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Global Economy

The Next Wave of Globalization Must Focus on Labor Rights

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One of the defining themes of the first half of this century will be the conflict between an increasingly globalized world of multinational corporations, borderless finance, worldwide supply chains and frontier-less consumer markets versus defendants of traditional national sovereignty fighting against the erosion of state power and the control that this had afforded to ordinary citizens. The supporters of Brexit and “America First” are heavily focused on this aspect of the globalization phenomenon[1]: that corporations can easily offshore services, shift production across borders, even move headquarters to exploit fiscal arbitrage opportunities is viewed as a failure of the modern state to safeguard the interests of its citizens. More importantly, their anger has a sound basis in fact: state powers have eroded in the past 30 years as more and more bilateral and multilateral trade treaties have limited the traditional toolbox available to governments seeking to insulate their citizen-workers from overseas competition.

Proponents of globalization will argue that free and expanded trade have made everyone wealthier; that shifts in production, though locally painful, have delivered tremendous benefits to consumers in the form of lower prices and greater variety: Walmart could not exist without China and the digital revolution could not have happened without Taiwan and South Korea. These arguments are grounded in orthodox economic theory that maintains that, with free trade, the overall gains always outweigh the overall losses. This theory is correct: but with emphasis on “overall”: it is a system-wide view, and while the overall system might be better off, free trade theory does little to describe distributional impacts and the fate of local losers.

Discussions about the pros and cons of globalization have been go on for decades in the academic sphere and one of the most contentious issues is simply agreeing on a definition of what is happening. When did globalization begin? Is it a modern phenomenon or has it been going on since the beginning of civilization? Is it primarily driven by economics or is it technological? Is it ideological and associated with liberalism or is it unrelated to political systems? “Globalization” will continue to defy simple explanation, and both supporters and opponents will continue to exploit its complex nature to further their own political agendas.

One conventional definition of “globalization” to that period after the Second World War when, as a reaction to the devastation of the Great Depression and the protectionism which had led to that devastating conflict, the industrialized nations negotiated the first in the series of nine general agreements on the reduction of tariffs (GATT). The first seven rounds were focused on tariff reductions in manufactured goods between the industrialized economies[2]; but in 1973 the Tokyo Round included 102 nations, including for the first time the markets of the developing world and expanding the scope of negotiations into non-tariff barriers. The eighth round, and the final one to be completed was the Uruguay Round: 123 nations took part and the agreement covered services, intellectual property rights, dispute settlement, textiles and agricultural products. It led to the World Trade Organization which went beyond the preceding GATT agreements in creating a new permanent structure to arbitrate and enforce the existing trade regime. The WTO is the archfiend of the anti-globalist play.

The current Doha round of trade negotiations has been mired in a rut for almost two decades. Scheduled to kick-off in 1999, the start of discussions was continually put off by anti-globalization protests (“The Battle in Seattle”) and then by the September 11 terrorist attack on New York. Global trade suddenly fell on the list of US priorities, but the initial round of ministerial meetings was nonetheless held in November 2001. Since then, there have been at least nine major trade discussions linked to Doha in different cities around the world[3], but the ambitious agenda has foundered on the still intractable problem of agricultural subsidies and patent protections – specifically those on medicines critical for the developing world. So far, there seems little appetite to push Doha forward and instead many nations have focused on regional and bilateral Free Trade Agreements (FTAs). But even these trade deals are now in question with a protectionist White House seeking ways to roll-back US “concessions” to trading partners.

Trade agreements are not the only drivers of globalization – and some would argue that they are not even the primary ones. Technology has had a tremendous impact on both the economic and cultural dimensions, with both communications and transportation costs falling dramatically and permitting a complete transformation in how businesses are organized. As transport became cheaper, the possibilities of leveraging labor cost advantages in overseas markets increased, permitting the creation of regional and global supply chains. Similarly, the vast increase in data storage and data bandwidth knocked the bottom out of telecommunications prices, eliminating the need to have everyone in the same location in order to manage business processes or efficiently organize human capital. This not only led to low-end value displacement, such as call center services, but also high-end value added activities like research and development.

