A feature of the People-Centered Development Forum
By David C. Korten
Opening Plenary Presentation to The Environmental Grantmakers Association Fall Retreat, October 13-15, 1994, Mount Washington Hotel & Resort, Bretton Woods, New Hampshire
We are here this morning to reflect on a major question of our time. What is the relationship between our hopes for a sustainable future and the dynamics of the global economy? This is a fitting question for a gathering at Bretton Woods, because of the historic role of this place in the creation of three important institutions that have led the move to globalize the world’s economies.
The fame of Bretton Woods, and of this hotel, dates from July 1944 when the United Nations Monetary and Financial Conference was held here. The world was in the throes of World War II. Mussolini had been overthrown. The Allies had landed at Normandy, but Hitler would last another ten months. War also continued to rage in the Far East and Japan would not surrender for another 13 months. The United Nations Charter was still a year away. In that context, the economic leaders who quietly gathered at this hotel were looking beyond the end of the war with hopes for a world united in peace through prosperity. Their specific goal was to create the institutions that would promote that vision.
At the opening session, held in this very room, Henry Morgenthau, U.S. Secretary of the Treasury and President of the Conference, read a welcoming message from President Roosevelt and gave his opening speech, which set the tone and spirit of the gathering. Morgenthau envisaged the “creation of a dynamic world economy in which the peoples of every nation will be able to realize their potentialities in peace and enjoy increasingly the fruits of material progress on an earth infinitely blessed with natural riches.” He called on participants to embrace the “elementary economic axiom…that prosperity has no fixed limits. It is not a finite substance to be diminished by division.”
Thus Morgenthau set forth one of several underlying assumptions of the economic paradigm that guided the work of the architects of the Bretton Woods system. Many of these assumptions were reasonably valid. But two of the most important were deeply flawed. The first is that economic growth and enhanced world trade would benefit everyone. The second is that economic growth would not be constrained by the limits of the planet.
By the end of this historic meeting the World Bank and the International Monetary Fund (IMF) had been founded and the groundwork laid for what later become the General Agreement on Tariffs and Trade (GATT). In the intervening years these institutions have held faithfully to their mandate to promote economic growth and globalization. Through structural adjustment loans the World Bank and the IMF have pressured the countries of the South to open their borders and focus their economies on export production. Trade agreements negotiated through the GATT have reinforced these actions and opened economies in both North and South to the increasingly free flow of goods and money.
Now, in October 1994, fifty years later, we are gathered in this same hall. As we look back on the intervening years we can see that the Bretton Woods institutions have indeed met their goal. Economic growth has expended five fold. International trade has expanded by roughly twelve times and foreign direct investment has been expanding at a rate two to three times the rate of trade expansion. Yet tragically, while these institutions have met their goal, they have failed in their purpose. The world has more poor people today than ever before. We have an accelerating gap between the rich and the poor. Widespread violence is tearing families and communities apart nearly everywhere. And the planet’s ecosystems are deteriorating at an alarming rate.
Yet the prevailing wisdom continues to maintain that economic growth offers the answer to poverty, environmental security, and a strong social fabric and that economic globalization which involves erasing economic borders to allow the free flow of goods and money is the key to growth. Indeed, the more severe the mounting economic, environmental, and social crises become, the stronger the policy commitment to these same prescriptions, even as evidence mounts that they are not working. Indeed, there is a growing consensus outside of official circles that they cannot work, for reasons I will elaborate. Yet official institutions seem unable to take a badly needed fresh look.
In 1944, those who gathered in this room were living in a world gripped by war, struggling to look beyond it to a new world order. In 1994, we in this room live in a world gripped by a particular economic paradigm which we are struggling to look beyond. In so doing we must envision a very different world order that embodies a more advanced understanding of the reality of our planet and the potentials of our species. Such a vision, which puts a new frame on our global crisis, is emerging out the struggles of growing numbers of individuals and organizations from around the world, mostly outside the mainstream. Many are dependent on private philanthropy to carry forward their important work.
