Neoliberalism and Global Order: Doctrine and Reality
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Noam Chomsky
I would like to talk about each of the topics mentioned in the title: neoliberalism and global order. The issues are of great human significance and not very well understood. To deal with them sensibly we have to begin by separating doctrine from reality. We often discover a considerable gap.
The term "neoliberalism" suggests a system of principles that is both new and based on classical liberal ideas: Adam Smith is revered as the patron saint. The doctrinal system is also known as "the Washington Consensus," which suggests something about global order. A closer look shows that the suggestion about global order is fairly accurate, but not the rest. The doctrines are not new, and the basic assumptions are far from those that have animated the liberal tradition since the Enlightenment.
The phrase "Washington Consensus" refers to the structural adjustment programs designed by the government of the United States and the international financial institutions that it largely dominates. Their decisions naturally have a major impact on global order. Some analysts take a much stronger position. The international business press refers to these institutions as the core of a "de facto world government" representing the interests of Transnational Corporations, banks, and investment firms in a "new imperial age."
Whether accurate or not, this description serves to remind us that the governing institutions are not independent agents, but reflect the distribution of power in the larger society. That has been a truism at least since Adam Smith, who pointed out that the "principal architects" of policy in England were "merchants and manufacturers," who used state power to serve their own interests however "grievous" the effect on others, including the people of England. Smith's concern was "the wealth of nations," but he understood that the "national interest" is largely a delusion: within the "nation" there are sharply conflicting interests, and to understand policy and its effects we have to ask where power lies and how it is exercised, what later came to be called "class analysis."
The "principal architects" of the neoliberal "Washington Consensus" are the masters of the private economy, mainly huge corporations that control much of the international economy and have the means to dominate policy formation as well as the structuring of thought and opinion. The United States has a special role in the system for obvious reasons. To borrow the words of diplomatic historian Gerald Haines, who is also senior official historian of the CIA: "Following World War II the United States assumed, out of self-interest, responsibility for the welfare of the world capitalist system." Haines is concerned with what he calls "the Americanization of Brazil," but only as a special case. And his words are accurate enough.
The United States had been the world's major economy long before, and during World War II, it prospered while its rivals were severely weakened. The state-coordinated wartime economy was at last able to overcome the Great Depression. By the war's end, the US had half of the world's wealth and a position of power without historical precedent. Naturally, the principal architects of policy intended to use this power to design a global system in their interests.
High-level documents describe the primary threat to these interests, particularly in Latin America, as "radical and nationalistic regimes" that are responsive to popular pressures for "immediate improvement in the low living standards of the masses" and development for domestic needs. These tendencies conflict with the demand for "a political and economic climate conducive to private investment," with adequate repatriation of profits and "protection of our raw materials" -- ours, even if located somewhere else. For such reasons, the influential planner George Kennan advised that "We should cease to talk about vague and unreal objectives such as human rights, the raising of the living standards, and democratization," and must "deal in straight power concepts," not "hampered by idealistic slogans" about "altruism and world-benefaction" -- though such slogans are fine, in fact obligatory, in public discourse.
I am quoting the secret record, available now in principle, though unknown to the general public or the intellectual community.
"Radical nationalism" is intolerable in itself, but also poses a broader "threat to stability," another term with a special meaning. As Washington prepared to overthrow Guatemala's first democratic government in 1954, a State Department official warned that Guatemala "has become an increasing threat to the stability of Honduras and El Salvador. Its agrarian reform is a powerful propaganda weapon; its broad social program of aiding the workers and peasants in a victorious struggle against the upper classes and large foreign enterprises has a strong appeal to the populations of Central American neighbors where similar conditions prevail." "Stability" means security for "the upper classes and large foreign enterprises," whose welfare must be preserved.
