Struggling Against Impunity: The Budding Revolution in Brazil’s Judiciary

For decades, Brazil has earned itself an international reputation as a land of impunity, where corrupt politicians, crime bosses, and former military torturers have been able to live above the law, unburdened by the fear of having to pay for past misdeeds. With a weak and deferential court system burdened by systemic corruption, parliamentary immunity against prosecution, and a generous amnesty law shielding past members of the military regime, the government and its citizens were virtually powerless to hold the powerful elite to account. No story better exemplifies this state of affairs than that of former president Fernando Collor. After resigning the presidency and being impeached by the Senate in 1992 on corruption charges, he was acquitted by the country’s Supreme Federal Tribunal (STF), the nation’s highest court. Collor lay low for a decade, but returned to politics in 2006 and was elected to the Senate, where he currently serves. Many Brazilians I talk to are infuriated by Collor’s presence in their highest legislative body, and point to this as evidence that the rule of law does not seem to apply to the country’s ruling elite.

This state of affairs is more than simply unjust. It is a major inhibitor of the country’s development. I have written before about the importance of developing shared norms and rules to govern societal interactions in order to build an economy’s human capital stock and improve its prosperity. The rule of law is an essential ingredient in this process. It represents the truest form of fairness that human society has yet developed: communities coming together to determine their own rules and enforcement procedures to guarantee that each individual will be held to the same standards. When the rule of law is not strong in a society and decisions appear to be made arbitrarily by government officials, citizens’ faith in the collective is undermined.

Many of the world’s major emerging economies are struggling to build an adequate rule of law (China and Russia come to mind). Brazil is much further along in this regard, as it has fully functional legislative, executive and judicial institutions defined within a constitution supported by popular mandate. But the country’s long tradition of impunity for the elite undermines faith in these institutions, and thus weakens the rule of law. When those at the top do not play by the same rules, those below fear that strict obedience to rules and laws will put them at a disadvantage. This has led to the famed “jeitinho brasileiro” (Brazilian way), a strategy for circumventing rules and procedures by a variety of approaches, such as using insider contacts, emotional appeals, or offering favors. Such behavior is considered a necessary strategy to get ahead here, but it poses a major challenge to Brazil in terms of building an honest, fair, meritocratic society.

Despite this disappointing history, there is reason to hope that Brazil is finally turning a corner. In a previous text, I mentioned some positive signals in the country’s fight against corruption, most notably a new Freedom of Information Act to empower citizen watchdogs as well as the “Clean Record” law that bars those convicted of a crime in the last eight years from holding office. But the most heartening signs of change are coming from an institution that was once widely distrusted by the public: the Supreme Federal Tribunal itself. 

The Mensalão Trial and the CNJ

Over the last several months, Brazilians across the country have been glued to their televisions watching daily broadcasts from the STF as the court tries the most high-profile corruption case in its history. Known as the “mensalão” (big monthly payment), the scandal dates back to President Lula’s first term in office, when some of his top aides and congressional allies were caught diverting money from state-owned enterprises in order to buy votes in the Congress. The scandal caused a massive uproar in the press, as it embroiled President Lula’s chief of staff and presumed successor, José Dirceu, who was accused of coordinating the scheme on behalf of the executive. Although Mr. Dirceu was expelled from Congress, President Lula denied any knowledge of the incident and went on to be reelected by a wide margin just a year later. Furthermore, Mr. Dirceu’s replacement as chief of staff, Dilma Rousseff, was elected president in 2010, and members of the ruling PT claimed that the election results spoke for themselves, acquitting the party of any wrongdoing.

While the scandal did not shake the PT’s hold on power, it did spring the country’s judiciary into action. The attorney general brought charges against 38 individuals, including Mr. Dirceu, accusing them of money laundering, embezzlement, corruption, and formation of a criminal gang. After six years of legal wrangling, the STF finally heard the case this year. Many Brazilians were cynical about the process. Opinion polls showed that, while the vast majority believed that those involved were guilty, few believed they would actually be convicted, considering that eight of the court’s eleven ministers were PT appointments. It was thus a pleasant surprise when 25 of the accused were convicted, including the PT’s three “big fish”: Mr. Dirceu, José Genoino, the PT’s ex-president, and Delubio Soares, ex-treasurer of the party. While the STF is just beginning to hand out sentences and many are still skeptical that any of these three will serve prison time, it has nevertheless been a watershed moment for Brazil. There is growing hope that the case is a sign of things to come, that the STF will begin to exert its influence as a fair and independent arbitrator, and that impunity will no longer have free reign. There is no denying the important psychological impact the case has already had across society.

