Globalization for Whom?

(Cornell International Law Journal, 1998 Symposium Issue, Vol. 31, #3)

By Mark Weisbrot
Co-director, Center for Economic and Policy Research 
(formerly Research Director of the Preamble Center)

Introduction

        At the height of the debate over "fast track" authority last November, President Clinton summed up the sentiment on his side: "I wish we could have a secret vote in the Congress," he said, " we'd pass it three or four to one."⁽¹⁾

        Prior to NAFTA, the President, for all practical purposes, would have had his wish. International trade and commercial agreements received scant public attention and were relegated, at most, to obscure articles buried deep in the business section of the newspaper. The highly public controversy over NAFTA six years ago changed all that, perhaps irreversibly, and initiated a process of democratization of US foreign economic policy. The recent debate over fast-track exemplifies how far we have come since the pre-NAFTA days. Furthermore, the fact that the House of Representatives, despite enormous lobbying from business interests, was unwilling to grant the President "fast-track" authority to negotiate new trade and commercial agreements-- that is, subject only to an up or down vote by Congress-- indicates the widespread perception by the public that such agreements are not in their interest.

        For nearly two years beginning in May of 1995, the Multilateral Agreement on Investment(MAI) was negotiated within the OECD, with almost no public knowledge. This wide-sweeping agreement among 29 mostly developed nations is intended to codify the liberalization of international investment, much as NAFTA had done for North America.⁽²⁾ The MAI was first scheduled to be completed by April 1997, and its architects hoped to extend it subsequently to the rest of the world. Grassroots opposition from environmental and citizens organizations throughout the OECD countries-- especially the US, Canada, and France-- has so far prevented its completion.⁽³⁾

        And now the Asian economic crisis has thrown a huge wrench into the machinery of financial liberalization, opening up a whole new debate over how to protect national economies from the instability caused by international capital flows. Even more importantly, the role of such globalizing institutions as the International Monetary Fund (IMF) in dealing with such crises has been called into question. All of these discussions have built upon the previous controversies in broadening the debate over global trade and capital flows.

        But the progress in opening up this debate has been uneven. The progress has been strongest at the level of the general public: the populace has always been open to considering questions about who benefits and who loses from globalization. Among popular audiences, it has never been off limits to suggest that the process of globalization should be slowed, or even halted or reversed, until its costs and benefits might be more equitably distributed, or until it can be made compatible with core public values on such issues as democracy, national sovereignty, labor rights, or the environment. Organized public interest groups have been the most dynamic; for example, even though most of the major U.S. environmental groups initially supported NAFTA, the same organizations opposed both fast-track and the MAI a few years later.

        Among circles of elite opinion, the debate remains much more closed, but there are nonetheless significant openings. In the economics profession, the default position remains that any kind of liberalization of trade or investment flows represents progress; however, some important research and writings from within mainstream economics have begun to acknowledge some of the problems with this approach. For example, Dani Rodrik's "Has Globalization Gone Too Far?," published by the staunchly pro-globalization Institute for International Economics, was the first work of its kind to focus on the damage inflicted by global economic integration on broad sectors of the labor force.⁽⁴⁾ Rodrik has conceded that the increased international mobility of firms has made it more difficult for governments to pursue polices that raise the cost of labor, or to sustain a social safety net for the labor force.

        William Cline (1997, p.234), in a study also published by the Institute for International Economics, estimated that 39% of the increase in wage inequality over the last 20 years has resulted from trade.⁽⁵⁾ This is an enormous impact on income distribution, and this is simply trade-- it does not include the downward pressure on wages that results from employers' increasing ability to move production to other countries (see below). And most recently Jeffrey Sachs of the Harvard Institute of International Development has taken on the International Monetary Fund, calling it "the Typhoid Mary of emerging markets, spreading recessions in country after country."⁽⁶⁾ Sachs' research, with Steven Radelet (Radelet and Sachs, 1998a, 1998b) on the Asian financial crisis also clearly documents the role of international financial liberalization in creating the conditions for the crisis.⁽⁷⁾

        In policy making circles, there has been much less of an opening. The executive branch of the government remains committed to "full speed ahead," and while they are constrained by popular opinion, they have made no concessions to it in their description, analysis, and vision of the world. For them, every removal of a barrier to international investment or trade is a step forward, for America and for the world.

        The media has mostly concurred in this position. While it has been willing to report the views of those opposing fast-track or other pro-globalization initiatives, the mainstream of journalism has yet to notice that there is a serious debate taking place within the economics profession. Some of this complacency is due to the unique, and partly coincidental, historical conjuncture that appears, in the eyes of the media, to lend support to the advocates of global deregulation. The Japanese economy, once looked upon as a model of successful industrial policy, has been in a slump for more than six years. This is interpreted as a failure of the entire Japanese model, which therefore needs to be scrapped in favor of a more internationally open, competitive, industrial and financial structure. The European Union is viewed in similar terms: its double-digit unemployment rates are attributed to their attempt to maintain "inflexible labor market policies" in the face of growing global competition. With the United States economy at 4.5% unemployment, it is easy for journalists who are predisposed in this direction anyway to conclude that "the American model," and indeed a much more globalized and idealized form of it, is the only viable alternative to economic stagnation.

        All of this should be the subject of vigorous debate. European unemployment rates are much more attributable, in reality, to the tight monetary policies that have been adopted in recent years. Prior to this tightening, the difference between European and American "labor market flexibility" was actually much greater, and yet European unemployment was lower. In fact, Sweden had unemployment of 1.8% as recently as 1990. Japan's current slump is similarly difficult to blame on the industrial policy that gave it one of the highest growth rates in the world during most of the post-war period, although the era of export-led growth may be coming to an end as the size and number of economies attempting this strategy has multiplied. And of course the United States' apparent success is largely a cyclical phenomenon: by most measures of economic performance-- e.g., capital formation, productivity growth, wage growth-- the current economic expansion still compares poorly with previous business cycle upswings. In any case, there is little empirical or theoretical basis for the simplistic notion that increasing liberalization of international trade commerce is the solution, without regard to the specifics of the economic institutions of particular countries.

        Until these prejudices are subject to much more serious challenge and debate-- at all levels of discourse-- it will be difficult to even conceive of, much less implement, democratic choices with regard to our most important economic policies. Indeed, for most of the less developed countries, such choices do not exist even in a formal sense. Their major economic policies are quite literally decided by the International Monetary Fund and the World Bank through their "structural adjustment" agreements.

        The continued blind adherence to the neoliberal paradigm, and its enforcement through the expanding scope of international agreements such as the MAI, or other international institutions, poses a threat to democratic reform generally. South Korea, for example, had its first democratic election at the end of last year, and the suffering brought on by the unnecessary austerity there will likely induce some nostalgia for past years of dictatorship.

        Disillusionment with democracy is also prevalent in much of Latin America, one of the more heavily "structurally adjusted" regions in the world.⁽⁸⁾ Since the IMF and the World Bank began their structural adjustment programs there in the early 1980s, the whole continent has actually had a per capita growth rate of about zero. In countries such as Mexico, it is clear that most of the population was economically better off under a more authoritarian regime. Mexican economic growth prior to international trade and investment liberalization was fairly rapid, at a real per capita rate of 3.9% in the 1960s and 3.2% in the 70's. Since the beginning of the 1980's, when the liberalization began, per capita income has stagnated and real wages have actually fallen.⁽⁹⁾ Democracy loses most of its meaning as more and more of the most important economic decisions are removed from the table, and people's attitudes towards democracy are easily poisoned when its introduction coincides with most of these economic issues being resolved against their interests. It is a tragic irony that Latin America, much of which was governed by military dictatorships in the 1960's and 70's when real reforms were on the political agenda, has now achieved formal democratic governance at a time when global economic institutions have so severely restricted the choices available to any elected government.

