Capital's limitless growth

David Harvey suggests global capitalism's long-term survival is premised on a mathematical impossibility. He presents a truly radical idea - the world should aim for zero growth and distribution of wealth.

He distinguishes growth from development. "Development is about investing in people's creative capacities and powers. You don't need growth to do that. So you can have zero growth and at the same time you can also have radical transformation..."

I don't think the world has exhausted growth possibilities quite yet. There are still places on earth we have yet to plunder and emerging markets with new consumers. Imagine the huge Chinese and Indian markets. There are still virgin forests in Latin America and Africa. Plenty more oil to drill in Eurasia. And who knows what new treasures the ocean might offer once the technology becomes available?

I'll give it a century more. Then humanity will have to reckon with what it has created. We'll all be dead by then, so who cares.

Show me the Money!

Public finance is probably not such a hot topic for opinion-makers and news writers. We do not often hear about the state of the country's national purse - what we make, what we save (if any), what we spend on, how much goes to what. Numbers probably seem a snooze compared to the political scandal of the moment.

But think about it - public finance deals with the most intimate aspect of our political identity - the money we are obliged (coerced) to give to our country. If you tally all that is automatically deducted from your income, what could you have bought instead? Would you have been able to send another sibling to school? Better medical treatment for your folks? A house? Seen this way, 'public' finance suddenly becomes very personal. What have we given up to the state, what have we sacrificed in our personal lives to be able to pay taxes?

4,338,000,000,000

When I was in sixth grade, I remember students from UP coming to speak with us on the issue of the Philippine debt. At the time, they said the sum was one trillion pesos. To a twelve year-old, that amount was unimaginable.

This last quarter, Philippine debt hit P4.338 trillion. This is an all-time high. The number is expected to increase next year. Each Filipino owes about P47,000+ to creditors. Each Filipino incurred this debt without so much as a by-your-leave from government. This simply means that the incumbent's choices in economic managers (those charged with budget and finance, banking and fiscal policies, NEDA, government financial institutions) are crucial because they make big decisions with long-term effects and work largely away from the public gaze. We don't get to vet who they are. Their assignations are entirely up to the caprice of the Executive.

See the history of Philippine debt from 1995 here.

Read also:
Third World Financial Crises
Dependency, Debt and the End of Resistance
World and Philippine Debt Figures

On Volunteerism: A Response to Luis

Ideological blinders lead one to strange conclusions. If we were the rational automatons my ol' pal Luis would have us be, then we would find sense in his call for developers such as himself devoting time instead to doing their work and making more money than volunteering.

Instead of under-utilizing himself at the cost of US$125 per session, the developer should just donate that US$125 to the relief effort. This money can be converted into goods, thus maximizing its benefits. In fact, if the developer is serious about helping, the best thing he can do is to work longer hours at his job every day so he can earn more money to donate to the cause.

In Luis' view, value can only be expressed in monetary terms and all human activity has one such value. From this ideological assumption, he notes that actual volunteering is a waste of value expressed in the income of developers. If we take this assumption and apply to all other things we do, then a whole array of activities will seem value-less if they do not generate monetary income. Individually, what is the use of reading for leisure? Listening to music? Looking at paintings and works of art? Relating to other individuals, what is the use of comforting a friend? A parent? A neighbor?

If he assumes that all human activity must be motivated by some sort of gain, then, that may be true. But "gain" cannot always express itself in monetary value. Sometimes, as he writes, in this follow-up, making human connections, assuaging the feeling of guilt and feeling useful - can be reward enough. For all these - there is no equivalent value expressed in money.

Luis, my friend, I suggest you diversify and stop exclusively reading the disciples of Hayek and Friedman. Start with Keynesians and Neo-Keynesians. I swear, they'll make you feel more human.

Number Crunching, Lying and Arroyo’s SONA

Palace poodle Alex Magno, minutes before yesterday’s SONA predicted the President will make a “very detailed, specific, technical report.” Indeed, the President is counting on most Filipinos not being able to make heads or tails of her laundry list of statistics. After all, these are the numbers she collated from the various departments. Who can dispute official government data?

Others have pored over the coded political messages couched in her hour-long speech. While remaining coy about perpetuating herself in power, Mon Casiple points out that Arroyo is not likely to leave the political scene. Manolo Quezon summed in three brief sentences the President’s core messages:

1. Don’t count me out.
2. Cha-Cha is a go.
3. We will mobilize vs.certain presidential candidates.

Popoy De Vera makes a quick assessment of GMA’s so-called accomplishments. Of eight points: balanced budget, education for all, automated election, transportation and digital infrastructure, terminate hostilities with milf and npa, healing the wounds of EDSA, electricity and water for all, opportunities for livelihood and 10 million jobs, decongest Metro Manila, develop Subic and Clark, only one item is a clear fact. The other are either complete fiction or deserve qualifiers.

While there may be no ‘smoking gun’ to tie the President to the graft and corruption scandals that have plagued her stay in power, Rep. Mong Palatino reminds us of human rights violations and the undisputed (missing) body count of militant and journalist desaparecidos.

Sassy Lawyer makes the obvious point that the President will strive to make her last address optimistic. Why indeed would she talk about her failures? Because the SONA is a highly publicized event it is a good opportunity for the president to legitimize and deodorize her incumbency. Nobody expected an inspirational tale from her. Nobody expected a rallying cry that would capture the Filipino nation’s imagination. So yes, her SONA, like her previous ones, was short on rhetoric and long on numbers and cheap shots at ‘opposition’ players.

Let us go back to the outrageous claims on the economic front. Gloria Arroyo PhD’s number crunching deserves some demystification. Aside from outright lies, they also betray false assumptions that result to her claiming the country’s ‘economic fundamentals’ are sound.

DEBT

Watching her speech yesterday, my eyebrows shot up the roof when she said she had “exorcised” the demon of foreign debt.

Far from Neutral uses IBON data to illustrate that Arroyo said an outright lie when she said that she has “exorcised” Philippine debt. By March 2009, government debt has nearly doubled from P2.17 trillion in 2000 to P4.23 trillion.

In a roundtable discussion organized by the Freedom from Debt Coalition, former Budget Secretary Boncodin presents us more hard data on the government's budget deficit and debt.

Debt owed to domestic lenders rose from P1.06 trillion in 2000 to P2.4 trillion in 2008. Debt owed to foreign lenders rose from P1.09 trillion to 1.8 trillion in 2008. And the President, dear beloved President in pink, has the gall to say she has "exorcised" debt???

FINANCIAL CRISIS

Arroyo also generously gave herself credit for ‘accomplishment’s in which she had no direct hand.

“In 2008 up to the first quarter of 2009 we stood among only a few economies in Asia-Pacific that did not shrink.”

Dr. Josef Yap of PIDS observes the drop in GDP growth rate in 2007 is consistent with the onset of the global financial crisis. And the Philippines is not unique in weathering the financial storm. He credits this to the following:

- the very limited direct exposure of the region to subprime and other related securitized products
- relatively strong bank balance sheets with a return to profitability—as impaired loans from the 1997/98 Asian financial crisis have been worked off
- improvements in risk and liquidity management
- strengthening of supervisory and regulatory systems
- moves by banks into new and profitable domestic business lines such as consumer lending.

The country has escaped the worst of the crisis because of the conservatism (dare I say backwardness?) of local financial markets. This meant financial players preferred to keep capital at home rather than play high stakes in the global casino. This conservatism probably has more to do with hard lessons learned in the 1997 financial crisis than excellent forecasting by Arroyo’s economic team.

In the same FDC roundtable mentioned earlier, another former Budget Secretary, Benjamin Diokno, presents data on falling exports.



He expects these figures to worsen in 2009 as the economies of the top 10 destinations of our exports, accounting for 84 percent of the total, are also expected to weaken.

The President was triumphant in proclaiming yesterday:

Our reforms gave us the resources to protect our people, our financial system and our economy from the worst of shocks that the best in the west failed to anticipate.

Cash handouts give the most immediate relief and produce the widest stimulating effect. Nakikinabang ang 700,000 na pinakamahihirap na pamilya sa programang Pantawid Pamilya.

We prioritize projects with the same stimulus effects plus long-term contributions to progress.

Early in the year the administration announced a P330 billion stimulus package that was supposed to target spending to save the economy. This just means the government (instead of the private sector) will spend money to promote economic activity. For example, if it commissions public work projects - this will create employment and business opportunities for construction workers and contractors.

Since the President makes no mention of the results of her stimulus package, did she plunk all P330 billion in her “Pantawid Pamilya” program?

Former National Treasurer Prof. Briones notes that of the P1.4 trillion 2009 budget, only P10 billion was allocated for the “Economic Stimulus Fund” and the rest were from normal government spending.

So, did all P10 billion go to Arroyo’s “Pantawid Pamilya” program?

POVERTY

Another outright lie is her claim that poverty has gone down during her watch.

