excerpts from the book

No-Nonsense guide to

Globalization

by Wayne Ellwood

New Internationalist / Verso, 2002, paper

p19
... around 1980 things began to change with the emergence of fundamentalist free-market governments in Britain and the US and the later disintegration of the state-run command economy in the former Soviet Union. The formula for economic progress adopted by the administrations of Margaret Thatcher in the UK and Ronald Reagan in the US called for a drastic reduction in the regulatory role of the state. Instead, government was to take a back seat to corporate executives and money managers. The overall philosophy was that companies must be free to move their operations anywhere in the world to minimize costs and maximize returns to investors. Free trade, unfettered investment, deregulation, balanced budgets, low inflation and privatization of publicly-owned enterprises were trumpeted as the six-step plan to national prosperity.

Hand-in-hand with the spread of free trade in goods and services came the deregulation of world financial markets. Banks, insurance companies and investment dealers which had been confined within national borders were suddenly unleashed. Within a few years the big players from Europe, Japan and North America expanded into each other's markets as well as into the newly-opened and fragile financial services markets in the South. Aided by computer technology and welcoming governments, the big banks and investment houses were keen to invest surplus cash in anything that would turn a quick profit. In this new relaxed atmosphere finance capital became a profoundly destabilizing influence on the global economy.

Instead of long-term investment in the production of real goods and services, speculators make money from money, with little concern for the impact of their investments on local communities or national economies. Governments everywhere now fear the destabilizing impact of this global financial casino. Recent United Nations (UN) studies show a direct correlation between the frequency of financial crises and the increase in international capital flows during the l990s.

p24
The Bretton Woods Trio

As World War II was drawing to a close, the world's leading politicians and government officials, mostly from the victorious 'Allied' nations (Britain, Canada, Australia, New Zealand and the United States) began to think about the need to establish a system of rules to run the postwar global economy.

Before the widespread outbreak of the war in 1939 trading nations everywhere had been racked by a crippling economic depression. When the US stock market crashed in 1929 nations turned inward in an attempt to pull themselves out of the steep skid. But without a system of global rules there was no coherence or larger logic to the 'beggar-thy-neighbor' polices adopted worldwide. High tariff barriers were thrown up between countries with the result that world trade nose-dived, economic growth spluttered and mass unemployment and poverty followed. As a result the 1930s became a decade of radical politics and rancorous social ferment in the West as criticism of laissez-faire capitalism and an unchecked market economy grew.

Scholars like Karl Polanyi helped to reinforce a growing suspicion of a market-based economic model which put money and investors at the center of its concerns rather than social values and human well-being. 'To allow the market mechanism to be the sole director of the fate of human beings and their natural environment... would result in the demolition of society,' Polanyi wrote in his masterwork, The Great Transformation.

Polanyi was not alone in his distrust of the market economy. Other thinkers like the influential Cambridge-educated economist John Maynard Keynes were also grappling with a way of controlling global markets, making them work for people and not the other way around. Keynes both admired and feared the power of the market system. With the memory of the Great Depression of the 1930s still fresh in his mind he predicted that, without firm boundaries and controls, capitalism would be immobilized by its own greed, and would eventually self-destruct. As it happened only World War Two turned things around. The War set the factories and farms humming again as millions of troops were deployed by all sides in the conflict. Armaments manufacturers, aircraft factories and other military suppliers ran 24-hour shifts. Years later, as the war wound down, government policy makers began to think about how to ensure a smooth transformation to a peacetime economy.

It was Keynes' radical notion of an 'interventionist' state to which governments turned in an effort to set their economies back on a steady keel. Until the worldwide slump of the 1930s the accepted economic wisdom had been that unemployment was a 'normal condition' of the free market. The economy might go up and down according to the normal business cycle but in the long run, growth (and increased global trade) would create new jobs and sop up the unemployed.

Keynes was skeptical of this orthodoxy, suggesting that the economy was a human-made artifact and that people acting together through their government could have some control over its direction. Why not act now, he suggested, since 'in the long run we're all dead. His approach offered a way out for governments who found themselves helplessly mired in economic stagnation.

In The General Theory of Employment, Interest and Money published in 1936, Keynes argued that the free market, left on its own, actually creates unemployment. Profitability, he said, depends on suppressing wages and cutting costs by replacing labor with technology. In other words profits and a certain amount of unemployment go hand-in-hand. So far so good, at least for those making the profits. But then Keynes showed that lowering wages and laying off workers would inevitably result in fewer people who could afford to buy the goods that factories were producing. As demand fell, so would sales, and factory owners would be forced to lay off even more workers. This, reasoned Keynes, was the start of a downward spiral with terrible human consequences.

To 'prime the economic pump' Keynes suggested governments intervene actively in the economy. He reasoned that business owners and rich investors are unlikely to open their wallets if the prospects for growth look dim. When the economy is in a tailspin then it is up to government to step in - by spending on public goods like education, health care, job training, roads, dams, trams and railways. And by wading in with direct financial support to the unemployed.

Even if governments had to go into debt to kickstart economic growth Keynes advised politicians not to worry. The price was worth it. By directly stimulating the economy, government could rekindle demand and help reverse the downward spiral. Soon companies would begin to invest again to increase production to meet the growing demand. This would mean hiring more workers with more money in their pockets. As jobs increased so would taxes. Eventually, the government would be able to pay back its debt from increased tax revenues raised from a now healthy, growing economy.

Desperate Western governments were quick to adopt the 'Keynesian' solution to economic stagnation. In the US the 'New Deal' policies of the Roosevelt administration were directly influenced by Keynes. The American Employment Act of 1946 accepted the federal government's responsibility 'to promote maximum employment, production and purchasing power'. The British Government, too, in 1944 accepted as one of its primary aims 'the maintenance of a high and stable level of employment after the war.'

Other countries like Canada, Australia and Sweden quickly followed. Keynes' influence spread and people began to believe that economics was finally a manageable science in the service of human progress.

p27
Bretton Woods

The aim of the Bretton Woods Conference [July 1944 ] was to erect a new framework for the postwar global economy - a stable, cooperative international monetary system which would promote national sovereignty and prevent future financial crises. The purpose was not to bury capitalism but to save it. The main proposal was for a system of fixed exchange rates. In the light of the depression of the previous decade floating rates were now seen as inherently unstable and destructive of national development plans.

Keynes' influence at Bretton Woods was significant. But despite his lobbying and cajoling he did not win the day on every issue. In the end the huge military and economic clout of the Americans proved impossible to overcome.

The Conference rejected his proposals to establish a world 'reserve currency' administered by a global central bank. Keynes believed this would have created a more stable and fairer world economy by automatically recycling trade surpluses to finance trade deficits. However his solution did not fit the interests of the United States, eager to take on the role of the world's economic powerhouse. Instead the Conference opted for a system based on the free movement of goods with the American dollar as the international currency. The dollar was linked to gold and the price of gold was fixed at $35 an ounce (28g). In effect the US dollar became 'as-good-as-gold' and in this one act became the dominant currency of international exchange.

Three governing institutions emerged from the gathering to oversee and coordinate the global economy. These were not neutral economic mechanisms: they contained a powerful bias in favor of global competition and corporate enterprise. And each had a distinct role to play:

INTERNATIONAL MONETARY FUND (IMF)

The IMF was born with a mission: to create economic stability for a world which had just been through the trauma of depression and the devastation of war. As originally conceived it was supposed to 'facilitate the expansion and balanced growth of international trade' and 'to contribute to the promotion and maintenance of high levels of employment and real income'.

A major part of its job was to oversee a system of 'fixed' exchange rates. This was supposed to stop countries from devaluing their national currencies to get a competitive edge over their neighbors - a defining feature of the economic chaos of the 1930s.

Another part of the Fund's mandate was to promote currency 'convertibility' - to make it easier to exchange one currency for another when trading across national borders and in this way to encourage world trade.

And finally the new agency was to act as a 'lender-of-last-resort' supplying emergency loans to countries which ran into short-term cash flow problems. Keynes' idea was to set up an International Clearing Union which would automatically provide unconditional loans to countries experiencing balance-of-payments problems. These loans would be issued 'no strings attached' and their purpose would be to support domestic demand and maintain employment. Otherwise countries feeling the pinch would be forced to balance their deficit by cutting off imports and smothering their domestic economy.

Keynes argued that international trade was a two-way street and that the 'winners' (those countries in surplus) were as obligated as the 'losers' (those countries in deficit) to bring the system back into balance. In fact, Keynes suggested that pressure be brought to bear on surplus nations so they would be forced to increase their imports and recycle the surplus to deficit nations.

But Keynes' view did not prevail. Instead a proposal put forward by US Treasury Secretary Harry Dexter White became the basis for the IMF. The International Clearing Union idea disappeared. IMF members would not automatically receive loans when they tumbled into deficit. Instead members would have access to limited loan amounts which were to be determined by a complex quota system.

