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Globalization Under Fire

Mises Daily: Sunday, August 20, 2000 by

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Hans F. Sennholz

The barriers to international trade continue to fall, and "globalization" is moving ahead. According to the World Trade Organization (WTO), the volume of trade is increasing at an annual rate of more than 6 percent, now exceeding $5 trillion. Some 60,000 "transnational" companies with more than 500,000 foreign affiliates are investing annually some $400 billion in plants, equipment, and offices outside their national bases, some $150 billion thereof in less-developed countries. Sony, Gillette, Ford, General Electric, and many other well-known international corporations are producing some $11 trillion in goods and services, exceeding the gross domestic product of the United States which includes a large share of output by foreign- owned companies. Supporting the huge volumes of international commerce and investment are foreign exchange transactions now exceeding $1.5 trillion per day.

The obvious reason for the burgeoning world trade and direct investment in foreign countries is the reduction in trade barriers and the liberalization of investment regulations throughout the 1990s. Ever since the disintegration of the Soviet Union, numerous countries have made, and continue to make, regulatory changes that welcome foreign trade and investment. They have turned away from the discredited Marxist-Leninist model of a command system which brought much poverty, misery, and the yoke of servitude. Governments have relaxed their rigid economic controls and have given what they call "the private sector" a greater role in economic production. Liberalization measures and rapid economic development have stimulated imports and exports. Various international trade-liberalization agreements have contributed to the trend. In South America the two trade blocs, the Andean Community (Bolivia, Colombia, Ecuador, Peru, and Venezuela) and Mercosur (Argentina, Brazil, Paraguay, and Uruguay) have increased their regional trade. The Asian-Pacific Economic Cooperation (APEC)consisting of 21 member countries and accounting for two-thirds of world trade has taken new steps toward its objective of removing all trade barriers by 2010 (2020 for less-developed countries). Even the former centrally planned economies have made some progress toward privatization of the facilities of production and liberalization of foreign trade and investment.

Globalization is a popular slogan in international affairs. Yet local conflict always finds a way. There are some 30 military conflicts of varying size and intensity throughout the world. An arc of violence stretches throughout Central Africa, from the Red Sea to the South Atlantic Ocean. Elsewhere in Africa, in Sierra Leone and neighboring Liberia, rebel armies are engaged in heavy fighting with African peacekeeping forces. In Asia the 17-year-old civil war in Sri Lanka continues unabated, while Cambodia is always verging on civil war. In Afghanistan, the Islamic fundamentalist Taliban, which conquered most of the country, is waging anti-Shi'ite campaigns and threatening its Muslim neighbors. In several Latin American countries the military is the final arbiter of political power. In Ecuador and Colombia it is waging an uneven struggle with various Marxian insurgent groups.

Laws are rather ineffectual in time of war as are the principles of trade. But even in peacetime there are those who seek to discredit trade and commerce and malign the trader. They are convinced that honor vanishes where commerce prevails and that international trading and, especially, economic globalizing are cheating on a world-wide basis. In the United States the critics blame globalization for destroying industries and jobs in rich countries, crippling poor ones, suppressing human rights, and allowing big business to overrun and exploit the world. Mass protests against free trade and global capitalism are popular from Seattle to Washington, D.C.

We may ignore such outbursts as being irrelevant expressions by a motley of organizations. Some positions are visibly self-serving; others earnestly hope to help developing countries. But such noisy protests against world trade and market policies may be an early indication of genuine ideological changes that could have ominous consequences. Political and economic ideologies do change, as 20th century history so clearly shows. They may usher in a new age of economic nationalism and international conflict. Therefore, we must confront such possibilities by explaining the meaning of trade and the benefits of globalization by insisting that a peaceful and prosperous world requires more open markets and economic development. It does not call for a return to economic nationalism and international confrontation.

The assault on the global economy calls for a response, especially since it is launched in full-page advertisements in major national media under the label of "economic globalization." Every isolationist argument must be met before it confuses legislators, regulators, and the electorate.

