Global Policy Forum

By Mark Weisbrot¹

"Power," Walter Reuther of the United Auto Workers once said, "is the ability of a labor union like the UAW to make the most powerful corporation in the world, General Motors, say 'Yes' when it wants to say 'No.' That's power."

On December 1, 1999, as clouds of tear gas hovered over the streets of Seattle, President Clinton said yes to 50,000 protesters, when he wanted to say no. He agreed, in principle, to making labor rights an enforceable condition for trade among the countries of the World Trade Organization.

That's not to say that he meant it - quite the contrary, in fact. The process proposed by the administration would take decades, and is unlikely to ever yield meaningful results. But that is not what mattered, since the immediate effect of his statement was to scuttle the millennium round of the WTO.

Clinton knew that would be the result of his speech; he didn't want it, but he went ahead with it anyway. This is what happens when a broad cross-section of labor, the environmental movement, the religious community and campus activists put aside their differences to pursue a common goal.

This grand coming together also made for great theater: the Seattle police, overdressed in their gas masks and riot gear; black-masked anarchists; environmentalists in sea-turtle costumes; bare-breasted Lesbian Avengers with "BGH-free" scrawled across their chests; and giant puppets and protesters on stilts with huge glowing wings of the monarch butterfly (the kind that seems to have trouble with the pollen from genetically modified corn). Greenpeace floated a big green condom over the labor march that said "Practice Safe Trade."

The pundits were not amused. The prospect that, as one businessman said at the World Economic Forum in Davos the next month, "we could lose" seems to have touched a raw nerve. Michael Kelly, writing in the Washington Post, accused President Clinton of taking "a dive in Seattle for labor, the enviros and the loony left." For Thomas Friedman of the New York Times, the protests were "ridiculous," "crazy," carried out by "a Noah's ark of flat-earth advocates, protectionist trade unions and yuppies looking for their 1960's fix." George Will noted that "semi-autarky has been the left's recurrent temptation. Protectionism is imperative for the left's agenda, which is ever-increasing government allocation of wealth and opportunity." Michael Kinsley assured readers of Time that "the WTO is OK" - without saying anything about what it does - and urged them to "do the math. Or take it on faith."

These mostly contemptuous dismissals betray an underlying intellectual weakness. There are good reasons that the defenders of the status quo do not wish to engage their critics on these issues. While they have been largely successful in pretending that they have the bulk of economic research and theory on their side, this turns out not to be true.

Let us begin with the simplest, commonly accepted definition of globalization: an increase in international trade and investment. Is this necessarily beneficial for everyone involved? Or even for the majority of people in any given country? In the United States, trade is now almost twice as large, as a percentage of GDP, as it was in 1973. Foreign investment, both outward and inward, has also risen sharply.

At the same time, the median real wage in the United States has been stagnant over the past twenty-six years. This one statistic tells a very big story, a fact which the more ardent advocates either don't understand or pretend they don't. Median: that means the fiftieth percentile, i.e., half of the entire labor force is at or below that wage. This includes office workers, supervisors, everyone working for a wage or salary - not just textile workers or people in industries that are hard hit by import competition or runaway shops. Real: that means adjusted for inflation, and quality changes. It is not acceptable to argue, as is often done, that the typical household now has a microwave and a VCR. That has already been taken into account in calculating the real wage.

This means that over the last twenty-six years, the typical wage or salary earner has not shared in the gains from economic growth. Now compare this result to the previous twenty-six years (1946-1973), in which foreign trade and investment formed a much smaller part of the U.S. economy, and was more restricted. During this time, the typical wage increased by about 80 percent. This is one reason why it is so uncommon for anyone to defend the era of globalization on its merits.

It must be emphasized that these statistics are not in dispute among economists. Their validity is also verified by the experience of most people who are old enough to have lived through the first half of the post-World-War II era. In the sixties and seventies, it was not uncommon for an average wage earner to buy a home and support a family with one income, and even put their children through college. This is no longer true.

There are differences among economists as to how much of the typical employee's misfortune has been due to globalization. But few would deny that it is a significant factor. William Cline, a staunchly pro-globalization expert in this area, has estimated that 39 percent of the increase in wage inequality from 1973-93 has resulted from increased trade. (This does not include the effect of increasing international investment, which has also put downward pressure on wages.) Other estimates have been smaller, but they still are enormous when we compare them, for example, to the gains from increasing trade.

