T he Asian financial crisis is a practical rebuttal to the naive internationalism that is America's foreign economic policy. Naive globalism includes these precepts:
- The freest possible movement of goods and services maximizes economic efficiency, hence human well-being. If free competition is good nationally, it is even better globally.
- With a few basic ground rules, such as respect for private property and equal access to markets, liberal capitalism is essentially self-regulating.
- At bottom, there is one true form of capitalism. It entails a relatively minimal role for the state. In principle, the size of the public sector and the level of taxation and public services are matters for national choice. The burden of proof, however, is always on government intervention, since taxation restricts individual choice and depresses incentives, while regulation distorts market prices.
- Above all, markets should be transparent and porous, and prices should be set by private supply and demand. Investors anywhere should be free to buy shares of institutions—or entire institutions—anywhere in the globe. They should be free to invest or speculate in currencies, and withdraw their investment at their pleasure.
All of this supposedly maximizes material well-being, of rich countries and of poor ones. People who resist this model are said to be economic nationalists, protectionists, and Luddites. But there are several problems with this narrative.
F irst is the ancient issue of political democracy itself. As sages since Aristotle have observed, man is a political animal. Either societies are tolerably self-governing, or they are dictatorships. A democratic society, of course, requires a polity. And for better or worse, the locus of the polity is the nation-state. There is no global state, hence no global polity and no global citizenship. I am a voting citizen of the United States of America, not of the Republic of Nafta.
Simple globalism removes from the compass of democratic deliberation key questions of self-governance. Several Asian nations are now, in effect, wards of the International Monetary Fund. More subtly, the pressures of laissez-faire globalism remove from national deliberation key questions of political economy that have no scientifically "correct" answer—what should be social, what should be private? Regional development policies, social safety net policies, cultural policies, industrial policies, and more have all been challenged as counter to the rules of GATT or NAFTA or the WTO.
Naive globalism creates a bias against the mixed economy. If you believe that laissez-faire is really optimal, this is a constructive bias. But the entire history of capitalism is littered with counter-examples. Market economies have unfortunate tendencies to financial panics that spill over into purchasing-power collapses and serious (and avoidable) depressions. Unregulated capitalism yields monopolies, gouges consumers, fails to invest adequately in public goods, and produces socially intolerable distributions of income and wealth.
Simple globalism undermines the project of the mixed economy in several distinct respects. It punishes nations that elect policies of high wages and generous social benefits. It pulls capital into corners of the globe where there is less regulation, which in turn makes it harder for the advanced nations to police their capital markets and social standards.
Globalism also tips the domestic political balance—in favor of the forces that want more globalism. Capital is of course mobile, and labor, except for immigration, is not. Investors, who are free to move money to locations of cheap wages and scant regulation, gain power at the expense of citizens whose incomes are mainly based on wages and salaries. That tilt, in turn, engenders more deregulation and more globalism. The global money market, not the democratic electorate, becomes the arbiter of what policies are "sound." In this climate, a Democratic president or Labour prime minister can snub the unions, but he'd better not offend Wall Street or the City of London. So even the nominally left party begins behaving like the right party—which then alienates the natural base of the party that is the supposed champion of the mixed economy.
There is an emergent set of global regulatory authorities, but they are stunningly undemocratic. In the nineteenth century, the so-called "money issue" dominated American politics: Would credit be cheap, so businesses could expand and farmers finance their crops—or would it be dear, to the benefit of creditors and the constraint of the young nation's economic potential? The Populists wanted an "elastic currency," freed from the tyranny of gold. In the epic compromise of 1913, the elastic currency was created—but entrusted to the nation's bankers, via the Federal Reserve.
If the Federal Reserve operates domestically at one remove from democratic accountability, the IMF and the World Bank operate at two removes. The World Trade Organization, as Howard Wachtel observes ["Labor's Stake in the WTO"], adjudicates fair play for investors, but not workers or citizens. Even worse, the WTO lacks the evolved rules of evidence, due process, public hearings, and the strictures against conflict of interest that characterize courts in mature democracies. If the WTO arbitrarily rules against a U.S. company, as it did recently in the case of Kodak's complaint against Japan's closed market, the only appeal is to diplomatic pressure, and the State Department has bigger fish to fry.
