Commentary | Wages Incomes and Wealth

Toward a Global Social Contract

Share this page:

Opinion pieces and speeches by EPI staff and associates.


Toward a Global Social Contract

The politics of the global economy

by Jeff Faux

“We are no longer writing the rules of interaction
among separate national economies.
We are writing the constitution of a single global economy.”

Rinato Ruggiero, former general secretary
of the World Trade Organization

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.” ¹

Therefore, every market system has a politics. The expanding global market system is no exception.

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 a 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 Mexico, 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, Mexican, or American.

A parallel can be drawn from the historic development of politics in national democracies. Typically, when nation-states are established, their domestic politics center around regional conflicts. But as regional markets consolidate into national economic systems, political issues more and more cut across traditional, sub-national boundaries.

For example, roughly a century and a half ago, the U.S. economy was a group of regional markets regulated by individual state governments. Then, changes in transportation and communications technology enabled businesses to expand into huge continental corporations, beyond the capacity of the states to regulate them. These giant concentrations of capital monopolized markets, exploited workers, and dominated state governments in different parts of the country, making regional distinctions less important in defining the critical economic issues. Gradually, cross-regional popular movements arose. They succeeded in winning a national social contract of anti-trust law, labor and consumer protections, social insurance, and other elements that both stabilized the economy and cushioned working people against the sharp edges of the market’s “creative destruction.”

In the U.S. case, these popular political movements were made possible by the prior existence of a national constitution that matched the geographic scope of the new national economy. Just as important, the constitution contained a Bill of Rights that protected ordinary citizens against oppression by the individual states. The constitution provided the framework for the creation of the social contract.

There is no political constitution to match the growing global market. Instead, we have separate piecemeal institutions with insufficient authority to manage the global economy, but with enough authority to shift income and wealth to the multinational investor class whose interests they serve. As a result, globalization has been defined and pursued primarily as a matter of finance, with the social contract dismissed as outside the mandate of these institutions.

The International Monetary Fund (IMF), for example, is not a central bank for nurturing global growth and stability. It is rather a shallow-pocket lender, conditioning its loans to troubled nations with austerity and anti-labor policies aimed at giving debt repayment through exports priority over 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. The 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. Even among developing nations, there is a hierarchy of clients. In the words of one World Bank official, “You can kick around a country like Costa Rica, but not one like Indonesia.”

Likewise, the World Trade Organization (WTO) has evolved from a forum for the gradual reduction of trade barriers to a powerful champion of the right of international investors to override national sovereignty. The WTO insists that it is pursuing the pure ideals of “free trade.” This is disingenuous. The WTO is a system of “protectionist” rules — protecting the property of global investors while weakening the rights of governments to protect their workers, their public health, and their environment.

Both the international financial institutions (IFIs) 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 international organization charged with protecting workers’ rights – the ILO – has no enforcement power. Not surprisingly, globalization has resulted in a shift of income and economic power from workers to investors throughout the world.

It is upon this set of narrow, inadequate and imbalanced institutions that the leaders of the advanced nations are trying to build a global order.

The Global One-Party System
Despite their legislative-like appearance, the meetings of the international agencies like the WTO, the IMF/World Bank, etc., are less like democratic parliaments and more like the conventions of a political party in a one-party system. The government officials, the corporate executives, trade lawyers, and journalists who attend and do business with each other at the receptions and dinners belong to a multinational political class that is attempting to create a global constitution in its own interest. It could be called the Neo-Liberal Party, the central purpose of which is to put political pressure on the world’s governments to deregulate labor markets, privatize government functions, and liberalize finances.

This Neo-Liberal Party includes the leading figures of the world’s important economies, whatever might be their rivalries at home. Both Margaret Thatcher and Tony Blair are
members, as are George Bush and Bill Clinton, Helmut Kohl and Gerhard Schroeder. Indeed, the leadership of most of the world’s nations have accepted – even if reluctantly — the Neo-Liberal Party’s claim that it speaks for the market. Populist candidates — from Bill Clinton in America, to Fernando Cardoso in Brazil, to Kim Dae-jung in South Korea – may gain office by criticizing the maldistribution of market-driven benefits (e.g., in Clinton’s case, he campaigned on the slogan that “Americans are working harder for less”). But once elected and faced with threats of a stock market crash, a capital strike, or a currency flight, they quickly pledge to give over the management of their economy to the “market,” as interpreted by the managers of the world’s largest banks and business corporations, convinced that – as Margaret Thatcher memorably put it — “There is No Alternative.”

