What is taken as gospel truth in European and American business circles, namely the infallibility of the western model, is far from accepted in the rest of the world. Brian Caplen explains why the dissenters exist and why their influence seems to be growing.
Over a weekend in September, the globalisation religion will be preached with an unmatched vigour and fervour: but to the converted. Delegates to the International Monetary Fund (IMF)/ World Bank annual meetings in Singapore will hear that unfettered markets bring the fastest economic growth, that multi-party democracy is the only form of acceptable government and that multilaterals are the best bodies to advise governments on reform.
To an audience of senior bankers, international policy makers and academics, many of them schooled in the world’s most august bodies such as Harvard and Yale, these proclamations are hardly news. The broad body of liberal ideas, that some years ago were dubbed the Washington Consensus, is meat and drink to them: most can recite the theoretical underpinnings, too, freely quoting from Adam Smith and John Stuart Mill.
The problem is that outside of cabinet rooms, ivory towers and bank boardrooms, a large percentage of the world’s population fails to buy into the concept. The Americans and the British are by and large all signed up, as is most of eastern Europe and, to a lesser extent, the Asian tigers: Singapore, Hong Kong, Taiwan, South Korea. But outside this sphere the ideology starts losing ground fast: France and Germany have always had a fuzzy attitude to free markets; Russia is developing its own brand of nationalistic capitalism that does not preclude massive interventions in the market, if deemed necessary, such as over oil company Yukos; and Latin America is experiencing a wave of populism that started with President Hugo Rafael Chávez Frías in Venezuela but now encompasses Bolivia and, less dramatically, Argentina, Ecuador, Uruguay and Brazil.
The Islamic world contains a range of economic and social initiatives including some that would sit comfortably with the Washington Consensus if only it could be renamed, but a political philosophy that is vastly different.
At the other end of the spectrum, the Communist Party of India (Marxist) emerged in the 2004 elections as the third largest party in the Indian parliament and aims to achieve “socialism and communism through the establishment of the state of dictatorship of the proletariat” and “by the principles of Marxism-Leninism”. Then there is the army of non-governmental organisations (NGOs) that administer a trillion-dollar aid business and have become some of the World Bank’s and IMF’s sternest critics.
If the Washington Consensus model works so well, why are there so many dissenters and is there any value in their opinions? The object of this article is to study ‘the unbelievers’ and to understand exactly what they do think – as opposed to the views that are often attributed to them – and to discover how this translates into policy. Interestingly, the rhetoric on both sides of the debate indicates a much more extreme position than the reality and the eerie conclusion is that in economic matters there is a lot more meeting of minds than might be supposed.
Yet at the ideological and political level there is huge argument. Could it be that the main cause of the disagreement is the use of different imagery and language and that history really did end in 1989, when the Berlin Wall collapsed? Read on.
Putin’s Russia
“We certainly would not want to have the same kind of democracy as they have in Iraq,” said Russia President Vladimir Putin in response to a critique of his country by US President George Bush at July’s G8 summit in St Petersburg.
More to the point, most ordinary Russians would not like to return to the chaotic, so-called democracy of the Boris Yeltsin era in the 1990s, when oligarchs were given free reign to grab state assets at giveaway prices.
For all of the opprobrium that is heaped on Russia, the country now boasts a very high standard of monetary and fiscal management that is increasingly rules-based, a sufficiently well functioning market economy to spawn thousands of private companies and entrepreneurial start-ups, as well as a democracy and free press of sorts.
Certainly it is possible for Russian citizens to join in the debate and dialogue about where Russia is headed – unthinkable under communism – but, surprise surprise (and inconveniently for the liberal democracy crowd), they do not always come to the kind of conclusions that Mr Bush and
his cohorts have prescribed for them. In a recent poll, for example, 50% of Russians said they believed that Joseph Stalin was a wise leader.
“The biggest trap to fall into when analysing Russia is to think that if we wait long enough it will develop into a western-style liberal democracy,” says Charles Hecker,
director, Russia/CIS, for consultant ControlRisks. “These analysts then become shocked with an incident like Yukos because they see Russia diverging from the ‘correct path’.”
