ROBIN HAHNEL is Professor of Economics at American University in Washington D.C. He demonstrated witht he Direct Action Network in Seattle against the World Trade Organization in November 1999, and worked with the Mobilization for Global Justice/A16 during the protests against the IMF and World Bank in Washington in April 2000. His most recent book is Panic Rules! Everything You Need to Know About the Global Economy (South End Press, November 1999).
FOR THE PAST 20 YEARS, UNDER THE BANNER OF NEOLIBERALISM, multinational corporations have increasingly succeeded in rewriting the rules governing the global economy ever more to their liking. In the 1980s corporations were assisted by conservative governments like those of Margaret Thatcher, Ronald Reagan, and Helmut Kohl. In the 1990s the supposedly liberal governments of Tony Blair, Bill Clinton, and Gerhard Schroeder helped corporations rewrite the rules governing international trade and investment, and reorient the policies of the IMF, World Bank, and GATT/WTO. Like every process of corporate-dominated expansion of the market system before it, this most recent process of corporate- sponsored globalization promises efficiency gains and (trickle down) benefits for all, but actually misdirects productive potentials, benefits the few at the expense of the many, and accelerates environmental degradation. Fortunately, like every previous expansion of capitalism it also spawns critics and opponents as victims begin to recognize themselves as such.
The protests against the WTO in Seattle announced, and the demonstrations against the IMF and World Bank in Washington D.C. confirmed, that a full-fledged movement opposed to corporate-sponsored globalization has finally emerged in the U.S. to join the international movement that raised its voice earlier. Given the fact that the coalition of victims of corporate-sponsored globalization includes workers in different industries and occupations in different kinds of economies, farmers and peasants in different kinds of economies, environmentalists with different analyses and priorities, and citizens whose human, political, and labor rights have been undermined in different countries, it should come as no surprise that there are different ideas about how best to oppose the global corporate juggernaut. I applaud the editors of New Politics for organizing this symposium, where contributors are asked to address some of the hard questions concerning the demands our movement should make and the reforms we should fight for. I approach your questions based on three convictions about corporate- sponsored globalization and one "value judgment."
Conviction #1: The "real" global economy -- production, consumption, and economic investment -- is increasingly held hostage by a system of global wealth management that is more and more unstable and prone to crisis. In the early 1990s the IMF and World Bank, at the behest of the U.S. Department of the Treasury, worked hard to create a disaster waiting to happen. In country after country IMF delegations used carrots and sticks to ply amenable governments and to force reluctant governments to eliminate restrictions on not only international business investment, but on the inflow and outflow of speculative, short-run liquid capital. A mushrooming pool of liquid global wealth, created by record profits due to stagnant wages, downsizing and mega mergers, as well as rapid increases in technological innovation, was suddenly free to move wherever and whenever it wished at the click of a mouse on a computer screen.
Moreover, financial liberalization and deregulation in the advanced economies meant that much of this liquid global wealth, managed by 30-year-old recent MBAs knowing little about the "emerging market" economies they invested in, was highly leveraged and therefore even more prone to panic and contagion.
There are two rules of behavior in any credit system: Rule #1 is the rule all participants want all other participants to follow: DON'T PANIC! Rule #2 is the rule each participant must be careful to follow herself: PANIC FIRST! The neo-liberal global managers have literally created the financial equivalent of the proverbial 900-pound gorilla. Question: Where does the 900-pound gorilla -- global liquid wealth -- sit? Answer: Wherever it wants! And when a derivative tickles, and investors obey Panic Rule #2 -- currencies, stock markets, banking systems, and, most importantly for the rest of us, formerly productive economies, all collapse in their wake. In 1986 $0.2 trillion per day traded on foreign exchange markets. In 1998 the figure was $1.5 trillion -- only 2% of which was needed to finance international trade and productive investment, meaning 98% of the $1.5 trillion traded per day in currency markets was purely speculative! In a word, we are now haunted by exactly the danger Keynes warned against at the Bretton Woods conference over 50 years ago -- that crises in a highly unstable international financial system could thwart all efforts to increase global production and trade.