The Mensalão case comes on the heels of another recent groundbreaking decision from the STF. In 2010, Eliana Calmon, a career judge, was appointed as head of the National Council of Justice (CNJ), an ombudsman agency for the judiciary. She quickly earned a reputation as a fiery crusader determined to promote accountability and fight corruption, excessive benefits, nepotism, and general sclerosis and inefficiency within the third branch of government. Ms. Calmon made headlines when she accused many of the country’s judges of being “bandits who hide behind their togas” (referring to the black robes high-ranking judges wear in court), interested only in advancing their own interest rather than promoting the rule of law. The judiciary pushed back, threatening to curtail the CNJ’s investigative powers. Yet the public rallied to her cause, and Ms. Calmon quickly emerged as a popular hero in social media and national news outlets. The issue came to a head in February of this year, when the STF voted by a nail-biting 6-to-5 margin to maintain the ombudsman’s full powers intact. Ordinary Brazilians were overjoyed by the news, and Ms. Calmon even earned a Carnival float in her honor. Former President Fernando Henrique Cardoso was effusive in his praise, calling the case “crucial for Brazilian democracy”. 

Future Cases 

Several upcoming cases will continue to test the mettle of the STF and will serve as crucial indicators as to whether the Mensalão trial and the CNJ case were flashes in the pan or signs of a broader shift. The first of these is expected to be the “Mensalão Mineiro”, a vote-buying program in the state of Minas Gerais run by the PSDB that was widely seen as the model for the PT-led scheme (even involving some of the same individuals). The second is a more recent scandal involving a major organized crime boss, “Carlinhos Cachoeira” (Charlie Waterfall), who was arrested earlier this year. Extensive wiretaps have revealed Mr. Cachoeira’s relation to numerous high-level politicians, including Demostenes Torres, a right-wing senator who gained fame in 2005 for leading the congressional inquiry into the Mensalão scandal. Mr. Torres was recently removed from the Senate by his colleagues and looks likely to face prosecution in the near future. A congressional panel continues to investigate the affair, but it may end up ensnaring several governors and congressmen and is likely to have involved the embezzlement of hundreds of millions of reals earmarked for construction projects. At some point, the case is likely to end up at the STF as well.

PT leaders, including former President Lula, have been especially keen to prosecute both cases, as they see them as a chance to even the score following the Mensalão trial. In essence, political parties are now eager to use corruption scandals in order to discredit their opponents and strengthen their popular support. These motivations may not be pure, but they do represent a hopeful sign in the struggle against impunity. Rather than politicians conspiring amongst themselves to avoid prosecution, they now see anti-corruption crusades as their ticket to electoral success. This should ultimately help to strengthen the rule of law, providing that an attentive public and investigative media continue to press the issue.

In addition to corruption scandals and oversight of the judiciary, Brazilians have opened up one more front in their fight against impunity: the blanket amnesty for those involved in the military dictatorship. I have written before about President Rousseff’s promotion of the Truth and Reconciliation Commission that is currently investigating human rights violations by the former regime, an issue that her predecessors preferred to avoid altogether. Before relinquishing control, Brazil’s generals passed a generous amnesty law that would shield them from any future prosecutions. Unlike its Southern Cone neighbors, Brazil chose to keep the law on the books well after its democracy became firmly established. A 2010 STF review upheld the law, although it was struck down later that year in a non-binding decision by the Inter-American Court of Human Rights. Yet the issue remains a somewhat grey legal area, and human rights lawyers have argued that kidnapping and torture of “disappeared” individuals constitutes an ongoing crime that is not protected by the amnesty law. They were successful this week in convincing the São Paulo judiciary to take up just such a case. While no one is sure where such prosecutions will lead, and what the end result of the Truth Commission will be, there is growing optimism that Brazil will finally gain some closure on the issue and end the legacy of resentment and frustration caused by the amnesty law. 

Problems Ahead: Will Real Reforms Come? 

