Category Archives: Globalisation

Ten Years after Bear Stearns, U.S. Financial Stability is again in Danger – Katharina Pistor * Waiting for the Chinese Bear Stearns – Daniela Gabor.

Banks are pushing for deregulation and roll backs of Dodd-Frank’s regular check-ups on their financial health. We should be worried.

Katharina Pistor

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The great financial crisis with its peak in the fall of 2008 was not inevitable; it could and should have been prevented. Had it been, the economy would not have lost trillions of dollars, millions of Americans would have been spared eviction and unemployment, and the U.S.’s vibrant financial sector would have remained intact.

But few saw a crisis of these proportions coming: Almost no one raised red flags when the first mortgage originators filed for bankruptcy, or when a roster of medium-sized banks experienced liquidity shortage. Even when margin calls began putting pressure even on larger financial firms, and credit lines that had been put in place to provide only short-term, stopgap measures were running hot, almost no one sounded alarms.

Every incident was eyed in isolation even as, slowly but surely, stress built in the system as a whole, as it always does in finance, from the weaker, less resilient periphery of mortgage originators to the very core of storied investment banks whose ultimate fall threatened to bring down the entire system.

The 16th of March of this year marked the 10-year anniversary of the marriage between Bear Stearns and JP Morgan Chase, which was arranged and co-financed by the Federal Reserve. It was by no means the beginning of the crisis; rather, it marked the beginning of the end. It was the final stage in which financial firms at the core were still able to keep their heads above water; however, fearing for their own survival, they would extend another lifeline to fellow banks only with government help.

By September, it took a massive government bailout to prevent a financial meltdown.

Of course, the government could have stepped aside and allowed the banking and finance system to selfdestruct. Members of Congress who voted against the Troubled Asset Relief Program (TARP) Act at the time certainly thought it should.

Allowing it to implode would have created a much cleaner slate for rebuilding finance on sound footing just as the collapse of the financial system in the 1930s had. On the downside, no one could say for sure whether the system would recover and what it would cost to get there. Fearing the abyss, the Fed, the Treasury and Congress stepped in and did what it took (to paraphrase then-Fed Chairman Ben Bernanke) to stabilize the financial system which has since returned to making huge profits.

No good deed goes unpunished.

Instead of a new foundation for sound finance, all we got for this massive public intervention was the same old system, merely patched up with rules and regulations to make it more resilient.

Among the most far-reaching of the reform measures was a new set of essentially preventive care measures for the financial sector: annual check-ups for banks beyond a certain size, strategies for designing tests that would make it harder for financial intermediaries to game them, and additional discretionary powers for regulators to impose additional prudential measures on banks in the name of system stability. Given the massive regulatory failure in spotting early signs of trouble and preventing the 2008 crisis, that looked like the least Congress could do to keep Americans safe from financial instability.

Yet, Republicans, along with a breakaway bloc of Democratic senators, have begun to strip away much of the preventive measures in the post-crisis regulatory legislation, known as Dodd-Frank. Following lobbying by the financial industry, the US. Senate just voted to proceed with considering a new bill, which provides that only banks with consolidated assets worth $100 billion or more (up from $50 billion) will be subject to regular stress tests conducted by the Fed; but these checkups will be “periodic” rather than annual, and they will include only two rather than three stress scenarios. Similarly, in the new design, company-run internal stress tests are required now only for firms with more than $50 billion in assets (up from $10 billion). They, too, can dispense with annual checks: periodic ones will do.

This massive act of deregulation will not be accompanied by greater discretion for the Fed to impose supervisory measures on select companies. On the contrary, the Fed’s discretionary powers have been circumscribed in the bill.

Thresholds are always arbitrary; it is simply impossible to find an optimal point that imposes just enough costs on banks and financial institutions to ensure financial stability. But with these new changes, financial stability has been placed on the back burner. Instead we are presented with back-of-the-envelope calculations about the positive effects scaling back regulation will have on credit expansion, and therefore on growth. It’s a dangerous game, least because this calculation does not include the costs of future crises that result from reckless credit expansion.

If financial stability were the goal, as it should be, we might want to do away with asset thresholds altogether and instead empower regulators to diagnose and treat threats to financial instability wherever they find them. No doubt, the financial industry would reject such a move, because it craves regulatory “certainty”, the very reason its lobbyists pushed for the thresholds in the first place. But we should not fool ourselves: Limiting financial preventive care to large banks at the core of the system deprives regulators of the tools they need to diagnose a crisis in the making, and leaves us exactly where we were in the run-up to the last one.

Waiting for the Chinese Bear Stearns

Daniela Gabor
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Unregulated, speculative lending markets nearly brought down the global financial system 10 years ago. Now, Western banks are exporting this failed model to the developing world.

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What a difference a decade makes’, mused Mark Carney, the head of the Financial Stability Board (FSB), in a recent speech. Carney was measuring, and applauding, regulatory progress since shadow banking brought Bear Stearns down in March 2008 and Lehman Brothers six months later, and since 2013, when he warned that shadow banking in developing and emerging countries (DECS) was the threat to global financial stability. A lot has changed since.

Shadow banking is no longer used pejoratively. The IMF recently noted that DEC shadow banking ‘might yield greater efficiencies and risk sharing capacity. In scholarly and policy literature, DEC shadow banking is portrayed as an activity confined by national borders, connected closely to banks that move activities in the shadows, circumventing regulation or financial repression, complementary to traditional banks that underserve (SME) entrepreneurs, be it because of market imperfections or the priorities of the developmental state (China).

Another C is relevant for China: constructed by the Chinese state as a quasi-fiscal lever. After Lehman, China’s fiscal stimulus involved encouraging local governments to tap shadow credit, often from large state-owned banks through local Government Financing Vehicles; Yet systemic risks pale in comparison to those that gave us the Bear Sterns and Lehman moments, since (a) complex securitization and wholesale funding markets are (still) absent and (b) DECS have preserved autonomy to design regulatory regimes proportional to the risks posed by shadow banks important to economic development. At worst, DECs may have to backstop shadow credit creation, just like high-income countries did after Lehman’s collapse.

The ‘viable alternative’ story has one shortcoming. It stops short of theorizing shadow banking as a phenomenon intricately linked to financial globalization. In so doing, it misses out a recent development.

The global agenda of reforming shadow banking has morphed into a project of constructing resilient market-based finance that seeks to organize DEC financial systems around securities markets. The project re-invigorates a pre-crisis plan designed by G8 countries, led by Germany’s central bank, the Bundesbank, together with the World Bank and the IMF, to promote local currency bond markets, a plan that G20 countries endorsed in 2011. As one Bundesbank official put it then: “more developed domestic bond markets enhance national and global financial stability. Therefore, it is not surprising that this is a topic which generates an exceptional high international consensus and interest even beyond the G20.”

Deeper local securities markets, it is argued, would (a) reduce DEC dependency on short-term foreign currency debt by (b) tapping into growing demand from foreign institutional investors and their asset managers while (c) expanding the investor base to domestic institutional investors that could act as a buffer, increasing DEC’s capacity to absorb large capital inflows without capital controls; and (d) reduce global imbalances, since large DECs (for example, China and other Asian countries) would no longer need to recycle savings in US. financial markets. Everyone wins if DECs develop missing (securities) markets.

Despite paying lip service to the potential fragility of capital flows into DEC securities markets, this is a project of policy-engineered financial globalization.

The key to understanding this is in the plumbing. Plumbing, for building and securities markets, holds little to excite the imagination. Until it goes wrong.

The plumbing of securities markets refers to the money markets where securities can be financed. According to the International Monetary Fund (IMF) and the World Bank: “the money market is the starting point to developing… fixed income (i.e. securities) markets.” The institutions refer to a special segment, known as the repo market. Repo is the “plumbing” that circulates securities between asset managers, institutional investors, market-making banks and leveraged investors, “greasing” securities’ liquidity (ease of trading). It allows financial institutions to borrow against securities collateral and to lend securities to those betting on a change in price.

This is why international institutions, from the FSB to the IMF and World Bank, have insisted that DECS seeking to build resilient market-based finance need to (re)model their repo plumbing according to a ‘Western’ blueprint.

The official policy advice coincides with the View of securities markets’ lobbies, as expressed, for instance, by the Asia Securities Industry and Financial Markets Association, in the 2013 India Bond Market Roadmap and the 2017 China’s Capital Markets: Navigating the Road Ahead.

The advice ignores economist Hyman Minsky’s insights on fragile plumbing (and the lesson of the Bear Sterns and Lehman moments). Minsky was deeply interested in the plumbing of financial markets, where he looked for signs of evolutionary changes that would make monetary policy less effective while sowing the seeds of fragile finance.

Fragility, he warned, arises where: ‘the viability of loans mainly made because of collateral, however, depends upon the expected market value of the assets that are pledged. An emphasis by bankers on the collateral value and the expected values of assets is conducive to the emergence of a fragile financial structure’

Western or classic repo plumbing does precisely that. It orients (shadow) bankers towards the daily market value of collateral. For both borrower and lender, the daily market value of the security collateral is critical: the borrower does not want to leave more collateral with the lender than the cash it has borrowed, and vice-versa. This is why repo plumbing enables aggressive leverage during good times, when securities prices go up, the borrower gets cash/securities back, and can borrow more against them to buy more securities, drive their price up etc. Conversely, when securities prices fall, borrowers have to find, on a daily basis, more cash or more collateral.

Shadow bankers live with daily anxieties. One day, they may find that the repo supporting their securities portfolios is no longer there, as Bear Stearns did. Then they have to firesale collateral, driving securities’ prices down, creating more funding problems for other shadow bankers until they fold, as Lehman Brothers did.

It was such destabilizing processes that prompted the FSB to identify repos as systemic shadow markets that need tight regulation in 2011. Since then, regulatory ambitions to make the plumbing more resilient have been watered down significantly, as the global policy community turned to the project of constructing market-based finance.

Paradoxically, when the Bundesbank advises DECS to make (shadow) bankers more sensitive to the daily dynamic of securities markets, it ignores its own history. Two decades ago, finance lobbies pressured the Bundesbank to relax its strong grip on German repo markets. The Bundesbank resisted because it believed only tight control would safeguard financial stability and monetary policy effectiveness. Eventually, the Bundesbank abandoned this Minsky-like stance because it worried other Euro-area securities would be more attractive for global investors.

Since the 1980s, the policy engineering of liquid securities markets has been a project of promoting shadow plumbing, first in Europe and the US, now in DECs. Take China. Since 2009, Chinese securities markets have grown rapidly to become the third largest in the world, behind the US and Japan. Such rapid growth reflects policies to re-organize Chinese shadow banking into market-based finance, driven by a broader renminbi (RMB, China’s currency) internationalization strategy that views deep local securities markets as a critical pillar. The repo plumbing of Chinese securities markets expanded equally fast, to around US$ 8 trillion by June 2017. Chinese plumbing is now roughly similar in volumes to European and US repo markets, when in 2010 it was only a fifth of those markets. Since then, Chinese (shadow) banks increased repo funding from 10% to 30% of total funding.

