By Francis Lee for the Saker Blog
‘The dependency thesis, like all good (and great) theories can be summed up in a single phrase: Modern ‘’underdevelopment’’ is not ‘’historical backwardness’’ the result of late and insufficient development; it is the product of capitalist development, which is polarizing by nature’. (Andre Gunder Frank -1996.)
The leader of the UK Conservative Party, Mrs Thatcher, first came to power in the UK in 1979 with a brief to end the post-war consensus which had prevailed from the Labour party victory in 1945. Although Labour lost the ensuing elections from 1951-1963, the Conservative Party nonetheless adopted many of Labour’s social-democratic policies, particularly the economic policies, which characterised the post-war years. The same process was to take place when Ronald Reagan established a similar ascendency in the United States. The Thatcher-Reagan duo was born and was to terminate the post-war settlement in both the UK and the US.
Theories were put forward by economic luminaries on both sides of the Atlantic, but particularly by Milton Friedman at the University of Chicago. The notion that there existed a magic panacea that would banish all the problems associated with the failing British and American economic policies of 1945-1979, formed the basis of the Thatcher-Reagan economic radicalism, which was to be followed by the Blair-Clinton consolidation of the 1990s. The so-called ‘supply-side’ revolution consisted of removing all the controls which undergirded capitalism, and which had been painstakingly put in place during the course of the 20th century, and simply letting the system find its own level. Privatisation, deregulation, and liberalisation were the components in this policy paradigm.
Of course none of this is news; it had been the staple of the West’s chattering classes in the late 20th century. But its effects were more than restricted to the North Atlantic bloc and was to have a global impact changing the political and economic policies and structures of the whole world.
NEO-LIBERALISM & GLOBALIZATION
In international terms ‘free’-trade as it was known was at the heart of the system – a system, which was later to become known as globalization, packaged and sold as an irresistible force of nature. Globalization was considered to be neo-liberalism writ large. But on the contrary, a more nuanced interpretation was to be put forward by one of the more astute commentators on the issue.
‘’The standard and most popular narrative is of globalization as the twin of neo-liberalism, expressing the market-fundamentalist view that state-intervention is bad for the economy. It is argued that the state interferes too much with the self-regulating power of the markets, thereby undermining prosperity. This perspective would explain why Alan Greenspan regarded it as fortunate that globalization was rendering the government as being redundant. We call this the anti-state narrative. An alternative narrative is actually considerably more germane: an anti-politics, specifically an anti-mass politics narrative. Greenspan’s statement incorporated the conventional presumption that the West has reached the frontiers of traditional politics: politics has lost its efficacy in the face of global forces. As a result, especially economic policy, is now pretty irrelevant if not actually detrimental, because everything is driven by – determined by – the impersonal force of globalisation. (1) So it is argued.
It was of course taken as axiomatic that free-trade – a vital component in the new economic paradigm – was always and everywhere the best policy. This conventional wisdom was to become known as the ‘Washington Consensus’ and was given a legitimating cachet by political, business, and academic elites around the world. However many of the elements – if not all – of the Washington Consensus where hardly new, many date back to the 18th and 19th centuries and perhaps beyond. It could be said that the newly emergent mainstream orthodoxy represented a caricature of an outdated and somewhat dubious political economy.
The free-trade canon is, of course, spoken of in almost reverential terms. It is as jealously guarded by the economics priesthood in Wall Street and the City of London and of course academia. In short, the theory is based upon a type of formal logic expounded by the early pioneers of political economy, viz., Adam Smith and David Ricardo; and in particular in Ricardo’s magnum opus, The Principles of Political Economy and Taxation first published in 1817. Briefly he argued that nations should specialise in what they do best and in that way world output would be maximised. The hypothetical example he used was England and Portugal and the production of wine and cloth, where he calculated that England should produce cloth and Portugal should produce wine. It was asserted, although no evidence was ever presented, that all would gain from this international division of labour.
However, even a cursory glance at economic history, and particularly the transition from agrarian to industrial societies, demonstrates the weaknesses, and indeed serves to falsify the whole Ricardian model – taken as a model of development. The brute historical fact is that every nation which has successfully embarked upon this transition, including most importantly the US and Germany, has done so adopting catch-up policies which were the exact opposite of those advocated by the free-trade school. (2)
In the world of actually existing capitalism free-trade is the exception rather than the rule. Contemporary free-trade is mainly a matter of intra-firm trading, that is to say, global companies trading with their own subsidiaries and affiliates mainly for tax avoidance purposes, transfer pricing for example. Next come the regional trading blocs – the EU, NAFTA, (which was superseded by the United States–Mexico–Canada Agreement USMCA) and Mercosur (in Latin America). With regard to Mercosur there is no common currency as is the case in most of the EU. Thirdly there is barter trade where goods and services are exchanged for other goods and services rather than money. Finally only about 20% of world trade can at most be considered free trade, and even here there are exceptions involving bilateral specifications and agreements.