“Bumaba ang bilang ng mga nagsasabing mahirap sila sa 47% mula 59%. Maski lumaki ang ating populasyon, nabawasan ng dalawang milyon ang bilang ng mahihirap.”

Not less than the government’s NSCB data disproves her claim! While the data may be dated at 2006 stats, the numbers categorically show a worsening of poverty incidence between 2000 and 2006 and more people now fall under the poverty threshold.

FOREIGN DIRECT INVESTMENTS

The World Economic Forum is a pow-wow of the most powerful business actors in the world. Yearly they compile a report called the “Global Competitiveness Report.” This signals to businesses where they may invest profitably. Last year, the report categorically states that foreign businesses have been avoiding the Philippines like the plague for these reasons:

1. Corruption
2. Inefficient government bureaucracy
3. Inadequate supply of infrastructure
4. Policy instability
5. Government instablity/coups



Somehow, I doubt that Speaker Nograles’ proposal to amend the constitution, supposedly to encourage investments, will attract these businesses. They will have to eliminate themselves first.

MAGICAL GDP GROWTH

Many experts now agree that GDP is not a sufficient measure of a country’s economic welfare. As the adage goes, if you cut trees the GDP goes up. If you have two cars smash into each other on the road, the GDP goes up. This is because GDP accounts for activities that go into producing products (things) and services. It is an ‘amoral’ measure in that it posts a plus for trees cut but cannot measure the costs of the same. Obviously, we all need trees for clean air.

Nevertheless, let us try to unpack the mystery that is Gloria Arroyo’s bullish GDP! Yesterday she happily announced:

“…our economy posted uninterrupted growth for 33 quarters; more than doubled its size from $76 billion to $186 billion. The average GDP growth from 2001 to the first quarter of 2009 is the highest in 43 years.”

Looking at the UPSE Economic Database, the figures seem to confirm a continuous upward increase in GDP from 2001 to 2008. The thing that puzzles though, and what ultimately makes experts scratch their heads, is why the so-called growth does not match other indicators to measure the over-all health of the economy.

This paper written by former NEDA head Felipe Medalla and Karl Robert Jandoc note that while GDP growth rates are on the up and up, other indicators do not go up along with them.

"We ask why is it that if economic growth is being correctly measured, many indicators and data sets are at odds with the supposedly high economic growth. Moreover, we find that Philippine growth patterns—shrinking growth of domestic absorption, exports, and imports accompanying rising output growth—do not fit the pattern in other Asian economies."

Pattern One: GDP went up even as imports contracted. These economists note that the pattern for other Asian countries show that both indicators go up at the same time. It makes sense, if the local economy is making more goods and providing more services, it will need to import materials - the most crucial of which that we lack, I think, is oil.

Pattern Two: GDP went up even as exports also contracted. Among the nine Asian countries surveyed, the Philippines again miraculously bucks the trend! There were more goods and services consumed...but we didn't export any of them?

So if GDP has enjoyed a consistent upward trend since Arroyo took over, and the products and services the economy produced were not exported, this must mean that Filipinos themselves did most of the consumption.

Medalla and Jandoc express serious doubts about the government's statistics on the strength of the Filipino's buying power. They make mention of many other inconsistencies, and here I will only mention that between Gloria's Statistics and the Family Income and Expenditure Survey.

"Now, if the obvious fact that the FIES and the NIA begun to diverge after 2000 is accepted, the question is which data set should given more weight for assessing what happened to the economy after 2000. As already pointed out, the incredibly high growth of food consumption and personal consumption growth that far exceeds the growth of purchasing power as estimated in the NIA itself already casts strong doubt on the claims that the economy has grown the fastest in recent years."

So, the GDP grew even when the Filipino's buying power did not. Allow me then to paraphrase their conclusions without jargon - something is wrong with Gloria's number crunching.

A STRONG ECONOMY BUILT ON WHAT?

After all this the President concludes: “The state of our nation is a strong economy.”

The President is not coy about her administration’s engines of growth. Her castle rests on our young and talented serving BPOs and the export of more of the young and talented to all corners of the world.

Why I do not think this is sustainable and will hardly earn us First World status by 2020, deserves another blog entry.

For now, let me just say, I am not looking for a visionary come 2010. I am looking for one who will at least not lie so audaciously.

Clarity from the Left

Epistemological rifts, far from the domain of those who make it their business to study how we know, are significant once their implications in the real world become apparent. I do not claim to have any intimate knowledge of these rifts among leftists in the Philippines. Given this caveat, let me explain the utility of asking questions such as those I have asked Kapirasong Kritika.

Like any student, we often frame reality through the lenses of our discipline. The existence of disciplinary myopia is a human limitation we cannot possibly overcome. We are not omniscient. Neither are we omnipresent. The postmodern intervention is useful in this aspect. Let us acknowledge that the things we know and believe are a sum of our own limited human experience.

Now, science is a human endeavor that aims to build knowledge. Scientists have their theories and hypotheses and aim to test them through experiments. Through rigorous methodologies scientists have proven many things we now know to be true. It is absolute truth that gravity exists. It is absolute truth that once we throw a rock up in the air it will fall back to earth. This is true back in Isaac Newton’s time. It was true a thousand years before that. It will be true a thousand years from now, given that the Earth continues to exist.

Now, what is the difference between a piece of rock and Aling Juana, proprietor of a sari-sari store? Well, while Aling Juana’s physical components may not significantly alter in the course of her lifetime, given she does not meet an accident that will deprive her of limbs or any one of her senses, will her attitudes and beliefs remain the same? It is true today that Aling Juana hates mangoes. This is her attitude. There are many reasons why she hates mangoes – all uniquely her own. The consequence of her belief will drive her not to ever purchase mangoes. Theory translated into action. Will she continue to hate mangoes tomorrow? Who knows? In twenty-four hours a thousand things could happen that might change her mind. That is the difference between a rock and Aling Juana. It is the difference between the study of inert, non-sentient objects and the study of human subjects.

I am reticent to accept willy-nilly any body of knowledge claiming to have the answers to problems besetting the human condition. Largely, this comes from my own positioned study of critical political economy. There are many theories to explain why the Philippines is poor compared to, say, the United States. Can any one theory or any one body of knowledge claim to have the absolute truth as an answer? A RESOUNDING YES animated the ideology of a whole generation of decision-makers among the powerful who sought to shape the world. Theirs was the fool-proof answer to the developing world’s poverty. This failed ideology, as Kapirasong Kritika will probably be familiar with, comes from the discipline of economics – a science of human beings that pretended to have the exactness of the most numeral of sciences – physics. Their claim to absolute truth led to the immiseration of millions around the world. The ill effects of this ideology’s prescriptions, KK will agree, can still be felt today.

I think KK will also agree that there are many ways to interpret the unfolding of politics at any level. He will agree that the dominance of one interpretation over one is necessarily a political struggle. A useful postmodern intervention is this acknowledgment. “Theory is always for someone and some purpose” writes political economist Robert Cox. The science of his vaunted predecessor, to which he and a whole generation of other scholars including this one owe much, is bound by its historical specificity. Karl Marx is not omniscient and omnipresent. He sought to uncover ‘laws’ of Capitalism much in the same manner that his contemporaries sought to uncover ‘laws’ explaining the natural world. As I said, a rock is not a human being. A collection of human beings – in a societal unit such as a country for example – will not be forever cemented in one mold. “Classes” in the specific historical context of nineteenth century Britain cannot be made to function as concept in twenty-first century Philippines. It is testament to Marx’s brilliance that much of his contribution to the body of human knowledge has withstood the test of time. A century and half since the publication of his oeuvre Das Kapital, millions upon millions of events have transpired to change the conditions in which Capitalism, his object of study, functions. For this reason, and as good historical materialists, we need to be critical of these changes.

I have written countless times about the depoliticizing tendencies of biting the postmodern apple hook line and sinker. If everything is relative, as postmodernists say, then what can we believe in? And if we believe in nothing, what do we fight for? I believe that there are certain absolute truths pertaining to the human condition that will apply to all human beings regardless of hue, gender or creed. For example, I hold true that all human beings deserve to live in dignity. My politics will stem from a belief in this truth claim. Now this relates to a value system to which Kapirasong Kritika and I can inter-subjectively agree.

Strategies for Late-late-late Capitalist Development Part Two

Read Part One here.

3. Reforms: From decentralisation to re-centralisation

Maoist China had only the People’s Bank of China (PBOC) as the sole financial institution. Under the centrally-planned economy it served a redistributive function and allocated funds to state-owned enterprises.

Bank diversification, as part of the over-all reform process, was initiated by the Deng regime. The PBOC began to assume a pseudo-central bank function. It remained the main financial institution controlling 80 percent of deposits and issuing 90 percent of all loans by financial institutions. A second bank was created, the Bank of China. As a PBOC’s subsidiary, it was charged with foreign exchange transactions, working closely with state-owned companies. Third was the China Construction Bank (CCB) which disbursed funds which came from the state budget for the state economic plan. Lastly the Industrial and Commercial Bank of China (ICBC) was created in 1984 to take over the commercial banking functions of the PBOC. These major banks would then be called the ‘Big Four.’



