Make the Toyako Summit 2008 the Last G8 Summit!

*Walden Bello interviewed for Japonesia Review by OGURA TOSHIMARU (People’s Plan Study Group)

Ogura: A different initiative to mobilize Japanese people against the G8 summit which is taking place in 2008, in Toyako town, Hokkaido Prefecture, is emerging. How do you see the present G8 strategy and what kind of struggle is important and necessary for movements against the G8, especially against the Japanese government that plays a key role in controlling other Asian countries through the G8 and Asian monetary system? What do you think about the present G8 situation and its role in the global capitalist regime?
 
Bello: The G8 was initially planned, as G7 in 1975 to be a sort of coordinating group of the most dominant capitalist countries to be able to work out a common strategy towards the south and the weaker countries generally. The G8 members seemed to believe that the summit still meets the purpose to come up with strategies that are liberal sounding to make the summit looks like they are solving global problems. But in fact they have failed miserably in terms of their actions and rhetoric.
 
In their rhetoric they basically say they are out to have better relations between the north and the south. They want to save Africa, they want to deal with climate change, and they want to deal with the debt problem. But their commitment to seriously dealing with these issues has been mainly rhetorical. There have been very little substantial actions they have come up with. The promises they made in terms of Africa aid, and the debt cancellation, have achieved very meager result in fact.
 
Now they are saying that they will focus on climate change. This was the theme during the last G8 summit in Rostock, Germany. But if you look at this, the whole real idea is about how they can continue their economic growth, while making symbolic and unserious efforts to cut down on emissions of green house gasses. In the G8 in Rostock, the members basically did not want to face the fact that the north should be the ones to radically bring down the consumption level to reduce the green house gasses. They did not come up with that discussion. In fact, they avoided it. They had no serious plan.
 
I think that the G8 summit at this point is some kind of a body where the members meet but that has become mainly a talk show. The members use the summit as a way by which the leading countries can try to evolve a strategy of defusing resistance in the south, but they cannot among themselves agree on what measures to take. I think that more and more people have seen the G8 as a body that is really ineffective in terms of addressing serious problems that are faced by the world today.
 
Ogura: I agree that more people are seeing the G8 as an ineffective body. Nevertheless, I think the G8 still retains its power as a sort of an informal headquarter of global capitalists. The G8 and several other ministerial meetings discuss the best way to operate global capitalism.
 
Furthermore, each member country has its own particular role. For example, Japan, as the only member country in G8 from Asia, plays the role of integrating other Asian countries into global capitalism. Also the G8 as a whole uses the United Nations, WTO, IMF, the World Bank and NATO and other transnational institutions. By seeing the problem in these terms, I believe the G8 holds hegemonic power in capitalist globalization.
 
But also, the internal ideology of the G8 is fundamentally contradictory. The climate change issue reveals itself as an aspect of this contradiction, as you just pointed out. Climate change issue is a part of environment issue. The environmental issue is broader than the mere issue of climate change. When you think of Subic in the Philippines, where a major U.S. military base was located until 1991, it still has very serious toxic contamination problems. Also, the JPEPA (Japan-Philippines Economic Partnership Agreement) is now being discussed at the Senate of the Philippines. I guess Japanese capital and the state also intend to export industrial waste to the Philippines and other Asian countries.
 
I also believe that the climate change issue is related to the nuclear plant issue. The Japanese government and businesses are trying to export nuclear plants to Asian countries. What do you think about the Japanese government vis-a-vis the G8?
 
Bello: Japan is a part of the G8 from the very beginning. I have always seen Japan as trying to act as the Asian voice in the G8. But, increasingly, I think that role has been challenged by China. The idea that Japan speaks for Asia within the G8 is also met with a lot of resentment and anger because that’s the way in fact Japan is putting forward itself. But people here in Asia are asking themselves who gave Japan the right to represent Asia. This is a big problem which should be considered among us.

Japan will feel that its membership in the G8 is more important because of the threat it faces from China’s rise as a big economic power. I think Japan will try to keep China out of the G8. Politically Japan needs the G8 for its prestige in Asia, and as of the body by which Japan can consult with other G8 members that are equally threatened by the rise of China.
 
If you look at the last G8 ministerial documents, aside from climate change, they were discussing about how countries should open up their investment, which was directed at China, and how countries should have rules in exploitation of natural resources — again this was directed at China. So what Japan eventually wants to do is to try to make the G8 some sort of a break on China’s ambitions.  That’s why the G8 has increasingly become important to Japan.
 
But as I said before, for Asians, it is bad for public relations with Asians to say that Japan is the voice of Asia within the G8. This is something that will create some resentment.
 
Ogura: I think that Asian countries have very little respect for Japan. In my opinion the main issues for the G8 will revolve around China. One will be China’s economy and the other will be national security or some kind of military issue. What do you think about the China-U.S. military relationship and Asian military relationships in terms of China?
 
Bello: I would see the U.S. and Japan, and even European countries seeing the G8 as a mechanism by which they can counter China’s rise. G8 members will cooperate to find ways to contain China.
 
But of course there is the whole set of other relations within Asia that is not in the G8, like military issues. Here, too, what unites the U.S. and Japan elites is their sense that they should cooperate more to be able to counter the rise of China.
 
However, they will see a big contradiction, because they also heavily dependent on China. China has a huge market, produces many products that G8 or northern countries need for their manufactures. For the United States, China is a source of credit. China is the well for global growth.
 
The important thing for us in the developing world is to show our opposition to policies of Japan and the U.S. directed at China, because these policies would eventually lead to conflict. But at the same time, we see China as becoming one of the pillars of the global capitalist order. Unless there is a new relationship between the south and China, China could end up with the same kind of exploitive relationships with the south that the U.S. and Japan and Europe now have.
 
And then the environment is another problem, because China is developing in a way that is damaging not only to itself but also to the environment of other regions and to the world. And we, especially the civil society, are basically saying that China should move towards more environmentally sustainable kind of economy. It can no longer hide behind excuse: U.S. does not respect the Kyoto Protocol, why should we.
 
So basically at this point in time it is important for the civil society in Asia to be critical about the policies of Japan and the U.S. aiming to contain China. But we should also have our own criticism of China as having patterns of growth that are environmentally quite destructive.
 
In fact, China and the U.S. have something almost like an unholy alliance, because when Bush says he will not sign the Kyoto Protocol because China and India have not signed it, then China says why it should agree to mandatory cuts in greenhouse gas emissions while the U.S. has not signed it. Basically, this is almost an undercover alliance, which exempts the Chinese and the U.S. industrial elites from having to take serious environmental controls.
 
Ogura: Japanese business circles look at China as a big opportunity for environmental investment.
 
Bello: When we look at environmental problems in China on one hand the U.S., Japanese and European investors have made use of China’ weak environmental enforcement in order to raise their profits. But at the same time, as you said, Japan is looking at China that in the future it can be a good source of environmentally advanced technology. This is an interesting issue emerging.
 
Ogura: The last question is about the people’s movements against the G8. I know that you were at the Rostock G8; what was your impression of the anti-G8 movement in Rostock, and what do you think about the mission of the people’s movement against the G8, especially the next G8 in Japan?
 
Bello: What was very impressive about the protests against Rostock G8 was that we were able to recover a spirit of Genoa. The English civil society and the NGOs, not all but some of them, made a very bad move in Gleneagles in 2005. What they told the civil society was that we should praise the G8 so that they would do good things like aid Africa and have fair trade rules. So instead of criticizing the G8, what happened at the Gleneagles Summit was that civil society was made to support the G8 so that they would make good moves, which was a big failure, because almost all the promises at Gleneagles have not been met.

