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Saving the world economy.

Twelve months ago world capitalism appeared to be on the verge of a total breakdown. Unemployment in the major capitalist countries rose to over 30 million, world trade and growth actually fell, and the economic crisis of the third world threatened to bring the international banking system crashing down. Belief that the system was about to collapse was widespread and generated a flurry of proposals on both sides of the Atlantic designed to head off that possibility. Those of Henry Kissinger (Newsweek, January 24, 1983) and Helmut Schmidt (The Economist, February 26-March 4, 1983) received most publicity, but in many respects they echo or at least complement the recommendations of the Brandt Commission's Second Report, Common Crisis, which also appeared in 1983. The similarity of these proposals stems from a shared view of the causes of the world crisis, of the nature of capitalism, and of the imminence of collapse. With the apparent turn around in the U.S. economy in 1983-84, however, such proposals have been shelved for the time being. Nevertheless, they need to be closely examined by the left because they represent an important line of reformist thinking which undoubtedly will reappear with vigor if, as expected, the current U.S. recovery proves to be only a fleeting one, not sustained for any length of time.

The underlying premise of these liberal or post-Keynesian proposals is that global economic disorder poses a threat to the world capitalist system and "Western Democracy" as we know it. The common interests of both the major capitalist countries and the third world are at stake, therefore, and this necessitates not only a far-reaching reform of the international system but also, argue Kissinger and Schmidt, new approaches to the domestic management of capitalism within individual countries.

At the international level they propose to deal with the global transmission of instability through "an unprecedented coordination" of national economic policies. By cooperating closely in fixing exchange rates, the growth of credit, and the size of the government deficits, individual countries would no longer be tempted to solve their economic problems at the expense of other countries. Central to this policy coordination would be the reduction of protectionist measures designed to interfere with the free flow of trade between countries. The major capitalist nations are also called upon to expand demand to assist the recovery of world growth and world trade.

Within the major capitalist countries Kissinger/Schmidt type proposals envisage capital, labor, and the state working hand in hand to achieve consensus on major economic problems. Thus, while recovery will require a restructuring of these economies to allow the state to play a pivotal role, this will be achieved in partnership with "people from both sides of industry." Thus, national strategies for recovery will be worked out in corporatist fashion jointly by all three parties, with the Japanese example being applauded as the one to follow. Since policies of free trade will inevitably create unemployment in some industries as cheaper imports replace local production, cooperation with labor and capital is considered vital if restructuring is to proceed smoothly without political opposition.

"Common interests" also dictate that action be taken to deal with the debt crisis in more orderly fashion. Debt repayments would be put off into the future, and the maintenance of flows of new bank debt would be encouraged. Those third world countries which are large debtors would thereby be deprived of the "weapon of default" and the "capacity for blackmail" (Kissinger). At the same time the state would create emergency aid facilities to bail out endangered banks.

Governments, international organizations, and private banks are also called upon to cooperate to create an early warning system in international bank lending and to clarify who would perform the function of lender of last resort in the event of a major default. The International Monetary Fund (IMF) and the World Bank (IBRD) would be strengthened financially and undertake a more active role in shaping the economic policies of member countries. In particular, large debtor countries and other third world countries requiring financial assistance from these bodies would be required to follow the economic policy prescriptions of the IMF and IBRD as a condition of receiving assistance. For the poorer third world countries there should be a much greater flow of concessional aid and the introduction of schemes designed to compensate for fluctuations in export prices.

Perhaps the major difference between these proposals is that while both Kissinger and Schmidt see them depending crucially on the United States assuming a clear leadership role in the world economy, the Brandt Commission, with strong representation from the third world, advocates the universalization and democratization of world economic bodies.

This, then, is the package, the essence of which is that the capitalist system as it now operates is prone to collapse, but that with bold new initiatives the danger can be averted. Capitalism is capable of being managed both domestically and internationally and, indeed, must be managed if chaos and the emergence of radical political alternatives, especially in the third world, are to be avoided. The choice facing governments is a simple one. Either they can choose to show foresight and promote their common interests by moving boldly to introduce reforms, or else they can continue as they are, pursuing their own narrow interests, until the pressure of a complete economic and political collapse forces them into more enlightened policies of cooperation. There can be no middle road.