Like most developing countries, the Chinese government is a major employer. Until 1994, the central government supported SOEs not only to foster industries but also to maintain full employment. As of 1995, 83 percent of all SOE loans were from the Big Four. Estimates of as much as 40% of these loans are based on “policy directives” rather than commercial profitability.

The economic reforms of the late 1970s made China’s non-state sector the economy’s growth engine. This sector, which included township and village enterprises (TVEs) in the cities, collectively-owned enterprises in the countryside, private enterprises and foreign-invested enterprises (FIEs), benefited greatly from market liberalisation which removed trade barriers in various goods and facilitated import of raw materials. This growth was however constrained by the nature of the China’s financial system, which was primarily geared towards financing state-owned enterprises.

Post-1994 reforms

It is estimated that China has lost $500 billion on non-performing loans (NPLs) to SOEs, a rough equivalent of all total FDI China has garnered since 1979. These loans are characterised as ‘value-destroying’ as there is “little or no hope of repayment (Calomiris 2007: 4).”

To alleviate losses in policy-directed loans, so-called because of their political impetus, further banking diversification, along with other policies, were carried out in since 1994. Three financial institutions were created to address specific development policy objectives – the Agricultural Development, China Development and the Export-Import Banks. This freed up other types of lending for commercial purposes. In 1998, the Central government re-capitalised the Big Four ($34 billion) and established asset-management companies (AMCs) and paired them with the banks to help balance sheets. New accounting standards were also put in place to make it difficult for the Big Four to hide their bad loans.

The 1994 round [of industrial policies]…also targeted five pillar industries – machinery, electronics, petrochemicals, automobile, and construction – for “national promotion (Edin 2005: 112).”
Guonan Ma, a senior economist at the Bank for International Settlements estimates that China's bank restructuring costs has amounted to RMB4 trillion (USD500 billion) as of 2005. The Ministry of Finance and the PBOC have shouldered 85 percent of the bill so far, and the rest shared by shareholders and customers both foreign and local.

Despite the reforms of the 1990s, China’s NPLs have not significantly abated. As of 2006, China's NPLs may approach 30 percent of GDP. However, what the reforms have accomplished is the concentration of public loans away from small and medium enterprises to the bigger players of the strategic sectors mentioned earlier. Between 1995 and 1999, employment in state sector decreased by 26.9 million and increased by 50 million in the non-state sector. About one-third of the small and medium SOEs have been privatised resulting to a decrease of workers in the public sector from 113 million in 1995 to 67 million by the end of 2004.

The reforms post-1994 have also led to the concentration of risk among a smaller number of SOEs. Similar to Japan’s banking crisis in the 1980s, China now faces a concentration of loans in hand-picked “winners.” In Japan smaller firms which were not given preferential access to lending sought cheaper financing from capital markets abroad. This in turn quickly made the Japanese hand-picked “winners” into losers as their profitability fell.

While foreign observers laud these reforms, some things have not fundamentally changed. The banking system is still statist. The three policy banks and the Big Four are still majority state-owned (62 percent). Even alternative sources of financing, such as the stock market, are largely state-dominated. SOEs still receive the bulk of funds from SOBs.

The status quo, while having improved on the past, is clearly still unsustainable. As China transitions further into capitalism, the public sector cannot possibly shoulder losses for very long as this damages China’s overall competitive advantage. Preferential loans lent to the public sector have resulted to a ‘glut’ of credit to the more dynamic parts of the economy, the private sector, which now accounts for about 40 percent of total industrial output. The percentage of new loans that went to this emerging group actually declined from 22 percent in 1998 to 14 percent in 2003.

The transition to more market-based financial decisions has been painfully slow and deliberate, owing to the political and social roles played by China’s banking institutions vis-à-vis the rest of the economy. The reforms of the past decade have nominally ‘massaged’ the bank books so to speak, and have reduced the losses incurred by the public sector – but value-destroying financial activities are still significant.

The next session will discuss the strategies employed by the State in manoeuvring, as it were, the Chinese behemoth in the labyrinthine complexes of global capitalism.

4. China and Global Capitalism

While initial changes of opening up the local economy to Asian capital were made in the late 1970s and continued well into the 1980s, it was clear that China was indeed, 'feeling for the stones' as it crossed the river.

Even though reforms in China had been going on for more than a decade already,
the goal of reforming the country’s economic system was still vague. Some
economists and officials responsible for the reform claimed that improving the
existing planned economic system was their only goal. Others considered it to be
the creation of a market-type economy. These two approaches clashed for quite a
long time. As long as there was no clarity about the ultimate objective of
reforms, China was literally “groping” in the dark, the only viable approach
being to take on problems as they arose. If no solution was at hand, a problem
would simply be put on freeze. As a result, many steps taken in the context of
reforms were no more than a compromise, to last as long as a new solution could
be found. The “two-level” pricing system could be called a textbook example of
this. In the late 1980s, when runaway inflation was a serious threat, there was
a growing realization that for the backlog of problems to be resolved, the goals
of reform in the economic system were to be clearly defined as soon as possible
(Zhang 2003: 40).

The 1990s finally saw some clarity China’s strategy by charting its course into what it has termed a ‘socialist market economy’ a duality of centrally-planned and market-based systems. This was a strategic choice that saved China from the US-sponsored ‘shock therapy’ experienced by former Soviet satellites in Eastern Europe.

Among the other ‘shocks’ of the 1990s was the Asian financial crisis of the 1997. Unlike its other East Asian neighbours China’s financial markets were little penetrated by highly mobile foreign capital, and thus remained unscathed. Even so, the Chinese realised that its interdependence with the global economy, while having been instrumental in its miracle growth, could also become a source of insecurity. This cautionary tale was clearly taken into account by the Chinese leadership as Jiang Zemin addressed the 15th Party National Congress. Even as he underlined the need to deepen reforms and continued engagement with the global economy, as well as the continued improvement and independence of China’s local enterprises, he emphasised the need for measured steps:

We shall use foreign capital actively, rationally and effectively. We shall
open the service trade step by step. In accordance with the law, we shall
protect the rights and interests of foreign-funded enterprises, grant them the
same treatment as their Chinese counterparts and improve guidance to and
regulation of these enterprises. We shall encourage Chinese investors to invest
abroad in areas that can bring China's comparative advantages into play so as to
make better use of both Chinese and foreign markets and resources. We shall
improve and enforce laws and statutes governing China's trade and economic
relations with foreign countries. We must correctly handle the relationship of
opening up versus independence and self-reliance, and safeguard the economic
security of the country (Zemin 1997).

Chinese academics engaged the Western conceptualisations of ‘globalisation’ and ‘interdependence’ with caveats. It was recognised that markets, production and capital had become truly global in the 1990s, and that the best way to manage globalisation was through multilateralism. Increasingly questions of the economy and environment were also being addressed, as well as issues which transcended borders and needed transnational solutions. Information revolution is recognised as the most important component of globalisation.

Chinese scholars were also cognisant that interdependence does not mean everyone can win. They cite the example of the Plaza Accord signed by the Japanese in 1985. The United States forced Japan to make significant concessions which undermined its economy (perhaps leading to the recession). Not coincidentally these changes took care of the American deficit vis-à-vis the US.

Thus began the elaborated concept of ‘security’ in Chinese strategic thinking. From 1978 to 1992, economic growth and national security maintained two separate logics. The boundary between the two became increasingly blurred in the mid 1990s. National economic security became the “most popular topic for Chinese scholars and policy-makers after the mid-1990s (Wang 2004: 528).” China’s defence white papers of the past few years are indicative of this trend.

…China's security still faces challenges that must not be neglected. The growing
interconnections between domestic and international factors and interconnected
traditional and non-traditional factors have made maintaining national security
a more challenging task (Chinese Defence White Paper 2006).

China had to prepare for economic warfare – a threat much more difficult to detect than conventional ones. It was understood that “through US power in international financial institutions, US power and hegemony can be imposed on the world—and on developing states in particular — without the use of brute military power (Breslin 2004: 663).”

It is with this kind of thinking in mind that the Chinese state carefully regulates its engagement of the global economy and vice versa. For example Chinese scholar Ye Fujing conceptualises the term ‘national financial security’ as “the ability of a financial system to function and develop organically, to the extent that it can withstand, rather than be controlled by, international capital supply/demand shocks (2007: 560).”

Financial security should be characterised not only by stability (i.e. resistance to external shocks) but also sovereignty – to ensure that foreign financial institutions do not control the local financial market and institutions and that market shares of overseas financial companies do not exceed fifty percent.

He then goes on to cite examples dating back to the late 19th century of how American banks behaved as oligopolies – with strong support of the state sector. Sovereignty is ensured by the National Banking Act of 1863 which required that officials of banks and insurance companies operating in the United States – whether domestic or foreign - must be American citizens.

