Naomi Klein: The Shock Doctrine

I'm only a tenth of the way through Naomi Klein's "The Shock Doctrine", but its already looking like a truly great piece of analysis. I may write more about the book after I've finished reading it, but for now, have a look at this short film which seems to capture the essence of her thesis very well.

"This is the secret history of the free market. It wasn't born in freedom and democracy. It was born in shock."

More info here.

2nd worst President ever?

A recent poll of 109 US historians showed 61 per cent viewing George Bush as the worst President ever, and a practically unanimous 98 per cent describing his administration as a failure.

Said one:

"No individual president can compare to the second Bush. Glib, contemptuous, ignorant, incurious, a dupe of anyone who humors his deluded belief in his heroic self, he has bankrupted the country with his disastrous war and his tax breaks for the rich, trampled on the Bill of Rights, appointed foxes in every henhouse, compounded the terrorist threat, turned a blind eye to torture and corruption and a looming ecological disaster, and squandered the rest of the world’s goodwill. In short, no other president’s faults have had so deleterious an effect on not only the country but the world at large"

Its tempting in light of this to view the post-Bush era as offering the prospect of some form of redemption for the United States government, least implausibly under the Presidency of Barack Obama. But as Clive Crook implies, this is not a good election to win, precisely because of this expectation that the end of Bush will be the end of the problems he created. In fact, the end of Bush will be the start of a hard process of paying the costs of his presidency; both for imperialists and for the victims of imperialism.

For example, it is highly unlikely that any Democratic President will raise taxes on America's wealthy to anything like the extent required to offset (a) the estimated trillions lost on the Iraq war and (b) the credit binge of the last 8 years. Probably much of the fiscal belt-tightening will be borne by the middle and lower classes, who will also be suffering from the US mortgage crisis and from the recession more generally. The next President will either have to continue Bush's fiscal recklessness or - and this is far more probable - be the person who makes the US public pay the consequences of that recklessness. Having to choose between being an idiot and being the bad guy is not a good position to be in.

The other main reason this is not a good election to win is Iraq. The "surge" of extra US troops into Iraq was supposed to reap political benefits for the US project. Without those having materialised, the escalation has served only to press the pause button on (the very worst of) a conflict which, as we've seen in Basra and Baghdad recently and as we will probably see in Kirkuk sooner rather than later, is a long way from being over. Much bloodletting will take place on the next President's watch, and their ability to blame it on Bush will diminish rapidly as time passes.

More broadly, Bush is passing to his successor a strategic catch-22 where failure appears to be the only option for the American Empire. I am assuming that, whoever wins the election, the central assumption that the US has the divinly-ordained right to run the world (provide "leadership" as its called) will continue to define US policy, albeit with some tactical modification. In that case, the bind the next President will be in is this: leave Iraq and you abandon a key square on the oil and gas chessboard to (at least) one of your bitterest rivals (Iran definitely, plus Russia and China in all likelihood); stay, and you continue to lose an unwinnable war, and continue to pay the fiscal consequences of doing so in a time of economic calamity.

In short, there is real scope for the next Presidency to end up being one that is seen as a very serious failure, and not entirely through fault of its own. A variety of disastrous consequences from the administration of Bush the Worst will be reaped by (in descending order of tragedy from high to zero) the people of Iraq, the people of the United States and the imperial project of the US governing class. Bottom line: this will not all be over come January 2007.

Neo-liberalism is unwell

In the Guardian, Martin Jacques places the temporary nationalisation of UK bank Northern Rock in a context of broader changes taking place in the global political economy. Jaques sees the West's current financial problems as symptomatic, not so much of capitalism's cyclical ups and downs, but of a seminal transformation of the nature and balance of economic power.

"[T]he underlying cause", says Jacques, "is permanent and far-reaching - a fundamental shift in power from the developed world to the developing world, and above all China and India. We have not witnessed anything like this since the inception of the west as an industrial powerhouse in the 19th century."

Read the whole thing here.

Last July, as the credit crisis began, Larry Elliot (whose writing is always an education) offered a good analysis of the economic imbalances and structural deficiences that are driving the changes that Jacques describes. Its worth revisiting that that article, which you can read here. The headline writer had it about right: "The hangover has kicked in - and here come the Chinese with the bill"

Elsewhere, over at the indispensible Tomdispatch, two other aspects of Western economic weakness are explored. Chalmers Johnson looks at how the United States' attempts dominate the globe militarily, without being able to meet the enormous costs that endevour involves, is paving the way to national bankruptcy in a classic case of imperial overstretch. Michael Klare looks at the part cheap oil played in inflating the West's economic bubble, and the part its rocketing price will play in bursting that bubble.

For more on the failures and contradictions inherent in the Anglo-Saxon economic model, see my articles "Bad Medicine" (on Western attempts to get the French to be more like us economically, which seem even more comical with hindsight), and "The Credit Crunch and the Free Market", (discussing the dissonance between neo-liberal policy and practice).