        Of course it is not only the power of supra-national institutions that has narrowed the range of economic choices to a point considered unimaginable twenty-five years ago. There has also been a sea change in economic theory. It has been known to development economists since the 1950s that "late industrialization" required even greater protection and state intervention than even the most developed countries relied upon during their early development.⁽¹⁰⁾ The "cumulative causation" of unfettered markets -- that is, their tendency to concentrate economic development in particular regions at the expense of others-- was also well known. And the whole discipline of development economics was founded on the premise that the problems of underdeveloped countries were fundamentally different from those of the rich countries, and required different tools of analysis as well as policy prescriptions.

        All of this has been lost, much like the loss of knowledge that took place in the natural and physical sciences in medieval Europe. It has been replaced, in theory and practice, by what Albert Hirschman (1981) has called "monoeconomics": the belief that there are universal laws of economics that apply to all economies, and economic policy-making is overwhelmingly a matter of conforming to these laws.⁽¹¹⁾ And today, this translates more than ever into following the dictates of "the global economy."

        The MAI and similar agreements, and more forcefully the programs of the IMF and the World Bank, are the practical manifestation of this shift in economic theory. They have the effect of enforcing compliance with the "laws" of monoeconomics, as embodied in their rules and operations. As such they severely restrict the choices available to governments, and especially to parliamentary and elected bodies around the world.

        For those who believe that only economic impact of government is to introduce "distortions" into the otherwise efficient operation of markets, the continuing subordination of the state to global markets-- and hence the dictates of global corporations-- is a welcome development. Ironically, however, the process of globalization also finds support among many who would never subscribe to such radical libertarian prescriptions for their own national economies.

        This is especially true among neoclassical economists, even those like Rodrik who have concerned themselves with the impact of globalization on inequality. These concerns are not enough to shake Rodrik's faith⁽¹²⁾ in the principle of comparative advantage, or globalization generally; for him, "the danger is that the domestic consensus in favor of open markets will ultimately erode to the point where a generalized resurgence of protectionism becomes a serious possibility."(Rodrik 1997, p. 6)

        But this domestic consensus is an agreement among the elite, and does not extend to the general population, which has borne the costs of globalization. When Harvard economist Robert Lawrence states that we cannot pay $10 an hour for "unskilled" labor in a global economy-- in fact, he says, nobody can⁽¹³⁾-- the public has good reason to regard this reasoning as absurd. After all, we could afford these wages, in real terms, 30 years ago. And productivity has increased more than 50% over the last three decades.⁽¹⁴⁾ It is worth emphasizing that the most common definition of "unskilled" labor used by economists includes anyone without a college degree, which is more than 70% of the labor force.⁽¹⁵⁾ Does our current participation in the global economy require declining wages for the majority of workers, in the face of rising productivity? If this is true, then the logical response is not to accept this misfortune as inevitable, but to re-examine our participation in the global economy.


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.⁽¹⁶⁾

       Unemployment has also been much higher since 1973 than previously, notwithstanding the present dip to 4.5%, which is a 29- year low but still slightly worse than the average of the Bretton Woods era. 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%.⁽¹⁷⁾

        Poverty and inequality have also increased dramatically in recent years. The reversal of the gains from the War on Poverty is most strikingly revealed in the poverty rate for children: in 1960 this rate was 27%, and fell to 14% in 1973. By 1993 it was back up to 23%.⁽¹⁸⁾ (Lawrence 1997). The post-War progress in the area of income inequality has been destroyed with a vengeance. If we look at the ratio of family income for the top to the bottom quintile of families, it declined from almost 9 to 1 in 1947 to 7 to 1 in 1973; since then it has soared to 11 to 1. (Burtless et al, 1998). Almost all of the income gains from economic growth in the last decade have accrued to the top 5% of American families (Freeman 1996-7).

        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 now entering the eighth 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.⁽¹⁹⁾

        All of 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 (Mishel et al. 1997, 192). Financial capital has become hyper mobile, with daily currency transactions rising from a mere $80 billion in 1980 to $1.26 trillion in 1995. In proportion to world trade, this trading in foreign exchange rose from a ratio of 10:1 to nearly 70:1.⁽²⁰⁾ 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.⁽²¹⁾ As a percentage of the world's gross fixed capital formation, FDI has nearly doubled since the beginning of the 1980's.⁽²²⁾

        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. While the focus here is on the United States, it is worth noting that the same is true for most of the rest of the world. The majority of European workers have not done as badly as their US counterparts, but they have suffered greatly reduced wage growth, and in recent decades, very high unemployment. And for most of the less developed countries, the post-Bretton Woods era has been a disaster. Africa has fared the worst, with an actual decline in income per person-- not just the income of the majority-- over the last two decades. As noted above, Latin America has had about zero per capita income growth since 1980. The exceptions to the general trend have been those Asian countries-- e.g. China, South Korea, Taiwan-- which to varying degrees were able, through considerable regulation, to participate in the global economy without sacrificing the needs of their domestic economies.

       The advocates of increasing trade and investment liberalization do not deny the basic facts of the decline in economic performance over the post-Bretton Woods era. 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 recently begun to concede that a very large number of workers have indeed been hurt by the process. However, they have argued that these effects are small relative to the gains and potential gains. For example, the OECD has just issued a report intended to make the case for international trade and investment liberalization, in which they contend that such negative impacts are "at most, modest."⁽²³⁾ Citing the low end of the range of estimates for the effect of trade, they attribute about 10-20 percent of the changes in wage and income distribution in the developed countries to trade with developing countries.⁽²⁴⁾ Leaving aside for the moment the fact that other estimates are much higher,⁽²⁵⁾ how is one to assess the importance of this impact? No one disputes the fact that the impact of trade on wage inequality is statistically significant. The question is whether this impact should be considered large or small, from the point of view of policy.

        In measuring the impact of trade liberalization, there is a standard of comparison that comes immediately to mind: the efficiency gains that are claimed as an achievement of trade liberalization. Cline has estimated the annual efficiency gains to the US economy from the Uruguay round of the GATT (General Agreement on Tariffs and Trade) at $450 million.⁽²⁶⁾ If we multiply this figure by 1.5 to account for the growth of trade since 1990, we get $675 million.

        How do these gains compare to the losses suffered by workers who have been negatively impacted by trade and investment liberalization? Real average hourly earnings⁽²⁷⁾ in the United States fell from $12.72 an hour in 1973 to $11.46 an hour in 1995.⁽²⁸⁾ For the years 1989-95, the drop was 3.4%, from $11.87 to $11.46.

