The Ethical Economist

The Moral Consequences of Economic Growth

By BENJAMIN M. FRIEDMAN: Knopf, 2005, 592 pp., $35.00

GROWTH MAY BE EVERYTHING, BUT IT’S NOT THE ONLY THING

Economists have long been a natural constituency in favor of growth. Since even the richest country has limited resources, the central economic problem is choice: Shall we fund tax cuts for the rich or investment in infrastructure and research and development, war in Iraq or assistance for the poor in developing countries and our own? By providing more total resources, growth should, in theory, make these choices less painful.

The United States, however, has powerfully demonstrated that while growth increases supply, it also raises aspirations. Choices that rich countries have to make thus seem to be no easier than those confronting poor countries, even though the tradeoffs are more heart-wrenching in the case of the poor. Brazil, for example, must choose whether to use its limited health budget to pay full-market price for AIDS drugs; some AIDS victims may live as a result, but people in need of other health care will die, because money that could have been spent on their needs is simply not there. More growth-provided resources, in this instance, mean the difference between life and death.

Still, growth has had its critics. There is a well-developed populist antigrowth literature concerned with, among other things, the impact of growth on the environment and on poverty. In this major work, The Moral Consequences of Economic Growth, Benjamin Friedman takes on such critics, positing that growth has not only obvious economic benefits, but moral benefits as well. He argues that it has the potential to improve the environment, reduce poverty, promote democracy, and make for a more open and tolerant society. But this is not to say that Friedman, a professor of economics at Harvard University, is simply a naive cheerleader for the market economy. His message is nuanced (though not, in some respects, as nuanced as I would have liked), and he realizes that growth has not always brought the promised benefits. The market economy does not automatically guarantee growth, social justice, or even economic efficiency; achieving those ends requires that government play an important role.

LET IT GROW

Historically, economists have questioned whether, at least in the early stages of development, growth is accompanied by societal goods such as greater equality and a better environment. Nobel Prize-winning economist Simon Kuznets argued, based on experiences largely before World War II, that there is an increase in inequality in the early stages of development. Arthur Lewis, another Nobel economist, went further: greater inequality, he argued, is necessary to generate the savings that growth requires. A later generation of economists has posited the existence of an environmental Kuznets curve: the early stages of growth cause environmental degradation, not environmental health.

Kuznets and his descendants held out the prospect that eventually growth would bring more social justice (greater equality, less poverty) and a better environment. But there is nothing inevitable about this — which means that even if it has been true in the past, it may not be in the future. Inequality did seem to fall in the United States after the Great Depression, but in the last 30 years it has increased enormously. Many forms of pollution have gone down as richer countries have turned their mind to air-quality issues, but greenhouse gas emissions — with all the dangers they present for global warming — have continued to increase with economic growth, especially in the United States.

Friedman emphasizes in particular the importance of externalities — instances in which an economic actor’s actions have consequences for others for which that actor does not pay (negative externalities) or for which he is not compensated (positive externalities). Almost everyone recognizes these “market failures” (when markets on their own do not produce efficient outcomes) and their implications, most notably damage to the environment. The United States’ production of greenhouse gases imposes staggering costs on others — especially low-lying islands that will be inundated in the not-too-distant future — but American firms and consumers do not pay for these costs. Correcting such a market failure does not require subsidies to oil companies to increase oil production (there is no market failure in that direction); it requires more conservation. But externalities imply a more general argument as well: if growth has broad-based societal benefits that go beyond those captured by each individual or firm, then there is a role for government in promoting growth.

Although one of these broader societal benefits is a more open and tolerant society, Friedman explains carefully that the relationship between democracy and growth is two-way: growth affects democracy; democracy affects growth. Both aspects of the relationship are complex and often ambiguous. China — not particularly democratic or open politically — has had the most rapid and sustained growth of any country over the past quarter century. Conventional wisdom holds that democracies, since they are more accountable to the “masses,” pay more attention to the poor. But China has done more to reduce poverty than most other countries. In recent periods, the United States has seen median real household income fall, and the rich have received huge tax cuts even as poverty has grown.

Unlike so many growth proponents, Friedman realizes that what matters is not simply growth; it is the policies that give rise to it. His work thus provides an important critique of those studies (such as at least one prominent World Bank study by Paul Collier and David Dollar) that correlate growth and poverty reduction or growth and integration into the global economy. For the most part, the policy decision facing governments is not to grow or not to grow or to integrate or not to integrate (though politicians often try to oversimplify in that way). The questions are more specific: whether or not to reduce tariffs, whether or not to liberalize capital markets, whether or not to invest more in research and development, whether or not to spend more on education. And the answers are less clear. Some of these policies may promote growth in ways that will increase poverty; others may promote growth in ways that will reduce it. Some growth strategies may be good for the environment; others may not be.

In short, the debate should not be centered on whether one is in favor of growth or against it. The question should be, are there policies that can promote what might be called moral growth — growth that is sustainable, that increases living standards not just today but for future generations as well, and that leads to a more tolerant, open society? Also, what can be done to ensure that the benefits of growth are shared equitably, creating a society with more social justice and solidarity rather than one with deep rifts and cleavages of the kind that became so apparent in New Orleans in the aftermath of Hurricane Katrina?

The problem is that most of the available empirical evidence comes from cross-country analyses, which are not very informative. Friedman’s work provides an important reiteration of recent calls by the World Bank for more micro-level and case-study-based research on the potential tradeoffs between growth and poverty reduction and environmental quality.

THE INCOME SWEEPSTAKES

Friedman ends his book, which covers a delightfully wide range of topics, with an analysis of the kinds of policies that the United States might pursue to achieve his vision of moral growth. This discussion is simultaneously optimistic and pessimistic. The policies are clearly within our grasp. Yet they are a far cry from the policies the United States has been pursuing in recent years — which have led to a double whammy, simultaneously stifling growth (the most damaging consequences of which may lie years in the future) and creating a society marked by greater social injustice.

Among the developed countries, the United States has been doing well in the growth sweepstakes — or so you might assume if you focused exclusively on GDP. GDP statistics, however, can be very misleading. They do not really measure how well the country is doing or how much better off its citizens are becoming.

