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“The State in a Changing World”

Social-Democratizing Global Capitalism?

Leo Panitch teaches Political Science at York University,he is the co-editor of Socialist Register.

There are two central developments that define our era. One of these is the historic failure of the socialist project of the mass working-class parties, both Communist and Social Democratic. The other is, of course, what has commonly come to be known as the “globalization” of capitalism. These two developments are certainly related to one another, but they cannot be reduced to one another. Each also has its own specific dynamics which need to be analysed separately.

The failure of communism was not only due to the strength of global capitalism. It was also due to the Communist Parties and regimes lack of understanding that democratic rights alone provide socialism with the political air it needs to breathe. Under a dictatorship, without multiple parties, freedom of the press, speech, and association, workers could never learn how to become a ruling class, as Rosa Luxemburg chastised Lenin immediately after his dissolution of the constituent assembly. In the absence of political freedom there is no way to generate the “thousand solutions” that need to be discovered in face of the “thousand problems” that revolutionary change inevitably entails.

Social Democracy reveals to us the opposite failure. Too much respect for the inherited institutional forms of liberal democracy produced a form of “parliamentary socialism” which lost the capacity to mobilize for social change in the course of learning how to get elected. It was able, for a certain period, to manage a reformed capitalism; but unable to transform society, it soon lost its vision, and eventually even its socialist rhetoric. The new right’s successful association of social democracy with state bureaucracy towards the end of the twentieth century proved that Max Weber had been correct to discern, at the beginning of the century, that “in the long run…it is not Social Democracy that captures the town or the state; it is the state which conquers the party.”

The loss of mobilizing capacity and vision in social democracy is today concealed behind the “buzz words” of modernization and the Third Way. These are terms which amount to little more than keeping up with capitalist globalization, when what is needed on the left is precisely to try to develop the capacity to issue a political challenge to globalization. But this can only be done on the basis of systematic analyses of the historical trends that globalization refers to and the structural resistances that can develop as a result of it.

The Meaning of Globalization

What is globalization? It is a fashionable word, but what does it actually mean? There are many myths and misunderstandings associated with the term, arising from simplistic extrapolations of particular trends and unwarranted generalizations from specific developments. Yet there are five dimensions of what is commonly termed globalization today that really are very significant. Three of these are conjunctural; two are structural. In terms of its more contingent, conjunctural dimensions, globalization properly refers to:

(i) the spatial extension of capitalism directly associated with the collapse of the USSR and the Communist regimes of Eastern Europe, as well as with the turn to capitalism in China and Vietnam, where Communist Party elites are laying the grounds for transforming themselves into new bourgeoisies.

(ii) the ideological and cultural sweep of capitalist ideas and values that defines our neoliberal era, whereby the bourgeoisie “makes the world in its own image” with an impunity almost unparalleled since Marx wrote these words 150 years ago.

(iii) the process of international class formation of recent years, especially transnational integration among the capitalist classes; this is a process which is, however, by no means yet very far advanced as is evidenced by the national locus of the owners and boards of directors of the leading multinational corporations.

Globalization in the stronger sense, in terms of its more determining, structural dimensions, is best understood as referring to:

(iv) the new stage of capital accumulation on a world scale, developing out of the contradictions of the postwar Keynesian/Bretton Woods order, which is characterized by a vast increase in the size, flow and speed of foreign direct investment and trade, and accompanied by an even more vast creation of international credit, currency flows, speculation, futures markets, and private and public debt.

(v) the internationalization of the state, which, properly speaking, must be understood not in terms of transnational capital escaping the nation-state, but rather in terms of states becoming more and more attuned to fostering and/or accommodating to capital accumulation on a world scale.

Each of these dimensions of globalization deserves very close analysis. This is, of course, especially true of the fourth dimension, which, far from merely reflecting the strength of capitalism in its new stage, actually grows out the class conflict, inflation, and falling rates of profit that ended the previous “golden age,” and is itself beset by recurrent economic crises even in its most dynamic centers of investment and trade as well as by mass underemployment and active impoverishment of large populations and regions of the globe. It is necessary to stress this in order to understand the nature of the role of the state.

