Ethics in International Economics:
The WTO, NAFTA, the IMF, and the World Bank.
An interview of Michael Kevane, Assistant Professor
of Economics at Santa Clara University, conducted by David Perry,
Director of Ethics Programs at the Markkula Center for Applied
Ethics, broadcast 30 April 2001 on "Ethics Today,"
KSCU radio, 103.3 FM.
David Perry: The World Trade Organization and the new
Free Trade Area of the Americas have become the focus of intense
and wide-ranging criticisms by labor unions, environmental activists,
and human rights proponents…. The WTO and NAFTA ostensibly
promote free trade, but some critics assert that they’re
really fronts for large multinational corporations that want
to exploit the labor of workers in developing countries and
take advantage of weakly enforced regulations on environmental
protection and workplace safety. How would you evaluate claims
like those?
Michael Kevane: The claim that the World Trade Organization
is a front for multinational corporations is probably a stretch.
The treaties that are negotiated within the World Trade Organization
are always negotiated among countries. To make the claim that
it’s a front for multinational corporations, one would
have to make the claim then that in most of the countries in
the world, their elected representatives are also fronts for
multinational corporations. If you think that’s true, then
it follows that the World Trade Organization is nothing more
than a governing body for the multinational corporations. If
however, you think that policy that gets made in a country like
the United States is the result of a more complex interplay
between activist groups, NGO’s [non-governmental organizations],
concerned citizens, and the big money companies having a strong
role, then you get a more complex mixture.
You can’t fall back on a real simple conspiracy theory.
That’s obviously not the case for a country like the United
States, or European countries, or even many developing countries.
Ordinary citizens and environmental groups do exert influence
and pressure; otherwise the United States wouldn’t have
the environmental laws that it does have. It’s stretching
it to say it is simply a front. But of course, just like big
companies exert perhaps an inordinate influence over policy
in the United States, they also, through those selected representatives
or dictatorial countries, through their ability to bribe dictators
or influence dictators, they have much more than their share
of power over the kinds of negotiations that go on.
DP: Even though most of the developing countries in
the world are members of the WTO, would it be fair to say that
they don’t have as much clout or influence in comparison
to major industrialized countries?
MK: Yes. That is a function of poverty. Developing countries
are poor countries, and whenever a poor country or poor person
is negotiating with a wealthier person, the bargaining power
resides with the wealthier person, or with the wealthier country.
That doesn’t mean, however, that the negotiations are win-lose.
The outcomes are win-lose; that is the outcome of the negotiation
involves a benefit for the rich country at the expense of the
poor country. All of the agreements that have been negotiated
within the World Trade Organization, all the loans that have
been made by the World Bank and the INF are voluntary. And the
World Trade Organization actually operates under a principle
of consensus, that all the countries have to agree. If a country
says ‘Well I don’t like this, this is hurting me,
this is hurting us, this is hurting our population,’ then
there is no army that forces any of them to abide by any of
the agreements they signed onto.
They are all voluntary agreements, so in that case, it’s
probably better to speak of win-win type situations…where,
perhaps, the win for the developing countries is small, and
the win for the developed countries is big. Now, that may sound
horrible, but a small win for a poor country may be a big percentage
change, whereas a big win for a very rich country may be a very
small percentage change in overall welfare. It’s hard to
make that kind of welfare judgement about whether poor countries
would be much better off if there were not a World Trade Organization
or International Monetary Fund or World Bank.
DP: The WTO has been criticized for the secrecy of its
deliberations about economic disputes between countries, making
it difficult for average citizens to find out whether the WTO
judges those disputes fairly. What do you think about that charge?
MK: Although it is a little ironic, that’s one
of the major criticisms of the World Trade Organization. Let
me explain by taking a specific case that a lot of people know
about, which is the case of the sea turtles. The United States
passed a law a decade ago saying that from then on, shrimp caught
in the United States’ territorial waters had to be caught
with nets that use what are called "turtle excluder devices."
These are basically large portholes in the nets where the turtle
can swim out but where shrimp can’t, so the net can take
all the shrimp, but the turtles, which are an endangered species,
are enabled to get out of the net.
The United States, in addition to passing this law saying that
all U.S. producers had to abide by this environmental regulation,
also said that all foreign producers had to abide by this environmental
regulation. They are perfectly free to not use turtle excluder
devices if they are not going to be exporting shrimp to the
United States, but any country that exports shrimp to the United
States, any producers have to have in place a system of regulation
very much like the U.S. regulatory apparatuses of monitoring
and forcing the use of turtle excluder devices or their equivalent.
