Problems in the Global Economy

April 10, 2000  The Nation

     Shopping Till We Drop


     During the past two decades, as random financial crises visited various fast-growing economies,
     we have become familiar, after the fact, with the profile of a developing country that's headed for
     trouble. A booming, modernizing industrial system expands so robustly that it's described as a
     "miracle" (Mexico, Korea, Indonesia, Brazil, to name a few). Its financial markets soar as foreign
     capital rushes in to invest and share in the bountiful returns. The country takes on short-term
     foreign debt at a disturbing pace--much faster than national income is growing--but no one pays
     much attention because the exuberant lending seems to confirm the bright prospects. Then, one
     day, investors redo the arithmetic and realize their expectations are wildly exaggerated. As they
     rush for the door, taking their capital, the currency collapses. Deep recession follows. The
     miracle is exposed as illusion.

     In present circumstances, oddly enough, the country that fits this profile is the United States,
     where surging economic growth is also portrayed as miraculous. The United States is unlikely to
     experience a full-blown currency crisis like Mexico's or Indonesia's, since the dollar is the hard
     currency everyone relies upon as the anchor in global commerce. But the fundamentals are more
     similar than American triumphalism will acknowledge, and America's prosperity can vanish just
     as swiftly if foreign investors decide to take back their money.

     An abrupt exit by foreign capital would be a disaster for the United States but also for the world
     as a whole. That's because the United States has used the borrowed money mainly to sustain its
     unique role as buyer of last resort--keeping the system afloat by mopping up the world's excess
     output. As a result, surging US imports are producing record trade deficits--nearly $300 billion
     last year, almost triple the deficit of 1995. The authorities acknowledge that the imbalance is
     unsustainable and must be adjusted, but they blandly advise us not to worry. After all, America
     has been running persistent trade deficits--buying more than it sells in the global system, a lot
     more--for more than two decades, and nothing terrible seems to have happened (if one ignores
     millions of lost manufacturing jobs). Swollen imports from Asia and elsewhere, it is said, reflect
     heroic efforts by US consumers to revive economies smashed by the global financial crisis that
     unfolded in 1997.

     America's anachronistic role as backstop purchaser for the trading system originated in the cold
     war. The twin objectives of ideological triumph and commercial advance were always
     intertwined in US policy and mutually reinforcing at a deep level. Washington provided the
     capital, foreign aid and military procurement to rebuild Europe and develop Asia's miraculous
     tigers; it granted easy access to the US market and even awarded shares of US production to
     far-flung allies. That was the glue that held the alliance together, keeping nations from "going red,"
     while it also extended the reach of US multinationals and investors.

     "The US de-emphasized savings and encouraged consumption, even to the point of providing tax
     deductions for consumer credit interest expenses," Robert Dugger of the Tudor Investment
     Corporation explained in testimony before the US Trade Deficit Review Commission. "This
     policy supported the evolving export-led growth strategies of US allies.... The United States cold
     war economy won because it essentially outconsumed the USSR and China." When the cold
     war ended a decade ago, the ideology disappeared but the economic strategy remained in place,
     stripped of the patriotic fervor for liberating people and now nakedly devoted to
     commercial/financial objectives.

     But this cannot continue. Since early 1998 the United States has provided roughly half the total
     demand growth in the entire world, according to the International Monetary Fund. The more
     ominous fact is that America's status as a debtor nation has deteriorated rapidly during the
     booming prosperity of the past three years. The cumulative net obligations to foreign creditors
     from the many years of trade deficits reached an astonishing 18 percent of GDP by the end of
     1998 and by now may be 20 percent or higher. That compares with 13 percent of GDP in
     1997. Ten years before, it was zero. In short, the hole is deepening at an accelerating pace.
     Sooner or later, foreign investors will react with alarm.

     I dwell on these unfashionable facts because I believe they provide the starting point for thinking
     about economic reforms in the global system. When the reckoning does arrive, there's a danger
     of confused, reactionary backlash among innocent bystanders who get hurt, but the moment will
     also expose the fallacies of the reigning orthodoxy, particularly the so-called Washington
     consensus, which imposes the neoliberal straitjacket on developing nations. That will be a rare
     opening in itself.