        These figures are for production and non-supervisory employees, who comprise about 80% of the workforce. If we look just at the years 1989-95, this reduction of 41 cents an hour for 1995 wages translates into about $82 billion in lost wages. Even if we were to accept that "only 10-20%" of these lost wages are due to trade liberalization, that is still approximately $8.2-16.4 billion for the year 1995. This is twelve to twenty-four times the efficiency gains from trade that accrue to the entire population-- not just these workers.⁽²⁹⁾ By this comparison, the losses that most workers suffer from liberalized trade cannot be considered "modest" or small, unless we are to dismiss the gains from trade as completely trivial.

        It should not be surprising that most workers would lose more from the downward pressure on wages due to globalization, than what they could hope to gain in the form of cheaper consumer goods made available through liberalized trade. There is a statistic that takes into account both of these effects, and that statistic is the real wage. Since real wages for the majority of workers in the United States have fallen since 1973-- i.e. during the post-Bretton Woods era of increasing globalization-- there is a strong prima facie case that the costs of globalization, at least for the majority, have exceeded the benefits.

        The relationship between globalization and declining wages is complex and cannot be captured simply by the effects that most economists try to measure, such as the effective increase in labor supply due to increasing trade. To see this, we can 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 have 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 have been deregulated. And perhaps most important of all, there has been 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? 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 (Scott, Lee and Schmitt 1997). 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.

        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-- this is three times the rate of such incidents that existed before NAFTA.⁽³⁰⁾

        This accords with a Wall Street Journal survey taken 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.⁽³¹⁾

        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. 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, one of the effects of globalization has been 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 (much more rapid) productivity gains during the Bretton Woods era, this is no longer true.

        One would expect that the increasing mobility and therefore bargaining power of capital, and the corresponding weakening of labor would not only increase wage inequality, but also alter the distribution of income between capital and labor. This has apparently happened. In the United States the share of national income going to corporate profits has increased by 3.2 percentage points since the last business cycle peak (1989).⁽³²⁾ This may not seem like a large number, but it actually represents a significant redivision of the economic pie: if not for this shift, the median wage earner would be making about $1100 more per year today than she is presently earning.

        In Europe, the redistribution of income from labor to capital has, over a longer period, been considerably greater than in the US. For countries in the European union, the share of capital income in the business sector was 5.5 percentage points higher in 1997 than it was for the average year of 1970-80.⁽³³⁾

        On the other hand the United States, which has gone further and faster down the path of regressive globalization as compared to OECD Europe, has become a low-wage country among the more developed nations. If we look at hourly compensation costs in manufacturing for fifteen of the highest income countries in the world, the US is just about tied with Italy for third from the bottom.⁽³⁴⁾

        While the conventional wisdom is that the lowering of wages has benefitted US employees by boosting job creation here, this argument rests on a fallacy of composition. That is, it is based on a confusion between the operation of economic forces at the micro level (the level of the individual firm or industry) and the macro level (economy-wide). In the hiring decisions of an individual firm, it is indeed possible and even likely that the number of employees hired would shrink as wages rise, and rise when wages fall. But at the level of the economy as a whole, we would expect no such relationship, and in fact none is observed empirically, for example, in studies of increases of the minimum wage.⁽³⁵⁾ The reason is that the economy-wide level of employment is primarily determined not by wages, but by the amount of aggregate demand in the economy. As wages rise, firms substitute capital for labor, but there is no reason for this to increase the unemployment rate in the economy, so long as there is enough demand for the goods and services that those who want to work are capable of producing.

        Of course there are limits to this generalization, especially in the short run. If the minimum wage, for example, were doubled overnight, this would cause some unemployment. But there is no reason to expect a similar result from wage growth, even to very high levels, that occurred less suddenly. The composition of jobs would change as wage levels rose-- in the United States, for example, we would expect fewer jobs in the fast food industry. In general, there would be a relative decline in the number of very low productivity jobs that could not sustain higher wages. But these would be replaced, as new jobs are created, with higher-productivity, higher-paying jobs.

        The institutionalization of a low-wage economy actually slows economic growth, and overall income growth, by slowing the rate of growth of productivity. If we compare OECD Europe with the United States, we find that productivity has grown at an annual rate of about 2% there, as opposed to 1% in the US, since 1979. It is likely that the lower wage levels of the United States, especially at the lower deciles of the wage ladder, have been responsible for much of the difference in productivity growth. These low wage levels encourage the creation of low-productivity jobs, and discourage the investment in new capital and technology that would boost the rate of growth of productivity.


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 Federal Reserve 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 will reduce economic growth and create higher unemployment. The Fed is supposed to balance these two conflicting goals, to maintain the highest levels of employment that are consistent with keeping inflation under control.

        Since the late 1970s, however, the Federal Reserve 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 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. 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.

        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 by the National Association of Manufacturers, an otherwise conservative business group, to unnecessary interest rate hikes by the Fed.⁽³⁶⁾ Today, the combination of international financiers and transnational corporations is enough to prevent a return to the expansionary monetary polices of the Bretton Woods era.⁽³⁷⁾

        Transnational corporations have an interest in a higher international value of the dollar, since this allows them to buy assets and labor more cheaply overseas. However, a higher dollar erodes our manufacturing base and increases our trade deficit by making U.S imports cheaper and exports more expensive abroad.

        Globalization also discourages the use of 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. An expansionary monetary or fiscal policy would tends to cause depreciation of the domestic currency, which increases the price of imports. For most countries, especially in Europe, the resultant inflation can be prohibitive. However, our imports are still less than fourteen of our GDP, so we have little to fear from a drop in the value of the dollar. 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.

        The role of globalization in consolidating the power of international financial interests, and their ability to exercise a veto over expansionary monetary and fiscal policies is probably one of its most important effects. The expectations of financial markets tend to be self-fulfilling. If bondholders believe that increased deficit spending causes interest rates to rise, this will in fact happen, even if there is no economic basis for their belief.⁽³⁸⁾ This is true simply because their selling of bonds in response to an increase in government spending will push up long-term interest rates. By increasing the power of these financial interests, globalization undermines the ability of governments throughout the world to engage in any kind of social spending in the public interest.

        In all of these ways and more, globalization has strengthened the forces and tendencies in the overall political economy that favors slower growth, higher unemployment, and lower wages. In sum, globalization serves the interests of international financiers, whose agenda may be more powerful than those of the trade and investment flows themselves. These effects are difficult to measure, but they are no less real than the plant closures and direct job loss due to import competition.


Legislating Globalization Internationally: The MAI

        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 twenty-five years.

        There are a number of provisions that would support the latter prognosis. First, there is the rule on national treatment, which requires that foreign investors and investments be treated no less favorably than domestic ones. Since many national, state 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.

        For less developed countries, these provisions would preclude many of the development strategies that were most successful in the past. For example, most of the policies that were essential to the South Korea's growth and development would be prohibited by the national treatment provisions of the MAI. The Korean government intervened heavily to promote targeted industries such as cement, fertilizer, and petroleum refining, steel, chemicals, as well as capital and durable consumer goods. This was done through subsidized credit, tax (including tariff) exemptions, export subsidies, and the creation of protected monopolies. Foreign direct investment was restricted and played a minimal role in South Korea's industrialization and development.⁽³⁹⁾

        The MAI would also limit performance requirements, that require firms to 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 under the MAI.

        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 powerful new tool for intimidating governments from passing environmental or other regulations that a particular company might not like, and could prevent governments from undertaking a variety of regulatory measures that are in the public interest. Currently, under agreements like the 132-nation GATT (the General Agreement on Tariffs and Trade), a corporation may not directly sue a government, but must ask its own government to pursue the complaint.