In particular, we must defend the often-maligned multinational corporations which are in the vanguard of globalization, raising living standards and improving working conditions at home and abroad. American corporations operating abroad tend to pay higher wages and set enlightened labor standards to which their ability to attract much foreign labor clearly attests. They are the most efficient source of economic development in poor countries, investing much capital of their own, and are among the most productive companies at home, typically paying higher wages and benefits.

Multinational corporations stand condemned for destroying industries and jobs in rich countries. In reality, they are multinational in size and outreach because they serve human needs more efficiently and economically than their competitors. They are foremost in technological innovation and market adjustment; of course, they are disparaged by all those who are fearful of modern technology and by those who prefer brute force over the laws of the market, in particular, by unskilled and semi-skilled union labor. In the centers of union unemployment, multinational corporations are the official bête noir.

Burgeoning world trade and direct investment are accused of suppressing human rights. Such charges obviously build on the contrapositioning of "human rights," which are said to spring from basic human needs, and "property rights," which are said to be rooted in "individual greed." Actually, in a market order commonly called capitalism, private ownership of the means of production springs from production and comes into existence peacefully. It is ever subject to the whims and wishes of the people who, through their buying or abstention from buying, determine not only individual income but also capital ownership. It is no special privilege enjoyed by the owner class, but a natural institution that facilitates orderly production and division of labor.

Private property in the means of production serves a production function. It is in the common interest for it assures the most economical use of scarce resources. In contrast, "human rights" rarely, if ever, spring from the right to life, which is rudimentary in all civilized societies, but flow from envy and covetousness; they are political "rights" to seize and consume the property of some members of society. In ethical terms, they are a claim to steal and plunder by political force. Throughout the ages countries, poverty-stricken and torn by civil strife, have been guided by such "human rights" claims.

The charge that globalization allows big business to run rampant in the world rests on the Marxian exploitation theory,according to which profit-seeking capitalists exploit their workers by forcing them to work without proper remuneration and to create "surplus value." This theory has become the guidepost for labor legislation and regulation all over the world. In the United States it guides both political parties to offer and provide protection from the discretion and power of corporations. It leads them to set minimum wage rates, mandate fringe benefits, and pass numerous labor laws.

The defenders of the market order readily admit the possibility and even certainty of labor exploitation in all command systems, whether communistic, socialistic, or fascistic, but they categorically deny the existence of labor exploitation in an unhampered market. Three market features negate any such power: competition among employers, the mobility of labor itself, and the freedom of self-employment. The presence of all three assures every member of society his full wage and benefit as determined by the market value of his services.

The critics of globalization frequently point to two United Nations organizations: the International Monetary Fund (IMF) and the World Trade Organization(WTO) which are said to promote and sustain international exploitation. Both organizations stand accused of denying sovereignty, that is, "supremacy of authority" to its member countries. Both face criticism for being secretive in their dealings, undemocratic in governance, and unresponsive to the needs of poorer members. Actually, the IMF is a specialized agency of the United Nations with 182 member countries. It is designed to foster monetary cooperation, providing short-term financing to members encountering balance of payments problems.

It makes the loans in return for pledges to restrict monetary expansion by the member government or its central bank and to rein in budget deficits. It is ruled by a board of governors, with one representative from each country. The board of governors elects an executive board of 20 representatives who conduct regular operations. The World Trade Organization is another UN specialized agency, a creation of a 1995 treaty replacing the General Agreement on Tariffs and Trade (GATT). It has stronger powers than GATT, particularly in assessing disputes and enforcement procedures. WTO is to lead the nations toward reduction of tariffs by 40 percent, strengthening patent and copyright protection, and reducing agricultural subsidies.

The friends of an unhampered market order deplore the very existence of regulatory agencies other than those designed for the protection of human life and property. Political interference in business affairs on any level, they argue, is bound to hamper the efficient use of economic resources and breed international conflict. But both UN institutions are neither undemonstrative nor unresponsive to the needs of poor countries. Surely, the IMF as a financial institution is in position to state its credit terms as all creditors do in a competitive credit market. But it wields no authoritative, monopolistic powers as the debtor countries have access to the capital markets of the world and the IMF as lender faces the competition by countless credit institutions, public and private. If IMF is the only willing lender, the loan risk must exceed that which all other lenders are willing to bear. IMF can bear the risk because its funds are moneys which member governments either extract from their taxpayers or borrow in their loan markets. As in all cases of public funds, IMF may lose them without danger to its solvency.

