IN THIS ISSUE
SAVING CHINA’S ECONOMY AND THE CLIMATE: CAN THE TWAIN MEET?
Dorothy Grace Guerrero
CLOSER TIES, LARGER MARKETS: EXAMINING THE ASEAN FTAS
ROBERT MCNAMARA’S SECOND VIETNAM
A MAN FOR THIS SEASON? KEYNES
The impacts of the global crisis on the Chinese economy and the effect on tens of millions of migrant workers that were thrown out of jobs produced doom and gloom forecasts for the world’s third-biggest economy in the early part of this year. Analysts agreed that if the economic slowdown continues the Communist party's claim to legitimacy, which was founded on the now wavering economic boom, is at stake. Indeed, the Chinese government’s determination and ability for crisis management is facing a very tough test as the country battles the worst global economic crisis since the 1930s. At the same time, Beijing was abuzz with meetings as VIPs came to press China to do more for the climate in the run up to Copenhagen.
Although it performed better than other key countries, the expansion of China’s economy continued to slow. The economy grew by 9 percent in 2008, down from 13 percent in 2007. The last quarter growth rate for 2008 was 6.8 percent, by far the lowest rate in the last seven years. (1)
With close to $1.95 trillion in foreign exchange reserves, the Chinese government has dug deep into its deep pockets to stimulate the domestic economy. A RMB 4 trillion ($585 billion) economic stimulus plan to encourage domestic demand was announced in November last year. Policymakers also cut interest rates, and launched thirteen tax reduction policies involving RMB 500 billion. (2) The aim of such draconian measures is to at least ensure an 8 percent economic growth this year and pre-empt the looming social instability being produced by the worsening unemployment. If the gross domestic product dips below 8 percent for 2009, which is still a healthy figure if compared to negative growth and contraction being experienced by major industrialized countries, it would be a disaster in China. The reason is that the demand for jobs would far outpace China's ability to create them.
Chinese leaders are increasingly worried about the growing risk of protests by disgruntled workers. The first quarter report of the Agriculture Ministry showed that about 20 million migrant workers (3), more than a sixth of the country’s total, are now unemployed. This is a very high figure and is making some people nostalgic of the guaranteed cradle-to-grave employment during Mao's time. According to a report commissioned by the Chinese Academy for Social Sciences, 670,000 small- and medium-sized firms, many of them labour-intensive ones based in coastal regions, shut their doors since September (4). There are around 130 million migrant workers who are mostly employed in factories. The rural unemployment rate could be as high as 20 percent.
In addition, one million college graduates are not expected to be able to find jobs this year (5). Graduate unemployment was already a problem in 2008 as 27 percent of new graduates could not find a job (6) which is a very sensitive subject considering the big investment families make in education.
The first document of the year, issued jointly by the State Council and the Central Committee of the Communist Party of China, for the first time, focused on the unemployment problem of migrant workers. Local and central government departments were urged to create jobs and increase rural incomes. It is reported that the government is considering setting up a social security scheme for migrant workers. It will however take a very long time before it can take shape.
CHINESE MEDICINE FOR ECONOMIC ILLS
Premier Wen Jiabao announced China’s aim to be the first to recover from the financial crisis (7). A series of new measures were put in place last March, which was based on the China State Council plan presented earlier in November 9, 2008. (8)
1. Housing: Building more affordable and low-rent housing and speeding the clearing of slums. A pilot program to rebuild rural housing will expand. Nomads will be encouraged to settle down.
2. Rural infrastructure: Speeding up rural infrastructure construction. Roads and power grids in the countryside will be improved, and efforts will be stepped up to spread the use of methane and to ensure drinking water safety. This part of the plan also involves expediting the North-South water diversion project. Risky reservoirs will be reinforced. Water conservation in large-scale irrigation areas will be strengthened. Poverty relief efforts will be increased.
3. Transportation: Accelerating the expansion of the transport network. That includes more dedicated passenger rail links and coal routes. Trunk railways will be extended and more airports will be built in western areas. Urban power grids will be upgraded.
4. Health and education: Beefing up the health and medical service by improving the grass roots medical system. Accelerating the development of the cultural and education sectors, and junior high school construction in rural western and central areas. More special education and cultural facilities.
5. Environment: Improving environmental protection by enhancing the construction of sewage and rubbish treatment facilities and preventing water pollution in key areas. Accelerating green belt and natural forest planting programs. Increasing support for energy conservation and pollution-control projects.
6. Industry: Enhancing innovation and industrial restructuring and supporting the development of the high-tech and service industries.
7. Disaster rebuilding: Speeding reconstruction in the areas hit by the May 12 earthquake.
8. Incomes: Raising average incomes in rural and urban areas. Raising next year's minimum grain purchase and farm subsidies. Increasing subsidies for low-income urban residents.
Increasing pension funds for enterprise employees and allowances for those receiving special services.
9. Taxes: Extending reforms in value-added tax rules to all industries, which could cut the tax corporate burden by RMB 120 billion (about US$17.6 billion). Technological upgrading will be encouraged.
10. Finance: Enhancing financial support to maintain economic growth. Removing loan quotas on commercial lenders. Appropriately increasing bank credit for priority projects, rural areas, smaller enterprises, technical innovation and industrial rationalization through mergers and acquisitions.
The above measures benefited from China’s advantage of having a lot of money than can be spent quickly to create jobs for its millions of workers. About $146.5 billion (RMB one trillion) was put into infrastructure and energy-related projects such as new highways, railways, electricity grids and nuclear plants for 2009 and 2010. Some $14.7 million (RMB 100 billion) has already been allocated for projects that started in 2008, of which $3.7 million (RMB 25 billion) went to roads, railways and airports; $5 million (RMB 34 billion) for rural infrastructure; $1.5 million (RMB 10 billion) for subsidized housing, and $1.9 million (RMB 13 billion) for medical and educational facilities (9). The combined national, provincial and local projects that are lined up for economic stimulus, when implemented, will surely change the Chinese landscape dramatically.
The two biggest projects include a $17.6 billion passenger rail line across the deserts of northwest China, a $22 billion web of freight rail lines in Shanxi province in north-central China and a $24 billion high-speed passenger rail line from Beijing to Guangzhou in the southeast. Apart from these, extra spending is planned in almost every town, city and county across the country. Intercity rail lines, the highest priority in the plan, will also be constructed to the tune of around $88 billion. Some $44 billion was already spent in 2008 and around $12 billion in 2004.
A new bullet train from Beijing to Tianjin, which travels at up to 217 miles an hour, was opened in 2008. The construction of a high-speed rail route from Beijing to Shanghai at a cost of $23.5 billion is also nearly finished. The said amount is almost equal to the price of the entire Three Gorges hydroelectric dam project on the Yangtze River. To ensure quick construction, the government employed 110,000 workers to make the route operational as soon as possible.
ARE THE MEASURES WORKING?
For many the important questions are whether the Chinese medicine of building roads and railways is the correct remedy for the current challenge and will it be enough to offset recession? What activities should be funded and how to ensure that they will benefit the lower-income groups? Will increased government spending create enough jobs to take care of the millions that already lost work and the new ones that will join the workforce? Lastly, can it help China transform into a low carbon economy to help prevent the climate crisis?
At first glance, it seems understandable that infrastructure took a big chunk of the budget. There is indeed an urgent necessity to reduce demand on personal cars and imported oil, to reduce air pollution and to relieve the annual shortage of seats on trains during Chinese holidays when millions of people visit their families. In the last four years, China has built as many miles of high-speed passenger rail lines as compared to similar investments in Europe in two decades.
On the other hand, concerned citizens worry that the RMB 4 trillion might only produce “roads and railways to nowhere” or are being invested in redundant, low-level construction. The $586 billion stimulus plan is equivalent to roughly 15 percent of China’s GDP. Although they generated employment opportunities, previous resuscitation programs like the $95.6 million (RMB 650 billion) campaign to revive the economies of the eleven western provinces in the late 1990s, have created large numbers of under-used highways, bridges, airports and railways in these outback regions (10). Recovery of investments in those projects will take decades.