Conviction #2: Liberalization of international trade and investment aggravates global inequalities. Whether or not neo-liberal liberalization has produced global efficiency gains is debatable. But there is every reason to believe that liberalization of trade and investment has aggravated inequality between more developed countries (MDCs) and less developed countries (LDCs) by distributing the lion's share of any efficiency gains to the MDCs. As long as capital is scarce globally it is predictable that international trade based on free market prices will distribute more of the efficiency gains to wealthier countries than to poorer countries, and international lending based on free market interest rates will distribute more of the efficiency gains from international investment to wealthier lenders than to poorer borrowers. (See Maddison for empirical evidence, Roemer for theoretical arguments, and Hahnel 1999, chapters 1, 2, and appendix B for empirical and theoretical arguments.)
Conviction #3: The "race to the bottom effect" is real. Liberalization of trade and international investment does put downward pressure on First World wages, labor standards, and environmental standards as it becomes easier for companies to relocate where wages, labor standards, and environmental standards are lower. Moreover, as liberalization in agricultural trade destroys peasant farmers in Third World countries, swelling the ranks of the urban unemployed, Third World peasants and workers do not enjoy the beneficial effect one might otherwise expect from increased international investment and specialization in labor intensive manufacturing in their countries. Instead we have seen declining real wages in countries like Mexico since NAFTA (See Rendon and Salas, tables 19, 20, and 23) as ten former peasants compete for every new job in labor intensive manufacturing (See Landau.) By strengthening the bargaining power of global capital versus any and all with whom it negotiates, liberalization of trade and investment leads to downward pressure on wages, labor standards, and environmental standards in First World and Third World countries.
Value Judgment: The worst off deserve the greatest help.
NOW LET ME TURN TO THE QUESTIONS YOU ASKED:
Answer: Joan Robinson once quipped: "The only thing worse than being exploited by a capitalist is not being exploited by a capitalist." But recognizing the simple truth that being unemployed is worse than being paid too little did not incline her to advise workers to lower their wages! While Third World governments that primarily serve the interests of local elites have reason to preserve, or even expand so-called "comparative advantages" in substandard wages, working conditions, and environmental regulations, workers and citizens of these countries certainly do not. This "low road" development strategy designed to attract foreign investment by abject prostration is not the road Third World workers and citizens should seek to follow. Nobody "needs" foreign investment so badly that they should seek it on such terms. When participation in the international economy demands a price this high, wise buyers walk away. The kind of foreign investment that would only come for these reasons is exactly the kind of foreign investment Third World countries can do better without. The only reason to want foreign investment in the first place is to raise wages, improve working conditions, and restore the environment. If accepting just the opposite is a condition for attaining the foreign aid, how can it be beneficial?
The question then becomes how to generate employment rather than unemployment in LDCs. If the movement against corporate-sponsored globalization succeeds in reorganizing international financial institutions so that they facilitate provision of more public and social investment to LDCs on terms that are actually beneficial to LDCs, all the better. But that is not what the IMF and World Bank are doing at present, and until they or the institutions we replace them with do, LDC governments need to pursue full employment policies themselves. It seems to me that no matter how lacking a country may be in technology and know-how, it is better off pursuing full employment policies at whatever level of productivity can be mustered locally, than begging for international investment based on a "comparative advantage" in misery. If foreign technology or know-how is absolutely essential in some industry, then "buy" it with tax breaks if it cannot be stolen or obtained by purchasing licenses and headhunting. But to "buy" it with lower wages, labor standards, or environmental standards is self-defeating.
Of course more aid and debt relief make possible acquiring more advanced technology and know-how precisely without giving up the reason to want more foreign investment in the first place. And this is why progressives should fight for increased aid (without strings) from the MDCs and for greater debt relief (without strings) from international creditors. But no matter how pathetic international aid and debt relief programs are, and no matter how lacking public and social investment on favorable terms is, LDCs that succumb to the myth of TINA -- there is no alternative to the neo-liberal development model -- make a fatal mistake. Fiscal and monetary policies aimed at expanding employment, egalitarian reforms that also fortify domestic demand, land reform combined with technical services, credit, and incentives to promote sustainable land management, combined with highly selective interaction with the global economy is a viable alternative. (See MacEwan for a comprehensive alternative to neo-liberalism for developing economies.)