Such threats to "the welfare of the world capitalist system" justify terror and subversion to restore "stability." One of the first tasks of the CIA was to take part in the large-scale effort to undermine democracy in Italy in 1948, when it was feared that elections might come out the wrong way; direct military intervention was planned if the subversion failed. These are described as efforts "to stabilize Italy." It is even possible to "destabilize" to achieve "stability." Thus the editor of the quasi-official journal FOREIGN AFFAIRS explains that Washington had to "destabilize a freely elected Marxist government in Chile" because "we were determined to seek stability." With a proper education, one can overcome the apparent contradiction.
Nationalist regimes that threaten "stability" are called "viruses" that might "infect" others. Italy in 1948 is one example. Twenty-five years later, Henry Kissinger described Chile as a "virus" that might send the wrong messages about possibilities for social change, infecting others as far as Italy, still not "stable" even after years of major CIA programs to subvert Italian democracy. Viruses have to be destroyed and others protected from infection: for both tasks, violence is often the most efficient means, leaving a gruesome trail of slaughter, terror, torture and devastation.
In secret postwar planning, each part of the world was assigned its specific role. Thus the "main function" of Southeast Asia was to provide raw materials for the industrial powers. Africa was to be "exploited" by Europe for its own recovery. And so on, through the world.
In Latin America, Washington expected to be able to implement the Monroe Doctrine, but again in a special sense. President Wilson, famous for his idealism and high moral principles, agreed in secret that "In its advocacy of the Monroe Doctrine the United States considers its own interests." The interests of Latin Americans are merely "incidental," not our concern. He recognized that "this may seem based on selfishness alone," but insisted that the Doctrine "had no higher or more generous motive." The US expelled its traditional rivals, England and France, and established a regional alliance under its control that was to stand apart from the world system, in which such arrangements were not to be permitted.
The "functions" of Latin America were clarified at a hemispheric conference of February 1945, where Washington proposed "An Economic Charter of the Americas" that would eliminate economic nationalism "in all its forms." Washington planners understood that it would not be easy to impose this principle. State Department documents warn that Latin Americans prefer "policies designed to bring about a broader distribution of wealth and to raise the standard of living of the masses," and are "convinced that the first beneficiaries of the development of a country's resources should be the people of that country." These ideas are unacceptable: the "first beneficiaries" of a country's resources are US investors, while Latin America fulfills its service function without unreasonable concerns about general welfare or "excessive industrial development" that might infringe on US interests.
The position of the US prevailed, though not without problems in the years that followed, addressed by means I need not review.
As Europe and Japan recovered from wartime devastation, world order shifted to a tripolar pattern. The US has retained its dominant role, though new challenges are arising, including East Asian competition in South America. The most important changes took place 25 years ago, when the Nixon Administration dismantled the postwar global economic system, within which the United States was, in effect, the world's banker, a role it could no longer sustain. This unilateral act led to a huge explosion of unregulated capital flows. Still more striking is the shift in its composition. In 1971, 90% of international financial transactions were related to the real economy -- trade or long-term investment -- and 10% were speculative. By 1990, the percentages were reversed, and by 1995 about 95% of the vastly greater sums are speculative, with daily flows regularly exceeding the combined foreign exchange reserves of the seven biggest industrial powers, over $1 trillion a day.
Prominent US economists warned 20 years ago that the process would lead to a low-growth, low-wage economy, and suggested fairly simple measures to prevent these consequences. But the principal architects of policy preferred the predictable effects, including very high profits. These effects were augmented by the sharp rise in oil prices and the telecommunications revolution, both related to the huge state sector of the economy of the US, to which I will return.
The so-called "Communist" states were outside this global system. By the 1970s, China was being reintegrated into it. The Soviet economy began to stagnate in the 1960s, and the whole rotten edifice collapsed 20 years later. The region is largely returning to its earlier status. Sectors that were part of the West are rejoining it, while most of the region is returning to its traditional service role, largely under the rule of former Communist bureaucrats and other local associates of foreign enterprises, along with criminal syndicates. The pattern is familiar in the Third World, as are the outcomes. In Russia alone, a UN inquiry estimates 1/2 million extra deaths a year as a result of the neoliberal "reforms," which it supports. A few weeks ago Russia's social policy chief estimated that 1/4 of the population has fallen below subsistence levels while the new rulers have gained enormous wealth, again the familiar pattern of Western dependencies.
