The Global Economy: Can it be Fixed?
Based on a presentation to the Bellerive/GLOBE International
Conference on
Policing the Global Economy
Geneva, March 23-25, 1998
by Dr. David C. Korten
David Korten is a former professor at the Harvard School of Business, was
the longtime head of the USAID in South-east Asia and is author of When
Corporations Rule the World (1995, Kumarian Press).
I want to express my deep admiration to Prince Sadruddin Aga Khan for the
courage and foresight he has demonstrated in organizing this meeting.
Economic globalization is one of the most important issues of our time. Yet
to my knowledge, this is the first major international meeting that has
attempted to bring together for serious dialogue those who believe that
economic globalization is the best and inevitable course for the human
future with those of us who believe that if we continue on our present
course humanity may have no future. It is a great credit to the Prince that
he has made it happen.
In my own case, I've spent most of my adult life in Third World countries
as a development worker. This included 15 years in Southeast Asia--until
recently considered one of the world's development success stories. I saw
the reality behind the modern airports, express highways, luxury hotels,
and the air-conditioned shopping malls stocked with the latest imported
consumer goods long before the recent financial collapse revealed the
shallow roots of much of Asia's development. I witnessed the deepening
misery of people who were displaced from their homes and lands in the name
of progress for the few, the environmental devastation, and the
disintegration of once vibrant cultures. My dismay turned to horror when I
realized that the same trends toward declining living standards, increasing
inequality, environmental destruction, and social disintegration were being
played out in the industrial nations of North America, Europe, and
Japan--including in my own country--the United States. It all suggested
institutional failure at a deeply systemic level.
Our attention in this particular session is directed to United Nations
reform as it relates to Policing the Global Economy--specifically the idea
that we might balance the World Trade Organization with a World Environment
Organization. It is my position that while this proposal would be a step in
the right direction, it would be a weak and wholly inadequate response to
the problem--as it does nothing to address the unpleasant fact that:
An unregulated global economy dominated by corporations that recognize
money as their only value is inherently unstable, egregiously unequal,
destructive of markets, democracy, and life, and is impoverishing humanity
in real terms even as it enriches a few in financial terms.
We face very basic questions as to the goals and values we want our
economies to serve. The issues go far beyond tinkering with trade rules at
the margin.
An Unstable System of Winners and Losers
On February 1, 1996 the International Herald Tribune published an opinion
piece by Klaus Schwab and Claude Smadja, respectively president and
managing director of the World Economic Forum In their piece they noted that:
Economic globalization is causing severe economic dislocation and social
instability.
The technological changes of the past few years have eliminated more
jobs than they have created.
The competition "that is part and parcel of globalization leads to
winner-take-all situations; those who come out on top win big, and
the losers lose even bigger."
Higher profits no longer mean more job security and better wages.
"Globalization tends to delink the fate of the corporation from the
fate of its employees."
They went on to warn that unless serious corrective action is taken soon,
the backlash could turn into open political revolt and destabilize the
Western democracies. If this assessment had come from some
anti-globalization environmental organization it might be dismissed as
hyperbole--but not when it comes from the club of the world's thousand
largest global corporations.
What I found more problematic was their call to the world's political and
economic leaders to demonstrate how the new global capitalism can be made
to work to the benefit of the majority and not only for corporate managers
and investors.
It raises a basic question: Can the new global capitalism be made to work
for the benefit of the majority, or are the problems more fundamental? In
their op-ed, Schwab and Smadja recommended increases in public expenditures
on training and education, upgrading telecommunications and transportation
infrastructure, providing incentives to investors, and reforming social
policies to increase international competitiveness.
Here we confront a troubling dilemma. Increasing the global
competitiveness of one country by using public subsidies to increase
private profit--to the extent it works--simply draws investment away from
others and creates new losers. If indeed we are to have a world that works
for everyone, we must come to terms with the dark side of global
capitalism's competitive dynamic.