No one would look at just a firm’s revenues to assess how well it was doing. Far more relevant is the balance sheet, which shows assets and liabilities. That is also true for a country. Argentina grew rapidly in the early 1990s, mainly as a result of a huge consumption binge financed by international borrowing. But that growth was not sustainable and was not sustained. Similarly, the United States has been borrowing heavily from abroad, at the rate of $2 billion a day. It would be one thing if this were being spent on high-productivity investment. In fact, it has been used to finance increases in consumption and massive tax cuts for upper-income Americans.

Consider the following thought experiment: If you could choose which country to live in but would be assigned an income randomly from within that country’s income distribution, would you choose the country with the highest GDP per capita? No. More relevant to that decision is median income (the income level that 50 percent of the population is below and 50 percent is above). As the income distribution becomes increasingly skewed, with an increasing share of the wealth and income in the hands of those at the top, the median falls further and further below the mean. That is why, even as per capita GDP has been increasing in the United States, U.S. median household income has actually been falling.

There are other reasons why someone might not want to look at just per capita GDP. He might worry about his security. What happens if he gets ill? If he loses his job? What happens when he retires? He might worry about crime. He might worry about the quality of his children’s schooling. How do his children fare in competition with those who can afford the best schooling that money can buy or with those in countries such as Singapore that offer a first-rate public education? He might worry about the environment. Are there government regulations prohibiting arsenic in the water?

When viewed through these lenses, the United States does not look as good. There are some dimensions in which it is outpacing others — for instance, it boasts five to ten times the per capita prison population of other advanced industrialized countries and more working hours per week. It also has less job security, worse unemployment insurance, and fewer people covered by health insurance.

To be sure, the American dream still attracts millions from around the world. But some of that attraction may be based on a lingering myth of upward mobility in the United States and an underappreciation of the difficulties that confront the poor. And although there is still no comparing the U.S. standard of living and that of poor countries, these are not the laurels on which one wants to rest.

HALF STEPS AND MISSTEPS

In the debate on the impact of globalization on poverty, Friedman supports the view that even if globalization has been associated with increases in inequality within countries, it has led to reductions in poverty and inequality globally. There are three fundamental flaws in this analysis. The first relates to the definition of poverty. As the World Bank has emphasized at various points, poverty is not just a matter of income; insecurity and voicelessness are also part of its profile. Friedman’s analysis completely ignores these other dimensions.

The second criticism relates to the point that what matters is not globalization per se, but specific policies associated with it. Capital market liberalization, for example, entails closer integration of capital markets, especially with respect to short-term capital flows. Modern economic theory and empirical analysis have shown that with imperfect capital markets, such integration may lead to greater economic volatility — a conclusion that even the International Monetary Fund now supports — and has a negligible effect on growth. Furthermore, there is ample evidence that the poor bear the brunt of the burden from increased volatility. In short, this particular aspect of economic integration increases poverty without much affecting growth.

The third is that Friedman relies too heavily on studies by Xavier Sala-i-Martin (The Disturbing “Rise” of Global Income Inequality) and Surjit Bhalla (Imagine There’s No Country: Poverty, Inequality, and Growth in the Era of Globalization) that have been subject to enormous criticism, without warning the reader of the debate surrounding their numbers. (It should be said that having an article published in a peer-reviewed academic journal and its conclusions parroted in the media does not imply automatic certification of its validity.) The problem is easy to state but hard to rectify: studies of inequality and poverty are based on household surveys of expenditures and income, but the numbers gleaned from those studies tend to be inconsistent with national income accounts, an outcome that suggests massive underreporting in the household surveys. One simple solution to this discrepancy — the approach largely used in the Sala-i-Martin and Bhalla studies — is to blow up the numbers from the household surveys. If the average income reported is $3,000 and national income accounts show average incomes to be $4,000, increase everyone’s reported income by a third. This immediately reduces the figure for the number of people living in poverty.

However, more sophisticated approaches observe that higher-income individuals are more likely to worry about tax collectors than are the poor. In this view, the shortfall in reporting is largely accounted for by those with higher incomes, and the number for those reportedly living in poverty according to the household surveys is roughly accurate. Assessments of reporting “errors” support this view — a view that says the world still has a long way to go in meeting its goal of reducing poverty by half by the year 2015. (For a discussion of both sides of this issue, see the forthcoming Debates on the Measurement of Poverty, a volume produced by the Initiative for Policy Dialogue, which I edited along with Paul Segal and Sudhir Anand.)

Meanwhile, Friedman’s contention that growth brings with it the virtues of greater openness and tolerance invites these questions: Is the United States, as it becomes richer, becoming more open and tolerant? Do openness and tolerance entail putting equal weight on modern science and pre-Enlightenment views?

Friedman is right, however, in arguing that democracy is less sustainable in poor countries. Thus, if Bush were serious about his commitment to spreading democracy, he would invest more in these countries’ development, living up to the agreement made by all the advanced industrialized countries to commit 0.7 percent of their GDP to foreign assistance. The money would make an enormous difference, both for the quality of lives in the developing world and for the prospects of democracy there. Of course, more than just money is required: nothing is more convincing than successful examples of open and tolerant societies that are able to bring the fruits of growth and democracy to all their people. How can the United States claim to provide such an example if it does not take care of its own?

THE MYTH OF THE INVISIBLE HAND

American economists tend to have a strong aversion to advocating government intervention. Their basic presumption is often that markets generally work by themselves and that there are just a few limited instances in which government action is needed to correct market failure; government economic policy, the thinking goes, should include only minimal intervention to ensure economic efficiency.

The intellectual foundations for this presumption are weak. In a market economy with imperfect and asymmetric information and incomplete markets — which is to say, every market economy — the reason that Adam Smith’s invisible hand is invisible is that it does not exist. Economies are not efficient on their own. This recognition inevitably leads to the conclusion that there is a potentially significant role for government.

Friedman, as a good American economist, begins his discussion by paying homage to the usual strictures, identifying externalities of the kind that warrant government intervention. He goes on to point out the importance of investment, both in physical and human capital, and to note that huge government deficits (“dissaving” on the part of government) are hurting those investments. A perfect market economist would dismiss this claim as nonsense: private savings will eventually increase to offset negative government savings, and if citizens want to consume more and save less now, that is their prerogative — just because Friedman wants to consume less today does not mean that he should be allowed to impose his preferences on the rest of us. Moreover, such an economist would say that it is not domestic savings that matter in our globalized world, but the global balance of supply and demand for funds.

