Chapter 4, Democracy and the Market

From Year 501: The Conquest Continues, a Noam Chomsky book, available here, or at your local library.

Among global planners, few captured the essence of policy more clearly than George Kennan when he advised in 1948 that if we are to maintain the disparity between our wealth and the poverty of others we must "put aside idealistic slogans and keep to straight power concepts." Deviation from these guidelines is rare. Such ideals as democracy and the market are well and good, as long as the tilt of the playing field guarantees that the right folks win. If the rascal multitude try to raise their heads, they must be beaten into submission in one or another way: in the Third World, outright violence often suffices. If market forces interfere with domestic privilege, free trade is quickly cast to the flames.

The truth of the matter was well articulated by a US banker in Venezuela under the murderous Perez Jimenez dictatorship: "You have the freedom here to do what you want to do with your money, and to me, that is worth all the political freedom in the world." That about sums it up.

These doctrines are too deeply rooted in institutional structures to be seriously challenged within the ruling state-corporate nexus. It can, on occasion, produce someone who will deliver moral lessons on human rights. But when some real interest is at stake, the rhetoric is quickly shelved: say, when it is necessary to support virtual genocide in East Timor, to protect Somoza's National Guard while it is slaughtering thousands of civilians, or to tilt towards China and Pol Pot, to select a few examples from the period of an unusual deviation toward High Principle.

The consistent practice is illustrated over a broad range throughout this discussion and in sources cited. To select another case that brings out fundamental principles sharply, consider the response when General Chun's military dictatorship in South Korea crushed the democracy movement in Kwangju in May 1980. Paratroopers "carried out three days of barbarity with the zeal of Nazi storm troopers," an Asia Watch investigative mission reported, "beating, stabbing and mutilating unarmed civilians, including children, young girls, and aged grandmothers." Two thousand people were killed in this rampage, they estimate. The US received two requests for assistance: the citizens committee that had called for democracy requested help in negotiations; General Chun requested the release of 20,000 troops under US command to join the storm troopers. The latter request was honored, and US naval and air units were deployed in a further show of US support.

"Koreans who had expected help from Carter were dumbfounded," Tim Shorrock writes, as "the news of direct support from the US was broadcast to the people of Kwangju from helicopters and proclaimed throughout the nation in blazing newspaper headlines." A few days later, Carter sent the head of the Export-Import Bank to Seoul to assure the military junta of US economic support, approving a $600 million loan. As Chun took over the presidency by force, Carter said that while we would prefer democracy, "The Koreans are not ready for that, according to their own judgment, and I don't know how to explain it any better."

Chun arrested thousands of "subversives" calling for democracy, sending them to military-run "purification" camps. Hundreds of labor leaders were purged; new legislation severely weakened unions, leading to a 30 percent drop in membership. Censorship became even more harsh. Gratified with this progress, the Reagan Administration honored Chun by selecting him as the first head of state to visit after the inauguration. Visiting Korea in 1986, Secretary of State George Schultz praised the "terrific job being done in security" and in the economy, and the "impressive movement towards democracy." He expressed his strong support for General Chun. He harshly criticized the democratic opposition, refusing to meet with its leaders Kim Dae Jung and Kim Young Sam, and explaining that "how countries design things can vary and you can still call it democracy."

To show how much has changed with the Cold War over, president Bush chose the amiable Mobutu of Zaire as the first African leader to be received at the white house, hailing him as "one of our most valued friends" and making no reference to human rights violations. Among others rewarded for their contributions to democracy and human rights were Bush's friends in Baghdad and Beijing, and Romania's mad dictator Ceausescu.

THE FLIGHT OF THE BUMBLEBEE

In the current phase of intellectual corruption, it must be stressed that, like democracy and human rights, the economic doctrines preached by the rulers are instruments of power, intended for others, so that they can be more efficiently robbed and exploited. No wealthy society accepts these conditions for itself, unless they happen to confer temporary advantage; and their history reveals that sharp departure from these doctrines was a large factor in development.

