Global Encounters: International Political Economy, Development and Globalization

Global Encounters International Political Economy, Development and Globalization

Edited by Graham Harrison

International Political Economy Series General Editor: Timothy M. Shaw, Professor of Commonwealth Governance and Development, and Director of the Institute of Commonwealth Studies, School of Advanced Study, University of London Titles include: Hans Abrahamsson UNDERSTANDING WORLD ORDER AND STRUCTURAL CHANGE Poverty, Conflict and the Global Arena Preet S. Aulakh and Michael G. Schecter (editors) RETHINKING GLOBALIZATION(S) From Corporate Transnationalism to Local Interventions Sandra Braman (editor) THE EMERGENT GLOBAL INFORMATION POLICY REGIME James Busumtwi-Sam and Laurent Dobuzinskis TURBULENCE AND NEW DIRECTION IN GLOBAL POLITICAL ECONOMY Elizabeth De Boer-Ashworth THE GLOBAL POLITICAL ECONOMY AND POST-1989 CHANGE The Place of the Central European Transition Bill Dunn GLOBAL RESTRUCTURING AND THE POWER OF LABOUR Myron J. Frankman WORLD DEMOCRATIC FEDERALISM Peace and Justice Indivisible Helen A. Garten US FINANCIAL REGULATION AND THE LEVEL PLAYING FIELD Randall D. Germain (editor) GLOBALIZATION AND ITS CRITICS Perspectives from Political Economy Barry K. Gills (editor) GLOBALIZATION AND THE POLITICS OF RESISTANCE Richard Grant and John Rennie Short (editors) GLOBALIZATION AND THE MARGINS Graham Harrison (editor) GLOBAL ENCOUNTERS International Political Economy, Development and Globalization Axel Hülsemeyer (editor) GLOBALIZATION IN THE TWENTY-FIRST CENTURY Convergence or Divergence? Helge Hveem and Kristen Nordhaug (editors) PUBLIC POLICY IN THE AGE OF GLOBALIZATION Responses to Environmental and Economic Crises

Takashi Inoguchi GLOBAL CHANGE A Japanese Perspective Jomo K.S. and Shyamala Nagaraj (editors) GLOBALIZATION VERSUS DEVELOPMENT Craig N. Murphy (editor) EGALITARIAN POLITICS IN THE AGE OF GLOBALIZATION Michael Niemann A SPATIAL APPROACH TO REGIONALISM IN THE GLOBAL ECONOMY Morten Ougaard THE GLOBALIZATION OF POLITICS Power, Social Forces and Governance Markus Perkmann and Ngai-Ling Sum GLOBALIZATION, REGIONALIZATION AND CROSS-BORDER REGIONS Leonard Seabrooke US POWER IN INTERNATIONAL FINANCE The Victory of Dividends Timothy J. Sinclair and Kenneth P. Thomas (editors) STRUCTURE AND AGENCY IN INTERNATIONAL CAPITAL MOBILITY Fredrik Söderbaum and Timothy M. Shaw (editors) THEORIES OF NEW REGIONALISM A Palgrave Reader Kendall Stiles (editor) GLOBAL INSTITUTIONS AND LOCAL EMPOWERMENT Competing Theoretical Perspectives Amy Verdun EUROPEAN RESPONSES TO GLOBALIZATION AND FINANCIAL MARKET INTEGRATION Perceptions of Economic and Monetary Union in Britain, France and Germany

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Global Encounters International Political Economy, Development and Globalization Edited by

Graham Harrison University of Sheffield, UK

Editorial Matter & Selection & Chapter 1 © Graham Harrison 2005 Chapter 2 © Mick Moore 2005 Chapter 3 © Ian Taylor 2005 Chapter 4 © Timothy M. Shaw 2005 Chapter 5 © Peadar Kirby 2005 Chapter 6 © Jonathan Perraton 2005 Chapter 7 © Phillip J. Wood 2005 Chapter 8 © Behrooz Morvaridi 2005 Chapter 9 © Marieke Riethof 2005 Chapter 10 © Martin Lodge and Lindsay Stirton 2005 Chapter 11 © Richard Woodward 2005 Chapter 12 © Tony Heron 2005 Chapter 13 © Paul Sutton 2005 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2005 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 1–4039–2079–6 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Global encounters : international political economy, development, and globalization / edited by Graham Harrison. p. cm. – (International political economy series) This book originated in a conference convened in 2002. Includes bibliographical references and index. ISBN 1–4039–2079–6 1. International economic relations–Congresses. 2. Globalization–Economic aspects–Congresses. 3. Economic development–Congresses. 4. Globalization–Economic aspects–Developing countries–Congresses. I. Harrison, Graham, 1968– II. International political economy series (Palgrave Macmillan (Firm)) HF1352.G542 2005 337–dc22 10 14

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne

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Contents List of Tables and Figures

vii

Acknowledgements

viii

Notes on Contributors

ix

List of Abbreviations

xi

1. Global Encounters: Three Themes for the International Political Economy of Development – Graham Harrison Part I

1

The State and Global Political Economy (Un)Developmental States

2. The Development of Political Underdevelopment – Mick Moore

21

3. Botswana’s Developmental State and the Politics of Legitimacy – Ian Taylor

41

4. Uganda as an African ‘Developmental State’? – Timothy M. Shaw

63

5. The Irish State and the Celtic Tiger: A ‘Flexible Developmental State’ or a Competition State? – Peadar Kirby

74

6. What’s Left of ‘State Capacity’? The Developmental State After Globalization and the East Asian Crisis – Jonathan Perraton

95

Part II

Networks of Development, New Patterns of Power

7. The Regional Impact of Globalization: The ‘Spatial Fix’ in Southern Textiles, 1974–1997 – Phillip J. Wood

115

8. Contentious Development Issues and Transnational Networks – Behrooz Morvaridi

133

9. Innovations in Trade Union Strategies in Brazil – Marieke Riethof

154

Part III

Regulating Globalisation, Development and Liberalisation

10. Well Connected? Building Capacity for Pro-Competitive Telecommunications Regulation in Three Caribbean States – Martin Lodge and Lindsay Stirton

171

11. Offshore or ‘Shorn Off’? The OECD’s Harmful Tax Competition Initiative and Development in Small Island Economies – Richard Woodward

195

v

vi Contents

12. Export Processing Zones and Policy Competition for Foreign Direct Investment: The Caribbean ‘Offshore’ Development Model – Tony Heron

213

13. Backwaters, Currents and the ‘Competitive State’ in the Caribbean: The Imperative of Public Sector Reform – Paul Sutton

229

Bibliography

245

Index

274

List of Tables and Figures List of Tables Table 3.1 Table 3.2 Table 5.1 Table 5.2 Table 5.3 Table 5.4 Table 5.5 Table 5.6 Table 5.7 Table 5.8 Table 6.1 Table 6.2 Table 7.1 Table 8.1 Table 10.1 Table 11.1

Percentage of GDP by selected industrial sectors, 1989–2000 Annual growth in percentage of GDP by selected industrial sectors, 1989–2000 Irish growth rates (GDP/GNP), 1992–2002 World’s highest average annual GDP growth rates, 1990–2001 World’s highest per capita annual growth rates, 1990–2001 Unemployment rates 1994–2002 (annual % of labour force): Ireland, EU, OECD and US Distribution of disposable household income, 1994–2000 Evolution of household poverty, 1994–2000 (% in poverty) Wage share of national income, 1987–2000 (%): Ireland, EU, US, Japan Trends in government revenues and social expenditure, Ireland and EU, 1993–2000 Pre-tax return on capital employed Pre-tax return on capital employed less lending rate Sources of textile employment change, southern counties, 1974–1997 Transnational development advocacy networks relating to the Ilisu dam project Regulatory capacity and associated capacity building strategies Classification of OFCs in small island economies by international financial/institutions

58 59 75 75 76 77 88 88 89 90 103 104 127 146 185 196

List of Figures Figure 4.1 The governance triangle Figure 10.1 Expansion of telephone networks in Jamaica, Trinidad & Tobago and Barbados 1990–1999

vii

65 176

Acknowledgements This book is a result of a conference sponsored and organised by the Political Economy Research Centre, University of Sheffield, with financial support from the Centre for the Study of Globalisation and Regionalisation, University of Warwick. The following have helped the book along the way: Sylvia McColm, Tony Payne, Jennifer Nelson, Amanda Watkins, and Tim Shaw. Royalties from this book will go to Oxfam UK.

viii

Notes on Contributors Behrooz Morvaridi is a Senior Lecturer in Development Studies at Bradford Centre for International Development, University of Bradford. He has carried out research and published in Turkey, Cyprus, India, and Zimbabwe. Graham Harrison is Senior Lecturer in Politics, University of Sheffield. His current work is focussed on governance and development, and concepts of empire. He has recently published The World Bank in Africa (2004). Ian Taylor is a Lecturer in the School of International Relations, University of St Andrews and a Visiting Research Fellow in the Department of Political Science, University of Stellenbosch. He taught at the University of Botswana from 2001–2004. He is the author of Stuck in Middle GEAR: South Africa’s Post-Apartheid Foreign Relations (2001), and co-editor of Africa in International Politics: External Involvement on the Continent (2004). Jonathan Perraton is Lecturer in Economics, University of Sheffield. He is co-author of Global Transformations (1999) and co-editor of Where are National Capitalisms Now? (2004). Lindsay Stirton is Lecturer in Law at the Norwich Law School, University of East Anglia, and is a member of the ESRC Centre for Competition Policy, also at UEA. His research interests include telecommunications and electricity regulation, health and welfare policy and administration, and accountability in public services. Marieke Riethof is a Lecturer in Politics and International Studies at the University of Warwick. She is the co-editor of Labour Relations in Development (2002) (with A. E. Fernandez Jilberto). Martin Lodge is Lecturer in the Department of Government and member of the ESRC Centre for Analysis of Risk and Regulation at the London School of Economics. His main research interests are in the area of comparative public administration and policy, in particular in the area of regulation. Mick Moore is Professorial Fellow at the Institute of Development Studies and Director of the Centre for the Study of the Future State. He has researched and written widely on the politics of development and poverty in poor countries. His most recent book, co-edited with Peter Houtzager, is Changing Paths: International Development and the New Politics of Inclusion (2003). Paul Sutton is Reader in Politics at the University of Hull where he teaches international political economy. His research interests have focussed on ix

x Notes on Contributors

the political economy of development, the vulnerability of small states and on the Caribbean. His most recent monograph (with A. J. Payne) is Charting Caribbean Development. Peadar Kirby is Senior Lecturer in the School of Law and Government, and co-director of the Centre for International Studies, both at Dublin City University. His latest book was Introduction to Latin America: Twenty-First Century Challenges (2003). Phillip J. Wood was educated in Canada and the UK, teaches Comparative and American Political Economy at Queen’s University in Kingston, Ontario, and is the author of Southern Capitalism. His recent published work focuses on economic development and racial politics in the American South, the spatial restructuring of the southern textile industry, and the expansion and racialization of the American prison-industrial complex. Richard Woodward is Lecturer in Political Economy and British Politics at Hull University. His main research interests are in the field of political economy, the political economy of financial crime, offshore financial centres, and the Organisation for Economic Co-operation and Development. Currently he is writing up his PhD thesis on the multi-level governance of global financial markets and will shortly commence a major study of the role played by the OECD in the global economy. Timothy M. Shaw is Professor of Commonwealth Governance and Development, and Director of the Institute of Commonwealth Studies at the University of London. He has recently contributed articles to the Canadian Journal of Development Studies, Commonwealth & Comparative Studies, Global Governance, Journal of Development Studies and Third World Quarterly. Tony Heron is Lecturer in International Political Economy in the Department of Politics at the University of Sheffield, UK. He has published The New Political Economy of United States-Caribbean Relations: The Apparel Industry and the Politics of NAFTA Parity (2004). He is currently investigating the effects of trade liberalization on outward processing and production sharing in the European and North American garment industries.

List of Abbreviations AID BDC BDP BEDIA C&W CARICOM CCN CCSCS CEDA COSATU CPE CSME CUT DRC EAC ECA EIA EIEA EMU EPB EPZ ESRC EU FAP FATF FCC FDI FDS FLA FSF FTAA FTC GATS GATT GDP GLR GNP HIPC HPI

US Agency for International Development Botswana Development Corporation Botswana Democratic Party Botswana Export Development and Investment Authority Cable and Wireles Caribbean Community Caribbean Communications Network Coordinadora de Centrales Sindicales del Cono Sur Citizen Entrepreneurial Development Agency Congress of South African Union consumer premises equipment CARICOM Single Market Economy Central Union Organization Democratic Republic of Congo East African Community Export Credit Agency Environmental Impact Assessment Export Industry Encouragement Act Economic and Monetary Union Economic Planning Board (South Korea) Export Processing Zone Economic and Social Research Council European Union Financial Assistance Programme Financial Action Task Force Federal Communications Commission Foreign Direct Investment Flexible Developmental State Fair Labor Association Financial Stability Forum Free Trade Agreement of the Americas Federal Trade Commission General Agreement on Trade in Services General Agreements on Tariffs and Trade Gross Domestic Product Great Lakes Region Gross National Product Highly Indebted Poor Countries Hispanic Population Increase xi

xii List of Abbreviations

HTS ICBL ICFTU IDB IDA IFAD IFI ILO IMF INGO IPED IPE ISP KCFTU MFDP MNC NAFTA NDP NEPAD NGO NIC NPM NRM OBM OECD OEM OFC OHAL ORIT OUR PEAP PKK PNM PNP PPRC PSMP PTR RIC SACU SAP SIE SGR TNC ToJ

Harmonized Tariff Schedule International Campaign to Ban Landmines International Congress of Free Trade Unions Inter-American Development Bank International Development Authority International Fund for Agricultural Development International Finance Institution International Labour Organization International Monetary Fund International Non-Governmental Organisation International Political Economy of Development International Political Economy Internet Service Provider Korean Confederation of Free Trade Unions Ministry of Finance and Development Planning Multinational Corporation North American Free Trade Agreement National Development Plan New African Partnership for Development Non-Government Organization Newly Industrialized Country New Public Management National Resources Management original brand-name manufacturing Organization for Economic Cooperation and Development original equipment manufacturing Offshore Financial Centre Regional State of Emergency Government Inter-American Organization of Workers Office of Utilities Regulation Poverty Eradication Action Plan Kurdish Workers Party Peoples National Movement People’s National Party Persistently Poor Rural Counties Public Sector Modernization Programme preferential tax regime Regulated Industries Commission Southern African Customs Union Structural Adjustment Programme Small Island Economy strategic global repositioning Transnational Corporations Telecommunications of Jamaica

List of Abbreviations xiii

TSTT UDN UNC UNCTAD UNDP UNIDO USAID VSAT WTO

Telephone Service of Trinidad and Tobago Uganda Debt Network United National Congress United Nations Commission on Trade and Development United Nations Development Programme United Nations Industrial Organization United States Agency for International Development Very Small Aperture Terminal World Trade Organization

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1 Global Encounters: Three Themes for the International Political Economy of Development Graham Harrison

Introduction Globalization has had a profound effect on the study of development.1 It has introduced an interdisciplinarity which has opened up the concept to a wider range of interpretations (and critiques) than existed before the 1990s. It has also rendered approaches to ‘national development’ problematic and brought issues related to international political regulation to the fore. As a result, globalization has not merely transformed the ‘subject matter’ or issues that fit under the rubric of development; it has also raised new conceptual concerns which, as Fine (2004) has argued, relate to substantive changes in the global political economy of capitalism. With Fine, we can argue that the concept of globalization has had a deep and profound effect on development studies, demanding theoretical reflection as well as an awareness that the ‘real world’ is changing. This book explores new thinking about development at the global level in this vein. Contributors do not cleave to a single theoretical point-of-origin, but they do all share an interest in the political economy of development. Hence the eponymous encounter: between development, globalization and International Political Economy (IPE). What these contributions do is serve to set out three key areas of theoretical and empirical reflection: the extent to which states act as developmental agencies; the formation of new spatial patterns of political mobilization for development; and the interplay between marketization and regulation at the international level.

Globalization and development Working with concepts like development and globalization does leave a very open field for investigation. Both concepts are quite general or under specified, and both have been subject to a diversity of meanings or 1

2 Global Encounters

normative claims. In a sense, what field of social enquiry is not at least partially connected to globalization and development? This book’s interest in IPE does endow these terms with more focussed set of concerns. Globalization is understood here as inextricably interlinked with changes to the global economy and changes in the predominant ways of understanding the management of the economy. In the first place, globalization is about the increasing internationalization and less frequently transnationalization (Scholte 1997) of flows of capital and commodities. It is now well recognized that ‘hyper globalization’ images of a single global marketplace are erroneous; in fact this image was largely the province of some economic journalists and business school writers rather than those studying IPE.2 Even those who did see a secular decline in state power as a result of globalization were certainly aware of the fact that this did not mean states were defunct or that unified markets emerged in the wake of a decline in state power (Strange 1998). Furthermore, convincing interventions have been made that states shape globalization (Burnham 2002; Panitch 1994); that new forms of international economic activity consolidate regions as much as global marketplaces (Gill 1992); and that much of what passes for globalization is in fact focussed on the ‘triad’ of North America, Western Europe, and Japan (Hirst and Thompson 1996; Rowthorn 2001). Thus, globalization is not a straightforward process of capital escaping national garb and producing a unified global economy. Nevertheless, something is happening. The liberalization of finance has produced a reel of striking figures concerning the levels of trade in currencies, bonds, and derivatives: a global bond market valued at $20 trillion; about $1.6 trillion is traded daily on the global currency markets, that is 400 per cent of the total foreign exchange reserves of the American, Japanese, and British Central Banks (Haynes 2002: 33). Cautionary notes have quite rightly been sounded concerning the meaning of these figures and their relationship to other economic processes. Nevertheless, as is now well known if not understood, the workings of global finance, and especially hedge funds, can have profound impacts on people’s well-being and indeed the coherence of nation-states. Furthermore, more ‘solid’ aspects of the global economy also demonstrate profound change: between the mid1980s and the 1990s, world foreign direct investment (FDI) increased at an average of 28 per cent per year and global trade at an average of 14 per cent per year (Kitching 2001: 87). The ratio of FDI stock to world GDP has also increased over the same period (Slaughter 2002: 9), meaning that FDI has become absolutely and proportionately more significant. In an important sense, then, globalization is the increasing importance of internationalized forms of capital, even if these processes of internationalization do not necessarily produce unified global markets, convergence, or ‘level playing fields’ (Harrison 2004b). This internationalization has been closely related to our second key component of globalization: the rise of

Graham Harrison 3

neoliberalism as an ideology of economic management. Neoliberalism is founded in neoclassical economics and an array of other orthodox ideas and models that economics has produced during the twentieth century. David Ricardo’s comparative advantage and Adam Smith’s ‘invisible hand’ produce a global vision of massive efficiency gains for all once economies are opened up to global competition. These efficiency gains produce growth which is socially beneficial, either as a result of forms of ‘trickle down’ or Pareto efficiency. Marginalist economics and the current profusion of algebraic, abstract, complex mathematical modelling provide microeconomic and inductive underpinnings for the grander claims. These economistic foundations provide neoliberalism with a strong faith in free markets as socially-desirable institutions. Thus, the state is posed as an institution that is immanently deleterious to a marketized ideal state of affairs: a rent seeker, author of ‘directly unproductive activities’, a bastion of ‘red tape’ and so on. Consequently, neoliberalism defines the state in two ways: as a danger to market-based growth and social improvement, and as an institution that must act in ‘market-conforming’ ways. In other words, where the state does have a designated role in development, it must be as an advocate of business, a promoter of competition, a vanguard of openness, or perhaps a ‘midwife’ to a market society (Evans 1995). Neoliberalism is not simply the ideational ‘shell’ for globalising capital (Blyth 2002), although it would degrade studies of both ideational change and economic change not to recognize their mutual shaping (Cox 1996). Thus, in the contributions that follow, neoliberalism is often mentioned as an ideology in tangent with specific forms of economic change that constitute components of internationalization (or economic globalization) of the kind outlined above. One of the key normative underpinnings of neoliberalism is convergence: that is, the belief that the liberalization of markets will produce a process of general economic improvement which will at the very least ‘lift all boats’ (Nederveen Pieterse 2002) or perhaps reduce inequalities between national economies or individuals (World Bank 2000/2001). To put it mildly, the extent to which convergence is actually working is contested (Milanovic 2003; Rao 1998; Wade 2004). What makes the notion of convergence relevant to this book is that it highlights the main device through which neoliberalism deals with development. In fact, it would only require a small amount of licence to state that convergence is the main neoliberal synonym for development. In the neoliberal view, development is the desirable and logical outcome of liberalization. The moderate aberration of the ‘post Washington consensus’ allows that markets require certain forms of social prerequisite, institutionalization, or policy sequencing before they function as markets should (Fine et al. 2001; Standing 2000). This is not to reject the liberalization-convergence-development association, but it does introduce considerations extraneous to the market as functions of market ‘failure’.

4 Global Encounters

For the contributors of this book, development is not a synonym for liberalization, and public action enters the frame in a more profound fashion than merely to usher in a harmonized set of market relations. Although there is no single political posture adopted by the authors, each contributor takes politics as seriously as markets; the former is not an adjunct or dependent variable of the economy (Leftwich 2000). As such, development here is not merely economic growth, but the political ordering of economies and nature of the ‘embeddedness’ of economic change. Development cannot but involve constructions of authority and social struggle. It is not solely economic growth but claims made to ‘progress’ or ‘the good life’ which are – and always will be – contested.

States, spaces, and regimes If we take development in the sense just mentioned, then it is likely that contest concerning the meaning of development will revolve around the state, itself the pivotal agent of development. Gramsci encapsulates this well: Every state is ethical inasmuch as one of its most important functions is to raise the great mass of the population to a particular cultural and moral level… which corresponds to the needs of the productive forces of development… (Gramsci 1971: 258). Gramsci is thinking through the roles of culture and morality within capitalist states, but this passage serves as a good standard for a secular concern within development studies: the creation of appropriate schemes of public action to ensure political stability and economic growth. Intuitively, this passage does not seem moribund – even in a ‘Global Age’ (Albrow 2001). There are two important points to recognize in respect to the IPE of development here. Firstly, that because globalization does not necessarily mean the death of the nation-state, a great deal of the politics of development is still produced by and/or filtered through national governments. Secondly, that the first point does not require us to resort to static forms of analysis; in other words, the endurance of states as developmental agents is dynamic and can mean different things in different contexts. To make a brief review, we can identify some salient aspects of states’ changing roles as globalized developmental actors. The model of the developmental state provides a starting point: centralized, purposeful, interventionist, strategically adroit, and culturally homogenous (Leftwich 1995). Intellectual celebrations of the developmental state led the World Bank to think more clearly about the role of the state, generating a different model of state action (World Bank 1993; World Bank 1997; see also Wade 1996). The Bank vision of the state was of an institutionally robust and minimalist

Graham Harrison 5

state with a remit to promote the growth of free markets through marketconforming public action. There have also been debates concerning the extent to which democratization facilitates development (Leftwich 2000; White 1998), with some arguing that democratization is not extrinsic to development but a key component of it (Sen 1999). Even this cursory sketch demonstrates that the state still matters, even if there is less consensus on how it matters. Perhaps one way forward is to accept that the developmental content of state action varies according to context. This would mean accepting that globalization is not simply homogenization and that, as a result, different states in different regions, or with different connections to global flows of value face different exigencies and retain different institutional and cultural repertoires with which to act (Palan and Abbott 1996; Rodrik 2003). In Part I, contributors take this broad approach, looking at specific national cases or regions and considering their developmental – or ‘underdevelopmental’ – content. In this sense, they open up our interest in developmental states to a keener global awareness and a less model-like epistemology, in which, if lessons are to be drawn, they will need to be discerning and provisional, not universal and prescriptive. It is now well established that ‘national development’ is not what it used to be (Berger 2001). Throughout the post-war period, development studies (like most social sciences) relied on the national template for its analysis. Curiously, both modernization theory and dependency theory took national units as a key component in their constructions of the world – not the only commonality between these two rivals (Bernstein 1971). The bulk of development programming was based on an analogue of Keynesian macroeconomic management: the state as investor, the maintenance of protective barriers around a national economy, Import Substitution Industrialization, large-scale investment in infrastructure and so on, all reflected the Keynesian model which established itself in post-war Europe. Globalization has problematized national spaces profoundly. States can no longer make grand claims to be custodians of a national economic project – all states are now subjected to powerful interventions and discipline from external agencies. Furthermore, the liberalization of international economic activity has led to new forms of economic integration, not based in national markets or national plans, but perhaps regions, sub-regions, industrial enclaves, Export Processing Zones (EPZs), strategic resources, tourist coastlines, and clusters of technological innovation. These are all components of economic globalization; and all of these subvert of notion of an integrated national economy and pose alternative developmental strategies: competition states, skill-based economies, and ‘new regionalism’ (Hettne et al. 2001). As a result of the problematization of ‘national development’; new ‘development spaces’ have become more prominent. One well-established

6 Global Encounters

outcome of this is a decline in the use of the term ‘Third World’ because it is based in a nationalist framework (Harris 1986) and excessively generalized (Bayart 1991). One alternative is to look at the world as a whole – a single indivisible unit with various components therein (Wallerstein 1979). But it is also the case that globalization has created new economic patterns which have drawn more closely on IPE literature. Global fordism (Frobel et al. 1980) represents the global economy as a series of transnational firms with different stages of production in different locations; commodity chain analysis focuses on the flow of value between firms but along the pathway of a specific commodity (Gereffi and Korzeniewicz 1994; Gibbon 2003); new forms of regionalism have looked at the regional strategies of companies in search of the best combinations of cheap factors of product and most liberal regulations (Sunkel and Mortimore 2001). All of this is even more significant if one recalls our understanding of development: not just economic growth/change but also the political contestation of the legitimacy and social benefits of this growth. Thus, new political forms of development advocacy or struggle are emerging (Burbach 2001). International labour activity has grown (Moody 1997), as have international and issue-based forms of political mobilization. The gist of these new developments is to make ‘development’ a more complex spatial phenomenon: neither national nor global in a straightforward sense, but none the less significant for that. In Part II, contributors analyse diverse examples of sub-regional, transnational, and international political mobilizations under the mantle of development. As we have already mentioned, globalization is both liberalization and regulation. Once the statist and nationalist frameworks of post-war development studies fell away in the 1980s, neoliberal analyses of economic growth reduced ‘development’ to a procrustean desire to reduce state involvement in the economy. Fortunately, researchers have rescued considerations of market regulation from the virile anti-statism that arose in the 1980s, and persists to the present day within institutions such as the OECD, World Bank, and WTO. But, as with states and spaces, regulation is not what it used to be. This is the case in two senses. Firstly, patterns of regulation-setting – whether legislative or based in economic policy – must face the rising power of international and transnational capital (Gill 1995; Soederberg 2002; van der Pijl 1998). Secondly, regimes of regulation are increasingly set either globally or regionally. The massive global influence of the World Bank, IMF and WTO has set the ‘politics of the possible’ for all states (Peet 2003; Wade 2003). Private forms of regulation also discipline states (Sinclair 2003). Nevertheless, even the smallest and most open of states has found some leeway to innovate forms of regulation which, in one sense or another, address themselves to economic globalization. It is the persistence of regulative forms that provides states with the resources to make their ethical

Graham Harrison 7

claims to be acting developmentally. Regulations might encourage mobile capital – perhaps through the creation of export platforms, the establishment of investment incentives, training programmes, the ratifying or creation of international agreements, etc. Other forms of regulation play a harder hand vis à vis global economic liberalism: capital controls, new forms of protectionism, or a challenge to the strictures of external agencies such as the IMF. The key insight to draw from the endurance and innovation of regulatory regimes is that economic growth is always intrinsically political; it cannot be rendered as a neutral or technical process, even though the majority of orthodox economics research pretends that it is. Currently, states actively intervene on behalf of capital: in powerful states with a view to promoting the interests of firms or industries considered ‘important’; in weak states with a view to disciplining labour forces. But (varied) nationalist sensibilities have also proven more robust than might have been supposed during the ‘end of history’, an important factor in explaining the collapse of the WTO summit in Seattle (Bayne 2000), as well as other constitutionalising forms of summitry. Thus, we see in Part III how new forms of regulation can be both liberalising and more interestingly political, or politically-interested.

Overview Mick Moore considers the developmental prospects of the state within the tradition of the historical sociology of international relations (cf. Hobden and Hobson 2002). The title of the chapter – The Development of Political Underdevelopment (cf. Gunder Frank 1978) – teasingly suggests that perhaps the dependentistas had a point: that the fact that ‘governance is more an affliction than a blessing’ is largely a product of the way in which many states in the global south have been a product of European empire and Western predominance in the post-colonial world. But Moore is no dependency theorist. His analysis is not schematically economistic, but fits rather better into a Weberian political economy in which war, taxes, and the emergence of forms of citizenship drive successful state formation. Weber has been a key influence on comparative studies of government, but this is not Moore’s perspective. He is interested in the international and transnational structuration of state formation and reproduction, and this perspective applies to all states, not merely ‘failed’ or ‘collapsed’ ones. In fact, it is the successful projects of state formation in northern Europe from Absolutism until the mid 1870s3 that creates formative conditions for ‘late developers’. The ‘second wave’ of European empire in the late nineteenth century created states in many parts of the world which are institutionally weak, authoritarian, geographically concentrated, and economically dependent

8 Global Encounters

on primary commodity exports. Moore goes on to demonstrate how these patterns have been maintained by the insertion of newly-independent states into the global political economy. Post-colonial elites have often relied on external sources of money, through their control of strategic resources and their ability to make claims to varying forms of international patronage, whether it be aid, military assistance, or credit from the World Bank and its coterie of policy-takers that constitute the ‘development industry’. This ‘extraversion’ relinquishes states from any compulsion to engage fully with their supposed citizenry. The fiscal sociology of many states leaves them indifferent to the need to levy direct taxes in a regular and minimally legitimate manner; the international rents on offer remove this duty from states. The result of this political underdevelopment is a significant category of post-colonial states which: do not fully control their formal sovereign boundaries; rely on unsystemic and coercive means to extract resources from citizens; enjoy very limited institutions of inter-dependence with citizens’ groups; and are subjected to very limited accountability to their citizenries. That these conditions exist in so many states in such diverse settings (although we should recognize that Moore is speaking mainly about sub-Saharan Africa) provides us with a useful and sobering standard to measure analyses of developmental states in various regions of the world. More specifically, Moore raises important pointers for the chapters that follow him in this section: the need to be fully cognisant of international settings in an understanding of developmental states; the need to fully acknowledge that developmental states centrally require strategies of legitimation; and the possibility that developmental states’ fortunes can fall as well as rise if the key conditions that Moore sets out are not met. As Moore fully acknowledges, the systemic patterns he is concerned to delineate do not give us an account of the variety of state experiences; nor does he wish fully to account for states which ostensibly fitted into the underdeveloped category in the early post-independence period but which have since won the epithet ‘developmental’. For these reasons, the following chapter provides a useful comparison to Moore’s overview, taking specific cases from countries or regions. Ian Taylor considers an intriguing case in the light of Moore’s conspectus: Botswana. Ostensibly, Botswana has many of the preconditions for decline (to paraphrase Rostow): a weakly established colonial state, a poorly diversified and extraverted economy, and from the mid-1970s a dependence on a single high-value mineral. And yet, Botswana poses as Africa’s strongest candidate for a developmental state – with an economic performance better than any other country in the world over the last 35 years, by some calculations (Acemoglu, Johnson, and Robinson 2003: 80). Taylor charts Botswana’s economic development, rightly demonstrating that there are real elements of a success story here. Of course, the trick is to make a

Graham Harrison 9

convincing explanation for this success, especially in Botswana’s continental context of ‘bad governance’. For Taylor, the diferentia specifica in Botswana is the nature of the politics of post-colonial governance. There are key aspects of Botswana’s dominant party polity that go a long way to explaining the developmental effectiveness of the Botswana state. In order to tease these specific aspects out, Taylor develops a broadly Gramscian frame of analysis, focussing especially on the concept of a historic bloc. This allows Taylor to take full account of the way in which the Botswana state is embedded in processes of accumulation and class formation without reducing politics to a determination of some form of economic logic or imperative. By taking this approach, Taylor reveals the ways in which Botswana has maintained political stability and a generalized economic growth. After independence, the party-state was formed out of a coalescence of elites. This ‘mutual assimilation’ of elites (cf. Bayart 1993) produced a reasonably coherent national development vision rather than a more narrowly focussed and ‘zero sum’ strategy in which state power is reduced merely to the struggle for wealth by insecure governing factions (the spectre foregrounded by Moore). This mutual assimilation was enabled by the incorporation of suitably modernized forms of traditional authority into the Presidency, the more rural focus of cattle ranchers, the maintenance of a technocratic esprit de corps within the bureaucracy, the ascendance of a ‘developmental’ ministry, and the febrile nature of Botswana civil society. This brief review clearly evokes the kind of politics that Leftwich identifies as characteristic of the developmental state, demonstrating that the concept does have mileage beyond Southeast Asia, even if we deny it some form of universal ‘model’ status. Most strongly, Taylor identifies the ways in which the ideology of development can work to promote effective state action: national development and technicist policy making. It is only because of these political conditions and relations that the discovery of diamonds is a blessing more than a curse. But, Taylor is fully aware that (as he puts it in another article) ‘diamonds are not forever’ (Taylor and Mokhawa 2003). Nor are they a developmental panacea. Diamond ‘rents’ forestall a more concerted attempt at structural transformation, leaving Botswana’s economy unbalanced. The secular overvaluing of the Botswana currency also has detrimental effects on exports and import substitution industrialization, what another author calls the ‘Dutch disease’ in Botswana (Love 1994). That said, Taylor draws the right conclusions for this section: that Botswana demands attention as a case with something to say about the way we understand developmental states. This is a case in which a developmental state can emerge in austere conditions, largely as a result of the way in which a post-colonial strategy of accumulation was sufficiently stable and developmental to endure and consolidate after the diamond windfall.

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Timothy Shaw presents us with a more equivocal case study: Uganda. Uganda has a more brief period of growth and stability and, as Shaw recognizes, important questions remain concerning the country’s prospects. Shaw uses a different conceptual approach to Taylor: more closely aligned with liberal and multi-level governance theory than Gramsci’s understanding of class, accumulation, and hegemony. This allows Shaw to bring into sharp relief the inter-relations between different processes of political change, leaving a veritable nebuleuse of developmental possibilities. Inasmuch as the term ‘developmental state’ is apposite, it refers to a far less institutionalist and statist form than emerged from the Southeast Asian literature. For Shaw, this is the salient ‘lesson’ that developmental state theory can draw from countries like Uganda. Shaw takes four fairly conventional levels of analysis: global, continental, national, and sub-national. At each level, he demonstrates how established categorizations are giving way to more fluid and pluralistic interactions. Nevertheless, the standard distinction between state, market, and civil society still has some mileage as an heuristic device for Shaw; his concern is mainly to argue that relations between this triad have become significantly more decentred and complex during the last twenty years. What does Shaw’s analysis of Uganda highlight? Uganda’s successes have derived from a congruence of interests and processes: sympathetic international donors and NGOs, a stable and adroit national government, the emergence of national civil society organizations, and the coalescence of all of these in specific localized instances. If we take Shaw’s representation of Uganda, then we need to understand developmental states as an expression of a broader ‘developmental coalition’, one that exists in what Latham calls an ‘international public sphere’ (Latham 2001: 73): neither national nor fully global but produced by a grouping of agents around a national development project. In sum, Shaw makes the state take a step back in his conceptualization of a developmental state. It is the nature of the relations between developmental states and their national societies that also drives Peadar Kirby’s incisive analysis of Ireland. Ireland has gained a considerable profile in analyses of developmental states by virtue of its high rates of growth during the 1990s, and the adoption of new forms of public policy during the same period. Ireland’s ‘tiger-like’ qualities therefore have been the result not only of market-based and globally integrated economic growth but also of astute public action. Kirby reviews this position, but then raises questions that derive from the broad themes of this book: what sense can we make of Ireland’s claim to have achieved a flexible developmental state in the light of the growth of interdisciplinary IPE/Development Studies approaches? Kirby’s answer is to problematize the ‘developmental’ of developmental state. In order to do so, he asks questions about the impact of globalization and new forms of public policy on Irish society, more specifically levels of

Graham Harrison 11

equality and social cohesion. It is here that the Irish developmental model seems most fragile; in fact, Kirby’s narrative reminds the reader of an older genre of research on ‘enclave economies’ and ‘associated dependent development’. Economic inequalities have grown during the Irish ‘miracle’; furthermore, the dynamo of economic growth has been large-scale foreign direct investments which have not led to a broadly-based social improvement, especially in the absence of a desire by the state to discipline Transnational Corporations (TNCs) in this direction. So, what kind of state has produced rapid rates of growth in Ireland? Rather than working as a developmental state, Kirby argues that Ireland resembles Evans’ ‘intermediate state’ (Evans 1995) or more strongly, Cerny’s ‘competition state’ (2000b). In essence, state strategy has been fundamentally market-conforming and socially disarticulated. The implication of this is that Ireland’s economic flourish in the context of globalization has no necessary enduring developmental effects. This section ends with that region that produced the concept of the developmental state. Jonathan Perraton provides an astute retrospective on the East Asian developmental state, especially regarding the repercussions of an ever-deepening economic globalization. As such, Perraton provides insight into the complex inter-relations between economic integration and the prospects for developmental state action. The key point that Perraton develops is that because the global political economy is dynamic, conceptualizations of the developmental state must also be prepared to work in a more flexible fashion than to outline an atemporal model. Whereas, normatively, it might be desirable to promote a developmental state, the real rub lies in the extent to which states have the opportunity and capacity to innovate new forms of developmental public action. The implication of Perraton’s argument is that, however well the other cases dealt with in this section approximate the ‘Southeast Asian model’, what will matter at least as much is how well these cases relate to the changing ‘developmental spaces’ within the global political economy (see also Wade 2003). The cases of Botswana, Uganda and Ireland each show how states have in fact learnt exactly this lesson, attempting to develop an integrated set of policies which engage with the specific location of their national economies in a global order. Reading Perraton’s chapter after the preceding three, one might suppose that the original developmental states might be well placed to take heed of these diffuse ‘second generation’ examples which, in one way or another, have developed in a more recent global dispensation. Perraton makes his argument by developing a number of cautiously revisionist points concerning the developmental state orthodoxy that came out of studies of South Korea and Taiwan in the 1990s. The social relations of capital and labour have been under-explained to date (but see Chang

12 Global Encounters

2001), largely as a result of the institutionalist-Weberian slant to developmental state political economy. Relatedly, the agency of capital – especially the chaebol in South Korea – at least moderates the extent to which we accept the vision of a dirigiste state planning the growth of national champions. Perraton concludes by asking whether studies of Southeast Asia have actually produced a model with sufficient robustness to generate comparative research: the comparators are not fully defined and there is a vague distinction between the specifics of country case studies and the universals that allow comparative considerations. This conclusion is all the more significant for future research on the changing nature of globalization and its impact of developmental public policy. The second section, ‘networks of development, new patterns of power’, explores the new spatial forms of development that globalization has produced. Phillip Wood’s chapter provides a powerful corrective for analyses that associate globalization with convergence. Rather, global capitalism is more ‘lumpy’ (Cooper 2001) than free-market models allow for. What is important to recognize is that the spatial ‘fixes’ that emerge as capital negotiates changes in market signals are less likely to conform to a national template; rather, spaces of accumulation might work within sub-regions, transnational spaces, rural areas, and various forms of ‘enclave’, which is also part of Kirby’s understanding of Ireland’s hi-tech industrialization. Wood looks in some detail at the restructuring of the textile industry in the southern states of America. This is a striking example to take because it is the textile industry that has been presented as a global industry par excellence: mobile, greedy for cheap flexible labour, and globally-integrated. Wood is struck by the historically embedded nature of southern textiles, which cautions strongly against analyses (neoliberal or ‘critical’) that sound the death-knell for textiles in the US. The social and political ‘armour’ within which the manufacture of yarn has emerged in southern states over a century or so has given textiles a path dependence which has adapted to the challenges of the emergence of consumer-driven commodity chains. The racialization of labour, neoliberal state governance, new technologies, and innovative integration with new regional agreements have stymied predictions of the imminent decline of southern textiles. What Wood shows is that space matters, and that globalization has produced manifold and complex spatial fixes for development. One can imagine how the concept of spatial fixing, without any predetermined scale or location might apply to political mobilization as well as accumulation. Generally, international theorists have been keen to identify the ways in which neoliberal globalization has produced possibilities for the emergence of global civil society, but this section’s focus suggests forms of collective mobilization that are not easily understood through the epistemology of ‘methodological nationalism’ (Sassen 2003) or ‘hyperglobalism’ (Held et al. 1999). Behrooz Morvaridi takes just this approach to development advo-

Graham Harrison 13

cacy in respect of one of the most controversial ‘development’ projects of the last decade: the Ilisu dam. Morvaridi reviews the emergence of the dam project and its associated programmes of socio-economic transformation. Here, we see how the ‘high modernism’ (Scott 1998) of the Turkish state has entwined with the interventions of various international agencies: the policy pressure of international financial organizations, the export promotion strategies of Western states, and the global search for contracts by transnational corporations. But, Morvaridi’s interest is in the political responses to the Ilisu dam’s extremely deleterious social effects. Here, we see how local political mobilization has articulated with an emerging transnational advocacy network. Local development issues are key components of transnational development communities that work with some form of rights-based vision of development. The effects of these transnational development networks are complex. On the one hand, Morvaridi shows how pressure has been exerted on Western states and transnational companies with real effect; on the other hand, Morvaridi argues that these networks are limited in their ability to pursue development as social justice because ultimately this latter project must engage with national governments if it is to make changes to the way states act and social structures change. As a result, transnational advocacy networks are not akin to New Social Movements, nationallybased and focussed on a more profound project of social transformation. For Morvaridi, this is not to discount transnational networks as much as it is to understand their ‘comparative advantage’ in raising specific normative issues vis à vis international actors. Morvaridi provides an apposite point of departure for Marieke Riethof’s chapter on labour unionism in Brazil. Here, we have a clear example of a political mobilization that is both engaged with globalization but – unlike the advocacy networks around the Ilisu Dam – also very much focussed on a national developmental agenda. Riethof outlines the political economy of labour organization from the 1980s. She shows how an increasingly confident and politicized labour movement contributed to democratization and changes in the organization of the workplace, especially in larger forms (national and international). The consolidation of a raft of neoliberal policies, most starkly marked by the adoption of the plano real, substantially modified the terrain of labour activism away from what Riethof calls ‘proactive’ towards ‘participatory’ strategy. Economic recession and neoliberal policies have rendered labour more vulnerable and consequently union activity has focussed on supporting ‘adjustment with a human face’, or in Riethof’s evocative phrase, ‘negotiated flexibilization’. What makes all of this interesting for this section of the book is the fact that Brazilian unions have increasingly conceived of the challenges of neoliberalism not only as exclusively national but also as global and regional.

14 Global Encounters

The central union organization, CUT, has involved itself in the construction of regional links within specific industries spread throughout the Americas. Furthermore, CUT has participated in regional trade agreements. In other words, the reaction to neoliberal imperatives from outside Brazil have evoked national responses and a growing set of regionalized and international responses, from membership of the International Congress of Free Trade Unions (ICFTU) to workers’ visits between factories in different countries owned by the same transnational. Many of the trends Riethof describes are embryonic, and this leaves an important open question: how might these new spaces of labour organization affect the defensive forms of union politics that have emerged during the 1990s? The final section of the book is introduced by Martin Lodge and Lindsay Stirton’s consideration of regulatory reform in the Caribbean. The theme of this section is the interplay between forms of regulation and the execution of liberalization. Economic liberalization does not merely require the rolling back of the state from the economy. In fact, neoliberal ‘transitions’ of one kind or another have all required new forms of regulation, as well as the abolition of older ones (Rodrik 2003). This raises two key questions for this section, both of which are also addressed by Lodge and Stirton. Firstly: what forms of regulation have emerged during the age of neoliberal development policy; and secondly: which regulative forms have proved to be the most developmental? For Lodge and Stirton, answers to these questions necessarily require an awareness of the diversity of regulative forms: there is no single neoliberal template to developmental regulation. This is not merely a question of looking at specific country cases, or sectoral analyses. Rather, Lodge and Stirton argue for a particular conceptual approach. Effective or developmental regulation requires robust institutions, controls over the exercise of public authority, and a degree of embeddedness for regulatory institutions. Together, these considerations set out a framework of regulatory autonomy in which institutions are both substantive, engaged in societies, and not captured by any single interest or personality. Lodge and Stirton review the cases of Jamaica, Trinidad and Tobago, and Barbados and find that regulatory autonomy is constructed in specific political milieux which do not necessarily mean that effective regulation is a direct function of the extent of liberalization. The politics of institutional and legislative change, the scheduling of reform, and the nature of negotiations between different agencies all matter. In sum, Lodge and Stirton focus attention on the way regulatory regimes are constructed as part of the liberalization process. Richard Woodward considers the ways in which new regulative regimes have been mooted for one of the most privately-constituted economic activities: offshore finance. This case study draws our attention to the tensions produced by the emergence of international finance and the desire

Graham Harrison 15

of (some) states to regulate or at least survey the movement of finance between states. Although small island economies have extremely limited power as states, they have established what might be called hyper laissezfaire financial systems that have given them a specialism in global financial markets. The OECD’s Harmful Tax Competition Initiative aims to establish a stronger regulative regime for the offshore sectors of small island economies. The contradiction for Woodward is that the strictures of this regulative regime would – if implemented in full – undermine offshore centres tout court. In this context, there has emerged a fragmentation of the OECD coalition behind the Initiative: the US has stepped back from the Initiative, American transnationals and neoliberal think tanks have lobbied against it, and some OECD member states are themselves both ‘delinquent’ and ‘uncooperative’ in the Initiative’s own terms. Thus, what Woodward illustrates very well is the way in which regulative initiatives require concerted political support if they are to succeed against the neoliberal flow of economic globalization. This was the case in each of the Caribbean cases analysed by Lodge and Stirton; it is also the case concerning international initiatives. The politics of regulatory construction is brought out more clearly in the chapter by Tony Heron. This is the case because Heron’s focus of interest – apparel manufacture in Export Processing Zones in the Caribbean – is strongly ‘overdetermined’ by US foreign policy. A raft of US trade legislation has produced incentives for American apparel companies to locate manufacturing plants in Caribbean EPZs. But, as Heron demonstrates, this does not necessarily represent a liberalization-friendly set of measures to promote global or regional economic integration and convergence; rather, the incentive structures reflect the mercantilist concerns of the US government and textile companies, responding to competitive pressures. Heron considers the evolution of EPZs in the light of their claimed developmental effects. EPZs are formally presented as an ideal model of economic growth and development through an open economy which of course fits well with research funded by the World Bank and the OECD asserting a correlation between open economies, global integration, and economic development. Although claiming not to engage in a critique of neoliberalism, Heron clearly raises some notes of caution. The trade structures established by the US effectively restrict or punish companies that attempt to integrate their EPZ operations with local economies. But furthermore, the ‘socialization’ of EPZ incentive regimes across the region generates downward competitive pressures on each and all. As a result, wages have fallen, work has become de-skilled, and fiscal incentives have become more extreme as the EPZ model has enveloped the region. Thus, for Heron, the EPZs in their current formulation will not promote the kind of industrial transformation ‘that they are allegedly designed to promote’ (Chapter 12).

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Heron brings to the forefront the importance of states in the construction of liberal regulatory regimes – perhaps: globalization is what states make of it. This is the key argument developed by Paul Sutton in his chapter on public sector reform and global competition. Looking especially at Jamaica, Sutton charts the rise of a neoliberal macroeconomic agenda from the early 1980s. This has produced serious developmental concerns partly as a result of the vulnerability of small states and partly as a result of the nature of the current form of economic globalization. A key response to this concern has been the exploration of innovative models of development management by policy makers and politicians in the region. The salient result of this exploration has been a general ‘model’ of governance based on New Public Management and capacity building. Here, there are clear echoes of the World Bank’s global interventions concerning the role of the state and public sector reform (World Bank 1997; see Harrison 2004a for a study of Africa); but the key concept developed regionally is strategic global repositioning (SGR). SGR is based on the premise that states need to act strategically and in entrepreneurial fashion to improve their relative position in the global economy. But surprisingly, the connections between neoliberal economic management and public sector reform are quite loose. There is little evidence of clear thinking about the causations between public sector reform and improved competitiveness. Furthermore, Jamaica’s experience with public sector reform implies that the state might be set on a path to progressively enhanced intervention in the economy: exactly the foil to liberalization that generated structural adjustment twenty five years ago. Thus, it seems, there is still space to consider enhanced state power vis à vis national economies, even in small states with ‘extraverted’ economies. The developmental properties of any enhanced public authority remains to be seen.

Prospects for the IPE of development This book should be read as an overture to a field of research for the IPE of development. It demonstrates the enduring importance of states but not as separated national case studies; it teases out some of the innovations in the spatial ordering of development; and it reveals the persistence of issues of regulation which exist at the heart of economic liberalization. Together, these three areas define a powerful set of concerns for those who wish to understand globalization not as a process of convergence in which there are no constitutive differences between national economies that cannot be addressed through liberalization. Notes 1 This book originated in a conference convened in 2002 by the editor: ‘Towards a New Political Economy of Development: Globalization and Governance’. The

Graham Harrison 17 Political Economy Research Centre (University of Sheffield) and the Centre for the Study of Globalization and Regionalization (University of Warwick) provided logistical and financial support. I would like to thank Sylvia McColm for her administrative skills in organising the conference. Thanks also to Andrew Gamble, Jean Grugel, Tony Payne, Jonathan Perraton, and Georgina Waylen. 2 A key example here is Thomas Friedman, who writes in the New York Times and published a paradigmatically vapid liberal ideal-type of globalization in The Lexus and the Olive Tree (2000). 3 The unification of Italy in 1861 and of Germany in 1870.

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Part I The State and Global Political Economy (Un)Developmental States

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2 The Development of Political Underdevelopment Mick Moore

Introduction For some decades now, the publics of the world have held governments in low regard.1 We load on them the blame for our collective ills, and deny them credit for the good things in life. Even if not thought to be blatantly self-serving or corrupt, they are widely held to be incompetent. Although we complain all over the world, some governments really are much worse than others. Within the OECD grouping of rich nations, the Italian and Japanese regimes – and not simply the governments currently in power there – have long been notorious for some combination of electoral and political corruption and inability to implement urgent reforms. It is not clear that Italy and Japan are much better governed than many of the more fortunate areas of the ‘global South’ – Costa Rica, Uruguay, Malaysia, Singapore, parts of Brazil and India. But there are many territories at the peripheries of the global economy and polity where governance really is more of an affliction than a blessing. Think, for example, of Afghanistan, Algeria, Angola, Armenia, Azerbaijan, Bangladesh, Benin, Belarus, Central African Republic, Chad, Colombia, the Congo, Congo Brazzaville, Cote d’Ivoire, Ecuador, El Salvador, Equatorial Guinea, Gabon, Georgia, Guinea Bissau, Haiti, Kazakhstan, Kyrgistan, Liberia, Libya, Malawi, Mauritania, Moldova, Myanmar, Nepal, Nigeria, Pakistan, Palestine, Paraguay, Sierra Leone, Somalia, Sudan, Turkmenistan, Zambia, and Zimbabwe. Such states are either weak and ineffective, arbitrary and unaccountable in relation to their own citizens or, most often, both simultaneously. Governments are not simply ‘anti-developmental’ (i.e. unable effectively to mobilize and deploy resources for purposes of collective betterment), but, to varying degrees, not even competent to perform core functions such as defence, the control of national territory, the promotion of public health, and the enforcement of law and order. They also have little regard for human and civil rights, and rule in the interests of narrow segments of the population. 21

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Why is this kind of ‘bad governance’ concentrated in the peripheries of the global system? That is the central question addressed in this chapter. In answering it, I also suggest some answers to two other big questions: • How can we account for the enormous variety of forms and qualities of governance in the ‘global South?’ • What might be done about these problems in practical policy terms? My principal focus however is sketching out why and how globalization – defined broadly as the increased intensity of economic and political interactions between different parts of the world – has, in a long historical time scale, helped cultivate poor governance in the peripheries of the global system. The core argument is that most contemporary states in the peripheries were formed in – and have continuously been moulded by – an international political and economic environment dominated and shaped by the prior existence of relatively wealthy and powerful core (or ‘Northern’) states, by the technologies emanating from the North, and by the global markets for commodities that had been developing over several centuries to serve the needs of these Northern economies. Compared to the ‘relevant comparator cases’ in the North, processes of state formation in the South have been dominated by extrinsic factors. A first trawl through the recent historical literature suggests three particularly important sets of extrinsic factors: (a) states have been created externally, often through simple military conquest; (b) they have been to a large degree sustained and supported, politically, militarily and financially, from external sources; and (c) through their intermediary roles in relation to the global political and economic system and global markets, they have commanded very considerable resources relative to those available to ordinary citizens. However, the impact of these more visible factors has been mediated by some less evident changes in the global political, economic and technological environment. It is most useful to think in terms of the following three broad characteristics of ‘dependent’ state formation in the South, each with varying impact from one location to another: • Political dependence Many peripheral states were either (a) created directly by Northern states that were already rich and powerful – through conquest and direct colonial rule; or (b) have been substantially shaped by various types of subordination to or dependence on those Northern states and the international institutions which they generally dominate – through mechanisms of indirect dependence (‘puppetry’), military alliance and military assistance, military intervention, and financial subsidies of various kinds, including development aid. • Rent bonanzas Unlike the now-rich countries at almost every comparable stage in history, many peripheral economies have been able to generate

Mick Moore 23

large financial surpluses by selling certain types of natural resources on global (i.e. largely Northern) markets, notably, gold, cotton, coffee, cocoa, tea, phosphates and tobacco (in the past) and (today) oil, other minerals, diamonds, tropical timber, and narcotics. Further, many peripheral states can obtain large ‘rents’, typically given in the form of military and development aid, because they are recognized actors in the international system, have UN votes, or control locations for military bases or key transport arteries. The relative size of these combined natural resource and strategic rents – and the fact that they either are ‘naturally’ controlled by the state, can easily be subjected to that control, or in some cases can be appropriated by armed challengers for state power – affects the incentives bearing on state elites and patterns of state formation. Further, the contemporary availability of ‘external banking sanctuary’ – secure Northern locations to stash illicit cash – increases the incentives for Southern political leaders to use political power to accumulate capital through exploiting these rent flows, even at the risk of losing power. • The industrialization of military technology Military technology has evolved over the centuries to become much more capital intensive, much more destructive, and quickly projectable over longer distances. This has greatly changed the balance of military (and political) power between (a) ordinary citizens choosing to arm themselves using the means immediately available to them in everyday life and (b) organizations, including states, that have sufficient capital to arm themselves through international markets (for military equipment and personnel) and international military alliances. Contemporary peripheral states with access to the kinds of rents mentioned above – or indeed well-funded insurgents seeking state power – enjoy a military superiority over their ordinary citizens which bears no comparison with earlier experiences there or in the North. Further, governments no longer need to engage in mass conscription to find enough people to operate their weaponry. This provides states (and well-funded insurgents) with incentives to adopt coercive rather than political bargaining strategies in interacting with citizens. There are three main immediate consequences of these ‘dependent’ state formation processes in the South. First, most citizens have been relatively powerless in relation to the state. Second, states have had limited incentives to bargain with citizens, either for material resources or political consent. Third, states sometimes have little incentive (or capacity) even to rule effectively some outlying regions of the territories over which they are nominally sovereign. The more general, longer term outcome is that many Southern states are in some respects powerful and unaccountable in relation to citizens, and in other respects are weak and ineffective. To use political science jargon, they often enjoy considerable despotic power, but little infrastructural power.

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What are the ‘relevant comparator cases’ mentioned above? Where in the world was the process of state formation significantly different? Every national experience is unique. But there is a family of similar cases that is particularly important because it has given rise to the dominant model of the successful, effective, modern (liberal, democratic) state: Northwest Europe and North America, from the sixteenth through to the nineteenth centuries. Here, internal strategic interaction between state apparatuses and organized groups of relatively powerful and wealthy citizens played a key role. Potential ‘joint gains’ from cooperation were explored and often embodied in the effective political constitution. States conceded institutional arrangements that gave some groups of citizens (a) some guarantee of human, civic and property rights and (b) some influence over state policy, through representative arrangements. In return, states obtained (a) the loyalty and commitment of substantial societal groups, and (b) agreements that provided a useful degree of predictability and compliance in revenueraising, and a basis on which they could move from dependence on their ‘own’ (demesne) incomes to become ‘tax states’, i.e. sharing reliably in the growing incomes of their more wealthy citizens. Military competition with other states – the reality or threat of war – was the dominant catalyst for these institutional bargains between states and various elites. And the absence of comparable consistent recent external military threats is one component of our story about the ‘creation of political underdevelopment’ in the South. But it is only one component. For purposes of isolating the generic features of state formation, the key contrast to bear in mind is that the significant strategic interaction and bargaining processes were essentially extrinsic in the global peripheries, but internal in ‘historical Europe’. That, in a rather bloated nutshell, is the core argument of this chapter. Before exploring it in more detail, let me make two contextual comments. First, I am focusing on state formation – conventional concerns about (re)constructing effective authority through states – rather than potential international solutions to bad governance in the peripheries. I take this to be the message of the very slow evolution of global governance institutions and the consequences of recent heavy external military interventions in Afghanistan and Iraq. While the more successful reconstructions of Southern states in severe crisis are likely to be nurtured by powerful external actors, it is the internal processes of (re-)negotiating a mutually beneficial relationship between the state and significant societal groups that will remain key to long-term achievement. There is so far no evidence that international agencies can substitute for a conventional state in creating the ideological, moral and practical basis for effective governance. Second, the weakness of public authority in the peripheries is no new thing, and certainly not a product of the end of the Cold War. It is true that talk of ‘failed states’ became abundant only in the 1990s (Reno 1998; Zartmann 1995). The collapse of the Somali state in the early 1990s was the

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first and most clear-cut example of how the sudden ending of competitive patronage from the US and the Soviet Union could undercut polities that lacked significant internal roots, independent sources of revenue, or indeed any significant ‘apparatuses’ at all beyond those needed to collect their foreign cheques and guard the capital city. But the disintegration of the Soviet Bloc and the end of the Cold War did not bring about any dramatic change – for better or for worse – in the overall quality of governance in the peripheries. A few ‘state collapses’ followed the ending of competitive international patronage and the declining interest of the great powers in those parts of the poor world that lacked economic or geo-strategic assets. But those ‘collapses’ reflected the extent to which many peripheral regimes previously had drawn much of their substantive reality – their international legitimacy and recognition, their revenues, and their external military support – from their possession of formal title deeds to the territory they claimed to rule, and of the consequent voting power in the UN and other international fora. Public authority in the periphery was not then, and is not now, universally weak and illegitimate. But it is so on average, and has long been so. If we want to understand the reasons, we need to go back in history well beyond both the end of the Cold War and the current wave of globalization that became visible in the 1970s. And it is useful to think of this history in terms of processes of political development (and underdevelopment).

