Le Monde Diplomatique: Reflections on the econ crisis

[Robert Weissman <rob@essential.org>]

This is very long, but very good.

Robert Weissman
Essential Information			|   Internet:	rob@essential.org

LE MONDE DIPLOMATIQUE - October 1998

FROM MARKET MADNESS TO RECESSION

Liberal dogma shipwrecked

     "Asian capitalism is paying the price of over-regulation." That was

     the reaction last year when the Asia-Pacific region plunged into
     recession. But the collapse of the Russian economy and the Latin
     American crisis are provoking a painful reappraisal. US Federal
     Reserve Chairman Alan Greenspan has now admitted the obvious.
     In an era of financial and commercial globalisation, no region of
     the world can remain an "oasis of prosperity". The extent of the
     danger is seriously discrediting the economic dogmas zealously
     applied throughout the world for the last twenty years.
     Deregulation of capital flows and monetary fanaticism were the
     first to be challenged, but privatisation and free trade itself may

     well be next in line.

     by SERGE HALIMI

     The first serious crisis of the post-communist era is at once
economic, political, ideological
     and strategic. All the postulates put forward over the last ten
years as fundamental to
     modern society are being called into question, this time throughout
the world. The "values"
     dinned into us by a gigantic educational and media apparatus - the
rule of the market, free
     trade, open borders, mobility, transparency and instantaneous
response - have all taken a
     beating. A world trembling at the prospect of contagious deflation
is wondering whether
     there may be something to be said for frontiers after all.
Frontiers not only between
     countries, but also between the private and public sectors, and
between intimacy and
     public divulgence. And perhaps also something to be said for
slowing things down, for
     controls and for a degree of opaqueness. The whole of society had
been recast as a
     neo-liberal utopia. This time, the bubble has well and truly burst.

     President Clinton was still promising that the United States would
continue to lead the rest
     of the world "in a way that is consistent with our values" as
Business Week was already
     beginning to break with its own. In a major editorial entitled
"Time to Act", the influential
     financial journal, which has always staunchly advocated liberal
recipes, showed how
     shaken it was by the scale of the economic upheaval that had hit
Asia and Russia and just
     reached Brazil, in the United States' own back-yard. "The American
model is under
     attack everywhere as the free-market system is rolled back...
Everywhere, the free
     market is increasingly perceived as the enemy of growth.
Increasingly nations are opting
     out. This retreat from the US model is a reaction to one of the
greatest episodes of
     wealth destruction ever" (1). Quite so. Japan has kissed goodbye to
prosperity. Korea,
     Malaysia and Indonesia have lost 5% to 15 % of their gross national
product in a single
     year. Russia has renewed its acquaintance with starvation and
bartering simultaneously
     and is seeking urgent food aid to help it survive the winter.

     There are no more certainties. "Rules we thought we understood
don't seem to apply
     now," the Washington Post ruefully remarks. There is widespread
nostalgia for the old
     illusions: the "Asian miracle", based on flexible production
techniques; the "new
     economics" that disproved the theory of business cycles and
explained the surprising
     buoyancy of the American economy and the stock markets throughout
the world; the
     multinational companies that spread investment, technology and
modernity into the most
     distant regions; the ongoing march of the middle classes, bringing
democracy in their
     wake; the universal abdication of political strategy in favour of
commercial ambition.
     Seldom had the development of the whole of humanity been conceived
in terms so closely
     identical and so largely inspired by the American model (2). Even
the problems of
     individual countries were approached in the light of issues and
ideas such as "minority
     rights", "political correctness", "community politics" and
"ghettos", developed in the United
     States in completely different contexts (3).

     George Friedman, director of an American business intelligence
service, summarised the
     economic orthodoxy that is collapsing before our eyes: "The
ideology of the new world
     order held that there are no different places, that all reasonable
people behave in the
     same reasonable way and that, therefore, given advice by Harvard
and Goldman Sachs,
     Russia would evolve economically. It was assumed that, with a
growing economy, all
     reasonable people would come to look like everyone else. Prosperity
would yield liberal
     democracy, and liberal democracy would make Russia an enthusiastic
member of the
     international community, just like people from Wisconsin but with
more beets in the diet"
     (4).

