What Can a Nation Do? Taming the Globalization Monster

By Alexander Jung

Part 3: Part III: A race to the bottom? 

Globalization often seems a struggle between the haves and the have nots.
AP

Globalization often seems a struggle between the haves and the have nots.

Of course, this is only true if the company is successful and the German engineer or programmer is worth his or her salary. Employees need to demonstrate "greater mobility in their brains, as well as in their feet," says EU Commissioner Günter Verheugen. In short, they have to adapt intelligently.

"The Indians and Chinese are not racing us to the bottom," says journalist Thomas Friedman. "They are racing us to the top." Time and again, economic change has opened up new, unexpected areas of work. A century ago, few farmers could have imagined their sons becoming highly respected and even affluent industrial workers. Fifty years ago, an industrial worker could hardly have dreamed of his daughter attending a university.

Today many parents can scarcely conceive of their children getting any kind of decent job in an increasingly international labor market. Until now, however, globalization has created more wealth than it has destroyed. In fact, it has engineered the wealth it is now accused of endangering.

The countries that embraced the global market have been the beneficiaries. They include South Korea, which ranks 10th in the world in terms of its economic strength, but excludes isolated North Korea, where poverty and hunger reign. And it also includes companies like Germany's Metro Group - which operates stores in 30 countries and generates nearly half of its sales abroad. But not crisis-ridden KarstadtQuelle, the department store chain that missed the globalization train.

Unpatriotic louts?

Most internationally operative companies are thriving. Raking in record profits, they distributed 40 percent higher dividends last year. At the same time, though, they have cut back domestic investments by 20 percent. Does this mean executives are unpatriotic louts, as some union leaders and politicians would have it?

Granted, the German market means very little to these companies now. Global players like Metro, Siemens and Adidas gave up long ago on their domestic economy, with its anemic growth and dearth of customers. They have shifted their focus to eastern Europe and the Orient instead. That's where they build their stores. That's where they find their customers. And that's where they post their profits.

British Prime Minister Tony Blair speaking at the G8 conference in Scotland in July.
AP

British Prime Minister Tony Blair speaking at the G8 conference in Scotland in July.


And, of course, that's where these German companies pay their taxes.

Siemens, for example, generates only some 10 percent of its earnings in Germany these days. Nonetheless, its share of German-based employees is remarkably high at about 38 percent.

The executives' hands are tied. The pressure from shareholders is unrelenting. They are driven by analysts and fund managers with a single obsession: profit and more profit. The lower the cost of a location, a plant or an employee, the better. A "race to the bottom" is underway in which everything has become a cost factor: wages, social standards and working conditions.

Basic human values

And what about corporate social responsibility? Is big business even accountable, or is moneymaking a company's sole duty, as Chicago economist Milton Friedman contended? Only a minority of German companies are pursuing such rigorous strategies to date. Over the past few years, German firms have had an average return on sales of 1.5 to 2.5 percent - less than the interest they would get from many banks. Nor is short-term profit hiking the rule: Some 84 percent of German companies are family owned, and their planning usually extends well beyond the current quarter. Just 974 of Germany's 3.3 million businesses are actually listed on the stock exchange.

Markets and morals are not always mutually exclusive, even at large corporations. As some have discovered, basic human values may not be harmful at all.

Sports-apparel maker Adidas, for example, demands that all its business partners, 835 suppliers around the world, make a commitment to certain standards, such as the requirement that no employee work more than 60 hours a week. Last year 53 of these subcontractors were inspected in China. Two received an initial warning and five a second caution. Given a third failure to comply, suppliers' contracts are automatically terminated. The home shopping group Otto has even established its own company to advise other businesses on adherence to social standards.

As Adidas and Otto acknowledge, spot checks are no guarantee of good conduct. But the two companies hope the word will spread and serve as a deterrent.

The companies' motives are not solely altruistic; their commitment to social justice is based on hard facts and figures. Otto has learned that suppliers who observe minimum social standards tend to be dependable. More importantly still, there is pressure at the checkouts from customers wishing to parade their shoes and sweaters with a clear conscience.

Scandals and tarnished images

Big corporations may be more powerful than ever in a globalized world - but they are also more vulnerable. This is because their critics also think globally, and can broadcast news of any abuses around the world in seconds. Shell abandoned plans to sink its Brent Spar oil platform due to media pressure, while Nestlé withdrew its Butterfinger candy bar, which contains genetically manipulated corn, from the German market.

North Korea remains completely cut off from the world economy.
AP

North Korea remains completely cut off from the world economy.

Companies implicated in such scandals are risking more than tarnishing their images. They are likely to see their profits and stock prices plummeting as well. On the other hand, consumers seem strangely indifferent toward ethical corporations. Fair-trade coffee has a market share of less than 1 percent.

Five years ago, U.N. Secretary-General Kofi Annan launched an initiative to promote corporate social responsibility. Some 2,000 companies joined the Global Compact, including DaimlerChrysler, Bayer and Volkswagen. They pledged to observe 10 principles, including the abolition of child labor and the right to collective wage bargaining. According to Annan, the initiative was designed to "give a human face to the global market."