At Rostock, the Germen NGOs were able to get back to militant mood of Genoa in 2001. Our role there was not to praise the G8, but to tell it to get out of the way, that it has no right to manage the affairs of the people of the world. So it was a very important message in Rostock and the levels of the demonstrations and the efforts to close down the G8 by the very use of actions and the theme; we are here not to talk of the G8 but want them to get out of the way and to shut down the G8 summit. 
 
I will certainly come and I think many people will come to Japan next July to continue to give the same message. We want you to get out of the way, and we want the people of the world to, in fact, manage the affairs of the world, and we no longer want to be seduced by promises on Africa, on climate change, and that you are the organization that has failed and the world would be better off without this directorate of global capital.
 
The G8 is the directorate of the global capital. How successful it is, that is a different matter. Nevertheless we do not need anymore of such a directorate. It is like a board of directors of global capital. We don’t want that, we don’t want a G8 summit anymore. And hopefully since it is taking place in Japan, Japanese movement will be able to lead in telling the G8 to stop. That is the big hope we have.
 
Ogura: In my view the G8 does not have negotiating partners. But some NGOs intend to negotiate with the G8 at the summit. How do you think we could make broader coalitions, including moderate NGOs together with very radical social movements. How do you think of the best way to construct such a network? Rostock made a very broad alternative space including NGOs together with a Black Block. It痴 difficult to achieve this, but still important. 
 
Bello: Rostock showed that the movements out on the streets were able to make a strong anti-G8, programs, protests, messages. This was from a broad fronts including church groups. You could have the same common theme which will unite everybody: “G8 out of the way, because you made promises you have not fulfilled, and let people manage their affairs.” I think Rostock showed that you could have a wide anti-G8 appeal. 
 
Ogura: How do you think Japanese people and people in other Asian countries work together in anti-G8 actions? Japan is a member of the G8, but other governments in Asia are not. How can we encourage Asian people to join the anti-G8 actions in Japan?
 
Bello: It would be important in the preparations leading up to the G8 to be able to talk to these various groups why they should have an alliance for global reform. And the process of discussions starting right now could convince them that it is useless to ask the G8 to be the one to reform. It is very important to get as many people as possible through-out Asia to come to Japan. We should really start right now to plan it well. 

It can be a historic one. One of the themes can read that in Toyako it should be “the last G8 meeting ever.” This will be a good theme to catch people’s imagination: the final G8 before it abolishes itself.
 
Ogura: So the slogan will be “the final G8, farewell G8.”                       
                                                                            (August 2007)

*Walden Bello: Professor of sociology and public administration at the University of the Philippines, and a fellow of the Transnational Institute. He is the author of numerous books on Asian issues and globalisation, including Walden Bello Presents Ho Chi Minh  (London: Verso, 2007), Dilemmas of Domination: the Unmaking of the American Empire (2005), The Anti-Development State: the Political Ecnonomy of Permanent Crisis in the Philippines (2004), and Deglobalisation: Ideas for a New world Economy (2004). His articles have appeared in numerous periodicals including Review of International Political Economy, Third World Quarterly, Foreign Policy, Race and Class, Le Monde Diplomatique, Le Monde, Guardian, Boston Globe, Far Eastern Economic Review, and La Jornada. In 2003 he was given the Right Livelihood Award, also known as the Alternative Nobel Prize, for “outstanding efforts in educating civil society about the effects of corporate globalisation, and how alternatives to it can be implemented.”

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This article is reprinted from Japonesia Review No4 issued in March 2008. Japonesia Review is a bi-annual English language magazine published by the People’s Plan Study Group [PPSG] based in Tokyo. Japonesia Review both provides up-to-date information on the contemporary Japanese political situation and protest movements and theoretically-informed analyses concerning social problems arising from the recent resurgence of nationalism and militarism in Japan. To start subscribing to the magazine, please visit www.ppjaponesia.org

Central Planning and Market Freedom: Manifestations of the Same Fundamentalist Mindset

Walden Bello*, Focus on the Global South, April 11, 2008

Walden Bello was invited to participate in the Economist’s Debate Series on “Freedom and its Digital Discontents.” The proposition of the debate was “By intervening to regulate business and financial risks, governments have made things worse.” The debate can be accessed at http://www. Economist.com/debate/

There are two doctrinaire positions that have proved singularly destructive over the last half century. One is that the government riding herd on the economy is the way to go. The other is that the market is always right.

The first brought us the gem that was central planning; and the second, the wondrous neoliberal economics that has reigned over the last 25 years. Despite opposite locations on the ideological spectrum, both approaches were united at a metaphysical level by the Platonic paradigm that there is one ideal straitjacket into which you can cram all actually existing economies.

We all know where central planning and the elimination of the market brought the Soviet Union and eastern Europe. Over the last few decades, we have witnessed how the holy trinity of radical liberalization, deregulation and privatization has increased the numbers of people living in absolute poverty, redistributed income towards the rich and reduced global economic growth per year in the 1980-2000 period by more than half of what it was during the 1960-80 period. Despite claims to the contrary, what we have had under the reign of unfettered market processes is not Schumpeterian creative destruction, but long-term stagnation combined with periodic destabilization.

The current financial crisis that may lead to what the former Federal Reserve chairman, Alan Greenspan, describes as possibly the “world’s worst economic crisis since the second world war” provides a cautionary tale of what happens if you eliminate all effective controls on the market. The housing bubble is but the latest of some 100 financial crises that have swiftly followed one another ever since Depression-era capital controls began to be lifted during the Thatcher-Reagan years.

Owing to the devastating impact of uncontrolled gyrations and permutations of speculative capital, there were calls for capital controls and a return to strong financial regulation following the Asian financial crisis in 1997 and the dot.com craze of the late 1990s. The first event led to the economic collapse of all the so-called Asian tiger economies that did not impose capital controls, the second to the wiping out of $7 trillion in investor wealth and the US recession of 2001.

Instead of heeding these calls, Washington caved in to Wall Street’s insistence on private sector “self-surveillance” and “self policing”. Instead of stronger monitoring and regulation of sophisticated financial instruments such as derivatives,, governments meekly agreed to leave this to market players who were supposed to have access to complex quantitative computer models that would undertake sophisticated risk assessment.

Instead of busting the housing bubble by decisively raising interest rates, Mr Greenspan simply stood by, as he did during the dot.com mania, and allowed another bubble to grow and grow. Instead of pushing Mr Greenspan to prick the bubble, the then US Council of Economic Advisers chairman, Ben Bernanke, provided his guru with technocratic cover and attributed the rise in US housing prices to “strong economic fundamentals” instead of speculative mania. Both Mr Greenspan and Mr Bernanke disregarded the overwhelming evidence that, as the economist Dean Baker put it a few years ago, when the bubble was taking off, “Like the stock bubble, the housing bubble will burst. Eventually, it must. When it does, the economy will be thrown into severe recession, and tens of millions of homeowners, who never imagined that house prices could fall, likely will face serious hardship.”

What happened to self-policing? When it came to risk assessment of derivatives such as collateralized debt obligations (CDOs) and structured investment vehicles (SIVs), the process collapsed almost completely, with the most sophisticated quantitative risk models left in the dust as risk was priced according to one simple rule by the sellers of securities: underestimate the real risk and pass it on to the suckers down the line.

