The ABCs of the Global Economy

The Dollars & Sense Collective

This article is from the March/April 2000 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org/archives/2000/0300collect.html

This article is from the March/April 2000 issue of Dollars & Sense magazine.

issue 228 cover

Note: This article was updated in the fall of 2006 for the 9th edition of Real World Globalization.

In the 1960s, U.S. corporations changed the way they went after profits in the international economy. Instead of producing goods in the U.S. to export, they moved more and more toward producing goods overseas to sell to consumers in those countries and at home. They had done some of this in the 1950s, but really sped up the process in the '60s.

Before the mid-1960s, free trade probably helped workers and consumers in the United States while disadvantaging workers in poorer countries. Exporters invested their profits at home in the United States, creating new jobs and boosting incomes. The AFL-CIO thought this was a good deal and backed free trade.

But when corporations changed strategies, they changed the alliances. By the late 1960s, the AFL-CIO began opposing free trade as they watched jobs go overseas. But unionists did not see that they had to start building alliances internationally. The union federation continued to take money secretly from the U.S. government to help break up red unions abroad, not a good tactic for producing solidarity. It took until the 1990s for the AFL-CIO to reduce (though not eliminate) its alliance with the U.S. State Department. In the 1990s, unions also forged their alliance with the environmental movement to oppose free trade.

But corporations were not standing still; in the 1980s and 1990s they were working to shift the architecture of international institutions created after World War II to work more effectively in the new global economy they were creating. More and more of their profits were coming from overseas—by the 1990s, 30% of U.S. corporate profits came from their direct investments overseas, up from 13% in the 1960s. This includes money made from the operations of their subsidiaries abroad. But the share of corporate profits earned overseas is even higher than that because the 30% figure doesn't include the interest companies earn on money they loan abroad. And the financial sector is an increasingly important player in the global economy.

Financial institutions and other global corporations without national ties now use governments to dissolve any national restraints on their activities. They are global, so they want their government to be global too. And while trade used to be taken care of through its own organization (GATT) and money vaguely managed through another organization (the International Monetary Fund), the World Trade Organization has erased the divide between trade and investment in its efforts to deregulate investment worldwide.

In helping design some of the global institutions after World War II, John Maynard Keynes assumed companies and economies would operate within national bounds, with the IMF and others regulating exchanges across those borders. The instability created by ruptured borders is made worse by the deregulation sought by corporations, and especially, the financial sector. The most powerful governments of the world seem oblivious to the threat giving into this neoliberal corporate agenda poses to their ability to govern.

This is a world-historical moment in which it is possible to stop the corporate offensive, a moment when the ruling partnership composed of the United States, Europe and to a lesser extent Japan is fracturing, as the European Union reaches its limit on the amount of deregulation it will take and Japan's economy is in turmoil. Those opposed to ruling bloc—Third World governments (which may be conservative), labor, and environmentalists worldwide—have built alliances of convenience with sympathetic elements within the EU to derail the neoliberal push for further trade liberalization. In the summer of 2006, the current round of World Trade Organization talks, launched in Doha, Qatar in 2001, collapsed for good in the face of European refusal to give up its farm supports and the growing recognition among developing countries that further trade liberalization had little to offer them. That the collapse of the Doha round of WTO trade talks was met with resounding cheers from popular organizations in many parts of the world gives hope that a reshaping of global institutions in a liberatory manner just might be in the offering.

What follows is a primer on the most important of those institutions. —Abby Scher and the Dollars and Sense collective

The World Bank and the International Monetary Fund (IMF)


Where did they come from?

The basic institutions of the postwar international capitalist economy were framed in 1944, at an international conference in Bretton Woods, New Hampshire, dominated by the United States and the United Kingdom. Among the institutions coming out of this conference were the World Bank and the International Monetary Fund (IMF).

