escape responsibility for their own policies by blaming all their problems on the IMF or World Bank. Therefore, once human and political rights are ensured, countries should have the flexibility to choose their own development path, for which their leadership should be held accountable – to their citizens.
  • Winners Compensating Losers. As long as workers who have to bear the costs of open markets expect that they will be abandoned by the society that profits at their expense, they will resist globalization. So countries need social policies that compensate those who must pay for the benefits of economic integration. Such policies would include increased public spending on health care for the uninsured, worker retraining, adequate pensions, and community redevelopment, as well as more generous unemployment compensation and wage insurance to cushion the blow of moving to lower-paying jobs.
  • Regulated Finance. Volatile financial markets must be tamed. Since no system of global banking regulation is in sight, the simplest solution is the “Tobin Tax” – a tax on international financial transactions. The proceeds would be used for long-term investments in education and health care in poor countries. Such a tax, which has the virtue of being easily understood and can be administered with minimal bureaucratic discretion, is already supported by many influential people around the world. Several years ago, in fact, the government of Canada proposed a discussion of the Tobin Tax for the agenda of the Group of Seven (the major economic powers) meeting in Halifax, but the U.S. Treasury quickly quashed the idea.
  • Coordinated Economic Policy. A fully functioning global economy – like a fully functioning national economy – needs central banking and counter-cyclical public budgets in order to maintain overall growth. But there will be neither a global central bank nor a global government budget for a long time, so these functions must be performed by the governments of the three largest economies – the United States, Europe, and Japan – acting together. Having pressured the world into a system of brutal competition, the major powers have an obligation to maintain sufficient global demand with low interest rates and other macroeconomic policies. Putting pressure on their governments to act is the special responsibility of worker organizations in those countries.

Regionalism and Democracy
Although international cooperation among those in the opposition is certainly growing, in a world of about 190 separate countries (most of which are desperate for investment) and more than six billion people (most of whom are poor), the development of a global political movement powerful enough to bring the investor class to the bargaining table is clearly a long way off.

Nevertheless, it is not so difficult to imagine an effective cross-border politics among limited groups of countries in subglobal geographic regions. People who live in countries in the same region tend to have more in common with one another. Language barriers are not as great. Culture is similar. And trading relations are usually the strongest. From a development perspective, regional clusters of nations can provide the economies of scale so that small third-world countries can take advantage of new technologies. From a political perspective, a path to global integration built on expanding regional markets could provide a more accommodating arena for a social-democratic alternative.

Indeed, regionalism has long been a project of the mainstream left around the world. The European Union grew out of a French socialist’s dream of burying Franco-German enmity. African regionalism was the vision of the late Julius Nyerere of Tanzania as a way of progressing beyond tribalism and colonialism. In Latin America, there is a history of efforts to bring together economies in the Southern Cone, in the Andes, and in Central America.

Attempts at regional integration of less-developed countries have failed more often than not, in part because ruling economic oligarchs and their foreign-investor allies are threatened by the bidding up of wages and costs that comes from a more diverse economy. Thus, the United Fruit Company-and, therefore, the U.S. State Department-was unenthusiastic about the regional integration of the Central American economies because it would have created competition for labor and weakened the politically conservative oligarchs that run those countries.

On the other hand, the European Union illustrates the greater potential for sustained economic integration when policy is focused on the development of a diverse domestic market. The extent of social protection in Europe and the rich debate over the restructuring of a continent-wide social contract reflect a comprehensive notion of economic integration as a tool for political and social development. Ironically, the European Union was inspired by U.S. economic history, which can be read as a process of regional integration supported by a federal constitu
tion that nurtured (not without struggle) the growth of trade unions, civil rights, and a modest welfare state.

This more comprehensive approach stands in stark contrast to the North American Free Trade Agreement (NAFTA), which the U.S. government is now holding up as the model for development in all of the Western Hemisphere. In NAFTA development is narrowly defined as an expansion of the volume of goods and money that flow across the border. Accordingly, the arrangement gives extraordinary protections to investors but leaves labor, the environment, and consumers to the mercies of the deregulated markets. As a result the benefits have largely gone to capital, while labor has borne the cost of dislocation, increased insecurity, and an overwhelmed public infrastructure on both sides of the border.

