MPIfG Working Paper 97/1, January 1997
Globalization and the Embedded Liberalism Compromise: The End of an Era?
by John Gerard Ruggie Columbia University, New York
MPIfG Lecture Series Economic Globalization and National Democracy, lecture
given on October 24, 1996
John Gerard Ruggie is the Burgess Professor of
Political Science and International Affairs at Columbia University, New York,
USA, where he served as Dean of the School of International and Public Affairs
from 1991-96. This article is drawn from and builds upon chapter 6 of the
author's most recent book, Winning the Peace: America and World Order in the New
Era (Columbia University Press, 1996).
Outgoing United States Labor Secretary Robert Reich, in a
January 1997 address, maintained that the second Clinton administration's "unfinished
agenda is to address widening inequality" in America. Indeed, he questioned
whether the United States was abandoning "the implicit social contract"
it had maintained with workers for half a century. Technological advances and
global economic integration, he noted, "tend to reward the best-educated
and penalize those with the poorest education and skills," and government
policy had not yet effectively responded to the new economic realities. The
press promptly portrayed his address as a swan song of liberalism in Washington.
But Reich's fears were anticipated by London's conservative Financial Times as
long ago as December 1993. With the demon of communism slain, an FT editorial
rejoiced in "the most capitalist Christmas in history. 
But it also expressed concern about the consequences within the Atlantic nations
of growing competition from "the younger, harsher, more robust capitalism"
of the Asian economies: "Even the middle classes, who have benefited most
from economic growth, fear that they may lose what they have, while those
outside note that however rich the super-rich may get, large-scale unemployment
persists. Lower down the income scale the picture is far worse."
Governments must devise "radical policies," the editorial concluded,
to ensure that "the fruits of capitalism" reach all segments of
Reich's views, as a self-confessed liberal, are
understandable. But what moved the FT to worry about the economic security of
the middle classes and the poor--and, even more curiously, to go on and suggest
that governments have an active role to play in achieving it? The answer is
surprisingly simple. The editors of the FT are conscious of the fact that the
extraordinary success of postwar international economic liberalization hinged on
a compact between state and society to mediate its deleterious domestic effects--what
I have elsewhere termed the embedded liberalism compromise. 
They sensed that this compact is fraying throughout the western world. And they
feared that if the compact unravels altogether, so too would public support for
the liberal international economic order. In short, out of a firm commitment to
free trade this stalwart of laissez-faire developed grave concerns about the
growing inability or unwillingness of governments to perform the domestic policy
roles they were assigned under the postwar compromise.
Thus, thoughtful observers on both sides of the political
aisle have begun to worry about the relationship between globalization and
domestic economic insecurity.  This article
investigates that relationship further and suggests that the concerns are
warranted. In the first section I offer a schematic sketch of economic
globalization. In the second section I review the direct effects of
globalization on economic insecurity as well as the indirect effects, through
globalization's impact on the ability of the state to live up to its side of the
postwar domestic compact. And in the third section I take up the future fate of
the embedded liberalism compromise, under the twin challenge of external
economic and internal political factors.
Much has been written about economic globalization and
nearly as much has been dismissed as "globaloney." The world economy
is far from becoming a single economy, governed by the law of one price, as are
domestic economies.  Moreover, the external sector
remains a substantially smaller component of the U.S. economy today than was
true of Britain in the 19th century, and in most of the other major economic
powers the external sector only in recent decades has resumed levels comparable
to the early years in this century.  To that extent
the skeptics are correct.
But what is different about the economic
internationalization of recent decades is not simply its magnitude but its
institutional forms: the growth of increasingly diverse and integrated links and
relationships forged within markets and among firms across the globe.
Illustrating the poverty of conventional concepts, the result is typically
described as "off-shore" markets and "off-shore" production,
as if they existed in some ethereal space waiting to be reconceived by the
economic equivalent of relativity theory.
The simple typology of markets, hierarchies, and networks
will help us grasp intuitively the changes underway.
Begin with markets, and take first the financial sector. The popular image of
globally integrated markets--functioning "as if they were all in the same
place," in real time and around the clock--is
most closely approximated by foreign exchange transactions. This is also the
biggest global market, towering over world trade by a ratio of more than 60:1.
International bank lending began to take off in the 1960s; its net stock grew
from $265 billion a decade later to $4.2 trillion by 1994. Bond markets, led by
U.S. Treasury issues, became globally integrated in the 1980s. Equity markets
are also proliferating and integrating but more slowly, and cross-national
equity holdings remain relatively modest. As for
markets in goods and services, average annual trade as a proportion of gross
domestic product for a group of 15 OECD countries increased from roughly 45
percent in the 1960s to 65 percent twenty years later.