When a country joins the IMF it is assigned a quota which is calculated in Special Drawing Rights (SDRs), the Fund's own unit of account. Quotas are assigned according to a country's relative position in the world economy which means that the most powerful economies have the most influence and clout. The US for example has the largest SDR quota at about 27 billion. The size of a member's quota determines a lot, including how many votes it has in IMF deliberations and how much foreign exchange it has access to if it runs into choppy financial waters.

Balance-of-payments loans are at less than the prevailing rate and members are supposed to use and repay them within five years. The issue of whether the IMF could attach conditions to these loans was lost in the verbiage of the original Bretton Woods agreement. But Harry Dexter White was very clear six months later when he wrote in the journal Foreign Affairs that the Fund would not simply dole out money to debtor countries. The IMF would force countries to take measures which under the old gold standard (see p34) would have happened automatically.

While the framers of the Bretton Woods agreements supported a gradual reduction of trade barriers and tariffs they were less enthusiastic about allowing the free movement of capital internationally.

Keynes, Britain's delegate to the meeting, advocated a balanced world trade system with strict controls on the movement of capital across borders. He held that the free movement of all goods and capital, advocated most powerfully by the US delegation, would inevitably lead to inequalities and instabilities.

WORLD BANK (INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT)

One of the other key goals of the Bretton Woods Conference was to find a way to rebuild the economies of those nations that had been devastated by World War Two. The International Bank for Reconstruction and Development (IBRD) was created to spearhead this effort. The Bank is funded by dues from its members and by money borrowed on international capital markets. It makes loans to members below rates available at commercial banks. Its initial mandate was to provide loans for economic 'infrastructure' which included things like power plants, dams, roads, airports, ports, agricultural development and education systems. The Bank poured money into reconstruction and development in Europe after World War Two. But it was not enough and it was not fast enough to satisfy the United States whose booming industries were in need of viable markets. In response the US set up its own, much looser, Marshall Plan which directly provided dollars to European nations, largely in the form of grants rather than loans.

As Europe gradually recovered in the 1950s the IBRD turned its interest to the newly-independent countries of the Third World where it became widely known as the World Bank. As Southern countries sought to enter the industrial age the Bank became a major player throughout the region. According to the 'stages of growth' economic theory popular at the time, developing nations could achieve economic 'take-off' only from a strong infrastructure 'runway'. It was part of the Bank's self-defined role to build this 'infrastructural capacity' and this it did enthusiastically by funding hydroelectric projects and highway systems throughout Latin America, Asia and Africa

But despite the Bank's concessional lending rates it was clear early on that the very poorest countries would have difficulty meeting loan repayments. So in the late 1950s the Bank was pressured into setting up the International Development Association (IDA). This wing of the Bank was to provide 'soft loans' with very low interest or none at all - and so head off attempts by the new countries of the Third World to set up an independent funding agency separate from the Bretton Woods institutions which could operate under UN auspices. The Bank also established two other departments: the International Finance Corporation which supports private-sector investment in Bank-approved projects, and the Multilateral Insurance Guarantee Agency, which provides risk insurance to foreign corporations and individuals who decide to invest in one of the Bank's member countries.

GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)/WORLD TRADE ORGANIZATION (WTO)

The GATT established a set of rules to govern global trade. Its aim was to reduce national trade barriers and to stop the competitive trade policies that had so hobbled the global economy prior to World War Two. Seven rounds of tariff reductions were negotiated under the GATT treaty - the final 'Uruguay Round' began in 1986.

March 1994, following completion of the final round of talks, politicians and bureaucrats gathered in Marrakech, Morocco, to approve a new World Trade Organization (WTO) which was to replace the more loosely-structured GATT. The WTO, unlike the GATT, has the official status of an international organization rather than a loosely-structured treaty. It has 137 member states and 30 'observers' and vastly expands GATT's mandate in new directions. The text of the WTO agreement had 26,000 pages: its sheer physical size is a hint of both its prolixity and its complexity. It includes the GATT agreements which mostly focus on trade in goods. But it also folds in the new General Agreement on Trade in Services (GATS) which potentially affects more than 160 areas including telecommunications, banking and investment, transport, education, health and the environment.

From the outset GATT was seen as a 'rich man's club' dominated by Western industrial nations which were slow to concede their position of power. The WTO continues this tradition of rich world domination.

p33
The WTO pursues its free trade agenda with the single-minded concentration of the true believer. Nonetheless there is a growing unease about the organization's globalizing agenda. Critics are especially wary of the new Dispute Settlement Body (DSB) which gives the WTO the legal tools to approve tough trade sanctions by one member against another, especially on nations which might disagree with the organization's interpretation of global trade rules. Any member country, acting on behalf of a business with an axe to grind, can challenge the laws and regulations of another country on the grounds that they violate WTO rules.

p36
All nations have the right to use the DSB to pursue their own economic self-interest. But the fact is that the world's major trading nations are also its most powerful economic actors and so the tendency is for the strong to use the new rules to dominate weaker countries.

The 'national treatment clause' basically says that a country may not discriminate against products of foreign origin on any grounds whatsoever. And in so doing it removes the power of national governments to develop economic policy which serves the moral, ethical or economic interests of their citizenry. For example, if goods are produced by children in sweatshop conditions that doesn't enter the equation. And the same is true if a foreign factory fouls the air and poisons the water, if poverty wages are paid to the workers who produce the stuff, or if the goods themselves are poisonous and dangerous.

According to WTO rules any country that refuses to import a product on the grounds that it may harm public health or damage the environment has to prove the case scientifically. So Canada, the world's biggest asbestos producer, has petitioned the WTO's dispute panel to force the European Community to import the known carcinogen once again. And when the European Union (EU) refused imports of hormone-fed beef from North America, the US took the case to the WTO arguing that there was no threat to human health from cows fed hormones. The EU ban on hormone-fed beef applied to their own farmers as well as foreign producers but that made little difference. The WTO panel decided in favor of the US, effectively ruling that Europeans had no right to pass laws that supported their opposition to hormones. The EU was ordered to compensate producers in the US and Canada for every year of lost export earnings. And in retaliation the US imposed 100 per cent tariffs on a range of European imports including mustard, pork, truffles and Roquefort cheese.

Meanwhile, the giant US-based shipping company, United Parcel Service (UPS), has been lobbying Washington to take Canada's government-run postal service to the WTO dispute panel. UPS says that Ottawa is unfairly subsidizing Canada Post and therefore poaching potential customers. Ottawa in its turn has announced its intention to prohibit the export of fresh water from Canada by a California-based company.

And so it goes in the topsy-turvy new world of economic globalization. Those institutions which first emerged from the Bretton Woods negotiations half a century ago have become more important players with each passing decade. It is their vision and their agenda which continue to shape the direction of the global economy. Together, they are fostering a model of liberalized trade and investment which is heartily endorsed by the world's biggest banks and corporations. A deregulated, privatized, corporate-led free market is the answer to humanity's problems, they tell us. The proof, though, is not so easily found.

p38
Debt and structural adjustment

The world has changed so dramatically in the last half century that it's hard to believe that only four decades ago the newly emerging colonies of Africa and Asia were joining with their nominally independent brethren in Latin America to push for a 'new international economic order' (NIEO). Throughout the 1960s and early 1970s an insistent demand for radical change burst forth from the two-thirds of the world's people who lived outside the privileged circle of North America and Western Europe. There was a powerful movement to shake off the legacy of colonialism and to fight for a new global system based on economic justice between nations.

Some Third World nations began to explore ways of increasing their bargaining power with the industrialized countries in Europe and North America by taking advantage of their control over key resources. Groups like the Organization of Petroleum Exporting Countries (OPEC) hoped to cooperate together to control the supply of petroleum and ratchet up the price of oil, thereby increasing their share of global wealth and bringing prosperity to their populations. There was heady talk of 'producer cartels' to raise the price of exports like sugar, coffee, cocoa, tin and rubber. That way poor countries that were critically dependent on one or two primary commodities could gain more income and more control over their own development. There was also strong and vocal opposition to the growing power of transnational corporations who were seen to be remaking the world in their own interests. But when poor countries did try to force up the price of their primary exports they often found themselves faced with near-monopoly control by Western corporations of processing, distribution and marketing. When the declaration of principles for an NIEO was issued in 1974 it was the culmination of a new 'solidarity of the oppressed' which had spread throughout the developing nations.

Galvanized by centuries-old colonial injustices and sparked by the radical ideas of Fanon in Algeria, Nkrumah in Ghana, Gandhi in India, Sukarno in Indonesia, Nyerere in Tanzania and Castro m Latin America, these 'Third World' nations set out to collectively challenge the entrenched power of the United States and Western Europe. The NIEO was not a grassroots movement. It was a collection of progressive intellectuals and politicians who believed correctly that, left on their own, free markets would never reduce global inequalities. Instead these leaders argued for improved 'terms of trade' and a more just international economic system. When bargaining failed producer countries began to form trade alliances based on specific commodities.

