excerpts from the book

The Silent Takeover

Global Capitalism and the Death of Democracy

Part 2

Let Them Eat Cake
Manning The Door At Private sector HQ

by Noreena Hertz

Arrow Books, 2001, paper

Let Them Eat Cake

The global policy shift towards neo-liberalism that took place during the 1980s and 1990s was supposed, according to its proponents, to bring a convergence of living standards of richer and poorer nations. This never actually happened. For the majority of developing and transitional economies the East-West and North-South income gaps are greater today than before.

The medicines doled out by the World Bank and IMF - 'shock therapy', 'stabilisation', 'structural adjustment', 'trade and financial liberalisation', 'deregulation' -.eroded labour institutions and diluted union bargaining power, led to rushed through mass privatisation programmes that only benefited a minority, and prohibited countries from increasing public expenditure to meet their welfare needs. Not only was the pill bitter, it was often force-fed. The IMF and World Bank can dictate terms to the developing countries that depend upon loans from the international community, by making their loans conditional on the acceptance of their economic views by these nations. Through financial dependence or the threat of sanctions, these organisations coerce errant states into compliance.

Often the patient is made worse. Inequality declined within many countries between 1945 and the 1970s, but since the tenets of the 'Washington Consensus' became mainstream there has been a reversal of this trend all over the world. ~ In the whole of the former Soviet bloc, most of Latin America, and much of South, South-East and East Asia, inequality has risen significantly over the past two decades. And 'with the notable exception of East Asia, the number of people living in extreme poverty - considered here as living on less than a dollar a day - has increased over this period in every developing country in the world.

... both the pursuit and the subsequent results of ... free-market policies can polarise the population to an increasingly unacceptable extent ...

This growing polarisation is not just a Third World phenomenon; we do not see it only in underdeveloped countries with weak democracies. It is also happening here in the West... For in the West too the gap between rich and poor is widening. In America, the spoils of a long period of prolonged economic expansion and low unemployment have not been widely distributed: 97 per cent of the increase in income has gone to the top 20 per cent of families over the past twenty years. While the rich earn more - average earnings of the top fifth of male earners rose by 4 per cent between 1979 and 1996 - the bottom fifth saw a 44 per cent drop in earnings. Some 36.5 million Americans (13.7 per cent of the population) now live in poverty, while 40 per cent of the country's wealth is owned by the top 1 per cent, compared with 13 per cent less than twenty-five years ago. Incomes in the US are now less equal than at any time since the Great Depression. While the national unemployment rate in the USA is 5.4 per cent, on many of its Native American reservations the rate is as high as 70 per cent. In isolated rural areas in America, the unemployment rate is often two, sometimes four, times as high as the national average. And social security for the unemployed has become much more conditional. Only 39 per cent of unemployed Americans have access to unemployment benefit today, compared to 70 per cent in 1986.

... in the United States there has been a 28 per cent decline since 1973 in entry-level wages in real dollars for male high-school graduates, and a decline in wages and benefits for all unskilled labour. A fifth of American employees work at rates below the official poverty level, making a mockery of the low official unemployment rates. Even workers carrying out hazardous jobs are bind paid less. In the late 1980s the union wage for removing asbestos insulation from old buildings was S31 an hour, but by the l990s the rate had collapsed, thanks to the rise in non-union removal companies and an influx of immigrants eager for work. Contractors had no trouble getting workers for $12 to 15 an hour ...

Now increasingly able to operate globally, corporations 'bottom fish', moving to countries with low labour costs to produce their goods. Production continues to shift to lower-cost options: from US factories to the maquiladora plants on the Mexican border where nearly a million people are employed at wages of under $5 a day; from Israel to nearby Jordan, putting scores of Israeli Arabs and Druzes out of employment as a consequence; from Silicon Valley to India and the former Soviet Union, where software is developed for a fraction of the cost it would entail domestically, from unionised workplaces to regions or countries where unions are less militant or there are non-unionised labourers, just glad to get a job.

And these jobs, even at reduced rates and with their spartan packages, are not even secure. For many, job security has become increasingly rare. Jobs are increasingly part-time, casual, contractual for those who still are in employment. In Latin America, for example, by 1996 the proportion of workers without contracts increased to 30 per cent in Chile, 36 per cent in Argentina, 39 per cent in Colombia and 41 per cent in Peru.

