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This is long! Cheers, Ken Hanly Wade is a prof. at LSE http://www.lse.ac.uk/Depts/destin/wader.html Open Democracy 13 - 3 - 2003 The invisible hand of the American empire The United States rigs the international economic system to its own advantage, argues the distinguished international economist Robert Hunter Wade. Robert Hunter Wade Part one: Blueprint for dominance outlines the agenda for a modern day Roman Emperor who wants to control the world. It anatomises an international financial architecture, a set of global institutions and a foreign policy remarkably similar to those in the real world - and shows just how these would work to deliver America's interests above all others. Part two: The messy reality shows that in the real world the Emperor cannot have everything his own way. Other key nations have to be drawn into networks and alliances from which they too benefit, and draw yet other nations into. But, says Wade, the system inevitably excludes the majority - with dangerous results. Part one: Blueprint for dominance Before 11 September 2001, calling the United States an imperial power was generally regarded as a criticism or an insult. Since then, many neo-conservative commentators have begun to talk with pride and promise of the 'new American empire'. By 'empire' they refer to power relations between states. But there is another face to empire, which is the framework of international economic rules and rule-making organisations. Today's international economic architecture ensures that the normal operation of world market forces (the process we call 'globalisation') tends to yield disproportionate benefits to Americans, and confers autonomy on US economic policy makers while curbing the autonomy of all others. It is legitimised by the widespread belief that, in the words of Alan Greenspan, chairman of the US central bank: "Markets are an expression of the deepest truths about human nature and.as a result, they will ultimately be correct." The economic benefits that accrue to the United States as the result of the normal working of market forces within this particular framework provide the financial basis of American military supremacy. To appreciate how this works, imagine you are a modern-day Roman emperor, the leader of the most powerful country in a world of sovereign states, international markets, and capitalist relations of production. How do you exercise statecraft to bolster the economic pre-eminence of your country, allow your citizens and only your citizens to consume far more than they themselves produce, and keep challengers down, without having to throw your military weight around more than occasionally? International financial architecture Your aim on the economic side is to create an international political economy that allows you to be the world's biggest debtor while escaping the usual drawback of being a debtor - vulnerability to the demands of the creditors. Then you can sustain the world's strongest military power while enabling your citizens, or at least the wealthier half of them, to consume more per head than anyone else. To support your high military spending per head you do not have to make your citizens cut their consumption and boost their savings, or depreciate your currency, or deflate your economy, all unsatisfactory options. Instead you harness the savings of the rest of the world and avoid having to choose between more guns and more butter. The rest of the world indirectly pays for your military supremacy, not your taxpayers. To achieve this you need an international financial architecture that gives you two basic things. Autonomy to decide on your exchange rate and monetary policy in response to your own national objectives, while having other countries depend on your support in managing their own economies. And the principle of exit, or liquidity, as the basic principle of the international economic order, so as to give your asset holders maximum freedom to move in and out of markets according to short-run profit considerations. Three architectural features together can give you these things. The first is no constraint on your ability to create your currency at will (such as a dollar-gold link), so that you can finance almost unlimited deficits with the rest of the world by selling your government's debt securities. The second is your currency as the main international currency for foreign exchange reserves, international trade, and foreign exchange speculation. This ensures robust demand from the rest of the world to hold your assets, especially from the regions that are accruing the current account surpluses that are the other side of your deficits. Your ability to control - by force if necessary - the energy regions and the supply routes helps to bolster the dominance of your currency. The third is the whole world as a single integrated capital market, with no barriers to capital mobility and no barriers to your financial services firms to enter and exit other countries' markets. This is the highest expression of the liquidity principle, and it gives you the central international location. You complement these three international features with domestic policies highly favourable to the financial sector, to give you the biggest and deepest financial sector, with low transactions costs, high transparency of company accounts, and sanctions against corruption. Rewards to finance These conditions enable your financial firms to capture most of the very high profits to be made from financial transactions. With world liquidity (specifically, foreign exchange reserves) being constantly pumped