A New Model for Managing International Trade and Development , Part I

This is the first part of a four-part series describing a new approach to the conundrum of manufacturing outsourcing. Sid Eschenbach is The Rag Blog‘s newest contributor. We welcome his participation in our growing effort. And we hope you, the readers of TRB, enjoy this proposal for changing the way globalization is taking place.

Richard Jehn / The Rag Blog

Click here for all the posts in the series.

In Development…
…only one road leads to Rome

By Sid Eschenbach / The Rag Blog / November 12, 2008

Introduction

The challenges facing President-Elect Barack Obama could not be clearer: in the U.S., he must reverse the hemorrhaging of high quality jobs and declining real wages, and set a course to restore real economic and wage growth. In particular, Obama’s policies must create real growth… that is, growth not founded on financial card shuffling or fiat spending, but on that growth of old founded upon simple work and production. Not on excess borrowing by American consumers, but earnings from jobs and investments in other than service and financial sector businesses.

The U.S., like most other nations, is finally going to be forced, once again, to make money, like that old Smith-Barney ad stated, the old fashioned way… by earning it… but industrial production is at its lowest level since 1942 as a percentage of the economy.

Over the past 40 years, the historic trade relationships between nations have been fundamentally changed by the introduction of massive, stateless global corporations into the traditional national trade and development equations. Because their interests are not necessarily congruent with those of any nation, the established development paradigm of protect, industrialize, consolidate and export has become distorted by their arguments and interests. I hope to show over the course of this paper that in spite of the self-serving arguments advanced by the global corporations, there is still only one road to generalized prosperity, and that is the traditional road.

It is the road that starts with protected national industrialization and ends with higher worker pay and the creation of a productive and entrepreneurial middle class, features that managed correctly then become self-perpetuating features of the national economy. However, without these precursor states of protection, industrialization and labor gains, the economic benefits generated by innovation and productivity will never be realized, and an otherwise achievable state of generalized and global economic well-being will be impossible to attain. I will further argue that the use of this paradigm does not, in fact, hurt the valid interests of the corporate trade entities, but will rather serve to spur their own prosperity.

However, to achieve this end, we will need to find a remedy to the problem that is at the heart of what currently drives manufacturing to migrate ‘off-shore’, the problem of global surplus labor and the natural and unavoidable exploitation of that resource by international businesses. This is not something that they do because they are inherently evil or abusive by nature, but rather something that they are obliged to do simply in order to survive within the capitalist system.

Fixing this labor problem and strengthening the traditional model of national development will allow us to return to a modified model of what has brought prosperity in the past, but with the added virtue of benefitting from the tremendous creative capacity of the new player in the arena, the international businesses.

The first indication that the above is likely true, that prosperity and well-being in large nations can only be created and sustained through industrialization, is the recognition of the fact that before the Industrial Revolution, no people, no nation and no empire on the planet achieved an economic level where the majority of their people were living above subsistence level.

Not the Greeks, not the Romans, not the Chinese or the Sumerians or the Aztecs or the Incas. Not in London, Rome, Angkor Wat, Baghdad, Cairo or Cuzco… no civilization anywhere achieved states of well-being remotely comparable to what has been achieved by hundreds of millions of people in the past two centuries since the industrial age swept out of England and changed the world. As we will see, it’s not a coincidence.

That being the case, Obama’s economic challenges, while bigger in scale than others, are the same as those faced by most national leaders on the planet… to improve the well-being of his or her people in real, sustainable ways. Amazingly, this is proving difficult to do, in spite of ample historical evidence as to what must be done. This paper will argue that there is one and only one road for any nation or region to successfully develop and achieve a sustainable economic state of comfortable well-being for its people, and that road that stands independent of national identity, cultural values or geographic peculiarity.

Over the last two centuries of competing economic theories, political and cultural policies and in a wide variety of geographic settings, it has been repeatedly shown that there is only one route to economic well-being, one that starts with industrialization and ends with organization of labor, higher worker productivity and innovation. Without them, you’re dead. With them, you are a success and your people are comfortable.

The idea, advanced by corporate interests intent on moving manufacturing to low-wage environments, that a large nation can generate and sustain prosperity through the economic activities of the service or finance sectors alone has finally collapsed, and the demise of this ideologically flawed model is as important to the worlds economic evolution as was the fall of the Berlin Wall in politics. However, unless this economic collapse is understood for what it is, the systemic failure of modern international corporate laissez faire economic ideology, and unless that recognition spurs a complete rethink and redesign of the past 50 years of economic development theory, there is absolutely no hope that that the new American president can, using Keynesian mechanics, rebuild within the United States and the rest of the world a system that by its nature generates and sustains prosperity.