Thus, not only are economic boundaries more open than ever before in the postwar
era. Markets have also become more directly linked with one another, from goods
and services on up to the most liquid--and globally most integrated--foreign
exchange markets, in which "rates are set by armies of bellowing 22-year
old traders, amid flailing arms, blinking screens and flashing telephones."
But in some ways an even more important shift has occurred in the global
organization of production and exchange of goods and services: increasingly, it
has taken the form of "administrative hierarchies rather than external
markets." This shift began simply enough.
For a variety of reasons, starting in the 1960s more and more firms began to set
up subsidiaries abroad to serve local markets. Since then, this outward movement
was progressively transformed into "the global factory."
Led initially by the automobile and consumer electronics industries, this
pattern now includes most advanced technological sectors. Components production,
input sourcing, assembly, and marketing by multinationals are spread across an
ever wider array of countries, exploiting shifting advantages of different
locales. Consequently, by the 1980s international production--that is,
production by multinational enterprises outside their home countries--began to
exceed world trade. By the early 1990s, the worldwide annual sales of
multinational firms reached $5.5 trillion, a figure only slightly less than the
entire U.S. gross domestic product. The revenues of U.S.-based multinationals
from manufacturing abroad are now twice their export earnings.
Not surprisingly, therefore, intrafirm trade--trade among subsidiaries or
otherwise related parties--is growing far more rapidly than arms-length trade.
It now accounts for about one third of all world trade, and a far higher share
of U.S. trade. In short, even as national
borders have become progressively more open to the flow of international
economic transactions, in an institutional sense the global division of labor is
becoming increasingly internalized at the level of firms. Administrative
hierarchies that span the globe manage the design, production, and exchange of
parts, finished products, and services; the synoptic plans that orchestrate
these processes, including their location; the allocation of strategic resources,
including capital and skills; and the information as well as telecommunications
systems that make it possible to manage globally in real time.
Analysts and policymakers are still struggling to
understand these globally integrated structures of production and exchange, but
the corporate world has already generated the next wave of institutional
innovation. It has been described as network forms of organization, more
commonly known as strategic alliances. The sheer size of investments and
magnitudes of risks in many rapidly changing areas of high technology
increasingly are beyond the capacity of even the largest firms, driving them to
establish strategic alliances --as in, for example, the automobile, commercial
aircraft, semiconductors, and telecommunications industries.
This organizational form is also regarded to be "especially useful for the
exchange of commodities whose value is not easily measured," including
"know-how, technological capability, a particular approach or style of
production, a spirit of innovation or experimentation, or a philosophy of zero
defects." Even in industries where foreign
ownership is strictly limited or prohibited by national regulations, such as
airlines, international strategic alliances are creating globally "seamless"
Contrary to the nostrums of orthodox economists and
realist political scientists, then, there is something new under the world
economic sun: a profound institutional transformation in the global organization
of markets as well as structures of production and exchange. How justified are
fears that these changes adversely affect the working public and the process of
economic policymaking? We turn next to that subject.
Average real wages for most categories of workers in the
United States have been stagnant since the mid-1970s; during the twelve-month
period ending in September 1995, they rose at the lowest rate since the U.S.
Department of Labor began to collect these statistics.
Official studies also confirm Robert Reich's observation, cited at the outset of
this article, that income disparities have grown significantly in the United
States over the past two decades, and are now the widest of any industrialized
country. Both wage levels and income
distribution have held up better in Western Europe. But unemployment has been
greater there--indeed, at ten-percent-plus in France and Germany, it has reached
postwar highs. Hence the somber assessment by
Paul McCracken, who chaired President Richard Nixon's Council of Economic
Advisers: "Those entering the work forces in Western Europe and even in the
U.S. confront labor market conditions more nearly resembling those of the late
1930s than those prevailing during the four decades or so following World War II."
But the issue before us is to what extent the forces of
globalization are responsible for these conditions.
The first thing to note about the United States is that
the American economy has also suffered from low rates of economic growth since
the 1970s, while the labor force has expanded rapidly. That alone would put
downward pressure on wages. The most direct cause of slow growth has been anemic
productivity increases. Growing foreign
competition is only one of the contributing factors, however; domestic economic
practices and policies together with demographic changes are far more
significant. At the same time, it is true that recent productivity improvements
have come "largely from record layoffs"--from fewer workers at home
doing more work and jobs migrating overseas. The
outward migration affects not only semiskilled and skilled labor, but growing
numbers of white-collar positions.
Evidence directly linking low rates of wage increases in
the United States to outsourcing production to lower-wage countries remains
elusive. The strongest case for such a link has been made by Adrian Wood:
drawing on the insights of the classical Heckscher-Olin model, he concludes that
the decline in relative wages of less-skilled workers in the North are due to
trade with countries in the labor-abundant South.
