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Virtuous Circle: Strengthening Broad-Based Global Progress in Living Standards

Part of Progressive Growth, CAP’s Economic Plan for the Next Administration

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Event: The Future Direction of U.S. International Economic Policy

The Center for American Progress believes that the primary emphasis of U.S. international economic policy during the next phase of globalization must be to improve the quality of global economic integration and not simply its quantity. The United States should lead the international community in a cooperative effort to strengthen and sustain global economic growth while translating that growth more effectively into broad-based increases in living standards and purchasing power around the world.

The United States over the past 60 years succeeded in bringing large parts of the world into a liberal economic order, but our challenge today is to ensure that the rising tide produced by economic integration does in fact lift all boats. Just as it is important for us to strengthen policies at home and enforce existing standards to better enable us to contend with this increased competition, so it is important for us to take steps abroad to ensure that expanded trade and investment with developing countries to drive strong increases in their living standards and domestic consumption, which in turn will generate additional demand for our own products and services to produce further improvements in our own living standards.

The top priority of the next administration’s international economic policy should be to breathe additional life into this virtuous circle of strong, synergistic advances in median living standards at home and abroad by organizing our trade, aid, and monetary policies around the central priority of removing the distortions and exploiting the opportunities that exist in this regard. We must retool and realign our policies so that they collectively serve to build a larger, more prosperous global middle class.

The best hope for transcending the polarization and caricature of the current trade and globalization debate is to ground it in this wider context. Rather than simply declaring a pause in trade liberalization, the next administration should commit to reevaluating how well each of the three main elements of international economic policy—trade, aid, and monetary policy—are contributing to the twin goals of sustained global growth and broad-based progress in living standards. The new administration should then pledge to refocus these policies, individually and collectively, more sharply on the achievement of these underlying strategic objectives.

In this context, we see trade agreements and other initiatives to deepen global economic integration as but a means of public policy rather than ends in themselves. Policy is best assessed by judging how well it works to advance a shared vision of global prosperity. What is the best way to improve living standards for working families in our own country? For those in emerging economies? And for the “bottom billion,” whose incomes have been virtually stagnant for almost half a century?

U.S. international trade, aid, and monetary policies today exhibit anything but a clear and common strategic focus. They appear to be chasing all manner of foreign and domestic priorities, and they lack an organizing principle that speaks directly to public concerns about the insecurity and inequality accompanying globalization. Most of all, our nation’s international economic policies do not appear to rest on the lessons learned from the remarkable success over the past two generations in creating an integrated world economy in which industrial production is now widely dispersed among a growing number of countries.

In the past, when conventional trade barriers were high and industrial production was concentrated in the United States and a handful of other countries amid the Cold War, it often made sense to subordinate our trade and exchange rate policies to other national objectives, such as strengthening political ties with strategically important countries or financing higher defense spending and tax cuts. There was good reason for us to espouse an export-led model of economic policy management to poor countries that we wished to see integrate rapidly into the world economy and the democratic community of nations. Our lead in living standards and industrial strength, as well as the slower pace of economic change, afforded us a certain luxury to play the role of both global economic engine and shock absorber.

But today, American middle class working families have a narrower margin of comfort when persistent exchange rate misalignments price our manufactured goods out of world markets, when major trading partners deliberately run large, ongoing trade surpluses through distor- tion of their macroeconomic and regulatory policies, when products arriving on our shelves fail to meet basic safety standards, and when free trade agreements with countries at vastly different levels of economic and institutional development lack mechanisms to ease the integration of such disparate societies. Many developing countries have much weaker domestic environmental and safety standards for their manufactured and agricultural products than those found in the United States. The U.S. regulatory framework in this respect is not only far from adequate but also has been allowed to deteriorate in recent years even as the market share of products coming from such countries has increased dramatically, exceeding 80 percent in some cases such as toys and seafood. To many citizens, this raises fundamental questions of not only public safety but also fairness, particularly given the scale of America’s trade deficit— nearly 6 percent of GDP—and the enormous job loss experienced by our manufacturing industries in recent decades.

