Rogue States

by Noam Chomsky

  Furthermore, this was predictable—and predicted. For example, it was predicted by the Office of Technology Assessment, Congress’s own research bureau, which did an analysis of NAFTA and predicted that if it went through by the White House plan, it would in fact harm the people of all three countries. They suggested alternatives that might not have had that effect. The US labor movement said exactly the same thing. None of this appeared in discussions in the United States because it was blacked out of the free press. Congressional analysis—its own research bureau—and the position of the labor movement were not permitted expression. Now, the results are there, and you can see them, but we’re not supposed to connect these things up in our heads. Unless, of course, we choose to.

  The economic miracle devastated the population, and, to their credit, the Wall Street Journal points this out. They then make the following interesting and enlightening comment: they say Brazil now faces the same problems that Mexico did back in 1994, but Mexico enjoyed one “benefit” that Brazil lacks. That benefit is that Mexico is a dictatorship. Therefore, it can force the poor to accept the costs of economic rectitude. But Brazil lacks that “benefit.” The leadership in Brazil may be incapable of transferring the pain and costs of following the rules to the poor while the rich and foreign investors benefit. That is correct. The problem is that Brazil may be too democratic, or maybe just too chaotic and uncontrolled, to be able to force the transfer of costs to the poor population while the rich in Mexico and foreign investors get their rights, and are rewarded properly.

  That’s an old problem, one that appears over and over again: namely, the institution of the socioeconomic structures from which terror and repression result. The problem was faced in a Latin American strategy workshop at the Pentagon in 1990, which was concerned with US relations with Mexico. This was a high-level meeting, part of the pre-NAFTA planning, and they concluded at the workshop that relations between the US and the Mexican dictatorship were just fine, but there was one potential problem: “a ‘democracy opening’ in Mexico could test the special relationship by bringing into office a government more interested in challenging the US on economic and nationalist grounds.”11 Something like Guatemala in 1950. There might be a democracy opening, and that’s a problem, so we have to do something about it. NAFTA is what they did about it. The point of NAFTA was to lock in the so-called reforms by treaty, so that even if there is a democracy opening—that hated danger—they won’t be able to do much about it, because they’re locked into these arrangements. The problem now is to see whether Brazil, which lacks the benefit of dictatorship, will be able to follow the same programs.

  8

  Jubilee 2000

  The Jubilee 2000 call for debt cancellation is welcome and merits support, but is open to some qualifications. The debt does not go away. Someone pays, and the historical record generally confirms what a rational look at the structure of power would suggest: risks tend to be socialized, just as costs commonly are, in the system mislabeled “free market capitalism.”

  A complementary approach might invoke the old-fashioned capitalist idea that those who borrow are responsible for repayment, and those who lend take the risk. The money was not borrowed by campesinos, assembly plant workers, or slum-dwellers. The mass of the population gained little from the borrowing, indeed often suffered grievously from its effects. But according to prevailing ideology, they are to bear the burdens of repayment, while risks are transferred to taxpayers in the West by IMF bailouts (of lenders and investors, not the countries) and other devices; recent “IMF bailout loans” keep to the norm as “private-sector creditors walked away with the IMF money, while debtor countries effectively nationalized the private-sector debts.”1 The operative principles protect the banks that made bad loans and the economic and military elites who enriched themselves while transferring wealth abroad and taking over the resources of their own countries. The debt may be a “crisis” for the poor, who are subjected to harsh structural adjustment programs to facilitate debt repayment, at enormous human cost, and a lesser crisis for Northern taxpayers to whom high-yield and hence risky loans are shifted if they go unpaid. But to wealth and privilege, the arrangements are quite congenial.

  The Latin American debt that reached crisis levels from 1982 would have been sharply reduced—in some cases, overcome—by return of flight capital, though all figures are dubious for these secret and often illegal operations. According to Karin Lissakers, currently US executive director of the IMF, “bankers contend that there would be no [debt] crisis if flight capital—the money the citizens of the borrowing countries sent abroad for investment and safekeeping—were available for debt payments,” although “these same bankers are active promoters of flight capital.” The World Bank estimated that Venezuela’s flight capital exceeded its foreign debt by some 40 percent by 1987. In 1980-82, capital flight reached 70 percent of borrowing for eight leading debtors, Business Week estimated.2 That is a regular pre-collapse phenomenon, as again in Mexico in 1994. The 1998 IMF “rescue package” for Indonesia approximated the estimated wealth of the Suharto family. One Indonesian economist estimates that 95 percent of the foreign debt of some $80 billion is owed by 50 individuals, not the 200 million who suffer the costs in the “Stalinist state set on top of Dodge City,” as Asia scholar Richard Robison describes Indonesia.3

  The debt of the 41 highly indebted poor countries is on the order of the bailout of the US Savings & Loan institutions in the past few years, one of many cases of socialization of risk and cost that was accelerated by Reaganite “conservatives” along with increase of debt and government spending (relative to GDP). Foreign-held wealth of Latin Americans is perhaps 25 percent higher than the S&L bailout, close to $250 billion by 1990.4

