An historic experiment. (The Global Compact).

Excerpts from Georg Kell and David Levin's "The Evolution of the Global Compact Network: An Historic Experiment in Learning and Action"

In his address to the World Economic Forum on 31 January 1999, United Nations Secretary-General Kofi Annan called on global business leaders to embrace nine shared values and principles in the areas of human rights, labour standards and environmental practices. His well-received proposal catalyzed the rapid, dynamic formation of a global network of unprecedented potential. The Global Compact network--consisting of several hundred companies, dozens of non-governmental organizations (NGOs), major international labour federations and several UN agencies--seeks to collaboratively contribute to a more stable, equitable and inclusive global market by making its nine principles an integral part of business activities everywhere.

The instability of the global market in its present form derives in part from the absence of strong social and environmental pillars to balance the developed system of economic exchange. The current global governance structure provides extensive rules for economic priorities, such as intellectual property rights, but lacks commensurate measures to protect the environment and human rights. The longevity of globalization will remain threatened until this imbalance is rectified. The international economic order must also become more inclusive by giving the billions of marginalized poor open access to global markets in a manner that guarantees them equitable opportunities for advancement. This primarily requires a commitment by those who currently dominate the global market to assist the disadvantaged in building their economic capacity through long-term, sustainable development. It also necessitates the elimination of market asymmetries inimical to developing countries, such as trade barriers and subsidies in ar eas where the developing world has a comparative advantage.

The Global Compact cannot resolve all of the deficiencies of global capitalism, but it can make a significant contribution by laying a foundation of shared values and harnessing the skills and resources of the private sector. It does not substitute for effective action by Governments, nor does it present a regulatory framework or code of conduct for companies. Rather, the Global Compact is conceived as a value-based platform designed to promote institutional learning, with few formalities and no rigid bureaucratic structures.

At its core, the Compact is simply a strategy to make the UN relevant by leveraging its authority and convening powers in ways that will actually produce the positive social change it aspires to create.

We contend that this network constitutes a viable mechanism for partially filling the governance void of the global economy, by engendering consensus around critical social and environmental crises and providing the means to ameliorate them through cooperative action. Furthermore, we argue that by facilitating transparency, dialogue and the dissemination of best practices, the Global Compact effectively encourages the implementation of good corporate citizenship. We refrain from making more ambitious claims about the initiative as we recognize the inherent difficulties that challenge the strength and dynamism of the network. Systemic deficiencies of the current framework governing economic transactions at the global level give rise to instability and touch the raw nerve of those concerned for social justice.

We briefly summarize some of the sources of social dissatisfaction with the current global economic system. First, many have pointed to figures showing that the expansion of global capitalism has witnessed a concomitant increase in inequality between and within nations. These figures indicate that economic growth in the last fifty years has been unbalanced, driving the income gap between-the richest fifth of the world's population and the poorest fifth to 74 to 1 in 1997, up from 60 to 1 in 1999, and 30 to 1 in 1960. The data also show that the richest quintile accounts for 86% of world gross domestic product, enjoys 82% of the expanding export trade, and 68% of foreign direct investment, while the lowest quintile benefits from only 1% of each. Second, the global market has failed to include the vast majority of the world's people, especially those in developing countries, as more than 1.2 billion people live on less than $1 a day, nearly a billion lack access to clean water sources, and more than 850 million are illiterate. Third, many believe that globalization has eroded the autonomy and sovereignty of the poorest countries on the "periphery" of the world economic system, thus weakening their bargaining power vis-a-vis the dominant players at the centre of the system. The doctrine of the "Washington consensus", they say, has effectively diminished the role of Governments in the global economy by pressing for privatization, deregulation and the reduction of corporate, trade and capital gains taxes.

Fourth, the liberalization of investment and trade regimes has increased the bargaining power and influence of transnational corporations (TNCs), which control foreign direct investment, technology transfers, $8 trillion of annual sales and two thirds of the world's exports. Fifth, some argue that the process of globalization has tended to prioritize the provision of private goods at the expense of public goods, such as the preservation of peace, the alleviation of poverty, the protection of the environment and the defense of labour and human rights. Finally, despite evidence to the contrary, it is widely believed that the drive to attract foreign capital has produced a "race to the bottom", in which corporations encourage the continuous reduction of labour and environmental standards as they seek to invest where standards are lowest.

While the Secretary-General's call to action took place nine months before these issues gained prominent media exposure with the explosion of anti-globalization protests in Seattle (Washington, USA), it was evident at that time that globalization had eroded the efficacy of the international agreements that formed the foundation of the global economic order after the Second World War. In his seminal article on the post-war economic order, John Ruggie demonstrated that international political authority derives not only from rules and procedures but also from the principles that establish the normative framework for multilateral agreements. He coined the term "embedded liberalism" to describe the post-war economic order as one originally founded upon a unique compromise between multilateral trade and domestic stability. The international regime was originally "embedded" in a broader social purpose and normative framework that were institutionalized in the Bretton Woods agreements. However, promises to share the social adjustment costs of liberal expansion and to ensure domestic stability were never fully realized, with particular detriment to least developed countries (LDCs) (1982). The acceleration of globalization in the 1990s only made things worse.

By the end of the decade, it was clear that the global economic architecture was not embedded in a broader framework of shared social values and thus lacked the social legitimacy critical to its survival. A disequilibrium in international governance structures persisted, in which strict rules and enforcement capacities for economic expansion were not matched by strong rules for social justice.

While developed countries had domestic institutional mechanisms for protecting themselves from this imbalance, poor countries did not and were thus much more vulnerable. The need grew ever stronger to devise an institutional equilibrium comparable in practice to the one inscribed in theory after the Second World War.

Long before the third Ministerial Conference of the World Trade Organization (WTO) in Seattle, a heated debate had surfaced over the feasibility and desirability of creating this equilibrium by infusing social and environmental clauses into the international trade regime. Those in favour of adding such clauses, including many NGOs, Northern trade unions, small-but-rich European countries, declining Northern industries and some leading economies, were concerned about the race to the bottom that would continue until minimum global standards were set. Conversely, eminent economists such as jagdish Bhagwati made several arguments against this proposal. First, such clauses would hamper the international trading system and render it ineffective. Second, trade sanctions based on labour and environmental conditions would discriminate against and damage those they desired to protect; LDCs would not have the resources to comply with international standards, and trade sanctions would drive children into worse occupation s. Third, the true motivation behind the push from Northern labour unions was to protect their own wages and jobs through furtive protectionism.

The UN Secretary-General agreed that a more stable and inclusive global market would not be best attained by adding social and environmental dimensions to the WTO, but rather by expanding market access to the world's poor and by strengthening the authority of existing international social and environmental institutions. The most imperative reforms for the WTO to undertake would have been to curb the use by industrialized countries of antidumping duties, trade restrictions and subsidies in areas where LDCs had comparative advantages. In 1999, advanced industrialized countries spent more than $360 billion on subsidizing agriculture each year, compared to annual aggregate contributions of $53.7 billion in foreign aid. Of course, reforming the world trade system to rectify the detrimental bias against poor countries would not be effective without also assisting LDCs with capacity-building through sustainable social and economic development. The call to strengthen UN social and environmental institutions, such as the International Labour Organization and the UN Environment Programme, was viewed as paramount for both hastening development and restoring balance to the global governance structure. Missing, however, was a proposal for directly engaging with business leaders to secure their support for universal values and objectives championed by the United Nations.

Georg Kell, Executive Head of the Global Compact Office, a voluntary corporate citizenship initiative of the United Nations, wrote this article with David Levin, student at The Wharton School, University of Pennsylvania.