It should come as no surprise that many Americans today voice second thoughts about globalization, and particularly its most visible policy feature—trade agreements—when real wages have stagnated, fringe benefits have been pared, and child care, college tuition and housing costs have risen. “Opportunity and Security for Working Americans,” a forthcoming report of this Progressive Growth series on economic policy, outlines a set of policies to safeguard and improve the health, education, incomes, and wealth of American families, including robust programs to help workers adjust when jobs are threatened or lost. The international economic misalignments price our manufactured goods out of world markets, when major trading partners deliberately run large, ongoing trade surpluses through distortion of their macroeconomic and regula- tory policies, when products arriving on our shelves fail to meet basic safety standards, and when free trade agreements with countries at vastly different levels of economic and institutional development agenda proposed in this report is an integral part of the Center for American Progress plan for achieving Progressive Growth and restoring opportunity and security for working Americans.

Another enduring legacy of our post-war international economic strategy is that the world economy continues to depend excessively on the United States for growth. While our large trade deficits are, in large measure, “made in the USA” through low household savings and fiscal policy, they also reflect various ongoing structural biases against growth in domestic demand in European, Asian, and other countries. In essence, policymakers in these countries continue to perceive of the United States as the residual outlet for global production, the world’s market of last resort.

Indeed, emerging economies have been effectively advised to do so by the so-called Washington Consensus—named after the Washington-based policymakers in the International Monetary Fund, World Bank, and U.S. Treasury who espoused it—through tight macroeconomic policy, promotion of exports, and comparatively little attention to social inclusion. And they have an incentive to do so due to the lack of a viable multilateral alternative to the unilateral accumulation of large amounts of foreign reserves through trade surpluses as insurance against a speculative attack on their currencies.

Globalization has helped lift an impressive 300 million (mainly Chinese) people out of extreme poverty over the past two decades, but it has also exacerbated inequality among and within most coun- tries, quite significantly in many cases. The persistence of structural economic biases that promote export production over domestic consumption in emerging economies contributes to this trend or, at a minimum, represents a missed opportunity for reducing it and making economic growth in them and the world economy as a whole more resilient.

U.S. Leadership to Diversify Global Growth and Broaden Progress in Living Standards

There is a great deal riding, both economically and politically, on the abil- ity of the international community to work together to strengthen the world economy’s virtuous circle. The combination of rising inequality in many newly industrializing countries and stagnating real wages in the United States and other advanced industrialized countries have sown doubts about whether global integration can live up to its billing as a force for shared progress. As a result, the social consensus behind free trade has frayed noticeably in recent years, particularly in developed countries.

Moreover, the abrupt end of the American housing boom means that the world economy may no longer be able to rely on the American consumer for stimulus for a number of years to come. If so, the longevity of the current global economic expansion and the depth of a possible U.S. economic slowdown may depend crucially on the extent to which other countries compensate by boosting their own consumption and domestic investment. The more they do so, the more limited the effect of a U.S. slowdown is likely to be on their own economic growth. The less they do so, the larger the risk they run that the dollar will depreciate dramatically and make the adjustment of global economic imbalances more painful for all concerned.

The United States is uniquely qualified to lead the world economy through this crucial next phase of integration. After all, we mastered similar challenges at home not so long ago. During the first several decades of the 20th century, in response to the glaring inequality and economic imbalances accompanying our own rapid industrialization and national economic integration, we implemented several waves of policy reforms aimed precisely at achieving more balanced and sustainable economic growth, particularly through the stimulation of broader progress in living standards.

From the landmark environmental and consumer protection measures enacted as part of Theodore Roosevelt’s Square Deal to the retirement, labor, and investor protections of Franklin Roosevelt’s New Deal, and from the labor, health, and environmental protections of Harry Truman’s Fair Deal to Lyndon Johnson’s Great Society, we constructed a national infrastructure of economic institutions that deliberately and successfully broadened the base of our economic growth. And we did so by diffusing income gains more widely among our population and thereby making the economy less dependent on swings in business investment.

In the middle decades of the 20th century, these reforms played a crucial role in making the American Dream of a middle-class lifestyle (rising incomes, home and small business ownership, retirement security) accessible to millions of American families that had little accumulated wealth and relied entirely on wage income. In the process, these progressive policies helped to turn the United States into the middle class society and mass consumption, economic superpower that it is today.

The United States by no means holds a monopoly of wisdom on the question of what it takes to build successful institutions; indeed, there is plenty of room for improvement in many of our own labor, consumer, investor, environmental, and social protection laws, many of which are outdated or have been permitted to weaken as a result of a conscious conservative deregulatory and fiscal strategy in recent years.

