Capitalist Globalism In Crisis



If
international trade and investment actually reduced international economic
inequality, if it actually reduced strain on the environment, if it actually
increased ds global efficiency, we should be all for it. The problem, of
course, is that international liberalization and neoliberal policies have
actually done just the opposite. They have increased international inequality
and environmental destruction, decreased economic democracy, and probably
decreased global efficiency as well. The irony, and therefore the tease, is
that international trade and investment could conceivably help in all of the
above ways. After all, it does not have to be a bad thing for advanced
economies to make capital and technical know-how available to less developed
economies, and for all countries to produce what they produce best. But
instead of living up to its potential, international trade and investment have
been classic underachievers, who show no signs of mending their wayward ways.


Have I
overstated the case? Not even the most rabid neoliberals claim that
international liberalization has actually reduced international inequality or
environmental degradation, or has actually given most people more control over
their economic lives. But neoliberals do insist that whatever other harm it
may have caused, international liberalization did yield efficiency gains, and
therefore could conceivably reduce global inequality and environmental
degradation. But what does the evidence suggest? Between 1950 and 1973 the
international economy was governed by the Bretton Woods system of controls and
interventions. The era of international liberalization began in 1973, and
liberalization has accelerated right up to the present. The table below gives
the average annual rates of growth of GDP per capita for 56 countries during
the two periods.


Admittedly,
this is what economists call a “crude” comparison between a single cause
and its supposed result. Nonetheless, it should be apparent why the Bretton
Woods era of international controls and interventions, 1950-1973, is commonly
referred to as “the golden era of capitalism,” and the period of
international deregulation and liberalization, 1973-1992, is not. If there had
truly been efficiency gains, would they not eventually show up as increased
rates of growth? Instead we see significant declines in the rate of growth of
per capita GDP for every region in the world except Asia where the growth rate
increased slightly during the era of liberalization. Of course there are many
reasons other than international liberalization which may have reduced
economic growth over the past quarter century, but the above figures hardly
suggest significant efficiency gains from international liberalization.


Why did
liberalization fail to yield efficiency gains, and why, despite strong
evidence to the contrary, do most economists insist it must? Belief in the
potential benefits of international trade and investment is one of the most
sacred convictions of economists. To question the existence of efficiency
gains from specialization and trade is tantamount to a confession of economic
illiteracy in professional circles. Since understanding how and why
globalization can fail even to improve global efficiency, and why it is likely
to continue to increase global inequality is important to understanding what
must happen if international trade and investment is to promote rather than
subvert our economic goals, let me answer the question at the beginning of
this paragraph very carefully.




 







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Source:
Angus Maddison,
Monitoring the World Economy 1820-1992, OECD 1995



It is
illogical to deny that if the true social opportunity costs of producing goods
differ in different countries there are potential efficiency gains from
specialization and trade. It is illogical to deny that if there are efficiency
gains, it is theoretically possible to distribute them so as to reduce global
inequality and/or environmental degradation. After all, an efficiency gain is
an efficiency gain and can be “spent” any way we choose—including on
poverty reduction or environmental restoration. Similarly, it is illogical to
deny that if the social productivity of capital differs in different countries
there are potential efficiency gains from international lending, and these
gains could, theoretically be used to advance any cause. However, the usual
statements of these propositions do not follow. It does not follow from the
existence of different social opportunity costs that trade necessarily yields
efficiency gains. And it does not follow from the fact that the productivity
of capital differs in different countries that international lending
necessarily yields efficiency gains.


First,
what if more trade or international investment leads to more global
disequilibrium, and the efficiency loss from unemployed resources outweighs
the efficiency gain from their greater productivity once they are redeployed?
Mainstream theoretical economists concede this point, but mainstream
practitioners invariably ignore it. Or, what if prices are “wrong,” that
is, what if they do not accurately reflect the true social opportunity costs
of traded goods or capital? It is possible that trade based on prices
different from social opportunity costs might produce efficiency losses, even
if trade based on accurate opportunity costs would produce efficiency gains.
Again, when put this way any mainstream theoretician would concede the point.
But few mainstream economists have ever considered that market prices may
differ from true social opportunity costs by say, 30 percent or more, and that
a significant degree of “miss signaling” could yield trade that results in
counterproductive patterns of specialization.


