During the past two decades, as random financial crises visited various fast-growing economies, we have become familiar, after the fact, with the profile of a developing country that’s headed for trouble. A booming, modernizing industrial system expands so robustly that it’s described as a “miracle” (Mexico, Korea, Indonesia, Brazil, to name a few). Its financial markets soar as foreign capital rushes in to invest and share in the bountiful returns. The country takes on short-term foreign debt at a disturbing pace–much faster than national income is growing–but no one pays much attention because the exuberant lending seems to confirm the bright prospects. Then, one day, investors redo the arithmetic and realize their expectations are wildly exaggerated. As they rush for the door, taking their capital, the currency collapses. Deep recession follows. The miracle is exposed as illusion.

In present circumstances, oddly enough, the country that fits this profile is the United States, where surging economic growth is also portrayed as miraculous. The United States is unlikely to experience a full-blown currency crisis like Mexico’s or Indonesia’s, since the dollar is the hard currency everyone relies upon as the anchor in global commerce. But the fundamentals are more similar than American triumphalism will acknowledge, and America’s prosperity can vanish just as swiftly if foreign investors decide to take back their money.

An abrupt exit by foreign capital would be a disaster for the United States but also for the world as a whole. That’s because the United States has used the borrowed money mainly to sustain its unique role as buyer of last resort–keeping the system afloat by mopping up the world’s excess output. As a result, surging US imports are producing record trade deficits–nearly $300 billion last year, almost triple the deficit of 1995. The authorities acknowledge that the imbalance is unsustainable and must be adjusted, but they blandly advise us not to worry. After all, America has been running persistent trade deficits–buying more than it sells in the global system, a lot more–for more than two decades, and nothing terrible seems to have happened (if one ignores millions of lost manufacturing jobs). Swollen imports from Asia and elsewhere, it is said, reflect heroic efforts by US consumers to revive economies smashed by the global financial crisis that unfolded in 1997.

America’s anachronistic role as backstop purchaser for the trading system originated in the cold war. The twin objectives of ideological triumph and commercial advance were always intertwined in US policy and mutually reinforcing at a deep level. Washington provided the capital, foreign aid and military procurement to rebuild Europe and develop Asia’s miraculous tigers; it granted easy access to the US market and even awarded shares of US production to far-flung allies. That was the glue that held the alliance together, keeping nations from “going red,” while it also extended the reach of US multinationals and investors.

“The US de-emphasized savings and encouraged consumption, even to the point of providing tax deductions for consumer credit interest expenses,” Robert Dugger of the Tudor Investment Corporation explained in testimony before the US Trade Deficit Review Commission. “This policy supported the evolving export-led growth strategies of US allies…. The United States cold war economy won because it essentially outconsumed the USSR and China.” When the cold war ended a decade ago, the ideology disappeared but the economic strategy remained in place, stripped of the patriotic fervor for liberating people and now nakedly devoted to commercial/financial objectives.

But this cannot continue. Since early 1998 the United States has provided roughly half the total demand growth in the entire world, according to the International Monetary Fund. The more ominous fact is that America’s status as a debtor nation has deteriorated rapidly during the booming prosperity of the past three years. The cumulative net obligations to foreign creditors from the many years of trade deficits reached an astonishing 18 percent of GDP by the end of 1998 and by now may be 20 percent or higher. That compares with 13 percent of GDP in 1997. Ten years before, it was zero. In short, the hole is deepening at an accelerating pace. Sooner or later, foreign investors will react with alarm.

I dwell on these unfashionable facts because I believe they provide the starting point for thinking about economic reforms in the global system. When the reckoning does arrive, there’s a danger of confused, reactionary backlash among innocent bystanders who get hurt, but the moment will also expose the fallacies of the reigning orthodoxy, particularly the so-called Washington consensus, which imposes the neoliberal straitjacket on developing nations. That will be a rare opening in itself.