But the reality of the Yukos affair was that the oil company’s boss, Mikhail Khodorkovsky, was involved in, among other things, buying votes in parliament. He soon felt the full force of the state down upon him.
At a different level, greater state control of the oil industry can be seen as adopting a Norwegian or a Saudi model rather than the retreat into communism that foreign investors always fear. The current political model is more aptly described as Chekism, a derivation of the Soviet secret police, the Cheka, with the restoration of Russia as a great power, as its major undertaking.
This is seen very clearly in an independent foreign policy and in energy policy where “Putin believes that in this area state interests must take precedent over those of individual or private enterprise”, as senior associate in the Carnegie Endowment for International Peace, Martha Brill Olcott, puts it in a recent paper.
“Free markets will not direct foreign policy under a Putin administration. He believes that private property should exist and that the state has to grant property owners legal protection, but the rights of property are not absolute and do not take priority.” The same logic may inform business deals between foreigners and Russian companies and good due diligence is essential.
Yet only a classical purist could really make the case that Russia’s non-conformity with markets is any greater than the aberrations found in other emerging markets, or even, on occasion, in France and Germany. Fundamentally the disagreement is over control of resources, with western countries getting into a blue funk every time they see gas exports shifting from Europe to Asia.
Chávez’s Latin populism
“If Mr Chávez would shut up for a year, Venezuela would become investment grade,” says a senior banker. But Mr Chávez, in power since 1999, does not shut up. In the true style of a populist he likes to talk about everything and anything all the time and often in an outspoken manner. He called UK Prime Minister Tony Blair “a pawn of imperialism, trying now to attack us from Europe”, and “the main ally of Hitler” – a reference to Mr Bush.
But apart from all the rhetoric, what has Mr Chávez – who is described by Richard Gott in his book Hugo Chávez and the Bolivarian Revolution as a “spell-binding orator” with the “didactic manner of a born teacher” – really done to deserve his pariah status?
He has renegotiated the deals Venezuela had with foreign oil companies but lost very few investors in the process; he has introduced a new Constitutional Assembly but, whatever its shortcomings, few would weep for the old one; and he is spending the country’s oil wealth on a vast array of social programmes, the success or failure of which has yet to be determined. Venezuela has currency controls and there is a land redistribution programme centred around unused lands on the latifundia – huge estates – but new foreign investors are unlikely to be affected. Venezuela’s tax take as a percentage of GDP has risen to 25% and the government has paid off parts of the international debt leading to a 15% decrease in annual payments.
As far as democracy goes, few observers have any doubts that Mr Chávez will win the forthcoming election as the poor majority of Venezuelans all support him, making the saga over voting machines an entertaining but irrelevant sideshow. (In May 2000, elections had to be postponed because automatic voting machines imported from the US failed to operate. More recently, Venezuelan-owned voting-machine maker Smartmatic International acquired California-based Sequoia Voting Systems, prompting Washington hysteria that somehow Mr Chávez could influence US election results.)
“There is no suggestion of fraud [in the election of Mr Chávez]. People were sick to death of the old parties and were looking for something different,” says Peter West, chief economist of Poalim Asset Management. Brazil President Luiz Inácio Lula da Silva has complained that under Mr Chávez, Venezuela has too much democracy, not too little.
The coming to power of populists such as Mr Chávez, and more recently President Evo Morales in Bolivia, should surprise no-one. Latin America has grown by only 4% over the past five years and by only 9% over the 20-year period previous to that. Whether these populists can deliver economically over the medium term, especially if oil and gas prices drop, is a moot point but they can hardly be accused of doing any worse than their predecessors (often advised by the IMF/World Bank).
Attempts to form a Latin American power bloc, and Mr Chávez’s close relationship to Cuba President Fidel Castro, sets off alarm bells in the US but as Venezuela’s USambassador Bernardo Alvarez Herrera writes in the latest issue of Foreign Affairs: “I have spent a large part of my tenure attempting to encourage Washington’s policy andgovernment establishments to look beyond the information they receive about Venezuela from Venezuelan elites.”