Perhaps Friedman does not spend time refuting these perspectives because, notwithstanding the significant role they play in academic debates, they are so patently absurd. Of course private saving has not offset public dissaving on a one-to-one basis. Of course domestic saving matters for domestic investment, even in a globalized world. But it is important to grasp the reason why the predictions of the perfect-market models fall so short: market failures go well beyond externalities. Understanding these limitations of the market leads to an understanding of the necessary role of government in promoting growth and making sure that it is the right kind.

There is, for instance, a greater role for government in promoting science and technology than Friedman seems to suggest. A report by the Council of Economic Advisers (conducted when I was its chair) found that the returns on public investment in science and technology were far higher than for private investment in these areas and than for conventional investment in plant and equipment. So, too, with education, especially at a time of such concern with the quality of American schools, and particularly for low-income families. Vouchers — what amounts to partial privatization of our elementary and secondary educational systems — have been put forward as a free-market solution to the shortfalls in educational quality. But the advocates of vouchers have never made a convincing case that they can be designed to promote higher educational attainments and greater racial integration across the entire educational system, rather than just for those receiving the vouchers.

Friedman’s book is thus an important antidote to the populist antigrowth movement and also to those who say that the free market is all we need. It joins a growing chorus calling for a change in the direction of U.S. economic policy — toward achieving growth that is stronger and more sustainable. Whether or not you agree with Friedman’s particular policy prescriptions, this much is clear: this kind of reasoned analysis is precisely what is necessary to put the United States back on the right track.

Joseph E. Stiglitz. Foreign Affairs. New York: Nov/Dec 2005.Vol.84, Iss. 6;  pg. 128

The End of Europe?

THE GREAT DEPRESSION

After French and Dutch voters rejected the draft treaty establishing a constitution for Europe last spring, there was no doubt that a crisis of unprecedented seriousness confronted the European Union. The shock was so severe that the ratification process was extended for an indefinite “period of reflection,” to allow some EU members (such as the United Kingdom) to suspend further votes that might deal the treaty additional blows. Soon, however, the effects of the French and Dutch no votes were compounded by the European Council’s failure to agree on the EU budget for 2007-13 thanks to a Franco-British showdown over the financial rebate to the United Kingdom and the Common Agricultural Policy. This double fiasco triggered concern that even the past achievements of European economic integration once held to be irreversible, such as the single market and the euro, might come undone. Europe has been in a state of depression in the months since.

There are good reasons to be alarmed, but one should not misdiagnose the problem and mistake the symptoms of the EU’s crisis for its causes. Disagreement over the constitution did not precipitate the EU’s current troubles; rather, it was a growing malaise over the EU’s operation and prospects that precipitated the constitutional debacle. The constitution’s rejection by founding members of the EU does not in itself spell the end of the union, but it both reflects and deepens a profound crisis in the process of European unification — one that has no obvious solution and carries significant implications for the United States.

A FRENCH EXCEPTION?

To outside observers, the present stalemate may appear to be just another in the long series of crises that have paved the way toward European unification. This pattern is evident in the EU’s repeated deadlocks over its finances: negotiating the seven-year budget always involves tough posturing, extensive bargaining, and temporary breakdowns. The latest exercise was further complicated by increased financial burdens resulting from last year’s eastward enlargement and the unwillingness of the richer member states (including some of those that pressed for enlargement) to increase or even to maintain their current contribution levels.

In other ways, too, the blow to the constitution is less severe than it might at first seem. There have been other ratification accidents in the past, such as the Danes’ rejection of the Maastricht Treaty in 1992. (Danish voters ratified the treaty the following year after Denmark was allowed to opt out of some of its provisions.) True, the constitution’s rejection by France and the Netherlands, two founding members of the European Community, the EU’s ancestor, comes with a sharper sting. And given the contradictory reasons behind the rejection, it is difficult to imagine what adjustments or exceptions would ease the text’s ratification in the future. But the no votes in France and the Netherlands had less to do with the constitution itself than with widespread frustration over economic and social ills at home, growing opposition to the ruling parties, and fears of large-scale trends such as globalization and immigration that were wrongly attributed to “Europe.”

More important, hardly any of the treaty’s new substance was debated during the French and Dutch referendum campaigns. The absence of a well-focused discussion only compounded the effect of the potent misrepresentation that surrounded the text from the beginning. As EU analysts will recall, the original purpose of what became the European constitution was a long overdue reform of the EU’s institutions and decision-making processes, which had become increasingly unmanageable following successive waves of EU enlargement. After several attempts to streamline the union’s operations failed (such as the treaties of Amsterdam [1997] and Nice [2000]), a convention of over 100 political representatives from the current 25 member states was convened. Following more than 18 months of negotiations under the chairmanship of former French President Valry Giscard d’Estaing, delegates reached an agreement over a broad range of institutional issues and political matters.

The process took a dangerous turn early on, when the convention set out to “write a Constitution for Europe” instead of using its broad mandate to launch a Europe-wide debate over what the EU’s purposes and policies should be in the twenty-first century. The lengthy document ultimately submitted for ratification in early 2005 had four parts, but only the first contained the bulk of the institutional reforms negotiated by the union’s 25 members during the constitutional convention. Part II incorporated into the EU’s legal framework the European Charter of Fundamental Rights adopted in 2000; Part III restated, with more coherence and certain improvements, existing EU treaty law; and Part IV contained provisions applicable only to the treaty itself, regarding amendment and ratification procedures. The convention had failed to produce a true constitution: the new treaty is indistinguishable from its predecessors from a legal standpoint. But the extensive hype surrounding the highly symbolic project set the public’s expectations — and fears — too high. The text had been oversold to the European public before it was even presented to it.