up by your deficit financing, and you having the biggest financial sector but only small savings of your own, you become the world's savings entrepôt. Your financial firms arrange the inflows of foreign funds needed to finance your deficits; and they also repackage these funds and 'invest' them back in the rest of the world. Hence your firms benefit in boom times; and benefit in crisis times in the rest of the world (provided the crisis is not bigger than regional), because they do the transactions of flight capital from the crisis region into your safe assets. Autonomy and power The same conditions give you autonomy to set the value of key parameters in response to domestic conditions without having to secure the cooperation of other ostensibly independent states; while making it difficult for those states to set the values of their own key parameters without your cooperation or in the face of your opposition. You generally want your currency to be highly valued relative to others. The high dollar makes your imports relatively cheap, which keeps domestic inflation down. At the same time, the inflow of foreign funds needed to finance your deficits exerts downward pressure on your domestic interest rates, despite the high dollar. The lower interest rates encourage your citizens to consume and invest. High investment (notwithstanding low savings) keeps parts of your economy on the world frontier of innovation and productivity. On the other hand, you may sometimes want your currency to have a relatively low value in order to boost exports and revive domestic industry. Whatever, you want to be able to shift the (private) currency markets in your direction just by voicing an expectation. If private market agents believe you have the ability to secure the result you want, they will act in a way that secures the result you want. When your currency accounts for the great majority of other countries' foreign exchange reserves, you can be sure that foreign holders of your assets will be very attentive to your signals about the direction you want the currency to move in. Having the private financial sector highly responsive to your verbal signals gives you immense power at little cost. Not only can you affect your own domestic conditions just by managing expectations; you can also shift your parameters and shift the markets' expectations about conditions elsewhere so as to hurt the macroeconomic conditions of would-be rival states. Your would-be rival states may have to secure your cooperation in setting the value of some of their key parameters. For example, if they want to revive their economies from a downturn by depreciating their currency against yours, they need your cooperation. And not just rival states. The system encourages poor states to borrow internationally, with the debt denominated in your currency and at variable interest rates linked to your interest rates. So your decisions about your currency and your interest rate profoundly affect economic conditions in poor states, but not vice versa. In conditions of open capital markets, floating exchange rates, and debt incurred at variable interest rates, poor economies are likely to have lower average growth, more volatile growth, and hence higher demand for foreign exchange reserves of your assets. This helps to make the rest of the world responsive to your voice signals about your intentions towards your currency value and your interest rates, and to ensure that over the long haul the gap between you in income, wealth and productivity does not come close to closing. International organisations To supervise this international framework you need a flotilla of international organisations that look like cooperatives of member states and confer the legitimacy of multilateralism, but that you can control according to the principle of unilateral cooperation ("We'll cooperate provided we get to set the rules and can veto outcomes we don't like.") In particular, you need some of these organisations to operate a bail-out mechanism that gives priority to your creditors and displaces losses from periodic panics on to the citizens of the borrowing country, while at the same time advancing your agenda of worldwide liberalisation, privatisation and free capital mobility via conditionality on the bail-outs. The conditionality may include cuts in the borrowing country's public spending, in order to free up resources for debt servicing; a domestic recession for the same reason; and a currency devaluation to generate more exports. At the next round this creates intense competition between exporters in the rest of the world, which gives you an inflow of imports at constantly decreasing prices relative to the price of your exports and keeps your inflation down and your living standards up, as their terms of trade and their living standards fall. The bail-out mechanism through international organisations has another useful function, to let you shift the risks of debt default away from your private banks to the member states of the international organisations. In the face of a possible debt default to your banks, you order one or more international organisations to lend heavily to the indebted countries, on the understanding that the countries will use the money to repay your banks. Your banks take the private profits, and you help them to socialise the losses on to the rest of the world. Likewise you also use international organisations to confer the legitimacy of multilateralism ('the wish of the world community') on your stringent rules of copyright and patent protection, and to help with enforcement in the rest of the world. Copyright and patents are