How do we think about ‘political development’? Scholarly literature stamped with the concept of political development mostly dates back to the 1960s and 1970s. It was one emanation from a set of (mainly American) debates within the modernization theory paradigm. Those debates were simultaneously very stimulating and productive in some dimensions, and deeply misleading and ideologically biased in others. No good purpose would be served in trying to disentangle the complex threads in this chapter. I want simply to establish two claims in relation to that literature. The first is that we can usefully begin again to use the term political development – and the obverse, political underdevelopment – without running the serious risk of having to define and defend what we say in relation to words penned a quarter of a century ago in a very different context. I am hoping to reclaim political development for commonsense, without paying royalties to competing sets of previous claimants. Second, if we are to use the concept of political development in any coherent sense, then this inevitably implies normative and historical judgements, and we should be explicit about them. Like many of its critics, I cannot accept the assumptions and judgements of the narrowest form of modernization theory, notably the notion that a particular image of a free, liberal, open, mobile, pluralistic, market-oriented and law-mediated –

26 Global Encounters

and implicitly American – society represents the good life to which poorer countries can and should move as directly as possible. I do however embrace a much less restrictive – but equally ‘liberal democratic’ – notion of what political development entails: the creation of polities that correspond broadly to contemporary ‘advanced’ states, in which democracy and associated mechanisms of political accountability and civilian rule help reinforce system legitimacy, and aggregate substantial effective authority within various parts of the state apparatus. In other words, the predominant features of the contemporary polities of OECD countries do in fact represent a sensible long-term objective for countries afflicted by poor governance. This is not because these are the best patterns of governance that we can imagine. Political philosophers since Plato have been providing us with plenty of alternatives. It is rather that history to date suggests that this broad model – that itself has many variants – represents the only state form that is relatively effective ‘internally’ and robust and durable in a world already dominated by other similar states. I am concerned with what is feasible in the world that we know, not with what might be feasible in a different world. If we accept this broadly liberal democratic perspective, and stick to a hard-headed, ‘realistic’ appreciation of the lessons of history, then we can define political development as a process requiring the accomplishment of five historical state-building tasks.2 None has absolute historical or causal priority, and the synergies and interactions between them are complex. One can however assign them some approximate chronological ranking. To a substantial degree, progress in solving the earlier tasks creates the conditions under which it is sensible and feasible to tackle the later ones: (i)

(ii) (iii)

(iv)

(v)

The creation of territorially-based institutions of rule which are authoritative and superordinate to other institutions claiming to exercise public authority. The establishment of procedures and institutions of rule that depend less on coercion and force and more on legitimacy, consent and negotiation. The institutionalization, between state authorities and organized societal actors, of relations of inter-dependence that encourage cooperation around mutually beneficial strategies. The institutionalization of both ‘internal’ (within the state apparatus) and ‘external’ (societally-based) constraints on the authority of the central state apparatus. The generation of a strong citizen commitment to their mode of governance through their extensive direct engagement in processes of policymaking and implementation.

With one exception, I will use this list to structure a presentation of some of the key differences in state formation between (a) ‘historical Europe’,

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where internal state-society interactions played a major role and (b) the contemporary global peripheries, where extrinsic relationships have been especially prominent. The exception is the last point listed above, about extensive ‘citizen engagement’ in governance. It is not given a central place here for two related reasons. First, there are wide differences between OECD states in this regard. In different ways, the Nordic countries and Switzerland, in particular, are ‘high engagement’ polities in respect of citizen involvement in the governance process (Rothstein 2001), while the United Kingdom, for example, is ‘low engagement’. Second, from the perspective of our core concerns here, these are ‘icing-on-the-cake’ issues: even the ‘low engagement’ OECD polities are highly participatory in comparison with most on the periphery. In Sections 3–6 respectively, I present a schematic comparison between the ways and extent to which these state-building tasks were accomplished in ‘historical Europe’ and in contemporary peripheral countries. I use the first four state-building tasks listed above as a framework to present the meta-argument of this chapter: that ‘late political development’ has impacted adversely on state formation in contemporary peripheral countries because of the relative importance of the three interrelated causal sequences listed above, each with a strong extrinsic dimension: political dependence, rent bonanzas, and the industrialization of military technology. I reiterate that the term ‘historical Europe’ is an abstraction relating Northwest Europe and North America where, between the sixteenth through to the nineteenth centuries, the dominant contemporary model of the successful, effective (liberal, democratic) state emerged. I am of course following in the footsteps of excellent historians, abstracting some common processes from very diverse historical experiences (Tilly 1992; Ertman 1997). The historical experiences and contemporary polities of the peripheral countries are much more diverse. As far as possible within space constraints, I try to indicate the main lines of that diversity.

Extrinsic state-building and (uneven) territorial authority Virtually every definition of a ‘modern state’ places some emphasis on the pre-eminent position of the state apparatus in relation to alternative sources of power and public authority: feudal landlords, local or transnational religious organizations, self-governing local communities, guerrilla or insurgent forces, transnational commercial and criminal networks, etc.3 The underlying idea is not that the state should dominate societal institutions in a totalitarian fashion: it is simply that there should be one superordinate power, which should exercise its monopoly of authority and armed force within its territory. In many parts of the South, governments do not entirely control the territories over which they nominally exercise authority: there are areas where

28 Global Encounters

policemen, teachers, health officials, and tax collectors do not or cannot go, and where the law of the land effectively does not apply. Some of those areas are controlled by local communities, separatist insurgents, religiouslybased organizations of various kinds, networks organized around the production or trade in narcotics, diamonds or arms, and combinations of all the above. Other areas are fought over by such groups and/or the ‘national’ armed forces. Why is the territorial authority of the state so weak in parts of the South? There are five main, interacting reasons. (i)

First, contemporary states in the South were formed, most directly, and a few indirectly, through European colonial conquest. A prime original motive for that conquest was to obtain control of valuable local natural resources, or of land where valuable tropical crops could be grown using cheap (often coerced, or slave) labour. The state apparatuses that were formed were ‘patchy’ in a spatial sense. States were dominated by groups – whether colonial bureaucracies or locally-based elites – that were interested principally in natural resource production and extraction. This focus on resource extraction had little visible impact on the spatial intensity of state power in the small islands of the Caribbean, where sugar was widely grown. But it made a significant impact in Latin America and Africa in particular, where gold, sugar and a wide variety of other valuable crops and minerals were extracted from relatively concentrated locations amid areas of very low population density. Here the colonial state apparatus, and its successors, often ruled relatively lightly over the ‘unexploited’ areas. To take an extreme case, Portugal controlled parts of coastal Mozambique from the fifteenth century, but many inland populations had no experience of colonial authority until well into the twentieth century. The weakness of elite and state economic interests in peripheral parts of the national territory is not itself an explanation of why state power was not fully extended to those peripheries. The full extension of territorial authority – to defend frontiers, collect tax revenues, and pre-empt political interference by ambitious neighbouring rulers – is ‘normal’ behaviour in a world of competing states. And that did happen to some degree in Latin America in the nineteenth and early twentieth centuries. A series of wars tested the military capacity and the durability of the existing states, changed some frontiers, and, except in the relatively impenetrable Amazon, brought about a degree of alignment between formal frontiers and the effective power of national governments (Centeno 1997, 2002). This did not happen to the same degree elsewhere in the South, and especially not in SubSaharan Africa. Most contemporary state boundaries in Sub-Saharan Africa were established during the brief and brutal ‘scramble for Africa’ that culminated in the Congress of Berlin (1884/5). Eager as the

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Belgians, British, French and Germans in particular had been to stake claims in Africa, they also realized that this competition threatened to precipitate war among them in Europe, and decided that Africa was not sufficiently valuable to justify that risk. They made such credible commitments to one another to respect the territorial boundaries agreed in Berlin that individual colonial administrations did not henceforth feel any strong obligation to extend territorial rule to defend frontiers, and prevent neighbours moving in (Herbst 2000). The most graphic evidence is the disinterest of most colonial African regimes in building rural roads (Herbst 2000: 84–7). (ii) In agreeing to carve up Africa in this way and not to later try to change the pattern they had carved, the European powers began to qualify the highly expedient, long-standing (‘Westphalian’) principle of international relations: that governments would recognize the authority of other governments provided that latter could demonstrate secure control of the territories they claimed. The Westphalian principle was challenged even more severely after 1945. Once the United Nations was created and the former European colonies in Africa, Asia, the Pacific and the Caribbean became independent, the operative rules of the international state system were substantially re-written. Effective control of territory and populations was no longer the main condition for recognition of statehood by other states. To be the successor to colonial rule was itself adequate to guarantee formal recognition and the more substantial material resources, including international aid, which accrue to those holding governmental power. In most of the excolonial world, but most strikingly in Sub-Saharan Africa, Darwinian processes of inter-state competition were not only discouraged, but positively ruled out by the new international and regional state systems. Governments that lost effective control of some of the populations and territories over which they nominally ruled did not – as they had historically in much of the world – as a matter of course fear wholesale predation on the part of their neighbours. Like their colonial predecessors, most African governments have shown little interest in building rural roads (Herbst 2000: 161–72).4 Only in very recent years, with the Eritrea-Ethiopia wars, the intersecting hostilities in Liberia, Sierra Leone, Guinea and Cote d’Ivoire, and the sequence of conflicts in the Great Lakes Region, has predation on weaker neighbouring states begun to appear as a potentially ‘normal’ strategy for Sub-Saharan African states. The malign consequences of these particular conflicts take us well beyond the subject of this chapter. The immediate point here is that the second reason for the spatial unevenness of the exercise of state authority in much of the contemporary South, especially Sub-Saharan Africa, has been that the previous operative rules of the international system have been suspended to reduce the penalties

30 Global Encounters

for states that do not always rule de facto where they claim de jure authority (Jackson 1990). (iii) The third and fourth points on our list do not require such extensive explanation. The third is that many contemporary Southern states cannot exercise authority in some regions because they are outcompeted by alternative networks financed by producing, for export to the North, commodities that are both highly profitable and illegal internationally: illegally felled tropical hardwoods, ‘blood diamonds’ and, above all, narcotics. Whatever the merits and demerits of the ‘wars on drugs’ and the illegality of narcotic use, it is very evident that these kinds of no-go areas threaten and undermine state power. Much of Colombia, parts of Bolivia and Peru, Afghanistan, parts of Myanmar and some surrounding countries – exist simply because (a) there is a very valuable market for narcotics in the richer North and (b) narcotics are illegal at the insistence of the core countries of the North. There is no precedent in European history. (iv) States that need to tax have powerful incentives to create an effective and honest public bureaucracy. Revenue raising is more difficult than most other civilian public service functions and more vulnerable to corruption. If taxes are raised coercively or corruptly, the legitimacy and stability of governments may be threatened. Accordingly, in shaping its revenue agencies, the public treasury has good reason to invest heavily in the institutional mechanisms that tend to promote competence throughout the public service: merit-based recruitment and promotion, and effective internal financial, procedural and personnel controls (Brewer 1989; Kaldor 1963; Weiss and Hobson 1995: 42–8). Because many Southern states are financed from various kinds of natural resource or strategic rents (see Section 5), they have limited need to tax their populations (Stotsky and WoldeMariam 1997). They miss out on one important set of incentives to enhance state capacity. (v) The final point is closely related. Where states have large non-tax revenues, they do not need to tax their own populations. But the search for taxes is one important motivation for states to extend effective rule to more remote rural territories and populations. Without any strong incentive to tax, the incentives to rule are also weakened. The consequent failure to bring some populations into the ambit of a regular civilian bureaucracy leaves the state vulnerable to the (armed) organizational challenge of competitors – guerrillas, private armies based on the narcotics and arms trades, and non-state movements of various kinds, including, in contemporary Sub-Saharan Africa, autonomous Christian and Islamic movements (Ellis 1996: 11–12 and passim). The key insight, shared inter alia by counter-insurgency specialists, is that active revenue raising may be an important means of keeping the state machinery alive and active at the grassroots. If the revenue raising

Mick Moore 31

function is permitted to decay, weak states leave themselves vulnerable to more committed and organized predators: ‘In the course of an internal war, economic assistance tends to become an alternative source of revenue for the local regime, allowing it to neglect its domestic tax base and thus leave it to the insurgents to exploit. This is not to suggest that regimes facing an internal war ought to tax their populations more heavily, but it is to say that, in order to tax the countryside and the urban sectors, they have to rule those sectors. If they rule them, the insurgents do not’ (Odon 1992: 219). It is some years since Guillermo O’Donnell observed that, if one could colour-code a map of Latin America according to the degree to which governments actually exercised effective, legally-sanctioned authority, the result would be patchwork. In some places, governments barely rule at all (O’Donnell 1993a, b). This image is even more valid for some other parts of the South (cf. Skocpol 1979, chapter 1).

Extrinsic state-building and the (limited) civilianization of public authority All states have military origins, and most depend for their economic success or physical security on the command of military force. However, direct military rule is ‘naturally’ associated with the use of state power for predatory purposes. The civilianization of rule has been important to the durability and effectiveness of states especially in the modern world. It is true that some states, dominated by military institutions, had a good historical run. Most strikingly, the Hohenzollern dynasty successfully constructed a Prussian/German state in Central Europe between the seventeenth to nineteenth centuries by using a highly organized army to rule and coerce taxes from ‘internal’ populations, expand frontiers, and generate revenue through hiring military services out to neighbours (Finer 1975: 134–44). Over a similar period, but initially on a more defensive and reactive basis, an equally powerful militaristic state was constructed in Japan. However, the military-coercive state-building strategy eventually was out-competed, politically and militarily, by variants of the liberal democratic approach. States based on civilian rule, electoral representation and consensual, bargained interactions between state and society – Australia, Belgium, Canada, France, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the UK and the US – proved to be equally or more compatible with capitalist industrialization and military strength, and politically more robust because of their basis in consent. A few states, either controlled by or substantially organized around militaries, have had striking periods of

32 Global Encounters

economic success in the South in recent decades: notably Brazil, South Korea and Taiwan over varying periods between the 1950s and 1980s. There is still no agreed interpretation of these ‘developmental states’, but there is convincing evidence that the military component in the ruling coalitions played an important role in helping to ensure political stability during the implementation of economic policies that would not have commanded much popular support. However, military rule in general is not associated with developmental policies, or with economic growth, and the countries cited above have all civilianized and democratized in recent years, following growing prosperity. Their experiences, like those of poorer countries more generally, strongly suggest that military rule is rarely consistent with the existence a large educated, white-collar middle class – and therefore not with national prosperity.5 In the long term, the civilianization of rule is likely to be conducive to the political and economic development of countries in the South – and even to their military strength. Yet the circumstances in which those states were created or nurtured often create a bias towards rule that is, in varying combinations, authoritarian, military and predatory. Again, we have four main, interacting reasons. (i)

The first is simply that a substantial degree of authoritarianism was intrinsic to colonial rule. Even in exemplary colonies like India and Sri Lanka, where some power was devolved to elected local institutions, and most positions in the colonial bureaucracy were held by local people before independence, that bureaucracy enjoyed extensive, relatively unconstrained administrative and judicial power at sub-national levels, and, at local levels, devolved these same authoritarian powers onto local elites through the type of arrangements generally known in Africa as ‘indirect rule’. The institutions and habits of authoritarian local rule persisted beyond independence – as illustrated for example by the coercive techniques used to raise taxes by local governments in contemporary East Africa (Fjeldstad 2001). (ii) The second reason is that military and authoritarian governments in the South have often been installed or supported by external Northern-based powers – and the former Soviet Union – because this has often been the most effective and direct way for those Northern regimes to exercise geo-strategic influence in the South. This has sometimes been accompanied by the less direct strategy of supporting political movements espousing the appropriate ideologies – of liberalism, markets and capitalism, or socialism and communism respectively. And, since the end of the Cold War in particular, some direct interventions have been intended to replace authoritarianism with democracy (e.g. Panama in 1989, Bosnia, Kosovo). However, the dominant experience of the South in the twentieth century was of direct inter-

Mick Moore 33

ventions in support of authoritarian and military rule, the threat of such interventions, or routine support for such regimes. The more enduring and consequential of these relationships of direct political and military dependence include: Britain and France in much of the Middle East in the earlier decades of the twentieth century; France in much of Francophone West Africa since the 1960s; the US and the Soviet Union in different parts of the Middle East and the Horn of Africa since the 1960s; and the US in Latin America, the Caribbean and East Asia at diverse periods during the past century. (iii) A third historical motivation for authoritarian and military rule in the South lies in the prevalence there of ‘commodity rents’. In a world dominated by a relatively wealthy group of increasingly-industrialized nations, the ‘natural’ economic role of the South has been to specialize in producing agricultural, forest and mining commodities for export. Most Southern countries are still principally producers of primary commodities. Three related structural characteristics of this export commodity economy have great political significance. First, individual areas and countries tend toward ‘monoculture’: they specialize in a very small number of commodities – bananas, bauxite, coca, cocoa, coffee, cotton, diamonds, groundnuts, oil, opium, palm oil, sugar, tea, and so on. Second, with the partial exception of diamonds, all these commodities are sufficiently bulky and/or physically rooted so that it is quite feasible for people who command political power or armed force to seize control of them, or extract a financial surplus under threat of seizing control. Third, the incentives to extract that surplus have often been strong because commodity production for export to the North sometimes has generated large ‘rents’, that is, market prices well above the level at which the producer would be willing to supply. This means that producers may be willing to continue producing and supplying the market even if someone is creaming off much of the surplus. Much of the political history of many Southern states has been oriented around competition to control these commodity rents. The forms and outcomes of these battles have been very diverse. In the early stages, they often revolved around control of the land on which valuable commodities would be grown, or under which they might be found – or of the labour needed to produce them. Once commodity production is well established, conflict is more likely to focus on control of those points in the transport, processing or export processes from where the surplus can most easily and reliably be creamed. In the 1970s and 1980s, a great deal of scholarly and policy attention was paid to what was often termed ‘urban bias’: the ways in which many Southern governments used control of the economy to extract a surplus from agriculture, and especially from agricultural export com-

34 Global Encounters

modities like cocoa, coffee, cotton, groundnuts, palm oil, sisal, sugar, tea, and tobacco.6 But those extraction processes were already by the 1980s to a large degree archaic and self-defeating: the terms of trade had moved so much against tropical agricultural commodities that there was little surplus left to extract, and the attempts to do so often impoverished farmers and reduced production. The economic liberalization policies of recent years have largely terminated this kind of ‘urban bias’. Attention now is on a much more profitable, significant and contentious commodity, which generally has more malign effects on the polities – and often on the economies – of the nations which it blesses (curses?): oil. Oil is dominantly produced in the South. Considerable research has been conducted recently on the implications for governance of possession of reserves of oil and of a number of deep-mined non-oil minerals. Schematically, the existence of these rents establishes incentives for two different types of actors to militarize political conflict. Those who enjoy government power are tempted to use some of the rents to ensure that they stay in power through non-democratic means: through buying over leading political opponents, recruiting well-paid armed forces and intelligence services, and spending generously on military equipment. The temptations are all the greater because it seems likely that anyone else who obtains power will be tempted to hang on to it in the same way. At the same time, knowledge that those in power are unlikely to cede it peacefully motivates ‘out’ groups to resort to military strategies to try to obtain their share of temptingly-large rents. In sum, the evidence tells us that existence of resource rents, especially those from oil and minerals, tends to generate both non-democratic forms of rule (Ross 2001b) and internal armed conflict (Ross forthcoming-a, b). Further, since both military/non-democratic rule and civil war are clearly inimical to human welfare, it comes as no surprise to find evidence that the economic resources that in principle become available from natural resource windfalls typically do not enhance mass welfare – mortality, health, education and nutritional status – and may indeed often damage it (Esanov et al. 2001; Moore et al. 2003; Ross 2001a). (iv) The final reason for the limited civilianization of public authority in much of the South lies in the changing nature of military technology (Ferguson 2001). In the contemporary world, governments (and other organizations) with access to large rents – or to wealthy supporters overseas – enjoy a military superiority over their ordinary citizens that bears no comparison with earlier experiences in the South or in the North. Over the centuries, but especially in recent decades, military technology has evolved to become much more capital intensive, much more destructive, and much more easily and quickly projectable over longer distances. In 1799, less than five per cent of the British gov-

Mick Moore 35

ernment land war budget went on dedicated military equipment like cannons, guns and ammunition. The remainder was spent on soldiers’ pay, horses, carts, knives, swords, pikes and related items, i.e. the kinds of things available to ordinary citizens choosing to arm themselves from the means immediately available to them in everyday life (Colley 2002: 9). Armies could move only slowly, but generally had to stay on the move because they lacked the logistical capacity to feed men and animals without ‘foraging’ in the areas through which they moved. In such circumstances, the capacity of states to coerce large populations was limited, and the scope for successful armed resistance was considerable. Those same incentives and restraints do not bear on contemporary states, or the non-state organizations that are able to raise sufficient financial resources to pose as challengers. To totally out-gun, cow and terrorize civilian populations, these organizations do not necessarily need access to ‘high-tech’ military technology in the form of helicopters, missiles, remote surveillance systems, aerial defoliants, and poisonous gas; or the services of the international mercenaries who are often needed to operate the more complex bits of contemporary military technology. A well-funded supply of AK47s, armoured vehicles, mobile communication systems and hand-held missiles is generally enough. Serious resistance is possible only if the finance can be found to purchase matching equipment. Because of the rapid increase in capital intensity of warfare, governments no longer need to engage in mass conscription or recruit large numbers of their citizens to operate the most effective weaponry. Those contemporary governments that enjoy large resource revenues or generous foreign military patrons find that the balance of incentives tends to favour military ‘solutions’ to internal political dissent. Saddam Hussain used his oil revenues to build up a large array of military forces and, inter alia, to cow the Iraqi Kurds with aerial gas attacks and the Southern Shias by draining enormous areas of marshland. The Myanmar junta, enriched by narcotics as well as oil, deploys armed force and intelligence apparatuses against a large and deeply rooted civilian democracy movement. Financed by oil and diamonds respectively, the well-equipped armies of the MPLA (government) and UNITA in Angola were in conflict for nearly 30 years. Unable to reach any stable accord, they fought until UNITA was destroyed – as, by then, was much of the population and economy of Angola outside the oil enclave and the elite that luxuriates in its fruits (Le Billon 2001; Malaquias 2001). Rather than reach a peace agreement with the increasingly narcotics-oriented FARC guerrilla movement, the Colombian government puts its faith in a military ‘solution’ that seems feasible only because of massive American military assistance and support. In sum, the combination of modern military technology and large revenues from natural resources or overseas

36 Global Encounters

supporters shifts the balance of military and thus political power against ordinary citizens, and in favour of both states and internal challengers for state power willing and able to take up arms. This increases the chances that armed force will be employed to deal with internal conflicts, and militates against the civilianization of rule.

Extrinsic state-building and (fragile) state-society interdependence Robust, effective states are built on a large dose of a certain kind of political conflict: tension and bargaining, within an agreed (institutionalized, constitutional) framework, between state authorities and organized societal actors.7 The greater the degree to which the different parties discover their inter-dependence, and employ their interaction to find ways of cooperating around mutually beneficial strategies, the more likely the process will result in both ‘strong’ (i.e. capable, legitimate and accountable) states and prosperous economies. States and social actors bargain over many different things. Historically, social actors have been especially interested in some combination, according to circumstances, of security, law and order, protection for property rights, support for capital accumulation, and, in the modern world, ‘welfare’ spending programmes of various types. States have tended to focus on a narrower range of immediate objectives: political loyalty, revenues, and manpower for military purposes. As pointed out above, contemporary Southern states have little need to bargain for military manpower. Many, at least in the first flush of post-colonial euphoria, have had little need to strive for political loyalty: a record of successful anti-colonial struggles, as for example in contemporary South Africa and Zimbabwe, provides legitimacy enough. Unfortunately, in many cases, states also have little need to engage or bargain with their societies to earn revenue. The reasons for this have been sketched out above: many Southern states do not much depend – or historically have not depended – on the revenues they obtain from taxing the generality of their citizens. They are rather financed from what I have termed unearned incomes. These take two main forms. One is the natural resource rents discussed above, especially, in the contemporary world, oil. The other is strategic rents: the generous development and military aid that accrues almost by right to governments of poorer countries, and the income generated from the granting of military bases to wealthy global powers or the control of strategic transport routes, such as the Panama Canal. There are no definitive figures on the ratio of these various rents to government income or expenditure in the South. In addition to the general unreliability of public finance statistics in the poorest countries (Moore 1998: 113), the numbers appear to be especially murky where rents are involved. There is currently a major international campaign to persuade

Mick Moore 37

oil companies to declare how much money they pay to governments in producer countries, because the governments themselves rarely let on (Ascher 1999: 16–17). Partly because countries that receive a great deal of development aid also have a plethora of official aid donors, each with their own agenda, some of this assistance does not appear in official public finance statistics (Burnell 2001; Lonstrup 2002). We can however be sure that many Southern governments rely heavily on rents. In the mid-1990s, development aid alone accounted for around half of the income of the governments of the ‘low income countries’ (Moore 1998; O’Connell and Soludo 2001) Natural resource rents are similarly large for many countries (Atkinson and Hamilton 2003). To appreciate the pernicious effects on governance of this high dependence of governments on rents, it is helpful to talk of them as unearned income. Government income is earned to the extent that the state has to put in both organizational and political effort to finance itself (Moore 2001: 401–6). It is the political effort that is especially relevant here. Lisa Anderson’s summary represents the consensus of a substantial amount of recent research: ‘Historically, states have become beholden to their citizens through reciprocal obligation. Impersonal, formal, arbitrary state extraction – taxes and conscription for example – was the first sign of government as penetration and control in the early modern nation state. It was soon followed by demands, particularly among property holders, for protection against such arbitrary exactions and for a role in deciding how state income was spent. These developments we now think of as the expansion of individual rights, democratic participation and class politics. In extractive states, wealth translates into the capacity to pay taxes to, and demand concessions from, the government – that is, into political power’ (Anderson 1994: 440). In sum, the taxation relationship has been a major site for the development of mutual dependence and cooperative engagement between states and significant societal groups. In ‘historical Europe’, strategic interaction between state apparatuses and organized groups of relatively powerful and wealthy citizens was centred around control of public finance. Potential ‘joint gains’ from cooperation were explored and often embodied in the effective political constitution. States conceded institutional arrangements that gave some groups of citizens (a) some guarantee of human, civic and property rights and (b) some influence over state policy, through representative arrangements. In return, states obtained (a) the loyalty and commitment of substantial societal groups, and (b) agreements that provided a useful degree of predictability and compliance in revenue-raising, and a basis on which they could move from dependence on their ‘own’ (demesne)

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incomes to become ‘tax states’, i.e. sharing reliably in the growing incomes of their more wealthy citizens.8 Such a relationship cannot be fully democratic, for it is larger taxpayers who are motivated to organize and bargain with the state (Levi 1999). But it has democratic potential: institutions that represent taxpayers have gradually transmuted into institutions that represent citizens. Equally important for many Southern countries today, the mobilization of taxpayer interests to hold the state to account is potentially a very important route to developing any kind of accountability of states to citizens in political environments where this is lacking. The independence of states from citizens that stems from the prevalence of unearned state incomes is arguably the most important single contemporary cause of political underdevelopment in the South (Anderson 1994 1995; Chaudhry 1989; Karl 1997; Shambayati 1994; Herb 1999; Ross 1999; Acemoglu et al. 2003; Bräutigam 1999; Knack 2001). It is also the area in which there is greatest scope for positive change in the medium term.

Extrinsic state-building and (weak) constraints on the state This section need only be very brief, because most the substantial points have already appeared under previous headings. Constraints on state power can derive from internal relationships within the state apparatus (horizontal accountability), from relationships of mutual dependence between state and organized citizens (vertical accountability) (Schedler 1999), or from relationships with international actors. As we have seen above, the latter pattern is often prevalent in poor countries: key state resources are controlled from abroad; economic elites have little distance from the state apparatus; and, where internal opposition is organized and potent, it may take military rather than civic routes to power. Internal, civic constraints on state power are weak.

Concluding comments This chapter explores the implications for political development of the more systemic interactions between the ‘core’ (the rich OECD countries) and ‘periphery’ of the global system. I have necessarily ignored the consequences of the more specific interactions and relations of dependency that exist among neighbouring countries in the South: for example, India’s policy of military hegemony in relation to Bangladesh and Sri Lanka, or Libya’s recent military and economic interventions in a number of African countries. To the extent that these relations are random and nonsystemic, they are not crucial to my story. There is however another apparent systemic factor that has received little attention here, because it has been very little explored. I refer to the extent to which individual countries adopt particular political and economic paths or develop in particular ways because

Mick Moore 39

of ‘neighbourhood effects’, i.e. the impacts, whether through material interactions or the structuring of expectations, of what happens in neighbouring countries. It is possible, for example, that Sub-Saharan Africa’s recent economic and political decline stems in part from such effects: for example, from the facts that individual national economies do relatively badly when their neighbours do badly (Kenny 1999), and that polities are more likely to become democratic if their neighbours are democratic (Gasiorowski and Power 1998). To the extent that these neighbourhood effects are powerful, we need to modify a little the interpretation of the causes of political underdevelopment that I have presented above. We also need to bear in mind that I have here concentrated on the malign effects on governance in the South of late political development in a globalized world. There is certainly another side to the story. In particular, the existence of wealthy, democratic OECD countries with effective governance institutions has provided both some general inspiration and support to pro-democracy movements in the South (Whitehead 1996), and has been an important source of ideas for useful new institutional technologies in such areas as public financial management, parliamentary procedure, privatization and taxation. Some of the less disadvantaged countries in the South may have benefited appreciably from this more benign dimension of late political development. But it seems clear to me that the kinds of countries that I listed at the start of this chapter have been net losers. They are badly governed in large part because they have been planted and nurtured in the wrong kind of international environment. What are the policy implications of my interpretation of political underdevelopment? I have no definite answer, but believe that the analysis above tells us where to look for some solutions. If many of the causes of bad governance in the South lie in the pattern of international relationships and transactions, some of the solutions are likely to lie there too: more attention to countering the malign effects of high levels of development aid; better control of international trade in weapons, ‘blood diamonds’, tropical hardwoods and other commodities from ‘tainted’ sources; better regulation and more transparency in relation to offshore bank accounts; measures to reduce the massive profits to be made from smuggling narcotics into the rich countries; and some transparency, with the help of transnational corporations, about the revenues that governments are actually obtaining from the sale of oil and other commodities on international markets. Notes 1 This paper reflects my interactions over recent years with many stimulating and helpful colleagues. I am especially conscious of my debts to Deborah Bräutigam, Richard Crook, Odd-Helge Fjeldstad, Graham Harrison, Lise Rakner, Michael Ross, Mark Schacter, Aaron Schneider, Mike Stevens, Judith Tendler, John Toye and Adrian Wood.

40 Global Encounters 2 Some scholars also emphasize the nation-building element in state-building: the creation of a ‘national’ population that is relatively homogenous in linguistic and cultural terms, and identifies with a ‘nation-state’ (e.g. Tilly 1997: 144–6). I find the processes and correlates of nation-building less tangible, and more open to conceptual dispute, than state-building. 3 A similar basic notion can be expressed in terms of a distinction between (modern) unmediated or direct and (pre-modern) mediated or indirect rule (Tilly 1997, chapter 6). 4 South Africa was a significant exception: the autonomous white governments always perceived continuous security threats. They were as assiduous in building roads (Herbst 2000: 170) as they were in raising high levels of tax revenues (Lieberman 2001). 5 With the exception, as described later in the main text, of prosperity based on possession of oil. There is very strong statistical evidence that industrialization and the growth of a white collar middle class tend to lead to more democratic polities (Diamond 1992; Gasiorowski and Power 1998; Londregan and Poole 1996; Przeworski et al. 1996). 6 For general models of the political economy of these extraction processes see Bates (1977) and Lipton (1977). For more nuanced studies of the politics of these ‘neo-mercantilist’ states, see Callaghy (1979), Crook (1983) and Mkandawire (1995). 7 Even scholars who appear to disagree by insisting on the primacy, respectively, of societal and state forces in this interaction actually agree on the primacy of the interaction (Migdal 1997; Nordlinger 1987). 8 The most authoritative general presentation of this argument is by Tilly (1992). See also Bates (2001), Bates and Lien (1985), Bräutigam (1991, 1996, 1999, 2002), Herbst (2000, chapter 4), Moore (1998, 2001, forthcoming), and Weiss and Hobson (1995, chapter 2).

3 Botswana’s Developmental State and the Politics of Legitimacy Ian Taylor

Introduction The ongoing debate about how globalization impacts upon and challenges nation-states have been largely restricted to how the North has been affected (Weiss 1998). Where non-Northern states are studied, the bulk of the literature has largely focussed upon East Asia, particularly how globalization has affected the so-called ‘developmental states’ of the Asian Tigers (White 1988; Wade 1990; Woo-Cumings 1999a). This discussion has drawn attention to the way in which developmental states emerged, invariably with very little focus on either the regional/global context nor on what factors stimulated such a state to emerge in the first place. In the main, the consensus seems to be that globalization has meant a profound challenge to the ability of the state to promote development or even advance its own preferred policies. This erosion of agency is seen as one of the more challenging aspects of globalization. The South is seen as being particularly affected in this regard and there is a common assumption that the developing world is now largely unable to formulate or continue policies that aspire to development. The notion of an African developmental state is, in this context then, largely an oxymoron. Whilst recognizing the problematic nature of a great many African state formations and the limited capacity existing in many African polities, it is important to interrogate the common sense assumption that state involvement in the economy in Africa is either undesirable or, under the conditions of globalization, largely impossible. In the context of the ‘hopeless continent’ where virtually the whole of Africa is written off as an unmitigated disaster, it is vital that (relative) success stories from the continent are examined and discussed. The dominant discourse surrounding the role of the state in the economy tends to view state involvement in the economy as negative, ‘market distorting’ and to be avoided, except perhaps as a minimalist regulator. Although we can talk about a ‘post-Washington consensus’, this orthodoxy 41

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remains largely intact (Fine 1999; Jayasuriya 2001). This neo-classical account of the state has, through the imposition of Structural Adjustment Programmes (SAPs) led to extensive costs for African states as adjustment has served to roll back government from a long-term development role, whilst concomitantly directing remaining state capacity in the service of short-term conditionalities (Stein 2000: 1). This has gone hand-in-hand with an intellectual endeavour to erode the creditability of the ‘developmental state’ as an alternative to neo-classical strictures: The discrediting of the ‘developmental state’ … and of the development record of earlier decades have, together with the delegitimization, [of] aspects of the UN’s development work … contributed to … the current intellectual hegemony (Gosovic 2000: 453).1 Indeed, in Africa, the international financial institutions have argued that African states lack the capacity to pursue developmental state policies, whilst being far too susceptible to vested interests in the political realm. Elites in Africa have frequently taken on board such judgements and have come to believe, albeit at times reluctantly and at varying speeds across the continent, that a minimalist role for the state is required. However, across the board liberalization and state rollback has had dubious effects (Fine and Stoneman 1996). It is thus important to interrogate the orthodox thesis that state involvement inexorably leads to economic decline and that developmental states in Africa are an impossibility. Comparative studies from East Asia suggest that there are some lessons to be learnt (Bräutigam 1994; Stein 1995). In this chapter, Botswana is provided as an illustration of a state that has pursued certain policies in the construction of what might be regarded as a ‘developmental state’, that is, a state that pursues policies that coordinate investment plans; has a national development vision – implying that the state is an entrepreneurial agent; that engages in institution building to promote growth and development; and that plays a role in domestic conflict management (Chang 1994: 192–9).

Botswana’s political economy Botswana has, since independence in 1966, been governed uninterruptedly by the Botswana Democratic Party (BDP). Both the growth and developmental record of independent Botswana has been impressive and Botswana (along with Malaysia) has, according to the UNDP, made the most progress in human development since 1960 (UNDP 2000c). From being one of the poorest countries in the world at independence, Botswana has enjoyed rapid economic growth and is now classified by the World Bank as an Upper Middle-Income country, with a per capita GDP of more than US$6000. Yet,

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when it became independent, Botswana had a per capita income equivalent then to roughly US$80 today (Republic of Botswana 2001). Currently, Botswana has reserves of 41.2 billion pula, representing about 39 months cover of imports of goods and services (Republic of Botswana 2002a: 9). Between 1982 and 1991 the country enjoyed an annual growth rate of 10.8 per cent. The country’s annual growth rate between 1990/91 and 2000/01 was 5.7 per cent, still quite robust (Republic of Botswana 2002b: 34). But it is not only the country’s economic growth that is impressive. At the developmental level, Botswana has achieved a great deal: income poverty rates fell from 59 per cent in 1986 to 47 per cent in 1994; real per capita income increased about ten-fold between 1966 and 1999; the primary school enrolment rate went from 50 per cent in 1966 to 97 per cent in 1999; adult literacy rates improved from 41 per cent in 1970 to over 79 per cent in 1999; the mortality rate of children under the age of five dropped from 151 per 1,000 live births in 1971 to 56 in 1991; the infant mortality rate fell from 108 deaths per 1,000 live births in 1966 to 38 in 1999; malnutrition among children under the age of five declined from 25 per cent in 1978 to less than 13 per cent in 1996 (UNDP 2000c). Primary health care is available to 80 per cent of the rural population who are within 15 kilometres radius of a health clinic. Households with access to potable water went from 56 per cent to 83 per cent between 1981 and 1994. The sources of this development success have been the exploitation of deposits of diamonds and minerals, a beef export industry that has preferred status with Europe, and a tourism policy that has courted the topend of the market. But it is diamonds that have been the engine of growth. The domestic cost of production is low compared to their overseas sales value (priced in American dollars) and as a result, diamond sales for Botswana are extremely profitable (Jefferis 1998). By the early 1980s, diamonds had replaced beef as Botswana’s leading foreign exchange earner: in 1981, diamond exports accounted for 40 per cent of total exports – in the first quarter of 2001 it was 87 per cent (Republic of Botswana 2002b). Importantly, in 1975, the state successfully negotiated with De Beers Diamond Company for a half-and-half share ownership in all of the country’s diamond mines (compared to the previous 85:15 per cent share in favour of De Beers).2 This more equitable share holding has provided the state with influence over the mines’ wage policies as well as the ability to authorize expansion when deemed necessary. The receipts accrued from the mines have allowed the government to invest considerably in a wide variety of development schemes starting with the 1974 Accelerated Rural Development Program, whereby the government committed a considerable amount of money toward building roads, dams, clinics, schools, and water reticulation schemes. Such a broad development project ran alongside financing market-enabling policies traditionally associated with develop-

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mental states. This came on the back of the 1969 re-negotiation of the 1910 Southern African Customs Union Agreement which gave Botswana a larger share of the Union’s revenue pool than was possible under the old Agreement. This new source of income enabled Botswana to end its dependence on British grants-in-aid as early as 1972/73, now referred to as the ‘Year of Our Second Independence’ (Tsie 1998: 9). However, an abundance of natural resources such as diamonds or cattle is no guarantee of success and does not explain Botswana’s developmental record, especially in the light of Moore’s chapter in this book. It is the utilization of these resources and the way in which the state has managed such receipts that needs explaining. In part Botswana’s success may be accounted for by the powerful sway of rural exporters, strategically situated at the highest levels of the state and bureaucracy, who have influenced economic policy. This has had the effect of avoiding the common ‘African bias’ against rural operations in favour of the urban areas (Bates 1981). In fact, the more rural-linked ruling class from which many of the early postindependence elites sprang, represented a formative national bourgeoisie that stands in contrast to many other African states.

‘Development’ in Botswana and the ‘developmental state’ There is of course a major problem in defining a developmental state simply from its economic performance: not all countries with good growth rates are developmental states. ‘The definition of the “developmental state” runs the risk of being tautological since evidence that the state is developmental is often drawn deductively from the performance of the economy. This produces a definition of a state as developmental if the economy is developing, and equates economic success to state strength while measuring the latter by the presumed outcomes of its policies’ (Mkandawire 1998: 2). Referring to Africa specifically, Mkandawire goes on to add that the definition of a developmental state is one whose ‘ideological underpinnings are developmental and one that seriously attempts to deploy its administrative and political resources to the task of economic development’ (ibid.). These ideological underpinnings are required in order to give the developmental project a ‘hegemonic’ aspect to it, in the sense that the project gains consensus and attracts broad sections of the population (see below). In Botswana this might be said to go back to the first presidency of Sir Seretse Khama who was conscious of developing what had been hitherto a relative backwater of the British Empire (Parsons et al. 1995). Woo-Cumings (1999b: 8) has argued that nationalism and a national vision lies at the heart of a developmental state. The slogan ditiro tsa ditlhabololo (‘work for development’) underpinned the trajectory post-1966 under Khama with a strong sense of nationalism. Indeed, Seretse Khama asserted:

Ian Taylor 45

When we attained independence in 1966 we had no economic base from which to proceed with the development of our country. Our chances of survival as a viable country were almost nil but we were not discouraged nor could we ever willingly return to the old days of colonial neglect. Having accepted the challenges of independence we had no other alternative but to get down to work to make our independence a meaningful one (Khama 1980: 323). The very process of nation-building after independence took on a nature that was inspired by the fundamental task of development. This developmental ethos was accepted and advanced by the political and bureaucratic elites and, subsequently, this project gained widespread acceptance. Attempting to account for how and why a disciplined and competent state apparatus emerged after independence and how this developed into a hegemonic project is then crucial in accounting for Botswana’s ‘developmental state’.

Explaining class dynamics in Botswana Obviously, any developmental strategy cannot be neutral: all developmental strategies are intimately linked to accumulation systems at the same time. In Botswana, ‘the members of the BDP and the political elite that emerged after 1966 had important interests in the cattle industry, the main productive sector of the economy. This meant that it was in the interests of the elite to build infrastructure and generally develop institutions…which promoted not only national development, but also their own economic interests’ (Acemoglu et al. 2001: 44). It is axiomatic that class relations within Botswana lie at the heart of any explanation of the country’s trajectory. Touching on one of the main factors in accounting for Botswana’s postindependence history, it has been said that ‘a key force that distinguishes successful from failed states is the social chemistry of the dominant class and the discipline of its leadership’ (Samatar 1999: 6). According to this argument, Botswana’s status as a developmental state is located in a professional Weberian-style bureaucracy that has conducted and implemented policy-making efficiently, made possible by a pivotal alliance amongst elites. Molutsi (1989a: 105) has identified five factions of the ruling elite in Botswana: elected representatives, traditional rulers, the higher echelons of the bureaucracy, the business elite, and leading cattle-ranchers. Many of these actors can be located in two or more of these ranks, although obviously the nature of class relations, and class identity, have changed over time. Here, the idea of a post-colonial historic bloc, borrowed from Gramsci but applied to the African situation by Bayart (1993) is most useful. In most African countries, the creation of an historic bloc, that is, a set of social

46 Global Encounters

groups with common interests and all adopting a hegemonic ideology, has been a fragmentary and incomplete process, but in Botswana this construction has been remarkably stable, with the ruling coalition of elites coopting or integrating the leaders of the most important social factions within Batswana society. This might be called the ‘mutual assimilation of elites’ (Bayart 1993: 150–79). Alavi (1979: 41) has commented that in general, post-colonial formations inherited a weak local bourgeoisie and as a result, were historically interventionist in the sense that the state and its capture and usage were seen as the be-all and end-all of politics. In the case of Botswana there is truth in this: the country at independence was incredibly underdeveloped: Despite more than eighty years of British rule, Botswana inherited very little in 1966: very little infrastructure and very few people with education, training, or experience except that provided by traditional activities and low level work in South African mines and farms…until independence…the country had no capital city, nor even the benefits of the small spending power of the colonial administration (Harvey and Lewis 1990: 15).3 Having a shared desire to consolidate their hold on the post-independent state as a means to accumulate and gain influence, the elites that emerged at and after independence joined to form a nascent bloc. As the construction of hegemony cannot be separated from the concept of a historic bloc, neither can the notion of reciprocity: the development plans advanced by the ruling party which have benefited a broad section of the country might be seen in this light. This created a ‘virtuous circle’ of support where the state machinery was employed to reward supporters and at the same time generate further support, predicated on policies that broadly benefited the long-term interests of the nation’s economy. At the same time, as Miliband (1994: 11) remarked in a different context, the hegemony constructed also reflected the capacity of the ruling classes to persuade subordinate ones that, whatever they may think of the social order being built, there was no alternative to it. In Botswana, there is evidence that both (consent and resignation) operated in tandem. This was facilitated by early pronouncements by Khama regarding Botswana’s position in the regional and global economy and repeated exhortations to the citizenry to make sacrifices for the ‘greater good’ of the nation (see many of the speeches in Khama 1980, for a flavour of this). Representative of this message was the persistent call for Batswana to exercise ‘responsibility’ and accept their condition lest the country become destabilized. Such appeals to national solidarity, combined with the active provision of services, helped craft and consolidate the legitimacy of the historic bloc in the eyes of the ruled, satisfying the criteria that a developmental state

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must have legitimacy and be able to oversee a healthy performance. In short, the beneficial spin-offs from Gaborone’s strategy were the consensual elements found in Gramsci’s classical definition of hegemony as being consent plus coercion. The ‘dominant relations of production set up by the cattle petty bourgeoisie…the removal of discriminatory legislation in commerce, provision of credit and extension services to local businessmen and farmers, and the encouragement of foreign capital’ further served to solidify this consensual support (Tsie 1995: 66). This hegemony contained psychological aspects as well, ‘involving some kind of acceptance – not necessarily explicit – of the socio-political order or of certain vital aspects of that order’ (Femia 1981: 37). This took on both class and ethnic characteristics, where Tswana dominance, until very recently (see below) was broadly accepted: ‘What is remarkable in Botswana is how much, up till now, the legitimacy of Tswanadom has been accepted and even supported by non-Tswana groups’ (Parsons 1985: 28). Crucially, at independence the first president, Seretse Khama, enjoyed a legitimacy, drawn from his position as (former) chief of the dominant Tswana tribe (the Bangwato). Khama’s charismatic style of leadership and his integrity, combined with the aforementioned chiefly authority undoubtedly helped secure the BDP and shaped the system of governance erected post-1966 (Nordås et al. 1998: 53). This, coupled with the legacy of neglect left by the British meant that there was no real organized opposition to Khama’s agenda. Indeed, negotiations for the transfer of power by London were conducted almost exclusively between local elites and the colonial administration, and did not encompass the ordinary rank and file. This led to a situation where, during Seretse Khama’s tenure at least, the electorate of Botswana was steeped in a traditionalist culture of respect for authority which hindered any disputing of the post-colonial dispensation and overlooked questions of class. This granted space to Khama and his BDP to begin the task of establishing a hegemonic position within postindependence Botswana, something that his royal status had importantly prepared the ground for. At the same time, the emergent national elite ‘became conscious of the fact that its interests would be better served by private capitalist accumulation rather than state capitalism, because…the state itself was in dire financial problems (sic) at independence and could not therefore be the sole means of accumulation. Consequently, this class did not necessarily see the state as a source of self-enrichment’ (Tsie 1998: 13). Instead, constructing an interventionist state to facilitate development and hence the accumulation of capital, was the main vehicle advancing the nascent bourgeoisie’s interests. We might even say that the state took on the role to promote this bourgeoisie and stimulate the development of this class. The space left at independence by the departing British left a state lacking in indigenous capacity, but it also gave Khama and his circle the

48 Global Encounters

space to strip possible alternative centres of influence, in particular the chiefs, of their political power whilst they sought to construct the BDP’s position. Any chiefly threat to the new state’s legitimacy was nipped in the bud: the Chieftainship Act of 1965 meant that power was granted to the president to recognize, or not recognize, a traditional ruler, making all chiefs subordinate to the central government. In addition, a House of Chiefs was established, but with no legislative powers (Somolekae and Lekorwe 1998). Essentially, the new state established new bodies (parliament, land boards, town and district councils, village development committees, etc.) that replaced the traditional leaders and transferred authority from the traditional to the modern state. Though the chiefs became exofficio members of local institutions because of their chiefly status, their positions were dependent on recognition by the state – something that could be (and sometimes was) withdrawn. This incongruous position was compounded by the chiefs’ role as premodern chairs of thoroughly modernizing institutions. Whilst traditional elites were seemingly incorporated into state structures in independent Botswana, the potency of their newly found roles was profoundly circumscribed. This at one blow meant that potential opposition to the new government was dissolved and a potential site of alternative power removed. Instead, traditional rulers, dependent on the state for official recognition, served as facilitators for the implementation of policy, particularly in the rural areas. Whilst accorded respect and status, their role within Botswana was re-invented and chiefs became agents of the government at the grassroots level, communicating at the kgotla (village assembly) information from the state for developmental purposes – in many respects acting as intellectuals in participating in a particular conception of what was going on in Botswana and contributing to that conception by communicating this to their tribesmen. The embedded autonomy (Evans 1995) of the political leadership in Botswana developed from enduring linkages between Batswana traditional authority and its subjects, which the British protectorate did nothing to erode. The autonomy of this leadership was socially anchored within the wider webs and networks that linked the cattle-ranchers, politicians and bureaucrats together. This created a dynamic interaction between the various (cross-cutting) groups that stimulated policies favourable not only to the elites themselves but also to development. This sort of embedded autonomy meant that at independence, the new leadership enjoyed ‘traditional’ legitimacy but were also relatively autonomous from the dominant chiefly groups, as well as the broader population (Samatar 1999: 27–8). In addition, the absence of any coherent challenge from the opposition granted a great deal of space for the new government (and has continued to do so). The BDP was thus able to implement policies with both legitimacy and a lack of opposition able to overturn decisions. Furthermore,

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with the economy based around the extractive mining industry, a sector with minimal backward linkages to the economy, in terms of either domestically supplied inputs or of wage employment, the relative autonomy of the state was aided, as the key source of government revenue was one that was not solidly connected to the rest of the domestic economy. Following on from this, the civil service tended to dictate policymaking (Somolekae 1993: 116). Leading elements of the bureaucracy were assimilated into the post-colonial historic bloc, creating a dynamic interaction between the various (cross-cutting) groups that stimulated policies favourable to the elites themselves but had the important knock-on effect of stimulating structural development as part of a ‘national’ project. What occurred in Botswana was a typical developmental state situation where the bureaucracy and the ruling party meshed. This historic bloc was consolidated by the commonness of the recruitment of senior civil servants directly not just into the ruling party politics but into senior state positions, the classic example being the current president Festus Mogae, who was Planning Officer, Director of Economic Affairs, Alternate Governor for Botswana at the IMF, Governor of the Bank of Botswana, Permanent Secretary to the President, Secretary to the Cabinet, Minister of Finance and Development Planning and finally Vice-President in 1992 before taking over the presidential reins in 1998. Some claims have been made that the state overly favoured an elite faction of cattle farmers (Picard 1980; Parson 1981). However, this presupposes a high degree of influence over policy by interest groups. Whilst it is true that at times the shared interests of the politicians, bureaucrats and cattle ranchers meshed, and that ‘insider’ influence was exercised, it is far too simplistic to argue that the state in Botswana has been captured by a ranching aristocracy. The determining debates on a particular policy took place within the government – not in parliament or in public discussion where the cattle barons might have exercised more influence – and besides, their ability to pursue insider deals was circumscribed by the fact that the dominant ministries, specifically the Ministry of Finance and Development Planning (MFDP), which shaped policy outcomes, were heavily influenced by expatriates not at all interested in pandering solely to cattle-oriented interest. Molutsi (1989b: 126) has in fact asserted that: Without denying that important government policies benefit the rich and influential sections of society…the state is not sui generis an instrument of local shopkeepers and cattle owners. Instead it is capable because of its relative autonomy from the major classes in society of concurrently advancing accumulation programmes in favour of the propertied classes on the one hand and welfare programmes for the poor

50 Global Encounters

masses on the other. The latter especially is important if the state is to establish itself as legitimate for the entire population. Indeed, allegations regarding the capture of the state by a specific class faction cannot explain the BDP’s hegemony since 1966: coercion and the partisan allocation of resources to some supposed cattle aristocracy would have undermined any claim by the historic bloc to legitimacy. In short, the commitment by the post-independence elite to ‘development’ and a policy of diversification ‘went beyond the interests of a particular faction of the ruling petty bourgeoisie to embrace broad capitalist interests’ (Tsie 1995: 66). It can be argued that the autonomy of the bureaucracy and diverse ministries cushioned policy from special-interest lobbying, though perhaps at a cost of the democratic accountability of the bureaucracy which in turn granted space for the historic bloc to supply resources that developed consent to their rule within the electorate (Molomo 1989). Indeed: [R]ather than responding to interest group pressure, the government in Botswana tended to make its own analyses and then build support for shifts in a long-term strategy geared toward maintaining its generally impressive economic performance. Interaction with the public was intended more to inform, instruct and persuade (Bräutigam 2000: 22, emphasis added). In Botswana, it is only relatively recently that an essentially benign paternalism vis-à-vis its citizens by the BDP government has consented to a more public and integrated agenda formulation with elements from outside the government. Representative of this is the High Level Consultative Committee, chaired by the President, which has opened up some space for a limited role by the organized private sector in commenting on economic policy before its formulation. This came after pressure from the capitalist class concerned that their interests were being ignored by the state and might be seen as a device by the government to shore up support from an increasingly influential bourgeoisie. According to Gramsci, ‘every State is ethical in as much as one of its most important functions is to raise the great mass of the population to a particular cultural and moral level, a level (or type) which corresponds to the needs of the productive forces for development, and hence to the interests of the ruling classes’ (1971: 258). Importantly, regarding our consideration of hegemony, a moment exists when the ruling group ‘becomes aware that one’s own corporate interests, in their present and future development, transcend the corporate limits of the purely economic class, and can and must become the interests of other subordinate groups too’ (Gramsci 1971: 181). The Batswana elite at independence may be said to have reflected Gramsci’s proposition: aware that they were inheriting a profoundly under-

Ian Taylor 51

developed political economy but (obviously) keen to advance their own class interests, the new state pursued a general developmental project that transcended narrow class interests – thus ‘capturing’ the subordinate classes within the hegemonic discourse of ‘development’ – whilst assiduously reproducing and developing capitalist relations of production. Importantly, in the context of Botswana, the discovery of diamonds meant that a developmental project could be pursued on the one hand benefiting the nascent bourgeoisie through programmes geared towards infrastructure, cattle and commercial development and on the other hand, through the provision of basic services and a relative qualitative upliftment in the lives of the peasantry: granting the project a ‘national’ rather than simply a class appearance. Thus even though inequality within the social formation increased, the lack of taxation from the central state (due to the in-flow of diamond receipts) and the empirical manifestation of service provision by the same state (totally absent prior to independence) granted a cloak of legitimacy to the post-1966 project: ‘the peasantry did not see the growth of the economy’s other sectors coming at their expense’ (Samatar 1999: 72).

The absence of counter-hegemonic projects in Botswana Like other developmental states, social engineering is integral to Botswana’s developmental project. Similarly, as in other developmental states, groups in Botswana outside the state administration have been poorly developed and disorganized (Molutsi and Holm 1990). Opposition parties have been generally weak due to interminable intra-party faction fighting, internal splits, an unfavourable electoral system (that is, ‘first past the post’), feeble organizational structures and poor capacity to promote alternative policies. The failure of opposition parties to unite and the propensity of opposition leaders to put their egos before everything has meant that Botswana is, and has been since 1966, a de facto predominant party system where the incumbent BDP has won each and every election by a landslide victory. The fragmented opposition in particular has meant that the BDP has enjoyed hegemonic – if not wholly unchallenged – status at the national level since independence (Mokopakgosi and Molomo 2000; and OseiHwedie 2001). As Chabal has noted, ‘the success of the state’s hegemonic drive in post-colonial Africa [has] depended not so much on the exercise of what appeared to be its power as a state but rather its ability to minimize the threat of counter-hegemonic politics’ (1994: 226). Two features of Botswana’s post-colonial politics are relevant in this respect: the potentiality of the traditional leaders as a counter-hegemonic site was destroyed early on in the post-colonial dispensation and, perhaps just as importantly, the opposition’s ineptitude and factionalism has resulted in the emascula-

52 Global Encounters

tion of credible alternatives to the BDP – helping to sustain one-party domination in Botswana (Selolwane 2001).

