Globalizing the economy: the influence of the International Monetary Fund and the World Bank

In this talk I want to focus on three issues. The first is the relationship between globalization and the nation state. The second is the relationship between the nation states of the world on the one hand and the IMF and World Bank on the other. The third is the historical context of globalization, and in particular its development within a long period of economic stagnation.

To begin, globalization as commonly discussed refers to the explosive growth in the past twenty to twenty-five years of huge multinational corporations and vast pools of capital that have crossed national borders and penetrated everywhere. This globalization, in turn, is seen as largely the result of a parallel technological explosion in computerization, telecommunications, and rapid transportation. Now, while the facts of an accelerated internationalization of capital and technology are not in dispute, I want to start by taking issue with the conventional wisdom that these multinational corporations have become so large and powerful that they are fundamentally more powerful than national governments, and as such are independent of them.

Interestingly, this is not a new idea, and in fact predates the period of the last twenty years conventionally described as one of "globalization." Thus, back in 1974, Richard Barnet and Ronald E. Muller in their book Global Reach: The Power of the Multinational Corporations were already saying: "If we compare the annual sales of corporations with the gross national product of countries for 1973, we discover that GM is bigger than Switzerland, Pakistan, and South Africa; that Royal Dutch Shell is bigger than Iran, Venezuela, and Turkey; and that Goodyear Tire is bigger than Saudi Arabia."(1) Moreover, the authors were citing a 1967 research report of a corporate consulting firm warning that "the nation state is becoming obsolete: tomorrow.... it will in any meaningful sense be dead."(2)

Today, however, in addition to the relative "size" of companies versus countries, the emphasis is on trends like the rapid flight of capital from countries such as Mexico which forces national governments to bow to the will of companies, or the jumping of companies from the United States to Hong Kong and then to Mexico or Haiti. These facts are pointed to as examples both of increasing globalization and of the impotence of national governments to stop it. In the words of Barnet's latest book, Global Dreams: Imperial Corporations and the New World Order "the balance of power in world politics has shifted in recent years from territorially bound governments to governments that can roam the world."(3)

Without denying the validity of some of these factual observations, I want to argue that there is a basic fallacy in the interpretation of these events, insofar as the conclusion is that there is a divorce of capital and multinational corporations from states or governments. While it is true that Exxon, Bayer, and Toyota sell and invest all over the world and that their primary goal is to make money for their shareholders, this does not make each of them independent of its home country, by which I mean the country in which it is headquartered and in which the great majority of its capital stock is owned. The reason for my conclusion is that today, as throughout history, the power of the state has always been important to companies seeking to sell and invest internationally. This is true whether or not state power is used to pressure other countries to reduce barriers to the companies' exports or investments.

This crucial role of state power, whether it be military, political, diplomatic, or economic, is perhaps clearest in natural resource sectors like oil. Here the historic rivalries among the United States, Britain, France, Germany, Italy, and Japan for control of this crucial industry have in the last analysis been settled by the ultimate test of state power-war-making ability. Thus, it is thanks to United States and British victories in two world wars that the names of companies like Exxon, Mobil, British Petroleum and Shell are household words, while Veba and Nippon Petroleum Refining, leading national companies in Germany and Japan, are known only to specialists. While oil is a dramatic example, I would argue that in every industry where companies are struggling for markets or investment opportunities, be it in Mexico, Thailand, or Saudi Arabia, the national identity of the company can be a very important factor in its success or failure.

Moreover, the other side of the coin is that even if the company doesn't give a hoot about the impact of its actions on its own country--which, by the way, is much more true in the United States than in Japan or Germany, where the links between the corporate world and state bureaucracies are much closer--the government of the home country almost always cares. Thus it is in the interest of each country's government that one or more of its national companies control important natural resources like oil or key technology like computers. This is true for a variety of reasons, including the profits that will accrue to the nation's shareholders as well as the national security and independence that come from their controlling the resources themselves.

Another reason is that a government has much more control over companies owned by its own citizens than it does over foreign companies, and can force them to do things it wants much more easily. For example, to take a recent case, a U.S. company, Continental Oil, was blocked by the U.S. government from helping to develop Iran's oil fields while European and Japanese companies were able to resist United States pressure.

One key point to bear in mind is that the significance of the state-company linkage is greatest in an era of strong rivalries among companies. Such rivalries are fiercest when overall economic growth is slow or nonexistent. Conversely, when economic growth is rapid and there is plenty of business for all competitors, or when the companies of one country are so dominant that there are no effective foreign rivals, then the state-company nexus is less important. The fact that we are now in a slow-growth or stagnant era, with fierce and growing economic rivalries, means that the state-company linkage is more important than ever. So, I conclude that the conventional view that globalization has made the nation state irrelevant is particularly wrong today.

