The Great Bargain

The next president of the United States either will lead the world into an era of unprecedented peace and growth, in which virtually all nations are knitted together into a seamless economic web, or will watch the world fragment into three trading blocs of advanced and rapidly developing nations, and a fourth vast territory -- stretching from South America through central Africa, Eastern Europe, and central and southern Asia -- largely characterized by deepening poverty, ethnic strife, and civil chaos. The choice is not entirely up to the next president, of course, but he will be in a unique position to influence it. As the chief executive of the only remaining superpower -- the very model of democratic capitalism to which most of the rest of mankind now openly aspires -- his words and deeds will count for much.

Most of the four billion people who inhabit the Southern Hemisphere, and the 400,000,000 inhabitants of Eastern Europe and the Soviet Union are already experiencing sharp declines in living standards. The world economy grew by only 1 percent in 1990 and is growing even more slowly this year; almost all the growth is occurring in North America, Western Europe, and East Asia. In 1990 the economies of Latin America shrunk by 4 percent; sub-Saharan Africa, by over 10 percent; Eastern Europe, by 11 percent; the Soviet Union, by 14 percent. Meanwhile, these populations are expanding, on average, by more than 2 percent a year, thus pushing each inhabitant further toward subsistence or starvation.

The world's impoverished majority needs two things from the wealthy minority. The first is investment -- in factories, laboratories, and equipment -- to employ them, give them a modicum of skills, and provide them wages to allow them to purchase real goods and services from the rest of the world. The second is access to consumers in advanced nations, to buy the items produced in the new factories and laboratories, and thus to ensure the profitability of the new investments. Absent these two prerequisites, the world's majority will continue its downward slide. With them, there is at least the possibility of a virtuous cycle of investment, jobs, export sales, further investment, and more jobs -- a dynamic that allows public investments in education, health, and infrastructure and generates enough local purchasing power to sustain indigenous businesses as well.

This lesson has in recent years been learned by most of the Third World and, even more recently, by the Second. Nations that had long and resolutely spurned foreign investment -- periodically expropriating foreign holdings, preventing repatriation of profits, restricting foreign ownership, and maintaining their currencies at artificially high levels -- have reversed direction. The reversals in Latin America and the Asian subcontinent have been dramatic, but not nearly as dramatic as those in much of Eastern Europe.

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The economic reforms that were set in motion in the Soviet Union in the late 1980s cannot be easily reversed. During the spring and summer of 1991, Mikhail Gorbachev was relying on foreign investment to spur the economy and transform the ossified structure of Soviet society. "We prefer a concept for the way in which the Soviet Union might move toward being integrated in the world economy," he said at last July's economic summit, and spoke darkly of "roadblocks" in the West and "a need for movement from the other side." He sought economic aid as a means of stabilizing the ruble and easing its transition toward a freely convertible currency; membership in international economic organizations was a means of assuring the West of the security of its investments. The debate over a so-called "Grand Bargain" of Western aid in exchange for Soviet economic reform only served to obscure this more fundamental need and the "roadblocks" in the way of responding to it.

Even if the nations of the First World ultimately had been willing to send billions of dollars to Gorbachev last spring, they were unwilling to take the less visible but more important steps of encouraging private investment outside the First World and opening their borders to imports from the Soviet Union as well as from Eastern Europe and the Third World. The reason for their reluctance has been the slowdown of global growth, which has caused their citizens to feel relatively insecure -- although, most assuredly, not as insecure as the rest of the world's people.

At midsummer, unemployment in the United States stood at 7 percent, not counting millions of workers too discouraged to look for work or in part-time jobs who would rather be working full-time. In Britain, the rate had climbed to 8.4 percent; in France 9.4 percent; in Canada and Italy, 10 percent. These relatively high levels of unemployment are, of course, related to the current recession. But even when the recession ends, long-term structural problems will remain. The cost of capital has continued on an upward trajectory that began before the recession, reflecting inadequate global savings relative to demand. Aging populations in Japan and the United States are already straining their nations' systems of housing, health care, and retirement security. Meanwhile, non-supervisory workers in the United States have seen their inflation-adjusted earnings drop by 11 percent since 1977, and in Britain and Canada by almost as much. The irony of democratic capitalism is that citizens hold governments responsible for their collective well-being, even though capitalist orthodoxy assigns no significant role to the state in economic affairs. By contrast, totalitarian communist regimes, which loudly proclaim such responsibility, offer their citizens no means of holding the state accountable for improving their standard of living. Hence the current problem. In this era of relatively high unemployment, chronic capital shortages, and declining real earnings in many advanced industrial nations, citizens of the First World are not apt to be enthusiastic about giving citizens of the Second and Third access to their financial capital and to their markets. And yet, if capitalism is to improve the lives of the impoverished majority of the world's inhabitants, it will do so primarily as part of an integrated system of global investment and trade.

