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Can Germany’s Corporatist Labor Movement Survive?

Ingo Schmidt teaches economics at the University of Northern British Colombia in Prince George and is coeditor of Goettringer Betriebsexpress, a local labor magazine in Germany. He is affiliated with the Scientific Advisory Board of ATTAC-Germany. He also works as a labor educator.


For seven years Germany has been governed by a center-left coalition. This government was elected in 1998 because a majority of the electorate was tired of conservatives promising that fiscal austerity, lower unemployment benefits and social security, and restrained wage growth would bring prosperity and full employment. However, the new government’s program has made that of its predecessor look like neoliberalism with a human face. The new government, led by the Social Democratic Party of Germany (SPD), has launched the most severe attacks on labor and social standards since the establishment of a welfare state after the Second World War. Since, for most of its history, the SPD has presented itself as the main force pushing for expansion of the welfare state, its anti-worker actions have deeply disappointed its followers and surprised its opponents.

This dismantling of the welfare state led to a dramatic decline in electoral approval and party membership, and also triggered a wave of mass protests. However, a movement capable of challenging the government did not emerge.

It was not street protests but a series of crushing defeats in provincial elections that eventually induced the federal government to call for new elections. This step led to a paradoxical situation. On the one hand, Christian Democratic Union (CDU) is generally expected to win these elections. On the other, there is no doubt that they will continue the neoliberal politics that led to the SPD’s decline in the first place. An explanation for this seeming contradiction is to be found in the different capabilities of these two parties to mobilize their constituencies. While the CDU can still draw on support from diverse social layers, the SPD has been hard hit by the loss of support from workers and unemployed people. Contrary to what one might expect, the CDU is not a one-sided party of the upper classes but has its own welfare state-oriented currents. Neoliberal hegemony in Germany has never been complete. While the perceived need to improve international competitiveness is widely accepted, there is at the same time a strong “taste for the welfare state.” This contradictory consensus is deeply entrenched in (West) Germany’s postwar history and still is crucial to political developments. Unions played a major role in the formation and transformation of this consensus, which consists of export-oriented growth and corporatist moderation between labor and capital.

Confronted with the SPD’s neoliberal turn, one faction within the unions opted to continue the alliance with the SPD. Doing so, they argued, would be the only way to defend the very existence of the welfare state against the conservatives. Against this position, another smaller faction opted for a more movement-oriented unionism. Some unionists went so far as to begin building a new party. After federal elections were announced in May, union leaders turned back to support the SPD, which they portrayed as the lesser evil. Efforts to build an electoral alternative that appeals to the SPD’s former voters continue, tolerated but not endorsed by the unions. Given the German unions’ record of suppressing any deviation from their official line, this might be seen as a step toward more openness and union democracy. In reality, it indicates the loss of the unions’ voice in parliamentary politics.

The decline of the unions’ political significance encouraged capitalists to challenge long-established principles of collective bargaining. Until very recently, unions demanded higher wages and shorter working hours, while employers tried to contain such claims. Now the employers have taken the initiative by calling for lower wages and longer hours. Faced with the threat of plant closures, the unions have often accepted deteriorating working conditions and incomes in exchange for guarantees of jobs for a limited time. Compared to this assault on the very core of the unions, occasional participation in protests and campaigns seems rather hopeless.

This state of affairs poses two questions: First, will the hollowing out of the basic institutions of the welfare state over the past three decades lead to their eventual abolition? And second, will the current crisis of the SPD and the trade union movement pave the way for a new approach to labor politics? In dealing with these two questions the following hypothesis will be explored: The postwar history of labor and the welfare state is characterized by a high degree of institutional continuity. However, the long-lasting slowdown of economic growth has led to a decline of social standards and the erosion of the welfare state’s social base. While institutions such as social insurance and collective bargaining might survive current attacks on the welfare state, these institutions may contribute to outcomes that fundamentally change the character of the system. The social integration of the majority of working people brought about by the welfare state might be replaced by the exclusion of more and more people from what was previously understood to be their rightful share of collectively-produced wealth. From a set of institutions that integrated the working class into the capitalist system while raising the social standards for workers, the welfare state might become an apparatus to defend the privileges of a new middle class that has developed as a byproduct of this very system. I will also argue that a kind of institutional fetishism, which is deeply entrenched in the main currents of the German labor movement, is a major obstacle facing any successful fight against such a development.

