November 1, 1998
Capital Ungoverned: Liberalizing Finance in Interventionist States
Capital Ungoverned provides extremely insightful analysis of the financial
liberalization process in five different countries. However, in his
concluding chapter Michael Loriaux provides an oversimplified, highly
accusatory summation of the cases. Loriaux focuses on two intertwined
issues: declining U.S. hegemony, and uneven economic growth. He stresses
the importance of U.S. foreign policy decisions in fomenting the need for
liberalizing reforms in all five cases. The different rates of growth
between countries are seen to account for the different paths countries
took in order to address calls and pressures for liberalization. These two
issues are almost circular in their connection, with the relatively low
growth rates in the U.S. increasing the foreign policy pressures on other
countries to liberalize their economies. There is little doubt that these
two issues are highly important in understanding the formation of a truly
international political economy in the past few decades. Unfortunately,
rather than remain content to describe these factors, Loriaux seems to
have been compelled to place normative assumptions on them, and by doing
so he takes away from the intellectual impact of his analysis.
Loriaux's account begins with a U.S. hegemon that is attempting to
maintain order in the capitalist world by creating institutions which
allow states to direct capital and credit. Loriaux believes that the U.S.
was originally very complacent regarding state interventionism. The need
for tolerance was generated by the Cold War political necessity of
maintaining good relations among capitalist states. This argument is most
compelling in the Japanese and Korean cases. These two countries benefited
most from U.S. hegemony, receiving military support, concessional loans,
and relatively open access to the U.S. market. As time passed uneven
growth weakened the capacity of the United States to manage these
institutions and arrangements. As the disparities in the international
system grew in the late-1960's, the U.S. became increasingly intolerant of
interventionist and credit-activist states.
Loriaux argument is appealing, but it fails to explain why the U.S.
remained dedicated to open market reforms. It also mischaracterizes the
intended role of such economic actors as the World Bank and the GATT. From
the close of WW II, the U.S. continually pressed even its close allies for
economic liberalization, including free trade, balanced accounts, and
price rationalization. These are economic policies in-line with a
classical understanding of, or perhaps belief in the universal benefits of
open economic activity. The Bretton Woods system was also rooted in these
same economic beliefs. State intervention and credit direction was a
necessary step to heal the war wounds of Europe. The purpose of the system
was direct all economies onto the road towards free trade and open
markets.
None of this addresses the issue of declining U.S. hegemony. Why would
a declining country continue to remain economically open? More
specifically, why would a perceived decline be met with calls for other
countries to open their markets? This is an incredibly difficult policy to
put into place. It would be much simpler to just increase protectionist
measures at home. It could be argued that the Reagan years saw increased
protectionism, but it also saw the beginning of the Uruguay round of GATT
negotiations. Even the VER's on Japanese automobiles cannot be seen as
overly protectionist, since they ultimately only increased the
profitability of each unit sold. Loriaux's most explicit criticism of
U.S. policy regards Nixon's abandonment of the gold standard, but this too
is a misleading argument. If the potential negative aspects of a floating
currency system were as dire as Loriaux describes (p. 220) why did foreign
central banks not move to shore-up the dollar's peg to gold? Even if the
decision to abandon gold was unilateral, it does not seem that the U.S.
should be made out as the villain.
Examining the "faults" in U.S. policy would be understandable if it were
not for the fact that Loriaux himself provides a clear non-statist,
market-based justification for rapid liberalization of capital in the
1970's and 1980's: the continuing oil crises. The availability of cheap
petrodollars in search of investment opportunities was seen to directly
undermine the interventionist programs each of the cases studied. But
even here Loriaux points to U.S. policy as a critical negative factor
explaining the failure or success of state indebtedness, as seen in the
comparison between Mexico and Indonesia (p.226-227).
Perhaps the most fundamental criticism of Loriaux's summary chapter is his
compulsion to a villain for his story. He seems to bring a normative set
of assumptions to the chapter (and the book) which many of the case
studies do not bear out. He clearly prefers an international system which
allows states to pursue interventionist policies both to increase the
social and economic welfare of their citizens. But such a system appears
to require a passive hegemon that will allow itself to be exploited by
other national economies. This creates an uneasy double standard between
the actions of the United States and the actions of other states.
Reagan's increase in military spending (military Keynesianism) is
portrayed as deteriorating the world economic system, but Japanese or
French state interventionism is described as rational pursuit of national
economic interests. Loriaux even manages to place blame for the oil
crises of the 1970's at the feet of the U.S. It remains unclear what path
Loriaux would prefer to have seen the U.S. follow. Should capital
controls have been put in place? Should the U.S. have devalued within the
Bretton Woods system? These questions are never satisfactorily answered,
but Loriaux's "freedom" laden concluding paragraph makes it clear that he
believes almost religiously in the right of states (at least,
non-hegemonic states) to direct productive investment. He seems to ignore
the obvious fact that most of the investment states directed was not
productive.
Despite these criticisms, Loriaux's discussion does provide an interesting
point of comparison regarding the political impacts of economic
liberalization. Loriaux argues that liberalization has largely undermined
the power of the state. Governments must fear the flight of capital and
must entice investors. In short, if governments are to be economically
successful, they must first meet the needs of international capital. Only
after those conditions are met can regimes attempt to address domestic
issues, such as labor. Loriaux believes that this situation is untenable
and will ultimately lead to the deterioration of internationalism as a
meaningful political or economic creed.
However, we also have witnessed the power of financial liberalization has
to act as a catalyst in the process of democratization in authoritarian
regimes. One of the larger conclusions of Henry's Mediterranean Debt
Crescent was that economic liberalization could stimulate political change
by increasing the autonomy of financial actors. In patrimonial
authoritarian regimes, an autonomous banking oligopoly could develop the
social space and institutions necessary to challenge the regime. The
reforming power of capital is such that political liberalization may occur
without the need for a specific democratic attitude. As capitalists seek
to secure their property rights, they may inevitably place constraints on
the regime. The crucial difference in interpreting the possible impact of
liberalizing pressure is the type of regime. In the corporatist regimes
described in Capital Ungoverned, the increased power of capital appears to
diminish the state's role in providing societal welfare. Conversely, in
predatory, authoritarian regimes, the growing autonomy of capital in the
society could be a force in to weaken the patronage network of the ruling
regime. Taken abstractly, the process of economic reforms, and
particularly the internationalization of capital, can be seen to place
similar requirements on all types of regimes, ie, provide a stable,
predictable environment for investment. While the French citizenry may
find it difficult to accept the cut-backs in social programs dictated by
international capital constraints, the Chinese people may find
bureaucratic predictability, rule of law, and increased economic
competition a blessing.