Alternatives International Journal

Why are Philippine Funds Being Used to Bail out Irresponsible European Banks ?

Walden Bello — 2012-07-01T22:18:00Z

The Philippine government's decision to extend a $1 billion loan to the International Monetary Fund (IMF) to supplement the Fund's war chest of $456 billion to contain the economic crisis in Europe has been justified as assistance to countries in dire need of financial help.

It will do no such thing.

The IMF funds may be nominally earmarked for Greece, Spain, or Ireland, but they will actually flow to the big banks that made loans to these countries.

A Supply-Driven Crisis

As in the United States, the financial crisis in Europe is a supply-driven-crisis, as the big European banks sought high-profit, quick return substitutes like real estate lending and speculation in financial derivatives for industrial and agricultural investment. German and French private banks hold some 70 per cent of Greece's $400 billion debt. German banks were great buyers of the toxic subprime assets from US financial institutions, and they applied the same lack of discrimination to buying Greek government bonds. For their part, even as the financial crisis unfolded, French banks, according to the Bank of International Settlements, increased their lending to Greece by 23 per cent, to Spain by 11 per cent, and to Portugal by 26 per cent.

Indeed, in their drive to raise more and more profits from lending to governments, local banks, and real estate developers, Europe's banks poured $2.5 trillion into Ireland, Greece, Portugal, and Spain. It is said that these countries' membership in the euro deceived the banks into thinking that their loans were safe since they were implicitly backed with the economic power of the Eurozone's most powerful economies, meaning Germany and France. Not only was this a lame excuse for not looking into a debtor's financial health, which every bank is obligated to do. More likely, a country's membership in the euro provided the much-needed justification for unleashing the tremendous surplus funds the banks possessed that would create no profits by simply lying in the banks' vaults.

Rescuing the Banks

The so-called rescue funds are pretty much like the $700 billion Troubled Assets Relief Program (TARP) that injected money into the United States' top financial institutions to keep them from crashing into bankruptcy in 2008. Like TARP, the European bailout funds are public monies being used to bail out private banks that made bad bets in the global casino. TARP, however, was clearly a bailout of the banks, whereas the European rescue funds are disguising a bailout of the banks as a bailout of countries.

The European rescue program is, in this sense, also very similar to the funds assembled by the IMF during the Asian Financial Crisis in 1997. Practically all of these funds went to pay off foreign creditors and hardly anything went to ease the sufferings of people whose economies collapsed when the investors deserted them. Many creditors got a large part of their money back, but nothing was allocated to assist the estimated 20 million Indonesians and one million Thais who dropped below the poverty line as a result of the harsh stabilization programs the IMF demanded in exchange for the bailout funds.

The European bailout funds are also like the structural adjustment loans extended to the Philippines in the 1980's during the depths of the country's foreign debt crisis. They went to rescuing Citibank and other foreign creditors while Filipinos were left not only with the task of paying off the World Bank and the IMF but also undertaking the painful measures of budgetary cutbacks, trade liberalization, deregulation, and privatization that dislocated the country's economy irreversibly. One of the IMF conditions for the rescue loans for international private banks was Automatic Appropriations Law, which mandated that servicing the debt to these creditors would have priority allocation in budgetary expenditures. In the last few years, we have allocated 20-25 per cent of the national budget to debt servicing.

Banks Escape, People Pay

While the big banks will be able to get a significant part of their irresponsible investments back, as a result of the generosity of countries like the Philippines, it will be the people of Spain, Greece, Ireland, and other bankrupt European countries that will be left with the bag, just as Asians and Filipinos were the ones who had to clean up the mess that their foreign creditors and domestic economic elites left behind after the Asian financial crisis.

From our bitter experience, we can relate to the frustration of the Spanish economist who, upon hearing of the $125 billion “rescue” deal that would put the enormous burdens of repayment on Spanish taxpayers in the dreary years to come, told the New York Times, “Ultimately, those who lent to our financial system were the banks and insurance companies of Northern Europe, which should bear the consequences of these decisions.” Great principle, but it won't be followed.

In order to repay the EU-IMF bailout loan, the Greek government agreed to a draconian program that increased the value-added tax to 23 percent, raised the retirement age to 65 for both men and women, made deep cuts in pensions and public sector wages, and eliminated practices promoting job security. Years of pain and stagnation are the only future Greeks can look forward to.

As for Ireland, in return for an 85 million euro loan to repay European banks, it accepted what the New York Times characterized as the “toughest austerity program in Europe,” involving “the loss of about 25,000 public-sector jobs, equivalent to 10 percent of the government work force, as well as a four-year, $20 billion program of tax increases and spending cuts like sharp reductions in state pensions and minimum wage.” The program, being essentially, as in Greece and Spain, a draconian effort to rip off resources to pay off the banks, will end up choking growth for years to come, with the IMF itself warning the program would risk a "pernicious cycle of rising unemployment, higher arrears and loan losses.”

Moral Hazard

There is a term for the consequences of bank bailout programs : “moral hazard.” By generating the expectation that they will be rescued whenever their debtors run into trouble serving their debts, bailout programs encourage irresponsible lending. The Eurozone governments-IMF rescue operations can only encourage more irresponsible lending in the future.

There are a number of other reasons others have cited why the $1 billion credit to the IMF is a bad idea. It could be better used being lent to the national government to pay off our $62.9 billion foreign debt or plugging the budgetary shortfalls for education, health, and infrastructure. It should be given only if the IMF agreed to changes in its governance structure to give countries like the Philippines larger quotas and greater voting power and a larger say in policy. But the main reason is plain, simple, and commonsensical : our government should not be in the business of bailing out irresponsible European banks.

Inq.net columnist Walden Bello is also the representative of Akbayan in the House of Representatives.

(This article appears in the author's column on Inq.net)

The Crisis of Humanitarian Intervention

Walden Bello — 2011-08-15T15:49:06Z

Events in Libya and Syria have again brought to the forefront the question of armed humanitarian intervention or the “responsibility to protect.”

Our hearts all go out to the unarmed demonstrators seeking to bring down corrupt dictatorships that are a plague on their people. In Tunisia and Egypt, the people rose and deposed dictators on their own. Armed supporters of the Mubarak regime did attack and even fire on people in Tahrir Square, but a massive crackdown was avoided when the military decided not to take the side of the dictator.

Things have not been so simple since then. Libyan despot Muammar Gaddafi came down hard on civilian protesters, providing the opportunity for the United States and the North Atlantic Treaty Organization (NATO) to intervene militarily by waging an air war and arming the rebels. Today, the Assad dictatorship's massive repression in cities and towns in Syria that have risen in revolt has also sparked agitation for intervention in the West.

Read more...

Source: INQUIRER.net

Photo: Defence Images (Flickr)

Can China Save the World From Depression?

Walden Bello — 2009-05-28T10:34:58Z

Will China be the "growth pole" that will snatch the world from the jaws of depression?

This question has become a favorite topic as the heroic American middle class consumer, weighed down by massive debt, ceases to be the key stimulus for global production.

Although China's GDP growth rate fell to 6.1% in the first quarter — the lowest in almost a decade — optimists see "shoots of recovery" in a 30% surge in urban fixed-asset investment and a jump in industrial output in March. These indicators are proof, some say, that China's stimulus program of $586 billion — which, in relation to GDP, is much larger proportionally than the Obama administration's $787 billion package—is working.

Countryside as Launching Pad for Recovery?

With China's export-oriented urban coastal areas suffering from the collapse of global demand, many inside and outside China are pinning their hopes for global recovery on the Chinese countryside. A significant portion of Beijing's stimulus package is destined for infrastructure and social spending in the rural areas. The government is allocating 20 billion yuan ($3 billion) in subsidies to help rural residents buy televisions, refrigerators, and other electrical appliances.

But with export demand down, will this strategy of propping up rural demand work as an engine for the country's massive industrial machine?

There are grounds for skepticism. For one, even when export demand was high, 75% of China's industries were already plagued with overcapacity. Before the crisis, for instance, the automobile industry's installed capacity was projected to turn out 100% more vehicles than could be absorbed by a growing market. In the last few years, overcapacity problems have resulted in the halving of the annual profit growth rate for all major enterprises.

There is another, greater problem with the strategy of making rural demand a substitute for export markets. Even if Beijing throws in another hundred billion dollars, the stimulus package is not likely to counteract in any significant way the depressive impact of a 25-year policy of sacrificing the countryside for export-oriented urban-based industrial growth. The implications for the global economy are considerable.

Subordinating Agriculture to Industry

Ironically, China's ascent during the last 30 years began with the rural reforms Deng Xiaoping initiated in 1978. The peasants wanted an end to the Mao-era communes, and Deng and his reformers obliged them by introducing the "household-contract responsibility system." Under this scheme, each household received a piece of land to farm. The household was allowed to retain what was left over of the produce after selling to the state a fixed proportion at a state-determined price, or by simply paying a tax in cash. The rest it could consume or sell on the market. These were the halcyon years of the peasantry. Rural income grew by over 15% a year on average, and rural poverty declined from 33% to 11% of the population.

This golden age of the peasantry came to an end, however, when the government adopted a strategy of coast-based, export-oriented industrialization premised on rapid integration into the global capitalist economy. This strategy, which was launched at the 12th National Party Congress in 1984, essentially built the urban industrial economy on "the shoulders of peasants," as rural specialists Chen Guidi and Wu Chantao put it. The government pursued primitive capital accumulation mainly through policies that cut heavily into the peasant surplus.

The consequences of this urban-oriented industrial development strategy were stark. Peasant income, which had grown by 15.2% a year from 1978 to 1984, dropped to 2.8% a year from 1986 to 1991. Some recovery occurred in the early 1990s, but stagnation of rural income marked the latter part of the decade. In contrast, urban income, already higher than that of peasants in the mid-1980s, was on average six times the income of peasants by 2000.

The stagnation of rural income was caused by policies promoting rising costs of industrial inputs into agriculture, falling prices for agricultural products, and increased taxes, all of which combined to transfer income from the countryside to the city. But the main mechanism for the extraction of surplus from the peasantry was taxation. By 1991, central state agencies levied taxes on peasants for 149 agricultural products, but this proved to be but part of a much bigger bite, as the lower levels of government began to levy their own taxes, fees, and charges. Currently, the various tiers of rural government impose a total of 269 types of tax, along with all sorts of often arbitrarily imposed administrative charges.

