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GLOBALIZATION:  THE PROBLEM

by Betsy Bowman, Ph.D. Teatro Santa Ana Biblioteca Public, San Miguel de Allende, March 19, 2004.

Welcome to this first of two lectures on introducing globalization.  Alternatives to corporate globalization will be the topic of the inaugural event of the research and learning center coming August here in San Miguel. We scheduled this first lecture today because tomorrow is March 20, a day for voicing opposition around the world to the war around the world – a global demonstration like the one on February 15, 2003. Here in San Miguel, the Peace Center has organized an event.  We’ll see there is a connection between globalization and the war.

I will lay out the problem of globalization and next week Bob Stone will discuss some solutions that have been offered.  Globalization is not just the neutral or even positive phenomenon the appellation suggests, it is a problem, a big one.  I’ll discuss it in eight steps:

First, I’m going to start with some definitions, frameworks in which we can think about  globalization.  Then, I’ll sketch the two economic systems we have in the world today. Thirdly, I’ll lay out some history and introduce some players.  Like the circus clown who keeps 10 balls in the air, we must keep in mind international institutions, transnational corporations, international trade treaties, and historical events. Then fourthly, I’ll assess results of economic globalization. Fifthly, I’ll advance an hypothesis to explain why certain phenomena of globalization are happening now. Sixthly, we’ll look at the US balance of payments crisis, seventh at how it might be solved, and finally, at interconnections between globalization and the US war in Iraq. 

1.  Definitions

The word “globalization” evokes the bringing of peoples, cultures and hence of economies together.  In this neutral or even positive sense it is an outcome of the mass availability of technological advances in mass communication. Through mass media  -- the internet, telephones, dish satellites, sound recordings, movies, etc.  --  a larger percentage of the world’s population than ever can share other peoples’ music, language, religion and culture. This is the good side of globalization. 

There is also economic globalization.  Made possible by the communication explosion and the fall of the Soviet Union, it is the spreading of the first-world economic system of transnational corporations to most of the rest of the world.  It is best understood as a stage of capitalism corresponding to the project of integrating everyone on the planet into a system of private property, wage labor, and purchase of world market commodities.

2.  The World’s Two Economic Systems

Before the fall of the Soviet Union, we used to consider that there were three economic systems on the planet, the major two being capitalism and Soviet communism.  Neither of these had integrated fully half of the population of the planet, that is, the 3 billion people who depend on subsistence farming.  So until the Soviet Union dissolved in 1991, there were three economic systems:  capitalism, communism and subsistence farming, and many sub-variations of those three.  Now we have two:  capitalism and subsistence farming, again with many transitional economies and variations.

I start with subsistence farming first, because half of humanity is directly or indirectly involved in it; because agriculture is the lynchpin of globalization; and because the effects of globalization on rural life are devastating. The November 2001 Doha round of the World Trade Organization talks put trade liberalization in agriculture on the global schedule. The Nov. 2003 WTO meeting in Cancun effectively stalled the trade liberalization of agriculture. 

It took over two centuries for the industrial revolution to transform Europe from a Medieval peasant society, based on non-wage subsistence farming, to a modern industrial society based on wage labor.  It was a cruel and bloody process.  People don’t voluntarily give up an autonomous reproduction of their life to work in a factory!  To be sure, subsistence farming is difficult.  But, with land to grow food, peasants don’t go hungry.  When the land is “privatized” or a flood of free trade imports makes selling its products impossible, farmers are forced into cities and wage labor.  And indeed today half of the earth’s population lives in cities and of those 3 billion, fully 1 billion of them live in slums in abysmal conditions.  

We live in Mexico and we have seen the changes over the past 10 to 20 years.  Huge numbers of farmers have left many rural areas.  A year ago January (2003), 100,000 Mexican peasants demonstrated in Mexico City to protest US dumping of corn on the Mexican market. By demanding re-negotiation of the agricultural clause of NAFTA , which took effect January 1, 2004, they demanded, in effect, food sovereignty and continued autonomous production.

3.  A Little History:   From Structural Adjustment to Trade Treaties

The US emerged from World War II as the dominant financial power.  International trade came to be done in US dollars.  Soon after the war the US and its allies – primarily Great Britain and France, created the International Monetary Fund and the World Bank.   The IMF was founded to secure international monetary cooperation, to stabilize currency exchange rates and to expand international liquidity in the form of access to hard currencies.  The World Bank was founded to finance development projects, provide technical assistance and implement free market reforms on behalf of international banks. With the IMF and the World Trade Organization, it plays a central role in overseeing economic policy in developing countries and in defining the global macroeconomic agenda.

