Shopping Till We Drop
by WILLIAM GREIDER
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During the past two decades, as random financial
crises visited various fast-growing economies,
we have become familiar, after the fact, with
the profile of a developing country that's headed for
trouble. A booming, modernizing industrial
system expands so robustly that it's described as a
"miracle" (Mexico, Korea, Indonesia, Brazil,
to name a few). Its financial markets soar as foreign
capital rushes in to invest and share in the
bountiful returns. The country takes on short-term
foreign debt at a disturbing pace--much faster
than national income is growing--but no one pays
much attention because the exuberant lending
seems to confirm the bright prospects. Then, one
day, investors redo the arithmetic and realize
their expectations are wildly exaggerated. As they
rush for the door, taking their capital, the
currency collapses. Deep recession follows. The
miracle is exposed as illusion.
In present circumstances, oddly enough, the
country that fits this profile is the United States,
where surging economic growth is also portrayed
as miraculous. The United States is unlikely to
experience a full-blown currency crisis like
Mexico's or Indonesia's, since the dollar is the hard
currency everyone relies upon as the anchor
in global commerce. But the fundamentals are more
similar than American triumphalism will acknowledge,
and America's prosperity can vanish just
as swiftly if foreign investors decide to
take back their money.
An abrupt exit by foreign capital would be
a disaster for the United States but also for the world
as a whole. That's because the United States
has used the borrowed money mainly to sustain its
unique role as buyer of last resort--keeping
the system afloat by mopping up the world's excess
output. As a result, surging US imports are
producing record trade deficits--nearly $300 billion
last year, almost triple the deficit of 1995.
The authorities acknowledge that the imbalance is
unsustainable and must be adjusted, but they
blandly advise us not to worry. After all, America
has been running persistent trade deficits--buying
more than it sells in the global system, a lot
more--for more than two decades, and nothing
terrible seems to have happened (if one ignores
millions of lost manufacturing jobs). Swollen
imports from Asia and elsewhere, it is said, reflect
heroic efforts by US consumers to revive economies
smashed by the global financial crisis that
unfolded in 1997.
America's anachronistic role as backstop purchaser
for the trading system originated in the cold
war. The twin objectives of ideological triumph
and commercial advance were always
intertwined in US policy and mutually reinforcing
at a deep level. Washington provided the
capital, foreign aid and military procurement
to rebuild Europe and develop Asia's miraculous
tigers; it granted easy access to the US market
and even awarded shares of US production to
far-flung allies. That was the glue that held
the alliance together, keeping nations from "going red,"
while it also extended the reach of US multinationals
and investors.
"The US de-emphasized savings and encouraged
consumption, even to the point of providing tax
deductions for consumer credit interest expenses,"
Robert Dugger of the Tudor Investment
Corporation explained in testimony before
the US Trade Deficit Review Commission. "This
policy supported the evolving export-led growth
strategies of US allies.... The United States cold
war economy won because it essentially outconsumed
the USSR and China." When the cold
war ended a decade ago, the ideology disappeared
but the economic strategy remained in place,
stripped of the patriotic fervor for liberating
people and now nakedly devoted to
commercial/financial objectives.
But this cannot continue. Since early 1998
the United States has provided roughly half the total
demand growth in the entire world, according
to the International Monetary Fund. The more
ominous fact is that America's status as a
debtor nation has deteriorated rapidly during the
booming prosperity of the past three years.
The cumulative net obligations to foreign creditors
from the many years of trade deficits reached
an astonishing 18 percent of GDP by the end of
1998 and by now may be 20 percent or higher.
That compares with 13 percent of GDP in
1997. Ten years before, it was zero. In short,
the hole is deepening at an accelerating pace.
Sooner or later, foreign investors will react
with alarm.
I dwell on these unfashionable facts because
I believe they provide the starting point for thinking
about economic reforms in the global system.
When the reckoning does arrive, there's a danger
of confused, reactionary backlash among innocent
bystanders who get hurt, but the moment will
also expose the fallacies of the reigning
orthodoxy, particularly the so-called Washington
consensus, which imposes the neoliberal straitjacket
on developing nations. That will be a rare
opening in itself.