This vision of a globally managed capitalism in which competitive rivalry, at the level of both domestic classes and nation states, will give way to harmonious cooperation in the collective self-interest is not a new one. A century ago Karl Kautsky argued that the interdependence of nations through ties of production, trade, and finance was a more powerful force than competitive struggles among them, that the era of ultra-imperialism had arrived. At the same time, the achievement of adult male suffrage, the rapid growth in real incomes, and the movement toward universal education at the end of the nineteenth century convinced many social democrats that class analysis of European and North American society had lost its validity, that the need for revolution had passed. The proposals of Kissinger, Schmidt, Brandt, and others serve to emphasize that this harmonious state of affairs is not the natural order of capitalism--quite the reverse. But what they share with nineteenth-century social democrats is a belief that such harmony is possible. What Kautsky and others thought had emerged naturally in the nineteenth century, Kissinger, Schmidt, Brandt and others believe must be negotiated at the end of the twentieth century; and the basis of negotiation will be an appeal to the enlightened common interests of both nations and classes.

The main flaw in these reform proposals lies in the belief that individual classes and nations will be prepared to forgo their specific interests and incur the immediate and certain costs of doing so for the greater good of the world community and the uncertain possibility of longer-run benefits. This is a very naive view of the workings of the capitalist system, one that suggests that class exploitation, competition between the owners of capital, and rivalry among nations induced by the international expansion of capitalism are merely incidental to the working of the system and can be dispensed with. In reality, of course, nothing could be further from the truth. These three characteristics of capitalism are what define it; and while their intensity may vary from time to time, they are ever present and constitute the very essence of the system. An examination of the implications of these proposals for the United States can help to reinforce this point.

If the Kissinger/Schmidt proposals were to be implemented, the United States would have to take action to assist the recovery of the world capitalist economy by bringing down its own interest rates and the value of the U.S. dollar. This would be necessary to enable other capitalist countries to reduce their interest rates, and speed economic recovery without incurring a flight of capital to the United States. The U.S. government would also be called upon to take the lead in putting aside resources to shore up the capital of its banks which have lent heavily to third world countries, and to significantly increase its foreign aid to the world's poorest countries. It would also be required to support granting the IMF (and to a lesser extent the IBRD) a more interventionist policy role in the global economy, with an expanded capital base. On the Brandt Commission proposals, the United States would be required to see its influence in these bodies reduced significantly.

In order to bring down interest rates, the U.S. government would have to greatly reduce the amount of money it borrows in the capital market. In effect this means it would have to reduce the gap between its ordinary revenues and expenditures, i.e., it would have to cut the budget deficit significantly. This would be an enormously difficult thing to do at this time. It would require significant cutbacks in public spending and/or a huge increase in tax revenues. Yet discretionary social service expenditures have already been cut back drastically by the Reagan administration. Further cutbacks, possibly involving increased attacks on public-sector wages, on unionization, or on job security, would most certainly generate a huge political backlash. A substantial increase in taxes would likewise be opposed. Each of these possible ways of cutting back the deficit would clearly undermine attempts to secure harmonious, corporatist, domestic solutions to class conflict, a key aspect of the Kissinger/Schmidt approach.

The alternative of course would be for the deficit to be cut back by slashing defense spending, but this would be completely at odds with the cold-war confrontationist orientation of U.S. foreign policy. The problem with the U.S. budget deficit is, therefore, a complex one that world capitalism must live with in the foreseeable future. Certainly the Reagan administration is not about to risk its stability or its international credibility to satisfy the desire of European and Japanese capitalism for lower interest rates. It is equally clear that the Reagan administration is not anxious to raise that deficit even further by embarking on an enlarged foreign-aid program, by bailing out the banks, or by significantly expanding the capital of international organizations: such moves would draw intense opposition from U.S. workers and non-bank capitalists alike.

Yet if U.S. interest rates do not decline and if financing the huge deficit by borrowing abroad continues to prevent a devaluation of the dollar, U.S. companies will find it difficult to sell their goods abroad or compete with foreign rivals. They will therefore turn to the government for protection against foreign imports, and world trade, instead of expanding, will further contract. Increased protectionism is indicative of increased rivalries between nations, and there has been a pronounced trend in this direction in recent years. U.S. companies have prevented or are seeking to prevent imports of a wide range of products, including autos, steel, copper, cement, footware, and fish. The effect has been that U.S. trading partners, and especially EEC countries, have retaliated by imposing restrictions on goods purchased from the United States. That we appear to be witnessing a replay of the disastrous beggar-thy-neighbor policies which helped cripple world trade in the 1930s testifies to the weakness of the appeal of common interests in guiding national policy in the midst of domestic economic crisis. Protectionism is on the increase because it is a rational response to an immediate problem from the point of view of an individual country, even if, cumulatively, the whole world economy suffers as a result.