There is, however, a catch. The exercise is entirely voluntary; there are no sanctions. Worse, the participants are precisely those corporations that already treat their Third World employees with a modicum of fairness, paying them comparatively well and seeking to ensure their business partners do the same.

In the global theater, exploitation plays out offstage: in the thousands of backstreet businesses that are subcontractors to the subcontractors, the smallest and most fragile links in the supply chain. It is here that the poor work 16 hours a day, six days a week. Out of view of the inspectors.

Toothless institutions with little bite

Well-intentioned codes of conduct are all but ineffectual here. Mandatory regulations on occupational health and safety are needed - set up by national legislators and enforced by regional inspectors.

In its Declaration on Fundamental Principles and Rights at Work, the International Labour Organization (ILO) has formulated four core principles: freedom of association and the right to collective bargaining, the elimination of discrimination in employment, freedom from all forms of forced labor, and the abolition of child labor. Each year, the ILO member states present a report outlining the practical implementation of these standards in their respective countries. But as well-meaning as it is, the declaration is little more than a piece of paper. The Geneva-based organization has no means of imposing these norms, let alone prosecuting alleged breaches.

It is easy to see why such toothless institutions have little bite in the world markets. The final report of the high-powered World Commission for the Social Dimension of Globalization stated that the problems of developing countries were the result of "deficits in governance systems" and not due to globalization. The organizations were "not sufficiently democratic, transparent and accountable."

A group of demonstrators protesting at the 2001 G8 conference in Genoa, Italy. 
AP

A group of demonstrators protesting at the 2001 G8 conference in Genoa, Italy. 


Third World nations have hardly any say at the WTO, the World Bank and the IMF. Many feel patronized by the richer members. First World development strategies - heavy on the market, light on regulation - only exacerbated the problems faced by Africa, Latin America and large parts of Asia during the 1990s. This crystallized most clearly during the currency crisis of 1997, when many Tiger economies became insolvent - virtually overnight.

The industrial nations are prepared to admit as much now. The latest indication of a strategy adjustment is the G8 nations' decision to waive the debts of Africa's poorest countries. Such concessions, however, will do little while the states themselves refuse to change - as long as the powers that be block governance systems that uphold legislation and protect private possession.

"The Third World does not lack the necessary capital," says Peruvian economist Hernando de Soto. "But it cannot put it to profitable use because it lacks modern property legislation and rule of law."

Corruption, the abuse of power, and bureaucracy are the biggest investment hurdles in these countries. According to the World Bank, it takes two days to set up a business in Australia, compared with 382 days in Ghana. It's not the market that malfunctions there. It's the state.

But ensuring fair competition between the northern and southern hemispheres is equally crucial - and long overdue. For years industrial nations have warded off competition from the Third World. They impose high import tariffs to protect their farmers from cheap fruit and vegetables, or keep them afloat with billions in subsidies. The North spends about $1 billion on agricultural subsidies every day - five times as much as on aid. As a result, European tomato producers can actually undercut their local rivals at the markets in Dakar and Nairobi.

More recently, however, there seems to be a shift toward fairer world trade. For example, the sugar directive is due to be abolished soon. It currently protects European beet growers against competitors from the South, at a cost of some €6 billion a year.

Global textile trade quotas already expired at the start of this year. For decades developed nations protected their garment industries from cheap imports, until GATT, the predecessor to the WTO, agreed in 1995 that the quotas should be abolished by 2005. Enough time to prepare, one might think.

Protecting people from oppression with Adam Smith

Nonetheless, very few were ready for the big day. Since the beginning of this year China has been swamping the world with cheap fabric. So overwhelming was the deluge that the EU negotiated a two year grace period for certain types of merchandise. To make its case, it cited protection clauses set up when China first joined the WTO. Once the period expires, EU Commissioner Peter Mandelson has assured the Chinese that trading will resume without further disruption.

The solution to the textile dispute highlights two things. It shows how difficult it is to open markets from one day to the next, even after a protracted period of groundwork. But it also demonstrates that national institutions can actively forge an environment that eases the transition.

Not even the grandsire of free market thinking, the British moral philosopher Adam Smith, would have objected to this type of intervention. Smith was convinced that the state must lay down rules. For example, he considered it a state's duty to protect "every member of the society from the injustice or oppression of every other member." Smith's works make no mention of reducing the power of the state.

Governments and global organizations, citizens and companies are thus quite capable of shaping the globalization process - as long as they adapt intelligently to its requirements. That, of course, is the tricky part. It means more uncertainty, more responsibility, and more stress. "Everybody wants growth, but nobody wants change," notes U.S. economist Paul Romer.

Even under the terrorizing capitalism of Hack Nike's "Logoland," not everyone is condemned to consume ad infinitum. In the novel, a heroine comes to save the day. Her name? Government. Jennifer Government.

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