Archive for ‘trade’ Category
The TPPA signing came and went, as did the nation-wide protests against it. I did not think that the government was going to be swayed from publicly commemorating what it considers to be the crown jewel of its trade-dominated foreign policy, but I had hoped that the numbers turning out to protest would add up to more than 100,000. At least that way the government could be put on notice that a sizeable portion of the electorate were unhappy about the surrender of sovereignty to corporate interests enshrined in the 6000 page text. Alas, the numbers assembled came nowhere close.
One interesting sidebar was the decision to stage a parallel protest at the Sky City complex rather than join with the larger protest march down Queen Street. The specific objective of the Sky City protest was ostensibly to use so-called non-violent direct action (NVDA) and other acts of civil disobedience to block the streets surrounding the gambling complex. In the build up to signing (and protest) day the leaders of the two rival demonstrations publicly debated and largely disagreed on the merits of each. The Queen Street march organisers were concerned that any pushing and shoving at Sky City would feed into the government’s narrative that the matter was a law and order issue (following reports that the police had conducted riot control refresher training and door knocked activists warning them about the consequences of unruly acts). The leaders of the Sky City blockade argued that peaceful marches were simply ineffectual and were ignored by policy-makers. As it turns out, both were right.
The Sky City protesters, some of whom showed up in helmets and assorted face coverings, were forcibly prevented by the Police from effectively shutting down access to and from the venue and surrounding areas. The activists responded by engaging in a series of rolling blockades of major intersections, including the Cook Street on-ramp leading to the Harbour Bridge and Northern Motorway. This continued well after the signing ceremony was over and while the Queen Street march was still in progress. That had the effect of causing gridlock in the Auckland CBD.
Coincidentally or not, there was a bus strike that day. Although Auckland Council allowed its employees to work from home, many other entities did not. That meant that people who normally used buses to get to work had to use alternative transportation, including cars. That added to the number of cars on Auckland inner city roads at the time of the rolling blockades. Needless to say, motorists were not happy with the seemingly random temporary road closures in and around the CBD.
That is why things got too clever. As a tactical response to the police thwarting of the initial action, the move to rolling blockades was ingenious. But that bit of tactical ingenuity superseded the strategic objective, which was to draw attention to the extent of TPPA opposition. In fact, it appeared that the Sky City activists were trying to outdo each other in their attempts to make a point, but in doing so lost sight of the original point they were trying to make. After all, blocking people from leaving the city after the signing ceremony was over was not going to win over hearts and minds when it comes to opposing the TPPA. Plus, it displayed a callous disregard for the motorists affected. What if someone was rushing to a hospital to be with their badly injured child or terminally ill parent? What about those who needed to get to work on time so as to not be docked pay? What about cabbies and delivery people who earn their livings from their vehicles? None of this seems to have factored into the blockader’s minds. Instead, they seemed intent on proving to each other how committed they were to causing disruption regardless of consequence to others.
I have seen this before in other places, most recently in Greece, where anarchists and Trotskyites (in particular but not exclusively) infiltrate peaceful protests and engage in acts of violence in order to provoke what are known as “police riots” (a situation where isolated assaults on individual police officers eventually causes them to collectively lash out indiscriminately at protesters). Fortunately, NZ does not have the type of violent activist whose interest is in causing a police riot. Unfortunately, it has activists who seemingly are more interested in establishing and maintaining their street credentials as “radicals” or “militants” than using protest and civil disobedience as an effective counter-hegemonic tool. So what ended up happening was that the Sky City protestors were portrayed by the corporate media and authorities as anti-social misfits with no regard for others while the Queen Street march was briefly acknowledged, then forgotten.
On a more positive note, Jane Kelsey has to be congratulated for almost single-handedly re-defnining the terms of the debate about TPPA and keeping it in the public eye. As someone who walks the walk as well as talk the talk, she was one of the leaders of the Queen Street march and has comported herself with grace and dignity in the face of vicious smears by government officials and right wing pundits lacking half the integrity she has. I disagree about the concerns she and others have raised about secrecy during the negotiations, in part because I know from my reading and practical experience while working for the US government that all diplomatic negotiations, especially those that are complex and multi-state in nature, are conducted privately and only revealed (if at all) to the public upon completion of negotiations (if and when they are).