Fortunes change quickly in a global capitalist economy of excess
productive capacity, massive unemployment, an unconscionable gap between
rich and poor, and large amounts of speculative money looking for quick
profits. Not long ago it seemed that Japan had become the invincible world
economic power, eclipsing the fading fortunes of the United States and
Europe. Then Japan's financial and real estate bubbles burst and countries
such as South Korea, Thailand, Malaysia, and Indonesia became touted as
models of the opportunities available to those who embraced neoliberal
policies. Then their bubbles burst and now we find the United States being
touted as the neoliberal success story. And when our bubble bursts, perhaps
Europe will be the speculator's next haven.
The glory is fleeting and for each winner, it seems there are many more
losers. It is time that those who are promoting the new global capitalism
wake up to the simple, but unpleasant truth, that an unregulated global
economy dominated by corporations that recognize money as their only value
is inherently unstable, egregiously unequal, destructive of markets,
democracy, and life, and is impoverishing humanity in real terms even as it
enriches a few in financial terms.
There are many telling statistics illustrating the unconscionable extremes
of inequality under the new global capitalism. I want to share only one.
Last year, Bill Gates, already the richest person in the world, doubled his
net worth to a total of $36.4 billion--roughly equivalent to the entire
gross domestic product of Bangladesh, a country of 120 million people. Now
it is now over $50 billion and still rising.
As an American citizen I find it appalling that our political and economic
leaders are touting the United States as a model of economic success. Yes,
profits are at a 40 year high, the stock market sets new records by the
week, and productivity since 1979 has increased 24 percent--but real
earnings for workers have actually fallen by 12 percent during the same
period. All of the benefit of our supposed success has gone to the richest
20 percent of Americans. The biggest declines are for the poorest 20 percent.
Capitalism Against the Market
The underlying belief that global capitalism can be made to work for
everyone is based on a deep faith in the theory that markets necessarily
allocate society's resources equitably and efficiently. Unfortunately, a
market economy and the new global capitalism are not the same thing. To the
contrary, the new global capitalism systematically violates nearly every
assumption on which market theory is based--including the key assumptions
about competition and cost internalization. Let me elaborate on this point,
which several earlier speakers have also noted.
A combination of economic globalization, deregulation, and financial
concentration has moved the new capitalist economy ever further away from
the characteristics that make a market economy socially efficient. They
have as well shifted economic and political power away from people and
democratically elected governments to an unstable and predatory system of
global finance.
Beginning with Adam Smith, market theory has been quite explicit that
market efficiency is a consequence of small, local owned enterprises
competing in local markets on the basis of price and quality for consumer
favor. By contrast, what we know as the global capitalist economy is
dominated by a handful of gigantic corporations and financial speculators
with billions of dollars at their disposal to reshape markets and
manipulate prices.
Furthermore, the mega-corporations and financial houses continue to
concentrate and consolidate their power over markets, technology, and
capital through mergers, acquisitions, and strategic alliances--even as
they shed their responsibility for people by downsizing and contracting
out. The statistics are sobering.
If we consider the gross sales of a corporation to be roughly the
equivalent of the GDP of a country, we find that of the world's 100 largest
economies, 51 are economies internal to corporations. Only 49 are national
economies. The total sales of Mitsubishi Trading Corporation are greater
than the GDP of Indonesia, the world's fourth most populous country and a
land of enormous natural wealth.
The combined sales of the world's top 200 corporations are equal to
28 percent of total world GDP.
These same 200 corporations employ only 18.8 million people, less
than 1/3 of one percent of the world's population-- even as the downsizing
continues.
Consider the fact that the economy internal to a corporation is not a
market economy. It is centrally planned by corporate managers to maximize
financial returns to themselves and their shareholders. No matter what
authority a CEO may delegate, he can withdraw it with a snap of his
fingers. In the U.S. system, which is rapidly infecting Europe, Japan, and
the rest of the world, the corporate CEO can virtually hire and fire any
worker, open and close any plant, change transfer prices, create and drop
product lines almost at will--with no meaningful recourse by the persons or
communities affected.