At least since the work of Alexander Gerschenkron in the 1950s, it has been widely recognized by economic historians that 'late development' has been critically dependent on state intervention. Japan and the Newly Industrialized Countries (NICs) on its periphery are standard contemporary examples. In a major study, 24 leading Japanese economists review the decision by the Ministry of International Trade and Industry (MITI) after World War II to disregard prevailing economic theory and to assign a "predominant role in the formation of industry policy" to the state bureaucracy, "in a system that is rather similar to the organization of the industrial bureaucracy in socialist countries." Each sector, if industry has its section of the government bureaucracy, which works "in close co-operation" with an industry association. Heavy protection, subsidies and tax concessions, financial controls, and a variety of other devices were employed to overcome market deficiencies that would have prevented development. Rejecting standard doctrines, MITI determined that "long-term self-reliance for Japan would be delayed or even undermined by following its apparent comparative advantage into labor intensive sectors." The radical defiance of economic precepts set the stage for the Japanese miracle, the economists conclude. Western specialists do not disagree. Chalmers Johnson notes that Japan could be described as "the only communist nation that works."

Some have suggested--only half in jest--that Japan's support for the Brookings Institution and other advocates of standard doctrine is intended to reinforce belief in the classical theory, to the detriment of its commercial rivals.

The same has been true of the NICs in Japan's periphery. In her important work on South Korean economic progress, Alice Amsden cites such factors as land distribution and wage-salary differentials that are equitable by Western standards, state intervention on the Japanese model to "get prices 'wrong' in order to stimulate investment and trade," and high discipline of labor, but more strikingly, of capital, which is controlled by "price ceilings, controls on capital flight, and incentives that made diversification into new industries contingent on performing well in old ones." Much the same has been true throughout East Asia, she notes. Case by case, the record of export-led growth refutes the doctrines of the neoliberal "New Orthodoxy," economist Stephen Smith points out. Success was based "on activist trade and industrial policies" that deliberately alter market incentives to place "long-run development goals over short-run comparative advantage." The most extensive comparative study concludes that "periods of significant export expansion are almost always preceded by periods of strong import substitution"--measures of state intervention in violation of the market (Chenery, et al.). The comparison of Brazil and the East Asian NICs is telling. Until 1980, they developed in parallel, with "active industrial and export policies" and import substitution. But the debt crisis compelled Brazil to adopt IMF-World Bank New Orthodoxy, elevating "trade liberalization over domestic growth objectives" and turning to the export of primary products, with grim consequences. The NICs, with much more powerful state controls, prevented the market disaster, barring capital flights and directing capital to investment.

Meanwhile China, the one "Communist" country that has kept the western experts at arms length, remains the only one with rapid economic development (along with vigorous repression and no pretense of democracy). "One phenomenal success has been 'township and village enterprises', for the most part factories owned by rural farmers," which "now account for close to 20 percent of China's GNP, employing more than 100 million people," financial correspondent David Francis writes, quoting a World Bank spokesman who predicts that they "will most assuredly be the single most dynamic form of enterprise on the Chinese scene."

The German economic miracle also relied on its departures from standard precepts, from the 19th century. The post-WWII system involves elements of "corporatism," defined as the "broad concentration between employer and employee representatives across industries, which is usually established and sometimes continually supervised under state auspices" (Charles Meier), though this conception underplays the role of central financial institutions, "a particularly significant actor in the German political economy," Michael Huelshoff writes. "The Reagan nightmare of supply side economics and military Keynesianism" and its "fiscal recklessness and monetary astringency" have received particularly harsh criticism in Germany (James Sperling). The smaller successful economies adopt similar means. Thus Holland relied on cartels coordinated through the Ministry of Economic Affairs for its postwar economic reconstruction, regulating production, sales, supplies, prices, etc. Not all of the more than 400 still surviving in 1992 will survive the EC, but the government announced that a "green light will be given to positive cartels" that offer protection for companies launching new technologies.