Yet China’s repo is fundamentally different. Legal and market practice there does not force the Chinese (shadow) banker to care about, or to make profit from, daily changes in securities prices. Without daily collateral valuation practices, the “archaic” regime makes for patient (shadow) bankers and more resilient plumbing. This is the case in most DEC countries.

The pressure is on China to open repo markets to foreign investors and to abandon “archaic” rules if it wants RMB internationalization. While China may be able to resist such pressures, it is difficult to see how other DECs will. The global push for market-based finance prepares the terrain for organizing international development interventions via securities markets, as suggested by the growing popularity of green bonds, bond markets for infrastructure, impact investment and digital financial inclusion approaches to poverty reduction. After all, the new mantra is “development’s future is finance, not foreign aid.”

In sum, the shadow-banking-into-resilient-market based-finance agenda seeks to define the terms on which DEC countries join the global supply of securities. It silently threatens the monetary power of DEC countries to manage capital flows and the effects of global financial cycles, a hard-fought victory to weaken the political clout of what Jagdish Bhagwati termed the “Wall Street-Treasury complex” that successfully pressured DECs to open their capital accounts.

This policy-engineered financial globalization seeks a clean break from “the engineered industrialization” that involved capital controls, bank credit guided by the priorities of industrial strategies and competitive exchange rate management.

Instead, it seeks to accelerate the global diffusion of the architecture of US. securities markets and their plumbing, despite well-documented fragilities and contested social efficiency.

Questions of sustainability, credit creation and growth should not be left to securities markets. Carefully designed developmental states, historical experience suggests, work better.

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A Superpower Trade War Looms – Liam Dann. 

“If America, China relations become very difficult, our position becomes tougher because then we will be coerced to choose.”

It’s a nightmare scenario for a small trading nation with historic cultural and political links to the US, but an increasing economic reliance on China. A full blown trade war between China and the US could have devastating political consequences for us all.

In this case, it’s not New Zealand’s Prime Minister doing the worrying, it’s Singaporean leader Lee Hsien Loong.

His simple, blunt assessment of the risk posed by Donald Trump’s anti-China trade rhetoric caused a minor uproar in the diplomatically cautious Asian nation.

Here in New Zealand, where we face the same risks, we’re yet to officially confront the issue. And as issues go, it’s a big one: in the year to June 2016, New Zealand’s total trade (imports and exports) with China was $22.86 billion, compared to $16.25b with the US.

Reserve Bank governor Graeme Wheeler has spoken most openly about his fears for the economic risk to New Zealand if the Trump Administration does some of the things it has threatened to do.

In a speech last month, Wheeler suggested that Trump’s Administration represents the greatest source of uncertainty for our economy – both in terms of his impact on the domestic economy and his potential to increase global trade protectionism. “Rationally speaking, there shouldn’t be a reason we should go into a trade war. But we have to be prepared,” says Auckland University Business School trade economist Dr Asha Sandra. China and the US are like Siamese twins, she says. In other words, their economies are now so intertwined that doing damage to one must hurt the other.

“I think they both know that if they start this, they will both go down. So I don’t think it should be a big risk. But the thing with Donald Trump, is you just don’t know. He has been running the most incoherent Administration we have seen,” Sandaram says. “What he says today is not correlated with what he says tomorrow … and what he’ll actually do. So we have to consider the possibility of an escalating trade war.”

For anyone who relies on global trade, Trump has said some frightening things. On the campaign trail, he talked about hitting Chinese imports with 45 per cent tariffs and accused China of currency manipulation. Since becoming President, he has pulled the US out of the Trans-Pacific Partnership free trade agreement. In a leaked recording, he has talked about imposing 10 per cent tariffs on all imports and is said to be considering border taxes.

His key trade adviser has been China hawk Peter Navarro, author of Death by China: Confronting the Dragon. And he has nominated Robert Lighthizer – who has accused China of unfair trade practices – as his US Trade Representative. Bloomberg has surfaced an article Lighthizer wrote in 2011 praising Ronald Reagan’s aggressive trade stance when Japan’s economic rise threatened the US.

There are concerns that Trump may look to follow those Reagan-era tactics, invoking section 301 of the US Trade Act, which allows a President to bestow “unfavourable trading status” on certain nations. It’s a measure the US hasn’t used since it adopted World Trade Organisation rules in 1995. And, as the many critics have warned, the world has changed. China is not like Japan, politically and militarily dependent on the US.

Last month, Wheeler told the Herald that his trade concerns deepened after visiting Washington DC at the start of the year. “I was in Washington recently talking to a number of senior people – very well connected to the Trump Administration. They were saying that the concerns around China are deeply felt. In other words, the Trump Administration has very strong views about currency manipulation and trade practices out of China. I found that deeply worrying.” Wheeler warns that the Trump risk comes on top of a protectionist trend which is already dampening global trade and threatening growth.

Long-time New Zealand trade advocate Stephen Jacobi agrees. “Undoubtedly it is a concern,” he says of Trump’s protectionist rhetoric. “It was already a concern. Protection was already on the rise and we had seen a slowing in trade growth as well.” The advent of the Trump Administration has thrown the spotlight on this he says. Jacobi, who was head of the NZ US Council as executive director from 2005 to 2014, is now executive director of the NZ China Council, so has a good perspective on New Zealand’s relationship with both economies.

“It is early days for the [Trump] Administration,” he says. “In fact the Administration isn’t even in place yet. We just have to withhold our judgment for a bit, however much it might pain us to do so, to see what actually happens.” From discussions he has had in Wellington, Jacobi believes New Zealand officials are very much taking that wait and see approach. That said, the Government has been working on a new trade policy strategy and is expected to release it this month. It will have to acknowledge the growing risks and look at alternatives to the TPP, Jacobi says. “But I doubt whether they will have given up on the US just yet. “So concern, yes. Panic no,”

Professor Natasha Hamilton-Hart, with the Department of Management and International Business at Auckland University, says one of the direct risks to New Zealand is the prospect that Trump scores an own goal with his economic policies. “I know the markets seem to be pricing in good times on the horizon but I’m pretty sceptical that that is going to last. She doesn’t see a sustainable growth trajectory coming out of either the tax or infrastructure programme.

Things like border taxes and tariffs would be distortionary and depress consumer spending, she says. “We will see an increase in military spending and with the tax cut will start to see an increase in the deficit, which is going to have implications for US interest rates. “There are potentially quite contractionary processes in the medium term. They just don’t seem to have a coherent, workable plan.”

Then there are the diplomatic risks around a President who tweets his midnight thoughts to the world.. Trump’s impact on Asia-Pacific trading relationships is a serious concern. “This might be overly optimistic,” Hamilton-Hart says. “I’m doubtful that it will come to a 45 per cent tariff on Chinese exports because that would be so disrupting and damaging to US firms and US consumers. It’s going to double the price of everything in Walmart.”

“What I think is more likely is that we will see a stronger line of creeping protectionism … so cancelling the TPP, looking at alternatives to dispute settlements outside the WTO, that kind of thing. I imagine we’ll see a lot more of that. And I imagine that is what China is gearing up for. So yeah, a less rule based trading system.”

The irony of Trump’s trade deficit obsession is that running big deficits is what actually gives you power on the global economic stage, Hamilton-Hart says. In other words, a big net importer is the customer and the customer is always right. “So if you stop running those trade deficits, then you no longer have the ability to throw your weight around. If Donald Trump were to significantly withdraw the US from world trade by putting up barriers and shrinking the US economy … that can only go with a reduction in US influence.”

China, for its part, doesn’t appear keen on a trade war and isn’t rushing to fill the trade leadership void left by the US . For example, it appears to be carefully maintaining the strength of the Renminbi to avoid inflaming US currency hawks. “They certainly do not want a trade war,” Jacobi says. “They’ve got enormous economic interests with the United States. And I think you can rely on the Chinese to manage all of that in a very sensible way.”

What worries Jacobi more is the risk of America over-playing its hand on security and sovereignty issues – like Taiwan. “That’s much more worrying because you can’t always guarantee how a nationalistic China might react,” he says. “When you touch on issues of national sovereignty with the Chinese, you don’t get the same sort of reaction that you do on other things.”

Jacobi does have faith that the US system, with its constitutional checks and balances on executive power, will work – in time. “But he [Trump] has a lot of power to do things in the short term. While congress catches up.” Likewise, there will be powerful lobbying forces in the US business community who will push back at things he might want to do. “But they also take time,” Jacobi says. “I’m confident that over time the right decisions should be made. But what damage will be done in the meantime is a bit of an unknown. And the world has lost a whole lot of leadership around open markets and free trade.”

So where does that leave the New Zealand and its Asia-Pacific trading partners?

The remaining TPP signatories head to Chile later this month to discuss what, if anything, is salvageable without America. The Americans have said they will send a representative to that meeting, although it’s not clear who that will be or what level of interest they will take, say Jacobi. “And China will also be around. Because there is a Pacific Alliance meeting [a Latin American trading bloc] and the Chinese have been invited to that.”

There is a need for quiet diplomacy behind the scenes and New Zealand could play a key role in that, says Jacobi. But we need to be careful not to upset the other members of the TPP. Particularly the Japanese who, says Jacobi, “are in a very invidious position”. “They had this ballistic missile sent from North Korea the other day. They have got real security concerns, for which they have to rely on the US. They are not going to be drawn to take issue with the United States unnecessarily.”

China is already a member of an alternative multilateral trade group – the Regional Comprehensive Economic Partnership (RCEP), which also includes New Zealand. If completed, that free trade agreement (FTA) would include the 10 member states of ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam) and the six states with which ASEAN has existing free trade agreements (Australia, China, India, Japan, South Korea and New Zealand).

There have been suggestions that China may look to push this deal as a TPP alternative. But China hasn’t yet shown any signs of taking the lead, says Jacobi. On the one hand, we’ve heard rhetoric from Chinese President Xi Jinping about China’s global leadership, but the reality is that they haven’t taken a major role in multilateral negotiations yet, Jacobi says. “Maybe it’s time. They do have an enormous ability now to fill a vacuum.”

It is a different game now, says Hamilton-Hart, who believes the TPP is effectively dead. “So do we make a much better effort to get on board with RCEP?” she says. “Or are we going to hang in there and hope that we could do a bilateral with the US … which I think would be a bad thing to do as we’d be massively disadvantaged in the negotiations.” 

Jacobi agrees that the bilateral path is problematic. “We can’t afford not to push on any open door,” he says. “But the reality is that is bloody hard going. Look at the experience we had with Korea, very complicated.”

Trump has said he’ll do bilateral deals with TPP partners. But we would want dairy concessions and the US would want a lot of movement on medicines, says Jacobi. And neither would play well politically for either nation. “We’ve got to talk, but will we be high up on the list? And will it be better than TPP? Most unlikely”

“I don’t want to be too pessimistic,” says Auckland University’s Sandaram. “There may be some opportunities as a small country where you could fly under the radar. It’s harder for a big country to be non-aligned.” This could be a unique opportunity, she says. “We could try and stay neutral and expand into both markets.” Sandaram, who has been based in New Zealand for only a year, feels New Zealand is sometimes overly cautious about Chinese sensitivities. “It’s not a traditional link like the UK or Australia, so maybe it is because it is new that we are so cautious.”

