Globalization at Uneven Speeds
The current phase of globalization started in the early 1970s, when a number of important changes occurred in the global economic structures. The opening shot was the collapse of the fixed exchange rate regime of Bretton Woods, named after the location in New Hampshire where a conference at the end of WWII charted the post-war economic order. With no new agreements in place, Bretton Woods was replaced by floating rates, which in turn initiated a wave of deregulation in international trading and financial systems, including the emergence of offshore banking.
Roughly about the same time, the technological revolution in trans-oceanic transport that put shipments of goods into containers, also reached a stage of maturity. After road and rail feeder systems adapted to the new shipping methods, seamless door-to-door shipments became possible, a development that sharply reduced costs and transport times between trans-oceanic manufacturing locations and the products’ final markets. The subsequent rapid emergence of offshore sourcing and manufacturing would not have been practicable without this important innovation in the world’s transport system.
More recently, offshoring of manufacturing has been followed by a wave of offshoring in a number of service industries, this time made possible by the last couple of decades’ innovations in data transfer systems, in particular the emergence of the internet as a primary tool for business communications.
Consequently, most segments of the modern marketplace have integrated into global networks. Formerly local and relatively protected national markets have unmercifully been thrown into this vortex of globalization. Competition is no longer with a manufacturer in the neighbouring town, but in China or El Salvador. And neither are labour costs now just compared with those in other local establishments but with those of in far-away offshoring countries.
Globalization has also incurred a number of deep changes on the national economy level. Foremost is the widely noted return to a pattern of widening income disparities that started in the US by the mid-1970s and later spread not only to many other Western countries, but also to the countries at the exporting end of globalization, where the benefits generally have been very unevenly distributed.
In the West, incomes had narrowed during a long stretch prior to the changes of the 1970s. Many had come to believe that this was the unstoppable path of Keynesian economics pushing the West toward truly middle class societies in which the extreme ends of the economic spectrum were being chopped off, partly by extending social services as publicly funded programs for the poor and partly by creating strong gains in labour productivity that enabled a growing middle class enjoying good paying jobs to slowly catch up with the top of the incomes spectrum.
However, this notion was shattered with the return to rising inequalities after globalization picked up speed. But other patterns also changed; particularly noteworthy is the changing relations between the economy’s cyclic movements, and the economic trinity of productivity, employment and real wages.
Productivity used to be negative during recessions and strong during recoveries, when it would give rise to resurgent growth in employment and wages. But events have not following this sequence during the last two recessions, which have been followed by so-called jobless recoveries, i.e., a recovering GDP showing solid productivity gains, which however did not translate into the usual rises in employment and wages.
The occurrence of these changing patterns has given rise to a hotly contested debate about their relationships to globalization. The neoconservatives – traditional defenders of non-interference in markets and unlimited property rights – see globalization as the great triumph of American capitalism. Sure, they are forced to acknowledge that a substantial numbers of good jobs have been lost and replaced by not-so-good jobs, meaning that economic growth no longer is a guarantee for progress shared by all in the boat. But painful as this might be for those losing out, it is the unavoidable verdict of markets, given the current state of global integration and technological progress. Thus nothing can, nor indeed should be attempted, done about it, since it is hastening resource transfers to more profitable industries to the benefit of everyone in the end.
However, this unfalsifiable claim – formatted so that it always can be countered with a ‘wait, but...’ riposte – sounds hollow after thirty years and counting, of widening inequalities. The fact is that globalization has caused a massive reallocation of society’s output in a way that threatens to disrupt social stability by pushing both national and global inequalities to new heights.
At the same time the environmental file and the plight of the poorest countries not passengers on the globalization train are left unattended by politicians busy positioning themselves to be among the beneficiaries of the new economic order. To all critique of their indolence with regard to these pressing problems they routinely claim that cross-border competitive pressures make it impossible to do more; a sort of reversed version of the beggar-thy-neighbor protectionism of the 1930s.
The Breakdown of Countervailing Forces
Current economic theory rests on the premise that markets fundamentally are equalizing forces in societies. This, the claim goes, is because they ensure free competition among equally positioned individuals, all capable of making rational and voluntary market choices.