Taxes and fees are not supposed to exceed 5% of a farmer's income, but the actual amount is often much greater. Some Ministry of Agriculture surveys have reported that the peasant tax burden is 15% — three times the official national limit.

Expanded taxation would perhaps have been bearable had peasants experienced returns such as improved public health and education and more agricultural infrastructure. In the absence of such tangible benefits, the peasants saw their incomes as subsidizing what Chen and Wu describe as the "monstrous growth of the bureaucracy and the metastasizing number of officials" who seemed to have no other function than to extract more and more from them.

Aside from being subjected to higher input prices, lower prices for their goods, and more intensive taxation, peasants have borne the brunt of the urban-industrial focus of economic strategy in other ways. According to one report, "40 million peasants have been forced off their land to make way for roads, airports, dams, factories, and other public and private investments, with an additional two million to be displaced each year." Other researchers cite a much higher figure of 70 million households, meaning that, calculating 4.5 persons per household, by 2004, land grabs have displaced as many as 315 million people.

Impact of Trade Liberalization

China's commitment to eliminate agricultural quotas and reduce tariffs, made when it joined the World Trade Organization in 2001, may yet dwarf the impact of all the previous changes experienced by peasants. The cost of admission for China is proving to be huge and disproportionate. The government slashed the average agricultural tariff from 54 to 15.3%, compared with the world average of 62%, prompting the commerce minister to boast (or complain): "Not a single member in the WTO history has made such a huge cut [in tariffs] in such a short period of time."

The WTO deal reflects China's current priorities. If the government has chosen to put at risk large sections of its agriculture, such as soybeans and cotton, it has done so to open up or keep open global markets for its industrial exports. The social consequences of this trade-off are still to be fully felt, but the immediate effects have been alarming. In 2004, after years of being a net food exporter, China registered a deficit in its agricultural trade. Cotton imports skyrocketed from 11,300 tons in 2001 to 1.98 million tons in 2004, a 175-fold increase. Chinese sugarcane, soybean, and most of all, cotton farmers were devastated. In 2005, according to Oxfam Hong Kong, imports of cheap U.S. cotton resulted in a loss of $208 million in income for Chinese peasants, along with 720,000 jobs. Trade liberalization is also likely to have contributed to the dramatic slowdown in poverty reduction between 2000 and 2004.

Loosening the Property Regime

In the past few years, the priority placed on a capitalist transformation of the countryside to support export-oriented industrialization has moved the party to promote not only agricultural trade liberalization but a loosening of a semi-socialist property regime that favors peasants and small farmers. This involves easing public controls over land in order to move toward a full-fledged private property regime. The idea is to allow the sale of land rights (the creation of a land market) so that the most "efficient" producers can expand their holdings. In the euphemistic words of a U.S. Department of Agriculture publication, "China is strengthening farmers' rights — although stopping short of allowing full ownership of land — so farmers can rent land, consolidate their holdings, and achieve efficiencies in size and scale."

This liberalization of land rights included the passage of the Agricultural Lease Law in 2003, which curtailed the village authorities' ability to reallocate land and gave farmers the right to inherit and sell leaseholds for arable land for 30 years. With the buying and selling of rights to use land, the government essentially reestablished private property in land in China. In talking about "family farms" and "large-scale farmers," the Chinese Communist Party was, in fact, endorsing a capitalist development path to supplant one that had been based on small-scale peasant agriculture. As one partisan of the new policy argued, "The reform would create both an economy of scale — raising efficiency and lowering agricultural production costs — but also resolve the problem of idle land left by migrants to the cities."

Despite the Party's assurance that it was institutionalizing the peasants' rights to land, many feared that the new policy would legalize the process of illegal land grabbing that had been occurring on a wide scale. This would, they warned, "create a few landlords and many landless farmers who will have no means of living." Given the turbulent transformation of the countryside by the full-scale unleashing of capitalist relations of production in other countries, these fears were not misplaced.

In sum, simply allocating money to boost rural demand is unlikely to counteract the powerful economic and social structures created by subordinating the development of the countryside to export-oriented industrialization. These policies have contributed to greater inequality between urban and rural incomes and stalled the reduction of poverty in the rural areas. To enable the rural areas of China to serve as the launching pad for national and global recovery would entail a fundamental policy shift, and the government would have to go against the interests, both local and foreign, that have congealed around the strategy of foreign-capital-dependent, export-oriented industrialization.

Beijing has talked a lot about a "New Deal" for the countryside over the last few years. But there are few signs that it has the political will to adopt policies that would translate its rhetoric into reality. So don't expect Beijing to save the global economy any time soon.

Walden Bello is a member of the Philippine House of Representatives, president of the Freedom from Debt Coalition, a senior analyst of the Bangkok-based Focus on the Global South, and a columnist with Foreign Policy In Focus. The issues touched on in this commentary are discussed in greater depth in the author's book The Food Wars, published by Verso, which will be available by July 2009.

U-20: Will the Global Economy Resurface?

Walden Bello — 2009-04-02T20:09:49Z

The Group of 20 (G20) is making a big show of getting together to come to grips with the global economic crisis. But here's the problem with the upcoming summit in London on April 2: It's all show. What the show masks is a very deep worry and fear among the global elite that it really doesn't know the direction in which the world economy is heading and the measures needed to stabilize it.
The latest statistics are exceeding even the gloomiest projections made earlier. Establishment analysts are beginning to mention the dreaded "D" word and there is a spreading sense that a tidal wave just now gathering momentum will simply overwhelm the trillions of dollars allocated for stimulus spending. In this environment, the G20 conveys the impression that they're more commanded by than in command of developments (In addition to the seven wealthy industrial nations that belong to the G7, the G20 includes China, India, Indonesia, Mexico, Brazil, Argentina, Russia, Saudi Arabia, Australia, South Korea, Turkey, Italy, and South Africa.).

Indeed, perhaps no image is more evocative of the current state of the global economy than that of a World War II German U-Boat depth-charged in the North Atlantic by British destroyers. It's going down fast, and the crew doesn't know when it will hit rock bottom. And when it does hit the ocean floor, the big question is: Will the crew be able to make the submarine rise again by pumping compressed air into the severely damaged ballast tanks, like the sailors in Wolfgang Petersen's classic film Das Boot? Or will the U-Boat simply stay at the bottom, its crew doomed to contemplate a fate worse than sudden death?
The current capitalist crew manning the global economy doesn't know whether Keynesian methods can re-inflate the global economy. Meanwhile, an increasing number of people are asking whether using a clutch of Social Democratic-like reforms is enough to repair the global economy, or whether the crisis will lead to a new international economic order.

A New Bretton Woods?
The G20 meeting has been trumpeted as a new "Bretton Woods." In July 1944, in Bretton Woods, New Hampshire, representatives of the state-managed capitalist economies designed the postwar multilateral order with themselves at the center.

In fact, the two meetings couldn't be further apart.

The London meeting will last one day; the Bretton Woods conference was a tough 21-day working session.

The London meeting is exclusive, with 20 governments arrogating to themselves the power to decide for 172 other countries. The Bretton Woods meeting tried hard to be inclusive to avoid precisely the illegitimacy that dogs the G20's London tryst. Even in the midst of global war, it brought together 44 countries, including the still-dependent Commonwealth of the Philippines and the tiny, now-vanished Siberian state of Tannu Tuva.

The Bretton Woods Conference created new multilateral institutions and rules to manage the postwar world. The G20 is recycling failed institutions: the G20 itself, the Financial Stability Forum (FSF), the Bank of International Settlements and "Basel II," and the now 65-year-old International Monetary Fund (IMF). Some of these institutions were established by the elite Group of 7 after the 1997 Asian financial crisis to come up with a new financial architecture that would prevent a repetition of the debacle brought about by IMF policies of capital account liberalization. But instead of coming up with safeguards, all these institutions bought the global financial elite's strategy of "self-regulation."

Among the mantras they thus legitimized were that capital controls were bad for developing economies; short-selling, or speculating on the movement of borrowed stocks, was a legitimate market operation; and derivatives — or securities that allow betting on the movements of an underlying asset — "perfected" the market. The implicit recommendation of their inaction was that the best way to regulate the market was to leave it to market players, who had developed sophisticated but allegedly reliable models of "risk assessment."

In short, institutions that were part of the problem are now being asked to become the central part of the solution. Unwittingly, the G20 are following Marx's maxim that history first repeats itself as tragedy, then as farce.

Resurrecting the Fund
The most problematic component of the G20 solution is its proposals for the International Monetary Fund (IMF). The United States and the European Union are seeking an increase in the capital of the IMF from $250 billion to $500 billion. The plan is for the IMF to lend these funds to developing countries to use to stimulate their economies, with U.S. Treasury Secretary Tim Geithner proposing that the Fund supervise this global exercise.

If ever there was a non-starter, this is it.

First of all, the representation question continues to exercise much of the global South. So far, only marginal changes have been made in the allocation of voting rights at the IMF. Despite the clamor for greater voting power for members from the global South, the rich countries are still overrepresented on the Fund's decision-making executive board and developing countries, especially those in Asia and Africa, are vastly underrepresented. Europe holds a third of the chairs in the executive board and claims the feudal right to have a European always occupy the role of managing director. The United States, for its part, has nearly 17% of voting power, giving it veto power.

Second, the IMF's performance during the Asian financial crisis of 1997, more than anything, torpedoed its credibility. The IMF helped bring about the crisis by pushing the Asian countries to eliminate capital controls and liberalize their financial sectors, promoting both the massive entry of speculative capital as well as its destabilizing exit at the slightest sign of crisis. The Fund then pushed governments to cut expenditures, on the theory that inflation was the problem, when it should have been pushing for greater government spending to counteract the collapse of the private sector. This pro-cyclical measure ended up accelerating the regional collapse into recession. Finally, the billions of dollars of IMF rescue funds went not to rescuing the collapsing economies but to compensate foreign financial institutions for their losses — a development that has become a textbook example of "moral hazard" or the encouragement of irresponsible lending behavior.