In 1971, then President Richard Nixon took the US off the gold standard.  Until then, US dollars could in theory be cashed in for gold.  The gold in Fort Knox guaranteed the value of circulating paper money up to the limits of the gold reserves there.  But when Nixon took the US off the gold standard, no one lost confidence in the dollar.  Everyone kept on trading in dollars, as they do today.  The US dollar became in effect the global reserve currency.   But without the gold standard, the supply of money has increased far beyond gold limits and can increase endlessly. 

In 1973, retaliating against the US for supporting Israel in the Yom Kippur War, oil-producing (mainly Arab) countries, stopped shipping oil to the US.  While the former Soviet Union was and is a top oil producer, there was then no US-Soviet trade. Oil prices went through the roof.  Inflation in the US spiraled out of hand.  Oil-producers – who bought and sold in US dollars – had billions of so-called “petro-dollars” in central banks and personal accounts of elites.  What could they do with all that cash?  Saudi Arabia, United Arab Emirates and Kuwait (significantly not Iraq) put their cash in US Treasury bills or foreign banks  --  who then offered it on loan to third world countries.  In this period many third world governments borrowed massively to finance huge public works projects.  The debt crisis of the 1980s was being prepared.

We now know that many of these local elites were pocketing a lot of this borrowed money.  When Ferdinand Marcos was finally kicked out of the Philippines in 1986, his personal net worth was about $5 billion.  This corresponded exactly to the indebtedness of the Philippine government and  people to the IMF, World Bank and private banks.  And when Mobutu Sese Seko finally died in 1997, his personal worth was in the billions while the debt of the Zairian people was astronomical. 

By the early 1980’s, most of these third world countries couldn’t pay interest on these loans, much less pay down principal.  So they borrowed more money to make the interest payments!  But to “help” borrowers repay the loans, the IMF and World Bank imposed “structural adjustment programs.” These “reforms” came to be known as “neo-liberal” reforms

Now we’re getting to the heart of things.  I first heard the term “neo-liberal” long before I heard the term “globalization.” I heard it first in Russia in 1992, several years before hearing it in the US.  Between 1992 and 1995, I went to Moscow five times to give lectures at Moscow State University on self-management and the Mondragon cooperatives in northern Spain, which Bob will tell about next week.  I have been involved in the worker cooperative movement since 1989.  These are socially or jointly owned businesses operating in a capitalist society.  I thought the idea of workers owning their workplaces would be popular in Russia. 

Well, the IMF and the World Bank had a different idea.  But this is how I learned about the “medicine” they were prescribing for “countries in transition.”  They recommended the same “reforms” for Mexico, Brazil, Argentina, Russia, and China.  These reforms are “liberal,” not in the sense of “progressive,” but in the Adam Smith sense of eliminating regulations to letting “the market” solve any imbalances.  Each country receiving IMF/World Bank loans was to:

Significantly, oil is excluded.  On neo-liberal theory  --  as explained by skeptic Harry Magdoff  --  removing barriers to capital flow will let a country concentrate on areas in which it has a ‘comparative advantage.’  Then it can purchase whatever else it needs with the currency earned by exporting these products. Making conditions attractive to foreign corporations  --  for example, by allowing them to repatriate all profits  --  means they will invest more.  This is supposed to “overcome(s) one of the main hindrances to development of the countries of the periphery – a lack of investment capital to build factories, communication systems, roads, and ports.”

The idea was that in “free” or unregulated markets capital could find its most efficient and productive use thereby building infrastructure and raising general living standards.  As a country’s production became more efficient and productive, it could sell more abroad,  earn more US dollars in international trade, and pay off its debts to the IMF and World Bank in US dollars.  Such “reforms” came to be known variously as “structural adjustment programs” or SAPs for short, or simply as “The Washington Consensus.” 

That’s the theory.  However, we must keep in mind, the goal of capitalism – and globalization is the spreading of capitalism to the rest of the world  -- is not to meet human needs; it is capital accumulation by owners.  Throughout the early 1990’s, SAP’s imposed by the IMF and World Bank were debated within academia, government, think tanks and international institutions.   I joined in this debate. What I and others learned was that the SAP’s were neither reducing debts nor raising living standards.  On the contrary, the great masses of the world’s 6 billion inhabitants were worse off. 