After that, the constitution fell victim to domestic politics. A clever, ad hoc opposition — to the treaty, European integration, EU enlargement, the market economy, globalization, and some national governments — took advantage of the public’s mixed feelings about Europe by obscuring the basic fact that the constitutional convention’s rational and well-intentioned central objective had been to address some of the EU’s shortcomings and distill its main tenets into a single comprehensive and streamlined document. It would be simplistic to pretend that the French (or the Dutch, for that matter) merely voted against their government when they rejected the treaty. But they certainly did not vote on, or have grounds to reject, anything the treaty would have brought about. In France at least, opponents to the text focused almost exclusively on Part III, the existing body of EU treaty law and policies, some of which dates back to the Treaty of Rome of 1957. The no campaign, orchestrated within the Socialist Party by former Prime Minister Laurent Fabius, targeted the market-economy principles that have long underlain the European community’s competition policy and its single market. On the one hand, it argued that the provisions of Part III, although long standing, took on a new meaning at odds with French interests when presented in a document with an enhanced constitutional status and in the context of EU enlargement and globalization. On the other hand, the no coalition claimed that because the truly novel sections of the treaty (contained in Part I) did little to respond to Europe’s needs and challenges, its definitive burial would not be the end of the EU. By simultaneously undermining Part I and demonizing Part III, no-campaigners gave voters ample reason to mistrust the treaty and no reason to fear the consequences of rejecting it. Given the French public’s traditional distrust of the market and its lack of familiarity with the complexities of Europolitics, the strategy worked.

THE CRISIS BELOW

Many Europeans believe that the treaty will ultimately be ratified in one form or another; others argue that the EU will survive with or without it. They may be right, but they are missing the point. A constitutional treaty designed by a former French president and modestly advancing the goals of European integration would not have been rejected by the citizens of two committed founding members of the EU if they had been confident about the EU’s condition and its ability to solve their problems. The debacle is significant evidence, therefore, that the European project is undergoing the most serious crisis of its half-century history. The French and Dutch votes did not produce the crisis; they simply brought it to the surface and then aggravated it. It was the economic, social, and political shortcomings of the existing EU that brought about the rejection of the treaty, not the other way around.

Although in some ways the no vote was more an expression of distrust of domestic politics than of disaffection with the constitution itself, the referendum debates did center on the European project and its impact on peoples’ future. With Part III recapitulating 50 years of European integration, moreover, the referendum gave voters their first-ever opportunity to challenge formally and directly core features of the EU: its competition policy, the freedom-of-movement rules in the single market (notably the liberalization of services), the euro and the EU’s monetary policy, and enlargement. The pre-referendum debates also reflected dissatisfaction with slow growth and high unemployment, immigration, enlargement and “social dumping” from new members, the prospect of Turkish membership, globalization, and the growing competition from China and the United States. They revealed profound worry about Europe’s ability to address these concerns, especially as a group of 25 heterogeneous members increasingly unable to act efficiently and with no stable geographic or cultural borders in sight. Never mind that the constitutional treaty improved the institutional framework and decision-making process of the EU and did little else. In classic French tradition, voters blamed Europe for their domestic economic ills and, by extension, the treaty for failing to remedy and perhaps reinforcing Europe’s allegedly nefarious effects.

Rejecting the treaty could hardly have been the cure, of course, but the gesture itself suggests that European unification is indeed in a state of crisis — to a degree that has not always been properly recognized within or outside of Europe. More than anything, what drove the no votes was the EU’s poor economic performance and uncertain long-term prospects. Although measures of economic well-being vary significantly among European states (largely as a result of domestic rather than EU policies), the EU as a whole and the eurozone in particular have consistently suffered from a serious growth deficit vis–vis the United States and remain plagued with slow growth, high unemployment, and public deficits. Europe lags substantially behind the United States in investment in research and development, technological innovation, and, since 1995, productivity gains. Various demographic trends and their impact on public finances and social programs, combined with global competition, seem to condemn Europe, in the long run, to being economically marginalized by the United States, as well as China and other emerging markets.

The much-celebrated Lisbon agenda of March 2000 was intended to turn the EU into “the most competitive knowledge-based economy in the world by 2010.” But halfway down the road, its ambitions are less than half met. The EU continues to fail in fulfilling such hopes largely because the structural reforms needed to improve its economic performance remain the province of national governments and require strong and coordinated leadership. Long-term vision and strong management have long been absent from many European political circles, and coordination has suffered from the declining effectiveness and legitimacy of the EU institutions since the early 1990s. The successful introduction of the euro and the waves of enlargement masked this decline for a time, but the pitiful negotiations of December 2000 leading up to the Nice Treaty (which governs the EU today) made it clear that the EU was in serious trouble.

What could be called “the deconstruction of Europe” began in the early 1990s, following the difficult ratification debates surrounding the Maastricht Treaty and the official completion of the single market. The EU’s intergovernmental institutions (mainly the European Council) took control of European unification at the expense of the European Commission and the European Court of Justice, which had been the twin boosters of European integration until then. The European Council committed itself to enlargement as the least controversial post-Cold War policy, but it proved incapable of strengthening EU institutions in a way that would preserve the cohesion and effectiveness of an expanding union. Without effective leadership from Brussels, the 15 western European member states diverged significantly in their economic and social policies and practices — not to mention their visions of the EU itself. And the EU’s eastward expansion, which brought union membership to 25 in 2004, was carried out without institutional reform, a sufficient financial commitment, or popular consultation and support.

Last spring, in rejecting the constitution, French and Dutch voters protested both the EU’s poor economic record and its failure to maintain the sense of direction, homogeneity, identity, common purpose, and effectiveness that had carried the European project in its earlier years, however indeterminate the project may have been. These existential issues date back to the beginning of European unification, but the impact of successive waves of enlargement and the prospect of further expansion have made them impossible for Europeans to ignore. Despite the creation of a single market and the euro, the EU has not fulfilled its economic promise, even though economics is its undisputed domain, and the growing differences among its increasingly numerous members have tarnished the dream of its political unity. It was this twofold disappointment — the crisis of performance and the crisis of identity — rather than the fear of excessive integration that alienated a critical component of the French, Dutch, and other national electorates from the European project.

