THE GLOBAL ECONOMY
For as long as humans have traveled, visitors have been received by locals with both gracious hospitality and suspicious hostility—depending upon the historical experience and the mission at hand. In recent decades, promises of expanded prosperity have proven false, although the rich are getting richer. Magnified by globalization, economic hardship and related social problems for the vast majority of people on this planet are not only contagious but spreading as fast as computerized money exchanges allow.
Back in the 1950s, U.S. Secretary of Defense Charlie Wilson remarked, “What’s good for General Motors is good for the country,” implying that government support for General Motors would trickle down into jobs and economic activity for U.S. citizens. Indeed, back in the 1930s, it was General Motors’ president who coordinated the campaign to reallocate state and local highway tax revenues toward constructing the interstate highway system. Along with Standard Oil, the Greyhound Corporation, Firestone Tire, and Mack Truck, they eliminated six major railroads and the streetcar systems of forty-five cities. Convicted of antitrust violations in 1947, General Motors was fined just five thousand dollars.
Sure enough, during that postwar era, millions of families bought their first family car, the suburbs began to sprawl, and General Motors grew fat. Then, to make a long story very short, the oil companies and their host countries realized they had Americans “over a barrel,” so to speak. In the 1970s, OPEC decided to quadruple the price of oil. Gasoline prices rose, and with the federal government devoting the nation’s wealth to another war, this time in Vietnam, “stagflation”—a time of both economic stagnation and inflation—defined the era. The brief period of American optimism was over.
Worldwide, inflation also skyrocketed. Prices for everything, from gasoline and food to industrial equipment and wages, soared. Developing countries needed funds, and the banks were eager to lend “petro-dollars” from their bloated OPEC accounts. The World Bank, too, was rolling in petro-dollars, and issued a policy rewarding staff with promotions for pushing increased sums of money out the door. With little attention to a project’s merit as an economic development strategy or to the credit-worthiness of its sponsors, the lenders scattered money around the world, almost indiscriminately. Even dictators were welcome to scoop up funds to pay off political friends and boost their illegal offshore accounts. And the IMF provided still more loans, to keep debt payments flowing.
As loan portfolios ballooned everywhere, the IMF began to oblige indebted governments to raise taxes on food, gasoline, and other basic commodities, and to cut back on health and education, all in order to funnel cash back to the creditors. It also began to require a devaluing of the national currency. So if, for example, a peso once was enough to buy a bushel of corn, it would now buy only part of a bushel. This is tough on local people; their paychecks and savings are suddenly worth less. But it’s great for exporters, whose corn or oil or diamonds are suddenly cheaper compared to their overseas competitors; they can sell a lot more, making up in volume what they lost in value.
While all this exporting brings in a certain amount of foreign exchange to pay off debts, there’s nothing in this scheme to guarantee that increased economic activity trickles down to local people. In fact, it doesn’t. Rioting occurred in Argentina, Jamaica, Venezuela, Ghana, the Philippines, Indonesia, and numerous other countries that bore witness to the hardship and popular revolt caused by IMF-imposed structural adjustment policies.
The so-called development projects financed by the World Bank tend to be environmentally destructive, too, while profiting corporate developers. The great dams, for example, destroy massive ecosystems and disrupt hydro-logical cycles with severe and long-term impacts—not to mention the displacement of millions of people. Some 20 percent of all the World Bank’s lending goes to the energy sector, but for each dollar spent on renewable sources, twenty-five dollars are spent on fossil fuels. It’s as if they’ve never heard of climate change!
And then there is all the waste, much of it toxic, accumulating as a result of Western consumer lifestyles. All the polluting by-products on the production side and the disposable trash on the consumer side add up to gargantuan environmental problems. And alas, it is the poor who suffer most immediately from environmental contamination: they live right where the poisons accumulate, as corporations emit wastes and otherwise dump in poor neighborhoods, while the rich are quick to move away.