Nor is the United States about to voluntarily hand over is political dominance of the IMF and IBRD to third world or socialist countries in pursuit of some nebulous "common interest." The realities of imperialism and political power, which seem lost on the Brandt Commission, leave no room for such altruism. Yet the plans of Kissinger and Schmidt for these bodies are hardly more realistic. An enlarged, activist IMF moving in the direction of a world central bank would, in effect, reduce the direct influence of U.S. economic policy on the global economy. This too would not be to the liking of the U.S. state and of U.S. capital. While the U.S. is the dominant political force in the IMF with the power of veto over certain important decisions, it is not able to control all decisions and in recent years, as competitive rivalry with European capitalism has increased, it has on occasion failed to impose its will. The key example of this was the approval by the IMF of a 1983 loan to the Bishop government of Grenada against U.S. objections, a decision no doubt influenced strongly by a very favorite World Bank report on the economic and social progress being made under the socialist Grenadian government. The subsequent U.S. invasion of that tiny island and its condemnation by most other major capitalist powers and most of the third world serve to further emphasize the limitations of appeals to common interests in a world dominated by imperialism.

International reaction to the Grenada tragedy underscores the futility of looking to the United States for selfless political leadership of the global capitalist economy, and highlights the growing tensions and rivalries among capitalist nations. Other capitalist governments either distanced themselves from or outrightly condemned the U.S. invasion and have expressed equally serious misgivings about U.S. destabilization policies in Nicaragua. Many of them disagree with the Reagan administration's crude cold war approach to the Soviet Union, especially the European nations, which are closer to the USSR not only geographically but commercially. Increasingly, U.S. allies are facing intense political pressure from the peace movement, which could in the not too distant future fragment NATO. In the meantime, the United States is seeking to relieve some of its own budgetary problems by pressuring both of its major economic rivals, Japan and West Germany, to develop stronger military capabilities. If successful, this will also increase the management problems of capitalism in these countries as well as create yet another potential source of military instability globally. Given current trends in global capitalism, it would be a mistake to assume that East-West tensions will always act to suppress military conflict between capitalist countries.

We conclude therefore that it is simply too facile to assume that the interests of the United States and other capitalist nations necessarily coincide or that the United States will put the interests of the world recovery before its own perceived economic and military interests.

What about the Kissinger/Schmidt prescriptions for the third world? While not being willing to expand concessional aid or explicitly write off bank debts, the U.S. administration, the IMF, and most major capitalist powers are in general agreement in the domestic policy measures that third world governments must take to meet their economic crises and to guarantee debt repayments to Western banks. They all agree that austerity and discipline are the answer, exercised within the framework of IMF stabilization programs. This, indeed, has been the reality since the onset of the most recent crisis. In 1983 no fewer than 51 third world countries were receiving balance-of-payments assistance from the IMF, and as a result were having their economic policies conditioned by the Fund. Between 1981 and 1983 fully two thirds of the poorest third world countries had to turn to the Fund for loans and, in return, accept policy conditions. Never before has the Fund exercised this degree of influence over the formulation of economic policy in the third world. What then, is the nature of the policy conditions laid down by the IMF and what will be their contribution toward saving the world economy?

The form taken by IMF conditionality varies greatly from country to country, but this apparent flexibility is exercised within the framework of a clearly discernible model of accumulation. The general thrust of IMF programs is to promote market-oriented, open economies geared to export promotion. The success of the handful of developing countries adopting this model in the 1970s--countries which in general borrowed extensively from the international banking system--provides the inspiration for the IMF approach. Restructuring is attempted by Fund manipulation of a handful of macro-policy variables that almost always include demand restraint (especially on government spending), efforts to "get prices right," and a reduction of direct state intervention. Price adjustments may often entail devaluation or other means of shifting relative prices in favor of exporters, reducing or abolishing subsidies on basic consumption items, imposing user fees on state services, introducing interest rates that are positive after allowing for price inflation, reforming tariff structures which protect local industries from foreign competition. These measures are often accompanied by various "liberalization" initiatives designed to allow market forces to replace controls on foreign exchange allocation and on domestic and international trade or, less frequently, to allow the private sector to replace the state in production or service enterprises.