Technological advances have allowed machines to replace people. The 'knowledge economy' requires less manpower. While the world's 500 largest multinational corporations have grown sevenfold in sales, the worldwide employment of these global firms has remained virtually flat since the early 1970s, hovering at around 26 million people.

Increased competition due to liberalisation of trade policies has meant that inefficient industries have had to downsize or streamline (euphemisms, of course, for sacking staff) or be forced out of business altogether. Even before the recession, companies that were performing at levels that in the past would have been considered acceptable were firing staff, not because they were struggling but because the pressure on companies to make high returns was unprecedented (in many industries returns of between 20 and 35 per cent are now expected, with institutional investors today on average turning over 40 per cent of their portfolio in a year looking for higher returns), competition for investment flows was ever greater, and corporations felt more vulnerable than ever to threats of takeover or acquisition. IBM fired 122,000 people between 1991 and 1995 and reduced total wages by a third in a bid to push up their dividends and share price. The return for such 'prudence'? In 1995 the company's share price and dividend beat all previous records. The announcement by the American food company ConAgra that it would lay off 6,500 employees and close down twenty-nine of its plants pushed the price of its shares up so steeply that the company's market capitalisation increased by 500 million dollars in twenty-four hours. 'For shareholders and managers downsizing does pay o£ Wall Street now simply prefers a dollar saved in costs to an extra dollar earned.

Even those who have jobs are losing benefits. In the USA, where people are mostly dependent on corporations for health benefits and pensions, the consequences are particularly worrying. While 70 per cent of American workers have pension plans, less than 1.0 per cent of those in the bottom tenth can rely upon any employer-financed retirement benefits. And the 20 per cent of Americans now working on temporary contracts or part-time receive no benefits at all, or insignificant ones.

Add to this the problems engendered by the privatisation of fundamental public goods and the situation is ever bleaker. In the US there have been numerous cases of HMOs (for-profit corporations that provide health care) having been exposed over the past decade as 'cherry picking', that is, making sure that they attract healthy people and avoiding those who will be heavy utilisers of services. And most HMOs that were set up to take care of Medicare patients (US Citizens over 65 years) are now going bankrupt and getting out of the business since they cannot keep up with escalating costs, especially prescription costs, of elderly patients.

But it is not just HMOs that are the problem. The ability to secure health insurance at all is proving elusive for significant numbers of Americans. Forty-five million Americans currently do not have health insurance, 25 per cent of the chronically ill do not have adequate coverage. Disqualified from some insurance plans because of pre-existing health conditions, viewed as high risk by others and facing premiums they cannot afford, millions of Americans are facing potential crises.

The antidepressant market grew 16 per cent per year in G7 countries between l989 and 1999. Sales of Prozac have eclipsed the GDP of small nations... The seemingly unstoppable craving for wealth, for the trophies of capitalism displayed on every billboard but ever harder to bag, is destroying the very fabric of people's lives.

former president of the German Bundesbank, Hans Tietmeyer

Politicians have to understand that they are now under the control of the financial markets and not, any longer, of national debates.

Pressure on governments comes not only from capital markets but also from corporations. The world of the twenty-first century is a seller's market for business. Advances in communications and technology and the deregulation of capital markets have meant that corporations are now increasingly portable, able to decamp and set up elsewhere with relative ease.

Recognising the power that they now wield, multinational corporations play countries and politicians off against each other, exacting for themselves ever better and more lenient terms. Corporations effectively auction off promises of new jobs, infrastructure investment and economic growth to the highest international bidder, declining to move to or threatening to pull out of countries whose employment costs and taxes are too high, or where standards are too stringent or subsidies and loans not forthcoming. Globally, dominant companies increasingly call the shots, able to move money freely, deciding for themselves where to invest and produce, where to pay taxes, and playing these potential sites off against one another. Politicians are left trying to stem the flow, offering sweeteners to corporations to maintain factories so as to minimise the political and social costs of closure, but without any long-term guarantees that the firms will not eventually relocate. National governments appear increasingly impotent in the face of the giant corporations, who transcended national borders many years ago.

