Global Policy Forum

The Impact of the MAI on Employment,


By Mark Weisbrot

Preamble Center
November 1997

What is the MAI? The proposed Multilateral Agreement on Investment (MAI) is a set of rules establishing rights for foreign investors. The United States, along with the other 28 members of the Organization of Economic Cooperation and Development (OECD), the association of the world's industrialized countries, is in the final stages of negotiating the agreement. When completed, the MAI will remove most remaining ownership restrictions that governments place on foreign investors, who are most often transnational corporations. This will be accomplished, in large part, by making it illegal for countries, states and localities to steer foreign investment capital towards particular geographical locales, or to place conditions on investors to ensure that the local or domestic economy benefits from the investment and by prohibiting governments from screening investment.

What will be the effect of the proposed Multilateral Agreement on Investment on the level of employment, wages, and living standards of the majority of people living in the signatory countries? The agreement, according to its drafters and proponents, is intended to facilitate the process of globalization. Globalization here refers to increasing international trade and capital flows, mainly through international deregulation and the lowering of barriers to both trade and foreign investment. The answer to this question will therefore depend on how one views our recent past experience with the process of globalization.

The Age of Globalization as Compared to the Bretton Woods Era

If we divide the post-World-War-II era into two periods, 1946 to 1973, and 1973 to the present, there is a clear deterioration in the progress of material well being for the majority of Americans. The first period-- often called the "Bretton Woods era" for the New Hampshire town where the system of fixed international exchange rates was hammered out towards the end of World War II-- was a time of rapidly growing incomes, with the gains from economic growth widely shared. The real wages of a typical American employee increased by more than 80% during this period. Since 1973, by contrast, they have actually declined.(1)

Unemployment has also been much higher since 1973 than previously, notwithstanding the present dip below 5%, which is a 24 year low but still slightly worse than the average of the previous period. Significant increases in temporary and contingent employment, and an increase in overall job insecurity have also characterized the present era. The lifetime employment once offered by companies like IBM and General Motors has pretty much disappeared. In a poll of more than 400 large corporations employees were asked whether they were "frequently concerned about being laid off." From 1979-1990, no more than 24 percent answered yes. By 1995 and 1996 that number reached 46%.(2)

Inequality and poverty have also increased dramatically in recent years. Almost all of the income gains from economic growth in the last decade have accrued to the top 5% of American families.(3) The reversal of the gains from the war on poverty are most strikingly revealed in the poverty statistics for children: In 1960 the rate was 27%, and fell to 14% in 1973. By 1993 it was back up to 23%.(4)

These trends have not been reversed in the course of the current economic recovery. Indeed, the fact that most Americans cannot even count on making real income gains during an economic expansion is probably one of the defining characteristics of the present era. The old saying, "a rising tide lifts all boats," which did describe the economy of the Bretton Woods era, no longer holds true. The U.S. economy is presently in the seventh year of an economic expansion, which is long by any historical measure, and the majority of American employees have still not reached their pre-recession (1989) level of real wages.

All this has coincided with an increasing globalization of the American economy. The share of imports in manufacturing has more than doubled in the past 25 years.(5) Financial capital has become hyper mobile, with daily currency transactions rising from a mere $15 billion in 1973 to more than $1.3 trillion today-- a nominal increase of nearly 900 times.(6) Foreign direct investment has also taken off, especially since the 1980s. In the eight years following the world recession of 1982, it increased by 35% per year.(7) As a percentage of the world's gross fixed capital formation, FDI has nearly doubled since the beginning of the 1980s.(8)

There is no question, then, as to the historical convergence of these trends toward increasing globalization and the declining living standards faced by the majority of Americans. The question is one of cause and effect: how much has the increase in globalization contributed to these problems? If it has, how has this happened and what should be done about it?