Whether NAFTA was worth this cost is a subject of partisan debate in each nation. But one thing is certain: NAFTA is incomplete. Deliberately so, of course; had its promoters revealed NAFTA for what it was – the first step toward economic and political integration of the three nations – it would have been soundly rejected in each country. Be that as it may, there is no going back. Supporters of the Washington Consensus are already pushing to consolidate their agenda for the North American economy, with proposals to adopt the U.S. dollar as currency in Mexico and Canada as well as an updated version of the infamous bracero system in which the U.S. government would provide American employers with Mexican workers whose docility is guaranteed by the threat to ship them back home.

Mexico’s new president, Vicente Fox, has explicitly called for the transformation of NAFTA into a wider continental agreement. He wants to open up the border to more immigration and to receive aid for schools, roads, and infrastructure from the United States and Canada similar to the “social cohesion” funds that the richer countries of western Europe provide to Spain, Portugal, Ireland, and Greece to help them grow faster.

These initiatives provide an opening for a trinational coalition of progressives to offer its own continental grand bargain that reflects the interests of working people in all three countries. In such an arrangement, the United States and Canada would agree to make capital available for sustained public investments and Mexico would agree to the enforcement of labor and environmental standards, which would rise as the country’s income grows (Faux 2000).

The advantages of starting a visible and transparent political debate over North American integration could spill beyond the continent. In light of the influence of the United States, it might give hope to many people around the world who are struggling with the consequences of a mismanaged global market-a sense that even here, in the heart of the Washington Consensus, an emerging alternative vision foreshadows a globalization that works for everyone.

Conclusion
The failure of the neoliberal paradigm and the growing imbalances of the world’s leading economy suggest that it is time for a rethinking of the politics of the global marketplace. Key to that understanding is recognition of the class dimension of the global political economy.

A major strategic task before us is the strengthening of the alliance of working people – North and South, East and West – through a common program. This should rest on a “grand bargain” in which the interests of developing and developed country workers are served. Such a grand bargain for labor would also help raise consciousness among the majority of the world’s citizens of the need for international solidarity with each other.

The task is difficult. But the world’s working majority has two great advantages.

One is that it is the vast majority – in every country. The second is that the world’s workers are indispensable. One can imagine a world without multinational investors. It is impossible to imagine a world without workers.

Bibliography
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Faux, Jeff and Lawrence Mishel. 2000. “Inequality and the Global Economy.” In Will Hutton and Anthony Giddens, eds., On the Edge: Living With Global Capitalism. London, U.K.: Jonathan Cape Publishing.

Faux, Jeff and Robert Scott (U.S.), Carlos Salas (Mexico), and Bruce Campbell (Canada). 2001. NAFTA at Seven: Its Impact on Workers in all Three Nations. Washington, D.C.: Economic Policy Institute

Faux, Jeff. 2000. Time for a New Deal with Mexico, The American Prospect, October 23.

Faux, Jeff. 2001. “The Politically Talented Mr. Greenspan.” Dissent, Spring.

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Rodriguez, Francisco and Dani Rodrik. “Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross-national Evidence” in NBER Macroeconomics Annual 2000. MIT Press 2000.

U.S. Trade Deficit Review Commission. 2000.The US Trade Deficit:Causes, Consequences, and Recommendations for Action.Washington, D.C.

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Endnotes
1. Although the U.S. and Eurozone economies are different, the U.S. experience may help shed some light on the European debate over “structure versus macro economic” roots of high unemployment rates there. The structural claim is that too many workers in Europe are unemployable, i.e., lack the skills and attitudes needed for the “New Economy.” In the early 1990s a similar claim was made about workers in the United States. Yet by pursing more expansive macroeconomic growth policies, the U.S. economy in the 1990s was able to absorb many people into the labor force that were previously considered unemployable.

[ POSTED TO VIEWPOINTS ON APRIL 15, 2002 ]

Jeff Faux is president of the Economic Policy Institute in Washington, D.C.


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