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Redesigning the global economy

From where I’m standing right now, smack in the middle of the Canadian prairies, people may not be able to put their finger on the global financial system as the source of their difficulties. But they sure know something is wrong.

Here in Saskatchewan, the most agricultural of Canadian provinces and the heartland of the country’s vaunted wheat lands, it’s not been a good year. Too much rain in the Southeast. Too dry in the Southwest. And the price of grain has been drifting down all summer.

Today, on the road from Yellow Grass to Weyburn, local farmers are out in force protesting the perilous state of farm incomes and the decline of their once-vibrant rural communities. Frustrated tourists in camper vans and townspeople in sedans and station wagons creep along behind a convoy of farmers in tractors, 4x4s, grain haulers and pickup trucks. The queue of vehicles stretches back for several kilometres in the burning prairie sun.

These farmers are angry. The leaflet that they’re handing out as the traffic slows to a halt sets out the cause of their upset.

‘The reason we’re slowing down traffic today is to bring to the attention of the Government and the public that the family farm is disappearing. We’re in danger of losing our farms because we are not realizing enough out of crops to cover the costs of producing these commodities.’ The leaflet continues: ‘In the past number of years shipping costs and input costs have increased dramatically while the prices of our products have been steadily dropping.’

In fact, net farm incomes in Saskatchewan plummeted by over 40 per cent in 1998 and are still falling. Last year the price of canola (the oil-seed grain sometimes called rapeseed) was so low a grower would have had to produce 25-per-cent above average yields just to break even. In the face of this squeeze farmers have few options. Thousands simply throw in the towel: rows of combine harvesters, seeders and tractors sit in abandoned farm yards where they await the auctioneer’s gavel. Other farmers, those with more guile or luck, take another tack. Instead of getting out, they get bigger – in an attempt to lower unit costs and make the economics of farming work in their favour. Even those who work 2,000 hectares or more live modestly. Most of their capital is tied up in land and machinery and there’s precious little left after the bills are paid.

Still, thousands of the province’s farmers leave the land every year. The results of the rural exodus are startlingly visible across the countryside. Short-line railways have been abandoned. Hundreds of the distinctive brightly coloured grain elevators which once dotted the countryside have been demolished. Small communities are decaying as schools and shops close. A way of life is dying.

This is the human face of industrial agriculture and it’s a pattern which will worsen dramatically if the global economic system continues on its current course. Free trade in farm products – what the World Trade Organization (WTO) in the sanitized language of bureaucracy calls the ‘fair and market-oriented agriculture trading system’ – is one of the main goals of the WTO. If that goal is reached, if countries are forced to remove all protection for their domestic food producers, this would be an immense catastrophe. It would change irrevocably the ability of the global community to feed itself and of individual nations to control their own food security.

Small-farm experts like Peter Rossett warn that economic globalization is ‘the single gravest threat faced today by the world’s peoples and ecologies’. Rossett, of the California-based Institute for Food and Development Policy, says that further ‘liberalization’ of trade in agricultural products will mean ‘greater freedom for the big to drive out the small’. He adds that it will force people everywhere to depend on distant global markets with unpredictable price swings for their daily meals. This would prompt another mass exodus from rural areas, further the growth of cities and ‘could lead to the final triumph of inefficient and ecologically destructive monocultures over ecologically rational and sustainable farming practices’.^1^


Free-trade advocates ground their faith in the notion of economic efficiency. Success is measured not by healthy, living communities but by profitability: money supersedes all else. In the case of farming, subsidized grain from the US and the European Community is dumped on Third World countries, destroying internal markets for local foodstuffs and favouring the expansion of export crops like palm oil or pineapples. In today’s global market, competition means keeping costs low, and the easiest costs to control are wages. Open markets in farm products, as in shoes or computers, pit farmers and workers in different countries against each other in what globalization critics call ‘a race to the bottom’. We may end up with cheap bananas or a bargain-basement microwave. But at what price for society as a whole?

Since the North American Free Trade Agreement (NAFTA) smashed trade barriers between Canada, the US and Mexico the US has lost more than 250,000 jobs and it is estimated that Mexico has lost more than two million. Meanwhile, in Canada more than 100,000 public-sector jobs have been cut since 1994 and wages for those who still have them have been frozen for nearly a decade. All to please big investors who demand ‘fiscal prudence’ from governments – ie balance your budgets no matter what the cost, unless you want the rug pulled out from under your currency.

This ratcheting down of standards is all in aid of ‘comparative advantage’ in the marketplace. Slash education and healthcare spending? Pollute the air, water and land? Sell off state-owned enterprises? Merge corporations and cut jobs? It’s all to the good as long as it’s ‘economically efficient’. Many would argue that this is _the_ central principle on which the current economic model of ‘neo-liberalism’ is based.

