Introduction

When a developing country liberalizes trade and investment, what is the effect on growth, income distribution, and the possibilities for achieving a more equitable society? And to what extent does liberalization accelerate technical progress and thereby enhance national economic independence? Drawing on the experience of Mexico under the North American Free Trade Agreement (NAFTA), the evidence suggests that, for developing countries, the benefits of liberalization are smaller and the costs higher than is generally claimed. A major reason why standard theory and many predictions have overstated these benefits in the case of NAFTA is that they overlook technology differences between developing countries and their richer trading partners. The consequences of technology differences, this chapter will argue, are that the benefits of liberalization fall less to wages and more to profits than is generally predicted. The consequences of liberalization for technical progress are mixed, and the influence of foreign capital tends to grow. And, by committing a nation to a competitive battle for foreign investment, liberalization also tends to undermine labor rights and working conditions, as well as many social programs and environmental protections.

Before embarking on this analysis, though, a few words on globalization are in order. Globalization is often talked about as if it were inexorable, and as if the only choice we faced were how to respond to it. In fact, however, globalization has two main components.

Introduction

Advocates of interventionist employment and labor market policies have long recognized that the internationalization of economic relations held the potential to undermine the pursuit of domestic goals such as full employment and wage growth. As the architects of progressive labor market policies struggled to construct the instruments for employment and income regulation at a national level (including both macroeconomic demand management policies and more micro-level structures of labor market regulation such as unionization and minimum wages), the emergence of a fundamentally deregulated international economy threatened to undermine the effectiveness of these measures.

What has been the effect of globalization on labor markets, and on the institutions and policies that were established in the postwar era to promote more equitable and socially beneficial outcomes in labor markets and in income distribution generally? The answer to this question depends centrally on one's underlying theoretical model of what determines those labor market outcomes in the first place. In mainstream economic theory, where competition and market-clearing determine employment and income distribution in a fashion that is both self-regulating and socially optimal, international economic integration promises a movement of the global economy toward a more efficient general equilibrium position, thus creating the basis for a mutual, Pareto-improving increase in social well-being (across nations and potentially across social classes). In alternative models, demand side constraints become relevant, and labor market outcomes depend on an interaction of socio-institutional and macroeconomic factors; globalization may then have negative effects on both labor market outcomes and on the ability of existing policy instruments to regulate or offset those outcomes.

There used to be a strand of thought that argued that the world economy constrained domestic economic policy in only one way: through fixed exchange rates. Let the exchange rate float, argued economists as far left as John Kenneth Galbraith and as far right as Milton Friedman, and then domestic policy will be free and unconstrained – and can be as stimulative (if the outside world should happen to be deflationary) or as committed to price stability (if the outside world should happen to be inflationary) as domestic politicians wish.

Yet for 25 years floating exchange rates have been the rule rather than the exception. And over these 25 years we have learned that this is not the case.

Let me try to give this point – Robert Pollin's point – some more empirical substance. Let me focus on Mexico in 1994–95, because it shows not only how brutal the limits placed on domestic policy by the integration of the world's financial market can be, but also how to at least mitigate the damage.

In the late 1980s, the authoritarian PRI party ruling Mexico shifted its economic policies in a “neo-liberal” direction. Instead of extremely tight restrictions on imports (even imports of the capital goods that serve as one of the major channels of technology transfer to the Third World), the party adopted policies of freer trade.

The political transformation of South Africa, a long and continuing process marked by its turning point, the democratic elections of April 1994, has been accompanied by expectations of economic transformation. Under the political regime of apartheid, minority control had generated an economic system that was unsustainable: the extreme inequality of income and wealth, principally along ethnic lines, could not be compatible with social stability; economic growth had been negative for a decade, reflecting the structural weakness of the existing economy; and South Africa's relationship to world markets was fragmented by both protection and sanctions, especially since access to world financial markets was interrupted in 1985. With political transformation, structural economic change was an imperative in all three respects. “Nation building” requires old inequalities to be addressed and a reversal of declining average gross domestic product, while the restoration of normal international relations meant South Africa had to achieve a new role in the world economy, a global system that is itself rapidly changing.

Irrespective of policy initiatives, South Africa's economy would change to a greater or lesser degree in response to shocks, but the question is whether South Africa's new government could construct an economic strategy that delivers structural change appropriate to the new political environment at home and abroad. Since 1994 the government has maintained a policy regime similar to the old one. It has implemented neither a radically “liberal” strategy, comprising rapid deregulation and privatization of the large state sector it inherited and complete liberalization of foreign exchange markets, nor a radically “populist” policy of expanded public expenditure to address housing shortages, education inequalities, and unemployment.