Rather than impose an alternative form of conditionality that seeks to duplicate our own institutional structures, the United States should support local, country-driven approaches to these goals. After all, institutions and policies in different countries will be as diverse as local circumstances, traditions, cultures, and stages of development. What is most important is to help governments build the capabilities they need to strengthen economic governance and institute effective labor, consumer, environmental, investor, consumer, and social protections, since these all drive rising middle class living standards.

The example of the European Union provides additional insight into how creating a broader policy framework can help foster sustainable economic integration of higher-and lower-income nations. The EU’s successful Single Market Initiative, in which countries at vastly different levels of development have combined to form the world’s largest internal market, has involved a far broader policy agenda than the simple removal of barriers to cross-border trade and investment. The elimination of conventional trade barriers has been accompanied by a wide range of legal and regulatory reforms and targeted development assistance aimed at helping the new entrants (Spain, Portugal, and Greece in the 1980s and 1990s, and Eastern European countries today) create the institutional environment necessary for the rapid productivity gains from Western investment to lead to strong and steady convergence of living standards with those of original EU member states.

With these lessons of history in mind, U.S. international economic policy must widen its field of vision if it is to succeed in strengthening the world economy’s virtuous circle of rising living standards. The last phase of globalization was aimed principally at spurring improvements in economic efficiency and growth through trade liberalization and sound macroeconomic management in line with the guidance provided by the Washington Consensus. The next phase of globalization should focus to a much greater extent on broadening the base of global economic growth in large part by helping newly industrialized countries stimulate broader improvements in living standards through a much wider range of instruments than just trade agreements.

At the same time, the next administration should step up the fight against absolute poverty in low-income countries as a way to build the world economy’s pipeline of future middle-class consumers. And it should push more assertively for the implementation of structural reforms in developed countries in order to increase their contribution to global growth, environmental sustainability, and a fairer and more open international trading system.

Underlying these strategies should be two principles: first, that respect for internationally recognized core labor standards is expected regardless of countries’ level of development; and second, that as countries become more systemically significant through their industrialization and integration into global product and services markets, they must assume a commensurate degree of responsibility for sustaining global growth and nourishing the world economy’s virtuous circle of rising global living standards. Our international trade, aid, and monetary policies should be reformulated and realigned to advance this principle, segmented on a bilateral basis according to level of economic development, and bolstered by a major renovation and coordinated redeployment of the major multilateral institutions relevant to this task: the International Monetary Fund, the World Bank and regional multilateral development banks, the International Labor Organization, and the World Trade Organization.

Recommendations for U.S. Policies Toward Middle-Income Countries:

Trade Policy

  • Establish what we call the Roosevelt Consensus, in which advanced countries and multilateral institutions help emerging market economies pursue not only sound macroeconomic and open trade policies but also the parallel construction of stronger safety nets and labor, environmental, consumer, and investor laws and institutions.
  • To this end, before entering into free trade agreement negotiations, the United States should conduct an assessment of not only whether the talks would be likely to produce a net expansion of trade but also if improvements should be sought in the country’s labor, environmental, consumer, or investor laws and institutions in order to strengthen the contribution to broadly rising living standards through expanded trade and investment with the U.S. economy.
  • Seek to include major weaknesses in law or institutional capacity in these areas within the scope of free trade agreement negotiations for the purpose of developing a mutually agreed upon plan of development assistance to help the country to reduce them over time.
  • Base this broader approach to economic integration on the principle of “staged progress,” in which the scale and required timeline of economic institution-building that accompanies trade agreements should be adapted to a country’s level of economic development. In the short term, we must ensure that key American standards are enforced against unsafe products coming from overseas.
  • Work with countries to make significant improvements in the enforcement of international core labor standards in their fields, factories, and other workplaces, and strengthen enforcement of U.S. trade laws to ensure that trade reflects the underlying competitiveness of national economies rather than distortions in costs due to poor governance or unfair subsidies.