The levying of taxes, arguably the most fundamental right of the nation state and a potential means of redressing social and economic inequality, is being squeezed by corporate pressure. As capital and highly-paid labour are now able to move more freely from high-tax countries to low-tax ones, as the world becomes more integrated in the wake of globalisation and developments in communications, a nation's ability to set tax rates higher than other nations is being put in question. The resultant mindset is one of 'beggar thy neighbor'. Ireland opposes harmonising corporate tax rates across the EU because its low rates give it an advantage over other member-states in attracting multinational firms. Britain blocks an EU savings-tax directive because it might hurt the City of London. And corporate tax rates are pushed down the world over: the rates of US affiliates operating in developing countries, for example, dropped from 54 per cent to 28 per cent between 1983 and 1996.

In Germany, where revenue from corporate taxes has fallen by 50 per cent over the past twenty years, despite a rise in corporate profits of 90 per cent, Finance Minister Oskar Lafontaine's attempt to raise the tax burden on German firms in 1999 was thwarted by a group of companies, including Deutsche Bank (assets over $400 billion), Dresdner Bank, the insurance conglomerate Allianz, BMW, Daimler-Benz and RWE, the German energy and industrial group, all of which threatened to move investment or factories to other countries if government policy did not suit them.

'It's a question of at least 14,000 jobs,' threatened Dieter Schweer, a RWE spokesman. 'If the investment position is no longer attractive, we will examine every possibility of "switching our investments abroad.' Daimler-Benz proposed relocating to the USA; other companies threatened to stop buying government bonds and investing in the German economy.

In view of the power these corporations wield, their threats were taken seriously. So seriously that they were undoubtedly a major cause of Lafontaine's resignation. He remained defiant to the end: 'The heart isn't traded on the stock market yet,' he said as he left. 'Things will be different now,' Bobo Hombach, Chance for Schroders's closet aide, commented in response. 'We have to move in a different direction. Gerhard Schroder will have different priorities, that's obvious'. If Oskar Lafontaine's resignation proved anything, it was that Schroder was willing to take the pressure from business very seriously. Within a few months Germany was planning corporate tax cuts which would reduce tax on German companies below US rates. As one of Schroder's senior advisers in Washington commented, 'Deutsche Bank and industrial giants such as Mercedes are too strong for the elected government in Berlin.'

It is not just corporate tax that concerns corporations. Countries with high rates of personal taxation are coming under pressure from the international business community too. Several large Swedish companies, including Ericsson, have threatened to leave their home country because of high income tax which, they claimed, made it hard to recruit highly skilled employees. (Ericsson actually did fulfill its threat, moving several corporate and production functions abroad and opening a big headquarters in London in 1999.) And in the UK, Internet companies are in conflict with the Treasury over national insurance charges on share options, which they claim will encourage highly skilled workers to move overseas.

In the twenty-first century, corporations are increasingly deciding how much tax to pay and where to pay it. The Internet is only likely to make it even harder for governments to collect taxes. A company can now locate in a low-tax haven, base its physical production facilities (where it may angle for subsidies) elsewhere, and sell to its customers from a virtual location - outside of the reach of governments. And the greater the advances in communications, the more cases we are likely to see of corporations locating in one place, and paying tax in another or even nowhere at all. Companies like the banking firm BCCI, which through a complex web of aliases managed to be registered nowhere for tax purposes, and Rupert Murdoch's News Corporation, which has earned profits of over $2.3 billion in Britain since 1987 but as of 1999, paid no corporation tax there at all and no more than 6 per cent tax worldwide, may well become the norm rather than the exception.

What is the impact of this non-collection of taxes from corporations? At worst, such damage to tax systems that governments could become unable to meet the legitimate demands of their citizens for public services - in the USA, for example, federal expenditure on roads, schools and universities fell as a proportion of GDP throughout the 1990s even under a Democratic president. At best, the government's ability to spend is severely restricted, and an ever higher burden put on individual taxpayers' shoulders. If governments were willing to implement such a redistributive strategy, that is. usually, however, it appears they are not.

