Opinion pieces and speeches by EPI staff and associates.

THIS PIECE ORIGINALLY APPEARED IN THE AMERICAN PROSPECT ON DECEMBER 6, 1999.

Slouching toward Seattle

by Jeff Faux

Every economic system develops a politics around the institutions and rules that govern it. The economic system now being created by the relentless merging of the world’s markets will be no exception. But what global politics will emerge to match the new global economy?

One place to look for clues will be in Seattle this November 30, when officials representing the 134 nations of the World Trade Organization (WTO) gather to begin another round of negotiations to lower trade barriers. More than tariffs will be on the table. As Renato Ruggiero, the outgoing director-general of the WTO, put it, “We are no longer writing the rules of interaction among separate national economies. We are writing the constitution of a single global economy.”

The Seattle “ministerial” conference has a largely ceremonial purpose: to approve agreements already struck in smaller, less public meetings around the globe. The official business in Seattle will therefore be much like casting votes at a U.S. political convention after the deals have been cut. As at a political convention, the business presence at the WTO meeting will be highly visible. The costs of this official gathering will be financed not by the attending governments but by a business host committee chaired by Boeing and Microsoft. A donation of $250,000 buys, among other things, the right to bring five guests to a dinner with the trade ministers.

The analogy to a political convention is apt. The corporate executives, government officials, trade lawyers, and journalists who will do business with each other at the receptions and dinners and in hotel lobbies are in many ways members of an implicit multinational political association that dominates the management of the global economy. It is the Party of the Washington Consensus.

Made in America
In the world of international economic policy, the term Washington Consensus has come to mean the promotion of the permanent deregulation of the markets for goods, services, capital, and human labor. It is the Washington Consensus because it has been orchestrated by the world’s remaining superpower. At a recent public conference in Washington, D.C., Michael Mussa, the chief economist of the International Monetary Fund, readily acknowledged that the IMF does not make a major decision without first checking with the U.S. Treasury.

Although made in America, the Party of the Washington Consensus includes the leading figures of the world’s important economies, whatever their rivalries at home. Both Margaret Thatcher and Tony Blair are members, as are the Georges Bush and Bill Clinton, Helmut Kohl, and Gerhard Schroeder. Indeed, the leadership of most of the nations represented in Seattle have accepted–even if reluctantly–the Washington Consensus’s argument that it speaks for the market. Populist candidates–from Bill Clinton to Alberto Fujimori in Peru, to Kim Dae-jung in South Korea–may gain office by criticizing the maldistribution of market-driven benefits (“Americans working harder for less”), but once elected and faced with threats of a stock market crash, capital strike, or currency flight, they quickly pledge to let the market manage their economy, convinced that–as Margaret Thatcher memorably put it–“there is no alternative.”

The last trade round, completed in late 1994, was a triumph for the Washington Consensus. The negotiations yielded a major dismantling of national government power to manage foreign trade, to favor domestic over foreign-owned industries, and to protect domestic labor, the environment, and public health. The WTO was established to settle international trade disputes with a jurisprudence designed to promote the rights of private investors. Indeed, for two decades, virtually every major meeting of the institutions who are charged with managing the global economy–whether the WTO, IMF, World Bank, or G-8 economic summits–has shifted more power from governments to multinational business. 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 power of private capital upon which the Washington Consensus is based has, thus far, made the current structure of international economic governance a one-party system. But in Seattle, outside the official and unofficial meetings, representatives of an embryonic global party of opposition will also be gathering. Thousands of people from diverse organizations–such as the International Confederation of Free Trade Unions, representing unions that speak for 124 million workers, the Sierra Club, and United Students Against Sweatshops–will
converge on Seattle for a week of teach-ins, networking, and demonstrations.

The presence of these groups in Seattle reflects the growing internationalism of progressive and populist grass-roots organizations. Internet technology, the declining cost of travel, and rising education levels have dramatically extended their capacity to both think and act, globally. 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 religious and antipoverty groups have successfully pressured the World Bank and the IMF to forgive some of the debt of some of the world’s poorest nations.

In Seattle, disparate groups will hold seminars on the effect of globalization on wages and living standards, the environment, social investment, democracy, and a host of other issues they believe are given short shrift by the delegates. There will also be street theater, marches, and, perhaps, physical confrontation. The Seattle police have stockpiled pepper spray.

An Emerging Opposition
The Party of the Washington Consensus dismisses this opposition as an irrelevant collection of environmental extremists and protectionists who are hopelessly ignorant of economics and stuck in a nationalist past. Some of those who oppose the current form of globalization certainly fit that description (just as some who support it are sweatshop owners and industrial polluters). But the bulk of the political opposition comes from people who understand that they must live, and buy and sell, on an increasingly integrated planet. Their resistance tends not to be against globalization as the natural expansion of the market, but against the Washington Consensus’s effort to impose on the global marketplace a late-nineteenth-century political economy in which the primary purpose of government is to protect the freedom and property rights of corporate investors.

