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[casi] The Invisible Hand of the American Empire.

This is long!

Cheers, Ken Hanly

Wade is a prof. at LSE

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

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 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

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

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,

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

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