Blowback
Here is an excerpt from
Blowback: The Costs and Consequences of American Empire
by Chalmers Johnson.
The book’s copyright is 2000,
but the prologue, the only dated part of the book,
is dated July 1999,
at the height of the American dot-com bubble.
Emphasis is added.
There is also, in parts of this work, a terminological innovation
(I hope some will not consider it an abortion :-):
The phrase “East Asia” appears so frequently, here and in other works,
that I am abbreviating it, simply for reasons of economy,
to “Eastasia.”
Any similarity to any other author’s use of the same term
is purely coincidental. :-)
Chapter 7
...
[7.36]
The second aspect of human rights in China we must recognize
is to ensure that
poor working conditions and prison labor in China (and elsewhere)
do not end up
destroying the livelihoods of American workers.
Without question
the most powerful human rights tool the United States could wield
would be to
deny access to the American market
to products from multinational companies
that have abandoned American workers
to seek out low-wage foreign workers
lacking in economic or political rights of any sort,
not to speak of human rights.
The economics profession may attack such policies as “protectionism,”
but the time is long past
when the United States should allow corporations to use
the bottom line, “globalization,” or the pressures of competition—
“Adam Smith made me do it”—
as excuses for their indifference to basic human rights at home or abroad.
Failure to consider this dimension of the rights question
leaves the United States open to a charge of hypocrisy.
[7.37]
The United States is formally as well as emotionally and intellectually
committed to an academic textbook definition of “free trade,”
which it believes (or pretends to believe)
was the foundation of the General Agreement on Tariffs and Trade (GATT).
Created in 1948 as a specialized agency of the United Nations,
GATT governed trade among the so-called free-market economies
during the era of the Cold War.
Its greatest accomplishments were
a series of multilateral negotiations among its members
to reduce or eliminate tariffs on many different products,
which greatly stimulated international trade over the years.
It was replaced on January 1, 1995, by the World Trade Organization (WTO).
Actually, for much of the Cold War,
GATT was part of an American grand strategy vis-à-vis the USSR
in which
[7.38]
China’s primary trade goal is to gain admission to the WTO
with the status of a developing country.
As a developing country,
China would not have to
open its markets to foreign competitors on an equal basis
and would be exempt from the provisions of the WTO treaty concerning
national subsidies for industries and
intellectual property rights covering items like foreign films and books.
If it achieves that—
as the ideological myopia of American trade negotiators of both parties
and the economists who advise them
makes likely—
its mercantilism will ultimately
do serious damage to the American economy,
not to speak of the WTO system.
Like Japan before it,
China will fun up huge trade surpluses with the United States
rather than generating a balanced and mutually beneficial trade.
Managed trade is the antidote to this,
and it need not hamper China’s economic development,
but it is anathema to the economic ideologists of the United States.
Management of trade with China would require
the kind of political leadership and a governmental capability
that the country may simply not be able to muster in the post-Cold War world.
After all,
the United States has never given the same priority to trade
as to human rights, arms sales, or territorial disputes.
[7.39]
Before the economic crisis that began in 1997,
which greatly expanded global dependency on the American market,
the United States was already absorbing
about 25 percent of all exports from East Asia
and running annual trade deficits with the area well in excess of $100G.
China’s trade surplus with the United States, more than $60G in 1998,
is second only to Japan’s and growing much faster.
When China launched its economic reforms in 1978,
its overall foreign trade totaled $21G;
by 1998 the figure was $196G, an increase of 950 percent.
Some 80 percent of China’s exports are manufactured goods,
and China is the world’s largest textile exporter as well as
the largest source of American textile and apparel imports.
The Europeans and Japanese also run trade deficits with China,
but the U.S. deficit is approximately two to three times theirs.
[7.40]
In a sense, this “trade problem” is really a matter of “systems friction,”
the clash of different forms of capitalism,
exactly as one might expect given
the developmental-state strategy that China is pursing.
The point of this strategy is
to bend the rules and norms of laissez-fair capitalism
in order to achieve national wealth and power,
since
economics in this view is inevitably a zero-sum game
in which some nations win and others lose.
China has never tried to become a “free-market economy”
but rather to engage and exploit other market economies
to become a great power.
Economic reform, after all, was undertaken in the first place
in order to preserve the Communist Party’s political control
and to achieve through other means
what it had failed to achieve through Stalinism and then Maoism.
[7.41]
The U.S. response to this challenge has primarily been
to try to induce or cajole China into “reforming” its economy
to give it the look of American-style capitalism.
Thus, in 1994,
reflecting the attitudes of Washington’s economic theorists and trade bureaucrats,
the Washington Post editorialized that
in order to be allowed into the WTO,
China must
but thoroughly at odds with
China’s chosen strategy of economic development
as well.
Even if China were to abandon its strategy of economic development,
it would never do business the way the United States does.
[7.42]
The answer to these problems,
in the sense of helping to promote China’s economic development
while preventing its predatory trade policies
from provoking international conflict,
is managed trade.
All this means is the use of public policy to manage outcomes
rather than procedures.
It assumes that
when either public or private companies in different economic systems
trade with and invest in each other’s economies,
a mutually beneficial outcome cannot be assured
merely through agreement on rules.
Managed trade is not nearly as uncommon as professional economists imply.
In 1960, at the height of the Cold War,
when the United States began to trade with Poland, Romania, and Hungary,
it set goals that these Leninist countries had to meet.
It required, for instance,
that Polish imports from GATT countries rise 7 percent per year
or trade would be cut off.
[7.43]
The economic challenge of China is likely to be the most difficult test
not just for American economic policy
but for its foreign policy in general
in the first quarter of the twenty-first century.
Unfortunately, Americans still remain confused by the idea that
the foundations of power no longer lie in military
but in economic and industrial strength.
[I might change the words “no longer” to “do not” in the above sentence.]
They tolerate, even applaud, irrationally bloated defense budgets
while
doing little to rebuild and defend
the industrial foundations of their own nation.
When the world economic crisis began in Asia in 1997,
the United States responded with
the stale formulas of the International Monetary Fund,
only worsening the situation.
Inadequate political leadership,
inappropriate staffing of the government,
and an inability to redirect
the foreign affairs, defense, technological, and intelligence agencies
to pay more reasonable attention to Asia in general and China in particular
seem endemic problems for the foreseeable future.
[Of course, Johnson was writing about two years before
the U.S. became obsessed with perceived threats from the Muslim world,
due largely to hyping of those threats by the friends of Israel.]
Chapter 8
[8.1]
During the Cold War
the Soviet Union lost any number of friends and potential allies
by forever hectoring them about Marxism
and the stages of economic growth they would have to go through
in order ever to hope to live like Russians.
Such Marxist rigidity clearly benefited the American side
in the superpower face-off of that era.
Ideological arrogance turned many countries, like Tanzania and Egypt,
against their Soviet economic advisers,
and overbearing Soviet behavior contributed heavily to the Sino-Soviet dispute.
Unfortunately in the post-Cold War era it is the United States
that is exhibiting a capitalist version of
such heavy-handedness and arrogance.
[8.2]
Ideology—that is, the doctrines, opinions, or way of thinking of
an individual, a class, a nation, or an empire—
is as tricky a substance to use in international conflicts as poison gas.
It, too, has a tendency to blow back onto the party releasing it.
During the late 1950s, in the depths of the Cold War,
many Americans began to suspect that
the Soviet Union was actually a third-rate economy;
but it still had the world’s most alluring ideology,
a body of thought capable of attracting more people in the Third World
than the “possessive individualism”
(to use the philosopher C. B. Macpherson’s term)
espoused by the United States.
Soviet intellectual appeals were built around the ideas of Karl Marx—
indubitably a man of the West
and properly buried in Highgate Cemetery, London—
which attracted even the most chauvinistic people on earth, the Chinese.
Marxism-Leninism, as espoused by the Soviet Union,
provided explanations for the inequities of colonialism,
a model of economic development
based on the achievements of Russia under Stalin,
and the promise of world peace
when all nations had passed beyond imperialism,
which was the “final stage of capitalism.”
[8.3]
Part of what gave Soviet ideology such power
to convince whole peoples in the Third World
was the way it assimilated and invoked
the single most uncontested ideology of our century, that of science.
It claimed to rest not on the hopes of idealistic reformers
but on the logic of “scientific socialism.”
The Soviets insisted that
they were acting in accordance with laws of human development
discovered by their patron saints, Marx and Lenin.
By contrast, the ideology of the “free world” looked at best like
a rationalization of the privileges enjoyed by Americans
because of their exceptional geography and history.
[8.4]
Not surprisingly, American leaders came to feel that
somehow they had to match the ideological claims of communism
in what they saw as
a great global battle for the souls of earth’s contested majority.
Nowhere did this need seem more acutely necessary than in East Asia,
where Communist regimes had come to power in China, North Korea, and Vietnam
despite the fact that
Marx’s analysis of class conflict in industrializing societies
bore only the faintest relation to
the actual conditions in any of these countries.
At the time,
communism was also an active competitor in every other country in the region.
Asians were attracted to it precisely because it claimed to be based on science—
the ingredient that seemed to undergird the industrial and military might
of their European, American, and Japanese colonizers—
and because the example of the Soviet Union held out the hope of a solution
that might someday be within their own revolutionary grasp.
[8.5]
The American response, never expressly articulated but based on
the total mobilization of the American people for the Cold War
by President[’s Eisenhower [34] and] John F. Kennedy [35] and other leaders,
was twofold.
First, we would do everything in our considerable power to
turn Japan into a capitalist alternative to mainland China,
a model and a showcase of what Asians might expect
if they threw in their lot with the Americans instead of the Communists.
Second, academic economics as taught in most American universities was subtly transformed into
a fighting ideology of the “West.”
From each of these transformations would come
forceful consequences for the American empire
after its competition with the Soviet Union ended.
Because most Americans never understood either policy
to be a strategy for pursuing the Cold War,
they took both Japan’s achievements and the wealth of the West
to be evidence of an ineluctable destiny that made the United States
a singularly appropriate model for the rest of the world.
Any doubts raised about these propositions
were seen as undermining the pretensions of the American empire.
Thus, what began as tactical responses to temporary,
often illusory or misleadingly interpreted Soviet “advantages”
ended up as ideological articles of faith
for the “sole superpower” of the post-Cold War world.
[8.6]
From approximately 1950 to 1975,
the United States treated Japan as a beloved ward,
indulging its every economic need
and proudly patronizing it as a star capitalist pupil.
The United States sponsored Japan’s entry into many international institutions,
like the United Nations
and the Organization for Economic Cooperation and Development,
well before a post-World War II global consensus for Japan had developed.
It also
transferred crucial technologies to the Japanese
on virtually concessionary terms and
opened its markets to Japanese products
while tolerating Japan’s protection of its own domestic market.
It even supported the Japanese side in all claims by individual American firms
that had been damaged by Japanese competitors.
[For an example, see Pat Choate’s Agents of Influence.]
In addition,
the United States allowed Japan to retain an artificially undervalued currency
in order to give its exports a price advantage
for well over a decade longer than it did any of the rebuilt European economies.
[8.7]
We proclaimed Japan a democracy
and a model of what free markets could achieve
while simultaneously helping to rig both its economic and political systems.
We used the CIA to finance the ruling party (the LDP)
and engaged in all manner of dirty tricks
to divide and discredit domestic socialists.
In this process there was much self-deception.
For far too long America’s leading officials insisted that
Japan could never be an economic competitor of the United States.
President Eisenhower [34]’s secretary of state John Foster Dulles
was, for example, convinced that
while the Japanese might be able to sell shirts, pajamas,
“and perhaps cocktail napkins” to the American market,
little else was possible for them.
Americans did not wake up to Japan’s competitive challenge
until their steel, consumer electronics, robotics, automotive, camera,
and semiconductor industries
were virtually extinct or fighting for their lives.
[8.8]
After the “security treaty riots” of 1960,
when a mass movement tried to prevent the signing of a treaty
that would perpetuate the basing of American troops in Japan and Okinawa,
the United States moved its campaign to portray Japan as a model democracy
into high gear.
It appointed as ambassador
the well-known Harvard historian of Japan Edwin O. Reischauer,
who was married to a Japanese woman from a distinguished political family.
His job was to repair
the damage to the image of Japanese-American amity caused by the 1960 riots,
which to man Asians appeared to be
a Japanese equivalent to the Budapest uprising of 1956.
Reischauer was to “reopen a dialogue” with the alienated Japanese left
while shoring up the conservative Liberal Democratic Party (LDP),
its aging rightists from prewar and wartime governments now screened from public view
while it emphasized economic growth over democracy.
[8.9]
Perhaps Reischauer’s most influential step
was to endorse in his own extensive writings and speeches of the time
a movement among American academic specialists
to rewrite the history of modern Japan
as a case study of successful “modernization.”
So-called modernization theory flourished in the United States during the 1960s
just as the Japanese economy “took off”
(to use that famous term of the modernization theorists),
achieving double-digit growth rates.
This new approach to Japan traced the country’s course of development
from the Meiji Restoration of 1868,
which was Japan’s debut as a unified nation
rather than a collection of feudal states.
It contrasted Japan’s achievement of great-power status
with the dependency and susceptibility to colonialism
of the rest of Asia, particularly China.
It stressed how the initial authoritarianism of the Meiji oligarchs
evolved into a toleration of political parties during the 1920s,
producing at least the possibility of parliamentary democracy.
The theory drew attention to how the “liberal” 1920s,
although ultimately destroyed by reaction and militarism after 1931,
provided precedents for reform that many Japanese leaders seized upon
when genuine democratization got under way during the American occupation.
[8.10]
Japan emerged from this stirring tale of political and economic development
as an exemplary nation, the only country in Asia that avoided being colonized.
[Thailand is another one.]
The fact that it did so by joining the Western colonialists
in victimizing the other countries of Asia
was underemphasized in such accounts.
Japan’s kuroi tanima, or “dark valley,” from 1930 to 1945,
in which it warred with China and the United States,
was explained away as due to a unique concatenation of international factors—
the Great Depression,
the closing of European and American colonies to Japanese exports,
Japan’s fear of bolshevism,
and American isolationism.
What actually went on in the “dark valley,”
from the rape of Nanking to the Bataan Death March,
was incidental to the tale of economic growth and political consolidation
and best forgotten,
since Japan’s aggression was now understood to be but a temporary sidestep
on a long march toward modernization.
The emperor of Japan, who had reigned since 1926
and presided over much military aggression and brutality,
emerged as a simple marine biologist and pacifist
who had opposed the war from the beginning
and had actually brought it to an end in 1945 through his own decisive action.
It was said that he was a man of few words in view of the fact that
from the end of the war to his death in 1989
he was never again allowed to utter many in public.
[8.11]
The American public, like its policy elites
never very well informed about Japan to begin with,
bought this rosy picture of that country
as the chief bulwark against communism in Asia.
John Dower and a few American academic specialists
argued that modernization theory was incomplete
and the Japan’s militarism had domestic roots every bit as deep
as its commitment to modernity,
but they were easily ignored.
Japan was now entrenched in American consciousness
as a full-fledged democratic ally
with a system rooted in free-market capitalism
and certain eventually to “converge” with the United States
as a liberal, consumer-based state.
[8.12]
To be sure, there were occasional “misunderstandings”
as one nation’s capitalists sought competitive advantage over the other.
In dealing with such “unfortunate” developments,
the task of diplomacy and the mission of the American embassy in Tokyo became
not to champion American interests
but to ameliorate the conflict itself, usually to Japan’s advantage.
Nothing seriously wrong could come of such policies, it was argued,
because, as modernization theory taught,
the two societies were on the same developmental path
toward common economic ends.
[8.13]
The second aspect of the ideological challenge to the Soviet Union
was the development of an American economic ideology
that might counter the promise of Marxism—
what today we call“neoclassical economics”,
which has gained an intellectual status
in American economic activities and governmental affairs
similar to that of Marxism-Leninism in the former USSR.
Needless to say,
Soviet citizens never understood Marxism-Leninism as an ideology
until after it had collapsed
[That sounds rather surprising to me.],
just as Americans like to think (or pretend)
that their economics is a branch of science,
not a fighting doctrine to defend and advance their interests
against those of others.
They may consider most economists to be untrustworthy witch doctors,
but they regard the tenets of a laissez-faire economy—
with its
cutthroat competition,
casino stock exchange,
massive inequalities of wealth,
and a minor, regulatory role for government—
as self-evident truths.
[8.14]
Until the late 1950s,
academic economics remained one of the social sciences,
like anthropology, sociology, and political science—
a non-experimental, often speculative investigation into the ways
individuals, families, firms, markets, industries, and national economies
behaved under different conditions and influences.
It was concerned with full employment, price stability, growth, public finance, labor relations, and similar socioeconomic subjects.
After it became the chief ideological counterweight to Marxism-Leninism
during the Cold War
[Johnson makes no allowance for the Christian well-springs
of the crusade against godless Communism,
nor, broadening the aperture somewhat,
of the “three great monotheistic religions” against godless Communism.],
its practitioners tried to extract it from the social sciences
and re-create it as a hard science.
[8.15]
Its propositions were now expressed less in words than in simultaneous equations,
the old ideas of Adam Smith reappearing as fully mathematized axioms,
increasingly divorced from empirical research.
Its data were said [by whom?] to be “stylized facts,”
and economists set out to demonstrate through deductive reasoning
expressed in mathematical formulas that
resources could be allocated efficiently only through an unfettered market.
By now all these terms
(“resources,” “efficiency,” “markets”)
had been transformed into abstractions,
not unlike the abstract formulations
(“the proletariat,” “the bourgeoisie,” “class conflict”)
of its Soviet opponents.
English-speaking economics became such a “hard science” that in 1969
the central bank of Sweden started giving Nobel Prizes to its adepts,
virtually all of them American academicians.
This ensured that virtually all aspiring economists would in the future
try to do so-called theoretical economics—
that is, the algebraic modeling of markets—
rather than old-fashioned empirical and inductive research into
real-world economics.
[8.16]
Economics split from the social sciences
and took up a new position somewhere close to mathematics.
Economists were now endlessly called upon by governmental bodies to testify that
the American economy was unmatchable,
even if it sometimes behaved badly because of
overspending liberals, pork-barrel politics, or greedy monopolist.
Alternatives to it were understood to be either converging with it
or destined to fail.
Economics no longer studied the economy;
it spoke ex cathedra about what was orthodox and what was heresy.
Meanwhile, empirical research on economic phenomena migrated to
business schools, commercial think tanks, and the other social sciences.
[8.17]
Unquestionably, after the first two decades of the Cold War [1945–65],
in a purely dichotomous choice between an economy based on Marxism-Leninism
and one base on free-market capitalism—
as exemplified by the economies of the Soviet Union and the United States—
most people around the world would have chosen the free market.
But in East Asia,
at the height of the Sino-Soviet dispute and the American war in Vietnam,
neither ideology was working out according to either superpower’s script.
The Chinese were discrediting forever
whatever attractiveness might have remained
in the forced-draft economic achievements of the Soviet model.
Through bungling, megalomania, and deep ideological confusion
about what Marxism and the Soviet experience taught,
the Chinese Communist Party managed to kill thirty million of its own citizens
and then, in a paroxysm of mutual blame,
came close to destroying its unmatchable cultural legacy
in the so-called Cultural Revolution.
Today this period is recognized—even in China—as a monumental disaster,
but at the time many Americans,
from idealistic leftist students to presidents and other political leaders,
failing to understand what was happening,
retained a sentimental attraction to Mao Zedong and Zhou Enlai,
the mismanagers of the Chinese revolution.
[8.18]
The truly surprising development in East Asia, however, was that America’s “non-Communist” satellites, protectorates, and dependencies
were starting to get rich and to compete with their superpower benefactor.
All of this was camouflaged by the Cold War itself,
so that the enrichment of East Asia occurred almost surreptitiously.
The year-in, year-out record-breaking growth rates
of such previously poor places as Japan, South Korea, and Taiwan
were not precisely what American elites had expected,
but they were explained away as nothing more than confirmations—
even overconfirmations—
of officially espoused free-market ideology
and so were greeted with parental pride.
[8.19]
If the capitalist economies of East Asia
were starting to perform better than the United States itself,
this anomaly was usually attributed to
mysterious Japanese or Asian cultural factors
or to complacency on the part of American managers and workers.