Also familiar are the effects of the large-scale violence undertaken to ensure "the welfare of the world capitalist system." A recent Jesuit conference in San Salvador pointed out that over time, the "culture of terror domesticates the expectations of the majority." People may no longer even think about "alternatives different from those of the powerful," who describe the outcome as a grand victory for freedom and democracy.
These are some of the contours of the global order within which the Washington Consensus has been forged.
Let us look more closely at the novelty of neoliberalism. A good place to begin is the recent anniversary publication of the Royal Institute of International Affairs in London, with survey articles on major issues. One is devoted to the economics of development. The author, Paul Krugman, is a prominent figure in the field. He makes five central points, which bear directly on our question.
First, knowledge about economic development is very limited. For the United States, for example, 2/3 of the rise in per capita income is unexplained. Similarly, the Asian success stories have followed paths that surely do not conform to what "current orthodoxy says are the key to growth," Krugman points out. He recommends "humility" in policy formation, and caution about "sweeping generalizations."
His second point is that conclusions with little basis are constantly put forth and provide the doctrinal support for policy: the Washington Consensus is a case in point.
His third point is that the "conventional wisdom" is unstable, regularly shifting to something else, perhaps the opposite of the latest phase -- though its proponents are again full of confidence as they impose the new orthodoxy.
His fourth point is that in retrospect, it is commonly agreed that the policies did not "serve their expressed goal" and were based on "bad ideas."
Lastly, it is usually "argued that bad ideas flourish because they are in the interest of powerful groups. Without doubt that happens," Krugman remarks.
That it happens has been a commonplace at least since Adam Smith. And with impressive consistency, even in the rich countries, though it is the Third World that provides the cruellest record.
That is the heart of the matter. The "bad ideas" may not serve the "expressed goals," but they typically turn out to be very GOOD ideas for their principal architects. There have been many experiments in economic development in the modern era, with regularities that are hard to ignore. One is that the designers tend to do quite well, though the subjects of the experiment often take a beating.
The first major experiment was carried out 200 years ago, when the British rulers in India instituted the "Permanent Settlement," which was going to do wondrous things. The results were reviewed by an official Commission 40 years later. It concluded that "The settlement fashioned with great care and deliberation has unfortunately subjected...the lower classes to most grievous oppression," leaving "misery" that "hardly finds a parallel in the history of commerce," as "the bones of the cotton-weavers are bleaching the plains of India."
But the experiment can hardly be written off as a failure. The British Governor-General observed that "the `Permanent Settlement,' though a failure in many other respects and in most important essentials, has this great advantage, at least, of having created a vast body of rich landed proprietors deeply interested in the continuance of the British Dominion and having complete command over the mass of the people." Another advantage was that British investors gained enormous wealth. India also financed 40% of Britain's trade deficit while providing a protected market for its manufacturing exports, contract laborers for British possessions replacing earlier slave populations, and the opium that was the staple of Britain's exports to China -- imposed by force, just as the sacred principles of the market were overlooked when opium was barred from England.
In brief, the first great experiment was a "bad idea" for the subjects, but not for the designers and local elites associated with them, a pattern that continues until the present. The consistency of the record is no less impressive than the rhetoric hailing the latest "showcase for democracy and capitalism" as an "economic miracle" -- and what the rhetoric regularly conceals. Brazil, for example. In the highly praised history of the "Americanization of Brazil" that I mentioned, Gerald Haines writes that from 1945, the US used Brazil as a "testing area for modern scientific methods of industrial development based solidly on capitalism." The experiment was carried out with "the best of intentions." Foreign investors benefited, but planners "sincerely believed" that the people of Brazil would benefit as well. I need not describe how they benefited as Brazil became "the Latin American darling of the international business community" under military rule, in the words of the business press, while the World Bank reported that 2/3 of the population did not have enough food for normal physical activity.
