♦
There is a paradox about the rapid shift of the last ten years toward market economies. The integrated world economy is shaken by crises—stock exchange upsets, debt crises, Mexico’s “tequila effect,” the “Asian flu,” contagion in Russia and South America. The dramas lead to more and more unease about “globalization”—or alternately, as its critics call the process, “neoliberalism,” “turbocapitalism,” “casino capitalism,” “disordered capitalism,” “capitalism pure,” “Anglo-Saxon economics.” With every crisis, an initial reaction claims that the new events spell the end of a particular model of liberal economics, the so-called Washington consensus. But despite the shocks and the shrieks, there is no interruption. On the contrary, the drive to the market becomes faster; and its former critics are converted into proselytes. Experiments in heterodoxy are ever shorter-lived. While the Mitterrand government experimented for two whole years from 1981 to 1983 with a French alternative to Reaganomics and Thatcherism, a similar experiment in a new ideology of demand management lasted only five months in Germany in 1998–99 with the brief tenure of Oskar Lafontaine as finance minister.
Each major recent crisis has produced arguments that a new Great Depression, and with it a collapse of globalization, is possible or perhaps even likely. As yet, it has not happened. The risks, as spelled out in the previous pages, emanate immediately from the financial system, and from the possibility of contagious financial collapse in a well-integrated world. What made the Great Depression “Great” was a series of contagious financial crises in the summer of 1931 and the subsequent trade response. But the policies that were followed built on a backlash against globalization that had been developing progressively since the last third of the nineteenth century. That backlash identified globalism with change and sin, and held that moral regeneration required national cultures.
Some of these associations have been broken apart in the course of the twentieth century. Thomas Friedman’s recent book sensibly treats the veiled Islamic woman who also uses the Internet as an icon of modern globality.1
This phenomenon of the strength of internationalism at the end of the millennium is so perplexing because it seems almost natural that there should be, perhaps not immediately but certainly in the foreseeable future, some backlash against global capitalism. It is tempting to see the world economy as moving over long historical stretches like a giant pendulum, in phases of liberalization followed by a rejection and the reimposition of controls. And many people ask: why don’t we attempt to control the economic process more?
We are now in the middle of a second Industrial Revolution, which has produced in the eyes of some analysts a new economic paradigm, of continued crisis-free growth. The combination of very rapid technical progress with global competition limits the possibility for inflationary crises, which plagued the world during much of the twentieth century (after the collapse of the international gold standard). Some commentators conclude that there has been a “death of inflation.”2
The technology revolution will transform society as much as did the first Industrial Revolution, which beginning in the late eighteenth century drove workers out of the fields and into the factories. It was that first revolution which shaped the push and pull of expectations about government that swung the intellectual pendulum. But that world is changing.
It is always easiest to see the transformation around us and in our own lives. These changes make us aware of the extent to which our own activities are caught up with the destiny of billions throughout the world. The drama of the economic transformation requires an institutional reordering—not an abandonment, but a complete rethinking of many aspects of traditional politics as developed over the past century.
At home, the new industrial order is emptying factories—and people are in increasing numbers working out of their homes again. Anxiety about the extent and the conditions of part-time employment fueled massive public support in the United States for the summer 1997 strike at the delivery firm United Parcel Service. Europe currently has one and a quarter million “teleworkers,” connected electronically to the outside world; and nearly half of these are in the United Kingdom. The large corporation of the midcentury is now squeezed by a much more competitive world, and it passes the squeeze on to its employees. Companies such as General Motors or IBM no longer offer the guarantee of jobs for life. The big companies themselves are unstable. Of the Fortune 500 companies in 1980, one-third no longer had an independent existence in 1990. Then the pace of extinction became even quicker, so that of the companies in 1990, two-fifths had disappeared by 1995.3 As a result, fewer and fewer people expect the security—or perhaps the drudgery—of lifetime work with one employer.
The result of such changes is a fundamental alteration of many social and also political certainties. It is easiest to see the consequences in the politics of our own society. Shifts in employment patterns have undermined the basis for class identifications and for the fundamental political dynamic of the past century and a half. In the politics that followed the Industrial Revolution, owners voted for the parties of the right, which wanted to preserve and strengthen notions of property; and workers supported parties of the left, which tried to redistribute property. The great success of the ballot box over the last century and a half is that it replaced the barricade and the street as a way of fighting the war about property. The new Technology Revolution has made that war irrelevant and replaced it with a battle over ideas and ethics and the control of technologies. Many old-style parties struggle to maintain their legitimacy. The result is a different sort of politics.
Does this mean a new set of enemies? Certainly Patrick Buchanan, or Ross Perot, or Jean-Marie Le Pen, or Jörg Haider, or Vladimir Zhirinovsky, or Mahathir Mohamad thinks so. Mr. Mahathir has perhaps been the most emphatic recently. Speaking about foreign speculators, whom he blames for Malaysia’s financial collapse, he stated: “I say openly, these people are racists. They are not happy to see us prosper. They say we grow too fast, they plan to make us poor. We are not making enemies with other people, but others are making enemies with us.”4 In fact he has his own kind of racism, which views the activities of Chinese businesses in Malaysia with suspicion, as part of a movement for the creation of an economic “greater China.”
Even some of the most powerful makers of the new international society, such as George Soros, are terrified of the implications of the new enemy culture. The repercussions in the international arena were felt even before the fall of Communism. Conventional military conflicts between industrial countries became unthinkable while substitute “trade wars” increased. By the late 1980s, surveys regularly showed that far more American citizens were afraid of Japan than of the Soviet Union. It is striking that this was exactly the kind of thinking that underlay the new approach to economics of the 1920s and 1930s.