the one area where you do not preach the doctrine of liberalisation; here you stress the imperative of protection - your artists and innovators being the predominant holders of copyright and patents. You get the international organisations to embrace rules that set a long minimum period for patents, that maximise the range of things over which private patent rights can be granted (for example, over naturally-occurring micro-organisms and micro-biological processes and over 'community knowledge', including knowledge of traditional healers), and that minimise the range of things over which a state can refuse to grant patent rights. Your firms must be able to patent anything they wish to and then securely enjoy the rents for twenty years, at least. You also use international organisations to secure agreements that make it illegal for other countries to treat your firms operating in their territory differently from the way they treat their own firms. Measures to place your firms' foreign subsidiaries under various sorts of performance requirements -for local content, exports, joint venturing, technology transfer - are not allowed. They might limit your firms' freedom of action. Your aim is to facilitate your firms' shifting of lower value-added operations to lower wage countries while maintaining the higher value-added operations (innovation, marketing and distribution) in your territory. You also support agreements for reduced trade barriers, and you sponsor multilateral negotiations to do so in the name of 'development rounds'. But you craft the agreements so that you can maintain your barriers against other countries' exports in sectors important for your voters and financial backers - but now described not as protection but as measures to protect your health, safety, the environment, and national security. And, with whatever rhetorical justification, you maintain an escalation of obstacles to trade, such that the higher the value added, the higher the obstacles - therefore the higher the probability that profit-seeking firms will maintain the high value-added operations in your territory. Foreign policy Your foreign policy seeks to befriend the middle classes elsewhere and make sure they have good material reasons for supporting the framework; and make it unlikely that elites and masses should ever unite in nativistic reactions to your dominance or demand 'nationalistic' development policies that nurture competitors to your industries. Your foreign policy needs to include a strategic immigration policy that attracts the best brains in the rest of the world to your universities, firms and research institutes. You want to have media, business schools, universities, think tanks and management consultants that are independent enough to provide a feedback loop on how to keep the system and your dominant position in it from falling over the edge of its own contradictions. The bottom line This international economic architecture allows your people to consume far more than they produce; it allows your firms and your capital to enter and exit other markets quickly; it locks in net flows of technology rents to you from the rest of the world for decades ahead; and through market forces apparently free of political power it reinforces your dominant position in relation to other states. All the better if your social scientists explain to the public that a structure-less and agent-less process of globalisation - relentless technological change shrinking time and distance - is behind all this, causing all states, including your own, to lose power vis-à-vis markets. You do not want others to think that globalisation within the framework you have constructed fortifies your power over other states, complementing your military dominance. Part two: The messy reality My interpretation, in part one, of the US role in the world economy since the end of the Bretton Woods regime in the 1970s suggests Machiavellian cunning. The reality was far less planned. Moreover, Europe and Japan have joined in to ensure that they too benefit from rigging the system. My account also ignores how the system has evolved over time. The statecraft strategy as I describe it applies to the period since the 1970s. Earlier in the 20th century the US dominated through production, and therefore faced recurrent crises of excess capacity or over-accumulation of capital. It responded with varying combinations of New Deal type investments in infrastructure, education and social spending, Marshall Plan type investments abroad, privatisation drives, and war - means to absorb excess capacity in the US, create new consumers abroad, or destroy capacity abroad. Since the 1970s the American system has developed a complementary line of response, domination through finance, as a way of expanding the play of the liquidity principle on behalf of US holders of financial assets - to make them mobile enough to save themselves from the periodic crises of excess capacity in the US and elsewhere. My account emphasises how the modern-day emperor seeks to cement in this kind of domination through finance. Again, we should distinguish between the faults of a very unequal, unipolar structure of wealth and power, on the one hand, and the faults of the state that occupies the top position, on the other. We can be critical of the US role while still recognising that - if the structure is to be as unipolar as it is - the world is probably better off with the US state on top than any of the likely alternatives. Certainly America's engineering of its dominance has at times been for the general good, when it used its clout to 'think for the world'. But it is also