To understand the labor movement and the corporatist welfare state of which the movement’s mainstream has become an integral part, we must take into account the feudal legacy that is incorporated in these modern phenomena. Feudalism in Germany was marked by decentralized political power held by a number of regional princes, above which was a weak central power, and the separate economic autonomy of the medieval city, which permitted the development of wealthy and powerful craft guilds. This separation is reflected in the labor movement’s strict division of labor between the SPD and the trade unions. Labor’s political concern has been the transformation of the feudal state into a democratic state; in the SPD’s early years this often was called a “people’s state.” As a reaction to feudalism’s fragmented power, the SPD pushed for unity among the masses of people, sometimes ignoring the dividing lines of class, as the social base for the democratic state. The goal of such a state was to improve the condition of working people through legislation. The trade unions, however, were to concentrate on collective bargaining with employers. They were not to mobilize workers for political action, especially not for political strikes. Since the unions arose originally from the medieval craft guilds, they were not only prepared to confine themselves to a narrowly defined economic role, but they also developed a strong productivist ideology that made it almost impossible to organize unskilled workers.

The separation between the SPD and the unions became highly problematic at the beginning of the First World War, when the party approved credits the government had requested from the parliament to finance Germany’s imperial aggression. At the same time, union leadership was not prepared to engage in autonomous political action. The left within the party and the unions, which later founded the Communist Party, had neither a mass following nor organizational capacities during the first years of the war. Things became even worse after the war. The Weimar Republic was seen by the SPD as the incarnation of their vision of a people’s state, and the labor movement would not break the republic’s parliamentary rules, not even when mass action, like a general strike, would have been the only way to stop Nazism’s rise to power.

Feudalism’s imprint on labor and the welfare state led, in summary, to a sharp differentiation between political and economic struggles; the former have been restricted to parliamentary activity and the latter have been largely concentrated on skilled workers, leaving the lower strata of the working class pretty much on the sidelines.

Capital has also been shaped by feudalism. The feudal heritage is reflected in the adoption of the craft guilds system of industrial training supplemented by theoretical education in the universities, both of which have favored incremental innovations along established paths of technological development. It was only with the beginnings of industrial capitalism that Germany saw a number of radical innovations, which led to the emergence of the chemical and automobile industries. But even here, the fact that these are still leading sectors of the German economy shows the preponderance of incremental over radical innovation. The third leading sector, machine tools, emerged directly out of medieval handicrafts and as a consequence is dominated by small and medium-sized firms, whereas the chemical and automobile sectors are dominated by big corporations. The early phase of these latter two industries saw a predominance of horizontal concentration, as opposed to the vertical integration characteristic of U.S. corporations. For a while, this supremacy of horizontal mergers allowed the continuation of long-established forms of work organization, including the use of skilled work. Even after assembly-line production was introduced on a mass scale, the degradation of work typical of Fordist and Taylorist methods remained more limited in Germany than in many other countries. This combination of concentrated capital with a relatively highly-skilled workforce was a breeding ground for the idea of replacing chaotic market regulation, and its cycle of boom and bust, with a corporatist regulation resting jointly on the shoulders of labor and capital. The union and SPD leadership believed that this would both overcome economic crisis and circumvent class struggle, which was seen as the outcome of unreasonable capitalists on the one side and unskilled, rude, and backward workers on the other.

The notion of corporatist regulation based on scientific insights and reason was even stronger after industrial corporations and banks merged into a unified finance capital. Regulation of credit was seen as an effective tool to control industrial production without the interference of volatile markets. Implicit in this focus on economic regulation on the company level is also a rejection of macroeconomic regulation. This is a view that was not only shared by many in the labor movement, even its radical currents, but also by many within the middle and ruling classes. Corporatism within companies at the oligopolistic sectoral level on the one hand, and an anti-Keynesian stand on the other, became the widely shared consensus which set the tone for economic and social developments in western Germany all through the postwar years and right into the present.

