Capital & Class. - 1985 - Issue 26 issue 26

r Kate Rubin and George Frisvold Reagan's new economic agenda : the militaryand the market

s MU Ca

This article reviews us economic performance since the re-election of Ronald Reagan . The main focus is on the role of the state in promoting and responding to structural change in the economy . The article summarises recent changes in fiscal policy, trade and debt, banking and the stock market . The discussion highlights the consequences of the economic programme implemented during Reagan's first term, from 1980 to 1984, and the contradictions and pitfalls of the policies he hopes to promulgate in the second . RONALD REAGAN campaigned against `big government' in both his bids for the presidency . His Inauguration Day speech in January 1981 articulated a philosophy 5 of federal spending that would govern the presidency for the next eight years : `Government is not the solution to our problem . . . Government is the problem .' Such a statement seems at odds with actual events . President Reagan stands at

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6 the helm of the biggest, baddest government that this country has ever seen . The federal debt more than doubled during the President's first term in office . Last year's federal spending accounted for almost one-quarter of gross national product . Reagan's campaign against big government aimed not to reduce the size of the state, but to change its priorities . Defence spending grew from 23 to 27% of the federal budget by 1984 . The share of domestic non-military expenditures declined dramatically from 68% when Reagan took office, to 60% at the end of his first term . Reagan's first-term budget cuts targeted the poor . Millions of Americans lost food stamps, welfare payments, disability benefits, federal medical insurance, subsidised school lunches, and low-interest college loans . The poverty rate rose from 13% in 1980 to more than 15% in 1983, an increase of 6 million people . The unemployment rate in 1982 stood at 10 .7%, the highest since the Great Depression . Farm income plummetted to its lowest level since the 1930s . Reagan's second-term budget continues the project of dismantling the welfare state, opting for complete elimination of various domestic programmes along with drastic cuts in others . The administration favours this approach to acrossthe-board reductions . The latter approach, according to Budget Director David Stockman, implies that all programmes are created equal . Not so for this administration . They make their priorities clear . The proposed budget released last February contains a $102 .3 billion hike in military spending and cuts in non-military domestic programmes of $182 .7 billion over the next three years . Military spending increases account for 85% of the growth in federal spending for fiscal years 1986-

88 . Domestic programme cuts represent 87% of spending reductions . The main items slated for spending reductions are farm subsidies, small business assistance, and state and local economic development programmes . Many of the proposed cuts face uncertain prospects for congressional approval . Congressional representatives facing reelection in 1986 may be reluctant to vote for reductions in federal support to farmers and small businesses in their districts . Proposed changes in us farm policy represent the most dramatic reversal . The Administration had no choice but to develop a new farm policy . Its macroeconomic policies devastated the farm sector, resulting in the largest federal farm programme outlays in history . Price supports, credit subsidies, and purchase and storage of commodity surpluses cost the federal budget between $10 and $18 billion each year during Reagan's first presidential term . Farm foreclosures are the highest since the Great Depression, despite enormous federal expenditures in agriculture . The Reagan Administration now proposes to let the free market resolve what federal spending could not. Administration proposals reduce price support levels below average market prices and set an absolute limit on total payments per farm . The President also plans to eliminate dairy price supports and the sugar import levy . Federal guarantees to private lenders for part of the value of farm loans would replace direct federal lending at subsidised rates . The Administration faces an uphill battle in Congress on agricultural policy . The farm lobby is in an uproar over the President's proposals, and carries considerable influence with key congressional leaders from both parties . Reagan will accomplish some reform in farm policy,

us Economy but surely not enough to reduce programme expenditures by the proposed $6 billion over the next three years . While Reagan faces major opposition to various domestic programme cuts, he will likely have his way on the military budget . Even if the President succeeds in gaining congressional approval for all of the proposed spending cuts, he will need an economic miracle to redcuce the federal deficit without cuts in military spending . But even more unlikely is the political miracle required for the legislature to accomplish more than a piecemeal reduction in the defence budget . Reagan plans to increase military spending in real terms by 3% per year . Defence is the largest single item in Reagan's budget for fiscal year 1986, consuming 29% of the $973 billion in projected federal outlays . Massive military spending is the Reagan Administration's answer to industrial policy . The real success of military spending lies not in creating employment, but rather in generating profits . Earnings statements of the top ten defence contractors record an average 35% after-tax return on equity for 1984 . The average return for all manufacturing industries was a mere 12 .8% by comparison . As defence contractors increase their economic strength they also expand their political power . The political contributions of the largest 20 defence contractors doubled between the last two presidential elections to $3 .6 billion by 1984 . Those contractors registering the largest growth in contributions received corresponding increases in contracts from the Pentagon . Rockwell International, builder of the B-1 bomber, more than quadrupled its political contributions from 1980 to 1984 . They received an eightfold increase in military contracts over the same period . Boeing became the largest political donor with a

350% hike in contributions and gained an 7 additional $3 .2 billion in defence contracts in return . Despite Reagan's favouritism for defence, his budget promises to accord benefits to all through a $50 billion reduction in the federal deficit by the end of his first term in office . But Administration projections assume an extremely optimistic economic horizon when calculating this figure . Specifically, they require uninterrupted GNP growth averaging 4% per year, interest rates of less than 6%, inflation below 4%, and lower unemployment to boot . The Congressional Budget Office, the economic research bureau of the Congress, offers a more realistic estimate . They project a federal deficit of more than $400 billion by 1990 (compared to $195 billion in 1983) should a recession occur sometime within the next few years . An economic downturn seems likely, given recent economic indicators of slow growth and persistent unemployment . The resulting deficit would credit Ronald Reagan with quadrupling the federal debt during his two terms in office . The ideological campaign against big government succeeded in transforming the role of the state from welfare and warfare to warfare alone . Hypocrisy and nuclear danger aside, the campaign's success seems guaranteed as long as the President does not raise taxes .

Taxes FUNDAMENTAL reform of the federal tax code is a cornerstone of Reagan's secondterm economic programme . The Reagan Tax Plan proposes the biggest changes in the tax system since World War II . Revamping the tax system could do for the Republican Party what Social Security accomplished for the Democrats . Polls report that a majority of Americans

Capital & Class 8 consider the present tax system unfair . Recent polls indicate widespread support for the President's simplification plan . Tax policy was also a major feature of the President's economic programme during his first term in office . The so-called supply-side tax cuts enacted in 1981 targetted wealthy Americans and heavy manufacturing . These cuts granted reductions in personal taxes in direct proportion to income, transferring the largest benefits to high-income groups . Investment tax credits and accelerated depreciation slashed the tax bills of companies with high plant and equipment costs . The Laffer Curve gave theoretical impetus to the supply-side tax cuts . Arthur Laffer postulated that reduced marginal tax rates spur individuals to work harder, generating higher income, savings, and investment . The astounding result suggested is an increase in tax revenues precipitated by tax reductions . History proved the Laffer Curve worthy of its name . Administration economists projected a $30 billion increase in federal tax receipts by 1983 . Instead, they got $18 billion less in taxes and a $195 billion deficit . Wealthy individuals did expand their share of total tax payments because their incomes rose and their ranks swelled in number . But this resulted not from harder work, but from speculative gains and greater income inequality . Reagan's supply-side tax programme turned out to be a classic case of one hand washing the other . The business tax cuts launched a boom in the stock market and real estate, producing larger gains for wealthy investors . Meanwhile, the recession eroded the incomes of poor and working-class Americans, thereby reducing their share of federal tax payments relative to high income groups .

Reagan's new tax plan is in part a reaction to the failure of the supply-side programme to reduce the deficit or revitalise basic industry . More fundamentally, the new plan signals the end of an era in which federal tax policy served as a mechanism to promote economic and social goals . The President aims to replace the tax system with the market as the preferred instrument of industrial policy . The new plan submitted to Congress `levels the field', according to presidential metaphor . It eliminates many loopholes in exchange for reduced rates overall in both business and personal tax assessment . Administration officials refer to the plan as tax simplification rather than reform, and contend that it is not a tax increase in disguise . Proposed changes in corporate taxes are by far the most dramatic . They promise a major redistribution of the tax burden within the corporate sector, if approved by Congress . The split in the business community has potential beneficiaries and victims locked in a pitched battle on Capitol Hill . The Reagan plan eliminates numerous tax provisions that currently favour heavy manufacturing ('smokestack') industries . Virtually the entire system of capital cost recovery hits the scrap heap, including many of the supply-side provisions passed in 1981 . Industries with large investments in plant and equipment that now pay little, no, or even negative taxes will pay substantially higher taxes under the new Reagan plan . Corporations with high wage bills and large inventory investment stand to benefit considerably from the proposed reduction in corporate tax rates overall . The Reagan plan would reduce the maximum rate assessed on corporate income from 46% to 30% . High technology, service, consumer goods, and publishing corporations, many

us Economy

of whom paid effective rates of up to 40% last year are the largest potential beneficiaries . The indirect benefits may also be significant as lower tax rates for high technology and service industries improve their competitiveness and profitability relative to other sectors . Critics in the smokestack industries argue that the Reagan plan is not as neutral as implied by his levelling metaphors . They argue that the international playing field stages an uphill battle for basic industry . Smokestack industry officials advocate continued preferential tax treatment to boost capital investment . So far their appeals to the White House have received little support . Legislative officials lay the odds for congressional approval of the Reagan tax plan at 50 :50 . The Democratic Party hopes to steal the president's thunder on tax reform, though many of their proposals exhibit a striking resemblance to the Reagan plan . Meanwhile, the short-run potential for tax simplification to provoke a recession is very great . Businesses will surely cut back on investment until they have a clear picture of the effects of Reagan's plan . Reagan's tax plan represents a major reversal both of the postwar trend and, more significantly, of the policies in effect during his first term of office . The transition from a regime providing large tax gifts to wealthy individuals and to smokestack industries to the new plan is in part a response to the devastating failure of the supply-side cuts . Reagan's 1981 tax bill did not revitalise basic industry or expand the federal tax base . Instead it contributed to the ballooning federal deficit . A more fundamental change in policy underlies the new tax plan . It unleashes market forces to accomplish what state subsidies for capital investment did not

achieve . Reagan's big government now aims to relinquish fiscal support for all but the defence industry . The only protection remaining for basic industry is trade policy, an area in which administration policy is a dismal failure . Trade PRESIDENT REAGAN'S macroeconomic policies helped create the largest trade deficit in history . Imports outpaced exports by more than $107 billion last year, marking an increase of almost $80 billion during Reagan's first term in office . The

current account deficit now stands at approximately $120 billion, making the

us one of the largest debtor nations . The high value of the dollar has American consumers on an international buying spree . The us imported $328 billion in foreign goods last year . Imports continue to increase with the total in March alone at almost $30 billion . The overvalued dollar combines with economic slowdown in OECD countries and austerity in developing nations to make us exports unaffordable to foreign customers . The American farm sector is especially hard-hit by the strong dollar and low commodity prices . Agricultural exports declined almost 22% during Reagan's first term as President . The farm sector maintains a trade surplus, but is no longer able to rescue the overall merchandise trade balance as it had done in previous years . The President blames the trade policies of other countries for the poor performance of us exports . Japan and the EC Common Agricultural Policy are the main targets of Reagan's attacks . But the effect of foreign trade barriers is generally exaggerated . They account for less than 25% of the us trade deficit with Japan, say some experts . Ronald Reagan continues to preach the gospel of free trade . But the preacher of

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10 comparative advantage is a practitioner of protection . The share of us manufacturing protected by non-tariff barriers grew from 20 to 30% from 1980 . The Reagan Administration also re-negotiated voluntary import quotas for steel and automobiles . Reagan's import controls accomplished little to revitalise steel and auto production in the us . Administration polices do not protect industry per se . Instead they protect capital within industries . The extension of steel import quotas facilitates the restructuring of capital within the industry . State policy effectively subsidises capital's tactical retreat from the sector as a whole . Some firms shift resources into , mini-mills' producing specialty steel products using far less workers . Others move capital out of the industry altogether in favour of more profitable economic endeavours . The end result of protection in the steel industry is security for profits rather than for jobs . Reagan's protectionist policies facilitate a similar process in the auto industry but with far greater success . Voluntary import restraints may not forestall the internationalisation of the us automobile industry . But they do guarantee that the process will not exclude the Big Three us auto makers . General Motors, Ford, and Chrysler are all partners in joint ventures with various foreign producers . u s auto makers recently ordered a record number of cars from Japanese firms in agreements that basically involve us firms as distributors . The Big Three have also relocated much of their production to developing countries . Meanwhile, major Japanese and European car makers plan to expand small car production in the us . Short of closing the border, selective protection cannot improve the us trade posture as long as the dollar remains overvalued . The internationalisation of the us

economy makes the dollar an important policy instrument . But the pressure on the dollar to achieve a number of different policy goals forces difficult choices on the Reagan administration . Devaluation is likely to cause more problems for a Republican President than it would solve . Cheap imports are a key component of Reagan's anti-inflation policy, especially in the energy and food sectors . High interest rates supporting the dollar also attract large foreign capital inflows . Foreign investment in the us economy rose significantly in recent months, most of it in Government securities that help finance the federal deficit . Devaluation of the dollar would also reduce the value of outstanding foreign debt held by major us banks . The threat to the us banking sector posed by foreign debt may well be a major reason for the Administration's reluctance to devalue . Foreign debt banks rest precariously on mounting foreign debt . Total Third World debt is now more than $800 billion according to IMF estimates . u s banks own a substantial portion of the total . Outstanding loans due to the nine largest US banks now exceed their total capital holdings . Several large us banks are in deep trouble as a result . Bank America Corporation, the second largest us bank, recently wrote of a number of oustanding foreign loans and is re-negotiating terms on several others . The corporation reports that it will earn zero profits in the second quarter of 1985 . Crocker National, another major Latin American leader, lost over $216 million in the last quarter of 1984 . The bank recently agreed to a purchase of its $22 billion in assets by Marine Midland in hopes of bolstering its stock value . The stakes are high for both creditors THE FORTUNES OF US

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and debtors . Default on one of the larger Latin debts owed by Mexico or Brazil could bankrupt a major us bank . But the penalties of default are even more severe for a developing nation, including the seizure of overseas assets and disruption of trade . us banks made several concessions in recent negotiations with Latin clients, including reduced interest rates and a rescheduling of payments that amounts to `rolling over' a large portion of the debt . The Federal Reserve Board often plays a major role in these negotiations . Poor economic forecasts for developing countries have American bankers in search of more credit-worthy customers . Recently, us banks scrambled to extend credit to the German Democratic Republic . Four of the top ten us banks expressed eagerness to lend to the Soviet Union . However, the Reagan Administration's cold war attitude may restrain us private lending to these countries . The effects of deregulation of us banks pose an even greater threat to the us financial system than the foreign debt crisis . During Reagan's first term, deregulation unleashed market forces in the financial sector . The recent spate of bank failures and panics suggests they may well undermine its viability . Domestic deregulation of us banks DEREGULATION SPARKED intense competition within the financial sector . New banking laws eliminated ceilings on interest rates payable to depositors, and removed restrictions on the operation of thrift institutions, allowing them to perform most of the functions of commercial banks . Now banks can compete with each other more freely by offering higher returns and a wider variety of services . However, they must almost compete with thrift institutions .