Numerous treaties—known collectively as Multilateral Environmental Agreements, or MEAs—have been negotiated under UN auspices over the decades, to grapple with the fearful consequences of the modern industrial model of development. The UN’s first summit on the environment took place in Stockholm in 1972. Over the next twenty years, dozens of treaties were born covering pollution at sea, tropical forests, the ozone layer, hazardous waste, endangered species and other wildlife, specific vulnerable regions including the Amazon and Antarctica, and so on. In 1992, the Earth Summit in Rio de Janeiro generated two new MEAs: the Framework Convention on Climate Change and the Convention on Biological Diversity. Since then, a number of additional treaties have been achieved. And in some cases, detailed implementation treaties, known as protocols, have been penned to help reach the goals expressed more generally in the original convention. But the ten-year review conference of the Rio Earth Summit, held in Johannesburg, South Africa, was perceived by many civil society groups as a failure—a barren attempt on the part of our governments to pretend that all this treaty making had accomplished something, while pollution and biological destruction continue virtually unchecked.
In the cities, epidemiologists have identified the industrial causes of conditions such as cancer, heart disease, diabetes, infertility, and birth defects. Corporate scientists often claim that a person’s genetic heritage is to blame, but our genes only bear the brunt of the poisons. Each of us may have inherited greater resistance to certain environmental toxins or greater vulnerability to others, but, in either case, our bodies—our genes—are responding to external factors. And in rural areas, food security often depends upon the local productive capacity: the next harvest is hurt by soil erosion and degradation, deforestation and desertification, the rechanneling of rivers, declining biological diversity, and drought. Toxic pesticides and fertilizers, too, have poisoned millions of rural people; and, sadly, these chemicals are used all too often in desperate acts of suicide by those who give up struggling for a better life.
Many countries that once produced their own basic foods are now dependent on expensive imports, having switched to export production under IMF conditions of structural adjustment and in accord with “free trade” policies. Kenya, for example, became a net importer of corn, their major staple food crop, after the structural adjustment and trade liberalization of the 1990s. Corn farmers lost about half the value of their production while their costs, mostly for imported fertilizers, rose. With the privatization of Kenya’s National Cereals and Produce Board, the government’s ability to manage the supply of corn and keep prices stable was greatly reduced, leaving Kenya’s food security dependent upon imports and transnational commercial interests.
In Mexico, NAFTA cut the value of Mexican corn farmers’ crops in half, while doubling the cost of agricultural inputs. In the Mexican countryside, the highly touted transition from basic grains to horticulture failed: vegetables intended for export never became competitive in the world market, while corn imports from the United States increased by a factor of eighteen. Flooded with corn, prices for producers fell drastically, and yet, with corporate production overwhelming the smaller, family-owned tortilla businesses in urban areas, the price of tortillas actually went up! As a whole, the economy of the rural sector shrank by 6 percent in 1997, despite Mexico’s gross domestic product growing by 7 percent.
The Philippines, formerly food self-sufficient, now depends upon imported rice to feed its population, after being made to shift from family subsistence and market plots to plantation sugar, oil palm, and (ironically) rice production for the export market, all thanks to structural adjustment and the GATT/WTO. Similar stories can be told of nation upon nation.
The WTO Agreement on Agriculture obliges countries to import certain percentages of foods, whether or not they need them. Yet a parallel WTO agreement (the Marrakesh Decision) that promised to provide instant aid for those least-developed and net food-importing countries negatively affected by the agriculture agreement has never been implemented: that is because the IMF argued these poor countries couldn’t prove their food security problems were a direct result of the WTO.
But globalization, trade rules, international loans, structural adjustment, and environmental exploitation work well for the corporate sector. Under trade rules, countries have to treat the exporting companies of all other nations just as they treat their own companies. Great! The big transnationals have access to every country that joins the WTO! The World Bank finances harbors and roads and dams. Great! This is just the infrastructure transnational companies need to exploit a country’s natural resources and bring them to export markets. And the IMF keeps priming the pump. Great! Squeeze those economies so the big money can trickle back to the headquarters of Citigroup, Goldman-Sachs, and the other financial giants in New York City, London, and Zurich.
Today, General Motors is the third-ranked company on the Global 500 list, with $184.6 billion in revenues. Its president makes $4.8 million a year, while an average autoworker makes $23 an hour. In the average Fortune 200 company, top executives make about $10 million, while roughly half of the entire U.S. workforce earns less than $60,000. Globally, the average income of hardworking people is rapidly eroding further.