There are questions that are swirling in China’s blogosphere about the wisdom of some specific projects. A $3 billion metro rail system linking the southern manufacturing cities of Guangzhou, Dongguan and Shenzhen has been criticized as a waste of money because there are already four railway lines linking these cities and trains plying the routes often run empty. The same holds true with a $4.5 billion highway connecting the Sichuan province cities of Chengdu, Zigong and Luzhou, because there are already highways from Chengdu to Zigong and from Zigong to Luzhou. A bridge project running from just outside Shanghai to a textile manufacturing centre on the other side of a bay was also revived to create construction jobs. The original project had been shelved because its designers were unable to get the $2 billion needed to build it because it is a duplication of another massive bridge with the same route.
Given the questions concerning the process of selecting and judging the merits of the projects to fund there are some views that the “bao-ba” imperative (direct translation of save the eight, which means that the stimulus package is aimed at saving the 8 percent growth) might be seen more as a show of the government’s determination at crisis management and that its real effects may be exaggerated (11). There are also some who argue that instead of roads, bridges and railways, China must put more money into education and healthcare and alleviating poverty in the rural areas.
More than 200 million Chinese lack health insurance. The budget allocation for health is a mere one percent of the GDP. As announced last February the government put a $124 billion, three-year overhaul of its healthcare system that aims to provide "safe, effective, convenient and affordable health services" to all of the country's 1.3 billion people by 2020.
Despite the government’s encouragement for families to spend more, urban as well as rural residents are holding on to their money. The Chinese citizens’ savings rate of 46 percent is one of the highest in the world and people’s attitude towards savings will not easily change since the stimulus package is not fully addressing the key issue of lack of social security benefits. The nation-wide health insurance and pensions program only started in 2002. Given the possibility of a long period of belt tightening and lack of guarantee of job security, ordinary wage earners will remain frugal because they simply need to save the money to pay for increasing school fees for their kids and relatives’ medical bills.
Some efforts are seen as sincerely aimed at helping the poor. To support job hunters, the central government extended subsidies and prepared training programs directed at migrant workers (12). Flexible employment policies and more training chances were also encouraged.
Even before the beginning of the global economic crisis, many were doubtful about the sustainability of China's growth strategy. The huge gap between the living conditions in the rural and urban areas was caused by substantial diversion of rural resources to industrial use, on the generally accepted assumption in policy circles that farming is backward, unprofitable and unproductive. China’s economic development is the result of rapid industrialization, the bedrock of which is to turn most farmers into non-farmers.
The environmental degradation caused by the growth model is very obvious and strongly felt, especially by the poor who rely on natural resources for their livelihood. China’s efforts to achieve a greener economy, more than ever, must be strengthened to ensure a sustainable recovery from the current crisis.
Strengthening the local economy is seen by economists as inevitable since it would be difficult for China to maintain its recent export trajectory. A shift to greater domestic consumption is seen as inevitable (13). However, this will only happen if the huge gap between the rural and urban conditions will be narrowed.
ADDRESSING THE CRISIS AND THE LONG WAY AHEAD
This year as many as 24 million people will be competing for as few as eight million newly created jobs. There are new efforts directed at organizing the unemployed, again it is a very young initiative and the discussions are more about helping sacked workers to get a new job. The youth and students are not organized around economic issues as well. Many are focused on local problems and issues connected to the environment. In terms of perception, the Beijing stimulus package is successful in creating an impression that the Chinese state is indeed taking care of its own people.
A recent state guideline said that at the cost of lowering its economic growth pace, China sets the target of cutting energy consumption per unit of gross domestic product (GDP) by 20 percent and cutting emissions of major pollutants, such as carbon monoxide and sulphur dioxide, by 10 percent between 2006 and 2010. Beijing announced that almost 40 percent of China’s four trillion-yuan economic stimulus package had gone to green projects. China is already making progress on the low-carbon economy front, laying the foundation for clean-energy jobs and innovations. Climate Group ranked it second in the world in 2007 in terms of absolute funds invested in renewable energy. In actual terms, China spent $12 billion, behind just Germany’s $14 billion. These investments have placed China among the world leaders in solar, wind, electric vehicles and grid technologies.
Beijing demonstrated signs of political hardening since last year when it comes to tolerance of dissent. This was attributed to the country’s holding of the Olympics last August and the 20th year anniversary of the Tiananmen protests of 1989 this June. Central and local authorities are fearful that the crisis might produce national level dissent comparable to the 1989 Tiananmen mobilisations. Localized public incidents are so common now and the tactics are getting more and more creative. The National Security Bureau stopped publishing the number of such incidents since 2007. Issues related to ethnicity are also exploding and showing threat for violent expression of dissatisfaction as can be seen in the case of the unrest in Xinjiang province now.
Will national level social movements emerge out of this crisis? Many are saying that it is not yet possible in the near future. Despite the fact that a huge number of workers are losing their jobs, their anger is more focused on the factories and the bosses that fire them. With less possibility to find another job, their time would rather be spent on job hunting. It would also be foolish to underestimate the state’s ability to suppress emerging independent labour movement. As can be seen too in the publicized protests like the taxi drivers protests in Chongqing and Guangdong, the authorities moved swiftly to placate the demonstrators. The climate issue offers opportunities for people’s participation and slowly, people are seeing the connection with justice issues. However, the discourse is still developing and a movement for it is still developing.
* Dorothy Guerrero coordinates the Focus on the Global South China programme.
1. Belinda Cao and Judy Chen, “China said to need guarantees for Treasuries”, Bloomberg News, Wednesday, February 11, 2009
2. China Policy Barometer 2009 (Part 1), Economic Observer Online, February 05, 2009, www.china-wire.org
3. Tom Mitchell and Patti Waldmeir, “China’s migrant workers face bleak outlook”, Financial Times, February 8 2009
4. “Grim times ahead as China battles worsening crisis”, China Daily, January 7, 2009
5. Ariana Eunjung Cha, “China's Jobless Numbers Mount, Protests Grow Bolder: Economic Woes Shining a Light On Social Issues, Washington Post Foreign Service Tuesday, January 13, 2009
6. Catherine Sampson, China’s Year of Living Dangerously, The Guardian, Tuesday 27 January 2009
7. “China can be first to recover from crisis”, Beijing Daily, January 12, 2009, www.bjd.com.cn
8. “China plans 10 major steps to spark growth”, Xinhua News Agency, November10, 2008
9. Willy Lam, “Beijing's Stimulus Plan: Preemptive Crisis Management”, China Brief Volume: 8 Issue: 22, November 24, 2008
10. Lam, ibid.
11. Leo Zhang, “China’s new deal”, China in Business, December 08, 2008, http://www.cibmagazine.com.cn/Features/Finance.asp?id=750&china_s_new_de...
12. “China to enhance vocational training for jobless amid global financial crisis”, February 02, 2009, www.chinaview.cn
13. Michael Pettis, “China’s Great Demand Challenge”, Far Eastern Economic Review, Jan/Feb 2009
The Association of Southeast Asian Nations (ASEAN) has been making significant strides over the past few years towards its own vision of regional integration. The ASEAN Charter, which is considered as the most important document after the 1967 Bangkok Declaration that gave birth to ASEAN (2) was signed by all Member states in November 2007. After completing a process of national-level ratification, the charter was formally adopted at a foreign ministers meeting that took place in Jakarta in December 2008. The Charter embodies the values and principles of ASEAN and defines the structures and mechanisms necessary to realize its vision of one regional community, build upon the three pillars of political and security cooperation, economic cooperation, and socio-cultural cooperation. (3)
On the economic front, community building the ASEAN way has gained momentum with the adoption of an ASEAN Economic Community (AEC) Blueprint in 2007, which defines the block’s strategies and plans for enhanced regional economic integration. The fact that the AEC blueprint came ahead of the two others-the political and security blueprint and the socio-cultural blueprint is an indication that economic integration has now become ASEAN’s top priority. This is a far cry from ASEAN’s early years when economic issues took a back seat to politico-security issues faced by the fledgling regional block.
