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Globalization: A Primer by Mark Weisbrot [1] CONTENTS ·
International
Trade and Investment ·
International
Financial Crises...and Washington's Response INTRODUCTION What
is "globalization" and why should anyone care about it? There
are a lot of different answers to this question, depending on whom you
ask. The dominant view among people who write and speak about the issue
is that globalization is an inevitable, technologically driven process
that is increasing commercial and political relations between people of
different countries. For them, it is not only a natural phenomenon, but
primarily good for the world, although it is recognized that the process
produces both "winners and losers."
There is a much
deeper skepticism about the process among the general population. For
example, a recent Wall Street Journal/NBC News poll found that
58% of Americans believed that trade had reduced U.S. jobs and wages, a
view that is almost never expressed by commentators or those who shape
public opinion. This widening gap
between elite and public opinion is striking, because it is not
difficult to imagine how economic globalization might lower living
standards for the majority of people in the United States. For example,
the idea that increasing competition from low-wage imports would drive
U.S. wages downward seems only logical. And there is now a wealth of
evidence, even from prominent economists who strongly favor free trade,
that this has happened over the last two decades. The fact that the
real wage of the typical American worker has actually fallen over the
past 25 years, as the economy had become increasingly globalized, is
also an indicator that something is wrong with the process of
globalization. According to traditional economic theory, wage and salary
earners gain from more open trade, because they get cheaper consumer
goods. But it is clear, according to universally accepted measures of
wages and salaries in the United States, that for most employees these
gains from trade have been more than canceled out by other forces that
have pushed their pay downward. The last two
years have seen a significant widening of the debate among economists
about international "capital flows"—investment and borrowing
across national boundaries. In the wake of the Asian, Russian, and
Brazilian economic crises, a number of prominent economists have been
rethinking their views, and have decided that the process of opening
national economies to these capital flows has perhaps gone too far. But
this debate within the economics profession has yet to influence the
agenda of the major policy makers or corporations, who continue to
strive for increasing globalization.
This primer will
try to sort out some of the most important issues, especially as they
affect the majority of people in the United States and the world. The
goal is to make the reader economically literate enough to be able to
discuss current international economic issues of pressing
importance—and think critically about them—without putting anyone to
sleep. International Trade and
Investment We
will start with the simplest economic definition of globalization, one
that is relatively value-neutral, and then fill in the picture enough to
ask some important questions, such as "who gains and who loses from
this process?" We can define globalization as an increase in trade
and capital flows across national boundaries. This invites some
more definitions (sorry, no avoiding them). An import is a good or
service that is produced in another country but consumed here (for
simplicity, we’ll take the United States and its economy as the
reference point). A computer that is manufactured in Taiwan and bought
here is an import. Trade in services enters into our balance of payments
in the same way: if you go to France as a tourist and spend money there,
that’s an import, too. An export is the
opposite, something that we produce here but is consumed elsewhere.
Hollywood movies are, for better or worse, one of America’s most
influential exports. You may have
noticed that another term was sneaked in without a definition: balance
of payments (BOP). This sounds a little more jargon-like, but it’s
really just an accounting of a country’s transactions with the rest of
the world. And that means all of the country’s transactions, both
public and private. What does the
balance of payments include? It is divided into two parts: the first
part we have just about defined—it’s the balance of trade. Economists call
this the current account, because it includes more than just
trade—things like foreign interest payments and transfers (say you are
an immigrant worker in the United States and you send money home to your
family in El Salvador). While "current account" is the proper
term, many people use "trade balance" and "current
account balance" interchangeably, since trade is the biggest item
in the current account—and we can do that, too, when it doesn’t
cause mistakes. The second part
of the balance of payments is called the capital account. This measures
the purchase and sale of assets across national boundaries.
German investors buy U.S. Treasury bonds: that is measured in the
capital account. It has a name, too: portfolio investment. If
German investors build a factory in the U.S., that is also a capital
account transaction, but it is called foreign direct investment. A simple way to
distinguish between the two accounts of the balance of payments is that
the capital account measures international investing, borrowing, and
lending—whereas the current account measures just about everything
else. The Trade Balance and Jobs Why did we
torment you with all these definitions? Well, consider the debate about
the U.S. trade deficit. (A trade deficit means that imports are greater
than exports). The U.S. trade deficit is expected to hit record levels
this year and next, mainly as a result of the economic crisis in Asia.