Jacobi believes the Chinese have a good understanding of our deep political and economic ties with the Western nations, and particularly the US. “In fact, one of the positive aspects they see in our relationship is that we are an interesting interlocutor because of our attachment to the West,” he says. “But they also know our trade and economic ties are towards China. So whether that will amount to cutting slack … I’m not sure.”

Both Sandaram and Jacobi believe we have more options than we did a generation ago. “We need to diversify,” says Sandaram. “China is decelerating. But we have Asian powers that are fast growing economies. India, Malaysia, Indonesia – with the emerging middle class there is going to be demand for goods that New Zealand exports. “That’s a great opportunity I think we’re uniquely placed.”

New Zealand, both at a government and a business level, has to be proactive about trade, now more so than ever, says Jacobi. “This is not something that New Zealand can just sit back and observe. We don’t have that luxury. This is about our economic livelihood and we have to have a say in it.”

NZ Herald 

Grave New World. The end of Globalisation, the return of History – Stephen D. King. 

PROLOGUE 


A Victorian Perspective on Globalization

 … we have now reached the third stage in our history, and the true conception of our Empire. What is that conception? 
As regards the self-governing colonies we no longer talk of them as dependencies. The sense of possession has given place to the sense of kinship. We think and speak of them as part of ourselves, as part of the British Empire, united to us, although they may be dispersed throughout the world, by ties of kindred, of religion, of history, and of language, and joined to us by the seas that formerly seemed to divide us. 

But the British Empire is not confined to the self-governing colonies and the United Kingdom. It includes a much greater area, a much more numerous population in tropical climes, where no considerable European settlement is possible, and where the native population must always outnumber the white inhabitants …

Here also the sense of possession has given way to a different sentiment – the sense of obligation. We feel now that our rule over these territories can only be justified if we can show that it adds to the happiness and prosperity of the people …

In carrying out this work of civilization we are fulfilling what I believe to be our national mission, and we are finding scope for the exercise of those faculties and qualities which have made us a great governing race …

No doubt, in the first instance, when those conquests have been made, there has been bloodshed, there has been loss of life among the native populations, loss of still more precious lives among those who have been sent out to bring these countries into some kind of disciplined order [but] …

You cannot have omelettes without breaking eggs; you cannot destroy the practices of barbarism, of slavery, of superstition, which for centuries have desolated the interior of Africa, without the use of force …

Great is the task, great is the responsibility, but great is the honour: and I am convinced that the conscience and the spirit of the country will rise to the height of its obligations, and that we shall have the strength to fulfil the mission which our history and our national character have imposed upon us. … the tendency of the time is to throw all power into the hands of the greater empires …

But, if Greater Britain remains united, no empire in the world can ever surpass it in area, in population, in wealth, or in the diversity of its resources …

Extracts from a speech by Joseph Chamberlain, Secretary of State for the Colonies, at the annual dinner of the Royal Colonial Institute, 
31 March 1897 

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INTRODUCTION
 

The Andalucían Shock ONE-WAY TRAFFIC 
Globalization is often regarded as ‘one-way traffic’. In the modern age, we think of extraordinary advances in technology that allow us to connect in so many remarkable – and increasingly inexpensive – ways. 

We can communicate verbally and pictorially through WhatsApp, Twitter and Facebook. We can talk to each other via FaceTime and Skype. We can search for recipes and the structure of the human brain through Google. We can purchase chicken madras and salmon nigiri over the internet and have them brought to our homes via local delivery services. We can stream music for free thanks to Spotify and watch our favourite artists and cat videos on YouTube or Vevo. We can download television programmes and movies to watch at our convenience. We can more easily pry into the affairs of the rest of the world (and, equally, the rest of the world can more easily pry into our affairs). 

Seen through these technological advances, it is easy to believe that globalization is inevitable; that distances are becoming ever shorter; that national borders are slowly dissolving; and that, whether we like it or not, we live in a single global marketplace for goods, services, capital and labour. 


IT’S NOT JUST ABOUT TECHNOLOGY 

Technology alone, however, does not determine globalization, and nor does it rule out competing versions of globalization at any one moment in time. If technology was the only thing that mattered, the Western Roman Empire –among other things, an incredibly sophisticated technological and logistical infrastructure –would never have come to an ignominious end in ad 476; the Chinese, with their superior naval technologies, would have been busily colonizing the Americas in the early sixteenth century, preventing Spain and, by implication, the rest of Western Europe from gaining a foothold; the British Empire would today still be thriving, thanks to the huge advantages it gained from the Industrial Revolution; the Cold War – which ultimately offered two competing versions of globalization associated with an uneasy nuclear stand-off – would never have happened; and today’s ‘failed states’–suffering from disconnections both internally and with the rest of the world –would be a contradiction in terms. 

Globalization is driven not just by technological advance, but also by the development – and demise – of the ideas and institutions that form our politics, frame our economies and fashion our financial systems both locally and globally. When existing ideas are undermined and institutional infrastructures implode, no amount of new technology is likely to save the day. Our ideas and institutions shift with alarming regularity. 

Spanish conquistadors of the early sixteenth century – bounty-hunters hell bent on extracting silver from the New World, regardless of the human cost – would have been surprised to discover that Spain, at one point Europe’s superpower, is now one of the poorer Western European nations. 

The Ottomans of the sixteenth and seventeenth centuries – who had threatened to conquer Vienna and, by implication, much of the rest of Europe – would have been amazed to see how their empire, which had stretched from the Balkans into the Middle East and North Africa, completely imploded after the First World War (even if the seeds of its downfall were sown many years before). 
Victorians would be shocked to find that their beloved British Empire – which provided the essential foundations for nineteenth-century globalization – had more or less disappeared by the late 1940s, by which time the UK itself was on the brink of bankruptcy. 

Those many fans of the Soviet economic system during the 1930s Depression years would doubtless be astonished to discover that the entire edifice began to crumble following the fall of the Berlin Wall in 1989. 

SOUTHERN SPAIN 

Even when patterns of globalization endure for many centuries, they can break down remarkably quickly, leading to dramatic changes in fortune. Consider, for example, the history of Andalucía in southern Spain, a story that veered from one seemingly permanent political structure (Islam) to another (Christianity) within just a handful of years. In AD 711, a Muslim Berber force travelled from North Africa across the Mediterranean to reach southern Spain. Six years later, and thanks to the Berbers’ defeat of the hitherto-ruling Christian Visigoths, Córdoba had become the capital of what was known as al-Andalus. 

The conquering Moors then set about building their symbols of power. In 784, construction began on the Grand Mosque of Córdoba. By 987 – and following three further development stages – the mosque was complete. A truly remarkable building, it was designed above all to be a symbol of lasting Islamic dominance. Yet, following the defeat of the Almoravids by the Almohads, the centre of Islamic power later transferred from Córdoba to Seville, just under a hundred miles away. 
Inevitably, a new mosque was required and, in 1171, it was provided: topped off by its minaret, known today as the Giralda, Seville’s Almohad Mosque was a marvel of the Moorish world. 

For the citizens of southern Spain, it would have been easy to believe that medieval ‘globalization’ was ultimately dependent on the spread of Islam, a way of life which appeared to be intellectually, technologically and culturally much more advanced than anything Christian Europe had to offer. 

Yet within a handful of years, Islamic rule in the Iberian Peninsula had descended into chaos. In 1213, following the death of the ruling caliph, his 10-year-old son took over. This inevitably triggered infighting among the grown-ups, each of whom jockeyed for power. Worse, the young caliph died a decade or so later without leaving a single heir: at a stroke, the ruling conventions of Moorish Spain had been totally undermined. 

For the northern Christian kings, this was too good an opportunity to miss. By 1236, they had taken control of Córdoba. Twelve years later, they had their hands on Seville. Córdoba’s mosque was ‘converted’ into a cathedral, while Seville’s mosque was demolished (apart from the Giralda, which became a bell tower), to be replaced by what to this day remains the world’s largest cathedral. The ultimate irony, perhaps, is that Seville Cathedral  – or, to give it its full Spanish name, Catedral de Santa María de la Sede –houses the remains of Christopher Columbus. In 1492, the year in which Columbus discovered the New World, the Moors were finally expelled from the Iberian Peninsula, following the start of the Inquisition in 1478 (doubtless a surprise to the remaining Moors: after all, nobody expects the Spanish Inquisition…). By then, Islamic power was being consolidated farther east. 


AFTER COLUMBUS 

Columbus had inadvertently discovered a new Western European-led and mostly Christian path towards global political and economic expansion. The next five hundred years witnessed the increasing dominance of so-called Western powers: either those based in Europe or those whose new populations were mostly sourced from Europe. And while these powers were often in conflict with each other, they all ultimately shared the same view of the rest of the world: it was there to be discovered, exploited and colonized for their individual and collective benefit. 
It was the beginning of what might loosely be described as ‘post-Columbus’ globalization. 

Yet while there were attempts to create lasting stability –ranging from the Peace of Westphalia in 1648 through to the Congress of Vienna in 1814–15 – post-Columbus globalization was always vulnerable to imperial rivalries. 

For a while, the British Empire, in all its pomp, appeared to provide an answer: its enthusiasm for free trade – enforced by the long arm of the Royal Navy – opened up a remarkable web of commercial connections worldwide. 

Other nations, however, understandably wanted their share of the spoils, most obviously the Russians in the nineteenth century and the Germans in the first half of the twentieth. Eventually – and, in hindsight, inevitably – post-Columbus globalization collapsed, to be replaced by war, revolution and isolationism. 

Only after the Second World War was it able to re-emerge, albeit under the shadow of the Cold War. This time the US was, in effect, both globalization’s leading architect and its main sponsor, even if Washington now rejected the empire-building it had partly sponsored during the nineteenth century. 

The emergence of the US as the world’s dominant superpower was, in many ways, the apotheosis of post-Columbus globalization, signalling the triumph of Western liberal democratic values and free-market capitalism. 

At the beginning of the twenty-first century, however, post-Columbus globalization is in serious trouble. Economic power is shifting eastwards and, as it does so, new alliances are being created, typically between countries that are not natural cheerleaders for Western political and economic values. There are signs that pre-Columbus versions of globalization – in which power was centred on Eurasia, not the West – are making a tentative reappearance. 

The US is no longer sure whether its priorities lie across the Atlantic, on the other side of the Pacific or, following the election of Donald Trump as president in 2016, at home rather than abroad. Indeed, President Trump confirmed as much in his January 2017 inauguration speech, stating that ‘From this day forward, it’s going to be only America first.’ 

Free markets have been found wanting, particularly following the global financial crisis. Support and respect for the international organizations that provided the foundations and set the ‘rules’ for post-war globalization – most obviously, the International Monetary Fund, the European Union and the United Nations Security Council (whose permanent members anachronistically include the UK and France, but not Germany, Japan, India or Indonesia) –are rapidly fading. 
Political narratives are becoming increasingly protectionist. It is easier, it seems, for politicians of both left and right to blame ‘the other’– the immigrant, the foreigner, the stranger in their midst – for a nation’s problems. Voters, meanwhile, no longer fit into neat political boxes. 
Neglected by the mainstream left and right, many have opted instead to vote for populist and nativist politicians typically opposed to globalization. 