Thailand paid off the IMF in 2003 and declared its "financial independence." Brazil, Venezuela, and Argentina followed suit, and Indonesia also declared its intention to repay its debts as quickly as possible. Other countries likewise decided to stay away, preferring to build up their foreign exchange reserves to defend themselves against external developments rather than contract new IMF loans. This led to the IMF's budget crisis, for most of its income was from debt payments made by the bigger developing countries.

Partisans of the Fund say that the IMF now sees the merit of massive deficit spending and that, like Richard Nixon, it can now say, "we are all Keynesians now." Many critics do not agree. Eurodad, a non-governmental organization that monitors IMF loans, says that the Fund still attaches onerous conditions to loans to developing countries. Very recent IMF loans also still encourage financial and banking liberalization. And despite the current focus on fiscal stimulus — with some countries, like the United States, pushing for governments to raise their stimulus spending to at least 2% of GDP — the IMF still requires low income borrowers to keep their deficit spending to no more than 1% of GDP.

Finally, there is the question of whether or not the Fund knows what it's doing. One of the key factors discrediting the IMF has been its almost total inability to anticipate the brewing financial crisis. In concluding the 2007 Article IV consultation with the United States, the IMF board stated that "[t]he financial system has shown impressive resilience, including to recent difficulties in the subprime mortgage market." In short, the Fund hasn't only failed miserably in its policy prescriptions, but despite its supposedly top-flight stable of economists, it has drastically fallen short in its surveillance responsibilities.

However large the resources the G20 provide the IMF, there will be little international buy-in to a global stimulus program managed by the Fund.

The Way Forward
The North's response to the current crisis, which is to revive fossilized institutions, is reminiscent of Keynes' famous saying: "The difficulty lies not so much in developing new ideas as in escaping from old ones." So, in Keynes' spirit, let's try to identify ways of abandoning old ways of thinking.

First of all, since legitimacy is a very scarce commodity at this point, the UN secretary general and the UN General Assembly — rather than the G20 — should convoke a special session to design the new global multilateral order. A Commission of Experts on Reforms to the International Monetary and Financial System, set up by the president of the General Assembly and headed by Nobel Prize laureate Joseph Stiglitz, has already done the preparatory policy work for such a meeting. The meeting would be an inclusive process like the Bretton Woods Conference, and like Bretton Woods, it should be a working session lasting several weeks. One of the key outcomes might be the setting up of a representative forum such as the "Global Coordination Council" suggested by the Stiglitz Commission that would broadly coordinate global economic and financial reform.

Second, to immediately assist countries to deal with the crisis, the debts of developing countries to Northern institutions should be cancelled. Most of these debts, as the Jubilee movement reminds us, were contracted under onerous conditions and have already been paid many times over. Debt cancellation or a debt moratorium will allow developing countries access to greater resources and will have a greater stimulus effect than money channeled through the IMF.

Third, regional structures to deal with financial issues, including development finance, should be the centerpiece of the new architecture of new global governance, not another financial system where the countries of the North dominate centralized institutions like the IMF and monopolize resources and power. In East Asia, the "ASEAN Plus Three" Grouping, or "Chiang Mai Initiative," is a promising development that needs to be expanded, although it also needs to be made more accountable to the peoples of the region. In Latin America, several promising regional initiatives are already in progress, like the Bolivarian Alternative for the Americas and the Bank of the South. Any new global order must have socially accountable regional institutions as its pillars.

These are, of course, immediate steps to be made in the context of a longer-term, more fundamental and strategic reconfiguration of a global capitalist system now on the verge of collapsing. The current crisis is a grand opportunity to craft a new system that ends not just the failed system of neoliberal global governance but the Euro-American domination of the capitalist global economy, and put in its place a more decentralized, deglobalized, democratic post-capitalist order. Unless this more fundamental restructuring takes place, the global economy might not be worth bringing back to the surface.

Foreign Policy In Focus columnist Walden Bello is president of the Freedom from Debt Coalition, senior analyst at the Bangkok-based Focus on the Global South, and professor of sociology at the University of the Philippines.

The global collapse: a non-orthodox view

Walden Bello — 2009-02-20T16:26:10Z

Week after week, we see the global economy contracting at a pace worse than predicted by the gloomiest analysts. We are now, it is clear, in no ordinary recession but are headed for a global depression that could last for many years.

The fundamental crisis: overaccumulation

Orthodox economics has long ceased to be of any help in understanding the crisis. Non-orthodox economics, on the other hand, provides extraordinarily powerful insights into the causes and dynamics of the current crisis. From the progressive perspective, what we are seeing is the intensification of one of the central crises or “contradictions” of global capitalism: the crisis of overproduction, also known as overaccumulation or overcapacity. This is the tendency for capitalism to build up, in the context of heightened inter-capitalist competition, tremendous productive capacity that outruns the population's capacity to consume owing to income inequalities that limit popular purchasing power. The result is an erosion of profitability, leading to an economic downspin.

To understand the current collapse, we must go back in time to the so-called Golden Age of Contemporary Capitalism, the period from 1945 to 1975. This was a period of rapid growth both in the center economies and in the underdeveloped economies — one that was partly triggered by the massive reconstruction of Europe and East Asia after the devastation of the Second World War, and partly by the new socioeconomic arrangements and instruments based on a historic class compromise between Capital and Labor that were institutionalized under the new Keynesian state

But this period of high growth came to an end in the mid-1970s, when the center economies were seized by stagflation, meaning the coexistence of low growth with high inflation, which was not supposed to happen under neoclassical economics.

Stagflation, however, was but a symptom of a deeper cause: the reconstruction of Germany and Japan and the rapid growth of industrializing economies like Brazil, Taiwan, and South Korea added tremendous new productive capacity and increased global competition, while income inequality within countries and between countries limited the growth of purchasing power and demand, thus eroding profitability. This was aggravated by the massive oil price rises of the seventies.

The most painful expression of the crisis of overproduction was global recession of the early 1980s, which was the most serious to overtake the international economy since the Great Depression, that is, before the current crisis.

Capitalism tried three escape routes from the conundrum of overproduction: neoliberal restructuring, globalization, and financialization

Escape Route # 1: Neoliberal Restructuring

Neoliberal restructuring took the form of Reaganism and Thatcherism in the North and Structural Adjustment in the South. The aim was to invigorate capital accumulation, and this was to be done by 1) removing state constraints on the growth, use, and flow of capital and wealth; and 2) redistributing income from the poor and middle classes to the rich on the theory that the rich would then be motivated to invest and reignite economic growth.

The problem with this formula was that in redistributing income to the rich, you were gutting the incomes of the poor and middle classes, thus restricting demand, while not necessarily inducing the rich to invest more in production. In fact, it could be more profitable to invest in speculation.

In fact, neoliberal restructuring, which was generalized in the North and south during the eighties and nineties, had a poor record in terms of growth: Global growth averaged 1.1 percent in the 1990s and 1.4 percent in the ‘80s, compared with 3.5 percent in the 1960s and 2.4 percent in the ‘70s, when state interventionist policies were dominant. Neoliberal restructuring could not shake off stagnation.

Escape Route # 2: Globalization

The second escape route global capital took to counter stagnation was “extensive accumulation” or globalization, or the rapid integration of semi-capitalist, non-capitalist, or pre-capitalist areas into the global market economy. Rosa Luxemburg, the famous German radical economist, saw this long ago in her classic “The Accumulation of Capital” as necessary to shore up the rate of profit in the metropolitan economies.

How? By gaining access to cheap labor, by gaining new, albeit limited, markets, by gaining new sources of cheap agricultural and raw material products, and by bringing into being new areas for investment in infrastructure. Integration is accomplished via trade liberalization, removing barriers to the mobility of global capital, and abolishing barriers to foreign investment.

China is, of course, the most prominent case of a non-capitalist area to be integrated into the global capitalist economy over the last 25 years.

By the middle of the first decade of the 21st century, roughly 40-50 percent of the profits of US corporations came from their operations and sales abroad, especially in China.

The problem with this escape route from stagnation is that it exacerbates the problem of overproduction because it adds to productive capacity. A tremendous amount of manufacturing capacity has been added in China over the last 25 years, and this has had a depressing effect on prices and profits. Not surprisingly, by around 1997, the profits of US corporations stopped growing. According to one calculation, the profit rate of the Fortune 500 went from 7.15 in 1960-69 to 5.30 in 1980-90 to 2.29 in 1990-99 to 1.32 in 2000-2002. By the end of the 1990s, with excess capacity in almost every industry, the gap between productive capacity and sales was the largest since the Great Depression.

Escape Route # 3: Financialization

Given the limited gains in countering the depressive impact of overproduction via neoliberal restructuring and globalization, the third escape route — financialization — became very critical for maintaining and raising profitability.

With investment in industry and agriculture yielding low profits owing to overcapacity, large amounts of surplus funds have been circulating in or invested and reinvested in the financial sector — that is, the financial sector is turning on itself.

The result is an increased bifurcation between a hyperactive financial economy and a stagnant real economy. As one financial executive noted in the pages of the Financial Times, “there has been an increasing disconnect between the real and financial economies in the last few years. The real economy has grown … but nothing like that of the financial economy — until it imploded.” What this observer does not tell us is that the disconnect between the real and the financial economy is not accidental — that the financial economy exploded precisely to make up for the stagnation owing to overproduction of the real economy

One indicator of the super-profitability of the financial sector is that while profits in the US manufacturing sector came to one percent of US gross domestic product (GDP), profits in the financial sector came to two percent. Another is the fact that 40 percent of the total profits of US financial and non-financial corporations is accounted for by the financial sector although it is responsible for only fiv percent of US gross domestic product (and even that is likely to be an overestimate).

The problem with investing in financial sector operations is that it is tantamount to squeezing value out of already created value. It may create profit, yes, but it does not create new value — only industry, agricultural, trade, and services create new value. Because profit is not based on value that is created, investment operations become very volatile and prices of stocks, bonds, and other forms of investment can depart very radically from their real value — for instance, the stock of Internet startups may keep rising to heights unknown, driven mainly by upwardly spiraling financial valuations.

