November 2004CFG REAGAN REVOLUTION
CAMBRIDGE FORECAST GROUP:
SINCE THE REAGAN REVOLUTION
In this chapter, we will describe, in detail, how the trends and processes described in chapter 3 have shaped economic and political events since the "Reagan revolution" of 1981. To oversimplify somewhat, we will describe how global rich/poor relations have been the "demiurge" of historical change from the "Reagan revolution" to the present.
To begin with, we would like to clear up a possible misconception. This chapter will be about the recent past, not about the next century, when, according to many commentators, global rich/poor relations will certainly be a key factor in global change. After all, most of the world's enormous population growth is in the poor regions of the world; regions which therefore, by sheer weight of numbers, must eventually come to have an all pervasive influence on economics and politics everywhere, including economics and politics in the rich regions of the world. Three mechanisms are generally postulated for this influence. First of all, the rich regions of the world could potentially be overwhelmed by migrants from the poor regions of the world. Secondly, upheavals caused by population pressures in the poor regions of the world could touch off global military conflagrations. Thirdly, the populations of the poor regions of the world could exceed the "carrying capacity of the earth", and thus precipitate "global environmental crises", which would embroil the rich regions of the world as well. This could happen whether or not the poor regions of the world industrialize successfully. If they do industrialize successfully, then "it is inconceivable that the earth can sustain a population of 10 billion people devouring resources at the rate enjoyed by richer societies of today - or at even half that rate". (P. Kennedy, 1993). If they don't industrialize successfully, then the earth's environment will be overwhelmed by massive increases in slash and burn agriculture, overgrazing, deforestation, and desertification. In fact, the world's poor, once they reach a certain demographic size, can do nothing at all that doesn't destroy the earth's environment. Wood gathering produces deforestation. Rice paddies produce methane which worsens the greenhouse effect. Livestock herds produce the same result through animal flatulence. In other words, if the poor populations of the world "so much as fart upwards", as the saying goes, they could fatally tip the earth's environmental balance to the detriment of the rich populations as well. Therefore, "the greatest test for human society as it confronts the twenty first century is how to use 'the power of technology' to meet the demands thrown up by the 'power of population'; that is, how to find effective global solutions to free the poorer three quarters of humankind from the growing Malthusian trap of malnutrition, starvation, resource depletion, unrest, enforced migrations, and armed conflict - developments that will also endanger the richer nations." (P. Kennedy, 1993).
All of the above is precisely what chapter 5 will not be about. First of all, what is the the "carrying capacity" of the earth ? Is it ten billion people? Twenty billion? Thirty billion? Has it, in fact, already been exceeded? Secondly, what does "the greatest test for human society" have to do with day-to-day, individual decision making? What does it have to do with interest rates, taxes, inflation jitters, health care reforms, budget agreements, hiring quotas, consumer confidence, banking regulations, exchange rates, and so on. After all, this book is addressed to individual decision makers, who are concerned precisely with these kinds of minutiae, and not to national governments, international organizations, or humankind as a whole.
Short Term Minutiae
And, on the face of it, the issue which engaged the world's rich minority, in the period under discussion, did not seem all that relevant to the human race as a whole, nor to the world's long term future. Issues such as Christian fundamentalism, tax cuts, the black/Jewish conflict, the "Reagan recovery", US/Israeli relations, deficits, drugs, industrial competitiveness, the "renewal of America", the "decline of America", sexual harassment in the work place, gays in the military, health care reform, the "gender gap", takeover artists, junk bond felons, homelessness, political correctness, pitbulls, date rape, the "new world order", hypodermic needles washing up on beaches, the "forgotten middle class", the underclass, gridlock, child abuse, the "new populism", and so on, came and went with no seeming rhyme or reason. One got the impression, that, in the developed world, in the majority of cases, politics and economics were literally decoupled from the needs of the majority of the world's people and from the world's long term future.
This impression is illusory however. During this period, the day to day and month to month political and economic changes in this country and around the world were, to a greater extent than at any time previously, and to a greater extent than one might have thought possible, "generated" and "driven" by "North/South" relations.
Now this statement might sound farfetched. After all, if there was a "driving force" of the recent past, wouldn't that "driving force" have to be the fall of communism and the end of the cold war? For one thing, these events drastically reduced the likelihood of a nuclear holocaust, and, if that likelihood was never large, then it was never zero either, and the possibility of a sudden end to the human race, certainly had an all pervasive impact on the global politics everywhere. In fact, some of the gloom that pervaded the American political mood after the end of the cold war was probably due to the fact that the human race was now perceived to have a future, and that the needs of many future generations now had to be taken into account. There were also more mundane ways in which the fall of communism and the end of the cold war shaped the political and economic events of the past several years. The capital needs of the former communist countries, the costs of German reunification, and the defense cutbacks in the West, were all important causes of the current global economic slowdown. Many analysts have called these factors "political shocks", analogous to the 1970's "oil shocks" in their depressive effects on the world economy. World politics was also signifantly changed by the ending of the cold war. The superpowers were able achieve a resolution of the Iran/Iraq conflict and to end their involvement in the Afghan civil war. This ended Iraq's geo-political importance to the West, and, thus, ended Iraq's ability to attract the open handed post-war financing it was expecting; financing that might have enabled it to avert a post-war economic crisis. It was the possibility of such a crisis that led us, in January 1990, to predict a political upheaval in Iraq, and it was to ward off such a upheaval, that Saddam invaded Kuwait. Conversely, one of Bush's reasons for going to war against Iraq, rather than relying on sanctions or air strikes, was his (accurate) anticipation of unpredictable future changes in the (then) Soviet Union, and a consequent desire to resolve the Gulf crisis quickly before it was subsumed by a larger and potentially far more dangerous crisis. One can also be sure that the intended audience for the Gulf war's elaborate techno-military display was not "would be Saddams" in the Third World, but hardliners within the Soviet military-industrial complex. It is for these reasons that the Gulf war could justly be called "the last battle of the cold war". Closer to home, it was fear of post-communist Russian and eastern European economic competition that led Salinas of Mexico to propose the North American Free Trade Agreement (NAFTA) which played so prominent a part in U.S. political debates. The ending of the cold war also changed the political equation in Israel and America. The upsurge in Russian Jewish immigration to Israel emboldened Shamir's Likud party to scrap the Labor/Likud alliance, accelerate the settlements activity in the occupied territories, scrap the "Shamir peace plan", and try to push a $10 billion loan guarantee through the US Congress in the Fall of 1991 in order to finance the absorption of the Russian immigrants (without cutting back the settlement activity). The resulting conflict between the Bush administration and Israel's supporters in Congress (and elsewhere) weakened Bush politically and contributed to his electoral defeat in 1992. To take an example from the more recent past, President Clinton's political problems in the spring of 1993 began after he advocated military action against the Bosnian Serbs and then backed off in the face of Boris Yelstin's opposition (deciding, obviously, that nothing in the Balkans was worth weakening Yelstin's position in Russia). That incident was to some extent, Clinton's "bay of pigs", and left him struggling with the image of being weak and inept. One could go on forever giving examples of how the end of the cold war and the fall of communism have influenced politics and economics everywhere. Suffice it to say, that these events have to be regarded as seminal.
And yet, in a larger sense, couldn't one say that it was America that was the "driving force" behind the events of the last 13 years? After all, America is certainly the one country in the world whose actions most affect the rest of the world, and whose internal affairs are the least affected by the outside world. In fact, according to many observers, it was America that "won" the cold war, by its 1980's arms buildup, and by its insistence on human rights as a prerequisite of detente. In addition, D. P. Calleo (1982) makes the point that the so-called "external economic shocks" of the 1970's, the post-Vietnam inflation, the breakdown of the Bretton-Woods monetary system, the flood of "stateless" US dollars, the raw materials price rises and the "oil shocks", all of which were supposed to presage American loss of control over the global economy, were, in reality, the direct consequences of US monetary policy. After that policy was changed, under Volcker, raw material and oil price inflation ended, and the flood of "stateless dollars" was brought back under control. In fact, the oil price collapse, brought about by Volcker's tight money policy, played a not insignificant role in the Soviet economic crisis which was one of the factors behind the collapse of communism.
Furthermore, American influence over world politics and economics has, if anything, increased, not decreased, as the years have gone by. In the 1950's and 1960's, for example, Third World Asian countries, with Russia's backing, were able to fight the United States to a military standstill. Now America is the world's unchallenged superpower, and no other country, or combination of countries, even comes close to matching it. In the 1960's, non-western values and cultures became faddish among America's youth, leading to many of the features of the so called "hippie culture". Now it is American values and culture that are permeating the rest of the world.
"It is America that today is the genuinely catalytic nation - the object of admiration, resentment, imitation, and - even more dramatic - of immediate and intimate impact on the social mores of other nations. America dominates the global chatter, the global perceptions, and the global educational interactions. At any point more than five hundred thousand foreign students .......Foreign imitation of America is now a worldwide phenomenon. This is not only a matter of cultural fashions, social styles or patterns of consumption. It also manifests itself in politics both on the serious and trivial levels. The growing worldwide sensitivity to human rights although in part the inevitable consequence of global political awakening, has been intensified by America's emphasis on the issue." Z. Bzrezinski, 1993 .
The Third World in the Mind of America
So how can we maintain that the underdeveloped world, the world's "poor majority", was the "driving force" of the last 13 years. Wasn't it precisely this "poor majority" that was more and more marginalized in the last 13 years?
The current chapter will be the answer to these questions. For the present we would like simply to refine what we are saying. The main "driving force" for change over the last 13 years has been the interaction between American politics, American policy and North/South relations, or, as we put it in our 1987 book The Trade Backlash Against Japan, "how the political situation in America is wrapping itself around the North-South question and vica versa."
In order to explain this, we are going to begin with a concept which might seem rather nebulous, so we ask you to bear with us. This concept relates to what we believe is one of the most important feature underlying American political life over the past 13 years. This feature is not a political movement, not a political party, not political strategy, not a political worldview, not a political theory and not a political agenda. It is a rather a mood, a feeling, an underlying anxiety, in many cases, a subconscious anxiety, but one whose effects on American and world politics are enormous. It is very related to recent advances in communication which have made the planet a "global village".
"The most important political effect of technological innovation has been to create social intimacy on the global scale -overcoming time and distance. But that new intimacy both combines and collides at the same time. In much of the world, the daily struggle for survival by the acutely impoverished masses now occurs in the context of an intense awareness of a totally contrasting life style on the part of its own elites as well as of the cornucopian West." Z. Bzrezinski, 1993
In fact, this intimacy works both ways. As we put it in our 1987 book, The Trade Backlash Against Japan: "Simply stated, Americans in the 1980's have the following anxiety: if you hook up my destiny and the destiny of the non-Western world, if you connect the Western future to the Third World - what happens to my primordial assets. You turn on the radio in America and listen to a talk show. You hear a union leader and he says: 'Look you can't compare me to a French or Japanese worker. Where will this stop? Why not compare me to a worker in Sri Lanka? What does he make, 30 cents a day? Should I compete with him for 20 cents?' You switch on your TV. Jimmy Swaggart, the fundamentalist preacher, says about a Pro-UN Reagan speech: 'The devil entered the White House.' You begin to see the reflection, the indicator which tells you what is really going on. The real issue is the North/South problem, the relation of the West to the Third World, the developed countries to the less developed countries. The fear, loathing, anxiety, mental paralysis in the American mind is: if it takes $50000 to keep me 'on the road' and $1000 to keep a Guatamalan campesino 'on the road', if you connect me to him, what happens? Do we divide $50000 and $1000 by two? Do we trade places? Who decides this?"
The sentiment that we are referring to is a sort of "LDC phobia", a fear of the "vast hungry masses out there" that could somehow "take what we have". In our Japanese books and articles, we used the term nativism to refer to this sentiment. In fact, nativism is not a completely accurate term. Navitism refers to anti-foreign sentiment in general, and the sentiment we are describing is directed primarily against the poor countries. Samir Amin's term "pan-occidentalism" would probably be more accurate, but it's too much of a mouthful, so we'll stick with the term nativism. Nativism, as we use it, does not necessarily imply any position on the range of so-called "North/South issues" that come up in the international forums, issues such as intellectual property rights, debt forgiveness, minerals rights on the sea bed, commodity price stabilization agreements, trade in services, Multi-Fibre arrangements, and so on. It's hardly likely that many Americans even know what these issues are, much less have a position on them, one way or another. Nativism does not necessarily imply liberalism or conservatism, being for or against free trade, or being a Republican or a Democrat. Nonetheless, nativism is one of the most significant domestic political phenomema in past 13 years. In the 80's, it took the form of a "Rambo-like" belligerence, an attitude brought about by the US defeat in Vietnam, the two OPEC oil shocks, and the Iranian hostage taking. Carter was seen as a "liberal wimp" who was letting the US be pushed around by Iran and price gouged by OPEC. In the 1992 election, OPEC had been busted, communism had fallen, Iraq had been crushed, and most Third World countries were adopting free market economics and trying to ingratiate themselves with the US. In this kind of environment, nativism took the form of isolationism, protectionism and self pity. Bush was seen as an "out of touch" conservative, so in love with free market economics that he was allowing, indeed encouraging, American factories to relocate American jobs to "slave wage" Third World countries. He was also seen as a "gung ho militarist" who was always sending the marines to help some Third World people, the Kuwaitis, the Kurds, the Bangladeshis and the Somalis, while ignoring Americans who were "hurting" from unfair competition with low wage Third World countries.
The influence of nativism is not confined simply to Presidential elections. In fact, it's pervasive. It influences analyses both in the popular and business press and in the electronic media. Most importantly of all, from the point of view of planning, it influences and distorts analyses of the future and thus influences swings in investor and consumer moods. For example (Cambridge Forecast Group, Science and Technology Today, 1985), "during the height of the second oil shock in 1980, there was an explosion of investor interest in biotechnology, particularly in the use of gene splicing techniques to produce cheap oil and petrochemicals. In this case, 'bacteria that produce oil' became a substitute for Arab countries that produce oil and were seen as a way of 'getting away from the Third World'. Two years later, when the price of oil began to drop, so did investor interest in biotechnology particularly in the U.S. (though logically the possible future commercial prospects of possible revolutionary advances in biotechnology would not be affected by marginal drops in the price of oil). At the present time, when many Americans feel threatened by cheap manufactured imports from low-wage LDC's there has been an explosion of interest in 'artificial intelligence' and 'intelligent robots'. In this case, 'intelligent robots' are seen as a substitute for cheap Third World labor and as a way of 'getting away from the Third World'." Of course, true artificial intelligence and the production of oil and petrochemicals from biotechnology are "techno-hype", nowhere to be seen on the commercial horizon. Yet "techno-hype" doesn't occur in a vacuum. In the truculent atmosphere of the 1980's, many Americans tended to think of Arabs as "bacteria that produce oil" and Asians as "intelligent robots", and were looking for artifical replacements.
Nativism was also an important reason for the "death of liberalism" in the seventies and eighties.
"In the early seventies, Third World demands for an international income redistribution constituted a sort of moral offensive. A great many European and American scholars took claims for a 'New International Economic Order' seriously. Many American liberal intellectuals suffered considerable discomfort. Third World claims inconveniently pushed liberal ideas to their logical conclusions. An integrating liberal world, like an integrating liberal nation and state, presumably implied a bond of brotherhood and, somewhere in the distance, a common standard of welfare." P. Calleo, 1982.
Living in "an outrageously rich society in a hungry, restless and straitened world", the interests of very few Americans "lay with radical world income redistribution." Thus, many of the constituents of New Deal liberalism, who saw themselves as benefitting from liberalism (redistributionism and egalitarianism) within the nation, definitely did not see themselves as benefitting from liberalism on a global scale, with result that, for many Americans, liberalism itself went out of favor.
As paradoxical as it might seem, nativism was also an important reason for the "resurgence of liberalism" in the early nineties. After the fall of communism and the end of the cold war, there was a widespread perception, inaccurate to the point of absurdity, but influential nonetheless, that the outside world was now somehow less important to America's destiny. With the "realm of political perception" thus confined to the domestic arena, redistribution began to seem politically palatable again. Clinton's "soak the rich" message touched a political chord with many of the "Reagan Democrats". (This was particularly the case since many of the rich were expressing an increasing interest in trade with and investment in the Third World.)
It's important to realize that it's not merely global redistributionism that makes Americans nervous. It's any linking of "our destiny" with "their destiny". Thus, it's no wonder that the most controversial, and divisive issues in American political life usually have a very large "North/South" component.
In the 1980's and early 1990's, these issues have generally fallen into two main categories; trade issues and Middle Eastern issues, particularly the Arab/Israeli dispute. In fact, prior to the fall of the Likud government, at times of tension between the U.S. and the Israel, the Arab/Israeli dispute became a paradigm for the North/South conflict in general.