Writing in 1989, Haines describes "America's Brazilian policies" as "enormously successful," "a real American success story." 1989 was "the golden year" in the eyes of the business world, with profits tripling over 1988 while industrial wages, already among the lowest in the world, declined another 20%; the UN Report on Human Development ranked Brazil next to Albania. When the disaster began to hit the wealthy as well, the "modern scientific methods of development based solidly on capitalism" (Haines) suddenly became proofs of the evils of statism and socialism -- another quick transition that takes place when needed.
To appreciate the achievement, one must remember that Brazil has long been recognized to be one of the richest countries of the world, with enormous advantages, including half a century of dominance and tutelage by the US with benign intent, which, once again, just happens to serve self-interest while leaving the majority of the population in misery.
The most recent example is Mexico. It was highly praised as a prize student of the rules of the "Washington Consensus" and offered as a model for others -- as wages collapsed, poverty increased almost as fast as the number of billionaires, foreign capital flowed in (mostly speculative, or for exploitation of cheap labor kept under control by the brutal "democracy"), and the other familiar concomitants of "showcases" and "miracles." Also familiar is the denouement, the collapse of the house of cards in December 1994. One sign of the effects is that today, half the population cannot obtain minimum food requirements, while the man who controls the corn market remains on the list of Mexico's billionaires, one category in which the country ranks high.
Changes in global order have also made it possible to apply a version of the Washington Consensus at home. For most of the US population, incomes have declined for 15 years along with working conditions and job security, continuing through economic recovery, an unprecedented phenomenon. Inequality has reached levels unknown for 70 years, far beyond other industrial countries. The US has the worst child poverty of any industrial society, followed by the rest of the English-speaking world. So the record continues through the familiar list of Third World maladies. Meanwhile the business press cannot find adjectives exuberant enough to describe the "dazzling" and "stupendous" profit growth, though admittedly the rich face problems too: a headline in BUSINESS WEEK announces "The Problem Now: What to do with All that Cash," as "surging profits" are "overflowing the coffers of Corporate America" and dividends are booming.
Profits remain "spectacular" through the mid-1996 figures, with "remarkable" profit growth for the world's largest corporations, though there is "one area where global companies are not expanding much: payrolls," the leading business monthly adds quietly. That exception includes companies that "had a terrific year" with "booming profits" while they cut work-forces, shifted to part-time workers with no benefits or security, and otherwise behaved exactly as one would expect with "capital's clear subjugation of labor for 15 years," to borrow another phrase from the business press.
New "experiments" are now underway to bring the Third World pattern of sharply two-tiered societies to the US itself, worth reviewing, but there is no time here. It doesn't take much imagination to write the articles that will appear a few years ahead lamenting the "failure" of the "experiments" that were undertaken with such benign intent -- "failure," that is, for the subjects, not for the designers, who will be doing just fine, in the time-honored pattern.
The historical record offers further lessons. In the 18th century, the differences between the First and Third World were far less sharp than they are today. Two obvious questions arise:
(1) Which countries developed, and which not?
(2) Can we identify some operative factors?
The answer to the first question is fairly clear. Outside of Western Europe, two regions developed: the US and Japan -- that is, the two regions that escaped European colonization. Japan's colonies are another case; though Japan was a brutal colonial power, it did not rob its colonies but developed them, at about the same rate as Japan itself.
What about Eastern Europe? In the 15th century, Europe began to divide, the West developing and the East becoming its service area, the original Third World. The divisions deepened into early in this century, when Russia extricated itself from the system. Despite Stalin's awesome atrocities and the terrible destruction of the wars, the Soviet system did undergo significant industrialization. It is the "Second World," not part of the Third World -- or was, until 1989.