The German model of economic development, as it came into being after the Second World War, is shaped not only by institutional continuity and a consensus across classes which puts economic prosperity, political stability, and social compromise first, but also by its strong export orientation. Selling German made products on world markets was, and still is, seen as the ultimate corroboration of their value and also as a prerequisite for prosperity. Therefore, the consensus mentioned above includes a mercantilist project of conquering foreign markets. This overarching goal of economic policies was pursued by the German bourgeoisie and accepted by the main currents within the labor movement long before international competitiveness became the propaganda slogan of neoliberal restructuring in the 1980s. In fact, it has been part of western Germany’s reintegration into the capitalist world after the defeat of the Third Reich. Thus the internal corporatism that has been a part of capitalist development right from the beginning and that took on a new form with the transition from fascist dictatorship to a democratic, albeit capitalist, republic was complemented by mercantilist policies toward the world market. Both have remained in place until now, but they have produced changing macroeconomic outcomes over the past half century.

Roughly speaking, we can divide the postwar period into the growth cycles of the 1950s and 1960s, a decade of transition in the 1970s, the redistributive cycles of the 1980s and 1990s, and finally a phase of stagnation with deflationary tendencies that began after the last world economic downturn in 2001. As in other countries of the capitalist core, aggregate production grew at unprecedented rates during the first of these sub-periods, but nominal demand grew even faster. Therefore inflation accelerated, albeit at a gradual pace. During this sub-period, workers won higher real wages and shorter working hours. Though overall growth was triggered by exports, the linking of real wage and productivity growth, the major outcome of collective bargaining in those years, helped to circumvent overproduction by raising mass consumption.

The export-oriented growth common to both Germany and Japan, however, brought about a buildup of overcapacities on a world scale that could not be balanced by the existing pattern of real wage growth and government expenditures. A gap in aggregate demand could have been avoided by higher real wage growth and/or increasing government expenditures, but in practice such a strategy, which can be labeled “left-Keynesian,” had no chance of realization. There were four reasons for this. First, technological development has become ever more capital-intensive, or in Marxian terms, the organic composition of capital has risen, therefore putting downward pressure on the rate of profit. Second, a working class that had just recently learned how to win rising standards of living was able and willing to fight for nominal wage increases. Third, inflation, which had accelerated in these struggles over income distribution, was seen as a major threat to exports. Therefore, a majority within the ruling class opted for restrictive economic policies to lower inflation and raise profits by weakening workers’ bargaining power. Fourth, even within the labor movement only a minority wanted to go in the direction of left-Keynesianism; the movement’s dominant currents had accepted the perceived need to curb inflation, even if this meant lower levels of employment that would come with restrictive macroeconomic policies.

The turn against inflation led to the redistributive cycles of the 1980s and 1990s, whose main feature was a restraint in wage growth that had two effects: First, a process of disinflation was set in motion, and second, real wage growth lagged behind productivity growth. In the short run, this led to a higher rate of profit, but, over time, due to a slowdown of the growth of mass consumption, aggregate growth, including realized profits, lost speed. Under these conditions of contained accumulation, not even a further shortening of working hours could hinder a decline in employment. The rise in unemployment also led to a widening gap between gross and net wages, since unemployment benefits are mainly financed by contributions that are deducted from the wage bill.

The two processes of contained accumulation and disinflation brought the German economy to the edge of stagnation and deflation when the world economy turned from boom to bust in 2001. For the first time since the Second World War, exports failed to stimulate domestic demand. Prolonged fiscal austerity, restrained wage growth, and rising unemployment led to a situation in which low-paid workers, who spend all of their income, were forced to cut their spending further and higher-paid workers increased their savings, since they could not rely on social welfare provisions as in previous times. Even rising exports could not prevent the economy from stagnating.

Under these conditions, corporatism will be less able to produce social integration. To understand why, it is important to consider two basic principles of the German welfare state: One is that payments, such as unemployment benefits and pensions for retired workers, are mostly financed by deductions from gross wages. The other is that individual entitlements depend on the level of wages that a worker formerly received. To compensate for the fiscal crisis of the welfare state brought about by the end of postwar prosperity and the subsequent emergence of mass unemployment, individual entitlements were pruned little by little over the last three decades. With ever more people eligible for welfare provisions of some sort but ever lower individual entitlements, the share of welfare expenditures in GDP was held constant. This was possible only because nominal gross wages rose throughout these years, and with them the financial base for social security taxes.