Ironically, the global victory of capitalism is not a victory for the
market so much as it is a victory for central planning. Capitalism has
simply shifted the planning function from governments--which in theory are
accountable to all their citizens--to corporations--which even in theory
are accountable only to their shareholders.
We are moving very fast toward ever greater consolidation of this
unaccountable corporate power. In the United States the total value of
corporate mergers and acquisitions has increased at a rate of nearly 50
percent a year in every year save one since 1992. Most of these mergers and
acquisitions are accompanied by large scale layoffs. The greatest
concentration is taking place in the financial and telecommunications
sectors--with deeply ominous implications for the future of democracy.
Merger mania is spreading. Mergers world wide had a total value of $1.6
trillion in 1997--up 48 percent over 1996. European mergers and
acquisitions set a record of $400 billion in 1996--double the level of just
two years earlier. American investment banks, which are moving into Europe
with a vengeance, were involved as advisors in two-thirds of the deals. Do
not for a moment think that because Europeans believe in stakeholder
capitalism that what I am talking about cannot happen here. It is happening
here at this very moment. Stakeholder capitalism is being purged from your
economies as inefficient and a violation of exclusive shareholder rights.
The primary accountability of global corporations and investment houses is
to the global financial markets in which now each day nearly $2 trillion in
foreign exchange changes hands in search of speculative profits wholly
unrelated to any exchange of real goods or services.
Whose interests are represented by the ruling financial markets? In the
United States 77 percent of shareholder wealth is owned by a mere 5 percent
of households.
Globally the share of the world's population that has a consequential
participation in corporate ownership is most certainly less than 1 percent.
This concentration of power denies the most basic principles of both market
economics and democratic governance.
The Myth of Corporate Efficiency
Another critical assumption of market theory is that the full cost of each
good and service is internalized by producers and reflected in the prices
of their products. By contrast, the success of global capitalism has been
in large measure dependent on its ability to privatize the gains of
economic activity for its managers and shareholders while passing the costs
onto the larger society. Global corporations now routinely insist that
governments provide direct subsidies and tax breaks in return for jobs.
Similarly, they expect many workers to accept less than a living wage. They
expect communities to bear the economic and health costs of their waste
discharge. And they expect consumers to bear the consequences of dangerous
and defective products.
The conservative Washington, DC based Cato Institute estimates that direct
corporate subsidies and tax breaks in the United States now total $135
billion a year. Paul Hawken has compiled preliminary data suggesting that
corporations in the United States currently receive more in direct public
subsidies than they pay in total taxes.
Ralph Estes, a CPA with a distinguished academic and research career has
compiled an inventory of studies estimating various costs externalized onto
the U.S. society by unsafe and defective corporate products and practices.
When added together, the total comes to $2.6 trillion a year--roughly 5
times the amount of reported corporate profits in the United States and 23
percent of 1994 U.S. GDP. In short, the data suggest that from a societal
perspective corporations are grossly inefficient institutions and that
their profitability has come at an enormous cost to society.
Those familiar with market theory know that a market can function
efficiently only within a framework of rules that maintain the necessary
conditions. There must be rules and incentives to limit the growth and
power of individual firms, encourage local ownership, and require firms to
internalize their costs. Therefore, our goal should not be to eliminate
necessary regulation, but rather to make it sensible and effective.
It is here that we experience the new global capitalism at it's most
perverse. NAFTA, GATT, the World Trade Organization, and the Multilateral
Agreement on Investment now being negotiated under the OECD all turn the
necessary practice of market regulation on its head. To restore market
efficiency and the equity essential to the legitimacy of its institutions,
we must police global corporations to insure their adherence to essential
market principles. Yet the international agreements and institutions in
place and under negotiation not only fail to serve this need, they do
exactly the opposite. They install corporate dominated mechanisms to police
democratically elected national and local governments to prevent them from
requiring the corporations and financial institutions that cloak themselves
in market rhetoric to actually play by market rules. This is the real
impetus behind formation of the WTO. Contrary to the claims of some WTO
supporters, a burning desire to protect the interests of the Third World's
poor was not the driving motivation.
