A critique of globalization based on my analysis of the phenomenon in 1999 and relating the outcome of this process to the current populist expressions in many countries. My critique is based on the absence of morality in the new global structures and how that is reflected in economic and cultural outcomes.
WORLD WITHOUT PITY
The relationship between globalization and populism
Populism speaks to the grievances of people who perceive themselves as a former majority or at least an advantaged group where somehow global events beyond their control have taken away their prosperity and the security of their culture. The perceived cause is often rooted in “globalization” – a term and concept that is little understood and masks both macro and granular changes and events that lead to this sense of grievance.
This essay was originally written in 1999, immediately after the global financial crisis of 1997, a crisis that affected developing countries much more than the wealthy developed nations. The essay points out that the early impact of globalization tended to impoverish developing countries but was masked in the rich countries. The past two decades have allowed the “third world” and the global financial community to play out the logic of a more global world – the rich countries or a portion of the population in the rich countries now also feel the pain.
The tendency is to blame the players who benefit and the Governments that are trapped by the internal logic of a global system that they often do not understand and that does not respond easily to national or local solutions. This essay speaks to the systemic issues that are the reality of globalization and the outcome of a market system disconnected from community and morality. Arguably people are no less ethical (possibly they were never ethical but there were boundaries) but the game has changed and most of us have failed to understand the impact of the new rules – or rather the absence of rules.
The populism of America and Europe in 2016 and 2017 is the product of these changes – significantly amplified by the effects of migration and cultural disruption.
WORLD WITHOUT PITY
In 1995 I gave a speech on the subject of globalization – the word I chose to use. I checked my 2000-page unabridged dictionary, spell-check plus recent documents from the World Economic Forum, World Bank etc. and the word ‘globalization’ could not be found. That was only 1995. The point is that although the elements that we describe as globalization today have always existed in some form, something has changed and it has become different and something that politicians and arguably economists do not really understand. They speak to the evidence and not the plumbing that drives these changes.
My argument will speak to the ethical deficit that lies behind the perceived negative outcomes of globalization so morality is a good place to start. The logic of the ‘market system’ is that winner-takes-all. Historically this has been bounded by religion, rules or the limitations of technology and geography. When those restraints disappear we get to a situation where the reported wealth of the 8 richest people on the planet equals that of the poorest 3.6 billion.
To understand the subject of globalization and its impact I will ask three questions:
DOES GLOBALIZATION MATTER? WILL A BORDERLESS ECONOMIC WORLD BE SIGNIFICANTLY DIFFERENT FROM THE WORLD WE HAVE KNOWN?
DO THE RULES OF THE MARKET OPERATE IN THE SAME WAY ON A GLOBAL BASIS AS THEY HAVE WITHIN LOCAL AND NATIONAL MARKETS?
WILL THE CHANGE TO A GLOBAL SYSTEM BE ETHICALLY NEUTRAL?
The point of my argument is not that there are no good people or responsible companies. The reality is that these kinds of people and companies do not run the world.
The driving force in the world has become financial and the connection between the decision maker and the persons and communities that are impacted has been cut.
The moral dimension of our society has always been based on relationships between people – but when the important decisions of our time are made without any reference to relationships – you can be assured they are made without reference to the moral dimension.
Morality does not exist in a vacuum. Morality develops in context. This context or framework relates to community, to religion and to the heritage and values of nations and societies. As the supportive framework or context disappears, there is increasing evidence that morality also disappears.
Does this matter? Many voices argue that the unseen hand of the market place will result in a better outcome than the heavy hand of Government or any other countervailing force. The problem is that a market place dominated by derivatives, hedge funds and short sellers is hardly the market described by Adam Smith. There may indeed be an unseen hand – but it is hardly the benign hand of pure competition.
In January 1989 I was in Buenos Aires and met a senior diplomat from the Washington DC Embassy of the Soviet Union. We became friends during the course of the Conference. He challenged me to return to the birthplace of my parents and become part of the process of change (both parents were born in southern Russia prior to the Revolution and departed as refugees at different times). I asked him what I could bring to the Soviet scene that would be useful. He made a very perceptive response.
As a businessman, bring the idea of the entrepreneur, but as a Christian help us rebuild a MORAL FOUNDATION.
He went on to say that he had studied the West very closely and realized that the success of the market system could not be separated from the Judeo-Christian heritage. He pointed out that in North America many transactions took place in an environment with a very substantial level of trust. This was the lubricant of the market system. He maintained that this trust was absent in the Soviet Union and for this reason the introduction of the market system would be a failure.