Globalization and Living Standards

Economists who support increasing deregulation of international trade and investment have very recently conceded that a very large number of Americans have indeed been hurt by the process. Harvard economist Dani Rodrik, in his book, "Has Globalization Gone Too Far?"(9) exemplifies this new trend among pro-globalization economists. He has noted that the increased international mobility of firms has made it more difficult for governments to pursue any policies that raise the cost of labor, or to sustain social safety nets for the labor force. While it is true that critics of globalization have made these same points for many years, it is especially significant that such issues are now being raised by authors (such as Rodrik) published under such auspices as the Institute for International Economics, the nation's leading pro-globalization think tank.

But there are still major differences that separate the critics from even the most conciliatory proponents of globalization. Most importantly, proponents would not slow down the process of increasing global economic integration. At most, they favor a wider social safety net to cushion the blows.

While opponents of globalization also favor increased state intervention in the domestic economy to ameliorate some of the harmful effects of globalization, they would put the brakes on the process, at least until its benefits and costs could be more equitably distributed. This major policy difference stems from a fundamentally different analysis of the role that globalization has played in our economic decline during the post-Bretton Woods era. For opponents of globalization, this decline has resulted from a number of institutional changes that have reduced the bargaining power, employment opportunities, and real wages of the majority of employees. They argue that globalization has played a major part in facilitating these harmful institutional changes, and that it will continue to do so unless the rules of the game are fundamentally altered.

To understand the opponents' arguments, consider some of the ways in which fundamental economic arrangements have changed since the end of the Bretton Woods era. Since 1973 union membership has fallen from 24% to about 14% of the labor force. The accord that had previously existed between capital and labor broke down: employers resorted to previously proscribed tactics such as the permanent replacement of striking workers, and the legal obligation of employers under the 1935 Wagner Act to bargain in good faith with a recognized union was rendered practically meaningless. Industries in such sectors as transportation and communications were deregulated. And perhaps most important of all, there was a drastic change in monetary policy, especially since 1979, that has favored higher unemployment and slower or zero real wage growth.

How much has globalization had to do with these changes? According to its opponents, quite a bit. The most straightforward and obvious connection has been the loss of unionized jobs, particularly in manufacturing. The most recent estimates have found that the increase in trade alone between 1979-1990 caused a net loss of 2.4 million job opportunities, as compared to a baseline scenario in which trade would have stayed at the same percentage of the economy.(10) This has probably been the single largest contributor to the decline in union membership over the last 25 years.

As union membership has dwindled, labor has found it more difficult to resist the erosion of its legal rights. Even under a Democratic President and with a Democratic majority in Congress (1992-94), there were few reversals of the legal and institutional changes that began with President Reagan's mass firing of striking air traffic controllers in 1981. More recently, organized labor has begun to score some significant victories: last year's minimum wage increase, and especially in the realm of public opinion, the Teamsters successful strike against the United Parcel Service. Nonetheless, its loss of membership due to import competition and FDI outflows have made labor's long-awaited rebound much more difficult and uncertain than it otherwise would have been. Even with the AFL-CIO's recent eight-fold increase in spending on these efforts, its membership has just begun to stabilize.

Wages have also been held down by the increased bargaining power of employers who can easily move production to any country with lower labor costs. In a study commissioned by the labor secretariat of NAFTA, Kate Bronfenbrenner surveyed firms who faced union organizing drives since the agreement was passed. She found that the majority of them threatened to shut down operations if the union won. And 15% of the firms actually did close all or part of a plant when they had to bargain with a union-- which is three times the rate that existed before NAFTA.

This accords with a Wall Street Journal survey prior to NAFTA in which executives of major US corporations were polled as to what they would do if NAFTA were to pass. Some 40% said it was likely that they would move at least some production to Mexico, and 24% said they would use the threat of moving as a bargaining chip with which to keep US wages down.(11)

This survey data is not easily quantified into a percentage of workers' real wage declines, but it is clearly a significant and understated part of the story. Even without taking into account this effect of employers' threat to leave, pro-globalization economists have found anywhere from 10%-50% of the relative decline in the wages of "low-skilled" workers to be attributable to trade. (In the economics literature, "low-skilled" or "unskilled" generally refers to the more than 70% of the labor force that does not have a college degree). The fact that the MAI, like NAFTA before it, contains scores of provisions that benefit foreign investors without any protection for labor, is seen by critics as a signal that the agreement will accelerate present trends.