However, there is another difficult and contentious issue regarding labor and environmental standards that threatens to divide opponents of corporate-sponsored globalization. First World workers and environmentalists understandably want to establish meaningful and enforceable universal labor and environmental standards. There is debate over whether to do this through reforms within the WTO, IMF, World Bank, or by increasing the power of the International Labor Organization (ILO) and granting international environmental treaties priority over trade treaties. But the key point First World victims of globalization are trying to insist on is that participation in the global economy require adherence to some set of minimal universal labor and environmental standards.
On the other hand, many Third World constituencies who desperately want higher Third World labor and environmental standards themselves resent being dictated to by their exploiters regarding how they must achieve higher standards, and fear that in a global economy where all reasons other than violations of international labor or environmental standards for raising tariffs have been outlawed by treaty agreement, only LDCs will be unarmed in the event of possible future trade wars. They have learned from long experience that First World industries all too often manage to convince their governments to resort to protectionist measures when pressured by competition from Third World imports. They fear that charging violations of labor or environmental standards could become the new pretext for protectionism in the First World, and that they would be left without any means of retaliating since the universal labor and environmental standards would be those already in effect in the First World and all other reasons for raising tariffs in retaliation would have been outlawed by international treaties. Knowing that the international economic playing field is already tilted against them, southerners are understandably nervous about any changes that further disadvantage them relative to northerners.
Before Seattle the AFL-CIO was insensitive to this legitimate concern on the part of southern opponents of corporate-sponsored globalization. But after Seattle U.S. labor launched a Campaign for Global Justice and increased ties with southern groups opposing corporate-sponsored globalization. Now the AFL-CIO is investigating a number of ways to achieve the goal of raising standards in the Third World to prevent the race-to-the-bottom effect in the first world, while protecting Third World workers from unfair protectionism in the future.
A: "More free trade is always good and more protectionism is always bad." NOT! The conviction that free trade is always good and protectionism always bad is one of the great myths of mainstream trade theory.
First, ignoring distributional issues for the moment, it is not even the case that freer trade always produces efficiency gains and therefore that protectionism imposes efficiency losses. Even in static models, even abstracting from the true social costs of transportation, even abstracting from the adjustment costs of moving resources and people from one industry and location to another, it is only the case that more specialization and trade yields efficiency gains if relative prices inside countries reflect the true social opportunity costs of producing things. Otherwise, comparative advantage as calculated by commercial prices may not be the same as true comparative advantage calculated in terms of true social opportunity costs.
For example, NAFTA led to less shoe production and more corn production in the U.S. and less corn production and more shoe production in Mexico. This was because the price of shoes relative to the price of corn was higher in the U.S. than in Mexico, so reducing Mexican tariffs on corn and U.S. tariffs on shoes reduced profits for corn farming in Mexico and for shoe making in the U.S. while raising profits for shoe making in Mexico and corn farming in the U.S. But the price of making corn in the U.S. did not include the environmental costs of pesticide run off or full price water for agricultural use, much less the positive probability that there will be future costs of genetically modified corn seeds. These are real costs of producing corn the way we grow it here in the U.S. that are not included in the commercial cost of corn. On the other hand, the commercial price of making more shoes in Mexico did not include the social costs of moving Mexicans out of villages into urban slums. In traditional villages Mexicans enjoy centuries-old kinship safety nets and lower exposure to crime and disease. It is not at all clear that if we take these external costs of living in Mexican urban slums and shanty towns into account that Mexico's true comparative advantage is in shoe production, and if we take the environmental external costs of modern corn farming into account the U.S. actually enjoys a comparative advantage in corn production. Therefore, it is not necessarily the case that by promoting more free trade between the U.S. and Mexico NAFTA has yielded efficiency gains rather than losses. (See Barkin 1990 and Barkin et. al. 1990.)
Second, even if there is an efficiency gain from freer trade, when the terms of trade are set by free market forces there is every reason to believe that the lion's share of any efficiency gain will be distributed to the country that was better off in the first place. The empirical evidence that the terms of trade have declined for LDCs is so overwhelming that even IMF studies confirm this fact, and theoretical considerations provide every reason to expect this to occur. Predictable differences in the income elasticity of demand for LDC and MCD exports would yield this result. (See Prebisch 1950 and Singer.) A greater degree of unionization and therefore greater downward rigidity in wages in MDCs than LDCs would also shift the terms of trade against LDCs. (See Prebisch 1964.) And even simple static models, where international markets are assumed to be competitive and elasticities of demand are all assumed to be infinite, predict that a greater share of efficiency gains from specialization and trade will go to countries where capital is relatively abundant while a lower share will go to countries where labor is relatively abundant. (See Hahnel 1999, Appendix B, and Roemer.) This important fact about the international economy (which mainstream economists love to ignore) implies that even if commercial prices did reflect true social opportunity costs (which they do not) so that freer trade would invariably produce efficiency gains (rather than sometimes yield efficiency losses), promoting more international trade at free market prices will almost always aggravate economic inequalities between countries.