The United States law said that these foreign countries would
have to be certified by the United States Marine Fisheries Department.
If they didn’t get certified, then the shrimp wasn’t
allowed to come into this country.
The other countries complained. They went to the World Trade
Organization and said the United States has passed a law preventing
us from exporting our shrimp to the United States. 'They are
regulating our productive practices and in a discriminatory
way' is the basis of the argument.
Now the World Trade Panel that was set up to arbitrate this
dispute between the United States and these other countries
found that indeed the United States’ law and its implementation
in particular had been discriminatory, and the grounds for which
they found the law to be discriminatory were precisely that
the Fisheries Department of the United States had no formal
process, no open hearings for how it determined whether or not
the countries were to be certified. It didn’t even have
an application procedure. So it was all left to a kind of informal,
bureaucratic decision. One of the things the appelate body noted
was that when the Fisheries Department actually did notify the
countries, all it did was publish the names in the federal register
of countries that had been approved. It never notified countries
that had been denied; it never gave an opportunity for an appeal
to its decision. It was completely secretive— very much
like the process you might criticize the World Trade Organization
for.
So that’s why I say it was sort of ironic that that’s
a major criticism of the WTO because in that very prominent
landmark case their criticism was that the United States’
procedure was not allowing for appeals, was not transparent.
Actually, it's also ironic because in that case, the appelate
body did overturn a previous decision that the WTO had made,
which was to not allow non-interested parties to submit briefs,
basically, to the dispute settlement body, and that ruling also
then opened up the WTO quite a bit more to receiving input from
NGO’s, from environmental activist groups.
So the WTO is an evolving organization; it is changing, and
I think the pressure from the activists is really what pushes
it in the right direction. I think the activists who were out
there on the streets in Seattle and Quebec are to be applauded
because they are doing the job that needs to be done of maintaining
an open, transparent system. It’s plain that that pressure
might come from the interplay between countries, but it’s
much more likely to come from grassroots movements like a lot
of the activist movements that are happening.
DP: Let’s talk a little bit about free trade. Some
people have argued that NAFTA has put a lot of American citizens
out of work because their companies have moved their jobs to
Mexico. Is that a legitimate concern or plausible claim? Who
is most likely to be helped and hurt by free trade? Is free
trade a good thing overall, even if it causes some people to
lose their jobs?
MK: When Ross Perot ran for president against Bill Clinton,
he talked about the "giant sucking sound" that would
be heard when the United States signed NAFTA and the "sucking
sound" was that all U.S. jobs would be "sucked"
down to Mexico and Americans would all be unemployed. We now
have the lowest unemployment rate in the United States since
the early 1960s, and that unemployment rate has been pretty
steady. So plainly, the argument that NAFTA was somehow going
to cause a lot of unemployment in the United States has been
already quite obviously falsified by the facts.
Unemployment might be even lower if we hadn’t signed NAFTA,
but I think that’s extremely unlikely for a very simple
reason: The trade that the United States has with Mexico is
an extremely small component of the gross domestic product of
the United States. So even if that trade doubled, the amount
of employment that would be generated, or if that trade was
cut in half, the amount of unemployment that would be created
would be tiny on the scale of the United States labor market,
which is a labor market of 150 odd million people….Mexico
is a very poor country, and the United States just doesn’t
trade a lot with Mexico. The United States trades a lot with
Japan and with Europe, countries that are at similar levels
of economic development… They just don’t buy enough
from Mexico to have a big effect on the U.S. economy.
Unemployment in the United States is determined almost completely
by the Federal Reserve policy; interest rate policy at the Federal
Reserve is the major determinant of GDP growth and changes in
unemployment in the United States. So these trade agreements
just don’t have enough effect to lead to those kinds of
conclusions.
DP: Do you think that there are ways to combine a focus
on free trade with safeguards on worker safety, on the right
to organize, and on environmental protection? Or if you try
to establish international standards on those latter things
are you likely to run up against the WTO, which might claim
that you are trying to inhibit free trade?
MK: In that famous shrimp/sea turtle case, the dispute
body of the World Trade Organization was very clear in saying
the WTO and the appelate body is not against countries legislating
and enforcing environmental regulations. That’s a very
broad exemption that’s been in the General Agreement on
Tariffs and Trade, the GATT, ever since its beginning. One of
the most important clauses in it is that countries are free
to pursue environmental policies, and that’s a legitimate
restraint on trade.