These technological developments are justifiably considered to be the Third Industrial Revolution: not only has it created new industries (e.g. computing, video games) and destroyed or is destroying others (e.g. print media, video rentals), it has transformed every aspect of business organization. Businesses experienced large sustained gains in productivity and efficiency which for the first time led to the substitution of large numbers of white collar workers through automation; while the advances in robotics and artificial intelligence that the continuing growth in processing power have delivered are set to disrupt more jobs across a wide variety of roles: manufacturing, but also service jobs from the low- to high-value added range. Beyond the economic impact of these technologies, they have also had a profound cultural impact, which is exacerbating other tensions.

Global politics have also played a major role in expanding the reach of globalizing technologies: back in 1980, the world economy was fragmented, with only the Americas, Western Europe and a fringe of East Asia truly integrated into it. Then came what I call “the Triumph of Capitalism”: the collapse of the Soviet Union and the end of communism as the alternative economic paradigm. With the integration of the former Soviet bloc into the global economy and the simultaneous accession of China into the WTO framework, approximately 2 billion people became consumers and producers for global capitalism. Yet one of the main characteristics of these new joiners was that their populations were too poor to absorb large quantities of consumer goods from the advanced industrial nations; and all have been eager to grow through exports. They shared a very high rate of savings, especially in Asia, with a fervent desire to invest in export-oriented industries and to suppress internal demand in order to preserve a favorable balance of trade. And their numbers are growing, because almost all human population growth is concentrated in the poorest countries in the world, an unprecedented demographic challenge which will have huge implications for immigration policy and which no one is prepared to deal with.

These revolutions in technology, demographics and global markets have provided clear benefits. Across the world, developing regions have gained tremendously from increased market access for their goods, better access to international finance and investment, and cheaper goods for their citizens. In every human quality indicator, there have been notable improvements: infant mortality, average life expectancy, poverty rates, literacy rates, the list goes on. The gains have not been equal in all regions, with East Asia benefiting the most and Sub-Saharan Africa benefiting the least, but all developing regions have shown improvements. Furthermore, within regions, the gains have not been evenly distributed across all economic actors: consumers and, to a lesser extent, workers in those lucky markets able to attract globally mobile capital have benefited, but workers in advanced industrial economies less so. “Globalization” must nevertheless be considered a success unprecedented in human history.

What globalization has not brought is the desired goal of convergence. Despite the laudable improvement in living conditions among the world’s poorest nations, there is no indication that these nations are becoming richer relative to the rich countries. If anything, the opposite appears to be true: the richest nations continue to gain wealth more quickly than the poorest nations. There are a few notable exceptions, all of them in East Asia: China, Taiwan, South Korea and Singapore. Otherwise, no other developing nations have yet been lifted out of the “middle income trap”[4]. Not only has income inequality increased across nations, it has increased within nations, to the point that it has again become a major source of political and social instability in advanced economies.

The explosive increase in income inequality is attributable to the fact that the key beneficiary to the current wave and form of globalization has been capital and its possessors: its free flow, as well as that of the goods and services it produces across markets, has mostly benefited those able to take advantage of interregional differences to reduce costs, increase margins and exploit “gaps” in the regulatory and fiscal regimes of developing states. The fact that this is so is evidenced by the incredible surge in cross-border financial flows: while total exports plus imports have increased by a substantial 55% since 1980, these gains pale beside measures of global finance like cross-border banking claims (+175%), stock of inward foreign direct investment (+470%) and daily turnover of foreign currency exchanges (+1000%).

Like in previous industrial revolutions, the “winners” in the new economy have managed to accrue disproportionate benefits[5] to themselves. Rather than seeing productivity gains passed on to consumers and workers in the form of lower prices and higher wages, firms have been able to capture a far greater percentage of these as profits. In fact, in the United States, nearly 100% of productivity gains since the 1990’s have been retained by corporations as worker’s real compensation has stagnated.

This is not a new phenomenon. Each previous industrial revolution has been characterized by massive and fundamental changes in the productive economy of the nations which have adopted it. The impact of these changes created clear winners and losers among economic actors and classes, leading to a period of widening income inequality and social dislocation as people and institutions struggled to adapt to the new patterns of economic life. As the technologies matured and were adopted more widely, change became evolutionary rather than revolutionary; and there was an inevitable reaction by marginalized actors to claim a greater share of the pie[6]. There is no doubt that the digital revolution would eventually follow the same path, except that we are already on the cusp of the Fourth Industrial Revolution[7] and it appears that change might be coming faster than the capacity of our societies and political systems to adapt.