What happens when you leave the market unregulated is best described by the Wall Street Journal’s summary of the report of the meeting of the Group of Seven’s Financial Stability Forum in Tokyo in early February: “[T]here is plenty of blame to go around for the financial chaos: The US subprime mortgage market was marked by poor underwriting standards and ‘some fraudulent practices.’ Investors didn’t carry out sufficient due diligence when they bought mortgage-backed securities. Banks and other firms managed their financial risks poorly and failed to disclose to the public the dangers on and off their balance sheets. Credit-rating companies did an inadequate job of evaluating the risk of complex securities. And the financial institutions compensated employees in ways that encouraged excessive risk-taking and insufficient regard to long-term risks.”

In other words, a bloody mess.

With the global economy on the brink of a deep recession, citizens in the developed and developing worlds have had their fill of doctrinaire policymakers from the far left and the far right imposing their fundamentalist views on them. Just as they were disillusioned with central planning, they have had enough of government inaction as speculative capital triggered permanent instability and redistributed the national income towards a small minority of market players. They want the market to be subjected to the discipline of the public interest. We are now entering what the great Hungarian economist Karl Polanyi described as the second phase of the “double movement” under capitalism: an era following a period of uncontrolled market gyrations when, forced by a civil society that is up in arms, governments again intervene, this time to stabilise the economy, bring about a just income distribution, eliminate poverty and - a critical goal in this era of global warming - promote environmental sustainability.

* Walden Bello is Senior Analyst with Focus on the Global South

Walden Bello: Capitalism in an Apocalyptic Mood

Walden Bello*, AlterNet, February 25, 2008

Yes, global capitalism may be resilient. But it looks like its options are increasingly limited. 

Skyrocketing oil prices, a falling dollar, and collapsing financial markets are the key ingredients in an economic brew that could end up in more than just an ordinary recession. The falling dollar and rising oil prices have been rattling the global economy for sometime. But it is the dramatic implosion of financial markets that is driving the financial elite to panic.

And panic there is. Even as it characterized Federal Reserve Board Chairman Ben Bernanke’s deep cuts amounting to a 1.25 points off the prime rate in late January as a sign of panic the Economist admitted that “there is no doubt that this is a frightening moment.” The losses stemming from bad securities tied up with defaulted mortgage loans by “subprime” borrowers are now estimated to be in the range of about $400 billion. But as the Financial Times warned, “the big question is what else is out there” at a time that the global financial system “is wide open to a catastrophic failure.” In the last few weeks, for instance, several Swiss, Japanese, and Korean banks have owned up to billions of dollars in subprime-related losses. The globalization of finance was, from the beginning, the cutting edge of the globalization process, and it was always an illusion to think that the subprime crisis could be confined to U.S. financial institutions, as some analysts had thought.

Some key movers and shakers sounded less panicky than resigned to some sort of apocalypse. At the global elite’s annual week-long party at Davos in late January, George Soros sounded positively necrological, declaring to one and all that the world was witnessing “the end of an era.” World Economic Forum host Klaus Schwab spokeof capitalism getting its just desserts, saying, “We have to pay for the sins of the past.” He told the press, “It’s not that the pendulum is now swinging back to Marxist socialism, but people are asking themselves, ‘What are the boundaries of the capitalist system?’ They think the market may not always be the best mechanism for providing solutions.”

Ruined Reputations and Policy Failures

While some appear to have lost their nerve, others have seen the financial collapse diminish their stature.

As chairman of President Bush’s Council of Economic Advisers in 2005, Ben Bernanke attributed the rise in U.S. housing prices to “strong economic fundamentals” instead of speculative activity. So is it any wonder why, as Federal Reserve chairman, he failed to anticipate the housing market’s collapse stemming from the subprime mortgage crisis? His predecessor, Alan Greenspan, however, has suffered a bigger hit, moving from iconic status to villain in the eyes of some. They blame the bubble on his aggressively cutting the prime rate to get the United States out of recession in 2003 and restraining it at low levels for over a year. Others say he ignored warnings about aggressive and unscrupulous mortgage originators enticing “subprime” borrowers with mortgage deals they could never afford.

The scrutiny of Greenspan’s record and the failure of Bernanke’s rate cuts so far to reignite bank lending has raised serious doubts about the effectiveness of monetary policy in warding off a recession that is now seen as all but inevitable. Nor will fiscal policy or putting money into the hands of consumers do the trick, according to some weighty voices. The $156 billion stimulus package recently approved by the White House and Congress consists largely of tax rebates, and most of these, according to New York Times columnist Paul Krugman, will go to those who don’t really need them. The tendency will thus be to save rather than spend the rebates in a period of uncertainty, defeating their purpose of stimulating the economy. The specter that now haunts the U.S. economy is Japan’s experience of virtually zero annual growth and deflation despite a succession of stimulus packages after Tokyo’s great housing bubble deflated in the late 1980s.

The Inevitable Bubble

Even with the finger-pointing in progress, many analysts remind us that if anything, the housing crisis should have been expected all along. The only question was when it would break. As progressive economist Dean Baker of the Center for Economic Policy Research noted in an analysis several years ago, “Like the stock bubble, the housing bubble will burst. Eventually, it must. When it does, the economy will be thrown into a severe recession, and tens of millions of homeowners, who never imagined that house prices could fall, likely will face serious hardship.”

The subprime mortgage crisis was not a case of supply outrunning real demand. The “demand” was largely fabricated by speculative mania on the part of developers and financiers that wanted to make great profits from their access to foreign money that flooded the United States in the last decade. Big ticket mortgages were aggressively sold to millions who could not normally afford them by offering low “teaser” interest rates that would later be readjusted to jack up payments from the new homeowners. These assets were then “securitized” with other assets into complex derivative products called “collateralized debt obligations” (CDOs) by the mortgage originators working with different layers of middlemen who understated risk so as to offload them as quickly as possible to other banks and institutional investors. The shooting up of interest rates triggered a wave of defaults, and many of the big name banks and investors — including Merrill Lynch, Citigroup, and Wells Fargo — found themselves with billions of dollars worth of bad assets that had been given the green light by their risk assessment systems.

The Failure of Self-Regulation

The housing bubble is only the latest of some 100 financial crises that have swiftly followed one another ever since the lifting of Depression-era capital controls at the onset of the neoliberal era in the early 1980s. The calls now coming from some quarters for curbs on speculative capital have an air of deja vu. After the Asian Financial Crisis of 1997, in particular, there was a strong clamor for capital controls, for a “new global financial architecture.” The more radical of these called for currency transactions taxes such as the famed Tobin Tax, which would have slowed down capital movements, or for the creation of some kind of global financial authority that would, among other things, regulate relations between northern creditors and indebted developing countries.

Global finance capital, however, resisted any return to state regulation. Nothing came of the proposals for Tobin taxes. The banks killed even a relatively weak “sovereign debt restructuring mechanism” akin to the U.S. Chapter Eleven to provide some maneuvering room to developing countries undergoing debt repayment problems, even though the proposal came from Ann Krueger, the conservative American deputy managing director of the IMF. Instead, finance capital promoted what came to be known as the Basel II process, described by political economist Robert Wade as steps toward global economic standardization that “maximize [global financial firms'] freedom of geographical and sectoral maneuver while setting collective constraints on their competitive strategies.” The emphasis was on private sector self-surveillance and self-policing aimed at greater transparency of financial operations and new standards for capital. Despite the fact that it was finance capital from the industrialized countries that triggered the Asian crisis, the Basel process focused on making developing country financial institutions and processes transparent and standardized along the lines of what Wade calls the “Anglo-American” financial model.

Calls to regulate the proliferation of these new, sophisticated financial instruments, such as derivatives placed on the market by developed country financial institutions, went nowhere. Assessment and regulation of derivatives were left to market players who had access to sophisticated quantitative “risk assessment” models.