The market system cannot exist without a moral foundation. The Soviet Union and its modern fragments do not have the necessary moral memory and the economic collapse of Russia in August 1998 will not have been a surprise to my friend.
Note: It can be argued that the global financial crisis of 2008 was significantly caused by the decline of this historic moral foundation in America and Europe.
A small group toured the decaying Soviet Union (August 1989) and then organized four national Conferences on “BUSINESS AND ETHICS” in 1990, ’91, and ’92. History suggests that our efforts were a very small drop in a very large ocean.
We do not need to flay the Soviet Union for its ethical failures – we can find plenty of examples closer to home!
In 1936 three companies pooled their resources to start a Holding Company called National City Lines or NCL. The purpose of NCL was to promote the virtues of buses for public transportation in major American cities. Since many cities had well-functioning electric street car systems the buses were not taking hold. NCL would purchase the street car companies, tear out the tracks and electric lines and replace them with buses. Who were these insightful investors in NCL? The three major investors were General Motors who built the buses plus Firestone and Chevron. Was it really the market system at work when America changed from non-polluting electricity to diesel in public transportation? Their greatest success was replacing a well-functioning electric system in the Los Angeles basin.
World Without Pity
At the beginning of November 1998 the market capitalization of all of the shares on the Indonesian stock market had dropped to 16 billion dollars. In other words, Bill Gates could buy 51% control of the entire Indonesian economy for 20% of the value of his shares in Microsoft. Quoting Peter Newman, the Canadian financial writer, “Bill Gates is not a person, but an ecosystem.”
What about the Big Leagues like the World Bank and the US Government? Larry Summers is a senior economic advisor in the Clinton Administration. In 1992, Summers was chief economist at the World Bank and actually wrote the following memo regarding pollution.
“Just between you and me, shouldn’t the World Bank be encouraging MORE migration of the dirty industries to the less developed countries?”
Summers added: “I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.”
Why is the logic impeccable? Because, life is cheap in the third world.
World Without Pity
Do you recognize the world I am describing?
The purpose of these anecdotes is to demonstrate that when a decision becomes disconnected from its context – when the people or cities or countries who are affected by a decision are not part of the decision – somehow the ethical dimension disappears.
Palliser Furniture was founded in the northeast corner of Winnipeg and the majority of our factories are (not true in 2017!) still in that location. Most members of our family live in the same community, shop in the same stores as our employees and attend the same churches. We are not immune to economic realities and deal with tough business decisions when necessary. What would happen if Palliser would announce an across the board cut in our staff of 20% just to raise our share price? A visit to the grocery store would become distinctly unpleasant when we have to look into the eyes of those affected by our arbitrary decision.
Note: Subsequent events included the massive shift of furniture manufacturing to China plus the increase in value of the Canadian dollar as a result of the natural resource boom. Palliser eliminated 2/3 of its employment in Canada – more than 2000 persons – moving production to Asia and Mexico
HOW DOES THIS PHENOMENON AFFECT US IN NORTH AMERICA?
Both Americans and Canadians consider their societies to be basically fair. The major difference is that Americans tend to define fairness as opportunity while Canadians would put a little more emphasis on outcomes. We can afford to have these opinions because the world as it has existed tends to work well for us. How would we feel if it stopped producing acceptable results?
The number of Indonesians below the poverty line increased from 20 million to 90 million during the past year (1998). Would anyone care to explain to me what those 70 million people did wrong? What would happen in our countries if 70 million people were suddenly thrown into extreme poverty?
It isn’t happening in such a dramatic way but in the past quarter century the least competitive part of North American society has been increasingly marginalized. The disparity of incomes and opportunity for those at the bottom and the top has increased dramatically. Why is there no revolution? Will there be a collapse in the consensus that our society is basically fair? Will there be a collapse in the international consensus about the fairness of the world and its systems?
Note: Arguably the Trump phenomenon is the outcome of this process – it simply took 20 years to express itself!
WHAT IS DRIVING THESE CHANGES?
In a 1993 speech entitled NORTH AMERICA – NO LONGER AN ISLAND, I argued that technology was the driving force for globalization and that it created opportunity for all societies. I further argued that culture would play an increasing role in the competition between societies and would give the developing societies a chance to catch up.