  The picture generalizes, and breaks little new ground. A study of the global economy points out that “defaults on foreign bonds by US railroads in the 1890s were on the same scale as current developing country debt problems.”5 Britain, France, and Italy defaulted on US debts in the 1930s. After World War II, there was reported to be heavy flow of capital from Europe to the United States. Cooperative controls could have kept the funds at home for post-war reconstruction, but, some analysts allege, policymakers preferred to have wealthy Europeans send their capital to New York banks, with the costs of reconstruction transferred to US taxpayers. The Marshall Plan approximately covered the “mass movements of nervous flight capital” that leading economists had predicted.6

  There are other relevant precedents. When the US took over Cuba 100 years ago it cancelled Cuba’s debt to Spain on the grounds that the burden was “imposed upon the people of Cuba without their consent and by force of arms.” Such debts were later called “odious debt” by legal scholarship, “not an obligation for the nation,” but the “debt of the power that has incurred it,” while the creditors who “have constituted a hostile act with regard to the people” can expect no payment from the victims. Rejecting a British challenge to Costa Rican debt cancellation, the arbitrator—US Supreme Court Chief Justice William Howard Taft—concluded that the bank lent the money for no “legitimate use,” so its claim for payment “must fail.” The logic extends readily to much of today’s debt: “odious debt” with no legal or moral standing, imposed upon people without their consent, often serving to repress them and enrich their masters. The principle of odious debt, “if applied today would wipe out a substantial portion of the Third World’s indebtedness,” Lissakers comments.

  In some cases, there are solutions to the debt crisis that are even simpler and more conservative than the unthinkable capitalist idea or the US government’s principle of odious debt. Central America is suffering severely from the debt crisis. The highest per capita debt in the region is Nicaragua’s, currently $6.4 billion and clearly unpayable. The human costs of the IMF programs designed to ensure that lenders are compensated many times over are incalculable. About $1.5 billion is from the Somoza years, hence clearly “odious debt,” of no standing. Another $3 bil
lion is from the post-1990 period when the US regained control over Nicaragua; also odious debt. The remainder is the direct responsibility of the United States, which was conducting brutal economic warfare and a murderous terrorist war against Nicaragua, for which it was condemned by the World Court, which ordered the US to pay reparations, variously estimated in the range of $17 billion. Accordingly, the highly conservative principle of adhering to international law, as determined by the highest international judicial body, would suffice to eliminate Nicaragua’s debt, with a good deal left over. Were elementary moral principles even to be imaginable in elite Western culture, similar conclusions would at once be drawn far more broadly throughout Europe and the US, even without World Court judgments. But that day remains very distant.7

  Bank lending more than doubled from 1971 to 1973, then “levelled off for the next two years, despite the enormous increase in oil bills” from late 1973, the OECD reported, adding that “the most decisive and dramatic increase in bank lending was associated with the major commodity price boom of 1972-73—before the oil shock.” One example was the tripling in price of US wheat exports.8 Lending later increased as banks sought to recycle petrodollars. The (temporary) rise in oil prices led to sober calls that Middle East oil “could be internationalized, not on behalf of a few oil companies, but for the benefit of the rest of mankind.”9 There were no similar proposals for internationalization of US agriculture, highly productive as a result of natural advantages and public-sector research and development for many years, not to speak of the measures that made the land available, hardly through the miracle of the market.

  The banks were eager to lend, and upbeat about the prospects. On the eve of the 1982 disaster, Citibank director Walter Wriston, known in the financial world as “the greatest recycler of them all,” described Latin American lending as so risk-free that commercial banks could safely treble Third World loans (as a proportion of assets). After disaster struck, Citibank declared that “we don’t feel unduly exposed” in Brazil, which had doubled bank debt in the preceding four years, with Citibank exposure in Brazil alone greater than 100 percent of capital. In 1986, after the collapse of the international lending boom in which he was a prime mover, Wriston wrote that “events of the past dozen years would seem to suggest that we [bankers] have been doing our job [of risk assessment] reasonably well”; true enough, if we factor in the ensuing socialization of risk through government intervention, welcomed by Wriston and others famous for their contempt of government and adulation of the free market.10

  The international financial institutions also played their part in the catastrophe (for the poor). In the 1970s, the World Bank actively promoted borrowing: “there is no general problem of developing countries being able to service debt,” the Bank announced authoritatively in 1978. Several weeks before Mexico defaulted in 1982, setting off the crisis, a joint publication of the IMF and World Bank declared that “there is still considerable scope for sustained additional borrowing to increase productive capacity”—for example, for the useless Sicartsa steel plant in Mexico, funded by British taxpayers in one of the exercises of Thatcherite mercantilism.11