"Israel with its strategic importance and the ties that link it with the first-(world) nations, presents the world with the spectacle of a first-(world) population directly confronting a second- and third- (world) combination of enemies. Power relationships that are usually mercifully disguised by distance appear in sharp relief on the West Bank of the Jordan river....Israel is a mirror in which Europe and America see themselves" W. R. Mead, 1987
The Israeli cause commanded a widespread popular sympathy in the developed countries, particularly in the U.S. and Britain, and the Palestinian cause commanded a widespead popular sympathy in the underdeveloped countries. The Israelis, in a sense, "represented" the developed North, the Palestinians "represented" the underdeveloped South. This fact, moreover, played a very important role in the way in which these issues were presented to the American public. ("The Middle East is not the Middle West". "Israel is in the Middle East, but not of the Middle East". "Israel is a good country, in a bad neighborhood", "Israel made the desert bloom. The Palestinians didn't make the desert bloom.") To the extent that Israel, with U.S. acquiescence, took a hardline stance on the Palestinian issue, this became a signal that the Palestinians "don't count", and, by implication, that the Muslim world and the Third World "don't count". This tended to placate American "Third World phobia". On the other hand, if the U.S. pressured Israel to be less hawkish, this became a signal that the "Third World counts", and American "Third World phobia" tended to increase. It is no accident that, in the same week that Bush pressed for a delay on the 10 billion dollars in loan guarantees to Israel and attacked "the Jewish lobby", his approval rating in the polls began to plummet, and consumer confidence in the American economy began to plummet:
"The free fall in consumer confidence exceeds anything that can be explained by economic variables." R. Brinner, DRI/MacGraw-Hill, 11/91
Why did this happen? Was it because Americans opposed Bush's position on the loan guarantees? Not at all. Polls taken at the time showed that Americans supported Bush's position by a margin of 3 to 1. Was it because of the "all powerful", Svengali-like Israeli lobby which could manipulate public opinion at will (as Bush himself implied in his "one lonely little guy" speech)? Again no. The Israeli lobby is neither as united or powerful as is generally believed. In fact, there was a sort of "coup d' etat" within AIPAC directed against members who had sided with Shamir in the Bush/Shamir fight.
American confidence fell because the American public could not understand why Bush (if he thought the Israeli lobby was so all-powerful) was squandering his post-Gulf-war popularity in a fight with it, in an election year, in a recession, when there were so many pressing American domestic problems, and on an issue that most Americans (wrongly) regarded as "marginal". After all, what did "land for peace" mean? The Arabs were no military threat to Israel without Russian support. Arab oil power had been neutralized by the precedent of American military intervention to guarantee the flow of oil, and, in any case, the Palestinians had antagonized the their wealthy Gulf State benefactors by siding with Saddam. So what did it matter if Israel settled the Palestinian issue once and for all by simply colonizing the West Bank and foreclosing any possibility of a territorial compromise? If America was the world's only superpower, then what could the Palestinians possibly do? Surely, Bush (known for his hard headed, pro-American approach to foreign policy) wasn't proposing to fix all the world's inequities before turning to address America's pressing economic needs? Surely, there wasn't any sort of connection, God forbid, between the world's inequities and America's pressing economic needs?
In short, something didn't "add up". Either Bush was a "foreign policy junkie" who "didn't care" about the important domestic problems that were "hurting" Americans, or (and this was too disturbing to admit) the Third World was more important than Americans had been led to believe. It was for this reason that Bush began to come under intense criticism that he was "paying too much attention to foreigners like the Palestinians, the Bangladesh flood victims, and the Kurds and not enough to the American middle class", and both his popularity ratings and faith in his economic management began to drop.
The general economic climate of the early nineties also contributed to nativist anxieties. Over the past ten years, the IMF and the World Bank have been urging the less developed countries to imitate the "Asian tigers". The less developed countries have been urged to implement market oriented reforms, to attract outside capital, and to strive to become competitive in the markets of the developed economies. After a period of resistance, many of the LDC's began to take the this advice. As the Third World investment climate improved (and in reaction to the disappointing results of the Eastern Bloc's economic reforms), American investors began to develop an interest in Third World economies. Chinese and Latin American stock markets began to boom. Flight capital that had fled Latin America in the 80's began to return. The higher echelons of the American business sector began to develop a more favorable attitude towards the Third World in general. For example, when asked about the long term stagnation in the American standard of living, Donald V. Fines, Chairman of Caterpillar Tractors said, "There should be a narrowing of the gap between the average American income and that of the Mexicans. As a human being I think that what is going on (redeployment of American industry to Mexico) is positive. I don't think it is realistic for 250 million Americans to control so much of the world's G.N.P." All this engendered a fear in the American public of an alliance between the business elites above them and the impoverished Third World masses below them. Many Americans began to feel simultaneously victimized by a perceived loss of economic status, and, at the same time, demoralized and guilty about the truly desperate economic needs of the Third World.
These contradictory feelings led to an attitude which could perhaps be called "liberal nativism", a longing for an "egalitarianism which stopped at the waters edge". One of the manifestations of "liberal nativism" was "Japan bashing". Japan, being the only non-Western country to join the "rich man's club", became a target for anti-Third World economic anxieties, (especially for the anti-Third World economic anxieties of liberal Democrats.) Bashing an economically powerful country like Japan justified a sense of "victimization" which would hardly be possible when bashing a poor, underdeveloped country.
Another manifestations of "liberal nativism" was victimology, the attempt by groups in American society to portray themselves as "victims", and vie for the sympathy of the political leadership, (as though they wanted to coopt Third World "victim status".) Tapping onto this mood, Clinton scored big in the Presidential debates by assuring the American viewers that he "felt their economic pain", whereas Bush got clobbered when he was unable to come up with an instance of personal economic trauma, and, thus, could not portray himself as a "fellow victim".
Liberal nativism came to a climax during the NAFTA debate of late 1993, a debate which generated an astounding amount of hysteria in an American public usually bored stiff by trade agreements. Commentators, at the time, wondered why a trade agreement between the United State and a country like Mexico with an economy the size of Los Angeles should touch off such passions, especially since the much more significant global GATT negotiations were attracting so little public attention. In fact, this mystery has to be understood, not on the level of substance, but on the level of symbolism. Like Israel/Palestine, the United States/Mexico constituted a symbol for the North/South question as a whole. This is because the United States, in addition to being the world's leading industrial power, is the only major industrial power physically adjacent to a Third World country. Thus, it was the physical proximity of Mexico that led to the intensity of Americans' economic anxieties about economic integration with Mexico. Mexico, because it shares a border with the United States, and because it was a low-wage Third World country, was seen as being able to absorb a large part of the American job market in an enormous "sucking sound". It was for this reason that "America/Mexico" replaced "Israel/Palestine" as the paradigm of the North/South question, and NAFTA replaced Arafat as the focus of anti-Third World anxieties. Thus, even as Israeli Prime Minister Rabin shook hands with Arafat and admitted that there was no way in hell the PLO could pose a threat to Israel, Clinton and most of the country's economists were trying to convince a sceptical American public that Mexico would not bring the U.S. economy to its knees. Mexico (the only Third World country that is physically contiguous with the United States) had become the target for the whole range of pent up anxieties about economic competition from the Third World.
To avoid any misunderstandings, we are not, in this chapter, saying that all, or even that most, of the political positions taken on Middle Eastern or trade issues were necessarily motivated by nativism. In fact, our analysis, at this point, is not about political positions at all (if by "political position" one means a well thought out, firmly held, commitment one way or another), but about moods and anxieties.
Nor are we implying that the American public was at a high pitch of xenophobia most of the time. On the contrary, Americans were probably more tolerant of foreigners than are most other nationalities.
Furthermore, the level of nativist sentiment in America has tended to fluctuate wildly over time. For example, in the late 80's, when global environmental fears about the ozone layer and the greenhouse effect began to surface, nativist sentiment waned. One began to see sympathetic articles in the popular American press about the need to close the global "rich/poor gap". Global poverty was portrayed as a threat to the global environment, and, thus, as a threat to the populations of the North and the populations of the South. In response to this perceived environmental threat, American sympathy for the Third World increased, and nativist sentiment decreased. Nativist sentiment also decreased in early 1994 when the passage of NAFTA was followed, not by a drain of U.S. jobs southward, but by an increase in U.S. employment.
Nativist sentiment is certainly not a result of political obtuseness on the part of the American leadership. In fact, every American administration, since the Carter administration, has been intensely aware of this sentiment, either upon taking office (Bush), or several years after taking office (Reagan), or several months after taking office (Clinton), or in the last few months of office (Carter). Of course, every American President, since Roosevelt, has faced the basic dilemma of having to be both 'President of the world' and President of the U.S. simultaneously, but, in the late 70's and early 80's, this dilemma became particularly acute, when the economic interdependence between the developed and underdeveloped world, (an interdependence which had always provoked political backlashes among Third World populations) began to ignite hostility and anxiety in the American electorate, and, even worse, began to evolve in a way that was extremely confusing to the Western political and economic leadership. Reagan responded to this dilemma by theatrics, media manipulation and public "mood manipulation". Bush responded to this dilemma by secrecy (the so-called "stealth Presidency), and then by military triumphalism (the "new world order"). Clinton responded to this dilemma by "slickness", "waffling", "glibness", and then, in early 1994, by Japan-bashing.
We are now almost ready to begin our history. Since, in this history, we will be quoting extensively from ourselves, and. since, many of the quotes were written several months to several years before the events they describe took place, there will be certain inaccuracies in the quotes from ourselves. We will point out these inaccuracies, and will analyze the deviations from our predictions and the actual events they predicted.
We want to stress that, in this history, we will not be expressing approval or disapproval of any particular leader, policy, position, or theory. We don't have any one particular point of view, but will try, as much as possible, but as succinctly as possible, to describe things simultaneously from all points of view.
The Reagan Revolution
When President Reagan took office in January 1981, there was a mood of economic and political pessimism in the country.
"In 1980, the nation was in the grip of the greatest economic crisis it has faced since the Great Depression. The United States had endured a decade of chronic economic disappointment accompanied by a series of acute political shocks, from the defeat in Vietnam to the OPEC oil crises. Not since the Depression had the American economy seemed so fundamentally flawed, or had so many Americans questioned our ability to control our own economic destiny. It was not uncommon to hear economists and political leaders arguing that we were doomed to declining standards of living, that we had entered an era of limits." L. B. Lindsey, 1990
And yet the dire predictions of "another 1929" which had become increasing commonplace since 1973 (the breakdown of the world monetary system) had failed to materialize. The world economy was proving surprisingly resilient to the monetary chaos and the oil price shocks of the 70's. One of the main reasons for this resilience was the quantum leap in communication and information processing technology that was beginning to make itself felt in the early 1970's. This new technology was making it possible for businesses to operate in a climate of extreme monetary, financial and price volatility. In fact, the monetary and price upheavals of the 70's were proving stimulatory to many sectors of the global economy. New financial instruments proliferated to enable businesses cope with the economic volatility. The information processing industry boomed as businesses sought more extensive and more up-to-date information in order to keep track of constantly shifting market conditions. Robotic technology improved as labor costs grew. Commodity price booms generated increasing economic activity in many Third World countries, even as heavy industry in the West stagnated.
In fact, more alarming than economic anxieties was the feeling that the world political system was spinning dangerously out of control. In 1979, a revolutionary government gained power in Iran, took the American embassy staff hostage, and was threatening to spread chaos throughout the Middle East. A Marxist government in Afghanistan tried to push through an insane land reform program, touched off a civil war, and then itself disintegrated into warring factions. This brought a massive Soviet military invasion, the first Soviet invasion of a non Warsaw Pact country since World War II, which, together with Russia 1970's arms buildup, reignited the cold war between the superpowers.
Candidate Reagan was seen by his supporters as a tough, belligerent, no-nonsense leader who could bring the world political situation back under control. However, whereas Reagan was primarily anti-Soviet, many of his strongest supporters were primarily anti-Third-World. For example, in 1980, the conservative economist Milton Freedman wrote an editorial in which he expressed the opinion that a Soviet takeover of the Middle Eastern oil fields might not be such a bad thing, because the Soviets would be more reliable suppliers of oil that the crazy Arabs and Iranians. To take another example, the conservative commentator William Buckley, in an interview with Reagan, asked whether the United States would not be justified in invading the Middle Eastern oil fields, if OPEC raised the price of oil to a level which seriously threatened the American economy. To which Reagan replied, "No. That would be imperialism." Buckley was dumbfounded. All he could stammer out was, "What?". Reagan corrected himself. "You know. I mean gunboat diplomacy." This exchange was symptomatic of a tension between Reagan and his supporters that would manifest itself continuously during the next eight years. Whereas many of Reagan's supporters were counting on Reagan to put "the Third World gremlins" back into their box, Reagan himself was primarily concerned with the U.S.-Soviet conflict. In fact, the tension between Reagan's anti-Sovietism and his supporters anti-Third-World-ism was to form a constant undertone to the Reagan administration (culminating finally in Irangate).
Of less dire human impact than the world's political crises, but important nonetheless for the purposes of this discussion, was the crisis taking place in economic theory. The economic orthodoxy in the United States since 1945 had been Keynesian economics. Since, as is usual in economic matters, there remains a continuing controversy as to exactly what actually constitutes Keysnesian economics, we will use the definition of one of the former members of Reagan's Council Of Economic Advisors, supply side economist Lawrence B. Lindsey:
"The Keynesians, whose views had been forged in the Great Depression, with its catastrophic contraction in the supply of money and credit, believed that government could most effectively manage the economy by managing the demand for goods and services. The government could do this through fiscal policy, primarily by increasing or diminishing government debt through changes in tax and spending policies. In times of economic contraction the government would spend more, thus increasing demand directly, thereby boosting the income of consumers and boosting demand indirectly. The increase in demand for goods and services would stimulate new production and employment and the economy would expand. Under the opposite economic conditions the government would reduce its spending or raise taxes to keep the economy from overheating and prices from rising...By 1980, this set of policy prescriptions had reached both its practical and theoretical limits....The Keynesians had no solution for the combination of rising prices (which to them indicated excess demand) and a falling economy with high unemployment (which to them indicated to little demand). The Keynesians were accustomed to using government fiscal policy to smooth out the booms and busts of the business cycle. But, by the late 70's, the business cycle had twisted into a diabolic double helix, in which unemployment and inflation rose together." L. B. Lindsay, 1990.
In fact, in 1980, one could say that, despite the widespread economic uncertainties, many of the world's economies were performing better than most of the world's economic theories. By the late 70's, two new economic theories had arisen to challenge the Keynesian orthodoxy. The first of these, extremely influential with the Reagan coalition, was supply-side economics. According to supply-side economics, tax cuts can be the cure for both inflation and recession. To state it simply, tax cuts, by increasing the rewards to economic activity, stimulate both production and consumption, and, therefore, stimulate supply as well as demand. The increased aggregate supply cures inflation, and the increased aggregate demand cures recession. For a readable account of supply-side economics, see The Great Experiment (1990) by Lawrence B. Lindsey. Less well known by non-specialists, but taken more seriously by most professional economists, is rational expectations economics, a formidable challenge to the technical underpinnings of Keynesian economics. Like the new growth theories, rational expectations economics is difficult to describe in non-technical terms. Basically, it criticizes Keynesian economics for failing to model the ways in which consumers, workers, and investors form expectations about the future. Therefore, according to rational expectations, Keynesian economics has no way of knowing how the participants in an economy will respond to changes in government policy. Rational expectations also criticizes Keynesian economics for dropping the pre-Keynesian assumption of "market clearing", because dropping this assumption makes the mathematics of modeling individual economic behavior impossibly difficult (although rational expectations mathematics is hairy enough). Rational expectation theory, while not well known among non-specialists, has come to have a great influence on economic theory in general, and, thus, indirectly on global economic policy.
The incoming Reagan administration consisted of many political factions with a wide divergence of beliefs. There were internationalist "Wall Street" Republicans, parochial "Main Street" Republicans, cold warriors, monetarists, supply-siders, Christian Evangelicals, the Moral Majority, State Department "Arabists", and Neoconservative partisans of Israel. At many times, these various factions were at daggers drawn. However, all of them (or most of them) were united by support for two fundamental policies, (1) distrust of the welfare state, and support for free market solutions to America's chronic problem of stagflation, and (2) a hardline stance toward the Soviet Union as a solution to America's weakened influence on world politics.
Soon after taking office, the administration guided through Congress a massive series of tax cuts (the ERTA or Economic Recovery Tax Act) and a massive increase in defense spending. However, commensurate cutbacks in government spending to balance the massive tax cuts were stymied by "gridlock" between liberals who wanted cutbacks in military spending and conservatives who wanted cutbacks in social spending. The Federal Reserve was keeping interest rates astronomically high to pressure the administration and the liberal congress to agree on spending reductions. This was precipitating a "global liquidity shortage". In early 82, in an article entitled Reagan Watching and George Gilder's Wealth and Poverty, we characterized the American political situation as follows: "
"It is well known the two policies most associated with the
Reagan administration are:
. the tight money policy of restraining the growth of the money supply:
. the 'supply side' policy of reducing both government social expenditures and taxes.
These two policies which were forced on the U.S. by the world economy would have been implemented by whatever political administration was in power, had, in addition, also long been advocated by all of the main factions of the 'Reagan coalition' namely the supply siders, the corporate community, the 'neoconservatives', the moral majority, the "cold warriors", the conservative Republicans. The fact that these policies which had long been advocated were in the process of 'implementing themselves' gave a feeling of inevitability to the Reagan victory which led people to talk of the 'Reagan revolution' and to predict a unified, decisive and effective administration. In fact, the story of the next two years was the story of the fragmentation of the Reagan coalition.