For example, at the May 1999 G-8 economic summit in Cologne, a group of trade union associations, representing virtually all of the functioning independent unions in the world, sent seven recommendations to the convening heads of governments. These included policies for macroeconomic stability, debt forgiveness of the poorest nations, strengthening of social safety nets, financial market regulation, international labor standards, transition help for dislocated workers, and strategies for environmentally sustainable development.

In any national context, this would be a mainstream, liberal, or moderately social democratic political platform. But in the context of the global political economy, such ideas are rejected by U.S. officials as antithetical to either the principles of free commerce or national soverei
gnty. The ostensible concern for other nations’ sovereignty is of course disingenuous. Using trade as leverage, the American government has pressured other nations to accept U.S. notions of corporate intellectual property rights, deregulated financial markets, privatized public services, and other surrenders of sovereignty to the interests of multinational investors.

I have asked several high-ranking trade officials whether the United States would have signed the North American Free Trade Agreement (NAFTA) if Mexico had not agreed to change its constitution to accommodate U.S. business demands. The answer is always “no.” In other words, for the U.S. negotiators, a refusal of Mexico to surrender sovereignty to multinational corporate interests was a deal-breaker; the refusal to surrender sovereignty for worker or environmental interests was not. 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–as the parade of ex–U.S. officials lobbying for foreign countries and firms attests. At a conference in New York at the Council on Foreign Relations–an organization at the heart of the Washington Consensus–a retired State Department official bluntly underlined the fundamental reality. “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.”

Class politics practiced from above generally succeeds when it trickles benefits down to those below. However, the failure of globalization to deliver has caused the political ground underneath the Washington Consensus to shake.

While the debate over the costs and benefits of global deregulation is far from settled, many, if not most, of its serious supporters would agree that so far its costs have proven much higher than predicted and its benefits considerably lower. In particular the income gap between rich and poor countries, which was supposed to narrow with global deregulation, has gotten wider. And the distribution of income within most countries has gotten worse.

A Consensus Unravels

In the United States, the first political reflection of this economic reality was the defeat, in 1997 and again in 1998, of President Clinton’s request for a renewal of his authority to put trade agreements on a “fast track.” The loss was a direct result of the experience with NAFTA, which increased imports from and outsourcing to Mexico, leaving angry unemployed workers and union activists in districts all over the congressional map. The environmental movement–some of whose mainstream organizations had supported NAFTA–also mobilized against this fast track renewal after watching the subsequent expansion of maquiladora firms along the Mexican border produce major water and air pollution.

Last year, the Party of the Washington Consensus suffered another defeat when it failed to pass the Multilateral Agreement on Investment (MAI) in the Organization for Economic Cooperation and Development (OECD)–the 29-member club of developed nations, headquartered in Paris. Among other things, the MAI would have given private corporations legal rights to overturn national laws that inhibit the free flow of capital.

The defeat of the MAI, which The Financial Times called a “humiliating retreat,” revealed the opposition’s growing sophistication. Compared with the U.S. Congress, the OECD is a closed bureaucracy largely insulated from democratic politics. Negotiations among country representatives and business interests were for the most part held in secret, aiming for a done deal to be presented to the world. But outside the guarded meeting rooms, there buzzed an international network of an estimated 600 nongovernmental organizations (NGOs) linked by e-mail and fax that managed to penetrate the closed meeting rooms. In the spring of 1997, draft copies of the text were leaked and quickly posted on the Internet, downloadable by NGOs, labor unions, women’s groups, and others who turned the heat on their nation’s delegations. Constituencies in France and Canada, for example, were upset when they saw provisions that would obliterate protections for national culture. Even the ultraconservative government of New Zealand was forced to back off. When the political dust settled, the MAI was shelved.

But by far the most damaging blow to the hegemony of the Washington Consensus was the series of spectacular crashes of financial markets in the developing world, which by early 1998 left 40 percent of the world in recession. Official unemployment rates in Indonesia jumped from 5 percent to almost 20 percent, in Thailand from 1.5 percent to 9 percent, and in South Korea from 2 percent to 11 percent.