        To illustrate the significance of this change. Last year the Canadian government prohibited the import of MMT, a gasoline additive that is effectively banned in the United States. It was banned on the grounds that it was a potential health hazard. The producer of the additive, the American-based Ethyl corporation, sued the Canadian government for $251 million in damages. Their argument was that the Canadian government's ruling discriminates against Ethyl, and they sued under the provisions of NAFTA that provide for equal treatment of foreign and domestic investors.

        On July 20, the Canadian government dropped its ban on MMT and agreed to pay Ethyl $13 million (Canadian), for legal costs and lost profits.⁽⁴⁰⁾ While there might be legitimate disagreements over the scientific evidence regarding the additive's threat to public health, there is little doubt that the Canadian government banned this substance for public health reasons. There is no evidence that it was done in order to benefit Canadian firms at the expense of Ethyl or any other foreign firm. The question then raised is whether the judgment of elected or appointed officials entrusted with protecting public health or the environment in such matters should be overturned by international agreements designed to protect corporate interests.

        This idea that no nation may distinguish between foreign and domestic investors in its laws is the guiding principle of the MAI. As a result, it would make it more difficult for state and local governments in the US, for example, to support local economic development based on local businesses. Municipal governments would not even be able to defend themselves if sued by a foreign corporation, but would have to rely on the federal government-- which may be unsympathetic to their aims, to defend them in an unaccountable international tribunal.

        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.


Destabilizing Capital Flows: The Asian Financial Crisis

        Prior to the onset of the Asian financial crisis one year ago, there were few mainstream challenges to the globalizers' maxim that the liberalization of international capital flows was in the best interests of everyone. This principle seemed almost as well established as the theory of comparative advantage with regard to trade, and was able to benefit from a sort of "proof by association" with the latter. This is in spite of the fact that the reasoning of the trade theory does not apply to capital flows⁽⁴¹⁾, not to mention the very limited usefulness of the theory of comparative advantage itself to any kind of economic development strategy.

        But the cause of liberalizing international investment was struck its most serious blow in decades when the economies of South Korea, Indonesia, Malaysia, Thailand, and the Philippines, and others in the region were hit by a financial crisis that quickly developed into a regional depression. Although the policies of the IMF helped transform the financial crisis into a crisis of the underlying real economy, it is also now clear even to pro-globalization economists that the financial liberalization of these countries was a major proximate cause, if not the major cause, of the onset of the crisis. Jagdish Bhagwhati, one of the world's leading international economists and the Economic Policy Adviser to the Director-General of the GATT (1991-93) has noted that "the Asian crisis cannot be separated from the excessive borrowings of foreign short-term capital as Asian economies loosened up their capital account controls and enabled their banks and firms to borrow abroad. . . it has become apparent that crises attendant on capital mobility cannot be ignored."⁽⁴²⁾

        What was so striking about this case is that it was truly "the intrinsic instability in international lending"⁽⁴³⁾ that pushed these countries to the abyss. Most important was a net reversal of private international capital flows to the region of $105 billion-- from a net inflow of $92.8 billion in 1996 to a net outflow of $12.1 billion in 1997. This amounts to about 11 percent of the GDP, before the crisis, of the economies of South Korea, Indonesia, Malaysia, Thailand and the Philippines.⁽⁴⁴⁾ This is a massive and highly destabilizing reversal of international capital flows, and it does not appear to be related to the workings of the real, underlying economies of the region.

        The regional current account deficit peaked at 5.9 percent of GDP in 1996, which is large but not overwhelming by historical standards. If we look at South Korea, for example, its current account deficit was 3 percent of GDP just before the crisis; this compares to a deficit of nearly 9% of GDP in 1980. Korea's foreign debt as a percent of GDP was 22% in 1996, which is low by international standards. The same is true for its debt service as a percentage of exports (5.4%).⁽⁴⁵⁾

        These figures varied by country-- for example, the current amount deficit from 3.5% of GDP for Indonesia to 8.0% for Thailand. But even Thailand was taking in capital flows in excess of its current account deficit-- that is, accumulating foreign exchange reserves-- as were the others. All of the countries were running domestic budget surpluses, or balanced budgets, up to the crisis, and had relatively low inflation. In short, there was not much in the way of "fundamentals" that would have indicated a storm was brewing.

        Indeed, the IMF's now well-known 1997 annual report, published after the crisis had already begun, was optimistic for the region: "Directors welcomed Korea's continued impressive macroeconomic performance [and] praised the authorities for their enviable fiscal record."⁽⁴⁶⁾ The directors also "strongly praised Thailand's remarkable economic performance and the authorities' consistent record of sound macroeconomic policies."⁽⁴⁷⁾

        The IMF was not the only party that was taken by surprise. Foreign lenders showed little perception of trouble, as interest rate spreads on Asian bonds continued to decline in Southeast Asia between mid-1995 and mid 1997. Investor rating services such as Moody's and Standard and Poor's did not fall until after the onset of the crisis.⁽⁴⁸⁾ Krugman has argued that investors may have perceived increasing risk but expected to be bailed out; however, as Radelet and Sachs have shown, this seems extremely unlikely.⁽⁴⁹⁾ Although the big foreign banks were eventually bailed out as part of the IMF agreements with these countries, there were many billions of dollars of lending by other institutions that could not expect and in fact did not receive any government guarantees.

        Other explanations of the onset of the crisis, especially the media sound bites about "crony capitalism" or "inefficient" industrial organization do not have much evidence to back them up. Indeed, when people, including some economists, refer to the Korean economic system as "inefficient" it is not clear what they mean. The most obvious economic meaning would be that resources were allocated inefficiently, so that the economy (and therefore living standards) did not grow in accordance with its full potential. The South Korean economy grew at a per capita rate of 7.2% over the last thirty years, one of the highest rates of economic growth in the history of the world. It is certainly possible that it could have grown even faster, but no one has presented an economic argument as to how this might have been accomplished.

        In such cases the real meaning of the word "inefficiency" appears to be something like "they don't do things the way we would like them to." For example, one of the conditions that the IMF attached to the South Korea's bailout packages was that companies engage in mass layoffs. This could well provoke a political crisis in South Korea, a country in which big companies have traditionally provided steady employment, and which has no social safety net for the unemployed. The IMF's argument is that mass layoffs will make the Korean economy more "efficient." But it is not clear that throwing people out on the street is more efficient than re-employing them elsewhere within a large firm or conglomerate, as has been done in the past.

        Some explanations of the crisis have focused on weaknesses in the Asian economies that had been accumulating in the 1990s. Much has been made of "speculative bubbles" in real estate markets. There was some increase in the portion of domestic lending that went to real estate loans, although it is difficult to say how much; official data underestimate the true amount, because loans are not always used for their stated purposes. Official data for Indonesia showed a sharp rise in real estate lending from 1990 to 1996, but data for the other countries do not. Nor do real estate prices show the kind of dramatic run-up that would indicate a "speculative bubble." In Indonesia, despite increasing real estate loans, prices actually declined from 1991 to the eve of the crisis.⁽⁵⁰⁾

        All this is not to say in the there were no problems accumulating in these five Asian countries. There was a build up in domestic bank lending in all of the countries except Indonesia. Indonesian firms were borrowing directly from foreign banks. Real exchange rates did appreciate noticeably-- about 12% for South Korea and 25% for the other four countries, --as large international capital flows poured in. But other countries have had much larger real appreciations without suffering a collapse in the value of their currencies. And it should be stressed that these weaknesses as well as the current account deficits were very much tied to the liberalization of capital flows that took place in the preceding years.

