As the Asian financial and currency crisis spun out of control, the world glimpsed the dark side of the new international economic order. It is highly efficient—linking global markets for goods and money—but dangerously unstable and asymmetrical.
For speculators, traders, bankers, and tycoons, there are unlimited opportunities to make money in the global economy. They buy and sell currencies, lend and invest in equity markets and real estate. For many of them, whatever the risks, it is a win win situation. They profit from their gains, and when the bubble bursts, as it did in Thailand and South Korea, the International Monetary Fund steps in with bail-outs. Anxious to restore stability and market confidence, the IMF allows local officials to collectivize private losses and cushions lenders from the consequences of their mistakes.
For the common people, the global system works quite differently when things go wrong. The IMF prescribes a deflationary program for the debtor country that forces up interest rates, cuts government spending, and boosts unemployment. Since the IMF typically insists that developing countries open capital markets and privatize industries, many in developing countries consider it a front for expanding Wall Street influence and American interference.
Of course, the economic internationalists who back the Clinton administration’s efforts to make the world safe for Wall Street and multinationals have a different interpretation. In times of economic crisis, they say, the world’s most powerful economy has special responsibilities for managing the global economic system. America has a duty, they assert, to act as both the lender and importer of last resort. The first obligation means making dollars available to underwrite the IMF, restore confidence in currencies, and avoid widespread defaults. The second—strict adherence to unilateral free trade—offers a way for debtors to export their way to financial recovery and to pay off debts.
In the current financial crisis, this means that the United States, with a huge current-account deficit of $166 billion, will shoulder most of the adjustment burden. Although Western Europe and Japan have current account surpluses totaling over $200 billion, only America is prepared to act as the locomotive for the global economy. When the subject of burden-sharing comes up, European and Japanese officials drag their feet. Citing Europe’s 18 million unemployed and the problems of expanding the European Union and adopting the euro currency, Jacques Santer, president of the European Commission, bluntly told Asia: “Everyone has to put his own house in order.”
Japan seems incapable of action. Despite extensive investment and trade ties with Southeast Asia, Japan has been slow to stimulate its economy in a way certain to boost imports from other Asian countries. Part of the problem is that both the Europeans and the Japanese know that America’s internationalist leadership will pay any price and accept any burden for the sake of sustaining the open economic order. Washington has done that since 1945.
It is no different in 1998. In February, Under Secretary of State Stuart Eizenstat explained our “special responsibilities” to the Senate Finance Committee. Referring to the “burdens” of American leadership, he warned that “leadership is not divisible. We cannot lead on critical security issues, or in opening markets, while abdicating the lead in the sometimes messy work of maintaining the international financial system.”
What does this “messy work” mean for ordinary Americans? The economic internationalists like to boast about individual Americans reaping vast short-term consumer benefits from cheaper imports. With low unemployment rates in the United States, they foresee little negative impact on American workers when imports flood the domestic market.
The test of this faith will come during the second half of 1998, as imports soar. Imports dislocated 10-12 million workers over the last quarter-century, and if history holds, many unskilled American workers will have little to cheer. Large numbers of them will pay for the Asian economic debacle with their own jobs.
An Economic Policy Institute study estimates that the Asian crisis will have “severe economic consequences for the United States.” It is likely to increase America’s merchandise trade deficit from nearly $200 billion in 1997 to $300 or $400 billion within 24 months. If so, the United States will lose from 700,000 to 1.5 million jobs in manufacturing and other tradable goods industries. The EPI study anticipates losing as many as 337,468 jobs in industrial machinery and equipment, 244,051 jobs in electronic and electrical equipment, and 196,387 positions in textiles and apparel.
From 30 years of intense import competition, America’s blue-collar workers know full well that they pay the costs of America’s global leadership. Since 1970, surging imports have ravaged one industrial sector after another, forcing lay-offs and plant closings while suppressing earnings. Wages and earnings have stagnated. While wage stagnation has many roots, most Americans believe—correctly, in my view—that cheap imports are a significant part of the problem.
For the professional class, which strongly espouses economic internationalism, globalization has had no apparent down side—yet. Professionals—like college professors—are generally insulated from the cold winds of global competition, or have the skills to adapt easily to new opportunities. The result is a more skewed pattern of income distribution, with the top fifth of families increasing their share of total income from 40.9 percent in 1970 to 46.5 percent in 1995. All other quintiles have experienced a decline in their shares, according to the U.S. Census Bureau.