Political casualties followed. Governments fell in all three countries. In Venezuela decades of corrupt rule were wiped out when the former leader of a military-coup attempt was elected on a platform of “democratic revolution” to take back the nation’s sovereignty. In Argentina, where the Menem government was a poster child for embracing the global economy, voters turned sharply against the political leaders who brought double-digit unemployment rates. Even in Mexico–where easy and open access to the U.S. market has cushioned the impact of its financial crisis–political anger against rising poverty, growing unemployment, and drastic cuts in social spending have split the ruling party and have threatened its 60-year hold on political power. No less a figure of the global establishment than James Wolfensohn, president of the World Bank, has declared: “At the level of people, the system is not working.”

Within the Washington Consensus, debate over whether the specific cause of the crisis was Asian crony capitalism, IMF miscalculations, or the earlier devaluation of the Chinese currency, has obscured two obvious lessons the crisis revealed to those on the outside.

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 ensure 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.

Given that the United States is the world’s largest and most open market, one result was that the U.S. trade deficit soared from $105 billion in 1997 to a currently estimated $275 billion in 1999. When U.S. steelworkers and companies asked for relief from a surge of low-cost steel imports, the administration offered only minimal concessions. In contrast, when the super-rich investors in the Long-Term Capital Management fund bet wrong on international currency movements, the U.S. Treasury and Federal Reserve called an emergency Sunday meeting to organize a private-sector bailout.

A second lesson was that the Party of the Washington Consensus is in over its head: Its managers do not understand, any more than does the rest of the world, 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 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 tanked. 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 instead.

Promoters of global deregulatio
n often analogize to the American experience, where free movement of capital, goods, and people among the various states of our union has clearly spurred economic growth. But when the United States expanded from a series of state-regulated local markets to a continental economy, it already had a political constitution within which to set the national regulatory institutions it needed–such as a central bank, child labor laws, and bank and securities regulation.

The global economy has no such institutions. For example, the IMF is far short of being a global banking regulator or a central bank. It is rather a shallow-pockets lender, dependent on loans from its member countries and partnerships with private investors who have their own agenda. In order to ensure repayment, it conditions its loans on austerity policies that invariably fall heaviest on workers, small-business people, and peasants.

The assumption of the Washington Consensus that functioning markets could be sustained in economies 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. And crony capitalism does not stop at foreign borders; evidence mounts of the looting of aid to postcommunist eastern Europe that involved New York banks, Harvard consultants, and contributors to U.S. presidential campaigns.

In its defense, the Washington Consensus now pleads 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 does 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.”

As a result, 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 10 personal friends–CEOs 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. Such moments may gratify the masters of the financial universe. But they are thin cords on which to hang the economic fate of six billion people.

Toward Alternatives
The Party of the Washington Consensus is still very much in charge, but its moral authority and its claim to competence have been shaken. As the political champion of multinational capital mobility, it has succeeded in crippling the power of governments to regulate markets or to buffer their people against capitalism’s excesses. The result is a global economy that is increasingly volatile and generates an upward redistribution of income and wealth. Particularly undermined is the credibility of the Third Way faction of the Washington Consensus, whose support for global deregulation has been rationalized by the assertion that government would help the “losers.” It turns out that winners are not eager to help losers. Global laissez-faire generates political pressure for tax cuts and smaller, not larger, public budgets. In nation after nation, social safety nets and human investments have been shredded on the grounds that the world’s investors would disapprove.

The stream of opposition activists converging on Seattle is betting that this arrangement is not sustainable and that, therefore, they on the outside–not the trade ministers and corporate lobbyists on the inside–represent the global economic future.

But what kind of a future? As with most parties in opposition, the coalition partners mostly agree on what they don’t want. On the question of what they want, the answers tend to be woven out of at least one of three implicit ideological strands.

One is economic nationalism. In America this is the cause of industrial workers concerned about the decline of manufacturing and conservatives who don’t like the WTO or the IMF any better than they like the UN. It is also shared by workers in other advanced nations and by political leaders in nations as diverse as Russia, India, and Venezuela, who see the global financial system as an obstacle to their development. The so-far successful recovery effort of Malaysia, which rejected loans conditioned on IMF austerity, has given the economic nationalist cause a boost among less-developed countries.

In modest doses, nationalism has supported the development of many individual economies–including that of the United States. But it does not address the question of how to manage the global marketplace, which, as currently organized, is relentlessly eroding the flexibility and authority of most nation-states.

Another economic vision is that of the global village–the implicit, and often explicit, projection by environmentalists of a future characterized by small–scale sustainable development, cultural and biological diversity, and limits to commercial growth. Global villagers disdain big institutions, global or corporate. They tend to believe that the vacuum created by the weakening nation-state can be filled by decentralized civic institutions linked together and empowered by the Internet. But NGOs, however humanistic their ideals, are no substitute for democratic government. “Our challenge,” says Mike Dolan, Public Citizen’s Seattle organizer, “is to have a seat at the table, and not merely near the table.” “But,” sniffs a former White House trade official: “who elected them?”