Profits then depend on taking advantage of upward price departures from the value of commodities, then selling before reality enforces a “correction,” that is a crash back to real values. The radical rise of prices of an asset far beyond real values is what is called the formation of a bubble.

Profitability being dependent on speculative coups, it is not surprising that the finance sector lurches from one bubble to another, or from one speculative mania to another. Because it is driven by speculative mania, finance driven capitalism has experienced about 100 financial crises since capital markets were deregulated and liberalized in the 1980s, the most serious before the current crisis being the Asian Financial Crisis of 1997.

Dynamics of the Subprime Implosion

The current Wall Street collapse has its roots in the Technology Bubble of the late 1990s, when the price of the stocks of Internet startups skyrocketed, then collapsed, resulting in the loss of $7 trillion worth of assets and the recession of 2001-2002.

The loose money policies of the Fed under Alan Greenspan had encouraged the Technology Bubble, and when it collapsed into a recession, Greenspan, trying to counter a long recession, cut the prime rate to a 45-year low of 1.0 percent in June 2003 and kept it there for over a year. This had the effect of encouraging another bubble — the real estate bubble.

As early as 2002, progressive economists were warning about the real estate bubble. However, as late as 2005, then Council of Economic Advisers Chairman and now Federal Reserve Board Chairman Ben Bernanke attributed the rise in US housing prices to “strong economic fundamentals” instead of speculative activity. Is it any wonder that he was caught completely off guard when the Subprime Crisis broke in the summer of 2007?

The subprime mortgage crisis was not a case of supply outrunning real demand. The “demand” was largely fabricated by speculative mania on the part of developers and financiers that wanted to make great profits from their access to foreign money — most of it Asian and Chinese in origin — that flooded the US in the last decade. Big ticket mortgages were aggressively sold to millions who could not normally afford them by offering low “teaser” interest rates that would later be readjusted to jack up payments from the new homeowners.

How did problematic mortgages become such a massive problem? The reason is that these assets were then “securitized” — that is converted into spectral commodities called “collateralized debt obligations” (CDOs) that enabled speculation on the odds that the mortgage would not be paid. These were then traded by the mortgage originators working with different layers of middlemen who understated risk so as to offload them as quickly as possible to other banks and institutional investors. These institutions in turn offloaded these securities onto other banks and foreign financial institutions.

The idea was to make a sale quickly, get your money upfront and make a tidy profit, while foisting the risk on the suckers down the line — the hundreds of thousands of institutions and individual investors that bought the mortgage-tied securities. This was called “spreading the risk,” and it was actually seen as a good thing because it lightened the balance sheet of financial institutions, enabling them to engage in other lending activities.

When the interest rates were raised on the subprime loans, adjustable mortgage, and other housing loans, the game was up. There are about four million subprime mortgages which will likely go into default in the next two years, and five million more defaults from adjustable rate mortgages and other “flexible loans” that were geared to snag the most reluctant potential homebuyer will occur over the next several years. But securities whose value run into as much as$2 trillion had already been injected, like virus, into the global financial system. Global capitalism's gigantic circulatory system was fatally infected. And, as with a plague, we don't know who and how many are fatally infected until they keel over because the whole financial system has become so non-transparent owing to lack of regulation.

For Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Bear Stearns, Bank of America, and Citigroup, the losses represented by these toxic securities simply overwhelmed their reserves. Iceland's banks and many European financial institutions have since joined the list of victims. Some, like Lehman Brothers, have been allowed to die, but most have been kept alive with massive injections of taxpayers' cash by governments that want the banks to lend to keep the real economy going.

Collapse of the Real Economy

But instead of performing their primordial task of lending to facilitate productive activity, the banks are holding on to their cash or buying up rivals to strengthen their financial base. Not surprisingly, with global capitalism's circulatory system seizing up, it was only a matter of time before the real economy would contract, as it has with frightening speed in the last few weeks. Woolworth, a retail icon, has folded in Britain, the US auto industry is on emergency care, and even mighty Toyota has suffered an unprecedented decline in its profits. With American consumer demand plummeting, China and East Asia have seen their goods rotting on the docks, bringing about a sharp contraction of their economies and massive layoffs.

Globalization has ensured that economies that went up together in the boom would also go down together, with unparalleled speed, in the bust, the end of which is nowhere to be discerned.

* Philippine Daily Inquirer, 11 February 2009. This is the longer version of an essay by the author released by the British Broadcasting Corporation (BBC) on Feb. 6, 2009. Copyright 2009 INQUIRER.net and content partners. Circulated by the Transnational Institute.

* Walden Bello, a fellow of the Transnational Institute, is professor at the University of the Philippines, Diliman; senior analyst at Focus on the Global South; and president of the Freedom from Debt Coalition.

The Coming Fury

Walden Bello — 2009-02-11T13:59:41Z

As goods pile up in wharves from Bangkok to Shanghai, and workers are laid off in record numbers, people in East Asia are beginning to realize they aren't only experiencing an economic downturn but living through the end of an era.

For over 40 years now, the cutting edge of the region's economy has been export-oriented industrialization (EOI). Taiwan and Korea first adopted this strategy of growth in the mid-1960s, with Korean dictator Park Chung-Hee coaxing his country's entrepreneurs to export by, among other measures, cutting off electricity to their factories if they refused to comply.

The success of Korea and Taiwan convinced the World Bank that EOI was the wave of the future. In the mid-1970s, then-Bank President Robert McNamara enshrined it as doctrine, preaching that "special efforts must be made in many countries to turn their manufacturing enterprises away from the relatively small markets associated with import substitution toward the much larger opportunities flowing from export promotion."

EOI became one of the key points of consensus between the Bank and Southeast Asia's governments. Both realized import substitution industrialization could only continue if domestic purchasing power were increased via significant redistribution of income and wealth, and this was simply out of the question for the region's elites. Export markets, especially the relatively open U.S. market, appeared to be a painless substitute.

Japanese Capital Creates an Export Platform

The World Bank endorsed the establishment of export processing zones, where foreign capital could be married to cheap (usually female) labor. It also supported the establishment of tax incentives for exporters and, less successfully, promoted trade liberalization. Not until the mid-1980s, however, did the economies of Southeast Asia take off, and this wasn't so much because of the Bank but because of aggressive U.S. trade policy. In 1985, in what became known as the Plaza Accord, the United States forced the drastic revaluation of the Japanese yen relative to the dollar and other major currencies. By making Japanese imports more expensive to American consumers, Washington hoped to reduce its trade deficit with Tokyo. Production in Japan became prohibitive in terms of labor costs, forcing the Japanese to move the more labor-intensive parts of their manufacturing operations to low-wage areas, in particular to China and Southeast Asia. At least $15 billion worth of Japanese direct investment flowed into Southeast Asia between 1985 and 1990.

The inflow of Japanese capital allowed the Southeast Asian "newly industrializing countries" to escape the credit squeeze of the early 1980s brought on by the Third World debt crisis, surmount the global recession of the mid-1980s, and move onto a path of high-speed growth. The centrality of the endaka, or currency revaluation, was reflected in the ratio of foreign direct investment inflows to gross capital formation, which leaped spectacularly in the late 1980s and 1990s in Indonesia, Malaysia, and Thailand.

The dynamics of foreign-investment-driven growth was best illustrated in Thailand, which received $24 billion worth of investment from capital-rich Japan, Korea, and Taiwan in just five years, between 1987 and 1991. Whatever might have been the Thai government's economic policy preferences — protectionist, mercantilist, or pro-market — this vast amount of East Asian capital coming into Thailand could not but trigger rapid growth. The same was true in the two other favored nations of northeast Asian capital, Malaysia and Indonesia.

It wasn't just the scale of Japanese investment over a five-year period that mattered, however; it was the process. The Japanese government and keiretsu, or conglomerates, planned and cooperated closely in the transfer of corporate industrial facilities to Southeast Asia. One key dimension of this plan was to relocate not just big corporations like Toyota or Matsushita, but also small and medium enterprises that provided their inputs and components. Another was to integrate complementary manufacturing operations that were spread across the region in different countries. The aim was to create an Asia Pacific platform for re-export to Japan and export to third-country markets. This was industrial policy and planning on a grand scale, managed jointly by the Japanese government and corporations and driven by the need to adjust to the post-Plaza Accord world. As one Japanese diplomat put it rather candidly, "Japan is creating an exclusive Japanese market in which Asia Pacific nations are incorporated into the so-called keiretsu [financial-industrial bloc] system."

China Masters the Model

If Taiwan and Korea pioneered the model and Southeast Asia successfully followed in their wake, China perfected the strategy of export-oriented industrialization. With its reserve army of cheap labor unmatched by any country in the world, China became the "workshop of the world," drawing in $50 billion in foreign investment annually by the first half of this decade. To survive, transnational firms had no choice but to transfer their labor-intensive operations to China to take advantage of what came to be known as the "China price," provoking in the process a tremendous crisis in the advanced capitalist countries' labor forces.

This process depended on the U.S. market. As long as U.S. consumers splurged, the export economies of East Asia could continue in high gear. The low U.S. savings rate was no barrier since credit was available on a grand scale. China and other Asian countries snapped up U.S. treasury bills and loaned massively to U.S. financial institutions, which in turn loaned to consumers and homebuyers. But now the U.S. credit economy has imploded, and the U.S. market is unlikely to serve as the same dynamic source of demand for a long time to come. As a result, Asia's export economies have been marooned.

The Illusion of "Decoupling"

For several years China has seemed to be a dynamic alternative to the U.S. market for Japan and East Asia's smaller economies. Chinese demand, after all, had pulled the Asian economies, including Korea and Japan, from the depths of stagnation and the morass of the Asian financial crisis in the first half of this decade. In 2003, for instance, Japan broke a decade-long stagnation by meeting China's thirst for capital and technology-intensive goods. Japanese exports shot up to record levels. Indeed, China had become by the middle of the decade, "the overwhelming driver of export growth in Taiwan and the Philippines, and the majority buyer of products from Japan, South Korea, Malaysia, and Australia."