Depoliticizing development: national planning The crystallization of the state’s development efforts have been the National Development Plans (NDPs). The NDPs have the advantage of granting policy implementers a significant degree of space between themselves and the politicians. By this it is meant that a technical document, drafted by experts and then approved by elected representatives, serves as the blueprint for government policy. ‘Once the new plan is approved, politicians’ proposals not in the plan are turned aside on the grounds that only emergency measures can be adopted until the next plan is formulated’ (Molutsi 1989a: 112). Botswana then, echoes the developmental state of Chalmers Johnson where ‘the politicians reign and the state bureaucrats rule’ (1981: 12). Crucially, the class interests of particular projects are obscured by the overweaning ideology affixed to the notion of ‘development’. One of the successful aspects of the BDP’s hegemonic project has been the ability to cast development as a class-neutral technocratic process whereby the state is cast as a benevolent provider of resources and services, irrespective of status. That this is of course not true is, at one level, beside the point: the BDP has successfully managed to portray this as common sense. As Mogalakwe remarks, ‘for the most part of the post-colonial period the labour movement in Botswana has been reminded time and time again of its responsibility to the nation. The petty bourgeoisie state elite…have on various occasions stressed the need for ‘wage restraint’, ‘industrial peace’ and ‘political stability’ in order to achieve ‘national development’ (1997: 74). Indeed, the BDP ‘has succeeded through its technocratic priorities of growth and stability (at the expense of participation and equity), in establishing a solvent enough state which is able to deliver public goods (roads, schools, watering facilities, clinics, etc) on a non-tribal, non-regional basis, so as to ensure that the minimum requirements of jointness of supply and non-excludability are met. Ensuring that the state is seen as neutral, not as an ethnic body…contributes to its legitimacy and that of the regime’ (Du Toit 1995: 121). This emphasis on ‘national development’ as a guiding ideological construct has been absolutely crucial. According to Mkandawire, ‘it is [the] ideology-structure nexus that distinguishes developmental states from other forms of states. In terms of ideology, such a state is essentially one whose ideological underpinning is “developmentalist” in that it conceives its “mission” as that of ensuring economic development’ (1998: 2). In a conscious imitation of another developmental state’s Vision 2020 (that is Malaysia), a Presidential Task Group produced a document entitled ‘A Framework for a Long Term Vision for Botswana’. The ‘Vision 2016’ is supposed to be a national manifesto to guide future NDPs as well as broad

Ian Taylor 53

government policy and is a statement of long-term goals with proposals for a set of strategies to meet these (Republic of Botswana 1997). Vision 2016 and the various NDPs are an indication of the developmentalist orientation of the historic bloc: ‘by planning within the context of a market economy, government policy has tended to influence the direction of government expenditure during the planning period while providing an environment in which private sector activity can thrive’ (Mkandawire 1998: 334). But, the state elite’s commitment to ‘development’ alone obviously does not explain Botswana’s experience. This commitment needed to be coordinated with institutional capacity for, to create a developmental state, the whole government machinery must be subordinated to the leadership of an economic agency of the state (Maundeni 2001: 18). Yet, at the same time, this institution building was not simply a bureaucratic procedure or the result of technocratic excellence, but sprang from political determinations, and ‘if the politics do not give rise to the kind of state which can generate, sustain and protect an effective and independent capacity for governance, then there will be no positive developmental consequences’ (Leftwich 1993: 619–20). In Botswana after 1966, the government saw to it that the economic agency that spearheaded developmental policies was located in the Ministry of Finance and Development Planning, which was situated in the Vice-President’s office. In fact, it is pertinent to point out that prior to becoming president after Seretse Khama’s death, Quett Masire was Minister of Finance and Development Planning and had been Vice-President for fourteen years. Similarly, prior to assuming the presidency in 1998, current president Festus Mogae had been Masire’s Vice-President for five years as well as being Minister of Finance and Development Planning. In addition, Peter Mmusi, who resigned as Vice-President in 1993, had also been Minister of Finance and Development Planning. Such a Ministry and its close links to the Executive has secured a balance between development planning and budgeting, as well as strengthening the capacity to implement national goals and demonstrating a commitment to economic development. Such a commitment came about after a struggle within the Ministry of Finance in the immediate post-independence period. Essentially two factions fought over the new country’s future economic policy. On the one hand, the Permanent Secretary Alfred Beeby, insisted on the need to ‘balance the books’ and ‘refused to entertain any ideas about economic development until moneys were in hand’ (Morton and Ramsay 1994: 63). Opposed to this conservative stance was a group of young economists such as Pierre Landell-Mills and Quill Hermans who favoured ‘aggressive planning for economic growth, identification of potential projects, and then finally lobbying internationally for potential sources of aid or loans to finance the projects. Moreover, they even promoted the idea of borrowing money to finance development’ (ibid.). The latter faction had the ear of

54 Global Encounters

Quett Masire, then Vice-President. Beeby had Landell-Mills thrown out of the civil service for ‘insubordination’, which for a period of six weeks (November–December 1966) caused a rift between Masire and President Khama. The matter was finally resolved after a commission of enquiry that eventually saw the creation of the Ministry of Development Planning (MDP) with Hermans as permanent secretary and Landell-Mills as senior government economist. It would not be too much of an exaggeration to say that the foundations for the Botswana developmental state were laid during the ‘Landell-Mills affair’ in the sense that afterwards the key Ministry of Development Planning was developmentally-driven whilst the objectives of the bureaucrats were politically-driven and supported by both Seretse Khama and Quett Masire. The MDP became, in 1970, the Ministry of Finance and Development Planning. According to one account (Parsons et al. 1995: 275), the ‘MFDP in some respects challenged the Office of the President as the premier ministry in Gaborone – dominating the “line ministries” that dealt with sectors of the political economy such as agriculture, education, health, water development, roads and so on’. The MFDP played an extremely important role, particularly in the early days of independence, in identifying suitable development projects via detailed developmental planning and the successful solicitation of external funding at a time when local capital was scarce. Because of the high degree of professionalism within the bureaucracy and the scope granted to the MFDP in advocating projects, the state was highly successful in securing donor funding. With the discovery of diamonds at Orapa in 1970, the MFDP under Masire then decided to embark on a project to borrow capital with the knowledge that these loans could be paid off. Capital was then diverted for ‘roads, schools, hospitals, parastatal Botswana Development Corporation investments and civil service expansion. As a result the economy expanded at an accelerated rate and manufacturing and commercial activity took off in the urban areas’ (ibid.). By 1980 the receipts from diamonds allowed Gaborone to pay off all its debts and the MFDP then returned to its former position of not incurring debts in excess of projected state earnings, a policy it largely adheres to today.

The Botswana state as an entrepreneurial agent The rhetorical commitment to development may well be seen as the articulation of a realization of a life in common which might be seen to underpin the developmental state. The role of the state as a facilitator (or ‘entrepreneurial agent’) and the early sea-change in philosophy from Beeby’s fiscal conservatism to Landell-Mills et al.’s more developmentoriented policies was crucial, with the state not shying away from an active involvement in the market. Pilot institutions were built to stimulate growth

Ian Taylor 55

in the private sector – the Botswana Development Corporation (BDC) being a prime example. The BDC was established in 1970 as Botswana’s main agency for commercial and industrial development and is the premier development finance institution in the country. All its ordinary shares are owned by the government of Botswana. The BDC’s primary objective is to assist in the establishment and development of businesses in Botswana. Its roles include the provision of financial assistance to investors with commercially viable projects, building partnerships with investors and supporting projects that generate employment for Batswana (Kaunda 1999). An important aim of the BDC is to encourage citizen participation in business ventures (see Botswana Development Corporation 1985; 1995; and 2000). This sprang from a recognition by the state elites that any reproduction of capitalist society in Botswana can best be secured through the creation of employment, especially in the non-mining sectors, and that with the relatively weak state of the local bourgeoisie, state promotion of industrial development, rather leaving things to ‘the market’ alone, was required. Similarly, the Botswana Export Development and Investment Authority (BEDIA), set up by the government in November 1997, seeks to promote investment into Botswana with special emphasis on export-oriented manufacture, the identification of market outlets for products manufactured in Botswana and the construction of factory buildings. Reflecting the close links between the public and private sector, the board of directors of BEDIA is made up of private sector representatives as well as representatives from the Ministry of Commerce and Industry and the Ministry of Finance and Development Planning. The Financial Assistance Programme (FAP) was another example of the state as an entrepreneurial agent.4 Established in 1982 and revised in 1989 and 1995, FAP was created to assist businesses which produce or process goods for import substitution or for export. Large-scale mining and the cattle industry were excluded from FAP. Eligible activities for assistance included manufacturing, small and medium scale mining, agriculture other than cattle, selected ‘linking’ service industries and tourism. However, despite good intentions, FAP became seen as a non-sustainable project. Most investors only came to Botswana due to the strong incentives offered through FAP, such as tax-free grants and fixed capital assistance. The effective result was that many ‘investors’ paid little or nothing in making their investments and there was widespread abuse of the programme (Good and Hughes 2002). FAP failed in generating any meaningful indigenous class of entrepreneurs. The problem for Botswana is that there is actually little reason for investing in manufacturing in the country. Firstly, the import burden from the strong exchange rate of the pula vis-à-vis other regional currencies is very high (the pula is approximately 30 per cent stronger than the South African

56 Global Encounters

rand). The very limited domestic market and the lack of locational advantage against competition from within SACU5 also weigh against Botswana. These factors, combined with the strong domestic belief that FAP was a scheme that mostly ‘fly-by-night’ foreigners could scam the country meant that FAP became seen as not only a non-sustainable development option for Botswana but also one that was acting against citizen empowerment (ibid.). Despite the failure of FAP, the scheme has not been abolished. Instead, the government recently established the Citizen Entrepreneurial Development Agency (CEDA), to manage existing and new programmes for the development of citizen-owned businesses. This will be facilitated through the development of and access to entrepreneurial and management skills training, monitoring and mentoring, as well as through the provision of finance and sharing of risks. The financial assistance provided is in the form of loans at subsidized interest rates, as opposed to outright grants, as was the case with FAP. The interest rates charged on small and medium scale CEDA loans are highly subsidized and the repayment periods are generous. These loans are available both for the setting up of new businesses and expansion of existing ones (Mogae 2001). CEDA also provides venture capital funding where CEDA expects market-related payoffs. However, the record of parastatal financial institutions lending to citizenopened businesses in Botswana is generally weak. Whilst clearly the state wishes to retain its role as an entrepreneurial agent, it has found it difficult to face up to the failure of its indigenous petty bourgeoisie to play any meaningful role in the economy (Kaunda and Miti 1995). Despite decades of rapid GDP growth and export (that is minerals and beef) success, the economy has failed to diversify. Diversification is stimulated from two sources: foreign direct investment (FDI) and domestic investment (as the local bourgeoisie appear and engage in non-traditional economic operations). Botswana however has not managed to attract meaningful FDI. This has much to do with the fact that ‘the global economy has, for the most part, no desire to deal with a small, landlocked political economy located far from major global markets’ (Swatuk 1997: 91). FDI has in the main been rather sporadic and linked to unique mega-projects such as the now-defunct Hyundai motor assembly plant in Gaborone. The FAP has, it must be said, failed to provide impetus to any role for FDI in the country’s diversification. At the same time, the domestic bourgeoisie has been highly conservative, restricting their activities in the main to the traditional sectors such as cattle farming. One of the failings of the developmental state in Botswana is the lack of promotion for a national industrial bourgeoisie. What monetary liquidity that has existed has been ploughed into unsustainable consumption-oriented credit, with only small amounts being put into service-related business ventures.

Ian Taylor 57

Weaknesses in the economy Although the state has sought to diversify the economy away from its traditional export base of minerals and towards manufacturing, the government has found this to be problematic. Botswana has been unable to emulate the developmental states in Asia such as South Korea or Taiwan in building up a large-scale competitive manufacturing base. The fact that manufacturing has remained at around 5 per cent of GDP over the last five years compared to mining’s 30–40 per cent is often held up as a major failing of the country’s development experience (Mhone 1996). Table 3.1 seems to concur with this assessment. However, whilst it is true that the state’s attempts to diversify the economy have not seen significant fruition, a cautionary note should be sounded regarding the focus on the sectoral shares of GDP, particularly within the context of an economy dominated by an extremely high value industry such as diamond mining. In simplistic terms, increased revenues from mining or the discovery of one diamond mine may obliterate any gains in share of GDP by all other industrial sectors.6 But, this does not mean that growth in these other sectors has not occurred. In fact, a look at the figures (see Table 3.2) indicates that relatively healthy growth in other sectors of the economy has occurred, even whilst mining continues to rise. Thus whilst superficial readings of the economy may focus in on the dominance of one sector (mining) and lament the failure to diversify per GDP percentage share, actual figures reveal that all other sectors in the economy have grown quite healthily: between 1989 and 2000, manufacturing grew on average by 14.8 per cent per year; construction by 15.5 per cent; trade, hotels and restaurants by 24.4 per cent; and financial services (banking and insurance) by 20.0 per cent. Mining in contrast grew by 10.8 per cent. Having said this, a major problem is that the high rate of GDP growth has been ineffectual in broadening and diversifying the economy, particularly vis-à-vis capturing the bulk of Botswana’s labour force and creating productive employment and safeguarding a sustainable increase in employment opportunities. The fact is that paid employment in the formal sector remains elusive for most: unemployment officially is 21 per cent but unofficial estimates place it closer to 40 per cent (Botswana Guardian (Gaborone) February 22, 2002). In addition, with few exceptions (education and central government), there has been negligible growth in the number of people employed within each sector. Despite the strong growth record of Botswana over twenty years, the country suffers from persistent and increasing unemployment and underemployment. This is due to not only the poor state of the agricultural sector but also to the insufficient employment provided by non-agricultural sectors. In fact, a notable part of the country’s inhabitants are engaged, if at all, in low-productivity activities either in the informal sector such as

58

Table 3.1

Percentage of GDP by selected industrial sectors, 1989–2000

Year

90/91

91/92

92/93

93/94

94/95

95/96

96/97

97/98

98/99

99/00

00/01

Agriculture Mining Manufacturing Construction Trade, hotels & restaurants Fin. services General govt.

4.4 41.1 4.7 7.2

4.4 37.7 5.0 7.5

4.9 33.8 4.8 6.5

5.1 43.4 4.7 7.8

3.9 33.8 5.0 6.3

4.1 33.8 5.1 6.2

3.4 38.9 5.0 5.7

3.4 38.0 5.0 5.7

3.0 31.1 5.2 6.3

2.6 33.1 4.9 5.6

2.5 36.6 4.7 5.4

6.8 7.7 13.9

5.5 8.1 14.2

5.3 9.7 15.7

9.7 12.5 15.5

9.6 11.0 15.4

10.1 11.4 14.9

10.1 10.0 14.0

10.0 10.3 14.5

10.9 11.2 17.4

10.8 10.9 16.2

9.5 10.9 16.1

Source: Republic of Botswana 2002b: 33

Table 3.2

Annual growth in percentage of GDP by selected industrial sectors, 1989–2000

Year

90/1

91/2

92/3

93/4

94/5

95/6

96/97

97/98

98/99

99/00

2000/01

Agriculture Mining Manufacturing Construction Trade, hotels & restaurants Financial services General govt.

8.0 6.5 11.3 17.2 11.2

10.4 1.5 17.1 15.6 –10.6

21.3 –2.5 5.6 –6.5 5.2

5.1 28.4 –1.7 20.5 83.6

3.5 4.8 43.1 9.2 33.5

21.6 15.8 17.9 14.1 21.8

2.3 43.9 21.5 15.0 24.4

14.5 11.0 14.6 13.4 13.1

–5.1 –12.7 11.5 17.9 15.9

1.7 25.3 10.0 4.7 16.9

7.6 22.6 10.3 9.8 –0.1

24.3 31.2

17.5 13.0

30.1 20.5

29.0 19.2

17.5 10.3

20.1 12.6

9.9 16.8

17.1 17.8

15.9 28.5

14.6 9.4

14.4 13.4

Source: Republic of Botswana 2002b: 33

59

60 Global Encounters

hawking or in the traditional agricultural sector. This poor employment situation in the formal economy and continuing high levels of income inequality and poverty relate to the failure to restructure the economy, although as has been mentioned, other sectors of the economy are growing at healthy rates. But, unemployment and inequality are, it should be also pointed out, in part a result of Botswana’s limited domestic demand and the amount and geographical distribution of the population. At only 1.7 million, Botswana’s population simply do not have the absorptive capacity for domestic production. Certainly, in many rural settlements, the population is much too small to support businesses on a scale that could make an impact on unemployment and poverty. That is why most rural settlements consist of a shop, a bottle store and perhaps a garage at most. A major contradiction of the economy though is the fact that the country’s diamond dependence has meant that there has been a lack of urgency to try and deal with the country’s limited diversification. The income from diamonds is a cushion that tempts many in the country to ignore the negative structural features of the economy, and obfuscates growing class contradictions. Whilst the going is good (and this has been largely the case ever since independence), the historic bloc has been able to construct a hegemonic mode of rule by prioritizing development issues alongside capitalist accumulation. But, whether the BDP would be able (or willing) to continue this if there ever was a period of economic crisis remains to be seen: no doubt, the economy would become the decisive issue in any struggles for a reconstituted hegemony. State strategies to avoid this scenario have not been overly successful and the receipts from diamonds, although increasing savings rates, boosting consumption and providing massive revenue for the state have, in effect, intensified the reality of Botswana being heavily dependent upon diamonds and consequently, living on borrowed time.

Conclusion Despite the criticism of inequality within the country, it is still true to say that state intervention can play a vital role in creating the conditions for sustained trade growth and in ensuring that trade expansion translates into poverty reduction – as the examples of both Botswana and Mauritius in Africa have demonstrated (Carroll and Carroll 1997). The developmental state in Botswana has made respectable progress and it can be argued that Botswana’s strategy has shown that ‘a disciplined activist African state that governs the market is essential for industrial development and recovery’ (Owusu and Samatar 1997: 270). In this sense, the lessons that Peter Evans has argued states might derive from the Asian experience, namely the construction of ‘local counterparts to the proximate institutional prerequisites of East Asian success – bureaucracies with a capable economic core and

Ian Taylor 61

government-business relations based on scepticism combined with communication and support in return for performance delivered’, might also be applied to Botswana (Evans 1998: 83). I would concur with the assessment that ‘Botswana [has] defied the thrust of prevailing development orthodoxy, which claims that African states cannot enhance industrial development through interventionist strategy. Botswana’s state-governed industrial strategy supports recent research on the “East Asian miracle”, which underscores the fundamental importance of state intervention in industrial transformation’ (Owusu and Samatar 1997: 289). Equally, the ‘primacy of politics’ in the complex process of development has been fundamental and decisive (Leftwich 2000), inferring that it is not how much state intervention should take place, but rather what kind and how support for such a project, through the construction of a hegemonic agenda, might underpin such an enterprise. Obviously, as Christopher Clapham points out, the very different historical and cultural contexts that various development experiences have evolved from make direct comparisons and the borrowing of models problematic (Clapham 1996). Developmental states cannot, as Leftwich (2000: 169) points out, ‘be had to order’. Nonetheless, it is possible to suggest that there is such a thing as a broad developmental state model that helps account for the relative success not only of Taiwan or Singapore, but also of Botswana and that we should not write off the possibility of more developmental states within the continent (on this, see Stein 2000). As Peter Evans has written, ‘in the best of all possible worlds, African and Latin American countries would follow the lessons generated by the East Asian experiences in the same way that East Asian policy-makers followed western models of capitalism: with such originality and inventiveness as to outperform the original. Hopefully the art of leapfrogging is not yet dead’ (Evans 1998: 83). Notes 1 This endeavour to discursively delegitimize alternative models to Anglo-Saxon hyper-liberalism received a major boost from the ‘Asian Crisis’ of 1997. On this, see Hall 2001. 2 Also crucial was the fact that the state had secured mineral rights for the central government after Khama had persuaded his Bangwato tribe to relinquish their communal mineral rights over the newly discovered diamond reserves at Orapa and the copper/nickel location at Selebi-Phikwe, both in the former Bangwato Reserve (renamed ‘Central District’). Once the Bangwato agreed, all other tribes followed suit – thus the newly discovered minerals went to the national treasury, rather than being captured by local ethnic interests. 3 It should here be added that observers have remarked that the state of underdevelopment, particularly post-World War One onwards, was a by-product of a form of ‘connivance’ between the colonial administration and the tribal chiefs, who saw development as the corollary of White settler land alienation. See Parsons 1985.

62 Global Encounters 4 For a critical discussion of FAP, see Kaplinksy 1991. 5 SACU is the Southern African Customs Union, made up of South Africa, Botswana, Lesotho, Namibia and Swaziland. SACU is the oldest Customs Union in the world. 6 Likely to get worse now that Botswana opened the new Damtshaa diamond mine at the end of May, 2002, that is expected to yield approximately five million carats of diamonds in its 30-year life span.

4 Uganda as an African ‘Developmental State’? Timothy M. Shaw

Introduction The ‘New African Partnership for Development’ (NEPAD) implies that, at the start of a new century, the continent can yet combine growth with participation. The notion of an African (democratic) ‘developmental state’ suggests that the definition and sustainability of human development in Africa is increasingly a function of novel forms of governance from local to national, regional to global levels. In part, developmental governance entails a dynamic mix of state, civil society and private sector actors responding to a set of new policy issues, such as biodiversity, debt, environment, gender, genocide, HIV/AIDS, media, orphans, small arms, street children and child soldiers. Uganda constitutes a particularly interesting case because of its success in forwarding post-conflict reconstruction and economic growth, leading to a HIPC agreement and a Poverty Reduction Strategy Plan,1 orchestrated by an NGO coalition, the Uganda Debt Network. Similarly, the Great Lakes Region (GLR) illustrates how no regime is immune from regional contexts: from market opportunities and ecological pressures to population movements and security challenges. In short, Uganda can illustrate varieties in the forms of and limitations to the ‘developmental state’ in the twenty-first century. The post-bipolar ‘world community’ now consists of some 200 mainly poor, small, weak countries, but most orthodox studies of ‘foreign policy’ fail to recognize the tenuousness or vulnerability of these states or regions (Khadiagala and Lyons 2001). Today, only a minority of ‘critical’ analysts focus on this ‘other’ side of globalization (Broad 2002; Gills 2000; Klein 2000; Mittelman 2000): the regional and global networks of informal or illegal trade in people and products, mafias and militias, drugs and guns (Cox 1999). Yet the formal governmental regimes of over half the members of the UN and World Bank exert at best a tenuous control over their territories, economies and civil societies (Duffield 2001; Thomas 2000; Willett 2001). 63

64 Global Encounters

In the aftermath of the Asian miracle, we need to reflect on resulting analytic and policy insights: were ‘Asian values’ merely an intellectual disguise or subterfuge for Asian (essentially ‘Overseas Chinese’) ‘cronyism’ (Crawford 2000)? Might the ‘African renaissance’ supersede that in Asia a decade later? Is Thandika Mkandawire’s (2001) formulation of an African democratic developmental state a chimera? Could the juxtaposition of Asia in the 1990s and Africa in the 2000s throw creative light on developmental experiences? In particular, are HIPC and NEPAD compatible, leading to an original framework for an innovative form of local to continental African developmental governance? This chapter suggests that, informed by the demise of the Asian developmental state in the mid-1990s and the possible rise of an African variant in the early 2000s (Mkandawire 2001), we need to rethink our analyses of development to accommodate a range of current phenomena such as contracting-out, corruption, flexibilization, feminization, fundamentalism, money-laundering, narco-diplomacy, smuggling, the privatization of security, supply chains and so on. These are no longer aberrations but rather central features of the political economy of the majority of the world’s states, typical of regions like Africa, Central America, Central Asia, and Eastern Europe. Furthermore, such distinctive forms of capitalism confirm that there are important differences amongst its major regional variants, not just in the ‘trilateral’ world – between liberal trans-Atlantic Anglo-American and corporatist continental European or a Japanese model (Cox 1999) – but also (overseas) Chinese, Latino, Islamic and African variants. Thus the current political economy of Africa has to be situated in a range of interrelated contexts, from global to local (Shaw 1999). In the next sections, I turn to the interrelated global to local dimensions of such evolving developmental contexts: how is ‘governance’ defined and effected at macro- to micro-levels? What are the characteristics of ‘capitalism’ and ‘developmentalism’ in Africa and more specifically in Uganda?

Global context Just as states are highly heterogeneous, so likewise are non-state actors. The two non-state ‘corners’ of the ‘governance’ triangle – the third being the ‘state’ – include global corporations and local micro-enterprises along with informal and illegal enterprises as well as formal and legal one (see Figure 4.1). Thus it is imperative to recognize that ‘global capitalisms’ are in fact heterogeneous rather than homogeneous: relationships around the governance triangle vary between Anglo-American ‘liberal’, European ‘corporatist’, Scandinavian ‘welfarist’ and Asian varieties, notably Chinese (mainland and ‘overseas’) and Japanese. Africa has its own distinctive forms of for-profit structures, increasingly impacted by South African capital and brands.

Timothy M. Shaw 65

GOVERNMENT

Shrinking

Growing

CIVIL SOCIETY Figure 4.1

Growing

MARKET

The governance triangle

Source: Commonwealth Foundation (1999: 16)

Similarly, NGOs vary from familiar global INGOs to very local grassroots organizations (Desai 2002; Van Rooy 2002). In particular, NGOs can be distinguished in terms of the extent to which they are primarily engaged in policy advocacy as think tanks, or service delivery as subcontractors, although most do both in varying proportions. Major INGOs have become increasingly engaged with international agencies in the UN and IFI nexuses in terms of both advocacy and subcontracting (Nelson 1995 and 2002). And such legal arrangements are matched by illegal transnational networks amongst mafias, militias, and private armies (Cox 1999; Mittelman 2000). ‘Global civil society’ is very heterogeneous (Anheier; Glasius and Kaldor 2001) with global social movements coming to play increasingly salient yet quite varied roles: from less to more ‘anti-globalization’ in sentiment. On the one hand, many contemporary INGOs have been the source of new global issues, such as ecology, genetic engineering, global warming, landmines, ozone-depletion, small arms, and now ‘blood diamonds’ (Smillie, Gberie and Hazelton 2000; Van Rooy 2001). These have led to major global coalitions such as the International Campaign to Ban Landmines (ICBL) which resulted in the ‘Ottawa Process’ (Hubert 2000; Tomlin 1998), now replicated in the ‘Kimberley’ and ‘London Processes’. But they have also advanced ‘antiglobalization’ sentiments as reflected in the ‘battle of Seattle’ against the WTO, subsequent alternative social fora, and counter-demonstrations at major global and regional summits (Klein 2000; Van Rooy 2001). In turn, major global corporations increasingly seek to insulate themselves from popular pressures and boycotts through a variety of strategies

66 Global Encounters

including association with the UN Global Compact, corporate codes of conduct, ethical as well as fair trade initiatives, and strategic alliances with certain international organizations or NGOs. Thus, many of the MNCs which feature in Naomi Klein’s No Logo (2000) in terms of being targets of anti-corporate campaigns – for example McDonald’s, Nestle, Nike, Shell – are most active in the UN Global Compact (Parpart and Shaw 2002)! One novel aspect of South-North trade in the new global political economy is ‘supply chains’ which link local producers to global markets in novel ways in a variety of sectors, including ‘new’ horticulture (Bendell 2000; Murphy and Bendell 1997). Typically these link producers of fresh flowers, fruits and vegetables to major supermarket chains and use new technologies for communication and airfreight. These in turn are open to pressure from advocacy groups over ecology, gender, and labour, leading to Ethical Trade Initiatives as well as Fair Trade, conditionalities over gender, housing and labour practices. There is a growing revisionist debate about whether the three ‘corners’ of the governance triangle (see Figure 4.1) are really separate or are rather different points along a continuum. Certainly, there is continuous communication and interaction along the three sides of the triangle, yet there is also some autonomy at particular times in particular instances over particular issues. In short, notwithstanding the continual possibility of co-optation, many actors at all levels in the governance nexus do maintain a degree of independence, as increasingly demanded by their stakeholders. Thus, the state is not entirely diminished: in some sectors, at certain times, under specific regimes and conditions, it can be ‘strong’, albeit in association with other state and non-state actors.

Africa and development in a globalized world The first few examples of developmental states were authoritarian. The new ones will have to be democratic, and it is encouraging that the two most cited examples of such ‘democratic developmental states’ are both African – Botswana and Mauritius (Mkandawire 2001: 310). Inter- and non-state relations within Africa are changing (Khadiagala and Lyons 2001) as a result of neoliberalism and globalization but also owing to the emergence of new leaders within Africa. The African renaissance has been institutionalized in the African Union and African Economic Community, the New African Partnership for Development (NEPAD), and supported by the G8 community reinforced by the bilateral initiatives of Tony Blair and Jean Chrétien. These may inform and legitimize regional peace-keeping responses to resilient regional conflicts, and they might even facilitate, perhaps unintentionally, non-state definitions of ‘new’ regionalisms relating to ecology, ethnicity, brands, and religions (Parpart and

Timothy M. Shaw 67

Shaw 2002). These might extend legitimacy to new African developmental states and their related NEPAD ideology (Taylor and Nel 2002). Coinciding with such promising developments are moves away from orthodox structural adjustment programmes (SAPs) and conditionalities towards poverty-reduction programmes. SAPs were widely criticized as being onerous and ineffective. Given the pressures on the IFIs, as well as the sequence of Asian, Russian and Argentinean ‘crises’, the International Finance Institutions moved towards special programmes for Highly Indebted Poor Countries (HIPC I and II). To qualify, African regimes had to meet SAP terms and design acceptable poverty reduction strategies in association with civil society. In the case of Uganda, one of the few currently successful HIPC cases, in the late-1990s the Uganda Debt Network acted as an intermediary between state and private sector on the one hand and civil society on the other at both design and implementation stages, moving from policy advocate to policy agent or subcontractor, achieving the status of an authoritative ‘epistemic community’ (Callaghy 2001). Uganda’s Poverty Eradication Action Plan (PEAP) was founded on four pillars (UNCTAD 2000: 148): i) creating a framework for economic growth and transformation; ii) ensuring good governance and security; iii) directly increasing the ability of the poor to raise their income; and iv) directly increasing the quality of life of the poor. Thus Uganda is something of a model in terms of designing the initial Policy Framework Paper (PFP) and then maintaining momentum during the elaboration of a Poverty Reduction Strategy Paper (PRSP) in collaboration with a wide network of ministries, international organizations and NGOs, both local and global. According to UNCTAD (2000: 143): The PRSP is intended to be a country-owned document prepared through a participatory process which elicits the involvement of civil society, other national stakeholders and elected institutions. ‘Ownership’ in this context refers to the Government taking the lead in the preparation of PRSP, including the animation of the participatory process (which is expected to increase public accountability) and the drafting of the action plan. Such a poverty reduction network constitutes an example of partnership for rural development as advocated by the International Fund for Agricultural Development (IFAD) in its Rural Poverty Report 2001: the challenge of ending rural poverty: a mix of state-NGO-private sector governance facilitated by decentralization.

Uganda’s developmental state? Patterns of ‘governance’ in Africa – increasingly inseparable from the notion of a democratic developmental state – are in flux at all levels and

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all sectors, from state and corporate to non-governmental organizations (NGOs). Contemporary notions of governance have a variety of conceptual, ideological, institutional, political and theoretical sources (Jenkins 2002; Quadir, MacLean and Shaw 2001). Governance in Africa varies over time and between regions (Reinikka and Collier 2001; Shaw and Nyang’oro 2000), and it reveals similarities and dissimilarities with other continents. As elsewhere, notions of comparative development have evolved profoundly over the last decade as the mix of globalizations and liberalizations have impacted in cumulative ways. The focus on state has been superseded by recognitions of diverse and changeable patterns of governance reflected in concepts like public-private partnerships, networks, and coalitions (Fowler 2002; Mbabazi, MacLean and Shaw 2002). The debate continues over whether ‘globalization’ does offer some opportunities for some African states, civil societies and companies, with the more optimistic ‘liberals’ insisting that it does, despite all the negative evidence and press over the last two decades (Makhan 2002; Nsouli and Le Gall 2001; Reinikka and Collier 2001). Nevertheless, if SAPs generated much scepticism, even defeatism, on the continent, then their de facto successor, negotiated debt relief for Highly Indebted Poor Countries (HIPC) (Anena 2001; Gariyo 2001), is leading to novel forms of governance. As Callaghy (2001: 138) suggests: …all HIPC debt relief is now to be tied directly to poverty reduction. This is to be ensured by the creation of Poverty Reduction Strategy Papers (PRSPs) put together by debtor countries in consultation with civil society groups…If seriously implemented, this new process could be an important change in international governance on debt, aid and development more generally and may have major implications for the unfolding of democratization processes in Africa and elsewhere. ‘HIPC governance’ by definition involves the state negotiating Poverty Reduction Strategy Papers with a range of non-state actors at local to global levels, in the Uganda case facilitated by aggressive decentralization and by the Uganda Debt Network (UDN), itself a heterogeneous coalition of (I)NGOs, think tanks, religious groups, etc. In the process of so negotiating and facilitating HIPC governance, the UDN has itself been somewhat transformed not only in status, but also in practice – not just an advocate but also service deliverer – raising issues about accountability, co-optation, transparency, etc (Nelson 1995 and 2002). And certainly, development has not been evenly distributed across Uganda: the north remains more impoverished and alienated than the south as reflected in opinion polls as well as support for opposition parties and guerrilla movements (Sunday Monitor, 3 February 2002). Conversely, Museveni gets most support for his handling of political debates concerning the introduction of multipartyism from the West (52 per cent) and least

Timothy M. Shaw 69

from the North (30 per cent). In short, there are profound limits to ‘democracy’ even in today’s Uganda in terms of regional differences and divergences, especially over the fraught issue of formal multi- versus singleparty (that is, ‘Movement’ in Ugandan parlance) political structures and processes. Yet these may be increasingly excused in relation to ‘developmental’ success; that is, the trade-off between economic and political ‘liberalizations’. Further, given the influential role which the donors play in Uganda, there may be a danger in the latter tending to divide NGOs into either delivery or advocacy types, as both varieties are needed within single organizations to make governance more efficacious and accountable (Lister and Nyamugasira 2003). Moreover, there may be a danger in privileging civil society to the detriment of formal, multi-party politics: civil society, especially when legitimated or reinforced by global donors and media, can ‘squeeze out’ other democratic processes like elections. The distinctively ‘Ugandan’ debate about multi-party politics is not separable from the broader discussion of the value of occasional formal elections versus continuous civil society activity and advocacy. Makumbe recognizes the weakness of contemporary civil society in much of the continent, including its tenuous democratic features, and concludes that with extra-continental support it can continue to develop (1998: 317): The resurgence of civic protest in virtually all sub-Saharan African countries since the late-1980s has resulted, inter alia, in the transformation of the continent’s governance and political systems, with civic groups in most of these countries demanding that their governments be democratic, transparent and accountable to the people. Although much has already been achieved, much also remains to be done if Africa is to have an effective and vibrant civil society. Similarly, extra-continental actors are also increasingly concerned about the continent, in part because of a variety of non-state connections, from diasporas and refugees to conflict, drugs and guns, environmental sustainability (Brown 2001; Van Rooy 2001).

The local level Finally, given decentralization and urbanization, the local level of governance – city and community – is of growing importance for human development. This level reveals similar patterns of partnership to the other levels; that is, the increasing role of non-state actors for example in service delivery. As we will see in the case of Mbarara municipality and county, subcontracting to local companies for education or to local NGOs for AIDS hospices has become commonplace. Over the last decade there has been

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about ten per cent growth in Western Uganda, albeit from a very weak base in the period before 1986. This has advanced both human development and human security. This chapter draws from a variety of interrelated disciplines and debates – from political science/economy and international relations to African development and security studies – to which I return at the end. It seeks to juxtapose generic concepts like ‘civil society’ and ‘governance’ with cases drawn from Africa. While it concentrates on the Great Lakes Region (GLR), it reflects analyses and debates from Sub-Saharan Africa as a whole (Villalon and Huxtable 1998). In particular, I juxtapose notions drawn from the overlapping HIPC, African developmental state and NEPAD genres. I turn in this final section, then, to a further elaboration of ‘triangular’ governance in today’s continent with a focus on civil society’s relations with the state and the economy: lessons from/for Africa? Civil society and the state: developmental relations? NGOs are engaged in service delivery and/or policy advocacy from local to global levels (Clark 2002; Desai 2002; Nelson 2002) leading to ‘partnerships’ of multiple types (Fowler 2002) which impact on the state, whether it seeks such links or not: ‘NGOs create alliances and networks to place pressure on the state’ (Desai 2002: 497). One side of the governance ‘triangle’ – that between the state and civil society – is focussed on democratization or ‘political liberalization’. By contrast, the other side – that between the state and private sector – is preoccupied with ‘economic liberalization’ or privatization. How compatible are these two forms of ‘liberalization’? Furthermore, both impact on the bottom, horizontal axis of the triangle, that between the two non-state elements: that is, civil society and private companies. There appears to be something of a stand-off (contradiction?) between global competitiveness and a democratic deficit: which is primary for national development? In a context in which the state is no longer clearly hegemonic, the roles of think tanks as well as NGOs are in flux. Today’s Uganda presents a full spectrum from rather conservative Private Sector Foundation and Economic Policy Research Centre to more radical Centre for Basic Research (CBR) and UDN. Both of these groups are distinct from the older and established research institutions like the Makerere Institute for Social Research. Hence the challenge under HIPC for a UDN to assemble a broad-based coalition supporting the PRSP process (UNCTAD 2000). HIV/AIDS has also led to innovative civil society-state/corporate relations in Uganda as elsewhere on the continent. NGOs have been active in financing hospices for the dying, prevention campaigns, and orphanages for children without parents; and MNCs are increasingly active in terms of infected workers. The stand-off between civil society and the state in South Africa is not replicated in Uganda as the Ugandan government has been in the

Timothy M. Shaw 71

vanguard of straightforward communication or education (Barnett and Whiteside 2002). Civil society and the economy in contemporary Africa: beyond privatization ‘African capitalism’ in contemporary Uganda is quite distinctive and different from that elsewhere. It includes not only traditional and contemporary ‘colonial’ commodities and supply chains but also informal or illegal, and formal regional exchanges. It thus now includes fruit, horticultural and vegetable exports as well as coffee and tea; and to the region it includes electricity, Coca Cola, Mukwano soap products, and UHT milk. In addition to serving as an entrepôt for Central African resources, it also serves as a conduit for informal coltan, diamond and gold exports. The mix of legal and illegal is problematic and controversial, with the UN contributing to the debates. But clearly, the Ugandan economy as a whole gains from the Congolese conflict and the Ugandan military’s involvement therein. In addition, the termination of apartheid has enabled South African capital, franchises, links, and technologies to enter Uganda, so competing with local (African and Asian), European and Asian capitals: for example, Century Bottlers’ Coca Cola franchise, MTN cell-phones, MNet cable and satellite TV, Nandos and Steer fast food franchises, Woolworths upmarket shopping, Shoprite supermarket and Metro Cash-and-Carry wholesaling, and South African Breweries. Such alternatives lead towards new opportunities and to new regionalisms: beyond established inter-state East African Community (EAC), to flexible non-state forms of regionalisms and other linkages throughout the continent.

Governance in contemporary Uganda: beyond peace-building to human development? For Uganda, the future looks too ghastly to contemplate. The elections have not only confirmed the traditional divide between the south and the north but, more critically, opened another internal divide within the NRM. These are very sensitive issues which will require delicate handling if Uganda is to avoid a return to the lawlessness of the 1970s and 1980s. The wild card in this whole question remains the generals returning from the DRC (Ajulu 2001). Human development in a small ‘fourth world’ state like Uganda at the periphery is a function of the balance between the local/national and the global/regional (Shaw 1999). Uganda has made a remarkable comeback in the last 15 years in terms of basic human development/security, at least for most of its regions (Baker 2001; UNDP 1998), but the sustainability of such an ‘African renaissance’ is problematic unless a judicious balance is

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maintained among patterns of governance at all levels. In particular, the notion of ‘national development’ is problematic when the ‘gap’ between the north and south of Uganda is very wide as indicated in the continued tensions and violence (Ehrhart and Ayoo 2000; UNDP 2000). Local governance offers a variety of advantages over centralized government in this respect, but accountability and transparency need to be continually demanded and monitored. Governance at the local level may require a continually changing mix of state and non-state resources and relationships (Kasfir 1998 and 2000) as our own work on Mbarara suggests (Mbabazi and Shaw 2000; Mbabazi, MacLean and Shaw 2002). The official, optimistic scenario emerging from Uganda in the earlytwenty-first century in terms of African or HIPC governance is that of a continuous negotiation among corporations, NGOs and state which might produce partnerships involving new capital, franchises, technologies or commodity chains. By contrast, the critical, pessimistic preview suggests arbitrary decision-making, exponential corruption, and state violence, as reflected in growing concerns re: accountability, and transparency (Lewis and Wallace 2000). Nevertheless, given Uganda’s comeback in the 1990s, are there developmental lessons to be learned for local to global decision-makers? In terms of orthodox canons, case studies like contemporary Uganda suggest the imperative of going beyond the state-market division to examine the myriad links between these and the informal: real as opposed to formal yet marginal or idealistic triangular forms of mixed actor governance? As Callaghy (2001: 144) concludes in his suggestive study of ‘HIPC governance’ in Uganda, somewhat parallel to the continents centrality in antilandmine and -blood diamond coalitions: …Africa has been central to the evolution of the international regime on public debt, although not its primary driving force. New actors and processes have been unleashed in response to Africa’s plight that might significantly alter the way the larger development regime functions. In the long run, the most significant changes may well not be HIPC itself, but rather the new processes and transboundary formations that it helped to unleash. In short, Africa in general and Uganda in particular confront a range of established assumptions about governance, non-state actors and development: not all anarchy but not all ‘developmental states’ either. Hence the challenge to advocates of both HIPC and NEPAD: how realistic as opposed to idealistic are their analyses and prescriptions given the proliferation of challenges to sustainable development? Can human development/security be advanced through innovative forms of governance in which non-state actors play increasingly authoritative roles?

Timothy M. Shaw 73

Note 1 The Highly Indebted Poor Countries scheme and the Poverty Reduction Strategy Paper are keystones of the World Bank’s framework to manage debt in Africa.

5 The Irish State and the Celtic Tiger: A ‘Flexible Developmental State’ or a Competition State? Peadar Kirby

Introduction Ireland’s economic success from 1994 to 2000 earned it the title, the Celtic Tiger.1 While differing interpretations have been offered as to the reasons for this success, the state is widely credited with playing a central role. Taking the East Asian analogy further, one analyst has described the Irish state as a ‘flexible developmental state’ (Ó Riain 2000), drawing on the international literature on the developmental state to understand the role of the Irish state in the emergence of the Celtic Tiger. While agreeing that the state has played a central role, this chapter takes issue with such positive interpretations of its role, in particular examining the claim that it has been developmental. The purpose of this chapter, therefore, is critically to examine the basis of Ireland’s economic ‘miracle’, interrogating the developmental claims made for it and the role of the state in achieving these. The first section outlines the nature of and bases for Ireland’s economic success in the second half of the 1990s. The next section outlines the mainstream interpretation of this success, namely that it is a successful example of development in a globalized world through the agency of the state. Particular attention is paid to the claim that the Irish state is a ‘flexible developmental state’. The chapter then offers a critique of the theoretical and empirical inadequacies of this analysis using a theoretical approach drawing on IPE and development theory. The third section highlights the correlation of economic success with social failure and argues that the concept of ‘competition state’ more adequately interprets the role of the Irish state in helping achieve these outcomes. The final section concludes that Ireland’s recent development shows the social costs of economic success in a globalized world.

74

Peadar Kirby 75

The nature of the Celtic Tiger Comparative data on Ireland’s economic growth over the second half of the 1990s serves to highlight its exceptional nature, both in relation to the country’s past performance and in relation to the rest of the world over the same period. Table 5.1 shows Irish Gross Domestic Product (GDP) and Gross National Product (GNP) growth rates from 1992 to 2002. These contrast with average annual GDP growth of 1.8 per cent between 1981 and 1986 and of 4.7 per cent between 1987 and 1991. Average annual GNP growth was 0.2 per cent for the earlier period and 4.5 per cent for the later. Both figures are given since, in Ireland’s case, GNP is regarded as a better measure of output and economic growth than is GDP due to the extent of profit repatriation by multinational companies out of the Irish economy. However, since GDP is used more widely internationally, it is required for comparative purposes. These growth rates put Ireland among the fastest growing economies in the world over the 1990s, as shown in Table 5.2. By contrast, the average annual GDP growth rates of high income countries over the same period was a mere 2.5 per cent. This comparative ranking also draws attention to the fact that Ireland, though normally categorized as a developed or industrialized country, is in fact more comparable to newly industrialized countries (NICs). When it Table 5.1

Irish growth rates (GDP/GNP), 1992–2002

Year:

1992

1993

1994

GDP: GNP:

3.7 2.1

2.9 2.9

6.8 7.6

1995 1996 9.8 8.0

7.8 6.9

1997

1998

10.8 9.4

8.6 7.9

1999 2000 2001 2002 10.8 8.2

11.5 10.4

5.9 5.0

Source: Dept of Finance 2002; CSO 2003

Table 5.2

World’s highest average annual GDP growth rates, 1990–2001

Country China Singapore Ireland Vietnam Mozambique Uganda Malaysia Chile Source: World Bank World Development Report 2003, Table 3

% growth 10.0 7.8 7.6 7.6 7.5 6.8 6.5 6.4

6.9 0.1

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achieved independence in 1922, its economy was dominated by agriculture and the export of agricultural produce constituted over 80 per cent of total exports. Its policy of native industrialization behind high tariff barriers through active state involvement, which began in 1932, has been likened to the Import Substitution Industrialization policies of Argentina, Brazil, Chile and Mexico over the same period (O’Malley 1992: 32). The adoption of an export-oriented industrial strategy from 1959 onwards, with active state policies to attract foreign direct investment (FDI) to manufacture goods in Ireland for export, continued the drive to industrialize. For these reasons, many scholars of Irish development have categorized Ireland as a NIC (O’Hearn 1989; Girvin 1989; Jacobson 1989; Kirby 1997). The high economic growth rates achieved by Ireland over the 1990s translated into high levels of per capita income growth for its population, as shown in Table 5.3. This contrasts with annual per capita GDP growth of only 1.2 per cent for high-income countries over this period. As a result, Ireland’s per capita GDP reached US$29,866 in 2000, one of the highest in the OECD; however, its per capita GNP was $25,520 thereby reducing its ranking. Following years of an apparently inexorable rise in unemployment, the Celtic Tiger boom also helped to create a substantial number of jobs, leading to a steady decline in unemployment as shown in Table 5.4. As well as offering this snapshot of the nature of Ireland’s economic boom, it is also necessary for the purposes of this chapter to interrogate its causes, identifying in particular the role that the state has played. In surveying the academic literature on the Celtic Tiger, two main approaches can be identified. The first consists of studies using a theoretical framework drawn from neo-classical economics or variants of it, such as new growth theory. The second approach can be characterized as political economy, exhibiting a diverse range of theoretical influences ranging from

Table 5.3

World’s highest per capita annual growth rates, 1990–20012

Country China Ireland Vietnam Myanmar Chile Korea Singapore Guyana Poland Source: UNDP Human Development Report 2003, Table 12

% growth 8.8 6.8 6.0 5.7 4.7 4.7 4.4 4.4 4.4

Peadar Kirby 77 Table 5.4 Unemployment rates 1994–2002 (annual % of labour force): Ireland, EU, OECD and US Country

1994

1995

1996

1997

1998

1999

2000

2001

2002

Ireland EU OECD United States

14.3 10.8 7.7 6.1

12.3 10.6 7.3 5.6

11.7 10.8 7.2 5.4

9.9 10.8 7.0 4.9

7.5 10.2 6.9 4.5

5.6 9.4 6.7 4.2

4.3 8.5 6.3 4.0

3.9 8.0 6.5 4.7

4.4 8.3 6.9 5.8

Source: OECD Economic Outlook 73, 2003

institutional and sociological economics to neo-marxism (see Kirby 2002: 71–107). As would be expected, the neo-classical literature devotes most attention to productivity growth and the maintenance of competitiveness through wage restraint, whereas the political economy approach examines the nature and role of institutions in creating the conditions for the Irish boom. Despite this, there is a wide consensus across the literature that the following five elements played a decisive role in helping create the Celtic Tiger, though there are disagreements about the relative contribution of each – macroeconomic management (including fiscal and financial policy), industrial policies, investment in education, EU transfers (particularly through the Structural Funds) and the distinctive Irish institutional innovation known as ‘social partnership’. Each are briefly treated here. A high degree of consistency and continuity in macroeconomic management has been evident in Ireland over recent decades, largely due to the non-ideological nature of the Irish party system. The consensus across all parties represented in the Dáil (the Irish parliament) has included agreement on an essentially outward-oriented free-market economic policy, on active state industrial policies focussed primarily on attracting high levels of FDI to Ireland, on investment in education, on respect for property rights and, since 1973, on membership of the European Union. Since the mid1980s a solid consensus has also been evident on the need for a more conservative and stable fiscal policy, reducing the ratio of debt to GDP and balancing the national budget, a consensus reinforced by preparations for joining the euro in 1999. The fiscal austerity introduced by the incoming Fianna Fáil government in 1987 to bring the fast growing national debt under control helped restore confidence in the public sector and resulted in a resurgence of private consumption and investment that allowed Ireland to benefit from the US boom that began in the early 1990s, sometimes referred to as ‘expansionary fiscal contraction’ (see Leddin and Walsh 1997). However, stabilization of the state’s finances would not on its own have resulted in an economic boom. As Fitz Gerald, a leading academic economist put it: ‘[T]he pro-active industrial strategy pursued by Irish policy makers was central to the long-term development of a strong industrial

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base’ (Fitz Gerald 2000: 38). Active state policies, focussing since the 1960s on the attraction of foreign multinational firms to establish in Ireland, laid the basis of export-competitive industries; something that the earlier policy of import-substitution industrialization had failed to do. A central role in this success was played by the semi-state Industrial Development Authority (IDA) which in its institutional makeup and role has been identified as bearing resemblances to the insulated bureaucracies of the East Asian developmental states (Kirby 1997: 202). Two key and consistent elements of IDA policy were, firstly, the tax incentives it put in place to attract FDI and, secondly, its pro-active policy which sought to identify high-growth industrial sectors appropriate to Ireland and, within these, their leading companies. The first has been described by IDA managing director from 1981 to 1990, Padraic White, as ‘the unique and essential foundation of Ireland’s foreign investment boom’ (Mac Sharry and White 2000: 250) since it offered a 10 per cent tax rate on manufacturing profits guaranteed for 20 years which in 2003 was changed to a 12.5 per cent tax on all trading companies, well below the tax levels of Ireland’s neighbours. The second plank of IDA policy succeeded by the early 1990s in attracting many of the world’s leading companies in three key sectors – electronics, pharmaceuticals and financial services. Success in winning FDI, however, resulted up to the late 1980s in marginalizing indigenous industry which in many cases proved unable to withstand the rigours of international competition. Complementing active industrial policies since the early 1960s has been an expansion of educational expenditure and provision which was maintained even during the severe budgetary cutbacks of the late 1980s. Wickham sums up some of the achievements of this 30-year expansion: participation rates have caught up with and overtaken British rates; the proportion of the Irish age cohort completing second-level education is about the EU average while the proportion gaining a third-level qualification is well above the EU average; within third-level education an unusually high proportion of students is studying science and engineering thus eroding the traditional focus on the liberal professions in Irish education; and standards in maths and science performance seem to be relatively high by international standards (Wickham 1997: 281). However, high Irish participation rates start falling rapidly after the age of 18 and are particularly low by OECD standards from the age of 20 onwards. Furthermore, on OECD tables ranking literacy levels, Ireland falls towards the bottom (Forfás 2001: 105). Some analysts have compared the contribution to the Irish success of EU structural funds with the impact of Marshall Aid on other European economies following the Second World War (Ó Gráda 2002; Ó Gráda and O’Rourke 2000). Designed to promote convergence in economic growth and living standards between the poorer regions of the Union and its core regions, EU structural funds are estimated to have contributed about

Peadar Kirby 79 = C12

billion to the Irish economy between 1989 (when the first Delors multiannual package of funding was agreed, known as Delors I) and 2001 (see Kirby 2003: 28, Table 10). These funds are allocated in multiannual tranches under four broad categories (infrastructure, human resources, the private sector and income support). They are credited with having had a significant impact on Ireland’s development through their contribution to the productive potential of the economy and through their institutional impact on the quality of decision-making in the public sector as they forced the introduction of long-term project planning and evaluation. However, the most innovative and original feature of the Irish success is widely regarded as social partnership. This refers to institutional arrangements through which key economic and social policy objectives are coordinated among sectoral interest groups (the state, trade unions, business organizations, farming organizations and community groups, known collectively as the social partners). Laffan and O’Donnell refer to it as ‘the emerging Irish model of economic and social governance’ that has grown from the series of national agreements since 1987 (Laffan and O’Donnell 1998: 165). The social partnership approach is seen as having ‘produced the much needed recovery and has underpinned a sustained period of growth since then’ (O’Donnell and O’Reardon 1996: 34). As economic growth resumed, the agreements began to include more ambitious commitments to social equality and inclusion, including the National Anti-Poverty Strategy (NAPS). From its institutionalization at national level, the principle of partnership has been broadened and finds expression in an array of partnership bodies, at national, regional and local level, and also at firm level. Among these are city and county development boards, and Area-Based Partnerships (ABPs), bodies set up by the state in areas of social deprivation under the control of boards representing the social partners to address local economic and social development in an innovative way. EU structural funds have acted as an important source of funding for these bodies. The extent to which these structural features are sufficient to explain the Irish success is still debated. For example, attention has also been drawn to the element of luck in that the stabilization of Ireland’s public finances in the late 1980s made it uniquely placed to benefit from the attractions offered to US companies by the Single European Market at a point when the decade-long US boom was beginning. Joining the euro at the beginning of 1999 with its declining value relative to the currencies of Britain and the United States, Ireland’s two main export markets, was a further boost to growth at the height of the Irish boom (Kirby 2002: 45). Yet, the account offered here makes clear that the state played a central role in creating both the economic and institutional conditions without which the boom could not have occurred. As Nolan, O’Connell and Whelan summarize in an authoritative overview of the Irish trajectory from ‘bust to boom’, ‘there was a great deal more to Ireland’s success than the liberalization of markets.

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The state has been deeply implicated in the entire process, managing both economic development and the welfare state. The most dramatic changes have taken place under the guidance of neo-corporatist arrangements’ (2000: 2). Yet, while valid, this analysis fails to interrogate in greater detail the nature of the state’s relationship to market forces and the developmental outcomes of this relationship (see Perraton 2001, Chapter 6). To this we now turn.

Ireland as a developmental state Two scholars have devoted central attention to the means through which the state has helped engineer the Irish boom. O’Donnell (2000, 2002) places the success of the Irish state in the 1990s against the backdrop of its failures over previous decades. ‘The failure of Ireland’s political, commercial and interest-mediation systems pushed Ireland to try something new; but, the limits of state-led development and policy, and the lack of support for neo-liberalism, dictated reliance on consensus-based, associative and experimental approaches’, he writes (2000: 193). Central to these new approaches (he calls it ‘the major innovation’) was the system of ‘negotiated economic and social governance’ known as social partnership (177). This ‘produced wage growth consistent with competitiveness and embodied a negotiated consensus on a range of economic and social policies, including the Maastricht criteria for entry to EMU (Economic and Monetary Union)’ (188). Commitment to the disciplines of EMU allowed policy-makers ‘to focus on the real economy’ (189), identifying and acting on issues such as supply-side measures, social cohesion and cooperation in which domestic policy could make a real difference. EU structural funds also acted ‘as a stimulus to policy innovation and experimentation’, writes O’Donnell (187), by introducing developmental thinking and procedures to the Irish public service, by creating a culture of monitoring and evaluation, and by helping decentralizing policy-making. The liberalization of the internal EU market following the Single European Act in 1987 also ‘produced a steady pressure to make public utilities and services more efficient, consumer-oriented and independent of overt or covert state subsidy or protection’ (183). As a result, concludes O’Donnell, ‘Ireland’s approach to market regulation, and the relationship between market, state and society, has been significantly reshaped by membership of the EU’ (184). He sees the emergence within Irish policy-making circles of ‘a new perspective on Ireland’s position in European integration and a globalizing economy’ (177), leading to a change in the nature of government which requires it to be more a facilitator and networker, monitoring, regulating and facilitating communication, rather than administering and executing (199). O’Donnell’s view is therefore a very benign one which centres on the successful adjustment of attitudes and institutional mechanisms by state and

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private-sector elites to the pressures and demands of international competitiveness, allowing the Irish economy to capture benefits for Irish society. While his views are not inconsistent with the developmental state literature, O’Donnell does not refer to it. However, Ó Riain explicitly draws on this literature to argue that the Irish state is a ‘flexible developmental state’, in contrast to the bureaucratic developmental states of East Asia which, he argues, have ‘appeared too inflexible to cope with rapidly changing informational industries and decentralized “post-Fordist” industrial structures’ (Ó Riain 2000: 157). On the other hand, the flexible developmental state (FDS) – examples of which include Ireland, the Netherlands and Israel – : is defined by its ability to nurture post-Fordist networks of production and innovation, to attract international investment, and to link these local and global technology and business networks together in ways that promote development. This ability is sustained by the multiple embeddedness of the state in professional-led networks of innovation and in international capital, and by the state’s flexible organizational structure that enables the effective management of this multiplicity’ (ibid. 158). In the case of Ireland, Ó Riain identifies three interacting but empirically distinct modes of integration into the global economy (or three globalizations, as he puts it): the global goes local in the form of FDI; the local goes global in the form of a local network of indigenous firms that have become increasingly integrated into international business and technology flows and have been successful in international markets; and the creation of a stable macroeconomic and financial environment to underpin industrial transformation, mediating through social partnership the relationship of unionized workers and welfare recipients to the global economy. For a long period, the Irish state’s industrial policy was almost exclusively oriented towards attracting foreign companies to establish in Ireland, leading critics to argue that ‘the IDA bought economic tigerhood’ (O’Hearn 2000: 74). So dominant was this policy, executed by the IDA, that Ó Riain writes of it being ‘embedded in the TNCs and autonomous from the rest of the state, indicating the difficulties of attempting to shape the actions of TNCs’ (Ó Riain 2000: 178–9). However, ‘it took the massive social and economic crisis of the 1980s to delegitimate the IDA’s role as the sole bearer of the task of Irish industrial transformation. It was into this restricted institutional space that the alliance of Irish technical professionals and the previously marginalized “science and technology” state agencies stepped to support indigenous industry, in the process creating the delicate compromise at the heart of the FDS’ (181). The story of how an internationally competitive indigenous software industry, comparing favourably with those in India and Israel, emerged through state ‘husbandry’ is central to Ó Riain’s view of Ireland as an FDS. He details the means used, such as high levels of invest-

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ment in education, and a shift in industrial strategy throughout the 1980s to ‘making winners’ out of indigenous firms through upgrading their capabilities. Central to this strategy was the fostering of a network of industry and trade associations, universities, and innovation and technology centres to provide an associational infrastructure for information sharing, cooperation, and innovation in the Irish software industry, in which the state played a crucial role. In all this, EU funding provided the means ‘through which a variety of new, sometimes experimental, measures could be taken without having to fight the rest of the state agencies for funding’ (179). If the state was successful in fostering this globalization of an indigenous Irish software industry, it has been far less successful in managing the impact of this on Irish society, according to Ó Riain. He identifies as ‘a political dilemma for the Irish model of development’ (182) the rising inequality generated by a new professional class of entrepreneurs and technical professionals whose non-unionized workplaces have offered income increases significantly in excess of national wage agreements. He writes that unionized workers who have lived under wage restraint while seeing others outstripping them at an increasingly rapid rate, are going to be less and less willing to modify their wage demands for the sake of international competitiveness. The very flexibility and fragmentation of state institutions that have been functional to facilitating the economic boom means that they are finding it difficult to manage these tensions. However, he argues that this is not inherent in the model of the FDS and shows how the Netherlands has followed a similar strategy to Ireland without generating high levels of inequality, suggesting ‘that the tensions around uneven internationalization and rising inequality can be managed better than the Irish state has done’ (186). Extensive attention has been devoted to Ó Riain since he provides the most coherent and detailed analysis of the state’s role in Ireland’s economic boom, identifying in this role a new model of state-led development that has proved more capable of responding to changing local and global conditions than has the East Asian bureaucratic developmental state. As he writes: ‘The FDS is defined precisely by its ability to create and animate post-Fordist networks of production and innovation and international networks of capital, and to link them together in ways that promote local and national development’ (165). However, it does this in ways that are far more fragmented than the bureaucratic developmental state since ‘the organizational structure of the FDS consists of a range of embedded autonomies of the state, linking specific agencies with particular organizational cultures and capacities to particular social groups’ (166). This very fragmentation carries its own limitations that Ó Riain (167) acknowledges threaten the model itself: The FDS’s strength is its ability to connect networked and fragmented labour to networks of international capital. However, this international-

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ization of capital does not seem to undermine local accumulation as territorialized innovation and production networks form a transnational circuit of autocentric development. Nonetheless, this process does result in a very uneven internationalization of society, as some sections of labour connect to the global directly while others are left largely servicing these groups’ local needs. Spiralling national and international inequality, even as local accumulation proceeds apace, becomes the dilemma of the FDS development model. This, in turn, creates political dilemmas for the FDS as the flexibility that enables the state to connect local and global in a variety of ways becomes a liability. The flip side of this flexibility is the fragmentation of the state, making it all the more difficult for the state to sustain a national development coalition around these uneven and unequal local-global connections.