The set of policies that follow from neo-liberal ideas are sometimes referred to as the “Washington Consensus” because they have been promoted by the World’s remaining superpower. Therefore it is no accident that the meetings of the multinational trade and finance agencies have the flavor of American political conventions. As such, the business presence at these meetings is highly visible. The costs of the last WTO meeting in Seattle, for example, were not financed by the attending governments — or even the host U.S. government – but by a business committee chaired by the CEOs of Boeing and Microsoft. A donation of $250,000 bought, among other things, the right to bring five guests to a dinner with the trade ministers. Similarly, at the annual meetings of the IMF and World Bank, the most important receptions, dinners and meetings are those sponsored by the large financial corporations. Jerome Levinson, former General Counsel to the Inter-American Development Bank observes: “Years ago, investment bankers would be lined up outside the hotel suites of Third World finance and trade ministers, vying for business. Today, it’s the government officials who stand in the corridors waiting for an audience with Goldman Sachs or Credit Lyonaise.”

The Neo-Liberal Failure
The premise of this finance-driven agenda is that any costs of global deregulation – i.e., the abrupt and massive dislocation of workers and communities – will be “transitional” and more than compensated for by the increase in overall economic growth. But even before the 1994 Mexican peso crisis and the 1997 East Asia financial crisis, the evidence clearly showed that neo-liberalism was not working — even on its own terms. For example, in a 1995 study for the United Nations, British economist John Eatwell pointed out that financial liberalization was supposed to:

• move savings from developed to developing companies
• lower the costs of borrowing
• reduce risk through new financial instruments
• increase economic growth

But more than a decade after financial liberalization accelerated in the 1970s, exactly the opposite happened. Savings flowed from poor to richer countries, interest rates generally rose, risk rose, and economic growth throughout the world slowed down for the vast majority of countries. Since Eatwell’s study, the performance of these measures have generally deteriorated further.

The income gap between rich and poor countries has gotten worse. The world’s poorest remain mired in debt and trapped in a downward spiral of poverty and social disintegration. Nations in Sub-Saharan Africa, for example, spend more on annual debt repayments than they do on education and health combined. In Zimbabwe — not the poorest nation — real incomes have fallen 37 percent since 1991, 25 percent of the country’s population has HIV/AIDS, and a fourth of its national income goes to pay off debts.

Within countries, although the data are not as reliable, the evidence is that the distribution of income, wealth and political power has worsened. Certainly, the world’s labor markets — in both developed and less developed nations — have become less stable.

An insight into the impact of the present mode of globalization on domestic income distribution is revealed by looking at the experience of the United States and Mexico. Together, they should represent the best possible conditions for the success of the neo-liberal model. The United States is said to be the model in its most advanced form. Mexico, in transition from an inward, regulated economy to an outward deregulated one, has clear advantages over other “emerging” markets. First, it has access to the largest most lucrative consumer market in the world. Second, the long mutual border provides an immigration safety valve to alleviate the stress of excess unemployment. Third, as the bailout of Mexico’s creditors in 1995 demonstrated, the United States and therefore the IFIs will provide foreigners who invest in Mexico special protection.

In both of these “best case” examples, despite their obvious differences, the impact of the globalization of the last 20 years on workers has been remarkably similar. In both cases the major economic benefits have been in lowering the rate of inflation — although in the case of the United States the effect has been quite modest — and a substantial increase in stock market prices and financial speculation. Enormous fortunes have been made at the top, with the inevitable “trickle-down” to some workers at the bottom. In both cases, the broad trends in real income, income inequality and poverty have been similar over the last four decades. In the roughly 20 years before the acceleration of financial liberalization, median real wages rose, inequality narrowed, and poverty diminished. In the 20 years since, all of these trends have worsened. In Mexico, large numbers of rural people have been dislocated and communities destroyed. In the United States, the normal dislocation of workers through the workings of the market has been accelerated, and social welfare programs eroded. In both cases, therefore, the Washington Consensus model of global integration has led to a widening of the income gaps and an increase in economic insecurity.