Isolationism is, once again, becoming a credible political alternative. Without it, there would have been no Brexit and no Trump. 

THE END OF POST-COLUMBUS GLOBALIZATION 

In combination, these political and economic forces suggest that globalization, at least of the post-Columbus kind, is simply not inevitable. In this book – a deliberate mixture of economics, history, geography and political philosophy – I make six key claims: 

• First, economic progress that reaches beyond borders is not, in any way, an inescapable truth. Globalization can all too easily go into reverse. 

• Second, technology can both enable globalization and destroy it. 

• Third, economic development that reduces inequality between nation states but appears to increase it within those states inevitably creates a tension between a desire for overall gains in global living standards and a yearning for economic and social stability at home.

• Fourth the desire for domestic stability may be undermined by huge twenty-first-century migration flows. 

• Fifth, the international institutions that have helped govern globalization’s advance are losing their credibility: rightly or wrongly, globalization is increasingly seen to work for the few, not the many. Creating new twenty-first-century institutions to combat this perception will not be easy, however, particularly given the potential clash in values between what might be described as Western democracies and Eastern autocracies. 

• Sixth (and as the Western powers are belatedly beginning to recognize), there is more than one version of globalization. As US relative economic power declines, so other nascent superpowers will be looking to reshape the world around them in ways that serve their own interests and reflect their own histories. 

If the Cold War was ultimately a binary rivalry, the twenty-first century is likely to see multiple rivalries, closer in nature to the imperial disputes of the nineteenth century. Indeed, President Xi’s speech in Davos in January 2017 only served to reinforce the sense that globalization is up for grabs. 

There have been many cheerleaders for globalization, but ultimately my conclusion is that the world is most certainly not flat, and nor can it be. 
Economics and politics are both heavily contoured and constantly changing, particularly so when borders are involved. And, as I argue throughout this book, we are all, in some sense, slaves to our own versions of history. For those of us living in the West, we have found it all too easy to claim that our own good fortune will continue and that, in time, it will inevitably spread far and wide. It’s time to wake up to reality. 


POST-WAR SUCCESS, TWENTY-FIRST-CENTURY FAILURE 

Part One explains both why globalization was, for so many post-war years, a means towards rising wealth, and why, later, it seemingly became more of a curse than a blessing. As the twentieth century drew to a close, it seemed as though Western free-market capitalism and liberal democracy had triumphed. 

At the end of the Cold War, it was easy to believe that we could all enjoy, to augment a notorious phrase, ‘peace and prosperity in our time’. It was not to be. Even before the global financial crisis, there were already signs of trouble: the crisis itself just made things worse. 

Why, after so many years of rising incomes for the many, was globalization suddenly in trouble? Put another way, why did we ever think we had discovered the secrets behind ever-rising prosperity? What went so right in the years after the Second World War – a period during which economies became both richer and increasingly integrated with each other – and why did it all seem to be going so wrong at just the point when lasting success was, for many observers, seemingly guaranteed? 


NATION STATES VERSUS GLOBALIZATION
 

Part Two examines the inevitable tension between globalization and the existence of nation states. For globalization to work, nation states need to accept reductions in sovereignty for the greater good. But who decides what is the greater good? In the nineteenth century, the imperial powers shared out the responsibility. Some performed the role better than others. Yet none was enthusiastic about the rights of their colonial subjects. 

Globalization flourished economically and financially, yet politically it was both unfair and unstable. As, one by one, empires collapsed, the twentieth century saw the nation state emerge as the ‘default’ political arrangement, thanks in part to the philosophical and practical support provided by successive US presidents (and, less helpfully, the arbitrary carve-up by the retreating imperial powers of the Middle East and Africa). 

Nation states, however, sit uneasily with a globalized world. From Hobbes to Montesquieu and through to James Buchanan with his ‘theory of clubs’, it is not at all obvious that what might loosely be defined as the ‘national interest’ will always be consistent with the ‘global interest’. 

Montesquieu, in particular, argued that a democratic nation would only survive if the vast majority of its citizens thought their interests sat comfortably with those of the state as a whole. If instead some of those citizens began to think their interests could more easily be pursued by taking advantage of others – via the exertion of political power – the ‘spirit of inequality’ would begin to undermine the social contract. 

Yet modern-day globalization appears to be conjuring up exactly this spirit of inequality. Rising income and wealth inequality has not helped – although it is worth noting that, even in those countries where inequality of living standards has not really risen much (notably in continental Europe), support for globalization is waning. But of greater importance is, perhaps, the sense that ‘we’re not all in this together’. 

In the modern age, the spirit of inequality takes many forms: the growing income gap among those countries that pooled their monetary sovereignty in the Eurozone; the absence of significant income gains for many millions of Western workers, even as a lucky few have become unimaginably rich; the extraordinary progress of the Chinese economy, thanks in part to China’s ability to attract investments by Western companies that might, in an earlier age, have created jobs and raised wages in the US or Europe; the increased competition in some –but not all –labour markets, thanks to the impact of both technology and immigration; and the emergence of elites, which too often appear to be deciding our collective futures to suit their own interests, whether we like it or not. 

It would be wrong, however, to think that globalization is struggling simply because it sits uncomfortably with the interests of nation states. As other parts of the world have flourished economically, so competing frameworks for globalization have emerged, reflected in China’s desire to, in effect, re-create a Eurasian Silk Road and Russia’s increasing exertion of power in the Middle East. 

New institutions are challenging the international status quo, including the fledgling Asian Infrastructure Investment Bank –backed by China – and the Shanghai Cooperation Organization – ultimately a Sino-Russian entity which potentially offers not just closer economic ties, but also closer security ties. 

In the West, we lazily talk about the ‘international community’, supposedly a like-minded collection of countries with similar moral and ethical outlooks. It turns out, however, that there is really no such thing. There are, instead, rival communities that, in difficult economic times, may increasingly struggle to agree on a common course of action, particularly given their very different historical perspectives and, in many cases, their inability to reach agreement on unresolved territorial disputes. 


THE TWENTY-FIRST-CENTURY CHALLENGES 

Part Three uses the prism of the past to gaze into the future, focusing on three crucial challenges to globalization: migration, technology and money. 

Globalization in its purest form would ultimately be a world without borders, without independent nation states, with the dominant institutions of government operating at the global level. In this – imaginary – world there would be free movement of goods, services, capital and people, precisely the ‘Four Freedoms’ enshrined within the European Union. 
There would also be a single currency and a single central bank: with perfectly functioning markets, there would be no need for currency adjustment. 

Already, however, we know that the European Union is struggling politically with two of its ‘Four Freedoms’, namely the free movement of capital and of people. The Eurozone crisis, in abeyance at the time of writing, but still unresolved, partly stems from Europe’s inability to cope with the consequences of the free flow of capital across its internal borders. The Syrian conflict, meanwhile, has revealed severe challenges regarding the free movement of people, particularly given the weak points in the Schengen area’s common external border. 

Yet, relative to historical patterns of migration, the number of Syrian migrants entering the European Union has been tiny. If migration had a high point, it was back in the nineteenth century, when rising incomes in Europe, together with the falling cost of a transatlantic berth, paved the way for a mass exodus of people to the New World. Syria may eventually represent only the foothills of a twenty-first-century migration crisis. 

In sub-Saharan Africa, where the infant mortality rate is falling more rapidly than the fertility rate, a ‘baby boom’ on a totally unprecedented scale is on the way. Alongside rising real incomes, we may be on the cusp of witnessing an extraordinary migration of African people northwards, across the Mediterranean to Europe –in search of a better life –whether Europe is ready or not. 

Technology is often regarded as the key driver of modern-day globalization, largely through its ability to demolish barriers associated with distance, time and cost. Yet technology has a dark side. The use of social media is undermining existing political arrangements. Despite its name, the Islamic State of Iraq and Syria (ISIS) is a classic example of a non-state actor that has been able to gain support via social media. The cybersphere has created opportunities for nations to attack and undermine each other in virtual reality. 
Mainstream political parties – on either side of the Atlantic – have effectively been hijacked by mavericks (and their supporters). And, in many cases, the mavericks have succeeded by forcibly expressing their opposition to globalization on social media, while being economical with the truth. 

Money, meanwhile, has become a means of conducting economic warfare, in a twenty-first-century version of coin clipping aimed at the foreign investor. For all the talk of central bankers kick-starting economic growth, monetary stimulus has increasingly ended up creating only winners and losers both within and across borders –a process that has served to create an even bigger gulf between policymakers and the citizens they are supposed to serve. 


TECHNOCRATIC SOLUTIONS, OBLIGATIONS AND MORALITY 

Part Four argues that many of the ‘solutions’ to the problems associated with globalization are simply too technocratic. 
The decline of post-Columbus globalization is, in part, a reflection of its lack of democratic accountability. It is also, importantly, a result of what might best be described as a lack of global ‘leadership’, a reflection not just of an increasingly insular approach from the US, but also of the emergence of credible rivals in other parts of the world who –unlike Western Europe and Japan after the Second World War – see no reason to bow to Washington, particularly given America’s ‘pick ’n’mix’ approach to global values: not everyone, after all, enthuses about Iran–Contra, the Second Gulf War or the treatment of prisoners in Guantanamo Bay. 

Globalization’s demise, however, is not only about the return of global power games. Both before and (more obviously) after the global financial crisis, it has simply failed to deliver prosperity for all. 
This reflects profound weaknesses that go far beyond market forces, even though market forces themselves have been – occasionally – incredibly destructive. 

Obligations that we take for granted within nation states tend too often to be ignored across borders. How should creditors in one country relate to debtors in another? Why should taxpayers in a single country be on the hook for a bank’s global misdemeanours? What social rights should immigrants enjoy if they haven’t paid their taxes? In the absence of a global tax system, how realistic is it to demand that globalization’s winners compensate its losers, particularly if they come not just from different countries, but from different continents? 

My version of the future is not quite as terrifying as that contained in Aldous Huxley’s Brave New World: there are no human ‘hatcheries’, no chemically engineered economic castes and no official promotion of hallucinogenic drugs to encourage a shallow and hedonistic lifestyle. 

My story is, however, deeply unsettling. Many of the values and beliefs that the Western world embraced following the end of the Second World War are rapidly crumbling. In particular, we placed our faith in markets and technology, lazily assuming that, with the Cold War at an end, the rest of the world would embrace supposedly universal truths associated with liberal democracy and free markets. Yet many countries have done no such thing. 

Worse, Western nations themselves are deeply divided, unsure as to whether they should carry on supporting international institutions and reaching out to the rest of the world, or should instead hunker down, opting for an insular approach that, even if initially seductive, has proved eventually to be hugely destructive. 

The book begins, however, with Lincoln Steffens, a man who would have disappeared from the history books altogether had he not uttered a phrase that encapsulates our utopian tendency to believe that, within the right framework, human progress is inevitable. 

