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Market Democracy in a Neoliberal Order: Doctrines and Reality
Part II of the Davie Lecture, University of Cape Town, May 1997
As mentioned in part I of this talk, Washingtons "crusade for democracy" was waged with particular fervor during the Reagan years, with Latin America the chosen terrain. The results are commonly offered as a prime illustration of how the U.S. became "the inspiration for the triumph of democracy in our time." The most recent scholarly study of democracy describes "the revival of democracy in Latin America" as "impressive" but not unproblematic; the "barriers to implementation" remain "formidable," but can perhaps be overcome through closer integration with the United States. The author, Sanford Lakoff, singles out the "historic North American Free Trade Agreement (NAFTA)" as a potential instrument of democratization, alongside of other examples of the kind already discussed.
A closer look at NAFTA is informative. The NAFTA agreement was rammed through Congress over strenuous popular opposition but with overwhelming support from the business world and the media, which were full of joyous promises of benefits for all concerned, also confidently predicted by the U.S. International Trade Commission and leading economists equipped with the most up-to-date models (which had just failed miserably to predict the deleterious consequences of the U.S.-Canada Free Trade Agreement, but were somehow going to work in this case). Completely suppressed was the careful analysis by the Office of Technology Assessment (the research bureau of Congress), which concluded that the planned version of NAFTA would harm most of the population of North America, proposing modifications that could render the agreement beneficial beyond small circles of investment and finance. Still more instructive was the suppression of the official position of the U.S. labor movement, presented in a similar analysis. Meanwhile labor was bitterly condemned for its "backward, unenlightened" perspective and "crude threatening tactics," motivated by "fear of change and fear of foreigners"; I am again sampling only from the far left of the spectrum, in this case, Anthony Lewis. The charges were demonstrably false, but they were the only word that reached the public in this inspiring exercise of democracy. Further details are most illuminating, and reviewed in the dissident literature at the time and since, but kept from the public eye. By now the tales about the wonders of NAFTA have quietly been shelved, as the facts have been coming in. One hears no more about the hundreds of thousands of new jobs and other great benefits in store for the people of the three countries. These good tidings have been replaced by the "distinctly benign economic viewpoint"the "expert's view"that NAFTA had no significant effects. The Wall Street Journal reports that "Administration officials feel frustrated by their inability to convince voters that the threat doesnt hurt them" and that job loss is "much less than predicted by Ross Perot," who was allowed into mainstream discussion (unlike the OTA, the Labor movement, economists who didnt echo the Party Line, and dissident analysts) because his claims were sometimes extreme and easily ridiculed. "Its hard to fight the critics by telling the truththat the trade pact hasnt really done anything," an Administration official observes sadly. Forgotten is what "the truth" was going to be when the impressive exercise in democracy was roaring full steam ahead.
While the experts have downgraded NAFTA to "no significant effects," dispatching the earlier "experts view" to the memory hole, a less than "distinctly benign economic viewpoint" comes into focus if the "national interest" is widened in scope to include the general population. Testifying before the Senate Banking Committee in February 1997, Federal Reserve Board Chair Alan Greenspan was highly optimistic about "sustainable economic expansion" thanks to "atypical restraint on compensation increases [which] appears to be mainly the consequence of greater worker insecurity" an obvious desideratum for a just society. The February 1997 Economic Report of the President, taking pride in the Administrations achievements, refers more obliquely to "changes in labor market institutions and practices" as a factor in the "significant wage restraint" that bolsters the health of the economy.
One reason for these benign changes is spelled out in a study commissioned by the NAFTA Labor Secretariat "on the effects of the sudden closing of the plant on the principle of freedom of association and the right of workers to organize in the three countries." The study was carried out under NAFTA rules in response to a complaint by telecommunications workers on illegal labor practices by Sprint. The complaint was upheld by the U.S. National Labor Relations Board, which ordered trivial penalties after years of delay, the standard procedure. The NAFTA study, by Cornell University Labor economist Kate Bronfenbrenner, was authorized for release by Canada and Mexico, but delayed by the Clinton administration. It reveals a significant impact of NAFTA on strike-breaking. About half of union organizing efforts are disrupted by employer threats to transfer production abroad; for example, by placing signs reading "Mexico Transfer Job" in front of a plant where there is an organizing drive. The threats are not idle: when such organizing drives nevertheless succeed, employers close the plant in whole or in part at triple the pre-NAFTA rate (about 15 percent of the time). Plant-closing threats are almost twice as high in more mobile industries (e.g., manufacturing vs. construction).