Arbitrage opportunities exist because so many aspects of a properly functioning market economy remain stubbornly localized: labor rights, environmental standards, regulatory scrutiny, labor force mobility and women’s rights[8]. We have a global financial system, but no global financial regulator: a necessary precursor to financial stability, which is why every state has a central bank. But in a world where so many new states are small and subject to the pressure that a multinational bank or corporation can bring to bear; and where new states struggle to meet and maintain international regulatory standards, it is naïve to believe that multinational central bank coordination is really an effective counter against dangerous financial practices. The 2008-2009 Financial Crisis and the Great Recession that followed ought to have convinced even die-hard sceptics of this fact.

The current debate being promoted by anti-globalists, headed by Donald Trump, is that free trade is generally bad; and that the specific trade deals negotiated by the United States are even worse. Mr. Trump’s approach to the protection of US workers is to renegotiate or renege on existing trade deals – like NAFTA and the South Korean FTA – while scuttling any future deals that might allow foreigners to “take advantage” of America. Supporters of this view focus on the cost advantage enjoyed by developing nations over the United States and other advanced economies: for example, in 2012 the nominal mean hourly compensation in manufacturing of a Mexican worker was $6.36 compared to $35.67 for a US worker[9], which would seem to be an insurmountable gulf. However, US workers are approximately 2.7x more productive ($19 vs. $52 of GDP per hour worked)[10]. That means that in order to produce as much as one US worker in one hour, firms must pay Mexican workers $17.17 – still a substantial gap, but half as much rather than one sixth as much.

The problem with a simple comparison of costs is that it ignores the substantial cost imposed by regulation. While this may seem a completely negative and stifling cost for business, there are very sound reasons we have it: so that 12-year old children are not forced to work in sweatshops; so that workers do not face 14 hour days, 6 days a week; so that workers don’t suffer workplace fatalities reminiscent of a warzone; and so the rest of us can enjoy breathable air and drinkable water. Regulation is necessary – though how much is open to debate – but it does impose a real cost on firms and disproportionately on small firms. The Office of Advocacy of the Small Business Administration identified four major categories of regulations impacting businesses:

  1. Economic Regulations: things like import restrictions, antitrust policies, telecommunications policies, product safety laws….
  2. Environmental Regulations: Clean air, clean water, rivers that don’t spontaneously combust, no asbestos in the children’s toys, etc…
  3. Tax Regulations: the ever growing complexity of the Federal tax code makes no economic sense, except as a gift to tax preparation companies, private wealth managers, and those with enough income and wealth to devote time and resources to exploiting the multitudinous loopholes…
  4. Occupational Safety, Health and Homeland Security: things like worker safety and health conditions (think meat packers) as well as a raft of Transportation Safety regulations imposed in the wake of 9/11.

Taken together, these regulations impose a substantial cost on American enterprises which undermine their export competitiveness. For medium and large firms, the cost associated with complying with environmental and OSHH regulations can be from 15% to 20% of the total regulatory cost, while for small firms it can be as high as 40% of the total.

One solution would be to reduce the regulatory burden on American firms in an effort to increase competitiveness. There are serious arguments against this: there are already directive in place for the various federal agencies in charge of regulations to conduct periodic cost-benefit analyses to determine which regulations are particularly onerous and ineffective and should be removed; there is also the justifiable fear of sparking a race to the bottom where governments iteratively undermine standards and environmental quality to the point that we are all impoverished and breathing pea soup, like in China.

The alternative is to “level the playing field” – we need to negotiate and enforce international labor and environmental standards that not only provide a level of decency for all workers around the world, but also take away the regulatory gaps that allow multinational firms to exploit weak standards and labor rights rather than focusing on other factors like productivity, quality and workforce improvement. Unlike the world of trade and finance, which protect themselves ferociously through the WTO arbitration process and the controversial ISDS clauses that are proliferating in international trade treaties, there is currently no international regime with enforcement mechanisms to investigate and enforce adherence to such standards.

