|Works Discussed In This Essay
Global Finance at Risk: The Case for International Regulation, by John Eatwell and Lance Taylor. New Press, 192 pages, $22.95.
The Lexus and the Olive Tree, by Thomas Friedman. Farrar, Straus, and Giroux, 394 pages, $27.50.
The Information Age: Economic Society and Culture, by Manual Castells. Blackwell, 1,246 pages, $64.95.
For a century, the United States has been a global power, but it is still deeply ambivalent about its relationship with the rest of the world. Its assertive side was most vivid in the rebuilding years after World War II. If the world has benefited from its leadership and engagement, the United States itself has not done badly either.
Even so, echoes of Thomas Jefferson's warning against "entangling alliances" still resonate two centuries later. At different times in its history, the United States has declared semi- independence from the rest of the globe, imposing protective tariffs or refusing membership to international organizations like the League of Nations—with disastrous results for both itself and the world.
This tension between nationalism and internationalism exists on both sides of the political divide. American liberals tend to be more internationalistic; they champion international arms and environmental agreements alongside sustaining the International Monetary Fund (IMF) and the United Nations (UN), even if they have doubts about those institutions' operations. But even liberals reflect American suspicion of foreigners when it comes to trade. The American left shares with the right the belief that in trade the United States should look first to its own armory of measures rather than to collective agreement seeking mutual benefit.
For American conservatives, this nativism is their first instinct. A distrust of foreigners and assertion of U.S. interests unilaterally helps to define their patriotism. They believe the defense of U.S. institutions is the prime responsibility of the political class. They were never comfortable with the New Deal or the U.S. role in creating the international institutions that shaped the postwar era, but fear of communism and the Soviet Union's expansionist ambitions enlisted them to what in truth was a liberal cause. With the evaporation of the communist threat, they are now free to revert to type.
The Republican refusal to ratify the Comprehensive Nuclear Test-Ban Treaty is but the most recent and dramatic evidence of the American right's willingness to turn its back on the web of treaties and international organizations that frame the world's diplomatic, financial, and economic order. The United States cannot rely on any international, collective system of security or verification of nuclear weapon testing; it must rely on itself and its own nuclear stockpile to ensure its security. It is the same story across the board. The Republicans obstruct the United States' paying its contributions to the UN, cut the foreign aid budget, would limit or even abolish the IMF, want no truck with an International Criminal Court, refuse to support a common plan to reduce emissions of carbon dioxide, and so on.
Liberals and conservatives share, as well, a deep ambivalence about globalization. There is no doubt that the evolution of a world market in capital, goods, and labor has hugely reinvigorated American capitalism. Globalization—empowering U.S. corporations, enfeebling U.S. labor, generating low inflation, and permitting high U.S. consumption—has done more to put the heart back into American capitalism than any program of deregulation or the arrival of new technology.
Indeed, as John Eatwell and Lance Taylor argue in their forthcoming book Global Finance at Risk, it is in part because globalization makes national controls so easy to avoid that deregulation worldwide has become easy to justify. Why continue with controls that are evaded? The conservative counterrevolution has been aided immeasurably by the way globalization has been allowed to develop.
Yet American conservatives barely tolerate globalization. And the United States is not comfortable acknowledging that, since the end of the Cold War, it has become not merely the sole superpower but the global hegemonic power at the center of what amounts to a world empire—whose architecture serves U.S. interests. There is still an element in the United States that conceives of the nation as a young republic committed to democracy and liberty, a challenger of empires and host to liberty-seekers, rather than an imperial power. The right wants to assert U.S. sovereignty in protection of traditional American virtues; the left wants to protect the American blue-collar worker from the consequences of a world labor market created by U.S. corporate, diplomatic, and financial power. The result is that there is little or no coherent debate either about the particulars of globalization or about the risks, both domestically and globally, in the way the international economy is being run.
