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 institutionsor entire
institutionsanywhere 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
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" answerwhat 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 balancein 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 partywhich then alienates
the natural base of the party that is the supposed champion of the mixed
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 cropsor 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 createdbut
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
lobalism particularly intensifies the aspect of capitalism that is
most vulnerable to herd instincts and damaging irrationalitiesfinancial
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 ramas
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.
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
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
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 nativistsa 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 nationalismthe
ugly kind that leads to Caesarism and warwatch 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.
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