Once again the gulf of understanding between Venezuela and Washington may have less to do with domestic policy and more to do with fears over where Venezuela’s oil may end up. But as the Cuban experience has shown, a foreign policy made from disenchanted expatriates is a recipe for abject failure.
India’s communists
With the Castro era coming to a close and China’s communist party communist in name only, India is the only country that retains a communist party still desperately trying to be authentic.
“The Indian communist party is in turmoil in that it is unable to reconcile its ideology with the forces of globalisation,” says Suresh Tendulkar, one of India’s leading economists.
“Most of the European communist parties have converted to social democracy, the Soviet Union is no longer there and China is following a pragmatic path. But the Indian communist party hasn’t made the transition yet.”
All the same, the Communist of Party of India (Marxist) enjoyed its best ever showing at national elections in 2004, gaining 43 seats. The smaller Communist Party of India (CPI) gained 10 seats. The parties belong to the United Progressive Alliance (UPA) ruling coalition but are not part of the government, allowing them to distance themselves from policies whenever they feel it necessary.
The price of the communists’ support for the UPA is that it adheres to the common minimum programme, a vague set of policies supporting welfare, rural workers and women.
“The UPA government is a bourgeois government. The left support to it is as a specific response to the existing situation,” says a political paper on the CPI website.
“The pressures from the IMF, World Bank and World Trade Organization (WTO) have increased through the present world order and the Indian political set-up [left-supported coalition] curbs their efforts to some extent.”
But interestingly, and reflecting the pressure to change, the document says: “We are not opposed to FDI [foreign direct investment] and invitation to foreign capital per se. We require it for our development. But this should be in spheres of our choice.”
Demonstrating a further lock on power, the CPM runs the states of West Bengal and Kerala and has been fairly pragmatic in its approach in the former. There is also a Communist Party of India (Maoist), known as the Naxalites, which is conducting an extensive terror campaign in Chhattisgarh and Andhra Pradesh states, and has been described by Prime Minister Manmohan Singh as one of the biggest threats to internal security.
Leaving the terrorists aside, why have so many Indian voters opted for the communists in a society famed for its entrepreneurial prowess and which grew at 7.5% annually between 2002 and 2006? Per capita incomes have more than doubled since 1980 and India is the world’s fourth-largest economy, soon to surpass Japan.
The obvious answer is poverty and the standard explanation is that under the previous conservative Bharatiya Janata Party (BJP) government, the benefits of reform failed to filter down to the poor, a common critique of conventional economic reform programmes. But it is not so much the classic urban slum dweller or rural peasant that votes communist in India as public sector workers and trade unionists whose livelihoods are threatened by privatisation and reform programmes.
Gurcharan Das, former CEO of Procter & Gamble in India, explains in a recent article for Foreign Affairs: “The left boasted that the election was a revolt of the poor against the rich. In reality, however, it was an anti-incumbent backlash – specifically, a vote against the previous government’s poor record in providing services.”
He continues: “Singh’s challenge is to get the majority of Indians united behind reform. One of the reasons that the pace of reform has been so slow is that none of India’sleaders has ever bothered to explain to voters why reform is good and just how it will help the poor. (Chinese leaders do not face this problem, which is peculiar to democracies.)”
Now there is an idea. Perhaps the technocrats in the multilaterals should be paying as much attention to the political reality of their policies, and how to overcome the challenges, as to their scientific aspects.
Islamic politics
In a purely economic world there would be little in the way of a dispute between classical, or at least neo-liberal, economics and Islamic governments. Islamic finance has found a way of bridging western financing techniques and Islamic values. Iranian clerics may differ in their take on the role of the state but in general, private enterprise is supported and in Iran a privatisation programme is underway. The background of Sunni and Shiite Muslim alike is one of family businesses, trading and commerce.
“In Iraq you have traders, merchants and bankers and whether they are Sunni or Shiite is besides the point [in terms of economic aspirations],” says Zaineb Al-Assam, Middle East editor with political risk consultants Exclusive Analysis. “They want to trade and make money.”