What I failed to anticipate was the emerging dominance of FINANCE over every other dimension. There was a time when most people with capital owned some real assets they could see and be identified with – such as my Furniture factory in my own community. This has been changing for some time – but the bull market of recent years and the development of a much more international capital market have changed all of the rules.
There is a progression of steps from the operator of a business to a public company to a long term investor and then to a punter or speculator in shares and finally to gigantic hedge funds. Investors buy mutual funds with little interest in the underlying shares and in the last few years the hedge funds have emerged. In this latest incarnation investors simply try to find the best poker player to play the game on their behalf. Do we have any idea what these people are doing with our money?
Earlier I promised to address three questions. The first was:
DOES GLOBALIZATION MATTER?
A global world is different than a local or national world in very fundamental ways. We easily understand the economic analysis of free trade and comparative advantage. What is important to add is that a global world tends to become a financial world rather than a world of operators. Secondly, a global world centralizes the power of the decision-makers and increases the remoteness of those making a decision from those affected by that decision.
The fact that the most important decisions are now financial rather than operational only compounds the problem. Our moral values were developed in a much more local context and seem to evaporate in a global marketplace.
The second question was:
DOES GLOBALIZATION AFFECT THE RULES OF THE MARKET SYSTEM?
I have answered this question in part by pointing out that our market system has some form of moral foundation even if we never speak about it. If we shift to a marketplace where the invisible hand of the market is the only set of rules – what will our world look like?
Macleans magazine (a print magazine that Canada defends as a cultural icon and the US Government would consider simply as a commodity like shoes) used the following headline for a commentary from Peter C. Neumann
GET READY FOR THE RUTHLESS ECONOMY
The subtitle was
“GLOBALIZATION MEANS THAT PEOPLE ARE KEPT ON THE JOB ONLY UNTIL THEY CAN BE REPLACED BY CHEAPER CANDIDATES?
Palliser Furniture rated a paragraph in this article and I was not sure if we were part of the problem or the solution. Newman describes the different nature of this new more global economy.
We live in a world where 51 of the world’s 100 largest economies are corporations. Wal-Mart by itself has revenues greater than the GDP of 161 countries.
Concentration of power is only being increased as one mega-merger after another is announced. These mergers are in part driven by ego but also by real global considerations.
How will the market system function with a herd of corporate elephants roaming the globe?
International investors have become accustomed to investing in high risk situations with appropriately high returns on the expectation that in the event of an economic collapse, such as Mexico in 1995 or Thailand in 1997 or the world in 2008 – the international community would bail them out – with the bills paid by the locals through an austerity program.
This phenomenon has even been given the wonderful name of MORAL HAZARD. In other words, investors have been led to believe that they will not be held accountable for their follies.
At the top of the pyramid are an evolving set of international arrangements which are in effect the rules of the game – but it is a game designed for big players and for trade and finance. For example, the Uruguay round of trade negotiations resulted in the WTO or World Trade Organization. The WTO has created a rules-based system of trade. Smaller countries must give up sovereignty to be a part of the game but have little negotiating power. The largest actor on the field, however, states that no agreement can impair its sovereignty (Trump is amplifying this reality). Imagine a game where the strongest team always reserves the right to re-interpret the rules if it is not winning.
The other part of this picture are the corporations. They can now play the game in different places where there are different rules. By different rules I mean the wage structure, the rules on pollution, the corruptibility of local authorities. They demand to be treated in a fair and equitable manner inside each country – the punishment is to withdraw investment – or use legal avenues. The corporations, however, do not agree to submit to any global rules of the game.
For example, every country has a local structure for income tax but given the global web of relationships within a large company, a small jurisdiction in Central America does not have a hope of claiming its share of tax or of insisting on other measures of performance. Many of the world’s most international companies in fact pay very little tax.
The point I hope is being made in these arguments is that the trend to a more global market and the reliance on market principles alone creates circumstances where the distance between financial decision-makers and those affected becomes ever larger. In this context the moral dimensions of any decision or action tend to disappear entirely.
This is complicated by the fact that the larger corporations operate in a largely borderless environment and can escape the restraining effect of local authorities. There is no international body which matches the corporations in power or scope.
Our world is also divided on how we understand the problem. Angus Reid, an important Canadian polling firm does an annual global survey. One question was of particular interest:
He asked people all over the world whether they thought the Government had a role in the reduction of the disparity of incomes.