A developmental state? Ó Riain’s characterization of the Irish state requires contesting at both a theoretical and an empirical level. However, before doing that, the limitations of his theoretical approach need to be identified and an approach adopted that can more adequately capture the nature of the Irish state’s transformation. Two limitations undermine the validity of his analysis. The first is his failure to specify what he means by ‘developmental’. Though developmental success is claimed for the Irish state, this rests on equating successful development with the generation of some successful industrial sectors. Nowhere does Ó Riain discuss what he means by ‘development’, though his discussion of the ‘darker sides’ of the Irish success (181) and the social tensions it is generating implies that successful development requires more than sectoral industrial transformation. For this reason, a reference to the lessons of development theory is required in order to specify what is needed to characterize a social process as developmental. The second limitation of his account relates to its intense focus on state power while failing to devote adequate analytical attention to the strategies of market power, and his failure adequately to integrate into his account the perverse social outcomes he identifies. Recognizing these weaknesses, IPE offers tools to analyze more fully the role of power in economic life and the social outcomes of how state and market power interact and relate. Furthermore, its international focus allows it to overcome the priority given to the nation state in much social science analysis, theorizing global, national and local interactions in a subtle way. Combining IPE with the concerns of development theory has resulted in the emergence of the International Political Economy of Development (IPED) as a distinct field of study (see Hettne 1995; Hoogvelt 1997; Kirby 2002). Its explicit focus on development, and its ability to analyze how interactions of market and state power at various levels from the global to the local result in certain social outcomes make it a more adequate approach both to evaluate the claims that the Irish state is

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developmental and, more broadly, to offer a more convincing account of the correlation of economic success and social failure that constitutes the Celtic Tiger. An IPED approach draws attention to the theoretical and empirical deficiencies of Ó Riain’s account. In making market power a focus of analytical attention, it highlights market constraints on state power, and offers an alternative reading of the logic of state actions to that offered by Ó Riain (and indeed, by O’Donnell). In his work, Cerny describes the ways in which state actors, both politicians and bureaucrats, react to the pressures of the global market by ‘promoting the competitive advantages of particular production and service sectors in a more open and integrated world economy’ (Cerny 2000a: 22). He continues: In pursuing international competitiveness, states or, more to the point, a range of state agencies closely linked with those economic sectors most deeply entangled in the world economy, increasingly accept and indeed embrace those complex interdependencies and transnational linkages thought to be the most promising sources of profitability and economic prosperity in a rapidly globalizing world (22). This is another way of describing Irish state agencies’ facilitation of the emergence of a competitive indigenous software industry. However, where Cerny diverges from Ó Riain is in his interpretation of the logic of these state actions which, he writes, ‘are often designed to enforce global market rational economic and political behaviour on rigid and inflexible private sector actors as well as on state actors and agencies. The institutions and practices of the state itself are increasingly marketized or “commodified”, and the state becomes the spearhead of structural transformation to market norms both at home and abroad’ (ibid.: 32). There is a subtle but very important shift of emphasis between these two readings, from Ó Riain’s emphasis on the state’s ability to capture and manage market forces for local and national development, to Cerny’s emphasis on the state’s reaction to, and even mediation of, market forces. The key difference between these two accounts is in the developmental impact of state actions (see Perraton 2001, Chapter 6). For Cerny is clear that while ‘the actual amount or weight of government imbrication in social life can increase … at the same time the power of the state to control specific activities and market outcomes continues to diminish’ undermining the ‘overall strategic and developmental capacity’ of state agencies (Cerny, 2000a: 34; emphasis in original). At issue therefore is Ó Riain’s claim that the state actions he describes have developmental outcomes, a claim which, as stated above, he fails to discuss or substantiate. What might this claim mean and does it apply to the actions of the Irish state over the period under discussion?

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Answering this question requires recourse to development theory. In his authoritative survey, Nederveen Pieterse defines development as ‘organized intervention in collective affairs according to a standard of improvement’ and he adds that what constitutes improvement will vary according to class, culture, historical context and relations of power (2001: 3). His survey of the meanings of development over time emphasizes the shift from narrowly economic definitions centred on growth and industrialization, to the broader view of development which makes improvements in living standards, growing equality and enlarging people’s choices central criteria of what constitutes development, such as the UNDP’s influential definition of human development. In this view, economic growth is seen as a means, not an end (UNDP 2003: 28). The literature on the developmental state gives very limited attention to the issue but reflects this shift in meanings. Chalmers Johnson, who is credited with inventing the term ‘developmental state’ in his book on the role of Japan’s Ministry of International Trade and Industry (MITI), seems to limit the term to industrial transformation when he writes that any state wishing to emulate Japan ‘must first of all be a developmental state – and only then a regulatory state, a welfare state, an equality state, or whatever other kind of functional state a society may wish to adopt’ (Johnson 1982: 306). However, Evans, on whose concept of ‘embedded autonomy’ Ó Riain bases his concept of the flexible developmental state, in discussing the importance of combining embeddedness and autonomy recognizes different views of development: [E]ither autonomy or embeddedness may produce perverse results without the other. Without autonomy, the distinction between embeddedness and capture disappears. Autonomy by itself does not necessarily predict an interest in development, either in the narrow sense of economic growth or in the broader sense of improved welfare. The secret of the developmental state lies in the amalgam (Evans 1995: 59). While Evans seems satisfied with either a broad or a narrow view of development, his elaboration of how the twin concept of ‘embedded autonomy’ functions to ensure developmental outcomes, poses fundamental problems for the concept of a ‘flexible developmental state’. For Evans places a lot of emphasis on the need for the state to be encompassing and coherent, reconciling conflicting interests, immersed in a dense network of ties that bind it to societal allies with transformational goals: ‘The state’s corporate coherence enhances the cohesiveness of external networks and helps groups that share its vision overcome their own collective action problems. Just as predatory states deliberately disorganize society, developmental states help organize it’ (ibid.: 248). The concept of a flexible, and therefore fragmented, state, as proposed by Ó Riain, seems to lack the very cohesiveness required to make it developmental. Indeed, Ó Riain’s own account of

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social tensions produced by the state’s success, and the weakness of its institutions to deal with these tensions, suggests that the Irish state is closer to ‘the confused and contradictory reality of intermediate states’, a term coined by Evans to describe the ‘partial transformation’ wrought by the state in Brazil and India (Evans 1995: 60; 244). While India ‘amassed a remarkable record of industrial growth in the 1950s and early 1960s’ and Brazil had its state-led economic miracle in the 1960s and 1970s, ‘their internal structures and relations to society are, like the performance, hard to describe in unambiguous terms’, being seen as both weak and strong, writes Evans (1995: 60). The Brazilian state lacked overall coherence and cohesiveness while the Indian state was tied to a social structure full of contradictory demands. Even in terms of Ó Riain’s own account, the term ‘intermediate state’ seems a more accurate one in the Irish case. Finally, however, there are substantial empirical grounds that cast doubt on the benign interpretation of the Irish state offered by Ó Riain. For, even his claim that state action resulted in indigenous industrial transformation, is questionable on empirical grounds. O’Sullivan expresses her doubts based on the fact that ‘indigenous success is concentrated in a small number of firms and sectors and certainly cannot be found across all, or even most, indigenous firms. Moreover, as the example of the indigenous software industry reveals, favourable developments are as yet of too recent a vintage to interpret them as firm grounds for forecasting continued success’ (O’Sullivan 2000: 283). O’Hearn is also sceptical about the extent to which indigenous industries are deeply rooted in Irish society and capable of becoming core or leading economic sectors. He asks: ‘Are they highly visible but nonetheless rather shallow adjuncts to a broader economy, limited in scope and largely still dependent on a continuous inflow of foreign capital to grow?’ (2000: 83). He points to the failure to replicate the success of the software sector elsewhere in the economy with far fewer linkages and spin-offs in the pharmaceutical or computer hardware sector, and concludes: ‘The rise of indigenous software, therefore, appears to be a fortuitous accident of the flexible developmental state, where decades of educating technicians created a large pool of potential entrepreneurs who finally came good’ (2000: 85). Finally, in surveying Ireland’s comparative advantage, Gallagher et al. found a continuing dualism between foreign and Irish-owned industry, even at the height of the Celtic Tiger period. Looking at Ireland’s top 30 companies, they highlight that the electronics and pharmaceutical sectors are dominated by foreign-owned companies while successful Irish firms are still in sectors enjoying relative protection such as cement, print and packaging, food processing, retailing, and brewing and distilling. They find little evidence of the emergence of ‘clusters’, except in the software industry. They conclude: ‘The recent success of the Irish economy has not been built on the strength of its national system of innovation and improvement. Rather, the

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remarkable turnaround in its fortunes has been driven to a large extent by foreign-owned firms in the electronics (including computers), pharmaceutical and financial services industries’ (2002: 77). This dominance of the multinational sector was graphically illustrated by the gap between Ireland’s GDP growth of 6.9 per cent and GNP growth of 0.1 per cent in 2002, prompting media comment about Ireland’s ‘two economies’. As Taylor wrote: ‘Much of the rapid multinational output growth last year came from the pharmaceutical sector and most of the growth appears to have taken place in a small group of companies, particularly Pfizer’s operations in Cork, where Viagra is famously among the product range’ (2003). This section has concentrated on questioning the claim that the nature of the Irish state’s action in facilitating an economic boom has been developmental, based on its flexible ability to link the Irish economy to dynamic growth poles within the global economy, both through attracting in FDI and in fostering a transformation of indigenous industry. This developmental state was also said to have established mechanisms of social partnership to mediate between the globalized economy and Irish society. However, following Ó Riain’s emphasis, the discussion so far has devoted little attention to the ways in which the correlation of state and market in Ireland has impacted on society. As stated earlier, the social outcomes of how state and market power interact is an essential focus of an IPED approach, not least in its concern for establishing a stable and just basis for an enduring social order. The next section therefore examines more closely the relationship of Ireland’s Celtic Tiger economy to society.

Bringing society back in Though Ó Riain addresses growing inequality, his characterization of Ireland as a developmental state rests on treating the distributional function of the state as being separate to its developmental function. In his work with O’Connell (2000), this distinction is made explicit: ‘We prefer to treat these two state roles as largely referring to the relatively distinct and identifiable institutional realms of industrial and economic development policy and welfare state policy’ (Ó Riain and O’Connell 2000: 313). This distinction allows him avoid the fact that one of the characteristics of the classic developmental states was their ‘high levels of social equality and social well-being’ (Pempel 1999: 156). However, he and O’Connell do acknowledge that the recent Irish experience is one of ‘growth with inequality’ (op. cit., 335), drawing attention to a marked feature of the Irish boom, namely its highly ambiguous social impact. It is clear from data offered earlier in this chapter that the Irish boom has substantially raised average living standards in society and has helped reduce unemployment to historically low levels. Yet a fuller picture of the social impact requires closer attention to how the benefits have been

88 Global Encounters Table 5.5

Distribution of disposable household income, 1994–2000 (%)

Decile

LII 1994

Bottom 2nd 3rd 4th 5th 6th 7th 8th 9th Top

2.3 3.3 4.6 6.0 7.5 9.1 11.1 13.5 16.5 26.4

LII 2000 1.8 2.9 4.1 5.5 7.6 9.4 11.6 13.7 16.7 26.8

HBS 1994–5

HBS 1999–2000

2.2 3.5 4.7 6.0 7.6 9.2 11.3 13.6 16.7 25.2

1.9 3.3 4.5 5.9 7.5 9.2 11.1 13.4 16.6 26.7

Source: Nolan 2003: 135

distributed, to trends in prices, to the nature of employment and to the quality of social provision. Increases in average living standards, even dramatic increases such as Ireland experienced over the 1990s, may not necessarily leave most people better off if the benefits have flowed disproportionately to certain social sectors. However, difficulties associated with measuring distributional inequality require that a more accurate picture of its nature and extent is achieved through drawing on different measures.3 For this reason, Table 5.5 offers a conventional measure of the share of national income by decile over the period of the Celtic Tiger as reported by the two principal datagathering organizations in Ireland. The LII is the Living in Ireland income survey carried out by the Economic and Social Research Institute (ESRI) while the HBS is the Household Budget Survey of expenditure carried out by the Central Statistics Office (CSO). This shows, in the LII survey, a shift in income away from the lowest four deciles to the fifth to the ninth deciles, while the HBS shows a more marked shift, with all the benefits going to the top decile. Table 5.6 complements these data with the percentages of households living below three different percentages of average income, a measure of Table 5.6

Evolution of household poverty, 1994–2000 (% in poverty)

Poverty Lines

1994

1997

2000

40 per cent average income 50 per cent average income 60 per cent average income

4.9 18.6 34.2

6.3 22.4 34.3

11.8 25.8 32.9

Source: Nolan et al. 2002: 19

Peadar Kirby 89 Table 5.7

Wage share of national income, 1987–2000 (%): Ireland, EU, US, Japan

Country Ireland EU United States Japan

1971–80

1987

1990

1995

2000

77.3 75.3 70.0 78.0

71.2 72.0 68.7 73.9

67.8 71.2 68.3 72

64.7 69.1 67.2 73.4

57.2 68.6 67.7 70.7

Source: European Commission 2000

relative poverty. Again this shows a significant increase in the percentages of households living on or below average incomes with a slight decline in the percentages living on 60 per cent of average income. Finally, Table 5.7 shows changes in the wage share of national income. While a less usual measure of income inequality, it offers a clear picture of relative benefits to capital and labour. On this measure, Ireland has moved over the boom years from a position in which wages had a share of national income more or less equivalent to the EU, the US and Japan, to one in which wages have a far lower share of national income. In this situation of growing income inequality, rising prices exacerbate the problems of those on the lower end of the income distribution. The most dramatic price increase associated with the Celtic Tiger has been housing. Up to 1994, new house prices increased broadly in line with the consumer price index, house building costs (labour and material costs) and average industrial earnings. Since then, however, this traditional relationship between house prices and income has been broken with house prices increasing at a significantly higher rate than incomes, with the result that ‘access to home ownership based on principal incomes has been eliminated for low-to-average-income households and an increasing number of middle-to-higher-income households. … Access to owner occupation is now limited to joint mortgage holders with combined incomes considerably higher than national average wages’ (Downey 1998: 34). Drudy and Punch report data on the occupations of those receiving loan approval which shows that professionals make up an increasing proportion of house buyers while representation of those from all other social classes has declined steadily since 1994 (2001: 250). The resulting increase in demand for rental accommodation has driven up rents in the private rental sector, forcing low-income groups out. The end result is a major increase in homelessness over the period of the Celtic Tiger, from 2,172 people in 1993 to 5,581 in 2002 (Simonnews 2003) while 48,000 families were on public authority waiting lists in 2002, an increase of 24 per cent since 1999 (Dublin Simon Community 2003: 2). Meanwhile, the ratio of personal debt to personal disposable income increased from 43 per cent in 1990 to 69 per cent in 2001, with most of the increase coming at the end of the period.

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‘The vast majority of this increase has been in borrowings for housing purposes. House mortgage finance and other housing finance amounted to just over 29 per cent of personal disposable income in 1990. By 2001 this had risen to 52 per cent’ (Duffy 2002: 49). The growth in personal debt took place amid a major increase in employment. Yet, while industrial employment increased from 343,600 in 1994 to 476,200 in 2000, most new jobs were created in the services sector which grew from 729,200 in 1994 to 1.064 million in 2000. Even within industry, construction showed a rise of 44.9 per cent in jobs as against 18.6 per cent in manufacturing. In services, the largest job increases over the boom period took place in the financial and other business services sub-sector (46 per cent), with substantial growth also taking place in the transport, storage and communications (44.5 per cent), the hotels and restaurants (37.2 per cent) and in the wholesale and retail (28.2 per cent) sub-sectors. The nature of these jobs and the conditions of employment they offer have generated debate, with Tansey claiming that ‘Ireland is becoming a highly qualified “white collar” economy’ (Tansey 1998: 41), while O’Hearn writes that rising employment ‘came at the cost of Ireland having one of the most flexible labour regimes in Europe, with low job security, substantially more workers on low wages and fewer workers’ rights’ (O’Hearn 2003: 42). While the evidence remains too fragmentary to draw firm conclusions, it points towards a growing polarization of the occupational structure of the Irish workforce, mirroring the emerging dualism in the social structure of informational societies identified by Castells (1996: 201–326) and to a significant growth in part-time employment and forms of atypical work, including casualization, fixed-term contracts, temporary work and outcontracting (Kirby 2002: 49–55). Part-time employment showed a significant increase following the end of the Celtic Tiger and, by mid-2003, 17 per cent of all jobs were part-time (CSO 2003). Ireland’s economic boom, therefore, created many social conditions calling for robust state action to address them. Yet, instead of social provision increasing, it decreased relative to GDP over the period of the boom, diverging ever more significantly from the EU average, as shown in Table 5.8.

Table 5.8 Trends in government revenues and social expenditure, Ireland and EU, 1993–2000 (as % of GDP)

Government current tax and non-tax receipts Government expenditure on social protection

Ireland

EU

Ireland EU

1993

1993

2000

2000

38.6 20.2

43.2 28.8

33.8 14.1

43.9 27.3

Sources: OECD Economic Outlook 71, 2002c; Abramovici 2003

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Furthermore, the effect of the state taxation and welfare systems was to exacerbate rather than ameliorate inequality. Surveying changes in these two systems up to the end of the 1990s, Fitzgerald concludes: ‘Welfare increases that lag behind earnings, and tax reductions focussed on the wealthier, are serving to widen not to narrow the gap between rich and poor. The unique opportunity to tilt the system in the direction of those on lower incomes has been wasted’ (Fitzgerald 2001: 192). State action has also proved ineffective in combating entrenched inequality in access to the health and education systems. Smyth and Hannan find a ‘notable persistence in educational inequalities by social background’ (Smyth and Hannan 2000: 117) while Wren draws attention to the ways in which state action fosters a two-tier access to the Irish health system: ‘Channelling state funds into private for-profit hospitals. Channelling them into preferential care for private patients through tax relief for insurance, subsidized charges for private accommodation in public hospitals and the payment of public salaries to hospital consultants while they earn private fees. The illconsidered use of state funds to subsidize and promote private care contrasts with the resistance of government to improving access to primary care for those who cannot afford it’ (Wren 2003: 363).

The Irish competition state Examining the social impact of Ireland’s economic boom draws attention to marked failures of the Irish state to distribute the benefits more equitably, raising questions about just how developmental it has been for many Irish people and for society as a whole. The contrast between the state’s actions in the industrial sphere, as emphasized in Ó Riain’s account, and its actions in the social sphere, also poses questions about its ‘embedded autonomy’. The state’s relative ineffectiveness in addressing social challenges, coupled with its willingness through its taxation, welfare and health care systems to ensure greater benefits for better-off citizens, seems better described by Evans’ category of the ‘capture’ of the state by particular vested interests. These actions of the Irish state in the social sphere undermine any claim that it was acting in a developmental fashion. To the extent to which he acknowledges these actions, Ó Riain finds particular difficulty in explaining them. He limits himself to observing that the Netherlands (another case of the FDS in his terms) has managed more egalitarian outcomes, concluding that perverse social outcomes are not intrinsic to the model and are largely issues of domestic politics (Ó Riain 2000: 184–7). This simply sidesteps the difficulties posed for his model by the state’s developmental failures in the social sphere. Saying that these are issues of domestic politics is beside the point; is he claiming that industrial policy is not an issue of domestic politics? More importantly, in stating this he is refusing to see that, far from being an

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accidental feature of the Irish model, the Irish state’s declining welfare effort is intrinsic to its development model. This is based on low levels of taxation on profits, property and wealth as the cornerstone of its efforts to attract high levels of FDI, and cuts in income tax as a trade off for wage moderation to maintain wage competitiveness. One result of this was the extent of the decline in the state’s tax receipts as economic growth slowed after 2000: again and again the state was forced to revise downwards its projections for tax income, with particularly sharp declines in income tax receipts being noted. To avoid excessive borrowing, the state chose to cut spending, particularly on services to the most vulnerable sectors of society. These actions are not dictated by hardness of heart; they are intrinsic to the nature of the Irish model and illustrate that, far from being developmental, it rests on the state offloading risks on to the most vulnerable in society. The correlation of ‘economic success and social failure’ (Kirby 2002: 5) that characterizes the Irish boom, points to a more accurate characterization of the Irish state as a ‘competition state’. For this captures far better the logic that governs the state’s actions in both the productive and the welfare spheres than does Ó Riain’s logic of flexible developmentalism. Cerny describes it in this way: Rather than attempt to take certain economic activities out of the market, to ‘decommodify’ them as the welfare state in particular was organized to do, the competition state has pursued increased marketization in order to make economic activities located within the national territory, or which otherwise contribute to national wealth, more competitive in international and transnational terms. The main features of this process have included attempts to reduce government spending in order to minimize the ‘crowding out’ of private investment by state consumption and the deregulation of economic activities, especially financial markets (Cerny 2000b: 122–3; emphasis in original). For Cerny, the competition state emerges out of the tensions between the demands of economic globalization and the embedded state/society practices that characterized the national welfare state. These tensions have propelled four types of policy change to the top of the political agenda: 1) a shift from macroeconomic to microeconomic interventionism, as reflected in both deregulation and industrial policy; 2) a shift in the focus of that interventionism from the development and maintenance of a range of ‘strategic’ or ‘basic’ economic activities in order to retain minimal economic self-sufficiency in key sectors, to one of flexible response to competitive conditions in a range of diversified and rapidly evolving international marketplaces, i.e., the pursuit of ‘competitive advantage’ as distinct from ‘comparative advantage’;

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3) an emphasis on the control of inflation and general neo-liberal monetarism, supposedly translating into non-inflationary growth, as the touchstone of state economic management and interventionism; 4) a shift in the focus point of party and governmental politics away from the general maximization of public welfare within a nation (full employment, redistributive transfer payments and social service provision) to the promotion of enterprise, innovation and profitability in both private and public sectors (Cerny 2000a: 30–1). Many of the activities of the competition state described by Cerny describe well the actions of the Irish state. These include: tight monetary policy alongside looser fiscal policy, in particular an emphasis on tax cutting; state action to alter some of the conditions that determine competitive advantage by encouraging restructuring, promoting research and development, encouraging investment and providing venture capital where capital markets fail; pursuing a more active labour market while removing barriers to mobility; and formulating new regulatory structures designed to cope with and even anticipate new regulatory advantage (31–2) (see Lodge and Stirton, Chapter 10). Finally, in pointing out that this does not mean the withering away of the state but rather the expansion of its activities, he points to its fragmentation as identified by Ó Riain, but sees a different significance in this: ‘The crucial point … is that those tasks, roles and activities will not just be different, but will lose much of the overarching, macro-political character traditionally ascribed to the effective state, the good state or the just state’ (Cerny 2000a: 23).

Conclusion On the A. T. Kearney/Foreign Policy index of globalization, Ireland emerged as the most globalized country in the world (Kearney/Foreign Policy, January/February 2002; 2003). Its economic success in the 1990s marked it out for major international attention as it seemed to offer a rare example of developmental success under the conditions of globalization. In learning the lessons of the Irish case therefore, it is important both that its nature be accurately described and also that the means used be identified as perceptively as possible. Characterizing the Irish success as developmental, and claiming that the Irish state is a flexible developmental state for its role in achieving it, is one reading that has gained wide prominence. This characterization of the state has been adopted without question by Ireland’s National Economic and Social Council (NESC) in its tri-annual strategy document for economic and social policy, and used as the basis for proposing ‘a new kind of welfare state, more suited to the economic, social and technological realities of the twenty-first century’, to be known as the ‘developmental welfare state’ (NESC 2002: 51–8).

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This chapter has offered an alternative and more critical reading, both of the nature of Ireland’s success and also of the role of the state in achieving it. This alternative reading sees the Irish success as being very ambiguous and the state’s ability to translate economic success into a project of social development as very circumscribed, even if it wished to do so. It therefore offers a more sober reading of the lessons of the Irish case, indicating the limits of translating economic growth into social development under the conditions of real existing globalization. Cox’s point about the effects on the state of the internationalization of production accurately describes the Irish state’s room for manoeuvre: ‘By and large, the state is conceived as subordinate to the economy. Competitiveness in the global economy is the ultimate criterion of public policy’ (Cox 1996: 529). Far from indicating the potential for developmental action by the state, the Irish case illustrates the successful penetration of society by market logic through the agency of the state. A careful analysis therefore will serve as a warning of the social costs of such a strategy. Notes 1 Ireland refers to the Republic of Ireland (or the present territory of that state) throughout this chapter. 2 GDP per capita annual growth rates of 20.5 per cent for Bosnia and Herzegovina and of 18.8 per cent for Equatorial Guinea are excluded from this table as they are more than likely due to features particular to those countries that reduce their comparability. 3 For example, surveys of income are regarded as particularly unreliable in accurately reporting the incomes of the highest deciles since many households in these deciles have multiple sources of income, some of which can be hidden from or underreported to surveyors.

6 What’s Left of ‘State Capacity’? The Developmental State after Globalization and the East Asian Crisis Jonathan Perraton

Introduction For proponents of the developmental state both globalization trends and the 1997 East Asian currency crises that hit many of the archetypal developmental states have few negative implications for their prescriptions.1 The problems that developmental states were designed to solve remain; if anything globalization increases the potential for effective intervention. Views that see the East Asian currency crisis as caused by state intervention are typically dismissed as superficial, even ideologically motivated by a faith in the superiority of Anglo-Saxon capitalism. This chapter argues that globalization trends and the East Asian currency crisis have more profound implications for the developmental state than its proponents allow. Globalization – both through cross-border economic activity and formal changes in international economic law – has seriously undermined the ability of states to use the tools of state intervention that developmental states have relied upon. Proponents of the developmental state tend to conflate the argument that globalization trends do not reduce the market failures the developmental state is designed to solve with the separate argument that developmental states retain the capacity to make such intervention. To the limited extent that developmental state theorists acknowledge the constraints globalization processes impose on traditional policy tools, these theorists argue that the strength of developmental states lies less with specific policy tools than with their capacity to formulate and execute effective intervention. This chapter argues that this conception of state capacity is vague and not always consistent with the historical record of these countries. Whilst the East Asian currency crisis may well not have been directly caused by state intervention, the crisis and their aftermath 95

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illustrate that clientelism and corruption were more prevalent than developmental state theorists have allowed. Overall the development state theorists’ account of state capacity remains theoretically weak. It should be emphasized that this chapter is not intended as an argument against state intervention per se, or an argument that liberalization along ‘Anglo-Saxon’ lines is the appropriate policy response. Much of the literature on the developmental state sees the need to deny almost any criticism of their practice: noting failures of the developmental state is often seen as tantamount to adopting a neo-liberal approach and denying the effectiveness of those states; noting significant levels of corruption is seen as accepting a lazy characterization of ‘crony capitalism’. A sophisticated understanding and defence of the developmental states should accept their failings as well as highlighting their achievements. Space precludes an analysis of the position of labour in these countries, but the neglect of this by developmental state theorists should be noted. When the East Asian countries were held up as shining examples of free trade virtues, radical critics noted these states’ suppression of labour movements. The developmental state approach, with its nationalist understanding of these states, has tended to underplay these functions, noting little more than relatively egalitarian income distributions and rising wages.2 Further, since state intervention practiced in these countries is at variance with much of orthodox economics and the ‘Washington consensus’ on economic policy developmental state theorists have often characterized these interventions as intrinsically progressive. It should be pointed out that industrial policy has variously entailed raising consumer prices and transferring income to businesses through protection, tax breaks, subsidies and preferential credit. In the short run such measures reduce the income of ordinary citizens (wage earners and others on average and below-average incomes, small savers, etc); as such, there is nothing intrinsically progressive about them.3 They can be justified on equity, as well as efficiency, grounds if – and only if – dynamically they raise basic income levels over time above the levels they would otherwise have been.

Prologue: Crisis in the Japanese developmental state Although antecedents of the developmental state can be found amongst many now industrialized economies (Chang 2002), Japan is usually taken as the prototype of the modern developmental state. It may thus be significant that the 1990s have seen the Japanese economy mired in recession. Whilst the roots of this are complex and remain debated, the traditional institutions of the developmental state appear to be in decline. The key Ministry of International Trade and Industry has been reformed and its power and resources have declined (Matsuura et al. 2003), whilst key industries have been at least partially liberalized. This reflects strategic decisions

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by the Japanese government and bureaucracy, as well as external pressure. Japanese banks have been in severe crisis and their close relations with industrial firms increasingly detrimental to the latter. Key policy errors by bureaucrats at least aggravated the 1980s bubble economy and 1990s financial crisis. This may not necessarily have negative implications for contemporary developmental states and Japan’s post-war achievements are undeniable; nevertheless, with key features of the post-war Japanese developmental state now in crisis or decline this must raise questions over the sustainability of those that have sought to emulate it.

What do (or did) developmental states do? Accounts of the practice of the developmental states vary between authors, but this is a largely a matter of emphasis. Alice Amsden’s account would command reasonable assent: ‘The developmental state was predicated on performing four functions: developmental banking; local-content management; “selective seclusion” (opening some markets to foreign transactions and keeping others closed); and national firm formation’ (Amsden 2001: 125). Overlaying this was the monitoring and control apparatus of the developmental state: A control mechanism involves a sensor, to detect the ‘givens’ in the process to be controlled; an assessor, to compare what is happening with what should happen; an effector, to change behaviour; and a communications network, to transmit information between all functions…. ‘The rest’ [industrialising non-Western countries] rose, therefore, in conjunction with ‘getting the control mechanism right’ rather than ‘getting the prices right’ (Amsden 2001: 9 & 11, emphases in original). This account is well known. States directed credit towards specific sectors, even specific firms, identified as being leading-edge; this was done through state-owned banks and/or via subsidies and tax breaks. These policies aimed to develop domestic industry through linkages, enhance domestic technological capability and promote the export industries of the future. Foreign trade, and still more foreign direct investment (FDI) and finance, was only liberalized gradually with deliberate use of trade policy to promote domestic industry. Entry by foreign MNCs was only permitted selectively and hedged by domestic content requirements and similar measures in order to promote domestic firm development and technological capacity. The crucial nature of the state here was to coordinate activity in an economy so as to solve certain key market failures in the developmental process. Coordination of investment effort amongst firms was crucial given the interdependence of profitability of any one firm’s investment on the activities of others. Up-grading of production and entering new industries

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entailed major risks for firms; whilst performance requirements were placed on firms, the socialization of those risks by the state was crucial in promoting structural change. Interventionist policies were common amongst developing countries in the post-war period, but typically much less successful elsewhere. In the classic cases of Korea and Taiwan support for domestic firms was tied to performance criteria, particularly achieving export targets (Amsden 1989; Wade 1990). The key was not just the policy tools chosen in this account: the successful developmental state has ‘embedded autonomy’ (Evans 1995), an effective bureaucracy relatively autonomous from political processes and interest groups so that it is able to formulate and implement policy independently, but one also sufficiently enmeshed with business that its policies command legitimacy and are responsive to their needs. Whilst developmental states may need autonomy to formulate and implement policy, they also need to be able to cooperate and communicate with the private sector to acquire relevant information and achieve public-private coordination. It was this ‘state capacity’ that allowed developmental states to implement these policies successfully. Leftwich (1995: 405) identifies six key features of the developmental state: ‘a determined developmental elite; relative autonomy; a powerful, competent and insulated economic bureaucracy; a weak and subordinated civil society; the effective management of non-state economic interests; and repression, legitimacy and performance’. Others conceive state-society power relations in less zero-sum terms (notably Weiss 1998). Weiss (1998; 2000) effectively defines Japan, Korea and Taiwan alone as developmental states. Others include, variously, Indonesia, Malaysia and Thailand, plus Botswana (see Taylor, Chapter 3), Brazil and Mexico. Amsden (2001) throws the net wider still to include Argentina, Chile, China, India and Turkey. To raise a key theme here, this reflects whether successful developmental states are to be explained on a case-by-case basis by a complex configuration of circumstances with, consequently, fewer general lessons; or, is there a more general continuum of developmental states with variations in the degree to which countries possess the characteristics of the ideal model? For developmental state theorists, ‘state involvement is a given. The appropriate question is not “how much” but “what kind”’ (Evans 1995: 10). Thus the nature of intervention in the developmental state is key. It is only reasonable to understand states as developmental if they are understood to pursue a thorough-going industrial policy defined as: a policy aimed at particular industries (and firms as their components) to achieve outcomes that are perceived by the state to be efficient for the economy as a whole…. [With] the state selectively monitoring entry, establishing mechanisms to make possible more ex ante coordination

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than is possible through market mechanisms alone, and for government regulation or overview to constrain or supplement profit incentives (Chang 1994: 60–1, emphases in original). Here Chang particularly identifies investment coordination and negotiated exit and scrapping of surplus capacity as key areas where the state can play a positive role through industrial policy. This chapter will examine how these policies were applied, before questioning whether they are operable given recent trends in globalization. The paper examines the role of developmental banking and selective seclusion. Other criteria have not maintained a contemporary relevance: local content management was largely a function of the trade and FDI regime anyway and national firm creation has been in some decline with privatization of state-owned enterprises. Subsequently, we will examine the relative neglect of capitalists and capital accumulation in this literature. To the extent that specific instruments may be undermined by globalization, development state theorists have stressed the over-riding strategic capacity of the state. The chapter therefore finishes by examining how much mileage the concept of ‘state capacity’ has, particularly in the light of the East Asian currency crisis.

Developmental banking Skocpol (1985: 17) sees finance as central to the developmental state: ‘a state’s means of raising and deploying financial resources tell us more than could any other single factor about its existing (and its immediately potential) capacities to create or strengthen state organizations, to employ personnel, to co-opt political support, to subsidize economic enterprises and to fund social programs.’ Developmental financial institutions play a key role both in providing investment funds when retained profits are likely to be insufficient, and in channelling funds towards priority areas. The classic argument of Amsden (2001) and others runs along the following lines: states direct finance through publicly-owned banks and/or systems of allowances towards the sectors they have ear-marked for expansion. Firms want the rents that accrue from this subsidized finance and hence there will be excess demand for it. States are able to monitor firms to ensure they do invest in line with developmental objectives through enforcing performance standards; firms will aim to meet these as they wish to retain access to preferential finance. Since these systems tend to transfer risks from macroeconomic fluctuations to the lenders this helps to socialize the risks of investment in new areas. How far this model fits developmental state reality varies. It can be seen in Korea before the 1990s and Brazil economic miracle years (c.1964–73) particularly. Malaysia and Thailand had a less thorough-going industrial policy and relied more on tax allowances than directed credit. Thailand

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had a relatively liberal financial system (Doner and Unger 1993). Malaysia had a weaker monitoring regime than Korea and policy that created rentseeking opportunities for favoured ethnic groups (Fay and Jomo 2000). Even in Taiwan, where public banks dominated finance until the 1990s, specific state direction of finance remained limited; the public banks were risk-averse and did not develop close monitoring relationships with their clients (Fields 1995: chapters 3 & 5). If this system was so effective, why was it liberalized in the 1990s? Some of the impetus came from external pressure and the desire to attract funds from abroad, but there were key internal pressures. Not only are there strong incentives for firms to build up debt, but this can act to weaken the disciplinary functions of the banks. In the Korean case, the impetus to liberalize came from the monetary authorities who found the system created difficulties with operating stabilization policies – high levels of corporate indebtedness, much of it short-term debt limited the scope for using interest rates as a policy tool. Big business welcomed the chance to escape from government control and, through shareholdings, exert control over the financial system (Choi 1993). This raises questions, considered below, as to whether the state-business relationship was quite the synergy the developmental state account claims. High levels of corporate indebtedness persisted in Korea until the crisis, but in Taiwan risk-averse lending and more cautious liberalization led to debt-equity levels similar to countries like Britain (OECD 2001a). Financial liberalization in the absence of adequate prudential regulation can lead to wide cycles of lending with excessive expansion leading to heavy retrenchment when bad loans become evident, associated swings in interest rates and lending for speculation. These trends were evident in emerging markets even before the 1997 East Asian crisis and subsequent currency crises elsewhere (Grabel 1995). Nevertheless it is difficult to see how developmental states can now return to the former finance systems.

Selective seclusion A key claim here is that developmental states have eschewed static principles of comparative advantage to promote industries with dynamic potential: ‘Rather than accepting some predefined place in a world divided on the basis of “comparative advantage”, such states seek to create “competitive advantages”’ (Pempel 1999: 139). Broadly the account seems to run along the following lines. In the orthodox trade theory account, comparative advantage evolves smoothly as economies grow: accumulation of capital leads to changing relative advantage and trade specialization patterns evolve to reflect this. Growth determines trade structure, rather than vice versa. The developmental state proponents argue that on the ground the picture is quite different. Which goods one specializes in affects the

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subsequent growth path, but firms are often reluctant to shift to producing more advanced, capital-intensive goods as this involves lumpy, risky investment together with the acquisition and mastering of unfamiliar technologies. Standard textbook Heckscher-Ohlin trade theory assumes common global access to technology, but the developmental state theorists deny that technology is freely available or that once acquired firms can immediately use it at best practice levels. In the classic accounts of Korea and Taiwan, firms had to be encouraged and cajoled through policy measures into shifting to new products and industries (Amsden 1989; Wade 1990). Socialization of the risks involved through state support and the nature of developmental finance is therefore crucial in the up-grading process. Implicitly this account presupposes multiple equilibria in comparative advantage. Ros (2000) models an economy which produces two tradable goods, one more capital-intensive than the other, and a non-tradable input good which has increasing returns to scale (this might, for example, be infrastructure). Assume too that the capital-intensive tradable uses the input good more intensively. Specialization in the capital-intensive good would lead to higher capital accumulation and incomes over the long term. Under certain conditions promotion of the capital-intensive good can lead to specialization in it and thus higher income (increased demand for the non-tradable output reduces its cost further increasing the output of the capital-intensive good). However, this does depend crucially on the conditions for multiple equilibria being present. If factor conditions clearly give the country a relative advantage in the capital-intensive good then it will become specialized in it anyway: industrial policy would therefore be inefficient, although to the naked eye it would appear to be effective because the industry promoted would grow. If the country does not have the factor conditions to specialize in the capital-intensive good then industrial policy cannot create a competitive sector in this good: industrial policy would be both inefficient and ineffective. Empirical work on testing this is on-going, but it is far from clear that Latin American countries did have the factor conditions to produce the manufactures they were promoting in the post-war period (Mahon 1992). Note, too, that although the non-tradable sector exhibits both increasing returns to scale and positive externalities (raising the productivity in the tradables industries) this does not of itself create a case for industrial policy (pace much of the developmental state literature); multiple equilibria in comparative advantage is a necessary condition for efficient industrial policy here. Nevertheless, in the classic cases firms given protection (including subsidies or preferential credit) were expected to export from an early stage and this was a key criterion for continued support (Amsden 1989; Wade 1990). Exporting provided useful information for firms and provided governments with a good indicator of whether the industry was maturing successfully. How successful this promotion was remains unclear, particularly in the

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light of the point concerning the confusion of apparent success with efficiency. Amsden (2001: Chapter 9) finds evidence of continued growth in promoted industries and points out that since trade liberalization in the 1980s and 1990s there has been little structural change in industrial patterns of these economies (if they were promoting internationally uncompetitive industries one would expect these to decline as protection was reduced). Furthermore, the leading edge sectors have continued to expand. Lee (1995) found evidence that industrial policy had altered Korea’s pattern of trade specialization (cf. Chang 1994), but Pack (2000) found little support for this view. Elsewhere the history of such policies is mixed, to say the least. Brazil and Mexico followed similar policies before the 1982 debt crisis but with much weaker control mechanisms and mixed results (Cárdenas et al. 2000). Although in many ways a prototype liberalized economy under Pinochet, Chile also saw a variety of subtle state measures to support particular industries that may have played a catalytic role in their export success (Kurtz 2001).

Bringing capital back in Surprisingly, much of the developmental state literature contains little analysis concerning what actually drives growth. Coordination of investment decisions is one of the most powerful arguments for industrial policy (Vartiainen 1999; Chang 1994; Rodrik 1995): where there is major interdependence of investment because the expected profitability of one investment project depends on whether or not others are undertaken then the market may lead to sub-optimal levels of investment. State coordination of investment can lead to higher levels. Several authors have identified a profits-investment-growth nexus in East Asian economies (Akyuz and Gore 1996; Singh 1998). In (post-) Keynesian terms developmental states were able to maintain the animal spirits of capitalists and ensure that savings out of capitalists’ incomes were high. This overlaps with orthodox economics accounts that emphasize macroeconomic stability and the relatively low cost of capital goods (World Bank 1993). Developmental state theorists also stress the ability of the state to ensure high investment out of corporate incomes – Singh (1998) contrasts East Asia with Latin America in this respect. The developmental state extracted rents from other groups – tax payers, household savers, consumers – and allowed firms to capture these provided they invested heavily according to government priorities.4 To a limited extent this approach does bring capitalists back in, who have often lurked in the shadows of developmental state theory. The developmental state proponents have often effectively portrayed a timid capitalist class, unable (or at least unwilling) to undertake risky investment projects and needing a whole set of inducements to get them to do so. It is not surprising that Meredith Woo-Cumings opens by quoting Alexander

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Hamilton: ‘Capital is wayward and timid in lending itself to new undertakings… the State ought to excite the confidence of capitalists’ (WooCumings 1999b: 1). This is not a picture of capitalists that Austrian economists or Marxists – let alone orthodox economists – would recognize, perhaps least of all in East Asia; however, the post-Keynesian emphasis on the levels of savings and consumption out of capitalist income does have a theoretical basis. Nevertheless, Amsden (2001) concedes that the policies and institutional framework of developmental states may encourage over-accumulation of capital. Recent evidence points to the magnitude of this in East Asia where in the 1990s before the crisis, capital accumulation was much higher than elsewhere in developing (or developed) economies (Pomerleano 1998). The boom fuelled by capital inflows in the 1990s was not just one of speculation and asset price bubbles. The impact on rates of return on capital largely conforms to expectations, as Table 6.1 illustrates. The problem of profitability in these economies is even more apparent after making allowances for the interest rate, crudely approximating to the internal rate of return, as shown in Table 6.2. Without detailed national accounts data, it is not possible to determine definitively how much of this profit squeeze is due to excess expansion leading to rising capital-output ratios (rather than squeezed price-cost margins, real wages rising faster than productivity and higher costs of capital), but available evidence points to this being the leading cause. This offers prima facie evidence of accumulation being pursued beyond optimal levels. It is too early to tell whether this represents merely an

Table 6.1

Pre-tax return on capital employed 1992

1993

1994

1995

1996

Average

Hong Kong Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand

22 12 7 12 6 9 8 9

21 11 6 12 7 8 7 7

21 11 8 11 7 8 10 7

19 11 9 11 8 7 7 7

16 10 n/a 10 5 7 5 5

20 11 8 11 7 8 8 7

Latin America France Germany Japan USA

15 7 4 6 9

15 5 2 5 9

14 6 4 4 11

14 5 3 5 12

23 5 5 6 13

16 5 4 5 11

Source: Pomerleano (1998)

104 Global Encounters Table 6.2

Pre-tax return on capital employed less lending rate 1992

1993

1994

1995

1996

Average

Hong Kong Indonesia Korea Malaysia Philippines Singapore Thailand

15 –12 –3 3 –13 3 –9

14 –10 –3 3 –8 3 –9

12 –7 –1 3 –8 2 –7

10 –8 0 3 –7 1 n/a

7 –9 n/a 1 –10 1 n/a

12 –9 –2 3 –9 2 –8

France Germany Japan USA

–3 –10 0 3

–4 –11 1 3

–2 –7 0 4

–3 –8 2 3

–2 –5 3 5

–3 –8 1 4

Source: Pomerleano (1998)

episode of over-expansion in East Asia or a more systemic shift with the post-1960s phase of rapid accumulation having exhausted much of its potential, as one would expect from standard growth theory. If the latter is the case then the institutional arrangements of the developmental state may no longer be appropriate. The next section argues that globalization has curtailed the ability of such states to use the policy tools they have hitherto relied upon. The argument made by proponents of the developmental state is that these states were able to devise and implement interventions to develop industrial capacity through directed credit and controls on trade, international finance and investment. Nevertheless, the empirical evidence on the effectiveness is not clear-cut and apparent success is not necessarily evidence that these policies were effective. Moreover, recently capital accumulation in East Asian economies appears to have been pushed beyond levels consistent with optimal rates of return. The next section argues that globalization processes operate to undermine the policy tools used by these states.

The impact of globalization Globalization might be thought to undermine the basis of the developmental state. The standard response from proponents of the developmental state to globalization trends is to downplay them. All too often this takes the form of examining a hyper-globalization thesis from the business school literature (nation states have no real power now, all countries must converge to the Anglo-Saxon model, etc) and find this wanting (e.g. Weiss 2000). Predictably, Weiss (1998: 1) starts with a quote from the archetypal

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hyper-globalist Kenichi Ohmae to use as a straw man. Space precludes a general examination of this argument, which succeeds in downplaying globalization trends largely by denying their most extreme versions (Perraton 2001; Held et al. 1999). Alternatively some argue that the developmental state will adapt to changing circumstances modifying its policy tools as it does so (Pempel 1999; Weiss 2000; Woo-Cumings 1999a). But this is too vague: if state intervention is ubiquitous, it needs to be shown that a specifically developmental state is persisting. A variant of the position accepts globalization trends to some degree but argues that this will tend to enhance the developmental state (e.g. Weiss 1998). Globalization does not logically imply that the market failures industrial policy seeks to address will have diminished. On the contrary, with larger and more competitive global markets the potential role of the state in enhancing national performance may well increase. There is nothing intrinsically wrong with this argument in principle, but it is in danger of conflating positive and normative aspects: simply because in principle a policy intervention could be beneficial, this does not mean that the intervention is permitted. New WTO rules increasingly act to limit or prohibit the policy tools that developmental states have traditionally used. In general terms discriminatory policies fall under the ambit of the WTO. Policies to promote investment or exports should be generic rather than industry specific. The exemptions granted to developing countries from these general principles are significantly more tightly circumscribed than under the GATT regime. It is not simply that standard tariff and quota restrictions are contrary to WTO principles, so are more specific measures widely used in the past by developmental states. The basic principle of non-discrimination militates against targeting of specific firms or instituting measures which discriminate against foreign firms. Specific subsidies to particular industries or for export promotion are prohibited. These prohibitions on subsidies do not apply to the least developed countries, but once a country graduates from this group these must be eliminated over an eight-year period. Other developing countries currently have five years to eliminate discriminatory subsidies; this may be extended with WTO agreement but this would require annual review. Where a developing country has become competitive in a product – defined as a global market share of 3.25 per cent – then subsidies must be removed over a two-year period. Overall these provisions represent a tightening relative to the GATT regime (cf. Hoeckman and Kostecki 2001: Chapter 5). Trade-Related Investment Measures, notably local content requirements, also fall foul of the WTO principles and WTO dispute panels have found against developing countries in respect of these measures. In principle these measures also fell foul of GATT provisions, but the WTO surveillance and enforcement regime is substantially tougher. Use of export targets – typically, as we have seen, a key instrument in nurturing indus-

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tries – would be likely to fall foul of various provisions, including antidumping measures. Much of the focus on WTO provisions has been on goods trade, especially manufactures. Nevertheless, the push for services trade liberalization through the General Agreement on Trade in Services (GATS) has some important potential implications here. Promotion of computer software industries – examined by Evans (1995) – would fall foul of these measures. Further, GATS provisions are leading to the liberalization and opening-up of developing country financial markets (e.g. Mattoo 2000). This would change domestic financial systems and act to reduce the scope for using domestic financial institutions to target specific industries. The case of Trade-Related Intellectual Property Rights was perhaps the most controversial of all during the Uruguay Round and remains so today; partly as a result there remains leeway for countries in the current provisions (e.g. Hoeckman and Kostecki 2001: Chapter 8). Nevertheless, this still limits the traditional use of performance requirements to acquire technological know-how for domestic firms and the reverse engineering methods of acquiring know-how and developing industrial capacity. Further, it is likely to lead to higher transfers of technology rents from developing countries to developed country companies. There is a sanguine view that WTO provisions will have little impact in practice (e.g. Amsden and Hikino 2000). This centres on Articles VIII and XVIII that provide for countries developing industries under infant industry conditions. Although these measures are time-limited and require demonstration of market failure, this could be seen as an advantage if it forced governments to focus support carefully and ensured it did not become open-ended or persistent. However, since infant industry support requires WTO approval this is much more stringent than before. So far developing countries have not invoked these provisions much, preferring instead to invoke the clauses permitting protection for balance of payments reasons (Hoeckman and Kostecki 2001: 338–9). It is questionable whether this will be allowed to persist. The nature of the WTO regime will depend on the evolution of case law and Dispute Panels’ rulings. But it is not simply that the formal rules have been tightened, the surveillance and enforcement powers of the WTO are considerably enhanced relative to the GATT regime. In only eight per cent of cases of disputes brought under the GATT over 1948–94 was a developing country the defendant but this had risen to 37 per cent over 1995–2000 under the WTO regime in the context of a sharp rise in the number of cases brought annually (Hoeckman and Kostecki 2001: 395; see also Piggott 2003). Trends in globalization through trade also act to reduce the effectiveness of traditional developmental state policy instruments. Increasingly developing countries’ comparative advantage in manufacturing is falling in stages of the production process – components and semi-finished manufactures –

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rather than whole products as a result of the ‘fragmentation’ or ‘slicing up’ of production processes (Feenstra 1998; Yeats 2001). Such production may be undertaken by MNCs, but is also commonly undertaken by independent developing country firms sub-contracted by developed country firms. This has several consequences. It tends to reduce the appropriateness of policies designed to promote specific industries. Protected markets would be an ineffectual promotion tool for semi-finished goods. On the contrary, a liberalized trade regime would be necessary to import components from the previous stage of the relationship. Subsidies create the danger of ultimate purchasing companies being able to play different production locations off each other for support. The liberalising impact of this trade goes further. Developed country purchasers will liase with local firms – whether MNC subsidiaries or independent companies – to provide expertise in production processes, design, etc. This can be an important source of technology transfer. However, the sourcing developed country firms tend to insist on fairly strict protection of intellectual property rights. The scope for using trade-related policy measures to bargain for technology rents, to promote technology diffusion throughout the economy or to promote indigenous technology capacity is consequently limited. In the absence of a global regime for FDI, the same kind of formal institutional pressures for liberalization do not operate for MNCs in quite the same way as they do for trade. Over the 1990s particularly, though, there has been widespread and extensive liberalization of FDI regimes on a bilateral basis amongst developed and developing countries (UNCTAD 2003: esp. Chapter 3). Given the generally liberal regime between developed countries, most of these changes are between developing or transitional economies or between them and developed countries. Whilst as yet falling short of the wholesale liberalization of the FDI regime, East Asian countries inward FDI regimes have become markedly more liberal in the 1990s (OECD 2001a). Indeed, inward FDI flows play a key role in technological up-grading in Korea and elsewhere (Timmer 2003). None of this means that all inward FDI in developing countries is footloose and developing countries have lost all bargaining power with MNCs – as developmental state proponents tend to caricature the globalization argument – but it does mean that their bargaining power has fallen considerably. The standard view amongst developmental state proponents is that the 1997 East Asian crisis resulted not from the model itself leading to excess accumulation and moral hazard, but largely from the abandonment of key elements of the model through financial liberalization (e.g. Weiss 2000). It is now widely recognized that financial liberalization undertaken hastily and without adequate regulatory structures is likely to lead to difficulties. However, this is not the same as believing that national systems of finance can be reconstructed along their earlier lines. Although Taiwan’s avoidance of the worst of the 1997 crisis may well be partly explained by its capital

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controls, it is something of a special case given its current account position. The degree of international financial integration of developmental state economies is now sufficiently high that it is unlikely to be significantly reversed (Brouwer 1999), particularly insofar as these economies wish to continue to attract foreign investment. Financial openness undermines the developmental state in two inter-related ways. First, financial integration makes it increasingly difficult for national authorities to control interest rates or direct credit, and would make such policies increasingly vulnerable to profiteering through arbitrage opportunities. Second, the financial systems of developmental states tended to lead to major firms having high debt-equity ratios (above all in Korea). As the East Asian crisis showed, with financial integration this makes such firms highly vulnerable to shifts in market sentiments. Some countries have reinstituted capital controls since the 1997 crisis; whilst this has been taken as indicating that alternatives to Anglo-Saxon capitalism remain, it is unclear how effective these are even in their narrow effects on flows and macroeconomic variables. It is even less clear that they are sufficient to reconstruct financial systems along earlier lines. Financial openness has already sharply undermined the operations of the developmental state and this is likely to continue.

Beyond plausible stories: how much capacity in ‘state capacity’? If the argument of the previous section holds that traditional policy instruments have been undermined by globalization, then the nature of the developmental state becomes crucially important if one is to give credence to the notion that it can adapt and develop new policy instruments. Central to all accounts of the developmental state is the ‘embedded autonomy’ of the bureaucracy. Development state theorists argue that the key distinguishing feature of the state in developmental states is its proactive role in drawing business in particular into formal negotiated relationships through regular and extensive consultation and coordination with the private sector. ‘Embedded autonomy’ relies on highly selective meritocratic recruitment to long-term careers in the bureaucracy. This makes the bureaucracy autonomous but not insulated from society; rather the complex social ties between the state and society provide institutionalized channels for the continual negotiation over goals and policies. Either side of the combination by itself would not work: a state that was only autonomous by itself would lack both sources of intelligence and the ability to rely on decentralized private implementation. This provides the state with information and legitimacy, while enabling it to solve collective action problems and transcend individual interests. Without effective autonomy, though, intervention can all to easily degenerate into unproductive rent-seeking and distorted priorities, as seen elsewhere in the developing world.

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The aftermath of the East Asian crisis raises questions of how accurate this picture really was. Kang (2002) and Lim (1998) find that the Korean bureaucracy was nowhere near as autonomous from political processes or businesses as portrayed in the developmental state accounts. Developmental priorities and policies were often dictated and changed by political masters, strongly limiting the discretion of developmental bureaucracies. The view of the Economic Planning Board (EPB) or the Ministry of Trade and Industry did not simply determine development strategy. The chaebol lobbied and bribed to get access to the rents from preferential credit. The industrial priorities often reflected the chosen evolution of the chaebol themselves. This led to over-expansion in key industries leading to the over-capacity that became all too evident after the 1997 crisis. Nor was the state able to orchestrate orderly reductions in capacity by different firms – identified as a key market failure the developmental state could address. Performance monitoring and enforcement was much less rigorous than the accounts of Amsden and others claim. It could hardly be otherwise, given that the highly indebted nature of the chaebol meant that rigorous enforcement risked bankruptcy. In these senses the contrast between the developmental state and others – the Philippines is the comparative case examined in Kang (2002), but the point can be generalized – is rather less than the developmental state proponents argue. Kang (2002: Chapter 4) argues that the key factor that limited the negative impact of corruption in Korea was the existence of ‘mutual hostages’ with the state: both state and big business were powerful and needed each other’s success: large firms exchanged bribes for preferential credit and other support but did use this for productive investment rather than simply profiteering. Nor is this picture exactly news to many scholars. Even in the 1960s distribution of state loans to firms had a strong political bias, fraud in accounting for performance was common and by 1969 over 200 large statefinanced (but not state-owned) firms were on the verge of insolvency making it hard for the state to confront the chaebol directly – and they knew it (Lim 1998). These problems are illustrated by the Korean government’s problematic drive to promote heavy and chemical industries in the late 1970s, on the face of it a classic developmental state pursuing policies of up-grading export structure into more dynamic industries. But this was less a case of careful autonomous bureaucratic management than presidential decree (Choi 1993: 35–6). The architect of the plan, Oh Won-Chul, amassed a fortune of US$4.5 million or more and took a bribe of 2.2 million won in 1976 (Kang 2002: 105). The late 1970s surge of investment led to overheating and deflationary policies in 1980 to address this. Attracting finance was problematic given low rates of return, and represented a transfer from (often small) savers to large businesses. Government policy was openly criticized by the chair of the Federation of Korean Industry that led to the EPB closing itself off from business (Rhee 1994: Chapter 4). Korean

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big business produced increasing demands for greater freedom from government policy (ibid.: Chapter 5). There was conflict amongst the companies over rationalizing excess capacity and resistance to government proposals for this, ultimately leading to the burden of adjustment falling on smaller firms. On virtually any grounds this episode runs contrary to the developmental state story: it was as much a political decision as a technocratic decision by the bureaucracy to initiate the policy; rather than a symbiotic relationship between business and state there were frequent conflicts between the two and the state was unable to achieve key aims over goals such as coordinated restructuring.5 Other examples can be produced (Kang 2002: Chapter 4; Lim 1998). In Taiwan, by contrast, the developmental state often went the other way, limiting its contact and relations with business (Fields 1995) with a state that was strongly autonomous but rather than being embedded imposed its will on relatively weak business interests (Haggard 1990: Chapter 4). So this too is in contrast to deep and symbiotic links between state and business stressed in the developmental state accounts. Proponents draw a contrast between developmental states, which aim to increase their resources through promoting development, and predatory states (e.g. Evans 1995). But this is too easy (see Chapter 5). Beyond such very broad contrasts the picture becomes less clear. Linda Weiss, for example argues that ‘state capacity is impossible to define in the abstract… the use and efficacy of particular instruments will vary over time, depending on the phase of development and its associated task: but it does not follow that state capacity must thereby ebb and flow’ (Weiss 1998: 15 & 32). Her point that strong state capacity in one area, such as industrial policy, does not necessarily imply strong capacity elsewhere (for example in social policy) is well made. Nevertheless, it is problematic to define state capacity in specific terms, whilst simultaneously asserting that the developmental state will be able to adapt successfully to meet new challenges with new policy tools it has devised. There is little in the developmental state literature on principles between the Korea-Zaire extremes. Thus, the developmental state literature is critical of Malaysia and Thailand for not instituting effective developmental state mechanisms and the diversion of state resources into rent-seeking activities (e.g. Booth 1999), but they have been amongst the most rapidly growing developing countries since 1960. The tenor of this literature is to criticize the role of their states, but given the success of these countries this questions whether the developmental state is typically necessary for rapid growth. What determines whether a state is developmental or predatory is also unclear. In some accounts the emphasis here is on the intention of the state elite. Woo-Cumings (1999a: 22) claims that unlike Latin America, East Asian states possessed the ‘will to develop’, partly as a result of the cold war legacy creating ‘compelling motives for intensive economic mobilization that was unthinkable in the Latin American context.’ This is a questionable

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history of Latin America. An emphasis on state elites’ ideologies is surely insufficient: whilst some were venal and corrupt, others clearly desired development but often failed in their endeavours. Many developing countries faced real or perceived external threats and the developing world is littered with cases where countries wasted resources on military expenditure typically funded by predatory states. There is debate amongst development state theorists between those who emphasize cooperative relations between state and society (Weiss 1998) and those who emphasize the coercive power of the state (Leftwich 1995), but they share a downplaying of the structural power of capital (cf. Lim 1998). Developmental state literature proceeds by detailed case studies emphasising the complex combination of forces at work; typically the underlying growth theory is vague. The strength and quality of the best of these studies is not in question, but the work advances its case by means of telling plausible stories. Without more comparative work the status of the theories cannot be fully tested, nor do we have much idea which of the many claimed features of the developmental state are crucial and whether all must be present for it to be effective. A specific and a hypothetical example may help to clarify this point: India. Whatever negative legacies there may have been, British colonialism bequeathed independent India an extensive, high quality bureaucracy and some industrial infrastructure. There was a political elite that desired development. In seeking to explain why India failed to produce a developmental state, contributors such as Herring (1999) stress a range of factors including size, democracy, the federal system and the range of interest groups. In terms of the particular example this is question-begging: other developmental states were (apparently) able to achieve popular legitimacy through growth rather than redistribution and India’s economic liberalization was successfully achieved through decisive centralized political and bureaucratic action. But the more general point here is that such accounts actually tell us very little about the conditions for successful developmental states. The hypothetical example is to ask what policy advice a developmental state theorist should give to, say, an average developing country with a bureaucracy that is neither outstanding or irredeemably corrupt. Certainly reform of the bureaucracy is desirable, but few would quibble with that. In his chapter for this volume, Mick Moore highlights both the problems of legitimacy in many developing states and the perils of policy transfer from previously successful states. If the various conditions identified as being key to successful developmental states are not all present should one try anyway or assume that in the absence of all conditions it is likely to lead to inefficiency and unproductive rent-seeking? If the importance of conditions lies somewhere between the all-or-nothing judgement – and the logic of some contributions like Pempel (1999) is to make an all-or-nothing judgement – then more precisely where does it lie?