As Jeff Gerth reported in the New York Times ["Where Business Rules," January 9], all over the world, quasi-official standard-setting authorities dominated by business are laying down the rules of global commerce. So the century-old project of making raw capitalism socially bearable is undermined in countless ways by naive globalism. Domestically, there are regulatory agencies, political constituencies, and a legacy of democratic deliberation and case law. These are neatly swept away in the name of free trade. The global market trumps the mixed economy.
Regional free trade areas like NAFTA, as Douglas Massey suggests ["March of Folly"], unite labor markets as well as product markets, even if they don't intend to. The European Union, at least, seeks to be an emergent polity, cognizant of a "democratic deficit" in which industry and finance currently have too much influence at the expense of citizenship. There is no such recognition in NAFTA, and, as Massey shows, are plenty of unintended consequences.
G lobalism particularly intensifies the aspect of capitalism that is most vulnerable to herd instincts and damaging irrationalities—financial markets. As George Soros, who knows the hazards well enough to have made billions from them, recently wrote, "Financial markets are inherently unstable, and international financial markets are especially so."
In Asia today, the irrationality of financial markets is on parade. Asia is not Mexico. The nations that got into trouble, for the most part, have policies that orthodox economists prize: high savings rates, balanced budgets, disciplined and efficient labor forces, and high rates of productivity growth. As in other newly industrializing countries before them (the United States, Germany, France, Brazil, Japan), East Asian development has been partly state-led. But until the crisis hit, the IMF was lauding most of these countries.
What happened, as Jeffrey Sachs recounts in "The IMF and the Asian Flu" was a largely financial panic based on worries by foreign investors that exchange rates would decline, and the value of their investments along with them. Thanks to the IMF's own "stabilization" policies, these fears became self-fulfilling prophecies. It is ironic in the extreme that an institution that was created precisely to counter the tyranny and irrationality of speculative private capital flows became their battering ram—as well as an agent of gratuitous austerity. Sachs tells the full story.
A related irony is that East Asia thrived on a variant model of capitalist development that largely (and prudently) eschewed the lure of foreign capital, precisely in order to retain control. If you borrow money in another currency, or rely on foreign investors who have no long-term commitment to your economy, you are at their mercy. This was Mexico's fate. As MIT economist (and Prospect contributor) Alice Amsden, a Korea expert, has observed, it was only after Korea acceded to international pressure to open its domestic capital markets that its currency came under pressure. Its "fundamentals" were, and are, sound.
The hypocrisy of the U.S. government and the IMF is breathtaking. When every major money-center bank was technically insolvent in the early 1980s because of bad bets on Third World loans, the Federal Reserve did not close them down. It allowed them to cook their books until the bad debts could be retired. And when the U.S. got in hock to foreign investors because of accumulated trade imbalances, the authorities worked to rig the value of the dollar, so that foreigners would keep buying our bonds. Nobody demanded that enterprises be closed down wholesale. Indeed, the entire history of our own Great Depression was one of containing the damage and figuring out ways to keep enterprises open. We should treat Asia as well as we treat ourselves.
T he real issues, it seems to me, are these: What are the proper terms of engagement between a national, democratic polity and a global economy? As international institutions necessarily replace national ones, to whom are these institutions democratically accountable, and what substantive policies should they pursue?
The social bargain of the 1940s respected recent history. The statesmen of that era created an international financial system that allowed member states to build mixed economies and avoid panics and depressions. Trade was promoted, but not as an end in itself. Speculation and the freedom of private capital movement were subordinated to the general good, and not seen as the essence of liberty.
As Sachs suggests, the new generation of global governing bodies needs to be rendered democratically accountable. These institutions need to pay attention to the fates of ordinary people, not just to investors. Their stewards need to read some history. (Keynes and Polanyi would be a good start.)
The members of Congress who voted down fast-track authority last fall were damned as archaic nativists—a weird left-right coalition. There were indeed a few jingoists, but for the most part the opponents were Gephardt Democrats who rightly insist on different terms of engagement before we continue to globalize. If laissez-faire at least produced reliable prosperity, it would be harder to challenge. But it produces terrible financial instability, as well as hardship.
There are cheap versions of this counter-narrative; it is easy to throw raw meat to an electorate that has suddenly suffered undeserved hardship at the hands of foreign forces. But if you want to see real economic nationalism—the ugly kind that leads to Caesarism and war—watch what happens in the IMF's wake. The naive internationalists, like their ancestors early in this century, are playing with real fire. Our challenge is nothing less than to rebuild the mixed economy for which earlier liberals struggled so nobly, and to defend it against the predations of facile globalism.