69% of Americans and 47% of Canadians said the Government had no role whatsoever. The next highest country was 39%. North Americans and Americans in particular have a different view of fairness compared to the rest of the world. This difference of views may yet come back to haunt us. The rest of the world is not willing to bet on the market for a fair outcome – at least not the way the game is being played.
Note: the election of Donald Trump suggests that the VOTERS IN AMERICA HAVE ALSO CHANGED THEIR VIEWS.
Three more examples and then a conclusion.
Nike is a major American sport shoe company that does not own any factories.
Nike reputedly produces most of its sneakers in Indonesia paying wages of $1.00 per day (1999) and that was before the collapse of the currency.
Nike has established great brand identity by using Michael Jordan to endorse its products. It has been reported that the endorsement fees paid to Michael Jordan alone are greater than all of the wages paid to all of the workers in all of the Nike factories in Indonesia. Assuming that is true, how does that feel?
In the final analysis, these problems become very practical. An activist group known as the “Christian Peacemaker Teams” had been active in HAITI in the critique of a company producing products for Disney. After being pilloried for its low wages, the company shifted its production to China.
The reality is that the same company has a new factory in China – where CPT would not be allowed to demonstrate. The company is still in production, Disney has its products and the CPT members have not reduced their standard of living. The only losers are the workers in Haiti who went from a low paying job to no job.
Justice and fairness are becoming very complicated questions. We all agree that what we see in the world around us does not pass the smell test. If it smells unfair it probably is unfair.
A final example will be a story from the October 26, 1998 edition of Fortune – hardly the flagship in the fight against Neoliberalism. The cover story is about Rupert Murdoch who owns the Fox network and much more. The title of the story is:
THE RULES ACCORDING TO RUPERT
Murdoch became an American citizen so that he could qualify for the ownership of television (Fox) in America. The parent company, however, does its accounting out of Australia where lax accounting standards permit him to exaggerate his income. When it comes to taxes Fortune says that he sings with a Caribbean lilt. News Corp has 800 business units of which the majority are incorporated in low tax or no tax havens like Bermuda, British Virgin Islands, Netherlands Antilles and more. The result is an effective tax rate during the past 8 years of 5.7%.
At least Murdoch is a real investor who starts and runs things – even if he wishes to control the world – or at least the media end of it.
My reason for editing an essay on globalization written in 1999 is twofold.
First – It is obvious that the issues we face in 2017 and that are part of the daily political dialogue (with the exception that the issue of migration was largely absent) were evident in 1999 except that the impact was experienced more in the less-developed part of the globe. Today this pain or frustration has spread to the developed countries in the form of growing inequality of income and opportunity and that now expresses itself in populism.
Second – Globalization is a phenomenon that is beyond the control and arguably the comprehension of most people and probably most politicians. As a consequence the arguments from both right and left fail to deal effectively with the core issue of how to create a world that can work in spite of the digital and other technological realities.
The populism of the USA and several other countries responds to this dilemma by resorting to a kind of protectionism that circles the wagons. Given the reality of an increasingly connected world this will hardly resolve the problem in a productive manner.
The world needs a new kind of economic and political architecture that deals with these issues but probably not in the bureaucratic manner of the EU, the America First of Trump or the self-serving strategy of China.
I would like to think that I am hopeful but I am not – because I cannot think of a politician who truly grasps the nature of the problem or is keeping it secret from the rest of us! May the world survive until that leadership emerges somewhere.
WHY DOES THE WORLD FEEL DIFFERENT?
We speak of the 1% or similar category to define inequality. The reality is a bit more complicated. The 0.1% actually controls most of the wealth. The 1% are relatively wealthy people who have enough resources to insulate themselves from the masses. However, there is another category which I will describe as the 10%. These are the global economic nomads who exist at the upper reaches of every nation on the globe. They are educated, tend to speak English, travel freely and are either employed globally or are active with global reach. These are the economic nomads of our time with limited national loyalty and do very well from the current global system.
This 10% exists in Canada, America and Europe but also in the Middle East, Russia, Indonesia – and everywhere else. In former times inequality was experienced between a limited number of highly developed economies and the rest of the world. Today inequality is a global phenomenon – the same elite exists in every society – and a parallel sense of inequality is experienced in most nations (a few places like Northern Europe have figured it out a little better).
We are now experiencing the backlash from the part of the American population that believes it has unjustly been left behind and has a dim understanding that world structures, Governments and sometimes migrants have somehow created this new reality.