No wonder so many middle-class Americans have grown disenchanted with the American political system, and cast presidential votes for Ross Perot, Jerry Brown, and Pat Buchanan in recent presidential elections. Public opinion polls show that a majority of Americans soured on free trade 30 years ago, at the end of the Kennedy Round. But the majority in Congress did not awaken to this reality until the NAFTA debate in 1993 made free trade votes radioactive.
Four years later, in the autumn of 1997, trade skeptics finally won a key round, and their bipartisan victory ricocheted around the New World Order. Congress declined to surrender more trade negotiating authority to the White House, voted down a proposal to extend NAFTA benefits to Caribbean Basin countries, rejected $3 billion in funding for the IMF, and refused to pay money supposedly due to the United Nations.
These setbacks did not discourage President Clinton and Wall Street. Having committed a half-century to creating the New World Order, economic internationalists had no disposition to abandon their agenda without more political combat. Corporate America’s response to Congress’s declaration of independence was an unusual démarche. It carried the signatures of two ex-Presidents (Jimmy Carter and Gerald Ford), two former Secretaries of State (Warren Christopher and Henry Kissinger), two ex-chairmen of the Federal Reserve, and 100 of the corporate elite. Buying two full pages in the Washington Post and the New York Times, they demanded “American leadership on key global issues.” They insisted that Congress fund the IMF with $18 billion, pay another $1 billion in back dues to the United Nations, impose no restrictions on the use of the Treasury’s $40 billion exchange stabilization fund, and approve new “fast track” trade negotiating authority to help President Clinton “maintain, strengthen, and expand market-opening initiatives.” In effect, this elite group sent a blunt message to grassroots democracy: don’t interfere with the global market; don’t challenge America’s global leadership responsibilities; don’t mess with the United Nations system.
Such bulldozer tactics may prevail in the short run. But protracted instability in Asia suggests that the financial crisis was neither an aberration nor an isolated incident. It is part of an emerging pattern of vulnerabilities that surfaced in the early 1980’s and intensified after the United States and Western Europe deregulated financial markets and embraced the New World Order.
Paradoxically, the IMF, the designated vehicle for rescue operations, has exacerbated problems with cookie-cutter solutions intended to hasten the spread of global financial markets and harmonize standards. The Asian crisis erupted in July 1997 after the IMF publicly counseled Thailand to allow some currency depreciation. This advice raised questions among debtors in Thailand about the government’s continuing commitment to a fixed exchange rate with the dollar. Not surprisingly, local banks and companies with dollar debts promptly began buying dollars, turning an orderly depreciation into a rout.
In November, when the IMF insisted on higher interest rates in Indonesia, a similar panic ensued. This set off a flight to safety that crippled the banking system and had disastrous social consequences—panic buying, hoarding, food and race riots, and strikes. Later, the IMF conceded its prescriptions had backfired and attempted to modify the adjustment program. From an historical perspective, it is ironic that the New World Economic Order, the brainchild of cerebral internationalist lawyers and economists, has proven so brittle and vulnerable. With the memory of earlier economic crises—the Great Depression and the economic nationalism that preceded World War II—on their minds, these internationalists set out during World War II to build the structure for a more stable international system. Under the United Nations’ flag, they created the Bretton Woods institutions (the International Monetary Fund and the World Bank) to address exchange rate and payment issues, and pressed for a World Trade Organization to facilitate trade liberalization.
The incremental internationalists argued that nations must cede some sovereignty in order to avoid the types of political and economic instability that ignited the last global war. To contain dysfunctional nationalism, they proposed to create a peaceful and prosperous world based on the twin foundations of free trade in money and goods, and mandatory dispute settlement mechanisms. These would bind nations together, making war impossible, while achieving the blessings of economic specialization and growth. Run by professional lawyers and economists, the New World Order would be a Utopia benefiting mankind and promoting peace, growth, and prosperity. Or so they thought.
As the Asian crisis unfolded over the past year, Karl Marx must have been laughing in his grave. Unlike the economic apologists for the New World Economic Order, he forecast long ago that the free trade panacea would produce chaos and the collapse of capitalism. Speaking in Brussels in 1848, he argued that the free trade system was “destructive.” “It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution.” Hoping to overthrow the capitalist system, Marx himself endorsed free trade. Of course, Marx’s rigid, dialectical analysis contained many flaws. Based on the European experience, it over-emphasized class antagonism between workers and employers. It neglected other sources of conflict such as race, ethnicity, and nationalism. Perspicacious as he was, Marx could not foresee that rapid advances in technology would so improve communications and transportation that global corporations would succeed in transforming and extending the capitalist system in a global economy.