Increased competition did not bring 11 recovery within the us finance industry . Instead, it triggered a record number of bank failures . The business media often portray even the most dramatic failures as isolated cases of poor management and generally overlook the poor performance of the banking sector as a whole . The fifty largest us banks suffered a decline of almost 12% in average net income . Average return on equity fell by 24% . Eight of the largest twenty banks registered negative operating income last year . And the picture would likely look worse without new federal regulations allowing banks to combine profits earned from government securities sales with those generated by more traditional banking operations . Expanded sales of these securities contribute a significant proportion of bank profits . A striking case is Chase Manhattan's income report for 1984 . Including securities sales, Chase Manhattan's income grew by 15% in 1984 ; excluding them, their income actually dropped 5 .4% . The most dramatic example of instability in the us banking system is the neartotal collapse of the country's 12th largest bank, Continental Illinois (CI), last May . Defaults by several large ci borrowers led wary institutional depositors to withdraw their deposits, starting a `corporate' bank run . Large corporations and other banks with multimillion dollar accounts who comprise the bank's main depositors, were especially vulnerable because of the Federal Deposit Insurance Coporation (FDIC) policy of insuring deposits only up to $100,000 . Consequently, only $4 billion of the bank's $28 .6 billion in deposits was insured . In March of this year, the Home State Bank of Ohio collapsed after losing a substantial amount of money from the failure of EsM Government Securities Inc ., a

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12 securities brokerage firm . The bank closed all 33 of its branches . The state of Ohio then closed 69 thrifts in efforts to stem a more widespread panic . Similar failures of privately insured thrifts recently occurred in the states of California and Maryland . Two trends characterise the response to this crisis . First is the rise of mergers and takeovers that increase the concentration of finance capital within the banking industry . Mergers are the industry's primary means of preventing widespread bank failures . In fact, those us banks posting the best growth performance in assets and deposits have done so through mergers . The second trend involves a movement toward the re-regulation of finance capital . The banking industry relies increasingly on federal and state agencies to avert and contain bank failures . Government agencies, in particular the FDIC and the Federal Reserve Board, participate directly in helping to finance takeovers of failing financial institutions . For example, the Ohio state government in conjunction with the FDIC actively sought outside buyers to take over Home State . The Maryland legislature recently granted emergency powers to close banks and limit withdrawals to $1,000 per month . In some cases, the Federal Reserve elected to back the full value of deposits to prevent runs . The FDIC also determines which thrift institutions quality for federal insurance . Those that do not qualify are ripe for takeovers supervised by the FDIC . This agency also scrutinises the structure of outstanding bank loans . Recently the FDIC closed six banks in one day after government officials determined that they held too many outstanding farm debts . The Federal Savings and Loan Insurance Corporation (FSLIC) faces similar problems which are not confined to a few institutions . Currently 438 thrift institu-

tions have negative net worth . By FSLIC's own estimation, 10% of all thrifts in the country may fail within the next year . FSLIC policies demonstrate a response similar to actions taken by the FDIC . It negotiated mergers for thrifts which lost large sums of money on real estate and government securities speculation . However, the agency itself is now in trouble with only $5 .9 billion in its reserves to insure almost $1 trillion worth of deposits . Banks have their own response to the current crisis . They monitor each other and their borrowers more carefully now than ever before . They seek to protect themselves from bad investment and loan decisions, and also from fraudulent dealings by depositors and borrowers . E F Hutton, for example, one of the largest brokerage houses in the country, recently pleaded guilty to charges of defrauding a number of small banks . Hutton devised a scheme to write itself a series of bad cheques that amounted to interest-free loans for the firm . Another example is a suit by Bank of America shareholders against the management for negligence after the bank lost millions in a mortgage fraud . Banks may also use their control over credit as a means of altering the management policies of their borrowers . In a credit squeeze experienced by Eastern Airlines, lenders conditioned their approval of new loans on the successful negotiation of tougher labour agreements with employee unions . Such demands are reminiscent of the treatment developing countries receive from international lending agencies . The institutional response of banks and federal agencies to deregulation illustrates a contradictory aspect of Reagan's programme to reassert market forces in an advanced capitalist economy . Increased competition did not boost profitability for many banks . Instead it promoted instabil-

us Economy ity, leading bankers and investors to promulgate their own regulatory mechanisms to reduce the risks of anarchic speculation . A similar process characterises the restructuring of productive capital . The current wave of corporate mergers has business leaders in search of institutional relief from corporate raiders . Increased competition for corporate assets on the stock market poses a serious threat to financial stability . Mounting corporate debt and rampant stock market speculation incite business experts and policy leaders to make frequent analogies to the Crash of 1929 . Mergers THE CURRENT WAVE of mergers is the

second to hit American business in the eighties . Corporate takeover battles dominate the daily business news . A given day on the stock exchange might see half a dozen deals on the trading block for corporations worth a billion dollars or more . The merger wave reflects a variety of economic trends . The Administration's macroeconomic policy plays an important role . High interest rates maintain relatively low stock prices by drawing investment towards money markets and away from equity . An undervalued stock market provides favourable conditions for corporate takeovers . Deregulation directly influences structural change in several industries . These include airlines, rail transport, communications, and banking . The administration's laissez-faire approach to anti-trust regulations removes many legal obstacles to greater concentration . Foreign competition also provides a major impetus to the restructuring of capital in basic industry . Structural

change proceeds through a combination of diversifications into more profitable enterprises and divestiture of assets in failing industries . This process characterises recent developments in the automobile, energy, and steel industries . The current wave of mergers exhibits a number of special characteristics . Most interesting is the dialectical nature of the restructuring process . The restructuring of capital in the us economy is by no means a uniform process of concentration and centralisation . Accompanying the rash of corporate takeovers is an equally large number of divestitures . Corporations sell assets of less profitable subsidiaries to streamline their operations or they divest very successful enterprises to raise cash and reduce debt . Most mergers occur between corporations similar in size . In general they do not fit the classic pattern of big business gobbling up smaller concerns . Instead the opposite result is now quite likely, where relatively small corporations mount takeover bids against large conglomerates . Finally, diversification marks the general trend in today's mergers . Many recent acquisitions involve corporate expansion into other industries . Corporations may expand into related industries as in cases of vertical integration, or they may diversify into more profitable enterprises unrelated to the buyer's primary sphere of production . Recent weeks provide numerous examples of these trends . The classic case of vertical integration is the friendly merger of the nation's largest private hospital management firm with the top hospital supplier in a deal costing almost $5 billion . The auto industry also seeks to boost efficiency through acquisition . Both Ford and General Motors recently purchased minority holdings in high technology

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companies to promote the use of robotics rating . New issues of junk bonds rose to and other innovations in car production . over $14 .3 billion last year . DrexelExpansion into aerospace by GM and Burnham, the investment banking comChrysler follows the same pattern . GM'S pany responsible for developing junk acquisition of Hughes Aerospace breaks bonds, controls over 70% of the market . the record for the third time in as many Junk bonds are high-yield baskets of weeks as the largest merger in history out- securities used to finance hostile leveraged side of the oil industry . It also expands buyouts . They constitute claims on the GM's holdings in the defence industry, an target of a merger bid, shifting the burden arena made highly profitable by Adminis- of raising cash from the buyer to the tration policy . corporation being bought . Junk bonds are The series of mergers within the com- sold to a small group of investors (usually munications industry also marks a new fewer than 50) who commit themselves to trend towards diversification . Acquisi- deliver cash once a merger is consummated . tions made in past weeks extend crossJunk bonds transform the corporate ownership of different types of media . raider into a formidable paper tiger . They This is a relatively recent phenomenon permit an investor with limited cash spurred by deregulation . reserves and assets to amass substantial Other merger activity involves diversi- economic strength without the aid of bank fication into unrelated industries . The financing . Perhaps more important is the much-publicised hostile takeover attempts fact that junk bonds make it possible for by so-called corporate raiders often fit this corporate raiders to reap speculative gains pattern . Another example is General on the stock market even if the takeover Motors' acquisition of several mortgage attempt fails to win stockholder approval . Junk bonds can compromise the viabanking companies, making the numberone auto maker the number-two mortgage bility of a newly-merged conglomerate . They saddle the company with a heavy company in the nation . burden of debt, which may require the Recent takeover bids in airlines, consumer products, and aerospace involve company to make substantial divestitures expansion rather than diversification . The to raise cash . The merger craze also diverts Allied-Signal merger, worth just under $5 corporate resources from productive actbillion, forms one of the world's largest ivity into defensive manoeuvres . Target aerospace companies . Reynolds Tobacco corporations pursue a variety of tactics to Co ., already a large owner in the food ward off raiders . These include efforts to business, recently purchased Nabisco buy off corporate raiders by paying `greenmail' and pursuing a `white knight' Foods for over $5 billion . Another series of takeover attempts for a friendly merger . Many corporations deserves a category of its own . These are also erecting bureaucratic obstacles to merger bids involve a small group of takeover bids by changing corporate by`corporate raiders' whose new-found laws . Such defence tactics can be very costly . economic power is much feared in the established corporate community . Their Phillips Petroleum accumulated a $7 .3 success stems from the development of a billion debt this year from fighting a sequence of takeover attempts by two of new form of finance capital . The new debt the top corporate raiders . Phillips recently securities are called junk bonds because announced plans to sell many of its operathey do not carry an investment-grade

us Economy

tions in oil, chemicals, and communications in hopes of reducing its debt burden . Critics of corporate raiding contend that short term speculation is the only motivation for these merger tactics . Indeed this appears to be the only appeal of junk bonds at present . So far, few takeover bids financed by junk bonds have actually prevailed at stockholder meetings . Business and congressional leaders are very concerned that junk bonds may threaten the stability of the stock market . They note that the effect of junk bonds is similar to buying on the margin, the nowillegal practice credited for the stock market crash of 1929 . The similarity arises because junk bonds are mere paper commitments . Businesses also warn that a recession could result in widespread defaults on junk bonds . An economic recession would strike hardest at highly leveraged companies whose debt could become a `collapsing pyramid', in the words of one takeover specialist . Congress may consider legislation to curtail the growth of the junk bond market . Federal Reserve Board chairman Paul Volcker advocates a prohibition on junk bond investments by savings and loans . Thrift institutions hold approximately $4 billion in junk bonds, according to federal estimates . The unrestrained exercise of market forces amidst the mounting debt of both countries and corporations undermines the stability of financial markets . But reregulation by the federal government and self-regulation by businesses and bankers may produce an adequate collective response that forestalls a major crisis . Measures taken so far in response to particular situations succeeded, though clearly more comprehensive policies are required .

Conclusion economic programme is a mix of extreme laissez-faire policies in regulation and unabashed Keynesianism in government spending for defence . Both aim to reorient the us economy towards high-growth sectors, most of them involved in military production : electronics, aerospace, services and communications . Indeed the President seems to have abandoned pretensions to revitalise basic industry . The administration continues to resist widespread application of trade protection . Those policies already in effect merely facilitate internationalisation and divestiture in industries such as steel and automobiles . Reagan's tax simplification plan launches a frontal assault on tax advantages for `smokestack' industries . Monetary policy is an integral component of the broader economic programme . The dollar boosts domestic consumption while controlling inflation through the provision of cheap imports . High interest rates dampen stock prices, facilitating the transfer of firm assets on the stock market . This eases the path for basic industry to diversify towards more profitable enterprises such as high technology, defence and services . Low stock prices also encourage speculation without a real basis . Junk bonds finance this empty speculative activity by allowing corporate raiders whose assets and cash reserves are otherwise inadequate to lunge at some of the nation's largest businesses . The debt pyramid created by highly leveraged buyouts imposes a heavy burden on the corporate sector . The integration of productive and finance capital circuits transforms the stock market into the arbiter of industrial organisation . While this ensures the financing of structural change in productive capital it also makes the real side of the economy more vulnerable to speculaTHE REAGAN

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16 tive booms and busts . The reassertion of the market as the instrument of industrial policy unleashes the forces of anarchy as well as those of accumulation . Workers and their communities are the first victims . But the unrestrained exercise of market forces in a sophisticated economy characterised by sectoral and international interdependence may well turn against itself . This enhances the prospects for recession, and more fundamentally it may threaten market stability . Financial markets are the critical link . Many argue that the global debt pyramid poses the greatest threat to the banking system . The high dollar is instrumental in this regard . It encourages exports by developing countries to the us, but it also increases the value of foreign debts taken in dollars (as most are) . So far it seems unlikely that either Brazil or Mexico will export their way out of debt servitude. Default by any one of the large Latin American borrowers has the capacity to precipitate a banking crisis in the us . But the penalties for the defaulter and the willingness of American banks and government agencies to forestall such an event at all costs makes this possibility seem remote . Foreign debt will continue to drain profits and spur further •concentration in the banking industry . The debt burden of the faltering agricultural sector exerts similar pressures . The failures of many thrift institutions (savings and loans) and rural banks may cause local banking crises . But federal agencies will continue to intervene to prevent the spread of financial panic by orchestrating the buyout of failed institutions . The greater threat to financial stability lives in Manhattan, on Wall Street . The debt-financed stock market boom has the capacity to transform a recession into crisis . Sluggish economic performance in

the last two quarters suggests a downturn may be already in progress . Real GNP increased by less than 1% in annual terms in the first quarter of this year . Last year's real GNP growth was 6 .8% . Reagan's tax simplification scheme now in debate on Capitol Hill increases the short term possibility for recession . This potential is even greater if the plan is enacted as business restricts spending and output in a climate of extreme uncertainty . The decline of the dollar in response to fears about the strength of the us economy (fuelled by recent indicators of poor performance) could induce massive capital flight by foreign investors whose holdings are mainly in short-term government securities . The cash requirements of highly leveraged firms could produce widespread divestitures in the wake of a recession . An extensive sale of firm assets could wreak havoc on the stock market as the corporate debt pyramid threatens to collapse . This scenario ignores one basic fact : the surprising tenacity of American capitalism . The profound restructuring of productive and finance capital surely heightens the volatility of the business cycle . But it does not imply crisis by necessity . Severe economic hardship may prompt the re-regulation of the us economy in the most vulnerable sectors, sparking new debate about the merits of state economic intervention . A certainty is that Reagan's quest for galactic political hegemony through star wars and global economic dominance led by the dollar will redraft the economic and political landscape . The political forces capable of mounting a progressive alternative to the militarisation and deindustrialisation of the us economy have yet to write themselves clearly into the picture .

Adelman

Recent events in South Africa Adelman looks at recent events in South Africa and at the seemingly intractable nature of the problems for the state, unable to restore stability either through repression or reform . He concludes that at the present time the state is on the defensive, and that the battle for South Africa will be increasingly bloody . ago, John Saul and Stephen Gelb published a book entitled The Crisis in South Africa .' Adopting Gramsci's notion of `organic crisis' as their theoretical point of departure, they argued that the `reformist' programme of P W Botha's government was nothing other than the most sophisticated response yet to the deepening of the crisis . More recently, Gelb, in collaboration with Duncan Innes, 17 has argued that the `South African economy is not simply undergoing a shortterm decline .' 2 Liberal commentator Herman Giliomee concurs, writing in the now defunct Rand Daily Mail that `the South African rollercoaster of hope and FOUR YEARS

Ca C&C 26/SLIMMER 05--B

Capital & Class 18 despair has plunged the country into its deepest gloom since 1976 . The problems all look intractable . The government seems unable to restore stability either through massive repression or thoroughgoing reform . Black resistance appears to be hardening every day . Foreign investors are getting jittery . . .' And, he continues, `we must accept that the downturn of the economy is not cyclical but structural', that the South African crisis is organic . 3 Recent events in South Africa would appear to vindicate the views of these writers, for the evidence increasingly points to crises of both accumulation and reproduction which, in a dialectical relation with the developing political crisis, reveal the extent of the organic crisis at this particular historical conjuncture . Many liberal commentators have contended that apartheid and capitalism are incompatible in that the political constraints imposed in pursuance of the former have undermined the logic and market forces of the latter . In response, Marxist analyses have shown how capitalist development in South Africa has, in fact, been greatly facilitated by the repressive system of apartheid, pointing in particular to the rapid economic growth which occurred in the 1960s .° However, before examining recent events in the country in greater detail, it is necessary to place them in their historical context so that we are better able to comprehend the dimensions of the crisis . The historical context IN 1973, a series of strikes over wage demands broke out in Durban, on South Africa's east coast . Involving more than 100,000 black workers, the spontaneity and effectiveness of the strike wave stunned both the government and employers . Having lived in the complacency generated by rapid economic growth and

labour quiescence during the previous 15 years, they were unaware of growing black anger, unprepared for its manifestation, and unsure how to respond . During the 1960s, the South African economy grew at a rate matched only by Japan, and this factor, along with the relative absence of organised resistance in the workplace and the townships, kept latent the many contradictions of racial capitalism . In the wake of the state of emergency declared after the Sharpeville Massacre in 1960, foreign capital had been attracted back to South Africa as the government demonstrated its control through the relentless repression of any forms of organised resistance . The African national Congress, ANC, which had by this time begun an armed struggle for liberation, was outlawed along with the South African Communist Party and The Pan-Africanist Congress ; the South African Congress of Trade Unions, SACTU, was forced into exile . In one blow, the state had removed those organisations which had been responsible for virtually all forms of organised resistance to apartheid . With the aid of increased foreign investment and technology transfer, the economy moved, during the 1960s, from being a relatively industrialised peripheral economy to the position of a subimperialist power in the stage of monopoly capitalism . Investment became more capital intensive, and industry discovered a concomitant need for a skilled and stable labour force - needs difficult of attainment under apartheid because of the vastly inferior education blacks were being given and the inherent instability of a largely migrant labour force in which any attempt at unionisation incurred massive repression . Black workers were, however, gaining little from the increase in GNP, which accelerated after the steep rise in the price of gold following the suspension of dollar