In his chapter, Andrew Glyn analyzes whether internal or external constraints have been more important in blocking the adoption of more egalitarian economic policies, especially in the European context. Glyn acknowledges that both internal and external constraints exist, and he also accepts that internal and external constraints sometimes interact with each other. But on the whole, Glyn concludes that “internal domestic problems…remain the fundamental ones.”

A first point to note is that the “egalitarian policies” discussed in this chapter are somewhat limited in scope. The main focus of the chapter is on the use of expansionary fiscal policies to promote full employment. Even monetary policy is discussed only tangentially, insofar as it impacts on the effectiveness of fiscal expansion. Complementary micro-level policies to enhance equity are not discussed.

Glyn makes a convincing case that boosting aggregate demand would have a positive impact on job creation for “less-qualified” or lower-paid workers. He does not say whether he thinks higher employment would help to significantly narrow the growing inequality in the distribution of income currently observed in Europe and the United States alike. In the U.S. context, at least, the evidence seems to be that the macroeconomic recovery and close-to-full employment conditions of the mid-to late 1990s have not done much to narrow the growing income gaps that arose in the 1980s. Thus, it appears that expanding aggregate demand and creating full employment are necessary but not sufficient steps for achieving more egalitarian outcomes in the face of structural changes that are making societies more unequal.

Half the people and two-thirds of the countries in the world lack full control over their own economic policy. Expatriate “experts” managed by industrial country nationals and based in Washington, D.C. regulate these countries' macroeconomics, investment projects, and social spending. The principles guiding these instructions from afar are even known as a “Washington consensus” (after Williamson 1989).

The foreigners who fly in with policy packages for developing and post-socialist countries staff two international agencies – the World Bank and the International Monetary Fund (IMF). Arguably, many actions that the IMF and the World Bank “recommend” to governments are intellectually ill founded and counterproductive in practice. However, their suggestions are heeded for several reasons. The two institutions are backed by the United States and other economic powers such as England and (less enthusiastically) Japan.

Their emissaries arrive in local capitals with substantial hard currency credit lines in hand – a strong incentive for the authorities to take their proposals to heart. Finally, the proposals are based on the “neo-liberal” or “market-friendly” brand of policy analysis that has become intellectually predominant over the past dozen years. In some cases – notably Mexico's since 1982 – local policy makers have been even more enthusiastic about neo-liberalism than are their friends from Washington.

Such “globalization” of economic policy is not entirely new. Argentina's transformation of its central bank in the 1990s into a “currency board” replicates ancient monetary customs of the British colonies, and the Princeton “money doctor” E.W. Kemmerer's missions of the 1920s closely resembled those of the IMF today.

The economic performance of the countries of the Organization for Economic Cooperation and Development (OECD) has deteriorated by almost every measure from the 1950s and 1960s to the 1980s and 1990s. Growth in gross domestic product has slowed significantly, in many cases to less than half its previous levels. This slowdown has hit the less-affluent segments of society especially hard, since it has been accompanied by an upward redistribution of income, particularly in the United States. It also has coincided with a large increase in unemployment. Countries such as Germany, France, and the U.K., which generally had unemployment rates below 3 percent, and often below 3 percent, during the earlier period, now regularly experience unemployment rates between 8 percent and 10 percent. These high rates of unemployment have placed an enormous strain on public budgets through the demands they place on the social welfare system, in addition to imposing hardships on the people experiencing or fearful of unemployment.

This chapter will examine the causes of this rise in unemployment. Specifically, it will attempt to address the question of whether there has really been a qualitative change in the labor markets of the OECD nations that leads to these higher rates of joblessness. The main method for this analysis will be an examination of the evidence for the existence of a non-accelerating-inflation rate of unemployment (NAIRU) in the various OECD countries.

Prabhat Patnaik and C.P. Chandrasekhar have written an uncompromising criticism of what they call “structural adjustment” in India. The changes occurring in India, however, are broader than the phrase “structural adjustment” implies and are more akin to systemic change of the type that has been occurring simultaneously in the centrally planned economies of China, Vietnam, Eastern and Central Europe, and the former Soviet Union. The economic reforms in India can be understood in this wider global context, and useful comparisons can be made between the transition in India and that in the centrally planned economies.

Between 1947, when India achieved its independence from British rule, and 1991, when the process of economic reform began, India pursued a development strategy that was state led, inward looking, and nationalist in spirit. Emphasis was placed on industrialization, state enterprises occupied the “commanding heights,” international trade was tightly regulated, inward and outward movements of capital were insignificant and tightly controlled, and private sector capital formation was regulated by investment licenses. There was an elaborate planning apparatus, although it was highly bureaucratic and not very effective. This system did produce some positive results. Growth was faster than during the colonial period, although usually slower than the average of developing countries as a whole. National self-sufficiency was achieved, and even today, after six years of economic reform, the ratio of exports to total product in India is about half that of China.

