The Neoliberal Globalization: Its Impact and Ways to Overcome it
An Article in the Compendium of Market-Based Social-Ecological Economics
Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?
Table of Contents
Since the failure of the Bretton Woods Agreement in the early seventies, the fate of economic globalization is more and more determined by the private economic sector. Private global players protect their interests by camouflaging them with a market-dogma of deregulation and “liberalization” – a concerted action unprecedented in economic history. Given the devastating social and environmental impact of this development, vigorous economic countermeasures are required.
2. Classification of the Term »Globalization«
The term globalization emerged in the late eighties of the last century. At first, it generally described the increasing global exchange and cooperation in political, social, cultural, humanitarian and economical fields. Not by chance, all these fields were related to the engagement of the corresponding special organizations of the United Nations. Due to the rise of market deregulation and »liberalization« and its social and ecological impact, the meaning of the term narrowed down to economic issues. When the critical quarrel with the liberalist economic principles began in the mid-nineties, critics introduced the term »neoliberal globalization«.
3. The Historical Development of Globalization
Figure 1: In July 1944, the prospective victorious powers of the Second World War and other countries negotiated an agreement in Bretton Woods, U.S.A. to establish a post-war economic order. The process was strongly influenced by U.S. industrial and financial representatives, who had an eye on direct foreign investments, export markets and import of raw materials. They were convinced, their own economic drive would eventually, in exchange with a resurgent Europe, generate worldwide growth, employment and prosperity after the war. And because the economic reasoning was not yet undermined by illusions of absolute economic freedom, the signed agreement was clearly based on firm regulations including a system of fixed exchange rates with a spread of 1 %. And, most important, national autonomy on economic policy was not questioned at all. The agreement was implemented in 1945 with the International Monetary Fund (IMF) and the World Bank (IBRD) being founded. In 1948, the General Agreement on Tariffs and Trade (GATT) was put into force, and decades later, in 1995, its responsibilities were transferred to the newly established World Trade Organization (WTO). The WTO extended its responsibilities with the General Agreement on Trade in Services (GATS) and the Agreement on Trade-Related Intellectual Property Rights (TRIPS). For more details see the articles Bretton Woods System (English) and World Trade Organization (WTO).
Figure 2: Up to the eighties, the industrial countries experienced an unprecedented economic boom, which was supported by a number of given facts: the reconstruction after the devastations of the war, the excessive use of fossil and nuclear energy sources, technological innovation, and not least, the firm regulations of the Bretton Woods Agreement. The developing countries benefited only marginally from the boom, because of the overwhelming and aggressive activities of the industrial countries. The agreement failed in 1973, when the U.S. decided to pass their national debt from the Vietnam War to their trading partners by means of expansionary monetary policy and termination of the gold convertibility of the dollar. The resulting vacuum of foreign trade policies marked the beginning of a new and insecure era of global economic relations.
At first, the control on exchange rates was removed under the pressure of increasing financial speculation. Then, the firm regulations of the Bretton Woods Agreement were softened, and finally, until the early nineties, the restrictions on capital movements were cut by all OECD countries. Subsequently, foreign direct investments of monetary and real capital became possible leading to actual worldwide freedom of establishment for business enterprises and to a new kind of competition between countries: the locational competition.
The WTO, founded decidedly as a stronghold of the new liberalist doctrine, sought, and still seeks multilateral free trade agreements not only for goods, but also for services. Lately, the WTO pushes for free labour movements too. With its principles of most-favored nation treatment (MFN) and national treatment the WTO intends to irreversibly secure and advance the negotiating process. For that, it requires each of its 153 member countries (Russia only joined in 2011) to grant their relevant maximum of market openness to each and every new trading candidate and to grant both foreign and domestic players absolutely equal footing. As the process of market »liberalization« advances under these principles, member countries gradually lose control over their own economies and trade relations.
The unquestioned acceptance of market liberalization in 1995, at the birth of the WTO, was dampened shortly afterwards, when the great markets of the developed industrial countries got caught in a state of saturation after forty years of growth. The global players tried to overcome the stagnation by means of technological innovation and export initiatives aimed at developing countries. But to their own surprise, they ended up competing with newly industrializing countries, in particular with China, which started to pursue an uncompromising strategy of export growth, supported by a devaluation of its currency.