To see why this was so we have to go back to our first newsletter 'Cambridge Forecast Reports,' Vol. I, June 1979, in which we stated:
'Political activity in the industrialized countries in the 1980's and beyond will be of three types: (I) nativist, blue collar, populist, petit-bourgeosie, anti-Third World, (II) establishment, pro-business, pro-Third World (III), young, anti-business, pro-Third World.'
The Reagan coalition is divided between political tendencies I and II above. For example, the 'neoconservatives' and the 'moral majority' are essentially Jewish and Christian populist movements respectively which support position I, whereas many of the "cold warriors" such as the Secretary of Defense Weinberger would tend to support position II. As the past two years have shown, any event which tends to polarize the U.S. around North/South issues, and which brings to the fore tendencies I, and II described above, also tends to fracture the Reagan coalition. To take some quick examples:
. The Israeli intervention in the Lebanese civil war (This referred to the limited military actions prior to the 82 invasion) led to the fight between the neocons in the National Security Council (Position I) and the 'Arabists' in the State Department and the CIA. (Position II);
. The revolution in Central America intensified the fight between the 'Atlanticists' in the State Department such as Haig (position I) and the 'cold warriors' in the Defense Department (position II) who advocated negotiations with the revels to lure them away from Marxism;
. The war between Britain and Argentina led to the fight between the 'Latin colonel sympathizers' and the 'Eurocentrists' in the Reagan administration, in particular to the fight between Jeanne Kirkpatrick and Haig.
The above perspective allows us to make sense of George Gilder's brilliant polemical book 'Wealth & Poverty' which became the bible of the Reagan administration and which must seem mysterious to Japanese readers with its bizarre combination of insights and evasions. Gilder's book became the bible of the Reagan administration because it celebrated those economic, political and social trends which brought the Reagan coalition to power while at the same time evading and obscuring those economic, political and social trends which eventually split the coalition.
Our perspective is that there are two main routes by which the American economy will recover from its present economic crises. One of these is the industrialization and privatization of the service economy partially through the use of the latest digital technology. For the short to the medium term, this will be the main avenue of economic growth. (For the longer term, the necessary precondition for American and Western economic growth is Third World economic development.) To oversimplify enormously, one can say that 'Reaganomics', 'Supply-side economics', the 'Reagan revolution' or whatever is the political and economic ideology called forth the the industrialization and privatization of the American service economy and George Gilder's 'Wealth & Poverty' is its main political manifesto. For example, in the chapter 'The Productivity of Services', Gilder gives a layman's description of the growth of the service economy under the stimulus of government social spending and its current future industrialization and privatization by the use of electronic techniques. In other chapters, he criticizes the public sector for stifling the private sector through taxes and regulation, for competing for its markets, and for raising the cost of its labor inputs by welfare and other social subsidies.
However, the most significant fact about the book and the reason for its popularity lies in the way it deals with the issues of global economics and the issues of long-term world economic growht. Obviously, to go too deeply into either of these tow issues brings one immediately into North/South issues, precisely the issues on which the Reagan coalition is hopelessly divided. Gilder gets around the first of these issues, the issue of global and trade politics, by simply not discussing it at all. He deals with the second of these two issues, the issue of long-term global economic development and growth by saying that it is essentially a very complex 'random walk problem' which is not amenable to rational discussion. To illustrate by some quotes:
'The dynamics of economic growth consists of a largely spontaneous and mostly unpredictable flow of increasing diversity and differentiation of new modes of production.'
'Rationalistic calculation for all its appeal can never suffice in a world where events are shaped by millions of men acting unknowably in a fathomless interplay of complexity.'
Implicit in these quotes is the possibility that future technical progress will allow the world and American economies to resume their upward growth while at the same time avoiding the painful and devisive global and North/South issues which lie in wait for the Reagan administration and the western economies in general.
Our own studies indicate that many of the people in the American business community who read Gilder's book came away with the impression that rapid American growth was possible without massive public, protectionist involvement in investment decisions (position I above) and without getting commercially involved with alien cultures and nations (position II above). Thus, there need be no conflict betwen the two positions. As is becoming increasingly clear, the story of American life in the 1980's and beyond will be the story of precisely such as conflict." CFG Reports, 4/82.
And what were "the painful and devisive global and North/South issues which ...(lay) in wait for the Reagan administration and the western economies in general."? To answer this question, let's go back to the Chapter 2 discussion of global economic growth.
"Businesses hire workers to produce economic output. Part of this output is consumed by the workforce and part is invested by businesses in order to create more economic capacity. This greater capacity is, in turn, used to hire more workers, which are used to produce an expanded amount of output, part of which is consumed by the expanded workforce and part of which is invested to create still more economic capacity to hire still more workers, and so on, the only limiting constraint being the size of the potential workforce. Given the billions of people outside the industrial market economies, such a growth model would certainly seem to have a lot of potential. The Malthusians often look at the burgeoning populations of the underdeveloped world as an unmitigated disaster. But to many investors, the enormous amount of talent, resourcefulness, ingenuity and drive for material betterment that must be present among so large a number of people, is often seen as an opportunity for unbounded economic expansion. The economist Milton Freedman (1992) has compared it to 'the equivalent of a second industrial revolution'".
Now obviously such a pattern of economic growth, requires at least one of three things: (i) population growth in developed regions, (ii) labor migration from underdeveloped to developed regions, or (iii) capital transfers from developed to underdeveloped regions. Since, the developed world (unlike the uderdeveloped world) is demographically stable, and, since (as is becoming increasingly obvious) there is a limit to the amount of immigration that the developed world can absorb from the underdeveloped world, it should be apparent that, if the growth pattern described above is what is "on the agenda" in the future, then, what is also "on the agenda", is an ever increasing amount of capital flow from the developed to the underdeveloped world.
R. Lucas (1988) (See Chapter 2 of this book) analyzes the failure of this latter phenomenon to occur (to the extent that would be predicted by standard economic growth theory). However, Lucas' arguments apply only to private investment. In addition to private capital investment, there were other sources of North/South capital transfer. These sources were both chaotic and turbulent but massive nonetheless. One such source (during the 50's and 60's) was U.S. cold war foreign aid, and massive U.S. war spending in Asia during the Korean and Vietnam wars (an important cause of the "Asian economic miracle" ). Other sources, (in the 70's) were inflationary surges in LDC commodity prices, and bank recycling of surplus OPEC petrodollars (both highly unstable sources).
In the 1979 and 1980, there were various proposals to formalize the latter form of North/South capital transfer. One such proposal was the Willy Brandt Report, North-South, which advocated a sort of "global Keynesianism", international public spending in the poor regions of the world to stimulate the world economy as a whole. In 1979, at the IMF conference in Belgrade, there were calls for long-term LDC development bonds to be issued to sop up excess "petrodollars", relieve global inflation and convert short-term and rapidly growing LDC debt into long-term development bonds, The list of reasons why this was politically impossible would fill a library. Paul Volcker flew back from Belgrade to Washington and imposed the tight money policy of 1979. While it was obvious that simply a U.S. tight monetary policy in the absence of anything else would inevitably precipitate a Third World debt crisis, reestablishing unilateral U.S. control over its money supply was seen as the more immediate problem.
Nonetheless, there had been a great deal of discussion, both public and private, about the need for Western/OPEC cooperation, and, in consequence, about the need for a solution to the Israeli/Palestinian problem. Furthermore, these calls for Western/OPEC cooperation were coming not from wild eyed radicals but from major heads of state. For example, in June of 1980, leaders of the industrialized countries supported the idea of a "summit conference" between representatives of the industrialized countries, the oil producing countries and the developing countries. This kind of talk was making both Israel and its supporters in the United States very nervous. In fact, one of the motives for the 1982 Israeli invasion of Lebanon was precisely to ward off such international pressure for a territorial compromise. For example, in early 1981, both the Pentagon and the CIA were pressing for a U.S. recognition of the PLO, while some advisors in the National Security Council were urging U.S. permission for an Israeli invasion of Lebanon to root out the PLO. When Israeli Prime Minister Begin told U.S. Secretary of State Haig at Sadat's funeral that he was planning the latter course of action, Haig responded, "If you move, you move alone." In June of 82 Israel invaded Lebanon and laid siege to Beirut. In August of 82 the Mexican debt crisis erupted.
These then were "the painful and devisive global and North/South issues which ...(lay) in wait for the Reagan administration and the western economies in general", namely the Third World debt crisis and a crisis in American/Israeli relations.
The American political and economic response to these two crises was the "Reagan recovery", and, it was the Reagan recovery which led to the current state of world politics and world economics (including, by the way, the collapse of communism and the end of the cold war). In early 1983, in our article The Limits of Recoveryism (which, in retrospect, should have been entitled How Congressional Gridlock Was Transformed into North/South Development Strategy) we characterized the Reagan recovery as follows:
"Towards the end of 1981 and the beginning of 1982, the U.S. central bank had put, what might be called, an 'embargo' on dollars. This 'embargo' together with a fall in the price of oil tended to drain liquidity out of the world financial system and, ultimately, to precipitate the 'Third World Debt Crisis' of the late 1982 and early 1983. At this point, whether by accident of design, a new U.S. (and, to some extent, Trilateral) policy was put into effect, which can best be described as a 'cartel on hard currency'. This policy was marked a large reflation in the U.S. (and to a lesser extent in Germany) together with a widespread wave of LDC debt reschedulings most of which carried very steep interest rate terms and austerity requirements. In other words, the U.S. was providing the liquidity necessary to head off a possible world banking crisis, but it was charging a very steep 'tax' on these dollars, the tax coming in the form of LDC austerity requirements and rescheduling fee and interest rate terms. In addition, the liquidity which being drained out of the system by the reshcedulings and 'semi-defaults' was keeping dollars scarce in spite of the large U.S. reflation.
This led to a model of growth which might best be called the 'deflationary' or 'hard currency' model of growth. This model of growth (stated briefly), says that the U.S. because of the world 'money shortage' is now in the position of exporting a very valuable and scarce commodity, namely dollars and it can achieve very favorable 'terms of trade' on this 'export, especially with the LDC's and the peripheral European countries. These favorable 'terms of trade' together with of global investors to hoard 'hard currency' will allow the U.S. to finance increasing levels of consumer spending and government spending without generating inflationary pressures. Thus, a U.S. 'consumer led recovery' can be generated which is 'funded from outside' by favorable terms of trade and the propensity of foreign investors to hoard U.S. dollars (dollar denominated debt). Thus, according to this model of growth, the trade deficit can be used to bail out the budget deficit.
To render this model of growth viable, the maximum possible level of austerity must be imposed on the debtor countries in order to reign in their imports from the developed economies in order to 'make room' for consumer spending in the U.S. so that U.S. consumer spending can be vastly increased without generating inflationary pressure. Thus, we have observed that the world economic and political establishment, particularly in the Reagan administration, and the IMF, which at the beginning of the debt crisis in the summer of 82, were speaking of the need for preserving LDC markets for western exports have been taking an increasingly 'tough' stance on LDC austerity requirements as U.S. consumer spending has picked up......
The important fact to observe about the 'hard currency' or 'deflationary' model of growth it is not a model of permanent world economic expansion and not intended to be one. It is rather intended to 'last until the U.S. elections'. The importance of generating a favorable economic climate in the U.S...has been stressed by many economic analysts such as Alan Greenspan and Helmut Schmidt and others. Obviously, the U.S. is the most important country in the formation of world economic policy and, thus, the U.S. electorate is one of the most 'destabilizing' elements in world economic policy since it has the ability to potentially seize control of this policy and turn it in a purely nationalistic direction. Reagan's increasingly protectionist stance is an example of this potential. Thus, the importance of preserving a favorable U.S. domestic economic climate is not only felt by the Reagan administration but also by many of the Trilateral policy makers.
The (up until now) ebullient mood of the U.S. consumers also deserves mention. The importance of dealing with the U.S. budget deficit and the dangers of Third World debt have been stressed by many U.S. policy makers such as Paul Volcker, Donald Regan, and Martin Feldstein without (up until now) putting a dent in the 'festive' mood of American consumers. The message that the American consumers have been getting from American policy makers (whether intended or not) can be summed up as follows: 'The recovery is exceeding anybody's expectations. But it will eventually run into budget deficit problems and Third World debt always remains a danger. But, who knows, we've been wrong before, nobody really understands how the world economy works anyway. Maybe the world economic crisis will simply vanish as suddenly as it came on and for equally inexplicable reasons."
Certainly, the extent to which consumers have run down savings in the face of high unemployment and cutbacks in the 'social safety net' is not a phenomenon that one could explain solely on the basis of individual economic rationality such as 'pent up demand' to find housing and replace worn-out automobiles. There has also been a tremendous increase in 'impulse buying'. In fact, all the 'horror stories' about Third World debt and economic privation seemed to improve the consumer mood rather than worsen it. A possible explanation for the phenomenon is as follows: In early 1983, the LDC's at the non-aligned conference took a political position which maintained that the Third World debt crisis showed the dependence of western and even American economic growth on the expansion of LDC markets for western exports. In other words, they were attempting to use the debt crisis as a wedge to open up a dialogue on North/South economic issues...The Reagan administration took up this line in asking for increases in IMF reserves (Donald Reagan's editorial in February 3, 1983 edition of the Wall Street Journal). In taking this line, both the Third World and the Reagan administration seriously underestimated the intensity of the populist, nativist, anti-LDC sentiment among large sectors of the American electorate (sentiment which played a large part in Reagan's 1980 electoral victory although he probably wasn't aware of this factor until the Falklands, Lebanon and LDC debt crises). The nativist counterattack to the relatively 'pro-Third World' line of the Reagan administration was not long in coming and this caused the Reagan administration to do an 'about face' and simply stress the 'recovery'
To sum up, the American consumers were very threatened by the whole idea of American dependence on Third World markets, (or, for that matter, on Third World anything) and decided to eliminate this dependence by increasing their levels of consumption....
However, this policy of increasing consumer spending in the U.S. while reducing the pace of development in the LDC's is a solution the world economic problem in the same way that Israeli colonization of the West Bank is a 'solution' to the Palestinian problem. Namely, consumer spending is expropriating the credit and purchasing power that the LDC's need to develop , and the only way around this dilemma is either U.S. budget cutbacks or inflation.
Thus, the 'hard currency ' model of growth has a finite life expectancy. If the U.S. attempts to solve the budget and debt problems simply by rescheduling and constantly injecting reserves to 'cover' the rescheduling and wash away the deficits then the result will inevitably be inflation..In other words, the amount of liquidity necessary to fund the U.S. budget deficit, finance increased consumer spending and capital investment in the U.S. and simultaneously fund LDC imports at a level which avoids a 'social calamity' in the LDC's would also eventually be enough liquidity to re-ignite inflation...However, the 'hard currency' model of growth could fail for political reasons long before inflationary pressure is generated.
Obviously, a political upheaval in one of the large debtor LDC's would be a significant impediment to the 'hard currency' model of growth. But, leaving LDC politics to one side, American politics (could)... also play a significant role, (in halting this model of growth) less because the level of American economic hardship is that bad (it isn't even for most of the unemployed) but simply because of the enormous political leverage of the American consumer. Namely, the 'hard currency' model of growth was intended to placate the ...nativist, protectionist, anti-LDC sentiment within the American political scene. It has, in fact, served to materially strengthen this political tendency, and also to embolden it. That is, this tendency now has a great deal of 'space' to advance its demands, such as (for example):
-Congressional control of the Fed;
-restrictions of international bank lending;
In fact the "Reagan recovery" was never meant to be a perpetual engine of global economic growth. As we said in Political Aspects of the Reagan Recovery, in early 1983:
"The Reagan administration was alarmed at the speed with which North/South economic and political issues began to enter into public consciousness after the Israeli invasion of Lebanon and the emergency global debt negotiations. Neither the Reagan administration nor other factions in the American political establishment.. have as yet staked out a position on these issues and they don't want to see a public debate on these crucial issues develop in wayas that are uncontollable or unpredictable...Thus, the 'recovery' is not seen as a solution to global economic problems, but as a means of buying time to prepare a solution."
Let's elucidate the above quotes (with the benefits of 20/20 hindsight). The Third World debt crisis and the debacle in Lebanon provided an "education" in North/South political and economic issues for the Reagan administration.
In order to cope with the Third World debt crisis, which threatened the global banking system, the administration knew that it would have to address itself to the problems of Third World development, about which it knew little. As a result, it turned for advice to the International Monetary Fund and the World Bank, whose role during the 80's expanded from trade balance financing (IMF) and project lending (the World Bank) to "Third World development management", and who enshrined export-led growth from the South to the North as the cardinal principle of LDC development (setting the stage for the protectionist backlash of the early 90's).
The administration became aware of the intense, anti-Third, World nativist sentiment in the United States, a sentiment which had played a big role in Reagan's defeat of Carter, and a sentiment which would obviously make it very difficult for the administration to deal with the Third World's economic needs. As Reagan's Treasury Secretary, Don Regan, mused at one point, "How can we give the Third World a break on its loans and explain such a policy to the American voter who is paying an astronomical interest rate on his mortgage?" How indeed? When Reagan formed an alliance with liberal Democrats to pass a U.S. increase in IMF funding to deal with the Third World debt crisis, one of Reagan's well known Christian Evangelical supporters said, "The Devil has entered the White House".