        Radelet and Sachs⁽⁵¹⁾ have also examined the effect of international shocks, such as the devaluation of the Chinese yuan in 1994, the increased competition from Mexico, and the overcapacity in particular industries such as semiconductors. The combined effect of these influences does not appear to account for what happened.

        It is therefore difficult to escape the conclusion that the instability caused by recent international financial liberalization bears the primary responsibility for the onset of the crisis. The reversal of capital flows amounting to eleven percent of the regional GDP was a result of "herd" behavior, with foreign and domestic investors alike stampeding for the exits for fear of being caught with greatly depreciated local currency and assets.

        The logic of such panics is fairly straightforward. In the recent Asian financial crisis, it began with the fall of the Thai currency (i.e., the baht), then soon spread to other countries. With a high level of short-term international debt, a depreciation of the domestic currency increases the cost of debt service. Everyone needs more domestic currency to get the same amount of dollars for debt service, and the selling of domestic currency to get those dollars or other "hard" currencies drives the domestic currency down further. It does not take much to set off a panic, especially if the central bank does not have a high level of foreign currency reserves relative to the short term debt. These reserves shrink further as more and more investors convert their domestic currency and domestic assets into dollars. Foreign lenders refuse to renew the short-term loans, and the downward spiral continues.

        Other economists have found that the inherent instability of international financial markets was a major cause of previous financial crises, including Mexico's in 1994.⁽⁵²⁾ And Radelet and Sachs' statistical analysis of recent crises in emerging markets found that the most important predictor of crisis was the ratio of short-term international debt to the country's foreign exchange reserves.⁽⁵³⁾ In other words, these countries became vulnerable to panic-induced capital outflows, as well as runs on their currency, because of a build-up of short-term international borrowing.

        This build-up of short-term international borrowing was a direct result of the financial-- and especially capital account-- liberalization that took place in the years preceding the crisis. In South Korea, for example, this included the removal of a number of restrictions on foreign ownership of domestic stocks and bonds, residents' ownership of foreign assets, and overseas borrowing by domestic financial and non-financial institutions.⁽⁵⁴⁾ Korea's foreign debt nearly tripled from $44 billion in 1993 to $120 billion in September 1997. This was not a very large debt burden for an economy of Korea's size, but the short-term percentage was dangerously high at 67.9% by mid-1997⁽⁵⁵⁾. For comparison, the average ratio of short-term to total debt for non-OPEC less developed countries at the time of the 1980s debt crisis (1980-82) was twenty percent.⁽⁵⁶⁾

        Financial liberalizations in the other countries led to similar vulnerabilities. Thailand created the Bangkok International Banking Facility in 1992, which greatly expanded both the number and scope of financial institutions that could borrow and lend in international markets. Indonesian non-financial corporations borrowed directly from foreign capital markets, piling up $39.7 billion of short-term debt by mid 1997, eighty-seven percent of which was short-term.⁽⁵⁷⁾ On the eve of the crisis the five countries had a combined debt to foreign banks of $274 billion, with about sixty-four percent in short-term obligations.

        The ratio of short-term debt to the countries' foreign currency reserves varied from 0.6 in Indonesia to 2.0 in South Korea. Economists who believe in the "efficient market hypothesis,"⁽⁵⁸⁾ i.e., that investors take into account all relevant information affecting asset returns when deciding their market positions, would be hard pressed to explain the disinvestment from these countries. Once begun, it proceeded without regard to country-specific economic or even financial conditions. The spread of such disinvestment to countries not even remotely related to the crisis, as happened during the Mexican peso crisis of 1994-5, should be reason enough to question whether the deregulation of international capital flows is in the best interest of "emerging market" economies.

        It is often assumed that liberalization is the antithesis of "crony capitalism," and that efforts by Western institutions such as the IMF to reduce the role of government in the economy can lessen corruption and inefficiency. Ironically, it appears that Korea's liberalization of the last five years appears has had the opposite effect. According to Chang, Park, and Yoo,⁽⁵⁹⁾ the sharp reduction in government planning and especially industrial policy has contributed to such problems as overcapacity in the petrochemical industry, as well as overinvestment and corporate failures in other industries such as semiconductors, steel, and autos. The collapse of the multi-billion dollar Hanbo conglomerate in a failed steel venture, as well as Samsung's destabilizing foray into the auto industry, are cited as examples of the dangers of abandoning industrial policy in a manufacturing system that was based on a high level of coordination of investment. Even more striking is the new form of corruption-- ironically, "crony capitalism"-- involved in these ventures, as particular chaebol (i.e., conglomerates) were able to leverage their influence with the government in ways that were not possible prior to the liberalization.


Globalizing Institutions: Making the Worst of a Bad Situation

        The greatest tragedy of the Asian crisis, especially in human terms, has not come from the financial panic brought on by destabilizing capital flows, but its aftermath. For although the financial crisis was itself serious, there was no reason for it to have resulted in the terrible loss of income that has now spread across the region. Analysts are comparing the situation to our own great depression, and tens of millions of people are being thrown into poverty. Years of economic and social progress are being negated, as the unemployed vie for jobs in sweatshops that they would have previously rejected, and the rural poor subsist on leaves, bark, and insects. Women have been particularly hard hit: they are first to be laid off, have taken sharper cuts in access to food and other necessities, and girls are being pulled from school to help with their families' survival.⁽⁶⁰⁾

        The depression did not have to happen, because the crisis was not a result of problems with the underlying real economy, but was rather a result of a liquidity problem in the financial sphere. The problem, as we have seen, was that investors began to panic when the Thai baht started to slide in July of last year. To head off the currency and financial collapses that ensued, what was needed was a loan of international reserves, so that investors could be assured that they did not have to sell today in order to avoid taking an exchange rate loss the next day. The short-term debt could then have been rolled over into long-term debt, and stability restored.

        This was recognized, for example, by the largest foreign banks that had made loans to South Korea, who issued a statement last December saying that they "shared the view that the Korean economy is strong and that the present situation is due to a liquidity squeeze primarily caused by an excessive reliance on short-term debt."

        By analogy, we could compare the situation with our own Savings and Loan crisis a decade ago. In that case the underlying financial weaknesses were quite serious-- in today's dollars, about $220 billion in bad loans. But the government was able to bail out the banking system, restructure those institutions that could be saved, and sell off the assets of others, all without causing any loss of output in the real economy.

        But the International Monetary Fund had its own plans for Asia, and had the strong backing of the U.S. government, which has the dominant voice within the organization. Like most bad policy, theirs was a mixture of ideology and bad intent. The latter was expressed most brazenly by former U.S. Trade Representative Mickey Kantor, when he "said 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."⁽⁶¹⁾

        This they did, and billions of dollars of assets in these countries are still being scooped up by foreigners at fire sale prices, thanks to both the undervalued currencies and the regional depression. Among the conditions that the IMF attached to the bailout were numerous provisions making it easier for foreign investors to buy up local financial and non-financial enterprises.