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All social scientific enquiry involves both universal principles and historical specifities (cf. Hodgson 2001: esp. Part IV). Theorists of the developmental state frequently berate orthodox economists, claiming that they propound an Anglo-Saxon ideology incapable of explaining these states’ success as a universal doctrine, although economists like Chang (1994), Rodrik (1995) and Vartiainen (1999) point out that recent developments in economic theory can help explain the success of developmental states. It is implausible to claim that Japan, Korea or Taiwan grew despite these countries’ industrial policies or that they would have been even richer without these policies (Chang 2002). Nevertheless, whilst it is one thing to stress the importance of historical and institutional specificities in contrast to the universalist claims of orthodox economic theory, developmental state theorists go too far the other way. Their emphasis on the details of each case limits both testing these accounts against rival explanations or providing wider lessons for policy in other countries. The concept of ‘state capacity’ invoked in this literature remains underdeveloped as a comparative concept: it is unclear how accurate it is as a description of developmental states or how far it can explain differences in performance across countries. This concept, though, is central to the arguments of developmental state theorists that even if particular policy instruments become inoperable the developmental state will remain effective.

Conclusions: beyond Korea and Taiwan After the 1997 East Asian currency crisis it is evident that developmental states had seen over-investment leading to rising capital-output ratios and falling profit rates. This may not have caused the currency crisis – the evidence of international investor panic is strong – but it does indicate that the old model is approaching exhaustion. This is in part due to globalization trends undermining the policy tools these economies had relied upon: trade protection and promotion measures are largely contrary to WTO rules, bargaining over inward FDI is increasingly difficult and financial liberalization and integration in the context of the developmental state is widely seen as having led to the 1997 crisis. Developmental state proponents are right to point out that globalization does not eliminate market failures in development and may well exacerbate some of them. This does not, though, mean that policy interventions can be made successfully. The challenge is to develop more accurate comparative notions of what determines state capacity – the capacity to intervene effectively. The aftermath of the East Asian crisis raises questions about how accurate the characterization of Korea was anyway. In particular, the emphasis on the ‘plan-rational state’ (Woo-Cumings 1999b) is overdone and in these accounts downplays the structural power of capital in shaping the plans and outcomes of developmental state policies. But the priority is

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to move away from studying Korea and Taiwan. In their chapters for this volume on Ireland and Uganda respectively, Peadar Kirby and Tim Shaw show how developmental states have responded to contemporary circumstances and the strengths and limitations of new strategies. As countries as diverse as China, India, Mauritius, South Africa and Turkey come to play a greater role in the world economy, we need more comparative studies of other, in particular, Asian and Latin American states to draw out more general principles. Notes 1 I would like to thank participants at the PERC conference for useful comments on this paper, particularly Ben Fine, Graham Harrison, Abhijit Sharma and Grahame Thompson. Responsibility for the contents remains mine alone. 2 By nationalist I mean both a focus on the nation state as unit of analysis and a downplaying of internal conflict. In some accounts social conflict is seen as essentially avoidable and negative, resulting from Prisoner’s Dilemma type problems and solvable through appropriate institutions. In other accounts potential conflict is acknowledged but accounts point to relatively egalitarian income distribution and ethnic homogeneity as limiting conflict in practice. 3 This follows from the nationalist perspective. For example, Amsden (2001) characterizes developing countries as facing the choice between an industrypromoting developmental strategy or devaluing the currency which works by reducing real wages. Describing devaluation as a development strategy is questionable economics anyway, but the point Amsden misses is that the industry promotion measures also reduce real wages. For progressive critiques of the developmental state see Harris (1986) and Kitching (2001). 4 On the positive and negative role rents can play in the development process, see Khan and Jomo (2000). 5 How far this push to heavy and chemical industries changed Korea’s development path is a moot point. As noted above, there is dispute over how far industrial policy affected Korea’s development patterns. Galbraith and Kim (2001) see the positive effects of this policy largely operating through raising aggregate investment by socializing risks.

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Part II Networks of Development, New Patterns of Power

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7 The Regional Impact of Globalization: The ‘Spatial Fix’ in Southern Textiles, 1974–1997 Phillip J. Wood

Introduction From originally denoting the chaotic impact of capitalist expansion on established social structures and intellectual paradigms, globalization has recently become, like many of its theoretical predecessors, a universal, a ‘violent abstraction’ (Sayer 1987). As such, it conceals more than it reveals, and has scant regard for the ‘concrete analysis of concrete situations’ (Lipietz 1987: 4), in part because it is politically more convenient to blame abstract forces for social instability than the political or corporate entities and individuals actually responsible. This chapter is an attempt to step outside this narrative: to contextualize and concretize globalization by looking at one specific encounter between it and the strategic corporate and political responses it elicits, and by documenting the empirical results. To understand both the encounter and its results, we must be eclectic in theoretical and disciplinary terms. The analysis thus uses Marxian and non-Marxian political economy, economic geography and sociology and organization theory, combined with an empirical investigation of the socio-spatial transformation of the textile industry in the southern United States. It argues that while global pressures demand strategic responses from firms, sectors and states, they do not dictate what those responses will be. The causal chain linking the global and the local is long and complex, made up of many intervening variables, among them uneven regional development, regionally-specific class and race structures, and the legacies of past strategic decisions about risk and security. The evidence assembled here suggests that it is the encounter between global structural change and the socio-spatial legacies of past accumulation strategies, not globalization as an abstract and inexorable force, that shapes the way southern textile capital responds to global pressures.

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The next section reviews the literature on globalization and textiles in an effort to avoid the most obvious pitfalls of the conventional arguments. There follows a brief overview of southern textile industrialization, conceived largely as a political process whose goal, to use Lillian Smith’s (1949) memorable phrase, was ‘regional armoring’, against internal and external challenges. The third section reports empirical evidence about textile restructuring since the 1970s, when southern textile employment peaked. The conclusion suggests some implications for southern regional development.

Globalization and restructuring Conventional wisdom suggests that global restructuring destroys jobs in advanced economies and that mass production industries are especially vulnerable (Brecher and Costello 1998). In the US since the 1970s, globalization has been seen as the cause of ‘Latin Americanization’ (Barnett and Muller 1974), deindustrialization (Bluestone and Harrison 1982), and the loss of routine jobs of all kinds (Reich 1992). Textiles are often seen as a classic case of this logic. Frobel, Heinrichs and Kreye (1980: 13, 15, 44) argued that the internationalization of German textiles resulted from a ‘practically inexhaustible’ reserve of cheap labour-power in the developing countries, an increasingly complex division of labour, new technologies, and progress in transportation and communications. Since the 1970s, there is ‘a world market for production sites and labour’ (Frobel, Heinrichs and Kreye 1980: 44). Transnational reorganization of production is now the precondition for textile survival. Counter-tendencies, such as the weight of capital already invested, state intervention, strategies to lower labour costs, and innovations in technology, quality control and marketing were thought insufficient to counteract relocation (Frobel, Heinrichs and Kreye 1980: 47, 179–80). This chapter suggests that these counter-tendencies are more important in the American case, and have produced a different outcome. In general, however, most American observers have tended to accept this inevitabilist argument (Gaventa and Smith 1991; Lyson 1989). From this viewpoint, protectionist efforts such as the Multi-Fibre Agreement may have slowed the process, but the dominant tendency is for pressures for freer trade to increase. While all labour-intensive industries are vulnerable, southern textiles are particularly so, and in one analysis, were not thought capable of resisting global pressures past the turn of the century (Glasmeier and Leichenko 1996: 613). By way of an obituary, historian David Carlton (1992: 1146) wrote that in view of the human cost of a century of southern textile accumulation, ‘it is … arguable that the traditional textile industry … is an incubus of which the South may be well rid.’ Critics have pointed out that conventional globalization theory is founded upon a few restrictive structural and productivist assumptions.

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The world is seen as a competitive hierarchy of capitalist platforms, differentiated in terms of labour and materials costs and the potential for work intensification. Investment decisions are explained as necessary responses to the market signals emanating from this global structure. Though excessively deterministic, parts of this view are not unwarranted. Since the 1970s, there has been a large expansion of production in low-wage areas. American textile firms have engaged in offshore manufacturing for several decades (Wood 1986: 195–8; Callahan 1997). The important question is not whether there exist cases that exemplify the process however, but whether they define them. A glance at some of the contemporary tendencies at work in the US textile industry suggests they do not. The group of activities usually referred to as ‘textiles’ is a complex commodity chain whose components respond differently to globalization (Dicken 1998; Taplin 1994). While its apparel segment (the final production of clothing and other finished goods) provides the classic example of internationalization (Bonacich 1994), evidence about the textile component (the manufacture of yarn and fabric) suggests a different conclusion. Several decades of technological development and rationalization, resulting in increasing firm sizes and capital intensity and high barriers to entry have helped companies retain high profit levels and resist pressures to relocate (Dicken 1998; Taplin 1994). The textile industry’s record of resisting import penetration is far better than that in apparel. In the mid-1990s, textile imports were 12.4 per cent of the value of US shipments, barely higher than in manufactures as a whole (11.9 per cent) and drastically lower than the 50.5 per cent ratio for apparel (US Bureau of the Census 1997: 739, 752; US Bureau of the Census 1998: 747, 751). Moreover, this was almost balanced by the value of exports (Abernathy et al. 1999). Seven of the world’s top ten textile exporting countries (the US ranks fourth) have high hourly labour costs, according to one industry observer (Verret 1997). There are also theoretical reasons for thinking that adaptation is more complex than is usually thought. The neo-classical theory that drives conventional globalization models neglects factors that are crucial in explaining industrial change. These include human agency, the lock-in effects of earlier investments, the embeddedness of accumulation strategies in regional, institutional and social structures, the role of local and national states, and the political and security dimensions of fixed capital investment (Massey 1984; March and Olsen 1984; Mingione 1991; Granovetter 1992; Storper and Walker 1989). From the neo-classical economist’s point of view, these are ‘frictions’, assumed away in the interest of predictive modeling. Historically, they are the essentials of an adequate explanation of economic action. Easterbrook (1990: 5) suggests a more useful approach to long-term investment patterns, arguing that the keys to the political economy of

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long-term development are ‘macro-uncertainty’ – ‘the continuous pattern of stressful uncertainties, political, social, economic and ideational, in which investment decisions involving time must proceed’ – and the politics of uncertainty-reduction. From this perspective, the structure of the world economy reflects past strategies of uncertainty-reduction and their institutional consequences. The devices designed to reduce risk and uncertainty can take many forms, including ‘military force and/or religious sanction, stress on flexibility, liquidity, diversification, legal procedures regarding safety of property and sanctity of contract, various insurance devices, the merging of public and private power, the shifting of tasks and lobbying’ (ibid.). For Easterbrook, decisions about restructuring involve not only profitability, but also the need for political, cultural and geographic ‘security zones’ (Easterbrook 1990: 3), which are products of long-term engagement in ‘power politics’ (Easterbrook 1990: 7). If conventional economic models miss these points, real-world actors do not. In a 1993 survey for instance, 79 per cent of a sample of American executives argued that change tends to be resisted ‘because it means a loss of control’ (Toronto Star 1993). According to Dicken (1992: 1–2), the effects of globalization are ‘not geographically uniform’. Rather, the ‘particular character of individual countries, of regions and even of localities interacts with the larger-scale general processes of change to produce quite specific outcomes.’ Easterbrook’s concept of the security zone adds some theoretical and historical flesh to this view, providing a useful device for organizing discussion of the ‘instrumentality of human geographies’ (Soja 1994: 139). Economic theory has long been familiar with the advantages of regional concentration. Marshall’s (1920: 271–3) ‘localization economies’, for instance, included access to skills and workers, to subsidiary trades and services and to local knowledge about techniques, organization and best practices which ‘are as it were in the air’ (Marshall 1920: 271). But Easterbrook’s security zone is more complex and less economistic than this. While not discounting regional histories that predate industrialization, Easterbrook, along with many economic geographers, sees an active political process of regionbuilding in strategic decisions about fixed investment and its environmental needs. According to Storper and Walker (1989: 96), this ‘turns the neo-classical world on its head, and views regional development as the result of regional capital accumulation through the region’s particular industrial history … industries create regional resources and not the other way around.’ None of this should be taken as implying that ‘regional armoring’ is a complete defence against the competitive pressures that drive spatial restructuring. At the systemic level, as Marx (1973: 539) pointed out, capital continuously strives to ‘annihilate space with time’. Transportation improvements and internationalization of the most liquid forms in which capital circulates have created the impression, reproduced in globalization

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theory, that time has in fact annihilated space. But this annihilation can never be complete. Distance remains intimately connected with uncertainty (Bauman 1998: 13). Moreover, the extent to which the spatial dimension is reduced ‘is itself uneven, depending on a variety of political social and other factors, and on the physical and other characteristics of the forms in which capital circulates’ (Harvey 1996: 605). The less liquid the form, the greater the uncertainty involved in dispersal and the more important the spatial dimension. Fixed investment, ‘the crowning glory of past capitalist development’ (Harvey 1996: 610) is not only the way capital annihilates space with time, but also a ‘prison for value’ whose future must be secured so that the imprisoned value can be liberated in production. Region-building provides this security by ‘embedding’ fixed assets and accumulation strategies in ‘concrete, ongoing systems of social relations’ (Granovetter 1992: 58) and also ‘embodying’ them in space (Friedland and Boden 1994: 6). Over and above the economics of localization, the political and social dimensions are crucial here. According to Friedland and Palmer (1994), there is a strong relationship between regional concentration of corporate elites and the development of trust and collective corporate action. Regional concentration facilitates formal and informal social networks, common class and educational backgrounds and corporate networking, crucial in building class alliances, gathering information, managing resources and strategizing in general. Regionally concentrated corporations are active in policy decisions that affect their profitability, and the decentralized structure of American government encourages regional politics. For Storper and Walker (1989: 81–2), regionally concentrated capital shapes labour markets, migration patterns, and the transmission of norms and habits, forming regional consciousness while building a political economy. Region-building by capital thus creates a tension between pressures to disperse and the legacies of past strategic decisions. As Storper and Walker (1989: 57) point out ‘[i]nertia, learning-by-doing and learning-by-using, the accumulation of technical artifacts, the creation of institutional frameworks of action, the weight of collective action, shutting out less immediately conceivable alternatives – all contribute to following a once-chosen path of development.’ The next section reviews the history of the southern textile accumulation strategy and the legacy of its region-building effects, especially its complex interactions with class, race, and spatial organization.

Building the southern textile security zone Globalization involves not only responding to market signals, but also dealing with the macro-uncertainty in which decisions are made and the path-dependence that results from earlier efforts at uncertainty-reduction. The latter required not only the coordination of factors of production and

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ways of coping with capital shortage and transportation bottlenecks, but also the organization of social and geographic space as well as the merging of private and public power. From the beginning this was a political process, depending on a class alliance of planters, industrialists, and others who saw industrialization as a means of post-emancipation salvation (Key 1949). The core of this alliance was careful labour market management, designed to protect plantation labour markets from industrial competition. Industrialization was thus a spatial strategy, occurring west of the main areas of plantation agriculture, in the rural and small-town Piedmont region of the Carolinas, where it mobilized white farm families who were being driven off the land by falling cotton prices and increasing indebtedness (Hall et al. 1987). This spatial separation did not mean that race played no part, however. Though generally excluded, black workers did a few of the most menial jobs, and the threat of black replacements as a means of demobilizing white workers was a permanent feature of textile industrial relations in times of crisis. For all except the most skilled, wages were determined by those in cotton agriculture. Wage rates converged, as the neo-classical competitive model predicts, but they converged down to those paid to black farm workers (Wright 1986). Company towns and social services were both a necessity given the origins of the textile labour force in the early years, and an important part of a low-wage accumulation strategy that demanded tight social control (Wood 1991). The result was dependence, the development of a culture and politics of paternalism, and the manipulation of race in relatively isolated small-town and rural textile communities. Textile accumulation, social engineering and region-building went hand in hand. Gradually, these southern social relations induced textile concentration in the South (Wood 1986: Chapter 3). In the late 1890s, tight labour markets produced a profits squeeze in New England. Firms responded by concentrating on finer goods, while moving the production of lower-count goods to the South. By the beginning of the First World War, virtually all of the nation’s coarse cotton goods were produced in the South. This strategy failed in the longer term however, and the slump that began in 1919 inaugurated a long period of textile depression. Technological stability mandated the ‘stretch-out’, a strategy of work intensification, as the only feasible response, but it was doomed to fail in the social conditions of industrial New England. The South was more hospitable however, and by 1939 the textile industry was in effect a southern industry. What needs emphasizing however is that this textile ‘spatial fix’ (Harvey 1996) did not dissolve southern production relations, which is what conventional economic theory predicts, but rather stabilized them. This was accomplished politically, through the institutionalization of the power of textile capital at the level of the state. North Carolina’s Shelby Dynasty, a corporate political machine that dominated North Carolina politics from

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the depression to the 1950s, is the best example of this merging of private and public power (Wood 1986: Chapter 5). During this period, southern governments took the conditions created by textile and similar capitals – low wages, low taxes and public expenditures, and ‘compliant’, non-unionized and hardworking ‘Anglo-Saxon’ workers – and made them the core of the South’s ‘de facto industrial policy’. Tax holidays, free training programmes, infrastructural spending, and a political commitment to preserve the political status quo provided additional incentives (Lyson 1989: 4–6). These campaigns allowed textile capital to shape the region according to its political and economic needs. Most important were so-called ‘right-to-work’ laws, anti-unionism in general, and a willingness on the part of local economic development commissions to exclude companies that might destabilize the status quo (Wood 1986: Chapter 6; Lyson 1989). In the 1950s and 1960s, these efforts attracted capital in a number of other low-wage sectors, and a general, though still decentralized, industrialization began. Textile profitability began to be squeezed in the 1960s by rising wages, sluggish growth and foreign competition. The industry’s adaptation has been a complex one. Its core is technology (‘looms so accurate they can stitch the front page of the Greensboro News and Record into readable fabric’ – Jonsson 2000) and a shift from high volume/low value production to a focus on high value fabrics for commercial and industrial markets. Traditionally, the labour intensity of textile production was relatively irreducible, so that accumulation of capital usually implied increased need for labour (Wood 1986). Technological breakthroughs have broken this logic. The advanced sectors of the industry are well on their way towards lean production and flexible specialization. Shuttleless looms, computerassisted manufacture, integrated production, supply and marketing systems and the shift towards high-value fabrics have drastically reduced the industry’s reliance on cheap labour. In some stages of production, such as opening, cleaning and mixing, a combination of air quality regulations and automation have all but eliminated the human factor (Hopkins 1997). Computerization has been especially significant, making possible new systems of inventory and quality control and permitting closer monitoring of consumer demand. According to industry observers, the ‘lean retailer’ is the key to this trend, transforming power relations and creating a commodity chain that is increasingly buyer-driven (Gereffi 1994; Abernathy et al. 1999). Flexible response to specialized customers is now the operating logic of the textile sector, necessitating shorter production runs, greater differentiation of product lines and more sophisticated quality control. In the most advanced firms, the productivity of the average loom has more than quadrupled between 1975 and the late 1990s. From 1949 to 1996, the average compound growth rates in multifactor and labour productivity were almost double those in manufacturing as a whole. Turnover time, a

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key component of industrial profitability, has been reduced, by about 50 per cent in the 1990s alone (Rudie 2000a; Abernathy et al. 1999: 189, 207, 214). Simultaneously, dependence on the apparel segment has been reduced (to about 35 per cent in 1999), with branded commodities, geo-synthetics (socalled ‘smart fabrics’, whose qualities change with conditions), automotive, safety and industrial fabrics taking up the slack (Abernathy et al. 1999: 278, 216). At the end of 2000, employers in these areas were expanding, rather than contracting, their workforces (Jonsson 2000). While technology is seen as the solution to the industry’s problems (Speizer 1996a; Abernathy et al. 1999), fixed capital investment also increases risk. In order to manage that risk, textile capital remains faithful to a southern strategy that has served it well for a century. This has been helped since the Reagan era by the shift to a national accumulation strategy directed at labour market flexibility and export competitiveness. Deregulation, social spending reductions, downward pressure on wages and immigration from Asia and Central America have created new patterns of class and racial polarization, reconstituting the low-wage labour markets on which the textile industry has traditionally relied (Davis 1987; Brenner 1998; Bonacich and Appelbaum 2000). As Hispanic workers move out of agriculture and food processing into textiles and other sectors (JohnsonWebb 1999), they expand the low-wage labour pool and simultaneously increase the social complexity of mill towns (Patton 1999: 280–1; Anderson 2000). Rural poverty, uneven development, and a union-free environment continue to set the context for southern economic development, and to provide crucial pillars of the textile security zone. This allows textile capital to adapt to the new global order, while managing risk. The South remains the poorest region in the US. At the time of the 1990 Census, the South accounted for about a third of the nation’s population, 40 per cent of its poor, 55 per cent of its rural poor, 56 per cent of its black poor and 97 per cent of its rural black poor (Rural Sociological Society Task Force on Persistent Rural Poverty 1993: 36). A fifth of all full-time jobs were lowwage, and the share increased to 40 per cent if part-time and seasonal workers were included. White women and African-Americans held most of these jobs (Tomaskovic-Devey 1991: 28, 31). Despite brisk growth in the second half of the 1990s, these basic facts persist (US Department of Agriculture, Economic Research Service n.d.). Politics is a crucial pillar of southern development. Southern states have resisted federal regulation; enacted state ‘right-to-work’ laws; provided generous incentive packages for footloose industries; and maintained low-tax, low-social service regimes that maximize workers’ market dependence. According to some scholars, globalization makes state intervention at all levels increasingly difficult (e.g. Sassen 1996). In the textile security zone, the relationship between private and public power shows no signs of weak-

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ening. In 1996 for instance, the North Carolina State Economic Development Board authorized new incentives to keep the state competitive in the search for capital, and was supported by the state Supreme Court, which ruled that incentives serve a ‘public purpose’ under the state constitution, even though they penalize poorer communities (Speizer 1996a; News and Observer 1996). In addition, there is a growing public involvement in technological development. Perhaps most interesting is the role of the military-industrial complex. With about US$30 million per year from the textile industry and with matching federal funds from the Senate Armed Services Committee and the Department of Energy, government-funded labs now adapt weapons technology to the problems of textile efficiency. One innovation reduces, by a factor of four, the water used for washing dyes and solvents out of fabric, while a second is an optical scanner, used in missile systems, that detects flaws in fabric in production and eliminates the need for human inspection. The third project is ‘Demand-Activated Manufacturing Architecture’ (DAMA), a huge computer networking project that reduces inventory costs, compresses turnover times and improves the speed of response to changes in fashion and demand (Speizer 1996b). Finally, the industry’s offshore activities are undertaken with the same considerations of time, distance, and security in mind as its internal restructuring (Corral 2001; Abernathy et al. 1999: 223). In 1997, an alliance of textile companies, the Mexican federal government and the Morelos state government started a joint venture in apparel production. Shortly afterwards, Cone Mills and Guilford Mills also began a joint venture in denim production on the Mexican Gulf coast at Altamira (Millman 2000). In both cases Mexican state governments have committed millions of dollars in the form of tax abatements, infrastructural improvements, cheap access to public utilities and subsidized worker training, primarily to soak up the region’s large pool of rural workers and stave off political unrest. For the textile companies, the goal is to use the North American Free Trade Agreement (NAFTA), usually seen as a major threat to southern textiles, to protect the industry by creating offshore apparel production in the western hemisphere and sourcing fabric from the US rather than Asia (Millman 1998; McCurry 1997; News and Observer 1997). Mexico provides American firms with investment security by virtue of the neo-constitutional protections embodied in the NAFTA agreement (Panitch 1994). Geographical proximity facilitates flexibility, just-in-time inventory control and quick turnaround. American firms also gain access to Central and Latin American markets, and also to the European Union, with which Mexico has had a free trade agreement since July 2000. Similar considerations are at work in the Caribbean. The Trade and Development Act of 2000 allows the members of the Caribbean Basin Initiative to export apparel to the US duty-free after October 2000 if they

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use American fabrics (Jacobs 1999; Rudie 2000b). Apparel jobs will be sacrificed to safeguard textile profitability. The emergence of wage competition in some labour markets, local bureaucratic difficulties, long worker training curves, political and financial instability and the beginnings of rationalization in Mexico give these expansions into Mexico and the Caribbean an experimental quality (Rudie 2000b; Bonacich and Appelbaum 2000: 69; Nowell 2002). Trade accords with the Caribbean and Central American countries are also vulnerable to Presidential coalition-building strategies and the concentrated regional power of textile interests (Kahn 2001). The long-term consequences of offshore production are thus difficult to predict, but the logic seems clear enough.

The restructuring of the southern textile security zone, 1974–1997 Industry observers stress technological adaptation. But there is a second component that has gained less attention. The textile industry remains dependent on low-wage, highly exploited and minority workers, and the South’s uneven development continues to allow these needs to be met. While ‘regional armoring’ has become more difficult in recent decades, it is far from exhausted. To illustrate this, this section reports the results of a county-level analysis (Anderson, Schulman and Wood 2001) of the evolving geography of southern textiles since 1974 when employment peaked, Fordism went into decline and restructuring began. The shifting pattern of employment between 1974 and 1997 indicates a thorough-going restructuring. In 1974, 456 textile counties averaged 1,573 workers in seven establishments. In 1997, 500 counties could be identified as textile counties, averaging 864 employees and six establishments. In general, employment has declined. From 1974 to 1997, there was a net loss of about 285,000 jobs in the 11 former Confederate states, about 40 per cent of the 1974 total. The Carolinas accounted for about two-thirds of these, but all states lost jobs. On the other hand there was also evidence of growth. The number of establishments showed a net increase of 16, despite the net loss of over 300 in the Carolinas. Rates of employment decline vary by state, but all states except North Carolina, South Carolina, Tennessee and Virginia increased establishments. Overall, 216 southern counties experienced job growth during this period, averaging 277 new jobs each. At the regional level, textile employment was spread wider and thinner in 1997. Employment shifted away from the Carolinas, attracted by lower textile wage rates and slacker labour markets of the Deep South (US Bureau of Labor Statistics 1999). The main beneficiaries were Alabama (12 expanding counties averaging a net increase of 821 employees each) and Georgia (30 growth counties, averaging 700 new jobs). There were also areas of growth in North and South Carolina, the main aggregate losers. Eighteen

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counties in North Carolina registered employment gains (average 279) in this period, as did eleven in South Carolina (average 240). The counties with the highest gain were Whitfield, GA (+6,141), Muscogee, GA (+4,094), Murray, GA (+3,019), Gordon, GA (+2,133), Moore, NC (+1,349), Baldwin, GA (+1,337) and Robeson, NC (+685). Declining aggregate employment evidently conceals expansion as well as rationalization. We are dealing with a complex process of spatial reorganization, not simply decline. There is also an underlying stability to the South’s role as a textile zone. Since 1969, despite losing a quarter of its employment, the Southeast has consistently accounted for about three quarters of all US textile jobs. This structural stability reflects both ‘the continuing importance of the Southeast in the textile industry’ (US Bureau of Labor Statistics 1994) and the continuing ability of southern textile capital to reorganize and adapt. In order to investigate the forces that shape this pattern, we developed regression models of numerical county-level change in textile industry employment between 1974 and 1997. We selected independent variables to represent demographic, labour market, agricultural structure, public policy and racial composition variables identified in the literature as factors in textile industrialization (Cobb 1993; Wood 1996). Table 7.1 summarizes the results of our analysis. The Beale Urban-Rural Index ranges from 0 for

Table 7.1

Sources of textile employment change, southern counties, 1974–1997

Each Increment Change in:

Produces a Corresponding Change in Textile Employment of:

Beale Urban-Rural Index County Labour Force Size (000) Mfg. Share in County Labour Force (%) Rate of Exploitation (US$) Farms under 50 Acres (%) Per Capita Property Tax (US$) Welfare Expenditure Share (%) Black Population Increase (000) Black Political Mobilization (000) Hispanic Population Increase (HPI), White Counties (000) HPI, Counties with Average Black Concentration (000) HPI, Black Majority Counties (000) Black County Population Concentration, counties with no HPI (%) Black County Population Concentration, average HPI counties (%) Source: Calculated from data in Anderson, Schulman and Wood 2001: 487

+204 –26 –43 +12 +22 –2 –144 +54 +146 +206 –74 –300 –8 –22

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the most densely populated urban counties to nine for those at the other end of the spectrum. We used it to test the hypothesis that industries in search of a ‘spatial fix’ decamp to ‘greenfield’ sites (Storper and Walker 1989; Wood 1986: 195–6). Table 7.1 provides support for this hypothesis, each step in the continuum producing a gain of 204 jobs. Textile job creation is highest in rural counties, which remain reservoirs of cheap labourpower (Gibbs 2001; Ghelfi 2001; Covington 2002). Historically, the textile industry flourished on managed labour markets, low wages and high rates of exploitation. Three independent variables were used to test this proposition for the current period. The results suggest continuity. The more limited the labour market and the weaker the competition for labour from other manufacturers, the greater the job gain. On average, 1,000 fewer workers in a county are associated with an increase of 26 textile jobs, while a one per cent decrease in the manufacturing share of the county labour force increases textile employment by 43 jobs. At the same time, high county rates of exploitation (measured by value added per production worker hour in manufacturing) continue to attract textile investment, with 12 jobs added for every dollar increment. The relationship between agricultural vulnerability and textile accumulation is another historical constant. We tested this hypothesis for the current period using the percentage of farms under 50 acres as an index of marginal agriculture. Again, the results confirm the persistence of the traditional relationship. The larger the percentage of farms under 50 acres, the better the record of textile employment growth. Each increment in the share of small farms produces about 22 textile jobs. We also investigated the policy dimension of restructuring. Tax regimes have traditionally been regressive, relying on consumption taxes while limiting corporate property and income taxes. Patterns of public expenditure reinforced market dependence. Two variables – the per capita property tax rate in fiscal year 1981–2 and the share of county public expenditures dedicated to public welfare – were used to test for policy effects. Lower property taxes were associated with textile job gains – each dollar reduction in per capita property taxes is associated with an increase of two textile jobs, while counties that devote greater resources to the poor lose employment. A one per cent increase in the share of public spending going to welfare eliminates 144 jobs. The contextual effect of race on southern political economy as a whole has long been recognized (see for example Key 1949). Research on race and textiles has produced contradictory hypotheses, however. Rowan (1970) suggested that tight labour markets in the 1960s made racial integration an inevitable and therefore ‘natural’ response to competitive market conditions, regardless of the civil rights movement and the legislation it elicited. Minchin (1999) suggests a different conclusion, however. Tight labour markets affected a few metropolitan firms, but most of the textile industry

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was located elsewhere. Companies integrated their workforces grudgingly because they needed federal contracts and feared of litigation. Workplace integration only began to occur after the 1964 Civil Rights Act came into effect, and firms continued to discriminate, despite in-house data telling them that black workers had lower quit and absentee rates than whites and were at least as productive. We used four independent variables to investigate the effects of race, in two stages. The first was a black concentration variable designed to investigate the overall racial contextual effect. The other three were used to test more specific hypotheses about minority groups and textile capital. First, we used a black county population change indicator to test the hypothesis that the shake-out of African-Americans from agriculture is one of the last major sources of the cheap labour in the region. We assumed that counties with growing black populations are those that offer the opportunity for displaced farm families to move up the job ladder, and that the African-Americans most likely to be targets of textile restructuring would be those from rural areas with the least experience of the predominantly urban civil rights and labour movements. We can make a similar argument for Hispanic workers. Large-scale immigration in recent decades has created economically significant concentrations of these workers in the textile belt. In Georgia and North Carolina for instance, there were 435,000 and 379,000 Hispanics respectively at the end of the century (http://factfinder.census.gov). These recent immigrants are an important element in the reconstitution of the pools of low-wage workers still needed for the low-skill jobs in textiles. We use a Hispanic population change variable to test this hypothesis. Finally, recent research has suggested that the traditional planterindustrialist compact with respect to labour market management still operates in parts of the South, and that the politics of race relations and labour market control is as important as demographics in explaining patterns of development (Roscigno and Tomaskovic-Devey 1994; Luebke 1998). If so, the pools of low-wage African-American labour-power that exist in the South’s rural areas can become targets for textile restructuring only if the traditional social and political controls are weakened. We use a black political mobilization variable (the numerical increase in black voter registration from 1958 to 1967) as a way to test the hypothesis that the decline of planter control and increased African-American autonomy are components of the restructuring process. This first run produced mixed results. Three variables produced highly significant positive statistical effects. Counties that experienced effective challenges to local power structures in the Civil Rights era and increased their African-American and Hispanic populations in the 1980s all experienced job growth. On the other hand, there was no significant black concentration effect. This seemed counter-intuitive in the context of the literature. We were able to shed more light on the topic, however. Recent

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research on a number of topics has uncovered significant interactions between black population concentrations and other causal factors (Roscigno and Tomaskovic-Devey 1994; Roscigno and Kimble 1995; Wood 1996). In the second stage of our research, we investigated this possibility. We found a significant interaction between Hispanic population growth and black county population concentration. This suggests first, that the relationship between black concentration and textile employment change is curvilinear about the values of Hispanic population change, which perhaps explains the first stage results. Second, it indicates that the size and direction of the Hispanic population growth effect is conditional on levels of black concentration. The relationship between the recent growth of Hispanic county populations and textile restructuring, in other words, depends upon existing county racial profiles. The higher the black concentration, the weaker is the job-producing effect of Hispanic growth. In an all-white county, an increase of 1,000 in the Hispanic population produces a gain of 206 new textile jobs. As black population concentration increases, however, the impact of Hispanic population growth on textile employment gradually declines, until it turns negative at 22 per cent. From the other side of the interaction, increases in Hispanic populations moderate the effect of black concentration on textile employment change. But here the effect of Hispanic population growth is to gradually increase the rate at which black concentration reduces the number of textile jobs. The data suggest, in other words, that the use of new Hispanic populations to reconstitute pools of low-wage labour is as much a part of textile restructuring as it is in other industries and regions (see e.g. Bonacich and Appelbaum 2000). But they also indicate that in the South, this depends on an overall racial concentration effect. Net gains in Hispanic population are associated with employment increases only where black population concentrations, and the likelihood of political alliances across racial and ethnolinguistic lines, are low. It appears that the industry’s divide and conquer labour market strategies depend on situations in which the local population is predominantly white. The manipulation of racial antagonisms, in other words, is a function of separate worlds. Whether the racial and economic agendas of the industry mesh in the long-term remains to be seen. These results cannot be claimed as a full analysis of the determinants of textile restructuring. Nevertheless, the analysis is suggestive: despite rapid technological change, the pattern of textile restructuring from 1974 to 1997 retains many of the characteristics of earlier periods. Counties that have successfully expanded employment in this period are: • rural counties or those with relatively small labour markets, with limited competition from other employers and a high degree of control by textile capital;

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• counties dominated by marginal agriculture, which continues to generate low-wage labour-power; • counties in which tax and expenditure patterns are skewed in favor of property; that is where market inequalities are reinforced by public policy; • counties experiencing recent growth of African-American populations; • white counties that have experienced recent Hispanic population growth, except where black population concentrations are also large; • counties in which political mobilization in the 1960s weakened control by traditional planter elites, making workers available for non-plantation employment.

Conclusion Textile companies continue to blame globalization and foreign competition for job losses (Nowell 2002). The conventional image of textiles as a sunset industry, soon to be destroyed or forced offshore, neglects two crucial dimensions of the adaptation process, however. The first is technology. The most advanced firms are four times as profitable as their competitors (Abernathy et al. 1999: 257). Where just-in-time inventory management and quick-response systems are in place, American producers are thought to be competitive, on a ‘return on capital employed’ basis, with low-wage producers in Asia (Verret 1997). The second, socio-spatial, dimension of this adaptation – the restructuring of the industry’s southern security zone – has been the subject of far less attention. The challenge of globalization does not produce a market free-for-all, but a structured encounter between global pressures and a variety of socio-spatial and political forces that have played a large part in the building, over the course of a century, of a regional industrial security zone. Evidence from the current phase of restructuring suggests that the industry’s adaptation to global competition is shaped by this encounter, marrying technology with a socio-spatial strategy strongly resembling what the industry has been doing for the last 120 years. Textile firms remain committed to low wages, to a union-free business climate, to small-town and rural settings with racially structured labour markets, and to the enhancement of the special relationship between textile capital and state. Region remains an ‘active moment’ (Harvey 1996: 601) in adaptation, continually re-engineered to suit the industry’s purposes, rather than simply a passive container of factor-prices. Competitive neo-classical growth models predict regional factor-price equalization. But the counties that are the targets of textile restructuring exhibit a depressing structural stability that fails to respond to variations in employment (Fossett and Seibert 1997). A recent study of ‘persistently poor rural counties’ (PPRCs – counties with poverty rates of 20 per cent or more

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in every census since 1960) found that 443 of the 535 PPRCs in the United States were in the South. Another 110 southern rural counties not defined as PPRCs had poverty rates over 20 per cent in 1995. Almost a quarter of these ‘still-poor’ and ‘again poor’ counties were manufacturing-dependent (Ghelfi 2001). Half have black populations of a third or more. Conventional regional development theory considers this combination of growth and continuing poverty paradoxical. But if the foregoing analysis is correct, the paradox is easily resolved. For textile capital, southern rural counties represent the internal frontier of a southern security zone, engineered over a century for the purpose of providing ‘regional armoring’ against macrouncertainty and externalizing risk. The purpose is to preserve the social relations that form the basis of this zone in order to solve the industry’s problems, not to transform them in order to improve social conditions. The evidence – almost three decades of increasing output and falling employment (Zingraff 1991; Dicken 1998) – suggests that this logic is far from exhausted.

8 Contentious Development Issues and Transnational Networks Behrooz Morvaridi

Introduction Globalization challenges the assumption that civil society is confined merely to the national setting in relation to development, by extending the spatial scale of the relationship between political struggle and contentious development. Increasingly we find that local issues are raised at the international level, and local people voice their concerns in global terms, demonstrating new alliances and new configurations of power. Both the actions of states and the interests of large corporations are increasingly subject to challenges from new alliances, such as transnational networks, operating outside the boundaries of the nation-state. Although contentious development issues are localized, transnational networks articulate linkages between local impacts and wider global concerns in respect of a range of issues – ecology, human rights, gender issues, the rights of ethnic and indigenous people and so forth. This chapter considers the potential influence of transnational networks – mobilized around local development issues – on the actions and policies of nation-states. It analyzes whether states that prevaricate over the adoption of policies that promote social, community and human rights, can continue to do so in the light of the activities of transnational actors. The political, legal and institutional changes upon which the resolution of most contentious development issues relies, have long been the focus of political challenges from local civil society. However, social protests and ‘contentious politics’ no longer operate in isolated national or local spaces, but, in the words of Tarrow (1994), are transnational, facilitated through an array of new technologies and telecommunications (fax, internet and so forth). Over the past three decades not only the number, but also the size and diversity of transnational organizations, that include local and international NGOs, operate to influence policy and to draw attention to a range of negative social and environmental impacts. The principal targets are multilateral organizations (IMF and The World Bank), transnational companies (e.g. Shell and Balfour Beatty) and mega-development projects such 133

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as hydroelectric dams that are typically promoted by states whose prime objective is to raise GNP in order to ‘catch up’ with Western countries and to strengthen their position on the global stage. There are many welldocumented examples of how interaction between international activists and their networks bring a distinct ‘global’ dimension to social protest in a range of developing countries (Obi 1997; Froehling 1997; Brown and Fox 1998; Rumansara 1998; Cleary 1997). But, to what extent do the new opportunities for collective transnational action constitute an international or ‘global civil society’ (Wapner 1996; Colas 2002); one that has the potential to erode state sovereignty and to reduce state power (Cerny 1990)? To what extent do transnational networks empower people to effect change through collective action, especially in settings where states are strong and overpowering? In considering whether transnational networks comprising different actors are social movements, it is useful to distinguish between orthodox social movements as an organized collective force that struggles for socio-economic and political change through a sustained defiance of power structures and ‘new’ social movements that have local culture or ‘identity politics’ as their focus (Calhoun 1993). Orthodox social movements constitute a sustained threat to prevailing political structures or state power and are, by this definition, transformative in their objective (Cox 2002). In this sense a social movement is a ‘collective identity’, which relies on its social solidarity to challenge the state and authorities. Working class labour movements, that had a common framework and operated on the basis of collective action, are a good example of orthodox social movements. In a global context, the Islamic Fundamentalist Movement is cited as an example of a transnational social movement by Tarrow1 (1994). Transnational networks that campaign against specific projects or issues are not, however, orthodox social movements, according to Tarrow. Even though they may be effective in advocating alternatives and drawing attention to the need for changes in the social and political behaviour of states and corporations, they are not driven by the objective of transforming a specific political opponent. Therefore, it is worth considering whether it is more appropriate to apply the concept of ‘new social movements’ to transnational networks. New sources of agency within domestic civil society (environmental, ecological, feminist, human rights and other activists), whose ambitions lie not in replacing the current political status, but in achieving greater autonomy from the state through modifications in everyday policies and practice, have been defined as ‘new social movements’ (Escobar 1995: 217; Calhoun 1993). The concept associated with a rise of post-modernism and the increasing influence of post-development ideas, as a riposte to outdated modernization policy, the Washington Consensus and the failure of Structural Adjustment Policies of the 1980s. New social movements of the environmental and feminist kind that struggle ‘for defense of place’ are

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centred ‘not on structures but on social actors; the promotion of democratic, egalitarian and participatory styles of politics’ (ibid.: 219). Among the reasons cited for the emergence of these new social movements are the exclusionary nature of development and lack of confidence in political institutions to protect ‘the displacement of spaces of identities’ for local people. The rise of ‘identity politics’ embedded in local cultures has shifted the focus of domestic social movements away from the struggle for political control of the state and towards demands for social change in respect of a range of contentious issues. Here we find some overlap with the concerns of transnational networks. At the local level, transnational campaign networks appear to have been most effective in drawing attention to contentious development – social and political issues arising from or concatenated with development policy and projects – rather than transforming policy and practice. Transnational networks exist in essence as a communicative, information-sharing structure enabling political exchange between NGOs, individuals, and governmental institutions by effectively linking locales and coordinating strategies for action. These conditions of interaction tend to make it difficult for the various movements that comprise a transnational network to be engaged with each other to the same degree of social solidarity as that which hallmarks domestically-based new social movements. For Keck and Sikkink transnational networks operate as ‘advocacy networks’, producing a common discourse on particular contentious issues and ‘includ[ing] those relevant actors working internationally on issues, who are bound together by shared values, a common discourse, and dense exchanges of information and services’ (1998: 2). What transnational networks achieve is ‘a new form of political space beyond the state’ (Robinson 2002: 206) that transcends state boundaries and defies the traditional notion that development actors are bounded by local or national scales. Transnational networks unite citizens across the world to advocate for certain global issues – environment, human rights, women’s and indigenous rights. In sum, in this chapter, we take the notion of New Social Movements and consider the new forms of politics that this ‘movement’ engages with as part of an emerging transnational development advocacy. An important consideration in this debate is the extent to which nation states have the capacity or command to control the diffusion of contentious politics through global communicative forces across their own territories, especially given that states are not in a position to constrain or structure social protests beyond their borders (Smith et al. 1997). The states that are likely to be challenged most by the actions of transnational networks are those countries that are aspiring to modernize, but have prevaricated over the empowerment of civil society, preferring to contain and control it. Many of the contentious developmental issues that have emerged centre stage of transnational politics in recent times, as is demonstrated in

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the case study presented here, are related to ‘mega development’ projects that involve a range of actors – private companies, state institutions, international development agencies, and local people – in countries where local civil society is constrained by a strong state and is unable to articulate its needs or shape projects to reflect them. Using a case study of the Ilisu dam in Turkey, the next section explores further whether there is merit in applying the discourse that underpins the conceptualization of ‘new’ social movements to the inter-relationships of individuals, civil societies and international NGOs whose common objectives fit within the context of global development advocacy. The Ilisu dam project has been faced with considerable resistance from local and transnational lobby groups who adopt a rights-based framework as a basis for social justice activism. The case study teases out distinctions between different local actors and their links with transnational networks, in particular the groups and individuals that advocate Kurdish rights, and local environmentalist protest groups concerned with wider issues of participation, citizenship, and rights to development. In examining the dynamics of these relationships, I attempt to assess the extent to which transnational networks have the capacity to change the behaviour of the actors involved and challenge existing development policies and practices.

States, development and civil society Over the last two decades almost all states in developing countries have adopted and implemented neo-liberal development policy that promotes the market as the driving force of change and accepts the relative autonomy of the state and non-market institutions. States have supported the economic growth objectives of neo-liberalist development policy by focussing on a strong commitment to macro-economic management and nurturing the private sector. While doing so, these states have proved less willing pro-actively to foster policies that tackle socio-political and economic inequalities manifested at the micro level that arise from distribution issues, for example in relation to land reform, gender relations and ethnicity. In other words states have fully taken on board the principles of market reform, but have been reluctant to incorporate social and political justice into development policy. The Turkish State is developmental in that its economic and political focus is economic growth and capital accumulation in order to ‘catch up’ with Western European countries and to fulfill its aim of joining the EU. Since the foundation of the Republic by the authoritarian, but modernizing nationalist Kemal Ataturk in 1923, the state has been the main actor in the development process. Turkey is the epitome of a centralized bureaucratic but ‘strong’ state (Heper 1991) that continues to maintain a firm hand on development policy, despite adopting a neo-liberal development model

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that promotes minimalist state intervention in both the economy and society. The Turkish state shares some of the characteristics Leftwich attributes in his model of the ‘Developmental State’ – powerful and competent bureaucrats, developmental elites, the relative autonomy of the state, a weak civil society, poor human rights, a strong commitment to economic growth, and nationalism (Leftwich 2000). This model of the developmental state has largely been developed in the context of East Asian countries, although Taylor and Shaw (Chapters 3 and 4) argue in previous chapters that it can also apply to other states, despite variance with the Taiwanese or South Korean examples. Others maintain that developmental states are the upshot of ‘unique historical circumstances’ (Onis 1991: 110), and similarities are difficult to establish across national settings. Many states ‘aspire to be developmental states; the real issues are differences in capacities and effectiveness in their policies’ (Block quoted in Woo-Cumings 1999a: 304), and this depends highly on the ability of the state to recruit ‘competent, insulated and career-based bureaucracies with the authority to direct and manage the broad shape of the economic and social development’ (Leftwich 2000: 162). It is a state’s capacity to be inclusive and to effect social justice and equal rights to development, not merely its capacity to stride towards economic growth that is under scrutiny in this chapter. For this reason, I prefer to refer to ‘states with a developmental orientation’ rather than use the concept ‘developmental state’. Having identified that many governments in the South demonstrate neither liberal values, such as accountability, nor ‘statist’ truisms, such as authoritativeness and capacity to protect citizens and to maintain order, Moore in Chapter 2 of this volume suggests that many states are structurally incapable of fulfilling a developmental promise due to their historical genesis and ‘late political development’. According to Moore, the explanation lies in the impact of interactions between Southern countries and the influence of an international political and economic system dominated by the ‘already developed’ countries. In the case of Turkey’s development model and policy, a similar line of argument would lead us to question the influence of institutions such as the IMF and the World Bank who, as dominant actors, promote developmental models that focus on macro-economic adjustment. Since 1980, structural adjustment and stabilization loans from the World Bank and the IMF have supported policy reforms intended to shift the Turkish economy from an inward-looking orientation to export-led growth, through restrictive policy tools – a restrictive monetary and fiscal policy, cutbacks in Central Bank funding of the public sector, and the promotion of export commodities. Although economic growth maintained a high rate of GNP at an average of 5.7 per cent between 1980–1995, this growth masks extreme income inequality, aggravated by a lack of social development policy and political commitment to

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redistribution, legal reform and the implementation of property rights and land distribution. The OECD has recently reported that in Turkey ‘income inequalities are increasing in a country that has the second widest (after Mexico) income dispersion among the OECD countries: the bottom 20 per cent of households account for only five per cent of disposable income. 36 per cent of the population is unable to purchase the basic needs basket including non-food items’ (OECD 2001b: 100). Poverty has been exacerbated by the economic crisis of 1999, the result of economic mismanagement in relation to high capital outflow, banking institutions’ liquidity problems as a result of speculation, increasing high public expenditure, double figure inflation rates, high interest rates and lack of investment. The government has come under increasing pressure to reduce public expenditure and high inflation. An IMF $19 billion ‘crisis intervention’ and conditional emergency package aimed at preventing the collapse of the economy through ‘non-inflationary growth’ was designed to bring down inflation from 65 per cent to seven per cent by the end of 2002, to support the implementation of wider ranging structural reforms to improve governance and to create a more market-oriented economy. Despite the fact that the economic crisis had significant impacts on the poor (bankruptcies and redundancies increased), IMF loans and state policy continued to prioritize macro-economic adjustment to achieve sustainable economic growth objectives. No worthy consideration has been paid to the negative social impacts of the economic crisis on society and the unjust social content of a set of reforms that clearly lacks a social policy dimension. The OECD optimistically maintains, ‘for the longer term, the challenge is to recapture growth momentum and translate it to sustain economic convergence, as a basis for prospective entry into the European Union. Boosting per capita income requires a major reorientation of government functions for a strong market economy’ (OECD 2001b: 2). The objective of growth is ‘deeply rooted within the psyche of the modern state’ (Kenny and Meadowcroft 1999: 6), which in Turkey’s case cannot be separated from its forceful national identity. Nationalist ideology and associated security issues underpin hostility between the state and ethnic groups, most notably the Kurdish minority. Within this context, the Turkish state continues to ‘offer a vital source of social agency and regulation as well as of social control’ (Held 1989), primarily because ‘the state remains perennially suspicious of civil society which it tries to co-opt, control or suppress’ (Toprak 1996) through an overpowering bureaucracy that leaves little room for individual initiative. The exclusion and control of civil society is particularly apparent in relation to the Kurdish ethnic group, the majority of whom reside in the southern and eastern provinces, the poorest regions of Turkey, where they have limited access to economic resources and are excluded from political participation. Many neo-liberal states consider civil society to exist as an intermediate sphere of agency

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between the market and the state that brings all three together and have thus set the parameters within which to engineer and strengthen it, most commonly by way of institutionalizing and mediating rights, based on the neo-liberal principle that states exist to ‘protect’ civil society and ‘social capital’ and ‘to defend and uphold property rights’ (Fukuyama 2001). Tied to this view the World Bank and other international organizations have promoted the strengthening civil society programs, which promotes not only the regulation of the market economy, but also partnership based on the transformation of institutions and participation that involves and supports groups in civil society and protects social capital. The strengthening of civil society, along with other instruments that comprise the new paradigm of neo-liberalism, are aimed at improving social well-being, but we find that they are resisted in Turkey out of concern that they could undermine the power of state institutions and threaten national security. Concepts such as participation, redistribution and social inclusion are devoid of meaning because neither state institutions/bureaucrats, nor the public has any experience of them. Thus far, the narrative has indicated the Turkish state’s failure to promote an inclusive development policy, fixated as it is with growth and macro-economic achievements. My intention in the following pages is to show how this operates at project level and the contentions it gives rise to. The Ilisu dam project demonstrates how in practice Kurds are excluded from full citizenship, as defined by rights to participate in decision-making in social, economic, cultural and political life. Where the state has excluded local people from involvement in shaping development projects or has used excessive interventionist forces to control civil society, civil society has increasingly been associated with political activism or rebellion, displayed by a variety of social groups and individuals that are separate from both the state and the market. Civil society therefore operates in opposition to the state, in the Gramscian sense, or to ‘counterbalance’ the power of the state rather than as its partner (Howell and Pearce 2001).

The state and a mega development project: the Ilisu dam In the pursuit of modernity the Turkish state has prioritized investment in large-scale development projects that promote national economic growth, many of which are located in the poorest regions such as Southeast Anatolia. The government has introduced a number of economic interventions to tackle poverty in the Kurdish regions, the most important being the Southeast Anatolia Development Project (the Guneydogu Anadolu Projesi or GAP), one of its most ambitious efforts to promote development. Under the GAP project, the intention is to build 22 irrigation dams for domestic water supply projects and hydroelectric energy plants constructed in the Euphrates and Tigris river basin, of which the Ilisu dam, located

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65 km upstream from the border with Iraq and Syria, is one of the largest with a total capacity of 1,200 MW of energy production. The review of the Ilisu dam project that follows illustrates that concerns over the impact of the GAP projects are not about poverty per se, but inequalities based on social, cultural and political rights. These are not addressed through the GAP, which effectively excludes local people from the development process, in line with the thinking that social and cultural institutions, including ethnic diversity, are obstacles to the very modernization that is desired by the state. Through raising income per capita and harnessing development in Southeast Anatolia to national economic goals, the GAP is perceived to provide a means of encouraging political and social stability – of tackling the ‘Kurdish problem’. Development elites and bureaucratic institutions do not accept that the Kurdish minority exists as a group with its own ethnic needs, but consider Kurdish people to be part of the political and economic establishment as Turks. In the 1960s all Kurdish village names were changed to Turkish names and cultural institutions – language, clothes, music, religious practices – were legally banned as part of the state’s overpowering ‘one nation’ policy. The common understanding of bureaucrats and planners is that civil society and all people within communities have equal access to resources, based on their ‘shared values’, and consider ethnicity to be a traditional obstacle to development that the course of ‘modernization’ can overcome (Hettne 1995). Development planners do not therefore operate strategies aimed at addressing the issues pertaining to ethnic minorities and indigenous peoples affected by the dam projects. Twelve large GAP dams have so far been completed at a total project cost of US$17 billion, 85 per cent of which has been financed by the state (the estimated total cost of the GAP on completion is US$32 billion). Many of the previous GAP dam projects that impacted on the Kurdish population, such as the Ataturk dam, have been criticized for lack of compliance with international guidelines in respect of the planning and implementation. Areas of concern include lack of local inclusion, inadequate, unequal, or no compensation in cases of insecure land tenure, unresolved issues concerning title deeds, as well as issues around the violation of people’s freedom of choice and human rights. A recent report by the World Commission on Dams (2000) was particularly critical of the three countries that build the most dams – China, India and Turkey – for lack of compliance with international guidelines in respect of planning and implementation. There has been considerable external pressure on Turkey recently, largely from the EU, which wants to see evidence of the full integration of civil society and in particular Kurdish civil rights into development agenda. In 1999 the EU endorsed conditions for Turkey to become a member state on the basis of the same criteria as applied to the other candidate states – the full implementation of democracy, human rights, the rule of law and the protection of minorities. On the basis of the Copenhagen criteria, the EU asked

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Ankara to reform its legal and political system and to solve the Southeast problem by peaceful means, ending conflict between civil society and the state. Large dam projects have been implemented in Turkey despite a lack of compliance with international recommendations for inclusive development policy, in part because of the inability of a weak civil society to challenge government practices, but also because the GAP has been primarily domestically financed by the state and is largely independent of overseas aid and loans.2 Thus the state has remained free from the pressure and influence of international institutions that would insist on it abiding by the principles of ‘sustainable development’. Following the economic problems of the second half of the 1990s large infrastructural investments supported by state economic enterprises have stagnated in Turkey. Under pressure from the World Bank and IMF to reduce the dependency of state agencies and institutions on public funding and in line with the conditionality and liberalization programme, state institutions turned for support to both the domestic and external private sectors for investment in large infrastructure development projects. In 1997 the Government, through the Agency for State Hydraulic Works (DSI) invited Sulzer Hydro of Switzerland to lead a consortium to build the power plant at Ilisu, which involved Balfour Beatty (UK and USA), Impregilo (Italy), Skanska (Sweden), ABB Power Generation, Sulzer Hydro (Switzerland and Austria) and the Turkish companies, Nurol, Kiska and Tekfen. Contractors in the consortium approached Export Credit Agencies (ECA) of their own countries to underwrite support for their involvement in the project, as financial guarantors against the risk of non-payment. The Ilisu dam project was originally conceived in the early 1950s. Project planners and bureaucrats of the State Hydraulic Works (DSI), the government agency responsible for the construction of dams in Turkey, are determined to build the Ilisu Dam to supply the demands of national energy requirements in order to sustain economic growth despite its substantial potential impact on the local area and local communities. It is estimated that 180 villages in the project area will be impacted by the dam, involving the flooding of large areas including the historic town of Hasankeyf and that an estimated 61,000 people will be displaced with a further 30,000 people affected partially. This is likely to be an undercount of all local people eligible for displacement compensation and as such unreliable as a measure of the scale of resettlement, because of the unavailability of adequate demographic data on ‘empty’ villages, which people have left as a result of conflict between the army and the Kurdish Workers Party (PKK).