In conventional economic theory, the gains from increased trade arise on the import side of the ledger. (Politicians often brag about "creating jobs" through exports - which is disingenuous in any case for the United States, where we have run trade deficits for twenty seven out of the last thirty years - but economists do not.) These gains result from importing goods that are more efficiently produced elsewhere - the textbook "theory of comparative advantage." When economists measure these gains for the United States, they turn out to be very small. For example, the best estimate for the Uruguay Round of the GATT - the last round of negotiations, which culminated in the creation of the WTO in 1994 - would put the direct benefits of tariff reduction to the U.S. economy at about $700 million per year. Even if we were to triple this figure for the effect of non-tariff barrier reduction, we are still talking about less than three hundredths of 1 percent of GDP.

The conventional theory that is taught in every international economics course also predicts that "low-skilled" workers would lose from increased opening to trade. Economists commonly define "low-skilled" workers to include about 70 percent of the labor force.

In other words, the overwhelming weight of the empirical evidence, and even economic theory, indicates that the typical American has little to gain from the present course of globalization, and in fact has already lost quite a bit from the process.

This should not be surprising, given the form and substance of the institutional changes that we have witnessed over the past three decades. Our political leaders have chosen to negotiate a series of trade and commercial agreements that throw American workers into increasing competition with much lower-paid counterparts throughout the world. One does not need a Ph.D. in economics to guess the likely results of such measures. Although manufacturing workers have been most directly impacted, the lowering of their wages and the general weakening of labor's bargaining power reduces compensation throughout most of the labor force.

It must be emphasized, because the contrary is so commonly believed, that this process is not driven by technology. Rather it is the result of deliberate political decisions made by human beings. Our leaders could have done the same thing to the salaries of doctors. We could, for example, initiate and monitor licensing and training procedures in foreign medical schools, and thereby increase the supply of doctors. With a fraction of the effort and resources than it has taken to raise foreign trade and investment to current levels, and without sacrificing the quality of health care, doctors' salaries would fall. The potential savings to consumers are quite large - $70 billion per year could be saved just by lowering doctors' salaries to European levels. This would be a hundred times larger than the direct gains from tariff reduction in the Uruguay round of the GATT. But it is not likely to happen any time soon, because doctors have enough political clout to prevent such an assault on their living standards. The same cannot be said for most of the rest of the labor force.

Lacking economic arguments on the domestic front, many proponents of globalization have presented it as a helping hand to the poorer countries of the world. This statement by Larry Summers, quoted without correction in the New York Times, is typical:

"When history books are written 200 years from now about the last two decades of the twentieth century, I am convinced that the end of the cold war will be the second story. The first story will be about the appearance of emerging markets - about the fact that developing countries where more than three billion people live have moved toward the market and seen rapid growth in incomes."

This is not likely, unless the historians of the future are innumerate. In Latin America, for example, income per person has hardly grown at all over the last two decades: about 5.6 percent total for 1980-97. If we compare this to the previous two decades, before the "Washington Consensus" of liberalized trade and investment was adopted, the contrast is striking: from 1960-1980, income per person grew by 73 percent. Summers may not be including Africa, where per capita income grew by 34.3 percent from 1960-1980, but has since fallen by about 20 percent. Some of the "emerging markets" of Asia (China, Indonesia, South Korea) have in fact grown rapidly over the last twenty years, but they also grew rapidly in the previous decades. And even these countries are mainly the exceptions that prove the rule: the "crony capitalists" who have largely disregarded Washington's advice, and China, a country that does not have a convertible currency, maintains state control of its banking system, and allows little foreign ownership in equity markets.

All this simply evaluates the globalization effort on the terms of its proponents: the growth of per capita income. This is the most basic measure of economic progress; it says nothing about the distribution of income, which has also worsened both within and between countries, as globalization has proceeded. Or environmental destruction, the loss of biodiversity, labor or human rights, or any of the other issues raised by the protesters in Seattle.

The more honest defenders of globalization avoid false claims about the past. They argue instead that we are going through a "transitional" period, and that the gains from the global economy will eventually raise everyone's living standards. This is partly true, but only in a tautological sense. The global economy, which is still really a collection of national economies, continues to generate increases in productivity. In most countries there is a limit as to how long these gains can be confined to a narrow sector of the population. Eventually, the majority will find a way - whether through elections or union organizing or insurrection - to get a piece of the pie. So it may be true that the increased productivity generated by global commerce will eventually benefit most people in the world. The more relevant question is not whether this will happen, but when. Twenty years is a long time. How much longer will it take? Will it be like the Industrial Revolution in England, where most people's living standards remained stagnant for half a century before they began to rise?

For most commentators these questions do not arise, because the entire process is seen through a prism of technological and market determinism. Their narrative is a simple one: the poorer countries are passing through stages that we completed in the last century. Child labor, poverty-level wages, intolerable levels of pollution - these are things that will recede with development, helped along by trade and inflows of foreign investment. But in fact no nation has ever pulled itself out of poverty under the conditions that Washington currently imposes on the underdeveloped countries of today.