In practice SAP’s were allowing transl-national corporations (TNCs) to go into countries, set up production, employ people at very low wages, and take out all the profit.  If a country’s government imposed workplace safety or environmental standards, or its workers set up unions, the TNCs could just move to another. IMF/World Bank reforms essentially opened formerly regulated national economies so powerful TNCs (many US-based) could come in, wipe out local competition, and park profits in off-shore tax havens.  This was good for the TNCs but not for the people.  In Russia, Mexico, and Argentina, for example, results have been extremely harmful.  China, given all the same advice by the IMF/World Bank, implemented none of it.  Today it is doing very well indeed.

Following IMF/World Bank imposition of these policies on debtor nations, many countries felt obliged (or were actually compelled) to sign trade treaties. These treaties establish international structures for enforcing neo-liberal trade policies.  While “freely” signed by governments, such treaties are rarely discussed among the home population.  A case in point is NAFTA – the North American Free Trade Agreement – which took effect January 1, 1994.  On that day the Zapatistas announced to the world the first serious opposition to “neo-liberal” policies.

In the late 1980’s, trade representatives from around the world met at what was called the Uruguay round of the GATT, the General Agreement on Trade and Tariffs.  GATT was created in 1947; the Uruguay Round of talks lasted from 1986 to 1994.  The result was a treaty creating the World Trade Organization or WTO.  The WTO was to supervise and liberalize world trade.  It began operation on January 1, 1995.  By the late 1990‘s, other treaties were in place:
 
GATS, the General Agreement on Trade in Services.  This treaty aims to open markets to service industries such as banking, education, health care and communications.
 
TRIP or Trade Related Intellectual Property Agreement enforces patent protection. Many seed, fertilizer, and pharmaceutical corporations have taken out patents on living organisms. TRIP assures their profits by patent protection.  If some genetically modified corn seed blows onto your land, you can be sued for patent infringement for not paying for the use of the patented corn.  Intellectual property is one of the few areas of the economy where a healthy profit is still being made.

TRIM, or Trade Related Investment Measures, forbids sovereign nations from prohibiting unwanted imports such as genetically-modified food, livestock fed with hormones and antibiotics, and toxic or nuclear waste.  Here in Mexico a Canadian company wanted to build a toxic waste treatment plant.  Mexico refused; the Canadian company sued and won.  Mexico must accept the plant. 

These reforms, SAP’s, and treaties constitute globalization or the spreading of capitalist relations of production and exchange around the world.  Corporations, often huge US based TNCs, can now move in and out of countries looking for the highest return on investment. Globalization facilitates accumulation of capital by the owners of large TNC’s.  This enhances their power within the US and vis-à-vis the US government.  It also enhances the power of the US.  Several years ago in a lecture in Scotland, Henry Kissenger said:  “Globalization is another word for US domination.”

4.  Results

The results of twenty years of neoliberal reforms are clear:  increased hunger, pauperization on a massive scale, and increased wealth for the wealthy. 
We’ve all heard the statistics, but I’ll repeat a few here. 

According to United Nations’ Human Development Report, the world’s richest 1% receive as much income as the poorest 57%.  The income gap between the world’s richest 20% and its poorest 20% rose from 30 to 1 in 1960 to 60 to 1 in 1990 and to 74 to 1 in 1999.  In 1999-2000, 2.8 billion people lived on less than $2 a day, 840 million were undernourished, 2.4 billion had no access to any form of improved sanitation services, and one in every 6 children of primary school age were not in school.  About 50 percent of the world’s non-agricultural labor force is estimated to be either unemployed or underemployed.

The year of the Arab oil embargo, 1973, was also the year when US workers’ buying power was greatest.  Real weekly earnings of production and non-supervisory workers fell from $315 in 1973 to $264 in 1989.  After a decade of economic expansion, it reached $271 in 1999.  

The world economy has slowed under neo-liberalism.  The world’s average annual GDP growth rate declined from 4.9% between 1950 and 1973, to 3.0% between 1973 and 1992, and 2.7% between 1990 and 2001.  From 1980 to 1998, half of all “developing countries” suffered falling real per capita GDP.

The results achieved by neo-liberal “free trade” are far from those promised.  Every country implementing them has undergone a serious economic crisis:  Mexico in 1995, Asia in 1997, Russia and Brazil in 1998, Argentina in 2001.  China, refusing all reform, is prospering.  One cause of these crises is currency flows. There’s a lot of money flying around the world – about 1.5 to 2 trillion daily, only 10% of which is trade-related. Barriers to such flows lifted, corporations can credibly threaten to move to where more profit can be made.
 
