Sterling Public Servant: A Global Tribute to Sylvia Ostry 9780773572232

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th e s t e r l i n g p u b l i c s e r va n t

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The Sterling Public Servant A Global Tribute to Sylvia Ostry

Edited by

jacob r yten

Published for The Canadian Institute of International Affairs by McGill-Queen’s University Press Montreal & Kingston • London • Ithaca

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© McGill-Queen’s University Press 2004 isbn 0-7735-2791-5 Legal deposit fourth quarter 2004 Bibliothèque nationale du Québec Printed in Canada on acid-free paper that is 100% ancient forest free (100% post-consumer recycled), processed chlorine free. Publishing consultant: Malcolm Lester & Associates McGill-Queen’s University Press acknowledges the support of the Canada Council for the Arts for our publishing program. We also acknowledge the financial support of the Government of Canada through the Book Publishing Industry Development Program (bpidp) for our publishing activities.

Library and Archives Canada Cataloguing in Publication The sterling public servant: a global tribute to Sylvia Ostry/ edited by Jacob Ryten. Includes bibliographical references. isbn 0-7735-2791-5 1. Ostry, Sylvia, 1927-. 2. Canada – Commercial policy. 3. Canada – Economic policy – 1971-1991. 4. Economists – Canada – Biography. 5. Civil service – Canada – Biography. I. Ostry, Sylvia, 1927II. Ryten, Jacob III. Canadian Institute of International Affairs hb171.s856 2004

354.74′092

c2004-903839-7

This book was typeset by Dynagram Inc. in 10/13 Baskerville.

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Contents

Foreword vii David A. Dodge Introduction Jacob Ryten

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pa r t o n e 1 Canadian Diplomacy: Past and Present Allan Gotlieb 2 Sylvia Ostry: The Public Servant Marc Lalonde

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3 Some Problems of Summitry and Advising Prime Ministers Gordon Robertson 4 The 1982 gatt Ministerial Allan J. MacEachen

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5 Emerging Countries: Opportunities and Challenges Jacques de Larosière

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6 From Trade Liberalization to Economic Integration: The Clash between Private and Public Goods 54 Marina von Neumann Whitman 7 Room for Differences? Social Policy in a Global Economy Lars Osberg 8 Multinationals and Governance A. Edward Safarian

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Contents

9 Measuring Global Skills Shortages 118 Mahmood A. Zaidi and Malcolm S. Cohen 10 Individualism, Federalism, and Social Responsibility: The Evolving Social Paradigm in the United States 130 Alice M. Rivlin 11 South of the Border Paul Krugman

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12 Globalization and Statistical Systems M.C. McCracken

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13 Statistics, Social Relevance, Policy, and Analysis: Why They Are Bound Together 169 Jacob Ryten pa r t tw o 14 Economic Summitry in the 1980s: A View from a Sherpa’s Tent Robert Armstrong 15 My Japan-Canada Relations and Sylvia Hiroshi Kitamura

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16 Thoughts on Governance from Europe: Making Sure We Don’t Forget the Cosmopolitics Pascal Lamys 17 What Comes after Globalization? Renato Ruggiero

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18 The New World Order: Staking Out Canada’s Interests Gordon S. Smith

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pa r t t h r e e Letters of Thanks from the Prime Ministers of Canada Contributors

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Foreword

Perhaps no Canadian economist’s contributions to public policy have been as wide-ranging as Sylvia Ostry’s. The geographic diversity of the distinguished contributors to this festschrift and the span of topics they cover are a testament to the breadth of her interests and to the respect in which she is held by all who have worked with her. The chapters in this volume reflect Sylvia’s abiding interest in the international economy and her profound belief that an open and well-managed world-trading order would improve the wellbeing of all. Throughout her professional career – whether as an academic or public servant – she contributed to making the world a better place by focusing on the gains to be had from expanded trade, not only trade in goods and services, but also trade in ideas. She has made many contributions to the academic literature, she has engaged in trade and international policy as a public servant, and she has helped improve the statistics that are so vital to the analysis of international flows of goods, services, capital, and people. Because the breadth and depth of her contributions to trade policy and international relations are recognized globally, it may sometimes be difficult for those whose focus is international to appreciate the huge contribution she has also made to domestic policy in Canada. As an academic, she influenced a generation of labour economists. As chief statistician, she laid the statistical groundwork for better analysis of labour-market and social policy. As deputy minister of consumer and corporate affairs, she focused on improved efficiency in the Canadian marketplace through enhanced competition among producers, improved transparency, and more effective and less costly regulation of markets. And as chair of the Economic Council of Canada, she charmingly bullied us all to adopt more effective social, labour-market, and economic policies.

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Foreword

None of these domestic accomplishments were easily come by. Canadians and their governments in the 1960s and 1970s tended to focus more on policies for redistribution of income and wealth than on policies to enhance competition and build a framework for the creation of wealth. So Sylvia’s messages, which advocated a procompetition, proefficiency, and promarket framework, were not always what Canadians wanted to hear. But they listened to her, not only because of the quality of her analysis, but also because of the wit, energy, and charm of her presentation. She was a tireless critic of “woolly” policy-thinking and encouraged hundreds of young economists – both inside and outside the public service – to carry out rigorous empirical analysis of economic and social-policy proposals. As one of those then-young economists, I greatly benefited from her encouragement and want to thank her for her leadership. Her capacity for incisive analysis was a hallmark of her tenure as deputy minister for international trade. She brought analytic rigour to the discussion of trade policy. She had the capacity to put the multitude of particular issues with which the department had to deal into a broader framework; she never lost sight of the forest for the trees. This ability served Canada particularly well when she became the Canadian prime minister’s G7 “sherpa.” As the smallest and most open of the G7 economies, Canada’s interest has always been best served by strong, well-functioning international frameworks, whether in trade, collective security, environment, or development. Sylvia vigorously put that framework analysis on the G7 table and subsequently on the tables of the multilateral trade negotiations. Her presence at those tables enabled Canada to punch above its weight. As head of the Economics and Statistics Department of the Organization for Economic Cooperation and Development (oecd), Sylvia made an enormous practical contribution to the promotion of a stronger international economic order. She fostered the production of ever-better statistics and analysis by the secretariat, analysis that facilitated improved economic and trade policy by the member countries. And, perhaps equally important, she challenged public servants, who participated in the various working parties and committees that she served, to produce better policy analysis for their own governments. Thus her influence went far beyond the oecd meeting rooms in Paris. As an academic, Sylvia has continued to push and prod governments, politicians, and public servants to strengthen and improve the international economic order. Her criticism and analysis are particularly helpful, for they combine academic rigour with a real understanding of how governments, businesses, and markets actually work – and, more important,

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how they ought to work. While those of us engaged in making policy do not always totally agree with her analysis and do not always welcome her criticism of our actions, we always appreciate her thoughtfulness and the spirit in which her comments are made. Just as competition in the market for goods and services leads to better products at better prices, competition in the marketplace for ideas produces better analysis and better policy outcomes. Sylvia provides those competing ideas, and public policies – both national and international – are better because of her efforts. The chapters in this volume are all global in perspective – appropriately so, as this reflects Sylvia’s own perspective. But they also deal with a wide variety of issues, which is also reflective of the breadth of her own interests: labour markets, social policy, statistics, trade, international relations, and international institutions. Whatever the subject matter, each chapter is well argued, reflecting her own emphasis on rigorous analysis. These reflections of her global perspective, broad interests, and intellectual rigour make this volume a true tribute to Sylvia Ostry. d av i d a . d o d g e

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Introduction

This collection of papers came about to honour Sylvia Ostry on the occasion of her seventy-fifth birthday. Some time in the summer of 2000, almost two years before the event, friends and professional colleagues decided it would be appropriate and thoroughly deserved to publish a festschrift to mark her contributions to labour economics, trade policy, and what we know about the international economy, not to mention her contributions to the Economic Summit, Canada’s federal public service, and the Organization for Economic Cooperation and Development (oecd) – the list of beneficiaries is long. The group included “sherpas” – personal representatives of the leaders of countries attending Western economic summits – whose terms overlapped with Sylvia’s; academic colleagues who worked in the same areas as she did; political figures, including several prime ministers of Canada who benefited from her advice; and more generally individuals in international organizations with whom she dealt on an ongoing basis. In retrospect, the enthusiasm to honour Sylvia’s outstanding intellectual achievements over a career that is far from having come to an end but that has already spanned more than forty years and has added variety of subject to depth of findings was only to be expected. That I was chosen to become the planned volume’s editor was the fruit both of accident and of a long and close professional association that had much more to do with official statistics than with economics. Whatever its causes, I took the choice as an honour that offset the challenge of editing a collection of papers contributed by authors in more than half a dozen countries out of my home in the Southern Cotswolds. Subsequently, experience showed me that even though my active career had prepared me for taking surveys and censuses, retirement had not trained me sufficiently in the craft of persuasion and cajolery required to bring out a volume of this nature on time.

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Fortunately, I was not alone. Bernard Ostry, Sylvia’s husband, was the festschrift’s Père Joseph,1 tirelessly helping to track authors, persuading them to contribute on time, and making sure that they honoured their promises, all the while refraining from interference with the editor’s tasks even though at times such a posture must have required considerable self-restraint. The contributed papers track, not always exactly, the paths taken by Sylvia Ostry in the course of her career first as an academic, subsequently as a senior public servant,2 and later again as an academic. A more exact tracing of such a long career would have required a considerably more ambitious collection steered by an intellectual biographer. But despite dealing with very selected aspects of Sylvia’s career, the chapters reflect her expanding and shifting interests as she went from the Economic Council of Canada to the Department of Economics and Statistics at the oecd – via Statistics Canada and the Federal Department of Consumer and Corporate Affairs – and eventually to the Federal Department of External Affairs, from which she bowed out of public service. In substantive terms, Sylvia’s progression started with a deep interest in the analysis of social policy propped up by her background in labour economics, moved on to a more general concern with macroeconomic conditions, and became even more general when, during her stay as chief economist at the oecd, her daily work was to keep abreast of member countries’ real and financial equilibrium (or rather, lack of it) with respect to the rest of the world. It was this last stage that ushered Sylvia into multilateral trade negotiations, economic summitry, and generally all the issues that surround globalization – economic and social. Throughout this progression, she retained both an interest in quantitative analysis and the ability to apply it to policy matters – a trait that may well go back to her stay at the Oxford Institute of Statistics when that body was at the height of its creative powers. Even though personal interests and perspectives shift, real-world economic issues that are worthy of attention tend to remain interrelated. In fact, there is no clearly defined point at which a particular issue ceases to be “economic” and becomes instead “social” or “political.” Interesting problems do not know of sharp boundaries, and even if such boundaries 1 François Le Clerc Du Tremblay, known as Père Joseph, was a Capuchin monk who acted as Cardinal Richelieu’s back-channel diplomat. His name is synonymous with a quiet and persevering diplomacy that is mostly discreet and always effective. 2 The English “senior public servant” is an anaemic translation of the French “haut fonctionnaire” possibly because the English do not share the French reverence of state-sponsored but independent thought. Be that as it may, Sylvia Ostry’s career in the public sector is more aptly described in French than in English.

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existed, they would not coincide with those that are fixed for university curricula or agreed to in order to demarcate the responsibilities of government departments and separate them from each other. All of this is to say that there are no clear ways of grouping the papers presented in the festschrift. But having granted that all possible groupings contain an element of arbitrariness, I felt that a structure and a sequence should be adopted and its usefulness measured by how readers can employ it as a rough guide. Thus the festschrift, like Ancient Gaul, is divided into three parts, which for want of better titles I have labelled: (1) assorted papers on governance, economics, and quantitative analysis; (2) the sherpas remember; and (3) the prime ministers acknowledge and thank. Within the first part, and reminding the reader of all the qualifications mentioned above, there are five themes: 1 Policy and governance in Canada: Gotlieb, Lalonde, and Robertson 2 Trade negotiations, politics, and economics: MacEachen, de Larosière, and von Neumann Whitman 3 The economic and social consequences of multinational operations: Osberg, Safarian, and Zaidi and Cohen 4 A US perspective on federalism and social policies: Rivlin and Krugman 5 Statistical information in an analytical setting: McCracken and Ryten The second part includes the chapters contributed by Armstrong, Kitamura, Lamy, Ruggiero, and Smith. A word about each of the chapters. The Lalonde and Robertson chapters complement each other in the following sense: While Lalonde reflects on the profound changes that were brought about in the 1970s within the federal public service – precisely those changes that stepped up the demand for senior people with outstanding professional qualifications – Robertson reflects on how those same people who were propelled into the forefront of the Canadian bureaucracy dealt with prime ministers. The new public servants were chosen less for their ability to make a well-oiled piece of government machinery run faultlessly than for their professional insight into those difficult technical choices with political dimensions that were ultimately dropped on prime ministers’ laps. The Gotlieb chapter sets the foreign-policy context in which the changes outlined by Lalonde took place. The time came when the authors of Canadian foreign policy could no longer ignore trade policy but rather had to integrate it. In order to do so successfully, however, they required substantial additions to their executive and advisory capabilities.

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The three chapters that appear under the theme of “trade negotiations, politics, and economics” are not quite as closely related as those grouped under the previous theme. The chapter by MacEachen is a “must read” for whoever holds ambitions to chair a negotiating session at a forthcoming round of multilateral trade concessions, as it leaves the reader breathless by the time the eleventh hour is reached and all negotiating hands must be shown. The chapter by de Larosière has very different objectives, the weightiest of which is to assess the gains that emerging economies have reaped so far from multilaterally negotiated tariff reductions and generally from the liberalization of trade and other external flows. In the same grouping, von Neumann Whitman takes up a conjecture first formulated by Sylvia and analyzes it in a context that cuts across economics and politics and implies profound consequences for the sociology of public administration. The point is that matters dealt with by trade negotiators are progressively handed over for settlement by supranational agencies because their handling of the matters tends to be more efficient. But the same agencies find that efficiency gains accrue if they also regulate matters that traditionally fall within the purview of national governments. The resulting tensions, if not properly managed, can defeat the loftiest goals of trade liberalization. Echoes of this chapter – but seen from a somewhat different perspective – can be found in the chapter by Lamy in the book’s second part, “the sherpas remember.” The chapters on the consequences of multinational operations shift the grounds from trade negotiations and the creation of supranational authorities to the consequences of trade liberalization. One question is asked: whether trade liberalization can cause uniformity of response and a resulting greater homogeneity of social policies (Osberg). Not surprisingly, the answer, once country and size of gross domestic product are taken into consideration as well as the political pressures created by dynamic adjustment, is that many responses are possible and that no particular pressure to homogenize them is analytically detectable. The chapter by Safarian, in his own words, reaches the conclusion “that globalization is neither as new, as widespread, as damaging or as threatening to state power as the critics of globalization often argue. In particular, there is more room for national governments to make choices than such critics suggest.” This last point, of course, finds an echo in the Osberg contribution and is also related to von Neumann Whitman’s concern about the duality between supranational measures and policies that still remain under the thumb of national government in a world where all trade and payment flows are liberalized.

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Finally, in the same grouping, Zaidi and Cohen ask whether and how the process of globalization affects the market for skilled labour and look at empirical evidence collected from North American labour-force surveys to reach the conclusion that labour shortages for certain skilled occupations must henceforth be viewed in a global rather than a national setting. The chapters contributed by Krugman and Rivlin are written from an American perspective. The piece authored by Krugman could be entitled “Vive la difference!” His is a researched example of how, despite close ties, a shared language and culture, and trade-liberalizing provisions, Canada is far from being a social-policy copy of the United States but continues to be mid-Atlantic or perhaps even closer to the European average. Rivlin’s chapter examines the compromises required within a federal country to keep both the Centre and the federated units together and coherent while at the same time recognizing the individuality of each one when it comes to social policies. The first of the statistical chapters deals very directly with economic statistics and how they should be collected in order to support our understanding of the process of globalization. The other, my own, is very closely related to a process started by Sylvia when she first became chief statistician of Canada. She was the first to demand that a certain class of statistics be always accompanied by an analysis of findings in a wider context. The thought was revolutionary in the history of Statistics Canada, and its acceptance was part of a long and drawn out process. But some of its consequences included avoiding the blunders that other statistical agencies as well or better endowed ended up committing. Even though I authored the chapter, many of its considerations constitute a debt to two of Sylvia’s successors: Martin B. Wilk and Ivan P. Fellegi, the current chief statistician of Canada. The book’s second part, “the sherpas remember,” includes chapters by Armstrong, Kitamura, Lamy, and Ruggiero, whose terms as sherpas overlapped with Sylvia’s when she was sherpa to a Canadian prime minister. As I note in my introduction to Kitamura’s chapter, “the sherpas created a powerful informal entity whose advice to leaders was derived at least in part from views they reached collectively. That these views could have crystallized despite national interests that might have acted as a barrier to collegial thinking is a reminder of how much the global economic system owes to a small group of men and one woman who brokered, cajoled, negotiated, briefed, advised, and eventually succeeded in bringing about one successful economic summit after another.” A view that seems to be shared by all of Sylvia’s contemporaries is articulated thus by Lord Armstrong:

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Sylvia Ostry is one of the great cosmopolitans of our time. We met twenty years ago in the international travelling circus known as the G8 sherpa meetings. Her uncanny ability to find the key question, and usually the key answer, made us fear her at our meetings. But the fear she inspired was less because she was a top civil servant than because academe is her real calling. In fact, there is hardly a topic under the broad heading of international political economy on which Sylvia does not have an informed opinion and just about no related subject on which she has not recently produced an erudite research paper. An invitation to contribute a paper that Sylvia is bound to read is two-edged. While you know she will read it, it will also be returned to you with comments scrawled in her inimitable hand.

I have left Smith’s chapter to the end of this part because he was a successor, rather than a contemporary, of Sylvia. Moreover, in a sense, he closes the loop opened by Gotlieb and finds himself more at home with the political and security implications of globalization. I will not comment on the letters addressed to Sylvia by the prime ministers whose privilege it was to be advised by her. But I am profoundly grateful to one of them in particular: The Right Honourable Kim Campbell served as the rallying point for her peers and ensured that each one had an opportunity to contribute to what turned out to be their collective expression of admiration and gratitude. jacob ryten

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pa r t o n e

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Canadian Diplomacy: Past and Present allan gotlieb

Why was Sylvia Ostry appointed to one of the highest positions in the Canadian federal trade negotiating machinery? What was the policy context in the Department of External Affairs that made her appointment a natural outcome of a process that started in the late 1970s, one that brought trade promotion and development to the very centre of Canadian foreign policy? This chapter by Allan Gotlieb answers these questions as it reviews the changes in emphasis and direction to which Canadian foreign policy after the Second World War was subject.

During the past few years, there has been increasing debate among Canadians about Canada’s role in the world. Since the conclusion of the Second World War, we have gone through several phases of self-examination. For approximately the first two decades after the war, Canadians saw themselves as a leading middle power and drew much satisfaction and national pride from Canada’s role in the United Nations, the North Atlantic Treaty Organization (nato), and the Commonwealth. Canadians were proud that they had helped to broker peaceful solutions and maintain peace in the Middle East, Cyprus, and other danger zones. In the three decades that followed Canada’s lead role in creating the United Nations Emergency Force (unef) during the Suez Crisis, ending with the Cold War – from the late 1950s to the beginning of the 1990s – Canadians still saw their country as a leading middle power but were much less sure of its importance as a global player. In the last quarter of the century, Canadians became increasingly unwilling to make the commitments to the country’s military capacity, aid programs, and human resources that would allow it to play a significant international role.

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Allan Gotlieb

In the current phase, many see their country as a fading power that makes only modest contributions, from time to time, on the world stage. Most recently, Canadians’ efforts have tended to focus on international rule making in multilateral bodies, designed to place restrictions on state behaviour on the international plane. In the past couple of years, there has been a proliferation of books, articles, and reports describing Canada as a fading power, a marginalized player on the global stage, punching below its weight. A recent book with the intriguing title While Canada Slept has received considerable media attention.1 Perhaps not every observer would agree with this overview of the changing role of our foreign policy, but it is generally recognized that Canadian diplomacy did have “a golden age” in the early postwar years and that during this time Canadian statesmen and diplomats did make significant contributions to the design, development, and management of the world order. The skills they brought to the world stage were honed in the period following the First World War and the Treaty of Versailles, during which Canada painlessly won independence through skilfully extracting a series of small concessions from Britain that led Canada to full participation in the international community. The Canadians were, to borrow a phrase, “best in class in the British Empire.”2 Almost anyone writing about Canada’s place in the world in those years could cite outside (i.e., non-Canadian) testimony to the quality of the human resources we contributed to international diplomacy. In terms of my own career choice, none outweighed in importance a remark made to me by Stuart Hampshire, the Warden of New College in Oxford. When this celebrated philosopher told me, then a student at Oxford, that “Canada had the best diplomatic service in the world,” he said what I already believed, but his remark served to confirm my determination to write the Canadian Foreign Service exams and seek acceptance in the Canadian Department of External Affairs. It was not only Lester Pearson, Hume Wrong, and Norman Robertson who were highly regarded in Washington, London, and New York. Escott Reid, Arnold Smith, John Holmes, and Chester Ronning, among many others, and, soon after, Robert Ford, Jules Leger, and Marcel Cadieux made an impact beyond our borders. What greater glory than to join that band of brothers and march into the international breach?

1 Andrew Cohen, While Canada Slept: How We Lost our Place in the World (Toronto: McClelland and Stewart, 2003). 2 From Canadian political scientist Tom Axworthy.

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A host of arguments are made about why that period was so special for Canada and cannot be duplicated. It is said, accurately, that we had one of the world’s four or five largest armies and navies after the Second World War, that we were one of the richest countries, with the world’s second highest per capita income, that the international community was a fraction of its size today, and that our Canadian forebears were willing to make major financial commitments to maintaining peace. It seems like a different Canada that, in the mid-1950s, was willing to contribute 7.3 per cent of its GNP to military expenditures, more than six times the percentage of today – and, not long after, to spend more than double on official aid than we do today. Our internationalist outlook and our willingness to spend led to notable results. Even in the late 1980s, one in every ten un peacekeepers was a Canadian. We ranked first in the number of personnel committed to the un’s global peacekeeping tasks. As is well known, the figures are startlingly different today, but they are commensurate with the lack of willingness on the part of Canadians to commit resources. At the end of 2002, we ranked thirty-first among un members in the numbers of personnel we commit to un peacekeeping; if we are to believe official figures, we stand with Luxembourg and the Netherlands at the bottom of comparative defence commitments among nato members, and we rank nineteenth in the world, among industrialized nations, in the size of our official aid. These figures are relatively well known in Canada, but what is the explanation for the decline in Canada’s commitment? For an active Canadian diplomat such as myself who worked in the Canadian Foreign Service for a large part of the last half-century, few explanations are compelling. After all, our prosperity remained relatively undiminished throughout this period (although there was a relative decline in comparison to European standards of living). The fear of nuclear war, whether caused by design or accident, certainly did not diminish. If anything, it grew in the 1960s and 1970s as the world remained on the cusp of global war during the Cuban Crisis and the long years of the Vietnam conflict. It remained high until the Soviet Union and its empire collapsed. Nor did the dictatorship of the Soviet Union become more benign in its international behaviour (witness the plight of Hungary, Czechoslovakia, Poland, and Afghanistan from the mid-1950s to the late 1980s). Nor does it seem that Canadians in any way thought of themselves as being isolationalist in their view of the world. There was no evidence in public opinion of a Canadian desire to conform to Mackenzie King’s prewar vision of Canada as a fireproof house.

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Allan Gotlieb

Making the change in Canadian attitude even more difficult to understand is that it was very gradual. Our willingness to spend money on peace, security, and aid did not disappear overnight; it just slowly diminished. Nor did we turn our talented group of star diplomats into trade-promotion officers in a day. It is true that in the 1970s the foreign services of External Affairs and Industry, Trade, and Commerce were fused and that the foreign-affairs and trade departments were themselves combined in the 1980s. It is true that the “fast track” to the top diplomatic jobs and embassies expanded to include officers working in the economic and trade fields and that at times they may have offered a quicker passage than the more traditional diplomatic streams. But the Canadian Foreign Service remained, and remains today, host to many talented professionals who are highly experienced, idealistic, creative, and committed. Although there are no simple explanations for the long decline in the strength of Canada’s international commitment, a number of factors, none conclusive but all of arguable relevance, combined to contribute to the gradual emergence of a different Canadian outlook. Some of the forces at work were not negative in terms of their impact on our national interest. The opposite is true: They had significant positive results for our nationhood and were evidence of a growing national maturity. They also contributed to a sense of justified national accomplishment. This is not, however, true of all factors at work. Perhaps the most important was the constitutional struggle, which began in the mid-1960s and became the all-consuming concern of many of “the brightest and the best” in the Canadian political sphere. This preemptive, almost obsessive, preoccupation embraced not only public service but foreign service as well. The constitutional issues, particularly those focusing on the place of Quebec in Confederation, were voracious consumers of the time, effort, and anxieties of almost the entire political class at its most senior levels. It is a truism that countries whose national unity or survival is at risk are hardly well equipped to solve the problems of other nations. Needless to say, Canadians did not ever stop trying to play a role in the Commonwealth, La Francophonie, and the un, but political energy is finite. With so much talent devoted to the seemingly endless process of negotiating reform of our Constitution there was, as an inevitable consequence, a certain turning inward. The huge preoccupation with our internal distribution of powers and our national institutions was matched by growing anxieties about foreign threats to our country’s national unity. For many years one of the world’s most important powers was devoted, at the highest levels, to our country’s dismemberment. Many Canadians

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were perhaps not fully aware of this. And some highly placed politicians and diplomats went into denial. Nevertheless, President De Gaulle’s campaign, conducted from the bowels of the Elysée, to help Quebec become an independent member of the international community did not succeed. But management of the Ottawa–Quebec–Paris relationship, and countering the French design to split the country, became the foremost preoccupation of the leadership of the foreign ministry and a major preoccupation of the Privy Council Office. During the long crisis, the passionately federalist undersecretary of state for external affairs, Marcel Cadieux, was able to persuade the Trudeau Cabinet to redesign much of Canada’s diplomatic presence and effort on the African continent and throughout the Frenchspeaking world. It was a high achievement of the Trudeau government and its key foreign-policy advisors that they succeeded in thwarting the efforts of Paris and Quebec to achieve international recognition of the province as a sovereign entity on the international plane. A second factor affecting the priorities of the political class in Ottawa and especially its senior public servants was the reorientation of the country’s effort to advance Canada’s economic interest as a foremost trading nation. The decades following the Second World War saw certain realities coalescing. American economic ascendancy declined slightly, but the US dominated the globe in both its investment activities and trade relations. At the same time, it placed a large premium on harmony among its Western allies. This encouraged it, throughout the Cold War, to subordinate any economic differences or conflicts with its friends to its principal geopolitical goals. Arnold Heeney, Canada’s ambassador to Washington in the late 1950s, reported to Prime Minister John Diefenbaker that there were no economic issues between Canada and the United States at the time. But by the third quarter of the last century, there was growing concern in the US about loss of its economic primacy, the rise of Japan as a financial and industrial superpower (remember Japan as number one?), the decline of US traditional industries (remember the “rust belt”?), and economic decline generally. Antidumping and countervail actions in the US and elsewhere grew apace, and Congress radically expanded trade legislation in the 1970s to allow for US retaliation against unilaterally determined, unfair (or allegedly unfair) trading practices. As protectionism grew in the United States in response to the shrinking of its traditional industries, the need to ensure access to US markets became a matter of the highest Canadian concern. Fortunately, Canadian public servants in the Departments of Finance, Trade, and Commerce and External Affairs were skilled international negotiators who had already

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Allan Gotlieb

contributed much to the design and functioning of the postwar international trading system, especially the General Agreement on Tariffs and Trade (gatt) and the success of the major multilateral trade negotiations (the Kennedy, Tokyo, and Uruguay trading rounds). In fact, skilled trade experts were appointed to the most senior economic positions in the Government of Canada. For example, Sylvia Ostry was promoted to deputy minister of international trade, and Simon Reisman, a former deputy minister of finance, was brought out of retirement to be the Canada-US trade negotiator. There was a clear deployment of the “brightest and the best” in public service in the pursuit of Canada’s economic goals. The success of multilateral trade rounds, the negotiation of sectoral free-trade with the US under the Trudeau government, a comprehensive Free Trade Agreement under Mulroney, and then the creation of the North American Free Trade Agreement (nafta) became the highest international priorities for Canada. As was the case with constitutional issues and Quebec secession, Canada’s major international preoccupations spanned the lifetimes of individual governments. Under Prime Minister Jean Chrétien, trade promotion by Team Canada seemed at times to have become the number one foreignaffairs policy priority. These were major undertakings. Consider the organizational demands of sending a delegation of some 600 people to China.3 The administrative enormity of the Team Canada excursions during the Chrétien years arguably affected other priorities. Once again, as during the constitutional crisis, circumstances proved that the amount of energy any government can generate is finite. Even if the effects of channelling political energy in one direction or another are not measurable, they are likely to be significant. Certainly, the financial resources committed to the international sphere shrunk dramatically. Although the economic benefits produced by Team Canada are questionable, Canada’s efforts to expand our trade agreements and a rule-based open-market system were assuredly not. They were at the core of our national interest and an appropriate high priority of the governments of the day. A third factor in the decline of Canada’s role on the global stage is more contentious. The final quarter of the twentieth century saw the emergence of significant changes in the attitude of Canadian officials toward the United States – again not measurable but nonetheless real. A tendency became increasingly evident among Canadian diplomats to seek to differenti3 See Cohen, While Canada Slept, 113.

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ate Canadian from US positions taken in multilateral bodies. This tendency was more pronounced during the Trudeau and Chrétien years than during the stewardship of Brian Mulroney, but the pursuit of separateness from US policy has been a long-term phenomenon. It seems to have derived from the Canadian conviction that effective multilateralization of Canada’s foreign policy requires evidence – as much measurable evidence as is possible – of Canada’s separateness and independence from the US. In the “golden age” of Canadian diplomacy, the Canadian role, although often too simplistically described, was to serve as an “honest broker” or interpreter, go-between, conciliator, or advisor in situations of potential conflict, not least in connection with differences among the Western allies themselves. This required the ability to influence, which, of course, depended on conditions of trust as well as easy, open, and continuous access. In Ottawa and Washington there were many long-standing friendships, and there was much personal bonding. This was, after all, the “golden age” not only of Canadian, but also of US, diplomacy – a period that was dominated by highly gifted diplomats in the two countries who admired each other. It is doubtful whether, on serious matters relating to the un and the Atlantic Alliance, any Western voice was listened to more receptively in Washington than that of Canada. As the Cold War hardened, it provided a relatively firm framework in which America’s allies could operate. This, once again, placed a high premium on Canada’s strength, which was the ability to persuade through quiet diplomacy in an atmosphere of mutual confidence. Ottawa’s familiarity with and closeness to Washington generated interest and respect in other capitals as well. Our standing in Washington contributed to our standing in Moscow. Canada was not, for the Russians, just a country similar to the rest. Canada was seen as especially close to Washington and able to influence it. Toward the century’s end but well before the Cold War terminated, Canadian diplomacy began to place a significant value on “differentiation” from the US. Critics of differentiation could well argue that this was a kind of “value-free” diplomacy on Canada’s part, which Canada was free to pursue because, from a security point of view, we could do so “on the US dime.” But differentiation served to give Canadian diplomats confidence that they were not in US pockets and that they could objectively demonstrate it. The practice even developed in the Department of External Affairs of keeping a “differentiation scoreboard” on votes in the un. Each year the

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tally demonstrated that the percentage of votes when Canada parted company with the US was higher than the percentages for Britain, Germany, Japan, and sometimes even France. Whatever impact this phenomenon may have had on Third World relations, it reflected a shift in Canada’s approach to its international role in the eyes of the practitioners: “Differentiation” replaced “influence” as the measure of Canada’s significance in the corridors of the un and in the capitals of Asia and Africa. The success of the Canada-US free-trade negotiations in the late 1980s gave rise to optimism that Canada’s confidence in its relationship with the US would grow thanks to the greater economic predictability and discipline of laws that were being introduced into its management. Binational panels created to resolve contentious trade disputes set the stage for an easing of trade tensions and less vulnerability on Canada’s part to Congressional protectionism or arbitrary actions, even as our bilateral trade increased. In delivering the annual Alan B. Plaunt memorial lecture in Ottawa on 31 March 1989, just a few months after the Canada-US Free Trade Agreement came into effect, I said, Canadians, in the historic election of 1988, choosing the path of free trade and institution building with the US, decided to see the US not primarily as a threat from which we must have protection, but as our comparative advantage in the world. The improved and more secure access we have achieved becomes part of our international comparative advantage. As I see the event, and I realize that we are perhaps too close to see it clearly, the adoption of the Free Trade Agreement exorcises a strong negative factor in the Canadian psyche: a fear of the US and its influence, which in turn conceals a fear of coming to terms with our own potential and even of our greatness. In opting to see the US relationship as a positive asset that needs to be preserved and enhanced, we have, I believe, liberated ourselves and our foreign policy from overwhelming American preoccupations – and even obsessions. Perhaps we are now liberated, so to speak, to get on with other challenges on the international plane and to our larger role.

I then went on to assert that Some of the ambivalence and ambiguities affecting the Canadian Diplomatic Service are also at the point of resolution. I don’t wish to exaggerate the significance of the changed North American environment. After all, Congress is still Congress, and they are an unruly bunch with an excess of international power, not always accompanied by a parallel sense of responsibility. But the raw power of the pressure

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groups and their Congressional Knights are now subject to new constraints and new transnational processes. Hence I am confident in predicting a more serene relationship and better conditions for focusing our talents and energies on other pressing global concerns. The resolution of our decades-long debate about our relations with the US in favour of an open economic approach will, in time, lead members of our service, of whom there are some, away from that type of thinking that recognizes a Canadian position on an international matter as valid and legitimate only if it differs from the US position. Canada can now, with greater vigour and use of resources, pursue new international goals.

On the cusp of the greatest expansion in our history of our trade with the US, we were indeed in a position to liberate ourselves and our foreign policy “from overwhelming American preoccupations and even obsessions” and to “get on with other challenges on the international plane and to our larger role.” This is particularly true because, at the same time as we started down the path of continental free trade with the United States, the Cold War came to an end. This historic event removed many of the long-standing constraints on members of the Western Alliance. The end of the great superpowers’ bipolar struggle created far greater room for America’s friends and allies to strike independent positions without having to be too concerned about any geopolitical fallout. Our new treaty-based economic relationship with the US and the termination of the Cold War international order reinforced the opportunity for Canada to experience a “new golden age” in our diplomacy. Perhaps it was not as golden as in the postwar years, given the greatly expanded size of the international community and the emergence of Europe as the new economic and political entity, but it was golden none the less. Looking back at the world during the decade and a half since I predicted a renaissance for Canadian foreign policy, I have no reason to recant my views. But, alas, the renaissance was not to be. Once again, one may argue about the reasons for this lost opportunity, but perhaps we are still too close to that period to form any consensus. Nevertheless, certain facts are clear once again. During the final decade of the last century, the decline in our defence capabilities accelerated, as did our commitments to international aid and our diplomatic capacities. The 1990s, in particular, saw a calamitous decline in Canadian defence spending, which in turn had a calamitous effect on our military capabilities. But

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there is no evidence that the Canadian public were angry with the federal government for failing to provide these resources. Canadians seemed willing to accept the low priority accorded at the political level to our ability to make a difference in the world. Yet public opinion polls of the time do not suggest that Canadians were becoming increasingly isolationalist in their outlook. The opposite is true. Polls showed Canadians to be idealistic and desirous that Canada pursue internationalist goals. Nevertheless, the Canadian public seem to have widely supported the government’s subordination of foreign-policy objectives to the domestic agenda. Few voices of criticism were heard, and the diminished support for defence and aid never became a political issue of any consequence. It is, perhaps, at least arguable that if the issues had been more clearly explained to Canadians, if they had appreciated that Canada would inevitably become a marginal force in the world, perhaps Canadians would have cared and made their voices heard. But perhaps not. In any case, this was not the story of Canada in the last decade. Why the indifference? Why did Canada sleep? The answer to the question is, once again, far from clear. There is, perhaps, a dark explanation. Whatever affirmations were being given to pollsters by Canadians about their deep internationalist sentiments, might the reality be that there were deeper streaks of isolationism in the Canadian psyche than Canadians were prepared to admit? Other factors come to mind as to why Canada has not, in recent years, lived up to its international potential. Some insight is gained from the orientation that occurred in Canadian foreign policy under the Chrétien government’s most vigorous and long-serving foreign minister during most of the period in question: Lloyd Axworthy. Under his guidance, Canada seems to have moved away from its more historic role as a diplomatic broker and bridge builder and toward a more rule-based approach to international peace and security. International law and treaty making moved more to the centre of Canadian foreign policy – unlike in earlier years, especially during the golden period, when law was not accorded much weight in Canada’s diplomatic thrust. Lloyd Axworthy was a strong advocate of “soft power,” a concept borrowed from the American academy with reference to American power and influence.4 For Axworthy “soft power” seemed, in large measure, to come 4 Robert O. Keohane and Joseph Nye, Power and Interdependence: World Politics in Transition (Boston: Little Brown, 1989). See also Mark F. Proudman, Soft Power Meets Hard: The Ideological Consequences of Weakness in Coping with the American Collossus, edited by David Garment, Fen Osler Hampson, and Norman Hilton (Oxford: Oxford University Press, 2003).

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down to the promotion of a rule-based approach to international affairs. A rule-based foreign policy favours the development of international legislation formulated by smaller and weaker powers in order to place bonds or limits on the stronger powers’ freedom of action. In view of the emergence of the United States at the century’s end as the sole superpower and the weakening military capabilities of the Europeans, international rule making seemed designed to tie the hands of our principal ally, the United States. Arguably, rule making is the vocation of the Lilliputians, which, if successful, could render inoperable the power and the strength of the American Gulliver. Lloyd Axworthy energetically promoted the Anti-Personnel Mines Convention in 1997 and the International Criminal Court in 1998. He also advocated treaties to ban small arms and to address the condition of children in combat. He and the Department of External Affairs under him pursued these objectives very vigorously in furtherance of a “human security” agenda. Canada took a very active stance on the un Security Council in criticizing American reluctance to adhere to the new war-crimes tribunal and in rejecting American arguments that adherence to compulsory adjudication would be against the US’s national interest. The vigour of the argument coming from Canada was, perhaps, somewhat ironic in view of the fact that Canada, under the Trudeau government, had itself renounced the Compulsory Jurisdiction of the International Court of Justice with regard to all matters affecting its coastal jurisdiction, on the grounds that its vital national interest was at stake and that it could not trust the outcome to the judges of the World Court. It is also more than a trifle ironic that Canada, despite becoming a lead advocate for international legislation, has not yet ratified one of the most significant international treaties negotiated since the Second World War: the Law of the Sea Conventions. Although Canada was a major architect and advocate of the treaty, its failure to ratify is due to the presence of certain clauses dealing with straddling fish stocks that are not deemed to meet Canada’s national interest. These rule-making initiatives were reminiscent of the flavour of a previous era: the period preceding the Second World War when Nobel Prizes were awarded to foreign ministers who promoted myriad bilateral treaties (the Kellogg–Briand Peace Pacts) making resort to war illegal. The interwar period was the high point of the influence of international lawyers. Treaties proliferated renouncing war and making it illegal to pursue national objectives through military means. This may well have contributed to a state of affairs in which the public believed that war was impossible.

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Allan Gotlieb

These attitudes may have created complacency and cloaked the reality that war was becoming inevitable. The international rules, indiscriminately violated, were at best pious norms and at worst deceptions passed off on a pacifist public unwilling to take steps to arm in their own defence. In the fledging Department of External Affairs, during the years of the Second World War and thereafter, there was no great love of international law and international lawyers. The failure of the League of Nations was one of the dominant influences of the era, and the Covenant was seen as a document dominated by legalistic norms and prescriptions. Peace was to be achieved “by the firm establishment of the understandings of international law.” The Covenant’s famous Article 10 proposed to preserve the territorial integrity of all its members against “external aggression.” An “act of aggression” is a legal concept that Canada vigorously opposed defining after the Second World War. Although the Nuremberg Tribunals broke new ground in prosecuting Nazi leaders for waging aggressive war and committing crimes against humanity, the drafters of the un Charter, including the Canadian participants, avoided making un enforcement action conditional upon any violation of international law. In a historic shift, mandatory enforcement action required only the determination by the Security Council of the existence of a “threat to the peace” or “breach of the peace.” There was no necessity to determine the existence of an “act of aggression,” and no criteria were specified as to what constituted a threat to the peace although the consequences for member states under Chapter 7 were farreaching. The Charter was far from forward-looking in all respects. It enshrined the Westphalian principle of state sovereignty and proclaimed a blanket prohibition of interference in the domestic affairs of states. As regards membership, it put dictatorship and democracies on the same footing. It only weakly alluded to human rights and not at all to genocide. But of overarching importance was that the business of maintaining peace and security was not tethered to legal formulations and findings. The practitioners of diplomacy in the Canadian Foreign Service were well attuned to the political approach enshrined in the Charter. As a participant in the department’s puny Legal Division, a decade after the Charter took effect, I can testify to how marginal legal considerations were in the Canadian approach to maintaining peace and security. The practitioners of diplomacy in Canada’s golden age were skilled conciliators and architects of compromises and brokered solutions. They were not writers of new

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rules for the very good reason that they had lived through an era during which more rules were proclaimed and broken than perhaps at any other time in history. Our recent pursuit of a rule-based approach to world peace has this to say for it: It costs very little – nothing actually. Overemphasis on “soft power” is perhaps the hallmark of a country unwilling to make the resource commitments that could address actual conflict. Shattering hopes for “a new world order,” the post-Cold War era has seen an astounding explosion of regional tensions and civil disorders – in the Balkans, Africa, the Middle East, and elsewhere. Regardless of the merits of new codes – and there may be some – drawing up prescriptions for good state behaviour is not likely to resolve situations on the global plane. In most instances, diplomacy trumps international law as a method of defusing conflict and achieving peaceful solutions. Whatever the merits of law and litigation, there will be no new golden age of diplomacy if we espouse rule making as the Canadian way. The exercise of “soft power” is, of course, important for all countries that wish to contribute to peace and further their national interests. A recent Canadian effort to encourage un members to define the rules for determining when humanitarian considerations trump domestic jurisdictions has merit, although it is unlikely to prove successful. But more important in the exercise of “soft power” is the ability to influence and thereby to help resolve the issues of the world. It is through the deployment of skilful diplomacy backed up by real resources that the voice of Canadians will be listened to attentively in world councils.

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2

Sylvia Ostry: The Public Servant marc lalonde

Marc Lalonde’s recollections go beyond pointing out that Sylvia Ostry’s rise to the category of top civil servant took place when she was appointed chief statistician of Canada. The initiatives that she took while in that post were a landmark in the history of social and economic research in Canada. During her watch, Statistics Canada made the first of its contributions to what subsequently became a long and distinguished tradition of inquiry into the social behaviour and educational and health characteristics of Canadians. But there is an additional, subtle message that may be even more important. Marc Lalonde’s chapter makes clear how at the prompting of what is today Health Canada, but under Sylvia’s stewardship, Statistics Canada, the government’s fact-finding institution, ventured from straight fact finding into a more analytical presentation of its survey activities.

As a mere former politician, it would be presumptuous of me to even attempt to present here a learned article; my text will instead concentrate on Sylvia Ostry, the public servant. Canada has been blessed over the decades with a professional public service of high quality. But this public service has comprised many kinds of public servants. I came across the full range in my twenty or so years in Ottawa (spread between 1959 and 1984): first, as an assistant to a Conservative minister of justice; subsequently, under the Liberals, as a consultant; and then as principal secretary to the prime minister and as a minister in the Canadian federal Cabinet. There were those who were in the profession for the career; they abided by the ebb and flow of political events and avoided expressing any opinion or proposing any initiative that might have compromised their gradual climbing of the administrative ladder; they tended to be what I call the

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“faithful executors.” They did their jobs honestly, but one was not to expect from them imaginative and, even less, daring initiatives. Since deputy ministers and heads of Crown corporations are designated by order-in-council, there was inevitably the odd straight partisan appointment, especially after a new party came into office (a switch to which Canadians are not very accustomed, at least at the federal level). But these appointments were very much in the minority, and the governments that attempted them discovered pretty quickly that such appointments generally did not yield great results. First of all, the appointees were naturally partisan and very keen to implement the policies of the new government, which had been developed in Opposition or which were the products of a new political team within the same party as that constituting the government; they tended to read any bureaucratic resistance as a lack of loyalty, and they did not benefit from the institutional memory that allows a senior official to tell his or her minister: “You can go ahead with it, if you wish, but I have to tell you that something like this has been tried several times and that we could never make it work.” Then there were those who should have run for office; they had their own political agenda and, given the chance, would manipulate their minister into pursuing the policies that they happened to believe were best for the country. Those officials formed a category that was well illustrated in the British tv series Yes Minister. Fortunately, they were few and far between; eventually most went on to pursue careers in other fields. Finally (although first in chronological order), there were those I call the “great satraps.” These outstanding individuals were recruited into the federal civil service during the Depression years, after the 1933 Treaty of Westminster had finally granted Canada full sovereignty, including responsibility for foreign affairs and defence. They were a relatively small group of people who became civil servants roughly at the same time and constituted the first cadres of modern Canadian public administration. For all practical purposes, with added recruits, such as C.D. Howe, they practically ran the government and the country during the Second World War. They knew each other extremely well and worked very efficiently; they also developed a sense of ownership of what was best for Canada. I will always remember the story told to me by a few young officials in the Department of Foreign Affairs about their initiation into their department during the late 1950s. As part of their training, they attended courses given by the top departmental officers at the time. One of the messages they received was that they were the chosen few who had been selected to serve their country in international affairs; as such, sometimes they would be exposed to very

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Marc Lalonde

sensitive information and called upon to perform duties assigned to them by their superiors. But their first duty was to serve Canada, and they were told that certain things were better not divulged to their political masters, who were considered to be guided by crass political interests that did not necessarily coincide with the public interest. I very much doubt that today any deputy minister would dare to put forward such extreme views, but this does not mean that these views have disappeared completely from public administration. Fortunately, the great satraps gradually tempered their views as they saw some of their own members leave the public service and enter politics, the most famous being Lester B. Pearson, who soon after became prime minister, C.D. Howe, and, after him, Mitchell Sharp, both of whom were appointed minister of industry, trade, and commerce. Suddenly, the satraps faced ministers who felt that they knew just as well as the satraps what was best for Canada. There were now, in Cabinet, men who knew practically every senior civil servant on a first-name basis. In addition, between 1958 and 1963, the party in office changed as a result of the election of Progressive Conservative governments under John Diefenbaker. The newcomers doubted the loyalty of the senior bureaucrats, and the latter realized that they had to keep their noses clean and cooperate fully with their new political masters. With the return of the Liberals to office in 1963, the public service continued its rapid enlargement, and a gradual transfer of bureaucratic power took place in favour of a new generation of public servants. This new generation had benefited from working under the great satraps. They had been recruited from all over Canada, and most had postgraduate degrees in a wide range of academic fields, very often from foreign universities. They were sophisticated, learned individuals with strong personalities. Because of the size of the public service they were joining, they were never given the opportunity to create the kinds of coteries with which the great satraps had surrounded themselves. There was a remarkable exchange between the two groups, the younger ones possessing advanced and up-to-date expertise in their fields of specialization and the older ones transmitting the strong values of high professionalism and commitment to the welfare of Canada. These young officials became senior civil servants themselves and improved upon the best in the Canadian public-service tradition. Top among that new group was Sylvia Ostry. Although she never reported to me as a minister, our paths frequently crossed in government, and, through the years, I was able to call upon her for help and advice, always to great benefit. In addition, I consider myself privileged to count myself among her numerous friends and admirers.

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I cannot recall exactly when I first encountered Sylvia Ostry. It may have been on the occasion of one of those parties that she and her husband, Bernard, hosted regularly in their beautiful home in Aylmer, across the river from Ottawa. But the most vivid recollection is my paper encounter with her. This was in the early 1970s, when I was principal secretary to Prime Minister Trudeau. By then Sylvia had been director of Special Manpower Studies and Consultation at Statistics Canada since 1965; her reputation had grown in Ottawa circles; the prime minister had high regard for her abilities and wished to consider her for an order-in-council appointment. As is normal in the case of senior appointments, I was asked to obtain the necessary security checks, which I did. What a surprise it was when, a couple of weeks later, a thick file landed upon my desk with “secret” printed on each page. One has to remember that this was only a few years after Senator McCarthy’s hearings in the US, and the Cold War was as cold as ever. I dutifully went through the whole file and was flabbergasted to read that the brilliant young intellectual with the trappings of a wealthy socialite had been, in the eyes of our intelligence service – and mainly thanks to the cooperation of the American and British Secret Services – a person strongly attracted by left-wing organizations. I learned that, in her student days, she had attended many meetings organized by radical socialists with links, no doubt, said the report, to the Communists. The implicit conclusion was that, although Mrs Ostry was already a public servant, the government would expose itself to risk in giving her a senior appointment. Mind you, one such radical socialist had been my tutor in economics at Oxford, and it had never crossed my mind that this might have compromised my appointment as principal secretary if it had been known. In any event, I made my report to the prime minister, who asked to see the file. He perused it and, laughing, mentioned that he had attended many such meetings himself. Needless to say, Sylvia was promptly appointed chief statistician of Canada. It was in her capacity as such that I had my first opportunity to work with Sylvia. In 1972 I had run for office and had been appointed minister of health and welfare. In 1974, as head of this ministry, I published a document, which subsequently acquired considerable notoriety, entitled “New Perspective on the Health of Canadians.” One of this report’s conclusions was that Canada needed much more sophisticated epidemiological information about its citizens. We called upon Sylvia, as chief statistician, to set up a major survey about the health and lifestyles of Canadians, including their sex lives. In those days, a government could be exposed to significant political

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Marc Lalonde

flack if it was perceived to be using Statistics Canada to probe into the intimate personal lives of Canadians. Thus the survey had to be conducted with ultimate professionalism – and good taste. I believe that this was the first time that Statistics Canada had embarked upon such a treacherous endeavour. Sylvia took it under her wing, and two years later the study was completed without an uproar. Today, such surveys are a dime a dozen, but, at the time, it took audacity to agree to do it. Sylvia went on to many other major appointments within the Government of Canada and international organizations. During all those years, we met many times, and it was always a pleasure to listen to, and sometimes to confront, a person with so much intelligence, expert knowledge, and determination. I have never stopped calling upon her, the latest occasion being a seminar about the World Trade Organization (wto) for the Vietnamese authorities in Hanoi. Needless to say, the Vietnamese have been asking for more of the same.

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Some Problems of Summitry and Advising Prime Ministers gordon robertson

The combination of jet air travel, television, and instant communication have made possible – and have rendered almost irresistible – the elevation of government discussion of a growing range of subjects to the apparent intimacy of personal meetings among heads of state, be they presidents or prime ministers – that is, whatever they may be called, among those with the real power. Such meetings at the top occurred in the past only rarely and invariably were attended by large delegations that included ministers and senior advisers. These meetings were for the negotiation of agreements of extraordinary importance – world peace at the Treaty of Versailles, the establishment of the United Nations – or for issues of lesser but still outstanding moment. The rarity of such meetings and the presence of participants other than heads of governments made impossible any sense of a significant, let alone a decisive, personal element in the discussions or the outcomes. They were conferences of governments, rather than “summits,” which are attended only by the leaders.

It is now possible for presidents and prime ministers to attend such personal “summits” no matter where they are held, to remain in constant touch with ministers and officials at home, and, best of all, to be present for television and photo opportunities with other members of the exclusive club in order to demonstrate their status in the world, with all the political advantage that this brings to their domestic political scene. Consequently, “summits” have become steadily more frequent and Cabinet ministers now play a diminished role in policy and negotiation, even in their own areas of responsibility. Only the top leaders can get to these “summits”; they enjoy the select company, the prominence, and the publicity. The focus is on them.

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Gordon Robertson

This new institution, which necessitates briefing the summiteers – often on subjects of which their own knowledge and experience may be limited – has produced the need for a new kind of official. These officials must possess qualities that enable them effectively to prepare the way for the modern “fields of the cloth of gold” and to brief a leader to play his or her role in these high-level state gatherings. That the results of the first “field” – which brought together Henry VIII of England and Francis I of France in the Europe of 1520 – were small and that such is now often the reality has not dimmed the attraction of this marriage of unique eminence, high technology, and front-page international politics. Each eminent person present confirms the eminence of the others, so the attraction of the institution and its priority for publicity are assured. The adviser of a prime minister at such sessions must have a quick and sure understanding of the interests of the other leaders and of the implications of positions or proposals that, often without notice, may emerge in the course of discussions. What is also needed is the capacity to formulate – almost on the run – amendments that might gather support and bridge gaps between the leader being advised and the most favourable possibilities among the offerings of the other princes at the “cloth of gold,” with each participant striving to advance a course of maximum advantage to his or her country and to him or her personally. To those needs in the sessions of the summit itself have now been added, in most cases, elaborate preparation, often lasting over many months, during which, like the Sherpas before guiding an assault on Mount Everest, the leading official can expect to be confronted with surprises that cannot be referred to the prime minister for decision without holding up the process and, equally embarrassing, exposing a lack of full authority or an incapacity to decide. Like the rarefied atmosphere of Everest, the summits of first ministers can require qualities of daring and self-confidence not often called for in sessions at lower altitudes. The original summit of the modern era was the Group of Six, which included the United States and the other strongest world economies – four in Europe plus Japan. But the six were joined one year later by Canada, creating the Group of Seven. (A few years after the fall of the Berlin Wall, Russia joined the group, initially on an honorary basis, producing the current G8.) The prestige that the G7 acquired led to its patterns being applied by the developing Asian countries plus the United States and Canada, giving rise to the Asia-Pacific Economic Cooperation Forum (apec). It acquired sufficient success and fame that it became the

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focus for well-publicized protest against “globalization” when apec met in Seattle and later in Vancouver. The original economic basis of “summits” is not an essential factor in applying the technique. The pattern influenced international meetings on the environment and global warming as well as meetings of the Organization of American States in Quebec City and La Francophonie. From the beginning, meetings of the Commonwealth had comprised gatherings of “first ministers,” but the character of these meetings was affected by the “summit” style. The value of summits to those opposing whatever comprises a summit’s formal scope and area of discussion may not have been apparent at first, but it became clear in Seattle, Vancouver, and other places where such meetings have been held. The genuine interest of the world in the economic agenda of the G7 provided a base from which to focus attention on quite different problems that the seven (or eight) were not dealing with. The advocates of particular causes hijacked the publicity. The violent clashes between protesters and police, however irrelevant they might have been to the agenda of the summit, had much greater television value than anything the presidents and prime ministers might have done or said. Nor was it necessary for the opponents to demonstrate any coherent line of policy about anything: The visible fact of protest was all that was needed for television; the more violent the protest and the reaction of the police the better. There is a poetic justice about this development. One new technology – television – became the means of destroying the advantages of the other technologies that had made summits possible in the first place. To the problem of irrelevant protest has now been added another negative factor: the enormous cost of trying to ensure the security of world leaders, whose eminence and publicity value made their gathering in one place, and their search for world attention, the antithesis of everything that security required – precisely at a time when world terrorism, after 11 September 2001, had made security much more difficult and uncertain. Meetings to be held in the near future may lead to some new thinking about the scale and character of such sessions – or about the wisdom of holding them at all. Such is the unfinished story of the summits, which have presented new challenges for the official responsible for the long process of preparation, for briefing leaders in their high-wire acts of negotiation, and for ensuring that the whole process adds lustre to the reputation of the leader that each adviser serves.

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The 1982 gatt Ministerial allan j. maceachen

In 1984 Sylvia Ostry was appointed deputy minister of international trade and less than two years later ambassador for multilateral trade negotiations. She represented Canada in the round of multilateral trade negotiations – the Uruguay Round – that followed the 1982 General Agreement on Tariffs and Trade (gatt) Ministerial in the latter of the two roles. Arguably, her performance in the Uruguay Round constituted her finest hour in the service of the Canadian federal government. Allan MacEachen’s blow-by-blow account of the 150 hours or so that marked the negotiating marathon leading to the closure of the 1982 round of gatt negotiations reads like a thriller. It leaves one wondering whether, if Sylvia Ostry had known what faced her and if she had been free to turn down the government’s confidence in her negotiating abilities, she would still have taken on the role of sherpa to the Economic Summit and Canada’s representative at the multilateral trade negotiations. Many of the side references in Allan MacEachen’s chapter may appear cryptic to those who did not closely follow gatt affairs. However, even if detailed notes were added, extensive documentation would still be required. Accordingly, the editorial judgment was that adding notes would hardly be worth while, for no matter how arcane the references, it is impossible not to get involved in the drama of the negotiations as they approach their climax with no generally acceptable resolution and final declaration in sight.

