The Dynamics of Globalization

excerpts from the book

Global Village or Global Pillage

Economic Reconstruction from the Bottom Up

by Jeremy Brecher and Tim Costello

South End Press, 1994

***

The Third World Alternative

One possible approach to global change was to update the system of national and global regulation. In response to the increasingly chaotic global economy of the 1970s, the Third World governments of the South attempted to initiate such an alternative. Working through the United Nations Conference on Trade and Development (UNCTAD), they called for a "North-South Dialogue" to develop a new International Economic Order" (NIEO). In place of domination by Northern interests, they called for the regulation of global market forces in the interest of the development process. They advocated price and production policies and long-term sales agreements designed to stabilize the prices of the commodities they produced. They did not propose to replace capitalism, but they did insist that the world economy be managed to support the development and relative self-reliance of poorer countries.

In several rounds of North/South negotiations, the wealthy nations of the North showed some willingness to discuss such new arrangements. These discussions culminated in 1981 at a meeting of 22 heads of government in Cancun, Mexico, where, as Chairman of the South Commission Julius Nyerere recalls, 'Reagan said 'no' and that was it. What was very revealing, and very depressing, was that after Reagan said 'no,' the other leaders from the North said that was the end.

The New Corporate Strategies

Corporations experienced the economic crisis that began in the early 1970s as an intensification of international competition and a fall in their profits. As Jacques de Larosiere, chairman of the IMF, put it in 1984, there was a clear pattern of "substantial and progressive long term decline in rates of return to capital" Corporations increasingly saw the system of national economic regulation and class compromise as a barrier to increasing their profits. The solution increasingly came to be seen as cutting labor and other costs. As de Larosiere delicately put it, there was a need for "a gradual reduction in the rate of increase in real wages over the medium term if we are to restore adequate investment incentives."

Faced with intensifying international competition, corporations began experimenting with strategies to increase their profits by reducing their labor and other costs. These strategies included moving their operations to lower-cost locations; transforming their own structures to operate in a highly competitive global economy; challenging national policies that increased their costs; and creating a new system of global economic governance which supported their other strategies. In short, they initiated the race to the bottom...

Capital Mobility

At the core of the new strategy was capital mobility-the ability to move capital around the world. New transportation, communication, and production technology helped make this possible, but the process was largely driven by a wish to lower production costs. As economist David Ranney writes, "There is a strong interconnection between capital mobility and the cheapening of the costs of production." Mobility offers the opportunity " to move to low cost areas" and "pit the peoples of different nations against one another." By using the threat of moving as a club, "corporations can extract wage and work rule concessions from workers in their home country." And mobility allows companies to challenge or escape such claims on value as "health care, welfare, and subsidized housing programs; worker and consumer safety standards; and environmental regulations."

The new capital mobility first became highly visible when First World corporations began to move production "offshore"-primarily to "export processing zones" (EPZs) in Third World countries. These were generally in military dictatorships and authoritarian "development states" with little pretense of democracy. Some of these countries, notably the "Asian Tigers" like Korea, parlayed their cheap labor and repressive social control into rapid economic growth, becoming known as the "Newly Industrialized Countries" (NICs). East, South, and Southeast Asian countries experienced annual growth rates up to 37 percent between 1985 and 1989; Southeast Asia alone received 48 percent of all foreign direct investment going to developing countries. The strategy of combining domestic repression with production for the new global economy spread from the original Tigers to many other countries, now including communist Vietnam and China.

***

Restructuring the Corporation

The large, vertically integrated mass production firms that had dominated the world's markets for most of the 20th century staggered in the face of the global economic crisis. They were frequently portrayed as dinosaurs, doomed to die out in competition with small, nimble competitors. But a recent study by economist Bennett Harrison provides a very different and far more credible interpretation of corporate restructuring.

According to Harrison, the "signal economic experience of our era" is not "an explosion of individual entrepreneurship" but rather "the creation by managers of boundary-spanning networks of firms, linking together big and small companies operating in different industries, regions, and even countries. Big firms "create all manner of networks, alliances, short- and long-term financial and technology deals - with one another, with governments at all levels, and with legions of generally (although not invariably) smaller firms who act as their suppliers and sub- contractors." But the locus of ultimate power and control "remains concentrated within the largest institutions: multinational corporations, key government agencies, big banks and fiduciaries, research hospitals, and the major universities with dose ties to business." Harrison describes this "emerging paradigm of networked production" as concentration of control combined with decentralization of production.' Businesses which are unable or unwilling to globalize are at a great disadvantage, since "The more the economy is globalized, the more it is accessible only to companies with a global reach."