Today, with the overall wage bill stagnating or even sinking, there is not only the problem of more and more people who are eligible for welfare provisions but also the problem of a lack of revenues to finance such provisions. This is exacerbated by the trend of employers to turn regular full-time jobs, which include benefits for the workers as well as contributions to the welfare system, into precarious jobs where workers are excluded from anything that goes beyond a minimum of social security. Thus, economic stagnation has led to an unprecedented fiscal crisis of the welfare state and ever decreasing provisions for those who cannot make a living without that very system. While its institutional setting might remain in place, the character of the welfare state appears to be changing from one which guaranteed social security, albeit at very different levels, to the vast majority of the population, to a polarizing system, where the privileges of the middle class and the highest strata of the working class are maintained at the expense of the working poor, the unemployed, and a growing number of pensioners. Unfortunately, while the number of these people is growing, resistance against such a fundamental change remains pretty weak. The reasons for this are to be found in a changing class composition that has eroded the social base of the welfare state in its old form.

Given the widely accepted priority for export-oriented growth in Germany, a strong industrial unionism had an important role to play. Not only did it help, as shown above, to create purchasing power by pushing for higher real wages and securing the funding of the welfare state, but the productivist ideology that industrial unions inherited from the crafts unions prevented strong worker resistance against new technologies, thus helping to maintain a competitive edge on world markets. For these reasons, the drive for higher exports and the self-image of the unions as a countervailing power to capital have entered into an always contested but nonetheless long-lasting relationship.

In shaping this relationship, the metal workers’ union, IG Metall, had, and still has, a major impact, for a number of reasons. IG Metall organizes workers in the production of machine tools and automobiles, which are, as we have seen, two of the leading sectors of the German economy. It also organizes workers in steel production, one of the most important inputs for export industries. Moreover, all these fields of production cover everything from big corporations to small and medium-sized firms. This heterogeneity is reflected in a carefully balanced wage scale. All the different sectors and occupations represented by IG Metall have put the union into a position where it shapes the collective imagination of the German working class to a very high degree and where it also is the leader in collective bargaining, setting the benchmarks for other unions following suit.

IG Metall also has leadership over the service workers’ union, Verdi, which is, in terms of membership, even bigger than the metal workers’ union, organizing public sector workers, transportation, and the trading and financial sectors. There are two reasons why IG Metall has the upper hand over the service sector union. First, the latter came out of a merger of smaller unions just a couple of years ago and thus lacks the coherence that has developed in the metal workers’ unions over many decades. Second, the prevalent productivist ideology, which is widely shared across class borders, regards service workers as more or less unproductive, bringing about high costs but only small benefits. From this angle, employment in these sectors is seen as inferior to industrial production, which brings together skilled workers and technologically advanced machinery. This widespread, and therefore politically quite influential, view is mirrored ideologically in the neoclassical notion of labor and capital as factors of production which have to be combined in the most efficient way and have nothing to do with one having power over and exploiting the other. Picking up on these ideas, IG Metall and other unions often try to play the role of a neutral moderator when it comes to labor disputes on the shop floor or at the factory level.

On the whole, the trade unions’ position in German corporatism, for which IG Metall is the role model, is quite ambiguous. On the one hand, they claim to organize and represent the whole working class in one sector against capital. But on the other hand, they also keep control over workers’ struggles that threaten to move beyond the productivist and mercantilist consensus which ties labor and capital together. Usually the balance between corporatist integration and autonomous claims of workers could be maintained by some sort of “controlled activism.” Only on very few occasions have unions either given up their autonomy totally to become part of the state apparatus or been unable to keep control over workers’ struggles.

Corporatist moderation of capital-labor relations has always been selective in a certain way. The reason is that unskilled workers are seen as contributing only marginally to the collectively produced wealth, a stigma they share with service workers. This marginal position has put them on the very end of the wage scale. During the postwar prosperity, however, there were not many of these workers, and the distances to the next better paid ranks were fairly small. Poorly paid, they still were regarded as members of the same class as skilled workers.

The presumption that there is one working class, however differentiated inside it might be, started to crumble when the end of postwar prosperity gave rise to economic restructuring. Two divisions that undermined corporatism’s social base have gradually arisen over the last three decades. First, there is the division between workers whose working conditions are regulated by collective bargaining agreements and those who perform precarious work that is low paid, very often involuntarily part-time and temporary. Second, there is the so-called wedge between gross and net wages, which emerged and widened with ever higher contributions to pay for unemployment benefits, health insurance, and pensions.