At both the World Bank and the IMF, the number of votes a country receives is based on how much capital it contributes to the institution, so rich countries like the United States enjoy disproportionate voting power. At both, five powerful countries—the United States, the United Kingdom, France, Germany, and Japan—get to appoint their own representatives to the institution's executive board, with 19 other directors elected by the rest of the 150-odd member countries. The president of the World Bank is elected by the Board of Executive Directors, and traditionally nominated by the U.S. representative. The managing director of the IMF is traditionally a European.

What are they up to?

Just after World War II, the World Bank mostly loaned money to Western European governments to help rebuild their countries. But during the long presidency (1968-1981) of former U.S. Defense Secretary Robert S. McNamara, the bank turned toward "development" loans to Third World countries. McNamara brought the same philosophy to development that he had used in the war against Vietnam: more is better. Ever since, the Bank has favored large, expensive projects regardless of their appropriateness to local conditions. Critics argue that the Bank pays little heed to the social and environmental impact of the projects it finances, that it creates dependence on imports and capital from rich countries, and that it often works through dictatorial elites that channel benefits to themselves rather than to those who need help. The poor are left to foot the bill later.

The most important function of the IMF is as a "lender of last resort" to member countries that cannot borrow money from other sources, usually when they are in danger of defaulting on previous loans from private banks. The IMF lends money on the condition that the country implement policy changes that are formally known as a "structural adjustment program" (SAP), but more often referred to as an "austerity plan." Typically, a government is told to devalue its currency, eliminate price controls and subsidies, and eliminate labor regulations like minimum wage laws—all changes that hurt the working class and the poor by cutting their real incomes.

Why should you care?

The IMF and the World Bank wield power disproportionate to the size of the loans they give out because private lenders follow their lead in deciding which countries are credit-worthy. Both institutions have taken advantage of this leverage—and of debt crises in Latin America, Africa, and Asia—to impose a cookie-cutter model of "development" based on "free market" principles, against varying levels of resistance, on the people and governments of poor countries around the world. —Alejandro Reuss

The Multilateral Agreement on Investment (MAI) and Trade Related Investment Measures (TRIMs)


Where did they come from?

You're probably not the sort of person who would own a chemical plant or luxury hotel, but imagine you were. Imagine you built a chemical plant or luxury hotel in a foreign country, only to see a labor-friendly government take power and threaten your profits. This is the scenario which makes the CEOs of footloose global corporations wake up in the middle of the night in a cold sweat. To avert such threats, ministers of the richest countries met secretly at the Organization for Economic Cooperation and Development (OECD) in Paris in 1997 and tried to hammer out a bill of rights for international investors, the Multilateral Agreement on Investment (MAI). When protests against the MAI broke out in the streets and the halls of government alike in 1998 and 1999, scuttling the agreement in that form, the corporations turned to the World Trade Organization to achieve their goal.

What are they up to?

Both the MAI and Trade Related Investment Measures (or TRIMs, the name of the WTO version) would force governments to compensate companies for any losses (or reductions in profits) they might suffer because of changes in public policy. Governments would be compelled to tax, regulate, and subsidize foreign businesses exactly as they do local businesses. Policies designed to protect fledgling national industries (a staple of industrial development strategies from the United States and Germany in the 19th century to Japan and Korea in the 20th) would be ruled out.

TRIMs would also be a crowning blow to the control of governments over the movement of capital into or out of their countries. Until fairly recently, most governments imposed controls on the buying and selling of their currencies for purposes other than trade. Known as capital controls, these curbs significantly impeded the mobility of capital. By simply outlawing conversion, governments could trap investors into keeping their holdings in the local currency. But since the 1980s, the IMF and the U.S. Treasury have pressured governments to lift these controls so that international companies can more easily move money around the globe. Corporations and wealthy individuals can now credibly threaten to pull liquid capital out of any country whose policies displease them.