The WTO’s nitpickiness is that if you have those kinds
of policies, they have to be applied uniformly and fairly to
all countries. You can’t have a nontransparent procedure.
For instance, there’s a famous gasoline case where the
gasoline was being refined in Venezuela and being exported to
the United States. It was lower quality in terms of the pollutants
that would be emitted after it was used up. The United States
passed a law saying foreign refiners had to meet the average
level of quality of refined gasoline in the United States. And
that sounds like a perfectly reasonable proposal, right? But
that means you’re discriminating; you’re treating
the foreign producer differently than the U.S. producer, because
[some] U.S. producers were below the average. The law didn’t
say that all U.S. producers had to meet a certain level; it
said that foreign producers had to meet the average level of
the U.S. producers. So it meant that if you had two producers,
a U.S. refiner and a foreign refiner, they could both be producing
[below] the U.S. average. The foreign refiner’s gasoline
would not be allowed into the United States, the U.S. refiner’s
gasoline could be bought and sold by U.S. consumers. So that’s
an arbitrary, differential treatment of the foreign refiner
and the domestic refiner. And those are the kinds of things
that run up against the treaty that the United States [signed
with] the World Trade Organization.
You’ve got to remember the countries change their policies.
The United States under President Clinton was fairly willing
to engage in global, multilateral talks about regulating the
environment. President Bush—one of his very first decisions
was to say that the United States…would no longer participate
in what is called the global framework for regulating global
warming, the Kyoto Protocol. The United States has unilaterally
withdrawn from those negotiations, and for the time being we
don’t know if [this administration is] going to have a
new proposal to offer or whether it is just going to, for the
tenure of President Bush’s presidency, not engage in any
multilateral negotiations. If you’re an environmental activist,
the pressure shouldn’t be against the WTO; the pressure
should be against President Bush for not quickly coming up with
a set of proposals or an agenda for how he’s going to deal
with environmental issues that have global implications.
DP: Let’s shift to the IMF. Many developing countries
have amassed huge debts that they seem unlikely to be able to
pay any time soon. How did they come to be in that situation?
MK: Let me talk first about the ones I feel most strongly
about. Some of those countries that have enormous debts got
indebted because they were run by dictators, and the dictators
allied themselves with the United States, which has an inordinate
influence over the lending activities of the International Monetary
Fund and the World Bank. The U.S. pressured those institutions.
Those institutions are run by a board of governors that is composed
of the member countries. Each member of the board of governors
represents a country, but the shares of voting power depend
on the wealth of the country—how much the country contributed
in terms of capital to the IMF or to the World Bank. The United
States as the wealthiest country, has contributed the most capital
to those organizations. Quite naturally there is nothing wrong
with the one who contributes the most having the most say.
Unfortunately the United States has pursued these kind of Cold
War battles by proxy through much of its history, which meant
that it had a foreign policy of aiding and abetting dictators
around the world. Jeanne Kirkpatrick, a former ambassador to
the United Nations, had this famous quip: ‘Well I don’t
care if they’re dictators, as long as they’re our
dictators.’ And I think that that foreign policy is just
wrong ethically. And that’s what lead to the indebtedness
of a lot of these countries—Zaire, now Congo, being the
most egregious case in point, was run by dictator Mobutu, who
was installed, in part due to assistance from the Central Intelligence
Agency. He received enormous amounts of loans from these financial
institutions and simply plundered the country. Those countries,
it seems to me, I don’t see any ethical standard for holding
the country, the people of that country, liable for debt that
was incurred by a dictator.
DP: Would you go along with some who argue today that
even just on moral grounds alone, apart from economic concerns,
that wealthy countries should forgive the debts of the poorest
countries or some of the countries that got into that situation
because of dictators?
MK: Oh, absolutely. [If you have a] country that was
ruled by a dictator for 25 years and amassed a country debt
of $20 billion, and it’s pretty easy to establish that
most of the loans that were taken by that dictator were never
used for the intended purposes, where it’s pretty easy
to establish that the dictator himself amassed a personal fortune
on orders of magnitude from $1 billion to $10 billion—it
seems to me ludicrous not to simply declare that those debts
no longer need to be repaid or to reduce them by enormous amounts.
Now the World Bank and the IMF do have a procedure called the
‘HIPC’ (Highly Indebted Poor Countries Procedure)
that is supposed to offer debt relief, and it’s fairly
reasonable though it’s not being applied aggressively enough.
