The ABCs of the Global Economy
Dollars and Sense magazine, March / April 2000
In the 1960s, U.S. corporations changed I ~ 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 1 950s, 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 hurting 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 is 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 new
World Trade Organization erases 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 this threat in giving them what
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. This may allow those opposing the ruling bloc-Third World
governments (which may be conservative), labor, and environmentalists
worldwide-to build alliances of convenience with sympathetic elements
within the EU to guide the reshaping of the global institutions
in a liberatory manner.
What follows is a primer on the most important of those institutions.
We hope in the near future to publish primers on other aspects
of the global economy: regional trade agreements and alternative
visions of how to regulate it. Stay tuned.
THE WORLD BANK AND INTERNATIONAL MONETARY FUND
(by Alejandro Reuss)
WHERE DID THEY COME FROM?
The basic institutions of the postwar international capitalist
economy were framed, in 1944, at an international conference in
the town of Bretton Woods, New Hampshire. Among the institutions
coming out of the conference were the World Bank and the International
Monetary Fund (IMF). These two are often discussed together because
they were founded together, because countries must be members
of the IMF before they can become members of the World Bank, and
because both practice what is known as "structural adjustment"
(where borrower countries unable to obtain credit from other sources
must change government policies before loans are released).
At both the World Bank and IMF, the number of votes a country
receives is based on how much capital it gives the institution,
so rich countries like the United States enjoy disproportionate
voting power. In both, five powerful countries (the United States,
Great Britain, 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 US representative.
The managing director of the IMF, meanwhile, is traditionally
a European. The governments of a few rich countries, obviously,
call the shots in both institutions.
WHY SHOULD YOU CARE?
Just after World War II, the World Bank mostly loaned money
to Western European governments to help rebuild their countries.
It was during the long tenure ( 1968-1981 ) of former U.S. Defense
Secretary Robert S. McNamara as president that the bank turned
towards "development" loans to Third World countries.
McNamara brought the same philosophy to "development"
that he had used in war - more is better. Ever since, the Bank's
approach has drawn persistent criticism for favoring large, expensive
projects regardless of their appropriateness to local conditions.
Critics have argued that the Bank pays little heed to the social
and environmental impact of the projects it finances, and that
it often works through dictatorial elites that channel benefits
to themselves rather than those who need them (and leave the poor
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. The loans are usually given to prevent a country
from defaulting on previous loans from private banks. Funds are
available from the IMF, on the condition that the country implement
what is formally known as a "structural adjustment program"
(SAP), but more often referred to as an "austerity plan."
Typically, a government is told to eliminate price controls or
subsidies, devalue its currency or eliminate labor regulations
like minimum wage laws-all actions whose costs are born by the
working class and the poor whose incomes are cut.
The conditions imposed by the IMF and the World Bank, which
places similar conditions on "structural adjustment"
loans, are motivated by an extraordinary devotion to the free-market
model. As Colin Stoneman, an expert on Zimbabwe, put it, the World
Bank's prescriptions for that country during the 1 980s were "exactly
those which someone with no knowledge of Zimbabwe, but familiarity
with the World Bank, would have predicted."
The IMF and World Bank wield power disproportionate to the
size of the loans they give out because private lenders take 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 now Asia, to impose their cookie-cutter model
(against varying levels of resistance from governments and peoples)
on poor countries around the world.
THE MULTILATERAL AGREEMENT ON INVESTMENT (MAI), TRADE RELATED
INVESTMENT MEASURES (TRIMS), AND THE INTERNATIONAL MOVEMENT OF
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 hand-picked 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 two
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.
WORLD INTELLECTUAL PROPERTY ORGANIZATION (WIPO) AND TRADE-RELATED
ASPECTS OF INTELLECTUAL PROPERTY RIGHTS (TRIPS)
(by Alejandro Reuss)
WHAT ARE THEY UP TO?
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 (though it oversees treaties
and conventions dating from as early as 1883). Companies are finding
it harder to control intellectual property in two new fields-computer
software and biotechnology-because it is so cheap and easy to
reproduce electronic information and genetic material in virtually
unlimited quantities. This is what makes software, music and video
In the old days, "intellectual property" only covered
property rights over inventions, industrial designs, trademarks,
and artistic and literary works. Now it covers computer programs,
electronic images and recordings, and even biological processes
and genetic codes.