The model of capitalism that the United States is exporting to the rest of the world is very particular. It works in an American context—although many on the American left would dispute even that—because of the unique set of U.S. political, economic, and social institutions. If it is a hard, entrepreneurial, dynamic capitalism, it also boasts tough regulation and a degree of transparency that springs from America's unique democratic traditions and Constitution. More than that, the sometimes savage inequalities and relentless individualism that it throws up are compensated by a degree of social and geographic mobility within the United States that are also unique. It has a market-based financial system in which financial short-termism and financial engineering are endemic, in which all is sacrificed before the totem of "shareholder value," but which again is compensated for by a readiness to take risks. All capitalisms have a different way of reconciling private property, profit, and markets to the different concerns and value systems of the wider civil society. The United States represents a particular solution to these dilemmas. But it is this model that is being thrust down the throat of the rest of the world, with huge risks that no part of the American debate seems to recognize.
There is a general American recognition that globalization contains an inherent tension between the vast, standardizing, transnational forces of markets and corporations and the values of community, neighborhood, blood loyalties, and tradition. This is at the heart of Thomas Friedman's new book The Lexus and the Olive Tree—the former being the luxury, high-tech Japanese car built by robots, the latter a symbol of rootedness, locality, and loyalty to community. Friedman argues that how these two tensions work themselves out will determine the course of the next 20 years.
Friedman is the foreign- affairs columnist for The New York Times, and the book-jacket blurb describes him as one of America's leading interpreters of foreign affairs. I suspect I am not alone in finding his breathless enthusiasm for globalization irritating; he sees it as win-win all around, if only the United States will get out there and lead it properly. I also suspect his fellow liberals in the United States find the whole gung ho tone maddening; they want more concern about how globalization is damaging the United States—not hymns to its praise. For a non-American reader, however, it is refreshing to find someone who has some grasp of what is taking place and why—and how enormously it benefits the United States.
But this is also Friedman's blind spot. He is too ready to cast globalization as something driven by the financial markets, new technology, and free trade (all of which is partly true)—and not by the United States itself. For example, he argues that "capitalist values, principles and networks are spreading to the remotest corners of the globe"—what Friedman, never short of a bon mot, calls the "golden straightjacket." If a country wants to prosper by having access to the Internet, global communications, world markets, and inward investment, then it has to accept the new rules of the game: that it must wear the golden straightjacket, including low taxes, privatization, deregulation, free capital movements, and all the rest. And the straightjacket is policed by the "electronic herd," the financial markets that will invest in your country and support its currency as long as you accept the straightjacket—but will flee in panic if you do not. If you go to war, the costs of losing the connections to the global economy are higher than ever, which leads Friedman to his "golden arches of conflict resolution" thesis. No two countries boasting a chain of McDonald's have ever gone to war, he contends. McDonald's stands as a proxy for how much any country has accepted the straightjacket and herd. Globalization means prosperity and peace. (This was evidently written before the NATO bombing of Belgrade.)
A Global Invisible Hand
While Friedman is right in his description of the golden straightjacket and the policing powers of the electronic herd, he tries continually to locate them in some stateless cyberspace. The straightjacket is in fact the Washington Consensus (not even mentioned in his index); its enforcers are the U.S. Treasury, the Federal Reserve, Wall Street, and the IMF. Its chief beneficiaries are U.S. investment and commercial banks and the rest of the Fortune 500. No fewer than 244 of the world's top 500 companies are now American. The electronic herd is not some creature of the Internet; the currency in which it deals is the dollar, and it is its access to dollar capital that gives it power. And it is not simply capitalist values that are being transmitted to the globe; it is American capitalist values.
When Friedman urges his readers to support globalization, he does so in the same spirit in which U.S. liberals argued for the Marshall Plan, the Bretton Woods institutions, open U.S. markets, and U.S. military protection after the war. It is part of the burden the United States must assume to make the world a better place. The idea that globalization might be self-consciously designed to serve U.S. interests in a world system whose architecture serves those same interests is not part of Friedman's intellectual map.