If Jacques is right, and we really are "only at the very beginning of the biggest geopolitical shift since the dawn of the industrial era", then we can expect the rest of this story to be messy and, at times, extremely painful. The question, as ever, will be who bears the costs of neo-liberalism's hubris.

The Credit Crunch and the Free Market

I want to aim this short essay at the lay reader, rather than at people with some technical knowledge of economics and/or public policy. The recent turbulence on the global markets gives us a good opportunity to re-examine some fundamental political questions about how economies function: questions that have relevance to the world outside of the City of London and Wall St. Now people's eyes tend to glaze over when subjects like this come up, but stick with me because I'm going to try and keep it straightforward. Economic issues seem complex largely because they're often dressed up in a lot of technical jargon. In fact, the basic principles are pretty simple for any of us to grasp. And once we have grasped them, the world we inhabit is illuminated in all sorts of ways.

Background

In essence, here's what's been happening on the markets in recent weeks.

US lenders have been selling mortgages to high-risk borrowers. That is to say, people who are less likely to be able to pay those mortgages back: those on low incomes, with bad credit ratings, and so on. These are called "sub-prime" mortgages. They carry high-interest rates because of the unusually high level of risk associated with the lending.

Because they carry high interest rates, these kinds of debt can make lenders a lot of money. That means they can be sold on to other lenders at a profit. Often the debts are bought and sold, again and again, as part of a package comprising a selection of debts. Gradually these packages have become more and more complex and, as the international financial markets have been able to escape official scrutiny, they've become less transparent as well. That's all fine as long as things go well. But high profits are made in these markets precisely because the debts that are being bought and sold are high-risk - i.e. there's a high-risk that things might stop going well. And now they have.

In recent months, low-income, low-credit-rating US borrowers have started to default on their sub-prime mortgages. That means that those high-profit debts have started to turn bad: people have lent money that they're now not going to get back. The difficulty is that because these debts have been bundled up and sold off, and then sold on again, and again, in all sorts of complex and non-transparent packages, people aren't entirely sure where the bad debts actually are now. The result is panic.

Investors now have a couple of problems. First, they're having to work out how much money they may have lent and now lost. Second, to cover these losses they may want to borrow, but the people they want to borrow from are in the same predicament: nursing potentially major losses that they're unable to calculate. The result is that less money is being lent overall. If less money is being lent then less money is being invested, so less shares are being bought. If less shares are being bought then the value of companies starts to fall on the stock market. That's what we've seen in the last couple of weeks.

Of course, when stock prices fall, companies stop investing in new products and services, and start laying people off or cutting their pay. That means that consumers have less money to spend, which means companies see their revenue go down, which reinforces the cycle and sends us towards recession territory. That's where this may eventually lead.

Think of the world economy as a badly knitted jumper and of those low-income mortgage holders as a loose thread. When they default on their mortgages the thread is tugged, and the whole thing can potentially unravel.

Implications: Free market vs Intervention

What does all this say about how economies are run? Political debate on economic questions is often characterised as being between two sides: the free market and state intervention. Either government plays an active role in the economy, or the markets are left to their own devices. Overwhelmingly in the West, political discourse is weighted in favour of the market approach. This in a sense is unsurprising. Our collective political discussions take place in a media environment that is largely owned by private corporations which are legally obliged to maximise profits for their shareholders. Such institutions are generally unlikely to employ journalists and commentators who speak in favour of high taxes and stricter business regulation, whether such policies are in the wider public interest or not. All of us - voters and decision-makers – develop our understanding of the world within a political culture disproportionately influenced by corporate media and lobbying. Our understanding of how economies ought to be run are shaped in no small part by powerful interests. The result is a "neo-liberal" or free-market consensus on economic issues.

Or is it? A closer look, particularly at recent events, reveals some interesting contradictions in the apparently prevailing culture. Two weeks ago, when markets started to experience dramatic losses, national banks started to pump cheap loans into the financial system to avert serious problems. In 48 hours $323bn was poured into the money markets; no small amount.

Now is that the free-market, or is it state intervention?

Big Finance has always resisted tax and regulation on familiar, ostensibly principled grounds. The argument is the same as that put forward by business lobbyists and free-market enthusiasts more generally on all sorts of issues. It is that state intervention damages the natural working of the free-market, whose benefits were described by the philosopher Adam Smith. It discourages entrepreneurialism by binding the hands of potential risk-takers with reams of red-tape, and removes the natural efficiency that markets have when left to their own devices.

One might ask why we are not hearing from these free-market enthusiasts now, as irresponsible lenders are bailed out by same the "nanny state" that is so loudly condemned when it helps single-mothers, asylum-seekers, the unemployed and so on. After all, the state aid lavished on wealthy lenders in recent weeks violates an elementary rule of market economics by introducing a serious "moral hazard". Simply put, irresponsible lenders have been shielded from the full cost of their irresponsibility by the taxpayer, and the "moral hazard" is that they will only continue to be irresponsible as a result.