     Wholesale adoption of the Western model, likened by some to a law
of nature (5), was all
     the more extraordinary as it contradicted a huge amount of
experience showing that
     "backward" countries could not achieve economic take-off and
development simply by
     imitating their predecessors. Paradoxically, it was in American
universities - though in
     departments of history, sociology and political science rather than
in business studies -
     that hundreds of academics had for decades been teaching a complex
comparative
     approach that showed how differences in traditions, institutions
and in the balance of
     political and social forces almost always prevent the same causes,
even economic causes,
     from producing the same effects.

     Moreover, the whole thrust of "development studies" was to
determine the link between
     the "industrialisation" of a nation (brought about by
technological, and hence, in the final
     analysis, economic change) and its "modernisation", which was
located rather in the social
     and political realms. Students who postulated an automatic
relationship between the two,
     who equated growth with democracy and sought to determine the
degree of development
     of a country on the basis of exclusively economic data, simply
demonstrated their
     ineptitude for the social sciences. For those who still had trouble
grasping the point,
     history was there to show that tradition and modernity are more
often overlapping than
     mutually exclusive, that modern societies long retain traces of
their distinctive itineraries,
     and that similar problems rarely call for identical responses. The
Austrian economist,
     Joseph Schumpeter, summarised the lesson in a sentence: "Social
mores, types and
     structures are coins that do not readily melt. Once formed, they
persist, sometimes for
     centuries".

     Such was the case during the industrial revolution. Despite Marx's
contention that the
     most developed country showed the others the image of their future,
neither Prussia nor
     France followed in Britain's footsteps. Their own industrial
revolutions were carried
     through at a much faster pace, since they had either to catch up
with Britain or submit to
     its dictates on the continent of Europe. And they relied on
industries (iron and steel,
     chemicals) which, unlike the textile industry on which Britain's
industrial revolution had
     been based, required large-scale capital investment, i.e. the
support of banks and the
     state. What had been achieved in Britain by means of retained
earnings and private
     enterprise, elsewhere required loans and state intervention.
Although the requirements of
     economic development were virtually identical, the political
outcome was bound to be
     different since it was conditioned by social structures that
differed greatly from one state
     to the next. (The peasantry, for example, had been decimated in
Britain but preserved in
     France.) The actual result was a relatively liberal regime in
Britain, and more
     authoritarian ones in France (the Second Empire) and Prussia
(Bismarck) (6).

     Later, during the depression of 1873-96, some industrialised states
such as Britain
     responded by strengthening free trade, a particularly attractive
option since it worked to
     their own advantage. Others, like France and Germany, erected
barriers to protect both
     industry and agriculture. Others still, like the United States,
took protectionist measures in
     one sector but not in the other. Responses differed once again in
the 1930s. The Great
     Depression led to the victory of the New Deal in the United States,
of Nazism in
     Germany, and of the Popular Front in France. And the crisis of the
1970s brought to
     power neo-liberals like Margaret Thatcher (1979) and Ronald Reagan
(1980), whereas in
     France, it resulted in a government that claimed at the outset to
be socialist (François
     Mitterrand in 1981) (7).

     Even allowing for the cultural impoverishment of Western leaders
and the alarming
     mediocrity of the mass media from which they draw their
information, it is difficult to see
     how, from the 1980s onwards, so many so-called experts were able to
impose the
     preposterous notions that the lessons of history no longer
mattered, that any society was
     simply potter's clay fashioned by the "laws of economics", and that
mass communications
     and the market would dissolve the differences between nations and
ensure modernisation
     thanks to the blessings of globalisation.

     Equipped with this inferior intellectual baggage and a toolbox
containing nothing more
     than four large hammers (deregulation, privatisation, tax
reductions and free trade), the
     international economic organisations set about transforming the
world according to the
     American model. In this endeavour, no account needed to be taken of
the history and
     geography of that world, with its various tensions and conflicts.
The cult of the "new"
     allowed ignorance of all precedents. The rule of the market, and
openness to the market,
     would guarantee prosperity and democracy everywhere. President
Clinton kept repeating
     that countries which trade with each other don't go to war with
each other. And that was
     almost the sum total of his foreign policy. Anyone who takes the
trouble to read the
     reports of the Organisation for Economic Cooperation and
Development (OECD) or the
     International Monetary Fund (IMF) will be struck by the fact that,
whatever countries are
     being considered, the analyses and remedies put forward over the
last fifteen years are
     monotonously similar. However, as one finally disillusioned
neo-liberal puts it: "Spreading
     capitalism is not simply an exercise in economic engineering. It is
an assault on other
     nations' culture and politics that almost guarantees a collision"
(8).