Contentious development issues and local protest A range of issues associated with the Ilisu dam could be considered contentious. Some are directly caused by the dam, such as displacement,

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environmental problems and cultural heritage loss induced by the flooding of the historical Kurdish town of Hasankeyf. Others are linked to more complex structural issues that development policy at the wider national level does not address and which are likely to impede the project’s implementation, such as local land disputes and problems in proving land tenure, as well as issues around the recognition of Kurdish identity, culture and social institutions. Many of the contentions that have been raised by local people relate closely to displacement and resettlement in the context of prevailing structures over land tenure and unequal land ownership in the region. A web of power processes based in local social relations and differentiation operates within the region and is the source of political as well as socio-economic conflict. Land ownership and the structure of landholdings are particularly divisive as they determine hierarchical power relations in rural areas and are the trigger of conflicts, that take various forms including forced land confiscation, family feuds over land and disputes between landlords and small property owners. Claims that rich landlords have unlawfully taken land from nearby villages and refuse to restore it to the rightful owners, for example, are not uncommon. Local protest groups and individuals from the rural areas believe that these conflicts are likely to cause a huge potential problem for the management and administration of the resettlement programme, in particular the allocation of expropriation and compensation. This is further complicated by restricted access to many villages still affected by security concerns, as well as difficulty in establishing ownership in villages that have been evacuated as a result of conflict between Kurds and the state. Throughout this conflict significant numbers of people have been have been forced to abandon their homes. Government statistics estimate that more than 30,000 people have been killed and more than 3,000 villages have been vacated resulting in the displacement of more than two million Kurdish people. Many have been internally displaced to major urban conurbations, while others have sought refuge in Europe. The drivers behind conflict-related displacement vary from direct conflict with the state, as well as local conflicts related to the political situation that reflect divisive power relations in the area based on the structure of landholdings. The extreme unequal distribution of assets in the area represents the institution of landlordism known locally as Aga. The Aga constitutes a powerful social institution that works to perpetuate inequalities and exploitative relationships within society and strengthen its lordly power at the expense of poorer families. In the Ilisu area there are a number of villages where only one or relatively few families (Aga) possess all cultivated land, with the ownership by these families extending beyond the boundaries of one village alone. By contrast high numbers of small holders are unable to prove ownership (i.e., title deeds) and it is estimated that 50 per cent of rural people in the dam area do not have land registration deeds or land titles.

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Despite their distinctive cultural diversity, the Kurds ethnicity is not recognized by the state. All Kurdish village names were changed to Turkish names and cultural institutions – language, clothes, music, religion were deemed illegal until recently as part of the state’s overpowering ‘one nation’ policy. For many years this drove direct conflict between the state and the Kurdish Workers Party (PKK) that fought for an independent ‘Kurdistan’ through violent and armed confrontation with the state from 1980 until the arrest of its leader in 1999. They believed in an independent Kurdish state with its own language and cultural institutions. As a consequence most of the region has been under Regional State of Emergency Governance (OHAL) since 1980 and as such is not governed by the Constitutional Court but is subject to a stricter legal and administrative rule. Since 1999 and subsequent to the arrest of their leader, the PKK has changed their political demand for an independent Kurdish state to Kurdish identity, political participation and human rights issues. Despite the PKK’s decision in 1999 to abandon its armed conflict and terrorist activity in order to seek a political solution to the ‘Kurdish question’, much of the area remains under emergency rule. Underlying the many concerns raised by the local protest groups is the widespread feeling that the displacement of Kurdish people from their villages and towns as a direct result of the dam project is part of a wider government agenda. For example, smallholdings are not actively encouraged to opt for government-assisted developmental resettlement and this is viewed suspiciously, given evidence from other GAP projects that indicates that in general displaced people have not fared well under self-resettlement and that government-assisted resettlement offers more opportunity for livelihood restoral. It has been argued that this feeds into a deliberate policy by the government not to establish new rural communities given the high number of Kurdish villages in the region. Others believe that there are underlying political reasons – that the government is attempting to ‘assimilate’ the Kurdish population through dispersal, rather than maintain its cohesion. The avenues of protest or opposition to state activity open to civil society, individuals and the media are limited in this region where civil society, its organizations and associations, and NGOs are prohibited from taking an active public role after years of violent conflict.3 It is important to highlight that the political origin, discourse, and action of new social movements or local protest groups are based on non-violent means that are distinct from the PKK. The PKK was an orthodox social movement, with Marxist Leninist ideology, that struggled for social change and a new societal order by way of physical force or terrorist means. The PKK’s political objective was to seize state power and replace it with a Kurdish socialist state, using whatever means necessary, including terror campaigns and criticism of Turkish nationalism in order to legitimize their own separatist nationalism. Since the arrest of its leader in 1999, the PKK has realigned its

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political demands to recognition of Kurdish identity, political participation and reform of human rights abuses. It is under the oppressive conditions of OHAL that new social movements have had to campaign in defence of ‘place’ – the loss of land, homes and identity through enforced displacement. Demonstrations were not permitted and civil society and environmental groups were not able to openly voice their concerns. The state has attempted to control opposition, to the extent that ‘critics of the dam have been subjected to intimidation or accused of belonging to the PKK, a crime punishable by up to 15 years imprisonment, whilst organizers of a rally to celebrate the history of Hasankeyf were forbidden by the local Governor from distributing a petition expressing concern over the dam’ (Kurdish Human Right Project 1999: 21). Despite the limited various media open to them, new social movements have mobilized to express concerns over the potential impacts of the dam on the environment, cultural heritage/archaeological conservation and the displacement of people and Kurdish identity. The main campaign tactics utilized have been letter-writing to state institutions and to the international media and information dissemination through Kurdish groups across Europe who have an established diaspora that operates as a network that binds immigrants to their homeland, as well as to each other. Local groups have taken state institutions to court over the flooding of Hasankeyf town and the inadequacy of consultation and participation over resettlement. The new social movements consist of individuals and local environmental groups that are concerned with specific issues around politics of identity (of the individual and the location), ethnicity, political participation and environmental issues and effect their protest by way of democratic means and against the exclusionary policy of the state. Although it is within the context of the dam that local campaigners have raised these issues, in so doing they are in fact challenging the wider national and regional development policy context. The challenge is most obvious in relation to the Turkish government’s policy towards civil society in respect of the recognition of Kurdish identity, culture and social institutions. The Kurdish dimension to the Ilisu dam project has in fact been a pivotal factor in the transnationalization of protest against the project.

Scaling up from local opposition to transnational campaigns Where local protest actions are largely ignored by state institutions or actively contained or suppressed leaving local movements politically weak, it is increasingly common for alternative communicative structures and international networks to provide the fora through which their concerns can be presented. In the case of Ilisu, local concerns over the politics of identity, place and displacement feed into the wider Kurdish ethnic question, while concerns over environmental issues are potentially global issues

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that many International NGOs and individuals express commitment to challenge. The social networks of the established Kurdish diaspora and Kurdish Human Rights movements based in Europe provided a transnational network through which local protests could scale up their actions and in so doing challenge the limits of national boundaries and local restrictions. A network of campaigners and NGOs lobbied against the dam, citing contentions around human rights, and social and environmental problems, in order to secure local people’s rights to development.

Contentious issues for transnational networks The key contentious issues that formed the focus of the transnational campaign networks against the Ilisu dam fit broadly into two groups – negative environmental impacts of the dam (river pollution, spread of disease, violation of UN Convention on the Non-Navigational Uses of Transboundary Watercourses) and human rights concerns around resettlement and the Kurdish population. Some of the key organizations and actors that were part of transnational networks are shown in Table 8.1. Table 8.1 shows that with the exception of local Kurdish and Turkish groups, and Amnesty International, the active organizations are mostly environmental groups who oppose dams and large development projects that have environmental impacts. Nevertheless the varied groups formed powerful alliances and ‘collective identity’ based on the specific context of the Ilisu dam, but which accepted that the general strategy and goal of the environmental organizations involved differed from those of the local Turkish Kurdish organizations. Friends of the Earth, for instance, focusses on themes relating to environmental issues and remains politically nonpartisan and ‘seeks the prevention rather than the cure for environmental problems’ even though specific key issues are attacked (Jordan and Maloney 1997: 37). The priority of Kurdish organizations is the protection of human rights and the rights of all to development within the Kurdish regions. Table 8.1 lists the different tactics and activities utilized to target national governments and private companies and intergovernmental institutions. These activities range from letter campaigns to senior government personnel (Prime Ministers, MPs), parliamentary select committee reports, lobbying of private companies including shareholders, organizing concerts and involving the mainstream media. More than 180 items on the Ilisu dam were published in mainstream newspapers globally from 1999 to 2000. The themes and titles of these articles reflect the activities of the campaigners of the transnational network that highlighted the deficiencies and failings of the Turkish government’s development model and policy to tackle contentious issues (as discussed above) in order to pressurize western companies and governments associated with the project into withdrawing their support.

Transnational development advocacy networks relating to the Ilisu dam project

Organizations, Groups and Individuals

Internet Campaign

Typical Actions of Protest Campaign

Kurdish Human Rights Project

www.khrp.org

Letter Writing (e.g. to Prime Minister), Demonstrations, Lobbying, Fact Finding Missions, Informing the Media, Purchasing shares from private company involved in Dam in order to attend the company’s annual meeting

Save Hasankeyf

www.hasankeyf.org

Demonstration, Lobbying, Informing the Media, Education, Purchasing shares from private company involved in Dam in order to attend the company’s annual meeting

www.kurdforum.com

Demonstration, Lobbying, Informing the Media, Education

The Human Rights Association of Turkey Kurdforum (Kurdish Environment Forum) The Ilisu Dam Campaign

www.Ilisu.org.uk

Demonstration, Lobbying, Informing the Media

Friends of the Earth UK, Friends of the Earth US, Friends of the Earth Sweden

www.foe.co.uk www.foe.org/International/

Court Action, Letter Writing (e.g. to Prime Minister), Demonstration, Lobbying, Fact Finding Missions, Informing the Media. Purchasing shares from private company involved in Dam in order to attend the company’s annual meeting

Amnesty International

Published Human Rights Audit 2001

World Economy, Ecology http://www.weedbonn.org/ and Development (Germany)

Fact Finding Mission and the Report, Lobbying

German NGO campaigning on Ilisu

www.medico.de

HERMES campaign, Germany

http://www.weedbonn.org/ hermes/ilisu.htm

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Table 8.1

Table 8.1

Transnational development advocacy networks relating to the Ilisu dam project – continued

Organizations, Groups and Individuals

Internet Campaign

Typical Actions of Protest Campaign

Berne Declaration, Ilisu campaign, Switzerland

http://www.evb.ch/bd/ ilisu.htm

Memorandum Submitted to International Development Committee Fact Finding Mission and the Report, Lobbying

Eye on SACE Campaign (Italy) International Rivers Network (USA)

http://irn.org/dayofaction/ 1999/turkey.shtml

Environmental Defense, US

http://www.commondreams.org/ Fact Finding Mission and the Report

Pacific Environment Research Centre (USA) The Corner House

http://cornerhouse.icaap.org/ briefings/14.html

Demonstration, Lobbying, TV, Concert, Letters, Education

Mark Thomas’ Ilisu page – Compedian and Human Right Activists Web-page on the Ilisu Dam

Letter Sent to the Prime Minister

http://www.heureka.clara.net/ sunrise/ilisu.htm

The Media Export Credit campaign – ECA–Watch: International NGO’s Campaign MP’s

http://www.eca-watch.org/ projects.html

Campaign on ECA to incorporate Environmental, Social and Human Rights Issues in their Procedures

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International Development Committee (sixth Reports), Fact Finding Mission.

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Transnational networks and government agencies in the UK The credibility of not only the development model and policies of the Turkish state, but also those of other states, ECAs, and private companies associated with the project were questioned during campaigning against the dam. The response of different governments to transnational activists and their critical campaigns varied from country to country. The discourse of protest was most effective in the UK, the base of exiled Kurdish movements who worked in alliance with other NGOs and individuals to challenge the UK government and the private company Balfour Beatty’s involvement in the dam project. In 1998 Balfour Beatty approached the UK Export Credit Agency of the Ministry of Trade (ECGD), for an Export Credit Guarantee of US$200 million to underwrite the company’s contract to build the Ilisu dam. The main companies involved in the project consortium commissioned an Environmental Impact Assessment Report (EIAR), which was published as a confidential report in 1988. As pressure against the ECGD mounted, it commissioned a report on the social impacts of resettlement and a review of the EIAR by independent consultants. This was a significant response to the concerns raised by transnational advocacy networks. Although most projects likely to have environmental impacts are subject to an EIA, few undergo significant social, political or human rights impact assessment. The objective of value-neutral EIA is to predict how the environment may change, what the costs may be, and what mitigation measures might be necessary. Decision-makers have shown little enthusiasm for incorporating mechanisms for social-political and human rights issues into the terms of reference of environmental assessment procedures, which tend to dictate and to some extent constrain what information should be gathered and what should be prioritized. Activists protested publicly over the UK government’s lack of mandatory environmental and development standards and the ECGD’s ‘secretive and unaccountable’ behaviour in not making public the findings of the EIA and the commissioned evaluation reports. On 21 December 1999, the reports were made public.4 Following evaluation of the two reports the Minister for Trade and Industry approved conditional support for the export credit guarantee, subject to the satisfaction of four conditions that bound the Turkish state into agreeing to tackle the environmental and social impacts of the project. The Turkish state agencies were asked to: 1) draw up a resettlement programme which reflected internationally accepted practice and included independent monitoring; 2) make provision for upstream water treatment plants capable of ensuring that water quality is maintained; 3) give an assurance that adequate downstream water will be maintained at all times; and 4) produce a detailed plan to preserve as much of the archaeological heritage of Hasankeyf as possible. In response to concerns that the Turkish government did not have the political capacity or will to implement these pre-conditions, the Swiss, the

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lead contractor on behalf of the ECAs initiated discussion with the Turkish authorities in order to secure their prior agreement to these recommendations. The consortium agreed that too heavy-handed an approach might risk being perceived as paternalistic and might raise concerns in Turkey over national sovereignty, threatening achievement of the desired end. The four conditions were the focus of intense criticism by protest activists for not incorporating human rights analysis and acknowledgement of the displacement of Kurdish people and conflict in the region. The reports of the House of Commons Select Committee on Trade and Industry and the International Development Committee reflect similar criticism: We are astonished that the Foreign Office did not raise any questions about the proposed Ilisu Dam and its effects on the human rights of those living in the region. The large-scale resettlement of a population, many of whom may well question the very legitimacy of the Government which moves them from their homes, must surely demand some detailed analysis from the Foreign Office. We would expect comments on the necessity of a genuinely transparent, free and fair consultation process; discussion of the relation between the removal of communities and drift to the towns on the one hand and on the other any conflict-related tactics and military strategy of the parties to the conflict; certainly an analysis of the human rights of the affected community and the extent to which the building of the Dam could possibly infringe or affect them (International Development Committee 2000: ix). The Turkish authorities accepted that ‘key issues’ needed to be resolved in respect of environmental concerns and guaranteed that they would be mitigated effectively. They rejected any debate on Kurdish problems, civil society and human rights issues on the grounds that these were national sovereignty issues. Contentious issues that have structural and political origins fall outside of the remit of development projects and demand a political commitment that, in this case, the Turkish state was clearly not willing to provide. Instead, planners and bureaucrats continued to maintain that civil society inclusion and inequality in the Ilisu area can be addressed and resolved at the project level by way of resettlement policy and cash compensation.

Transnational networks, the private company and reputational risk Private companies are under pressure from civil society, NGOs and regulatory policy to operate within the realms of a global corporate social responsibility that reflects the aims of sustainable development principles. This prescribes a clear mandate not to support projects that risk jeopardizing those aims. Campaigns driven by environmental activists, NGOs and the

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media to disrupt large development projects argue that it is neither ethical nor socially responsible for states and companies to ignore social and environmental problems. This challenges the interests of large corporations in terms of their operations and in relation to specific areas, namely corruption, local social relations and environmental impacts. Sklair (2001) takes the position that in fact ‘corporate social responsibility’ does nothing more than provide a convenient tool for private companies anxious to protect their ‘reputations’ when they are threatened by pressure and criticism both from civil society and transnational movements, in particular when their actions are not subject to a code of regulations. Balfour Beatty’s previous involvement in dam projects such as the Pergau dam in Malaysia and the Highlands Water Project, Lesotho, were cited as typical examples of unethical involvement in development projects that were linked with corruption (The Guardian, June 19, 2001). The company’s initial response to criticism over its involvement in Ilisu was to maintain that the criticisms raised were based ‘largely on misunderstandings, misconceptions and out-of-date information’. Additionally the company argued that its rationale for membership of the Ilisu dam project consortium was the associated economic benefits in terms of exports and jobs for the UK. Different tactics were used to increase pressure on Balfour Beatty, one of which was the purchase of shares in the company by network activists enabling them to attend the Annual General Meeting and lobby other shareholders over their concerns. Investors were persuaded to vote in favour of the firm adopting ethical guidelines to cover its investment and project work, based on environmental risk assessment and human rights evaluations. A non-executive director was appointed to review the company’s performance in line with these annually. In November 2001, Balfour Beatty pulled out of the Ilisu project on the grounds of limited progress in respect of social and environmental impacts implying lack of political commitment and concerns over the Turkish state agencies’ capacity to fulfil the ECA’s funding conditions given the bureaucratic machinery. Despite the fact that the EIAR set clear ‘benchmarks’ requiring government departments and agencies to act, there had been little evidence of a commitment to doing so. Balfour Beatty concluded that: The EIA … report details the principal social and environmental issues associated with the dam’s development and construction and offers recommendations to the dam’s proponents, the Turkish General Directorate of State Hydraulic Works (DSI). Its recommendations set clear benchmarks that require substantial actions on the part of the customer and other Turkish government departments and agencies. Given the substantial difficulties, which remain to be addressed, including meeting the four conditions set by the Export Credit Agencies, Balfour

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Beatty believes the project could only proceed with substantial extra work and expense and with considerable further delay. Accordingly, in concert with its international partner in the civil engineering joint venture, Impregilo of Italy, it has decided to withdraw from the project (Balfour Beatty Press Release, November 2001). The transnational network, civil society groups and associations claimed a victory, which according to Friends of the Earth in a press communiqué was: a tremendous win for campaigners against a disastrous dam project. Balfour Beatty’s very welcome decision to drop out of the project shows the power of shareholder pressure and publicity campaigns by groups like Friends of the Earth and the Ilisu Dam Campaign. The story of the Ilisu Dam project shows the need for laws which require British companies to adopt clear ethical and environmental standards in their work abroad as well as at home. Certainly, backing such an export credit should never even be considered in cases which involve such obvious environmental destruction and abuse of human rights’ (Friends of the Earth Press Release, November 2001). Once Balfour Beatty had withdrawn from involvement in the Ilisu dam project, pretty much the same transnational network switched its energies to campaign against the Yusefeli dam in Turkey, located on the River Coruh in the Northeast of Turkey near the border with Georgia, a nonKurdish region. A private British company, AMEC, approached ECGD for support to underwrite a £68 million contract to work on the project. Once the orchestrated campaign by environmentalists, the media and individuals started to take effect, including a demonstration outside the company’s London office, AMEC announced its withdrawal from the project on commercial investment grounds.

Conclusion In this chapter I have attempted to show that transnational protest networks tend to evolve in opposition to projects that perpetuate inequalities or abuses, ranging from environmental concerns to human rights. What this clearly demonstrates is that new forms of organizational structure are emerging to lobby and campaign on contentious development issues and that attempts to influence ‘national’ development interventions are by no means limited to the local or community level. Transnational networks facilitate the forging of links between local concerns and wider political issues associated with national development models and policy, legal frameworks and human rights agendas. Such activities represent processes

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of ‘deterritorialization’ that create new opportunities for individuals and communities to fight for improvements to their well-being. Transnational networks tend to achieve most impact in situations where grassroots groups and individuals are prohibited from making demands at the local level, as the Ilisu dam narrative illustrates. The case study shows how the protests of local movements, namely those of the ethnic minority, were transnationalized through such networks as Kurdish diasporas and the access to resources of protest that they offer. The postponement of the Ilisu dam project can be directly linked to the activities of transnational networks, which successfully drew attention to contentious development issues that were not resolved by the project by specifically targeting its protests at the reputations of companies and governments linked with the dam. It does not automatically follow, however, that transnational networks can challenge prevailing development paradigms or offer an alternative to the institutional context within which development policy and practice are articulated. It is unlikely that they would effect any sustained pressure on sovereign states to introduce political or socio-economic change. Thus we cannot consider them to be orthodox movements. But, having reviewed the Ilisu dam case, to what extent has development advocacy fitted under the New Social Movements rubric? There are limits to the association of transnational advocacy networks with New Social Movements for two reasons. Firstly, transnational networks consist of pluralistic and diverse organizations that are not unified by the objective of achieving political and structural change nor do they pretend to be so. If we take the case of the Ilisu dam, we find that transnational networks facilitate the alignment of the protests of northern-based activities and local groups, concerned with environmental impacts on the one hand and broader Kurdish human rights concerns on the other. Structural change to tackle distributional issues, the politics of identity and the exclusion of civil society, which are key obstacles to democratic processes and the achievement of development, remain the focus of local social movements. Rarely does structural change become the core purpose of activists that tend to be project focussed, and who tend to ‘move on’ once short-term institutional reforms, such as project postponement, are achieved. Transnational networks are ‘advocacy networks’, that mobilize resources on behalf of a weak civil society by linking local issues to a wider global context, but they engage with local people, rather than partner or integrate with them in their struggles. Secondly, access to development continues to be articulated through the structures of nation-states, that can chose how to respond to demands for change at the global level. This is despite the fact that globalization makes political processes increasingly interdependent and the policies of nationstates open to challenge from the wider global community. Nation-states may not be able to constrain transnational protests, but they can ignore

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their demands. States that resist external challenges tend to be those that are defensive of the need to tackle structural issues in respect of civil society inclusion, inequality (e.g. based on land tenure), human rights and environmental policy, especially if they are perceived to threaten national development objectives. The implication is that the fundamental political, legal and institutional changes required to resolve contentious development issues have to remain the challenge of local New Social Movements. The potential of the political space of transnational networks, however, should not be underestimated. It is increasingly within the contextual framework of large development projects that they transnationalize developmental problems, by emphasizing local/global connective structures. The evidence from this study shows that this activity makes it particularly difficult for private companies and ‘stable democratic governments’ to ignore the deficiencies of projects they may support. It can also force northern institutions to reflect on their own policies and practices, although this has tended to be concentrated on environmental procedures and regulations. As it becomes more commonplace for strong states to seek international funding and private sector support for mega development projects, they are increasingly accountable to external pressures. Within this context, they will find it difficult to ignore the criticisms of transnational and local campaigners. States will find it difficult to prevaricate over the inclusion of civil society in the development process, for to do so is likely to undermine the potential of public/private cooperation. Notes 1 Tarrow (1994: 184) makes a distinction between domestic social movements that actively embark on contentious political confrontations with elites at national state level and transnational social movements, that involve interacting ‘with opponents – national or non-national – by connected networks of challenges organized across national boundaries’. 2 Although the World Bank has been heavily involved in conditional Structural Adjustment and liberalization programme loans, it has remained reluctant to finance dam building in Turkey on the grounds that the World Bank does not support projects involving transnational rivers or disputed river basins. Turkey has been in dispute with both Iraq and Syria over the down flow of water from the Tigris and Euphrates rivers, who argue that the dam will reduce water flows into Iraq and Syria and gives Turkey control over the water flow. 3 Government statistics estimate that more than 30,000 people have been killed during armed conflict and more than 3,000 villages have been vacated. Large numbers of Kurdish people have moved from the area to the major cities as a result of conflict. 4 See The Review of Environmental Impact Assessment and Stakeholders’ Perception of Involuntary Resettlement of Ilisu Dam Project ECGD, UK 1999. The two review reports were highly critical of environmental impacts identified including downstream discharges, reservoir water quality and loss of cultural heritage and significant social impacts relating to displacement and resettlement in respect of land tenure issues, conflict and civil society.

9 Innovations in Trade Union Strategies in Brazil Marieke Riethof

Introduction The Brazilian labour movement is often viewed as a unique case of success in a time when most labour movements are in decline. Brazilian unions played a crucial role in the democratization process of the 1980s and industrial unions managed to consolidate a position of influence within multinational corporations. The political importance of the Brazilian labour movement is also reflected in the election of the leader of the Workers’ Party (Partido dos Trabalhadores) Luís Ignácio ‘Lula’ da Silva as president of Brazil in 2002. Even though large sections of the Brazilian labour movement were successful in strengthening their position within the workplace and also politically, trade unions experienced many difficulties throughout the 1990s. The introduction of economic reforms and changes in the labour movement’s organizational context during the 1990s meant that union strategies based on pro-active and militant strategies began to be replaced by a combination of international strategies and negotiations with employers and the government in a more defensive style. The purpose of this chapter is to show how these strategic changes within the Brazilian labour movement took place. The specific focus of the chapter is, on the one hand, on the analysis of strategies of trade unions within multinational corporations in Brazil, and on the other hand, the analysis of the global dimensions of trade union action in Brazil. The chapter starts with an overview of the characteristics of trade union strategies in Brazil and argues that these strategies have become more pragmatic during the 1990s. The second part of the chapter addresses the case-study of trade union action in multinational corporations in response to labour flexibilization policies. This section shows that union strategies have shifted from mobilization (focussed on both the democratization of the political system and the workplace) to a more defensive position, including attempts at negotiation with the government on issues like social security, employment policy and labour reforms. The third section analyzes the 154

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internationalization of union strategies and demonstrates that Brazilian trade unions no longer view their activities as limited to national borders. International trade union strategies are a potential counterweight to the ‘national’ difficulties that organized labour experiences. These international activities range from involvement in regional integration processes in the Americas, to membership of global union federations and the establishment of transnational union networks in multinational corporations.

New unionism and changing trade union strategies Can trade unions challenge globally mobile capital and the constant threat of factory relocation? Are trade unions able to promote their members’ interests when workers have to compete in a globally integrated market in which capital is mobile and labour largely restricted to national borders? Pessimists argue that trade unions have very few possibilities for effective action in times of global economic integration: ‘while for more than a century the trade union movement has been an important actor in defending the interests of workers and struggling for independence and democracy, it now faces in large parts of the world almost total elimination as a significant institution’ (Thomas 1995: 3). Trade unions not only face challenges in terms of their relationship with employers, but also in their relationship with their members and society as a whole. Trade unions tend to represent particular groups of workers – for example industrial workers and public sector employees – but find it difficult to represent workers in the informal sector, women and rural workers (Hyman 1999; Catalano 1999; Jose 2000). The Brazilian labour movement has overcome some of these limitations by adjusting its strategies during the 1980s and 1990s. The trade unions that emerged from the opposition to the Brazilian military regime (1964–1985) emphasized their autonomy from the state and traditional political parties; this represented a rejection of both corporatism and populism, which were dominant features of the Brazilian political system. In addition, the unions attempted to establish workers’ representation on the shopfloor and direct bargaining relations with employers, something which was made impossible by the military regime’s restrictions on trade union activities. Furthermore, the unions’ mass mobilizations and strikes from the late 1970s onwards re-established the labour movement as a legitimate political actor, a process which also included large-scale involvement of civil society organizations in the return to democracy. This new type of labour movement is known more widely as ‘new unionism’ and can be seen as a move towards the strategies of ‘new social movements’ (see Morvaridi: Chapter 8). The novel aspects of new unionism are the following: (1) a focus on internal democracy and democratic workplace relations; (2) strong connections with social movements and a new type of left-wing

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party (the Workers’ Party); (3) autonomy from the state (a rejection of corporatist unionism); and finally (4), a broad vision on the meaning of workers’ representation. The last point involves an attempt to include workers from outside the formal sector into the labour movement and represents a wider political programme focussed on social development. ‘New unionism’ is often viewed as an answer to the problems that unions face in the era of globalization, as it avoids the pitfalls of ‘traditional’ trade unions, which, through their focus on a traditional union constituency, increasingly lose membership and representative capacity (Seidman 1994; Barros 1999; Rodrigues 1997). During the 1980s, the Brazilian labour movement developed a successful strategy of mobilization in opposition to the military regime. Although there were important moments of negotiation during the 1980s, particularly in the case of the writing of the new Constitution in 1988, the new unionist strategies were mainly based on mobilization and confrontation. The success of the mobilization strategy in pressurizing the military regime and later the new civilian regime has left a legacy in new unionism that emphasizes the virtues of mobilization, and views negotiation with the government, and ‘defensive’ forms of bargaining with employers with suspicion. In the Brazilian context, the difference between ‘defensive’ and ‘pro-active’ bargaining during the 1990s refers to shifts in the purpose of collective bargaining. Examples of ‘pro-active’ demands can be found in the 1980s, when many of the stronger unions were able to extend their demands to progressive wage adjustments and the improvement of workplace representation. During later years, in times of economic recession, when firms decided to reduce and to flexibilize the workforce, unions often found themselves having to bargain (‘defensive bargaining’) in order to protect employment and wage levels in a company. During the late 1980s and 1990s, economic crisis and stabilization policies came to dominate the political agenda of the new democratic governments. This meant, firstly, that tensions between economic reforms and democratic deepening became more apparent. Despite several attempts at establishing a social pact in order to facilitate the implementation of stabilization plans, the central union organizations and the government failed to find common ground for regular negotiations in which social actors could influence government policy. Secondly, the ‘transition momentum’, during which the opposition had an important impact on policy-making and on the establishment of a new democratic regime, was replaced by the reality of economic reform. Compared to the 1980s, the political debate no longer dealt with the establishment of the new democratic system, which included the introduction of social and labour rights. During the 1990s, economic pressures precluded the extension of social and labour rights, and replaced them with a focus on macro-economic stabilization and institutional reforms (Cook 2002: 2). Thirdly, economic recession and

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economic reforms reduced the effectiveness of union action. The threat of unemployment reduced the willingness of workers to strike and demonstrate, whereas reform of the public sector and privatization undermined some of the most important constituents of the labour movement (Riethof 2002: 145–8). The consolidation of economic reforms in the aftermath of democratization led to a paradoxical situation in which the labour movement developed a more flexible attitude in capital-labour relations and also attempted to maintain its identity based on its successes during the 1980s (cf. Martins and Rodrigues 1999: 156). Apart from the worsening economic situation, the main reasons for the tension within new unionism between strategies of mobilization and political participation can be found in the organizational characteristics of the Brazilian labour movement (Cardoso 1999). Firstly, in developing countries like Brazil, the existence of a large informal sector poses limits on the representativeness of the labour movement, as unions tend to represent workers in the formal sector. Secondly, although central union organizations, such as the Central Única dos Trabalhadores (CUT), played a significant political role as the public face of important sections of the labour movement and as the organization that coordinates union action, individual unions are the organizations that attract members, bargain collectively and often represent the original location of changes in union strategies (Cardoso 1999: 62–3; Comin 1995: 80, 153–4). Two further points are important for an understanding of changing union strategies in Brazil. Victoria Murillo (2001: 9, 17) argues that the choice for militant or participatory strategies is usually the result of political dynamics within unions. According to Murillo (2001: 194), union militancy is the result of union leaders’ responsiveness to the rank-and-file members, who demand a militant reaction to market reforms. This chapter argues, though, that militancy is one possible outcome of internal political dynamics, but that, particularly in the Brazilian case, the individual unions, which need to deal with the day-to-day practice of labour relations and the effects of economic reforms, also developed pragmatic responses. Competition within the union movement concerning membership and political participation plays a significant role in the formation of union strategies, but competition can also undermine the effectiveness of union strategies, as it prevents union opposition from forming a united front. By assessing conflicts and fragmentation within the labour movement, other actors can judge the strength of unions and decide to negotiate with one group rather than another (Murillo 2001: 17). Particularly relevant cases in the Brazilian context are the CUT’s principal competitor, Força Sindical, and the Landless Workers’ Movement (Movimento dos Trabalhadores Rurais SemTerra, or MST – Cardoso 1999; Branford and Rocha 2002). In sum, trade unions in Brazil are confronted with two paradoxes. Firstly, labour movements (re-)emerged as an important opposition force in the

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context of protests against authoritarian regimes. This provided the labour movements with renewed legitimacy as members of the opposition and legitimate representatives of workers. However, democratization usually did not produce the expected positive results on inequality, poverty, and workers’ rights. In particular, when the Brazilian government began to introduce macro-economic stabilization plans and economic reform programmes – including state reform, privatization, deregulation and trade liberalization – during the 1990s, not only large-scale mobilization and strikes, but also more formal participation of non-state actors in decisionmaking and consultation were seen by governments as potentially jeopardizing the success of these plans. Therefore, governments tended to become more hostile to political participation and opposition (Starr and Oxhorn 1999; Roberts 1998). Secondly, even though unions managed to play a crucial role in the democratization process and in widening the transition agenda to include social concerns and workers’ rights, changes in the labour market, economic restructuring and long-term processes of socioeconomic change started to undermine the traditional constituency of the labour movement. Both processes fundamentally shape current possibilities and limitations of trade union action in Latin America.

Negotiations with multinational corporations Multinational corporations have long been the engine of Brazilian economic development and, at the same time, the source of innovative trade union action since the end of the 1970s. New unionism emerged in the car industry in São Paulo and although new unionist practices spread to other sectors as well, trade union action in industrial multinational corporations can be seen as the starting point of many changes in Brazilian labour relations (Keck 1992; Seidman 1994). A study of multinational corporations can provide a more profound insight in the local effects of global economic integration and responses from society: ‘a focus on the firm in its immediate social relations can highlight the deficiencies in globalist approaches to the firm, while at the same time providing a more nuanced understanding of the context specificity of experiences of globalization and restructuring’ (Amoore 2000: 189). Apart from the particularly successful negotiations between unions, the government and employers’ organizations, attempted in the late 1980s and early 1990s, important collective bargaining innovations took place at a plant and regional level, particularly in the heavily industrialized state of São Paulo. Factory commissions (comissões de fábrica) were established by new unionists in enterprises with strong trade unions during the early 1980s with the aim of democratizing workplace relations. Although they were not formalized in Brazilian labour legislation, the commissions can be characterized as a new unionist response to the corporatist union structure,

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in which company-level unions are banned. Although factory commissions still exist in the automobile industry (particularly in the state of São Paulo), they have lost much of their power and did not manage to become a standard feature in the Brazilian labour landscape. Sectoral chambers (câmaras setoriais) are an example of direct bargaining and participation between unions and employers. The purpose of sectoral chambers was to define sectoral policies and to compensate for the negative effects of economic liberalization on the export sector; the main examples were also found in the automobile industry in São Paulo. While the establishment of factory commissions was a consequence of the strong position of particular unions in the late 1970s and early 1980s, the sectoral chambers were a reaction to the effects of the economic crisis of the early 1990s (cf. DESEP/CUT 1993: 1). The principal diagnosis of the problems of the automobile industry during the early 1990s reached in the sectoral chambers was that cars produced in Brazil were too expensive and of low quality, while automobile exports should be higher, in order to ensure the sector’s competitiveness. In addition, according to the results of the sectoral negotiations, there was not enough investment in technology and modernization of production organization. Given this diagnosis and declining automobile production from March 1992 to February 1993, unions and employers agreed to reduce the price of automobiles by 22 per cent and to involve workers in the modernization of the production process and crisis management. These negotiations were aimed at maintaining employment levels and wage adjustments fully linked to monthly inflation. Sector-wide, the production of automobiles increased, while car sales increased for some time and then stabilized (Martin 1997; DESEP/CUT 1993). The sectoral chambers in São Paulo disappeared at the end of the Itamar Franco (1992–1994) government, as sector-specific industrial policies were increasingly criticized. At the same time, monetary problems and the introduction of the Plano Real in 1994 undermined wage indexation and wage demands linked to productivity increases. In order to avoid price increases during the introduction of a new currency, Fernando Henrique Cardoso reduced tariffs from 35 to 20 per cent. This sudden move was seen as undermining the consensus that economic liberalization should occur gradually, in order that companies had time to modernize their production organization. The effects of the Mexican peso crisis, which led to the devaluation of the Real, meant that the government temporarily increased import tariffs in some sectors (including the automobile sector, but not for auto components) to 70 per cent, in order to prevent a sharp increase in imports of consumer goods (Martin 1997: 54–6), which further undermined the compromise. In Scott Martin’s analysis, one effect of the sectoral chambers was that they stimulated companies in some economic sectors to introduce productive and technological modernization in dialogue with workers, local

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government, and suppliers. On the other hand, it also was an important form of organizational innovation, according to Martin, as sectoral chambers went far beyond traditional Brazilian corporatism and are also more flexible and dynamic than national forms of neo-corporatism (Martin 1997: 57–9, 63). The main political group within the CUT, Articulação, was very positive about the sectoral chambers, viewing sectoral bargaining as a strategy aimed at ‘the formulation and exercise of union strategies capable of configurating an alternative of proposition-based confrontation (confrontação propositivo) to the neo-liberal project’ (DESEP/CUT 1992: 7). Despite their premature disappearance, the sectoral chambers represent an illustration of the shift in the CUT’s strategies towards an emphasis on negotiations with the government and employers’ organization at national and regional levels. In the words of Scott Martin, this represents a move from oppositional militancy to innovative militancy, a situation in which both unions and management become more open to participation and negotiation (Martin 1997: 68). The introduction of the Plano Real macro-economic stabilization programme did not only lead to the end of the sectoral chamber initiative, but also contributed to the trade unions’ increasingly defensive position. The economic problems evident during the later 1990s weakened even the strongest unions. The CUT interpreted the rise of unemployment and the deterioration of labour conditions during the 1990s as a result of the introduction of economic reforms (Executiva Nacional da CUT 1996). For the CUT, the key issues in Brazilian employment policy were the quality of work in general (including flexibilization, the casualization of work, outsourcing, rights of workers in the work place) and unemployment. Outsourcing (terceirização), in particular, was the subject of much criticism, as this was perceived to lead to a deterioration of working conditions, including threats to safety at work. Most new forms of labour flexibility were first initiated by individual unions and companies, after which some of these changes were turned into legislation at the federal level. Most of these changes were first started in the ABC1 industrial region in São Paulo and are especially characteristic of multinational corporations. The negative effects of economic reforms on employment also affected trade union strategies, as the focus of union action shifted from wages to employment issues during the 1990s. After the introduction of the Plano Real, wage indexation based on past inflation was abolished (in 1995). Until 1994, Brazilian wage policy was based on indexation to inflation, although unions often had to bargain for the higher wage adjustment margins. After wage indexation was abolished in 1995, the new wage policy became based on the principle that wages are shaped in a system of decentralized collective bargaining (Pochmann et al. 1998: 12; DIEESE 1995: 7–8). As a result of the threat of dismissal and unemployment, new issues in negotiations and union action became job security, protesting against

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mass dismissals and labour flexibilization. Examples of this are the increase in the number of negotiated restructuring agreements. Oliveira even argues that the debate on labour flexibilization replaced the debates on the transformation of the corporatist labour relations system in Brazil (1998: 26; cf. Cook 2002: 21). Particularly in sectors where unions are strong (multinational industries), unions can demand to be consulted about production and employment restructuring and they can demand a guarantee to maintain employment levels and outplacement possibilities in the process of restructuring (DIEESE 1995: 18–9). One prominent illustration of a shift from a focus on wage demands to job security is that union action in the automobile sector increasingly tended to focus on the protection of employment levels in exchange for labour flexibilization and wage and benefits cuts, at a time when employees were threatened with dismissal and plant relocation within Brazil. In 1997, Volkswagen threatened with mass dismissal of one-third of the work force, but introduced a ‘voluntary dismissal’ programme – a programme which stimulated employees to quit their jobs through financial benefits, training programmes and early retirement programmes – under pressure from union-led action, as unions feared that a mass dismissal policy would not be accompanied by benefits for dismissed workers. In November 2001, Volkswagen workers in São Bernardo do Campo accepted a 15 per cent wage cut and reduction in working hours in return for employment protection and proper redundancy schemes. More specifically, unions started to negotiate several forms of work flexibility. Direct negotiations between employers and employees, on issues such as shorter working weeks, temporary dismissal and a typical labour contracts (e.g. temporary and part-time contracts), were made possible by new laws since 1998 (Cook 2002: 19–23). The reforms were aimed at reducing unemployment through labour flexibilization, while the broader economic purpose was to facilitate the Brazilian economy’s adaptation to global competition. The three existing forms of negotiated flexibilization are ‘Banco de Horas’ (hour bank) and other mechanisms that enable enterprises to reduce the number of working hours, temporary contracts, and profit participation (Participação nos Lucros e Resultados – PLR), a form of variable wages. The context to these initiatives is that the federal government has reduced the costs of dismissal, a measure facilitated by the national Congress’ approval of the withdrawal of ratification of ILO Convention 158 (protection against unjustified dismissals, Cook 2002: 18). An important example of voluntary reduction of the working week is the Banco de Horas, regulated by law in 1998. The Banco de Horas is a system in which working hours are not calculated per week or day, but per year. In this system, employers can vary the number of hours worked according to production requirements. Because employees can be either in credit or in debit with the bank, they can be asked to work more during a period when

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it is needed, without being paid overtime rates (Freitas 2001: 11–2). The crucial issue is the ability of unions to negotiate favourable arrangements within the legal framework of this system. The CUT considered reduction of the working week negative if accompanied by proportional salary reduction, yet a shorter working week without salary reduction in order to create more employment has been an important demand since the beginning of the 1980s. The Banco de Horas in its contemporary form is considered as a negative development by the CUT as it represents the deregulation of the labour market and forms part of the government’s policy to adjust labour costs as part of economic restructuring. At the same time, the CUT doubted whether this project would generate employment, as employers tend to adjust the work force through labour flexibilization without necessarily employing more people (CUT/ Secretaria da Política Sindical 1998: 2–3). Possibilities for temporary contracts were legislated for in 1998, enabling the hiring of a number of workers on a temporary basis, although this has to be negotiated between employers and unions (Portella de Castro 1999b: 39). Temporary contracts have been possible since 1974, but the percentage of the temporary work force and the terms of the contract had to be negotiated with the union. Fixed-term contracts were regulated by law in 1998, making this form of employment more attractive for employers through a reduction of social-security contributions. Moving from small companies to large employers, between 50 per cent (for companies with less than 49 employees) to 20 per cent (more than 199 employees) of a company’s employees can be employed on the basis of a fixed-term contract. Another initiative inaugurated in 1998 was the introduction of part-time contracts, based on a maximum of 25 weekly hours. In addition, a 1998 legislative proposal facilitated temporary dismissal for a maximum of five months. Workers receive a benefit equivalent to the unemployment benefit and a retraining programme, and workers can be fully dismissed after five months (Martins and Rodrigues 2001: 167–70). ‘Participation in Profits and Results’ is intended as an introduction of variable wages. As in the case of Banco de Horas, the premise of variable wages is that unions negotiate specific terms and conditions with their employers within the legal framework of PLR. Aspects that are considered within PLR agreements are quality, productivity, absenteeism and health and safety on the shop floor. To a certain extent, the possibility to negotiate variable wage segments shifts away collective wage bargaining from the adjustment of wages to inflation to direct bargaining of wage levels between employers and employees. The purpose of promoting direct bargaining about wages and working conditions is to avoid the return of the ‘wage-price’ spiral, characteristic of hyper-inflation, in which wages follow price increases, while higher wage levels are in turn translated into higher prices. Although direct labour relations without the state’s intermediation have always been a prominent demand of new unionists, the more negative

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economic context of the late 1990s meant that direct bargaining would not necessarily contribute to a democratization of labour relations in the eyes of the labour movement (cf. Cook 2002: 21). Moreover, negotiated flexibilization was introduced in an economic context in which unions were much less able to bargain for gains in working conditions, wages and workplace representation. Instead, protecting the job security of the unions’ own members became a priority. Negotiating wage flexibilization has been a difficult step to take for many unionists and has led to internal conflicts, as ‘defensive bargaining’ is not accepted by radical groups within the CUT. The Sindicato dos Metalúrgicos do ABC (one of the pioneers in negotiated flexibilization) argues in an introduction to a manual for bargaining PLR agreements (SMABC 1998) that both the struggle for higher real wages and negotiating PLR agreements are important forms of class struggle, in a world where this struggle is in a state of transformation. The union does not want to abandon the ideal of socialism, but the ideal has to be reached in a different way: ‘as one of many contradictory instruments, [it can be used] for the construction of class consciousness. It should not serve as a proposal for an unconscientious and demobilizing partnership … We will have all the conditions for it to turn into an instrument for the accumulation of forces’ (SMABC 1998: 12).

Global dimensions of Brazilian union action A further important concern of the Brazilian labour movement is focussed on the relationship between globalization and domestic economic development, and the increasing importance that the government attributes to market forces. The CUT does not believe that Brazil has had no choice but to submit itself to the forces of globalization and sees ‘globalization’ as an excuse that the government uses at will: ‘In reality, the government has taken various initiatives that eliminate the historically achieved rights of those who work in this country, with the pretext of realizing “necessary” reforms for the subordinate entry of the country into globalization’ (Executiva Nacional da CUT 1997). This implies an interesting assertion, that the CUT believes globalization is a choice, not necessarily an unavoidable reality. According to the CUT, the challenges of economic globalization in combination with the policies of the Brazilian government imply that integration will be subordinate to ‘the conditions of the global economy’. In the CUT’s diagnosis, liberalization and economic crisis during the 1980s led to the dismantlement of the previous Latin American model of domestic economies structured by the state, ‘where the priority was to expand the internal market through the association between public and private capital (national and international). At the same time, the state provided essential social services and guaranteed “social peace” through its intervention in

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the regulation of social relations’ (CUT 1994b: 3). This quotation reflects the importance the CUT attaches to the state as a crucial actor in the development process, albeit with a different and more democratic role than before. Additionally, in the CUT’s view, economic reforms and particularly liberalization policies have led to the dismantlement of the national industrial sector. This point reflects the CUT’s belief in the industrial sector as the driving force of economic and social development, as the CUT expects that a focus on agricultural and mineral exports makes the Brazilian economy too vulnerable to the volatility of international demand (CUT 1994a: 7), as economic reforms tend to promote competitiveness on the basis of products with low added value, such as agricultural products. In addition, in an analysis provided in a CUT document which discusses changes to development strategy, it is argued that the economic liberalization process has immediate negative consequences for workers, as labour costs are reduced, labour markets flexibilized, and union and workers’ rights attacked. In this view, the purpose of economic reforms is to leave regulation of social and economic relations to market forces (CUT 1994b: 3–4, 9–10). In this sense, the CUT criticizes the strengthening of the market mechanism in the Brazilian economy, although economic reforms are not automatically rejected. While the strengthening of the market mechanism is associated with the pressure of international financial institutions and other foreign lenders, the CUT believes that the Brazilian state can take a more assertive position in negotiations with foreign lenders and multinational corporations, for instance, through taking a tougher stance in the renegotiation of external debt. When analyzing the Brazilian labour movement’s opinion of globalization and its effects, it becomes clear that the CUT does not view globalization as an inherently negative process. For example, the CUT supports the view that technological development and globalization should be reflected in social development and solidarity. Nevertheless, it is argued that the current form of globalization is exclusive in nature and leads to competition among governments to reduce labour costs and union rights, as part of comparative advantage. As a consequence, according to the CUT’s former president, Vicente Paulo da Silva, ‘workers from all over the world are pressurized to abandon their rights and legitimate demands in the name of international competitiveness. At the same time, unemployment increases, and we see an enormous process of concentration of power and wealth’ (da Silva n.d) Globalization in combination with neo-liberalism ‘represents the increase of unemployment, making precarious of labour contracts, informality and growing attacks on the right to unionize’ (CUT 1997: 7). Neoliberalism as interpreted in the CUT’s analyzes of the global economy, leads to unemployment, economic stagnation and, interestingly enough, a loss of international competitiveness for countries which have introduced neoliberal reforms. In turn, economic modernization causes the substitution of

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human labour by machines, outsourcing (terceirização), and segmentation of the labour market. The CUT has also discussed the role of multinational corporations in the Brazilian economy, maintaining that multinational corporations increasingly control research, production, and trade. Multinationals search for comparative advantages and these can be found in countries with deregulated labour markets and low wages (CUT 1994a: 5). In the CUT’s perspective on globalization, multinational corporations and international financial institutions are the driving forces of economic integration, as they intend opening up new markets and increasing their profits through the reduction of wages and labour costs. At the same time, for already industrialized developing countries (such as Brazil), ‘the sectoral and differentiated character of the integration [of multinational corporations] implies, on the one hand, the constitution of islands of excellence connected to the transnational enterprises and, on the other, the de-industrialization […] of a large part of the industrial park established through substitution of imports in the previous period’ (CUT 1997: 8).

International strategies and contacts with unions around the world In a way, the CUT has formed a double relationship with global unionism. Firstly, the CUT receives financial and organizational support from unions in developed countries. Secondly, the question whether the CUT should be a member of the International Congress of Free Trade Unions (ICFTU) has long caused major conflicts. The ‘Cold-War’ characteristics of the ICFTU and its Latin American counterpart Organización Regional Interamericana de Trabajadores (Inter-American Regional Organization of Workers – ORIT), were an important obstacle to the organizational and political changes that many new unionists deemed necessary in international union organizations (see Jakobsen 2001). When affiliation to the ICFTU was finally approved in 1991, the CUT found that it was necessary to state the following justification: ‘Our affiliation does not mean any political-ideological alignment to the currents that dispute the hegemony of the international trade union movement. It expresses our will to fight, at an international level, our conception and practice of union action with other centrals’ (CUT 1991: 17). Even now, according to the secretary of international relations of the CUT, Kjeld Jakobsen, the ICFTU ‘does not appear to have realized that this new global economic order cannot be confronted by using the old strategy, and that neo-liberalism is not an inexorable process, the consequences of which must be accepted or even welcomed since we can have a minimum effect on them’ (2001: 364). Jakobsen points to North-South tensions that weaken global unionism. According to him, the international trade union movement should take into account that developing countries are more vulnerable to global

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economic change and the pressure to introduce reforms. He explains that the reason why unions in developing countries are ambiguous about social and labour clauses in international trade agreements, is as a result of a fear of protectionist use of such clauses. In addition, the inclusion of social and labour clauses in international trade agreements tends not to address fundamental socio-economic problems, such as unemployment, poverty and large-scale violations of human rights, and an absence of a culture of negotiations between employees, governments and employers in developing countries (Jakobsen 2001: 370–2).2 The CUT is not necessarily against regional and global integration agreements, as they can contribute to more sustainable global and regional economic integration, and can aid debt renegotiation (Portella de Castro 1999b: 12). The labour movement’s fears are twofold. Regional integration initiatives, such as NAFTA (North American Free Trade Agreement), Mercosur (Mercado Común del Sur), and the FTAA (Free Trade Agreement of the Americas), tend to be focussed on trade liberalization and the hidden agenda of trade liberalization is economic deregulation, at least in the CUT’s view. Furthermore, regional integration between asymmetric countries is expected to lead to downward harmonization of social and labour rights (Portella de Castro 1999b: 13). Union action within the institutions of Mercosur and during the ongoing negotiations of the Free Trade Agreement of the Americas (FTAA) has played an important role in the international relations of Brazilian trade unions, although it is not the unionists’ highest priority.3 The CUT is a member of the Coordinadora de Centrales Sindicales del Cono Sur (CCSCS), established in 1988, an organization which attempts to coordinate union action at the level of tripartite working groups and the socio-economic consultative forum of Mercosur. The emphasis of union action in a regional context is on the inclusion of the fundamental labour rights established by the ILO in the regional integration process. An important result of union pressure on Mercosur negotiations was the official adoption of a ‘Declaration of Social and Labour Rights’ in 1998 (Portella de Castro 1999a, 1999b; Riethof 2002; Munck 2001). A major focus of union opposition is the limited extension of the democratic participation of civil society movements in the regional integration process (CUT 1994a: 6), which at the moment do not have very significant consequences. For example, Mercosur has a tripartite technical subgroup dealing with labour and employment issues (SGT10) and a consultative forum on economic and social issues (Foro Consultativo EconômicoSocial). Since the creation of Mercosur, union participation in the regional organization’s institutional structures has also focussed on macro-economic and trade issues, including attention to the common external tariff (the CCSCS supports a gradual reduction of the external tariff), internal trade, the active promotion of productive modernization and sectoral union negotiations within Mercosur. Sectoral union and tripartite negotiations

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are explicitly based on the example of the sectoral chambers in Brazil. Union committees exist in the metallurgy sector, but there are also other sectoral initiatives in banking, transport, construction, textile, paper, and the graphic sector (Portella de Castro 1999b: 14–6). Conflicts, protest, and the transnational networks surrounding the North American Free Trade Agreement are an illustration of the possibilities for transnational organizing (Rupert 2000; Grinspun and Cameron 1993; Cook 1997). The protests have had an important impact on the inclusion of nontrade issues in free trade agreements. In the case of NAFTA, the inclusion of non-trade issues concerned the establishment of side agreements on environmental protection and labour rights. María Lorena Cook calls the different forms of contact between social groups and organizations in the context of NAFTA the emergence of a transnational political arena (Cook 1997: 526) in which there is an awareness of the broader and global consequences of economic and political processes. It can mean that non-state actors attempt to find allies in other countries and that they become stronger because of their relations with international bodies or organizations in other countries (transnational organizing and transnational solidarity) (Cook 1997: 521). The CUT also participates in alternative social summits for the FTAA and in the World Social Forum (Porto Alegre 2002). Moreover, a sense of common circumstances and interests inspire information exchange and meetings between members of COSATU in South Africa, the KCFTU (Korean Confederation of Free Trade Unions) and the CUT. Joint statements, strike solidarity and contacts between workers in the same multinational corporations have led to a network of unions in these countries. A particularly interesting recent development is the establishment of union networks between employees of multinational corporations in different countries, in order to strengthen international coordination of union action. These networks are usually extensions of factory commissions in companies where unions are already strongly represented. Extensive contacts exist between employees of Volkswagen in São Bernardo do Campo and in Germany, and also in South Africa and Mexico, based on visits and information exchange. In addition, these contacts played an important role in the Volkswagen management’s acceptance of the factory commission and the union in Brazil. With reference to the creation of Works Councils in European Union member-states, a global workers’ committee for Volkswagen was established in May 1999. Through this committee, employees of Volkswagen branches can be informed about and consulted during the management’s decision-making process, even though, according to the representative for Latin America, Mario Barbosa, employees of Volkswagen in Brazil do not have the same rights of representation as German employees. Information exchange on company matters and the international context of labour relations has also been important for local collective bargaining.4 The South American network of BASF employees was

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recognized by the company in the beginning of 2001. The main results of this network has been the establishment of contacts, information exchange, attempts at regional and global synchronization of union demands, concrete agreements with the BASF management in the area of occupational health and safety, and further recognition of trade unions and shop-floor organization (Novais 2001).

Conclusion The Brazilian ‘new unionism’ is an important example of innovation in trade union strategies and of attempts of trade unions to overcome limitations of representativeness in new democracies. Despite these innovations, which also contributed to the election of a former trade union leader as president of Brazil in 2002, economic reforms have posed new challenges for trade unions. Instead of a deepening of democratization of the 1980s, which created significant space for the promotion of social and labour rights, trade unions were confronted with economic reforms during the 1990s. On the one hand, the introduction of economic reforms meant that space for effective opposition became limited. On the other hand, due to the negative effects of the recession that accompanied the stabilization plan, unions had to change their strategies to adapt to a new reality. This adaptation consisted of a more defensive approach to collective bargaining and the internationalization of union strategies at a regional and a global level. As the organization of mobilizations and strikes became more difficult after the introduction of the Plano Real, and as negotiations with the federal government were not successful, several new trade union strategies emerged. Characteristic of these new strategies is that they were a response to economic problems and to the reforms introduced by the government, compared to the more pro-active strategies for workplace representation and wage adjustment that were common during the 1980s. The first example refers to tripartite negotiations in the automobile sector, particularly in 1992 and 1993, leading to cooperative strategies of employers and unions in attempting to create a solution for the crisis of the automobile sector. Secondly, trade unions, particularly in the multinational automobile sector, began to negotiate various forms of labour flexibilization under pressure of economic recession, including flexibilization of working hours, temporary contracts and variable wages. In addition to national and local strategies, Brazilian trade unions participate in numerous transnational networks. These transnational strategies are a clear innovation when used as a complement to national collective bargaining processes. The importance of these strategies lies in particular in information exchange and the coordination of union strategies worldwide, and to a lesser extent in the ability to put pressure on transnational

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employers. The CUT plays an important role in the Southern Cone union umbrella organization CCSCS, which attempts to influence Mercosur’s socio-economic agenda and increase participation of civil-society organizations in the regional integration process. Although Brazilian trade unions play a prominent role in more traditional international union structures, such as the ICFTU and participation in the ILO, the most innovative developments take place in transnational sectoral networks (based on the International Trade Secretariats) and union networks in multinational corporations. Notes 1 ABC stands for three industrial suburbs of the city of São Paulo: Santo André, São Bernardo and São Caetano. 2 Interview Kjeld Jakobsen, São Paulo, 27 August 2001. 3 Interview Maria Silvia Portella de Castro, advisor Confederação Nacional dos Metalúrgicos, October and December 1999. 4 Interview with Mario Barbosa, Sindicato dos Metalúrgicos do ABC, representative in global committee of Volkswagen, São Bernardo do Campo, 27 August 2001.