As in the interwar period, many people see in internationalism (rather than in the new technology that which links countries but also has far-ranging other effects) the source of a major challenge. Globalization has become a favorite target of people who call for more economic activism in promoting some particular vision of a social order, shaped in accordance with local conceptions and prejudices.
The new world has produced some powerful and persistent myths. The most widespread of these is that all dramatic economic changes, whether desirable or undesirable, are the product of “globalization.” It is easy to demonstrate the false assumptions behind much of the alarmism, at least as regards the present:
1. That unskilled jobs are disappearing solely because of competition from foreign low-income producers. Most unskilled jobs are in the service sector, where international competition for obvious reasons is not easy.
2. That wages for unskilled workers are falling as a consequence. Most recent studies in fact argue that the effect of international competition is relatively limited: for the United States at most one-fifth of the reduction in unskilled earnings can be accounted for in this way. But such analysis does correctly identify the way in which globalization may eventually make for a greater equalization across national boundaries of returns to labor as well as returns to capital.5
3. That trade is dominated by cheap imports from low-income countries. In fact most trade is between industrial countries.
4. That there is a limit to the amount of goods that the world can absorb, and that we face a glut in consequence. In fact there is no evidence that consumption rates are falling in most countries—indeed, the contrary is the case. In the United States, personal savings rates, which are correlated inversely with consumption, have fallen by half since the 1960s.
The fundamental economic story is much simpler than these myths. Maybe it is even more comforting. We have just become more efficient at producing. It is because of this improvement that over the past fifty years something of the old integrated world economy that reigned before the First World War has been restored. In fact the direction of causation runs in the opposite direction to the one usually supposed, in which international opening leads to a spread of technology. It was in fact technical changes and efficiencies of scale that have made purely national markets relatively inefficient, and created pressures on business to rationalize by spreading across borders. Much of the shift to “globalization” has thus been a consequence of corporate strategies and the dramatic expansion of the scope of multinational corporations. Even in a world deeply suspicious of economic internationalism, firms began to produce and distribute across national frontiers, in order to realize the gains offered by new techniques.
The move to globalism surprised many commentators, who in general assumed that it was either undesirable (that business is best “homespun,” to use Keynes’s famous term) or impossible because of the dynamics of protectionist pressure groups. At regular intervals since the publication of David Ricardo’s Principles of Political Economy in 1817, analysts have predicted the imminent death of free trade. Such observers have been confronted with a constant series of astonishing and incomprehensible events. It is worth taking a moment to think of the startling turns in modern economic history.
The first surprise concerns the opening of trade. It can be read as a suspense drama, with a new twist to the narrative on almost every page. The GATT was a compromise. It achieved its greatest successes in the 1960s, largely at the cost of reducing its extent so as to exclude some of the most contentious trade items—textiles and agricultural products. By the 1970s, after the collapse of the Bretton Woods par value system, most writers agreed that the GATT was moribund. The Tokyo Round was protracted and spotty. In the mid-1980s the leading experts concluded that the GATT was “in a state of breakdown.” The ministerial meeting of 1982 had failed. The Uruguay Round looked doomed to failure as the United States and the European Community became locked in a politically complex struggle over agricultural pricing and subsidies. Even in 1993, on the eve of the final agreement of this round, a major text produced by a GATT official had as its theme “the weakening of a multilateral approach to trade relations,” “the creeping demise of GATT,” and the fact that “the GATT’s decline results from the accumulated actions of governments.”6 But then came the astonishing extension of multilateral principles to intellectual property, trade-related investment, the creation of a more complete conflict-resolution procedure, and the institutionalization of multilateralism in the World Trade Organization. At that time the commentators were skeptically insisting that the United States would ignore the new institution, and instead continue a unilateral exercise of power through the application of Super 301 (the 1989 extension of the president’s power, under Section 301 of the 1974 Trade Act, to take retaliatory action against trading practices deemed “unfair”). But when the first ruling came against the United States, the United States accepted it. In 1998 everyone gave reasons why the financial services agreement could not be realized. Then, apparently unpredictably, at the last moment it came about.
The second startling development, which accompanied the trade revolution, is the liberalization of capital movements. At the time of the 1944 Bretton Woods Conference almost every economist believed that volatile capital markets—hot money—had been the contagion mechanism by which the Great Depression spread internationally. It was highly unlikely that international capital flows would resume quickly. The bankers had seen their credits frozen and their reputations attacked; the badly burnt fingers of the bondholders were still clutching the defaulted and worthless paper issued by governments all over the world. But even if capital movements did by some unlikely chance resume, there should be international and national policy instruments available to control them. There was no equivalent to the requirement of the 1944 Bretton Woods agreements to liberalize current-account transactions. In fact, however, it was really quite hard to put such limitations on capital; the offshore markets developed and eventually brought down the Bretton Woods regime. However, many capital controls remained in force and impeded capital flows. It is only recently that the consensus that embraces trade liberalization has been extended to the capital account.
Capital flows remain very volatile; and indeed each crisis brings fresh calls—even ingenious schemes—to reintroduce some measure of control or to discriminate between useful and speculative, destructive movements. After the great European Monetary System crises of 1992–93, there were demands for some variety of sand in the wheels. The Mexican peso crisis of 1994–95 produced in the view of otherwise quite sane commentators the verdict that this was a consequence not of human error, but of “the collapse of an economic model.” Malaysian prime minister Mahathir Mohamad in 1997 blamed international speculators and the hedge funds. He was not alone.
Labor flows remain the most controlled part of the international economy. In the classical Industrial Revolution, before 1914, these had been relatively free, although starting in the 1880s the United States attempted to control Asian immigration. Immigration is the area most vulnerable to the protectionist impulse. This was where a decisive backlash against internationalism occurred in the 1920s, and was accompanied by the hardening of unpleasant and also short-sighted nationalistic arguments.