Economists have long known that markets by themselves - whether international or domestic - would not accomplish the task of economic development. Although there have been many paths to development, virtually all have required a host of interventions by the state, deliberately designed to alter the comparative advantage of the national economy. The protection of northern manufacturing was a major cause of our own civil war, with the southern slave-holders unsuccessfully trying to raise the banner of free trade. And the few countries that have successfully industrialized after Europe and America - Japan, South Korea, Taiwan - have, as latecomers, needed much higher levels of protection, planning, industrial policy, and other measures. Such policies are now prohibited; now the TRIPS provisions in the WTO, if enforced, would make technology transfer so difficult and expensive that today's developing countries would have very little chance of learning from past successes.

This raises another crucial question: even if our political leaders were right, and the current miseries of globalization were but a temporary hurdle on the road to economic progress, how should this process be directed? The WTO, the IMF and World Bank - the three most important international economic institutions - are often described as "institutions of global governance." But in practice they are much more of a global anti-government, unaccountable to any electorate. Indeed one does not need a conspiracy theory to notice the progressive removal of economic-decision making from governments to unelected (and for most countries, foreign) officials. For much of the world, this is the face of globalization that intrudes into civil society, and it is not benevolent. In Latin America, for example, it is natural for people to become highly cynical about democracy, after experiencing enormously faster and more widely shared income growth under military and authoritarian regimes than under formally democratic governments whose economic policies are decided in Washington.

Ironically, the WTO is the least controlling of the three institutions, and the only one that even pretends to offer the poorer countries a voice in deciding their own destiny. It stumbled into the line of fire, and got shot down by an international "swarm" of NGO's (non-governmental organizations), because of its intrusion on the national sovereignty of its richer member nations. ("Swarm" is a post-internet term coined by a Rand Corporation study seeking to explain how NGO's, through loose networks and fast-flowing exchange of information, could converge upon and defeat much more powerful governmental and multilateral adversaries.)

This intrusion was in line with the worst warnings of the WTO's critics: in every case in which a national environmental or public health measure was challenged before the WTO, the challengers seem to have won. The WTO ruled that the European Union could not ban beef treated with growth hormones, even if such regulation applied equally to domestic and foreign-produced meat. The United States' EPA regulations on the contaminants in foreign gasoline were found to discriminate against Venezuelan producers. Our ban on shrimp caught in nets that ensnare giant sea turtles, legal under our Endangered Species Act, was similarly found to violate the rights of foreign sellers. And so on.

But the IMF and the World Bank, still flying mostly below radar, are invested with vastly greater and more autocratic powers. The Fund, which has 182 member nations but is basically run by the U.S. Treasury department, makes the major economic decisions for more than 50 countries. To get a feel for what it is like to be one of the IMF's clients, imagine that London or Paris had to approve Alan Greenspan's latest term as Chairman of the Federal Reserve, the Fed's decisions every six weeks on interest rate policy, the director of the Office of Management and Budget, and the major legislation considered by the House and Senate Finance Committees.

This makes the Fund the most powerful institution, of any kind, in the whole world, in terms of its influence over the lives of hundreds of millions of people - and indirectly, billions.

Most of the time the Fund exercises this power without having to lend much money, except in special cases like the recent Asian and Russian financial crises. This is simply a result of the way the rules have been set up: IMF approval is considered a prerequisite for other sources of multilateral credit such as that of the World Bank, and most private credit as well. This leaves many countries with the harsh choice of submitting to the Fund's dictates, or facing a cessation of credit and a political crisis that could, for example, topple the government.

Official Washington is very attached to this arrangement. To take just one example: two and a half years ago, when the Thai currency began to fall and the Asian financial crisis was just beginning, the Japanese government offered to set up a fund that would provide the necessary guarantees to stem the hemorrhaging of capital. As the major foreign banks were well aware, this was exactly what was needed: a panic was setting in, foreign currency reserves were dangerously low throughout the region, and investors were selling local currencies just to get out before they fell further. China, Taiwan, Hong Kong, Singapore and other countries offered support for a $100 billion fund to stabilize these currencies. But the idea did not sit well with Treasury, and Larry Summers (then Deputy Secretary) was quickly dispatched to Asia to kill it. The orders from Washington were clear: any bailout would have to go through the IMF, with results that turned out to be an economic and human disaster. In case anyone did not understand why it had to be this way, former U.S. Trade Representative Mickey Kantor later explained that "the troubles of the tiger economies offered a golden opportunity for the West to reassert its commercial interests. When countries seek help from the IMF, Europe and America should use the IMF as a battering ram to gain advantage."