While these recent cases have created some optimism around the future of the Brazilian judiciary, a few words of caution are in order. High profile corruption cases may cause a political stir for some time and generate hope that the system will be forced to change, but that is not necessarily the case. Italy is the perfect example of this. The “Bribesville” corruption scandals in the early 1990s toppled the entire political order and brought to power new parties and individuals who promised to bring about major change. Twenty years later, Italy is facing a new Bribesville, as a new series of scandals has emerged and the political order is once again in flux. Without undergoing major reforms to root out corruption and change its political culture, the country wound up repeating its own history. A series of cases in front of the STF may make Brazilians feel that justice has been served, but it will ultimately be meaningless if major reforms to combat white-collar crime are not undertaken as well. A former president of the STF recently claimed that the Mensalão trial would not change the country’s history if not accompanied by more meaningful political reforms to change the process of coalition-building in Congress and discourage vote-buying schemes.

Looking at just the Mensalão trial alone, the weaknesses in Brazil’s judiciary are readily apparent. The general sensationalism of the trial was on full display during the proceedings, as ministers at time switched their votes following public outcry that they were being too lenient. Two separate votes to condemn Mr. Dirceu were taken right before the first and second rounds of the municipal elections, causing suspicion among many observers that the timeline was planned for political theatre.

The bigger problem, however, has been the relative inefficiency of the process. The case took six years to be tried, highlighting the complexity and slowness of the judiciary. (The Cachoeira case, if charges are indeed brought, is not expected to reach the STF for many years.) The trial itself has already been ongoing for three months, and looks likely to be extended for a significant amount of time due to a chaotic sentencing process that had even the STF ministers confused on procedures. The fact that politicians are entitled to trial by the STF rather than in lower courts makes the process significantly slower, and adds to the public perception that politicians are not treated as equal to ordinary citizens.

The wheels of justice turn notoriously slowly in all judiciaries, including the U.S., but the sclerosis of the judicial system is especially problematic, as it slows down the general functioning of the economy as a whole. The World Bank’s most recent “Ease of Doing Business index” gave Brazil poor marks in important legal matters such as resolving insolvency, enforcing contracts, and registering property.

There is certainly much work to be done in the future, and changes to Brazil’s legal system, if they come, will be slow and steady, not sudden and spectacular. But the country does seem to be moving in the right direction. No longer will politicians be able to assume they are automatically above the law. They are now aware that the public has the power to hold them to account in certain situations. This in itself amounts to a sea change in the way Brazilians view their political system.

Brazil's War on Drugs: The New Incarceration Nation

Over the last several decades, the illegal drug trade has wrought havoc on Latin America. Cocaine produced in the Andean valleys of Colombia, Peru and Bolivia is transported by violent cartels to the U.S., either overland via Central America and Mexico or by boat across the Caribbean. It is also exported to Europe, normally passing first through Brazil and West Africa. Marijuana, which is also grown throughout the region, travels along these same routes. The violence and corruption caused by drug traffickers are well known, and have been major obstacles to the creation of peaceful, prosperous and democratic societies in the region.

The nature of the drug trade has changed significantly in recent years. There has been much international focus on the escalating situation in Mexico and Central America, as violence spirals out of control and governments struggle to rein in the traffickers. But there has also been another major change: the rapid growth of local consumer markets. Whereas Latin America’s primary role in the drug trade was traditionally in production and transport, it is now a major consumer as well. Nowhere has this shift been more apparent than in Brazil, which now has the largest crack market and second largest cocaine market in the world. Instead of being a transit point, Brazil is now the final destination for much of the region’s drugs. This is unwelcome news for a country already plagued by violent crime.

Brazil’s approach to its crack epidemic bears striking resemblance to the U.S. Citizens emphasize a law-and-order approach that focuses on throwing perpetrators behind bars. Since 1992, the incarceration rate has increased by 251%. (In the U.S., the increase was 46%, though from a higher baseline; the U.S. has approximately 750 prisoners per 100,000 population, while in Brazil the figure is roughly 250.) As in the U.S., the war on drugs has a very disconcerting racial component, as blacks are much more likely to end up in jail than whites. They represent over two-thirds of prisoners but only half the population. Yet this trend looks set to continue as a “tough on crime” approach has propelled many political candidates to victory in recent elections, including several ultra-conservatives recently elected to the São Paulo city council. In a 2008 opinion poll, 73% of respondents said that prison conditions should be made even tougher. (Poor blacks are just as likely to express such sentiments as rich whites.)

The surging incarceration rate is especially dangerous in Latin America, and in Brazil in particular, because it has the potential to reinforce traditional institutional weaknesses. As Brazil struggles to build an effective judiciary governed by rule of law (more on that in an upcoming post), it is still prone to police abuse, human rights violations and inhumane conditions within its facilities. Cramming more people into already overstretched prisons exacerbates the problem.