Critics maintain, however, that the wage effects in the North of labor-reducing
technologies and skills-biased technological changes have not yet been
rigorously distinguished from the effects of globalization.
Nor, Jagdish Bhagwati contends, have such studies shown the logically necessary
intermediating step that relative prices of goods using unskilled labor have
declined in the North, which would put downward pressure on domestic wages.
But in one rigorous study, Dani Rodrik establishes the
plausibility of a causal sequence that runs through the mechanism of relative
power shifts in labor markets: globalization makes the services of large numbers
of workers more easily substitutable across national boundaries, he argues, as a
result of which the bargaining power of immobile labor vis-à-vis mobile capital
erodes. Thus, labor is obliged to accept greater instability in earnings and
hours worked, if not lower wages altogether, and to pay a larger share of
benefits as well as improvements in working conditions.
Bhagwati has proposed another hypothesis, compatible with
Rodrik's. Globalization has narrowed, or made more thin, he suggests, the
margins of comparative advantage many industries in the OECD countries enjoy.
Those industries, therefore, are becoming "more footloose than ever,"
resulting in higher labor turnover and frictional unemployment, which in turn
logically implies flatter earnings for labor.
More generally, Bhagwati suggests, the capitalist economies may be experiencing
the rise of "kaleidoscopic" labor markets, as opposed to continuous
and cumulative employment patterns, a trend that, if borne out, would further
diminish the structural bargaining power of labor. The proliferation of
strategic alliances reinforces this process: most are intended from the start to
be temporary, and many "are in the business of closing plants and
A vivid illustration of this disjuncture between
globalizing production relations and internationally immobile work forces may be
found in a U.S. Department of Commerce study. It sought to measure what the
American position in the overall world market for goods and services would be if
the standard balance-of-trade account were combined with net sales by U.S.-owned
companies abroad less sales by foreign-owned companies in the United States. The
study found that on this more inclusive measure of global sales "the United
States" consistently has been earning a surplus, rising from $8 billion in
1981 to $24 billion in 1991, even as its trade deficit deteriorated during the
same period from $26 billion to $28 billion. The
study presented this finding as up-beat news about the competitive performance
of American industry, and as an antidote to gloomier balance-of-trade figures.
And in one sense it is: the strategies of U.S.-owned multinationals and their
valuation by stock markets reflect their contribution to this broader "American"
share of global sales. The problem is, however, that the surplus does not accrue
to "the United States" as such, especially not to immobile factors of
production like labor, but to increasingly globalized and denationalized capital.
In sum, globalization does bear at least some
responsibility for the "funk de siècle" that afflicts the working
public in the capitalist countries, to borrow Ikenberry's clever turn of phrase.
At the same time, policy demonstrably affects outcomes.
Richard Harris has compared globalization and wage growth as well as inequality
in Canada and the United States. Even though Canadian industry is relatively
more internationalized, wage growth has slowed less and income distribution is
more equal. "Public policy," Harris concluded, "accounts for a
large part of this difference." Similarly,
Geoffrey Garrett, in a statistical analysis of 15 OECD countries, shows that the
political strength of social democratic parties as well as organized labor
results in policies that compensate for potentially deleterious effects of
But is not the efficacy of key policy instruments itself
undermined by the forces of globalization? "When markets evolve to the
point of becoming international in scope," Richard Cooper has written,
"the effectiveness of traditional instruments of economic policy is often
greatly reduced or even nullified."
Cooper's claim has not gone unchallenged, but it seems to be supported by the
best available evidence. We take up first some policy effects of capital
mobility, and then of globalization in production and exchange.
Financial integration, it appears, has had contradictory
consequences. On the one hand, governments have far greater access to capital
and can borrow more cheaply than earlier in the postwar era, as reflected by
growing public sector debt in the OECD countries for the past twenty years.
There is, of course, a point at which markets decide, often quite suddenly, that
debt is too high. On the other hand, governments are less free to deploy
monetary policy in the pursuit of desired domestic outcomes "independent of
external constraints." This is so because
the markets will demand higher bond yields from governments of whose policies
they disapprove, or drive down their currency exchange rates. All else being
equal, then, capital mobility has increased market-based pressure for policy
convergence within a range of acceptability that the markets determine.
Advocates of these changes feel that little is lost
because markets only take away from governments the power to do "wrong"
things. But the markets have not demonstrated
that they are sufficiently sophisticated and function sufficiently smoothly to
discriminate between good and bad policy objectives at the margin any more than
governments in the past were able to fine-tune the economic cycle. Lastly, there
is little dispute that globalization has restricted governments' ability to
increase taxes, especially on business. As a result, even The Economist concedes
that "if governments need to cut budget deficits, they have to look mainly
to public spending." Whether they like it
or not governments seem stuck with their lot, for "the costs of resisting
capital mobility either in isolation or in combination have dramatically
escalated, with the results that states have by and large chosen to accommodate
Global capital markets also pose entirely new policy
problems. Existing systems of supervision and regulation as well as tax and
accounting policies were created for a nation-based world economic landscape.