These and other practices reported in the study are illegal, but that is a technicality, on a par with violations of international law and trade agreements when outcomes are unacceptable. The Reagan administration had made it clear to the business world that their illegal anti-union activities would not be hampered by the criminal state, and successors have kept to this stand. There has been a substantial effect on destruction of unions or in more polite words, "changes in labor market institutions and practices" that contribute to "significant wage restraint" within an economic model offered with great pride to a backward world that has not yet grasped the victorious principles that are to lead the way to freedom and justice.
What was reported all along outside the mainstream about the goals of NAFTA is also now quietly conceded: the real goal was to "lock Mexico in" to the "reforms" that had made it an "economic miracle," in the technical sense of this term: a "miracle" for U.S. investors and the Mexican rich, while the population sank into misery. The Clinton administration "forgot that the underlying purpose of NAFTA was not to promote trade but to cement Mexicos economic reforms," Newsweek correspondent Marc Levinson loftily declares, failing only to add that the contrary was loudly proclaimed to ensure the passage of NAFTA while critics who pointed out this "underlying purpose" were efficiently excluded from the free market of ideas by its owners. Perhaps some day the reasons will be conceded too. "Locking Mexico in" to these reforms, it was hoped, would deflect the danger detected by a Latin America Strategy Development Workshop in Washington in September 1990. It concluded that relations with the brutal Mexican dictatorship were fine, though there was a potential problem: "a democracy opening in Mexico could test the special relationship by bringing into office a government more interested in challenging the U.S. on economic and nationalist grounds" no longer a serious problem now that Mexico is "locked into the reforms" by treaty.
The threat is democracy, at home and abroad, as the chosen example again illustrates. Democracy is permissible, even welcome, but again, as judged by outcome, not process. NAFTA was considered to be an effective device to diminish the threat of democracy. It was implemented at home by effective subversion of the democratic process, and in Mexico by force, again over vain public protest. The results are now presented as a hopeful instrument to bring American-style democracy to benighted Mexicans. A cynical observer aware of the facts might agree.
Once again, the chosen illustrations of the triumph of democracy are natural ones, and are interesting and revealing as well, though not quite in the intended manner.
Markets are always a social construction, and in the specific form being crafted by current social policy they should serve to restrict functioning democracy, as in the case of NAFTA, the WTO agreements, and other instruments that may lie ahead. One case that merits close attention is the Multilateral Agreement on Investment (MAI) that is now being forged by the OECD, the rich mens club, and the WTO (where it is the MIA). The apparent hope is that the agreement will be adopted without public awareness, as was the initial intention for NAFTA, not quite achieved, though the "information system" managed to keep the basic story under wraps. If the plans outlined in draft texts are implemented, the whole world may be "locked into" treaty arrangements that provide transnational corporations with still more powerful weapons to restrict the arena of democratic politics, leaving policy largely in the hands of huge private tyrannies that have ample means of market interference as well. The efforts may be blocked at the WTO because of the strong protests of the "developing countries," notably India and Malaysia, which are not eager to become wholly-owned subsidiaries of great foreign enterprises. But the OECD version may fare better, to be presented to the rest of the world as a fait accompli, with the obvious consequences. All of this proceeds in impressive secrecy, so far.
@PAR SUB = The announcement of the Clinton Doctrine was accompanied by a prize example to illustrate the victorious principles: What the Administration had achieved in Haiti. Since this is again offered as the strongest case, it would be appropriate to look at it.
True, Haitis elected president was allowed to return, but only after the popular organizations had been subjected to three years of terror by forces that retained close connections to Washington throughout; the Clinton administration still refuses to turn over to Haiti 160,000 pages of documents on state terror seized by U.S. military forces "to avoid embarrassing revelations" about U.S. government involvement with the coup regime, according to Human Rights Watch. It was also necessary to put President Aristide through "a crash course in democracy and capitalism," as his leading supporter in Washington described the process of civilizing the troublesome priest.
