Global Policy Forum

By Alexander Jung

Unemployment epidemics, capitalism bashing, Europhobia: Unease over the borderless economy is spreading, and globalization is beset by crisis. Are nation states impotent in the face of market forces, or can the global economy be remastered?

It is sometime in the near future. The world is dominated by a handful of corporations. Taxes have been abolished; schools are sponsored by McDonald's or Mattel; and people take the name of the company that employs them. Hack Nike has been assigned a contemptible task by marketing head John Nike. To boost sales of the new, ludicrously expensive Mercury shoes, he has been dispatched to murder over a dozen young shoppers. The message: People will do anything to lay their hands on these shoes.

Welcome to "Logoland," the nightmarish world of the terrorized consumer conjured up by Australian author Max Barry. Governments have long thrown in the towel. The world has been privatized. The police only pursue criminals if the victims are prepared to foot the bill. Companies have torn down all boundaries, physical and moral. Crimes are subject to market laws alone.

A vision of capitalism tomorrow? "It's a novel, not an essay," Barry confirms. But like all good science fiction, his book is also a critique of the present - and strikes a nerve as a result. It has been translated into eight languages and become required reading for all those who see globalization as a sinister plot concocted by a cabal of executives, politicians and economists. It seems to strike chords everywhere. A broad protest movement is gathering pace, a coalition of the deceived and disappointed who no longer trust the promises of a global market economy: German butchers and tile setters who suddenly find themselves competing with cheap labor from Poland or the Czech Republic; American engineers and programmers whose jobs have been offshored to eastern Europe or the Indian subcontinent.

"Make poverty history"

A motley army of blue- and white-collar workers, union members, environmentalists, church activists, pop musicians and writers has no intention of bowing to "the dictates of fleeting global capital," as literature Nobel Prize laureate Günter Grass puts it. Their dream is to "make poverty history," the rallying call of the huge Live 8 concert series held this past summer. And they fear a "total economization" of society, as recently articulated by Franz Müntefering, Germany's then-deputy chancellor.

They are united by a diffuse sense of discomfort spawned by a turbocharged capitalism which, powered exclusively by money, seems to have engulfed the world. They believe globalization serves companies, not people; that it destroys jobs and the environment, threatens cultural diversity, exploits the Third World, and deepens the divisions within our own societies.

"We have a real problem of justice," warns Claus Leggewie, a professor of political science at Germany's University of Giessen: "Growing social inequality poses a threat to democracy." According to a recent survey, two-thirds of the Germans think globalization hurts their country - and themselves - more than it helps. Only half of those polled said they felt the social market economy has proven its worth. And this growing disquiet is not limited to Germany. The French and the Dutch voted down the EU constitution this year primarily due to the perceived threat to their standards of living created by the European Union's eastward expansion. And in a textile dispute with Beijing, Europe and the United States are now adopting the selfsame protectionist stance for which they have been wont to lambaste China. German Chancellor Gerhard Schrí¶der's appearance at the Protestant Church Convention in Hanover last May underscored the change in the nation's mood. Schrí¶der won a big round of applause there with his support for the Tobin tax, a levy on cross-border financial transactions aimed at damming the flow of international capital. For a brief moment, he seemed to be in agreement with former adversary Oskar Lafontaine, now the leader of Germany's Left Party.

Economic liberalism has lost its gloss

Schrí¶der's public pronouncement reflects the deep confidence crisis surrounding the principle of free trade. Apprehensive about the future, people are seeking sanctuary in national solutions. They are calling for customs duties and trade quotas. It is entirely possible that a new wave of protectionism will take hold, partitioning off individual economic blocs from the rest of the world.

More than 15 years after the fall of the Berlin Wall, economic liberalism seems to have lost its gloss. Yet in the early 1990s, the raising of the Iron Curtain fueled a surge in globalization. Seemingly overnight, Russia and the Baltic States, China and India - one third of the world's population - had adopted the market economy. Out of nowhere there were - to cite the title of Clyde Prestowitz's landmark book - "Three Billion New Capitalists." Free trade had triumphed. The state was in retreat.

Powering this development was the information technology revolution which brought the spread of the Internet along with the digitization of words, sound and images. "Put those two together and, willy-nilly, you have a global platform for multiple forms of collaboration," said New York Times columnist Thomas Friedman; "The earth had been flattened." In short, all workers - be they in Boston, Berlin, Bratislava or Bangalore - have an equal chance to grab their share of the world's wealth.