They’re doing a kind of retrospective debt relief in the
sense that a country that signs up to become a member of this
program agrees to carry out certain structural reforms in the
economy; bring down inflation rates; fire ghost civil workers
who are the kind of patron type agreement; carry out a whole
bunch of structural reforms in the economy. If they do that
successfully, then they get large write-downs of the debt.
The World Bank and the IMF would rather use the debt as a kind
of bullying stick. But it’s a big problem because even
when people like Mobutu were chased out of Zaire, or General
Nimeiri was chased out of Sudan, their replacements might not
have been democrats. And so now you have a situation where an
old dictator took $20 billion worth of loans, and then the old
dictator left. And there was a transition, maybe there was a
popular uprising, maybe there was a civil war, and you’ve
got a new regime in place. The new regime says, ‘We now
represent the people, and all debt should be wiped out.’
But then it becomes clear after one or two years that the new
regime is not as bad, but it is still a dictatorial regime.
So now you have one of those really hard ethical questions,
of whether you reward a dictatorial regime that’s not as
bad as the previous dictatorial regime.
DP: Right, that’s like the classical ethical dilemma,
of having to choose between the lesser of two evils.
MK: The lesser of two evils. My feeling is that reducing
debt implies you have fewer resources available. The resources
of the World Bank and the IMF come from the payment of debt
that countries have taken. If they forgive the debt, that means
they have, maybe not fewer resources now, but fewer resources
in the future.
There’s lots of ongoing negotiations on this, but the
way to get out of this morass is to channel resources that are
available into non-governmental organizations. The World Bank
is making a big move in that direction, which poses its own
ethical problems for non-governmental organizations to be receiving
funding from the World Bank and for the World Bank to not respect
the sovereignty of a country. The World Bank is composed of
member countries; they are the only ones who can receive loans.
Increasingly, the World Bank is trying to structure its loans
so that it may give the loan to the country, but the country
has agreed to immediately disburse that money to non-governmental
organizations….
DP: You mentioned in connection with the IMF structural
adjustments that they often ask the governments to cut out a
lot of the patronage and so on, but some people have said that
the IMF sometimes goes too far in its structural adjustments,
that it sometimes requires such drastic cuts in governmental
expenditures that the country has to cut support for education,
or the fund requires so much of a devaluation of the country’s
currency that it just destroys the savings of the people who
have been stowing things in the bank or under mattresses.
MK: That’s an absolutely legitimate criticism.
I think it’s even worse than that. When the International
Monetary Fund and the World Bank are negotiating these debts,
when countries that owe money to the World Bank and the IMF
find that they need more money, the IMF imposes these conditions.
Both of the organizations consistently take the position that
they’re apolitical institutions, so they can’t get
into the business of working out exactly what programs should
be cut by a sovereign country.
When it comes down to the nitty-gritty, however, they always
do. They sit down with the country, and their representatives
come in, and they look at the budget. And they say, ‘We’re
going to cut this, we’re going to cut that.’ But the
one thing that they never touch is the military expenditures
of these poor countries because that would be political, right?
So they have this double inconsistency. They maintain this consistent
two-facedness of saying on the one hand, we’re not political,
then they go and they get political, and then when they’re
criticized for not getting political about the military expenditures,
they say we’re not political.
You know, you can’t operate that way. The World Bank and
the IMF have a really bad history of continuing to lend to countries,
when those countries have obviously used their revenue to build
up military and security apparatuses that are used then to intimidate,
torture, oppress citizens. So in Central America, we have civil
wars in a number of countries, and international institutions
lending. Money is fungible, so a loan that comes in one hand
can go out the other hand to a secret military apparatus to
maintaining prisons, to buying helicopter gunships, things like
that. The World Bank and the IMF have done really poor job in
that regard of not making their loans conditional on past behavior.
And they’ve always used this justification that they’re
not political to do that, but of course they are political…
None of the views expressed here should be taken necessarily
to reflect those of the Markkula Center for Applied Ethics.
The Center does not take official stances on controversial issues.
"Ethics Today" seeks to promote careful reflection,
civil dialogue, and informed action on matters of ethical significance.
FURTHER READING
Krugman, Paul R. and Maurice Obstfeld. International Economics:
Theory and Policy. Addison Wesley, 2000.
RELATED LINKS
Fair Labor Association http://www.fairlabor.org/
Global Exchange http://www.globalexchange.org/
World Bank http://www.worldbank.org/
World Trade Organization http://www.wto.org/
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