I chaired the 1982 gatt Ministerial. At its end I asked that a blow-by-blow, minute-by-minute account of the proceedings be prepared for future reference and perusal. My purpose in doing so was clear enough. I wanted to review the proceedings later on. I did not anticipate that the review would take place twenty years later in preparation of this chapter for a volume in

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honour of Sylvia Ostry. The perspective of time is helpful in analyzing and assessing the issues and the personalities of a strenuous and frustrating week of negotiations that finally resulted in a ministerial declaration three days behind schedule being approved as dawn broke on a Monday morning in Geneva. It is possible with the perspective of lapsed time to stand back from the event itself and provide today’s reader with an assessment more balanced than the snap judgments made on the heels of the event itself. Chairing the gatt Ministerial was the first major international assignment I undertook upon returning to Foreign Affairs following my service as minister of finance. Ed Lumley had, as minister of international trade, worked hard in preparation for the ministerial, making clear in his public statements the Canadian objectives he intended to pursue. He was excited at the challenge of the ministerial meeting. His move from trade to a new portfolio ended that possibility, if not his expectation that some arrangement might be worked out to ensure his continued involvement. Gerald Regan, the new minister of international trade, himself no shrinking violet when it came to the international stage, would have readily accepted the Canadian chair at the ministerial. Both Lumley and Regan were successful trade ministers. Either would have been a credible performer. I decided that chairing the gatt Ministerial myself would be a good way to begin my second term as Canada’s foreign minister. However, as the events of the week developed, it became apparent that I could have saved myself a lot of grief by taking a pass on this particular assignment. Chairing the 1982 gatt Ministerial was a week of sheer hell. This conference was populated by devils stoking the flames – though not intentionally, of course. The circumstances existing at the beginning of the Geneva Ministerial go a long way in explaining why it was so difficult. The session faced several daunting challenges. First, the international economic scene in 1980-81 was difficult and darkening even further as preparations for the meeting proceeded through 1982. Economic growth had slowed to recession. The rising US deficit and high interest rates, along with volatile exchange-rate fluctuations, were increasing transatlantic tensions. Japanese trade surpluses with the US and the European Community (ec) were becoming politically unsustainable. There were growing fears of deindustrialization, as jobs in North America and Europe were being shed in textiles, autos, steel, and electronics in the face of imports from Japan and the “newly industrializing countries.” The mood was therefore glum and not propitious for resisting protectionist pressures, let alone undertaking an ambitious new liberalizing agenda.

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Second, the preparatory process had, rightly, engaged developing countries in establishing the agenda as never before in gatt’s history, and they had responded in an unprecedented way. This reflected their growing economic importance and their political realization that they had to take part in order to protect their growing interests. The inability to include all contracting parties in the actual negotiations created a negative mood that carried forward unjustifiably to assessments made at its conclusion. Third, since about 1980, there had been an institutional hiatus, or standstill, as governments backed away from strong support of new action in any of the trade-oriented organizations. Thus there was uncertainty not just about whether or when, but also about how, to locate a viable new direction for progress in trade liberalization. The Tokyo Round had concluded only twenty-four months earlier; the Conference on International Economic Cooperation (ciec) had run its course; and the activities of the United Nations Conference on Trade and Development (unctad) had proved their limitations. There was no clearcut road for either developed or developing countries to take with respect to new trade-policy measures. Indeed, the former had increasingly resisted less developed countries’ (ldc s’) pressures (exerted through other organizations) for unilateral trade concessions by arguing that gatt was the proper forum for trade matters. This was hardly attractive to developing countries, which had been pushing for “global negotiations” and which, in any event, before getting too deep into gatt waters, first wanted to see an end to developed-countries’ most-favoured-nation (mfn) departures, such as agriculture and textile barriers. Moreover, by about 1980, ldc s had begun to worry that if they did enter gatt negotiations, developed countries would begin pressuring them to “graduate,” or progressively give up their preferred non-mfn treatment in developed markets. Eventually, there was nowhere else to go but gatt, however unattractive the prospect was to developing countries and no matter how unenthusiastic some developed countries were about it. One further concern was the presence of more players (from both developed and developing countries) with a more diverse range of interests. This factor, especially when coupled with the parties’ differences on how to proceed, explains in large part the laundry-list nature of the ministerial agenda. It became a matter of self-defence for individual contracting parties, not just ldc s, to add their own items to the list when others were adding theirs, which in turn became a technique for procrastination lest any eventual “negotiations” threaten to move beyond one’s span of control.

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This final concern went deeper than simply the problem of accommodating the right people at a negotiating table or of achieving consensus views in a large group. As the broad multilateral techniques of gatt and the nature of national economies had become increasingly complex over time, so, too, had the specific negotiating needs of individual governments; thus “one size fits all” techniques no longer provide balanced results. Moreover, no negotiating system was in place that could involve all contracting parties. No process was at hand that could lead to decisions in a timely way on the nonagreed issues. There was a further major difficulty arising from the breadth and nature of the substantive agenda. Canadian trade officials in postconference analyses spent considerable time dealing with this problem. The number of issues that had emerged in the preparatory process was long – a “laundry list.” Several items were of interest only to one or a few contracting parties. Some, like agriculture and safeguards, were intractable. Others, like trade in services and trade-related investment measures, which the United States pressed for, were new, touching on what had formerly been regarded as belonging to the domain of domestic policy, law, and regulation. In the event, the possibility for real “give and take” was absent. Certain contracting parties for differing reasons decided not to “give.” Other contracting parties for reasons of policy did not wish to “take.” “Absence of a negotiating dynamic”; “contracting parties travelling nonintersecting paths.” Such were the phrases that Canadian trade officials employed to describe the prevailing situation. Further elaboration of these phrases may help the reader to assess the difficulties faced. The “process” of the ministerial saw several “demands” coming from various groupings (the makeup of which would change according to the issue involved) or from individual parties, like the US on the new issues or the ec on selective safeguards, for which there were no corresponding responses. Varied demands from various players did not allow for trade-offs between the various issues. The demands, therefore, went zipping off into the corners of the “greenroom” and other locations, to be bundled later into negotiating packages for the Uruguay Round as consensus on substance became stronger. A concrete example is provided in the respective stances of the US and developing countries in their approach to new areas of concern. On the new areas of trade-related investment and intellectual property and trade in services, the US was the key demander, with varying degrees of support (none very strong) from other developed countries, but it faced very

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strong opposition from developing countries on two grounds: In principle, they objected to proceeding with new areas of interest to the developed countries when the old issues of textiles, safeguards, and agriculture remained outside true gatt coverage; and, in practice, they (along with others) did not know enough about the role of these sectors in their economies and wanted to retain their flexibility on the domestic side in regulating them. With only the US pressing and unable to provide anything likely to entice the ldc s into engagement (such as an important opening-up on textiles), this demand went across the multishaped table with no party on the other side prepared to engage seriously. Major players – the European Union, the United States, ldc s operating as a bloc – had their own agendas, and these were often incompatible. I was not fully aware of these huge difficulties upon my arrival in Geneva on Sunday, 21 November 1982. The ministerial was to begin the following Wednesday. Instead of being apprehensive about the challenge ahead, my attitude was reasonably confident, as I believed that my experience in negotiating my way through difficult political and parliamentary situations in Canada, combined with my previous international experience, including the rigorous battleground of the Conference for International Economic Cooperation, equipped me with adequate skills to carry me through this gatt exercise handily. All of this experience was a great help in dealing with aggressive participants like Roy Denham and Bill Brock, who did not always follow gentle methods in seeking their objectives. However, skill and experience cannot prevail over deeply defended national interests. A chilling reality became apparent shortly after arrival: The Preparatory Committee and the gatt Council, each having laboured long and hard over many months had failed to reach agreements binding on governments. Unlike the Tokyo Meeting in 1973, where the final document had been preagreed by all governments (except for two small items), the 1982 meeting began with nothing preagreed and all matters being referred to ministers for decision. The declaration and associated decisions were conveyed by the gatt Council to the ministers “for consideration.” Issues upon which these bodies had been unable to reach consensus over many months were now forwarded to ministers for resolution within three days – and, as I have already pointed out, with no established negotiating methodology for the new agenda, many participants, and new political realities. It was made starkly clear that “nothing in the texts at this time could be considered approved by governments.” Obviously, we were facing a daunting if not impossible task. It would be going too far to say that we were

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starting from scratch. The gatt Council had worked heroically as did the Preparatory Committee in bringing forward texts. These texts were provisional and tenuous. Mr Dunkel, the director general of gatt, stressed on Monday morning in my ministerial briefing how provisional and tenuous these texts were. Mr Dunkel stressed the divergence of positions among the contracting parties on the very threshold of the meeting. Negotiating obstacles were laid on the table: the difficulty of dealing with important delegations without the presence of ministers and the difficulty of not including in my conversations less important delegations with high-level representation. Despite all these difficulties, I had to find by trial and error a negotiating pattern capable of getting decisions and consensus on substantive issues from the eighty-eight contracting parties in attendance. There were no immediate solutions to this major problem. At one point we explored the possibility of employing the informal gatt consultative technique of “7 plus 7,” which involves representatives of the major developed and developing countries for the purpose of consultation and consensus building. Naysayers abounded. Various perceived weaknesses in this approach were put forward. Ministers were apt to alter the existing text. Imagine! Delegations that did not have ministers might be left on the outside looking in. Such an initiative by the chairman might affect the individual negotiating tracks of delegations. The US especially was nervous about such an initiative by the chairman. The reluctance to adopt this particular negotiating technique allowed a useful idea to surface and eventually gain acceptance. It was that the chairman be allowed to consult as he saw fit. This is what eventually occurred. It was the only way to go. And I proceeded along that path at a price. I consulted with ministerial colleagues in groupings of a size that, at a particular time, would yield results. This had an unavoidable downside, namely that colleagues not included in a particular grouping or totally excluded, except in plenary, had legitimate grounds for complaint. Such exclusions led to understandable frustrations and gave the appearance of disorder. The Canadian delegation was constantly assessing the situation. As a result of a canvass of major delegations, it was apparent on the eve of the plenary beginning on Wednesday, in view of the differing objectives of delegations, that no basis existed at the time for a package approach or for the settling of differences. At the same time, to the outside world a facade that the situation wasn’t too bad was being assiduously projected. No one wanted at that stage to be cast as a “spoiler.” It was essential to have ministerial statements as quickly as possible so that the outside world would be

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made aware of the deep differences that existed among the contracting parties. At the same time, I began my consultations with groupings of delegations. We were searching for a workable and acceptable system to advance the negotiations. We were groping our way forward. It was trial and error. For example, on Thursday at 4:30 p.m. I met with twenty-two delegations. This group was ironically described as “Friends of the Chairman.” The Canadian delegation thought that the group was too large. However, we deferred to the opinion of the director general of gatt and included additional delegations to ensure broader representation. The latter was a valid objective. At this time it was my hope that this particular group might become the key negotiating instrument for ministers until the conclusion of the conference. For that reason I asked the group to focus on the key outstanding issues: • • • •

protectionism/safeguards dispute settlement services agriculture (and the more general subsidies question)

I wanted to tackle as a priority item the difficult questions in the linkage of protectionism with safeguards. The issue was critical at this time because it lay at the heart of how governments were going to respond to the political pressures arising from stagnant economic growth and mounting job losses in industries facing the need for adjustment. Would they conclude bilateral deals outside gatt disciplines (as the US and Japan did), or seek new gatt authority for “selective” safeguard measures, departing from the key gatt most-favoured-nation principle (as the ec wanted), or hold the line against such backsliding (as Canada, Australia, and the ldc s insisted)? It brought high gatt principles and domestic political realities into sharp relief, with important national interests at play on all sides. The Canadian minister of trade, the Honourable Gerald Regan, in a press conference in Geneva at the time of the ministerial, described the issue as follows: “Safeguard action has to occur in some circumstances to protect domestic employment against a surge of imports from a particular country. When it occurs it should be temporary and done after consultation with exporting nations sending the harmful goods and that action should be subject to an element of compensation ... If gatt is to remain relevant, safeguard actions which now occur outside the agreement on a unilateral rather than consensual basis need to be regularized and brought within the system.”

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Quickly, the discussion revealed that the issue was more difficult and the disagreements more widespread than I had previously thought. For example, on behalf of the United States Mr Brock supported the explicit commitment on protectionism contained in the article in the text dealing with existing measures and measures that might be embarked upon in the future. Safeguard actions in grey areas outside gatt could still take place unless steps were taken to deal with them. Mr Haferkamp, speaking on behalf of the ec, readily acknowledged the inconsistency between the strong words on protectionism and the lack of specific safeguard actions. Inasmuch as the stiff protectionism commitments were unrealistic in current economic circumstances, the solutions to the inconsistency lay not in action on safeguards but in a watering down of the protectionism text. Then the spokesman for the ldc s, Sr Felipe Jaramillo, the Columbian ambassador and permanent trade representative to the United Nations in Geneva, argued against any tampering with existing texts. Such could lead to an unravelling. Therefore, no progress was made, and the meeting came to an end with an evident split between developed and developing countries on whether any change should be made to the existing declaration. This “Friends of the Chairman” group was adjourned, never to be convened again. We had a deep split between the US and the ec. We had a deep split between the developed countries and the ldc s. How now to proceed? A suggestion came from the European Community. Following the adjournment, both ec commissioners argued for an even smaller group of ministers to meet the following morning (Friday) for breakfast. (The schedule called for the conclusion of the conference on that day.) We did resume on Friday at 8 a.m. with a smaller group. The group consisted of Mr W. Haferkamp (head of delegation and vice president of the European Commission) and Mr E. Davignon (vice president of the European Commission); Mr Bonruku Yoshino (ambassador extraordinary and plenopotentiary, Japan); Mr Bill Brock (trade representative for the United States) and Mr David MacDonald (deputy trade representative, Executive Office of the President, United States); Mr Shivraj Patil (commerce minister and leader of delegation, India) and Mr Abid Hussein (commerce secretary and alternate leader, India); Mr Ramiro Saraiva Guerreiro (minister of external relations, Brazil); Mr Roberto V. Ongpin (minister of trade and industry, chairman of negotiations, Phillipines); and Dunkel and McPhail. We had to sit throughout the day in an effort to make progress. In fact, we sat throughout the next twenty-four hours until close to 7 a.m. Saturday. We interrupted the session for my statement to plenary at 4 p.m. with the intention of resuming immediately afterward. At this point we had

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to tell other participants what was taking place, which we tried to do throughout. It was not an enviable task to appear at plenary to say once more that we were continuing the work with no certain end in sight. However, we were delayed from resuming the Breakfast Group meeting until 9 p.m. owing to long ldc caucusing. The resumed meeting lasted almost ten hours. And while this small group was in session, other delegations were cooling their heels in increasing frustration and living on rumours and speculation. No wonder the mood became critical and pessimistic. The schedule that the small negotiating group set for itself was gruelling. Following adjournment Saturday morning, we resumed again – that is, the Breakfast Group resumed at 2 p.m. Saturday, enlarging the group at 8 p.m. and breaking at 10 p.m. to report to plenary. On Sunday we resumed at 8 a.m. and continued our meetings until early evening. At this point, despite strenuous efforts, it became evident that we had reached a stalemate. There was no point in continuing the negotiations. So I adjourned the meeting for the ostensible purpose of conducting private consultations and to seek a way of bringing finality to the conference. Happily, the further consultations broke the stalemate, and the conference did not end in failure, as it might have. However, before describing how the stalemate was broken, allowing the conference to conclude in an orderly way, I wish to deal with the difficult substantive issues that eluded consensus until the very last moment. This takes me back to the state of play on Friday afternoon when I urged that the unresolved issue of protectionism be again confronted. We were still agonizing over the difficulty of reaching an agreed resolution of this and other issues. We had tackled the same issue on Thursday afternoon and failed. It was still in contention and urgently required further work. I did not despair at this point but was very concerned. Accordingly, at 3 p.m. on Friday, I urged ministerial colleagues to focus once more on this issue. In response to my plea, later that day at about 9 p.m., Haferkamp proposed new language be drawn, as was apparent, from previous ec proposals. He argued that his language was realistic in calling for the softening of proposed new measures (7(i)) and a weaker text on eliminating existing protectionist measures. There was some interest in these new formulations, but there were no commitments. However, it was agreed that we should take another look following consultations. No agreement developed at this time. Still, on Saturday afternoon, in the absence of agreement on the protectionism text, the ec again circulated new texts on 7(i) and 7(ii). Some support appeared for (i), but none for (ii). In view of this impasse, it appeared that the only way to deal with this difficulty would be through an ec reser-

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vation. Caucus meetings held subsequently revealed concerns at the prospect of fewer obligations being undertaken by the ec than by other contracting parties. Two-tiered obligations were reprehensible in principle and could lead to undesirable practical trade effects. The politics of such a solution were bad. In the assessment that I conducted with my officials at the hotel that night at 11 p.m., protectionism was still an outstanding item. On Sunday morning at the beginning of the 8 a.m. meeting, I was unable to report any progress. Later in the morning it was agreed that a working party under Ambassador Jolles would attempt to reach consensus on paragraphs 7(i) and 7(ii) on protectionism. I made provision on the agenda for a report from Jolles at 1 p.m. Happily, his work proved successful. He reported that there was consensus on 7(i) and 7(ii) to merge the two subparagraphs, subject to a wording to cover US Congressional responsibility for US trade law and the need for some contracting parties to have a certain amount of time to get rid of some measures inconsistent with gatt. It was suggested that the latter point be covered by a statement from the chairman. Only Australia indicated possible problems with the merged text. This issue was disposed of definitively without the danger of two-tiered obligations, as had been feared by some developed countries outside the ec. It was a major step forward. Subsequent analysis by Canadian officials on the merged text was positive. Don McPhail was of the view following the ministerial that the commitment on protectionism was meaningful. Earlier legalistic language would have been incomprehensible and would not have been observed with precision. The final language, which all partners, including the ec, regarded as binding, stood a chance of aiding governments to better withstand protectionist pressures. Our efforts to resolve the issues on agriculture did not yield the same favourable results. It remained an insurmountable problem until the very end. On Friday afternoon, in reviewing the substantive situation, I was obliged to report that we had reached an impasse on both the declaration and the separate text on this subject. In our resumed meeting following a report to plenary (beginning at 9 p.m. and lasting until almost 7 a.m. Saturday), Haferkamp proposed four amendments to the detailed text on agriculture. The first two amendments eliminated any possible ambiguous reference to future negotiations on this subject; the second two amendments were minor. The amendments dealing with future negotiations were turned down by developed countries. The ec also proposed a revision to the agricultural

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reference in the main declaration (7(vii)) along the lines of an earlier ec amendment. This also was rejected. Continued debate was clearly no longer profitable; we returned to the subject the following day (Saturday, 27 November), at which time the ec put forward a new text that found no takers, with the exception of Switzerland. The matter was held in abeyance until Sunday morning. Another discussion ensued with no breakthrough. Eventually, that morning in the enlarged Breakfast Group, I secured agreement to refer agriculture to the Jolles working group. The group under Jolles made some progress, but ultimately the ec could not accept the language proposed by the working group on 7(vii). And others could not accept the ec position. We were stalemated and adjourned for informal discussions. Haferkamp departed for consultation with his council. On his return, his only proposal was for two side-by-side texts. It was now 8 p.m. on Sunday. The scope for negotiation had been exhausted. Now an extraordinary series of developments occurred. But before describing these developments, I want to return to the other contentious issue in play, namely dispute settlement, and outline how it too became stalemated at that critical hour on Sunday evening. In an optimistic mood on Friday afternoon, I expressed in my summation the opinion that agreement on dispute settlement seemed in sight – alhough I had taken note of the previous objections by Patil and Brock to a revised ec draft. The concept that contracting parties should not “obstruct” a council decision, previously accepted by the ec, had been dropped. At the same time, I also noted that Haferkamp had easily agreed to try once more to gain approval for this concept, and the matter was left there. However, later in the evening Haferkamp reported that following consultations with his council, he could not revert to the concept of “no undue blocking of a consensus” and proposed instead “noting in gatt that consensus remains the traditional method of agreement.” Developing countries could not accept this revision. Saturday afternoon we returned to the same subject, which showed a continuing split between the ec and others on the concept of the “blocking of a consensus.” However, there appeared to be scope for further consideration by the ec and further drafting. I then proposed that we settle on new language put forward by the ec. Later in the day Haferkamp advised that he could not accept my proposal with respect to new language suggested by the ec. It then became clear that there was a genuine and widespread misunderstanding as to the text under consideration. Haferkamp had consulted with the ec on his latest text, which had been put forward in the group as I had suggested. Oth-

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ers thought that Haferkamp would go back to the earlier “no blocking of a decision” version. Discussion continued without any progress. It was considerably later in the day when I again sought to make progress on the matter of dispute settlement. Continuing his explanation on the misunderstanding, Haferkamp stated that the text some thought was being considered the day before had already been rejected by ec ministers. Following this misunderstanding, the ec had continued its efforts to produce an acceptable text. However, the ldc s in particular continued to be concerned about a possible compromise of gatt rights in decision making under Article 25, a concern subsequently dealt with by a footnote indicating that the decision did not prejudice the provision on decision making in the General Agreement on Tariffs and Trade. Once again the ec commissioner, Haferkamp, undertook to take the new text to the ec ministers. The consultation arising from this undertaking did not yield positive results. Later on Sunday Haferkamp returned with alternative language on dispute settlement, which he offered perfunctorily. It had previously been turned down. Now it was 8 p.m. Sunday, and on a second major item we had reached an impasse. Further negotiation would be fruitless. The time had come for a new and tough tactic. The tough tactic was to confront the ec with the reality of its isolation. No further negotiation would take place. The ec was now faced with taking responsibility for a failed conference and a meaningless conclusion to the immense amount of effort that had been invested. First, I adjourned the meeting for the ostensible purpose of consulting and to prepare for the final plenary at 10:30 p.m. Sunday. However, we failed to realize this timing target. The Secretariat was to prepare a chairman’s text for the plenary with the items agreed to at this point. In the office of the director general, Mr Dunkel, I met with Haferkamp, Brock, Jaramillo, Fraguio, and McPhail. I noted that however close we were to a solution, the conference at this point had reached a stalemate. No one wished to take responsibility for a failure. Whatever the concessions made previously by all sides, the stumbling block now was the ec; others had moved toward the community, but the community had not moved. The ec was now fully isolated. I asked Haferkamp to make this clear to the council. I offered to meet informally with the council if it would do any good. Then Brock, Jaramillo, and Fraguio weighed in, fully backing up my stand and insisting that there was no further room for conciliation. In fact, Jaramillo had to be convinced that such a last appeal was better than a breakdown. It is to Haferkamp’s credit that he was capable of instant assessment and

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response. He did not enter a defense of ec positions. He concurred fully and instantly. He undertook to get back to me as soon as possible, hopefully within an hour. He came to the Hilton Hotel at 10 p.m. with Denman and Tran. Dunkel and McPhail were also present. He reported that the ec Council had not (yet) given him authority to move. He therefore intended, if need be, to act on his own. This decision by Haferkamp took courage and was fraught with huge implications in the ec context. He went on to say that if he was denied authority or if a quorum was not available, he would accept the document as it stood, without the final concessions he had sought, and would (he was confident) get approval from a full council later. Haferkamp showed me a paper containing a statement that he intended to give in plenary that slightly reserved and slightly reinterpreted ec positions on protectionism and agriculture. However, he did not offer a copy. He wanted me to know how he intended to proceed and would confirm all this by midnight. Now it was my job to ensure that misunderstandings on what had now been agreed would not haunt us later. So I made certain that the ec would accept the texts in their latest agreed forms (agreed minus the ec amendments). I arranged for the heads of the delegations to meet again in the Conference Centre at 12:15 a.m. Monday and for others to be informed prior to the plenary itself. However, it was 1:30 a.m. before Haferkamp arrived at the meeting, which consisted of fifteen heads of delegations. The meeting was to prepare for the final plenary. I asked for views. Haferkamp reported that he had council approval to accept the text as it now stood, thus resolving outstanding issues. Then he made the important point that only after adoption would he make a statement in plenary along the lines he had disclosed earlier. Haferkamp underlined that he now had full council backing for the text. He was not acting alone or on his own authority. (The ec had a plane standing by in Brussels to produce a quorum of ministers if need be.) This major breakthrough on the threshold of the final plenary threw the developing countries into a tailspin, causing an important shift in their positions. The representatives present made clear that they were now accepting texts individually. They were unable to say what their colleagues would do. The ldc caucus had been as difficult as the ec Council; it now began to fall apart as contracting parties had to take positions publicly. Observers like Algeria, large on Group 77 theological input, did not have to do so. The position of the Australian representative was reflective of the “rollback-standstill” stance adopted during the conference. His strong state-

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ment would not block the adoption of the text but would distance his government from it. Then at a moment when a constructive atmosphere was for the first time enveloping the proceedings, a tense atmosphere developed over a “misunderstanding” that had developed in connection with the ec attitude on high technology, a subject matter that had not been previously discussed by ministers and that had lurked in the text of the council without attention. The ec had raised objection to this text and sought a change. Mr Brock at this point blew his stack more from general frustration than difficulty with the change and directed a general tirade against the incessant parade of concessions sought by the ec. Haferkamp stood firm. He could not be accommodating because of the French. Mr Jerry Regan advanced a solution that got us through this time-consuming difficulty as the clock ticked toward dawn and the final plenary. His idea, which was accepted, was that the matter be passed on to the gatt Council for later consideration. At 3 a.m., armed with a newly printed version of the text, I presented the declaration and associated decisions to the conference. The document was adopted, following which the ec and Australia in particular made their presentations. Statements followed from a number of other (nonmajor) contracting parties, and the meeting adjourned at 4:30 a.m. In Geneva I had spoken on the telephone to the prime minister, apprising him of difficulties faced at the conference and in particular of the resistance from the French minister to making any progress. I requested that Mr Trudeau put a phone call through to the president of France with a view to moderating this negative role. The prime minister declined, revealing not for the first time a sensitivity in dealing with the French government. In fact, the French minister, Mr Jobert, provided one of the human vignettes of the conference. One recollection of officials at the conference is of Jobert, who before and during the conference had discounted its appropriateness and importance, waiting in the corridors of the Conference Centre at 3:00 a.m. on Monday for the final session, some six days after ec ministers arrived and three days after they had intended to depart. This picture says much about the importance of the meeting after all and about the drama that was taking place in the ec Council throughout the conference but particularly toward the end when failure, if it came, would – they and all others knew – rest squarely on community shoulders. But failure did not come. These events were still fresh in my mind as I made my report to the prime minister immediately upon my return to Ottawa. Naturally, I underlined how difficult, protracted, and intense the negotiations had been and that

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the necessity of negotiating in a small group to reach consensus had created hard feelings and a sour mood among those unavoidably excluded. However, no one at the conference had presented a better alternative – aside from giving up, which at times some frustrated participants were ready to do. I also underlined that the political commitment to avoiding protectionist policies and actions – linked always to safeguards, trade in agriculture, gatt dispute settlement, and trade in services – had been the most difficult issue to resolve. I was not reluctant to point the finger at the developing countries for their refusal to approve any work in gatt on services. Nor was I reluctant to assign the principal responsibility to the ec. Believing its vital economic interests were at stake and declining to enter into undertakings it might not fulfill, the ec was isolated on almost every issue. As a consequence of the ec approach, the results of the meeting fell short of what others (e.g., the US, Canada, Switzerland, and Australia) had hoped for. The Japanese were always present but watched from the sidelines. But there were achievements. That it was possible to adopt a ministerial declaration on the basis of consensus was in itself an important achievement. At various points throughout the week, such an outcome seemed virtually impossible. (This led one participant at the conference to observe that it is almost the existence of the ministerial text more than what it contains that is regarded as significant.) The political commitment to resisting protectionism is a positive and realistic achievement, particularly given the current difficult economic situation and protectionist pressures. The significance of the agreed work program should not be underestimated. The overall package represents an important achievement, showing positive results on a number of difficult issues. It is a work program of broad interest to both developed and developing countries and includes areas of new activity, such as trade in services. Then I drew to the attention of the prime minister important areas where advances had been made. On safeguards, we had agreed to continue our efforts to negotiate a comprehensive understanding in as short a time frame as possible, hopefully within a year. On agriculture, our objectives were largely met with the agreement to establish a gatt work program charged with developing recommendations aimed at facilitating the further liberalization of trade in agricultural products. This would cover all aspects of export assistance and import protection and was to be completed within two years.

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We obtained agreement on a gatt work program that addressed tariff and nontariff barriers to trade in the fisheries and in processed-resource products (forest, metal, and mineral) as a means of improving the terms of access to markets. This was a high priority for Canada. I concluded my report to the prime minister by making a number of points quite briefly. First, the outcome was likely to be regarded by the US as, at most, a partial success. As a result, there was probably even greater risk of unilateral trade-restricting measures from Congress. (Tracing in detail Canadian responses to the threat of American protectionist measures would take me away from the principle focus of this chapter. However, it is interesting to recall that six months after the gatt Ministerial, Mr Regan and I issued a paper, “Trade Policy for the 1980s,” in which a sectional approach was proposed for trade negotiations with the United States. Subsequent talks led to the decision that this approach did not yield enough benefits for Canada to be further pursued.) Second, the working relationship between the US and the ec at the conference had not contributed to a lessening of bilateral tensions; much would depend on the outcome of a ministerial meeting between the US and the ec to take place the following 10 December. Third, there had been no divisive North-South confrontation, with the developing countries playing a constructive role in reaching a consensus. Then I made the most important point of all. It deserves to be quoted: “The value and credibility of what was achieved in Geneva last week can be assessed only in the light of actions taken by governments to implement policies that affect trade and through cooperation in gatt in implementing the agreed work program.” Recently I turned to the World Trade Organization (wto) website to find out whether any current assessment could be found on the implementation of the “agreed work program.” I was encouraged by what I learned: The seeds of the Uruguay Round were sown in November 1982 at a ministerial meeting of gatt members in Geneva ... In fact, the work programme that the ministers agreed formed the basis for what was to become the Uruguay negotiating agenda. Nevertheless, it took four more years of exploring, clarifying issues and painstaking consensus-building, before ministers agreed to launch the new round. They did so in September 1986, in Punte de Este, Uruguay. They eventually accepted a negotiating agenda which covered virtually every outstanding policy issue ... It was the biggest negotiating mandate on trade ever agreed, that the ministers gave themselves four years to complete it.

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This reference to the 1982 gatt Ministerial made available twenty years after the event benefits from the perspective of time and throws a more positive light on its outcome than the comments made in its immediate aftermath. It is a slight if belated reward for the enormous energy expended. In stating immediately on the close of the ministerial that the result was the launching of a work program that would give new impetus to gatt, Don McPhail had reached a judgment that subsequent developments have backed up. Negative attitudes following this ministerial stemmed from a number of causes already mentioned. However, there is an additional factor that must be mentioned. In the minds of some, there was confusion prior to the conference itself and even among some participants during the conference as to its purpose. Canadian documentation makes perfectly clear in various formulations how Canada viewed the purpose. Its purpose was to review the adequacy of the multilateral trading system and to establish the tradepolicy agenda of the 1980s. For the Canadian delegation, this was the objective. As an objective it involved politics and trade policy. It did not call for bargaining on specific tariff and nontariff barriers. Some contracting parties perceived this difference from the beginning and set their objectives accordingly, while others did not see what was involved until late in the day. Another Canadian official made the same point in another way. Emphasizing that it was a trade-policy conference, he argued that there was no possibility of trade-offs on tariffs or other matters affecting individual export and import items. Accordingly, from a theoretical point of view there should have been no winners or losers. I find no support in any Canadian overview for the contention that ministers intended to launch a major new negotiation. However, some participants shaped the preparatory work and the ministerial more than others. Here developing countries must be given special attention and possibly special marks. It was developing countries that manipulated the process most successfully until crunch time, when their common front collapsed. In fact, during the twelve months leading up to the conference, the developing countries outnegotiated the industrialized world. As the ministerial declaration evolved, they successfully pushed aside futuristic items proposed by the United States. This was done initially on the grounds that work must be completed first on existing problems. Later, this was carried to the point of arguing, when the ministerial began, that the document to emerge from the council should be sacrosanct. This infuriated the European Community, which insisted that ministers had the right to reopen what officials had considered but by no means approved.

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Later, they continued to argue that the document had best remain intact because it represented a balanced approach. Thus it was constantly up to others to knock the developing countries off this position. For the first time in the history of gatt, they employed a caucus that developed and maintained a unified stand until very late in the game. The first crack came with the Philippines opening statement in plenary acknowledging that consensual safeguards were negotiable. The real test came two days later when the Brazilians and Indians worried that the US and the European Community might accept differing obligations with respect to protectionism. Finally, in the dying hours, when fringe developing countries did not want to depart from their position of principle against the inclusion of services, the developing countries at large reverted to their standard gatt position that each speak for itself. The ldc s’ spokesman was the Colombian minister, Jaramillo. When the final deal was struck, there was a danger that he might not accept it for fear of being disowned by the radicals. In fact, at the showdown meeting in Dunkel’s office at 8 p.m. Sunday, it took the persuasion of the Argentine minister, Fraguio, to prevent Jaramillo from breaking off further efforts to reach a final settlement by forcing the ec to back down. Like all major participants the ldc s were somewhat shattered by the process. However, the Canadian assessment of Jaramillo’s overall role was highly favourable. Fundamentally, the ldc s had decided a month earlier to ask for nothing. Thus they would be able to refuse any request from the North, especially with respect to graduation or, for example, services. Major developing countries spoke for themselves and played their own games astutely. For example, the Indian minister, Patil, repeatedly intervened in smaller group meetings to delay matters and obfuscate. Were Patil a hockey player, he would acquire an undoubted reputation for “ragging the puck” when his teammates were in the penalty box. The battle on services and futuristic items, while motivated by “theological” considerations, was employed by countries like Brazil and India as a smokescreen to protect their commercial policy objectives. The final collapse of the ldc s’ front occurred when developing countries decided for commercial reasons that they could not go along with differing obligations on the part of the European Community and other industrialized countries with respect to the question of protectionism. Thus developing countries with substantial commercial interests in no way deserted gatt. The European Community was acutely aware of the continuing economic situation and constantly called for “realism” in approaching the work of the conference. This call for realism dominated its rhetoric and

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negotiating stance, which at the outset entailed the desire to negotiate texts. No one was interested. Developing countries recognized the community as the potential spoiler. The community’s nervousness about this perception resulted in the community’s Ministerial Council remaining in Geneva for an additional four days. It met almost continuously. The ec’s commissioner, Haferkamp, was the interlocutor between the ec Council and the gatt Ministerial negotiating group. Until Sunday evening he faithfully carried out instructions from his council. However, when other participants gave the ec an ultimatum on Sunday evening, Haferkamp became his own man. The ec was told that negotiations were over. The community had to sign on or be left out. It was Haferkamp’s personal leadership that carried the day. For the first time, commission officials felt that they had a political leader, a sentiment that apparently spread through various parts of the ec, including member states. Haferkamp, who had tended to work during the day indirectly through ec ministers favourable to an outcome, then discharged his full responsibilities. He went to the ec Council threatening to act on his own responsibility if there was no quorum or if those present rejected his acceptance of compromise texts. Ultimately, Jobert caved in. Haferkamp was able to report that he had full ministerial responsibility to accept texts, with minor observations to be made after adoption. Throughout the long and difficult negotiations, Haferkamp always behaved in a courteous and professional manner. On Sunday night he became a hero. The community had taken the unprecedented step of moving its Ministerial Council to the site of a conference presumably to maintain strict ministerial control over developments. At a crucial moment, the commission, in the person of Haferkamp, wielded power over the member states, no doubt causing a certain amount of trauma therein. In retrospect, beyond the sense at the time that the ec was being obstinate and the drama of Haferkamp’s role, the ministerial provides an interesting snapshot of two great multilateral economic and political ideals confronting each other. Both ideals emerged from the ashes of the Second World War: the broad consensus on multilateral-trade liberalization and law under gatt and the efforts among Western European countries to increase economic cooperation, with a view to developing political ties that would preclude renewal of conflict. From the formation of the “Common Market” in 1958 to the early 1980s, the “European Project” absorbed more and more political attention and capital in the European countries; its internal and overseas preferences posed an increasing challenge to the multilateral nature of gatt; and the sacrosanct status of the Common Ag-

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ricultural Policy (cap) became a major irritant to other gatt trading partners. In addition, the ec had been losing hundreds of thousands of industrial and manufacturing jobs throughout the 1970s, and protectionist pressures were strong with the downturn in the early 1980s. Perhaps it is not surprising that at times throughout the week, it seemed to the participants that the ec was pitted against the rest of the world. Shortly after the meeting, when the mood in Geneva was glum, a uk delegate (the uk as well as the Dutch and the Danes were embarrassed by the ec position) observed with an ironic smile that the conference had been a success: “We stayed engaged at the ministerial level, and we stayed together.” This was the explanation, and the standard, of ec success. The US was less than happy with the results. It was not certain at the time whether the US would recognize the obvious cause-and-effect relationship. Having set large objectives for the conference, it had failed to nurture the process. Coming into the conference, its relationships with the ec in the trade field were not the warmest. Its bargaining was neither skilful nor subtle. Measuring their achievements against their opening positions a year previously gave the impression that they had been losers. Over the months leading up to the conference, they had advanced their positions awkwardly, and they did little to defend them just prior to or during the ministerial conference itself. Their heavy-handed tactics, including the use of Congressional representatives on the scene throughout the week, were much resented. However, the US was able to agree that the text on protectionism that emerged from the conference was probably better than the one we had begun with. In addition to serving both as an initial run at what would be the main elements of the negotiating agenda for the Uruguay Round and as confirmation of the engagement of key developing countries in the substantive issues of the day, the 1982 gatt Ministerial ultimately stands as testimony to the fundamental resilience of the gatt multilateral trading system. At the time, many commentators bemoaned the erosion of the system, the failure of political leadership to stand up to protectionist pressures, and so on. But these pressures were very real. The industrial structures that had developed in Europe and North America in the postwar period – first, in the areas of textiles and clothing, and then in consumer electronics, autos, machinery, and steel – could not compete against the onslaught from Japan, the Asian “tigers,” and the newly industrializing countries elsewhere. These industries were in the process of painful adjustment. Economists could explain how liberal trade policies would facilitate this necessary adjustment, but politicians had to face the clear public perception that, as

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imports increased, domestic jobs were lost. The situation was arguably the strongest challenge to the open, multilateral trading system since its inception in 1947. The system bent, with political management of trade relations sometimes infringing on strict gatt principles. But as a whole, the system held and was able to advance a few years later to its most ambitious liberalizing round. That week in Geneva, along with the technical, policy, and political effort that had gone into it in the preceding year, was a major battleground in the fight to ensure that the “war” was not lost. Any account of this ministerial would be incomplete without reference to the able assistance to ministers provided by Mr Dunkel, the director general of gatt, and by officials in general. Especially significant was the working group under the chairmanship of Ambassador Jolles of Switzerland. I have referred already to the role of this group in developing consensus on thorny topics referred to it by the small ministerial group. Its work in drafting was critical to a successful outcome. It worked quickly, producing texts from ministerial instruction that then went back and forth between the ec Council and the ldc caucus. By late Sunday this process had so clarified the situation that the isolation of the ec was clear to all. Any failure at this point would have been on the shoulders of the ec Council. Ambassador Jolles and I were not strangers. We had worked closely together on the Conference on International Economic Cooperation in the 1970s. His devotion and ability were still strongly evident. However, I thought that the demands made of him at the conference were taking a toll on his friendliness and openness. The Canadian delegation worked tirelessly under the leadership of the Honourable Gerald Regan. And Don McPhail and his associate in the room, Ted Hobson, were towers of strength. My personal ministerial staff included John Noble, Alain Duduoit, and Bob Pattillo. It was the latter who broke the news to me of the death in Nova Scotia of Danny MacIsaac, a former assistant and political collaborator. This personal blow came at a demanding time in the conference proceedings. Naturally, I had to carry on with my duties and suppress my sense of failure at being unable to attend his funeral in my hometown of Inverness, Nova Scotia. Noble, Dudoit, and Pattillo were gifted and hardworking. When my spirits sagged in the face of enormous frustration, they buoyed me up with tart and amusing commentary on the foibles of conference participants. We constantly analyzed my actions, always searching for improvements in performance and procedures. I wish to complete this account of the gatt Ministerial meeting by commenting on the content of a number of letters I received from ministerial colleagues who attended the meeting. I had forgotten these letters until I

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came across them in my papers while preparing for this chapter. For example, I was greatly touched, upon rereading the letters, by my colleagues’ compliments on my work as chairman and the understanding they showed regarding the difficulties I faced. Also gratifying, and perhaps more important, were the assessments they provided of the the meeting. Bill Brock, the United States’ trade representative, after stating that the chairmanship “was a thankless task under the most extreme conditions,” concluded that without my “tireless efforts we would not have been able to accomplish the results that we did.” Peter Rees, minister of trade for the United Kingdom, believed that we had achieved “a generally satisfying conclusion” to a meeting that “was not the easiest.” Alberto Fraguio, secretary of commerce for Argentina, wrote a letter from Buenes Aries with the same conclusion: “My belief is that we have participated in a historic event and that all the contracting parties owe very much to your personal effort that this event could culminate in a satisfactory way.”

note Facts, reflections, opinions, and formulations in the text originate in conference documents and in the memories of attendees. The Hon. Gerald Regan, Don McPhail, Ted Hobson, John Noble, and Alain Dudoit read this text and made comments. Don McPhail and Ted Hobson made substantive additions.

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5

Emerging Countries: Opportunities and Challenges jacques de larosière

Sylvia Ostry was Canada’s chief trade negotiator throughout the years of the Uruguay Round. She observed that “these ‘new issues’ [trade in services, particularly those based on communications and information technology] represent a fundamental transformation in the process of trade liberalization. They involve change in domestic regulatory and legal systems embedded in the infrastructure of national economies ... The degree of intrusiveness into domestic sovereignty bears little resemblance to the shallow integration of the gatt.”

Emerging countries have specific characteristics. They are “developing countries,” but they are also characterized by more or less efficient market economies and by access to international financing. The other developing countries – generally the poorest – are those that have not yet reached the emerging stage (mostly located in Africa and certain parts of Asia). In this chapter I answer the question “how are emerging countries faring?” by addressing two related questions: •

•

How have emerging countries taken advantage of globalization over the last thirty years? What is the current situation of these countries, and in particular what are the risks they run in relation to the worldwide economic slowdown and the current instability of financial markets?

In my conclusions I attempt to list future challenges facing these countries as well as the opportunities open to them.

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emerging co unt ries a nd globa lization Globalization is a subject very much in the news, having been featured in the World Economic Forum and in the Porto Alegre conference. It is highly topical because it is the object of distortions and untruths. If we try to approach the subject with objectivity – that is, from the point of view of world-trade liberalization, international finance, and the effects on poverty – the following is the case: Liberalization of World Trade • •

•

World trade has grown faster than world gross domestic product (gdp). The share in world trade accounted for by developing countries has grown. Thus during the decade 1964-74 the share averaged 26 per cent, but between 1990 and 2000 it rose to 34 per cent. Growth in the gdp of developing countries has continuously outpaced that of those countries belonging to the Organization for Economic Cooperation and Development (oecd) over the last thirty years (the average annual difference between the two sets of growth rates was 1.8 per cent during the period but increased to 2.5 per cent during the last decade).

Accordingly, the growth process linked to the opening of world trade has worked in that it has brought about a more efficient allocation of resources and fostered emerging countries’ growth. But the nature of trade liberalization is in the process of changing. From 1948, when the General Agreement on Tariffs and Trade (gatt) was created, until the Uruguay Round (1986-94), the governments of the main industrialized countries led the liberalization process by lowering customs and noncustoms tariffs. However, beginning with the Uruguay Round, the orientation of trade liberalization shifted toward an emphasis on “regulatory integration.” Before the Uruguay Round, the key actors were the United States and Europe, and the process was focused on manufactured goods and tariffs, while agriculture was sidestepped. The Uruguay Round changed all this. In fact: • •

Agriculture was added as an issue for negotiations. “New subjects” (services, investments, intellectual property, etc.) were put forward, especially by the United States, as essential elements in the negotiations.

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Since the Uruguay Round, the key actors have become, to a large extent, multinational corporations, notably American. Financial deregulation and the free movement of capital have also brought about the “privatization” of international finance. Since the beginning of the 1980s, we have witnessed a worldwide movement toward deregulation of financial markets. This trend has manifested itself through liberalization of banking and financial systems, privatization of banks and financial institutions, and the gradual elimination of exchange-rate controls. Not only did this trend affect all developed countries, but it also began to spread to emerging countries – albeit to a varying degree but enough for private capital flows to represent, currently, the major source of external financing of those countries. Since 1998 the net external financing of emerging countries has fluctuated between $150 billion and $200 billion per year. In the past, official flows represented the predominant share of developing countries’ financing, whereas today they only reach about $20 billion per year (essentially from multilateral sources). Therefore, private flows now constitute approximately 80 per cent of the total. Currently, they are entirely in the form of portfolio and direct investment (bank loans, badly affected by successive debt crises, have become practically nonexistent in net terms). The figures show that private flows, notably in the form of direct investment, play a major and very positive role in financing emerging countries. This is the case because this type of financing does not entail financial charges and is also a vector of technology transfers and integration with international trade networks. Glancing back over the last thirty years, one sees that emerging countries have shifted from a situation in which their productive sectors were largely protected and controlled by the state, and in which external financing flowed primarily from public institutions and banks, to a more open system wherein trade has been liberalized and private investors and financial markets provide most of their foreign financing. Thus not only are structures of production moving toward privatization, but the international financial system is as well (with few exceptions, governments are no longer major borrowers). One consequence of these trends is the increasing tendency to privatize imbalances: The major part of emerging countries’ balance-of-payments deficits derives from the private sector rather than from public deficits (with some notable exceptions, numerous governments among emerging countries are on track to “repair” their public finances and are currently registering surpluses). Contrary to the usual clichés, globalization has resulted in stronger growth and a reduction in poverty for emerging countries. One often

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hears the comment that “with globalization, the rich become richer and the poor become poorer.” This is inexact. Since 1990 world inequalities have ceased increasing and have begun to diminish. More significantly, the number of inhabitants living in extreme poverty (those with an average income of less than $1 per day) has declined by 200 million people over the last twenty years. This is largely due to faster growth in China and India. However, even excluding these two countries, there is a set of countries with very low incomes, like Bangladesh, Uganda, and Vietnam, where extreme poverty is showing a tendency to decline. The truth is that from 1820 to 1980 the number of poor countries in the world never stopped increasing. But since 1980 this trend has been halted. Sometimes one hears that behind the favourable statistics on growth, there is increasing inequality within emerging countries. This is true of some countries, but it should not be generalized. In a recent study conducted by the Massachusetts Institute of Technology (mit),1 which covers 137 developing countries, economists examined the effect of growth in gdp on the income of the poorest 20 per cent of the populations concerned. They found nothing to indicate that growth is leaving this segment of the population by the wayside. In fact, their income generally follows the average growth rate of the respective economy. This study highlights the fact that, without growth in poor countries, there is no chance of seeing poverty reduction continue in the manner witnessed over the last twenty years. Perhaps, more significantly, when one examines income trends in open emerging countries (“globalizers”) and in closed developing countries (“nonglobalizers”), one notices that over the last decade the former saw their real incomes rise by an average of 5 per cent annually, while income growth in the latter category was only 1 per cent annually.

what is the cu rren t sit uation of these co un tries, and in pa rticu l ar what ar e t h e i r r i s k s i n r e l at i o n to t h e wor l dw i d e economic slowdown and the current instability of financial markets? The macroeconomic situation of emerging countries is strongly influenced by world economic conditions. The slowdown observed in most industrialized countries, beginning in the United States in approximately 2001, has 1 Art Kray and David Dollar, “Growth Is Good for the Poor.”

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been impacting emerging countries in a significant way. We know, in fact, that growing world trade and increasing financial integration facilitate the transmission of external shocks, especially those affecting demand in industrialized countries. An economic slowdown in developed countries reduces demand for exports from emerging countries. There is a strong correlation between the latter’s export volumes and the G7 business cycle. As of 2002 it was still difficult to make any pronouncements about the momentum and intensity of an economic recovery in the United States, but the geographic distribution of growth in emerging countries shows sharp differences. Latin America has been hit particularly hard by both the slowdown and market volatility. Likewise, Eastern Europe has suffered from European sluggishness, especially Germany’s, and Turkey has been strongly impacted by the crisis. Five Asian economies have felt the crisis deeply, especially in the high-technology products sector. For 2002 a modest recovery is predicted for the emerging countries. They are expected to grow by 3.1 per cent instead of by the 2.7 per cent they recorded in 2001. But this recovery will obviously depend on the strength of economic growth elsewhere, especially in the United States. Obviously, this decline in growth rates has contributed to the deterioration of the current account balances of developing countries. Estimates suggest that the combined deficit of all emerging countries could reach $22 billion by 2002 against a $17 billion surplus in 2001. Indeed, recovery in emerging countries will cause their imports, which fell throughout 2001, to increase. This raises the issue of how to finance the growth of emerging countries and their access to markets. Emerging countries’ external financing will continue to depend on direct investment flows. Projections from the Institute of International Finance (iif) predict that direct investment flows will reach about $120 billion in 2002 versus $148 billion in 2001. But this aggregate hides important regional differences. Latin American countries will be more affected (direct investments dropping from $60 billion to $36 billion between 2001 and 2002). Of course, Argentina’s special situation has been taken into account in these estimates. Forecasts for Asia envisage stable flows of around $50 billion to $60 billion. Central and Eastern Europe should receive direct investment flows in the neighbourhood of $20 billion, similar to 2001. Portfolio investments should become marginally positive in 2002, in net terms following a negative figure for 2001, but should remain under $15 billion. Stagnation in bank credits will likely continue. Public development aid should likely remain at about $20 billion.

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wh at a r e t h e c o n ta g i o u s e f f e c t s o f m a r k e t vo l at i l i t y o n e m e r g i n g c o u n t r i e s ? Let us consider three distinct periods: •

•

•

Following the 1997 Asian crisis and the August 1998 Russian crisis, by the autumn of 1998 all of the emerging countries saw their access to financial markets closed. A halt in all investment, other than bonds issued by large industrialized countries, was witnessed as emerging countries were frozen out of the markets. This was a manifestation of the wellknown phenomenon referred to as the “flight to quality” and of the widespread contagion to which emerging countries fell victim. However, the phenomenon did not last, and starting in 1999 markets began to return to more selective assessments of the quality of signatures. Of course, there were shocks to emerging countries (devaluation of the real at the start of 1999, the Turkish and Argentine crises of 2001, etc.), but the manifestations of contagion were both localized and of short duration. It was the same for the shock of 11 September 2001. We observed real but variable contagious effects that depended on each country’s initial situation. The worsening of the Argentine risk in October 2001 did not result in generalized contagion, except in Brazil (a deterioration of 225 basis points between 11 September and 5 October) and in the Philippines (a deterioration of 150 basis points). Countries like Hungary and Poland, on the other hand, saw a slight improvement in their interest spreads over this same critical period. This shows that the markets had already discounted Argentine risk. Following the announcement on 19 October 2001 of the unilateral restructuring of Argentine debt, the markets were remarkably calm, with a stable interest spread between 19 October and 8 November 2001.

Can we infer from these developments that there will be no “Argentine contagion”? I believe that one must remain cautious in answering this question. The Argentine situation has deteriorated considerably over the last few months, and some of the measures recently undertaken appear quite risky. Thus the unprecedented step taken by Argentine authorities to treat the assets carried on banks’ balance sheets differently from their liabilities, as well as a new law on bankruptcies, will likely weaken Argentina’s banking system. If such precedents became institutionalized, and if they were accompanied by protectionist policies, what effect could this have on

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other countries that might want to follow the Argentine example? The consequences could be serious for foreign direct investment in the banking and nonbanking sectors alike. Argentina’s case demonstrates just how fragile the balance can be and how important it is to follow coherent policies. Indeed, liberalization of capital flows can be a good thing for emerging countries, provided it is accompanied by solid capitalization and firm oversight of local banking systems. Furthermore, emerging countries must combine this with prudent macroeconomic policies, particularly in matters of public finance. The Argentine experience has also shown that fixed exchange-rate regimes of the currency-board type can hold up only if internal financial discipline provides the market with a long-term sentiment of confidence and credibility. It seems that the role of large global institutions, and of the International Monetary Fund (imf) in particular, is to actively ensure this consistency in economic policy and to sound the alarm the moment a situation begins to slip out of control. The way that the United States and, more generally, the G7 and the imf allowed the “Argentine model” to drift in recent years provides real reasons for concern. And, as pointed out, one would be mistaken to imagine that Argentine risk will necessarily remain contained and that it could not have “systemic” consequences. Likewise, some of the great Asian champions of the high-growth years should not be allowed to drag their feet in terms of structural reform, as some of them are doing today. The current absence of structural reform will provoke the economic and financial crises of tomorrow. There is a final word on demographics. Today the planet counts 6 billion inhabitants. There were a mere 2.5 billion in 1950. This growth is unprecedented! The annual rate of increase began declining in 1970, but it is still around 12.5 per thousand. According to Jacques Dupâquier, we can risk making the following forecasts: By the year 2015

Expected population (in billions) 7.2

2025

7.9

2050

9.0

Nearly all these population increases (totalling nearly 2 billion additional inhabitants by 2025) will be in developing countries. By 2025 Europe will have lost 130 million inhabitants; the Western hemisphere will have gained approximately 400 million (largely owing to Latin America); and the other

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1.7 billion people will be concentrated in Asia and Africa. India will doubtlessly have become the world’s most populous country, outstripping China by 2040. The great question facing the world is how this significant population growth will translate into sustainable growth and income distribution across the planet. In 1820 the income gap between the world’s richest and poorest countries was quite low – a ratio of 1 to 2. Today the gap has widened to a ratio of 1 to 20 on average, with far more pronounced gaps for specific countries. Nevertheless, population growth – far from being calamitous – is in fact the key to development. On this issue, the industrialized countries of Europe will face serious problems throughout the twenty-first century owing to their population deficit, and it is clear they will turn to immigrant labour. But what will become of the “great population battalions,” mainly concentrated in Asia? Will they prove to be a source of increasing poverty, or will they be put to work thanks to liberalization of trade and services? Will they actively participate in the third industrial revolution, the one of information and communication technology? Population represents the future’s greatest challenge. Meeting that challenge will require considerable and sustained efforts in education and in health and social infrastructures in emerging countries.

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From Trade Liberalization to Economic Integration: The Clash between Private and Public Goods marina von neumann whitman

Over the decades during which Sylvia Ostry has been actively engaged in promoting multilateral trade liberalization, the process of liberalization has broadened its focus, shifting from “the shallow integration of the postwar, Cold War era” – the reduction or elimination of trade barriers erected at national borders – to “the deeper integration of the post–Cold War era of the 1990s and beyond.”1 Encompassed in this wider scope are pressures to harmonize a wide variety of “domestic” policies that also affect international trade and investment, a process that has received increasing focus in Ostry’s recent work and that she has termed pressure for “system convergence.”2 This broadened focus was, in fact, an inevitable result of the success of earlier, more narrowly focused rounds of trade negotiations. As both tariffs and nontariff border barriers were reduced and, in some areas, eliminated entirely in successive trade rounds, differences among nations’ laws and regulations in such areas as intellectual property protection, environmental rules, labour standards, competition (antitrust) policy, and many others increasingly emerged as major factors limiting or distorting the flow of goods, services, and capital across national boundaries. At the same time, this shift has made the process of international trade negotiations more complex and more difficult, impinging as it does on issues of policy traditionally regarded as domestic and therefore belonging exclusively to the jurisdiction of national governments.

1 Sylvia Ostry, The Post–Cold War Trading System: Who’s On First? (Chicago: University of Chicago Press, 1997), 233. 2 Sylvia Ostry, “Convergence and Sovereignty: Policy Scope for Compromise?” in Aseem Prakash and Jeffrey A. Hart, eds, Coping with Globalization (New York: Routledge, 2000), 53.

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m ar ke t i nt e grati on a nd p ol i cy auton om y The tension between the integration of markets across international boundaries and the preservation of policy autonomy (“national sovereignty”) at the level of the nation-state is hardly new. In its modern incarnation, it was presciently and succinctly stated by Richard Cooper in 1968 in his classic book The Economics of Interdependence: “The central problem of international economic cooperation – and of this book – is how to keep the manifold benefits of extensive international economic commerce free of crippling restrictions while at the same time preserving the maximum degree of freedom for each nation to pursue its legitimate economic objectives.”3 However, a number of developments in succeeding decades have escalated this tension. First and foremost, the increase in transnational economic integration has itself generated a growing demand for rules to govern international economic interactions, what John Jackson has called the “interface issue,”4 particularly as multinational corporations (mnc s) have increasingly played a dominant role in this globalization process. Somewhat independently, the rise and proliferation of nongovernmental organizations communicating and operating across international boundaries (Sylvia Ostry has dubbed them ingo s) has intensified such pressures, “pushing for a codification of international norms in a variety of issue areas.”5 According to one estimate, the number of such entities increased over the last quarter of the twentieth century from about 2,500 to some 16,000.6 And, as one would expect in response to increased demand, the supply, or number, of international organizations and treaties that make international law has also expanded substantially. Ironically, the tension between market integration and policy autonomy has also been sharpened by the spread of democracy. The number of countries where an authoritarian regime has given way to some form of democracy has grown steadily in recent decades, and although accelerated by the fall of the Berlin Wall in 1989, this welcome development has been by no means confined to the countries of Eastern (now Central) Europe and the former Soviet Union. As a leading scholar of international law has noted, 3 Richard N. Cooper, The Economics of Interdependence (New York: McGraw Hill, 1968), 5, italics in the original. 4 John H. Jackson, The World Trading System (Cambridge, ma: mit Press, 1989), 218-21. 5 Daniel W. Drezner, “On the Balance between International Law and Democratic Sovereignty,” Chicago Journal of International Law 2, no. 2 (Fall 2001): 322. 6 Dirk Messner and Franz Nuscheler, “World Politics: Structures and Trends” in Paul Kennedy, Dirk Messner, and Franz Nuscheler, eds, Global Trends and Global Governance (London and Sterling, Va.: Pluto Press, 2002), 126.