It is a sensitive political issue, often coupled in popular debates with the “globalization” theme. Indeed the arguments on this issue are very ancient: both Aristotle and Aquinas recognized that some products needed to be traded over long distances, but believed that local production was more moral, because foreigners would disrupt civic life.7 In every major economy except Japan, the number of foreign-born workers has been rising since the 1980s. In the European Union there are now over 20 million legal immigrants and an estimated 3 million illegal aliens. The most authoritative recent official study, a joint effort by Mexico and the United States, suggested that there are just over 7 million Mexican-born people living in the United States, of whom almost 5 million are legal residents. Illegal immigration has increased as it became easier with mass travel, the removal of bureaucratic restrictions, and the end of Communism.8
It is not anti-immigrant sentiment alone that fuels the globalization debate. The most pervasive feature of the new world is a sense of helplessness, produced by altered expectations about what politics can do. Our angst is in large measure so intense because of the way in which the lopsided internationalization (more for capital than for labor) has decisively limited the room for action for governments. The traditional role of states is challenged by globalization. Taxes on capital are limited by the possibility of “exit” (in Albert Hirschman’s terminology) resulting from the new factor mobility. The result is an alteration of the political game, and a reduction in the space for political self-assertion and for privileged elites.
By contrast, the expansion of the state accompanied the first Industrial Revolution. New wealth gave greater resources to governments, and new problems called for collective solutions. By the late nineteenth century, a German economist, Adolph Wagner, even formulated a “law” of the constant growth of state expenditure and of the increasing share of the state in national income. The organization of the new states, bureaucratic and hierarchical, was mirrored in business organization, with numerous layers of authority and control.
Such governmental growth in this century was fueled by military expenditure. After the Second World War there was no retrenchment of the public sector. On the contrary, the expansion of the state continued at a faster rate in the recovery years. Dani Rodrik has recently pointed out the character of the bargain for the great period of postwar trade expansion: that those states which opened themselves most to trade (small European states such as Austria, Denmark, the Netherlands, Sweden, as well as Germany) also embarked on higher state spending on income transfers, in order to create a safety net to surround the disruptive consequences of the open trading economy.9
Today the same changes that are encouraging businesses to simplify and abolish hierarchies in order to permit more flexibility, faster responses, and greater innovation also demand a reorganization of government. It would be foolish to foresee an end of traditional government, but its role will become much smaller. The past traditions are irrelevant in two critical ways. First, collective management from the top down—the characteristic behavior of the modern state—will stand in the way of effective institutional adaptation to global change. Second, transfer payments—increasingly the business of the late twentieth-century state—are the opposite of wealth creation.
Indeed in some societies the law of increasing state expenditure, characteristic of the first Industrial Revolution, has already gone into reverse. By attacking universal entitlement programs, some countries have radically reduced the share of public expenditure of national income. A recent study concluded that a reduction of public expenditure in industrialized countries to 30 percent of GDP level would not seriously affect the level of services provided by governments.10
In fact a remarkable consensus has emerged, based on trade liberalization, capital account liberalization, stable money (guaranteed by strong and independent central banks), budgetary orthodoxy, the privatization of public-sector enterprise, and (by far the weakest and most unstable area) banking liberalization and deregulation. Sometimes it is called the “Washington consensus” (the term was first used by the economist John Williamson), although this is a misleading label in that the new approach had its roots much more in a series of local responses in developing countries against the failure of previous developmental orthodoxies. The most striking contributions to liberal trade theory were in fact made by economists appalled by their experiences of the controlled trade regime of India: Jagdish Bhagwati and Deepak Lal.
The modern Washington consensus is in this way fundamentally different from the “Geneva consensus” of the interwar period, which was the focus of the bulk of this book. The most important difference does not lie in the power politics of economics (that the Washington consensus is backed by the world’s most economically and militarily powerful country, while the Geneva version had to survive on goodwill or hot air). Rather it lies in the difference between an order imposed by treaties and an order built in sustained reflection about appropriate policy—and the gains to be derived from it. It was obviously particularly unfortunate to put the constitution of the League and the International Labour Organization into as vindictive and absurd a treaty as the Versailles peace treaty. But the mistake was characteristic of a world which believed that internationalism had to be politically imposed, rather than internally generated as a consequence of calculations about advantage.
The most astonishing feature of this consensus is that very few argue any longer that their country is a special case. It was once a commonplace that a large country such as Brazil had extensive protection in order to set off its own Brazilian miracle. Indian economists argued about their national peculiarities, which were said to produce a “Hindu rate of growth.” Perhaps the summer of 1997 brought the final blow to “special case-ism”: the demonstration that east and southeast Asian economies do not have some miraculous key to continued fast growth (as a consequence of an allegedly original approach to the management and regulation of competition by the state). Instead, as elsewhere, extensive state involvement produced misallocation of investment and—unsurprisingly—a collapse of confidence.
Probably the simplest way of summing up the modern orthodoxy is that there is no such thing as a separate economic truth that applies to either developing or developed countries.
Inevitably these ideas do not sit easily with traditional politics. The old politics emphasized the doable, the scope for initiative. The new politics is about the limits on action. Parties explicitly and exclusively devoted to market principles rarely do well in elections. Nor are such parties very good in translating their visions into reality. In Germany, the small, economically liberal FDP (Freie Demokratische Partei) persistently wins the votes of around 5 percent of the electorate. In the recent parliamentary elections in Poland, Leszek Balcerowicz’s Freedom Union with 13 percent obtained one of the best-ever election results for a free-market party. One of the striking features of the interwar collapse of global capitalism was its complete inability to generate political toleration, let alone any kind of affection or support. Where a market order survived in the 1930s, it managed to do so only by pretending to be something different: elegiac Anglican romanticism in the case of British Conservatives, planning in the case of U.S. Democrats.
