UNCIVIL SOCIETY
The ill-fated multilateral agreement on investment shows the need to confront the claims of pressure groups hostile to globalisation, writes Martin Wolf <Martin.Wolf at ft.com>
In 1997, according to the World Bank, the 10 economies with the highest incomes per head were, in order, Singapore, the US, Switzerland, Hong Kong, Norway, Japan, Denmark, Belgium, Austria and Canada. Two things should strike anyone who looks at this list: first, these are all internationally open, market economies; second, seven of them have populations of less than 10m.
As Adam Smith remarked, the division of labour is limited by the size of the market. But the biggest of all markets is the world. If people are able to access world markets and know-how, the size of their own economies becomes irrelevant. That this is what more and more countries have chosen to do is the most heartening economic development of our era.
Yet, like all human achievements, it is fragile. Integration is vulnerable to attack from protectionist interests and populist rabble-rousers. It may also die from suspicion or neglect. These are not small dangers. They are ones trade ministers attending the World Trade Organisation's ministerial meeting in Seattle, in November, must bear well in mind.
There can be no more salutary warning than the ill-fated multilateral agreement on investment (MAI), conceived in 1995 and still-born in December 1998. This is a sad tale, clearly told in a recent pamphlet by David Henderson, former chief economist of the Organisation for Economic Co-operation and Development.*
As Mr Henderson points out, back in 1995, there seemed nothing very remarkable about taking the liberalisation of investment regimes further. In the background was the increasing importance of foreign direct investment (FDI) - shown clearly in the chart. As Mr Henderson notes, between 1986 and 1996, world real output increased by about 40 per cent, the volume of trade doubled and the quantity of FDI rose by a factor of more than four and a half. This growth reflected the decisions to liberalise of individual governments. It seemed obvious, however, that just as world trade had gained from the security provided by a rules-based regime, so might investment.
Nevertheless, this attempt was abandoned after three and a half years of effort. The question is why.
Mr Henderson ascribes the failure to two main interrelated sources of concern. The first was fierce disagreements within the negotiations; the second was the rising anxiety of a host of non-governmental organisations.
Specific problems arose in three ways. First, disagreement grew over the broad definition of investment, the design of the dispute settlement mechanism and the treatment of incentives. Second, the US and the European Union were unable to compromise on the things of greatest concern to each. Third, governments began to feel concerned that an agreement as ambitious as the MAI would deprive them of all control over the pace of liberalisation.
Crucial to the latter were the superbly organised NGOs. For many, the MAI became a totem of the loathed cause of globalisation. Partly in response, negotiators became increasingly concerned about social and environmental standards. Meanwhile, as hopes for liberalisation diminished, business lost interest, too.
In the end, an agreement with little upside for any and much downside for many was allowed to die. That is not of great importance. The pressures for unilateral liberalisation of investment remain intact. But it is widely seen as a defeat for multilaterally agreed liberalisation and could be a harbinger of worse to come. Those involved in the WTO must learn from this failure.
A vital lesson is that a negotiation needs a format and an agenda likely to lead to success. In this case, the differences among the participants turned out to be far too large, as was the importance of the countries not included within the negotiations.
As significant a lesson, however, is the political one. A way must be found to deal with the new pressures coming from outside such negotiations.
This needs to be done in two complementary ways. The first is to tackle head on the arguments of extremists who believe international economic liberalisation threatens parliamentary democracy, the poor and the environment. The second is to insist that the claims of NGOs to represent civil society as a whole and, as such, to possess legitimacy rivalling - perhaps even exceeding - that of elected governments is outrageous.
On the first, as Mr Henderson notes, many of the fears of those opposed to liberalisation make little sense. It is absurd to argue that multinationals, which possess no armies and run no secret police, would, in the words of one group of NGOs, "end up hijacking the fundamental democratic rights and freedoms of peoples all over the world". On the contrary, it is no accident that all the great tyrants have imposed closed economies.
Again, many of the critics rely on the simplistic slogans of "production for people, not profits". But there is no better way of deciding whether something is worth producing than by comparing prices with costs. True, problems arise when social and private costs and benefits diverge. But there is no credible alternative to profit as the motor of the economic system.
Finally, on the vexed question of standards, it is not the case that liberal trade or investment flows demand that standards be the same everywhere. Differences, both over the environment and the labour market, are perfectly legitimate. It is particularly absurd for people to argue that international agreements to liberalise trade or investment are an interference in sovereignty, while also insisting that every country must adopt the same environmental and labour standards. Now that really is an interference in sovereignty.
At the very least, then, the substantive claims of those most strongly opposed to liberalisation must be challenged. Yet it is quite as important to confront their political legitimacy as purported representatives of civil society as a whole.
Only elected governments can be properly responsible for the making of law, domestically and internationally. This does not preclude full discussion with all private interests. But a civilised society is one in which the state alone has a monopoly of coercive power, exercised, under law, by a government responsible to the electorate as a whole. To grant any private interests a direct voice in negotiations over how coercion is to be applied is fundamentally subversive of constitutional democracy.
As for "civil society", it is simply a label for all those activities, relationships and organisations that fall outside the purview of the state. This amorphous mass cannot be represented by anyone. Those who claim to do so are impostors. Organisations can only represent themselves. If NGOs were indeed representative of the wishes and desires of the electorate, those who embrace their ideas would be in power. Self-evidently, they are not.
The fate of the MAI is a warning. Policy-makers need to prepare their ground far better than this. They also need to recognise the changed political context in which they operate. The enemies of the liberal international economy have found new arguments and new ways of organising. Both need to be resisted. What is at stake is far too important to go by default.
* David Henderson, The MAI Affair, a Story and its Lessons. The Royal Institute of International Affairs, London, 1999.