South Africa

convertibility in 1971 . In 1973, 80% of workers employed by British and South African companies in the Durban area were receiving wages below the Poverty Datum Line, the minimum subsistence level . Then, in 1976, a more political dimension was added to the crisis facing the state and capital when black anger erupted in the student uprising centred on Soweto . It was during the first half of the 1970s that mass political protest began to re-emerge, particularly with the rise of the Black Consciousness movement under the leadership of such as Steve Biko . Successful wars of liberation were completed in Mozambique and Angola, providing black South Africans with an important psychological boost . The number of workers involved in industrial disputes exceeded 30,000 annually after totalling no more than 10,000 during the entire decade of the sixties . And in the aftermath of Soweto, the exodus of youth to neighbouring states gave a fillip to the war of liberation being waged by the military wing of the ANC . `The state response was two-fold . Firstly, it resorted to massive repression shootings, arrests, bannings, detentions, political trials and deaths in detention . Secondly, it initiated a long-term strategy to disorganise and subjugate the communities producing such action; to remove as far as possible the impulse to such resistance . This strategy consisted of a selective relaxation of certain of the institutions of apartheid in the attempt to channel community action into directions less threatening to the status quo, on the one hand ; on the other was the tightening of the institutions of Grand Apartheid, especially influx control .' 5 Less constrained than the government by the political and ideological straitjacket of Afrikaner Nationalism, and removed

from the tensions which were erupting 19 within Afrikanerdom, capital began to agitate for reform . One of the dilemmas facing management after the strike wave was the fact that even when they were forced to negotiate with the emergent unions, the relative lack of organisation amongst workers, allied to a healthy fear of repression on the part of workers, made such negotiations difficult if not impossible . Certainly repression - to which management continued to resort when perceiving itself to be under threat - was inadequate in the long term, with more sophisticated capitalists realising that increased productivity and the development of the potentially large internal market would not be possible if workers were in a state of continual unrest . The answer was a rationalised industrial relations system, but this implied changes far beyond the workplace alone, and certainly far beyond anything envisaged in terms of apartheid . If workers were but temporary sojourners in the urban ares, with no rights to own land, if the townships themselves were not electrified or provided with any other services, and if black wages were below the subsistence level, then economies of scale were impossible and the economy would soon be facing a crisis of accumulation . Finally, South Africa's integration into the world economy would be affected by its dependence on foreign investment, which accounts for one-fifth of all investment in the country . If the high levels of investment were to be sustained, the concomitant high dividends would have to be protected, and labour and political unrest would have to be dealt with . The contradictions facing the state were somewhat different . Any changes to the theology of apartheid would have to be pushed through in the teeth of a white electorate indoctrinated for generations

Capital & Class 20 against precisely the reforms which were by now acknowledged to be essential to the maintenance of white hegemony . Moreover, those in control of the government and the state were Afrikaners to whom the inevitable splitting of the nation on class lines was anathema, and to whom the protection of the interests of rural and petty bourgeois Afrikaners was at least as important as the reforms being urged upon it by capital . Caught between mounting popular resistance on the one hand and the awareness of an ultra-rightwing resistance on the other, Prime Minister Vorster's government appeared to be paralysed . Before reform could take place, the class war within Afrikanerdom would have to be resolved, for the reforms being mooted were those aimed at benefitting the Afrikaner bourgeoisie while posing the most immediate threat to rural and petty bourgeois voters . After losing the Anglo-Boer War at the turn of the century, Afrikaners had regrouped under the aegis of the secret Broederbond (Brotherhood), which was formed in the early 1930s . Consisting of the cream of Afrikanerdom, this organisation evolved what virtually amounted to an Afrikaner class project . Denied access to real economic power, and politically vanquished, Afrikaners joined the National Party, the police, the army and the civil service in numbers great enough to gain widespread political influence, thereby laying the ground for the accession to political power in 1948 . From that point onwards, with apartheid now official state policy, the nascent Afrikaner bourgeoisie's realisation of economic parity with the descendants of British colonialism began to take place through the deployment of state resources in the interests of this grouping, and the final part of the class project was now underway . By the early 1970s, a strong and sophisticated

Afrikaner bourgeoisie had emerged, with needs and interests almost identical to those of the historically dominant 'English' capitalists against whom these Afrikaners were measuring their economic success . Having ridden to political and economic power on the policies of apartheid, this class fraction nonetheless began to realise that the contradictions involved in its rise to power would now have to be confronted . Apartheid, in its idealised conception of a white-dominated country in which blacks would be present in the urban areas only so far as they were required as workers, had obviously failed, as the continual increase of `illegal' workseekers in the cities testified . An Afrikaner government, on the other hand, was faced with the political reality of having much of its support amongst rural and petty bourgeois Afrikaners, the former standing to lose greatly if its supply of labour was cut off due to changes in influx control policy, the latter standing to lose most immediately if blacks were allowed a measure of upward mobility in the labour market . Added to this was the fact that the most obvious way of rationalising much of the control needed by the apartheid economy, as well as the development of an internal market and a stable buffer middle class with a vested interest in stability and continued foreign investment, could best be served by the emergence of a non-white middle class . It has been argued that, despite manifestations of differences on the ideological level, the state and capital had enjoyed an harmonious relationship under apartheid ; certainly the issues of major conflict between the two were minimal from 1948 through to the early 1970s . It is at this point, however, that a divergence may be discernible between the two, with the state having to ensure the retention of its electoral base in the teeth of capital's demands for a more

South Africa thoroughgoing reform of the system than could be permitted . The overt form which this struggle within Afrikanerdom took was the socalled Information Scandal of 1978, gleefully exposed by the liberal capitalist English press (with great help, so it is rumoured, from within the government itself) . Instances of government corruption were exposed which led to the resignation of Vorster and his heir apparent, Connie Mulder, the minister directly associated with the corruption . P W Botha assumed power at the head of a government and party in conflict . Indeed, by 1982 the long-awaited split in Afrikanerdom occurred with the formation of the Conservative Party by breakaway National Party MPs with constituencies mainly in the farming strongholds of the northern Transvaal and the Orange Free State . Botha's was a mandate for reform, but it was at best a highly circumscribed and diluted mandate . His major problem was how to make much-needed reforms while controlling the pace and extent of that contradictory process . In 1979, the report of the Wiehahn Commission into labour legislation provided the basis for the first major reformist initiative . Reform and control IN 1973, the Bantu Labour Relations Amendment Act had been passed in a deliberate attempt to forestall the rebirth and growth of the union movement . The `works' and `liaison' committees provided for in terms of the Act as the forums for negotiations between management and racially divided unions were immediately denounced as shams by the emergent black unions ; nonetheless, the many committees which were in fact formed gave many black workers their first real taste of organised collective bargaining .

Then, hard on the heels of the uprising 21 centred on Soweto in 1976, the Wiehahn Commission had been appointed in 1977, as part of the state's attempt to confront directly the growing threat of the organised trade union movement operating largely outside of state control . The stated mandate of the Commission was to rationalise the exploitation of black labour through the extension of legislative control over unregistered independent black unions, parly in the hope of stabilising the labour force, and partly because of the danger facing the state of failing to control this rapidly burgeoning force . The Commission stated that its aim was the `promotion of industrial peace' within a `free market economy', and it confronted the fact that unregistered unions appeared to enjoy greater freedom from legislative prohibitions than those which were registered and which were, almost without exception, prepared to acquiesce in the prevailing racist and exploitative labour relations system . 6 The Commission expressed the fear that the option of continuing to repress independent black trade unionism would simply drive the movement underground and make it both harder to control and a potentially greater threat . Registered and unregistered unions were to be brought under state discipline and control, the closed shop would be abolished, prohibitions on political activities on the part of the unions would be strengthened, and section 77 of the Industrial Conciliation Act, which provided for the reservation of certain jobs for certain racial groups would be repealed . In Haysom's words, `There has been some debate on the advantages, disadvantages and the actual impact of registering in terms of the Act . But there was general agreement about the intended purpose of the legislative intervention and the context in which it was introduced .

Capital & Class

22 The Wiehahn labour `reforms' were a product of the inability of the existing industrial relations framework to deal with industrial conflict, and in particular the growth of black trade unions operating outside of the official structures . The reforms were introduced at a time when there was disinvestment pressure and mounting overseas criticism of South Africa's racist and dual industrial relations legislation . It occurred in a context in which changes in the structure of industry and its labour requirements allowed for or needed a more settled and skilled labourforce . Furthermore, the reforms were conceived and executed during a period of mounting political resistance to racial oppression .'' Recent legislative amendments and the publication of a recent set of recommendations by the National Manpower Commission indicate that the state is intent upon tightening control over the unions even further . Official recognition of unions involved a policy decision which flew in the face of 60 years of government thinking, and may be said to have initiated the so-called period of reform which provides the context for recent events in South Africa . While management initially responded favourably to the reforms, as witnessed by a sharp increase in the number of recognition agreements entered into, it was not so pleased with another manifestation of the increase in worker organisation and confidence, the leap in the number of strikes, some of them bitter and protracted . The dramatic rise in worker organisation and power is illustrated by the fact that between 1969 and 1984 combined union membership climbed from less than 14,000 to more than 1 .5 million . Reforms in the sphere of labour relations were contradictory for both sides . Within the union movement a vigorous debate arose over the implications of

organising within a system manifestly designed to bring the unions under state control and discipline . For the state and capital, forced to recognise the reality of working-class struggle, the contradictions of Wiehahn lay in the fact that while reform became essential in order to maintain exploitation and accumulation in a rationalised manner, such reforms were initiated in a situation of crisis and hence from a position of relative weakness . Thus the pace and ramifications of such reform could not be completely controlled or predicted . For example, one of the most significant outcomes of the legislative alterations was the fact that, despite specific prohibitions on political activity by the unions, workers were able to organise legally and non-racially in a form denied them for decades . In the absence of any other meaningful legal form of political expression for the black majority, the increasingly sophisticated and assertive union movement soon began to flex its muscles on issues relevant to workers beyond the confines of the mines or factories - a process accompanied by ongoing debates within the unions themselves over the extent to which they are able to involve themselves in broader political questions without sacrificing their hard-won organisation in the face of state repression . Significantly, this upsurge in workingclass organisation and strength in the 1980s has coincided with the worst recession in South Africa since the 1930s . South Africa essentially is a oneproduct economy, that commodity being gold, which yields more than half of South Africa's exports by value . The price of gold has fallen more than $200 in the past two years . Inflation is expected to top 18% in the next few months, and even the most optimistic forecasts do not envisage a growth rate of more than 2% for 1985 . A growth rate of at least 5% is required to

South Africa prevent unemployment exceeding its current unofficial estimate of 20% . Along with unemployment, the high rate of inflation has political implications, and the 30% fall in the value of the national currency against the dollar has had severe inflationary effects, as has a recent 40% hike in the price of petrol, made necessary by the oil embargo . Lastly, interest rates are in excess of 20%, and the government is confronting an enormous balance of payments deficit by reducing spending in virtually every area apart from defence and by cutting wages in the civil service, further alienating the Afrikaner petty bourgeoisie, already restive over the reform programme . Farmers, another important constituency, have reacted angrily to a freeze in the price of maize, made necessary by rising resistance in the townships to increases in the cost of basic foods . Recent events On 3 September 1984, a new constitution became law in South Africa . It provides for a tricameral parliament, with racially separate houses for coloureds, Indians and whites - the latter having an automatic majority. P W Botha became the country's first Executive President, responsible only indirectly to parliament . The former Defence Minister, having reorganised the state machinery to give an unprecedented role to the military and the police since his accession to power in 1978, had completed his `silent coup' . Africans are completely excluded from the new dispensation, the government having decided that they must exercise their political aspirations in the labour reservoirs known as bantustans . They would, however, be granted a modicum of control of their townships at the local or municipal level . The central motivation behind consti-

tutional reform is the realisation by both the government and capital that the narrow base of capitalism must be expanded . It was hoped that the basis of a black buffer middle class with a vested interest in stability might be generated through the co-optation of certain petty bourgeois elements in the coloured and Indian communities, making them shareholders in apartheid, partners in their own oppression . The youth of these communities, having been given a taste of the fruits of apartheid, could then be conscripted to defend the system in the townships, Angola, Namibia and the rest of the subcontinent . It was to fight the implementation and effects of the new constitution that the United Democratic Front, UDF, had been formed as a multi-class and non-racial alliance of more than 600 worker, community, womens and student organisations . Having attained a 66% majority in the white referendum on whether to adopt the new constitution, the government heeded the calls of those coloured and Indian leaders who feared a massive rejection of the new dispensation should referenda be held in their communities, and organised elections to be held at the end of August last year . The UDF and every major trade union campaigned for a boycott of the elections, and the results reflected the widespread resistance to what was regarded as the fraudulent attempt to portray South Africa as a democracy : the percentage poll in the coloured election was 18%, in the Indian election just 16% . After P W Botha's tour of European capitals in 1984 and the fanfare with which the new constitution was heralded, the western media appeared eager to laud reform and to welcome South Africa back into the world community . Foremost in her support for the regime was Margaret Thatcher . The violent repression of resist-

23

Capital & Class 24 ance in the Transvaal townships focussed media attention more sharply upon South Africa as the realisation dawned that neoapartheid could logically be no solution to the problems of apartheid - one cannot fight fire with fire . Within weeks, however, repression in South Africa attracted world attention to a greater extent than at any time since 1976 . First, the occupation of the British consulate in Durban by six members of the Natal Indian Congress and the UDF hit the headlines . The six sought refuge in the consulate after the police had attempted to redetain them in the teeth of a Supreme Court decision to the effect that their previous detention had been illegal even in terms of South Africa's security legislation . Upon leaving the consulate, the six were charged with high treason .

sanctions . The formal adoption of the new constitutional dispensation, the pearl at the centre of the government's reform programme, was overshadowed by sustained violent unrest in the townships of the Vaal Triangle in the country's industrial heartland . The name of Sharpeville came once again to the fore, foreshadowing even darker events in the resistance which has been continuous during the past nine months . With both the government and capital hoping to convince foreign investors of the viability of a constitution which gave petty bourgeois non-whites a severely circumscribed form of parliamentary representation for the first time in three decades, the implications of the exclusion of the black majority were being witnessed in the Vaal Triangle .

In October, Bishop Desmond Tutu was awarded the Nobel Peace Prize . The Bishop met with Reagan and attacked his policy of `constructive engagement' just as many prominent Americans were courting arrest outside the South African embassy and consulates in the us . Spurred by Jesse Jackson's presidential campaign, black Americans, students and the Democratic Party has at last found an issue on which to bash Reagan . The disinvestment campaign in the us, having had scattered successes during the past two years, now became one legitimated by middle-class support . Senator Edward Kennedy's controversial visit to South Africa in

The ostensible cause of the unrest in the townships, the most widespread since 1976, was a large rent increase . However, as the liberal Johannesburg Star reported, `there are clear pointers that what seemed like revolt at a single-figure rent rise was actually outrage over a number of political and economic issues .' Initially, the demonstrations appeared to be `over an added financial burden that many found unreasonable or unbearable . . . but more general political antagonism was equally clearly shown by the immense anger directed at community councillors . The

January gained much international media attention and provided more grist for the disinvestment mill . Conservative Republicans added their voices of condemnation, and their support for several legislative measures now in the Congress . Under Reagan, sanctions are extremely unlikely, but the fears of the apartheid regime are manifested by the vast amounts being spent on countering the spectre of

small percentage poll in the elections which put these men into office suggests that the whole system of local government has long been by residents . At mass meetings which preceded the stayaway [from work] call, the talk was of rents - rents that people found more and more difficult to pay as General Sales Tax increased, basic foods became more expensive and transport fare rose ."' The police response to black anger was predictable : teargas, rubber bullets and shotguns . In the first

South Africa wave of repression at least 31 blacks were killed . Fuelled by the nationwide resistance to a constitution from which they were excluded, and exacerbated by the effects of the recession, black anger erupted and spread across the country . According to official figures, 68 people were killed and 916 injured in battles between black civilians and the army and police between August and March ; unofficial estimates put the number of deaths during the first three months of 1985 alone at 100, and at more than 175 for 1984 as the centre of the unrest shifted from the Vaal Triangle to the Eastern Cape . 9 On 21 March, the 25th anniversary of the Sharpeville Massacre in which 69 blacks were killed by police while protesting against the pass laws in 1960, at least 19 mourners in a funeral procession were killed at Langa in the Eastern Cape - as in 1960, many were shot in the back . The government immediately appointed a commission of inquiry as the worldwide outcry threatened to lead to even greater international pressure for sanctions and disinvestment . Similar action was taken after the death in detention of a trade union leader and a student activist in April, reflecting the growing concern at international efforts to isolate the regime, and the regime's continuing attempts to portray itself as reformist and democratic .