Third World nations came together in political organizations like the Non-Aligned Movement which was initially an attempt to break out of the polarized East/West power struggle between the West and the Soviet Bloc. In the United Nations, developing countries formed the 'Group of 77' which was instrumental in creating the UN Conference on Trade and Development (UNCTAD). Within UNCTAD poor countries pushed for fairer 'terms of trade'. Many newly-independent countries of the South still relied heavily on the export of raw materials in the 1950s and 1960s. But there was a faltering effort and a stronger belief in the need to build local industrial capacities and to support the push for a 'new international economic order'. Why was it, they asked, that the price of everything they imported from the West, whether it was manufactured goods, spare parts or foodstuffs, seemed to creep ever upwards while the prices they received for their agricultural exports and raw materials remained the same - or even decreased?

The transparent injustice of this enraged and frustrated leaders like Tanzania's Julius Nyerere who referred to declining terms of trade as constantly 'riding the downward escalator'. Between 1980 and 1991 alone non-oil-exporting developing countries lost nearly $290 billion due to decreasing prices for their primary commodity exports. In response to this economic discrimination Third World nations also began agitating for an increase in 'untied aid from the West; for more liberal terms on development loans; and for a quicker transfer of new manufacturing technologies from North to South.

In addition most developing countries favored an active government role in running the national economy. They quite rightly feared that in a world of vast economic inequality they could easily be crushed between self-interested Western governments and their muscular business partners. That was the chief reason that many Third world nations began to take tentative steps to regulate foreign investment and to maintain at least minimal trade restrictions.

Latin American nations were especially successful at encouraging 'import substitution as a way of boosting local manufacturing, employment and income Countries like Brazil and Argentina used a mix of taxation policy, tariffs and financial incentives to attract both foreign and domestic investment. American and European auto companies set up factories to take advantage of import barriers. The development goal was to stimulate industrialization in order to produce goods locally and to boost export earnings. This had the added benefit of reducing imports, which both cut the need for scarce foreign exchange and kept domestic capital circulating inside the country. Unfortunately, the era of import substitution was short. Latin American nations were soon bullied into dismantling import barriers so that by the late 1960s there were no local producers of cars, TVs, iceboxes/fridges or other major household goods. Still, this was a brief but important step in trying to shift the balance of global power to poor countries.

New economic order

But even before the clamor for a new world economic order, momentous changes were beginning to unfold that would dramatically alter the fate of poor nations for decades to come. By the late 1960s the Bretton Woods dream of a stable monetary system of fixed exchange rates with the dollar as the only international currency was collapsing under the strain of American trade and budgetary deficits.

The United States' economy was firing on all cylinders and beginning to dangerously overheat. As the war in Vietnam escalated, the Federal Reserve in Washington pumped out millions of dollars to finance the conflict. Inflation edged upwards and the US foreign debt ballooned to pay for the war.

World Bank President Robert McNamara also leapt into the fray and contracted huge loans to the South during the 1970s - both for 'development' (essentially defined as basic infrastructure to bring 'backward' economies into the market system) and to act as a bulwark against a perceived worldwide communist threat. The Bank's stake in the South increased five-fold over the decade.

At the same time a guarded optimism took hold in the South, fueled by moderately-high growth rates and a short-term boom in the price of primary commodities particularly oil. The Organization of Petroleum Exporting Countries (OPEC) was the first, and ultimately the most successful, Third World 'producer union'. By standing together and controlling the supply of oil they were able to increase the price of petroleum three-fold to over $30 a barrel. The result was windfall surpluses for OPEC members - $310 billion for the period 1972-1977 alone. This 'oil shock' rippled through the global economy, triggering double-digit inflation and a massive 'recycling' problem.

What were OPEC nations to do with this vast new wealth of 'petrodollars'? Some of it they would spend on glittering new airports, power stations and other showcase mega-projects. But much of it eventually wound up as investment in Northern financial centers or deposited in Northern commercial banks. This was the birth of the 'eurocurrency' market - a huge pool of cash held outside the borders of the countries that originally issued the currency. The US dollar was the main 'eurocurrency' but there were also francs, guilders, marks and pounds.

Western banks, flush with this new OPEC money, then began to search for borrowers. They didn't have long to look. Soon millions in loans were contracted to non-oil-producing Third World governments desperate to pay escalating fuel bills and to fund ambitious development goals. At the same time the massive increase in oil prices helped inflation soar around the world. Prices skyrocketed while growth slowed to a crawl and a new word was added to the lexicon of economists: 'stagflation'. In the midst of this economic chaos US President Richard Nixon moved unilaterally to de-link the dollar from gold. As a result the world moved to a system of floating exchange rates. Nixon also devalued the greenback (US dollar) against other major world currencies and jacked up interest rates, a move which had an enormous impact on the global economy.

By slashing the value of the dollar Washington effectively reduced the huge debt it owed to the rest of the world. The US had been running a large deficit in order to pay the costs of the war in Vietnam. As interest rates shot up, those countries reeling under OPEC oil-price hikes had the cost of their eurodollar loans (most of which were denominated in US dollars) double and even triple, almost overnight. The debt of the non-oil producing Third World increased five-fold between 1973 and 1982, reaching a staggering $612 billion. The banks were desperate to lend to meet their interest obligations on deposits so easy terms were the order of the day. Dictators who could exact payments from their cowering populations with relative ease must have seemed like a good bet for lenders looking for a secure return.

Sometimes the petrodollar loan money was squandered on grandiose and ill-considered projects. Sometimes it was simply filched - siphoned off by Third World elites into personal accounts in the same Northern banks that had made the original loans. Often it was both wasted and stolen.

Foolish loans

The experience was similar across the South. From the mid-1960s to the mid-1980s, despotism pervaded Latin America and employed an ingenious variety of scams wherever it went. In Asia and Africa, megalomaniacs with powerful friends and large appetites for personal wealth were financed with enthusiasm by the international banking fraternity. Indeed, it seemed to work so well that the credit lines became almost limitless - particularly if the governments in question were fighting on the right side of the Cold War and buying large quantities of armaments from Northern suppliers.

Examples of these foolish loans to corrupt leaders are well known. In the Philippines, dictator Ferdinand Marcos along with his wife Imelda and their cronies are estimated to have pocketed in the form of kickbacks and commissions a third of all loans to that country. Before he was forced out of office, Marcos' personal wealth was estimated at $10 billion.

Meanwhile, there are no records for 80 per cent of the $40 billion borrowed by the Argentinean military dictatorship from 1976 to 1983. Argentineans are demanding that their Government either produce accounts or have the debts declared illegal. It seems that New York banks knew money was being misused, that there had been kickbacks and fraudulent loans to companies linked to the military, and that the IMF allegedly connived with the fraud. It is also clear that the military used some of the loans to buy weapons for the Falklands/Malvinas War.

Deeper in debt

From 1997 to the first year of the millennium, the 'Jubilee 2000' citizens' movement led a worldwide campaign to cancel the debts of the world's poorest countries. Jubilee researchers found that almost a quarter of all Third World debt (nearly $500 billion) is the result of loans used to prop up dictators in some 25 different countries. ~

The money flowed free and fast through the 1980s and early 1990s. But eventually the soaring tower of debt began to creak and sway. One government after the next began to run into financial trouble. The loans they had raised and squandered on daft projects or salted away in private bank accounts became so large their foreign exchange earnings and tax revenues couldn't keep up the payments.

During this period the IMF became an enforcer of tough policy conditions on poor countries that were forced to apply to the Fund for temporary balance-of-payments assistance. During the 1970s and early 1980s the IMF's loans were conditional on governments following the advice of the Fund's economists who had their own take on what Southern nations were doing wrong and how they could fix it. The Fund's demands were woven into the deals worked out with those countries that required an immediate transfusion of cash. Essentially, the agency argued that the debtor country's problems were caused by 'excessive demand' in the domestic economy. Curiously, the responsibility of the private banks who made most of the dubious loans in the first place (with their eyes wide open it should be noted) was ignored.

The IMF prescription

According to the Fund this excessive demand meant there were too many imports and not enough exports. The solution was to devalue the currency and cut government spending. This was supposed to slow the economy and reduce domestic demand, gradually resulting in fewer imports, along with more, and cheaper, exports. In time, the IMF argued, the balance-of-payments deficit would be eliminated. Countries were more or less forced to adopt these austerity measures if they wanted to get the IMF 'seal of approval'. Without it they would be ostracized on the fringes of the global economy. Both the IMF and the World Bank also urged debtor nations to take on deeper 'structural adjustment' measures as early as the 1970s but borrowing countries refused to go along with the advice.

