If one wants to understand what all the fuss is about as the World Trade Organization holds its ministerial conference, Ethan Kapstein’s Sharing the Wealth: Workers and the World Economy, is a good place to start. Unlike many books on globalization that focus on the wonders of electronic technology or the trillions of dollars of goods, services and investments that circle the planet, Sharing the Wealth is concerned with growing inequality. While leaders in government, business and finance cling to the reigning free-market orthodoxy, many workers around the world are on the losing end of economic change. Kapstein’s interest is with the “100 million citizens in the industrial countries who are classified as living below the poverty line…the 35 million in these same countries who are unemployed…[and the] 1.3 billion people in the developing world whose income level is under $1 per day.”
Kapstein argues that the inequality and poverty that characterize today’s global economy are politically dangerous, economically unproductive and morally bankrupt. Politically dangerous because these trends can provoke a harsh reactionary politics. Economically unproductive because rising levels of inequality result in lower rates of economic growth and threaten a global recession. Morally bankrupt because the global economic system will lose legitimacy if its gains go overwhelmingly to the richest.
It was not always this way. For what Kapstein calls “two golden decades” after World War II, the international system worked reasonably well. In his discussion of the postwar economic order–called the Bretton Woods order after the New Hampshire town where delegates from forty-four countries met in 1944 to establish the governance of the international economy–Kapstein highlights the role played by John Maynard Keynes, who believed that the key to a stable prosperity was to create markets for the unprecedented masses of goods that the new industrial system was able to produce.
The first element in the postwar plan was to channel dollars to Europe to stimulate purchasing power without creating burdensome repayment obligations. The Marshall Plan was one aspect of this policy, but there were others. The International Monetary Fund and the World Bank (its official name, the International Bank for Reconstruction and Development, reflects the World Bank’s original postwar mission) were funded to reduce the necessity of austerity in Europe.
The second element was composed of two factors that today we often forget were once considered complementary: full employment and free trade. With full employment in the major trading countries, the political pressure for protection would be low. At the same time, the competitive stimulus of free trade would offset inflationary tendencies of full-employment policies.
Infusions of dollars primed the pump of the international economy in the same way that stimulative policies helped national economies recover from the Depression. The competitive pressures and comparative advantage of international trade kept prices low, while the combination of high wages at full employment and international competition induced employers to improve productivity. The tight labor market enabled workers to press successfully for their due proportion of the benefits of enhanced productivity, creating new purchasing power and stimulating the circle of growth once again. Output, productivity, purchasing power and investment all rose.
And if the system didn’t work quite as smoothly as the preceding paragraph suggests, these policies, at least in the United States and Europe, led to an unprecedented era of high employment, rising living standards, economic growth and improved productivity–without excessive inflation. Since the world shifted away from the Keynesian perspective of Bretton Woods in the early seventies we have had less growth, more unemployment and more inflation.
Although heavily influenced by Keynes, the Bretton Woods system was the product of international relations, not a Cambridge seminar. The major factor shaping the postwar world was the overwhelming economic supremacy of the United States. The American policy-makers of the forties sought to combine Keynesian ideas with policies designed to advance traditional American interests.
One of the shortcomings of the Bretton Woods system was the failure to give labor a voice in determining the policies of the international institutions. Kapstein describes how the participants at Bretton Woods had sought to establish an International Trade Organization alongside the World Bank and IMF. The ITO was to be concerned with the relationship between trade and labor. In 1946, according to Kapstein, “the United States and its allies were pursuing a ‘two-track’ trade policy at this time. On a separate track, negotiators were working on the General Agreement on Tariffs and Trade, whose simple purpose was to achieve multilateral agreement on trade-barrier reductions. This was meant to be a temporary instrument, and upon its establishment, the ITO would subsume the GATT’s functions, as well as tackle the broader issue of trade and employment.”
But the ITO was not to be. By the late forties the cold war was in full gear. Economic policy was increasingly couched in terms of the capitalist/communist struggle. The business community in the United States was able to use this to stop the ITO. For example, the National Foreign Trade Council, a business lobbying group, asserted that the ITO “would operate inexorably to transform the free enterprise system of this country into a system of planned economy, with consequent initiative-destroying regimentation, reduction in productive output and standards of living, and threat to the free institutions and liberties of the American people.”
By 1950, realizing that the ITO would not pass, the Truman Administration withdrew the charter from Congressional consideration. According to Kapstein, “The failure to create the ITO thus meant that issues of trade and employment would not be formally joined at the level of international institutions. Instead, labor would have to rely upon the International Labor Organization to advance its objectives in multilateral discussions. Given the relative inefficacy of that organization, the practical result was that labor’s voice was effectively stilled in discussion and debate over international economic policy.”
In response to the collapse of the Bretton Woods system in the early seventies and the resulting bouts of inflation, governments everywhere retreated from full employment. Corporations searched the globe for the lowest wages, taxes and environmental standards. Countries sought to “compete” by keeping production costs as low as possible. Low wages, the abandonment of regulations and a scaling back of redistributive taxes and expenditures are now seen as the keys to national prosperity. Poor countries that refuse to follow these policies lose their access to international sources of capital; rich ones suffer capital flight.
Unemployment rates increased in the United States and Europe, growth in real wages slowed and in the United States real wages never returned to the peak levels reached in the early seventies. Markets grew more slowly; workers and plants were idled. The competition among the world’s manufacturers for the remaining market niches intensified. The result is growing economic disparity both between and within nations. Between nations, grotesque inequalities between rich and poor countries worsen. Within nations the fates of rich and poor diverge. In the United States, Kapstein worries about the danger of “an apartheid economy.”
This world order is not a stable one, as demonstrated by the Latin American debt crisis in the eighties, Mexico’s in the mid-nineties and East Asia’s in the late nineties. The world economy suffers from chronic problems of oversupply and weak demand, speculative bubbles and collapses on its volatile financial exchanges.
So what is to be done? Kapstein offers a catalogue of proposals. A few of them–urging companies to adopt codes of conduct and individuals to buy from socially responsible firms–are lame. Others–rejecting protectionism, investing in education and training–are conventional. But some–creating public-sector jobs, linking trade with worker rights, increasing supervision of multinational enterprises and insuring that the IMF and World Bank are sensitive to equity considerations–are truly meaningful. This last set of proposals not only differentiates Kapstein from the mainstream consensus that trade policy should simply focus on opening up markets and assume that all will then be well, but it also points the way to a different global economy, one that would benefit workers and not undercut labor, environmental and other social protections.
While Kapstein argues for economic policies that are sensitive to the concerns of working people, he is aware that the United States has other priorities:
Washington has delinked trade from human rights issues in China; blindly supported the interests of multinational corporations in the World Trade Organization while doing little to promote core labor standards; and continued to support bankrupt regimes from Russia to Indonesia. It has reduced foreign-aid spending to a pittance, and the vast bulk of those funds go to support military-equipment transfers. This country has done everything to protect mobile capital, little to support immobile labor.
The WTO meeting in Seattle will demonstrate that the rule-makers for the global economy are not pursuing pro-worker policies. In fact, they are moving in the opposite direction. But ultimately they must address the question posed by Kapstein: “If our economic policies do not help working people enjoy a decent way of life, and instill hope for a better future, what is the point?”