STUMBLING BLOCKS

Still, the troubles of the European constitution may be serving an important, if unintended, purpose: to challenge the conventional celebration of the European social model, which is often brandished to counter attempts to introduce structural reform in key member states. Even the French, who have long defended a “social Europe” against Anglo-Saxon economic liberalism and the newly emerging “barbarians” from Asia, can no longer convincingly claim that a system that produces massive, long-term unemployment and minimal growth is a model worth following. The post-referendum debate in France has finally acknowledged the diversity of Europe’s economic and social practices and the difference between those states that have successfully adapted the welfare state and its ideology to market economics and global competition and those that have not. The United Kingdom, Ireland, Spain, and the Scandinavian and eastern European countries are doing well; the interventionist and socially rigid economies of Germany, France, and Italy are depressing EU growth and employment levels. The U.S. model remains anathema in Paris, but the combination of labor-market flexibility and social protection practiced in Scandinavia has become fashionable; in view of the United Kingdom’s growth and employment records, even the “British model” is no longer taboo by the Seine.

With the United Kingdom assuming the EU’s presidency for the second half of 2005, British Prime Minister Tony Blair has had an opportunity to invoke the French and Dutch votes and the budget deadlock to start a sound discussion on the EU’s condition, question its current budget priorities, and call for modernizing the union to confront the challenges of the twenty-first century. Blair’s address to the European Parliament on June 23, 2005 (in support of refocusing Europe’s priorities toward growth, higher education, and research and innovation), may have been opportunistic, but it nonetheless received unexpected attention throughout the continent, including in Paris. Much as several years of economic and political stagnation precipitated the single-market program in the mid-1980s, the recent constitutional drama may have a positive aftermath and lead to a pragmatic rethinking of the EU’s priorities.

One should not, however, underestimate the obstacles ahead. First among these are EU citizens’ growing disenchantment with “Europe” and the troublesome mix of left-wing radicalism, right-wing sovereigntism, bipartisan populism, and anti-Americanism that buttressed the no votes. Despite their differences, these movements share a common aversion to market economics, economic competition, political liberalism, open borders, and transatlantic cooperation — that is, to a good part of what the EU stands for and needs more of. Although at bottom the no votes were a cry for significant change, the immediate effect of the referendums will likely be a defense of national interests and social privileges, however illusory. National governments will have to navigate around this contradiction. In the short run, they will probably try to improve their economic and social records with mild liberal reforms while maintaining the good old rhetoric (and much of the reality) of the status quo. Going forward, political debates will likely pit a bolder embrace of liberal market economics against a more radically social and nationalist approach to economic and social ills. The latter is already gaining ground in France.

Already lacking at the national level, where it most matters, the political leadership required for change is unlikely to come from Brussels. Setbacks to the European unification process have typically been followed by extended freezes on EU initiatives. (The difficult Maastricht ratification debate altered the whole European dynamic of the second half of the 1980s.) As long as salvaging the constitutional treaty in one form or another remains a hope, the European Commission is unlikely to undertake any measure that might upset public opinion or a national government.

As could be expected, the British presidency of the EU has been too short and the challenge too formidable for the vision laid out in Blair’s post-referendum agenda to have produced concrete results yet. In addition, France’s irrational blow to its own vision of Europe as a world power has made the United Kingdom’s influence within the EU both greater and more politically sensitive. Although the derailment of the constitutional project was a self-inflicted wound, it is widely viewed in continental Europe as the triumph of the Anglo-Saxon ambition for the EU: a vast free-trade area or, more plausibly, a loose confederation of nations cooperating on economic and certain political matters. The frustration many Europeans feel with such an outcome after 50 years of continuing unification will have to be addressed before a consensus on the European project can be rebuilt. And so even though the EU’s substantive problems now appear more clearly to political leaders and public opinion, Europe is unlikely to be in a better position to deal with them for some time.

COLLATERAL DAMAGE

Despite the views of those who still believe that a weak and fragmented EU is a good thing for the United States, the present state of affairs should be a matter of concern for Washington. Thanks to the constitutional fiasco, pragmatism and economic reform now top the EU agenda, but opportunities for reform may still succumb to the political and ideological forces that sealed the constitution’s fate. In the meantime, the political consequences of the no votes will undoubtedly be negative for the United States.

first and most important, Washington will have to wait longer for the EU to become the more effective partner that it and the rest of the world need. Although the constitutional treaty anticipated only modest steps in that direction — such as a more stable EU presidency, an EU foreign minister, and certain improvements on security and defense — even these are now on hold, as the EU can be expected to devote a considerable amount of time and energy to its internal problems rather than to world affairs. Europeans seem to want the EU to play a bigger role on the world scene, but that desire has not translated into more defense spending, a more consensual foreign policy, or a more strategic view of EU enlargement.

Even if dealing with a weakened, self-centered Europe would improve transatlantic relations (which remains to be seen), the United States needs more than that from a key ally in confronting global security and economic challenges. Without meaningful support from its European partners, Washington is likely to ignore them, fueling U.S. unilateralism, European resentment, and the tensions that have been so harmful in the past few years. Ad hoc groups set up to deal with discrete foreign policy and security matters, such as the European troika currently in talks over Iran’s nuclear program, are useful second bests, but they are not nearly as effective as a stable and united global player allied with the United States.

The future of the EU’s enlargement policy should be another, and perhaps more immediate, matter of concern for Washington. Among other things, the constitutional treaty’s rejection by the French and the Dutch was a vote protesting the EU’s admission, without popular consultation, of ten new members last year. For the treaty’s opponents, as well as for many other Europeans, the EU’s recent eastern enlargement poses two problems. First, the new members’ more market-oriented (and more successful) economies raise fears of outsourcing, in addition to fears of increased competition in trade and from cheap immigrant labor. Second, the failure of the 15-member EU to strengthen its institutional system and rejuvenate its core mission has made the public fear, not without reason, that the 25-member union of today is an unworkable and unreasonable project.

These two sets of concerns are exacerbated by the prospect of Turkish membership, which also raises cultural, religious, and geopolitical issues for EU citizens. Indeed, the constitutional referendums have both turned enlargement into such a sensitive matter that national governments will no longer be able to bypass public opinion on it and put Turkey’s membership, however distant, in even greater jeopardy than before. In a vain effort to insulate the constitutional referendum from popular fears relating to Turkey’s possible accession, the French government imprudently amended the national constitution to require that, after Bulgaria and Romania join the EU, any further enlargement will have to be approved by referendum. That requirement is more likely to be imitated by other member states than ignored, casting doubt on any future expansion, including toward the Balkans.