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Part III Regulating Globalisation, Development and Liberalisation

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10 Well Connected? Building Capacity for Pro-Competitive Telecommunications Regulation in Three Caribbean States Martin Lodge and Lindsay Stirton

Introduction Among the key controversies in development has been the contribution of the state to the achievement of particular development goals. Themes of ‘state capacity’ and ‘state autonomy’ have been used to highlight the importance of the state in developing and fostering economic development, such as during ‘second wave’ industrialization (such as 19th century Germany) or in the countries of South East Asia (Evans 1995; Polidano 2001). In the development context, such themes have gained currency in recent decades, receiving, for example, the blessing by the World Bank during the 1990s (World Bank 1997). Four key orthodoxies are often associated with issues of state autonomy in a developmental context. The first orthodoxy is that lesser developed countries are less able to attract and maintain capable staff for their bureaucracies. Not only are these states unable to rival private sector firms in terms of remuneration packages, they are also unable to maintain ‘knowledge elites’ within their territories. Thus even initially successful reforms are, in the long term, undermined by an inability to maintain sufficient human capital to develop a capable and ‘autonomous’ economic policy that is appropriate to developmental goals. The second orthodoxy concerns organizational capability. Besides the issue of organizational resources, poor legislation and weak organizational boundaries are said to leave the state and the public sector incapable of governing. As Patrick Dunleavy (1994) suggested in the case of contemporary public sector themes of outsourcing and privatization, the weak ‘contracting’ and ‘monitoring’ power of states is likely to lead to powerful transnational service providers dominating the agenda. 173

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The third orthodoxy concerns power relations within the state. Thus, instead of achieving developmental goals, policies and policy change are regarded as protecting, if not strengthening particular economic and political elites rather than opening access to political and economic resources. Others regard policies of reform as a dramatic redistribution of power away from national states to transnational corporations, creating dependency effects. Some have even suggested that the telecommunications policy in the Caribbean has been characterized by ‘tele-colonialism’ (Noguera 1997). The fourth orthodoxy, partly drawing on the other three, is that inheritance (or ‘endowment’) matters (on the positive impact of the ‘Weberian state’, see Rauch and Evans 2000). Thus, those states with some form of institutional capacity are more likely to achieve economic development than other states without institutional capacity. Development is therefore regarded as path dependent or, at least dependent on matching the appropriate instruments to the national ‘institutional endowment’ (Levy and Spiller 1995). Such common orthodoxies are likely to be pertinent in the case of three Caribbean states, Barbados, Jamaica and Trinidad; in particular in the domain of telecommunications. As is also stated in the other chapters in this section, Caribbean states are all relatively or very small island economies, with a broadly similar cultural, social and political background (and joint members of CARICOM and the Caribbean Telecommunications Union (CTU)), shaped by colonial histories and in the shadow of the hegemonic North American market, while also dealing with the same transnational (and formerly colonial) telecommunications operator, Cable and Wireless. Nevertheless, the analysis across the three states and their regulation of telecommunications reveals a number of puzzles to the orthodoxies of ‘state capacity’. Thus, if the fourth orthodoxy is to hold true, then the ‘worst’ case, Jamaica, has seen much more ‘benevolent’ developments, at least at first sight and at the time of writing, in terms of personnel and organizational capacity than would be expected. In contrast, the apparently better endowed Barbados, as well as Trinidad and Tobago showed far less success in building regulatory autonomy or in expanding their telecommunications markets. Something more than a very basic path dependent view (or at least a modified view) seems to have been at play across these three cases. Similarly, despite being exposed to the same transnational operator, C&W, developments across the three islands led to very different policy and interaction patterns that at best provide only weak support for the orthodoxy of weak government capacity. Finally, the creation of regulatory offices was not to any great extent subsequently undermined by the exit of talented and ambitious staff to the private sector; instead there was seen to be a mutual interest in strengthening the staff capacity of the regulatory offices.

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Cases that do not, at least at first sight, conform to stereotype and show substantial variance are valuable for the drawing of lessons for other countries, given that the capacity to regulate a market is crucial in order to achieve both private investor and developmental goals, to avoid the emergence of predatory or captured states and to reduce the wider costs of poor regulation caused by ‘global forces’, as suggested by Peter Evans (1997: 74). Arguably, nowhere else are these costs of ‘poor regulation’ as visible as in telecommunications, with its attractions for inward investment, the necessity to establish and maintain a modern communications infrastructure, interaction patterns between international and national standard-setting activities, a high degree of technical uncertainty and the presence of international operators and investors. To explore the different patterns further, the remaining parts of this chapter first narrate the process of reform in telecommunications across the three states. We then introduce the notion of ‘regulatory autonomy’, which we elaborate along three dimensions, to highlight the importance of interdependencies and interaction effects for the use of regulation as an instrument of development, in addition to more traditional concerns with organizational and legal dimensions of regulatory reform. The concluding section discusses the more general lessons emerging from these three case studies, while also pointing to its limitations and anticipating possible criticisms of the views developed here.

Regulatory reform in three Caribbean countries Despite a set of common challenges, the three states dealt with here show considerable variation in types of policy response: while Jamaica has over a decade achieved a substantial degree of embedded regulatory autonomy, Trinidad and Tobago’s reforms have been defeated or stalled by political and interest-group adversarialism. In Barbados, although a stable political environment and strong commitment to the rule of law have enabled a degree of economic development and progress towards universal access to basic telecommunications services, powerful state and societal interest groups have coalesced to prevent the emergence of autonomous regulatory capability. This is reflected in the rate of development of the telecommunications network in the three countries (see Figure 10.1). While Barbados entered the period of privatization and regulatory reform with a more developed telecommunications network, growth in Jamaica has outstripped both Barbados and Trinidad and Tobago. The rest of this section sets out the common international challenges to national regulation in telecommunications, before briefly summarizing regulatory change. Caribbean telecommunications has faced both domestic and international change, which has challenged existing regulatory regimes. Regulatory regimes of the late 1980s and early 1990s were characterized by

Total number of telephone lines per 100 inhabitants

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Expansion of Telephone Network 60 50 40

Barbados

30

Jamaica

20

Trinidad & Tobago

10 0

90 91 92 93 94 95 96 97 98 99 19 19 19 19 19 19 19 19 19 19

Index of telephone lines per 100 inhabitants

Index of Telephone Network Expansion (1990=100) 600 500 400 300 200

Barbados Jamaica Trinidad & Tobago

100 0

90 91 92 93 94 95 96 97 98 99 19 19 19 19 19 19 19 19 19 19

Figure 10.1 Expansion of telephone networks in Jamaica, Trinidad & Tobago and Barbados 1990–1999 (includes cellular connections) Source: International Telecommunications Union, World Telecommunications Indicators

governmental agreements with the international operator, C&W (C&W) for the exclusive supply of telephony services. A number of sources for change, partly related, partly unconnected, can be identified.

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First, there has been substantial technological change, which apart from introducing data-rich forms of communication, also increased the ability of individuals and businesses to challenge the previous technological control of legal monopolies, in particular via ‘voice over Internet’ offered by Internet Service Providers (ISPs). Second, the international telecommunications domain has witnessed significant diversification, moving from the ‘telecom-diplomacy’ of national monopolists towards more complex overlapping and partly competing international regimes, putting pressure on existing domestic and international arrangements. The 1997 Federal Communication Commission’s (FCC) Benchmarks Order required US carriers to reduce the rates paid for outgoing international calls. The ruling reflected the pressure of US operators which paid an estimated annual US$6bn to foreign operators. The impact of the ruling was a reduction in termination rates for incoming international calls to the three Caribbean countries from US$0.575 to US$0.19 by 1 January 2001. The FCC’s order challenged the basis on which Caribbean telecommunications services cross-subsided domestic telephone services, in particular in Jamaica that was said to be more dependent on the income from incoming international telephone calls. This order was upheld by the US Court of Appeal in 1999 after a challenge led by C&W.1 Third, under the 1997 World Trade Organization (WTO) Agreement on Basic Telephone Services (Fredebeuil-Krein and Freytag 1997) the three Caribbean countries agreed to liberalize their telecommunications sector. While the US-led initiative in the WTO was directed mainly at South East Asian markets, it allowed Caribbean states to signal their commitment to regulatory reform. Fourth, C&W shifted its business strategy, away from residential services towards data-rich business services. This was accompanied by increased pan-Caribbean regional control over negotiations with Caribbean governments through the head offices in London. By 2003, the Caribbean operations had become one of the most profitable businesses of C&W. Finally, the Dominican Marpin case suggested that the Commonwealth Caribbean states’ exclusivity agreements potentially violated the right of free speech.2 The following describes regulatory reform in telecommunications in Jamaica, Trinidad and Tobago and Barbados. Jamaica After negotiations with C&W, the Government announced in May 1987 the creation of Telecommunications of Jamaica (ToJ) as a holding company to combine the existing domestic and international telephone service providers, both of which required substantial investment for network expansion and modernization. The transfer of government shares to C&W proceeded gradually under the Jamaican Labour Party (JLP) government, which intended to retain a controlling 40 per cent stake in the company with 21 per cent being sold to the general public (Wint 1996).

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The initial regulatory arrangements (which form the basis of the seminal contribution by Levy and Spiller 1995) were set out in five licences issued by the Jamaican government to ToJ in 1988. They were issued for a 25-year period, with the option for the licencee to renew the licences for a further 25 years, and were based on a simplified rate-of-return mechanism that guaranteed the company an after-tax return of 17.5 to 20 per cent on equity (an agreement that was not paralleled anywhere else in the world, suggesting that Jamaica was regarded as a pariah state for private investment). The Minister of Public Utilities was required to adjust tariff levels annually to maintain the rate-of-return level, which was mainly financed from the termination of international telephone services profits. These profits cross-subsidized expansion of the domestic telephone network. Despite the supposed extent of exclusivity provided by the licences, considerable pressure soon challenged the basis of these licences. From the beginning, the extent of exclusivity of the 1988 licences was contested. C&W claimed that the set of licences, as a whole, created the expectation of an exclusive right to provide telecommunications services.3 However, the legal basis of this ‘expectation’ was tenuous given that the Telephone Act of 1893 (on which the All-Island Telephone Licence was based) at best authorized the government to establish a monopoly over the local wired telephone network, but was hardly applicable to data transmission, storage and retrieval, value added services or fibre-optic transmission. This legal uncertainty surrounding the extent of exclusivity led to attempts by C&W to obtain clarification from the government. The People’s National Party (PNP) Prime Minister Michael Manley, faced by a substantial financial crisis, agreed to respond to C&W’s demands. Subsequently, a Telecommunications Bill was introduced in 1993, which sought to grant C&W comprehensive monopoly rights. Widespread opposition led to a sidelining of the Bill and further initiatives were only taken after the 1997 election under a new Commerce and Technology minister. Domestically, most aspects of telecommunications regulation were transferred to the Office of Utilities Regulation (OUR) in 1997. The OUR was to assume jurisdiction for regulating network industries and public transport; however, the founding legislation provided for the OUR to regulate ‘approved organizations’ specified in the Act or ‘enabling instruments’, though the Act itself did not specify any utility undertakings to be subject to the OUR’s jurisdiction.4 Until 2000, therefore, the OUR lacked formal legal powers, and operated in an advisory capacity, but also through ‘naming and shaming’ underperforming utilities. However, the Fair Trading Commission (FTC, established under the Fair Competition Act of 1993) challenged the C&W’s exclusivity, but only at the margins. This led to the partial liberalization in the market for consumer premises equipment (in 1994), C&W’s 1995 decision to allow Internet Service Providers (ISPs) to interconnect with the public telephone network (following action by the

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FTC and ‘Infochannel’ (an ISP) starting in 1994), and to the settlement between FTC and C&W on C&W’s advertisement of ‘free’ voicemail. C&W’s exclusivity was also challenged by the emerging possibility for consumers to bypass its international gateway by using Internet-based facilities. The Ministry for Commerce and Technology effectively condones this competition, issuing five licences to VSAT (Very Small Aperture Terminal) operators under the Radio and Telegraph Control Act 1973. C&W was unsuccessful in its challenge regarding access to the local network.5 This action before the Supreme Court was eventually abandoned, as part of a broader agreement between C&W and the Government for the liberalization of the sector in 1999. This agreement was motivated (on the part of C&W) by the domestic and international challenges just described, as well as by the replacement of the serving Minister by a more credible and reform-minded Minister Phillip Paulwell, who oversaw the adoption of a comprehensive telecommunications sector policy (Government of Jamaica 1998). The agreement contained detailed drafting instructions for what became the 2000 Telecommunications Act and established a phased, three-year liberalization policy (that allowed for some ministerial discretion). The OUR obtained legal powers, interconnection arrangements were established, while universal service provisions adjusted to reflect a liberalized market environment. Furthermore, C&W committed itself to enhance and expand the telecommunications infrastructure. The Act also protected C&W during the transition period; for example, preventing VSAT operators from engaging in bypass services without a licence. This latter provision was at first instance successfully challenged in the Constitutional Court as a breach of the Constitution’s right of freedom of expression.6 At the time of the final edit of this chapter, the Supreme Court had overturned this judgement on appeal, and Infochannel was contemplating an appeal to the Privy Council. Trinidad and Tobago In Trinidad and Tobago, differences in the relationship between operator and government as well as very different political arrangements have led to the adoption of different approaches that subsequently resulted in different outcomes. Nationalization of the domestic telephone provider, the Trinidad Consolidated Telephone Company took place in 1960 after a prolonged strike. From 1969, international services were provided by the Trinidad and Tobago External Telephone Company (TEXTEL), a joint venture between the Government of Trinidad and Tobago and C&W. An expert Working Group was set up in 1987 to consider the reform of the telecommunications sector. The Group subsequently advocated liberalization and regulatory reform, claiming that the previously secret Shareholders Agreement did not establish exclusivity. A Telecommunications Authority Act was subsequently passed by Parliament in 1991,

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which provided for the creation of an independent Telecommunications Authority. However, the Act was never proclaimed, following the return of the Peoples National Movement (PNM) to power after the 1991 election, and so never came into effect. In the meantime, an agreement was reached with C&W in 1989 – following a tendering process that also involved British Telecom. A Shareholders Agreement provided for the amalgamation of the external and domestic providers into the Telephone Service of Trinidad and Tobago (TSTT), 51 per cent owned by the government and 49 per cent owned by C&W. The newly amalgamated operator was to provide both domestic and international services for a period of 20 years.7 The Shareholders Agreement guaranteed TSTT a minimum rate of return of 15 per cent on its base rate. In line with this, in 1990 an amendment was made to the Public Utilities Commission Act 1966. Given the failure of any far-reaching regulatory reform attempt, the PNM government established a Telecommunications Division within the Office of the Prime Minister to advise on policy and to deal with licences and concessions and technical issues. The Public Utilities Commission (PUC) had jurisdiction over setting domestic, but not international tariffs. Satellite and other wireless communications for which the Telecommunications Division was responsible were governed by a Wireless Telegraphy Ordinance 1936, which established ministerial licensing authority with respect to these services. Further reforms were sidelined until the election of the United National Congress (UNC) under Prime Minister Panday in 1995.8 A new Working Group, whose terms of reference were expanded to include broadcasting as well as telecommunications, suggested that the liberalization of cellular services was possible under the existing Wireless Telegraphy Ordinance 1936. The group’s Draft Telecommunications Policy also recommended the overall modernization of the regulatory framework. In cellular services, a second provider was sought, which was required to be a registered company in Trinidad and Tobago, and which was at least 51 per cent owned by nationals. The evaluation procedure, agreed with the WTO, required the establishment of an advisory Licences Committee to the Prime Minister. The licence was awarded to Open Telecom, a company controlled by the family of the Minister of Telecommunications. Advice by the Director of Telecommunication, against the findings of the Licences Committee (established independently to rival the Telecommunications Division), had recommended that Caribbean Communications Network (CCN) should be excluded from final consideration. CCN, a consortium led by Ken Gordon’s Express Group of newspapers, was regarded as hostile to Panday. CCN challenged the decision, and the Trinidad and Tobago High Court of Justice held the selection invalid on the grounds of breach of agreed procedure, citing strong and partial statements by the Prime Minister against the Express Group as evidence of bias.9

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The Working Group’s recommendations were mostly enacted as the Telecommunications Act 2001. The Act established a Telecommunications Authority, which was to take over the responsibilities of the Telecommunications Division and rate-setting responsibilities (expanded to include international tariffs). The Authority was to comprise a Board, in whom authority was vested, but supported by a secretariat headed by an Executive Director. Responsibility for granting licences was to remain with the Minister. However, although provisions establishing the Telecommunications Authority took effect on the accession of the Act by Parliament, most provisions in the Act required proclamation by the President. Following the December 2001 election and the subsequent parliamentary stalemate, the absence of any parliamentary consensus blocked any further developments until the further election in autumn 2002 which produced a PNM government. Developments in the energy sector, supported by Inter-American Development Bank (IDB) assistance, led to the creation of a Regulated Industries Commission (RIC) in 1998.10 The RIC had jurisdiction over setting, monitoring and enforcement of service standards, as well as setting of price caps. The Regulated Industries Commission Act included jurisdiction over domestic and international telephone services, although these were to be relinquished once the Telecommunications Act 2001 took effect. This jurisdiction had not been exercised, however, as TSTT had not, by the time of writing, sought a rate review. Telecommunications reform has therefore been characterized by persistent gridlock. Domestic political adversarialism, union opposition and disputes over institutional arrangements such as appointment methods and controls over ministerial discretion delayed policy reform. Following the 1997 FCC Benchmarks Order, TSTT (and the PNM) supported new legislation incorporating a phased transition towards liberalization (similar to the approach taken in Jamaica and Barbados). The UNC government instead insisted on a ‘Big Bang’ approach, allowing for the immediate and comprehensive liberalization of telephony services. Liberalization within the existing statutory framework was stalemated by the procedural irregularities in the selection of a second cellular operator as well as delaying tactics by the incumbent. There was some renewed emphasis in regulatory reform following the PNM election victory in autumn 2002 (with the appointment of an IDB-sponsored executive director for the telecommunications authority during early 2003), but less movement in terms of establishing the regulatory instruments to implement legislative provisions. Barbados Domestic telephone services in Barbados were provided by C&W Bartel under a licence issued in 1991 and international services were provided by C&W BET under a licence granted to the company the same year. Both

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licences gave the C&W companies the exclusive right to provide services until 2011. Cellular services were provided by C&W Caribbean Cellular (Barbados), a joint venture between the two C&W companies. Therefore, unlike the previous two cases, Barbados did not enter the period of regulatory reform with majority government ownership in the telecommunications sector. The government transferred control of Bartel and BET as early as 1983, with a sale of shares to C&W and to the general public. The government sold all of its remaining shareholding in these two companies prior to the period of regulatory reform. In contrast to the other two cases, Barbados relied on (relatively) modern telecommunications legislation. The Telecommunications Act 1991 established ministerial authority to issue public carrier licences and to regulate rates. The Act provided C&W with the right of first refusal over new services. Domestic rate-setting was delegated to the Barbados Public Utilities Board (established by the 1955 Public Utilities Act), while international rates were set by the (ministry’s) Telecommunications Unit. While the two C&W companies were separate entities, cross-subsidy of domestic rates through international revenues was established. C&W BET was required to pay 50 per cent of its international revenues to pay for the shortfall in revenues from domestic services provided below cost, providing a crude, but broadly successful strategy for promoting universal service.11 This regime provided significant expansion of the wired telecommunications network as well as an unmetered island-wide rate. The C&W companies also provided developed world standard communications services, which attracted communications-based industries to the island (Barclay 2000: Chapter 9). By the late-1990s, the arrival of answering machines, fax machines and other enhanced consumer premises equipment (CPE) led to an informal acceptance by the C&W companies of de facto liberalization of CPEs. Paging services were also de facto liberalized around this time (seven providers eventually offered services). However, the attempt by Caribnet, an ISP, to bypass C&W BET’s control over international data traffic by sub-leasing spare capacity from a VSAT facility leased by C&W to another company, was aggressively challenged by C&W, who disconnected the service. Caribnet, financially crippled, was taken over by a rival, Caribsurf. The latter and C&W soon established mutual accommodation. Challenges to the monopoly emerged in the mid-1990s when the Barbados Labour Party committed itself to an ‘internationally competitive’ telecommunications sector. Barbados signed up to the WTO Agreement on Basic Telephone Services, including the (at the time of the completion of this research, unfulfilled) undertaking to open the cellular market to liberalization in January 1999.12 The responsible minister, Senator Goddard found little political support for wider liberalization measures, given also the telecommunications operators’ influence on social and political life in Barbados. Further change was signalled in the 1999 Barbados Labour Party election manifesto which committed a future Labour government, in ful-

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filment of its international commitments under the WTO Agreement on Basic Telecommunications Services, to re-negotiate the exclusivity licences. A Green Paper on Telecommunications Sector Policy of 2000 set out a framework for the modernization of Barbados’ telecommunications legislation, as well a gradual three-phase agenda for liberalization commencing in December 2000 and culminating in full liberalization in December 2002. The Green Paper also envisaged a move away from cross-subsidization of domestic services towards cost-based pricing, partly in recognition of the FCC Benchmarks Order 1997. However, due to the lack of expertise of liberalizing telecommunications (and due to delaying tactics on the part of C&W) a Memorandum of Understanding was only reached between the government and the C&W companies by October 2001. In return for the licence changes, the government consented to the amalgamation of the C&W companies into a single entity. The agreement also envisaged rebalancing of national and international tariffs, including the (muchcontested) introduction of metered rates island-wide. C&W companies supported these moves as they allowed for more operational ‘flexibility’ than the previous monopoly-based regulatory structure. The reform of telecommunications was part of an overall change in policy approach towards the utilities sector. A Fair Trading Commission (FTC, replacing the Public Utilities Board) was established in 2001. An FTC (part-time) Board was appointed under the chairmanship of a former High Court judge (Justice Frank King) and support staff were hired. The FTC was to act as a combined telecommunications and utilities regulator, competition authority and consumer protection body. The Telecommunications Act 2001 vested responsibility for management and regulation of telecommunications in Barbados with the Minister. The FTC was to be responsible for enforcement of ministerial policy, ‘light touch’ regulation of competition between carriers and providers in the interests of consumers as well as administering mechanisms for price regulation. The Minister had discretionary power to prescribe the use of ‘an incentive-based rate setting mechanism’. While it was widely assumed that the FTC would retain US-style hearings there was some pressure for more sustained oversight to be exercised over newly-amalgamated C&W companies as well as potential new entrants. The Act envisaged progressive liberalization, similar to the approach taken in Jamaica. Nonetheless, the provisions regarding the FTC represented a considerable strengthening of the powers of its predecessor, not only in terms of organizational resources, but also in terms of its ability to impose monetary sanctions.

Three dimensions of regulatory autonomy Despite the commonalities of external and internal challenges to the existing ‘exclusive’ telecommunications arrangements, the evolution of regulatory change, in terms of timing, choreography and extent varied

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widely, for reasons that are explored further below. This section deals with the issue of ‘regulatory autonomy’, drawing comparisons across the three states on three dimensions. The previous description of the three states’ approaches towards regulatory reform in telecommunications highlights substantial variety. However, in terms of achieving developmental aims, the process of regulatory reform is one (important) aspect, the introduction of effective and accepted regulatory instruments is another. This section turns to the latter aspect, developing the notion of regulatory autonomy. Apart from describing a ‘desirable’ state of affairs, regulatory autonomy is used here as an analytical type that can be utilized for assessing and comparing regulatory regimes. The institution-building literature has traditionally focussed on two dimensions: the institutional capability of a regulatory body to handle technical complexity, and the presence of controls to prevent the arbitrary exercise of discretion (Levy 1998: 355; see also Grindle 1997). While the former concerns questions of resourcing, organization and management, the latter is mainly a question of institutional design to increase the costs of malfeasance in the exercise of discretionary action, whether in terms of contractual devices or in terms of institution-building. Less attention has been paid to a further set of societal-level constraints against malfeasance, at the level of embeddedness of relationships within the regulatory space. Embeddedness characterizes the way in which institutions are placed within a set or network of social relations and highlights to what extent authority is being exercised in a mutually consented form, pointing to changing behaviours and orientations among actors as an effect of increasing interaction and ‘trust’-building. The rest of this section sets out in more detail the three dimensions, as illustrated in Table 10.1, while also discussing the relationship between the three dimensions. Ability to handle technical complexity Accounts in development administration offer numerous sources of dysfunctionality: top-heavy administrative bodies, weak administrative and support structures, poorly specified objectives, inadequate overall control despite micro-management, low productivity and coordination and communication capacity. Weak organizational boundaries leave administrative bodies to state predation and societal capture (Kiggundu 1989: 9–10). Two traditional responses to these problems have been human resource development and organizational strengthening; the former involves the recruitment and retention of technical expertise in competition with strong societal interests, and the effective management of human and other resources within the organization. Furthermore, it requires an understanding of what crucial functions should be located ‘in house’ and how institutional memory should be retained or drawn in from external sources.

Table 10.1

Regulatory capacity and associated capacity building strategies

Dimension of Regulatory Capacity

Capacity Building Strategies

Focus

Types of Activities

Ability to manage technical complexity

Human resource development

Supply of professional and technical personnel

Training, salaries, conditions of work, recruitment

Organizational strengthening

Management systems to improve performance of specific tasks and functions; microstructures

Incentive systems, utilization of personnel, leadership, organizational culture, communications, managerial structures; financial resources

Presence of checks and balances against capture and administrative expropriation

Institutional reform

Institutions and systems; macrostructures

Regulatory ‘rules of the game’ policy and legal change, input-oriented transparency mechanisms; information requirements (nodal position)

Embeddedness of regulatory institutions

Organizing regulatory space

Agency-sectoral linkages

Output-oriented transparency mechanisms and ‘legitimacy’; increasing number of actors and relationships; forging intergovernmental alliances

Source: Adapted and expanded from Grindle 1997: 9

185

186 Global Encounters

In the Jamaican case, the OUR was widely regarded as successful in recruiting and retaining technical expertise. This involved the appointment of a widely respected (Jamaican) director general with a background in World Bank energy programmes. One crucial dimension was the OUR’s utilization of foreign aid (first from the UK Department for International Development, later from the Canadian International Development Agency) that led to the creation of an international advisory board and, more importantly, to the recruitment of a medium-level regulatory expert. This proved crucial to establishing credibility with C&W (the Director General was known to key actors in C&W from regulatory processes in Britain) and to building internal competencies. This approach differed substantially from the approach taken in Trinidad and Tobago where, despite the creation of the RIC and the establishment of the Telecommunications Authority to assume most of the responsibilities of the Telecommunications Division, there was far less evidence of organizational strengthening. Initially, the RIC had negligible impact, its IDB-funded chief executive was effectively sidelined by regulated industries and ministers alike, and the Telecommunications Division was regarded by many as having conducted its responsibilities in a somewhat arbitrary fashion, according to the personal preferences of its Director, Mr Ragbir. This was evident, for example in the debacle over the allocation of a second cellular licence. Unlike the other cases, Barbados did not receive any development assistance for its reform programme. Here the emphasis was placed on the procedural rules and staff training, but it remained to be seen whether a part-time board (albeit with a full-time Chairman) and the divided attention of its staff over multiple areas of concern would be sufficient for promoting competition in a policy domain which had been dominated by C&W. More generally, the OUR, the only agency in this study which had a lifespan of more than five years at the time of writing of this chapter, was seen as successful in preventing an exodus of skilled staff to private sector actors and also in overcoming the risk of transition from its first ‘charismatic’ leader to his successor. The first Director General, Winston Hay, not only provided the Jamaican government with a utility-experienced national, but also afforded the expertise of a former member of an international organization, the World Bank. Trinidad and Tobago also offers the example of a successful leadership ‘transition’ in the RIC from a little-accepted international consultant to a more credible domestic former public servant. Institutional design Institutional checks and balances within a regulatory regime must be able to cope with two potential pitfalls (Levy 1998): those of capture by the regulated interests and those of ‘administrative expropriation’ (for example, by setting of tariffs above marginal cost, but below the operator’s ability to recover sunk costs). Legal, bureaucratic, political and informal constraints

Martin Lodge and Lindsay Stirton 187

are said to be somewhat substitutable instruments to prevent administrative expropriation – with the appropriate mix depending on the initial national institutional endowment (see Levy and Spiller 1995). In the Jamaican case, the account by Spiller and Samson (1995) suggests that the initial licence agreements provided effective means of securing commitment through private law mechanisms. This chapter’s account partly contradicts their claim; it was subsequent institutional reforms, specifically the Telecommunications Act 2000 that established checks and balances rather than the licences themselves. In contrast, in Trinidad and Tobago, the relationship between RIC and the Telecommunications Authority remained unresolved. Among the ways in which the regulators were kept under control was the appointment of individuals to the boards of these regulatory bodies. Nevertheless, since the late 1990s appointments were seen to have become more independent of governmental preferences – with all but one member of the RIC Board remaining in office despite the 2002 change in government. Barbados was characterized by a longestablished reputation for protecting property rights and administrative justice. The creation of the FTC concentrated regulatory authority, it also provided for the legal provision that the chairperson had to be a lawyer. While it was suggested to us that this was mainly introduced to bias the initial appointment to the Chairmanship, at the same time it also signalled a commitment towards the values of legal process and natural justice. Embeddedness The notion of embeddedness (see Polidano 2001) refers to the apparent differences in the ability of states to pursue certain policy options due to different styles of national ‘organized societies’, stressing the significance of the emergence and development of loosely configured networks (or ‘weak ties’) that institutionalize behaviour (Granovetter 1973, 1985). The way in which social relations within the policy domain are structured affects the institutional capacity of regulatory agencies, potentially protecting them against attempts at capture or expropriation: ‘they are embedded in a concrete set of social ties that binds the state to society and provides institutionalized channels for the continual negotiation and renegotiation of goals and policies’ (Evans 1995: 12; see also Migdal 1994; also Hancher and Moran 1989: 292). An increasing number of inter-organizational linkages facilitates embeddedness, provided there is mutual acceptance of different actors’ authority and legitimacy. For example, one indicator of embeddedness of a regulatory regime is the mutually shared acceptance of its legitimacy across participants in the policy sector on the basis of the agency’s status and formal position rather than the reliance on charismatic leadership, the presence of a number of actors that accept market relationships and conduct, the acceptance of the regime by service-users and the integration of national regulatory actors into the wider regional and

188 Global Encounters

international context. Embeddedness is therefore both an empirical phenomenon of institutionalization through the design and dispersal of relational ties, and also it is an informal cultural phenomenon based on convention and norms of legitimacy. Jamaica offers signs of an increasing ‘embeddedness’ of its regulatory regime for telecommunications. Competition in the cellular market provided the OUR with communication channels not only to C&W, but also to its first competitor, Digicel. Since the late 1990s, the Office of the Prime Minister, and in particular the Cabinet Office, as well as the Ministry of Commerce Technology and Industry protected the OUR’s formal independence against other departmental interests, often interfering in turf fights to support the OUR’s position. Furthermore, the government’s ability to signal its willingness to commit to regulatory reform and liberalization within the international and regional context also offered ways in which the overall approach became embedded within the domestic process. The agreement between C&W and the Government of Jamaica for the reform of regulatory arrangements emerged in the context of a shared understanding of the respective parties’ interests. Nonetheless, grounds for caution remained, not least the reliance on charismatic OUR leadership, as well as parallel developments in the electricity sector, where the OUR had arguably been able to assert only marginal influence on the privatization process and the design of the All-Island Electricity Licence (2001). In contrast, Trinidad and Tobago provides an example of weak embeddedness. Contributing to such weak embeddedness was the close political and ministerial (under PNM rule) ties to TSTT, the idiosyncratic relationships between UNC Prime Minister and the Director of Telecommunication (which internal administrative competition orchestrated from within the civil service failed to challenge effectively) and the delayed development of both RIC and the Telecommunications Authority. Barbados was similarly characterized by very close relationships within a very small elite, between C&W and the government. This privileged position allowed C&W to resort to a mostly ‘unhelpful’ attitude towards the FTC, denying, for example, the prompt supply of information. Furthermore, the cross-Caribbean cooperation on telecommunications also established a different set of relationships (and, therefore, ties) – something that, as Paul Sutton shows in his contribution to this volume, has been characteristic of public sector reform in the Caribbean more generally. The three dimensions are largely interdependent and mutually reinforcing. Embeddedness is difficult to imagine in the case of a regulatory agency that is unable to handle technical complexity, given its importance on building social ties that characterize ‘regulatory autonomy’. Similarly, linkages between the different actors within the regulatory space are shaped by the way the institutional rules of the game have been established, while the credibility of any single regulatory agency, and its ability to establish and

Martin Lodge and Lindsay Stirton 189

sustain any form of technical capacity is likely to depend on the creation of particular rules that establish (and check) its formal authority. Certain issues also cut across the dimensions; for example, ‘information’ is a crucial strategy for organizational strengthening, and this relies on the way in which the agency is placed within a key nodal position. At the same time, there are marginal trade-offs across the three dimensions of regulatory autonomy. For example, while the distribution of formal authority and the creation of sectoral agencies is widely held to enhance sector-specific capacity and to reduce the risk of expropriation, such recommendations are challenged by small states’ capability to establish and resource different agencies. For example, overlap of legal authority across agencies might increase focussed attention to particular sectors, but also may divide the pool of available regulatory expertise into different organizations, therefore reducing overall system capability. Similarly, a single cross-sectoral regulator may have advantages in concentrating staff resources (in particular in smaller states), but it reduces the capabilities of cross-sectoral comparison within a jurisdiction. This type of conflict was particularly evident in the case of Jamaica with its cross-sectoral regulatory body, the OUR. Its existence was (initially at least) opposed by C&W as well as contradicted (then) ‘best practice’ advice from international organizations. However, despite claims that the different sectoral dynamics and demands would lead to agency overstretch of resources and lack of focussed monitoring, the OUR was widely seen to have developed into a successful regulator in telecommunications (it was largely marginalized in electricity) that offered a ‘best practice’ example of cross-sectoral regulator to smaller states. A cross-sectoral agency was also in existence in Barbados, while Trinidad and Tobago opted for a separate agency for telecommunications. These choices did not seem to have been undertaken with any major evaluation of the Jamaican experience. There are also tensions between embeddedness and the two other dimensions. On the one hand, a mutually cooperative relationship between regulated and regulator is widely held to enrich the quality of regulation – however, it raises questions as to the ability of the regulator – a developing one in a development context – to remain ‘friendly, but firm’ and be able to generate independent authoritative decisions in an environment where regulated industries and governments have the potential to affect crucially the viability of the regulatory office itself. On the other hand, the issue of providing for sufficient ‘redundancy’ as well as checks and balances across the regulatory system may reduce the ability to increase predictability of regulatory choices, and therefore reduce the possibilities of inducing ‘embeddedness’. Finally, the pace and choreography of the regulatory reform process is also likely to impact on the way in which regulatory autonomy can be established. Thus, ‘Big Bang’ liberalization may be justifiable in terms of

190 Global Encounters

reducing monopoly rents, but risks overwhelming limited organizational capabilities and may reduce opportunities to embed social relations on a basis of mutual acceptance rather than adversarial hostility. Therefore, while the phased transition period in Jamaica set in the agreement between C&W and the Jamaican government, may have conceded some monopoly rents to C&W in the interim, it allowed for the gradual adaptation of regulatory instruments as well as for negotiations between the OUR and C&W. This contrasted with an emphasis in Trinidad and Tobago on immediate ‘Big Bang’ liberalization which nonetheless petered out somewhat even following the emergence from legislative gridlock with a decisive PNM victory in late 2002.

Conclusion This chapter has shown substantial diversity in terms of organizational choices, despite common international challenges and the internationalized nature of policy sector, that, arguably, were not temporary, transitional differences, but which remained likely to persist. This diversity is of interest, not merely for the regulatory reform-watcher, eager to collect a variety of specimens; such diversity is also relevant to the formulation of policy advice, because it reflects on the three states’ ability to establish ‘regulatory autonomy’ which we have argued has been crucial to achieving regulatory reform and development goals. When considering the outcomes of the three cases, the three states offered examples of societal capture in Barbados; the sustained administrative expropriation given political gridlock in Trinidad and Tobago (as well as the corresponding defensive strategies on the part of TSTT/C&W), and the success story (so far, at least) of Jamaica, where a ‘developmental coalition’ was able to strengthen regulatory autonomy by insulating the policy domain from competing demands. Politicization of regulatory relations in Trinidad and Tobago occurred directly, through the majority ownership in the telecommunications operator and the large-scale presence of labour unions among TSTT’s workforce, and indirectly, due to the continued political instability of changing governments, short parliamentary terms and changing levels of oil-price dependent economic confidence. In Barbados, the lack of insulation was due to the close links of C&W to the political elite, which, admittedly, was difficult to avoid in that small island state. An analysis of the three states’ attempts to deal with the three dimensions of ‘regulatory autonomy’ suggests that conventional orthodoxies regarding development hold only to a degree. As already noted, the country widely regarded as having the ‘worst’ institutional endowment, Jamaica, performed remarkably well, not only in terms of extending the coverage of telecommunication on the island (that may be regarded as a ‘catching up’ process vis-àvis the other two states), but more importantly, in terms of building capacity

Martin Lodge and Lindsay Stirton 191

for the regulation of telecommunications. Furthermore, the analysis suggests that it is only to some extent the interaction with the international operator, C&W, that shapes and (in Trinidad and Tobago and Barbados especially) inhibits the development of regulation; rather it is largely the internal politics of the islands. This means that the organizational and collective capacity of regulatory institutions is limited and still based (across all the three islands) on personal political and charismatic leadership rather than on the formal acceptance of the ‘rules of the games’. Nevertheless, the example of Jamaica also points to the benefits of liberalized markets in that the OUR was faced with competitors that offered substantial and competing (rather than cartelized) market intelligence. This chapter has put forward the notion of regulatory autonomy, consisting of three dimensions, as one way to analyze the capability and capacity of states to govern essential sectors of their economies. First of all, regulatory reform in particular and public sector reform more broadly are heavily dependent on interaction effects. A focus on organizational resources or the formal status of a regulatory agency is, while important, not sufficient for the creation of a credible regulatory regime – as the example of the ‘neutered’ Jamaican OUR between 1997 and 2000 suggested. Regulation has to be understood as an interdependent interplay between a dispersed set of actors with different levels of formal and informal authority. The design of regulatory regimes and offices should therefore not merely focus on ‘organization’ and ‘formal relationships’ between ministers and agencies themselves, but also on relationships within the wider regulatory domain. Furthermore, the analysis suggests that ‘endowment’ is not a deterministic concept. Rather, similar to the way in which deterministic judgements about external hegemons should be avoided, endowment establishes particular opportunity and constraint structures that are only one aspect in the building of a regime that may be regarded as autonomous. Such issues are also increasingly important in the area of financial regulation (Woodward: Chapter 11). Such a seemingly upbeat conclusion that points to limitations of the widely held but pessimistic orthodoxies is susceptible to challenge on three counts: that as a sector, telecommunications is a special case; that the English-speaking Caribbean states are somehow exceptional; and that we have misdiagnosed developments. It is important to consider these challenges because, if justified, they suggest important limitations to the transferability of the lessons that this account suggests. Turning to the first objection, the alleged ‘special’ nature of telecommunications, and the inability to transfer lessons to other sectors, it may be argued that telecommunications is somehow special and that therefore any generalizations to other sectors may be unreliable. We concede that this is a fair observation both analytically as well as empirically – telecommunications has witnessed the depletion of economic and political rents available to national political

192 Global Encounters

and economic elites in contrast to other network industries. Such a case has been prominent in Jamaica, where the case of electricity regulation has arguably seen the sidelining of the OUR and the Fair Trading Commission, at least for the time being. However our argument – which has pointed to a number of ways in which such regulatory autonomy can be facilitated and reinforced across the three dimensions while also pointing out that potential trade-offs – is not itself affected by these special circumstances. Furthermore, if telecommunications was universally ‘special’, then the contrasting developments across the three islands seem rather surprising. Telecommunications is therefore ‘special’ only to a limited degree. The second objection, of Commonwealth Caribbean ‘exceptionalism’ is also persuasive – but only up to a point. All three countries in this study are English-speaking, they have large emigrant populations, and are relatively close to the large North American market. Therefore, regardless of the relatively minor political and economic weight and geographical size of these countries, the access to international ‘best practice’ may be favourable when compared to other less developed countries. At the same time, as was noted at the outset, such effects are more than likely to be outweighed by their characteristics as ‘small island economies’ and relative insignificance, especially following the end of the Cold War (see also Sutton’s chapter in this volume). So, while there may be reasons for agreeing or disagreeing with the ‘special’ nature of the Caribbean, such a charge cannot fully account for the different developments across the three states – with the state (Jamaica) with arguably the weakest tradition of state capacity and institutional endowment offering the most successful example in establishing regulatory autonomy. The third potential objection is that we have completely misdiagnosed our cases, in that all the three Caribbean islands have been exploited by the transnational operator to the benefit of the national political and economic elites. For example, many critics have suggested that ‘Jamaica has been taken to the cleaners’13 through its three-year transition agreement with C&W. However, the development in Jamaica, as illustrated above, contrasts favourably with that of Trinidad and Tobago which, for a time, attempted to avoid an agreement similar to that to Jamaica. And empirical analysis suggests that while C&W may have benefited considerably from the transition period, this has not impeded competition on the cellular market and enthusiasm of the Jamaican user to reject the offerings of the incumbent. At the same time, whether regulatory reform has redistributed political and economic power remains to be seen, although it is doubtful that such effects would be evident in the short-term, if at all. Furthermore, as our account has shown, the Jamaican case can hardly be understood as a success of ‘minimizing discretion’ as suggested by Spiller and Savedoff (1999) – neither formally nor informally did the licences by themselves provide for a credible regime.

Martin Lodge and Lindsay Stirton 193

Regardless of the empirical analysis, this chapter also sought to add a different dimension to the debate on regulatory reform as one subset of wider public sector reform. That is, the effects of regulatory reform are far from determined and are prone to dynamic interactive effects in which the payoffs to the different actors may change due to endogenous and exogenous causes. Put differently, regulation takes places in an interactive space, which are in continuous dialogue with its wider environment. This chapter has suggested that the more linkages exist within any regulatory space and between the regulatory space and its wider (international) environment, the more resilient it is against capture and expropriation, and the more open and responsive the regime will be towards new pressures and actors. At the same time, it has highlighted certain trade-offs and tensions. Regulated autonomy is therefore a necessarily vague concept – vague in the sense of being difficult to pin down but also in implying an illusive balance between authoritative independence within a context of cooperative relationships – thereby avoiding both ‘strong society, weak states’ (i.e. captured regulation) and ‘strong states, weak society’ (i.e. expropriating states) syndromes (to draw on Migdal’s (1992) distinction). The challenge, therefore, of building regulatory autonomy is not merely one of formal institutional design and the maintenance of ‘intelligent’ regulatory institutions, it also requires the far more difficult process of embedding relationships within the regulatory space in order to reduce opportunities of capture and predatory state behaviour. Such a perspective also highlights the importance of moving beyond a merely static analysis of a country’s institutional endowment towards a more dynamic and interactive interpretation of those factors that establish regulatory credibility and commitment. In particular, this contribution has sought to make the case that the relatively neglected phenomenon of the nature of linkages between regulatory agencies and other state, international and private sector actors within the regulatory space is a crucial variable in the success of regulatory reforms in developing countries. While the casual comparison attempted in the present study cannot, by itself, prove that point, it has nonetheless pointed to a potentially fruitful avenue for further, more systematic research. Notes 1 C&W plc. v. Federal Communication Commission and United States of America, 344 U.S. App. D.C. 261; 166 F. 3d 1224. While data remained unpublished, it was claimed that Jamaica was more exposed to the FCC ruling than Barbados or Trinidad and Tobago. 2 See Privy Council in C&W (Dominica) v. Marpin Telecoms and Broadcasting Ltd [2001] WLR 1123. 3 Minister of Commerce and Technology v. C&W Ltd., Suit M089/98. 4 Office of Utilities Regulation Act 1995. 5 Infochannel Ltd. v. C&W Jamaica Ltd. Suit E014/99.

194 Global Encounters 6 Infochannel Ltd. v. Minister of Industry Commerce and Technology Suit M135/01. 7 The domestic licence was established under authority of the Telecommunications Act. The international licence lacked a statutory basis, but was arguably protected by the Shareholders Agreement. Under its WTO GATS agreement, Trinidad and Tobago committed to the exclusive provision of internal and external services by TSTT for the duration of the licence. 8 Trinidad and Tobago’s accession to the WTO Agreement on Basic Telecommunications Services committed the state to liberalization after 2010, while protecting TSTT’s exclusivity. Competition in basic services was not permitted until 2010, while value-added services were only permitted on TSTT’s network facilities until that time. 9 Caribbean Communications Network v. A-G of Trinidad and Tobago, HCA No. 1313 of 2000. 10 Regulated Industries Commission Act 1998. The Board of the RIC was not formally appointed until 2001. 11 Statutory Instrument No. 54 of 1989. 12 GATS/SC/9/Suppl.1, 24 February 1998. 13 A comment we have received in more than one formal and informal setting across all three islands.

11 Offshore or ‘Shorn Off’? The OECD’s Harmful Tax Competition Initiative and Development in Small Island Economies Richard Woodward

Introduction The difficulties of developing and executing a sustainable development program in Small Island Economies (SIEs) are well documented.1 Comparatively small domestic markets, remote export markets, a dearth of natural and human resources, susceptibility to environmental change and natural disasters, plus limitations on the state’s capacity to govern economic activity have narrowed the range of feasible development strategies resulting in a reliance on sectors vulnerable to the vicissitudes of the global economy (Demas 1965; Kakazu 1994; Briguglio 1995; Commonwealth Secretariat/ World Bank Joint Task Force on Small States 2000: 5–19).2 In this context ‘offshore’ strategies including the creation of Offshore Financial Centres (OFCs) and Export Processing Zones (EPZs) (see Heron: Chapter 12) were widely advocated as an effective addition to the development and diversification strategies available to SIEs. Though there are dissenting voices (see for example Maingot 1994; see also Heron: Chapter 12, on the drawbacks of EPZs), most commentators consider that offshore financial services have ‘lifted a host of small jurisdictions from the poverty of the developing world to levels of affluence few would have believed within their grasp’ (Hampton and Abbott 1999b: 1). However, this benevolent attitude towards OFCs was gradually superseded by one of antagonism and hostility. Recently OFC jurisdictions have been vilified as ‘parasites’ (Palan and Abbott 1996) or ‘pariahs’ (Hampton and Christensen 2002) of the global financial community. These territories were castigated for the laxity of their regulatory and supervisory arrangements which were held responsible for catalyzing and exacerbating financial crises and facilitating criminal activity including money laundering and tax evasion. Of the 36 SIEs with OFCs, 31 have, at 195

Classification of OFCs in small island economies by international financial institutions Organization for Economic Cooperation and Development Harmful Tax Competition Initiative

List Last Updated

196

Table 11.1

Financial Action Task Force Non-Cooperative Countries and Territories (NCCT) Initiative

20 May 20031

25 June 2003

Financial Stability Forum

25 May 2000

Jurisdiction

Listed in 2000 Report?

Date of Commitment

NonCooperative Jurisdiction2

Date of Removal from List (where applicable)

Quality of Financial Regulation3

Anguilla Antigua and Barbuda Aruba Bahamas Bahrain Barbados Bermuda British Virgin Islands Cayman Islands Cook Islands Cyprus Dominica Grenada Guam Guernsey Isle of Man Jersey

Yes Yes Yes Yes Yes Yes No Yes No Yes No Yes Yes – Yes Yes Yes

March 2002 February 2002 May 2001 March 2002 September 2001 – May 2000 April 2002 May 2000 March 2002 May 2000 March 2002 February 2002 – February 2002 December 2000 February 2002

– No – No – – No No No Yes No No No – No No No

– – – June 2001 – – – – June 2001 – – October 2002 February 2003 – – – –

Group III Group III Group III Group III Group II Group II Group II Group III Group III Group III Group III – – – Group I Group I Group I

Table 11.1

Classification of OFCs in small island economies by international financial institutions – continued Organization for Economic Cooperation and Development Harmful Tax Competition Initiative

List Last Updated

Financial Action Task Force Non-Cooperative Countries and Territories (NCCT) Initiative

20 May 20031

25 June 2003

Financial Stability Forum

25 May 2000

Listed in 2000 Report?

Date of Commitment

NonCooperative Jurisdiction2

Date of Removal from List (where applicable)

Quality of Financial Regulation3

Maldives Malta Marianas Marshall Islands Mauritius Micronesia Montserrat Nauru Netherlands Antilles Niue Samoa Seychelles St Kitts and Nevis St Lucia St Vincent and the Grenadines Tonga Turks and Caicos

Yes No – Yes No – Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

– May 2000 – – May 2000 – February 2002 – November 2000 April 2002 April 2002 February 2001 March 2002 February 2002 February 2002 – March 2002

– No – No No – – Yes – No No No No No No – No

– – – October 2002 – – – – – October 2002 – – June 2002 – June 2003 – –

– Group II – Group III Group III – – Group III Group III Group III Group III Group III Group III Group III Group III – Group III

197

Jurisdiction

198

Table 11.1

Classification of OFCs in small island economies by international financial institutions – continued Organization for Economic Cooperation and Development Harmful Tax Competition Initiative

List Last Updated

Financial Action Task Force Non-Cooperative Countries and Territories (NCCT) Initiative

20 May 20031

25 June 2003

Financial Stability Forum

25 May 2000

Jurisdiction

Listed in 2000 Report?

Date of Commitment

NonCooperative Jurisdiction2

Date of Removal from List (where applicable)

Quality of Financial Regulation3

US Virgin Islands Vanuatu

Yes Yes

March 2002 May 2003

– No

– –

– Group III

1 The OECD originally identified 41 jurisdictions as meeting its tax haven criteria. Two jurisdictions (Tonga and the Maldives) were removed from this list after the OECD decided they no longer met the tax haven criteria. All the jurisdictions listed in this section continue to meet the OECD’s tax havens criteria and will continue to be classified as such. However, jurisdictions which have made a commitment will not be considered for inclusion on any future list of uncooperative jurisdictions. 2 All of the jurisdictions assessed by the FATF were identified as having some deficiencies in their money laundering regimes. Only those jurisdictions whose shortcomings were serious enough to prohibit or seriously impair international cooperation are deemed non-cooperative. A dash indicates the FATF has not rated the jurisdiction. 3 The quality of financial regulation is ranked by inclusion within one of three groups: (i) Group I ‘ jurisdictions generally viewed as co-operative jurisdictions with a high quality of supervision, which largely adhere to international standards’; (ii) Group II ‘jurisdictions generally seen as having procedures for supervision and co-operation in place, but where actual performance falls below international standards, and there is substantial room for improvement’; and (iii) Group III ‘jurisdictions generally seen as having a low quality of supervision, and/or being non-co-operative with onshore supervisors, and with little or no attempt being made to adhere to international standards’ (FSF 2000a: 46). Sources: OECD (2000), FATF (2003a), FSF (2000b)

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some point, appeared on one or more of the lists endorsed by the Financial Action Task Force (FATF), the Financial Stability Forum (FSF) or the Organization for Economic Cooperation and Development (OECD), censuring them for substandard fiscal or regulatory arrangements (see Table 11.1). The publication of these lists is indicative of efforts to develop a more intricate and inclusive international financial architecture, a central plank of which has been to ensure that OFCs comply with internationally accepted standards of regulation (FSF 2000a; IMF 2002a). Some analysts suggest this tightening of the regulatory regime has violated the conditions that made OFCs possible and profitable, leading them to temper their enthusiasm for using offshore finance as the backbone of development strategies in SIEs (Hampton and Christensen 1999, 2002; Hampton and Levi 1999; Christensen and Hampton 1999b). This chapter seeks to assess how one aspect of this tighter regulatory regime, the OECD’s Harmful Tax Competition initiative, will affect development of SIEs hosting OFCs. Using a framework originally devised by Hampton (1996a) it will argue that the OECD initiative is constricting the political, fiscal, regulatory and secrecy ‘spaces’ needed for OFCs to prosper. Nevertheless, acknowledging that these spaces are shrinking is not the same as accepting they will be closed. Despite the understandable concerns of SIEs, the OECD project seems unlikely to lead to the collapse of offshore finance. Proponents and critics alike have overlooked the unresolved issues and tensions implicit in concluding a deal to tackle tax competition, not least wavering political support, the open hostility of corporate interests, and the inherent dynamism of financial markets.

Offshore finance – definition, development and growth Hampton (1994: 237, 1996b: 4) defines an OFC as ‘a centre that hosts financial activities that are separated from major regulating units (states) by geography and/or by legislation’. The inducements offered by a typical OFC include no or low rates of taxation, special tax privileges for non-resident business, and a light and flexible supervisory regime. These incentives are usually complemented by labyrinthine and impenetrable secrecy laws designed to obfuscate the identity of the owners of offshore assets. Offshore financial activities are highly varied encompassing offshore banking (private banking for wealthy individuals and wholesale banking facilities for transnational corporations), offshore investment funds, offshore company formation and captive insurance (Hampton 1996b: 23–33). Since the late 1960s offshore finance has grown rapidly. By 1998 some US$5.1 trillion of assets resided offshore (Diamond and Diamond 1998; quoted in Palan 2002: 156). The likelihood is that this substantially underestimates the true extent of offshore financial activity. Existing data disregards activities taking place ‘off balance sheet’ and pays scant attention to the quantity of assets held by non-bank financial intermediaries. The

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overall growth in offshore finance is mirrored in SIEs. A 1975 survey listed just 11 SIEs hosting offshore financial services (Diamond and Diamond 1975). Today, 36 small island territories have a presence in the sector (see Table 11.1) with the Cayman Islands and the Bahamas now among the 15 largest international financial centres measured by the size of external banking assets (Dixon 2001). Hampton (1996a) insists that the phenomenal growth and continuing success of OFCs is contingent upon the prevalence of four interdependent ‘spaces’ (political, fiscal, regulatory and secrecy) supplying international financial capital with the latitude to operate. The availability of political space is dependent upon the main political actors adopting a broadly supportive or at least passive disposition toward the conduct of offshore activity. Political space has external and internal dimensions. Elsewhere in this volume a number of authors note how small, peripheral economies are vulnerable to external changes (see Chapters 10 and 13). Therefore, OFCs require the approval of nearby onshore authorities and the international community more generally. The tolerant attitude of the British state, for example, facilitated the rise of OFCs among its dependencies (Hampton 1996a, 1996b). A compassionate international community is equally indispensable. A determined coalition of powerful states could, if it so wished, move to curb or close down offshore centres through the imposition and enforcement of rigorous international standards. In the past political expediency negated the emergence of such an alliance, not least in recognition of the roles OFCs played as sources of cheap funding for capital importing developed nations such as the United States and in assisting development in former colonies (Strange 1998). Internally, domestic political stability is a prerequisite of hosting an OFC. The peculiarities of small island polities often assure the triumph of domestic political stability. Consensus politics tends to prevail whereby the elites of both parties are drawn from the same pro-business cadre, ensuring a seamless transition from one pro-OFC administration to the next. The checks and balances found in developed polities including an independent civil service, academic institutions and a free press are absent or underdeveloped, meaning that there is no intellectual community capable of criticizing OFC friendly policies (Hampton and Christensen 2002: 1664; Mitchell et al. 2002). In short, unsophisticated government machinery allows financial capital ‘to exert considerable political influence in sponsoring favourable tax and regulatory legislation’ (Christensen and Hampton 1999b: 16). The creation of fiscal, regulatory and secrecy space requires the existence of political space. Without political space the state is unable to enact the legislation needed to lay the foundations for an OFC. Fiscal space refers to the provision of low or no rates of taxation and/or tax exemptions for assets belonging to non-residents (Hampton 1996a: 107). Tax advantages are a common thread linking all major forms of offshore activity (Hampton

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1996b: 24–33). Regulatory space is created in two main ways. Firstly, the divergence of supervisory requirements between onshore and offshore realms. A widely held view is that the growth of OFCs from late 1960s onwards is attributable to the emergence of onerous financial and fiscal regulations among OECD nations from which increasingly mobile financial capital sought avenues of escape (Johns 1983; Johns and LeMarchant 1993; FSF 2000a). Despite two decades of subservience to neo-liberal policy nostrums and the concomitant liberalization of financial markets among advanced economies, OFCs still constitute less regulated spheres attractive to mobile international capital. Secondly, regulation is hampered by the scarcity of suitably qualified staff available to supervisory authorities in OFCs (Christensen and Hampton 1999a: 181, 1999b: 16; Riechel 2001; IMF 2002a: 16, 2002b). The problem is exacerbated by the complexity of contemporary financial instruments, the effective management of which has repeatedly proved beyond the mastery of even the most well resourced regulators. Furthermore, the task of regulation is habitually conflated with, and subordinate to, the job of marketing and attracting business to the OFC (Maingot 1994; Christensen and Hampton 1999a, 1999b). The comparative leniency of regulation in conjunction with the shortcomings of regulatory structures, especially in SIEs, has created the regulatory space that gives international financial capital the room to manoeuvre. Lastly, secrecy space refers to the opacity conferred by strict confidentiality laws and the complex layering of financial activities which serve to conceal the genuine owners of assets (Hampton 1996a: 108). Confidentiality laws preclude the exchange of information with juridical or revenue authorities from overseas. This makes it difficult, if not impossible, for onshore authorities to apply fiscal or regulatory practices on the foreign activities of their residents. In the last decade the international regulatory authorities have elicited a grudging commitment from OFCs to cooperate with their counterparts on criminal matters, such as tax evasion and money laundering and the related maladies of drug trafficking and the financing of terrorist organizations, through the signing of Tax Information Exchange Agreements and Mutual Legal Assistance Treaties. Nevertheless those pursuing civil cases, for example those relating to tax avoidance, are still confronted by insurmountable hurdles to obtaining information.

The OECD’s harmful tax competition initiative The perception of OFCs as weak links in the quest for global financial stability ushered in an era of aggressive international action to plug these regulatory lacunae. In 1996, as part of this drive to minimize abuses of the global financial system, the OECD Annual Ministerial Meeting called upon the organization to ‘develop measures to counter the distorting effects of harmful tax competition’ (OECD 1998: 7). The OECD’s Committee on

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Fiscal Affairs picked up the baton and in April 1998 published its report entitled Harmful Tax Competition: An Emerging Global Issue (hereafter the 1998 report). This argued certain tax practices were diminishing global welfare. The OECD was worried that the growing mobility of capital combined with the availability of low tax jurisdictions had weakened the ability of states to levy taxes, denying governments of much needed revenue. Firstly, it has become axiomatic that the presence of low tax jurisdictions prevents states from raising taxes on wealthy individuals or corporate profits because this would cause capital to relocate offshore. The second consideration was the direct price of tax avoidance and evasion. These practices are reckoned to cost the US Internal Revenue Service US$70bn each year in lost revenue (Wechsler 2001: 45) while accountants Deloitte and Touche calculate that in the 20 years since 1976 the British Treasury has been robbed of £2,000bn (at 1996 prices) (quoted in Guardian, 6 March, 1998). Tax dodging also afflicts developing nations with US$50bn of tax revenue slipping from their grasp annually (Oxfam 2000). These leakages thwart attempts by governments to raise sufficient revenue to deliver public goods. To surmount these fiscal constraints the OECD feared that states would resort to shifting the burden of taxation onto immobile factors of production and consumption, moves which are highly regressive (OECD 1998: 14). This mix of more regressive tax structures and widespread tax avoidance would ‘undermine the fairness, neutrality and broad social acceptance of tax systems’ (OECD 1998: 8). Broadly speaking the 1998 Report defines harmful tax competition as the combination of low or no rates of taxation on foreign owned assets with legal or administrative procedures that prevent overseas tax authorities from identifying the owners of assets (Woodward forthcoming). The report distinguishes two categories of harmful tax competition: tax havens and preferential tax regimes (PTRs). A tax haven is a jurisdiction that maintains no or nominal rates of taxation and promotes itself as a location where non-residents can elude tax in their country of residence (OECD 1998: 22). However, low or no taxation is a necessary but not sufficient condition for identifying a harmful tax haven. Low taxes in tax havens are only deemed harmful when combined with any of the following features. Firstly, a lack of effective exchange of information. This refers to laws or administrative practices that prevent foreign tax authorities from obtaining the information required to apply their own tax laws upon their residents (OECD 1998: 22–3). Secondly, the absence of transparency in legal, administrative or legislative affairs. This hinders the ability of tax authorities to identify the beneficiaries of assets held overseas, preventing them from accurately auditing the foreign activities of their residents and hence their ability to levy taxes upon them. Finally, the absence of substantial business activities. This indicates that the jurisdiction seeks to entice investment motivated purely by tax considerations.