     For a long time, everything was hunky-dory. True, the gap between
rich and poor
     continued to grow. But that, we were told, was the price to be paid
for efficiency. The
     only international body that cared was a UN committee whose damning
reports were
     immediately buried under a mountain of indifference. The real
business was being done
     elsewhere. As the liberal counter-reformation proceeded, it
provided its shareholders -
     i.e. the richest people - with increasingly juicy shares in the
public good. In December
     1996 New York's Dow Jones Index was 6400 and still rising. Alan
Greenspan pointed
     timidly to the "irrational exuberance" of the markets. The markets
themselves, which
     apparently understood the "new economics" better than the chairman
of the Federal
     Reserve, grew even more exuberant. On 17 July 1998 the Dow Jones
Index hit 9337.
     Then, everywhere, shares prices started to fall. Last year, the
Moscow stock market
     grew faster than all the others. This year, no other stock market
is doing as badly.

     It is sometimes claimed that the onset of general blindness
coincided with the fall of the
     Berlin Wall and the consequent euphoria of the ruling classes. In
fact, the United States
     authorities, led by George Bush, did not at first believe the
collapse of the Soviet bloc
     would lead to the "end of history" and a century of American
domination (9). The then
     president admitted in his inaugural address in January 1989 that
"our heart is bigger than
     our pocket". His deputy secretary of state, Lawrence Eagleburger,
explained that
     although America had beaten the Soviets to the finishing line, it
had "finished the race out
     of breath". It no longer had the capacity to influence the course
of events and defend its
     interests in the world. But it was essentially the Clinton
administration which from 1993
     onwards, both for lack of an overall strategy and for lack of
means, decided (once it had
     conceded a few symbolic embargoes to lobbies in Florida and New
York) to reduce its
     foreign policy to a policy on trade and finance, based on the
demand that foreign markets
     everywhere be opened up to exports of goods and capital.

     The United States also exported its experts (10). Their advice,
particularly in Russia, was
     to "reform" the system by calquing it on the American model. This
approach, conceivable
     in the case of industrialised countries with tried and tested
institutions, was no good at all
     to a country in the process of imploding and plagued by the mafia.
History teaches us that
     it is impossible to imitate the process of development adopted by
another country once
     that process has itself changed the balance of forces that
justified its adoption in the first
     place. That lesson was forgotten. Heady with the triumph of
capitalism throughout the
     world, the United States, the international economic organisations
and the mass media
     equated modernity with market reforms and imposed those reforms in
the name of
     modernity. What had ultimately emerged in the Western countries
after decades of
     adjustments, resistance and compromise had now to be achieved
elsewhere in a matter of
     months. History was to be accelerated, and the increase of capital
flows was to be the
     accelerator.

     For ten years now, the Western leaders have had nothing to say to
the rest of the world
     except that markets are self-regulating, exports are the key to
development, free
     movement of capital produces the optimum allocation of investment,
and international
     alliances necessarily require more privatisation. Anyone who dared
to criticise financial
     globalisation was immediately accused of selfishly trying to
reserve prosperity for the
     countries of the Northern hemisphere. Now, with deflation at the
door, the Asian middle
     classes melting away, those of Latin America in a state of panic
and "American ideology
     foundering on the iceberg of Russian reality (11)", there is much
more at risk than utopian
     economics. The countries of the South are beginning to question the
premisses of the
     peace imposed upon them by the rich.