sion is, as we have already seen, one of the 25 basic contradictions facing both the state and capital, and it is likely to intensify rather than diminish . The government has toyed with the idea of banning the UDF, which it has accused of being merely a front for the ANC and the SA Communist Party, but has so far not done so as it tries vainly to jettison the image of a state which simply silences those voices which it does not like . Instead, an apparently more sophisticated tactic is being adopted, that of charging the leaders of the UDF and trade unions with high treason . Currently, 30 people, including virtually the whole UDF leadership, face such charges ; in 1984 there were five such trials leading to thirteen convictions . From the perspective of the state, the effectiveness of such trials lies in removing whole layers of leadership for long periods (it is expected that the current trials will last as long as two years, and those leaders not charged can be called as state witnesses subject to a minimum sentence of 5 years for refusing to testify against their comrades) while protesting

to the world that what is being done is in the best democratic traditions of the West . As Geoffrey Bindman put it, `It is surely not going too far to say that the imminent treason trials are an elaborate sham . They are an attempt to dress up in the guise of In an attempt to court western public fairness and justice a crude and brutal opinion, the government depicts all forms exercise of arbitrary power ." O Indeed, if of resistance to apartheid as being any further evidence were required as to communist-inspired ; at the same time, it the impact of so-called reform, one need has sought to alter the forms of repression look no further than the the recent conin an attempt to portray itself as adhering viction of a black worker in the Pretoria to the rule of law . In fact, the level of regional court for writing pro-ANC slogans repression during the past year may safely on the walls of the compound in which he be said to be greater than at any time in worked . He received a 12-month susSouth Africa's history . Indeed, repression pended sentence ." will undoubtedly increase even further as reform spawns more and more contradic- Regime under pressure tions . The duality of reform and repres- Yet while the government tries to present

Capital & Class

26 itself as a paragon of moderation, the facts tell a very different story . The reformrepression dichotomy epitomises the contradictions : the government offers to release Nelson Mandela and others from prison as long as they reject violence as a solution, while in the same breath Botha orders the detention of UDF leaders, who have publicly rejected violence, on treason charges ; it offers leasehold rights to urban workers while rigorously enforcing the pass laws, and promises to halt the denationalisation of blacks while continuing the homeland policy ; and it promises an end to forced removals while extending the number of those forcibly removed to the homelands beyond the 3,372,900 who have already become victims . According to the government itself, in the seven months between September 1984 and March 1985, R28 million damage was caused to buildings, R12 million damage to vehicles, 10,000 people were arrested in connection with the unrest, 216 blacks and 1 white were killed and 736 blacks and 15 whites injured (unofficial figures for deaths and injuries are far higher), and 4 policemen had died with 181 being injured . 12 In addition, more than 120 black councillors have been attacked, and more than 150 have been forced to resign and rejoin the people's struggle . The number of killings has increased greatly ; in addition to the police, the army is now regularly deployed in the townships, accentuating the impression of civil war ; meetings and funerals (which, in the absence of other legal forms of protest, have become larger and more overtly political than ever) have been banned ; and the number of people detained without trial continues to rise - more persons were detained without trial in 1984 than in any previous year ; and deaths in detention have continued to occur with depressing regularity .

Since 1980, black students have been in almost continuous revolt against apartheid education, with as many as 400,000 students boycotting classes at the same time . The number of strikes in 1984 climbed to 469, involving 181,942 workers, in contrast to the 336 strikes involving 64,469 workers the previous year, and this in a situation in which there is massive unemployment, the unions are organising in a recession, and 85% of black workers still remain to be unionised . Indeed, the extent of union growth can be measured by the fact that it is only in South Africa that the union movement has grown during the world recession . After the highly successful two-day stayaway from work in the Transvaal in November, this tactic has been used with varying degrees of success on subsequent occasions in different parts of the country . Professor Eddie Webster called the stayaway the most successful in 35 years precisely because the unions had lent it their support under pressure because of the increasing polarisation of the society . 13 Amongst the demands which prompted the stayaway were that all community councillors resign, that the police and army be withdrawn from the townships, the halting of rent and bus fare increases, the release of all detainees and political prisoners, the reinstatement of dismissed workers, and the withdrawal of unfair taxation . It was as a result of their support for the action that the 6,500 workers were summarily dismissed and `deported' to the homelands by the state-owned SASOL plant which converts coal into petrol . Similarly, when black miners went on strike at an Anglo-American mine in April, the strategy of this ostensibly liberal multinational was to dismiss and deport 14,500 workers and to call in the police . Mass dismissals followed by selec-

South Africa

tive rehiring is a tactic often used by management to remove effective union leaders . In retaliation, Anglo-American's offices in downtown Johannesburg were bombed by the military wing of the ANC . The threat posed by the National Union of Mineworkers is particularly great as any disruption of the production of the many minerals with which South Africa is endowed - and gold in particular - will have acute economic ramifications in a very short time . After years of implacable resistance, the Chamber of Mines and the state were forced to recognise the National Union of Mineworkers as representative in the industry . In September, on the eve of the first legal strike by black gold miners, the police were called in . Seven miners were killed and at least 69 wounded . More than 10,000 miners were dismissed . In March this year, 42,000 miners at Anglo-American's Vaal Reefs mining complex - the largest in the world - downed tools in the largest wildcat strike in South Africa's history . As the government's reform programme unfolds at a pace which generates deep-seated fears amongst whites, it is derided as being too little, too late by most blacks for whom any changes within the parameters of apartheid are a contradiction in terms . The recent decision to repeal the Immorality and Mixed Marriages Acts was greeted with scorn by Patrick Lekota of the UDF, who noted that the reason for the change was to appease world opinion and that these pieces of legislation had been chosen because they were peripheral to the system . Yet the contradictions facing the state are epitomised by this decision in that this crack in the edifice of apartheid means that other changes will have to be made to the Group Areas Act and the Urban Areas Act if couples of different races are to be able to live together .

Similarly, the government is establish- 27 ing a negotiating forum in which it is hoped that blacks will participate to discuss their constitutional future . Homeland leaders may participate, but all progressive black leaders have stated that discussions can only begin once apartheid is dismantled and the principle of one person-one vote in a unitary state is accepted . The armed struggle has been escalating to the point at which the costs are becoming great enough to force blackmailed accords onto neighbouring states and still the war intensifies, winning new adherents with every twist in the spiral of repression . Today, with violent resistance endemic rather than isolated in time and space as in the past, the country is facing the reality of civil war . More than 50,000 mourners attended the funeral of the Federation of South African Trade Unions leader Andries Raditsela in May, after FOSATU had called for a one-day nationwide strike . What is significant is that the unions, after a period in which some have displayed a reticence about confronting overtly political questions, are now responding to rank-and-file pressure and taking the struggle beyond the factory gates . On the morning of the funeral, three state buildings in the adjacent white town of Brakpan were bombed . The level of politicisation, and the socialist content of the struggle are, it is safe to say, higher than they ever have been in South Africa . A recent survey noted that it is `clear that worker perception of the free enterprise system and of its benefits to them individually is decidedly dim and that most would see a socialist economic system as a better option than the status quo .' 14 The Observer recently reported that the battles between residents and police at the Crossroads squatter camp in February



Capital & Class 28 `took place against a background of escal- have probably done more to de-emphasise ating racial unrest which has spread to race and highlight class as the main axis of many parts of South Africa and seems to exploitation than much of the work of have become endemic in some areas . progressive organisations . The scale and level of resistance has There were violent clashes between police and residents in more than a dozen black been greater than anything witnessed since townships last week . A number were in 1976, prompting the recently unbanned small country towns where for generations and newly-elected head of the South the black communities, isolated from the African Council of Churches, Dr Beyers political consciousness of the cities, have Naude, to describe the prevailing situ"known their place" and been subservi- ation as one of civil war . Dr Naude cited, ent . In one, near the little wine-producing in support for his view, the ongoing clashes town of Paarl, 40 miles from Cape Town, between police and civilians, the continued black residents threatened with removal use of the army to quell resistance in the to the same place as the Crossroads com- townships, the breakdown of government munity held an all-night meeting at which authority in the townships, and acts of they decided that any government vehicle terrorism between black and black and which entered their township should be black and white .' 6 If South Africa is not in fact in a state of incipient or low level civil "demolished" .'' 5 Having decided that blacks must exer- war, then there can be no doubt that what cise their poliitcal aspirations in the home- now prevails is a state of permanent civil lands, the government must now recognise disobedience, in which acts of resistance the ruins of the local government system against the state and those who are seen to which it has offered as a sop to township collaborate with it are commonplace and residents . Black local councillors have increasingly violent . The ANC has called resigned in droves, some for positive upon the oppressed majority to make the reasons, most due to the fact that township residents have decided to resort to violence where necessary . Several councillors and black policemen have been killed in recent months . The wider implication is that attempts at creating a black buffer middle class with access to capital and influence and a vested interest in stability through which much control can be filtered now lies in ruins as well . And, significantly, a white man was nearly burned to death in the white town of Uitenhage after the killings on the anniversary of Sharpeville - an incident of

country ungovernable, as have leaders within the country such as Cedric Kekane of the Saulsville/Atteridgeville Youth Organisation : `We must make ourselves ungovernable . We must be difficult to control . We must render the instruments of oppression difficult to work . We must escalate all forms of resistance .'" As a result of the reforms so far initiated, a significant realignment of forces is occurring within the white body politic, with the National Party perceived to be a party of genuine reform by many Englishspeaking liberals hitherto opposed to it .

racial violence relatively unheard of in the On the fascist right, however, are parapast . As ever, communist agitators are military groupings which are beginning to blamed for the unrest yet, ironically for flex their muscles - in May 2,000 members such a paranoically anti-communist of the Afrikaner Resistance Movement regime, the institutions of apartheid such marched through the centre of Pretoria in as the bantustans and the local councils protest against the policies of a govern-

South Africa

ment which is now seen as representing big business at the expense of the rest of the Afrikaner nation . Such demonstrations are virtually unknown in the history of apartheid . Yet the history of white politics in South Africa reveals that any party operating from the centre has eventually faded into oblivion in the face of the basic conflict between those whites who will fight to the death to preserve their supremacy in the face of the tide of black liberation . It is likely that the next few years will see further realignments within parliament, possibly involving the emergence of multi-racial parties . Certainly President Botha is now openly courting the support of English liberals as his traditional base disappears . The proportion of reactionary Afrikaners in the ranks of the police, army and civil service is not accurately known, but there is more than a hint of the undermining of reformist policies at the lower echelons of these institutions - indeed, it appears at times as if the government is not fully in control . There is, for example, little doubt that elements of the army have directly undertaken adventures in neighbouring states (particularly Mozambique) which appear to run counter to government policy and further undermine the Nkomati Accord which Mozambique was forced to sign after a combination of military and economic blackmail . Moreover, it is not inconceivable that the neo-fascist forces on the extreme right (in South Africa such terms are obviously relative) might attempt a coup if the Botha regime is perceived to be making too many concessions to the black majority . More interesting perhaps, is the impression of a schism between the state and elements of capital after years in which criticism of the government's handling of the economy had been virtually non-existent . For capital, support for the

reformist regime has not prevented open 29 criticism of the government's handling of the economy. In March, organised business, in the form of six groupings which together employ more than 80% of workers in the industrial, commercial and mining sectors of the economy, noted the myriad recent statements of intent by the government, including the extension of freehold rights to blacks, the resolution of the citizenship issue, the suspension of the forced relocation of people, de-emphasis of negative influx control measures, recognition of the permanence of urban blacks and increased involvement of blacks in decision-making bodies : `the signatory organisations welcome and fully endorse these significant statements of intent . . . Nevertheless, it is vitally important that visible expression is given to these intentions ."" For capital, it appears, the implementation of neoapartheid is far too slow ; for the government, scared of losing its narrowing political base, it is all going too fast ; and for the oppressed majority, the central issue, that of majority rule in a unitary state, has not even begun to be addressed . The government is now being urged to negotiate with the ANC by sections of the Afrikaner intelligentsia as the unrest escalates and it becomes obvious that South Africa's campaign of destabilisation in the sub-continent has failed to halt the escalating guerrilla war . In a recent poll conducted by a Johannesburg newspaper to ascertain the level of support of various black leaders, the ANC received 56% of the vote despite the fact that it has been outlawed for 25 years and its leaders are either in prison or in exile .' 9 Predictably, Nelson Mandela topped the poll, and it is certain that there will be no solution to the problems of the country without the ANC . The UDF continues to echo the ANC's call for a national convention, but the prospects of



Capital & Class 30 a negotiated solution, slim at best, are Notes 1 . John S . Saul and Stephen Gelb, The Crisis in diminishing daily . Recent events in South Africa give the South Africa: Class Defense, Class Revolution (Monthly Review Press, New York, 1981) . impression of a regime in crisis, not really 2 . Stephen Gelb and Duncan Innes, `Economic capable of conceptualising a way out of the Crisis in South Africa - Monetarism's Double morass in which it finds itself as the Bind', in Work in Progress Number 36, Southcontradictions of racial capitalism become ern African Research Service, Johannesburg, 1985, p . 31 . more manifest . Indeed, such is the nature 3 . Rand Daily Mail, Johannesburg, 16 April of reform that every concession forced 1985 . from the state and capital in the struggle 4 . See, for example, on the liberal side, H . creates the space and opportunity for Blumer, `Industrialisation and Race Relations', further organisation and the articulation in G . Hunter (ed .), Industrialisation and Rac of further demands . The contradictions Relations (London, 1965) and R . Horwitz, The almost appear to be self-generating . In the Political Economy of South Africa (London, political sphere the crisis is characterised 1967) . On the Marxist side, see as examples, H . by the growing inability of the regime to Wolpe, `Capitalism and Cheap Labour Power in South Africa: From Segregation to Apartheid' exercise its authority on the black major- in Economy and Society, vol . 1, no . 4, 1972 and ity . In the economic sphere the delayed M . Legassick, `South Africa : Capital Accumueffects of the world recession are com- lation and Violence', in Economy and Society, pounded by the structural contradictions vol . 3, no. 3, 1974 . which characterise the organic crisis . This 5 . Jean de la Harpe and Andrew Manson, `The is not to argue that South Africa is on the UDF and the Development of Resistance in Africa Perspective no . 23 verge of revolution, for the forms of South Africa', in (Johannesburg, 19830, p . 58 . organisation necessary to overthrow the 6 . Report of the Commission of Inquiry into state are still some way short of realisation Labour Legislation, Government Printer, and there are many contradictions which Pretoria, 1979, paras . 1 .19 .1-5 . the forces of liberation have to overcome . 7 . Nicholas Haysom, `The Industrial Court : As a result of the crisis which has engulfed Institutionalising Industrial Conflict' in South (Southern African Research the regime during the past nine months, African Review Two Service, Ravan Press, Johannesburg, 1984) important sections of the ruling class such p . 108 . as monopoly capital are openly question- 8 . The Star, Johannesburg, 6 September 1984 . ing the wisdom of perpetuating apartheid . 9 . The Star, Johannesburg, 30 March 1985 . Within the National Party itself there are 10 . The Guardian, London, 25 March 1985 . those who appear to doubt whether the 11 . Rand Daily Mail, Johannesburg, 16 April government has any coherent strategy for 1985 . 12 . The Star, Johannesburg, 30 April 1985 . the future . The crisis is exacerbated by the 13 . Rand Daily Mail, Johannesburg, 30 April growing disinvestment movement, partic- 1985 . ularly in the United States . There is little 14 . Financial Mail, Johannesburg, 22 March doubt that the state is on the defensive and 1985 . that the initiative in struggle may well 15 . The Observer, London, 24 February 1985 . have passed to the forces of liberation . As 16 . The Star (International Airmail Edition), a consequence, it can be expected that the Johannesburg, 8 April 1985 . . ANC Weekly News Briefing, vol . 8, no . 32, regime will resort increasingly to repres- 17 sion as its every reform appears in contra- African National Congress of South Africa, London . dictory fashion to strengthen resistance . 18 . Rand Daily Mail, Johannesburg, 14 March The battle for South Africa is likely to be 1985 . 19 . City Press, Johannesburg, 9 March 1985 . increasingly bloody .

John Harrison and Bob Morgan

Hattersley's economics • THIS PIECE is about tensions within Labour's economic policies . Part one outlines Shadow Chancellor Roy Hattersley's views . Part two looks at official Party policy, to assess whether Roy is swimming with or against the tide . Part three offers some critical comments . The aim is to stimulate comrades' interest in Labour's forthcoming conference discussion . The debate may prove a watershed .

The key source for this section is a six-inch deep stack of speeches and interviews . The material is organised around two themes . One is job creation, including easing constraints on employment . The other is industrial modernisation .' Where space permits, we let Roy speak for himself.