Modernisation and industrialisation, wherever it took place, involved tariffs, non-tariff barriers (3) infant industry protection, export subsidies, import quotas, grants for Research and Development (R&D), patents, currency manipulation, mass education and so forth – a smorgasboard of interventionist policies whereby the economy was directed from above by the state. For example, during its period of industrialisation, the United States erected tariff walls to keep out foreign (mainly British) goods with the intention of nurturing nascent US industries. US tariffs (in percentages of value) ranged from 35% to almost 50% during the period 1820-1931, and the US itself only became in any sense a free trading nation after WW2, that is once its financial and industrial hegemony had been established.
In Europe laissez-faire policies were also eschewed. In Germany in particular tariffs were lower than those in the US, but the involvement of the German state in the development of the economy was decidedly hands on. Again there was the by now standard policy of infant industry protection, and this was supplemented by an array of grants from the central government including scholarships to promising innovators, subsidies to competent entrepreneurs, and the organisation of exhibitions of new machinery and industrial processes. In addition ‘’during this period Germany pioneered modern policy, which was important in maintaining social peace – and thus promoting and encouraging social investment – in a newly unified country.’’ (4)
This path from under-development to modern industrial development, a feature of historical and dynamic economic growth and expansion which has taken place in the US, Europe, and East Asia is not a ‘natural’ progression, it was a matter of state policy. It has been the same everywhere that it has been applied. That being said the Ricardian legacy still prevails. But this legacy takes on the form of a free-floating ideology with little connexion to either practical policy prescriptions or the real world.
Turning to the real world it can be seen, by all of those who have eyes to see, that, ‘’ … history shows that symmetric free-trade between nations of approximately the same level of development, benefits both parties.’’ However, ‘’ … asymmetric trade will lead to the poor nation specialising in being poor, whilst the rich nation will specialise in being rich. To benefit from free-trade, the poor nation must rid itself of its international specialisation of being poor. For 500 years this has not happened anywhere without any market intervention.’’ (5)
GLOBAL ECONOMIC ASYMMETRY
This asymmetry in the global system is both cause and consequence of globalization. It should be borne in mind that the Least Developed Countries (LDCs) are the providers of cheap raw material inputs to the industrial countries of North America, Western Europe and East Asia. In technological terms the LDC’s find themselves locked into low value-added, dead-end production where no discernible technology transfer takes place. Thus under-development is a structural characteristic of globalization, not some unfortunate accident. Put another way,
‘’ … If rich nations (the North) as the result of historical tendencies (i.e., colonialism – FL) are relatively well-endowed with vital resources of capital, entrepreneurial ability, and skilled labour, their continued specialisation in products and processes that use these resources intensively can create the necessary conditions for their further growth. By contrast LDCs (the global South) endowed with abundant supplies of cheap unskilled labour, by intentionally specialising in products which use cheap, unskilled labour … often find themselves locked into a stagnant situation which perpetuates their comparative advantage in unskilled unproductive activities. This in turn inhibits the domestic growth of needed capital, and technical skills. Static efficiency becomes dynamic inefficiency, and a cumulative process is set in motion in which trade exacerbates already unequal trading relationships, distributes benefits largely to the people who are already well off, and perpetuates the physical and human resource under-development that characterises most poor nations. (6)
Examples of these unequal economic relationships are not difficult to find. US global trade policy was openly based upon a ‘Me Tarzan, you Jane’ set up. America’s trade ‘partners’ were somewhat less endowed with both political and economic capital compared with their senior trading associate – this fact provides a number of typical case studies in this connexion.
Agriculture was always a particular example of the double standard inherent in the trade liberalization agenda. The United States always insisted that other countries reduce their barriers to American products and eliminate subsidies for those products which competed against theirs. However, the US kept up barriers for the goods produced by the developing countries whilst it continued to underwrite massive subsidies for their own producers.
Agricultural subsidies encouraged American farmers to produce more output, forcing down global prices for the crops that poor developing countries produce and depend upon. For example, subsidies for one crop alone, cotton, went to 25,000 mostly very well-off US farmers, exceeded in value the cotton that was produced, lowering the global price of cotton enormously. American farmers, who account for a third of global output, despite the fact that US production costs twice the international price of 42 cents per pound, gained at the expense of the 10 million African farmers in Mali, West Africa, who depended on cotton for their meagre living. Several African countries lost between 1 and 2 percent of their entire income, an amount greater than what these particular countries received in foreign aid from the US. The state of Mali received US$37 million in aid but lost US$43 million from depressed cotton prices.
