Crashing the Party of Davos

Globalization works for the bosses. Can we make it work for workers too?

By Jeff Faux

Tagged EconomicsGlobalization

All markets have a politics, reflecting conflict among economic interests over the rules and policies that determine–as the American political scientist Harold Lasswell once famously put it–”who gets what.” And when markets expand, so do their politics. Thus, in the nineteenth century, driven by improvements in transportation and communication technologies, commerce spilled across state borders beyond the capacity of states to regulate them. The power of large corporations went unchecked, generating bitter and violent class conflict. Fortunately, the democratic framework of the U.S. Constitution permitted popular challenges to the excessive concentration of wealth and influence. Ultimately, through the Progressive and New Deal eras, the United States developed a national politics that imposed a social contract–a New Deal that provided workers, as well as business, with enforceable economic rights. Over time, the contract was extended to racial minorities, women, and others who had been previously excluded from expanding economic opportunities.

Today, markets have expanded again, beyond national borders–and beyond the capacity of the world’s nation-based political institutions to manage them. As a result, the global economy is sputtering. Witness the collapse of the Doha Round of trade negotiations, popular hostility to the “Washington Consensus” of development in Latin America and other underdeveloped regions, and the spread of social tensions over immigration and foreign-wage competition in both rich and poor countries. The current pattern of globalization is undercut- ting the social contract that national governments, in developed and in many less-developed countries, had imposed over the last century in order to stabilize their economies and protect their citizens from laissez-faire’s brutal insecurities. Even as the world grows more tightly knit, it still lacks a common politics for managing its integration.

Just as bringing stability to the American economy in the last century required stronger national institutions, bringing social balance to the global economy in this century will require stronger global political institutions to regulate global markets. Already, many such institutions exist–such as the World Bank, World Trade Organization (WTO), and International Monetary Fund (IMF). But in make-up and in culture, they are dominated by those who own and manage large concentrations of internationally mobile capital, whose goal is to escape market regulation and break free of obligations to stakeholders other than the global corporate investor. In the politics of the global market, these institutions are dominated by a single party: Call it the Party of Davos, after the Swiss resort where several thousand global corporate CEOs, government leaders, and their assorted clientele of journalists, academics, and an occasional nongovernmental organization (NGO) or trade union head have the equivalent of their party convention every winter.

We are therefore faced with a catch-22: a global economy that is both prosperous and fair requires strong global institutions, but given the lack of a constitutional framework for democracy on that scale, strengthening existing global institutions is unlikely to generate a better distribution of global income and wealth. Indeed, under the present structure, as the world’s markets become more integrated, world inequality grows.

This fundamental contradiction cannot be resolved by unruly demonstrators at the entrance to the World Bank or the IMF. Nor will it be resolved in polite public policy seminars with proposals for globalization’s winners to share their gains with the losers; that is not what winners voluntarily do. Serious reform will only come from the development of a cross-border politics that challenges the cross-border power of the Party of Davos. Pulling together a worldwide movement is a utopian goal, but doing this in a region-by-region process is not. In fact, American progressives could begin the process right here in North America by transforming the North American Free Trade Agreement (NAFTA) into an instrument for continent-wide social progress. A redesigned NAFTA, in turn, could serve as a critical building block in constructing a global economy that is more equitable, more stable, and more democratic.

The Politics of Expanding Markets

The politics of the New Deal and social democratic analogues across the world rested on a new understanding of how national economies worked. The British economist John Maynard Keynes and his American followers showed that in a modern economy the worker/consumer was as important an actor in the market drama as the investor/manager. The government therefore had an obligation to pump income into the economy during downturns to assure that workerscontinued to buy the products they had made. Although many of America’s business elites resisted the egalitarian implications of the New Deal, the smartest of them understood that Franklin Roosevelt and Keynes had saved them from much worse, namely, Marx’s prediction of inevitable class warfare. When Dwight Eisenhower’s nominee for secretary of defense, Charlie Wilson, said, “What’s good for General Motors is good for America,” liberals snickered, but the country–and the United Auto Workers–thought he was right. By 1971, Richard Nixon could claim, with some justification, that “we are all Keynesians now.”

Shortly afterward, the slow fusion of the U.S. economy with the rest
of the world accelerated. Between 1969 and 1979, the share of the U.S.
Gross Domestic Product (GDP) represented by foreign trade rose from 10
to almost 20 percent, and the trade balance shifted from a surplus to
deficit. By 2005, trade was 26 percent of our economy, and the
relentlessly rising trade deficit was at 6 per- cent of our GDP. Along
the way, the American industrial base–from apparel to steel to
high-technology products–has been dramatically eroded, wages have
stagnated, and the economic security of the typical American worker has
been systematically undercut. Economists will always debate the exact
numbers, and globalization is not the only factor driving the erosion
of American economic security, but by now few can doubt that it is a
major cause.