WIPO has been busy staking out a brave new world of property
rights in the electronic domain. A 1996 WIPO treaty, which now
faces ratification battles around the world, would outlaw the
"circumvention" of electronic security measures. It
would be 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, if ratified, would
also prevent programmers from cracking open commercial software
to view the underlying code. This could 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 country's economic development-not just Taiwan
but also the United States. Lowell, Massachusetts, textile manufacturers
built their looms based on English designs.
WIPO now faces 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 less developed countries have resisted its
agenda. But the mass-media, information-technology, and biotechnology
industries in wealthy countries stand to lose the most from "piracy"
and to gain the most in fees and royalties if given more extensive
property rights. So they introduced, under the name "Trade-Related
Aspects of Intellectual Property Rights" (TRIPS), extensive
provisions on intellectual property into the most recent round
of WTO negotiations.
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. By manipulating just one gene of a living organism,
a company can be declared the sole owner of an entire plant variety.
WHY SHOULD YOU CARE?
These proposals may seem like a new frontier of property rights,
but except for the defense of ownership over life forms, TRIMS
are actually a defense of the old regime of property rights. It
is because current computer- and biotechnology make virtually
unlimited production and free distribution possible that the fight
for private property has become so extreme. By extending private
property to previously unimagined horizons, we are reminded of
the form of power used to defend it.
THE WORLD TRADE ORGANIZATION (WTO)
(by Ellen Frank)
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
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
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
Lori Wallach and Michelle Sforza, in their new 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. Currently, the WTO is considering whether "selective
purchasing" laws - like a Massachusetts law barring state
agencies and local governments from buying products made in Burma
and intended to withdraw an economic lifeline to that country's
dictatorship - are a violation of "free trade." It is
feared that the WTO will rule out these kinds of political motives
from government policy making. The organization has already ruled
against Europe for banning hormone-treated beef and against Japan
for prohibiting pesticide-laden apples.
WHY SHOULD YOU CARE?
(by Abby Scher)
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. Certainly, the current structure
of institutions like the WTO allows for little if any expression
of the popular will. Can a city, state, or country insist that
goods sold in its markets meet labor and environmental standards
determined in a democratic forum by its citizens? What if the
U.S., for example, insisted that clothing manufactured for the
Gap by child laborers not be permitted for sale here? 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
INTERNATIONAL STANDARDS ORGANIZATION (ISO)
There's at least one global institution shaping commerce that
corporations control completely, with no pretense of public involvement.
That is the International Standards Organization (ISO).
It was founded in 1947 (around the same time as the International
Monetary Fund, World Bank and GATT), with the aim of easing trade
by standardizing the dimensions of industrial products. Most famously,
it set the dimensions of screw threads so that an auto manufacturer
in the United States can be confident that screws it buys in China
can be used in its cars. More recently, the ISO trumpets its success
in standardizing ATM and credit card dimensions so they can be
used in machines worldwide.
Without set standards, buyers cannot roam the world in search
of the cheapest deal; the dissimilar products thus act as a "technical
barrier to trade." Not surprisingly, the ISO, although privately
run, is intimately linked to the World Trade Organization with
whom it says it is creating "a strategic partnership."
"The political agreements reached within the framework
of the WTO require underpinning by technical agreements"
devised by the ISO, according to the ISO.
"From an environmental perspective, the ISO isn't ideal
because it's captured by industry," says trade lawyer Stephen
Porter of the Washington, D.C. Center for International and Environmental
law. Companies send their expert reps to national standards organizations,
that in turn send reps to the ISO.
That might not be a problem if the ISO stuck to screws, but
in the 1990s it expanded its scope to setting environmental standards,
including the process used for producing organic agricultural
"The part that's most troublesome is when an ISO standard
becomes a default standard under the WTO rules," says Porter.
"Does it become impossible to go beyond that in a practical
matter if Austria wants to set an environmental standard that
is 130% of the ISO standard?" And once ISO standards become
part of the WTO, what was a voluntary system receives the force
of law, without public involvement.
THE INTERNATIONAL LABOR ORGANIZATION (lLO)
(by Peter Dorman)
Every year it is becoming more obvious that the global economy
needs global regulation to protect the interests of workers and
their communities. This was a central demand of some WTO protesters
in Seattle. But who can regulate at a global level, and how can
this regulation be made democratically accountable? There are
no easy answers to these questions, but we can learn a lot by
studying the successes and shortcomings of the International Labor
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.
After World War II the ILO was grafted onto the UN 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.
WHY SHOULD YOU CARE?
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 US, 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
* 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
* 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.
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.