My task here is to present a synthesis of some of this thinking. Please bear in mind that the issues I will be addressing today are complex and not well understood. Furthermore, given the brief time available I will necessarily have to simplify some very complex realities. Regardless of whether I convince you of my arguments, I hope you will at least leave this session with a sense of the profound significance of the issues addressed and seek out other opportunities to examine them in greater depth. I want to start with four overheads that in my mind provide an orienting perspective fundamental to understanding why the world view that informed the original Bretton Woods meeting and subsequent policy is dangerously wrong.
A FULL WORLD
As the founder of ecological economics, Herman Daly, regularly reminds us, the human economy is embedded in and dependent on the natural ecosystem of our planet. [See Figure 1.] Up until the present moment in human history, however, the scale of our economic activity relative to the scale of the ecosystem has been sufficiently small that in both economic theory and practice we could get away with ignoring this fundamental fact.
Figure 1: Transition to a Full World
Source: Goodland, Daly, & El Serafy, Population, Technology and Lifestyle
We have now crossed, however, a monumental historical threshold. Because of the five fold economic expansion since 1950 the environmental demands of our economic system now fill the available environmental space of the planet. We now live in a full world.
The first environmental limits that we have confronted, and possibly exceeded, are not the limits to nonrenewable resource exploitation, as many once anticipated, but rather the limits to our use of renewable resources and to our use of the environment’s sink functions its ability to absorb our wastes. These are limits related to the loss of soils, fisheries, forests, and water, to the absorption of CO2 emissions, and to destruction of the ozone layer. We could argue about the details of whether a particular limit was hit at noon yesterday or will be passed at midnight tomorrow. The details are far less important than coming to terms with the basic truth that we have no real option other than to recreate our economic institutions in line with the reality of a full world.
The existing Bretton Woods system is geared by both structure and ideology to an ever continuing expansion of economic output economic growth and to the integration of national economies into a seamless global economy. The consequence is to intensify competition for already overstressed environmental space. In a full world this intensified competition accelerates destruction of the regenerative capacities of the ecosystem on which we and future generations depend; crowds out all forms of life not needed for immediate human consumption purposes; and increases competition between rich and poor for control of ecological resources. In a free market which responds only to money, not needs the rich win this competition every time. We see it happening all over the world. Hundreds of millions of the financially weak are simply displaced as their lands, waters, and fisheries are expropriated and converted to uses serving the wants of the more affluent.
So long as resources remain, the demands of the rich can be met which may explain why so many of the rich see no problem. The poor experience a very different reality, but in a market economy their experience doesn’t count.
As Herman Daly regularly notes, the market is unable to deal with questions relating to the appropriate scale of economic activity. There are no price signals indicating that the poor are going hungry because they have been forced off their lands. Nor is there any price signal to tell polluters that too much CO2 is being released into the air or that toxics should not be dumped into soils or waters. Steeped in market ideology and highly responsive to corporate interests, the Bretton Woods institutions have demonstrated little capacity to give more than lip service either to environmental concerns or to the needs of the poor. Rather their efforts have de facto centered on assuring that people with money have full access to whatever resources remain with little regard for the broader consequences.
A new Bretton Woods meeting to update the international system would serve a significant and visionary need if it were based on a realization that economic growth is no longer a valid public policy priority. Indeed, whether the global economy grows or shrinks is largely irrelevant. Having crossed over the threshold to a full world, the appropriate concern is whether the available planetary resources are being used in ways that: 1) meet the basic needs of all people; 2) maintain biodiversity; and 3) assure the sustained availability of comparable resource flows to future generations. Our present economic system is failing on all three counts.
THREE SOCIO-ECOLOGICAL CLASSES
In How Much is Enough, Alan Durning divided the world into three consumption classes that we might characterize as: overconsumers, sustainers, and marginals. [See Figure 2.] The overconsumers are the 20 percent of the world’s people who consume roughly 80 percent of the world’s resources those of us whose lives are organized around automobiles, airplanes, meat-based diets, and the use of wastefully packaged disposable products. The marginals, a corresponding 20 percent of the world’s people, live in absolute deprivation. Given the reality of a full world, we have little choice but to acknowledge that the deprivation of this group is a direct consequence of our own overconsumption.