In a theoretical free market, if one lends to a risky borrower one is rewarded for taking on that risk by a high rate of interest. The risk is with the lender, who profits from it. We can hardly talk about the benefits of entrepreneurialism - of brave pioneers, driven by the promise of high profits and the costs of any potential failure to push the economy onwards and upwards - when these entrepreneurs are in fact cosseted by a state that bails them out when they screw up. The exact criticism free-market advocates level at the public sector is that it is inherently less efficient because it is not exposed to the rigours of the market. Where are these people now? Perhaps is hard to speak when you've got your mouth full with a below-market-rate $323bn dollar state loan.

The reality is that Western economies are not driven by free-market principles but, as I indicated above, by private interests to varying degrees. Often it suits these interests for the state to leave them alone in a market environment - at least that's the default rhetorical position. But in many cases the market is quietly avoided and the state called upon for assistance. Think no-bid contracts for Halliburton in Iraq. Think of the UK arms industry's incestuous links with government, where ministers on overseas trips (including the Prime Minister) practically act as salesmen for the likes of British Aerospace. Think of how the US economy boomed in the post war era, in no small part due to government defence budgets socialising research costs for technologies that were subsequently turned over to the private sector for profit; like aeronautics, like computers and the internet even. Plainly there is no free-market principle at work here.

The mixed-economy consensus

Talk of liberalism vs interventionism serves largely to caricature discussion of economic issues. The religion of business freedom is a useful default position. But it disguises the reality of a broad consensus that economies will inevitably be mixed, with the level of state involvement ranging from actual state provision of goods and services, through market provision via heavily regulated industries, to market provision where the state provides only a minimum legal framework governing standards of behaviour and then sits in the background while the market goes to work. Few argue that the state should disappear altogether and few argue that markets should disappear altogether. The real political question regarding economic affairs is this: how and, more specifically, in whose interests should the balance between state and market involvement be struck in any given area?

For all its talk, delivered by the media and lobby firms that represent it, of neo-liberalism and the wonders of the free market, economic power is not concerned with ordering the economy according to moral or technical principles. It is not interested in the liberalism vs interventionism question that frames political discourse the West. The question it is concerned with is the question I have just posed: whose interests shall the mixed economy serve? Business will demand, using whatever rhetorical devices suit the occasion (including lofty appeals to high principle), that the balance between state and private involvement in any given area be struck in its favour. This is quite natural. Businesses are obliged to maximise profit. The challenge for the public is to use democratic institutions and freedoms to thwart this effort, and instead ensure that the balance is struck in our favour when the two interests conflict.

Current events provide a useful example. Big Finance has argued for liberal financial markets and generally to be left alone by government. But plainly Big Finance does not object to state intervention in principle, having just accepted over $300bn of cheap public money. What Big Finance wants is for the government to back off when it is making a profit and step in when it is making a loss. This is not about liberalism vs interventionism. Its about what suits economic power at any given time.

Lets suppose that instead the free-market/intervention balance on the financial markets was struck in favour of the public interest. Plainly, it does not increase public utility when financial markets are effectively run by the equivalent of spoilt children, immune to the costs of their actions, acting ever more recklessly and endangering the broader economy as a result. In a public-interest economy, the state would involve itself at an earlier stage, placing restrictions on excessively risky lending and forcing transparency in the dealing of debt packages (genuine free markets rely on the good provision of information to function effectively). If the state is to intervene in these markets – as it has done these past couple of weeks - let it intervene in a way that ensures stable markets that reward intelligent and responsible business practices, rather than in a way that rewards incompetence and irresponsibility.

Conclusion

Recent events on the global markets provide a very useful insight into the limits of trying to understand economic issues in terms of liberalism vs interventionism. The reality is that economic questions are settled in favour of material interests, not philosophical principles. The moral-philosophical question of relevance here is whether we can accept a socio-economic settlement designed to benefit elite interests, or whether we should demand one that serves the common interest. Once that fairly straightforward question is answered, the answers to smaller questions on how and when to “intervene” in our economy will flow quite easily and naturally.

In fact, the experience of the Nordic countries – which consistently outperform the UK and US on social mobility, child welfare, poverty and other bottom-line indicators – show that searching for the right balance for our economy need not take us into uncharted territory. The solutions are available and we are free to choose them if we wish.

The anti-capitalist IMF

Noam Chomsky makes an excellent point about the IMF:

"The IMF’s former U.S. executive director Karin Lissakers accurately described the Fund as the credit community’s enforcer. The IMF is very anti-capitalist. For example, suppose I lend you money. And I know that you’re a risky borrower, so I insist on a high-interest rate. Now, suppose that you can’t pay me back. In a capitalist system, it’s my problem. I made a risky loan. I got a lot of profit from the interest. You defaulted. It’s my problem.

That’s now what the IMF is about. What the IMF is saying, to put it in personal terms, is that your friends and neighbors have to pay off the loan. They didn’t borrow the money, but they have to pay it back. And my friends and neighbors have to pay me to make sure that I don’t lose any money. That’s essentially what the IMF is.