Malaysia successfully imposed controls during the Asian crisis of 1997 and 1998, spurring broad interest among developing countries. The United States wants to establish a new international discussion group—the Group of 20 (G-20), consisting of ministers from 20 developing countries handpicked by the U.S.—to consider reforms. Meanwhile, it continues to push for the MAI-style liberation of capital from any control whatsoever.

Why should you care?

It is sometimes said that the widening chasm between the rich and poor is due to the fact that capital is so easily shifted around the globe while labor, bound to family and place, is not. But there is nothing natural in this. Human beings, after all, have wandered the earth for millennia—traversing oceans and continents, in search of food, land, and adventure—whereas a factory, shipyard, or office building, once built, is almost impossible to move in a cost effective way. Even liquid capital (money) is less mobile than it seems. To be sure, a Mexican can fill a suitcase with pesos, hop a plane and fly to California, but once she disembarks, who's to say what the pesos will be worth, or whether they'll be worth anything at all? For most of this century, however, capitalist governments have curbed labor's natural mobility through passports, migration laws, border checkpoints, and armed border patrols, while capital has been rendered movable by treaties and laws that harmonize the treatment of wealth around the world. The past three decades especially have seen a vast expansion in the legal rights of capital across borders. In other words, labor fights with the cuffs on, while capital takes the gloves off. —Ellen Frank

World Intellectual Property Organization (WIPO) and Trade-Related Aspects of Intellectual Property Rights (TRIPs)


Where did they come from?

One of the less familiar members of the "alphabet soup" of international economic institutions, the World Intellectual Property Organization (WIPO) has governed "intellectual property" issues since its founding in 1970. In the old days, "intellectual property" only covered property rights over inventions, industrial designs, trademarks, and artistic and literary works. But WIPO has been busy staking out a brave new world of property rights, especially in the electronic domain. Now "intellectual property" includes computer programs, electronic images, and digital recordings, as well as pharmaceuticals and even biological processes and genetic codes.

What are they up to?

The 1996 WIPO treaty outlaws the "circumvention" of electronic security measures. It makes it illegal, for example, to sidestep the security measures on a website (such as those requiring that users register or send payment in exchange for access). The treaty also prevents programmers from cracking open commercial software to view the underlying code. Similar restrictions had already gone into effect in the United States, thanks to the Digital Millennium Copyright Act (DMCA). These laws prevent programmers from crafting their own programs so that they are compatible with existing software, and prevent innovation in the form of "reengineering"—drawing on one design as the basis of another. Reengineering has been at the heart of many countries' economic development, including the United States'. In the 19th century, for example, Lowell, Massachusetts, textile manufacturers built their looms based on English designs.

In recent years, WIPO has faced a turf war over the intellectual property issue with none other than the World Trade Organization (WTO). Wealthy countries are attempting an end run around WIPO because it lacks enforcement power and because some poor countries have resisted its agenda. But the mass media, information technology, drug, and biotechnology industries in wealthy countries stand to lose a great deal from "piracy" and to gain a fortune in fees and royalties if given more extensive property rights. So they have introduced, under the name "Trade-Related Aspects of Intellectual Property Rights" (TRIPs), extensive provisions on intellectual property into recent WTO negotiations.

Why should you care?

TRIPs would put the muscle of trade sanctions behind intellectual property rights. It would also stake out new intellectual property rights over plant, animal, and even human genetic codes. The governments of some developing countries have objected, warning that private companies based in rich countries will declare ownership over the genetic codes of plants long used for healing or crops within their countries—what activists have called "biopiracy." By manipulating just one gene of a living organism, a company can be declared the sole owner of an entire plant variety.

These proposals may seem like a new frontier of property rights, but except for the issue of ownership of life forms, TRIPs actually defend the old regime of property rights. It is because current electronic, chemical, and biological technology make virtually unlimited production and free distribution possible that the fight for private property has become so extreme. —Alejandro Reuss

The World Trade Organization (WTO)


Where did it come from?

