Review of Panic Rules
By Jeremy Brecher
A funny thing happened on the way to the New Millenium: the Old Millenium crashed. According to economist Paul Krugman, "Never in the course of economic events -- not even in the early years of the Depression -- has so large a part of the world economy experienced so devastating a fall from grace."
If you leaf back through the writings of mainstream economists and media pundits over the past decade, you will discover that such a global economic crisis couldn't happen; that it wasn't happening; that it wasn't as bad as people said; that it probably was a good thing in the long run; and that, anyway, it's over. If you want to escape this miasma of denial, read Robin Hahnel's Panic Rules!
Hahnel, himself an economist, challenges the economic dogma that unregulated markets, free trade, and globalization necessarily improve global economic efficiency, let alone that they must lead to benefits for all. Since the market doesn't charge firms for the environmental and social damage they do, unregulated markets give them an incentive to dump their wastes as cheaply as they can and to drive small farmers off the land even if they then have to live in squalor in already-bursting cities. Conversely, the market doesn't give individual firms an incentive to invest in education or healthcare, even if these are far more "efficient" means of creating well-being for society as a whole than producing sports utility vehicles.
When corporations and private wealth can move without regulation in the global free market, workforces, communities, and countries are forced to compete to attract footloose capital. The result has been called a "race to the bottom," in which environmental standards, social protections, and incomes are drawn down toward those of the poorest and most desperate. Hahnel shows that this was occurring -- even in globalization's boom phase.
Something else was happening, too -- the accelerating growth of a global financial capital with little or no relation to the production of goods and services. New borrowing worldwide increased twentyfold from 1983 to 1998 while production only tripled. Daily trading in currency markets grew from $0.2 trillion in 1986 to $1.5 trillion in 1998. Less than two percent of that $1.5 trillion is used to finance international trade or investment in plant and capacity; an incredible 98 percent is for purely speculative activity.
Officials from the U.S. and the IMF (International Monetary Fund) roamed the world, encouraging countries to "liberalize" their economies -- open them up to unrestricted flows of goods, services, and capital. Speculative capital poured into so-called emerging markets: Investment by mutual funds in emerging markets, for example, increased from $1 billion in 1991 to $32 billion in 1996.
Trouble was, the money could pour out even faster than it poured in. Hahnel traces how an apparently local crisis in Thailand rapidly spread around the globe. In 1998, Thai GDP fell by 8 percent; in Indonesia it shrunk by 14%; there were roughly comparable declines in South Korea, Hong Kong, Malaysia, and Russia. In Indonesia, 20 million people lost their jobs in a year as the unemployment rate rose from less than 5 percent to more than 13 percent, and the number living in absolute poverty quadrupled to 100 million.
Faced with what threatened to become a global financial meltdown, the IMF rode in to the "rescue." Oh, woe to those visited by such rescuers! In exchange for further loans, it imposed ruinous "conditionalities" under which countries had to raise interest rates, privatize public investments, open their economies to unlimited foreign ownership, cut social welfare, and rewrite their labor laws to eliminate workers' rights. The goal was to turn each stricken country into what Hahnel calls a "debt-repayment machine."
Hahnel quotes, of all people, conservative economist Milton Friedman saying that "IMF bailouts are hurting the countries they are lending to, and benefiting the foreigners who lend to them. . . . This is a different kind of foreign aid. It only goes through countries like Thailand to Bankers Trust." One example of the suffering caused by IMF "conditionalities": Oxfam International estimates that, in the Philippines alone, IMF-imposed cuts in preventative health care programs will result in 29,000 deaths from malaria and an increase of 90,000 in the number of untreated tuberculosis cases. Tribunals investigating "crimes against humanity": Take note!
Business page headlines proclaim that stocks have rebounded, currencies have recovered, and the crisis is therefore over. True, some stock markets and some currencies have rebounded, but 40 percent of the world remains in recession and poverty continues to grow. And since the tidal waves of speculative capital sloshing around the world remain undiminished, a global meltdown remains a catastrophe just waiting to happen.
Meanwhile, global corporations based in the U.S. and Europe are gobbling up the economic resources of countries that have spent the past century struggling to escape from colonialism. A Washington Post article in late 1998 describes how "Hordes of foreign investors are flowing back into Thailand, boosting room rates at top Bangkok hotels despite the recession. Foreign investors have gone on a $6.7 billion shopping spree this year, snapping up bargain-basement steel mills, securities companies, supermarket chains and other assets." And IMF "conditionalities" require that countries eliminate laws that might prevent this neocolonial asset grab. Perhaps this is one of the reasons that the world's 200 richest people have doubled their wealth in the past four years.
The economic mainstream is divided on what to do to prevent future meltdowns. What Hahnel dubs the "A Team" -- AKA free-traders, globalizers, or the Washington Consensus -- calls for even more liberalization and even less "interference" with the workings of the market. An emerging "B Team," in contrast, is modernizing the ideas economist John Maynard Keynes developed in the Great Depression regarding the need for global financial regulation and coordinated fiscal and monetary policies worldwide in order to ward off economic meltdowns in the future.
The A Team's approach, according to Hahnel, is just what got us into the global mess in the first place. Some of the B Team's proposals could help stabilize the system, but without additional, more radical measures, they will also perpetuate the global economy's drive toward increasing inequality and environmental degradation. They only deserve support if they are combined with other measures which would actually reduce inequalities and environmental destruction -- such as major debt relief for impoverished countries and price supports for third world exports.
When Hahnel presents his own alternatives, it is a shock to hear him, sounding like the most orthodox of economists, calling for more "global efficiency." But he makes clear that "efficiency" should not be equated with "profitability" -- because private profit leaves out all those "external" costs and benefits that accrue to society as a whole rather than to wealth holders. And he makes clear that environmental destruction is the most blatant kind of inefficiency. Instead, true efficiency requires that non-market institutions compensate for the "inefficient" biases of the market in order to "get prices right." He also points out that, in today's global economy, equity requires international cooperation to set non-market interest rates and terms of trade to distribute more of the benefits of globalization to the poorer economies. And Hahnel makes clear that "efficiency" should not be pursued at the expense of other values like equity, democracy, diversity, solidarity, or environmental sustainability.
How are these goals to be achieved? Hahnel describes what has been called the "Lilliput Strategy," in which grassroots organizations, unions, and independent institutes and coalitions cooperate across national borders to contest the negative aspects of globalization. He points out that this approach has already won some important victories -- such as the global grassroots campaign that recently blocked negotiation of the MAI (Multilateral Agreement on Investment), scotching what has been called a Magna Carta for global corporations. While the immediate objective of the Lilliput Strategy, Hahnel argues, should be to stop corporate-sponsored globalization in its tracks, it can and should also start the process of building a system of equitable international cooperation. Only in such a system can globalization provide the benefits that today it promises but in reality denies.
After describing the economic "A Team" and the "B Team", Hahnel states that "a C Team with a very different agenda and policies is needed." Panic Rules! provides the "C Team's" play book.