In recent years, the centrepiece of ASEAN’s approach to economic integration has been its pursuit of free trade agreements (FTA). ASEAN is emerging as the hub for FTA activity in the region (4) with agreements being negotiated and forged with its main dialogue partners.
ASEAN TRADE DEALS
ASEAN- China: ASEAN embarked on FTA negotiations with China in 2001 and signed a framework agreement on comprehensive economic cooperation in 2002. The implementation of the framework agreement was laid down in stages. An early harvest programme covering trade in goods came into force in July 2005. Negotiations on a dispute settlement mechanism were finalised in 2004 for implementation in 2005. Negotiations on trade in services were completed and an agreement signed in January 2007 while the China-ASEAN investment agreement is still under development. (5)
ASEAN-Japan: ASEAN –Japan Comprehensive Economic Partnership Agreement (AJCEPA) was signed by ASEAN and Japan on April 14, 2008. The comprehensive agreement complements and expands the coverage of the bilateral economic partnership agreements (EPAs) that Japan has forged with five of the largest countries in ASEAN -- Singapore (2002), Malaysia (2005), Philippines (2006), Thailand (2007) and Indonesia (2007).
The AJCEPA represents a mandate and a mechanism to push the agenda for further liberalization of goods and services as well as investments beyond the scope and quality of the bilateral EPAs. The agreement pushes for the establishment of a legal framework for such comprehensive economic partnership among the parties that would institutionalize trade and investment liberalization as guiding principle in the regional integration process. (6)
AJCEPA will enter into force December 1, 2008, beginning with Japan and countries that have completed domestic ratification procedures by the end of October 2008. (7)
ASEAN-Korea: The negotiations for an ASEAN-Korea free trade agreement were launched in early 2005. By December of that same year a Framework Agreement on Comprehensive Economic Cooperation was signed outlining the measures for comprehensive economic partnership which would include agreements on trade in goods, agreement on services, agreement on investments, and agreement on dispute settlements.
The Agreement on Trade in Goods was signed in August 2006 by nine out of the 10 ASEAN Member states (Thailand initially opted out of the agreement but became a party in August 2008). The agreement on trade n services was signed in November 2007.
ASEAN-India: The framework agreement on comprehensive economic cooperation was signed in October 2003 launching negotiations for an ASEAN-India Regional Trade and Investment Area (RTIA), which includes a Free Trade Area (FTA) in goods, services and investment, and cooperation. (8)
FTA negotiations in goods were concluded in August 2008, and the deal is scheduled to be signed in December on the occasion of the ASEAN Summit in Bangkok.
The agreement on goods is quite ambitious with all parties reducing or eliminating tariffs on more than 90% tariff lines corresponding to about 96% of total trade. (9)
ASEAN- European Union: The EU-ASEAN Free Trade Agreement is a comprehensive agreement between the European Union and the Association of Southeast Asian Nations (ASEAN) to liberalize trade in goods and services as well as investments.
The negotiations were launched in May 2007 in Brunei and both the EU and ASEAN expect to conclude negotiations in two to three years time. A unique aspect of these negotiations is the region to region approach to the negotiations. The joint committee formed to oversee the negotiations process has had four meetings focused on procedural concerns on how to implement the region-to-region approach.
In January 2008, the office of the Director General for Trade of the European Commission reported that the EU will continue the region-to-region approach while, at the same time, start to explore, on a bilateral level, the contents of the bilateral parts of our agreement and the level of ambition of the individual countries.
ASEAN-United States: The United States unveiled its Enterprise for ASEAN initiative in 2002. EIA is considered as an intermediate step towards forging bilateral FTAs with ASEAN member countries patterned after the US-Singapore FTA. The EIA also sets as a pre-requisite the signing of Trade and Investment Framework Agreements or TIFAs between the US and the prospective ASEAN partner.
The United States concluded an FTA with Singapore in 2003 and is currently negotiating FTAs with Thailand and Malaysia. In addition, the United States recently concluded a TIFA with Cambodia and a bilateral market access agreement with Vietnam as part of its bid to join the World Trade Organization. The United States also has active trade and investment dialogues with Indonesia, Philippines and Brunei and is working with Laos to support its WTO accession. (10)
In August 2006, U.S. Trade Representative Susan C. Schwab and ASEAN economic ministers endorsed an initial work program under the Trade and Investment Framework Agreement. The work program included three initial projects on Implementation of the ASEAN Single Window for customs clearance; Assistance on harmonization of ASEAN pharmaceutical policies and standards; and Development of a U.S. -ASEAN framework on sanitary and phyto-sanitary procedures to facilitate trade in agricultural goods. (11)
SCRAMBLE FOR PREFERENCES
The FTA frenzy is by no means confined to the Southeast Asian region. According to the World Trade Organization (WTO), as of July 2007 there have been around 380- 400 regional trade agreements or RTAs that have been notified to the GATT/WTO across the globe. Around 90% of these RTAs are free trade agreements (FTAs) and partial scope agreements while customs unions account for less than 10%. (12)
The surge of bilateral trade deals is often attributed to the collapse of the multilateral negotiations in the WTO. It is interesting to note however, the marked increase in RTAs in the years following the establishment of the WTO in 1994, suggesting that countries pursue these RTAs alongside the multilateral trade negotiations in the WTO.
Rich countries like the United States and the European Union in fact adopt a dual strategy of pursuing bilateral negotiations alongside the multilateral talks in the WTO. The United States has its Enterprise for ASEAN Initiative (EAI), which envisions a network of bilateral FTAs between the US and ASEAN. The EU on the other hand launched its new generation FTAs and economic partnership agreements across Latin America, Africa and the Caribbean and its new partnerships for the 21st Century in Asia which includes FTA negotiations with Korea, India and ASEAN. Former Director General for trade of the European Commission perhaps best described this dual strategy by saying that for the EU “Doha first (referring to the Doha Round negotiations in the WTO) has never meant Doha alone.” (13)
WTO RULES ON RTAS
Bilateral or regional FTAs are by nature preferential and discriminatory agreements. When countries enter into such agreements they afford more favourable trading conditions to parties to the agreement. They in effect go against the principle of non-discrimination or most favoured nation (MFN) treatment, (14) a cornerstone of the multilateral trading system. WTO Members are however permitted to enter into such arrangements under specific conditions which are spelled out in three sets of rules: (15)
- Paragraphs 4 to 10 of Article XXIV of GATT (as clarified in the Understanding on the Interpretation of Article XXIV of the GATT 1994) provide for the formation and operation of customs unions and free-trade areas covering trade in goods. More specifically Article XXIV of GATT states that the purpose of a custom union or an FTA should be to facilitate trade and not to raise barriers to trade. Furthermore, with respect to FTAs, it specifically prescribes that duties and other regulations of commerce shall not be higher or more restrictive than duties or regulations that already exist before the FTA. It is the understanding as well of the Members that FTAs should cover “substantially all trade” and that the “reasonable length of time” to establish free trade areas should not exceed 10 years.
- The so-called Enabling Clause (i.e., the 1979 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries) refers to preferential trade arrangements in trade in goods between developing country Members; and
- Article V of the General Agreement on Trade in Services (GATS ) governs the conclusion of RTAs in the area of trade in services, for both developed and developing countries. Article V which outlines the area of economic integration, sets two pre-conditions for bilateral agreements on trade in services. The first pre-condition is that the agreements should have substantial sectoral coverage in terms of number of sectors, volume of trade affected and modes of supply. In order to meet this condition, agreements should not provide for the a priori exclusion of any mode of supply. In terms of sectoral coverage, the GATS already mandates in principle a comprehensive agreement that covers all service sectors, with only two exceptions-- services supplied in the exercise of governmental authority. These are services that are supplied neither on a commercial basis nor in competition with other suppliers; and the second exception deal with measures affecting air traffic rights and services directly related to the exercise of such rights. (16)
With these prescriptions, the WTO has in effect set the parameters not just for the substantive elements of bilateral and regional trade agreements by broadly defining their nature and coverage but has also the pace of these negotiations with its prescription that FTAs be established within a maximum period of ten years. In short, for FTAs to comply with WTO rules, they should by ambitious, comprehensive in scope and fast paced agreements.