     "Private capital in the developed countries obeys other rules than
the geopolitical demands
     of world stability", as one economic journalist now puts it (12).
But who ever believed the
     contrary? It is impossible not to share the anger felt by certain
Asian peoples when, only
     a few months ago, IMF chief Michel Camdessus welcomed the fact that
the crisis in their
     countries would force them to step up the pace of the very
"reforms" that had brought
     them to their ruin (13). And it is easy to understand the distress
of the Brazilian president,
     Fernando Henrique Cardoso, at being unfairly blamed for what was
happening in Russia,
     simply because - for no other reason than investors' panic
reactions to all the "emerging
     markets" - Brazil has lost more capital in one month ($25 billion)
than it gained from the
     biggest privatisation operation in the history of Latin America.

     Mr Camdessus sees all this as a lack of judgement induced by panic.
Joseph Stiglitz, chief
     economist at the World Bank, has called it "an especially cruel
injustice". "Brazil and
     other South American countries," he states, "deserve better than to
be tainted by someone
     else's troubles... Looking at these economies as a whole today,
strong fundamentals and a
     bright future are evident" (14). The Brazilians are lucky to have
friends like these. But
     who is going to explain to them why in the world of globalisation,
which was supposed to
     be rational, efficient and transparent, they should suddenly have
suffered a "cruel
     injustice". Mr Camdessus, at any event, is sticking to his guns.
The IMF's
     recommendations were right, he maintains, but they were wrongly
applied.

     When capital fled, ruining the countries that had put into practice
the "reforms" imposed
     by the West, it was in the West that it took refuge. In the name of
the "race to quality",
     the master benefited from the punishment meted out by the markets
on his most obedient
     disciples. This further injustice is no doubt temporary. In the
longer run, some contagion is
     inevitable. The fall in the yen is undermining Chinese exports to
Japan. Sixty per cent of
     Australia's exports go to the ailing Asia-Pacific region. In the
case of New Zealand, the
     figure is 40%. The depression in the Far East is penalising Chile,
a third of whose exports
     go to Asia. The Brazilian crisis is impoverishing the whole of
South America, which takes
     almost 20% of US exports. The "Euroland" countries export only 0.4%
of their gross
     national product to Russia - which in the view of some economic
commentators, justifies
     letting the Russians starve to death - but European banks have sunk
$48 billion into a
     country that has lost control of its currency. Obviously, the
markets of the centre have
     benefited from the withdrawal of capital from the periphery. But
they cannot prosper
     indefinitely if the periphery collapses.

     On 3 June 1998 Robert Rubin, US Treasury Secretary (and former
chairman of the Wall
     Street firm Goldman Sachs) confessed that he was seriously worried,
as was the
     president, by the weakening of public support for globalisation at
a time when the
     country's economic, national security and geopolitical interests
required the contrary. That
     was before Russia began to implode and the crisis reached South
America. Since then,
     Mr Rubin has been stressing the "unprecedented" nature of the
present situation: "The
     number of countries experiencing difficulties at once is something
we haven't seen
     before" (15). The market had already encouraged herd reactions. But
now the herd has
     grown.

     Some countries are coping better than others. And they are often
those that have the
     most dynamic home markets and the smallest proportion of exports.
Many specialists are
     stressing the relative good health of the US economy and the
effectiveness of the euro as
     a shield. But America is a country whose foreign trade accounts for
only 12% of its
     GNP. Continued growth is driven mainly by the American consumer. As
for Europe,
     "ninety per cent of the income of Europeans comes from their own
expenditure" (16). If
     the "weakening of public support for globalisation" sheds light on
the link between the
     financial bubble, the trade bubble (17) and the development bubble,
if it serves to
     rehabilitate the idea of public policy and long-term strategy, and
if it ultimately casts doubt
     on the wisdom of selling whole sectors of industry to foreign
pension funds that can bring
     about their collapse in a matter of hours, then there will be no
reason to complain about
     this sudden onset of lucidity and foresight.

     Business Week finds some consolation in the thought that "perhaps
the only good thing
     about crises is that they can shatter accepted notions about how
the world works". The
     idea of controlling foreign investments, once so heretical that the
IMF considered
     condemning it in its charter, is continuously gaining new
advocates, dismayed at the
     discovery that the flight of capital inevitably increases the risk
of bankruptcy it feeds on.
     Experience speaks for itself. China and India, which had resisted
the blandishments of
     financial liberalisation, are standing the strain better than their
Asian neighbours. The
     regulation of short-term capital inflow has also proved effective
in Chile. In fact, the case
     for controls is almost incontrovertible. If a country raises its
interest rates to combat
     inflation and slow down money growth, and at the same time produces
an inflow of
     foreign currency attracted by a high return, its strategy is doomed
from the outset.
     Conversely, if it lowers interest rates to prevent a recession (and
stimulate money
     growth), it is likely to provoke an immediate flight of foreign
capital.