In the simplest economic terms, what globalization of the sort that is embodied in the MAI has done, according to its critics, is to sever the link between productivity and wage growth for the majority of the work force. Thus while the majority of employees were able to share in the gains from economic growth during the Bretton Woods era, this is no longer true.

The MAI and Globalization

It is not disputed that the MAI is intended to facilitate the process of globalization. The controversy over its impact has to do with whether the kind of globalization it promotes will benefit broad sectors of the population, or whether it will exacerbate the problems that critics have attributed to the global economic integration of the past 25 years: increasing income inequality, unemployment and underemployment, and declining living standards for the majority of the labor force.

Opponents point to a number of provisions that would support the latter prognosis. First, their is the rule on national treatment, which requires that foreign investors and investments be treated no less favorably than domestic ones. Since many national, stand and local initiatives to promote employment, local investment, and industrial policies would have a differential impact on foreign-owned firms, these could be prevented under the MAI. For example, the direction of state pension funds to investment in local businesses, as part of a local economic development plan, could run afoul of the agreement's national treatment provisions.

The MAI would also limit performance requirements, which mandate that firms comply with certain conditions in order to operate in a particular country or municipality. Requirements that foreign firms hire a certain percentage of local residents, or use domestically or locally produced inputs, for example, could be prohibited.

Opponents are also particularly concerned about a proposed provision within the MAI for resolving disputes between investors and national governments. This provision would give private investors and corporations the right to sue national governments for monetary damages. This is a significant departure from most existing multinational agreements such as GATT, in which only governments can file complaints against other governments. Opponents argue that conferring such power on private investors and corporations could prevent governments from undertaking a variety of regulatory measures that are in the public interest.

These and other provisions which establish new rights for corporations without any corresponding rights for labor or the public, and that limit the ability of governments to carry out policies to promote employment and local (or even national) economic development, are among the opponents' primary concerns. They argue that this is exactly the kind of globalization that has contributed to increasing poverty and income inequality over the last two decades.

Globalization and Monetary Policy

Most people are unaware of the tremendous impact that monetary policy-- the setting of interest rates by the central bank-- has on economic growth, employment, wages, and income distribution. In the United States, a committee of the Federal Reserve meets every six weeks to determine what short-term interest rates will be. This enables them to slow the rate of growth of the economy simply by raising interest rates. The unemployment created by the Fed's action then exerts downward pressure on wage growth.

The Fed faces a tradeoff in determining its monetary policy: if the economy grows "too fast," there is a greater likelihood of higher inflation. On the other hand, if keeping inflation down is its only priority, then the Fed can accomplish this by maintaining slower growth and higher unemployment. The Fed is supposed to balance these two conflicting goals, in order to maintain the highest levels of employment that are consistent with keeping inflation under control.

Since the late 1970s, however, the Fed has been almost exclusively concerned with inflation. As a result, we have had much higher unemployment and slower growth than we experienced during the Bretton Woods era. This is partly a result of ideological changes in the realm of economic theory, but it is also very much an issue of political power. The large bondholders, and financiers in general, prefer a tight monetary policy (i.e. higher interest rates). Any increase in inflation, or even the threat of an increase, erodes the value of their bonds. Whereas the majority of people would be better off with, for example, an extra percentage point of inflation, if it meant higher real wages and more available jobs, this is not true for the bondholders. For them, there is no level of inflation that is too low, and no unemployment rate too high.