But while global affluence is growing, it is also being redistributed. Nations that are poor today could be rich tomorrow - and vice versa. So far there are only tentative signs of the tectonic shifts that would indicate a truly global economy. The rise of China and India will impact the United States and Europe. The question then becomes: Can the Western powers rise to the challenge, or will they falter?

At first people in the Northern Hemisphere seemed stunned by these developments, then paralyzed. Today the mistrust is growing. It is dawning on doctors at Massachusetts General Hospital in Boston that physicians in Bangalore too can interpret their patients' magnetic resonance images. Database experts at IBM Business Services in the German cities of Hanover and Schweinfurt have had to train their replacements in eastern Europe - before being laid off. And north Germany's apple farmers are concerned about their livelihoods, with China flooding the EU juice concentrate market.

"Greediest decade in history"

Even prominent proponents of capitalism are beginning to express doubts. Financier George Soros has complained that the world has been blinded by an un-questioning faith in self-regulating markets. And Nobel Memorial Prize laureate Joseph Stiglitz, a former chief economist at the World Bank, says he expects everyone to "pay the price for the greediest decade in history." How, then, should people deal with globalization? Can they actually influence it? Few people believe they can, says Heiner Geissler, a former general secretary of Germany's conservative Christian Democratic Union party. He reverts to the apocalyptic phraseology of natural disaster when discussing the issue. Industrial workers and trade unions see themselves "at the mercy of anonymous powers controlled by men whose rampant greed is eating away at their brains," he says.

Or - as German President Horst Kí¶hler muses - can the market be harnessed for everyone's benefit? In his eyes, the answer lies in forging intelligent policies. "Globalization is a reality, but one with the ability to mutate into a monster," says Kí¶hler, who holds a doctorate in economics. For this reason, we have to "constrain it with carefully-considered rules of governance."

Kí¶hler appreciates the difficulties of taming this monster. In his earlier life, he was president of the International Monetary Fund (IMF), a position that saw him wage various battles with the Americans. The United States is intent on dominating the IMF just as it seeks to control the World Trade Organization and World Bank. Nothing happens in these institutions without U.S. approval, which is ultimately why so little progress is made. The Americans have little interest in new rules. So far, the mighty U.S. financial lobby has also resisted any attempts to rein in speculative hedge funds. Not only do these behemoths attack companies and entire countries with their billions; their appetite for risk and lack of transparency threaten the stability of the global economy. In their desire to maximize profits they take huge gambles, often with other people's money.

Little can be done on a national level to discipline global hedge funds - a fact that highlights the predicament of politics in this globalization age. Has the state become entirely impotent? Is it unequivocally at the mercy of global capitalism?

Central Berlin, the old East German State Council building near the Spree River: In September, courses commenced at the new Hertie School of Governance. The 30 students in the institution's first class hope to garner top jobs in global organizations, EU institutions or German federal and state authorities. Director Michael Zürn, 46, maintains that these government institutions still wield power, even in the era of globalization: "The nation state," the professor says, "is still capable of intervention."

Admittedly, he says, many responsibilities have been delegated upwards. About 50 percent of all economic regulations are drawn up by European or international institutions and merely implemented by national parliaments. But nation states aren't necessarily helpless in the face of globalization: "The challenge lies in intelligent adaptation."

Reducing labor costs generates jobs

Specifically, Zürn advocates a modern approach to the pursuit of national interests. Nearly all politicians agree on it, at least tacitly. Under this system, the state would increasingly finance social services with taxes and private premiums - rather than payroll withholdings. In Germany, individual contributions for retirement, social security and health benefits are matched by company contributions. About two years ago, the country's Institute for Economic Research calculated the effects of such a model for SPIEGEL. It found that a drastic reduction in non-wage labor costs could generate one million new jobs.

The formula wouldn't work for every industry, of course. The era when basic clothing could be manufactured profitably in Germany is probably long gone. A German seamstress simply cannot compete with the hourly wages in Romania. But it could be a lifeline for other industries. In the automotive sector, for example, wages often account for as little as 15 percent of total costs. There, a few cents saved per hour on non-wage labor costs can secure a factory's future.