At the turn of the millennium, the declining economic growth in the old industrial countries drove the global economy into a state of depression with mass unemployment, poverty and environmental pollution. For the first time, it was generally suspected that the liberalist choices had promoted an economic system that, due to the illusion of endless quantitative growth, had already gone beyond its natural (ecological) limits. And quite obviously, the system could not even fulfil its social obligations anymore. Nevertheless, the neoliberal protagonists presented themselves unimpressed and sought to protect their interests by introducing a dubious growth paradigm:
Ever since, the neoliberal protagonists interpret declining economic growth as a symptom of insufficient liberalization that has to be fought with enforced liberalization.
In 2008, the multi-lateralistic approach of the WTO unexpectedly touched its limit, when the developing countries allied against the hegemony of the developed industrial countries and let the negotiations in the so-called Doha Round fail. A round that was explicitly intended to further spread »liberalization« of global trade. In the fall of 2008, when the collapse of the liberalized financial markets began, the speculative excesses with opaque financial instruments came under massive criticism for the first time. The relevant investigations revealed that financial transactions were carried out in part with high criminal energy. In the U.S. alone, 1500 inquiries against suspected financial players were initiated.
4. The Neoliberal Economic Doctrine and its Consequences
The message of the doctrine suggests that the political and cultural boundaries and differences would be resolved (would converge) during the development caused and driven by the neoliberal globalization. The world economy would evolve liberated from political influence and controlled only by the dynamics of global markets. And finally, a maximum of productivity, growth, employment and prosperity would be generated. To underscore the message, neoliberal protagonists spread the warning that guidelines and interventions imposed by economic policy were not only superfluous, but extremely harmful.
The doctrine focuses on three decisive factors of competition to guarantee a maximum of isolated commercial (business) productivity: locational advantages, economies of scope and economies of scale. Because these factors are abstracted from the real world (they are absolutized, so to speak), they cause extremely high (external) social and environmental costs and therefore generate negative aggregate productivity at the national level.
Since the neoliberal message is contrary to any practical economic experience at the national level, it seems even more absurd at the global level. The main motive for the implementation of the doctrine obviously lies in the industrial and financial striving for expansion, growth and profit. As indicated above, this was also the driving force behind the official negotiations for the Bretton Woods Agreement.
And because the circle of neoliberal protagonists is not only composed of market players, but also of economists and politicians, we are additionally confronted with a number of odd motives like self-interest, craving for recognition and naive economic convictions. Even the former head of the U.S. Federal Reserve, Alan Greenspan, has justified the financial instruments responsible for the current financial crisis with the argument, they would stabilize the markets by »transfering the risks to those who are willing and able to bear them«. A highly naive conviction, because the worldwide sales and continued resales of securities, such as the U.S. Mortgage Backed Securities, leave the final buyer without a chance for reasonable risk assessment. Especially, when the rating agencies are not willing or able to realistically assess the risks in the first place. Alan Greenspan has to live with the fact that he will most likely go down in history as the legitimate father of this financial crisis.
In the logic of the neoliberal doctrine the following demands are the »core« of its radical market liberalization:
The high priority of capital efficiency, aimed at high returns on investment, means that full employment, fair pay as a basis for life and sustaining restrictions and prices for natural resources are of low priority and can supposedly only be expected once high returns on investment are generated. With its absolute primacy of capital efficiency (and returns) the neoliberal doctrine meets the essential criterion for a capitalist agenda. For more details see the article Excesses of Capitalism.
High system inherent pressure of production costs arises from the biased striving for capital efficiency. And thus, pressure is building up for ongoing concentration of production sites and capital, for territorial specialization and monopolization, and for a disproportionately high volume of global transport. The process of concentration is accelerated by a hostile kind of competition: predatory, cut-throat competition aimed at monopolizing and eliminating competitors once and for all.
The seemingly high productivity of this system in fact produces unemployment, poverty and environmental pollution. No wonder that the overall economic productivity is negative. It’s an apparent productivity, or a mock productivity, if you like. With saturated domestic markets, the global players have no choice but to focus on foreign markets, and thus they end up in fierce global competition with each other and produce a worldwide oversupply. Finally, frictions in world trade and wrangling in the WTO go from bad to worse.
The inconsistency of the doctrine is revealed most clearly, when countries demand open export markets on the one hand and import restrictions for themselves on the other, claiming that their domestic markets are not globally competitive yet. In the WTO these quarrels usually lead to absurd and fruitless mutual accusations of protectionism (see the article Protection and Protectionism).