Without overstating the case, this is a moment not unlike that faced by John Locke when he wrote his ‘Two Treatises of Government.’ In it, he first refutes the basis of the then-existing seventeenth-century political order (primogeniture), and then goes on to develop the arguments for an entirely new political system. First, however, he asked all the hard questions, the answers to which demanded a rethink of the political realities of the day… and it is just this type of analysis that is called for at this current time of economic crisis. The king is dead; long live the king.

The situation as it stands today

The current development mantra is the internationalized version of the U.S. domestic ‘trickle-down’ theory first popularized by Ronald Reagan. Its ‘developmental’ premise is that what is good for the top is also good for the bottom; that unrestricted and unregulated corporate ‘free-trade’, the unrestricted manufacture and exchange of goods, will by its nature lead all who participate in it to a developed economic state.

The adoption of this ‘strategy’ is, in historical terms, very recent, and is driven by the particular agenda of the new kid at the party… the powerful and essentially stateless multi-national corporations who, not surprisingly, have their own needs before them. That is because while trade agreements are signed between nations, they are in fact driven by particular business interests that may or may not be congruent with the national interests, and as such, are not necessarily made in their national interests.

Furthermore, the silent partners to these agreements, the multi-national corporate structures, do not share equitably in the true burden1 of the educational, legal, social and environmental services provided for the workers of the multi-nationals… but paid for by the nation-states. Thus, the so-called ‘free-trade’ agreements signed between nation states have invisible co-signatories, the corporate multi-nationals that will be the major beneficiaries of them.

Instead of seeing the outcome as a win/lose or a win/win contract between the national parties involved, the outcomes should more truly be considered to be shared between three parties… the two nations involved… and the corporate parties who will most likely be the real beneficiaries. It is the very nature of this new tripartite relationship that has dramatically changed the historic shape of national development and trade policy.

For many, the new and powerful groups of international corporations are the villains of the piece, a group whose interests are not national and whose goals are distinct from the historical processes used by nations to develop. To the degree that they are the authors and the proponents of the current ‘free-market’ development model, they are indeed the villains. However, in my opinion this is more coincidental than by design, as they simply grew, like nations and individuals, to act in their own best interests… something that should surprise no one.

The challenge is to design a trade and development strategy that joins the goals and the success of the multi-nationals to the goals and the success of the national interests they work between… a situation that we don’t currently enjoy.

Exactly what is different about modern international trade? Surely there has always been trade, and empires from the Venetians to the Dutch were built upon it. The answer is simple: the dominant power of statelessness corporate players. From the time of the Peloponnesians, through the Venetians to the Dutch and the English, all trading was done by national entities that, while acting privately, generally reflected national interests… a fact that is no longer the case.

There are now many companies that while headquartered in a particular nation, actually do the bulk of their business, have the bulk of their workforce and earn the bulk of their profits in other nations than their ‘own’. When they make decisions, then, whose interests do they represent… their own, or the nation where their headquarters is located, their manufacturing done, or their sales consummated?

It is due to the opaque answer to this question that the historical trade and development paradigm has been altered, and that reason is simply because, as stated above, national trade agreements are not any more necessarily in the best interests of the nation where either the manufacturing or the selling takes place, but in the best interests of the manufacturer or the seller… and that may be completely different than any of the nations involved.

As international trade and development policy currently exists, it is harder, not easier, for a nation to implement the policies that will actually lead to the goal line — an industrialized, unionized economic state where innovation and productivity are the engines of well-being. Why? Because as things stand now, international capital can shop production facilities between national sites that are reduced to underbidding; giving more generous tax holidays, forgiving labor and environmental regulations, even paying the potential investor to invest in their country.

This happens because of one simple, commanding and unavoidable reality; the world has a huge surplus of cheap labor. Therefore, under the ‘any job is better than no job’ scenario, for the citizens of most countries these policies constitute nothing less than a game of economic ‘limbo’… how low can you go? For labor, it is quite simply a race to the bottom.

For the corporate entities, it is also a race to the bottom, but their ‘bottom’ is the bottom line. This is the simple result of the inevitable capitalist struggle, their fight for survival among their peers, and their actions represent only what they must do to survive. Therefore, the country that offers the best combination of low labor costs and efficiency, all else being equal, will receive the production facility… which is why it is a race to the bottom.

The international negotiating record is rife with tax holidays, environmental sacrifices, payoffs to national leaders, labor exceptions, etc, tools and gifts employed by both the country and the company to get a ‘better’ deal. It is most often then not on what is best for the country or the people, but upon the argument that anything is better than nothing, even if workers rights, environmental protections and decent pay are sacrificed to get the ‘deal’.

Due to economies of scale and low costs of transportation, it is far better from the corporate and strictly economic point of view to manufacture any product in a low wage – low controls – low obligations environment and sell in the high cost environment. Due to worldwide surpluses of both labor and capital, and in combination with the information technology revolution, this ‘flat’ world phenomena can be expected to continue unhindered unless international trade and development policies change through national legislative actions.