The administration also became aware that it had an "Israel problem", which we will explain below.
In the early 90's, there was a spate of books about U.S./Israeli relations purporting to show Israeli "duplicity" towards the U.S. Two notable examples of this genre were The Sampson Option by Seymour Hersch (Random House, 1991), and Dangerous Liaisons by Andrew and Leslie Cockburn (Harper-Collins, 1991). How much of this material is true, how much fantasy, and how much disinformation, is certainly very hard to say. However, the appearance of these books certainly demonstrates one thing: there was a great deal of tension between the Israeli government and the American administration during the Reagan/Bush era. Furthermore, this tension didn't start with the Bush/Shamir fight of 1991, but was present almost from the very beginning.
The conventional view of Reagan's attitude towards Israel is expressed by G. W. Ball and D. B. Ball in their 1992 book, The Passionate Attachment:
"Because the cold war supplied the coordinates by which Ronald Reagan charted all aspects of foreign policy, he warmly embraced the doctrine that Israel was an important U.S. 'strategic asset', a bastion blocking the encroachment of Soviet power into the Middle East. He had expressed that view during his 1980 campaign that Israel 'was perhaps the only remaining strategic asset in the region on which the United States can truly rely...Finally, he announced that he would use the full panoply of U.S. influence to 'insure that the PLO has no voice or role as a participant in future peace negotiations with Israel'. Reagan was thus clearly the most partisan of Israel's supporters, just when in 1981 Israel's Arab neighbors seemed prepared to make peace with Israel."
All this is certainly true, but it is not the whole story. The fact is that the Begin government in Israel was very distrustful of the incoming Reagan administration. All the talk, during the 70's, about the need for Western/OPEC cooperation, about the need for North/South cooperation in general, and the increasing sympathy among the OECD countries and the transnational business community for Palestinian rights, were making the Israeli government very nervous indeed. The Israelis feared that once the Reagan people learned about the importance of Western/OPEC economic cooperation and the importance of North/South economic cooperation (and the upcoming Third World debt crisis might be just the thing to teach them), their attitude towards the Israeli/Palestinian conflict would change. Thus, from the very beginning, the Begin government began a strident policy of confrontation with the incoming Reagan administration. For its own part, after the Israeli and invasion of Lebanon and the American debacle in Lebanon, the Reagan administration certainly did not see the Begin government as a strategic asset, but as a strategic liability. Furthermore, the administration had become well aware that the Israeli right was able to mobilize enormous support from the anti-Third World "nativists" within the U.S., within the "Reagan coalition", and within the Reagan administration itself, particularly among the cold war neo-conservatives, the military, and the Christian fundamentalists. Thus, after the events of 82, the Reagan administration was very loath to be seen putting public pressure on Israel, interfering in Israeli politics, or coming between the American Jewish community and Israel. (This is particularly the case since the administration needed both the Israeli lobby and Israel's supporters in Congress to support its approach to the world economic problems.)
All of the above determined the Reagan approach to the Third World debt crisis. Any thought of "North/South" capital transfers or Western/OPEC cooperation, ala the Brandt Commission Report, was of course, out of the question. Instead, the standard IMF/World Bank prescriptions were to be followed to the Third World debt crisis, namely the Third World countries were to contract their imports and export their way out of the crisis. This raised an obvious "fallacy of composition. To wit: "if everyone is exporting who is importing?". The answer to this question was to be - the United States! That is, the Reagan strategy was to have the United States be the "importer and borrower of last resort" (as David Hale of Kemper Financial Services put it). The U.S. budget deficit was to be a "Keynesian stimulus", if you will, for the world economy, and was to replace Third World markets that were lost owing to the IMF austerity programs. The U.S., furthermore, was deliberately to run a large trade deficit, in order to give the debtor countries someplace to export to. Surplus countries, such as Japan were, in turn, to use their dollar holdings to help finance the U.S. budget deficit. The depressed nature of much of the world economy and the role of the dollar as "safe haven" made this possible. In essence, the U.S. deliberately generated a large trade deficit in order to bail out the budget deficit. (As far as the "Israel problem" was concerned, the approach of the Reagan administration was to put the Arab/Israeli dispute "on hold" and pray for the Israeli labor party to get in.)
As can be expected, the world's finance ministers regarded this strategy of "debt-led" global economic growth as hair raising, but, in the absence of an alternative, they went along with it. In his 1992 book Changing Fortunes, former Federal Reserve Chairman, Paul Volcker, describes a conference of the world's finance ministers.
"(Then Secy of the Treasury Don Regan) aggressively delivered a speech telling his foreign counterparts that they had it wrong and we had it right......I happened to walk into the room in the middle of it all, with Regan in full flight, almost shouting. It was immediately apparent that this was not a high point for the niceties of international diplomacy...But Regan did have an important point. Their economies and those of the rest of the world were being substantially buoyed by the United States, quite directly by our rapidly expanding imports. The administration might in foreign eyes have seemed totally ideological in its tax, its budget and its exchange rate policies...But that same ideology was doggedly resisting protectionism and promoting more open markets around the world in the common interest".
As former Japanese Finance Minister, Toyoo Gyohten, put it:
"..if the United States were to cut its deficit and slow its economy who would replace it as the engine of growth?..So let me say there was a certain amount of mutual aquiescence in the crimes of another, because we were all sinners to some extent." Ibid.
From both a geopolitical and domestic political point of view, the Reagan strategy of "debt-led" growth certainly had a lot of advantages. First of all, it put the control of the world economy squarely back into the hand of the U.S. The OPEC petrodollar surpluses vanished, so the whole dreaded issue of "Western/OPEC" cooperation vanished as well. The U.S. also gained an enormous amount of political leverage over the rest of the world. After all, the U.S. was now the world's "importer of last resort" and nobody wants to argue with a good customer. Finally, the downward pressure on oil prices deprived the Soviet Union of hard currency and certainly hastened the collapse of "the evil empire". The tax cuts together with the drop in inflation certainly pleased the American consumer. Finally, for reasons that we will explain below, the Reagan strategy of "debt-led" growth ameliorated (but did not end) the conflict between the globalist and nativist factions within the Reagan coalition.
Nonetheless, throughout the 80's, the Reagan administration was far more pre-occupied with Third World development issues than it was letting on. In fact, at the end of 1984, when Reagan was asked what achievement he was most proud of, he said, "getting through one more year of the Third World debt crisis." Nonetheless, the Reagan administration (like the succeeding Bush administration) was very reluctant to get into public discussions of global economic issues, particularly North/South economic issues, (which is one of the reasons why the American public now feels that it's not being "leveled with" about economic matters). Instead, the main approach of the administration was to play up the "miraculous Reagan recovery" generated by "supply side" tax cuts, and to explain the battering that American industries were taking (because of the high dollar, surging imports, the collapse of the Latin market for American exports, the diversion of investment capital to the financial and service sectors), by saying that the U.S. was "entering the age of information".
This does not mean that the Reagan administration was keeping its anxieties about North/South issues a state secret. In fact, the Reagan administration was far more candid about the North/South problems it was facing than was the succeeding Bush administration. (although the Bush administration, aided by the end of the cold war, went much further in implementing actual "solutions" such as the Brady plan, the NAFTA, the Baker Middle East peace plan). The administration's official statement on the LDC debt problem in 82, entitled National Security Directive 3, was classified and then leaked. It said that a U.S. economic recovery would solve the global debt problems without inflation. There was also a dissenting opinion which said the opposite. This was probably a device to send one message to the domestic audience and another message to the trilateral partners prior to the upcoming economic summit conference. Later on, the question of aid to the LDC's was discussed in The Carlucci Commission Report, a sort of "cold war Brandt report".
The 1985 book Third World Development, a three volume encyclopedia of commercially oriented articles on Third World development, published by Grosvenor Press, featured articles by Ronald Reagan, George Schultz and Caspar Weinberger. These articles stressed free trade, privatization, free market liberalization, and carefully controlled social and agrarian reform, which "avoided chaos and disorder". The literature put out by the International Center for Economic Growth, started by Casper Weinberger after he left the administration, gives a good idea of the kind of thinking about Third World development questions that was taking place in the Reagan White House in the mid-80's. In fact, we found some (lower level) Reagan appointees to the Agency for International Development and the Department of Commerce quite enthusiastic about promotion of Third World development and the benefits it would have for the U.S. economy.
However, the Reagan administration, as a whole, certainly preferred that the American public think about something other than Third World development.
"The last thing the administration wants is to have its policies subject to a blast of rhetoric by articulate anti-Third World spokesmen (of whom there are many) for which it would have no good answers." CFG 10/83
The main tactics used by Reagan to distract the public from global economic issues were theatrics, media manipulation and public mood manipulation, examples of which will be given later in the chapter.
To continue, the Reagan "debt-led" model of growth was designed to last "until the elections" of 1984. In fact, it ran into political difficulties several months prior to the elections.
"Since IMF policy required suppression of imports, (LDC) exports had to be expanded, and since many European countries were also undergoing austerity, the only place to do this was to the U.S. market. Thus, the U.S. became the 'borrower and consumer of last resort' (in the worlds of David Hale) of the entire world economy, and the debt crisis was converted into an 'import crisis'...This vitiated the 'recovery euphoria' which was being experienced by many parts of the American public, and led to all sorts of strange analyses that 'those foreign exporters are stealing our recovery'. The vision of the Third World as an economic threat (also came to the fore, because)..'the Third World as military threat' anxieties were being reduced by Reagan's move towards dialogue with Russia." CFG 1/84
As the U.S. trade deficit began to balloon, anti-Third World, nativist sentiment which had, in the 70's, been concerned with the defeat in Vietnam, the OPEC cartel, the Iranian hostage taking, and the enhanced diplomatic status of the Palestinians, began, in the mid-80's, to become alarmed at the foreign products which were flooding into the U.S. market. One of Reagan's appeals to the American voter in the 1980 election was that he was seen as a "Third World basher", as someone who would "bring America back", "make America first again", as someone who would make up for the humiliations of the Vietnam defeat and the Khomeini hostage taking. In 1984, the Democrats began using Reagan's "America first" image against him. If Reagan was going to make America "number one" again, the Democrats asked, then why was he "giving away" so much of American industry to other countries, especially low wage, Third World countries? When Reagan, in response to a terrorist incident, said, "America is a friendly old man with a spine of steel" the Democrats countered that the spine was increasingly being made of Korean steel. For his part, Reagan knew that the flood of foreign imports into the U.S. economy was tarnishing his "America first" image, and he did bow to protectionist pressure to some extent. However, there was a definite limit to how far he could go in that direction. The Reagan "debt-led" model of growth in the early 80's depended completely and absolutely on America's ability to import from the rest of the world. If this ability were to be choked off by protectionist legislation, then the foreign market for U.S. debt would vanish, much of the Third World debt would have to be be written off as uncollectable, U.S. money center banks would take enormous losses, and the world economy would begin to unravel. In fact, one could say, that the main problem on the mind of the Reagan administration in the mid-80's was how to combat protectionist sentiment without directly discussing global economic issues with an American public that didn't want to hear about them. One of the approaches of the administration to this problem was the use of distractions and "theatrics". Political debates would be started with the purpose of distracting people from trade issues. For example, in the 1984 Presidential campaign Reagan said something about America being a Christian nation, a statement which provoked Mondale into devoting a lot of attention to the separation of church and state, an issue which very few voters cared about, and a welcome diversion from trade issues. In fact, distractions, theatrics, mood manipulation and media manipulation became important features of governance during the middle years of the Reagan administration.
"The American fear (of the Third World)..in (a)..vague and inchoate way does grasp the basic diagnosis: The future will be decided by the changing relations between the West and the Third World..Ronald Reagan came in in 1980 after the Iran hostage crisis. The American public wanted an anti-Third World kabuki with an aragoto Danjoru, namely Ronald Reagan. They waited for his Kabuki style 'nirami' (tough stare) against the Third World, which was the bombing of Libya..The American far-right National Security Council provides a kind of nagauta in the backgroup. It is absolutely false to argue that...Reagan = The opposite of Carter. This is true ..... to an extent, i.e. Reagan's aragoto versus Carter's wagoto. However, both were primarily occupied with the North-South problem. Ironically, if you look at the recent book Third World Development with essays by Reagan and Schultz you see that Reagan is ..... in favor of Third World development and not 'anti-Third World' as he keeps implying by his 'nirami' which is (used as a tranquilizer) for the American mind." CFG book, 1987.
Although Reagan did, by these methods, succeed in deflecting nativist criticism of the American debacles in Lebanon, protectionist sentiment continued to grow, and, by the end of 1984, the Reagan administration knew that it had a serious problem that needed more than media wizardry to solve.
"As it turned out, the administration had real difficulty with the protectionist onslaught in Congress and is now seriously rethinking its economic policy. To expand on this latter point, the administration is now pressing for a general North/South trade conference to formalize a North/South industrial redeployment strategy (our high-tech and services for their raw materials, agricultural products, and manufactures)." CFG 11/84
It was at this point that the "Reagan revolution" came up with the concept that was to dominate global development strategy for the next decade (and beyond). In order to explain this concept. it is important to observe that the "Reagan revolution" was not so much a revolution as it was a continuation and intensification of long standing U.S. policy towards global economic growth. Since 1945, the US had historically run budget and trade deficits in order to act as "an engine of growth" for the rest of the world economy. (See D. P. Calleo, 1982.) The Reagan debt-led model of growth simply put this strategy into "full throttle" by an "order of magnitude" increase in the U.S. budget and trade deficits, and, in order to ward off inflation, financed the deficits by debt creation rather than by monetary creation.
The Reagan debt-led model of global growth, however unpalatable it might have seemed from a bookkeeping point of view, was in fact a bold and decisive strategy. For several years, it put the U.S. squarely back in charge of the world economy. and allowed the U.S. to break the international OPEC/West/LDC "gridlock" on global economic strategy. The world's most important commodity was now, not oil, but the U.S. dollar. Commodity prices plunged. Large parts of the global economy were turned into a "global distress sale" and U.S. growth was financed from the "proceeds". A significant portion of the Third World's consumer markets were shut down and replaced by the U.S. consumer market. The world's financial power and "market" power which had been dispersed between the U.S., Europe, Japan and OPEC was now pulled firmly back into the hands of the U.S. In short, Reagan's response in 1982 to ten years of Western, OPEC and Third World bickering was: "You'll do it my way. Even if I'm not quite sure what my way is yet.".
In other words, the U.S. was now able to set the agenda for discussions of global development strategy for the next decade.
The strategy towards North/South development that ultimately emerged from this U.S. dominance was the so-called neoliberal strategy. Its most important feature was the initiation, in 1986, of a new round of global trade negotiations, the Uruguay Round, of the General Agreement on Trade and Tariffs (GATT). To give some background, the origins of the General Agreement on Tariffs and Trade (and of its stillborn predecessor, the International Trade Organization (ITO)) go back to American-British wartime discussions concerning the shape of the post-war world economy. Despite vigorous efforts by developing countries (in the Havana negotiations of 1947) the draft ITO Charter only "paid lip service to development concerns". The GATT, a separate temporary agreement negotiated by 23 countries (which became permanent when ITO was never ratified), was even less receptive to the needs of the developing countries. Tariffs on trade in manufactures between developed countries were reduced substantially under the auspices of GATT, but products in which the developing world had a comparative advantage (such as textiles or agricultural products) received much less favorable treatment. In addition, when the developing countries diversified into industrial exports, they faced a proliferation of new discriminatory non-tariff trade restrictions directed specifically at them (see notes).
The basic thrust of the Uruguay Round was as follows: It had been estimated that the above restrictions on LDC exports to the West cost the Third World 500 billions dollars each year. The West would agree to abolish those restrictions, thus providing 500 billion dollars worth of economic benefit to the Third World. In return, the Third World would agree to:
- open up their service economies to imports;
- give wide automony to outside investment;
- agree to strengthen their patent protection of western technologies, (thus, according to some critics, "locking in" western advantage in these technologies).
According to the neoliberal strategy, such an agreement, and even the promise of such an agreement, would bring about a massive North/South capital transfer. This capital would be lured by the promise of access to Western markets, by cheap labor, and by a favorable climate for Western investment brought about by deregulation in the LDC's. This flood of capital investment would, in turn, "jump start" the Third World economies, lead to a rising standard of living and open up markets for Western exports. The Third World would follow the path of the dynamic Asian LDC's and would simultaneously break the cycle of slow growth, trade imbalances and fiscal deficits in the West. In the meantime, the West's increased access to LDC service sector and high-tech markets, brought about by the GATT agreement, would reduce protectionist sentiment in the West.
"Cheap labor is drawing investment and production away from the industrial countries. Plentiful goods and materials are crowding the world markets, and annual exports from developing to industrialized nations have risen by $100 billion since 1989. A new economic order is being born. Eventually, the entire world should share the bounty of this new order. As nations develop, their need for imported goods rises, and worldwide demand grows. Multinationals expect the developing countries to become vast new markets by the end of the decade (for Western high tech, capital equipment and services, ala GATT) as productivity and incomes climb worldwide. History is on the side of the optimists." (Editorial from Business Week, 8/2/93.)