Keynes–whose ideas inspired the IMF and what eventually became the
WTO–was no protectionist. Yet he cautioned nations to limit their
foreign trade, because he believed it weakened a democratic
government’s ability to maintain the economic growth needed to keep
social peace. For example, if a large share of consumer demand went for
imports, government deficit spending to overcome a recession would
stimulate production in the exporting country rather than at home. And
where growth depended heavily on exports, reducing wages to become more
competitive would take priority over raising incomes to stimulate
domestic consumption.

He was right to worry. Whatever else one might want to argue about
the last 25 years of globalization, there is little question that it
has undermined the New Deal–era social contract that rests on the
mutual dependence of workers and employers. As companies become global,
they increasingly find their workers and customers in other nations,
loosening the economic bonds of shared self-interest that previously
connected them with their fellow citizens. Indeed, for the last two
decades, CEOs of major “American” multinationals have openly
acknowledged that their future no longer depends on the prosperity of
their fellow nationals. In the 1980s, Carl Gerstacker, chairman of Dow
Chemical, said that he yearned to put his headquarters on an island
where it would be “beholden to no nation or society ” rather than being
governed in prime by the laws of the United States.” A decade later,
Alex Trotman, chairman of Ford Motor Company, observed bluntly: “Ford
isn’t even an American company, strictly speaking. We’re global. We’re
investing all over the world ” Our managers are multinational. We teach
them to think and act globally.”

As American industry went global, the political lines over trade and
globalization began to be redrawn. In the past, workers and employers
in the same industry were, for example, on the same side on the
question of raising or lowering tariffs, depending on the industry’s
competitiveness. After World War II, which had eliminated much of
America’s industrial competition, both capital and labor became
champions of free trade. But as American companies began to transform
themselves into global corporations, free trade agreements have become
a way for them to shift production to places where labor was cheap. The
1993 debate over NAFTA, the first major political battle of the new
global economy, reflected this new division: American workers on one
side, investors and executives on the other.

A similar division over NAFTA occurred in Mexico and Canada, whose
working classes also anticipated the loss of bargaining power. Their
fears were justified. A decade later, in all three nations, the gap
between what workers produced and what they were paid grew
dramatically. In the United States, labor productivity in manufacturing
rose 80 percent, while real wages rose only 6 percent. In Mexico,
productivity rose 68 percent, while real wages rose 2 percent. In
Canada, the numbers are 34 and 3 percent, respectively. As Jorge
Casta“eda, former foreign minister of Mexico, observed at the time,
NAFTA was “an agreement for the rich and powerful in the United States,
Mexico, and Canada, an agreement effectively excluding ordinary people
in all three societies.” It is not surprising that the rich and
powerful in all three nations gained most of the benefits while the
“ordinary people” paid most of the costs. The relentless tide of
Mexicans desperately crossing the border for work–a dozen years after
NAFTA’s promoters predicted substantially reduced illegal
immigration–is just one sign of the agreement’s failure to deliver on
its promises.

The fallout from NAFTA echoes the current pattern of globalization
generally. As capital becomes both more internationally mobile and more
protected, its bargaining power over domestic labor is strengthened.
Offshore outsourcing expands, and the threat to outsource becomes more
credible, forcing workers to agree to work for less and local
governments to weaken regulation. The result is rising global
inequality of income and wealth–and the inequality in political power
that follows.

The Garbled Language of Globalization

As globalization relentlessly reorders American
economic and political life, the policy debate remains mired in an
obsolete paradigm that clouds our under- standing of what is happening.
On the one hand, pundits like the New York Times’ Thomas Friedman tell
us that the global economy has obliterated borders, making government
irrelevant. On the other hand, the discussion of policy remains trapped
in the language that defines globalization as competition among
sovereign Westphalian nation-states, in which the conflicting interest
of domestic politics stops at the water’s edge. Thus, for example,
politicians and journalists speak of economic competition between
“China” and “America” as national rivalries. Yet the business news
channels are replete with celebratory segments on the profitable
integration of U.S. and Chinese firms. Indeed, the “China threat” is
actually a business partnership between local commissars who provide
the cheap labor and American and other transnational capitalists who
provide the technology and financing. Similarly, while analysts frame
the discussion of world poverty in terms of rich and poor countries,
they ignore the reality that there are poor people in rich countries
and rich people in poor countries, leading to foreign-aid programs that
are merely an inefficient transfer of resources from the former to the

Most confusing and damaging to the debate is the wide use of “free
trade” as a synonym for globalization. Leaving aside the theoretical
issues, simple liberalized trade among sovereign nations does not
describe how the world’s economy is evolving. The process is rather
global economic integration, which aims at imposing a universal set of
rules and policies on all nations. As Renato Ruggiero, the first
director-general of the WTO, observed, “We are no longer writing the
rules of interaction among separate national economies. We are writing
the constitution of a single global economy.”