Because the process of globalization has initially taken place under the ideological aegis of the new right, operating with the conceptual optics of neoclassical economics, it has presented itself in terms of reducing the role of the state in relation to both domestic and international markets. Obscured from view has been the active role of states in setting the new rules of the game as well as in shifting the balance of class forces as part of the process of globalization. In what sense is this so? First of all, since states themselves are fields of class relations, the internationalization of capital means that foreign capital becomes interiorized not only within a given territory but becomes a player on the field of the state. Second, states continue to establish the essential infrastructural and juridical conditions of markets, private property, and contract within their territorial domain. Third, states are the actual authors of globalization in so far as it is the changes they made in the rules governing capital movements, investment, currency exchange, and trade that permitted a new stage of global accumulation to come about. Fourth, in the process of doing this, states don’t withdraw from the economy but restructure their relationship to it, reordering their apparatuses and the role each plays in representing and regulating social actors and markets. Finally, fifth, it is through inter-state relations, as these are formalized in international agreements, treaties, and the rules governing international agencies, that the necessary international juridical and infrastructural conditions for global capital accumulation are established and maintained.

None of this should be understood as functionally automatic; far from it, all this takes place through trial and error, negotiation and compromise, tension and contradiction. These tensions and contradictions, and the class struggles that attend them, may be displaced from one terrain of the state, only to reappear in another, where they reemerge in new forms. Thus we see today a marked increase in corruption and the buying of political favors, as individual capitalists, faced with the insecurities and rigors of global competition, are tempted to secure from particular politicians what industrial subsidies, banking monopolies, and tariff protections used to provide to whole sectors of capital.

The contradictions of globalization are such today that the political and ideological leadership of the neoliberal right is increasingly vulnerable to challenge, as is evidenced in the fact that in fourteen of the fifteen European Union countries, social democrats now occupy governmental office. But as already seen in the path President Clinton had tread despite his defeat of Bush and Dole, this does not mean that European social democratic parties (which no longer have, for the most part, an orientation to policy distinct from the American Democratic Party) will not accommodate to neoliberalism, let alone continue to underwrite globalization in all its dimensions.

It has proved convenient for politicians without the deep ideological conviction of someone like Mrs. Thatcher, but also without the inclination either to confront the power of capital or take responsibility for the costs of globalization, to have recourse to the argument that “our hands are tied” by international financial markets and bond traders. This argument, as the Economist noted in an important editorial on October 7, 1995, entitled “The Myth of the Powerless State,” actually obscures the fact that “global integration has left governments with about as many economic powers as they ever had.” To the Economist there is a “frightening” prospect that “the barriers governments have lowered can be raised again…given the will, governments could do it. Call it their sovereign right.” To prevent the “trend to global integration [being] halted and reversed,” the Economist called on politicians to openly proclaim the state’s responsibility for sponsoring capitalist globalization, and to stop using “bad arguments (‘our hands are tied’) in a good cause (lowering the barriers to international trade and finance).”

The 1997 World Bank Report

Given the contradictions of globalization, a change in the nature of state sponsorship of it, both ideological and material, is in fact on the agenda. Neoliberalism has reached its limits, even if globalization has not. This is precisely the message of the World Bank’s remarkable World Development Report for 1997, The State in a Changing World. This is a momentous intervention by the Bank, a bid to do no less than displace the Trilateral Commission’s famous 1976 report with a new strategic perspective designed to carry globalization into the twenty-first century. In explicit contrast with the “overloaded government” thesis that governed the former report, and in place of the advocacy of a “minimalist state” (which the new report suggests led many countries to “overshoot the mark”), the World Bank now advocates a large role for the state in protecting and correcting markets. This perspective, of course, only echoes arguments that have been current in social democratic intellectual circles for the better part of a decade. One might even call this the social democratization of globalization.