If Argentina takes out an IMF loan with huge interest rates because it’s risky and then they default, the IMF comes along and says the workers and peasants and other people in Argentina have to pay for that. They may not have borrowed it, it may have been borrowed by a military dictatorship, but they have to pay it back. That’s what structural adjustment is. And the IMF will ensure that western taxpayers pay off the bank. It’s radically anti-capitalist, whether you like that or not. The whole system has no legitimacy. In fact the whole debt system in the world, which is crushing much of the world, most of it is fake debt.

If Suharto, one of the biggest debtors in the world, borrows money and ends up the richest man in Indonesia or maybe the world, why is it the responsibility of the farmers in Indonesia to pay it off? They didn’t borrow it; they didn’t get anything from it. They were repressed, but they have to pay it off. And the IMF makes sure that the lenders don’t lose money on their risky loan after making a lot of profit from it. Why should the system even exist?"

Read the rest here.

See also from Chomsky, "Starving the Poor" and an audio talk on the rise of South America (talk begins at 16.17mins).

Notes on illiberal Liberalism

It is worth relating any political theory to the historical context in which they have gained most currency. This exercise often reveals a close correlation between what the dominant theory of the time tells us is right on philosophical grounds and what philosophical conclusions happen to suit those in power. Nowhere is this more applicable than in the case of political Liberalism. As the Athenians said of the Spartans in the Melian dialogue, western liberals "are most conspicuous for believing that what they like doing is honourable and what suits their interests is just".

Liberalism's central tenants are as follows:
1. Equality before the law and equal rights
2. State legitimacy derives from popular consent
3. Right to own property and productive forces
4. Primacy of the market as an organising force of societies material assets

The rise of Liberalism coincided with and was driven by the emergence of the new bourgouisie in the late C18th and early C19th, who adopted it as their defining philosophical creed. Under its flag came the creation of the new United States of America, the French Revolution and various socio-political and economic reforms in Britain. Overwhelmingly, these social changes benefitted this emerging economic class which, though non-aristocratic, was gaining wealth and commensurate socio-political power.

Of the four values highlighted above, it was the last two that were dominant (note in particular that point 3 accentuates a right that, in a different value system, could easily be slotted in with the rights to education, healthcare etc under point 1). Thus the new liberal United States maintained slavery for nearly a century after its inception in accordance with Liberal Article Of Faith number 3, if not Article number 1. For all the fine words of the Declaration of Independence and the Constitution, it was John Jay's remark that "the people who own the country ought to govern it" that best characterised the new Liberal order. This new order primarily liberalised the bourgouisie from the constraints that prevented them from extending their new found wealth and power, often at the cost of broader human values. Witness the general social trauma of the creation of the industrialised working class in C19th. Would their fate have improved if mass political organisation had not taken place among them, and Liberalism been left to its own devices?

Neo-Liberalism, in the field of international relations, must bear some of these same criticisms. It cites the Bretton Woods system, the United Nations and US hegemony over this institutional order in the post WWII era as being a generally benign manifestation of liberal values. However:

1. The Bretton Woods system has presided over grotesque levels of inequality, where widespread poverty abides alongside extraordinary wealth whose potential to all but end much of human economic suffering remains untroubled. Moreover, the "liberal" economic system liberalises only when in Western interests (e.g. manufactured goods) and remains restrictive when not (e.g. agriculture). Its imposition of aid conditionality on developing countries undermines democracy and its privitisation programs deny basic public services through charges (contra Article 1) and encourage corruption;

2. The United Nations entrenches great power privilege and ability to coerce smaller states; and

3. The US frequently overthrows democratic regimes, supports or commits human rights abuses, backs tyrants and launches wars of aggression, covert or overtly, directly or by proxy.

Contra Liberal Article Of Faith number 1, there are clear winners and losers in this system. The winners are a general transnational Executive Class and their companion state/institutional interests. The losers - from a small to a great extent - are just about everyone else. By privileging economic interests over the other purported liberal values of human welfare and equality, Liberalism - rathar than Marxism or Realism - has become the prime ideological force for imperialism in the modern age.

Why is the WTO Facing a Legitimacy Crisis?

Introduction

In this essay, I will argue that a major source of the WTO’s current legitimacy crisis is a failure on the part of the more powerful elements within that forum to secure the full consent of developing country governments to further multilateral trade liberalisation. This consent has not been fully secured for the simple reason that many developing countries currently do not see further liberalisation via the WTO as being in their interests.

Using Daniel Esty’s conception of ‘legitimacy’, augmented with Antonio Gramsci and Giovanni Arrighi’s use of the term ‘hegemony’, I will examine the current difficulties experienced by the WTO forum, and the interests that shape its agenda, to establish a global trading order whose legitimacy is commonly accepted. I will review the emerging developing country opposition to the policy direction taken by the WTO, and the probable reasons for that opposition.