During the Bretton Woods era the interests of the bondholders were counteracted by large domestic manufacturers who had a stake in a growing U.S. economy and the demand that it generated for their products. Their influence, together with that of organized labor, was enough to insure a monetary policy that favored relatively higher levels of employment.

In the present period, financial capital trumps manufacturing interests, and labor has very little influence at all-- hence the tight monetary policy. Globalization, according to its opponents, has played a major role in bringing us to this state of affairs-- through the "hollowing out" of our manufacturing base (90% of our trade deficit is in manufactured goods), and the weakening of unions. Furthermore, they argue, extending the process of international economic integration through agreements such as the MAI will further consolidate the financiers' grip on monetary policy, making the pursuit of full employment policies increasingly difficult in the future.

To illustrate with some examples: globalization increases the power of transnational corporations relative to domestic firms which have more of an interest in a growing national economy. This conflict can be seen, for example, in the consistent opposition that the National Association of Manufacturers, which represents such domestic companies, wages against the Fed's tight monetary policy. The combination of international financiers and transnational corporations is enough to veto any move toward an expansionary monetary policy that would bring us closer to full employment.

The same is true, in general, for an expansionary fiscal policy-- that is, a deliberate increase in government spending in order to stimulate the economy, for example, during a recession. As the US economy becomes more globalized, the feasibility and effectiveness of both monetary and fiscal policy is reduced. The US is still in the enviable position of being able to pursue full employment policies without having to worry about the inflationary consequences brought about by an international response to such action. In other words, an expansionary monetary or fiscal policy would tend to cause our currency to depreciate, which increases the price of imports. For most countries, including those of Europe, the resultant inflation would prohibitive. However, our imports are still less than 14% of GDP. As the share of trade in our economy increases, it will become more difficult for the US to pursue an expansionary monetary policy; the effectiveness of fiscal policy is also reduced as imports grow.

Transnational corporations also have an interest in a higher international value of the dollar, since this allows them to buy assets and labor more cheaply overseas. However, an overvalued dollar further erodes our manufacturing base and increases our trade deficit-- now running at upwards of $170 billion a year-- by making U.S imports cheaper and exports more expensive abroad.

In sum, opponents of globalization have argued that it has strengthened all the political forces and tendencies in our political economy that favor slower growth, higher unemployment, and lower wages. It has therefore rendered the pursuit of full employment politically difficult, if not impossible. In their view, agreements like the MAI would exacerbate these overall problems. It would also, for example, prohibit the kinds of controls on the international movement of capital that would be necessary for the pursuit of full employment policies.

Globalization and Competition

Globalization's defenders rely primarily on the virtues of competition to make their case. In their view, increased international competition leads to more efficient production and lower prices of consumer goods. This increased competition is brought about through imports and also by allowing international investors to set up shop wherever they can produce most efficiently.

It must be emphasized that these gains from increased efficiency through international specialization and trade are realized through imports, not exports. Although these gains are not necessarily very large, they are, according to economists, the foundation of the case for freer international trade and investment. There is a lot of confusion over this point, because politicians often make the argument that freer trade (and by extension, agreements like the MAI which liberalize investment) will create jobs by expanding exports.

This is not an argument generally made by economists, even the more staunchly pro-globalization ones, for several reasons. Most importantly, if exports create jobs, then it follows logically that imports take them away. Since the United States, is running an annual trade deficit of more than $170 billion, the logical conclusion of this argument is that we are losing hundreds of thousands more jobs through imports than we gain through exports.(12)

With regard to the gains from more efficiently produced imports, opponents point out that the real median wage for employees in the US has actually fallen over the last 24 years.(13) Since this is a measure of the real wage, it takes into account the cheaper consumer goods that are available as a result of imports and import competition. If the real wage is falling, it means that whatever gains the typical worker has enjoyed in the form of cheaper or better consumer goods has been more than offset by downward pressure on wages.