The third vision of the future is that of the global New Deal–the application of the social contract that remains intact, if somewhat tattered, in advanced nations to the global economy. This is the logical extension of the Washington Consensus’s own vision of creating an international marketplace in the mold of the American economy. Indeed, in the immediate aftermath of the Asian crisis, Robert Rubin announced that the world economy needed a “new financial architecture” based on the American-designed system of financial transparency, standard accounting, and prudent bank regulation. The president went one better, actually using the phrase a global New Deal. Then the IMF loans stopped the free fall in Asian currencies, and the stock markets bottomed out. For the moment, at least, the fear of a worldwide depression abated, taking with it any possible interest of the business community. The president’s trial balloon quickly burst and disappeared from the policy radar screen. Rubin lowered his bold call for a new architecture to a plea for banks and finance ministries to open the windows on their operations a bit more by improving their statistical reporting.

But the more policy-oriented parts of the global party in opposition have picked up on the idea. After all, if the essential notion of the Washington Consensus is to export the American economic model to the rest of the world, why not export all of it–not just accounting rules, but the whole package of a mixed economy in which nonmarket values such as the dignity of labor, ecological balance, and democratic community have enforceable claims? To flesh out this vision, small groups have sprung up in various parts of the world, putting together blueprints of specific proposals, including “Tobin-type” taxes on financial transactions, international sanctions against labor and environmental abuse, and bankruptcy protection for insolvent countries. Implicit in some of the thinking is the possibility of a bargain in w
hich less-developed nations would accept minimal social standards calibrated to their level of development in return for long-term investment aid.

For many in the economic-nationalist and global-village camps, the global New Dealers are hopelessly naïve. Indeed, the latter do seem caught in a political catch-22: (1) A global social contract must be brokered and enforced by global economic institutions. (2) In the absence of world government, global economic institutions are captured by global business interests. (3) But global business interests are opposed to a global social contract.

The only way out of this trap for global New Dealers is to develop a cross-border opposition politics to force individual governments to support an international social contract. But so far, at least, it is hard going. The less technocratic and complicated visions of the nationalists and global villagers have sparked the political passions feeding the opposition to the Washington Consensus, not notions of alternative world governance.

Sleepless in Seattle
Given the fundamental anticorporate ideology of both the nationalists and the global villagers, global New Dealers represent the one opposition strand with whom the Party of the Washington Consensus might reach a political accommodation. After all, Roosevelt and Keynes were out not to destroy large corporations, but to keep them profitable as engines of full employment and prosperity.

Clearly, the global New Dealers are anxious for a bargain. Despite their demonstrated power to block important parts of the insiders’ agenda, the demands of the mainstream unions and NGOs outside the Seattle conferences are surprisingly modest. Specifically, they want the WTO to pause, before moving ahead with another round of negotiations, for an assessment of the social and economic effects of its past deregulation and to appoint a “working party” to study the incorporation of labor and environmental standards in trade agreements.

Neither of these requests is likely to be taken seriously by the WTO at Seattle. Needing the backing of labor and environmentalists in the coming election, the administration will again give lip service to their concerns. Some Europeans will be mildly supportive. The trade ministers of most nations, anxious to show foreign capital whose side they are on, will oppose. Some token language may be adopted. But the Party of the Washington Consensus is not yet sufficiently threatened to divert energy from the real business in Seattle: deal-making among multinational interests in agriculture, finance, textiles, etc.

As so often happens in national political life, the opposition will have nowhere to go but into the streets, where political theater trumps political discussion. In that case, Seattle will be a lost opportunity for the Party of the Washington Consensus to diffuse the pressures building up in different parts of the world against globalization itself–from angry steelworkers in the American rust belt to unemployed rioters in Jakarta, from skinheads in Brandenburg to Zapatista peasants in Chiapas. In the United States, the politics of globalization will become more polarized. Ultimately, in its effort to avoid negotiating over the moderate proposals of the world’s John Sweeneys, the Party of the Washington Consensus may find itself confronted with the demands of the world’s Pat Buchanans.

The future shape of the politics of globalization in a world without a constitution remains hazy. But politics is about “who gets what.” So long as the Washington Consensus does not produce stable, sustainable, and widely shared prosperity, its one-party hegemony will continue to be challenged by an increasingly sophisticated if disparate opposition. The gathering inside the meeting rooms in foggy Seattle will tell us something about the direction in which the global political economy will be going in the next century. To get the clearest picture, watch what goes on outside as well.

[ POSTED TO VIEWPOINTS ON DECEMBER 6 ]

Jeff Faux is the president of the Economic Policy Institute.