What does this mean for the U.S. economy? The most
immediate impact is on jobs: some 1.5 million workers, mostly in
manufacturing, would lose jobs as a result of the increase in the trade
deficit.[2]
That’s because the production of imports, which takes place in other
countries, does not employ people here. But it gets a
little more complicated than that. First, it should be noted that this
is a loss of 1.5 million jobs as compared to the number of jobs that the
economy would have created if the trade deficit had not increased. If
the economy is growing, as it normally is, the demand generated by this
growth will cancel out some of the job losses that would have resulted
from the increased trade deficit. Second, not everyone who is laid off
will be permanently unemployed; many will find other jobs, although
often at lower pay. In fact, if the economy is growing fast enough, the
unemployment rate for the overall economy need not increasse.[3]
But there is still a serious cost to the people who lose their jobs,
spend time unemployed, and end up working for lower pay. And there is a
waste of capital, too—there is plant and equipment that will rust and
lie idle before its time is up. Running a current account deficit has other consequences, too. If a country is importing more than it exports, it must find a way to pay for this. It is analogous to you spending more than your income, as a household. How can you spend more than you earn in a given year? There are basically two ways: you can borrow, or you can sell something you own (e.g. your house).[1] Foreign Debts The international balance of
payments accounting is very similar. If we import more than we export,
we must either borrow or sell assets internationally, in order to
finance that trade deficit. That means we are adding to our foreign
debt. (This is not to be confused with our national debt, which is owed
mainly to people and institutions here). For the United States, our foreign
debt is not big enough to present any problem for our economy or people,
even though we are the largest foreign debtor in the world with more
than $1.5 trillion in debt. That’s because this debt is still not that
big relative to our economy, so we don’t have a large debt service
burden. But for many poorer, indebted
countries, it is a major problem. Mozambique, for example, spends 25% of
its export earnings on debt service. This represents a huge drain of
resources out of the country, and prevents them from investing in things
that they desperately need. In fact their debt payments exceed the
country’s spending on health care and education. If just half of
Mozambique’s debt service payments could be spent on health care, it
would save the lives of 115,000 children each year, as well as 6,000
mothers who die in childbirth, according to estimates derived from the
analysis of UN economists.[4] As we will see, such horrific,
unsustainable debt burdens raise the question of whether some countries
might be better off just defaulting on their debt—that is, refusing to
pay it—even if they were punished by international banks and
investors. The answer to this question depends partly on how one
evaluates the gains that they get from international trade and
investment—i.e., increasing globalization. But first let’s make sure we all
understand the basic definitions and balance of payments accounting. Say
we have $950 billion in imports, and $700 billion in exports. That gives
us a trade deficit of $250 billion. Ignoring the other items in the
current account, this would mean that we must borrow or sell assets
(including foreign direct investment in the United States) to the tune
of $250 billion. This adds to our foreign debt. Similarly, when a country like
Japan runs a current account surplus, it is accumulating assets in the
rest of the world. This increases its net creditor position
internationally. Currencies So far we haven’t said anything
about money. Countries have different currencies, and so this introduces
certain problems that we don’t have in commerce between, say, Indiana
and California. If you can stay awake a little longer, it’s worth
throwing this into the mix. Some motivation: think of the Asian economic
crisis, which began in August of 1997 with the decline of the Thai baht.
Or the collapse of the Russian ruble in the summer of 1998, which
resulted in Russia’s default on some of its debt. Or Brazil’s
financial crisis last year, where interest rates rose to more than 40%
in order to keep the Brazilian currency from falling. All these events
are part of an ongoing global economic turbulence, and before examining
how these national and regional crises are related (or not related), we
need to know a little bit about currencies. What determines the value of the
dollar in terms of other currencies? This is important because it helps
determine how much our imports and exports will cost. The United States
has what is called a flexible exchange rate, which means that the value
of the dollar goes up and down, depending on supply and demand for the
currency. When you buy a bottle of French
wine, you are supplying the international currency markets with dollars.
Somewhere before that winery in France pays its employees, those dollars
have to be converted into Francs. So our imports constitute a supply of
dollars; similarly, our exports generate demand (by foreign citizens)
for dollars. When we run a current account
deficit (ignoring capital flows for now), it means that the supply of
dollars is greater than the demand for dollars. This would cause the
dollar to fall in value, as would happen to any other commodity that had
more sellers than buyers. Is a falling dollar a bad thing?
Not usually. When the dollar falls, our imports become more expensive.
That’s because you need more dollars to buy the same amount of francs
that the winery needs to produce a bottle of wine. Similarly, our
exports become cheaper in foreign markets. If everything works they way
it is supposed to, our imports would decline and our exports would
increase, reducing or even (in theory) eliminating the trade deficit. Reducing the trade deficit gives
our economy a boost, too, because a smaller trade deficit means more
production in the Unites States. There is an important lesson right
here. Many people get nervous when the dollar falls, thinking that this
is somehow bad for the economy. But in fact it is often positive. The only down side is that the
increase in the price of imports can add to our inflation rate. But
since only about 13% of our economy consists of imports, this has never
posed much of a threat. The dollar lost a third of its value between
1985 and 1987, without causing any serious inflation or other economic
problems. This is important, because it
means that the United States can pursue whatever domestic economic
policies that it prefers, without worrying about the international
financial repercussions. Many people are not aware of this, and believe
that U.S. economic policy is very much constrained by "the dictates
of the global economy." But this is not true. For example, if our
government wanted to have low interest rates in order to stimulate
economic growth and employment, we could do that without worrying about
the effects of a falling dollar (it would fall because some investors
would sell dollars and take their money elsewhere in order to get a
higher return). The fact that our government does not pursue full
employment policies has very little to do with any potential
repercussions from the global economy. Most countries do not have this
much independence. France, for example, has imports equal to about 30%
of its economy. France would have much more inflation than we would if
their currency fell sharply. These well-developed links between the
economies of the European Union constitute the main argument for the
creation of the Euro, a single currency for the EU countries which was
initiated this year. There is controversy over this move, however, and
we can see why: the eleven countries who have adopted the Euro have
given up their ability (however limited) to directly pursue their own
monetary policy. International Financial Crises ...and Washington's Reponse Now
we can look at the Asian and other financial crises. When the Thai baht
began to fall in August of 1997, investors became convinced that it was
going to fall much further. When this happens there is panic selling,
and this sends the currency down even more. The panic selling spread to
other countries in the region, such as South Korea, Malaysia, Indonesia,
and the Philippines. These currencies crashed, losing
as much as 75 or 80 percent of their value within months. This can cause
serious economic disruption, including a sharp increase in inflation. As
foreign lenders call in their loans, domestic firms and banks in these
countries that are not necessarily unhealthy go under, because they
cannot get credit. The burden of foreign debt also increases for many
debtors, because each dollar of debt service that they need to pay is
more expensive in terms of local currency. The main cause of the crisis was
the international financial "liberalization" of the previous
decade. In other words banks, other financial institutions, and
corporations in South Korea, Indonesia, and elsewhere were allowed to
borrow large amounts of money in international markets. Furthermore, a
large proportion of this debt was short-term debt. This created the
situation in which a falling currency sets off a panic: investors, both
foreign and domestic, have reason to fear that they will not be able to
convert their domestic currency into "hard" currency—e.g.
dollars or yen. As everyone heads for the exits, the government runs low
on foreign exchange reserves—these are basically sums of foreign
currency held by the central bank. This causes even more panic and
further downward spiraling of the domestic currency. One way to avoid a financial
collapse is to intervene early, providing large enough sums of reserves
to the central bank so that investors do not panic. Interestingly, the
Japanese government proposed to do just that in September of 1997,
before these currencies had collapsed. It offered a plan for an Asian
Monetary Fund of about $100 billion and quickly lined up the support of
Taiwan, China, and other governments in the region. But the U.S.