***

National Policies

Large corporations once had promoted nationally regulated capitalism, but in the context of deepening crisis they began to see it as an obstacle to their emerging strategies. Corporate leaders and the think tanks and economists associated with them evolved a new public policy agenda designed to overcome this obstacle. This Corporate Agenda appeared under a variety of labels, including monetarism, deregulation, laissez-faire, neo-liberalism, and supply-side economics.

Economic policymakers deliberately encouraged downward leveling. They used high unemployment to fight inflation. They cut wages, public services, and environmental protection to reduce businesses' production costs. Unemployment and falling real wages led to declining consumer demand for products worldwide, and policymakers no longer tried to counter this effect with Keynesian policies. The "class compromise" which had given labor and other non-elite groups a voice in the economic policies of many countries was renounced, and unions and other popular forces were marginalized in the political process and in some countries repressed.

Those whose voices were allowed to be heard in policy debates formed a dominant consensus around a simple but dubious formula: Each country should reduce costs for labor and government in order to become "more competitive" in the global economy. All will benefit because goods and services will be provided by those whose "comparative advantage" enables them to produce more cheaply.

In the United States, a political base for the Corporate Agenda was created by means of an alliance, consummated within the Republican Party, between large corporations and right-wing formerly fringe elements expressing racial, gender, and religious resentment against the social changes of the 1960s and 1970s.'9 While the Corporate Agenda was already affecting public policy in the last two years of the Carter Administration, it began to be fully implemented with the election in 1980 of Ronald Reagan.

International Institutions

As the economic crisis deepened, there gradually evolved what David Ranney has called a "supra-national policy arena" which included new organizations like the Group of Seven industrial nations (G7) and NAFTA and new roles for established international organizations like the KU, IMF, World Bank, and GATT.

The policies adopted by these international institutions allowed corporations to lower their costs in several ways. They reduced consumer, environmental, health, labor, and other standards. They reduced business taxes. They facilitated the move to lower wage areas and the threat of such movement. And they encouraged the expansion of markets and the "economies of scale" provided by larger-scale production.

The IMF and World Bank. The Bretton Woods Agreement established the World Bank to help rebuild Europe and the IMF to maintain fixed exchange rates for currencies, but over time their functions changed radically. Starting in the 1950s, the World Bank became a major funder of development projects in the Third World. After 1972, fixed exchange rates were abolished, but the IMF took on much of the management of the exploding international debt crisis. As the debt of Third World countries soared, the IMF and World Bank began to require debtor countries to accept structural adjustment programs as conditions for new loans. These conditions "neatly coincide with the agenda of mobile capital and the cheapening of the costs of production" for global corporations by:

* radically reducing government spending, in order to control inflation and reduce the demand for capital inflows from abroad, a measure that in practice translated into cutting spending in health, education, and welfare)

* cutting wages or severely constraining their rise to reduce inflation and make exports more competitive;

* liberalizing imports to make local industry more efficient and instituting incentives for producing for export markets, which were seen both as a source of much-needed foreign exchange and as a more dynamic source of growth than the domestic market;

* removing restrictions on foreign investment in industry and financial services to make the local production of goods and delivery of services more efficient, owing to the presence of foreign competition;

* devaluing the local currency relative to hard currency like the dollar in order to make exports more competitive; and

.privatizing state enterprises and embarking on radical deregulation in order to promote allocation of resources by the market instead of by government decree.

Most Third World governments abandoned the pursuit of a more just international economic order and instead acceded to virtually any conditions in exchange for loan renewals. Their austerity plans in turn reduced markets for industrial products from developed countries. Similar "shock therapy" plans were imposed on the ax-communist countries as a precondition for loans and investment.

In 1994, a group of international bankers, former top financial officials, and monetary experts from the world's richest countries, headed by former U.S. Federal Reserve Board Chairman Paul Volcker, circulated a proposal to give the IMF "a central role in coordinating economic policies and in developing and implementing monetary reforms." They argued that "there has been no reliable long-term global approach to coordinating policy, stabilizing market expectations, and preventing extreme volatility and misalignments among key currencies." They proposed several immediate measures, to be followed by "a more formal system for managing exchange rates." According to Kenneth H. Bacon of the Wall Street Journal, "The Volcker commission's plan would, in effect, require countries to relinquish some of their economic sovereignty." Powerful interests began lining up both in support and in opposition to the plan.