Suppose
the social costs of modern agricultural production in the U.S. are far greater
than the private costs because environmentally destructive effects go
uncounted, as many environmentalists believe. And suppose life in traditional
Mexican villages have significant advantages vis a vis disease prevention and
effective social safety nets compared to life in Mexican urban slums, as many
social workers testify. In this case it is quite possible that trading Mexican
shoes for U.S. grain, which moves Mexican peasants from rural agriculture to
shoe factories in Mexico City and transfers productive resources in the U.S.
from shoe factories to modern agriculture, may lower, not raise economic
efficiency. In this case, “miss signaling” in the price system could
generate efficiency losses, not gains from NAFTA even in absence of
unemployment effects. And it is possible that if interest rates do not reflect
the true social opportunity cost of capital in different countries, or if
international credit markets divert lending from productive to speculative
uses, that credit liberalization might produce efficiency losses rather than
gains. If liberalization of international financial markets ties up more
capital in short-run speculation in currencies, bonds, and stocks, leaving
less available for long term loans to improve productive capacity, global
production might fall, not rise with an increase in international lending. In
1980 daily transactions in international currency markets totaled only $80
billion. By 1995 $1.26 trillion were exchanged in currency markets per
day—very little of which is promoting increases in productive capabilities.


Second,
even if prices do not “miss signal” so that more efficient patterns of
international specialization in production and allocation of capital actually
do result from international trade and investment; and even if there are no
efficiency losses due to temporary unemployment of resources while they are
being redeployed so the efficiency gains are not diminished, or eliminated, it
is highly probable that international trade and investment based on free
market prices and interest rates will distribute more of the efficiency gains
to wealthier countries than to poorer countries. In this case, while there may
be gains in global efficiency, and even gains in absolute terms for poorer as
well as wealthier economies, the disparity between rich and poor countries
would increase. The international terms of trade and international interest
rates are what determines how any efficiency gains are distributed. If capital
is scarce relative to labor globally, there is every reason to believe
free market terms of trade and free market interest rates will distribute the
lion’s share of any efficiency gains to the capital rich countries, i.e. the
ones who were wealthier in the first place. So there is every reason to expect
increased trade and lending to lead to greater disparities between rich and
poor countries. Between 1950 and 1973 the spread between GDP per capita in the
richest and poorest of the seven regions listed in the table above increased
only from 10:1 to 11:1. But between 1973 and 1992 when trade, and particularly
international investment increased dramatically, the spread increased from
11:1 to 16:1. The spread between the richest and poorest of the 56 countries
included in the table increased only from 35:1 to 40:1 between 1950 and 1973,
but between 1973 and 1992 the spread increased from 40:1 to 72:1.


Third, it
is also highly probable that liberalization of international trade and credit
will affect wage, interest and profit rates within countries in ways that
increase internal inequalities. While mainstream trade theory disguises the
possibility of efficiency losses from trade, as well as the probability of
inegalitarian distributive effects between countries, at least
Heckscher-Ohlin theory helps us understand the likelihood of inegalitarian
internal effects. If trade actually does generate efficiency gains it will be
because it leads countries to specialize in the production of goods in which
they have a comparative advantage, which will tend to be those goods that use
inputs, or factors of production, in which the country is relatively abundant.
But this means trade increases the demand for relatively abundant factors of
production and decreases the demand for relatively scarce factors within
countries. In advanced economies where the capital-labor ratio is higher than
in third world economies and therefore capital is “relatively abundant,”
Heckscher-Ohlin theory predicts that increased trade will increase the demand
for capital, increasing its return, and decrease the demand for labor,
depressing wages—as has occurred in the U.S., making the AFL-CIO a
consistent critic of trade liberalization. In advanced economies where the
ratio of skilled to unskilled labor is higher than in third world economies,
Heckscher-Ohlin theory also predicts that increased trade will increase the
demand for skilled labor and decrease the demand for unskilled labor and
thereby increase wage differentials. In a study published by the
pro-globalization Institute for International Economics in 1997, William Cline
estimates that 39 percent of the increase in wage inequality in the U.S. over
the last 20 years was due solely to increased trade.