Sometimes this battering ram can level a whole country. Take Russia, for example: the IMF's economic program went into effect at the beginning of 1992, and within five years the country had lost nearly half of its national income. The number of people living in poverty rose from 2 million to 60 million. Male life expectancy declined from 65.5 to 57 years. This is an economic collapse rarely seen without a major war or natural disaster. And despite widespread assertions to the contrary, the statistics show that the Russian government did indeed follow the IMF's prescriptions - on monetary and fiscal policy, as well as the rapid privatization of industry that brought them a plague of organized crime and corruption.

In spite of these and other less spectacular failures, until 1998 hardly anyone outside of the affected finance ministries even knew what it was that the Fund did. Then came the Asian financial crisis: and here the IMF was implicated not only in helping to cause the crisis, but in worsening it. These blunders, too, would probably have passed unnoticed by Western journalism, if not for the public criticism of two economists that were too prominent to ignore: Joseph Stiglitz and Jeffrey Sachs.

This is worthy of special mention, not to lionize them, but as an illustration of how dependent American journalists and policy makers are on economic experts to interpret current events. Where the experts are silent or, in many cases actively complicit - as Harvard's Dani Rodrik has duly noted - in the perpetuation of certain myths, these myths can persist indefinitely.

Stiglitz was chief economist of the World Bank and a former Chair of President Clinton's Council of Economic Advisors, as well as one of the profession's most respected academic economists. He pointed out the absurdity of squeezing countries like Indonesia and South Korea with monetary and fiscal austerity at a time when their economies were contracting. He went on to chronicle and explain other major failures of the Fund and the Bank, especially in Russia and Eastern Europe. His reward was an untimely departure from Bank, which according to a report in the Financial Times, was arranged by Larry Summers.

Sachs, together with Steven Radelet of Harvard's Institute for International Development, showed how the Washington-sponsored liberalization of Asian financial markets had created the instability - in particular, a large influx and sudden reversal of foreign investment flows - that led to the financial crisis. They then documented the series of policy errors that helped turn the crisis into a regional depression. Sachs described the IMF as "the Typhoid Mary of emerging markets, spreading recessions in country after country." This high-profile criticism made the Fund vulnerable to public opinion, albeit a narrow layer, for the first time in more than fifty years.

Critics of corporate globalization have focussed primarily on its most glaring injustices, its environmental destruction, its erosion of national sovereignty - and with good reason. The Fund and the Bank are bleeding Africa dry, exacting debt payments from the poorest countries in the world that are ten times as large (relative to income) as the Allies considered conscionable to take from Germany after World War II. Their relentless promotion of resource-intensive exports has hastened the destruction of the world's forests. And of course there is nothing good that comes from allowing the secret tribunals of the WTO to substitute their judgement for that of elected representatives on matters of public health and safety.

But there is no need to concede the economic high ground to the system's most misinformed defenders. These people have managed to create an image of a world on the brink of slipping into a protectionist, isolationist chaos - as if no one would engage in trade or foreign investment unless they were bound by Washington's rules.

It is true that their agenda has been stopped dead in its tracks. Not coincidentally, ever since NAFTA created the first public debate on U.S. foreign economic policy, every major administration initiative to extend its principles has failed. Fast-track authority for the President to negotiate new trade and commercial agreements: failed in Congress. The Free Trade Area of the Americas (34 countries): tabled. The Multilateral Agreement on Investment (OECD, 29 countries): nipped in the bud by ferocious opposition from over 600 NGO's throughout the world. Then there was Seattle, and a bruising follow-up battle now emerging over China's trade status and entry into the WTO. And now, the same coalition of forces that toppled the millennium round of the WTO will gather in the other Washington-D.C. - on April 16th, for the first large-scale protests ever to meet the IMF and World Bank on their home territory.

The world's financial and corporate elite have reason to be concerned. But their warnings of worldwide economic malaise brought on by a backlash against globalization must be taken with a grain of salt.

A more optimistic scenario is more likely: as the debate over global economic integration becomes more honest and inclusive, and the iron grip of institutions like the IMF and the World Bank relents, much of humanity will be freed to pursue new experiments. Some of the many possible paths to social and economic development that have been blocked for so long will open up. There is nothing natural or inevitable about an economic order that restricts half of the earth's six billion people to an income of less than two dollars a day. The demise of the Washington consensus will give rise to new hopes and opportunities for a better world.

¹Mark Weisbrot is the co-director of the Center for Economic and Policy Research in Washington, D.C.

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