Saturday, May 31, 2008

David Grewal on Network Power

How do standards, such as learning English as a minimum for success, emerge in the global economy? Harvard graduate student David Grewal has written one of the most important books on globalization in recent memory. His book Network Power will probably go down as one of the classics like Dani Rodrik’s Has Globalization Gone Too Far? I had a chance to talk with David about it:

David, what is the argument of your book?

The book was motivated by a puzzle. On the one hand, globalization is often celebrated for the new freedoms and opportunities it provides. Individuals are, it is claimed, freer now than ever before to roam the globe with their money, ideas, and ambitions—and to create a new world order outside the traditional hierarchies of states. On the other hand, globalization is often criticized for the inequalities and exclusions that it generates, and is sometimes alleged to represent a new kind of “empire.”

In Network Power: The Social Dynamics of Globalization, I advance an argument that tries to make sense of these different accounts. I argue that globalization can best be understood as the rise to dominance of shared “standards” underlying newly transnational and international networks in areas including media, trade, language, and even some forms of culture. These new global networks link people together as never before—but they also generate problems of insider/outsider dynamics that raise challenging ethical questions, for to become part of a global network often means adopting a dominant standard at the expense of alternative ones that could mediate the same activity.

I devote a significant part of the book to examining these ethical issues, including trying to consider what we owe to people left out of new global networks and whether (and how) we should try to destabilize a standard that has become dominant and threatens to eliminate local and less powerful—but nevertheless deeply valued—attachments of one kind or another. It is in this ethical assessment of the new power at work in global networks that I try to consider what a “fairer globalization” might look like, and which I hope will be of particular interest to readers of Policy Innovations.

How is your book different from all the other books on globalization?

Globalization is, rightly, a topic that has generated an enormous literature in a short period of time. What I try to do that may be a bit different from the many other interesting contributions to the discussion is to get at the heart of the power behind globalization. I locate this power in networks, which I understand as social structures that allow otherwise distant participants to coordinate their actions via shared standards. The idea of “network power” enables us to make better sense of the combination of voluntary (even eager) acceptance and profound resentment that we see in the responses of many people all over the world to globalization. A number of other books focus on one side or the other of what seems to me to be an integrated process, if we think about it more carefully.

Which other globalization books do you like? Which do you disagree with?

What a dangerous question to ask an academic! A few years ago, I was fortunate to serve as a teaching fellow in a course on globalization, which centered on a debate among the Harvard moral philosopher Michael Sandel, Harvard’s then-President Larry Summers, and the New York Times columnist Thomas Friedman. The students got to see early drafts of Friedman’s book, The World Is Flat, which has since become an international bestseller. If you wanted to sum up my criticism of Friedman’s thesis, it would be that the world isn’t flat, but it is networked—and that the evidence that Friedman offers for all the ways in which the world has been “flattened” might better be understood as arguments about how it has become networked. The difference between these ways of seeing the problem isn’t just semantic: for if the world is understood as flat, it’s very hard to understand the backlash against globalization or the complex insider/outsider dynamics that it generates. A view of the world as networked allows us a different sense of the whole process of globalization by putting the power of new global networks solidly at the heart of the analysis.

A year before that, I taught in another course on globalization—this time at the Harvard Law School—which featured a discussion between the Brazilian social theorist Roberto Mangabeira Unger (who is now Brazil’s Minister of Long-Term Planning) and the labor economist Richard Freeman. A few years after that course, Unger brought out a fascinating book called Free Trade Reimagined, which has not gotten the attention it deserves. It recasts the whole debate on “comparative advantage” in a way that is truly remarkable. I was lucky enough to be part of several discussions between him and the economist Sanjay Reddy while the book was being drafted, although Network Power was already too far along for me to be able to address his arguments in much detail. Unger taught an earlier version of this course with the economist Dani Rodrik, whose works I relied on in my chapters on international trade and on neoliberalism. Rodrik’s book Has Globalization Gone Too Far? remains an important classic in this debate and was rather courageously published in the mid-90s, before the “Washington Consensus” had yet attracted the critical scrutiny that it has over the past decade.