Another view, that of nationalists and Baathists, is to retain Iraq’s oil wealth for Iraqis and so they would like to renegotiate production sharing agreements or abolish them altogether, rather like the stance of Messrs Chávez and Putin.
The Washington error, however, is in believing there is some kind of modern Muslim secularist movement that is about to spring out of the Middle East and bring a US lookalike democracy to fruition. The reality is that the power balance in the region has been disturbed by the toppling of Saddam Hussein in 2003 and is going to be rebuilt under greater Shiite influence. Ironically, the Shiias (whom Washington distrusts following the Iranian revolution) are the more progressive of the two major branches of Islam. They are likely to support democracy as they stand to gain by it (they are the majority in Iraq, Bahrain and Iran) and they are against Saddam Hussein and Al-Qaeda.
“Freed from the menace of the Taliban in Afghanistan and Saddam in Iraq, Iran is riding the crest of the wave of Shiite revival, aggressively pursuing nuclear power and demanding international recognition of its interests,” writes Vali Nasr in an essay called When the Shiites Rise. “Leaders in Tehran… want to create a greater zone of Iranian influence – something akin to Russia’s concept of ‘the near abroad’.”
But it might not go all their way. Ayatollah Sistani is the prime spiritual reference for Shia Muslims everywhere and the most senior Shia cleric in Iraq. He rejected an American plan to transfer power to an unelected government in June 2004 and he rejects Iranian-style theocracy in favour of a separation between state and religion. All the same, he is no free-wheeling secularist.
“Americans could certainly grow cold about spreading democracy in the Middle East if the victors do not at all look like us,” writes Reuel Marc Gerecht in his book The Islamic Paradox. “But moderate Muslims may not be the key to a new less threatening Middle East… they are simply a minority.”
That’s the problem with democracy: the voters do not always elect the right party.
Non-governmental organisations
Anti-globalisation protesters may have manned the barricades and disrupted multilateral meetings, but the considered views of responsible NGOs are a long way from the vitriol of the streets. And on one issue there is no disagreement between NGOs such as Oxfam and Friends of the Earth and the economists who give speeches at IMF/World Bank annual meetings: they both dislike subsidised agriculture in the US and Europe that distorts world trade.
“We are not anti-globalisation,” insists Barbara Stocking, director of Oxfam, the anti-poverty NGO. “We see it as something that is here to stay and it’s a question of who benefits. How can we make sure that poor people don’t get left out?”
“But we would say that poverty is a political issue. [Anti-poverty campaigners] can’t avoid politics because we are trying to shift power.”
Similarly Tony Juniper, executive director of Friends of the Earth (FoE), is agnostic on whether corporations should exist or not and is only concerned with how they exist. “Our campaign isn’t about whether corporations are good or bad. It’s about power and whether corporate power should be more accountable to democratically elected governments.” FoE wants to see legislation making company directors not only responsible to shareholders, but also legally accountable for their corporation’s impact on the environment.
Both Oxfam and FoE have major issues with the WTO and the demise of the Doha round was regarded as a turning point from which a better system may emerge (although there is concern that bilateral trade agreements put developing countries at an even bigger disadvantage).
Predictably, IMF/World Bank policies come in for criticism. Forcing developing countries to liberalise before they are ready, imposing excessive conditionality on loans and failing to enforce environmental standards are some of the concerns.
But maybe the greatest angst of all is over the gap between political declarations on aid and the environment that make wonderful headlines but never translate into reality. NGOs can, however, take some credit for getting these issues onto the political agenda and for publicising the failure to follow through.
In conclusion, it seems that history did end in 1989 in the sense that the huge battle between capitalist and communist economics disappeared. Now there is an argument about the degree of state intervention and its form but little dispute that the market is a key driver of development. Yet where those who predicted unlimited peace and prosperity erred was in failing to appreciate the battle for resources that would ensue and how markets cannot deliver all possible solutions in an acceptable time frame.
The unbelievers can best be explained by using an unfashionable Keynesian model in which the market delivers growth but there is a political debate about distribution. And, of course, urgency is an issue, for as Keynes famously said: “In the long run we are all dead.”
