Crashing the Party of Davos

Globalization works for the bosses. Can we make it work for workers too?

All markets have a politics, reflecting conflict among economic interests over the rules and policies that determine–as the American political scientist Harold Lasswell once famously put it–“who gets what.” And when markets expand, so do their politics. Thus, in the nineteenth century, driven by improvements in transportation and communication technologies, commerce spilled across state borders beyond the capacity of states to regulate them. The power of large corporations went unchecked, generating bitter and violent class conflict. Fortunately, the democratic framework of the U.S. Constitution permitted popular challenges to the excessive concentration of wealth and influence. Ultimately, through the Progressive and New Deal eras, the United States developed a national politics that imposed a social contract–a New Deal that provided workers, as well as business, with enforceable economic rights. Over time, the contract was extended to racial minorities, women, and others who had been previously excluded from expanding economic opportunities.

Today, markets have expanded again, beyond national borders–and beyond the capacity of the world’s nation-based political institutions to manage them. As a result, the global economy is sputtering. Witness the collapse of the Doha Round of trade negotiations, popular hostility to the “Washington Consensus” of development in Latin America and other underdeveloped regions, and the spread of social tensions over immigration and foreign-wage competition in both rich and poor countries. The current pattern of globalization is undercut- ting the social contract that national governments, in developed and in many less-developed countries, had imposed over the last century in order to stabilize their economies and protect their citizens from laissez-faire’s brutal insecurities. Even as the world grows more tightly knit, it still lacks a common politics for managing its integration.

Just as bringing stability to the American economy in the last century required stronger national institutions, bringing social balance to the global economy in this century will require stronger global political institutions to regulate global markets. Already, many such institutions exist–such as the World Bank, World Trade Organization (WTO), and International Monetary Fund (IMF). But in make-up and in culture, they are dominated by those who own and manage large concentrations of internationally mobile capital, whose goal is to escape market regulation and break free of obligations to stakeholders other than the global corporate investor. In the politics of the global market, these institutions are dominated by a single party: Call it the Party of Davos, after the Swiss resort where several thousand global corporate CEOs, government leaders, and their assorted clientele of journalists, academics, and an occasional nongovernmental organization (NGO) or trade union head have the equivalent of their party convention every winter.

We are therefore faced with a catch-22: a global economy that is both prosperous and fair requires strong global institutions, but given the lack of a constitutional framework for democracy on that scale, strengthening existing global institutions is unlikely to generate a better distribution of global income and wealth. Indeed, under the present structure, as the world’s markets become more integrated, world inequality grows.

This fundamental contradiction cannot be resolved by unruly demonstrators at the entrance to the World Bank or the IMF. Nor will it be resolved in polite public policy seminars with proposals for globalization’s winners to share their gains with the losers; that is not what winners voluntarily do. Serious reform will only come from the development of a cross-border politics that challenges the cross-border power of the Party of Davos. Pulling together a worldwide movement is a utopian goal, but doing this in a region-by-region process is not. In fact, American progressives could begin the process right here in North America by transforming the North American Free Trade Agreement (NAFTA) into an instrument for continent-wide social progress. A redesigned NAFTA, in turn, could serve as a critical building block in constructing a global economy that is more equitable, more stable, and more democratic.

The Politics of Expanding Markets

The politics of the New Deal and social democratic analogues across the world rested on a new understanding of how national economies worked. The British economist John Maynard Keynes and his American followers showed that in a modern economy the worker/consumer was as important an actor in the market drama as the investor/manager. The government therefore had an obligation to pump income into the economy during downturns to assure that workers continued to buy the products they had made. Although many of America’s business elites resisted the egalitarian implications of the New Deal, the smartest of them understood that Franklin Roosevelt and Keynes had saved them from much worse, namely, Marx’s prediction of inevitable class warfare. When Dwight Eisenhower’s nominee for secretary of defense, Charlie Wilson, said, “What’s good for General Motors is good for America,” liberals snickered, but the country–and the United Auto Workers–thought he was right. By 1971, Richard Nixon could claim, with some justification, that “we are all Keynesians now.”

