Toward a New International Economic Order

Palley, Thomas I.

THE FINANCIAL crisis that erupted in east Asia in mid-1997 has thrust millions of workers back into dire poverty and shattered an entire decade of economic development in the region. The...

...This opening provides an opportunity to remake the process of globalization in a manner that shifts it away from its current path of unstable and inequitable development, on to a path of stable and equitable growth...
...However, they continue to see the long-run solution in terms of limited financial market reforms...
...The narrow financial-markets crisis view is promoted by supporters of the "Washington consensus" that has dominated economic policy making for the last twenty years...
...The policies of the Washington consensus have failed...
...For these reasons, the Main Street alternative advocates that international trading agreements incorporate rules that disallow the environment and workplace safety as dimensions of business competition...
...The reality is that these behaviors are politically sponsored, and changing them requires political reform...
...There is also nominal agreement on the need to strengthen demand conditions to foster growth, but once again there is fundamental disagreement on the specifics...
...The Main Street alternative also maintains that improved accounting standards and financial transparency and disclosure are needed, but there is also a need to reduce speculation and make investors invest with an eye to the long term and proper regard to risk...
...All are for growth...
...The argument is that market competition will drive out cronyism...
...The Main Street alternative seeks to modernize the financial architecture, as does the IMF-Treasury view...
...Just as footloose capital is able to threaten workers, so too it is able to threaten governments...
...WHAT IS true for workers also holds for governments...
...Producing stable equitable growth requires that all elements of the international economic order be designed in a mutually consistent and reinforcing manner...
...Learning means that policy makers will not make this mistake next time, and meanwhile the underlying recommendations of the Washington consensus remain correct...
...Both common sense and economic logic tell us that globalization can work only if there is a level playing field between business and labor, and if economic growth is predicated on expanding domestic markets...
...Strong well-functioning democracy is needed to prevent economic cronyism, and unions are an essential ingredient for such an outcome...
...This is the hallmark of the race to the bottom that has been unleashed by globalization Washington consensus style...
...When it comes to the financial architecture discussion of specifics quickly reveals fundamental differences between the Main Street alternative and the Washington consensus...
...Brazil's currency devaluation now risks spreading financial contagion to other Latin American countries and China, while its attempt to export its way out of trouble will aggravate the problem of global deflation...
...Policy makers must therefore focus on jump-starting the world economy through a variety of initiatives, from coordinated interest rate cuts to debt relief and development assistance...
...Though IMF policy in east Asia and Federal Reserve interest-rate policy have both shifted in a more expansionary direction, this shift risks being short lived unless accompanied by recognition of the fundamentally flawed character of the existing global economic order...
...In sum, Sachs may have broken with the Washington consensus over east Asia, but he has not broken with the global economic architecture that the Washington consensus has fostered in the last twenty years...
...economy's own exposure to east Asia's misfortune, and last October it cut interest rates...
...Here, the focus has been on the appropriateness of the International Monetary Fund's (IMF's) policy recommendations for east Asia and the need for global reflation...
...Absent the protections granted by core labor standards, individual workers will face a ceaseless uphill struggle for higher wages, thereby confounding the possibility of shifting to a path of domestic demand-led growth...
...Moreover, though the Fed has cut interest rates by three-quarters of a percent, this reduction does not match the fall in inflation over the last eighteen months...
...The crisis has also flared and spread within the global economy...
...To the Washington consensus, these are interventions that distort the market's natural rhythms...
...This second set of issues is at the heart of the debate over the international financial architecture...
...This means that real interest rates have actually risen...
...How this debate is resolved will critically determine the path of fuTOWARD A NEW INTERNATIONAL ECONOMIC ORDER ture prosperity...
...Meanwhile, the Federal Reserve Board has reluctantly come to recognize the U.S...
...All that is required is a minor tune-up of the international financial system, combined with some learning from experience...