On the
other hand, the internal distributive effects of international trade within
third world economies predicted by Heckscher-Ohlin deserve serious
consideration by progressives. In third world economies where labor is
relatively abundant and capital is relatively scarce, and unskilled labor is
relatively abundant and skilled labor is relatively scarce, Heckscher-Ohlin
theory predicts that increased trade should cause wages to rise and the return
to capital to fall, and should reduce the wage differential between skilled
and unskilled labor. In other words, while Heckscher-Ohlin predicts that
international trade will aggravate inequalities within the advanced economies,
they predict that international trade will reduce inequalities within third
world economies. Since it is undeniable that unskilled third world residents
are the most economically needy of all earth’s citizens, this issue deserves
important consideration. Indeed, proponents of free trade in the U.S. often
throw this argument in the face of those who oppose globalization, accusing us
of favoring workers in the advanced economies at the expense of workers, and
particularly the least skilled workers, in underdeveloped economies. Are we
guilty?


First of
all, Heckscher-Ohlin theory says nothing about the distribution of the
benefits of trade between countries. Their theory is silent on this subject,
as all mainstream theory is. So, if my contention is correct that as long as
capital is scarce relative to labor globally the lion’s share of the
benefits of expanded trade will rebound to the benefit of the more advanced
economies, it is quite possible trade liberalization will increase global
inequality. In this case, even if third world wages were boosted by expanded
trade third world workers would be expanding their share of an economic pie
that is shrinking relative to the economic pie of the advanced economies. But
is it really true that trade liberalization is likely to boost wages within
third world economies? Heckscher-Ohlin logic is impeccable, but theories are
based on assumptions which sometimes do not hold in the real world. The fact
is we are not guilty of caring more about workers in advanced economies than
unskilled third world residents when we oppose globalization. In effect, we
are “saved” by a fact. Unfortunately the “fact” that saves our
“honor” is the same “fact” that is most responsible for creating
economic misery in the world today. The fact is that the combination of the
so-called “green revolution” in agriculture and economic globalization is
destroying traditional agriculture in third world economies. Before the spread
of “modern” agricultural techniques and the rise of global agricultural
markets large amounts of land in the third world had a sufficiently low value
to permit billions to live on it producing mostly for their own consumption
even though their productivity was quite low.


Globalization
and modern agriculture for export has raised the value of that land. Peasant
squatters are no longer tolerated. Peasant renters are thrown off by owners
who want to use the land for more valuable export crops. Even peasants who own
their family plots fall easy prey to local economic and political elites who
now see a far more valuable use for that land and have become much more
aggressive land grabbers through all sorts of legal and extra legal means. And
finally, as third world governments relax restrictions on foreign ownership of
land, local land sharks are joined by multinational agribusinesses adding to
the human exodus. Globalization has already thrown hundreds of millions of
peasants off land where they made a poor living, to be sure, but were
nonetheless better off than they are living in disease infested slums
surrounding swollen third world cities where productive employment is even
less likely than it was in their rural villages, and where traditional social
safety nets are non-existent. And unless globalization is stopped, or its
character fundamentally changed, it will soon be billions who travel this
“trail of tears” adding to the supply of urban unemployed whose
reservation wage has dropped from the very low average productivity of labor
in traditional agriculture to literally zero. The relevance of this to
Heckscher-Ohlin theory is that the increase in the supply of urban labor
caused by the ruin of traditional third world agriculture dwarfs any increase
in the demand for third world labor from more direct foreign investment or
from increased specialization in the production of labor intensive
manufactured exports. In other words, the rural to urban migration effect of
globalization resulting from the destruction of traditional agriculture swamps
the Heckscher-Ohlin effect on returns to factors of production in most third
world economies. The net result is greater unemployment and lower
wages—particularly for those who were already the “wretched of the
earth.”
So now
that we are quite sure that we are not guilty of opposing the interests of the
most needy residents of the third world by opposing international
liberalization; now that we are quite sure that I did not overstate the case
when I said that the present kind of globalization has actually increased
international inequality and environmental destruction, decreased economic
democracy, and probably decreased global efficiency as well—and that this
was no temporary accident, but is likely to continue—what should we ask from
the global economy?