As a condition on his return, Aristide was compelled to accept an economic program that directs the policies of the Haitian government to the needs of "Civil Society, especially the private sector, both national and foreign": U.S. investors are designated to be the core of Haitian civil society, along with wealthy Haitians who backed the military coup, but not the Haitian peasants and slum-dwellers who organized a civil society so lively and vibrant that they were even able to elect their own president against overwhelming odds, eliciting instant U.S. hostility and efforts to subvert Haitis first democratic regime.
The unacceptable acts of the "ignorant and meddlesome outsiders" in Haiti were reversed by violence, with direct U.S. complicity, not only through contacts with the state terrorists in charge. The Organization of American States declared an embargo. The Bush and Clinton administrations undermined it from the start by exempting U.S. firms, and also by secretly authorizing the Texaco Oil Company to supply the coup regime and its wealthy supporters in violation of the official sanctions, a crucial fact that was prominently revealed the day before U.S. troops landed to "restore democracy," but has yet to reach the public, and is an unlikely candidate for the historical record.
Now democracy has been restored. The new government has been forced to abandon the democratic and reformist programs that scandalized Washington, and to follow the policies of Washingtons candidate in the 1990 election, in which he received 14 percent of the vote.
Haitians seem to understand the lessons, even if doctrinal managers in the West prefer a different picture. Parliamentary elections in April 1997 brought forth "a dismal 5 percent" of voters, the press reported, thus raising the question "Did Haiti Fail U.S. Hope?" We have sacrificed so much to bring them democracy, but they are ungrateful and unworthy. One can see why "realists" urge that we stay aloof from crusades of "global meliorism."
Similar attitudes hold throughout the hemisphere. Polls show that in Central America, politics elicits "boredom," "distrust" and "indifference" in proportions far outdistancing "interest" or "enthusiasm" among "an apathetic public...which feels itself a spectator in its democratic system" and has "general pessimism about the future." The first Latin America survey, sponsored by the European Union, found much the same: "the surveys most alarming message," the Brazilian coordinator commented, was "the popular perception that only the elite had benefited from the transition to democracy." Latin American scholars observe that the recent wave of democratization coincided with neoliberal economic reforms, which have been very harmful for most people, leading to a cynical appraisal of formal democratic procedures. The introduction of similar programs in the richest country in the world has had similar effects. By the early 1990s, after 15 years of a domestic version of structural adjustment, over 80 percent of the U.S. population had come to regard the democratic system as a sham, with business far too powerful, and the economy as "inherently unfair." These are natural consequences of the specific design of "market democracy" under business rule.
Let us return to the prevailing doctrine that "Americas victory in the Cold War" was a victory for democracy and the free market. With regard to democracy, the doctrine is partially true, though we have to understand what is meant by "democracy": top-down control "to protect the minority of the opulent against the majority." What about the free market? Here too, we find that doctrine is far removed from reality, as several examples have already illustrated.
Consider again the case of NAFTA, an agreement intended to lock Mexico into an an economic discipline that protects investors from the danger of a "democracy opening." Its provisions tell us more about the economic principles that have emerged victorious. It is not a "free trade agreement." Rather, it is highly protectionist, designed to impede East Asian and European competitors. Furthermore, it shares with the global agreements such anti-market principles as "intellectual property rights" restrictions of a sort rich societies never accepted during their period of development, but now intend to use to protect home-based corporations: to destroy the pharmaceutical industry in poorer countries, for exampleand, incidentally, to block technological innovations, such as improved production processes for patented products; progress is no more a desideratum than markets, unless it yields benefits for those who count.