This idealized picture blatantly ignores the experiences of everyday life, in which we constantly are confronted with the results of market power and controlled information. The fact is that people commonly assume, and tacitly accept as a reality, that businesses only will disseminate information favourable to their interests unless otherwise unequivocally is mandated by laws.
Therefore markets, instead of trending toward the theory’s vaunted general equilibrium, are trending in directions that generate asymmetric relationships within the economic networks. Furthermore, crucially important is that markets when they expand in geographical reach and/or complexity – as they have done as a consequence of globalization – the tendencies to generate asymmetries will grow exponentially as a structural function.
The only circumstances that can rein in expanding market asymmetries are the existence of Galbrathian countervailing forces, capable of protecting market participants with structurally weak positions. Within the framework of national economies, such countervailing forces can consist of government regulations and oversight bodies, or non-governmental organizations (NGOs) that pool dispersed agents with weak individual positions into organizations capable of wielding countervailing market power, labour unions of course being the foremost example of this.
While the build up of countervailing forces during the last hundred years never had been totally adequate to fully counteract the market power of large corporations, it at least had established a considerable ability to check it. But after globalization moved the principal economic networks into a global arena, the existing structures of countervailing forces have not been able to respond. Current international organizations, such as the UN, have little economic impact and labour unions have at best been able to establish some regional networks. Only a few NGOs, for example Greenpeace dealing with the environmental problems, have had some success with working on an international scale.
Otherwise, the attempts to counter globalization with enhanced international cooperation have met a crank fate, in recent years not least thanks to the almost pathological tendency of the Bush administration to obstruct all international cooperation that they can’t fully control. Thus, when the OECD tried to get a modest level of oversight over offshore banking, and when the international community painstakingly cobbled the Kyoto Treaty together, these attempts were torpedoed by the Bush administration after the US under Clinton at first had signaled that it would sign on.
With no new structures of countervailing forces emerging on the international level this has enabled the corporations to force domestic wage earners to compete with low and unregulated labour costs in a number of developing countries. Naturally, the consequence of this has been a massive loss of market power by Western wage earners.
One of the consequences of a situation with widening income inequalities is that it shifts the aggregate propensity to consume downwards. This puts pressures on the markets for liquid financial assets that serve as stores of wealth.
Surpluses and deficits are complementary relations. If monetary surpluses accumulate somewhere in an integrated market without corresponding outlets for their reinvestments, it can fuel asset inflation. It is the old story of too much money chasing too few things, though in this case it is not goods but investment opportunities being chased.
Prior to the rise of globalization and offshore banking, the US economy had been relatively closed, with foreign trade accounting for a ratio of less than 10% of its GDP. This ratio doubled during the 1970s at a time when the dollar had eclipsed the older popular vehicles for international savings, such as Gold and the European currencies of the pound and Swiss franc.
Effectively, only the US government had the ability to either pull back the runaway creation of excess money, or, alternatively, create reinvestment assets on the scale needed. Thus at the start of the Reagan administration, the US was faced with an important choice. Either it could try to restore the trend of diminishing income inequalities by extending social programs and progressive taxation, a choice of actions that also would require a balanced foreign trade policy and willingness to transfer more funds to the developing world.
This path of action would effectively ignore the interest of international holders of dollars and would therefore in all likelihood reduce the dollar’s role as an international reserve currency. But it would also create an international economic structure that would be much less dependent on the fortunes of one country by not ceding to the US, as currently is the case, the ability to export its structural problems to the rest of the world, while over-disciplining all others in their quest for dollar surpluses. This was Keynes old warning at Bretton Woods, and in neither case was it heeded.
The other path of action would be to accommodate the demand for dollar assets by running deficits. The temptation to follow this path proved too great as it could be done by cutting taxes primarily benefiting high incomes, a policy ideologically very palatable to the neoconservatives around Reagan.
Naturally, this policy blueprint meant that the income inequalities instead of being reversed, to the contrary would accelerate, and it also left the trend of unregulated globalization intact. Thus, it laid out the path that the US-lead globalization has followed ever since.
The resultant chronic deficits that the US has run, except for the short blimp during the last years of the Clinton presidency, have on a massive scale flooded the world with dollar-denominated debt instruments. As these have absorbed much of the world’s savings they have sustained an unchecked binge of over-consumption in the US, to the detriment of equalizing and more sustainable developments in the global economy.
-- from Economic Reform, July 2005