Treasury Department killed this plan, insisting that any bailout plan go
through the IMF (International Monetary Fund) [5] The IMF failed to act in time to
stem the outflow of capital or to prevent the currency collapses. But
even worse than that, the conditions that the IMF attached to the loans
helped send the regional economy into a downward spiral. These
conditions are known as austerity, and include such measures as very
high interest rates and fiscal tightening (that is, cutting government
spending and raising taxes). Japan, the world’s second largest
economy, had already been in a slump for six years, and was further
injured by the shrinkage of its most important export markets in the
region. The IMF came under heavy fire, for
the first time in its 53 year history, from prominent
economists—including Joseph Stiglitz, the Chief Economist of the World
Bank—who accused the institution of making the crisis worse.[6]
The Fund defended its policy by arguing that the high interest rates
were necessary to keep more capital from fleeing the country. But these
currencies did not have much further to fall, and so it is very
questionable whether it is worth causing a recession, or even a
depression, in order to avoid the possibility of further currency
depreciation. Perhaps more importantly, there
are ways to stem a currency collapse without sacrificing the growth and
health of the economy through sky-high interest rates. As MIT economist
Paul Krugman has suggested recently, a country can use capital controls,
including restrictions on currency conversion.[7]
In other words, a government doesn’t necessarily have to let anyone
convert their domestic currency into foreign currency any time they want
to, in unlimited amounts, or regardless of the reasons. China, for
example, does not allow its domestic currency to be converted into
dollars except for certain specified purposes, mainly trade and
investment. Regardless of their political perspective, observers have
noted that this and other regulatory features in place in China have
enabled it to weather the regional storm with the least amount of
damage: the Chinese economy continues to grow at an annual rate of about
7%, as compared to the depression (in 1998, an annual contraction
of 5.5% in South Korea, and 13.7% in Indonesia) suffered by its
neighbors. Malaysia has been the first country to take Krugman’s
post-crisis advice and restrict the convertibility of its currency, and
early results seem to be that it has helped the country’s economic
recovery. The main way such controls can work, when they do, is by
allowing the country to keep capital from fleeing the country and the
currency, without having to strangle the economy by jacking up interest
rates. The majority of economists, as
well as policy makers, oppose currency controls on the grounds that they
cause "distortions"—that is, they cause prices to differ
from their "natural" or market price. Black markets and other
inefficiencies can also result. The latter concern is not trivial, and
the question of whether to use such controls, and how best to use them,
will vary depending on the customs and institutions of the country, the
administrative capabilities of the government, and other local
conditions. This would seem to make a good argument for not having
universal policy prescriptions, often devised by foreign economists at
the IMF or the World Bank, who do not necessarily know enough about the
specifics of the countries (now numbering 75), for which they make the
major economic decisions. Brazil: The IMF’s Latest Patient Brazil provides a recent test case
of the "Washington consensus," as it is called—the
combination of policy prescriptions consistently advocated by the IMF
and the U.S. Treasury Department. In November of 1998, Brazil concluded
a $41.5 billion agreement with the IMF, which called for continued high
interest rates (over 40%), an increase in taxes and large cuts in
government spending—a combination pretty much guaranteed to send any
economy into a recession. From the IMF’s point of view, a recession
was "necessary" in order to reduce the country’s current
account deficit (which was running at about 4% of the economy). Here’s how it works: A recession
reduces a current account deficit by shrinking demand for goods and
services. When people lose their jobs and their income falls, they buy
less of everything, including imports. This is one way to improve the
trade balance. We could reduce our own current account deficit this way
also; a depression could wipe it out entirely. But our government would
not adopt such policies, because of the political backlash it would
provoke. An alternative policy for Brazil
would have been to devalue its currency—that is, let the value of its
currency fall relative to the dollar. This would reduce the trade
deficit (see above). The increased demand for Brazil’s exports (and
lower demand for imports) would stimulate its economy. And most
importantly, interest rates could come down to normal levels, allowing
economic growth to resume. The downside of devaluation is of
course the inflation that would be caused by the resulting increase in
the price of imported goods. But Brazil’s imports are only 7% of its
economy, so the inflationary risk of a currency devaluation is not that
great. Given this situation, why would
economists from the IMF (and some within the Brazilian government)
insist on maintaining the fixed exchange rate? Fixed exchange rates do
have certain advantages over flexible rates. Most importantly, they can
reduce or eliminate the uncertainty and fluctuations in the price of
traded goods, as well as financial securities. They can also eliminate
some of the waste and destabilization of speculative buying and selling
of the domestic currency. But a fixed exchange rate is a very difficult
thing to maintain, in general, because the government has to convince
everyone that the currency is not going to be devalued at any time in
the foreseeable future. In light of these difficulties,
and the enormous price that countries like Brazil (and Russia until the
ruble collapsed last year, despite the IMF’s best efforts) have paid
to fix their exchange rates, critics have charged that the Fund’s
priorities are skewed. A fixed exchange rate is good for foreign
investors, and of course the latter are against capital controls or any
restrictions that would make it more difficult for them to get their
profits or capital out of the country. The Fund’s focus on maximizing
the freedom of foreign investors, while protecting the latter from
currency risks (often at the expense of the national treasury), is not
necessarily in the best interests of the host country. In the Brazilian case, the fixed
exchange rate policy certainly failed. Within two months of the November
IMF agreement, the Brazilian currency came under speculative attack, and
the government lost tens of billions of dollars in a futile attempt to
defend it. But the fixed exchanged rate could no longer be maintained—
just as the IMF's critics had predicted.[8]
The Brazilian currency lost nearly half of its value, but the dreaded
hyper-inflation that the Fund and its allies had warned about did not
occur. After an increase to a 4.4% annual rate in the month
following the currency collapse (January), inflation soon ceased to be a
threat. Over the last year (June 1998–June 1999), consumer prices in
Brazil have risen only 3.1%. The depreciated currency has
improved Brazil’s trade balance. However, the Fund’s continued
insistence on high interest rates has hampered the country’s recovery. The Brazilian case illustrates
some of the problems that arise when a country’s major economic
policies are determined by institutions like the IMF, or even by