        But the ideologically driven component of the IMF's plan was much more damaging than the policies that were tailored to Western commercial interests. Like a medieval doctor whose first recourse is to drain the "bad blood" from the patient, the Fund prescribed its ususal medicine: high interest rates and a tightening of domestic credit to slow economic growth; fiscal tightening, including cuts in food and energy subsidies in Indonesia (later rescinded there after rioting broke out); and further liberalization of international capital flows, notwithstanding that this is what got these countries into trouble in the first place. South Korea, for example, was required to abolish nearly all of its remaining restrictions on capital flows, including those relating to the domestic financial services market and foreign exchange controls.⁽⁶²⁾

        The IMF's power should not be underestimated: countries suffering from balance of payments problems are generally required to get the IMF's seal of approval before they can obtain credit from other financial institutions, public or private.⁽⁶³⁾ After its mishandling of the Asian financial crisis, this power has come under challenge. As Jeffrey Sachs has noted, "it defies logic to believe that the small group of 1000 economists on 19th Street in Washington should dictate the economic conditions of life to 75 developing countries with around 1.4 billion people."⁽⁶⁴⁾

        It should also be noted that Japan proposed, at a meeting of regional finance ministers in September 1997, that an "Asian Monetary Fund" be created in order to provide liquidity to the faltering economies faster, and with fewer of the conditions imposed by the IMF. This fund was to have been endowed with as much as $100 billion in emergency resources, which would come not only from Japan, but from China, Taiwan, Hong Kong, Singapore, and other countries, all of whom supported the proposal. After strenuous opposition from the U.S. Treasury Department, which insisted that the IMF must determine the conditions of any bailout before any other funds were committed, the plan was dropped by November. It is impossible to tell how things might have turned out differently, but it is certainly conceivable that not only the depression, but even the worst of the currency collapses could have been avoided if the fund had been assembled and deployed quickly at that time.⁽⁶⁵⁾

        The IMF has been imposing similar conditions for decades around the world, and it has often been criticized for causing recessions and worsening poverty, unemployment, and income distribution with its "structural adjustment" programs.⁽⁶⁶⁾ But its intervention in the Asian economic crisis drew more fire than ever before in its 53 year history, in spite of the fact that the conditions that the Fund imposed were very much in line with past practice. In a unique breach of protocol, Joseph Stiglitz, the chief economist at the IMF's sister organization, the World Bank, publicly criticized the Fund's policies: "These are crises in confidence," he said.⁽⁶⁷⁾ "You don't want to push these countries into severe recession. One ought to focus. . . on things that caused the crisis, not on things that make it more difficult to deal with."⁽⁶⁸⁾ One reason for the broader base of criticism is that the ideological underpinnings of the Fund's policies, which are normally presented as purely technocratic measures to stabilize the macro economy or improve efficiency, were in this case more exposed. In many countries in which the IMF intervenes, there are chronic or structural problems with central government budget deficits or the international balance of payments. Under such circumstances it is easier to make an argument for the some of the austerity measures that the IMF generally imposes, as well as "structural adjustment" generally. But these were countries with balanced budgets, low inflation, and high national savings rates. Even their current account deficits, as noted above, provided little justification for the conditions attached to the bailout.

        Although many of these conditions, as always, remain secret, those that have been publicized illustrate the destructiveness of the Fund's policies. For example, at a time when the Korean won had depreciated by eighty percent, the IMF imposed an inflation target of 5.2% for South Korea for 1998. This compares with inflation of 4.2% the previous year.⁽⁶⁹⁾ To hold inflation to this small of an increase with the cost of imports soaring due to the currency depreciation would require a recession, and perhaps a depression.

        The IMF made other serious mistakes that worsened the crisis. One of these was admitted, in an internal Fund memo that was leaked to the press, to be an error. This was the closing of sixteen Indonesian banks, a move that the IMF thought would help restore confidence in the banking system. Instead it led to panic withdrawals by depositors at remaining banks, further destabilizing the financial system. ⁽⁷⁰⁾

        The IMF also failed to arrange a roll over of the short-term foreign debt owed by Indonesian non-financial firms. Indonesia was thus unable to stabilize its currency and economy, and firms could not obtain the necessary credits for essential imports and even exports. The Indonesian currency actually took its worst plunge just days after the second IMF agreement was signed on January 15 of this year.

        In retrospect, it is not surprising that the IMF failed to restore market confidence in the region. The Fund was negotiating, first of all, for recessionary conditions with the affected countries. Even worse, the Fund was fighting for structural "reforms," and therefore put forth the argument that the crisis was due to "fundamental structural weaknesses"⁽⁷¹⁾ in these economies, rather than the much more easily resolvable liquidity problem that actually caused the crisis. This is certainly not a recipe for inducing investors to return. And the amounts of funds committed dispersed were very much smaller than the amounts of funds committed (i.e., the numbers most widely reported in the press), probably not enough for the IMF to function as the lender of last resort that was needed. In Indonesia, for example, only $3 billion had been disbursed by March 1998, as compared to a $40 billion commitment.⁽⁷²⁾

Conclusion

        It has long been known that a system of unregulated markets does not regulate itself, is prone to crises and even depressions, and does not necessarily allow the majority of its participants to share in the gains from economic growth and technological progress. Globalization is a way of forgetting all this, of blotting out the last two centuries of economic history as though it were all part of a bad dream. It is capitalism in denial, a back door way of re-introducing the worst excesses and irrationalities of the market, long ameliorated, to varying degrees in different countries, by the nation-state.

        There is no global equivalent of the nation-state that can engage in expansionary fiscal policy to combat a regional or even global recession, not even the automatic stabilizers that are built into the national budgets of the developed countries. There is no international central bank to use monetary policy for similar purposes. There is no global welfare state to provide a safety net for the hardest-hit victims of market forces, no global equivalent of national labor legislation to protect the rights of workers to organize and bargain collectively. There is no international environmental legislation, nor would there be a means of enforcing it if it existed.

        The global economy is therefore the last refuge for those who would prefer to avoid such encumbrances, including of course the transnational corporations, who have had the dominant voice in reshaping the world economic order in the present era. But it is also much more than that.

        The supra-national institutions of the global economy -- the IMF, the World Bank, the GATT and WTO, and the proposed MAI � are often viewed as quasi-state institutions, especially by reformers who see in them the potential for performing those rationalizing functions that the state has taken on at the level of the national economy. But in fact they resemble the nation-state only in its most repressive aspects: they reinforce and exacerbate the existing distribution of wealth and power, as well as the international division of labor between rich and poor nations. And that is the rational side of their operations.

        There is also a more irrational side to these institutions, one that is irrational even from the point of view of those who control the commanding heights of the global economy. This aspect has become more prominent since the 1980s, as the ideology of neo-liberalism⁽⁷³⁾ has increasingly taken on a life of its own, and globalization is pursued as an end in itself.

        The country specifics vary widely, but the overriding principle seems to be the subordination of the national economy, and generally human needs as well, to the vicissitudes of international markets. The tail wags the dog, and hobbles it, too. In Russia, for example, the stability and convertibility of the ruble was given top priority, partly because this is of utmost importance to foreign investors-- and especially those concerned with portfolio investment. In August of 1998 the IMF loaned Russia $4.8 billion, as part of a $22 billion dollar package, to stabilize the ruble. This money went right into the outstretched hands of speculators, and in September the ruble collapsed and Russia defaulted on its debt, both domestic and foreign.