true that the US has often used its clout solely in the interests of its richest citizens and most powerful corporations, and this latter tendency has been dominant lately. Think of the US position on climate change, its dismissal of the threat of global warming so that it can continue to pollute the planet on the cheap. Think of its protection of agriculture, steel, apparel, and footware; its privileging of US oil corporations; its willingness to invade Iraq partly to make sure that Russian, French and Chinese companies do not get a lock on Iraq's enormous oil reserves and that US firms get enough influence to break Opec and maintain world prices within an upper and lower band. Think of what the US is pushing through the World Trade Organisation (WTO) and other international economic organisations. My account of what the emperor wants in patents and copyright corresponds closely to what the US has obtained in the WTO's Trade-Related Intellectual Property Rights (TRIPS) agreement. My account of what the emperor wants in no restrictions on foreign direct investment corresponds closely to the WTO's Trade-Related Investment Measures (TRIMS). Then there is the WTO's General Agreement on Trade in Services (GATS), which is facilitating a global market in private health care, welfare, pensions, education, and the like, in which US firms tend to have an advantage. This may well undermine political support for universal access to social services in developing countries and facilitate middle-class 'exit' from their nation as a fate-sharing community - making any kind of nationalistic or regional challenge to the current world rules that much less likely. And the US has steered the World Bank - through congressional conditions on the replenishment of the International Development Association (IDA), the soft-loan facility - to launch its biggest refocusing in a decade, a 'private sector development' agenda devoted to the same end of accelerating the private (and non-governmental organisation) provision of basic services on a commercial basis. The World Bank has made no evaluation of its earlier efforts to support private participation in social sectors. Its new private sector development thrust, especially in the social sectors, owes almost everything to intense US pressure. At the same time as the US has been leading the drive to coerce or induce other countries to give up industrial policies to promote upgrading and diversification of their industries and services (partly via the WTO agreements), the US itself has for decades mounted a large-scale industrial policy that nurtures high-tech industries (including computers, advanced sensor devices, stealth materials, aircraft) with massive amounts of public finance and public authority. Much of it is flatly inconsistent with WTO agreements, but is protected from sanction by the rhetorical shield of 'defence policy'. But the US's single most important thrust since the 1970s has been for open capital accounts and freedom of entry and exit to financial service firms - because once these two things are in place worldwide they constitute a parametric shift in the whole world economy. All states then lose power to resist other parts of the US agenda. This is what lies behind then US Deputy Treasury Secretary Lawrence Summers' statement in 1996: "At Treasury, our most crucial international priority remains the creation of a well funded, truly global capital market." So the US Treasury and the senior management of the International Monetary Fund (IMF) got the governing body of the Fund to endorse a plan to change the articles of agreement of the Fund for only the fourth time in its history, in 1997, to add 'the promotion of capital flows' to the goals of the Fund and add 'the capital account' to the jurisdiction of the Fund. The Fund, backed by the US Treasury, even went so far as to twist the arm of Ethiopia, one of the poorest countries in the world, to open its capital account in 1996-97. When the government refused (advised by World Bank chief economist Joseph Stiglitz) the Fund stopped Ethiopia's eligibility for very cheap loans (that is, its eligibility for the Extended Structural Adjustment Programme), even though the government had already met virtually all the other of the Fund's conditions. With access to the cheap loan programme denied Ethiopia also lost its eligibility for several other sources of cheap funds that are cross-conditional on a country's being certified as eligible by the Fund, including cheap funds from the World Bank, the European Community, and aid from bilaterals (for the rest of the story see "Capital and revenge: the IMF and Ethiopia" by Robert Hunter Wade in Challenge, September/October 2001, 67-75). The impetus to hard-wiring in a world commitment to open capital accounts stalled with the East Asian crisis of 1997-98. But already by 1999 IMF Managing Director Michel Camdessus was saying, "I believe it is now time for momentum to be re-established.Full liberalisation of capital movement should be promoted in a prudent and well-sequenced fashion." What is disquieting about statements like these is that they reflect not so much 'failure to learn' as 'unlearning'. The present push for free capital mobility is a repetition of that of the 1920s. Then the US and the UK governments and bankers concerted their demands for a new financial architecture based on balanced budgets, independent central banks, restoration of the gold standard, and free capital movements. American and Britain pushed this agenda through bilateral dealings with war-devastated countries of Europe and through the Financial Committee of the League of