Shortly afterward, the slow fusion of the U.S. economy with the rest of the world accelerated. Between 1969 and 1979, the share of the U.S. Gross Domestic Product (GDP) represented by foreign trade rose from 10 to almost 20 percent, and the trade balance shifted from a surplus to deficit. By 2005, trade was 26 percent of our economy, and the relentlessly rising trade deficit was at 6 per- cent of our GDP. Along the way, the American industrial base–from apparel to steel to high-technology products–has been dramatically eroded, wages have stagnated, and the economic security of the typical American worker has been systematically undercut. Economists will always debate the exact numbers, and globalization is not the only factor driving the erosion of American economic security, but by now few can doubt that it is a major cause.

Keynes–whose ideas inspired the IMF and what eventually became the WTO–was no protectionist. Yet he cautioned nations to limit their foreign trade, because he believed it weakened a democratic government’s ability to maintain the economic growth needed to keep social peace. For example, if a large share of consumer demand went for imports, government deficit spending to overcome a recession would stimulate production in the exporting country rather than at home. And where growth depended heavily on exports, reducing wages to become more competitive would take priority over raising incomes to stimulate domestic consumption.

He was right to worry. Whatever else one might want to argue about the last 25 years of globalization, there is little question that it has undermined the New Deal–era social contract that rests on the mutual dependence of workers and employers. As companies become global, they increasingly find their workers and customers in other nations, loosening the economic bonds of shared self-interest that previously connected them with their fellow citizens. Indeed, for the last two decades, CEOs of major “American” multinationals have openly acknowledged that their future no longer depends on the prosperity of their fellow nationals. In the 1980s, Carl Gerstacker, chairman of Dow Chemical, said that he yearned to put his headquarters on an island where it would be “beholden to no nation or society ” rather than being governed in prime by the laws of the United States.” A decade later, Alex Trotman, chairman of Ford Motor Company, observed bluntly: “Ford isn’t even an American company, strictly speaking. We’re global. We’re investing all over the world ” Our managers are multinational. We teach them to think and act globally.”

As American industry went global, the political lines over trade and globalization began to be redrawn. In the past, workers and employers in the same industry were, for example, on the same side on the question of raising or lowering tariffs, depending on the industry’s competitiveness. After World War II, which had eliminated much of America’s industrial competition, both capital and labor became champions of free trade. But as American companies began to transform themselves into global corporations, free trade agreements have become a way for them to shift production to places where labor was cheap. The 1993 debate over NAFTA, the first major political battle of the new global economy, reflected this new division: American workers on one side, investors and executives on the other.

A similar division over NAFTA occurred in Mexico and Canada, whose working classes also anticipated the loss of bargaining power. Their fears were justified. A decade later, in all three nations, the gap between what workers produced and what they were paid grew dramatically. In the United States, labor productivity in manufacturing rose 80 percent, while real wages rose only 6 percent. In Mexico, productivity rose 68 percent, while real wages rose 2 percent. In Canada, the numbers are 34 and 3 percent, respectively. As Jorge Casta“eda, former foreign minister of Mexico, observed at the time, NAFTA was “an agreement for the rich and powerful in the United States, Mexico, and Canada, an agreement effectively excluding ordinary people in all three societies.” It is not surprising that the rich and powerful in all three nations gained most of the benefits while the “ordinary people” paid most of the costs. The relentless tide of Mexicans desperately crossing the border for work–a dozen years after NAFTA’s promoters predicted substantially reduced illegal immigration–is just one sign of the agreement’s failure to deliver on its promises.