international financial markets. The crisis was brought on by the herd
behavior of international investors, in response to the collapse of the
ruble. But Russia has very little commerce with Brazil, and many of the
investors who fled Brazil may have done so simply because they were
afraid that other investors would leave "emerging markets"
because of the Russian crisis. The IMF then worsened the crisis both by
prescribing the wrong economic medicine, and by insisting that the
Brazilian Congress enact certain measures (e.g. cuts in pensions for
retired workers) that were very unpopular. When the Fund demands that
such measures be taken in order to "restore the confidence of
international investors," and they are not immediately enacted,
this has the effect of deepening the crisis. Of course the most effective way
to deal with the financial crises that we have seen recently would be to
prevent them, and the Asian financial crisis has sparked considerable
debate in even the most "insider" policy circles about how to
do that. Even the most pro-globalization economists and policy makers
have now joined a discussion about how a "new global financial
architecture" can be constructed that will be less vulnerable to
such meltdowns. But so far there has been no change in policy from those
who have to power to make such changes. In fact, the Clinton
administration continues to pursue the same agenda in its foreign
economic policy: increasing "free trade" and international
investment flows through a variety of new international agreements. And
in spite of the fact that most of the experts in the field acknowledged
that the IMF’s prescriptions actually made the Asian economic crisis
much worse, the Clinton administration subsequently won an $18 billion
increase in funding for the IMF. (This will add $90 billion to the
Fund’s coffers when the other member nations contribute their
corresponding increases.) The Human Costs of the Asian Crisis Before leaving this topic it is
important to call attention to the enormous human costs of the Asian
economic crisis and depression. Tens of millions of people have
been thrown into poverty, with many millions of Indonesians now earning
less than the amount necessary to purchase a subsistence quantity of
rice.[9] In the countryside, millions are
eating leaves and grass, tree bark, and insects in order to survive.
Decades of social progress have
been undermined or reversed, as girls are pulled out of school to help
their families survive, with a rising number being sold to brothels, for
example, in Thailand.[10]
Jobs in sweatshops that just a
year and a half ago would have been avoided by most workers are now
being fought over.[11]
In spite of all this, the IMF’s managing director Michel Camdessus has
called the Asian economic crisis a "blessing in disguise,"
even repeating and defending this statement after it drew criticism.[12] The Rules of the Game Is
globalization progress? Nearly all of the experts and journalists who
write about this subject would answer at least a qualified
"yes" to this question. For some, there is a natural
progression from the medieval fiefdoms of Europe to the nation-state, to
the increasing importance of international institutions such as the UN
or the IMF. Others are in less of a hurry to build the institutions of
world government, but nonetheless see the increase in trade and
commercial relations between countries as a step forward for humanity.
And almost everyone views the process of globalization as inevitable in
any case, flowing naturally from advances in communications,
transportation, and other technological changes. It is certainly possible to
imagine a world in which globalization could raise the standard of
living for the majority of the world’s people. It could increase the
size of markets and the efficiency of production, allow countries who
are short on capital to borrow from those who have a surplus, and even
break down some of the barriers and prejudices that have contributed to
military conflicts in the past.
But the historical record of the
current era of globalization is quite another story. As noted above, the
typical wage earner in the United States has suffered a decline in real
wages since 1973. It is important to recognize that this decline is at
least partly a result of a choice to pursue a particular form of
globalization. Our political leaders have chosen to negotiate, over a
period of decades, a set of rules that has thrown U.S. workers into
increasing competition with much lower-paid counterparts throughout the
world. This has had the effect, not surprisingly, of lowering wages for
most Americans. But the same thing could have been
done with the salaries of doctors. Our government could set up and
monitor licensing and training procedures in foreign medical schools,
and greatly increase the supply of doctors here. Without any sacrifice
in the quality of health care, doctors’ salaries would fall (even
European doctors are currently paid much less than American doctors).
The potential savings in health care costs to consumers are quite large.
But no such plan has ever gone forward, partly because the medical
profession is powerful enough to protect itself from such an occurrence. The Impacts of Globalization: Africa and Latin America For most of the poorer countries
of the world, the opening up of their economies in the last two decades
has coincided with a sharp decline in their rate of growth. Income per
person in Mexico, for example, increased by 3.9% annually in the 1960s
and 3.2% in the 1970s; since 1980, it has been stagnant. The figures are
similar for Latin America as a whole (see graph).
It is important to understand what
an enormous difference this makes in people’s living standards. When
per capita income grows at a rate of 3.9% a year, it means that the
average person’s income will double in about 18 years. For the average
Latin American, income has gone nowhere over the last 18 years. This
means that a whole generation of poor people, which in many of these
countries is the majority of the population, has lost the chance to
improve their living standards. And this does not even take into
account the increased inequality in the distribution of income; in
Mexico, for example, workers’ real wages have fallen below their level
of the 1970s, and have continued to fall sharply over the last three
years in spite of rapidly growing productivity. For Africa, the era of
globalization has been even more disastrous, with per capita incomes
actually falling (see graph). Asia is the exception, with countries like
China, and until the recent crisis, South Korea, Indonesia, and
Malaysia, showing high growth rates over the last 20 years. But these
countries, to varying degrees, have kept a heavy role for government in
the economy: industrial policy, planning, state control over the
financial system, and other interventions enabled these economies to
benefit from expanding access to foreign markets. Although there is
debate among economists over how much these state interventions
contributed to the growth rates of the "Asian tigers," the
once-popular idea that "free market" globalization was the key
to their success has been discarded. And then there is the problem
which is known more generally as a "fallacy of composition":
What works for one part of the system may be impossible if everyone
tries it at the same time. Clearly the "export-led" growth of
countries like South Korea and Taiwan could not serve as a path to
development for more than a handful of relatively small countries,
because the developed economies can only absorb a limited amount of
imports.[13] Defenders of the status quo would
not deny the historical record of the last 25 years of globalization.