Nations. The policies helped to usher in a spectacular financial boom that ended in economic collapse. Nevertheless, four years into the Depression the World Economic Conference of 1933, led by the US and the UK, continued to make the same four demands, with special emphasis on independent central banks and abolition of capital controls. The lesson was finally learned in the 1944 Bretton Woods agreement, which left the option of capital controls to the discretion of individual states (provided only that the controls were not intended to restrict trade). Keynes considered this to be about the most important part of the agreement. "What used to be heresy is now endorsed as orthodox", he wrote. "Our right to control the domestic capital market is secured on firmer foundations than ever before, and is formally accepted as a proper part of agreed international arrangements." 'Globalisation' - a pretext for maintaining the status quo The current talk about 'globalisation' presents it as a general shrinkage of time and distance and widening of opportunities for all, with a corresponding erosion of the power of states. Joseph Nye, author of The Paradox of American Power (Oxford University Press, 2002), suggests that, although the world is very much 'unipolar' on the chessboard of classic interstate military issues, it is 'multipolar' or 'balance of power' on the chessboard of interstate economic issues, and 'chaotically organised among state and non-state actors' on the third chessboard of transnational economic issues. "It makes no sense at all to call this [the second and third chessboards] a unipolar world or an American empire," he says. It is true that Europe and East Asia are not as passive as my empire account suggests. For example, of the three-quarters of total world foreign currency reserves that are held in US dollars, well over half are held by East Asian governments. And this reflects not only their large current account surpluses but also a policy strategy to preserve export competitiveness by maintaining a relatively low value of their currencies vis-à-vis the dollar. Now the imbalances are so large that if the US authorities want to make the dollar fall in value gradually rather than precipitously they do need to secure the cooperation of East Asian governments - and others - to go on buying US liabilities and not suddenly start selling. Nevertheless, the bigger story is that economic globalisation is being channelled by rules of the international economic regime in the making of which the US state has exercised by far the dominant voice. Rules such as those for patents and copyright - which far from shrinking time and distance actually slow down the diffusion of technology to the rest of the world and boost technology rents flowing to, disproportionately, Americans. And rules such as those that result in the US dollar being the main international currency, the US having the biggest financial sector, and free capital mobility worldwide. Globalisation so constructed frees the US government of constraints in key areas of economic policy while putting other states under tighter constraints. This is the paradox of economic globalisation - it looks like 'powerless' expansion of markets but it works to enhance the ability of the United States to harness the rest of the world to its own economic rhythms and structure, to fortify its empire-like power status. It is true and important that many people in the world, especially in East Asia, are a lot better off than they were twenty years ago, and that this improvement would not have been possible had they not had access to rich country markets and rich country technology. On the other hand, average living standards have risen hardly at all in Latin America, Africa, the non-oil Middle East and much of South Asia since 1980. World income inequality has probably widened (as measured, say, by the ratio of the average purchasing-power-parity income of the top 10 per cent of the world's population, to that of the bottom 10 per cent). The surge of jobs in apparel in China and Mexico during the 1990s - thanks to exports to North America - went with a fall in real wages and a sharp deterioration in working conditions (measured by the 'startlingly high' incidence of violence and severed limbs and fingers in factories owned by Taiwanese, Korean and Hong Kong intermediaries). Slow economic growth and vast income disparities, when seen as blocked opportunities, breed cohorts of partly-educated young people who grow up in anger and despair. Some try by legal or illegal means to migrate to the west; some join militant ethnic or religious movements directed at each other and their own rulers; but now the idea has spread amongst a few vengeful fundamentalists that western countries should be attacked directly. The US and its allies can stamp out specific groups by force and bribery. But in the longer run, the structural arrangements that replicate a grossly unequal world have to be redesigned, as we did at the Bretton Woods conference near the end of the second world war, so that globalisation working within the new framework produces more equitable results. Historians looking back a century from now will say that the time to have begun was now. http://www.opendemocracy.net/debates/article.jsp?id=6&debateId=77&articleId= 1038 _______________________________________________ Sent via the discussion list of the Campaign Against Sanctions on Iraq. To unsubscribe, visit http://lists.casi.org.uk/mailman/listinfo/casi-discuss To contact the list manager, email casi-discuss-admin@lists.casi.org.uk All postings are archived on CASI's website: http://www.casi.org.uk