COMMON FEATURES OF ASEAN FTAS
While ASEAN does not have a common trade policy and in fact its members have oftentimes taken on contrary positions in the WTO negotiations, there seems to be general consensus among ASEAN Member states to pursuit FTAs that generally aim to accomplish three things: Liberalize trade and investments; facilitate trade and harmonize rules; and strengthen mechanisms for cooperation among the parties.
Liberalization: ASEAN FTAs aim for the highest possible degree of trade liberalization not just in goods but including far-reaching liberalisation of services and investment. In accordance with WTO rules, liberalization should be applied to substantially all goods and have substantial sectoral coverage in services. Liberalization in goods entails the reduction and elimination of tariffs and non-tariff barriers (NTBs) while services liberalization entails easing restrictions on entry and operations of foreign-service providers.
Elimination of trade restrictions under these bilateral and regional FTAs are characterized as both progressive- meaning the commitment is not just a one-time reduction of tariffs but a gradual elimination of rates such that they are reduced to zero at the end of the implementation period; and reciprocal- meaning both the developed and developing country or countries entering the agreement are obliged to reduce and eliminate tariffs and NTBs with very minimal flexibilities in terms of coverage and longer implementation periods for developing countries.
The goal of investment liberalization on the other hand is to lessen or eliminate restrictions and rationalize regulations on investments as well as institutionalize investment protection measures. An OECD report concludes that the investment chapters in regional trade agreements, which are essentially derived from bilateral investment treaties, typically provide broad investment coverage, strong protection and non-discrimination commitments and recourse to investor-state international arbitration. (17)
Facilitation: These agreements also aim to facilitate trade through the harmonization of rules and standards. FTAs cover a whole range of standards from sanitary and phyto-sanitary requirements and other technical barriers to trade (TBT) to mutual recognition arrangements (MRAs) that deal with regulations that help ensure that goods sold conform to particular health and safety standards. MRAs also cover regulations, certifications and licenses that govern the practice of a particular profession like those that cover healthcare professionals, architects, and lawyers for example.
There are concerns among developing countries however over the objective of harmonizing standards. First of all because compliance to global standards can be a costly exercise requiring both financial and technical support. For the Philippines, developing exporters’ capability to conform to SPS and NTBs would requires improving production conditions, developing laboratory as well as inspection facilities and services and the creation of institutional mechanisms to support exporters. (18)
Another concern of developing countries with regard to standards is that it is often used by developed countries, where these high standards are already in place, as a means to block the entry of exports from developing countries.
In the proposed EU-ASEAN FTA for example, the EU identified the fisheries sector particularly, the tuna sector as sensitive given the strong socio-economic impact that full and immediate liberalisation of tariffs would have on the sector. So while the agreement covers liberalization of this sector, which incidentally is one of the sectors where developing countries like the Philippines seem to enjoy comparative advantage over, the EU has given “emphasis on the importance of compliance with hygiene and health rules in the fishing industry as a means of achieving improved and increased development of the industry in these countries, as well as fair competition with the EU fishing industry”. (19) In other words, the compliance to standards is also used to guarantee and protect the competitiveness of developed country exports.
Rules of Origin: Perhaps one of the most important trade rules that FTAs aim to harmonize are those that deal with so called “Rules of Origin” (ROO), which sets the criteria for defining where a particular product was made. This is important because as countries scramble for trade deals with other countries and regions they create a web of trade preferences. ROO becomes critical in defining which goods originate from a country or region and therefore eligible to receive the preferential tariff rates under the agreement. It likewise sets the criteria for eligibility of goods that are not-wholly obtained or produced in the originating country.
In the Rules of Origin under AFTA-CEPT for example, a good which is not wholly obtained or produced is deemed to be originating from a country where working or processing of the good has taken place if at least 40 percent of its content (hereinafter referred to as “ASEAN Value Content” or the “Regional Value Content (RVC)”) originates from that Member State or it has undergone a change in tariff classification at four-digit level (change in tariff heading) of the Harmonised System. (20) Costs associated with materials, labour and overhead are all factored in the formula for computing the RVC.
Cooperation: Another common feature of these ASEAN deals is that they all include a chapter on cooperation which outlines the priority areas of cooperation between parties in support of development goals and the promotion of peoples’ well-being.
In recent years, there has been increased emphasis on trade-related development assistance. The WTO launched in December 2005 its Aid for Trade (AoT) initiative which mandates an increase in trade-related development assistance going to poor countries. The logic of AoT is that development aid should help build the supply side capacity and the trade related infrastructure in developing countries to allow them to maximize the benefits arising from the opening of international trade. AoT is directed towards addressing internal barriers to trade which come in the form of lack of knowledge, excessive red tape, inadequate financing and poor infrastructure.
The chapter on cooperation in these trade agreements therefore effectively subsumes the much broader issue of development assistance under the confines of trade and investment.
In the comprehensive agreement with Japan for example, the chapter on cooperation zeroes in on economic cooperation areas between Japan and ASEAN. AJCEPA defines as priority the fields of energy, environment, tourism, information and communication technologies, agriculture and fisheries, intellectual property rights, trade related procedures, and competition policy.
Ambition and Secrecy: ASEAN has by and large pushed for what can generally be described as WTO-plus agreements. These deals contain chapters on the so-called Singapore issues of investment, competition policy, trade facilitation and government procurement that were already rejected by developing countries in the WTO negotiations.
Aside from subscribing to an ambitious liberalization agenda, another common feature of these FTAs is that they were/are being negotiated in almost total secrecy. Copies of the official negotiating texts are inaccessible to the public and very minimal spaces for public consultations regarding these negotiations are opened up in the process. Often but not always, copies of the final agreement are made public only after the negotiations have been concluded. In the case of the ASEAN-Australia and New Zealand FTA (AANZFTA) for example, the final texts of the agreement remains inaccessible to the public even after the deal has already been sealed.
INVESTMENT REGIME IN ASEAN
Recent efforts in ASEAN to further open up trade in goods and services through these bilateral and regional free trade agreements was preceded by reforms undertaken at the country level to liberalize investment regimes. Over the years, Member States have undergone considerable reforms in their investment policies, affecting a shift from being generally restrictive of foreign participation to a more liberal regime that encourages and gives incentives to foreign investments. Regulations covered by these reforms are those dealing with the entry and establishment of investments, restrictions on the level of foreign ownership, performance requirements, and special treatment and incentives for foreign investors.
Although these unilateral reforms were for the most part driven by competition from within the region for foreign direct investments (FDI) and in response to the changing international climate favouring more liberal investment regimes, (21) these policy changes across the region nevertheless paved the way for what has been referred to as de facto integration or market driven integration. (22) Not surprisingly, as Ofreneo pointed out “it has been the transnational corporations (TNCs) that have either regional operations in Southeast Asia or in the individual ASEAN countries that have been integrating ASEAN.” (23) De facto integration resulted from the establishment by these TNCs of their vertically integrated production chains across the region.