...Thus, whereas the Washington consensus sees export-led growth as a solution to each country's demand problem, the Main Street alternative sees it as a source of competitive devaluation and deflation...
...Thus, we have Secretary Rubin's claim that "these reform programs have at their core strengthening financial systems, improving transparency and supervision, eliminating the inter-relationships between banks, the government, and commercial entities, opening capital markets, and appropriate monetary and fiscal policies...
...Instead, a more fundamental reconfiguration of the international economic order is needed...
...In industrialized countries, wages have stagnated, workers are working longer hours, and there has been an increase in job insecurity...
...He is the author of Plenty of Nothing: The Downsizing of the American Dream and the Case for Structural Keynesianism (Princeton University Press...
...Rather than being an isolated event, east Asia's financial crisis represents one more in a succession of crises...
...52 n DISSENT / Spring 1999...
...Now, the process of financial contagion has added Brazil to the ranks of crisis countries, and most economists are predicting a severe Latin American economic downturn in 1999...
...Sachs implicitly argues that stabilization is not possible without growth...
...A key difference between the IMF-Treasury view and Sachs concerns the relationship beDISSENT 1 Spring 1999 51 TOWARD A NEW INTERNATIONAL ECONOMIC ORDER tween stabilization and growth...
...The issue is not one of recalibrating the model, but rather one of designing a new model that is stable, equitable, and pro-growth...
...However, the IMF-Treasury view maintains that stabilization must come first, and only then will growth be possible...
...The same process threatens to undermine environmental and workplace safety standards...
...Finally, it is worth pointing out a third view associated with Jeffrey Sachs, which straddles the debate...
...This is so even if exports are achieved through reliance on depreciated currencies...
...This requires taxes on the buying and selling of currencies to reduce speculative trading, as well as requirements that oblige investors to 50 n DISSENT / Spring 1999 commit for a minimum time period...
...The Treasury view is broadly similar to that of the IMF...
...Growing domestic demand calls for rising wages to support domestic consumption, and achieving this requires evening the balance of power between capital and labor...
...For this reason, core labor TOWARD A NEW INTERNATIONAL ECONOMIC ORDER standards that give workers rights of free association allowing them to form unions and bargain collectively are essential...
...Since then, both have reversed these policy prescriptions to a significant degree...
...Debt-service burdens now hinder much of the developing world from following an equitable pro-growth agenda...
...This is a strategy that lifts all boats, because demand growth in one country pulls in exports from others, so that all grow together...
...However, it maintains that the measures to improve financial transparency and accounting standards are nowhere near enough...
...It maintains that global economic growth is best furthered by more open trade, export-led growth, greater deregulation, and more liberalized financial markets...
...it has now been grudgingly compelled to allow east Asian governments to run deficits, and east Asian interest rates have also been lowered somewhat...
...Trade, finance, economic growth, and income distribution are all intimately connected, and this means much more must be on the table...
...Under such circumstances it is hard to be optimistic...
...Escaping the trap of export-led growth and making globalization work for all can happen only if the playing field between workers and capital is leveled...
...On the other hand there is a view that reads the situation as a full-fledged crisis of globalization that has revealed deep flaws in the design of the existing global economic order...
...Whereas proponents of the Washington consensus think that the existing model of globalization merely needs a tune-up, there is a "Main Street alternative" that thinks the model is fundamentally bankrupt...
...The reality is that it is central...
...Federal Reserve viewed the crisis as exclusively regional in impact...
...In particular, the Fed continues to claim that rate cuts were only needed to calm financial markets, which indicates that it may not yet have recognized the magnitude of weakening of global demand...
...They therefore both initially supported mistaken policies of economic austerity predicated upon high interest rates, government spending cuts, and higher taxes...
...to the Main Street alternative, they are rules that diminish speculation and encourage productive long-term investment...
...As a result of their increased mobility, corporations are increasingly able to win tax exemptions by threatening to move jobs overseas...