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“Citizens of democracies are naturally reluctant to cede decisionmaking authority to unelected international bodies unless the benefits of doing so are crystal clear.”7 And the desire of national governments to preserve policy autonomy is likely to hold greater moral sway with the international community at large when those governments are democratically elected. Finally, this tension has been given concrete and immediate reality in Western Europe, as the customs union established by the Treaty of Rome in 1957 has evolved in the European Union (eu) and European Monetary Union (emu) of today.8 In fact, the autonomy and effectiveness of individual countries’ monetary and fiscal policies in targeting domestic goals had begun to erode with the progressive liberalization of international capital flows and deregulation of financial markets beginning in the 1970s. But this de facto erosion of national economic sovereignty in the macroeconomic sphere took a dramatic leap into de jure reality during the final years of the twentieth century. It was then that the member countries of the emu formally gave up monetary independence entirely, as national currencies were replaced by the euro and the European Central Bank (ecb) took over the formulation and execution of monetary policy from the central banks of member nations. Although in principle the member nations of the emu retain some control over fiscal policy, their fiscal autonomy is severely constrained by the Stability and Growth Pact, adherence to which is one of the requirements for emu membership. The pact requires member countries to limit government deficits to no more than 3 per cent of gross domestic product (gdp), except under exceptional circumstances, and imposes other limitations as well.9 Although the draconian fine for violations provided for in the pact has not so far actually been imposed on any member country, both Germany and Ireland have received formal reprimands for exceeding the 3 per cent limit, and France, Italy, and Portugal have been the subjects of somewhat softer “warnings.” That several members of the emu, including the two largest, have failed to adhere to the pact’s requirements has led to a lively debate within the emu regarding whether its provisions should be made more flexible.

7 Drezner, “On the Balance between International Law and Democratic Sovereignty,” 321-2. 8 Actually, the Treaty of Rome itself involved aspects of deep integration in the form of the Common Agriculutural Policy (cap) and a Competition Policy. Both of these arrangements involve considerably more supranational government than would be required by a customs union alone.s 9 The ratio of government debt to gdp is expected to stay below a ceiling of 60 per cent for emu members. Countries whose ratio rises above this ceiling are expected to achieve fiscal balance within a specified period ranging from about one to three years.

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In the microeconomic sphere, it is the eu’s commitment to the creation of a “single market” that has stimulated the process of deep integration in order to facilitate the free flow of goods, services, labour, and capital among member countries. In principle, the commitment to subsidiarity10 enshrined in the 1992 Maastricht Treaty should preserve considerable microeconomic policy independence for the member states. And the repeated confirmation by the European Court of Justice of the principle of mutual recognition,11 stating that compliance with the regulatory requirements of one member state will confer legitimacy in the other member states as well, has gone some way toward reconciling a measure of national regulatory independence with the goals of a single market. Adherence to the principles of subsidiarity and mutual recognition have not, however, eliminated ongoing wrangles between member governments and the eu bureaucracy regarding their application in particular situations. In the sphere of taxation, national policy independence appears to have won out. Early efforts to harmonize levels of value-added taxes were effectively abandoned in the face of resistance by national governments with different views on taxation and government spending and differing degrees of dependence on such taxes for revenues. And, as the Economist noted in the mid-1990s, not only do the shares of government in the gdp of member countries vary widely within the eu, but this range broadened rather than narrowed between 1980 and 1995.12 In the regulatory realm, by contrast, disputes between Brussels and one or another of the member states, particularly the larger ones, are ongoing. The creation of economic rents through subsidies or other forms of state aid to particular firms or industries constitutes one fertile arena for such arguments. In 1996, for example, the European Commission forced the German state of Saxony to reduce its planned subsidy to a Volkswagen plant on the grounds that it did not fully comply with eu rules limiting such assistance. More recently, on similar grounds, the European Commission 10 The principle of subsidiarity, derived from the Catholic Church, holds that decisions should be made by the lowest “appropriate” level of government, the one closest to the citizens affected. 11 Michael S. Greve, “New Insights from the Old Continent,” AEI Federalist Outlook, no. 10 (Jan./Feb. 2002): 3. 12 “The Myth of the Powerless State,” Economist, 7 October 1995, 15-16. At least part of the reason for this continued divergence may be that eu-level regulation of member-state taxation requires unanimity, rather than a qualified majority, in the eu Council of Ministers. Some observers believe, however, that such regulation is imminent. See, for example, Robert T. Kudrle, “Does Globalization Sap the Fiscal Power of the State?” in Prakash and Hart, eds, Coping with Globalization, 215 and cited references.

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announced that it would investigate a substantial subsidy, committed jointly by the German federal government and the regional government of Saxony to bmw for a new car plant in Leipzig. This move was only the latest of several that led the German chancellor, Gerhard Schröder, to “attack Commission authorities for an alleged antiGerman bias on issues such as new proposals on car sales, a new Europeanwide takeover code and the health of his country’s economy.”13 Shortly after this complaint, “the European Commission ordered Deutsche Post, the partially-privatized German postal group, to repay 572 million euros ($545 million) in public subsidies it said were wrongly used to undercut the prices of rivals in the parcel delivery market.”14 Tensions between the eu Commission and national authorities have also arisen from differences in regulatory philosophy, or even simply regulatory history, on a wide variety of issues. These include areas as widely divergent as competition policy, corporate governance, employment protection, privacy rules, regulations governing the taxation and investment of pension funds, and prudential rules for financial institutions. Furthermore, the scope for such conflicts is likely to increase as the drafting of a constitution for a larger and more integrated Europe proceeds toward its planned completion in 2004. This exercise, in the eyes of some observers, is likely to favour increased pressure for harmonization (that is, convergence) of laws and regulations of member states and reduced reliance on the principle of mutual recognition. As these pressures for steps akin to federal preemption of state laws in the United States confront the reality of an increasingly diverse group of member countries in an expanded eu, more frequent conflicts between national governments and eu institutions are a likely outcome. Although such deep integration has not proceeded nearly so far at the global level, the Uruguay Round of multilateral trade negotiations under the auspices of the General Agreement on Tariffs and Trade (gatt), completed in 1994, moved significantly beyond negotiating reductions in border barriers to trade. At the insistence of a group of American mnc s, who took the leadership in forming a coalition with their counterparts in Europe and Japan, this round was brought to successful completion only by

13 Francesco Guerrera and Uta Harnischfeger, “Brussels to Probe Subsidy for bmw,” Financial Times, 4 April 2002. 14 Paul Meller, “Europe Orders Deutsche Post to Repay Public Money,” New York Times, 20 June 2002.

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incorporating agreements on such matters as access to foreign markets for service providers, the protection of intellectual property (trips), and national requirements pertaining to foreign direct investment (trims). The simultaneous creation of the World Trade Organization (wto), with a filled-out organizational structure and a much-strengthened mechanism for the settlement of disputes, offered a framework within which tensions similar to those experienced within the eu could be played out. As Ostry has noted, although the deeper integration agenda successfully pursued in the Uruguay Round largely reflected the economic concerns of mnc s, the issues that have more recently risen to prominence and are likely to be particularly difficult to negotiate in future rounds arise from advocacy by cross-border coalitions of ingo s “linked less by a rule of reason than by a rule of morality or values.”15 The most prominent of these conflicts involves pressures for and against incorporating such issues as environmental and labour standards into multilateral trade agreements. Those who favour such inclusion do so in the name of eliminating policy-induced distortions of international trade and investment flows and deterring a competitive “race to the bottom” by nations attempting to stimulate exports and/or attract foreign investment by offering cost advantages based on low standards of protection for workers or the environment. Opponents argue, on the other hand, that efforts to harmonize such policies on a global basis would violate legitimate differences in national needs, preferences, and priorities as revealed through democratic processes. Even more to the point, they note, is that using trade sanctions to punish countries found to have violated the standards incorporated into wto-sponsored agreements is likely to be counterproductive. The reasoning is that, because poverty is the major factor associated with low levels of labour and environmental protection, sanctions that slow the economic development of poor countries by blocking their exports are likely to perpetuate rather than alleviate the very situation the sanctions purport to address. Above and beyond the various arguments for and against incorporating such harmonization of standards into trade agreements is the fact that the overwhelming majority of developing nations are vehemently opposed to any such broadening of wto authority. They regard it simply as a vehicle for disguised protectionism on the part of rich countries fearing competition

15 Ostry, “Convergence and Sovereignty,” 60.

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from goods and services produced at lower cost in poorer nations.16 Indeed, it was President Clinton’s surprise endorsement of labour standards enforced by some form of sanctions that many observers believe to have been the major cause of the collapse of the ill-fated Seattle Round even before it got underway.17 Although the member nations of the wto recouped the Seattle debacle by agreeing, in November 2001, to an agenda for the Doha Round, planned to conclude in 2005, these standards issues will almost certainly cause further difficulties in the actual negotiations. And the persistent tensions, papered over in the agenda-setting discussions, between the provisions for the protection of intellectual property incorporated into the Uruguay Round agreements and the demand of developing nations for access to low-cost drugs to treat diseases wreaking havoc among their populations has already delayed agreement on this issue (with the United States the lone holdout) beyond the anticipated end-of-2002 deadline. I have just described a number of developments that have exacerbated the tension between international economic integration and the desire for policy autonomy on the part of nation-states. These include the increased demand for the codification of international norms arising from the expansion of economic transactions across international boundaries, the rising prominence of both mnc s and ingo s, the proliferation of international organizations and treaties that create international law, the spread of democracy giving enhanced legitimacy to national preferences and priorities, and the concrete examples of how these contradictory demands play out at the regional level in the European Union and at the global level in the World Trade Organization. The question then arises as to

16 Speaking at the annual meeting of the World Economic Forum, President Ernesto Zedillo of Mexico commented that “forces from the extreme left, the extreme right, environmentalist groups, trade unions of developed countries and some self-appointed representatives of civil society are gathering around a common endeavour: to save the people of developing countries from ... development.” World Economic Forum, New Beginnings: Making a Difference: Report on the Annual Meeting 2000 of the World Economic Forum (Geneva, Switzerland: World Economic Forum, 2000). 17 The carrot may be more effective than the stick. For example, in an unprecedented bilateral agreement signed in 2002, the Cambodian government undertook to improve respect for modern labour rights in its garment industry and to accept monitoring by the International Labour Organization (ilo) in return for an 18 per cent bonus in its US annual textile quota. Amy Kazmin, “US Sportswear Giant May Be Ready for a Return to Cambodia,” Financial Times, 18 June 2002.

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whether there are any analytical principles or concepts that can help bring order to these contradictions and alleviate the tensions inherent in them.

macroeconomic aspects o f t h e “ i m p o s s i b l e tr i n i t y ” In The Economics of Interdependence, Richard Cooper posed the “impossible trinity” of open-economy macroeconomics: that a country cannot simultaneously maintain fixed exchange rates, an independent monetary policy, and unrestricted international capital flows but must choose any two of the three and give up the third. Some thirty years later, Dani Rodrik offered a parallel “trilemma” in the political sphere, asserting that international economic integration, the nation-state, and mass politics cannot coexist. Once again, he argues, we must choose any two of the three, where “mass politics” is defined as a situation in which democratically controlled political institutions are responsive to a popular will expressed through the exercise of an unrestricted franchise combined with a high degree of political mobilization.18 The tensions I have described in the preceding section can, in fact, be seen as examples of the pulling and hauling among these three mutually inconsistent goals. Rodrik himself resolves the trilemma by opting (in the double sense of regarding it as both most likely and most desirable) to sacrifice the sovereignty of the nation-state in many areas in favour of a form of global federalism, with “supranational promulgation of rules, regulations, and standards.”19 But, as he freely admits, this prediction is nothing more than a “bet” based on optimism and his own preferences. The question remains: What further light, if any, can the existing body of analysis and alternative models in the realm of political economy shed on a possible resolution of this conundrum? One possibility might be to extend the concept of an optimum currency area to encompass fiscal as well as monetary policy, thus creating an analytical construct for an optimum policy area, or, more precisely if more awkwardly, an optimum macropolicy area, where macropolicies are defined as policies directed toward income stabilization and economic growth. Such an extension might indeed seem logical in light of the myriad practical

18 Dani Rodrik, “How Far Will International Economic Integration Go?” Journal of Economic Perspectives (Winter 2000): 180. 19 Ibid., 185, italics in the original.

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problems that are likely to interfere with the effective application of monetary and fiscal policies for these purposes if their domains are different.20 There is, of course, a rich literature focused on defining the characteristics of an optimum currency area – that is, the geographical boundaries within which the welfare costs of giving up the independent use of monetary policy as a stabilization tool are low compared to the benefits of permanently eliminating the costs of exchange-rate variability and its associated risks. The concept was introduced by Robert Mundell in the late 1960s in the course of the ongoing debate on the relative merits of fixed versus flexible exchange rates. Mundell’s criterion was apparently simple: The optimum currency area must coincide with the area over which labour can move freely out of regions with unemployment and into those experiencing inflationary pressure.21 One of the implications of this labour mobility criterion, as Mundell himself pointed out, is that the optimum currency area is likely to be small. This point is reinforced by the fact that Mundell’s definition requires perfect labour mobility in the occupational as well as the geographical sense. His optimum currency area, in other words, must be perfectly homogeneous; “it must, indeed, be coexstensive with the single-product region.”22 But as Mundell anticipated and others were quick to elaborate, the identification of a small, homogeneous region with the optimum currency area is fraught with contradictions, for such a region will inevitably be extremely open in the sense that the foreign trade sector represents a large part of its economy, which, in consequence, will be heavily dependent on and sensitive to influences from the outside world. In particular, as McKinnon has pointed out, the exchange-rate flexibility required for monetary independence implies loss of control over the domestic price level in a highly open economy and is thus likely to undermine the liquidity value and the general acceptability of the domestic currency.23 20 This does not imply that all fiscal policy should be conducted at the same level as monetary policy; most countries have several levels of fiscal jurisdiction. For a more extensive discussion of this issue, see Marina v.N. Whitman, “Place Prosperity and People Prosperity: The Delineation of Optimum Policy Areas,” in Reflections of Interdependence (Pittsburgh, Pa.: University of Pittsburgh Press, 1979), 65-6. 21 Robert A. Mundell, “A Theory of Optimum Currency Areas,” American Economic Review 51 (Sept. 1961): 657-65. 22 Peter B. Kenen, “The Theory of Optimum Currency Areas: An Eclectic View,” in R. Mundell and A. Swoboda, eds, Monetary Problems of the International Economy (Chicago: University of Chicago Press, 1969), 44. 23 Ronald I. McKinnon, “Optimum Currency Areas,” American Economic Review 43 (Sept. 1963): 717-25, and “Optimum World Monetary Arrangements and the Dual Currency System,” Banca Nazionale del Lavoro Quarterly Review (Dec. 1963): 366-96.

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In the decades since Mundell and McKinnon wrote their seminal papers, scholarly analysis of the issues they addressed has moved well beyond the simple, static Keynesian and price-elasticities assumptions on which their models were based.24 But none of the more sophisticated elaborations has, to my knowledge, resolved the basic conundrum posed by the Mundell-McKinnon paradox:25 that the small, homogeneous economy required by Mundell’s labour-mobility criterion is virtually certain also to be highly open, thus contradicting McKinnon’s point that only in a relatively closed or self-sufficient economy is an independent monetary policy, and the associated flexibility of the exchange rate, likely to be compatible with domestic control over the price level. Without such control, experience has shown, confidence in and therefore acceptability of the domestic currency is likely to collapse. The kinds of problems confronted by a currency union that fails to meet one or another of these criteria is illustrated by the issues currently confronting the conduct of monetary policy in the emu. Stubbornly high unemployment in some of the larger member countries, particularly Germany, indicates the need for monetary ease, while inflationary pressure in others, such as Spain and Portugal, militates against it. Such problems are predictable given the low degree of labour mobility, both geographical and occupational, not only between but even within emu member countries. The emu is clearly not an optimum currency area by the Mundell factor-mobility criterion. The strong political commitment to maintaining and extending the emu, together with the fact that it is already a fait accompli, makes its breakup virtually unthinkable. But the difficulties confronting the European Central Bank are not likely to attenuate without significant structural changes, including above all a substantial increase in labour mobility. If extending the concept of an optimum currency area to define the criteria for an optimum macropolicy area encompassing fiscal as well as monetary policy is to prove useful, it must be based on a currency-area 24 For a survey of this literature, see Marina v.N. Whitman, “The Open Economy Macromodel: Interactions Between Theoretical Developments and Real-World Behavior,” in Arie Arnon and Warren Young, eds, The Open Economy Macromodel: Past, Present and Future (Amsterdam: Kluwer Academic Publishers, 2002), including cited references. 25 The United States springs immediately to mind as an example that runs counter to the paradox. But two points must be noted. First, the United States is characterized by a uniquely high degree of labour mobility. And, second, the structure of federal taxes and transfer payments automatically generates equilibrating changes in the regional allocation of tax revenues and expenditure outlays when different regions of the country experience different exogenous shocks.

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definition free of the contradictions just outlined. One starting point for such an alternative criterion is the proposition that the macroeconomic costs of being part of a larger currency area are proportional to the extent to which the optimal rate of inflation for the economy under consideration diverges from that for the rest of the currency area. This criterion can be clarified with the aid of a simple Phillips-curve analysis.26 The optimum rate of inflation for an economic system is then determined by the point of tangency between the Phillips curve, which represents the attainable combinations of unemployment and inflation determined by the structural characteristics of the economy, and the community-indifference curve, which represents, in this case, the politically determined trade-off function between unemployment and inflation. Deviations in the optimum rate of inflation between different economies can be caused by differences in either their Phillips curves, their trade-off functions, or both. This point is illustrated graphically, for the two-region case, in Figure 1.27 It is assumed here that deviations in optimum inflation rates are due to differences in the underlying Phillips curves – that the trade-off preferences of both regions can be represented by the same family of II curves. (The case where the deviation is due to differences in the community-preference curves could also be examined graphically, but any conclusion would require specific assumptions about the distribution of adjustment costs between the partner economies.) Note, incidentally, that since both inflation and unemployment are presumed to represent costs in welfare terms, the curves of the trade-off map represent higher levels of economic welfare as they approach the origin, where unemployment and inflation are both zero. In the special case where the adjustment burden is equalized, in the sense that both regions have the same unemployment rate after joining the common-currency area, the common inflation rate can be found in Figure 1 by locating the point where the two regions’ Phillips curves intersect and then extending a perpendicular to the vertical axis on which the common rate of inflation is measured. It is then clear that the cost of belonging to a common-currency area is proportional to the initial (precurrency merger) discrepancy between the optimum rates of inflation in the two regions. When 26 The controversy surrounding the long-term stability of the Phillips curve is not critical to this discussion. Even if the Phillips curve is not stationary, desired rates of inflation may still differ between economies. 27 This figure, and the discussion that accompanies it, is taken from Whitman, “Place Prosperity and People Prosperity,” 75-8.

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Figure 1 Harmonizing rates of inflation: The welfare effects

P1 P2

I o⬘

Rate of inflation (per cent)

Io

P 2⬘

I1 p1

P1

p2 P2

p 2⬘

P 2⬘ 0

u1

u2

u⬘2

I1

I o I o⬘

u

Unemployment rate (per cent)

the optimum rates of inflation are p1 and p2, based on underlying Phillips curves P1 and P2, the constraint of a common inflation rate will reduce total welfare in each of the two regions from the level represented by I1 to that represented by I0. If, however, the Phillips curve of one of the regions were represented by P´2, the comparable costs would be represented by the move from I1 to I´0, clearly a greater reduction in economic welfare. This conclusion is not confined to the specialized case of an equalized burden of adjustment. Assume, on the contrary, that the rate of inflation in the common-currency area settles at p1, implying that region 1 bears none of the adjustment cost, remaining on the same indifference curve as before. Then the total adjustment burden borne by region 2 will be greater, in the sense that it will move to an indifference curve representing a lower level of economic welfare, when its relevant Phillips curve is represented by P´2 rather than P2. Analogously, when it is region 1 that bears the full burden of adjustment, this burden will be greater when the common rate of inflation is p´2 than when it is p2. Regardless of how the burden of adjustment is distributed, the total welfare loss involved in moving to the

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common rate of inflation implied by a common currency will be greater, ceteris paribus, the greater the initial discrepancy between the optimum inflation rates in the two regions.28 This simple analysis generates an alternative criterion for the delineation of an optimum policy area: The regions or countries comprising such an area should vary as little as possible in their optimum inflation rates. For nations or regions with substantial differences in economic structure leading to substantial differences in the loci of attainable inflation-unemployment combinations represented by Phillips curves, or in the preferences that determine their subjective trade-offs between the two, the costs associated with the maintenance of a common monetary policy and severely constrained fiscal policies are likely to be high.29 This conclusion, in turn, yields at least two alternative implications for policy. On the one hand, it suggests that countries widely divergent in this respect should remain separate policy areas. On the other, if the decision to merge into a common macropolicy area has already been made, efforts should be undertaken to reduce the divergences among the optimum inflation rates of the member countries by exerting pressures for either their indifference maps, their Phillips curves, or both to converge. As regards the preferences and priorities that constitute a community-indifference map, one might anticipate that the very fact of membership in a larger “community” is likely to reduce these differences over time. However, such convergence may not occur quickly enough to guarantee the political sustainability of the economic union. A concern that such convergence may not be proceeding sufficiently rapidly among substantial segments of the member countries’ populations is one way to interpret the efforts of the eu’s executive, legislative, and judicial bodies to reduce or eliminate what has come to be called the “democratic deficit.” This term refers to the fact that quasi-governmental decisions are being made by unelected bodies whose accountability to the constituent electorates is very tenuous. The kinds of changes required to bring about convergence of member countries’ Phillips curves (or, more realistically, a three-dimensional ver28 Great distances or other natural barriers to accessibility may, of course, prevent full price-equalization even between regions of a single country (Alaska and Hawaii in the US, for example), but in the absence of such barriers, pressures for price-convergence will be strong. 29 Some empirical support for this assertion is offered by G.C. Archibald, “The Phillips Curve and the Distribution of Unemployment,” American Economic Review 59 (May 1969): 12434. Archibald derives this result for both the United Kingdom and the United States. However, his analysis uses data from the 1950s and 1960s, and, to my knowledge, has not been updated.

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sion of Phillips curves incorporating rates of economic growth) are quite different. Stated as succinctly as possible, the policies involved here are the provisions governing taxation, regulation, and the creation or reconfiguration of economic institutions that affect the structural characteristics of an economy. It is such policies that, in the majority of cases, figure in the issues regarding deeper integration, at both the eu and the global levels, that were raised at the beginning of this chapter. And it is to the more detailed discussion of such policies and the prospects for their convergence that I now turn.

convergence of structural policies: to p d o w n o r b o t t o m u p ? The convergence of structural policies associated with deep integration can come about through two different routes or through some combination of the two. One is the “top-down” application of “hard law” created by formal treaties and conventions signed between sovereign states and ratified by national legislatures. The other is the “bottom-up” creation of “soft law” either through guidelines, recommended practices, nonbinding resolutions, or other multilateral political documents that lack the force of the formal agreements cited in the preceding sentence or through promulgation by private-sector organizations with a multilateral reach.30 Examples of the first category of soft law include un General Assembly resolutions, International Monetary Fund (imf) codes and standards, and G20 communiqués. Examples of the second category include the requirements developed by the International Accounting Standards Board and the standards imposed by credit-rating agencies, stock exchanges, and the International Standards Organization (iso). For the nations of the European Union, the role of hard law promulgated at the supranational level has grown steadily in recent years. As of 1995 one particularly knowledgeable observer estimated that “in the economic sphere, less than 50 percent of existing regulations are now of national origin. One instance of a supranational entity, the European Commission, has become the principal source of regulation.”31 In light of the commission’s activities since 1995, along with the rulings of the European Court of Justice, 30 Drezner, “On the Balance between International Law and Democratic Sovereignty,” 324, divides the two sources of international law into “treaty law” and “customary law,” a distinction similar to the one noted above. 31 Jean-Marie Guéhenno, The End of the Nation-State (Minneapolis: University of Minnesota Press, 1995), 50.

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which has tended more often than not to uphold the rulings of the commission in disputes with national authorities, the percentage of economic regulations originating at the supranational rather than the national level has almost certainly increased further since that year. At the global (or at least massively multilateral) level, the promulgation of hard law affecting policies and institutions traditionally regarded as “domestic” was stimulated in the mid-1990s by the Uruguay Round’s creation of the wto and the expansion of its scope to encompass such policy areas as trips, trims, and market access for services. But the regulatory areas affected by this 1994 agreement have been relatively limited, and efforts to extend them have been thwarted so far by the strong opposition of many developing-country members of the wto. Similarly, efforts to promulgate a Multilateral Agreement on Investment (mai) that, after ratification, would have been binding on the member countries of the Organization for Economic Cooperation and Development (oecd) – that is, on virtually all the industrialized countries – collapsed in the face of opposition from several member countries, particularly France, and the powerful adversarial tactics of a number of ingo s. Although expansion of supranational hard law in the economic sphere has been limited where large numbers of countries that are geographically dispersed, culturally divergent, and at widely varying levels of economic development are concerned, the growth of soft law has not been similarly constrained. As Ostry points out, “[I]n the financial sector there are a number of intergovernmental institutions such as the venerable Bank for International Settlements (bis) created after World War I, the 1984 International Organization of Securities Commissions (iosco) and, most recently, the International Association of Insurance Supervisors (iais) formed in 1995.”32 In Ostry’s view, however, the inability of governments and intergovernmental institutions to keep pace with the accelerating rate of global economic integration has produced a move toward self-regulation not only in financial services, but also in the new marketplace of electronic commerce.33 Such self-regulation may occur through private-public interactions such as that between the International Accounting Standards Board (iasb), a private organization created in 2001, which is in the process of developing a hotly debated set of supranational standards for accounting practices, and the eu Commission, which has mandated the adoption of 32 Ostry, “Convergence and Sovereignty,” 58. 33 Ibid.

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the iasb standards by all eu firms by 2005. Or it may occur through the pressures stemming from standards promulgated by purely private organizations whose multinational reach has a significant effect on international capital markets, such as credit-rating agencies and stock exchanges. The received wisdom in most discussion of the pressures for system convergence as a result of deepening economic integration is that these pressures are making it increasingly difficult and costly for nations to resist moving toward the American (sometimes also called Anglo-Saxon) style of capitalism. Certainly, this is the view popularized by Thomas Friedman in his description of the policies required by what he has termed “the Golden Straightjacket.”34 As summarized by Rodrik, these policies are “tight money, small government, low taxes, flexible labor legislation, deregulation, privatization, and openness all around,”35 for which the US represents the gold standard. Similarly, Ostry argues that “a confluence of unrelated events ... are accelerating the global reach of investor capitalism and deepening the push for convergence to an ‘Anglo-Saxon’ corporate governance model in which the stockholder is king.”36 Or as she puts it more colloquially in conversation, “convergence toward the American model, which is fluid, flexible, disposable.” Certainly the increasing globalization of private markets for goods, services, and capital has intensified pressures on countries to increase their competitiveness in international trade and to create a legal and regulatory climate attractive to foreign capital in both direct and portfolio forms. But pressures to adhere to the sorts of policies described in the preceding paragraph have also been generated by such multilateral institutions as the imf and the World Bank through their insistence that current or would-be borrowers adapt their policies to what has come to be called the “Washington consensus.” This set of prescriptions essentially extends the requirements imposed by private capital markets, as described in the preceding paragraph, into the sphere of public borrowing and lending as well. In just the last year or so, however, the lessons learned from recent currency crises, together with heavy pressure from ingo s, including embarrassing and sometimes paralyzing street demonstrations, have caused these organizations to begin to question the Washington consensus and rethink their criteria for credit-worthiness. Similarly, while the gatt-wto has in the past tended to focus on and promote issues and policies favoured by 34 Thomas Friedman, The Lexus and the Olive Tree: Understanding Globalization (New York: Farrar, Straus and Giroux, 1999). 35 Rodrik, “How Far Will International Economic Integration Go?” 182. 36 Ostry, “Convergence and Sovereignty,” 62.

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American-style capitalism, the agenda for the new round of trade negotiations initiated at Doha late in 2001 reflected a commitment to making this the “development round” – that is, to bringing to the fore and dealing with matters of particular concern to developing nations. In a variety of nonfinancial areas, in contrast, it is the rules and standards of the European Union, rather than those of the United States, that are extending their reach in the global economy. The most widely noted instance of this dominance was Brussels’ refusal in 2000 to approve the General Electric-Honeywell merger. This negative decision resulted in the abandonment of the deal even though both companies are US-based and the American antitrust authorities had already given their approval. Much more widespread, though less noticed, has been the impact of eu regulations affecting both the characteristics of goods and services that are internationally traded and the processes by which they are produced. This is because, where protection of consumers or of the environment is involved, eu requirements are generally more stringent than those of the United States or of most other nations. This stringency is grounded in the eu’s strong adherence to the precautionary principle, which holds that, in cases where there is uncertainty regarding the possibility of harm, rules and standards should err on the side of caution. The eu has not always prevailed when specific applications of the precautionary principle have been submitted to the dispute-settlement procedures of the wto, whose sanction is necessary for a provision to be incorporated into the formal body of supranational hard law.37 But its record in creating what is in effect global soft law is more impressive. The eu’s fifteen nations together constitute the world’s second-largest market – the United States remains the largest – and non-eu companies that compete in the global marketplace, or hope to do so, are increasingly designing and manufacturing all their products to conform to eu requirements. This is because customizing products to meet different rules and standards in different countries would vastly increase complexity and expense; uniformity requires that the most rigorous regulations and standards prevail. Thus it is that Fisher-Price toys, Carrier air conditioners, Toyota (as well as other makers’) cars and suv s, and Procter and Gamble dishwasher detergents all have been, or soon will be, adapted to meet eu safety, environ37 The wto Appellate Body ruled in January 1998 that the eu ban on beef treated with growth hormones was not based on adequate scientific evidence and therefore violated international trade rules. When the eu refused to lift the ban, the United States and Canada, which had together brought the complaint to the wto, imposed trade sanctions against the eu roughly equivalent to their estimated export losses from the ban.

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mental, and recycling rules. And, as regulatory harmonization across the eu proceeds, more and more products, wherever they are made and wherever they are sold, will be de facto subject to the soft law thus created. The same is true of the processes involved in international commerce. Over the past two years, for example, nearly 200 US companies, producing a broad range of goods and services, have signed “voluntary” agreements to abide by eu privacy rules, which affect the transfer and use of online data about individuals and thus have an impact on virtually every firm that has workers, suppliers, or customers within the eu’s borders.38 Perhaps the greatest impact of such eu soft law is on farmers, primarily but not exclusively American, who make use of biotechnology in genetically modifying their crops. Because of stringent eu restrictions and labelling requirements on genetically altered foods or ingredients, multinational food processors are increasingly refusing to buy them on the grounds that they are likely to cause marketing problems in Europe. In June 2002 the US threatened to bring legal action through the wto against the eu for its refusal to approve some genetically modified crops, despite their having been approved by eu scientists, allegedly because of political sensitivity to European consumers’ concerns about their possible health and environmental risks (concerns that have led to such crops being labelled “frankenfoods” by those suspicious of their potential effects). This illegal ban, the US argues, is costing it millions of dollars a year in lost exports.39 The pressures for system convergence created by both hard and soft supranational law have tended to be toward US-style capitalism in the realm of finance and corporate governance and toward eu-style regulatory stringency regarding product and process regulations. In still other areas, the nature of the ultimate compromise is less clear. As regards the soft law of global accounting standards, for example, a fierce struggle for the hearts and minds of the iasb is currently being waged between the “principlesbased” approach that prevails in Europe and the “rules-based” philosophy that underlies the US’s generally accepted accounting principles (gaap). 38 Brandon Michener, “Increasingly, Rules of Global Economy Are Set in Brussels,” Wall Street Journal, 28 April 2002. 39 Michael Mann, “US Warns eu on Modified Crops,” Financial Times, 21 June 2002. Since that time, Zambia, confronted by a severe drought and resulting food shortage, has refused to accept American aid in the form of genetically modified seeds on the grounds that potential “contamination” might prevent it from exporting such crops to European markets in the future. This action has caused the US to fear that a de facto ban on imports of genetically modified crops or seeds might spread beyond the eu and has increased the likelihood that the US will bring a case against the eu on this issue.

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Just how things will settle out by 2005, when all firms publicly traded within the eu will be required to conform to iasb rules, is as yet unclear although the recent rash of accounting-related scandals in the United States has certainly unseated gaap from its gold-standard throne. And on some issues, such as corporate governance, where there is considerable pressure for and anecdotal evidence of convergence toward American shareholderfocused practices,40 at least one econometric analysis suggests that convergence has been much greater in form than in substance or practice.41 Thus far, however, two things seem clear from experience. One is that the tension between deepening international economic integration and the desire for policy autonomy on the part of nation-states will continue into the foreseeable future. Another is that, although top-down hard law and bottom-up soft law will both play a role in the resolution of particular instances of this tension, the latter approach, because of its greater flexibility and more rapid adaptability, is likely to play the starring role.

conflicting domains: p r i vat e v e r s u s p u b l i c g o o d s Once again, Cooper was the first to make a point that now seems obvious: For private markets in goods, services, and factors of production, the optimum currency – or macropolicy – area is the world. The welfare justification for nation-states lies in the existence of public or collective goods and of differences in the consumption preferences for such goods among the citizens of different countries.42 The principle of subsidiarity extends this logic to subnational governmental units as well. Among the many public goods in regard to which citizens express their preferences through the political process, and with whose provision governments at all levels are concerned, are such myriad determinants of satisfaction, or dissatisfaction, as national defence, income distribution, en40 See, for example, Organization for Economic Cooperation and Development, “Corporate Governance in oecd Member Countries: Recent Developments and Trends,” oecd report, 2000, . See also World Bank, “Corporate Governance: A Framework for Implementation,” World Bank paper, 2001, 41 Tarun Khanna, Joe Kogan, and Krishna Palepu, “Globalization and Corporate Governance Convergence? A Cross-Country Analysis,” Aspen Institute/William Davidson Institute Conference (Aspen, CO, Sept. 2001). 42 Richard N. Cooper, “Worldwide vs. Regional Integration: Is There an Optimal Size of the Integrated Area?” in Fritz Machlup, ed., Economic Integration: Worldwide, Sectoral, Regional, Proceedings of the Fourth Congress of the International Economic Association (New York: Halsted Press, 1977), 41-53.

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vironmental quality, worker protection, level of physical infrastructure, and countless others. One such public good that has played a significant role in trade disputes is culture. When France imposed a discriminatory tax on foreign films and when Canada refused to allow the Borders bookstore chain to open stores there, the rationale given for these barriers to trade and investment was the preservation of the national culture, as exemplified in films by French filmmakers and books by Canadian authors, in the face of potential domination by carriers of foreign (in these cases, American) products. Even such a staunch defender of trade liberalization as Sylvia Ostry has been heard to remark more than once, in this context, “only the Americans would fail to distinguish between culture and ball bearings or chickens.” Earlier in this chapter, I suggested that the gross welfare costs (not taking into account the benefits) of forming a common macropolicy area could be described in terms of the size of the premerger difference between two countries’ (or regions’) optimum inflation rates. This difference was shown graphically to result from differences in the countries’ structural trade-offs between unemployment and inflation, represented by Phillips curves, and/or from the subjective combinations of the two preferred by their citizens, represented by community-indifference maps.43 Conceptually, this approach to measuring the costs of economic integration in the sphere of public goods can be extended to the arena of microeconomic policies as well, although mapping it would require as many dimensions as there are pairs of public goods that citizens care about and among which they have particular preferences. All this may be no more than an elaborate way of saying that economic integration between countries with very different needs, tastes, and priorities, as represented through the political process, is likely to be particularly difficult. But it does help to clarify why the North American Free Trade Agreement (nafta), the first free-trade area to encompass countries at widely different levels of economic development, was regarded as a pioneering step into the unknown. And it may also help to explain why the accelerating process of deep integration popularly termed globalization, encompassing more and more countries widely divergent in their economic, political, and cultural characteristics, has been accompanied by an intensifying backlash.

43 I abstract here from the adding-up problems associated with community indifference curves.

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Because human beings value both private and public goods, the tensions created by the divergent optimum policy domains that these two categories of goods imply are certain to persist. But these persistent tensions need not produce, as some have feared, a battle to the death between global economic integration and the nation-state. Rather, one can imagine the two coexisting in a state of symbiosis – not through a centralized world government but through a networked form of international governance, fostered in part by private organizations and in part by functional components of nation-states themselves. As described by one legal scholar, “[T]hese parts – courts, regulatory agencies, executives, and even legislatures – are networking with their counterparts abroad, creating a dense web of relations that constitute a new, transgovernmental order.”44 Many of today’s most successful corporations exercise control over the resources required to produce private goods and services not simply through ownership but, increasingly, through the ability to coordinate and thus effectively utilize resources owned by others.45 Similarly, nation-states may in the future find their effective sovereignty expanded rather than shrunk if they can manage a corresponding transformation in the provision of public goods, coordinating not only with other nation-states in order to achieve their goals, but also with governmental bodies at both the subnational and the supranational levels, as well as with public-private and purely private entities performing regulatory functions.

44 Anne-Marie Slaughter, “The Real New World Order,” Foreign Affairs (Sept./Oct. 1997): 184. 45 At the limit, this process produces what has come to be called a “virtual corporation.”

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Room for Differences? Social Policy in a Global Economy1 lars osberg In this volume there are those whose views are implicitly optimistic and those whose background music is less upbeat. Lars Osberg finds that “globalization” of trade in goods has in the past not imposed identical responses everywhere, particularly in terms of social policies. However, the World Trade Organization (wto) represents a qualitatively new level of pressure for policy “harmonization,” and it is not yet clear whether countries of different sizes and different levels of per capita gross domestic product (gdp) will continue to be able to find enough room to make their own policy adjustments in response to the emerging tensions of socio-cultural globalization.

Around the world, there is both widespread unease at the process of “globalization” as well as hope that it can produce a more prosperous future. This combination of hope and unease is due to the fact that although it is easily agreed that “globalization” has many impacts, there is great uncertainty as to what they all are. Will “globalization” produce a new era of abundance, enlightened social policies, and economic equity, or will it primarily benefit an entrenched global elite? Does “globalization” imply a worldwide trend toward cultural and social homogenization (more specifically,

1 Revised version of a paper presented at the International Forum on Globalization and Contemporary Capitalism, Wuhan University, China, 20 to 23 November 2001, cosponsored by the China Centre for Comparative Politics and Economics (cccpe), the Social Science Documentation Publishing House (ssdph) under the auspices of the Chinese Academy of Social Sciences, the School of Politics and Administration of Wuhan University, and the Ford Foundation. The comments of participants at the forum and of Mike Bradfield, Brian MacLean, and Andrew Sharpe provided great assistance in the preparation of this chapter, but all remaining errors are my responsibility.

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Americanization)? Might “globalization” imply that nations will no longer be able to implement different social policies appropriate to the specific needs and preferences of their different societies? The subject of this chapter is the connection between globalization and social policy. The first section begins by discussing three different meanings of the term “globalization,” while subsequent sections explore the implications of these differing conceptions for the analysis of globalization’s impacts. The second section focuses in particular on the fairly narrow interpretation by many economists that “globalization” is to be seen mainly as greater openness to international trade in goods. Since many worry that globalization will force a homogenization of social policies, this section discusses the extent of current divergences in social policy among nations that are heavily dependent on trade. The second section argues that substantial heterogeneity in social policy can, in general, coexist with high levels of merchandise-trade dependence. However, in both trade and social policy, “the devil is in the details.” A political-economy perspective would argue that trade between nations always happens within a specific institutional context of international agreements and a specific balance of international power. The language of particular trade treaties, the case law of interpretive rulings that builds up over time, and the balance of power that nations actually have in enforcing adherence to such rulings will, to a greater or lesser degree, affect the room that governments have to implement divergent policies. Hence, from a political-economy perspective, it is the specific language, interpretation, and power context of the trade treaties now implementing “globalization” that will determine whether it tends to produce greater homogenization of social and economic policy. The fourth section of the chapter is, frankly, more speculative. It suggests that the first section’s adoption of the economist’s conceptualization of globalization as “greater merchandise trade dependence” and the second section’s use of the political-economy perspective of increasing commonality of economic regulation are both perhaps a bit narrow. From a socio-cultural perspective, the explosive growth of international travel, the penetration of multinational marketing and cultural products to every corner of the globe, and the dramatic and ubiquitous development of global information access through the Internet may be some of the most important long-run channels of a “globalization of culture.” If globalization produces cultural changes that alter the demands citizens make of their governments, the long-run implications for social policy may be quite profound.

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The chapter concludes with a brief discussion of the logical and practical relationships between these three conceptions of globalization.

wh at i s “ g l o ba l i z at i o n ” ? O’Rourke and Williamson (2000) have argued persuasively that globalization is not a new phenomenon, at least not in the sense of reduced obstacles to the movement of goods and factors of production across nations and the substantial interdependency of national-factor and goods markets. Indeed, it can be argued that, at least in Europe and America, the globalization process of the late nineteenth century was in some ways more profound than globalization in the twentieth and twenty-first centuries. The growth of world trade and the expansion of international investment of the late nineteenth century occurred in an environment in which intercontinental movements of labour were considerably less impeded by barriers to immigration than they are now or have been for the last fifty years.2 Hence globalization – in the sense of greater international economic interdependence – is not a new phenomenon. In the nineteenth century much of the world was colonized, but for those states that were independent, national sovereignty had a clear meaning. Governments did not then have to worry about rulings by international agencies, such as the World Trade Organization, on whether or not domestic policies constituted “subsidization” to local enterprises. States could ban the importation of particular goods (e.g., on public health grounds or for any reason at all) without running afoul of their obligations to international organizations. Governments were also perfectly free to offer advantages and subsidies to local businesses that were not made available to foreigners – the principle of nondiscriminatory behaviour, or “national treatment,” embedded in the limited number of trade treaties that existed was extremely limited, and governments often implemented policies of local preference. In the nineteenth century, international markets became linked by trade, investment, and the movement of labour – but largely in the absence of treaties, covenants, and international agreements that constrained the domestic legislative and regulatory options of national governments. The institutional context of the twentieth and 2 O’Rourke and Williamson (2000) emphasize the importance for both European and American economic development of the fact that from 1850 to 1910 labour-surplus Europe exported millions of workers to labour-scarce America, which improved average incomes in both places. During this same period, there were substantial impediments to emigration from South Asia and China – hence “free movement of labour” was only true in part of the world.

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twenty-first centuries is clearly very different. Is the globalization process of the nineteenth century at all comparable to that of recent years? During the nineteenth century, the main obstacles to international trade were (aside from transportation costs) high tariffs and occasional quotas on imports. Hence, since O’Rourke and Williamson (2000) think of globalization in terms of reduced obstacles to the movement of goods and factors of production across nations and a consequent increase in the trade dependence of national economies, in an analysis of this period it is tariffs and quotas on merchandise trade that are relevant. This usage of “globalization” as corresponding to increases in merchandise exports as a fraction of gross domestic product is very common in economics – for example, in the excellent International Monetary Fund (imf) survey paper by Crafts (2000).3 One definition of “globalization” is therefore: (1) the increase in linkages between national markets for goods that occurs when tariffs between nations are reduced and quantitative restrictions on imports are progressively abolished.

However, although this conception might be an adequate framework for analysis of the nineteenth century and the first three quarters of the twentieth century, the institutions that govern international trade relationships now have a much more comprehensive conception of “obstacles to trade.” The expansion of world trade after the Second World War under the auspices of the General Agreement on Tariffs and Trade (gatt) occurred in an environment where nations agreed to reduce obstacles to trade in the form of tariffs and to foreswear (at least generally) quotas and quantitative limits on imports, but nontariff barriers to trade were largely untouched. Since 1994 the World Trade Organization has taken a much harder line. In reaction to the use of “special” institutions and programs to camouflage trade barriers, the mandate of the wto has been to establish a common set of rules for all its members so that international trade can occur “on a level playing field.” The arbiters of trade complaints then judge whether differences between nations in laws or regulations represent valid exercises of national sovereignty in the pursuit of domestic objectives (which just happen to affect trade flows) or illegal attempts to influence trade flows (which also have an incidental impact on domestic policy objectives). Many areas have been touched by these disputes, but the regulation of cultural industries is a particularly important example. 3 See, in particular, pages 25-8. Crafts does not explicitly define globalization, but his emphasis on merchandise trade as a fraction of GDP is consistent.

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As well, the historic emphasis in trade negotiations on freer trade in goods has been broadened in recent years to an attempt to establish free trade in goods and services. In the abstract, some economic theorists may think of both goods and services as simply “commodities,” but international trade in services takes quite a different concrete form than trade in goods. Firms that produce export goods have a point of production whose labour relations and supply of capital are governed by the laws of the exporting country, with no necessary impact on the relations of production of the importing country. However, since a service typically cannot be stored, the actual production of services must usually occur where customers reside. As a consequence, “free trade in services” really means allowing the foreign firms that provide services (such as transportation, banking, and insurance) to enter domestic markets on an equal footing with local firms. In order to do that, foreign firms have to be able to produce abroad in much the same way as they do in their country of origin. Free trade in services therefore implies the freedom to import and export capital and technology (which is embodied in key workers and in the particular labour practices of foreign firms). If foreign-owned service firms are to compete in “service-importing” countries, the international regulatory environment therefore has to be compatible – which inevitably entails deregulating capital markets and pressures toward “harmonizing” labour market regulations. As well, nations differ substantially in the extent to which some services (such as prisons, hospitals, medical services, and education) are considered at all appropriate for production in the private sector. Hence, many people fear that pressures for “free trade in services” may conflict with local autonomy in deciding the appropriate boundaries of public and private spheres of activity. Given all this, in the current context a political-economy perspective would look beyond trends in merchandise trade to changes in the institutional context of markets and might add the following to definition 1 of “globalization”: (2) the tendency toward the establishment of global “common rules” governing trade in goods and services – that is, the reduction over time in differences in the local regulatory and legal environments of goods, services, capital, and labour markets that arise from the cumulative impact of international trade treaties and the interpretive decisions of the dispute settlement mechanisms that they establish.

However, although this is clearly a broader conception than definition 1, it may still miss much of the motivation of the antiglobalization movement.

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In a world in which one feature of popular protests against “globalization” is the destruction of local branches of the McDonald’s hamburger chain, it is clear that symbols matter. There is something about globalization that creates fears (at least among many non-Americans) of the loss of local cultural identities and distinctiveness – and it is also clear that some people care deeply about the possibility of such a loss. For centuries, the differences between local cultures around the world were partly sustained by their mutual isolation. That isolation is breaking down, with implications that are both positive and negative. One can use the International Forum on Globalization and Contemporary Capitalism as a positive example of the greater tendency around the world to learn from comparative international experience. Even as recently as ten or twenty years ago, it was much rarer4 for domestic policy discussions to be exposed to international comparative experience. In part, the trend to greater international cross-learning in the policy formation process is driven by the recent development of comparable international data to judge policy outcomes – for example, the Luxembourg Income Study data base. In part, it is due to the growth of international bureaucracies – for example, the Organization for Economic Cooperation and Development (oecd), the imf, and the World Bank. The result is a globalization of social policy discourse and an increasingly dense net of linkages between opinion-forming elites.5 Conferences like the International Forum on Globalization and Contemporary Capitalism may be invisible to the broader public, but cnn or Skytv are seen by many millions. When global media presence is combined with the multinational marketing of cultural and consumer products, teenagers in Wuhan, China, can disco dance to the tunes of Michael Jackson and Madonna, and consumers around the world can come to a common understanding of what trademarks (like the Nike “swoosh”) mean for high-status consumption. Although the multinational marketing of consumer products has a history that goes back to the earlier phase of globalization in the nineteenth century, it is increasingly ubiquitous. And 4 Obviously, the history of China since 1970 provides an extreme case of greater openness to international influences – but the same tendency is apparent even in oecd countries. 5 However, a greater tendency toward agreement among international policy elites can only be counted as a benefit if they are agreeing on wise and effective policies. An international consensus in favour of bad policy ideas has even larger social costs than a national consensus. See Stiglitz (2000) for a discussion of some of the costs of the “Washington consensus” during the East Asia economic crisis of 1997-98.

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the delivery of a common message of style and consumerism to the far corners of the globe has been immensely assisted by recent technological advances in satellite tv transmission and reception. Technological change has also made the Internet possible. The possibility of “surfing the Web” for breaking news, historic documents, statistics, chat rooms, pornography, and consumer goods is of very recent origin, and there is much speculation about long term impacts. However, it is clear that Internet use around the world will increase substantially in future years and that a much wider spectrum of the world’s population will have instant, common access to the same potential base of information (and misinformation). All this suggests that “globalization” has a socio-cultural dimension, which implies that a third possible conception might be: (3) an increased salience of common, shared, global cultural space – that is, the increasing commonality of cultural referents and symbolic discourse around the world.

If this is what one means by globalization, then it potentially has very strong implications for the sense of identity and norms of behaviour of individuals worldwide. Since governments around the world often appeal to the feelings of patriotism and civic mindedness that a sense of national identity enables, governments have reason for concern. Since social policy can, for present purposes, be thought of as “that set of public policies that seeks to improve equity in the distribution of economic wellbeing,” it crucially depends on the idea of a national community, within which redistribution is seen as appropriate. Furthermore, social policy is always embedded in a particular understanding of equity and of appropriate social roles. If global cultural trends change national social norms and local feelings of national identity, there may be strong pressures for changes to social policy.

g r e a t e r tr a d e i n g o o d s : t h e e c o n o m i s t s ’ p e r s p e c t i v e o n g l o ba l i z at i o n a n d s o c i a l p o l i cy It is often dangerous to generalize about the opinions of an entire occupational group – particularly a group as opinionated and cantankerous as economists. Nonetheless, it is also probably safe to say that the views of most economists on increased international trade in goods have been heavily influenced by Ricardo’s theory of comparative advantage. In arguing that

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greater international specialization of production increases economic efficiency, this theory has two potential implications for social policy. The greater aggregate economic output enabled by trade is forecast to increase the resources potentially available to finance social-policy initiatives, while the dislocations produced by greater trade dependence may increase the need for social policies to compensate those who lose out in the process. Because greater trade openness will hurt some industries, the initial structural adjustment to greater trade creates job losses in those sectors. As well, greater dependence on international markets often produces greater cyclical variability in aggregate output and higher cyclical unemployment. In both the short and the long term, greater trade openness therefore creates needs for social policy intervention. However, in principle, a more efficient allocation of resources could enable those who lose from greater trade to be compensated for their losses, with something left over as a net social gain. Critics of greater trade protest that these compensatory transfers are often not actually made – and if they are not, large sections of the populace may end up worse off in a freer-trade environment.6 However, advocates of trade liberalization (e.g., Frankel 2000) tend to downplay the importance of such adverse impacts on income distribution and to emphasize the potential that greater trade may have for dynamic gains in an increased rate of growth of the economy. If there are dynamic gains in more rapid growth (perhaps due to more rapid international transfer of leading-edge technologies), these gains in growth will rapidly accumulate, eventually leading to income gains that are considerably larger than the static gains in the level of output promised by the theory of comparative advantage. It is this promise of a gain in the long-run rate of economic growth that is the source of hope for globalization – particularly in the world’s poorer nations. And prior to July 1997, one could point to the countries of East Asia (particularly Taiwan, Hong Kong, Indonesia, Korea, Thailand, and Malaysia) as exemplifying the rewards in higher average incomes that greater integration into the world economy can bring to the citizens of poor nations. The export of labour-intensive goods (such as textiles) was the initial stage, but exports of more complex commodities rapidly followed (e.g., Korean automobiles and Malaysian electronic goods), and these economies changed beyond recognition. Since 1997-98 the picture has become more clouded – but one should not forget the huge impact on living standards of the previous decades of economic growth. 6 As well, Weisbrot et al. (2001) question whether aggregate outcomes have improved during the period of globalization.

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The East Asian example epitomizes the hopes of the advocates of globalization.7 However, the economic crisis8 of 1997-98 has changed the debate. In particular, there is a new focus on the role played by capital-market liberalization in enabling an initial crisis of financial confidence in a single nation to generalize into a major currency crisis and depression that spread across an entire region. The policy question is whether globalization in East Asia went “too far” – that is, whether the gains from globalization for poor countries are mostly to be had in greater openness of merchandise trade and long-term investment, while openness to short-term capital flows exposes poor countries to much greater risks for smaller returns.9 In thinking about the future impacts of trade liberalization, however, one also should remember that one can, in general, expect diminishing returns from greater trade liberalization. Large tariffs have significant impacts on the location of economic activity, but small tariffs have small impacts – indeed, when tariffs become very small they have to compete for attention in a firm’s decision making with international differences in myriad other cost factors (such as quality of infrastructure, labour relations, taxation regimes, etc.).10 Since the largest tariffs have already been eliminated from international merchandise trade by several decades of trade liberalization, further reductions should not be expected to produce equally large efficiency gains. As well, in thinking about the future, and the extension of liberalization to new domains of the economy, one should not forget that in attaining an efficient allocation of resources, the movement of commodities and of different factors of production are substitutes. In the classical theoretical example of trade between two nations with differing endowments of capital and labour, which produce capital-intensive and labour-intensive goods, one can trade goods with differing factor intensities, or the capital can move to the labour, or the labour can move to the capital. The implication is that if barriers to goods movement, long-term investment, and technology transfer have 7 Sub-Saharan Africa offers a much less optimistic picture of the cumulative impact of engagement in the global economy. 8 See, for example, Agénor et al. (1999) or Hill (1999). 9 In introducing exchange controls at the height of the crisis, the Malaysian authorities clearly signalled their opinion. Rodrik (2001) argues that they were basically right, but the debate goes on. Note that free trade in financial services entails greater openness to short-term capital flows. 10 The wto website notes that “Developed countries’ tariff cuts are for the most part being phased in over five years from 1 January 1995. The result will be a 40% cut in their tariffs on industrial products, from an average of 6.3% to 3.8%. The value of imported industrial products that receive duty-free treatment in developed countries will jump from 20% to 44%.”

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already been much reduced, the marginal gain from liberalization in another domain (such as services or short-term capital movements) is likely to be smaller than if that liberalization had not already occurred. Nevertheless, whatever the benefits of further trade liberalization, there has often been an agreement of both the political right and the left on the impact of greater merchandise trade on social policy. From the left has come the worry that greater openness will produce a “race to the bottom” in social policy, as states respond to the competitive pressures of imports on domestic firms by slashing the social benefits of workers. Under the slogan of “tina” (There Is No Alternative), right-wing commentators have often made a similar assertion: that social programs must be cut if domestic firms are to remain competitive in the new global trading environment. However, even when there is a complete absence of tariff barriers to merchandise trade, very substantial differences in social policy have persisted for many years. Heady et al. (2001, 6) note that “Social transfers vary enormously across the European Union.”11 Even within the US, where national legislation constrains state governments to a far greater degree than the member states of the European Union, there is substantial variability across states in the level of social benefits. (In 1997, for example, average monthly spending per social assistance recipient was nearly three times as high in Minnesota [$289.50] as in Mississippi [$107.20] – see Osberg 2000.) These differences in social spending have been in place for many years and have evidently not prevented firms in these different jurisdictions from competing with each other successfully in a trading environment free of tariff barriers to merchandise trade. As well, there have long been substantial differences in the structure of social-policy delivery in countries heavily dependent on trade and competitive with each other. Many comparisons can be made – but just as an example, one can cite Australia and Canada, two oecd nations that compete directly in many of their important export markets and that resemble each other in cultural origin, population size, income level, and degree of trade dependence. Historically, Canada has had a nationally administered, earnings-related Unemployment Insurance Plan and locally delivered social assistance, while Australia has had only a single flat-rate social benefit. Canada has had a mixed system of old-age security, partially dependent on 11 “Total social transfers vary from 19.9% (of household income) for Greece to 32.7% for Belgium; pensions range from 10.9% of household disposable income in Denmark to 23.4% for Italy; while non-pension social transfers range from 1.6% in Greece to 16.3% in Denmark” (Heady et al. 2001, 6). See also Bowles and Wagman (undated), who also emphasize the extent of national variation in social spending.