Instead, they argue that we are in a period of transition, and that the
advances in efficiency and productivity that the global economy can
provide will eventually raise living standards for everyone. There is a sense in which this is
true: capitalism is a dynamic system, and productivity is constantly
growing. If the gains from this productivity growth continue to accrue
to the upper reaches of the income distribution, eventually the majority
of people will demand, and get, some of these gains. The question is not
whether this will happen, but when. For example, will large-scale social
unrest have to occur before the domestic social contract is rewritten to
allow the majority of the labor force to share in the benefits of
growth? During the industrial revolution in Britain, there was a 50-year
period in which the average person’s income hardly grew, while at the
same time there was enormous exploitation and misery that accompanied
economic change. The critics of today’s
globalization process argue that there is no reason to condemn such a
large part of humanity to a similar fate at the turn of the millennium.
Certainly there is no recent period in American economic history in
which the gains from growth went exclusively to such a small segment of
the population. In the poorest countries of the world, the need for very
substantial change is much more desperate—not only growth, but
large-scale redistribution of income and wealth will be necessary to
pull hundreds of millions of people out of crushing poverty. It is
difficult to imagine these changes taking place while the architects of
the global economy negotiate agreements that place more power in the
hands of private corporations, at the same time that they restrict the
options of governments. For critics of globalization, this
is the heart of the problem: the dominant globalizing institutions are
continuously altering the rules of the game so as to redistribute income
and power upwards. Agreements like NAFTA are a case in point. By making
it easier and more profitable for U.S. corporations to relocate to
Mexico, NAFTA increases their bargaining power against workers who try
to organize unions. A study commissioned by the labor secretariat of
NAFTA found that the agreement did in fact have that effect.[14] Moreover, NAFTA gave private
foreign investors and corporations the right to sue governments directly
for profits lost as a result of regulatory measures—a right they did
not have under previous trade or commercial agreements such as the GATT
(General Agreement on Tariffs and Trade). This right has already been
exercised by an American corporation against the Canadian government,
which had instituted a ban on the gasoline additive MMT. This additive
is effectively banned in the US, but the Ethyl Corporation was able to
sue under NAFTA’s provisions and force the Canadian health ministry to
reverse its ban in July of 1998. The corporation also collected $13
million in damages for lost profits.[15] It is cases like these that have
reinforced critics’ most compelling claims about the process of
globalization: that it is a means of moving economic decision-making
away from elected bodies such as congresses and parliaments, and placing
more authority in the hands of unelected, unaccountable institutions
such as the IMF, NAFTA, or the transnational corporations themselves. In
the process of doing so, globalization is undermining the institutions
that have alleviated the worst excesses and irrationalities of the
market: the social safety net, environmental legislation, and various
forms of financial regulation. Comparative Advantage and Development The latter set of problems has
been recognized, to varying degrees, by pro-globalization economists and
policy-makers. However, these people tend to emphasize the benefits or
potential benefits of globalization. For trade, they rely on a simple
but abstract economic theory: the principle of comparative advantage.
This theory asserts that all countries are made better off by moving
toward freer trade. The idea is that different countries are relatively
more efficient at producing different things. On this basis it is easy
to demonstrate that the world can benefit if each country specializes in
the production of those goods that it can produce most efficiently and
trades with other countries who do likewise. The British classical
economist David Ricardo illustrated this principle a century and a half
ago, with a relatively simple numerical example. Modern (or
"neo-classical") economics has added some more variables, but
retained the basic logic and conclusion. There are a number of problems
with this theory when it is applied to the real economy. First of all,
even the theory itself does not assert that everyone in each
country is made better off through freer trade. There are "winners
and losers," and the theory only predicts that for the entire
country the gains outweigh the losses. The modern version of the theory
would actually predict that in the United States, freer trade would make
"unskilled" labor worse off—which is just what has happened
over the last 25 years. (A common definition among economists of
"unskilled" labor includes all those without a college degree,
or more than 70% of the U.S. labor force). The theory also assumes full
employment. If the economy does not normally run at full employment (as
ours does not), then free trade can inflict further losses; although as
noted below, the overall unemployment rate is primarily determined by
our Federal Reserve’s interest rate policies. Defenders of increasing
unrestricted trade often point to the benefits that accrue to
underdeveloped countries. Here the theory of comparative advantage is
even more problematic. Any country that wants to grow and develop its
economy will have to change its comparative advantage: for
example, the countries with higher income today moved from agriculture
to industry as their main economic activity as they developed. Japan was
told by prestigious Western economists at the end of World War II that
heavy industry (steel, automobiles) was not in the cards for them
because they did not have a comparative advantage in this area—due to
their lack of the appropriate raw materials (iron, coal, etc.).