The World Bank’s central message is that “globalization begins at home.” [p. 12]. Not only does it see the state as a necessary “partner, catalyst, facilitator,” it goes further in recognizing that “markets cannot develop without effective property rights.” [p. 41] The failures of “state-dominated development,” the World Bank insists, must not obscure the fact that “development without an effective state is impossible.” This means recognizing the positive role played by “states working in partnership with markets to correct their failures, [while] not replacing them…. The state’s unique strengths are its powers to tax, to prohibit, to punish, and to require participation. The state’s power to tax enables it to finance the provision of public goods. Its power to prohibit and punish enables it to protect personal safety and property rights. And its power to require participation enables it to minimize free riding….” [p. 25]

The World Bank’s goal is to shift “attention from the sterile debate of state and market to the more fundamental crisis of state effectiveness.” [p. 25] Effectiveness is defined primarily in terms of developing the kind of public rules and institutions that “allow markets to flourish” [p.1], but this is understood to include taking seriously the legitimation functions of the state. Thus while very much in favor of the removal of restrictions on the trade and cross-border movements of capital, this is seen as only one precondition among many for active global integration, rather than marginalization, for most countries. The report points out that “despite spreading trade liberalization, the share of trade in GDP fell in forty-four of ninety-three developing countries between the mid-1980s and mid-1990s” [p.134], and it especially points to the tragedy of south-Saharan Africa, which it sees in terms of the problem of “states collapsing from within.”

Even as regards the advanced capitalist states of Western Europe, the report cites opinion polls which show that a clear majority across all fifteen European Union states believe that governments should maintain current social benefits and protection levels as opposed to only 12 percent who think they should be cut to enhance competitiveness in world markets. It cites similar positive orientations in Latin America and Asia, and in contrasting these with anti-egalitarian and anti—welfare state opinion in the United States, it makes the latter look like the exceptional case. [p.111]

Such a perspective, especially as it is articulated by the World Bank, will doubtless generate considerable enthusiasm on the part of many people who have for so long been troubled by the nostrums of neoliberalism. But critics of globalization would do well to temper their enthusiasm. There is no shortage of passages in the report that insist that states must bring themselves closer to the people, make themselves more accountable to civil society, and reflect “the full panoply of a society’s interests.” But states are warned against biting off more than they can chew and are advised to constrain themselves to match their role to their capacities. Above all, when it comes to advancing specific reforms, the report carefully ties these to what it calls the “fundamentals,” insisting that “maintaining liberal trade, capital markets and investment regimes is essential for economic growth.” [p. 48, emphasis in text].

What this means is that the report largely restricts itself to “safe” reforms, that is, to the development of those state capacities which facilitate rather than hinder integration into capitalist globalization. It rationalizes the regressive shift in taxation from corporate and personal income taxes, and trade taxes, towards consumption-based taxes like VAT as an inevitable consequence of the global integration it advocates. It endorses the discipline in the area of fiscal deficits that financial markets impose on “open economies exposed to external risk,” but it also wants to reinforce this with “the need to comply with the rules and conventions of international treaties [as] another spur to good behavior.” [p. 4]

The report’s “recipe for good policies,” and its definition of “bad” ones, are, in fact, more than a little familiar. Bad policies “channel benefits to politically influential groups” examples are macroeconomic policies which are “covert ways of levying unexpected taxes on the private sector or of redistributing economic benefits” and microeconomic policies which impose “restrictions on the operation of markets,” including “import restrictions” and “local monopoly privileges.” Good policies, on the other hand, accord priority to restraining inflation, and the Bank advocates “locking” this in through central bank independence and “choosing a conservative central bank governor, one who is more opposed to inflation than society in general.” The vital ingredients to “rolling back overextended states” are “commitment to competitive markets and an accompanying willingness to eliminate obstacles to their operation.” [p. 51]

Even in the areas of urban hospitals, clinics, universities, and transport, where governments concentrate their spending on infrastructure and social services, the report takes the view that markets and private spending can meet most needs, except for those of the very poorest minority of the population. “Most curative health care is a (nearly) pure private good—if government does not foot the bill, all but the poorest will find ways to take care of themselves.” [p. 53] The Bank’s concern with the social dimension of globalization is further tempered by its resignation to the fact that developing countries cannot afford western social programs as well as by its claims that greater social security can be achieved at lower costs by relying on communities and households to take up the slack.

