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.

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.

What Should We Most Fear?

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.