A more recent trend however has been the greater emphasis on bilateral and regional trade and investment agreements as main mechanisms not just of liberalization but of regional integration as well. De jure integration or integration driven by formal institutional arrangements has become the preferred mode of ASEAN. (24)
ASEAN leaders signed the Framework Agreement on the ASEAN Investment Area (AIA) in 1998 signalling its intent to formalize cooperation within the region in making ASEAN a viable and attractive area for investments. The vision of ASEAN as defined in the ASEAN Investment Agreement is to make the region a competitive investment area through a more liberal and transparent environment. Among the goals are to increase investments into ASEAN from both ASEAN and non-ASEAN sources, strengthen the competitiveness of the economic sectors and progressively reduce or eliminate investment regulations or conditions that may impede investment flows and the operation of investment projects. (25)
The Framework Agreement on the ASEAN Investment Area (AIA) has since been revised with the forging of the ASEAN Comprehensive Investment Agreement in Cha-am Thailand on 26 February 2009. The comprehensive and “forward looking” agreement is envisioned to create an investment regime in the region that is “comparable to international best practices” in order to increase intra-ASEAN investments and enhance ASEAN’s competitiveness in attracting inward investments into ASEAN. (26)
One thing new about the Comprehensive Agreement is that it has made the objective of regional integration more explicit. The creation of a “free and open” investments regime is meant to achieve the end goal of economic integration as defined under the ASEAN Economic Community Blueprint (AEC).
The agreement spells out the steps to achieve this goal: progressive liberalization of investment regimes of Member states; provision of enhanced protection to investors of all Member states and their investments; improvement of transparency and predictability of investment rules, regulations and procedures; joint promotion of the region as an integrated investment area; and cooperation to create favourable conditions for intra-ASEAN investments.
What the agreement does in effect is align national investment policies across the region to conform to common principles and objectives in order to create an ASEAN investment area that is more transparent, predictable and investor-friendly. The regional framework complements the reforms made at the individual country level to ease regulations on investments in favour of liberalization coupled with stronger investor protection.
The agreement further outlines ASEAN’s priority sectors for investment liberalization as: manufacturing; agriculture; fishery; forestry; mining and quarrying; services incidental to the five priority sectors; and any other sectors as may be agreed upon by Member States.
INVESTMENTS IN ASEAN FTAS
Investment rules and disciplines have found their way prominently in ASEAN free trade agreements. Investment disciplines in FTAs are lodged in both a distinct investment chapter and in the trade in services chapter of the agreement. The investment chapter generally covers all the investment provisions of both goods and services including clauses on protection of investments, expropriation, compensation for losses, and investor state dispute resolution. The trade in services chapter on the other hand deal with the liberalization of supply of services.
One of the most controversial provisions in the investment chapters in FTAs is the one on investor-state dispute resolution. This provision was first introduced in the investment chapter (Chapter 11) of the North American Free Trade Area (NAFTA). NAFTA Chapter 11 rules have provided extensive rights and privileges to foreign investors. These investor rights are enforced through investor-state arbitral tribunals which operate outside the national court systems. (27) The US-based consumer advocacy group Public Citizen has documented a total of 42 cases filed under NAFTA Chapter 11 with total investor claims amounting to US$28 billion. (28)
These investor rights and privileges have found their way into almost all modern FTAs including those signed by ASEAN. Even ASEAN’s framework agreement on investments and the updated comprehensive agreement on investments carry the NAFTA language on investor-state dispute settlement.
Critiques have argued that the “greater rights” for foreign investors afforded by NAFTA Chapter 11 provisions actually undermine public policies. Policies and decisions of government at the state or local levels are subject to a wide array of challenges from corporations arising from perceived violations of their rights under binding agreements. National policies on land use, environmental protection, health and safety are just some of the policies that are open to challenge.
THE ISSUE OF REGULATORY TAKING
Reforms in investment policies across the region have created a liberal and more investor protective regime designed to encourage more FDI inflows. At the regional level, ASEAN has agreed on a comprehensive regional framework that further aligns policies of Member States in favour of a free and open investment regime and in compliance to international standards towards its shared goal of regional integration.
By negotiating and concluding FTAs that spell out investment disciplines that mirror NAFTA Chapter 11 provisions particularly on the guarantee of investor rights and privileges, ASEAN as a block and its Member States have set themselves up for greater challenge from corporations based on the concept of “regulatory expropriation”- where governmental regulations diminish the value of private property to such an extent that the regulation is deemed ‘expropriatory’ and compensation is payable. (29) These agreements therefore clearly limit the space of governments and of ASEAN as a regional body to prescribe and enforce national and regional policies to advance its development goals. These provisions create a “regulatory chill” where governments are effectively prevented from introducing environmental regulations for fear of compensation claims from aggrieved investors. This effect is exacerbated by the uncertainty surrounding when a State breaches the dividing line between legitimate regulation and regulatory expropriation. (30)
Civil society organizations and social movements have raised serious concerns against these ASEAN FTAs.
Job Losses: The ambitious agenda to further liberalize trade in goods and services would have profound negative consequences on jobs and livelihoods. While proponents of these deals dismiss job losses and worker displacements as mere temporary adjustment costs that would be offset by the positive trade creation effects of such agreements, any negative effect on employment particularly at a time of serious global economic crisis would have dire consequences on development.
UNCTAD reported that under an ambitious tariff reduction scenario, job losses In South East Asia are projected for non-ferrous metals (6.4%), other manufacturing (2.3%), motor vehicles (6.6%) and electronics (1.7%). In the Philippines, job losses could be expected in the motor vehicles sector, which employs around 39,000 workers, the apparel sector with an even bigger workforce of 370,000, the leather and footwear sector with 69,000 workers, furniture sector with 143,000 workers and plastic products which provides jobs to 54,000 workers.
Corporate Control over Resources: Another issue levied against these FTAs, is that they advance the interests of corporations over the development interests of countries or regions and its peoples. Corporate control particularly of public goods and resources is a particularly critical issue. With the goal of enhancing foreign investments, we would expect governments to be more aggressive and adamant in pushing for policies that would ease restrictions on investments, increase incentives and provide more protection for foreign corporations.
The weakening of domestic investment regulations, including the removal of restrictions that are enshrined in national laws and constitutions, in favour of corporate interests is a particularly serious issue in an environmentally and socially critical sector like mining where the livelihoods, rights, security and well-being of entire communities are at stake and have for decades been seriously contested.
Erosion of Policy Rights: FTAs also have the effect of eroding policy space or the ability of governments to use tariff and other trade-related policies to advance its own development objectives. Under ‘free trade’ regimes, governments lock-in their tariff and trade policies by way of their commitments and obligations under the agreements. The direction of trade policy is often just one way, moving towards the eventual elimination of tariffs and other trade barriers with very limited space and flexibilities for countries to calibrate these policies in line with their own development objectives or to safeguard domestic economies against import surges.
The adherence to investment disciplines that guarantee and protect investor rights particularly the rights of investors to claim compensation for acts by the state or states that are deemed to impede or violate these rights further undermine development policy space. The number of cases brought up for arbitration and the huge amounts of money demanded by corporations under NAFTA create a “chilling effect” against any policy or regulation affecting the acts of corporations. This may lead to a reversal of existing ordinances and laws at the local and national levels that regulate the activities of mining corporations and/or the stifling of the power of local and national governments to enact new legislation or policies regulating investments for fear of being sued by these corporations for millions of dollars.
Exacerbating regional asymmetries: The Southeast Asian region has been characterized as a growth area for trade and investments. The countries within the region have a combined Gross Domestic Product of US$ 700 B. The region has registered an average growth rate of 6.4 percent in 2007. ASEAN continued to sustain positive trend for its trade performance with the value of total trade now exceeding US$1.4 trillion. (31) ASEAN FDI flows amount to around US$50 billion.
This impressive economic performance however masks the reality that “Southeast Asia is an economically diverse region, with countries having variable levels of development and capacities to respond to globalization and change, and to the needs of its citizens”. (32)
ASEAN is a region of poverty and inequality where on average 30 percent of people live below national poverty threshold levels (33) and where the richest 20 % of the population corner close to 50% while the poorest 20% get less than 10% of national income.
On a regional level, this income inequality is apparent in per capita GDP figures. Singapore is the richest among the ten nation Members of ASEAN with a per capita GDP US$35,000, followed closely by Brunei with US$31,000. A far third would be Malaysia with per capita GDP of US$6,880. On the tail-end is Myanmar/Burma whose per capita GDP is a dismal US$215 or less than 1 % (0.6) of Singapore’s.