     The Economist, a weekly with impeccably liberal credentials, now
agrees. "The view that
     capital first poured too copiously into emerging markets, without
due regard for the risks,
     and then was withdrawn too abruptly, without due regard for
long-term prospects, is, on
     the whole, true. Mistakes were made and the consequences, even if
things get no worse,
     have already proved disastrous... Restrictions on capital flows :
the idea makes sense"
     (18). But not, apparently for Tony Blair, who confidently asserts
that "the solution to the
     world's financial problems does not lie in misguided attempts to
control international
     markets or trade" (19).

     There are still people who claim that the countries hit by the
crisis have only themselves
     to blame. They are the victims of the "harsh but fair laws of the
financial markets". This
     proves what we already suspected, namely that liberalism is more
than a set of economic
     recipes. It is also a culture, a moral stance. However, even some
of its most dogmatic
     and cynical advocates are currently rediscovering the virtues of
the state, now that
     capitalism needs to be protected from its own self-destructive
impulses. Even President
     Clinton (the man who abolished social assistance for the poor in
his own country)
     understands that "wrenching economic transition without an adequate
social safety net
     can sacrifice lives in the name of economic theory." But in case we
still have any illusions
     about the wisdom of the ruling classes, here is how Wim Duisenberg,
president-designate
     of the European Central Bank - sounding like a ship's captain who
has lost his compass -
     described his confusion in the face of the financial storm: "We do
what we can, but there
     is not much we can do".



                                                 Translated by Barry
Smerin


     (1) Business Week, 14 September 1998.

     (2) See "Le nouveau modèle américain", Manière de voir, no. 31,
August 1996.

     (3) See "Les ruses de la raison impérialiste", Actes de la
recherche en sciences
     sociales, March 1998.

     (4) George Friedman, "Russian Economic Failure Invites a New
Stalinism", International
     Herald Tribune, 11 September 1998.

     (5) E.g. Alain Minc, who in 1997 wrote the book Jolly
Globalization. Two years earlier
     he had stated "I do not know whether markets think correctly, but I
do know that you
     cannot think against the markets. I am like a peasant who doesn't
like hail but has to live
     with it."

     (6) See Alexander Gershenkron's seminal work Economic Backwardness
in Historical
     Perspective, Harvard University Press, Boston, 1962.

     (7) For a comparative study of these three periods, see Peter
Gourevitch, Politics in
     Hard Times : Comparative Responses to International Economic
Crises, Cornell
     University Press, Ithaca, 1986.

     (8) Robert Samuelson, Newsweek, 14 September 1998.

     (9) See "La prudence forcée de M. George Bush", Le Monde
diplomatique, November
     1989.

     (10) See Ibrahim Warde, "Les faiseurs de révolution libérale", Le
Monde diplomatique,
     May 1992.

     (11) The New York Times, 30 August 1998.

     (12) Erik Izraelewicz, Le Monde, 2 September 1998.

     (13) Along the same (generous) lines, Jean-Marc Sylvestre,
editor-in-chief of the French
     TV channel TF1, commented that "the Japanese crisis is a fabulous
opportunity for the
     Western economies", enabling European firms to "shop for companies"
in Asia at low
     cost.

     (14) International Herald Tribune, 19-20 September 1998.

     (15) International Herald Tribune, 7 September 1998.

     (16) Quoted approvingly on the French TV channel LCI by a financial
operator who had
     never ceased to vaunt the merits of export-led growth, which
naturally imposed the need
     to "adapt" to the norms of competition.

     (17) See Bernard Cassen, "Tartarin à l'assaut des marchés", Le
Monde diplomatique,
     September 1996.

     (18) Editorial, "The case for global finance", The Economist, 12
September 1998.

     (19) Financial Times, 21 September 1998.









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