Steps have been taken to coordinate the supervision of international banking by
establishing capital adequacy standards and a lender-of-last resort
understanding through the Bank for International Settlements. But international
securities trading, as well as the international banking and securities
clearance and settlements systems, remain weak and vulnerable. Moreover,
although markets in exotic financial derivative instruments help manage risks
for individual firms and investors, they may make the system as a whole more
vulnerable. George Soros, a leading global financier, testified to this effect
at Congressional hearings on hedge funds: "The instrument of hedging
transfers the risk from the individual to the system....So there is a danger
that at certain points you may have a discontinuous move"--which,
when it occurs in stockmarkets, is called a crash. But to date only some
derivatives markets have the margin requirements or "circuit-breakers"
that have long existed in stockmarkets.
By liberalizing regulations, governments first facilitated
the emergence of global capital markets. Private and public economic actors
derive benefits from these markets. But their expansion and integration have
also eroded traditional instruments of economic policy while creating wholly new
policy challenges that neither governments nor market players yet fully
understand let alone can fully manage.
Globalization in production relations also has had
significant effects on traditional policy instruments. One of its byproducts, as
noted above, is the growth of intrafirm trade. Studies indicate that this form
of trade is far less sensitive than conventional trade to such policy
instruments as exchange rates. It also lends
itself more readily to transfer pricing for the purposes of cross-subsidization
and minimizing tax obligations--indeed, within
global firms these become core objectives of strategic management. Intrafirm
trade also reduces the effectiveness of "process protectionism," which
has been one of the key policy instruments by means of which governments have
buffered deleterious domestic effects of surges in imports.
Furthermore, globalization has turned some aspects of
trade policy into a virtually metaphysical exercise--poignantly captured by
Robert Reich's question: "Who is ÔUS'?"
Symbolizing this existential state, the U.S. International Trade Commission not
long ago found itself confronted with antidumping charges brought by a Japanese
firm producing typewriters in Bartlett, Tennessee, against an American company
importing typewriters into the United States from its off-shore facilities in
Singapore and Indonesia. But the "who is us"
issue is not limited to minor cases of portable typewriters. The tendency by
American firms to forge strategic alliances for costly high technology projects
has raised serious concerns in the defense community.
Finally, globalization of production challenges what was
perhaps the central policy premise guiding the postwar American political
economy. As Cowhey and Aronson depict it, the federal government assumed that
its primary role was to manage levels of consumer spending, support research and
development, and otherwise help socialize the costs of technological innovation
by means of military procurement and civilian science programs. America's
corporations would take it from there. Today, it
is getting harder not only to determine whether something is an American product,
but more critically whether the legal designation, "an American corporation,"
describes the same economic entity, with the same positive consequences for
domestic employment and economic growth, that it did in the 1950s and 1960s. In
the absence of an alternative, the major default option for government is the
"denationalized" economic policy posture of competing with other,
similarly situated, capitalist countries in providing a friendly policy
environment for transnational capital irrespective of ownership or origins. A
British scholar calls this model "the residual state."
The Future of Embedded Liberalism
As noted at the outset, the postwar international economic
order rested on a grand domestic bargain: societies were asked to embrace the
change and dislocation attending international liberalization, but the state
promised to cushion those effects by means of its newly acquired domestic
economic and social policy roles. Unlike the economic nationalism of the
thirties, then, the postwar international economic order was designed to be
multilateral in character. But unlike the laissez-faire liberalism of the gold
standard and free trade, its multilateralism was predicated on the
interventionist character of the modern capitalist state. Increasingly, this
compromise is surpassed and enveloped externally by forces it cannot easily
grasp, and it finds itself being hollowed out from the inside by political
postures it was intended to replace.
Quite apart from the diminished capacity of governments to
employ traditional policy instruments due to the forces of globalization, a
pendulum-like swing in political preferences and mood has been gaining momentum
throughout the capitalist world in a neo-laissez-faire direction. This political
shift is too big and its outcome still too fluid for us to explore it fully here.
But we do need to take up those aspects of it that implicate our subject at hand.
The shift is especially pronounced in the United States.
America has never had a significant socialist movement or labor party. Nor has
it had a Tory (or Junker) tradition. As a result, "America (has) been the
most classically liberal polity in the world from its founding to the present."
America's sense of community has been defined in civic, not economic, terms. And
the welfare state in the United States, therefore, has been more narrowly
conceived and has rested on far more tenuous foundations than in Europe, where
its historical roots flourished in the ideological soil not of the left but
also, as exemplified by Disraeli and Bismarck, the right.