What then really distinguishes this cookbook from the neoliberal one? It is that the goal of market liberalization is now linked by the World Bank to the development of effective regulatory state capacity to sustain private markets. In the crucial case of the financial sector, this is presented in terms of moving from “control to prudential regulation.” Thus while the report endorses “the near-universal…move away from controls over financial markets and their allocation of finance,” it insists that “liberalization is not the same as deregulation. The case for regulating banking is as compelling as ever. Only the purpose has changed, from channeling credit in preferred directions to safeguarding the heath of the financial system.” [p. 65]

Regulatory reform must also accompany privatization. Since it is opposed to public sector monopolies as well as private sector ones, the report is in favor of privatization in general and especially the “hiving off” of utilities and social insurance to the private sector. But “successful” privatization depends on “winning the acquiescence of employees” through generous severance pay; winning the acquiescence of citizens through share vouchers or public offerings of shares at “attractive prices” and developing “a regulatory system that credibly restrains the abuse of power in non-competitive markets.” [p.64]

A major concern of the report—arguably the major concern—is the endemic corruption that attends the state-capital interface in so much of the world. For this report, the Bank undertook a survey of 3,685 firms in sixty-nine countries in an attempt to measure the extent of such corruption and their perception of the harm that it does to investment. It found that “high and unpredictable corruption” especially had this effect. [p. 103] Strengthening mechanisms for juridical monitoring and punishment, making rules more transparent, reducing the scope for official discretion, introducing competitive bidding processes into government—all these are advanced as administrative reforms that would help to contain the problem, albeit always in conjunction with “policies that lower controls on foreign trade, remove entry barriers for private industry, and privatize state firms in a way that ensures competition.” [p. 8]

One of the factors the report is able to identify as most highly correlated with corruption is the erosion of civil servants’ wages relative to average manufacturing wages. The remedy it advances, notably, is the decompression of public sector salary structures, paying senior officials more while still constraining the overall total public sector wage bill through layoffs and wage restraint at the lower levels. Those at the top are to be given the material compensation to stop them from lining their pockets. When it comes the lower levels, the report looks to securing “worker dedication and commitment” by stressing “the importance of non-monetary rewards—recognition, appreciation, prestige, and awards—in motivating staff, over and above the adequacy of pay and meritocratic recruitment and promotion.” [p. 96]

Globalization, indeed, “begins at home.” The reforms the World Bank advocates for more effective states depend on the institutional restructuring of state apparatuses, and the reordering of responsibilities among them, beginning “with a few critical enclaves [that] typically include the ministry of finance, the central bank, and the tax collection agency.” Restructuring of these apparatuses—“which can mostly be achieved through executive order”—are designed to effect drastic budget cuts, tax reform, price liberalization, deregulation, and some privatization, and above all to “establish effective macroeconomic management by an insulated technocratic elite.” But a fully effective state will avoid limiting itself to these “first generation reforms” and will eventually move to restructure the executive itself as well as the legislature and judiciary, the civil service, unions, political parties, media, state and local government, and even the private sector—all to the end of “upgrading regulatory capacity,” which the report sees as an “institutional development highly dependent on middle management in the public sector.” [p. 152]

All this means that the international institutions that sponsor globalization do not see themselves as by-passing or displacing the state, but rather as operating to guarantee a certain type of state restructuring. While “external support can achieve little where the domestic will to reform is lacking,” the World Bank report repeatedly stresses that the role of international agencies, in addition to providing expert advice and financial assistance, is to provide “a mechanism for countries to make external commitments, making it more difficult to back-track on reforms.” [p. 15] Among these are international commercial or currency treaties through which the state commits to “self-restricting rules, which precisely specify the content of policy and lock it into mechanisms that are costly to reverse.” [p. 6]

Conclusion: Drawing

Social democratic politicians today from, Jacques Delors to Tony Blair pose the challenge before us as that of figuring out how to make accommodating to globalization consistent with progressive social values. The lesson of the World Bank Report, as well as the fate of Delors own “Social Charter” in Europe amidst the effects of the move to the common currency, is that this is the wrong challenge for the left to pose for itself. Attaching side agreements on labor or environmental rights to international treaties will at best reinforce the type of second-order state reforms advanced by the World Bank. The overarching priority will remain that of fostering the penetration of capitalist values into every dimension of state-society relations as well as every corner of the globe and every facet of human life.