The vocal critics of IMF never tire of condemning it for its insensitive and even ruthless policies, especially toward less- developed countries. Its lending conditions are censured for being unduly restrictive and even exploitative of the unfortunate, wretched conditions of poor debtors. Actually, such complaints are rarely ever lodged at the time the loans are negotiated and finally made. They are heard only when it is time to pay interest or repayment is due. A bad debtor may complain about the conditions of his loan, although they merely are the simple conditions of honesty and integrity, exhorting him to act responsibly.

IMF credit conditions serve a useful function in less- developed countries. They lend moral support to weak and irresolute legislators, regulators, and central bankers who actually may want to correct the evils. Having inflated and depreciated their currencies and having spent billions in excess of revenue, they may face fiscal bankruptcy, economic stagnation, and even chaos. Anxious to stay in positions of power, they may be willing to embark upon monetary and fiscal reform but fear facing the vocal opposition of the beneficiaries of government largess. In democratic societies it takes great courage, fortitude, and tenacity to embark upon reforms that are unpopular with a large political class thriving directly and indirectly on government favors. Many politicians lack such attributes, but may be persuaded to launch a reform provided they are rewarded generously and can point to UN conditions and constraints. They may cleverly lay the blame on the doorstep of prominent American authorities, which hopefully will absolve them from any responsibility in the eyes of their electorates. Foreign authorities provide welcome excuses and crutches for weak and corrupt administrations.

Economic austerity programs, which are typically attached to any IMF assistance, are designed to demand reforms which the debtors hate and denounce. They may blame recommended spending cuts for deepening local recessions, thus making the reform task all the more difficult. Actually, the "austerity programs" are designed to force the politicians in power to live within their means and abstain from further expanding and depreciating their currencies. What the debtors bewail as "austerity" merely is integrity and honesty in everyday language. For the population political austerity signals welcome ease of inflation and taxation. They prefer austerity programs that bring instant relief and speedy return to fiscal integrity rather than a gradual weaning of the political class. Thus, a speedy return facilitates rapid readjustment and shortens the recession.

No matter what we may offer in defense of UN institutions against their radical critics, we cannot escape the conclusion that their very existence contributes significantly to the great economic evils of our time. The IMF in particular is designed to come to the rescue of corrupt governments which inflate their currencies and ravage their economies. Surely, IMF officials seek to lead them to stability by offering massive aid. But such support not only keeps the officials in power and enables them to mismanage the reforms but also aggravates the corruption. Countless billions of IMF aid are wasted on bungled reforms by incompetent officials or have disappeared into the pockets of central bankers and crooked administrators.

This Austrian economist is convinced that, in a free world without an IMF, poorly managed governments would simply be permitted to go bankrupt. They would lose their contacts with the capital markets of the world and be forced to return to primitive barter. Should a bankrupt government impose bankruptcy on its subjects in their foreign trade relations, the country would suffer international isolation and thus forego the benefits of the worldwide division of labor. Underdeveloped countries would soon turn into economic wastelands. In democratic countries a bankrupt government would be discredited and quickly brushed aside. New administrations would take their places and earnestly embark upon far-reaching reforms. Public creditors and debtors would negotiate the value of the loans and determine whether poor loans could be exchanged for equity or other assets. Of course, throughout bankruptcy proceedings imports and exports by multinational corporations would continue in any trustworthy currency.

There are no IMFs in domestic trade and commerce. Insolvent debtors face bankruptcy which settles obligations in an orderly and equitable manner. Court-appointed trustees may make management changes, arrange unsecured financing, and generally operate the debtor's business. Or the debtor may remain in control of his business but work together with creditors in negotiating payment schedules, restructuring debt and negotiating new loans. What works efficiently and equitably in domestic economic relations should also work in international commerce.