The New Deal state was America's version of the universal
reaction against the collapse of laissez-faire liberalism in the Great
Depression and the economic warfare that preceded the outbreak of military
hostilities in World War II. It was also the platform from which the United
States sought to reconstruct the postwar international economic order. The
current domestic political struggle over what kind of state should replace the
New Deal state, therefore, has profound implications not only for America but
for the future of international economic stability.
The New Deal state was considerably more modest in aims
and less intrusive in means than European-style social democracy and corporatism,
let alone socialism. Its objective was to
stabilize the capitalist order, not transform it, and its means were largely
limited to Keynesian-type monetary and fiscal policies in pursuit of the
principle of full employment, and a safety net of social services for those in
need. The Great Society initiatives of the 1960s added several layers of welfare
programs onto this base. But they were rendered politically acceptable only by
strict and extensive specification of the boundaries of state intervention,
eligibility requirements, and the modalities of private sector provision of
public services. Over time, this produced "the paradox of liberal
intervention," in Mary Ruggie's felicitous phrase, whereby the state was
drawn into ever-deeper and clumsier intervention, spawned a sizable bureaucracy,
and fought legal battles with advocacy groups--all necessitated by its desire
for the scope of intervention to be as contingent and circumscribed as possible.
Today, anti-government sentiment in the United States is driven, at least in
part, by this experience. The West European states, in contrast, avoided this
particular problem by making many of the same programs universally available,
though escalating costs have now forced stricter limits in Europe as well.
There are several routes linking the future domestic
policy role of the American state, not simply to welfare at home, but to
stability in the world economy at large. One involves labor. In keeping with its
underlying commitment to market institutions, the New Deal state employed
relatively unintrusive labor market policies. In
the 1950s, then-Senator John F. Kennedy took up the cause of trade adjustment
assistance for labor, gaining its enactment as President. This provided workers
or firms hurt by imports with federal financial and technical assistance for job
retraining and worker relocation, securing labor support for the trade
liberalization that was about to unfold. Trade
adjustment assistance was enhanced in the 1970s with the same objective in mind.
However, the policy was doing progressively less to promote actual "adjustment"--by
then it amounted to little more than an extended duration of unemployment
benefits. The Reagan administration sharply
reduced it. The Clinton administration has proposed eliminating it altogether,
and using the savings for more productive retraining efforts.
But for now, virtually nothing is in place. Furthermore, compared to its OECD
trading partners, the United States ranks dead last in public spending for job
training and placement, as a percent of GDP--lower
even than Japan, which, until recently, has required no policy thanks to
lifetime employment practices by firms. Moreover, U.S. health care benefits for
workers are more precarious and less portable, while pension benefits are less
secure. Outside the military, vocational training programs are episodic and
typically of a low quality. Germany, for example, with less than one-third the
U.S. population, has nearly six times the number of industrial apprenticeships.
It is hardly surprising, then, that American labor in
recent decades has been an implacable foe of further trade liberalization. Another link between the domestic role of the state in
America and international economic stability is via the social safety net more
generally. It was a cardinal belief of New Dealers that society seeks protection
from the deleterious effects of unmediated market forces, and that it will hold
government responsible for providing that social protection. There were, and
remain, sound historical grounds for that view.
Today, as we have seen, unmediated market forces increasingly emanate from the
global economy. Publics in kaleidoscopic labor markets, slipping through a
tattered safety net, witnessing income disparities that are unprecedented in
their lifetime, at some point are highly likely to turn against those unmediated
market forces. Ross Perot's image of the "giant sucking sound" created
by jobs moving out attracted their attention in 1992. Pat Buchanan's proposed
"social tariff" and his promise to withdraw from all "globalist"
institutions, including NAFTA and the WTO, helped sustain his race in 1996. A
siren song awaits the entrepreneurial mainstream political singer.
Budget deficits and tax-averse publics make it impossible
for governments to expand the web of social policies that have characterized
welfare capitalism since World War II. Even for the most social democratic and
neocorporatist welfare states, the costs have become too high. Moreover, there
is a growing sense that some of these policies have become part of the problem,
not a solution, due to not only their financial burden but also because many are
perceived not to work well any longer and even to create perverse disincentives.
As Labor Secretary, Robert Reich reflected a growing sentiment in proposing the
termination of several job-related social programs: "Investing scarce
resources in programs that don't deliver cheats workers who require results and
taxpayers who finance failure."
The prudent course of action, however, is to "review
and redesign" the social safety net, not simply to "slash and trash"
it, as Lloyd Axworthy put it in House of Commons Debates on Canadian welfare
reforms when he was Minister of Human Resources.
There are widespread misconceptions in the United States about the overall
magnitudes involved. Social expenditures began to rise rapidly in the OECD
countries in the 1960s, and average roughly one-third of GDP today.