And if this lapse is typical of Friedman, whose grasp of the globalization process is rich if wide eyed, it is also typical of most American debate. The stock market boom is regarded as the result of a "new economic paradigm"—a combination of information technology, native entrepreneurial genius, fiscal conservatism, and highly flexible labor markets. The U.S. commentating, financial, and political establishment congratulates itself on a long boom that is the envy of the world. Even the lionized Alan Greenspan, whose skepticism and love of the Delphic utterance is legendary, has allowed himself to publicly muse that perhaps the U.S. economy has invented new rules and broached new frontiers. The view of the United States as an exceptional civilization is validated once again.
casual inspection of the numbers forces any independent analyst to come to a more balanced view. The U.S. boom has a soft underbelly; the astonishing trade deficit is set to climb to 4 percent of GDP, which is the driver of an amazing deterioration in the United States' international balance sheet. This economic superpower has growing foreign debts. The reason this does not emerge as a constraint on policy is simple. The dollar, at least until the launch of the euro this year, is the sole world currency. The rest of the world may not want to finance the U.S. trade deficit on the current scale, especially if the dollar continues to depreciate as it has consistently for the past 20 years, but it has had no choice. There has been no other source of universally acceptable liquidity but the dollar. Forcing the rest of the world to finance U.S. consumption on an unwanted scale and with depreciating dollars is a form of imperial tribute.
Indeed the rise in Wall Street itself would have been impossible without the way globalization has been shaped to conform to U.S. interests, and Wall Street's performance is as much the cause of the long economic boom as its consequence. The higher it has risen, the richer many Americans have become courtesy of their mutual funds and pension plans. And as their balance sheets have grown stronger, so they have been prepared to run down their savings and spend. Equally, the higher equities have soared, the more capital companies have been able to raise to fund investment programs—particularly marked in information technology. It may be true that Internet stocks are classic "bubbles," but for the three years over which the mania has continued, cash has been raised and investment undertaken that would otherwise have been impossible. All this has helped the boom to continue.
Beneath Wall Street's astronomic rise, there lies a transformation in the fundamentals of U.S. corporations' relationship with labor and, thus, in their profitability. Since the mid-1980s, profits as a share of GDP have risen sharply while the wage share has fallen. U.S. companies have become more mobile, both within the U.S. and beyond. Even as the economy has approached full employment, there has been little upward-wage pressure; most American workers, unless they are highly skilled, fear that their employer might relocate to a low-wage part of the United States, North America, or elsewhere on the globe. The winding up of the General Agreement on Tariffs and Trade and the establishment of the successor World Trade Organization, much of whose constitution was written by U.S. corporations (such as the clauses on intellectual property rights), has for the first time established a world market in goods and labor. Beyond an underlying weakness of labor law, companies have become much more hawkish in pursuit of maximizing shareholder value in a context where they have global options.
Backlash and Systemic Risk
If globalization cum Americanization courts new financial risks, it also courts global backlash. Developed and less developed countries alike seek inward investment, but they resent the increasingly high price they have to pay to get it. Europeans, for example, bitterly resent the stance taken by Monsanto and Novartis over genetically modified food or Chiquita over bananas; Africans resent the insistence that inward investment must mean aggressive deregulation and the requirement that intellectual property rights—like those of AIDS drugs—are held tightly in the United States. As Manuel Castells, professor of sociology at the University of California, Berkeley, argues in his remarkable trilogy on globalization, The Information Age, the new fundamentalism—of right-wing xenophobic political parties, religious mania, and environmental aggression—is rooted in a reaction to the sense that there is no longer any choice about how economies and societies should be organized. All must conform to the U.S. model.