In the past the most effective and sustainable liberal reforms have been introduced by politicians and movements presenting themselves as centrist or leftist: from Ludwig Erhard, who often liked to emphasize rhetorically that his “social market economy” was a third way between Manchesterite liberalism and planned socialism, through Felipe González, Alberto Fujimori (who won by campaigning against the “extreme” neoliberalism of the novelist Mario Vargas Llosa), and Fernando Henrique Cardoso (who was the major theorist of the antiliberal dependency school). Kim dae-Jung, with his strong ties to the labor movement, on this argument is likely to be more effective in introducing a wide-ranging liberal reform than his less popular and more remote and authoritarian predecessor.
The rhetorical offensive against neoliberalism has been the easiest way of introducing market principles. In Europe today, the protests against Anglo-Saxon capitalism have been loudest in France, where there has been a great deal of financial reform and economic restructuring. In Germany, by contrast, there is much less emotional or convincing criticism of the Anglo-Saxon world, but also a greater unwillingness to embark on reform. The essence of the centrist argument today is always concerned with a recognition of “the inevitable,” which is usually presented as coming from outside. That is why the transformation of the modern economy by technological advance is now almost always described as “globalization”: its foreign origins mean that it cannot be molded or guided by internal political debate.
The extent of the triumph of the new consensus can be judged by an examination of where potential intellectual, ethical, or religious criticisms might originate. There are currently two interpretative models. One suggests that we have arrived at the end of history, the end of conflicts, the end of ideology. Karl Marx was perversely right in predicting the end of class conflict and the withering away of the state, though wrong about the way in which these would be achieved. The alternative suggests that ideas move in great pendulum swings, and that triumphalism invariably provokes a sharp reaction.
But where will that reaction come from? Not, at least for the moment, from a religious critique of secular values. Both Christian and Islamic interpretations of the economy have been shaken or even remolded by the collapse of the Communist alternative.
On the hundredth anniversary of the great encyclical of Leo XII, Rerum Novarum, defining the Catholic Church’s doctrine in the face of the first Industrial Revolution and asserting the importance of both private property (if used responsibly) and a “just wage,” John Paul II issued the encyclical Centesimus Annus. It is remarkable in its analysis of the shift in the character of economic activity. After a rough sketch of the history of economic development, it concludes that an order based on land was replaced (during the classical Industrial Revolution) by a system in which the control of capital was paramount; and that this primitive capitalism has now been succeeded by a more fluid and mobile world. Here “the decisive factor is increasingly man himself, that is, his knowledge, especially his scientific knowledge, his capacity for interrelated and compact organization, as well as his ability to perceive the needs of others and to satisfy them.”11 In other words, the modern market economy, the world of choice, is not subject to the structures and problems of classical capitalism.
The interaction between the individual and society depends on a constant human phenomenon, which the church analyzes in terms that the anticlerical and atheist Adam Smith would undoubtedly approve without qualification. Original sin means that the social order will be more stable if it “does not place in opposition personal interest and the interests of society as a whole, but rather seeks ways to bring them into fruitful harmony. In fact, where self-interest is violently suppressed, it is replaced by a burdensome system of bureaucratic control which dries up the wellsprings of initiative and creativity.”12
From this, an analysis of the state and its role can be deduced. The major function of the state is to provide “sure guarantees of individual freedom and private property, as well as a stable currency and efficient public services.”13 The excessively overstretched state produces ethical as well as economic difficulties. These thoughts have their origins in deep reflection on the character of the collapse of Communist economies. The outcome is a criticism of modern Western welfare states in which ethical and pragmatic considerations overlap.
Islam traditionally has had an ethical code, in which—as in Christian thought—exploitative usury was forbidden, while lending could be rewarded only if there was a participation in risk. It is easy to develop an Islamic system of credit—in fact it is an equity culture—and Western banks can operate so-called Islamic windows quite unproblematically. On the other hand, the attempt since the Second World War to develop a separate science of Islamic economics was heavily dependent—as was liberation theology in the Christian world—on Marxist concepts. The result of the collapse of Marxism has consequently also been a deep crisis in the attempt to define anti-Western Islamic economics. It may therefore not come as a surprise that modern Iran is as much a part of the new consensus about the market economy as Brazil or India.
If religion is not likely to be a fruitful source of criticism, will there be a reaction against this modern consensus? There are at least four reasons for thinking that a violent rejection is inevitable. In shorthand, these are: the nostalgia of the ci-devants, the protest of the hand-loom weavers, the Zhirinovsky reaction, and the banana-skin effect.
1. The political implications of the new world are anti-elitist: they make the position of an entrenched elite defending privileges generated through state control of economic activity increasingly untenable. This group neither deserves much of our sympathy, nor is it likely to be very successful in hanging onto the doctrines that made it powerful. Indeed its main hope is now lawlessness—the phenomenon of nomenklatura privatization, whereby in the anarchy of the transformation process the old elite builds up a property position for the future. The threat in former Marxist states, from the former Soviet Union to Africa, is not a revival of Marxism, but the likelihood of elite-sponsored chaos. There is a precise analogy with the aristocracy of pre-industrial Europe, the ci-devants (dispossessed nobles) of the French Revolution. Where this group clung to political power alone, as in France, it was rapidly overwhelmed. But where, as in Britain or parts of Germany, noblemen used the remnants of political power to move into the new industrial activities, and developed coal mines and steel mills, they were easily able to secure and guarantee their continuation as a social order. The only way for the old elite to rescue itself was by shifting from a monopoly of political power to one of economic power. This is the lesson that much of the nomenklatura has quite effectively learned.