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prior earnings, while Australia has had a means-tested universal flat-rate pension. Australia has had a national system of collective bargaining, with wages awards by occupational group, but although Canadian firms are largely not unionized, where a union is certified, agreements are negotiated at the firm level. Australian health insurance is an uneasy mix of public and private provision – but two basic principles of the Canada Health Act are universality and public provision. All these programs are continually subject to revision – but the basic point is the diversity of social-policy delivery in two seemingly similar, heavily trade-dependent nations. Evidently, heavy dependence on merchandise trade and unique national social policies can coexist. Surveys (e.g., Brown 2000; Bowles and Wagman undated) of the literature on the impact of merchandise trade on labour standards consequently alternate between discussion of the fears that globalization produces a race to the bottom and consideration of the hypothesis that greater trade produces a tendency toward upward convergence. This heterogeneity in outcomes arises partly because the longer-term cost in aggregate technical efficiency of particular social-policy choices is often ambiguous (e.g., greater labour-market “flexibility” in the hiring and firing of workers has short-run gains for firms but long-run costs in decreased human capital formation through on-the-job training – hence lower productivity growth). Divergent social policies do impinge differentially on specific industries, but nations can “afford” to run different social policies because costs for some sectors are often balanced by benefits to others. As well, the costs of antipoverty transfers are typically a small percentage of total government expenditures and therefore make only a marginal difference to aggregate tax burdens. Because poor people have little, it does not take much to make a major difference in their lives. Hence these transfers are very important to their recipients – but they are a much smaller percentage of the incomes of the affluent majority. As a result, although the pressures of international trade are often used as an excuse for the advocacy of particular social-policy initiatives, nations have in the past competed successfully in international merchandise trade under a variety of substantially different social policy regimes.

who rules? “active” social policy and t h e n e w i n s t i t u t i o n a l f r a m e w o r k o f tr a d e What impact will the World Trade Organization have on social policy? If the only implication of the wto were a continuation of past trends toward decreased tariffs on goods and increased merchandise trade, then the

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wto’s role would not entail much that is new. In this case, evidence from the past on the coexistence of substantial trade dependency and social-policy heterogeneity would be directly relevant. However, the wto is, in at least two important respects, qualitatively different from the gatt regime that preceded it. Since the wto is aggressively pursuing “nontariff barriers” (and the trade-complaints adjudication process cannot be appealed) and since trade regulation under the wto is being extended to the service sector, it represents a new institutional framework, and past data may be of limited relevance. The wto was established in 1995.12 Clearly, there has not yet been much time in which to assess the cumulative impact of this new institutional framework for international trade. Some parts of the framework are even younger – for example, it was only in 1997 that seventy members of the wto concluded a financial-services deal covering more than 95 per cent of trade in banking, insurance, securities, and financial information. Extensions to the wto are now under negotiation, but the outcome is far from certain. In practice, it is the trade-complaints adjudication process that will give specificity to the general language of these treaties, but trade cases take time to be concluded. Since it is the cumulative impact of the adjudication decisions of trade tribunals that will determine the ultimate set of international restrictions on national sovereignty, one cannot yet know for certain what the wto framework will ultimately imply. Hence much of the anxiety about the wto framework is necessarily about what it might produce in the future – in particular, the constraints it might imply on new directions in social policy. In market economies, a core concern of social policy is to remedy inequity in the distribution of economic wellbeing that market processes otherwise produce. Governments do social policy because there is a societal judgment that market processes have not produced equitable outcomes, but they now do it in different ways in different countries because societies differ both in outcomes and in the equity judgments made about outcomes. However, in general a social-policy problem can be approached in two ways. Governments can either intervene in market processes to affect the distribution of market incomes (primarily by influencing wages and/or access to employment) or the state can transfer income or change taxes to affect the distribution of net income (after taxes and transfers). If, for example, factory closures create an unemployment problem, governments 12 The wto website notes that gatt was in existence for nearly fifty years previously but also emphasizes the substantial changes that the wto embodies.

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can respond with unemployment insurance or welfare payments to mitigate the impact of joblessness on family incomes. Historically, these responses have been very important in offsetting the social stresses that regional inequalities and cyclical instability otherwise create for a capitalist economy, but in recent years such transfer payments have been criticized in much of the literature as being “passive” social policy. Alternatively, by subsidizing a factory’s operations (perhaps by giving a wage subsidy, providing infrastructure, or training its labour force without charge), governments can help to ensure that workers continue to receive earnings and do not need transfer payments. This latter sort of intervention is now often referred to as “active” social policy and is increasingly popular as a policy direction in oecd countries (see Arjona et al. 2001). The problem is that the shift in emphasis in social policy to active interventionism13 in labour markets is occurring at the same time as the wto is setting new standards of noninterventionism. The transfer payments that “passive” social policy produced were generally not thought, in the gatt era, to represent barriers to trade.14 However, it is inescapable that when nations apply different “active” social-policy designs, industrial sectors will be differentially affected – which will necessarily alter the balance of international competitive advantage at the industry level. In “active” social policy, the policy objective is to change market outcomes, typically by changing the profitability to firms of hiring specific groups of workers. Wage subsidies have, for example, often been proposed as ways to encourage firms to offer employment to disadvantaged workers. Such subsidies also alter the relative costs of firms (indeed, they are intended to), which may give an advantage to a particular industry in export markets or in competing with imports. Under what circumstances would wage subsidies be ruled an illegal subsidy in international trade? Training programs can be either general in orientation or specifically focused on job-relevant skills in particular industries – and the latter skills are often best taught on the job. How far can governments go in training workers for the needs of a 13 In part, this represents a new labelling of policy interventions. Although, for example, a 1970s government would have advertised its commitment to regional policy (motivated by the social imperative of redressing regional disadvantage), this rhetoric is now passé. The language of the 1990s emphasized the necessity for an active national social policy to redress regional social exclusion – using similar methods as in the 1970s. 14 One illustrative exception was the challenge to the Canadian Unemployment Insurance system by the US fishing industry, which argued that since fishermen in Canada could claim unemployment insurance in the off-season, while similar workers in the US could not, the Canadian industry derived an unfair competitive advantage and should be subject to countervailing duties.

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specific industry before they give that industry an unfair trade advantage? Mandatory work programs for social-assistance clients provide firms with almost free labour – should a trade panel consider this a subsidy to local firms that is not available to their foreign competitors? Eventually, a wto panel will likely be asked to make this decision in the context of a specific case. Over time, a succession of judgments will build up a body of case law, and this accretion of precedent will form the set of constraints on governments. However, there is no reason to think that a series of individual judgments, made one by one, will in the end produce a desirable overall policy design. And even if the wto panels have some eye on the social implications of their decisions, these will still not be the result of any sort of national or democratic process. Country Differences in wto Impact Thus far, the discussion of the wto has been rather general, but in actual practice its impact will depend on the national context in which it operates. A useful example of differing contexts for trade rulings is Canada and China – two countries that are polar cases along a number of dimensions that are crucial to assessing the likely impacts of the wto, namely: 1 2 3 4

economic development institutional framework international power socio-cultural history

Canada is a rich nation that has always had a high level of international trade and capitalist-market relations of production. Compared to the European members of the oecd, the Canadian government’s policies are relatively noninterventionist, and a number of Canadian institutional practices (such as industrial relations or unemployment insurance) are closer to the American than to the European model of capitalist development. Hence Canada is likely to have relatively few adjustments to make in order to come into line with the wto agenda – at least compared to China. As a relatively poor country (at least in terms of its per capita gdp) with some regions of affluence (which are growing rapidly), China faces much greater structural problems in its efforts to ensure regional and social balance. The transition from a closed, planned economy to an open, marketoriented system is very recent and creates much unevenness and sudden new inequalities – in a context of very incomplete social-welfare mecha-

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nisms (e.g., for retirement pensions or unemployment benefits). The Chinese case is also greatly complicated by the rapid transition, and uncertainty, in economic institutions and systems of market regulation and property rights that it is now undergoing. Even in a country with a well-developed system of property rights and long habituation to market-based relations of production, there would be huge pressure on the social-policy system to intervene via “active” social policy to avoid social discontent. As it is, there is clearly much greater potential for wto rulings to conflict with national political and social priorities in China than in Canada. On the other hand, China is more powerful than Canada. Although Canada is more affluent, its population is 30 million, compared to China’s 1.3 billion. Nobody pretends that Canada is a “great power” in international terms, while China clearly is. Power matters – in international trade, as in other issues. As an example, one can cite Canada’s experience with softwood lumber exports to the US. Although Canada’s signature of the Free Trade Agreement (fta) with the US and of the North American Free Trade Agreement (nafta) with the US and Mexico as well as its accession to the wto should have guaranteed Canadian softwood lumber exports tariff-free access to the US market, this has not actually happened (see Appendix). In 2001, for example, Canadian exports of softwood lumber to the US market faced countervail duties of 32 per cent15 – even though Canada’s legal case for tariff-free access has been upheld on four separate occasions in US courts. In short, for Canada it is clear that formal guarantees of trade access matter less than the political power of internal US trade lobbies. The wto has not, in actual fact, been able to impose a rules-based system when it does not suit the interests of the US for it to do so. However, it is less likely that China could get pushed around in the same way – China’s power may shield it from some of the impacts that the wto would otherwise have on domestic social policy. Canada and China also view the impact of globalization in general, and of the wto in particular, from very different perspectives – particularly with regard to social norms and cultural identity. Canada is a relatively young nation, populated by immigrants with diverse cultural origins, that sits directly beside the much larger US – hence Canadian authors have often been concerned with defining what it is that is unique and different in Canadian culture and with preserving it from Americanization. With huge 15 It appears that these duties will be withdrawn only if provincial governments agree to align timber sales with the US institutional model and if Canada accepts a transitional export levy and drops its case at the World Trade Organization (see Winsor 2001).

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size, relative ethnic homogeneity, and thousands of years of history, China does not have the same worries about national identity. Furthermore, in China there are many who remember the excesses of the Cultural Revolution, which was both isolationist and destructive of China’s traditional cultural heritage. In the Chinese context, opening the country to foreign trade and rediscovering ancient traditions are both reactions to the Cultural Revolution experience and are seen as quite compatible. Since Canada, like other countries, did not experience a Cultural Revolution, trade openness is more often seen as a threat to national cultural uniqueness. As a consequence of these differences in context and history, “globalization” is likely to have different impacts in different places – but the question remains as to whether there is a trend toward a “globalization of culture,” in which these national differences in context are attenuated.

m c wo r l d : 1 6 t h e s o c i a l - p o l i c y i m p l i c a t i o n s of global culture What is the relationship between socio-cultural globalization and social policy? The term “culture” can be used in the narrow meaning of cultural products (such as music, books, movies, television, etc.), and it is these aspects of culture that are directly affected by globalization. However, the term “culture” can also be used in the broader sociological sense of a society’s norms, values, and associated patterns of behaviour, which are the factors that affect social policy. The relationship between these two understandings, or aspects, of culture is clearly complex. For example, some art is created in reaction to existing sociological norms as artists attempt to hold up an unflattering mirror to their society and present a critique of current behaviours. Simultaneously, other artists may seek to exemplify, glorify, or summarize aspects of their society. However, underlying the efforts of both is the idea that art matters – that cultural products help to define the frame of discourse within which individuals interpret their world and that these understandings affect their behaviour.17 For present purposes, all this chapter needs to assert is that changes in the types of cultural products produced and consumed (i.e., “culture” in the narrow sense) will affect norms, values, 16 “Today’s youth live, communicate and act in a wired world of corporate logos, symbols and branding. ‘McWorld’ is the symbolic term often used to capture the new realities of corporate-driven globalization which engulf young people today” (Clarke and Depp 2001, 1). 17 Many national governments (not just in China) have instinctively grasped the importance of popular culture and have consciously sought to influence its evolution.

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and behaviours. The issue is then whether, and to what degree, a process of globalization of symbolic culture will have social-policy impacts. One of the social functions of cultural products (such as books, tv shows, plays, movies, and music) is to enable a society to express its dilemmas and grapple with its issues. For example, films about life in the trenches during the First World War were important in enabling European societies to come to terms with the aftermath of that war during the 1920s, and films about the Vietnam War were similarly important to Americans after that conflict. However, although there is often something universal in a good film, cultural products like cinema speak most directly to a particular social reality.18 If cultural products are to speak to the specific, local issues of a society, local cultural industries have to be financially viable. However, this may be more unlikely under the rules of the wto, as illustrated by the case of the Canadian magazine industry. Cultural industries (e.g., magazines, books, movies) are characterized by a relatively high cost of production of the first copy but by low marginal costs of reproduction. Hence American producers often have an inherent structural competitive advantage. Because their fixed costs of production are spread over a very large domestic market and their marginal costs of reproduction (including any small changes required to customize for a particular foreign market) are fairly small, they can often underprice local producers. Because of this market advantage, Canadian governments have long been aware that the maintenance of a distinctly Canadian culture requires market intervention. To that end, since 1965 Canadian tax law has provided incentives to Canadian advertisers to use magazines with original, Canadian-produced editorial content as a means of ensuring that the Canadian magazine sector retains financial viability. However, when American magazine publishers appealed this discriminatory treatment of their subsidiary Canadian editions, a wto panel agreed, and the practical consequence was that Canadian cultural policy had to be changed – in a way unanticipated19 at the time Canada acceded to the wto. Of course, the increasing commonality of cultural referents and symbolic discourse around the world is not some sort of general, unspecific set of events. In fact, it is American television, movies and music that are dominant 18 For example, actual or potential racial conflict among US soldiers is a frequent theme of Vietnam-era movies but not of post–First World War European cinema. 19 An outside observer cannot verify what was in the minds of Canada’s trade negotiators in the early 1990s. However, one can easily verify that this consequence of accession to the wto was not part of the parliamentary or broader public debate, so there is no sense in which public consent was invited or obtained.

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globally. As well, American multinational firms predominate globally. Although American culture has absorbed influences from many countries and some regional cultures do appear sometimes on the world stage (e.g., reggae music), the common cultural referents seen and heard around the world are primarily American in origin. Hence it is not so much cultural homogenization, as Americanization, that concerns the rest of the world. Why might that matter for social policy? One important reason is that some countries have based much of their social-policy framework (or lack of it) on the presumption of continued cultural dissimilarity to the US (or to European countries in general). The East Asian countries, for example, did not establish much by way of a retirement-security system for older workers or an unemployment-insurance system for jobless workers even during their years of booming growth. The argument (e.g., in Malaysia) was that their citizens could depend on the support of a large extended family in their retirement years or in the event of personal misfortunes, such as unemployment or disability.20 Hence it was believed that unlike in the US or Europe, welfare-state bureaucracies to deliver old-age pensions, unemployment-insurance benefits, or workers’ compensation payments were not needed. Can one expect to have both substantially common global cultural products (e.g., movies, tv shows, and popular music) and a substantially different set of private attitudes with respect to obligations to share with an extended family? The American norm is the nuclear family – television shows may portray its tensions, but they do so within a common expectation that it is certainly not normal to share income outside the nuclear family. American culture is also notoriously youth-oriented, showing relatively little respect for parents or the elderly; popular US culture sends the message that such disrespect is quite normal. The social policies of American governments are quite consistent with the fact that in the US there is no expectation that adult children will devotedly support their aged parents when they retire and that any support for distant relatives (e.g., for an unemployed cousin) would be an unusual act of generosity. Since support of the elderly or distant relatives is not normal behaviour, governments have to fill the gap. Strong norms of mutual obligation and sharing within the extended family have, in many countries, enabled the extended family to be the social institution that has fulfilled many of the functions of social-insurance programs. However, such sharing depends on everyone taking these norms of obligation for granted (and support from the affluent is particularly cru20 Whether this was a reasonable presumption is another issue (see Osberg 1998).

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cial). The question is whether those norms can, in the long run, withstand the influence of repeated media suggestions that they are, basically, a bit weird (in terms of the values portrayed in the global culture). Social norms affect the need for social-insurance programs and also the need for income redistribution. In some societies, both sex before marriage and divorce after marriage are unthinkable. In some very traditional societies, the penalties for either are extreme. In US society both are common, and much American popular culture reflects the dilemmas associated with this reality. One does not have to express a judgment about the morality or personal happiness connected with either premarital sex or divorce to recognize that both produce single-parent households. Such households are very likely to be poor, in all societies, and to need substantial social support in income and services – and in traditional societies such families are often ostracized. To the extent that cultural media affect, in the long run, norms of sexual behaviour and family formation, they will have impacts on the need for some types of antipoverty social policies. Social norms also affect the details of design and administration of social programs in many practical ways. A historical example of national differences is the payment of family allowances, which in Canada were payable to the mother and in Germany, to the father. In both cases, the intention was to benefit the children, but the national norm of familial financial control was clearly different. Such national norms are reflected in the structure of domestically produced television, radio, and music – but not in the global cultural product that is absorbed via satellite television. To the extent that such social norms converge in a common pattern,21 there will be similar pressures for converging modalities of program delivery, in addition to greater pressures for the establishment of similar programs of social insurance and income redistribution.

c o n c l u s i o n : l e v e l s o f g l o ba l i z ati o n This chapter has argued that there is good historic data to indicate that the expansion of international trade in goods – “globalization” in the sense of the term used by some economists – is consistent with a variety of socialpolicy regimes at the national level. It has also argued that although it is clear that there are now many anxieties about the process, globalization in the sense of the cumulative harmonization of the rules governing trade is being 21 A number of data sets (such as the World Values Survey) have used comparable surveys of national values and attitudes to track this process.

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implemented by a relatively new institution (the wto), and definitive statements about the implications of rulings that have not yet been written cannot now be made. Meanwhile, globalization in the socio-cultural sense is being partly driven by new technologies (such as satellite tv and the Internet); hence data from the past on social impacts are not available. To some extent, the economic, political-economy, and socio-cultural conceptions of globalization are separable. We know that there were long periods of expansion of international merchandise trade without the establishment of anything comparable to the wto. The specific institutional features of the wto were established as a consequence of deliberate political decisions, which could have been made differently. Hence one cannot argue that globalization in the first sense (expanding merchandise trade) necessarily entails globalization in the second sense (harmonization of regulation, as in the wto). Similarly, restrictions on the penetration of global culture into local societies in the past (e.g., local content requirements for television and cinemas) coexisted with expansions of merchandise trade – so it cannot be argued that globalization of trade in goods necessarily entails socio-cultural globalization. Nevertheless, there are also some clear linkages. The fourth section of this chapter has noted the difficulties Canada has experienced in trying to maintain a local magazine industry under wto regulation. The issue of “free” trade in cultural and intellectual products, versus the maintenance of local cultural diversity, will clearly be heavily influenced by the emerging body of wto decisions. Hence globalization in the political-economy sense will have a strong influence on socio-cultural globalization. This chapter has argued that it is the political-economy and socio-cultural meanings of globalization that are likely to have the greatest impacts on the delivery of social policy at the national level in future years. Although much remains uncertain, the bottom line is, therefore, that in the longer term there are likely to be substantial pressures on national governments to further “harmonize” their policy frameworks – especially for “active” social policy.

appendix Contingent Protectionism and the Continuance of US Power: The Canada-US Softwood Lumber Trade Issue Canada’s major aim in negotiating the fta and nafta was to escape “contingent protectionism” – the chance that politically powerful US lobbies

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could mobilize support for a complaint of “unfair competition,” which would potentially open Canadian exporters up to punitive antidumping duties. However, the softwood lumber case provides an illuminating example of the divergence between formal guarantees and actual trade relations in the real world of power politics. Canada’s single largest net export to the US is softwood lumber, but a series of “antidumping” challenges by the US industry has, throughout the 1990s, repeatedly threatened punitive duties22 and forced the Canadian industry to adopt “voluntary” export quotas – despite the existence since 1988 of a Free Trade Agreement with the US and the existence since 1995 of the wto. The nub of the issue is that in most provinces of Canada, forestry land is publicly owned and granted to lumber firms on large, long-term leases (which enables economies of scale in lumber mills), while US woodlands are privately owned and often relatively small in scale. The US industry complains that this system of leases on Canadian public woodlands gives an “unfair advantage” to producers and has used this as an excuse for countervail and antidumping duties. Lumber exports from the parts of Canada where woodlands are privately owned are not affected by the threat of antidumping duties, and the US timber lobby’s legal case for antidumping duties on softwood lumber would go away if all of Canada adopted the US model of private ownership of forests – that is, if the Canadian institutional structure of forest management were aligned with the US model. Frankel (2000, 28) notes that in 1999 the number of antidumping cases launched in the US was double that in 1995 and that “the use of ad (antidumping) measures increased rapidly in the 1980s and 1990s because firms hit by increased imports have found it much easier to gain protection under the antidumping laws than under the safeguard laws.” He also notes that the US is unlikely to agree to any limitation on its right to pursue antidumping remedies. The problem that the softwood lumber case illustrates is that the US continues to define what constitutes “unfair competition.” US producers have the incentive to claim that any difference between the US and a foreign nation’s institutional structure that confers a significant cost advantage is “unfair.” Charges of unfair competition can be avoided if other nations adopt US institutions, but many outside the US would see this as very costly (in a social sense), which raises the issue of US hegemony over other nations’ institutional practices (without any voice in the setting of US institutions). 22 In the latest instalments of this long-running dispute, the United States imposed a 19.3 per cent tariff on Canadian softwood lumber on 10 August 2001 (see Simon 2001), followed by a second round of penalties on 31 October 2001, which brought the effective rate of duty to as high as 32 per cent (see McKenna and Scoffield 2002).

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If nations never enquired about the origins of the cost advantages of their trading partners, then issues of the “fairness” of the production process would not arise.23 But the prevalence of concerns with “dumping” over the years, and with environmental and labour issues more recently, illustrates that trade relations are always about production, as well as exchange. Behind the “free”-trade debate, there have always been arguments over what constitutes “fair” conditions of production – and it is the powerful who get to decide “what’s fair.” Some smaller countries have been active in shaping the wto agenda in the hope that a multilateral context for trade will provide constraints on US power. The counterargument is that although the wto framework is heavily influenced by the US, and thus over time will constrain many policy choices to a set consistent with an American worldview,24 on particular trade issues the US also effectively retains the possibility of opting out and imposing a bilateral solution (when domestically convenient – as in the case of softwood lumber). In this bilateral “discussion,” the reference point for “fairness” is likely to be current American institutional practice, and treaty guarantees can count for little – as Winsor (2001) notes: “Canada has won in court or in panels of the North American free-trade agreement four times in the past, but the protectionist clout of the U.S. Department of Commerce and the U.S. foreign trade office have overridden those legal victories and Canada has always been forced to accept quotas and export duties to keep its share of the U.S. market from growing beyond about 30 per cent.”

references Agénor, P-R., M. Miller, D. Vines, and A. Weber, eds. 1999. The Asian Financial Crisis: Causes, Contagion and Consequences. Cambridge: Cambridge University Press. Arjona, R., M. Laidaique, and M. Pearson. 2001. “Growth, Inequality and Social Protection.” Occasional Paper No. 51. Paris: oecd, Directorate for Education, Employment, Labour and Social Affairs, 29 June. 23 Some economists would argue that if foreigners want to pay for subsidies and give their goods away at below cost, why not buy cheap? Others would emphasize the longer-term impacts on industrial structure of predatory pricing. 24 As a concrete example, one can cite Frankel (2000, 24), who argues for product labelling because “consumers can if they choose exercise their right not to consume products that they view as environmentally or socially harmful or objectionable.” Clearly, consumers are seen as having an individual right not to consume (which is the American/wto model), but the same people, as citizens, are not seen as having the right to collective action through local governments to the same end. This model of the balance between individual and collective rights has not, historically, been embraced by all countries.

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Bowles, P., and B. Wagman. Undated. “Globalization and the Welfare State: Four Hypotheses and Some Empirical Evidence.” Eastern Economic Journal, . Brown, D.K. 2000. “International Trade and Core Labour Standards: A Survey of the Recent Literature (English).” Occasional Paper No. 43. Paris: oecd, Directorate for Education, Employment, Labour and Social Affairs, 4 October. Clarke, T., and S. Dopp. 2001. Challenging McWorld. Ottawa: Canadian Centre for Policy Alternatives. Crafts, N. 2000. “Globalization and Growth in the Twentieth Century.” imf Working Paper, WP/00/44. Frankel, J.A. 2000. “Assessing the Efficiency Gains from Further Liberalization.” John F. Kennedy School of Government, Harvard University, RWP01-030, December. Heady, C., T. Mitrakos, and P. Tsakoglu. 2001. “The Distributional Impact of Social Transfers in The European Union: Evidence from the ECHP.” Discussion Paper No. 356. Bonn: Institute for the Study of Labour, September. Hill, H. 1999. The Indonesian Economy in Crisis: Causes, Consequences and Lessons. Singapore: Institute of Southeast Asian Studies. McKenna, B., and H. Scoffield. 2002. “Softwood-Lumber Talks Fall Apart.” Globe and Mail, 22 March. O’Rourke, K., and J. Williamson. 2000. Globalization and History. Third printing. Cambridge: mit Press. Osberg, L. 1998. “Economic Insecurity in the Malaysian Context.” Working Paper. Kingston: John Deutsch Institute, Queen’s University, October. – 2000. “Poverty in Canada and the USA: Measurement, Trends and Implications.” Canadian Journal of Economics 33, no.4 (November): 847-77. Rodrik, D., with E. Kaplan. 2001. “Did the Malaysian Capital Controls Work?” Revised. John F. Kennedy School of Government, Harvard University, February. Simon, B. 2001. “U.S. Tariff Put on Lumber from Canada.” New York Times, 11 August, C1. Stiglitz, J. 2000. “What I Learned at the World Economic Crisis: The Insider.” New Republic, 17 April. Weisbrot, M., D. Baker, E. Kraev, and J. Chen. 2001. “The Scorecard on Globalization 1980-2000: Twenty Years of Diminished Progress.” Centre for Economic and Policy Research, . Winsor, H. 2001. “Lumber Towns on New U.S. Christmas List.” Globe and Mail, 26 November, A7.

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Multinationals and Governance a . e dwa r d s a fa r i a n

Ed Safarian’s first professional contacts with Sylvia Ostry go back to the days when both were engaged in research into applied economics of a nature requiring large helpings of statistical analysis. When submitting his contribution to the present volume, Safarian noted that “Sylvia Ostry never lost her passion for statistical analysis and for research even when circumstances engaged her in positions that demanded the skills of a top negotiator combined with those of a high-policy analyst.” Since she retired from public service – assuming the word “retired” to have a very restricted connotation – Sylvia Ostry has devoted most of her attention to the national and international dimensions of governance in a globalizing world. At the Organization for Economic Cooperation and Development (oecd), she had first-hand experience of the latter, and as a sherpa, she could not help gaining additional experience of both.

This chapter brings both evidence and analysis to bear on an important public-policy issue. In particular, it considers a number of questions that have been raised about the nature and consequences of the most important organizational force in globalization:1 the multinational enterprise (mne). Such firms account not only for all foreign direct (controlling) investment, but also for most of the licensing, subcontracting, and other alliance forms of international business. They also account for most of the international trade and international-technology transfers, as well as for much of the communication spillovers between countries. The mne s have been criticized on many grounds, even by those who tend to favour them but especially by those who see them as threats to the economic, 1 The popular term “globalization” is used throughout this paper although, as Rugman (2001) has noted in detail, regionalization of foreign direct investment (FDI) is a far more accurate description.

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social, and political order. Their very size is said to diminish sharply the power of most nation-states to make policy in their own interests. The mergers and acquisitions that comprise their main form of expansion are believed to be centralizing more of the skill-intensive functions in head offices abroad. It is feared that the outsourcing of standardized products to low-cost centres in developing countries will reinforce many undesirable socio-economic practices in some of these countries while also leading to strong competition against the least-skilled workers in the industrialized countries. One effect of globalization is believed to be an increase in income inequality. Ultimately, the power of national governments is said to be weakened by the largely unchecked spread of such firms and their influence in various international institutions. There is some truth to these allegations, but my preliminary research suggests that the problems are in each case either exaggerated or misconstrued. Moreover, they need to be considered in the context of the unusual opportunities that are available in a globalizing world in terms of developing national advantages. There are also ways to limit the problems associated with multinationals in some sectors. Much depends on the policy capacity of a country – that is, on its capability and will to exercise its policy choices with maximum net benefit in a globalizing world. The focus of this chapter is the examination of the alleged nature and effects of globalization and mne s and the consequent limitations on state power, rather than the details of the many attempts to regulate such firms. The next section deals with some misconceptions about the nature of globalization and the size of the firms. The section that follows examines some of the effects of the spread of economic integration. The subsequent section deals with the challenge to the power of nation-states. The concluding section considers some implications for public policy. It is recognized that there are facets of globalization not considered here, such as issues regarding population migration, but space constraints limit what can be said about these.

some misconceptions Two issues are addressed in this section: the nature of globalization and the size of the firm relative to that of the nation-state. Recency, Scope, Continuity Globalization is frequently seen as a recent phenomenon, widespread in terms of integration of economies and irreversible in terms of its effects on public policy. These assumptions need substantial qualification.

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First, in a number of respects many economies in the half century before the First World War were at least as integrated as they are now. The ratio of foreign trade to output has risen greatly since 1950, but it is only moderately higher now than before the First World War in countries such as the United Kingdom, the United States, France, and Germany and markedly lower for Japan (Economist 18 October 1997, 80). Capital flows as a percentage of national income are still below those for a century ago although well above the very low ratios of the 1950s and 1960s (Taylor 1993). In particular, the stock of outward foreign direct investment (fdi) as a percentage of gross domestic product (gdp) was higher for several major home countries in 1914 than in 1996 (Economist 18 October 1997, 80). There is also evidence that labour was more mobile internationally than is the case today: Several authors note that the passport is a twentieth-century invention (Helliwell 2000; Summers 1999). It should not be concluded, of course, that the nature of economic integration was the same in the two periods. Even if net capital flows were relatively larger earlier, gross flows are extremely large now, and much more investment is short-term and speculative. The international economy is far more prone now to major banking crises and exchange-rate crises than it was in the earlier period. And while trade liberalization and reduced transport and communication costs all played a role in both periods of integration, the difference in the major technologies involved is important. The information-technology (it) revolution, along with reduced transport costs, has allowed mne s to build interdependent network operations within their organizations and in alliances with others. The extended specialization and exchange of intermediate as well as final products has meant that today’s integration reaches many more countries and individuals than was the case earlier and links them more fully. It also complicates the assessment of national interest: A few years ago some well-known Japanese car models had more North American content than some equally well-known American car models. Second, despite the integrative power of modern technologies, globalization has been very selective. A recent World Bank study showed that twenty-four developing countries with a total of 3 billion people greatly increased their ratio of trade to gdp over the past twenty years, while another 2 billion people live in developing countries where that ratio fell. Many of the latter countries were in Africa. Moreover, twenty-five developed countries plus four developing countries had about 85 per cent of the world’s inward fdi stock in 2001, while the least populous 100 recipients have for some time had only about 1 per cent (United Nations 2002). The most in-

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clusive measure of internationalized production (production in a country controlled by firms based elsewhere) suggests that only 4.5 per cent of world output was involved in 1970, compared to 7 per cent in 1995. In the most internationalized sector, which is manufacturing, the internationalized share of production has risen from less than 12 per cent to more than 16 per cent. The percentage is far lower in services but rising rapidly in some sectors, such as transportation, communication, and finance (Lipsey 1998; Lipsey et al. 1995). Of course, it is easy to get much larger figures by taking into account certain sectors of manufacturing, such as electrical and chemical products and motor vehicles, and certain natural resource and service sectors, but doing so simply emphasizes the selectivity of the spread of fdi. Third, the potential for both the spread of globalization and its reversal should not be underestimated. In terms of the potential for its spread, Helliwell (1998, 2000) has brought together and extended data showing that trade between the Canadian provinces is several times that between these provinces and US states once one adjusts for size and distance. Border effects are likely to be even larger for nontrade flows. The potential for the spread of globalization is larger for most developing countries than for the great majority of those that are developed (Eichengreen 2002). And surely history teaches us that trends should not be projected without limit. The First World War led to a reversal of economic integration, and the renewed protection of the Great Depression of the 1930s along with the economic disruptions caused by the Second World War extended that reversal into the 1950s and beyond. Developments that might significantly limit the integrative forces of technological change, even if they do not reverse them fully, include another serious depression; a substantial reversal of the policies of liberalization of trade, capital, and labour mobility; and substantially increased border controls for security purposes. Size of Firm and Size of Nation There is a widespread misunderstanding of the relative size of mne s and of national economies. Many of the former are said to be so much larger than many of the latter that political independence is threatened. This claim has many versions. One is that 51 of the largest 100 “economies” in the world are corporations, whereas only 49 are countries (Anderson and Cavanagh 2000; Hertz 2001). Another is that single firms such as General Motors are larger than most countries. Those who make such claims – and they include academics as well as other critics of mne s – have

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made at least two elementary statistical errors. One is to use total sales for firms but value added, or gdp, for nations. The former includes the inputs at various stages of production – that is, it involves double or multiple counting – while the latter excludes this. De Grauwe and Camerman (2002) have helped demolish these claims by measuring value added for companies. Thus General Motors’ sales in 2000 of $185 billion shrink to $42 billion when measured in terms of value added. A claim that General Motors is bigger than Denmark suddenly translates into Denmark being three and a half times the size of General Motors. A claim that 14 of the largest 50 economies are firms is recast to reveal that only two such economies are firms if value added is used in both cases: These are Exxon Mobil and General Motors, at forty-fifth and forty-seventh respectively. mne s comprise 27 of the next 50 largest economies. However, the value added of the 100 largest mne s in 2000 was still only 4.3 percent of world gdp. It is true that the largest mne s are larger than many small countries. They are also only a small fraction of the size of the largest economies.2 A further point appears to have escaped attention. The total sales figures used by critics of mne s include sales in their home markets as well as those abroad. For the 100 largest mne s, about 50 per cent of overall sales are in their home markets. The home countries of most of the largest mne s are among the largest countries in the world in terms of gdp; 24 of the 100 largest mne s are from the United States, and 51 are from Japan, the United Kingdom, France, and Germany. Thus what the comparisons of mne s’ value-added sales to those of national economies reveal, in good part, is that the home countries of most major mne s are large countries. This is not news. In 1995 fully 87 of 192 countries had fewer than 5 million inhabitants; in effect, half of the 192 countries had fewer people than the state of Massachusetts (Alesina and Wacziarg 1998). One might turn the comparisons of mne s to national economies around and ask whether many countries are not too small for efficient scale of operations and other requirements for high living standards. That would seem to be the view of the vast majority of the governments involved, which not only have joined the World Trade Organization (wto) in recent decades, but are developing bilateral and regional trade treaties at a rapid pace. Statistical comparisons such as the ones mentioned above should not detract from the more fundamental point that countries and firms are quite different. Countries have the power to coerce legally, whether it is to keep 2 Apart from De Grauwe and Camerman, see United Nations 2002, 90-1, and Wolf 2002. The first two sources differ somewhat in their estimates, especially for the next fifty largest economies. Wal-Mart and Exxon are in the top fifty economies in the UN study.

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firms out of the country, expropriate them, tax them, and so on. This elementary difference is sometimes forgotten because some firms abuse their relationship with governments and peoples (as is so often noted with International Telephone and Telegraph (itt) in Chile, for example) and because both governments and firms, whether large or small, have to change the ways they pursue their objectives given the effects of globalization. A striking example of how governments can assert power when they wish to is provided by the 511 cases of forced divestment of fdi in seventy-seven developing countries from 1960 to 1976 (Kobrin 1980). By and large, mne s must rely on competitiveness rather than coercion. Shifts in the composition of the largest mne s suggest something about the competitiveness pressures involved. Only about half of the ten, twenty, and fifty largest industrial firms in 1980 were on these lists in each case by 2000. Corporate power, by this measure, fluctuates a good deal (De Grauwe and Camerman 2002).

s o m e e f f e c t s o f i n t e g r at i o n This section deals first with the alleged centralization of skill-intensive functions in mne s. We then turn to poverty and some other socio-economic issues as they relate to globalization and mne s. Centralizing Skill-Intensive Functions The mergers and acquisitions (m & a s) that are now the main form of mne expansion in new locations are much criticized for a variety of reasons. One is the assumed centralization of the more skill-intensive functions of the subsidiary in head offices abroad. Pejorative terms such as takeovers, selling out, and hollowing out give some idea of the negative views of such m & a s presented in much of the media. At the root of this critique is the ways mne s have changed their organization and operations in order to take advantage of the opportunities offered by the changes in transportation and communication technologies and by the liberalization of policies on trade and fdi. A few decades ago, in response to the heavier protection in many small markets and the existing technologies, subsidiary product lines were far broader, and a larger set of so-called headquarters functions – research and development, accounting, purchasing, and various managerial functions – was conducted locally. This was in the context of central strategic planning for the various subsidiaries and accountability to the regional or global headquarters. One result was

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that affiliates were focused largely on domestic markets – indeed, protection for relatively small markets often led to relatively high costs, which limited export development and growth more generally. In the 1970s and later, a very different organizational and operational strategy developed. Firms specialized the various stages of production much further on a regional and sometimes broader basis. This lead to a huge expansion in both intrafirm trade and trade with alliance partners. But this process did not stop with production facilities. It turned out that many so-called headquarters functions could be decentralized more efficiently for a large region or even between regions. This was true not only for activities such as accounting and purchasing, but also for research and development (r&d). There is a view that r&d may be the last function to be decentralized because of large economies of scale, scope, and agglomeration. This may well be true. mne s from Japan and the United States in particular continue to concentrate r&d in the home market to a very large degree. However, mne s from both larger and smaller European countries have located a substantial part of their r&d in affiliates abroad. The trend for the largest industrial firms over several decades has clearly been to place more and more of their new r&d units outside their home countries (Eaton et al. 1994; Pearce and Singh 1992). It is important to add that technological capacity, as distinct from r&d, is likely to be far more widely dispersed in mne s since it is more closely related to the production process. Unfortunately, there is no good single measure of such capacity characterized by country of ownership of the firm. The change from stand-alone subsidiaries to network-type structures has involved considerable restructuring of firms, of which cross-border m & a s are but one aspect. Both adjustment costs and a move to higher valueadded activities are involved. One of the concerns that has arisen in the process is that m & a s will “hollow out” industry in the sense that headquarter functions in the acquired firms will be relocated to the country of the acquiring firm. This issue has arisen in a number of countries. It is interesting to consider it in the Canadian context, where some long-held concerns of the critics of mne s have been suddenly taken up by some of the leaders of the Canadian-based business community. The issue was first raised because of the move to the United States of some headquarters functions in the oil and gas industry. It was then picked up by some senior banking executives, whose firms cannot be controlled from abroad but who saw an eroding base of highly skilled personnel and other problems because of cross-border m & a s. The issue was linked to the

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belief that the depreciation of the Canadian dollar over some years would reduce the cost of such m & a s. There has been no comprehensive study of the issue to date in Canada. Indeed, the m&a aspects of fdi in general are not well researched. However, the examinations to date do not bear out the widespread concerns in the Canadian media. For example, several writers have pointed out that Canada has had a strong performance in outward fdi over the past two decades. Presumably this would create more high-skill jobs at the Canadian headquarters to offset any losses in the reverse direction. Aba and Mintz (2002) conclude that the evidence does not support the claim that the declining Canadian dollar led to net sales of Canadian assets to nonresidents. Their data suggest that, despite the declining Canadian dollar, there has not been a corresponding sharp increase in foreign acquisitions of Canadian firms, while acquisitions of foreign firms have maintained their pace. A similar conclusion was reached by Safarian and Hejazi (2001). However, the declining Canadian dollar might have had different effects in those sectors where acquisitions by foreign firms are dominant. Another study reviewed the performance of a large number of manufacturing firms in Canada between 1983 and 1987, comparing in particular those that were the target of a merger or acquisition with those that were not. For those firms that moved from the Canadian-controlled category to foreign control, r&d intensity was very high before acquisition; it increased further afterward, particularly because of r&d by the largest firms involved. Investment intensity fell off for the small number of larger firms as some assets were reorganized or spun off; the reverse was the case for the smaller and medium-sized firms in this group (Investment Canada 1992). Finally, we note that whatever hollowing-out has occurred is likely not a linear trend. Foreign ownership and control ratios can be projected only at considerable risk since divestments occur as well as investments. For example, foreign control of the capital in nonfinancial industries in Canada rose to a peak of 36 per cent in 1970, then fell steadily to 23 per cent in 1987 before rising again in the following years. Absolute Poverty Levels The case against globalization rests partly on the alleged income and socioeconomic effects in both developing and developed countries. In particular, outsourcing of production by mne s is said to divert low-skill jobs to developing countries, not only creating socio-economic problems there

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(low-paying jobs in sweatshops, increased demands for child labour, environmental damage), but also leading to competition with low-skilled workers in the developed countries. It is not difficult to construct models giving such results, or the reverse, and to find particular examples that appear to fit. What will be explored here is how far the overall evidence fits this view of the globalization process in general and the mne in particular. We look first at the effects on absolute poverty. In terms of absolute income improvements, the evidence in favour of openness appears to be far more convincing than the case against it. The broadest available studies suggest that poverty levels have fallen globally and that openness has been a significant factor in increasing growth to this end (Edwards 1997; World Bank 2001; Bhalla 2002; Bhagwati and Srinivasan 2002). Sala-i-Martin (2002) combines income distributions over 125 countries from 1970 to 1998 and concludes that poverty rates declined substantially. While the Asian population showed large declines in this respect, however, Latin American progress stopped in 1980, while poverty rates rose rapidly in Africa. Moreover, the economic growth and change that generally come with increased openness can bring far more than poverty reduction and income increases. Bhagwati (2002) has noted evidence not only that poverty can be reduced, but also that labour and other social conditions can improve with openness and growth. One striking example is given in a study by Edmonds and Pavenik (2002) showing that Vietnam’s efforts to expand rice markets internationally raised farm income and persuaded parents to take children, especially girls, out of the workforce. In any case, it is probably a mistake to relate poverty rates and other socio-economic factors too closely to globalization as opposed to policy choices by governments and the particular macroeconomic and social conditions they face. Thus Osberg (2000) has shown that Canadian provinces and American states have maintained very different antipoverty programs compared to those even within the same country, where integration is far greater than between countries. To argue that mne s are responsible for the poverty, stagnation, and negative social conditions in many developing countries seems even more farfetched. mne s bring to a country a set of potential advantages that, within an appropriate policy framework, can account for substantial gains in both economic and noneconomic terms. Those advantages include capital, market access, and above all a set of technical changes ranging from labour training to production development and marketing skills. The spillover ef-

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fects from foreign trade and investment to local productivity are huge – far outstripping, for many developing countries, the gains derived from their own investments in r&d and in knowledge production more generally (Hejazi and Safarian 1999; Coe, Helpman, and Hoffmaister 1997). That sometimes the effects of mne investments are detrimental, both overall and in some particular cases, may point to defects in public policy that should be remedied. It is well known, for example, that inward fdi in the context of high protection can bring national losses by reallocating resources to the protected foreign-owned sector. One reaction to this is to set up fiscal incentives and performance requirements in order to get more desirable social outcomes from mne investments. However, a first-best policy approach, as many governments in the developing countries now realize, is to reduce tariffs and nontariff barriers or at least to move to subsidies instead. Moran (2002) provides a particularly telling examination of the damage done to development in countries that choose to stay out of the integrated networks of modern mne s by various types of performance requirements and thus fail to participate in innovation sharing.3 In any case, many studies show that, with some exceptions, mne performance tends to be better than that of local firms in the same sector. For example, Graham (2002) has shown that mne s tend to pay wages in developing countries that are well above the prevailing rate, partly because of skills development. The network-type mne described above is also an export leader (as well as importer) in many developing countries. Recognizing these points, many critics of mne s now insist that they should follow the labour and other standards of their home countries, a point we will take up later. Inequality of Incomes Turning from absolute levels to inequality of incomes, we see that a variety of models suggest that there are circumstances where increased foreign trade and fdi can increase inequality both within and between countries (Feenstra 1998, 42-3). For example, outsourcing can reduce the demand for unskilled labour in both the developed country that reduces production and the developing country that increases it. This outcome arises because the outsourced activities are likely to be relatively skilled-labour intensive in the latter. 3 Moran notes that countries need not have foreign-controlled mnes in order to participate in their networks. Taiwan, South Korea, and Japan have participated widely in such networks through joint ventures, subcontracting, licensing, and other cooperative modes. However, they did need local business entities capable of cooperating with foreign mnes.

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Once again, the evidence on increasing inequality is less than compelling. Williamson (1995) shows that the now high-income countries had three phases of growth after the mid-nineteenth century, two of which were rapid. These two periods of increased globalization saw convergence of the richer and poorer countries, while the third period of slower growth and globalization witnessed divergence. However, factor mobility was crucial to the two periods of convergence. Other studies covering a wider set of countries point to greater openness to trade and investment as at least mitigating increases in inequality between those countries that participated in globalization (for example, Lindert and Williamson 2001). A recent study of 125 countries by Sala-i-Martin (2002) is particularly interesting in this regard. He notes that using purchasing power rather than market exchange rates for intercountry comparisons makes income far more equal since the cost of living is lower in poorer countries. Thus, using market exchange rates, the income of the 20 per cent of the world’s population in the richest countries in 1960 was thirty times that in the poorest 20 per cent, a figure that grew to seventy-four times in 1997. In terms of purchasing power, however, the differences were eleven and fifteen times. Moreover, he notes that two very large countries, India and especially China, have grown very rapidly recently. If the cross-country measures are weighted by population, there has been a declining trend for international inequality, rather than the increasing trend suggested by the unweighted measures. A variety of indexes he uses to measure income inequality all show significant reductions in global inequality during the 1980s and 1990s. Where increasing inequality is present, whether in international comparisons or within countries for some country sets or periods, there is still the question of the driving forces. For example, Cline (1997) considers what led to the increase in the ratio of skilled workers’ wages to unskilled workers’ wages in the United States from 1973 to 1993. He found that skill-biased technological change was four times more important in widening inequality than was foreign trade. Indeed, the widening inequality occurred despite a very large increase in the stock of skilled labour relative to unskilled, an increase that was a powerful equalizing force. Feenstra and Hanson (1999) found that foreign outsourcing accounted for 15 per cent of the rise in the wage gap between skilled and unskilled workers in US manufacturing in the 1980s, while technological upgrading accounted for 35 per cent.4 Two studies focus on the role of mne s in the debate on the ef4 While these and other studies point to the role of skill-biased technological change, Card and Di Nardo (2002) have pointed to some important puzzles in this explanation.

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fects of outsourcing (Slaughter 1995; Brainard and Riker 1997). Both conclude that parent-company employment complements rather than displaces that in their foreign affiliates, thus suggesting a relatively benign impact of outsourcing. Two points need to be emphasized in concluding this section. First, erroneous or debatable claims about these complex topics are often based on single causal relations drawn from simple correlations. Economic growth and development, poverty reduction, income inequality, negative social conditions – none of these topics relate simply to globalization in general or to the mne in particular, whether in a positive or negative way. Those who believe that improvement along these dimensions will arise simply by increased openness, without regard for all the other forces involved, are as guilty of oversimplification as those who take the reverse position. Openness can certainly help, but only if attention is paid to skills development and the other variables involved in social and economic improvement. The second and related point is that appropriate public policies are important both to create an environment for growth that is welfare-improving overall and to reduce the costs for those who become worse off. I have argued that the evidence points to welfare improvement along a number of dimensions, but this view rests on an assessment of overall indicators. There are clearly groups that lose as a result of economic change, including that change arising from trade and investment. There are also values that are not reflected in current measures of income but that may be highly desired nevertheless. Governments in many countries are alert to these needs and have the capacity to express them in policy terms. Unfortunately, not all governments have such capacity or will. We turn next to some broader questions of the effects of globalization.

th e c h a l l e n g e s f o r nat i o n - s tat e s Many indicators suggest that in recent decades markets have become increasingly international, sometimes even global, in response to technological changes and economic-liberalization policies. National governments lose some room to manoeuvre in such circumstances, both because they have less control over international than over national forces and because they bind themselves by treaties to avoid restrictive or discriminatory steps in the liberalization process. While correct, this is only part of the story and, by itself, apt to be misleading. First, there is considerable evidence that national governments have played a growing role in step with globalization, although not necessarily

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because of it. This role frequently serves to differentiate societies. The growing role of government can involve significant costs in a globalizing world, but these costs presumably reflect the choices made by decision makers in such societies. The increased government role also reflects a desire to shield some groups from too rapid change and to reduce obstacles to training and mobility that slow adjustments in the workforce. Second, often at issue are differences in the ways of achieving given policy objectives rather than any question of surrendering those objectives. Sometimes the ideas and technologies introduced by globalization expose serious defects in national policies, requiring new approaches that may be improvements on what existed. Two policy challenges are likely to be of particular importance: pursuing policies that avoid financial instability and taking account of how industrial competitiveness is affected. Neither of these issues can be avoided in relatively closed economies, but they are more transparent and immediate in the open ones. Third, globalization opens up important new opportunities for countries provided that the public and private actors have the will and the capacity to take advantage of these new opportunities. This topic will be taken up in the conclusion. It is useful to begin with the experience of one country that “internationalized” earlier and more fully than most others and that did so with the world’s greatest economic power as, effectively, its only neighbour. It is sometimes forgotten that Canada’s international integration generally, and especially its integration with the United States, began well before the Canada-US treaty of 1989 and the North American Free Trade Agreement (nafta) of 1994.5 Exports plus imports as a proportion of gdp rose from about 35% in the late 1950s to about 53% in the late 1980s, before rising more quickly to 81% in 2001. The stock of inward fdi as a proportion of gdp was already at 30% by 1970, fell thereafter to 19% in the year before the Canada-US Free Trade Agreement came into effect, and subsequently rose to 29% in 2001. In 1970, 80% of this inward stock was from the United States, a figure that had fallen to 67% by 2001. Fully 60% of the capital in Canadian manufacturing was controlled abroad – largely in the United States – in 1970, a figure that fell to about 50% over the next three decades. In addition, media spillovers from the United States have come to dominate many aspects of Canadian culture, such as books, periodicals, 5 It is also clear that the integration process was far from one-directional for all major indicators.

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music, and film. All of this is apart from close military cooperation, particularly as exists in air defence. Canada has also played a leading role in the General Agreement on Tariffs and Trade (gatt), the wto, and many other multilateral and regional institutions, further integrating the country both with the United States and with countries further abroad. Yet Canada developed economic, social, and political institutions significantly different from those of the United States in particular over this period of high or increased integration. This was true at the national level and also in terms of significant differences within Canada by regions. For example, Canadian approaches to health care, public pensions, unemployment insurance, and university finance – all greatly expanded in this period – have been very different from those in the United States. Labour law, mainly a provincial responsibility, has been far more friendly to labour unions than is the case generally in the United States. The degree of state intervention is greater in Canada by all sorts of measures: For example, the percentage of taxes to gdp and the role of state corporations are considerably greater in Canada. Federalism has developed in a more decentralized way in recent years than has been the case in the United States. And, despite the media spillovers, literature and the arts have been involved in a remarkable cultural revival over the period. It is true, of course, that some types of integration have increased even further in recent years and that new challenges are being faced. Some would point to Chapter 11 of nafta, which with some exceptions binds governments against discriminatory actions toward foreign investors and allows such investors to challenge states directly. So few cases have been resolved under this provision that it would be premature to decide how fundamental the change is that has occurred. And it bears noting that some of the challenges Canada faced in earlier decades were from the US government itself, a more powerful entity than any mne. Studies of other regions suggest that a greater international presence need not mean a reduced role for governments. East Asian governments promoted exports aggressively while using a variety of industrial policies to steer the domestic effects. More generally, there has been concern that even as the changes produced by globalization increase the demand for a broader social safety net, the mobility of capital and other changes erode the capability of governments to meet these demands (Rodrik 1996, 1997). Another view is that the increased wealth produced in part by globalization increases the choices for a society, including choices in social policies. Studies by the International Monetary Fund (imf) show that

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spending as a percentage of gdp has risen substantially throughout those countries belonging to the Organization for Economic Cooperation and Development (oecd) over the past four decades of globalization – the state has clearly not been withering away in this respect (Economist 20 September 1997, 8). It is also true that taxes have had to be steered more to labour and consumption as capital has become more mobile; hence taxes on corporations have fallen as a percentage of the total. And, despite major efforts in recent years, the problems of tax shifting through transfer prices and tax havens are far from resolved. Tanzi (1995) shows that corporations continue to be taxed very differently in different countries. In 1971 revenues from corporate taxes in the G7 countries varied from 1.7% of gdp to 5.2%, averaging 3.1%. By 1990 average taxes on corporations had actually grown to 3.4% of gdp, varying from 1.8% to 6.8%. Tanzi also shows that marginal tax rates on corporate income in 1991 varied from 34% in France and the United Kingdom to 57.5% in Germany. Obviously, even in a globalizing world, taxation can diverge significantly given the perceived benefits and other factors. One might add that, while harder to quantify, a variety of reports in different countries suggests that the regulatory power of governments continues to be used widely despite globalization. In brief, states continue to exercise a great deal of power. Moreover, the view that globalization will gradually make states less necessary needs to be taken with several grains of salt – and not only because states have multiplied in recent decades. Wolf (2001) has noted three reasons why globalization increases the necessity for states.6 First, taking advantage of the potential benefits of globalization (as well as controlling the costs) requires state action on a variety of fronts. This would include, for example, personal security broadly defined, property rights, a competent and honest public service, basic education, and some types of economic infrastructure. A longer list might be proposed depending on one’s view of the appropriate role for a particular government and a country’s stage of economic development. Second, the state normally helps to define, or at least to nourish, national identity. Various indexes of social and culture differences, and even of economic organization, can be read to suggest convergence in some respects, but also to suggest persistent continuing differences despite globalization. 6 My summary of Wolf’s article differs somewhat from his emphases, which simply indicates that preferences are critical to how one interprets these significant points.

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Finally, the idea that international governance will reduce the power of states is based on the obvious fact that states willingly surrender power in the expectation of benefits. However, states themselves provide the stability and order needed to implement treaty obligations. This is painfully evident in financial markets, where both international governance and state power have too often failed to cope with volatility.

i m p l i c at i o n s f o r p u b l i c p o l i cy I have argued above that globalization is neither as new, as widespread, as damaging, or as threatening to state power as the critics of globalization often argue. In particular, there is more room for national governments to make choices than such critics suggest. At least three policy issues require attention. First, the clear implication of much of what has been said above is that Canada and other open societies have important choices to make about how they will react to globalization and how they will utilize its proceeds. Political will and political choices will ultimately determine the impact of globalization on the nature of their societies. Canada, for example, has chosen to protect a number of its cultural sectors by exempting them from various liberalization treaties, providing subsidies and employing other measures to this end. There is certainly room for debate on the ways this has been done and even on some of the exemptions, as cultural and economic developments have changed over time, but the objectives have been retained by Canadian governments over long periods despite great pressures from trading partners. Second, this assumes, however, that the policy capacity exists to capitalize on the opportunities involved and to mitigate the costs. Most developed countries have considerable capacity in this respect, which is used, not always effectively, to mount stable macroeconomic policies and to help the private sector to thrive in a globalizing context. Many developing countries have important gaps in such capacity and look to public and private support from abroad to help develop it. Third, there is a critical role, as always with complex issues, for careful research and for critical analyses of policy approaches. Perhaps three examples will suffice. First, in a wide-ranging analysis of how Asian countries can face the challenges from globalization and capitalize on the opportunities involved, Eichengreen (2002) notes that many Asian countries have not moved to growth based on innovation and factor productivity as distinct from that

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based on factor accumulation and open markets. The required changeover in the policy setting and in the incentives for individuals and businesses is something that some developed countries, including Canada, have not yet quite mastered either. Second, institutional design has lagged far behind the requirements of global finance, especially in terms of dealing with volatile short-term financing. While there is more than one problem here, a critical one is the moral hazard created by governments protecting banking institutions against the consequences of their excessive or untimely lending. Many of the financial crises of recent decades are in no small measure a reflection of government failure to correct this problem (Economist 2001, 22-3). Finally, there is the aberrant way in which much of the debate on globalization has proceeded. Governments must take much of the blame for this because they have sometimes pretended that only gains exist in globalization and at other times have insisted that they have no control over external forces. Many mne s have given up the leadership roles they played in earlier liberalizations and have taken a very low profile generally, no doubt in part because of egregious and well-publicized policy errors made by some of them. All of this has left the field wide open to a variety of private organizations that have become highly effective in promoting their views. It is far too soon to say how this dynamic will develop. Some significant changes can be credited in part to the nongovernmental-organization (ngo) movement: The reduction in the debts of the poorest countries is a case in point, as is the greater alertness to environmental, labour, and human-rights issues more generally. Some ngos have engaged in policy discussions with governments, a process that necessarily involves taking into account the consensus-seeking and implementation issues of the publicpolicy process. By contrast, the pressure to have mne s adopt the same standards in developing-country markets as they have in their home markets will probably mean, if successful, that the 170 or so developing countries that now get 15 per cent of the world’s fdi and a small amount of technology in other ways will get much less of both. There ought to be better ways of persuading and assisting the many such governments to improve their standards without imposing even more hardships on their populations.

references Aba, Shay, and Jack Mintz. 2002. Preserving Control: Canada and the International Market for Corporate Acquisitions. Toronto: C.D. Howe Institute.