     More important, the social ideas and moral values already being advanced by the new movement
     against corporate-led globalization should gain greater respect because their relevance as
     economic solutions will become clearer. Labor rights, corporate accountability, the sovereign
     power of poorer na-
     tions to determine their own destiny--these and other reform causes involve more than fairness.
     They also provide essential answers to the economic maladies and instabilities embedded in the
     present system. In a previous article ["Global Agenda," January 31] I described some modest
     first steps toward building new global rules for social and moral equity. Reforming the economics
     of globalization is obviously more daunting, but it starts with a simple proposition: The pursuit of
     common human values--what people around the world recognize as justice--is not in conflict
     with our economic self-interest; in fact, the two can be mutually reinforcing.

                                        * * *

     The core contradiction in the global economy--enduring overcapacity and inadequate
     demand--is usually obscured by the more visible dramas of financial crisis because it is located in
     the globalizing production system, the long-distance networks of factories and firms that produce
     the goods and services flowing in global trade. Corporate insecurity--the fear of falling behind,
     the need to keep driving down costs, including labor costs--is what generates globalization's
     greatest contradiction. Alongside energetic expansion and innovation, the system generates vast
     and growing overcapacity across most industrial sectors, from chemicals to airliners. My favorite
     example is the auto industry, which in the spring of 1998 had the global capacity to produce 80
     million vehicles for a market that would buy fewer than 60 million. This excess sounds irrational
     (as it is), considering that the multinationals are esteemed for sophisticated strategic management.
     Yet each corporation decides (perhaps correctly) that it has no choice but to disperse and
     expand production for survival--moves that seem smart and necessary in their own terms but that
     collectively deepen the imbalances of overcapacity and quicken the chase for new markets. So
     we witness the recurring episodes of giddy overinvestment by firms, investors and developing
     nations, followed by financial breakdown. Then the process regains momentum and repeats itself
     somewhere else.

     The overcapacity is further deepened by the "Washington consensus" enforced by international
     lending institutions. The doctrine pushes more and more countries to pursue the export model of
     development pioneered by Japan, except without any of Japan's equalizing features--the social
     guarantees, full employment and minimized income inequality--or the protective measures that
     insulated its infant domestic industries from foreign competitors. The global system instead
     encourages countries to ignore or actively suppress labor rights and regularly opposes
     public-sector investment as a wasteful impediment to growth. Unlike developing Japan, South
     Korea or Taiwan, which shielded their producers, the new exporting nations are told they must
     keep their borders and financial systems wide open to foreign interests--that is, hostage to the
     global system--so they are unlikely to achieve the earlier success of Japan or the "tigers." The
     plain fact is that too many poor nations are now betting their futures on export-led growth--too
     many for most of them to succeed. These pro-capital, wage-retarding policies contribute
     substantially to insufficient demand worldwide, the flip side of overcapacity or overinvestment.
     One can now appreciate why the US market is so essential: If America taps out, who will buy all
     this stuff? The immediate pain would probably be felt most severely in poorer countries, which
     would lose their meager shares in global trade.

                                        * * *

     Actually, the remedy does exist for the United States to correct its lopsided trade flows swiftly
     and defuse the potential for global crisis, but it's not a measure Washington is likely to employ,
     given its pretensions as pre-eminent promoter of free-market dogma. The international rules of
     trade recognize the right of any nation that's sinking into a debt trap to impose emergency import
     limits to stop the financial drain (this is not regarded as protectionist unless it targets individual
     countries or products). Article 12 of the original GATT agreement of 1948 still authorizes this
     step to stanch the bleeding, but in fifty years it has seldom been used. Developing countries in
     trouble typically have found themselves unable to use the measure, since it would ignite retaliation
     from investors and trading partners. However, because it is the largest market, the customer
     everyone needs, the United States would be in a very different position, with enormous leverage.
     Yet the United States may also be past the point where it can introduce such a wake-up call.
     The political shock to an already fragile system might itself produce panic and crash.

     What US authorities can and should do--but undoubtedly won't--is face up to the worsening
     condition with a frank, public recognition that compels their foreign counterparts to do the same.
     The mere mention of Article 12 by Washington would make for a sobering moment. If trading
     partners were faced with the threat, they could in theory work out an agreement for gradually
     correcting the US trade imbalances. The bulk of the problem, after all, is concentrated in a
     handful of trading partners: Japan, China, Canada, Mexico and Western Europe generate more
     than 80 percent of the deficit. More likely, these nations would stall, convinced that the United
     States was bluffing, as usual. Then Washington would have to work out, unilaterally, a
     step-by-step schedule for raising the bar--slowly curbing its import volumes so that others would
     have time to adjust and pick up the slack in demand.