That an integrated global economy should be regulated by universal
rules is obvious. The problem is that the “constitution”–which includes
the policies of the international financial agencies as well as
so-called trade agreements–protects and supports just one category of
citizen, the global corporate investor. The interests of other
stakeholders–workers, communities, civil society, and others whose
hard-fought rights were finally established in democratic national
societies–have been excluded. Even among sophisticated policy
intellectuals, the political implications of economic integration are
ignored by stuffing them safely back into the nation-state, whose
citizens are assumed to have suffered no loss of power. One of many
examples is economist Jagdish Bhagwati, a prominent proponent of
global laissez-faire economics, who writes that “moral suasion,”
“democratic politics,” and “judicial activism” at the national level
are sufficient safeguards for labor, human rights, and environmental
protections. Although goods and capital are acknowledged to flow and
commingle in borderless markets, the class conflicts that markets
inevitably generate are not. Yet these are global political conflicts
that befit a global economy. By confining them to the nation-state box,
the popular cross-border politics needed to countervail the
cross-border power of private wealth is suppressed.

Thus a disconnect emerges between the theoretical notion of
“national interest” and its actual promotion on the international
stage. The conventional wisdom implicitly assumes that while tactics
and style may differ according to which party is in power, a nation’s
representatives to the IMF or the WTO are assumed to be furthering the
“national interest,” a phrase frequently referenced but rarely
specified. One of the few foreign policy commentators to address, even
in passing, the question of how to define the national interest is
Harvard’s Joseph Nye, Jr. As he wrote in The Paradox of American Power,
“In a democracy, the national interest is simply what citizens, after
proper deliberation, say it is ” If the American people think that
our long-term shared interests include certain values and their
promotion abroad, then they become part of the national interest.
Leaders and experts may point out the costs of indulging certain
values, but if an informed public disagrees, experts cannot deny the
legitimacy of their opinion.”

The description of U.S. foreign policy being driven by the
citizenry, with leaders and experts passively “pointing out the costs,”
would be suspect under any circumstance. The Iraq war, to cite one
obvious example, was hardly initiated by a spontaneous grass-roots
movement in America demanding Saddam Hussein’s head. But in the context
of the global economy, where cosmopolitan elites have more in common
with peers in other countries than they do with people who simply share
their nationality, it is stunningly na‘ve.

A more accurate description of how the new world economy is governed
comes from Anne-Marie Slaughter, dean of Princeton’s Woodrow Wilson
School of International Affairs, who in her book The New World Order
describes informal networks of global bureaucrats and business-people
that bypass traditional governments. According to Slaughter, this
“disaggregated” state has the speed and flexibility to “perform many of
the functions of a world government–legislation, administration, and
adjudication–without the form.” The most advanced part of this virtual
state is the networks of people who run, manage, and regulate
international finance. Political scientist Judith Teichman, a less
enthusiastic analyst of cross-border networks, quotes a senior IMF
official who manages its Western Hemisphere portfolio: “We are all the
same–people who come and go through the [World] Bank, the
[International Monetary] Fund, and Finance Ministries and Central Banks
of Latin American countries. We all studied at the same universities;
we all attend the same seminars, conferences ” we all know each other
very well. We keep in touch with each other on a daily basis. There are
some differences, such as between those who studied at Harvard and
those who studied at the University of Chicago, but these are minor

Slaughter, for her part, believes these networks bring
accountability back to the people. “We need more [global] government,”
she writes, “but we don’t want the centralization of decision-making
and the coercive authority so far from the people actually to be
governed.” But, far from solving the globalization paradox, Slaughter’s
networks are likely to transfer more power from ordinary people to the
hands of international technocrats whose career paths, like those of
their domestic counterparts, depend on those with financial–and
therefore political–influence. The WTO, one of its officials told the
Financial Times in a moment of candor, “is the place where governments
collude in private against their domestic pressure groups.” The comment
reveals both contempt for democracy and disingenuousness about
political influence. In fact, the WTO’s work is suffused with the
interests of domestic pressure groups with global business interests.
Corporate representatives dominate its many advisory committees and
working groups; its dispute settlement panels are chosen from pools of
experts who regularly work for transnational corporations; and business
even directly pays for the organization’s expenses. In the last WTO
ministerial meeting held in America–scene of the famous “Battle of
Seattle” in 1999–business corporations, for instance, paid $250,000
each for special access to the trade ministers. The Office of the U.S.
Trade Representative is a well known revolving door of lawyers and
trade specialists (such as former Trade Representative Robert Zoellick,
now working at Goldman Sachs) whose next move is often to those
transnational corporate sector, where success comes to those who “think
and act globally”–and do so on behalf of those who are benefiting from
this global system.