Many foes of UN institutions also revile the North American Free Trade Agreement (NAFTA) of 1992. It officially opened the way for trade and peaceful exchange, but then quietly closed it down again with 1,200 pages of qualifications, regulations, side accords, sequels, and supplements. It promised to lower some trade barriers among Canada, Mexico, and the United States, but added qualifications to prevent painful adjustments and maintain the protection of favored industries. In Mexico, powerful labor unions in the textile industry, in farming, fishing, and the State oil industry continue to enjoy privilege and protection. In the United States, the Agreement reflects the common fear that business will relocate in Mexico in search of lower wages and fewer environmental restrictions. Designed to appease labor unions, numerous provisions seek to keep business in the United States and Mexican labor out. NAFTA gave Canada protection from foreign imports for its poultry and dairy farmers and, along with Mexico, the right to screen incoming U.S. investments.

Several Canadian provinces and the trade union movement still oppose the pact, fearing the loss of jobs to the low-labor-cost Mexican economy. The anti-globalization movement is an ideological phenomenon, as much so in America as in Europe. It is supported by a collection of labor unions, environmentalists, and protectionists in search of a common cause. In Europe, the movement has a powerful agrarian base, fiercely protective of its farmers and advocating a complex web of import duties, price supports, export subsidies, and direct payments to farmers. The European Union (EU) devotes nearly one-half of its total budget to farm support. It refuses to import American beef and, contrary to GATT rules, limits banana imports from Central and South America, giving preference to imports from former European colonies in the Caribbean. Its policies sparked a trade war with the United States which retaliated by slapping 100% tariffs on a range of European agricultural exports.

The foes of globalization do not hesitate to resort to old and proven debate tricks and ruses in order to discredit foreign trade. They speak of a "dark side" of globalization: drug trafficking. Drug dealers are "the real pioneers of globalization." International criminal organizations, such as the Cosa Nostra in the United States, the Mafia in Italy, the drug cartels in Colombia and other countries are trading internationally in the world's most expensive goods: drugs; the drug lords, therefore, are paving the way for globalization.

Such wanton condemnation of international trade ignores the history of man. Long before there were traffickers of drugs, there were the traffickers of slaves who plied their barbaric trade. Throughout the history of man the stronger tended to enslave the weaker. Captives taken in war, however noble their social position might be, were reduced to the status of slave. The system flourished in ancient Greece and Rome. In North America African slaves were traded as early as 1619. Are we to forego the great benefits of international trade and peaceful cooperation because there have been traffickers of slaves since the dawn of history? Another "dark side" of globalism is the contamination of soil, water, and the atmosphere by the discharge of noxious substances. "We are on the brink of a global collapse," environmentalists warn us. Carbon dioxide emission continues to increase and some 1.3 billion people are affected by polluted air. The increasing buildup of carbon dioxide, methane, and other gases from the burning of fossil fuels is warming the climate. The gases collect in the atmosphere, wrapping the earth in a layer of insulation and heating the climate, which will have devastating effects on man's environment.

Anti-globalists tend to attribute all such evils to globalization and the market order. Surely, growing populations do raise material output and consumption as does the growth of international commerce. The world's industrial countries produce the bulk of industrial emissions but they do not necessarily spoil the environment. Highly productive and wealthy countries are steadily improving their environments; they have the necessary resources and technological know-how to safeguard the environment efficiently. Most of their facilities of production are privately owned, which assures their best possible care and maintenance. In the poor countries of the world, in contrast, most such facilities are government-owned or -controlled, which invites their wasteful use and abuse. The most polluted countries on earth are the republics formerly comprising the Soviet Union and its satellites. They also are among the poorest and least healthful places on earth. The male life expectancy in communist North Korea, according to official statistics, is 48.9 years; in South Korea it is 69 years. In Azerbaijan it is 59 years; in the U.S., 73.8.

Much of the Muslim world from North Africa to Southeast Asia is under the sway of Islamic fundamentalists and activists who despise the capitalistic order. President Mohammad Khatami of Iran frequently denounces globalization, calling it a "destructive force" that resembles a kind of "neo-colonialism." Surely, in his view, it is "destructive" in the sense that it undermines his supreme political authority over his 62 million Muslim subjects, and it is "neo-colonialism" because it has forced him to privatize some public enterprises, thereby reducing the "public sector" to a mere 80 percent of national production.