Fortunately for the Japanese people, their planners ignored this advice,
and Japan became one of the world’s leading industrial powers. There remains today a division of
labor between rich and poor countries. Although manufacturing has
certainly grown as a proportion of the less developed countries’
economies, the richer countries still tend to monopolize the
"cutting edge" technologies that have the most potential to
raise national income. At the same time the IMF and the World Bank have
used their enormous influence to steer the poorer countries in the
direction of producing for world markets according to their present, and
narrowly conceived, comparative advantage. This generally means
producing primary products (agricultural products, raw materials) or
sometimes light assembly manufacturing, with the latter generally based
on imported parts, very cheap labor, and not contributing much to the
development of the local economy. In other words, there is a
profound bias against any kind of national economic development
strategy. The obvious problem with this application of the theory of
comparative advantage is that it rules out most of the strategies that
the developed countries of the world have used in order to attain the
standard of living that they enjoy today. The extreme case can be seen
in Russia, where industry has been practically dismantled under IMF
supervision since the demise of the Soviet Union. The country now
produces almost nothing but energy. In the process, Russia’s economy
has shrunk by more than half in just a few years, and they have suffered
an increase in poverty and declines in life expectancy that are
historically unprecedented, in the absence of war or natural disaster. All of this underscores the
importance of national economic sovereignty in the process of economic
development. This issue is rarely raised in the United States, where it
is commonly assumed that our foreign policy experts and the economists
at the IMF know what’s best for everyone. But the failures of the last
two years—especially in Asia, Russia, and Brazil—have shown very
clearly that they do not know what’s best, even if they were to have
the best of intentions. Indeed, critics of globalization would argue
that the experience of the last two decades—in which the architects of
the global economy have increasingly re-crafted the economies of most of
the world towards their ideal of unified international markets—has
been a failure by almost any measure of economic performance. And there
is no reason to assume that institutions that are controlled by a small
group of people from one or a handful of high income countries would
adequately represent the interests of the world’s poor and working
people. The Russian example is most
striking because the foreign economists in charge of policy were
attempting to engineer a transition from a planned to a market economy,
in a very short time. But the general principles of subordinating the
domestic to the international economy, and precluding any national
development strategy, are commonly applied. Countries like Haiti are
told that they have a comparative advantage in producing coffee and
mangos, and some light assembly (with wages of about $2.10 per day), and
that these exports will be the key to their growth and development. This
application of comparative advantage is similar to telling someone just
out of high school that their comparative advantage is to work at
McDonald’s. That may be true at the given moment, but the more
important question is how to change that comparative advantage—through
education, for example—so as to increase one’s opportunities. Institutions like the World Bank
would respond by saying that they support increased government spending
on education, and they do, at least in theory—when they are not lining
up behind the IMF’s typical demands for government budget cuts. But
without a national development strategy that would enable a poor country
to advance to more profitable areas of production, and shape their
economy according to their own needs (rather than those of world export
markets), even the raising of educational levels will have a limited
effect on national income. Capital Mobility and Foreign Investment The efficiency arguments for
increasing globalization are even more clouded when applied to capital
flows rather than trade. The theory of comparative advantage, which is
based on relative efficiencies in production, no longer applies. So how
do countries, especially poor ones, gain from increased foreign
investment within their borders? This question needs to be examined
carefully, because there is a lot of confusion that surrounds it in most
discussions of foreign investment. The main form of investment that
is promoted by advocates of increasing globalization is called Foreign
Direct Investment (FDI). This is basically investment in which the owner
has a controlling share—for example, General Motors recently spent
$750 million to build a Buick assembly plant in China. FDI is to be
distinguished from the other major form of international investment,
portfolio investment. The latter is basically the purchase of stocks,
bonds or other financial assets in another country, without acquiring a
controlling interest. There are several ways in which
foreign investment of either type can help a country’s economy. First,
it can allow the country to tap foreign savings, thereby enabling its
economy to grow faster than it could grow if it only had domestic
savings to finance investment. It should be emphasized that even if this
increased growth occurs, the country will have to pay interest or
returns to the foreign investors in the future. But if the present
return to the host country is greater than what it has to pay back in
the future, than there is a net benefit from foreign investment. But not all foreign investment
augments domestic savings. To understand why not, consider the
conditions which would have to hold true: the country receiving the
foreign investment would be using it to finance a current account
deficit, importing capital goods (e.g., machinery, equipment—things
that add to the country’s productive capacity). So, for example, China
today is the world’s largest recipient of foreign direct investment
among "emerging market" economies, receiving about as much FDI
as all other less developed countries combined. But China is running a
current account surplus. This means that foreign investment is not
contributing directly, as described above, to China’s economic growth.
In other words, the foreign funds are not providing extra resources to
supplement domestic savings. If that foreign investment were not
available, the Chinese economy would not necessarily grow any slower. Similarly, if foreign investment
allows a country to run a trade deficit, but only increases the
country’s consumption (e.g. of imported consumer goods) rather than
investment, it does not contribute to the host country’s economic
growth. Of course, there are other ways in
which foreign investment can facilitate economic growth and development.
One of the most often cited of these is through technology transfer. For
example, the Chinese may acquire technology and skills from the Buick
plant located there, which would have taken them much longer to develop
on their own. The evidence on how much FDI has contributed to the
economic development of host countries through technology transfer is
not that conclusive.[16]
But one thing is for sure: agreements like the GATT, MAI, and NAFTA,
would limit the ability of less developed countries to ensure that they
do benefit in this way from the FDI that they receive. That’s because
these agreements prohibit what are called "performance
requirements." These are conditions that governments place on
foreign investors—for example, that they must hire a certain
percentage of local citizens as managers or engineers, or take other
measures that would result in technology transfer to the host country.
One of the main purposes of recently negotiated commercial agreements
has been to make such requirements illegal under international law. Given the limited and
situationally specific ways in which foreign investment can contribute
to economic development, it should not be surprising that foreign
investment played little role in the fastest-growing economies of the
last 50 years—for example, China, Japan, and South Korea. Yet the
major policymakers in Washington and the world economy insist that it is
the key to any developing nation’s economic future. Of course, in many
cases poorer countries are in dire straits in terms of their balance of
payments—running large and unsustainable current account deficits, for
example. So they are in desperate need of hard currency (e.g. dollars),
just to finance imports that they need for domestic production, or even
more vital needs such as oil and medicines. In such cases they are very
much in need of foreign capital inflows—indeed they are addicted to
them. But to recognize this need is not the same thing as to make a
sober assessment of what role foreign investment can reasonably be
expected to play in the development of the poorer countries’
economies, an assessment which is very much missing from most
discussions today. The same is true with regard to
exports. It has also become part of the conventional wisdom that
increasing a country’s exports, as a percentage of its economy, is an
end in itself. But there is little economic reasoning to suggest that it
is better to produce exports than to produce for domestic consumption or
investment. And this is in fact the trade off, if we assume (as most
pro-globalization economists do) that all resources are fully employed.