The Fund frequently prescribes "shock" treatment for borrowers on the grounds that short-run pain is necessary for long-run gain, i.e., that sacrifices are needed in the short run if the economy is to recover in the long run. Yet forcing adjustment in this way can cause significant contraction in economic activity and large shifts in the distribution of income as certain sections of society bear the brunt of austerity and/or of large, abrupt movements in relative prices. Usually the urban working class is worst affected, by lay-offs induced by restraint and by deteriorating real incomes in the face of inflationary pressures resulting from devaluation, subsidy cuts, and the imposition or raising of fees and prices for public-sector services. In extreme cases this has given rise to what are now called "IMF riots" which are, essentially, an urban phenomenon. The impact of IMF programs on income distribution in rural areas is less predictable and depends very much on the precise nature of class structures. There is, however, no evidence that IMF programs have ever shifted income in favor of the poor.

In earlier crises in the 1970s the IMF sought to ease the burden to adjustment on third world countries by providing cheap financial facilities with little or no conditionality. This was consistent with expansionist U.S. policies at that time. But since the Reagan Administration came to power these facilities are no longer available, and the Fund has tightened up the conditionality attached to its regular loans. The Fund is therefore now putting a disproportionate share of the burden of world adjustment on the third world and, within these countries, on the backs of the working class in particular.

This then is the nature of IMF conditionality which is expected to play such a crucial role in solving the world debt problem and the economic crises of the third world. How effective are such programs likely to be in meeting the economic problems of the third world and restoring their credit-worthiness? Putting the question differently, what is the likelihood of these programs saving the intern ational banking system from a major collapse? We can perhaps gain some insights into this question by first of all examining the record of IMF programs in the 1970s and then by analyzing the relevance of the experience of that decade for the one which now faces us.

Most studies conclude that IMF programs have at best only a modest positive short-run impact on a country's balance of payments, are associated with deteriorating inflation records, and in general are as likely to reduce growth rates as to raise them. Only one study of the 1970s experience found a much more positive record, but this can be explained by the strong economic performance of a small handful of countries which had access to massive bank credits, a performance not shared by most countries borrowing from the Fund. If these countries are excluded, it can be shown that the vast majority of those borrowing from the IMF, and especially the poorest third world countries, did not experience this improvement nor did IMF programs serve to attrack bank capital to most countries. Finally, there is evidence that as the world economic situation deteriorated in the 1970s, the proportion of IMF programs considered effectively implemented fell drastically from a high of over three quarters in 1963-72 to less than 20 percent by the end of the decade. This reflects the political difficulties involved in administering austerity.

It is on the basis of this somewhat dubious record of performance in the 1970s that IMF conditionality is being widely advocated as a way of solving the crises being faced by third world countries at this time. Yet apart from the weak and contradictory evidence of an association (let alone causation) between improved economic performance and the existence of an IMF program, there are other strong grounds for doubting that IMF conditionality offers a way out of the current crisis. The current world economic situation is quite different from that of the 1970s, so that whatever the experience was in that decade, it is likely to have little relevance now. Apart from two crisis periods, the 1970s were a decade of rapid growth for many developing countries. Thus IMF conditionality was applied to a minority of countries within an expansionary global economic environment. In that situation the IMF prescription of import contraction and export expansion had at least some theoretical plausibility. No such case can be made for the IMF cure when it is generalized to a large number of countries within a context of negative or zero world trade growth as was the case in 1982-83. Widespread resort to demand restraint and import contraction are unlikely to assist the recovery of world trade and global economic growth. Yet without such a recovery, there seems little chance that 30 to 40 of the poorer countries can simultaneously expand their exports.

There is therefore a serious logical flaw in the IMF cure for global crisis, one that does not escape the notice of both Kissinger and Schmidt. Both warn that irrelevant or unrealistic conditionality may deepen the global crisis and more especially lead to political instability and the coming to power of radical governments which might seriously disturb the East-West balance of power, but neither deals with what "realistic" or "relevant" conditionality might look like.

