Who Killed Globalization?

Sachs makes the case that if the G8 countries honour their pledge to give 0.7 percent of their gnps to battle extreme poverty, it will do the job by 2025—a massive challenge but possible if carefully managed. But pledges have a way of dissolving as jet-lagged leaders return to face their own troubled lands. The United States is one of the laggards here, giving only 0.15 percent of its gnp. Part of its reluctance can be attributed to increasing unilateralism, part to its own frightening debt, and the remainder to the growing sentiment that money sent to sub-Saharan Africa is wasted.

George W. Bush’s former secretary of the Treasury Paul O’Neill once said of African aid, “We’ve spent trillions of dollars on these problems and we have damn near nothing to show for it.” In 2002, the US gave $3 toward each sub-Saharan African. After taking out the administrative costs, consultant fees, emergency aid, and money used to service debt, the donation amounted to 6 cents per person.

The other argument commonly made against aid for Africa is: look at Malaysia, Indonesia, Bangladesh, and the two poster children for globalization, China and India. They have all managed to climb up the ladder, yet sub-Saharan Africa remains mired. But China and India aren’t pulling themselves up by their bootstraps so much as reclaiming the position they held less than 200 years ago. In 1820, Japan, Western Europe, China, and India all had roughly the same per-capita gdp. China had been the world’s technological leader for a thousand years (ad 500 to 1500). It’s true that Africa has no shortage of corrupt leaders, and it remains plagued by internecine warfare, but it also has the unhealthy residue of colonial policy, environmental degradation, and pandemic diseases.

The sense that money is being thrown at the problem and having little effect is a fair one. It also represents a failure of globalization itself: the indiscriminate throwing of money.

Another failure is the dismal state of its chief product: capitalism. At a point in history when it is as bloated and morally distorted as Caligulan Rome, it is being exported. In his book The Battle for the Soul of Capitalism, John C. Bogle, a former fund manager and ceo and a lifelong Republican, decries “the remarkable erosion in the conduct and values [of] our business leaders, our investment bankers, and our money managers.”

Capitalism has undergone a fundamental shift from a system based on owners to one based on managers: entrepreneurship and risk have been replaced by a lucrative bureaucracy. In 1980, total pay for ceos in the US was forty-two times the average American worker’s salary. In 2000, the multiple was 531. (It has since gone down to 280.) During his tenure as ceo of General Electric, Jack Welch made almost a billion dollars in salary; in retirement he is receiving $734,000 per month (a mere $614 of which is lost to charity). In 2000, the market capitalization of GE was $600 billion; in early 2005 it was $379 billion. The scale of executive compensation, in salary, bonuses, perks, and stock options, is often ludicrous and not always tied to performance. Performance itself is a moving target. What is it measured against? Stock price? Actual value? The performance of a rival kleptocracy? Punishment for wretched performance is a seven-figure severance.

The reasons for these abuses are manifold. In the last two decades, long-term investing has been displaced by speculation. Individual investors, once the majority, are now dwarfed by institutional investors, who, Bogle says, “must bear a heavy share of responsibility for what went wrong in corporate America.” Mutual funds evolved from an organ of stewardship to one of salesmanship. There is a growing gap between stock price and actual value, and a perilous hunger for instant gratification. Quarterly results are critical; missing your stated earnings estimate often means an immediate, barbarous response from institutional investors and a subsequent drop in share price. There is tremendous pressure to massage numbers to get them in line with earnings forecasts. In a Businessweek poll, two-thirds of chief financial officers said they had been asked to lie about the numbers.

The checks and balances are few and imperfect. Analysts who are employed by investment banks can be compromised by the need to bring in valuable underwriting business. They manufacture favourable reviews to appease new clients. Henry Blodget, a former analyst with Merrill Lynch, loudly touted new Internet stocks (some of them underwritten by Merrill Lynch) that he dismissed in private emails as “crap.” Boards of directors have forsaken their role as shareholder advocates, though, to be fair, shareholders have abandoned the idea to some extent. “When we have strong managers, weak directors, and passive owners, don’t be surprised when the looting begins,” Bogle writes. The last few years have seen the corporate equivalent of the sack of Carthage.

The last line of defence is the accountants who conduct the audits. But some accounting firms have had a conflict of interest in the form of lucrative consulting contracts with the firms they are auditing. In 2000, Sprint paid Ernst & Young $2.5 million for audit services and $63.8 million for other services, a typical ratio, though this conflict of interest is now prohibited under the Sarbanes-Oxley Act, passed in 2002. Investing has always had an element of the sideshow—an opaque, predatory world that usually disappoints once you get inside the tent. But now it is bolder, bigger, and never rests. Bogle argues that shareholders have been robbed of trillions of dollars.

As globalization wanes (and the evidence that it is waning is mostly anecdotal at this point) an older ideology is making a strong comeback. There were twenty-two religious references in the 2002 State of the Union speech. God is riding shotgun in Iraq and occasionally helping out with policy back home in Washington. Leadership tainted by Armageddon theology isn’t a good fit, as the business people say, for the current crisis. Poverty affects almost half the world’s population and is directly linked to social upheaval, military tension, and political instability.