By the time the Western world awoke to what had actually happened,
economic growth in East Asia was self-sustainable
and unstoppable by external actions
(although many Asians thought
this was exactly what the United States was attempting
when its policies toward the area led to the meltdown of 1997).
The enrichment of East Asia under the cover of the Cold War
was surely the most important, least analyzed development in world politics
during the second half of the twentieth century.
It remains to this day intellectually indigestible in the United States.
[8.20]
The fundamental problem is not simply that
in the Cold War era Japan attained a $5T economy—
although that alone was an unexpected competitive challenge
to American economic preeminence—
but how it did so.
It had found a third way between
the socialist displacement of the market advocated by Soviet theorists
and an uncritical reliance on the market advocated by American theorists.
The Japanese had invented a different kind of capitalism—something no defender of the American empire could accept.
It was therefore assumed either that the Japanese were cheating
(and that all we needed to compete successfully against them was
a “level playing field”)
or that they must be headed for a collapse
similar to the one that had overtaken the USSR.
[8.21]
In turning neoclassical economic theory into a fighting ideology,
American ideologues encountered one element of capitalist thought
that they could not express
in abstract, seemingly “scientific” mathematical terms.
This was the set of institutions through which
competitive market relationships actually produce their benefits.
Institutions are
the concrete, more-or-less enduring relationships through which
people work, save, invest, and earn a living—
such things as stock exchanges, banks, labor unions, corporations,
safety nets, families, inheritance rules, and tax systems.
This is the realm of the legal, political, and social order,
where many considerations that govern the economy other than efficiency
contend for primacy.
For economic theorists institutions are “black boxes,”
entities that receive and transmit economic stimuli
but are themselves unaffected by economic theory.
[8.22]
In attempting to forge
a fully numerical, scientific-looking model of the capitalist economy
for purposes of the Cold War,
Western ideologues simply assumed that
the institutions of modern capitalism must be
those that existed in the United States in the late Eisenhower [34] era
[i.e., the late 1950s].
This meant that savings were typically moved from the saver to industry
through a capital market (such as the New York Stock Exchange)
rather than, for example, through the banking system.
They assumed that industrial-labor conflicts
were settled by interminable strikes,
and not by, for example, offering some workers career job security
[That last statement seems rather biased.];
and
they assumed that the whole purpose of an economy
was to serve the short-term interests of consumers,
instead of some overarching goal such as
the wealth and power of the nation as a whole.
[8.23]
These American assumptions were almost identical to the Soviet assumption that
the institutions of “socialism” must be
those that existed in the USSR during, say, the Khrushchev era
[i.e., 1958–64].
Neither side ever produced an ideological model to sell to others
that could be divorced from their own country.
Because of this inability to express
the institutions of either socialism or capitalism
in some culturally neutral—or at least more varied—way,
it is understandable that many observers simply reduced
the claims of Marxist-Leninist ideology to the USSR
and those of free-market capitalism to the United States.
[8.24]
In finding a third way,
Japan’s postwar economic “miracle” reinvented not economic theory
but the institutions of modern capitalism
so that they would produce utterly different outcomes
from those imagined in the American model.
Given Japan’s history of catch-up industrialization,
its overarching need to avoid the victimization and colonialism to which
every other area of East Asia had succumbed,
its virtual dearth of raw materials,
its dependence on manufacturing and international trade
to sustain its large population,
and its overwhelming defeat in World War II,
it could not ever have become a clone of the United States.
Its postwar planners and technocrats instead organized
a capitalist economy intended to serve
the interests of producers over consumers.
They forced Japan’s citizens to save
by providing little in the way of a safety net;
they encouraged labor harmony
regardless of what it did to individual rights;
and they built industries based on the highest possible human input
rather than simply on some naturally given comparative advantage,
such as cheap labor or proximity to a large market like China’s.
Their goal was to enrich Japan, if not necessarily the Japanese themselves.
They viewed all economic transactions as strategic:
theirs was to be an economy organized for war
but now directed toward ostensibly peaceful competition with other countries.
[8.25]
Since the 1950s,
the United States had seen the entire world in Cold War terms.
This meant that Japan was far more important as an anti-Communist ally
then as a potential economic competitor.
In order to keep U.S. troops and bases in Japan,
the Americans provided open access to their market and
the government pressured private American firms
to relinquish ownership rights
to technologies being transferred to Japan.
As the Japanese trade and industrial bureaucrats took advantage of this deal,
trade disputes became inevitable.
From the “dollar blouses” that flooded into the United States
during the Eisenhower [34] era
to the textile disputes
of the Kennedy [35], Johnson [36] and Nixon [37] administrations,
complaints about the costs of “alliance” with Japan
became a permanent feature of Washington politics.
They also produced a lucrative new field
for former government officials turned lobbyists,
whom the Japanese hired in increasing numbers
to ameliorate or paper over the disputes.
Even though Washington remained more or less ignorant
of how the government in Tokyo actually worked,
the government in Tokyo took a life-or-death interest in
Washington’s role in regulating the American economy.
Japanese officials also did everything in their power
to maintain the artificial separation between trade and defense
that the U.S. government had invented
and to see that the Pentagon was happy with its facilities.
[8.26]
This artificial separation between trade and defense
has been a peculiar characteristic of
the half-century-long American hegemony over Japan.
Official guardians of the Japanese-American Security treaty
and their academic supporters
have maintained an impenetrable firewall
between what they call, using the Japanese euphemism, “trade friction”
and the basing of one hundred thousand American troops in Japan and South Korea.
There was no reason why
these two aspects of the Japanese-American relationship
should have been dealt with as if they were separate matters
except that, had they not been,
the actual nature of the relationship would have been far easier to grasp.
[8.27]
Until the 1980s, the United States officially ignored all evidence that
this compartmentalization of its massive military establishment
and its growing trade deficits with Japan
was going to be very costly.
From about 1968 on, trade deficits began to rise
just as
the hollowing out of certain industries
that the Japanese government had targeted
became more visible.
U.S. officials then consulted with their Japanese counterparts
about these problems
and accepted fig-leaf agreements that offered the pretense of remedies
to distressed American businesses and communities.
With the exception of President Nixon [37]’s 1971 decision
to force an ending to Japan’s artificially undervalued exchange,
nothing else of significance was done.
[8.28]
During the 1980s, however,
pressures for action of some sort markedly increased.
The Japanese economy, now a major competitor,
was starting to erode the industrial foundations of the United States.
Moreover, the Cold War was settling into its final Reaganesque [40] rituals.
Despite inflated CIA estimates of Soviet strength,
it became increasingly clear to many,
even before the rise to power of Mikhail Gorbachev,
that the two sides were starting to accommodate each other
and that the threat of a superpower war was declining.
In this context, a new way of thinking developed about Japan itself
and about the nature of America’s relationships with newly rich Asia.
Business Week dubbed it “revisionism” and wrote:
[8.29]
The Japanese,
who had been very proud of their “developmental state” and its guided economy
and who readily wrote about it for domestic consumption,
suddenly became concerned when American revisionists, myself included,
began saying that “leveling the playing field” was not the issue,
since the two economies were different in such fundamental ways.
It was one thing for Japan and its lobbyists
to parry complaints about their country’s closed markets
and the numerous barriers it raised against foreign products
ranging from automobiles and semiconductors to grapefruit and rice.
It was quite another for Americans to claim that
they were playing by entirely different rules.
Accusations that the “revisionists” were Japan bashers or racists
rose quickly to the surface.
[8.30]
Meanwhile a number of Japanese politicians and industrialists
added insult to injury by claiming that
the trade deficit resulted from the laziness of American workers
or resorted to racism by pointing to
the racially mixed nature of the workforce
while characterizing American minorities as indisciplined and ineducable.
In 1989,
a prominent Japanese politician, Shintaro Ishihara,
and the president of Sony, Akio Morita,
cowrote a book, The Japan That Can Say “No”,
in which they suggested that
their country should not share Japanese-developed technologies
that the Americans regarded as of national security significance
unless the Americans reined in their critiques.
In 1998, Ishihara,
angry about an economy that seemed to be heading into decline,
wrote a sequel,
The Japan That Can Say “No” Again,
suggesting a halt in investment in U.S. government securities
to teach a lesson to Americans who had pushed Japan to open its economy.
These views made him sufficiently popular that in 1999
he was elected mayor of Tokyo.
[8.31]
Nonetheless,
the American government continued its typical Cold War style of doing business
into the early 1990s.
In 1988, for example, State Department and Pentagon leaders proposed
transferring to Japan the technology of the F-16 fighter aircraft
in order to allow the Japanese to build their own fighter, the FS-X.
A huge controversy erupted over
why the Japanese did not simply buy the F-16 fighters they needed
from the manufacturer, Lockheed,
thereby helping to balance the trade deficit
and keep manufacturing in the United States.
One State Department official, Kevin L. Kearns,
who was in Tokyo at the time the FS-X deal was negotiated,
agreed with the critics and wrote in the foreign Service Journal,
“As long as the Chrysanthemum Club [of pro-Japanese American officials]
continues to skew the policy process in our government
and paid Japanese lobbyists and academics-for-hire
continue to influence disproportionately
the treatment of Japan in the public realm,
the United States will continue its approach to Japan
in the same tired, self-defeating way.”
Following these remarks,
Deputy Secretary of State Lawrence Eagleburger publicly denounced Kearns
and in February 1990 forced his resignation from the State Department.
The Bush-41 administration then transferred the F-16 technology to Japan.
[8.32]
In an equally telling incident in 1990,
the Matsushita Electric Company of Japan
bought MCA Inc. the giant Hollywood-based entertainment conglomerate,
for $7.5G,
one of the biggest purchases ever of an American company by a foreign firm.
This was less than a year after an Sony had acquired Columbia Pictures for $3.4G
and Newsweek had run a cover
showing Columbia’s torch-bearing female icon wearing a kimono.
In addition to by-then-widespread worries
about Japanese capital invading the United States,
there was the further complication that MCA owned a lucrative concession
that serviced visitors to Yosemite National Park.
In order to avoid the public relations embarrassment
of having a Japanese company own part of a national park,
the Department of the Interior suggested that
Matsushita donate the concession to the park service.
The Japanese, however, did not want to let it go
and instead hired an elite corps
of Washington lobbyists, lawyers, and public relations specialists
to escort their purchase past congressional and government critics.
[8.33]
Leading the Matsushita team was former U.S. trade representative
[and Democratic éminence grise] Robert Strauss.
According to the Washington Post,
he was paid $8M for successfully brokering the deal
and seeing to its public relations aspects,
including getting the Department of the Interior to back off.
When asked by reporters why he was being paid such an enormous fee
for a minimal amount of work,
Strauss nonchalantly replied,
“I don’t work by the hour anymore. I don’t do windows.”
This remark greatly puzzled the Japanese,
although they were pleased enough with what their largesse had bought them.
They concluded that
Washington was as corrupt as Jakarta or Seoul
and that anything could be had if the price was right.
Rather than devoting attention
to the potential pitfalls of their own brand of capitalism,
the Japanese in this instance followed a distinctly American path
and convinced themselves that they were invincible,
while the United States was in a terminal decline.
They therefore marched steadily toward their own decade-long economic downfall.
[8.34]
These alarms and diversions
were also effective in turning American attention away from
the most distinctive trait of Japan’s type of capitalism—
namely,
the major role given to governmental industrial policy
and its role in a capitalist economy.
Industrial policy refers to the attempt by the government
to nurture particular strategic industries
that are thought to be needed by an economy
for reasons of national security, export competitiveness, or growth potential.
As a result, most Americans failed to grasp
how crucially Japan’s industrial policy depended on
its political and military relationship with the United States
and on access to its vast market.
Nor did they understand that
the Japanese were investing the huge trade profits
in American Treasury securities
that were, in turn, helping to finance America’s huge debts
and making the American financial system
critically dependent on Japanese savings.
This growing dependency
made American officials reluctant to criticize the Japanese in any way.
Even when they did so, the Japanese rationalized such criticism
as meant only for U.S. domestic consumption.
[8.35]
What Americans, including the revisionists, failed to see was that
the Japanese economy,
still devoted to exporting a vast array of
ever more sophisticated and technologically advanced manufactured goods
primarily to the American market,
was generating an industrial overcapacity
that would eventually threaten the health of the world economy.
Moreover, as much of Asia began to emulate the Japanese form of capitalism
or become offshore manufacturing platforms for Japanese corporations,
this overcapacity threatened to reach crisis proportions.
The crisis came to a head in 1997,
and has been a continuing feature of the international economy ever since.
[8.36]
Political developments helped precipitate the crisis.
In 1992, the Americans elected Bill Clinton [42]
on a slogan of “It’s the economy, stupid,”
and in 1993, the Liberal Democratic Party of Japan,
no longer needed as a bulwark against communism,
simply collapsed of its own corruption and redundancy.
[8.37]
The Clinton [42] administration did experiment briefly with
policies advocated by the revisionists, including managed trade.
The new administration even toyed with
convincing the Japanese to join in helping manage Japanese-American trade,
but its heart was never in it.
The actual work was left to
the usual array of Washington lawyers and economists,
who had no East Asian knowledge or experience whatsoever,
with the usual predictable outcome that the Japanese,
much more experienced and better informed than their American adversaries,
simply ran circles around them.
[8.38]
Using their huge leverage over American debt financing
and Clinton’s need for the appearance of domestic economic prosperity
in order to be reelected in 1996,
the Japanese got the Americans to back down on most trade issues.
The administration covered its tracks by claiming that
it could not allow economic disputes
to interfere with security and military matters.
The difficulty was that
except for the bellicose statements and deployments of the United States itself,
peace was breaking out in East Asia.
In 1992, for example,
China recognized South Korea;
that same year the government of the Philippines asked the U.S. Navy
to leave the major base it had long occupied at Subic Bay.
Still, the U.S. government claimed to see threats from North Korea and China,
and the Japanese went along, doing whatever they could to satisfy the Pentagon.
[8.39]
In 1993, the Liberal Democratic Party lost its majority in the Japanese Diet
for the first time in thirty-eight years.
Increasingly irrelevant to Japan’s need to reinvigorate its economy
and assume control over its foreign policy,
it was not voted out of office but simply disintegrated.
At first,
a popular coalition government formed among the many new parties in the Diet.
It seemed that a long overdue political realignment might be at hand.
As it turned out, the Socialist Party,
long feared by the United States because of its advocacy of “neutralism,”
was so beguiled to be in office
that it ultimately abandoned everything it had ever claimed to stand for
and forged a cynical coalition with the LDP to control parliament.
In the end, all the LDP’s loss of power revealed was that
the party system itself had largely been postwar window dressing.
In 1997, the LDP returned to power and resumed its stewardship over
Japan’s old Cold War relationship with the United States.
[8.40]
At least, though, the rise to power in the 1993–97 interregnum
of nonmainstream LDP and opposition party leaders
opened up an important debate over
how and why the country had become so rich
and yet had such an ineffective elected government.
Bureaucratic insiders as well as intellectuals and academics
began publicly to acknowledge and elaborate on
the very points the American revisionists had made.
New York Times correspondent James Sterngold reported [in 1993] from Tokyo,
“Five years ago,
some Western critics were derided by the Japanese establishment
as wrong—and probably racist—
for declaring that Japanese policy was set by bureaucrats, not politicians,
and that Japanese politics was often corrupt ....
Suddenly, [representations] and criticism previously regarded as blasphemous\
when uttered by ‘revisionists’ and ‘Japan bashers’
are spoken with a surprising matter-of-factness.”
In the process they opened up whole new perspectives for viewing
the interlocking Japanese governmental, social, and economic systems.
They affirmed that a corps of unelected elite bureaucrats
actually governed the country under a façade of democracy.
They laid out the ways in which,
working within a Cold War framework and guided by their government,
the major corporations had invested in productive capacity
many times greater than domestic demand could possibly absorb,
thereby becoming totally dependent on continued sales
to the American and Asian markets.
They detailed the methods of the cartels,
of restrictive licensing practices,
of the under-developed system of political review,
and of myriad other “nontariff barriers” to trade
that kept American and European corporate penetrations of the domestic market
to a minimum.
[8.41]
One impetus for such new, self-critical attitudes could be found
in the changed economic atmosphere.
Following a binge of big-ticket investments at the end of the 1980s
and a bubble of real estate speculation that accompanied newfound wealth,
the economy began to falter.
After eight years of stagnation,
in 1998 it finally plunged into real recession.
In an ironic twist,
American ideologists used these developments to argue as always that
American free-market capitalism was the globe’s one and only path to success.
However, they now incorporated revisionist analyses without acknowledgment
into their critiques of the Japanese economy.
For example, the Wall Street Journal’s Paul Gigot had long maintained that
Japan’s economy operated just like the U.S. model.
“Japan’s miracle, like Britain’s and America’s before it,” he wrote in 1986,
“was largely the product of creativity and enterprise
by individuals and their businesses.”
A decade later, in a column entitled
“The Great Japan Debate Is Over: Guess Who Won?,”
he could be found deriding Japan’s “model of bureaucratic-led growth,”
as distinguished from “American-style capitalism.”
His new point:
the revisionists may have been right about how Japan worked
but they were wrong to think it was a success.
To the extent that the Japanese economy might ever stage a comeback,
Gigot argued in a fashion typical of his colleagues,
it would have to do business
“in a framework that more resembles the American model.”
Put another way,
these economic ideologues found convincing proof in Japan’s economic fate that
a hegemonic America
would continue to dictate the rules of international commerce
into the distant future,
even if that hegemony were disguised with catchphrases like “globalization.”
[8.42]
As the Cold War receded into history, the United States,
rather than dissolving its Cold War arrangements,
insisted on strengthening them as part of a renewed commitment to global hegemony.
Japan was supposed to remain a satellite of the United States,
whether anyone dared use that term or not.
Meanwhile, annual American trade deficits with Japan soared.
American manufacturing continued to be hollowed out,
while a vast manufacturing overcapacity was generated in Japan and its Southeast Asian subsidiaries.
Capital transfers from Japan to the United States
generated huge gains for financiers
and produced an illusion of prosperity in the United States.
[Johnson’s preface is dated July 1999,
showing he completed this work at the height of the dot-com bubble.],
but in 1997, it all started to unravel.
The most severe economic crisis since the Great Depression
hit the East Asian economies
and began to spread around the world.
Chapter 9
...
[9.2]
The global economic crisis that began in Thailand in July 1997 had two causes.
First, the built-in contradictions of the American satellite system in East Asia
had heightened to such a degree that
the system itself unexpectedly began to splinter and threatened to blow apart.
Second, the United States, relieved of the prudence imposed on it by the Cold War, when any American misstep was chalked up as a Soviet gain, launched a campaign to force the rest of the world to adopt its form of capitalism.
This effort went under the rubric of “globalization.”
As these two complex undertakings—perpetuating Cold War structures after they had lost their purpose and trying to “globalize” countries that thought they had invented a different kind of capitalism—played themselves out around the world, they threatened a worldwide collapse of demand and a new depression.
Whatever happens, the crisis probably signaled the beginning of the end of the American empire and a shift to a tripolar world in which the United States, Europe, and East Asia simultaneously share power and compete for it.
[9.3]
During the Cold War, the Communists routinely charged that the United States used the Marshall Plan for rebuilding wartorn Europe and subsequent economic aid programs to advance the interests of American companies and to keep the Third World dependent on the First.
According to the Communist theory of economic colonialism, capitalist states enforce an inherently discriminatory division of labor on less developed countries by selling them manufactured goods and buying from them only raw materials, an extremely profitable arrangement for capitalists in advanced countries and one that certainly keeps underdeveloped countries underdeveloped.
This is why revolutionary movements in underdeveloped countries want either to overthrow the capitalist order [¶ 6.2.3] or to industrialize their economies [¶ 6.2.4] as fast as possible.
[9.4]
Such economic colonialism has long existed in many aspects of America’s relations with Latin America.
During the Cold War, the United States wrapped this system of dependency in the rhetoric of anticommunism, labeling elected leaders Communists if they seemed to endanger American corporate interests, as in Guatemala in 1954, and ordering the CIA to overthrow them.