Development Assistance Policy

  • Elevate economic institution-building to a major, new priority of development assistance, particularly in middle-income countries where the central poverty challenge is no longer providing basic human needs but confronting growth in inequality and marginalization despite significant advances in national income.
  • Offer financial and technical assistance to support countries’ own efforts to spur job creation by strengthening their enabling environment for private-sector investment in small businesses, housing and infrastructure, as well as by helping them improve social protections such as basic social insurance programs and implementation of worker rights, consumer safety, and environmental rules.
  • Lead the Group of 8 industrialized countries and other developed donor countries to renovate and strengthen the mandates and capabilities of the ILO, multilateral development banks, and bilateral donor agencies that relate to economic institution-building, beginning with a coordinated effort to implement the ILO’s Decent Work Agenda.
  • Catalyze global implementation of the ILO’s Decent Work Agenda of job creation, fundamental worker rights, social protections, and social dialogue between workers, employers, and civil society by promoting a tripling of funding for ILO capacity-building assistance; improving the format, independence, and funding of its country-monitoring activities; establishing a joint annual report on the performance of the world economy from the IMF, ILO, World Bank, and WTO; ensuring policy coherence between these organizations on core labor standards and the other Decent Work Agenda pillars; issuing an Executive Order to create an interagency Decent Work task force, and boosting funding for the U.S. International Labor Affairs Bureau.
  • Refocus the operations of multilateral development banks in middle-income countries from direct lending to strengthening institutional capacity in the areas of investor, consumer, and environmental protections; social safety net expansion; and private investment risk mitigation, particularly regarding infrastructure and clean energy.

Reform of the International Monetary System

  • Reduce the incentive for emerging market countries to undervalue their exchange rates and accumulate large foreign exchange reserves through trade surpluses by improving the IMF’s currency surveillance and macroeconomic coordination functions, increasing the resources available for currency crisis prevention, and striking a better balance between growth in exports and domestic consumption in policy advice.

Recommendations for U.S. Policies Toward Low-Income Countries:

  • Facilitate their more rapid advancement to middle-income status by increasing resources for basic human needs, eliminating trade barriers to their exports, and helping them to capitalize on export opportunities by providing major funding and incentives for investment in infrastructure and trade-related productive capacity.
  • Place development on a par with defense and diplomacy by creating a cabinet-level position to develop a single strategy for U.S. humanitarian and development assistance programs.
  • Fully fund the U.S. share of resources required to achieve the Millennium Summit and G-8 commitments with respect to infectious diseases, maternal and child health, basic education, water and sanitation, hunger, and extreme poverty reduction.
  • Provide low-income countries with 100 percent duty-free, quota-free access to the U.S. market and significantly increase funding for “aid for trade” assistance.
  • Expand employment in the formal economy of low-income countries by creating incentives for establishment of ILO Decent Work Country Programs as part of their involvement in trade preference programs while ensuring that even the least developed countries respect and enforce internationally recognized core labor standards.

Recommendations for U.S. Policies Toward Developed Countries:

  • Spur greater implementation of structural reforms necessary to raise the growth potential of the economies of Europe and Japan by elevating and expanding the recent U.S.-EU Transatlantic Economic Council dialogue so that it focuses on not only regulatory convergence but also three structural challenges that we each face: balancing economic growth and social cohesion in the face of the heightened pace of technological change and competition accompanying globalization; shifting from carbon-intensive forms of energy; and facilitating the transition of rural economies from trade-distorting agricultural supports.

    Catalyze progress in the WTO Doha Development Round of multilateral trade negotiations by proceeding to modernize our rural safety net so that it serves more farmers and to shift some agricultural commodity funding to renewable energy.

  • Prepare the ground for a set of future multilateral trade negotiations among countries with well-developed regulatory regimes to eliminate tariffs and harmonize, strengthen, and rationalize rules of origin, standards and other miscellaneous features of the group’s various and sometimes overlapping free trade agreements that serve to complicate business and divert trade around the world.
  • Assemble a coalition of G-8 and other developed countries to advance the modernizing reforms of multilateral economic institutions outlined in this paper, which are aimed at making them more effective instruments in a strategy to diversify global growth and strengthen the contribution of globalization to broad progress in living standards.

In the pages that follow, we will examine this comprehensive blueprint to reset the priorities of U.S. international economic policy in greater detail. As will become clear, the next administration has a special opportunity—indeed responsibility, in view of current signs of a possible U.S. economic slowdown—to build a larger and more prosperous global middle class by strengthening the world economy’s virtuous circle of rising median living standards at home and abroad.

 

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