Overall, national economies become more vulnerable to uncontrollable external incidents (so-called shocks) as both export intensity and world trade volume increase. The financial crisis that became certain in early 2008 is the current proof for this effect.
Figure 3: It’s the nature of the neoliberal competition that best explains the destructive core of the doctrine: Due to open global markets and lack of tariffs, trade quotas and fixed exchange rates, competition is inevitably held on the basis of U.S. dollar or euro prices. For the purposes of the doctrine, this allows to compare prices of commercial products worldwide at any instant. However, the economic consequences of global competition based on absolute price advantages are far-reaching: Differences in national productivity and price levels are completely ignored although they differ considerably by nature, even within the EU and the euro zone. Therefore, business enterprises can only compete successfully, when they constantly keep up with the lowest global dollar or euro offer. The lowest offer usually comes from production sites in countries which allow – on a dollar-related basis – for low wages, low resource prices, low taxes and lax regulations. Consequently, enterprises with sites in developed industrial countries either have to motivate these countries to effectively adapt to relevant global standards or outsource productions to less developed countries, a measure that naturally includes jobs. The forced adaptation process is endless and, as a rule, constitutes anti-dumping offences mainly regarding social and ecological (environmental) dumping. Since national productivity and price levels are under constant pressure and subject to constant change, outsourcing goes on back and forth around the globe. The resulting chaotic relocations are responsible for the widespread social insecurity that particularly affects dependent employees (see also the article Economic Competition).
The process of concentration and the relocation of production facilities have, in combination with high export rates, devastating effects on domestic economic structures and circular flows: regional and remote areas are de-industrialized, social and environmental standards are reduced, entrepreneurial and government planning becomes insecure, and unemployment, poverty and social exclusion escalate. In addition, unemployment is cemented by structural distortions, mainly because the demand for labor is narrowed down to the increasingly specialized needs of export businesses. With its regional devastations, the neoliberal globalization inexorably destroys its own foundation of human assets (qualified labor), widespread consumption, natural resources, diversity and sources of progress. The self-destruction of the system resembles a vicious circle. Each undesirable economic trend perceived is followed by new reflex-like requests for reduced national standards and reduced regulations. And so, the world economy slips into a neoliberal vicious circle (for a detailed description see the article Neoliberal Vicious Circle, and in addition Neoliberal Economic Doctrine).
5. Transnational Corporations as Subjects of the Neoliberal Doctrine
Transnational corporations have first emerged in the course of the neoliberal globalization through mergers, acquisitions and equity participation beginning in the early nineties. They not only operate distributed production sites and offices, but take advantage of different regional trends in production factor costs (including labor costs), tax benefits, access to raw materials and technology, and related market opportunities. Although they deliberately operate at the transnational level beyond national regulations, they integrate and coordinate specialized regional suppliers for their global activities. By doing so, they contribute to territorial specialization, monopolization and disproportionate growth of the world trade volume more than any other type of enterprise. With their corporate mobility, which allows them to transfer productions and jobs across national boundaries at a moment’s notice, they selectively put national governments under pressure to improve their conditions and pricing scope for predatory competition and market conquests.
It’s obvious, that the number of dependent foreign subsidiaries and suppliers grows faster than the number of transnational corporations. But it’s alarming, that foreign direct investments and the world trade volume grow faster than the gross world product (being the sum of all gross national products). Clearly, the expectation that a growing volume of world trade would boost the world gross product, especially to overcome poverty, turns out to be a neoliberal illusion. A closer look reveals another fact: The growth of international trade and transportation is for the most part caused by intra-group transactions of transnational enterprises. And furthermore, predatory competition and hostile market penetration result in nothing but a worldwide redistribution of value-added activities and wealth – always at the expense of employees whose qualifications don’t match the requirements of specialized export productions. Both industrial and newly industrialized countries are affected alternately, while developing countries are forced to trade their raw materials, if any, at dumping prices for essential goods. The best source for related statistics is the United Nations Conference on Trade and Development.