‘Sovereignty’ of other advanced capitalist economies was also cited. In 2004, for example, foreign banks had a 1.4% market share in Germany, 2.8% in France, 1.3% in Japan, and the largest share—at 12%—in Spain (Ye 2007: 573).

With regard to the Asian financial crisis, some Chinese observers apparently do not discount that the ‘Asian miracle’, i.e. the Asian model of capitalism, was undermined by Western speculators deliberately.

When Asian nations called for strict regulations on transnational
speculations, Western governments led by the Clinton Administration insisted on
protecting free capital flows. The international rescue plan designed by the IMF
imposed rigid conditions on Asian nations and required them to open their
domestic markets at the climax of recession. The consequence was that Westerners
suddenly found they could get into the once-forbidden fields in Asian markets by
purchasing local companies at unimaginable low prices (Zhu 2001: 53).

Capital account liberalisation and WTO Commitments

A stable and regularised access to external markets forms the backbone of China’s export-oriented external economy. Accession to the World Trade Organisation in 2001, which was negotiated over a fifteen year period, finally guaranteed China access to the panacea of the Asian developmental state model – US markets.

Upon accession to the WTO, China agreed to a five-year phase in for banking services by foreign banks. On December 11, 2006, China fully liberalised its financial markets to meet its WTO obligations. Foreign banks must now be allowed to play on a level playing field as local ones. Foreign banks in operation more than doubled from 69 in 2000 to 173 in 2005. Beginning in 2004 more foreign investors were also allowed to buy shares in Chinese banks (Tong & Zheng 2007).

Authorities expect that competition from foreign players would lead to qualitative improvement of the banks’ governance. But more than such technical fixes, the WTO commitments, as an external driver, were expected to further reforms of the protected domestic state sector – namely the SOEs and SOBs – which the State could not accomplish through domestic channels given their political sensitivity.

A haphazard liberalisation of the Chinese capital account could lead to depositors rushing to move savings to foreign banks given the questionable record of domestic institutions. As such, the US has called on China’s failure to remain on schedule with its WTO commitments and the protectionist measures it adopted prior to the December 2006 deadline. A month before, the State Council issued the Regulations for the Administration of Foreign-Funded Banks. This mandated that only foreign-funded banks that have had a representative office in China for two years and that have total assets exceeding $10 billion can apply to incorporate in China. After incorporating, moreover, these banks only become eligible to offer full domestic currency services to Chinese individuals if they can demonstrate that they have operated in China for three years and have had two consecutive years of profits (USTR 2007: 89).

A second bone of contention with regard to China’s financial system is its exchange rate regime. China has been pressured to revalue the Renminbi (RMB) since 2003. While China has allowed its currency to float within a narrowly defined band since July 2005, it has been reluctant to heed calls of the international community. While it is not clear whether US trade deficit with China would improve were the RMB to revalue, the US Treasury Department has “strongly urged” China to allow the RMB to float. It has even considered legislation that would penalise China if it does not do so. There are mixed data on how much (if at all) the RMB is undervalued. The IMF claims it is undervalued, but they cannot say by how much.

China refused to bow to pressure because in the international game of ‘problem assignment’, China has so far refused to accept that the US trade deficit is its problem.

As of October 2007, even as the financial markets looked increasingly problematic due to the sub-prime crisis in the United States (EIU 2007), China has not changed this policy stance. In an address to the IMF, the PBOC’s deputy governor had this to say:

We believe that the Fund’s exchange rate surveillance should focus on whether a
member country’s exchange rate regime is consistent with its medium-term
macroeconomic policies, rather than on its exchange rate level. Given the
apparent weakness in the concept and measurement of the equilibrium exchange
rate, its estimation can serve only as one of references for technical analysis,
but not as the basis for the assessment of members’ policies. We hope the Fund
will fully recognize the diversity of members’ situations, the limited role
exchange rates play in macroeconomic management and the limitations of the tools
used for exchange rate analysis. We also hope that the Fund will respect the
autonomy of its members in choosing exchange rate regimes (Wu 2007: 7).

China has indeed taken advantage of expansion of credit in the US economy for the last decade, having been one of its most robust export markets. Now that the US is in recession (Scopical News 2008), it will be interesting to see if China will finally devalue its currency and begin a serious undertaking of cultivating its own domestic markets.


5. China’s Grand Strategy: From Rule-taker to Rule-maker?

Belatedly, US officials have noted the country's financial insecurity vis-a-vis China. "We are so dependent upon decisions made in other countries' capitals" says Senator Hillary Clinton. In a discussion she had with a retired general, she was given the nightmare scenario of the PRC finally invading Taiwan with the US unable to defend the island because Beijing might well say "Fine. You do that, we will dump your dollars. We will flood the market. We will not buy any more of your debt (Mason 2008)."

The United States-China Economic and Security Review Commission cites as issues of concern China's trade surplus with the US. As of November 2007 this was at $163.8 billion. Its foreign currency reserves is at $1.43 trillion, 70 percent (or 1 trillion) of which are invested in dollar denominated assets, mostly in US sovereign and corporate bonds (USSC 2007).

As the US domestic economy falls into recession, China will have saved more than enough for the rainy days coming ahead and may be better able to weather the economic storm in its primary export market. The PRC will also have enough foreign reserves to continue importing vital commodities such as crude oil. And as the US dollar continues to fall in value, China may well decide to unload its holdings to switch to more stable currencies, such as the Euro. Various Chinese officials have already said as much. Because Chinese business interests are also state interests, any pronouncements of such kind are always treated as political threats. Former World Bank chief economist and US Treasury Secretary Larry Summers has used the term 'balance of financial terror' echoing the nuclear stand-off between the Soviets and the US during the Cold War. If China does decide to unload its US dollars en masse, will it be shooting its own foot? In turn, how will the US react?

Due to the credit crunch brought on by the sub-prime crisis, Chinese financial institutions have also been taking advantage of the 'fire sale' in the heart of the American financial capital, acquiring shares in long-standing US financial institutions such as Blackstone and Morgan Stanley (Straszheim 2007). Meanwhile, the collapse of Bear Sterns, with which China’s Citic Securities had cross-investment deals to the tune of $1 billion, has been a learning experience for Chinese players to tread more cautiously. Nevertheless, China’s financial instruments will continue its global expansion (Zhao 2008).

In September last year, the PRC created the China Investment Corporation (CIC) to further venture into the weird, wired world of global capital markets. This new economic policy arm will take charge of China's gargantuan foreign currency reserves. European and American politicians have already expressed worry that the CIC will purchase shares in other countries’ sensitive industrial sectors - and may be used as political leverage in the future. The CIC’s chief risk officer quickly allayed any such suspicions by saying that “The claim that sovereign-wealth funds are causing threats to state security and economic security is groundless…We don't need outsiders to come tell us how we should act (WSJ 2008).”

Given such patterns it is apparent that China is well on its way to flexing its financial muscles and has been successful at playing the high finance game. One would think that the PRC has been taking pointers from Samuel Huntington’s Clash of Civilisations – that the path to global leadership and power entails owning and operating the international banking system, controlling hard currencies and dominating international capital markets.

Strategies for Late-late-late Capitalist Development Part One

0. Introduction

The banking system is a crucial instrument in China’s strategic choice to pursue capitalist development. Since the opening-up policies of the late 1970s until today, banks have experienced significant reforms, from decentralisation in the 80s to recentralisation in the 90s. While these changes may have restructured China’s financial institutions in the past decades, they have not deviated from their original intent.

The country’s financial system, which is still dominated by the state, serves to disburse capital accumulated from the most successful non-state sector of the economy – hand-picked ‘winners’ plugged into China’s greater export-led growth strategy – to the state sector, i.e. the state-owned enterprises (SOEs). The ‘developmental’ character of the Chinese state has also used the predominantly state-owned financial institutions to redistribute available capital resources across regions.

The non-commercial function of the banking system, financing SOEs and incurring staggering losses on non-performing loans, is an institutional fix of the Chinese state’s management of its transition to what it calls a ‘socialist market economy.’ The SOEs serve as the powerbase of the Party leadership, as well as the State’s source of continuing legitimacy among its constituency – the working class. For this reason, successive governments from Deng Xiaoping to today were willing to shoulder these costs. Since Deng’s Open Door policy however, there have been successive attempts to overhaul the financial system so that it may operate on a more commercial basis.

Increasingly the impetus for further reform become more urgent as China prepares to open its domestic financial markets to the world. Other than domestic concerns, there is a growing consensus on the need for reform as China becomes an increasingly important player in the global economy.

The following discussion aims to characterise the strategies employed by the Chinese state as it has chosen to ‘transition’ into a more market-based economy, with an emphasis on the problematic and even contradictory roles played by its financial system – as a political resource and a commercial resource.

Deng Xiao Ping’s gradualist, ‘piecemeal social engineering’ has triggered the country’s transition to what it names ‘socialist market economy.’ Consequent congresses and leaderships have built on the policies of the late 1970s, and have explicitly put ‘development’ as top priority.