We need
to “get prices right” first. Without more accurate estimates of true
social opportunity costs it is impossible to know how to redeploy productive
resources internationally to achieve efficiency gains. Almost nobody worries
about this, and almost none of the reforms being discussed even in the most
progressive circles address this problem. The reason is simple. You can’t
address this problem without admitting a fundamental flaw in the market
system, and you can’t fix the problem without resort to non-market methods
to correct for a host of daunting externalities that include, but go far
beyond major environmental effects that are currently completely unaccounted
for in global economic decision making. The second thing that cannot be left
to the free market is the terms of trade and international interest rates.
Because if we do, global inequality will only increase. Again, discussion,
negotiation and conscious cooperation between international trading partners
and lenders and borrowers must replace market interactions. Something like the
New International Economic Order proposed by representatives of the
Non-Aligned Movement in the 1970s, but ignored and then rejected by the OECD
countries, the IMF, the World Bank, and all the regional development banks, is
required if pursuit of efficiency gains from international trade and
investment are not to lead to growing international inequality. As I discuss
below, improving international labor and environmental standards, while
worthwhile, will not solve this problem. So it is a strategic mistake for
progressives to allow the issue of international equity to be reduced entirely
to the issue of international labor and environmental standards. Third, not
only must the terms of trade be set so as to give poorer not richer countries
most of the benefits, all international lending must past an equity test. For
example, there must be preferential terms and interest rates for all loans to
Sub Sahara Africa, much as the World Bank does now by classifying countries
according to per capita GDP to determine eligibility for its loans. Fourth, we
must solve the problem of lost production due to credit bubbles and crises
which lead to massive unemployment of productive resources. Whether it is
possible to redesign the international credit system so that it serves the
purpose of facilitating productive investment, and how best to do so, is the
subject of most of the ongoing debate I evaluate below. But that discussion
cannot even sensibly begin until the problem of old debt that has much of the
world’s productive capacity currently tied up in knots is solved. It is no
longer only the cause of international equity that begs for debt forgiveness.
Restarting production in Asia, Russia, Europe, Brazil—in almost every part
of the globe except the U.S. where production still hums along oblivious to
the impossibility that this lone American “exception” can continue much
longer—requires debt forgiveness, as does eliminating future dangers to the
credit system already visible on the horizon.

 

 

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Besides
global depression spreading from East Asia to Japan and China, or from Russia
to Germany and Europe, or from Brazil to Argentina, the rest of Latin America
and the great bastion of economic denial, the United States—all of which
remain distinctly possible over the next 12 months—our greatest fear should
be that Western multinational corporations and banks will soon have reacquired
the most attractive economic assets the third world has to offer, at bargain
basement prices. They may succeed in doing this in a fraction of the
time—the next 3 to 5 years—it took progressive and nationalist third world
movements and governments to reconquer control of some of their natural
resources from colonial powers—50 to 100 years. They may do it without the
cost of occupying armies. They may do it without firing a shot. Just as the
painfully slow reduction of inequality and wealth within the advanced
economies won by tremendous organizing efforts and personal sacrifices of
millions of progressive activists during the first three quarters of the 20th
century were literally wiped out in the past 20 years, all of the gains of the
great anti-imperialist movements of the 20th century may soon be wiped out by
the policies of neoliberalism and its ensuing global crisis.