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Alesina, A., and R. Wacziarg. 1998. “Openness, Country Size and Government.” Journal of Public Economics 69, no. 3 (September): 305-21. Anderson, Sarah, and John Cavanagh. 2000. The Rise of Corporate Global Power. Washington, dc: Institute for Policy Studies. Bhagwati, Jagdish. 2002. Talk to Donnor Canadian Foundation. Toronto. November. – and T.N. Srinivasan. 2002. “Trade and Poverty in Poor Countries.” AEA papers and proceedings (May): 180-2. Bhalla, S.S. 2002. Imagine There’s No Country: Poverty, Inequality and Growth in the Era of Globalization. Washington, dc: Institute for International Economics. Brainard, L., and D. Riker. 1997. “Are US Multinationals Exporting US Jobs?” Working Paper 5958. NBER. Cambridge, ma. – and D. Riker. 1997. “US Multinationals and Competition from Low Wage Countries.” Working Paper 5959. NBER. Cambridge, ma. Card, David, and John Di Nardo. 2002. “Skill-Biased Technological Change and Rising Inequality: Some Problems and Puzzles.” Working Paper 8769. NBER. Cambridge, ma. Cline, William. 1997. Trade and Income Distribution. Washington, dc: Institute for International Economics. Coe, D., E. Helpman, and A.W. Hoffmaister. 1997. “North-South r&d Spillovers.” Economic Journal 197: 134-49. De Grauwe, Paul, and Filip Camerman. 2002. “How Big Are the Big Multinational Companies?” Mimeo. Eaton, Curtis, Richard Lipsey, and Edward Safarian. 1994. “The Theory of Multinational Plant Location: Agglomerations and Disagglomerations.” In Lorraine Eden, ed., Multinationals in North America. Calgary: University of Calgary Press. Economist. 1997. “The Future of the State: A Survey of the World Economy.” London: The Economist Newspaper, 20 September. – 1997. “One World?” London: The Economist Newspaper, 18 October. – 2001. “Globalization and Its Critics: A Survey of Globalization.” London: The Economist Newspaper, 29 September. Edmonds, Eric, and Nina Pavenik. 2002. “Does Globalization Increase Child Labor? Evidence from Vietnam.” Working Paper 8760. NBER. Cambridge, ma. Edwards, Sebastian. 1997. “Openness, Productivity and Growth: What Do We Really Know?” Working Paper 5978. NBER. Cambridge, ma. Eichengreen, Barry. 2002. “Capitalizing on Globalization.” Asian Development Review 19, no. 1: 14-66. Feenstra, R. 1998. “Integration of Trade and Disintegration of Production in the Global Economy.” Journal of Economic Perspectives 12: 31-50. Feenstra, R.C., and G.H. Hanson. 1999. “The Impact of Outsourcing and HighTechnology Capital on Wages: Estimates for the United States, 1979-90.” Quarterly Journal of Economics 114: 907-40.

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Graham, Edward. 2002. Fighting the Wrong Enemy: AntiGlobal Activists and Multinational Enterprises. Washington, dc: Institute for International Economics. Hejazi, Walid, and A. Edward Safarian. 1999. “Trade, Foreign Direct Investment and r&d Spillovers.” Journal of International Business Studies 30, no. 3: 491-511. Helliwell, John F. 1998. How Much Do Borders Matter? Washington, dc: Brookings Institution. – 2000. Globalization: Myths, Facts, Consequences. Toronto: C.D. Howe Institute. Hertz, Noreena. 2001. The Silent Takeover: Global Capitalism and the Death of Democracy. London: Heinemann. Investment Canada. 1992. “Business Performance Following a Takeover.” Working Paper 11. Ottawa: Investment Canada. Kobrin, Stephen J. 1980. “Foreign Enterprise and Forced Divestment in the ldcs.” International Organization 34 (Winter): 65-88. Lindert, Peter, and Jeffrey Williamson. 2001. “Does Globalization Make the World More Unequal?” Working Paper 9228. NBER. Cambridge, ma. Lipsey, Robert. 1998. “Internationalized Production in Developed and Developing Countries and in Industry Sectors.” Working Paper 6405. NBER. Cambridge, ma. –, Magnus Blomstrom, and Eric Ramstetter. 1995. “Internationalized Production in World Output.” Working Paper 5385. NBER. Cambridge, ma. Moran, Theodore. 2002. “The Relationship Between Trade, Foreign Direct Investment and Development: New Evidence, Strategy and Tactics under the Doha Development Agenda Negotiations.” Asian Development Bank, September. Mimeo. Osberg, Lars. 2000. “Poverty in Canada and the United States: Measurement, Theory and Implications.” Canadian Journal of Economics 33 (November): 847-77. Pearce, R.D., and S. Singh. 1992. “Internationalization of r&d Among the World’s Leading Enterprises.” In O. Grandstrand, L. Hakanson, and S. Sjolander, eds, Technology Management and International Business. Chichester, UK: John Wiley and Sons. Rodrik, D. 1996. “Why Do More Open Economies Have Bigger Governments?” Working Paper 5537. NBER. Washington, dc. – 1997. “Trade, Social Insurance and the Limits of Globalization.” Working Paper 5905. NBER. Washington, dc. Rugman, Alan. 2001. The End of Globalisation. London: Random House. Safarian, A. Edward, and Walid Hejazi. 2001. Canada and Foreign Direct Investment: A Study of Determinants. Centre for Public Management, University of Toronto. Sala-i-Martin. 2002. “The World Distribution of Income (Estimated from Individual Country Distributions).” Working Paper 8933. NBER. Cambridge, ma. Slaughter, M. 1995. “Multinational Corporations, Outsourcing and American Wage Divergence.” Working Paper 5919. NBER. Cambridge, ma. Summers, Lawrence H. 1999. “Reflections on Managing Global Integration.” Journal of Economic Perspectives 13, no. 2: 3-18. Taylor, Alan. 1993. “International Capital Market Mobility: The Saving-Investment Relationship.” Working Paper 5743. NBER. Cambridge, ma.

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Tanzi, Vito. 1995. Taxation in an Integrating World. Washington, dc: Brookings Institution. United Nations. 2002. World Investment Report: Transnational Corporations and Export Competitiveness. New York and Geneva: unctad. Williamson, J. 1995. “Globalization, Convergence and History.” Working Paper 5259. NBER. Cambridge, ma. Wolf, Martin. 2001. “Will the Nation-State Survive Globalization?” Foreign Affairs (January/February). New York: Council on Foreign Relations. – 2002. “Globalization Myth.” The National Post. FP 15. World Bank. 2001. Globalization, Growth and Poverty: Policy Research Report. Washington: dc.

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Measuring Global Skills Shortages1 mahmood a. zaidi and malcolm s. cohen Mahmood Zaidi’s collaboration with Sylvia Ostry began in the 1960s when she was the director of Special Manpower Studies and Consultation at Statistics Canada and continued until the 1970s (Ostry and Zaidi 1979) when she became more heavily involved in economic and trade-related policy issues. In this chapter, the authors combine a field of economics in which Sylvia Ostry did seminal work (labour shortages and job vacancies) with the area that marked the later phase of her career: globalization. As Blinder (1988) has pointed out, international trade is an important aspect of economic growth and development, but we need to know more and communicate more about the dynamics of employment resulting from changes in international-trade practices both in the short run and in the long run. If the world is to be viewed as a single global economy with individual countries as sectors, there might be long-run implications for unemployment when “selected” shocks arise from changes in trade barriers, exchange rates, tax structure, and so on. The authors stress how, given her background in both labour and trade and her emphasis on empirical-based research, Sylvia Ostry has been a great bridge builder between international-trade policies and their possible impacts on a country’s domestic employment and income.

The 25 September 2000 issue of the Wall Street Journal (Zachary 2000) featured an article entitled “The Global Battle – People Who Need People: With Skilled Workers in High Demand, Employers Are Hunting Them

1 We would like to thank Teresa F. Collier, Sarahjoy Crewe, Adrienne B. Schiff, and Thomas J. Norman for exceptional research assistance on this paper.

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Down – No Matter Where They Live.” What we deduced from this article was that the emergence of global markets and global production was leading to global hiring of labour and labour services in various occupations. Moreover, globalization studied in terms of a decline in barriers to international trade and investment and a reduction in costs associated with technological advances in communications, information processing, transportation, and so forth has led to a deepening of the integration of world economies not only in the products and financial markets, but also to some extent in the labour market. One can also observe integration forces in operation in several regional economies. For example, under the North American Free Trade Agreement, globalization has been contributing to deep integration of “various North American markets for goods and services, financial, capital, physical capital, human capital, labour and ideas” (Gunderson 2002, 317). Some effects of this deep integration on employment and labour standards have been receiving a great deal of attention (Stigler 2002). We have focused on updating our recent study only for Canada and the United States. Not only are Canada and the US the leading trade partners, but over the decades there has been a great deal of interest among economists in comparing the economic performances of these two countries (Ashenfelter and Card 1986; Bernstein, Harris, and Sharpe 2002; Zaidi 1991). It is our hope that this chapter’s focus on an empirical analysis of skill shortages in a global context will stimulate further discussion and research on this subject. In this chapter we discuss: 1 2 3 4

The importance of shortages in a global context Methodological issues in measuring labour shortages Sample results from our international study An update for Canada and the United States from 1998 to 2000

th e i m p o rta n c e o f s h o rta g e s in a global context Canada and the United States are the leading trading partners. As we can see from Table 1, Canada accounts for 20 per cent of the total trade with the United States and is the leading trade partner as measured by adding up imports and exports. Canada, Mexico, Japan, China, Germany, and the United Kingdom accounted for 58 per cent of all trade with the United States in 2001.

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Table 1 United States trade with selected countries, 2001 (millions of dollars) Rank

Total trade

Percentage of total trade

Canada

1

379,692

20.3

Mexico

2

232,634

12.4

Japan

3

183,925

9.8

China

4

121,461

6.5

Germany

5

89,072

4.8

United Kingdom

6

82,083

4.4

Source: US Department of Commerce, International Trade Administration, 2003.

Over the last decade, US trade has exploded, with the largest increase coming from those countries signed to the North American Free Trade Agreement (nafta). From 1991 to 1999, US trade increased 133% in nafta countries, compared to 76% in Asia, 73% in South America, and 72% in the European Union. The increase in trade has resulted from a decline in barriers to trade and investment, including a 4 per cent drop in average tariffs and an easing of capital-movement restrictions. Advances in communications, information processing, and transportation have also enhanced global trading. Some international companies have distribution points around the world and have integrated inventory control, manufacturing, and order fulfillment. For example, a Canadian consumer could order a Dell computer online using a credit card, and Dell would receive the order from the customer and direct its manufacturing facility to assemble the computer in China or wherever the assembly plant is located and ship it to the customer, who could well receive it in the same week. Due to labour costs as well as the ease of transmitting data around the world, it is becoming increasingly common for North American companies to use workers in other countries to carry out some of their work. Clerical and programming work are examples of nonmanufacturing work that can be easily outsourced. For instance, an American company can send forms containing data to be entered into a computer to a lower-wage country such as India where workers enter the data into the corporate database. The Indian workers complete the data entry during the evening in North American time so that it is available to the North American company the next morning. Companies also use secure networks to permit round-the-

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clock product development by allocating work to teams located in three different time zones. For example, a team in Denver might work an eighthour shift developing a program and then send the project off to a Tokyobased team for another eight-hour shift, who then hands the program to a team in Tel Aviv, and the process repeats itself. Note that this strategy reduces product development time by creating a twenty-four-hour continuous work cycle and does not necessarily rely on differential labour costs among countries. These examples illustrate the importance of understanding labour shortages in a global context because it is so much easier today for companies to make use of foreign workers, whether they actually work in the United States or Canada or whether they work abroad. The previous examples would suggest that if there are shortages in one country and surpluses in another, equilibrium could be readily achieved by movement of people or work until equilibrium is reached. However, not all work is this mobile. There could be a shortage of carpenters or electricians in one country and a surplus in another. Immigration restrictions could make it difficult for skilled craft workers to immigrate in order to ease the shortage in the deficient country. Of course, one could argue that importation of prefabricated housing could alleviate the shortage, but not all consumers want prefabricated houses. Shortages can also exist within a country even though immigration is not an issue within national borders. For example, Hawaii has had frequent labour-shortage problems due to the expensive rental costs for worker housing.

methodological issues in measuring labour shortages Differences exist among countries in the measurement of employment and unemployment. Differences exist in the minimum age at which workers are counted. Differences exist in how unemployment is measured. The methodology employed generally requires detailed occupational data over a three- or four-year period. In less-developed countries, availability of such specialized occupational data is less common. However, even if data on specialized occupations were present in a country, a large sample would be required to provide meaningful statistical results. The labourmarket indicators developed in our study measured the degree of shortages or surpluses in as many as forty-nine occupational groups.

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Persons are either in or out of the labour force depending on whether they are employed or actively looking for work. Differences exist among countries in how persistent a person’s job search must be before he or she is counted as unemployed or in the labour force. The US Bureau of Labor Statistics, Eurostat, and the International Labour Organization (ilo) have conducted studies using a standardized measurement across countries to determine unemployment. Occupational definitions also differ considerably among countries. The ilo uses standardized occupational definitions across countries. However, data collected by the ilo are generally published for fewer than a dozen occupational groups. In preparing our book (Cohen and Zaidi 2002) we attempted to collect more detailed standardized data from 1995 to 1998 for nineteen countries and succeeded in doing so for about fifteen of them. The ilo definition of occupations is skill-based. Until recently the United States occupational classification was not skill-based. This made the comparability of US occupations to ilo occupations very difficult. For example, the ilo definitions embodied in the International Standard Classification of Occupations (isco-88) are based on the average skill level of workers. isco-88 has ten major groups, including professionals, who are required to have a university degree; technicians and associate professionals, who are required to receive training after high school; and elementary occupations, which require only a grade-school education. An occupation in the United States could combine professionals and associate professionals, making it difficult to compare the US’s data to ilo data. The new occupational system in the United States, the Standard Occupational Classification System, is more skill-based. Thus data generated by this system could more easily be compared to ilo data. However, at the time this chapter was written, no regular household data had yet been published using the new system. Governments that have sought to measure labour shortages have approached the problem in one of three ways: 1 Development of an indicator, such as a job vacancy survey 2 Collection of anecdotal information 3 Use of indicators such as those used in this study Job Vacancy Data (Ostry and Sunter 1970; Zaidi 1970) The use of a job vacancy survey to measure shortages is of limited use and is in place in only a few countries for several reasons:

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a) Firms do not always keep records of their vacancies. A large firm may have many branches or departments that keep independent records. b) Even if records were kept it would be necessary to classify the occupation of the vacancy in a uniform fashion and frequently update the status of vacant positions. c) A survey of vacancies, which provided sufficient occupational and geographic detail, would be very costly. Only a few localities in the United States, such as the state of Minnesota, collect this information. The United Kingdom collects it through employers registering jobs through the employment service. Even if these data were available, it is a necessary but not sufficient condition for labor shortages to occur. Market mismatches could occur such that vacancies and unemployment could both be high in an area or country. In the absence of direct measures of job vacancies, indirect measures have been used. (Cohen and Solow 1967) Anecdotal Information While anecdotal information can provide a clue to what shortages may exist, its lack of scientific rigor makes it an undesirable measure. One reporter’s perception of a shortage could be different from another’s perception, leading to inconsistent information. But generally when we have correlated our shortage measures based on indicators with anecdotal reporting, the correlation has been good. The main problem we have detected has been due to timing. For example, people tend to report shortages after they are no longer present. Labour-Market Indicators (Cohen 1995; Cohen and Zaidi 2002) Labour-market indicators are the approach we have advocated for measuring labour shortages. By systematically looking at several measures, we can get a good idea of whether shortages exist. We have identified four measures that would be appropriate. Ideally, job-vacancy statistics could be a fifth indicator if they were collected. The four indicators we have advocated are: 1 2 3 4

Unemployment rate Rate of change of employment Rate of change of wages Training time required for an occupation

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The unemployment rate is typically low when shortages are present. Available workers can find jobs, so few unemployed workers are present. If labour-market information is poor, workers are unwilling to relocate to where the jobs are, living expenses are high where the jobs are, and shortages could exist when unemployment rates are high. The rate of change of employment is a measure of the growth of an occupation. Typically employers in the faster-growing occupations have the hardest time finding sufficient numbers of workers. During the latter part of the 1990s when the demand for computer professionals was growing rapidly, labour shortages emerged. But if the supply of workers were totally inelastic and demand increased, employment change would be zero, so it is possible for employment growth to be a misleading measure in this circumstance. However, when considered in conjunction with the other measures, this indicator can contribute useful information. The third indicator, wage change, would show rapid wage increases if labour supply were highly inelastic and demand were increasing. Wage increases would not be as good an indicator as the growth of entry-level salaries since wage growth depends in part on the composition of the workforce. For example, if many new, inexperienced workers are added to the workforce in an occupation, average salaries could be falling when salaries at each step of the wage progression are rapidly rising. Finally, training time is a relevant indicator because generally persons in occupations requiring more preparation can fill shortages in occupations requiring less training time. If there is a shortage of brain surgeons and it takes ten years to train one, the shortage could last a long time. If there is a shortage of copy-machine operators and a person can be trained in two hours to operate the machine, the sources of supply are endless and can be easily addressed by increasing wages offered. On the other hand, increasing the wages of brain surgeons would not necessarily attract any new supply in the short run.

sample result s from our international study We assigned a score of 1 to 5 for each of the four indicators, with 5 being assigned when a shortage was most likely and 1 when a shortage was least likely. For example, if the unemployment rate for a particular occupation in a country was below 2 per cent, we assigned the indicator a 5. An unemployment rate above 8 per cent was assigned a 1. If an occupation in a country averaged 5.00, this would mean that it received top scores in all indicators. A 1.00 would denote that it received bottom scores.

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To illustrate our results, we selected the United States, Canada, and Australia. We show indicator scores for three occupations in Table 2: Table 2 Shortage indicators, 1995–98 Australia

Canada

United States

Legislators, officials, and senior managers

4.67

3.00

4.00

Professionals

4.33

3.25

4.00

Technicians and associate professionals

3.33

3.25

3.25

Source: Cohen and Zaidi 2002.

On the basis of this assessment, we would conclude that there was a probable shortage of legislators, officials, and senior managers in Australia (4.67) and a possible shortage in the US (4.00). The only other occupation at or above 4.00 was that of professionals in Australia (4.33) and in the US (4.00). We would conclude that there was no overall apparent shortage in any of the other occupations in any of the three countries. For more insight into where labour shortages exist, more detailed occupational data should be examined. For example, in the Canadian data, when ceo s and senior managers are separated from all officials and managers, their indicator score is higher (3.5) but still not high enough to declare a shortage. In the US, on the other hand, ceo s and senior managers had an indicator score of 4.5. Business professionals had a score of 4.67 in Australia, 3.5 in Canada, and 3.75 in the United States.

results for 1998 to 2001 for canada a n d t h e u n i t e d s tat e s Table 3 Shortage indicators, 1998–2001 Canada

United States

Legislators, officials, and senior managers

3.00

Professionals

3.67

3.67 3.67

Technicians and associate professionals

3.33

3.00

As we can see, the indicators slipped or remained the same in every category in the United States and in Canada, suggesting no shortages for any of

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Figure 1 Comparative Unemployment Rates

12 United States Canada 10

8

6

4

2

03 20

02 20

01 20

00 20

99 19

98 19

97 19

96

95

19

19

94 19

93 19

92 19

91 19

90 19

19

89

0

the major groups we were examining. In some cases, such as Canadian professionals, the indicators actually increased but were still below the level at which shortages are probable. The Canadian economy has generally mirrored the larger US economy in recent history. From 1995 to 1998, the period of our original study, this continued. The unemployment rate fell by just about the same amount in both the United States and Canada. However, during this period, the unemployment rate in Canada was considerably higher. In 1998 the adjusted Canadian rate was 7.7 per cent, compared to 4.5 per cent in the United States.2 Figure 1 illustrates the comparative unemployment rates in the United States and Canada from 1990 to 2002. From 1998 to 2002, although changes in the Canadian unemployment rate continued to mirror changes in the United States, the differential between the two rates narrowed considerably. A comparison of 1998 to 2001 or 2002 shows that the unemployment rate in Canada actually declined while the US rate was increasing 2 US Bureau of Labor Statistics, unemployment rate in nine countries, .

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When actual shortages were measured for three major groups in which skill shortages were most likely, from 1998 to 2001 no shortages remained apparent, as Table 3 illustrates, since the indicator levels had fallen below 3.75. Complete data for 2002 were not available at the time of this chapter’s writing. However, since the overall unemployment rate as well as the rate for professionals and managers continued to rise in both countries, the probability of shortages at the major group level seemed unlikely. At the time of writing, 300,000 jobs had been lost in the United States in the latest month. Thus the probability of shortages at these group levels continued to be unlikely. Statistics Canada has provided us with data on detailed occupations from 1998 to 2001, which has allowed us to complete our indicators for twenty-two occupations, as presented in Table 4. Three occupational groups have average indicators of 3.75 or higher for the period 1998-2001. Table 4 4.25

Natural and applied scientists Technical, assisting, and related occupations in health

3.75

Occupations in social science, government service, and religion

4.25

The first two occupations include health workers, information technology workers, lawyers, and paralegals. Based on other data we have received, it is evident that these strong trends continued even through 2002.

conclusion Labour shortages in certain occupations have been recognized as a problem in times of both economic expansion and economic contraction. With the emergence of global markets and global production, studies of global occupational shortages are increasingly relevant. Accordingly, this chapter has drawn from our recent study of labour shortages by occupation in a global context, which measured both skill shortages and the study’s overall results based on an analysis of standardized occupational data collected from selected industrialized countries. In this chapter we have discussed examples from the study. The methodology employed generally requires detailed occupational data over a three- or four-year period. In less-developed countries, availability of such specialized occupational data is less common. However, even if data on specialized occupations were present in a country, a large sample would be required to provide meaningful statistical results. The labour-market indicators developed

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in our study measured the degree of shortages or surpluses in as many as forty-nine occupational groups. The indicators measured factors that would be present when skill shortages existed, such as rapidly growing wages, low unemployment in the occupation, rapidly growing employment, and long training times. All of these factors do not have to be present for labour shortages to exist. For example, if the labour supply were totally inelastic, wages could rapidly rise without inducing a new labour supply. However, looking at all four factors as a whole was helpful in identifying shortages, as has been validated by external studies discussed in the chapter. One of the findings of this study is that shortages in some of the occupations, such as ceo s, senior managers, computing professionals, and health professionals, were common across many of the countries studied and part of a global shortage. In this chapter we have updated our study of selected major occupational groups from 1998 to 2001 for Canada and the United States.

references Ashenfelter, O., and D. Card. 1986. “Why Have Unemployment Rates in Canada and the US Diverged?” Economica 53, supp.: S171-95. Bernstein, Jeffrey I., Richard G. Harris, and Andrew Sharpe. 2002. “The Widening Canada-US Productivity Gap in Manufacturing.” In International Productivity Monitor. Ottawa: Centre for the Study of Living Standards. Blinder, Alan S. 1988. “The Challenge of High Unemployment.” American Economic Review 78, no. 2: 1-15. Cohen, Malcolm S. 1995. Labor Shortages as America Approaches the Twenty-first Century. Ann Arbor, mi: The University of Michigan Press. – and Mahmood A. Zaidi. 2002. Global Skill Shortages. Cheltenham, uk: Edward Elger Publishing. – and Robert M. Solow. 1967. “The Behavior of Help-Wanted Advertising.” Review of Economics and Statistics 49, no. 1: 108-10. Goto, J. 1990. Labor in International Trade Theory. Baltimore: The Johns Hopkins University Press. Gunderson, Morley. 2002. “North American Economic Integration and Globalization.” In Patrick Grady and Andrew Sharpe, eds, The State of Economics in Canada: Festschrift in Honor of David Slater. Montreal and Kingston: McGill-Queen’s University Press. Stigler, Joseph. 2002. “Employment, Social Justice and Societal Well Being.” International Labour Review 141, nos 1-2: 9-29. Ostry, Sylvia. Forthcoming. “Global Integration: Currents and Counter Currents.” In The Kluwer Companion to the wto Organization. Boston, ma: Kluwer Academic Publisher. – and Alan Sunter. 1970. “Definition and Decision Aspects of the Canadian Job Vacancy Survey.” Journal of American Statistical Association 65 (September): 1059-70.

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– and Mahmood A. Zaidi. 1979. Labour Economics in Canada. 3rd edition. Toronto: Macmillan. – with Daniel Drache. 2002. “From Doha to Kananaski: The Future of the World Trading System and the Crisis of Governance.” In John M. Curtis and Dan Ciuriak, eds, Trade Policy Research 2002. Ottawa: Minister of Public Works and Government Services, Department of Foreign Affairs and International Trade. Zachary, G. Pascal. 2000. “The Global Battle – People Who Need People: With Skilled Workers in High Demand, Employers Are Hunting Them Down – No Matter Where They Live.” The Wall Street Journal, 25 September 2000, R8. Zaidi, Mahmood A. 1970. “Unemployment, Vacancies and Conditions of Excess Demand for Labor in Canada.” Applied Economics 2, no. 2: 101-12. – 1991. “Some Reflections on Theories of Unemployment in the North American Context.” The North American Journal of Economics and Finance 2, no. 1: 1-22.

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10

Individualism, Federalism, and Social Responsibility: The Evolving Social Paradigm in the United States alice m. rivlin1

Alice Rivlin describes herself as the same kind of economist as Sylvia Ostry. Like Sylvia, she has “remained outside the mainstream of the minimalist mathematized discipline and continued stubbornly to believe that politics and policy and social institutions and history really do matter.”2 Dr Rivlin’s chapter is an analysis of issues of national governance in a federal context and under pressure from globalizing trends. The issue at the forefront of her concerns – and why this chapter fits so well in a volume dedicated to Sylvia Ostry as a public servant – is how federalism can resist the globalizing onslaught without federated units feeling that they are so much poorer as a result. The tensions that have grown within the European Union (eu) and the way the European Commission is attempting to manage them – also featured in other chapters – are at the centre of this chapter’s analysis.

The question of how decision making should be shared among multiple layers of government has fascinated me for several decades, and I have returned to it periodically like a homing pigeon. I came back to this longstanding interest in the power-sharing question recently when I was invited to talk about the evolving social paradigm in the United States at a confer1 The author is indebted to Christopher Lyddy for research assistance. 2 Sylvia Ostry, “Globalization and Sovereignty,” James R. Mallory Annual Lecture in Canadian Studies, McGill University, 19 March 1999.

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ence in Austria on the “Paradigm Shift in the European Social Model: Redefining the European Welfare State?” It was a daunting assignment because the paradigms are perceived on both sides of the water to be significantly different. United States policy makers put great store in individual responsibility and are constantly afraid that helping people in economic distress will undermine their willingness to fend for themselves. Europeans have a stronger tradition of collective responsibility and are more willing to pay the costs of assuring all citizens at least a minimum standard of living, including decent housing and access to health care and child care. Moreover, until recently, social policy in the United States mystified Europeans. They found it hard to grasp that, while Washington runs defence and foreign policy, states have a great deal of control over social policy. The same puzzlement may well apply to the way they see Canada. Now, however, the European Union has put Europeans and North Americans on a more comparable footing and forced Europeans to deal with the difficulties of harmonizing social policy in a union of member states with diverse traditions and histories. In addition, both sides of the Atlantic are dealing with similar economic and demographic forces – global competition, immigration, and aging populations – that will impact social policy regardless of the basic paradigm. Indeed, the only safe prediction I can make about social policy in the United States at this moment is that big changes are inevitable. The future cannot involve modest incremental adjustments in current programs, or “more of the same.” Over the next few years, social programs in the United States will be severely stressed by at least three major forces: •

•

•

the widening gap between low-wage workers and the rest of the population, especially the very well off rapidly rising costs of programs for the elderly, resulting from increased longevity, the impending retirement of the large postwar generation, and the rapidly rising cost of medical care the long-run budgetary consequences of what I believe to be the recklessly shortsighted fiscal policy of the US national government, together with financial stress at the state level

The first two challenges appear to call for additional public resources. Increasing wage supplements or tax benefits, child-care allowances, or subsidized health insurance could relieve the plight of low-wage workers – at some cost to taxpayers. While the underfunded US public pension system

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could be restored to long-run solvency by reducing future benefits, additional revenues would make the necessary cuts less drastic and more politically acceptable. Moreover, the far more difficult task of providing health care to an aging population will certainly require more public resources, even if part of the increased burden is borne by the private sector. As recently as early 2001, these challenges seemed daunting but not insurmountable. The national budget, benefiting from the combination of tight fiscal discipline and a booming economy in the 1990s, was running unprecedented surpluses, which were projected to continue through the end of the decade. Now, however, the US fiscal outlook has changed dramatically for the worse. Two huge tax reductions, combined with slow growth of the economy and rising international commitments, have turned projected surpluses into projected deficits. State governments are also in fiscal trouble. Budgetary forces are on a collision course. In this chapter I trace the evolution of the American social-policy paradigm, with emphasis on two major themes: federalism and the ideology of self-reliance. I focus on the principal public transfer programs that provide assistance to the poor and the elderly in the form of cash or payments for food and medical services – leaving aside education, housing, and social services. I then risk some speculation about what might emerge from the coming collision between current social policy and the forces mentioned above.

th e i n f l u e n c e o f f e d e r a l i s m Until the formation of the European Union, I suspect Europeans who had not closely studied American social policy found it hard to take the states seriously. There are fifty of them, so it is hard even to remember their names! But the states have to be taken seriously with respect to social policy because each has its own tax structure, social benefits, and historical tradition. New York is not much like Arizona; Mississippi is very different from Oregon. In an economic union of continental proportions, it is important to preserve cultural identity and the variations in social policy that go with it. But when capital and labour can move easily throughout the union, there are advantages to harmonizing taxes, making pensions portable, and establishing at least minimum standards for social benefits. The complexity of American social policy results from decades of trying to find ways to harmonize social policies across state boundaries without forcing diverse states to make the same choices or fund social programs at the same level. As a

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result, some of the US’s social programs are national, and others are not. Important programs to assist the poor and the elderly are joint federal/ state programs under which the national government contributes part of the money and attempts to influence state policy through conditional subsidies, but benefit levels and coverage still differ greatly from state to state. Europe now faces similar challenges and may eventually find some of the mechanisms used in the United States useful in the eu. Until the 1930s, social-benefit legislation in the United States – what little there was of it – was primarily at the state level. The national government was not significantly involved in social policy or income redistribution. But the Great Depression caused such widespread economic distress that progressive reformers surged through the barricades of states’ rights and their fear of centralized power to create substantial national commitments to social policy. Income-transfer programs were created to relieve hardship and stabilize the ailing economy. The US’s major public pension program (called Social Security) dates from this period. Social Security is a national program run by the federal government that now provides retirement income and survivors’ and disability benefits to about 44 million people. Its wage-related benefits and contributions are governed by the same formulas throughout the country. A joint federal/state program to assist needy families with children (popularly known as “the welfare program”) began during this period, as did unemployment insurance. In both these programs, by contrast, benefit levels differ greatly from state to state. Another surge of progressive legislation occurred in the 1960s. A national program to provide medical benefits to the elderly (called Medicare) was enacted, as well as a joint federal/state program to pay for medical services to the poor (called Medicaid). Federal assistance to help low-income people buy food (called the Food Stamp Program) was also begun in the 1960s, and the program expanded rapidly after 1974, when Congress required all states to offer food stamps to poor households. The growth of central-government responsibility, which seemed inexorable in the mid-twentieth century, began to reverse in the 1970s. Over the past three decades, there have been frequent adjustments in the complex rules governing these transfer programs, and their costs have risen substantially, but most of the adjustments have returned power to the states. States have been given increasing discretion within the framework of joint federal/state programs and, in response, have been experimenting with a variety of approaches to helping low-income people. The interstate diversity of approaches involving social programs has been increasing.

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Federalism in the United States has probably worked to hold down social benefits and the taxes that support them. Wage levels differ among states, and employers in low-wage states have generally fought against public benefits that would undermine incentives to work. Progressive reformers succeeded in establishing uniform national benefits for retired and disabled people but not for poor people of working age. Moreover, when individual states have full or partial responsibility for paying for social benefits, they are under competitive pressure to keep the tax rates low for fear of losing business or residents to other states. The fear of attracting the destitute from other states may also hold benefits down. This downward competition among American states in social benefits is sometimes called the “race to the bottom.” Another downward force is the deeply ingrained commitment of Americans to individual responsibility.

th e i d e o l o g y o f i n d i v i d ua l r e s p o n s i b i l i t y Individualism and self-reliance are persistent American themes, and socialism hardly appears at all in the fabric of American history. Indeed, American political leaders across the ideological spectrum inveigh against bureaucracy, government intrusion, and, of course, socialism. The term “welfare state” has negative connotations in the United States and is used only by right-wing politicians to denigrate the policies of their opponents. The preferred term for benefits to low-income people is “safety net” or help to those who “fall through the cracks.” These metaphors emphasize that the main action of the economy is in the market place, and government help is only for the singularly unfortunate, who cannot make it on their own. In reality, this persistent glorification of self-reliance is at least partially disingenuous. Millions of Americans gladly accept help from the government in the form of agricultural subsidies, special tax advantages, veterans’ benefits, and low-interest loans for higher education without thinking of themselves for a minute as beneficiaries of a welfare state. In the wake of disaster – whether hurricane or terrorist attack – Americans call as quickly on all levels of government for help as do Europeans. Nevertheless, the ideal of self-reliance not only colours election rhetoric, but also greatly influences the decisions that political leaders make about social policy. The Two-Category Mindset The self-reliance ideology was reflected in a public-policy mindset that people with inadequate incomes could be divided into two distinct categories:

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those who could work and those who could not. Only the latter deserved public help. Adult males were presumed able to work unless permanently and totally disabled, as were adult women without children. Fierce political battles raged for decades over whether needy women with children should be required to work if there was no male breadwinner. This controversy continues but has largely been resolved in favour of work requirements for needy single mothers. The two-category mindset biased policy makers against social benefits for anyone deemed able to hold a job. It explains why the United States has no universal benefits for families with children, such as European-style children’s allowances or mothers’ benefits. It also explains the absence of health-care coverage for the general population that Europeans find so remarkable. While most working-age Americans and their families have private health-insurance coverage, often subsidized by their employers, about 40 million people – many of them in low-wage jobs – have no health-insurance coverage at any given moment. Sixty million people lack coverage at some time during a year, and many others have inadequate insurance plans.3 Several presidents, most recently President Clinton, have proposed universal health insurance, but none of the proposals has won approval in Congress. The Clinton plan was derailed by ridicule of its complexity, strong opposition from private health insurers, and the caution of a public suspicious of adding to government responsibilities. The two-category mindset also affects disability programs, whose benefits go only to people so severely disabled that they are deemed permanently unable to work. Unlike their counterparts in many European countries, American policy makers have paid scant attention to rehabilitation or to creating subsidized work opportunities for the partially disabled.4 Cash support for children in the United States has been largely limited to children of needy single mothers. The so-called “welfare program,” established during the Great Depression to aid impoverished widows and their children, evolved into a program of cash support for low-income single mothers (and, to a very limited extent, for unemployed fathers as well). While it kept millions of families from destitution over the years, the welfare program was unpopular with rich and poor alike. Critics alleged that it discouraged work and marriage. Policy makers kept tinkering with the

3 “How Many People Lack Health Insurance and for How Long?” Congressional Budget Office, May 2003, . 4 Michael J. Graetz and Jerry L. Mashaw, True Security: Rethinking American Social Insurance (New Haven: Yale University Press, 1999).

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Figure 1 Numbers of “welfare” recipients

16,000,000 14,000,000

Numbers

12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000

88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 1 Ju 99 ne 9 20 00

87

19

86

19

19

19

85

0

Year Source: Department of Health and Human Services Note: “Welfare” includes afdc and tanf recipients.

rules in the hope of providing greater work incentives and preventing fraud. Recipients found the resulting rules onerous and demeaning. The association of the word “welfare” with this unpopular program helps to explain why many Americans use the term in a pejorative sense. While the welfare program was never large – spending never exceeded half a percentage point of gross domestic product (gdp) although polls indicate that average citizens perceived that it was much larger – it was persistently controversial. In his 1992 campaign, President Clinton pledged to “abolish welfare as we know it.” “Welfare-reform” legislation, enacted in 1996, did away with the program and replaced it with Temporary Aid to Needy Families (tanf). States have considerable discretion in the use of the money, but recipients are subject to sanctions if they do not fulfil work requirements and to a lifetime limit of five years for benefits. As may be seen in Figure 1, welfare rolls dropped precipitously in the booming economy of the nineties. Jobs were plentiful, and the stricter requirements of tanf discouraged applicants. Many states had enough money to pay for training, job-finding services, and child care. But, when the economy slowed in 2000, welfare rolls began to rise again – although they have remained far below the pre-1996 level.

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Studies of former welfare recipients suggest that, while their income increased modestly after leaving welfare, most are still poor. Despite some success stories, the typical former welfare family is still scraping by in a world of insecure low-wage jobs with few benefits. For a single earner with children, having a low-wage job does not provide a minimally adequate level of living. The gradual realization of the fact that work alone is not enough to eliminate poverty has eroded the two-category mindset and led to a new emphasis on making work pay. Making Work Pay Some social activists view welfare reform as an abdication of social responsibility, which forced the poor into low-wage jobs and left their children in unsafe neighbourhoods without parental care. A more positive view is that welfare reform was a step toward a new paradigm of social policy in which individuals who take responsibility for themselves in the labour market are supported by public efforts to make low-wage jobs more rewarding. This paradigm implies raising minimum wages, increasing wage supplements, offering training and job placement, and subsidizing child care and health care. In any case, assistance for low-income working families has become a growing theme of social activism in the United States. Food-stamp benefits and some housing subsidies are available to low-income working families, and Medicaid benefits have been extended to the children of the working poor. The Earned Income Tax Credit (eitc), which supplements the incomes of low-wage earners, has been increased, and similar tax provisions have been enacted by some states. The eitc is “refundable,” meaning that recipients can obtain the supplement even if the credit exceeds their tax liability. Despite recent erosion of the two-category mindset, its legacy still dominates the federal budget. Programs for the elderly and disabled are relatively generously supported, while programs for people of “working age” (and their children) receive far less public support. Part of the reason for this disparity is that the principal programs that assist the elderly are universal social-insurance programs, whose benefits go to all income groups. Programs for people of working age, by contrast, are generally incometested and concentrated on the much smaller population that is poor. Social Insurance Social-insurance benefits do not have the stigma of charity because everyone contributes and all are entitled to benefits when misfortune strikes,

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regardless of income. But universal social insurance is a far more costly way of channelling benefits to the needy than an income-tested benefit program. The two major federal programs that assist the elderly and the disabled (Social Security and Medicare) are both social-insurance programs, financed by payroll taxes on employees during their working years and by taxes on their employers, with benefits available when specified conditions are met irrespective of income. Not all social insurance is uniform across the states. Indeed, unemployment insurance may be an illustration of the “race to the bottom” that occurs when states set benefits. Unemployment insurance is financed by payroll taxes on employers that vary by state and reflects both firm and industry experience. Since states compete with each other to attract and retain employers, they are under pressure to keep their programs lean and their tax rates low. Hence wage-replacement rates and eligibility rules differ greatly by state but are generally far less generous than those of European systems. Benefits are time-limited. In recession periods, when spells of unemployment lengthen, the national government regularly extends the benefits at its expense, but workers often exhaust their benefits before they find jobs. Moreover, in contrast to many European countries, unemployment benefits in the US are available only to experienced workers, not to new workers, such as young people graduating from school or women entering the labour force after child rearing. For a combination of reasons, only about 43% of the currently unemployed are actually drawing unemployment insurance benefits – up from a low of 30% in the early 1980s. The percentage of unemployed workers drawing benefits varies greatly by state – for example, from 18% in Virginia to 65% in Rhode Island in 1995.5 That benefits are so limited in the United States makes unemployment a more painful experience in the US than in Europe. It may also encourage more vigorous job searches and help to keep unemployment rates lower in the US than in many European countries, even in the face of slow economic growth rates.

public spending to help the poor a n d t h e e l d e r ly The results of this historical interaction between federalism and ideology can be seen clearly in public budgets:

5 Graetz and Mashaw, True Security, 75.

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While Americans do not admit to having a welfare state, the US does have substantial social spending. Federal government spending for cash, food, and medical benefits for the poor and the elderly totalled over a trillion dollars in the fiscal year 2002 – about half the federal budget and about 10 per cent of gdp. State and local spending for the same range of programs added almost half a trillion dollars in the same year, or another 5 per cent of gdp (see Appendix). Programs for the elderly and disabled dominate social spending in the United States, especially at the national level. About 80 per cent of federal benefits go to Social Security, Medicare, and related programs for the elderly and disabled. High spending for the elderly results from a combination of the preference for social insurance (Social Security and Medicare), the political attractiveness of spending for older people, whose work incentives have been deemed mostly irrelevant, and the rapidly rising cost of medical care. This dominance of spending for the elderly is remarkable because the proportion of older people in the population is quite low in the United States compared to the proportion in Europe or Japan. The US will not reach the current European/Japanese proportion until about 2020 (see Figure 2). By contrast, assistance to working-age families is relatively small and under pressure from budget cutbacks. Only about 20 per cent of the federal benefit payments we are discussing go to the working poor: low-income people who are not elderly or disabled. State spending is more heavily focused on this group, but their spending is at risk in the current state-budget crisis. Under pressure to balance their budgets in the face of revenue shortfalls, states have been cutting Medicaid benefits for the working poor as well as training, child-care, and other services for low-income working families.

Not surprisingly, statistics on the incidence of poverty in the United States show that public spending has been extremely successful in reducing poverty among elderly Americans. About 10 per cent of those over the age of sixty-five are estimated to be poor – a lower incidence of poverty than for the nonaged population. The incidence of poverty among children is about 16 per cent but is much higher for those in single-parent families and for blacks and Hispanics. This historical legacy has resulted in a complex set of federal, state, and joint programs that are now colliding with economic and demographic forces: •

Growing inequality and stagnation of unskilled wages. US distribution of income has been becoming increasingly unequal for more than two decades. Between 1980 and 2001 the share of total household income

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Figure 2 Demographic breakdown by age of Japan and oecd Europe, 2000, and of the US, 2000–2030

100% 65 + 20-64 Percent of population

80%

60%

40%

20%

0%

Japan & oecd Europe 2000

US 2000

US 2010

US 2020

US 2030

Source: un Population Division

concentrated in the lower 60% of American households dropped from 32% to 27%, while the share concentrated in the highest 20% rose from 44% to 50%, and the share concentrated in the top 5% went from 16% to 22%. This growing inequality reflects falling or, at best, stagnating real wages for workers with little skill or education combined with very rapid increases for those with intellectual, technological, and managerial talents. Through the 1970s and 1980s, the wages of workers with only a high school education or less were falling in real terms, while the wages of those with college and graduate degrees soared. Only in the extremely tight labour markets of the 1990s did wages at the bottom stop falling and begin to rise, although wages of higher skilled workers rose much faster. It is not clear what will happen in the first decade of the new century, but there is little reason to expect that workers in low-skill jobs will be able to increase their standard of living without public efforts to make their work pay better or to subsidize their consumption. Policy responses to the plight of low-skilled workers could involve: increased opportunities to acquire the skills and education necessary to get higher-paid jobs; measures to supplement their wages by increasing

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the eitc, enhancing refundable child-tax credits, and subsidizing their housing or child-care costs; or (probably most important) providing lowwage workers with health-care coverage. This progressive agenda requires increased public funding, however, and large future deficits are likely to force reductions, rather than increases, in aid to the working poor. The immanent rise in the public cost of pensions and other services for the elderly. The number of Social Security beneficiaries is expected to rise from 45 million in 2000 to 69 million in 2020 and to 88 million in 2040.6 The ratio of workers to retirees in this period is expected to fall from about 3:4 in 2000 to 2:5 in 2020 and to 2:1 in 2040. The cost of Medicare (without adding new benefits for prescription drugs or other services) is estimated to grow from $254 billion in the fiscal year 2002 to $421 billion in 2010.7 The cost of Medicare will escalate even more rapidly after 2020, when the postwar generation begins to move into the high-cost ages of seventy-five years and older. Both the federal government and the states will also feel the cost pressures of the elderly in the Medicaid Program, which pays much of the cost of nursing-home and other long-term care. Both Social Security and Medicare are running surpluses at present but are seriously underfunded for the longer run. By about 2015 Social Security benefits are estimated to exceed tax revenues at currently projected tax rates. By around 2035, on the unlikely assumption that no changes are made, the program will have used up its reserves and will not be able to pay full benefits under current law. Funding Social Security is an easy problem compared to funding Medicare. Medical-care prices have been rising about 1.8 times as fast as the general price level for more than twenty years, and advances in medical knowledge are making more and more life-extending treatments available to the elderly. Ultimately, some form of rationing of care will be necessary if costs are not to rise exponentially, but the public is far from willing to accept rationing at present. Indeed, current political debate is about expanding the prescription-drug benefits under Medicare, which currently covers only drugs administered to beneficiaries during hospital visits. A budget outlook with huge future deficits in the national budget and continuing budget stringency at the state and local levels. In view of these challenges, the budgetary future would have been difficult enough in the United States

6 “Green Book 2000,” Committee on Ways and Means, US House of Representatives, I-37. 7 Congressional Budget Office, “March 2003 Baseline: Medicare,” http://www.cbo.gov/ factsheets/medicare.pdf.

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even with the federal budget in comfortable surplus, as it appeared to be in early 2001. To be sure the projected surpluses were based on unrealistic assumptions and did not allow for known future liabilities, such as the underfunded pension system. Nevertheless, the US government was paying off public debt and appeared well positioned to meet the challenges of widening economic disparities and an aging population. Most state governments were also in solid fiscal shape. Tax cuts, a slower economy, war in Iraq and Afghanistan, and rising expenditures for homeland security and other purposes have transformed projected federal surpluses into deficits. The federal deficit for the fiscal year 2004 will likely be more than $500 billion (at least 5 per cent of gdp). Official projections show declining future deficits but are unrealistically low because they assume that tax reductions already on the books will not be extended, although President Bush favours their extension. They also do not include probable additional expenditures, such as the prescription-drug benefit that Congress is likely to add to Medicare. More realistic projections anticipate continuing deficits of around 4 per cent of gdp for the next ten years. State budgets cannot sustain persistent deficits, but they are unlikely to return to the surpluses of the late 1990s in the foreseeable future. States have been struggling to keep up with the rising costs of the Medicaid Program, on top of funding education and other continuing state obligations.

w h a t m ay c o m e o u t o f t h e c o l l i s i o n ? One can only speculate about possible outcomes from the coming collision between rising demands for funding programs for the working poor and the elderly, on the one hand, and persistent deficits, on the other. Here are a few guesses: 1 Public benefits for low-income workers are not likely to be increased and may be significantly cut. The new paradigm of social responsibility, emphasizing efforts to make low-wage jobs more rewarding, is in danger of being derailed before it becomes a reality. Pressure to find savings in both the national- and state-level budgets is likely to be especially hard on lowwage workers because they have little political clout. Job-training programs, child-care subsidies, and Medicaid benefits are already being reduced at the state level as the slow economy cuts into state revenues. Pressure to reduce deficits in the federal budget will also probably lead

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to the federal government restraining the grants it extends to states to support such benefits. For example, tanf grants might be kept at existing dollar levels without allowance for inflation – or even reduced – and Medicaid contributions could be capped or restricted. Fiscal stringency will make serious discussion of national health insurance impossible, and the main losers will be low-wage workers. Since most Americans already have health-care coverage, one would think that it would be relatively inexpensive to extend coverage to the rest. But subsidizing health care for the uninsured is likely to cause employers to drop their current coverage of employees. No initiative designed to extend healthcare coverage to the uninsured will gain political support if it is perceived to make some of the currently insured worse off. Although there is some scope for increasing the efficiency of the health-care delivery system, the hope that efficiencies can pay for extending insurance coverage to more than 40 million more people is an illusion. Hence proposals for universal coverage in an environment of fiscal stringency are likely to meet the unhappy fate of the Clinton plan. Social Security benefits will gradually become less generous (relative to earnings), but the system’s solvency will be maintained without drastic restructuring. Attempts to preserve the solvency of Social Security without raising taxes will focus on raising the normal retirement age, discouraging early retirement, and changing benefit calculation formulas to reduce benefits from expected future levels. These cost reductions plus the income testing of benefits at the high end will allow social security to continue without major restructuring. In a less generous system, retirees will have to rely more on private savings to augment their benefits, which will be most difficult for low-wage earners. Advocates of privatizing Social Security will continue to have a following on Wall Street but will not get serious political attention because their proposals are two expensive to be considered in a tight-budget world. Channelling a portion of payroll taxes into private accounts requires finding additional funds to pay the benefits expected by current retirees and those close to retirement age. Fiscal stringency will make it impossible to find these transitions funds, so private accounts will cease to be a feasible reform. The costs of the Medicare Program will continue to grow rapidly as the population ages; attempts to hold down costs will be a continuous losing battle. Whatever version of the prescription-drug benefit Congress passes will become more generous and more costly over time. Medicare will require increased tax revenues, possibly funded through a special tax, such as an income-tax surcharge.

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6 Some of the recently enacted tax reductions will be reversed, and both national and state taxes will gradually rise. The large budget deficits of the 1980s were eventually reduced, beginning in 1990, by sustained bipartisan efforts to restrain spending and increase taxes. Restraining spending will be much more difficult in the next decade as the promises made to retirees come due. Hence taxes will have to go up again, and the first move will likely be abrogation of the legislated reductions that have not yet come into effect. The estate tax will not actually be abolished. Capital-gains taxes will not go down as much as legislated. Rate cuts at the high end will be reversed. 7 Nevertheless, the federal budget will remain in substantial deficit for the foreseeable future. The persistent deficit will create a strong bias against public spending for many purposes. It may lead to the scaling back of foreign commitments. It will almost certainly lead to reduced federal aid to state and local governments. Public infrastructure is likely to deteriorate, which will undermine both economic growth and quality of life. Some public infrastructure construction will utilize private financing, such as toll roads. The predictions above are consistent with the US economy recovering from its recent stagnation within a year and beginning to grow again at a pace sufficient to keep unemployment from rising further and, ultimately, to bring it down. A prolonged economic slump with rising unemployment rates and a declining stock market would make matters much worse. Really bad news might change the political dynamic, undermining the self-reliance ideology as it did in the Great Depression, and lead to a whole new social paradigm. This kind of economic disaster in the world’s largest economy would have equally terrible consequences for Europe.

conclusions Both Europe and the United States face difficult years ahead as they try to maintain social commitments in the face of rapidly aging populations. At present, Europeans are deeply concerned about paying for future pension commitments although they seem relatively relaxed about paying for medical care for the elderly. To an American, the latter problem seems more daunting. Europe is just beginning to deal with the problem of harmonizing social policy in an economic union of diverse states. The United States has not

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solved this problem although some of its experience may be helpful to Europe. That European countries, unlike American states, came into their economic union with well-developed social-policy paradigms may avoid a race to the bottom. But competition for industry within the union, coupled with the budgetary pressures of an aging population, may lead to less generous European social benefits in the future.

appendix Table 1 Federal, state, and local benefit payments for elderly, poor, and disabled persons, fiscal year 2000 Federal benefit payments (dollars in millions) Pensions

Social security

Disability insurance Old-age and survivors’ insurance

54,435 351,432

Railroad retirement

4,600

Federal employees’ retirement

100,328 510,795

Total pensions Unemployment insurance

21,139

Public assistance

88,316 26,099

Earned income-tax credit

646,349

total: cash programs Health

Medicare

215,145

Medicaid

117,921

Other Total health Food programs total: benefit programs total: federal

29,550 362,616 32,369 394,985 1,041,334

State and local benefit payments (dollars in millions) Medicaid and public assistance

237,885

Other health

127,342

Unemployment insurance Pensions total: state

18,648 95,679 479,554

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Total government social expenditures in categories discussed in this chapter (dollars in millions) Dollars As a fraction of US gdp

1,520,888 15.4%

Approximate federal social expenditures on demographic categories (dollars in millions) Aged and disabled

804,554

Other

236,780

Portion spent on aged and disabled

77.3%

Sources: (1) Table 11.3: Outlays for Payments for Individuals by Category and Major Program, “Historical Tables: Budget of the US Government, Fiscal Years 2002 & 2004”; (2) US Census Bureau, “Census of Governments.”

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11

South of the Border pa u l k r u g m a n

In his conclusion to this chapter, Paul Krugman notes that “if the US moves away from a strong welfare state, it will diverge sharply from other advanced countries – including Canada.” Conversely, in attempting to integrate further with the United States, could Canada move away from being a welfare state? The intriguing conjecture in Krugman’s paper is that if income distribution remains more equal in Canada than in the United States, and thus continues to more closely resemble that of the Northern European countries, Canadian voters acting rationally will show a preference for state provision of essential services, unlike voters in the United States, who, if acting rationally, might on average be averse to such provision.

It’s easy to see why residents of the US tend to forget that Canada exists. The linguistic boundary in North America runs through the middle of Canada, not between the nations. The threat of terrorism has led to strengthened border controls, yet the frontier remains remarkably open. And the cultural interaction between the nations is, of course, enormous in both directions. Given all this, one might expect to find strong similarities both in political attitudes and in economic and social policy. Yet when it comes to taxes and public services, the border is wide, indeed. Canada collects about 10 per cent more of its gross domestic product (gdp) in taxes than the United States. It provides universal health care; it offers substantially more generous assistance to low-income families. Largely thanks to much higher spending on income security, Canada has substantially lower poverty rates than the US, especially among children. And even these measurable differences fail to capture the full difference in attitudes. Canada’s welfare state is no longer as generous as it was a

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decade ago because fiscal difficulties and a new sense that deficits must be avoided have forced some retrenchment. Nonetheless, Canadians are far more supportive of a strong welfare state than their southern neighbours. Attempts to create a Canadian antitax coalition on the right along the lines of America’s ruling coalition have so far failed dismally. In all of this, Canada is a typical advanced Western nation, and the United States the outlier. Despite its geographical and cultural closeness to the United States, Canada has the policies – and, apparently, the political economy – of a European nation. Smeeding (1997) titled one of his papers comparing income inequality across advanced nations “Why Are We So Different?” His answer stressed proximate causes: the prevalence of low-wage work and the generosity or lack thereof of social transfers. In this chapter I want to add to the literature that tries to look behind these causes in explaining differences in political economy. My chapter is a speculative analysis of the reasons for American exceptionalism. I begin with a brief summary of the differences between Canada and European nations, on the one hand, and between Canada and the United States, on the other. I then turn to a very abstract typology of explanations for these differences, before describing some more specific models. Finally, I speculate about whether the American differences will fade away or widen over time.

the a m e r i c a n d i f f e r e n c e There has been an extensive effort to produce useful international comparisons of fiscal and social policy; I am by no means an expert. However, even a quick review of the readily available literature immediately shows that the United States is very different from the European norm, while Canada is not. Table 1 shows some measures of “inputs,” taken from the Organization for Economic Cooperation and Development (oecd 2002) and Smeeding (1997). What I mean by inputs are measurable dimensions of public policy that are indicative of the generosity of the welfare state. I show these indicators for the United States, Canada, and France (viewing the latter as a proxy for the European norm). Clearly, Canada lies between the US and France in each dimension but closer to France: Health care is mainly paid for by the public sector, tax rates are higher, and transfers other than to the elderly – on whom the United States does spend a lot of public money – are also high.

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Table 1 Measures of public policy United States

Canada

France

Public share of health costs (%)

43.8

70.7

75.5

Taxes (% of gdp)

28.9

38.2

45.8

3.5

7.6

9.0

Nonaged transfers (% of gdp)

Table 2 Measures of inequality United States

Canada

France .286

.373

.290

10:50 ratio

38

47

54

90:10 ratio

5.64

3.90

3.32

Gini coefficient

Families with children at tenth percentile (% of US median)

32

40

56

Infant mortality (per 1,000 births)

7.1

5.3

4.5

Table 2 shows some measures of “outputs” – measures of inequality in outcomes. The first three measures are relative. The Gini coefficient is, of course, a general measure of income inequality. The 10:50 ratio is the ratio of incomes at the tenth percentile to median income – a measure of how different the poor are from the typical family. The 90:10 ratio is the ratio of incomes at the ninetieth percentile to incomes at the tenth percentile, which Smeeding (1997) suggests is a measure of the “social distance” between the elite and the poor. By all these measures, Canada is a much less unequal society than the US; somewhat surprisingly, it has a higher Gini coefficient than France although it appears less unequal by other measures. Still, the US has higher real income per capita than Canada or Europe. Does this higher water level float all boats? The answer is no. Line 4 of Table 2 compares the real income of families with children at the tenth percentile in each country; this income is 75 per cent higher in France than in the US, and 25 per cent higher in Canada. That is, real – not relative – income poverty for families with children is substantially higher in the United States, for all its wealth, than in other advanced countries. While this probably isn’t the sole explanation for the results in line 5, it’s surely relevant: Infant mortality is much higher in the US than in the other two countries.