Employers and bourgeois media have been very successful in telling workers who are represented by unions and are eligible for the welfare system that a growing number of supposedly voluntarily unemployed people exploit the welfare state that is financed by the former’s social security taxes. Instead of being angry about mass unemployment and the pressure it puts on the social standards of those still working, there is growing acceptance of the bourgeoisie’s drive to cut welfare spending. This is even true for many workers who might soon need such welfare assistance. Spending cuts are not only approved for ideological reasons, though. There also is a widespread willingness to accept wage freezes or cuts and longer hours as long as workers can keep their jobs, because nobody expects to find a position that is regulated by collective bargaining agreements and offers benefits after a layoff. Accepting precarious work seems to be the only way to find a new job.

Downsizing the working class is just one thing that has happened in the course of economic restructuring. The new middle class of so-called professionals—like lawyers, consultants, and journalists—whose roots go back to the early days of monopoly capitalism, and which grew in massive numbers during the postwar boom, has been able to consolidate its position. Partly this happened because these professionals became an active force in the economic restructuring, supplying the expertise and producing the propaganda used to make such steps seem like a hard but unavoidable path to prosperity.

The position of this middle class relies much more on symbolic than on economic capital, which distinguishes it from the bourgeoisie. For this reason the former is, especially in times of economic stagnation, in fear of losing its status. To prevent this from happening, they have led a drive to capture the welfare state and exclude growing numbers of the old working-class base from that very system. Ideologically this has taken the form of a “third way,” which supposedly would overcome old schemes of redistribution via the welfare state with a system that would activate people, thus fostering economic growth. In practice, third way policies not only polarized the distribution of income, social security, and access to public services, but they also brought about a major transformation of the SPD. Its electorate has always been wider socially than union membership; nonetheless the latter has been the core of the former ever since unions and the SPD came into being as the two main forces of labor in Germany. Only recently has this core of skilled workers been more and more replaced by the new middle class as the SPD’s social base. Politically, the labor movement is faced with two difficulties now: One is the change of class composition, which has weakened well-established forms of union representation, and the other is that unions, which are already weakened, have lost their counterpart in the political arena.

Mass unemployment and economic restructuring have hollowed out the labor side of German corporatism. This has led to a transformation of the SPD into a third way party and put the unions on the defensive. Since corporatism—including the collective bargaining and the welfare state which have been an integral part of it—was part of a general consensus, its crumbling base shakes not only labor organizations but the whole political system. In the state apparatus, and even in the conservative CDU and certain factions of the bourgeoisie, like highly regulated craft industries, there are currents that prefer a corporatist moderation of capital-labor relations over a combination of unfettered markets and an authoritarian state. However, there is an important contradiction which must be recognized, one which arose out of the crisis of corporatism and also shapes the way the crisis is dealt with. Consensus on the necessity of the welfare state and organized labor is still widespread, but it is almost absent in the parliamentary system, where something like a capitalist unity party is pushing for ever lower social standards. Although their outcomes are widely disliked, these policies rely on another consensus that has been around over the decades, that it is necessary to stand the test of world markets. In order to increase exports, a majority of people, from all different classes, accept the perceived need to lower wages and dismantle the welfare state in order to increase international competitiveness.

The reaction of the trade unions to this contradiction and the crisis of corporatism has been to argue for the maintenance of a tried and true system, which has only come under pressure because of a misguided political class. While the defense of corporatism’s institutional framework is shared by a vast majority of unionists, from the rank-and-file to the leadership, the strategic claims that are attached to it take two different directions.

The conservative reaction to the crisis of corporatism takes up third way rhetoric by stressing the needs of highly-skilled workers for whom collective bargaining means not social protection but a restriction on their creativity. While it might be an illusion within the upper ranks of the working class that individual bargaining gives them better wages and working conditions than collective agreements, trade union policies along those lines will at best defend the privileges of the upper strata of the working class against those who have to work harder and for lower pay. Former attempts to organize the whole class in one sector and keep a balance between its internal divisions might be replaced by a deep split between labor aristocracy and proletariat. Such a development would not imply that unions would disappear, but that they would undergo a transformation similar to that which the SPD went through only recently. The old partnership between unions and the SPD, which is in crisis right now, might be reestablished, if both parts go down the third way.