Since an awareness of the historical time period we are dealing with is vital to understanding the role of the World Bank and the International Monetary Fund in the global economy, I need to say a few words about it. The history of these two institutions dates back fifty years to the end of the Second World War, and particularly to the years after 1950, when the reconstruction of Europe was complete.

In this postwar period, a crucial distinction has to be made between an earlier phase of strong economic growth, roughly 1950-1973, and a later phase of relatively slow growth or economic stagnation, 1973 to date. Two numbers sum up the difference between the two periods: for the industrial countries as a whole, the average annual growth rate in total output was 4.4 percent for 1950-1973 and has been only 2.4 percent since 1973. And, not unrelated, as we shall see, the earlier period was one of unilateral United States dominance of the world economy while the present period is one of tri-polar rivalry among the United States, Germany, and Japan.

What has caused this shift from a high-growth economy to a low-growth economy? In the United States, which emerged from the Second World War as the dominant world economy and as the locomotive of economic growth, there was tremendous pent up demand for both consumer and investment goods and a huge pile of savings to turn these needs into effective demand. So, in this 1950-1973 period, there was an explosion in the production of television sets, automobiles, and new housing for a public whose needs had been thwarted by depression and war. The growth of the 1950s and much of the 1960s was led by suburbanization and by the vast housing boom, highway construction, and expansion in the automobile industry that went with it. Along with the demand for single-family houses in the suburbs went the need for all kinds of commodifies, from furniture to swimming pools, and for public infrastructure like schools, roads, and utilities. In addition, the Korean war of 1950-1953 gave the United States economy another boost just when it was starting to have a cyclical decline. And the almost steady growth of military expenditures during the following years, accelerated by the Vietnam war, became another pillar of economic growth. Finally, as first Europe and then Japan began to recover from the war and grow rapidly, this added to the industrial countries' collective growth.

But at some point in the late 1960s the forces of stagnation began to set in. A number of factors seem to have been involved. First, beginning in the United States and coming later in Europe, there was a relative saturation of the demand from private consumers. Second, whereas the boom period was a sellers' market for the United States, by 1970 competition from Europe and Japan was becoming stronger. And because of these two factors, the high profit rates of the previous years were beginning to weaken. Most importantly, there were no major technological innovations to replace the auto, highway, and housing investment complex as a stimulus for growth. As a result, the 1970s and 1980s were marked by an enormous growth in financial investment and transactions of a speculative nature. Whereas in the mid-1960s bank lending across national borders accounted for only about I percent of the GDP of the market economies, by the mid-1980s it reached 20 percent of the much higher levels of GDP.(4) As Barnet points out in his 1994 book:

The Global Financial Network is a constantly changing maze of currency transactions, global securities, Mastercards, euroyen, swaps, ruffs, and an ever more innovative array of speculative devices for repackaging and reselling money. This network is much closer to a chain of gambling casinos than to the dull gray banks of yester-year. Twenty-four hours a day, trillions of dollars flow through the world's foreign exchange markets.... No more than 10 percent of this staggering sum has anything to do with trade in goods and services.(5)

At the same time, the Reagan-Thatcher years of deregulation and privatization were accompanied by a tilt in government tax and expenditure policy that shifted income and wealth sharply toward the rich. The result of the shift has been a weakened demand for real goods and services. Moreover, with the end of the Cold War, the mainstay of the U.S. economy in the 1980s--military expenditures--no longer has much justification; even though the military budget remains near Cold War levels, it is difficult to make a case for pursuing a policy of pump priming through "military Keynesianism."

Finally, I want to stress that the globalization process focused on by the conventional wisdom took place precisely in the post-1973 era of stagnation, and in my view was largely a response to the end of the boom period. Thus, the over-accumulation of productive capital by the end of the boom period (the other side of the coin of underconsumption) meant increased competition, which put pressure on profits. This, in turn, put pressure on companies to expand abroad and led to increased financial investment and speculation. These developments in turn were, in my view, facilitated rather than caused by the technological improvements of the post-1973 era in computers, communications, transport, etc.

Now we come to the question of where the IMF and the World Bank fit into this globalization process. Both institutions were conceived at the 1944 Bretton Woods conference, and ultimately reflected the interests of the world's overwhelmingly dominant power at that time--the United States. The United States had seen itself adversely affected in the Great Depression by its industrial rivals' defensive restriction of currency, trade, and capital in their colonies and spheres of influence. Therefore, the United States wanted a post-war era based on its traditional "open-door" policy, with the goal being abolition of virtually all restrictions on international currency flows in order to create the maximum opportunity for trade and investment. The IMF and the Bank were thus conceived as twin institutions working together but specializing in different aspects of achieving this goal.