In other grubby little deals the US tried to keep out Mexican tomatoes, and Mexican trucks, Chinese honey, and Ukrainian women’s coats. Whenever an American industry is threatened, the US authorities swing into action, using so-called fair-trade laws, which had been largely blessed by the Uruguay Round.
Such Treaties were little more than a con game between two grossly unequal partners where one of the partners holds all the cards. Nor does it end there. Transnational Companies can and do avoid much local taxation by shifting profits to subsidiaries in low-tax venues by artificially inflating the price which they pay for their intermediate products purchased from these same subsidiaries so as to lower their stated profits. This phenomenon is usually called ‘transfer pricing’ and is a common practice of Transnational Companies (TNCs), one over which host governments can exert little control as long as corporate tax rates differ from one country to the next.
It should also be borne in mind that although the IMF and World Bank enjoin LDCs to adopt market liberalisation policies they apparently see – or conveniently ignore – the past and current mercantilist practices of developed nations. Agriculture, as has been noted, is massively subsidised in both NAFTA and the EU. But it really is a question of don’t do what I do – do as I say.
The hypocrisy at the heart of the problem represents the elephant in the room. We know that countries which attempt to open their markets when they are not ready to do so usually pay a heavy price (Russia during the Yeltsin period and the shock therapy for example). The countries which protect their growing industries until they are ready to trade on world markets – e.g. South Korea –have been the successes, even in capitalist terms. The wave of development during the 19th century and the development of East Asia in the 20th bears witness to this.
NOT IN THE DEVELOPMENT BUSINESS
But the object of the free-trade rhetoric and finger-wagging posture of the developed world is precisely to maintain the status quo. We should be aware that … ‘’Transnational Corporations are not in the development business; their objective is to maximise their return on capital. TNCs seek out the best profit opportunities and are largely unconcerned with issues such as poverty, inequality, employment conditions, and environmental problems.’’ (7)
Given the regulatory capture of the political structures in the developed world by powerful business interests, it seems that this situation is likely to endure for the foreseeable future. Development will only come about when the LDCs take their fate into their own hands and emulate the national building strategies of East Asia.
‘’…markets have a strong tendency to reinforce the status quo. The free market dictates that countries should stick to what they are good at. Stated bluntly, this means that poor countries are supposed to continue with the current practices in low-productivity, low-value added, and low research-intensive activities. But engagement in these activities is exactly what makes them poor in the first place. If they want to leave poverty behind, they have to defy the market and do the more difficult things that bring them higher income and development – there are no two ways about it.’’ (8)
THE RUSSIAN ROAD.
The legacy of the Yeltsin years had left Russia badly exposed to a triumphalist Western US/EU/NATO bloc. The NATO expansion up to Russia’s western frontiers posed a serious threat to Russia’s security. Internationally Russia was relatively isolated. The socialist political and economic alliances (Warsaw Pact and Comecon) were disbanded, and their previous commercial and economic networks were dismantled. The Russian Federation was excluded from membership of the European Union and was not (yet) a member of the World Trade Organization (WTO). This was the background for the widespread popular support for the assertive policy of President Putin.
But the geopolitical situation was to say the least – challenging. For his part Putin objected to NATO’s deployment of missiles in Poland and Romania pointed directly at Russia. In 1999 the Visegrad countries, Czech Republic, Poland and Hungary, joined NATO and in 2004 they were joined by Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia and Slovenia. All these states joined in 2009. Albania and Croatia joined in the same year. Economically, politically and militarily, the ‘’West’’ had arrived at Russia’s borders.
In addition to its external enemies Russia had an abundance of internal foes. This latter group was a product of the Yeltsin model and prior to this a tottering bureaucratic system which barely worked and ultimately collapsed. It was possible to distinguish two main groups which, for better or worse, undermined the Soviet system, which were identified as 1. The Administrative Class, and 2. The Acquiring Class, to which should be added the black-market entrepreneurs who were keen to emulate their western business icons in addition to the American mafia. Powerful reactionary and criminal elements in Russia were keen to bring about deep-rooted changes at the expense of the Russian people.