Neo-liberalism adds a new twist to the old liberal faith in free trade of goods and services – an unflinching, dogmatic belief in the rights of private capital. It is a system with a Western (and particularly a US) world view which puts economic values and goals first and social goals a distant second. It calls for a world prised open to the free movement of both goods _and_ capital, though not labour. The International Monetary Fund (IMF), the WTO and the World Bank are the institutions which manage and enforce the laws of neo-liberalism. These three function as an unelected world state accountable to no-one except the bond traders in London and Tokyo and the mega-corporations that are the major beneficiaries of the emerging global system and whose resources dwarf those of most nation-states. Maybe Karl Marx was right after all when he said ‘modern state power is merely the executive committee charged with managing the affairs of the bourgeoisie’.

The system wasn’t meant to function that way. The roles of the IMF, the WTO (formerly GATT, or the General Agreement on Tariffs and Trade) and the World Bank have changed radically since they were first dreamed up at Bretton Woods, New Hampshire in July 1944. As World War Two drew to a close, 44 nations met in the New England resort village to erect a new framework for the post-war global economy. The economic frenzy of the 1920s had spiralled into worldwide depression in the 1930s and led to the collapse of an international exchange system based on the gold standard.

The aim of the Bretton Woods conference was to build a stable, co-operative international monetary system which would promote national sovereignty and prevent future financial crises. The main proposal was for a system of fixed exchange rates – floating rates were seen as inherently unstable and destructive of national development plans.

The three global institutions which emerged from the conference each had a distinct role (see The Bretton Woods Trio,below). But none of them had the authority which they have since arrogated to themselves. Their key job was to sort out temporary balance-of-payments problems; they had no control over the economic decisions of particular countries nor could they intervene in national policy. The original Bretton Woods agreements specifically sought to limit the movement of finance capital and contain it within national borders.

Britain’s delegate, John Maynard Keynes, was especially adamant about this. ‘Nothing is more certain,’ he wrote, ‘than that the movement of capital funds must be regulated.’ Otherwise the money would ‘shift with the speed of a magic carpet and these movements would have the effect of disorganizing all steady business’. So Article Vl of the IMF Articles of Agreement allows members ‘to exercise such controls as are necessary to regulate international capital movements’.

It was not to be. Sparked by the radical right-wing policies of Margaret Thatcher in the UK and Ronald Reagan in the US, free trade found a new audience and restraints on global investment were slowly unbuckled. With London and Wall Street leading the way, deregulation and the computer revolution combined to transform banking, finance and investment. The Bretton Woods institutions, essentially controlled by the G7 group of rich nations, were pulled into this frenzied rush to free markets, spreading strictly enforced structural-adjustment programmes across the Third World.

And what is structural adjustment but neo-liberalism with a different name, another way to shift wealth into the pockets of the already well-off? The UN Conference on Trade and Development (UNCTAD) has meticulously documented the transfer of wealth from wages to profits in dozens of countries over the past two decades. And not only in the South. Even in the US real wages (adjusted for inflation) have fallen and income equality has worsened since the Bretton Woods agreements fell apart. The top one per cent of Americans have doubled their share of the national wealth since the mid-1970s and now control 40 per cent of the total.

The result is that national governments, both North and South, have become subordinate to the dictates of supra-national organizations with apparently limitless power. As the Harvard economist Jeffrey Sachs has stated, the IMF now dictates economic policy for 1.4 billion people or nearly 60 per cent of the developing world – outside China and India which are not under its programmes.^2^ True believers in the neo-liberal agenda would prefer a pliable nation-state, one which supports them when it’s necessary and stands aside the rest of the time. ‘National governments can’t be trusted to be either rational or efficient,’ they crow. Never mind that we’re talking here about all national governments, including those that are _democratically elected_. The thoughts of an employee of the Lehman Bros investment firm after the downfall of the Social Democratic Government in Sweden a few years back are instructive. ‘The international financial markets,’ he quipped, ‘are on a religious crusade to roll back social democracy.’^3^

And not just social democracy. What is being challenged fundamentally is the ability of national governments to implement economic policy in the interests of their citizens. In this sense neo-liberalism is as great a threat to democracy and national sovereignty as we’ve seen this past century.

Nevertheless, there are signs that what is sometimes called the ‘Washington consensus’ is beginning to wear thin. Distinct cracks have emerged in the neo-liberal facade since the catastrophic economic meltdown in Asia two years ago and the subsequent crises in Russia, Brazil and parts of Latin America. More than 20 million people are estimated to have lost their jobs since the crisis first erupted. Social unrest and anger has been growing. In Indonesia it led to the downfall of the Suharto dictatorship. In Brazil thousands have protested against IMF-imposed spending cuts. Even G7 leaders like Tony Blair and Bill Clinton have made soothing noises about ‘taming speculators’ and rebuilding the ‘global financial architecture’.