The IMF's job was to help insure that in periods of economic downturn, nations did not try, as in the 1930s, to solve their problems by beggar-thy-neighbor policies--for example, by trying to increase their exports and reduce their imports through exchange and trade restrictions and competitive devaluations of their currencies. Thus, the IMF's goal was that nations facing external balance of payments difficulties would take internal steps to improve their competitive position, such as reducing production costs by cutting wages or government expenditures. They would not take steps negatively affecting other countries, like currency restrictions or devaluations.

The carrot for joining the IMF was that in the event a country found itself with balance of payments difficulties, it could obtain short-term loans from the Fund to give it breathing space to make the fundamental adjustments necessary for correcting the difficulties. The downside of membership was the stick that, as a condition of getting Fund loans, the government might have to take all kinds of measures that hurt the mass of people-cutting wages, ending subsidies, privatizating, and opening up to foreign investment. These were extremely unpopular.

The voting structure of the IMF was directly related to the amounts of money subscribed by the member states, which ensured that the United States, with 36 percent of the subscribed capital, was the dominant voice, along with the other industrial countries, which in total had the great majority of subscribed capital. Even though its share had dropped to 23 percent by 1974, the United States had a veto through a provision requiring an 80 percent majority vote on key issues.

A good summary of the real impact of the IMF in the earlier boom period was given by Cheryl Payer in 1974:

The IMF has never played a deciding role in the adjustment of exchange rates and trade practices among the wealthy developed nations, despite the large sums it has made available for the defense of their currencies ... it cannot dictate policies when there are fundamental disagreements among the titans of international finance. It is rather the weaker nations which are subject to the full forces of IMF principles ....(6)

This differential impact on nations is something I want to return to later. Turning now to the World Bank, once the reconstruction of the war-torn industrial countries was completed, the fundamental role of the Bank was to make loans to Third World governments to pay for investments in large basic infrastructure projects like dams, power plants, roads, etc. These were projects that private investment was unwilling or unable to carry out, but which were necessary to lay the basis for private investment in other sectors, particularly natural resource exploitation and manufacturing.

As with the IMF, voting power in the Bank was determined by capital subscribed, which ensured that the Bank too worked primarily for the interests of capital in the developed countries and not for the Third World. Thus from the very beginning, the United States owned the largest percentage of the Bank's stock (35 percent), and the industrial countries as a whole the great majority. Moreover, the influence of the industrial countries was further strengthened by the Bank's policy of financing much of its loans by borrowing huge amounts in world capital markets--which needless to say were dominated by the same industrial countries.

While the conventional wisdom is that world Bank loans were ultimately intended to promote economic development in the Third World, the reality is that their role was to promote private foreign investment in those countries. A good example of the Bank's real motives can be seen in the oil area, where for decades the Bank stubbornly refused to lend money to Third World governments for highly profitable investments in oil refining and production, insisting instead that foreign investors be given these lucrative opportunities.

Thus we can conclude that in the boom period prior to the period of globalization, the Bank and the IMF basically functioned as handmaidens of Western capital vis-is-vis the Third World, and played little role in the relationships among the industrial countries.

In the 1970s and early 1980s, these two institutions played their traditional but increasingly important roles in beating back the challenge of the Third World. This was the challenge presented by the rise of OPEC and the drive by other key raw-material-producing countries to improve the terms of trade for their exports of these key commodities. The World Bank in particular played an important role by working to prevent individual industrial countries from making favorable unilateral deals with raw-material-producing countries; instead the Bank led multilateral efforts to increase the supply of raw materials available to all industrial countries. In other words, the Bank worked to prevent the formation of potential rivalries among industrial countries, which would have improved the bargaining position of the Third World.