More important, the social ideas and moral values already being advanced by the new movement against corporate-led globalization should gain greater respect because their relevance as economic solutions will become clearer. Labor rights, corporate accountability, the sovereign power of poorer nations to determine their own destiny–these and other reform causes involve more than fairness. They also provide essential answers to the economic maladies and instabilities embedded in the present system. In a previous article [“Global Agenda,” January 31] I described some modest first steps toward building new global rules for social and moral equity. Reforming the economics of globalization is obviously more daunting, but it starts with a simple proposition: The pursuit of common human values–what people around the world recognize as justice–is not in conflict with our economic self-interest; in fact, the two can be mutually reinforcing.

The core contradiction in the global economy–enduring overcapacity and inadequate demand–is usually obscured by the more visible dramas of financial crisis because it is located in the globalizing production system, the long-distance networks of factories and firms that produce the goods and services flowing in global trade. Corporate insecurity–the fear of falling behind, the need to keep driving down costs, including labor costs–is what generates globalization’s greatest contradiction. Alongside energetic expansion and innovation, the system generates vast and growing overcapacity across most industrial sectors, from chemicals to airliners. My favorite example is the auto industry, which in the spring of 1998 had the global capacity to produce 80 million vehicles for a market that would buy fewer than 60 million. This excess sounds irrational (as it is), considering that the multinationals are esteemed for sophisticated strategic management. Yet each corporation decides (perhaps correctly) that it has no choice but to disperse and expand production for survival–moves that seem smart and necessary in their own terms but that collectively deepen the imbalances of overcapacity and quicken the chase for new markets. So we witness the recurring episodes of giddy overinvestment by firms, investors and developing nations, followed by financial breakdown. Then the process regains momentum and repeats itself somewhere else.

The overcapacity is further deepened by the “Washington consensus” enforced by international lending institutions. The doctrine pushes more and more countries to pursue the export model of development pioneered by Japan, except without any of Japan’s equalizing features–the social guarantees, full employment and minimized income inequality–or the protective measures that insulated its infant domestic industries from foreign competitors. The global system instead encourages countries to ignore or actively suppress labor rights and regularly opposes public-sector investment as a wasteful impediment to growth. Unlike developing Japan, South Korea or Taiwan, which shielded their producers, the new exporting nations are told they must keep their borders and financial systems wide open to foreign interests–that is, hostage to the global system–so they are unlikely to achieve the earlier success of Japan or the “tigers.” The plain fact is that too many poor nations are now betting their futures on export-led growth–too many for most of them to succeed. These pro-capital, wage-retarding policies contribute substantially to insufficient demand worldwide, the flip side of overcapacity or overinvestment. One can now appreciate why the US market is so essential: If America taps out, who will buy all this stuff? The immediate pain would probably be felt most severely in poorer countries, which would lose their meager shares in global trade.

Actually, the remedy does exist for the United States to correct its lopsided trade flows swiftly and defuse the potential for global crisis, but it’s not a measure Washington is likely to employ, given its pretensions as pre-eminent promoter of free-market dogma. The international rules of trade recognize the right of any nation that’s sinking into a debt trap to impose emergency import limits to stop the financial drain (this is not regarded as protectionist unless it targets individual countries or products). Article 12 of the original GATT agreement of 1948 still authorizes this step to stanch the bleeding, but in fifty years it has seldom been used. Developing countries in trouble typically have found themselves unable to use the measure, since it would ignite retaliation from investors and trading partners. However, because it is the largest market, the customer everyone needs, the United States would be in a very different position, with enormous leverage. Yet the United States may also be past the point where it can introduce such a wake-up call. The political shock to an already fragile system might itself produce panic and crash.

What US authorities can and should do–but undoubtedly won’t–is face up to the worsening condition with a frank, public recognition that compels their foreign counterparts to do the same. The mere mention of Article 12 by Washington would make for a sobering moment. If trading partners were faced with the threat, they could in theory work out an agreement for gradually correcting the US trade imbalances. The bulk of the problem, after all, is concentrated in a handful of trading partners: Japan, China, Canada, Mexico and Western Europe generate more than 80 percent of the deficit. More likely, these nations would stall, convinced that the United States was bluffing, as usual. Then Washington would have to work out, unilaterally, a step-by-step schedule for raising the bar–slowly curbing its import volumes so that others would have time to adjust and pick up the slack in demand.