2. More important, in a process of rapid technical and economic transformation it may be clearer who the losers are than who the eventual gainers will be (since inevitably no one can predict what sort of occupations and activities will emerge or whether he or she personally will be any good at them). Thus there is always a potential for a revolt of the losers. Like the similarly displaced hand-loom weavers of nineteenth-century Europe, who also found it very hard to envisage where their precarious future might lie, those displaced by today’s technology are unlikely to be able to reshape politics.
3. There is a sort of schadenfreude that wants this cooperative process of mutually beneficial development to collapse, not because anyone will gain significantly from the crash but rather so that the costs can be imposed on some hate figure. This might be termed the Zhirinovsky reaction. Vladimir Zhirinovsky is not much of a politician, but he is a fine inventor of malicious aperçus. One of his most revealing is the question he asks of Russians: “Why should we create suffering for ourselves? We should create suffering for others.”14 It is surprising and perhaps gratifying how rare this reaction is, or how widely appreciated it is that the world economy is not a simple zero-sum game. Even in the peculiarly dramatic and colorful world of Russian politics, Zhirinovsky is treated as a clown, not a prophet.
4. When unexpected and unpleasant events take place, many blame the “system” as a whole and begin a search for alternatives. This is the “banana-skin” effect. We slip, and then we start to curse the whole world. Slipping on the banana skin is sometimes unavoidable. It is quite conceivable—indeed it is inevitable—that the new economic consensus will be challenged by dramatic crises, fiscal and financial. Market economies are dynamic and disruptive. And there is an underlying political problem.
In particular, states are faced by contradictory pressures: on the one hand, to reduce tax levels, because of the enhanced mobility of factors of production; and on the other traditional considerations requiring additional expenditure. Since the 1970s, the international capital markets have made it easier to finance deficits. They react sharply to unsustainable fiscal policies—not immediately, at the first signs of problems, but only at the last moment, with the result that the integrated world is likely to see more and more generalized financial and banking panics of the type currently experienced in Asia.
But is the liberalized economy really a “system”? Or is it not rather, as some critics who like the idea of more order sometimes complain, a “non-system.” The character of the liberal economy lies in its governance only by general rules or laws, which do not envisage or intend specific or discriminatory outcomes. It might be said that the more any order is unplanned and the result of chance interactions, ideas, and developments, the less likely there is to be a coordinated effort to overthrow it. The more complex a system is, the less simple-minded ideas of planned alternatives are likely to appeal: centralization looked much more attractive and efficient in an era when industry was dominated by the production of a few basic goods.
From the summer of 1997 to the summer of 1998, Asia dominated the financial headlines. There followed in 1998 an autumn of panic about the possibility of a truly global contagion. After 1997, many Americans and Europeans gloated about the end of the “Asian Miracle.” Asian economies have indeed been shaken by a major crisis of confidence, one that contains the risk of a prolonged deflationary spiral. But it is already clear that the response will be greater liberalization of financial markets, the end of below-market interest credits, and an opening to foreign investors. There is no reason why growth cannot resume quite quickly—much more quickly than in Latin America, after the traumatic debt crises of the 1980s.
The Asian debate has been misleading as to where the fundamental problems lie in the relationship between markets and states. The greatest risk to the world economic order emanates from two opposing directions: from some of the richest and oldest industrial societies, and in societies as yet largely untouched by the globalization revolution. In geographical terms, Europe and Africa present the greatest dangers. In the former, there is too little flexibility in regard to expectations of what the state should do, and too much of a tendency to put reform proposals outside the pale of acceptable political discourse. These states rely on their credibility—on the confidence of the markets—to such an extent that they can prolong the outbreak of a severe fiscal crisis for the longest time. This perception stops politicians from reacting and innovating, even when the diagnosis of the malaise is unmistakable. The markets are less inclined to punish deficits and irresponsible behavior because market-makers are conventional and do not like to think the impossible. The result is that when and where crises occur here, they will be late and appear completely insoluble within the confines of the existing political order and current political expectations.
In Latin America or east Asia, markets are vigilant and blow up quickly as a result of inappropriate policy. The demonstration effects are readily apparent, and other emerging markets rapidly learn the lessons about the need for consistent policy. By contrast, the reserve of confidence in Europe creates a blockage of reforms.
In the other area, in the poorest economies, markets do not trust states at all, and the consequence is a profound current crisis of governability, in which the prerequisites for economic development are often destroyed. Here is another parallel with the original Industrial Revolution, which was politically far less problematical in its heartland, in western Europe and then the United States, than where its impact was more recent and explosive, and far more linked with political resentments: in eastern Europe and Russia, and in the colonial world.
The sustainability of the global economy depends on effective political reform in these two areas: in short, in a rethinking of both the European and the African models of development. The pursuit of a notion of a special route for development—the wrong approach to policy and to the role of the state—has badly damaged African economic and political stability. Frighteningly, the same diagnosis applies to continental Europe.
There is also an important political and constitutional element here. The nation-state was not a creature of the era of industrialism, but its existence helped to facilitate economic change by providing a stable legal framework. Now it is also worth preserving as an essential element of political order. But its future is threatened by the absence of reform. It will survive only if the expectations about what politics can do are reduced. Otherwise there will be an inexorable pressure to look to supranational institutions to impose an order where national governments are increasingly failing—to cut subsidies, to restore fiscal stability, to regulate banking. Already the European Union is being widely instrumentalized as a source of necessary discipline that states cannot impose on their own initiative. This phenomenon has produced across the continent disenchantment both with politics and with Europe itself. Such a mood will make any coming explosion more difficult to resolve.