In response to their critics, the spokespeople for neo-liberalism assert that it will just take more time for the benefits to materialize. After all, Western Europe, the United States, Japan, Canada, and Australia took decades, if not centuries, to reach the state of advanced development. True, but none of these countries created their prosperity on the neo-liberal model. All of them employed protectionism (coupled in many cases with economic colonialism), state-directed industrial policies, and subsidization of the transition of labor from agriculture to industry. Thus, despite their appeal to history, there is little historic evidence that neo-liberalism is a path to national prosperity.

The United States in particular is typically cited as proof that neo-liberalism works. Indeed, it is often called the “American” model, in contrast with the European model in which capitalist markets are said to be excessively burdened with social democratic policies. But this American model presented by the Neo-Liberal Party to the rest of the world is a distorted picture of how the U.S. economy actually works. It is a projection of the hopes and ideals of neo-liberalism, rather than an accurate picture of reality.

For example, neo-liberals point to the great gaps between rich and poor in the United States as the price that must be paid to spur labor mobility among the poor and less educated workers, which will lead to higher productivity and growth. But the latest data show that economic mobility among low income workers and poor families is actually lower in the United States than in most European countries. Indeed, the so-called more “flexible” U.S. labor market has higher relative unemployment rates for less educated workers among all OECD countries. And over the decade of 1987-1997 (the last years for which comparative data is available) productivity growth was higher in virtually every western Europ
ean nation than in the United States.

The secret of the recent success of the U.S. economy cannot be found in its more “flexible” workforce. After all, American labor markets were always more flexible, even in the days when European unemployment rates were consistently below those of the United States. Moreover, in the decade of the 1990s, relative to Europe, the U.S. labor force actually became less flexible with the imposition of a number of new laws restricting employer rights and a more vigorous enforcement of existing labor protections. The recent U.S. high rates of growth are a result of low savings rates, profligate borrowing, heavy government investment in technology (in this case through the military budget) and, in the 1990s, the Federal Reserve’s willingness to keep interest rates low. Most of all, it lies in the strength of the U.S. dollar derived in part through its use as a currency reserve and a medium of international payment for oil and other commodities. As a result, the United States is now running a current account deficit of over 4.5 percent, a condition that would bring down the wrath of the IMF on other economies.

The persistence of claims for the American model is in part attributable to the one-party system that dominates the economic reporting of the world press and subsidizes sympathetic academics all over the world. But it is also the result of a general acceptance, even by critics, of the final argument for neo-liberalism: “there is no alternative.”

Neo-Liberal Economic Governance
After the Asian financial crisis of 1997-1998, the Washington Consensus engaged in intense debates over whether the specific cause of the crisis was “crony capitalism,” IMF miscalculations, the earlier devaluation of the Chinese currency, or some other cause deemed to be exogenous to the neo-liberal model. These tended to obscure two broader lessons from the crisis.

First, the crisis further exposed that the priority of the Washington Consensus was the promotion of the narrow interests of finance capital. When the crash came, the IMF/U.S. Treasury covered losses of multinational banks with loans that put developing nations deeper in debt. At the same time, they forced nations into domestic austerity to assure that tax revenues would first go to debt repayment. When domestic demand collapsed, desperate Third World economies had no choice but to lower wages even further in order to expand exports.

Second, the crisis showed that the managers of the Washington Consensus do not understand the deregulated global market they have created. They were caught flat-footed by the burst of the Mexican financial bubble in late 1994. They bet wrong again and on a larger scale in Asia three years later, when countries that had been pushed to operate their economies by the Washington Consensus rule book suddenly collapsed. And in Russia, they forced a radical free market “shock therapy” on an already demoralized society with disastrous consequences. In each case, policies were based on confident predictions of a sustained boom in this or that “emerging market” only to have the market submerge.

The notion of the Washington Consensus that it could create functioning markets without strong regulatory institutions has proven embarrassingly naïve. From Russia to Mexico to the Far East, privatizations demanded by the IMF have shifted hundreds of billions of dollars in public assets to crooks and oligarchs. Nor does “crony capitalism” stop at foreign borders; evidence mounts of the looting of aid to post-communist Eastern Europe that involved New York banks, Harvard consultants, and contributors to U.S. presidential campaigns.