Here at home, the imperative facing the United States is to discard the open-armed cold war economics, cut the losses and redefine the national interest in more pragmatic terms. This will require deep changes in domestic life, as the nation attempts to shift from high to low consumption, from low to high savings policies. That transition is sure to be most unpopular in shopping-mall America and, given the gross inequality in incomes, will feel like stagnation or worse for the many families already deeply indebted. Thus an aggressive politics devoted to equality and to restoring public aid and equity will become even more essential, as will a new environmentalism that directly attacks the wastefulness embedded in modern production and consumption. There is plenty to go around in America, and there would be even more if we didn’t throw so much away.

The US government must also begin to re-examine its obligations to the multinationals, like Boeing and General Electric, that call themselves “global firms” but rely on America and its taxpayers as home base. The multinationals typically plant a foot in one country, then export components to another location in the production chain, then do final assembly somewhere else and sell the product in many other places (or perhaps only in the United States). If GE is telling its jet-engine suppliers to move to low-wage Mexico, as it is, why should US taxpayers provide so many forms of subsidy to this company? Reducing the large abstractions of globalization to such hard-nosed particulars will get their attention and also clarify the relationship. The national interest should not be defined as enhancing returns for shareholders, with no obligations to broader values.

Indeed, the same principle ought to apply everywhere in the global production system, for poor nations as well as rich. The reforms that impose national and community obligations on companies will not halt the processes of integration or trade, but they will change the choices for company managers in very positive ways. As standards are imposed on their behavior, the multinationals will be compelled to give more scrupulous and long-term consideration to where they invest their capital. Globalization may slow overall, but it can also become a deeper, more permanent creation.

Deepening indebtedness compels the United States to get its own house in order. Meanwhile, the logical outline for reforming the global production system is also visible, at least in the form of plausible principles:

(1) The global system needs a new, more sophisticated version of Article 12 that would allow countries to correct the injury from unbalanced trade flows, more or less automatically, with temporary limits on imports. The mechanisms would define reasonable levels for action and the point at which other governments must respond by applying national influence over both their multinationals and financial investors (ultimately, this also requires reform of international financial institutions like the IMF, which will be the focus of a subsequent article). This approach recognizes that the marketplace of competing multinationals cannot succeed in managing supply and demand worldwide–not without creating cartels and trustlike alliances to do so. It implicitly suggests the basis for a grand bargain in which the leading industrial powers agree, at least informally, to assume greater responsibility for the developing nations in their spheres–that is, to take a greater share of the exports from regional neighbors. Japan is the most egregious case of evading this obligation.

(2) The system must be refocused on the demand side: the promotion of rising incomes, in step with rising productivity. Multinational competition now produces a reflexive imperative for companies to do the opposite, that is, expand productive capacity while at the same time suppressing demand. Labor rights and public spending are two reliable tools for bolstering demand, but both are scorned by present dogma and its operating rules. Another tool is national measures to impose more accountability on global firms and investors–rules that require longer-term commitments from them to the new countries where they invest in production, as well as concrete penalties for players “gaming” the system by hopscotching from one poor country to another. For instance, if a US firm refuses to embrace labor rights for its overseas workers, why should American taxpayers subsidize it through Export-Import Bank loans, government-backed insurance for overseas investment or the many tax breaks designed to promote globalization? In short, governments have a lot of sovereign leverage over global firms if they will use it.

(3) The heavy-handed “Washington consensus” and the many international trade rules that accompany it must be scrapped so developing countries will have breathing space to pursue their own distinctive plans for industrialization. The World Trade Organization, instead of becoming more intrusive, should be forced to back off and acknowledge that a poor nation may be better off in the long run by concentrating first on domestic economic fundamentals–education and health, public infrastructure, self-sufficiency in producing basic goods like food and pharmaceuticals–than by turning itself into another exploited export platform. A global network of WTO reformers, including Global Trade Watch in the United States, is already staking out this approach as its new either/or demand: Prune the WTO or shut it down.