The disenchantment with politics is reflected in the increasing prevalence of corruption scandals. It is no longer simply a matter of corruption as a way of life in the peculiar circumstances of post-Communist transition economies, notably Russia. In western Europe, the end of the Cold War broke some bands that had previously held political systems together. Ideology became less important, and many people began cynically to see in politics just a mechanism for distributing the spoils of political power. Italy has gone furthest along the path of de-ideologization and political disintegration, in that the two most influential governing parties of the Cold War era, the Christian Democrats and the Socialists, simply disappeared in mushrooming corruption scandals. Ministerial corruption (“sleaze”) was a critical element in the widespread loss of confidence in the British Conservative party in the 1990s. Similar scandals continue to bring down ministers in France. A party financing scandal in Germany looks as if it could develop to almost Italian proportions and seriously weaken, if not destroy, the preeminent parties of the Bonn Republic, the Christian Democrats and the Social Democrats.
What makes the late twentieth century unique is the depth of skepticism with regard to the previous answer (a strong state) to the sin of globalization. The answer that Martin Luther gave in the German Reformation—the strengthening of the state and public power—was essentially the answer of the late nineteenth century also. It became the orthodoxy in the mid-twentieth century after wars and the Great Depression boosted state activities. But now the states look politically more unattractive—more sinful—than the markets.
We also have a very different view of what the sin of globalization involves. Most of the world has dramatically changed its attitude to economic and financial action. George Soros’ criticism of modern financial capitalism rests on the observation that there exist fewer and fewer common values than bind a society together and that there has been a “general failure of politics both on the national and the international level.”15 One striking demonstration of the transformation of values is the way in which financial villainy is treated. This had been the stock story in the demonization of capitalism in the nineteenth and first half of the twentieth centuries. Are there really financial villains left in the world? The 1990s is much more forgiving. Nick Leeson, the Singapore trader whose activities brought down the venerable Barings Bank in 1995, is portrayed in film as an amiable man caught up in something much bigger. Michael Milken’s insider trading is much less important to us than his invention of a new from of finance (“junk bonds”) that drove a great part of the dynamism of the U.S. economy in the 1990s.
Speculation can really be quite positive in its effects, and more and more frequently is judged in this way. George Soros, who put together a “war chest” of £19 billion in the attack on the parity of the pound sterling within the European Monetary System’s Exchange Rate Mechanism in 1992, and is estimated to have made a profit of £1 billion on what became more and more of a one-way bet, is generally treated as a hero rather than a villain. It is not simply that he is a reflective and interesting thinker, or that he has given large sums of money for educational and social projects in central and eastern Europe. It is rather that many recognize that the attack on the pound was actually a benevolent action, which ended a crazy exchange-rate regime. The financial humiliation of the British government in 1992 was not followed, as that of 1967 had been, by any outbursts against the “gnomes of Zurich.” Instead it provoked a burst of intense self-criticism among the politicians, who had to acknowledge their responsibility for their mistaken policies. As one of the chief figures involved in the débacle, Norman Lamont, who had been chancellor of the Exchequer, put it in his resignation speech, “The trouble is that they [the government] are not even very good at politics, and they are entering too much into policy decisions. As a result, there is too much short-termism, too much reacting to events, and not enough shaping of events.”16 The lesson was that governments could no longer decide the fate of economies.
The de-demonization of finance is part of a democratization of financial activity. We are like the heroes or villains of the past when we tap e-trades into our home computers. As a consequence, we have a completely different concept of financial sin from that which stimulated those nineteenth-century critiques of capitalism analyzed in the first chapter. Marx’s and Wagner’s demons are now quite commonplace characters. It is no longer a question of mysterious gods of high finance in top hats: we are all part of the system.
Are there then alternative answers to the problems that may be caused by global chaos? It is commonplace to suggest that a new international order, and the threat of disorders on the capital markets, require a new international regulatory regime.
One of the differences between the world of the late twentieth century and the world of depression economics is the complexity and strength of international organizations. To what extent is such a complicated system an effective protection mechanism? After all, in the 1920s there had been a highly sophisticated and at the same time visionary approach to the international order. All international economic movements could be subject to international surveillance and even control. Financial flows across frontiers were to be managed by central-bank cooperation, orchestrated by the Bank for International Settlements. The League of Nations would supervise economic stabilization and negotiate the removal of barriers to the flow of goods. The International Labour Organization would harmonize conditions of work, remove “unfair competition,” and thus manage global labor markets. The generous and certainly exaggerated expectations vested in the new institutional arrangements were soon bitterly disappointed. The BIS was much too small, the World Economic Conferences were a fiasco, and the ILO an irrelevant sideshow.
The clearest case for the desirability of a role for international institutions is when there has been a failure of the state to perform basic functions. In some very poor countries a quite different question about the state and its role arises to that gripping the problematic welfare states of the industrial world. Good rule, stability, and respect for law and the lawmaking process are preconditions for effective economic reform and advance. But how can it be extended to these areas where at present there are anarchy and a disintegration of state structures? Some cynics might ask why the rest of the world should even care about the integration of other lands into a functioning world economy. One answer is that this is primarily a moral obligation, concerned with the realization of human potential. But the urgent need for a response can also be grounded in pragmatism or self-interest. For if these societies cannot export goods and participate in international society, they will not remain simply self-contained in a ghetto of misery and inhumanity. They will export their problems: their terrorism, their violence, and even their diseases.