Roy's policies

Jobs

Jobs are where it's at . `The overwhelming priority is a reduction in unemployment . That would be the principal priority of a Labour government this year, next year or the year after .' (10 .5 .85) Jobs will come from increased state investment : ` . . . reflation means that money has to be directed specifically into the areas where job creation is the most probable outcome of spend-

31

Capital & Class 32

ing money . That means basically public sector capital works . That is the only way to do it .' (10 .5 .85) But prospects are limited . `Whether "full employment" is still the Keynesian concept, with no more than frictional unemployment, I am not sure . I certainly don't see full employment meaning everyone who wants to work from 16 to 65, for 35 hours a week . . . equally we've got to be frank and say we are not going to bring it about in the lifetime of a single Labour government .' (10 .5 .85) Hattersley won't be drawn on numbers . `When the election comes, it will be our democratic duty to reinforce our promise of reduced unemployment with a specific target .' But, for the moment, we must make do with `an unqualified promise that the next Labour government will make substantial and sustained reductions in unemployment' . Unfortunately `substantial' is a pretty flimsy concept . Roy's recipe for the last budget - boosting spending by £3bn, twice Lawson's figure but only three-fifths of Heath's - was hardly encouraging . This reticence has two sources . One is a belief that Labour's 1983 pledge to cut dole queues by two million over five years was a mistake . `After the last election I said that the people of Britain looked at our economic policy, admired our compassion but doubted our capacity .' (18 .1 .85) Hattersley's response to the fear that Labour might be branded as the party of profligacy has been to butcher aspirations to cover his right flank . He now fosters the image of a new realism in Party economic thinking . `The belief that we can turn principle into practice has (since) been encouraged by the advocacy of plans which even our most hysterical of opponents cannot describe as impractical extravagance .' (18 .1 .85) The other argument for caution is the fact that `putting Britain back to work will be a great deal more difficult in 1988 . . . because of . . . a malign inheritance which we cannot quantify today .' (14 .10 .84) What we can do, however, is to identify the key constraints on job creation and devise policies to minimise them . Roy cites two as crunch : the threats of inflation and of a sterling collapse . 2 Reflation would threaten prices in three ways . Bottlenecks could lead to shortages, prompting speculative hoarding and profiteering . Hattersley would deal with this by selective price controls . `I favour the reconstruction of price controls . . . but not blanket [controls] . . . The sort of selective price policy . . . which prevented unreasonable price increases - increases that were the product of a company's monopolistic power in the economy - and which prevented exploitation, I want to see again .' (10 .5 .85) Job creation could also lead to wage pressure . Here Roy

Hattersley's economics

favours a voluntary incomes policy, along social contract lines . `There is only one way in which we can secure economic expansion without inflation . That is to negotiate with the trade unions an agreement about the highest level of money incomes which can be sustained in any year without increasing either prices or unemployment . It is absurd that free collective bargaining - a system which gives most to the strongest - should be regarded as a test and tenet of socialism .' (Sept 83) Or, in a more ruminative mood, `I see the need for an agreement with the trade unions on pay, but then I see the need for an agreement with the trade unions on everything . . .' (10 .5 .85) Finally, expansion might push up import prices by pulling down sterling . Hattersley would protect the current account by a combination of Buy British state purchasing policies and selective, temporary, import controls . `Action on imports is certainly a second best solution'- second to an internationally co-ordinated expansion - and `an essentially temporary expedient' (14 .10 .84) Nevertheless `in certain sectors there have to be limited and temporary import controls to allow industry breathing space . The technique of operating import controls to make them effective is one thing which we are looking into in great detail now .' (10 .5 .85) On capital account, old-style exchange controls are ruled out . `We cannot reintroduce exchange control of the types which were operated in this country between 1947 and 1979 . . . Reintroducing the system . . . is literally impossible .' (13 .1 .85) Hattersley's alternative has two components . One is talking up sterling . `Very much of the flight from confidence in previous Labour Governments has been not because antagonists abroad did not agree with what we did, it was because they feared that we didn't know what the hell we were doing . Next time we are going to say to them "We don't expect you to like it but we do expect you to realise that the numbers add up and that we are deserving of confidence in terms of our competence" .' (10 .5 .85) Fortunately, he does not intend to rely solely on jawboning . `The Labour Party is committed to a re-introduction of exchange control .' (13 .1 .85) This will take the form of `a scheme intended to achieve the repatriation of a substantial amount of the portfolio investment which has left this country since the abandonment of exchange control, and to deter further outflows .' (13 .1 .85) This ingenious proposal - reportedly the brainchild of a sympathetic merchant banker - works by tightening the criteria for tax breaks . Institutions (pension and assurance funds, investment and unit trusts, charities) and individuals will lose existing fiscal privileges unless they reduce the foreign component of their asset mix to a stipulated proportion3 5 per cent, roughly the 1979 C&C 26/SUMMER 85--C

33

Capital & Class 34

average, has been suggested . `Institutions will, in fact, be given the right to elect the tax regime under which they wish to operate . Those which elect to observe the criteria will enjoy the fiscal privileges which they presently possess . The net effect of the scheme - indeed, the reason why it will secure the repatriation of British capital - is that the tax privileges enjoyed by institutions which invest in Britain will raise the

net return on their portfolios above that received from foreign investment.' (13 . 1 .85) More accurately, their net returns will fall by less if they opt to sell foreign holdings . 4 Hattersley expects inflows of around £20bn and that this will more than offset deterioration on current account . Sterling will appreciate - good for inflation, bad for exports . Modernisation Roy is an emphatic moderniser . `Anything designed to slow down the march of technology - including the Prime Minister's promise to "end the tax bias in favour of machinery" - will only make Britain less competitive in the long run as compared with countries which have welcomed and encouraged progress . . . Wage cuts designed to make manual labour more competitive against machinery are just a modern form of Luddism.' (14 .10 .84) Welcome shades of Marx . More specifically, `it is the Government's duty to create the conditions in which the competitiveness of British industry can be improved .' (16 .5 .85) Investment is the key . The main constraint - at least the main easable constraint-is finance . `The problem, [the banks] say, rests with the borrower not the lender, the real rate of return on manufacturing industry is too low to finance the necessary investment . That judgement is half right . But only half right . . . The only certain way [to improve investment] is to alter the ratio between the cost of new capital and the return on investment . I do not minimise the importance of increasing the return . But in the short run, that solution will not be achieved sufficiently to overcome the timidity of the British entrepreneur . I therefore choose a reduction in investment cost .' (16 .5 .85) The vehicle for cheap money is to be a National Investment Bank (NIB) . This new institution - built on the foundations of a newly-nationalised Investors in Industry (3i) -'will be the centrepiece of Labour's economic and industrial policy at the next election' . (16 .5 .85) `The initial financing of the bank will come from repatriated portfolio investments held overseas .' 5 (16 .5 .85) Institutions wishing to retain tax privileges will be required to `invest a

Hattersley's economics proportion of total funds - roughly equivalent to average repatriation and future retention - in the NIB .' (13 .1 .85) `The holding of funds with the NIB . . . will attract a guaranteed rate of return in line with market returns .' (16 .5 .85) 6 Since the bank will offer subsidised loans, many of its operations will be loss-making . Parliament will fix a maximum operating deficit annually in the public expenditure estimate . This will constitute `the principle though not the exclusive scheme of government assistance to Industry' . (16 .5 .85) The deficit will be the only direct charge on the exchequer . Otherwise, the government will adopt a hands-off approach . The NIB will be a quango, not a government department . 7 `The NIB will be precluded in its statute from making loans to firms that are not potentially commercially viable . . . the NIB will not exist to subsidise jobs .' (16 .5 .85) 6 `The bank will be expected to give sympathetic consideration to [cases where] the balance sheets of the firms concerned are insufficiently strong to raise an adequate level of debt finance from conventional sources, whilst their past track records discourage subscribers of new equity . Nevertheless, each firm offers the prospect . . . of viability over the longer term' . (16 .5 .85) The NIB will give `priority to small and medium sized enterprises on the grounds that finance is generally available for large companies .' (16 .5 .85) Applications from multi-nationals will be considered only if they can show that the project could not attract funding elsewhere, and will receive low priority . Recipients of NIB money will be required to come up with a project plan, agreed between management, workers and the bank, covering the duration of the loan . 9 Periodic progress appraisals must also be presented . The central role of the NIB in promoting investment will be supported by four other policies . Two, about which Hattersley has said little beyond the fact that they are labour policy, are extra R&D spending and tougher anti-monopoly powers . A third is encouragement to workers to press for high investment . `Profits must be used for productive purposes . . . divided restraint is not an adequate solution . For it does little except postpone the distribution of profits and does nothing to ensure their re-investment . . . The balance between retained earnings and dividends, the way retained earnings are allocated between different investment projects and the distribution of dividends between shareholders and employees are all areas in which we must extend collective bargaining .' (14 .10 .84) Hattersley has also expressed a keen interest in Swedish-style, workercontrolled investment funds . `In my speech to the Conference of Socialist Economists last

35

Capital & Class 36

year [actually, the SERI I quoted the example of the Swedish investment banks where, in order to convince trade unions that high profits would not be distributed into dividends, but would be used to invest in job-creating industries, they have a profit levy . This is invested in the regional investment banks which are controlled by trade unions . This means, in the short term, that trade unions feel more involved in that whole swathe of decisions that that in the long term more and more of industry is owned by the investment banks which are an extension of public ownership .' (June 85) Finally, he intends to re-jig the mixed economy to bring about `a substantial extension of social ownership' . (23 .9 .84) One object of such an exercise is `to improve the efficiency of British industry by creating the opportunities for and availability of the new investment which private institutional sources have failed to provide' (23 .9 .84) . . . But `I do not propose an extension of nationalisation' . (23 .9 .84) `I don't believe that the economy I want to see, let alone the society I want to see, can be created without their being an extension of social ownership . But I don't believe that it has to be the old-style public utility, a corporation state monopoly, run from London . We've got to have more local authority public enterprise, far more co-operatives, much more autonomous social ownership out in the country, not run from Hobart House .' (10 .5 .85) Elsewhere, he has linked nationalised industries with multi-nationals, he spoke of `the tyranny and inefficiency of either massive state ownership or the domination of unaccountable private monopolies' . (16 .10 .84) The centrepieces of Roy's approach, then, are `realistic' reflation, backed up by a voluntary incomes policy and a new tax regime to encourage institutions to repatriate funds, the funds will be channelled into a National Investment Bank which will provide subsidised loans for investment . But this approach, as we argue below, shows some marked changes from that adopted by Labour in its 1983 manifesto .

Maverick or mainstreamer?

Hattersley must have been pleased with his reception at last year's Labour Party Conference . His sponsorship of new forms of social ownership and of controls over capital outflows, and his warnings against promising too much, won applause . He seemed to have won the support of delegates for his developments of Labour's economic policy . But Doug Hoyle, speaking for the NEC, also made it clear that `the commitments that we outlined in our 1983 manifesto still remain the basis of our policy' . (Conference Report, 1984, p . 200)

Hattersley's economics 37

Is there a contradiction here? If so, how is it likely to be resolved?

For AES afficionadoes Labour's 1983 manifesto must have rung many bells . Unemployment was to be cut to below one million over the course of a parliament by reflation backed up by a radical industrial strategy and planned trade . Familiar stuff. But the attempt to integrate industrial democracy and planning was new . This approach had first surfaced in the TUCLabour Party Liaison Committee document, Economic Planning and Industrial Democracy : the framework for full employment (EPID) . The sub-heading indicates the importance attached to planning and industrial democracy in promoting employment . This document formed the basis for much manifesto policy on the economy . EPID reviewed past UK planning experience to draw lessons . The 1974/79 Labour Government's failure to implement widespread planning agreements is largely explained by : (a) Whitehall resistance . (b) Absence of a coherent planning framework within which agreements could be negotiated . (c) Inadequate powers to ensure company compliance . (d) Uncertainly about the trade unions' role in the planning process . To overcome these problems, especially corporate non-compliance, key firms in priority sectors should in future be squeezed both from above, via National Planning agencies, and from below, by workers and their union representatives . Trade unions' influence should be increased through new rights to information, consultation and representation . New institutions were also needed . A Department of Economic and Industrial Planning would oversee a five-year national plan . It would also sponsor the National Investment Bank and the National Enterprise Board, co-ordinate medium-term planning and, more generally, offset Treasury pressures to respond to short-term crises by ditching a planned return to full employment . A National Planning College would train public servants, management and trade unionists . This would help counter any civil service hostility to Labour's policies . However, National Planning Agencies would not exercise direct control over the whole economy . For, as EPID argued : `A rigid approach from the centre would also be inconsistent with what must be an essential feature of the planning system - a high level of participation by workers and management at sectoral, regional, company and plant level .'

Hattersley's inheritance

Capital & Class Planning would be democratised at all levels . A strengthened National Economic Development Council would conduct tripartite discussions at national, sectoral and industrial levels, to form a new National Planning Council . This forum would develop a National Economic Assessment . A follow-up document, Partners in Rebuilding Britain (Tuc-Labour Party Liaison Committee, March 1983) saw the Assessment as an extension of collective bargaining to the national level . Parallels with the social contract are obvious . Trade union involvement in planning at sectoral and firm level would also be boosted . Firstly, the Sector Working Parties and Economic Development Committee of NEDC - with increased union and management participation - would develop sectoral plans . Second the unions would take a leading part in negotiating agreed development plans with key firms in priority sectors . The plans would cover corporate purchasing policy, investment plans, pricing and training and so as new statutory powers would be introduced to ensure compliancy. Such powers would allow a Labour Government to refuse a company the right to raise prices, to withhold access to credit and to fail to offer protection from imports in cases of non-compliance . Third, public ownership would be extended significantly to increase social control. The manifesto `shopping list' included the nationalisation of all assets privatised by the Tories, plus the nationalisation of companies in the electronics, pharmaceuticals, health equipment and building materials sectors, one or more clearing banks would also be taken over if they proved obstructive . Finally, workers would wield influence on corporate planning, even in firms not covered by an agreed development plan, EPID summarises its major message' . . . the failure to influence decisively the strategies of enterprises is the key weakness in past attempts to plan . Progress towards our economic and social priorities therefore requires a two-pronged approach : The nationwide and democratic structure of the trade union • movement must be brought to bear on the centralised areas of economic power . • A strong national planning focus must be created to coordinate the activities of all agencies involved in planning .'

38

Developments since '83

The 1984 Conference accepted an NEC statement on the economy entitled, A Future That Works . Whilst clearly based on the 1983 Manifesto, the statement embodies shifts in emphasis, and indications of changes to come . The potential opportunities of technical change received greater stress than previously . And, whilst the commitment to extend public ownership is reiterated, the need for an alternative to old style nationalisation is raised . `We must develop new models of socialist enterprise that build on the

Hattersley's economics 39

initiative and creativity of working people and combine productive efficiency with responsiveness to consumer and community needs, if we are to inspire popular support for socialism .' Municipal enterprises and co-ops are cited as examples, and a commitment is made to build on existing achievements . In March of this year Labour launched its jobs and Industry Campaign . According to a major campaign pamphlet, its themes are based on the policies set out in A Future That Works and Partners in Rebuilding Britain . Many elements of the 1983 Manifesto find a place in the campaign . The overriding aim is to `convince people that Labour can get Britain working again .' Working Together for Britain - a major campaign document - argues that `We need a partnership of government, unions and management - working together to plan the future of their firms .' The mechanisms envisaged include agreed development plans, more industrial democracy and an extension of public ownership . But others have died a death . There is, for example, no mention of a Department of Economic Planning . Much mention is also made of new technologies and skills . `High tech socialism' is contrasted with `no tech monetarism' . This emphasis has led the FT'S political editor, Peter Riddell, to remark that `The Labour Party is advancing towards 1963 . Since the Miners' strike the party leadership has spiced up the modernisation theme expresed after Neil Kinnock's election, and the Jobs and Industry Campaign echoes both the style and substance of Harold Wilson's `white heat of technology' speech of 1963 .' (Marxism Today, May 1985) There is clearly a major tension within Party policy between Hattersley-type policies and the spirit of '83 . And, whilst much fudging can be expected, there are also signs that disagreements may soon come to a head . Hattersley seems confident that his conception will prevail . He is on record as expecting important policy changes to be passed at the next two Conferences (Times 3/6/85) . Benn, on the other hand, recently denounced the latest TUC-LP Liaison Committee economic policy statement as `an inadequate and incredible document which even Mr Francis Pym could have found acceptable' containing `violently antisocialist elements' . (Guardian 23/5/85) Part three offers some observations on current policy thinking in the hope that they will contribute to clear Party debate, rather than more fudging and nudging . 1 . Hattersley's talking down of job prospects is deeply disturbing . He is right to point both to Labour's lack of economic credibility in '83 and to constraints on expansion . But the correct