Focused on disciplining developing countries, the Basel II process accomplished so little in the way of self-regulation of global financial from the North that even Wall Street banker Robert Rubin, former secretary of treasury under President Clinton, warned in 2003 that “future financial crises are almost surely inevitable and could be even more severe.”

As for risk assessment of derivatives such as the “collaterized debt obligations” (CDOs) and “structured investment vehicles” (SIVs) — the cutting edge of what the Financial Times has described as “the vastly increased complexity of hyperfinance” — the process collapsed almost completely. The most sophisticated quantitative risk models were left in the dust. The sellers of securities priced risk by one rule only: underestimate the real risk and pass it on to the suckers down the line. In the end, it was difficult to distinguish what was fraudulent, what was poor judgment, what was plain foolish, and what was out of anybody’s control. “The U.S. subprime mortgage market was marked by poor underwriting standards and ’some fraudulent practices,’” as one report on the conclusions of a recent meeting of the Group of Seven’s Financial Stability Forum put it. “Investors didn’t carry out sufficient due diligence when they bought mortgage-backed securities. Banks and other firms managed their financial risks poorly and failed to disclose to the public the dangers on and off their balance sheets. Credit-rating companies did an inadequate job of evaluating the risk of complex securities. And the financial institutions compensated their employees in ways that encouraged excessive risk-taking and insufficient regard to long-term risks.”

The Specter of Overproduction

It is not surprising that the G-7 report sounded very much like the post-mortems of the Asian financial crisis and the dot.com bubble. One financial corporation chief writing in the Financial Times captured the basic problem running through these speculative manias, perhaps unwittingly, when he claimed that “there has been an increasing disconnection between the real and financial economies in the past few years. The real economy has grown … but nothing like that of the financial economy, which grew even more rapidly — until it imploded.” What his statement does not tell us is that the disconnect between the real and the financial is not accidental, that the financial economy expanded precisely to make up for the stagnation of the real economy.

The stagnation of the real economy stems is related to the condition of overproduction or over-accumulation that has plagued the international economy since the mid-1970s. Stemming from global productive capacity outstripping global demand as a result of deep inequalities, this condition has eroded profitability in the industrial sector. One escape route from this crisis has been “financialization,” or the channeling of investment toward financial speculation, where greater profits could be had. This was, however, illusory in the long run since, unlike industry, speculative finance boiled down to an effort to squeeze out more “value” from already created value instead of creating new value.

The disconnect between the real economy and the virtual economy of finance was evident in the dot.com bubble of the 1990s. With profits in the real economy stagnating, the smart money flocked to the financial sector. The workings of this virtual economy were exemplified by the rapid rise in the stock values of Internet firms that, like Amazon.com, had yet to turn a profit. The dot.com phenomenon probably extended the boom of the 1990s by about two years. “Never before in U.S. history,” Robert Brenner wrote, “had the stock market played such a direct, and decisive, role in financing non-financial corporations, thereby powering the growth of capital expenditures and in this way the real economy. Never before had a US economic expansion become so dependent upon the stock market’s ascent.” But the divergence between momentary financial indicators like stock prices and real values could only proceed to a point before reality bit back and enforced a “correction.” And the correction came savagely in the dot.com collapse of 2002, which wiped out $7 trillion in investor wealth.

A long recession was avoided, but only because another bubble, the housing bubble, took the place of the dot.com bubble. Here, Greenspan played a key role by cutting the prime rate to a 45-year low of one percent in June 2003, holding it there for a year, then raising it only gradually, in quarter-percentage-increments. As Dean Baker put it, “an unprecedented run-up in the stock market propelled the U.S. economy in the late nineties and now an unprecedented run-up in house prices is propelling the current recovery.”

The result was that real estate prices rose by 50 percent in real terms, with the run-ups, according to Baker, being close to 80 percent in the key bubble areas of the West Coast, the East Coast north of Washington, DC, and Florida. Baker estimates that the run-up in house prices “created more than $5 trillion in real estate wealth compared to a scenario where prices follow their normal trend growth path. The wealth effect from house prices is conventionally estimated at five cents to the dollar, which means that annual consumption is approximately $250 billion (2 percent of gross domestic product [GDP]) higher than it would be in the absence of the housing bubble.”

The China Factor

The housing bubble fueled U.S. growth, which was exceptional given the stagnation that has gripped most of the global economy in the last few years. During this period, the global economy has been marked by underinvestment and persistent tendencies toward stagnation in most key economic regions apart from the United States, China, India, and a few other places. Weak growth has marked most other regions, notably Japan, which was locked until very recently into a one percent GDP growth rate, and Europe, which grew annually by 1.45 percent in the last few years.

With stagnation in most other areas, the United States has pulled in some 70 percent of all global capital flows. A great deal of this has come from China. Indeed, what marks this current bubble period is the role of China as a source not only of goods for the U.S. market but also capital for speculation. The relationship between the United States and Chinese economies is what I have characterized elsewhere as chain-gang economics. On the one hand, China’s economic growth has increasingly depended on the ability of American consumers to continue their debt-financed spending spree to absorb much of the output of China’s production. On the other hand, this relationship depends on a massive financial reality: the dependence of U.S. consumption on China’s lending the U.S. Treasury and private sector dollars from the reserves it accumulated from its yawning trade surplus with the United States: one trillion dollars so far, according to some estimates. Indeed, a great deal of the tremendous sums China — and other Asian countries — lent to American institutions went to finance middle-class spending on housing and other goods and services, prolonging the fragile U.S. economic growth but only by raising consumer indebtedness to dangerous, record heights.

The China-U.S. coupling has had major consequences for the global economy. The massive new productive capacity by American and other foreign investors moving to China has aggravated the persistent problem of overcapacity and overproduction. One indicator of persistent stagnation in the real economy is the aggregate annual global growth rate, which averaged 1.4 percent in the 1980s and 1.1 percent in the 1990s, compared to 3.5 percent in the 1960s and 2.4 percent in the 1970s. Moving to China to take advantage of low wages may shore up profit rates in the short term. But as it adds to overcapacity in a world where a rise in global purchasing power is constrained by growing inequalities, such capital flight erodes profits in the long term. And indeed, the profit rate of the largest 500 U.S. transnational corporations fell drastically from 4.9 percent from 1954-59, to 2.04 percent from 1960-69, to -5.30 percent from 1989-89, to -2.64 percent from 1990-92, and to -1.92 percent from 2000-2002. Behind these figures, notes Philip O’Hara, was the specter of overproduction: “Oversupply of commodities and inadequate demand are the principal corporate anomalies inhibiting performance in the global economy.”

The succession of speculative manias in the United States has had the function of absorbing investment that did not find profitable returns in the real economy and thus not only artificially propping up the U.S. economy but also “holding up the world economy,” as one IMF document put it. Thus, with the bursting of the housing bubble and the seizing up of credit in almost the whole financial sector, the threat of a global downturn is very real.

Decoupling Chain-Gang Economics?

In this regard, talk about a process of “decoupling” regional economies, especially the Asian economic region, from the United States has been without substance. True, most of the other economies in East and Southeast Asia have been pulled along by the Chinese locomotive. In the case of Japan, for instance, a decade-long stagnation was broken in 2003 by the country’s first sustained recovery, fueled by exports to slake China’s thirst for capital and technology-intensive goods. Exports shot up by a record 44 percent, or $60 billion. Indeed, China became the main destination for Asia’s exports, accounting for 31 percent while Japan’s share dropped from 20 to 10 percent. As one account in the Strait Times in 2004 pointed out, “In country-by-country profiles, China is now the overwhelming driver of export growth in Taiwan and the Philippines, and the majority buyer of products from Japan, South Korea, Malaysia, and Australia.”