Luckily, there is opposition within the unions against such a development. Against the perceived necessity to cut social spending, the adoption of Keynesian policies is recommended to create economic growth and employment and to take fiscal pressures off the welfare state. By this, it also should be possible to maintain, or even improve, social standards. Since the SPD has turned against such a Keynesian-welfarist strategy, unions need, it is argued, to extend their playing field beyond collective bargaining into the political sphere by allying with social movements, such as the new social justice movement. It would be a major step forward if those who want to ally with the social justice movement prevailed over those who want to take the third way. For this to happen, a few obstacles have to be overcome, however.

The first and most important is that third way politics are not only proposed by a small number of trade union intellectuals but have a social base within union membership. Within the upper ranks of the working class there are many workers who see the possibility of maintaining their jobs by increasing competitiveness and cutting the ties to those at the low end of the class. Productivist ideology, which relates productivity and income to formal education, backs this view and therefore is a major roadblock to progressive union politics.

A second problem is that Keynesianism is often seen as a way to full employment based on economic prosperity. But it is highly unlikely, as well as undesirable for ecological reasons, that growth rates like those of the postwar prosperity will recur. Under conditions of slow growth, or even stagnation, there is no need to cut wages and social spending. Should they be maintained, however, this surely stands in the way of capital’s drive for higher profits. What was possible during prosperity, sharing a growing pie between labor and capital, is not possible when growth rates are low. Therefore the corporatist notion of a “fair share” of income has to be replaced by something that employers started long ago—asking for a bigger share of the pie, even if this is at the expense of the antagonist class. Ironically enough, the leaderships of IG Metall and Verdi adopted the Keynesian program, to which only half-hearted lip-service has been given, only after the economic and social conditions for its application in a corporatist manner were crumbling. Under the prevalence of economic stagnation and a severe polarization between the new middle class and precarious workers, any attempt to persuade the Social Democratic party to turn to Keynesianism again is doomed.

The recent call by the SPD for a federal election clearly indicates that the third way is a dead end. Thus the question arises whether the labor movement should try to reinvent Keynesian policies to pursue its immediate goals or whether it has to develop new strategies that reflect the economic and social changes which have led to the exhaustion of Keynesianism. Not only are the main currents within the trade unions now calling for such a strategic orientation, but as mentioned above, some unionists have started to build a new party, the Electoral Alternative for Jobs and Social Justice (WASG), which is trying to give the SPD traditions of Keynesianism and corporatism a new voice.

These endeavors have gained ground only in western Germany. The ideas of fiscal stimulation and redistribution did not come to eastern Germany until unification, a time when such measures had lost much of their postwar appeal and efficacy. Moreover, the industrial downsizing that went along with East Germany’s transformation to capitalism brought about an unprecedented accumulation of debt, which discredited the notion of deficit spending even further. Such skepticism is articulated by the Party of Democratic Socialism (PDS), the successor of the old state-ruling Socialist Unity Party, which also represents the failure of state socialism. While it has so far been unable to develop a new socialist politics, it still articulates a deep dissatisfaction with a capitalism that came in the name of prosperity but brought unemployment and economic decline.

Realizing the regional limitations of the WASG and the PDS, the leaders of the two parties have decided that only together do they have a chance to articulate progressive policies on the federal level. This is most obvious in purely electoral terms. Since parties have to pass a 5 percent threshold of the total vote, both might fail if they run for parliament independently, but they will most likely succeed running together.

The alliance between these two organizations, which carry the burden of the histories of state socialism in the East and welfare capitalism in the West, represents a significant step forward. This is proved by the hysterical anger of the neoliberal commentators in the dominant media. The prospects of this left alliance, however clouded by history, depend on the continuing growth of working-class rejection of the neoliberal regime. In the same period as the alliance emerged, polls showed a majority of Germans coming to reject the capitalist European constitution. The alliance was born in fierce argument, and the hysteria of neoliberal commentators was matched by the vitriol of sectarian leftist critique, the latter not entirely without good basis. But the fact remains that the new alliance seems to attract many of those who are disappointed with capitalism’s present economic stagnation, social polarization, and a perceived lack of political alternatives. Aspirations to build a more equitable and free society that come with such disappointment may eventually learn from labor’s past failures, in both East and West.