Observations on policy

Capital & Class 40

response would be to amass a credible and powerful planning armoury . The more severe the constraints, the greater the need for planning to overcome them . The 1945-51 Labour Government, armed with a plethora of wartime controls, created 2'h million civilian jobs in three yeras . 2 . Hattersley has effectively junked planning, in the traditional sense of direction, in favour of a sixties-style manipulation of market forces via taxes and subsidies . He rejects widespread nationalisations (with a vitriol which, despite verbal pyrotechnics, amounts to a ditching of clause IV) .' ° He never mentions Agreed Development Plans, which in his scheme are implicitly replaced by Project Plans, applicable only to those small and medium firms which choose to borrow from the NIB . He also sees no need for a Department of Economic Planning, or a National Planning College, as a counter-weight to the Treasury. His view is that `obdurate civil servants in some Departments become an excuse for failure . Ministers who knew that they wanted to do and got on with it could normally deal with their civil servants . That's my experience . But the economic staff of the Treasury really does have to reflect our view on economic management, and that means that there has to be a new Senior Economic Advisor . . .'(10/5/85) What about a National Economic Assessment? `There has to be a National Economic Assessment . It is a terrible phrase and I try not to use it . Being more conversational, there has to be a process whereby we all sit down together and get the common denominator of what is best . I don't believe all that needs a permanent institution . My own guess is that Neddy will go on, but it is more likely that I would, for example, come down to the House and say, `Mr Speaker, I have completed my conversations on the prospects for the economy this year and the conclusions are printed in a white paper' . All that will be done by talking to trade unionists and industrialists at No . 11 Downing Street . It cannot be done at a big meeting . It's not disingenuous or secret, but there is no way that you can hammer out a real agreement without there being any sweat about it .' (June 85) The only concession to planning we can detect in any of Roy's pronouncements is the acknowledgement that `even if we get these new forms of social ownership, there needs to be a regulatory agency for the private sector combining the old role of the Monopolies and Mergers Commission and the old Prices Commission . My own view is that the price sanction is by far the best sanction, but we are working at the moment on the notion of a central institution to see that the rules of the mixed economy are observed' . (June 85) Elsewhere, selective price controls are viewed simply as a device to combat monopolistic abuse . (section one)

Hattersley's economics

Hattersley's alternative to directive planning - which he dubs a National Investment Policy - hinges on repatriating institutional funds and channelling them into a NIB . He sees this scheme neatly short-circuiting two potential difficulties ; a collapse of sterling and a shortage of investment funds ('The scheme will provide a conclusive answer to the question so often repeated by critics of a high investment strategy - where is the money coming from?') (13 .1 .85) ) The first is a serious threat ; the second a non-problem . The government could `find' the money by printing it . This would not be inflationary providing the investment materialised (and if it did not, there would be no need to print fivers to finance the NIB) . City confidence might well be shattered by a leap in the money supply, even if accompanied by extra output . But repatriating institutional funds would have precisely the same effect on the money supply . For the NIB approach to work, two conditions must be obtained . First, the offer of subsidised loans must prompt small and medium firms to embark on massive investment programmes, despite poor profitability, questionable assumptions . Second, such an investment surge must boost accumulation significantly . This is most unlikely . Most production and investment and hence the pace of accumulation - in the manufacturing industry is dominated by giant corporations, many multi-national in scope . Since they would be treated as lepers by the NIB, why should they give a toss about a National Investment Policy? Finally, Hattersley's `exchange control' policy is not a policy of exchange controls at all . It is a package of fiscal incentive . Since no one is compelled to keep assets in sterling, there are no

41

controls .

This misnomer is symptomatic . By willfully abusing terms like `exchange controls', Roy has managed to get away with ditching Conference policy under the guise of creative development . 1. Hattersley rightly accords these themes major importance . He also stresses the alienation of poverty and income redistribution . Topics which are not discussed here . 2. Hattersley cites a potential shortage of investment funds as a third major constraint . We discuss this under modernisation . Capacity and skill shortages are also mentioned, though not discussed in detail . 3. Specifically, institutions would lose the following privileges . Occupational pension funds, tax exemption and the employer's right to deduct contributions . Life assurance : right to issue qualifying policies . Charities : tax exemption . Investment trusts : special Capital Gains Tax (cGT) rate . Investment and unit trusts and major companies with large portfolios would also have their shares treated as foreign securities (13 .1 .85) .

Notes



Capital & Class

If institutions retain `excess' foreign securities, their net returns fall 4. because (extra) tax is now levied . If they repatriate the funds, the tax burden remains unchanged but gross returns presumably fall as the motive for holding foreign securities was their greater earning power . 5. `If none of the present capital exporters chose to make themselves institutions [i .e . repatriate funds to retain fiscal privileges, JH, BM] the increase in revenue to the Treasury would be immense . If the institutions do not choose to invest in Britain and its National Investment Bank, the additional taxes which they pay will be available for that purpose' . (13 .1 .85) 6. `The NIB stock will be priced at market rates, carry no stamp duty and have the same capital gains tax treatment as gilts . It will be guaranteed by the Bank of England and will trade alongside gilts with equal liquidity' . (13 .1 .85) 7. Ministers will appoint the chair and board of directors. There will be legal restrictions on the communication of commercially privileged information to government departments and agencies . (16 .5 .85) 8. However, rather confusingly, `it may be possible to make a fourth distinction from the conventional terms for the supply of finance . This is the assessment of returns . Thus a social return rather than a narrow accounting return may allow for a more efficient allocation of funds . A social return would take account of external costs and benefits' . (16 .5 .85) But this passage seems to be an aberration . 9. The plan must cover product and market strategy, location, employment levels and conditions, pricing, financial projections, investment, technological innovation and training . (16 .5 .85) 10 . Hattersley is also out of line with Party policy on re-nationalising all assets privatised by the Tories . `I'm not terribly worried about Thomas Cook's . I'm not terribly worried about the old British Rail Hotels . I wouldn't like to waste time on a Bill concerning either of those, when we ought to be pursuing new forms of public ownership .' (10 .5 .85)

42

references

Sept83 Interview in New Socialist, Sept/Oct 1983 . 23 .9 .84 Speech to the Socialist Economic Review Conference, County Hall, London SE1 . 14 .10 .84 Aneurin Bevan Memorial Lecture, Redditch Town Hall . 16 .10 .84 Speech to the Small Business Research Trust . 8 .1 .85 Speech to a public meeting organised by COME, St Albans Town Hall . 13 .1 .85 Speech to the Teesside Fabians, St Mary's Centre, 42-50 Corporation Road, Middlesborough . 10 .5 .85 Interview in Tribune . 16 .5 .85 Speech at County Hall, London SE1 . June 85 Interview in New Socialist .

Paul Teague

The Alternative Economic Strategy: a time to go European controversial to say that industrial production and the division of labour are being thoroughly reshaped on a global basis . Equally non-contentious, for socialists at least, ought to be the observation that this process of internationalisation has substantially reinforced the citadels of capital . The British economy has become deeply enmeshed in this process . Transnational companies now dominate the vast majority of industrial sectors in Britain. These companies have opened up both industry and employment to the full impact of the worldwide restructuring of capital . At the same time, however, British financial institutions in their role as 'off-shore banker' have worked to facilitate the process . The statistics bear out Britain's central role in the development of transnational capital . The United Kingdom has the biggest share of USA multinational companies investment stock in Europe, taking 51% of the total . In money terms, this amounts to over $20 billion . Between 1963-1979 there was an overall decline of some 769,000 workers in manufacturing industries in the UK . Within the same period, however, the number of people employed in foreign transnational companies increased by 435,000 . In 1963, 7% of the total manufacturing workforce was employed in foreignowned companies, the figure now stands at 14% . Transnational companies presently contribute 40% to Britain's GDP . The penetration of the UK's industrial base by inward investment has been equalled by an upsurge in the overseas activities of UKIT IS HARDLY

The internationalisation of economic life imposes increasingly recognised constraints on labour movement activities, both at the level of industrial negotiations and in the scope of national economic policy . Part of the answer lies in extra-national initiatives, especially in Western Europe . But it would be wrong to see in European policy an escape from acute problems of policy al 43 national level . This article examines present labour movement thinking on Britain's economic relations with Western Europe,

Capital & Class 44

owned transnational companies . In 1981, for example, the foreign investment of these companies incresaed by over 40% to £5 billion .' The Labour Research Department conducted a survey of the activities of UK multinationals in manufacturing . The main conclusion reached was that `since 1978 the top British manufacturing companies have cut their UK employment by more than 470,000 . But at the same time they have expanded their non-UK workforce by almost 40,000 .' 2 In other words, it was not simply the recession, but the desire to restructure internationally, which prompted the transnationals to enact their much-publicised rationalisation programmes . Trade is a further indicator of the dominance of transnational companies within the UK economy . Approximately four-fifths of UK exports are produced by enterprises with overseas subsidiaries . In 1981 these subsidiary concerns purchased 50% of UK exports . Furthermore, about half of the UK exports in the same year were made by a mere 72 firms . 3 The policies of Britain's financial institutions have accentuated the process of internationalisation . Since 1979 when the Conservative Government abolished exchange controls, there has been a marked acceleration of overseas portfolio invstment by British-based financial institutions . Between 1979-1981 the flow of private overseas portfolio investment increased from £909 million to £4,100 million . The amount of pension funds invested abroad has risen by 100% in five years, from £10 billion to £20 billion . It is thus hard to dispute that capital's dominance of the world economy has reached a new and more intense level, or that Britain is at the very heart of the process .' These transformations have created major problems for the British labour movement . The major restructuring plans begun by transnational companies in recent years have caused thousands of redundancies and highlighted the weakness of the trade unions in the face of this process . The simple truth is that trade unions have not been able to construct an effective countervailing strategy . They have remained impotent and vulnerable . One key problem is that faced with an announcement of closure by a multinational, the trade unions are automatically placed in a defensive and weak position . In a representative case, trade unionists actively campaigning against closure by a multinational write : `Evidently closure situations where union countervailing power is most urgently needed are also ones where the methods available to labour to hamstring a multinational are at their weakest' . 5 Even at the level of analysis, writers who are sympathetic to the cause of labour have been unable to outline a coherent and workable strategy . Some obviously think the task so difficult that

Alternative Economic Strategy they do not even attempt to construct any guidelines for action . For example, Tony Lane after a detailed and precise narrative on the strategies of Dunlop to reorganise its production worldwide, concludes with the following statement : `The author of this paper has no answers to the problems and questions raised by the case-study . In the short term at least perhaps the most that could be hoped for would be measures which tie foreign investment to bilateral trade agreements . This however is to open the discussion into an area of which this writer has no knowledge .' 6 Similarly, a recent publication, The Job Crisis and the Multinationals, surveyed the role of transnational companies in the job losses in the West Midlands .' The book gives a vivid picture of how the international activities of such firms have brought the local economy to its knees . But in terms of developing a strategy which could challenge such processes the book is rather weak . The last section details in uncritical fashion a number of traditional approaches to the problem - e .g . the need for international trade union collaboration, planning agreements, etc . The limitations of these policy options are not called into question . It is self-evident that the left is on much firmer ground when analysing the strategies and practices of transnational companies, then when finding ways to counter them . Indeed, the major tendency of left economists has been to search out the key dynamics and features of the internationalisation of capital . This paper will have a different focus . It will examine the various strategies and policies developed by the left to bring the process of internationalisation under control . The major theme will be that most of the strategies put forward to harness the dynamics of international capital are deficient, and that a major rethink has to take place on the subject . It will be suggested that the establishment of a new set of extra-national policies at the European level would constitute a novel and effective approach . There will be three main sections to the paper . The first will examine the conventional strategies of the labour movement in response to the internationalisation of capital . The conventional strategies consist of two differing approaches . One advocates national policies and instruments to challenge transnational companies . The other argues for action at the international level . These two different positions will be examined in turn . The second section will detail and analyse recent calls for a more European-orientated economic strategy . In particular, it will ask whether the case put forward for a European strategy would place the left's approach to the new integrated world economy on a more sound footing . The last section will draw out some conclusions from the preceding discussion, and develop the theme that the construction of extra-national policies at the

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European level should be a major aim of the labour movement at the present time .

Conventional strategies : the national approach

The national approach is a widely held approach on the left . It perceives the nation-state as the most appropriate context in which to harness the activities of transnational companies . The main emphasis is on trade unions and a socialist government acting together to align the multinationals with overall policy objectives for the economy . For example, planning agreements to control large enterprises supported by selective trade controls which could also shelter Britain from intense international competition were the main approaches to international problems in the alternative economic strategy formulated by the left during the seventies . There are three basic assumptions behind the analysis . Firstly, that outside the national context the trade unions will automatically lose much of their bargaining strength . Secondly, that trade unions acting in isolation cannot confront the issues thrown up by international capital, and that therefore the need is for some form of alliance with labour or social democratic parties . The third and central premise is that national economic and industrial policies can shield a state's economy from the intense forces and pressures of international capitalism . 8 This last assumption highlights the continuing influence of 'Keynesian' formulations on the left's strategic economic thinking . The most pervasive notion is that instruments of economic policy-making must be established at the level of the nationstate . The theoretical shortcomings of this position were the major theme of a recent article by Hugo Radice in Capital and Class . 9 The applicability of this national model to guide genuine social and economic reform is called into question by the failings of the French Socialist Government's initial economic programme, and the debacle of the Labour Party at the last general election . Clearly, the economic programme presented to the British electorate at the last election by the Labour Party was seriously deficient . The programme was a straightforward Keynesian one, sparsely seasoned with ideas from the AES . The underpinning economic logic was exactly the same as the one used at the 1964 General Election . No account had been taken of the fundamental changes in the world economy since that date . Small wonder the electorate rejected the proposals out of hand . A much more serious and immediate problem for socialist economists is the experience of the French Socialist Coalition Government over the past four years . It is clear that the Government's first economic programme went deeply wrong . The initial euphoria has been replaced by desperate attempts to claw back electoral popularity .

Alternative Economic Strategy Unfortunately, the Mitterrand administration is looking increasingly like the crippled sibling of the 1974-1979 Labour Government . It is therefore worth giving some details of the French experiment .

The French experiment The French Socialist Party, in alliance with the Communist Party and other socialist parties, took office in May 1981, and immediately embarked upon an ambitious macro-economic programme . The expansion strategy was three pronged : the economy was given a boost by an increase in public expenditure ; consumption was raised by a series of measures aimed at alleviating low pay ; and interest rates were held down through subsidies to encourage industrial investment . As a result, the French growth rate increased by 2% to become the highest in the industrialised countries apart from Japan, and unemployment ceased to rise . However, there were costs : in one year France's current account deficit expanded three-fold, from FFR 26bn to FFR 78b ; the inflation rate was amongst the highest in Europe . The most ominous indicators, however, revealed that the reflationary programme had failed - the strategy of demand management had not succeeded in producing an increase in investment or sustainable growth in the French economy . As a consequence, the priorities of economic policy-making were reordered - the central concerns became the curbing of the balance of payments deficit and the lowering of the inflation rate . During 1982 France underwent several rounds of re-alignment within the European Monetary System which, in total, amounted to an 18% devaluation . The Government introduced a policy of freezing prices and wages in its endeavours to reduce inflation . These policies brought about a mild improvement in the economic situation . However, they were insufficient to arrest the balance of payments deficit . This caused the French Government to devalue the franc further in 1983 and to enact even tighter fiscal and monetary policies . The austerity programme was now in full operation . These policies precipitated a series of political crises . The Socialist Party suffered a series of damaging electoral defeats in recent local and European elections . Moreover, in these electoral contests the `new right' emerged as a strong political force in France . The shift in Government economic policy has also led to increasing strains within the left . This culminated with the departure of the Communist Party from the Government . The initial radical economic and political strategy is now completely defunct . Different explanations are put forward for the failure of the

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Socialist Government's first economic programme . The first is that the policy was jettisoned by capitalist sabotage via an investment strike and speculation against the franc . This view is rather conspiratorial . While the French capitalist classes were hardly enamoured with the socialist strategy, there is no evidence of a systematic attempt to undermine the economic programme . A second and more plausible argument is that there was a mismatch between the Socialist Government's economic policies and the peculiarities of the French economy . In particular, the first economic programme placed little emphasis on rejuvenating the mature industries which predominate in the French economy . A more cogent explanation, however, is made by David Cobham : in his assessment of economic policies under the Mitterrand regime he states `it should be said that the failure of the Mitterrand expansion does not imply the inevitable failure of "socialist" policies in general, but rather the inadequacy in the present economic environment of a particular kind of socialism whose Keynesian character has its roots in the 1930s and 1940s, is heavily coloured by the political establishment of the 1950s and 1960s and has not yet come to grips with the changed economic environment of the 1980s ." 0 In other words, conventional socialist economic thinking has to undergo fundamental revision . While the French Government's macro-economic programme was being blown off course by the new international economic environment of the 1980s, it is extremely interesting to note that the same process of internationalisation was carried further by developments within French industry . During the Mitterrand regime there has been an escalation of direct overseas investment by French multinational companies ." Recently released figures show that the stock of French direct investment in the United States alone has increased by 65% from 1980 . Most of this increase occurred when the Socialist Party was in office .' 2 In money terms the amount invested adds up to $6 billion . Furthermore, there has been a spate of joint ventures between French and foreign-owned companies (particularly Japanese) over the past few years, increasing the number of 'trojan-horse' imports within France . The industrial sectors most affected by such developments are computers, electronics and telecommunications .' 3 These events add further weight to the assertion that conventional socialist economic strategies have little influence over the dynamics of internationalisation . The argument so far calls into question the conventional strategy devised by European socialist parties and trade unions in response to the internationalisation of industrial and economic activity . The strategy is built upon the concept of the national economy . It is becoming increasingly recognised that the orthodox

Alternative Economic Strategy national economy approach is limited in the face of the new international economic environment . One response is that it is the particular policies that need changing, not the underlying premises of a national programme . There are two main revisions to the national economy approach . One argues that a greater emphasis must be placed on protectionist policies . The other advocates a full-blooded nationalisation programme . The next sections will examine the nature and applicability of these two revised versions of the national economy approach .