However, as research by C.P. Chandrasekhar and Jayati Ghosh and has underlined, China is indeed importing intermediate goods and parts from these countries but only to put them together mainly for export as finished goods to the United States and Europe, not for its domestic market. Thus, “if demand for Chinese exports from the United States and the EU slow down, as will be likely with a U.S. recession, this will not only affect Chinese manufacturing production, but also Chinese demand for imports from these Asian developing countries.” Perhaps the more accurate image is that of a chain gang linking not only China and the United States but a host of other satellite economies whose fates are all tied up with the now-deflating balloon of debt-financed middle-class spending in the United States.

New Bubbles to the Rescue?

Do not overestimate the resiliency of capitalism. After the collapse of the dot.com boom and the housing boom, a third line of defense against stagnation owing to overcapacity may yet emerge. For instance, the U.S. government might pull the economy out of the jaws of recession through military spending. And, indeed, the military economy did play a role in bringing the United States out of the 2002 recession, with defense spending in 2003 accounting for 14 percent of GDP growth while representing only 4 percent of the overall U.S. GDP. According to estimates cited by Chalmers Johnson, defense-related expenditures will exceed $1 trillion for the first time in history in 2008.

Stimulus could also come from the related “disaster capitalism complex” so well studied by Naomi Klein: the “full fledged new economy in home land security, privatized war and disaster reconstruction tasked with nothing less than building and running a privatized security state both at home and abroad.” Klein says that, in fact, “the economic stimulus of this sweeping initiative proved enough to pick up the slack where globalization and the dot.com booms had left off. Just as the Internet had launched the dot.-com bubble, 9/11 launched the disaster capitalism bubble.” This subsidiary bubble to the real-estate bubble appears to have been relatively unharmed so far by the collapse of the latter.

It is not easy to track the sums circulating in the disaster capitalism complex. But one indication of the sums involved is that InVision, a General Electric affiliate producing high-tech bomb-detection devises used in airports and other public spaces, received an astounding $15 billion in Homeland Security contracts between 2001 and 2006.

Whether or not “military Keynesianism” and the disaster capitalism complex can in fact fill the role played by financial bubbles is open to question. To feed them, at least during the Republican administrations, has meant reducing social expenditures. A Dean Baker study cited by Johnson found that after an initial demand stimulus, by about the sixth year, the effect of increased military spending turns negative. After 10 years of increased defense spending, there would be 464,000 fewer jobs than in a scenario of lower defense spending.

A more important limit to military Keynesianism and disaster capitalism is that the military engagements to which they are bound to lead are likely to create quagmires such as Iraq and Afghanistan. And these disasters could trigger a backlash both abroad and at home. Such a backlash would eventually erode the legitimacy of these enterprises, reduce their access to tax dollars, and erode their viability as sources of economic expansion in a contracting economy.

Yes, global capitalism may be resilient. But it looks like its options are increasingly limited. The forces making for the long-term stagnation of the global capitalist economy are now too heavy to be easily shaken off by the economic equivalent of mouth-to-mouth resuscitation.

*Walden Bello is president of the Freedom from Debt Coalition, a senior analyst at Focus on the Global South, and a columnist for Foreign Policy In Focus. 

Interview with Walden Bello: There Must Be a U-turn to Create Healthy Domestic Markets

Interview with Dr. Walden Bello, executive director of Focus on the Global South HALIFAX, Canada, Jan 15 (IPS) - In 1992, Dr. Walden Bello issued a macro-economic warning about the so-called Asian miracle in his book “Dragons in Distress”. Six years later, the Asian financial crisis Bello predicted swept the region, throwing millions into poverty.Born in the Philippines in 1945, Dr. Bello is the author of more than 10 books, including “People and Power in the Pacific” (1992), “Dark Victory: The United States and Global Poverty” (1999), “Global Finance: Thinking on regulating speculative capital markets” (2000) and “The Future in the Balance: Essays on globalisation and resistance” (2001).After receiving a Ph.D from Princeton, he was arrested several times in the United States, peacefully protesting the Ferdinand Marcos dictatorship in his home country. Bello is the executive director of Focus on the Global South and a visiting professor in Southeast Asian Studies at the University of California at Los Angeles. Dr. Walden Bello spoke by phone from the Philippines with IPS Canada correspondent Chris Arsenault. IPS: There seems to be consensus among economists that globalisation, as practiced by the Bretton Woods institutions, leads to greater income inequality but also to significant GDP growth. As one of Asia’s leading critics of the Bretton Woods model, don’t you feel that growth is necessary to pull people out of poverty, even if inequality is an initial byproduct? Bello: I think that when you aggregate it, in the number of countries where there has been significant GDP growth, on balance, there has been an absolute reduction in poverty. Certainly in the cases of Vietnam and China, there has been an absolute decrease in poverty. However, certain social groups, especially in the rural areas, and lower-class groups in the cities, have gone into even greater poverty. In all countries in South East Asia and East Asia, you have greater inequality in income distribution. In practical terms, a great imbalance has grown between the cities and the countryside; people in the countryside have lost in absolute and relative terms compared to the city. Furthermore, we have had tremendous rates of environmental destruction. The gains in terms of poverty reduction have been counterbalanced by these other trends. I am speaking only about East Asia in this regard; the other caveat I would say in regards to Vietnam is that Vietnam has done a better job in containing these contradictions compared to countries like China. IPS: You have written that, “in the Third World the pendulum has swung so far in the direction of export-oriented production, that it does need to be corrected back towards the domestic market — the balance between the two has been lost in the drive to internationalise our economies.” Is this really true? A lot of economists think the expansion of China’s domestic consumer purchasing power will keep that country’s manufacturing base strong even if its export markets, like the United States, are faced with a recession. Do you think domestic markets in East Asia will be able to absorb current levels of economic activity? Bello: There are certain groups who have gained in income, including the emerging sectors in the cities, especially the coastal cities. To some extent, they act as a supplement to export-orientated production. The driving force is still export markets. To maintain that export edge, you have to be able to keep down your labour costs. Keeping down labour costs continues to be the main factor limiting domestic consumption growth. In China, raising the incomes of people is in severe contradiction with the demand of low wages to continue turning out cheap commodities. There has to be a very significant u-turn to create healthy domestic markets. This turn can only happen with significant measures to redistribute income, to redistribute welfare. This isn’t going to happen so long as you have your eye on being competitive in export markets. IPS: According to the environmental monitoring group the Worldwatch Institute, China now boasts 16 of the world’s 20 most polluted cities. What rate of economic growth would be a good balance between pulling people out of poverty and having some degree of environmental sustainability? Bello: I want to say very strongly that we have to focus on a new paradigm of environmental sustainability. I am not talking about achieving 6-10 percent GDP growth, and just changing the driver from export markets to the domestic economy. I am talking about a whole reorientation. I am really thinking about bringing growth rates, as measured in the traditional way, down to 2-3 percent. You can only do that with significant redistribution of the benefits of growth, so as to fulfill a large number of social demands with a relatively low growth rate. My sense is that, so long as you have good government policies that support equitable distribution, you can achieve higher standards of living, even with growth rates that are not high in traditional terms. Certainly, the kind of 10 percent growth that China has been enjoying is out of the question; even 6-8 percent growth is out. IPS: One position paper from your organisation, Focus on the Global South, touts ALBA, the Bolivarian Alternative for the Americas, as a possible regional integration model that might work in South East Asia and other regions. Do you think ALBA would even be possible without large amounts of Venezuelan oil and the petro-dollars that come with it? Basing a regional development strategy around crude oil exports to the U.S. isn’t necessarily the most sustainable practice. Bello: The principles of ALBA, not necessary the wealth base, are what need to be reproduced; not everyone has those petro-dollars and environmentally it’s questionable as a long-run strategy.The less powerful economies should have greater privileges than the more powerful economies, so regional cooperation increases their [lower income countries'] capacity rather than eroding it. ALBA focuses on building a regional market based on import substitution and technology sharing.Certainly there are things that aren’t present in ALBA at the present time that would also be important to reproduce in other regional associations. The lesson we should be taking from ALBA is the move away from free trade towards genuine economic cooperation. IPS: Currently, most observers agree that China is not in a colonial relationship with other smaller and weaker nations in South East Asia. However, China is on track to displace the United States as the world’s largest economy by 2050 and some worry that China could become a metropolis gaining markets and raw materials from a South East Asian hinterland. Do you think China is on course to becoming a neo-colonial power? Bello: Definitely, unless there is more real planning, setting firm the principles of mutual and equitable relationships, on the part of China in terms of its relations with other countries. China needs to create standards and policies for its transnational corporations operating abroad. Unless these things happen, the old colonial relationship could be reproduced. There is tremendous demand in China for raw materials and a whole bunch of other things; China has the capital to export. The structural drives for a new periphery- metropolis are there; they need to be countered by policies, strong counteractive state policies from China. We have the opportunity at this point to have new relations between developing countries and China that do not reproduce the old colonial relationship. But we have to act soon.