"A strict free marketeer would declare the German economy, like the bumble-bee, theoretically incapable of flight," the Economist observes with puzzlement, reviewing such departures from orthodoxy as "well-trained and well-paid workers, who sit on oversight boards," "giant, bank-owned industries unbothered by shareholders, secure from predators and heedless of profit, high taxes, cradle-to-grave welfare," and other sins:

Low wages do not appear to have been a major factor in late development, however attractive they may be to TNCs. "Neither Germany nor the US industrialized by competing against Britain on the basis of low wages,' Amsden points out, and the same was true of Japan, which undercut British textiles in the 1920s by modern production facilities more than low wages. In Germany and other successful economies, labor conditions and benefits are high, by comparative standards. A study of industrial productivity by MIT specialists notes further that Germany, Japan, and other countries that maintained the "craft tradition, with more direct participation of skilled workers in production decisions" have been more successful in modern industry than the US, with its tradition of deskilling and marginalizing workers in the "mass-production model"; lessened hierarchy, responsibility in the hands of production workers, and training in new technologies has also improved results in the US, they conclude. Economist David Felix makes a similar point in comparing Latin America and East Asia. Asians who were less subordinated to Europe and the US than Latin American elites did not assign such high status to foreign-made consumption goods, "allowing much larger segments of the craft sector to survive, accumulate, and modernize the technology," while also easing balance-of-payments pressures. Amsden attributes South Korea's success in part to reliance on workers' initiative on the shop floor in preference to managerial hierarchies.

It is, however, not only "late development" that is crucially dependent on departures from doctrinal orthodoxy. The same was true of the "early development" of England. The US as well. High tariffs and other forms of state intervention may have raised costs to American consumers, but they allowed domestic industry to develop, from textiles to steel to computers, barring cheaper British products in earlier years, providing a state-guaranteed market and public subsidy for research and development in advanced sectors, creating and maintaining capital-intensive agribusiness, and so on. Elimination of tariffs in the 1830s would have bankrupted "about half the industrial sector of New England," economic historian Mark Bils concludes.

There were experiments with unconstrained markets in 19th century England, quickly abandoned. Free trade was (selectively) introduced and dropped as domestic power interests dictated. In the US, business regularly turned to the state to overcome its problems, initiating government bureaucracies from the 1880s and demanding protection and subsidy. By the 1930s, faith that capitalism might be viable had virtually disappeared, as the advanced countries moved towards one or another form of state-integrated economic system. It should be a virtual truism that "Since WWII, military spending had become the backbone of our goods production. It could be, and was, managed to sustain the level of aggregate demand and unemployment, adjusted periodically as the business cycle might require, and used to help meet the growth targets" (Richard Bartel). Military spending in WWII convinced corporate executives of the validity of the Keynesian model of state intervention, and they have taken for granted since that the state must intervene actively to protect and subsidize the wealthy and privileged, notoriously during the Reagan years.

The crucial role in industrial development of the "visible hand"--planning and coordination of production, marketing and R&D--is well known from the studies of business enterprise by Alfred Chandler over the past 30 years. Summarizing and extending work by Chandler, David Landes, and other historians of development, William Lazonick argues that industrial capitalism has passed through three major phases: the "proprietary capitalism" of 19th century England, with family-owned firms and a substantial degree of market coordination; the "managerial capitalism" of the US, with "administrative coordination" for planning and organization; and the "collective capitalism" of the Japanese model, which allows still more efficient long-term planning and coordination. In each case, private enterprise has relied extensively on the state power that it largely controls, though in different ways. The TNCs extend these internally coordinated, state-supported systems worldwide.

"Import substitution [through state intervention] is about the only way anybody's ever figured out to industrialize," development economist Lance Taylor observes: "In the long run, there are no laissez-faire transitions to modern economic growth. The state has always intervened to create a capitalist class, and then it has to regulate the capitalist class, and then the state has to worry about being taken over by the capitalist class, but the state has always been there." Furthermore, state power has regularly been invoked by investors and entrepreneurs to protect them from destructive market forces, to secure resources, markets, and opportunities for investment, and in general to safeguard and extend their profits and power.