In other words, if the economy is producing all that it is capable of
producing, then increasing exports requires reducing production for
domestic use.[17] Third World Debt Critics of globalization have
argued that institutions such as the IMF and the World Bank promote
"export-led growth" because they are unduly concerned with the
collection of the enormous Third World debt ($2.2 trillion). In order to
make payments on this debt, countries must earn hard currency through
exports. Thus any increase in exports by debtor countries, even if it
comes at the expense of vitally needed domestic consumption or
investment, is good for the debt collectors. Here, too, there is a clash of
political views. A growing number of religious and non-governmental
organizations have argued that the third world debt represents an
unconscionable burden and an insurmountable obstacle to economic and
human development, and should be canceled. Much of it was borrowed by
corrupt, autocratic governments, often going right out of the country
into foreign bank accounts, without adding anything to the economy’s
ability to produce. Furthermore, the maintenance of an unpayable debt
burden allows the creditor countries—mainly through the IMF and World
Bank—to dictate economic policy to the debtors. The Fund and the Bank have
recently conceded the need for limited debt relief for the most heavily
indebted countries, but so far there has been no significant reduction
of any country’s debt burden. This is partly because much of the debt
is unpayable. For example, imagine you owe $50 million and are paying
all of your income for debt service, other than rent and food. If the
bank reduces your debt to $30 million, this is a large reduction in your
debt but it will not change your debt service—the latter will still
eat up all available income. Furthermore, the debt relief
proposed by Washington has strings attached—namely, the same
conditions that form the basis of the "structural adjustment"
agreements that the IMF and World Bank generally require.[18]
Critics charge that these requirements—further opening to foreign
investment and trade, export-led development policies, etc.—have
failed elsewhere and will inflict further damage on some of the
world’s poorest countries. The Debate over "Reform" For
the most prominent policy makers and writers on this topic,
"reform" is synonymous with the opening of markets,
privatization, and reducing the role of government in the economy.
Indeed this has become the standard definition of reform in the media,
and it is used without quotation marks in this way. For most of these
people, the
recent economic turmoil is just a bump in the road toward a more
integrated world economy and the social progress that it promises. They
generally favor increased regulation for "emerging market"
banking and financial systems, as well as greater
"transparency"—that is, better information for investors. However, since the onset of the
Asian financial crisis two years ago, a debate has begun within the
economics profession about whether some of the "reforms" that
opened up these markets may have gone too far. Indeed, there is a fairly
wide recognition—shared by most people outside of what one prominent
economist has called "the Wall Street-Treasury complex"[19]—that
some different kinds of reforms might be needed to ensure the stability
of the international financial system. Most prominent among these reforms
are what economists call "capital controls." These are
restrictions on international borrowing and lending, investment, or the
conversion of currencies. For example, to prevent a financial meltdown
of the type that set off the Asian crisis, governments could restrict
the amount that domestic banks and firms could borrow—especially
short-term—in foreign currency. (There were more such restrictions in
place in countries like South Korea and Indonesia until recently; hence
the conclusion by some economists that recent "reforms" have
gone too far.) Or they could require foreign investors to deposit a
percentage attached to any new investment in an account that could not
be withdrawn for some time, say a year. Currency controls are still
opposed by the vast majority of economists, as well as Washington policy
makers, and they are unlikely to form part of any international
financial reform. But particular countries may adopt them in spite of
this pressure, as Malaysia did (see above). Critics of globalization welcome
the debate over capital controls, and see it as an overdue break from
what they have long argued was a dogmatic and de-stabilizing insistence
on opening financial markets. However, there are questions as to whether
reform in this area would address the more important problems that
globalization has created. In particular, there is the
downward harmonization of labor and environmental standards—the
oft-described "race to the bottom" that has accompanied the
increased power of transnational corporations to avoid regulation and
play one government against another. There is also the increased poverty
and inequality that have accompanied these forms of globalization, and
the reduced ability of governments to take remedial measures. Critics
charge that any international reform which does not reverse these trends
will provide little improvement in the lives of most people on the
planet, even if it helps to stabilize the international financial
system. Of course, there is something to
be said for any reforms that could help prevent a repeat of the Asian
financial meltdown. But what if these reforms grant more power and
authority to unaccountable international institutions like the IMF, the
World Bank, or a newly created World Financial Authority (as some
reformers have proposed)? Would they still be a step forward? On these questions there is
disagreement among the critics of globalization. Some analysts see an
analogy to the domestic economy: all modern capitalist economies have a
central bank, for example, to regulate the money supply and act as a
lender of last resort. Our own Federal Reserve was established in 1913.