For example, the NZ public did not get to see the terms of the Wellington and Washington Agreements restoring NZ as a first-tier security partner of the US until after they were signed, and even today most of their content has been ignored by the press and no protests have occurred over the fact that such sensitive binding security arrangements were decided without public consultation. More specifically with regards to the TPPA, no public consultations were held in any of the 12 signatory states, and in the non-democratic regimes governing some of those states the full details have still not been released. Even so, I do think that it was a good opposition ploy to harp about “secrecy” as it simply does not smell right to those not versed in inter-state negotiations. In any event, what Ms. Kelsey did was exactly what public intellectuals should be doing more often–informing and influencing public opinion for the common good rather than in pursuit of financial or political favour.
I would suggest that opponents of the TPPA focus their attention on the Maori Party and its MPs. The Green Party’s opposition to TPPA is principled, NZ First’s opposition is in line with its economic nationalism and the Labour Party’s opposition is clearly tactical and opportunistic (at least among some of its leaders). So the question is how to wrestle votes away from the government side of the aisle when it comes to ratification. Peter Dunne and David Seymour are not going to be swayed to change sides, but the Maori Party are in a bit of an electoral predicament if they chose to once again side with the economic neo-colonialists in the National government.
For all the sitting down in the middle of public roadways, it may turn out that old fashioned hardball politicking may be the key to successfully stymying ratification of the TPPA in its present form.
Now THAT would be clever.
On returning this week from his trade mission in the Middle East, John Key stated on Breakfast TV that countries such as Saudi Arabia have views of human rights that are “different” from our own, justifying the government’s decision to exclude human rights issues from any trade agreement that New Zealand is able to secure in the region. That is putting it rather mildly. Saudi Arabia has one of the consistently worst human records in the world. While the mainstream media is quick to focus in on a discriminatory gender regime that bans women from driving and requires them to be covered from head-to-toe, such problems pale in comparison to the treatment of the foreign workers who make up at least a third of the country’s population, or the torture, imprisonment, and death sentences handed down to Christian converts, human rights workers, activists, journalists, and other critics of the ruling elite. Unlike the distinctly Saudi approach to gender relations, it is difficult to see how the Saudis themselves could seriously attempt to justify such severe human rights abuses in religious or cultural terms.
What is especially surprising about the Prime Minister’s statement is that, if he genuinely believes that Saudi Arabian understandings of human rights are “different” rather than simply wrong, this would put him far over on the fringes of moral philosophy into the cultural relativist camp. This is a space occupied only by academic extremists who have followed the logics of social constructionism to their absolute and final conclusions (i.e. there is no such thing as truth, which makes it rather hard to speak truth to power as many of these theorists seem to want to do), or a small minority on the extreme right, which proposes that liberal values can only ever be achieved in supposedly superior Western cultures. Sticking to this line of argument means that anything whatsoever can be justified in cultural terms to the point where, essentially, nothing practised by any society at any point in history can be criticised at all. What strange company for a Mr. Moderate who usually tries to avoid coming to any conclusions that could undermine his apparently undying popularity to be found in.
Furthermore, this is not the generally shared understanding most reasonable people have of these issues. In fact, New Zealand, along with just about every other country in the world, is a signatory to the Universal Declaration of Human Rights, adopted in the wake of the horrors of World War Two and aimed at establishing a basic set of rights and liberties that countries should do their very best to uphold. Least it isn’t clear from the title of the Declaration, most of the world believes that human rights are universal, Mr. Key, not particular.
Saudi Arabia, by the way, does not accept these principles, rejecting the Declaration on the grounds that guaranteeing freedom of religion would be detrimental to the country’s own traditions, and that its own version of Islamic law supposedly upholds a higher threshold of human rights than this or any other international agreement. By far the more important point, however, is that New Zealand is itself a signatory to the Universal Declaration, which not only obligates us to ensuring that we uphold basic human rights within our own borders, but also to promote human rights abroad.
Yet when it comes to trade agreements, the explicit approach adopted by both recent centre-right and centre-left governments has been to exclude human rights from the negotiating agenda. This puts us at odds with the other members of the international “club” we belong to, to use another of the Prime Minister’s terms. Based on academic research, the World Trade Organization states that about 75 percent of contemporary trade agreements include human rights clauses, whether binding or non-binding, driven largely by the human rights promotion agenda of Canada, the European Union, and yes, the United States. It obviously cannot be assumed that these clauses always lead to substantive improvements in human rights outcomes, but they are a start.