But the rate of increase leveled off some time ago. In the United States, they
nearly doubled from roughly 10 percent of GDP in 1960 to just under 19 percent
in 1975. But they peaked there, and by 1985 had drifted lower than a decade
before. Indeed, in 1985 only Spain and Japan devoted a smaller share of GDP to
social expenditures than the United States. Hence, there should be ample degrees
of freedom for the United States to adopt the prudential course.
A final link is provided, perhaps ironically, by the same
economists who did so much to demonstrate the inability of Keynesianism to
deliver on its macroeconomic promises. For example, Robert Lucas, the 1995
economics Nobel prize winner, showed in the 1970s that economic actors--business
owners, investors, or consumers--learn to anticipate governments' actions and to
incorporate those "rational expectations" into their own behavior,
confounding the policies' efficacy. His work did much to help undermine
confidence in what was left of the New Deal state. Lucas subsequently turned his
attention to the determinants of economic growth. Here, he and fellow "new
growth" theorists have found that the role of the state can be critical in
providing collective goods that the market undersupplies, such as education,
infrastructure, and research and development.
The policy recommendation that follows from this work is not to return to
laissez-faire, but to rethink and reconfigure the political economy of the
advanced capitalist state, bringing it into alignment with the new realities of
The distinguished economic historian Jeffrey Williamson
has posed well the problem the capitalist countries face on the eve of a new
century. Globalization produced inequality in the "new world" in the
late 19th century, his careful econometric analysis shows. That fact, he
concludes, "contributed to the implosion, deglobalization and autarkic
policies between 1913 and 1950...[and] should make us look to the next century
with some anxiety: will the world economy retreat once again from its commitment
For the moment, the American public and its leaders appear
trapped by their own ideological predispositions, which make it difficult for
them to see the contradiction between their increasingly neo-laissez-faire
attitude toward government and the desire to safeguard the nation from the
adverse effects of increasingly denationalized market forces. These contending
forces were most poignantly--and dangerously--expressed in Pat Buchanan's
presidential candidacy: an abiding bias against government coupled with an
avowed desire to enhance domestic economic stability and opportunities for
working America. That combination left him with no alternative but a 1990s
version of the 1930 Smooth-Hawley tariff, which caused the entire system to
unravel. What is needed instead--for the sake of America and the world--is a new
embedded liberalism compromise, a new formula for combining the twin desires of
international and domestic stability, one that is appropriate for an
international context in which the organization of production and exchange has
become globalized, and a domestic context in which past modalities of state
intervention lack efficacy or legitimacy. Until that is found, what Charles
Kindleberger, in his classic study of the Great Depression, called "transition
traps," moments of discontinuity when things could go terribly wrong, lurk
1 Quoted in David E. Sanger, "A Last
World From the Last Liberal," International Herald Tribune, January 10,
1997, p. 3.
2 "Capitalism at Christmas," Financial Times, December
24, 1993, p. 6.
3 John Gerard Ruggie, "International Regimes, Transactions,
and Change: Embedded Liberalism in the Postwar Economic Order,"
International Organization, 36 (Spring 1982).
4 For a provocative though flawed populist account, see William
Greider, One World, Ready or Not: The Manic Logic of Global Capitalism (New
York: Simon & Schuster, 1997).
5 Milton Friedman, "Internationalization of the U.S.
Economy," Fraser Forum, February 1989, p. 8.
6 Kenneth N. Waltz, "The Myth of National Interdependence,"
in Charles P. Kindleberger, ed., The International Corporation (Cambridge, Mass.:
MIT Press, 1970).
7 The typology is due to Oliver E. Williamson, Markets and
Hierarchies (New York: Free Press, 1975); and Walter W. Powell, "Neither
Market Nor Hierarchy: Network Forms of Organization," Research in
Organization Behavior, Vol. 12 (Greenwich, CT: JAI Press, 1990).
8 John M. Stopford and Susan Strange, Rival States, Rival Firms:
Competition for World Market Shares (Cambridge, England: Cambridge University
Press, 1991), p. 40.
9 This and the following figures are taken from "A Survey
of the World Economy: Who's in the driving seat?" The Economist, October 7,
10 As of 1993, only about 6% of U.S. stocks, for example, were
owned by foreigners. Alan S. Blinder, "Remarks Before Community Leaders
Breakfast Meeting," San Francisco, California, March 9, 1995, p. 7.
11 Geoffrey Garrett, "Capital Mobility, Trade, and the
Domestic Politics of Economic Policy," International Organization, 49 (Autumn
1995), Figure 1, p. 661.
12 "A Survey of the World Economy," p. 24.
13 Stephen J. Kobrin, "An Empirical Analysis of the
Determinants of Global Integration," Strategic Management Journal, 12 (Summer
1991), p. 20.