Then in 1982 Mexico told its creditors it could no longer pay and a full-fledged Third World 'debt crisis' emerged. Northern politicians and bankers began to worry that the sheer volume of unpayable loans would undermine the world financial system. Widespread panic began to sweep through the world of international finance as scores of Southern nations teetered on the brink of economic collapse. In response both the Bank and the IMF hardened their line and began to demand major changes in the way debtor nations ran their domestic economies. Countries like Ghana were forced to toe the line and enforce tough adjustment conditions as early as 1983.

A few years later, the US Treasury Secretary James Baker decided to formalize this new strategy to force Third World economies to radically 'restructure' their economies to meet their debt obligations. The 'Baker Plan' was introduced at the 1985 meeting of the World Bank and the IMF when both agencies were called on to impose more thorough 'adjustments' to the economic policies of debtor countries.

The Bank and the Fund made full use of this new leverage. Together they launched a policy to 'structurally adjust' the Third World by deflating economies and demanding a withdrawal of government - not only from public enterprise but also from compassionate support of the basic health and welfare of the most vulnerable. Exports to earn foreign exchange were privileged over basic necessities, food production and other goods for domestic use. Y

The Fund set up its first 'formal' Structural Adjustment Facility in 1986. The World Bank soon followed, so that by 1989 the Bank had contracted adjustment loans to 75 per cent of the countries that already had similar IMF loans in place. The Bank's conditions both extended and reinforced the IMF prescription for financial 'liberalization' and open markets. They included 'privatizing' state-owned enterprises; reducing the size and cost of government through massive public sector layoffs; cutting basic social services and subsidies on basic foodstuffs; and reducing barriers to trade. This restructuring was highly successful from the point of view of the private banks who siphoned off more than $178 billion from the South between 1984 and 1990 alone. Structural adjustment programs (SAPs) were in fact an extremely effective mechanism for transforming private debt into public debt.

The 1980s were a 'lost decade' for much of the Third World. Growth stagnated and debt doubled to almost $1,500 billion by the decade's end. By 1999 it had reached nearly $3,000 billion. An ever-increasing proportion of this new debt was to service interest payments on the old debt, to keep money circulating and to keep the system up-and-running. Most of this debt had shifted from private banks to the IMF and the World Bank - though the majority was still owed to rich countries and Northern banks. The big difference was that the Fund and the Bank were always first in line so paying them was a much more onerous prospect.

Taking more out

The stark fact that the Fund and the Bank began operating with reverse capital flows (in other words they were then taking more money out of the Third World than they were putting back in) was sobering for those who believed those institutions were there to help.

In six of the eight years from 1990 to 1997 developing countries paid out more in debt service (interest plus repayments) than they received in new loans: a total transfer from South to North of $77 billion. And most of the increase was used to meet interest payments rather than for productive investment. After 1998 the balance changed again as a result of massive bailout packages to Mexico and Asia. However, this will likely set the stage for negative flows again in the near future.

The 'conditionalities' of structural adjustment meanwhile diverted government revenues away from things like education and healthcare, towards debt repayment and the promotion of exports. This gave the World Bank and IMF a degree of control that even the most despotic of colonial regimes rarely achieved.

Even former enthusiastic supporters of structural adjustment were forced to reconsider their faith in this 'neo-liberal' recipe for economic progress. In 1999, Harvard University's 'economic shock-therapy' advocate Jeffrey Sachs wrote: 'Many of the three billion of the world's poorest live in countries whose governments have long since gone bankrupt under the weight of past credits from foreign governments, banks and agencies such as the World Bank and the IMF. These countries have become desperate wards of the IMF... Their debts should be canceled outright and the IMF sent home.

The situation has remained essentially unchanged ever since. In nations as far apart as Yugoslavia, Rwanda and Peru, the privations suffered in the name of debt repayments lay concealed behind outbreaks of violent civil unrest. All attempts to organize relief for the South were rebuffed on principle until 1996, when the 'Heavily Indebted Poor Countries Initiative' was launched to make debt repayments 'sustainable'. Within a decade, the 'cold' war which ended in 1989 was replaced by a 'financial' war that is still being fought.

Two decades of structural adjustment has not only failed to solve the debt crisis, it has caused untold suffering for millions and led to widening gaps between rich and poor. A 1999 study by the Washington-based group, Development Gap, looked at the impact of SAPs on more than 70 African and Asian countries during the early 1990s. The study concluded that the longer a country operates under structural adjustment the worse its debt burden becomes. SAPs, Development Gap warned, 'are likely to push countries into a tragic circle of debt, adjustment, a weakened domestic economy, heightened vulnerability and greater debt.' 6

Debt's legacy

So we are left with a bizarre and degrading spectacle. In Africa, external debt has ballooned by 400 per cent since the Bank and the IMF began managing national economies through structural adjustment. Today in Ethiopia a hundred thousand children die annually from easily preventable diseases, while debt repayments are four times more than public spending on healthcare. In Tanzania, where 40 per cent of people die before the age of 35, debt payments are 6 times greater than spending on healthcare. From the whole of Africa, where one in every two children of primary-school age is not in school, governments transfer four times more to Northern creditors in debt payments than they spend on the health and education of their citizens.

Structural-adjustment programs may not have put Third World countries back on a steady economic keel but they have certainly helped undermine democracy in those nations. Joseph Stiglitz, former World Bank Chief Economist, is candid about the record of bureaucrats in both agencies undermining the ability of nominally independent nation states to govern their own affairs. In an article written shortly after his resignation Stiglitz said there are 'real risks associated with delegating excessive power to international agencies... The institution can actually become an interest group itself, concerned with maintaining its position and advancing its power.' If we believe in democratic processes he continues, 'countries must make the decisions for themselves, and the responsibility of economic advisors is only to appraise them of prevailing views.

The debt load on all governments, but particularly those of the Third World, has crippled their capacity to look after their citizens. Capital moves so freely that it is often impossible for governments to find, let alone tax.

With the disintegration of the Soviet Union, the impoverishment of Africa and the resurgence of an unfettered market system in Asia and Latin America the triumph of capitalism seems complete. Indeed, SAPs really only make sense when seen through the lens of economic globalization. They are an integral part of the free-market orthodoxy which aims to give free rein to private corporations to trade, invest and move capital around the globe with a minimum amount of government interference.

But there are cracks emerging in this seemingly uniform consensus. People in the South are resisting structural adjustment through violent opposition and grassroots organizing. Protest too is coming from the millions uprooted by World Bank mega-projects, particularly the building of massive hydroelectric dams. Rejection of all things Western is on the rise. Fundamentalism and the politics of ethnic exclusion (from Somalia to Kosovo to India) are turning political costs into military ones. And, as the Seattle protests of December 1999 illustrated, powerful and unaccountable institutions like the World Trade Organization are coming under direct pressure from citizens' groups, community activists, students, trade unionists and environmentalists. Many are calling for reform. Others are going much farther and demanding the outright abolition of these agencies and a complete restructuring of &e global financial architecture.

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One of the corporate sector's greatest political victories in recent decades has been to beat down corporate taxes. In Britain, the corporate tax rate fell from 52 per cent in 1979 to 30 per cent in 2000 and Labor Prime Minister Tony Blair has boasted that British business is subject to even fewer strictures than corporations in the US. Corporate tax rates have declined in virtually every OECD country over the last two decades as governments rely more and more on personal income taxes and sales taxes for revenues. In 1950 corporate taxes in the US accounted for 30 per cent of government funds; today they account for less ~ than 12 per cent.

Their sheer size, wealth and power means that multinationals and the business sector in general have been able to structure the public debate on social issues and the role of government in a way which benefits their own interests. They have used their louder voices and political clout to build an effective propaganda machine and to boost what the great Italian political theorist Antonio Gramsci called their 'cultural hegemony'. Through sophisticated public relations, media manipulation and friends-in-high-places the neo-liberal economic perspective has come to be accepted as the 'common sense' approach to running a country. This radical paradigm shift has occurred in the short space of 30 years.

A corporation's ultimate responsibility is to its shareholders, as Chief Executive Officers (CEOs) constantly reassure their investors at annual general meetings. It is enhanced value for shareholders which drives and structures corporate decision-making - without regard for the social, environmental and economic consequences of those decisions. Unless obligations to the public good are imposed on companies the business agenda will continue to ride roughshod over national and community interests.

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Public disillusionment with the WTO is now well known and opposition is growing to the organization's bottom-line brand of globalization. But if activists hadn't stumbled across the MAI in 1997, efforts to inject human values into the debate on the global trading system could have been severely curtailed. After the WTO came into being in 1994, the globe's major corporations began to put together a plan for codifying the rules of world trade in a way that would give them complete freedom. They found it in the MAI, an agreement which was drafted by the International Chamber of Commerce (a 'professional association' of the world's largest companies) and presented to the rich-nation OECD members for discussion and, it was assumed, rubber-stamp approval.

Once passed, the next stop was to be the WTO. Third World governments were rightly suspicious of the MAI and many saw it as 'a throwback to colonial era economics'. But, with the weight of the OECD behind it, supporters of the MAI reckoned it would be speedily adopted as an official WTO document.