The Brandt commission seeks to get around this problem by advocating stabilization policies which emphasize longer term growth and capacity expansion, which play down demand contraction, are sensitive to income distribution, and are facilitated by greatly increased flows of low-conditional and concessinal funds. With the ascendance of monetarist policies in the United States, in most European nations, and accordingly in the IMF itself, this approach has no chance of acceptance. The governments of major capitalist countries which have exercised demand restraint to the point of pushing unemployment to post-1930s heights and that are systematically dismantling social programs and workers' basic rights to organize and to strike, cannot be expected to embrace less austere, expansionist programs in third world countries. They believe that recovery of the rate of profit globally requires that workers (and peasants) everywhere bear the burden of adjustment. In third world countries, therefore, policies of austerity will be pushed notwithstanding the social conflict they are likely to create.

The danger of IMF programs enhancing political instability is nowhere greater than in those developing countries considered successful in the 1970s. Many of these owed their export growth and their access to foreign debt to extreme political repression which served, among other functions, to deter opposition to low-wage policies and to provide a "stable" investment climate. As the export model has faltered, popular pressure has mounted for more liberal political systems in such important debtor countries as Brazil, Argentina, Chile and the Philippines. IMF austerity measures, which would meet with widespread opposition at the best of times, are encountering strong resistance and are heightening the already serious political crises in these countries. The prospect of more liberal regimes being propelled to power in the backlash against IMF-inspired austerity measures is one that must cause a great deal of concern to both the banks and the Fund, for action to repudiate debt or to freeze debt payments, either unilaterally or through a debtors' cartel, would be one of the few alternative courses of action open to these regimes. The penalties for such a move would not be too burdensome, given the drying up of debt flows and the large negative outflows of interest and profit now experienced by these countries. The direct impact of retaliation by the banks and the Fund is not, therefore, likely to be too great. The cost of probable trade and aid embargoes would need careful assessment by debtors, but in some cases mutual interdependence between debtor and creditor countries would make such retaliatory measures costly for creditors too (e.g., Mexico).

Current policies of seeking to cure the crisis of world capitalism by pushing much of the burden of adjustment onto the debtor countries of the third world are thus fraught with uncertainty. IMF conditionality is likely to precipitate further crises there as it is to forestall them. Yet most proposals to reform the international financial system to prevent a banking collapse, including those of Kissinger and Schmidt, retain IMF conditionality as a crucial feature. They offer, therefore, no real advance on current practice and are equally suspect.

Apart from a passing reference by Schmidt to the need for more concessional aid, only the Brandt report addresses the severe crisis situation facing the poorest developing countries. This crisis predates the debt crisis by many years and is seemingly much more intractable. Yet there is little evidence of concern in international organizations and less evidence of any corrective action being taken. Indeed, as we have seen, recent policy thrusts of the IMF move in entirely the opposite direction to that which the situation seems to require. Unfortunately, the relatively underdeveloped class system of most of these countries, in particular the absence of a well organized working class, and the repressive capabilities of the state in many instances, suggests that it is precisely in these countries that IMF conditionality will be pushed to the extreme. In effect, this will mean that the world's poorest will be the ones to feel the full impact of attempts to revive the rate of profit in the world at large.

For the third world, therefore, Kissinger and Schmidt offer only palliatives, the minimum necessary to head off potential revolutions; otherwise their prescriptions underwrite the policies of austerity being imposed by the IMF through the leverage of financial assistance. The Brandt Commission, with a stronger social democratic and third world orientation, goes furter in arguing for expanding resource transfers, more flexible conditionality, and a greater third world involvement in global decision-making. It does not, however, take issue with the basic model of accumulation which underlies IMF conditionality and is therefore arguing essentially for greater equity within a globally managed capitalism in which third world countries participate through export-oriented growth strategies.

The common aim of all these proposals is of course the restoration of global profit rates and the maintenance of the capitalist system. In this they differ from the dominant monetarist policies only with respect to means. If, as one expects, current policies become discredited in an aborted economic recovery or in a collapse of international bank debt, the search for alternative ways of saving world capitalism may well lead to a reconsideration of Kissinger/Schmidt/Brandt type proposals. It is quite conceivable that a deepening of the global crisis could give rise to new forms and levels of international cooperation and to renewed efforts to coopt labor in tripartite arrangements with capital and the state, as these reformists envisage. But in a system characterized by exploitation, competition, and the drive for profits, such social and national harmony could, at best, be only short lived. The vision of a world free from class conflict in which nations cooperate selflessly for the common good of humanity is a commendable one but its realization will require not the reform of capitalism but its replacement.
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Author:Loxley, John
Publication:Monthly Review
Date:Sep 1, 1984
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