Even though China appeared to be a new driver of export-led growth, some analysts still considered the notion of Asia "decoupling" from the U.S. locomotive to be a pipe dream. For instance, research by economists C.P. Chandrasekhar and Jayati Ghosh, underlined that China was indeed importing intermediate goods and parts from Japan, Korea, and ASEAN, but only to put them together mainly for export as finished goods to the United States and Europe, not for its domestic market. Thus, "if demand for Chinese exports from the United States and the EU slow down, as will be likely with a U.S. recession," they asserted, "this will not only affect Chinese manufacturing production, but also Chinese demand for imports from these Asian developing countries."

The collapse of Asia's key market has banished all talk of decoupling. The image of decoupled locomotives — one coming to a halt, the other chugging along on a separate track — no longer applies, if it ever had. Rather, U.S.-East Asia economic relations today resemble a chain-gang linking not only China and the United States but a host of other satellite economies. They are all linked to debt-financed middle-class spending in the United States, which has collapsed.

China's growth in 2008 fell to 9%, from 11% a year earlier. Japan is now in deep recession, its mighty export-oriented consumer goods industries reeling from plummeting sales. South Korea, the hardest hit of Asia's economies so far, has seen its currency collapse by some 30% relative to the dollar. Southeast Asia's growth in 2009 will likely be half that of 2008.

The Coming Fury

The sudden end of the export era is going to have some ugly consequences. In the last three decades, rapid growth reduced the number living below the poverty line in many countries. In practically all countries, however, income and wealth inequality increased. But the expansion of consumer purchasing power took much of the edge off social conflicts. Now, with the era of growth coming to an end, increasing poverty amid great inequalities will be a combustible combination.

In China, about 20 million workers have lost their jobs in the last few months, many of them heading back to the countryside, where they will find little work. The authorities are rightly worried that what they label "mass group incidents," which have been increasing in the last decade, might spin out of control. With the safety valve of foreign demand for Indonesian and Filipino workers shut off, hundreds of thousands of workers are returning home to few jobs and dying farms. Suffering is likely to be accompanied by rising protest, as it already has in Vietnam, where strikes are spreading like wildfire. Korea, with its tradition of militant labor and peasant protest, is a ticking time bomb. Indeed, East Asia may be entering a period of radical protest and social revolution that went out of style when export-oriented industrialization became the fashion three decades ago.

Walden Bello is a Foreign Policy In Focus columnist, a senior analyst at the Bangkok-based Focus on the Global South, president of the Freedom from Debt Coalition, and a professor of sociology at the University of the Philippines.

Sources

Hisahiko Okasaki, "New Strategies toward Super-Asian Bloc," This Is (Tokyo), August 1992. Reproduced in Foreign Broadcast Information Service Daily Report: East Asia Supplement, Oct. 7, 1992.

"China: the Locomotive," The Straits Times, February 23, 2004.

The end of an era

Walden Bello — 2009-01-24T18:56:11Z

MANILA, Jan (IPS) As the US recession drags Asia down, there has been much speculation about a regional response to the crisis. Seemingly lending substance to this have been a trilateral summit of the leaders of China, Japan, and South Korea last December and a flurry of bilateral talks between Japan's Taro Aso and Korea's Lee Myung-bak, all of which had economic cooperation at the top of the agenda.

On the face of it, coordinated action by the three could be significant: they account for about three-quarters of East Asia's GDP and two-thirds of its trade, and each is among the other two's leading trading partners. There are, however, reasons to be sceptical of recent declarations of cooperation.

First, the idea of Northeast Asian cooperation in the form of a regional trading area has been kicked around for the last 15 years in different formulations, with little movement at all in terms of implementation.

Second, government coordination of economic policies in the face of a crisis does not have a good track record. It was not just the US that vetoed the Asian Monetary Fund (AMF) proposed by Japan during the 1997 financial crisis: China also did for fear it could become a vehicle of Japanese hegemony.

Third, these meetings have been a case of a mountain giving birth to a mouse. The concrete measures agreed upon -to expand use of bilateral swap facilities under the ten-member Association of Southeast Asian Nations (ASEAN) Plus Three (China, Japan and South Korea) Arrangement and call for the infusion of more capital into the Asian Development Bank (ADB)- were timid compared to the gargantuan task at hand. None of the three named a specific amount they would commit to the ADB, and for nearly a decade now, the institutional evolution of the ASEAN Plus Three formation has been stuck at the level of bilateral swap arrangements to prop up regional currencies subject to speculative attack.

One reason economic cooperation among the Northeast Asian giants has become a hot topic is that it was Chinese demand that pulled the Asian economies, including Korea and Japan, from the depths of stagnation and out of the Asian financial crisis in the first half of this decade. Japan's first sustained recovery following its collapse into recession in the early 1990s was fuelled by record exports of capital and technology-intensive goods to China. Indeed, China became the main destination for Asia's exports, with one analysis pointing out that by the middle of the decade, China had become ''the overwhelming driver of export growth in Taiwan and the Philippines, and the majority buyer of products from Japan, South Korea, Malaysia, and Australia.''

This positive role of the Chinese 'locomotive' earlier this decade sparked optimistic talk in academic and policy circles about 'decoupling' economic growth in East Asia from that of the US when the latter was threatened with recession because of the subprime mortgage crisis in 2007. Others were less optimistic. Research by economists C.P. Chandrasekhar and Jayati Ghosh, for instance, underlined that although China was indeed importing intermediate goods and parts from Japan, Korea, and ASEAN, it was for assembly as finished goods for export to the United States and Europe, not for its domestic market. Thus, ''if demand for Chinese exports from the United States and the EU slows down, as will be likely with a US recession, this will affect not only Chinese manufacturing production but also Chinese demand for imports from these Asian developing countries.''

The swift transmission to Asia of the collapse of their key market has banished all talk of 'decoupling'. The more accurate term for US-East Asia economic relations today might be a chain gang, linking not only China and the US but a host of other satellite economies, all of whose fates were tied to the deflating balloon of debt-financed middle-class spending in the United States. China's growth in 2008 fell to 9 per cent, from 11 per cent a year earlier, provoking widespread unemployment and discontent. Japan is now in deep recession, its mighty export-oriented consumer goods industries reeling from plummeting sales. South Korea, the hardest hit, has seen its currency collapse by some 30 per cent relative to the dollar.

The current downturn, many now realise, is no simple recession. For East Asia, there is the added significance that this is the end of an era of export-oriented industrialisation that began in the 1960s, when Korea and Taiwan embarked on a development process that tied their growth to the US market. Encouraged by the World Bank to make ''special efforts'' to turn their manufacturing enterprises away from the relatively small markets associated with import substitution toward the much larger opportunities flowing from export promotion, the Southeast Asian countries followed suit in the 1970s and 1980s.

Everybody's export market was the United States, where, over the last 15 years, a consumer binge fuelled by massive international credit -much of it from China and Japan- extended a boom past its natural life and appeared to portend a never-ending demand for Asian imports. Now that Alan Greenspan's ''New Economy'' has fallen victim to the law of gravity, it will not be easy to reorient the export machines that the Asian economies have become into economic engines serving the domestic market. Income and asset redistribution will be central to that reorientation, and many national elites will fight tooth and nail to avoid that.

Regional integration or the joining of national markets by bringing down tariffs against one another while keeping them up against non-member countries is another remedy for the decline of the US market. The different economic elites, however, are very jealous of their national markets, and government technocrats, who have been the ones promoting the dream of a 1.9 billion East Asian market, have not demonstrated an eagerness to take them on. The current crisis may embolden them to take some first steps, but the distance between the rhetoric of regionalism and the reality of separate markets and independent economic policies will continue to be considerable.

Asia & the US in the 21st Century

Walden Bello — 2008-11-20T12:41:36Z

(An earlier version of this commentary was delivered as the Ted Wheelwright Memorial Lecture at the University of Sydney on Sept. 1, 2008.)

Despite the glitter that surrounded the Olympics in Beijing, the Democratic National Convention in Denver, and the Republican National Convention in Minneapolis, the messages coming to Asia from these events were very different.

From Beijing, the message was, to put it in the words of one pundit, China has had a few bad centuries but is back on its feet. From Denver, the word was that the world's most powerful country has been on a desperate decade-long downspin that can only get worse if the Republicans keep the White House. From Minneapolis, the message was that things weren't that bad but they would definitely get worse under the Democrats.

For people in this part of the world, the weakening of US power is most evident elsewhere: in the Middle East and Southwest Asia, where Washington is bogged down in unending wars in Iraq and Afghanistan; in Latin America, where the rebellion against neoliberalism and US meddling is in full swing; and, most recently, in Central Asia, where Washington and the North Atlantic Treaty Organization (NATO) have been taught a painful lesson in overextension in Georgia.

The erosion of Washington's position is less obvious in East Asia. After all, the US continues to maintain over 300 military bases and facilities in the Western Pacific. Over the last decade, it has established what amounts to a permanent troop presence in the Southern Philippines to make up for its giving up its two big military bases on Luzon Island in 1992. And in Indonesia, the Pentagon has reestablished its close ties with the Indonesian military after several years of uncertainty, using the opportunity provided by relief operations during the tsunami of 2004.

Erosion of US power in East Asia

Nevertheless, the region—and Southeast Asia in particular—is probably more independent of the US today than at any other time in the last 60 years. Economics is the reason. Over the last two decades, several developments have eroded the US's position.

First of all, its drive to create the trans-Pacific free trade area known as the Asia Pacific Cooperation (APEC) failed. APEC was meant to be a westward extension of the North American Free Trade Area (NAFTA), and both were intended to serve as a geoeconomic counterweight to the European Union. Japan, China, and the Association of Southeast Asian (ASEAN) countries, fearing US economic domination in the name of free trade, scuttled President Bill Clinton's trans-Pacific dream at the APEC Summit in Osaka in 1995.

APEC summits continue to be held, but these are remembered more as times when heads of state don the host country's national costume than as occasions for serious economic decision-making.

Second, the US effort to impose capital account and financial liberalization on the Asia Pacific economies as a key element of more thoroughgoing structural transformation backfired. Capital account liberalization led to the Asian Financial Crisis in 1997-1998. Instead of helping to shore up economies in crisis, Washington took advantage of the crisis to try to comprehensively transform the region's economies along neo-liberal lines.