     Here at home, the imperative facing the United States is to discard the open-armed cold war
     economics, cut the losses and redefine the national interest in more pragmatic terms. This will
     require deep changes in domestic life, as the nation attempts to shift from high to low
     consumption, from low to high savings policies. That transition is sure to be most unpopular in
     shopping-mall America and, given the gross inequality in incomes, will feel like stagnation or
     worse for the many families already deeply indebted. Thus an aggressive politics devoted to
     equality and to restoring public aid and equity will become even more essential, as will a new
     environmentalism that directly attacks the wastefulness embedded in modern production and
     consumption. There is plenty to go around in America, and there would be even more if we
     didn't throw so much away.

     The US government must also begin to re-examine its obligations to the multinationals, like
     Boeing and General Electric, that call themselves "global firms" but rely on America and its
     taxpayers as home base. The multinationals typically plant a foot in one country, then export
     components to another location in the production chain, then do final assembly somewhere else
     and sell the product in many other places (or perhaps only in the United States). If GE is telling
     its jet-engine suppliers to move to low-wage Mexico, as it is, why should US taxpayers provide
     so many forms of subsidy to this company? Reducing the large abstractions of globalization to
     such hard-nosed particulars will get their attention and also clarify the relationship. The national
     interest should not be defined as enhancing returns for shareholders, with no obligations to
     broader values.

     Indeed, the same principle ought to apply everywhere in the global production system, for poor
     nations as well as rich. The reforms that impose national and community obligations on
     companies will not halt the processes of integration or trade, but they will change the choices for
     company managers in very positive ways. As standards are imposed on their behavior, the
     multinationals will be compelled to give more scrupulous and long-term consideration to where
     they invest their capital. Globalization may slow overall, but it can also become a deeper, more
     permanent creation.

                                        * * *

     Deepening indebtedness compels the United States to get its own house in order. Meanwhile,
     the logical outline for reforming the global production system is also visible, at least in the form of
     plausible principles:

     (1) The global system needs a new, more sophisticated version of Article 12 that would allow
     countries to correct the injury from unbalanced trade flows, more or less automatically, with
     temporary limits on imports. The mechanisms would define reasonable levels for action and the
     point at which other governments must respond by applying national influence over both their
     multinationals and financial investors (ultimately, this also requires reform of international financial
     institutions like the IMF, which will be the focus of a subsequent article). This approach
     recognizes that the marketplace of competing multinationals cannot succeed in managing supply
     and demand worldwide--not without creating cartels and trustlike alliances to do so. It implicitly
     suggests the basis for a grand bargain in which the leading industrial powers agree, at least
     informally, to assume greater responsibility for the developing nations in their spheres--that is, to
     take a greater share of the exports from regional neighbors. Japan is the most egregious case of
     evading this obligation.

     (2) The system must be refocused on the demand side: the promotion of rising incomes, in step
     with rising productivity. Multinational competition now produces a reflexive imperative for
     companies to do the opposite, that is, expand productive capacity while at the same time
     suppressing demand. Labor rights and public spending are two reliable tools for bolstering
     demand, but both are scorned by present dogma and its operating rules. Another tool is national
     measures to impose more accountability on global firms and investors--rules that require
     longer-term commitments from them to the new countries where they invest in production, as
     well as concrete penalties for players "gaming" the system by hopscotching from one poor
     country to another. For instance, if a US firm refuses to embrace labor rights for its overseas
     workers, why should American taxpayers subsidize it through Export-Import Bank loans,
     government-backed insurance for overseas investment or the many tax breaks designed to
     promote globalization? In short, governments have a lot of sovereign leverage over global firms if
     they will use it.

     (3) The heavy-handed "Washington consensus" and the many international trade rules that
     accompany it must be scrapped so developing countries will have breathing space to pursue their
     own distinctive plans for industrialization. The World Trade Organization, instead of becoming
     more intrusive, should be forced to back off and acknowledge that a poor nation may be better
     off in the long run by concentrating first on domestic economic fundamentals--education and
     health, public infrastructure, self-sufficiency in producing basic goods like food and
     pharmaceuticals--than by turning itself into another exploited export platform. A global network
     of WTO reformers, including Global Trade Watch in the United States, is already staking out this
     approach as its new either/or demand: Prune the WTO or shut it down.

