by Francis Lee for the Saker Blog
Europe is tending to bring the society and culture of the continent into harmony with those of the United States, exulting the characteristics of the latter into models and objects of an uncritical and overwhelming admiration … There is no longer at present a European project. A North American project … under American command has replaced it … The hegemonism of the United States is clearly visible behind the disappearance of the European project in favour of a return to Atlanticism – political, economic, cultural, and militaristic.
Samir Amin (The Liberal Virus 2004)
According to current orthodox economic trade theory – see the works of David Ricardo (1772-1823) and his theory of comparative advantage – this is a hypothesis which in policy terms is predicated upon the free movement of labour, capital and commodities, which it is argued will result in flows into the most optimal investment and growth areas. This process will be seen to maximise social welfare in terms of income and output. Like many economic theories which have come and gone this particular addition to the collection may seem disarmingly plausible; in practise, however, the theory begs a number of key questions.
The current conventional wisdom as applicable to the free-trade paradigm rests on a one-size fits all prescriptive model; that is to say that always and everywhere it is regarded as the policy of choice. Free-up the dead hand of state controlled, interventionist policies, and the markets will deliver the goods, so it is argued. This is, it should be understood, not an empirical assessment but a purely theoretical paradigm, which is to say the least, questionable. The quasi-religious belief in the efficacy of free trade/markets and factor input movement is the cornerstone of trade agreements such as free-trade areas like NAFTA, on the Mexican/American border and trading blocs like the EU in Europe and MERCOSUR in Latin America.
This theory, which was effectively mobilized and globalized by the Anglo-American economic establishment (the Reagan-Thatcher axis) continues to be taught in schools and university courses so that generation after generation of students are infected by what has become known as the Washington Consensus, Neo-liberalism, Globalization call it what you will. However, in the cold and unforgiving world of actually-existing capitalism free-trade and free-markets have never to any great extent really existed. It cannot be emphasised enough that orthodox economic theory is, as Amin states elsewhere, a purely ideological construct bearing only a tenuous connection with the real world.
At the outset it should be made clear that capitalist development was and is a function of the market and state relationship. Public authority has always actively intervened in shaping and promoting the economic policies of the domestic and international economy contrary to hyper-globalist assertions which we might call ‘state-denial’. It should be stated unequivocally that the state and its role is and remains the most significant force in shaping both the national and world economy. This was evident as far back as Tudor England and beyond when the English monarchs banned the importation of woollen cloth in an early version of infant industry protection transforming England from an importing wool country into the most formidable wool and later manufacturing country in the world.
Mercantilism and its influence*
The same mercantilist policies initially carried out in England (as it then was) were then also in time operationalised in both the United States and Germany who played catch-up with the UK in the late 19th century. The architect of US mercantilism was Alexander Hamilton (born 1755 or thereabouts – died 1804) who overcame the free-trade preferences of Thomas Jefferson in the early stages of US economic development; but it was the civil war – 1861-65 – essentially a conflict between the protectionist north and the free-trading south, which settled the issue. Ex Commander-in-Chief of the Union Army of the Potomac, Ulysses Simpson Grant, later to become US President argued that:
“For centuries England has relied on protection, has carried it to extremes and has obtained satisfactory results from it. There is no doubt that it is to this system that it owes its present strength. After two centuries, England has found it convenient to adopt free trade because it thinks that protection can no longer offer it anything. Very well then, gentlemen, my knowledge of our country leads me to believe that within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade.”(1)
In Germany, Friedrich List (1789-1846) who also had scant regard for any ‘free-market’ nonsense and the Ricardian corollary of comparative advantage was instrumental in promoting a system of political guidance from above as a policy for economic development.
‘’ … the first stage (of such a long-term policy) is one of adopting free-trade with more advanced nations as a means of raising themselves from a state of barbarism, and of making advances in agriculture; in the second stage, promoting the growth of manufactures, fisheries, navigation and foreign trade by means of commercial restrictions; and in the last stage, on after reaching the highest degree of wealth and power by gradually reverting to the principle of free-trade and of unrestricted competition in the home and in foreign markets’’. (2)
This was the policy instrumentalised by Bismarck during the middle and late 19th century which enabled Germany to outperform its European rivals, principally the UK. And still today in many ways German nationalist mercantilism which it rests upon has dominated the EU and is even now still much in evidence.