Campaigns against the influence of Fidel Castro, for instance, often proved of great usefulness to American companies south of the border.
But this pattern of relationships did not case the global economic crisis of the late 1990s.
[9.5]
The fundamental structural cause was
the way the United States for more than forty years
won and retained the loyalty of its East Asian satellites.
These non-Communist countries accepted the American deal as offered [which, from the American perspective, was in fact off-shoring] and worked hard at “export-lead growth,” primarily to the American market.
If the Japanese led this movement, behind them were three ranks of followers:
first, the “newly industrialized countries” of South Korea, Taiwan, Hong Kong, and Singapore;
then, the late developers of Southeast Asia, Malaysia, Indonesia, Thailand, and the Philippines;
and finally, China, at present the world’s fastest-growing economy.
The Japanese found this so-called flying-geese pattern appealing.
They were flattered to be the lead goose and the inspiration for those that followed.
The leaders of each of these countries assumed that their economic destination—Los Angeles (and from there the rest of the American market)—was a permanent feature of the international environment; and so long as the Cold War existed, it was as permanent as anything ever is in interstate relations.
[9.6]
Over time, however, this pattern produced gross overinvestment and excess capacity in East Asia,
the world’s largest trade deficits in the United States, and
a lack of even an approximation of supply-and-demand equilibrium across the Pacific.
Contrary to Communist analyses of how neocolonialism should work, these terms proved surprisingly costly to the imperial power.
They
cost American jobs,
destroyed manufacturing industries, and blunted the hopes of minorities and women trying to escape from poverty.
[9.7]
Judith Stein, a professor of history at the City College of New York has detailed how the de facto U.S. industrial policy of sacrificing American workers to pay for its empire devastated African-American households in Birmingham, Alabama, and Pittsburgh, Pennsylvania.
She writes,
“At the outset of the Cold War, reconstructing or creating steel industries abroad was a keystone of U.S. strategic policy, and encouraging steel imports became a tool for maintaining vital alliances.
The nation’s leaders by and large ignored the resulting conflict between Cold War and domestic goals.
Reminiscing about elite thinking in that era, former Federal Reserve Board chairman Paul A. Volcker recalled that
‘the strength and prosperity of the American economy was too evident to engender concerns about its costs.’ ”
Moreover, American economic ideologues always dominated what debate there was, couching the problem in terms of protectionism versus internationalism, never in term of prosperity for whites versus poverty for blacks.
[How about “Prosperity for Jews versus poverty for gentiles”?]
The true costs to the United States should be measured in terms of crime statistics, ruined inner cities, and drug addiction, as well as trade deficits.
[Not sure how much of that is really due to globalization.
Poverty does not automatically lead to crime or drug addiction.
Further, the loss of manufacturing jobs has impacted the entire gentile population, of whatever race, far more than it has the Jewish part of the population.
The deindustrialization of America bears a certain similarity to the Morgenthau plan.]
[9.8]
U.S. officials did finally start to negotiate more or less seriously with the Japanese and the other “miracle economies” to open their markets to American goods.
But the attempt always collided with the security relationship.
In order to level the economic playing field, the United States would have had to level the security playing field as well, and this it remains unwilling to do.
[9.9]
In East Asia, to create industries that could export to the American market, design the right products, and achieve competitive prices and levels of quality, governmental industrial policies became the norm.
Japan was the regional pioneer in creating model collaborative relationships between government and industry.
In part, it drew on its history as one of the world’s most successful late industrializers and on its wartime production system, in which the government and the huge zaibatsu, or corporate combines, had worked together to produce the weapons that Japan needed.
After the onset of the Cold War, the Americans did very little to prevent the Japanese from re-creating the combines (now called keiretsu) and the legal structures that supported them, largely because occupation officials either failed to recognize what was happening or were blind to its implications.
[9.10]
To base a capitalist economy mainly on export sales, rather than domestic demand [i.e., what is often called “mercantilism”], however, ultimately
subverts the function of the unfettered world market to reconcile and bring into balance supply and demand.
Instead of producing what the people of a particular economy can actually use,
East Asian export regimes thrived on foreign demand artificially engineered [?? U.S. demand looks pretty real to me.] by an imperialist power.
In East Asia during the Cold War, the strategy worked so long as the American economy remained overwhelmingly larger than the economies of its dependencies and so long as only Japan and perhaps one or two smaller countries pursued this strategy.
But by the 1980s the Japanese economy had become twice the size of both Germanies.
Anything it did affected not just the American but the global economy.
Moreover, virtually everyone else in East Asia (and potentially every underdeveloped country on earth) had some knowledge of how to create such a miracle economy and many were trying to duplicate Japanese-style high-speed growth.
An overcapacity for products oriented to the American market
(or products needed to further expand export-oriented economies) became overwhelming.
There were too many factories turning out athletic shoes, automobiles, television sets, semiconductors, petrochemicals, steel, and ships for too few buyers.
The current global demand for automobiles, for example, seems to have peaked at around 50M vehicles at a moment when capacity has already grown to 70M.
To make matters worse, as a result of the global economic crisis, auto sales in Southeast Asia fell from 1.3M in 1997 to 450K in 1998.
[9.11]
This is not to say that all the barefoot peoples of the world who might like to wear athletic shoes or all the relatively poor people who might someday be able to afford a television set or an automobile are satisfied.
But for now they are too poor to be customers.
The current overcapacity in East Asia has created intense competition among American and European multinational corporations.
Their answer has been to lower costs by moving as much of their manufacturing as possible to places where skilled workers are paid very little.
[Offshoring.]
These poorly paid workers in places like Vietnam, Indonesia, and China cannot consume what they produce, while middle- and lower-class consumers back in the United States and Europe cannot buy much more either because their markets are saturated or their incomes are stagnant or falling.
The underlying danger is a structural collapse of demand leading to recession and ultimately to something like the Great Depression.
[Not the only danger, Professor. There is also inflation, hyperinflation, or what has happened in America, the loss of the knowhow as to how to make many high-tech products. But hey, women have caught up to men! Who cares if America goes to hell, as long as women catch up to men. Right, feminists?]
As the economic journalist William Greider has put it in his book One World, Ready or Nor,
“Shipping high-wage jobs to low-wage economies has obvious, immediate economic benefits.
But, roughly speaking, it also replaces high-wage consumers with low-wage ones.
That exchange is debilitating for the entire system.”
The only answer is to create new demand by paying poor people more for their work.
[Evidently Johnson does not like tariffs.]
But the political authorities capable of enacting and enforcing rules to enlarge demand could not do so even if they wanted to because “globalization” has placed the matter beyond their control.
[An example in para. 13 seems to contradict that.]
[9.12]
A crisis of oversupply was inevitable [sic: the Japanese could simply have chosen to produce less.] given the passage of time and the unwillingness of imperial America to reform its system of satellites.
Even in the late 1990s, the American economy continued to serve as the consumer of last resort for the enormous manufacturing capacity of all of East Asia, although doing so produced trade deficits that cumulatively transferred trillions of dollars from the United States to Asia.
This caused an actual decline in the household incomes of the bottom tenth of American families, whose real income fell by 13 percent between 1973 and 1995.
It was only in 1997 that a weak link snapped—not, ironically in trade, but finance—and threatened to bring the system down.
[9.13]
The financial systems of all the high-growth East Asian economies were based on encouraging exceptionally high domestic household savings as the main source of capital for industrial growth.
Such savings were achieved by discouraging consumption through the high domestic pricing of consumer goods
(which, of course, also led to charges of “dumping” of normally priced goods when they were sent abroad).
To save in such a context was a patriotic act, but it was also a matter of survival in societies that provided little in the way of a social safety net for times of emergencies, and in which housing often had to be bought outright or in which interest payments on mortgages were not treated favorably as a tax deduction.
[9.14]
East Asian governments collected these savings in banks affiliated with industrial combines or in government savings institutions such as post offices.
In organizing their economies, they had chosen not to rely primarily on stock exchanges to raise the capital their export industries needed.
Instead they found it much more effective to guide the investment of the savings in these banks to the industries the governments wanted to develop.
In Eastasia, ostensibly private banks thus became partners in business enterprises and industrial groups, not independent creditors concerned first and foremost with the profitability of a company or the success of a loan.
These banks in effect followed government orders and felt secure so long as they did so.
[9.15]
Superficially, corporations in most Eastasian countries looked like their American or European equivalents, but in this case appearances were indeed deceptive.
As the American corporate raider T. Boone Pickens discovered when he tried to buy a small Japanese company that made auto headlights, a significant block of shares was held by the Toyota Motor Company.
The firm he wanted to acquire was part of the automaker’s keiretsu, or conglomerate of cooperating firms and banks.
Although Pickens acquired what in the United States would have been a controlling interest in the company,
Toyota blocked his takeover and prevented him from naming his own directors and corporate officers.
The fact that Pickens was able to buy the shares at all was a fluke in Japanese corporate governance, the result of a single disgruntled stockholder.
Until very recently Japanese corporations were “owned” entirely by one another in elaborate cross-share-holding deals designed to keep people like Pickens out and to keep the enterprise
working for the country rather than
for the profits of the shareholders.
The sale of shares was not a way to raise capital, and the people who held them were uninterested in the risks or profits that the company’s operations entailed.
[9.16]
This was actually a brilliant system.
Oxfam, the British development and relief agency, maintains that the Cold War Eastasian economies achieved
“the fastest reduction in poverty for the greatest number of people in history.”
But the stability of any Eastasian economy depended on keeping it its financial system closed—that is, under national control and supervision.
Once opened up to the rest of the world, the financial structures of the Eastasian developmental states were extremely vulnerable to attack by foreign capital and international financial speculators.
The industrial policy system produced corporations in which the burden of debt was five times greater than the value of the shareholders’ investments, whereas these so-called debt-to-equity ratios for U.S. firms are less than one-to-one.
Eastasian corporations operating with such large burdens of debt were normally indifferent to the price of their equity shares.
Instead, they serviced these debts at their banks with income from foreign sales.
When they were unable to repay their loans, the banks themselves very quickly veered toward bankruptcy.
The whole system depended on continuous growth of revenue from export sales.
[9.17]
Eastasian bankers are no stupider or more corrupt than those elsewhere.
It is just that the industrial policies [and social order] of the systems within which they operate put the profitability of a loan very near the bottom of the criteria they use for making an investment decision.
Instead, these bankers focus on enlarging production capacity, achieving larger market shares, accumulating assets, and having large balance sheets.
It is true that from a purely Western perspective, they should not have offered many of the loans they made.
To us it seems insane to ignore commercial criteria such as profitability.
But for a Korean banker, it was more important to support an affiliated company that was building cars for the U.S. market than to question whether the company was making prudent investment decisions.
That was part of the logic of being a banker in a satellite country within America’s hegemonic order in Eastasia.
[9.18]
Then, without warning, that order changed.
Perhaps the first important blow to the Eastasian model of capitalism came in 1971, when President Nixon [37] abolished the Bretton Woods system of fixed exchange rates, created by the United Nations Monetary and Financial Conference in the summer of 1944 at Bretton Woods, New Hampshire.
The treaties that resulted from Bretton Woods were the most important efforts of the victorious Allies of World War II to create a better global financial system than the one that existed in the 1930s.
The Allies intended to prevent a recurrence of the protectionism and competitive devaluations of national currencies that had deepened into the Great Depression and fueled the rise of Nazism.
To do these things, the Bretton Woods conference established a system of fixed exchange rates among the world’s currencies.
It also created the International Monetary Fund, to help countries whose economic conditions forced them to alter the value of their currencies, and the World Bank, to help finance post-war rebuilding.
The value of every currency was tied to the value of the U.S. dollar, which was in turn backed by the U.S. government’s guarantee that it would convert dollars into gold on demand.
[9.19]
Nixon decided to end the Bretton Woods system because the Vietnam War [and, it should be said, the Democratic Party’s “Great Society” programs] had imposed such excessive expenditures on the United States that it was hemorrhaging money.
He concluded that the government could no longer afford to exchange its currency for a fixed value of gold.
A more effective answer would have been to end the Vietnam War [or scale back the “Great Society” programs] and balance the federal budget.
[Does any of this sound familiar in 2011?]
Instead, what actually occurred was that the dollar and other currencies were allowed to “float”—that is, to be converted into other currencies at whatever rate the market determined.
[9.20]
The historian, business executive, and novelist John Ralston Saul described Nixon’s action as
“perhaps the single most destructive act of the postwar world.
The West was returned to the monetary barbarism and instability of the 19th century.”
Floating exchange rates introduced a major element of instability into the international trading system.
They stimulated the growth of finance capitalism—which refers to making money from trading stocks, bonds, currencies, and other forms of securities as well as lending money to companies, governments, and consumers rather than manufacturing products and selling them at prices determined by unfettered markets.
Finance capitalism, as its name implies, means making money by manipulating money, not trying to achieve a balance between the producers and consumers of goods.
On the contrary, finance capitalism aggravates the problems of equilibrium within and among capitalist economies in order to profit from the discrepancies.
During the nineteenth century the appearance, and then dominance, of finance capitalism was widely recognized as a defect of improperly regulated capitalist systems.
Theorists from Adam Smith to John Hobson observed that capitalists do not really like being capitalists.
They would much rather be monopolists, rentiers, inside traders, or usurers or in some other way achieve an unfair advantage that might allow them to profit more easily from the mental and physical work of others.
Smith and Hobson both believed that finance capitalism produced the pathologies of the global economy they called mercantilism: that is, true economic exploitation of others rather than mutually beneficial exchanges among economic actors.
[9.21]
Opponents of capitalism, such as Marxists, viewed such problems as inescapable and the ultimate reason capitalist systems must sooner or later implode.
Supporters of capitalism, such as Smith and Hobson, thought that its problems could be solved by imposing social controls on the monetary system, as did the Bretton Woods agreement.
As they saw it, lack of such controls led to the maldistribution of purchasing power.
Too few rich people and too many poor people resulted in an insufficient demand for goods and services.
The “excess capital” thus generated had to find some place to go.
In the maturing capitalist countries of the nineteenth century, financiers pressured their governments to create colonies in which they could invest and obtain profits of a sort no longer available to them at home.
The nineteenth-century theorists believed this was the root cause of imperialism and that its specific antidote was the use of state power to raise the ability of the domestic public to consume.
After the United States ended the Bretton Woods system, these kinds of problems once again returned to haunt the world.
[9.22]
In the 1980s, when the Japanese began seriously to damage the American economy, the leaders of both countries chose to deal with the problem by manipulating exchange rates.
This could be done by having the central banks of each country work in concert buying and selling dollars and yen.
In a meeting of finance ministers at the Plaza Hotel in New York City in 1985, the United States and Japan agreed in the Plaza Accord to force down the value of the dollar and force up the value of the yen, thereby making American products cheaper on international markets and Japanese goods more expensive.
The low (that is, inexpensive) dollar lasted for a decade.
[9.23]
The Plaza Accord was intended to ameliorate the United States’ huge trade deficits with Japan, but altering exchange rates only affects prices, and price competitiveness and priced advantages were not the cause of the deficits.
The accord was based on good classroom economic theory, but it ignored the realities of how the Japanese economy was actually organized and its dependence on sales to the American market.
The accord was, as a result, the root cause of the major catastrophes that befell Eastasia’s economies over the succeeding fifteen years.
[9.24]
Once the high yen-low dollar regime was in place, the U.S. government assumed that the trade imbalance would correct itself.
The United States did nothing to end Japan’s barriers against imports and still permitted Japan to export into its market anything and everything it could sell there.
Japan reacted to the high yen by putting its industrial policy system into high gear in order to lower costs so it could continue its export-led growth, even at a disadvantageously high exchange rate.
The Japanese Ministry of Finance also lowered domestic interest rates to make capital virtually free and encouraged industrial groups to invest more vigorously than they had ever done before.
The result was fantastic industrial overcapacity and a “bubble economy,” in which the prices of such things as real estate lost any relationship to underlying values.
Business leaders proudly announced on American television that a square meter of the Ginza was worth more than all of Seattle.
Ultimately, huge debts accumulated and the Japanese banks were stuck with at least $600G in “nonperforming” loans that threatened to bankrupt the entire banking system.
[9.25]
By 1995, the contradictions were starting to come to a head.
Japan still had a huge surplus of savings, which it exported to the United States by investing in U.S. Treasury bonds, thereby helping fund America’s debts and keep its domestic interest rates low.
And yet Japan itself was simultaneously facing the possibility of the collapse of several of its bankrupt banks.
Financial leaders said to the Americans that
they needed relief from the high yen in order to increase Japan’s exports.
They hoped to solve their problems in the traditional way, via more export-led growth.
Eisuke Sakakibara, then Japan’s vice minister for international affairs in the Ministry of Finance, readily acknowledges that he intervened with Washington to lower the value of the yen and admits to his
“inadvertent role in precipitating one of the 20th century’s greatest economic cruses,:
The United States went along with this; facing reelection in 1996,
Bill Clinton [42] certainly did not want Japanese capital called home to prop up Japanese banks at that moment.
As a result, between 1995 and 1997 the U.S. Treasury and the Bank of Japan engineered a “inverse Plaza Accord”—which led to a 60 percent fall of the yen against the dollar.
[9.26]
However, in the wake of the Plaza Accord, many newly developing Southeast Asian economies had by then “pegged” their currencies to the low dollar, establishing official rates at which businesses and countries around the world could exchange Southeast Asian currencies for dollars.
So long as the dollar remained cheap, this gave them a price advantage over competitors, including Japan, and made the region very attractive to foreign investors because of its rapidly expanding exports.
It also encouraged reckless lending by domestic banks, since pegged exchange rates seemed to protect them from the unpredictability of currency fluctuations.
During the early 1990s, all of the Eastasian countries other than Japan grew at explosive rates.
Then the “reverse Plaza Accord” brought disaster.
Suddenly, they exports became far more expensive than Japan’s.
Export growth in second-tier countries like South Korea, Thailand, Indonesia, Malaysia, and the Philippines went from 30 percent a year in early 1995 to zero by mid-1996.
[9.27]
Certain developments in the advanced industrial democracies only compounded these problems.
Some of the capitalists had spent the post-Plaza Accord decade developing “financial instruments” that enabled them to bet on whether global currencies would rise or fall.
They had also accumulated huge pools of capital, partly because aging populations led to the exceptional growth of pension funds, which had to be invested somewhere.
Mutual funds within the United States alone grew from about $1T in the early 1980s to $4.5T by the mid-1990s.
These massive pools of capital could have catastrophic effects on the value of a foreign currency if transferred in and then suddenly out of a target country.
Fast-developing computer and telecommunications technologies radically lowered transaction costs while increasing the speed and precision with which finance capitalists could transfer money and manipulate currencies on a global scale.
The managers who controlled these funds began to encourage investments anywhere on Earth under the rubric of “globalization,” an esoteric term for what in the nineteenth century was simply called imperialism.
[That seems to me to be a stretch.
E.g., is the U.S./Japan relation since 1960 really comparable to the U.K./India relation during the period of the British Raj?]
They argued that excess capital should be allowed to flow freely in and out of any and all countries.
Some economists argued that the free flow of capital was the same thing as the free flow of goods, despite mountainous evidence to the contrary.
[9.28]
Capital flows to developing nations in Asia and Latin America jumped from about $50G/year before the end of the Cold War to $300G/year by the mid-1990s.
From 1992 to 1996,
Indonesia, Malaysia, Thailand, and the Philippines experienced money and credit growth rates of 25 to 30 percent a year.
During this same period
South Korea, Thailand, and Indonesia invested nearly 40 percent of their gross domestic product in new productive capacity as well as in hotels and office buildings; the comparable figure for European nations was only 20 percent and even less for the United States.
In 1996,
Asia was the destination for half of all global foreign investment,
European and Japanese as well as American.
On the American side, by 1997
Citibank held about $22G in local currency loans in Eastasia, about $20G in securities and $8G in dollar loans;
Morgan Bank had $19G in Asian securities and $6G in dollar loans; and Chase had $4G in local currency loans, $15G in Asian securities and $6G in dollar loans.
[9.29]
Although they did not speak out at the time, a number of famous financiers and economists have since pointed out the dangers of what is called “hot money” or “gypsy capital.”