Not only are governments finding it harder to raise taxes, they are also finding themselves having to provide 'welfare' to a not terribly needy client - the private sector. In America direct subsidies to businesses total over $75 billion annually, with the poorest states - those where the difference in income between rich and poor is greatest - offering the largest amounts.

So governments are caught between a rock and a hard place; unwilling to risk losing the electorate's support by raising taxes, and unable to increase spending for fear of market censure. But what will be the impact of the enforced capping of government's social spending? More inequity? A world in which the poor become ever more marginalised, and the rich even richer? A world in which the principal division is between those who are inside and those who are outside the global corporation? A world in which the consumer has some power, but those who cannot afford to be consumers have none?

Politicians from all mainstream parties have over the past few years espoused noble aims of reconciling capitalism with humanity, social justice with economic success. In the US and UK, Clinton and Blair for example, talked of a 'Third Way', while Bush spoke of 'Compassionate Conservatism'.

In the US at least, such aims sound increasingly shallow. The country regularly stands last among developed nations in the proportion of its GNP devoted to social programs or to redistribution. Bush's phasing out of the 'death tax' which affects only the wealthiest two per cent of the population with more than $1.35 million to leave to their children, and his $1.35 trillion in tax cuts over the next eleven years in ways that will substantially advantage the better off in society, show very clearly the extent to which his administration is intent on favouring the rich.


Manning The Door At Private sector HQ

In the post-Cold War era, in the age of international laissez-faire capitalism, commercial and economic interests have tended to supersede All other national interests. Instead of acting as a check on corporations, governments are now doing All they can to romance them, acting less as night watchmen - the role Adam Smith said that they needed to play in order to ensure the success of free markets and more as round-the-clock doormen at the headquarters of Private Sector plc.

Economics has become the new politics, and business is in the driving seat. Governments have redefined their role from that of rule maker to that of referee, from warden to corporate champion. Because of their dependence on the success of the private sector and exports for wealth, stability, rising aggregate standards of living, jobs - factors that can today be equated with political power - governments do not just sit back and let the market take its course. Instead they actively pursue policies that benefit business, giving up in the process their ability to set an independent agenda and favouring corporate Goliaths over individual Davids.

International politics in the twenty-first century is less and less about territorial gains, and more and more about increasing economic freedoms and market share. In advanced economies governments now act as salesmen, promoting the fortunes of their own corporations in the hope of providing a core prosperity for their state and keeping themselves in power.

To quote Madeleine Albright, former US Secretary of State:

Competition for the world's markets is fierce. Often, our firms go head-to-head with foreign competitors who are receiving active support from their own governments. A principal responsibility of the Department of State is to see that the interests of American companies and workers receive fair treatment, and that inequitable barriers to competition are overcome. Accordingly, the doors to the Department of State and our embassies around the world are open - and will remain open - to US businesspeople seeking to share their ideas and to ask our help.

The predominant concern of governments in the free-trade, free-market world of the early twenty-first century remains, even post-September 11th, how to ensure their firms get a decent slice of the global economic pie.

What about human rights?

It is not just that arms are being sold to repressive regimes; the whole idea of safeguarding human rights, a concept that was imbued with real meaning after World War II, has also fallen by the wayside as Western governments perceive only their need to promote trade and champion their firms' interests worldwide.

The European Union-agreed a customs union agreement with Turkey at the same time that the European Parliament was voicing concern on human rights violations and fears of genocide of the Kurds in Turkey's eastern territories. It did little for years about Nigeria's human rights violations under the regime of General Sani Abacha, apart from routinely condemning them. Trade and oil interests prevailed.

The US backed the dictatorial Taliban regime in Afghanistan until 1997, despite its terrible record on human rights, its severe oppression of women, public executions, and intransigent Islamic fundamentalism. In large part, this was because the American oil company Unocal had signed a deal with the Taliban to build a $2 billion gas line and $2.5 billion oil line to transport oil and gas from Turkmenistan to Pakistan via Afghanistan. Washington eventually got tough with the Taliban - but only after immense pressure from the US feminist movement and because of the Taliban's support for the Saudi terrorist Osama Bin Laden.