The peculiarities of financialised capitalism in Germany stands in marked contrast to that of the Anglo-American world. During the last 4 decades the German service sector has become proportionately larger, as should be expected from a financialised economy, but Germany has also systematically defended its industrial sector, not least by manipulating the exchange rate to protect its export industries. The distinctive feature of German financialization is a maintenance of a strong industrial base, in spite of weak aggregate investment. Additionally, the German financial system has retained much of its historic character as ‘bank-based’ in contrast to the ‘market-based’ system of the US/UK. Germany has a small stock-market in comparison to the Anglo-American model and a larger more diffused and competitive banking model – the Sparkassen which stands in sharp contrast to the liberalised and oligopolistic banking systems in the US/UK.
Generally speaking the reversion to free-trade from protectionism has been fraught with difficulties. The mutual benefits of free-trade only exists between highly developed nations, or between nations of roughly equal levels of development. There is no question that free trade can ever become a source of growth and development between nations of unequal economic status; such development has never worked for the less developed party in the trade relationship and in all probability never will. (See the Prebisch-Singer hypothesis.) The advantages will accrue to the more productive economy.
It is easy enough to cite examples of this phenomenon: Why for example do Portugal, Spain, Ireland, Latvia, Italy, run chronic negative trade figures on their respective current accounts? The answer is that their productivity levels are lower and therefore their costs are higher than Germany’s. This means that there is a structural problem of trade relations between Germany together with the core states (Holland, Scandinavia, Austria, and so forth) and the EU’s less developed peripheral states (See above). Moreover, given that they use the same currency free markets only work for the core of the EU. Germany and the core states run surpluses on their current account whilst the periphery runs chronic trade deficits. One nation’s surplus is another’s deficit. Hence given the policy prescriptions stipulated by the ruling institutions of global capitalism, and their applications, the increasing divergence between developed, semi-developed and under-developed states becomes apparent and understandable.
Furthermore, simply opening up a developing economy to global market forces will almost certainly lead to further disaster. There is always the danger of local businesses being wiped out by more efficient foreign competition before they can get a toehold into the wider world. This was certainly the case in Russia during the Yeltsin years. The imposition of the economic ‘shock therapy’, turned out to be all shock and no therapy. ‘Experts’ from the west in the shape of neo-liberal economists such as Jeffrey Sachs and Andrei Shleifer, and the lawyer Jonathan Hay, had a degree of influence over Russia’s economic policy that was unprecedented for a sovereign independent state. Together with Yagor Gaidar and Anatoli Chubais they formulated decisions that were inserted directly into Presidential decrees. The lesson learnt was that a prerequisite for positive and beneficial engagement with the global economy is the development of robust internal structures; the development of a national economy starts with internal integration and then moves on to external integration.
Strange as it may seem the development strategies employed in the East Asian states and economies were in flat contradiction to the IMF/World Bank prescriptions and met – mirabile dictu – with considerable success. These policies carried out by South Korea and Japan were in fact based on the exclusion of inward investment of western capital inflows particularly those of a short-term speculative nature (i.e. ’’Hot Money’’). The strategy was supplemented by an extensive programme of export driven development and gradually opening up the domestic economy for trade. A policy which is still extant with China now included.
What Price Comparative Advantage?
Yet the Ricardian ideology still holds sway in the textbooks and institutions seemingly unaware of the negative outcome of such policies. This is perhaps a classical example of the dissociation of theory from empirical reality; a hidebound and utterly incapable of reform of the institutions of global capitalism and their spokespersons are aptly personified in the words of one of Samuel Becket’s characters in one of his plays ‘’I must go on, I can’t go on, I’ll go on.’’ Neo-liberalism, in fact, proved extremely difficult to implement technically but then practical results have little to do with the persuasiveness of ideologies.
Suffice it to say that this ideological paradigm both permeates and is pretty much obligatory in the ruling institutions of global capitalism – the IMF, World Bank and WTO and in addition to other auguste bodies such as the Bank for International Settlements (BIS) the OECD and G7. Any questioning of the holy script is treated as blasphemy and relegated to mocking footnotes or treated as being non-existent.
With an unchanging policy consensus the EU defenders of the faith are completely sold on the putative beneficial outcomes to be derived from the holy trinity of free-movement of labour, capital, and commodities. And of course, this sacred trinity is crucial to an understanding of the results of these policies which have had extremely deleterious effects in practice, both in the developing world but more recently particularly in Europe. This meant that in Euroland the deficit countries could not devalue their currencies in order to rectify their trade deficits and would be forced into what became known as ‘internal devaluation’, more commonly understood as austerity.