The real reason behind both National and Labour’s exclusion of human rights concerns from the negotiation of trade deals is two-fold. Firstly, to state the obvious, New Zealand is very small in global terms, and thus cannot exercise much leverage over larger countries in the Asia and the Middle East. When countries are dependent on us for aid, absolutely do we try to influence human rights, most notably in the Pacific (which also occasionally invokes issues of culture and human rights that I don’t intend to get into here). Realistically, if we are to incorporate human rights concerns into our trade relations framework, this might more successful if done through multilateral arrangements—yet is it difficult to see human rights becoming a major concern of the kind of multilateral trade deals that New Zealand has wedded itself to, such as the Trans Pacific Partnership.
Secondly, the bipartisan approach reveals not only a deep ideological commitment to free trade that is not necessarily shared by other developed countries, in which the influence of large protectionist interest groups often moderates that stance, but a rather naïve belief that trade deals and trade relationships can be separated from everything else. Despite good empirical and historical evidence that trade cannot be viewed independently from other aspects of foreign policy, we do this with regard to our security relations, in which government officials cannot see the long-term problem emerging out of the contradiction between an Asia-oriented trade policy and a Five Eyes-oriented security one, and we also apparently do it when it comes to more noble causes.
So herein lies the hypocrisy not only of our current leadership, but all those sectors of our community who stress trade above all other national goals. We tend to have a rather rosy view of our country not only as an independent voice in the international arena, but as a progressive force in the big wide world. We ban nuclear ships and we save whales. We were the first to give women the vote and at least some of protested against the Springbok Tour. We think we deserve a seat on the Security Council because we are nice (alternatively, to carry on the theme, there are those who no doubt think it will help us out on the trade front). Not caring—or pretending not to care— about the worst instances of human rights abuses, however, not only threatens to undermine this aspect of our national identity, but undermines both our reputation and potential as a global player that punches above our weight on moral issues.
Lost amid the distractions of royal visits, Mananet Party circus side-shows and assorted other peripheral issues has been the subject of NZ foreign policy after the September 2014 election. The topic is worth considering beyond the attention it has received so far. In this post I outline some (far from all) of the major areas of convergence and difference in the event a National-led or a Labour-Green coalition wins.
If National wins it will deepen its current two-pronged approach: it will continue with its trade obsession to the detriment of other foreign policy areas such as disarmament, non-proliferation and human rights, and it will strive to deepen its security ties with the US and its close allies, Australia in particular. The trade-for-trade’s sake foreign policy approach will see National return to the bilateral negotiating tale with Russia regardless of what it does in Ukraine or other Russian buffer states, and will see it attempt to garner even a piecemeal or reduced TPP agreement in the face of what are growing obstacles to its ratification (especially US domestic political resistance that sees TPP as a drain on American jobs, but also sovereignty protection concerns in areas such as copyrights, patents and strategic industries in places like Chile, Japan and Singapore). NZ will continue to try and expand its trade relationships with Middle Eastern states in spite of their largely despotic nature, and it will continue to push commodity specialization, niche value-added manufacturing and education provision as areas of competitive advantage.
On a security dimension NZ will continue its return to front-tier, first line military ally status with the US and Australia, and will deepen its intelligence ties within the 5 Eyes signals intelligence network as well as with other pro- US partners and in the field of human intelligence. This will occur whether or not Edward Snowden reveals the full extent of NZ espionage on behalf of 5 Eyes in the months leading up to the election, but the government will find itself under scrutiny and hard pressed to defend the behaviour of the NZ intelligence community in that event. Closer military ties with the US brings with it the risk of involvement in American-led conflicts, but the National approach, as it is with the looming Snowden revelations, is to “wait and see” and deal with the issues as they arise (presumably in more than a crisis management way).
Truth is, under National NZ will become another US security minion. One has to wonder how the Chinese, Indians, Russians and assorted Middle Eastern trading partners feel about that, especially if it is revealed that NZ spies on them on behalf of 5 Eyes..
National will conduct its foreign policy unimpeded by its potential coalition partners. United Future and the Maori Party have zero interest in foreign affairs other than to reaffirm whatever status quo they are part of, and ACT, should it survive, is a National mini-me when it comes to the subject. Winston First will not rock the boat on foreign policy issues so long as a few baubles are thrown its way.