The World Bank’s understanding that this does not mean a minimal state, but rather an efficient capitalist state is, increasingly, what social democracy itself stands for today. It has adopted global competition as a goal, which the state must foster, rather than regarding it as a constraint which must eventually be overcome. Social democracy still recognizes the importance of liberal democratic institutions, but it has lost that broader democratic vision that originally impelled socialists to try to use those institutions as building blocks for organizing societies on cooperative rather than competitive principles.

So extensive is this accommodation to globalization that social democracy (incorporating as it does now most former Communists in Eastern Europe) is largely reduced, even in the face of continuing mass unemployment in Western Europe, to undercutting social benefits in order to advance labor-market flexibility while still promoting the new “cargo cult” of training. (“If you train them the jobs will come.”) It is as though, seeing a man on the street, hungry and homeless, you approach his problem only through the optic of his not being motivated enough, entrepreneurial enough, skilled enough to get a job, rather than through the optic of there being something fundamentally wrong with the capitalist system. There is nothing much socialist in a value system that does not begin, morally, from the latter optic.

Nor can much be said for social democratic economic strategies that increasingly rely on export competitiveness for “success.” This ignores not only the ethical dilemmas this inevitably entails in terms of the more successful countries exporting their unemployment to those that are less successful, but also the crisis-ridden nature of globalization, both in terms of the overproduction that must attend a system where everyone is trying to increase their exports and limit their imports, and in terms of the financial instability that attends capital movements attuned to free exchange rates in such a system.

In response to neoliberal calls for a minimal state, social democratic intellectuals over the last decade have often had recourse to the example of East Asian states which have allegedly proven that efficient markets require active state involvement in the economy. The class-ridden nature of those systems, let alone the “crony capitalism” that characterizes their state-market interface, usually got swept under the carpet. The World Bank report also adopted the East Asian states as its model for “successful” integration in globalization. The fact that it did so even as the storm clouds of a vast financial crisis were gathering over the region makes the report look rather bad. Yet the central message of the report—that regulation is necessary for liberalization—will now be heard more and more in relation to international finance.

At the launch of the World Bank report in Toronto last June, a video was shown of women engaged in embroidery production through a NGO in India, one of whose leaders articulated the desire for “a situation where women are not only the producers but are the owners and managers.” No one really took these words seriously at the launch, for good reason. This age-old inspiration for genuine democracy cannot possibly be advanced by the World Bank’s report. It will only be met when, in light of the contradictions of globalization, there emerge new socialist forces to challenge the power of capital as it is embedded in the contemporary state.

Out of the inevitable conflicts that globalization is generating and will continue to generate, it is not unlikely that new parties and movements will emerge which will make this their aim. As such forces do emerge they may even want to take a few pages out of the book of the World Bank, at least to the extent of recognizing that building alternatives to globalization also must begin at home. Of course, there will need to be extensive international cooperation among such forces. While located on the terrain of each state, such movements and parties will have to inspire one another across state borders. And such successes as they may have within each of their states will certainly still be conditional on other states also being transformed by similar movements and parties, allowing for that cooperation among states necessary to effect controls over the mobility of capital. It may also be worth paying attention to the praise the Bank heaps on those “farsighted political leaders” who played such a large role in bringing about capitalist globalization, and who “have transformed the options for their people…because they spelled out a longer term vision for their society, allowing people to see beyond the immediate pain of adjustment.” [p. 14] As against the Bank’s concern to ensure there will be more capitalist political leaders “with a clear vision of the way things could be and a contagious determination to turn that vision into reality” [p 144], it will be necessary to develop a new generation of socialist political leadership in the twenty-first century that has precisely these qualities and capacities, but uses them to the end of advancing very different kinds of structural reforms to those of the World Bank. The goal of this new socialist political leadership must be to transform states into creative agencies of cooperation, decommodification, and democratization rather than efficient agencies for capitalist globalization.

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