Can the Global Economy be Fixed?

Based on a presentation to the Bellerive/GLOBE International Conference on
Policing the Global Economy
Geneva, March 23-25, 1998

by Dr. David C. Korten
Author of When Corporations Rule the World

I want to express my deep admiration to Prince Sadruddin Aga Khan for the courage and foresight he has demonstrated in organizing this meeting. Economic globalization is one of the most important issues of our time. Yet to my knowledge, this is the first major international meeting that has attempted to bring together for serious dialogue those who believe that economic globalization is the best and inevitable course for the human future with those of us who believe that if we continue on our present course humanity may have no future. It is a great credit to the Prince that he has made it happen.

In my own case, I've spent most of my adult life in Third World countries as a development worker. This included 15 years in Southeast Asia--until recently considered one of the world's development success stories. I saw the reality behind the modern airports, express highways, luxury hotels, and the air-conditioned shopping malls stocked with the latest imported consumer goods long before the recent financial collapse revealed the shallow roots of much of Asia's development. I witnessed the deepening misery of people who were displaced from their homes and lands in the name of progress for the few, the environmental devastation, and the disintegration of once vibrant cultures. My dismay turned to horror when I realized that the same trends toward declining living standards, increasing inequality, environmental destruction, and social disintegration were being played out in the industrial nations of North America, Europe, and Japan--including in my own country--the United States. It all suggested institutional failure at a deeply systemic level.

Our attention in this particular session is directed to United Nations reform as it relates to Policing the Global Economy--specifically the idea that we might balance the World Trade Organization with a World Environment Organization. It is my position that while this proposal would be a step in the right direction, it would be a weak and wholly inadequate response to the problem--as it does nothing to address the unpleasant fact that:

An unregulated global economy dominated by corporations that recognize money as their only value is inherently unstable, egregiously unequal, destructive of markets, democracy, and life, and is impoverishing humanity in real terms even as it enriches a few in financial terms.

We face very basic questions as to the goals and values we want our economies to serve. The issues go far beyond tinkering with trade rules at the margin.

An Unstable System of Winners and Losers

On February 1, 1996 the International Herald Tribune published an opinion piece by Klaus Schwab and Claude Smadja, respectively president and managing director of the World Economic Forum. In their piece they noted that:

  • Economic globalization is causing severe economic dislocation and social instability.
  • The technological changes of the past few years have eliminated more jobs than they have created.
  • The competition "that is part and parcel of globalization leads to winner-take-all situations; those who come out on top win big, and the losers lose even bigger."
  • Higher profits no longer mean more job security and better wages. "Globalization tends to delink the fate of the corporation from the fate of its employees."

They went on to warn that unless serious corrective action is taken soon, the backlash could turn into open political revolt and destabilize the Western democracies. If this assessment had come from some anti-globalization environmental organization it might be dismissed as hyperbola--but not when it comes from the club of the world's thousand largest global corporations.

What I found more problematic was their call to the world's political and economic leaders to demonstrate how the new global capitalism can be made to work to the benefit of the majority and not only for corporate managers and investors.

It raises a basic question: Can the new global capitalism be made to work for the benefit of the majority, or are the problems more fundamental? In their op-ed, Schwab and Smadja recommended increases in public expenditures on training and education, upgrading telecommunications and transportation infrastructure, providing incentives to investors, and reforming social policies to increase international competitiveness.

Here we confront a troubling dilemma. Increasing the global competitiveness of one country by using public subsidies to increase private profit--to the extent it works--simply draws investment away from others and creates new losers. If indeed we are to have a world that works for everyone, we must come to terms with the dark side of global capitalism's competitive dynamic.

Fortunes change quickly in a global capitalist economy of excess productive capacity, massive unemployment, an unconscionable gap between rich and poor, and large amounts of speculative money looking for quick profits. Not long ago it seemed that Japan had become the invincible world economic power, eclipsing the fading fortunes of the United States and Europe. Then Japan's financial and real estate bubbles burst and countries such as South Korea, Thailand, Malaysia, and Indonesia became touted as models of the opportunities available to those who embraced neoliberal policies. Then their bubbles burst and now we find the United States being touted as the neoliberal success story. And when our bubble bursts, perhaps Europe will be the speculator's next haven.

The glory is fleeting and for each winner, it seems there are many more losers. It is time that those who are promoting the new global capitalism wake up to the simple, but unpleasant truth, that an unregulated global economy dominated by corporations that recognize money as their only value is inherently unstable, egregiously unequal, destructive of markets, democracy, and life, and is impoverishing humanity in real terms even as it enriches a few in financial terms.

There are many telling statistics illustrating the unconscionable extremes of inequality under the new global capitalism. I want to share only one. Last year, Bill Gates, already the richest person in the world, doubled his net worth to a total of $36.4 billion--roughly equivalent to the entire gross domestic product of Bangladesh, a country of 120 million people. By now it is surely over $40 billion and still rising.