A Green-Labour government will have a slightly different approach, but not one that fundamentally rejects the basic premises of National’s line. The Greens have already begun to soften their stance regarding TPP and trade relations, emphasising their interest in “fair” trade and after-entry protections and guarantees. Labour, which otherwise would have likely continued the thrust of National’s trade strategy, will back away from some of the more foreign-friendly aspects of trade negotiations in order to mollify the Greens, and if Winston First is part of that coalition it may place some restrictions on foreign ownership and investment rights on NZ soil.
Along with the softening of single-minded trade zealotry, a Labour-Green government will attempt to reemphasize NZ’s independent and autonomous diplomatic stance (which has now been fundamentally compromised by the nature of National’s two-pronged approach). This will include attempting to rebuild its reputation and expertise in the fields hollowed out by National’s razoring of the diplomatic corps, although it will be very hard to replace the lost expertise and experience in fields such as chemical and nuclear weapons control, multinational humanitarian aid provision and environmental protection. To do so will require money, training and recruitment, so the time lag and costs of getting back up to speed in those areas are considerable.
With regards to security, the Greens and Labour are in a dilemma. The Greens want to review the entire NZ intelligence community with an eye towards promoting greater oversight and transparency in its operations. That includes a possible repeal of the recently passed GCSB Act and, if some of its members are to be believed, a reconsideration of NZ participation in 5 Eyes. For all its opportunistic protestations about the Dotcom case and GCSB Act, Labour in unlikely to want to see major changes in NZ’s espionage agencies or its relationship with its intelligence partners. It is therefore likely that Labour will agree (as it has said) to a review of the NZ intelligence community without committing itself to adopting any recommendations that may come out of that review. It may also agree to a compromise by which recommendations for greater intelligence agency oversight and accountability are accepted as necessary and overdue in light of recent revelations about the scope and extent of NZ domestic espionage as well as its foreign intelligence operations (all of which will become much more of a public issue if Snowden reveals heretofore denied or unexpected espionage by NZ intelligence agencies).
The same is true for NZ’s burgeoning military alliance with the US. Labour will not want to entirely undo the re-established bilateral military-to-military relations, especially in the fields of humanitarian assistance, search and rescue and perhaps even de-mining, peace-keeping and peace-enforcement operations. The Greens, however, will object to continuing the bilateral military “deepening” project and will oppose NZDF participation in US-led wars (especially those of of choice rather than necessity). The Greens will push to further reduce military expenditures as percentage of GDP (which is currently around 1.1 percent) and will seek to restrict weapons purchases and upgrades as much as possible. That will put it as loggerheads with Labour, which will see the necessity of maintaining a small but effective fighting force for both regional as well as extra-regional deployments, something that in turn will require modernization of the force component as well as good working ties with military allies (which is maintained via joint exercises and cross-national training events).
What that means in practice is that the Greens will not be given ministerial portfolios connected to foreign affairs or security, although they will be assuaged by concessions granted by Labour in other policy areas, to include (however token or cosmetic) intelligence reform.
Minor parties that might be part of the coalition will have little influence on the Labour-Green foreign policy debate. Mana will bark the usual anti-imperialist line but will be ignored by Labour and the Green leadership. Winston First will extract a pound of flesh with regard to the influence of non-Western interests on the NZ economy and NZ’s security commitments but otherwise will toe the Labour foreign policy line. The Maori Party will be irrelevant except where there is international diplomatic interest in indigenous affairs.
The vote on NZ’s candidacy for a non-permanent seat on the UN Security Council will not be greatly influenced by the election (the UN vote occurs in October). NZ’s chances have risen as of late in the measure that Turkey’s has fallen thanks to the increasingly autocratic and erratic rule of the Erdogan government. Spain, the other rival for the “Europe and other” non-permanent UNSC seat (yes, NZ is not part of Oceania when it comes to such voting), has been tarnished by its economic woes, so NZ’s relative economic and political stability have bolstered its chances by default. Even so, a Labour-Green government will likely be more appealing to the majority of the UN membership given National’s obsequious genuflection to Great Powers on both trade and security.