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Is the difference in outcomes fully explained by the differences in the strength of social-insurance policies? Probably not: The US appears to have a uniquely unequal distribution of pre-tax-and-transfer income as well as less redistribution and social insurance (though, as we’ll see, even pretax inequality may indirectly reflect public policy). Still, it’s probably a major factor. Which system is better – the low-tax, low-social-insurance US system, or the higher-tax system prevailing in other advanced countries? The answer, of course, is that it’s a value judgment. However, we can say that it’s highly likely that in terms of expected utility, a majority of families are better off in Canada or France than in the United States. This is true even though per capita gdp in the US is substantially higher than in the other two nations. Why do I say this? One reason is that gaps in per capita gdp partly reflect differences in working hours. Gaps in real gdp per hour worked are much smaller. So we should give some weight to the value of longer vacations, especially in France. A more important reason is that because of differences in inequality, comparisons of the mean overstate the international differences in the median. Using data from the Luxembourg Income Study, Smeeding (2001) estimates that median family income in Canada and France is within a few percentage points of US median income; on the other hand, income at the ninetieth percentile is about 25 per cent lower in both countries. Finally, there is the impact of income mobility: the movement of individuals up and down the income distribution. This is commonly regarded as a reason not to be concerned about income inequality: Who cares if the eightieth percentile does much better than the twentieth percentile if families shuttle frequently between those positions? But in reality income mobility does not fit what I once (Krugman 1992) called the “blender” model, in which families are constantly shifting positions. (And contrary to popular myth, the US has no more income mobility than other advanced countries. In fact, recent studies suggest that it may have somewhat less.) And the more limited type of mobility we actually have arguably strengthens the case for social insurance. A family at the middle of the income distribution has as much chance of falling to the tenth percentile as it has of rising to the ninetieth percentile. With a reasonable degree of risk aversion, the gain in expected utility to such a family from knowing that it does not risk facing US extremes of poverty would easily outweigh the cost from knowing that it cannot hope to reach US heights of affluence. Or to put it another way, income mobility should make the median individual adopt a

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partially Rawlsian attitude toward social policy: To some extent the individual doesn’t know where in the income distribution he or she will be in later life and therefore resides behind Rawls’s “veil of ignorance.” And as Rawls (1971) famously argued, the thought experiment of choosing a social order from behind that veil of ignorance should lead one to favour very strong social insurance. One more point: The risk of losing health insurance is a blow not fully captured by normal measures of downward income mobility. It is one more reason why one might expect the median family to favour a strong system of social insurance, including guaranteed health care. The upshot of all this is that it’s easy to understand why most Western democracies have extensive welfare states. Even if one acknowledges a trade-off between equity and efficiency, and even if one attributes the whole of the difference in per capita gdp between the US and other nations to the adverse efficiency effects of taxes and transfers, a majority of families still seem to be better off under European or Canadian levels of social insurance. Yet the United States does maintain a low-tax, low-benefits system and, if anything, seems to be moving further in that direction. What explains America’s choice? Even more puzzling, what explains why America’s choice is different from that of other countries?

structural differences or just different equilibria? At a very general level, there are two types of explanation one might offer for differing policies among countries. On the one hand, we might look for a structural explanation: What is it about America’s society that leads to a preference for a low-tax, low-benefit system? On the other hand, we might look for multiple political-economy equilibria: Are there ways in which an existing high-tax, high-benefits system creates the political environment that supports such a system, while the absence of such a system stifles the demand? Of these two general types of explanation, a multiple-equilibria story is the more intellectually interesting not only because it suggests that the American difference may be explained by accidents of history, but because it lends itself to modeling. The concept of multiple political-economy equilibria is also interesting because it is politically fraught. As I’ll explain later, a key factor behind both the hopes of conservatives and the fears of liberals in the United States is the possibility that conservative control of the government can permanently alter the nation’s political economy – that by

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undermining even the modest welfare state the US now has, the right can also undermine the political basis for any liberal comeback. One can see, then, why it’s more interesting and exciting to discuss the possibility of multiple equilibria. And I will devote most of what follows to multiple-equilibria stories. But one must always remember that the most interesting story isn’t necessarily the right one. So let’s briefly look at the possible structural reasons why US political economy might be different from that of other advanced countries. Casual observation suggests that the US differs from the rest of the Western world in two significant respects. One is race; the other is religion. The key point for understanding the role of race in American politics is that the African-American and Latino populations are considerably poorer than the white majority and hence more likely to be net recipients of benefits. Since these groups have also tended to be relatively disenfranchised – legally, in the past, and in more subtle ways even now – the electorate is that much less likely to take a Rawlsian view of the welfare state. Moreover, it’s painfully obvious that racial divisions have a negative effect on social solidarity. Would fictitious stories about “welfare queens” have had any purchase if not for race? Meanwhile, it’s equally obvious that the power of fundamentalist Christianity is a major factor in the US political equation in a way it is not elsewhere. In 1998, after the Columbine school shootings, Rep. Tom DeLay called a press conference to declare that these shootings were caused by classroom teaching of the theory of evolution. DeLay is now House majority leader, and arguably the second most powerful man in America. By contrast, campaign appearances by the Canadian politician Stockwell Day, who also asserts the literal truth of the Bible, were greeted by hecklers waving toy dinosaurs. It might not be immediately obvious why religiosity should work against a strong welfare state. But in the United States, at any rate, the religious right has in effect made a deal: It supports economic conservatism in return for social conservatism. As a result, many voters who would, judging by their economic status, be net gainers from a stronger welfare state have been turned into reliable opponents of taxes and transfers. It’s possible that race and religion are the whole story. But for what it’s worth, political strategists themselves don’t agree. In particular, the architects of the tax-cut drive in the United States have made it clear that they view cuts in taxes and transfers not just as good in themselves but as the key

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to a cumulative process of governmental downsizing, in which a smaller government becomes a less popular government, which in turn can be made still smaller. What basis might they have for this belief?

selfish elites Before I turn to multiple-equilibria stories of the American difference, I will begin with one approach to this difference that does not on the face of it lead to multiple equilibria but that can with some further reasoning lead in that direction. This is the model proposed in a fascinating recent paper by my Princeton colleague Roland Benabou (2000). Benabou begins by pointing out an apparent paradox: The United States, which is the Western nation with the least generous welfare state, is actually the nation in which the median family would seem to have the greatest incentive to support a strong welfare state. Why? Because the US has the highest pre-tax-and-transfer income inequality. Consider a highly stylized representation of taxes and social spending. Suppose that the choice before the voters is whether the government should tax all income at a rate τ in order to finance per capita spending G. Assume that the dollar value of this spending to each individual is αG. And lets initially assume α to be less than one. (This can be viewed less as a statement about the efficiency of government spending than as a metaphor for the efficiency costs of taxation due to their effect on incentives. It’s possible but messier to represent these costs directly, and the basic results are unchanged.) Consider also a highly stylized representation of political economy: Decisions reflect the interests of the median voter. Now as a matter of accounting, we must have G = τYavg, where Yavg is the average income per capita. If the distribution of voter incomes matches the distribution of incomes among individuals, however, the median voter will have median, rather than average, income. And since real income distributions are always skewed to the right, this means that the median voter’s income Ymed is less than the average income. So will this voter support a taxand-spend program? The answer is yes if and only if α τYavg > τYmed. Or, rearranging and cancelling, the median voter will support the program if Ymed/Yavg < α. This suggests a classic equity-versus-efficiency trade-off. That the median voter has income lower than the average tends, other things being equal, to produce majority support for higher taxes and spending. But against

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this is the efficiency cost of higher taxes, which reduce incentives. So rational voters will weigh these factors against each other. For simplicity I have just represented this as an either-or choice, but it’s clear that this can lead to an equilibrium level of taxes and spending that depends, other things being equal, on the distribution of income. A nation with a more unequal distribution of income, and hence a lower ratio of median to average income, should vote for a more generous welfare state. But the raw facts are just the opposite. The United States has the most unequal income distribution of advanced Western nations; it also has the least generous welfare state. Furthermore, as income inequality has increased in the US over the past twenty-five years, the political balance has shifted toward the right: Tax rates have fallen, rather than risen, with the biggest tax cuts being reserved for the highest incomes. Benabou’s proposed explanation of this apparent paradox reverses both assumptions of the simple equity-versus-efficiency model. On the political side, he supposes that despite majority voting the political system reflects the interests of a voter with above-average income – say, the voter at the ninetieth percentile. This might be justified by voter participation rates that rise with income; it might also, in a vaguer sense, reflect the tendency of the well-off to be better informed; and in a still vaguer sense, it may reflect the role of money in shaping political debate. But if the system reflects the interests of a voter with above-average income, why does this voter support any tax-and-spend program? Presumably because the program yields benefits that exceed its costs – that is, in the context of our hugely stylized model, because α > 1. Think of it this way: Even if some voters expect to pay more in taxes than the government will spend on them, these voters might view the benefits of living in a society with good public health care and education, effective antipoverty programs, and so on as nonetheless worth the personal cost. But as Benabou points out, this calculation depends on just how high these voters’ incomes are. Voters at the ninetieth percentile might support a generous welfare state if their incomes are 1.5 times the average income, but withdraw support if their incomes are 2.5 times the average. Stepping outside the model a bit, we may also point out that “social distance” may reduce the perceived benefit to elite voters of government services: If the pivotal voters live in better-than-average houses, but still live in mixed neighbourhoods and send their children to public schools, they may well view the cost of good policing and good education-related public services as worth the taxes. But if these voters live in gated communities and send their children to private schools, they may lose interest.

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As Benabou points out, this revised story can suggest a seemingly perverse relationship between income inequality and government programs that mitigate the impact of this inequality. Think of it as a theory of a selfish ruling elite: As long as the elite remain relatively close in income and lifestyle to the typical family, they support productive government spending. If the gap widens sufficiently, however, the elite turn their backs on such programs. Thus it becomes possible to understand why the United States, with the highest income inequality of advanced countries, has the most minimal social-insurance institutions. And it ceases to be a paradox that politicians advocating low-tax, low-benefit policies have become increasingly dominant over the past twenty-five years, even as the US’s distribution of pretax income has returned to Gilded Age levels of inequality. But how does this become a story about multiple equilibria? Benabou suggests that public spending, which is affected by inequality, affects inequality in turn. Education is the most obvious example: A well-financed system of public education is surely an equalizing force, while a poorly financed system presumably widens the disparity between the children of those who can afford either to live in good school districts or to pay for private schooling and the children of those who cannot. (Some authors make a convincing case that the perceived inadequacy of US public education in most locations has become a powerful driving force behind the spending choices – and the financial distress – of middle-class families.) In subtler ways other public spending, notably on health care, may also have the effect of reducing inequality – even aside from the direct redistributional effect of the spending itself. In Benabou’s model, then, the United States is different from other Western nations because of a circular process involving social insurance and the attitudes of the elite. Because inequality is high, the elite do not view a strong welfare state as being in their interests; because of the weakness of public spending, inequality is high. One might also extend the model a bit. Political dominance by an elite that does not share the interests of the majority might affect inequality in ways that go beyond taxes and transfers to include institutions. For example, a public policy that favours union organizing could be an important equalizing factor; if policy is antiunion, inequality will be higher. If public policy helps impose an “outrage constraint” on executive compensation (Bebchuk, Fried, and Walker 2002), the corporate elite will not be as distanced from middle-class concerns as they will be if compensation of top executives is 500 or 1,000 times average wages. And so on. In short, Benabou’s approach is highly suggestive as an explanation both of why the United States is so different from other Western nations and of

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why shifts in US policy have reinforced, rather than opposed, the explosion of inequality since the 1970s. Yet a casual reading of what political strategists say about taxes and transfers suggests a somewhat different explanation for this difference.

lucky duckies In a now-famous 2002 editorial, the Wall Street Journal dropped its usual position in favour of any and all tax cuts, opposing any tax breaks for low-income workers. Its reasoning was political: It is, in the Journal’s view, important that people hate government. Yet even the Journal admits that government programs provide some benefits. And low-income workers are “lucky duckies” who pay little in income taxes – yes, that was the Journal’s phrase. The trouble with such people, the Journal asserted, is that their taxes are not enough to get their “blood boiling with rage.” So there is a danger that such workers might actually support a strong social-insurance state. A cooler but similar message came in an analysis by Canada’s Fraser Institute, which would like to foment a US-style taxpayer revolt but has had little success: It explained its failure to gain traction with calculations purporting to show that 57 per cent of Canadians receive more in government benefits than they pay in taxes. What theory of political economy underlies such pronouncements? In the previous section I sketched out models in which the pivotal voters are rational and well informed: They vote for or against a policy based on a calculation of how that policy will actually affect their welfare. The luckyducky theory, however, seems to posit pivotal voters who are myopic – who look at the current balance of benefits and costs they receive from government and make a judgment about whether a larger government would be good for them on this basis. Here’s a crude way to represent the theory. Suppose that there are two kinds of government spending: spending that does not provide identifiable individual benefits, such as military spending, and social-welfare spending whose benefits are visible to the individual voter. Let M be military spending per capita and W be social-welfare spending per capita. If revenue is raised by a proportional tax τ, we must have M + W = τYavg. Also, lets assume that the benefits of government spending visible to a voter are αW. So will the median voter feel that government is his or her friend? It depends on whether αW > τYmed.

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The point, however, is that over some range this comparison is likely to depend positively on the level of social-welfare spending. To take the most extreme case, if W = 0, voters will see no direct benefits from government spending. Yet they will still have to pay taxes to support military spending. So if they are truly myopic, they will see government as simply a burden and oppose any expansion in the governments role. Yet if social spending is productive – high α – and, perhaps, if median income is low compared to the average, the median voter will have a positive view of a high-tax, highbenefit system if it exists. The lucky-ducky theory, then, is that voters who experience a generous social-insurance system will support it; however, if they can be denied this experience, they will remain hostile to taxes and big government. Incidentally, analysis aside, it seems an act of extraordinary cynicism to make this theory – which basically relies on voter ignorance and myopia – the basis of a political strategy. Yet it’s pretty clear that this is how strategic thinking works both at think-tanks like the Fraser Institute and the US Heritage Foundation and among lobbyists like America’s redoubtable Grover Norquist. And there’s also reasonable evidence that the theory is valid. A case in point was Alabama’s tax referendum in September 2003. The state’s governor proposed a tax reform that would have increased overall revenue, permitting a rise in education spending. The reform would also have made the state’s taxes less regressive, so most voters would have ended up paying lower taxes. Yet the measure went down in defeat: Opponents succeeded in convincing a heavy majority of voters, who had learned not to expect good things from government, that they would be hurt by the plan. The hope of American tax-cutters – and the fear of their opponents – is, of course, that they can achieve an Alabama-like equilibrium for federal taxes and spending. If federal spending can be cut to the point where most voters see little benefit from such spending, they will see taxes as a pure negative and accept a minimal welfare state. But how does such a view fit into the history of the United States and other advanced countries?

t h e o n c e a n d f u t u r e we l f a r e s t a t e ? Historians are, with considerable justification, usually scornful about attempts to fit history into simplified schema. Yet the urge to draw up such schema is irresistible and possibly justified. After all, we do need to make guesses about where we’re headed, and a guess informed by even a simplified model is better than one with no foundation.

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With these excuses, I will suggest a story about how Western nations came to have extensive welfare states and about how one nation may be about to lose its welfare system. Suppose that we take multiple-equilibria stories seriously. It follows, then, that before 1930 all advanced countries were, basically, in a low-tax, low-benefits equilibrium. But the combination of depression and war created both an enlarged tax base and a demand for far more extensive benefits. And once these benefits had been in place for some time, they became self-perpetuating via a combination of the Benabou and lucky-ducky stories. This schematic history applies to all advanced Western nations, but in the United States the high-tax, high-benefit equilibrium was not as firmly established as elsewhere – perhaps because of the race and religion issues described above. As a result, the US had lower taxes and benefits than other advanced countries even a generation ago. But now the divergence has become more marked. This may reflect underlying economic and technological forces that have pushed toward greater inequality – a trend opposed by government policy in many advanced countries but not in the US. It may also reflect a clever political campaign by the right, exploiting the nation’s race and religion issues. The big question is whether the US is nearing a tipping point, where it may transition back to a pre-1930-type low-tax, low-benefit equilibrium. This is the goal of strategists on the right. And the answer – aside from the fact that we do not, of course, really know – is that it seems possible. But only the United States seems even potentially near this tipping point. Certainly Canada, where attempts to create a US-style right have foundered ignominiously, is not in a similar place. So if the US moves away from a strong welfare state, it will diverge sharply from other advanced countries – including Canada. The border between Canada and the US may be about to get a lot wider.

references Bebchuk, L., J., Fried, and D. Walker. 2002. “Managerial Power and Rent Extraction in the Design of Executive Compensation.” University of Chicago Law Review 69: 751-846. Benabou, R. 2000. “Unequal Societies: Income Distribution and the Social Contract.” American Economic Review 90: 96-129. Krugman, P. 1992. “The Rich, the Right, and the Facts.” The American Prospect 3, no. 11 (September).

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“The Non-Taxpaying Class.” Wall Street Journal, 20 November 2002. Organization for Economic Cooperation and Development (oecd). 2002. oecd in Figures. Paris: oecd. Smeeding, T. 1997. “Why Are We So Different?” Maxwell School of Citizenship and Public Affairs Working Paper #157. – 2001. “The Gap between Rich and Poor: A Cross-Country Perspective.” Mimeo. Syracuse University.

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Globalization and Statistical Systems1 m.c. mccracken

A version of McCracken’s chapter was first delivered as a keynote address to one of Statistics Canada’s annual conferences on the state of economic information in Canada. In this chapter, two of Sylvia Ostry’s concerns come together: the challenges to Canada and the Canadian government created by globalization and the importance of keeping the Canadian public well informed and, indeed, involved in the generation of a sound information system. During Sylvia’s tenure as chief statistician of Canada, she tried very hard to transform an outdated statistical institution into a modern information system attuned to new challenges and to changes in policy priorities. Globalization as such had not yet been recognized as the single most important change in the economic landscape. But Statistics Canada was in a much better position to face the challenges of globalization because of these initial investments in its analytical capabilities and the emphasis on policy relevance.

th e m a n y f o r m s o f “ g l o ba l i z at i o n ” In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal interdependence of nations.2 Karl Marx and Friederich Engels

1 This paper draws on a keynote address to Statistics Canada staff as part of a conference on globalization (15 May 2000). It has beesn extended as a result of on-going developments at Statistics Canada and international statistical agencies. 2 Karl Marx and Friederich Engels, The Communist Manifesto (London: Penguin Classics, 1985), 83-4.

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The notion of increasing interdependence holds true today despite having been penned by Karl Marx during the heyday of the British Empire. But does it differ from the original? Today’s globalization has been defined as “deeper integration of the world economy” as countries become more tightly linked through trade, financial flows, and foreign direct investment, all of which were liberalized in stages during the postwar period, followed by migration of skilled workers and e-commerce.3 There are, however, other definitions of globalization. For example, the International Monetary Fund (imf) provides a blander definition: “Economic globalization is a historical process, the result of human innovation and technological progress ... The integration of economies around the world, particularly through trade and financial flows ... an extension beyond national borders of the same market forces that have operated for centuries at all levels of human activity ... they can have access to more capital flows, technology, cheaper imports, and larger export markets.”4 The technological change reflected in telecommunications, information technology, and financial networks has shrunk distance and allowed large enterprises and other projects to be centrally controlled. At the same time, the high fixed costs of research-intensive or marketing-intensive corporations have encouraged the spread of operations across the largest economic base possible. As a result large, private networks have been created that span many countries, with different parts of the enterprise spread across international boundaries, with internal trade a dominant activity, and with nation-state borders and legal frameworks often ignored. Membership in such a network is a different kind of globalization, essentially a parallel universe to the more conventional nation-state. The main agent of globalization has been the multinational enterprise (mne).5 Some see the current world as one of growing wealth, based on the productivity improvements of the new technologies. Kimon Valaskakis, at one time Canadian ambassador to the Organization for Economic Cooperation and Development (oecd), puts it this way: “The world economy today resembles an all-you-can-eat giant buffet ... At the heart of this amazing

3 Sylvia Ostry, “Globalization: What Does It Mean?” (G78 Annual Conference, Econiche House, Ottawa, 1999). 4 imf Staff, “Globalization: Threat or Opportunity?” imf Issues Brief, April 2000, . 5 Ostry, “Globalization: What Does It Mean?”.

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performance of the World Economy is the combined impact of technological change and globalization ... Distance has been trivialized and geography rendered irrelevant. This has accelerated the process of ‘globalization,’ which in its quintessential form can be defined as the transposition of human activities from the narrower stage of the nation-state to the wider theatre of Planet earth itself.”6 In its more extreme form, the future is expected to hold the end of the nation-state, with thousands of small city-states of limited power operating in a context of an international government, along with multiple private networks organizing economic and social life for their members. Obviously, it is not for statistical offices to choose the form of future governance. But the form of future governance will influence the challenges for statistical frameworks; the debate about such forms requires facts, and the on-going management of public and private affairs needs continuing flows of information with the required qualities. This brings us to a brief discussion of the notion of a national economic information system, or neis. In the past, we evolved a system with certain key data providers, each looking after their area of responsibility or, in the case of highly centralized statistical systems, providing a central statistical function for a number of departments. In Canada the “old” data providers were Statistics Canada, the Bank of Canada, Central Mortgage and Housing Corporation, and Natural Resources Canada. Now the world is changing. The reference databases include the old data sources plus other international databases and increasingly private data assembled as a by-product of on-going operations or website “fronts.” If we cared to write it down symbolically: Today’s required information = Σ (old + US + oecd + World Bank (wb) + imf + un + other specific countries + “private” data). Microsoft’s new mantra is “decision-making at the speed of thought.” Why is globalization of particular concern to Canada? Because Canada is one of the most globalized countries in the world, with substantial trade flows, high levels of foreign ownsership, large inflows of immigrants, and a cultural scene flooded by US providers. Canada is also one of the most open countries, whether measured in terms of trade, capital flows, ownership, culture, or ease of entry, among others. Exports of goods and services 6 Kimon Valaskakis, “The Search for a New World Order,” The Club of Athens, 15 March 2000, 7.

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rose from 25.8 per cent of gross domestic product (gdp) in 1990 to 45.6 per cent in 2000, both measured at the top of the business cycle. Many sectors of the Canadian economy are almost totally owned by foreign interests: autos, cement, petroleum refining, computing, and so on. After some declines, recent years have seen a growing concentration of foreign-owned enterprises and entry into new areas (telecommunications, banking, etc.). At least half of the magazines sold in Canada are from other countries, particularly the US. More than 70 per cent of newsstand sales are US. Television is dominated by US signals or by programs produced in the US. Book titles are mainly US-authored and printed. Music, movies, and other cultural forms originate in the US. No other country faces this same domination or has tried to develop a culture of its own in such a maelstrom. Over half of Canada’s population and labour-force growth is now based on immigration. This is expected to rise in the coming years to more than 70 per cent of population growth. Canada dips into the world technological pools for almost everything it uses. Fortunately, it also contributes to these pools with some research and development (r&d) efforts in universities, corporations, and governments. But any efforts to regulate access by other countries or business enterprises would have a major adverse impact on Canada if, in retaliation, it were excluded. With its openness, Canada is a “joiner” of multilateral organizations. It wants to broaden its options beyond the US and to “control” US urges to treat it as an appendage. But with each membership also come responsibilities and rules of conduct that affect the capacities of the federal government and Canadian corporations to act both abroad and in Canada. Responsibilities for provision of data are usually part of such agreements. In addition to multilateral agreements, bilateral or regional agreements are growing in importance. The North American Free Trade Agreement (nafta) looks as though it will form the main framework for future trade and investment flows. Specific interest in the US, Mexico, and Chile have become part of the ongoing monitoring responsibilities for government and private-sector organizations. New entrants mean new concerns. Canada is the “canary” in the globalization mine. Are we experiencing major adjustment problems? Can government programs act to rectify the imbalances? Do foreign companies behave in positive or negative ways? It seems to me that we have a particular responsibility to focus on the special measurement problems resulting from globalization, both in the interest of our own needs and to serve the rest of the world. Some of the key measurement areas are noted in the Appendix.

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i m p l i c at i o n s f o r s tat i s t i c s c a n a da ’ s activities In addition to the measurement challenges that result from the many aspects of globalization, the Canadian statistical establishment (Statistics Canada and other federal departments) is affected by pressures to conform to “best practices,” guidelines, and standards and codes promulgated by international agencies such as the oecd, the imf, and the un. Although Canadian bureaucrats are often consulted in the development of such guidelines, when these guidelines eventually become a reality, the statistical agency and other government departments face additional resource demands in order to implement them.7 Indeed, the failure to implement the guidelines can result in a Report on Standards and Codes (rosc) detailing the shortcomings. Unlike similar pressures applied say fifty years ago, today’s documents are made public instantaneously through websites. They can be used to pressure the central agencies for more resources, but until a response has been formulated, they serve as a “black mark” on the statistical system. Globalization imposes the requirement to globalize the standards of official information. For example, Statistics Canada is directly involved in the development of industrial classifications. The North American Industrial Classification System (naics), in whose development Statistics Canada played a major role, will be the main system for industrial studies in forthcoming years as more data become available in both Canada and the US. Statistics Canada was an active participant in developing the standards that form the basis for the Canadian System of National Accounts, sna-93. It was one of the first to adopt the standard for its use and remains active in improving the standards through consultation. The Canberra Group produced a set of recommendations for improving the quality of data on income distribution and enhancing its international comparability.8 Even when countries adopt the same international standard, possible differences in practice or characteristics of the countries can emerge. But globalization is intolerant of differences in the way information is produced. An excellent example of the challenges in achieving comparability

7 An excellent example is Fiscal Affairs Department, Manual on Fiscal Transparency (International Monetary Fund, 2001). 8 Expert Group on Household Income Statistics, Canberra Group: Final Report and Recommendations (Ottawa, 2001).

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is covered in the recent study by Kishori Lal of Statistics Canada.9 Two items – allocation of financial services and defence capitalization – have led to a level of gdp in the US that is 2 per cent higher than Canada’s.

issues Globalization or deeper integration challenges Statistics Canada to produce the data to assist those evaluating the benefits and costs of the various international economic agreements. This may require cooperation from the other participants in these agreements to ensure comparability of data. For many years, governments have had a “lock” on policy research and ideas. This practice is under pressure as more emphasis is placed on information and analysis by nongovernmental organizations (ngo s), both domestic and international. Is there a tradeoff between international focus and domestic needs? In a more closed economy it is understandable that the data needs of international financiers or policy makers might be secondary to the data needs of those trying to understand the resources required for primary education or the percentage of clean water available in rural areas. But Canada is so “open” that almost all data collection and analysis has a linkage to its role in the global economy. In the simplest form, every politician wants to compare Canadian performance to that of the US, particularly when ours is superior. With the domination of the media in Canada by US “signals,” it is almost a necessity to view Canadian performance within the context of international developments in that area. Of course, the US is not the world. Indeed, broadening the comparisons to other countries would be a major improvement in analysis. Statistics Canada and the Office of the Auditor General recently completed a review of the quality dimensions of some parts of the statistical system. This was a path-breaking exercise, with substantive lessons learned by all parties. This experience could be the basis for further studies of this important part of the statistical system. The International Monetary Fund has raised similar issues.10

9 Kishori Lal, Measurement of Output, Value added, GDP in Canada and the United States: Similarities and Differences (Statistics Canada, May 2003). 10 For references on the multiple dimensions of quality in official statistics, see the IMF website at .

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s o m e a r e a s f o r p o s s i b l e s p e c i a l i z at i o n If the statistical systems around the world are going to improve in step with the many changes that globalization is encouraging, one strategy would be for some of the developed countries to “adopt” problem areas or specialize in leading the international efforts in improving the quality and comparability of data in a specific area. A short list of possible areas for active Canadian participation might include: • • • •

•

a foreign direct investment register temporary movements of people federation data systems international comparability productivity taxation and government expenditures resources literacy improving the quality of information

conclusions Canada is committed to globalization while most countries are only involved. The difference is best understood by reference to a breakfast of ham and eggs. In the production of that breakfast, the hens were involved, but the hog was committed. This requires the best statistical system in the world. Statisticians must focus on this objective each day for each action they take, making it the context for their decisions and planning. Governance requires involvement of civil society; civilians are the statistician’s clients too. Statistics Canada has served governments well for many years. The corporate sector is also well taken care of by the detailed demographic and marketing information that it so much desires. Civil-society organizations (as reflected by the ngos, research institutes, unions, political parties, etc.) also require detailed information about the functioning of government and other parts of society. Is government operating efficiently and effectively? Is social exclusion occurring? If so, where and why? What are the effects of globalization? And what are the effects of corporate activities on workers, on society? An informed public is the key to strengthening democracy and developing a balanced society – one in which the efficiency and innovation of a

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market economy can be linked to the richness of a democratic society. Statistical agencies throughout the world play a key role in providing the information and knowledge bases required to support efforts toward creating and maintaining an informed public.

appendix Special Areas for Measurement Capital Flows and Stocks Foreign direct investment (fdi) and market revaluation Capital Markets Equity markets Exchange rates Interest rates Wealth effects Cultural Dimensions Linkages Multicultural aspects Trade Environment Air and water pollution flows Greenhouse Gases (ghg) Solid wastes Toxic wastes Immigration Out-migration Temporary and seasonal movements Institutional Characteristics Corporate (domestic) Corporate (transnational) Nongovernmental organizations (domestic and international); there were 6,000 international ngos in 1989 and 26,000 in 1999. International Agreements Free Trade Agreement (fta) G7, G30 Kyoto commitments North American Free Trade Agreement (nafta) World Trade Organization (wto)

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Labour Markets Adjustment processes Certification Executive exchange Human capital formation Education Training Occupational demands and returns Temporary movements The New Economy Business-to-business Internet transactions Information and communications technologies Services sectors and adoption of technologies Technology is lowering goods prices and increasing the list of “commodities” Societal Dimensions Health Income distribution Literacy Poverty and exclusion Social capital and cohesion Technological Linkages Intellectual property and research and development (r&d) Licensing agreements Patents and copyrights Trade in Goods Delivery of goods through postal and courier systems Trade in Services Delivery through the Internet

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13

Statistics, Social Relevance, Policy, and Analysis: Why They Are Bound Together jacob ryten

From mid-1972 to early 1975, Sylvia Ostry was chief statistician of Canada. Statistical offices are not known to respond quickly to new challenges, for continuity is one of the elements of their trade. They respond even more slowly or not at all to possible changes in mission. The Canadian statistical office was no exception to this rule, and Ostry’s tenure in the organization’s top post was short. However, she managed to sow the seeds of something that was to affect the organization’s posture, mission, and importance within the array of federal institutions many years later: the need to be policy-relevant and to ensure that the Canadian statistical office stayed relevant by maintaining a well-developed analytical capacity. This chapter refers mostly to the role of such a capacity in an organization created to produce official statistics.

Thirty years ago, government statistical offices were reluctant to provide a contextual analysis to accompany the figures they published on a regular basis on the grounds that doing so would somehow deprive them of the objectivity and neutrality that were key to their mission. Today a number of those offices, chief among them being Statistics Canada, regard the results of their analytical efforts as an important supporting device that underpins their publication efforts. Are they right in so doing, and if so why? In an article published some fifteen years ago, Fellegi and Wilk, two chief statisticians of Canada, argued that no published official statistic was complete if unaccompanied by an analysis of what the estimated numbers

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meant.1 They went on to argue that no institution that produced official statistics carried out its mission fully if it did not include, nurture, and deploy an analytical capability. They further argued that the very quality of official statistics was affected detrimentally by the absence of such a capability. Thus this chapter also addresses a subsidiary question: What is so remarkable about complementing raw information with an appropriate analytical supplement that it warranted an article in a learned journal to argue the case? In order to answer these questions, the chapter puts forward three propositions: •

•

•

It is impossible to measure anything in the physical or in the social domain without an underlying theory to guide the measurement, and an analytical effort is required to relate the measurement to the theory. It is impossible to interpret the results of the measurement without separating what appears to be due to regularities in social behaviour from what seems to be the consequences of chance. It is most advisable to leave the process of analytical interpretation in the hands of the producer of official statistics on the grounds of competence, integrity, and exclusive familiarity with the basic results.

Fellegi and Wilk invoked a number of reasons2 why it is useful and beneficial for a statistical agency to have an analytical capability and to exercise it at every opportunity. None of the reasons was compelling. In this paper I advance what strike me as compelling reasons why (a) there should a manifest capability and (b) failing to activate it is tantamount to reducing the value of the finding, the transparency of the methods, and the usefulness of the results. These reasons are as follows: (a) it is impossible to determine how and what to measure without the support of a theory; this implies an understanding of the range of predictions of which the theory is capable and an analysis of what measurable facts can support or refute the theory; (b) it is impossible to move from a notional measurement to one that is operationally feasible in the absence of an analytical context; and 1 I.P. Fellegi and M.B. Wilk, “Is Statistics Singular or Plural?” The Canadian Journal of Statistics 16 (1988): 1-8. 2 These reasons include the relationship between certain techniques and confidential data; the probability of discovering data gaps in the array of data produced by an official agency; the requirement for the formulation of systems of statistical data; maintaining relevance; assessing quality and consistency; the requirement to underpin research and development in a statistical agency; and that modelling is an alternative to expensive collection in certain cases.

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(c) given the purposes of statistical measurements, their simple dissemination cannot answer the key question, namely whether they give the lie to or corroborate a hypothesis. In order to make matters clearer, I use two examples throughout the chapter. They are provided by labour-force surveys as instruments to calculate the rate of unemployment and by surveys of household expenditure as one of the elements with which to estimate the cost of living.

on the impossibility of measurement w i t h o u t a n u n d e r ly i n g th e o ry The English3 philosopher Sir Karl Popper, when arguing against the notion of tabula rasa, used to give his class the instruction “Observe,” which invariably prompted the reaction “Observe what?”4 This was the expected answer and served to make a subsequent point. It is impossible to observe without instructing the eye which way to turn and without a frame of reference to interpret the sense data the eye gathers. Now suppose that instead of “Observe,” he had said (in the context of a statistical operation) “Measure!” or “Survey!” or “Balance!” or any of the generic operations that are basic to a complex statistical activity. The reaction would have been much the same. Yet, for many years, government information gatherers as well as users, much like seventeenth-century empiricists, pretended that they could measure social and economic processes in a completely objective way, implying that they did not need to relate the results of their measurements to any frame of reference, let alone an analytical one. Of course, one’s frame of reference may be both implicit and primitive. It may rest as much on foolish as on reasonable assumptions. It may be highly controversial or in line with generally acceptable views about the way social groups or enterprises or public-sector institutions behave in response to particular stimuli. But it is no challenge to reason to argue that one’s frame of reference should be intersubjectively communicable and its nature arguable on analytical grounds. Moreover, it is impossible to do without a frame of reference, just as it is impossible to interpret sense data without a spatial framework to organize them. More formally:

3 Technically, he was English but at heart profoundly Viennese. 4 In the case of an organization using public money that could be allocated to alternative ends, after being told what to observe, it would have to ask why and to describe as objectively as possible what would prompt it to observe one thing and not another.

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There has to be a conjecture or a hypothesis underlying the measurement activity. The conjecture must be reducible to a formula of the type “In all cases that can be described as A with attributes (a1, a2, a3 ... an), if the factors X (x1, x2, x3 ... xm) are seen or known to be present, observable consequences Y (y1, y2, y3 ... yk) are likely to follow.” The evidence marshalled to corroborate or refute the conjecture must refer to situations of the same type, must control for the presence of the factors listed, and must answer the question of whether the expected consequences followed.

The three “musts” in the last of the formal conditions are impossible to secure without a proper analytical effort. There is an important underlying assumption that is not usually spelled out, but which nevertheless guarantees that statistical measurement in the social and economic domains remains the single most important purveyor of evidence for and against social and economic hypotheses: •

There are regularities in social and economic behaviour. More so than in the physical sciences, these regularities may apply exclusively to processes and events in the same neighbourhood, but within these limitations, deviations from what a theory predicts must be explained; otherwise, the theory stands refuted.

And there is a standard epistemological desideratum: •

Theories are to be preferred if they explain more rather than less – much as is the case with the physical sciences.

Consider household expenditure as an example. Assume that for fiscal reasons a government decides that it is desirable to increase consumer expenditure by stimulating consumption of a number of goods and services the demand for which is assumed to be elastic and that it will do so by removing from those goods and services the indirect tax – value-added tax (vat) or sales tax – that is currently levied on them. And lastly assume that the government’s initiative is part of a set of preelectoral promises that together with others are to be independently monitored so that the political opposition and public opinion at large can be shown within an acceptable lapse of time whether or not the government’s measures were as effective as promised.

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Suppose that an official statistical office is asked to undertake the task. It opts to conduct an immediate survey of household consumption and to do the same twelve months later. Here are some of the decisions that it must make, the support of which entails the availability of theory: •

• •

•

•

whether there is a satisfactory way of measuring “cost of living” as opposed to measuring a weighted average of the prices of goods and services purchased for consumption purposes the period over which consumption should be measured the expenditure authorities within the household so as to understand how decisions are made and modified the resolution to be applied to expenditures in order to distinguish those goods and services that were affected by a change in indirect taxation from those that were not the ancillary information that should be collected in order to decide whether conditions at the end of the period are roughly similar to those observed initially (incomes, family structures, relevant consumer and mortgage interest rates, general confidence in the economy, etc.)

I deliberately exclude those decisions that are more closely related to the theory of measurement and its instruments (sampling rates, coding manuals, interview techniques, reliance on memory as opposed to a diary, presentation of receipts, etc.) on the grounds that these are the permanent object of attention of the specialized staff within statistical agencies. Next, there are the decisions on how to convert a measurement model into a set of practical operations. These have mostly to do with identification, inclusions, and exclusions. Here are some examples, but by no means an exhaustive list, of all the decisions to be made: •

•

•

What should not be considered a household? Once a household has been identified, who should its members be? (Are children at boarding schools whose educations are being financed by guardians and godparents from outside the household in scope for measurement, or should they be excluded?) What should not be considered a consumption expense? Is the hiring of a landscape architect to improve the appearance of the front lawn of an owner-occupied house that is about to go on sale a current expense? Where is the boundary between buying and borrowing? Is the fixed charge levied on a credit card a consumption expense?

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These decisions must be made and defended on objective grounds. Arbitrariness is a last resort, but a careful analysis of the relationship between each decision and received theory is much like a trench or a bunker necessary to defending the statistician’s integrity and reputation for objectivity. And finally, the crux of the operation is to answer the question of whether there is evidence to suggest that the government’s measures produced (and to what degree) the desired effect or whether what was observed is as much the product of chance and of changed initial conditions as what might be imputed to the government’s measures. Note that unlike in the physical sciences, the social units under observation have a will of their own – imagine if an atom announced that it was about to change the relationship between the basic forces that keep its constituent elements in equilibrium! These social units can decide to change their response to a particular stimulus for reasons that fall outside the scope of any experiment. For example, received theory states that given the choice, socialized individuals will opt for more rather than fewer resources (more leisure, more goods and services, more assets, more security, and so on) and when faced with a disturbance will seek to redistribute their command over goods, services, and assets to the point where no further redistribution will give them as high a yield of satisfaction. But individually, other priorities could interfere with their choices. Thus love of country, church, party, or sports team could lead to actions that on the surface are irrational and not susceptible to interpretation by standard economic theory.5 But only analysis intimately tied to measurement will provide a basis for speculation on whether there is a fault with underlying theory or whether an external and new condition has invalidated the experiment. Consider a second example, that of the government in power states: “If the following fiscal measures are taken, and there is no unforeseen change in the economic environment, in the light of observed regularities in behaviour (or in the light of the predictions of economic theory), the consequence will be a lowering of unemployment to 2 per cent.” This is as much a party platform announcement as it is a conditional forecast based on a theory about the behaviour of economic agents. If it is the former, it is usually accompanied by the undertaking (at least in democratic societies) that “the good faith of the government is demonstrated by asking an indepen5 The last time these assumptions were challenged was when Lenin and subsequently Stalin came to the belief that they could produce a homo sovieticus who would respond to social incentives and deterrents differently from his or her unliberated cousin, homo sapiens.

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dent observer to measure unemployment and to announce whether, in the interval forecast, the measures taken brought the number of jobless down to 2 per cent of all those who declare themselves engaged in the labour force.” It is this undertaking that requires the intervention of an authority on the measurement of social processes, which in most societies is neither more nor less than the institution charged with the compilation of official statistics. This institution – the government’s statistical arm – must have the technical competence, the integrity, and the analytical ability to place the government’s announcement in its proper social and economic context, to assess the circumstances of the national labour force, and to decide how it is going to measure objectively the number of unemployed and to interpret the answers it obtains. For example, the lowering of unemployment to a 2 per cent rate would mean little if it were reached for one month, and this for purely seasonal reasons, but started tending toward a higher number soon afterward. Accordingly, only a credible statistical institution would have the legitimacy and authority to declare that after so many months during which the rate bounced around the 2 per cent mark, and after allowing for typically seasonal and purely stochastic factors, the government’s target had been attained. But to earn the necessary credibility to make such a pronouncement, the statistical office would need to have previously shown its proficiency in analytical issues. Nor is the capacity to make a judgment on the outcome of the government’s measures – however guarded the words chosen – all that is expected of the statistical office. Prior to making this judgment, it would have to convert the government’s stated objective into something operationally measurable. In the example given, it would have to establish a measurable and analytically defensible demarcation of who is in the labour force and who is out based on what should be considered a state of unemployment as opposed to either a state of employment or a state in any of the in-between areas (discouraged unemployed, underemployed, partially employed, etc.) We need not stop to refer to matters that relate more intimately to the measurement process: how to sample, how to sample with a given precision, and how to decide what an adequate sampling error is given the applications of the estimated number. Nor do we need to consider what are purely institutional attributes: how to inspire confidence in the result, how to convince the public that the number calculated was not tampered with by government intervention, and so on. In converting a general proposition – the state of unemployment or the number of jobs created or the

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level of prices – into an operationally measurable set of magnitudes, many decisions must be made. Each of these decisions must be credible and convincing. In order to make it so, the statistician must be prepared to invoke the right arguments and to show why a particular course of action was rated preferable to all others. When one is dealing with the definitional structure of a complex measurement, not all elements require explicit analytical support. Certain cases are obvious. Thus, if in defining the labour force one excludes infants, the chronically infirm, the very elderly, and so on, the arguments to do so are obvious. But the same cannot be said about excluding those between the ages of sixty and sixty-five or between fifteen and eighteen. And if in the end it is decided to opt for self classification – the surveyed informs the surveyor of whether he or she is in the labour force – this requires an analytical defence should it be attacked as excessively “subjective.” The argument that these matters have been thrashed out in international forums and that in practice one follows internationally accepted norms in order to preserve or secure international comparability is not sufficiently true though it may be. At one point – irrespective of where or who – a decision about labour force inclusions and exclusions was reached on analytical grounds. If this decision was international in scope, local statisticians had to decide for explicit reasons whether the cost of adhering to an international definition was offset by the advantages of comparability and the convenience of suspending judgment on one of the many grey areas that plague the best of definitions and demarcations. But the third analytical activity – to test implicit forecasts and theories embodied in policies, measures, beliefs, and questions instituted and voiced by government and the public – is the most important. In fact, it falls on the shoulders of the official statistician not so much to corroborate social and economic theory but to highlight the instances where the theory’s predictions are refuted by evidence. An expert once stated that “statistics exists only at the interfaces of chance and empirical data”6 and might have added that the empirical data collected arise when social and economic regularities meet chance. The resulting statistics are the compound of underlying approximately invariant processes and chance, but who but the expert statistician is to say which is which and what proportions should be allocated to the one and not to the other? So the inescapable analytical obligations of the statistician are to 6 Leslie Kish, “Chance, Statistics, Statisticians,” Journal of the American Statistical Association 361 (1973): 1-6.

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provide the evidence that corroborates or refutes an implicit forecast (and possibly an implicit theory) and to analyze by how much of the evidence produced is the product of chance. It can be safely argued that no outside researcher is equally well equipped to conduct this line of inquiry and that certainly no one has an equivalent sense of mission. These then are very fundamental reasons why the measurement process can be understood only in a social and economic context and why the data produced must be subjected to profound analysis if they are to serve as a basis upon which to decide whether underlying theories and implicit forecasts should be severely questioned or accepted as temporarily corroborated by the evidence. We turn now to the question of whether it was always the case that in providing a judgment on the outcome of an experiment, statisticians did not hesitate to make known the results of their analysis.

h o w i t wa s Two hundred years ago, there was no question about the role that statistics played in the art of statecraft.7 In the English-speaking world, statistics supported the advance of social science and made it possible for governments to discuss weighty matters, such as whether they should repeal the Corn Laws or how many capital ships could be commissioned without endangering the country’s taxation base. On the Continent, statistics made it possible to calculate the relative sizes of standing armies and the likely demand for corn that feeding them would require. The quantitative base to establish these relationships was derived periodically from population censuses, farm holdings, and all the productive assets available to the country’s households. The numbers that were yielded seldom provided unexpected results. After the Napoleonic wars, they tended rather to confirm majestic upward trends on the basis of which new projections could be made with the confidence that only relative peace and prosperity can engender. The most careful of studies would not find evidence of mistrust in the results of these periodic censuses, strong arguments for speedier processing of the results, or suggestions that the process of gathering quantitative evidence was in any way flawed because of the close relationship between the government that made use of the results and the experts who collected and described them. 7 Davenant, Of the Use of Political Arithmetick, “By Political Arithmetick we mean the art of reasoning by figures upon things relating to government,” 128.

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In many countries, both on the European continent and abroad, an annual document8 assembled all the numerical evidence about the condition of the people, the soil, and institutions, based partly on state inquiries into their respective condition and partly on private scientific or commercial initiatives to learn more about markets, buyers, and, generally speaking, trade opportunities. This document – the Yearbook, Annuaire, or Jahrbuch (of Statistics) – was much the same among the more advanced countries and in many ways served as an annex to the political review of a country’s condition that, in one instance, constituted the speech from the throne and, in the other, the review of the state of the nation. There is no suggestion dating from those times – thirty or forty years on either side of 1870 – that the numbers included in the annual document were tendentiously chosen, deliberately rounded in one direction rather than in another, or selectively published to give a rosier picture of actual conditions than that warranted by fact.

how it became, or is t h e l o n g te r m d e a d ? The Great Depression, followed by enormous demands for resources for reconstruction in the aftermath of the Second World War, changed matters or at least brought sharply to the surface changes that had started to take place in earlier and less troubled times. These changes affected the use of numerical evidence, the frequency with which their updating was required, and the lingering suspicion that the numbers were deliberately misused or tainted by outright bias in order to advance the electoral prospects of a political platform. The intensive and extremely tendentious use of statistics adopted right from the start by totalitarian governments9 may have been as much a factor in the battle of numbers as was the urgent need to diagnose the causes of unemployment, to establish the presence of creeping inflation, and generally to assess party and government commitments to getting the reconstruction of European housing and plant underway. 8 As early as 1838, The Royal Statistical Society, to give it its present title, defined statistics as the “illustration of the conditions and prospects of society.” 9 And, indeed, adopted by their leaders long before they came to government. But this was the case more so in the Soviet and Soviet-inspired countries. The creators of “scientific socialism” took pride in the ease with which they marshalled quantitative evidence, and they made the point that its existence disposed of an adversary’s argument.

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Of course, steady trends and the unhurried consultation of numbers gave way to a daily preoccupation with updated figures, to an almost exclusive focus on changes and changes in the rate of change, and above all to a general agreement that quantitative evidence was both the yardstick by which to judge good political performance and the argument that brushed aside opponents’ explanations and excuses.

unintended effects Some twenty years ago, an irritated Canadian minister of finance quipped to reporters that analysis was too important a subject to be left to statisticians and that the latter should concentrate on measuring properly. Someone else would look after analytical matters. It is not clear when it happened or whether it happened in direct response to public criticism, but as of the early 1950s many heads of statistical agencies and their senior associates, the academic profession to a considerable extent, and most politicians who had thought about the matter came to the tacit agreement that official statisticians were exclusively in the business of objective measurement and that for measurement to remain objective, it must be accompanied by silence. What statisticians were supposed to measure was a matter for the governments to decide, and how the results should be interpreted was for social scientists and policy analysts to consider. In all likelihood there was never an organized and systematic attempt to stifle analytical impulses originating in statistical organizations. But it would seem that these impulses were channelled into areas where personal subjectivism or partisan bias were unlikely. It is not a surprise that throughout the world and in the wake of the Second World War, the more outstanding analytical activities carried out within statistical agencies were to be found in the realm of socio-demographic statistics. In the case of the composition of population, its growth, and even its migratory waves – short of those provoked by natural or human-generated disasters – the relevant trends are slow paced, predictable, largely unaffected by chance events, and have little in common with the short-lived oscillations that characterize the economic cycle. But economic or socio-economic analysis is still in its infancy in the overwhelming majority of statistical offices partly because of a fear of being judged as biased, partly because of a fear of competing with the more powerful analytical units housed in central banks or in prestigious ministries in governments’ economic portfolios, and partly because of a sheer lack of knowledge and habit.

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th e th i r d o f t h e th r e e q u e s t i o n s Analysis is the process of identifying or establishing relationships which have some approximate character of invariance.10 I.P. Fellegi and M.B. Wilk

Actually analysis is much more than this. John Maynard Keynes pointed out the relationship between a political pronouncement today and the ideas of yesterday’s long-dead and forgotten economist. The quip has a dimension relevant to my argument. Whenever public officials, governments, or political parties make pronouncements about what they are about to do (if in power) or intend doing (if power is given to them), they are making inferences (forecasts) based on social theory insofar as they invoke certain methods to bring about changes in behaviour or in outcomes. In democratic societies these promises are subsequently checked against realizations, and accountability is demanded if there are gaps between outcomes and forecasts. But what if there is no satisfactory explanation for a gap between a promise and an outcome? And what if the conditions described and the means invoked to produce a desired outcome are those prescribed by received theory? The statistical measurement of the outcome closely resembles an experiment in the domain of the physical sciences. The burden of refutation of a theoretical prediction falls to the statistician or to whomever is acting as a statistician. Obviously, nothing is as conclusive in real life as it is in idealized examples. Theories that have faced worse encounters with evidence are still around faute de mieux. The point is not to determine whether this is sound epistemology but rather to note that it is an undeniable fact. But even if theories stay around after uncomfortable evidence against them is collected, it is up to the statistician to design the experiment, to collect the evidence, and to argue whether a logical inference has been invalidated by objectively collected evidence. The final argument is that no one is in a better position to determine whether the results of a data-collection operation and all that they imply are a product of chance or indeed of an unpredicted change in behaviour that has invalidated theory – to say nothing of the fact that the change in behaviour has made nonsense out of a political commitment. But such an argument follows from the obligation to make a pronouncement on whether the evidence supports or refutes an implicit forecast. In practice it 10 Fellegi and Wilk, “Is Statistics Singular or Plural?”.

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is very difficult, almost impossible at least in the short term, for any party other than the collectors and compilers of statistical information to manage the information that is required (a) to make a judgment about the social and economic context (its similarity to initial conditions, the presence or absence of important external factors, etc.) and (b) to interpret to which extent the results of the measurement activity – the experiment – are a product of chance rather than of an established socio-economic regularity.

conclusions It will take a while before government statistical offices throughout the world recognize that their mission is not exclusively to make the body politic and society at large aware of the quantitative description of all those social, economic, and environmental processes that are objects of public concern. No doubt this is a large part of the mission. But there is another part that was relegated to the institutional unconscious many years ago and that has not yet fully resurfaced. This is the need for the statistical arm of government to make its analytical processes visible and its analytical conclusions public not only so that the audience is better informed, but also so that the interpretation of the conditions of society by objective fact-finders can become a genuine target for discussion and criticism. Official statistics are the hammer and anvil on which sociology, economics, and demography are tested, on which their hypotheses are corroborated or more likely refuted. It should be up to statistical offices to have the last word on whether a counterintuitive development is the fruit of chance or whether it is the harbinger of something new and unexpected. This last word can result only from a serious analytical effort. Moreover, the effort has to be made by the official designer of experiments, collector of the information, author of the methods and techniques used to conduct the experiment, and interpreter of the results. In theory, this could be any researcher. But in practice no one will have the feel for the data, the moral authority, and the theoretical and practical expertise to make the final pronouncement. These ideas are not new in Canada. They arose some thirty years ago when Statistics Canada found a stimulus and an opportunity to broaden its sense of mission.

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pa r t t w o

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Economic Summitry in the 1980s: A View from a Sherpa’s Tent robert armstrong

Lord Armstrong’s own words best introduce his memoir of the sherpa club in the 1980s: “Sylvia Ostry came into my life in the 1980s – in 1983 or 1984, I should say, but I cannot now remember in exactly which year – when she became the Canadian prime minister’s personal representative for the preparation of Economic Summits of the heads of state or government of the seven major industrialised countries, or (since that was rather an indigestible mouthful) sherpa. This term (first applied in this context, I believe, by The Economist), was just coming into currency when I became the British prime minister’s sherpa in October 1979. We had not then yet started to talk generally about the ‘G7.’ As sherpa, she was an admirable representative of her country. For myself, I am glad and proud that she became and has remained a good friend.”

The first Economic Summit was held in 1975 at Rambouillet in France on the initiative of the then president of the French republic, Monsieur Giscard d’Estaing, and the chancellor of the Federal Republic of Germany, Herr Helmut Schmidt. The original membership was intended to consist of the heads of state or government of France, Germany, Japan, the United Kingdom, and the United States, but before the first meeting the prime ministers of Canada and Italy were added to the group. After two years the president of the Commission of the European Community and the head of state or government of the country currently in the presidency of the Council of Ministers of the European Community (if that was not a country already represented at the summit) were invited to attend as observers. The seven member countries took turns hosting the summit. All this was of

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course before the end of the Cold War, and the question of Russian representation at the Economic Summit was still well below the horizon. It was the intention of the founding members of the group that their discussions should be as wide-ranging and as informal as possible and that they should not be trammelled either by an elaborate preparatory process or by the need to arrive at agreed decisions on specific issues. It was recognized nonetheless that there would need to be some preliminary preparation and that their own parliaments and electorates and the international media would look for some account of what they had discussed and any conclusions to which they had come. They therefore decided that the work of preparation should be undertaken not through normal diplomatic channels but by a group of personal representatives, all of them public servants chosen because they were not only well versed in the problems of international economy and finance, but also close enough to the heads of state or government to know their thinking and enjoy their confidence. The sherpas were the only people allowed in the room for sessions of heads of state or government. Each sherpa sat at a table behind his or her1 leader so that the leader could turn to his sherpa for information or consultation. By the mid-1980s each sherpa was provided at his table with equipment enabling him to be in direct touch with his delegation’s office and thus to request or receive information. With each summit that passed, this equipment became more and more technologically sophisticated: It was as though each host country were determined to outdo the one before. I remember on one occasion having at my table a telephone (which I could not easily have used without distracting the heads of state or government), a fax machine, and a magic electronic screen on which I could write; what I was writing would come up simultaneously on a similar screen in the British delegation’s office. This was a two-way arrangement so that if all else failed the sherpa could play noughts and crosses with someone in his delegation office. One had to trust that one’s communications went only to one’s own delegation office. On more than one occasion, I made notes of the discussion, which I faxed page by page to my delegation office. The notes were not only read eagerly by members of the delegation, who were keen to know what was going on at the meeting, but also transcribed, thus saving me the trouble of producing a record of the meeting after the event.

1 For the sake of convenience and readability, I shall not continue to write “his or her” every time it would be strictly correct to do so: Let “he,” “him,” and “his” be deemed hereafter to include “she” and “her” whenever the context requires it.

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In my time (in effect the summits of 1980 to 1987) there were typically four or five meetings of the sherpas between summits. These meetings were hosted and chaired by the sherpa from the country whose head of state or government was to host and chair the forthcoming summit and were often held in agreeable and tranquil surroundings as far removed as possible from the mundane distractions of official life in capitals. At our preliminary meetings, each of which customarily lasted for two or three days, we discussed the issues and problems among ourselves on the basis of a draft document prepared by the host sherpa, which was a kind of annotated agenda for the summit. These discussions enabled us to take stock of developments in the international economic and financial situation, to identify issues on which there was likely to be general agreement among the leaders at the summit so that these issues could be (as it were) taken as read at the summit, and to identify issues on which there was reason to think that there would not be general agreement and which would therefore need to be resolved (in so far as they could be resolved) by the leaders at the summit meeting itself. The document would be revised and refined after each meeting until, by the last meeting, it was in a form in which the sherpas could submit it to the heads of state or government as a basis for their discussions at the summit meeting itself. After the early summit meetings, and by the time I became a sherpa, it had become regular practice for the heads of state or government to be accompanied to summit meetings by their ministers of finance and of foreign affairs. For some sessions the heads of state or government met on their own, and the “specialist” ministers had their own separate meetings. For other sessions, including the main economic sessions and the final session, heads of state or government and their ministers would normally sit together. The preliminary meetings of the sherpas were also attended by representatives from the Ministry of Finance and the Ministry of Foreign Affairs from each country (one from each). These people came to be known as “soussherpas.” They would normally participate in all but the concluding discussions. At each meeting the sherpas themselves would gather on their own for a final discussion to sum up the conclusions of the meeting and decide upon the work to be done in preparation for the next meeting. Sometimes the last meeting before the summit meeting was a “sherpas only” gathering. In order not to inhibit discussions at the summit itself, and in order to avoid the whole of a summit meeting being taken up with arguments about the drafting of the communiqué to be issued at the end of the meeting, the sherpas were under instructions not to prepare a draft of the communiqué before the summit.