The Chinese state’s “developmental” character is examined in comparison to East Asian models. In which ways does it adhere to the model and in which ways is it different? And how do these differences translate into the State’s ability to regulate the economic reforms of the past three decades? And more importantly, how have economic adjustments made an impact on politics and vice versa?

1. The Great ‘Fall’ of China: A Synthesis

The 1960s were tortuous times in Chinese history, as they were for many countries around the world. The ideological zeal of Mao Ze Dong’s Cultural Revolution left in its wake not only a leadership deeply divided but a dilution of that which before underpinned the unfolding of its modern history. The certainty of victory in revolutionary movements (as in the Stalinist case) gave politics and history an engine with which to move forward. The fact that Mao conceded to the open-endedness of the revolution, even its defeat, generated a “pall” on the political machine.

Nevertheless, the victors of the Chinese leadership’s internal struggle put aside the momentary ‘hiccup’ of the Cultural Revolution and have not looked back since. Deng's principles of adhering to socialism, the dictatorship of the proletariat, the philosophy of Marxist-Leninist and Maoist thought, all co-opted and absorbed the ideological fragmentation within the Chinese Communist Party's re-invigorated and re-legitimised role as the ultimate embodiment of the state. The continuing process of assuring the Party’s continued legitimacy and the state’s re-calibration as a result of its enmeshment in the global economy will be further discussed in the second section.

Under Deng’s leadership, China began its tentative embrace of what was once its antithesis – capitalism. The Dengist regime’s open-door policy on the level of industrial policy-making and the espousal that “To get rich is glorious” were signals to the international community that China had taken a more pragmatic view of the world than its Soviet comrades. The short-comings of the Soviet Union’s centrally planned economy had become evident by the late 1970s vis-à-vis the capitalist sphere. Growth hit negative levels in the eve of the eventual Soviet collapse (White 2000). These stresses, coupled with the sudden political reforms of the Gorbachëv era, finally led to the demise of Capitalism’s ideological foe.

Without going into the nitty-gritty of how the reformist under Deng were able to seize state power, from a systemic level it is apparent that China chose to play the capitalist game given the geopolitical and geoeconomic context of the ‘winding down of history’ in the late 1970s to the final ‘end of history’ in the late 1980s.

Viewed from the lenses of history, the changes of the past few decades seem nothing but revolutionary. However closer scrutiny will show the prudence of ‘feeling the stones’ as China entered into heretofore unknown territory. This prudence continues to be exhibited today.

The 14th CCP Congress in 1992 finally gave the ongoing reforms a name - a “socialist market economy with Chinese characteristics.” Communist China has well and truly embraced its capitalist foe. In thirty short years it has become the ‘world’s workshop’ in this new century. The illustration below neatly summarises China’s centrality in today’s global commodity chains.





Thus began the meteoric ‘rise’ of China’s economic growth. Between 1979 and 2005 average, it maintained an unprecedented average growth rate of 9.6 percent. Post-WTO membership, its economy is 70 percent bigger from 2001.

China now openly espouses that ‘development’ in a peaceful context is its ‘strategic choice’. This development is now understood as capitalist development, being played in Chinese terms.

Historically, the modern State has played key roles in capitalist accumulation in the Western experience. It is also observable that “the later a country embarks on the path of capitalist development, the stronger is the need for state intervention to make capitalist accumulation successful.” This has been demonstrated by the experience of ‘late’ capitalist developers of the 19th century – the United States, Japan and Germany and the ‘late, late’ developers of the 1960s – South Korea, Singapore, Taiwan and Hong Kong.

Its transition into what can be characterised as ‘capitalism’ has been managed and regulated by the CCP. The Chinese state is now being tagged as the latest incarnation of the Asian developmental state model.

2. East Asian Developmental State…with Chinese characteristics

Chinese scholars also recognise three models of development - namely the Anglo-Saxon mode, the continental European mode, and the Asian mode. The last has been judged “the most suitable” to Chinese needs, and this was predominant in the thoughts of Chinese reform strategists from the very beginning. Among the Chinese intelligentsia, there were defenders of the first two models. However in the end it was recognised that the experience of Western Europe and the United States could not be copied. These countries accomplished industrialisation under different historical circumstances.

The scholarship on the East Asian developmental state charted initially the rise of Japan and later the newly-industrialising countries (NICs) of Singapore, Taiwan, Hong Kong and South Korea. The developmental state approach, in the scholarship of the 1980s, was essentially a theory of economic growth.

Observers claim it this same path that has inspired China in its transition away from the Soviet-style centrally-planned economy which was failing not only externally in terms of competition with capitalism but domestically in terms of a working provision of even the most basic of commodities. This ‘inspiration’ is perhaps best illustrated by Chinese authorities in the 1990s expressing that they wanted to create firms in the mould of the South Korean chaebols. These firms were envisioned to be listed on Fortune magazine’s largest enterprises by the year 2000.

The Chinese state exhibits the characteristics of the archetypal developmental state. Not unlike the imperial period’s bureaucracy of mandarins, it is manned by technocrats. The State itself, being an autarky, enjoys relative autonomy from society. Since Deng’s regime, it has put development as the top priority. And lastly, it is ‘dirigiste’ in character, intervening in the planning and implementation of economic policies, the orchestration of preferential loans with target industries, the creation of monopolistic enterprises and the selection and protection of market winners.

Some of the characteristics shared by China with other East Asian developmental states include, having the US become a major export market, strong control of fiscal and monetary policies, state control over key industries and a high savings rate. Japan and Korea also picked industry winners and lent them support through banks. While China shares similarities to Southeast Asia's FDI-led export strategy, the key difference is in China's SOEs dynamism in the economy. China effectively practiced a dual economy – the SOEs and the non-state sector.

But the Chinese developmental state differs from the Asian model in a number of ways. Unlike the development strategy of Japan which sought to protect domestic markets while promoting exports, China’s industrialisation was largely externally-driven. It has been willing to exploit the opportunities presented by economic globalisation, while shielding selected key industries - the machinery, electronics, petrochemicals, automobile, and construction sectors. It is thus qualitatively different from the classic Asian export-led model of development, as its main engine is FDI.

The Chinese developmental state has also had to adjust to a different geopolitical and geoeconomic context compared to the other East Asian states. It is engineering its take-off in an environment of highly-regulated and rules-based global trade regime. South Korea, Taiwan, Singapore and Hong Kong industrialised and completed their integration into the global economy prior to the existence of the World Trade Organisation.

Adhering to the rules of the current global trading regime has qualitatively changed the Chinese state’s regulatory framework. Because China lobbied for fifteen years to join the WTO, this means it was willing to pay the institutional costs needed to join, as it were, the club. For example, a restructuring of the government was initiated in 1998, shrinking the bureaucracy from eighty ministries to less than thirty. This reform shrank and centralised industry ministries to just one – the State Economic and Trade Commission (SETC). Further, this institution was scrapped later on and merged with Ministry of Foreign Trade and Economic Cooperation to form a new Ministry of Commerce. There have also been proposals to scrap the constitutional definition of China as a “people’s democratic dictatorship” as this “contradicts the spirit of the World Trade Organization and the requirements of globalization.” The reasons behind China’s institutional concessions will be explored in further detail in the fourth section.

Lastly, the Chinese developmental state, unlike the others, has to manage the ‘duality’ of its economic system. It exhibits both two seemingly opposed strategies - it follows the market-oriented structures of neoclassical economics, the same model lauded and promoted by the World Bank. At the same time it has followed the developmental state model - i.e. heavy public involvement in the economy.

As a result China has built a dual economy - the SOEs supported by government funding, and the dynamic FIEs and emerging private sector. The re-calibration of the state’s institutional capabilities is difficult in the financial system because this would entail, first and foremost, a reform of the SOEs. Up to 80 percent of total bank loans and up three-fourths of all bank loans are absorbed by these SOEs.



The non-state sector has been outperforming the state sector in the past decade. But why has China subsidised this sector through loans?

In Reforming China’s State-Owned Enterprises and Banks, authors Chiu and Lewis propose the following factors (2006: 9-12):

1. While SOEs have had a decreasing proportion of total industry output since 1980, they still posted strong economic growth.

2. SOEs still account for 32 percent of employment in urban centres. The provinces of Liaoning, Jilin and Heilongjiang (China’s version of the rust belt) derive 70 percent of GDP from local SOEs. Heavy industry and technology are still largely state-owned. All other sectors rely on these SOEs for basic productive inputs.

3. While the number of SOEs have officially shrunk, many other non-SOE are in fact “mutations” of the former. 80 percent of the 1,300 largest companies listed in the stock market were once SOEs or offshoots of SOE holding companies, and remain majority government owned. A good percentage of foreign-invested firms (FIEs) are joint or cooperative ventures with SOEs.