Delegates from OECD countries began discussing the MAI in early 1995 behind closed doors. By early 1997 most of the treaty was down on paper and the public was none the wiser. In fact, most politicians in the OECD's 29 member countries weren't even aware of the negotiations. It was only when activists in Canada got their hands on a copy of the MAI and began sending it around the world via the Internet that the full scope of the document became clear.

The MAI was a corporate dream come true. Essentially the agreement set out to give private companies the same legal status as nation-states in all countries that were party to the Agreement. But more importantly it set out a clear set of rules so that corporations would be able to defend their new rights against the objections of sovereign governments. The MAI was so overwhelmingly biased towards the interests of multinationals that critics were quick to label it 'the corporate rule treaty'.

For example, under MAI provisions corporations could sue governments for passing laws that might reduce their potential profits. They could make their case in secret with no outside interest groups involved and the decision would be binding. The MAI also allowed foreign investors to challenge public funding of social programs as a distortion of free markets and the 'level playing field'. If a government chose to privatize a state-owned industry it could no longer give preference to domestic buyers. In addition, governments would be forbidden to demand that foreign investment benefit local communities or the national economy. They could not demand domestic content, local hiring, affirmative action, technology transfer or anything else in return for allowing foreign companies to exploit publicly owned resources. And there were to be no limits on profit repatriation.

Once the text became public, citizens' groups around the world began vigorous education campaigns on the potentially-damaging impact of the MAI. Two influential activists, Tony Clarke and Maude Barlow, summed up the feelings of citizens' groups everywhere. The MAI, they wrote, 'would provide corporations with the right to directly enforce an international treaty to which they are not party and under which they have no obligations. It would be entirely one-sided; neither citizens nor governments could sue the corporations back. The MAI would provide foreign investors with new and substantive rights with which they could challenge government programs, policies and laws all over the world.

MAI protest

In a few months public anxiety about the deal came to a head. In France, Australia, Canada and the US politicians at all levels were drawn into the debate and governments were forced to enter 'reservations' to protect themselves from certain of the MAI's provisions. By the May 1998 deadline it was clear that the talks were at a standstill and that public opposition had torpedoed further progress on the Agreement.

This was a stunning victory for a growing international citizens' movement. But the end of the MAI as such did not spell the end of the corporate agenda for an unregulated, global investment treaty. The focus would now shift to the WTO and other global venues where multinationals could lobby for the MAI-like investment provisions.

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Fueled by a strong dollar and a vastly-overvalued stock market, the American economy continues to suck in cheap imports from the rest of the world. The result is colossal domestic debt and record trade deficits. In 1999 the US trade deficit soared to nearly $300 billion, almost triple the deficit of 1995.

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Over the past decade the UN has documented a\ steady shift of global income from wages to profits throughout the world. Even so investors are no longer satisfied with five or six per cent annual returns. As barriers to the free movement of capital started to crumble around the world, corporations, banks and other major investors began to cast around anxiously for other surefire means of maximizing their returns. The solution was quick at hand. From the 'real' economy of manufacturing and commodity production investors turned to the world of international finance. Speculation and gambling in international money markets seemed an easier path than competing for fewer and fewer paying customers in the old goods and services economy. The era of the 'global casino' had arrived.

p72
... the biggest and most dangerous change over the past 30 years has been in the area of global finance. The volume of worldwide foreign exchange transactions has exploded as country after country has lowered barriers to foreign investment. In 1980 the daily average of foreign exchange trading totaled $80 billion; today it is estimated that more than $1,500 billion changes hands daily on global currency markets.

That is an unimaginable sum of money, but it is all the more stunning when you realize that most of this investment has virtually nothing to do with producing real goods and services for real people. In 1998 the annual global trade in merchandise and services was $6.5 billion - equal to only 4.3 days of trading on foreign exchange markets. '

p72
Money chasing money has eclipsed productive investment as the motor of the global economy.

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Critics of corporate-led globalization charge that \ unregulated flows of capital pose a major threat to the stability of the global economy, turning the world into a 'global financial casino'. This free flow of capital has also had a direct political impact, leaving national governments hostage to market sentiments. Any departure from the received wisdom is instantly , punished. This threat leads to a massive degree of self-censorship and a serious loss of democracy.

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And crises we've seen ~ from 1973 to 1995 there were 11 major global financial blow-ups. All of them required active intervention by international financial institutions and national governments to keep the world system from collapsing. The last major one began in Southeast Asia in mid-1997 when 'hot money' panicked and fled as quickly as it had arrived. Although the IMF and the US Government eventually stepped in with an emergency bailout of more than $120 billion, the damage from the financial chaos was widespread. Currencies were devalued in Thailand Indonesia, the Philippines and South Korea; factories were shut down, imports slashed, workers laid off and public sector services like healthcare, education and transport cut drastically.

As the UN Development Program commented in its 1999 Human Development Report: 'The East Asian crisis in not an isolated accident, it is a symptom of general weakness in global capital markets.' The UN agency was not alone in its assessment. Even the stridently pro-business magazine, The Economist, was forced to admit that abrupt reversals in capital 'have challenged the conventional wisdom that it is a good thing to let capital move freely across borders'. Others likeJagdish Bhagwati were less equivocal. He noted that 'the Asian crisis cannot be separated from excessive borrowings of foreign short-term capital... It has become apparent that crises attendant on capital mobility cannot be ignored.'

p77
The Southeast Asian economy went into freefall in the summer of 1997.

p82
... The set-back for development was so severe that non-governmental agencies estimated it would take a decade or longer to make-up the lost ground. Oxfam analyzed the situation as follows:

'The crisis now gripping East Asia bears comparison in terms of its destructive impact with the Great Depression of 1929. What started as a financial crisis has been allowed to develop into a full-fledged social and economic crisis, with devastating consequences for human development. Previously rising incomes have been reversed and unemployment and underemployment has reached alarming levels. Rising food prices and falling social spending have further aggravated the social conditions of the poorest.'

The human impact of the crisis was stunning. According to the UN's International Labor Organization (ILO) more than 20 million people in Indonesia were laid off from September 1997 to September 1998. UNICEF said that 250,000 clinics in the country were closed and predicted that infant mortality would jump by 30 per cent. The Asian Development Bank said that more than six million children had dropped out of school. And Oxfam estimated that more than 100 million Indonesians were living in poverty a year after the crisis -four times more than two years earlier.

There was also a frightening resurgence of racial 'scape-goating' and inter-communal violence throughout the region. Malaysia's autocratic leader Mahathir Mohamad blamed Jewish financiers for destabilizing his Muslim country, while in Indonesia the shops of ethnic-Chinese merchants were looted and burned and hundreds of Chinese brutally beaten and killed.

There were, however, some clear winners that emerged from the Asian meltdown. The big ones were the Western corporate interests that rushed in to snap up the region's bargain-basement assets after the economic collapse. As former US Trade Representative Mickey Kantor said at the time, the recession in the Tiger Economies 'was a golden chance for the West to 'reassert' its commercial interests. 'When countries seek help from the IMF,' he said, 'Europe and America should use the IMF as a battering ram to gain advantage.'

That was certainly true in South Korea where the IMF agreement lifted restrictions on outside ownership so that foreigners could purchase up to 55 per cent of Korean companies and 100 per cent of Korean banks. Years of effort by the Korean elite to keep businesses firmly under control of state-supported conglomerates called chaebols were undone in a matter of months. In January 1998 the French investment firm Credit Lyonnais estimated that just 87 of the country's 653 non-financial firms were safe from foreign buyers. Rudi Dornbusch, a US economist, accurately summed up the overall impact of the economic crisis. 'Korea is now owned and operated by our Treasury,' he crowed. "That's the positive side of this crisis."

p89
The original Bretton Woods agreement did not fulfill Keynes' dream of giving 'every member government the explicit right to control capital movements' but the policies did give members some controls. Unfortunately, even these limited tools have been gradually eroded over the years by the growing insistence on deregulation. US Treasury official Lawrence Summers criticized efforts by Malaysia, Hong Kong and others to hobble the movement of overseas capital. He called controls a 'catastrophe' and urged countries to 'open up to foreign financial service providers, and all the competition, capital and expertise they bring with them'. Given the damage inflicted on millions by the fickle nature of short-term speculators, Summers' fundamentalism comes across as both short-sighted and harmful.

As people from Mexico to Russia see their lives wrecked by the whipsaw effect of one global financial crisis after another it is becoming painfully evident that the old ways no longer work. The world has been led to the brink of financial chaos too often in the last decade. Solutions are needed urgently to ensure that money markets, bond traders and currency speculators are brought under the control of national governments in the interest of the public good.

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One of the most cogent critiques of the downside globalization came from the UN Development Program in its 1999 Human Development Report. 'When the market goes too far in dominating social and political outcomes, the opportunities and rewards of globalization spread unequally and inequitably - concentrating power and wealth in a select group of people, nations and corporations, marginalizing the others.'