A Very Capitalist Disaster: Naomi Klein’s Take on the Neoliberal Saga

A critical review of Naomi Klein’s The Shock Doctrine: the Rise of Disaster Capitalism (New York: Metropolitan Books, 2007)

Walden Bello*, Republished from Focus on the Global South website.

Naomi Klein’s The Shock Doctrine: the Rise of Disaster Capitalism is very impressive indeed. This is, however, not immediately evident, a sense that is confirmed by Joseph Stiglitz’ review of the book. Even before I read it, I was certain that the Nobel laureate would highlight Klein’s attempt to make a connection between the electric shock experiments performed by the notorious McGill University psychologist Ewen Cameron who was on contract with the CIA and the economic shock approach developed by Milton Friedman at the University of Chicago.

And indeed, he does, in the course of writing a typical New York Times Book Review piece that dares not evince too much enthusiasm for a book that comes from left field lest it provoke the ever-alert watchdogs of the right to question one’s credentials. Stiglitz, in fact, suggests that Klein’s analysis might be infected with conspiracy theory with his very first sentence: “[T]here are no accidents in the world as seen by Naomi Klein.” The Nobel laureate does have some positive things to say about the book, but he neutralizes this by dropping the line that Klein “is not an academic and must not be judged as one.” As for Klein’s central concept of “disaster capitalism,” it is mentioned once but otherwise ignored. It all adds up to damning with faint praise.

The New York school of publishing says that you win or lose your audience in the first few pages, but whatever their reason for bringing the Cameron experiments up front and strongly implying a link between the genesis of Cameron’s shock treatment and the Chicago School approach to economic policymaking, it is bad judgment on the part of Klein and her editors. What is transparently intended mainly as a dramatic device risks achieving its opposite. Conspiracy theory buffs will be elated but not the critical, discerning audience the book is aimed at.

Towering Work

Which is a pity since, despite this initial fumble, The Shock Doctrine recovers to emerge as a towering work, one that brilliantly follows neoliberalism’s march from marginal theology to universal policy. Klein combines the journalist’s eye for the arresting detail, the analyst’s ability to spot, surface, and dissect deeper trends, and a talent for telling a spell-binding story to prove once again that a masterful journalist can often illuminate social realities far better than the best-trained economist or political scientist.

With her ability to combine no-stones-left-unturned investigative reporting with in-depth social analysis, Klein is her generation’s David Halberstam, her Shock Doctrine and an earlier book No Logo being on par with The Best and the Brightest and War in a Time of Peace. There is one difference, though: Klein is unashamedly a woman of the left, and this is where her analysis derives both its power and its passion.

The Shock Doctrine traces neoliberalism’s rise to dominance to a program set up in the mid-fifties to enable Chilean students to imbibe the radical free-market doctrine being propagated by Milton Friedman and his associates at the University of Chicago, then an oasis of radical free-market thinking in a world dominated by Keynesianism in the United States and Europe and “developmentalism” or desarrollismo in Latin America, with their pragmatic compromises between the state and the market, labor and management, trade and development.

Los Chicago Boys

The opportunity for neoliberalism to come in from the cold arrived in the early seventies, when General Augusto Pinochet overthrew the revolutionary government of President Salvador Allende in Chile and invited the “Chicago Boys” that had been waiting in the wings for years to manage the economy. With the population stunned by the coup, the “Chicago Boys” went about the task of swiftly dismantling the Keynesian and developmentalist compromises that underpinned one of Latin America’s most advanced industrial economies.

With a Year Zero mentality akin to the Khmer Rouge, they forced Chile’s overnight transformation into the free-market “paradise” prescribed by Friedman, a believer in seeing crisis as an opportunity for radical restructuring. It was, however, a paradise that could be created only with massive repression–and an even greater dose of repression was necessary to radically liberalize neighboring Argentina, where tens of thousands were murdered and over a hundred thousand were tortured by a murderous military regime that gave a free hand to free-market radicals to restructure the economy.

Some of Klein’s most original insights are found in her chapters on Bolivia, Poland, China, and South Africa. Bolivia, under the tutelage of a younger “Doctor Shock”–Harvard economist Jeffrey Sachs–showed that neoliberal measures could be imposed by a democratically elected government if it was willing to resort to emergency measures, like arresting and isolating labor leaders. Poland, also advised by Sachs, showed how democratic transitions could actually be an opportunity to deliver a system-transforming shock that included eliminating price controls overnight, slashing subsidies, and rapidly privatizing state enterprises to a population that was still dazed by the collapse of communism.

There was no democratic transition in China, but Deng Hsiao Ping and his allies used the Tiananmen Square massacre and its aftermath, when the population was confused and paralyzed, to decisively advance and consolidate the ambitious capitalist reform program they had begun in the late seventies. Neither in Poland nor in China were people who were tired of communism clamoring for the free market, Klein emphatically points out; they were demanding greater popular, democratic control over economic policy.

South Africa

South Africa provided yet another route to neoliberalism. Here there was an element of stealth, with white business interests taking advantage of the African National Congress’ (ANC) overwhelming focus on the politics of achieving Black majority rule to preserve their property rights and install a conservative macroeconomic regime. But not everything was that subtle: big capital made clear their intention to leave should socialist policies be introduced, conveying the prospect of economic destabilization.

In these circumstances, the white elite found a valuable ally in chief ANC negotiator and future South African President Thabo Mbeki, who convinced Nelson Mandela that what was needed to stabilize the new regime was “something bold, something shocking that would communicate, in the broad, dramatic strokes the market understood, that the ANC was ready to embrace the neoliberal Washington Consensus.”