In Asia during the 1960s, 1970s, and 1980s, the more economically successful governments actively managed their own affairs. They invested in job creation, regulated capital flows and financial markets, and supported national enterprises and exporting into the global market. Overall, the region thrived with better growth rates than even the United States. The trouble came, says Nobel Prize winner Joseph Stiglitz, when the Thai government succumbed to IMF and U.S. Treasury pressure and agreed to deregulate its financial and capital markets.
Until then, Thailand had restricted bank lending for speculative real estate, preferring that available capital be invested in job creation. With restrictions lifted, new money poured into the country, spurring a speculative real estate boom; but it all collapsed when investors realized the debt load was unsustainable and more attractive interest rates could be found elsewhere in the world. By the late 1990s, this “hot money,” as short-term investments are called, fled not only Thailand but also other East Asian countries, and the economic crisis spread in what became known as “Asian contagion.” Eventually, the panic spread all the way to Russia and Brazil as global investors chose to avoid risky economies altogether.
In any recession, it is the poor who suffer most. Thailand’s rural poor, who had flocked into the cities during the boom years, were left without a safety net; the lucky ones returned home to their villages, where at least food and shelter could be found. But the global institutions’ response, funded by U.S. taxpayers, was directed toward making the banking system whole again—lending money at very favorable rates to the IMF to lend in turn to the central banks in Asia, which then lent to insolvent companies to pay off their creditors, which tended to be the major international banks. The U.S.-orchestrated bailout did nothing for the poor.
Since 1995, the IMF, World Bank, and U.S. Treasury have put together at least eight other bailouts (in Asia as well as in Russia, Mexico, and Brazil), transferring $250 billion worth of risk from the balance sheets of banks and other companies to the public sector and the multilateral system. All in all, this process generates a tidy shift of resources from the public to private interests, and from poor to rich.
Argentina’s crisis at the turn of the century was provoked by the global downturn following the Asian crisis, but it had been building for decades. Since joining the IMF in 1956, Argentina had borrowed funds in thirty-four out of forty-five years and cooperated with all of the structural adjustments required—including nationalizing private debt incurred during the dictatorship and encouraging foreign ownership of the banking system. By 2001, the government owed more than $200 billion in debt—more than $160 billion to private foreign banks including Chase Manhattan, J.P. Morgan, and Citigroup, and about $25 billion to the IMF, World Bank, and other public lenders.
In 2000, a judge in the federal criminal court found a history of unscrupulous mismanagement of the country’s finances and declared that since 1976, Argentina had been “placed at the mercy of external creditors, and in those negotiations IMF officials participated actively.” Judge Jorge Ballestero emphasized that the effect was “to benefit private companies and businesses—both national and foreign—to the prejudice of state companies that suffered policies impoverishing them further every day.” He specified, among other things, that the governor of Argentina’s central bank, Domingo Cavallo, in 1982 near the end of the military dictatorship, created public guarantees insuring $17 billion of private debt and a number of foreign loans to private domestic companies—effectively nationalizing this debt. By 2001, the part of the nationalized debt incurred by the dictatorship had grown to some $43 billion, more than one-fifth of the country’s total debt.
Domingo Cavallo has a long résumé. In 1991, serving his country as Argentina’s finance minister, he pegged the Argentine peso to the U.S. dollar—meaning that Argentina’s central bank could no longer manage its value according to Argentine economic and political factors; instead, their currency’s value would automatically rise and fall with the value of the dollar. The theory was that foreign investors would appreciate the security of the dollar and bring funds into the country. Also during that period, Argentina joined Brazil, Uruguay, and Paraguay in a regional economic development plan called Mercosur, or “Market of the South,” designed to boost cooperation in the region and increase its capacity relative to the rest of the world.
At first, money did pour in as investors scrambled to buy up Argentine dollar bonds and pieces of the country’s privatized power and communications sectors. But Brazil’s currency was not pegged to the dollar, and instead of buying wheat in overvalued Argentinean money from its Mercosur partner Argentina, Brazil bought it from the United States. Within one year, Argentina’s trade deficit exceeded $1.2 billion. In desperation, the Carlos Menem administration announced it would give tax refunds for exporters, eliminate domestic duties on farm exports, fuel oil and diesel oil, and set higher import tariffs. In a speech one month later, Domingo Cavallo hinted that he thought regional integration was impossible and that joining NAFTA might be preferable to instability within Mercosur.
