The Dull Compulsion of the Economic (#9)

A series of blog entries by D&S collective member Larry Peterson.

A couple of weeks ago I went to see my dad for his birthday, and there I came across an article in Newsweek from May (for some reason, Dad keeps issues from months ago strewn around the living room, while more recent issues are nowhere to be seen) that seemed to contain just about every major misrepresentation and simplification concerning the history of trade in the last 60 years. In the article “China’s Wrong Turn on Trade,” economics journalist Robert J. Samuelson (no relation to Nobel laureate economist Paul) claims that China’s trade strategy “threatens to wreck the entire post-World War II trading system. Constructed largely by the United States, that system has flourished because its benefits are widely shared. Since 1950, global trade has expanded by a factor of 25. By contrast, China’s trade is mercantilist: it’s designed to benefit China even if it harms its trading partners.”

Samuelson goes on to say a lot of other things, including a kind of defense of the law of comparative advantage, and a denial that he is a protectionist, but I’d like to focus on the claims I quoted. For it’s not difficult to find dissenters to this view, even among conventional economists. For instance, Alice Amsden of MIT has just published a book (Escape from Empire: The Developing World’s Journey Through Heaven and Hell) in which she divides the US-led global trade system into two periods, one in which developing countries largely benefited, and a subsequent one in which they have clearly suffered. In an interview in the latest issue of Challenge magazine, she claims that, during the first period, which lasted from 1950 to 1982, developing countries—and one would have to count some of the more backward European countries, like Italy, and possibly even Japan in this category, though Amsden doesn’t say this—were more or less allowed by the United States and the international financial institutions it dominated to pursue an import-substitution policy that led to historically unprecedented levels of growth. Amsden claims that import substitution was largely successful because it “gave something to just about everybody:” it gave workers jobs, small capitalists a market for parts and components, and training possibilities for a lot of people. These processes, in turn, allowed skill levels to migrate beyond those more appropriate for labor-intensive industries, which meant more opportunities to enter more export markets. And though there was less (foreign) competition, Amsden points out that “[n]ot having competition does not mean that many companies ceased trying to reduce costs…” But the companies that succeeded in this were precisely the ones that had some manufacturing experience before decolonialization started, because they recognized that the protection they received from the import-substitution programs, and the money they would receive from state subsidies and state-directed lending would give them access to far greater earnings via foreign markets and growing domestic ones, than some others, with no similar experience had: these would tend to be tempted by what Amsden calls “a little piddling corruption.”

This all came to an end in the early ‘seventies, according to Amsden. To her, the inflation of this period had much to do with the fact that the Vietnam War and the rise of OPEC caused demand in the US to exceed supply for “so many goods:” not merely oil and guns. And it was just at this time that many foreign manufacturers had fully recovered from the devastation of World War II, or had developed competitive export industries with the aid of import-substitution and other forms of state-led assistance, so that they provided cheaper imports for American consumers. But cheaper imports couldn’t fully offset the deeper inflationary pressures caused by growing US budget and trade deficits, and this led to what other economists have come to call the “great reversal”: Fed chairman Paul Volcker’s jacking up of interest rates in 1981 and 1982 (which reversed the inflows of capital into developing countries, and in fact resulted in net capital inflows from developing countries to developed ones: a seeming violation of basic capital theory, which stipulates that capital will tend to go where it is relatively scarce in relation to labor—i.e. to the developing countries). These large rate rises increased the cost of capital in many developing countries to a prohibitive (Amsden says they in fact prevented emerging economies’ companies and industries from restructuring) level, while dampening demand in the United States. And this led to an almost generation-long period of slow or even negative growth in many developing countries.

Needless to say, Amsden’s view is far more complicated than I can render it here, but the point remains that the idea that the US-led trade system was largely beneficial to just about everybody is simplistic in the extreme. The tensions created within that system were, in fact, a consequence of its successes, according to Robert Brenner. In a magisterial study published in a special issue of New Left Review in 1998 (“The Economics of Global Turbulence: A Special Report on the World Economy, 1950-98”), and later turned into a book—with a sequel on the era and its aftermath, Brenner sketches the development of a global trade system doomed to stagnation, overproduction and increased competitive pressures and protectionist threats as time went on, which we in fact see today. This was the case because the postwar reconstruction of Germany and Japan would eventually result in the decimation of the manufacturing base in the United States: “the international economic arrangements constituted at Bretton Woods turned out to instantiate an informal bargain: on the one hand, the US, with its dollar key currency, was enabled to run large balance of payments deficits to finance its overseas military bases and its foreign aid, as well as the foreign direct investments of its corporations; on the other hand, those countries which were once its allies and its economic rivals were allowed to control in various ways access to their domestic markets for commodities and capital. On the condition that its allies/rivals would not seek to cash in too many of their dollars for gold, the US government opened up the US market to their exports, while accepting without complaint their protectionism and their restrictions on the outward and inward mobility of capital, even forbearing to push too hard or too fast for the re-establishment of currency convertibility. It thereby helped to create the conditions for the secular decline of the competitiveness of US domestic manufacturing.” (p.43)

This decline in manufacturing, in turn, played no small part in the run up of fiscal and trade deficits, and this led, again, to the Volcker shocks of the early ‘eighties, which reined in inflation at a huge cost: the de-industrialization of much of America, along with the wage stagnation, increased indebtedness and all the other evils that accompanied it, which largely fell on—and continues to fall on—the backs of the poor and middle-class.

What finally undid the system has been aptly summarized by Robert Pollin in a recent piece (“Resurrection of the Rentier,” New Left Review 2:46, July/August, 2007), which, I believe is largely in accord with Brenner’s thesis: “The golden age model was premised on the continued economic leadership of the United States and the commanding role of the dollar in international finance. When Western Europe and Japan began to challenge US firms in global markets—including those in the US itself—this meant that the Bretton Woods system of fixed exchange rates based on the dollar was no longer sustainable. This in turn created growi
ng cracks in the entire edifice in what had been tight financial regulatory regimes throughout the OECD.”

So Brenner, Pollin and Amsden give us a far more complex picture of a global trading system: one designed with a whole host of competing, and at times contradictory motivations: to rebuild societies devastated by war (and sell them US surplus production); to contain communism by rebuilding these countries; to give access to US multinationals to foreign markets; to allow US financial institutions growth opportunities financing deals beyond US borders; to secure a US security apparatus dependent on the maintenance of a host of foreign bases; and so on. Far from Samuelson’s cartoon sketch of a more-or-less seamless global trade fabric which benefited all, these authors reveal a conflict-ridden, contradictory mess that was to no small degree a victim of its very successes and even good intentions, and whose breakdown has led to a major intensification of competitive pressures and financial swings, not to mention decades of lost growth after the US pulled the plug on the deal.

One further aspect of this more complex picture I would like to emphasize (and I realize that I have only given the most rudimentary sketch of it here) is provided by Vivek Chibber, in a study of South Korean development (“Building a Developmental State: The Korean Case Reconsidered.” Politics and Society, Volume 27, Number 3, September 1999, 309-46). So far, I have failed to mention the many protectionist measures all countries employed until quite recently (the early ‘nineties or so), including the United States. Chibber documents how Korean manufacturers were able to penetrate the US market by forming alliances with Japanese firms that enjoyed preferential access to US markets (which Korean firms didn’t). In return, of course, Japanese producers were able to take advantage of much lower Korean labor costs. Once again, we see here the workings of a far more fragile—and potentially conflict-ridden—system than the one conjured up by commentators like Samuelson.

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