Castells, unlike more sanguine observers such as Friedman, can see the way capitalism is becoming the global means of organizing the economy, driven by a combination he dubs "info-capitalism"—all-encompassing 24-hour global financial markets and information technology. He understands the obvious advantages in higher growth, productivity, and employment. But Castells is also keenly aware of the disadvantages: that the extraordinary growth in productive capacity is outstripping demand and that the financial markets risk implosion and the "social, cultural and political rejection by large numbers of people around the world" of a market system that ignores or devalues their humanity. Even in the United States, he observes, there remains extraordinary inequality after the unprecedented long boom, and it is the U.S. market system that has become the new global standard, masterminded by the U.S. power elite. Market systems have always been embedded in societies and directed politically, and globalization is no different. It revolves around the United States.
This world system has been put into place much more aggressively since the collapse of the Cold War; the end of the Soviet Union has made the world safe for globalization—and it is no accident that the Wall Street boom and long U.S. recovery should date from the late 1980s. All restraints to the operation of capitalism are over. But the system is fragile, as last year's Asia crisis exposed.
The conventional wisdom is that the over-indebted countries of Asia had mismanaged their financial and political systems. They paid the price with capital flight, currency, and economic collapse. There was a risk in the autumn of 1998 that the contagion would undermine the capital base of the U.S. banking system, but prompt action by Greenspan averted the threat. The United States saved the day.
There is some truth in this, but it is an incomplete view. What is ignored is why the countries of Southeast Asia had fixed their currencies against the dollar in the first place and why, when the inevitable speculative assault came, it was so overwhelming. Throughout the late 1980s and early 1990s, the United States insisted that the Asian tigers adopt exchange-rate links with the dollar to facilitate inward investment from U.S. multinationals and investment banks. This would transfer the exchange-rate risk to the host country as well as give their monetary policy an anti-inflationary anchor. The United States then pressed for financial liberalization and deregulation to allow U.S. banks a growing share of the tigers' burgeoning financial business. The result was a credit, stock market, and property boom in all the countries concerned.
But the tigers' export earnings were not equal to the inflated expectations. Their trade balances moved into deficit; their currency links with the dollar, itself appreciating, became impossible to sustain. When China entered the world system after Clinton's election in 1992, its cheap exports further undermined their trade performance already under pressure as the dollar appreciated against the yen; dollar-priced exports became fiercely uncompetitive. The "hot money" that had moved into their countries moved out no less quickly under the new rules of capital liberalization, while the barely regulated financial-derivatives markets and hedge funds—another U.S. invention—added to the speculation.
The global consensus, lead by the United States, blamed the calamity not on the operation of the financial markets or the U.S.-inspired policy agenda, but instead on crony capitalism. The same Asian values that had been praised only months earlier as being the secret behind 20 years of economic success were now scorned. Successive IMF adjustment programs, in close coordination with the U.S. Treasury, were designed to stabilize the countries' international position, retaining the capital market liberalization so important to the United States, whatever the consequences for unemployment, output, and social stability. It was a naked exercise in financial, political, and ideological power. Japanese attempts at constructing a more benign international financial architecture for Asia, the centerpiece of which was a Japanese-funded Asia fund, were scotched. The markets moved on to score similar destabilizing attacks against Russia and Brazil.
There are now signs of recovery, but the costs in lost output and social instability have been severe. And when Clinton and Greenspan talked of the most serious threat to the world economy since the 1930s, they were deadly serious. Had Long-Term Capital Management been allowed to collapse, the knock-on consequences for the U.S. banking system would have been potentially calamitous. We should not run such risks again.
The Weakest Link
Economists John Eatwell and Lance Taylor make this point forcibly. The heart of their forthcoming book Global Finance at Risk is the proposition that each financial crisis experienced by the world system since the end of the Bretton Woods system in 1972 and the adoption of floating exchange rates and free movement of capital has become worse than the preceding one, and that there will eventually be a calamity. What has been happening globally mirrors what has been happening domestically; there has been a surrender of regulation, a weakening of universal rules, and a decay of supranational institutions. The system of collective security against highly risky and volatile movements of capital has been dismantled; the consequent risk has in effect been privatized—but of course the system cannot insure itself against risk that it is systemically risky. We need better insurance than that.