George Soros, one of the world’s richest financiers and head of a large “hedge fund” located in the Netherlands Antilles, asserted that
“financial markets, far from tending toward equilibrium, are inherently unstable,” and he warned against the folly of continuing down the path of deregulating the financial services industry.
Jagdish Bhagwati, one of free trade’s most passionate supporters and a former adviser to the director-general of the General Agreement on Tariffs and Trade, argued that the idea of free trade had been “hijacked by the proponents of capital mobility.”
He claimed that there was a new “Wall Street-Treasury complex”
[More recent developments have made it clear that that should be broadened to a
“Wall Street-Federal Reserve Board-Treasury complex.”
See, e.g., Chapter 8 of Reckless Engangerment by Gretchen Morgenson et al.],
comparable to the military-industrial complex,
which contributes little to the global economy
but profits enormously from pretending that it does.
[That does not seem an accurate description of why it has such enormous profits.
For some reasons, which most certainly deserve to be ferreted out, the ordinary rules of capitalism, especially the use of competition to eliminate excess profits, simply do not apply to the financial industry.
That Wall Street makes such outrageous profits should be a subject of outrage, not just among the “populists” so despised by our elite, but by the media/government complex as well.
But the Washington Post, for example, has de facto defended Wall Street at every opportunity.
As to government, the power of Wall Street is pervasive and evident,
and now being made explicit in such as the rise of Eric Cantor.
And as to the general media culture,
I find it sickening that the sharpies of Wall Street
have been so often dubbed “wizards,”
rather than the short-sighted, narrow-visioned predators,
using high-powered mathematics to confuse rather than enlighten,
that they often are.]
The Eastasian economies did not really need hot money from abroad,
since in most cases they saved enough themselves to finance their own growth.
Bhagwati has also pointed out that
an unregulated financial system can with relative ease
become divorced from the productive system it is supposed to serve
and so be unnaturally predisposed to “panics and manias.”
[9.30]
There was as well a less financial ingredient in the disaster-in-the-making.
Without particularly thinking about it or sponsoring any public debate on the subject, the U.S. government built its future global policies on the main military elements of its Cold War policies.
It expanded NATO to include the former Soviet satellites of the Czech Republic, Hungary, and Poland; it reinforced its Eastasian alliances; and it committed itself to ensuring access to Persian Gulf oil for itself and its allies.
The Gulf War of 1991 was the first demonstration of this commitment.
Eschewing a “peace dividend,” which it might have directed toward its own industrial and social infrastructure, the United States also kept its Cold War-sized defense budgets in the $270G range while seeking to reorient its military focus from the possibility of war with a more or less equivalent enemy to imperial policing chores everywhere on earth.
[I certainly agree with Johnson on the overcommitment of the U.S. to military actions and bases around the world.
But on minimizing the peace dividend, he is simply incorrect.
Take, as an example, Army force structure.
At the peak of the Cold War, we had sixteen active duty divisions, many heavy.
In Germany, to face the Red Army (GSFG) and Warsaw Pact forces,
we had four heavy divisions with several armored cavalry regiments supporting them.
That force structure was over about a decade cut almost in half,
down to ten active divisions, with two in Europe.
As to the more equipment-heavy Navy and Air Force, they went on a widely-recognized “procurement holiday” during the Clinton [42] administration, letting their equipment age without replacement.]
[9.31]
With hegemony established on military terms and the American public more or less unaware of what its government was doing, government officials, economic theorists, and members of the Wall Street-Treasury complex
launched an astonishingly ambitious, even megalomaniacal attempt to make the rest of the world adopt American economic institutions and norms.
[He is evidently referring to what Thomas Friedman calls “The Golden Straightjacket,”
and by others "the Washington consensus.”]
One could argue that the project rejected the last great expression of eighteenth-century Enlightenment rationalism, as idealistic and utopian as the paradise of pure communism that Marx envisioned, or one could conclude that having defeated the Fascists and the Communists, the United States now sought to defeat its last remaining rivals for global dominance: the nations of Eastasia that had used the conditions of the Cold War to enrich themselves.
In the latter view,
U.S. interests lay not in globalization but in bringing increasingly self-confident competitors to their knees.
[9.32]
In any event, buoyed by what the apologist for America Francis Fukuyama has called the “end of history”—the belief that with the end of the Cold War all alternatives to the American economic system had been discredited—American leaders became hubristic.
Although there is no evidence that Washington hatched a conspiracy to extend the scope of its global hegemony, a sense of moral superiority on the part of some and of opportunism on the part of others more than sufficed to create a similar effect.
[9.33]
Their efforts came in two strategic phases.
From about 1992 to 1997, the United States led an ideological campaign to
open up the economies of the world to free trade and the free flow of capital across national borders.
Concretely this meant attempting to curb governmental influence, particularly any supervisory role over commerce in all “free-market democracies.”
Where this effort was successful (notably in South Korea), it had the effect of softening up the former developmental states, leaving them significantly more defenseless in the international marketplace.
[9.34]
Beginning in July 1997, the United States then
brought the massive weight of unconstrained global capital to bear on them.
[That formulation admits the possibility of confusing the U.S. government with the actions of Wall Street.]
Whether the U.S. government did this by inadvertence or design is at present impossible to say.
But at least no one can claim that America’s leadership did not know about the size and strength of the hedge funds located in offshore tax havens and about the incredible profits they were making from speculative attacks on vulnerable currencies.
In 1994, for example,
David W. Mullins, former Harvard Business School professor and vice chairman of the Federal Reserve Board, went from being a deputy of Reserve Board chairman Alan Greenspan to a position as a director of Long-Term Capital Management (LTCM), a huge hedge fund with its headquarters in Greenwich, Connecticut, but its money safely stashed in the Cayman Islands, beyond the reach of tax authorities.
In 1998, after the conditions [see ¶ 9.43] it helped bring about had almost bankrupted the fund, the New York Federal Reserve Bank arranged a $3.65G cash bailout to save the company—as good an example of pure “crony capitalism” as any ever attributed to the high-growth economies of Eastasia.
[What we have seen repeatedly in the 2000s—
privatized profits, socialized losses, or,
Wall Street gets the gain, the taxpayer gets the pain.]
In fact, when the bailout came to light, a number of Asian publications cynically recalled how the New York Times had editorialized only months earlier that in Asia,
“collusive practices were not only tolerated, they were encouraged” and that
“the United States needs to reiterate the importance of full transparency by companies and financial institutions.”
After the LTCM bailout, Martin Mayer, one of the most respected writers on the American financial system, observed that
“the Fed, for all its talk of ‘transparency,’ has made the fastest growing area of banking totally opaque, even to the supervisors themselves.”
[9.35]
In order to make it intellectually respectable for the smaller Asian economies to swallow all the money the United States, Japan, and other advanced countries were offering them, the U.S. government threw its weight behind the Asia-Pacific Economic Cooperation forum (APEC), an organization the Australians had launched at a meeting of trade ministers in Canberra in November 1989.
The forum did not, however, take off until November 1993, when President Clinton [42] decided to attend an APEC meeting in Seattle and turned it into an Asia-Pacific summit of leaders from all the major Eastasian nations.
[By the way, the well-known “battle of Seattle” took place at a WTO meeting in November 1999. It is nowhere mentioned in this book, which as noted above has its Prologue dated July 1999.]
The Seattle meeting also produced APEC’s first “Economic Vision Statement”:
“The progressive development of a community of Asia-Pacific economies with free and open trade and investment [italics added by CJ].”
Under American leadership,
APEC became the leasing organization promoting globalization in Eastasia.
At annual meetings in different Pacific Rim countries, it insistently propagandized that the Asian “tiger economies” open up to global market forces, in accordance with the most advanced (American) theorizing about capitalist economies and in order to not be left behind as mere developmental states.
[9.36]
The November 1994 APEC meeting in Bogor, Indonesia, committed the participants to fred trade and investment in the Pacific by 2010 for developed countries and by 2020 for developing countries, such as China and Indonesia.
In 1995, at Osaka, APEC members agreed to unilaterally open their economies rather than attempt to negotiate a treaty like the North American Free Trade Agreement, which would have generated too much resistance in many of the member nations.
Nothing much happened in Manila in 1996….
At Vancouver in November 1997, with the Asian financial crisis already under way, the United States pushed for the rapid removal of tariffs and nontariff barriers to trade in fifteen different sectors of economic activity.
At Kuala Lampur in November 1998, APEC finally came unglued.
The prime minister of Malaysia, Mahathir Mohamad, had only a few months earlier reimposed capital controls over his economy to insulate it from gypsy capital, for which U.S. Vice President Al Gore openly denounced him, encouraging the people of Malaysia to overthrow him.
The meeting ended in rancor, with Japan taking the lead in scuttling any further market-opening schemes for the time being.
Its Ministry of Foreign Affairs declared that the United States was possessed by an “evil spirit” and accused it of endangering the region’s fragile economic condition by pushing market-opening measures down the throats of countries too weak to open their borders further.
Malaysia and the United States did not even bother to attend the 1999 APEC meeting of trade ministers in Auckland, New Zealand.
[9.37]
The shock that brought this edifice crashing to the ground started in the summer of 1997, when some foreign financiers discovered that they had lent huge sums to companies in Eastasia with unimaginably large debts and, by Western standards, very low levels of shareholder investment.
They feared that other lenders, particularly the hedge funds, would make or had already made the same discovery.
They knew that if all of them started to reduce their risks, the aggregate effect would be to force local governments to de-peg their currencies from the dollar and devalue them.
Since this would raise the loan burdens of even the most expertly managed companies, they too would have to rush to buy dollars before the price went out of sight, thereby helping to drive the value of any domestic currency even lower.
[9.38]
The countries that had followed recent American economic advice most closely were seriously devastated.
They had opened up their economies to unrestricted capital flows without understanding the need to regulate the exposure of their own banks and firms.
They did not ensure that borrowers in their countries invested the money they acquired from abroad in projects that would pay adequate returns or that actually constituted collateral for the loans.
The foreign economists who advised them did not stress the institutional and legal structures needed to operate in the world of American-style laissez faire.
No one warned them that if they raised their interest rates in order to slow inflation, foreign money would provoke an immediate flight of foreign capital.
They did not know that unrestricted capital flows had put them in an impossible position.
What took place in Eastasia was a clash between two forms of capitalism: the American system, disciplined by the need to produce profits, and the Asian form, disciplined by the need to produce growth [and jobs!] through export sales.
[9.39]
The International Monetary Fund entered this picture and turned a financial panic into a crisis of the underlying economic systems.
As already mentioned, the Bretton Woods conference of 1944 had created the IMF to service the system of fixed exchange rates that lasted until the “Nixon [37] shocks” of 1971.
It survived its loss of mission in 1971 to become, in the economist Robert Kuttner’s words,
“the premier instrument of deflation, as well as the most powerful unaccountable institution in the world.”
The IMF is essentially a covert arm of the U.S. Treasury, yet beyond congressional oversight because it is formally an international organization.
Its voting rules ensure that it is dominated by the United States and its allies.
India and China have fewer votes in the IMF, for example, than the Netherlands.
As the prominent Harvard economist Jeffrey Sachs puts it,
“Not unlike the days when the British Empire placed senior officials directly into the Egyptian and Ottoman [and also the Chinese] financial ministries, the IMF is insinuated into the inner sanctums of nearly 75 developing country governments around the world—countries with a combined population of some 1.4 billion.”
[9.40]
In 1997, the IMF roared into a panic-stricken Asia, promising to supply $17G to Bangkok,
$40G to Jakarta, and $57G to Seoul.
In return, however, it demanded the imposition of austerity budgets and high interest rates, as well as fire sales of debt-ridden local businesses to foreign bargain hunters.
It claimed that these measures would restore economic to the “Asian tigers” and also turn them into “open” Anglo-American capitalist economies.
At an earlier meeting in November 1997 called to deal with the crisis,
Japan and Taiwan had offered to put up $100G to help their fellow Asians, but the U.S. Treasury’s assistant secretary, Lawrence Summers, denounced the idea as a threat to the monopoly of the IMF over international financial crises, and it was killed.
He did not want Japan taking the lead, because Japan would not have imposed the IMF’s conditions on the Asian recipients and that was as important to the U.S. government as restoring them to economic health.
[9.41]
In Indonesia, when the government ended its dollar peg and let the currency float, the rupiah fell from about 2,300 to 3,000 to the dollar but then stabilized.
At that point, with almost no empirical knowledge of Indonesia itself, the IMF ordered the closure of several banks in a system that had no deposit insurance.
This elicited runs on deposits at all other banks.
The wealthy Chinese community began to move its money out of Indonesia to Singapore and beyond, and the country was politically destabilized, leading ultimately to the overthrow of President Suharto.
All Indonesian companies with dollar liabilities rushed to sell rupiahs and buy dollars.
Equities instantly lost 55 percent of their value and the currency, 60 percent.
The rupiah ended up trading at 15,000 to one U.S. dollar.
David Hale, chief economist of the Zurich Insurance Group, wrote at the time,
“It is difficult, if not impossible, to find examples of real exchange rate depreciations comparable to the one which has overtaken the rupiah since mid-1997.”
He suggest that a proper comparison might be with the hyperinflation that hit the German mark in 1923.
[9.42]
By the time the IMF was finished with Indonesia, over a thousand shopkeepers were dead (most of them Chinese), 20 percent of the population was unemployed, and a hundred million people—half the population—was living on less than one dollar a day.
William Pfaff characterized the IMF’s actions as
“an episode in a reckless attempt to remake the world economy, with destructive cultural and social consequences that could prove as momentous as those of 19th-century colonialism.”
Only Japan, China, and Taiwan escaped the IMF juggernaut in Eastasia.
Japan kept aloof even when the Americans publicly rebuked it for failing to absorb more exports from the stricken countries, for the Japanese knew the Americans would not actually do anything as long as the Marines were still comfortably housed in Okinawa.
China remained largely untouched because its currency is not freely convertible and it had paid no attention to APEC calls for deregulation of capital flows.
And Taiwan survived because it had been slow in removing its financial barriers.
It also maintains a relatively low ration of investment to gross domestic product, is shifting further toward a service economy whose capital needs are less, and has maintained export diversity—unlike, for example,
Korea’s overconcentration in products such as semiconductors destined for the American market.
Foreign holdings of Taiwanese currency are negligible because its peculiar political status makes it unattractive to the hedge funds.
Thus, it has been able to offer some of its own huge foreign currency holdings to help bail out countries in Southeast Asia.
[9.43]
After the big investors had pulled their money out of Eastasia and left the area in deep recession, they turned to Russia.
They calculated that there was little or no risk in buying Russian state bonds paying 12 percent interest because the Western world would not let a former super-power armed with nuclear weapons default.
But the situation was further gone in Russia than these investors imagined, and so, in August 1998, the Russians defaulted on the interest payments (at the time of writing, 1999, they still owe foreign investors perhaps $200G).
If Russia does not repay these loans, it will be the largest default in history.
These developments so scared the finance capitalists that they started pulling their money in from all over the world, threatening even well-run economies that had implemented all the economists’ nostrums on how to get rich like the North Americans.
The Brazilian economy was so destabilized that in mid-November 1998 the IMF had to put together a $42G “precautionary package” to shore it up.
Needless to say, the IMF has also helped plunge millions of poor Brazilians deeper into poverty.
In order to meet the IMF’s austerity requirements, the Brazilian government even had to cancel a $250M pilot project to save the Amazon rain forest.
The result was that other countries withdrew their matching funds for the Amazon, and the degradation of an area that contributes 20 percent of the globe’s fresh-water supply resumed.
[9.44]
In speeches in Russia and Eastasia during the second half of 1998,
President Clinton [42] warned the peoples of these areas not to “backslide” and urged them to open their nations even further to American-style laissez-faire capitalism.
But he had lost his audience.
By now his listeners understood that the cause of their misery could not also be its cure.
Many remembered that the Great Depression started as a financial panic then made worse by deflationary policies similar to those prescribed by the IMF in 1997 and 1998 for Eastasia, Russia, and Brazil.
The result in the early 1930s was a general collapse of purchasing power.
That has not happened so far this time, largely because the United States went on a consumption binge and provided virtually all growth in demand for the excess output of the world.
Can American “shop till we drop” be sustained indefinitely?
No one knows.
[Surely Johnson is being disingenuous. Surely the answer is “certainly not.”]
[9.45]
The economic crisis at the end of the century had its origins in
an American project to open up and make over
the economies of its satellites and dependencies in Eastasia.
Its purpose was both to diminish them as competitors and
to assert the primacy of the United States as the globe’s hegemonic power.
[I think Johnson is being dishonest here.
Surely many in the U.S. sincerely thought
these measures would help the foreign economies,
and also many in the U.S. (probably not the same ones!)
thought those measures would be very profitable for some elements in the U.S.]
Superficially it can be said to have succeeded.
The globalization campaign significantly reduced the economic power and capitalist independence of at least some of the United States’ “tiger” competitors—even if, as with Russia and Brazil, the crisis could not be kept within the bounds of Eastasia.
This was, from a rather narrow point of view, a major American imperial success.
[9.46]
Despite such immediate results, however, the campaign against Asian-style capitalism
(and the possibility that America’s satellite states in the area might gain independent political clout as well) was ill-founded and included serious blowback consequences.
The United States failed to acknowledge that
Eastasian success had depended to a considerable extent on preferential, Cold War-based exports to the American market.
By cloaking its campaign in the rhetoric of market opening and deregulation instead of the need to reform outdated Cold War arrangements, the United States both destroyed the credibility of its economic ideology and betrayed its Cold War supporters.
The impoverishment and humiliation of huge populations from Indonesia to South Korea was itself blowback itself, even if the blowback for the time being spared ordinary Americans.
But if and when the stricken economies recover, they will almost certainly start to seek leadership elsewhere than from the United States.
At a bare minimum, they will try to protect themselves from ever again being smothered by the American embrace.
In short, by refusing to reform its Cold War structures and instead insisting that other peoples emulate the American way, the United States gave itself an unnecessary, possibly terminal case of imperial overstretch.
Instead of forestalling global instability, it helped make such instability inevitable.
[9.47]
The triumphalist rhetoric of American leaders basking in their economy’s “stellar performance” has also alarmed foreigners.
When Alan Greenspan asserted to Congress that the crisis meant the world was moving toward
“the Western form of free market capitalism,” almost no one thought that was either true, possible, or desirable.
Economics has not displaced culture and history, regardless of the self-evaluation of the economics profession.
Many leaders in Eastasia know that globalization and the crisis that followed actually produced only pain for their people, with almost no discernible gains.
Globalization seems to boil down to the spread of poverty to every country except the United States.
[If that last sentence was not evidently an overstatement in 2000, by 2011 it certainly looks like one.
Johnson himself in earlier parts of his book has frequently pointed out how globalization had already resulted in “the hollowing out of American manufacturing,” in his own words.
How he can suddenly seem to ignore these adverse effects of globalization on significant segments of the American population and economy is hard to understand.]
[9.48: paragraph the last!]
Clearly on the defensive,
Richard N. Haass and Robert E. Litan, directors respectively of foreign policy and of economic studies at the Brookings Institution in Washington, lamented,
“In some quarters [globalization] is seen as having caused the rapid flows of investment that moved in and out of countries as investor sentiment changed and were behind the Mexican [1995] and Asian financial crises.”
But to them this would be a wrong conclusion.
To accept it would be to
“abandon America’s commitment to the spread of markets and democracy around the world at precisely the moment these ideas are ascendant.”
But whether such ideas are actually ascendant is, thanks to the crisis, now in doubt, and such doubts are generating more blowback.
The duties of “lone superpower” produced military overstretch; globalization led to economic overstretch; and both are contributing to an endemic crisis of blowback.
Blowback: The Costs and Consequences of American Empire
by Chalmers Johnson.
The book’s copyright is 2000,
but the prologue, the only dated part of the book,
is dated July 1999,
at the height of the American dot-com bubble.
Emphasis is added.
There is also, in parts of this work, a terminological innovation
(I hope some will not consider it an abortion :-):
The phrase “East Asia” appears so frequently, here and in other works,
that I am abbreviating it, simply for reasons of economy,
to “Eastasia.”
Any similarity to any other author’s use of the same term
is purely coincidental. :-)
Chapter 7
China:
Foreign Policy, Human Rights, and Trade
...