...Sachs was one of the early architects of Washington consensus "shock" therapy in Eastern Europe, the premise of which was that the old command style economies had to be opened to the bracing wind of the market by rapid privatization and deregulation...
...South Africa, which is Africa's largest economy, has had to raise interest rates to defend its currency and faces a significant economic slow down...
...At the most abstract level, the Main Street alternative begins by challenging the fatalistic notion that markets and the process of globalization are natural phenomena...
...In an attempt to gain a competitive advantage on international markets, countries are led to try to lower the value of their currencies relative to those of their rivals...
...This growth versus stabilization difference is important, but we should not be misled about its ultimate significance...
...East Asia's collapse has revealed a clear need to refashion globalization so as to render it stable and share its benefits...
...International wage competition and shifting of jobs in response to cross-country differences in workplace and environmental standards are legitimate dimensions of free trade...
...If policy makers in the industrialized countries also take steps to ward off a recession, the suffering caused by the crisis will not have been all in vain...
...As World Bank chief economist Joseph Stiglitz puts it, the world economy has been having "a boom in busts...
...However, there is a real danger of Federal Reserve policy turning out to be "too little, too late...
...This is the only way to ensure equitable growth with full employment...
...There is now a historic opportunity to break with the Washington consensus and replace it with the new internationalism of the Main Street alternative...
...Instead, it is about what type of market rules we will have, and whose economic interests they will serve...
...In light of Brazil's troubles, Newsweek recently went so far as to compare the winter recovery in world financial markets as akin to the "phony war" of 1940, a period when people falsely reassured themselves that calamity would be avoided...
...Absent a rejection of this thinking, the world economy will remain brutally exposed to the unstable deflationary forces inherent in today's global economic order, while policy makers will ineluctably be drawn back toward policies of contraction...
...The intelligence and humanity that mark Treasury Secretary Rubin have placed him on record as supporting core labor standards and human rights for ethical reasons, but the problem is that this issue remains peripheral in the Treasury's economic construction of the current crisis...
...If there is any doubt about this, consider the North American Free Trade Agreement (NAFTA), which is widely represented as a model free trade agreement...
...For these reasons it is time to say "Goodbye Washington consensus, hello Main Street alternative...
...It is epitomized , by the IMF, which has sought to characterize the crisis as resulting from inadequate financial transparency, and in the aftermath of the crisis the IMF has actually called for greater liberalization of international financial capital flows...
...Financial market governance, labor market governance, and the international trading system interact...
...In all other regards Sachs shares the Washington consensus...
...In particular, he is committed to "fast-track" style free trade, which fosters an international race to the bottom...
...There is another reason why human rights, labor standards, and strong independent trade unions are vital...
...Achieving domestic demand-led growth in turn requires strengthening domestic demand, and this brings to the fore even deeper divisions between the Washington consensus and the Main Street alternative...
...On one hand, there is the IMF-Treasury view, which interprets it as a narrow crisis of international financial markets...
...Debt relief for developing countries is another measure that can help shift the world economy toward a path of domestic demand-led growth...
...This will ensure that the benefits of economic development are shared and that domestic consumption demand can absorb the growth of output...
...This has contributed to shifting the tax burden on to working households...
...One country's exports are another country's imports, and this means that all cannot rely on export-led growth...
...The IMF has emphasized the problem of political corruption and economic cronyism that has given rise to misallocation of borrowed resources...
...The recent spreading of the crisis to Brazil provides further evidence that the existing system is unstable...
...This in turn requires putting in place countervailing forces that can block such behavior...
...THOMAS I. PALLEY is assistant director of public policy for the AFL-CIO...
...It has proposed solving this problem through increased market discipline imposed by increased financial transparency and increased international openness of domestic financial markets...
...This in turn risks producing a vicious circle of currency crises, as market speculators quickly realize that one country's devaluation renders rival-country currencies over-valued...