But stability in Mexico was not to be had, either. Even before IMF intervention, the Mexican economy had already suffered decades of manipulation by the dominant political party, the Partido Revolucionario Institutional (PRI). For many decades, the PRI controlled the presidency, and their six-year terms were usually marked by early austerity. While this improved the country’s financial balances, pleasing the international community, the subsequent steep drop in real wages, onset of recession, and increased income inequality displeased voters. So midterm, presidents would start redistributing income through subsidies and other public investments, gaining popular support in time for the next election but displeasing the banks.
Then in 1984, the IMF bailed out the Mexican economy with a deal persuading the commercial banks to leave their money in the country in exchange for an IMF-designed structural adjustment program. Simultaneously, the World Bank for the first time went beyond its mandate to finance development projects and joined in debt-related lending. A few years later, the banks invented the Baker Plan—named after U.S. Treasury Secretary James Baker, who served under the Reagan administration—and convinced both private and public sector banks to increase their loans in Mexico (and a dozen other countries) in exchange for structural adjustment, tax reform, intervention in labor markets, and further trade and investment liberalization. Baker’s successor at Treasury, Nicholas Brady, then sweetened the deal for the banks. The Brady Plan offered stronger international guarantees to cover the risks of all those new loans, in exchange for which the banks would forgive part of the principal and accept lower interest rates on the balances. Debt instruments began to trade in secondary and tertiary markets, as the banks holding potentially bad loans sold them at discounted rates to others who were either more optimistic or figured they could make money off the public guarantees.
Meanwhile, a remarkable coalition of creditors invented an array of legal and accounting devices to maintain as much of the full value of the debt as possible. Canada, France, Germany, and the United Kingdom recategorized funds kept in reserve for potential loan losses as tax deductible. Japan created tax deductions for one percent of all capital tied up in risk reserves. The head of the U.S. Federal Reserve Bank at the time, Paul Volcker, informed U.S. banks that if they complied with the Brady Plan they would “not be subject to supervisory criticism.” The UN Center on Transnational Corporations documented twenty-three tax and accounting incentives developed by governments to support the private banks during that period.
For a while, Mexico was a star performer in the Baker-Brady scheme for debt restructuring, and according to the established routine, the PRI again won the presidency, putting Carlos Salinas in office in 1988. Under Salinas, Mexico’s total debt climbed from $70 billion in 1989 to $100 billion by 1992. Foreign investments, too, had climbed, encouraged by Salinas’s active pursuit of the NAFTA agreement, but most of this wealth was invested in services, tourism, and foreign ownership of Mexican assets.
As the vote on NAFTA approached in the U.S. Congress, the peso-to-dollar exchange rate began to fluctuate wildly. Salinas used the government’s stock of foreign currency to buy pesos, tightening the money supply in hopes of sustaining the peso’s value until the next presidential election. In the last week before the November 17, 1993 NAFTA vote, as Bill Clinton brokered billions of dollars’ worth of political deals with congressional representatives to ensure a “yes” vote, investors pulled $5 billion out of Mexico fearing a “no.” Salinas allowed the exchange rate to rise, so investors would have to exchange more pesos to get their dollars out, and currency exchange shops on the border stopped accepting pesos altogether. The Salinas administration increased interest rates, hoping to lure investors back, and when the U.S. Congress approved NAFTA, the peso did not crash. In August 1994, the PRI Party once again won the Mexican presidency, putting Ernesto Zedillo in office.
But four months later, the peso crashed. The Mexican treasury had run out of dollar reserves with which to buy up pesos to keep them out of the money supply, thus they could no longer prop up their scarcity value. Bill Clinton agreed to a bailout by U.S. taxpayers, supplying a $40 billion line of credit, and the IMF added $18 billion, but the peso continued to fall—from a ratio of three to the dollar before the NAFTA vote to seven to the dollar. This meant that paychecks and savings in Mexico were worth less than half their value compared to the glory days when NAFTA was signed, while the real cost of food and other necessities doubled. The crumbling peso caused panic to spread throughout Latin America.