Since the 1950s, government officials from around the world have met irregularly to hammer out the rules of a global trading system. Known as the General Agreements on Trade and Tariffs (GATT), these negotiations covered, in excruciating detail, such matters as what level of taxation Japan would impose on foreign rice, how many American automobiles Brazil would allow into its market, and how large a subsidy France could give its vineyards. Every clause was carefully crafted, with constant input from business representatives who hoped to profit from expanded international trade. The GATT process however, was slow, cumbersome and difficult to monitor. As corporations expanded more rapidly into global markets they pushed governments to create a more powerful and permanent international body that could speed up trade negotiations as well as oversee and enforce provisions of the GATT. The result is the World Trade Organization, formed out of the ashes of GATT in 1995.

The WTO's ministerial meetings have been the target of massive antiglobalization protests. Over 50,00 people went to Seattle in 1999 to say no to the WTO's corporate agenda, successfully shutting down the first day of the ministerial meeting. African, Caribbean, and other least-developed country representatives walked out of the meeting. The WTO held its 2001 ministerial meeting, Doha, Qatar, safe from protest. Their WTO initiated a new round of trade talks it promised would address thee need s of developing countries. The Doha Development round was in fact continued the WTO's pro-corporate agenda. Two years later "the Group of 20 developing countries" at Cancún ministerial refused to lower trade barriers in their countries trade until the United States and EU cleaned up its unfair global agricultural systems. By the summer of 2006, five years after it began, the Doha round had collapsed and the WTO suspended trade negotiations.

What is it up to?

The WTO functions as a sort of international court for adjudicating trade disputes. Each of its 135 member countries has one representative, who participates in negotiations over trade rules. The heart of the WTO, however, is not its delegates, but its dispute resolution system. With the establishment of the WTO, corporations now have a place to complain to when they want trade barriers— or domestic regulations that limit their freedom to buy and sell—overturned. Though corporations have no standing in the WTO—the organization is, officially, open only to its member countries—the numerous advisory bodies that provide technical expertise to delegates are overflowing with corporate representation. The delegates themselves are drawn from trade ministries and confer regularly with the corporate lobbyists and advisors who swarm the streets and offices of Geneva, where the organization is headquartered. As a result, the WTO has become, as an anonymous delegate told the Financial Times, "a place where governments can collude against their citizens." Lori Wallach and Michelle Sforza, in their book The WTO: Five Years of Reasons to Resist Corporate Globalization, point out that large corporations are essentially "renting" governments to bring cases before the WTO, and in this way, to win in the WTO battles they have lost in the political arena at home. Large shrimping corporations, for example, got India to dispute the U.S. ban on shrimp catches that were not sea-turtle safe. Once such a case is raised, the resolution process violates most democratic notions of due process and openness. Cases are heard before a tribunal of "trade experts," generally lawyers, who, under WTO rules, are required to make their ruling with a presumption in favor of free trade. The WTO puts the burden squarely on governments to justify any restriction of what it considers the natural order of things. There are no amicus briefs (statements of legal opinion filed with a court by outside parties), no observers, and no public record of the deliberations.

The WTO's rule is not restricted to such matters as tariff barriers. When the organization was formed, environmental and labor groups warned that the WTO would soon be rendering decisions on essential matters of public policy. This has proven absolutely correct. The organization has already ruled against Europe for banning hormone-treated beef and against Japan for prohibiting pesticide-laden apples. Also WTO rules prohibit selective purchasing laws, even those targeted at human rights abuses. In 1998 the WTO court lodged a complaint against the state of Massachusetts law that banned government purchases from Burma in an attempt to punish its brutal dictatorship. Had the WTO rules been in place at the time, the anti-Apartheid divestment movement would have violated them as well.

Why should you care?