*

Part One 

PARADISE LOST 


1 FALSE PROPHETS, HARSH TRUTHS NEW MODEL ECONOMIES 

Lincoln Steffens was one of the pioneering muckrakers. Hailing from California, he first made his mark as an ‘investigative journalist’ in New York in the early 1900s. He came to know everyone – from Theodore Roosevelt and Woodrow Wilson through to William Randolph Hearst and James Joyce. His chosen mission was to expose corruption wherever he found it. 
In early twentieth-century America, there was no shortage of targets, with Wall Street, big business and municipal governments at the top of the list. 

Steffens eventually became disillusioned with his muckraking efforts. Scandals typically led only to short-term reform. Venality, it seemed, was pretty much a fact of life, at least in the United States. Like other intellectuals of his generation, Steffens became increasingly fascinated by more radical approaches to political and social reform. If corruption was endemic in Western society, perhaps it was time for more ‘scientific’ solutions. 

During a trip in March 1919 to what was to become the Soviet Union, Steffens thought he had found the answer. Unlike other fans of the Marxist-Leninist experiment, who chose to ignore the brutality associated with the embryonic Soviet regime, Steffens accepted that life in the ‘workers’ paradise’ was not exactly easy. Short-run ‘evil’, however, was a price worth paying for long-run ‘hope’. 

So impressed was Steffens by the design of the Soviet system that, on his return to the United States, he famously proclaimed ‘I have seen the future, and it works.’ 
It is easy to see why he was so enthralled. In the immediate aftermath of the First World War, much of the West found itself in the midst of economic and political chaos. The United States economy succumbed to an eighteen-month depression beginning in 1920, its citizens enduring both falling output and severe deflation. 

Weimar Germany suffered from hyperinflation between 1921 and 1924, a consequence of the absurd reparation conditions imposed by the allied victors under the Treaty of Versailles. Bundles of Marks were carried around in wheelbarrows, and cigarettes became a more useful means of exchange. 

Government debt in the UK had jumped from a mere 25 per cent of national income before the outbreak of hostilities in 1914 to a remarkable 181 per cent in 1923, triggering years of financial upheaval and austerity. The nineteenth century’s pre-eminent world power found itself, both politically and economically, in severe relative decline. 

For a while, Steffens’claim seemed to be remarkably prescient. We now know that, between 1920 and 1930, Soviet living standards rose by more than 150 per cent, compared with gains of 42 per cent for Germany, 20 per cent for the UK and 12 per cent for the US. 

Not surprisingly, many regarded Soviet industrialization under Lenin and Stalin as a near-miraculous process. Naive luminaries were totally seduced. In a letter to the Manchester Guardian published on 2 March 1933, George Bernard Shaw and 20 co-signatories angrily wrote: 

Particularly offensive and ridiculous is the revival of the old attempts to represent the condition of Russian workers as one of slavery and starvation …We …are recent visitors to the USSR …Everywhere we saw a hopeful and enthusiastic working-class, self-respecting, free up to the limits imposed upon them by nature and a terrible inheritance from the tyranny and incompetence of their former rulers, developing public works, increasing health services, extending education, achieving the economic independence of women and the security of the child and …setting an example of industry and conduct which would greatly enrich us if our system supplied our workers with any incentive to follow it … We urge all men and women of goodwill to take every opportunity …to support the movements which demand peace, trade and closer friendship with an understanding of the greater Workers’ Republic of Russia.  

Shaw and his fellow travellers presumably had not stumbled across the Gulag. Nor had they recognized that, in Stalin’s ‘Through the Looking Glass’ ethical world, the best way to survive was to denounce others before they could denounce you. 

Steffens and Shaw were far from stupid. Nevertheless, they were too easily seduced by the Soviet system, blinded by the iniquities they saw at home: corruption, unemployment, inequality, inflation and austerity. For them, capitalism had failed. The Soviet system provided, through their blinkered eyes, a vision of the future. It was not to be. Soviet living standards rose relative to those in the US in the interwar period –from 20 per cent in 1920 to 35 per cent in 1938 –only to return to 21 per cent in the immediate aftermath of the Second World War. They rose again during the Cold War, reaching a peak of 38 per cent of American incomes in 1975, before falling to 31 per cent as the Berlin Wall came down in 1989. 

The Soviet version of economic progress – the one that Steffens and Shaw believed in so passionately – just didn’t deliver the goods. 


HOW THE WEST DIDN’T WIN 

Still, it would be wrong to suggest that the proponents of communism in its various forms were the only ones unable to see clearly into the future. In 1909, Norman Angell published the first edition of The Great Illusion, in which he argued that, thanks to nineteenth-century globalization and the resulting economic interdependency, war between the major nations of the world would be futile. Many regarded his book as the best argument in favour of continued peace, and therefore concluded that war was simply impossible (Angell himself wasn’t so optimistic). 

Yet thanks to the shooting skills of Gavrilo Princip in Sarajevo five years later, it turned out that no amount of political or economic logic could prevent a catastrophic conflagration. 

The First World War turned the world upside down economically, financially and politically. The Ottoman and Austro-Hungarian empires disappeared without trace, while the British Empire began what proved to be its terminal decline. 

Eighty years on, as the Soviet states began to crumble, Francis Fukuyama, the eminent political scientist, argued that: The most remarkable development of the last quarter of the twentieth century has been the revelation of enormous weaknesses at the core of the world’s seemingly strong dictatorships …liberal democracy remains the only coherent political aspiration …liberal principles in economics –the ‘free market’–have spread, and have succeeded in producing unprecedented levels of material prosperity, both in industrially developed countries and in countries that had been part of the impoverished Third World. 

More than two decades after the publication of Fukuyama’s The End of History – both as a 1989 short paper and a 1992 weighty tome – its claims no longer appear to be quite so secure. The link between liberal democracy and economic advance, frequently espoused by Western politicians, is not so obvious given the rapid economic growth of China, a nation that shows no sign of abandoning its one-party principles. 

Fukuyama himself now writes about both political order and political decay, presciently drawing attention to perceived fault lines in American society: The American political system has decayed over time because its traditional system of checks and balances has deepened and become increasingly rigid. With sharp political polarization, this decentralized system is less and less able to represent majority interests but gives excessive representation to the views of interest groups and activist organizations that collectively do not add up to a sovereign American people. 

Certainly, the American people are today no longer quite so enthusiastic about activities on Capitol Hill. The proportion of Americans polled who have either ‘a great deal’ or ‘quite a lot’ of confidence in Congress dropped from 42 per cent in 1973 – when Gallup first asked the question – to just 8 per cent in 2015, an approval rating lower than for any other institution, including banks, organized labour, newspapers, the criminal justice system, television news and big business. 

Liberal democracy may be a coherent aspiration, but in the US it seems there is little appetite for the current batch of democratically elected politicians or the gridlocked system they claim to represent: one reason why Donald Trump –political outsider, property developer and reality TV star – was elected US president in November 2016. 

In what was a mostly conciliatory acceptance speech, Mr Trump stated that ‘the forgotten men and women of our country will be forgotten no longer’. Why had they been forgotten? Why had they been left behind? For Trump, the explanation was simple: too many people had suffered as a result of free trade deals, Chinese competition, Mexican immigration and Islamic terrorism. It was time to reject globalization in all its many forms. 
Trump’s answer was to build walls, both physical and metaphorical, to protect the forgotten people. 


MR PUTIN’S POPULARITY 

Outside the United States, it is far from obvious that liberal democracy really is ‘the only coherent political aspiration’ or that the collapse of Soviet communism has somehow proved that Western political and economic values are universal. 

Vladimir Putin first became Russian president in 2000. After eight years, he ‘stepped down’ to become Russia’s prime minister under Dmitry Medvedev. Four years later, Putin was back in charge. By the summer of 2015, his approval rating was the highest it had ever been. Nine out of ten Russians thought favourably of Putin’s presidency, thanks in large part to developments in Ukraine. Specifically, 87 per cent of Russians were in favour of the annexation of Crimea, which just so happens to be mostly populated by ethnic Russians. 

The West’s decision to impose sanctions on Russia only bolstered Putin’s popularity, even if the sanctions – alongside a collapse in energy prices – contributed to the Russian economy’s contraction in late 2014 and 2015. It is hard to believe that Putin’s many supporters are craving the imminent arrival of liberal democracy, despite their economic hardship. They instead appear to prefer their ‘strongman’, an image Putin chooses to reinforce by riding bare-chested on a horse or plumbing the Black Sea’s depths in a submersible off the Crimean coast. 


WHAT HAPPENED TO THE ARAB SPRING?
 

The hoped-for transition to liberal democracy in the Middle East and North Africa has simply not materialized. In November 2003, President George W. Bush – sticking to the End of History theme – told an appreciative audience at the National Endowment for Democracy that the US was: working closely with Iraqi citizens as they prepare a constitution, as they move toward free elections and take increasing responsibility for their own affairs …This is a massive and difficult undertaking –it is worth our effort, it is worth our sacrifice, because we know the stakes. 
The failure of Iraqi democracy would embolden terrorists around the world, increase dangers to the American people, and extinguish the hopes of millions in the region. Iraqi democracy will succeed – and that success will send forth the news, from Damascus to Teheran – that freedom can be the future of every nation. The establishment of a free Iraq at the heart of the Middle East will be a watershed event in the global democratic … 

*
from

Grave New World. The end of Globalisation, the return of History

by

Stephen D. King.

get it at Amazon.com 

Reclaiming the State. A Progressive Vision of Sovereignty for a Post-Neoliberal World –  William Mitchell and Thomas Fazi. 

Introduction: 

Make the Left Great Again 

The West is currently in the midst of an anti-establishment revolt of historic proportions. The Brexit vote in the United Kingdom, the election of Donald Trump in the United States, the rejection of Matteo Renzi’s neoliberal constitutional reform in Italy, the EU’s unprecedented crisis of legitimation: although these interrelated phenomena differ in ideology and goals, they are all rejections of the (neo) liberal order that has dominated the world –and in particular the West –for the past 30 years. 

Even though the system has thus far proven capable (for the most part) of absorbing and neutralising these electoral uprisings, there is no indication that this anti-establishment revolt is going to abate any time soon. Support for anti-establishment parties in the developed world is at the highest level since the 1930s –and growing. At the same time, support for mainstream parties –including traditional social-democratic parties –has collapsed. 

The reasons for this backlash are rather obvious. The financial crisis of 2007–9 laid bare the scorched earth left behind by neoliberalism, which the elites had gone to great lengths to conceal, in both material (financialisation) and ideological (‘the end of history’) terms. 

As credit dried up, it became apparent that for years the economy had continued to grow primarily because banks were distributing the purchasing power –through debt –that businesses were not providing in salaries. To paraphrase Warren Buffett, the receding tide of the debt-fuelled boom revealed that most people were, in fact, swimming naked

The situation was (is) further exacerbated by the post-crisis policies of fiscal austerity and wage deflation pursued by a number of Western governments, particularly in Europe, which saw the financial crisis as an opportunity to impose an even more radical neoliberal regime and to push through policies designed to suit the financial sector and the wealthy, at the expense of everyone else. 

Thus, the unfinished agenda of privatisation, deregulation and welfare state retrenchment –temporarily interrupted by the financial crisis –was reinstated with even greater vigour. Amid growing popular dissatisfaction, social unrest and mass unemployment (in a number of European countries), political elites on both sides of the Atlantic responded with business-as-usual policies and discourses. 