Moving toward the future, the real question is if Brazil will change course in its war on drugs. Will it follow in the U.S.’s footsteps, or take an alternative approach? Rumors of change in Latin America have been gaining steam in recent years, as politicians in Mexico, Guatemala, Chile, Colombia and Uruguay have started arguing more forcefully for decriminalization or perhaps legalization of certain drugs. Uruguay looks set to consider such a bill in its current legislative session. In Brazil, the most prominent dissenting voice has been former president Fernando Henrique Cardoso, who headed the Latin American Commission on Drugs and Democracy together with the ex-presidents of Colombia and Mexico. Cardoso has argued for a rethink of Brazil’s drug policy, suggesting that the country follow the Portuguese model of decriminalization and increased focus on public health programs

So far, few sitting politicians have taken up his call. The conservative, U.S.-style law and order approach still pervades in Brazil. However, the overall dynamic of Latin America’s approach to this issue does seem to be changing, and the debate is finally being joined in earnest. Many Latin Americans understand the illegal drug trade much better than their peers in the U.S. and Europe because they witness firsthand the side effects at every step in the process: production, transport and consumption. If a drug policy rethink does occur, it would make sense that this region would act as the pioneer. Brazil’s role in this policy shift, if it does happen, is still quite uncertain. But if its neighbors start to move in a new direction, it is difficult to imagine the country not getting swept up in the tide as well. 

Could Brazil Become the Next Greece?

In this blog, I have generally tried to paint a picture of Brazil that is cautiously optimistic, emphasizing the major challenges the country is facing while suggesting possible approaches to address them. In this post, however, I will present the pessimist’s case. Despite the immense progress that Brazil has made in the last twenty years, there is a very real concern that such gains will ultimately prove illusory, just as the famous “Brazilian Miracle” of the 1970s led to a massive debt crisis and a lost decade of economic stagnation. Looking at the ongoing situation in Southern Europe, it is difficult not to draw parallels with Brazil.

By now, the troubles of Greece, Italy, Spain and Portugal have been well documented. The countries had long been plagued by similar problems: underlying competitiveness issues in businesses and labor markets due to weak productivity growth, a large, entrenched bureaucracy that soaked up government spending while inhibiting the private sector, entrenched corruption and tax evasion issues that led to inefficient spending and revenue collection, and overly generous salaries and pensions in the public sector that grew exponentially with the demographic aging of the population. While economies suffering from such flaws would normally be expected to stagnate, Southern Europe actually boomed over the last decade due to the adoption of the euro and the governments’ ability to borrow money at cheap interest rates. People excitedly talked about the “convergence” of the Eurozone, and Greece, Spain and Portugal became part of a handful of countries to cross the threshold from middle- to high-income status. Now, of course, that story is quickly unwinding, and Southern Europe looks set to struggle with economic hardship for many years to come.

Brazil suffers from many of these same underlying weaknesses. It has a very large, bloated public sector whose salaries and pensions take up most of government spending, and federal spending continues to rapidly outpace the overall expansion of the economy:

 

(Source: The Economist)

Furthermore, Brazil already spends more on pensions than any major country in the world save Italy, despite having a much younger population. This means that as the population ages, the problem is expected to get significantly worse, resulting in an explosion of costs for the government:

(Source: The Economist)

These problems, combined with an underlying lack of competitiveness and poor productivity growth, point to serious structural problems facing the Brazilian economy. Like the nations of Southern Europe, these issues have plagued Brazil for a long time. Whereas Southern Europe’s problems were camouflaged by the adoption of the euro, Brazil’s problems were camouflaged by a massive commodity boom due to China’s industrialization. The dangers have not yet become as acute in Brazil as they are now in South Europe, but as the population ages it is clear that the country is walking toward a major fiscal crisis.

Yet there are reasons to be hopeful that Brazil will not necessarily go down this path. Brazil learned about fiscal mismanagement the hard way after crises in 1982, 1998 and 2002. Long a poster child for out-of-control spending and hyperinflation, the country is now considered to be fairly fiscally prudent. It has regularly run a fiscal surplus, boosted its foreign currency reserves, brought down its debt-to-GDP ratio, maintained rigid inflation targeting through monetary policy controlled by an independent central bank, and seen its sovereign debt rating rise over the last few years. Furthermore, unlike its Southern European peers, it has strengthened its tax collection agency, referred to locally as “The Lion”, which has successfully cracked down on evasion and adopted aggressive revenue collection tactics that are lauded internationally. The adoption of these policies under President Cardoso and their continuation under President Lula has been the hallmark of Brazil’s success, and the reason that the country was able, for the first time in its history, to adopt counter-cyclical measures in 2008 and 2012 to stimulate the economy and shield it from the effects of the global financial crisis. This was a major step forward for the country.