I think that the most interesting recent work on globalization comes at the intersection of moral philosophy and the political economy of international institutions, and brings ethical criticism to bear on the regulation of the global economy. Important philosophers now thinking about these questions of global justice include Thomas Pogge and Philippe Van Parijs, among others, and I’ve learned a lot from their works. I’m delighted to note, too, that it’s the Carnegie Council—through its seminars and its affiliated publications, Ethics and International Affairs and Policy Innovations—that is leading the way here by opening up an important space for systematic thinking about a “fairer globalization.” My earliest essay on “network power” was published in Ethics and International Affairs several years ago in a volume that collected critical responses to globalization and empire from such interesting commentators as Jedediah Purdy, Robert Hunter Wade and Pratap Bhanu Mehta, all of whom have helped to shape my thinking about these issues.

An excellent new book that combines work on global justice with the economic analysis of institutions is International Trade and Labor Standards: A Proposal for Linkage, by the moral philosopher Christian Barry and economist Sanjay Reddy. It’s just about to be released. It offers an integrated ethical and economic assessment of a critical question—perhaps even the critical question—concerning a “fairer globalization” and proposes a much needed rethinking of the relation between free trade and minimum labor standards in the developing world.

Your book explains how standards emerge in the global economy. Are those standards intrinsically good or is there a darker side to this story?

The emergence of shared global standards can come about in one of two basic ways. Either we can be deliberate about the creation of a new international standard—that is, transparent and participatory in the crafting of new rules and regulations—or we can allow one to emerge from country-by-country convergence on a dominant standard that governs access to a powerful network.

Let me give a concrete example from the book that illustrates the latter case. The Multilateral Agreement on Investment was an effort in 1998 to draft a treaty liberalizing capital flows among OECD countries, which failed in part due to public protests against it. While drafted among OECD countries, the agreement need not have been restricted to them ultimately. In fact, it appears that it was being designed with a longer-term aim of its being opened up for adoption by the developing world. Given the “network power” that such an investment treaty among the capital-rich OECD countries would have possessed, it might very well have become a global investment standard—but without ever having been the product of a genuinely global deliberation in the first place.

Using network power to catapult a standard to dominance in this manner strikes me as wrong—and part of my ambition in writing the book was to lay out just how these network power dynamics work, in order that future efforts of this kind can be revealed more clearly for what they are. The protesters who criticized the MAI may not have been entirely well informed about the proposal, but I argue that their intuitions were broadly right. If the world needs a global investment treaty—and it’s far from clear to me that it does—it should emerge from global consultation and not as the product of a closed-door deliberation by rich countries designed to be foisted on the rest at a later point in time.

Wednesday, May 28, 2008

Compensating the Losers from Trade

I am always happy to see my copy of the National Interest come in the mail. In the latest issue, there is a debate that will surely excite trade specialists between two highly respected economists Joseph Stiglitz and Gary Hufbauer. Stiglitz, an advisor to our program at the Carnegie Council, makes a point that is often forgotten in the trade policy world. There is a bargain implied in trade theory: Since free trade creates some winners and some losers, for free trade policies to be fair and politically sustainable, the winners should compensate the losers. Here is Stiglitz in the National Interest:

More generally, standard economic theory does not say that everyone will be better-off as a result of trade liberalization, only that the winners could compensate the losers. They could take a portion of their gains, give it to the losers and everyone could be better-off. But, of course, the winners, which in much of America are the very well-off, haven’t compensated the losers; indeed, some have been arguing that to compete in the new world of globalization requires cutbacks in government spending, including programs for the poor. The losers then lose doubly.

Stiglitz actually goes on to write that free trade can in some cases make everyone worse off--contrary to trade theory. Free trade can expose people and companies to greater risk, for example.