Could it really be this simple? Of course not. In the early 90's, there was a flurry of criticism, from both the right and the left, of the global growth strategy described above. For example, environmental and consumer groups criticized the GATT on the grounds that to subject local and national environmental, safety, health, and patent legislation to the control of global and regional trade agreements would be to put local and national governments in an impossible strait jacket and make it very difficult to adjust local policies to local conditions. Some Third World critics called GATT an offer of "market access (but) with draconian reciprocity". There was also "left wing" criticism of the "global underconsumptionist" sort which went as follows: Because of widespread global poverty and underdevelopment, global consumer markets are too narrow to allow sustainable global economic growth. The strategy of using Western consumer markets and LDC cheap labor to "bootstap" the global economy won't work. It will run into a brick wall of Western protectionism and underconsumption long before LDC standards of living rise enough to relieve Western markets of the pressure of cheap imports. Therefore, some sort of "global Keysnesianism" is needed to enlarge LDC consumer markets. For an example of such criticism see Walter Russell Mead's article The New Global Marketplace, from Changing America, Blueprints for the New Administration, 1992.
Actually, many of the supporters of the "GATT approach" to the North/South question, including many officials in the Reagan and Bush administrations, knew very well that a lot more was needed in the way of global economic policy than simply global trade agreements. Like "the Reagan recovery", GATT, and the promise of GATT, was seen as a "holding action", in this case a long term holding action as opposed to a short term holding action. If one had to paraphrase Reagan and Bush thinking, one would say, "The world economy is globalizing and changing in ways that are aren't entirely understood. The best thing to do is to free up national and international restrictions to the movement of knowledge, goods, liquidity and capital and see what happens. Besides, free trade and free markets are like 'motherhood and apple pie'. Keynesianism has been descredited as unworkable on a national level. GATT is an established, entrenched global institution. If countries can't agree on a trade agreement, then how the hell are they going to agree on 'global Keysnesianism'?".
Another goal of the Reagan/Bush global development strategy - both in its short term form (the "Reagan recovery" and in its long term form (GATT, structural adjustment and NAFTA) - was to unite the globalist and nativist factions of the Reagan coalition. And here, let it be repeated that the term "nativism", as we use it, does not refer to a political position, a political belief or a political worldview. It refers to a sentiment, a sentiment, moreover, which can be experienced by the same individual at some times and not others, and for some reasons and not others. Thus, there are many different kinds of nativism. There is - among other forms - race nativism (fear of non-white countries with economic, political or military power), flag nativism (fear of the Third World as a military threat to the West, or fear of Third World criticism which might make the U.S. "look bad"), and wage nativism (fear of low wage economic competition from the Third World). For example, in the 1984 Presidential election, Reagan used flag nativism to distract the Reagan Democrats from wage nativism.In the 1992 Vice Presidential debate, candidate Al Gore used wage nativism against the Republicans (by criticizing an Agency for International Development program which resulted in a relocation of U.S. businesses to Central America) in order to distract attention from his advocacy of a "Marshall Plan" for the Third World. With the exception of the blue collar Reagan Democrats, the nativists in the Reagan coalition tended to fear the Third World more as a military, cultural, or ideological threat (or as a threat to Israel) than as an economic threat. A pattern of global economic growth in which military, political, market, financial and "cultural" power remained with the West, even as parts of the Third World achieved industrial success within Western markets, was, in general, acceptable to the nativist wing of the Reagan coalition. After all, "the customer is king". As long as the Third World remained largely dependent on western markets, then the Third World would have to adjust to western values, western culture, western needs and western world views, if it wanted to sell its products, so that, even as Third World products invaded the American market, American culture and values would reach out to inundate the Third World. Eventually, "they" would become more and more like "us", a state of affairs more or less acceptable to the nativists in the Reagan coalition. Thus, from the early 1980's to the early 1990's, the Jewish neoconservative right and the Christian right were to make a transition from nativism to globalism. For example, in 1984, the neoconservative Ben Wattenberg was invited to accompany a Reagan administration team to a U.N. population conference in Mexico. The position taken by the Reagan team at the conference was that development, and not abortion, was the solution to the problems of Third World overpopulation. The conference's Third World participants agreed, and this indeed was the position taken by the conference. However, the final statement also included a condemnation of Israeli settlements on the West Bank. This soured Ben Wattenberg on Third World population growth. He was soon to come out with a book entitled the The Birth Dearth. In the Birth Dearth, Wattenberg bemoaned the fact that most of the world's population growth was concentrated in the non-Western regions of the world, regions whose non-Western values and culture made them unlikely candidates for sustainable economic growth. In the meantime, the developed Western regions of the world were experiencing a "birth dearth" which would deprive them of the population increase needed to sustain economic growth. In the late 1980's, however, Wattenberg had come to the conclusion that American culture and values were spreading to the rest of the world, and expressed a far more sanguine view of the world's prospects in The World's First Universal Nation.
Let's get back to out history. In his book, Changing Fortunes, Paul Volcker divides the history of Reagan/Bush era into four periods; "The Latin American Debt Crisis", "Bringing Down Superdollar", "More Experiments in Economic Management", and "The New World Order". (To which we add a fifth period, "Nativist Backlash to the New World Order".) The seminal period of this history, in our perspective, and the cause of all the succeeding ones, was the Latin American debt crisis. We will explain this below.
In late 1984, the Reagan debt-led model of growth was running into severe difficulties. When asked, at the time, what achievement he was proudest of, Reagan said, "getting through one more year of the Third World debt crisis". And, indeed, the Third World debt crisis was no longer an imminent threat to the world financial system. In fact, since 1983, the commercial banks had been receiving more in debt-service payments from the heavily indebted developing countries than they were extending to them in new loans. An enormous net resource transfer from the debtor countries to the American economy was taking place. The Reagan debt-led model of growth, while stimulating economic growth in the export-oriented Asian LDC's, was suppressing it in the Latin LDC's, threatening chaos and upheaval on America's doorstep, and leading to a surge in Latin immigration to the U.S. (and the growth of the Latin drug trade). In addition, the American trade deficit was generating a protectionist backlash in the U.S., and the increasing U.S. budget deficit was causing alarm in many sectors of U.S. business community.
In 1985, the U.S. sought the help of the other G5 countries in dealing with this situation. The result was the G5 meeting in the Plaza Hotel on September 22, 1985 for coordinated intervention to bring down the value of the dollar (called the Plaza agreement). The purpose of this dollar devaluation was to make U.S. goods more competitive on world markets in order to allow the U.S. to work down its trade deficit. According to P. Volcker (1992), the Plaza agreement was "the most aggressive and persistent effort to guide exchange rates on both a transatlantic and transpacific scale since floating had begun more than a decade earlier". The principal architect of this policy was the new Treasury Secretary James Baker. Many other members of the Reagan administration had been very nervous about a devaluation of the dollar. Their fears were expressed in a scenario called "the hard landing scenario". According to "the hard landing scenario" a fall in the dollar exchange rate would cause foreign investors, fearing an exchange rate loss, to shy away from dollar investments, thus, choking off the inflow of foreign capital that was allowing the U.S. to finance its budget deficit. In fact, this did not happen. The foreign capital, which had been flowing into U.S. debt, now flooded into the U.S. asset markets, into stocks, into real estate and corporate acquisitions. This, in turn, generated the so-called "junk bond market" to finance the buying of U.S. conglomerates to be "unbundled" and sold off to foreign investors. Investors, both foreign and domestic, continued to pour capital into the U.S. economy, leading to the "go-go" years of the late 80's. The commercial real estate boom precipited by the tax provisions of ERTA, continued in many regions of the country. Despite increasing volatility, the financial markets continued to provide employment, generate profits, and stimulate economic activity in the burgeoning service economy. Both the U.S. trade deficit and the U.S. budget deficit began to decline, and economic optimism increased.
However, even as the growth of federal debt slowed down, both private and corporate debt continued to soar. Consumers borrowed to finance the purchase of goods and the purchase of residential real estate. Corporations were acquired by means of "leveraged buyouts" and resisted takeover by means of "poisoned pill" borrowing. Commercial real estate borrowing continued to grow.
To sum up this period (and to oversimplify enormously both for rhetorical purposes and purposes of brevity) we can say that the Third World debt had been "resolved", and Third World debt "neutralized", as follows: problematic and risky Third World debt had been dwarfed by a stupendous rise in First World debt, with the result that, by the late 80's and early 90's, the the Third World debt crisis was no longer a threat to the U.S. banking system. That role was to be played by the First World Debt crisis; the savings and loan debacle, the surge of corporate and personal bankruptcies, the massive amount of non-performing real estate loans.
However, there are three points that must be made about the First World debt crisis. First of all, it was a lot more manageable than the Third World debt crisis. It was a lot more manageable because it did not span the North/South divide and, thus, did not raise the specter of a nativist backlash. Imagine, for example - given the uproar over NAFTA - the political feasibility of applying a savings and loan type bailout to Latin America.
Secondly, (and this was very important to the Reagan administration), borrowing kept the American import and consumer market going, thus, providing both domestic political support and political leverage over the rest of the world. Even though the U.S. needed the help of its Trilateral partners to manage the world economy, it still "called the shots", because every country in the world (with the possible exception of North Korea) wanted access to its lucrative market.
Finally, the buildup of First World debt had financed a pattern of world economic growth in which IMF conditionality and World Bank structural adjustment made sense in the aggregate. America "borrowed to import", and, in so doing, provided an "import engine", which rendered a strategy of export-led growth for the Third World as a whole least vaguely plausible.
In other words, many of the economic problems of the late 80's the debt problems, the "bubble economy", the market instability, the protectionist pressures, the unemployment problems, the corporate bankruptcies, etc. were, to a large extent, the consequences of a global economic strategy whose genesis lay with the Third World debt crisis, the Israeli/Palestinian conflict, and widespread American anxieties about the underdeveloped world. The economic and political problems of the 80's were, in effect, manifestations of an enduring crisis in North/South economic and political relations. As S. Amin (1990) puts it:
"For more than 15 years the world economic system has been in an enduring structural crisis. This is a world crisis marked by the collapse of growth in productive investment, a notable fall in profitability (very unequally distributed in sectors and companies) and persistent disorder in international relations.... The current crisis is therefore most apparent in the field of world relations. North/South relations and the conflicts around them constitute the central axis of the current crisis. .... In..circumstances (such as the 1930's) the Keynesian policies of redistribution of income might have been a solution to the crisis. By contrast, (the present crisis) comes after a long period of full employment, the rule of the welfare state,etc. Today's deficient demand is essentially deficient demand in the periphery ....... In other words, only a redistribution at the international level in favor of the South would permit a fresh start for the world. The obvious question is 'under whose aegis' will ...this be carried out?"
One of the purposes of the Reagan debt-led model of growth was precisely to buy time to formulate an answer to this latter question (while simultaneously keeping it from becoming a subject of public debate and nativist anxieties). However, when Bush became president, the Reagan debt-led model of growth had begun to slow down.
The Stealth Presidency
Nothing could be further from the truth than the belief that Bush was a "do nothing president". It might be more accurate to say that he was a "tell nothing president". Like Reagan, he was not terribly anxious to get into a public debate about global economic development and "North/South structural crises". However, his attempts to distract people with attempts at Reaganesque charismatic theatrics came across as forced and patronizing. To a large extent, his main method of distracting voters from touchy global economic and political issues was simply not to talk about them, and not to be seen dealing with them. He would conduct his foreign policy, including his foreign economic policy, as quietly as possible, often by means of secret meetings and personal communication with world leaders. At the June 1992 North/South environmental summit, he agreed to very little, and told everyone to convene the conference again after the U.S. and Israeli elections were over. In addition, (and we're not saying that this was a conscious strategy) Bush's abrasive domestic political style, his "Willy Horton" campaigning, his liberal bashing, his woman baiting, and so on, had the effect of taking American hostility towards the outside world and redirecting it into into internal, domestic animosities, animosity between liberals and conservatives, blacks and whites, Jews and Christians, men and women, religious and secular and gays and straights. Strident, "in your face" group identity politics drowned out discussion of global affairs. After the Gulf war, Bush tried to use military triumphalism to get Americans enthusiastic about U.S. involvement in global issues, the so-called "New World Order". This attempt failed dismally. One year after the Gulf victory, Americans were accusing Bush of "being more interested in Kurds and Palestinians than Americans". Domestic intergroup hostilities, hostilities which, to some extent, Bush had helped foment, were now being directed against Bush, who, like Carter before him, had become the scapegoat for everything Americans feared about the outside world. Expressing a common misconception about the Bush administration, the economist Rudiger Dornbusch said:
"At the end of the Gulf, war Mr. Bush enjoyed uniquely high approval ratings. He could have asked for anything and Congress would have gone along; strikingly he did absolutely nothing except sit on his polls."
Bush had indeed built up a great deal of political capital after the Gulf victory. Many Americans thought Bush had done what Carter should have done to Iran in 1979 and what Nixon should have done to OPEC in 1974. However, Bush was to use all of this political capital (and then some) in stopping Israel's breakneck settlements drive. In the fall of 1991, he asked Congress to make the proposed $10 billion Israeli loan guarantees dependent on a settlements freeze. He knew that the Shamir government would never accept a settlements freeze, and that, therefore, there would be heavy pressure on the Israeli electorate to vote Shamir out. Congress, under the threat of a presidential veto, did indeed go along with Bush, but, after the fracas, Bush's popularity had vanished, and his domestic political base had shrunk to almost nothing.
When Bush left office in 1993, Shamir had been replaced by Rabin, Arab/Israeli peace talks were under way, the U.S. economy, after the rapid growth of the 80's, had been successfully guided to a "soft landing" , and, for the first time since the 1970's, the developing world was growing faster than the West, with the consequence that investors, for the first time in decades, were beginning to talk about the Third World as an opportunity for the U.S. rather than as a threat to American interests, or as a global slum, doomed to poverty and famine. All this was, to a large extent, the result of Reagan/Bush policies of debt-led global growth. For all the global problems these policies failed to address, much less solve, the Reagan/Bush policies had, by the early 90's, shown that Third World countries could undergo rapid economic growth, even in a context of Western economic sluggishness. These policies had also converted a sizable number of previously sceptical Third World leaders to a pro-American, democratic and free market point of view. Ironically, it was the very perception that the Third World was now having more "economic success" than the West that contributed to the backlash against Bush in 1992. Bush, despite all his right wing theatrics and strident liberal bashing, had, like Carter in the 70s, become stigmatized as "pro-Third World".
"In 1988, George Bush said, 'We're going to create 30 million new jobs.' What he didn't tell us was that they would be in Guangdong Province, Yokohama, and Mexico." Pat Buchanan, 1992
When Bush campaigned for the presidency in 1988, he maintained that the U.S. budget deficit could be signicantly lowered by economic growth. In fact, the exact opposite turned out to be the case. Under Bush, the budget deficit was to be, not lowered, but once again put to political and economic use. In the 80's it had been used to ameloriate the Third World debt crisis. In the 90's, the U.S. budget deficit was now to be used to ameliorate the First World debt crisis; the deficit was allowed to increase in order to bail out the savings and loans, and the additional federal debt provided long term high interest government debt in which the commerical banks could place their low interest short term deposits. Like the Reagan administration, the Bush administration faced a number of difficult and complex crises. However, the Bush administration had far less economic and political room to maneuver than did the Reagan administration. The rapid debt led growth experienced during the Reagan years was becoming increasingly unsustainable, all the more so as the fall of communism and German reunification had put upward pressure on global interest rates. The Latin debtor countries, although they had undergone a widespread and substantive democratization, had also undergone a draconian economic crisis during the 80's, poverty had grown by leaps and bounds. In addition, Latin American debt was still growing, and steps had to be taken to reduce it directly rather than rely on an American led recovery ala the "Baker plan". Under the circumstances, the U.S. simply could not grow at a rate that put upward pressure on interest rates. It had to be guided to "a soft landing". Unlike Reagan, Bush could not count on a strong domestic economy to bolster his support. To be sure, Bush could count on the U.S. "victory" in the cold war to generate political support, but the fall of communism had also led to some very thorny and dangerous crises. One of these was the Iraqi invasion of Kuwait. Another was the fall of Likud/Labor alliance in Israel and the subsequent drive of the Likud government to build settlements until the West Bank was completely colonized or until the Likud government fell. The fact the Bush administration was able to deal with all these crises simultaneously was a triumph of tactical virtuosity. Bush, whatever one might think of his beliefs, goals, policies or methods, was anything but a "do nothing president". In fact, by early 1992, Bush and Baker were suffering from physical and mental exhaustion caused by all the things they were doing simultaneously. By the time of the Republican convention, many observers were getting the impression that Bush was keeping himself going by shear force of will. He seemed far more interested in locking in Middle East peace negotiations and foreign trade agreements than in getting re-elected. As New York Magazine reporter, John Taylor, was to write after the election:
"...... the look on his face was a patrician version of one I had seen before in my old neigborhood in Staten Island: the Lomanesque look of a man who keeps working long after a job has lost all its excitement, because there are two years left until the pension or because there's still a kid in school."