As one of Clinton's economic lieutenants saw it, "Most of these countries are going through a dark and deep tunnel...But on the other end there is going to be a significantly different Asia in which American firms have achieved a much deeper market penetration, much greater access."

The outcome proved to be different. Malaysia imposed capital controls. The International Monetary Fund (IMF) was discredited, with the Thai government declaring its intention never to go back to the agency after paying off its loans in 2003 and the Indonesian government resolving to do the same thing in 2008. While Washington and the IMF were able to kill Japan's proposal for an Asian Monetary Fund (AMF) at the height of the crisis, the East Asian governments formed the "ASEAN Plus Three" financial mechanism that excludes the US and is likely to be the precursor of a full-blown regional financial agency.

Neo-liberal transformation has stalled in most Southeast Asian countries as well as in Japan, where it has been stymied by resistance from the institutions of what Marie Anchordoguy calls "communitarian capitalism." Among the Pacific Rim economies, in fact, it is only South Korea that is currently moving along the free-market path desired by the US.

Moreover, to protect themselves against future speculative crises provoked by the movements of global finance capital spearheaded by US funds, the Asian governments have built up massive foreign exchange reserves, on which the US has become dependent for funds to prop up its massive military expenditures and the middle-class spending that for a long time served as an artificial barrier against recession. With the unraveling of American financial institutions, the onset of recession, and the depreciation of the dollar, the US economy has become hostage to these countries' decisions to continue to lend to Washington and Wall Street.

A third development that is not positive for the US is the region's becoming increasingly dependent on the red-hot Chinese economic locomotive. According to a United Nations report, China has been a "major engine of growth for most of the economies in the region. The country's imports accelerated even more than its exports, with a large proportion of them coming from the rest of Asia."

In fact, Chinese demand is what pulled the Asia Pacific economies from the recession caused by the Asian financial crisis that the US tried to take advantage of. China has not only surpassed the United States to become Japan's main trading partner but Chinese demand has helped keep the world's second-largest economy from falling back into recession.

Conscious of its economic clout, China has moved to consolidate its position as East Asia's new economic center via smart economic diplomacy. In 2002, it convinced the ASEAN governments to create the ASEAN-China Free Trade Area that is scheduled to come into effect in 2010. Japan has tried to catch up by offering ASEAN countries "economic partnership agreements." Meanwhile, talks on a U.S.-Thailand free trade area have been frozen by popular opposition to Washington's strident championing of the so-called intellectual property rights of its corporations.

All in all, there is a great deal of truth in the observation that the biggest beneficiary of the Bush administration's imperial and corporate misadventures over the last decade has been China, which has kept itself from military entanglements and devoted itself single-mindedly to economic development.

Challenges Posed by China's Ascent

The rise of China provides a number of very fundamental challenges to different key actors in East Asia.

To Japan, the key challenge is to move from being effectively a vassal state of the United States in security matters to a mature relationship with China that would definitively leave behind five decades of aggression followed by six decades of serving as a springboard for US power projection onto the Asian mainland. A definitive acceptance of responsibility for the atrocities committed by Japanese troops during the Second World War, including the infamous Nanjing Massacre, on the part of the Japanese people and their leaders is an indispensable step in this move towards a mature relationship between Asia's leading economic powers.

For Southeast Asia, the challenge is how to avoid becoming an appendage of the Chinese economy. Chinese demand was, as mentioned earlier, an immense force lifting Southeast Asia's economies from the depths of the Asian financial crisis. However, China's developing trade and investment relations with ASEAN have had some not pleasant aspects.

The experience of Thai vegetable and fruit producers owing to an "early harvest" free trade arrangement with Thailand earlier this decade is one of them. Under the agreement, Thailand would export tropical fruits to China while winter fruits from China would be eligible for the zero-tariff deal. The expectations of mutual benefit evaporated after a few months, however, with massive imports from China wiping out Thai producers of many fruits and vegetables such as garlic and red onions.

But the fear of many in Southeast Asia goes beyond having trade agreements with China that would yield unequal benefits. With land and energy relatively scarce in China, Chinese enterprises, with the blessings of the Chinese government, are seeking deals that would allow them to mine minerals and grow crops in Southeast Asian countries for exclusive export to the China market.

To take one example, in a deal with the Philippines, the Chinese Fuhua Group planned to invest $3.83 billion over five to seven years to develop 1 million hectares of land to grow high-yielding strains of corn, rice, and sorghum. The Philippine government's Departments of Environment and Agrarian Reform plan to identify "idle lands" that could be incorporated into the Chinese plantations. This in a country where seven out of 10 farmers are landless! This is a formula for real trouble.

Some have been quick to call China's international economic policies "imperialistic." It is, however, difficult to sustain this label since exploitative relations between China and other developing countries have not congealed structurally. Economic trends where China emerges as a net beneficiary do not add up to imperialism. Moreover, there is absent that element of force and coercion that accompanied the imposition of European and American economic power on weaker societies.

Nevertheless, Southeast Asian governments need to balance their spontaneous feelings of South-South solidarity with cool-headed realism. Countries like China, Brazil, and India, are led by developmental elites that are seeking to find their place in a new global capitalist order marked by the loosening of the economic hegemony of the old capitalist centers, that is, Japan, the US, and the European Union.

The pursuit of national economic interest, not regional cooperation for development, is their central concern. By uncritically signing trade and investment agreements or joining a regional formation anchored by these bigger, ambitious powers, smaller countries may simply end up being used economically, territorially, and politically to advance their regional and global agenda.

Does this mean that a trade agreement and regional economic formation linking China and ASEAN is to be avoided at all costs? No, it simply means the ASEAN governments must enter talks with China with eyes wide open and negotiate collectively, not as 10 separate governments. They must make it clear to China that they do not desire a trade agreement based on free trade, such as the arrangements that the US, European Union, and Japan are pushing on them, but one where, as the weaker economies, the net benefits of the arrangement accrue to them, not China.

They must see to it that the terms of association are carefully negotiated and that they work closely to offset the dominance of the central power. And, first things first, before entertaining dreams of being part of an East Asian block, they must focus on transforming ASEAN from 10 separate economies into a truly integrated regional formation.

Yes, China's relationship with Southeast Asia cannot be described as an exploitative one. But unless considerations of equity are front and center in the negotiation of economic relationships between Beijing and its neighbors, the old structural patterns marking the relations between Southeast Asia and Europe, the United States, and Japan could easily be replicated.

The US-China Relationship

The most critical regional relationship, however, is between the US and China since the US is the most powerful power in East Asia and China the next most powerful.

In his stimulating book Adam Smith in Beijing, our eminent colleague Giovanni Arrighi of Johns Hopkins University writes that there are three alternative policies that the United States can adopt towards a China that is on the ascendant.

The first is an updated version of the Cold War strategy of containment. In this strategy, China is seen as a strategic threat or, as the 2002 National Security Strategy Paper of the Bush administration puts it euphemistically, a "strategic competitor." The US response would be to "dissuade China" from its military ambitions by giving a high profile to the massive American military presence in the Western Pacific, strengthening the bilateral agreements with US allies that sustain this trans-Pacific garrison state, and building up defense cooperation with India, Asia's other big power. Needless to say, this response misconstrues the nature of the Chinese challenge, which is an economic rather than a strategic one. And needless to say as well, this response would be disastrous for the whole world.

A second strategy is not to directly confront China as the US confronted the old Soviet Union but to put into motion balance of power politics, wherein China is weakened indirectly. Arrighi quotes James Pinkerton, a protagonist of this approach:

Instead of confronting directly the rising Asian powers, the United States should play them off each other. As the Latin expression tertium gaudens —the happy third—reminds us that, rather than getting in the middle of every fight, sometimes it is better "to hold the coats of those who do." For the US national interest, "a better Asia would be one in which China, India, Japan, and possibly another ‘tiger' or two contend with each other for power while we enjoy the happy luxury of third party by-standing."

Needless to say, this strategy would also have terrible consequences for the region.

A third strategy, one that Arrighi identifies with two old faces from the 20th century, Henry Kissinger and Zbigniew Brzezinski, National Security Adviser to President Jimmy Carter, does not see China as a revisionist power but as one that wants to join the global status quo. The appropriate response for Washington is to accept China as part of the elite of the global state system and work with it in pursuit of international stability, in the same way that Britain, the hegemon of the 19th century, cooperated and made way for the United States, the hegemon of the 20th century.

Arrighi prefers the third strategy. Indeed, though still in essence conservative in that it seeks to preserve the global status quo, this is by far a preferable American response. It is, however, the least likely to be adopted. The problem is that imperial America is not like imperial Britain. The US is ideologically an expansionist missionary democracy that will find it difficult to accept a No. 2 status without provoking a reactionary populist reaction among key segments of its population. Aside from its powerful corporate and strategic drives, providing leadership in the messianic enterprise of remaking the world along the lines of a liberal or neoliberal Lockean democracy is a fundamental driving force of US hegemony.

Civil Society, China, and America

This conundrum inevitably leads to a discussion of how civil society both in Asia and globally ought to respond to the erosion of US hegemony and the ascent of China. In the best of all possible worlds, the US and China could be supporters of the effort to create a new world order built on peace, justice, and popular sovereignty. Unfortunately, we live in a less than ideal world

With respect to China, the task of civil society is to pressure it, as it intensifies its engagement with the world, to resist the temptation of following the destructive imperial path trodden by Europe and the United States. It is also to push it to move away from the fossil-fuel intensive, over-consumption-oriented path of development pioneered by the West to one that is more ecologically sustainable and sensitive to equity issues. This will not be easy. Nevertheless, there are signs of hope, one of them being the rethinking of the direction of China's development that is going on among China's leaders. One can only agree with Arrighi when he says:

If the reorientation succeeds in reviving and consolidating China's traditions of self-centered market-based development, accumulation without dispossession, mobilization of human rather than non-human resources, and government through mass participation in shaping policies, then the chances are that China will be in a position to contribute decisively to the emergence of a commonwealth of civilizations truly respectful of differences. But, if the reorientation fails, China may well turn into a new epicenter of social and political chaos that will facilitate Northern attempts to reestablish a crumbling global dominance.