4. SOEs’ reforms are also dependent on SOEs’ reforms.

5. Foreign firms funded by FDI contributed 30 percent of gross output in. FDI from overseas Chinese was a response to the lack of domestic financing for mainland Chinese non-state enterprises.

6. SOEs are politicised – they serve more than just commercial functions but a combination of socio-economic and political ones. SOEs continue to provide housing, health and other social welfare benefits to current and past workers. Similar to the PLA, which has a military as well as political leader, SOEs have a CCP party committee attached and is headed by a Secretary who has equal rank as a CEO.

A reform of the SOEs – owned by central ministries and local governments - would entail counterbalancing the interests of the Chinese state’s domestic constituencies, essentially its powerbase, with the interests (and discipline) of global capital. On the one hand are the workers and local government administrators of the state-sector and on the other are nascent domestic and foreign capitalists of the private sector. As Minxin Pei argues in his seminal work China’s Trapped Transition: the Limits of Developmental Autocracy, eliminating loan losses means eliminating the existing system on which politicians and their constituents rely (2006).

SOEs are the economic basis of the State’s power. Thus, Chinese leaders often remark that the development of SOEs is related to the future of the CCP. Also, factors including the scale of SOEs, their importance in the national economy and the role of social stability, determine that SOEs relate closely with the political future of the CCP. So, the State devotes great attention to SOEs because of the considerations of the political ruling group. Although traditional SOEs are inefficient, they could not be allowed to become bankrupt (Yang 2006: 54).

This counterbalancing is further reflected in the institutional fix of “Three Represents” which enable the State to legitimately harness the non-state sector’s productive capacities on behalf of the ‘majority.’ Amendments to the Consitution were made in 1993, 1997, 1999 and 2004 to legitimise the non-public sector and indeed the market economy, with the State. To accommodate the increasingly influential non-public sector, they have been incorporated into the state by becoming members of the CCP. The percentage of private enterprise owners who are also Party officials rose from 13.1 percent in 1993 to 19.8 in 2000. For the first time, eight Party officials from the private sector were present in the 9th Guangdong Provincial Congress convened in 2002.

“Three Represents” neatly sums within the CCP, on behalf of the State, the most ‘advanced social productive forces (economic production), the ‘progressive course of China’s advanced culture’ (cultural production) and the ‘fundamental interests of the majority’ (political consensus) (Zemin 2002). While China may seem unchanging to the causal observer, headed as it is by an ‘outmoded’ authoritarian regime, the ongoing internal changes and ‘experimentation’ in governance has been a fascinating study of modern statecraft.

Road to Perdition

This interview of Prof. David Harvey and Alexander Cockburn of Counterpunch made me want to review the origins of this crisis. Harvey claims that now that America has only five banks standing, this consitutes a consolidation of class power in that country.

Contrary to what some have been saying, this has been a crisis thirty years in the making. Whilst we in the developing world have been in permanent crisis in for decades, Capitalism has come full circle and landed square in the heart of the world's largest economy.

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Capitalism’s ‘Golden Age’ in the 50’s and 60’s saw expansion and growth. Between 1950 and 1975, income per person in the developing countries increased by 3% annually on average, accelerating from 2% in the 1950’s to 3.4% in the 1960’s. In the developed countries GDP and GDP per person grew almost twice as fast as in any previous period since 1820.

This was a stable regime of accumulation regulationists termed Fordism. If Fordism was the regime of accumulation, then the mode of regulation, indeed the mechanisms that enabled such a system to work, were the Bretton Woods institutions.

A regime of accumulation, according to Regulation theory, is a period where crisis is put on hold, where crisis, indeed, is ‘regulated.’ Tensions of the contradictory social relations are managed by politically instituted compromises.

Within the core, national models of capitalisms meant the State’s support of national industries and class compromise between the State, Capital and Labour (Corporatism). With these compromises, Capital’s mass production had a steady market in Labour’s increased purchasing power due to rising wages. Because Capitalism’s survival is based on continued growth in profits, and domestic markets could only grow so much, expansion is necessary. Crisis is defined as lack of growth.

Regulationists generally agree that in the 70’s the world broke away from the old regime of accumulation. This was a crisis-prone period, one where the old mode of regulation (i.e. the Bretton Woods System) no longer worked to continually expand profits. The 70’s therefore saw a painful transition to Capitalism’s latest form.

Globalisation

Whereas the State was mainly concerned with juggling conflicting class interests within the national territory and resolving these conflicts as best it can within the domestic context, internationalisation meant the destruction of national capital and national labour compromise brokered by the State.

With capital’s logic of expansion in search of cheaper cost of production and more markets, production was increasingly internationalised. The very first multinational corporations were born in the 60s. The economic orthodoxy of ‘comparative advantage’ or specialisation made “less sense” as corporations’ production globalised.

As American firms went abroad, their banks followed. To remain competitive, European and Japanese multinationals followed suit as well. And so did their banks. Even when doing financial transactions abroad, MNCs tended to act out ‘nationalistically.’ Japanese firms borrowed from Japanese banks, German firms from German banks and so on. Banks wanted to escape financial regulation, taxation and capital controls. US banks went to Europe to escape the legal reach of the nation-state.

Inadvertently, American monetary policies enacted by the Federal Reserve in the 60’s, which were meant to keep capital at home, effected the opposite. The Voluntary Foreign Credit Restraint Program, which was designed to curb foreign firms and governments borrowing from US banks, and the Foreign Direct Investment Program, which limited the amount of capital US firms could send abroad, were what caused US banks to leave in the first place, taking residence in Europe.

American capital surpluses ‘hiding out’ in Europe saw the growth of Euromarkets. The Euromarkets are “an organized market for foreign currency deposits. To take the example of dollar deposits, a Eurodollar deposit is no more…than dollars deposited in a bank outside the US (Kapstein, 1994: 32).” Estimates saw the growth of the Eurodollar market from $20 billion in 1964 to $305 billion in 1973.

In the late 60s, the US dollar was overvalued, capital was exiting American shores and the Vietnam War was draining the American economy. The announcement of 1971 did not take long in coming, and exchange rates were set free to ‘float.’ On August 15, 1971, President Nixon announced the dollar was no longer freely convertible to gold, effectively abolishing the fixed exchange rate system. Currencies were allowed to float letting ‘markets’ dictate values of currencies according to the laws of supply and demand. The Bretton Woods system had collapsed.

This unilateral decision was a political one. The impact, made in defence of American national interest, was nevertheless felt world-wide.

Globalisation of production corresponded with the corollary globalisation of finance. As the leading capitalist power, the United States’ decision to abandon the old regime of accumulation for continued growth of its corporations was perhaps best manifested in its abandonment of the mode of regulation.

Period of Transition: Loose Capital

The only successful group in the developing world able to change the terms of exchange using ‘commodity’ power were the oil-exporting countries of the Middle East. The newly-established Organisation of Petroleum Exporting Countries (OPEC) quadrupled oil prices from $2.48 to $11.65 per barrel in 1973.

The oil crisis of the 70s affected all oil-importing countries in the world, both rich and poor. There was severe recession in the West resulting to depression in demand for developing country exports, further spurring the deteriorating terms of trade. The decreased income of developing countries resulted to large-scale borrowing to finance balance of payments deficits.

The oil-exporting countries of the OPEC on the other hand, saw a prodigious increase in income estimated at $125 billion in the years 1974 to 1976 alone. $48 billion were invested in government paper, portfolio and long-term direct investments in the industrial countries. $49 billion, or 37 percent of total, were deposited in private commercial banks in New York and London.

The depression in the ‘real’ economy and the prodigious growth of financial markets via MNCs’ Euromarket deposits and OPEC’s ‘petrodollar’ deposits in multinational banks were the contradictory trends of the 70s. Both these two trends gave birth to a new regime of accumulation, one where growth is based on the expansion and accumulation of ‘fictitious’ capital.

Highly liquid, banks began lending to non-oil-exporting developing countries. Prior to the crisis, banks were wary of lending to these poor countries. In the 60s however, they seemed capable of servicing debt due to growth and rising exports. Further, banks had limited markets “in the slowly growing developed countries (Spero 1990: 167).” From 1970 to 1983 "the share of bank loans in total long-term financing increased from 4 percent to 22 percent (Singer & Ansari 1988: 220)."

Here it is important to note that banks were not operating on their own, but had active encouragement from governments and the IMF “which saw [lending] as a mechanism for recycling (Spero 1990: 167).”

The IMF enacted a mechanism to facilitate lending to the Third World. The ‘Facility to Assist Members in Payments Difficulties from the Initial Impact of Increased Costs of Imports of Petroleum and Petroleum Products,’ was in effect a "multilateral program to recycle petrodollars through 1975.” At first hesitant, the United States later acceded to the IMF’s proposal.

By the end of the 70s, governments in the Third World looked increasingly unable to make payments, incurring new debts to service old ones. The IMF played a central role in managing the ‘Debt Crisis.’ Two strategies were formulated and applied to all debtor countries to ensure that they could make their payments. These were the Brady and Baker Plans respectively. Both were named after US Treasury Secretaries.