Policy Innovations has just published Part Two of a trade policy roundtable in which specialists Susan Aaronson, Sherman Katz, Frank Lavin, and Thea Lee debate the future of U.S. commercial policy. Check it out here.

Thursday, May 22, 2008

Principles Do Pay; Wanted: A Thomas Aquinas of the business world

Companies can’t succeed in a society that fails.
That expression nicely captured the message at Geoffrey Heal’s talk yesterday at the Carnegie Council's Global Policy Innovations program on his new book When Principles Pay: Corporate Social Responsibility and the Bottom Line. Heal, a professor at Columbia Business School, credits the phrase to a friend of his.

Does it really pay to be ethical? Do principles pay, as the book’s title suggests? Not only does Heal touch on CSR’s manifestations from Adam Smith to Starbucks in an elegant sweep, he makes an argument that principles do pay, pointing to philosophical, empirical, and anecdotal evidence.

In the book, Heal sets the philosophical stage. Adam Smith, he reminds us, argued in 1776 that if everyone acts in his or her own interest, society would benefit—the concept known as the invisible hand. From Heal's book:

He was arguing against do-gooders and in favor of self-interested behavior, at first sight a strange position for a moral philosopher. What was counterintuitive is the claim that self-interested behavior by each individual in society is good for society as a whole—‘By pursuing his own interest he frequently promotes that of society.’

The invisible hand has two problems, however. One was less relevant in Smith’s day. That is the issue of external costs. Private costs are those paid by the person carrying out an action. In the case of driving a car, those would be the cost of gas and insurance, notes Heal. Meanwhile, the external costs are those that everyone pays, in pollution, climate change, and congestion, for one person using a car. The same applies to the operation of a company. Some costs are borne by the company while others are borne by society.

The second is fairness. Fairness may sound removed from modern economics. But Heal reminds us that it is not. Just as some measures in the name of efficiency could be inhumane, Heal points out that insider trading and favoritism are not condoned in the ethics of our modern capitalism, whether we think about it that way or not. Similarly, as Heal put it yesterday, is it fair to pay someone a dollar a day even if that is the market clearing wage?

Since the birth of the corporation, these organizations have somewhat lost their way. We might need a Thomas Aquinas, Martin Luther, or Nagarjuna of the business world to come around and remind us that corporations should be run for the good of society—the second part of Smith’s invisible hand formulation: …promotes that (interest) of society. Shouldn’t we recall that promoting society’s interest was the original goal of corporations?

Heal responded that companies’ interpretations of their role in society has fluctuated over the years. The last time we had a wave of corporate responsibility was at the end of the 19th Century. People such as Henry Ford tried to strengthen the welfare of employees by paying them higher wages. Indecently, Ford was sued for this policy by the Dodge brothers, who went on to found the eponymous car company. They sued on the grounds that Ford’s obligation was to shareholders, not employees. The Dodges won that suit. And, as Heal put it, corporate responsibility went out of style.

But a sense of corporate responsibility has returned. This awareness is partly due to an increased awareness of the interdependence of global problems like climate change, Heal surmised yesterday. As we sometimes put it at the Carnegie Council, the awareness of other cultures and global problems, through modern communications, is fostering an ethical moment in history whereby people are more conscious of the effects of their actions.

While companies have always had social and environmental impacts, how can we explain the integration of these factors in corporate decision-making? Heal cites four factors. First, with their privatization efforts, the Reagan and Thatcher administrations gave more power to companies in areas that were traditionally managed by the state.

Second, the globalization of business has forced managers to examine their ethical obligations in foreign markets or operations. Third, the rise of nongovernmental organizations (NGOs) and consumer activism (in the form of boycotts) has required companies to reduce their social footprints. The famous campaign in 1997 against Nike’s use of child labor is often credited for causing that company’s about-face on labor rights.