We know from the internal record that into the 1960s, Western planners feared that Russia's economic growth would inspire "radical nationalism" elsewhere, and that others too might be stricken by the disease that infected Russia in 1917, when it became unwilling "to complement the industrial economies of the West," as a prestigious study group described the problem of Communism in 1955. The Western invasion of 1918 was therefore a defensive action to protect "the welfare of the world capitalist system," threatened by social changes within the service areas. And so it is described in respected scholarship.
The Cold War logic resembles the case of Grenada or Guatemala, though the scale was so different that the conflict took on a life of its own. It is not surprising that with the victory of the more powerful antagonist, traditional patterns are being restored. It should also come as no surprise that the Pentagon budget remains at Cold War levels and is now increasing, while Washington's international policies have barely changed, more facts that help us gain some insight into the realities of global order.
Returning to the question of which countries developed, at least one conclusion seems reasonably clear: development has been contingent on freedom from "experiments" based on the "bad ideas" that were very good ideas for the designers and their collaborators. That is no guarantee of success, but does seem to have been a prerequisite for it.
Let's turn to the second question: How did Europe and those who escaped its control succeed in developing? Part of the answer again seems clear: By radically violating approved free market doctrine. That conclusion holds from England to the East Asian growth area today, surely including the United States, the leader in protectionism from its origins.
Standard economic history recognizes that state intervention has played a central role in economic growth. But its impact is underestimated because of too narrow a focus. To mention one major omission, the industrial revolution relied on cheap cotton, mainly from the US. It was not kept cheap and available by market forces: rather, by elimination of the indigenous population and slavery. There were of course other cotton producers. Prominent among them was India. Its resources flowed to England while its own advanced textile industry was destroyed by British protectionism and force. Another case is Egypt, which began industrial development at the same time as the United States, but was blocked by British force, on the quite explicit grounds that Britain would not tolerate independent development in that region. New England, in contrast, was able to follow the path of the mother country, barring cheaper British textiles by very high tariffs as Britain had done. Without such measures, half of the emerging textile industry of New England would have been destroyed, economic historians estimate, with large-scale effects on industrial growth generally.
A contemporary analogue is the energy on which advanced industrial economies rely. The "golden age" of postwar development relied on cheap and abundant oil, kept that way largely by force. So matters continue. A large part of the Pentagon budget is devoted to keeping Middle East oil prices within a range that the US and its energy companies consider appropriate. I know of only one technical study, which concludes that Pentagon expenditures amount to a subsidy of 30% of the market price of oil, demonstrating that "the current view that fossil fuels are inexpensive is a complete fiction," the author concludes. Estimates of alleged efficiencies of trade, and conclusions about economic health and growth, are of limited validity if we ignore many such hidden costs.
A group of prominent Japanese economists recently published a multi-volume review of Japan's programs of economic development since World War II. They point out that Japan rejected the "neoliberal" doctrines of their US advisers, choosing instead a form of industrial policy that assigned a predominant role to the state. Market mechanisms were gradually introduced by the state bureaucracy and industrial-financial conglomerates as prospects for commercial success increased. The rejection of orthodox economic precepts was a condition for the Japanese miracle, the economists conclude. The success is impressive. With virtually no resource base, Japan became the world's biggest manufacturing economy by the 1990s and the world's leading source of foreign investment, also accounting for half the world's net savings and financing US deficits.
Turning to Japan's former colonies, the major scholarly study of the US Aid mission in Taiwan found that US advisers and Chinese planners disregarded the principles of "Anglo-American economics" and developed a "state-centered strategy," relying on "the active participation of the government in the economic activities of the island through deliberate plans and its supervision of their execution." Meanwhile US officials were "advertising Taiwan as a private enterprise success story."
In South Korea the "entrepreneurial state" functions differently but with no less of a guiding hand. Right now South Korea's entry into the OECD, the rich men's club, is being delayed because of its unwillingness "to rely on market-oriented policies," such as allowing "takeovers by foreign companies" and free movement of capital, much like its Japanes
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