In sum, foreign policy may be a non-issue in the run up to the elections but that does not mean that it does not matter. Party activists and the public at large would do well to contemplate which direction they would like to see NZ steer towards in its foreign relations, and what international role they envision it should properly play. Otherwise it becomes just another elite game uninformed by the wishes of the majority, which means that when it comes to engaging the world it will be exclusively elite logics that inform the way NZ does so.
Much has been made of the fact that since the entrance into effect of the bilateral Free Trade Agreement (FTA) with China in 2008, New Zealand exports to China totaled NZ$33.7 billion in the six years since then compared to NZ$9.9 billion in the period 2002-08. In 2007/08 before the FTA went into effect exports to China totaled NZ$2.5 billion, and in 2012/12 they were worth NZ$7.7 billion. That is more than 200 percent growth in six years, or more than 45 percent per year (Hat Tip: Kiwiblog)
Needless to say, pro-trade cheer leaders think that this is a great thing. And perhaps it is. But before we get too excited and proclaim the absolute benefits of this bilateral, a few questions need answering.
First, what is the volume and worth of imports from China during the same period? In other words, what is the state of the bilateral trade balance?
Second, has the FTA led to export commodity diversification or concentration?
Third, has the increase in bilateral exports led to an increase in employment in the export sectors affected?
Fourth, has there been a trickle down effect evident in the expansion of auxiliary industries and tax revenues derived from them and the export sectors involved?
Then there are subsidiary questions:
Has overall NZ GDP per capita and income distribution increased as a result?
Have occupational health and safety standards improved in the export sectors associated with the FTA?
These questions are important because they illuminate more precisely who has and has not benefitted from the FTA.
I invite readers to do a little research on these questions, using the government’s own sources as well as academic studies. The findings may come as a surprise, as oftentimes macro-statistics mask the meso- and micro-impacts underneath the “big picture.”
Not all is what it seems.
It is said that the who and when of diplomatic missions tells much about the disposition of the government sending them. If that is true, then consider this.
The most important annual Trans-Pacific diplomatic (APEC) meetings are being held in Bali this week. John Key and Tim Groser are there, once again pushing their trade-first (only?) agenda in the main sessions and back rooms.
Meanwhile, Foreign Minister Murray McCully is on a mission to Antarctica.
Since Antarctica has no diplomatic agencies on its soil, it seems odd that the foreign minister is headed that way in the absence of a treaty signing or other diplomatic event. His press release states that the visit, his first, is because he is the minister responsible for New Zealand’s Antarctic Affairs and that along with his visit to Scott Base he will head to the US base at McMurdo Sound. But there is nothing diplomatic on his agenda.
Mr. McCully is not a minister for anything scientific, so he is not discharging science portfolio responsibilities by visiting one of the research stations on the continent. Perhaps, as Minister of Sports and Recreation, he is looking into possibilities along those lines, especially since he was flown down on an Air Force plane along with 117 others plus the 11 person Air Force crew.
But if he is not engaged in anything other than a tour of the realm, why is he not with other Trans-Pacific foreign ministers in Bali? Is this the contemporary equivalent of the colonial practice of assigning diplomats in disgrace to a posting in Brazzaville? Is Antarctica New Zealand’s diplomatic version of the Mosquito Coast?
MFAT and National will say that he was superfluous to requirements in Bali (not exactly in that language) because the PM and Trade Minister are there. That tells us two things.
On the international relations front it confirms that New Zealand’s foreign policy is dominated by a trade fixation (fetishism?) that has come to dominate all other aspects of New Zealand’s diplomatic endeavor. In spite of Mr. Key’s posturing at the UN with regard to UN reform, weapons non-proliferation and multilateral intervention in search for votes for a Security Council temporary seat next year, the hard fact is that New Zealand’s diplomatic ranks have been purged, one way or another, of arms control and non-proliferation specialists, climate change and human rights experts and many other senior diplomats whose primary expertise lies outside the realm of trade. They have been replaced by younger, less costly and more narrowly focused trade zealots (many riding on Groser’s coat tails) whose knowledge and experience in other diplomatic fields is comparatively thin.
This has been accompanied by out-sourcing lead responsibility for intelligence sharing and security assistance negotiations to the GCSB, SIS and NZDF, which is one of the reasons, in concert with the trade fixation, that New Zealand’s foreign relations have taken a distinctly schizophrenic look under National (trade with the East, defend with the West, even if the PRC and US are on a collision course for supremacy in the Western Pacific).
