Workers and the World Economy: Breaking the Postwar Bargain

Ethan B. Kapstein

From Foreign Affairs, May/June 1996

Article preview: first 500 of 7,290 words total.

Summary:  Not everyone is a winner in the global economy. Unemployment is high in Europe and inequality is rising in the United States as growth proves disappointing and foreign competition drives wages down. While economists debate causes and officials fret over inflation, protectionism threatens world trade. Postwar policymakers, learning from the upheaval of the 1930s, struck a deal with workers. Bretton Woods and Dumbarton Oaks would foster global commerce, and the International Monetary Fund and domestic public policy would make sure that everyone gained. Stagflation in the 1970s undermined this social contract. Policymakers today must abandon their fiscal stringency, or more unpleasant leaders may rise.

Ethan B. Kapstein is Director of Studies at the Council on Foreign Relations. His most recent book is Governing the Global Economy: International Finance and the State.

The global economy is leaving millions of disaffected workers in its train. Inequality, unemployment, and endemic poverty have become its handmaidens. Rapid technological change and heightening international competition are fraying the job markets of the major industrialized countries. At the same time systemic pressures are curtailing every government?s ability to respond with new spending. Just when working people most need the nation-state as a buffer from the world economy, it is abandoning them.

This is not how things were supposed to work. The failure of today?s advanced global capitalism to keep spreading the wealth poses a challenge not just to policymakers but to modern economic ?science? as well. For generations, students were taught that increasing trade and investment, coupled with technological change, would drive national productivity and create wealth. Yet over the past decade, despite a continuing boom in international trade and finance, productivity has faltered, and inequality in the United States and unemployment in Europe have worsened.

President Bill Clinton may have been right to proclaim that ?the era of big government is over,? and perhaps the American people will ultimately decide that those who need assistance should look elsewhere for help. But if the post-World War II social contract with workers--of full employment and comprehensive social welfare--is to be broken, political support for the burgeoning global economy could easily collapse. For international economic integration is not some uncontrollable fact of life, but has deepened because of a series of policy decisions taken by the major industrial powers over the last 45 years. It is time to recognize that those decisions, while benefiting the world economy as a whole, have begun to have widespread negative consequences. The forces acting on today?s workers inhere in the structure of today?s global economy, with its open and increasingly fierce competition on the one hand and fiscally conservative units--states--on the other. Countermeasures, therefore, must also be deep, sustained, and widespread. Easing pressures on the ?losers? of the new open economy must now be the focus of economic policy if the process of globalization is to be sustained.

It is hardly sensationalist to claim that in the absence of broad-based policies and programs designed to help working people, the political debate in the United States and many other countries will soon turn sour. Populists and demagogues of various stripes will find ?solutions? to contemporary economic problems in protectionism and xenophobia. Indeed, in every industrialized nation, such figures are on the campaign trail. Growing income inequality, job insecurity, and unemployment are widely seen as the flip side of globalization. That perception must be changed if Western leaders wish to maintain the international system their predecessors created. After all, the fate of the global economy ultimately rests on domestic politics in its constituent states.

The spread of the dogma of restrictive fiscal policy is undermining the bargain struck with workers in every industrial country. States are basically telling their workers that they can no longer afford the postwar deal and must minimize their obligations. The ...

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