While international inequality may not concern mainstream economists, it is a major priority for progressive minded people and should thus be reason enough for us to generally oppose more free trade. And it is surely more than enough reason for us to concentrate our attention on both short-run and long-run programs to manage the terms of trade so as to distribute more of the gains from trade to LDCs. Instead of throwing the agenda of the New International Economic Order of the 1970's and UNCTAD into the dustbin of history, we should be studying and improving upon their initiatives to improve the terms of trade for the South. Unless the terms of trade are managed politically rather than determined by market forces, global inequality will continue to increase.
Third, besides aggravating economic inequality between countries, more free trade usually aggravates economic inequality within countries. There is a theory in mainstream economics developed by Heckscher and Ohlin which predicts that freer trade tends to lower payments to whatever factors of production are relatively scarce within a national economy and to raise payments to factors that are relatively abundant. Compared to LDCs, in MDCs unskilled labor is relatively scarce and skilled labor is relatively abundant. And, compared to LDCs, in MDCs labor in general is relatively scarce and capital is relatively abundant. There is no reason to doubt the essential logic and relevance of this theory, which predicts that freer trade will put downward pressure on unskilled labor compared to skilled labor in the MDCs, as well as downward pressure on wages in general compared to returns to capital -- thereby aggravating inequality within MDCs. But there is good reason to doubt that globalization will produce a beneficial Heckscher-Ohlin effect in LDCs. Heckscher- Ohlin theory predicts that freer trade should tend to raise unskilled wage relative to skilled wages, and raise wages in general relative to returns to capital in LDCs -- thereby reducing income inequalities in LDCs. Unfortunately, however, as I indicated above, trade liberalization in agriculture, combined with elimination of restrictions on foreign ownership of land in many LDCs, has dislodged so many peasants from traditional agricultural pursuits that low-skill labor markets have been flooded throughout the Third World. This effect overwhelms the Heckscher-Ohlin effect in LDCs, putting downward pressure on rural and urban wages, thereby increasing returns to employers and landlords and aggravating inequality within LDCs as well as MDCs. (See Gottschalk and Smeeding.)
MOST OF THE MINORITY OF ECONOMISTS WHO RECOGNIZE THAT FREE TRADE is not always beneficial and protectionism not always harmful do not emphasize these first three problems. Instead they start their critique of free trade doctrine with dynamic models and theories of economic development in which protectionism plays an important temporary role. I consider these arguments further reasons to doubt the beneficial effects of freer trade.
Fourth, "new trade theory" and "new growth theory" do not predict that free trade necessarily leads to the most rapid economic growth for LDCs, but instead predict a positive role for protectionist measures to guide the development of comparative advantages yielding higher long-run growth trajectories. (See Krugman.) If one prefers simpler models, there is nothing wrong with the old infant industry argument, illustrated in every introductory text by a concavity in a country's production possibility curve giving rise to a suboptimal local maximum where free trade would keep the country producing.
But the most compelling evidence is empirical rather than theoretical. If ever there was need to be reminded that comparative advantages are to be created rather than accepted as acts of God, and that protectionism can play an important role in changing comparative advantages, empirical studies of the relatively few successful cases of national economic development reveal that protectionism almost invariably has, in fact, played a crucial positive role. The Asian development model responsible for the Japanese economic "miracle" of the 1950s and 1960s, and for the Asian "miracles" in South Korea, Taiwan, Thailand, and Indonesia in the 1980s and 1990s (see Amsden), the German development model in the 19th century (see Schonfield), and even the U.S. development experience in the 19th century, all speak volumes to the positive role protectionism can play for late-comers to the global economy. And for all the criticism import substitution has received from neo-liberals, it remains the case that Latin America has never grown more rapidly than during the period when it was most cut off from international trade and investment during the Great Depression and World War II, and when Latin American governments pursued import substitution policies. Finally, the "other" economic development success stories in the twentieth century -- the centrally planned "socialist" economies during their heydays -- are hardly testimony to the advantages of opening one's economy internationally or expanding trade based on free market prices.*
These four points provide more than enough reasons for progressives to question the wisdom of freer trade and speak up in defense of some protectionist measures. A more difficult issue is whether progressives should support protectionism in defense of labor and environmental standards in MDCs. Focusing the fight against the race to the bottom on labor and environmental standards is a potentially divisive issue, as explained above, and requires careful analysis.