In short the problems that Bush was forced to address were the problems caused by the fall of communism and the problems caused by the Reagan debt-led model of growth. The belief that Bush was a "do nothing president" stems from mistaken belief that these crises were somehow of less immediate importance than other problems, such as health care, national competitiveness, deficit reduction, and global warming, etc. In fact, the problems Bush dealt with were the problems in which U.S. interest was immediately involved, and in which "the clock was ticking". He tended to let other problems slide, not even subjecting them to "spin control". He went along with a Democratic tax rise, social spending increase and civil rights bill in order to placate Congress, thus alienating the Republican right. and then, at the Republican convention, he went alone with the Republican right, thus, alienating the Republican moderates, (and leaving the impression that he was too besieged by
too many opponents to govern effectively).
The New World Order
At the beginning of this chapter, we promised to show that North/South relations were the driving force of global history from the Reagan revolution to the present. There was a bit of hyperbole in this promise. The fact is that the fall of communism and the end of the cold war cannot be reduced to North/South issues. The communist economic system collapsed under its own weight for reasons that were internal to the communist economic system.
What we will show, however, is that the impact of this collapse on the West cannot be understood apart from an understanding of North/South relations. For the past 500 years, two seminal forces have shaped the evolution of the world capitalist system; (1) scientific and technological advance in the West, and (2) the colonization by the West of, what is today, the Third World. The West and the Third World share with eachother a 500 year "historical relationship", to which the Eastern bloc was, to some extent, "external". In other words, the West + the Third World, on the one hand, and the "Eastern bloc", on the other hand, form two separate "world systems", whose "trajectories", over the past 1000 years, although intersecting at some times, have had very different equations of motion".
The widespread failure to appreciate this fact was to have enormous political and economic repercussions in the early 90's.
To explain this in more detail let's go back to Chater 4 of this book. In Chapter 4, we described the concept of rational expectations. Rational expectations is the way in which consumers, producers, and investors, change their future economic behavior in response, not to their perfect foreknowledge of future political changes, which is impossible, but to their "rational expectation" of future political changes, to their "acturial estimate" of the future impact of governmental and political changes. An important concept in understanding the political and economic crises of the early 90's is the concept of plausible but ahistorical expections. Plausible but ahistorical expectations (expectations precipitated by the fall of communism but shaped by North/South relations) lay behind the political and economic crises of the early 90's, the European monetary crises, the Gulf war, and the U.S./Israeli conflict over settlements. The most important of these plausible but ahistorical expectations was a belief, called by the Japanese white centrism, that the "white areas" of post-communist world, America, East and West Europe and Russia, constitute an economic bloc with enough people and resources to marginalize the Third World (and possibly Japan as well).
Let's give a brief overview of white centrist beliefs. According to left wing white centrism (ala Gorbachev and the western liberals), a massive "Marshall plan" from West to East can generate an economic boom in Europe, lift the Russian standard of living toward European levels, and provide an engine of growth for the developed world. According to right wing white centrism (ala Yeltsin and the western neocons), a high level of education, technology and "Western culture" will enable the newly liberated Eastern bloc to replace the Third World as a source of cheap labor and raw materials. The fallacy of left wing white centrism was demonstrated by the financial debacle of German re-unification. The fallacy of right wing white centrism was demonstrated by the political consequences of IMF shock therapy when applied to Russia.
Be that as it may, white centrism played a very important role in shaping world events. Indeed, it played an important role in the collapse of communism itself. Observers in the Eastern bloc, at all levels of society, had seen the success of Third World countries in attracting western capital and in capturing western markets. It was a sort step from this to the conviction that a non-communist Eastern bloc, being educated, technologically skilled and culturally European, would be at least as successful as the Third World in both endeavors, and would attract more direct western aid as well. For example, in early 1990, a Polish Solidarity member expressed a sentiment that was widespread in the post-communist Eastern bloc, when he said:
"..a failure of democratic renewal in the heart of the Old Continent would be much more detrimental to the fundamental interests of the West than the perpetuation of gross social and political injustice in the Third World...Major economic interests will also be involved. Central European countries offer Third World advantages to investors; a cheap and eager labor force, a liberal tax and profit policy, an insatiable internal market. This comes without the inherent Third World dangers of political destabilization, while the technological and social infrastructure of Central Europe is more developed. The Third World will probably lose not only some of (its), but some of the private investment as well. There seems, of course, to be some sort of scandal attached to this. Central Europe's most serious basket case, is in better shape than, say, Bangladesh."
Givi Taktakashvili, Chairman of the Georgian Parliament's Committee on Economic Reform under the Gamsakhurdia regime, put the case even more bluntly:
"We helped the West during the crusades. When the Mongols were descending on Europe, we formed a barrier. The West will help. Gentlemen never forget to pay their debts."
Russian disappointment over the failure of this aid and capital investment to materialize in the amounts that were expected was one of the reasons for the coup attempt in 1991 and the rebellion of the Khasbulatov Parliament in 1993. In both cases, the insurrectionists thought anti-western hostility caused by failed expectations would enable them to muster military and popular support.
It is a truism to say that the fall of communism had a tremendous impact on American politics. This impact has been the subject of an enormous amount of discussion. What has been completely overlooked in this dicussion - to our knowledge - is the impact of the fall of communism on American race relations. Of course - you might be thinking - the fall of communism had an impact on everything and, therefore, also had an impact on race relations, but that's not what we mean. To see what we mean, let's go back to our concept of white centrism. By "white", in this context, we mean, not "Caucasoid", but "Anglo-European", as opposed to, say, East Indian, Arab, Persian, Turkish, Afghan, Berber, Hispanic, and so on. We mean "politically white" from the point of view of American racial politics. Prior to the fall of communism. an American observer looking at the world capitalist system would see a system in which "whites" were dominant from an economic point of view, but in which "non-whites" were overwhelmingly dominant from a demographic point of view. From a demographic point of view, non-whites were an "order of magnitude" superior to whites; billions as opposed to hundreds of millions. Unless one believed in endless economic expansion on a fixed population, it didn't take much imagination to see that continued capitalist expansion would eventually require the participation of the "non-whites". It was this perception, in the late 80's, that gave American black politics an overtone of "global social democracy", an overtone that showed up in Jesse Jackson's Rainbow Coalition. One of the messages of the Jackson moverment was that that American blacks could act as an economic and politicial bridge between American and the "non-white" world. Indeed, in the 1980's, Jackson was the only American politician with a broad base of popular support in American domestic politics who also had a broad base of popular support in the Third World. He was certainly the only presidential candidate who could meet with Yassir Arafat without being hooted out of the race. In other words, the Rainbow coalition and the Jackson movement gave American blacks what seemed at the time to be a potentially important role on the world stage.
After the fall of communism, however, this perception changed. Now it seemed that 400 million whites had been suddenly and instantanously thrown into the world capitalist system. The demographic balance did not now seem overwhelmingly unfavorable for whites. It was possible to imagine a global "white bloc" sufficiently populous to permit self-sustaining global economic growth without the need for the "non-whites". Many observers declared the Third World "irrelevant". Africa, in particular, with its famines, droughts, civil wars and plagues, having lost it's cold war importance, seemed to be headed for total isolation from the rest of the world. As the development economist, A. Frank (1993), put it:
"There is a decreasing market ... for Africa's natural and human resources. Having been squeezed dry like a lemon...much of Africa may now be abandoned to its fate."
That such a perception would have an enormous impact on American race relations goes without saying. How could it not? The "global social democracy" of Jackson's rainbow coalition was replaced by a defensive black centrism, a militant American black particularism which said, "You might be able to ignore them, but you won't be able to ignore us so easily. We're here", a sentiment which was summed up in the phrase "no justice, no peace".
White centrism also had an enormous effect on politics within the Third World. We've already mentioned how Salinas of Mexico, nervous about the possibility of competition from the eastern bloc, began to seek admittance into the U.S.-Canadian free trade zone, and how Saddam, worried about becoming "another Ceaucescu", invaded Kuwait. In addition, there was a pervasive feeling in the Third World that - just at a time when the West, recovering from its euphoria over the fall of OPEC, and sensing the limits of the Western market, was beginning to attach renewed importance to Third World development - the Third World was suddenly marginalized yet again, this time by a newly capitalist Eastern bloc. In other words, to use a forced and rather flippant analogy (considering the seriousness of the issues involved), if we were to compare the world economy to a senior prom, we could say that, just as the West was about to "ask the Third World to dance", the Eastern bloc "cut in".
"Both (Latin America and Africa) .... now fear they will be the losers as the West takes new interest in Eastern Europe...At the same time the majority from the developing world sees its influence at the United Nations diminishing as real power passes to the United States and the Soviet Union...The result is a growing Third World resentment." Paul Lewis, New York Times, 9/23/90.
The Palestinians, in particular, after having made concession after concession to Israel and its American sponsor, felt that they were now about to be overwhelmed by surge of Russian Jewish immigration into the West Bank. There's no doubt in our mind, that the resentment in the Third World over the West's sudden rapture at a newly capitalist Eastern bloc was one of the reasons why Saddam thought he would get popular support for his invasion of Kuwait. According to a New York Times editorial of 2/6/91, Saddam won the support of millions of people in the Third World:
"That they cheer such a loathsome tyrant sends Washington an important message, one that must be addressed if the war is to be followed by a durable peace. Pro-Iraqi sentiment is particularly strong in countries with pro-Western governments, including some that have sent troops to the Persian gulf... most countries in the Third World were once exploited colonies of Europe..Ordinary people in these lands do not consider themselves beneficiaries of the present world order, and doubt the promise of a new one. And probably the only useful way to respond ... is for Washington and its allies to show that the new world order is not going to become a rich man's club"
Perhaps this resentment was felt by Saddam personally. Certainly many people, such as Mubarak, who observed Saddam's regrets, anxieties and second thoughts after his invasion of Iran, were flabbergasted that he would provoke a war with the United States and its allies.
To summarize, at the end of 1989 and the beginning of 1990, the collapse of communism in the Eastern Bloc swept aside environmental concerns and produced a burst of euphoria in America at the prospect of hundreds of millions of white, Europeans entering the world capitalist system. It was assumed that because these people were white, European, skilled and educated, they would rapidly provide the West with economic stimulus as they "privatized". Comparisons were made to Western Europe after World War II. There were calls for a new "Marshall Plan" and predictions that the underdeveloped world was now "irrelevant". The Japanese called this sentiment "White Centrism". This "White Centrist" euphoria strengthened President Bush and the Republicans and thus tended to keep protectionist sentiment in check. However, in the latter half of 1991, the severe structural difficulties to privatization in the Eastern bloc began to become apparent. The Germans were shocked at the cost of absorbing the "Neue Laender" and the world was shocked at the extent of the economic collapse in the Eastern bloc. The American mood of "White Centrist" euphoria evaporated. The fact that even some of the "banana republics" in Latin America were having more success with their economic stabilization programs than the white, European Eastern bloc, was seen as a humiliation by many middle class Americans. In addition, as the primitive nature of the Russian economy became apparent, many Americans began to see Russia as simply another Third World economic competitor, rather than as an economic ally against the Third World. This played an important role in the souring of the American mood, and the drop in consumer confidence. It also played a role in the disaffection with President Bush, in early 92, whose boasts of "victory over communism" fell flat.
One group that was genuinely emboldened by the events in the Eastern bloc was the Israeli right. The feeling of Third World irrelevance, the prospect of new trading partners among the cash hungry former Soviet republics, the flood of Russian Jews into Israel, all seemed like a "sign from God" to the Israeli right. In the spring of 1990, Rabbi Menachem Schneerson of Crown Heights in Brooklyn, N.Y., the spiritual mentor of the Israel's Agudath Israel party, (a small religious party in Israel) had a vision that the coming of the Messiah was at hand. He announced that there was now a religious necessity to annex the West Bank. The Agudath Israel party then formed a coalition with Likud which enabled the Israeli right to set up a narrow coalition government without the help of Labor. Ariel Sharon was made Minister of Housing and settlement activity in all the occupied territories increased exponentially. In the fall of 1991, Israel's supporters in congress were on the verge of pushing through 10 billion dollars in loan guarantees to finance these activities. A week before the legislation was due to be introduced to congress, Bush did the one thing that every American president dreaded, he confronted the Israeli lobby. In doing so, he had to make concessions to the liberal Democrats that alienated many of his conservative supporters (the support of the civil rights bill). He further split the "Reagan coalition", which had already been frayed by his breaking of his "no new taxes pledge", by alienating the pro-Israel neoconservatives. By early 1992, Bush was being besieged on so many fronts that there were serious doubts about his ability to govern. The only thing that was holding up his standing in the polls, was the fact (which, to our knowledge has never been touched upon) that the Israeli loan guarantee issue was scaring the big name Democrats away from entering the Presidential primaries. This, in turn, left the field open for an unknown candidate, the Governor of Arkansas, Bill Clinton, whose candidacy was initiated by a breakaway faction of AIPAC. Clinton supported unconditional loan guarantees to Israel and maintained that an Israeli settlements freeze was not necessary as a pre-condition of peace talks or Arab recognition of Israel. This position, so obviously politically motivated, and so at variance with American interest in the Middle East, led to a widespread distrust of Clinton and kept his rating in the polls at a low level. It was only after the election of Rabin ended the U.S./Shamir fight over settlements that Clinton's standing in the polls shot from third place to first place. All of this shows how two "North/South issues", namely the Israeli/Palestinian conflict, and fear of economic competition from Third World countries (Ala NAFTA) were the "driving forces" of the 1992 Presidential elections.
SINCE THE REAGAN REVOLUTION
It is also necessary to emphasize that we are considering here only trends which are invariant to a wide range of environmental and technological assumptions. We are looking for a "stable platform" from which to project, among other things, the practical consequences of various environmental and technological assumptions. This "stable platform" cannot itself depend on environmental assumptions, which, while not necessarily implausible, are still only assumptions.
By "liberalism" we mean, not free trade and free market economics, but New Deal and Great Society liberalism. Sometimes, the Reagan/Bush approach to global development is called neoliberalism.
See B. Ginsberg, 1993.
Events in the Arab/Israeli conflict (a North/South issue and a paradigm for the North/South question as a whole) had tremendous repercussions in the U.S. political arena, a point we will be returning to again and again.
The fact that three ex-Presidents came to Washington to shake hands with Arafat and then immediately put in a plug for NAFTA only served to emphasize the "North/South" symbolism of the NAFTA debate and add to the intensity of it.
This Japan-bashing of early 1994 was, in fact, Clinton's response to the large U.S. trade deficit of 1993. He was anxious to placate an economic nativism which had surged during the NAFTA debate, but, which, had, in fact, dissipated in early 1994, after the passage of NAFTA was followed by an upsurge in employment.
Particularly Intel's placing the entire central processing unit of a computer on a single chip in November of 1971. See G. Gilder (1989) for a readable account of the electronic advances of the last 30 years and their impact on the global economy.
Those who have a background in college economics, see Modern Macroeconomics, Geoffrey Woglom, (1988),
In our books and newsletters, we referred to these two political tendencies as nativist and globalist.
A "wish-dream" which, in our opinion, was of the reasons for the popularity of the "new growth theories" if not an actual motivation for their creation.
The then Secretary of Agriculture, Bill Brock, expressed this when he said, "There's a lot of Third World out there and we are just beginning to realize how much we need eachother."
Later on in this chapter we will analyze the extent to which these policies are actually solutions to the problems they purport to address.
which is one of the reasons why it was less popular than the Reagan administration.
This approach was symbolized at the economic summit in 1983 when Reagan had the other participants meet him in an elaborate ceremony at Williamsburg, Virginia and kept the press confined to a separate quarters several miles away. By these means, he symbolically "Americanized" the economic summits and put a halt to the anxiety producing public squabbling between America and its Trilateral partners.
A confusing point. The term "liberal" here is used in the 19th century sense of "free trade and free markets", not in the more customary sense of New Deal or Great Society liberalism. We would have chosen the term "global free market conservatism".
See J. G. Castaneda, 1993.
In the early 90's, the Reagan Democrats were to defect because of trade anxieties, the secular Republicans to be alienated by the abortion issue, and the neoconservatives to be alienated by Bush's fight with Shamir over the settlements. It is striking though how long the juggling act was kept up. Helpful in this was the euphoria over the fall of communism and the U.S. performance in the Gulf war.
Many economists claim population increase is not needed for long-term economic growth. See chapter 2 of this book.
The "hard landing scenario" for the U.S. dollar was formulated by Steven Marris of the International Institute of Economics.
And in what manner.
Another period when the Third World was growing faster than the West.
As a crisis to the world financial system. It was still a crisis to the debtor countries.
The confluence of these two crises in the summer of 1990 led to some genuinely hair raising possibilities, an upheaval in Jordan, another Arab/Israeli war, another exodus of Palestinians, a "greater Israel", a "Somalia-ization" the Middle East with its enormous arsenal of weapons.
New York Magazine, 11/30/92.
Prior to that the historical development of the West, the East, and (what is today) the Third World differed in the ways described in Chapter 3 of this book.
For purposes of this discussion, the "Eastern bloc" refers to the former Soviet Union plus Eastern Europe minus the central European countries of Poland, East Germany, Czechoslovakia, and Hungary.
See Chapter 3 of this book.