Fourth, the growth of socially responsible investment (SRI) funds have put more power in investors’ hands to shape the kind of society they want to see. It is sometimes said that if everyone owned more of the economy, more ethical decisions would be made. Heal noted that the university endowment that he advises has its own set of social principles and estimated that a quarter of all the money in the stock market is for ethical causes.

One consequence of these developments is that businesses are now “over complying.” Heal gave several examples: BP publicly accepted the role of greenhouse gases in global warming in 1997, long before it was common wisdom and much to the dismay of BP’s oil industry competitors. Another was the decision of Citibank, Barclay’s, ABM Amro, and West LB (“the gang of four”) to come together and establish the Equator Principles for project finance.

Heal gave quantitative and qualitative evidence for the argument that principles do pay. One area was in human resources. Starbucks saves millions of dollars a year by retaining their employees longer (50 percent turnover) than the industry average. Another point was that an analysis of the EPA’s Toxics Release Inventory and stock prices shows that the more a business pollutes the more its stock price tends to fall. Finally, Heal mentioned that Goldman Sachs has indicated that social and environmental impact data are valuable for stock picking.

One of the final questions at the talk was about the development of a peace index (the Global Peace Index in 2008 ranked Iraq last). I was thinking that Andrew Carnegie would have loved this question. Heal remarked that there is certainly a very strong business case for peace. Only a handful of companies can actually benefit from war. But the question is: Which issues do businesses have control over? While businesses have a lot of sway over global equity and pollution, it is the politicians who wage war.

Monday, May 12, 2008

Do Ethics Pay?

Today’s Wall Street Journal reported on the large sums of money companies invest in social responsibility. (Policy Innovations ran a story last month about how CSR programs might fare during a recession.) The WSJ focuses on the extent to which consumers reward ethical behavior.

WSJ conducted a series of experiments in which three groups of consumers were shown the same products, but one group was told the products were made using high ethical standards while the other was told that low standards had been used. The control group got no information regarding the products.

In short:
Regardless of their expectations, consumers were willing to pay more for ethical goods than unethical ones, or ones about which they had no information. Likewise, negative information had a much bigger bearing on consumer response than positive information. People punished unethical goods with a bigger discount …than they rewarded ethical ones with premiums…

People with high expectations doled out bigger rewards and punishments than those with low expectations.
The Policy Innovations article notes that ethical products tend to experience smaller losses during an economic downturn than most goods because of ethical consumers’ commitment to concerns other than price.

WSJ suggests that ethical consumers should be targeted regardless of the state of the economy:
Companies should segment their market and make a particular effort to reach out to buyers with high ethical standards, because those are the customers who can deliver the biggest potential profits on ethically produced goods.

Thursday, May 8, 2008

The Empathy Economy: CSR and Web 2.0

I just got back from participating in an innovative discussion this week in Orlando at SAP’s SAPPHIRE event. The workshop covered the intersection of corporate social responsibility (CSR) and web 2.0. I am posting my initial thoughts on Fairer Globalization and the Ethical Blogger because the topics are relevant to both blogs. Here are some of the points I made and heard:

From an ethics point of view, web 2.0 has the potential of dissolving the false divisions between people—whether it is between nations and communities, producers and consumers, or labor and capital. With more ownership—both in influence and voting power—of the global economy, these divisions can fall away.

I start with the premise that companies are full of people, individuals, each of whom has an ethical duty. Naturally, some of these people are bloggers and some are stockholders. Companies can find champions outside the corporate walls to force change within a company for the benefit of society beyond the simple bottom line.

An ethics of the web is needed. Without one, we could face more government regulation, creating an excuse for governments to control information and connectivity. Some of the ethics of the web are simple: link to others, log in frequently, and share content. They are the principles that speak to the scientific origins of the web. Other principles might focus on the integrity of the information on the web; those would be transparency, honesty, and disclosure.