Offers by the advanced nations of technical assistance and membership in the International Monetary Fund and World Bank are cheap. Relatively speaking, so is foreign aid, even of the "Grand Bargain" variety. But imports into advanced nations of inexpensive products, and outflows from them of investment capital, can impose substantial burdens on their citizens in the short term, which may translate into electoral defeats for incumbent politicians. Thus has the recent tendency among advanced nations been in precisely the opposite direction -- toward trading blocs that exclude most of the Second and Third Worlds, domestic-content requirements and strict rules of national origin intended to lure global direct investment into the blocs rather than encourage outward flows, and public subsidies designed to retain or attract global capital.

Despite all the hoopla in the business press over investment opportunities in Eastern Europe, the Soviet Union, and the new democracies of Latin America, direct investment outside the First World has actually slowed to a trickle. Trade between the First World and the Second and Third has fallen off as well. The Uruguay round is stymied. The Bush administration barely succeeded in gaining congressional authority to negotiate a free-trade accord with Mexico, and there is little or no possibility of expanding the agreement to embrace more of Latin America. Although several Eastern European nations now maintain trade surpluses with the European Community, Community members have drawn the line on imports of steel and textiles. In fact, Western Europe is beginning to shut its doors to the East. Fran├žois Mitterand says that Eastern Europe won't be allowed to join the Community for "at least several dozen years." Meanwhile, agricultural exports from the Second and Third Worlds into the First remain effectively blocked by farm subsidies and price supports. The United States continues to bar dairy products from Eastern Europe and still imposes harsh quotas on textiles and steel.

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The fundamental choice here, as in most important areas of public policy, is not between laissez-faire capitalism and dirigiste planning, although that is how many conservatives want to frame it. The creation of a truly inclusive system of global trade and investment, adequate to bridge the widening gap between the First World and the other two, entails a major role for the public sectors of advanced nations.

For example, the best way to assure the work forces of the First World that they have little to fear from large-scale imports of steel, textiles, agricultural staples, and simple consumer electronics from the Second and Third is by easing the transition of work forces in the First World to more advanced production: giving them the necessary skills, compensating them for unforeseeable losses, supporting them with first-class transportation and communications systems, and maintaining social safety nets sufficiently durable and flexible to reduce their fear of being left behind.

Likewise, one way to assure an adequate outflow of private investment from the First World to the Second and Third, without worsening the capital shortage and causing global interest rates to rise perilously, is by reducing the U.S. budget deficit. But how to do so while simultaneously embarking on government programs to ease the transition of the work force to more advanced production? By cutting military spending and raising taxes on the highest-income earners, whose marginal tax rates have declined precipitously since the late 1970s.

There is also a need for what might be termed a GATT for direct investment -- a logical extension of the General Agreement on Tariffs and Trade that the United States sponsored after World War II -- setting out international rules of fair play by which nations can bid for global investments. Barred would be threats by advanced nations to close their domestic markets unless certain investments were undertaken within them. Instead, the rules would seek to give an advantage to Second and Third World nations. For example, the amount of permissible subsidy might be directly proportional to the size of the nation's work force but inversely proportional to its average skills. This formula would give greater leeway in bidding for global investment to nations with large, relatively unskilled work forces than to nations with work forces that are smaller and more highly skilled.

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Call all this the First World's Great Bargain with the Second and Third. Such a vision is entirely consistent with a half-century of liberal internationalism. It was, after all, a liberal vision that led to the rebuilding of Japan and Western Europe after the Second World War and to the founding of international economic institutions like the IMF and the GATT to foster trade and investment among these nations and the United States. It was also a liberal vision that inspired the great postwar rounds of market-opening agreements; and a liberal vision that simultaneously propelled America toward making major public investments in its long-term economic future -- in higher education, training, research and development, highways, and public health -- investments that complemented America's trade and investment initiatives by helping to ensure the nation's continuing prosperity.

The conservative imagination, by contrast, has tended toward isolation, nativism, chauvinism. Postwar liberals in America were able to sell conservatives their international vision, as well as their agenda of public investment, by emphasizing its utility for containing Soviet communism. A prosperous Europe and Japan would be less susceptible to Soviet blandishments. Trade and investment would help bind the remainder of the Free World to the United States. Meanwhile, public investments at home were necessary in order to keep pace with the Soviets' technology (hence the oxymoronic moniker, National Defense Education Act) or to maintain home defenses (the National Defense Highway Act).

It was a Faustian bargain, which permitted liberals to avoid the important task of defining and legitimizing the liberal internationalist vision on its own terms. With the recent implosion of Soviet communism, the containment rationale has lost much of its force. In its place have appeared two caricatured sets of American policy responses to the growing needs of the Second and Third Worlds, neither of which is capable of satisfying them, nor of legitimizing public investments at home to ease the transition of the work force to more advanced production: On the one hand, an argument to protect domestic jobs and retain domestic capital; on the other, an argument to unfetter the private sector from all government restraint and allow capital to roam the world in pursuit of the highest return on investment. A similar division of opinion can be found in the European Community and in Japan.

In international economics, it should be the liberal's hour. There is a possibility, for the first time in a half century, of a truly integrated global economy. Realizing that promise and promoting democratic capitalism around the world require a bold and active public sector in the United States, mobilizing and working in concert with other governments. The economics of inclusion should be a liberal crusade.

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