More important, the social ideas and moral
values already being advanced by the new movement
against corporate-led globalization should
gain greater respect because their relevance as
economic solutions will become clearer. Labor
rights, corporate accountability, the sovereign
power of poorer na-
tions to determine their own destiny--these
and other reform causes involve more than fairness.
They also provide essential answers to the
economic maladies and instabilities embedded in the
present system. In a previous article ["Global
Agenda," January 31] I described some modest
first steps toward building new global rules
for social and moral equity. Reforming the economics
of globalization is obviously more daunting,
but it starts with a simple proposition: The pursuit of
common human values--what people around the
world recognize as justice--is not in conflict
with our economic self-interest; in fact,
the two can be mutually reinforcing.
* * *
The core contradiction in the global economy--enduring
overcapacity and inadequate
demand--is usually obscured by the more visible
dramas of financial crisis because it is located in
the globalizing production system, the long-distance
networks of factories and firms that produce
the goods and services flowing in global trade.
Corporate insecurity--the fear of falling behind,
the need to keep driving down costs, including
labor costs--is what generates globalization's
greatest contradiction. Alongside energetic
expansion and innovation, the system generates vast
and growing overcapacity across most industrial
sectors, from chemicals to airliners. My favorite
example is the auto industry, which in the
spring of 1998 had the global capacity to produce 80
million vehicles for a market that would buy
fewer than 60 million. This excess sounds irrational
(as it is), considering that the multinationals
are esteemed for sophisticated strategic management.
Yet each corporation decides (perhaps correctly)
that it has no choice but to disperse and
expand production for survival--moves that
seem smart and necessary in their own terms but that
collectively deepen the imbalances of overcapacity
and quicken the chase for new markets. So
we witness the recurring episodes of giddy
overinvestment by firms, investors and developing
nations, followed by financial breakdown.
Then the process regains momentum and repeats itself
somewhere else.
The overcapacity is further deepened by the
"Washington consensus" enforced by international
lending institutions. The doctrine pushes
more and more countries to pursue the export model of
development pioneered by Japan, except without
any of Japan's equalizing features--the social
guarantees, full employment and minimized
income inequality--or the protective measures that
insulated its infant domestic industries from
foreign competitors. The global system instead
encourages countries to ignore or actively
suppress labor rights and regularly opposes
public-sector investment as a wasteful impediment
to growth. Unlike developing Japan, South
Korea or Taiwan, which shielded their producers,
the new exporting nations are told they must
keep their borders and financial systems wide
open to foreign interests--that is, hostage to the
global system--so they are unlikely to achieve
the earlier success of Japan or the "tigers." The
plain fact is that too many poor nations are
now betting their futures on export-led growth--too
many for most of them to succeed. These pro-capital,
wage-retarding policies contribute
substantially to insufficient demand worldwide,
the flip side of overcapacity or overinvestment.
One can now appreciate why the US market is
so essential: If America taps out, who will buy all
this stuff? The immediate pain would probably
be felt most severely in poorer countries, which
would lose their meager shares in global trade.
* * *
Actually, the remedy does exist for the United
States to correct its lopsided trade flows swiftly
and defuse the potential for global crisis,
but it's not a measure Washington is likely to employ,
given its pretensions as pre-eminent promoter
of free-market dogma. The international rules of
trade recognize the right of any nation that's
sinking into a debt trap to impose emergency import
limits to stop the financial drain (this is
not regarded as protectionist unless it targets individual
countries or products). Article 12 of the
original GATT agreement of 1948 still authorizes this
step to stanch the bleeding, but in fifty
years it has seldom been used. Developing countries in
trouble typically have found themselves unable
to use the measure, since it would ignite retaliation
from investors and trading partners. However,
because it is the largest market, the customer
everyone needs, the United States would be
in a very different position, with enormous leverage.
Yet the United States may also be past the
point where it can introduce such a wake-up call.
The political shock to an already fragile
system might itself produce panic and crash.
What US authorities can and should do--but
undoubtedly won't--is face up to the worsening
condition with a frank, public recognition
that compels their foreign counterparts to do the same.