  The record continues to the present. Mexico was hailed as a free market triumph and a model for others until its economy collapsed in December 1994, with tragic consequences for most Mexicans, even beyond what they had suffered during the “triumph.” The cheers now resound once again, while wages have fallen more than 25 percent since 1994 (the first year of NAFTA), after a very severe decline from the early 1980s, when the liberal reforms were initiated; real minimum wages dropped more than 80 percent from 1981 to 1998.12 Just as the Asian financial crisis erupted, the World Bank and IMF published studies praising the “sound macroeconomic policies” and “enviable fiscal record” of Thailand and South Korea, singling out the “particularly intense” progress of “the most dynamic emerging [capital] markets,” namely “Korea, Malaysia, and Thailand, with Indonesia and the Philippines not far behind.” These models of free market success under IMF-World Bank guidance “stand out for the depth and liquidity” they have achieved, and other virtues. As the fairy tales collapsed, the OECD also came out with a report in 1997 hailing the marvels of liberalization, which, though it had been accompanied by a sharp deterioration in growth of GDP and other macroeconomic indicators over 20 years, was soon to reveal its promise, thanks to the dynamism of the “emerging non-OECD economies” led by the “Big Five of Brazil, China, India, Indonesia, and Russia.”13

  Failure of prediction is no sin; fundamental elements of the international economy “are only dimly understood” (Jeffrey Sachs). It is, however, hard to overlook the observation that “bad ideas flourish because they are in the interest of powerful groups” (Paul Krugman). Confidence in what is serviceable is also fortified by blind faith in the “religion” that markets know best (Joseph Stiglitz).14 The religion is, furthermore, as hypocritical as it is fanatic. Over the centuries, “free market theory” has been double-edged: market discipline is just fine for the poor and defenseless, but the rich and powerful take shelter under the wings of the nanny state.

  Another factor in the debt crisis was the liberalization of financial flows from the early 1970s. The post-war Bretton Woods system was designed by the US and UK to liberalize trade while exchange rates were stabilized and capital movements were subject to regulation and control. The decisions were based on the belief that liberalization of finance may interfere with trade and economic growth, and on the clear understanding that it would undermine government decisionmaking, hence also the welfare state, which had enormous popular support. Not only the social contract that had been won by long and hard struggle, but even substantive democracy, would be damaged by loss of control on capital movements.

  The Bretton Woods system remained in place through the “golden age” of economic growth and significant welfare benefits. It was dismantled by the Nixon administration, with the support of Britain and others. This was a major factor in the enormous explosion of capital flows in the years that followed. Their composition also changed radically. In 1970, 90 percent of transactions were related to the real economy (trade and long-term investment). By 1995 it was estimated that 95 percent was speculative, most of it very short term (80 percent with a return time of a week or less), with the aggregate effect of drawing more “resources into finance while deterring real capital formation.”15

  The outcome generally confirms the expectations of Bretton Woods. There has been a serious attack on the social contract and an increase in protectionism and other market interventions, led by the Reaganites. Markets have become more volatile, with more frequent crises. The IMF virtually reversed its function: from helping to constrain financial mobility, to enhancing it while serving as “the credit community’s enforcer,” in Lissakers’s words.

  It was predicted at once that financial liberalization would lead to a low-growth, low-wage economy in the rich societies. That happened, too. For the past 25 years, growth and productivity rates have declined significantly. In the US, wages and income have stagnated or declined for the majority while the top few percent have gained enormously. By now the US has the worst record among the industrial countries by standard social indicators. England follows closely, and similar though less extreme effects can be found throughout the OECD.

  The effects have been far more grim in the Third World. Comparison of the East Asia growth areas with Latin America is illuminating. Latin America has the world’s worst record for inequality; East Asia ranks among the best. The same holds for education, health, and social welfare generally. Imports to Latin America have been heavily skewed towards consumption for the rich; to East Asia, towards productive investment. Unlike Latin America, East Asia controlled capital flight. In Latin America, the wealthy “refuse to pay taxes” and are exempt from social obligations generally.16 East Asia differed sharply.

  The Latin American country considered the leading exception to the generally dismal record, Chile, is an in
structive case. The free market experiment of the Pinochet dictatorship had utterly collapsed by the early 1980s. Since then, the economy has recovered with a mixture of state intervention (including the nationalized copper firm, a major income producer), controls on short-term capital inflow, and increased social spending.

  Financial liberalization had spread to Asia by the 1990s. That is widely regarded as a significant element in the subsequent financial crisis, along with serious market failures, corruption, and structural problems.

  The debt is a social and ideological construct, not a simple economic fact. Furthermore, as understood long ago, liberalization of capital flow serves as a powerful weapon against social justice and democracy. Recent policy decisions are choices by the powerful, based on perceived self-interest, not mysterious “economic laws” that leave “no alternative,” in Thatcher’s cruel phrase. Technical devices to alleviate their worst effects were proposed years ago, but have been dismissed by powerful interests that benefit. And the institutions that design the national and global systems are no more exempt from the need to demonstrate their legitimacy than predecessors that have thankfully been dismantled.

  9

  “Recovering Rights”: A Crooked Path

  The Confucian Analects describe the exemplary person—the master himself—as “the one who keeps trying although he knows that it is in vain.” The thought is not easy to suppress at the 50th anniversary of the signing of the Universal Declaration of Human Rights (UD).