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Globalization Under Fire

August 20, 2000

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.

* * * * *

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.

-----------------

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.


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