The mere mention of Article 12 by Washington
would make for a sobering moment. If trading
partners were faced with the threat, they
could in theory work out an agreement for gradually
correcting the US trade imbalances. The bulk
of the problem, after all, is concentrated in a
handful of trading partners: Japan, China,
Canada, Mexico and Western Europe generate more
than 80 percent of the deficit. More likely,
these nations would stall, convinced that the United
States was bluffing, as usual. Then Washington
would have to work out, unilaterally, a
step-by-step schedule for raising the bar--slowly
curbing its import volumes so that others would
have time to adjust and pick up the slack
in demand.
Here at home, the imperative facing the United
States is to discard the open-armed cold war
economics, cut the losses and redefine the
national interest in more pragmatic terms. This will
require deep changes in domestic life, as
the nation attempts to shift from high to low
consumption, from low to high savings policies.
That transition is sure to be most unpopular in
shopping-mall America and, given the gross
inequality in incomes, will feel like stagnation or
worse for the many families already deeply
indebted. Thus an aggressive politics devoted to
equality and to restoring public aid and equity
will become even more essential, as will a new
environmentalism that directly attacks the
wastefulness embedded in modern production and
consumption. There is plenty to go around
in America, and there would be even more if we
didn't throw so much away.
The US government must also begin to re-examine
its obligations to the multinationals, like
Boeing and General Electric, that call themselves
"global firms" but rely on America and its
taxpayers as home base. The multinationals
typically plant a foot in one country, then export
components to another location in the production
chain, then do final assembly somewhere else
and sell the product in many other places
(or perhaps only in the United States). If GE is telling
its jet-engine suppliers to move to low-wage
Mexico, as it is, why should US taxpayers provide
so many forms of subsidy to this company?
Reducing the large abstractions of globalization to
such hard-nosed particulars will get their
attention and also clarify the relationship. The national
interest should not be defined as enhancing
returns for shareholders, with no obligations to
broader values.
Indeed, the same principle ought to apply everywhere
in the global production system, for poor
nations as well as rich. The reforms that
impose national and community obligations on
companies will not halt the processes of integration
or trade, but they will change the choices for
company managers in very positive ways. As
standards are imposed on their behavior, the
multinationals will be compelled to give more
scrupulous and long-term consideration to where
they invest their capital. Globalization may
slow overall, but it can also become a deeper, more
permanent creation.
* * *
Deepening indebtedness compels the United States
to get its own house in order. Meanwhile,
the logical outline for reforming the global
production system is also visible, at least in the form of
plausible principles:
(1) The global system needs a new, more sophisticated
version of Article 12 that would allow
countries to correct the injury from unbalanced
trade flows, more or less automatically, with
temporary limits on imports. The mechanisms
would define reasonable levels for action and the
point at which other governments must respond
by applying national influence over both their
multinationals and financial investors (ultimately,
this also requires reform of international financial
institutions like the IMF, which will be the
focus of a subsequent article). This approach
recognizes that the marketplace of competing
multinationals cannot succeed in managing supply
and demand worldwide--not without creating
cartels and trustlike alliances to do so. It implicitly
suggests the basis for a grand bargain in
which the leading industrial powers agree, at least
informally, to assume greater responsibility
for the developing nations in their spheres--that is, to
take a greater share of the exports from regional
neighbors. Japan is the most egregious case of
evading this obligation.
(2) The system must be refocused on the demand
side: the promotion of rising incomes, in step
with rising productivity. Multinational competition
now produces a reflexive imperative for
companies to do the opposite, that is, expand
productive capacity while at the same time
suppressing demand. Labor rights and public
spending are two reliable tools for bolstering
demand, but both are scorned by present dogma
and its operating rules. Another tool is national
measures to impose more accountability on
global firms and investors--rules that require
longer-term commitments from them to the new
countries where they invest in production, as
well as concrete penalties for players "gaming"
the system by hopscotching from one poor
country to another. For instance, if a US
firm refuses to embrace labor rights for its overseas
workers, why should American taxpayers subsidize
it through Export-Import Bank loans,
government-backed insurance for overseas investment
or the many tax breaks designed to
promote globalization? In short, governments
have a lot of sovereign leverage over global firms if
they will use it.
(3) The heavy-handed "Washington consensus"
and the many international trade rules that
accompany it must be scrapped so developing
countries will have breathing space to pursue their
own distinctive plans for industrialization.