Eatwell is a former economic adviser to the Labor Party and now master of Trinity College, Cambridge. Taylor teaches at the New School in New York and works frequently with the UN Development Program. They take care not to paint themselves as isolated academics crying wolf, citing both Alan Greenspan and the Economic Report of the President as echoing their call for more effective regulation of world financial markets to protect both the markets and the real economy from the inherent and systemic risk of the current structure. New methods of international currency speculation now escape the purview of any one national regulator.
As a solution Eatwell and Taylor would build on the existing structure for regulation in the Bank for International Settlements and turn it into a full-fledged world financial authority tasked with ensuring that all the players in the world's financial markets conform to the same standards. There should be common rules about balance-sheet structures, about the capacity to speculate, about the amount of capital needed to underwrite business in financial derivatives, and so on. And while the world financial authority would not be a global lender of last resort—a role that in their vision would fall to a beefed-up IMF—it would play a key role in brokering a collective response from the private sector when any one country suffered a financial crisis.
Their logic is impeccable, but it faces one insuperable obstacle. The United States at present has no intention of ceding any regulatory sovereignty to such an authority. Rather it would extend its own system of regulation to the world, as the country with the largest and deepest capital markets. If every top corporation requires a quote on Wall Street in order to raise capital on level terms with U.S. corporations, then necessarily they must adopt U.S. accounting rules and subscribe to U.S. regulation. In just the same way that the new Africa Act defines the terms on which the U.S. government will permit its agencies to support African development (by adopting the Washing ton Consensus), so the U.S. has no intention of letting go of its control of financial regulation. Why on earth should it?
Here is the rub. The United States has to make a judgment about the extent to which it really wants to export its economic and social model to the world, ensuring that supranational institutions are weak or nonexistent and that by default the rest of the world has to submit to U.S. regulation. Alternatively, is the United States prepared to play the leading role in constructing a new international system of collective risk management? The European Union has launched the euro not only to promote the cause of European integration but overtly as a rival to the dollar. The Europeans want to protect their culture and particular form of economic and social organization, and they see the euro as a means to that goal. Already there are signs that capital is moving from Wall Street to Frankfurt and Paris as investors fear Wall Street and the dollar are overvalued; for the first time since World War II, there are markets as liquid and deep as those in the United States, but with a prospect of an appreciating rather than depreciating currency. How does the United States propose to meet this challenge? Will it confront it head to head or instead work collaboratively with the European Union to manage the world economy?
The United States of the immediate postwar period would have been unhesitating in its choice; it would have worked to establish a liberal world order in which it surrendered a measure of domestic sovereignty to gain the leadership of new world institutions—in the 1940s, the IMF and World Bank. But the contemporary United States—with Republican Senate majorities voting down the Comprehensive Nuclear Test-Ban Treaty and shamelessly cutting back aid—is a different proposition. The conservatives assert U.S. hegemony, and American liberals find that position hard to criticize because they take the same stance on trade. This stance is increasingly dangerous. The world needs a stabler international financial order; it needs globalization on fairer terms; and it needs universal rules on the environment and the deployment of child labor (and, in the noneconomic domain, over arms trade and nuclear weapon testing and proliferation).
It is not good enough for the United States to attempt to assert its interests unilaterally in all these areas. It must create and shape a new liberal international consensus, not least in its own self- interest. A world recession induced by a financial calamity will not pass it by. Environmental risk confronts the United States as it does the rest of the world, and the fallout from any nuclear explosion has a global impact. But if the United States is to give that lead, its better side has to assert itself and win at home. The battle that American liberals fight against American conservatism is not just for a more generous, just, and equitable vision of the United States; it is for a more generous, just, and equitable vision of the world.