With the conventional pretext gone, Washington sought new ways to maintain the subsidy to advanced industry. One method is foreign arms sales, which also help alleviate the balance-of-payments crisis. As the Cold War came to a definitive end, the Bush administration created a Center for Defense Trade to stimulate arms sales while proposing government guarantees of up to $1 billion in loans for purchase of US arms. The Defense Security Assistance Agency was reported to have sent more than 900 officers to some 50 countries to promote US weapons sales. Pentagon officials trace the policy to a July 1990 order that Embassy officials should expand their assistance to US arms exporters; the Gulf war was then prominently featured as a sales promotion device. At a Pentagon-industry conference in May 1991, industry officials asked the government to pick up the costs of US military equipment and personnel sent to contractor trade shows around the world for sales promotion. The Pentagon agreed, reversing a 25-year policy. The first taxpayer-funded display was at the June 1991 Paris Air Show.

Lawrence Korb of the Brookings Institution, formerly Assistant Secretary of Defense in charge of logistics, observed that the promise of arms sales had kept stocks of military producers high despite the end of the Cold War, with arms sales rising from $12 billion in 1989 to almost $40 billion in 1991. Moderate declines in purchases by the US military were more than offset by other arms sales by US companies. Since "president Bush called last May [1991] for restraint in weapons sales to the Middle East," AP correspondent Barry Schweid reported in early 1992, "the US has transferred roughly $6 billion in arms to the region," part of the $19 billion in US weapons sent to the Middle East since Iraq's invasion of Kuwait. From 1989 through 1991, US arms exports to the Third World increased by 138 percent, making the US far and away the leading arms exporter. The sales since May 1991 are "fully consistent with the president's initiative and the guidelines" in his call for restraint, state department spokesman Richard Boucher announced--quite accurately, given the actual intent.

Bush administration calls for restraint were timed for the triumphal celebration of the Gulf war, as part of the PR campaign on the new era of peace and tranquility that we are entering, thanks to the valor of our grand leader. On February 6, 1991, secretary of state james baker told the House Foreign Committee that the time had come for concrete steps to stem the flow of armaments to the Middle East, "an area that is already over-militarized." On March 6, in his triumphant address to a cheering joint session of congress, the president announced that control of arms sales would be one of his major postwar goals: "it would be tragic," he said, "if the nations of the Middle East and Persian Gulf were now, in the wake of war, to embark on a new arms race."

In recognition of the scale of the tragedy, the administration, a few days earlier, had provided the Senate Foreign Relations Committee with a confidential listing of planned sales reaching to record levels, more than half for the Middle East; and informed congress of a $1.6 billion sale of advanced fighter aircraft to Egypt. A week after the speech, congress was informed of a $760 million deal for Apache helicopters to the United Arab Emirates. The pentagon then used the Paris Air Show for an unprecedented sales pitch, displaying with pride the goods that had so magnificently destroyed a defenseless Third World country (Iraq). Secretary of defense Cheney announced new arms transfers to Israel and plans to stockpile $200 million worth of US weapons there; another $7 billion in weapon sales, mainly to the Middle East, was announced in July. The UK followed the same path. China was the only weapons exporter to call for concrete limits on arms sales to the Middle East, a proposal quickly dismissed by the US and its allies.

Military Keynesian initiatives have not been limited to the taxpayer subsidy (R&D) and a state-guaranteed market. While the US “lags far behind nations like Japan and Germany in per-capita spending on foreign aid budget “, it is devoted to direct grants or loans to foreign governments for the purchase of US military equipment”; other programs are shaped to the same ends.