Revisions to the national approach : the protectionist option From the `right' of the labour movement, the economist Nicholas Kaldor has put forward the view that the only way to stem the de-industrialisation of Britain, and the effects of intense international competition is to construct a rigorously protectionist economy . Kaldor accepts that his proposal is contentious . The key example in support of his case is the change of policy in Britain in 1932 from deflationary measures to general import controls . This change in policy produced immediate and startling results . Kaldor writes `manufacturing output expanded by 7 .8% a year in the following five years, manufacturing productivity rose by 3 .9% each year and manufacturing employment by 4 .7% each year .'" From this evidence Kaldor concludes that a similar approach should be adopted to reverse the effects of the Thatcher Government's monetarist policies . Kaldor is not alone in advocating such a course . The left-wing grouping within the French Socialist Party CERES has reached similar conclusions from its analysis of the failure of the French Government's economic strategy . CERES believes that the policies introduced were insufficiently protectionist . The protectionist case cannot be lightly dismissed . However, the argument underestimates the economic changes occurring in the post-war period . A first example is changes in international trade, in particular the fragmentation of the operations of transnational companies, in which their production of goods and services is dispersed across national frontiers . Take for instance the production of Ford cars : many of the component parts for certain car models are made in several European countries, and then imported into Britain for assembly . Under a highly protectionist system the Government would be in a quandary . If they refused to import component parts from Fords Germany, the result could well be the closure of Ford plants in Dagenham . However, if the Government declared such imports permissible then the import system would be put into jeopardy . An even greater threat to the import control paradigm is the increase in CEC

26/SUMMER 85--D

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the number of `trojan-horse' imports . Many multinationals have opened up new industrial plants within various European states (e .g . Nissan establishing a factory in Britain), which can give their owners complete access to home markets . These schemes would unquestionably make a considerable dent in the operations of a protectionist system . 15 We must also consider the effects of international financial integration on a thorough-going protectionist strategy . Since the second world war the role of the pound in world exchange markets has declined, and the Sterling Area has ended . The most important development in this period has been the emergence of the Eurodollar credit markets . In 1980 outstanding Eurodollar deposits amounted to £1,200 billion dollars - which is approximately four times the entire monetary stock of the whole of the USA . 16 These changes in the financial system, coupled with the floating of exchange rates, have led to much more centralisation in the international money markets . The sheer intensity of these worldwide financial linkages would make it difficult to introduce tight controls on currency convertibility, which would tend to undermine a protectionist strategy . Furthermore, an effective national regulation policy for the financial system would almost certainly prove to be very costly . This is because there would have to be constant interventions in the money markets, and high interest rates to maintain control over convertibility . The result would be that a protectionist regime would find it difficult to operate a cheap money policy, which would be required to boost industrial investment, etc . Finally the extensive import control model is too isolationist . The key dynamics of the present recession are international . The introduction of a trade policy to reduce foreign imports into Britain could well have the effect of worsening the recession in other countries by causing a decline in their exports . Furthermore, if a country unilaterally embarked upon a policy of protectionism it could suffer retaliatory action from other countries . The truly international nature of the present economic crisis has caused many previous advocates of the import control solution to change their position, the most important being the Cambridge Economic Policy Group, which now argues for a European-wide reflationary programme . 17 Consequently, the Protectionist Option has limited value in the present climate .

Further revisions to the national approach : the nationalistic option The alternative economic strategy places central importance on a system of planning agreements to harness the operations of

Alternative Economic Strategy

multinationals . However, the effectiveness of this instrument is now being called into question . The reappraisal was largely sparked off by the experience of the last Labour Government, which implemented only one voluntary agreement . Some left economists are now calling for more radical policies . For example, Ben Fine, in a very rigorous article, rejects the notion of planning agreements and argues for a full-blooded nationalisation programme . He concludes that the major problem with this proposal is of a political, not economic, nature- `one conclusion to emerge from our analysis is that the relationship between the AES and the MNC's is not a technical one of economic policy but a political one which struggle can be embarked upon now .' 18 Fine's analysis is certainly provocative, and will no doubt spark off debate within the left . The arguments, however, are not water-tight . Firstly, he considerably underplays the extent to which the aspects of internationalisation described above could frustrate a government attempting to implement a fully-fledged nationalisation programme . It would not be sufficient for such a government to be armed solely with `political will' ; a deep understanding of the workings of international capital would also be essential . Even then the success of a nationalisation programme would most certainly not be assured . Moreover, the simple act of bringing industries under public control does not necessarily guarantee control over multinational companies . For example, under the Socialist Government in France, the nationalised Renault Car Company has actually expanded its overseas production . In other words, the problem of curbing the functioning of multinational companies extends beyond the principle of public ownership . Secondly, it is unconvincing at present to have a widespread nationalisation programme as the central plank of a socialist political and economic strategy . A programme of nationalisation on the lines called for by Fine would have to command general public support, and the political consciousness of the labour movement in particular would have to be at an 'extremely high level . Major changes would have to occur in the prevailing attitudes of antipathy towards nationalised industries . In taking up his position, Fine is in effect suggesting that there is no need for a transitional programme in Britain ; there can be a straight move from a highly developed capitalist system to an embryonic socialist society . It must be remembered, however, that the system of planning agreements etc . were not drawn up for their precision, but to accommodate a fundamental assessment of the political and economic structure of Britain - the assumption that an intermediate stage between capitalism and socialism is necessary to reorientate the economic institutions and values towards

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socialism, and to consolidate popular support for socialist programmes . Nothing has happened to call this reasoning into question . On the contrary, the present political climate merely reinforces the need for a transitional programme .' 9 There can be little doubt that the neo-liberal policies of the Thatcherite government have struck a deep chord in wide sections of the population . 20 In this context, Fine's formulations appear to be misplaced . They do not confront the dominant political tasks facing socialists at this juncture because the call for a full-blooded programme of nationalisation has limited appeal . 21 The above argument has dealt with the variety of positions put forward with the objective of controlling the processes of international capital from the standpoint of the national economy . It has tried to highlight some of the problems and flaws within these writings . The overriding conclusion is that the labour movement will have limited success in influencing the direction of the multinational companies if policies are introduced solely at the national level . Put differently, the labour movement is facing a completely new situation which will necessitate some radical revisions in its orientation and practice . It is essential that strategies and programmes are developed which go beyond the nation-state . In the next section the analysis will shift onto the international plane . The conventional international activities of the labour movement will be examined to try to assess their effectiveness . Conventional strategies : international trade union action

There has been a long tradition of activity by national labour movements at the international level . There are a number of features to this international activity . At one level, it is intensely political . The first half of this century witnessed a whole series of solidarity actions by trade union and working class organisations at the international level . International working class solidarity reached its high-point during the Spanish Civil War when workers of all nationalities joined the international brigades in their thousands . This rank-and-file working class internationalism has been distorted by a continual political battle in the years since 1945, between and within World Labour organisations . As a result, there is a major gulf at present between national and international trade unionism . The situation is not as bad within the International Trade Secretariats (the bodies which organise trade unions within specific industries on a global basis) . This has allowed space for some analysis on the role of international trade unionism in the face of multinational corporations etc . One major argument developed over the last decade calls for supranational trade union organisations . The underlying supposition is that as capital has

Alternative Economic Strategy become international so must labour . 22 The proponents of this argument recognise that the creation of supranational trade unions will be a continuous process, starting with activity within individual transnational companies, and ending up with a substantial transfer of power and authority from the national to the international level . It is envisaged that any new supranational trade union organisations would co-ordinate activity on a wide range of industrial relations matters, including wages . It is clear that a quantum leap would be required to change the existing international trade union federations into such high-powered supranational entities . There must be considerable doubt about the feasibility of such a project . One can also question some of the assumptions behind these arguments . In particular, one should challenge the most fundamental premise - the notion that trade unions in themselves can develop an effective countervailing force to the operations of multinationals . Much too often the trade unions are heralded as the dominant force through which socialists can make inroads into transnational capital . Such an approach comes dangerously close to a form of international syndicalism . 23 Another variant of this international syndicalism is the strategy which places the activity of multinational combine committees or worker councils as the central instrument of opposition against multinational corporations . A recent study has clearly shown that combine committees et al are of very limited strategic value . The committees are classified as communication networks for the dissemination of information on company plans etc .24 This is not to say that combine committees or such like are unimportant . Of course they are important, and their role in the present context is very necessary . Their present activities of collecting and disseminating information, and on occasions coordinating industrial action, are very fruitful . However, the limitations of such organisations should be recognised . The combine committees et al should not be viewed as the main vehicle to confront the supremacy of transnational capital . The basic problem is that the theories which see the problem of making inroads into the new international economic and industrial structure in this way, are both incomplete and inadequate . The powers of multinational companies are so vast that trade unions could only play a part in any strategy which aimed at gaining a leverage over their operations . The greatest merit of the national approach is that it realises the necessity of working in conjunction with other political forces . The existing work of international trade union organisations is too isolated, which has made them ineffectual ; in reaction the old argument that trade union activity should be continued at the national level has been repeated .

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The central conclusion from the above is that the conventional strategies devised by the left to curb the dynamics of transnational capital are deficient . National economic and political instruments are not adequate to tackle the issues and problems arising from the new intricate pattern of global production . The international activity of trade unions are also too weak in the face of this process to effect any meaningful change . Furthermore, even if trade unions became more powerful at the international level their impact would be limited . This is because most of their actions are reactive in character, which leaves intact the ability of multinationals to initiate industrial and economic strategies . In essence, the power of transnational companies rests on this inability to initiate . Therefore, if the labour movement is going to be successful in gaining some control over international capital it must develop a new international political and economic strategy . Revisions to the international approach : the project for European recovery Fortunately there has been some movement in this direction . A group of academic economists and politicians associated with the Socialist International have written an important report : `Out of the Crisis - A Project for Europe on Recovery' . 25 This group, under the auspices of the Forum for International Political and Social Economy (IPSE), has opted for a median European point between the national and international policies and programmes . In doing so they are making the basic assumption that Europe is sufficiently self-contained politically and economically for positive policies to be developed . There are three main tenets to the IPSE's alternative European Economic Strategy : reflation, restructuring and redistribution . The starting point for the group is its belief that the present economic crisis in Europe has been greatly exacerbated by monetary policy . The direct consequence has been a substantial increase in the levels of unemployment throughout Europe . The cornerstone of any recovery programme, IPSE argues, is the restimulation of demand by injecting substantial amounts of money into all aspects of the economic structure - industry, infrastructural projects, and public services . What marks its formulations off from previous Keynesian demand management is that the envisaged reflation would take place on a co-ordinated European basis . Co-ordination is the lynchpin of the entire strategy, because it is believed that national reflationary programmes would produce very little benefit for the country which adopts them, the main beneficiaries being other countries whose exports would increase . The report explicitly recognises that the days of Keynesian demand management at the national

Alternative Economic Strategy

level have passed . The main burden of this projected European reflation programme would fall on the larger national economies, West Germany, Britain and France . These countries would reflate their economies, generating a demand for imported goods and services, and thereby increasing the exports of third countries . This action would be followed by reflationary packages in first the intermediate economies, and then the smaller ones . This `locomotive operation, it is envisaged, would start off a cycle of growth . Alongside this reflationary package, the report argues for policies aimed at restructuring industry in the European Communities . These policies are necessary because capitalist economies, as presently structured, are thought to be incapable of meeting the need for growth, employment and rising living standards . There are various dimensions to the restructuring programme . Firstly, much more public control ought to be exercised over the financial sector, which the IPSE argues, has been the major source of monetarist policies . The big banks and other financial institutions may be forced to adopt policies which blend with the overall economic strategy - less rigid borrowing conditions, a more positive attitude towards industrial investment and a reduction in their inflation phobia . The report also calls for some form of European monetary organisation to promote stability between different currencies, and to safeguard against bouts of speculation . The second element of the restructuring programme is the establishment of an industrial planning system within each European nation . It is pointed out that major industrial sectors are dominated by vast monopolies and conglomerates which can fix prices, and exercise considerable economic and political muscle . A system of planning agreements, or similar instruments, needs to be introduced to ensure that this power does not frustrate the overall objectives of economic policy . The report hopes that such arrangements could be established voluntarily but suggests that if necessary, legally binding agreements should be introduced . This system of industrial planning should extend from national to local and international levels so that the European strategy is uniform and coherent . The final aspect of the project for European recovery is redistribution . The report claims that any economic programme which aspires to be democratic and progressive must include concrete proposals to redistribute wealth and resources to the poorer regions and people of Europe . The redistributional policies outlined by IPSE are both spatial and social in character . The chief economic mechanism proposed is the use of `development

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deficits' . Under this system poorer countries would be allowed to pursue policies such as import tariffs, subsidies, tax reliefs, etc . IPSE argues that this system would also benefit the richer European countries in the long term, because as the poorer economies became more developed there would be an increase in the demand for the products of the former . Out of the Crisis: A Project for European Recovery is an ambitious attempt to reorientate the labour movement's approach to economic policy-making . The call for a European-wide programme is clear recognition that the conventional national and international strategies of the left are limited in the present economic climate . However, some of the proposals put forward in the report are not fully worked out . A case in point is the lack of discussion on the European Monetary System (EMS) . The strongest component of the IPSE report is the desire to break the dominance of the neo-liberal economic ideas which have been embraced by many European governments . IPSE thinks that the way to do this is to re-establish reflationary policies as a viable alternative economic measure . Reflation is thus the cornerstone of the IPSE Project . And the lynchpin of this reflationary strategy is the existence of a European monetary agency . Although this agency plays a central role in the entire construct, its nature and functions are left rather obscure by the report . It can only be presumed that IPSE is referring to the EMS or some variant of it . But the EMS has been consistently derided by the British left, who see it as a mechanism to enact monetarist and deflationary policies . This aversion may be somewhat misplaced, since the EMS, as an instrument of economic policy, could equally be used to promote expansionary measures . The real issue is who controls the instrument . This question is not tackled in an explicit manner by the report . Consequently, it is uncertain whether IPSE is recommending that the British left urge its opposition to the EMS, or that it should support an alternative monetary agency at the European level . The question of the British labour movement's opposition to the EMS has been approached in a more direct manner by other left economists . David Fishman argues that the EMS could play a potentially progressive role . 26 His central thesis is that creating a third currency bloc around the EMS would undermine the dominance of America in the world economy . For this reason, Fishman concludes that the left should support the EMS . Two other economists, Francis Cripps and Terry Ward, have also argued strongly for British membership of the EMS . They even go further than Fishman and state that the authority of the system should be increased . 27 The argument is that a strong EMS would make it very unlikely that a European currency would experience a `loss