The 1982 Brady Plan aimed to decrease government spending and increase tax collection. To garner increased revenues, governments should also seek to improve exports and devalue their currencies to make exporting more attractive for domestic enterprises. By 1984, the Brady Plan was not working as effectively as planned since these governments still had difficulty making payments. Its assumption that the problem was only a matter of lack of liquidity on the part of the debtors was a misdiagnosis of the problem.

The second strategy, the Baker Plan, was more aggressive in restructuring debtor economies in order to ensure their debts would be serviced. These structural changes would ostensibly make their economies more efficient, generating more revenues and being better able to pay debt. The IMF made further disbursements of capital conditional on enacting these changes.

In taking steps to resolve the Debt Crisis, i.e. making sure overexposed banks would recoup their investments, the IMF played an increasingly political, indeed politicised, role in the global economy. From its early mandate of merely overseeing a stable international monetary system it had not only transformed into a mediator between debtors and creditors with a demonstrable bias for the latter, but also into an unaccountable, unelected house of economists imposing economic policy on governments and polities far, far away.

Financial Liberalisation and More Crisis

The ‘Debt Crisis’ of the 80s faded into memory as banks were assured by their governments and the IMF that their loans would get paid, rescheduled perhaps, but paid nonetheless. Capital shortage for the Third and Fourth Worlds, however, would not go away. The 90s presented a different kind of crises and indebtedness. If capital was owed to banks in the 80s, today they are owed to literally hundreds of thousands of private individuals investing in ‘emerging markets’ and all kinds of funds.

Governments ‘freed’ money capital by removing restrictions on international capital movements. The very first to do so were Canada, Swtizerland and Germany in 1973. In 1974 the US did the same, followed by the Britain in 1979, Japan in 1980, France and Italy in 1990 and Spain and Portugal in 1992.

In Economic orthodoxy, the freedom of financial markets were supposed to effect a redistribution of capital world-wide. Capital was supposed to “flow from capital-rich developed countries to opportunity-rich emerging countries (Eatwell 1997: 11).” Not only that, markets were also expected to discipline governments for greater ‘efficiency.’

The IMF itself advocated deregulation of capital controls among members. Deputy Managing Director Stanley Fischer claimed capital account liberalisation would “outweigh the potential costs," hence the need to adapt “economic policies and institutions, particularly the financial system [to] operate in a world of liberalised capital markets (Singh 2003: 195).” Its sister institution, the World Bank also encouraged opening capital markets to foreign portfolio investment. Interestingly, China had not liberalised its capital account, but has maintained economic growth for the last two decades.

The result was the permutation of money into what Marx might recognise as ‘fictitious capital.’ The last thirty years has seen the creation of credit and wealth never before witnessed in Capitalism’s history. From 1975 to 1994, the stock of international bank lending from grew from $265 billion to $4200 billion despite crises. This is perhaps because of the nature of the debtors themselves. Unlike businesses or individuals that can declare bankruptcy, Sovereign states will always be able to pay as long as tax payers are born every day.

The Bank of International Settlements (BIS) estimated the value of exchange traded derivative products at $13.5 trillion in 1999. Over-the-counter (OTC) transactions, i.e. private transactions between institutions was estimated at $72.6 trillion (Nesvetailova 2005: 400).

Increasingly, investments have moved away from the “bricks and mortar” kind to short-term portfolio investments, the kind that can pull out quickly at the first sign (imagined or not) of trouble. The most obscure, highly ‘conceptualised’ capital circling the globe today such as swaps, options, derivatives and futures, are perhaps better explained by mathematicians than the space in this discussion allows. Indeed this ‘electronic herd’ of money managers, armed with computers, use algorithms and pure mathematical formulae to ‘read the mind’ of the market.

Increasingly, the way these highly liquid forms of capital move have little to do with the real economy. Investors wanting a quick return would prefer portfolio investments over FDI because they are easily recoupable with a few strokes on computer keyboard.

Surreptitiously, the phrases ‘economic fundamentals’ or ‘the real economy’ as distinct from the weird world of high finance…Indeed the financial sector is now often dismissed as a casino society where speculators play out their compulsive habits.

The past decade has seen one financial crisis after the next as rogue capital chase profit opportunities across the globe. Like the tide, money instruments ebb and flow in the developing world with the whims of the market. Their flow triggered imaginary ‘prosperity’ in the hands of local capital and there was some growth due to increased local consumption. Their ebb triggered crashes in Mexico in 1994, Asia in 1997, Brazil in 1998, Russia in 1999 and Argentina in 2001.

JPEPA: President Arroyo's Coup d'Etat?

My favorite Fil-Aussie Benign0 subscribes to the notion that the specificities of those who occupy his former country's positions of power do not matter. He writes:

If we are not able to prove that our prospects for prosperity are a function of who is sitting in Malacanang, then why bother even wasting precious bandwidth on any discussion about whether Gloria is out to extend her term or not?

Now a more inane statement I have not read in a while. To claim that structure trumps agency, i.e. that the institutions matter and actors do not, is a view taken by people who are probably so brilliant they have foregone common sense.

Manong Benigs also claims the Philippines is in a "normal" state:

We are in a situation that is part and parcel of what it means to be a democracy.

According to Manong Benig's normative standards, a democracy does not need to address serious allegations of electoral cheating and massive graft and corruption among the country's top-level officials. A democracy does not need to address accusations of its armed forces making people disappear. Nevermind the trail of anomalous deals the Arroyo administration has pursued in the last four years. Nevermind the impeachable offences outlined yearly by those who are still outraged but still go through due process anyway. Nevermind that the law in this democratic society only applies when and if the law-makers and law-enforces deem them applicable.

So, Manong Benigs wants a concrete example of Gloria Arroyo's activities which can only be described as a "serious injury" to the Republic? If the allegations of the past four years are not enough to satisfy, then let me offer the case of the JPEPA - Arroyo's largely silent coup d'etat.

The JPEPA was signed by the President in September 2006 in Finland. It was signed under a cloak of secrecy as has been wont to do by the Arroyo administration. It is the country's first bilateral agreement of such an extensive scope, dealing with trade in commodities, investments, and labour. From 2004 to September 2006 (after the president signed the treaty), the initial drafts of the treaty were kept from public view.

The House of Represenatives, mandated by no less than the Constitution to participate in crafting trade agreements, had zero participation in the trade negotiations. The Supreme Court acceded to this secrecy by ruling in favour of "Executive Privilege." This privilege is normally invoked in diplomatically sensitive negotiations - understood to be security-related. The JPEPA is explicitly an economic treaty - divulging the nitty-gritty of negotations would in no way compromise 'national security.'

In a belated attempt civil society groups and certain representatives brought the issue on executive privilege to the Supreme Court. They cite three grounds to gain access to the full text of the treaty - it is of public interest, the right to participate in an agreement of such a wide scope, and a concern that disclosure of the full text to the Senate after the negotiations have been concluded would make the latter a mere 'rubberstamp' of the Executive.

So here is a "slice" of how the Arroyo executive works.

Owing to the ignorance and indifference of the general public, the co-opted legislative and judicial branches and the weakness of civil society groups, the Arroyo government has assumed such massive decision-making powers in violation of this country's own Consitution, laws and interests of various domestic sectors.

To humour Manong Benigs, how is JPEPA "injurious" to the republic?

1. It normalizes trade in toxic wastes. DTI Secretary Favila himself admitted in November 2006 that it was a necessary condition that the Philippines include the toxic waste provisions for Japan to open its services market in caregivers and nurses.

JPEPA provisions directly clash against domestic legislation which aim to protect the environment - the Clean Air Act, the Toxic Susbtances and Hazardous and Nuclear Wastes Control Act and the Solid Waste Management Act.

2. JPEPA will subject domestic industries to competition with Japanese goods through tariff elimination and through the most-favoured-nation clause - which means that Japanese investors should be treated the same way as Filipinos. This may well kill what is left of local industries.

Unthinkingly, due either to sheer incompetence or malicious side-deals (you can imagine a Filipino negotiator being susceptible to bribes), Philippine negotiators eliminated tariff lines unnecessarily - making reservations only for rice and salt. Japan on the other hand was able to uphold its tariff protection on 238 agricultural and manufactured products.

While Philippine exporters may well benefit from open Japanese markets, JPEPA also assures that each party should able to uphold standards, i.e. SPS requirements. SPS are known to be 'non-tarriff' barriers - which could include something as innocent as requiring Philippine bananas to be certain size and blemish free. To comply with these standards would cost domestic exporters money.

3. The agreement has not won any clear benefits for the Philippines in terms of foreign direct investments (FDI). Countries such as China and South Korea have demonstrated the capacity of FDI to transfer know-how and technologies to benefit their domestic firms specifically and to be integrated into national development plans generally.

Under JPEPA, the Philippine government cannot impose these transfers of technology to the Philippines. Under normal investment treaties, foreign corporations are required to hire a certain number of locals. This has also been scrapped in the agreement.