As an American citizen I find it appalling that our political and economic leaders are touting the United States as a model of economic success. Yes, profits are at a 40 year high, the stock market sets new records by the week, and productivity since 1979 has increased 24 percent--but real earnings for workers have actually fallen by 12 percent during the same period. All of the benefit of our supposed success has gone to the richest 20 percent of Americans. The biggest declines are for the poorest 20 percent.

Capitalism Against the Market

The underlying belief that global capitalism can be made to work for everyone is based on a deep faith in the theory that markets necessarily allocate society's resources equitably and efficiently. Unfortunately, a market economy and the new global capitalism are not the same thing. To the contrary, the new global capitalism systematically violates nearly every assumption on which market theory is based--including the key assumptions about competition and cost internalization. Let me elaborate on this point, which several earlier speakers have also noted.

As portrayed in Figure 1, a combination of economic globalization, deregulation, and financial concentration has moved the new capitalist economy ever further away from the characteristics that make a market economy socially efficient. They have as well shifted economic and political power away from people and democratically elected governments to an unstable and predatory system of global finance.

Beginning with Adam Smith, market theory has been quite explicit that market efficiency is a consequence of small, local owned enterprises competing in local markets on the basis of price and quality for consumer favor. By contrast, what we know as the global capitalist economy is dominated by a handful of gigantic corporations and financial speculators with billions of dollars at their disposal to reshape markets and manipulate prices.

Furthermore, the mega-corporations and financial houses continue to concentrate and consolidate their power over markets, technology, and capital through mergers, acquisitions, and strategic alliances--even as they shed their responsibility for people by downsizing and contracting out. The statistics are sobering.

  • If we consider the gross sales of a corporation to be roughly the equivalent of the GDP of a country, we find that of the world's 100 largest economies, 51 are economies internal to corporations. Only 49 are national economies. The total sales of Mitsubishi Trading Corporation are greater than the GDP of Indonesia, the world's fourth most populous country and a land of enormous natural wealth.
  • The combined sales of the world's top 200 corporations are equal to 28 percent of total world GDP.
  • These same 200 corporations employ only 18.8 million people, less than 1/3 of one percent of the world's population-- even as the downsizing continues.

Consider the fact that the economy internal to a corporation is not a market economy. It is centrally planned by corporate managers to maximize financial returns to themselves and their shareholders. No matter what authority a CEO may delegate, he can with draw it with a snap of his fingers. In the U.S. system, which is rapidly infecting Europe, Japan, and the rest of the world, the corporate CEO can virtually hire and fire any worker, open and close any plant, change transfer prices, create and drop product lines almost at will--with no meaningful recourse by the persons or communities affected.

Ironically, the global victory of capitalism is not a victory for the market so much as it is a victory for central planning. Capitalism has simply shifted the planning function from governments--which in theory are accountable to all their citizens--to corporations--which even in theory are accountable only to their shareholders.

We are moving very fast toward ever greater consolidation of this unaccountable corporate power. In the United States the total value of corporate mergers and acquisitions has increased at a rate of nearly 50 percent a year in every year save one since 1992. Most of these mergers and acquisitions are accompanied by large scale layoffs. The greatest concentration is taking place in the financial and telecommunications sectors--with deeply ominous implications for the future of democracy.

Merger mania is spreading. Mergers world wide had a total value of $1.6 trillion in 1997--up 48 percent over 1996. European mergers and acquisitions set a record of $400 billion in 1996--double the level of just two years earlier. American investment banks, which are moving into Europe with a vengeance, were involved as advisors in two-thirds of the deals. Do not for a moment think that because Europeans believe in stakeholder capitalism that what I am talking about cannot happen here. It is happening here at this very moment. Stakeholder capitalism is being purged from your economies as inefficient and a violation of exclusive shareholder rights.

The primary accountability of global corporations and investment houses is to the global financial markets in which now each day nearly $2 trillion in foreign exchange changes hands in search of speculative profits wholly unrelated to any exchange of real goods or services.

Whose interests are represented by the ruling financial markets? In the United States 77 percent of shareholder wealth is owned by a mere 5 percent of households. Globally the share of the world's population that has a consequential participation in corporate ownership is most certainly less than 1 percent. This concentration of power denies the most basic principles of both market economics and democratic governance.

The Myth of Corporate Efficiency

Another critical assumption of market theory is that the full cost of each good and service is internalized by producers and reflected in the prices of their products. By contrast, the success of global capitalism has been in large measure dependent on its ability to privatize the gains of economic activity for its managers and shareholders while passing the costs onto the larger society. Global corporations now routinely insist that governments provide direct subsidies and tax breaks in return for jobs. Similarly, they expect many workers to accept less than a living wage. They expect communities to bear the economic and health costs of their waste discharge. And they expect consumers to bear the consequences of dangerous and defective products.