Margaret Thatcher and Ronald Reagan’s contribution was to show that neoliberal programs antithetical to the interests of the majority could be imposed in a western democracy if one was ruthless enough to exploit certain situations. For Thatcher, the war with Argentina over the Falklands in 1982 was a heaven-sent opportunity to enlist jingoism in the service of a radical program, one of her tactics being to portray the labor unions as the “enemy within.” Thatcher’s tactics prefigured those of George W. Bush in the aftermath of 9/11, when he and his crew exploited the hysterical state of the population to declare a “war on terror” that was meant to kick-start a new phase of the neoliberal enterprise that Klein labels “disaster capitalism.” But before we go into this, let us pause to assess Klein’s analysis so far.

Great but…

Klein’s account is superb, but it is not without its flaws. For one, Klein has too rosy a view of the Keynesian state that reigned in the United States and Europe and the developmental state that dominated the Southern Cone in the period from late nineteen forties to the mid-seventies. She writes that owing to developmental regimes, “[T]he Southern Cone began to look more like Europe and North America than the rest of Latin America or other parts of the Third World.”

Again, “Developmentalism was so staggeringly successful for a time that the Southern Cone of Latin America became a potent symbol for poor countries around the world: here was proof that with smart, practical policies, aggressively implemented, the class divide between the First and the Third World could actually be closed.”

That certainly was not what it felt like at the time. Indeed, if the neoliberals walked in from the wilderness, it was because they were perceived as presenting an alternative, albeit untested, to economic systems in crisis. In the United States, the period of rapid economic growth fuelled partly by the reconstruction of Japan and Europe gave way to a state of stagnation cum inflation that was a symptom of a deeper crisis, the growing gap between enormous productive capacity and limited consumption, leading to erosion of profitability that Marxists have called the crisis of overproduction. In Latin America, the leading critics of the developmental state were found on the left, who charged that the process of industrial import substitution presided over by the state was “agotado,” or exhausted, owing to a domestic market limited by a very unequal distribution of income.

In the United States and Britain, the experience of seeing their salaries and savings eroded by double digit inflation made the middle strata receptive to the Friedmanite message. In Chile, they were initially receptive to the left’s critique of the developmental state. But when the left came to power with a socialist project in 1970, the middle classes–fearing the rise of the poor, whom they called rotos, or “lowlifes”– turned on the left with a vengeance, with the middle-class-based Christian Democrats joining the right on an anti-communist platform that shrilly proclaimed a defense of private property, capitalism, and “liberty.”

Neoliberal Ascendancy

This leads us to the question of how the neoliberals came to power. This was not simply a matter of the elite using the military or manipulating democracy to impose a neoliberal program on a recalcitrant but stunned population, which is the image that Klein’s account—wittingly or unwittingly—projects. This was not the case even in Klein’s paradigmatic example, Chile. Neoliberalism’s coming to ascendancy there involved the elite and the military acting in concert with a counterrevolutionary middle-class mass base that controlled the streets, with Christian Democratic youth joining their more fascist brethren, Fatherland and Liberty, in intimidating and beating up partisans of the left.

I know, since as a PhD student doing a dissertation on the rise of the counterrevolution, I was nearly beaten up a couple of times by angry anti-Allende middle class youths who insisted I was a Cuban agent sent to destroy Chile by Fidel. Sure, the CIA played a critical role, but it was in support of an already heated counterrevolution with a middle-class base, a process that was reminiscent of Italy and Germany in the post-World War I period.

In other words, in practically every instance, neoliberalism found a middle class that was disenchanted with the Keynesian or developmental state or felt threatened by the left, or both.

The Construction of Hegemony

This is why to counter Stiglitz’ suggestion that she operates with a conspiracy paradigm, Klein’s instrumentalist account must be supplemented with David Harvey’s notion of the “construction of hegemony,” a process by which the elite creates a consensus among the subordinate classes in support of a neoliberal project that principally serves its interests. (David Harvey, A Brief History of Neoliberalism [Oxford: Oxford University Press, 2005])

In the case of the UK, it was not so much the jingoistic atmosphere of the Falklands War as the ideological captivation of the middle class by a conservative leader adept at evoking the themes of freedom, the individual, and property that was the tipping point towards neoliberal reform. Thatcher was an expert at promoting what Harvey calls a “seductive possessive individualism” and she “forged consent through the cultivation of a middle class that relished the joys of homeownership, private property, individualism, and the liberation of entrepreneurial opportunities.”

The construction of consent was the main avenue to hegemony in the United States, where neoliberals deftly connected their free market program to the agenda of a middle class-based coalition that was propelled by resentment against minorities that were allegedly coddled by liberal democrats and by an inflamed attachment to religious values that were seen as being under attack from the left. “Not for the first time,” says Harvey, speaking of the ascendancy of the Republicans under Reagan, “nor, it is feared, for the last time in history has a social group voted against its material, economic, and class interests for cultural, nationalist, and religious reasons.”

Even some blue-collar workers were in danger of being coopted: “Greater freedom and liberty of action in the labor market could be touted as a virtue for capital and labor alike, and here, too, it was not hard to integrate neo-liberal values into the ‘common sense’ of the work force.”

Neoliberalism, in fact, became so “commonsensical” that even where social democratic parties have come to power, displacing the traditional conservative parties of neoliberalism, as they have in Britain, Chile, and the United States, they have not dared to reassemble the interventionist liberal state and have made it a point to pay homage to the “magic of the market.” Indeed, it has not been conservatives but social democrats such as the Blairites in Britain, the Clintonites in the United States, and the Socialist-led Concertacion government in Chile, with their rhetoric about “market-oriented social policies,” that have consolidated the neoliberal economic regime.

Crisis of the Keynesian State

The book’s most important contribution is its theory of “disaster capitalism.” But to fully appreciate Klein’s insight, it is important to go back to the roots of the crisis of the Keynesian state and the developmental state in the 1970’s that she glosses over. This crisis, which paved the way for the neoliberal ascendancy, had its origins in what economists have called the crisis of overaccumulation or overproduction.

The golden period of postwar growth globally that skirted major crises for nearly 25 years was due to the massive creation of effective demand via rising wages for labor in the North, the reconstruction of Europe and Japan, and the import-substituting industrialization in Latin America and other parts of the South. This dynamic period came to a close in the mid-seventies, with stagnation setting in, owing to global productive capacity outrunning global demand, which was constrained by continuing deep inequalities in income distribution.

According to the calculations of Angus Maddison, the premier expert on historical statistical trends, the annual rate of growth of global gross domestic product (GDP) fell from 4.9% in what is now regarded as the golden age of the post-World War II Bretton Woods system, 1950-73, to 3% in 1973-89, a drop of 39%.

These figures reflected the wrenching combination of stagnation and inflation in the North, the crisis of import substitution industrialization in the South, and erosion of profit margins all around. For global capital, neoliberal policies, which included redistribution of income towards the top via tax cuts for the rich, deregulation, and an assault on organized labor, were one escape route from the crisis of overproduction. Another was corporate-driven globalization, which opened up markets in the developing world and moved capital from high-wage to low-wage areas.

Financialization

A third was what Robert Brenner and others have called “financialization,” or the channeling of investment towards financial speculation, where much greater returns were to be derived than in industry, where profits were largely stagnant.

Feverish speculation triggered the proliferation of novel sophisticated speculative instruments like derivatives that escaped monitoring and regulation. Finance capital also forced the elimination of capital controls, the result being the rapid globalization of speculative capital to take advantage of differentials in interest and foreign exchange rates in different capital markets.