5.Two Preconditions for the Current Crisis

In 1971 the US dollar was taken off the gold standard, and since the early 1970’s, the rate of profit has been falling. 

These two factors set the stage for globalization.  Neo-liberalism can be seen as a means of trying to increase the rate of profit by lowering the cost of production.  Lowering the cost of production has meant that US and European industries have moved production abroad to areas of ever cheaper labor.  Meanwhile, US and European wages and their purchasing power have been falling.  And in Mexico and other third world countries, former peasants who have been pushed off the land move to sweatshop jobs in the cities or in maquilas, but don’t earn enough to purchase what they produce.  Result?  The world is swamped in goods that cannot be sold. There is simply too much stuff being produced chasing too few dollars!  In this crisis of over-accumulation, world economic growth has slowed. 

To escape this crisis, neo-liberalism has required governments to cut budgets and raise interest rates.  But these measures have exacerbated both world poverty and the crisis.  By further reducing disposable income, effective demand has been cut, resulting both in increasing pauperization greater capacity to produce than the world economy can absorb. Frustrated by pinched profits with old-fashioned manufacturing, many investors have turned to speculation especially in currencies.  Cross-border speculative capital flows have greatly increased, raising the danger of capital flight and financial crisis.

So we have a deepening global crisis of over-accumulation resulting in stagnation, insecurity and recession.  Only one thing has prevented a global downward spiral:  the US.  It has continued soaking up the world’s production.  But it has done this by borrowing money in order to consume ever more. 

6.The House of Cards

Unbeknownst to most, the US is the world’s largest debtor nation.  As Ronald Reagan’s administration started I n 1980, the national debt was one trillion dollars.  As it ended in 1988, the national debt was 3 trillion dollars. Over the last three years, the Bush tax cuts have cost the US government $1.7 trillion. The budget deficit for fiscal Year 2004 will be $521 billion dollars. The 2005 budget proposes $1.24 trillion more in debt for tax cuts.  That’s $2.94 trillion of debt for tax cuts for the wealthy (the estimate of the House Budget Committee is $2.6 trillion.  The end result?  When George W. Bush’s took over in 2001, the national debt was 5.6 trillion.  Today it is $7 trillion!

When the US government runs a budget deficit, it must borrow money.  It does this by issuing US Treasury Bills.  As noted earlier, in the 1970’s many oil-producers used their profits to buy T-bills.  They still own them.  The US is still paying interest on them.  In effect, the US government borrows money from foreigners to give, through tax breaks, to rich Americans.  Why it’s kind of like Philippine President Marcos borrowing from the World Bank in order to increase his personal wealth while sticking his people with the debt.  Meanwhile we have no national health insurance and an education system in rapid decline.

So much for budget deficits.  At the same time a trade deficit exists of roughly half a trillion.  Together that’s a trillion dollars of red ink this year alone.  The US government actually borrows to finance the budget deficit.  It doesn’t print money, it prints US Treasury Bonds (no longer backed by gold).  The trade deficit has to be off set by incoming investment. Not only are we the largest debtor country in the world  --  and of course the IMF and World Bank can’t impose a SAP on the US  --  but it is only confidence in the US dollar and the potential profitability of US business that keeps all the foreign investment coming into the country. European countries are limited to running trade deficits of not more than 3%.  The US, by contrast, has no limit. 

Should the “float” afforded by incoming investment be cut, the house of cards could collapse. While about 75% of the world’s total foreign exchange reserves are held in the form of dollar-denominated assets America’s share of world GDP is only 32%  --  less than half  --  according to Stephen Roach, chief economist of Morgan Stanley.  At the same time, foreign investors hold about 45% of US Treasury indebtedness, 35% of US corporate debt, and 12% of US equities  --  at or near record highs.  Roach cautions:  “Never before has the world put more stock in America – both as an engine of growth and as a store of financial value.  The problem is that the math gets exceedingly tenuous if it is projected into the future.”  The global crisis of overproduction is showing up the underlying weakness of the US real economy in the form of galloping trade and budget deficits.  Consequently, as one observer has remarked, “The Euro now poses a credible alternative to the status of the dollar as the global reserve currency, threatening the US’ crucial ability to fund its deficits by soaking up the world’s savings.”  Indeed a flight from the dollar to the Euro could cause a collapse.  For it is the savings and investments of the rest of the world that keeps this big house of cards standing. 