I will not argue that this developing country opposition is the only reason that the WTO is facing a crisis of legitimacy. There are other factors that may challenge the WTO’s legitimacy. These include the input that activists and NGOs have had into the emerging popular understanding of globalisation; specifically their role in promoting the perception that WTO trade negotiations have not been offering a good deal for developing nations (Smith:2003). Another factor is the perception within the developed countries that trade liberalisation may be detrimental to certain domestic and/or cultural interests (Bhagwati:2001:19). Though these factors are relevant, I will limit the scope of this essay to an examination of the failure to secure sufficient developing country consent to WTO-managed liberalisation and the importance of this particular factor in the erosion of WTO legitimacy.

Although I will review the probable reasons for developing country opposition, I will not enter into the debate on whether this opposition is objectively justified. The thesis presented here is that the WTO faces a legitimacy crisis because developing nations increasingly fail to see further liberalisation under its auspices as being in their interests. For these purposes, the question of whether that perception is justified is, to an extent, peripheral. The point is that the perception exists and that there are substantive reasons for its existence.

Legitimacy and Hegemony

For Esty, a governing institution establishes its legitimacy either because it is representative (by being subject to elections, for example) or as a result of the “efficacy of the outcomes it generates” (Esty:2002:9). I will focus particularly on this second factor – the notion that “institutions also [in part] win legitimacy and authority because of their capacity to deliver good results..” (Esty:2002:16). Understanding of this particular source of legitimacy and how it relates to the global trading order can be enhanced by introducing the notion of ‘hegemony’, as it is used by Gramsci and Arrighi.

Gramsci noted that, at the national level, order does not necessarily establish itself through straightforward coercion by the dominant social group. Often, “the development and expansion of the particular group are conceived of, and presented, as being the motor force of a universal expansion, a development of all the ‘national’ energies” (quoted in Arrighi:1994:28).

This Gramsci describes as “hegemony”. Order is established not simply by coercion but by consent. The interests of the dominant group are widely accepted (correctly or not) as being consistent with the interests of society more broadly. In Arrighi’s words:

“Whereas dominance will be conceived of as resting primarily on coercion, hegemony will be understood as the additional power that accrues to a dominant group by virtue of its capacity to place all the issues around which conflict rages on a ‘universal’ plane” (Arrighi:1994:28 - emphasis in original)

Arrighi applies this concept of hegemony to the international sphere and the evolution of the global political economy. He identifies “three hegemonies” that have shaped the history of modern capitalism: the first was the post-Westphalia system of sovereign states whose prosperity was underwritten by Dutch economic and military power; the second was the British-managed free trade system of the late nineteenth century; and the third was that of the post World War II era, run under US auspices via multinational institutions and corporations.

What qualifies the Dutch, the British and the US as hegemons in their respective periods, for Arrighi, is their ability first to create a new system and secondly to secure broad consent amongst the subjects of that system. In the case of the WTO’s current legitimacy crisis, it is this second factor that concerns us. The global trading order that has evolved under the GATT and latterly under the WTO does not by itself constitute a global economic system on the Dutch, British or US model, but the principle of hegemony applies. A hegemonic global trading order can only be created and sustained by consent, and governments will only consent to multilateral trade liberalisation if the agenda of the WTO is placed on a “universal plane” – in other words, if they perceive it as being in their interests to participate in the WTO process. Here we return to Esty’s point about efficacy. The WTO’s hegemony over the global trading system can only be secured when its “capacity to deliver good results” is demonstrated to the satisfaction of member states. Its current crisis of legitimacy derives in part from its failure adequately to make that case.

Withdrawing consent

Concerns about the WTO process and who benefits from it have been present in the developing world for several years, as acknowledged even by supporters of the institution’s track record. Daniel Esty remarked in 2002 that the crisis of legitimacy that came to the fore at the time of the Seattle meeting of 1999 was partly due to the fact that “fears of special interest domination [of the WTO] are now prevalent. And these views are not limited to the public; many developing countries share the concern” (Esty:2002:11). What is relevant in terms of the question of legitimacy is not whether these perceptions were objectively correct – Esty felt that they were not – but rather the fact that they existed and affected the developing countries’ sense of the WTO’s legitimacy.

For reasons that will be discussed further below, many developing countries viewed the 1986-1994 “Uruguay Round” of trade talks as having been largely detrimental to their economic interests. At the turn of the century, there was little appetite amongst those countries for more of the same. In advance of the Seattle meeting in 1999 , the Group of 77 developing countries (“G77”), whilst declaring themselves fully in favour of international trade liberalisation in principle, nevertheless “noted with great concern…that the benefits of the existing multilateral trading system continue to elude developing countries”. They warned that these problems “could erode the confidence of developing countries in the multilateral trading system” and said that they “therefore attached utmost importance to addressing the issues and difficulties…that have arisen in the course of the implementation of the WTO multilateral trade agreements” (G77:1999:paragraphs 18-20). The Tanzanian Minister for Industry and Trade expressed these reservations more forcefully before the Doha conference in July 2001, saying that “most of us are not ready, psychologically, materially and technically, for a new round” (WDM:2006:11).