Saudi Arabia's human rights record is almost as bad, but foreign governments unwilling to jeopardise their relationship with the oil-rich sheikdom continue to supply the country with equipment that can be used to torture or ill-treat prisoners. Between 1980 and 1993, the US government authorised export licences worth $5 million under the category OA82C, which includes thumb cuffs, leg irons, and shackles.

The West continues to woo China despite its continuing poor record on human rights - its gaoling of followers of the Falun Gong spiritual and exercise group, underground Christians and dissidents; its ignoring of the internationally recognised rights of workers spelled out in the UN Convention on Human Rights; its use of forced prison labour - because of the huge market opportunity that China presents to Western firms. China has a good fifth of the world's population, and Hong Kong and Shanghai (with Singapore) lead economic and financial revitalisation in the post-crisis East Asian economies and are becoming the main 'business hubs' the region. It is not difficult to understand the attraction.

Cynics have long noted that American foreign policy is n~ driven by a concern for the greater good. US government policy has long been dictated by corporate interests. But whereas during the Cold War corporate interests masqueraded as military interests, this rationale is no longer convincing or relevant. In an ideal world a superpower like the US, now that the Soviet military threat has disappeared, would concentrate on important issues like human rights. Instead, despite a growing rhetoric on human rights, we see little willingness to make any sacrifice to guarantee them; purely commercial interests are allowed to dwarf all others. The spy satellites that are being used to pass on corporate secrets to American companies could be being used to monitor human rights abuses in, say, Burma instead.

When governments evaluate trade, sanctions and human rights on purely economic rather than ethical grounds, they do not only fail the people in the countries in question. They also fail to respect the wishes of many of their own citizens. Choice is restricted to what business or the markets want rather than the traditional democratic notion of what the people want.

The Western public, to varying degrees, wants politicians to be more proactive in this area. For example, according to a recent opinion poll, 69 per cent of British people either strongly agree or tend to agree with the statement that 'The British government should do more to implement its human rights policies abroad.' In Denmark and Sweden over 40 per cent of people want the European Parliament to make human rights a priority. The human rights organisation Amnesty International now has over one million members in over 170 countries. In the UK membership has doubled since 1990, suggesting that the human rights issues are of increasing public concern. And 62 per cent of Americans believe that America should not increase trade with China until it gives more economic, political, and religious freedom to its citizens.

However, the problem facing politicians is that despite these espoused progressive beliefs, when faced with the realities that prioritising human rights in foreign policy would entail, it is unclear whether Western electorates would favour action (which may incur personal costs) over doing nothing. How likely is it really that people would be willing to risk their own comforts, much less their own lives, to protect the lives of strangers in faraway places? Until the public's rhetoric on human rights can be taken to be a reality, until the public cries out for governments to balance economic aims with other goals, corporate interests with concrete aims and vote-winning outcomes (jobs, lower prices and so forth) will prevail at the expense of what is perceived to be and perhaps is an ambivalent public.

Confusing democracy with capitalism

But it is not just human rights that have been relegated; democracy has also lost out to trade interests for much of the past century. This is nowhere more striking than in the case of the United States of America, the world's loudest proponent of democracy, which has regularly allowed democracy to take a back seat to capitalism, despite its claims that it is its main priority.

When the tanks carried Yeltsin into Red Square in August 1991, Clinton said that democracy must prevail. What he probably didn't mean was a system in which people had the vote. It is unlikely that he really cared whether Russia was democratic; what he did care about was that a system should emerge in Russia that was favourable to US interests, and shared its economic values. A Singaporesque authoritarian system would have been just fine. Among potential investors in America and elsewhere in the West, the prevailing view was that 'What Russia needs is a benevolent dictator' - that is, a dictator sympathetic to the American capitalist system.

America's official line during the Cold War was: 'The overreaching aim of our foreign policy is to spread democratic values'. The truth, however, seems to be that foreign policy decisions were and are driven by a belief that the American system and its values are best protected by 'a global system based on the needs of private capital, including the protection of private property and open access to markets'.

In Iran in 1953 the CIA backed the fall of the popular government of prime minister Mohammed Mosaddeq, who had been demanding that the Anglo-Iranian Oil company (the antecedent of BP) share more of its profits with Iran. Once the rule of Shah Mohammed Reza Pahlavi was restored, the returning ruler renegotiated his country's oil arrangements so that for the first time American oil companies were able to operate there, taking a 40 per cent stake in the international consortium of private oil companies that were now to own and operate Iran's oil assets.