There are also questions about the nature of "trade." Over half of U.S. trade with Mexico is reported to consist of intrafirm transactions, up about 15 percent since NAFTA. For example, already a decade ago, mostly U.S.-owned plants in Northern Mexico employing few workers and with virtually no linkages to the Mexican economy produced more than one-third of engine blocks used in U.S. cars and three-fourths of other essential components. The post-NAFTA collapse of the Mexican economy in 1994, exempting only the very rich and U.S. investors (protected by U.S. government bailouts), led to an increase of U.S.-Mexico trade as the new crisis, driving the population to still deeper misery, "transformed Mexico into a cheap [i.e., even cheaper] source of manufactured goods, with industrial wages one-tenth of those in the U.S.," the business press reports. Ten years ago, according to some specialists, half of U.S. trade worldwide consists of such centrally-managed transactions and much the same is true of other industrial powers, though one must treat with caution conclusions about institutions with limited public accountability. Some economists have plausibly described the world system as one of "corporate mercantilism," remote from the ideal of free trade. The OECD concludes that "Oligopolistic competition and strategic interaction among firms and governments rather than the invisible hand of market forces condition todays competitive advantage and international division of labor in high-technology industries," implicitly adopting a similar view.
Even the basic structure of the domestic economy violates the neoliberal principles that are hailed. The main theme of Alfred Chandlers standard work on U.S. business history is that "modern business enterprise took the place of market mechanisms in coordinating the activities of the economy and allocating its resources," handling many transactions internally, another large departure from market principles. There are many others. Consider, for example, the fate of Adam Smiths principle that free movement of people is an essential component of free tradeacross borders, for example. When we move on to the world of transnational corporations, with strategic alliances and critical support from powerful states, the gap between doctrine and reality becomes substantial.
Free market theory comes in two varieties: the official doctrine, and what we might call "really existing free market doctrine": Market discipline is good for you, but I need the protection of the nanny state. The official doctrine is imposed on the defenseless, but it is "really existing doctrine" that has been adopted by the powerful since the days when Britain emerged as Europes most advanced fiscal-military and developmental state, with sharp increases in taxation and efficient public administration as the state became "the largest single actor in the economy (historian John Brewer)" and its global expansion, establishing a model that has been followed to the present in the industrial world, surely by the United States, from its origins.
Britain did finally turn to liberal internationalismin 1846, after 150 years of protectionism, violence, and state power had placed it far ahead of any competitor. But the turn to the market had significant reservations. Forty percent of British textiles continued to go to colonized India, and much the same was true of British exports generally. British steel was kept from U.S. markets by very high tariffs that enabled the United States to develop its own steel industry. But India and other colonies were still available, and remained so when British steel was priced out of international markets. India is an instructive case; it produced as much iron as all of Europe in the late 18th century, and British engineers were studying more advanced Indian steel manufacturing techniques in 1820 to try to close "the technological gap." Bombay was producing locomotives at competitive levels when the railway boom began. But "really existing free market doctrine" destroyed these sectors of Indian industry just as it had destroyed textiles, ship-building, and other industries that were advanced by the standards of the day. The U.S. and Japan, in contrast, had escaped European control and could adopt Britains model of market interference.
When Japanese competition proved to be too much to handle, England called off the game: the empire was effectively closed to Japanese exports, part of the background of World War II. Indian manufacturers asked for protection at the same time but against England, not Japan. No such luck, under really existing free market doctrine.
With the abandonment of its restricted version of laissez-faire in the 1930s, the British government turned to more direct intervention into the domestic economy as well. Within a few years, machine tool output increased five times, along with a boom in chemicals, steel, aerospace, and a host of new industries, "an unsung new wave of industrial revolution," Will Hutton writes. State-controlled industry enabled Britain to outproduce Germany during the war, even to narrow the gap with the U.S., which was then undergoing its own dramatic economic expansion as corporate managers took over the state-coordinated wartime economy.
A century after England turned to a form of liberal internationalism, the U.S. followed the same course. After 150 years of protectionism and violence, the U.S. had become by far the richest and most powerful country in the world, and like England before it, came to perceive the merits of a "level playing field" on which it could expect to crush any competitor. But like England, with crucial reservations.