In the case of CSR, companies should consider the principles of sincerity, innovation, and pluralism (as Mikkel Sorensen and Nicolai Peitersen have argued in “CSR 2.0”). Companies can draw on the infinite wisdom out there (in publics). They have this great list of principles for CSR 2.0:

1. Inclusiveness – involving stakeholders directly from beginning to end
2. Market driven – no longer expert driven
3. Innovation – smart companies turn market pressure into stakeholder led
4. Sincerity – you can no longer uphold an image that is not real
5. Co-ownership – a truly embedded value-based culture requires involvement
6. Dynamics – standards and annual audits replaced by 24/7 engagement
7. Quality - CSR as immersive business strategy
8. Personal - It’s about you, not your sector! What are your own ethics?
9. Pluralism – number and nature of CSR projects will expand dramatically
10. Proximity - local impact is global

Megacommunities or multistakeholder initiatives become a reality with web 2.0, producing more sustainable solutions. Not only are the solutions drawing on more information but they also get more buy-in from increased participation. Web 2.0 has empowered civil society to do its job: producing social values and fostering the positive dynamic between companies and civil society.

The convergence of web 2.0 and CSR also occurs in the need for public goods. The web is a public good much like the environment, public health, and human rights. In this way, web 2.0 and public goods can help one another. The revolution in the relationship between corporations and society is syncing up with the IT revolution in web 2.0, democratizing corporate governance (I suggest democratic wealth funds here).

Formal compliance is giving way to informal compliance measures, making ethics more important relative to strict law. As I put it, in this new business environment, what is increasingly important is empathy, not regulation. As one panelist put it, it is democracy without rules, challenging the way companies communicate. As Booz Allen has put it, companies are now “always on.”

Does the intersection of web 2.0 and CSR bring about mutual benefit? I think so. Transparency is fostered when companies are forced to listen to their stakeholders. And privacy can actually be strengthened through transparency. Some people track themselves online to preclude further surveillance, and more information availability can eliminate the need to investigate. I have suggested blogging our emails in order to deter people from writing things that are hurtful or libelous.

Making sure web 2.0 brings about a better world will be about fostering trust. Software that can facilitate trust will be a huge business opportunity in this realm. Finally, time is precious. I would assert that efficiency is ethical. Several people at the workshop dreamed of a day when our communications become more streamlined, eliminating the need of outdated methods like email. Remember when email was the future?

Channels for communication between the corporation and civil society were spelled out: blogs (topic specific); wikis (with a final goal); social networking such as Facebook (for awareness and promotion); crowdsourcing (to ask crowds to solve problems or prioritize goals); and the boycott and buycott.

Photo by linkerjpatrick.

Saturday, May 3, 2008

Olympics Already a Failure?

It's 96 days 'till the Beijing Olympics, and people are already assessing the event's success or failure. This week, I met a scholar from a Chinese university who was in town for a conference. He said the Beijing Olympics were "already a failure" because: the Chinese have been embarrassed by the pro-Tibet protests around the world; European governments may not attend the opening ceremony; athletes are bringing their own food to the Games (as if China has no suitable food); and, interestingly, the Chinese people have been misled by their government in that they supported a hard line position toward Tibet but now China is going to talk with the Dalai Lama. He also said the Olympics will have an oppressive atmosphere due to the high level of security measures needed to thwart any terrorist plot--most likely Uygur, he and other senior Chinese sources have told me. Finally, he noted that young Chinese people are creating a new social memory in which China is a victim of Western oppression but the "nationalist" element is thin or shallow. I agree that the phrase "rise of nationalism" isn't helpful or even accurate.

But I don't necessarily agree that it is time to call the Olympics a failure, although I have pointed to the risks associated with it, including at a Tokyo conference six months ago where I said:

Pollution is one risk: Perhaps the performance of athletes will suffer as a result of poor air quality. Or a discomfiting story related to environmental degradation could embarrass the Chinese. The government may not be prepared to respond to critical questions from foreign journalists, nor to their own citizens disseminating controversial information over the Internet. Activists are already planning protests with respect to human rights, the environment, and civil liberties to correspond with the international attention the Olympics will draw to Beijing. Protests might be violently quelled, begging more questions about China’s human rights record.