International institutions will be crucial in resolving the crises arising here. They can provide a substitute for a domestic order that is not in place. An elaboration of the elements of the modern economic consensus makes clear the extent to which it reaches well beyond the simply technical spheres of economic management and into highly sensitive political areas. Of course, during the Cold War era economic assistance was frequently linked to political criteria: indeed the major economic crisis that in 1956 brought the IMF back into the center of the world financial system, Suez, was basically political in origin. Decisions in the 1970s to support Rumania or Yugoslavia followed a fundamentally political logic (as these were the planned economies furthest politically from the Soviet Union), as did the extensive assistance to Egypt or Zaire. Some Europeans complained that “Washington,” a close and unhealthy working relationship between the U.S. administration and the Bretton Woods institutions, was illegitimately paying for American policies with “other people’s money.”17
The post–Cold War world has a quite different politics: no longer a lineup of East versus West, in which pro-western regimes automatically obtain support, regardless of levels of efficiency and competence and probity, but rather a much more interventionist stance in which the logic that associates economic and political change is taken much more seriously. The result has been the forcing of a much quicker pace of economic reform in some states (such as Egypt, which until the early 1990s largely resisted attempts to liberalize); the disintegration of the political order in others (the collapse and defeat of Mobutu’s Zaire); and descent into the status of international pariah for others (Nigeria after the execution of Ken Saro-Wiwa). The striking change in this area is that there is no longer an acceptance of domestic political inefficiency, corruption, or oppression.
The collapse of the Communist economies or (in the case of China) their transformation into market economies was the last stage in the creation of the new consensus. The consequence has been an increasing homogeneity of political outlook, as well as of the economic order. Indeed, one key insight is that the two are linked: that economic efficiency depends on a functioning civil society, on the rule of law, and on respect for private property.
The most visible product of the new political environment is the concern of the Bretton Woods institutions with “governance.” In August 1997 a new set of Guidance Notes from the IMF’s Executive Board instructed the staff that in policy advice the IMF “has assisted its member countries in creating systems that limit the scope for ad hoc decision making, for rent seeking, and for undesirable preferential treatment of individuals or organizations.” The IMF suggested that “it is legitimate to seek information about the political situation in member countries as an essential element in judging the prospects for policy implementation.”18
The new political outlook had already been reflected in a number of very high-profile decisions of international institutions in 1996–97. Military spending had never been a topic of explicit discussion in the era of the Cold War. Now, in a number of cases, notably Pakistan and Rumania, it became a quite central element in Fund discussions. Corruption is now explicitly addressed—in Africa, but also in the case of Indonesia’s crony capitalism. So too is democracy, although (unlike the European Bank for Reconstruction and Development) there is no reference to democracy in the Bretton Woods Articles of Agreement. Serbia was barred from the IMF on the basis of such a political argument. In the case of Croatia, in July 1997, the IMF withheld the release of a $40 million tranche of structural assistance for privatization, not because of any direct problems with the privatization program, but because of “the unsatisfactory state of democracy in Croatia.”19
There had been some links with human-rights issues in the past—in Poland, where the membership application was held up in the 1980s after the imposition of martial law and the internment of political dissenters; and, more discreetly and subtly, in South Africa in the 1980s, where apartheid was attacked as an inefficient labor practice. But the scale of the discussion of political issues in the mid- and late 1990s is quite novel. The gradual extension of the IMF into politics is an immediate result of the new consensus about economic practice, and of a new world political order that it has helped to produce. But it reflects something more profound—a realization increasingly shared throughout the world that the world economy and world institutions can be better guarantors of rights and of prosperity than some governments, which may be corrupt and rent-seeking and militaristic.
There are many obvious problems in regard to the new position. One of the most fundamental is the political counterpart to the criticism expressed by Paul Volcker for Fund economic programs: “When the Fund consults with a poor and weak country, the country gets in line. When it consults with a big and strong country, the Fund gets in line. When the big countries are in conflict, the Fund gets out of the line of fire.”20 Dealing with military expenditure, corruption, and undemocratic practices is easier for international institutions in the cases of small countries such as Croatia or Rumania, or even in isolated states such as Pakistan or Nigeria. But it is likely to be hard and controversial in large states with substantial military and economic potential, such as Russia or China. In other cases, it will be interpreted as a flagrant attempt to impose Western values in the hope of restraining or even crippling potential competitors (the criticism frequently voiced by Mahathir Mohamad).
Second, there is the question of institutional capacity for implementation. Some recent programs and statements also go into the question of economic organization: the dismantling of cartels, the improvement of accounting practices, and banking supervision. It is easy to see the macroeconomic effects of the organizational or structural flaws criticized by the IMF. On the other hand, correcting them takes the IMF into completely new areas, in which it has no expertise. It is clearly experienced in fiscal affairs and in advising on central bank policy, but not in wide-ranging reforms of the financial sector and certainly not in accountancy. Many critics will wonder whether the specification and implementation of such advice are not better left to other institutions or to the concerned firms themselves.
Third, and most fundamentally, this process of adding new expectations will create a dangerous momentum of its own. Part of the package under discussion in the late 1990s in the U.S. Congress for an IMF quota increase involves the integration of environmental and labor standards into Fund programs. The same issues, once enunciated by the president of the United States, led to the débacle of the Seattle meeting of the WTO. Such demands reflect an expectations trap. The more the IMF is seen to extend its mandate, the more it will be expected to do; and inevitably also the less it will be able to live up to the demands. The consequence of this perception of failure is already clear in the mounting skepticism, even in the mainstream of political life, about the continued viability of the IMF. In order to counter such opposition, it will need to resist institutional overstretch: to ensure that its mandate is limited, clearly defined, and subject to an assessment of results.
Since the outbreak of the Asia crisis in the summer of 1997, critiques of the IMF have exploded, from almost every political direction. Common to many of the criticisms is the idea that the existence of international institutions constitutes a “moral hazard.” States do not follow good policies, because they think that they will be bailed out. But more important, investors have no incentive to be prudent, because they believe that if they lend to a major country, they will be bailed out by the international community because it is frightened by the global implications of financial panics. It might be thought that this argument applies only to sovereign debt, for instance to the purchases in 1994 of Mexican government dollar-denominated short-term securities. But it does not require too much political ingenuity to see that lending to a large industry or bank in a big country, especially with good political connections, may be based on similar calculations. The government in the recipient country will be too anxious or too weak or too corrupt to let big companies fail, and they therefore have an implicit government guarantee. In this interpretation, which is very widespread, Mexico in 1994–95 provided a bad precedent, which encouraged the very rapid capital inflows to the Asian economies in the two subsequent years.