The fallout from NAFTA echoes the current pattern of globalization generally. As capital becomes both more internationally mobile and more protected, its bargaining power over domestic labor is strengthened. Offshore outsourcing expands, and the threat to outsource becomes more credible, forcing workers to agree to work for less and local governments to weaken regulation. The result is rising global inequality of income and wealth–and the inequality in political power that follows.

The Garbled Language of Globalization As globalization relentlessly reorders American economic and political life, the policy debate remains mired in an obsolete paradigm that clouds our under- standing of what is happening. On the one hand, pundits like the New York Times’ Thomas Friedman tell us that the global economy has obliterated borders, making government irrelevant. On the other hand, the discussion of policy remains trapped in the language that defines globalization as competition among sovereign Westphalian nation-states, in which the conflicting interest of domestic politics stops at the water’s edge. Thus, for example, politicians and journalists speak of economic competition between “China” and “America” as national rivalries. Yet the business news channels are replete with celebratory segments on the profitable integration of U.S. and Chinese firms. Indeed, the “China threat” is actually a business partnership between local commissars who provide the cheap labor and American and other transnational capitalists who provide the technology and financing. Similarly, while analysts frame the discussion of world poverty in terms of rich and poor countries, they ignore the reality that there are poor people in rich countries and rich people in poor countries, leading to foreign-aid programs that are merely an inefficient transfer of resources from the former to the latter.

Most confusing and damaging to the debate is the wide use of “free trade” as a synonym for globalization. Leaving aside the theoretical issues, simple liberalized trade among sovereign nations does not describe how the world’s economy is evolving. The process is rather global economic integration, which aims at imposing a universal set of rules and policies on all nations. As Renato Ruggiero, the first director-general of the WTO, observed, “We are no longer writing the rules of interaction among separate national economies. We are writing the constitution of a single global economy.”

That an integrated global economy should be regulated by universal rules is obvious. The problem is that the “constitution”–which includes the policies of the international financial agencies as well as so-called trade agreements–protects and supports just one category of citizen, the global corporate investor. The interests of other stakeholders–workers, communities, civil society, and others whose hard-fought rights were finally established in democratic national societies–have been excluded. Even among sophisticated policy intellectuals, the political implications of economic integration are ignored by stuffing them safely back into the nation-state, whose citizens are assumed to have suffered no loss of power. One of many examples is economist Jagdish Bhagwati, a prominent proponent of global laissez-faire economics, who writes that “moral suasion,” “democratic politics,” and “judicial activism” at the national level are sufficient safeguards for labor, human rights, and environmental protections. Although goods and capital are acknowledged to flow and commingle in borderless markets, the class conflicts that markets inevitably generate are not. Yet these are global political conflicts that befit a global economy. By confining them to the nation-state box, the popular cross-border politics needed to countervail the cross-border power of private wealth is suppressed.

Thus a disconnect emerges between the theoretical notion of “national interest” and its actual promotion on the international stage. The conventional wisdom implicitly assumes that while tactics and style may differ according to which party is in power, a nation’s representatives to the IMF or the WTO are assumed to be furthering the “national interest,” a phrase frequently referenced but rarely specified. One of the few foreign policy commentators to address, even in passing, the question of how to define the national interest is Harvard’s Joseph Nye, Jr. As he wrote in The Paradox of American Power, “In a democracy, the national interest is simply what citizens, after proper deliberation, say it is ” If the American people think that our long-term shared interests include certain values and their promotion abroad, then they become part of the national interest. Leaders and experts may point out the costs of indulging certain values, but if an informed public disagrees, experts cannot deny the legitimacy of their opinion.”

The description of U.S. foreign policy being driven by the citizenry, with leaders and experts passively “pointing out the costs,” would be suspect under any circumstance. The Iraq war, to cite one obvious example, was hardly initiated by a spontaneous grass-roots movement in America demanding Saddam Hussein’s head. But in the context of the global economy, where cosmopolitan elites have more in common with peers in other countries than they do with people who simply share their nationality, it is stunningly na‘ve.

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