14 Joseph Grunwald and Kenneth Flamm, The Global Factory:
Foreign Assembly in International Trade (Washington, D.C.: The Brookings
15 "The discreet charm of the multicultural
multinational," The Economist, July 30, 1994, p. 57.
16 Comparative figures are hard to come by, but for orders of
magnitude see Jane Sneddon Little, "Intra-Firm Trade: An Update," New
England Economic Review (May/June 1987).
17 Stephen Kobrin, "Beyond Geography: Inter-Firm Networks
and the Structural Integration of the Global Economy" (William H. Wurster
Center for International Management Studies, Wharton School, University of
Pennsylvania, WP 93-10, November 1993), stresses this causal factor.
18 Powell, "Neither Market Nor Hierarchy," p. 304.
19 For example, "Sabena, Austrian and Swissair Strengthen
Cooperation with Delta," International Herald Tribune, January 9, 1997, p.
11; the proposal includes joint reservation services, unified fares, and full
20 Reported in Robert D. Hershey, Jr., "U.S. Wages Up 2.7%
in Year, A Record Low," New York Times, November 1, 1995, p. A1. Inflation
for the same period was 2.5%, producing a 0.2% rate of increase in real wages.
21 Anthony B. Atkinson, Lee Rainwater, and Timothy M. Smeeding,
Income Distribution in OECD Countries (Paris: Organization for Economic
Cooperation and Development, 1995); also see Richard B. Freeman, "Solving
the New Inequality," Boston Review, December/January 1997.
22 William Drozdiak, "New Global Markets Mean Grim
Trade-Offs," Washington Post, August 8, 1994, p. A1.
23 Paul McCracken, "Costlier Labor, Fewer Jobs,
Unemployment--The Crisis Continues," Wall Street Journal, January 7, 1994,
24 Since 1973, it has barely averaged annual increases of 1
percent. See Angus Maddison, Dynamic Forces in Capitalist Development (New York:
Oxford University Press, 1991), p. 51.
25 Jeff Madrick, "The End of Affluence," New York
Review of Books, September 21, 1995, p. 14.
26 Some of the U.S. figures are cited in Keith Bradsher, "Skilled
Workers Watch their Jobs Migrate Overseas," New York Times, August 28,
1995, p. A1.
27 Adrian Wood, North-South Trade, Employment and Inequality:
Changing Fortunes in a Skill-Driven World (Oxford: Clarendon Press, 1994).
28 For a good survey of the literature, see Richard G. Harris,
"Globalization, trade, and income," Canadian Journal of Economics, 26
(November 1993). Also see "Trade and Wages," The Economist, December
7, 1996, p. 74.
29 Jagdish Bhagwati, "Trade and Wages: A Malign
Relationship?" (Department of Economics, Columbia University, discussion
paper # 761, October 1995), p. 23. Also see Bhagwati and Vivek Dehejia, "Freer
Trade and Wages of the Unskilled--Is Marx Striking Again?," in Jagdish
Bhagwati and Marvin Kosters, eds, Trade and Wages (Washington, D.C.: American
Enterprise Institute, 1994).
30 Dani Rodrik, Has International Economic Integration Gone Too
Far? (Washington, D.C.: Institute for International Economics, forthcoming).
31 Bhagwati, "Trade and Wages."
32 "The discreet charm of the multicultural
multinational," The Economist, July 30, 1994, p. 58.
33 J. Steven Landefeld, Obie G. Whichard, and Jeffrey H. Lowe,
"Alternative Frameworks for U.S. International Transactions," Survey
of Current Business, December 1993.
34 G. John Ikenberry, "Funk de Siècle: Impasses of
Western Industrial Society at Century's End," Millennium: Journal of
International Studies, 24 (Spring 1995).
35 Harris, "Globalization, trade, and income," p.
36 Garrett, "Capital Mobility, Trade, and the Domestic
Politics of Economic Policy."
37 Richard N. Cooper, Economic Policy in an Interdependent
World (Cambridge, Mass.: MIT Press, 1986), p. 96.
38 As a proportion of GDP, public sector debt increased from 15
percent in 1974 to 40 percent twenty years later. "A Survey of the World
Economy," p. 15.
39 David M. Andrews, "Capital Mobility and State Autonomy:
Toward a Structural Theory of International Monetary Relations,"
International Studies Quarterly, 38 (June 1994), p. 204.
40 In the words of The Economist: "borrow recklessly, run
inflationary policies or try to defend unsustainable exchange rates."
"A Survey of the World Economy," p. 37.
41 Ibid., p. 16.
42 Andrews, "Capital Mobility and State Autonomy," p.
43 U.S. regulatory authorities have been particularly worried
about this problem. See, for example, E. Gerard Corrigan, "A Perspective on
the Globalization of Financial Markets and Institutions," Federal Reserve
Bank of New York, Quarterly Review, 12 (Spring 1987), p. 2. Corrigan at the time
was President of the New York Fed, and did much to push this agenda.