One was that Washington used its power to bar independent development elsewhere, as England had done. In Latin America, Egypt, South Asia, and elsewhere, development was to be "complementary," not "competitive." There was also large-scale interference with trade. For example, Marshall Plan aid was tied to purchase of U.S. agricultural products, part of the reason why the U.S. share in world trade in grains increased from less than 10 percent before the war to more than half by 1950, while Argentine exports reduced by two-thirds. U.S. Food for Peace aid was also used both to subsidize U.S. agribusiness and shipping and to undercut foreign producers, among other measures to prevent independent development. The virtual destruction of Colombias wheat growing by such means is one of the factors in the growth of the drug industry, which has been further accelerated throughout the Andean region by the neoliberal policies of the past few years. Kenyas textile industry collapsed in 1994 when the Clinton administration imposed a quota, barring the path to development that has been followed by every industrial country, while "African reformers" are warned that they "must make more progress" in improving the conditions for business operations and "sealing in free-market reforms" with "trade and investment policies" that meet the requirements of Western investors. In December 1996 Washington barred exports of tomatoes from Mexico in violation of NAFTA and WTO rules (though not technically, because it was a sheer power play and did not require an official tariff), at a cost to Mexican producers of close to $1 billion annually. The official reason for this gift to Florida growers is that prices were "artificially suppressed by Mexican competition" and Mexican tomatoes were preferred by U.S. consumers. In other words, free market principles were working, but with the wrong outcome. These are only scattered illustrations.
High tech industry has always functioned by the same rules. A few weeks ago (September 29, 1997), an honest headline in the Wall Street Journal read: "In Effect, ITCs Steep Tariffs on Japan Protect US Makers of Supercomputers." The story reports the decision of the U.S. International Trade Commission to impose "steep antidumping duties on Japanese supercomputers," sending "a clear message abroad: Foreign supercomputers, keep out." The ITC ruled that a proposed sale by Japans NEC Corporation "could damage U.S. industry," in particular Cray Research, the main U.S. manufacturer of supercomputers. Cray is called "private enterprise"; its technology has relied heavily on public subsidy and its market has been the Pentagon and the Department of Energy, but profits and management are private. Japanese firms have yet to sell a single supercomputer to agencies funded by the U.S. government, while Japan is regularly bashed accurately for its efforts to protect its own industry and services. The whole farce is standard and natural under the rules of really existing free market capitalism. The biggest thug on the block basically does what he likes.
One revealing example is Haiti, along with Bengal, the worlds richest colonial prize and the source of a good part of Frances wealth, largely under U.S. control since Woodrow Wilsons Marines invaded 80 years ago, and by now such a catastrophe that it may scarcely be habitable in the not-too-distant future. In 1981, a USAID-World Bank development strategy was initiated, based on assembly plants and agroexport, shifting land from food for local consumption. USAID forecast "a historic change toward deeper market interdependence with the United States" in what would become "the Taiwan of the Caribbean." The World Bank concurred, offering the usual prescriptions for "expansion of private enterprises" and minimization of "social objectives," thus increasing inequality and poverty and reducing health and educational levels; it may be noted, for what it is worth, that these standard prescriptions are offered side-by-side with sermons on the need to reduce inequality and poverty and improve health and educational levels, while World Bank technical studies recognize that relative equality and high health and educational standards are crucial factors in economic growth. In the Haitian case, the consequences were the usual ones: profits for U.S. manufacturers and the Haitian superrich, and a decline of 56 percent in Haitian wages through the 1980s in short, an "economic miracle." Haiti remained Haiti, not Taiwan, which had followed a radically different course, as advisers must surely know.
It was the effort of Haitis first democratic government to alleviate the growing disaster that called forth Washingtons hostility and the military coup and terror that followed. With "democracy restored," USAID is withholding aid to ensure that cement and flour mills are privatized for the benefit of wealthy Haitians and foreign investors (Haitian "civil society," according to the orders that accompanied the restoration of democracy), while barring expenditures for health and education. Agribusiness receives ample funding, but no resources are made available for peasant agriculture and handicrafts, which provide the income of the overwhelming majority of the population. Foreign-owned assembly plants that employ workers (mostly women) at well below subsistence pay under horrendous working conditions benefit from cheap electricity, subsidized by the generous supervisor. But for the Haitian poor the general population there can be no subsidies for electricity, fuel, water, or food; these are prohibited by IMF rules on the principled grounds that they constitute "price control." Before the "reforms" were instituted, local rice production supplied virtually all domestic needs, with important linkages to the domestic economy. Thanks to one-sided "liberalization," it now provides only 50 percent, with the predictable effects on the economy. The liberalization is, crucially, one-sided. Haiti must "reform," eliminating tariffs in accord with the stern principles of economic science which, by some miracle of logic, exempts U.S. agribusiness; it continues to receive huge public subsidies, increased by the Reagan administration to the point where they provided 40 percent of growers gross incomes by 1987. The natural consequences are understood, and intended: a 1995 USAID report observes that the "export-driven trade and investment policy" that Washington mandates will "relentlessly squeeze the domestic rice farmer," who will be forced to turn to the more rational pursuit of agroexport for the benefit of U.S. investors, in accord with the principles of rational expectations theory.