But this sound fiscal management in itself will not be enough over the long term to avoid an economic crisis. With the economic tailwind from China fading and the population aging (the worker-retiree ratio is set to fall from 8.51 in 2010 to 2.89 by 2050), the government cannot rely indefinitely on a commodity boom and a demographic dividend to buoy its finances. Major structural reforms will be needed to avert a Southern Europe-style catastrophe.

The ruling PT’s record of leadership is not encouraging on this front. President Lula established a reputation as a free-wheeling populist, generously spending government funds on an assortment of development projects. While many of these programs achieved very admirable social goals, others simply expanded the political patronage machine and bloated the government payroll. President Rousseff has changed course somewhat, staring down striking public workers, fighting congressional patronage machines, publishing bureaucrats` salaries to promote public shaming, and successfully passing a first-step pension reform program. But there are some worrying signs that she is letting Brazil’s fiscal rigor slip: pressuring the central bank to continue to reduce interest rates despite rising inflation concerns, and reducing the primary budget surplus in order to stimulate growth. (However, these moves may end up being wise over the long run, as falling interest rates and new tax cuts could improve competitiveness, providing inflation can be kept under control.)

Overall, it is clear that President Rousseff is moving the PT toward more prudent fiscal policies. There is hope that, like the Socialists in France, economic realities will force the leftist party to restrain its big-spending instincts and move to a more moderate position in the long term. The danger, however, is that Brazil’s problems are not as immediate as those of Europe, and its political leaders can probably get away with putting off major reforms for some time to come. Ms. Rousseff has taken a few steps in the right direction, but she has not been bold enough. To avoid becoming the next Greece, Brazil will need to be much more aggressive in radically reorganizing its bureaucracy, improving its spending efficiency, simplifying its tax code, and promoting productivity gains in the private sector. The major worry is that Brazil, like its Southern European cousins, will ignore the problem until it is too late. Courageous leadership will be needed to save the country from becoming the next Greece.

Understanding Globalization: Past, Present, and Future

Few phenomena have changed human society more drastically in recent decades than economic globalization. While people have always traded across borders and international commerce and finance have been important for centuries, most of the world’s major national economies were relatively closed up until the 1960s. Businesses operated primarily in their own national markets, balanced out by national governments and civil society structures such as labor rights groups and environmental advocacy organizations. One clear example of this was the U.S. car industry, which was headquartered in Detroit, bargained with the national United Auto Workers labor union (UAW), and produced and sold cars almost exclusively within the U.S. market. Under this system, a handful of industrialized wealthy nations formed the “center” of the world economy, while the traditional agricultural societies of the developing world remained on the “periphery”, with limited participation in the production and consumption of manufactured goods and an overall focus on the export of raw materials such as agricultural foodstuffs, oil and minerals. During this period, Brazil was a classic case of a country on the periphery: a poor society of rural peasants whose national economy was dependent on the export of coffee and rubber to the U.S., Western Europe and Japan.

1971-2012: Changing Patterns of Economic Trade

This global order began to rapidly change in the 1970s and 1980s based on a few key factors. New advances in shipping, trucking and railways caused transport costs to plunge, while advances in information and communication technology (computers, telephones, the Internet) reduced the barriers caused by distance. This made trade between countries significantly cheaper and reduced the benefits of local production. Liberalizing reforms and macroeconomic stabilization programs in major developing countries such as Mexico, Brazil, China and India helped to modernize these countries’ economies and unleash their potential. Government efforts to promote free trade and reduce protectionism opened up markets both in the center and on the periphery. The end of the gold standard and the Bretton-Woods financial system led to new, free floating currency markets and a new global financial order where capital could flow more freely between countries.