But intelligent adaptation also demands a simplified tax system with low rates, a broad tax base and few tax breaks. Financial experts have recommended this for years: It means income would be taxed less than spending on consumer goods. Similar models are already commonplace elsewhere - in many of the new EU member states in eastern Europe, for instance. That's where "young politicians are implementing the sort of tax policies they learned about as students at western European colleges," says Franz Wagner, a professor of taxation law at Germany's University of Tübingen.

Germany is certainly capable of competing in the global marketplace. After all, Great Britain, Ireland, Austria, Denmark and Sweden - all countries exposed to globalization, and also burdened with dismal economies - managed to turn the corner. Today the OECD praises their growth rates, low debt levels and successful employment market strategies.

The legal jungle

At any given time, the German parliament could take a machete to the jungle of 2,000 federal laws and 3,000 regulations containing more than 85,000 individual clauses; it could hack off two old regulations for every one it inserted. And nobody is stopping it from reorganizing the federal structure, and ending the frequent deadlocks between federal, state and municipal authorities. It could even replace proportional representation with a first-past- the-post system - thereby boosting the government's political leverage.

In any case, the claim of impotence in the face of the market appears odd given the fact that the German state generates nearly 50 percent of the country's gross domestic product. Even in the age of globalization, the German government can effect change; it simply lacks the desire and will to do so. "Capitalism, in whatever shape or form, cannot stop us from launching a comprehensive reform of our social insurance system," says economic expert Peter Bofinger.

More than any other country, Germany - the world's top exporter - profits from free markets, in particular from growing sales to central and eastern Europe. Exports to these countries rose 9 percent in 2004, while imports increased by just 1 percent. Furthermore, without the inexpensive components made in places like Bratislava, Gliwice or Temesvar, German corporations and midsized companies would struggle to remain competitive.

Advocates of shutting the door on the low-cost production sites in eastern Europe might be in for an unwelcome surprise: A digital camera that now runs about €200 may end up costing twice as much. A €40 shirt could jump to €100. Discount prices are - purely and simply - an indirect increase in wages. Indeed, there is ample evidence that wage competition would benefit, not harm, Germany's economy. For example, not everyone can afford a German tiler's gross hourly wage of nearly €50. Many households engage under-the-table workers to do their repairs. Cheaper workers from the East would significantly increase demand for registered contractors. But what would that mean for the masons, mechanics, tile setters and other low skilled German workers? They could only compete with the eastern Europeans' cheap wages if the state were to subsidize their income through a "citizen credit" - a type of negative income tax that has long been used in the U.S. As even Dirk Niebel, general secretary of Germany's pro-business FDP party, recognizes: "There is no way around it."

"Not a zero sum game"

For the past 30 years, the U.S. government has been subsidizing the incomes of low-wage earners with a tax credit. A family with two children, for example, whose annual income does not exceed $10,750 receives up to 40 percent on top of that from the state. This amounts to $4,204. The support shrinks proportionately as income rises, and it ends when the total reaches $35,000.

This system does not come cheap; the subsidies cost the U.S. government about $35 billion. But it is cheaper than financing unemployment. Germany's Federal Labor Office has a budget of about €58 billion or $71 billion. Offering good prospects to skilled middle- class workers and employees poses a greater challenge. Many also see themselves as the fallout of globalization, and at first glance this may seem to be true. But it doesn't have to be.

When an engineer is hired in Bratislava, it doesn't automatically mean that one in Ingolstadt has nothing to do. A programmer in Bangalore doesn't necessarily cut his colleague in Walldorf out of the market. Audi and SAP have added employees both in Germany and abroad. "Globalization isn't a zero-sum game," stresses Jagdish Bhagwati, a free-trade expert from New York.

Of course, this is only true if the company is successful and the German engineer or programmer is worth his or her salary. Employees need to demonstrate "greater mobility in their brains, as well as in their feet," says EU Commissioner Günter Verheugen. In short, they have to adapt intelligently.

"The Indians and Chinese are not racing us to the bottom," says journalist Thomas Friedman. "They are racing us to the top." Time and again, economic change has opened up new, unexpected areas of work. A century ago, few farmers could have imagined their sons becoming highly respected and even affluent industrial workers. Fifty years ago, an industrial worker could hardly have dreamed of his daughter attending a university.