By such methods, the most impoverished country in the hemisphere has been turned into a leading purchaser of U.S.-produced rice, enriching publicly-subsidized U.S. enterprises. Those lucky enough to have received a good Western education can doubtless explain that the benefits will trickle down to Haitian peasants and slumdwellers ultimately. Africans may choose to follow a similar path, as currently advised by the leaders of "global meliorism" and local elites, and perhaps may see no choice under existing circumstances a questionable judgment, I suspect. But if they do, it should be with eyes open.
The last example illustrates the most important departures from official free trade doctrine, more significant in the modern era than protectionism, which was far from the most radical interference with the doctrine in earlier periods, either, though it is the one usually studied under the conventional breakdown of disciplines, which makes its own useful contribution to disguising social and political realities. To mention one obvious example, the industrial revolution depended on cheap cotton, just as the "golden age" of contemporary capitalism has depended on cheap energy, but the methods for keeping the crucial commodities cheap and available, which hardly conform to market principles, do not fall within the professional discipline of economics.
After World War II, the U.S. broke from its protectionist tradition and called for liberalization of the international economy, recognizing that "the playing field" was appropriately tilted sharply in favor of U.S. firms. But business leaders intended to take no chances, as noted, and insisted on crucial reservations. One had to do with public subsidy. It is a fundamental component of free trade theory that public subsidies are not allowed. It was, however, widely understood that high tech industry "cannot satisfactorily exist in a pure, competitive, unsubsidized, free enterprise economy" and that "the government is their only possible savior," as the business press put the matter 50 years ago. The Pentagon system was quickly selected as the most efficient means to transfer public funds to private pockets. It is easy to "sell" to the public under the guise of security, and does not have the unwelcome side effects of social spending, which tends to be redistributive and democratizing, and is not a direct subsidy to corporate power.
So the system has functioned to the present, with variations as needed. The peak of market interference was reached by the Reaganites, who preached the gospel of market discipline to the poor at home and abroad ("Reaganite rugged individualism") while raising protection for U.S. manufacturers to postwar heights and conducting a "defense buildup [that] actually pushed military R&D spending (in constant dollars) past the record levels of the mid-1960s," Stuart Leslie notes. The public was terrified with foreign threats, but the message to the business world was plain and clear.
As soon as the Cold War ended, with the fall of the Berlin Wall in 1989, Washington informed Congress (and the business world) that military spending must continue with little change, in part to protect the "defense industrial base" virtually all of high tech industry offering dual-use technology to its beneficiaries to enable them to dominate commercial markets and enrich themselves at public expense.
All understand very well that free enterprise means that the public pays the costs and bears the risks if things go wrong; for example bank and corporate bailouts that have cost the public hundreds of billions of dollars in recent years. Profit is to be privatized, but cost and risk socialized, in really existing market systems. The centuries-old tale proceeds today without notable change, not only in the United States, of course.
Another equally venerable tale is the refusal of the public to accept such outcomes. Despite setbacks, popular struggles have made the world a far better place. There is no reason to doubt that the cycle can continue its generally upward course. Right now, popular movements are resilient and growing throughout the world, and can realistically aim for higher goals than seemed attainable not long ago. Skeptics who dismiss such thoughts as utopian and naive have only to cast their eyes on what has happened right here in South Africa in the last few years, an inspiring tribute to what the human spirit can achieve, and its limitless prospects lessons that the world desperately needs to learn, and that should guide the next steps in the continuing struggle for justice and freedom here too, as the people of South Africa, fresh from one great victory, turn to the still more difficult tasks that lie ahead.