Since the beginning of European unification, the United States has consistently advocated a wide and open union. European supporters of political integration regularly suspect that Washington’s (and London’s) pro-enlargement policy is motivated by the desire to prevent the advent of a more politically cohesive Europe. A more balanced assessment would stress that the United States has always had a primarily geopolitical vision of the European enterprise, regarding as its essential mission the spread of peace, democracy, and prosperity throughout and around Europe through the reinforcement of market mechanisms and the rule of law rather than through the creation of a United States of Europe. As it turns out, Europe has been remarkably successful at fulfilling the United States’ hopes, and the EU’s expansion toward southern and eastern Europe has been essential to regional prosperity and world stability. But the foreign policy virtues of expansion may now be reaching their limits: the enlarged EU is increasingly ineffective, and its citizens long for definite and politically meaningful borders and are widely opposed to Turkey’s accession. During the negotiations between Brussels and Ankara, Washington should take greater account of the EU’s sensitivities than it has in the past but still encourage institutional arrangements that preserve a close link between Turkey and the EU as well as, down the road, the prospect of membership for the Balkan countries.

The worst outcome of the EU’s current crisis would be the gradual undoing of European unification, including in economic and trade matters, as a result of declining EU legitimacy and rising nationalism. Such a development would generate political instability and tensions in and around Europe, a concern that Washington has been spared for several decades. Although such a scenario appears unlikely, the persistence and rise of radical, nationalist, and anti-American tendencies in Europe is almost a certainty.

THE WAY FORWARD

So where does the EU go from here? There are no obvious legal or institutional solutions to the current impasse. The constitutional treaty itself, for which the ratification process continues, is bound to produce an unprecedented legal deadlock. Since the French and the Dutch voted against the document last spring and the referendum was postponed in the United Kingdom, other states, including Luxembourg, have ratified the treaty. The number of ratifying states now exceeds a majority of EU members and represents a majority of the EU’s population. Still, unless the countries that rejected the constitution are invited to vote again on the same text (which is unlikely) or an amended version is submitted for ratification in all 25 members, the treaty is already history. In any event, not much will happen on this question (or any other) unless the winner of the French presidential elections, scheduled for the spring of 2007, is committed to putting France back in the EU driver’s seat. Meanwhile, hopes that a strong Franco-German union or a union of core member states could counteract the EU’s institutional weaknesses have become less realistic than ever in the aftermath of the French (and, to a lesser extent, the Dutch) vote, as both scenarios rely on a healthy France committed to a politically unified Europe and a Germany willing to permanently favor Paris over London or Washington. Although long-standing Euroskeptics such as Czech President Vclav Klaus believe that the EU’s current condition is a realistic, stable, and desirable outcome of a half century of European unification, most Europeans reject this view — and with reason. The current state of the union, were it to last, would soon give way to the EU’s regression.

In the end, only pragmatic steps can help the EU out of its crisis. The first one is to boost Europe’s overall economic performance, improve its employment record, and ease its social malaise. This is largely a domestic challenge facing France, Germany, Italy, and other founding members. At the EU level, a few changes would be beneficial: realigning Germany and France along more liberal economic tracks and renewing the EU’s commitment to both integration and its partnership with the United States. These steps, both significant departures from the past few years, would strengthen European unity and in turn create an environment more favorable to a new European initiative to which the United Kingdom and eastern European members could subscribe. Further progress on institutional and policy matters (such as security and immigration policies) would also help reconcile the citizens of the former European Community with the enlarged EU. This is a key challenge, but it is also a prerequisite for future accessions, including those of Romania, Bulgaria, and the Balkan states. As for other countries, Brussels will have to devise a new form of economic and political partnership that falls short of actual membership.

All of these adjustments will require vision, leadership, and diplomacy on the part of European governments. It is ironic that the EU stumbled just as the Bush administration was beginning to acknowledge its existence and even its virtues. Still, Washington should help its European allies out of the impasse, if only to protect one of the key pillars of Western identity and global stability — and the most progressive political experiment of our time.

Laurent Cohen-Tanugi. Foreign Affairs. New York: Nov/Dec 2005.Vol.84, Iss. 6;  pg. 55

Who Will Control the Internet?

WASHINGTON BATTLES THE WORLD

As historic documents go, the statement issued by the U.S. Department of Commerce on June 30 was low-key even by American standards of informality. No flowery language, no fountain-penned signatures, no Great Seal of the United States — only 331 words on a single page. But the simplicity of the presentation belied the importance of the content, which was Washington’s attempt to settle a crucial problem of twenty-first-century global governance: Who controls the Internet?

Any network requires some centralized control in order to function. The global phone system, for example, is administered by the world’s oldest international treaty organization, the International Telecommunication Union, founded in 1865 and now a part of the UN family. The Internet is different. It is coordinated by a private-sector nonprofit organization called the Internet Corporation for Assigned Names and Numbers (ICANN), which was set up by the United States in 1998 to take over the activities performed for 30 years, amazingly, by a single ponytailed professor in California.

The controversy over who controls the Internet has simmered in insular technology-policy circles for years and more recently has crept into formal diplomatic talks. Many governments feel that, like the phone network, the Internet should be administered under a multilateral treaty. ICANN, in their view, is an instrument of American hegemony over cyberspace: its private-sector approach favors the United States, Washington retains oversight authority, and its Governmental Advisory Committee, composed of delegates from other nations, has no real powers.

This discontent finally boiled over at the UN’s World Summit on the Information Society, the first phase of which was held in Geneva in December 2003 (the second phase is set for November in Tunis). Brazil and South Africa have criticized the current arrangement, and China has called for the creation of a new international treaty organization. France wants an intergovernmental approach, but one fundamentally based on democratic values.{See Footnote 1} Cuba and Syria have taken advantage of the controversy to poke a finger in Washington’s eye, and even Zimbabwe’s tyrant, Robert Mugabe, has weighed in, calling the existing system of Internet governance a form of neocolonialism.