As political scientist Ian Bremmer recently put it: “Even if police are able to maintain order in Beijing, can they extend that control across the country? Can they manage the flow of information and ideas through the blogosphere as online activists open yet another front in their battle for free information?”

What to make of the Olympics now? We are going to explore the ethical issues in depth at the Carnegie Council in New York City on May 16:

This Workshop for Ethics in Business luncheon panel will focus on the ethics of engagement with China in the context of the Olympics. What have companies learned in the process of assessing their engagement with China? How do companies respond to civil society demands while tapping the Chinese market? What is a company's moral responsibility when operating in China?

Bard College scholar Ian Buruma will speak about the international relations case for engagement with countries such as China. General Electric VP of Corporate Citizenship Bob Corcoran will explore the role of multinational corporations in promoting human rights, using the Olympics as a case study. What has GE learned from balancing business and civil society demands? Counsellor Qi Qianjin of the Chinese Mission to the UN will relate the Chinese government's experience with the Olympics so far. Minky Worden of Human Rights Watch will discuss her new book, China's Great Leap: The Beijing Games and Olympian Human Rights Challenges. Former International Herald Tribune journalist Thomas Crampton will join the panel via video from Hong Kong.

This event is part of the Carnegie Council's Workshop for Ethics in Business, sponsored by Booz Allen Hamilton's strategy+business magazine. Support also comes from Eli Lilly and New York University's Center for Global Affairs.

Join us for what promises to be a fascinating and important dialog. Or check it out on the Carnegie Council YouTube channel later.

The luncheon cost is $50 (fee can be waived for students, academics, and nonprofit professionals), $30 for Carnegie Council members. Please send your RSVP and payment info to:

Photo by california cowgirl1.

Thursday, May 1, 2008

Democratic Wealth Funds?

This morning, I visited the Japan Society in NYC to listen to a talk on sovereign wealth funds with John Green of the Eurasia Group, Edwin Truman of IIE, Ann Wyman of Citigroup, and Japanese politician Kotaro Tamura (pictured left). A lot of interesting ethical issues surround sovereign wealth funds.

Some of the common questions people often ask include: how transparent are the investments made by the funds? Will the investments be made for the purpose of wealth generation or for political purposes? Is investment in strategic industries fair? If governments are undemocratic but have funds, are they investing on behalf of the people, and are those investments being made at the expense of projects that should take place in the home country? This point relates to some very interesting points that Tamura made.

Tamura is a member of the Japanese House of Councilors and of the ruling Liberal Democratic Party (LDP). He is also leading a group that is seeking to establish a sovereign wealth fund for Japan. When people think about governments investing in assets and potentially making decisions on boards, a gut reaction that it is not fair for governments to have this kind of power when they did not have a role in the entrepreneurial generation of wealth. Governments can print money, collect foreign reserves, tax its people, conduct currency interventions, and other activities. I might not think of these things as giving governments the authority to have stakes in a company. But Tamura put it a different way:

If a government is democratically elected and represents its people, it can act on behalf of its people, as Tamura put it. In Japan, an economy with some socialist characteristics (as Tamura admitted), the government could bring about positive corporate change through the investments it makes--at least in theory. Sure, Japanese society often thinks of government to provide the solution to problems and needs. But Tamura's remarks made me think about the relationship between companies and their stakeholders.

If stakeholders are broadly defined as the society in which a company operates, then in a way, the government might indeed have a role to play in pushing for positive change in corporations. It is sometimes said that if everyone owned a little part of the whole economy, then there would be more incentives for shareholders to push companies to act on behalf of society at large. Well, what if a representative government owned part of many companies? Is there a case for democratic wealth funds?