What resulted has been called the “tequila effect,” as investors scrambled to withdraw their funds from what they feared were low-end financial markets. And the tequila effect had particularly harsh effects in Argentina, which lost $8 billion in capital flight and spent $7 billion in reserves to balance the exchange value of its currency. By midyear, Brazil devalued its currency twice, threatened to limit its imports of Argentine automobiles, and entertained proposals from Brazilian wheat millers to drop the Mercosur tariff on wheat imposed from outside the region. Argentina found itself unable to compete.
Then in 1995, the United States raised interest rates, forcing the value of the Argentine currency to rise as well. This meant Argentina’s exports became even more expensive, relative to its trading partners in Europe and Brazil, and imports cheaper. So export revenues fell while cheaper imports flooded the domestic market, driving out domestic production. People lost jobs. When Brazil devalued its currency in 1998, the problem grew worse. The loss of foreign exchange—through diminishing export revenues and payments for growing imports—reached critical proportions while unemployment rose to double digits. And then the Asian crisis raised interest rates globally, augmenting the cost of servicing Argentina’s debt while investors both foreign and domestic sent their money to safer economies.
In 1999, Carlos Menem left the presidency, discredited for overissuing dollar bonds to finance budgetary deficits and accused of corruption. Since then, a series of Argentine presidents have tried to rebuild the economy through desperate tactics—suspending payments on the debt, decoupling the currency from the dollar, and prohibiting bank withdrawals to prevent any further capital flight. Without cash and without jobs, millions of middle-class Argentines are suffering a frightening slide into poverty.
With links to the Asian contagion (not to mention decades of dictators and engagement with the IMF and World Bank), Argentina’s economic crisis spread to Uruguay, Brazil, and throughout Latin America. It is increasingly apparent: the more globalized the economy, the more contagious our economic problems—and the social problems thereof.
Even in the United States, the middle class is shrinking and economic issues rank very high on the political agenda. So far, our government has managed to insulate most of us from the terrors of extreme poverty—although declining tax revenues and skyrocketing military budgets threaten those minimal protections that our government provides the poor. Since the Welfare Reform Act of 1996, nearly half of all food stamp recipients have been eliminated from the program due to its more rigorous eligibility standards, and some 23 million people had to go to Second Harvest and other private sources for food aid in 2001. Some 40 million people, more than 14 percent of the U.S. population, lacked health insurance during the past few years.
Is our social order really “sound as a dollar”? How sound is the U.S. dollar, anyway? How do all these economic factors—currency exchange rates, interest rates, the money supply, trade balances, and foreign investment—affect us in the wealthiest nation on Earth? In fact, how did we get to be the wealthiest nation in the first place?
Five hundred years ago, explorers paid no more than shipping costs to extract slaves, gold, silver, and other precious raw materials to their home country to be sold at fabulous prices. Since the prohibition of slavery, low-wage labor to manufacture goods made out of imported raw materials has enriched the industrialized world while the providers of this expropriated wealth have suffered in poverty. In short, labor and natural resources—the resources of the Third World (often referred to as “the South”) have always been abundant, undervalued, and exploited.
Of course, labor and natural resources in the industrialized world (also called “the North”) have also been exploited and undervalued. But there have always been more wealthy entrepreneurs in the North ready to invest in extracting value from the South than vice versa—resulting in a historical problem that has affected geopolitics ever since.
Over the centuries, industrialization and capital accumulation in the North have created a pattern of trade where developing countries sell natural resources to traders from the industrialized world, and then import those same materials in the form of processed goods. Despite modernization, this fundamental disequilibrium in the exchange rate of the respective resources between the South and the North is actually worsening. The technical term for this relationship is the “terms of trade,” and analysts have declared them to be “deteriorating” for decades—despite the stated intentions of the World Bank, IMF, and GATT/WTO. Countries exporting coffee and cocoa, jute and pineapple, timber, copper, and bauxite have watched their value on the commodity exchanges plummet year after year, while the prices of the pesticides and tractors, factories, refrigeration, and modern mining equipment they import rise. The more technology adds costs and presumed efficiencies to the up-front costs of their imports, the more developing countries’ terms of trade deteriorate.