The roots of this underlying deficit go back to the demonetarization of gold in 1971.  Economist Michael Hudson explains that “By going off the gold standard at the precise moment that it did, the US obliged the world’s central banks to finance the US balance-of-payments deficit by using their surplus dollars to buy US Treasury bonds, whose volume quickly exceeded America’s ability or intention to pay. . .  Because of the restrictions placed on the central banks -- there is no place else for this money to go – these countries were forced to buy US treasuries or else accept the worthlessness of the dollars received through trade.”  The situation has become precarious. The US current account deficits must be matched by capital in-flows.  For the US current account deficits to continue rising at the present rate, the rest of the world must be willing to hold increasingly bigger proportions of their financial reserves in dollar-denominated assets.    Globalization turns out to be betting the future of the US and world economies on the world’s continued confidence in the US economy.

7.True and False Solutions

There are four ways to reverse the US current accounts deficits. 

1. Global growth that is much faster than US growth. 
2. Constraining US demand (i.e. depression).
3. Devaluation of the US dollar.
4. Using political and military strength that might affect the components of the growth in the current account deficit.

Taking these in order:

1 -- global growth that is much faster than US growth – is simply not going to happen.

2 – cutting US demand by raising interest rates is politically impossible now, before the elections.  And raising interest rates would risk a wave of person bankruptcies greater than in the Depression.

3 --  Dollar devaluation would make US goods cheaper outside the US and imported goods more expensive in the US.  But that would require a fall in the value of the dollar by 30-50%, which is not going to happen. 

4 – So we’re left with political/military domination to “manage” the crisis.  This has indeed become US policy.  

Why?  Imports have to be reduced – imports such as motor vehicles and electronic goods, but that can only be done if the Japanese yen and the Chinese yuan are devalued. Japan and China have resisted this.  Other imports, such as clothing and shoes, cannot be cut because there is practically no domestic production of these necessary items.  So that leaves us with oil.  “The key import is mineral fuels, and here the long-term costs can only be contained by US control of the physical resources.”  

8. Globalization and the War in Iraq

To correct the balance of payments problem, we have to:  1) balance the US budget, and 2) import less.  If this isn’t done, the only choice that remains is to “manage the crisis.”  That is, to keep the house of cards from falling, postpone indefinitely the inevitable reckoning, with its consequences of gigantic proportions. This strategy of evasion is the one being pursued.

It is not commonly remarked that, prior to the invasion of Iraq, that country was planning to start selling its oil in Euros instead of US dollars.  Were this to signal a general move to the Euro the “float” of incoming dollars that props up the house of cards would cease.  To “manage the crisis,” then, the US is attempting to control the supply and cost of oil and natural gas to assure that oil and natural gas are sold in US dollars.  Then the dollars in foreign hands will flow back into the US, thereby correcting the balance of payments problem.

Globalization is a stage of capitalism that generates so much misery and starvation that it also generates opposition.  “. . . free enterprise economics only works when you have authoritarian control to suppress opposition seeking to place economic relations in a broader social context.”

So it seems to me that the US war in Iraq is not aimed only at securing Iraqui oil and US control of the world’s supply of oil.  I think it is also aimed at anyone who might oppose this imperial design – anyone – Europe, third world countries, us.

Is this the way to manage an economy?  We all need to understand what is happening and think of ways to solve the problem.  We need to discuss the problem of the falling rate of profit, that is to say we need to discuss the goal of capitalism:  why isn’t its goal to meet human needs?  To feed the hungry etc.  We need to discuss the role of the US $ asw the global reserve currency; we also need to discuss the separation of the world’s currencies into convertible and non-convertible currencies. 

A few immediate demands that can be made right now are:

Then we need to discuss what kind of world we want to have – do we want one based on profit above all else or do we want one where children don’t grow up hungry and in their own shit.  It’s absurd that we have a crisis of overproduction, overaccumulation when literally half of the world lives in need.

  Next week Bob Stone will discuss some alternatives to corporate globalization and criteria for deciding between them.  But we are just two minds.  Inventing a viable future will take many more.  This is why we are starting a research and learning center in San Miguel. Its inaugural event August 4-13 will be a workshop on Alternatives to Globalization.  Scholars from several nations will join together.  We hope you will bring your intelligence to bear.  I hope to see you next week.  Thank you for your attention.

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