The increasing pressure on production costs and technological innovation, caused by global competition based on dollar and euro prices, forces transnational enterprises to mass-produce standardized products. To achieve the necessary economies of scale and scope for a competitive mass production, corporate mergers and acquisitions are the first choice. But naturally, that involves the danger of oligopolistic and monopolistic structures. When enterprises reach the monopoly-like final state, they limit the market diversity as well as their own innovation and product quality and simply turn to a maximum-profit pricing policy. The quasi-monopolist Microsoft is the outstanding example for such a policy. Moreover, transnational enterprises are characterized by their extreme externalization of social and environmental costs, thus increasing their business productivity, but, at the same time, decreasing national aggregate productivity by diminishing common social and ecological value mainly through unemployment, underemployment and environmental damage. Since the externalized costs are not entered into national accounting systems, they can not possibly be fought. For more details see the article Transnational Corporations.
6. Interactions between Neoliberal Markets
The »liberalization« began, as outlined in the historical retrospect, with the financial markets, simply because their products are easiest to standardize and transfer globally. However, the original function of financial markets, namely to provide economic enterprises with equity and borrowed capital, has suffered greatly under this lead. Particularly, because financial players are tempted under the neoliberal doctrine to invent new and derivative financial products for absurd speculation on securities, capital and foreign exchange markets. Many financial players have gone independent with these products and neglect their responsibility to contribute to value-added activities. Although derivative financial instruments depend on real economy fed cash flow, they are at best useless, at worst they jeopardize the real economy. In any case, they are a zero-sum game causing nothing but a redistribution of income from the losers to the winners. Their dangerous effect becomes obvious, for instance, when stock prices rise fare above the real (intrinsic) value of stock corporations and the speculative value is then used as a base for business policies and investments. The effect worsens, when investments are financed by loans. A resulting stock-market bubble can burst as soon as speculators lose their nerves, sell their stocks and trigger a panic-driven sell-off with plunging stock prices. Finally, when the speculative values, that served as loan collaterals, turn out to be worthless or of minor value, the involved enterprises and banks, and even entire national economies, can be driven into insolvency. The current financial crisis has given evidence that this is a very realistic threat.
But interactions also exist between commodity, manufactured goods and services markets. The cost pressure under global competition, which increases with an economy’s export intensity, forces all standards into a downward spiral including corporate taxes and national tax revenues, thus causing community (public) poverty. The greediness of the private economic sector to privatize public services, already pursued with extreme power, is obviously encouraged, when public budgets are tight. But social welfare is very seriously threatened, when public resistance weakens to the extent that general-interest public services are voluntarily handed over to private enterprises. This leads to a thinning-out of the supply of these services (due to the criterion of profit maximization) at the expense of the general public and particular of citizens with low income. A typical example is the planned privatization of the Deutsche Bahn (German Public Railways), which already led to a cut down of regional services in favor of a few high-speed lines – with the seemingly paradoxical result of prolonged average travel times for passengers within the entire network. Another example is the capital-based old-age provision, the so-called German Riester-Rente: Since the poverty of the elderly becomes more critical, mainly because the underemployed and unemployed contribute little or nothing to the solidarity-based German pay-as-you-go system, private supplementary pension schemes are sponsored by the federal government. The dues, including the subsidies, flow to private insurance companies, who invest the money in globalized financial markets. However, with the money being anonymously invested, a prompt relief of old-age poverty is not achieved at all. The future effect is also uncertain, because returns on investments can not be predetermined.
A totally different kind of interaction exists between commodity, manufactured goods and services markets on the one hand and labor markets on the other hand: In addition to the jobs, which have already been cut or outsourced under the global cost pressure, repeated efforts are made by private enterprises to open national labor markets for the immigration of workers from less developed, low-wage countries. That way, they initially intend to replace local workers with less demanding foreign workers of similar qualifications and, in the long run, to put pressure on domestic levels of wages, social benefits and working conditions and to lower them step by step. With the unbalanced migration from low-wage countries, the social responsibility, which is mandatory for corporate property and capital, is being violated with respect to those employees who have originally contributed to the creation of the capital. It is revealing that the »liberalization« of labor markets is on the agenda of both the EU and the WTO. For further details see also the article Market and Market Economy.
7. From Neoliberal to Civilized Globalization
As mentioned before, neoliberal globalization means dominance of unregulated and increasingly chaotic free trade.
The most active players are transnational enterprises, who dominate the economy not only by suppressing diverse regional productions and traditions, but also by controlling
Therefore, the deregulation of the economy, including the process of concentration, is responsible both for the reduction of economic and cultural diversity and for the growing political willingness to dilute necessary future-oriented standards for the short-term benefit of private enterprises.