The World Trade Organization. GATT was formed in 1948. In various rounds of negotiations, it established rules governing tariffs, quotas, and other measures that countries use to protect a particular industry or sector. Early in 1994, more than 100 member countries, accounting for four-fifths of world trade, signed an agreement to transform GATT into a World Trade Organization (WTO). If ratified by their governments, this agreement will create a powerful center of global economic governance.

The WTO is the product of GATT's "Uruguay Round," which began in Punte del Este, Uruguay in 1986. The United States put forward proposals to radically expand GATT's mission and power, in effect making it a vehicle for global enforcement of the Corporate Agenda. The expanded GATT program would pre-empt democratic self-government at local, national, regional, and global levels by defining such matters as environmental and consumer protection, labor law, worker health and safety protection, food security policies, national industrial planning, plant closing legislation, and restrictions on foreign ownership of industries as "non-tariff barriers to trade." It redefines "free trade" to mean the right of companies to go wherever they want and do whatever they want with as little interference as possible from anyone. Such "freedom" for corporations means restricting the freedom of governments and citizens. The WTO represents, in effect, a daring global coup d'etat.

GATT in many ways offered an ideal vehicle to implement the Corporate Agenda. It was dominated by the major trading countries, who often cut deals in private "green room" caucuses and then imposed them on a "take-it-or-leave-it" basis. It was not officially part of the United Nations and therefore was insulated from pressures that might be brought to bear by the poorer but more numerous countries of the South. Its activities were conducted largely in secret. Its mission was restricted to reducing "barriers to trade." And it wielded the powerful weapon of trade sanctions to enforce its decisions.

The WTO involves a transformation of GATT's governance structure. While GATT was a contract among countries whose rules any country could veto or opt out of, the WTO will be a "legal personality" like the United Nations or World Bank. Its rules will be binding on all members.

At the core of WTO power will be "dispute resolution panels." Any WTO member country can challenge the domestic laws of any other member as violations of WTO rules. The charges will be heard before secret panels of three "trade experts" with no right of citizens or their organizations to testify or even to observe. A panel's decision will be automatically adopted within a fixed number of days unless every WTO member-including the initial complainant-votes to reverse it. If a country's laws are found to violate WTO rules, the laws must be eliminated. If they aren't, trade sanctions will be imposed automatically unless every member country votes against them. The trade panels will in effect have dictatorial powers over governments. (In May, 1994 the European Union circulated a list of the U.S. laws it wanted to challenge under the WTO, which included the Marine Mammal Protection Act, the Nuclear Non-Proliferation Act, food safety laws, California's Safe Drinking Water and Toxic Enforcement Act, and many others.)

The range of economic activity covered will also be enormously expanded. While GATT has primarily regulated trade in goods, WTO rules will cover agriculture, services, investment, and "intellectual property rights." They will apply to state and local governments-and any state or local law will be subject to challenge if it is more restrictive than national law. The WTO will establish ceilings for environmental, food, and safety standards; national standards will be subject to challenge if they are higher than the WTO standards but, incredibly enough, not if they are lower.

The WTO will also intensify the gap between global rich and poor. According to an OECD/World Bank study, the industrialized countries will receive 70 percent of the additional income resulting from increased trade; at the opposite pole, Africa by 2002 will lose $2.6 billion. "free trade" rhetoric notwithstanding, little was done to open developed country markets to developing country products. The WTO can be expected to work hand-in-hand with the IMF and World Bank to impose the Corporate Agenda on developing countries.

The treaty establishing the WTO, while portrayed as a vehicle for eliminating regulation, runs to more than 22,000 pages and weighs 395 pounds. As Ralph Nader put it, these texts "formalize a world economic government dominated by giant corporations, without a correlative democratic rule of law to hold this economic government accountable."`

Regional Institutions. The era of globalization has also seen a proliferation of regional "free trade" agreements and institutions. These institutions generally incorporate large elements of the Corporate Agenda. At the same time, they have the potential to serve as regional blocs should the global economy break down into hostile, competing regions.