[7.36]
The second aspect of human rights in China we must recognize
is to ensure that
poor working conditions and prison labor in China (and elsewhere)
do not end up
destroying the livelihoods of American workers.
Without question
the most powerful human rights tool the United States could wield
would be to
deny access to the American market
to products from multinational companies
that have abandoned American workers
to seek out low-wage foreign workers
lacking in economic or political rights of any sort,
not to speak of human rights.
The economics profession may attack such policies as “protectionism,”
but the time is long past
when the United States should allow corporations to use
the bottom line, “globalization,” or the pressures of competition—
“Adam Smith made me do it”—
as excuses for their indifference to basic human rights at home or abroad.
Failure to consider this dimension of the rights question
leaves the United States open to a charge of hypocrisy.
[7.37]
The United States is formally as well as emotionally and intellectually
committed to an academic textbook definition of “free trade,”
which it believes (or pretends to believe)
was the foundation of the General Agreement on Tariffs and Trade (GATT).
Created in 1948 as a specialized agency of the United Nations,
GATT governed trade among the so-called free-market economies
during the era of the Cold War.
Its greatest accomplishments were
a series of multilateral negotiations among its members
to reduce or eliminate tariffs on many different products,
which greatly stimulated international trade over the years.
It was replaced on January 1, 1995, by the World Trade Organization (WTO).
Actually, for much of the Cold War,
GATT was part of an American grand strategy vis-à-vis the USSR
in which
the United States traded access to
its market and its technologies
in return for
support against communism
by nations like Japan, South Korea, and Taiwan.
it must either
deliver the allegedly mutual [original emphasis] benefits of free trade
or else it is
a menace to the livelihoods of all working Americans.
Far too often free trade has meant in practice
free access to the American market for foreign products
but American toleration of closed foreign markets regardless of
the damage this has done to U.S. industries
and good jobs in manufacturing.
[7.38]
China’s primary trade goal is to gain admission to the WTO
with the status of a developing country.
As a developing country,
China would not have to
open its markets to foreign competitors on an equal basis
and would be exempt from the provisions of the WTO treaty concerning
national subsidies for industries and
intellectual property rights covering items like foreign films and books.
If it achieves that—
as the ideological myopia of American trade negotiators of both parties
and the economists who advise them
makes likely—
its mercantilism will ultimately
do serious damage to the American economy,
not to speak of the WTO system.
Like Japan before it,
China will fun up huge trade surpluses with the United States
rather than generating a balanced and mutually beneficial trade.
Managed trade is the antidote to this,
and it need not hamper China’s economic development,
but it is anathema to the economic ideologists of the United States.
Management of trade with China would require
the kind of political leadership and a governmental capability
that the country may simply not be able to muster in the post-Cold War world.
After all,
the United States has never given the same priority to trade
as to human rights, arms sales, or territorial disputes.
[7.39]
Before the economic crisis that began in 1997,
which greatly expanded global dependency on the American market,
the United States was already absorbing
about 25 percent of all exports from East Asia
and running annual trade deficits with the area well in excess of $100G.
China’s trade surplus with the United States, more than $60G in 1998,
is second only to Japan’s and growing much faster.
When China launched its economic reforms in 1978,
its overall foreign trade totaled $21G;
by 1998 the figure was $196G, an increase of 950 percent.
Some 80 percent of China’s exports are manufactured goods,
and China is the world’s largest textile exporter as well as
the largest source of American textile and apparel imports.
The Europeans and Japanese also run trade deficits with China,
but the U.S. deficit is approximately two to three times theirs.
[7.40]
In a sense, this “trade problem” is really a matter of “systems friction,”
the clash of different forms of capitalism,
exactly as one might expect given
the developmental-state strategy that China is pursing.
The point of this strategy is
to bend the rules and norms of laissez-fair capitalism
in order to achieve national wealth and power,
since
economics in this view is inevitably a zero-sum game
in which some nations win and others lose.
China has never tried to become a “free-market economy”
but rather to engage and exploit other market economies
to become a great power.
Economic reform, after all, was undertaken in the first place
in order to preserve the Communist Party’s political control
and to achieve through other means
what it had failed to achieve through Stalinism and then Maoism.
[7.41]
The U.S. response to this challenge has primarily been
to try to induce or cajole China into “reforming” its economy
to give it the look of American-style capitalism.
Thus, in 1994,
reflecting the attitudes of Washington’s economic theorists and trade bureaucrats,
the Washington Post editorialized that
in order to be allowed into the WTO,
China must
- publish its trade regulations in a transparent form accessible to importers,
- ensure that all foreign and domestic companies
receive the same treatment from the legal system,
and - stop using artificially low exchange rates
to boost exports and impede imports.
but thoroughly at odds with
China’s chosen strategy of economic development
as well.
Even if China were to abandon its strategy of economic development,
it would never do business the way the United States does.
[7.42]
The answer to these problems,
in the sense of helping to promote China’s economic development
while preventing its predatory trade policies
from provoking international conflict,
is managed trade.
All this means is the use of public policy to manage outcomes
rather than procedures.
It assumes that
when either public or private companies in different economic systems
trade with and invest in each other’s economies,
a mutually beneficial outcome cannot be assured
merely through agreement on rules.
Managed trade is not nearly as uncommon as professional economists imply.
In 1960, at the height of the Cold War,
when the United States began to trade with Poland, Romania, and Hungary,
it set goals that these Leninist countries had to meet.
It required, for instance,
that Polish imports from GATT countries rise 7 percent per year
or trade would be cut off.
[7.43]
The economic challenge of China is likely to be the most difficult test
not just for American economic policy
but for its foreign policy in general
in the first quarter of the twenty-first century.
Unfortunately, Americans still remain confused by the idea that
the foundations of power no longer lie in military
but in economic and industrial strength.
[I might change the words “no longer” to “do not” in the above sentence.]
They tolerate, even applaud, irrationally bloated defense budgets
while
doing little to rebuild and defend
the industrial foundations of their own nation.
When the world economic crisis began in Asia in 1997,
the United States responded with
the stale formulas of the International Monetary Fund,
only worsening the situation.
Inadequate political leadership,
inappropriate staffing of the government,
and an inability to redirect
the foreign affairs, defense, technological, and intelligence agencies
to pay more reasonable attention to Asia in general and China in particular
seem endemic problems for the foreseeable future.
[Of course, Johnson was writing about two years before
the U.S. became obsessed with perceived threats from the Muslim world,
due largely to hyping of those threats by the friends of Israel.]
[End of Chapter 7.]
Chapter 8
Japan and
The Economics of the American Empire
[8.1]
During the Cold War
the Soviet Union lost any number of friends and potential allies
by forever hectoring them about Marxism
and the stages of economic growth they would have to go through
in order ever to hope to live like Russians.
Such Marxist rigidity clearly benefited the American side
in the superpower face-off of that era.
Ideological arrogance turned many countries, like Tanzania and Egypt,
against their Soviet economic advisers,
and overbearing Soviet behavior contributed heavily to the Sino-Soviet dispute.
Unfortunately in the post-Cold War era it is the United States
that is exhibiting a capitalist version of
such heavy-handedness and arrogance.
[8.2]
Ideology—that is, the doctrines, opinions, or way of thinking of
an individual, a class, a nation, or an empire—
is as tricky a substance to use in international conflicts as poison gas.
It, too, has a tendency to blow back onto the party releasing it.
During the late 1950s, in the depths of the Cold War,
many Americans began to suspect that
the Soviet Union was actually a third-rate economy;
but it still had the world’s most alluring ideology,
a body of thought capable of attracting more people in the Third World
than the “possessive individualism”
(to use the philosopher C. B. Macpherson’s term)
espoused by the United States.
Soviet intellectual appeals were built around the ideas of Karl Marx—
indubitably a man of the West
and properly buried in Highgate Cemetery, London—
which attracted even the most chauvinistic people on earth, the Chinese.
Marxism-Leninism, as espoused by the Soviet Union,
provided explanations for the inequities of colonialism,
a model of economic development
based on the achievements of Russia under Stalin,
and the promise of world peace
when all nations had passed beyond imperialism,
which was the “final stage of capitalism.”
[8.3]
Part of what gave Soviet ideology such power
to convince whole peoples in the Third World
was the way it assimilated and invoked
the single most uncontested ideology of our century, that of science.
It claimed to rest not on the hopes of idealistic reformers
but on the logic of “scientific socialism.”
The Soviets insisted that
they were acting in accordance with laws of human development
discovered by their patron saints, Marx and Lenin.
By contrast, the ideology of the “free world” looked at best like
a rationalization of the privileges enjoyed by Americans
because of their exceptional geography and history.
[8.4]
Not surprisingly, American leaders came to feel that
somehow they had to match the ideological claims of communism
in what they saw as
a great global battle for the souls of earth’s contested majority.
Nowhere did this need seem more acutely necessary than in East Asia,
where Communist regimes had come to power in China, North Korea, and Vietnam
despite the fact that
Marx’s analysis of class conflict in industrializing societies
bore only the faintest relation to
the actual conditions in any of these countries.
At the time,
communism was also an active competitor in every other country in the region.
Asians were attracted to it precisely because it claimed to be based on science—
the ingredient that seemed to undergird the industrial and military might
of their European, American, and Japanese colonizers—
and because the example of the Soviet Union held out the hope of a solution
that might someday be within their own revolutionary grasp.
[8.5]
The American response, never expressly articulated but based on
the total mobilization of the American people for the Cold War
by President[’s Eisenhower [34] and] John F. Kennedy [35] and other leaders,
was twofold.
First, we would do everything in our considerable power to
turn Japan into a capitalist alternative to mainland China,
a model and a showcase of what Asians might expect
if they threw in their lot with the Americans instead of the Communists.
Second, academic economics as taught in most American universities was subtly transformed into
a fighting ideology of the “West.”
From each of these transformations would come
forceful consequences for the American empire
after its competition with the Soviet Union ended.
Because most Americans never understood either policy
to be a strategy for pursuing the Cold War,
they took both Japan’s achievements and the wealth of the West
to be evidence of an ineluctable destiny that made the United States
a singularly appropriate model for the rest of the world.
Any doubts raised about these propositions
were seen as undermining the pretensions of the American empire.
Thus, what began as tactical responses to temporary,
often illusory or misleadingly interpreted Soviet “advantages”
ended up as ideological articles of faith
for the “sole superpower” of the post-Cold War world.
[8.6]
From approximately 1950 to 1975,
the United States treated Japan as a beloved ward,
indulging its every economic need
and proudly patronizing it as a star capitalist pupil.
The United States sponsored Japan’s entry into many international institutions,
like the United Nations
and the Organization for Economic Cooperation and Development,
well before a post-World War II global consensus for Japan had developed.
It also
transferred crucial technologies to the Japanese
on virtually concessionary terms and
opened its markets to Japanese products
while tolerating Japan’s protection of its own domestic market.
It even supported the Japanese side in all claims by individual American firms
that had been damaged by Japanese competitors.
[For an example, see Pat Choate’s Agents of Influence.]
In addition,
the United States allowed Japan to retain an artificially undervalued currency
in order to give its exports a price advantage
for well over a decade longer than it did any of the rebuilt European economies.
[8.7]
We proclaimed Japan a democracy
and a model of what free markets could achieve
while simultaneously helping to rig both its economic and political systems.
We used the CIA to finance the ruling party (the LDP)
and engaged in all manner of dirty tricks
to divide and discredit domestic socialists.
In this process there was much self-deception.
For far too long America’s leading officials insisted that
Japan could never be an economic competitor of the United States.
President Eisenhower [34]’s secretary of state John Foster Dulles
was, for example, convinced that
while the Japanese might be able to sell shirts, pajamas,
“and perhaps cocktail napkins” to the American market,
little else was possible for them.
Americans did not wake up to Japan’s competitive challenge
until their steel, consumer electronics, robotics, automotive, camera,
and semiconductor industries
were virtually extinct or fighting for their lives.
[8.8]
After the “security treaty riots” of 1960,
when a mass movement tried to prevent the signing of a treaty
that would perpetuate the basing of American troops in Japan and Okinawa,
the United States moved its campaign to portray Japan as a model democracy
into high gear.
It appointed as ambassador
the well-known Harvard historian of Japan Edwin O. Reischauer,
who was married to a Japanese woman from a distinguished political family.
His job was to repair
the damage to the image of Japanese-American amity caused by the 1960 riots,
which to man Asians appeared to be
a Japanese equivalent to the Budapest uprising of 1956.
Reischauer was to “reopen a dialogue” with the alienated Japanese left
while shoring up the conservative Liberal Democratic Party (LDP),
its aging rightists from prewar and wartime governments now screened from public view
while it emphasized economic growth over democracy.
[8.9]
Perhaps Reischauer’s most influential step
was to endorse in his own extensive writings and speeches of the time
a movement among American academic specialists
to rewrite the history of modern Japan
as a case study of successful “modernization.”
So-called modernization theory flourished in the United States during the 1960s
just as the Japanese economy “took off”
(to use that famous term of the modernization theorists),
achieving double-digit growth rates.
This new approach to Japan traced the country’s course of development
from the Meiji Restoration of 1868,
which was Japan’s debut as a unified nation
rather than a collection of feudal states.
It contrasted Japan’s achievement of great-power status
with the dependency and susceptibility to colonialism
of the rest of Asia, particularly China.
It stressed how the initial authoritarianism of the Meiji oligarchs
evolved into a toleration of political parties during the 1920s,
producing at least the possibility of parliamentary democracy.
The theory drew attention to how the “liberal” 1920s,
although ultimately destroyed by reaction and militarism after 1931,
provided precedents for reform that many Japanese leaders seized upon
when genuine democratization got under way during the American occupation.
[8.10]
Japan emerged from this stirring tale of political and economic development
as an exemplary nation, the only country in Asia that avoided being colonized.
[Thailand is another one.]
The fact that it did so by joining the Western colonialists
in victimizing the other countries of Asia
was underemphasized in such accounts.
Japan’s kuroi tanima, or “dark valley,” from 1930 to 1945,
in which it warred with China and the United States,
was explained away as due to a unique concatenation of international factors—
the Great Depression,
the closing of European and American colonies to Japanese exports,
Japan’s fear of bolshevism,
and American isolationism.
What actually went on in the “dark valley,”
from the rape of Nanking to the Bataan Death March,
was incidental to the tale of economic growth and political consolidation
and best forgotten,
since Japan’s aggression was now understood to be but a temporary sidestep
on a long march toward modernization.
The emperor of Japan, who had reigned since 1926
and presided over much military aggression and brutality,
emerged as a simple marine biologist and pacifist
who had opposed the war from the beginning
and had actually brought it to an end in 1945 through his own decisive action.
It was said that he was a man of few words in view of the fact that
from the end of the war to his death in 1989
he was never again allowed to utter many in public.
[8.11]
The American public, like its policy elites
never very well informed about Japan to begin with,
bought this rosy picture of that country
as the chief bulwark against communism in Asia.
John Dower and a few American academic specialists
argued that modernization theory was incomplete
and the Japan’s militarism had domestic roots every bit as deep
as its commitment to modernity,
but they were easily ignored.
Japan was now entrenched in American consciousness
as a full-fledged democratic ally
with a system rooted in free-market capitalism
and certain eventually to “converge” with the United States
as a liberal, consumer-based state.
[8.12]
To be sure, there were occasional “misunderstandings”
as one nation’s capitalists sought competitive advantage over the other.
In dealing with such “unfortunate” developments,
the task of diplomacy and the mission of the American embassy in Tokyo became
not to champion American interests
but to ameliorate the conflict itself, usually to Japan’s advantage.
Nothing seriously wrong could come of such policies, it was argued,
because, as modernization theory taught,
the two societies were on the same developmental path
toward common economic ends.
[8.13]
The second aspect of the ideological challenge to the Soviet Union
was the development of an American economic ideology
that might counter the promise of Marxism—
what today we call
which has gained an intellectual status
in American economic activities and governmental affairs
similar to that of Marxism-Leninism in the former USSR.
Needless to say,
Soviet citizens never understood Marxism-Leninism as an ideology
until after it had collapsed
[That sounds rather surprising to me.],
just as Americans like to think (or pretend)
that their economics is a branch of science,
not a fighting doctrine to defend and advance their interests
against those of others.
They may consider most economists to be untrustworthy witch doctors,
but they regard the tenets of a laissez-faire economy—
with its
cutthroat competition,
casino stock exchange,
massive inequalities of wealth,
and a minor, regulatory role for government—
as self-evident truths.
[8.14]
Until the late 1950s,
academic economics remained one of the social sciences,
like anthropology, sociology, and political science—
a non-experimental, often speculative investigation into the ways
individuals, families, firms, markets, industries, and national economies
behaved under different conditions and influences.
It was concerned with full employment, price stability, growth, public finance, labor relations, and similar socioeconomic subjects.
After it became the chief ideological counterweight to Marxism-Leninism
during the Cold War
[Johnson makes no allowance for the Christian well-springs
of the crusade against godless Communism,
nor, broadening the aperture somewhat,
of the “three great monotheistic religions” against godless Communism.],
its practitioners tried to extract it from the social sciences
and re-create it as a hard science.
[8.15]
Its propositions were now expressed less in words than in simultaneous equations,
the old ideas of Adam Smith reappearing as fully mathematized axioms,
increasingly divorced from empirical research.
Its data were said [by whom?] to be “stylized facts,”
and economists set out to demonstrate through deductive reasoning
expressed in mathematical formulas that
resources could be allocated efficiently only through an unfettered market.
By now all these terms
(“resources,” “efficiency,” “markets”)
had been transformed into abstractions,
not unlike the abstract formulations
(“the proletariat,” “the bourgeoisie,” “class conflict”)
of its Soviet opponents.
English-speaking economics became such a “hard science” that in 1969
the central bank of Sweden started giving Nobel Prizes to its adepts,
virtually all of them American academicians.
This ensured that virtually all aspiring economists would in the future
try to do so-called theoretical economics—
that is, the algebraic modeling of markets—
rather than old-fashioned empirical and inductive research into
real-world economics.
[8.16]
Economics split from the social sciences
and took up a new position somewhere close to mathematics.
Economists were now endlessly called upon by governmental bodies to testify that
the American economy was unmatchable,
even if it sometimes behaved badly because of
overspending liberals, pork-barrel politics, or greedy monopolist.
Alternatives to it were understood to be either converging with it
or destined to fail.
Economics no longer studied the economy;
it spoke ex cathedra about what was orthodox and what was heresy.
Meanwhile, empirical research on economic phenomena migrated to
business schools, commercial think tanks, and the other social sciences.
[8.17]
Unquestionably, after the first two decades of the Cold War [1945–65],
in a purely dichotomous choice between an economy based on Marxism-Leninism
and one base on free-market capitalism—
as exemplified by the economies of the Soviet Union and the United States—
most people around the world would have chosen the free market.
But in East Asia,
at the height of the Sino-Soviet dispute and the American war in Vietnam,
neither ideology was working out according to either superpower’s script.
The Chinese were discrediting forever
whatever attractiveness might have remained
in the forced-draft economic achievements of the Soviet model.
Through bungling, megalomania, and deep ideological confusion
about what Marxism and the Soviet experience taught,
the Chinese Communist Party managed to kill thirty million of its own citizens
and then, in a paroxysm of mutual blame,
came close to destroying its unmatchable cultural legacy
in the so-called Cultural Revolution.
Today this period is recognized—even in China—as a monumental disaster,
but at the time many Americans,
from idealistic leftist students to presidents and other political leaders,
failing to understand what was happening,
retained a sentimental attraction to Mao Zedong and Zhou Enlai,
the mismanagers of the Chinese revolution.
[8.18]
The truly surprising development in East Asia, however, was that America’s “non-Communist” satellites, protectorates, and dependencies
were starting to get rich and to compete with their superpower benefactor.
All of this was camouflaged by the Cold War itself,
so that the enrichment of East Asia occurred almost surreptitiously.
The year-in, year-out record-breaking growth rates
of such previously poor places as Japan, South Korea, and Taiwan
were not precisely what American elites had expected,
but they were explained away as nothing more than confirmations—
even overconfirmations—
of officially espoused free-market ideology
and so were greeted with parental pride.