In its defense, the Washington Consensus now acknowledges its ignorance. Stanley Fischer, the American economist who is second in command at the IMF, says that despite its army of a thousand economists, his agency 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.”

Thus, the global economy is now governed by ad hoc crisis management and high-wire policy acrobatics: IMF officials flying to Third World capitals in disguise, multibillion dollar loans made in New York hotel suites, and late-night phone calls from vacationing U.S. Treasury officials to the world’s financial tycoons.

Shortly after he left the U.S. Treasury, Robert Rubin told the Washington Post that in the midst of the crisis, as South Korea was hemorrhaging reserves, “There was a moment when I thought it could come undone.” But Rubin then called a group of eight to ten personal friends – CEO’s of major international banks. “It was a delicate call,” said Rubin, “the Treasury has no power to direct them to do anything.” But they put up the money and the tide was turned.

This “crisis-management” style has several advantages for the Washington Consensus. The drama of government leaders and bankers riding to the rescue of collapsing markets obscures the evidence of systemic failure. The only priority is to restore investor confidence. When the crisis is over, the policymakers turn to other issues, and the opportunity for serious public debate is lost – until the next crisis, when the high-wire act must be performed again at still higher levels of risk.

Having convinced themselves that the crisis was caused by corrupt alliances between government and locally owned banks and businesses, Clinton, Blair, then secretary of Treasury Robert Rubin and others demanded new rules for transparency, improved accounting standards and the breakup of national cartels and Keiretsu-style arrangements.

If the western financiers seriously wanted to impose quality and behavior standards on international financial markets, they would certainly have been able to do so in the late 1990s. But in reality, they were unenthusiastic. Indeed, they themselves were buying up developing country financial assets and creating their own “crony” relationships with government officials and local oligopolists . Gradually the financial markets recovered. Clinton and Blair stopped talking about reforms, Rubin went to work for Citibank and little was done. Crony capitalism was globalized.

The Neo-Liberal Party has thus been hoisted on its own petard. In the name of a global economy it has organized multinational capital to liberate markets from the regulatory authority of nation-states. But new global financial regulations are needed to support the global economy, which international capital is unwilling to permit.

Spokespeople for the Neo-Liberal Party now grudging admit that the benefits have shifted to the top and the costs to the bottom. The business press in developed nations has increasingly acknowledged the stubborn persistence of poverty, and spreading dislocation. Some have cautioned that these trends could lead to social unrest and a threat to corporate property. Among political leaders – even champions of the Washington Consensus like Clinton, Blair, and Camdessues now regularly refer to those whom globalization has left behind. James Wolfensohn, president of the World Bank has said it most bluntly: “At the level of people, the system is not working.”

But the contradictions of neo-liberalism cannot be resolved simply by trying to sensitize the existing leadership of the IMF or the WTO to the problems that their policies create among the poor. However compassionate individual bureaucrats might be, however many soul-searching seminars they might have with labor unions, NGOs, and church groups, they do not have the power to make a significant shift in the policies of their own institutions. James Wolfensohn may well believe that the system is not working for most people, but the moment that he makes an effort to change that system, he will be an ex-president of the World Bank. Indeed, when Joseph Stiglitz, the World Bank’s chief economist began to criticize the neo-liberal model, U.S. Treasury Secretary Summers gave Wolfensohn a
choice: either he must fire Stiglitz or he, Wolfensohn, would not be reappointed. Stiglitz was fired.

Neither can a global social contract be imposed by solidarity among the leadership of the world’s developing nations. Our recent history is littered with thick resolutions and demands from conferences of the leaders of developing nations that have been politely ignored. Even efforts to organize commodity cartels and debtors’ alliances have been unsuccessful. The Washington Consensus has a proven ability to isolate and/or co-opt Third World leaders who attempt to challenge its authority.

The discussion of change remains stuck on the assumption that global politics is exclusively an issue for nation-states. Says Horst Kohler, the new head of the International Monetary Fund, “We have to tackle the selfishness of wealthy countries.”