The conservative Washington, DC based Cato Institute estimates that direct corporate subsidies and tax breaks in the United States now total $135 billion a year. Paul Hawken has compiled preliminary data suggesting that corporations in the United States currently receive more in directpublic subsidies than they pay in total taxes.

Ralph Estes, a CPA with a distinguished academic and research career has compiled an inventory of studies estimating various costs externalized onto the U.S. society by unsafe and defective corporate products and practices. When added together, the total comes to $2.6 trillion a year--roughly 5 times the amount of reported corporate profits in the United States and 23 percent of 1994 U.S. GDP. In short, the data suggest that from a societal perspective corporations are grossly inefficient institutions and that their profitability has come at an enormous cost to society.

Those familiar with market theory know that a market can function efficiently only within a framework of rules that maintain the necessary conditions. There must be rules and incentives to limit the growth and power of individual firms, encourage local ownership, and require firms to internalize their costs. Therefore, our goal should not be to eliminate necessary regulation, but rather to make it sensible and effective.

It is here that we experience the new global capitalism at it's most perverse. NAFTA, GATT, the World Trade Organization, and the Multilateral Agreement on Investment now being negotiated under the OECD all turn the necessary practice of market regulation on its head. To restore market efficiency and the equity essential to the legitimacy of its institutions, we must police global corporations to insure their adherence to essential market principles. Yet the international agreements and institutions in place and under negotiation not only fail to serve this need, they do exactly the opposite. They install corporate dominated mechanisms to police democratically elected national and local governments to prevent them from requiring the corporations and financial institutions that cloak themselves in market rhetoric to actually play by market rules. This is the real impetus behind formation of the WTO. Contrary to the claims of some WTO supporters, a burning desire to protect the interests of the Third World's poor was not the driving motivation.

Privatizing Gains, Socializing Losses

Another aspect of the new global capitalism's dark side is its confusion of money with wealth. Wealth is something that has real value in meeting our needs and fulfilling our wants. It takes many forms, including human skills, technology, land, trees, functioning ecosystems, factories, buildings, food, clothing--even friendship and love. Our most important forms of wealth consist of living capital--the productive-regenerative capacities and systems of life that are the primary sources of our existence and well-being and the foundation of our civilization. These include natural, human, social, and institutional capital. Healthy living capital is the most valuable of all resources because it has the ability to continuously renew itself--to regenerate--and to evolve in its capacities through self-directed learning.

Money, on the other hand, is nothing but a number on a piece of paper or a coin or an electronic trace in a computer file. Aside from the metal in the coin, it has no intrinsic value or productive utility. We covet it only because by social convention others will accept it in exchange for things of real value. Thus, while money is not itself real wealth, it gives us a claim on the wealth of others.

One reason we fail to recognize the seriousness of our current predicament is because we are so obsessed with global capitalism's ability to make money we fail to recognize that it is rapidly destroying the world's real wealth. It destroys natural living capital when it strip mines forests, fisheries, and mineral deposits, aggressively markets toxic chemicals, and dumps hazardous wastes that turn once productive lands and waters into zones of death. It destroys human capital with substandard working conditions in places like the Mexican maquiladoras where it employs vital and productive young women for three to four years until failed eyesight, allergies, kidney problems, and repetitive stress injuries leave them permanently handicapped.

It destroys social capital when it breaks up unions, bids down wages, and treats workers as expendable commodities--leaving it to society to absorb the family and community breakdown and violence that are inevitable consequences. It destroys institutional capital when it undermines the necessary function and credibility of governments and democratic governance by buying politicians, financing anti-government political movements, weakening environmental, health, and labor standards essential to the long-term viability of society, and extracting public subsidies, bailouts, and tax exemptions that inflate corporate profits while passing the burdens of risk and public finance to governments and the working poor.

We are just barely beginning to wake up to the fact that the industrial era has in a mere century consumed a consequential portion of the natural capital it took evolution millions of years to create. It is now drawing down our social, institutional, and human capital as well.

A few years ago during a visit to Malaysia, I had a brief conversation with the Minister responsible for Malaysia's forests. He explained to me in all seriousness that since money grows faster than trees, Malaysia will be better off once it has cut down all its trees and put the money in the bank to earn interest. The image flashed through my mind of a barren and lifeless landscape populated only by banks--their computers faithfully recording interest payments on each of the accounts recorded on their hard drives.

Making Money, Growing Poor

I now draw your attention to Figure 2, which summarizes in fairly stark fashion what we are doing to ourselves. A study by McKinsey and Company found that since 1980, the financial assets of the OECD countries have been growing at two to three times the rate of GDP. This means that potential claims on economic output are growing from two to three times faster than the growth in output of the things that money might be used to buy.