One might respond that spy agencies and armed forces should cut their own deals with foreign counterparts, since it is their business after all. But that is precisely why diplomatic intercession is required–securing the national interest is a long-term game played on many fronts that is not reducible to bureaucratic self-interest, making friends amongst foreign counterparts, or currying immediate favor. It is a fluid balancing game rather than a static one-off opportunity, which is why allowing spooks and uniforms to dictate the terms of engagement on matters of intelligence and security is less than ideal. That is particularly so when the ministers in charge of security and intelligence as well as military affairs are less than conversant with the nature of the operations they are responsible for and where there is no independent oversight of their decisions regarding the conduct of those operations.
Likewise, trade zealots need to have their single-minded obsession with neo-Ricardian prescriptions tempered by those who understand that the world is not solely dominated by trade balances and import/export quotas, tariffs, licensing and the other minutiae of cross-border economic interaction. Important as these are, they need to be considered in relation to other areas of diplomatic endeavor so that coherence, congruence and continuity in foreign affairs can be achieved and maintained. The latter is important for no other reason than it helps establish and maintain a nation’s reputation as a global actor.
New Zealand’s reputation as a global actor has transformed under National from that of an independent and autonomous honest broker into that of a wheeling, dealing “free” trading operator that hedges its bets by cozying up to the world military superpower. It remains to be seen how tenable this position will be over the long-term.
On the internal front McCully’s Antarctic junket offers proof that he is an outcast within his own party, a pariah best unseen and unheard. He has no significant allies in the Collins or Joyce factions of the National caucus and no real friends elsewhere. He has no discernible influence on foreign policy, serving more as a spokesperson and chief of ceremony. The weeks before his trip to the frozen continent he was flitting about the US and Caribbean, visiting the America’s Cup before heading to the UN for some meeting and greeting, then onto bilaterals with Caribbean counterparts. Prior to that he was at the Pacific Island Forum in the Marshall Islands, preceded by trips to Hong Kong, China and Mongolia, Melanesia and the Cook Islands and Africa and the Seychelles. He presented many gifts to a variety of dignitaries from far-off lands and wore colorful shirts as much as he did suits. He did little hard negotiating.
That is a lot of time spent abroad during times when parliament is sitting, particularly when the bulk of the trips were for more symbolic than significant purposes. Come to think of it, when was the last time he answered a question in the debating chamber? I may have missed it but he does seem conspicuous by his absence.
In effect, McCully has been given a comfy sinecure to ensure that he stays away from his own caucus and steers clear of involvement in the “real” business of foreign affairs, that being trade. This neuters him in terms of the internal politics within National as well as with regard to foreign policy making (which is now the province of Groser and his minions). This is a variation on the theme used by Labour with respect to Winston Peters, when he became a Foreign Minister not in cabinet who spent a similar amount of time as McCully does exploring the far–and nicer–reaches of the globe. Except Antarctica.
And we have paid for all of it.
Media coverage of trade negotiations in the Asia-Pacific have largely overlooked the strategic perspectives underpinning different countries’ approaches to the subject. In this analytic brief I outline some of the issues involved, to include potential problems when different strategic outlooks are juxtaposed.
Posted on 10:13, August 30th, 2012 by Pablo
“Tokens of sovereignty” are state-issued commodities such as stamps, passports and internet domain suffixes. They differ from symbols of sovereignty such as flags in that only nation-states can legally own, sell and trade them. I examine the issues surrounding one such token, known as a “flag of convenience” (FOC), here.
Posted on 17:04, August 1st, 2012 by Pablo
A recent canvass of members of the diplomatic community resident in Wellington had as a common theme the apparent incoherence of contemporary New Zealand foreign policy. That prompted me to attempt to deconstruct the major features of New Zealand foreign policy during the last three decades and to offer some explanations as to why they no longer hold in the measure that they once did. You can find the explanation here.
Given that foreign policy has rarely been addressed in this year’s election campaign, and then only briefly in the form of PR releases and sound bites rather than genuine debate, I used this month’s Word from Afar column at Scoop to point out why that is not such a good thing.