[8.19]
If the capitalist economies of East Asia
were starting to perform better than the United States itself,
this anomaly was usually attributed to
mysterious Japanese or Asian cultural factors
or to complacency on the part of American managers and workers.
By the time the Western world awoke to what had actually happened,
economic growth in East Asia was self-sustainable
and unstoppable by external actions
(although many Asians thought
this was exactly what the United States was attempting
when its policies toward the area led to the meltdown of 1997).
The enrichment of East Asia under the cover of the Cold War
was surely the most important, least analyzed development in world politics
during the second half of the twentieth century.
It remains to this day intellectually indigestible in the United States.
[8.20]
The fundamental problem is not simply that
in the Cold War era Japan attained a $5T economy—
although that alone was an unexpected competitive challenge
to American economic preeminence—
but how it did so.
It had found a third way between
the socialist displacement of the market advocated by Soviet theorists
and an uncritical reliance on the market advocated by American theorists.
The Japanese had invented a different kind of capitalism—something no defender of the American empire could accept.
It was therefore assumed either that the Japanese were cheating
(and that all we needed to compete successfully against them was
a “level playing field”)
or that they must be headed for a collapse
similar to the one that had overtaken the USSR.
[8.21]
In turning neoclassical economic theory into a fighting ideology,
American ideologues encountered one element of capitalist thought
that they could not express
in abstract, seemingly “scientific” mathematical terms.
This was the set of institutions through which
competitive market relationships actually produce their benefits.
Institutions are
the concrete, more-or-less enduring relationships through which
people work, save, invest, and earn a living—
such things as stock exchanges, banks, labor unions, corporations,
safety nets, families, inheritance rules, and tax systems.
This is the realm of the legal, political, and social order,
where many considerations that govern the economy other than efficiency
contend for primacy.
For economic theorists institutions are “black boxes,”
entities that receive and transmit economic stimuli
but are themselves unaffected by economic theory.
[8.22]
In attempting to forge
a fully numerical, scientific-looking model of the capitalist economy
for purposes of the Cold War,
Western ideologues simply assumed that
the institutions of modern capitalism must be
those that existed in the United States in the late Eisenhower [34] era
[i.e., the late 1950s].
This meant that savings were typically moved from the saver to industry
through a capital market (such as the New York Stock Exchange)
rather than, for example, through the banking system.
They assumed that industrial-labor conflicts
were settled by interminable strikes,
and not by, for example, offering some workers career job security
[That last statement seems rather biased.];
and
they assumed that the whole purpose of an economy
was to serve the short-term interests of consumers,
instead of some overarching goal such as
the wealth and power of the nation as a whole.
[8.23]
These American assumptions were almost identical to the Soviet assumption that
the institutions of “socialism” must be
those that existed in the USSR during, say, the Khrushchev era
[i.e., 1958–64].
Neither side ever produced an ideological model to sell to others
that could be divorced from their own country.
Because of this inability to express
the institutions of either socialism or capitalism
in some culturally neutral—or at least more varied—way,
it is understandable that many observers simply reduced
the claims of Marxist-Leninist ideology to the USSR
and those of free-market capitalism to the United States.
[8.24]
In finding a third way,
Japan’s postwar economic “miracle” reinvented not economic theory
but the institutions of modern capitalism
so that they would produce utterly different outcomes
from those imagined in the American model.
Given Japan’s history of catch-up industrialization,
its overarching need to avoid the victimization and colonialism to which
every other area of East Asia had succumbed,
its virtual dearth of raw materials,
its dependence on manufacturing and international trade
to sustain its large population,
and its overwhelming defeat in World War II,
it could not ever have become a clone of the United States.
Its postwar planners and technocrats instead organized
a capitalist economy intended to serve
the interests of producers over consumers.
They forced Japan’s citizens to save
by providing little in the way of a safety net;
they encouraged labor harmony
regardless of what it did to individual rights;
and they built industries based on the highest possible human input
rather than simply on some naturally given comparative advantage,
such as cheap labor or proximity to a large market like China’s.
Their goal was to enrich Japan, if not necessarily the Japanese themselves.
They viewed all economic transactions as strategic:
theirs was to be an economy organized for war
but now directed toward ostensibly peaceful competition with other countries.
[8.25]
Since the 1950s,
the United States had seen the entire world in Cold War terms.
This meant that Japan was far more important as an anti-Communist ally
then as a potential economic competitor.
In order to keep U.S. troops and bases in Japan,
the Americans provided open access to their market and
the government pressured private American firms
to relinquish ownership rights
to technologies being transferred to Japan.
As the Japanese trade and industrial bureaucrats took advantage of this deal,
trade disputes became inevitable.
From the “dollar blouses” that flooded into the United States
during the Eisenhower [34] era
to the textile disputes
of the Kennedy [35], Johnson [36] and Nixon [37] administrations,
complaints about the costs of “alliance” with Japan
became a permanent feature of Washington politics.
They also produced a lucrative new field
for former government officials turned lobbyists,
whom the Japanese hired in increasing numbers
to ameliorate or paper over the disputes.
Even though Washington remained more or less ignorant
of how the government in Tokyo actually worked,
the government in Tokyo took a life-or-death interest in
Washington’s role in regulating the American economy.
Japanese officials also did everything in their power
to maintain the artificial separation between trade and defense
that the U.S. government had invented
and to see that the Pentagon was happy with its facilities.
[8.26]
This artificial separation between trade and defense
has been a peculiar characteristic of
the half-century-long American hegemony over Japan.
Official guardians of the Japanese-American Security treaty
and their academic supporters
have maintained an impenetrable firewall
between what they call, using the Japanese euphemism, “trade friction”
and the basing of one hundred thousand American troops in Japan and South Korea.
There was no reason why
these two aspects of the Japanese-American relationship
should have been dealt with as if they were separate matters
except that, had they not been,
the actual nature of the relationship would have been far easier to grasp.
[8.27]
Until the 1980s, the United States officially ignored all evidence that
this compartmentalization of its massive military establishment
and its growing trade deficits with Japan
was going to be very costly.
From about 1968 on, trade deficits began to rise
just as
the hollowing out of certain industries
that the Japanese government had targeted
became more visible.
U.S. officials then consulted with their Japanese counterparts
about these problems
and accepted fig-leaf agreements that offered the pretense of remedies
to distressed American businesses and communities.
With the exception of President Nixon [37]’s 1971 decision
to force an ending to Japan’s artificially undervalued exchange,
nothing else of significance was done.
[8.28]
During the 1980s, however,
pressures for action of some sort markedly increased.
The Japanese economy, now a major competitor,
was starting to erode the industrial foundations of the United States.
Moreover, the Cold War was settling into its final Reaganesque [40] rituals.
Despite inflated CIA estimates of Soviet strength,
it became increasingly clear to many,
even before the rise to power of Mikhail Gorbachev,
that the two sides were starting to accommodate each other
and that the threat of a superpower war was declining.
In this context, a new way of thinking developed about Japan itself
and about the nature of America’s relationships with newly rich Asia.
Business Week dubbed it “revisionism” and wrote:
No less than a fundamental rethinking of Japan is now under way
at the highest levels of the U.S. government, business, and academia.
The standard rules of the free market, according to the new school,
simply won’t work in Japan ....
Some people call the new thinking “revisionism,”
departing as it does from the orthodox view
that Japan will eventually become a U.S.-style consumer-driven society.
[8.29]
The Japanese,
who had been very proud of their “developmental state” and its guided economy
and who readily wrote about it for domestic consumption,
suddenly became concerned when American revisionists, myself included,
began saying that “leveling the playing field” was not the issue,
since the two economies were different in such fundamental ways.
It was one thing for Japan and its lobbyists
to parry complaints about their country’s closed markets
and the numerous barriers it raised against foreign products
ranging from automobiles and semiconductors to grapefruit and rice.
It was quite another for Americans to claim that
they were playing by entirely different rules.
Accusations that the “revisionists” were Japan bashers or racists
rose quickly to the surface.
[8.30]
Meanwhile a number of Japanese politicians and industrialists
added insult to injury by claiming that
the trade deficit resulted from the laziness of American workers
or resorted to racism by pointing to
the racially mixed nature of the workforce
while characterizing American minorities as indisciplined and ineducable.
In 1989,
a prominent Japanese politician, Shintaro Ishihara,
and the president of Sony, Akio Morita,
cowrote a book, The Japan That Can Say “No”,
in which they suggested that
their country should not share Japanese-developed technologies
that the Americans regarded as of national security significance
unless the Americans reined in their critiques.
In 1998, Ishihara,
angry about an economy that seemed to be heading into decline,
wrote a sequel,
The Japan That Can Say “No” Again,
suggesting a halt in investment in U.S. government securities
to teach a lesson to Americans who had pushed Japan to open its economy.
These views made him sufficiently popular that in 1999
he was elected mayor of Tokyo.
[8.31]
Nonetheless,
the American government continued its typical Cold War style of doing business
into the early 1990s.
In 1988, for example, State Department and Pentagon leaders proposed
transferring to Japan the technology of the F-16 fighter aircraft
in order to allow the Japanese to build their own fighter, the FS-X.
A huge controversy erupted over
why the Japanese did not simply buy the F-16 fighters they needed
from the manufacturer, Lockheed,
thereby helping to balance the trade deficit
and keep manufacturing in the United States.
One State Department official, Kevin L. Kearns,
who was in Tokyo at the time the FS-X deal was negotiated,
agreed with the critics and wrote in the foreign Service Journal,
“As long as the Chrysanthemum Club [of pro-Japanese American officials]
continues to skew the policy process in our government
and paid Japanese lobbyists and academics-for-hire
continue to influence disproportionately
the treatment of Japan in the public realm,
the United States will continue its approach to Japan
in the same tired, self-defeating way.”
Following these remarks,
Deputy Secretary of State Lawrence Eagleburger publicly denounced Kearns
and in February 1990 forced his resignation from the State Department.
The Bush-41 administration then transferred the F-16 technology to Japan.
[8.32]
In an equally telling incident in 1990,
the Matsushita Electric Company of Japan
bought MCA Inc. the giant Hollywood-based entertainment conglomerate,
for $7.5G,
one of the biggest purchases ever of an American company by a foreign firm.
This was less than a year after an Sony had acquired Columbia Pictures for $3.4G
and Newsweek had run a cover
showing Columbia’s torch-bearing female icon wearing a kimono.
In addition to by-then-widespread worries
about Japanese capital invading the United States,
there was the further complication that MCA owned a lucrative concession
that serviced visitors to Yosemite National Park.
In order to avoid the public relations embarrassment
of having a Japanese company own part of a national park,
the Department of the Interior suggested that
Matsushita donate the concession to the park service.
The Japanese, however, did not want to let it go
and instead hired an elite corps
of Washington lobbyists, lawyers, and public relations specialists
to escort their purchase past congressional and government critics.
[8.33]
Leading the Matsushita team was former U.S. trade representative
[and Democratic éminence grise] Robert Strauss.
According to the Washington Post,
he was paid $8M for successfully brokering the deal
and seeing to its public relations aspects,
including getting the Department of the Interior to back off.
When asked by reporters why he was being paid such an enormous fee
for a minimal amount of work,
Strauss nonchalantly replied,
“I don’t work by the hour anymore. I don’t do windows.”
This remark greatly puzzled the Japanese,
although they were pleased enough with what their largesse had bought them.
They concluded that
Washington was as corrupt as Jakarta or Seoul
and that anything could be had if the price was right.
Rather than devoting attention
to the potential pitfalls of their own brand of capitalism,
the Japanese in this instance followed a distinctly American path
and convinced themselves that they were invincible,
while the United States was in a terminal decline.
They therefore marched steadily toward their own decade-long economic downfall.
[8.34]
These alarms and diversions
were also effective in turning American attention away from
the most distinctive trait of Japan’s type of capitalism—
namely,
the major role given to governmental industrial policy
and its role in a capitalist economy.
Industrial policy refers to the attempt by the government
to nurture particular strategic industries
that are thought to be needed by an economy
for reasons of national security, export competitiveness, or growth potential.
As a result, most Americans failed to grasp
how crucially Japan’s industrial policy depended on
its political and military relationship with the United States
and on access to its vast market.
Nor did they understand that
the Japanese were investing the huge trade profits
in American Treasury securities
that were, in turn, helping to finance America’s huge debts
and making the American financial system
critically dependent on Japanese savings.
This growing dependency
made American officials reluctant to criticize the Japanese in any way.
Even when they did so, the Japanese rationalized such criticism
as meant only for U.S. domestic consumption.
[8.35]
What Americans, including the revisionists, failed to see was that
the Japanese economy,
still devoted to exporting a vast array of
ever more sophisticated and technologically advanced manufactured goods
primarily to the American market,
was generating an industrial overcapacity
that would eventually threaten the health of the world economy.
Moreover, as much of Asia began to emulate the Japanese form of capitalism
or become offshore manufacturing platforms for Japanese corporations,
this overcapacity threatened to reach crisis proportions.
The crisis came to a head in 1997,
and has been a continuing feature of the international economy ever since.
[8.36]
Political developments helped precipitate the crisis.
In 1992, the Americans elected Bill Clinton [42]
on a slogan of “It’s the economy, stupid,”
and in 1993, the Liberal Democratic Party of Japan,
no longer needed as a bulwark against communism,
simply collapsed of its own corruption and redundancy.
[8.37]
The Clinton [42] administration did experiment briefly with
policies advocated by the revisionists, including managed trade.
The new administration even toyed with
convincing the Japanese to join in helping manage Japanese-American trade,
but its heart was never in it.
The actual work was left to
the usual array of Washington lawyers and economists,
who had no East Asian knowledge or experience whatsoever,
with the usual predictable outcome that the Japanese,
much more experienced and better informed than their American adversaries,
simply ran circles around them.
[8.38]
Using their huge leverage over American debt financing
and Clinton’s need for the appearance of domestic economic prosperity
in order to be reelected in 1996,
the Japanese got the Americans to back down on most trade issues.
The administration covered its tracks by claiming that
it could not allow economic disputes
to interfere with security and military matters.
The difficulty was that
except for the bellicose statements and deployments of the United States itself,
peace was breaking out in East Asia.
In 1992, for example,
China recognized South Korea;
that same year the government of the Philippines asked the U.S. Navy
to leave the major base it had long occupied at Subic Bay.
Still, the U.S. government claimed to see threats from North Korea and China,
and the Japanese went along, doing whatever they could to satisfy the Pentagon.
[8.39]
In 1993, the Liberal Democratic Party lost its majority in the Japanese Diet
for the first time in thirty-eight years.
Increasingly irrelevant to Japan’s need to reinvigorate its economy
and assume control over its foreign policy,
it was not voted out of office but simply disintegrated.
At first,
a popular coalition government formed among the many new parties in the Diet.
It seemed that a long overdue political realignment might be at hand.
As it turned out, the Socialist Party,
long feared by the United States because of its advocacy of “neutralism,”
was so beguiled to be in office
that it ultimately abandoned everything it had ever claimed to stand for
and forged a cynical coalition with the LDP to control parliament.
In the end, all the LDP’s loss of power revealed was that
the party system itself had largely been postwar window dressing.
In 1997, the LDP returned to power and resumed its stewardship over
Japan’s old Cold War relationship with the United States.
[8.40]
At least, though, the rise to power in the 1993–97 interregnum
of nonmainstream LDP and opposition party leaders
opened up an important debate over
how and why the country had become so rich
and yet had such an ineffective elected government.
Bureaucratic insiders as well as intellectuals and academics
began publicly to acknowledge and elaborate on
the very points the American revisionists had made.
New York Times correspondent James Sterngold reported [in 1993] from Tokyo,
“Five years ago,
some Western critics were derided by the Japanese establishment
as wrong—and probably racist—
for declaring that Japanese policy was set by bureaucrats, not politicians,
and that Japanese politics was often corrupt ....
Suddenly, [representations] and criticism previously regarded as blasphemous\
when uttered by ‘revisionists’ and ‘Japan bashers’
are spoken with a surprising matter-of-factness.”
In the process they opened up whole new perspectives for viewing
the interlocking Japanese governmental, social, and economic systems.
They affirmed that a corps of unelected elite bureaucrats
actually governed the country under a façade of democracy.
They laid out the ways in which,
working within a Cold War framework and guided by their government,
the major corporations had invested in productive capacity
many times greater than domestic demand could possibly absorb,
thereby becoming totally dependent on continued sales
to the American and Asian markets.
They detailed the methods of the cartels,
of restrictive licensing practices,
of the under-developed system of political review,
and of myriad other “nontariff barriers” to trade
that kept American and European corporate penetrations of the domestic market
to a minimum.
[8.41]
One impetus for such new, self-critical attitudes could be found
in the changed economic atmosphere.
Following a binge of big-ticket investments at the end of the 1980s
and a bubble of real estate speculation that accompanied newfound wealth,
the economy began to falter.
After eight years of stagnation,
in 1998 it finally plunged into real recession.
In an ironic twist,
American ideologists used these developments to argue as always that
American free-market capitalism was the globe’s one and only path to success.
However, they now incorporated revisionist analyses without acknowledgment
into their critiques of the Japanese economy.
For example, the Wall Street Journal’s Paul Gigot had long maintained that
Japan’s economy operated just like the U.S. model.
“Japan’s miracle, like Britain’s and America’s before it,” he wrote in 1986,
“was largely the product of creativity and enterprise
by individuals and their businesses.”
A decade later, in a column entitled
“The Great Japan Debate Is Over: Guess Who Won?,”
he could be found deriding Japan’s “model of bureaucratic-led growth,”
as distinguished from “American-style capitalism.”
His new point:
the revisionists may have been right about how Japan worked
but they were wrong to think it was a success.
To the extent that the Japanese economy might ever stage a comeback,
Gigot argued in a fashion typical of his colleagues,
it would have to do business
“in a framework that more resembles the American model.”
Put another way,
these economic ideologues found convincing proof in Japan’s economic fate that
a hegemonic America
would continue to dictate the rules of international commerce
into the distant future,
even if that hegemony were disguised with catchphrases like “globalization.”
[8.42]
As the Cold War receded into history, the United States,
rather than dissolving its Cold War arrangements,
insisted on strengthening them as part of a renewed commitment to global hegemony.
Japan was supposed to remain a satellite of the United States,
whether anyone dared use that term or not.
Meanwhile, annual American trade deficits with Japan soared.
American manufacturing continued to be hollowed out,
while a vast manufacturing overcapacity was generated in Japan and its Southeast Asian subsidiaries.
Capital transfers from Japan to the United States
generated huge gains for financiers
and produced an illusion of prosperity in the United States.
[Johnson’s preface is dated July 1999,
showing he completed this work at the height of the dot-com bubble.],
but in 1997, it all started to unravel.
The most severe economic crisis since the Great Depression
hit the East Asian economies
and began to spread around the world.
[End of Chapter 8.]
Chapter 9
Meltdown
...
[9.2]
The global economic crisis that began in Thailand in July 1997 had two causes.
First, the built-in contradictions of the American satellite system in East Asia
had heightened to such a degree that
the system itself unexpectedly began to splinter and threatened to blow apart.
Second, the United States, relieved of the prudence imposed on it by the Cold War, when any American misstep was chalked up as a Soviet gain, launched a campaign to force the rest of the world to adopt its form of capitalism.
This effort went under the rubric of “globalization.”
As these two complex undertakings—perpetuating Cold War structures after they had lost their purpose and trying to “globalize” countries that thought they had invented a different kind of capitalism—played themselves out around the world, they threatened a worldwide collapse of demand and a new depression.
Whatever happens, the crisis probably signaled the beginning of the end of the American empire and a shift to a tripolar world in which the United States, Europe, and East Asia simultaneously share power and compete for it.
[9.3]
During the Cold War, the Communists routinely charged that the United States used the Marshall Plan for rebuilding wartorn Europe and subsequent economic aid programs to advance the interests of American companies and to keep the Third World dependent on the First.
According to the Communist theory of economic colonialism, capitalist states enforce an inherently discriminatory division of labor on less developed countries by selling them manufactured goods and buying from them only raw materials, an extremely profitable arrangement for capitalists in advanced countries and one that certainly keeps underdeveloped countries underdeveloped.