The UN agency backed its analysis with hard-hitting figures on what it called a 'grotesque and dangerous polarization' between those people and countries benefiting from the system and those that are merely 'passive recipients' of its effects.

Even on its own terms economic globalization is not working. In 1960, the fifth of the world's people who live in the richest countries had 30 times more income than the fifth living in the poorest countries. By 1997 the income gap had more than doubled to 74:1. Income inequalities within countries have also increased over the past two decades. Another UN study, this one on income inequality in OECD countries, concluded that in the 1980s real wages (adjusted for inflation) had fallen and income inequality increased in all countries except Germany and Italy.

The widening gap

In the US the top ten per cent of families increased their average income by 16 per cent during that decade, while the top five per cent increased theirs by 23 per cent and the top one per cent by a whopping 50 per cent. This trend was echoed elsewhere. In Latin America the top 10 per cent of wage-earners increased their share of total income by 10 per cent while the poorest 10 per cent saw their income drop by 15 per cent, wiping out what meager improvements they had made in the previous decade. Income inequality also grew in Thailand, Indonesia, China and other Asian nations even though the region enjoyed healthy economic growth throughout the decade. In sub-Saharan Africa the situation was worse: after two decades of IMF and World Bank structural adjustment not only is income inequality growing but average per capita incomes are falling. They are now lower than they were in 1970.

This shift in wealth and income from bottom to top is part of the logic of globalization. In order to be 'competitive' governments adopt policies which cut taxes and favor profits over wages. The economic argument is simple: putting more money into the pockets of corporations and wealthy individuals (who benefit most from tax cuts: the higher the income the greater the gain) will lead to greater investment, jobs, economic growth and good times for all.

Unfortunately, there is no evidence that improvements in public well-being result from tax cuts for the rich or lower wages for the rest of us. If tax cuts were directed towards those at the bottom of the income ladder there might be some impact since the money would almost certainly be spent on basic necessities. But this isn't part of the globalization game plan. In every country that has taken up the 'reduce-taxes-cut-the-deficit' mantra the majority of tax cuts benefit wealthy individuals and corporations. What happens to the money is perhaps predictable: some goes into high-priced consumer baubles - a phenomenon which is glaringly visible amongst the elite in cities from Bangkok to Los Angeles. But most winds up in the stock market or in other sorts of non-productive speculative activity.

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Despite ... worrying warning signs, neo-liberals are reluctant to abandon their beliefs: 'Give the private sector the resources,' they say, 'and it will do the job.' But the proof is hard to find. Surplus capital which doesn't get funneled into currency markets zips straight into overseas tax havens where both rich individuals and globe-trotting multinationals have been squirreling away their cash for decades.

There are nearly 70 tax havens scattered around the world. These 'offshore financial centers' include places like the Bahamas, the Cayman Islands, Liberia and Bermuda. Investors can store their wealth secretly, no questions asked - thus escaping any social obligations to the country where they may have earned it.

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As corporate profits boom and real wages stagnate, the glue that holds us together is losing its strength. We're told there is no longer enough money to pay for 'public goods'. In exchange for a few hundred dollars in tax cuts we sacrifice our schools, reduce state support for community parks and recreation facilities, hobble our public transport and weaken our healthcare system

In Western Europe, Canada, Australia and New Zealand (Aotearoa) public education and healthcare systems have seen repeated budget cuts as the state retreats and makes way for private, profit-oriented ventures. Welfare and unemployment benefits have been 'rationalized', slashing the number of those eligible. Senior citizens and those nearing retirement are fearful that promised pensions will evaporate as governments become more desperate for funds. Individuals are frantically scraping together whatever savings they have and heading towards the stock market in the hope that they too will ride to old-age security on the coattails of the FTSE, the Nasdaq and the Dow Jones. Government funding for the arts and for environmental protection has also been steadily eroded. This failure to protect these 'public goods' diminishes us all, makes us less capable of caring for each other and prohibits us from advancing together as a cohesive, mutually supportive community.

Globalization has also derailed development in the South where the poor continue to pay the highest price of adjustment. In order to boost exports and maintain their obligations to creditors, developing countries must divert money away from things like healthcare, education and aid to small-scale farmers. There have been countless studies detailing the social impact of structural adjustment and the findings are depressingly similar. Those with the least suffer the most.

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The litany of suffering and chaos spawned by harsh l market reforms is repeated across the developing world. A 1999 joint study by the Washington-based Development Gap and Friends of the Earth confirmed this damage in five different poor countries.

In Senegal, which has endured 20 years of IMF programs, the report found 'declining quality in education and health' combined with a growth in 'maternal mortality, unemployment and child labor'. In Tanzania the research found that globalization had successfully redirected agriculture towards exports but had also 'expanded rural poverty, income inequality and environmental degradation'. Food security decreased housing conditions deteriorated and primary-school enrollment dropped while malnutrition and infant mortality rose.

In Mexico the report noted that globalization led to 'economic depression'. Millions of farmers were pushed out of agriculture and thousands of small businesses went bankrupt - 'drastically slashing jobs and wages' in the process. In Nicaragua, whose mildly leftist Sandinista government was destabilized by the US in the 1980s, IMF policies drove the country into further poverty. Financial deregulation attracted capital to 'short-term, high interest deposits' and 'away from productive investment in small-scale domestic agriculture and manufacturing'. In Hungary, the IMF advised introducing liberalized trade, a tight money supply and rapid privatization of state assets. But the report found the policies deflected money away from education and social services and into the wallets of wealthy bond holders.

But it was in Russia that the orthodox prescription for economic reform did some of its greatest harm. Supported by billions in Western aid, subsidized loans and rescheduled debt, the plan was to turn Russia into a capitalist success story overnight. Instead the 'shock therapy' threw the economy open to the winds of corruption. Privatized state assets ended up in the hands of a small group of powerful insiders (often the same people who ran the former communist state apparatus) while ordinary Russians were saddled with colossal debts. At the same time an estimated $150 billion left the country, most of it permanently.

Poverty in Russia

In the absence of price controls and the guaranteed employment of the Soviet era, average Russians endured poverty unknown for decades. It is estimated that 70 per cent of Russians now live below the poverty line while capital investment is barely 10 per cent of what it was in 1990. The country has experienced the steepest fall in peacetime living standards in modern history. According to the UN inequality doubled from 1989 to 1996. The income share of the richest 20 per cent of Russians is 11 times that of the poorest 20 per cent. Much of the economy has returned to barter while male life expectancy dropped from 65 to 60 years (two years less than the average for developing countries) and the under-five child mortality rate jumped to 25 per thousand live births - the same as Libya or Venezuela

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The IMF does not exist in a vacuum. Governments fund it and in return receive votes based on a 'one dollar, one vote' principle - in contrast to the UN's 'one country, one vote' system. As a result, industrialized countries account for over 60 per cent of the voting strength at the IMF and World Bank, compared with just 17 per cent in various UN bodies.

The chief beneficiary is the U.S. which is the only country with a large-enough slice of the votes to enjoy an effective veto of major IMF decisions. That, and the Fund's location in Washington, has helped give the US disproportionate power in using the IMF to pursue its own international agenda.

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In 1995 more than one hundred nations endorsed an agreement that will have profound impacts on biodiversity, climate change and virtually every other major environmental issue. The agreement is binding and is armed with powerful enforcement measures to ensure that every member lives up to its obligations under the treaty.

The bad news is that this international treaty will be an environmental disaster.

Can't guess which agreement this is? Here are more clues. The treaty wasn't established under the UN Environment Program (UNEP). In fact, it was the product of highly secretive negotiations conducted by public officials working hand-in-glove with the world's largest corporations. Nor is it explicitly about the environment. In fact the treaty rarely mentions the word and never even refers to biodiversity, climate change or desertification.

This international 'environment' treaty is, of course, the World Trade Organization's General Agreement on Trade and Services (GATS). While its proponents deny that it is anything more than a commercial agreement, their protests betray the dangerously myopic perspective they bring to economic and trade policy. The WTO's environmental relevance has also been obscured behind a smoke-screen of jargon. In 'tradespeak' environmental standards become 'technical barriers to trade', food-safety regulations are 'sanitary and phytosanitary measures' while the genetic commons becomes a system of 'intellectual property rights'. This also explains why its backers have been successful in denying the link between trade agreements and environmental concerns.

In broad terms, the WTO is designed to entrench 'grow-now, pay-later' globalization by removing the power of governments to regulate corporate activity in the public interest. The result is that it will undermine our capacity to redirect current economic, development and trade policies towards a truly sustainable path.

Clear evidence of its impact can be seen in a number of successful trade challenges to environmental, conservation and food-safety regulations. Since the WTO was founded four years ago we have watched (its rules prohibit public participation) as the treaty's enforcement machinery has been wheeled into action to punish governments that flout its rules. The growing list of casualties now includes European and Japanese food-safety measures, US clean-air regulations and marine mammal conservation laws, aid and development treaties between Europe and a few impoverished former colonies, and Canadian cultural programs. And the list is likely to grow.