There is also a clear imbalance among countries in terms of the share of benefits from this impressive economic growth in the region. Singapore gets a lion-share of both merchandize exports as well as FDI in the region.
While the ASEAN FTAs recognize these asymmetries and hopes to address these by way of differentiated obligations for the least developed countries in the region, these deals nevertheless push for an ambitious trade and investment agenda that could very well exacerbate poverty and inequality among and within countries in the region. ASEAN’s obsession for closer economic relations through these comprehensive and ambitious trade and investment deals coupled with the weakening of regulation at both the national and regional levels may in fact lead to exactly the opposite- a region further divided along economic, political, and social lines.
* Joseph Purugganan is a research associate with Focus on the Global South
1. For publication in the Philippine Natural Resources Journal of the Legal Rights and Natural Resources Centre. Re-printed with the permission of LRC.
2. Secretary Franklin M. Enderlin, Opening Remarks at the Second National Consultation Meeting with the Civil Society on the ASEAN Charter (August 11, 2006).
3. Declaration of ASEAN Concord II (Bali Concord II), October 7, 2003, § 1, at http://www.aseansec.org/15159.htm (last visited Dec.3, 2008)
4. Kawai, Masahiro & Ganeshan Wignaraja, ASEAN+3 or ASEAN+6: Which Way Forward?, ADB Institute Discussion Paper No. 77 (2007), at http://www.adbi.org/discussion-paper/2007/ 09/13/2359.asean.3.asean.6/ (last visited Dec. 3, 2008).
5. http://www.bilaterals.org/rubrique.php3?id_rubrique=95 (last visited Dec. 3, 2008).
6. Joseph Purugganan, Preliminary Comments on the AJCEPA, available at http://www.bilaterals.org/article.php3?id_article=11997&var_recherche=AJ... (12 May 2008).
7. ASEAN-Japan FTA to Take Effect Dec. 1, THE JAPAN TIMES ONLINE, October 22, 2008, at http://search.japantimes.co.jp/cgi-bin/nb20081022a6.html (last visited Dec. 3, 2008).
8. Framework Agreement on Comprehensive Economic Cooperation Between the Republic of India and the Association of Southeast Asian Nations, October 8, 2003, at http://www.aseansec.org/15279.htm (last visited Dec. 3, 2008).
9. Amiti Sen, FTA in Hand, How far are India and ASEAN to a CEPA?, ECONOMIC TIMES, Sept. 10, 2008, at http://economictimes.indiatimes.com/Economy/How_far_India_ASEAN_from_a_C... (last visited Dec. 3, 2008).
10. http://www.ustr.gov/Document_Library/Press_Releases/2006/August/US_Trade... (last visited December 3, 2008).
11. http://www.ustr.gov/Document_Library/Press_Releases/2006/August/US_Trade... (last visited December 3, 2008).
12. http://www.wto.org/english/tratop_e/region_e/region_e.htm (last visited Dec. 3, 2008).
13. Commissioner Peter Mandelson, Global Europe: Competing in the World, (4 October 2006), at http://ec.europa.eu/commission_barroso/ashton/speeches_articles/sppm117_... (last visited December 3, 2008).
14. Any advantage, favor, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties (General Agreement on Tariff and Trade GATT, [April 1947) at http://www.wto.org/english/docs_e/legal_e/gatt47_e.pdf
15. http://www.wto.org/english/tratop_e/region_e/regrul_e.htm (last visited Dec. 3, 2008).
16. General Agreement on Trade in Services (GATS), [April 1994) at http://www.wto.org/english/docs_e/legal_e/26-gats.pdf
17. Marie-France Houde, Akshay Kolse-Patil & Sébastien Miroudot, Interaction between Investment and Services Chapters in Selected Regional Trade Agreements, OECD Trade Policy Working Paper No. 55 (June 19, 2007), available at http://www.olis.oecd.org/olis/2006doc.nsf/ENGDATCORPLOOK/NT00009302/$FILE/JT03229309.PDF (last visited Dec. 3, 2008).
18. Riza Bernabe, Study of EU-PhilippineTrade Relations (2008) In A Partnertship Among Equals: Examining the EU-ASEAN Free Trade Agreement. EU-ASEAN FTA Campaign Network. March 2009available online at http://focusweb.org/country-level-thematic-reports.html?Itemid=1
19. Report of the Committee on International Trade of the European Parliament (August 2008).
20. RULES OF ORIGIN FOR THE AGREEMENT ON THE COMMON EFFECTIVE PREFERENTIAL TARIFF SCHEME FOR THE ASEAN FREE TRADE AREA (CEPT-AFTA ROO) art. 4, at http://www.aseansec.org/17293.pdf (last visited Dec. 3, 2008).
21. Lawan Thanadsillapakul, The Investment Regime in ASEAN Countries, available at http://asialaw.tripod.com/articles/lawaninvestment.html (last visited Dec. 3, 2008).
22. Pierre Sauve, Investment Regulations through Trade Agreements: Lessons from Asia, Asia-Pacific Research and Training Network on Trade Working Paper Series, No. 49, December 2007 at http://www.unescap.org/tid/artnet/pub/wp4907.pdf (last visited Dec. 2008)
23. Rene E. Ofreneo, Neo-liberalism and the Working People of Southeast Asia a chapter in Revisiting Southeast Asian Regionalism, Focus on the Global South (Dec. 2006).
24. Sauve, supra note 22.
25. Framework Agreement on the ASEAN Investment Area (AIA), [October 7, 2008, at http://www.aseansec.org/7994.pdf].(last visited Dec.2008)
26. ASEAN Comprehensive Investment Agreement, [February 26, 2009], at http://www.aseansec.org/22218.htm (last visited March 2009)
27. NAFTA’s Threat to Sovereignty and Democracy: The Record of NAFTA Chapter 11 Investor-State Cases (1994-2005), Public Citizen (Feb. 2005), at http://citizen.org/documents/Chapter11Report Final.pdf (last visited Dec. 3, 2008).
29. Lisa Michelle Baetsen, When Regulation Goes ‘Too Far’: A Comparative Analysis of Environmental Regulatory Expropriation under the Australia-United States Free Trade Agreement, 11 INTERNATIONAL TRADE AND BUSINESS LAW REVIEW (2006-2007), at http://www.law.murdoch.edu.au/publications/itblr/volume_xi.html (last visited Dec. 3, 2008).
31. ASEAN Trade Statistics, at http://www.aseansec.org/18137.htm (last visited Dec. 3, 2008).
32. SAPA Working Group on the ASEAN, Submission on the Economic Pillar (June 2006), at http://www.mfasia.org/mfaResources/SAPA-Submission2-ASEANCharter-EconPil... (last visited Dec. 3, 2008).
33. Average based on figures for seven (7) countries – Cambodia, Indonesia, Laos, Philippines, Malaysia, Thailand and Vietnam from the UNDP Human Development Report 07/08.
The stylized view of Robert McNamara, who passed away a few days ago, is that after serving as the chief engineer of the disastrous US war in Vietnam, he went on, in 1968, to serve as president of the World Bank, seeking to salve his troubled conscience by delivering development assistance to poor countries.
The reality is, as usual, more complex.
DEVELOPMENT FROM ABOVE?
As president of the Bank, the world’s premier channel for multilateral aid, McNamara did quadruple the institution’s lending portfolio to $12 billion. The key beneficiaries, however, were authoritarian dictatorships. Indeed, the rise to hegemony of authoritarian regimes in the developing world cannot be separated from the massive funding that the World Bank under McNamara provided them. By the late seventies, five of the top seven recipients of World Bank aid were military, presidential-military, or military-controlled regimes: Indonesia, Brazil, South Korea, Turkey, and the Philippines.