Thus, the issue is framed as a question of “charity” – the moral obligation of rich countries to poor countries. This convenient moral posture hides the reality that there are poor people in rich countries and rich people in poor countries. As the social contract in rich countries deteriorates, political resistance to more than a token increase in foreign development assistance will grow. Certainly there has been no interest in the Neo-Liberal Party for a more general transfer of wealth from rich people to poor people. In any event, nothing as important as the distribution of economic power in the global economy is going to be resolved through acts of charity.

The Opposition
The weakness in the Neo-Liberal Party’s performance has emboldened and expanded the scattered opposition to its one-party rule. This opposition to the Neo-Liberal Party has two wings. One is based in the developed world, and symbolically represented by the coalition of trade unionists, environmentalists, religious activists, students and other civil society groups that disrupted the Seattle meeting of the WTO in late 1999. Although this “Seattle Coalition” represents different constituencies — often in the case of labor unions and environmentalist, groups that have in the past been opposed to each others’ agenda — over the past years there has been a remarkably successful effort to join together, across borders, to oppose the neo-liberal vision of globalization.

The same forces that have eroded national borders — the revolution in communications technology, the declining cost of travel, and rising education levels — have dramatically extended the capacity of grass-roots organizations to both think, and act, globally. Thus, trade unions serving workers at the same multinationals in various countries have coordinated organizing campaigns. Worldwide environmental networks have herded nations into a global warming treaty, and civil society activists have forced an international treaty banning land mines. Religious and civil society groups have successfully pressured the World Bank and the IMF to forgive the debt of some of the world’s poorest nations. Even prior to Seattle, an international coalition of labor and environmental activists succeeded in scuttling the proposed Multinational Agreement on Investment, which would have further ripped apart the ability of governments to regulate the flow of money in and out of their countries.

The other wing of the opposition to the Neo-Liberal Party is located in the developing world — where most of the globe’s citizen’s live. It includes a wide range of people — from peasants being forced from the land by corporate agriculture and mining, political leaders humiliated and disempowered in their own country by international financial corporations and bureaucracies, civil society organizations fighting for human rights and democracy and trade unions struggling for give voice to the working class.

Despite the efforts of neo-liberals to brand their opponents as “protectionists,” “luddites,” and people who are opposed to trade, the overwhelming majority of the opposition is not opposed to globalization per se, but rather to the particular path to globalization dictated by the party of neo-liberalism.

In fact, the shrinking of the globe has brought advantages to those who struggle for democracy. Globalization has introduced new ideas and catalyzed new ways of thinking that have helped liberate individuals, nurtured democracy and protected human rights. The ability of subjugated people – from oppressed ethnic groups in particular countries, to women in almost all countries – to make their case to the world through the internet and television has in many places put constraints on tyranny and brutality.

In any event, there is a growing, if fragile, experience of cooperation among the populist movements in developed and developing countries. In Seattle, for example, trade unionists from 50 developing countries joined in the protest. Leroy Trotman, the Barbados union leader who chairs the International Confederation of Free Trade Unions, said in a speech to a workers rally: “This isn’t North against South, or privileged workers against the poor. It is the workers of the world standing together to call on the WTO for justice.”

The position of national political leadership in the developing world is more ambivalent. Third World politicians chaff against the arrogance and power of the First World politicians and businessmen, and at international meetings of the United Nations and the G-77 they regularly grumble about western imperialism. At the same time, they are a privileged caste who enjoy the benefits of a partnership with the world’s rich and powerful. The individuals who negotiate trade and investment agreements formally represent different national interests. But globalization has brought their perspectives and personal career paths closer together. At a conference at the Council on Foreign Relations in New York – an organization at the heart of the Washington Consensus – a retired U.S. State Department official bluntly explained the neo-liberal alliances. “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.”

Even those in developing countries who struggle for labor and human rights in the context of their domestic politics are often hostile to efforts to include social protections in trade and financial agreements. As many see it, the First World forces their countries to surrender sovereignty over finance. Then they send in the IMF to force them to adopt austerity budgets, surrendering even more sovereignty. As a result, the developing countries have to increase exports in order to survive, which means cutting costs. Then they hear First World labor unions and environmentalists complain that they are cutting costs too much and therefore should surrender sovereignty over labor market and environmental policies. This leads to the suspicion that the Seattle Coalition is more interested in protecting its members’ quality of life than in global social justice.