These trade disputes represent only the most visible conflicts between free-trade rules and the environment. Indeed, the most damaging effects of this new global regime occur out of sight, as governments quietly abandon environmental, conservation, worker and consumer protections rather than become embroiled in international trade disputes.

Lately, many environmentalists have come to realize that while they were plodding down the hallways of conference centers trying to negotiate international agreements to combat climate change, protect biodiversity or reduce hazardous-waste trade to poor nations, the ink was drying on an agreement that would only heap fuel on these ecological fires.

This is discouraging, but it is also instructive. The WTO's authority depends on powerful enforcement machinery and in this regard it offers a model for environmental treaties. It proves that when governments are motivated they will sign on to truly binding international agreements.

Any government that violates WTO rules is vulnerable to sanctions - often too severe for even the wealthiest nation to ignore. In the organization's first trade complaint (a challenge by foreign gasoline refiners to US Clean Air Act regulations) the Environmental Protection Agency was given two options. Either remove the offending statute or face trade sanctions in the order of $150 million a year.

A similar fate befell European food-safety regulations last year when the WTO ruled that a European Community (EC) ban on hormone-treated beef violated several rules. The Organization ordered the EC to remove its import controls and, when it refused, authorized trade sanctions worth more than $125 million as the price of its defiance. Moreover, sanctions can be imposed against unrelated products - wherever they will be felt most.

In addition, WTO cases are routinely heard, decided, appealed and resolved within a year. It would be impossible to find any other legal sanctions against government initiatives that are as quick and effective as these. In contrast, international environmental agreements rarely use trade sanctions. Even where they do exist they represent only a pale imitation of the powerful enforcement regime built into the WTO.

Agreements like the Framework Convention on Climate Change and the Biodiversity Convention don't include any enforcement mechanism other than moral persuasion. This lack of teeth explains why governments have so resolutely ignored commitments they made when they signed these agreements at the UN's Earth Summit in Rio back in 1992.

Ultimately, nation states must face legally binding obligations if international environmental goals are to be met. This is where we need to tear several pages from the WTO text concerning enforcement.

Consider, for example, the enforcement provisions of the WTO Agreement on Intellectual Property Rights which were written to promote the interests of global pharmaceutical, biotechnology and media firms. Then imagine environmental goals being taken as seriously as patent rights. If the WTO were transformed into an organization that was as concerned about climate change as it is about the growth of transnational drug companies, we could have an Agreement on Trade-Related Measures To Combat Global Warming. Such an Agreement could require all WTO members to:

* adopt domestic laws to stabilize greenhouse-gas emissions at 1990 levels.

* provide for customs inspection, seizure and disposal of goods that were produced in ways that violate the Agreement.

* establish criminal sanctions for any breach of the legislation or regulations mandated by the Agreement.

* authorize the use of trade sanctions, including cross-retaliatory measures - such as prohibiting the export of energy or energy products - against any jurisdiction that was in breach of its obligations under the Agreement.

It is a measure of how much work lies ahead that a proposal to treat climate change as seriously as pharmaceutical patents would no doubt be greeted with complete incredulity by the WTO. That's why it's critical that governments be pressed to explain why they consider patent protection a higher priority than global warming or biodiversity loss.

But what then do we do with trade and investment deals that are currently exacerbating ecological crises? Does the WTO need to be fundamentally overhauled? Or do proposals to delegate environmental issues to a new UN organization, such as a Global Environmental Organization, make sense?

The answer depends on whether you believe that the environment can be isolated and protected from the main thrust of free-trade policies. In fact, they are cut from the same cloth.

As conflicts between environmental and trade policy became too obvious to deny, free-traders have pushed the environment debate to the margins within the WTO or isolated it entirely.

Current WTO head Michael Moore suggests that environmental issues don't belong in his agency and should be left to 'specialized institutions' with the expertise to address them. He is hoping that most people won't appreciate how intimately interrelated trade and environmental issues really are.

Of course we do need to strengthen the mandates of the international environmental institutions. But it is naive to imagine that this can happen outside the framework of international economic relations. Indeed, the isolation of these organizations from UN agencies like the World Bank and the WTO explains the marginal influence they have had.

The WTO is as much an environmental agreement as the Basel Convention on Transboundary Waste Shipments is a trade agreement. The distinction is artificial and serves only to defeat efforts to build a sustainable and integrated model for human development.

Trade agreements must serve the goals of combating climate change, preserving biodiversity, assuring food security and protecting diversity. By the same token, international environmental agreements must integrate economic and environmental strategies if they are to be effective and durable.

The need for fundamental reform of the WTO is undeniable. But a supranational Global Environment Organization (GEO) could also play a supportive role by legitimizing the use of trade and economic sanctions. A GEO will have to be equipped with enforcement mechanisms very much like those of the WTO. Noncompliance would be greeted with sanctions every bit as certain, swift and substantial as those meted out by the WTO. Economic and trade sanctions might not always be necessary, but they'd have to be available just in case.

It is unlikely that Michael Moore can imagine a GEO to rival the power and influence of the WTO he now heads. Indeed, the challenge of establishing an effective international environmental regime will be no less daunting than transforming the WTO. Ultimately, this is because both agendas have precisely the same end point - a treaty to promote ecological and economic security for all peoples, rather than some grotesque notion of international trade built on perpetual growth.

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[Robin Round directs the Tobin Tax campaign of the Halifax Initiative, a coalition of Canadian NGOs.]

What is the Tobin Tax?

In 1978 Nobel Prize-winning economist James Tobin proposed that a small worldwide tariff (less than half of one per cent) be levied by all major countries on foreign-exchange transactions in order to 'throw some sand in the wheels' of speculative flows. For a currency transaction to be profitable, the change in value of the currency must be greater than the proposed tax. Since speculative currency trades occur on much smaller margins, the Tobin Tax would reduce or eliminate the profits and, logically, the incentive to speculate. The tax is designed to help stabilize exchange rates by reducing the volume of speculation. And it is set deliberately low so as not to have an adverse effect on trade in goods and services or long-term investments.

How would a Tobin Tax benefit the global economy?

It could boost world trade by helping to stabilize exchange rates. Wildly fluctuating rates play havoc with businesses dependent on foreign exchange as prices and profits move up and down, depending on the relative value of the currencies being used. When importers and exporters can't be certain from one day to the next what their money is worth, economic planning - including job creation - goes out of the window. Reduced exchange-rate volatility means that businesses would need to spend less money 'hedging' (buying currencies in anticipation of future price changes), thus freeing up capital for investment in new production.

Tobin's proposed tax would not have stopped the crisis in Southeast Asia, but it could help prevent future crises by reducing overall speculative volume and the volatility that feeds speculative attack.

In what way would the Tobin Tax benefit national governments?

It is designed to reduce the power financial markets have to determine the economic policies of national governments. Traditionally, a country's central bank buys and sells its own currency on international markets to keep its value relatively stable. The bank buys back its currency when a 'glut' caused by an investor sell-off threatens to reduce the currency's value. In the past, most central banks had enough cash in reserve to offset any sell-off or 'attack'.

Not any longer. Speculators now have more cash than all the world's central banks put together. Official global reserves are less than half the value of one day of global foreign-exchange turnover. Many countries are simply unable to protect their currencies from speculative attack.

By cutting down on the overall volume of foreign exchange transactions, a Tobin Tax would mean that central banks would not need as much reserve money to defend their currency. The tax would allow governments the freedom to act in the best interests of their own economic development, rather than being forced to shape fiscal and monetary policies according to demands of fickle financial markets.

How would the Tobin Tax benefit people?

By making crises less likely, the tax would help avoid the social devastation that occurs in the wake of a financial crisis. It could also be a significant source of global revenue at a time when foreign aid is decreasing and strong domestic anti-tax sentiments are reducing the ability of governments to raise revenue. In the face of increasing income disparity and social inequity, the Tobin Tax represents a rare opportunity to capture the enormous wealth of an untaxed sector and redirect it towards the public good.

Conservative estimates show the tax could yield from $150-300 billion annually. The UN estimates that the cost of wiping out the worst forms of poverty and environmental destruction globally would be around $225 billion per year.

Who will be taxed ?

The majority of foreign-exchange dealing is by 100 of the world's largest banks. The top ten control 52 per cent of the market and are mostly American, German and British. Citibank tops the list with a 7.75 percent market share and a 1998 volume of foreign exchange transactions which, at $8.5 trillion, exceeded the GDP of the US. These banks operate in their own interest and on behalf of large corporate and private investors, insurance companies, hedge funds, mutual funds and pension funds.

What will be taxed ?

Only specialized financial transactions known as 'spots', 'swaps', 'futures' and 'forwards' will be taxed. With the exception of spot transactions, these instruments are known as 'derivatives' because their value is derived from the value of an underlying asset which is not bought or sold in the transaction.