In addition to this has been the lack of fiscal transfers from the more developed to the less developed or one state to another. Fiscal transfers within sovereign states, from Vermont to Louisiana or Surrey to Merseyside, or the North to the South of Italy, is quite normal, but fiscal transfers between sovereign states, for example, Finland and Greece, is more problematic. In the same spirit this lack of mutualization of public debt, i.e., allowing the debt of one-member state to be considered as an obligation of another and proposed to correct it through the issue of Eurobonds. However the members of the EU have neither the legitimacy nor the desire to carry the costs and burdens of each other’s actions. Nation states are not, after all, registered charities and charity stops at their borders.
‘’So long as a country is a member of the EU – even if it is not bound by a specific programme imposing austerity measures because of its huge debt, and so forth – it will still be bound by the catastrophic neoliberal rules imposed by the various EU treaties. That is to say the EU treaties that followed the Treaty of Maastricht, which institutionalised the opening and liberalisation of the markets for commodities, capital, and labour, and which, indirectly, also imply privatisations and the phasing out of the welfare state. (my emphasis – FL). This on top of the severe restrictions imposed on fiscal policy through the stringent rules and upon budget deficits and debt-to-GDP ratios (through the Stability and Growth Pact) which indirectly impose austerity.’’(3)
We should be by now also familiar with the imposition of the holy trinity of privatisation-liberalisation-deregulation policies and the effects which these policies have visited upon the world courtesy of the so-called ‘Washington Consensus’.
The problem is that there seems to be an invincible barrier of learnt ignorance nurtured within the governing institutions which direct and administer the global economy and its policies, and the shutting down or even the possibility of transcending what amounts to a religious dogma the consequences of which are manifest.
‘’We are now being asked to believe that these policies which have further impoverished people and are devastating the planet will in fact lead to diametrically different and highly beneficial outcomes, if only they can be accelerated and applied everywhere, freely and without restrictions; that is when they are globalized.’’ (4)
You see, the problem is easily solved by a more radical implementation of the existing – failed!- policies. Words fail one!
Predictably the result of the above guiding principles have reduced annual GDP growth figures for the Euro area which have been uniformly poor. These indicators were already baked in the cake and there were serious reservations regarding the sustainability of the global system as far back as 2019 which were bound to give rise to weak levels of investment and growth with the corollary of increasing unemployment – and so it turned out. From January 2018 Euro growth had slowed down to an average of 0.3% and then with the onset of the pandemic collapsed to a negative -3.6. As follows all are the latest figures for the 4 major EU countries: the UK -1.7%, France -5.0% Germany -2.2% and Italy -5.4% as of March 2020. GDP growth in the EU had been on a downward trajectory from 2.7% in 2017 to 1.3% in early 2020 and since the Covid-19 has plummeted to minus -3.6% (5)
IMF/WB Shock Therapy – Eastern Europe
Latvia. Soup de Jour: Russophobia. Enjoy.
Looking back and having witnessed the great Soviet meltdown with its attendant economic cataclysm the ex-Soviet satellites and republics have more recently received less attention in the business and financial media. What attention they have received paints a rosy picture of full-employment and runaway growth which have been a function of the rapid shock therapy which caused such mayhem in Russia in the 1990s. So much for the hype. What did in fact happen was rather different.
If anything the implantation of the neo-liberal virus and shock-therapy in the newly emerged post-communist states of Eastern Europe, together with an additional virulent and counter-productive Russophobic hostility should stand as a model for a botched and bungled attempt at social and economic development. The subsequent economic and social ravages has reduced these states to an almost Latin-American relationship with Western Europe.
The bald fact is that in economic terms there is little comparison to be made between Eastern and even Central Europe to Western Europe. This gap has not significantly changed and the only ex-soviet satellite comparable is Czechia reputed to be the success story. Czechia just squeezes into the bottom of the income hierarchy of the west as measured in GDP per capita of Purchasing Power Parity (PPP). The only western states which fall below the Czechia are Portugal $30,622.00 and Greece $27,812.00. (6)
These states, the ex-soviet Republics and satellites, having thrown off the yoke of communism wanted to taste the joys of western consumerism and national self-determination, apparently, and as subsequent events turned out, also for the imposition of the yoke of US imperialism, which for bizarre reasons they found liberating. Suffice it to say that their geopolitical outlook was unashamedly Atlanticist, and their economics were neo-liberal; this much to the dismay of the European Gaullists and socialists.