This is why revolutionary movements in underdeveloped countries want either to overthrow the capitalist order [¶ 6.2.3] or to industrialize their economies [¶ 6.2.4] as fast as possible.
[9.4]
Such economic colonialism has long existed in many aspects of America’s relations with Latin America.
During the Cold War, the United States wrapped this system of dependency in the rhetoric of anticommunism, labeling elected leaders Communists if they seemed to endanger American corporate interests, as in Guatemala in 1954, and ordering the CIA to overthrow them.
Campaigns against the influence of Fidel Castro, for instance, often proved of great usefulness to American companies south of the border.
But this pattern of relationships did not case the global economic crisis of the late 1990s.
[9.5]
The fundamental structural cause was
the way the United States for more than forty years
won and retained the loyalty of its East Asian satellites.
These non-Communist countries accepted the American deal as offered [which, from the American perspective, was in fact off-shoring] and worked hard at “export-lead growth,” primarily to the American market.
If the Japanese led this movement, behind them were three ranks of followers:
first, the “newly industrialized countries” of South Korea, Taiwan, Hong Kong, and Singapore;
then, the late developers of Southeast Asia, Malaysia, Indonesia, Thailand, and the Philippines;
and finally, China, at present the world’s fastest-growing economy.
The Japanese found this so-called flying-geese pattern appealing.
They were flattered to be the lead goose and the inspiration for those that followed.
The leaders of each of these countries assumed that their economic destination—Los Angeles (and from there the rest of the American market)—was a permanent feature of the international environment; and so long as the Cold War existed, it was as permanent as anything ever is in interstate relations.
[9.6]
Over time, however, this pattern produced gross overinvestment and excess capacity in East Asia,
the world’s largest trade deficits in the United States, and
a lack of even an approximation of supply-and-demand equilibrium across the Pacific.
Contrary to Communist analyses of how neocolonialism should work, these terms proved surprisingly costly to the imperial power.
They
cost American jobs,
destroyed manufacturing industries, and blunted the hopes of minorities and women trying to escape from poverty.
[9.7]
Judith Stein, a professor of history at the City College of New York has detailed how the de facto U.S. industrial policy of sacrificing American workers to pay for its empire devastated African-American households in Birmingham, Alabama, and Pittsburgh, Pennsylvania.
She writes,
“At the outset of the Cold War, reconstructing or creating steel industries abroad was a keystone of U.S. strategic policy, and encouraging steel imports became a tool for maintaining vital alliances.
The nation’s leaders by and large ignored the resulting conflict between Cold War and domestic goals.
Reminiscing about elite thinking in that era, former Federal Reserve Board chairman Paul A. Volcker recalled that
‘the strength and prosperity of the American economy was too evident to engender concerns about its costs.’ ”
Moreover, American economic ideologues always dominated what debate there was, couching the problem in terms of protectionism versus internationalism, never in term of prosperity for whites versus poverty for blacks.
[How about “Prosperity for Jews versus poverty for gentiles”?]
The true costs to the United States should be measured in terms of crime statistics, ruined inner cities, and drug addiction, as well as trade deficits.
[Not sure how much of that is really due to globalization.
Poverty does not automatically lead to crime or drug addiction.
Further, the loss of manufacturing jobs has impacted the entire gentile population, of whatever race, far more than it has the Jewish part of the population.
The deindustrialization of America bears a certain similarity to the Morgenthau plan.]
[9.8]
U.S. officials did finally start to negotiate more or less seriously with the Japanese and the other “miracle economies” to open their markets to American goods.
But the attempt always collided with the security relationship.
In order to level the economic playing field, the United States would have had to level the security playing field as well, and this it remains unwilling to do.
[9.9]
In East Asia, to create industries that could export to the American market, design the right products, and achieve competitive prices and levels of quality, governmental industrial policies became the norm.
Japan was the regional pioneer in creating model collaborative relationships between government and industry.
In part, it drew on its history as one of the world’s most successful late industrializers and on its wartime production system, in which the government and the huge zaibatsu, or corporate combines, had worked together to produce the weapons that Japan needed.
After the onset of the Cold War, the Americans did very little to prevent the Japanese from re-creating the combines (now called keiretsu) and the legal structures that supported them, largely because occupation officials either failed to recognize what was happening or were blind to its implications.
[9.10]
To base a capitalist economy mainly on export sales, rather than domestic demand [i.e., what is often called “mercantilism”], however, ultimately
subverts the function of the unfettered world market to reconcile and bring into balance supply and demand.
Instead of producing what the people of a particular economy can actually use,
East Asian export regimes thrived on foreign demand artificially engineered [?? U.S. demand looks pretty real to me.] by an imperialist power.
In East Asia during the Cold War, the strategy worked so long as the American economy remained overwhelmingly larger than the economies of its dependencies and so long as only Japan and perhaps one or two smaller countries pursued this strategy.
But by the 1980s the Japanese economy had become twice the size of both Germanies.
Anything it did affected not just the American but the global economy.
Moreover, virtually everyone else in East Asia (and potentially every underdeveloped country on earth) had some knowledge of how to create such a miracle economy and many were trying to duplicate Japanese-style high-speed growth.
An overcapacity for products oriented to the American market
(or products needed to further expand export-oriented economies) became overwhelming.
There were too many factories turning out athletic shoes, automobiles, television sets, semiconductors, petrochemicals, steel, and ships for too few buyers.
The current global demand for automobiles, for example, seems to have peaked at around 50M vehicles at a moment when capacity has already grown to 70M.
To make matters worse, as a result of the global economic crisis, auto sales in Southeast Asia fell from 1.3M in 1997 to 450K in 1998.
[9.11]
This is not to say that all the barefoot peoples of the world who might like to wear athletic shoes or all the relatively poor people who might someday be able to afford a television set or an automobile are satisfied.
But for now they are too poor to be customers.
The current overcapacity in East Asia has created intense competition among American and European multinational corporations.
Their answer has been to lower costs by moving as much of their manufacturing as possible to places where skilled workers are paid very little.
[Offshoring.]
These poorly paid workers in places like Vietnam, Indonesia, and China cannot consume what they produce, while middle- and lower-class consumers back in the United States and Europe cannot buy much more either because their markets are saturated or their incomes are stagnant or falling.
The underlying danger is a structural collapse of demand leading to recession and ultimately to something like the Great Depression.
[Not the only danger, Professor. There is also inflation, hyperinflation, or what has happened in America, the loss of the knowhow as to how to make many high-tech products. But hey, women have caught up to men! Who cares if America goes to hell, as long as women catch up to men. Right, feminists?]
As the economic journalist William Greider has put it in his book One World, Ready or Nor,
“Shipping high-wage jobs to low-wage economies has obvious, immediate economic benefits.
But, roughly speaking, it also replaces high-wage consumers with low-wage ones.
That exchange is debilitating for the entire system.”
The only answer is to create new demand by paying poor people more for their work.
[Evidently Johnson does not like tariffs.]
But the political authorities capable of enacting and enforcing rules to enlarge demand could not do so even if they wanted to because “globalization” has placed the matter beyond their control.
[An example in para. 13 seems to contradict that.]
[9.12]
A crisis of oversupply was inevitable [sic: the Japanese could simply have chosen to produce less.] given the passage of time and the unwillingness of imperial America to reform its system of satellites.
Even in the late 1990s, the American economy continued to serve as the consumer of last resort for the enormous manufacturing capacity of all of East Asia, although doing so produced trade deficits that cumulatively transferred trillions of dollars from the United States to Asia.
This caused an actual decline in the household incomes of the bottom tenth of American families, whose real income fell by 13 percent between 1973 and 1995.
It was only in 1997 that a weak link snapped—not, ironically in trade, but finance—and threatened to bring the system down.
[9.13]
The financial systems of all the high-growth East Asian economies were based on encouraging exceptionally high domestic household savings as the main source of capital for industrial growth.
Such savings were achieved by discouraging consumption through the high domestic pricing of consumer goods
(which, of course, also led to charges of “dumping” of normally priced goods when they were sent abroad).
To save in such a context was a patriotic act, but it was also a matter of survival in societies that provided little in the way of a social safety net for times of emergencies, and in which housing often had to be bought outright or in which interest payments on mortgages were not treated favorably as a tax deduction.
[9.14]
East Asian governments collected these savings in banks affiliated with industrial combines or in government savings institutions such as post offices.
In organizing their economies, they had chosen not to rely primarily on stock exchanges to raise the capital their export industries needed.
Instead they found it much more effective to guide the investment of the savings in these banks to the industries the governments wanted to develop.
In Eastasia, ostensibly private banks thus became partners in business enterprises and industrial groups, not independent creditors concerned first and foremost with the profitability of a company or the success of a loan.
These banks in effect followed government orders and felt secure so long as they did so.
[9.15]
Superficially, corporations in most Eastasian countries looked like their American or European equivalents, but in this case appearances were indeed deceptive.
As the American corporate raider T. Boone Pickens discovered when he tried to buy a small Japanese company that made auto headlights, a significant block of shares was held by the Toyota Motor Company.
The firm he wanted to acquire was part of the automaker’s keiretsu, or conglomerate of cooperating firms and banks.
Although Pickens acquired what in the United States would have been a controlling interest in the company,
Toyota blocked his takeover and prevented him from naming his own directors and corporate officers.
The fact that Pickens was able to buy the shares at all was a fluke in Japanese corporate governance, the result of a single disgruntled stockholder.
Until very recently Japanese corporations were “owned” entirely by one another in elaborate cross-share-holding deals designed to keep people like Pickens out and to keep the enterprise
working for the country rather than
for the profits of the shareholders.
The sale of shares was not a way to raise capital, and the people who held them were uninterested in the risks or profits that the company’s operations entailed.
[9.16]
This was actually a brilliant system.
Oxfam, the British development and relief agency, maintains that the Cold War Eastasian economies achieved
“the fastest reduction in poverty for the greatest number of people in history.”
But the stability of any Eastasian economy depended on keeping it its financial system closed—that is, under national control and supervision.
Once opened up to the rest of the world, the financial structures of the Eastasian developmental states were extremely vulnerable to attack by foreign capital and international financial speculators.
The industrial policy system produced corporations in which the burden of debt was five times greater than the value of the shareholders’ investments, whereas these so-called debt-to-equity ratios for U.S. firms are less than one-to-one.
Eastasian corporations operating with such large burdens of debt were normally indifferent to the price of their equity shares.
Instead, they serviced these debts at their banks with income from foreign sales.
When they were unable to repay their loans, the banks themselves very quickly veered toward bankruptcy.
The whole system depended on continuous growth of revenue from export sales.
[9.17]
Eastasian bankers are no stupider or more corrupt than those elsewhere.
It is just that the industrial policies [and social order] of the systems within which they operate put the profitability of a loan very near the bottom of the criteria they use for making an investment decision.
Instead, these bankers focus on enlarging production capacity, achieving larger market shares, accumulating assets, and having large balance sheets.
It is true that from a purely Western perspective, they should not have offered many of the loans they made.
To us it seems insane to ignore commercial criteria such as profitability.
But for a Korean banker, it was more important to support an affiliated company that was building cars for the U.S. market than to question whether the company was making prudent investment decisions.
That was part of the logic of being a banker in a satellite country within America’s hegemonic order in Eastasia.
[9.18]
Then, without warning, that order changed.
Perhaps the first important blow to the Eastasian model of capitalism came in 1971, when President Nixon [37] abolished the Bretton Woods system of fixed exchange rates, created by the United Nations Monetary and Financial Conference in the summer of 1944 at Bretton Woods, New Hampshire.
The treaties that resulted from Bretton Woods were the most important efforts of the victorious Allies of World War II to create a better global financial system than the one that existed in the 1930s.
The Allies intended to prevent a recurrence of the protectionism and competitive devaluations of national currencies that had deepened into the Great Depression and fueled the rise of Nazism.
To do these things, the Bretton Woods conference established a system of fixed exchange rates among the world’s currencies.
It also created the International Monetary Fund, to help countries whose economic conditions forced them to alter the value of their currencies, and the World Bank, to help finance post-war rebuilding.
The value of every currency was tied to the value of the U.S. dollar, which was in turn backed by the U.S. government’s guarantee that it would convert dollars into gold on demand.
[9.19]
Nixon decided to end the Bretton Woods system because the Vietnam War [and, it should be said, the Democratic Party’s “Great Society” programs] had imposed such excessive expenditures on the United States that it was hemorrhaging money.
He concluded that the government could no longer afford to exchange its currency for a fixed value of gold.
A more effective answer would have been to end the Vietnam War [or scale back the “Great Society” programs] and balance the federal budget.
[Does any of this sound familiar in 2011?]
Instead, what actually occurred was that the dollar and other currencies were allowed to “float”—that is, to be converted into other currencies at whatever rate the market determined.
[9.20]
The historian, business executive, and novelist John Ralston Saul described Nixon’s action as
“perhaps the single most destructive act of the postwar world.
The West was returned to the monetary barbarism and instability of the 19th century.”
Floating exchange rates introduced a major element of instability into the international trading system.
They stimulated the growth of finance capitalism—which refers to making money from trading stocks, bonds, currencies, and other forms of securities as well as lending money to companies, governments, and consumers rather than manufacturing products and selling them at prices determined by unfettered markets.
Finance capitalism, as its name implies, means making money by manipulating money, not trying to achieve a balance between the producers and consumers of goods.
On the contrary, finance capitalism aggravates the problems of equilibrium within and among capitalist economies in order to profit from the discrepancies.
During the nineteenth century the appearance, and then dominance, of finance capitalism was widely recognized as a defect of improperly regulated capitalist systems.
Theorists from Adam Smith to John Hobson observed that capitalists do not really like being capitalists.
They would much rather be monopolists, rentiers, inside traders, or usurers or in some other way achieve an unfair advantage that might allow them to profit more easily from the mental and physical work of others.
Smith and Hobson both believed that finance capitalism produced the pathologies of the global economy they called mercantilism: that is, true economic exploitation of others rather than mutually beneficial exchanges among economic actors.
[9.21]
Opponents of capitalism, such as Marxists, viewed such problems as inescapable and the ultimate reason capitalist systems must sooner or later implode.
Supporters of capitalism, such as Smith and Hobson, thought that its problems could be solved by imposing social controls on the monetary system, as did the Bretton Woods agreement.
As they saw it, lack of such controls led to the maldistribution of purchasing power.
Too few rich people and too many poor people resulted in an insufficient demand for goods and services.
The “excess capital” thus generated had to find some place to go.
In the maturing capitalist countries of the nineteenth century, financiers pressured their governments to create colonies in which they could invest and obtain profits of a sort no longer available to them at home.
The nineteenth-century theorists believed this was the root cause of imperialism and that its specific antidote was the use of state power to raise the ability of the domestic public to consume.
After the United States ended the Bretton Woods system, these kinds of problems once again returned to haunt the world.
[9.22]
In the 1980s, when the Japanese began seriously to damage the American economy, the leaders of both countries chose to deal with the problem by manipulating exchange rates.
This could be done by having the central banks of each country work in concert buying and selling dollars and yen.
In a meeting of finance ministers at the Plaza Hotel in New York City in 1985, the United States and Japan agreed in the Plaza Accord to force down the value of the dollar and force up the value of the yen, thereby making American products cheaper on international markets and Japanese goods more expensive.
The low (that is, inexpensive) dollar lasted for a decade.
[9.23]
The Plaza Accord was intended to ameliorate the United States’ huge trade deficits with Japan, but altering exchange rates only affects prices, and price competitiveness and priced advantages were not the cause of the deficits.
The accord was based on good classroom economic theory, but it ignored the realities of how the Japanese economy was actually organized and its dependence on sales to the American market.
The accord was, as a result, the root cause of the major catastrophes that befell Eastasia’s economies over the succeeding fifteen years.
[9.24]
Once the high yen-low dollar regime was in place, the U.S. government assumed that the trade imbalance would correct itself.
The United States did nothing to end Japan’s barriers against imports and still permitted Japan to export into its market anything and everything it could sell there.
Japan reacted to the high yen by putting its industrial policy system into high gear in order to lower costs so it could continue its export-led growth, even at a disadvantageously high exchange rate.
The Japanese Ministry of Finance also lowered domestic interest rates to make capital virtually free and encouraged industrial groups to invest more vigorously than they had ever done before.
The result was fantastic industrial overcapacity and a “bubble economy,” in which the prices of such things as real estate lost any relationship to underlying values.
Business leaders proudly announced on American television that a square meter of the Ginza was worth more than all of Seattle.
Ultimately, huge debts accumulated and the Japanese banks were stuck with at least $600G in “nonperforming” loans that threatened to bankrupt the entire banking system.
[9.25]
By 1995, the contradictions were starting to come to a head.
Japan still had a huge surplus of savings, which it exported to the United States by investing in U.S. Treasury bonds, thereby helping fund America’s debts and keep its domestic interest rates low.
And yet Japan itself was simultaneously facing the possibility of the collapse of several of its bankrupt banks.
Financial leaders said to the Americans that
they needed relief from the high yen in order to increase Japan’s exports.
They hoped to solve their problems in the traditional way, via more export-led growth.
Eisuke Sakakibara, then Japan’s vice minister for international affairs in the Ministry of Finance, readily acknowledges that he intervened with Washington to lower the value of the yen and admits to his
“inadvertent role in precipitating one of the 20th century’s greatest economic cruses,:
The United States went along with this; facing reelection in 1996,
Bill Clinton [42] certainly did not want Japanese capital called home to prop up Japanese banks at that moment.
As a result, between 1995 and 1997 the U.S. Treasury and the Bank of Japan engineered a “inverse Plaza Accord”—which led to a 60 percent fall of the yen against the dollar.
[9.26]
However, in the wake of the Plaza Accord, many newly developing Southeast Asian economies had by then “pegged” their currencies to the low dollar, establishing official rates at which businesses and countries around the world could exchange Southeast Asian currencies for dollars.
So long as the dollar remained cheap, this gave them a price advantage over competitors, including Japan, and made the region very attractive to foreign investors because of its rapidly expanding exports.
It also encouraged reckless lending by domestic banks, since pegged exchange rates seemed to protect them from the unpredictability of currency fluctuations.
During the early 1990s, all of the Eastasian countries other than Japan grew at explosive rates.
Then the “reverse Plaza Accord” brought disaster.
Suddenly, they exports became far more expensive than Japan’s.
Export growth in second-tier countries like South Korea, Thailand, Indonesia, Malaysia, and the Philippines went from 30 percent a year in early 1995 to zero by mid-1996.
[9.27]
Certain developments in the advanced industrial democracies only compounded these problems.
Some of the capitalists had spent the post-Plaza Accord decade developing “financial instruments” that enabled them to bet on whether global currencies would rise or fall.
They had also accumulated huge pools of capital, partly because aging populations led to the exceptional growth of pension funds, which had to be invested somewhere.
Mutual funds within the United States alone grew from about $1T in the early 1980s to $4.5T by the mid-1990s.
These massive pools of capital could have catastrophic effects on the value of a foreign currency if transferred in and then suddenly out of a target country.
Fast-developing computer and telecommunications technologies radically lowered transaction costs while increasing the speed and precision with which finance capitalists could transfer money and manipulate currencies on a global scale.
The managers who controlled these funds began to encourage investments anywhere on Earth under the rubric of “globalization,” an esoteric term for what in the nineteenth century was simply called imperialism.
[That seems to me to be a stretch.
E.g., is the U.S./Japan relation since 1960 really comparable to the U.K./India relation during the period of the British Raj?]
They argued that excess capital should be allowed to flow freely in and out of any and all countries.
Some economists argued that the free flow of capital was the same thing as the free flow of goods, despite mountainous evidence to the contrary.
[9.28]
Capital flows to developing nations in Asia and Latin America jumped from about $50G/year before the end of the Cold War to $300G/year by the mid-1990s.
From 1992 to 1996,
Indonesia, Malaysia, Thailand, and the Philippines experienced money and credit growth rates of 25 to 30 percent a year.
During this same period
South Korea, Thailand, and Indonesia invested nearly 40 percent of their gross domestic product in new productive capacity as well as in hotels and office buildings; the comparable figure for European nations was only 20 percent and even less for the United States.
In 1996,
Asia was the destination for half of all global foreign investment,
European and Japanese as well as American.