Privatizing Gains, Socializing Losses
Another aspect of the new global capitalism's dark side is its confusion
of money with wealth. Wealth is something that has real value in meeting
our needs and fulfilling our wants. It takes many forms, including human
skills, technology, land, trees, functioning ecosystems, factories,
buildings, food, clothing--even friendship and love. Our most important
forms of wealth consist of living capital--the productive-regenerative
capacities and systems of life that are the primary sources of our
existence and well-being and the foundation of our civilization. These
include natural, human, social, and institutional capital. Healthy living
capital is the most valuable of all resources because it has the ability to
continuously renew itself--to regenerate--and to evolve in its capacities
through self-directed learning.
Money, on the other hand, is nothing but a number on a piece of paper or a
coin or an electronic trace in a computer file. Aside from the metal in the
coin, it has no intrinsic value or productive utility. We covet it only
because by social convention others will accept it in exchange for things
of real value. Thus, while money is not itself real wealth, it gives us a
claim on the wealth of others.
One reason we fail to recognize the seriousness of our current predicament
is because we are so obsessed with global capitalism's ability to make
money we fail to recognize that it is rapidly destroying the world's real
wealth. It destroys natural living capital when it strip mines forests,
fisheries, and mineral deposits, aggressively markets toxic chemicals, and
dumps hazardous wastes that turn once productive lands and waters into
zones of death. It destroys human capital with substandard working
conditions in places like the Mexican maquiladoras where it employs vital
and productive young women for three to four years until failed eyesight,
allergies, kidney problems, and repetitive stress injuries leave them
permanently handicapped. It destroys social capital when it breaks up
unions, bids down wages, and treats workers as expendable
commodities--leaving it to society to absorb the family and community
breakdown and violence that are inevitable consequences. It destroys
institutional capital when it undermines the necessary function and
credibility of governments and democratic governance by buying politicians,
financing anti-government political movements, weakening environmental,
health, and labor standards essential to the long-term viability of
society, and extracting public subsidies, bailouts, and tax exemptions that
inflate corporate profits while passing the burdens of risk and public
finance to governments and the working poor.
We are just barely beginning to wake up to the fact that the industrial
era has in a mere century consumed a consequential portion of the natural
capital it took evolution millions of years to create. It is now drawing
down our social, institutional, and human capital as well.
A few years ago during a visit to Malaysia, I had a brief conversation
with the Minister responsible for Malaysia's forests. He explained to me in
all seriousness that since money grows faster than trees, Malaysia will be
better off once it has cut down all its trees and put the money in the bank
to earn interest. The image flashed through my mind of a barren and
lifeless landscape populated only by banks--their computers faithfully
recording interest payments on each of the accounts recorded on their hard
drives.
Making Money, Growing Poor
I'd now like to summarize in fairly stark fashion what we are doing to
ourselves. A study by McKinsey and Company found that since 1980, the
financial assets of the OECD countries have been growing at two to three
times the rate of GDP. This means that potential claims on economic output
are growing from two to three times faster than the growth in output of the
things that money might be used to buy.
The distortions go far deeper, however, because an important portion of
the output that GDP currently measures represents a decrease, rather than
an increase, in our well-being. When children buy guns and cigarettes, the
purchases contribute to GDP--though no sane person would argue that this
increases our well-being. When a married couple gets divorced, it is good
for GDP. It generates lawyers fees and requires at least one of the parties
to buy or rent and furnish a new home. Other portions of GDP represent
defensive expenditures that attempt to offset the consequences of the
social and environmental breakdown caused by harmful growth. Examples
include expenditures for security devices and environmental clean-up. GDP
further distorts our reality by the fact that it is a measure of gross,
rather than net domestic product. The depreciation or depletion of natural,
social, human, institutional, and even human-made capital is not deducted.
So when we cut down our forests or allow our physical infrastructure to
deteriorate, there is no accounting for the loss of productive function. We
count only the gain.