In the wake of World War II, the countries of Western Europe created institutions for regional economic and political cooperation which eventually evolved from the European Economic Community (EEC) to the European Community (EC) to the European Union (EU). Their goals included preserving peace and democracy as well as reducing barriers to trade.

The EU represents a so-far unique experiment in transnational governance whose future direction remains unclear. In the era of regulated capitalism, the EU took on many of the regulatory functions of a government. It provided extensive support for economic development in poorer regions and initiated a "social charter"-not accepted by the United Kingdom-to protect labor and other rights and standards. In response to the emerging Corporate Agenda, however, the EU has increasingly become a vehicle for forcing national governments to admit all imports that meet EU standards, even if they don't meet higher national standards.

In 1990, US. President George Bush and Mexican President Carlos Salinas decided to launch negotiations for a Mexican-U.S. Free Trade Agreement. The initiative came from the Mexican elite, which had unsuccessfully sought help from Europe in meeting their deep economic crisis and finally had turned reluctantly to the United States. Canada, fearing exclusion from the proposed free trade zone, asked to join the negotiations for what was thereafter dubbed the North American Free Trade Agreement

The Corporate Agenda had already been affecting economic relations between the United States and Mexico. Over the course of the 1980s, Mexico had cut its tariffs from 100 percent or more to less than 10 percent, and over 1,700 US. (and a growing number of Japanese) companies had established plants employing nearly half-a-million workers in Mexican free trade zones known as "maquiladoras." NAFTA's 2,000 pages of details represented in large part a "wish list" eliminating inconveniences faced by U.S. businesses that wanted to operate in Mexico. Despite massive opposition in the United States and Canada and more veiled criticism in Mexico, NAFTA went into effect January 1, 1994. Other countries, notably Chile, may enter negotiations to join the agreement

Other regional trade institutions are proliferating. Asia has the Association of Southeast Asian Nations (ASEAN) and the Bangkok Agreement. The Pacific has the Asia Pacific Economic Cooperation (APEC). Latin America has the Central American Common Market (CACM), the Andean Common Market (ANCOM), the Southern Cone Common Market (MERCOSUR), and several others. Europe, Africa, the Middle East, and Oceania provide at least a dozen more. These organizations, which generally operate in accordance with the rules of GATT, are creating what has been called "layered governance" in the global economy.

The New Global Governance

Globalization is bringing out some of the contradictions that have marked the nation-state system from its beginnings. Even the regulated democratic national welfare state never adequately addressed the inherent unreality of absolute state sovereignty and independence. Nationalist theories notwithstanding, the world was not made up of distinct peoples living in contiguous territories; more powerful states dominated less powerful ones; the world was too interdependent for even powerful states to truly determine what happened within the territories they governed; markets and businesses operated internationally and did not necessarily have the same interests as "their" states and peoples. The concept of absolute national sovereignty, which continues to be the basis of most international law, regularly comes into conflict with such principles as universal human rights and the obligations of states under the UN Charter.

National governments have ceded much of their power to a "New Institutional Trinity"-the IMF, World Bank, and GATT/WTO. These agencies increasingly set the rules within which individual nations must operate, and they increasingly cooperate in pursuit of the same objectives-objectives generally indistinguishable from the Corporate Agenda.

Rather than eliminate national governments, this new system of global economic governance adds another institutional layer-one that will at times conflict with national governments and may sometimes have to bow to them. It lacks the police and military organizations for dominion at home and war abroad that have characterized states from their origin. But its ability to impose its rules on its subordinate parts has nonetheless proved increasingly effective.

Just as the states of early modern Europe often served and were supported by the emerging class of capitalists, this new system of global economic governance serves and is supported by the emerging global corporations. Like the absolute monarchs of yore, the IMF, World Bank, and GATT/WTO have little formal accountability to anyone except themselves, but they understand that in reality their power derives from their alliance with a powerful class. The functions they perform are more limited than those of conventional government - limited to the functions that accord with the Corporate Agenda. Just as the absolute monarchs defined themselves as performing God's will on earth, so the new system of economic governance defines itself as a tool carrying out the work of the "invisible hand" of the market.

Like the absolutist states of the past, this new system of global governance is not based on the consent of the governed. It has no institutional mechanism to hold it accountable to those its decisions affect. No doubt for this reason, it also fails to perform those functions of modern governments that benefit ordinary people. It should come as no surprise that, like the monarchies of the past, this emerging system of undemocratic power is calling forth revolts.

Global Village or Global Pillage