With the Chinese leadership's great concern for legitimacy both internally and internationally, one cannot say that the failure of the proponents of reorientation is a foregone conclusion. This is why pressure from international civil society for a change in economic strategy, for pro-environment policies, for the expansion of democratic rights, and for equitable relations with the developing countries must be kept up.

But this must be an enterprise that distances itself from doctrinaire liberal democratic criticism and acknowledges the contributions of the Chinese government to promoting one of the most fundamental freedoms of all— the freedom from want and economic insecurity for vast numbers of its people. One may disagree with many of the assertions Kishore Mahbubani makes in his book ‘The New Asian Hemisphere,' but not where he says, "The fundamental layer of human freedom is freedom from want...In this sense, the Chinese people have never enjoyed greater human freedom."

Towards a New American Isolationism

Blunting Washington's innately hegemonic thrust will be much more difficult. Difficult but not impossible.

Perhaps the best strategy for civil society at this point is not so much to rely on appeals to American ideals but to continually point to the very high costs of intervention, in terms of soldiers killed, money spent, domestic strife, and credibility lost, to consistently campaign against any temptation for US forces to intervene on whatever grounds.

Part of this strategy must be pressure for the removal of the US military bases from Asia and the Pacific and the neutralizing of the bilateral treaties between the US and a number of Asian countries. Aside from being the pillars for Washington's containment of China, these institutions are the main factors that prevent China and other East Asian countries from evolving a more mature relationship. They are destabilizing anachronistic relics of two 20th century wars that are fast fading from the memory of the region.

More broadly, the aim of civil society mobilization both in Asia and globally should be to encourage a new American isolationism. Barack Obama is definitely preferable to John McCain, but the world does not need a new American internationalism, this time of the liberal and "soft power variety." We should not tolerate a policy of withdrawing troops from Iraq, only to send them to Afghanistan in the name of defending human rights. We do not want in place of military confrontation, an aggressive diplomatic isolation of Iran led by a Democratic elite that is uncritical, as Obama is, of Israel.

We do not want an obsession with the Middle East to be replaced with an obsession with destabilizing Hugo Chavez and restoring US influence in Latin America. And we should worry when Bill Clinton says, as he did during the Democratic Party convention, that one of Obama's objectives will be to "restore American leadership in the world." Asia does not need or want American leadership.

What Asia, like the rest of the world, needs is a vacation from a messianic United States, and a few decades of a withdrawn, self-absorbed, isolationist America, paying attention to its domestic troubles and deterred by the high costs of the continued pursuit of hegemony globally, would be good for the region, good for everybody.

The Asia Pacific region, in sum, is pregnant with both dangers and possibilities, and there is, if anything, great indeterminacy, a great element of contingency on where we're heading. In times like this, when the possible and the impossible hang in a fine balance, it is important to remember the advice of that great Italian thinker Antonio Gramsci about balancing the pessimism of the intellect with the optimism of the will.

GLOBALIZATION ON THE EDGE

Walden Bello — 2006-12-31T13:14:27Z

When it first became part of the English vocabulary in the early 1990s, globalization was supposed to be the wave of the future. Fifteen years ago, the writings of globalist thinkers such as Kenichi Ohmae and Robert Reich celebrated the advent of the emergence of the so-called borderless world. The process by which relatively autonomous national economies become functionally integrated into one global economy was touted as “irreversible. ” And the people who opposed globalization were disdainfully dismissed as modern day incarnations of the Luddites that destroyed machines during the Industrial Revolution. Fifteen years later, despite runaway shops and outsourcing, what passes for an international economy remains a collection of national economies. These economies are interdependent no doubt, but domestic factors still largely determine their dynamics. Globalization, in fact, has reached its high water mark and is receding.

Bright Predictions, Dismal Outcomes

During globalization's heyday, we were told that state policies no longer mattered and that corporations would soon dwarf states. In fact, states still do matter. The European Union, the U.S. government, and the Chinese state are stronger economic actors today than they were a decade ago. In China, for instance, transnational corporations (TNCs) march to the tune of the state rather than the other way around.

Moreover, state policies that interfere with the market in order to build up industrial structures or protect employment still make a difference. Indeed, over the last ten years, interventionist government policies have spelled the difference between development and underdevelopment, prosperity and poverty.

Malaysia's imposition of capital controls during the Asian financial crisis in 1997-98 prevented it from unraveling like Thailand or Indonesia. Strict capital controls also insulated China from the economic collapse engulfing its neighbors.

Fifteen years ago, we were told to expect the emergence of a transnational capitalist elite that would manage the world economy. Indeed, globalization became the “grand strategy” of the Clinton administration, which envisioned the U.S. elite being the primus inter pares — first among equals — of a global coalition leading the way to the new, benign world order. Today, this project lies in shambles.

During the reign of George W. Bush, the nationalist faction has overwhelmed the transnational faction of the economic elite. Nationalism-inflected states are now competing sharply with one another, seeking to beggar one another's economies.

A decade ago, the World Trade Organization (WTO) was born, joining the World Bank and the International Monetary Fund (IMF) as the pillars of the system of international economic governance in the era of globalization. With a triumphalist air, officials of the three organizations meeting in Singapore during the first ministerial gathering of the WTO in December 1996 saw the remaining task of “global governance” as the achievement of “coherence,” that is, the coordination of the neoliberal policies of the three institutions in order to ensure the smooth, technocratic integration of the global economy.

But now Sebastian Mallaby, the influential pro-globalization commentator of the Washington Post, complains that “trade liberalization has stalled, aid is less coherent than it should be, and the next financial conflagration will be managed by an injured fireman.” In fact, the situation is worse than he describes. The IMF is practically defunct. Knowing how the Fund precipitated and worsened the Asian financial crisis, more and more of the advanced developing countries are refusing to borrow from it or are paying ahead of schedule, with some declaring their intention never to borrow again.

These include Thailand, Indonesia, Brazil, and Argentina. Since the Fund's budget greatly depends on debt repayments from these big borrowers, this boycott is translating into what one expert describes as “a huge squeeze on the budget of the organization.”

The World Bank may seem to be in better health than the Fund. But having been central to the debacle of structural adjustment policies that left most developing and transitional economies that implemented them in greater poverty, with greater inequality, and in a state of stagnation, the Bank is also suffering a crisis of legitimacy. This can only be worsened by the recent finding of an official high-level expert panel headed by former IMF chief economist Kenneth Rogoff that the Bank has been systematically manipulating its data to advance its pro-globalization position and conceal globalization's adverse
effects.

But the crisis of multilateralism is perhaps most acute at the WTO. Last July, the Doha Round of global negotiations for more trade liberalization unraveled abruptly when talks among the so-called Group of Six broke down in acrimony over the U.S. refusal to budge on its enormous subsidies for agriculture. The pro-free trade American economist Fred Bergsten once compared trade liberalization and the WTO to a bicycle: they collapse when they are not moving forward. The collapse of an organization that one of its director generals once described as the “jewel in the crown of multilateralism” may be nearer than it seems.

Why did globalization run aground?

First of all, the case for globalization was oversold. The bulk of the production and sales of most TNCs continues to take place within the country or region of origin. There are only a handful of truly global corporations whose production and sales are dispersed relatively equally across regions.

Second, rather than forge a common, cooperative response to the global crises of overproduction, stagnation, and environmental ruin, national capitalist elites have competed with each other to shift the burden of adjustment. The Bush administration, for instance, has pushed a weak-dollar policy to promote U.S. economic recovery and growth at the expense of Europe and Japan. It has also refused to sign the Kyoto Protocol in order to push Europe and Japan to absorb most of the costs of global environmental adjustment and thus make U.S. industry comparatively more competitive. While cooperation may be the rational strategic choice from the point of view of the global capitalist system, national capitalist interests are mainly concerned with not losing out to their rivals in the short term.

A third factor has been the corrosive effect of the double standards brazenly displayed by the hegemonic power, the United States. While the Clinton administration did try to move the United States toward free trade, the Bush administration has hypocritically preached free trade while practicing protectionism. Indeed, the trade policy of the Bush administration seems to be free trade for the rest of the world and protectionism for the United States.

Fourth, there has been too much dissonance between the promise of globalization and free trade and the actual results of neoliberal policies, which have been more poverty, inequality, and stagnation. One of the very few places where poverty diminished over the last 15 years is China. But interventionist state policies that managed market forces, not neoliberal prescriptions, were responsible for lifting 120 million Chinese out of poverty. Moreover, the advocates of eliminating capital controls have had to face the actual collapse of the economies that took this policy to heart. The globalization of finance proceeded much faster than the globalization of production. But it proved to be the cutting edge not of prosperity but of chaos. The Asian financial crisis and the collapse of the economy of Argentina, which had been among the most doctrinaire practitioners of capital account liberalization, were two decisive moments in reality's revolt against theory.

Another factor unraveling the globalist project derives from its obsession with economic growth. Indeed, unending growth is the centerpiece of globalization, the mainspring of its legitimacy. While a recent World Bank report continues—amazingly—to extol rapid growth as the key to expanding the global middle class, global warming, peak oil, and other environmental events are making it clear to people that the rates and patterns of growth that come with globalization are a surefire prescription for an ecological Armageddon.

The final factor, not to be underestimated, has been popular resistance to globalization. The battles of Seattle in 1999, Prague in 2000, and Genoa in 2001; the massive global anti-war march on Feb. 15, 2003, when the anti-globalization movement morphed into the global anti-war movement; the collapse of the WTO ministerial meeting in Cancun in 2003 and its near collapse in Hong Kong in 2005; the French and Dutch peoples' rejection of the neoliberal, pro-globalization European Constitution in 2005 — these were all critical junctures in a decade-long global struggle that has rolled back the neoliberal project. But these high-profile events were merely the tip of the iceberg, the summation of thousands of anti-neoliberal, anti-globalization struggles in thousands of communities throughout the world involving millions of peasants, workers, students, indigenous people, and many sectors of the middle class.

Down but not out

While corporate-driven globalization may be down, it is not out. Though discredited, many pro-globalization neoliberal policies remain in place in many economies, for lack of credible alternative policies in the eyes of technocrats. With things not moving at the WTO, the big trading powers are emphasizing free trade agreements (FTAs) and economic partnership agreements (EPAs) with developing countries.