Furthermore, in the 1980s, as globalization and financial speculation went into high gear, the two institutions continued their efforts to insure that the Third World remained subservient to the needs of international capital, whatever the cost. Thus they collaborated to coordinate the handling of the Third World debt crisis, in which big Western banks recycled petrodollars by foisting ill-advised loans on Third World countries like Mexico and Brazil. Thus the IMF and the Bank used their enormous clout to see that countries repaid their debts to Western capital. As a UN report notes: "In 1983-89, rich creditors received a staggering $242 billion in net transfers on long-term lending from indebted developing countries."' Yet despite this huge debt repayment flow from the Third World, its total debt, which was only $100 billion in 1970, doubled in the 1980s, from $650 billion to $1,350 billion.(8)

These dry figures do not do justice to the cost in human terms. As Davison Budhoo, an IMF economist who resigned in disgust in 1988, has stated: IMF-World Bank structural adjustment programs (SAPs) are designed to reduce consumption in developing countries and to redirect resources to manufacturing exports for the repayment of debt.... the greatest failure of these programs is to be seen in their impact on the people.... it has been estimated that at least six million children under five years of age have died each year since 1982 in Africa, Asia and Latin America because of the anti-people, even genocidal, focus of IMF-World Bank SAPs. And that is just the tip of the iceberg.... some 1.2 billion people in the Third World now live in absolute poverty (almost twice the number ten years ago).... On the environmental side, millions of indigenous people have been driven out of their ancestral homelands by large commercial ranchers and timber loggers ... It is now generally recognized that the environmental impact of the IMF-World Bank on the South has been as devastating as the social and economic impact on peoples and societies."(9)

I conclude, therefore, that the IMF/Bank track record has been consistent throughout the eras of boom and stagnation in terms of representing the interests of the industrial countries versus the Third World. In the 1990s, however, we are in a period of extremely fierce economic rivalry among three major industrial powers. The collapse of communism means that Japan and Germany no longer need a United States military umbrella, although the Persian Gulf war can be seen as a United States attempt to show them their vulnerability and the importance of United States military power in protecting their access to resources. But today the main rivalries are over trade and investment restrictions, particularly between the United States and Japan, but also between the United States and Europe.

In this situation of extreme rivalry, it is not so clear to the international financial institutions what they should do when their key members are quarreling. Two good examples are given by recent events. The first was the collapse of the Mexican peso, after which case the IMF moved quickly on U.S. demands to bail out Mexico by offering within hours a standby credit of almost $18 billion--far more than it had ever given any single country before and a very large proportion of its available lending capacity. But key European powers like Germany and France, as well as Japan, were furious at these actions of the IMF, and in an unprecedented step some of them abstained from voting on the formalities of the loan. In this case, the U.S. rivals were upset by the way in which the IMF bureaucracy jumped through the hoops for what was seen by these rivals as fundamentally a United States problem, which the United States should have solved by itself.

The second example is the recent widely publicized decline of the dollar in terms of the yen and the mark. Japan and Germany have openly stated that the United States should deal with its "dollar" problem--which they see as caused by the huge United States budget and trade deficits--by the traditional IMF methods imposed on Third World countries: namely, the United States should reduce these deficits by raising taxes and cutting social expenditures, even if this then throws the country into recession. The continuing currency devaluation taking place in the U.S. dollar is not acceptable to these rivals both because it hurts their competitive position vis-a-vis the United States in trade, and because as holders of large amounts of United States debt obligations, they are hurt by the decline in value of these debts.

According to standard IMF prescription, such currency devaluations are unacceptable, and the country should take internal steps to solve these problems. But the United States, as the world's leading economic power, is unwilling to impose upon itself the same restriction that it has imposed on Third World countries through the IMF. So the IMF finds itself hoist on its own petard, and all the world can see that its ideology of free markets and financial discipline are fine for the weak, but not for the powerful.

Finally, I would like to conclude with some speculation on the future of globalization and the two institutions. Globalization which along with its co-conspirator, privatization, involves the relentless penetration of private capital and market principles into every arena of life, is a powerful force everywhere in the world. Since there are no longer socialist countries to offer either a practical or an ideological challenge, populations and leaders everywhere are succumbing to the continually trumpeted idea that there is no alternative to privatization and the market. Yet, globalization's own increasing success may well lay the groundwork for the ultimate containment and reversal of this trend.

One reason is that globalization has been marked by the development of blocs based in North America, Europe, and East Asia. The push for privatization may begin to run up against the desires of each of these conflicting blocs to be the main beneficiaries from such privatization. For example, at last month's World Bank/IMF annual meeting in Washington, there was general agreement that the Bank should shift the focus of its loans toward private investors rather than Third World governments. But this raises the question of which private investors from which countries should be the beneficiaries.

A more fundamental limitation to globalization is that in today's era of stagnation, globalization is increasing income inequality all around the world. In 1970, the richest 20 percent of the world's population had an average income 32 times that of the poorest 20 percent; by 1991 that ratio had almost doubled, to 61 times.(10) As the Human Development Report notes, "The gaps in income and employment opportunities between rich and poor nations and between rich and poor people are thus very large--and widening at an alarming pace."(11) The same pattern of course can be seen here in the United States and in our own state and city.