Against this backdrop, the EU Commissioner for Trade, Pascal Lamy, “a skilled negotiator and shrewd tactician, knew that something needed to be done to demonstrate that the EU ‘cared’ about poor countries” according to an NGO, the World Development Movement (“WDM”)(WDM:2006:11). It was Lamy that called the new round the “Doha Development Agenda”, with the WTO Secretariat arguably compromising its apolitical role by adopting this slogan as part of its Doha Round official logo (WDM:2006:13). Whether the expressed concern for development was genuine or a tactic, the adoption of this slogan strongly indicates that the developed nations and the WTO bureaucracy recognised the importance of presenting the WTO agenda as being on a “universal plane”, and specifically in the interests of the developing nations. Whether those nations would consent to a new round, and on what terms, was implicitly acknowledged to be in question.

Developing country concerns have persisted throughout the Doha “Development Round”, according to a WDM review (WDM:2006). These concerns have centred on the economic problems that the developing world perceived to have been caused by the “implementation of the WTO multilateral trade agreements”, as noted above in the G77 statement. The concerns were exacerbated by the fact that these “implementation issues” were often relegated in importance or ignored during WTO negotiations in favour of “new issues” – i.e. the further liberalisation of developing country economies - brought to the table by the developed nations and the national and multinational corporate interests that they arguably help to represent. The developed world demanded a quid pro quo for any concessions it made during the Doha round, but the developing countries felt that this would mean them having “to pay a second time with new liberalisation commitments in return for trying to rectify” the losses incurred from the last set of liberalisation commitments (WDM:2006:10,12).

Proposals from developing countries aimed at addressing their concerns were put forward in December 2001, April 2002, October 2002 and August 2003, only to be rebuffed by the developed world (WDM:2006:14). In advance of the Cancun meeting in 2003, 66 developing countries signed statements expressing their opposition to the “new issues” pressed on them by the developed world (WDM:2006:15). The collapse of the Cancun talks was in no small part due to the collective opposition of many developing nations to the emerging WTO policy agenda – which opposition stemmed from the perception that this agenda was not in their interests. As Dipak Patel, the Zambian Trade Minister, said:

“I am definitely sure that I would have been lynched by the private sector and civil society if I had returned home with a bad deal….No deal is better than a bad deal” (WDM:2006:16).

This last phrase was indicative of where the growing disillusionment amongst developing countries could lead.

By the Hong Kong meeting of December 2005 there were strong indications that this disillusionment had become widespread and entrenched. An opinion poll of African trade delegations, carried out by the development NGO Christian Aid, found that ninety per cent of respondents did not agree with the characterisation of Doha as a “development round”. Seventy per cent believed that their country’s economy would suffer a net loss if they accepted what the developed countries were proposing. And fifty-five per cent said that they were prepared to “block the consensus and stop negotiating” if the round failed to address their priorities (Christian Aid:December 2005). This disillusionment contributed towards continued co-ordinated opposition amongst developing countries at the Hong Kong meeting to the more excessive demands of the developed world (Rice & Talpur:2006).

Clearly the most powerful interests at the WTO – the developed nations and the private sector interests they arguably helped to represent – had failed to establish their agenda on a “universal plane”. The WTO’s legitimate hegemony over the global trading system was not being effectively secured because, quite simply, those whose consent was required to bring that hegemony into being had not had the WTO’s “capacity to deliver good results” in their interests demonstrated to their satisfaction. In order to deepen our understanding of this failure to secure developing country consent, it is necessary to look at the probable reasons for that consent being withheld.

The costs of liberalisation

According to a study produced by Christian Aid, drawing on data from the World Bank, International Monetary Fund, the United Nations and academic studies, trade liberalisation has cost sub-Saharan Africa US$272 billion over the past 20 years, which is

“..roughly what it has received in aid. Effectively, this aid did no more than compensate African countries for the losses they sustained [through trade liberalisation]. Had they not been forced to liberalise…sub-Saharan African countries would have had enough extra income to wipe out their debts and have sufficient left over to pay for every child to be vaccinated and go to school…..The negative effects of trade liberalisation are not confined to Africa. The average loss to the countries in Christian Aid’s study [which included developing nations in Latin America and South Asia] was about 11 per cent of total GDP over 20 years…The total loss for the 32 countries in the study was US$896 billion” (Christian Aid:June 2005:2-4)

The study pointed out that trade liberalisation often leads to harmful trade deficits, as increased imports squeeze local producers in developing countries by causing decline in local demand for their wares, while export opportunities do not increase to compensate (Christian Aid:June 2005:2-4).

Furthermore, both the WDM and Gallagher and Wise point out that the liberalisation that developing countries have undertaken under WTO auspices runs counter to what history tells us about the policies required to foster development. (WDM:2006:5 and Gallagher & Wise:2006:3-4) Development has traditionally involved countries not concentrating on an existing ‘comparative advantage’ in exporting primary products such as agricultural produce, but in creating a new specialisation in more profitable manufacturing industries. Both the “Asian Tiger” economies since World War II and the now developed Western nations before them retained and exercised their freedom to strategically deploy various kinds of trade barriers to protect their infant manufacturing industries. The WDM quotes the economist Erik Reinert, who says that

“Today the application of the rules of the Washington Consensus – essentially that the historically proven procedure of artificially creating a comparative advantage in manufacturing is no longer allowed – means that the road to development that has been followed by absolutely all industrialised countries up until now, is completely blocked for the Third World of today” (WDM:2006:5 – emphasis in original).