One question is simply whether actual concessions received are as great as any concessions given. The Clinton Administration is willing to support a working committee on labor standards in the WTO, but only in exchange for further trade liberalization. But a working committee is a far cry from strong, enforceable standards now, while further liberalization conceded in exchange accelerates the race to the bottom. A second question is how much standards would arrest the race to the bottom in any case. Suppose the WTO gave the U.S. the right to ban imports from any country where labor standards were lower than those in the U.S., and the statute was easy to enforce. That is far beyond the wildest dreams of the AFL-CIO leadership, but how much would it diminish the race to the bottom they fear? If the bargaining power of employees outside the U.S. remained the same as before, the race to the bottom effect on U.S. wages would be just as great as before. Granted, the internationalization of U.S. labor standards would protect U.S. labor standards (for the time being), and would give workers everywhere else the same labor standards as those workers enjoy here. But if the new statute did not change the bargaining strength of employees elsewhere, their employers would pass on whatever the higher standards cost them to their employees in the form of lower wages. Presumably if bargaining strength were not changed the pass-through would be 100% since what employers and employees bargain over is the wage/standards package. Employees want higher wages and higher standards. Employers want lower wages and lower standards since both are costs to them. So while lower labor standards elsewhere would no longer contribute to the race to the bottom effect in the U.S., the greater wage gap would produce the same size effect as before!
The conclusion is that only to the extent that universalization of U.S. labor standards increased the bargaining strength of workers elsewhere would it diminish the race to the bottom effect for U.S. workers. I wonder how many who press for labor standards in trade treaties understand this. Moreover, anything that increased the bargaining strength of foreign workers more than universal labor standards would arrest the race to the bottom effect for First World workers more. What if land reform in the Third World increased the bargaining strength of Third World workers in manufacturing industries more than universal labor standards would? This could well be the case because land reform forces employers in the manufacturing sector to pay workers more by decreasing urban migration, and raising the reservation wage (the lowest wage someone will accept because they have another income option that is at least as good- Ed.). In this case Third World land reform would be more beneficial to First World workers than universal labor standards. Or what if stopping U.S. military aid to totalitarian regimes in the Third World improved the bargaining strength of Third World workers more than universal labor standards? In this case stopping U.S. military aid would go farther to arrest the race to the bottom effect for U.S. workers than universal labor standards.
Obviously how much any particular labor standard, land reform, or reduction in military aid affects the bargaining strength of Third World workers depends on the actual reform. But the important thing to remember is that the race to the bottom effect depends on how weak labor is elsewhere, period. Any reform, including universal labor standards, affects the race to the bottom effect only to the extent that it affects the strength of Third World labor. There may well be other reforms that would better preserve the wage/labor standards, or just plain living standards of First World workers than fighting to achieve some level of universal labor standards.
A: It seems to me that this question, as posed, is not a question about globalization at all, but rather a more general question about how we can improve the quality of people's economic lives, eliminate economic inequality, and restore the environment all at the same time. To make a long answer short: We must, and can do this, but we cannot and will not be able to do this as long as we have a corporate- dominated market economy. The environment is not endangered because there are too many people. Nor is the environment endangered because it is impossible to have a very high standard of economic life for everyone without damaging the environment. The environment is endangered because we produce too many of the wrong kinds of economic goods and services in too many of the wrong ways. No, the rest of the world cannot live like Americans without destroying the environment. But then Americans cannot continue to live as we do without destroying the environment. A transportation system centered on the automobile and gasoline, suburban living while commuting to work, an energy system based on fossil fuels, unrecycled packaging -- this and other follies are the problem. But as long as we live in a corporate-dominated market economy these follies will persist. And to the extent that corporate-sponsored globalization spreads the most environmentally destructive economic system ever devised to more and more of the globe, globalization will accelerate environmental destruction.