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During my time these instructions were observed faithfully in every case but one. That was the summit of 1980. This summit came toward the end of the second major oil crisis, and President Carter insisted that the summit would not carry credibility if it did not agree upon highly specific targets – to which the heads of state or government would commit their governments – for improvements in energy efficiency, energy savings, and the development of alternative sources of energy. The process of reaching agreement on targets was difficult and painful, requiring a large input from expert energy advisers in all the summit countries, who held their own preliminary meetings. What the summit communiqué had to say about these targets had to be agreed upon in detail with these advisers before the summit took place. On that occasion, therefore, the summit communiqué was largely “precooked.” This experience led the other leaders, including President Reagan, who took office before the 1981 summit, to revert to the arrangement whereby a draft communiqué was not discussed before the summit meeting itself. They wished the final communiqué so far as possible to reflect rather than to determine their discussions at the summit. In practice the host sherpa would no doubt come to the summit meeting with a first draft of a communiqué in his briefcase, but nothing was circulated until the evening before the last day of the summit meeting itself. The host sherpa would refine his draft in the light of the discussion at the summit up to that point and circulate it to his fellow sherpas at about dinner time that evening. The sherpas, meeting on their own and without any “sous-sherpas” to confuse the issues, would then work on the draft communiqué for as long as necessary to arrive at an agreed text to submit to the leaders for consideration at their last meeting. These drafting sessions would typically last for most of the night, until 5 or 6 a.m. There could be serious differences of view among the sherpas, which could be reconciled only after considerable discussion – not only among the sherpas themselves, but also between each sherpa and one of his “sous-sherpas” during breaks in the main drafting session – and if need be after some skilful redrafting to paper over any cracks. Indeed it was not unknown for the draft communiqué to emerge with sidelined passages on which the sherpas had not been able to reach agreement and which had therefore to be considered and hammered out by heads of state or government themselves when they considered the draft communiqué at their final session. The sherpas sought, however, to reduce the number of disagreed passages to a minimum and on the whole were usually able to reach agreement on most of the draft.

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Here the discussions at previous meetings proved to have been valuable not only for identifying issues, but also for suggesting the wording that was likely to be generally acceptable for dealing with those issues in the final communiqué. Although a draft communiqué was not produced or discussed until the summit meeting itself, there was a sense in which the preparatory sherpa process laid the foundations for the eventual drafting of the communiqué. The working language of the summits was English, with simultaneous translation (or whispered interpretation) for those heads of state or government and ministers who were not sufficiently comfortable in English. The work of the sherpas was done in English. The official communiqué was published in English and in the language of the host country; each delegation was responsible for preparing an unofficial translation of the communiqué in its own language where necessary. This led to a problem at the Ottawa Summit, held at Montebello, in 1981. Only a couple of hours or so before the press conference at which the communiqué was to be issued, it was realized that the Canadian delegation was producing an official version of the communiqué in French (as well as the official English text) and that the French delegation was at the same time producing an unofficial French translation. An urgent meeting was called between the Canadian and French delegations to make sure that the Canadian and French versions of the French text were consistent with each other. The rest of us were not of course at this meeting; but it became clear that the process of reconciling the two French texts was not proving to be entirely straightforward. It was completed only just in time. In the early years of economic summitry, the heads of state or government generally used the opportunity of their meeting for a private discussion of current international political issues, but the summit remained an economic summit, and there were no political decisions or declarations. This began to change at the time of the Versailles Summit in 1982, when heads of state or government decided that they should issue a public reaction to a major terrorist incident that had just occurred and commissioned the sherpas to prepare a draft of an appropriate declaration. The following year, at the Williamsburg Summit, at least one summit session was devoted to a political issue – the development and stationing of medium-range ballistic missiles in Europe – and a political declaration was required. The sherpas were put in charge of the drafting, with support provided by the “sous-sherpas” from Ministries of Foreign Affairs. From that time on it became habitual to start the summit with a political discussion, which gave rise to a first communiqué issued while the summit

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was still in session, and then to proceed to an economic and financial discussion, which in turn gave rise to an economic communiqué, which was issued at the end of the meeting. For the sherpas, to whom the task of preparing drafts of both communiqués was entrusted, this meant two long night-time drafting sessions, one after the other. We would work through the night and then have a break to wash and dress and eat some breakfast, and possibly to take a short nap, before going back to our desks for the morning session of the heads of state or government. In this context I remember especially the Tokyo Summit of 1986. The British delegation left London on a Friday and arrived in Tokyo the following Saturday afternoon. In those days it was not possible for the British prime minister to fly over the Soviet Union, and we therefore travelled over the North Atlantic and Pacific Oceans: a flight of some fifteen hours, including a “pit stop” of about an hour to refuel at Anchorage, Alaska. I had a reasonable night’s sleep on the Saturday night. I was up for most of the Sunday night working with my fellow sherpas on a draft political declaration and then for most of the Monday night working on an economic communiqué. When I climbed into the aircraft for the homeward journey on the Tuesday evening, having had very little sleep for some sixty hours, I was eagerly looking forward to catching up on some sleep. It was not to be. Mrs Thatcher, who never needed much sleep, said as we went to our seats: “Robert, we have a long flight ahead of us. Let’s talk on the first leg, and then sleep after Anchorage.” I managed somehow to stay awake and make sense while, for several hours between Tokyo and Anchorage, we discussed a reshuffle of her government that Mrs Thatcher was contemplating. There was of course intense media interest in the summits. How could it be otherwise when seven or eight of the world’s leading statesmen assembled in this way, each with a retinue of ministers and officials? In the early years, with the emphasis on the private and informal nature of the summit discussions, media interest was concentrated on the outcome and the meetings themselves were relatively undisturbed. At the Ottawa Summit in 1981, there was nowhere for representatives of the media to be accommodated at Montebello, where the summit meeting was held, and the media were obliged to stay forty miles away in Ottawa. Heads of state or government agreed among themselves that none of them would give media interviews or briefings while the meeting was in progress, but other ministers and official spokesmen were free to do so, even if it meant going to Ottawa. From 1982 on increasing numbers of media representatives came, and it became necessary to provide them not only with material to report on, but also with facilities for

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communications and for refreshment and even with “freebies” such as summit ties and briefcases. The media contingent for the London Summit in 1984 numbered no less than 3,000 – many, many more than the total number of official delegates, which we tried to limit to fifteen per country. With so many journalists in attendance, media interest and comment were not confined to the subjects discussed or to who said what but were extended to who was wearing what and to who was seen talking to whom. Was all this worthwhile in terms of benefit to the management of international relations? Did taxpayers get value for money for all that was spent on these summits? These are of course two different questions. Even in my time – and that is now two decades ago – hosting a summit had become a very expensive operation. But I thought at the time, and I still think, that the summits were worthwhile. It might be difficult to point to particular decisions made at the summits or to things that might (or might not) have happened as a result of a summit meeting and that would not have happened otherwise. But these meetings enabled the heads of state or government to get to know each other personally better than they would otherwise have been able to do. The summits enabled them better to understand and allow for each other’s particular concerns and the reasons for those concerns. This undoubtedly oiled the wheels of the processes of managing international economic and financial affairs. At any given summit, one or more of the heads of state or government would be facing an election at home; indeed, at the Williamsburg Summit in 1983, Mrs Thatcher was in the middle of an election campaign. Colleagues at the summit would be keen not to rock domestic political boats if they could avoid doing so. So I believe that the Economic Summits made a useful and beneficial contribution to the management of international economic and financial affairs and to the improvement of international relations. Perhaps the best answer to the question is the pragmatic one. Nearly thirty years after the first Economic Summit, the G7 – now G8 – Summits continue to be held every year. This would hardly be the case if those concerned seriously doubted their value. To end on a personal note, it was a great privilege, as well as a great pleasure, to be a member of the sherpa club, one of the most select clubs in the world (comprising only eight or nine members at any one time). Being a sherpa brought me into contact, and indeed friendship, with some remarkable people: to name but a few, from the United States, Henry Owen and

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Allen Wallis; from France, Bernard Clappier and Jacques Attali; from Germany, Horst Schulmann and Hans Tietmeyer; and from Italy, Renato Ruggiero and Sergio Berlinguer. None has been more remarkable, or has been a stauncher friend, than Sylvia Ostry. As I write this, I think of her with great admiration and great affection. With her professional skill as a statistician and her formidable background of experience in international economic relations, and particularly in the issues of world trade, she was highly qualified to contribute as a sherpa to the summit process. On a personal level, she was always a positive, constructive, and vigorous contributor to our discussions, never difficult for the sake of being difficult, never failing to infuse the process with a sense of fun and zest that greatly enlivened our discussions.

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My Japan-Canada Relations and Sylvia hiroshi kitamura

In addition to the charm of Hiroshi Kitamura’s recollections, this chapter makes the substantive point that the sherpas created a powerful informal entity whose advice to leaders was derived at least in part from views they reached collectively. That these views could have crystallized despite strong national interests that might have acted as a barrier to collegial thinking is a reminder of how much the global economic system owes to a small group of men and one woman who brokered, cajoled, negotiated, briefed, advised, and eventually succeeded in bringing about one successful economic summit after another.

My first experience with Canada was in 1954 when I was a “debutant” diplomat at the Consulate General of Japan in New York. I was assigned to research the public-relations activities of various leading countries as they were carried out in New York targeting the American people. In those days in Japan, there was no word for or concept of “public relations.” The nearest concept was “advertising.” It was taken for granted that the abbreviation “pr” meant “personal relations.” So researching this new concept was an honourable assignment for an inexperienced diplomat like me. I spent three months visiting the information offices of the United Kingdom, Germany, France, and Canada. When ready, I reported my findings to the deputy consul general, who had given me the assignment, and concluded by saying, “It is Canada, sir, from whom we must learn in this field.” “Canada?” The deputy consul general stared at me as if he could not believe his ears. “Yes, sir. I think the Canadian activities furnish us with better references and suggestions than those of the other countries.”

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“Why would that be?” demanded the deputy consul general, who added, “Mr Kitamura, you may have noticed that Canada is the neighbour of the United States, and the American people certainly know Canada better than they know any other country. What would require the Canadians to make such great efforts to inform the Americans about themselves?” My boss continued to stare, and if I had not been confident in my research, it would have been an uncomfortable situation. So I explained what I had learned from the Canadian officials about something called “Canadian identity” and how Canada had engaged energetically in the activity of informing the Americans of the differences between Canada and the United States. I told him, “The American people, according to the Canadian officials whom I interviewed, tend to believe that the Canadians are just like the Americans and, therefore, that they think and act as the Americans do. If the Canadians don’t do so, and don’t adequately explain why, the Americans think that the Canadians are being unfriendly to America.” After some discussion the deputy consul general was convinced. My research ultimately resulted in the publication of basic information pamphlets and fact sheets and the production of some tv cassettes about Japan. Many of them are still in use. This was the first page of the thick volume that has become my Japan-Canada relations and the first time that I learned of the deep-rooted problem of the Canadian identity. I continued to come across the issue of Canadian identity, often in my dealings with Canadian affairs, in the later stages of my career. After serving in various posts in the US, Asia, and Europe, I was appointed director general of the American Affairs Bureau in 1982. The bureau had only two countries to look after: the United States and Canada. I recalled my first experience with Canada in New York in 1950, and I was delighted that I could renew my acquaintance with Canadian affairs. But it was not very easy. Dealing with the problems of the United States, including the Japan-US security arrangement and the frequent incidents and troubles connected with it, took up nearly 90 per cent of my time and nearly 100 per cent of my energy. To make matters worse, the Japanese parliamentary system in those days required government officials, rather than ministers, directly to answer tough questions from the Opposition. I had to be constantly prepared to testify regarding any troublesome problem, and this invariably meant concentrating on the US. Thus the weekly staff meetings in the bureau were usually packed with American issues, leaving no time to discuss those affecting Canada.

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It was never that Canada was less important than the US. On the contrary, Japan had many things to learn from Canada, including Canadian techniques for handling foreign aid to developing countries, disarmament, un peace operations, and coordination with and adjustment to American foreign policies. But bureaucracies, unfortunately, have a tendency to respond to urgent issues with priority, and the problems and troubles with the US were both numerous and urgent, while our relations with Canada were generally calm. Finally, I resorted to the creation of an artificial device to allocate time and energy for Canada. I dedicated one staff meeting per month to discussion of Canadian issues and in this way forced our bureau to devote at least 25 per cent of its time and energy to Canada. I maintained this policy throughout my tenure as director general of the bureau. At the beginning of 1987, I was appointed deputy minister for foreign affairs and concurrently personal representative of the Japanese prime minister to the G7 Summit, a post colloquially known as “sherpa.” As I had served in New Delhi during the 1960s, I knew the word “sherpa,” which was originally the name of a Tibetan tribe specialized in mountaineering but which also names the profession of those who assist mountaineers. It was the first time that I had heard the word used in reference to a personal representative of a summit leader, but after serving as a sherpa for several months, I thought that it was a well-chosen nickname for those people who carried the heavy burden of assisting their respective leaders in advancing their positions at the summit. The first “sherpa meeting” that I attended was a dinner held in January 1987 in Paris, where I met Sylvia for the first time. There was a formal seating arrangement, and Sylvia was on my right. I had heard a lot about the formidable Ms Sylvia Ostry but had not met her. I knew that she had made a considerable contribution as an economist to the Organization for Economic Cooperation and Development (oecd) and the General Agreement on Tariffs and Trade (gatt). When people spoke of Sylvia, they invariably mentioned that her arguments were founded on irrefutable logic and that her presentations were vigorous and persuasive. From her reputation I imagined that she was a scholarly type and not easy to converse with on nonacademic matters. I was wrong! Throughout the dinner, I found Sylvia an extremely charming lady with whom I could enjoy conversations on various subjects not related to economics. We talked about New York theatre and found that we both had enjoyed many of the same dramas and musicals.

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There was a happy coincidence that evening concerning Sylvia’s perfume, Yves Saint Laurent’s “Poison.” I happened to know of that perfume because it had been introduced to Japan only several months earlier at an extravagant dinner party thrown by the maker. Yves Saint Laurent presented each of the attendants with souvenirs heavily scented with the new perfume, as a consequence of which my home was permeated with “Poison” for several weeks. It is a scent I remember to this day. Without mentioning the perfume, I told Sylvia about a French detective story that I had read in my school days. In short, an assassination is carried out during a course of dinner. Later the detective discovers that there was an intentional misprint in the menu placed in front of the victim. The killer had omitted one “s” from the course containing poisson (fish), making it “poison.” When I finished the story, Sylvia turned to me and just smiled. Sylvia and I, together with five other sherpas, prepared the Venice Summit in 1987 and the Toronto Summit in 1988. At the Venice Summit, Sylvia helped me a great deal when Japan introduced a new scientific project called the Human Frontier Science Program under the strong leadership of Prime Minister Nakasone and called for the joint efforts of the summit countries in realizing it. This project has now been very successfully implemented in most of the summit countries. In the beginning, however, I had difficulty explaining the proposal because I myself did not fully understand its complicated scientific approach. Some sherpas for the influential countries at the G7 Summit seemed quite dubious, not only about the idea but also about the intention behind the project, since it came from Japan, a country that had a reputation for utilizing other countries’ basic science knowledge in order to develop downstream technology for use in the manufacture of commercial products. Sylvia helped me to smooth out unfavourable perceptions and to insert a short paragraph in the text of the “Economic Declaration of the Venice Summit,” in which the summit countries encouraged Japan’s continuing efforts to develop this project. The following year in Toronto, under Sylvia’s leadership, even more positive support was expressed in that round’s “Economic Declaration.” I have always been very grateful for her understanding and cooperation. During the four sherpa meetings in preparation for the Toronto Summit, Sylvia was a brilliant leader. I recall very well the meeting we had on a fancy yacht in November 1987, a week after the Black Monday financial crisis in the United States. The discussion was tense, but the analysis of the situation and the short-term and medium-term prospects we developed

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were highly appreciated by our respective governments and our leaders. I remember that as the boat slowly cruised, we could see many small islands in the Vancouver Bay reflecting the weak winter sunshine through the clouds. Although the arguments were quite rough, the sea was calm. At the Toronto Summit, Prime Minister Takeshita, who had succeeded Mr Nakasone, was my new boss. He had been very influential in Japanese financial quarters and was eager for international cooperation in providing financial aid to the least developed countries in Asia and Africa. Sylvia appreciated Japan’s positive response to this idea, which she wanted to make one of the pillars of the summit. A newcomer to the G7, Mr Takeshita was well received in Toronto, and surprisingly enough the New York Times printed an editorial the morning after the summit ended to the effect that his enthusiastic entrance and support of Ronald Reagan had allowed Mr Reagan to make a graceful exit from the G7 stage after eight years of participation in the summits. The Toronto Summit was not only successful, but also meaningful, leading to a decision to go into the third round of the G7 Summit the next year. There had been a popular argument that the summit had lost its original objective of coping with the serious economic problems of the world and had become an annual festival, gathering too many officials and journalists. Sylvia invited candid discussions on this theme in the final sherpa meeting before Toronto. The consensus was that, although we should always remind ourselves to go back to the summit’s original objective of being an “economic” rather than a “political” meeting, the summit had more merits than demerits, not only for the developed countries but for many underdeveloped countries in the world, and that it should therefore continue to be held. I joined my British colleague in arguing that the annual summit provided an excellent opportunity and incentive for a participating country, such as Japan, to be a “good boy” on the stage of international economic activities. No government would allow their leader to lose face by having not prepared to contribute something to the needs of the world economy, and each would make extra efforts once a year to produce some contributions. In this way interministerial strife and differences were overcome, and socially and economically beneficial and significant measures were taken. I termed this the “Summit Good Boy” argument, and it turned out to be persuasive. Anyway, the sherpa team headed by Sylvia in 1988 pushed the summit into its third round, and I think it was a significant step in the history of the G7 Summit.

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At the final sherpa meeting, held in a suburb of Toronto, I intimated to Sylvia that I would be appointed ambassador to Canada a couple of months after the summit meeting. Sylvia took it as good news and congratulated me heartily. Given that I had served as director general of the American Affairs Bureau and as a sherpa at the summit in Canada, my appointment as the ambassador to Canada concluded a logical sequence. I arrived in Ottawa in October 1988, about a month before a general election was to be held in Canada. The political atmosphere in Canada at the time was very tense. One of the most important issues in the election was the Free Trade Agreement (fta) with the United States. I watched the tv debate between the leaders of the three political parties, including Prime Minister Mulroney and Mr Turner, head of the Opposition. Watching the long debate both in English and French, I was deeply impressed by the fact that the theme of Canadian identity – to which I had first been introduced in New York more than thirty years earlier while conducting a survey on the leading countries’ public-relations activities – had become once more the central argument in the debate over the fta. In short, the argument was that if the fta was concluded, Canada would be swallowed up by its huge neighbour to the south, not only in the economic but also in the social and cultural fields. Canada, the argument went, would lose its Canadian identity. It was symbolic for me that the first Canadian theme that I encountered as ambassador invoked my experience as a young diplomat. I was strongly reminded that Canadian identity is the issue from which one cannot escape in dealing with Canadian affairs. Sylvia was still deputy minister of foreign affairs and international trade when I arrived in Ottawa, and she introduced me to a number of influential people in various walks of life. For a new ambassador, having a good friend who is well known and popular in the country is quite an asset because one can reach the “right” person at the “right” time through the “right” channels. Sylvia was a great catalyst for me, and she gave me appropriate advice concerning not only my official activities, but also my personal interests. Thanks to Sylvia, my wife and I were able to thoroughly enjoy spring and summer theatre in Niagara and Stratford, where plays by Bernard Shaw and Shakespeare were regularly produced. Through Sylvia I was able to enjoy a close relationship with the then governor general of Canada, Madame Sauvé, to whom I presented my credentials, which were directed to Queen Elizabeth II. Madame Sauvé was a longtime friend of Sylvia’s. One evening in 1989, I organized a Japanese

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dinner with Madame Sauvé and her husband as the guests of honour. I was deeply impressed by the fact that so many important positions in Canada were held by women. The women on the guest list included, besides Madame Sauvé and Sylvia, a deputy minister in the Department of Science and Technology and the director general of Asian affairs in the Foreign Office. I remember labouring over the seating plan for the respective husbands of these women because the protocol required a subtle calculus involving both the wife’s position and the husband’s. When Emperor Hirohito of Showa passed away in January 1989 and it was announced that the Imperial Funeral Ceremony would be held on 22 February, I was presented with another difficult problem of protocol. It concerned the order of paying tribute to the late emperor. The Imperial Household Agency of Japan had notified the diplomatic corps in Tokyo of the respective “tribute order” of each representative of the countries that were to participate in the Funeral Ceremony. The order was based on a general formula, according to which the first group to pay tribute at the beginning of the ceremony included kings, queens, princes, and princesses representing the royal family of a country. This was well accepted because Emperor Showa was similar to a king; thus royal or imperial family members were given priority. Then came the presidents. First were those with the status of the American and French presidents, who are also the highest political authorities in their lands, followed by those with the status of German and Indian presidents, who are heads of state but not the highest political authorities. After the presidents came the governors general of Canada, Australia, and New Zealand, who are appointed by the British Crown. They were regarded as ranking higher than prime ministers but lower than the above-mentioned heads of state. This formula was technically logical because, for instance, the Canadian Constitution clearly indicates that Canada’s head of state is the British Crown, by whom, on the advice of the Canadian prime minister, the governor general is appointed. However, the Canadian government was extremely perturbed by the fact that in the “tribute order” the Canadian governor general was fifty-third, next to the president of a small island state in the Pacific Ocean. The first protest came from the Canadian Embassy in Tokyo, but having failed to find a satisfactory solution, the Canadian government transferred the issue to Ottawa, and my deputy was summoned by the Canadian Foreign Office and strongly requested to find a satisfactory solution as soon as possible. At this stage I telephoned the top echelon of the Japanese

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Foreign Ministry and reminded them that, even according to formula, snubbing the top official of one of our G7 partners could easily inflict damage that would be difficult to repair. I asked them to consider the absurdity of potentially damaging our bilateral relations, built on our many years of effort, to adhere to a formalistic “tribute order.” Having had a long exchange of views, we agreed to add a new factor to the original formula of the “tribute order.” The factor was whether each representative of a country had actually met the late emperor, either in Japan or abroad; if this was the case, the representative was to be given a certain priority in his or her “tribute order.” It turned out that Madame Sauvé had been given an audience with Emperor Showa when she visited Japan in her capacity as Speaker of the House of Commons. This factor gave the Canadian governor general a much higher standing in the “tribute order,” raising her from fifty-third to thirty-third, which satisfied the Canadian government. I slept well the night I received the news. The next morning I sent a cable to the Foreign Office requesting statistics on the temperature in Tokyo at 12 p.m. on 22 February for the previous ten years. My intention was to provide Madame Sauvé an estimate of what the temperature would be on the day of the Imperial Funeral as well as the details of the ceremony. A couple of days later, I called on the governor general at Rideau Hall with the statistics I had received from Tokyo. I said to Madame Sauvé, “Your Excellency, February is the coldest month in Tokyo, and the average temperature for the last ten years at around noon, when the ceremony will take place, has been around twelve degrees centigrade.” “Twelve degrees centigrade? That is warm!” she laughed. For a Canadian from Quebec, twelve degrees centigrade is certainly warm, but for students of Japanese history, the end of February brings cold memories of a snowy night in 1936 when some of the political leaders of our country were assassinated by young, jingoistic military officers. I added, “Madame, the average temperature is not very cold, but the climate during the latter part of February is very unstable, so please bring a long, warm coat. My advice turned out to be right. When I watched the live tv broadcast of the Imperial Funeral Ceremony, it was raining in Tokyo, and the temperature was nearly zero. There on the screen was Madame Sauvé, snug in a warm fur coat, with President Bush nearby, shivering in a light raincoat! Sylvia left the Foreign Office and joined the University of Toronto to direct a new Institute of International Affairs. The timing of her departure from the Canadian government happened to coincide with the enforcement of a law that prohibited smoking in government buildings. We often joked that it was the best timing for her to leave the government.

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Sylvia once invited me to talk to her students about my candid observations on Japan-Canada relations. The following is the gist of my talk: Japan’s relationship with Canada is one of the best bilateral relations in the world. At the same time, it is one of the most tranquil and peaceful relationships. There has been no serious political or economic problem to disturb the friendly relations between the two countries. This has made both the Japanese and Canadians take their good relations for granted, and consequently the mutual interest in each other has remained at a lower level than is deserved, considering the magnitude and quality of the two countries. Another factor that augments this tendency is the geo-political situation of Canada, which has a huge neighbour, in the sense of the United States’ political and economic power as well as its size of population. This huge neighbour has tended to absorb peoples’ mutual interests among both the Japanese and Canadians. For instance, Canada has depended upon the United States for approximately 80 per cent of its trade and finance. Naturally, the Canadian people’s interest is directed overwhelmingly at America and not much at Japan. The same story is true in Japan. The United States was a benevolent teacher in Japan’s efforts toward modernization in the latter part of the nineteenth century, a formidable rival in the first part of the twentieth century, regrettably an enemy in the Pacific War, and after 1945 a formidable partner in the political, economic, and security fields. Naturally, the Japanese people’s interests and concerns have been directed at America and not much at Canada. This gap between the level of attention given to each other, on the one hand, and the level of importance of Japan-Canada relations, on the other, is a basic problem between the two countries and two peoples. In other words, the most important issue between us is to increase and promote attention to each other. For that purpose, both of us must make intentional efforts to create attention to each other’s contributions in various fields, including by means of exchange visits, not only by politicians and businessmen, but by sportsmen, artists, journalists, and especially young people. Japan has many things to learn from Canada. Among these, three fields are outstanding. First is Canada’s efforts and creativity in promoting the various aspects of disarmament. Second is Canada’s idea of using a limited amount of foreign aid in the most effective and timely manner. Third, which is quite important, is Canada’s experience and wisdom concerning how to coordinate and cooperate with the United States, making use of American strength for the benefit of Canada.

Having spent two and a half winters in Canada, and having visited all the provinces as well as the northern Territories, my wife and I left Canada in

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December 1990, with many pleasant memories, to assume my new post of ambassador to the United Kingdom. I returned to Tokyo from London in 1994 and resigned after forty-one years of foreign service. In 1996 I was appointed by Prime Minister Hashimoto to be a co-chair of the Japan-Canada Forum, which was set up as a standing committee to make recommendations to the prime ministers on the management of the two countries’ relationship. I co-chaired the forum for four years in cooperation with my Canadian counterpart, Mr Edward Lumley, who was appointed by Prime Minister Chrétien. We held our annual meetings in Vancouver, Sapporo, Ottawa, and Tokyo. The forum adopted a series of recommendations in October 2000 and reported to the respective prime ministers. Having finished my job, I resigned as co-chair in the following year. In thinking of Canada, I cannot finish without mentioning Dolgie, a small Tibetan dog. He spent sixteen and a half years with my family in four different countries: France, Japan, the United States, and Canada. His life finally ended in Ottawa in 1989. I buried him in a corner of the back garden of the residence in which I lived in Ottawa. I have written a book about him, An Ambassador’s Lhasa Apso, and visited his tomb four times after I left my post in Canada. This is a casual recollection of my personal experiences and observations concerning Japan-Canada relations throughout my diplomatic life. I have a deep attachment to this country, its natural beauty, and its friendly people. Canada is a country generous in its regard for different cultures. If the United States is a melting pot, Canada is a salad bowl in which cucumbers, tomatoes, and lettuce stay as they are, but they are covered by a salad dressing called “Canada.” I like Canada, and it was Sylvia who introduced me to the country and to the people. Without her help and advice I could not have enjoyed and understood the country and its people as I have. I owe her a great deal and want to say to her, “Thank you very much for your friendship and congratulations on your brilliant career.”

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Thoughts on Governance from Europe: Making Sure We Don’t Forget the Cosmopolitics pa s c a l l a m y 1

The sherpa meetings created a virtual club (or as Pascal Lamy calls it, a “travelling circus”). The most interesting feature of this club was that it served as a meeting place for high-level public administrators abreast of the latest relevant academic research. By all accounts, Sylvia’s performance in the club was outstanding. She managed to keep a foot in both academe and public administration and derived all she could from each camp in making a point, detecting a trend, forecasting turbulence, and mobilizing the energy and intellectual resources to cope. While this exposure to high-policy discussions kept her academic research relevant to public concerns, Sylvia’s engagement in academic pursuits also saw that the rigour of the publicpolicy discussions was in no way sacrificed.

th e c h a l l e n g e s o f g l o ba l i z at i o n to our governance structures As the pace of globalization has gathered speed in recent times, the debate in the international community has moved beyond the question of whether globalization is new or simply the latest twist in the capitalist road. I find this debate sterile. But fortunately it has given way to a further debate on global

1 Although currently the eu commissioner for trade, the author is writing in a personal capacity and not on behalf of the European Commission.

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governance that is both more important and more interesting. The European Intergovernmental Conference (igc) and the failure of the Ministerial Conference of the World Trade Organization (wto) in Cancun in the autumn of 2003 fuel the debate and stimulate us to think further about global governance in terms of the lessons we must learn and the reforms we should pursue. Globalization has unleashed a genuinely radical force. Both unapologetic “globalizers,” such as multinational enterprises, and “antiglobalizers” affiliated with nongovernmental organizations (ngos) agree that this is the case. Globalization has had a dramatic effect on sovereignty, on questions of democratic accountability and legitimacy, and most importantly, on people and the economy. If left to its own devices, globalization has the potential to damage international stability as well as the fabric of political life. It can be one of the causes of growing inequality within and among countries. Globalization fuels a sense of powerlessness and disenchantment: It gives rise to the apparent contradiction that amid unparalleled prosperity, people feel that the world, at both global and local levels, is increasingly fragile. Globalization challenges our identity and our sense of belonging. Globalization brings closer the prospect of extraordinary personal riches for the few while dramatically weakening the ties that bind us to the fabric of our society. These tensions make people doubt the ability of governments, national or international, to tackle global issues and address their primary concerns. As we painstakingly develop international organizations, it must be admitted that we in the European Union (eu), in the wto, and elsewhere are running into a major and endogenous legitimacy constraint. Our challenge, therefore, is to find a working model of global governance that sets objectives in terms of both substance and process. On substance, we require a system that will permit fair and sustainable development at the global level in economic, social, and environmental terms. On process, the system must provide for interconnections between governments, markets, and civil society. To ensure that this is the case, rules must be drafted, decided upon, and implemented. Additionally, two principles are required. The first is transparency. Unfettered access to information is one of the keys to governance, and this principle has never been required with greater intensity than in the modern Information Age. The second is the principle of subsidiarity, which ensures that issues are addressed at the right level of government. This principle is rooted in the conviction that we should only transfer to a higher political forum those issues that individuals, families, companies,

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villages, regions, and nations cannot resolve for themselves. The nationstate is not always going to be the appropriate level at which to articulate collective preferences. The main objective of this chapter is to describe a category of questions that are best addressed at the supranational level, such as those occasioned by trade – both in terms of whether it is in the European interest to negotiate collectively and whether there is a need to create a global framework covering international norms and standards within which trade should be liberalized. The World Trade Organization should and could be the natural home of global rules, including those affecting investment, competition, trade facilitation, and transparency in government procurement. These would be natural targets for the rule-making authority that already exists inside the wto. This view, however, is not universally shared, and we have to be ready to look flexibly at different options for reaching these targets. Underlying these principles are two values: efficiency (the most frequently cited since it concerns finding the best way to regulate problems) and legitimacy. While legitimacy and efficiency are twinned in my mind, it is striking how much the focus is almost exclusively on efficiency, to the detriment of legitimacy. While efficiency is, of course, a fundamental justification for any governance system, legitimacy is also crucial to ensuring accountability and to guaranteeing support for governance.

th e c e n t r a l p o s i t i o n o f l e g i t i m acy in int e rnationa l govern an ce Legitimacy and the absence – or at least the perceived absence – of legitimacy is a key concept. This is a fundamental question faced by the eu, by international organizations such as the wto, and by national governments. International crises, especially those in the early part of this decade, demonstrate clearly that problems related to legitimacy, credibility, and transparency – that is, the principles and the underlying values of a governance system – are limited not just to international bodies, but also to national administrations. International organizations need higher levels of legitimacy than national or local bodies. National models are inadequate for measuring “how much legitimizing” is needed of international bodies. This is the case because the sense of powerlessness and disenchantment derives from the fact that citizens, it would seem, feel very remote from action taken exclusively on the grounds of efficiency. This is not only because they are distant from

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the action, physically and psychologically, but also because control is exercised from a remote location. Remote control is welcome if it still permits choice. But it is not appealing if the source of power controls one’s life and livelihood. Power exercised at the supranational level creates its own demands for checks and balances in order to ensure legitimacy. Demands for legitimacy are derived from perceptions of power and responsibility and from concerns about how they are used. Consider the very different examples of Europe and the World Trade Organization. The citizens of Europe care about the eu because it has been granted powers, and they are right to care about accountability and transparency in how this power is used and exploited since the exercise of such power affects their daily lives. But it is remarkable how citizens berate European institutions for their possession of excessive powers at the same time as the percentage of those voting in European elections continues to decline. This can be explained only in terms of a deep-seated and growing sense that power has been moved to a remote location and that it is impossible for an individual citizen to influence it. If accurate, this is a significant problem that all those in positions of political influence inside the European Union have a duty to solve. From political, academic, media, and social commentary, it would appear that there is also interest in and concern about the wto. The wto has become one of the modern age’s great “bêtes noires”: It is painted as a great globalizing machine that challenges national sovereignty and nationally agreed laws and policies. In reality, the wto relies excessively on a “member-driven” mantra. The myth matches reality only in respect to the binding dispute-settlement system, which in turn is central to a key component of legitimacy, namely accountability. It helps to ensure that even the mighty, such as the US and the eu, can be effectively held to account. Even though the case for checks and balances is clear, conventional legitimizing systems do not work equally at different levels of governance. International governance runs into problems of aggregation of interests. This is partly because the sense of legitimacy is also watered down by distance but also because the mechanisms do not work as well in the context of interests that are different and more diverse. We still rely too much on the nineteenth-century system of nation-state interests, which clash with the actions of supranational entities however efficient and legitimate their functioning. Two common threads link the legitimacy problems of the wto and the eu. The first is that a lack of legitimacy is transitive: In so far as a body’s

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constituent members are sovereign and legitimate, the organization to which they belong is equally so. Sometimes an additional, traditionally American argument is tacked on, namely that an organization’s power is democratically controlled by the members’ electorates. The second common thread is that, increasingly, no one buys the former argument. Are ngos convinced by the argument that the wto is legitimized because the individual nation-state members of the wto control the overall policy of the organization? Are the euro-skeptic voters of the uk, France, and Sweden convinced that their own governments can sufficiently control European policy? This does not seem to be the case. Why? The crucial issue is how does a set of nation-states – whether members of the wto or of the eu – adequately address matters of collective interest. By definition, nation-states defend their own interests once they find themselves in an international arena. Yet in an intergovernmental system, such as the wto, the end result of their efforts may be neither efficient nor legitimate. If all members of an intergovernmental system but one decide that change is needed, the “legitimacy” of this decision is questionable. Moreover, as the global village grows, self-selection in the intergovernmental system risks discriminating against those who are not selected for membership of the system. For example, the G8 body brings together only rich countries to make decisions that impact on a far wider group. The existence of the G8 challenges us to conceive of a way of engaging and involving others, especially developing countries, in order to reduce the “legitimacy deficit.” Otherwise, counter-efforts will emerge (for example, the creation of the G20+ or the G90 at the wto conference in Cancun) that are bound to undermine the efficiency of the system. Let us recognize that the legitimacy of international organizations does not and cannot derive solely from the legitimacy of its members, the nation-states. While the nation-states are the authorizing environment in the international system, reliance on derived legitimacy has led them to underinvest in the legitimacy of the international system. Europe is a prime example of this phenomenon.

europe: efficiency and legitimacy Defenders of the classical European Community (ec) method of decision making (in which, put simply, the Commission proposes, and a combination of the Council and Parliament decides) sometimes mistakenly argue that there is no problem of legitimacy in the eu’s decision-making processes.

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While the ec method of deciding should be defended, it clearly does not provide the ultimate solution to the legitimacy deficit. The development of the eu can be considered from the perspective of a rational response to the ravages of war on the continent of Europe. But it can also be viewed as the result of a series of struggles between efficiency and legitimacy. The birth of Europe in 1957, and the moves of Jean Monnet2 and his colleagues, were based on a determination – in the spirit of the age – to produce efficient solutions to perceived problems. The Treaty of Rome, signed in 1957, frames Europe solely within the framework of efficiency: “Resolved to ensure the economic and social progress of their countries by common action to eliminate the barriers which divide Europe.” There was no conception of the need for checks and balances or for wider democratic concerns. The treaty provided for the Commission as the executive and the Council as the legislature, and while the European Parliament existed, it was exclusively for consultation and was not even directly elected. In successive igcs, this arrangement has been fought over and the debating lines only slightly redrawn. If there is a trend, it is that at each stage, the European Community (and now the eu) has edged in the direction of greater efficiency, usually by acquiring new competences. But increasingly, qualified majority voting has been used, and concurrently more power has been ceded to the European Parliament and other “legitimizing” institutions. Since the start of direct elections in 1979, the European Parliament has grown steadily in stature, to the point where it is now a colegislator in a substantial part of the eu’s activities. Despite the tendency toward greater legitimacy, the involvement of eu citizens in the ideals of Europe has not increased. Polls suggest that most agree with the building of European institutions, but increasingly, even in countries that are traditional allies of the eu and its institutions, the European Union is felt to be too remote from its citizens. There are various sug2 Jean Monnet (1888–1979) has been called the Father of the European Community. Soon after his Monnet Plan, a five-year recovery plan for France, was adopted in 1947, he realized that France’s recovery depended on a revived European economy, and he led the movement to unify Western Europe in the 1950s and 1960s. Following a term as president of the High Authority of the European Coal and Steel Community from 1952 to 1955, Monnet founded an Action Committee for a United States of Europe. In 1957 he helped to create the European Atomic Energy Community (Euratom) and the European Economic Community (Common Market). Central to Monnet’s approach to developing Europe was his insistence that the work be based on practical achievements and common institutions. His enduring legacy was that he had the vision to “make men work together and show them that beyond their differences and geographical boundaries there lies a common interest” (www.historiasiglo20.org/europe/ monnet.htm).

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gested solutions to allay this feeling: The “derived-legitimacy” school says that power needs to be redirected back to the member states and that if the European Council were to reassert its strategic role and if European leaders were given the right framework in which to operate like leaders and to map out their strategic vision of Europe, the problem would be resolved. But this approach does not represent a sustainable or realistic solution; derived legitimacy does not work. In reality, member states are not capable of mapping out a strategic vision for a fifteen-member eu and will certainly not be able to manage this role in a twenty-five-member union. They are represented in the Council so that they can scrutinize the proposals of the Commission and defend the interests of their own populations. Other options could also be pursued. It would be in keeping with the objective of erecting more legitimizing checks and balances, for example, if the Council – as well as the Parliament – were given the power to dismiss the Commission. But the way toward a real balance among institutions will only become clear if the different representations of interests within the eu are separated out. The member states are effective in representing national interests in the same way that the Parliament is increasingly effective in representing the individual citizen. But only the Commission can hope to try to represent the general interest. A strong Commission is not concerned only with efficiency. It must also address matters of legitimacy. It is important to consider alternative ways of increasing the legitimacy of the eu. Citizens must be given assurances that an ever-changing pattern of competences does not represent a permanent threat. This can be done by adopting the constitutional option. Unfortunately, the European project has lacked the accoutrements of many political systems, not least in failing to draw in the media to report effectively on eu themes.

a new conception: cosmopolitics For international and supranational organizations to function properly, they need a new kind of politics, which might be termed “cosmopolitics.” Some might not consider this concept so new. The word-stem linked to “cosmopolitan” has an honourable heritage, yet in this context it does not concern the glossy magazine, nor does it try to convey urban sophistication, as in the modern (mis)use of the term (indeed, Hitler hijacked the notion with his onslaught against “cosmopolitan minorities”). Rather, it is Immanuel Kant who lies behind this notion, inspiring others, such as Norberto Bobbio’s notion of “cosmopolitanism.” Kant’s original utopian idea of federal association between free republics relies on the notion of

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global public opinion, which, while utopian at the time, is now fast becoming an Internet-driven reality. Cosmopolitics provides a wider base for world politics, itself the product of globalization. Cosmopolitics describes a new world and is needed to organize and mediate between different interests. By developing the tools of legitimacy, nongovernmental organizations and civil society, while not conventionally “legitimate,” can contribute to legitimization by providing for different channels of activity (including mobilization, advocacy, or indeed simply legal/technical support) and thereby fulfil a hitherto unsatisfied demand for new social intermediaries. ngos and civil society are effectively organizing some of societies’ different impulses and responses to global change. They have a legitimizing function and can make a crucial contribution to global governance.

europe and her constitution At the time of writing, Europe is in the second phase of her constitutional overhaul in the shape of the Intergovernmental Conference, following the Constitutional Convention chaired by Valéry Giscard d’Estaing. The convention was an intense and open battle for the future shape of Europe. It was a practical effort to reach a constitution that works better and is easier for the public to understand. It is also a constitution that is more efficient, more legitimate, and more transparent. The convention provided a simpler and clearer division of responsibilities. It is clearer, for example, that the European Union will have exclusive powers over trade policy and competition. In some areas, such as economic and foreign policy, the eu will share powers with member states, while in other areas, such as education, member states will largely retain responsibility for their own policy development. In terms of the crucial question of whether sufficient progress has been made toward European integration, the constitutional project deserves a passing grade. First, in the external sphere, there is a strengthened capacity for action. Even if a long way from possessing full diplomatic unity of action, a single representative, the so-called foreign minister, will be given the telephone number that Henry Kissinger made famous with his line “I would love to speak to Europe. Does anyone have the telephone number?” The capacity to act on defence policy has also been strengthened. Second, a single legal entity is being created so that in time member states may develop sufficient confidence to accept decisions made by judges in other member states.

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Third, faster progress toward a common asylum-and-immigration policy is urged, to be enforced in a European spirit rather than in a “beggar thy neighbour” national sense. Of course, the European Commission as a whole would have liked to go further in ensuring that the European institutions are sufficiently overhauled to face the challenge of an enlarged twenty-five-member European Union. Take the example of the upgrading of instruments of economic policy coordination that should accompany the introduction of the euro. The economic turbulence of the year in which the Constitutional Convention was at work was not matched by the ambition of the proposals on the table. It was not only a question of how to adjust and manage the Stability and Growth Pact, but also one of Europe’s collective capacity to make decisions in this area. Unfortunately, member-state veto rights in the area of fiscal policy were maintained. Unanimity is the key to inaction. In the institutional area, at the time of writing, the right compromise over the make-up of the European Commission, particularly the balance between the big and small states of the eu, has not yet been achieved. But history shows that Europe advances step by step, and the convention is by historical standards a respectable step forward in terms of efficiency and a very solid base for the work of the igc. Not so as regards legitimacy, but this is understandable given the political climate. It is worth noting that in trade policy, a potentially important advance will have been secured if it is confirmed by the igc. The European Parliament has been given, for the first time, serious powers over the eu’s trade policy.

fa i l u r e i n c a n c u n What was learned from the wto ministerial meeting in Cancun from the perspective of this paper’s central concern? A successful outcome in Cancun would have meant that all wto members stood to win. Trade negotiations are generally described as a win-win situation in that success means that the parties’ gains outweigh the cost of the quid pro quo they offer. In the event of failure, however, the reverse is true. The aim of the Cancun Conference was to move halfway through the negotiating program adopted at Doha in November 2001. However, the gap between the parties’ negotiating positions remained too wide to be bridged, and thus barely a third of the ground was covered. The failure arose not as a result of poor preparation, which is what happened in Seattle, but because the negotiations never took off, either in the run-up to Cancun or at the

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conference itself. Negotiations need to pick up a forward momentum if the negotiators are to see the prospect of a positive outcome. It is only at this point that they start seriously to narrow their differences and that failure becomes increasingly unappealing and success more of a prize. None of this happened in Cancun. Readers will recall that this meeting collapsed in rancour in September 2003, with developing countries and ngos claiming triumph over the forces of globalization and over the rich countries of the north. “Can’t buy the world,” was their triumphant song, to the old Beatles tune. But interestingly enough, as the dust settled and headlines faded, a number of countries and organizations hastily changed their tune about their great triumph. It seemed that the death sentence passed on the “great globalizing institution,” the wto, may have been commuted. The wto is generally too weak in numerical terms (the organization has approximately only one-quarter of the staff employed by the Organization for Economic Cooperation and Development [oecd]), in institutional terms (the director general lacks the power of proposal), and in political terms. The wto is vilified by the ngos for being the instrument of globalization, yet at the same time, the wto does not even command the full support of the business community (multilateral liberalization being too difficult and likely to establish too many intrusive rules for some in the business community). While playing the blame game is unproductive, analysis of what happened in Cancun serves as another example of how legitimacy derived solely from an organization’s constituent parts does not a priori lead to a solution in the general interest. The fault appears to lie with the way assembled negotiators saw fit to fulfil their mandates. The European Union was keen to see the Doha program – and hence Cancun – succeed. In practice, such a position is tactically difficult in terms of exchanging concessions or bringing in the rules espoused by the eu. Consequently, Europe paid a price: by moving on agriculture, including offering to eliminate export subsidies on products of interest to developing countries; by reducing trade-distorting support to farmers, following the painful adjustment in June 2003 of the Common Agricultural Policy; by offering a major reduction of eu tariffs to open up the union to farm imports; and so on. However, and even if one adopts a cosmopolitical approach, concessions can only go so far and can proceed only with the assent of the authorizing environment. The eu went as far as it could in Cancun to find a compromise solution. With regard to the US, the fading prospect of any additional access to markets for its farm produce or manufactured goods upset a precarious bal-

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ance with the positions of others (among them the European Union) who were actively and self-consciously promoting new and improved rules for the wto as part of an overall effort to harness and control globalization.3 The US is torn in two. On the matter of bringing investment into the wto, the business community is interested in new global rules on investment so long as they place on governments the burden of ensuring market-access opportunities for global companies. But the ngo community is implacably hostile to new rules of this sort and would favour them only if they placed new obligations on investors. In such circumstances, the position of the US government is (understandably) reticent, even if this leaves the world’s largest economy entirely absent from the debate. The US was left with empty hands once it became clear that its market-access agenda was unlikely to be fulfilled in the short term, at least not in the wto. The emergence of the Group of 20+4 (including Brazil, India, South Africa, and thirteen Latin American countries) is testament to the existence of a legitimacy deficit, which has grown out of a (perceived) lack of representation of these countries on the world stage. The remaining most visible participants in Cancun were Africa and the least-developed countries. Analysis suggests that they feared the erosion of their trade preferences in eu markets, regarding this possibility as a loss outweighing prospective gains within reach in other areas. This fear led them to refuse the chair’s compromise proposal that all the new Singapore issues be dropped, except transparency in commercial transactions and in public procurement, the rock on which the Cancun meeting was eventually to founder. This rather brief overview of what took place in Cancun seeks to demonstrate that conventional criticism of wto governance in terms of sharp north-south differences is unfounded. In Cancun there was no such confrontation. It would be much more accurate to say that the “Norths” and the “Souths” crossed paths without actually meeting; that is, the general, cosmopolitical interest was not given an opportunity to speak. In the short term, the failure of Cancun may lead to a search for governance in dark corners of different institutions, with cosmopolitical constituencies being relied upon for support and a policy being patched together 3 I should also note that this precarious balance was upset by the sudden emergence of the issue of cotton, which saw four African countries target the cotton subsidies of wealthy countries, particularly the US. Clearly, this was never going to be easy to deal with given the importance of cotton to a number of southern US states as an election approached. 4 I use this formulation because the number of countries involved rarely stabilized due to an active and ongoing recruitment campaign led by Brazil and an active and ongoing disaffiliation campaign led by the United States!

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to respond to new needs. This search may include a new style of self-regulation and co-regulation, exemplified by the oecd multinational company guidelines, agreed in June 2000. For the moment, however, the wto is simply too weak, in contrast to what its critics maintain, to deliver even a small portion of the threatened damage to the sovereignty of the nationstate. It is also obvious that the wto needs to be overhauled to bring it into the twenty-first century. It is absurd, for example, that its director general should have no power to make proposals and that the organization should have no capacity to pull together small, informal, but representative groups of countries to study difficult issues before remitting them to the full membership. In order for the wto, and indeed the European Union, to gain legitimacy, a certain level of trust must be built up. This trust is the cement that binds an institution to a social contract constituting the foundation of the structure. Only through trust, accumulated stage by stage, can progress be made. It was only through trust that a single market was created within the European Union in defiance of challenges in the areas of justice and internal affairs. It is also through trust that the eu’s external trade policy works, allowing a political consensus to be reached in order to make possible common action through a balanced and efficient decision-making process. The important lesson is that to build trust a body is needed that can act as guarantor and go on to generate a consensus proposal that facilitates the emergence of the general interest. In Europe, only the Commission can be the guarantor, taking the European project forward in the general interest rather than in multiple national interests. Similarly, for the wto, for consensus to be arrived at from the individual views of its members, there must be a degree of collective “trust” in the director general and his secretariat. But the wto cannot tackle all the problems by itself. Its rule-making capacity is weak and constrained by differences of opinion over its scope for discussing new trade issues. Given the wto’s evident difficulties in reaching an agreement with its partners on new rule making on investment, competition, trade facilitation, and transparency in public procurement, and although in principle the European Commission prefers a multilateral solution, in November 2003 the Commission communicated that it was ready to explore, with an open mind, all the options available that could facilitate progress in this area of the negotiations. One idea would be to leave it entirely to bilateral or regional agreements to address. Another would be to press for a new multilateral organization, alongside the wto, where is-

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sues of rule making in international economic policy and crucial “interface” questions, such as the relationship between trade and environment, could be addressed. It is remarkable, nearly ten years after the idea of a global-environment organization, or geo, was launched, how little public debate there has been on this issue. Perhaps it is time that these kinds of structural questions are looked into again.

conclusion The cosmopolitical world is not just a conceivable, likely, and necessary development but already with us. It is not a question of whether we believe that ngos ought to be part of our polity, our decision-making machinery, but rather of how far they will enter into it, how far they will take up active positions where they propose solutions in the interests of global governance as well as simply being rather good at opposing ideas put forward by governments. Another conclusion is that the pressures of globalization and the challenge of governance force us to take a fresh look at the entire European project. At the simplest level and at the same time, Europe has to be “big” in order to deliver, whether on trade or foreign policy, yet also “small” in order to embrace subsidiarity fully and to ensure that politics remains truly close to its citizens. Europe is capable of achieving such a balance; therefore, cosmopolitics may simply be about thinking globally and acting locally. Indeed, to return to Monnet, the closing words of his memoirs on his extraordinary career were that Europe is “a key step towards the organisation of tomorrow’s world.”5 Such an outcome is conceivable but only if we take care of the matter of legitimacy. Similarly, a fresh look at the wto is required in order to confirm that its ground rules and organizational principles still meet today’s needs and demands for legitimacy. This will ensure that its decisions – which, however technical, nonetheless affect the lives of billions of men and women and consequently have far-reaching political implications – are transparent and in the interests of all.

5 Jean Monnet, Memoirs, translated by Richard Mayne (London: Collins, 1978).

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17

What Comes after Globalization? r e n ato r u g g i e r o

Sylvia Ostry is recognized not only as an economist and scholar in academic circles, but as a leading public servant in top government circles. As chief economist of the Organization for Economic Cooperation and Development (oecd), Canada’s “sherpa” at G7 Summits, and a leading participant in the Uruguay Round of multilateral trade negotiations, Sylvia Ostry’s career was bound up with the consolidation of the transatlantic alliance and the evolution of a truly global trading system embodied above all in the World Trade Organization (wto). For Sylvia Ostry there is no contradiction between the world of ideas and the world of public duty. Both are indispensable to building a better future.

Ideas create history. The globalized age we live in today is the product not simply of technology and economics, but of a vision of world politics that arose out of the devastation of the Second World War. Half a century ago, internationalism was the great ideal of humankind. It was the time of the Marshall Plan, the Atlantic Alliance, the beginnings of the European Union (eu), and the creation of the great multilateral institutions: the un, the International Monetary Fund (imf), the World Bank, and the General Agreement on Tariffs and Trade (gatt). un societies flourished. Young women and men joined the Peace Corps. The millions who died in the killing fields of Europe and Asia served as an ever-present reminder of the dangers of isolationism, nationalism, totalitarianism – of a closed and hostile world. A global community of nations – fostered by widening circles of prosperity, the rule of law, and greater openness and interdependence – was seen as the essential answer to peace. It was a revolutionary idea. It is easy to forget – at a time when even the Cold War is a fading memory – how spectacularly successful the postwar vision has been. The Berlin Wall has

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fallen without a drop of blood being shed. Developing countries and ex-Communist states alike have turned to open markets and democracy as their best hope of progress. Former superpower rivals – the US, the eu, China, and Russia – are now partners in a common international system, one defined increasingly by the rule of law instead of by the rule of power. Meanwhile, economies and nations and cultures are being woven ever more tightly together by trade, technology, and communications. In so many ways, we have made huge progress toward the kind of global community of nations that men and women could only dream of in the aftermath of the Second World War. Why then has the twenty-first century begun in such disarray? There have been the terrorist attacks on the US, the war in Afganistan, nuclear tensions in South Asia, and the escalation of the conflict between Israel and Palestine, alongside the continuing spread of aids, financial instability, human-rights abuses, environmental devastation, and intolerable poverty. From Seattle to Washington, Prague to Genoa, we have witnessed mass public protests against globalization and the institutions and governments that defend it. How quickly perceptions have changed. The optimism that greeted the fall of the Berlin Wall just over a decade ago has given way to a growing sense of uncertainty and vulnerability. In some quarters it has led to a questioning of openness and integration as well as to a growing appeal to unilateralism, even isolationism – a palpable desire to rebuild walls, seal off borders, and shut out a messy world. The central paradox is this: Having created a globalizing world, we are uncertain what to do with it. Where are we headed? For fifty years, we have broken down walls, shrunk distances, and linked economies together. Yet globalization has created its own challenges and is demanding its own solutions. It has resulted in a world that is more interconnected but not more united, raising fundamental questions about where we go next: How can we build an integrated global economy when divisions between the haves and the have-nots are so wide? How can we minimize our differences while maintaining our distinct cultures, languages, and communities? And how can we address increasingly global problems with political systems that are still national or local? The terrorist attacks on New York and Washington were as much a reflection of globalization as the explosion of trade and economic growth. They underlined, in a devastating way, that global problems are now domestic problems – and vice versa. In trade, finance, the environment, health, and poverty – as well as in matters of security – the walls that once separated our different worlds no longer exist. We live in “one world,” but it is a world of huge disparities, widening fault lines, and deep resentments – made all the more immediate and unavoidable by the Internet, mobile phones, and twenty-four-hour television.

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Whereas the challenge of the last half-century was to manage a divided world, the challenge now is to manage an interdependent one. Where is globalization taking us? What is our end objective? Do we have a vision for a globalized world as compelling as the vision that motivated the postwar generation? And if so, what is it? It is precisely because our economies and societies have become so interconnected that the challenge of globalization is so complex. A quarter of global output is now traded across borders – compared to just 7 per cent in 1950. The vast developing world – some 4 billion people – now accounts for 25 per cent of world trade, and this share will likely rise to 50 per cent by mid-century. At the same time, capital moves around the world far faster and in volumes many times greater than ever before – almost $1.5 trillion criss-crossing the planet every day, easily dwarfing trade flows. All of this is made possible by a seamless flow of information, ideas, and technology that is impervious to frontiers, time zones, and cultures. These huge technological and economic transformations of the last decade or so could, in the long run, prove to be more important than the tectonic political shifts that accompanied the end of the Cold War. One result of an interconnected world is that it exposes our inequalities as well as our commonalties – our differences as well as our similarities. It is true that humanity has made huge progress since the Second World War. The un reminds us that poverty has been reduced more in the past 50 years than in the previous 500.1 Literacy, longevity, and health have increased. In the first half of the twentieth century, there were but a handful of democracies, and the future seemed likely to be a contest between the twin totalitarianisms of fascism and communism. By the century’s end, 120 of the 192 governments in the world were in principle – if not always in practice – electoral democracies.2 But it is just as true that improvements have not come fast enough – or been evenly enough distributed around the planet. Some 300 million people in the developing world still live on less than one dollar a day. Most lack proper access to food, water, health care, education, and justice. By some measures, the global divide between the haves and the have-nots has never been greater. This is not because we have failed to produce growth – capitalism remains the greatest generator of wealth the world has ever seen – but because politically we have failed in our efforts to ensure that more people 1 undp, Global Development Report, 1997. 2 World Democracy Forum, 2001.