The evolution of capitalist economies has always been intimately bound up with nation-states and national economic policies. Economists have correspondingly placed the nation-state and national policy questions at the center of their analyses. Adam Smith, for one, could not have been more clear that his primary concern was to understand the nature and causes of the wealth of nations, not merely the wealth of individuals, households, or regions. In large measure, Smith's famous book was criticizing the position of the mercantilists on the causes of national wealth and, in particular, their view that export-promoting economic policies could make a nation wealthier by making its trading partners poorer.

In his model of comparative advantage, David Ricardo was also focused on the economic interactions between nations, demonstrating in the model – contrary to the mercantilists – how all countries, not merely those most aggressive at exporting, would benefit from foreign trade. But for Ricardo, this did not mean that the economic significance of national boundaries would diminish over time. In fact, what is not well known about Rieardo's famous exposition of trade between Portugal and England, with Portugal the more productive economy, is his conclusion that the benefits of foreign trade rested entirely on an assumption of capital immobility between nations.

Introduction

The left's concern with globalization is, of course, nothing new. Marx wondered whether the process of globalization would crush incipient revolution in his “small corner of the planet.” And today, we ponder whether the recent acceleration of globalization will crush all national prospects for egalitarian and sustainable development. Yet, despite a good deal of hand wringing, discussion, and research, we are still quite far from understanding the implications of this much-discussed phenomenon for the lives of people, communities, and nations around the globe.

Here we look at one aspect of globalization: the role of multinational corporations (MNCs) and foreign direct investment (FDI). What has been the effect of MNCs and FDI on wage stagnation, inequality, and unemployment? More generally, what do future trends hold for the long-run impact of MNCs on our standard of living? We identify five views of the likely effect of MNCs on the trajectory of the world economy.

The first is “the race to the bottom” (Bluestone and Harrison 1982; Barnet and Cavanagh 1994; Greider 1997). According to this view, capital will increasingly be able to play workers, communities, and nations off against one another as they demand tax, regulation, and wage concessions while threatening to move. According to this view, increased mobility of MNCs benefits capital while workers and communities lose. A modified version is that the winners in the race to the bottom will include highly educated (or skilled) workers, or workers in particular MNC rentappropriating professions (e.g., lawyers and investment bankers), along with the capitalists; the losers will be unskilled workers and the unemployed.

These three chapters provide three perspectives on migration and attempt to offer policy options as an alternative to those reflected at present in international debate, especially those advocated by the receiving countries.

The chapters start from the same premise, that, despite an increase in migratory flows in recent years, “the voluntary movement of people is a clear…exception to globalization” (Sutcliffe), or, put another way, “the mobility of labor seldom if ever matches that of capital” (DeFreitas).

There is no doubt that the last two decades have witnessed an increase in migratory flows. It has been estimated that roughly 100 million (or 2 percent of the world's population) live outside their country of citizenship. This figure is exaggerated, however, since it covers refugees. According to the International Labor Organization (ILO), migrants in 1993 totaled 30–35 million and their dependents 40–50 million, for a total of 70–85 million.

Despite this magnitude, it is not justified to label the 1990s as the “age of migration,” as Sutcliffe does.

The question is: how has the globalization process changed the scene of migration, and what are the policy options to deal with this important aspect?

First, we start with the views of the three chapters. How do they deal with this question?

DeFreitas is mainly concerned with policy reversals both in Europe and the U.S. toward migrants. He concludes that the fear that immigration harms domestic wages or employment are not founded.

Introduction

For roughly the past 25 years, the advanced economies have experienced a significant decline in their average growth rate relative to that experienced in the first quarter-century after World War II. Output growth in the countries of the OECD (Organization for Economic Cooperation and Development) averaged 4.8 percent from 1959 to 1970, the latter phase of the post-World War II “Golden Age” stretching from 1945 to 1970, while during the more recent “Leaden Age,” running from the early 1970s to the present, output growth in the OECD has averaged 2.8 percent (1994 is the last year for which we have full data). This Leaden Age growth experience in the OECD is closely associated with changes in employment conditions. In Western Europe, high average unemployment rates have emerged concurrently with the growth slowdown, while in the United States, slow growth has been associated with a sharp long-term decline in average real wages for nonsupervisory workers.