All of these developments enabled supply chains to finally become international, as firms began to operate across borders and take advantage of lower production costs in developing countries, primarily due to cheaper labor. Customer bases also expanded and domestic companies suddenly began to invade their rivals’ home turf (think of the expansion of Toyota and Volkswagen in the U.S.). With big businesses going from national to multinational, an incredible opportunity for knowledge transfer opened up. Whereas countries used to have to build their own domestic supply chains from scratch (such as Japan’s incredible transformation during the Meiji Restoration or Latin America’s failed approach of Import Substitution Industrialization), it suddenly became much easier for developing countries to learn on the go as multinational firms set up shop locally and shared their technological capacity and know-how, thus allowing for easier integration into global markets.

No country better exemplifies this approach than China, which established itself as the world’s low-cost manufacturing center while forcing multinational companies to work in tandem with domestic partners to stimulate knowledge transfer and “indigenous innovation”. (This topic has become polemical in discussions with Western businesses, many of whom believe the Chinese government has actively promoted the theft of their intellectual property.) China’s rapid growth itself had a profound effect on global trade patterns, as the country’s sheer size means that the share of the world’s population living in “central” economies has more than doubled in the last few decades, rebalancing the traditional center vs. periphery dynamic.

Today’s Global Economy: Advantages and Problems

As a result of this process of economic change, the world looks drastically different today than it did 50 years ago. “Emerging markets” have become a hot topic in discussions of international business and politics, as the BRIC powers continue to gain in prominence and the “Rise of the Rest” is reshaping the global order. The concept of the “center” and the “periphery” is quickly becoming an outdated relic of 20^th century international relations. Across the world, people have seen their living standards rise as millions emerge from extreme poverty and become integrated into the global economy. After having accelerated for over 150 years (since the dawn of the industrial revolution), global inequality is finally falling. Globalization has without a doubt been a huge boon for the world’s poor.

These economic trends have not been uniformly positive, however. Globalization has led to much anxiety for the middle class of the traditionally powerful economies of the center. In the U.S., newly multinational firms began to move much of their supply chains overseas. This development—combined with advances in automation that replaced many workers with robots and machines—led to a drastic reduction of domestic manufacturing jobs, causing once-dynamic cities in the industrial heartland such as Detroit and Pittsburgh to fall into decline and neglect. Much noise has since been made in political circles about the scourge of outsourcing and the need to defend domestic workers by increasing protectionist barriers once again. Also, with international competition squeezing margins, multinational firms were forced to cut costs to stay alive, holding wages down and thus hurting the middle class further. Inequality has steadily crept upward as a result, with the well-educated workers of the “knowledge-based economy” pulling ahead of their peers. These trends were masked for a while by a large expansion of credit and a debt-fueled consumption boom that burst during the 2008 financial crisis, a similar event to the 1929 market crash that was in many ways caused by a structural employment shift from agriculture to manufacturing.

To understand these trends, it is important to realize that the last thirty years of economic globalization have undermined the careful capital vs. labor balance that underpinned the success of the middle class in the economies of the center during most of the 20^th century. In the early decades of the industrial revolution, capital reigned supreme as wealthy industrialists made massive profits while forcing their workers to endure terrible working conditions for meager salaries. Many derisively referred to these powerful businessmen as “robber barons”. This laissez-faire free-for-all system came under enormous criticism, most notably from economist Karl Marx, whose influential and poignant critiques laid the foundation for the labor rights movement, which fought to ensure fair wages, safer working conditions, progressive tax structures and the establishment of the welfare state to guarantee retirement programs, health care and other benefits.

The success of the labor movement led to a healthy equilibrium between capital and labor. Businesses continued to grow and improve productivity, thus driving economic development, while labor organizers and their partners in civil society and government guaranteed that the benefits from such growth were, at least to a certain extent, shared by all. During this period, governments also increased their regulatory powers in areas such as antitrust enforcement and environmental protection. This stable equilibrium, organized under national economies, was the norm for the economies of the center through the 1960s.

Economic globalization changed this dynamic drastically. As firms became multinational, capital once again gained the upper hand. Although the economy continued to grow, workers lost the ability to negotiate as fear of outsourcing weakened their leverage in discussions. Governments felt pressured to slash their regulatory frameworks and tax regimes, fearing that stricter measures and higher taxes would cause multinationals to leave and set up shop in a country with a more hands-off approach. This has led to a so-called “race to the bottom”, where the countries with the lowest wages and taxes are able to attract more companies, even if this undermines their goal of building a middle class and a social safety net.