For their part, many trade unionists and other First World activists see their Third World equivalents as being too willing to ally themselves with multinational capital in opposing social protections through trade and financial agreements. First World activists are skeptical when those in the Third World who claim to be supportive of human rights refuse to consider economic sanctions, which in practical terms is the only way to enforce those rights.

The antagonism over labor rights and social standards between the two wings of the opposition to the party of neo-liberalism strengthens the hand of global capital. Leaving these policies in the hands of national governments which are severely constrained by the export-led growth policies imposed on them from the outside, ensures that capital will have a virtual free hand in exploiting labor and the environment in the Third World. And the existence of protectionist politics in the First World gives corporations more b
argaining power to force concessions out of Third World governments, as well as provide domestic support for export subsidies.

The Seattle Coalition’s ability to get beyond protest is also crippled by differences between those who want to abolish the institutions of globalization, and those who want to regulate them. Both are caught in contradictions. The “Abolitionists” are faced with the reality that most nation-states have even less ability to withstand the power of global finance than do the global bureaucracies. Without such institutions, the global economy would lack any capacity to keep an increasingly unstable system from falling apart. Just as in the context of domestic politics, populists may attack the policies of the central bank, but there is no credible politics in a demand for abolishing a central bank and leaving the economy to the mercies of an unstable unregulated banking system.

Thus, the “Reformers” have the better argument. But they are also caught in a trap – the classic “catch-22.” ²

• 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

The Democracy Deficits
The dilemma of the “Reformers” is compounded by the absence of a legitimate democratic framework for putting outside political pressure on global institutions. Thus, the only place to discuss the policies of the IMF is at the IMF! As a consequence, the leadership of NGOs, labor unions and religious organizations are drawn into “dialogues” with the IMF that often lead to co-optation.

Despite their good intentions, the NGOs who want to get into dialogue with the multinational agencies do not represent the people they speak for. Neither do many of the national representatives to those multinational agencies who hold power at home through a monopoly of military and economic resources. At the core of the problem of global politics, therefore, is the absence of democracy.

The neo-liberal perspective holds that democracy is a product, rather than an input, into economic development. But, as development theorists from Albert Hirschman to Amartya Sen to Joseph Stiglitz have noted, democratic institutions – both public and private – are critical to the release of entrepreneurial energy and imagination. In the effort by historians to answer the maddening question of why some societies become rich and many remain poor, the role of democratic institutions, values and habits consistently emerges as a fundamental explanation.

But people who insist on the importance of democratic values to development do not rise very high in the hierarchy of global economic governance. The stubborn insistence that economic development is primarily, if not exclusively, a function of private capital investment, enables the Washington Consensus to rationalize opposing the inclusion of effective human and labor rights into the constitution it is attempting to write for the global economy.

When, on occasion, the issues of democracy are acknowledged in the policy debate, they are ignored on the grounds that international development agencies have no authority on these matters. In its most recent World Development Report, the World Bank defined poverty to include “powerlessness and voicelessness, and vulnerability and fear.” But, no one expects the World Bank or any other agency to impose democratic rights as a condition of aid to sovereign governments.

At the same time, the international economic agencies have little problem overrunning national sovereignty when insisting that countries privatize government services, cut corporate taxes, deregulate markets, cut social budgets, resist union demands, and so forth. In many poor countries, candidates are referred to as the “World Bank’s candidate” or “the IMF candidate.” The operations of the international financial institutions support those politicians in developing countries that consider democracy as some future benefit, and therefore less important than the subsidization of private sector investment. This, in turn, reduces the constituency for democracy among developing world leaders, and strengthens the Washington Consensus’ claim that developing nations are not interested in democracy.

Toward a Democratic “Grand Bargain”
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 to the Neo-Liberal Party is to develop an alliance of its developing and developed country wings, it must pursue a common 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 that understand that national social contracts cannot be maintained in a global market that lacks one. Nor can a global social contract be established in the absence of effective social democracy at the national level.