Tourists exchanging dollars to pay for their holidays abroad would not be subject to a Tobin Tax. Debate continues as to whether the tax should apply to any transaction less than a million dollars.

How does the Tobin Tax work?

The tax would target only speculative currency transactions. Because it is not easy to determine which types of transactions are speculative and which are associated with legitimate trade in goods and services, the tax hinges on the speed of a transaction. Speed is the primary difference between speculative and legitimate trade. Productive investment works on the medium to long term while speculators flip investments like pancakes, profiting by the daily, hourly and minute-to-minute fluctuations in interest rates and currency values. Eighty per cent of all speculative transactions occur within seven days or less - 40 per cent occur in two days or less.

A Tobin Tax would automatically penalize short-term exchanges, while barely affecting the incentives for commodity trading and long-term capital investments.

Won't speculators find ways to evade the tax?

Inevitably. However, this has never dissuaded governments from collecting taxes, particularly 'sin taxes' designed to stem unacceptable behavior. The real question is, how do you minimize evasion?

A Tobin Tax could be difficult to evade. Because currency transactions are tracked electronically, in theory the tax would be easy to collect through the computer systems that record each trade. While the amount of money is enormous, the number of centers where trading occurs and the number of traders is not. Eighty per cent of foreign-exchange trading takes place in just seven cities. Agreement by London, New York and Tokyo alone would capture 68 per cent of speculative trading.

Won't speculators still operations to offshore tax havens?

Agreement between nations could help avoid the relocation threat, particularly if the tax were charged at the site where payments are settled or 'netted'. Globally, the move towards a centralized settlement system means transactions are being tracked by fewer and fewer institutions. Hiding trades is becoming increasingly difficult. Transfers to tax havens like the Cayman Islands could be penalized at double the agreed rate or more.

What is the biggest barrier to the Tobin Tax?

It's not technical or administrative. It's political. The tax is seen as a threat by the financial community and has met with stiff resistance by a sector with massive political clout. The very idea of putting people ahead of markets challenges the foundations of the current global economic model and those who control it.

Can the opposition be overcome?

In the wake of recent global financial crises governments everywhere are examining their faith in free markets. Even the World Bank and the International Monetary Fund praised Malaysia's use of capital controls to jump-start its battered economy in 1997-8. This is a fundamental shift in attitude, unimaginable until recently.

The political appeal of this tax to cash-strapped governments and multilateral agencies worldwide can't be underestimated. At the UN Social Summit +5 in Geneva in June 2000, 160 governments agreed to conduct a rigorous analysis on new and innovative sources of funding for social development, including a currency transaction tax. NGOs from around the world fought hard for this crucial study and believe it will make a significant contribution to the intergovernmental debate on a Tobin Tax.

Who supports the Tobin Tax?

The international trade union movement, the Canadian Parliament, the Finnish Government and a growing number of academics and elected representatives all support the tax. The European Parliament, and parliamentarians in the UK and France have held debates on the Tobin proposal and groups of parliamentarians are active in Brazil and throughout Europe. Over 400 parliamentarians from 21 countries have signed a World Parliamentarians Call for a Tobin Tax and 160 economists from 29 countries signed a similar appeal launched in June 2000. Citizens' movements for a Tobin Tax are active around the world. These include: CIDSE in Europe, the Halifax Initiative in Canada, KEPA in Finland, War on Want in Britain, ATTAC in France and Brazil, CCEJ in Korea and the Tobin Tax Initiative in the US. These and other groups have established the International Tobin Tax Network to share information and coordinate actions as they work to build public and political support for the tax.

This is only one aspect of the fundamental reform of the global financial system and is not a panacea for the world's financial ills and development woes. The democratization of economic decision-making and the equitable redistribution of wealth must become the central principles upon which governments act in the new millennium.

The real work has just begun. Citizens and politicians around the world must not let the powerful forces who oppose the Tobin Tax stifle, manipulate and ultimately undermine an essential public debate on controlling global financial markets.

The Tobin Tax deserves a fair hearing. Only widespread popular support and public pressure can ensure it.

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[Tony Clarke is Director of the Polaris Institute in Ottawa, Canada and board member of the International Forum on Globalization.]

As a rich-nations club where most of the 'Global Fortune 500' - the biggest and wealthiest corporations - are based, the Organization for Economic Cooperation and Development (OECD) is not the place to construct an alternative treaty along these lines. Nor is the World Trade Organization (WTO). Although the WTO includes most of the world's nation states, its power structure is heavily weighted against the developing countries.

The only appropriate place is the UN itself. Despite disturbing signs of corporate infiltration in UN affairs, the foundation for developing an alternative framework is located there, along with more equitable decision-making. What is required is leadership within UN circles to kick-start the process.

The main principles of an Alternative Investment Treaty should include:

* Citizens' rights- Investment should be designed to ensure that capital serves the basic rights and needs of all citizens including: human rights (adequate food, clothing, shelter); social rights (quality health care, education, social services); labor rights (employment, fair wages, unions, health and safety standards); environmental rights (protection of air, waters, forests, fish, wildlife and nonrenewable resources) and cultural rights (preservation of peoples' identity, values, customs, heritage).

* State responsibilities - To ensure that citizens' rights are respected governments have the right and responsibility to regulate the national economy. These powers should include the right to protect strategic areas of their economies (finance, energy, communications) by establishing public enterprises. And the right to protect sensitive areas known as the 'commons' (the environment, health care, culture) through government-run public services.

* Corporate obligations - Although foreign-based corporations can expect fair treatment and a reasonable return on investment (compensation for expropriation of assets) they must maintain certain social obligations such as performance standards designed to ensure citizens' basic needs and rights. They must also recognize that governments have the right to protect and enhance strategic areas of their economies and the 'commons'. And they must contribute a portion of their capital to the 'commons' by paying their fair share of taxes.

An Alternative Investment Treaty based on these fundamental principles would include the following key elements:

* Fair treatment - Foreign investment would be welcome provided social obligations were met. The concept of 'national treatment', which is used to force governments to treat foreign corporations on the same terms as domestic companies, should be discarded. Instead the 'stored value' of capital would be the basis for establishing obligations for fair treatment of foreign-based corporations.

* Social obligations - Governments would have the legal right to require all corporations, both foreign and domestic, to meet basic social obligations such as labor standards, environmental safeguards and social-security contributions.

* Performance standards - To ensure that foreign investment serves national-development priorities, governments would be allowed to require standards such as job quotas, balancing imports with exports, quotas on natural-resource exports or restrictions on the repatriation of profits. In return for access to a country's markets and resources, a government could require that a foreign company create a specified number of new jobs in the community or adhere to restrictions on the export of nonrenewable resources. These initiatives are both feasible and practical. Canada's Foreign Investment Review Act once provided the Canadian Government with the policy tools to apply this kind of performance requirement on foreign investments.

* Investment incentives - To ensure that corporations keep these social obligations, governments may use investment 'incentives' including: grants, loans and subsidies; procurement practices; tax incentives and limits on profit remittances for foreign companies that fail their social obligations. Governments could decide, for example, to buy from either foreign or domestic companies as a way of attracting productive investment.

* Public enterprises - All governments have a responsibility to use tax revenues for protecting the 'commons' through public investments. These could include exercising public ownership over key sectors of the economy; establishing social programs and public services; safeguarding ecologically sensitive areas; and protecting cultural heritage.

* Expropriation measures - Fair compensation should be paid to foreign corporations whose physical assets are expropriated for public purposes. But not when social or environmental regulations add to business costs. Compensation should be determined by national law with due regard to the value of the initial investment, the valuation of the properties for tax purposes and the amount of wealth taken out of the country during the period of investment.

So a foreign corporation could not demand compensation for an environmental law that placed a quota on the export of a nonrenewable resource or a health ban on the sale of toxic substances, on the grounds that such measures would reduce the corporation's profit margins. Nor could a foreign company claim compensation for loss of future profits because government actions prevent a planned investment from going ahead.

* Financial transactions - All governments have a right to require that foreign investment be used for productive rather than speculative purposes; that foreign corporations deposit a percentage of their profits in the central bank for a specified minimum period; that foreign-exchange transactions be taxed in order to slow down currency speculation. For example, to prevent the sudden exodus of speculative capital from Chile, 'speed bump' measures were introduced which required investment to remain in the country for at least a year.

* Dispute settlement- In the event of a dispute citizens, governments and corporations would all have the right to be heard. Disputes filed by citizens would be heard by national courts which would have powers to invoke injunctions and award monetary compensation. Through this process any one of the three parties with legal standing could bring a suit for monetary compensation but not for violation of the investment rules aimed at striking down national laws. To ensure that non-governmental organizations (NGOs), native communities, environment and women's groups, trade unions and others have equal access to the dispute-settlement mechanism, national and international funds should be established for citizen intervenors.

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