Together with New Deal reforms that increased the government’s role in
regulating the national economy, we have created a much more stable
economy than we had, for example, in the previous century. This is true
in spite of the fact that the Fed is a largely unaccountable institution
which often accords first priority to the interests of large bondholders
and bankers, keeping unemployment much higher and wages lower than they
should be. Few of the Fed’s critics would want to return to the
economic instability of the 19th century. On this basis, proponents of
rebuilding "the global financial architecture" argue that
institutions like the IMF and World Bank must be reconstituted, or new
international institutions created, to perform the functions that
central banks and other regulatory institutions perform at the national
level. Other reformers are more skeptical
about these possibilities. While welcoming any positive changes in
existing institutions such as the IMF and the World Bank, they are not
convinced that any such unaccountable bodies can have a net positive
impact. As noted above, there has been no change in the policies of the
governments that control these institutions—especially the United
States.[20]
Why, they ask, would we expect such institutions to go against the firm
and established policies of the governments that control them? Relying on institutions controlled
by the same narrow interests is also a threat to the national
sovereignty of the world’s nations—sovereignty that these critics
see not only as a matter of principle, but as a matter of necessity for
economic development and social progress in the poorer countries. Most importantly, they argue, from
the perspective of reform, the international economy is not analogous to
the domestic economy. At the level of the national economy it is
certainly true that even an unaccountable, oligarchical central bank is
better than no central bank. But the same cannot be said for the
institutions of the global economy. At the national level, there has
been no alternative but to create regulatory institutions and then try
to make them more accountable to the electorate. At the level of the
global economy, however, there is an alternative: regulation at the
national level. As we have seen, some of the most important regulatory
measures—including capital controls—can still be implemented at the
national level. We can expect that more and more governments will look
for national solutions as the global economy fails to meet the needs of
the majority of their citizens, and the latter put pressure on their
elected (or in some cases, non-elected) officials. In the United States, whose
government has been the most powerful advocate of the current form of
globalization, measures to ameliorate the worst excesses of the global
economy—either here or abroad—will most likely not be warmly
received. If history is any guide, proponents of such changes throughout
the world will be dismissed as "trying to turn the clock
back," "protectionists," and worse. And, as often happens
in the real world, some of their leaders or followers—as in Malaysia
or Russia today—will have right-wing or authoritarian ideologies
attached to them. But this does not mean that their pro-national,
regional, or local economic development policies are misguided. Or that
the men who have been working overtime to "write the constitution
of a single, global economy"[21]
are right. October 1999 ENDNOTES [1]
Mark Weisbrot is Research Director at the Preamble Center in
Washington, D.C. [2]
See Robert E. Scott and Jesse Rothstein, "American Jobs and the
Asian Crisis: The employment impact of the coming rise in the U.S. trade
deficit," Economic Policy Institute, January 1998. [3]
In fact the overall unemployment rate has not increased over
the last year, as the trade deficit has risen. In the United States, the
Federal Reserve basically determines the rate of unemployment through
its control over interest rates. As a result, over the long run, the
trade deficit does not necessarily affect the unemployment rate. For
example, if the increasing trade deficit over the last year had not
slowed the economy, it is almost certain that the Fed would have done
so, by raising interest rates. [4]
See UNDP, Human Development Report 1996, (New York: Oxford University
Press, 1996) and Jubilee 2000 Coalition, "Mozambique Gains Little
or Nothing from Debt ‘Relief,’" June 1998. [5]
See, e.g., Paul Blustein, "Summit Stresses Trade, Leaving Bailouts
to IMF," Washington Post, November 27, 1997; David Felix,
"IMF: Still Bungling in Asia," Journal of Commerce,
July 9, 1998. [6]
See David Sanger, "Decisions by U.S. and I.M.F. Worsened Asia’s
Problems, the World Bank Finds," The New York Times,
December 3, 1998. [7]
See Paul Krugman, "Saving Asia: It’s time to get radical," Fortune,
September 7, 1998. [8]
See Jeffrey Sachs and Steven Radelet, "Next Stop: Brazil," The
New York Times, October 14, 1998. [9]
See World Bank, "Latest World Bank poverty update shows urgent need
to better shield poor in crises," June 2, 1999, for the latest
poverty data on Indonesia. [10]
See Nicholas D. Kristof, "Asia Feels Strain at Society’s
Margins," The New York Times, June 8, 1998. [11]
See Nicholas D. Kristof, "Asia’s Crisis Upsets Rising Effort to
Confront Blight of Sweatshops," The New York Times, June 15,
1998. [12]
"IMF’s Camdessus Still Describes Asian Crisis as Blessing in
Disguise," The Wall Street Journal, September 24, 1998. [13]
See William R. Cline, "Can the East Asian Model of Development be
Generalized?," World Development (Vol. 10, No. 2, 1982), pp.
81-90. [14]
Kate Bronfenbrenner, "Final Report: The Effects of Plant Closing or
Threat of Plant Closing on the Right of Workers to Organize,"
Cornell University, September 1996. [15]
See Preamble Center, "Ethyl v. Canada: Implications for U.S.
Commercial Policy," forthcoming, November 1999. [16]
See Edward Graham, Global Corporations and National Governments,
Washington, DC: Institute for Intl. Economics, 1996, Appendix A. [17]
This assumes full employment of labor, too. Of course most people
outside the economics profession do not make this assumption. But if
there is unemployment, and therefore exports can create jobs, then it
must also follow that any kind of domestic spending, such as government
deficit spending, will also create jobs. So there is still no reason to
favor exports over production for the domestic economy. [18]
As of this writing, only three countries have qualified for the IMF/World
Banks HIPC (Heavily Indebted Poor Countries) program of debt relief:
Mozambique, Uganda, and Guyana. [19]
Jagdish Bhagwati, "The Capital Myth," Foreign Affairs,
May/June 1998. [20]
It is widely acknowledged, even by observers who are not critical of the
IMF, that it is "essentially a proxy for the United States"
(Michael Wines, New York Times, December 26, 1998: "Yeltsin
Agrees To Closer Ties With Belarus," p. A1) and is controlled by
the U.S. Treasury Department. In fact, at a recent Congressional hearing
it was noted that the representatives of member countries rarely
vote—there have been 12 votes in the last 2000 decisions (Karin
Lissakers, U.S. Executive Director, International Monetary Fund,
Testimony to the House of Representatives Committee on Banking and
Financial Services, General Oversight Subcommittee, April 21, 1998). [21]
Renato Ruggerio, Director General of the World Trade Organization,
speech delivered to UNCTAD’s Trade and Development Board (October 8,
1996). "We are writing the constitution of a single global
economy," he said, in reference to the WTO’s efforts to develop a
Multilateral Investment Agreement. Center
for Economic and Policy Research |