The Party of Davos is no monolith. It has its factions, competing
ambitions, and interests. And because the world’s economies, while
globalizing, are far from being completely globalized, important
concentrations of economic power are still rooted in national
economies. Corporations in China and Russia, for example, are constrained by a state apparatus that is decidedly nationalist. But it is
only a matter of time before these national connections erode, too;
meanwhile, the concentrations of private capital that have their roots
in Europe, the Americas, and large parts of Asia have a shared agenda
in weakening the power of national governments to restrict the freedom
of capital in both rich and poor countries. As one prominent member of
the Party of Davos blurted out at a conference at the Council of
Foreign Relations, “When we negotiate economic agreements with these
poorer countries, we are negotiating with people from the same class.
That is, people whose interests are like ours.”

There is no countervailing force at the level of global governance
to balance the Party of Davos’s power. The International Labor
Organization (ILO), which is often erroneously thought of as the
worker’s equivalent of the WTO or the IMF, is really a tripartite
structure in which labor, government, and business have equal voting
strength. More importantly, unlike the IMF, which has money, and the
WTO, which has trade sanctions, the ILO has no leverage over any nation
or company. A global capitalist class, of course, implies a global
working class. In response to the Party of Davos, international
cooperation among trade unionists on issues of collective bargaining
and organizing in specific industries is growing. But, by and large,
unions are too involved in fighting for survival in their national
economies to mount a global challenge to corporate power. And what
might be called (after the Brazilian city where it holds a
counter-Davos summit) the “Party of Porto Alegre”–the loose network of
dissenters and protestors that the media calls the “anti-globalization
forces,” seen protesting at IMF meetings–is much more bark than bite.
It is too diverse, disorganized, and disdainful of power to get much
beyond demonstrations that make the nightly news but little else.

Next Steps for NAFTA

How then to reshape the politics–and power
relationships–of the global economy? A social contract did not come to
an expanded American economy until American workers became conscious of
their common interests. Similarly, one will come to the global economy
only when working families see that in a global labor market, they have
more in common with working families in other countries than they do
with those on the other side of the bargaining table. Yet in a world of
6.5 billion people in almost 200 separate countries–representing wide
differences in culture, living standards, and political consciousness–the prospect of seeing, to use an old phrase, “workers of the
world unite” enough to humanize the relentlessly interconnecting
markets seems hopelessly utopian. But if we begin to think of
establishing a global social contract as a step-by-step process, in
which political solidarity is built first among neighboring societies,
region by region, rather than some grand, all-embracing design, there
may yet be light at the end of this dark global tunnel.

Unlike global elites, who have easy access to global culture but
little connection to their hometowns, ordinary citizens in countries in
the same region tend to have more in common with one another than they
do with people half a world away. Culture and language are closer, and
trading relations are usually the strongest and most sustainable. True,
wars historically have been fought mostly among neighbors, but the
European Union (EU) demonstrates that at least among the more advanced
societies, the future need not necessarily be prisoner of such a past.
Moreover, regional integration would seem to be a much more promising
path toward the inevitable trial-and-error involved in building
competent and accountable institutions to manage cross-border economic
integration. American states were, and to some extent still are,
“laboratories of democracy” for the national government. In the same
way, the process of creating regional institutions that match expanding
regional markets might well produce “laboratories” for the construction
of a social contract that might eventually stretch to the range of the
global economy.

For all its slowness and the pain of its “two steps forward, one
step backward” process, the effort to build a “Social Europe” to match
the expanded European market offers the best real-world example of the
development of a politics around a cross-border social contract among
historically splintered neighbors. The future shape of Europe is
contested political terrain, and the conflicts between workers and
bosses, regulators and deregulators, and Europeanists and nationalists
reflect the inevitably messy way in which democracy is addressing this
historic experiment. The fragile democracies of the Mercosur countries
in the southern cone of South America are beginning a similar project
of economic integration that, if it continues, will inevitably involve
some political integration as well. A germ of the same idea also lies
in the economic collaboration among Southeast Asian nations.