Both Christian Aid (Christian Aid:June 2005:6) and the WDM (WDM:2006:6) present statistics to show the correlation between trade liberalisation and increases in poverty. The WDM table, based on data from the United Nations Conference of Trade and Development, is reproduced below. It shows that, contrary to the policies adopted by developing countries under the WTO process, poverty is generally more likely to increase in the absence of moderate (though not stringent) trade protections.

*

Table 1

Column A - IMF trade restrictiveness index (1 = most open, 10 = most restricted)

Column B - Percentage change un US$1-a-day poverty level in LDCs (figures with every country treated the same, regardless of population)

Column C - Percentage change in US$1-a-day poverty level in LDCs (figures weighted to account for more populous countries)

A B C
1 +24 +16
2 +5 +5
3 +4 +2
4 +3 +8
5 -1 -3
6 -1 -1
7 -4 -4
8 -7 -10
9 0 0
10 +6 +5

*

The costs of liberalisation described by these studies will have been no secret to the developing country governments that suffered the losses in question. And as the Doha round continued it seems likely that many of those governments came to the conclusion that the lessons of history were likely to repeat themselves under the WTO process.

As noted above, pressure was put on the developing nations throughout the Doha round to further open up their economies – now particularly their service industries - to competition from the developed nations (WDM:2006:12, 16-19). The latter saw this as a quid pro quo for any concessions they made. However, not only did the developing nations feel that they had already “paid” significantly as a result of the liberalisation they had undertaken to date, but the concessions now offered by the rich world seemed unlikely to offset any potential further losses. For example, as Charlton and Stiglitz point out, the much trumpeted phasing out of export subsidies by 2013 agreed at Hong Kong represented a mere four per cent of the total support given to agriculture in OECD countries (Charlton & Stiglitz:2006). The developing countries were effectively being offered more of what had cost them so dearly in the past. It was hardly likely that this would assuage their concerns.

Conclusion

I began by noting Esty’s view that “institutions …. win legitimacy and authority because of their capacity to deliver good results..” (Esty:2002:16). I augmented this view of legitimacy with the notion of ‘hegemony’ as used by Gramsci and Arrighi, for whom the hegemony of a certain order was secured not by the sheer coercive dominance of the strongest social group but by the agenda of that order being placed on a “universal plane”. A translation of these principles to the case of the WTO tells us that, for the global trading order to maintain its legitimacy, it will not be sufficient for the wealthy nations and/or the private interests they arguably help to represent in that forum to simply dictate terms to the weaker actors. Those weaker actors – the governments of the developing world, would have to perceive it to be in their interests to grant their consent to this order. As we have seen, the developing countries do not have this perception, and for substantive reasons.

However, there are reasons to believe that the crisis need not be terminal. As mentioned above, the G77 countries had expressed their support in principle to continuing trade liberalisation under WTO auspices in advance of the Seattle meeting of 1999. This indicates that the subject of the crisis of legitimacy under discussion here is the process of WTO liberalisation as it is currently unfolding, rather than the notion of the WTO itself. Should the process continue to offer what, in the perception of many developing nations, are deals that run contrary to their interests, than the crisis will persist and may indeed become terminal. But if WTO trade negotiations can begin demonstrate “their capacity to deliver good results” for the developing world, there is every reason to believe that the forum’s legitimacy could be reasserted.

Bibliography

Arrighi, G., (1994), “The Long Twentieth Century: Money, Power, and the Origins of Our Times”, (London: Verso)

Bhagwati, J., (2001), “After Seattle: free trade and the WTO”, International Affairs, 77(1), 15-29.

Charlton, A. and Stiglitz, J., (2006), “The Doha Round After Hong Kong”, conference paper produced for “An Assessment of the Doha Round after Hong Kong”.

Christian Aid, (June 2005), “The Economics of Failure: The Real Cost of ‘Free’ Trade for Poor Countries”, (London).

Christian Aid, (December 2005), “Christian Aid warns of World Trade Organisation walk out”, (London).

Esty, D.C., (2002), “The World Trade Organisation’s Legitimacy Crisis”, World Trade Review, 1(1), 7-22.

Gallagher, K.P. and Wise, T.A., (2006), “Doha and the Developing Countries: Will the Doha Deal do More Harm Than Good?”, RIS Policy Briefs, 22, (Delhi).

Group of 77, (24 September 1999), “The Twenty-Third Annual Meeting of the Ministers for Foreign Affairs of the Group of 77: Ministerial Declaration”, (New York).

Rice, T. and Talpur, M., (2006), “A Development Analysis of the WTO Hong Kong Declaration”, Action Aid, (London).

Smith, J., (2003), “WTO Mood at Cancun Worsened by NGOs – EU’s Fischeler”, AlertNet. Viewed Online 17 March 2006

World Development Movement (“WDM”), (2006), “Missing Presumed Dead: Whatever happened to the Development Round?”, (London).