Market responses to the US debt crisis and financial downgrade have been like king tides as of late, and inevitably speculation centers on the possibility of a “double dip” global recession (this speculation is more than rhetorical. Gold and other precious metal prices have spiked overt the last three weeks as investors flee the stock, bond, commodity and currency markets). There is much talk, some fearful and some hopeful, of a global meltdown of epic proportions. The argument goes that downgrading the US credit rating devalues US Treasury bonds and the dollar, which slows US private investment at home and abroad, decreases domestic consumption, increases unemployment and generally prolongs the recession begun in 2008. This ripples negatively across the globe given the interconnectivity of commodity chains and the central role of the US in them. Be it on the Left or the Right, the belief in state bankruptcy is taken as an article of faith.
The reality is different. What is happening is a fiscal crisis of the Western State rooted in a cyclic crisis of capitalism. Arguments about the blown-out US public debt obscure the fact that it is the result of the same conditions that produced the 2008 recession and which are at root the cause of the next one. For the last thirty years the ‘bubble” of private debt was replicated by the US Government, in the last decade under the strain of simultaneously fighting two prolonged low intensity conflicts. In Europe public debt was in part procured in order to compensate for private debt (via the provision of subsidized entitlements). Capital was lent on looser and looser terms as interest payment calculations came to rival returns on productive investment as the dominant macroeconomic logic. The market in financial derivatives boomed, then busted, bringing with it a crisis in small scale property ownership at the same time that major manufacturers were being bailed out by the US government.
There is a difference, however, between the private sector and the State when it comes to fiscal crises. The analogy between States and firms is overdrawn. Firms go bankrupt; States do not. States may default on loans and suffer the indignities of downgrading by financial institutions, but they do not go out of business. The reason is simple. States with a presence in the global economy may fail but they do not cease to exist.
Modern states are political entities with other measures of power beyond economic resources, are rooted in historical and cultural ties within more or less fixed borders, have distinct political systems and political regimes that govern them, and are therefore sheltered from the hard realities that beset wayward market agents in a globalised system of production, service and exchange. More importantly with regard to the social and political relations of production, the modern nation-state supercedes the market at any specific moment even while being generally subject to its rhythms and dictates. It is, after all, a capitalist type of state that is not reducible to the productive apparatus.
Imagine even if the US defaulted on its current obligations. Its credit rating would fall further in parallel with the value of its currency, but how long will that last? Even if the US fails its financial obligations, it would be the markets that push for a debt restructuring favourable to it. As the core of the global economy, the US is simply too big to fail because its financial collapse would reverberate widely and deeply through the world. In fact, with the exception of undeveloped failed states and microstates with minimal economic resources to promote, virtually all modern states can survive a fiscal crisis and default.
Take Argentina, which in 2000 defaulted on its foreign loans, uncoupled its currency from the US dollar and then renegotiated the terms of its obligations. Since most of the outstanding balance was interest rather than principal, foreign creditors were eventually forced to settle on terms favourable to the Argentines (about 60 cents on the dollar lent). The weakened Argentine peso stimulated commodity exports and attracted foreign investment in resources and primary goods. In spite of endemic corruption, political interference and a multitude of market inefficiencies, over the last five years Argentina has averaged growth rates in excess of six percent and attracted the highest levels of foreign investment ever even while maintaining a large public deficit.
Greece, the poster child of all that is supposedly wrong with governments and societies that do not couple entitlements with production, is another such case. What would happen if Greece defaulted on its recently rescheduled loans? Will it cease to be? what it could do is drop out of the Eurozone, replace the Euro with the much less expensive drachma, and print money to fund its domestic obligations. Somee foreign investors may flee, but local capitalists will continue to engage the domestic market, people will continue to consume, albeit at lower rates with regards to imported goods, tourists will still flock to see the historical sites and visit the islands, and the country will continue to exist. In fact, should it be successful at restructuring its economy on more internally-focused terms out from under the straitjacket of Eurozone obligations (say, by making its tax collection system more rational and efficient), it could serve as a model for the other “PIGS” nations—Portugal, Ireland and Spain—as well as Italy.
It was Northern European, mostly German capital, directly and channeled through the European Central Bank, which sought to recycle in the European periphery the super-profits accrued during the last two decades of derivative market expansion. These are the creditors who took the risk in the PIGS and who now demand debt repayment schedules rooted in austerity measures and privatization programs. They are also the beneficiaries of a strong Euro, unlike the weaker Southern European economies now under siege. Should debtor countries in Europe decide to reconfigure their economies around a devalued national currency a la Argentina, the European Union will be finished as a currency regulator. Here the sub-regional ripple or contagion effect makes each of the PIGS too big to fail, something that is magnified in the case of the US. Loss of credit rating and a high debt to GDP ratio, in others words, does not translate into State bankruptcy.