Another important, and somewhat more encouraging, insight imbedded in this figure is the fact that roughly 60 percent of the world’s people are already members of the sustainer class. Their basic needs are being met in more or less sustainable ways. This insight makes the problem seem somewhat less formidable.
Figure 2: Earth’s Three Socio-Ecological Classes
Based on Alan Durning, How Much Is Enough, Worldwatch Institute
Unfortunately, by embracing the premise of infinite physical abundance articulated by Morgenthau, the Bretton Woods system has pursued a development vision that defines prosperity in terms of bringing both sustainers and marginals into the overconsumer class. In a finite world this is a physical impossibility. The vision of Bretton Woods is an illusion; its failure of purpose was inevitable.
Even more tragic, however, policies and projects directed to achieving the impossible dream have made, and continue to make, life in the sustainer class ever more difficult. For example, the more that human habitats become structured around the automobile, which has become one of our most environmentally and socially destructive technologies, the more difficult it becomes to live without a car even though it is entirely possible to structure a built environment so that a car serves no real need. Our goal must be to make life in the sustainer class as secure, comfortable, and fulfilling as possible and to assist the world’s overconsumers and marginals in becoming sustainers. This requires a fundamental reorientation in development thinking.
Population growth is as well a relevant concern. The larger the total population, the more constrained the sustainer lifestyle must ultimately be. I do not dwell on the population problem here only because I believe it is already well understood by this audience.
THE CHAMPAGNE GLASS OF ECONOMIC INJUSTICE
The UNDP Human Development Report for 1992 introduced the champagne glass as a graphic metaphor for a world of extreme economic injustice. The bowl of the champagne glass represents the abundance enjoyed by the 20 percent of people who live in the world’s richest countries, receive 82.7 percent of the world’s income, and consume a comparable share of resources. Down at the bottom of the stem, where the sediment settles, we find the poorest 20 percent of the world’s people who barely survive on 1.4 percent of the total income. The combined incomes of the top 20 percent are 60 times larger than those of the bottom 20 percent. Furthermore, this gap has doubled since 1950 when the top 20 percent enjoyed only 30 times the income of the bottom 20 percent. And the gap continues to grow.
Figure 3: Global Inequality
Source: UNDP Human Development Report
This figure actually understates the true inequality in the world, because it is based on national averages rather than actual individual incomes. If we take into account the very rich people who live in poor countries and the very poor people who live in rich countries it turns out that the incomes of the richest 20 percent of the world’s people are approximately 150 times those of the poorest 20 percent. That gap is growing as well.
Robert Reich, the current U.S. Secretary of Labor, explained in his book The Work of Nations, that the economic globalization the Bretton Woods institutions have advanced so successfully has served to delink the interests of the wealthy classes from a sense of national interest and thereby from a sense of concern for and obligation to their less fortunate neighbors. A thin segment of the super rich at the very lip of the champagne glass has formed a stateless alliance that defines the global interest in a way that happens to be synonymous with the personal and corporate financial interests of its members.
This delinking has been occurring in nearly every country in the world to such an extent that it is no longer meaningful to speak in terms of a world divided into Northern and Southern nations. The more meaningful North-South divide is not geographic, it is class.
The free market, free trade policies advanced by the Bretton Woods institutions give precedence to the interests of money over other human and environmental concerns and are thus aligned almost entirely with the narrow interests of the ruling economic elite. It is difficult to conceive of a more powerful proof of this assertion than the rapid growth of the gulf that separates the small strata of the super rich from the rest of society. Whether intended or not, the policies so successfully advanced by the Bretton Woods institutions have inexorably strengthened the ability of the super rich to lay claim to ever more of the world’s wealth at the expense of other people, species, and the viability of the planet’s ecosystem.
The issue is not the market per se. Trying to run an economy without markets is disastrous, as the experience of the Soviet Union demonstrated. However, there is a fundamentally important distinction between markets and free markets. Figure 4 speaks to this difference.