The distortions go far deeper, however, because an important portion of the output that GDP currently measures represents a decrease, rather than an increase, in our well-being. When children buy guns and cigarettes, the purchases contribute to GDP--though no sane person would argue that this increases our well-being. When a married couple gets divorced, it is good for GDP. It generates lawyers fees and requires at least one of the parties to buy or rent and furnish a new home. Other portions of GDP represent defensive expenditures that attempt to offset the consequences of the social and environmental breakdown caused by harmful growth. Examples include expenditures for security devices and environmental clean-up. GDP further distorts our reality by the fact that it is a measure of gross,rather than net domestic product. The depreciation or depletion of natural, social, human, institutional, and even human-made capital is not deducted. So when we cut down our forests or allow our physical infrastructure to deteriorate, there is no accounting for the loss of productive function. We count only the gain.

Economists in the United States, the U.K., Germany, the Netherlands, and Australia have adjusted reported GDP for their countries to arrive at figures for net beneficial economic output. In each instance they have concluded that the economy's net contribution to well-being has actually been declining over the past 15 to 20 years.

Yet even the indices of net beneficial output are misleading as they do not reveal the extent to which we are depleting the underlying base of living capital on which all future productive activity depends. I know of no systematic effort to create a unified index giving us an overall measure of the state of our living capital. Obviously, this would involve significant technical difficulties. However, what measures we do have relating to the depletion of our forests, soils, fresh water, fisheries, the disruption of our climatic systems, the unraveling of our social fabric, the decline in educational standards, the loss of legitimacy of our major institutions, and the breakdown of family structures give us reason to believe that the rate of depletion of our living capital is even greater than the rate of decline in net beneficial output.

The indicators of stock market performance and GDP our leaders rely on to assess the state of the economy create the illusion that their policies are making us richer--when in fact they are making us poorer. Governments do not compile the indicators that reveal the truth of what is happening to our wealth and well-being. And the power holders, whose financial assets are growing, experience no problem. In a global economy their money gives them ready access to the best of whatever real wealth remains. Those who experience the reality of the dark side have neither power nor voice.

To Create a Market Economy

The challenge before us is to replace the global capitalist economy with a properly regulated and locally rooted market economy that invests in the regeneration of living capital, increases net beneficial economic output, distributes that output justly and equitably to meet the basic needs of everyone, strengthens the institutions of democracy and the market, and returns money to its proper role as the servant of productive activity. It should favor smaller local enterprises over global corporations, encourage local ownership, penalize financial speculation, and give priority to meeting the basic needs of the many over providing luxuries and diversions for the wealthy few. In most aspects it should do exactly the opposite of what the global capitalist economy is doing.

Most of the responsibility and initiative must come from local and national levels. Supporting nations and localities in this task should become the core agenda of the United Nations, as the protection of people and communities from predatory global corporations and finance is arguably the central security issue of our time.

A first positive step would be to dismantle the World Trade Organization on the ground that there is no legitimate need for a global police force to protect global corporations from the actions of democratically elected national and local governments so that the richest one percent of humanity can become even richer at the expense of the rest. And while the removal of trade barriers may be a priority concern of global corporations eager to increase profits and market share--it falls far down on the list of human priorities in a world in potentially terminal social and economic crisis. Indeed, where the trading interests of global corporations conflict with the social and environmental goals of people--social and environmental interests should trump the trade goals in nearly every instance.

The WTO is a powerful, but illegitimate and democratically unaccountable institution put in place through largely secret negotiations with little or no public debate to serve purposes largely contrary to the public interest. The 99 percent of the world's people whose interests it does not serve have every right to eliminate it.

Addressing the real need to police the global economy requires an organization very different from the WTO--an open and democratic organization with the mandate and power to set and enforce rules holding those corporations that operate across national borders democratically accountable to the people and priorities of the nations where they operate. It should as well have the power to regulate and tax international financial flows and institutions. And it should have a mandate to make speculation unprofitable and to help protect the integrity of domestic financial institutions from the instability of international financial markets and the predatory practices of international financial speculators. Call it the World Organization for Corporate and Financial Accountability.

There are obvious questions as to whether such proposals are politically feasible given the stranglehold of corporations and big money over our political processes. Yet we could use this same reasoning to conclude that human survival itself is not politically feasible.

I believe global corporations and financial institutions are more vulnerable than they may at first appear--because they are all populated by human beings--like you and me--many of us with children--all of us with human sensibilities and a stake in the future. They are our collective creations. And we have both the right and the means to change or replace them if they do not serve.

For this reason, I suggest we set about defining what is necessary to the future security and prosperity of humanity and to the realization of widely shared human values. We can then turn our attention to the question of how to make feasible that which is both necessary and desirable.