(4) Once new principles are established, the wealthier nations must follow through with the money to help make them succeed–that is, capital in the form of substantial aid commitments. The above measures ought to generate much more equity in the global system–more people sharing in its wealth-creating benefits through greater income equality–but they will also moderate the pace of globalization. Slowing things down is a necessary step toward more stability, less random wreckage, but it also threatens the poor nations disproportionately unless the advanced nations guarantee that capital inflows will continue. The Jubilee 2000 debt-relief campaign offers a good beginning in what should become a much larger program of governments. The AFL-CIO, among others in the movement, has advocated significant new aid from the United States (always a laggard compared with others). The money is available if the United States ever comes to its senses and begins paring down its bloated military-industrial establishment.

Reforming global economics in the absence of a climactic crisis is hard politics, of course, but these suggestions make it clear that fundamental reform is more a matter of what politics will allow, not what economics is sound. The obligation is peculiarly centered in the United States because what’s required is confrontation with America’s own prideful establishment. It is not Japan, Germany or China tenaciously upholding the status quo’s obvious flaws and inequities but Wall Street and Washington. America’s fusion of corporate-financial-political interests is the principal obstacle to change, and, one concedes, those interests are unlikely to yield until events have delivered fear and loss to their doorstep too. The only way to change the politics before catastrophe occurs is mobilization of people around the world demanding these reforms.

For roughly fifty years, the United States and allied international institutions have lured or pushed poor nations into pursuing the export approach to industrial development and have implicitly promised to buy much of their production. Now, it appears, we may abruptly throw them over the side. The export-led model is doomed because the United States can no longer afford to sponsor it. Developing nations are entitled to be skeptical, since it will look to them like one more instance of the wealthy protecting themselves from the aspiring poor.

Lori Wallach, director of Global Trade Watch, has discussed the situation with anti-WTO activists from countries like Malaysia, India, the Philippines and Thailand, and has encountered their ambivalence. She tells her coalition partners that “you’ve got to break yourself of the addiction of export-led development because it is not going to be around for long.” Their initial response is anger. “What they say first is, ‘You can’t do that to us!'” Wallach recalls. “‘You’ve led us down this primrose path, and now you’re saying you’re going to take it away? You’re not going to buy our exports?'” Yet, she explains, they also welcome the change, since these people have spent their lives fighting for self-sustaining, locally evolved economies–for pragmatic reasons but also as a matter of political independence.

The necessary first step, as this activist network has defined it, is an international mobilization to strip the WTO and institutions like the IMF of their imperious dictates for the developing world–the many rules that serve global capital but force poorer nations to forgo self-reliance in favor of an export economy. That agenda should be accompanied by debt relief for the poorest forty-one nations but also far more generous investment aid from advanced economies. Again, this is a matter of political will, not economics. For example, a modest transactions tax on global finance would amass a huge fund of low-cost capital that could be used to build domestic infrastructure in poor nations–projects that, for once, would not be beholden to the plans of multinational corporations.

In a way, these measures are the easy part. The larger challenge is defining the plausible strategies and reasonable safeguards that enable a nation to concentrate first on inward-led development, without losing access to capital markets and becoming hostage to the usual treadmill of insecurity, in which companies threaten to move on if wages rise. The concept of development directed at the internal fundamentals has been advocated for many years, but the truth is that there are still not many living examples of success. Until the global rules change, it will be nearly impossible for an individual nation to do this without losing access to capital.

Contrary to the globalization propaganda, every poor nation is not going to get rich quick, certainly not for generations to come. But all nations could improve themselves and the lives of their citizens quite dramatically if allowed to pursue that goal on their own terms. The cold war is over, finally, and precious ideological distinctions about what is sound economics and what is forbidden should be buried with it.