Nonetheless, Marx—far better than most modern economic theorists—grasped the dark side of the free trade order. He understood that unregulated capitalism produced, along with great efficiency and dynamic growth, disruptions and dislocations. This volatility presented unique opportunities for revolutionaries like himself to mobilize the disaffected. In his own way, he thus anticipated some of the fundamental problems of an open global economy in which vast multinational corporations and speculators shift plants, jobs, and money from country to country to arbitrage differences in labor costs and interest rates. In the New World Economic Order, unskilled labor becomes a fungible, disposable commodity subject to the whims of corporate managers obsessed with the need to boost shareholder value and to satisfy huge investment funds. Stakeholders-workers, families, communities, and nations —have diminished standing.
Three significant lessons emerge from the Asian financial crisis. First, like the protectionists and isolationists of the interwar period who carried nationalism to excess, the incremental economic internationalists have created an unnecessary glut of globalism. Ordinary people do want the freedom to travel abroad, sample other cultures, and buy foreign goods, if they choose. But they have little desire to abandon national sovereignty, relinquish their own culture, integrate markets, and harmonize standards simply for the convenience of roofless traders, speculators, and multinational corporations. This is the message from Canada, where citizens want to preserve their distinctive culture from assault by American media giants; from Germany, where the public is skeptical of a single European currency; and from Southeast Asia, where leaders like Prime Minister Mahathir of Malaysia play to nationalistic sentiments in denouncing the disruptive actions of foreign speculators.
Even some international economists are coming to recognize that globalization has gone too far. Dani Rodrik of Harvard University notes that globalization can lead to social disintegration. He concedes that the efficiency benefits of further reductions in existing trade barriers are “unlikely to be large.” He admits that “the dirty little secret of international economics is that a tiny bit of protection reduces efficiency only a tiny bit.” Blaming a “Wall Street-Treasury complex” for pushing its agenda of unregulated capital mobility, Jagdish Bhagwati of Columbia University notes that this form of free trade is inherently crisis prone.
A second lesson is that the open global system is no Utopia. Along with beneficial gains from wider markets and greater efficiency come asymmetrical burdens and pernicious consequences. For well-paid and well-educated bureaucrats who work for the IMF and help manage the system, the global economy may seem a win-win situation. The global bureaucrats have considerable job security; the international lawyers prosper in good times and bad; the IMF endures from one crisis to the next, helping to preserve the system. But for common people vulnerable to boom-and-bust cycles, the economic gains come with substantial down-side losses and social disruption.
For the American people, the hidden burdens of global leadership are especially heavy. Losses include suppressed real economic growth and incomes, as well as social dislocations of workers, families, and communities. America’s persistent current- account deficit, which has exceeded $1.5 trillion in the last 15 years, is a future vulnerability. More dollars now circulate outside the United States than within. Over the long term, the glut of dollars may become a measure of weakness far more than a symbol of strength. It is possible to imagine a situation in the early 21st century when the overvalued dollar ignites a flight to safety. Investors may prefer to diversify their reserves with the new European currency, or a new Asian regional currency, or even scamper back to gold.
Finally, the Asian crisis offers a broader lesson regarding the relevance of the state in an era of market economics. True, some laissez-faire enthusiasts interpret recent events as demonstrating the triumph of free markets over Asian-style crony capitalism and regulated markets. Business Week has asserted that “Asians have confused corruption and cronyism with capitalism and ‘Asian values’ for too long.” It was time “for Asia to transform its autocratic, command-and-control societies into democratic, flexible, market-driven economies.” The Wall Street Journal offers a similar interpretation. But many Asians have second thoughts about the march to globalism. They note that the economies least touched by the conflagration—China and India—control capital flows. Their conclusion: governments can, and must, regulate capital markets. As a result, China is likely to move slowly in pressing its claim for membership in the World Trade Organization and in deregulating its economy to the whims of the global market. In Southeast Asia, countries talk of regional clearing arrangements to facilitate trade in local currencies rather than the dollar.
Looking back at the present period from the vantage point of another generation, the great irony may be a simple one. Economic internationalists, who relentlessly pressed for creation of an international economic order during the half-century after World War II, may awaken to discover that the real enemy of peace and prosperity was not a revival of 1930’s-style protectionism but an open, volatile, and unregulated system that invited the excesses of cowboy capitalism. Without effective national buffers, global markets became a transmission belt for disruptive forces. In effect, the economic internationalists met the enemy and discovered, as Pogo did, that “they is us.”