Alternative Economic Strategy

of confidence' during a reflationary period . Furthermore, Britain's membership would more effectively check the tendency of the German D-mark to dominate the system . The idea of a strong EMS is attractive . Certainly, it would ease some of the inevitable problems of a joint inflationary programme . However, one issue which would require careful consideration before Britain joined the EMS is a parity for the pound against other European currencies which would reflect the relative weakness of British manufacturing industries and the coming end of North Sea oil . 28 Other facets of the Report are defective, particularly the discussion of the EEC . No matter how one views that entity, it is surely only common sense to say that any proposed pan-European economic strategy must clearly define the role, if any, of the EEC . However, in IPSE's account, the discussion on the EEC is extremely brief and non-conclusive . Failure to confront such a central question can only give credence to the argument that a European strategy is naive and unworkable . This is a serious weakness, and the point will be taken up below . Certainly, any European strategy, to be viable, needs to gain a legitimacy amongst the people of Europe, especially from the different national labour movements . The Report, to its credit, does state that `if the Project to reflate, restructure and redistribute is to gain credibility at the international level and especially in the smaller European countries it will do so mainly through the advocacy by parties and trade unions .' 29 But apart from this general statement there is no discussion of how labour movements can actually forward this new European strategy . At best, IPSE assumes that trade unions will grativate in an almost voluntaristic manner to the new European programme ; at worst it views the implementation of the programme as a technical economic exercise . While in essence, the IPSE Forum advocates the creation of associative economies within Europe it fails to realise that this will entail associative links being forged between different economic groups such as trade unions within and between nation-states . In short, IPSE is much too vertical and `macro' in its approach to a European programme . 30 The absence of any detailed analysis of how the Project for European Recovery can be transformed intoa popular strategy puts the entire report at risk of being dismissed as impractical . Indeed, it is for this very reason that a comprehensive European alternative economic strategy cannot solely rest on iPSE's writings . Nevertheless, the Forum must be congratulated for placing the idea of a European strategy on the agenda for socialist parties and trade unions in different countries . The excessively vertical formulations of IPSE have been heavily criticised by John Palmer who puts forward a different

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approach to the question of a European socialist strategy . In several articles he calls for a European strategy on a horizontal basis . In particular, he advocates European-wide agitational campaigns on jobs and welfare rights e tc . to be initiated by the labour movements within different nation-states . These campaigns should closely follow the paradigm set by the European nuclear disarmament movement . Palmer is critical of strategies aimed at reforming the institutions of the EEC ; he disparages Francis Cripps and Terry Ward for stating that the Labour Party should support Britain's entry into the EMS . Such initiatives he dismisses somewhat glibly as `making capitalism work better' . 31 Palmer's arguments are partly valid but too general . Firstly there are problems in simply calling for European-wide demonstrations against unemployment and so on, not least because similar campaigns at national level had limited success . Secondly, Palmer underestimates the changes that would have to occur in national trade union attitudes . A recent study of British trade unions' responses to the EEC has shown total disarray on the issue . 32 The biggest problem with Palmer's arguments is that he concentrates too heavily on the horizontal features of a European alternative strategy . This runs a real danger of becoming purely trade union action . Certainly such activity will have its role, but it should not acquire the status of a fully-fledged European socialist strategy . The latter must try to outline how the left would solve the employment crisis, and the necessary restructuring of industry within Europe . Palmer's agitational approach gives an unhealthy emphasis to purely negative, reactive action . Rather than counterposing horizontal and vertical features of a European alternative economic strategy, the need is to integrate the two dimensions . The dichotomy between the two is false, reflecting a constant tendency within the British left to concentrate on action at state level at the expense of activity within civil society, or vice versa . The key point is to view the vertical institutions and decisionmaking apparatuses as a mechanism to transfer power to the horizontal terrain . This in turn will give a greater legitimacy for further action in the vertical dimension . Consequently the most fruitful course is to explore ways in which IPSE's programmatic approach and the horizontal agitation and pressure called for by Palmer, can be strengthened and combined to form a much more comprehensive strategy . The analysis so far has mainly been taken up with a review and critique of different labour movement approaches to the processes of transnational capital . The conclusions reached so far are that both the conventional national and international strategies put foward to control the behaviour of multinational companies are defective . This is because the writings are either conceptually

Alternative Economic Strategy 59

flawed, or that they underestimate the intensity of the new international economic climate . The analysis also examined whether recent writings calling for a European strategy could place the left's approach to the problem on a more sound footing . It was argued that while the European level provided a better context to face the dynamics of international capitalism, present accounts of an alternative European strategy were deficient . The following notes make no attempt to supply these deficiencies, merely to indicate a few of the relevant factors . The first problem which must be tackled in any European alternative economic strategy is the role of the EEC . Diplomatic attempts to sidestep this question merely make strategic discussion abstract and unconvincing . It is certainly true that the European Commission has undertaken, in the main, a non-interventionist economic strategy, and because the member-states have been very reticent to transfer powers to the European level, the majority of initiatives have been of a negative nature . Clearly, at present, the potential for a positive economic programme of EEC level is limited . The central question, therefore, is whether the EEC can be sufficiently reformed to embark on such a programme . Some on the left believe that it cannot, and as an alternative suggest that the UN Economic Commission for Europe (ECE) should be the body which co-ordinates any left alternative strategy . 33 The main reason for selecting this organisation is that it encompasses all European nations, East and West, and as a consequence any initiative would be genuinely comprehensive . Undoubtedly this is an attractive point . Against this, however, one must consider the fact that the present functions of the ECE are nebulous . It does not undertake any meaningful activities apart from drafting reports and documents on the economic and industrial situation in Europe . For such an organisation to be reconstituted with the capacity to introduce positive extra-national policies would take a long period of time, and require the establishment of a new set of structures and institutions . In reality it would mean setting up a new international body . Moreover, if the body was going to acquire any authority it would mean that the countries within the EEC would have to agree either to withdraw from it, or assign it only a peripheral role in European affairs, or to abolish it totally . It simply would not be possible for the EEC to exist with its present set of powers and functions alongside an ECE with the capacity to initiate reflationary programmes and industrial policies . There is not the space for both . Accordingly, while a reformed ECE may look an attractive option on paper, the existing political and economic reality within Europe does not make the

The role of the European Economic Communities : problems and prospects

Capital & Class 60

scheme a viable option . The basic point is that the very existence and operation of the EEC create enormous barriers to the development of any alternative economic institutions . This should not be surprising as Tom Nairn cogently points out in his seminal dissection of the British labour movement's case against membership of the EEC -'a realistic focus surely demands a more complex, less facile attitude towards `capitalist' Europe . A future `Socialist Europe' may be very different from and far better than all this . But it cannot credibly be visualised as having no real connection with the present bedraggled sordid reality .' 34 In other words, an alternative strategy cannot be established in a detached and abstract manner paying no serious attention to the dominant structures and processes currently in existence . On the contrary, it is the dominant features of European society, such as the EEC, which must constitute the starting point . The fact is that the British labour movement's debate on the EEC has been conducted at a very abstract and superficial level . Within the framework of a nation-state trade unions fundamentally insist that there cannot be a simple leap from capitalism to socialism . Society, it is emphasised, must undergo a transition ; existing social, political and economic structures must be reshaped, remoulded, but not smashed, to usher in the new order . Yet in relation to Europe thinking is either highly absolutist in character, (the EEC must be smashed or no transitional strategy is feasible), or the reforming programmes are remarkably simplistic, (the EEC must change from a rampant capitalist institution to a genuine socialist organ in one almighty act) . The point here is that the space for a European-wide programme of positive policies is occupied by the institutions and operations of the EEC . The potential to abolish that entity and rebuild a more favourable body is remote . In short, if any alternative strategy is to be implemented it must succeed in reordering the priorities of the EEC . This, of course, is not to state that the EEC can be transformed into a fully-fledged institution for the development of radical policies . This would be a serious miscalculation of the institutional and class constraints which exist at the European level . The development of associative economies

A guiding principle in any exercise to revamp the orientation and policies of the EEC could be the development of associative economies . The associative economy model sets out to pose an alternative to the notions entrenched within the economic discussion of the EEC . The aim is to undermine the fundamental premise upon which many of the economic debates are conducted - the assumption that the only options open are either national based policies or supranational European ones . The traditional

Alternative Economic Strategy `Europe' enthusiasts have succeeded in framing the debate on the EEC within Britain around this national/supranational paradigm, to the extent that much of the left's analysis has accepted the national/supranational dichotomy as the starting point for any commentary on the nature and workings of the EEC . How often has the argument been put forward that any extension in the role of the European Communities will lead automatically to a decline in the sovereignty of the British political process? Of course, that may well be the case, but it does not have to be . In other words, by accepting the paradigm constructed by fervent pro-Europeans, now largely concentrated in the SDP, the left has viewed the `national alternative' as the only viable option, and as a consequence it has acquired the image of being xenophobic, and `little Englander' . Small wonder that the arguments on the EEC within the labour movement during the last decade have been intensely uncreative, and the policies wholly negative . Consequently, the need is for the left to develop its own policies, and this is indeed the value of the associative economy approach . The left should recognise extranational industrial policies which are not alternatives to, but supports for, national strategies . Throughout this article the argument has been put forward that it is insufficient to concentrate on solely national policies . However it does not follow from this that no radical policies can be enacted at the level of the nation-state . There are political trends which are at present eagerly embracing the idea of an alternative European economic strategy because of their failure to enact meaningful social and economic reforms at the national level . But a European programme should not be viewed as a substitute for the inadequacies of past social-democratic governments . 35 Clearly, substantial and quite crucial economic and social reforms can be achieved via national economic mechanisms ; as a consequence national policy formation will remain the central focus of attention . The need for economic and social reforms beyond the nation-state is to help safeguard national programmes from constraints imposed by the dynamics of the interational economy . In short, the nation-state will remain the fulcrum of any economic strategy . The extra-national approach aims to move away from the assumption inherent in the national/supranational paradigm that actions within and beyond the nation-state are mutually exclusive . The concept of extra-national policies is largely an unexplored area ; certainly the AES - of whatever kind - has not touched upon this subject . Yet institutions which could be directed towards an extra-national pattern of intervention already exist in some areas of the European Community, e .g . the European Social and Regional Funds, and the European Investment Bank . These

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programmes and services operate on the basis that they complement, not undermine, national measures . It is this principle, albeit in a more meaningful form, which ought to be extended into central sectors of the economy . Obviously such extra-national policies in themselves will not be particularly socialist . The crucial role of such policies is to facilitate the implementation of more radical measures within the nation-state . During the seventies the dominant theme within the EEC was the establishment of central European institutions and policies to promote economic convergence amongst member-state economies . 36 But in the main these policies failed because of differing conceptions of convergence : the richer countries emphasised convergence of economic poliices which implied uniform measures such as controlling inflation ; however, the poorer nations talked about the convergence of economic performance, which meant the reduction of national income disparities between member states . 37 This conflict contributed to the political inertia which characterised the EEC throughout this period . The failure of the strategies of centralisation has led to a new debate on the nature and direction of the European Communities . The left must intervene in this debate : it must develop a principled positive policy for Europe, and move away from the opportunistic and pragmatic outlook of the Labour Party leadership . The pronouncement of Roy Hattersley that britain ought to remain within the Common Market but adopt a firm `Gaullist' strategy and refuse to introduce measures it dislikes, hardly presents a visionary European policy . The principle which the left should focus on in any reappraisal is the establishment of associative companies, through the formation of extra-national policies . The establishment of extra-national economic policies Reflation . A reflationary programme ought to be a major feature of any alternative economic programme for Europe . However, it would be incorrect to view a reflationary programme as either the panacea or unproblematic . There are major political and economic obstacles to the introduction of such a strategy . The strong adherence of European governments to neo-liberal economic policies would have to be broken, and at least two out of the `Big Three' (West Germany, Britain and France) would have to be active supporters . Some underlying economic conditions in Europe are certainly conducive for reflation . There is a unique level of mutual interdependence . About 70% of total exports by European countries go to other states in the same region . However, this general fact unmasks some of the specific

Alternative Economic Strategy problems in relation to a synchronised European reflation strategy . Any policies to expand demand on a European-wide basis would have to be introduced in a very co-ordinated manner . If the programme lacked integration, the countries initiating the reflationary cycle could experience an excessive increase in imports from their partners relative to exports, causing downward pressure on the exchange rate, leading to inflation and other financial problems . This is what happened when West Germany reflated its economy by 1% of GNP in 1978, to initiate a cycle of growth . A similar situation could develop if individual states over reflated relative to other states . 38 A reflationary programme would also have to take precautions against sparking off a world-wide inflationary process, or causing economies to overheat by increasing their exports too sharply . Furthermore, some assessments suggest that Britain would benefit the least out of all European countries from a reflationary programme . 39 This is essentially because Britain is in a trading deficit with other EEC countries . To offset some of the inequities, Francis Cripps suggests that a mechanism to shift trade balances could be introduced as an adjunct to the reflationary strategy . In theory, trade adjustment policies could solve some of the problems arising from expansionary measures ; however, the practicality of establishing such policies has to be questioned . In the absence of any trade adjustment or equalisation policies, the working of the EMS becomes all the more important in the management of financial pressures . It is clear from the above that reflation on a European-wide basis is not straightforward, and that its impact would be uneven . Nonetheless, in certain circumstances, it is an indispensable step in reversing the trend to contraction and unemployment . The question of `competitiveness' . A European economic strategy must go beyond the enactment of reflationary policies . The dominant themes in the economic thinking of the EEC must also be addressed by the strategy . In particular, a clear response has to be worked out to the central argument of the European Commission - that the present task is for the EEC economies to maintain or regain competitiveness by establishing a completely integrated internal market . This remains the goal of the Eurocrats in Brussels : the new European Commission has set as its top priority the total liberalisation of the internal market . The creation of a single market within Western Europe has been strongly supported by representatives of European capital . A group calling itself G16, which brings together top European industrialists and bankers, has been lobbying strongly for the removal of barriers hampering intra-EEC trading . 40 The logic behind this policy is that a European-wide common market could lay the conditions

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for industry to become more competitive because it could induce proper economies of scale, make production more efficient, etc . The argument is a classical free trade one . The fetish with obtaining a completely liberalised internal market would have to be curbed by an alternative strategy . In any event, the actual attainment of such a goal must be doubted . Further advancement towards a total common market would primarily come about by reducing the costs and bureaucracy involved in transporting goods and services across frontiers . The central objective of EEC policy over the past twenty years has been greater freedom and movement of goods across customs posts . 41 This policy has had only limited success, and there are no sound reasons for believing that this will change in the near future . On the contrary, the present creeping protectionism between member-states would indicate that such a strategy is not very realistic . Therefore, the goal of a fully liberalised internal market is dependent on policies which have a small chance of being introduced at the present time . Moreover, the persistent focus on the internal market blurs the fact that there has been a continuing increase in intraEuropean trading since the inception of the Common Market . The table below details the trends . Intra-Community trade has in fact multiplied 23 times between 1958-1980 . This increase in mutual interdependence has not led to any marked or dynamic effects on European economies . Therefore, in terms of past trends it is entirely legitimate to question whether any further liberalisation of the Common Market will have any significant impact on employment creation, or better industrial performance . Furthermore, the strategy of creating an open internal Intra-Community trade of total exports

FR of Germany France Italy Netherlands BLEU

United Kingdom Ireland Denmark Greece EUR 10 (source : Eurostat)

% of GDP

1958

1982

1958

1973

1982

36 28 34 57 53 20 84 58 50 35

48 49 46 72 71 41 71 49 46 52

6 3 3 22 17 3 21 16 4 5

9 8 7 29 35 6 25 10 5 10

13 8 10 35 43 9 33 13 5 13



Alternative Economic Strategy market at this juncture would be shortsighted, bearing in mind other problems in the world economy . Presumably, the strategy of liberalisation is partly geared to winning a greater share of existing world trade . Leaving aside the technical difficulties of European industry gaining such a competitive edge, this policy would almost certainly compound many of the deep-seated problems and inequities in the world economy . Of the existing total of EEC exports, 68% are accounted by six sectors (metals, chemicals, mechanical and electrical engineering, motor mechanics, agro-industries), in other words medium technology markets . If the EEC countries improved their share of these markets it would be to the direct detriment of third world countries . This would add further problems to the already intractable World Debt crisis . The main conclusion is that to talk the language of `negative integration' at present is misplaced, and that more positive policies are required to turn around high unemployment and low growth in Europe . The development of employment and industrial initiatives, displacing the logic of economic competitiveness, must be the main theme of any alternative European strategy . Along with reflation, employment and industrial measures should constitute the major aspects of extra-national policies . The European Commission already operates some positive employment policies . In regions and areas where there is exceptionally high unemployment, the EEC offers a job subsidy of 33 1/3 of total costs to employers if they take on new workers . The European Social Fund also makes available money for co-operative development schemes and training initiatives . These measures ought to be extended and integrated into an overall employment strategy . The European Commission has also given its support to the introduction of a 35-hour working week throughout Europe . This policy has not been agreed by the Council of Ministers however, mainly as a result of the opposition from the British Government . There are obvious advantages to introducing a shorter working week on a synchronised European basis, all members would have to incur the inevitable costs arising from the scheme at the same time . This policy alone would have a sizeable impact on the levels of unemployment in Europe . Clearly, this particular measure would play a prominent part in any extra-national employment strategy . While the European Commission has developed some positive programmes, albeit on a small scale, via the Social Fund, it has ruthlessly applied the laws of the market economy to many of the problems of the mature industries (steel, shipbuilding, textiles) in Europe . The consistent theme of the Commission has C€