But, more importantly, the crisis has invigorated a worldwide citizens’ movement whose insistent calls for change are attracting increasing numbers of supporters. And those in power are taking note. US Trade Representative Charlene Barshefsky recently said that ‘there is growing distrust’ of globalization in both the North and the South. ‘The single greatest threat’ to the global financial system, she admitted, is ‘the absence of public support’.

At *New Internationalist* we see this as a sign of hope. National governments are either too weak or too compromised in their dealings with the current global financial order. An international citizens’ movement is the only way to convince states to act in the interests of their people. There is now a growing popular movement to redesign the Bretton Woods architecture from the ground up. And that means more than just tinkering with the wiring. Instead, we need a radical rethink that will put humans in control, at the heart of the global economy. The goal should be a new international financial architecture that will restore the social vision of meaningful employment and human rights. One that will prejudice the local over the global. And one that will restore the ecological health and natural capital of our planet.

Tens of thousands of people in dozens of countries around the globe are now working on this project. Many of the ideas found in this issue are rooted in their inspiration and vision in what we feel will become the most critical debate of our time – at the start of this new millennium.

  1. *1* _The Multiple Functions and Benefits of Small Farm Agriculture in the Context of Global Trade Negotiations_, Peter Rossett, IFDP, September 1999.
  2. *2* ‘The IMF is a Power Unto Itself’, Jeffrey Sachs, _The Financial Times_, 11 December 1997.
  3. *3* ‘Can Finance Be Controlled?’ Paper by Manfred Bienefeld presented at the Economic Sovereignty in a Globalizing World Conference, Bangkok, Thailand, 24 March 1999.

The Bretton Woods Trio

The old international financial architecture explained.

The International Monetary Fund (IMF)

*HEADQUARTERS* Washington *MANAGING DIRECTOR* Michel Camdessus (France – due to resign Feb 2000) *GOALS* The IMF was set up to maintain currency stability and develop world trade by establishing a multilateral system of payments between countries based on fixed exchange rates and complete convertibility from one currency to another. All participating nations (originally 29, now 182) had to peg their exchange rates to gold or to the US dollar. The US in turn pegged the dollar to gold at the rate of $35 an ounce. Each member country had to pay a subscription to the Fund which was set aside to support members who ran into temporary balance-of-payments problems. The fixed-exchange-rate regime worked, with minor hiccoughs, until 1971 when the Americans torpedoed the system by allowing the dollar to float, leaving the IMF without its central role. The Fund is now the main advocate of the ‘Washington consensus’: a narrow view of the global economy based on market ‘efficiencies’ and the free flow of capital, goods and services – also known as the neo-liberal economic model. Nowadays, IMF assistance to countries in crisis is dependent on stringent reforms intended to advance this system.

The World Bank

*HEADQUARTERS* Washington *PRESIDENT* James Wolfensohn (Australia) *GOALS* The International Bank for Reconstruction and Development (better known as the World Bank) was founded as a means of reviving war-damaged European economies, a mandate that was later extended to developing nations. The Bank is funded by dues from members and by money borrowed in international markets. It makes loans to member nations at rates below those of commercial banks to finance development ‘infrastructure’ projects (power plants, roads, hydro dams) and to help countries ‘adjust’ their economies to globalization. Like the IMF, the Bank was an early and enthusiastic supporter of the neo-liberal agenda. The World Bank group also includes: the International Development Association (IDA) which makes ‘soft’ loans (no or very low interest) to the poorest nations; the International Finance Corporation (IFC) which tries to attract private-sector investment to Bank-approved projects; and the Multilateral Insurance Guarantee Agency (MIGA) which provides risk insurance to private investors in member countries.

World Trade Organization (WTO)

*HEADQUARTERS* Geneva *DIRECTOR GENERAL* Michael Moore (New Zealand) *GOALS* The WTO replaced the General Agreement on Tariffs and Trade (GATT) in 1995. GATT was one of the original Bretton Woods initiatives which established a set of rules to govern world trade. Its aim was to reduce national trade barriers and to stop the ‘beggar-thy-neighbour’ actions that had hobbled trade in the pre-World War Two period. Seven rounds of tariff reductions were negotiated under the GATT treaty; the final ‘Uruguay Round’ began in 1986. The WTO vastly expands the GATT’s mandate in new directions. It includes the GATT agreements, which mostly focus on trade in goods. But it folds in the new General Agreement on Trade in Services (GATS) which covers areas like telecommunications, banking and transport. There are also agreements covering trade-related intellectual property rights (TRIMS) and trade-related investment measures (TRIPS). These new treaties have far-reaching implications for environmental standards, public health, cultural diversity, food safety and many other areas. The old GATT had no legal teeth to enforce rules but the WTO can impose tough trade sanctions. The organization currently has 134 member countries.