But this really was manna from heaven for the British and German Atlanticists. Their object all along had been to smash the Delors’ vision of Euro-deepening with the policy tool of Euro-widening. German big business in particular saw juicy opportunities to outsource its operations to a new low-wage, East European hinterland thereby lowering its costs, as well as opening up new markets in which to sell their products. European banks also saw opportunities to extend credit – a move that they would later regret bitterly – to these newly emerging states. From the British viewpoint Euro-widening effectively meant political and institutional dilution as well as economic and financial deregulation. The cheap armies of labour in the East would provide the perfect instrument for downward harmonisation of wage levels and workers’ rights and benefits in the West.
This was indeed a deep-going change in both the economic configuration and geopolitics of the EU. But I cannot recall any discussion prior to the event. Such big policy decisions, taken behind closed doors with minimal consultation (if any) to all those who would be affected only served to distance the electorates of the west further from the EU political and bureaucratic elites. Pretty much par for the EU.
A case study by Michael Hudson (7) is illustrative of the whole process which happened, and is still happening in Eastern Europe, he writes with reference to Latvia:
‘’Post-soviet economies were free of public debt, real estate and personal debt or other bank loans obtained with their political independence in 1991 … like other post-soviet economies Latvians wanted to achieve the type of prosperity they saw in Western Europe. If Latvia had actually followed the policies that had built up the western industrial nations, the state would have taxed wealth and income progressively to invest in public infrastructure. Instead Latvia’s ‘miracle’ assumed largely predatory forms of rent-seeking and insider privatisations. (My emphasis – FL).
Accepting US and Swedish advice to impose the world’s lopsided and set of neoliberal tax and financial policies, Latvia imposed the heaviest taxes on labour. Employers must pay a flat 25% tax on wages plus a 25% social service tax, whilst wage earners pay another 11% service tax … Persons who advocated taxing real estate and financial wealth, or even supported public spending, protecting consumers and other regulation were accused of threatening a return to communism. A black and white contrast is drawn either soviet style socialism, or neoliberal ideology denying that there is any such thing as a viable mixed economy (Op.cit. pp.286/287)
There followed a period of phony, debt-fuelled growth which inevitably popped in 2008 when in Warren Buffet’s amusing little quip ‘’You only see who’s been swimming naked when the tide’s gone out.’’ And in the fullness of time the tide went out for Latvia. By 2008 it had become common knowledge that the post-soviet economies had not really grown at all but had simply been financialised and indebted.
Eastern Europe – A Demographic Disaster Zone
If the economic problems of Eastern Europe were not bad enough there was the second wave of bad news. To wit, an unmitigated fall in population levels which have already have now resulted from a massive exodus of young and talented migrants from the Baltics and others to the more salubrious climes of Western Europe, mainly Germany and the Scandinavian states. The depopulation phenomenon was not a policy as such, but it emerged as the unanticipated corollary to other parts of the neoliberal policy baggage.
In addition to mass migration there has been a fall in the fertility rate (8) and a rise in the death rate as well as the exodus of skilled and ambitious young workers looking for a better life in Western Europe. For population growth to stabilise a fertility rate minimum of 2.1 babies for every one child-bearing woman per annum is needed. Suffice it to say that even Western Europe has not managed to hit this target let alone the Eastern periphery.
Post-independence from the Soviet bloc in 1991, the population of Latvia has been diminishing annually at the rate of 23,000 people a year. These frightening figures were unveiled last March by a professor at the University of Latvia, demographer Peteris Zvidriņš who would note that the sad reality is that Latvia loses a small town every two weeks. In raw figures, that is 55 people a day, or 1,650 people a month. Another Latvian demographer, who heads a local office of the International Organization for Migration of the United Nations, Ilmar Mezhs, has recently told Skaties.lv that most of those who are leaving Latvia are not planning to go back. Referring to the forecasts of Eurostat, Mezhs suggested that in sixty years in the place of 2.7 million people who had previously resided in Latvia, one would find less than a million people still dwelling in this country. According to preliminary reports, the country’s population has already been reduced to 1.946 million people. Latvia has been plagued by high mortality rates along with the massive exodus of its people since 1991. According to LTV7, a local media station, the situation in maternity wards across Latvia is critical: low salaries often go hand-in-hand with a shortage of medical personnel, especially young professionals. If the situation is not addressed urgently, as various Latvian media sources report, there will be no qualified doctors left in hospitals.