This alliance might be built around a grand bargain, not between First World plutocrats and Third World bureaucrats who meet at Davos, but between the institutions that represent ordinary working people around the globe – who make up the vast majority of the populations of all countries. It would reflect the need of workers in the developing world for investment to support sustained growth and the need of workers in the developed world to prevent erosion of their bargaining power. It would reflect the common needs of all people for a healthy environment. It would reflect a redefinition of economic development that puts democratic institutions at the center.

For example, the following three political goals might be included in a “bargain,” between the two wings of the parties of global opposition.

1. Development aid. A long-term commitment from wealthy countries of aid for infrastructure and social investment, debt relief, and technical assistance to developing countries. In effect, nations whose per capita income is above the median would contribute a certain share of their GDP to an international fund that would distribute it on a per capita basis to those below the median for education, health and other investments. The funds would not be competed for, but would be automatically allocated to the recipient countries. They would constitute an entitlement, but would bring with it strict requirements for transparent reporting, and the protection of human and labor rights.

2. Rights and standards. A commitment from all countries to the five core labor rights of the ILO and to labor and environmental standards that are enforceable through trade and financial sanctions. The core ILO rights are: the right to association and collective bargaining; the prohibition of child and forced labor; and discrimination in the workplace. All nations would be required to have enforceable minimum standards on conditions of employment and environmental pollution. But the actual standards would be set by the political process within the nation. Adherence by all, nations, not just the developing countries, would be required.

3. Global transaction tax. The establishment of an international tax on global financial transactions, whose proceeds would be dedicated to social investment in the developing world. The “Tobin tax” would be designed to slow down the destabilizing short-term movement of capital. It is the regulatory strategy that requires the least bureaucracy and has the added advantage of providing more transparency in the movements of capital. Since workers in all countries lose from the consequences of financial instability, they would all gain for its reduction.

In addition to being a possible foundation for a potential grand bargain, the above propositions also represent a shift of development strategie
s back to providing greater freedom for nations to determine their own development priorities, on the condition that they permit the development of democratic institutions. In this regard, independent trade unions are of critical importance. They are the most important countervailing economic force to the concentration of capital in a market-based society.

Regional Opportunities: the Case of North America
At this point in history, the development of a effective world-wide opposition to neo-liberalism is, to say the least, a daunting and somewhat utopian, enterprise. It becomes nearly impossible to imagine what an international alliance of working people really means in the context of the world’s roughly 190 nations and 6 billion inhabitants.

It is easier to imagine developing models of cross-border politics at the regional level. The European Union is of course far and away the most advanced effort. The struggles over a common social contract have certainly not been won, but there is a genuine region-wide political debate over the future of Europe, and as a result there is more resistance to the excesses of neo-liberalism there than in most other places in the world.

Ironically, another opportunity to develop a cross-border opposition political movement may lie in North America. The North America Free Trade Agreement was in many ways the model for neo-liberalism, and the Neo-Liberal Party claims it is a great success. Canadian, Mexican, and U.S. stock markets have been booming and the rich are getting richer in all three countries. In addition, NAFTA has so tied together the three economies in trade and finance that – as the 1995 bailout of the holders of depreciated Mexican bonds vividly showed – Washington has a bipartisan commitment to placing a safety net under the large investors in Mexico’s financial markets.

But during his recent trip to Washington and Ottawa, Mexican President-elect Vicente Fox has suggested that NAFTA, as currently designed, did not deliver on its promise to raise the living standards of ordinary Mexicans. Indeed, their frustrations helped vote him into office. Even Bill Clinton, who considers NAFTA one of his legacies, has expressed his concern that it did not raise wages in Mexico.

Fox proposes to go beyond NAFTA, to a model more like the European Union. Specifically, he wants to open up the border to more immigration and 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.

At the moment, there is little political support in Canada or the United States for allowing more immigration and taxpayer-funded aid to Mexico. Fox’s proposals were politely rejected by President Clinton and Prime Minister Cretien of Canada, who want to limit the subject of economic integration to trade and finance.