When Argentina exports beef to the United States, it brings in dollars; when it exports to Japan, it brings in yen. Theoretically, the dollars go back to the United States when Argentines import Fords and the yen go back to Japan when they import Toyotas. Of course, trade balances are never perfect, so surpluses of one currency and deficits of another can accumulate.
Over time, each government’s economic planners are supposed to strive toward a “balance of trade” with other countries while the central bankers are supposed to try to maintain a “balance of payments” in all currencies. This can be done, in part, by keeping currency reserves in stock—to buy back the national currency from other countries’ central banks when a domestic shortage is on the horizon, and to release funds into the domestic economy when necessary to stabilize the money supply relative to demand. All of this, in theory, keeps the value of money steady, preventing inflation and maintaining sound economies.
However, a variety of factors interfere with the smooth functioning of supply and demand in the international economy. For one thing, central banks in each country adjust their “money supply” and thus the value of their money every day. These adjustments at many national levels may contradict each other and exacerbate the conditions they were intended to correct. They also stimulate human behaviors that can be difficult to accurately calibrate in advance, with economic responses that take months to filter through the system.
When the chair of the Federal Reserve Bank lowers interest rates by 0.25 percent, it makes money cheaper to access, so it encourages people to borrow more. In the United States, consumer credit is so incredibly extensive that many of us often receive loan offers in the mail. Greenspan and the other economic planners want us to spend our borrowed money—on cars, furniture, new homes, jeans, and CDs—and thus keep the economy going. When we’re all out there buying stuff, the economy thrives: manufacturers produce more, retailers build up their inventory, and the furniture and car dealers and realtors raise their prices. If this goes on too long, people start worrying about inflation (prices rising faster than wages and other values in the economy) and then decide they can no longer afford all these goods. Then the banks tighten the money supply, raising interest rates so that people will put their money in the bank instead of buying so much stuff, and the economy shrinks. When people are pinching pennies and retailers are overstocked, prices go down and inflation falls. Every country’s money supply constantly fluctuates, so as goods are traded and currencies exchanged internationally, surprises and volatility are the norm in the global economy.
Another glitch in the balancing of trade and payments internationally is the fact that at least one third of all world trade is conducted by transnational corporations buying and selling goods between their own affiliates in different countries. As you might expect, corporations charge prices designed to benefit the bottom line. In particular, taxes can be avoided by overpricing goods sold to U.S.-based affiliates from operations based overseas and underpricing goods sold to overseas affiliates from operations based in the United States. For example, in 2000, a study by finance professors at the University of Florida found a $2,306 hypodermic syringe and a $1.58 ton of soybeans. How about a $528 bulldozer and a $5,655 toothbrush? While each firm can balance its discounts and premiums to ensure internal accuracy, the practice—known as “transfer pricing”—keeps the income out of its reports to the Internal Revenue Service. Transfer pricing is entirely legal; international accounting firms even advertise their expertise with transfer pricing to attract clients. But it can certainly screw up national accounts!
A third destabilizing factor in the global economy is the relatively recent decoupling of money from anything of real worth. The U.S. dollar may be considered the most stable currency in the world, but (hard to believe) it is not worth anything more today than the trust we give it. Until 1974, the U.S. dollar was formally based on the “gold standard”; anyone could trade in their paper money for gold from the vaults in Fort Knox. While no one can eat gold, it and other precious metals have had a relatively stable value in world markets over the centuries. Under the gold standard, the currencies of other countries were fixed at agreed ratios to the dollar and also redeemable for gold at that rate. But the United States began to accumulate a dollar deficit in the 1960s, with heavy expenditures on the Vietnam War, and the flow of dollars to higher-interest investments overseas accelerated with President Nixon’s effort to stimulate the economy through lower interest rates. By 1971, foreign claims on the gold stored in Fort Knox were double the value of the actual stock of gold. The Nixon administration unilaterally devalued the dollar and temporarily stopped payments in gold for dollars in foreign exchange. Then, with a stroke of the pen, Nixon permanently divorced the dollar from the gold standard, and currencies everywhere were decoupled from their foundation in real wealth.