Today many parents can scarcely conceive of their children getting any kind of decent job in an increasingly international labor market. Until now, however, globalization has created more wealth than it has destroyed. In fact, it has engineered the wealth it is now accused of endangering. The countries that embraced the global market have been the beneficiaries. They include South Korea, which ranks 10th in the world in terms of its economic strength, but excludes isolated North Korea, where poverty and hunger reign. And it also includes companies like Germany's Metro Group - which operates stores in 30 countries and generates nearly half of its sales abroad. But not crisis-ridden KarstadtQuelle, the department store chain that missed the globalization train.

Unpatriotic louts?

Most internationally operative companies are thriving. Raking in record profits, they distributed 40 percent higher dividends last year. At the same time, though, they have cut back domestic investments by 20 percent. Does this mean executives are unpatriotic louts, as some union leaders and politicians would have it?

Granted, the German market means very little to these companies now. Global players like Metro, Siemens and Adidas gave up long ago on their domestic economy, with its anemic growth and dearth of customers. They have shifted their focus to eastern Europe and the Orient instead. That's where they build their stores. That's where they find their customers. And that's where they post their profits. And, of course, that's where these German companies pay their taxes. Siemens, for example, generates only some 10 percent of its earnings in Germany these days. Nonetheless, its share of German-based employees is remarkably high at about 38 percent.

The executives' hands are tied. The pressure from shareholders is unrelenting. They are driven by analysts and fund managers with a single obsession: profit and more profit. The lower the cost of a location, a plant or an employee, the better. A "race to the bottom" is underway in which everything has become a cost factor: wages, social standards and working conditions.

Basic human values

And what about corporate social responsibility? Is big business even accountable, or is moneymaking a company's sole duty, as Chicago economist Milton Friedman contended? Only a minority of German companies are pursuing such rigorous strategies to date. Over the past few years, German firms have had an average return on sales of 1.5 to 2.5 percent - less than the interest they would get from many banks. Nor is short-term profit hiking the rule: Some 84 percent of German companies are family owned, and their planning usually extends well beyond the current quarter. Just 974 of Germany's 3.3 million businesses are actually listed on the stock exchange.

Markets and morals are not always mutually exclusive, even at large corporations. As some have discovered, basic human values may not be harmful at all. Sports-apparel maker Adidas, for example, demands that all its business partners, 835 suppliers around the world, make a commitment to certain standards, such as the requirement that no employee work more than 60 hours a week. Last year 53 of these subcontractors were inspected in China. Two received an initial warning and five a second caution. Given a third failure to comply, suppliers' contracts are automatically terminated. The home shopping group Otto has even established its own company to advise other businesses on adherence to social standards. As Adidas and Otto acknowledge, spot checks are no guarantee of good conduct. But the two companies hope the word will spread and serve as a deterrent.

The companies' motives are not solely altruistic; their commitment to social justice is based on hard facts and figures. Otto has learned that suppliers who observe minimum social standards tend to be dependable. More importantly still, there is pressure at the checkouts from customers wishing to parade their shoes and sweaters with a clear conscience.

Scandals and tarnished images

Big corporations may be more powerful than ever in a globalized world - but they are also more vulnerable. This is because their critics also think globally, and can broadcast news of any abuses around the world in seconds. Shell abandoned plans to sink its Brent Spar oil platform due to media pressure, while Nestlé withdrew its Butterfinger candy bar, which contains genetically manipulated corn, from the German market. Companies implicated in such scandals are risking more than tarnishing their images. They are likely to see their profits and stock prices plummeting as well. On the other hand, consumers seem strangely indifferent toward ethical corporations. Fair-trade coffee has a market share of less than 1 percent.

Five years ago, U.N. Secretary-General Kofi Annan launched an initiative to promote corporate social responsibility. Some 2,000 companies joined the Global Compact, including DaimlerChrysler, Bayer and Volkswagen. They pledged to observe 10 principles, including the abolition of child labor and the right to collective wage bargaining. According to Annan, the initiative was designed to "give a human face to the global market."

There is, however, a catch. The exercise is entirely voluntary; there are no sanctions. Worse, the participants are precisely those corporations that already treat their Third World employees with a modicum of fairness, paying them comparatively well and seeking to ensure their business partners do the same.