If Central America had gotten billions of dollars and trade concessions to be anti-communist, what would Russia get for being anti-communist?
Was a "new growth theorist" or had gotten totally carried away with the Reagan recovery.
After the breakup of the Soviet Union, Byelorus negotiated an economic cooperation treaty with Iraq. Bush's fear was that a coup in the Soviet Union could end its support for the anti-Iraq coalition or that a cash hungry former Soviet republic could break the arms embargo.
He was afraid, incorrectly as it turns out, that Western investment and aid would be siphoned away from the developing countries and towards the newly capitalist eastern bloc countries.
The Israeli labor party generally favored a "territorial compromise" in the occupied territories in return for peace. The Likud generally favored holding onto the territories and incorporating them into Israel by means of massive Jewish settlements. The argument given by Labor for its viewpoint was usually a demographic one; the Arab population was increasing faster than the Jewish one, and holding onto the territories would lead to an Arab majority and create a situation similar to that of apartheid. As we shall discuss later in this chapter, economics and not demographics underlay the pressure towards a settlement of the Arab/Israeli dispute, but nonetheless the flood of Russian Jews into Israel weakened Labor's argument, and seemed like a "sign from God" to the Israeli hardliners that their policy was the right one. In the spring of 1990, Rabbi Menachem Schneerson of Brooklyn, N.Y., the spiritual mentor of the Israel's Agudath Israel party, (a small religious party in Israel) had a vision that the coming of the Messiah was at hand. He announced that there was now a religious necessity to annex the West Bank. The Agudath Israel party then formed a coalition with Likud which enabled the Israeli right to set up a narrow coalition government without the help of Labor. Ariel Sharon was made Minister of Housing and settlement activity in all the occupied territories increased exponentially. In the fall of 1991, Israel's supporters in congress were on the verge of pushing through 10 billion dollars in loan guarantees to finance these activities. A week before the legislation was due to be introduced to congress, Bush was forced to do the one thing that every American president since Eisenhower has dreaded, he got into a fight with the Israeli lobby during an election year.
It is truly striking how both Bush's approval rating and consumer confidence plunged vertically downward shortly after Bush's fight with Congress over unconditional loan guarantees to Israel. We'll elaborate on this connection later on in this chapter.
Nativism often finds its way into economic analyses. Here is one such analysis by D. Landes (1992):
"A few countries especially in East Asia, are clearly forging ahead and catching up; others seem to move in fits and starts...others do well in some regions and languish elsewhere - a pattern that we may call mottled development....- we are witnessing a selection process. The best prepared for development have moved or are moving in that direction. The least prepared will likely never enter the process...In the meantime economies, like love, laugh at locksmiths; if a society cannot export merchandise, it can, and will export people, or, in extreme cases, get them to sell their body parts. This too is not a basis for sustainable growth."
There are many terms (dualistic, disarticulated, dependent, hollow) that can be used to describe the type of development that Landes refers to as "mottled". The use of the term "mottled" projects an image of a leper colony. The use of the term "selection process" reminds one of the "selectzia" in a concentration camp. One doesn't have to be a mind reader, to say that the use of these terms in this way, together with the imagery of selling body parts, projects a morbid imagery which suggests an attitude of antagonism and revulsion towards the Third World and its problems.
After the fall of the Likud government and the election of Clinton, "America/Mexico" replaced "Israel/Palestine" as the paradigm of the North/South question. NAFTA replaced Arafat as the focus of anti-Third World anxieties. Fears of the low-wage Mexicans "stealing all our jobs" (fears as far-fetched as the fears of the "destruction of Israel by the PLO") began to manifest themselves. So even as Israeli Prime Minister Rabin shook hands with Arafat and admitted that there was no way in hell the PLO could pose a threat to Israel, Clinton and most of the country's economists were trying to convince a sceptical American public that Mexico would not bring the U.S. economy to its knees. Mexico, after all, is the only Third World country that is physically contiguous with the United States. Thus, Mexico became the target for the whole range of pent up anxieties about economic competition from the Third World.
New York Times, November 17, 1991.
The fracas between Bush and Congress left Bush in the position of "putting pressure on Israel", in what politically was the worst possible way. By denying Israel the loan guarantees to house the Russian Jewish immigrants, he was "holding the lives of a million harried and worried people (the Russian Jews) hostage to his demand that Israel surrender its most cherished possession (the West Bank) beforehand." (W. Safire, New York times, 10/9/91). Furthermore, he was doing this to help the Palestinians, the "Quislings" of the Gulf war, "the turncoats" who, after having obtained U.S. recognition in 1988, had sided with Saddam, a man Bush himself called the "new Hitler". All this was a public relations nightmare from hell, and the Bush administration knew it (even if Bush's chronic "foot in mouth disease" had, in fact, contributed to it). But Bush had no choice. As Shamir admitted after he lost to Rabin, if he had won the election he would have turned the Middle East peace talks into what the Japanese call an Odowara Hyojo, while he colonized the West Bank. (See Israeli newspaper, Maariv, 6/26/92.) No American President could be in the situation where the U.S. went to war in the Gulf to make the region safe for a "greater Israel". The relations between the U.S. and the Muslim world have irretrevably poisoned. In other words, in the "New World Order", the Third World was not simply to be ordered around, but actually had some rights, rights which could take precedence over the most sensitive of domestic political issues, rights which could force a sitting American President to knowingly shoot himself in the political foot, one year before the election. This was one of the reasons why Americans went into a funk in late 1991, a funk from which they have yet to recover.
New York Times, November 17, 1991
Some more disclaimers. We are not defining nativism as some sort of global prejudice which must be exposed and corrected. We are not saying that nativist anxieties are necessarily unrealistic, although, in many cases, (as witness the hysteria in the early 90's over the North American Free Trade Agreement) they are. Nor are we saying that opinions or criticisms based on nativist anxieties are necessarily wrong. We are not praising the benefits of global economic integration as a model of development as opposed to some sort of "delinking strategy". We stress again that this book is not about advocacy. We are saying nothing at all about what should happen, what should have happened in the past, or what should happen in the future. We leave those questions entirely up to you. We only analyzing what did happen, what is happening now and what will happen in the future.
There were several others factors at the time that contributed to the decline of nativist sentiment. The spectacle, in the Irangate scandal, of Reagan selling arms to Khomeini tended to "de-demonize" the Third World as a whole. Reagan's "teflon" rubbed off onto the Third World. In addition, the Palestinian Intifada, and the PLO's recognition of Israel gained public sympathy for the Palestinians, and this tended to extend to sympathy for the Third World as a whole. The proposed arms reduction treaty with the Soviet Union tended to improve the American attitude towards the outside world as a whole. As we put it in our talk at the Symposium on Global Change at the MITI in early 1990: "By presenting a threat which is in some sense 'external' to global society, a 'greenhouse crisis', should such a crisis arise, would bring about the feeling that 'we're all in the same boat' together with a diminution of global 'rich/poor' antagonisms. In fact, the greenhouse issue has already had this effect on American politics. For a long time, Americans have been very loath to discuss North/South issues. In fact, since the Iranian hostage crisis in 1979, the popular American media has produced a steady diet of 'Third World' bashing articles, 'The OPEC threat', 'the import threat', 'the drug threat', 'illegal aliens', etc. There was always some threat from the LDC's. And, indeed, this was the attitude that the American media at first took towards the greenhouse issue. For example, in early 88, there was an articlue in Time magazine which presented the AIDS epidemic as nature's way of dealing with overpopulation in the underdeveloped world. To take another example, there was an eidtorial peace by Senator Albert Gore in the New York Times in which he compared the ecological threat caused by the burgeoning populations of the Third World to the 'Nazi threat to Western civilization'. ....As the potential gravity of a global ecological crisis began to sink in, however, the coverage of it in the popular media began to take a very different tone. The articles began to show far more sophistication about the links between the environment and Third World development. The whole range of North/South issues began to receive far more coverage in the American media than it ever had before. Ideas for 'North/South capital transfer' which had generally been portrayed as 'far out', 'utopian', by mainstream American political commentators, began to receive far more mainstream support..To take an example, at the end of 1988, rather than publish its usual 'man of the year' edition, Time magazine published a 'planet of the year' edition. (The only possible candidate for 'man of the year' at that point was Yassir Arafat because of the PLO recognition of Israel and it was probably to avoid him that Time created the 'planet of the year' idea. This shows that a global environmental crisis is a far safer way to introduce North/South issues into American political discourse than are touchy political issues such as the Palestinian issue). The striking thing about the Time magazine 'planet of the year' edition was the extent to which it addressed North/South economic and political issues..For example, an article entitled 'Hands Accross the Sea' and subtitled 'Rich and Poort, North and South Must Get it Together or Face Common Disaster,' called for a 'global bargain' in which the rich agreed to cut back their defense spending in order to provide funds for 'sustainable development' in the Third World."
As former Chairman of the Federal Reserve, Paul Volcker, puts it: "The world didn't come apart. Currencies had floated for several months. The changes in exchange rates that were ultimately agreed on were larger than most countries anticipated. During the protracted negotiations, trade restrictions were threatened, and considerable antagonism arose among governments. Yet stock and bond markets performed well, trade continued to expand, and business in general prospered in the ensuing year. While there were inevitable distortions and uncertainties, neither the world economy nor its trading system seemed so sensitive to monetary disturbances as had been feared by those of us raised in the Bretton Woods system." P. Volcker, 1993.
Keynesian economists explain unemployment by saying that the labor market "doesn't clear". Rational expectations economists maintain that "market clearing" assumptions together with probability theory can account for unemployment, recessions and business cycles, and, in addition, can also describe the ways in which government policies can cause structural changes in the economy which are not captured by the standard economic forecasting models. For a description of rational expectations see Modern Macroeconomics, Geoffrey Woglom, 1988.
We didn't mean to imply here that pro-business = pro-Third World and pro-labor = anti-Third World, although when trade issues are in the limelight, they might, at times, seem to be the case. We were predicting (correctly) that in the 80's, these would be the two tendencies that prevailed. "Blue collar" in the quoted passages refers primarily to the "Reagan Democrats". In the 80's, the U.S. labor movement, aside from some protectionism, largely didn't concern itself with issues of global development. In the 90's, that is likely to change, and we are likely to see advocacy, in at least some parts of the labor movement, of Third World development as a way of raising the wage rate in Third World countries to remove downward pressure on U.S. wages, and of providing exports markets for American manufactured products, a sort of "social democracy on a world scale".
These statements are not, in themselves, wrong, but to confine discussions of long term economic growth solely statements like these to the total exclusion of global econmic and trade issues is misleading.
Which, according to Lucas, would be limited by "human capital" shortages in the underdeveloped world.
These were also important causes of the "Asian economic miracle" since they opened up markets in commodity producing LDC's for exports of Asian manufactured goods.
Not the least of these was Saudi insistence that the PLO be given observer status at the IMF.
According to the New York Times, June 23, 1980, the strongest support for such talks came from Chancellor Helmut Schmidt of Germany, President Valery Giscard D'Estaing of France, Prime Minister Elliot Trudeau of Canada, and Prime Minister Francisco Cossiga of Italy. President Carter refrained from endorsing the idea of a global summit meeting, but he called for cooperation between the industrialized countries and moderate oil producing countries (who, after all, owned the bulk of the world's oil reserves).
"The (Israeli) .....hope is that the stricken PLO, lacking a logistic and territorial base, will return to its earlier terrorism...In this way, the PLO will lose part of the political legitimacy, that it has gained and will mobilize the large majority of the Israeli nation in hatred and disgust against it, undercutting the danger that...the Palestinians..might become a legitimate negotiating partne for future poltical accomodations." Yehoshua Porath, Ha'aretz 6/25/82, quote taken from The Passionate Attachment, George W. Ball and Douglas B. Ball, W. W. Norton and Company, 1992.
L. Cannon, 1991.
After which it was supplemented by the G5 agreements to force down the value of the dollar in 1985 and later, in the late 1980's, by European and Japanese economic stimulus programs in response to U.S. pressure, and still later by the 'Brady plan' for LDC debt and promises to trade past with the LDC in return for structural reforms all of which reversed the flow of flight capital and sucked in western exports.
Although many of them found the U.S. policy of using massive deficit spending as a "Keynesian' stimulus for the world economy hair raising.
Although, prior to the Mexican debt crisis, there was very little talk of 'the recession'. Instead the popular and business press was talking about 'the segmented economy' and 'the age of information'.
And very quickly producing an anxiety, from 1984 onwards, about the flood of cheap Third World imports.
The first of these was to be the biggest economic headache for the Reagan, the Bush, and now the Clinton administrations. The fourth became part of the Democratic political critique of Reaganomics. The rest did not materialize to any great in the period under discussion.
The original function of the IMF was to enable member states to maintain a fixed exchange rate versus the dollar, by providing financing, if necessary, to cover a current account deficit. The IMF also had a resonsibility to see that a member state making use of IMF financing "behaved responsibly". This led to the concept of conditionality. Conditionality is defined as, "the policies the Fund expects a member state to follow in order to be able to use the Fund's general resources." After the collapse of the fixed exchange rate international monetary system in 1973, the IMF branched out into lending to countries that were in deficit because of an "external shock", an oil price rise, an interest rate rise, a drop in global export prices, or were in deficit because of "irresponsible policies", generally too much demand stimulation or too much monetary creation. The borrowers included poor countries (from a special fund generated by gold sales) and Third World debtor countries. The lending was subject to conditions specifying the measures a country had to take in order to "adjust" to a current account deficit. These measures would include demand reductions, restrictions on public and private credit, abolition of multiple exchange rates and devaluation. Measures to reduce demand might include wage freezes, dropping of price controls or subsidies, improvement in tax administration, and reductions in government spending. Measures to restrict credit might include abolishing interest rate controls, and increasing the amount of liquid reserves banks had to hold. The goal of the conditions was to bring the country out of deficit. In many cases, the "IMF stabilizations" as they were called led to a drastic reduction in economic growth for the borrowing country. In the 1980's, the IMF became heavily involved in the management of the Third World debt crisis. Under IMF tutelage, the Latin debtors underwent a draconian economic adjustment, their aggregate current acount deficit dropping from $51 billion in 1982 to nothing in 1985. But their economies were not growing and the debt crisis had not been resolved. The deficits had been decreased, not by export promotion, but by falls in imports and and falls in investment. In the 1980's, the IMF adopted the slogan of "adjustment with growth". In line with this strategy, IMF doctrine usually assumed the economic efficiency of market forces, and the desirability of export promotion, such as, for example, the dropping of price controls on tradable goods. During this period of time, the World Bank's role had also been undergoing changes. Historically, this role was the raising of money in the international capital markets and the issuing of loans to finance projects, such as dams, power stations, roads and other transport investments in Third World countries. In the 1970's, because of the oil prices rises, and for other reasons, the Bank noticed that more of its projects were failing. The Bank began to make some of its loans conditional on overall changes in the economic policies of the borrowing country. These types of loans were called Structural Adjustment Loans (SALS). To take an example, in the 1991 World Development Report the Bank examined 1200 projects and plotted the rates of return on these projects against a variety of measures of the economic policies of the countries in which the projects were financed. It found that a high rate of return on projects was correlated with a low level of trade restrictions, a low fiscal deficit, a "realistic" exchange rate (a small difference between the official and black market exchange rate), and an inflation rate lower than interest rate. In the 1980's, the Bank began making an increasing number of Structural Adjustment Loans (SALS), loans to finance economic reforms of the type described above. Structural adjustment stressed "free market reforms"; i.e., the privatization of state run enterprises, and the freeing up of restrictions on the movement of goods and capital, both within the country, and across the border. These policy changes could include, for example, the abolition of industrial licensing requirements, the changing of import quotas to import tariffs, the lifting of price controls and interest rate controls, the ending of subsidies, and the pitching of the official foreign exchange rate to correspond to the black market rate, the deregulation of foreign investments, and so on. Since use of domestic government measures to stimulate internal demand were, in general, inconsistent with these free market reforms, exports became the preferred source of final demand increases. For example, according to the World Bank Development Report of 1981, of those countries relying on structural adjustment policies to respond to an "external shock", during the 1970's, the most successful were countries following an "outward-oriented approach" leading to an expansion of exports. By and large, countries, including both semi-industrial countries and primary commodity producing countries which followed an export oriented strategy, maintained their growth rates in the face of an external shock, while the others had reduced growth rates. Thus, developing countries with economic problems were urged by the IMF and World Bank to follow the example of the "Asian tigers" and to seek export markets. However, given the unequal distribution of global wealth, many of these export markets would naturally have to be in the developed countries, at least initially. This, of course, imposed a corresponding obliglation on the developed countries to accept LDC imports. Bush, for all his negativity on what are usually called "North/South" issues, tried his hardest to meet this obligation (one of the reasons of his political demise). The concepts of IMF conditionality and World Bank structural adjustment played a very big role in Reagan and Bush thinking about global development in the 80's, and, in the early 90's, came to form a "global development consensus" among the world's elites both North and South, a consensus, which, in turn, led to the upsurge of populist economic nativist hysteria in the U.S. in the early 90's.