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can participate in this growth or to guarantee that its benefits are more evenly distributed. The problem, as un Secretary General Kofi Annan has rightly argued, is not too much globalization but too little. Old and clearcut divisions between East and West and between North and South are being superseded by a new divide – between open and closed countries, fast and slow countries, growing and stagnant countries, those benefiting from globalization and those being left behind. This divide, moreover, is now more visible – and intolerable – in a world woven together by jet travel, mass communication, and globalized markets. How can we bridge it? Shrinking distances and falling barriers have also blurred the distinction between “foreign” and “domestic” concerns – “global” and “local” – making nations more dependent on each other’s financial stability, economic growth, development, and environment for their security. Are macroeconomic, health, or environmental policies national or international? Is the spread of aids a health or a security concern? Is financial instability an economic or a social matter? And at which level of government – multilateral, state, or local – should responsibility and authority reside? Who decides? As global linkages increase and economies intertwine, underlying differences in domestic policies, legal systems, economic structures, and even cultures are emerging as new sources of tension. International disputes were once confined largely to issues that lay in the “foreign” realm, beyond a nation’s borders. No longer. Conflicts have increasingly moved “inside the border” and encompass issues as diverse as human rights, health, the environment, taxation, technology policy, and cultural protection. They involve domestic issues and priorities and reflect the way that different governments organize their internal affairs. Policy makers in these areas operate under assumptions and mandates very different from those motivating diplomats. They respond to different problems and answer to different interest groups. Their priorities do not involve globalization – indeed, their constituencies often vocally resist such moves. It is precisely because these issues cut deeply into traditional notions of sovereignty, raising questions about the ways societies organize themselves, that they are proving more difficult to resolve. There is something else going on. In our global “electronic village” – powered by e-mail, mobile phones, and twenty-four-hour television – people have become more engaged, more globally aware, less deferential. At one time national frontiers could block out the eyes of the world. Unspeakable atrocities against Russian peasants or black South Africans could be hidden behind concrete walls and barbed wire. No longer. When images of burning rainforests or ethnic cleansing are beamed into living rooms every

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night on tv – even in the most remote corners of the planet – globalization ceases to be an academic issue. World public opinion is no longer an empty phrase. It suddenly has a powerful political dimension and a growing public voice. It raises important and complex questions – too complex to be resolved in Internet chat rooms or on cnn, but also too important to be left to international bureaucracies alone. Not only are issues becoming more complex, but interests are proliferating. Globalization means many things. It means growing interdependence through markets and communications. It also means the growing decentralization and spread of power – economic, political, intellectual. It is not just the dozens of developing and ex-Soviet states that now rightly demand a seat at the international table. Media, nongovernmental organizations (ngos), transnational corporations, hedge funds, city-states – all have become international actors in their own right, erasing the harsh but simple order of the superpower era. “Technology has been diffusing power away from governments,” writes Joseph Nye, and empowering individuals and groups to play roles in world politics. In a globalized world it makes less and less sense to focus exclusively on “international” relations for the simple reason that nations no longer hold a monopoly on power. Even in the traditional military sphere, the “power” of nation-states will be less clearcut, as the terrorist attacks of 11 September 2001 brought home in such a horrific way. This increasingly interconnected and decentralized world is perhaps best symbolized by the Internet. At once global and local, a communications tool and a knowledge resource, it exemplifies – as New York Times columnist Thomas Friedman puts it – “a world where everyone is connected and no one is in control.”3 As a result, a new kind of international politics is struggling to emerge. Amid the sound and fury of the antiglobalization demonstrations, one thing at least is clear: Politics has to become global. In Seattle, Washington, Prague, and Genoa, the protesters are as globalized as the institutions they claim to reject, their slogans often as banal as corporate advertising. Just as government is increasingly about world summits and international organizations, so politics is morphing into a global phenomenon – putting a new kind of pressure on the international system in the process. The agenda is being set by an organized, media-savvy coalition of ngos, activists, and protestors – as well as by politicians and bureaucrats.4 Its drama is being played 3 Thomas Friedman, The Lexus and the Olive Tree: Understanding Globalization (Farrar, Straus and Giroux, 2000), 16. 4 Sylvia Ostry, “The wto after Seattle: Something’s Happening Here, What It Is Ain’t Entirely Clear,” address to the American Economic Association, New Orleans, January 2001.

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out not only in meeting rooms and conference halls, but on the streets and, especially, on worldwide television. All of this raises perhaps the most difficult question of all: Who are “we” in an age of globalization? We have built an interdependent global economy, but have we also created an integrated global community? Who are “we the people” in a world where pride in culture and nation is so strong and where shared global identity is so weak? What is the “world’s interest,” and who represents it? The United Nations? The wto? The ngos? The reality is that a body politic does not yet exist at the global level with a sense of community strong enough to legitimize decisions and the exercise of power based on world-majority options. Indeed, as nations come together, economies open, and borders blur, there are signs that important parts of our societies are pushing in the opposite direction – turning inward, resisting integration, rejecting all things “foreign.” Several years ago Robert Reich asked the question “Who is us?” in a world where the web of economic production, consumption, and ownership cannot be unravelled? Many voters want their national governments to answer precisely that question – Who is us? – and they perceive multinational corporations, international organizations, and “faceless” technocrats as standing in the way. In every country and every region, the same tensions and contradictions are evident: People want the benefits of trade and investment but fear their effects on sovereignty and a sense of nationhood. They call for greater cooperation and coordination at the international level but not when these interfere with their domestic affairs. Integration means conflict as well as convergence – the ties that bind can also chafe. The new polarity of the post-Cold War era is not between left and right, but between those who accept globalization and those who actively resist it. The existing international system seems ill-equipped to answer these fundamental questions. The irony is that in an age of globalization, internationalism is in retreat. The great coalition against terrorism assembled by the United States in the aftermath of 11 September 2001 now looks like an exceptional event, even if it’s immediate results were successful. Once again unilateralism appears in the ascendancy. Critics warn of the power of today’s multilateral institutions, but more worrying is their apparent weakness. Even after the successful Doha Ministerial Conference of last November, there is still no consensus in the wto on how to liberalize new markets, integrate developing countries, reform existing agreements, and negotiate new ones – with the risk that more and more countries will turn to regional blocs to protect their trade interests if multilateralism falters. The imf seems no more

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equipped to prevent financial contagion than it was at the time of the last major crisis in Asia. The un can barely keep up with existing humanitarian and peacekeeping crises, let alone cope with fast-emerging ones. A chasm risks opening up between globalization – powered by technology and economic integration – and the international rules and structures needed to make it work. In trade, finance, and the environment and in our efforts to tackle aids or mass poverty, international cooperation risks falling behind or falling apart. It is not global tyranny that should concern us – as some ngos claim – but global anarchy: the warning signs that this fastchanging planet risks becoming ungovernable. The international system itself is not to blame. It is not an alien creation but the product of national governments. Institutions like the wto, the imf, and the un are only as strong or as weak as their members want them to be. The international system works when governments find common purpose. When they resist closer cooperation, the system falls into paralysis and indecision. It is not just institutions and alliances that are under strain. The bigger problem is that governments have failed to articulate a clear vision of what a new global order should look like. Half a century ago, the statesmen who designed the postwar system were deeply influenced by the shared lessons of history, even if their politics or outlooks differed. All had lived through the economic chaos of the 1930s – when turning inward had lead directly to the breakdown of international trade, the Great Depression, and ultimately to world war. All – including the defeated powers – agreed that the only route to reconstruction and peace lay with building an entirely new international architecture, one rooted in the values of freedom, openness, and interdependence. Ironically, in an age shattered by world war, there was a broader consensus than today on the path ahead – and an acute awareness of the need not only for shared ideals, but to give substance to those ideals through multilateral institutions and approaches. What is the shared vision that guides world leaders today? So far no one has managed to turn globalization into an equally compelling narrative. History tells us that it takes a “crisis” to galvanize international action. But the crises we face today – terrorism, global warming, aids, poverty, financial instability – are very different from the sudden outbreak of war or economic depression. They are everywhere and nowhere at the same time. Ever-present and hidden. All defy easy solutions or demand such a radical realignment of global resources or such a fundamental reexamination of concepts like sovereignty as to be politically very difficult. It is much easier for governments to talk around the problems at global summits than to tackle their root causes. Ours is perhaps above all an age of complacency.

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In this, governments have the complicity of voters. The main threat to the international system is not angry protesters in the streets (at least they have an opinion) but the apathy and indifference of the silent majority at home. At best, people are bored and confused by global challenges. At worst, they feel alienated and detached. There is a sense of disillusionment with an international order that often seems to offer no more compelling a vision than a world federation of shopping malls: the utopia of Yahoo. Few voters seem willing to man the barricades for the un, the wto, or the imf – unless it is to throw some more stones. The irony is that our past success in moving toward global peace and prosperity seems to have diminished the willingness of everyone – governments, business, intellectuals, voters – to take the actions necessary to correct existing disparities. The result is an intellectual vacuum: an inability to come to grips with the political implications of globalization because we do not like the potential answers. The central question is this: Can we adapt to our new world? Can our systems, our policies, our approaches catch up? At the beginning of this century, we built a framework of national institutions and policies to help realize the full potential of freer national markets: banking legislation, competition policy, social welfare, and work, health, and safety laws. As the logic of globalization unfolds, there is a pressing need for similar policies internationally. The problem we face today is that we are trying to manage the global economy of the new century with mainly the institutions and policies of a century that is fading away. Many of the economic, environmental, and even social issues we face are global – a reality acknowledged in the Millennium Development Goals – but our politics remain national. Our leaders, representatives, and officials are answerable first and foremost to domestic constituencies – whose concerns are still largely domestic. How can we resolve the potential for tension between our growing global interests and responsibilities, on the one hand, and our narrower national concerns, on the other? How can we mobilize popular support for global objectives, policies, and institutions? And, most important, how can we avoid a “democratic deficit” – a gap between global policies and the people whose interests they are meant to reflect. If ideas are the great drivers of history, what vision is guiding us today? Do we really have a clear idea of what kind of global institutions and approaches are needed to tackle today’s global challenges? And what comes next? The reality is that the logic of integration is pushing us – haphazardly, piecemeal – toward new forms of world governance. Yet no one seems to want to face this reality, let alone address its implications. We

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resist the idea of the wto, the imf, and other bodies becoming global actors with real teeth and meaningful policy authority – yet we have called for stronger international rules, wider policy coordination, and better “global governance.” We are quick to dismiss a world government as unworkable and utopian – yet we are at a loss to explain what kind of international system is needed to manage our ever-deeper integration or to realize the global goals we have set ourselves in the Millennium Declaration. This is one area where the ngos have got it right. We have reached a stage where it is absolutely necessary to debate what this new global system is all about. But a serious debate cannot begin until we acknowledge where we are and where we are going. So what is to be done? First and foremost we need to give a new sense of purpose to the transatlantic relationship. Just as the partnership between Europe and North America was key to the success of the postwar international order, so too will it be central to the future of our globalizing world. But the transatlantic relationship has also changed in important ways. We need to acknowledge that we face new and intractable enemies today – terrorism, poverty, hunger, the degradation of our environment, violations of human rights – that are very different from the enemies faced at the end of the Second World War. We also need to recognize that, in redefining the core of this relationship, Europe’s responsibility is now no less than that of the United States. It is often assumed that transatlantic relations are fraying in part because a unified Europe is now stronger and more assertive. In fact, the problem is the opposite. No one can question Europe’s commitment to multilateralism or its belief that consensus solutions offer the best hope for lasting international peace. No one should undervalue the immense contribution that Europe has made to international peace through its historic march toward economic and political union. The present enlargement negotiations leading toward a community comprising as many as twenty-seven countries represents, more than anything else, the reunification of Europe after the fall of the Berlin Wall. This is a bold decision, based on political wisdom, that sends out a message of peace and solidarity that has no equal in the present world. But enlargement, by itself, is not enough to give the eu the necessary power to realize its objectives or to become an equal partner with the United States in building a new global order. As Pascal famously observed, “justice without force is powerless and force without justice is despotic. We need to join force and justice so that what is strong is right and what is right is strong.” Europe needs to build institutions in the areas of foreign

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and defence policy that will allow its members to speak with one voice in the same way that they now speak with one voice on trade. Europe urgently needs to devote resources to defence and foreign policy that are commensurate with its ambitions as well as with its gross domestic product (gdp). Most important, Europe needs to strengthen itself – not in opposition to the United States but in partnership. It would be the greatest mistake to give the impression that the eu is being constructed in response to the US, for there has been – and will continue to be – no meaningful European security outside of the context of the transatlantic relationship. Time is short. And Europe has to send a clear and early signal that it is really prepared to move in this new direction. The demand for a more active and influential Europe is strong. But only a Europe that is united and capable of meeting its responsibilities and ambitions will be accepted as an equal partner by the United States. Only when Europe really moves toward a common foreign and defence policy will it be able to influence the United States and convince Americans that power alone is not enough to solve the problems we face, including terrorism and the proliferation of weapons of mass destruction. A new sense of transatlantic purpose can be the product only of a more balanced relationship on both sides of the Atlantic. A strengthened transatlantic community is essential, but not sufficient, to finding the global answers we need. We must at the same time move toward a more collective global leadership – one that reflects the reality of a multipolar world and especially the emergence of new developing-country powers. This leadership must be drawn not just from the advanced economies but from the developing ones as well. From new economic powers like China, South Africa, Brazil, Malaysia, India, Pakistan, and Mexico – not just from the United States, Europe, Russia, and Japan. This does not mean that the G8 is suddenly any less important. As Sylvia Ostry recognized, cooperation and consensus among the advanced economies – and in particular between the US and Europe – is not an alternative to global cooperation. Rather it is central, even indispensable, to advancing a larger international agenda. This means simply that the advanced economies alone are no longer capable of providing international leadership. Recent summits in Genoa and Kananaskis – where leaders from the developing world, especially Africa, were present at the meetings – are already indicative of the kind of broader international leadership we need. We also need to redouble our efforts to widen the circle of globalization – beginning with early progress on the central goal, adopted at the wto’s Doha Round, of integrating developing countries into the multilateral

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trading system. A borderless world simply cannot tolerate such stark divisions between the haves and the have-nots, the “globalized” and the “marginalized.” Broadening participation in economic growth – and reducing worldwide disparities – has become the central challenge of globalization. As we begin this new century, we need to recognize that global interdependence without global integration – a shared world without a shared future – is a recipe for continuing instability and insecurity as well as injustice. To do this we need to look at the policy challenges we face as pieces of an interconnected puzzle. We can no longer treat trade, finance, the environment, development issues, health, and human rights as separate issues to be addressed through separate policies and institutions. As a matter of fact, we need an institutional framework for the management of these complex issues – one that is truly representative of the new global realities. We need a framework that, on the one hand, brings world leaders together to tackle an expanded policy agenda and, on the other hand, strengthens and coordinates the role of the major international institutions as embodiments of the collective interests of the growing international community. At the same time, we need to recognize the constructive role of the democratic representatives of civil society. Last but not least, we need a more engaged debate about globalization – at all levels of government – in order to build a stronger mandate for addressing common global objectives. The immediate challenge is to better integrate the globalization debate into the mainstream of national politics. This debate can only benefit internationalism by demystifying globalization. It can lift discussion out of a virtual world of slogans and sound-bites and into the real world of difficult problems and tough choices. It can educate, inform, force people to think – and, in doing so, underscore the logic of greater international cooperation and openness. An open global society is inconceivable without open discourse. Globalization is about freedom – free markets, free democracies, the free flow of ideas and innovation. By breaking down barriers between us, and by sharing our ideas, our thoughts, our cultures, globalization is giving individuals more power to choose and, by extension, weakening the power of those who would choose for us. Without the freedom to express differences – as well as similarities – an open global society is meaningless. Vision has always defeated skepticism. This was the case with the fall of the Berlin Wall without a war and with the European construction, out of a devastated and divided continent, of a customs union, then a single market, and now a single currency, all of which have moved Europe closer to a

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structured political organization. It has also been the case with our efforts through the wto to build a world trading system that is rules-based and universal. Where is the world headed? Toward new forms of world government. And why not? There was a time, not too long ago, when the fall of the Berlin Wall without a major war or a single European currency would have seemed equally utopian. Yet the visionaries won the day. In many ways, we stand at another of history’s crossroads. The choice we face – as the attacks of 11 September 2001 so starkly underlined – is a simple one. We must choose between moving forward on the basis of shared rules or on the basis of power, between consensus or conflict, civilization or terror, a united future or a return to our divided past – with all of its conflicts and tragedies. Fifty years ago, international cooperation, collective security, and the global rule of law were powerful and inspiring concepts. We need to reinvent internationalism for a modern age. Even more important, we need a new moral vision that can galvanize people everywhere to achieve common values and a shared destiny. We need a new concept of global solidarity. Let’s not forget that our globalized world is linked together by shared ideas, aspirations, and concerns as well as by trade, finance, and technology. There has been a globalization of our hopes and fears, not just of our economies. And it is this human dimension of globalization – more than any other – that must be our guiding vision for the future.

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18

The New World Order: Staking Out Canada’s Interests1 gordon s. smith

This chapter was written by a sherpa to the G7/8 Summits who took on the challenge some ten years after Sylvia Ostry first shouldered the responsibility: “Writing this chapter caused considerable personal reflection upon the changes in the world, leading back to my experiences as the Canadian prime minister’s (Jean Chrétien’s) sherpa for the G7/8 Summits from 1995 to 1997.” Gordon Smith’s perspective – in his own words – was distinctly that of a political scientist rather than that of an economist. In a critical passage, this chapter refers to the broadening of the summit’s agenda and explains why its sharp focus on trade, economic multilateralism, mutual concessions, progressive liberalization, and so on soon expanded to include the political implications of globalization: When the prime minister asked me to take on the responsibilities of sherpa, I confess that I was a little intimidated. After all Sylvia Ostry, a distinguished scholar and highly regarded Canadian public servant, was one of my predecessors. I am a big fan. She had written the book – I should say books – on international trade. I was comfortable with the landscape of political and security issues and at home with the European Union and Canadian federal-provincial processes. But how would I answer a question about dispute-settlement mechanisms? The number of things I did not know about international economics exceeded those I did know. What would I do if I were asked a question about how special drawing rights (sdr s) worked?

1 Wanda Ollis, a senior research assistant at the Centre for Global Studies, greatly assisted in preparing this text.

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“ f r a g m e g r at i o n ” a n d nat i o n a l i n t e r e s t s Do not be deceived. The title of this chapter – “The New World Order” – does not suggest that the new world will be orderly. It will not. Rather, it is likely to be quite disorderly. Political scientist Jim Rosenau has coined a word for this – “fragmegration” – connoting the fact that integration and fragmentation are occurring at the same time. Responding to the effects of disorderly “fragmegration” will require some truly “out of the box” thinking from Canadian policy makers. It may even mean getting rid of the box altogether. The avalanche of change emerging from the so-called new world order means that Canada must redefine its interests and find innovative ways to advance them. In particular, Canada needs to judge how close to, and how far from, the United States it should be, as the US is at the epicentre of the changing world. Coupled with a need to revisit and redefine Canada’s relationship with the US is the need to consider other facets of the emerging new world order, specifically the significant risks related to the failure of states around the world, including bigger ones than we have thus far seen. One such risk, identified by Robert Kaplan, an author who focuses more on fragmentation than integration, is that “two dynamic classes will emerge under globalization [and failed states] – the entrepreneurial nouveaux riches and, more importantly, the new sub-proletariat – the billions of working poor, newly arrived from the countryside, inhabiting squatter’s settlements that surround big cities in Africa, Eurasia and South America.”2 According to Samuel Huntington, this may lead to a “clash of civilizations.”3 Although Huntington’s take is overdrawn, it does seem that Osama bin Laden and like-minded extremists are trying to provoke precisely that. Another of Huntington’s views, however, does not seem exaggerated: that the world is “a dangerous place, in which large numbers of people resent (US) wealth, power, and culture, and vigorously oppose efforts to persuade or coerce them to accept American values of human rights, democracy, and capitalism.”4

2 Robert D. Kaplan, Warrior Politics: Why Leadership Demands a Pagan Ethos (New York: Random House, 2002), 5. 3 Samuel Huntington, The Clash of Civilizations and the Remaking of the World Order (New York: Simon and Schuster, 1996). 4 Samuel Huntington, quoted in Robert D. Kaplan, “Looking the World in the Eye,” Atlantic Monthly 288, no. 5 (December 2001): 75.

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Meanwhile, integration leading to global interdependence is increasing in the finance, environment, and security domains, to name but a few. Better governance – management of that growing interdependence – is clearly required. However, at the same time, governance has become increasingly problematic, as there has been a diffusion of power to nonstate actors in the system. Transnational corporations are more powerful, and a more active civil society is gaining influence. What do these changes mean for Canada as the neighbour and major trading partner of a unilaterally inclined hegemonic state? What should Canada do to advance its interests when “normatives” are changing rapidly for governance policy makers? Although ideals are important, it is necessary to base policy on hardheaded realism in the context of the changing world order. I will lay the foundation for my call for realism by reviewing the current global situation. Over the next several pages, I will highlight some instances of global change, such as the changes brought about as a result of the terrorist attacks against the US on 11 September 2001 (commonly referred to as 9/11) and the situation in the Middle East. In turn, I will focus on the psychology of the US, Canada’s powerful neighbour. Then I will come back to the new kind of realism called for and advance five broad prescriptions for advancing Canadian interests. Briefly, these include the need for Canada to: •

•

•

•

•

accommodate globalization in such a manner as to provide for more winners and fewer losers pursue increased legitimacy and accountability for international organizations find appropriate methods to make nongovernmental organizations (ngo s), and civil society generally, constructive parts of the solution, which includes exploring new forms of governance that involve them be supportive of the US regarding security issues and make a concerted effort to understand its profound sense of vulnerability develop a clear strategy for dealing with the US, one that builds on enhancing existing international regimes, is cautious about enforcement in the early stages, directly addresses US public opinion, and avoids isolating the US

Canada’s interests are best served with a hard-headed view of global affairs and by securing the means to influence Canada’s future. This means being close to the US while not fearing to advance Canadian interests. This does not derogate from sovereignty. Independence in foreign policy is not an

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end in itself and, if so pursued, could paradoxically have the effect of actually increasing dependence and reducing sovereignty.

change Several major changes have recently occurred or are occurring in the world that necessitate new policies and realistic prescriptive solutions. For example, the Iron Curtain will soon be but a memory – yet it heavily influenced national and international policies and behaviour for half a century. Russia and the North Atlantic Treaty Organization (nato) have developed a new partnership, nuclear arsenals are being cut, and the Baltic republics may soon be nato members. China may not be a model democracy, but it is now a member of the World Trade Organization (wto) and much more engaged with the rest of the world. Moreover, China is already a major economy, and in the years ahead will become even more powerful – economically, militarily, and politically. In the next twenty-five years, the world’s population is going to increase by one-third – an increase of 2 billion people. The consequences are hard to imagine, especially when virtually all of this growth will be in the poor countries of the world. Most will be in cities. The current living conditions for the vast majority of the population in the cities of developing countries, such as Lagos, Sao Paulo, and Bombay, are appallingly bad. And they will get a lot worse: These cities are likely to double their populations in the next twenty-five years. The problems related to providing shelter, food, water, and sanitation – the basic necessities – will escalate and exacerbate already tenuous conditions. Imagine how the rapidly growing numbers of young people will respond when the disparity between the “haves” and “have nots” increases. Among those areas with the highest population growth are, and will continue to be, Arab countries. This fact has taken on added significance since the terrorist attacks of 11 September against the US and the subsequent “war on terror.” Accordingly, my later discussion of that region will be disproportionate to the region’s size. Water, or more precisely the lack of it, is going to become an increasingly important source of conflict in the Middle East as its population increases. Throughout the world, at the present time, 350 million people suffer from chronic water shortages, 1.5 billion do not have access to clean drinking water, and 3 billion – half the world – do not have access to adequate sanitation. With bigger populations, the water problem will get worse; conflicts over water will escalate and emerge in

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new regions. Climate change will exacerbate water-scarcity challenges, as it will several other resource-related challenges. Coupled with these changes, the understanding of two terms – “globalization” and “governance” – will have a profound effect on government policies, and governing globalization must clearly be one of Canada’s top priorities. Globalization and governance are about more than economics, on the one hand, and governments, on the other. Globalization must be looked at in connection with a number of areas: nuclear weapons, other weapons of mass destruction, and terrorism as part of maintaining traditional security; climate change, desertification, and biodiversity as part of environmental security; and inclusive national and international economic strategies as part of livelihood security, to give but a few examples. The point is that the people and nations of the world are becoming increasingly interdependent: The old boundaries between domestic and foreign policy have disappeared in many areas, as Rosenau pointed out when he coined the phrase “intermestic.” The bottom line is that only collaborative solutions will work. Mutual interdependence means mutual vulnerability. Surely, this should provide sufficient stimulus to action. Mutual vulnerability was evident half a century ago with the advent of nuclear weapons and the means of delivering them over long ranges. It is certainly evident today in several other arenas but perhaps most obvious in the financial world. Governments are no longer the only players in governance. Those simpler days are gone. But governance has lagged behind globalization. Governance at the global level is, of course, more complicated than at the national level. At the national level, institutions gain legitimacy through political processes that involve citizens. There is nothing comparable at the global level. Nor is there a “social compact” that works at the global level, something that at the national level helps cushion change. Some people already live in a global village. They are connected to networks that extend around the world, and the costs of communications, in particular, but also of travel, are low. While this is a reality for many living in the developed world, it is not the experience of the majority in developing countries. More than half of the world have never placed a telephone call. Travel remains even further out of reach for an even greater proportion of the global population. There are real risks in a world with a growing gap between those elites who are “globalized” and those who feel totally alienated from this world. Too many people are completely focused on sheer survival, in many cases not knowing much about what is going on elsewhere, and if

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they do, they realize that they are economic losers – through no obvious fault of their own. The information and communications revolution makes it obvious to more people that they are truly being left behind, with few opportunities to better the circumstances of their families and no real capacity to affect their lives. This is dangerous as well as unfair; these conditions, which breed despair and rage, must be taken seriously. There is also a problem because a large number of people feel left out, uninvolved in any way in decisions that affect them. They see the US, unresponsive international organizations, and big companies as those with real power in the world; therein lies the danger.

9/11 I want to turn my attention to a more recent development. The events of 9/11 were very important – not simply because they initiated a new era of large-scale global terrorism, but because they changed how the United States looks at the rest of the world. The United States and, for that matter, Canada have been extraordinarily lucky in their short histories with respect to security. Both countries have been at war on various occasions, but the wars geographically have been far away. Except for the attack on Pearl Harbor, the US has not been bombed or been occupied by foreign armies for almost 200 years. Compared to the rest of the world, this is quite atypical. Americans and Canadians are used to feeling secure – except that Americans no longer do. The events of 9/11 underscore a reality that was heretofore only partially perceived: Too often dislike was, and is, in reality, hatred. The underlying dislike of the US and the symbols of capitalism so often associated with that country are certainly known by Canadian youth backpacking around the world with maple leaves on their backs to distinguish themselves. But many Americans were left truly puzzled after 11 September, asking themselves: “Why do people hate us? Why would anyone want to do this to us?” There is a widespread feeling in the US that 9/11 was aimed at the very existence of America – at its values and its institutions. The attack was not against the US’s military might, as was the case in December 1941, but directly against its civilians and institutions. And the attack was not from an enemy state but instead from a “nonstate actor.” The anthrax attacks in the US in the fall of 2001 compounded the already enormous sense of vulnerability generated in the wake of 9/11.

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It is very important for Canada to understand the depth of this feeling of vulnerability in the US. Despite its formidable military, the US is vulnerable to terrorism. Imagine what will happen if attacks are perpetrated – and they likely will be – by suicide bombers in the shopping malls, pizzerias, and night clubs of the US. Imagine what will happen if biological or nuclear devices are used. There is also an important political dimension to the aftermath of 9/11 that should not be elided. The war on terror is the defining element of the Bush administration. But it is not just a war on terror. The president has made it clear that there is another key objective: to stop those seeking to develop weapons of mass destruction from doing so; whether there were links between Saddam’s Iraq and Osama’s al-Qaeda is largely irrelevant. The US has shown that it will act with or, if necessary, without allies. Accordingly, Canadian concern regarding this strategy needs to move beyond disagreement and “what if” scenarios to concrete on responses and alternatives. It is also quite possible that the war on terror will not end with Iraq. Iran and North Korea were included in the Bush administration’s original “axis of evil.” This “axis” seems to relate principally to countries interested in developing weapons of mass destruction. But there are other lists that relate more to terrorism. The State Department produces an annually revised list of those states that support terrorism, and another list of “most wanted” terrorists is produced by the Federal Bureau of Investigation. These lists exemplify more than potential threats to US security; they exemplify the growing need to ensure that Canadian policy is sensitive to US insecurity yet responsive to Canada’s security goals. These changes in US priorities are occurring amidst other real international threats. At the time of this writing, Pakistan and India are on the verge of war, and both states are armed with nuclear weapons. The IsraeliPalestinian conflict is so deep as to make peace seemingly unimaginable. Can there be lasting peace without a democratic Palestinian state? Yet there must be opportunity and hope for young Palestinians, and, of course, Israel must be secure. On a humanitarian and human rights scale, the Mideast tinderbox is of great importance and concern. Most significant, however, in the context of global security is that the risks of spillover are high. To propose Canadian policy for the Middle East is to enter a minefield. The pressures from Canadians of Jewish faith, on the one hand, and from Canadians with Palestinian and Arab backgrounds, on the other hand, have made it virtually impossible, politically, to traverse this minefield. Yet surely this is a case when Canadians, all Canadians, ought to be helping to stake out vital Canadian interests in this region of the world.

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It is also important to bear in mind that many in the Muslim world – as far away as Indonesia – still do not accept that Osama bin Laden and alQaeda were behind the attacks of 11 September. An astonishing number see the perpetrators as agents of a Jewish conspiracy that was specifically designed to put the blame on the followers of Islam. This perspective is deeply disturbing given the evidence available and the fact that bin Laden has effectively admitted his role in video-taped interviews. T-shirts with his face are popular; he has become a martyr – if, indeed, he is dead. There is a sense in parts of the Muslim world that the “US had it coming.” There is a dangerously widespread perception around the world that the war on terrorism is a war on Islam. Americans have a tendency to see the world in black and white terms. This was perhaps most evident during the Cold War. Yet, in a few short years, the “old” enemy disappeared. The Warsaw Pact disintegrated. The Soviet Union dissolved. The Russian military was much weakened. Communist ideology has been relegated to the history books and the political fringe. However, it seems that there was a need for an enemy. For a while, it seemed that China might replace the Soviets as “enemy number one.” A clear enemy not only helped to substantiate the need to avoid large cuts to the military, but also helped order the world. It assisted some in divining good and evil, always a compelling basis for choice. The events of 9/11 gave the US a new organizing principle: the war on terror and now the additional element of the mission to prevent the development of weapons of mass destruction by unreliable “axis of evil” states. Bush has been very clear: You are either for us or against us. Nonalignment is not an acceptable alternative. Other foreign policy objectives, including the promotion of human rights and democracy, are clearly subordinate. Yet even alignment has its weaknesses from a US point of view. The experience of the US with nato during the Balkans war was not a happy one. Not only did a group of foreign ambassadors sit around a table reviewing target lists, but one of the US’s very own generals overstepped his authority. General Wesley Clark thought that, as the saceur – the supreme allied commander of Europe for nato – he could hold views based on his alliance responsibilities that differed somewhat from those emanating from the Pentagon. He was “relieved” shortly before his term ended, thereby sending a loud signal to senior officers in the US military as to who their boss really was. This time, despite nato’s invocation of Article 5 – the provision stating that an attack on one is an attack on all – the military response has not been conducted through the nato military command structure or managed by

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the political structure. Rather than in Brussels, the centre of action is in Tampa. The US allies (and the un) are arrayed in huts in the parking lot of Central Command. This hub-and-spoke command-and-control system will not change any time soon. That the US is changing its national command system in ways important to Canada is especially evident in the creation of Northern Command. This move is forcing Canada to make an important decision – a decision that must be made without illusions – for the US is going to defend itself the way it judges most effective. This includes (if the US is under attack) the use of Canadian air space and waters. Canada was at this juncture during the emergence of the Soviet bomber threat to the US fifty years ago. Canada had a choice. It could stand apart, not involving Canadian interceptors in an integrated arrangement and, consequently, not having any influence – even much knowledge – about the defence of the US that would be carried out, or it could, and did, decide to become involved in North American Air Defence Command (norad). That was the right thing to do even though Canada was obviously the junior partner. Ironically, it turned out that the commander-in-chief of norad was so often in Washington that his Canadian deputy deep in the mountain headquarters of norad at Colorado Springs was very often in charge. In the North Atlantic, Canada also had, in effect, an integrated command structure under the saclant (the supreme allied commander for the Atlantic), always a US admiral based in Norfolk. There is, then, a subordinate command in Halifax, where a Canadian is in charge. Therefore, Canadians are used to integrated commands in which military units of both countries operate. Canada benefits from these commands if they are correctly designed. Canadians’ interests are better served by their knowing what is going on and being able to influence events. This clearly means their being part of the new command structure and being grateful for a position “inside the tent.” This will require explaining to the Canadian public, which brings me back to what I noted in the introduction: Canadians need to be realists. It is obvious that the United States is by far the most powerful country in the world – militarily, economically, and technologically. It spends almost Cdn$400 billion annually on its military, more than the next twenty-five countries together. Its ideas and its popular culture resonate around the world, generally positively, but sometimes negatively. In foreign policy, however, the US is becoming increasingly unilateral in its approach. This is not to say that the US does not consult; it generally does. Nevertheless, the US does not want to be constrained by multilateral

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institutions and processes in a significant number of areas. Many explanations are advanced for this, and these explanations are not mutually exclusive. First, the US pursues its interests as it deems best, and the means may be unilateral or multilateral – no country with such a dominant position in the world would probably do otherwise. Second, the US clearly has a strong “souverainiste” tendency – to borrow a phrase from another arena. The US’s political elite simply do not like to have US law overridden by international law except where its interests clearly indicate that this would be advantageous. Third, and much less known, is the long intellectual and political history that describes the US as “exceptional.” Exceptionalism not only implies better, but includes a concomitant mission to advance US values in the world – of course, for the interests of others, not just for the US. Thus it includes an important strand of idealism.5 One sees this unilateralism not only being maintained but being advanced by the Bush administration. This is exemplified in its approach to the International Criminal Court, the Convention on the Rights of the Child, the Anti-Personnel Landmines Ban, the Comprehensive Test Ban, biological and chemical weapons treaties, missile defence, and the Kyoto multilateral accord on climate change, to cite some of the major examples. Richard Haas, now director of policy planning in the State Department and one of the moderates in the administration, wrote a book entitled The Reluctant Sheriff. Its title says it all. Think of Gregory Peck in High Noon. He wanted to give up being sheriff to marry his true love, but a report arrived that a well-known criminal was coming back to town after a period in jail. His deputies were intimidated by this threat. So he decided to stand his ground alone and risk losing his loved one. Duty called. Sound familiar? And, keeping the Western metaphor, do not “posses” sound a little like “coalitions of the willing”?

new approaches to governance There is an increasing need for what Wolfgang Reinicke has called “global public policy.”6 In arriving at such policies, the role of networks is of increasing importance. Networks are of various kinds. Often they are 5 Ironically, a lesser known definition of exceptionalism states that it is “the belief that the peaceful capitalism of the U.S. is an exception to the Marxist law of the inevitability of violent class struggle.” Katherine Barber, ed., Canadian Oxford Dictionary (Don Mills, Ont.: Oxford University Press, 1998). 6 Wolfgang Reinicke and Francis Deng, Critical Choices (Ottawa: International Development Research Centre, 2000).

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formed among groups that are all part of civil society. However, increasingly, they bring together civil society, the private sector, and governments. Sometimes they are quite informal. Sometimes they involve only governments. As a consequence, argues Anne-Marie Slaughter, a Harvard professor, rather than disappearing, states are disaggregating. The constituent parts, “courts, regulatory agencies, executives and even legislatures ... are networking with their counterparts abroad, creating a dense web of relations that constitutes a new, trans-governmental order.”7 At economic summits, leaders did not talk about dispute-settlement mechanisms and sdr s. This is partly because the finance ministers moved in preemptively and occupied much of the space. But it is also because the leaders really wanted to talk more about how to manage big global issues – climate change, infectious diseases, and crime being the three major ones in my time. They knew that these issues could no longer be managed at the national level and that the international means of doing so were less than adequate. They knew that the major international institutions needed reform: the Bretton Woods duo of the International Monetary Fund (imf) and the World Bank as well as the United Nations. Canada has always been attracted to multilateralism. There are several possible reasons for this: Its neighbour to the south is much more powerful, political elites in Canada are not comparable to those in the US, and Canadians believe that they fare better in negotiations that involve more players. This brings us back to the prescriptions for realism briefly outlined in the introduction. Prescription #1 Globalization needs to be “shaped.” It needs to be shaped to ensure that more people benefit and to ensure that global public goods are provided. As committed a capitalist as George Soros has acknowledged these facts. Markets do many things very well, but they do not deliver on public goods: Markets do not provide for investment in the global commons; they are not a substitute for governments. More sophisticated international standards and regulations are needed. Soros has also correctly expressed concern about the alliance of left and right against international institutions. This is not to say that the institutions do not need reform – they do – but their existence and competence remain essential. 7 Anne-Marie Slaughter, “The Real New World Order,” Foreign Affairs 76, no. 5 (1997): 184.

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Prescription #2 Canada’s interests lie in the development of effective, inclusive global governance that has broad-based legitimacy. There are difficult global issues to be managed. For example, how will the regulations behind liberalization, the rules of globalization, and the restraints on technology be settled? These issues obviously have a substantial political content, with politics being defined, in Harold Lasswell’s terms, as “Who Gets What, When and How?”8 If outcomes are to be stable, they must be the result of reasonably broad-based consensus. The decision-making process needs to be more transparent. There needs to be conviction that various voices will be heard. There should also be some process of holding decision makers accountable. This is complex enough at the national level and even more so among nations. The alternative is a world of “gated communities,” with the stress and discomfort of insecurity, and extensive “no go” zones. Prescription #3 Power at the global level is now less state-centric – there are other sources of power, other means of exerting power, than through the state system. International organizations are now more important, as they affect the everyday lives of citizens – as demonstrated by the impact of the wto and the imf on what had previously been considered domestic policy. Foreign and domestic policies merge. The private sector is a major player globally, with powerful corporations that operate across borders having little accountability to any elected political body. There has also been a tremendous increase in the role of civil society at the international level: The number of transnational ngo s has increased substantially; there are now estimated to be 15,000.9 According to Ann Florini of the Carnegie Endowment, they are “bound together more by shared values than by self-interest.”10 All of this, however, does not mean that the state is going away. It does mean that the state needs to accept that there are other actors on the stage with whom it must work.11 These other actors may seem like a nuisance, but, in fact, they can be very useful. As an example, Lloyd Axworthy, a former 8 Harold Lasswell, Politics: Who Gets What, When, and How? (New York: Meridian, 1958). 9 According to the Union of International Associations. 10 Ann Florini, The Third Force (Washington: Carnegie Endowment for International Peace, 2000), 7. 11 I have coauthored a book with Moisés Naím on this subject: Altered States: Globalization, Sovereignty, and Governance (Ottawa: International Development Research Centre, 2000).

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Canadian minister of foreign affairs was successful in negotiating the antipersonnel landmines treaty because he had allies among the ngo s. To dismiss the role of ngo s is to risk a repeat of the successful campaign that was mounted against the Multilateral Agreement on Investment (mai). Another example is the campaign that was mounted in the United Kingdom in front of grocery stores against paper products coming from the oldgrowth rainforests on British Columbia’s coast. The result was that Scott Paper told MacMillan Bloedel (a bc-based forest-products company now owned by Weyerhaeuser) that it would only buy from MacMillan Bloedel if the latter stopped harvesting in these locations. This quickly produced results. ngo s have demonstrated the power to compel major corporations to address environmental and social issues. In an increasing number of areas, ngo s are interacting directly with corporations to achieve their objectives, something to which Starbucks, Nike, and Weyerhaeuser can attest. Both ngo s and businesses realize that they do not always need governments. The expertise of ngo s often exceeds that of governments, with the result that they not only drive the agenda and influence negotiations, but also ensure follow-up – in fact, they may do much of the follow-up. A good example is the work on the rights of the child by a group led by Philip Cook and the Institute for Child Rights and Development, part of the Centre for Global Studies at the University of Victoria; this group works in close collaboration with Senator Landon Pearson, who has special responsibility in this field. Like-minded ngo s have more time and expertise to devote to this problem than do government foreign-affairs departments. While governments may not be able to act with the same degree of autonomy as they have in the past, it is still government officials who negotiate agreements and governments that take the lead in putting them into effect. The state will still be here in the distant future.12 States have legislative power as their bottom line. Businesses have economic power. ngo s have softer instruments of power and rely more on moral authority. This does not make them any less capable of influencing the development of norms, and these norms, in due course, can find their way into legally binding international treaties.

12 I have edited a book on this subject as part of the Trends Project, Who is Afraid of the State (Toronto: University of Toronto Press, 2001). The Trends Project was initiated by the Policy Research Secretariat, an offspring of the Privy Council Office, to look ahead at the emerging context for policy development.

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Prescription #4 With respect to the United States, Canada needs to understand the extent to which many Americans feel seriously threatened. Canada needs to be there for the US on security matters, provided Canadians are convinced that the US is on the right course (and that Canada has the means). Canada’s recent withdrawal of ground troops from Afghanistan contradicts this need to support the US. Ironically, Canada’s interests are now much more at stake in Afghanistan than in Bosnia, where Canada has made significant contributions and has maintained a peacekeeping presence. Prescription #5 Canada also needs to work with the US to build better regimes for managing interdependence in a cooperative way. Isolating the US, tempting as that may seem, is not productive. Instead, Canada should build from its understanding of the US’s socio-economic and security concerns to develop the arguments and the constituencies needed to engage the US in the process of building better global governance policies and mechanisms.

engaging civil society These prescriptions have a common element: the need to engage with civil society. The forms this may take are varied, and they necessitate determining what engaging with civil society means within both a Canadian and global context. Nevertheless, collective notions of civil society can have both negative and positive results. Canadian policy needs to encourage productive dialogue with civil-society groups. For example, the recent G8 Summit’s focus on supporting the New Partnership for Africa’s Development (nepad) was impressive. As the lead for this summit, Robert Fowler, the Canadian sherpa, did notable work. Significant, too, was Prime Minister Chrétien’s commitment to creating an “Action Plan for Africa.” Critics of the nepad, however, point out that civil society was not consulted, which has led to resentment. Neither the G8 nations nor the African nations that produced the nepad can ignore civil society, which has the power to derail both the process and implementation. As mentioned previously, civil-society organizations often have the expertise and knowledge to be a constructive part of solutions. Canada should do considerably more to lead the engagement of global civil society in the follow-up to the G8 commitment to Africa.

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There is a deep problem with civil society and the processes of globalization. The views of those ngo s that have gathered to protest the Asia Pacific Economic Cooperation organization (apec), the Summit of the Americas, the wto, the imf, and the World Bank, as well as the G7/8 Summits, are diverse and often contradictory. As an example, in the area of trade many of those from the South want access to markets in the North for those products in which they have a comparative advantage: agriculture, textiles, and so forth. This is exactly the opposite of what the unions of the North want. It is important to bring out these differences and discourage people from building coalitions based on being against particular institutions. There will inevitably be protests replete with anarchists and hooligans determined to break up high visibility meetings. What is important – and this opportunity has been lost – is to separate the violent individuals and those who want only to be seen and heard protesting from those who want to have a real dialogue. There are substantive reasons to have worries about how globalization is unfolding. It is part of democracy to allow those voices to be heard, to engage them in dialogue, and perhaps even to learn something from them.

conclusion Canada needs a very clear sense of where its interests lie. Canada is not interchangeable with the United States. Canadians have some interests that are the same and others that are different. Moreover, national autonomy, generally, is on the wane. It is true that Canadians are losing some of their autonomy vis-à-vis the US. Nonetheless, Canada can still pursue its own interests, follow its own values. Canadians want a world that is peaceful, fair, and environmentally secure. This requires: • • •

•

better governance of a globalized world finding innovative ways of involving civil society and the private sector the engagement of the US – which is now actually “unsigning” more international agreements than it is signing working with the US as it responds to what it sees as an existential threat

There is neither democracy at the global level nor world government – and there is not likely to be for a very long time. Innovation is necessary to com-

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pensate for this reality. The political dimension is more important than the technocratic. Canada knows the US and can work with it and sometimes, when Canada’s interests so suggest, work in other directions. There are substantial opportunities for Canadian leadership to build a better and, ultimately, safer world.

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pa r t t h r e e

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sylvia ostry has devoted her entire working life to public service both in Canada and in international organizations of which Canada was a member. From the time she returned to Canada from the United Kingdom in 1958, her intellect, expertise, and energy benefited different federal government departments, ministers, and eight prime ministers: John G. Diefenbaker, Lester B. Pearson, Pierre Elliott Trudeau, Joe Clark, John N. Turner, Brian Mulroney, Kim Campbell, and Jean Chrétien. It was that same intelligence and expertise that made her for much of this time our country’s most senior female bureaucrat and, indeed, one of the very few women in the world to attain such stature and influence. Those of us who benefited from her wise counsel – which we mistakenly didn’t always accept – thank her on our behalf, as well as that of the community we served, for her extraordinary intellectual contribution to Canada’s welfare. We wish to add our names to those who honour her seventy-fifth anniversary for her past contribution and for her continuing endeavours across the world to make it a more civilized, stable and secure place for all of us to inhabit. Many happy returns and thank you, Sylvia, for your unparalleled contribution. We thank the editor and publisher of this festschrift who have given us the opportunity to convey our personal appreciation of Sylvia Ostry’s life’s work.

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Contributors

l o r d r o b e r t a r m s t r o n g is chair of Forensic Investigative Associates (fia) United Kingdom. Since his retirement from public service in 1987, he has served as chair of Biotechnology Investments, as chair of Bristol and West, and as a director of a number of companies, including the Bank of Ireland, N.M. Rothschild and Sons, and 3i Bioscience Investment Trust. Lord Armstrong served as principal private secretary to Prime Ministers Edward Heath and Harold Wilson, under secretary of the treasury, permanent under secretary of state, secretary of the Cabinet, and head of the Home Civil Service. m a l c o l m s . c o h e n is president of Employment Research Corporation. He has served as a consultant for the Migration Institute on Guest Workers for the US department of state, for the Advisory Council on Unemployment Insurance, and for the federal Cost of Living Council and as a labour economist in the Bureau of Labor Statistics. Dr Cohen has taught at the University of Minnesota and at the University of Michigan, where he also served as director of the Institute of Labor Industrial Relations and chair of the Program for Human Resource Development. j a c q u e s d e l a r o s i è r e is advisor to the chair of the Banque Nationale de Paris (bnp) Paribas, chair of the Per Jacobsson Foundation, cochair of the Committee on Crisis Management and Crisis Resolution in Emerging Markets of the Institute of International Finance (iif), and president of the Observatoire de l’Epargne Europénne (oee). He is also a member of the board of directors of France Telecom, Alstom, and Power Corporation. He served as French finance minister and undersecretary for monetary affairs until he was elected managing director of the International Monetary Fund (imf) in 1978. He has also served as governor of the

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Banque de France, president of the European Bank for Reconstruction and Development (ebrd), president of the Group of Ten, and president of the governors of the central banks of the Group of Ten. d av i d a . d o d g e is governor and chair of the board of directors of the Bank of Canada. He has held senior positions at the Department of Employment and Immigration and at the Department of Finance, including that of G7 deputy, in the Central Mortgage and Housing Corporation, and on the Anti-Inflation Board. During his academic career, he was associate professor of Canadian studies and international economics at the School of Advanced International Studies, Johns Hopkins University, senior fellow at the University of British Columbia, and visiting professor at Simon Fraser University. He has also served as director of the international economics program of the Institute for Research on Public Policy. a l l a n g o t l i e b is a senior consultant in the Toronto law firm of Stikeman Elliott. Formerly the Canadian ambassador to the United States and chair of the Canada Council, Mr Gotlieb is also a director of several major corporations and has held a number of senior government posts. He is chair of the Donner Canadian Foundation, Canadian chair and North American vice chair of the Trilateral Commission, director of the American Institute Saltzberg, and a member of the boards of the Canadian Institute for Advanced Research and of the governing council of the International Institute for Strategic Studies in London, England. Mr Gotlieb was the 1989 W.L. Mackenzie King Visiting Professor at Harvard University. h i r o s h i k i t a m u r a is corporate advisor to the Mitsubishi Corporation. He served as ambassador to Canada from 1988 to 1990 and to the United Kingdom from 1990 to 1991. After his retirement from foreign service, he served as president of Shumei University and as cochair of the Japan-Canada Forum. Ambassador Kitamura spent his early career in Tokyo, followed by overseas assignments in Washington, New York, New Delhi, London, and Paris. In 1970 he became a fellow at the Center for International Affairs (cfia) at Harvard University. He also served as his prime minister’s personal representative to the 1987 Venice Summit and the 1988 Toronto Summit. pa u l k r u g m a n is a professor in the Woodrow Wilson School of Public and International Affairs at Princeton University. He is a research associate of the National Bureau of Economic Research, a member of the board of

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advisers of the Institute of International Economics, a fellow of both the Econometric Society and the American Academy of Arts and Sciences, and a member of the Group of Thirty. A regular columnist for the New York Times, Dr Krugman has also written columns for Slate and Fortune. He has taught at Yale, Stanford, and the Massachusetts Institute of Technology (mit) and was a member of the president’s Council of Economic Advisers. m a r c l a l o n d e , a partner in the law firm of Stikeman Elliott and an ad hoc judge for the International Court of Justice, has acted on Canada’s behalf in a number of trade disputes. He holds several directorships and is chair of the board of the Hôtel-Dieu de Montréal. Mr Lalonde held various portfolios under Prime Minister Trudeau, including those of minister of national health and welfare; minister of state for federal-provincial relations; minister of energy, mines, and resources; and minister of justice. He served as minister of finance under both Prime Ministers Pierre Trudeau and John Turner. pa s c a l l a m y is trade commissioner for the European Union. He has served as adviser to Economics and Finance Minister Jacques Delors and to Prime Minister Pierre Mauroy. From 1984 to 1994, Mr Lamy worked in Brussels as chief of staff to European Commission president Jacques Delors, representing him at the G7. In November 1994 he joined the Crédit Lyonnais and helped restructure France’s leading bank before it was privatized. Since 1995 he has also been a member of the central office of the Mouvement européen in France. a l l a n j . m a c e a c h e n has served as Canada’s first deputy prime minister, as minister of health and welfare, manpower and immigration, labour, finance, and external affairs, and as president of the Privy Council. He was Senate government leader and then Senate opposition leader until his retirement in 1991. He has also served as an observer to the United Nations, as an alternate delegate to the Economic and Social Council of the United Nations in Geneva, and as cochair of the Conference on International Economic Cooperation. m . c . m c c r a c k e n is chair and ceo of Informetrica Limited, a Canadian-based economic research and information company. He is also treasurer of the Canadian Employment Research Forum (cerf) and a member of the National Accounts Advisory Committee, the Trade Statistics Advisory Committee at Statistics Canada, and the Advisory Group on Rural Issues to the Minister of State for Rural Development. Mr McCracken has

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served as the first director of the candide Project, as president of the Canadian Association for Business Economics, as chair of the US Conference of Business Economists, and as a member of the Construction Industry Development Council. l a r s o s b e r g is the McColloch Professor of Economics at Dalhousie University. He serves on the board of directors of the Centre for the Study of Living Standards; on the Academic Advisory Board of the focal/cis Joint Research Project, “After nafta”; and on the Advisory Committee on Social Conditions at Statistics Canada. He has also served on the Advisory Committee on Labour Demand Data for Statistics Canada, on the board of directors of the Canadian Employment Research Forum, and on the Advisory Committee on Social Policy of the Economic Council of Canada. a l i c e m . r i v l i n is a visiting professor at the Public Policy Institute of Georgetown University, a senior fellow in the Economic Studies Program at the Brookings Institution, and the codirector of the Greater Washington Research Program at the Brookings Institution. She is also a member of the board of directors of kpmg Consulting. Ms Rivlin has served as vice chair of the Federal Reserve Board, chair of the District of Columbia Financial Management Assistance Authority, and director of the White House Office of Management and Budget and was the founding director of the Congressional Budget Office. Ms Rivlin was also director of the Economic Studies Program at the Brookings Institution. g o r d o n r o b e r t s o n is the former president of the Institute for Research in Public Policy. As a leading expert on constitutional matters, he served as an adviser to Prime Ministers Mackenzie King, Louis St Laurent, Lester Pearson, and Pierre Trudeau. He was clerk of the Privy Council as well as deputy secretary in charge of federal-provincial relations. He also served as commissioner of the Northwest Territories and as deputy minister of northern affairs. After his retirement, Mr Robertson became president of the newly formed Institute for Research on Public Policy, where from 1984 to 1990 he was fellow-in-residence. In 1990 he became president of the Network on the Constitution. r e n a t o r u g g i e r o served as director general of the World Trade Organization (wto) from 1995 to 1999. After his tenure at the wto, Ambassador Ruggiero was chair of eni, Italy’s national energy company. He left that position to become vice chair of Schroder Salomon Smith Barney International and chair of Schroder Salomon Smith Barney Italy. In 2001 Ambassador Ruggiero was appointed minister for foreign affairs in the sec-

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ond government of Italian prime minister Silvio Berlusconi. In 2003, in addition to his position with Schroder Salomon Smith Barney, Ambassador Ruggiero was appointed chair of Citigroup in Switzerland. j a c o b r y t e n is currently a part-time consultant to a number of international organizations and to the governments of several Latin American countries. He has also retained teaching responsibilities in the Training Centre of his former office in Canada. Mr Ryten was assistant chief statistician of Canada until the end of 1997, when he retired from Canadian public service. Previously, he was director general in the Canadian statistical office and chair of the Organization for Economic Cooperation and Development’s (oecd’s) working parties on globalization and on industrial and business statistics. During his career, Mr Ryten served with both the United Nations and the oecd. a . e d w a r d s a f a r i a n is Professor Emeritus of Business Economics in the Faculty of Management of the University of Toronto. He is also the editor of the Hong Kong Bank of Canada “Papers on Asia.” Professor Safarian was an associate in the Economic Growth and Policy Program of the Canadian Institute for Advanced Research and has served on the faculty of the Banff School of Advanced Management, on the Canadian National Committee on Pacific Economic Cooperation, and on the Ontario Economic Council. g o r d o n s . s m i t h is the director of the Centre for Global Studies and an adjunct professor of political science at the University of Victoria. He currently holds positions as chair of Canada’s International Development Research Centre, senior fellow at the Liu Institute for Global Issues, executive director of the Canadian Institute for Climate Studies, chair of the International Network on Bamboo and Rattan (inbar), fellow of the World Economic Forum, member of the Commission on Globalization, senior adviser to the rector of the University for Peace in Costa Rica, and board director of the International Forum de Montréal. Dr Smith has also served as deputy minister of foreign affairs, ambassador to the European Union, and ambassador to the Canadian delegation to the North Atlantic Treaty Organization (nato). m a r i n a v o n n e u m a n n w h i t m a n is a professor of business administration and public policy at the University of Michigan. She is also a member of the board of directors of Intelliseek, Alcoa, Chase Manhattan Corporation, Procter and Gamble, and Unocal. She has served on the president’s Council of Economic Advisers, as a group vice president at General

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Motors Corporation, and as a trustee, director, or member of numerous educational, professional, and governmental organizations. Professor Whitman was the Distinguished Public Service Professor of Economics at the University of Pittsburgh and a fellow of the Center for Advanced Study in the Behavioral Sciences in Stanford. m a h m o o d a . z a i d i is a professor of human resources and industrial relations, an adjunct associate in the Hubert H. Humphrey Institute of Public Affairs, and director of international programs for the Carlson School of Management at the University of Minnesota. He is coeditor of the North American Journal of Economics and Finance and a member of the board of directors of the Global Access Development Association for Minneapolis-St Paul International Airport. Dr Zaidi has taught at the University of California, the University of Western Australia, the Université Jean Moulin Lyon III, the Graduate School of Business in Zurich, and the Warsaw School of Economics.