While no one can foretell the future, if the past is any example, what this probably means is a continued decline in the manufacturing sectors in the national economies in the developed world, and very moderate increases in income for the undeveloped and developing world… a situation that is not beneficial for either … and is in fact politically untenable for both.

Because of this recent addition of the multi-nationals to the mix and their advancement of a ‘trade is development’ paradigm, a rethink of the entire situation is past due. The development argument advanced by corporate interests in support of their ‘free-trade’ and ‘out-sourcing’ policies is the following: that the consumer benefits through lower prices and that efficient capitalism (measured by cheap prices) is not only good, but historically inevitable (which, given the policy, becomes a self-fulfilling theory).

It also embodies the argument that trade and consumerism will create development and well-being automatically as a bi-product of the same. However, are there any facts to support this assertion? I would say no.

There is no doubt that the well-being of humanity as a whole has indeed improved, but this is unremarkable in itself: exclusive of short-term variations, human quality of life has always improved over time. The Sumerians lived better than early Homo sapiens, Rome better than Sumeria, etc. Therefore, general or specific cases of improved well-being cannot be used as a particularly compelling argument for the ‘free-trade as development’ model.

Indeed, the fact is that the only national economies that actually have graduated from ‘un’ or ‘under’ developed to developed status did so using the traditional methods of protecting national markets and industries while strengthening them in order to then export and prosper. The examples of the successful use of this historical model would be the Asian tigers, China, and to a lesser degree India. On the other side of the coin, we have all of Africa and South America who were forced to accept the neo-liberal model… and are still struggling to achieve both economic and political well-being.

A Step in the Right Direction

In my opinion the current model of international trade can actually be described in the following equation: abundant international capital + excess international labor + super efficient global communication and transportation systems = development.

It represents the neo-liberal argument that a ‘goods’ based system, the manufacture and trading of goods, will lift the standard of living of everyone. As stated above, the only examples of nations that have in the past 30 years achieved the levels of well-being enjoyed by the previously ‘developed’ world did so by creating a hybrid model, one that utilizes the proven methodology of the past while joining it to the creative and financial power of the international corporate trading and manufacturing entities.

First, they rejected the neo-liberal policies promoted by the IMF, World Bank and what is know as the Washington Consensus and, bucking strong opposition, went traditional: they protected their industry, protected their markets, and kept control over their own national priorities. However, that added a twist to that historical model by taking advantage of the multi-nationals, offering their countries as bases for export manufacturing and thereby gaining the benefits of their technological and financial capacity.

Compared to the regions that did not adopt this ‘amalgamated’ strategy and simply swallowed the neo-liberal philosophy and practices, those many countries that simply opened their borders to the ‘cheap’ consumer articles produced elsewhere, the difference is dramatic. This is not to say that over the past 40 years there has not been uniform and rising global prosperity even in the ‘free-trade’ countries. However, the difference between a star of the neo-liberal world, Chile, and one of the many stars of the modern ‘amalgamated’ world, South Korea, for example, is dramatic. It is not an argument that open-border trade is bad, but rather that real development is better.

And we should not be surprised that even just trade makes things better. After all, man is nothing if not creative and intelligent. Things have been getting better for the past 10,000 years, so we certainly would not expect to go backwards. However, using a ‘things are better’ argument against a ‘things could be much better yet’ argument makes no sense. I am not against trade, but I am against the proposition that trade is the best vehicle for development.

What then, is the best program? Have the Asian economies created a viable new model that combines the best of the past and the best of the modern? What should be at the heart of development? In contrast to the neo-liberal argument that cheap consumer prices are the standard by which success is measured, I believe that they should not the central part but one of the least relevant parts of a successful national development policy.

While price will always drive consumption and consumers behavior, the consumer can only consume if he/she has money to buy… and that must be earned. The question is, from where? How does one produce with one’s labor something that has enough value to purchase the goods produced elsewhere?

The truth is that ‘free’ trade, in the absence of global industrialization and collective bargaining is, as I said above, nothing less than a race to the bottom for the many, all for the benefit of a relative few international parties. When two nations sign a ‘free-trade’ agreement, the businesses that can move do move… from the high-wage nation to the low wage nation, as there is no longer a penalty to export back into that high wage market. Therefore, when that company ‘off-shores’ its manufacturing, the high wage laborers lose, the low wage laborers lose, and the company gains. This is no solution for the peoples of either country.

Note

1 In August, the U.S. Government Accountability Office reported that two-thirds of U.S. corporations paid no income taxes between 1998 and 2005.

Sidney Eschenbach, 60, lives and works in Guatemala, Central America. His thoughts regarding developmental economics and trade are based on decades of development work in Latin America at various levels, community and corporate.

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