The history of labor standards regulation has been played out within national borders, for the most part. Each nation has developed its own set of standards based on its history of labor-capital conflict, legislation and jurisprudence. The organic growth of labor protections was thus based on the history and traditions of guilds, craft unions and other forms of labor associations; on the charisma of particular labor leaders or socialist politicians; and on the proximity or perceived proximity of the “red menace” of communism after 1917. The result was a complete hodge-podge of labor rights, standards and protections that – while bearing some similarity to each other – were not founded on a common set of accepted standards.

In 1998, the International Labor Organization (ILO) made an initial effort at ordering this confusion. They sponsored an international labor conference that adopted a “Declaration on Fundamental Principles and Rights at Work”, which established a baseline of rights that all 187 member states would have to adhere to. Since then, the ILO has worked to expand acceptance of its core labor “conventions” with varied success. There are a variety of obstacles to overcome: inconsistencies in the self-reported data; varying sizes of the informal economy where measurement of labor standards is difficult; hostility from private sector interests and the public sector officials who represent them; and a system of voluntary compliance. The reality is that international labor standards are merely guidelines; they are no more enforceable and are as frequently violated as international standards of press freedom or human rights.

There is a strong argument that this is how it should be: that states need “flexibility” in order to implement labor standards that are appropriate for their level of development. Supports of weak labor laws argue that enforceable international standards only serves to erode domestic policy and the state’s role in shaping this legislation. This is a curious argument, since typically it is the same people who have no problem with pushing for extremely invasive investor state dispute settlement provisions in trade treaties: a set of protections which completely circumvent the national legislative and judicial systems of signatories and allow private individuals to sue national governments for any legislation or judgement that they feel unfairly prejudices their investments. ISDS provisions do not provide states with flexibility and they certainly don’t respect domestic policy and the state’s role in it; yet they are a central plank of the newest wave of bilateral and multilateral free trade agreements under negotiation.

Which is why the next round of globalization talks needs to focus on the establishment of measurable and enforceable labor and environmental standards. A more level regulatory playing field will not only benefit the workers and exports of advanced economies; it will also deliver a host of benefits to developing economies. As labor standards improve and living standards rise, more and more people will enter the global middle class, increasing the size of internal markets and domestic consumption. This will help rebalance the politically sensitive focus of industrializing nations on an export-only development model. Better living conditions, increased female labor force participation and greater worker security will also promote lower fertility rates, which will begin to curb the demographic challenge the world faces. If we want to maintain and build upon the great success of the first waves of globalization, we must now focus on rebalancing the gains of trade. This is the best way to fight the rising tide of populist anger and protectionism in advanced economies and to gain the middle and lower class political support that further trade agreements will require.


Sources and Notes

[1] Immigration, is intimately linked with the economic aspect. For a more detailed analysis of the immigration issue, please see my article: “A Hard Look at Immigration”

[2] The 1947 Geneva Round include 23 nations of the western world; the Annecy and Torquay Rounds (1949 and 1950) included 34 nations, while the Kennedy Round in 1964 had risen to 48 nations.

[3] Doha (2001), Cancun (2003), Geneva (2004), Paris (2005), Hong Kong (2005), Geneva (2006), Potsdam (2007), Geneva (2008), Nairobi (2015).

[4] The “middle income trap” describes an economy that has successfully industrialized and lifted itself out of the low income group of developing nations. However, this increase in wealth has led to higher wages, which undermines their export competitiveness while not yet permitting them to invest the large amounts in R&D and innovation that are essential in the high-value added manufacturing sector. Brazil, South Africa and Mexico are examples of nations that have been stuck for decades in the “middle income trap”. China is in this range, but seems poised to break out of it due to her massive investments in education and technology.

[5] Disproportionate in relation to the previous distribution of income during the “steady state” period.

[6] All too often, these were bloody events: think of the 1848 revolution and the repression of the same; of the strike busting and murder of workers and scabs throughout the industrialized West up to the Second World War; as well as the Russian Revolution and other violent proletarian/agrarian movements.

[7] Nanotechnology, bio-engineering and genetics, fusion energy, artificial intelligence, and advances in exotic materials.

[8] Female labor force participation, through an expansion of women’s rights, has played a major role in the advanced Western economies and should be a focus of a third round of global negotiations.

[9] Bureau of Labor Statistics

[10] OECD

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