     (4) Once new principles are established, the wealthier nations must follow through with the
     money to help make them succeed--that is, capital in the form of substantial aid commitments.
     The above measures ought to generate much more equity in the global system--more people
     sharing in its wealth-creating benefits through greater income equality--but they will also
     moderate the pace of globalization. Slowing things down is a necessary step toward more
     stability, less random wreckage, but it also threatens the poor nations disproportionately unless
     the advanced nations guarantee that capital inflows will continue. The Jubilee 2000 debt-relief
     campaign offers a good beginning in what should become a much larger program of
     governments. The AFL-CIO, among others in the movement, has advocated significant new aid
     from the United States (always a laggard compared with others). The money is available if the
     United States ever comes to its senses and begins paring down its bloated military-industrial

     Reforming global economics in the absence of a climactic crisis is hard politics, of course, but
     these suggestions make it clear that fundamental reform is more a matter of what politics will
     allow, not what economics is sound. The obligation is peculiarly centered in the United States
     because what's required is confrontation with America's own prideful establishment. It is not
     Japan, Germany or China tenaciously upholding the status quo's obvious flaws and inequities but
     Wall Street and Washington. America's fusion of corporate-financial-political interests is the
     principal obstacle to change, and, one concedes, those interests are unlikely to yield until events
     have delivered fear and loss to their doorstep too. The only way to change the politics before
     catastrophe occurs is mobilization of people around the world demanding these reforms.

                                        * * *

     For roughly fifty years, the United States and allied international institutions have lured or pushed
     poor nations into pursuing the export approach to industrial development and have implicitly
     promised to buy much of their production. Now, it appears, we may abruptly throw them over
     the side. The export-led model is doomed because the United States can no longer afford to
     sponsor it. Developing nations are entitled to be skeptical, since it will look to them like one
     more instance of the wealthy protecting themselves from the aspiring poor.

     Lori Wallach, director of Global Trade Watch, has discussed the situation with anti-WTO
     activists from countries like Malaysia, India, the Philippines and Thailand, and has encountered
     their ambivalence. She tells her coalition partners that "you've got to break yourself of the
     addiction of export-led development because it is not going to be around for long." Their initial
     response is anger. "What they say first is, 'You can't do that to us!'" Wallach recalls. "'You've led
     us down this primrose path, and now you're saying you're going to take it away? You're not
     going to buy our exports?'" Yet, she explains, they also welcome the change, since these people
     have spent their lives fighting for self-sustaining, locally evolved economies--for pragmatic
     reasons but also as a matter of political independence.

     The necessary first step, as this activist network has defined it, is an international mobilization to
     strip the WTO and institutions like the IMF of their imperious dictates for the developing
     world--the many rules that serve global capital but force poorer nations to forgo self-reliance in
     favor of an export economy. That agenda should be accompanied by debt relief for the poorest
     forty-one nations but also far more generous investment aid from advanced economies. Again,
     this is a matter of political will, not economics. For example, a modest transactions tax on global
     finance would amass a huge fund of low-cost capital that could be used to build domestic
     infrastructure in poor nations--projects that, for once, would not be beholden to the plans of
     multinational corporations.

     In a way, these measures are the easy part. The larger challenge is defining the plausible
     strategies and reasonable safeguards that enable a nation to concentrate first on inward-led
     development, without losing access to capital markets and becoming hostage to the usual
     treadmill of insecurity, in which companies threaten to move on if wages rise. The concept of
     development directed at the internal fundamentals has been advocated for many years, but the
     truth is that there are still not many living examples of success. Until the global rules change, it will
     be nearly impossible for an individual nation to do this without losing access to capital.

     Contrary to the globalization propaganda, every poor nation is not going to get rich quick,
     certainly not for generations to come. But all nations could improve themselves and the lives of
     their citizens quite dramatically if allowed to pursue that goal on their own terms. The cold war is
     over, finally, and precious ideological distinctions about what is sound economics and what is
     forbidden should be buried with it.