The larger point is that states can default but they cannot be bankrupted because they are not solely economic agents but instead sovereign political actors with interests that transcend a financial bottom line. They can be upgraded and downgraded as financial risks, but even if investment falls and inflation rises, they will not disappear. Think of Brazil and Argentina in the late 1980s when inflation ran at over 1000 percent per year. Did they disappear? Did all foreign investment dry up? Did local markets crash?
Truth be told, capitalism, led by finance capital, was on overheated overdrive for the two decades before 2008, only slowing down briefly after events such as 9/11, even when objective conditions advised against the maintenance of the macroeconomic policies private agents used to calculate the speed of their returns. Western States emulated private agent logics, whereas Asian banks and sovereign wealth funds were less keen to adopt derivatives-led financial approaches backed by increasingly unsecured loans (although some of that did creep into Asian markets as regional economies attracted Western investment).
Here is where global networks come in. Rather than wage war on States with economies in default, other States that are debt free or less indebted work to cover their investments, and those of their private agents, in the debtor States. This means that even if private agents in the debtor States fail as a result of their market excesses or miscalculation, and State treasuries do n not have enough reserves to cover their debts, States remain open for business, perhaps even on more favourable terms depending on the nature of sovereign debt restructuring agreements (public debt for equity swaps are one measure that can improve State efficiencies as a result of restructuring). Inefficient producers are expelled from the market; inefficient States muddle along.
The entire Western capitalist combine was due for a retrenchment given the downward slope it has been on since spending, both public and private, exceeded productive output in material goods and services. So long as money could be made off of lending money and risks were passed on to increasingly lower-level actors, early 21st century capitalism saw States tax and spend without coherent productive purpose (which mirrored the approach of the financial markets). This was a good political calculation but not a sound economic grounding for future productive growth within current capitalist parameters. Thus the turn towards private sector retrenchment in 2008, with public sector retrenchment now following.
We hear about the demise of various States because they can no longer afford to repay what they have borrowed in order to maintain whatever it is that is considered precious to national identity and political stability–public goods and entitlements in Europe, a war machine in the US. Retrenching Western States may not be able to provide these services in the measure they used to, but thy remain (however diminished) as linchpins of an international system that has its origins in the Treaty of Westphalia rather than Bretton Woods or the Washington Consensus. States are the ties that bind that global system of exchange, and Western States continue to have a central role in it even as the system moves towards increased multipolarity.
Markets and politicians alike need to be cognizant of this fact, because as Keynes pointed out, it is political conditions, not economic conditions, that are the best guarantors of long-term investment. Rather than the economic particularities of a given investment climate at a specific moment in time, political stability offers better conditions for secure future private return. A stable national polity is the best guarantee of profit even if the public books are not balanced. That is the political cost for the social peace that is the basis for economic stability.
Ironically, it was the short-term focus of the macroeconomic logics that propelled the “bubble” that led first to the financial crisis of 2008 and now to the current conditions of political impasse and social instability in many liberal democracies. That is where the convergence of the fiscal crisis of the Western State and the cyclic crisis of capitalism can lead to liberal democratic State failure: when it produces a crisis of legitimacy of the political elite, often confused with regime crisis, that once rooted in and superimposed on the economic downturn and social unrest constitutes an organic crisis of the State. The UK evidences these type of pre-conditions.
Rather than demand zero-sum tax cuts and a diminished State role in guaranteeing the social relations of production, the priority of the market during a State fiscal crisis should be to to express confidence in the State because delegitimisation of the latter is an absolute guarantee of disasterous market consequences for the private actors involved with them in the event that they are overthrown or fragment. That is where market ideologues have failed in their basic obligation: to help foster the political and socio-economic conditions in which stable rates of private return are generated. Instead, they are exacerbating the crisis with their jitters, demands and panic trading. This will not lead to an organic crisis in most liberal democratic states (which will muddle along), but it could produce legitimacy crises in newly democratic states or those with significant social cleavages. Even then the prospect of State, as opposed to regime or private sector failure, is unlikely.
All of which is to say that when it comes to the fiscal crises of modern Western States, this too shall pass.