In 1954 the US helped overthrow the elected government of Guatemala's President Jacobo Arbenz after he had expropriated 80 per cent of the Tiquisate and Bananera plantations then the American-owned United Fruit Company. US State department interest in the affair was intense, since the former law firm of the secretary of state, John Foster Dulles, represented United Fruit, and the head of the CIA, Allen Dulles, had been a member of the company's board of trustees. Furthermore, Washington officials viewed this behaviour as a serious threat to American investors' interests, and thus to American security. Arbenz's reformist government - which had undoubtedly made these expropriations in retaliation for the fact that none of United Fruit's profits had been reinvested or redistributed in Guatemala itself- was replaced by a CIA-backed military dictatorship in 1954. 'Over the next forty years the military built the worst human-rights record in the Western Hemisphere.'

In 1964 the USA encouraged the pro-military politicians Jose de Magalhaes Pinto and Humberto de Alencar Castelo Branco in their successful attempt to overthrow Brazil's democratically elected government, a government whose espoused economic policies were again unacceptable to Washington owing to its leftist leanings. 'The new regime imposed military rule on Brazil for the next twenty years. During those two decades, the US was the regime's best trading partner, while Brazil attracted more US investment than any [other] Latin American country.'

Reagan took up the battle cry for democracy in the mid-1980s. The views of Jeanne Kirkpatrick, his ambassador to the UN, were central in reconciling the apparent paradox between actively supporting non-democratic regimes such as those of President Marcos of the Philippines, General Pinochet of Chile, and South Africa's pro-apartheid government, while continuing to demonise those in Cuba, the USSR and China. According to Kirkpatrick there was no paradox once a distinction was made between authoritarianism and totalitarianism. Authoritarian regimes such as those in the Philippines, South Africa and Chile were not democratic, often violently oppressed their peoples and were usually corrupt but, because they shared American beliefs in open economic systems, it was acceptable for America to work with them. Totalitarian regimes, on the other hand, 'were evil because they controlled every part of society especially the economy which was closed to private enterprise and foreign access'. If freedoms were ranked in order of priority, the first seemed to be freedom for American corporations to make money.

Woodrow Wilson's proclamation that 'the world must be made safe for democracy' has been presented as the driving ideology behind US foreign policy for most of the last century. This is clearly misleading. When the American government talks about spreading democracy, what it really means is spreading its own flavour of liberal democracy. In fact its policies suggest that what it cares most about is just the 'liberal' element or, even more narrowly, just the economic element of liberalism. It will encourage liberal attitudes to human rights only to the extent that they favour the development of a market economy - but in practice, as we have seen, it often prefers authoritarian regimes. Other elements of liberal democracy that it might value are the rule of law and the protection of private property, since investors need to feel secure from arbitrary seizures of their assets. But the 'democratic' elements of liberal democracy - mass participation, an active civil society, regular elections - have proved much more expendable.

Throughout the last century, the United States has cloaked a foreign policy based on trade considerations, and centred on safeguarding private economic interests in a veil of a concern for democracy. The leading US diplomat in Asia in the early part of the twentieth century, Willard Straight, was probably closer to the truth when he observed that Americans make 'politics out of money'.

WTO- whose trade organisation?

Nearly all capitalist countries do the same today. Competing economic interests have replaced ideological differences as the most divisive force in world politics. But whose interests are being fought over: corporations' or nations'? The answer today must be corporations, although nations consistently support them in fostering their interests overseas. Multinationals, many now as large and as powerful as many nation states, have a larger stake in the new world order than do many individual governments. And where the interests of corporations and states come into conflict, it is increasingly the corporate agenda that prevails.

a Colgate-Palmolive executive

The United States does not have an automatic call on our resources. There is no mindset that puts this country first.

Clive Allen, Nortel Network's executive vice-president and chief legal officer

Just because we were born there [he was speaking about Canada] doesn't mean we'll remain there. Canadians shouldn't feel they own us. The place has to remain attractive for us to remain interested in staying there.

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