In the global theater, exploitation plays out offstage: in the thousands of backstreet businesses that are subcontractors to the subcontractors, the smallest and most fragile links in the supply chain. It is here that the poor work 16 hours a day, six days a week. Out of view of the inspectors.

Toothless institutions with little bite

Well-intentioned codes of conduct are all but ineffectual here. Mandatory regulations on occupational health and safety are needed - set up by national legislators and enforced by regional inspectors.

In its Declaration on Fundamental Principles and Rights at Work, the International Labour Organization (ILO) has formulated four core principles: freedom of association and the right to collective bargaining, the elimination of discrimination in employment, freedom from all forms of forced labor, and the abolition of child labor. Each year, the ILO member states present a report outlining the practical implementation of these standards in their respective countries. But as well-meaning as it is, the declaration is little more than a piece of paper. The Geneva-based organization has no means of imposing these norms, let alone prosecuting alleged breaches.

It is easy to see why such toothless institutions have little bite in the world markets. The final report of the high-powered World Commission for the Social Dimension of Globalization stated that the problems of developing countries were the result of "deficits in governance systems" and not due to globalization. The organizations were "not sufficiently democratic, transparent and accountable."

Third World nations have hardly any say at the WTO, the World Bank and the IMF. Many feel patronized by the richer members. First World development strategies - heavy on the market, light on regulation - only exacerbated the problems faced by Africa, Latin America and large parts of Asia during the 1990s. This crystallized most clearly during the currency crisis of 1997, when many Tiger economies became insolvent - virtually overnight.

The industrial nations are prepared to admit as much now. The latest indication of a strategy adjustment is the G8 nations' decision to waive the debts of Africa's poorest countries. Such concessions, however, will do little while the states themselves refuse to change - as long as the powers that be block governance systems that uphold legislation and protect private possession.

"The Third World does not lack the necessary capital," says Peruvian economist Hernando de Soto. "But it cannot put it to profitable use because it lacks modern property legislation and rule of law." Corruption, the abuse of power, and bureaucracy are the biggest investment hurdles in these countries. According to the World Bank, it takes two days to set up a business in Australia, compared with 382 days in Ghana. It's not the market that malfunctions there. It's the state.

But ensuring fair competition between the northern and southern hemispheres is equally crucial - and long overdue. For years industrial nations have warded off competition from the Third World. They impose high import tariffs to protect their farmers from cheap fruit and vegetables, or keep them afloat with billions in subsidies. The North spends about $1 billion on agricultural subsidies every day - five times as much as on aid. As a result, European tomato producers can actually undercut their local rivals at the markets in Dakar and Nairobi.

More recently, however, there seems to be a shift toward fairer world trade. For example, the sugar directive is due to be abolished soon. It currently protects European beet growers against competitors from the South, at a cost of some €6 billion a year.

Global textile trade quotas already expired at the start of this year. For decades developed nations protected their garment industries from cheap imports, until GATT, the predecessor to the WTO, agreed in 1995 that the quotas should be abolished by 2005. Enough time to prepare, one might think.

Protecting people from oppression with Adam Smith

Nonetheless, very few were ready for the big day. Since the beginning of this year China has been swamping the world with cheap fabric. So overwhelming was the deluge that the EU negotiated a two year grace period for certain types of merchandise. To make its case, it cited protection clauses set up when China first joined the WTO. Once the period expires, EU Commissioner Peter Mandelson has assured the Chinese that trading will resume without further disruption.

The solution to the textile dispute highlights two things. It shows how difficult it is to open markets from one day to the next, even after a protracted period of groundwork. But it also demonstrates that national institutions can actively forge an environment that eases the transition.

Not even the grandsire of free market thinking, the British moral philosopher Adam Smith, would have objected to this type of intervention. Smith was convinced that the state must lay down rules. For example, he considered it a state's duty to protect "every member of the society from the injustice or oppression of every other member." Smith's works make no mention of reducing the power of the state.

Governments and global organizations, citizens and companies are thus quite capable of shaping the globalization process - as long as they adapt intelligently to its requirements. That, of course, is the tricky part. It means more uncertainty, more responsibility, and more stress. "Everybody wants growth, but nobody wants change," notes U.S. economist Paul Romer.

Even under the terrorizing capitalism of Hack Nike's "Logoland," not everyone is condemned to consume ad infinitum. In the novel, a heroine comes to save the day. Her name? Government. Jennifer Government.

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