Economists in the United States, the U.K., Germany, the Netherlands, and
Australia have adjusted reported GDP for their countries to arrive at
figures for net beneficial economic output. In each instance they have
concluded that the economy's net contribution to well-being has actually
been declining over the past 15 to 20 years.
Yet even the indices of net beneficial output are misleading as they do
not reveal the extent to which we are depleting the underlying base of
living capital on which all future productive activity depends. I know of
no systematic effort to create a unified index giving us an overall measure
of the state of our living capital. Obviously, this would involve
significant technical difficulties. However, what measures we do have
relating to the depletion of our forests, soils, fresh water, fisheries,
the disruption of our climatic systems, the unraveling of our social
fabric, the decline in educational standards, the loss of legitimacy of our
major institutions, and the breakdown of family structures give us reason
to believe that the rate of depletion of our living capital is even greater
than the rate of decline in net beneficial output.
The indicators of stock market performance and GDP our leaders rely on to
assess the state of the economy create the illusion that their policies are
making us richer--when in fact they are making us poorer. Governments do
not compile the indicators that reveal the truth of what is happening to
our wealth and well-being. And the power holders, whose financial assets
are growing, experience no problem. In a global economy their money gives
them ready access the best of whatever real wealth remains. Those who
experience the reality of the dark side have neither power nor voice.
To Create a Market Economy
The challenge before us is to replace the global capitalist economy with a
properly regulated and locally rooted market economy that invests in the
regeneration of living capital, increases net beneficial economic output,
distributes that output justly and equitably to meet the basic needs of
everyone, strengthens the institutions of democracy and the market, and
returns money to its proper role as the servant of productive activity. It
should favor smaller local enterprises over global corporations, encourage
local ownership, penalize financial speculation, and give priority to
meeting the basic needs of the many over providing luxuries and diversions
for the wealthy few. In most aspects it should do exactly the opposite of
what the global capitalist economy is doing.
Most of the responsibility and initiative must come from local and
national levels. Supporting nations and localities in this task should
become the core agenda of the United Nations, as the protection of people
and communities from predatory global corporations and finance is arguably
the central security issue of our time.
A first positive step would be to dismantle the World Trade Organization
on the ground that there is no legitimate need for a global police force to
protect global corporations from the actions of democratically elected
national and local governments so that the richest one percent of humanity
can become even richer at the expense of the rest. And while the removal of
trade barriers may be a priority concern of global corporations eager to
increase profits and market share--it falls far down on the list of human
priorities in a world in potentially terminal social and economic crisis.
Indeed, where the trading interests of global corporations conflict with
the social and environmental goals of people--social and environmental
interests should trump the trade goals in nearly every instance.
The WTO is a powerful, but illegitimate and democratically unaccountable
institution put in place through largely secret negotiations with little or
no public debate to serve purposes largely contrary to the public interest.
The 99 percent of the world's people whose interests it does not serve have
every right to eliminate it.
Addressing the real need to police the global economy requires an
organization very different from the WTO--an open and democratic
organization with the mandate and power to set and enforce rules holding
those corporations that operate across national borders democratically
accountable to the people and priorities of the nations where they operate.
It should as well have the power to regulate and tax international
financial flows and institutions. And it should have a mandate to make
speculation unprofitable and to help protect the integrity of domestic
financial institutions from the instability of international financial
markets and the predatory practices of international financial speculators.
Call it the World Organization for Corporate and Financial Accountability.
There are obvious questions as to whether such proposals are politically
feasible given the stranglehold of corporations and big money over our
political processes. Yet we could use this same reasoning to conclude that
human survival itself is not politically feasible.
I believe global corporations and financial institutions are more
vulnerable than they may at first appear--because they are all populated by
human beings--like you and me--many of us with children--all of us with
human sensibilities and a stake in the future. They are our collective
creations. And we have both the right and the means to change or replace
them if they do not serve.
For this reason, I suggest we set about defining what is necessary to the
future security and prosperity of humanity and to the realization of widely
shared human values. We can then turn our attention to the question of how
to make feasible that which is both necessary and desirable.
(
geocities.com/capitolhill)