On the American side, by 1997
Citibank held about $22G in local currency loans in Eastasia, about $20G in securities and $8G in dollar loans;
Morgan Bank had $19G in Asian securities and $6G in dollar loans; and Chase had $4G in local currency loans, $15G in Asian securities and $6G in dollar loans.
[9.29]
Although they did not speak out at the time, a number of famous financiers and economists have since pointed out the dangers of what is called “hot money” or “gypsy capital.”
George Soros, one of the world’s richest financiers and head of a large “hedge fund” located in the Netherlands Antilles, asserted that
“financial markets, far from tending toward equilibrium, are inherently unstable,” and he warned against the folly of continuing down the path of deregulating the financial services industry.
Jagdish Bhagwati, one of free trade’s most passionate supporters and a former adviser to the director-general of the General Agreement on Tariffs and Trade, argued that the idea of free trade had been “hijacked by the proponents of capital mobility.”
He claimed that there was a new “Wall Street-Treasury complex”
[More recent developments have made it clear that that should be broadened to a
“Wall Street-Federal Reserve Board-Treasury complex.”
See, e.g., Chapter 8 of Reckless Engangerment by Gretchen Morgenson et al.],
comparable to the military-industrial complex,
which contributes little to the global economy
but profits enormously from pretending that it does.
[That does not seem an accurate description of why it has such enormous profits.
For some reasons, which most certainly deserve to be ferreted out, the ordinary rules of capitalism, especially the use of competition to eliminate excess profits, simply do not apply to the financial industry.
That Wall Street makes such outrageous profits should be a subject of outrage, not just among the “populists” so despised by our elite, but by the media/government complex as well.
But the Washington Post, for example, has de facto defended Wall Street at every opportunity.
As to government, the power of Wall Street is pervasive and evident,
and now being made explicit in such as the rise of Eric Cantor.
And as to the general media culture,
I find it sickening that the sharpies of Wall Street
have been so often dubbed “wizards,”
rather than the short-sighted, narrow-visioned predators,
using high-powered mathematics to confuse rather than enlighten,
that they often are.]
The Eastasian economies did not really need hot money from abroad,
since in most cases they saved enough themselves to finance their own growth.
Bhagwati has also pointed out that
an unregulated financial system can with relative ease
become divorced from the productive system it is supposed to serve
and so be unnaturally predisposed to “panics and manias.”
[9.30]
There was as well a less financial ingredient in the disaster-in-the-making.
Without particularly thinking about it or sponsoring any public debate on the subject, the U.S. government built its future global policies on the main military elements of its Cold War policies.
It expanded NATO to include the former Soviet satellites of the Czech Republic, Hungary, and Poland; it reinforced its Eastasian alliances; and it committed itself to ensuring access to Persian Gulf oil for itself and its allies.
The Gulf War of 1991 was the first demonstration of this commitment.
Eschewing a “peace dividend,” which it might have directed toward its own industrial and social infrastructure, the United States also kept its Cold War-sized defense budgets in the $270G range while seeking to reorient its military focus from the possibility of war with a more or less equivalent enemy to imperial policing chores everywhere on earth.
[I certainly agree with Johnson on the overcommitment of the U.S. to military actions and bases around the world.
But on minimizing the peace dividend, he is simply incorrect.
Take, as an example, Army force structure.
At the peak of the Cold War, we had sixteen active duty divisions, many heavy.
In Germany, to face the Red Army (GSFG) and Warsaw Pact forces,
we had four heavy divisions with several armored cavalry regiments supporting them.
That force structure was over about a decade cut almost in half,
down to ten active divisions, with two in Europe.
As to the more equipment-heavy Navy and Air Force, they went on a widely-recognized “procurement holiday” during the Clinton [42] administration, letting their equipment age without replacement.]
[9.31]
With hegemony established on military terms and the American public more or less unaware of what its government was doing, government officials, economic theorists, and members of the Wall Street-Treasury complex
launched an astonishingly ambitious, even megalomaniacal attempt to make the rest of the world adopt American economic institutions and norms.
[He is evidently referring to what Thomas Friedman calls “The Golden Straightjacket,”
and by others "the Washington consensus.”]
One could argue that the project rejected the last great expression of eighteenth-century Enlightenment rationalism, as idealistic and utopian as the paradise of pure communism that Marx envisioned, or one could conclude that having defeated the Fascists and the Communists, the United States now sought to defeat its last remaining rivals for global dominance: the nations of Eastasia that had used the conditions of the Cold War to enrich themselves.
In the latter view,
U.S. interests lay not in globalization but in bringing increasingly self-confident competitors to their knees.
[9.32]
In any event, buoyed by what the apologist for America Francis Fukuyama has called the “end of history”—the belief that with the end of the Cold War all alternatives to the American economic system had been discredited—American leaders became hubristic.
Although there is no evidence that Washington hatched a conspiracy to extend the scope of its global hegemony, a sense of moral superiority on the part of some and of opportunism on the part of others more than sufficed to create a similar effect.
[9.33]
Their efforts came in two strategic phases.
From about 1992 to 1997, the United States led an ideological campaign to
open up the economies of the world to free trade and the free flow of capital across national borders.
Concretely this meant attempting to curb governmental influence, particularly any supervisory role over commerce in all “free-market democracies.”
Where this effort was successful (notably in South Korea), it had the effect of softening up the former developmental states, leaving them significantly more defenseless in the international marketplace.
[9.34]
Beginning in July 1997, the United States then
brought the massive weight of unconstrained global capital to bear on them.
[That formulation admits the possibility of confusing the U.S. government with the actions of Wall Street.]
Whether the U.S. government did this by inadvertence or design is at present impossible to say.
But at least no one can claim that America’s leadership did not know about the size and strength of the hedge funds located in offshore tax havens and about the incredible profits they were making from speculative attacks on vulnerable currencies.
In 1994, for example,
David W. Mullins, former Harvard Business School professor and vice chairman of the Federal Reserve Board, went from being a deputy of Reserve Board chairman Alan Greenspan to a position as a director of Long-Term Capital Management (LTCM), a huge hedge fund with its headquarters in Greenwich, Connecticut, but its money safely stashed in the Cayman Islands, beyond the reach of tax authorities.
In 1998, after the conditions [see ¶ 9.43] it helped bring about had almost bankrupted the fund, the New York Federal Reserve Bank arranged a $3.65G cash bailout to save the company—as good an example of pure “crony capitalism” as any ever attributed to the high-growth economies of Eastasia.
[What we have seen repeatedly in the 2000s—
privatized profits, socialized losses, or,
Wall Street gets the gain, the taxpayer gets the pain.]
In fact, when the bailout came to light, a number of Asian publications cynically recalled how the New York Times had editorialized only months earlier that in Asia,
“collusive practices were not only tolerated, they were encouraged” and that
“the United States needs to reiterate the importance of full transparency by companies and financial institutions.”
After the LTCM bailout, Martin Mayer, one of the most respected writers on the American financial system, observed that
“the Fed, for all its talk of ‘transparency,’ has made the fastest growing area of banking totally opaque, even to the supervisors themselves.”
[9.35]
In order to make it intellectually respectable for the smaller Asian economies to swallow all the money the United States, Japan, and other advanced countries were offering them, the U.S. government threw its weight behind the Asia-Pacific Economic Cooperation forum (APEC), an organization the Australians had launched at a meeting of trade ministers in Canberra in November 1989.
The forum did not, however, take off until November 1993, when President Clinton [42] decided to attend an APEC meeting in Seattle and turned it into an Asia-Pacific summit of leaders from all the major Eastasian nations.
[By the way, the well-known “battle of Seattle” took place at a WTO meeting in November 1999. It is nowhere mentioned in this book, which as noted above has its Prologue dated July 1999.]
The Seattle meeting also produced APEC’s first “Economic Vision Statement”:
“The progressive development of a community of Asia-Pacific economies with free and open trade and investment [italics added by CJ].”
Under American leadership,
APEC became the leasing organization promoting globalization in Eastasia.
At annual meetings in different Pacific Rim countries, it insistently propagandized that the Asian “tiger economies” open up to global market forces, in accordance with the most advanced (American) theorizing about capitalist economies and in order to not be left behind as mere developmental states.
[9.36]
The November 1994 APEC meeting in Bogor, Indonesia, committed the participants to fred trade and investment in the Pacific by 2010 for developed countries and by 2020 for developing countries, such as China and Indonesia.
In 1995, at Osaka, APEC members agreed to unilaterally open their economies rather than attempt to negotiate a treaty like the North American Free Trade Agreement, which would have generated too much resistance in many of the member nations.
Nothing much happened in Manila in 1996….
At Vancouver in November 1997, with the Asian financial crisis already under way, the United States pushed for the rapid removal of tariffs and nontariff barriers to trade in fifteen different sectors of economic activity.
At Kuala Lampur in November 1998, APEC finally came unglued.
The prime minister of Malaysia, Mahathir Mohamad, had only a few months earlier reimposed capital controls over his economy to insulate it from gypsy capital, for which U.S. Vice President Al Gore openly denounced him, encouraging the people of Malaysia to overthrow him.
The meeting ended in rancor, with Japan taking the lead in scuttling any further market-opening schemes for the time being.
Its Ministry of Foreign Affairs declared that the United States was possessed by an “evil spirit” and accused it of endangering the region’s fragile economic condition by pushing market-opening measures down the throats of countries too weak to open their borders further.
Malaysia and the United States did not even bother to attend the 1999 APEC meeting of trade ministers in Auckland, New Zealand.
[9.37]
The shock that brought this edifice crashing to the ground started in the summer of 1997, when some foreign financiers discovered that they had lent huge sums to companies in Eastasia with unimaginably large debts and, by Western standards, very low levels of shareholder investment.
They feared that other lenders, particularly the hedge funds, would make or had already made the same discovery.
They knew that if all of them started to reduce their risks, the aggregate effect would be to force local governments to de-peg their currencies from the dollar and devalue them.
Since this would raise the loan burdens of even the most expertly managed companies, they too would have to rush to buy dollars before the price went out of sight, thereby helping to drive the value of any domestic currency even lower.
[9.38]
The countries that had followed recent American economic advice most closely were seriously devastated.
They had opened up their economies to unrestricted capital flows without understanding the need to regulate the exposure of their own banks and firms.
They did not ensure that borrowers in their countries invested the money they acquired from abroad in projects that would pay adequate returns or that actually constituted collateral for the loans.
The foreign economists who advised them did not stress the institutional and legal structures needed to operate in the world of American-style laissez faire.
No one warned them that if they raised their interest rates in order to slow inflation, foreign money would provoke an immediate flight of foreign capital.
They did not know that unrestricted capital flows had put them in an impossible position.
What took place in Eastasia was a clash between two forms of capitalism: the American system, disciplined by the need to produce profits, and the Asian form, disciplined by the need to produce growth [and jobs!] through export sales.
[9.39]
The International Monetary Fund entered this picture and turned a financial panic into a crisis of the underlying economic systems.
As already mentioned, the Bretton Woods conference of 1944 had created the IMF to service the system of fixed exchange rates that lasted until the “Nixon [37] shocks” of 1971.
It survived its loss of mission in 1971 to become, in the economist Robert Kuttner’s words,
“the premier instrument of deflation, as well as the most powerful unaccountable institution in the world.”
The IMF is essentially a covert arm of the U.S. Treasury, yet beyond congressional oversight because it is formally an international organization.
Its voting rules ensure that it is dominated by the United States and its allies.
India and China have fewer votes in the IMF, for example, than the Netherlands.
As the prominent Harvard economist Jeffrey Sachs puts it,
“Not unlike the days when the British Empire placed senior officials directly into the Egyptian and Ottoman [and also the Chinese] financial ministries, the IMF is insinuated into the inner sanctums of nearly 75 developing country governments around the world—countries with a combined population of some 1.4 billion.”
[9.40]
In 1997, the IMF roared into a panic-stricken Asia, promising to supply $17G to Bangkok,
$40G to Jakarta, and $57G to Seoul.
In return, however, it demanded the imposition of austerity budgets and high interest rates, as well as fire sales of debt-ridden local businesses to foreign bargain hunters.
It claimed that these measures would restore economic to the “Asian tigers” and also turn them into “open” Anglo-American capitalist economies.
At an earlier meeting in November 1997 called to deal with the crisis,
Japan and Taiwan had offered to put up $100G to help their fellow Asians, but the U.S. Treasury’s assistant secretary, Lawrence Summers, denounced the idea as a threat to the monopoly of the IMF over international financial crises, and it was killed.
He did not want Japan taking the lead, because Japan would not have imposed the IMF’s conditions on the Asian recipients and that was as important to the U.S. government as restoring them to economic health.
[9.41]
In Indonesia, when the government ended its dollar peg and let the currency float, the rupiah fell from about 2,300 to 3,000 to the dollar but then stabilized.
At that point, with almost no empirical knowledge of Indonesia itself, the IMF ordered the closure of several banks in a system that had no deposit insurance.
This elicited runs on deposits at all other banks.
The wealthy Chinese community began to move its money out of Indonesia to Singapore and beyond, and the country was politically destabilized, leading ultimately to the overthrow of President Suharto.
All Indonesian companies with dollar liabilities rushed to sell rupiahs and buy dollars.
Equities instantly lost 55 percent of their value and the currency, 60 percent.
The rupiah ended up trading at 15,000 to one U.S. dollar.
David Hale, chief economist of the Zurich Insurance Group, wrote at the time,
“It is difficult, if not impossible, to find examples of real exchange rate depreciations comparable to the one which has overtaken the rupiah since mid-1997.”
He suggest that a proper comparison might be with the hyperinflation that hit the German mark in 1923.
[9.42]
By the time the IMF was finished with Indonesia, over a thousand shopkeepers were dead (most of them Chinese), 20 percent of the population was unemployed, and a hundred million people—half the population—was living on less than one dollar a day.
William Pfaff characterized the IMF’s actions as
“an episode in a reckless attempt to remake the world economy, with destructive cultural and social consequences that could prove as momentous as those of 19th-century colonialism.”
Only Japan, China, and Taiwan escaped the IMF juggernaut in Eastasia.
Japan kept aloof even when the Americans publicly rebuked it for failing to absorb more exports from the stricken countries, for the Japanese knew the Americans would not actually do anything as long as the Marines were still comfortably housed in Okinawa.
China remained largely untouched because its currency is not freely convertible and it had paid no attention to APEC calls for deregulation of capital flows.
And Taiwan survived because it had been slow in removing its financial barriers.
It also maintains a relatively low ration of investment to gross domestic product, is shifting further toward a service economy whose capital needs are less, and has maintained export diversity—unlike, for example,
Korea’s overconcentration in products such as semiconductors destined for the American market.
Foreign holdings of Taiwanese currency are negligible because its peculiar political status makes it unattractive to the hedge funds.
Thus, it has been able to offer some of its own huge foreign currency holdings to help bail out countries in Southeast Asia.
[9.43]
After the big investors had pulled their money out of Eastasia and left the area in deep recession, they turned to Russia.
They calculated that there was little or no risk in buying Russian state bonds paying 12 percent interest because the Western world would not let a former super-power armed with nuclear weapons default.
But the situation was further gone in Russia than these investors imagined, and so, in August 1998, the Russians defaulted on the interest payments (at the time of writing, 1999, they still owe foreign investors perhaps $200G).
If Russia does not repay these loans, it will be the largest default in history.
These developments so scared the finance capitalists that they started pulling their money in from all over the world, threatening even well-run economies that had implemented all the economists’ nostrums on how to get rich like the North Americans.
The Brazilian economy was so destabilized that in mid-November 1998 the IMF had to put together a $42G “precautionary package” to shore it up.
Needless to say, the IMF has also helped plunge millions of poor Brazilians deeper into poverty.
In order to meet the IMF’s austerity requirements, the Brazilian government even had to cancel a $250M pilot project to save the Amazon rain forest.
The result was that other countries withdrew their matching funds for the Amazon, and the degradation of an area that contributes 20 percent of the globe’s fresh-water supply resumed.
[9.44]
In speeches in Russia and Eastasia during the second half of 1998,
President Clinton [42] warned the peoples of these areas not to “backslide” and urged them to open their nations even further to American-style laissez-faire capitalism.
But he had lost his audience.
By now his listeners understood that the cause of their misery could not also be its cure.
Many remembered that the Great Depression started as a financial panic then made worse by deflationary policies similar to those prescribed by the IMF in 1997 and 1998 for Eastasia, Russia, and Brazil.
The result in the early 1930s was a general collapse of purchasing power.
That has not happened so far this time, largely because the United States went on a consumption binge and provided virtually all growth in demand for the excess output of the world.
Can American “shop till we drop” be sustained indefinitely?
No one knows.
[Surely Johnson is being disingenuous. Surely the answer is “certainly not.”]
[9.45]
The economic crisis at the end of the century had its origins in
an American project to open up and make over
the economies of its satellites and dependencies in Eastasia.
Its purpose was both to diminish them as competitors and
to assert the primacy of the United States as the globe’s hegemonic power.
[I think Johnson is being dishonest here.
Surely many in the U.S. sincerely thought
these measures would help the foreign economies,
and also many in the U.S. (probably not the same ones!)
thought those measures would be very profitable for some elements in the U.S.]
Superficially it can be said to have succeeded.
The globalization campaign significantly reduced the economic power and capitalist independence of at least some of the United States’ “tiger” competitors—even if, as with Russia and Brazil, the crisis could not be kept within the bounds of Eastasia.
This was, from a rather narrow point of view, a major American imperial success.
[9.46]
Despite such immediate results, however, the campaign against Asian-style capitalism
(and the possibility that America’s satellite states in the area might gain independent political clout as well) was ill-founded and included serious blowback consequences.
The United States failed to acknowledge that
Eastasian success had depended to a considerable extent on preferential, Cold War-based exports to the American market.
By cloaking its campaign in the rhetoric of market opening and deregulation instead of the need to reform outdated Cold War arrangements, the United States both destroyed the credibility of its economic ideology and betrayed its Cold War supporters.
The impoverishment and humiliation of huge populations from Indonesia to South Korea was itself blowback itself, even if the blowback for the time being spared ordinary Americans.
But if and when the stricken economies recover, they will almost certainly start to seek leadership elsewhere than from the United States.
At a bare minimum, they will try to protect themselves from ever again being smothered by the American embrace.
In short, by refusing to reform its Cold War structures and instead insisting that other peoples emulate the American way, the United States gave itself an unnecessary, possibly terminal case of imperial overstretch.
Instead of forestalling global instability, it helped make such instability inevitable.
[9.47]
The triumphalist rhetoric of American leaders basking in their economy’s “stellar performance” has also alarmed foreigners.
When Alan Greenspan asserted to Congress that the crisis meant the world was moving toward
“the Western form of free market capitalism,” almost no one thought that was either true, possible, or desirable.
Economics has not displaced culture and history, regardless of the self-evaluation of the economics profession.
Many leaders in Eastasia know that globalization and the crisis that followed actually produced only pain for their people, with almost no discernible gains.
Globalization seems to boil down to the spread of poverty to every country except the United States.
[If that last sentence was not evidently an overstatement in 2000, by 2011 it certainly looks like one.
Johnson himself in earlier parts of his book has frequently pointed out how globalization had already resulted in “the hollowing out of American manufacturing,” in his own words.
How he can suddenly seem to ignore these adverse effects of globalization on significant segments of the American population and economy is hard to understand.]
[9.48: paragraph the last!]
Clearly on the defensive,
Richard N. Haass and Robert E. Litan, directors respectively of foreign policy and of economic studies at the Brookings Institution in Washington, lamented,
“In some quarters [globalization] is seen as having caused the rapid flows of investment that moved in and out of countries as investor sentiment changed and were behind the Mexican [1995] and Asian financial crises.”
But to them this would be a wrong conclusion.
To accept it would be to
“abandon America’s commitment to the spread of markets and democracy around the world at precisely the moment these ideas are ascendant.”
But whether such ideas are actually ascendant is, thanks to the crisis, now in doubt, and such doubts are generating more blowback.
The duties of “lone superpower” produced military overstretch; globalization led to economic overstretch; and both are contributing to an endemic crisis of blowback.
[End of Chapter 9.]
posted by KHarbaugh at 00:30
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