For a description of World Bank structural adjustment programs, see E. Stern (1983). For a succinct overview of IMF conditionality, see D. Avramovic (1989). For a critical (some would say hostile) analysis of World Bank programs, see C. Payer (1982). For a succinct history of the IMF and the World Bank, which stresses their roles in the Third World debt crisis, see the insert Sisters in the Wood: A Survey of the IMF and the World Bank in the
October 12, 1991, issue of the Economist magazine.
M. Ghilan (1992) even says that these books were inspired by the Bush administration and the CIA to put pressure on Shamir.
Although, it obviously saw Israel itself as a strategic asset under different government. The "bedtime for Begin scenario".
It is important to mention, in this regard, the domestic role and international outlook of the very influential American Jewish community. When the Iranian revolution in 79 was followed by the oil price rises, a 12% inflation, fears of another depression, and the Iranian hostage taking (which threw America's domestic politics into a turmoil), Americans wondered how a "medieval" political revolution in a small country, half way around the world, could come to have such an impact on their own lives. They couldn't have been more astonished if the planet had cracked open like an enormous egg and a giant green bird had flown out. However, this graphic lesson in global economic interdependence was completely lost on most Americans. They were simply too flabbergasted to absorb it. All they felt instead was an anxious hostility towards the Third World as a whole. And when the giant green bird began to shout anti-Semitic slogans, American Jews, many of whom might have been sympathic to Third World economic aspirations, (liberal Jews were traditionally sympathetic to the "underdog" and conservative Jews saw Third World commercial success as weakening Soviet influence) were completely turned in the other direction.
"The 1980's have already begun. They began with the takeover of the American embassy in Tehran earlier this month and with the subsequent confrontation between the United States and a virulently anti-Western Iranian regime. This episode is, as it were, the shocking proloque to an equally tense drama that stands poised to unfold in the decade ahead. It promises to be an abolutely ghastly period..As the post-World War II international order falls apart - not only in the Middle East, but probably in Latin America as well - all thinking about American foreign policy from that era assumes an air of irrelevance. SALT becomes irrelevant. The United Nations becomes irrelevant. Foreign aid becomes irrelevant. Sermons on human rights become irrelevant. NATO itself may soon become irrelevant, as our European allies decide that, in the face of American weakness, sauve qui peut is the sensible flag to fly. What will be relevant is American foreign policy in which power and the readiness to use it boldly, will play a far more central role than have ever been the case in our history." Irving Kristol, WSJ, 11/18/79.
One knows exactly what was on Irving Kristol's mind when he wrote his hyperbolic editorial in the Wall Street Journal. He had obviously seen the pictures of hostage Barry Rubin blindfolded before a jeering Iranian mob and was thinking what every Jewish person in America was thinking, "Oh God! He's Jewish! It's starting again!". Israel's hardline goverment was able to make use of these Jewish anxieties to vastly increase its influence over the American Jewish community. All of which had a decisive impact on the domestic American political climate, when the administration was confronted with the Israeli invasion of Lebanon and the LDC debt crisis. American Jews, including many influential Jews in the Reagan administration, were hostile to any American policies, even
Reagan administration policies, which were in conflict with the goals of Israel's hardline government (this tension within the Reagan administration was one of the reasons for Reagan's incoherent policies in the Middle East), and Americans, as a whole, were pretty much fed up with the entire Third World and its problems. The upshot was that the administration could not even begin to address these problems from any other vantage point than a non-inflationary, non-OPEC strengthening American recovery which had to be brought about by any means necessary.
As Reagan himself was to say in a 1984 speech to the IMF:
"Expansion here in the world's largest single market has meant increased trading opportunities for other nations. Total U.S. imports rose 32 percent in the first half of this year, and for the full year our imports are expected to exceed 1983 imports by over 25 percent. U.S. imports from non-oil developing countries rose about 14 percent in 1983, and they're up by nearly 30 per cent for the first half of 1984..Not enough mention is made of ...the benefits developing countries receive from ..open-market policies in the United States". (See R. Reagan, 1985)
Saudi Arabia, which had financial reserves of $120 billion dollars in the early 80's, was reported to be in deficit in 1993.
NYT Times Sunday Magazine.
It is interesting to note that these articles put more emphasis on social reform than did the 1991 World Bank Development Report, which is much more technocratic in nature, the result of the influence of the "new growth theories" (See Chapter 2) and, of course, the collapse of communism and the resulting discrediting of anything which smacked of "leftism".
For example, after pressuring Israel in late 1983 to allow Arafat to escape from Tripoli by sea, the administration attempted to "compensate" for this "pro-Third World" action, by withdrawing from UNESCO and taking protectionist measures against Third World steel. Even so, Americans were surprised at the spectacle of a conservative President like Reagan intervening to assist a "left-wing terrorist" like Arafat. It is somewhat ironic that in the fall of 1993 when Israel and the U.S. finally recognized the PLO and Clinton was able to shake hands with Arafat with no domestic political backlash whatsoever, Clinton was having just as much image problems with his necessity to support NAFTA as Reagan had with his necessity to get Arafat out of Tripoli. Americans were surprised at the spectacle of a left-wing Democrat like Clinton supporting a "union busting" trade agreement with Mexico. In the early 90's, the primary American nativist anxiety was not Arafat/OPEC/Khomeini, but U.S. economic integration with low wage LDC's ala NAFTA. There were many Americans who would have been made far more nervous by the sight of Clinton shaking hands with Salinas of Mexico than by the sight of Clinton shaking hands with Arafat.
An example of the use of political distractions was the Reagan visit to the Bitberg cemetery in Germany (in which storm troopers were buried) during the 1985, G7 economic summit, which started a raucous debate with the American Jewish community, a debate which Reagan well knew would get economic and trade issues off the front pages of the American press.
According to one report, during 1985 alone four hundred bills were introduced in Congress to protect American products, including an import surcharge proposed by leading Democrats. (See P. Volcker and T. Gyohten, 1992). In fact, during the 1984 elections, Reagan was quite vulnerable to a Ross Perot type economic nationalist attack. However, fortunately for Reagan (and the world economy) Mondale was too responsible (the "wimp factor") to make one.
[i]. This historical summary of the GATT negotiations was taken from the Statement on the Uruguay Round, adapted by the South Commission, at its third meeting in Cocoyoc, Mexico, 5-8 August, 1988.
See K. Mahbubani (1992).
Like the IMF and the World Bank, the GATT (General Agreement of Trade and Tariffs) was designed in the small New Hampshire town of Bretton Woods in 1944. Formalized in 1948, the GATT has undergone a lot of negotiated changes since then. These negotiating changes are called rounds. The eighth of these rounds, the Uruguay round was started in 1986. The Uruguay round was proposed by the former chairman of American Express, James Robinson, however one can be sure that the basic ideas behind the Uruguay round emerged from Reagan administration thinking about North/South development problems. In fact, one could say that the Uruguay round of GATT takes the World Bank concept of structural adjustment and blows it up into a global trade and development strategy. At first, the GATT dealt mainly with tariffs. Later rounds dealt with non-tariff barriers to trade, the set of rules and regulations that countries apply to traded products. For example, Canada has charged the U.S. with non-fair trade for requiring the use of recycled paper in newsprint. The Uruguay round goes much further than previously in attempting to develop rules to deregulate non-tariff barriers. There are four main issues addressed by the Uruguay round. They are (1) Liberalization of trade in services such as transport, education, health care, banking and insurance, (2) Strengthening of trade related intellectual property rights (TRIPS) such as patents and copyrights, including patents on seeds, software or new forms of ariticial DNA. Some critics of GATT maintain that this would lock developing countries into technologicial backwardness, (3) Reduction of trade related investment measure (TRIMS) which are performance requirements on foreign capital investment, such as, for example, limits on profit repatriation, minimum requirements for the use of local materials in production ("local content"), the requirement to use a use a national bank, etc.,(4) elimination of discriminatory trade measures directed against exports in which the developing countries have a comparative advantage, such as tropical and agricultural products, textiles and other forms of labor intensive manufacture. In many important sectors where developing countries have emerged as major exporters over the past decade or so, reductions in visible protection have been accompanied by a proliferation of "grey area" measures and non-tariff barriers by developed countries such as sector specific quantitative restrictions in steel, leather goods, foorwear and consumer electronics. Essentially, the Uruguay Round of GATT offers the following "grand bargain" to the Third World: the developed countries will agree to (4) above, if the developing countries agree to measures (1),(2),(3) above. In fact, in the early 1990's, alarmed by the specter of competition from the newly capitalist countries of the eastern bloc many developing countries became more willing to do this. It was at this point that free trade, free markets and unrestrained capitalism began to lose some of their appeal to the American voters, making free trade as touchy an issue in the early 1990's as talking to Arafat was in the early 1980's. Thus, right before the 1992 elections, Bush mused, "Over the past four years, we have seen a change of almost biblical proportions. But here's the irony. At the very moment in which the rest of the
world is moving my way, my opponent wants us to move the old way. (i.s. away from free trade and free markets)" (NY Times 10/31/92). And it seems that the electorate felt the same way. To some extent, the reason for this was nativism.
For a succinct description of the issues under negotiation in the Uruguay round of the GATT negotiations see H. B. Junz (1991).
Such as criticism of the U.S. role in Vietnam, of the U.S. role in the Central American civils wars, of the U.S. role in the overthrow of Mossadegh by Khomeini, or of former episodes of U.S. "gunboat diplomacy".
At the 1984 Republican convention, one of the theme songs was a country and western song, entitled, "I'm proud to be an American". The point of the song was that "even if I had to start over again with nothing but my children and my wife, I would still be free and still be an American". In other words, one could be proud to be an American and could feel "special" even in the abscence of an American standard of living. This message was to lose its appeal to many of the Reagan Democrats and to many of the "Perotista" Republicans after the end of the cold war and in the recession of the early 90's. Many of the people in these groups were to feel that they had been "suckered" by having been bought off with American pride, while America's "industrial base" was handed over to the rest of the world. Hence Perot's "sucking sound". Or as Pat Buchanan said in a September 1992, New York Post editorial, "What, then is NAFTA (the North American Free Trade Agreement) really about? ...It is about losing America, where the first duty of the government is to look out for Americans, not just those with the 'skills...to prosper in the new (global) economy'. Behind the rising spirit of rebellion in this land is a gathering consnsus that the nation's elites do not give a damn about the old Republic."
Thus, the Jewish neocons in the Reagan coalition feared Arab financial power, not because they feared Third World commercial success per se, but because they saw Arab financial power as a "threat to Israel". In fact, many Jewish neocons and even some Jewish liberals, were very distrustful of any discussion of Third World needs, fearing that it would draw attention to the Palestinians. For example, after the overthrow of Marcos in the Phillipines, the columnist Max Lerner expressed nervousness at the Reagan administration's willingness to cooperate in the overthrow of Marcos. He stressed the fact that Americans preside over an "imperfect imperium" in which it would be foolish to insist on civil and social progress in all cases. The unspoken anxiety here was, "If the Phillipinos have rights, then what about the Palestinians?".
Which it would if inflation was contained and liberal calls to broaden Third World markets via increased aid were resisted.
An approach to North/South issues which stresses structural adjustments and market access can be portrayed as "free trade", "supply side economics on a world scale", as opposed a to more elaborate global economic polity such as global Keysnesianism, global monetary creation, or North/South "grand bargains", etc. which could be seen as a "satanic world government" by the Christian right. However, if trade agreements become loaded down with environmental and labor standards/ and or middle class job loss becomes sufficiently severe. one could certainly see the Christian right turning against regional or global trade agreements. As far as the Jewish right is concerned, the desire to keep Israel's access to the American market openned certainly would predispose them towards free trade. However, one could see them supporting trade sanctions for political reasons such as "lack of religious tolerance", "lack of democracy" and so on.
In other words, the banks were making new loans, but, because of the high dollar interest rates, in amounts less than the interest payments they were receiving from the debtor countries.
According to the 1986 Inter-American Development Bank Report, Economic and Social Programs in Latin America, the net resource transfer from the debtor countries since 1982 was more than $95 billion dollars.
Thus, in the late 80's almost every country in the world was rooting for the Republicans (who were seen as much better customers than the Democrats) and doing what they could to make them look good. For example, Taiwan bought U.S. gold to reduce its trade surplus with the U.S. and Japan stimulated its economy.
In other words, the debt-led model of Western growth kept the Western import market at a level in which the fallacy of composition arising from all the poor countries adapting a strategy of export led growth to the rich countries was postponed to an indeterminate future. As R. Lucas (1992) puts it:
"The main engine of growth is the accumulation of human capital--of knowledge----and the main source of differences in living standards among nations is differences in human capital.....Learning on the job seems to be by far the most central (engine for accumulation of human capital). For such learning to occur on a sustained basis, it is necessary that workers and managers continue to take on tasks that are new to them, to continue to move up what Grossman and Helpman call the 'quality ladder'. For this to be done on a large scale the economy must be a large scale exporter. This picture has the virtue of being consistent with the recent experience of both the Philippines and Korea. It would be equally consistent with post-1960 history with the roles of these two economies switched. It is a picture that is consistent with any individual small economy following the East Asian example producing a different mix of goods from the mix it consumes. It does not appear to be consistent with the third world as a whole beginning to grow at East Asian rates: There is a zero-sum aspect, with inevitatable mercantilist overtones, to productivity growth fueled by learning-by-doing." (R. Lucas 1992).
The Western debt-led model of growth postponed Luca's, "zero-sum aspect with inevitable mercantilist overtones" from the early 80's to the early 90's.
The Economist 10/24-10/30 1992.
NYT, January 15, 1992.
The Bush administration's strategy for reducing Third World Debt was the so-called Brady plan initiated in 1989. Negotiations between the Third World debtor countries, the Western governments, the creditor banks and the official lending insitutions were very complicated. They spawned a voluminous literature on Third World debt. Two important concepts associated with the Brady plan were the debt Laffer curve and the free rider problem. To explain them, recall the Laffer curve of supply side economics in the 1970's. The Laffer curve expressed the relationship between the income tax rate and the total tax revenues received. At a tax rate of zero, there are no tax revenues. As the tax rate increases, so do total tax revenues. Eventually, however, when the tax rate gets high enough, total tax revenues begin to drop because the high tax rate has suppressed economic activity and reduced the total amount of income subject to taxation. Thus, the Laffer curve rises at first, as the tax rate grows, but then falls, as the tax rate continues to increase. The Laffer curve for Third World debt expresses the relationship between the total face value of a country's external debt and its total market value on the secondary market. If investors anticipate that the debt will not be repaid in full, then the value of the debt on the secondary market is less than the face value. Up to a certain point, a growth in the face value of a country's debt will cause a growth in the value of the debt in the secondary market. Beyond that point, however, a continued growth in the face value of the debt will cause its value in the secondary market to drop. This is because, at a certain point, the debt service requirements will become so onerous that they will suppress economic activity in the debtor country and lead to a drop in the percentage of debt repaid which will more than counterbalance the increase in total face value. The economist Paul Krugman, using a "scatter diagram" of debtor countries to plot the Laffer curve for Third World debt. This graph showed that, for many heavily indebted countries, it make economic sense for the creditors to get together and write off a portion of the debt (or sell it back to the debtor country at a heavy discount). This is because the subsequent rise in the market value of the remaining debt would more than compensate the creditor banks for the reduction in the face value. Nonetheless, the creditor banks were reluctant to collaborate in this manner. The reason for this reluctance was the so-called free rider problem. According to the free rider problem, it was in the interest of any creditor bank, acting separately, to wait for the others to collaborate in a combinded debt reduction, and then not participate. It would then get the benefit of the rise in the secondary market value while avoiding any of the cost. This would put the free rider bank at a competitive advantage to the others. International banking, after all, is a very competitive business. To make a long story short, the Brady plan for Third World debt reduction consisted of a wide variety of extremely intricate, Rube Goldberg devices, using IMF, World Bank and Japanese funding, to induce the creditor banks to collaborate in concerted reductions of Third World debt.
"As cramming for the match-ups (debates) proceeded, however, Bush seemed disengaged, several aids said, and the image carried into the debates themselves. Except in the final debate, where he performed well, he sat passively as Clinton wooed the audience and Perot rattled on." NY Times, 11/29/92
The West, together with the Third World, forms a single "system", the world capitalist system and the Eastern bloc wants to join this system. Left wing white centrism maintained that the West can be expanded via a "Marshall plan" to absorb the East. Right wing white centrism maintained that the East would, if it submitted to IMF shock therapy, be able to successfully compete with the Third World for Western markets and capital.
It has to be emphasized here that the IMF could not treat the Eastern bloc countries differently than the Third World countries, however structurally different their economies were. It certainly could not be harsher on a poor non-white country than on a "middle income" white country. Also, the main reason for the economic collapse in the Eastern bloc was the collapse of the communist economic system. The effect of later reforms on this collapse is hard to determine at best. The reason for the political backlash to the IMF reforms is that they were treated as a panacea at the outset.
Konstanty Gebert, one of the founders of Solidarity, writing in Peace and Democracy News, Fall, 1990.
The Nation, 3/2/93.
In July of 1990, on the night that King Hussein of Jordan predicted a Middle east war on Nightline, but before Saddam invaded Kuwait, in telephone conversation with Palestinians in Jordan, the sentiment that we observed was, "The West has abandoned us. Saddam is a son of a bitch, but maybe he can give the West a kick in the ass!. What other hope is there?"