        The collapse of the ruble and Russia's default have had profound implications far beyond Russia's borders. These events have highlighted another spectacular failure of the IMF, coming not only on the heels of the Asian financial crisis, but also six years of IMF intervention in Russia, in which the stabilization of the ruble had been its only accomplishment. The Russian people have paid a terrible price for their adherence to the IMF's neoliberal prescriptions, in which it was assumed that the country's manufacturing and industrial base had to be scrapped-- because these are not "internationally competitive"-- and rebuilt on the basis of foreign investment. The first part of the formula has been applied-- the country now produces hardly anything but energy-- but it is now clear that the foreign investment will not be forthcoming. Meanwhile, in the last six years, the average Russian household has lost more than half of its income-- a decline greater than our own Great Depression. The majority of people have fallen below the poverty line, and the decline in male life expectancy-- from a pre- "reform" 65.5 years to 57 years-- is historically unprecedented in the absence of a war or a major natural disaster. The odds that Russia will opt for a path very different from the IMF's "reform" program of the last six years are now considerable and increasing.

        The final disintegration of the Russian "reform" model has sent shock waves through the international financial system, highlighting the instability of globalized capital markets. As this paper goes to print, Brazil has been forced to raise interest rates to 50%, and has spent more than a billion dollars a day over the last month to support its exchange rate. Mexico has pushed interest rates to 40%, and Latin America teeters on the edge of financial collapse. Even if the dreaded implosion can be avoided, the economic and social costs will be steep. And all of this turmoil has been set off by a financial meltdown in Russia, an economy with which these countries have the most minimal commercial relations. The irrationality of international financial markets has reached new extremes, as one poor country after another is trampled by the herd behavior of investors who may know nothing more than the fact that other investors might be averse to "emerging markets" after the last disaster.

        Meanwhile, the fallout from globalization continues to drift back the United States, most recently in the form of record trade deficits ($15.7 billion for May 1998) that have followed in the wake of the Asian crisis. An estimated 700,000 jobs will be displaced here.⁽⁷⁴⁾ It is difficult to see why the IMF, and by extension our own government, have not been accorded their rightful share of the blame for this dislocation. By unnecessarily forcing the Asian economies into depression, and leaving them no way to grow except through exports based on undervalued currencies, they have greatly worsened the impact of the crisis on the US economy.

        As the evidence of globalization's harmful effects continues to mount, the debate within the United States, source of the "Washington consensus" that currently dominates the major institutions of the global economy, will undoubtedly intensify. A shift in the burden of proof would seem long overdue. The logic of "downward harmonization," as unfettered global market forces push environmental and living standards toward the lowest common denominator, is straightforward enough. The instability and irrationality of global deregulation is becoming more obvious with each crisis.

        Until recently, those who claim that the majority of citizens will benefit from continuing in the direction of increased trade and investment liberalization have not had to argue their case. They have not had to explain, for example, how international agreements that contain an array of new protections and privileges for transnational corporations, with nothing for the environment or labor, are in everyone's best interest. They have only had to dismiss their opponents as "protectionists," demagogues, atavists, or xenophobes. More recently, a group of economists has diagnosed this opposition as suffering from "globaphobia,"⁽⁷⁵⁾ an apparently irrational fear of the global economy.

        Those days may be nearing an end, and the globalizers may soon have to make their case on the merits. Let the debate begin.

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Radelet, Steven and Jeffrey Sachs. 1998b. "The East Asian Financial Crisis: Diagnosis, Remedies,  Prospects." Harvard Institute for International Development, April 20, 1998.

Rodrik, Dani. 1997. Has Globalization Gone Too Far? Washington, DC: Institute
for International Economics.

Sachs, Jeffrey. 1998. "Rule of the Ruble." The New York Times, June 4.

Sachs, Jeffrey. 1997. "IMF is a Power Unto Itself." Financial Times, December 11.

Scott, Robert E., Thea Lee, and John Schmitt. 1997. "Trading Away Good Jobs: An Examination of  Employment and Wages in the US, 1979-1994." Washington, DC: Economic
Policy Institute.

Scott, Robert E. and Jesse Rothstein. 1998. "American Jobs and the Asian Crisis." Economic Policy  Institute Briefing Paper. (January).

Taylor, Lance and Ute Pieper. 1996. "Reconciling Economic Reform and Sustainable Human Development: Social Consequences of Neo-Liberalism," UNDP Office of Development Studies Discussion Paper Series no. 2.

Westphal, Larry. 1990. "Industrial Policy in an Export-Propelled Economy: Lessons from South Korea's Experience," Journal of Economic Perspectives vol. 4, no.3.

Endnotes

1. See "Clinton, House GOP Leaders Push for 'Fast Track' Support," Washington Post; November 7, 1997, page A20.

2. Although NAFTA was presented to the public as a trade agreement, the five chapters dealing with the liberalization of investment are arguably of much greater impact, especially since US trade barriers were already quite low, and the potential for expanding the Mexican market for U.S. goods is not all that large. What U.S. corporations wanted most, and got from NAFTA, was a set of rules that made it easier, safer, and more profitable to invest in Mexico.

3. See, for example, "The Sinking of the MAI," The Economist, March 14, 1998; Guy De Jonquieres, "Network Guerillas," Financial Times, April 30, 1998; and Madeleine Drohan, "How the Net Killed the MAI." One World News Service, July 3, 1998.

4. Dani Rodrik, Has Globalization Gone Too Far?, 1997.

5. William Cline, Trade and Income Distribution; 1996, page 234.

6. Jeffrey Sachs, "Fixing the IMF Remedy," The Banker; February 1996, page 6.

7. Steven Radelet and Jeffrey Sachs, "Asia's Reemergence," Foreign Affairs; Nov./Dec. 1997, page 44.

8. See, for example "Venezuelans Confronting Democracy's Dire State," The New York Times, December 14, 1997. The article cites "the end of government price supports"-- a condition enforced by an IMF agreement-- as well as the fact that "70 to 80 percent of the population is in poverty" as part of the reason for disillusionment.

9. Angus Maddison, Monitoring the World Economy 1820-1992; 1995, pages 78-79.

10. See, e.g., Alexander Gershenkron, Economic Backwardness in Historical Perspective, 1966.

11. Albert Hirschman, Essays in Trespassing: Economics to Politics and Beyond; 1981, page 3.

12. As Jeff Faux (1997) has noted, "faith" is the best word to describe Rodrik's (and other economists') attachment to the principles of free trade; when economists actually try to measure the gains from trade, they turn out to be very small (see below). Rodrik concedes as much: "For example, no widely accepted model attributes to postwar trade liberalization more than a very tiny fraction of the increased prosperity of the advanced industrial countries. Yet most economists do believe that expanding trade was very important to this progress."

13. Washington Post; June 23, 1997, p.A12.

14. Economic Report of the President; February 1998, page 338.

15. Another commonly used definition is production and non-supervisory workers, which is about 80% of the labor force.

16. Mishel, Bernstein, and Schmitt, The State of Working America 1996-1997, 1997.

17. International Survey Research Corporation, cited by Federal Reserve Chairman Alan Greenspan in his "Monetary Policy and Report to the Congress," February 26, 1997. Monetary Policy Report to Congress: Hearing Before the Committee on Banking, Housing and Urban Affairs, 150th Cong. 54 (1997) (statement of Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System).