Employment conditions have also been worsening in developing countries. As Singh and Zammit write:

The South African economy prior to 1994 combined the characteristics of a colonial economy with some of the features of a Soviet bloc country. Sanctions imposed a form of autarky on the economy. Much of industry was heavily protected and insulated from global competition. The black population was dispossessed, deprived of its land and excluded from high-wage employment and opportunities to accumulate capital. There were rigorous controls over labor mobility and job allocation. At the end of apartheid, South Africa had a highly deformed economy and faced a daunting task of destroying internal colonialism while reintegrating the country into the global economy.

Compare South Africa with Tunisia, a former French colony at the opposite end of the African continent. Both have a per capita income of about $5,000 (in purchasing power parity terms). Yet male life expectancy in Tunisia is 68 years compared to only 61 years in South Africa. The infant mortality rate in South Africa is 50 per thousand live births, whereas it is only 39 per thousand in Tunisia. Both countries have an unequal distribution of income, but the Gini coefficient in South Africa is an extraordinarily high 58.4 as compared to Tunisia's 40.2. High inequality in South Africa is a cause of a high incidence of poverty. Using the World Bank's poverty threshold of $1 per capita per day, the head count index of poverty in South Africa was 23.7 percent in 1993, whereas in Tunisia in 1990 it was only 3.9 percent.

The mobility of labor seldom if ever matches that of capital, but the end of the Cold War seemed for a time to be the start of a new era of accelerated population movements. Just as foreign investment and trade restrictions were being widely dismantled, so too were many national barriers to intercountry migration. The most dramatic case was, of course, the opening of Eastern Europe's borders to permit massive outmigration. From 1989 to 1992, over 2.1 million applied for asylum in the West. Concurrently, the European Union moved toward relaxation of internal border checks under the Schengen Accord. And in the United States, new 1990 entry criteria raised considerably the official ceiling on legal green card admissions.

However, by the mid-1990s, all Western European countries had moved to sharply curtail in-migration from non-EU nations, and full implementation of Schengen was being delayed by several countries that were worried about weak external border controls in poorer member states. In the U.S., new restrictive legislation was passed in 1996 to strip most immigrants of important legal protections, exclude them from public assistance programs, impose higher income tests on Americans wishing to sponsor them, and limit claims for political asylum.

This sharp reversal of policy, both here and abroad, reflects in part the emergence of highly nationalistic and ethnocentric political forces opposed on principle to sizable foreign-born populations in their midst. But it is also driven by broader public concerns about the perceived economic impacts of immigration.

The particular contribution of this chapter is that it creates a new context in which to reassess the benefits and drawbacks of the changes in housing finance over the last two decades that have been widely debated in both academic and political arenas. The comparative experiences of the four countries examined here – the United States, the United Kingdom, France, and Germany – underscore the differences in the mechanisms they have used to achieve the goal of providing adequate housing stocks as well as the different ways in which housing finance in each country has been transformed. Nevertheless, the paper finds a strong commonality in the reduction in government support for housing as a social good in all four countries. Moreover, it describes the erosion in households' access to adequate and affordable housing that has already occurred, arguing that a continuation of current finance systems is certain to further reduce access for low-income families and increase financial and lifecycle risks for most families.

While the paper discusses governments' withdrawal from their former role in supplying affordable housing, the primary focus is, as noted, on changes in housing finance, and the commonality in the experience of these four countries is deregulation. The authors provide an especially useful analysis of the ways in which risks have been shifted from financial institutions to households – making the point that risk has only been shifted, not reduced – and that the increased risk for households can only lead to a symmetrical increase in risk for financial institutions.

Reflecting views then dominant among Anglo-Saxon economists, the Bretton Woods Accords were devised around the basic thesis that free international capital mobility is incompatible with the preservation of reasonably free trade and full employment. The displacement of the Bretton Woods pegged exchange rate regime in the 1970s with floating rates has, however, been paralleled by the displacement of the old orthodoxy by a new one, which holds that free capital mobility is essential for maximizing the global welfare benefits from international trade and investment. Thus, rationalized by economic “science,” the U.S., with the International Monetary Fund (IMF) and World Bank as pliant instruments, has been aggressively promoting financial market deregulation and the lifting of capital controls throughout the globe.

This chapter contends, however, that the Bretton Woods incompatibility thesis remains valid. None of the major benefits claimed by the current orthodoxy has been realized. Lifting capital controls has greatly increased the frequency of currency crises and cost-sharing inequities between developed and less-developed economies during crisis management. The general claim that deregulating financial markets produces more economically correct pricing of capital assets and credit allocation has little theoretical standing and has been falsified by experience. The global integration of financial markets has adversely impacted First as well as Third World economies and has retarded the global expansion of output and trade. The policy implication is that curbing the international mobility of financial capital is more than ever a basic requisite for smoothing international economic interchange, and for more stable and equitable First and Third world economies.