At stake is a fundamental issue of popular sovereignty—the rights of the people to regulate economic life, whether at the level of the city, state, or nation. The U.S. does not allow businesses operating within its borders to produce goods with child labor, so why should we allow those same businesses— Disney, Gap, or Walmart—to produce their goods with child labor in Haiti and sell the goods here? —Ellen Frank

The International Labor Organization (ILO)


Where did it come from?

The ILO was established in 1919 in the wake of World War I, the Bolshevik revolution in Russia, and the founding of the Third (Communist) International, a world federation of revolutionary socialist political parties. Idealistic motives mingled with the goal of business and political elites to offer workers an alternative to revolution, and the result was an international treaty organization (established by agreement between governments) whose main job was to promulgate codes of practice in work and employment.

What is it up to?

After World War II the ILO was grafted onto the U.N. structure, and it now serves a wide range of purposes: drafting conventions on labor standards (182 so far), monitoring their implementation, publishing analyses of labor conditions around the world, and providing technical assistance to national governments.

The ILO's conventions set high standards in such areas as health and safety, freedom to organize unions, social insurance, and ending abuses like workplace discrimination and child labor. It convenes panels to investigate whether countries are upholding their legal commitment to enforce these standards, and by general agreement their reports are accurate and fair. ILO publications, like its flagship journal, The International Labour Review, its World Labor and Employment Reports, and its special studies, are of very high quality. Its staff, which is headquartered in Geneva and numbers 1,900, has many talented and idealistic members. The ILO's technical assistance program is minuscule in comparison to the need, but it has changed the lives of many workers. (You can find out more about the ILO at its website: www.ilo.org.)

As a rule, international organizations are reflections of the policies of their member governments, particularly the ones with the most clout, such as the United States. Since governments are almost always biased toward business and against labor, we shouldn't expect to see much pro-labor activism in official circles. The ILO provides a partial exception to this rule, and it is worth considering why. There are probably four main reasons: The ILO's mission explicitly calls for improvements in the conditions of work, and the organization attracts people who believe in this cause. Compare this to the mission of the IMF (to promote the ability of countries to repay their international debts) or the WTO (to expand trade), for instance. Governments send their labor ministers (in the U.S., the Secretary of Labor) to represent them at the ILO. Labor ministers usually specialize in social protection issues and often serve as liaisons to labor unions. A roomful of labor ministers will generally be more progressive than a similar gaggle of finance (IMF) or trade (WTO) ministers.

The ILO's governing body is based on tripartite principles: representatives from unions, employers, and government all have a seat at the table. By institutionalizing a role for nongovernmental organizations, the ILO achieves a greater degree of openness and accountability. Cynics would add that the ILO can afford to be progressive because it is largely powerless. It has no enforcement mechanism for its conventions, and some of the countries that are quickest to ratify have the worst records of living up to them.

Why should you care?

The ILO has significant shortcomings as an organization. Perhaps the most important is its cumbersome, bureaucratic nature: it can take forever for the apparatus to make a decision and carry it out. (Of course, that beats the IMF's approach: decisive, reactionary, and authoritarian.) The experience of the ILO tells us that creating a force capable of governing the global economy will be extremely difficult, and that there are hard tradeoffs between democracy, power, and administrative effectiveness. But it also demonstrates that reforming international organizations—changing their missions and governance systems—is worth the effort, especially if it brings nongovernmental activists into the picture. —Peter Dorman

Resources Arthur MacEwan, "Markets Unbound: The Heavy Price of Globalization," Real World International (Dollars & Sense, 1999); David Mermelstein, ed., The Economic Crisis Reader (Vintage, 1975); Susan George and Fabrizio Sabelli, Faith and Credit: The World Bank's Secular Empire (Penguin Books, 1994); Hans-Albrecht Schraepler, Directory of International Economic Organizations (Georgetown University Press, 1997); S.W. Black, "International Monetary Institutions," The New Palgrave: A Dictionary of Economics, John Eatwell, Murray Milgate, and Peter Newman, eds. (The Macmillan Press Limited, 1987).
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