As a result, the social contract binding citizens to traditional ruling parties is more strained today than at any other time since World War II –and in some countries has arguably already been broken. 

Of course, even if we limit the scope of our analysis to the post-war period, anti-systemic movements and parties are not new in the West. Up until the 1980s, anti-capitalism remained a major force to be reckoned with. The novelty is that today –unlike 20, 30 or 40 years ago –it is movements and parties of the right and extreme right (along with new parties of the neoliberal ‘extreme centre’, such as the new French president Emmanuel Macron’s party En Marche!) that are leading the revolt, far outweighing the movements and parties of the left in terms of voting strength and opinion-shaping. 

With few exceptions, left parties –that is, parties to the left of traditional social-democratic parties –are relegated to the margins of the political spectrum in most countries. 

Meanwhile, in Europe, traditional social-democratic parties are being ‘pasokified’–that is, reduced to parliamentary insignificance, like many of their centre-right counterparts, due to their embrace of neoliberalism and failure to offer a meaningful alternative to the status quo –in one country after another. 

The term refers to the Greek social-democratic party PASOK, which was virtually wiped out of existence in 2014, due to its inane handling of the Greek debt crisis, after dominating the Greek political scene for more than three decades. A similar fate has befallen other former behemoths of the social-democratic establishment, such as the French Socialist Party and the Dutch Labour Party (PvdA). Support for social-democratic parties is today at the lowest level in 70 years –and falling. 

How should we explain the decline of the left –not just the electoral decline of those parties that are commonly associated with the left side of the political spectrum, regardless of their effective political orientation, but also the decline of core left values within those parties and within society in general? 

Why has the anti-establishment left proven unable to fill the vacuum left by the collapse of the establishment left? More broadly, how did the left come to count so little in global politics? Can the left, both culturally and politically, become a major force in our societies again? And if so, how? 

These are some of the questions that we attempt to answer in this book. Though the left has been making inroads in some countries in recent years –notable examples include Bernie Sanders in the United States, Jeremy Corbyn in the UK, Podemos in Spain and Jean-Luc Mélenchon in France –and has even succeeded in taking power in Greece (though the SYRIZA government was rapidly brought to heel by the European establishment), there is no denying that, for the most part, movements and parties of the extreme right have been more effective than left-wing or progressive forces at tapping into the legitimate grievances of the masses –disenfranchised, marginalised, impoverished and dispossessed by the 40-year-long neoliberal class war waged from above. 

In particular, they are the only forces that have been able to provide a (more or less) coherent response to the widespread –and growing –yearning for greater territorial or national sovereignty, increasingly seen as the only way, in the absence of effective supranational mechanisms of representation, to regain some degree of collective control over politics and society, and in particular over the flows of capital, trade and people that constitute the essence of neoliberal globalisation. Given neoliberalism’s war against sovereignty, it should come as no surprise that ‘sovereignty has become the master-frame of contemporary politics’, as Paolo Gerbaudo notes. 

After all, as we argue in Chapter 5, the hollowing out of national sovereignty and curtailment of popular-democratic mechanisms –what has been termed depoliticisation –has been an essential element of the neoliberal project, aimed at insulating macroeconomic policies from popular contestation and removing any obstacles put in the way of economic exchanges and financial flows. 

Given the nefarious effects of depoliticisation, it is only natural that the revolt against neoliberalism should first and foremost take the form of demands for a repoliticisation of national decision-making processes. 

The fact that the vision of national sovereignty that was at the centre of the Trump and Brexit campaigns, and that currently dominates the public discourse, is a reactionary, quasi-fascist one –mostly defined along ethnic, exclusivist and authoritarian lines –should not be seen as an indictment of national sovereignty as such. History attests to the fact that national sovereignty and national self-determination are not intrinsically reactionary or jingoistic concepts –in fact, they were the rallying cries of countless nineteenth- and twentieth-century socialist and left-wing liberation movements.

Even if we limit our analysis to core capitalist countries, it is patently obvious that virtually all the major social, economic and political advancements of the past centuries were achieved through the institutions of the democratic nation state, not through international, multilateral or supranational institutions, which in a number of ways have, in fact, been used to roll back those very achievements, as we have seen in the context of the euro crisis, where supranational (and largely unaccountable) institutions such as the European Commission, Eurogroup and European Central Bank (ECB) used their power and authority to impose crippling austerity on struggling countries. 

The problem, in short, is not national sovereignty as such, but the fact that the concept in recent years has been largely monopolised by the right and extreme right, which understandably sees it as a way to push through its xenophobic and identitarian agenda. It would therefore be a grave mistake to explain away the seduction of the ‘Trumpenproletariat’ by the far right as a case of false consciousness, as Marc Saxer notes; the working classes are simply turning to the only movements and parties that (so far) promise them some protection from the brutal currents of neoliberal globalisation (whether they can or truly intend to deliver on that promise is a different matter). 

However, this simply raises an even bigger question: why has the left not been able to offer the working classes and increasingly proletarianised middle classes a credible alternative to neoliberalism and to neoliberal globalisation? More to the point, why has it not been able to develop a progressive view of national sovereignty? 

As we argue in this book, the reasons are numerous and overlapping. For starters, it is important to understand that the current existential crisis of the left has very deep historical roots, reaching as far back as the 1960s. If we want to comprehend how the left has gone astray, that is where we have to begin our analysis. 

Today the post-war ‘Keynesian’ era is eulogised by many on the left as a golden age in which organised labour and enlightened thinkers and policymakers (such as Keynes himself) were able to impose a ‘class compromise’ on reluctant capitalists that delivered unprecedented levels of social progress, which were subsequently rolled back following the so-called neoliberal counter-revolution. 

It is thus argued that, in order to overcome neoliberalism, all it takes is for enough members of the establishment to be swayed by an alternative set of ideas. However, as we note in Chapter 2, the rise and fall of Keynesianism cannot simply be explained in terms of working-class strength or the victory of one ideology over another, but should instead be viewed as the outcome of the fortuitous confluence, in the aftermath of World War II, of a number of social, ideological, political, economic, technical and institutional conditions. 

To fail to do so is to commit the same mistake that many leftists committed in the early post-war years. By failing to appreciate the extent to which the class compromise at the base of the Fordist-Keynesian system was, in fact, a crucial component of that history-specific regime of accumulation –actively supported by the capitalist class insofar as it was conducive to profit-making, and bound to be jettisoned once it ceased to be so –many socialists of the time convinced themselves ‘that they had done much more than they actually had to shift the balance of class power, and the relationship between states and markets’. 

Some even argued that the developed world had already entered a post-capitalist phase, in which all the characteristic features of capitalism had been permanently eliminated, thanks to a fundamental shift of power in favour of labour vis-à-vis capital, and of the state vis-à-vis the market. Needless to say, that was not the case. 

Furthermore, as we show in Chapter 3, monetarism –the ideological precursor to neoliberalism –had already started to percolate into left-wing policymaking circles as early as the late 1960s. Thus, as argued in Chapters 2 and 3, many on the left found themselves lacking the necessary theoretical tools to understand –and correctly respond to –the capitalist crisis that engulfed the Keynesian model in the 1970s, convincing themselves that the distributional struggle that arose at the time could be resolved within the narrow limits of the social-democratic framework. 

The truth of the matter was that the labour–capital conflict that re-emerged in the 1970s could only have been resolved one way or another: on capital’s terms, through a reduction of labour’s bargaining power, or on labour’s terms, through an extension of the state’s control over investment and production. As we show in Chapters 3 and 4, with regard to the experience of the social-democratic governments of Britain and France in the 1970s and 1980s, the left proved unwilling to go this way. This left it (no pun intended) with no other choice but to ‘manage the capitalist crisis on behalf of capital’, as Stuart Hall wrote, by ideologically and politically legitimising neoliberalism as the only solution to the survival of capitalism. 

In this regard, as we show in Chapter 3, the Labour government of James Callaghan (1974–9) bears a very heavy responsibility. In an (in) famous speech in 1976, Callaghan justified the government’s programme of spending cuts and wage restraint by declaring Keynesianism dead, indirectly legitimising the emerging monetarist (neoliberal) dogma and effectively setting up the conditions for Labour’s ‘austerity lite’ to be refined into an all-out attack on the working class by Margaret Thatcher. 

Even worse, perhaps, Callaghan popularised the notion that austerity was the only solution to the economic crisis of the 1970s, anticipating Thatcher’s ‘there is no alternative’(TINA) mantra, even though there were radical alternatives available at the time, such as those put forward by Tony Benn and others. These, however, were ‘no longer perceived to exist’. 

In this sense, the dismantling of the post-war Keynesian framework cannot simply be explained as the victory of one ideology (‘neoliberalism’) over another (‘Keynesianism’), but should rather be understood as the result of a number of overlapping ideological, economic and political factors: the capitalists’response to the profit squeeze and to the political implications of full employment policies; the structural flaws of ‘actually existing Keynesianism’; and, importantly, the left’s inability to offer a coherent response to the crisis of the Keynesian framework, let alone a radical alternative. 

These are all analysed in-depth in the first chapters of the book. Furthermore, throughout the 1970s and 1980s, a new (fallacious) left consensus started to set in: that economic and financial internationalisation –what today we call ‘globalisation’–had rendered the state increasingly powerless vis-à-vis ‘the forces of the market’, and that therefore countries had little choice but to abandon national economic strategies and all the traditional instruments of intervention in the economy (such as tariffs and other trade barriers, capital controls, currency and exchange rate manipulation, and fiscal and central bank policies), and hope, at best, for transnational or supranational forms of economic governance. 

In other words, government intervention in the economy came to be seen not only as ineffective but, increasingly, as outright impossible. This process –which was generally (and erroneously, as we shall see) framed as a shift from the state to the market –was accompanied by a ferocious attack on the very idea of national sovereignty, increasingly vilified as a relic of the past. As we show, the left –in particular the European left –played a crucial role in this regard as well, by cementing this ideological shift towards a post-national and post-sovereign view of the world, often anticipating the right on these issues. 

One of the most consequential turning points in this respect, which is analysed in Chapter 4, was Mitterrand’s 1983 turn to austerity –the so-called tournant de la rigueur –just two years after the French Socialists’ historic victory in 1981. Mitterrand’s election had inspired the widespread belief that a radical break with capitalism –at least with the extreme form of capitalism that had recently taken hold in the Anglo-Saxon world –was still possible. By 1983, however, the French Socialists had succeeded in ‘proving’ the exact opposite: that neoliberal globalisation was an inescapable and inevitable reality. As Mitterrand stated at the time: ‘National sovereignty no longer means very much, or has much scope in the modern world economy. …A high degree of supra-nationality is essential.’ 

The repercussions of Mitterrand’s about-turn are still being felt today. It is often brandished by left-wing and progressive intellectuals as proof of the fact that globalisation and the internationalisation of finance has ended the era of nation states and their capacity to pursue policies that are not in accord with the diktats of global capital. The claim is that if a government tries autonomously to pursue full employment and a progressive/redistributive agenda, it will inevitably be punished by the amorphous forces of global capital. 