Nowadays, the value of the dollar—as well as that of every other currency, gold and silver, and any other commodity traded in the formal commodities markets—flickers from microsecond to microsecond to the digitized pulse of computer software packages across the globe. These computer calculations tally their investors’ returns down to a ten-thousandth of a dollar, based on minute advantages to be found in the vacillating interest rates and exchange rates from one country to another. Each incremental sliver of profit is then reinvested instantly, yielding exponentially expanding wealth based on nothing more than all the other investors’ simultaneous behavior. Occasionally, the data on all these computers will prompt investment advisors to move their clients’ funds out of a particular country’s currency altogether, and the sudden rushing outflow of this hot money can leave that country devastated.
The investors then have to rush into another economy with their capital, although they have no intention of investing long-term; their computers are just looking for the next ten-thousandth of an incremental gain. Such short-term investments in currency exchange markets are not linked to real production of any kind: no factory is built, no streets or water treatment facilities are constructed, no value-added processing occurs, no technology or technological know-how is transferred—and so there is no real economic development. Or funds may be poured into speculative real estate development, but when the bubble bursts and investors decide to pull out, the gigantic cement forms for office towers are abandoned mid-construction, highway projects dead-end, and thousands of people lose their jobs.
As if international supply and demand, transfer pricing, hot money, and speculative real estate aren’t unpredictable enough, investment advisors have invented an array of speculative financial instruments based on the future movement of exchange rates, interest rates, and mixed portfolios of stocks. From 1960 to 1990, trading in these high-risk “futures” and even more complex “derivatives” of these financial instruments increased some 700 percent, far outpacing the value of trade in actual goods and services. Essentially a gamble on future prices of all these dynamic interrelated instruments, speculation—performed by only a small number of trading companies—can make (or lose) money whether prices rise or fall; it merely depends on the accuracy of speculators’ guesses. Volatility itself became remunerative for the gamblers, while the negative effects on consumers and small producers as well as whole economies are suffered worldwide.
Enron specialized in this global pyramid scheme, which is not illegal, trading in speculative derivatives financed by shareholders with layer over layer of paper deals, and anticipating future gains by betting electronically on the value held in its employees’ retirement funds. The big banks, J.P. Morgan, Chase, and Citigroup, have been implicated in the deception. Insider trading, fraudulent accounting, and other illegal activities resulted in criminal charges and the incarceration of Enron executives. And Enron’s auditor, the since discredited and now defunct Andersen company, let it all happen. Indeed, the global corruption watchdogs at Transparency International (http://www.transparency.org) cite Enron and the other corporate scandals of that period as garnering the United States its high corruption rating in their 2002 index; ranked sixteenth, the United States was deemed more corrupt than nine European countries, Iceland, Canada, New Zealand and Australia, Singapore, and Hong Kong.
Presumably, the Securities and Exchange Commission (SEC) of the United States and similar market oversight agencies of other countries have some responsibility for approving financial instruments and deals, and for supervising the accounting profession. Two years before Enron’s collapse, the SEC tried to limit consulting between companies and their auditors, but the political heat from corporate lobbyists was intense and the stronger regulations failed. Under the Bush administration, SEC Commissioner Harvey Pitts (who used to represent the big accounting firms in his law practice) tried to privatize this responsibility and prompted the mass resignation of a five-member ethics board that oversees the accounting profession. After Enron’s collapse, Pitts appointed William Webster, former director of both the FBI and the CIA, to take on this responsibility, adding to the public dissatisfaction with his leadership. Webster survived in this position just a few months, and by the end of 2002, Pitts himself resigned in disgrace.
In the wake of the scandals at Enron, Andersen, WorldCom, Adelphia, ImClone, and other major companies, it seemed that the demand for accountability from corporate executives and reforms of the accounting and auditing systems, derivatives markets, and the financing of political campaigns might lead to genuine reforms. But the Republicans’ success in the 2002 midterm elections for Congress gave President Bush’s corporate and militarist agenda a green light. Whether there is enough political will to alter our approach to terms of trade, international investments and financing in the near term is doubtful—especially in times of war, when citizens become reluctant to rock an already unsteady boat.
The juxtaposition of economic contraction and military expansion is a familiar scenario, however, and raises the question: Who benefits?