What may
become the greatest global “asset swindle” of all time works like this:
International investors lose confidence in a third world economy dumping its
currency, bonds and stocks. At the insistence of the IMF, the central bank in
the third world country tightens the money supply to boost domestic interest
rates to prevent further capital outflows in an unsuccessful attempt to
protect the currency. Even healthy domestic companies can no longer obtain or
afford loans so they join the ranks of bankrupted domestic businesses
available for purchase. As a precondition for receiving the IMF bailout the
government abolishes any remaining restrictions on foreign ownership of
corporations, banks and land. With a depreciated local currency and a long
list of bankrupt local businesses the economy is ready for the acquisition
experts from Western multinational corporations and banks who come to the fire
sale with a thick wad of almighty dollars in their pockets. Sandra Sugawara
recently described how this process is unfolding in Thailand. (Washington
Post
11/28/98): “The panic is gone—those days when investors were
frantically yanking their money out of Thailand and dumping its currency so
quickly that the country’s financial system appeared to be careening out of
control…. Hordes of foreign investors are flowing back into Thailand,
boosting room rates at top Bangkok hotels despite the recession. Foreign
investors have gone on a $6.7 billion shopping spree this year, snapping up
bargain-basement steel mills, securities companies, supermarket chains and
other assets.”


 “‘Thai
companies have been in distress longer, so maybe they are further along the
road in getting beyond the denial stage,’ said Fineman, an American
acquisitions expert. ‘They are at the stage where they are thinking it’s
better to sell assets now than in six months, when they will be worth less.’
In many other countries, distressed companies still are holding out for better
deals.


“The
reluctance of Thai banks to make loans is a predicament found throughout Asia
these days. During the boom years of the early to mid-1990s, Asian banks lent
money aggressively, sometimes recklessly. When the recession hit, many of
those loans went bad. In Thailand, more than one-third of the loans may not be
repaid. Short of capital, banks are holding on tight to the money they have,
making it hard for even healthy companies to expand. The decision of the Thai
government and Thai banks not to prop up Thai companies also has accelerated
the restructuring process and helped foreigners close deals. For example,
Charoen Pokphand, one of Thailand’s largest business groups, sold its Lotus
discount store chain to Britain’s Tesco PLC and its share of a motorcycle
plant and brewery in Shanghai to pay off creditors and protect its core
agribusiness.


“A few
pages behind stories about layoffs and bankruptcies are large help-wanted ads
run by multinational companies. General Electric Capital Corp., which
increased its stake in Thailand this year through three major investments in
financing and credit card companies, is seeking hundreds of experts in finance
and accounting, according to one ad. Another said that Bank of Asia, acquired
this year by the Dutch bank ABN Amro, is hiring in many job categories,
including credit analysts and risk managers.


“General
Motors Corp. is recruiting aggressively for its massive new Thai car assembly
plant, scheduled to open in two years. Last month, BMW AG said it planned to
build a manufacturing plant in Thailand. The facility, which eventually would
employ 500 people, is intended to serve as BMW’s Asian hub, to produce
vehicles for export to the rest of the region.”
All this
in an article that Sugawara’s editor at the Post ironically chose to
title “Thai Economy Shows Signs of Rebounding!” For decades South Korea
managed to achieve high rates of economic growth while preserving domestic
ownership over its “world class” international businesses known as
chaebols. Even before the crisis hit the South Korean government had succumbed
to international pressure and had eliminated some restrictions on foreign
ownership in some industries. But the IMF insisted that all remaining
restrictions on foreign ownership be rescinded as a condition for its bailout
loan. Many of those companies are becoming very attractive to international
investors now that the won is cheap and South Korean labor has been chastized.
One can only wonder how South Korean workers who demonstrated and occupied
plants in their attempts to avoid massive layoffs at the hands of their fellow
South Korean employers may react to going back to work for Western owners who
flaunt their scorn for the South Korean system of “life time employment”
with wage increases roughly proportionate to productivity increases. If land
swindles by banks and railroads in the U.S. West caught the eyes of
“muckrakers” at the turn of the last century, one can only wonder what a
generation of international muckrakers will have to write about the great
international asset swindle at the turn of the millennium.
                  Z


Robin
Hahnel is co-author with Michael Albert of numerous books including
Socialism
Today and Tomorrow and Looking Forward: Participatory Economics for
the 21st Century (both South End Press). He is professor of economics at
American University.