This narrative claims that Mitterrand had no option but to abandon his agenda of radical reform. To most modern-day leftists, Mitterrand thus represents a pragmatist who was cognisant of the international capitalist forces he was up against and responsible enough to do what was best for France. In fact, as we argue in the second part of the book, sovereign, currency-issuing states –such as France in the 1980s –far from being helpless against the power of global capital, still have the capacity to deliver full employment and social justice to their citizens. 

So how did the idea of the ‘death of the state’come to be so ingrained in our collective consciousness? 

As we explain in Chapter 5, underlying this post-national view of the world was (is) a failure to understand –and in some cases an explicit attempt to conceal –on behalf of left-wing intellectuals and policymakers that ‘globalisation’ was (is) not the result of inexorable economic and technological changes but was (is) largely the product of state-driven processes. All the elements that we associate with neoliberal globalisation –delocalisation, deindustrialisation, the free movement of goods and capital, etc. –were (are), in most cases, the result of choices made by governments. 

More generally, states continue to play a crucial role in promoting, enforcing and sustaining a (neo) liberal international framework –though that would appear to be changing, as we discuss in Chapter 6 –as well as establishing the domestic conditions for allowing global accumulation to flourish. The same can be said of neoliberalism tout court. 

There is a widespread belief –particularly among the left –that neoliberalism has involved (and involves) a ‘retreat’, ‘hollowing out’ or ‘withering away’ of the state, which in turn has fuelled the notion that today the state has been ‘overpowered’ by the market. However, as we argue in Chapter 5, neoliberalism has not entailed a retreat of the state but rather a reconfiguration of the state, aimed at placing the commanding heights of economic policy ‘in the hands of capital, and primarily financial interests’. 

It is self-evident, after all, that the process of neoliberalisation would not have been possible if governments –and in particular social-democratic governments –had not resorted to a wide array of tools to promote it: the liberalisation of goods and capital markets; the privatisation of resources and social services; the deregulation of business, and financial markets in particular; the reduction of workers’ rights (first and foremost, the right to collective bargaining) and more generally the repression of labour activism; the lowering of taxes on wealth and capital, at the expense of the middle and working classes; the slashing of social programmes; and so on. 

These policies were systemically pursued throughout the West (and imposed on developing countries) with unprecedented determination, and with the support of all the major international institutions and political parties. 

As noted in Chapter 5, even the loss of national sovereignty –which has been invoked in the past, and continues to be invoked today, to justify neoliberal policies –is largely the result of a willing and conscious limitation of state sovereign rights by national elites. 

The reason why governments chose willingly to ‘tie their hands’ is all too clear: as the European case epitomises, the creation of self-imposed ‘external constraints’ allowed national politicians to reduce the politics costs of the neoliberal transition –which clearly involved unpopular policies –by ‘scapegoating’ institutionalised rules and ‘independent’ or international institutions, which in turn were presented as an inevitable outcome of the new, harsh realities of globalisation. 

Moreover, neoliberalism has been (and is) associated with various forms of authoritarian statism –that is, the opposite of the minimal state advocated by neoliberals –as states have bolstered their security and policing arms as part of a generalised militarisation of civil protest. In other words, not only does neoliberal economic policy require the presence of a strong state, but it requires the presence of an authoritarian state (particularly where extreme forms of neoliberalism are concerned, such as the ones experimented with in periphery countries), at both the domestic and international level (see Chapter 5). 

In this sense, neoliberal ideology, at least in its official anti-state guise, should be considered little more than a convenient alibi for what has been and is essentially a political and state-driven project. Capital remains as dependent on the state today as it was under ‘Keynesianism’–to police the working classes, bail out large firms that would otherwise go bankrupt, open up markets abroad (including through military intervention), etc. 

The ultimate irony, or indecency, is that traditional left establishment parties have become standard-bearers for neoliberalism themselves, both while in elected office and in opposition. 

In the months and years that followed the financial crash of 2007–9, capital’s –and capitalism’s –continued dependency on the state in the age of neoliberalism became glaringly obvious, as the governments of the US, Europe and elsewhere bailed out their respective financial institutions to the tune of trillions of euros/dollars. 

In Europe, following the outbreak of the so-called ‘euro crisis’ in 2010, this was accompanied by a multi-level assault on the post-war European social and economic model aimed at restructuring and re-engineering European societies and economies along lines more favourable to capital. This radical reconfiguration of European societies –which, again, has seen social-democratic governments at the forefront –is not based on a retreat of the state in favour of the market, but rather on a reintensification of state intervention on the side of capital. 

Nonetheless, the erroneous idea of the waning nation state has become an entrenched fixture of the left. As we argue throughout the book, we consider this to be central in understanding the decline of the traditional political left and its acquiescence to neoliberalism. 

In view of the above, it is hardly surprising that the mainstream left is, today, utterly incapable of offering a positive vision of national sovereignty in response to neoliberal globalisation. To make matters worse, most leftists have bought into the macroeconomic myths that the establishment uses to discourage any alternative use of state fiscal capacities. 

For example, they have accepted without question the so-called household budget analogy, which suggests that currency-issuing governments, like households, are financially constrained, and that fiscal deficits impose crippling debt burdens on future generations –a notion that we thoroughly debunk in Chapter 8. 

This has gone hand in hand with another, equally tragic, development. As discussed in Chapter 5, following its historical defeat, the left’s traditional anti-capitalist focus on class slowly gave way to a liberal-individualist understanding of emancipation. Waylaid by post-modernist and post-structuralist theories, left intellectuals slowly abandoned Marxian class categories to focus, instead, on elements of political power and the use of language and narratives as a way of establishing meaning. This also defined new arenas of political struggle that were diametrically opposed to those defined by Marx. 

Over the past three decades, the left focus on ‘capitalism’ has given way to a focus on issues such as racism, gender, homophobia, multiculturalism, etc. Marginality is no longer described in terms of class but rather in terms of identity. The struggle against the illegitimate hegemony of the capitalist class has given way to the struggles of a variety of (more or less) oppressed and marginalised groups: women, ethnic and racial minorities, the LGBTQ community, etc. As a result, class struggle has ceased to be seen as the path to liberation. 

In this new post-modernist world, only categories that transcend Marxian class boundaries are considered meaningful. Moreover, the institutions that evolved to defend workers against capital –such as trade unions and social-democratic political parties –have become subjugated to these non-class struggle foci. What has emerged in practically all Western countries as a result, as Nancy Fraser notes, is a perverse political alignment between ‘mainstream currents of new social movements (feminism, anti-racism, multiculturalism, and LGBTQ rights), on the one side, and high-end “symbolic” and service-based business sectors (Wall Street, Silicon Valley, and Hollywood), on the other’. 

The result is a progressive neoliberalism ‘that mix[es] together truncated ideals of emancipation and lethal forms of financialization’, with the former unwittingly lending their charisma to the latter. 

As societies have become increasingly divided between well-educated, highly mobile, highly skilled, socially progressive cosmopolitan urbanites, and lower-skilled and less educated peripherals who rarely work abroad and face competition from immigrants, the mainstream left has tended to consistently side with the former. Indeed, the split between the working classes and the intellectual-cultural left can be considered one of the main reasons behind the right-wing revolt currently engulfing the West. 

As argued by Jonathan Haidt, the way the globalist urban elites talk and act unwittingly activates authoritarian tendencies in a subset of nationalists. In a vicious feedback loop, however, the more the working classes turn to right-wing populism and nationalism, the more the intellectual-cultural left doubles down on its liberal-cosmopolitan fantasies, further radicalising the ethno-nationalism of the proletariat. 

As Wolfgang Streeck writes: Protests against material and moral degradation are suspected of being essentially fascist, especially now that the former advocates of the plebeian classes have switched to the globalization party, so that if their former clients wish to complain about the pressures of capitalist modernization, the only language at their disposal is the pre-political, untreated linguistic raw material of everyday experiences of deprivation, economic or cultural. This results in constant breaches of the rules of civilized public speech, which in turn can trigger indignation at the top and mobilization at the bottom. 

This is particularly evident in the European debate, where, despite the disastrous effects of the EU and monetary union, the mainstream left –often appealing to exactly the same arguments used by Callaghan and Mitterrand 30–40 years ago –continues to cling on to these institutions and to the belief that they can be reformed in a progressive direction, despite all evidence to the contrary, and to dismiss any talk of restoring a progressive agenda on the foundation of retrieved national sovereignty as a ‘retreat into nationalist positions’, inevitably bound to plunge the continent into 1930s-style fascism. 

This position, as irrational as it may be, is not surprising, considering that European Economic and Monetary Union (EMU) is, after all, a brainchild of the European left (see Chapter 5). However, such a position presents numerous problems, which are ultimately rooted in a failure to understand the true nature of the EU and monetary union. 

First of all, it ignores the fact that the EU’s economic and political constitution is structured to produce the results that we are seeing –the erosion of popular sovereignty, the massive transfer of wealth from the middle and lower classes to the upper classes, the weakening of labour and more generally the rollback of the democratic and social/economic gains that had previously been achieved by subordinate classes –and is designed precisely to impede the kind of radical reforms to which progressive integrationists or federalists aspire to. 

More importantly, however, it effectively reduces the left to the role of defender of the status quo, thus allowing the political right to hegemonise the legitimate anti-systemic –and specifically anti-EU –grievances of citizens. This is tantamount to relinquishing the discursive and political battleground for a post-neoliberal hegemony –which is inextricably linked to the question of national sovereignty –to the right and extreme right. It is not hard to see that if progressive change can only be implemented at the global or even European level –in other words, if the alternative to the status quo offered to electorates is one between reactionary nationalism and progressive globalism –then the left has already lost the battle. 

It needn’t be this way, however. As we argue in the second part of the book, a progressive, emancipatory vision of national sovereignty that offers a radical alternative to both the right and the neoliberals –one based on popular sovereignty, democratic control over the economy, full employment, social justice, redistribution from the rich to the poor, inclusivity and the socio-ecological transformation of production and society –is possible. Indeed, it is necessary. 

As J. W. Mason writes: Whatever [supranational] arrangements we can imagine in principle, the systems of social security, labor regulation, environmental protection, and redistribution of income and wealth that in fact exist are national in scope and are operated by national governments. By definition, any struggle to preserve social democracy as it exists today is a struggle to defend national institutions.  

As we contend in this book, the struggle to defend the democratic sovereign from the onslaught of neoliberal globalisation is the only basis on which the left can be refounded (and the nationalist right challenged). However, this is not enough. 

The left also needs to abandon its obsession with identity politics and retrieve the ‘more expansive, anti-hierarchical, egalitarian, class-sensitive, anti-capitalist understandings of emancipation’ that used to be its trademark (which, of course, is not in contradiction with the struggle against racism, patriarchy, xenophobia and other forms of oppression and discrimination). 

Fully embracing a progressive vision of sovereignty also means abandoning the many false macroeconomic myths that plague left-wing and progressive thinkers. One of the most pervasive and persistent myths is the assumption that governments are revenue-constrained, that is, that they need to ‘fund’ their expenses through taxes or debt. This leads to the corollary that governments have to ‘live within their means’, since ongoing deficits will inevitably result in an ‘excessive’ accumulation of debt, which in turn is assumed to be ‘unsustainable’ in the long run. 