The latest Eurostat report on the situation in Lithuania shows that up to 29% of the inhabitants are living on the verge of poverty, with the situation remaining unchanged for eight consecutive years. At the same time, Lithuania is among the top five states of the EU where people are being employed for meagre salaries. The sad reality of this trend is evident in historical records showing an unprecedented drop in the population of this Baltic country, falling from 3.7 million back in 1990 to 2.8 million in 2016 – a 25% decline. Income inequality and the striking poverty of some Lithuanian residents is only getting worse over time, putting Lithuania on the list of the poorest EU states. A typical resident would pay a third of his monthly salary in a bid to get access to healthcare services.
It’s not surprising that for many years Lithuania has had the largest number of suicide cases in the EU. Therefore, it is quite understandable why Lithuania remains a country that consumes more alcohol than any other, as it’s been stated by the World Health Organization (WHO). A similar situation can be seen in other Eastern European countries, that are being described, according to Der Spiegel, as so-called “second speed EU states … Apart from migration additional factors exacerbate the problem namely: low birth and increasing death rates.
The long list of domestic social problems in the Baltic states has been largely ignored by media engaged in a massive Russophobia campaign promoted by Washington. Rolandas Paksas, the former president of Lithuania summed up the results of the post-Soviet period in the history of the republic in March. In his opinion, nothing has been done in the past twenty-seven years of independence nor has anything been built. Therefore, as Paksas points out, every year there are fewer and fewer people in Lithuania, and the life of those who remain is only becoming more difficult.
In general terms Eastern Europe’s population is shrinking like no other regional population in modern history. The population has declined dramatically in war ridden countries like Syria as well as in some advanced economies in peacetime, like Japan. But a population drop throughout a whole region and over decades has never been observed in the world since the 1950s with the exception of Southern Europe in the last five years and Eastern Europe over the last 25 consecutive years. The UN estimated that there were about 292 million people in Eastern Europe last year, 18 million less than in the early 1990s, that’s more than the population of the Netherlands disappearing from the region. The fall corresponds to a drop of six per cent – moreover, the trend continues
- Lithuania 12%
- Latvia 12%
- Ukraine 9%
- Hungary 8.5%
- Romania 7%
- Bulgaria 6%
- Estonia 1.5%
- Poland 0.5%
- Russia, slight increase
- Slovakia, slight increase
- Czech Republic, slight increase.
But the most drastic consequences of the “post-communist breakdown” have been experienced by Ukraine – once one of the most developed republics of the USSR. If in the early 1990s there were 52 million people in the republic, now the population does not exceed 42 million. So much for the revolution of dignity and prospect of freedom democracy and abundance promised by the EU. The Kiev Institute of Demography estimates a population of 32 million by 2050 or perhaps sooner. According to recent polls, 35% of Ukrainians declared their readiness to emigrate usually to other Eastern European states; particularly Russia and Poland. The process accelerated after Ukraine received a visa-free regime with the EU: about 100,000 people leave the country every month. Ukraine is not so much a failing state, it is more a dying state.
In geopolitical terms a recognisable global configuration has since the 1990s come into being. This consists of a top down US-Zionist structure resting upon a West European layer of semi-comprador states, which in turns rests upon completely comprador regimes in Eastern Europe as was the case during their years of Soviet domination.
Unfortunately for them neo-liberalism and Russophobia didn’t put food on the table. The peoples of Eastern Europe have been subjected to a three-card confidence trick of ‘find the lady’ a card game practised by petty thieves on dumb overseas tourists in the streets of central London during the tourist season. It may work for a time, but ultimately the deteriorating conditions of life are and will be such that there will be a search for alternatives. But given their abject servility ‘will be’ should be perhaps be less likely than ‘may be’.
*Mercantilism: economic theory and practice common in Europe from the 16th to the 18th century that promoted governmental regulation of a nation’s economy for the purpose of augmenting state power at the expense of rival national powers. It was the economic counterpart of political absolutism. Its 17th-century publicists—most notably Thomas Mun in England, Jean-Baptiste Colbert in France, and Antonio Serra in Italy.
- Monthly Review Press – 1967
- National System of Political Economy – Friedrich List – p.141 – 1841
- The New World Order in Action – Takis Fotopolous – pp.156/157
- The Case Against the Global Economy – Jerry Mander, et al.
- Source: – Trading Economics.
- Source: – Pocket World in Figures – The Economist 2020 edition.
- Killing the Host – Michael Hudson -2015
- The total fertility rate in a specific year is defined as the total number of children that would be born to each woman if she were to live to the end of her child-bearing years and give birth to children in alignment with the prevailing age-specific fertility rates. It is calculated by totalling the age-specific fertility rates as defined over five-year intervals. Assuming no net migration and unchanged mortality, a total fertility rate of 2.1 children per woman ensures a broadly stable population.