But the discussion may have just begun. In the past, Clinton and Cretien have resisted domestic pressures for a social dimension for NAFTA by insisting that it would affront Mexican nationalism – which they have interpreted to mean that gringos can dictate protections for investors, but not workers. Fox, an unlikely champion of enforceable labor and environmental standards in NAFTA, by proposing to extend NAFTA to labor market issues – including a demand for better treatment of Mexican immigrant workers in the United States and Canada – has undercut the “sovereignty” argument for a narrow vision of North American economic integration. He thus provides an opening for political movements in all three countries that want a more balanced agreement that would address Mexico’s need for faster growth and the concerns in Canada and the United States for worker rights and environmental standards.

This may well be an opportunity for an alliance of labor, NGOs, small farmers and businesspeople, and human rights activists in all three nations to make a counter proposal that might be the basis of a North American social contract.

What might such a North American bargain look like?

For example, the United States and Canada could commit themselves to sustained development assistance to Mexico for education, infrastructure, and environmental clean-up — not just along the U.S. border, but investments in clean air and water in Mexico City and other places in the interior where pollution is even more threatening to people’s health. An increase in legal immigration linked to a greater Mexican efforts to stem illegal crossings could also be offered. And the United States could forgo the annual ritual of certifying that Mexico is making an effective good faith effort in the war against drugs. Inasmuch as neither Republicans nor Democrats have any intention of decertifying Mexico, the process serves no useful purpose. It humiliates Mexico and perpetuates the myth that the source of America’s drug problem lies there, rather than within its own borders.

For its part, Mexico would commit itself to enforceable labor rights — including trade union democracy — and workplace and environmental standards that would rise toward U.S. and Canadian levels as Mexico’s per capita income rose. Citizens of any of the countries would be able to bring action against violators in the court of any other, and trade sanctions could be invoked against both violating companies and violating governments.

The ruling elites of the United States, Canada, and probably Mexico are clearly not interested. The current narrow view of North American integration gives them what they want – protection for capital and cheap labor.

But with credible safeguards, a new North American accord could have wide support in all three countries. For Canadians, it would help protect their generally higher social standards from erosion. In the United States, many in the labor and environmental movements would welcome the chance to support a progressive internationalist program. The prospect of helping build an independent trade union movement in Mexico as an ally in fighting for higher wages and benefits across the continent could be particularly attractive to U.S. labor. In Mexico, it would be in the political interest of Vicente Fox, as well as the Mexican left, to bring democracy to unions whose leaders have been in the pocket of corrupt PRI bosses. Certainly, among average Mexican families, the combination of social investment and an elevation of workers’ rights would be popular.

Those in all three countries whose “internationalism” is limited to finding cheap labor and the freedom to pollute would doubtless oppose. As would those worried about an international agreement that required the United States to raise its own labor and environmental standards, and do a better job of enforcing them. That alone is good enough reason for U.S. labor, which fought fiercely against NAFTA, to consider the possibilities.

Jay Gould, the 19th century American financier once said that he could hire one-half of the working class to kill the other half. There was a bit of truth to this cynical remark. For decades, workers in the United States fought each other more than they fought those who exploited them. The ethnic and racial divisions generated more passion than the division of income and power between labor and capital.

Gradually, American workers began to understand that they had a common plight, and eventually their collective action created a significant, if modest and incomplete, social contract to the U.S. economy.

The task for progressive researchers and analysts in this global economy is to help the people who must toil for a living in all countries overcome their ethnic and national differences, and assist them in understanding that workers in all countries have similar basic interest. When income, dignity, and conditions of work are undercut in one part of the global economy, it will eventually be cut in others as well.

Understanding the importance
of ideas in an increasingly information-driven world, the Neo-Liberal Party has created a global “echo chamber” to propagandize their ideas. It resonates in newspapers, television, on the web and especially in parliaments all over the world. It is time for a serious effort to challenge those ideas, and bring together the working people of the developed and developing world to lay the foundation for a global economy that works for all.

September, 2000

¹ Harold D. Lasswell Politics: Who Gets What, When, How. (1936)

² From the novel of World War II by Joseph Heller. Catch-22 was as follows: Not wanting to remain in the was rational. Therefore acting insane in order to get a discharge was rational. Therefore those who acted insane would not be discharged because to act insane was rational.


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

See related work on Wages Incomes and Wealth

See more work by Jeff Faux