This brings us back to the question of North America. Although NAFTA
failed to deliver on its promises, it succeeded in integrating the
three economies to the point of no return. Too many economic channels
have been redirected north-south to reverse the course of economic
integration. Every day, along with commingling labor markets,
intracontinental connections in finance, marketing, and production are
being hardwired for a seamless North American economy. We may not like
NAFTA, but there is no reversing its course.

But that does not mean that it’s sacrosanct. Even those who designed
NAFTA to accommodate their own interests understand that it is an
inadequate instrument with which to govern this new political economy.
Revising NAFTA is already a topic of conversation among North American
business and political elites: The U.S. Council on Foreign Relations,
the Mexican Council on Foreign Affairs, and the Canadian Council of
Chief Executives have set up an ongoing “Task Force” to map out the
next steps. Their 2005 report called for a commonly administered
military security perimeter, common energy policies, and a modest
investment fund for Mexico. And Mack McLarty, former Clinton chief of
staff and now partner with Henry Kissinger in a consulting firm, has
called for planning an oil-for-infrastructure deal with Mexico to be
ready for the next U.S. president. But, while these and similar
proposals contain some sensible ideas, the framework is the familiar
one–an expanded market to feed global corporate ambitions–and gets us
no closer to solving the catch-22 of unaccountable governance.

Instead, we need to transform NAFTA into a set of rules that
recognizes the common economic future that now connects all of the
people of the three nations. It would need to include, at a minimum, a
“bill of rights” for citizens of North America, enforceable in all
countries, that would reestablish rights for people at least as strong
as the extraordinary privileges NAFTA gives to corporate investors.
They would include guarantees of freedom of association and collective
bargaining across borders, as well as an independent judiciary and
public transparency in government dealings with the private sector. A
new NAFTA would have to be a continental grand bargain in which Canada
and the United States commit substantial long-term aid to Mexico in
order to nurture higher and sustainable economic growth, while Mexico
commits to policies (independent trade unions, minimum wages, equitable
taxes, assistance to its depressed farm sector) that assure wages in
all three nations rise with their productivity. To that end, it would
require a North American customs union in which foreign trade would be
managed in the service of the needs of all three countries for greater
industrial self-sufficiency, resource conservation, and increased
investment in health and education. Such a new vision for NAFTA would
more strongly unite the three nations in a single competitive bloc that
provides all of the citizens of North America, not just its corporate
interests, an investment in its success.

North America is, of course, not Europe. It is easy to make the case
that the political and economic conditions that motivated and nurtured
the EU are quite unique. But at its conception, it was also easy to
argue that the EU would be still born. Indeed, in at least some
dimensions, a unified North American economy is a more credible idea.
There are only three languages (counting Quebecois French) to deal
with. All are relatively new countries. For at least two centuries
people have been moving, marrying, and interconnecting culturally. The
one time the United States and Canada fought was in the War of 1812,
while the Mexican-American War ended in 1848.

When the twenty-first century began, polls showed Americans,
Canadians, and Mexicans possessed highly favorable opinions of one
another. Asked in a 2000 World Values Survey poll if they would be
willing to form a new single country if it meant having a higher
quality of life, majorities in each country said yes. In the aftermath
of September 11, Canadians and Mexicans expressed massive solidarity
with Americans (although the invasion of Iraq, which they
overwhelmingly opposed, has rekindled some latent anti-Americanism).
Many on the U.S. side, when they still supported the war, resented that
Mexico and Canada refused to send troops. Still, the sense that–like it
or not–the three societies share a common future comes through in a
report of polls taken between 2003 and 2005, which shows support for
North American economic integration in all three nations, even though
people in each thought that NAFTA had been a “loser” for their country.

Moreover, gathering economic forces might actually force an
acceleration toward integration. At some point, the unsustainable rise
in the U.S. trade deficit will have to be reversed, threatening the
economies of Canada and Mexico, whose growth since NAFTA has depended
on the U.S. market. In order to avoid the political consequences (e.g.,
more illegal immigration from Mexico, less cooperation on national
security from Canada), the United States may well be forced to
establish a North American trading bloc anyway that protects its
neighbors’ access to a U.S. economy that will be forced to reduce its
overall imports.

One thing is certain. The global economy will continue to undermine
both democracy and economic security until we develop the institutions
to support a social contract across borders. To do that, what better
place to start than in our own continental backyard?

Read more about EconomicsGlobalization

Jeff Faux is the Founder and now Distinguished Fellow at the Economic Policy Institute. His most recent books are The Servant Economy and The Global Class War.

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