Markkula Center of Applied Ethics

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/