Figure 4: Democratic Pluralism
A struggle between two extremist ideologies has been a central feature of the 20th century. Communism called for all power to the state. Market capitalism calls for all power to the market a euphemism for giant corporations. Both ideologies lead to their own distinctive form of tyranny. The secret of Western success in World War II and the early post-war period was not a free market economy. It was the practice of democratic pluralism built on institutional arrangements that seek to maintain a balance between the institutions of the state and the market and protect the right of an active citizenry to hold both institutions accountable to the public interest.
Contrary to the claims of ideologues who preach a form of corporate libertarianism, markets need governments to function efficiently. It is well established in economic theory and practice that markets allocate resources efficiently only when firms internalize the costs of their production and when markets are competitive. Governments must set and enforce the rules that make cost internalization happen and since successful firms invariably grow larger and more monopolistic, governments must regularly step in to break them up and restore competition.
For governments to play their necessary role in balancing market and community interests, governmental power must be concentrated at the same system level as market power. If markets are national, then there must be a strong national government. By expanding the boundaries of the market beyond the boundaries of the nation state through economic globalization, we almost inevitably place the concentration of market power beyond the reach of government. This has been an important consequence of both the structural adjustment programs of the World Bank and IMF and the trade agreements negotiated under the GATT. The effective result is to transfer governance decisions from governments, which at least in theory represent the interests of all citizens, to the dominant institutions of the market corporations which by their nature serve the interests of their shareholders. One result is a loss of ability of societies everywhere on the planet to address environmental and other needs.
Relieved of constraints to their own growth, enormous economic power is being concentrated in the hands of a very few global corporations. Antitrust action to restore the conditions of market competition by breaking up these concentrations has been one of the many casualties of globalization. Indeed, current policy encourages firms to merge into ever more powerful concentrations to strengthen their position in global markets.
The fact that large corporations have been shedding employees at a rapid rate has created an impression in some quarters that the large firms are losing their power. It is a misleading impression. The Fortune 500 firms did shed 4.4 million jobs between 1980 and 1993. During this same period, however, their sales increased by 1.4 times, assets by 2.3 times, and CEO compensation by 6.1 times. This concentration has progressed to the point that of the world’s 100 largest economies, 50 are now corporations not including banking and financial institutions.
Any industry in which 5 firms control 50 percent or more of the market is considered by economists to be highly monopolistic. The Economist magazine recently reported that 5 firms control more than 50 percent of the global market in the following industries: consumer durables, automotive, airlines, aerospace, electronic components, electrical and electronic, and steel. Five firms control over 40 percent of the global market in oil, personal computers, and especially alarming in its consequences for public debate on these very issues media.
Such firms have enormous political power and they are actively using it to reshape the rules of the market in their own favor. The GATT has become one of their most powerful tools for this purpose. Under the new GATT agreement now in the process of ratification, a World Trade Organization, the WTO, is being created with far reaching powers to provide the world’s largest corporations with the legal protection they feel they need to continue expanding their far flung operations without responsibility for serving any interest other than their own bottom line.
The WTO will hear disputes brought against the national or local laws of any country that another member country considers to be a trade barrier. Complaints will be heard by secret panels comprised of three unelected trade experts whose rulings can be overturned only by a unanimous vote of the member countries. In general any health, safety, or environmental standard that exceeds a maximum set by an international standards body dominated by industry representatives is likely to be assumed to be a trade barrier unless the offending government can prove it has a valid scientific basis. The burden of proof is on the defendant. If the WTO panel rules that a law constitutes a trade barrier the government for whom the decision is taken may demand payment from the transgressing government equal to the presumed loss. The GATT agreement also guarantees global patent protection a move that gives large corporations virtual monopoly rights over a wide range of technologies and even life forms.