How did such a welcomed technology become the source of such discord? Everyone understands that the Internet is crucial for the functioning of modern economies, societies, and even governments, and everyone has an interest in seeing that it is secure and reliable. But at the same time, many governments are bothered that such a vital resource exists outside their control and, even worse, that it is under the thumb of an already dominant United States. Washington’s answer to these concerns — the Commerce Department’s four terse paragraphs, released at the end of June, announcing that the United States plans to retain control of the Internet indefinitely — was intended as a sort of Monroe Doctrine for our times. It was received abroad with just the anger one would expect, setting the stage for further controversy.

MASTERS OF THEIR DOMAIN NAMES

One of the most cherished myths of cyberspace is that the Internet is totally decentralized and inherently uncontrollable. Like all myths, this one is based on a bit of truth and a heavy dose of wishful thinking. It is true that compared with the century-old telephone system, the Internet is a paragon of deregulation and decentralization. In four critical areas, however, it requires oversight and coordination in order to operate smoothly. Together, these areas constitute the “domain name system” of addresses, with which users navigate the Internet and send e-mail.

First, there are domain names, such as www.foreignaffairs.org. Somebody must decide who will operate the database of generic names ending with suffixes such as “.com,” “.net,” “.info,” and others (a privilege that promises handsome profits). Also, someone must appoint the operators of two-letter country-code suffixes (such as “.cn,” for China).

Second, there are Internet Protocol numbers, the up-to-12-digit codes, invisible to users, that every machine on the network needs to have in order to be recognized by other machines. Due to a technical decision made when the network was developing in the late 1970s — in a world speckled with mainframe computers — the system was set up to accommodate only around four billion potential Internet Protocol numbers, far fewer than are now necessary. Until the Internet is upgraded, accordingly, Internet Protocol numbers must be allocated sparingly — and carefully, since accidentally duplicating them creates mayhem for routing Internet traffic.

Third are what are called root servers. Some form of control is needed in the actual machines that make the domain name system work. When users visit Web sites or send e-mail, big computers known as root servers match the domain names with their corresponding Internet Protocol numbers in a matter of milliseconds. The database is the world’s most important Rolodex. Yet due to a technical hiccup that occurred when the network was young, there can be only 13 root servers, some of which provide data to mirror sites around the world. As a result, somebody must decide who will operate the root servers and where those operators will be based. Because the system evolved informally, the root servers’ administrators are diverse, including NASA, a Dutch nonprofit organization, universities, the U.S. military, and private companies. Today, all told, ten root servers are operated from the United States and one each from Amsterdam, Stockholm, and Tokyo.

Fourth and finally, there are technical standards that must be formally established and coordinated to ensure the Internet’s interoperability. They entail more than just the addressing system and involve everything from how routers send traffic to parameters so that video flows smoothly. Ultimately, the standards let the Internet evolve.

If all this sounds outrageously technical, that is because it is. And it is the reason why, even after the Internet had become a mass-market medium, most diplomats and foreign policy experts remained largely unaware of these issues. But although the management of the names, numbers, root servers, and standards that constitute the Internet’s infrastructure — what techies call “Internet governance” — seems nerdy, it can have an important impact on mainstream policy issues. For instance, countries that place restrictions on the types of domain names that can be used effectively hamper free speech. The personal information of registrants of addresses with generic suffixes such as “.com” and “.net” are made publicly available online, which jeopardizes people’s privacy. Telecom operators need access to Internet Protocol numbers to deploy services, making them a major asset for companies and an economic interest of countries. Technical standards can be designed either to foster openness or to permit censorship and surveillance. In short, the Internet, before it is physically constructed from routers and cables, is made up of values. And the domain name system is the central chokepoint where control of the Internet can be exercised.

For most of its history, the Internet has been administered by Woodstock-era American engineers and academics. As a result, the network has embodied the philosophy of that community: a political and economic liberalism led to openness on a technical level. The open infrastructure (with nonproprietary standards that let any network connect to any other, hence the “inter-net”) has fostered free expression, low-cost access, and innovation. Its private-sector origins (despite initial federal funding) have made the Internet nonbureaucratic, particularly compared with state-run monopoly telecom carriers. And the fact that the Internet’s networks carry streams of data rather than mainly voice calls has kept it outside of the purview of traditional telecom regulators.

To be sure, the Internet’s openness begets big headaches: it is difficult to track spammers, and the system is tremendously vulnerable to hacking. But the open network is like the open society — crime thrives, but so does creativity. We take for granted that the Internet we enjoy today will continue to have these characteristics, but this is hardly certain. It all depends on who controls the domain name system and what priorities they choose to set.

THE TANGLED WEB THEY WOVE

Until 1998, the Internet was overseen almost exclusively by one man: Jon Postel, a computer science professor at the University of Southern California. As a graduate student in the 1960s, he was among the handful of engineers who built the Internet. For the next 30 years, he managed it on behalf of the Department of Defense’s Advanced Research Projects Agency, which funded the Internet’s initial development.

Postel made seemingly technical decisions such as who should get to operate a country-code domain. Although it may seem odd that national address suffixes (such as “.uk,” for the United Kingdom) were allocated to private individuals rather than government bodies, such was the case. In its early days, the Internet was so new and strange that there was usually no appropriate national organization to hand a suffix to. Besides, governments, and particularly their monopoly telecom carriers, more often hindered communications development than helped it. By the mid-1990s, however, it became clear to the small coterie of officials in the United States and elsewhere who were aware of the matter that the Internet could no longer be administered by a single individual. But who or what would replace him?

After a bitter series of negotiations among the business community, governments, and nongovernmental organizations worldwide, the Clinton administration helped broker a compromise and established ICANN in 1998. Because the United States’ hands-off approach had allowed the Internet to flourish, it seemed appropriate that the new organization be based in the private sector. This would make it more responsive, more flexible, and less prone to bureaucratic and political squabbling. The negotiations were so tense that Postel suffered a heart attack as they were ending and never lived to see the birth of the successor organization he was instrumental in creating.