Much of the environment is a common property resource (CPR). And it is a well-known fact that profit-oriented users will over-exploit CPRs. Pollution is a negative external effect of production and consumption in market economies, and it is a well-known fact that market systems over-produce goods with negative external effects associated with their production and/or consumption, which means market systems over-pollute. Pollution reduction is a public good since all benefit from anyone's pollution reduction. Likewise it is a well-known fact that market economies produce too little public goods compared to private goods, which means market systems reduce pollution too little. And the economics of competition and greed drives us all to work and consume too much and enjoy too little leisure. (See Schor 1993 and Schor 1998.) Until we replace our corporate-sponsored market system with some sort of democratic planning that takes environmental costs into account (see Albert and Hahnel), the environment will continue to deteriorate.
A: One of the hallmarks of capitalism is supposed to be that people who make mistakes get fired and replaced by people whose advice turned out to be correct. Instead, the only head to fall in the aftermath of the East Asian, Russian, Brazilian, and Ecuadorian financial crises has been Joseph Stiglitz, former Chief Economist for the World Bank -- who was the lone critical voice within the establishment of IMF policies during the East Asian crisis. In stark contrast, the chief architect of further liberalization in East Asia, recession-aggravating conditionality agreements, and blame-the-victim pontificating, Stanley Fischer, was nominated for a promotion from second to top gun at the IMF by U.S. Treasury Secretary Lawrence Summers and President Clinton. With no sign of meaningful reform at the IMF or World Bank in sight, the place to start is to weaken the power of these institutions to do harm. And the next step will be to revitalize and re-empower UNCTAD and the United Nations as a major player in attempts to reorganize the international economy -- as recommended by Walden Bello, professor of sociology at the University of the Philippines and long-time spokesperson for the Global South. While imperfect, to say the least, UNCTAD and the UN are much more responsive to the interests of the global majority than the IMF/WB/WTO holy trinity. Until the IMF/WB/WTO are succeeded by UNTAD/UN as the center of reform efforts we cannot even begin to replace the economics of competition and greed with the economics of equitable cooperation.
"This is a crisis, but it is also a tremendous opportunity for the U.S.," said Muthiah Alagappa, a Malaysian scholar at the East-West Center in Honolulu. "This strengthens the position of American companies in Asia." A clear indication that the Asian crisis would further the American agenda came in December, when 102 nations agreed to open their financial markets to foreign companies beginning in 1999. It is unclear how the pact will be carried out, but it marks an important victory for the U.S., which excels in banking, insurance and securities. Fundamentally that agreement and other changes are coming about because Asian countries, their economies gasping, are now less single-minded in their concern about maintaining control. Desperate for cash, they are less able to pick and choose, less able to withstand American or monetary fund demands that they open up.The great global asset swindle has not been confined to East Asia, and is not yet over. Western progressives should not underestimate the damage from this aspect of neo- liberal globalization, nor the resentment it causes among Third World constituencies.
While it is true that the Chinese government is a major violator of human and labor rights, this is not reason to oppose China's entry into the WTO. Whether or not they should be, the fact is that observance of human and labor rights are not conditions for membership in the WTO. Moreover, many of the 135 current members of the WTO have governments that are gross violators of human and labor rights and nobody is calling for their expulsion. While progressives everywhere should denounce human and labor rights violations everywhere, including in China, to hold only China to such standards for WTO membership is simply illogical. Moreover, the hypocrisy of the U.S. Congress appointing itself prosecutor, judge, jury, and executioner regarding the human and labor rights violations of any other government is inescapable -- given its own dismal record of blatant violations of human rights and international treaty obligations whenever they are deemed in conflict with U.S. corporate or military interests.
* I do not claim that all protectionist measures are beneficial. There are many cases where protectionism is harmful to the economy and beneficial only to owners (and sometimes employees) in a particular industry. More often than not governments protect industries with political clout rather than industries whose protection and promotion would enhance economic development and therefore advance the general interest. But the possibility and relaity of counter-productive protectionism should not lead us to condemn protectionism in general. return
Contents of No. 29