18. Robert Lawrence, Societal Cohesion and the Globalizing Economy, 1997.

19. This is in spite of the fact that median real wages have actually risen for 1996 and 1997, at an average annual rate of 2.6%. It remains to be seen whether this recent trend can be sustained; clearly it has much to do with the relatively low levels of unemployment that have been sustained for the last few years (see below). See Mishel, Bernstein, and Schmitt (1998a, 1998b).

20. John Eatwell, International Capital Liberalisation: The Record (Working Paper No.1); August 1996, page 1.

21. Nunnenkamp, Guundlach, and Agarwal, Globalisation of Production and Markets; 1994, pages 6-7.

22. Edward M. Graham, Global Corporations and National Governments; 1996, page 1.

23. See Open Markets Matter: The Benefits of Trade and Investment Liberalization (OECD, 1998), p. 11.

24. Id., page 67.

25. William Cline, Trade and Income Distribution; November 1997, page 234.

26. Cline, William, "Impact of the Uruguay Round on U.S. Fiscal Revenue," Institute for International Economics, 1994, based on USTR's estimate of $336 billion as the volume of imports covered by GATT as of 1990.

27. Real average hourly earnings for production workers and non-supervisory employees. This group constitutes about 80% of the workforce.

28. In 1995 dollars. Mishel, Bernstein, and Schmitt, 1997.

29. This approximation is for 1995; earlier years in the 1989-95 period will of course show smaller losses, and the average year would be about half of this $8.2-16.4 billion. But the lost wages would still be many times the estimated gains from freer trade.

30. Kate Bronfenbrenner, Final Report: The Effects of Plant Closing or Threat of Plant Closing on the Right of Workers to Organize, 1996.

31. Bob Davis, "One America," Wall Street Journal; September 24, 1992, page R1.

32. Economic Policy Institute analysis of NIPA data.

33. OECD Economic Outlook (December 1997). European workers, unlike their American counterparts, have not suffered an absolute decline in their real wages during the post-Bretton Woods era. This was possible in spite of the much greater shift of income shares (as compared to the US) from labor to capital in Europe, because of higher productivity growth rates in Europe. (See below).

34. Bureau of Labor Statistics, January 1998; data is for 1996, the most recent year available.

35. See, e.g., Bernstein and Schmitt, 1998; Card & Krueger, 1995; Lawrence Mishmel et al., The State of Working America, 1997.

36. See, e.g., "Federal Reserve Lifts a Key Rate; First Rise Since '95." The New York Times; March 26, 1997, page A1.

37. For the last year the Fed has allowed the unemployment rate to remain below 5%, without raising interest rates. The Fed last raised rates in March of 1997, and was criticized for doing so at a time when there was no evidence of rising inflation. A combination of factors, including falling inflation and the Asian financial crisis have kept the Fed holding nominal interest rates steady since then. It remains to be seen to what degree this represents a long-term policy change; prior to mid-1994 the Fed operated under the theory, supported by most economists, that unemployment could not drop below 6% without causing inflation to accelerate.

38. See Eatwell, 1996.

39. See Larry Westphal, "Industrial Policy in an Export-Propelled economy : Lessons from South Korea's Experience," Journal of Economic Perspectives, vol. 4, no. 3; summer 1990, pages 41-59.

40. "Liberals Lift Ban on Controversial Gas Additive," Toronto Star; July 21, 1998, page A7.

41. See Jagdish Bhagwati, "The Capital Myth: The Difference Between Trade in Widgets and Dollars," Foreign Affairs, 1998.

42. See id. page 8.

43. Radelet and Sachs; 1998b, page 4.

44. Radelet and Sachs, 1998b.

45. Chang et al, 1998.

46. IMF Annual Report 1997; page 57.

47. Sachs, 1997.

48. Radelet and Sachs; 1998b, page 23; Krugman, 1998.

49. Radelet and Sachs, 1998b.

50. Radelet and Sachs, 1998b, tables 8 and 9.

51. Radelet and Sachs, 1998b.

52. See, e.g., Guillermo Calvo and Enrique Mendoza, "Reflections on Mexico's Balance of Payments Crisis: A Chronicle of a Death Foretold," Journal of International Economics; 1995, page 235.

53. The authors used a probit model based on data for 22 emerging markets, during the years 1994-97.

54. Chang et al, 1998.

55. Radelet and Sachs, 1998b.

56. Change et al, 1998.

57. Bank for International Settlements data cited in Radelet and Sachs 1998b.

58. See Felix (1998) for a critique of this theory, with particular attention to the type of financial liberalization discussed here.

59. Chang et al; 1998, pages 9-14.

60. See Nicholas Kristof, "Asia Feels Strain at Society's Margins," New York Times, June 8, 1998 and Kristof, "With Asia's Economies Shrinking, Women Are Being Squeezed Out," New York Times; June 11, 1998.

61. "Fund Managers in a Surrey State,"The Times (London); December 5, 1997, page 31.

62. Yung Chul Park, "Gradual Approach Capital Account Liberalization: the Korean Experience"; March 9, 1998.

63. The IMF is correctly perceived in most of the world as a proxy for the US government. Although Europe and Japan could outvote the United States if they wanted to (voting rights are proportional to contributions), they have never chosen to do so. The executive board operates by consensus-- there have been 12 votes in the last 2000 decisions. (Karin Lissakers, U.S. Executive Director, International Monetary Fund, Testimony to the House of Representatives Committee on Banking and Financial Services, General Oversight Subcommittee, April 21, 1998) Even when the Clinton Administration asked the IMF for an unprecedented $20 billion loan to Mexico during the peso crisis in 1995, on extremely short notice, the European representatives expressed their disagreement only by abstaining. (See "Western Allies Rebuff Clinton in Mexico," by Nathaniel C. Nash, New York Times, February 3, 1995).

64. Jeffrey Sachs, "At Risk in Korea,"Financial Times; Dec. 11, 1997, page 21.

65. Felix, 1998 has argued this point; for details on the politics of the proposal, see Altbach, 1997.

66. For an overview of these programs, see Taylor and Pieper, 1996; and Taylor, 1988.

67. Bob Davis and David Wessel, "World Bank, IMF at Odds Over Asian Austerity," Wall Street Journal; January 8, 1998, page A5.

68. Id, January 8, 1998.

69. Jeffrey Sachs, "IMF is a Power Unto Itself," Financial Times; Dec. 11, 1997, page 21.

70. See "IMF Reports Plan Backfired, Worsening Indonesia Woes," by David E. Sanger, New York Times; January 14, 1998.

71. Korea-- Memorandum on the Economic Program, Annex I, Request for Stand-by Arrangement; December 3, 1997, page 38 (quoted in Radelet and Sachs, 1998b).

72. See Radelet and Sachs (1998b), for some of these and other arguments regarding the failure of the IMF to restore market confidence.

73. Lance Taylor and Ute Pieper, :Reconciling Economic Reform and Sustainable Human Development: Social Consequences of Neo-Liberalism," 1996.

74. Robert Scott and Jesse Rothstein, "American Jobs and the Asian Crisis," 1998.

75. See Burtless et al, Globaphobia: Confronting Fears About Open Trade, 1998.