One result of this increasing income inequality is that the problem of overaccumulation of capital, or underconsumption, which itself gave rise to the period of stagnation, is getting worse. Fewer and fewer people around the world can afford to buy the necessities and comforts of life which the global economy is capable of producing. Living standards of the middle and working classes are being reduced, sometimes destroyed almost overnight. One example of this phenomenon, related directly to the impact of globalization's accelerated financial speculation, is Mexico. As a result of the 1994 flight of hot money which led to a sharp devaluation of the peso last December, thousands of Mexican businesses were destroyed, hundreds of thousands of Mexicans were thrown out of work, and real wages, which had already declined by half in the 1980s, are likely to fall by another 20 percent or more by the end of the year.(12)

At present, the reaction of people around the world to the huge stresses generated by globalization varies. They range from patient waiting to stunned despair to isolated violent actions. On the other hand, the ideologues of the market, political leaders and media personalities alike, often shed crocodile tears over the suffering of the masses; but they also say that while there is no alternative to this suffering, as the virtues of the market finally work themselves out, everyone's life will improve. The reality, however, is that there are no mechanisms within the market today to prevent the living standards of most people from falling indefinitely. Indeed, some of the ideologues are already preparing the groundwork for accepting a new era of unprecedented income inequality, often based on race and class prejudices. Here at home we already have the trial balloon of the "Bell Curve" as justification for the depressed position of African Americans and minorities in general.

Is there anything hopeful in this gloomy picture? I think there is, in the sense that most people are not stupid, and after the shock and despair wear off, I believe they eventually will come to see that the promise of the ideologues is false. At that point in time, which will be different for different places, people will look for new solutions and new ways of organizing economies. They will come to see, as they did in the 1930s in the United States or in revolutionary countries in the Third World, that it is not necessary to sit by passively while vast proportions of the population are unemployed and poor; but rather that by intelligence and planning and cooperation, people can build a decent economic life in their community and country.

What the nature of these new economic communities will be is something extremely difficult to know or specify in advance. But even if we cannot give detailed blueprints of a new utopian future, what is important as a starting point is to .expose the present drive for globalization and the total rule of capital for what it is--a blueprint for dealing with stagnation and economic crisis by enriching a few to unprecedented levels while impoverishing the many.

And in that connection, since last year was the fiftieth anniversary of Bretton Woods and the founding of the Bank and the IMF, there were many useful critiques published of these institutions, as well as a great variety of suggestions for reforms. In my opinion, since the two institutions have always been handmaidens of an unjust international economic system, the fundamental solution lies not in reforming or even in abolishing them. What is needed is a complete overhaul of the international economic system and the replacement of the primacy of capital with the primacy of human beings. Only then will we see the kinds of global financial institutions that are needed.

And, finally, since in my view the nation state is still the fulcrum of political activity for the foreseeable future, it is incumbent on progressives in the United States to work toward changing governmental policy in this country. Only in this way can United States political and economic power be used to build a more just economic order for all the people of the world, not least those in our own country. One small but important step in that process is educating ourselves as to what the present international system is all about. I hope that this talk and the discussion that follows will advance this process.

NOTES

(1.) Richard Barnet and Ronald E. Muller, Globalreach: Thepowerof themultinational Corporations (New York: Simon & Schuster, 1975), p. 15. (2.) Ibid. p. 19. (3.) Richard Barnet and John Cavanagh, Global Dreams: Imperial Corporations and the New World Order (New York: Simon & Schuster, 1994), p. 14. (4.) Harry Magdoff, "Globalization: To What End" The socialist register (New York: Monthly Review Press, 1992), p. 56. (5.) Barnet and Cavanagh, Global Dreams:, p. 17. (6.) Cheryl Payer, The Debt Trap: The International Monetary Fund and the Third World (New York: Monthly Review, 1974), p. 24. (7.) Human Development Report, 1992, Table 3. 1, p. 36 and 1994, Table 2.6, p. 35. (8.) Ibid. (9.) "IMF/World Bank Wreak Havoc on Third World," in 50 Years Is Enough: The Case Against the World Bank and the International Monetary Fund, Kevin Danaher, ed. (Boston: South End Press for Global Exchange, 1994), pp.20-22. (10.) Human Development Report, 1992, p. 45. (11.) Ibid., p. 38. (12.) Left Business Observer, March 14,1995, p. 7.

Michael Tanzer, a frequent contributor to Manthly Review, is an economic consultant living in New York. This article is based on a lecture presented at the Five Towns Forum on Long Island, New York on May 12, 1995.

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