‘’Ostensibly the reforms in Russia were overseen by a group of senior state officials headed by one Yegor Gaidar and advised, supported and encouraged by senior figures from the US administration, as well as by various American ‘experts.’ But according to an American scholar, Janine Wedel, the Russian reforms were worked out in painstaking detail by a handful of specialists from Harvard University, with close ties to the American government, and were implemented in Russia through the politically dominant ‘Chubais Clan’. (Wedel – 2001). Chubais was officially reported as having engaged foreign consultants including officers of the CIA, to fill leading roles in the State Property Committee. Jonathan Hay, citizen of the USA and Officer in the CIA, was appointed director of the Foreign Technical Aid and Expertise Section and Deputy to the chairperson of the committee (Anatoliy Chubais) within the Expert Commission. The Expert Commission was empowered to review draft decrees of the president of Russia to review for the decisions by the government and instructions by the Chairman and Deputy Chairman of the State Property Committee of the Russian Federation of the details of privatisation in various sectors of the economy … The memoirs of Strove Talbott, Assistant to the US President William Jefferson Clinton on Russian affairs, left no doubt that the US administration viewed (the then) Russian President, Boris Yeltsin, as a reliable conduit for its interests in Russia.
The US neo-liberal economists Jeffrey Sachs and Andrei Shleifer, and Jonathan Hay, had an unprecedented degree of influence over Russia’s economic policy which was unparalleled for a sovereign state. Together with Gaidar and Chabais they formulated decisions that were inserted directly into Presidential decrees … Analysis shows that the implementation of Russian reforms organically combined an aspiration by Soviet bureaucrats to transform themselves from State functionaries into private property owners, and a desire on the part of the ruling elites in the West to impose their own system of values on their historical rival. It was thus inappropriate to speak of Russia and its neighbours in the CIS as having been independent in their conduct of radical economic reforms, and this very lack of independence was crucial for determining the strategy applied in these transformations.’’ (9)
Be that as it may, the damage to Russia carried out and orchestrated by both internal and external enemies was to push back Russian development at least two decades, if not more. Russia has been described by various informed opinion as being a ‘semi-peripheral economy’ and there is some truth in this, its main exports being raw materials and military and defence hardware. But this was a choice forced upon Russia by the US-western alliance. At the turn of the 19/20 century Russia needed to defend itself from western aggression. There were two absolute priorities. Agricultural security and military security. This was the sine qua non for Russia’s continued survival and development. The mixed economy – a characteristic of the western economic models, was for the moment, out of reach. But then the west started to run into its own problems, so things began to balance, particularly with the emergence of the Russian-Chinese alliance. However, the Yeltsin period which had produced a crop of cronies, co-conspirators, criminal and mafia elements, are still hidden in the shadows, often in very high places. The struggle goes on. La Lotta Continua.
(1) Phillip Mullan – Beyond Confrontation – p.36
(2) These economic policies as advocated by Alexander Hamilton in the US. In the month of January of 1791, the Secretary of Treasury to the then President George Washington’s administration, Mr. Alexander Hamilton, proposed a seemingly innocuous excise tax on spirits distilled within the United States of America. The move was part of Hamilton’s initiative to encourage industrialization and higher degree of national sufficiency. In his December 1791 report to manufacturers, Hamilton called for protective tariffs to spur domestic production. Also, Hamilton called for the reduction of duties on goods that were carried by American ships.
This was also the case of Freidrich List in Germany in his short work – The National System of Political Economy.
(3) A non-tariff barrier (NTB) is a policy implemented by a government that acts as a cost or impediment to trade. It is not tariffs on products but rather different rules and regulations that are often the biggest practical barrier to trade between countries. Examples of non-tariff barriers include rules on labelling and safety standards on products. Other types of non-tariff barriers to trade can also be the result of policies that differentiate between national and international companies and firms. For example, domestic subsidies by governments to a carmaker may help keep that manufacturer in their country. However, that acts as essentially an indirect non-tariff barrier to other car companies looking to compete. Governments are also often likely to give preferential treatment to companies in their own country when it comes to government procurement contracts. Governments also buy products from their own industries in preference to foreign companies, these are called procurement policies another NTB. This can be seen as an impediment to free and fair international trade.
(4) Ha-Joon Chang – Kicking Away the Ladder – p.32/33.
(5) How Rich Countries Got Rich and Why Poor Countries Stay Poor. – Erik Reinert. It could be argued that political intervention would be the prerequisite for an industrial policy.
(6) Development Economics – Todaro and Smith – 2009
(7) Todaro and Smith – Development Economics – Ibid.
(8) Ha-Joon Chang – Bad Samaritans – p.210
(9) Ruslan Dzarasov – Russia, Ukraine and Contemporary Imperialism – Semi-Peripheral Russia and the Ukraine Crisis – pp.82-97