Venezuela: myth and reality

With a little more time on my hands, and with events in the Middle East in a less ominous state, I would certainly devote more space here to a subject I'm very interested in and haven't written nearly enough about: Latin America in general and Venezuela in particular.

Venezuela has been undergoing some very interesting changes over the past ten years, with a popular government using the nation's oil wealth to combat the grinding levels of poverty that affect most of the population[pdf]. Venezuela has also been a prominent critic of the United States, whose foreign and economic policies devastated Latin America during the twentieth century [pdf]. Indeed, Venezuela has particular reason for taking exception to a Bush Administration that backed a failed coup attempt against the Venezuelan President Hugo Chavez in 2002.

Getting hold of useful information about Latin America and Venezuela is not straightforward. Mainstream news reporting passes through the standard ideological filters[pdf], with the corporate media unable to forgive Chavez for contradicting the Western script on good governance. This has resulted in some pretty unreliable coverage on the success of Venezuela's economic policies and the state of its democracy. Most bizarre amongst these criticisms are the increasingly desperate attempts to portray President Chavez as a quasi-dictator; though he has regularly contested and won elections that have been certified as free and fair by the most respected of international observers. These inconvenient facts have reduced Chavez's opponents to using dictator-substitute words such as "autocrat" and "strongman", even as the autocrat devolves democratic power to the local level, enlists public participation in writing a new democratic constitution, and removes power from the corrupt political-economic elite that, like their counterparts across Latin America, had ruled the country like a private plantation since the dawn of the Columbian era.

A good example of this sort of media coverage was a piece written by Rory Carroll for the Guardian in January this year. Carroll reported that Chavez had declared himself to be a Communist, which will have surprised many people since Chavez has never described himself in such terms before. The report contained no direct quote where Chavez said "I am a Communist" or words to that effect. I spoke to Carroll by email and, though he insisted that Chavez had indeed called himself a Communist, he wouldn't provide me with a direct quote despite my repeated requests.

Julia Buxton, a British academic expert on Venezuelan affairs, casts further doubt on Carroll's paraphrasing. Buxton told me that:

"Chavez has, as far as [I] know, absolutely never, ever said he was a communist. He has always been explicit in this - only ever a socialist and only ever a Venezuelan model of socialism. There can be Bolivarian socialism and Socialism of the C21st - but each socialism has to refect the historical and social experince of each country."

"Chavez has said he is a christian, a socialist, a democrat etc but always distant from communism - and what he calls the 'failed Marxist experiments of the C20th'" [her emphasis]

But as ever, one does not need to rely on the corporate media. More accurate information can be found on Venezeula if one knows where to look. Academic and former Guardian foreign correspondent Richard Gott is probably the UK's best known expert on the Chavez era. His book on the "Bolivarian Revolution" provides a solid introduction to the socio-economic conditions that gave rise to the current changes. Venezuelanalysis is a good one-stop shop for independent news and comment on Venezuelan affairs. And the Washington based Centre for Economic Policy Research produces detailed analysis of the Venezuelan economy on a fairly regular basis.

I would also highly recommend the work of the above-mentioned British academic Julia Buxton, who is particularly good at challenging mass media misreporting of the situation in Venezuela. Her most recent article "The deepening of Venezuela’s Bolivarian revolution: why most people don’t get it" sheds light on the most recent developments in Venezuela and debunks some of the official Western mythology on the subject.

Few occurences in politics are unambiguously good or bad, but recent events in Venezuela may be viewed with cautious optimisim. If Venezuela can demonstrate that it is possible to defy the dominance of international political-economic power, and chart its own independent path whilst retaining, even deepening its democracy and effectively attending to the needs of its most deprived citizens then it will stand as a source of enormous encouragement to countries across the developing world. Perhaps it is this prospect, the threat of a good example and a functioning challenge to Western power, that so offends Washington and its ideological allies.

Bad Medicine: the bitter taste of the Anglo-Saxon model

My latest piece, Bad Medicine, on UK coverage of the French presidential election, is available now on the UK Watch blog.

An excerpt:

"In recent weeks, our political class has gleefully taken the French presidential election as a high profile opportunity to bang the drum for the ‘Anglo-Saxon’ economic model. For British commentators, the French malady of high unemployment and general inefficiency can have but one cure: the French must accept that we were right and they were wrong, and take their neo-liberal medicine.

In February this year, UNICEF produced a study of child welfare in the industrialised countries. British children were found to be the worst off out of those in twenty one developed economies. After nearly three decades of neoliberalism post-1979, child poverty had doubled. France may have only come sixteenth out of twenty one. But it came five places higher than the country whose model the UK commentariat are so keen for it to adopt. In fact, it was Holland, Sweden, Denmark and Finland – the countries operating the so called “Nordic” economic model – that came in first, second, third and fourth"

Read the rest here.

Also on the elections, gender in the Royal v Sarkozy debate and an interesting deconstruction of the Financial Times' take on the French economy.