Another way of formulating the overstretch critique is to argue that the IMF and other international institutions are strengthening states that are incapable of efficient and just economic action. Such a point is most obvious in the case of failed states or states engulfed in civil war. The civil war in Tajikistan in the early 1990s was sometimes described as a struggle between rival gangs to control the fax machine connected with the IMF and the World Bank—and thus with money. A similar point has been made about ethnic conflict and genocide in Rwanda: the struggle for control of government was so important because it led to aid and thus power.
Such thinking often also lies behind the moral-hazard critique in the case of states that function much better: the incentives of the international system may lead them away from good policy.
The expectations overstretch that has partly crippled the IMF—or at least sent it into a profound phase of self-criticism and self-doubt—is even more characteristic of the brief history of the World Trade Organization. Trade issues are more politically sensitive than international monetary arrangements, for the reasons suggested in the foregoing analyses of trade and monetary policies in the depression era. Whereas money works abstractly and anonymously, the consequences of trade flows are immediately visible to every consumer. Trade is as a result much more a part of the political process. Resistance to globalism can easily be translated into trade policy terms: for rich industrial countries, resistance means using fair trade, labor standards, and environmental considerations to block imports from poorer countries that cannot meet ambitious and costly targets. For the developing world, such Western preconditions are hypocritical, masking a new protectionism in a cloak of concern about the international order. In fact the international institutions are, in this interpretation, being used as a lever to force an unfair globalism on the world. The handling of the Seattle WTO meeting by the United States—the lack of an effective agenda on the part of the chair, U.S. Trade Representative Charlene Barshefsky, and the apparent embracing of the cause of labor standards protection by the U.S. president—are all taken as evidence of the duplicity of the U.S. commitment to an international regime.
Here again the story of the depression era offers a grim warning. The international system—the politics of reparations and war debts, and the mechanisms devised to handle those political problems—became demonized as the source of international disorder. It was the unilateral protectionism of the United States in the Hawley-Smoot tariff that gave the most powerful of the early warning signals to financial markets in 1929 and helped to precipitate the financial contagion that provided the trigger mechanism in the collapse of globalization. The scale of financial movements has increased (but not, as many commentators would have it, incomparably) from those of the interwar world, creating a greater inherent vulnerability. To give some idea of the magnitudes involved, a capital outflow of less than $1 billion brought down Germany in 1931 (4 percent of GDP) and precipitated a world crisis; almost $30 billion in short-term capital flowed out of the United States in 1971 (less than 3 percent of GDP), destroying the Bretton Woods system; and over $100 billion (over 10 percent of GDP) flowed out of the Asian crisis economies in 1996 and 1997.21
In dealing with the consequences of globalization, there have been historically two institutional defense mechanisms. The first set out to develop new compensation mechanisms within existing political systems, on a state and national level. The second saw the process as a universal one, recognized the limitations on localist responses, and correspondingly tried to generate rules that went beyond the national level. Inevitably, in the second process, a good deal of national interest filtered through in a new guise, as a solution to a general, universal, and global challenge. Before the First World War, in the classic era of globalization and belief in progress, the former defensive mechanism was most politically successful and appealing. It gradually brought with it, through tariffs, monetary policy regulation, and immigration legislation, a series of obstacles to globality. After the First World War, confronted with these obstacles, there was considerable energy and commitment behind an attempt to explore the second answer (as there was also after the Second World War). But after 1918, the international vision was hopelessly overburdened with expectations, and provoked a much more bitter backlash that radicalized the attempt to find national solutions.
Can such a backlash occur again? The case for optimism rests, perhaps curiously, on the extent of our disillusionment with institutions, both national and international. At the beginning of the new millennium, nobody would write about the United Nations or—more importantly for this argument—the IMF or the WTO with the passion and the commitment of the 1920s idealists who dreamed about the League of Nations and the Bank for International Settlements (although the president of the World Bank made a point of telling protesters in Prague calling for the abolition of his organization that he admired “their passion and their commitment”).22 Wilsonian rhetoric sounds jaded and passé. We have very reduced expectations of what institutions can offer. But the same disillusionment affects our view of national institutions and their capacity to respond to globalization and its problems.
The obviously political types of reaction against globalization—fascism, Stalinism, and their economic manifestations in managed trade and the planned economy—are forever discredited. There is in consequence little proclivity to see a political answer as solving the dilemmas of globalism and globalization. The French protesters against Seattle used the term souverainisme for the defense of the nation-state. But it is a defense that without any rationale will hardly appear attractive. National sovereignty, without a systematically worked out ideological justification and without any clear demonstration or proof of its success, is nothing more than an empty shell.
At present there is the beginning of an antiglobalist coalition, based on hostility to immigration (because of concerns about the labor market), a belief in capital controls (in order to prevent shocks emanating from the financial sector), and skepticism about global trade. There is plenty of anger against a multiplicity of targets—the acronym jungle of multinational corporations, international financial institutions, global capital, the new billionaires … But no one has shown convincingly how that anger makes sense or how it can be used productively in formulating alternative strategies. There is no coherent intellectual package that links the resentment. It is incoherent and allusive—in short, postmodern. It may, however, produce some policy initiatives.
Is there a model of antiglobal success? Some commentators see Mahathir’s Malaysia as offering a path for nonorthodox economic success, based on state direction, capital controls, and anti-American rhetoric. But he is not as globally seductive as were Hitler and (especially) Stalin in the 1930s.
The absence of these two features—the intellectual cement and the specific model of national success—explains why the pendulum is so slow in swinging back from globality. But it does not and cannot explain why it will not swing.