Pro-globalization economists must therefore argue that this downward pressure on wages is due to forces other than globalization. Their chief culprit is technology: they claim that technological changes have lowered the demand for "unskilled" relative to "skilled" labor, therefore increasing the disparity between the two.(14) They would also deny or minimize the connection between any of the other institutional changes noted above-- e.g. the decline of organized labor or the move to a tight monetary policy-- and globalization.

One thing is clear: the MAI would facilitate the process of increasing globalization, and is designed to do so. The result will be more international investment with fewer restrictions or regulations, and more international trade as well. For proponents, this means a more efficient allocation of investment, and added gains from trade as diverse national economies continue to specialize more in accordance with their comparative advantage. For them, these benefits outweigh the costs that may be incurred in the form of economic dislocation or transition.

For opponents, the MAI is a glaring example of a particular form of economic integration that benefits the few at the expense of the many. For them, an agreement that establishes and consolidates extensive rights for investors, with no corresponding protection for labor, the natural environment, or the sovereignty of local and national governments is fundamentally flawed. It is exactly this kind of lopsided institutional change, they argue, that has increased the concentration of income, wealth, and political power over the last 25 years, and led to increasing economic insecurity for the majority of people.

1. Mishel, Lawrence, Jared Bernstein, and John Schmitt, The State of Working America 1996-97 (Armonk, New York: M.E. Sharpe, 1997, p. 140-143)
2. International Survey Research Corporation, cited by Federal Reserve Chairman Alan Greenspan in his "Monetary Policy Testimony and Report to the Congress," February 26, 1997
3. Freeman, Richard B. "Solving the New Inequality," Boston Review
4. Lawrence, Robert Z., "Current Economic Policies: Social Implications Over the Longer Term," in Societal Cohesion and the Globalising Economy (Paris: OECD, 1997, p.29)
5. Mishel et al, op. cit., p.192.
6. Crotty, James, and Gerald Epstein, "In Defence of Capital Controls," in Are There Alternatives? Socialist Register 1996 (New York: Monthly Review Press, 1996, p.132). These authors also develop some of the ideas relating changes in monetary policy to globalization and shifting class alliances, as discussed below; see also Crotty, James, Gerald Epstein and Patricia Kelly, "Multinational Corporations and Technological Change: Global Stagnation, Inequality, and Unemployment." Paper presented to the Economic Policy Institute's Conference on "Globalization and Progressive Economic Policy" (Washington, DC, June 21-23, 1996).
7. Nunnenkamp, Peter, Erich Guundlach, and Jamuna P. Agarwal. Globalisation of Production and Markets. JCB Mohr (Paul Siebeck) Tubingen. Mohr: 1994, p.6-7
8. Graham, Edward. Global Corporations and National Governments. Washington, DC: Institute for International Economics, 1996, p.1.
9. Washington: Institute for International Economics, 1997.
10. Scott, Robert E., Thea Lee, and John Schmitt. "Trading Away Good Jobs: An Examination of Employment and Wages in the US., 1979-94." Washington, DC: Economic Policy Institute, 1997, p.5.
11. Wall Street Journal, September 24, 1992.
12. A second reason that economists reject this argument is that it assumes that the economy is operating at less than full employment. Most economists do not subscribe to this assumption; if they did, it would then follow, as a matter of logic, that an increase in Federal deficit spending would have the same effect on expanding employment as an increase in exports. In this regard it must also be kept in mind that the Federal Reserve (in the US) limits the growth of employment through monetary policy (see above). Therefore, with the exception of short-term fluctuations, trade deficits (or surpluses) will not have much effect on the overall level of employment. Import competition has, however, caused considerable gross job displacement (as noted above); and to the extent that these displace workers do not find jobs at similar pay and benefits, there is an employment loss due to trade.
13. Mishel et al, op. cit., p. 143.
14. This argument has been challenged extensively, on both empirical and theoretical grounds by the Economic Policy Institute (see Mishel et al, op. cit., p.214-226).

Mark Weisbrot is Research Director of the Preamble Center.

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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.