Previous experiences with the enforcement of negotiation results at the global level suggest that the chances for a global consensus on the restoration of diversity – as well as international trade based on diversity – are more than slim. Although the UNESCO took a first step in 2005 (with its agreement for the protection of cultural diversity) to free the trade of cultural assets from the embrace of the WTO regime, the enforcement got stuck in a mine field of countless definition and delimitation issues. For a global consensus to break the power of both the WTO and transnational enterprises regarding all merchantable goods, first of all, the neoliberal doctrine would have to be overcome in the minds of all players involved. This is so unlikely, it’s not even worth considering.
For the world to beneficially grow close, returning to decentralized political responsibility and autonomy seems the only realistic choice – whilst seeking normative standards for international exchange and trade. It can not be accepted that countries delegate their political responsibility to interest-controlled bodies like the WTO. On the contrary, they are obliged to pursue and install a future-proof regional and national economic system, even single-handedly and even against fierce internal and external opposition. That way, they can set democratic and economic standards that others can follow and that one day may lead to globally accepted standards and to a future-oriented global system. The first step on the path to a civilized globalization is undoubtedly the most courageous, but also the most important. One of the member countries of the WTO will have to risk it, for the good of all. Nothing ventured, nothing gained!
Figure 4: The original worldwide diversity and the wealth of local and regional experience, which emerged from it, are irreplaceable assets and also prerequisites for a joint and sustainable humane development – both for social welfare and the preservation of natural resources. Recognizing this, leads to the conviction that a civilized globalization is not only indispensable, but feasible. The connected economic and political principles are neither new nor revolutionary, but allow a realization that can additionally draw its lessons from the current historically unprecedented aberration. The following economic measures reflect the principles and can be applied by individual countries or supranational economic entities such as the EU:
1. Repatriating political and economic autonomy and power from the transnational and supranational level to the national, regional and local levels in order to decentralize (to subsidiarize) the political and economic structures and responsibilities.
2. Introducing a process of permanent dynamic decentralization of economic structures by means of progressive taxation according to size of business, extent of the ecological footprint and number of employees to counteract and limit the »natural« striving for expansion, growth and profit. Thus, added value is always produced at the lowest possible level, that is, as decentralized as production technologies allow to cover all geographical areas. Decentralization, or more precisely: subsidiarization, aims at decentralized (direct) responsibility for social and environmental matters and at self-determined economic participation and »sharetaking« enabling full employment and fair income as a basis for life. Furthermore, it establishes beneficial competition horizontally between productions of the same kind (within individual levels) and vertically between labor-intensive and capital-intensive productions (across different levels). Overall, controlled subsidiarity is the only promising method to achieve optimum welfare based on socially and ecologically defined productivity and the best possible distribution of employment and income. Adding, that the above mentioned economies of scale and scope perfectly apply to the conditions of controlled subsidiarity to generate sustainable social and ecological gains.
The effective building of subsidiary economic structures under the conditions of the neoliberal globalization as a base for a post-neoliberal economic order is addressed in the article Building Subsidiary Economic Structures.
3. Shaping international trade and competition on the basis of comparative, relative price advantages. These can be identified and put to good use, when trading countries bilaterally agree upon exchange rates that reflect and neutralize their average price and productivity gap. This, by the way, being the original function of exchange rates. In multi-bilateral trade relations, partners can identify and utilize the maximum price advantage for any given product to be imported at any time by applying the current exchange rate and picking the lowest priced offer. This way, trading countries can mutually achieve gains in trade completely independent of their individual levels of productivity. In order to integrate international competition into domestic competition in a constructive way to avoid absurd destructions and eliminations of competitors, autonomy to decide on import tariffs and quotas can and must be mutually granted by trading partners. With such a reasonable protection the absurd and fruitless accusations in the WTO on protectionism become superfluous.
4. The domestic economic subsidiarity can be extended across national boundaries for the purpose of large-scale international projects and enterprises, private as well as public, which exceed the usual demands of national undertakings concerning resources and production technologies.
5. International trade on the basis of relative price advantages (which excludes destruction and elimination) is also the ideal foundation to establish an independent multilateral trade with intellectual property. Competition in this trade can be free to a large extent, because it does not interfere with trade in commodities, manufactured goods and services, and because it directly induces worldwide technology transfers and social as well as ecological advancement.
As a compliment see the article Sustainable Social Welfare.
Click here for the German-language version: Wirtschaftliche Globalisierung