The World Trade Organization, instead of becoming
more intrusive, should be forced to back off
and acknowledge that a poor nation may be better
off in the long run by concentrating first
on domestic economic fundamentals--education and
health, public infrastructure, self-sufficiency
in producing basic goods like food and
pharmaceuticals--than by turning itself into
another exploited export platform. A global network
of WTO reformers, including Global Trade Watch
in the United States, is already staking out this
approach as its new either/or demand: Prune
the WTO or shut it down.
(4) Once new principles are established, the
wealthier nations must follow through with the
money to help make them succeed--that is,
capital in the form of substantial aid commitments.
The above measures ought to generate much
more equity in the global system--more people
sharing in its wealth-creating benefits through
greater income equality--but they will also
moderate the pace of globalization. Slowing
things down is a necessary step toward more
stability, less random wreckage, but it also
threatens the poor nations disproportionately unless
the advanced nations guarantee that capital
inflows will continue. The Jubilee 2000 debt-relief
campaign offers a good beginning in what should
become a much larger program of
governments. The AFL-CIO, among others in
the movement, has advocated significant new aid
from the United States (always a laggard compared
with others). The money is available if the
United States ever comes to its senses and
begins paring down its bloated military-industrial
establishment.
Reforming global economics in the absence of
a climactic crisis is hard politics, of course, but
these suggestions make it clear that fundamental
reform is more a matter of what politics will
allow, not what economics is sound. The obligation
is peculiarly centered in the United States
because what's required is confrontation with
America's own prideful establishment. It is not
Japan, Germany or China tenaciously upholding
the status quo's obvious flaws and inequities but
Wall Street and Washington. America's fusion
of corporate-financial-political interests is the
principal obstacle to change, and, one concedes,
those interests are unlikely to yield until events
have delivered fear and loss to their doorstep
too. The only way to change the politics before
catastrophe occurs is mobilization of people
around the world demanding these reforms.
* * *
For roughly fifty years, the United States
and allied international institutions have lured or pushed
poor nations into pursuing the export approach
to industrial development and have implicitly
promised to buy much of their production.
Now, it appears, we may abruptly throw them over
the side. The export-led model is doomed because
the United States can no longer afford to
sponsor it. Developing nations are entitled
to be skeptical, since it will look to them like one
more instance of the wealthy protecting themselves
from the aspiring poor.
Lori Wallach, director of Global Trade Watch,
has discussed the situation with anti-WTO
activists from countries like Malaysia, India,
the Philippines and Thailand, and has encountered
their ambivalence. She tells her coalition
partners that "you've got to break yourself of the
addiction of export-led development because
it is not going to be around for long." Their initial
response is anger. "What they say first is,
'You can't do that to us!'" Wallach recalls. "'You've led
us down this primrose path, and now you're
saying you're going to take it away? You're not
going to buy our exports?'" Yet, she explains,
they also welcome the change, since these people
have spent their lives fighting for self-sustaining,
locally evolved economies--for pragmatic
reasons but also as a matter of political
independence.
The necessary first step, as this activist
network has defined it, is an international mobilization to
strip the WTO and institutions like the IMF
of their imperious dictates for the developing
world--the many rules that serve global capital
but force poorer nations to forgo self-reliance in
favor of an export economy. That agenda should
be accompanied by debt relief for the poorest
forty-one nations but also far more generous
investment aid from advanced economies. Again,
this is a matter of political will, not economics.
For example, a modest transactions tax on global
finance would amass a huge fund of low-cost
capital that could be used to build domestic
infrastructure in poor nations--projects that,
for once, would not be beholden to the plans of
multinational corporations.
In a way, these measures are the easy part.
The larger challenge is defining the plausible
strategies and reasonable safeguards that
enable a nation to concentrate first on inward-led
development, without losing access to capital
markets and becoming hostage to the usual
treadmill of insecurity, in which companies
threaten to move on if wages rise. The concept of
development directed at the internal fundamentals
has been advocated for many years, but the
truth is that there are still not many living
examples of success. Until the global rules change, it will
be nearly impossible for an individual nation
to do this without losing access to capital.
Contrary to the globalization propaganda, every
poor nation is not going to get rich quick,
certainly not for generations to come. But
all nations could improve themselves and the lives of
their citizens quite dramatically if allowed
to pursue that goal on their own terms. The cold war is
over, finally, and precious ideological distinctions
about what is sound economics and what is
forbidden should be buried with it.