These agreements are in many ways more dangerous than the multilateral negotiations at the WTO since they often require greater concessions in terms of market access and tighter enforcement of intellectual property rights.

However, things are no longer that easy for the corporations and trading powers and the corporations. Doctrinaire neoliberals are being eased out of key positions, giving way to pragmatic technocrats that often subvert neoliberal policies in practice owing to popular pressure. When it comes to FTAs, the global south is becoming aware of the dangers and is beginning to resist. Key South American governments under pressure from their citizenries derailed the Free Trade of the Americas (FTAA) — the grand plan of George W. Bush for the Western hemisphere — during the Mar del Plata conference in November 2005.

Also, one of the reasons many people resisted Prime Minister Thaksin Shinawatra in the months before the recent coup in Thailand was his rush to conclude a free trade agreement with the United States. Indeed, in January this year, some 10,000 protesters tried to storm the building in Chiang Mai, Thailand, where U.S. and Thai officials were negotiating. The government that succeeded Thaksin's has put the U.S.-Thai FTA on hold, and movements seeking to stop FTAs elsewhere have been inspired by the success of the Thai efforts.

The retreat from neoliberal globalization is most marked in Latin America. Long exploited by foreign energy giants, Bolivia under President Evo Morales has nationalized its energy resources. Nestor Kirchner of Argentina gave an example of how developing country governments can face down finance capital when he forced northern bondholders to accept only 25 cents of every dollar Argentina owed them. Hugo Chavez has launched an ambitious plan for regional integration, the Bolivarian Alternative for the Americas (ALBA), based on genuine economic cooperation instead of free trade, with little or no participation by northern TNCs, and driven by what Chavez himself describes as a “logic beyond capitalism.”

Globalization in Perspective

From today's vantage point, globalization appears to have been not a new, higher phase in the development of capitalism but a response to the underlying structural crisis of this system of production. Fifteen years since it was trumpeted as the wave of the future, globalization seems to have been less a “brave new phase” ofthe capitalist adventure than a desperate effort by global capital to escape the stagnation and disequilibria overtaking the global economy in the 1970s and 1980s.

The collapse of the centralized socialist regimes in Central and Eastern Europe deflected people's attention from this reality in the early 1990s. Many in progressive circles still think that the task at hand is to “humanize” globalization. Globalization, however, is a spent force. Today's multiplying economic and political conflicts resemble, if anything, the period following the end of what historians refer to as the first era of globalization, which extended from 1815 to the eruption of World War I in 1914. The urgent task is not to steer corporate-driven globalization in a “social democratic” direction but to manage its retreat so that it does not bring about the same chaos and runaway conflicts that marked its demise in that earlier era.

Walden Bello is professor of sociology at the University of the Philippines and executive director of the Bangkok-based research and advocacy institute Focus on the Global South. An extended version of this piece titled “The Capitalist Conjuncture: Overaccumulation, Financial Crises, and the Retreat from Globalization,” appears in the latest number of Third World Quarterly (Vol. 27, No. 8, 2006).

(This column appeared in Foreign Policy in Focus on Dec. 27, 2006)

View online : http://www.fpif.org

What Will Democrats Do?

Walden Bello — 2006-11-21T14:33:23Z

The recent US election was a redemptive election. At a time that many throughout the world had written off the American electorate as lifeless putty in the hands of Karl Rove, it woke up to deliver the Republican Party its worse blow in the last quarter of a century. Not only independents and centrists voted to repudiate Republican candidates but a third of evangelical — Bush's fundamentalist Christian base — voted for Democrats.

TWO ROADS
Of course, many of those who voted Democrat did so because they could no longer take the daily scandals engulfing the Republicans in Congress. But poll after poll showed that the two key reasons animating voters were the Iraq War and the strong feeling that Bush was leading the country down the wrong path.

In terms of the national direction, the choice in the minds of voters on 7 November was presciently articulated by Jonathan Schell in his 2003 book "The Unconquerable World":

"For Americans, the choice is at once between two Americas, and between two futures for the international order. In an imperial America, power would be concentrated in the hands of the president, and checks and balances would be at an end; civil liberties would be weakened or lost; military spending would crowd out social spending; the gap between rich and poor would be likely to increase; electoral politics, to the extent that they still mattered, would be increasingly dominated by money, above all corporate money, whose influence would trump the people's interest; the social, economic, and ecological agenda of the country and the world would be increasingly rejected."

In contrast to this path of an "Imperial America" was that of "Republican America"

"...dedicated to the creation of a cooperative world, [where] the immense concentration of power in the executive would be broken up; power would be divided again among the three branches, which would resume their responsibility of checking and balancing one another as the Constitution provides; civil liberties would remain intact or be strengthened; money would be driven out of politics, and the will of the people would be heard again; politics, and with it the power of the people, would revive; the social, economic, and ecological agendas of the country and the world would become the chief concern of government."

On November 7, the American electorate clearly rejected the imperial path.

But one cannot say with confidence that they were very clear about the signposts of the alternative path that they were choosing. It is the role of leadership to illuminate signposts, and the big question at the moment is whether the exultant Democrats can provide that leadership.

IRAQ: ALL OPTIONS BAD

Iraq is the test case. As many have pointed out, the Democrats have no unified strategy on Iraq. And the reason for this is that developments around Iraq have deteriorated to the point where there are only bad choices available.

The current Bush strategy is to shore up the Shiite-dominated government militarily, and that isn't working.

Bringing in more troops temporarily to stabilize the situation, then leaving — a plan originally endorsed sometime back by John Kerry — won't work since the civil war has progressed to the point where even a million troops won't make a difference.

Partitioning Iraq into three entities — the Sunni center, the Shiite South, and the Kurdish North — will simply be a prelude to even greater conflict tying down more US troops.

Withdrawing to the bases or to the desert to avoid casualties will simply raise the question: Why keep troops there at all?

Getting Iran, Turkey, and Syria to come in to create a diplomatic solution — one that some expect the bipartisan "Iraq Study Group" headed by James Baker and Lee Hamilton to propose — is not going to work because no foreign-imposed settlement can counteract the deadly domestic dynamics of a sectarian conflict that has passed the point of no return.

Bush, of course, remains the boss when it comes to Iraq policy, and it is not likely that this stubborn, stupid man has ceased to believe in victory, which he restated as his goal at the same press conference where he announced Donald Rumsfeld's resignation. The more Machiavellian Republican strategists such as Karl Rove will probably want to enmesh the Democrats in a protracted bipartisan exit strategy that will cost more Iraqi and American lives so that by the time the 2008 presidential elections come around, the mess in Iraq will be as much their mess as the Republicans.

As of now, the Democrats have the moral weight of the country behind them, and they have the opportunity not only to cut off a foreign policy millstone but to open up the road to a new relationship between the United States and the world if they take the least unviable route out of Iraq — that espoused by Rep. John Murtha, who, perhaps among the key Democrats, knows the military realities on the ground: immediate withdrawal. With all their inchoate feelings about wasted American lives, "our responsibility to Iraqis," or being seen as "cutting and running," many of those who voted for the Democrats may have some difficulty accepting the reality that immediate withdrawal is the least unviable of all the options. But then that is what leaders are there for: to articulate the bitter truth when the times demand it.

It is not likely that most Democratic politicians will embrace immediate withdrawal of their own accord. Without more sustained pressure, the likely course they will take is to come with a plan that will compromise with Bush, which means another unworkable patchwork of a plan.

THE US MILITARY: WILL IT GO ON STRIKE?

One source of pressure could be the military. It is well known that the top brass are in a state of extreme disaffection with the civilian leadership because they feel that Iraq is destroying the credibility of US military. When Major General William Caldwell, the senior US military spokesman in Iraq, pronounced on October 19 that the results of the Pentagon's strategy of focusing troops in Baghdad to assist the Iraqi military in containing the runaway violence was "disheartening," he drove the nail in the coffin of the Republicans' electoral chances. Most likely, his words were not cleared by the civilian leadership.

The US military in Iraq may not have yet experienced significant cases of mutiny, but the deterioration of morale is evident in the growing incidents of civilian killings, rape, and prisoner abuse for which an increasing number of marines and soldiers are undergoing trial or have been sent to prison. Unlike during the Vietnam War, the US military is not a conscript military. But the high command knows that even professional militaries have their limits and that at some point the rank and file will balk at being sent to a pointless war. Nobody wants to die for a mistake. Nobody wants to be in the last bodybag sent from Baghdad. This is what Murtha, a decorated Vietnam veteran who has been hawkish on most other military issues, has been telling his Democratic Party colleagues.

Nevertheless, a de facto military mutiny such as that which swept the US Army in the last years of the Vietnam War is not likely. What will probably happen is that Democrats and Republicans bicker over a plan for an "honorable exit," the brass will steadily place US units in a de facto defensive posture in order to cut down on the casualty rate, leaving the mercenary Iraqi security forces to fend for themselves. The troops might even be ordered to hole up in the bases, with increasingly infrequent patrols meant not to ensure security but simply to show the flag. This would be the military equivalent of going on strike.

THE CHALLENGE TO THE ANTI-WAR MOVEMENT

So it comes down to the anti-war movement.

The movement is to be congratulated for its role in the titanic struggle to turn the tide of American public opinion on Iraq: Cindy Sheehan's campout at Bush's ranch in Crawford, Texas, the any other acts of protest and civil disobedience engaged in by so many others, the big protest rallies and demonstrations — all this made a difference, a big difference.

But the movement cannot even think about relaxing for a second. The moment is critical. Now — the immediate post-election period — is the time to raise the ante. Now is the time for the US anti-war movement to escalate its efforts — to mount demonstration after demonstration — to effect immediate withdrawal. Electoral choice has created the momentum that can be translated into street action that can in turn translate into strong pressure on the Democrats not to agree to a protracted exit strategy. The movement cannot afford to squander this momentum, for the price of stepping back and letting the Democrats come up with the strategy will be more Iraqis and Americans dead, sacrificed for a meaningless war with no real end in sight.

*Walden Bello is professor of sociology at the University of the Philippines and executive director of the Bangkok-based institute Focus on the Global South.

View online : http://www.focusweb.org