All over the globe the "public sectors" are shrinking as a result of invigorating competition, which obviously alarms all public officials and their workers. Fearful of the fresh air of market competition, they protest "the merging of national economies", the "homogenizing of mankind," and "the physical, social, and cultural decay of man." A merger actually signifies a welding or unification of two or more bodies or masses; it obviously has no bearing on the simple act of exchange. When I purchase a shirt made in Hong Kong and a doctor in Hong Kong buys penicillin made in the United States, we do not merge or amalgamate in any form. We do not even relate culturally, but we both satisfy our needs. Modern communication and transportation have brought populations closer than at any time in history. The computer revolution has made complex data easily accessible everywhere; it does so in simple English language commands. Software companies even have developed machine-translation systems based on personal computers, which supply foreign data with the click of a computer key. What took no less than several weeks to cross the oceans from Europe or Asia to America during the 17th and 18th centuries and still several days during the 19th and most of the 20th is traversed today in a few hours. Yet the speed of modern travel does not necessarily promote the merger of countries nor human homogenization or cultural decay.

Cultural differences distinguish societies from one another. The ability to communicate readily exposes various cultures to each other, making known their differences in the arts, beliefs, institutions, and other products of work and thought. It may help to increase mutual understanding.

The fear of "homogenization of mankind," that is, the fear of racial and ethnic mixing, thereby losing original identity and characteristics is inborn in all races and ethnic groups. Although such is the natural instinct of most individuals, some do mix and interbreed to which the racial composition of nations clearly attests. All European countries comprise half a dozen or more racial and ethnic stocks, the United States even more. Many individuals evidence features of different stocks. Whatever the benefits or detriments of such mixing may be, they cannot be attributed solely to the globalization of international commerce. Some responsibility must be placed on immigration laws that encourage the mixing by inviting members of other races and ethnic groups to enter a country. The United States government embarked upon such a policy with the Immigration and Nationality Act of 1965. The Act replaced the ethnically oriented quota system with a measure designed to eliminate favoritism in the admission of immigrants and to favor individuals with skills, training, and ability which would "substantially benefit prospectively the national economy, cultural interests, and welfare of the United States."

Illegal immigration is a disturbing political and economic problem. The United States is a powerful magnet for young and old seeking to improve their economic condition. Although thousands are refused entry every month and many more thousands are intercepted at the border through the use of patrols, fencing, high-intensity lights, night-vision devices, and motion detectors, the U.S. borders are not difficult to slip across illegally by those who are able to enlist the services of a guide. No one can know how many millions of illegal immigrants make their homes in the United States. Many have come in order to escape poverty and deplorable conditions, unaware of any globalization of commerce. Others have crossed borders in order to benefit from the many welfare benefits generously offered to all newcomers.

The foes of globalization, unfortunately, are missing an important effect of the rising volume of world trade: the improvement of living conditions in poor countries. Globalization actually reduces the pressures of migration to the United States. It especially reduces the flow of migrants from less-developed countries where the population comprises many different races and ethnic groups and where the migration pressure is greatest. It is ironic that the anti-globalists, wherever they are successful, effect the very opposite of what they mean to accomplish.

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For now, globalization is moving ahead. But economic ideas may change quickly and so may government policies. They changed radically during the late 1920s and early 1930s, turning interventionist and protectionist. In June 1930 the U.S. Government passed the Hawley-Smoot Tariff Act which raised U.S. tariffs significantly, cut off foreign markets, and caused mass unemployment, especially in export industries and agriculture. It transcended all other government follies in its baleful consequences. Once the United States had raised its tariffs, many other countries soon followed, raising tariffs and erecting other trade barriers. Protectionism became worldwide and the Great Depression descended over all.

The ideological and political situation today is similar to that of the late 1920s. With the longest economic boom drawing to a close, we must brace for a systemic financial shock and severe economic downturn. How will the federal government, Democrat or Republican, react to such a scenario? I am fearful that it will repeat the follies of the past and, stirred and prodded by the anti-globalists, strike at international trade.

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Hans F. Sennholz, professor emeritus at Grove City College, received a second PhD under the direction of Ludwig von Mises. Professor Sennholz has his own website, from which this essay is reprinted: Sennholz.com. You can send him MAIL.