Such considerations, however, should not obscure the more fundamental role of the pentagon system (including NASA and DOE) in maintaining high-tech industry generally, just as state intervention plays a crucial role in supporting biotechnology, pharmaceuticals, agribusiness, and most competitive segments of the economy. The Reagan administration sharply increased protectionist measures along with steps to support failing banks and industries, and generally to assist US corporate power.

By IMF standards, the US, after a decade of Reaganite folly, is a prime candidate for severe austerity measures. But it is far too powerful to submit to the rules, intended for the weak.
As noted, the World Bank now estimates that protectionist measures of the industrial countries—keeping pace with free market bombast—reduce the national income of the south by twice the amount of the official “development assistance.” The latter may help or harm the recipients, but that is incidental. Typically, it is a form of export promotion. One notable example is the Food for Peace program, designed to subsidize US agribusiness and induce others to "become dependent on us for food” (senator Hubert Humphrey), and to promote the global security network that keeps order in the Third World by requiring that local governments use counterpart funds for armaments (thus also subsidizing US military producers).

A more significant case is the Marshall Plan. Its goal was “to avert economic, social and political chaos in Europe, contain communism (meaning not Soviet intervention but the success of the indigenous Communist parties), prevent the collapse of America’s export trade, and achieve the goal of multilateralism,” and provide a crucial economic stimulus for “individual initiative and private enterprise both on the continent and in the US,” undercutting the fear of “experiments with socialist enterprise and government controls,” which would “jeopardize private enterprise in the US” as well (Michael Hogan, in the major scholarly study). The Marshall Plan also “set the stage for large amounts of private US direct investment in Europe,” Reagan’s Commerce Department observed in 1984, establishing the basis for the modern TNCs, which “prospered and expanded on overseas orders, fueled initially by the dollars of the Marshall plan” and protected from “negative developments by the umbrella of US power,” Business Week observed in 1975, lamenting that this golden age of state intervention might be fading away. Aid to Israel, Egypt, and Turkey, the leading recipients in recent years, is motivated by their role in maintaining US dominance of the Middle East, with its enormous energy reserves.

The utility of free trade as a weapon against the poor is illustrated by a World Bank study on global warming, designed to “forge a consensus among economists” in advance of the June 1992 Rio conference on global warming, N.Y. Times business correspondent Silvia Nasar reported under the headline “Can Capitalism Save the Ozone?” (the implication being: “Yes”). Harvard economist Lawrence Summers, chief economist of the World Bank, explained that the world’s environmental problems are largely “the consequence of policies that are misguided on narrow economic grounds,” particularly the policies of the poor countries that “have been practically giving away oil, coal and natural gas to domestic buyers in hopes of fostering industry and keeping living costs low for urban workers” (Nasar).If the poor countries would only have the courage to resist the "extreme pressure to improve the performance of their economies” and to protect their population from starvation, then environmental problems would abate. “Creating free markets in Russia and other poor countries may do more to slow global warming than any measures that rich countries are likely to adopt in the 1990s,” the World Bank concludes—correctly, since the rich are hardly likely to pursue policies detrimental to their interests. In the small print, the consensus economists also recognize that “more effective government regulation” reduces pollution, but grinding down the poor has obvious advantages.

The same page of the Times business section carries an item on a confidential memo for the World Bank leaked to the Economist. Its author is the same Lawrence Summers. He writes: “Just between you and me, shouldn’t the World Bank be encouraging more migration of the dirty industries to the Third World?” This makes good sense, Summers explains: for example, a cancer producing agent will have larger effects “in a country where people survive to get prostate cancer than in a country where under-5 mortality is 200 per thousand.” Poor countries are “under-polluted” and it is only reasonable to encourage “dirty industries” to move to them. “The economic logic behind dumping a load of toxic waste in the lowest-wage country is impeccable and we should face up to that.” To be sure, there are “arguments against all of these proposals” for exporting pollution to the Third World: “intrinsic rights to certain goods, moral reasons, social concerns, lack of adequate markets, etc.” But these arguments have a fatal flaw: they “could be turned around and used more or less effectively against every Bank proposal for liberalization.”

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