ICANN was an experiment, a bottom-up, multi-stakeholder approach toward managing a global resource on a nongovernmental basis. Indeed, in its early days it was often touted as a model for other issues that require the unified action of numerous groups from government, industry, and civil society, such as treating communicable diseases or handling climate change. ICANN’s private-sector status, moreover, has helped keep the Internet free from political interference. When in 2002 members of the Federal Communications Commission were asked by their counterparts at China’s Ministry of Information Industry why Taiwan had been allocated its own two-letter domain (“.tw”), the commissioners could pass the buck to ICANN and breathe a sigh of relief.

Yet from the start, ICANN was plagued by controversy. Critics charged that it lacked transparency, accountability, and legitimacy. Civil-society groups felt it was in the pocket of the domain name registration businesses it was designed to regulate. Businesses felt it was overly governmental. And foreign governments felt powerless before it. As many developing countries woke to the Internet’s importance, it struck them as outrageous that the Internet was essentially run by a nonprofit corporation whose 15-person board of directors was accountable to the attorney general of the state of California and under the authority of the U.S. government. Even the U.S. Congress criticized it, hauling the group into tense hearings regularly. Half a decade after it was founded with such optimism, the organization was mockingly referred to in tech-policy circles as “ICANN’T.”

All this came to a head in 2003, during the preparatory meetings for the World Summit on the Information Society. Washington had been able to deflect criticism of ICANN in bilateral discussions but proved unable to block the momentum for change at the multilateral level. Telecom-policy officials mildly supportive of ICANN were replaced by senior representatives from foreign ministries, officials less familiar with the details of Internet governance but more experienced in challenging U.S. power. Watching the United States go to war in Iraq despite global opposition, these diplomats saw ICANN as yet another example of American unilateralism. What would prevent Washington, they argued, from one day choosing, say, to knock Iran off the Internet by simply deleting its two-letter moniker, “.ir,” from the domain name system? Surely the Internet ought to be managed by the international community rather than a single nation.

Governments worldwide sought to dilute the United States’ control by calling for a new arrangement, and in November 2004 UN Secretary-General Kofi Annan appointed a 40-person working group to address questions of Internet governance. Washington had planned to grant ICANN autonomy from its oversight in 2006. But the more other countries clamored for power, the more the United States reconsidered its policy of relinquishing control. Ultimately, it came down to national interest: Washington, with so much at stake in the Internet’s continuing to function as it had, decided it was not prepared to risk any changes. So, as the UN working group was preparing to release its report (which, unsurprisingly, favored transferring authority over the Internet to the UN), the U.S. government made a preemptive strike. In the brief Commerce Department statement, Washington announced its decision: the United States would retain its authority over ICANN, period.

THE OPEN NETWORK AND ITS ENEMIES

Power, before it comes from arms or wealth, emanates from ideas. The Internet has emerged as a piece of critical information infrastructure for every nation. Developed countries increasingly rely on it for their economic livelihood and basic communications; developing nations recognize it as a way of linking people together, enabling commercial relationships, and generating the transparency and civic dialogue that undergird democratic governance. Information technology can also strengthen the hand of authoritarian regimes, but there seems little doubt that in its current form the Internet’s general influence is progressive rather than regressive.

ICANN cannot take credit for any of this, but the group’s work has ensured that the network operates smoothly so that these benefits can be realized. As the overseer of the domain name system, the United States has taken a liberal approach in keeping with its liberal values. There is no guarantee that an intergovernmental system would continue on such a course, and so even committed internationalists ought to be wary of changing how the system is run.

This is especially so since the very countries that most restrict the Internet within their borders are the ones calling loudest for greater control. As other countries sharpen their diplomatic knives for the final round of the summit in Tunis in November, the dispute is echoing an earlier battle at Unesco in the 1980s over the so-called New World Information and Communication Order, which led the United States and the United Kingdom to pull out of the organization. Then, it was the Soviet Union, its satellites, and the developing world that called for controlling media activities and funding the development of media resources in developing countries; today, some of those same nations seek power over the Internet, as well as financial aid to overcome the digital divide.

Washington’s new position shrewdly mixes a few carrots in along with the big stick. It formally acknowledges that countries have “sovereignty concerns” about their national two-letter address domains — a mealy-mouthed nod toward granting countries control over them, which is only appropriate. Although this will invite problems, such as with Taiwan’s “.tw,” these can be sidestepped — just as the allocation of telephone “country codes” to territories does not confer diplomatic recognition, neither does the allocation of country domains need to. Washington also supports the continued discussion of broader Internet governance issues in multiple forums, which could restrain the creation of a cumbersome and monolithic Global Internet Policy Council (which was among the UN working group’s proposals). It may also keep politicians from trespassing on ICANN’s more purely technical areas, which could harm the network.

Nevertheless, although the new U.S. position may be the least bad alternative in the short term, it will almost certainly be unsustainable over the longer term. For the moment, there is little other governments can do to rebel. Unless they feel their concerns are being addressed, however, they are likely to try to set up a parallel naming and addressing system to compete with ICANN-sanctioned domains. Technology abhors homogeneity; differing technical standards are the norm rather than the exception. The ongoing scuffle over the creation of Galileo, Europe’s challenge to Washington’s Global Positioning System, is one example; the battle over third-generation mobile-phone standards is another. The danger, however, is that two different addressing systems on the Internet may not interoperate perfectly. If it wants to preserve and extend the benefits the Internet currently brings, Washington will have to come up with some way of sharing control with other countries without jeopardizing the network’s stability or discouraging free speech and technical innovation.

Ultimately, what is playing out is a clash of perspectives. The U.S. government saw the creation of ICANN as the voluntary relinquishing of a critical source of power in the digital age; others saw it as a clever way for Washington to maintain its hegemony by placing Internet governance in the U.S. private sector. Foreign critics think a shift to multilateral intergovernmental control would mark a step toward enlightened global democracy; Washington thinks it would constitute a step back in time, toward state-regulated telecommunications. Whether and how these perspectives are bridged will determine the future of a global resource that nearly all of us have come to take for granted.

{Footnote 1} This sentence was edited after publication. Original sentence read: “France wants an intergovernmental approach, but one involving only an elite group of democratic nations.”

Kenneth Neil Cukier. Foreign Affairs. New York: Nov/Dec 2005.Vol.84, Iss. 6;  pg. 7