One of the best examples of this dynamic is the current political discussion in the U.S. over the corporate tax rate. In the 1950s and 1960s, when the economy was doing well, the corporate tax rate hovered at around 50%. It has since come down significantly due to the government’s desire to boost national competitiveness (it now stands at 35%). With the country’s growing fiscal crisis due to the aging of its population, politicians are now placed in a tough situation regarding the future of the tax rate: increase taxes to boost revenue and risk slowing economic growth as competitiveness falls, or keep taxes low and slash benefits for the upcoming generation of retirees. France’s recent proposal to raise taxes to solve its fiscal woes has also come under scrutiny, as leading businessmen have announced their intention to leave the country.

In addition to weakening fiscal policy, his situation has created perverse incentives for countries to loosen their regulatory and labor laws to jumpstart their economic development. In Brazil, for example, rather than developing rigorous antitrust regulation to prevent monopolies, the government has encouraged consolidation as a way to create “national champions” that can compete abroad, despite the effects this can have on domestic consumers. It is not alone in this regard. The growing benefit of size in the international economy has set off a wave of consolidations in various industries, from defense and airlines to logistics and mining, and national governments are eager for their companies to emerge with the upper hand. Furthermore, the growing pressure to improve competitiveness is beginning to undermine some of the labor protections industrial societies carefully built over the last century: overnight working is beginning to return in Western manufacturing centers, and the “right-to-work” movement has been growing even in the U.S. industrial heartland, further weakening the power of labor unions. In a world where capital is globalized and labor and government are not, it is difficult to avoid this sort of race to the bottom, as multinational businesses essentially are not forced to answer to any ultimate authority.

Finding a Way Forward: Deepening Integration

Given these problems, many are tempted to reverse course on globalization, arguing that we must return to the days of national economies, when capital was tamed by powerful civil society groups and government agencies. I do not support such an anti-globalization message. First, technological and economic changes are here to stay, and we cannot simply go back in time. Second, to do so would be to condemn many developing countries back to the periphery, abandoning the world’s poor and creating an unequal world order. This is not a realistic or desirable possibility.

To move ahead and correct the current global economic imbalances, we must deepen our economic integration. To counteract the power of global firms, we must have a global civil society and global governance structure. International labor rights standards, environmental regulations, standardized tax regimes and social welfare programs will ultimately be necessary to combat the problems caused by globalization. A sovereign central authority charged with representing the interests of all of humanity’s individuals is the only way to ultimately create the balance needed for a well-functioning and fair global economy. In addition to creating a more healthy economic equilibrium, global governance will be important to solving issues such as poverty alleviation, peace and security, and international human rights and democracy.

While a global government may seem like an unrealistic, far-fetched idea, I am confident that humanity is slowly but surely moving toward this path. It will be a long journey, probably taking multiple centuries, but I believe the end result is inevitable. Humanity is integrated today in a way it has never been before: we have instant global communication, ease of travel, a universal lingua franca (English), and new international governance structures that are slowly getting stronger and more effective over time, such as the United Nations, the G-20, and the World Trade Organization.

There are many challenges to building global governance, but there are two key steps that we can take moving forward. The first involves breaking down existing protectionist barriers that separate national economies by promoting international free trade agreements and the free movement of people. Both of these are difficult politically, as nearly every society in the world is highly resistant to liberalizing reforms to connect markets and loosen immigration controls. The second is the promotion of regional integration, as this is probably a necessary prelude to full, global integration. I have written previously about these sorts of efforts, and believe very strongly that they are ultimately pivotal to strengthening globalization. The current situation in the Euro Zone is thus a huge test for humanity’s future. If Europe’s political leaders can keep the euro intact and further integrate their economies in a successful way, it will be a model for other regions to imitate in the future. If they fail, the collapse of the euro will set global governance back for a long time to come.

I have suggested this future for global governance to several people before, and am normally met with quite a bit of skepticism. This is understandable. After all, few in early 19^th century Europe would have believed that the myriad states of Germany and Italy would successfully unite into single countries. And few in post-World War II Europe would have believed that the continent would soon be united into a single currency zone with federal powers. Over the millennia of human society, we have slowly and steadily consolidated sovereignty at increasingly higher levels. We began as local bands of hunters and gatherers, moved into larger tribes and villages, then into city-states and military empires, and now live primarily under the sovereignty of nation-states. I see no reason why further consolidation should not occur, especially given the economic trends of the last thirty years. Global governance may not be around the corner, but I believe that we are marching toward such an inevitable future for humanity, and will ultimately be better off because of it.