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 they want.

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.


(by Alejandro Reuss)


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.


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.




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.


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.


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.

(by Alejandro Reuss)


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 "piracy" widespread.

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.


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.


(by Ellen Frank)


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 1994.


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 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.

(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


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 products.

"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.


(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 Organization.


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.


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:

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 (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.


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.

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