44 George Soros, "Hedge Funds and Dynamic Hedging,"
an edited version of testimony given to the U.S. House of Representatives
Committee on Banking, Finance, and Urban Affairs on April 13, 1994 (New York:
Soros Fund Management, May 1994), p. 13.
45 Little, "Intra-Firm Trade."
46 See Mark Cassons, Multinationals and World Trade (London:
Allen & Unwin, 1986).
47 See John Gerard Ruggie, Winning the Peace: America and World
Order in the New Era (New York: Columbia University Press, 1996), chap. 5.
48 Robert B. Reich, The Work of Nations (New York: Knopf,
1991), chap. 25.
49 The case involved Brothers Industries Ltd. of Japan,
assembling typewriters in the United States, and Smith Corona, doing so abroad.
Adding another element of complexity, Smith Corona is owned 48 percent by Hanson
P.L.C., a British group. Robert B. Reich, "Dumpsters," The New
Republic, 10 June 1991, p. 9. The Brothers request was subsequently denied, the
ITC concluding that the firm was not enough of a domestic producer to claim
50 See Theodore Moran, "The Globalization of America's
Defense Industries: Managing the Threat of Foreign Dependence,"
International Security, 15 (Summer 1990).
51 Peter F. Cowhey and Jonathan D. Aronson, Managing the World
Economy: The Consequences of Corporate Alliances (New York: Council on Foreign
Relations, 1993), pp. 16-17.
52 Philip G. Cerny, "Globalization and the Changing Logic
of Collective Action," International Organization, 49 (Autumn 1995), p.
53 The reasons have been extensively analyzed by Seymour Martin
Lipset. See, most recently, American Exceptionalism: A Double-Edged Sword (New
York: W.W. Norton, 1996); the quotation is from p. 33.
54 At least, this was true of its post-1938 variant, as Alan
Brinkley shows in his recent study, The End of Reform: New Deal Liberalism in
Recession and War (New York: Knopf, 1995).
55 Mary Ruggie, "The Paradox of Liberal Intervention:
Health Policy and the American Welfare State," American Journal of
Sociology, 97 (January 1992). Note also Garry Wills' characterization of
President Clinton's original health care reform plan: "In seeking minimal
government involvement, Clinton had produced the maximum feasible complication."
Wills, "The Clinton Principle," New York Times Magazine, January 19,
1997, p. 34.
56 For a comparative overview, constructed from the case of
health care reforms, consult Mary Ruggie, Realignments in the Welfare State (New
York: Columbia University Press, 1996).
57 See Steve Fraser, "The 'Labor Question'," in Steve
Fraser and Gary Gerstle, eds, The Rise and Fall of the New Deal Order (Princeton:
Princeton University Press, 1989).
58 I. M. Destler, American Trade Politics, 2nd Ed. (Washington,
D.C.: Institute for International Economics, 1992), p. 23.
59 Ibid., pp. 152-153.
60 See Frank Swoboda, "Reich Targets Several Job Programs,"
Washington Post, January 28, 1994.
61 OECD, Employment Outlook (Paris: OECD, 1993), Table 8.19.
For a comprehensive survey of policies, see Thomas Janoski, The Political
Economy of Unemployment: Active Labor Market Policy in West Germany and The
United States (Berkeley and Los Angeles: University of California Press, 1990).
62 "Training up America," The Economist, January 15,
1994, p. 27.
63 The seminal study of the ill-effects of believing otherwise
remains Karl Polanyi, The Great Transformation: The Political and Economic
Origins of Our Time (1944; Boston: Beacon Books, 1957). Also see Edward Hallett
Carr, The Twenty Years' Crisis, 1919-1939 (1939; New York: Harper, 1964).
64 Quoted in Frank Swoboda, "Reich Targets Several Job
65 Quoted in Geoffrey York, "Grits vow radical social
reform," Globe and Mail (Toronto), February 1, 1994, p. A7.
66 OECD, The Future of Social Protection (Paris: OECD, 1988),
Table 1, p. 10.
67 See, for example, Robert E. Lucas, "On the Mechanics of
Economic Development," Journal of Monetary Economics, 22 (July 1988), and
Robert Barro, "Government Spending in a Simple Model of Endogenous Growth,"
Journal of Political Economy, 98 (October 1990).
68 Jeffrey G. Williamson, "Globalization and Inequality
Then and Now: The Late 19th and Late 20th Centuries Compared" (Cambridge,
Mass.: National Bureau of Economic Research, Working Paper 5491, March 1966),
pp. 2 and 20.
69 Charles P. Kindleberger, The World in Depression, 1929-1939
(Berkeley: University of California Press, 1973).
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