These volatile movements, the result of capital’s liberation from the fetters of the post-war Bretton Woods financial system, was one source of instability. What was fundamentally problematic with speculative finance, however, was that it boiled down to an effort to squeeze more “value” out of already created value instead of creating new value since the latter option was precluded by the problem of overproduction in the real economy. But the divergence between momentary financial indicators like stock prices and real values can only proceed to a point before reality bites back and enforces a “correction,” like the recent collapse of stocks tied up in myriad Byzantine ways to overvalued subprime mortgages. Corrections or crises have become more frequent in the neoliberal era, with one Brookings study counting about 100 over the last 30 years.

At any rate, neoliberal policies, globalization, and financialization, while restoring and strengthening elite power by redistributing income from the bottom to the top, have not been effective in reinvigorating global capital accumulation. Its actual record, Harvey points out, “turns out to be nothing short of dismal.” Aggregate annual global growth rates came to 1.4% in the 1980s and 1.1% in the 1990s, compared to 3.5% in the 1960s and 2.4% in the 1970s.

Disaster Capitalism

It is this fundamental failure of finance-driven capitalism to reignite vigorous capital accumulation that allows us to fully appreciate Klein’s theory of disaster capitalism and David Harvey’s closely related notion of “accumulation by dispossession.” Both may be seen as the latest desperate effort of an increasingly sputtering capitalist machine’s effort to surmount the persistent and deepening crisis of overproduction.

In the last few years, stagnation or weak growth has marked most areas of the world economy, with the exception of China and India. U.S. growth has been higher than that of sclerotic Europe, but it has been largely illusory, being largely the result of middle-class spending fuelled by massive credit from China and East Asia. China has to lend to the United States to keep up demand for its cheap-labor based export-industrial sector, but the expansion of its production has itself contributed mightily to the overcapacity, overproduction, and shrinking profitability plaguing the whole global system. Even the International Monetary Fund (IMF) has recognized that the world is skating on thin ice, which could break should American consumers rein in their debt-driven spending, as they now seem to be doing.

In its efforts to surmount the crisis, capitalism has increasingly supplemented, if not supplanted accumulation through production with accumulation through dispossession, or the expropriation of already created wealth or sources of wealth akin to the process of primitive accumulation that marked early capitalism in the 14th to the 17th centuries. Accumulation by dispossession involves an acceleration of the privatization and commodification of the commons, which includes not only land but also the environment and knowledge. Millions of peasants and indigenous peoples are displaced from the soil as private property supplants common property or communal regimes, often with the active support of institutions like the World Bank and the Asian Development Bank. Seeds, the end-result of eons of interaction between nature and human communities, are now privatized through mechanisms such as the Trade Related Intellectual Property Rights Agreement (TRIPs), which has also dampened technological development in the South owing to fear of infringing on the patents of northern corporations.

Contracting Out the War on Terror

A key mechanism for accumulation by dispossession is the accelerated privatization of hitherto public or state assets, which is what disaster capitalism is all about. Disaster capitalism is the Bush administration’s central contribution to neoliberalism. Its key feature is the parceling out to the private sector of the “core” functions of security, defense, and infrastructure that Adam Smith himself thought had to be left to the state. Through the “war on terror,” Klein writes, the Bush administration brought about:

“The creation of the disaster capitalism complex—a full-fledged new economy in homeland security, privatized war and disaster reconstruction tasked with nothing less than building and running a privatized security state, both at home and abroad. The economic stimulus of this sweeping initiative proved enough to pick up the slack where globalization and the dot-com booms had left off. Just as the Internet launched the dot-com bubble, 9/11 launched the disaster capitalism bubble…It was the pinnacle of the counter-revolution launched by Friedman. For decades, the market had been feeding off the appendages of the state; now it would devour the core.”

In the disaster capitalism paradigm, the state serves as the engine of capital accumulation— that is, it raises capital via taxes, then transfers it to private contractors that take over its core functions, from defense to incarceration to the provision of infrastructure. Security provision becomes the new growth industry, incorporating but going beyond the old military-industrial complex. Disaster, either of the natural kind like Katrina or the socially created kind like Iraq, is seen as opportunity in several ways. It creates demand for a commodity, that is, for security or reconstruction. By taking advantage of natural disasters, it provides the opportunity to alter the physical landscape and “add value” to it, by sweeping away “value-deprived” poor communities and converting the land to upscale commercial or residential real estate, as in post-Katrina New Orleans.

Finally, as in Iraq, war becomes the instrument to erase the old interventionist state and create from scratch the ideal neoliberal government whose key function is to delegate its own functions to private contractors, like the engineering firm Bechtel or the notorious private security firm Blackwater. “In Iraq,” Klein writes, “there was not a single governmental function that was considered so “core” that it could not be handed to a contractor, preferably one who provided the Republican Party with financial contributions or Christian footsoldiers during elections campaigns. The usual Bush motto governed all aspects of the foreign forces’ involvement in Iraq: if a task could be performed by a private entity, it must be.”

The problem, of course, is that disaster capitalism is so brazenly anti-people that even dressed up in the rhetoric of freedom, entrepreneurship, and efficiency, it cannot win over people in the way early neoliberal ideology was able to captivate the middle classes in the era of Reagan and Thatcher. Reading Klein’s chilling account, one wonders how Paul Bremer, the head of the Coalition Provisional Authority, could not have realized that the decrees he made which had the effect of making Iraqi youth a surplus population in a society where the state functioned mainly to enrich foreign contractors would turn them into insurgents. Disaster capitalism and accumulation by dispossession represent a capitalist order that no longer seeks ideological hegemony but seeks to impose itself through pure force. This is not sustainable.

Klein’s last chapter, which looks at the vast and varied global movement that has risen against what French thinkers call “savage capitalism” shows that, as Gramsci noted, nothing can remain hegemonic for long without legitimacy. People have become both more hopeful and more savvy: they will not be easily subjected to another neoliberal shock.

Klein Past versus Klein Present

So here’s the inevitable question: which is the better book, No Logo or The Shock Doctrine? This is not an easy choice, but I would land on the side of No Logo.

Let me explain. The critical edge, analytical sharpness, and passion of No Logo are to be found in The Shock Doctrine as well. But there is something different about the writing. In a review I did for Yes! in 2001, I wrote: “No Logo is compelling, but it’s not an easy read. Reading Klein is like serving alongside a skilled commander who relentlessly probes the enemy’s many defenses to locate the principal point of vulnerability. And just when the reader thinks Klein has identified the key to the defense, she reveals that this is only one episode in unraveling the dynamics of contemporary capitalism. This is deconstructive writing at its best, the product of a first-rate, restless mind that is not satisfied with drawing a solitary insight or two from her material.”

Reading The Shock Doctrine is a different experience. You don’t need to work. You’re like a tourist being guided on a well-lit path where there are few surprises.

I much prefer the discourse of No Logo, and I certainly do not relish being subjected at the very beginning to a literary shock treatment that has no other purpose but to prod me to read further. That flaw—and the change in style–I prefer to attribute not so much to the Toronto-based Klein but to the New York School of publishing, which, like Hollywood, much prefers an in-your-face approach to a more allusive, more indirect, less predictable but ultimately more enlightening discourse.

*Walden Bello is currently a Distinguished Visiting Professor at St. Mary’s University in Halifax, Canada. Bello is also a senior analyst at the Bangkok-based institute Focus on the Global South and professor of sociology at the University of the Philippines at Diliman. He is the author of Walden Bello Presents Ho Chi Minh (London: Verso, 2007), Dilemmas of Domination (New York: Metropolitan Books, 2005) and Deglobalization (London: Zed, 2002).

Further Resources:

After Shock: Interview with Naomi Klein

A World Occupied by Profit: Interview with Naomi Klein

Watch a video interview with Naomi Klein and a short video on The Shock Doctrine