...They also force the third world to focus on export-led growth, which has contributed to deteriorating terms of trade, as well as causing job loss in developed countries...
...The latter seeks more international openness of domestic financial markets, better accounting standards, more financial transparency, and disclosure, and more IMF market surveillance...
...Hence, Treasury Secretary Robert Rubin's call to "modernize the architecture of the international financial markets...
...The crisis and its subsequent spread have raised two distinct sets of issues...
...Thus, "sequencing of reforms" has become a hot new issue, the argument being that countries like South Korea engaged in wrong sequencing whereby they mistakenly liberalized short-term capital flows before long-term flows...
...At the macroeconomic level, export-led growth, which has countries relying on foreign demand to ensure full employment, is also legitimate...
...Attempts to do so result in a beggar-thy-neighbor dynamic in which countries seek to export by relying on demand in other countries, thereby generating a global shortage of demand that risks plunging the global economy into a deflationary spiral...
...For the last twenty years, the Washington consensus has dominated policy making, yet global economic growth has been slower and inequality has risen...
...49 TOWARD A NEW INTERNATIONAL ECONOMIC ORDER fashioned by the Washington consensus as it did to markets fashioned under Franklin Roosevelt's New Deal...
...Yet, it is possible that there may be a silver lining to the crisis in that it has forced an opening of debate at the highest levels about the future course of globalization...
...Indeed, some economists identify the Chinese devaluation of 1994 as the trigger behind east Asia's financial crisis...
...Whereas the Washington consensus views independent trade unions as a market distortion, the Main Street alternative sees them as the private-sector solution to the imbalance of power created by capital's ability to roam the globe in search of the cheapest, most exploitable workers...
...Thus, with business perceiving these measures as a cost, the threat of relocation will be used to get such standards repealed...
...Also needed are measures that prevent tax competition, whereby governments compete against one another by lowering business tax rates to attract investment...
...One set has concerned how to react immediately to the 48 n DISSENT / Spring 1999 crisis and prevent it from deepening...
...THE DIFFERENCES in thinking regarding the validity of the existing global economic order are reflected in disagreements over the interpretation of the current crisis...
...However, he has broken with the Washington consensus over East Asia's crisis, and was one of the first to point out that austerity was the wrong response to a bank run...
...All markets and all economies operate on rules, and this applies as much to the markets that have been DISSENT / Spring 1999...
...Human and labor rights that give workers the right of free association and confer the ability to organize independent trade unions are the foundation of such reforms...
...Export-led growth must therefore be replaced with domestic demand-led growth...
...Russia has undergone a financial collapse...
...This is because the thinking that gave rise to the IMF's initial mistaken prescription for east Asia is the same thinking that underlies the structure of the existing order...
...Both the Treasury and the IMF were slow to recognize that east Asia's troubles were triggered by a bank run that had foreign investors rushing to repatriate funds...
...The conversation cannot be restricted to discussion of financial markets...
...The claim is that more daylight and more market openness will enhance market discipline, thereby producing efficiency and stability...
...Here, the question is to what extent are fundamental flaws in the structure responsible for the crisis, and to what extent are these flaws responsible for the trend of slowing economic development and worsening of global income distribution...
...hence, the inclination to high interest rates and fiscal austerity to placate financial markets...
...FVEN MORE problematic is the tendency of export-led growth strategies to proI mote global deflation...
...Debt relief is a means out of this box...
...A second set of issues concerns the structure of the international economic order...
...The IMF initially recommended a dose of fiscal and monetary austerity in the afflicted economies (Thailand, South Korea, and Indonesia), while the U.S...
...The IMF's policies threatened to worsen east Asia's deflation...
...Viewed from this perspective, the debate is not one of regulation versus deregulation...
...In fact, the actual treaty consists of one thousand pages of rules governing trade...
...This belief is mistaken...

Vol. 46 • April 1999 • No. 2


 
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