A FINANCIAL SYSTEM OUT OF CONTROL
As powerful as the large corporations are, they function increasingly as instrumentalities of a global financial system that has become the world’s most powerful governance institution. The power in this system lies with a small group of private financial institutions that have only one objective to make money in massive quantities. A seamless electronic web allows anyone with proper access codes and a personal computer to conduct instantaneous trades involving billions of dollars on any of the world’s financial markets. The world of finance has become much like a gigantic computer game. In this game the smart money does not waste itself on long-term commitments to productive enterprises engaged in producing real wealth to meet real needs of real people. Rather it seeks short-term returns from speculation in erratic markets and from simultaneous trades in multiple markets to profit from minute price variations. In this game the short-term is measured in micro-seconds. The long-term in days. The environmental, social, and even economic consequences of financial decisions involving more than a trillion dollars a day are invisible to those who make them.
Joel Kurtzman, former business editor of The New York Times and currently editor of the Harvard Business Review, estimates that for every $1 circulating in the productive economy today, $20 to $50 circulates in the world of pure finance. Since these transactions take place through unmonitored international computer networks no one knows how much is really involved. The $1 trillion that changes hands each day in the world’s international currency markets is itself 20 to 30 times the amount required to cover daily trade in actual goods and services. If the world’s most powerful governments act in concert to attempt to stabilize exchange rates in these same markets, the best they can manage is a measly $14 billion a day little more than pocket change compared to the amounts mobilized by speculators and arbitragers.
The vast bulk of these free floating funds are controlled by large investment houses, banks, mutual funds, and retirement funds. Each pool of money is managed by a professional investment manager whose reputation depends on his or her financial performance relative to that of their colleagues. The mutual fund managers see their results reported for public scrutiny each day in every major newspaper around the world. Some people may put their money in these funds for the long-term, but the professionals who manage these funds have to show daily and quarterly results.
The corporations that invest in real assets are forced by the resulting pressures to restructure their operations in ways that maximize their immediate short-term return to share holders. One way to do this is by downsizing, streamlining and automating their operations, using the most advanced technologies to eliminate hundreds of thousands of jobs. The result is jobless economic growth. Contemporary economies simply cannot grow fast enough to create jobs faster than technology and a dysfunctional economic system are shedding them. In nearly every country in the world we now have a labor surplus and those lucky enough to have jobs are increasingly members of the contingent work force without either security or benefits. The resulting fear and insecurity makes the jobs versus environment issue a crippling barrier to essential environmental action.
Another way to increase corporate profits is to externalize ever more of the cost of the firm’s operations onto the community. This is accomplished by pitting localities against one another in a standards lowering competition to offer subsidies, tax holidays, and freedom from environmental and employment standards. Similarly workers are pitted against one another in a struggle for survival that pushes wages down to their lowest common denominator. This is what global competitiveness is about competition among localities not among the large corporations, which are engaged in minimizing the competition among themselves through mergers and strategic alliances.
Any corporation that does not play this game to its limit is likely to find itself a take-over target by a corporate raider who will buy out the company and profit by taking the actions that the previous management perhaps from a fit of social conscience and loyalty to workers and community failed to take. The basic point is that the globalizing economic system is reconstructing itself in a way that makes it almost impossible for even highly socially conscious and committed managers to operate a corporation responsibly in the public interest.
We are caught in a terrible dilemma. We have reached a point in history that requires us to rethink the very nature and meaning of human progress in fundamental ways. Yet the vision and decisions that emerged from this very room some fifty years ago set in motion events that have transformed the governance processes of societies everywhere on the planet in ways that make the necessary actions virtually impossible. It has happened so quickly and is so foreign to our culturally imbedded assumptions that few among us even realize what has happened. The real issues are seldom discussed in a media dependent on corporate advertising.
There is a compelling case to be made that sustainability in a growth dependent globalized economy is what Herman Daly would call an impossibility theorem. What is the alternative? Among those of us who are devoting significant attention to this question, the answer is the opposite of globalization. It lies in promoting greater economic localization breaking economic activities down into smaller more manageable pieces in ways that link the people who make decisions to the consequences of those decisions, both positive and negative. It means rooting capital in place and distributing its control among as many people as possible.
Powerful interests stand resolutely in the way of achieving such a reversal of current trends. The biggest barrier, however, is the limited extent of the public discussion of the subject. The starting point must be to get the issues out on the table and bring them into the mainstream policy debates in a way that is not now happening. The world’s independent private foundations have an essential role to play.