Why did the Bank under McNamara feel a special affinity to military-dominated regimes? A great part of the reason stems from McNamara’s own background. He was one of the prototypes of the “technocrat,” a term coined in the early sixties to refer to the seemingly apolitical practitioner of the science of political and economic management.
As chief executive of the Ford Motor Company, then head of the Defense Department, McNamara ran organizations that were hierarchical and non-democratic in structure.
Not surprisingly, he was susceptible to the rhetoric of authoritarian regimes that promised to sanitize the political arena in order, according to them, to allow economic managers the space to modernize the country.
THE MARCOS CONNECTION
One of the people who most successfully cultivated the image of being engaged in a process of bringing “development from above” was Philippine President Ferdinand Marcos, who imposed martial law in 1972 in order, in his words, to “break the democratic deadlock” that had become a barrier to development.
“All that people ask,” Marcos explained, “is some kind of authority that can enforce the simple law of civil society. Only an authoritarian system will be able to carry forth the mass consent and to exercise the authority necessary to implement new values, measures, and sacrifices.”
Skillfully deploying a cadre of technocrats that included Alejandro Melchor and Cesar Virata to impress him, Marcos won McNamara over to backing his regime in a major way.
The country was upgraded to what the Bank called a “country of concentration.” Between 1950 and 1972, the Philippines received a meager $326 million in bank assistance.
In contrast, between 1973 and 1981, more than $2.6 billion was funneled into the country. Whereas prior to martial law, the Philippines ranked about thirtieth among recipients of Bank loans, by 1980 it placed eighth among 113 developing countries.
In return for this massive increase in aid, the Bank was given carte blanche to forge a comprehensive economic development plan for the Philippines. The two pillars of the strategy were “rural development” and “export oriented industrialization.”
CONTAINING THE COUNTRYSIDE
“Rural development” was the Bank’s response to the agricultural crisis. The centrepiece of the strategy was increasing the productivity of small farmers through the delivery of “technological packages” and upgrading agricultural support services like credit systems.
Rural development, however, had implications that went beyond improved efficiency.
As McNamara explained to the Bank’s Board of Governors, the strategy would “put the emphasis not on redistribution of income and wealth – as justified as that may be in our member countries – but rather on increasing the productivity of the poor, thereby providing for an equitable sharing in the benefits of growth.”
In short, rural development was partly counterinsurgency, directed at defusing the appeal of the revolutionary movement among the restive rural masses. It was, as one development specialist close to the Bank described it, “defensive modernization” which if successful, will create a smallholder sector closely integrated with the national economy.
Bank projects will encourage subsistence farmers to become small-scale market producers. With economic ties to other sectors, the farmers will be loath to link their interests to those not yet modernized and will hesitate to disrupt the national economy for fear of losing their own markets.
When it came to industry, McNamara pushed Marcos and other World Bank clients to “turn their manufacturing enterprises away from the relatively small markets associated with import substitution toward the much larger opportunities flowing from export promotion.”
Quotas were to be eliminated and tariffs brought down to expose protected local industries to the winds of international competition; exporters were to be given incentives; export processing zones were to be set up; and wages were to be kept low to attract foreign investors.
A plan by Marcos’ more nationalistic technocrats to set up “11 big industrial projects,” including an integrated steel industry and a petrochemical complex, that would serve as the strategic industrial core was shot down by the Bank as not in line with export promotion.
As in the case with rural development, there was a social logic to export-oriented industrialization. Persisting in industrialization based on the internal market would have meant having to undertake income redistribution in order to expand the market necessary to sustain it, a move that was not welcomed by the local elite.
By hitching the industrialization process to export markets instead, the Bank broke the link between industrialization and domestic income redistribution, but at the cost of intensifying class conflict owing to the necessity of keeping wages low to make one’s exports competitive.
The World Bank vision was grand, but implementation of a project that favored foreign interests and the traditional elites met mass resistance. It was dogged as well by corruption, cronyism, incompetence, and when it came to land reform, lack of political will.
Then there was the special problem of Imelda Marcos, who wanted to corner more and more World Bank money for her projects.
“Mrs. Marcos,” one Bank bureaucrat wrote in a briefing paper for McNamara, “has identified herself with a few showcase projects that we consider ineffective and which are a bit of a joke among knowledgeable Filipinos.”
CRISIS AND THE ADVENT OF STRUCTURAL ADJUSTMENT
By the early 1980’s, the World Bank program was floundering, prompting management to commission political risk analyst William Ascher to assess the situation.
Ascher’s findings were grim. The Marcos regime was marked by “increasing precariousness” and “the World Bank’s imprimatur on the industrial program runs the risk of drawing criticism of the Bank as the servant of multinational corporations and particularly of US economic imperialism.”
In desperate effort to salvage a deteriorating situation, the Bank forced Marcos to appoint a cabinet of technocrats headed by Prime Minister Cesar Virata, its most trusted agent in the country.
But the cure that Virata and company administered was worse than the disease.
The country was subjected, along with only four other countries, to an experimental Bank program called structural adjustment that involved the comprehensive liberalization and deregulation of the economy.
The program, one of McNamara’s last innovations before he retired in 1981, sought to fully expose developing economies to international market forces in order make them more efficient.
In the Philippines, adjustment entailed bringing down the effective rate of protection for manufacturing from 44 to 20 percent. Instead of invigorating the economy, however, this shock liberalization combined with the international recession of the early eighties to bring about deep economic contraction in 1983 to 1986.
Indeed, structural adjustment led not only to deindustrialization; according to one study, it also created so much unemployment that migration patterns changed drastically. The large migration flows to Manila declined, and most migrants could turn only to open access forests, watersheds, and artisanal fisheries. Thus the major environmental effect of the economic crisis was overexploitation of these vulnerable resources.
Adjustment led to a decade of stagnation from which the country never really recovered, even as its neighbors, who were smart enough to avoid being saddled with the program, were registering 6 to 10 per cent growth rates in 1985-1995.
Yet there was one unintended benefit for the country: the economic chaos structural adjustment provoked was one of the key factors that brought about the ouster of Marcos through a combined civil-military uprising in February 1986.
By that time, McNamara had been out of the Bank for five years. Ensconced in retirement, he must, however, have seen parallels between the last US helicopters leaving Saigon in 1975 and Marcos being transported to exile in Hawaii in a US aircraft in 1986.
The Philippines was McNamara’s second Vietnam, and like the first, it was a memory the once celebrated whiz kid of the Kennedy administration would probably have preferred to bury.
*Walden Bello is a member of the House of Representatives of the Republic of the Philippines. He is also a retired professor of sociology at the University of the Philippines and senior analyst at the Bangkok-based analysis and advocacy institute Focus on the Global South.
THE collapse of neoliberal economics, with its worship of the “self-regulating market,” has had among its most significant consequences the revival of the great English economist John Maynard Keynes. It is not only his writings that make Keynes very contemporary. There is also the mood that permeates them, one that evokes the loss of faith in the old and the yearning for something that is yet to be born.
Aside from their prescience, his reflections on the condition of Europe after the First World War resonate with our current mix of disillusion and hope: In our present confusion of aims, is there enough clear-sighted public spirit left to preserve the balanced and complicated organization by which we live? Communism is discredited by events; socialism, in its old-fashioned interpretation, no longer interests the world; capitalism has lost its self-confidence. Unless men are united by a common aim or moved by objective principles, each one’s hand will be against the rest and the unregulated pursuit of individual advantage may soon destroy the whole.1
GOVERNING THE MARKET
That government must step in to remedy the failure of the market is, of course, the great lesson that Keynes imparted, one derived from his wrestling with the problem of how to bring the world out of the Great Depression of the 1930s. Left to itself, the market, Keynes said, would achieve equilibrium between supply and demand far below full employment and could stay there indefinitely. To kick-start the economy into a dynamic process that would move it toward full employment, the government had to serve as a deus ex machina, pouring massive quantities into spending that would create the “effective demand” that would restart and sustain the engine of capital accumulation.