In reality, as we show in Chapter 8, monetarily sovereign (or currency-issuing) governments –which nowadays include most governments –are never revenue-constrained because they issue their own currency by legislative fiat and always have the means to achieve and sustain full employment and social justice. 

In this sense, a progressive vision of national sovereignty should aim to reconstruct and redefine the national state as a place where citizens can seek refuge ‘in democratic protection, popular rule, local autonomy, collective goods and egalitarian traditions’, as Streeck argues, rather than a culturally and ethnically homogenised society. 

This is also the necessary prerequisite for the construction of a new international( ist) world order, based on interdependent but independent sovereign states. It is such a vision that we present in this book. 

*

PART I 

The Great Transformation Redux: From Keynesianism to Neoliberalism –and Beyond 

1 Broken Paradise: A Critical Assessment of the Keynesian ‘Full Employment’ Era 

THE IDEALIST VIEW: KEYNESIANISM AS THE VICTORY OF ONE IDEOLOGY OVER ANOTHER 

Looking back on the 30-year-long economic expansion that followed World War II, Adam Przeworski and Michael Wallerstein concluded that ‘by most criteria of economic progress the Keynesian era was a success’. 

It is hard to disagree: throughout the West, from the mid-1940s until the early 1970s, countries enjoyed lower levels of unemployment, greater economic stability and higher levels of economic growth than ever before. That stability, particularly in the US, also rested on a strong financial regulatory framework: on the widespread provision of deposit insurance to stop bank runs; strict regulation of the financial system, including the separation of commercial banking from investment banking; and extensive capital controls to reduce currency volatility. 

These domestic and international restrictions ‘kept financial excesses and bubbles under control for over a quarter of a century’. 

Wages and living standards rose, and –especially in Europe –a variety of policies and institutions for welfare and social protection (also known as the ‘welfare state’) were created, including sustained investment in universally available social services such as education and health. Few people would deny that this was, indeed, a ‘golden age’ for capitalism. 

However, when it comes to explaining what made this exceptional period possible and why it came to an end, theories abound. Most contemporary Keynesians subscribe to a quasi-idealist view of history –that is, one that stresses the central role of ideas and ideals in human history. This is perhaps unsurprising, considering that Keynes himself famously noted: ‘Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.’ 

According to this view, the social and economic achievements of the post-war period are largely attributable to the revolution in economic thinking spearheaded by the British economist John Maynard Keynes. 

Throughout the 1920s and 1930s, Keynes overturned the old classical (neoclassical) paradigm, rooted in the doctrine of laissez-faire (‘let it be’) free-market capitalism, which held that markets are fundamentally self-regulating. The understanding was that the economy, if left to its own devices –that is, with the government intervening as little as possible –would automatically generate stability and full employment, as long as workers were flexible in their wage demands. 

The Great Depression of the 1930s that followed the stock market crash of 1929 –where minimal financial regulation, little-understood financial products and overindebted households and banks all conspired to create a huge speculative bubble which, when it burst, brought the US financial system crashing down, and with it the entire global economy –clearly challenged traditional laissez-faire economic theories. 

This bolstered Keynes’ argument –spelled out at length in his masterpiece, The General Theory of Employment, Interest, and Money, published in 1936 –that aggregate spending determined the overall level of economic activity, and that inadequate aggregate spending could lead to prolonged periods of high unemployment (what he called ‘underemployment equilibrium’). Thus, he advocated the use of debt-based expansionary fiscal and monetary measures and a strict regulatory framework to counter capitalism’s tendency towards financial crises and disequilibrium, and to mitigate the adverse effects of economic recessions and depressions, first and foremost by creating jobs that the private sector was unable or unwilling to provide. 

The bottom line of Keynes’ argument was that the government always has the ability to determine the overall level of spending and employment in the economy. In other words, full employment was a realistic goal that could be pursued at all times. 

Yet politicians were slow to catch on. When the speculative bubbles in both Europe and the United States burst in the aftermath of the Wall Street crash of 1929, various countries (to varying degrees, and more or less willingly) turned to austerity as a perceived ‘cure’ for the excesses of the previous decade. 

In the United States, president Herbert Hoover, a year after the crash, declared that ‘economic depression cannot be cured by legislative action or executive pronouncements’ and that ‘economic wounds must be healed by the action of the cells of the economic body –the producers and consumers themselves’. 

At first Hoover and his officials downplayed the stock market crash, claiming that the economic slump would be only temporary. When the situation did not improve, Hoover advocated a strict laissez-faire policy, dictating that the federal government should not interfere with the economy but rather let the economy right itself. He counselled that ‘every individual should sustain faith and courage’ and ‘each should maintain self-reliance’. 

Even though Hoover supported a doubling of government expenditure on public works projects, he also firmly believed in the need for a balanced budget. As Nouriel Roubini and Stephen Mihm observe, Hoover ‘wanted to reconcile contradictory aims: to cultivate self-reliance, to provide government help in a time of crisis, and to maintain fiscal discipline. This was impossible.’ In fact, it is widely agreed that Hoover’s inaction was responsible for the worsening of the Great Depression. 

If the United States’ reaction under Hoover can be described as ‘too little, too late’, Europe’s reaction in the late 1920s and early 1930s actively contributed to the downward spiral of the Great Depression, setting the stage for World War II. 

Austerity was the dominant response of European governments during the early years of the Great Depression. The political consequences are well known. Anti-systemic parties gained strength all across the continent, most notably in Germany. While 24 European regimes had been democratic in 1920, the number was down to eleven in 1939. 

Various historians and economists see the rise of Hitler as a direct consequence of the austerity policies indirectly imposed on Germany by its creditors following the economic crash of the late 1920s. Ewald Nowotny, the current head of Austria’s national bank, stated that it was precisely ‘the single-minded concentration on austerity policy’ in the 1930s that ‘led to mass unemployment, a breakdown of democratic systems and, at the end, to the catastrophe of Nazism’. 

Historian Steven Bryan agrees: ‘During the 1920s and 1930s it was precisely the refusal to acknowledge the social and political consequences of austerity that helped bring about not only the depression, but also the authoritarian governments of the 1930s.

*

from

Reclaiming the State. A Progressive Vision of Sovereignty for a Post-Neoliberal World

by

William Mitchell and Thomas Fazi.

get it at Amazon.com

The Rise And Fall Of The American Middle Class – William Lazonick. 

Social Europe

William Lazonick is a Professor at the University of Massachusetts Lowell, where he directs the Center for Industrial Competitiveness. He is also a Visiting Professor at the University of Ljubljana where he teaches a PhD course on the theory of innovative enterprise. Previously he was an Assistant and Associate Professor of Economics at Harvard University, Professor of Economics at Barnard College of Columbia University, and Visiting Scholar and then Distinguished Research Professor at INSEAD.


Globalisation once made the world go around. Is it about to grind to a halt? – Larry Elliott. 

His speech was like one normally expected of an American president. Countries must resist the temptation to retreat into harbour, the world leader said to a packed and admiring audience, but instead have the courage to swim in the vast ocean of the global market.

This was the kind of paean to free trade that might have come from John F Kennedy, George W Bush or Bill Clinton – all occupants of the White House who saw it as the United States’s role to defend the open international trading system set up at the end of the second world war.

This, though, was China’s President, Xi Jinping, in Davos last week, making it clear that he was prepared to fill the vacuum if Donald Trump went ahead with the sort of protectionist policies he had proposed in his election campaign.

Those attending Davos reassured themselves that Trump would ditch all these proposals once he was in office. But if he doesn’t, the consequences are obvious: the world will be plunged into a trade war that will bring the globalisation of the past quarter of a century to a juddering halt.

The Guardian

Brexit Britain turns against globalisation and modern technology, blaming it for low UK wages and inequality – The Independent. 

Post-Brexit Britain is in the throes of a major backlash against globalisation, blaming dwindling wages and rife inequality on the opening of the world’s economy, an exclusive poll for The Independent has revealed.

The survey by ComRes even exposes a new backward-looking dislike of modern technology in the UK, with the public blaming advances for a widening gap between the rich and poor.

People believe the gap has also been widened by the low interest rates employed by governments in many countries now suffering resurgent populist movements.

The Independent

Protest flotillas banned in Auckland’s harbour for first US ship visit in 33 years.

The restrictions are intended to “ensure the safety of everyone on the water, including people who are not part of the event”.

RUBBISH! 

These restrictions are for uncle Sam’s benefit.

Protest boats will be banned from parts of Auckland’s harbour during a historic visit by a United States warship.

The US Navy is sending the USS Sampson to Auckland for the Royal New Zealand Navy’s 75th birthday next month – the first visit by an American ship in 33 years.

Transport Minister Simon Bridges today declared the International Naval Review a Major Maritime Event.

That meant vessels not taking part in the review would have to stay clear of restricted areas in the Waitemata Harbour, Rangitoto Channel and parts of the inner Hauraki Gulf.

Bridges said the restrictions were intended to “ensure the safety of everyone on the water, including people who are not part of the event”. NZ Herald 

No Time for Trade Fundamentalism.

“There is great danger that the system will break down … or that it will collapse in a grim replay of the 1930s.” by Dani Rodrik

Not so long ago, it would have been unimaginable to contemplate a British exit from the European Union, or a Republican presidential candidate in the United States promising to renege on trade agreements, build a wall against Mexican immigrants, and punish companies that move offshore. The nation-state seems intent on reasserting itself. Project Syndicate 

Basing globalization on defensible democratic principles is its best defense. – Dani Rodrik

We need to rescue globalization not just from populists, but also from its cheerleaders. Simply put, we have pushed economic globalization too far, toward an impractical version that we might call “hyperglobalization”. Some simple principles would reorient us in the right direction.

1. There is no single way to prosperity. Countries make their own choices about the institutions that suit them best.

2. Countries have the right to protect their institutional arrangements and safeguard the integrity of their regulations. Financial regulations or labor protections can be circumvented and undermined by moving operations to foreign countries. Countries should be able to prevent such “regulatory arbitrage” by placing restrictions on cross-border transactions. For example, imports from countries that are gross violators of labor rights may face restrictions when those imports demonstrably threaten to damage labor standards at home.

3. The purpose of international economic negotiations should be to increase domestic policy autonomy, while being mindful of the possible harm to trade partners. Poor and rich countries alike need greater space for pursuing their objectives. The former need to restructure their economies and promote new industries, and the latter must address domestic concerns over inequality and distributive justice. Both objectives require placing some sand in the cogs of globalization.

4. Global governance should focus on enhancing democracy, not globalization.

5. Nondemocratic countries like Russia, China and Saudi Arabia,  where the rule of law is routinely flouted and civil liberties are not protected, should not be able to count on the same rights and privileges in the international system as democracies can.

When I present these ideas to globalization advocates, they say the consequence would be a dangerous slide toward protectionism. But today the risks on the other side are greater, namely that the social strains of hyperglobalization will drive a populist backlash that undermines both globalization and democracy. Basing globalization on defensible democratic principles is its best defense.