4. The provisions on trade in services short-change Philippine nurses. No less than the Philippine Nurses' Association has rejected the JPEPA. Their grounds for rejection include the very stringent requirements needed for Filipino nurses to enter the Japanese healthcare service market.

To illustrate, despite having four years of higher education, passing the Philippine Licensure Examination and three years of actual nursing practice, nurses will enter Japan as "trainees" to undergo training for two more years. If after these two years they do not pass the licensure exam in Nihonggo, they will be deported.

As trainees these nurses will not be paid the salary of professional nurses. They also forego employment rights under the Japanese Immigration Control Act.

5. JPEPA limits the Philippine legislature's space to maneuver. Again in a monumental oversight of disastrous proportions, the Philippine negotiating team did not make reservations for future legislation that would ostensibly protect Filipino interests, while allowing the Japanese the same privilege. This means that should the Philippines craft another treaty which extends certain benefits to a third country in the name of 'national interest' then the Philippines can be sued by Japan. In negotiating for JPEPA, the Arroyo executive branch compromised Congress' law-making power.

6. JPEPA sets a bad precedent for the Philippines' other bilateral agreements - all taking place outside the WTO regulatory framwork. The Philippines is no different from a host of countries entering these FTAs and EPAs as the WTO's Doha Round has failed to progress in the last six years. Philippine bilateral and multilateral agreements outside the WTO ambit are taking place in the context of an increasingly "deregulated" international trade regime - a race to the bottom, the survival of the fittest.

JPEPA will enter into force on December 11, ten days from now. The question we need to ask is this - was JPEPA an end product of the Arroyo Administration's sheer incompetence? A lapse in governance? A result of her neoliberal ideologue-advisors? Or was it a product of more malicious intentions - i.e. officials of the Arroyo government engaging in massive rent-seeking activities to enrich themselves?

Cross-posted at FilipinoVoices.

The Population (Debate's) Explosions

As a response to last week's Talk of the Town in the Inquirer discussing the contents of the Reproductive Health bill, the CBCP will issue their arguments this coming Sunday.

From a socio-economic point of view, here is a fun read this weekend.

The population issue – now passé elsewhere in the developing world, even in the poorer countries – remains a durable puzzle in the Philippines. On the one hand, a majority of Filipinos regard rapid population growth as an impediment to socioeconomic development, requiring policy intervention; on the other hand, virtually nothing is being done about it as the government appears immobilized owing to opposition from the conservative Catholic Church hierarchy. Central to the population issue are the negative externalities that sustained high fertility brings to bear on economic growth, the environment, inequality and poverty. These externalities plus the fact that women, particularly in poor households, are having more children than their desired number, as repeatedly shown by surveys, constitute strong grounds for an unambiguous population policy. Population is evidently a public interest issue that the national government must address squarely objection from some religious groups notwithstanding.

As I am trawling the net for data, I hear Dr. Ben Diokno's interview conducted by our organisation. As of 2 weeks ago at least, and according to the UP economist, the Philippines is the most unstable country in Asia (politically and economically), even more so than perceivable basket-cases Myanmar and Laos. Hooray.

Why Population Management is Political

Salient features of Professor Ernesto Pernia's article on Population, Economy and Poverty:

Is it any wonder why we have fallen behind our Asian neighbors, and are likely to be left behind by the rest of developing Asia? We’re still debating such rudimentary matters as the population issue and fiscal deficits, while our neighbors have moved on to focus on more contemporary economic concerns, such as global competitiveness, investment climate and productivity growth.

A common view was that rapid population growth – of two percent or higher per year then prevailing in many developing countries – was more likely to hinder than foster economic development. This negative effect operates via reduced child care and human capital investment, lower household savings for private and public investments, and constraints on allocative efficiency, entrepreneurship and innovation. Rapid population growth results in available capital being thinly spread among many workers, as well as in fiscal and environmental externalities.

Other countries in East and Southeast Asia have experienced sharp reductions in poverty as a consequence of rapid and sustained economic growth, attributable to sound economic strategy that included strong population policy. These countries have benefited from a "demographic bonus" resulting from marked increases in the share of workers (population ages 15-64) relative to young dependents (ages 0-14), while the Philippines continues to bear a "demographic onus" – a large share of young dependents relative to workers (and savers). Thus, in the 1990s, research and the debate on the population issue in the developing world began to taper off, except in the Philippines.

The Philippines in Crisis: Failures of Economic Governance

Freedom from Debt Coalition (FDC)

together with

Global Call to Action Against Poverty-Philippines (GCAP)
UPD School of Economics Student Council
UPD Economics Towards Consciousness (ETC) and
UPD College of Social Science and Philosophy Student Council

Invites you to a Forum on

The Philippines in Crisis: The Failures of Economic Governance

University of the Philippines- Diliman School of Economics

July 23, 2008 9:00AM-1:00PM


Program

9:00AM Arrival and Registration

10:00AM Welcome Remarks

UP Economics Towards Consciousness (ETC)


10:15 AM Presentations

Under the Shadow of Debt: Global Trends and the Philippine Economy

Professor Walden Bello

President, Freedom from Debt Coalition (FDC)

10:30AM Under a Perfect Storm: The Power and Oil Crisis

Wilson Fortaleza

Co-convenor, EmPower Consumers


10:45AM The Starving Nation: The Food Crisis in the Philippines

Arze Aglipo (to confirm)

Executive Director, Integrated Rural Development Foundation (IRDF)


11:00AM The Lingering Political Malady: The Failure of Democratic

Governance

Loretta Ann Rosales

Three-time Party-list Representative

Chairperson Emeritus, Akbayan! Citizens’ Action Party

11:15AM Reactors

Dr. Emmanuel De Dios (to confirm)
Dean, UP School of Economics

School of Economics Student Council

11:30AM Open Forum

Moderator:

Joel Saracho

Coordinator, Global Call to Action Against Poverty (GCAP)

IBON Midyear 2008 Birdtalk

An alternative venue to discuss the most pressing economic issues of today at the UP School of Economics. Click the picture to enlarge and see details.

An 'End' Too Late

This pronouncement has probably come a decade too late. Now people recognise the failure of deifying 'markets.' Well, experiments have been done, with countries in the 'Third World' as guinea pigs, but we can hardly turn back to the clock. No use crying over spilled milk. Joseph Stiglitz writes:

The world has not been kind to neo-liberalism, that grab-bag of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources efficiently, and serve the public interest well. It was this market fundamentalism that underlay Thatcherism, Reaganomics, and the so-called “Washington Consensus” in favor of privatization, liberalization, and independent central banks focusing single-mindedly on inflation.

For a quarter-century, there has been a contest among developing countries, and the losers are clear: countries that pursued neo-liberal policies not only lost the growth sweepstakes; when they did grow, the benefits accrued disproportionately to those at the top.

Though neo-liberals do not want to admit it, their ideology also failed another test. No one can claim that financial markets did a stellar job in allocating resources in the late 1990’s, with 97% of investments in fiber optics taking years to see any light. But at least that mistake had an unintended benefit: as costs of communication were driven down, India and China became more integrated into the global economy.

While I am now far too old to reify global regulating institutions like the IMF and the World Bank and label them as 'evil' and such, maybe it is time to recognise them as open to politicisation and personal interests. Robert Zoellick, current WB President, was appointed by El Dubya. This might explain why the biofuel report was suppressed - Zoellick didn't want to make his benefactor look like an ass. Among other things.

Maybe it is also time for a bit of diversity amongst the twin institutions' staff. They have not benefited from intellectual in-breeding - their staffers coming from pretty much the same universities and such. And wouldn't it be great if they actually put a non-American and a non-European as heads of these institutions? Especially for the World Bank. I mean, come on. This should be common sense. How can you make policy prescriptions for the Third World having never lived there?

I volunteered for a development conference in Brisbane last January. I took away a couple of things from the week-long experience. First, 'development' really has become an industry of sorts. There is an army of professionals out there who make 'developmen' their business. Second, there were two moments that would forever be etched in my mind.

I sat in the opening plenary session where Graeme Wheeler, WB Managing Director, was speaker. I sat there and heard him tell me that the world has experienced 'unprecedented growth' in the last forty years. I do wonder where this 'growth' has occured. In the same breath he then said that income inequality has increased in less developed countries. And with new calculations based on purchasing power parity, surely there was now more than one billion people living on less than a dollar a day. Huh?!?

During one of the coffee breaks I had a bit of talk with a young economist from Portugal. I think my questions became a bit too critical, I mean, questions are by nature critical aren't they? He had a bit of a start as though a thought had just occured to him. After which he looked me accusingly in the eyes and said, "Oh wow. You're one of the NGO types aren't you?" As though that invalidated everything else I had said. I was not an economist and therefore I was not worth wasting his breath on. He said the words as though they left a filthy aftertaste in his mouth. I cringe now at the memory. I hope he doesn't ever climb the ranks.