President Obama’s $780-billion stimulus package, as well as those of Europe and China, are classically Keynesian, being pre-emptive measures to stave off a depression; and a measure of the triumph of Keynes after nearly 30 years of being in the wilderness is the marginal impact on the public discourse of the howls of Republicans, Russ Limbaugh, the Cato Institute and other species of neoliberal dinosaurs about “passing on a huge debt to coming generations.”
UNCERTAINTY AND ANIMAL SPIRITS
The revival of Keynes is not, however, simply a policy matter. It involves as well the theoretical displacement of the assumption of the individual rationally maximizing his or her interest from the centere of economic analysis by two ideas. One is the pervasiveness of uncertainty in the making of decisions, which investors try to deal with by working on the soothing but highly unlikely assumption that the future will be like the present, and by coming up with techniques to predict and manage the future based on these assumption. The related concept that Keynes is associated with is the notion that the economy is driven not by rational calculus but by “animal spirits” on the part of economic actors; that is, by their “spontaneous urge to action.” (2)
Key among these animal spirits is confidence, the presence or absence of which is at the centre of the collective action that drive expansions and contractions. Not rational calculation but behavioural or psychological factors predominate. From this standpoint, the economy is like a manic-depressive driven by chemical imbalances from one pole to the other, with government intervention and regulation playing a role akin to that of chemical mood stabilizers in the case of the clinically bipolar. Investment is not a matter of rational calculus but a manic process that Keynes described as “a game of Snap, of Old Maid, of Musical Chairs, the object of which to pass on the Old Maid—the toxic debt—to one’s neighbour before the music stops.”(3) Here, notes Robert Sidelsky, Keynes’s biographer, “is the recognizable anatomy of the ‘irrational exuberance,’ followed by blind panic, which has dominated the present crisis.”(4)
ECONOMISTS AS DENTISTS
Unbridled investors and submissive regulators are not the only protagonists in the recent tragedy. The hubris of neoliberal economists also played a part, and here Keynes had some very relevant insights for our times. Economics, he saw, as “one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future.” Indeed, he was, as Skidelsky notes, “famously skeptical about econometrics,” with numbers for him being “simply clues, triggers for the imagination,” rather than the expressions of certainties or probabilities of past and future events. With their model of rational homo economicus in tatters and econometrics in disrepute, contemporary economists would do well to pay heed to Keynes’s advice that if only “economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.”
Yet, even as many welcome the resurrection of Keynes, others have doubts about his relevance to the current period—and these are not limited to neoliberal die-hards.
LIMITATIONS OF KEYNSIANISM
For one thing, some contend, Keynesianism is mainly a tool for reviving national economies, and globalization has severely complicated this problem. In the 1930s and 1940s, it was a case of reviving industrial capacity in relatively integrated capitalist economies that revolved around the domestic market. Nowadays, with so many industries and services having been transferred or outsourced to low-wage areas, the effects of Keynesian-type stimulus programs that put money into the hand of consumers to spend on goods would have much less impact as a mechanism of sustained recovery. Transnational corporations and TNC host China may reap profits, but the “multiplier effect” in de-industrialized economies like the US and Britain might be very limited.
Second, the biggest drag on the world economy is the massive gulf—in terms of income distribution, the pervasiveness of poverty, and the level of economic development—between the North and the South. A “globalized” Keynesian program of stimulus spending funded by aid and loans from the North is a very limited response to this problem. Keynesian spending may prevent economic collapse and even spur some growth, but sustained growth will demand structural reform of a radical kind—the kind that will involve a fundamental recasting of economic relations between the central capitalist economies and the global periphery. Indeed, the fate of the periphery—the “colonies” in Keynes’s day—did not elicit much concern in his thinking.
Third, Keynes’s model of managed capitalism merely postpones rather than provides a solution to one of capitalism’s central contradictions, which is the underlying cause of the current economic crisis: that of overproduction, in which productive capacity outpaces the growth of effective demand, driving down profits. Here, a bit of history might place things in perspective. The Keynesian-inspired activist capitalist state that emerged in the post-World War II period seemed, for a time, to be able to surmount the crisis of overproduction with its regime of relatively high wages and technocratic management of capital-labor relations. However, with the addition of massive new capacity from Japan, Germany and the newly industrializing countries in the 1960s and 1970s, its ability to do this began to falter, leading to the famous stagflation or coincidence of stagnation and inflation throughout the industrialized world in the late ’70s.
The Keynesian Consensus collapsed, as capitalism sought to revive its profitability and overcome the crisis of over-accumulation by tearing up the capital-labor compromise, liberalization, deregulation, globalization and financialization. In this sense, these neoliberal policies constituted an escape route from the conundrum of overproduction on which the Keynesian welfare state had foundered. As we now know, they failed to bring back a return to the “golden years” of post-war capitalism, leading instead to today’s economic collapse. It is not, however, likely that a return to pre-1980s Keynesianism is the solution to capitalism’s persistent crisis of overproduction.
THE GREAT LACUNA
Finally, and perhaps the greatest obstacle to a revived Keynesianism, is the revving up of global consumption and demand that is its key prescription for revitalizing capitalism in the context of the climate crisis. While the early Keynes had a Malthusian side, his later work hardly addressed what has now become the problematic relationship between capitalism and the environment. The challenge to economics at this point is raising the consumption levels of the global poor with minimal disruption of the environment while radically cutting back on consumption or overconsumption in the North, which is the greatest contributor to climate change. There is something that is simply foolish and irresponsible with all the talk about replacing the bankrupt American consumer with the Chinese peasant engaged in American-style consumption as the engine of global demand.
Given the primordial drive of the profit motive to transform living nature into dead commodities, it is increasingly doubtful that the reconciliation of ecology and economy can be done under capitalism—even under the state-managed technocratic capitalism promoted by Keynes.
‘WE ARE ALL KEYNESIANS AGAIN?’
In other words, Keynesianism provides some answers to the current conjuncture but it does not provide the key to surmounting it. Global capitalism has been laid low by its inherent contradictions, but it is not self-evident that a second bout of Keynesianism is what it needs. Clearly, the deepening international crisis calls for severe checks on capital’s freedom to move, tight regulation of financial as well as commodity markets, and massive government spending. However, the needs of the times go beyond these Keynesian measures to encompass massive income distribution, a sustained attack on poverty, a radical transformation of class relations, deglobalization, and perhaps the transcendence of capitalism itself under the threat of environmental cataclysm.
“We are all Keynesians again” -- to borrow but slightly modify Richard Nixon’s much quoted phrase -- might be said to be the theme that unites Barack Obama, Paul Krugman, Joseph Stiglitz, George Soros, Gordon Brown and Nicolas Sarkozy, though in the implementation of the master’s prescriptions, they may have differences. But an uncritical revival of Keynes might simply end up with another confirmation of Marx’s dictum that that history first occurs as tragedy, then repeats itself as farce. The period does not so much need Keynes as it needs its own Keynes.
* Walden Bello is a member of the House of Representatives of the Philippines and president of the Freedom from Debt Coalition. A retired professor of sociology at the University of the Philippines, he is also senior analyst at the Bangkok-based analysis and advocacy institute Focus on the Global South. He may be reached at waldenbello(at)yahoo.com
1. Robert Skidelsky, John Maynard Keynes: the Economist as Savior (London: Penguin Books, 1992), p. 121.
2. George Akerloff and Robert Sherrill, Animal Spirits (Princeton: Princeton University Press, 2009).
3. Robert Skidelsky, “Keynes is Back,” Prospect Magazine, Nov. 2008; http://www.prospect-magazine.co.uk/article_details.php?id=10451
Focus on Trade is a regular electronic bulletin providing updates and analysis of trends in regional and world trade and finance, the political economy of globalisation and peoples resistance, and alternatives to global capitalism. Nicola Bullard edits Focus on Trade. Your contributions and comments are welcome. Write to firstname.lastname@example.org
Focus on Trade is translated into Spanish. If you would like to receive the Spanish edition, contact n.bullard(at)focusweb.org.