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A similar methodology is used to identify harmful PTRs, with low rates of tax becoming harmful when the regime lacks transparency and effective mechanisms for the exchange of information about non-resident investors (OECD 1998: 26–30). The critical difference between a tax haven and a PTR is that in a tax haven low taxes normally apply across the entire jurisdiction whereas in a PTR only certain income streams from non-resident investors qualify for less onerous treatment. PTRs exist in countries which generate significant revenue from general taxation, but grant exemptions to certain sectors according to residential status. The practice of offering tax immunity exclusively to non-residents is what the OECD calls ‘ring fencing’ (OECD 1998: 26). This is considered harmful because while the domestic tax base of the country sponsoring the regime is insulated, it simultaneously poaches the tax base of other nations by attracting mobile capital seeking to avoid taxation in its country of residence. Having delineated the nature of harmful tax practices the Report goes on to make 19 Recommendations to counteract the problem. Fourteen of these measures were unilateral or bilateral (see OECD 1998: 40–52). However, the OECD was sensitive to the fact that unilateral or bilateral responses alone would merely displace rather than extinguish harmful tax practices (OECD 1998: 37, 52). Therefore the lynchpin of the OECD’s approach was the intensification of multilateral cooperation. It proposed the creation of a new body, the Global Forum on Harmful Tax Practices, to oversee the adoption of the recommendations and to coordinate international work on tax competition. OECD countries were automatically eligible for membership of the Forum, non-member countries would be admitted only after they had publicly committed to the elimination of harmful tax practices. By signing up to the 1998 Report, OECD members committed to eliminate harmful elements of their tax system by April 2003. The Forum’s first task was to initiate a process for OECD countries to identify and eliminate their harmful PTRs. OECD members were asked to review their PTRs and to report aspects which might be harmful. The tax practices submitted by member states were then peer reviewed. The outcomes of these reviews were discussed by three specially convened Working Groups of the Forum. The OECD’s 2000 Report Towards Global Tax Co-operation (hereafter the 2000 Report) listed 61 potentially harmful PTRs occurring in 21 OECD states (OECD 2000: 12–4). The OECD also requested the Forum to pursue work in non-member countries and to draw up a list of tax havens. The methods used to identify and assess tax haven jurisdiction differed markedly from those used to identify PTRs. Instead of self-evaluation followed by peer review the Forum conducted external reviews of tax haven arrangements. Following these reviews 41 jurisdictions were found to meet the tax haven criteria and were invited to appear before the Forum. Between July 1999 and April 2000 tax

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haven territories came before the Forum where ‘in an inquisition-type setting, representatives of these small jurisdictions were arrayed before senior Treasury officials of the OECD countries and presented with an OECD-researched report describing their territory as “tax havens”’ (Sanders 2002: 328). A handful of jurisdictions (Bermuda, the Cayman Islands, Cyprus, Malta, Mauritius and San Marino) quickly capitulated and provided commitments to the Harmful Tax Competition initiative. The 35 remaining jurisdictions were listed in the OECD’s 2000 Report (OECD 2000: 17) as meeting the tax haven criteria and were given until the end of July 2001 to make a commitment to eliminate harmful tax practices by 2005. Failure to do so would result in those territories being placed on a List of Uncooperative Tax Havens, rendering them liable to official countermeasures from OECD countries. Possible countermeasures include disallowing deductions, exemptions and credits on transactions, the imposition of withholding taxes, charging levies on transactions and the termination of tax conventions (OECD 2000: 25). Over the next year progress was made toward the preparation of a list of uncooperative tax havens. However, in May 2001 the OECD proposals were thrown into disarray when US Treasury Secretary Paul O’Neill said the US had ‘serious concerns…about the direction of the OECD initiative’. While reiterating US support for the ‘core elements’ of the project, namely greater transparency and information exchange, he inveighed against the unequal treatment of OECD and non-OECD members and the premise that low rates of tax were inherently dubious (US Treasury Department 2001). The OECD pointed out that its objective was not the abolition of low tax regimes but to make low tax regimes more transparent (Owens 2000). The OECD’s protestations, while entirely accurate, could not disguise faltering political support for the project. Indeed O’Neill’s announcement was a public acknowledgement of behind the scenes negotiations that were already taking place between US Treasury officials and their counterparts from other OECD countries aimed at securing substantial modifications to the original plans. The other OECD countries, realizing that the project could not succeed without the backing of the world’s largest economy, had little option but to acquiesce. The alterations to the initiative with regard to tax havens were unveiled following the meeting of the G7 Finance Ministers in July 2001 (G7 Finance Ministers 2001) and confirmed in the OECD’s 2001 Harmful Tax Competition Progress Report. Firstly, the deadline for tax havens to make commitments and avoid inclusion on the forthcoming OECD blacklist was extended to 28 February 2002. Secondly, the no substantial activities criterion was dropped and commitments would now only be sought with regard to transparency and information exchange. Finally, there was a guarantee that coordinated defensive measures would not be applied to

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non-OECD tax havens any earlier than they would to OECD members hosting PTRs (OECD 2001c). The initial phase of the OECD project came to fruition on the 18 April 2002 with the publication of the inaugural List of Uncooperative Tax Havens (OECD 2002b). Feverish negotiation in the months immediately before the list’s disclosure saw all but eight of the 35 jurisdictions listed in the 2000 Report make a commitment. Seven of these jurisdictions (Andorra, Liberia, Liechtenstein, the Marshall Islands, Monaco, Nauru and Vanuatu) were designated uncooperative. The eighth, Barbados, reached a separate agreement with the OECD in January 2002. In detailed discussions between the two parties Barbados was able to convince the OECD that its mechanisms for information exchange and transparency were adequate. In return the OECD agreed that Barbados would not appear on the List of Uncooperative Tax Havens.

The implications of the OECD initiative for SIEs The OECD initiative has been the subject of excoriating attacks from several quarters and, in particular, officials, politicians and business leaders in the Caribbean. Here the investigation into harmful tax practices is denounced as nothing short of an act of economic warfare motivated by a desire to bolster the position of OFCs in OECD countries and to re-assert colonial and imperialist modes of control in the region (Sanders 2001, 2002). This final section evaluates the potential impact of the OECD’s initiative on SIEs. Initially it will examine the contention, propounded by SIEs, that the OECD’s initiative is imperilling their development because it will inevitably result in the shrinkage or closure of the spaces needed to ensure the survival of OFCs. The second part will go on to suggest that these fears, while understandable, may prove unfounded. The dangers to development Previously it was shown that political goodwill is essential to offshore finance, for it enables the relevant authorities to devise the fiscal, regulatory and secrecy arrangements needed to entice capital to offshore locations. In the 1990s political tolerance among advanced industrialized nations towards OFCs began to evaporate. The consequence has been a series of international initiatives seeking to clamp down on OFCs. SIEs hosting OFCs are now expected to conform to the panoply of rules, codes and standards or incur the wrath of international financial institutions. OFCs have been offered a stark choice: conformity or closure. Those searching for a competitive advantage by flouting international norms have been promised a ‘bleak future’ by leading regulatory authorities (Financial Services Authority (UK) 2001). This has imposed a regulatory straitjacket

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which severely retards the freedom SIEs once enjoyed to develop their own regulatory framework, a feature lying at the very heart of their competitive advantage. From the perspective of SIEs the Harmful Tax Competition initiative presents a number of dangers. OFCs in SIEs seem destined to lose business whether they commit to eliminating harmful tax practices or not. The choice between conformity and closure offered to SIEs by the OECD omits the problem that conformity will lead to the closure of their offshore sector. If, on the one hand, the SIE makes a commitment to avoid being the subject of countermeasure economic sanctions, they would be required to submit themselves to the principles of transparency and information exchange. This would involve the creation or extension of tax information exchange agreements, to include civil as well as criminal tax matters, and allowing access to locally maintained information about the ownership of assets and financial statements of registered companies. In so doing the veil of secrecy that forms one of the principal attractions of offshore finance would be lifted resulting in a significant loss of business. In other words, compliance with the OECD’s initiative would necessitate closing the secrecy space needed to survive. Alternatively SIEs may elect not to make a commitment. Under these circumstances SIEs would be placed on a list of uncooperative jurisdictions and the OECD would be empowered to ask its member states to invoke countermeasures against them. These countermeasures would prevent or increase the cost of conducting transactions in these centres causing business to flee. Jurisdictions are in the unenviable position of ‘either committing to the initiative (so suffering possible and immediate to long-term loss of economic activity through the loss of offshore sector clients) or not providing a commitment (and suffering loss of economic activity through the imposition of defensive measures by OECD members)’ (Pacific Islands Forum 2001 quoted in Woodward 2004). Whichever route is selected ‘the elements which make offshore financial tools attractive will be removed and so cause the shrinkage or closure of this sector in listed nations’ (ibid.). Worries about the migration of business out of SIEs are reinforced by the absence of a level playing field between OECD and non-OECD jurisdictions. From the outset Switzerland and Luxembourg have abstained from the initiative, citing their desire to protect client confidentiality and disagreements with the criteria used to identify harmful tax practices (OECD 1998: 73–8). By not consenting to these reports Luxembourg and Switzerland have yet to make a commitment equivalent to those made both by other OECD members or committed tax havens. Furthermore, the OECD has been somewhat ambiguous about whether or not it is developing countermeasures to deal with its own members with PTRs as well as uncooperative tax havens (ITIO 2002b). ‘When asked directly whether “the defensive measures will apply to uncooperative OECD countries” Jeffrey

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Owens, the Head of the OECD’s Centre for Tax Policy and Administration, trotted out the well established mantra that “there is only going to be one distinction: co-operative or uncooperative”’ (Owens 2002: 6 quoted in Woodward forthcoming). This assertion is demonstrably false. Despite their persistent failure to make a commitment, Switzerland and Luxembourg have never been referred to by the OECD as uncooperative jurisdictions and they were conspicuous absentees from the list of uncooperative jurisdictions. These flagrant double standards threaten to undermine the viability of OFCs in SIEs. While the regulatory and secrecy spaces of SIEs are slammed shut they remain open in Switzerland and Luxembourg, two of their principal competitors. If they are not obliged to make the same reforms as tax havens, funds will be drained from SIEs and relocated in jurisdictions which are not quaking in the shadow of OECD sanctions. The International Tax and Investment Organization (ITIO) suggests that there is already clear evidence of business flowing away from SIEs towards Switzerland as a result of the offensive on tax havens (ITIO 2002a). The feeling that SIEs are being unfairly victimized is heightened by the absence of a level playing field between non-OECD members. Places including Hong Kong, Singapore, Dubai and Costa Rica offer offshore facilities, but have neither appeared on the list of uncooperative tax havens or been forced to make a commitment equivalent to those made by SIEs. Again SIEs are confronted with the danger of an exodus of capital to jurisdictions unencumbered by the threat of countermeasures. The OECD has accepted the likelihood that SIEs will be afflicted by some degree of economic dislocation as a result of implementing its commitment. To placate them the OECD has promised to ‘work with other interested international and national organizations to examine how best to assist co-operative jurisdictions in restructuring their economies’ (OECD 2000: 21). As yet, precise details of this assistance have not been forthcoming and critics complain that nothing has been offered in the way of practical compensation (Persuad 2002). As Sutton (Chapter 13) demonstrates small states must strengthen public regulation in order to obtain the maximum benefits from globalization. However, the wholesale reforms necessitated by globalization are often precluded by the resource constraints afflicting SIEs. Nowhere is this better illustrated than in the financial sphere, and in the problems confronting SIEs as they attempt to conform to the OECD’s Harmful Tax Competition initiative. Already the chapter has alluded to the difficulties facing regulators in SIEs in recruiting and retaining sufficient numbers of qualified staff. Though many SIEs have mechanisms in place to exchange information as a result of pressure to comply with the exigencies of FATF money laundering rules, the complexity of the OECD’s proposals will ‘place exceptional demands on already scarce and limited human and other resources available to small economies’ (Scanlon 2002: 44). The OECD has promised tech-

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nical assistance but ‘technical assistance, however generous and ongoing, does not address the infrastructure and human resource limitations inherent in all micro and most small jurisdictions’ (Commonwealth Secretariat 2000: 7). SIEs will be forced out of the offshore financial sector because of the prohibitive costs of erecting an institutional edifice capable of meeting the OECD’s demands on fiscal transparency. The OECD project – overstating the danger From the above it would be easy to infer that SIEs face an uncertain future. The compression of political space and the concomitant pressure to close the fiscal, regulatory and secrecy spaces that gave them their competitive advantage, especially when these spaces remain open in their major OECD competitors, appear to sound the death knell of OFC’s located in SIEs. Nevertheless there are signs that the threats posed by the OECDs proposed regime are beginning to recede and may always have been overstated. The first factor is the strength and determination of the coalition driving the harmful tax agenda. The diverging interests of OECD members have fractured support for the project. This is exemplified by the fading political support from the US. In contrast to the Clinton government, which enthusiastically embraced the initiative, the demeanour of George Bush’s administration has been decidedly lukewarm. The Republican government, with its inveterate sympathy for individual liberty and unfettered markets, provided a receptive audience for the intense lobbying from an unholy alliance of libertarian think tanks, big business and those campaigning on developmental issues. These various groups were adamant that cracking down on tax competition was not in the US’ interests. The think tanks, amassed beneath the banner of the Coalition for Tax Competition and headed by the Centre for Freedom and Prosperity, were instrumental in sensitizing the Bush administration to the philosophical and economic drawbacks of adhering to the OECD plan. They argued that financial secrecy is a crucial component of individual freedom. Committing to the OECD’s principles of information exchange and transparency would necessitate unwarranted intrusion by the state into private affairs. They also pointed out that the sort of tax competition being prosecuted by the OECD is one of the cornerstones of US economic policy. Low taxation combined with strict privacy laws for non-residents has assisted in attracting US$9 trillion of foreign investment to the US (Mitchell 2002: 41) making it ‘the world’s biggest beneficiary of tax competition’ (Mitchell 2001b: 6). As well as stimulating growth and employment these flows have been a cheap and readily available source of funds with which the US has been able to finance chronic trade and government deficits since the 1970s. The US trade deficit is now so severe that the US must attract US$1.3bn a day simply to prevent the dollar’s depreciation (Financial Times 2002b). This, in conjunction with the perpetually expanding war on terror and the tax cutting instincts of the Bush administration, suggests that the US would be

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‘unable to afford the cost of lost investment that would inevitably follow any international crackdown (on tax havens)’ (Palan and Abbott 1996: 174). Discussions about the OECD Harmful Tax Competition initiative have focussed principally on the interstate dimension and, in particular the ability of larger, more powerful states to bully smaller, weaker states into submission. However big business has been equally vociferous in its opposition to the OECD’s plans and it is important not to underestimate the power of organized capital to resist tax reform through manipulating the agenda and influencing government. Webb (2002: 3) has shown how ‘lobbying by TNCs and the transnational tax services industry also helped to move the OECD away from its original goals’. US corporations quickly recognized that they would lose out if the OECD’s initiative were to proceed unaltered. American transnational corporations earn a third of their profits in low tax jurisdictions (Mitchell 2001b). They professed that further layers of bureaucracy and administrative costs combined with higher effective rates of taxation would undermine the continuing vitality of the US economy. Finally, development agencies pointed to the threat to the economies of the Caribbean Basin in the US ‘backyard’. The closure of financial services industries would undermine a number of SIEs economies in the Caribbean, possibly sponsoring emigration to the US or forcing SIEs to turn to more damaging means of generating income, particularly the production of narcotics (Mitchell 2001c). The antipathy of the Bush administration has forced the OECD to ‘substantially curtail’ (Mitchell 2001a: 9) the Harmful Tax Competition initiative. The project now has an altogether narrower focus, with non-core elements being jettisoned and talk of harmful tax competition being replaced by less caustic references to ‘fiscal transparency’ (see for example Financial Times 2002a). The OECD has made these concessions as US withdrawal would almost certainly precipitate the collapse of the project. The OECD can only request that its members implement countermeasures. They have no authority to force them to do so. However, their effectiveness is critically dependent on all countries enforcing countermeasures. Presently the interests of the US seem diametrically opposed to the aims of the OECD’s project and it is unlikely that the US would enforce punitive measures against offshore tax havens. The renegade OECD members who have failed to sign up to the initiative are further evidence of disagreement amongst the OECD about the basic premise of tackling harmful tax competition. Moreover, they are now conspicuous barriers to further progress because the pledges made by nonOECD members were conditional on a level playing field between OECD and non-OECD jurisdictions. Typically commitments were couched in the following terms: ‘The commitment is offered on the basis that…Those jurisdictions, including OECD Member countries and other countries and jurisdictions

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yet to be identified, that fail either to make equivalent commitments or to satisfy the standards of the 1998 Tax Competition Report, will be the subject of a framework of co-ordinated defensive measures…’ (OECD 2002a).3 The commitments entered into by tax havens will not be binding until either all OECD members make commitments or the OECD agrees to apply countermeasures to its own members. It is unlikely that Switzerland or Luxembourg will accede to the OECD’s demands in the near future, nor does the OECD appear to have any stomach for adding its own members to the list of uncooperative jurisdictions. Until these matters are resolved the commitment letters of non-members are ‘virtually meaningless’ (Mitchell quoted by Centre for Freedom and Prosperity 2002). The OECD juggernaut has for the moment ground to a halt. Reports of the death of political space have been greatly exaggerated and, at least for the time being, the scope for SIEs to prop open their regulatory, secrecy and fiscal spaces remains. Even if the OECD is able to resolve the current political impasse there are a number of further obstacles to be negotiated. The imposition of countermeasures will not be straightforward because ‘virtually all’ (Orava 2002: 181) of the countermeasures envisaged by the 2000 Report (OECD 2000: 25) will fall within the purview of the World Trade Organization’s (WTO) General Agreement on Trade in Services (GATS) (Simmons 2002; though see Grynberg and Chilala 2001). OECD countermeasures are liable to be struck down by the WTO for impeding fair trade in financial services, particularly given that OFCs are not violating any of the WTO’s rules pertaining to free trade. Nevertheless, the problem for SIEs is that recourse to the WTO is only possible after countermeasures are applied, by which time the damage to an SIE may be irreversible. Other prevailing international legal norms also need to be taken into consideration. The notion of ‘dual criminality’ asserts that states are only required to assist each other in investigating and prosecuting offences that are a crime in both countries. In many tax havens, including a number of OECD countries, tax avoidance is not a criminal offence. Countries could therefore refuse to comply with the exigencies of the OECD initiative citing the need to protect the confidentiality of their clients. The way round this would be for the OECD to insist as part of the commitment package that tax avoidance be criminalized. However, at present, support for such a move is muted, even among OECD member states (Gilmore 2002). The final factor is the ingenuity of financial markets in outflanking regulatory constraints. Strange (1998: 132) asserts that: If the Group of Seven were to announce that they would be publishing a blacklist of the known tax havens and another blacklist of firms and

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individuals actively making use of tax havens, and would impose fines or other sanctions on them unless the accounts were closed within a specified time, there can be little doubt that most could not survive for very long. The reasons why this does not happen are, once again, political rather than technical. This implies that concerted political action alone will be sufficient to reign in offshore financial markets. However, this contradicts much of Strange’s other work in which he argues that markets are now beyond the political control of states acting alone or in concert (see for example Strange 1986, 1996). The inherent dynamism of contemporary financial markets with their rapid rates of innovation enables them to outmanoeuvre attempts by regulators to control them. Indeed the Financial Times (2002c) reports that Wall Street is already devising new products in response to the OECD initiative. While political will is essential it cannot on its own overcome the huge technical difficulties associated with governing contemporary financial markets. International regulation has challenged the fertile minds of financial practitioners. However, instead of conceding defeat it is prompting a ceaseless stream of new products designed to take advantage of the new frictions introduced by changing regulatory structures. Reregulation will redirect the flow of funds but it will not prevent them entirely. Indeed OFCs have flourished despite the avalanche of international initiatives setting stricter parameters for their operation.

Conclusion Critics of OFC-led development in SIEs argue that one of its principal drawbacks is that it compounds rather than lessens dependency. Given the notoriously fickle nature of global capital markets and the vulnerability of OFCs to external policy change, the development of SIEs which rest on offshore finance is extremely precarious. The OECD’s Harmful Tax Competition initiative brought this issue into sharp relief. If the plan had proceeded as intended it would have been a serious threat to the viability of the OFC strategy in SIEs, endangering the development of those with an existing offshore presence and narrowing the field of options available for other SIEs. The OECD project would have narrowed or forced shut the regulatory, fiscal and secrecy spaces that once made them profitable. Worse still, the absence of a level playing field, which would have allowed certain OECD and non-OECD countries to prop their regulatory spaces open, would have provoked the transfer of capital out of SIEs. Thankfully from the perspective of SIEs these threats seem to be receding. The OECD project has been watered down with key elements of the 1998 report including the demand that tax havens force institutions to maintain a physical presence

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have been cast aside. Moreover, the project has now reached a political impasse. Without US support or the creation of a level playing field the OECD project is stalled. Finally, the creativity of financial entrepreneurs in developing products to circumvent or to derive profit from new regulations suggests that the imposition of countermeasures will not be as straightforward as the OECD has assumed. Nonetheless there is no cause for complacency among SIEs. While the battle over the OECD’s Harmful Tax Competition initiative seems to have been won, the wider war on financial opacity in OFCs still rages. Following the terrorist attacks of 11 September 2001 and the corporate scandals which engulfed Enron and WorldCom, the US suddenly rediscovered its interest in financial transparency. It has passed a raft of legislation allowing it to peer into the offshore activities of its citizens and has wrung tax information exchange agreements out of a number of Caribbean tax havens. Furthermore the FATF has now revised its 40 recommendations on the countering of money laundering which include several provisions which could hurt SIEs, including the elimination of ‘shell’ banks (FATF 2003b). The European Union (EU) continues to seek its own settlement on the exchange of information for tax purposes. If the negotiations are successfully completed the dependent territories of EU countries, which include a number of SIEs, would be forced to adopt similar measures to those being proposed by the OECD. Finally, there are concerns that with many SIEs committing to the initiative a certain legitimacy has been accorded to the OECD ‘opening the floodgates to a raft of other demands from an organization with no authority except the coercive power of its member states’ (Sanders 2002: 339). The manner in which the OECD has dealt with SIEs over the issue of tax competition has done nothing to assuage the view held amongst many in the developing world that the governance of globalization remains an exclusionary and dictatorial project. Notes 1 This chapter is based upon a paper presented to a conference entitled ‘Towards a New Political Economy of Development: Globalization and Governance’ hosted by the Political Economy Research Centre, University of Sheffield, 4–6 July, 2002. I am grateful to the conference participants for their comments and criticisms. I am also indebted to Paul Sutton, Tony Payne, and Abhijit Sharma for their helpful and insightful comments on earlier versions of this chapter. The usual caveats apply. 2 There is no precise definition of a ‘small’ state. This chapter subscribes to the threshold used by the Commonwealth Secretariat and the World Bank which designates small states as those with a population of less than 1.5 million. 3 The letters of commitment by non-OECD members are available from the OECD’s website at http://www.oecd.org/document/19/0,2340,en_2649_33745_ 1903251_1_1_1_37427,00.html

12 Export Processing Zones and Policy Competition for Foreign Direct Investment: The Caribbean ‘Offshore’ Development Model Tony Heron

Introduction Since the mid-1980s, the Caribbean has become an increasingly important export platform for US manufacturing firms seeking to reduce costs and offset competition by outsourcing the most labour-intensive aspects of the production process to local assembly factories, mostly located in specially designated export processing zones (EPZ). To a large degree, this trend reflects a range of factors exogenous to the Caribbean, including the advent and subsequent growth of intra-firm and intra-industry trade among US manufacturing firms and specific US government policies which have sought to encourage the practice of offshore production. At the same time, the attempts by Caribbean governments to persuade US firms to invest in their particular EPZ sites at the expense of neighbouring economies have come to play an increasingly important role in these unfolding transnational production networks. It is this aspect of the political economy of offshore production that this chapter seeks to investigate. First, the chapter traces the origins of offshore manufacturing in the Caribbean and proceeds to outline the specific legislation governing its operation, including both those provisions relating to the use of EPZs in the Caribbean as well as the special US tariff rules that allow for this type of economic activity. Second, it examines the issue of policy competition in the region in relation to EPZ-related investment and assesses the costs and benefits associated with offering (increasingly generous) preferential treatment to export-orientated investment. On this basis, the third and final section assesses the broader costs and benefits associated with the use of EPZ regimes as the basis of a long-term development strategy. Ultimately, the chapter argues that, even though these EPZs offer the host country 213

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undeniable benefits in terms of employment and foreign exchange earnings, the experience of the Caribbean suggests that the competitive logic of EPZs often precludes the possibility of the zones contributing to the type of industrial transformation that they are allegedly designed to promote.

Export processing zones and ‘offshore’ development in the Caribbean Export processing regimes are nothing new to the Caribbean. It could be argued that attempts to promote the region as an export platform for foreign – predominantly US – investment on the basis of economic incentives, such as the free provision of infrastructural services and tax holidays, has been a consistent feature of Caribbean development thinking since the 1950s. As early as 1949 the St Lucian-born economist, W. Arthur Lewis (1949; 1950), advocated a type of EPZ-led industrial strategy in what later came to be known, somewhat disdainfully, as ‘industrialization by invitation’ (Girvan and Jefferson 1971: 1). Industrialization by invitation was based on the premise that it in order for the English-speaking Caribbean to overcome its longstanding dependence on the production and export of primary commodities, it would be first necessary for Caribbean governments to persuade – through fiscal incentives and other economic inducements – foreign manufacturers already selling in overseas markets actually to locate their plants in the Caribbean (Payne and Sutton 2001: 3–4). Hence, from the onset development thinking within the Caribbean has been closely tied to the idea of what we might call the offshore economy (see Chapter 11 by Woodward). In practical terms, this initially manifested itself in a series of attempts by Caribbean governments to persuade foreign firms to use the region as a platform for penetrating major export markets, particularly the US. For example, Jamaica enacted the Export Industry Encouragement Act (EIEA) in 1956, which allowed approved firms a tax holiday on profits and dividends for a ten-year period as well as granting duty exemption on capital goods and imported raw materials (Thomas 1987: Chapter 5). Subsequently, with the formation of the Caribbean Community (CARICOM) in 1973, similar measures were applied throughout the English-speaking Caribbean, with member states offering exemption from all income taxes for anywhere from 10 to 15 years to firms exporting their products outside of the customs union (Schoepfle and PérezLópez 1992: 126–7). Likewise, in the Dominican Republic the Industrial Incentives Act (more commonly known as Law 69) was passed in 1979 and offered similar fiscal incentives and duty exemptions to that of Jamaica’s EIEA; Haiti implemented comparable measures in the early 1960s and was the first independent Caribbean territory to establish specially designated EPZs. These EPZs are discussed in more detail below. EPZs are usually defined, somewhat broadly, as specially created industrial enclaves, designed to stimulate export performance and foreign direct

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investment by providing firms with tax exemptions and other fiscal incentives. To this definition, we can add that EPZs are distinct from other industrial districts, such as ‘freeports’ and ‘free trade zones’, which are normally associated with warehousing, transhipment and other commercial activities, in so far as they primarily serve to transform primary imported material and components into manufactured goods (Dicken 1998: 130). In more specific terms, we can follow the more comprehensive definition of an EPZ offered by the United Nations Industrial Development Organization (UNIDO) as follows: ‘a relatively small, geographically separated area within a country, the purpose of which is to attract export-orientated industries, by offering them especially favourable investment and trade conditions as compared with the remainder of the host country. In particular, the EPZs provide for the importation of goods to be used in the production of exports on a bonded duty free basis’ (cited in Dicken 1998: 130). Although many of the features associated with EPZs – infrastructural provision, duty exemptions, tax holidays and so on – were contained within the first set of industrial policies implemented in the Caribbean in the immediate post-war period, it was not until the late 1960s that specially designated EPZs were established, as regional elites attempted to follow what they took to be the development path set by the East Asian newly industrialized countries (NICs). Having said this, the first EPZs in the Caribbean were actually set up in Haiti as early as 1960 (although they did not become economically significant until over a decade later) when privately owned industrial parks were created in and around Port-au-Prince (Schoepfle and Pérez-López 1992: 138). More significantly, however, the Dominican Republic opened its first EPZ in La Romana in 1969 and further zones were subsequently established in San Pedro de Macorís (1973), in Santiago (1974) and Puerto Plata (1983). Jamaica soon attempted to emulate this strategy when the Kingston Export Free Zone, originally a warehousing and transhipment facility, was converted into an EPZ in 1982. The Kingston Export Free Zone was followed by the creation of two further EPZs in the 1980s – the Montego Bay Export Free Zone in 1985 and the Garmex Export Free Zone (located near Kingston) in 1987. While the initial impetus for the construction of EPZs emerged mainly in the 1960s and 1970s, it was not until the 1980s that these zones became economically significant. As Buitelaar, Padilla and Urrutia (1999: 143) have argued, during this period EPZs in the Caribbean changed from ‘being an exception in an otherwise inward-orientated policy framework’, and ‘became a spearhead in the change towards an export-led development model’. By the mid 1980s the cumulative pressures exercised by the US and an array of international agencies, notably the US Agency for International Development (AID), the IMF and the World Bank, coupled with the

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perceived lack of realistic development alternatives in the region, led most Caribbean elites to the conclusion that neo-liberal, export-led grown offered the best means of economic survival in an increasingly competitive global economy. From this perspective, the promotion of the Caribbean as an export platform for labour-intensive and import-intensive industries provided a means by which Caribbean elites could put the principles of neoliberal, export-orientated development into practice (Pantojas-García 2001). All the same, as a number of commentators have pointed out, despite the best efforts of Caribbean governments, the timing of EPZ-related investment growth lay primarily not with these industrial polices, but with a set of factors that were largely exogenous to the region (Mody and Wheeler 1987). First and foremost among these was the advent and subsequent growth of intra-firm and intra-industry trade associated with the attempts by – predominantly US – TNCs to offset foreign competition by outsourcing the most labour-intensive aspects of the production process to lowwage foreign assembly factories, typically located in the developing world (cf. Frobel et al. 1980; Grunwald and Flamm 1985; and Sklair 1989). Although these activities were suggestive of a broader set of structural changes that took place within the world economy during the late 1970s and 1980s, they were also facilitated by a specific set of policies pursued by industrial countries, which actually sought to encourage offshore production. The most important policy instrument in this regard was the US tariff code provisions 806.30 and 807.00, dating from 1930 and 1964 respectively. These provisions offered duty-free treatment to certain metal products and a range of other manufactured goods that were made with US raw materials and then subsequently re-imported into the US, with the importer paying duty only on the value added overseas. Now known as the Harmonized Tariff Schedule (HTS) 9802.00, these provisions have played a key role in the expansion of a number of Caribbean offshore manufacturing industries, including electronics, footwear, garments and other apparel items. Nevertheless, as we shall see shortly, while the 9802.00 regime has indeed facilitated the vast majority of foreign investment in the Caribbean EPZ sector, it has also brought with it significant costs. Before examining these costs, however, it is first necessary to take a closer look at the specific policy instruments that Caribbean governments have used to persuade foreign investors to locate in their particular EPZs. Policy competition for foreign direct investment According to a number of sources, fiscal incentives designed to attract foreign direct investment to export-orientated industries tend to play a relatively minor role in the locational decisions of TNCs, when compared to other advantages such as market size and growth potential, production costs, skill levels and political and economic stability (Mortimore and Peres 1998). Nonetheless, as Mortimore and Peres (1998: 54) note, fiscal incen-

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tives do tend to be more attractive for footloose, export-orientated investments, such as in the electronics and apparel sectors, which constitute the overwhelming majority of the offshore industries in the Caribbean. The typical range of incentives offered to prospective investors is usually based on a series of fiscal benefits, such as tax holidays and duty-free treatment for imported capital equipment and components that are used in assembling products destined for export. In addition to this, though, most Caribbean governments also offer more general incentives, including the subsidized rental of factory shells, infrastructural improvements, government-supported worker training programmes, reduced public utility rates, credit assistance, guarantees that profits may be repatriated, permission to sell a share of the output in the domestic market and special treatment with regard to foreign currency restrictions (Schoepfle and Pérez-López 1989: 134). As specifically related to the larger Caribbean islands, the governments of the Dominican Republic, Jamaica and Haiti offer a noticeably similar range of economic incentives to potential investors. Citing a 1988 brochure prepared by the Investment Promotional Council of the Dominican Republic, Schoepfle and Pérez-López (1989: 134–5) have summarized the incentives offered to firms which locate in Dominican EPZs as follows: (1) duty and tax-free importation of all machinery, equipment, spare parts, construction materials and other items needed for the construction and operation of their production facility; (2) duty-free entry of imported raw materials and other goods destined for re-export; (3) complete exemption from all taxes and fiscal charges for periods of 12 to 15 years; (4) freedom from currency holdings and foreign exchange restrictions; (5) freedom to sell up to 20 per cent of production to the local market; and (6) no financial reporting requirements other than local expenses. A similar package of incentives is offered by both Jamaica and Haiti (Steele 1988). The homogeneity in terms of what individual Caribbean governments offer investors in order to persuade them to locate in their particular EPZs does, of course, reflect the widespread policy consensus that currently exists within the region with regard to foreign investment. At the same time, however, this homogeneity also implies a high degree of policy competition within the Caribbean as each country attempts to persuade foreign investors to locate in its EPZs at the expense of neighbouring economies. According to a number of critics, this type of competitive strategy wherein neighbouring EPZ economies compete for foreign investment through ‘bidding wars’ approximates a fallacy of composition similar to the selfdefeating policies that have blighted primary-exporting countries, which have attempted to use such measures as currency devaluations in order to remain export competitive, for a number of years (Kaplinsky 1993). In other words, while it may make sense for a single EPZ economy to adopt investor-friendly polices, such as tax holidays and duty-free entitlements,

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the effectiveness of such measures are immediately eroded once neighbouring EPZs chose – as they have done in the Caribbean – to implement similar policies. Ultimately, this can lead to a spiralling competitive ‘race to the bottom’ as each EPZ economy attempts to out-bid its neighbours by offering increasingly generous incentives to prospective foreign investors. One manifestation of this competitive logic within the Caribbean has been for governments to transform temporary (10–15 years) fiscal incentives, such as limited-time authorizations to operate under the temporary admissions or EPZ regimes, into permanent ones, whenever a competitor allows for automatic renewal (Mortimore and Peres 1998: 61). In the Dominican Republic, for instance, the provision of increasingly generous tax holidays for investors choosing to locate in its EPZs has led to a situation where now over 40 per cent of the country’s total exports provide virtually no fiscal income for the government (Mortimore 1999: 131). In the longer term, such measures are likely to have severe consequences for economic development, given that these resources might otherwise have been used to strengthen the local industrialization process via, for example, investment in infrastructure, such as ports, airports and roads. In fact, Mortimore and Peres (1998: 57) go as far as to conclude that the effect of policy competition of this nature has been to limit and distort the nascent industrialization process in the Caribbean wherein continued export growth can only be maintained on the basis of incentive dependent investment. Beyond fiscal incentives, Caribbean EPZ economies also compete on the basis of exchange rate policy. One of the most important aspects of the structural adjustment policies implemented in the Caribbean during the 1980s was the recommendation of currency devaluations, as a means to reduce domestic consumption and thus generate sufficient foreign exchange to service debt payments (MacAfee 1991). The most immediate side effects of this policy was that it led to a significant decline in real wages in the Caribbean and thus made export-related industrial investment in unskilled labour-intensive areas a far more attractive option for foreign capital. Furthermore, while the use of exchange rate policy was not directly aimed at enhancing the international competitiveness of Caribbean offshore industries, the link between the move to more ‘flexible’ exchange rates and the promotion of EPZs is difficult to ignore. As Williamson explains: There is now a very wide consensus in Washington that export-led growth is the only kind of growth Latin America [and the Caribbean] stands any chance of achieving in the next decade. There is equally little controversy over the proposition that the first key prerequisite to exportled growth (or ‘outward orientation’) is a competitive exchange rate. By that is meant one that will promote a rate of growth of exports that will allow the economy to grow at its supply-side potential. It is also fairly

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widely accepted that, in order to invest in production for the export market, business needs assurance that the exchange rate will remain competitive in the near future (cited in Kaplinsky 1993: 1860–1, emphasis added). Within the context of the Caribbean, the adoption of more ‘flexible’ exchange rate policies went hand in hand with the dramatic expansion of the EPZ sector that took place in the region during the mid-1980s. Kaplinsky (1993: 1860) estimates that, in relation to the US dollar, almost all Caribbean Basin EPZ economies – Colombia, the Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Mexico, Panama and Venezuela – increased the competitiveness measured against the real 1980 exchange rate; and in most cases the effective devaluation exceeded 20 per cent for much of the decade. Citing the specific case of the Dominican Republic, Kaplinsky (1993: 1860) sees a clear link between these currency devaluations and the dramatic expansion of the island’s offshore assembly industries. During the 1980s real wages in the Dominican Republic paid by foreign investors more than halved, at the same time as they rose by 15 per cent in the US. In the same period, the proportion of total manufacturing employment on the island accounted for by EPZs increased from 23 per cent in 1981 to 56 per cent in 1989, by which time EPZ exports were responsible for 20 per cent of the Dominican Republic’s total foreign exchange earnings (Kaplinsky 1993: 1860). A similar pattern has also been observed in other EPZ economies, most notably, Mexico, where the spectacular growth of its maquila exports has been accompanied by a recurrent series of currency devaluations, the most recent of which took place during the 1994/1995 peso crisis (Gereffi 2000). Taking the region as a whole, the impact of currency depreciation on real wages has been considerable. For example, the hourly compensation costs for Caribbean Basin apparel workers in the late 1980s stood at approximately US$0.95 in Costa Rica, US$0.88 in Guatemala, US$0.84 in Mexico, US$0.79 in the Dominican Republic, US$0.63 in Jamaica and US$0.58 in Haiti, while comparable rates in the United States stood in the order of US$13.66 per hour (Kaplinsky 1993: 1859). Admittedly, these hourly rates still compare favourably to those found in low-cost Asian countries, where unskilled assembly workers generally earn between two to four time less than their Caribbean counterparts. Nevertheless, given the abundance of unskilled lowcost labour in the Caribbean, and the fact that regional EPZs are all primarily geared towards attracting the same prospective investors, harsh policy competition between neighbouring EPZs continues to act as a downward pressure upon local wages. Moreover, as more and more regional economies adopt the offshore development model, these competitive pressures are likely to intensify. Since the onset of peace in Central America in the late 1980s and early 1990s, states such as El Salvador, Guatemala and Nicaragua

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have become increasingly attractive locations for export-orientated investment (see Robinson 2002). In fact, it is already becoming apparent that the prevailing low wages found in parts of Central America are beginning to lead to the diversion of investment away from the Caribbean and towards the isthmus.1 This in turn may tempt some Caribbean countries to engage in further ‘competitive devaluations’ as a means to regain, albeit temporarily, their export competitiveness (Mortimore and Peres 1998). Nevertheless, as is already apparent, using exchange rate policy as a means to enhance export competitiveness only works in so far as it offers a temporary advantage until neighbouring economies realign their currencies; after which, such wage depressing tactics become highly contingent upon a continuing fall in local purchasing power for Caribbean workers and a corresponding lowering in their standard of living. Thus, as PantojasGarcía (2001: 62) notes, ‘it seems clear that maintaining a competitive advantage in labour-intensive maquiladoras is a self-defeating strategy for the Caribbean, considering that the key to remaining competitive as a maquila export platform means deepening the social and economic disadvantages of the working population’ (ibid.). Conversely, however, if real wages paid to assembly workers are allowed to rise, as they have done in the Caribbean since the massive currency devaluations of the 1980s, the alternative scenario is that local workers will effectively price themselves out of the market. Mortimore (1999: 131), for instance, argues that increases in hourly labour costs for some of the more established EPZ economies, such as Jamaica and Costa Rica, are growing at a much greater rate than in newly emerging EPZ economies, particularly those located in the Central American isthmus. As a result, we are likely to see a much greater level of trade and investment diversion away from the more established EPZs sites in the Caribbean and toward the lower wage sites of Central America in the near future. More fundamentally, however, there is no real evidence that the rise in labour costs in the more established EPZ economies has been accompanied by industrial upgrading or specialization in higher value added tasks. Backward linkages From the perspective of the host country, it is often claimed that the most important contribution that EPZs can potentially make to the process of economic development is derived from the degree to which backward linkages (i.e. local inputs used in the production process) are established between EPZ firms and domestic suppliers. The example of the East Asian NICs, which is generally regarded as the archetypal model for successful industrial upgrading through export-led growth, is particularly illustrative of this point. Spinanger (cited in Wilson 1992: 23) estimates that the proportion of domestic inputs among assembly plants located in South Korean EPZs rose from 13 per cent in 1972 to 32 per cent in 1978; in Taiwan the

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use of local inputs rose from 5 per cent in 1967 to 27 per cent in 1978. What this all means is that, while export processing in both Taiwan and Korea was heavily reliant in the initial stages on foreign capital and inputs, these zones were able to rapidly establish important economic linkages with the domestic economy. Thus, in the context of the industrial transformation of East Asia, the transition from an initial reliance on foreign inputs to a more integrated form of production can be said to have played a key role in allowing these economies to move into the production and export of goods with a high value added (Gereffi 1999). In the Caribbean the most important factor influencing the degree to which local inputs are used in EPZ assembly operations is, clearly, the 9802.00 tariff system. Because this regime provides tariff-free and duty-free treatment only for US-made components it effectively penalizes all of the value added outside of the US, and thus discourages the use of local inputs in the production process. As a consequence, this scheme – which accounts for the overwhelming majority of Caribbean EPZ exports – has had the effect on limiting the use of local resources to that of labour costs, for, as Mortimore (1999: 130) aptly puts it, Caribbean inputs are neither ‘needed or desired by manufacturer or buyer’. Evidently, the consequences of this for limiting the growth of backward linkages in Caribbean EPZ assembly operations have been considerable: Kaplinsky (1993: 1857) cites a study of over 60 EPZ firms in the Dominican Republic carried out by the World Bank in 1990 which could not report a single linkage. Similarly, research conducted in the Dominican Republic by Matthews (1994) in the early 1990s found little evidence of the use of local inputs by assembly firms located in the island’s EPZs. Peter Steele (1998) has argued, moreover, that the low level of backward linkages between EPZs firms and local Caribbean suppliers is not so much an unintended consequence of the 9802.00 tariff system, but rather a deliberate result of US policy. Thus, in the case of the Caribbean apparel industry he argues that the strategy has been to ‘curb and, in the longer term, effectively to discourage the emergence in the Caribbean of more highly integrated garment enterprises capable of producing items with a higher local added value’ (Steele 1988: 3). Regardless of whether or not this is a deliberate aspect of US policy, what remains clear is that the 9802.00 regime has had the effect of limiting the use of local inputs in EPZ assembly operations. What is more, as this accounts for an ever-increasing share of export activity in the Caribbean, the 9802.00 system has begun to distort the evolution of domestic industry by attracting firms which were previously involved in higher value added production for the domestic market (Kaplinsky 1995). Griffith (1990: 48) cites the example of the Jamaican clothing industry whose retreat into 9802.00 production during the late 1980s had the effect of dramatically reducing the value added in the region, while also limiting the capacity of Jamaican firms to play a decisive role in coordinating the entire garment

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production chain. At the same time, Jamaica’s relatively liberal tariff regime has made its own garment industry increasingly vulnerable to competition from cheap US imports, to the extent that by the mid-1990s local industry was only supplying an estimated 20 per cent of all the clothing purchased by Jamaicans (Willmore 1994). At the same time as the 9802.00 tariff system has had diversionary consequences for industries where domestic producers compete directly with US imports, it has had a similar effect on other Caribbean export industries. During the 1980s US economic policy towards the Caribbean sought actively to discourage the export growth of traditional commodities such as sugar (particularly through the use of import quotas), at the same time as promoting ‘non-traditional’ exports, such as garments, whose value added in the region represented a tiny fraction of that which had previously been derived for traditional commodities. Deere and Melendez (1992: 66) estimate that, since 1985, the value added in Caribbean of 9802.00 exports has never exceeded 32 per cent; and for some items the figure is as low as 26 per cent. Comparing this with traditional exports, such as sugar and coffee, whose value added component was often as high as 90 per cent, they suggest that a US$1 million decline in sugar exports would have to be offset with a US$3.8 million increase in garment exports to guarantee the same level of foreign exchange. Thus even with significant growth in 9802.00 exports, such trade is unlikely to compensate for the loss of foreign exchange from traditional commodities. Still, if the low level of domestic integration between EPZ assembly operations and the local economy can be largely attributed to the exclusionary nature of the 9802.00 tariff scheme, this is not something that Caribbean governments have sought to challenge. Indeed, as Larry Willmore (1994; 1995) has argued, the various rules governing EPZs in the Caribbean have, if anything, actually encouraged the exclusion of domestic suppliers from contributing to EPZ assembly operations. According to Willmore (1995: 532), although the 9802.00 regime may indeed limit the scope for backward linkages, not all export processing is carried out through this scheme, and, even when it is, this does not prevent local firms from supplying items such as buttons, thread, hangers, plastic bags and cardboard boxes. In Willmore’s view, the key difference between the EPZs that took off in some of the East Asian NICs during the 1970s and those in the Caribbean lies not so much with the 9802.00 scheme itself, but rather with the attitude of local customs authorities. When the first South Korean EPZ opened in Mason in 1971, assembly firms were free to use local inputs, which were given duty-free treatment; in contrast, Caribbean assembly operations are prohibited from sourcing locally, either because the use of domestic inputs is explicitly outlawed by EPZ legislation or because complicated bureaucratic procedures discourage potential suppliers from entering the market. All in all, then, the low level of domestic integration between activities in

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EPZs and the local economy is not only due to the 9802.00 tariff scheme, but also the prohibitive nature of the regimes governing Caribbean offshore industries. Technology transfer In addition to employing large numbers of relatively unskilled workers and generating foreign exchange reserves, advocates often allege that EPZs also act as a vehicle for the transfer of technology, which is defined by UNIDO as ‘the process by which knowledge related to the transformation of inputs into competitive products is acquired by national entities and whose source is foreign’ (cited in Buitelaar and Pérez 2000: 1633–4). Hence, within the context of the Caribbean, it is argued that EPZs introduce workers for the first time to the rigours of industrial employment, including notions of punctuality, quality control and meeting deadlines, while also offering local entrepreneurs a ‘low risk’ method of entering the export market, which will ultimately enable them to move from simple assembly tasks towards the production of items with a much higher local value added (Willmore 1995: 97). Once again, the example of the East Asian NICs is broadly illustrative of this argument. Although the economies of Taiwan, South Korea, Hong Kong and Singapore initially relied upon assembly operations for export growth (typically, although not always, utilizing EPZs located near major ports), these countries rapidly progressed to a more generalized system of investment incentives that applied to all exportorientated factories, foreign and domestic, operating in their borders. On this basis, the NICs soon became responsible for original equipment manufacturing (OEM), wherein indigenous firms sourced raw materials locally and manufactured products to the specification of foreign buyers. Finally, having established a range of technological skills through industrial learning, these firms in the NICs were then in a position to enter original brand-name manufacturing (OBM), which was also accompanied by a regionalization of Asian trade and production networks in the late 1980s and 1990s (Gereffi 1999: 55–64). Despite all of this, comparisons between the East Asian NICs and the Caribbean are of only partial relevance (see Griffith 1987). As Kaplinsky (1993) has noted, the key difference between the NICs and the EPZs found in the Caribbean is the dependence of the latter upon the US market: largely, though not exclusively, because of the 9802.00 tariff regime – which, as we have seen, accounts for the overwhelming majority of EPZ activity – the value added in the Caribbean is limited to that of labour, utilities, port-facilities and building space. What this means is that any potential benefit that EPZs may offer the region in terms of the transfer of technological resources is, to all intents and purposes, confined to the labour aspect alone. This, of course, does not preclude the possibility that EPZs may have positive developmental consequences for the region with

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regard to certain aspects (i.e. those related to human resources) of technology transfer. In the case of the Dominican Republic, for instance, Willmore (1995: 531) claims that the majority of the 140,000 or so line operators working in the island’s EPZ are made up of those entering the labour market for the first time; he also argues that, in nearly all the island’s EPZs, industrial employment, including supervisors, technicians and plant managers, is constituted by Dominican nationals. As a consequence, EPZ employees are acquiring skills and experience that will be of long-term benefit for the industrial development of the Dominican economy. Finally, Willmore asserts that prima facie evidence exists that EPZs have already made a positive contribution to the transfer of technology due to the fact that firms operating within the island’s EPZs are considerably more efficient that those producing for the domestic market. Still, not all analysts share Willmore’s optimism. On the basis of a survey of over 50 EPZ firms operating in the Dominican Republic, Matthews (1994: Chapter 4) found that the majority of respondents cited ‘prior experience’ as the single most important criteria when recruiting workers; he also discovered that in 72 per cent of cases more than half the workforce was drawn from other EPZ firms, thus questioning Willmore’s assertion that the island’s EPZ workers are those entering the labour market for the first time. On the basis of these figures and his own research, Kaplinsky (1995: 538) has concluded that, rather than introducing workers to the rigors of industrial employment for the first time, EPZs are most likely to recruit from other EPZs or, in the case of jobs requiring a higher skill level, from the domestic economy. Conversely, Kaplinsky sees little evidence of EPZ labour being recruited by non-EPZ employers, thus making it difficult to conclude that EPZs lead to significant technology transfer to the domestic economy. Even if we accept that Caribbean EPZs may make some positive contribution to the transfer of technology within regard to human resource capital, it still remains unclear how this may lead to the type of industrial upgrading which lay behind the spectacular growth rates experienced by the East Asian NICs from the late 1960s onwards. As Mortimore (1999: 131) has argued with regard to the Caribbean apparel industry, rather than representing the starting point for industrialization, as was the case for some of the East Asian NICs, EPZs in the Caribbean have become an end in themselves, thus leading to a skewed process of industrialization. Despite the rapid explosion of Caribbean apparel exports since the mid-1980s, he argues, this activity does not represent the extension of the national apparel industry into the international market, but rather the ‘localization’ of the assembly function itself. As a result this process has not created national leader companies, and there has been no transformation of industry to the extent that the assembly country has extended its industrialization process into more technologically complex tasks or more fashionorientated aspects of the apparel industry (Mortimore 1999: 131–2).

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The economic and social effects of export processing zones in the Caribbean Despite the dubious nature of EPZ-led growth as the basis for a long-term development strategy, at least as measured by the more limited criteria of creating jobs for Caribbean workers, it can be argued that the offshore development model has been something of a ‘success’. Since the late 1980s EPZ employment has come to represent an increasingly greater share of total manufacturing employment. Again, the case of the Dominican Republic is illustrative of this trend. Measured in terms of employment, the Dominican Republic is the fourth largest EPZ economy in the world (the fifth, if China’s Special Economic Zones are included), with approximately 430 assembly firms, employing some 160,000 workers, mostly working in the manufacture of garments and other apparel items (Burns 1995: 39). During the 1980s, as we have already seen, the share of official manufacturing employment accounted for by EPZ firms increased from 23 per cent in 1981 to 56 per cent in 1989, making the Dominican Republic second only to Singapore and Mauritius in terms of the share of the manufacturing labour force employed in EPZs (Kaplinsky 1993: 1856). By 1996 38.5 per cent of the island’s total manufacturing employment was to be found in EPZs (Buitelaar and Pérez 2000: 1639). Still, despite the impressive nature of this employment growth, the economic contribution of EPZs towards the generation of employment within the Caribbean has not been as impressive as would seem to be the case. In the Dominican Republic, as in other Caribbean EPZ economies, the use of export manufacturing as a means to alleviate unemployment has been largely undermined by the decline of employment in traditional sectors of the economy, most notably sugar. Moreover, the advances made in the EPZ sector have done little to offset decline in these traditional sectors, but rather have incorporated a new social grouping, namely, women between the ages of 18 and 24, into the labour force. According to Helen Safa (1994: 258), EPZ firms in the Caribbean ‘have shown a strong preference for women workers, because they are cheaper to employ, less likely to unionize, and have greater patience for the tedious, monotonous work employed in assembly operations’. Certainly, the empirical data seems to support this assertion. In Jamaica, for instance, women occupy 95 per cent of the jobs in the EPZ sector, while outside of the zones they constitute one of the smallest shares of industrial employment in the developing world (Klak 1995: 310). Similarly, the rest of the Caribbean relies overwhelmingly upon female labour to perform most of the assembly work found in EPZs: Schoepfle and Pérez-López (1989: 142–5) estimate that women workers represent approximately 70 per cent of total EPZ employment in Haiti and the Dominican Republic, while they comprise over 90 per cent of the total EPZ workforce in the rest of the English-speaking Caribbean.

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The disproportionate number of women employed in assembly factories, coupled with low levels of unionization and the relatively poor pay and working conditions, has led some critics to argue that the zones constitute little more than a means for TNCs to exploit local workers while contributing little to the long-term economic development of the host country.2 Certainly, some aspects of the Caribbean offshore development model do correspond to this argument. Briggs and Kernaghan (1994) refer to the example of Haiti, where some of the poorest EPZ working conditions in the insular Caribbean are to be found (although the conditions found in Haiti’s EPZ factories are by no means exceptional to the region). In a ‘model’ apparel factory in the EPZ district of Port-au-Prince, the highest paid garment workers receive the equivalent of US$1.48 per day. As of the mid1990s, these worker’s average transportation costs and daily subsistence amounts to approximately 77 cents, leaving them with around 71 cents to take home at the end of the day. Briggs and Kernaghan (1994: 39) estimate that, once rental and other expenses are accounted for, a typical Haitian garment worker is left with as little as US$2.75 with which to feed family members at the end of a six-day working week. All the same, supporters of the offshore development model are quick to point out that pay and working conditions found in Caribbean EPZ factories, while admittedly poor by Western standards, actually compare favourably to conditions found in comparable domestic industries located outside of the zones (Willmore 1995: 530). Equally, supporters also defend the practice of EPZ factories recruiting disproportionate numbers of non-unionized, women workers. In Jamaica, for instance, despite the opportunities for EPZ employment, women between the ages of 18 and 24 – who often constitute the sole economic contributors to the household – still experience the highest levels of unemployment on the island. Thus, arguably, EPZ employment represents one the few economic opportunities for Jamaican women to earn sufficient money with which to support their families.3 These counter-arguments notwithstanding, during the late 1990s the poor wages and working conditions such as those found in Haiti led to a series of labour-supported exposés in the US against top brand-name companies (Wal-Mart and K-Mart, Disney, GAP and so on), which were accused of employing EPZ subcontractors engaged in persistent labour abuses, including the use of child and forced labour (Gereffi et al. 2001). Since then, concern over sweatshop labour has been transformed from being perceived as a relatively minor domestic political issue within the US and has become a central theme in the so-called ‘anti-globalization’ movement. Partly as a result of the cumulative pressure applied by labour organizations, NGOs and student activists, a number of the leading brand-name companies have since attempted to reassure consumers by setting up (voluntary) codes of conduct and monitoring systems designed to eradicate the labour abuses associated with EPZ employment (see Kaufman and Gonzales

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2001). What is more, in 1998 the Clinton Administration, working in conjunction with manufacturers, NGOs and labour groups, established the Fair Labor Association (FLA) designed to implement and monitor a voluntary code of conduct, stipulating that companies must pay at or above the minimum or prevailing local wage, that workers be at least 14 years old, and that employees work no more that 60 hours per week, although they could work unlimited ‘voluntary’ hours (Gereffi et al. 2001: 61–2). Despite the well-intentioned nature of these initiatives, however, many within the Caribbean suspect that the ‘anti-sweatshop’ movement represents in the main a vehicle for domestically orientated labour unions within the US, which are vehemently opposed to the practices of offshore production and preferential trade agreements (such as the Caribbean Basin Initiative and NAFTA) more generally.4 Significantly, during the 1990s the opposition of the US labour movement to the practice of offshore production manifested itself in a series of ‘shock tactics’ designed to expose the labour abuses in EPZ factories, particularly those in Central America. In 1992 action of this nature led to the withdrawal of funds from a USAIDsponsored project, promoting the establishment of EPZs in Central America, after a ‘60 Minutes’ television exposé claimed – on the basis of investigations carried out by the US Department of Labor – that such initiatives were effectively subsidizing the export of American jobs (Bradsher 1992; Cockburn 1992). Still, none of this detracts from the fact that the Caribbean offshore development model, in which competitive advantage is almost exclusively derived from poorly paid, unskilled labour, does not constitute a sound basis for a long-term industrialization strategy. According to Michael Porter (1990: 49–51), reliance upon unskilled, poorly paid workers represents what he calls a ‘low order’ competitive advantage in contrast to other ‘higher order’ advantages such propriety technology, product differentiation, brand reputation, customer relationships, and constant industrial upgrading. Similarly, Kaplinsky (2001) sees low wages and other aspects of what he refers to as ‘static’ comparative advantage as associated with ‘immiserizing’ growth for developing countries: that is, economic growth contingent upon declining terms of trade and continuous loss of international purchasing power for local workers. Clearly, we have seen evidence for both these sets of claims in our foregoing analysis of the Caribbean offshore development model.

Conclusion In some respects, it might be tempting to regard the Caribbean offshore development model as something of a ‘success’. Clearly, export promotion regimes have played a significant role in encouraging US manufacturing firms to locate their assembly operations in the region; and in the context

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of falling commodity prices and declining investment levels, this is no mean achievement. In a more critical sense, however, as this chapter has shown, the offshore Caribbean development model has also come with significant costs. The growth of EPZ employment in the region positively correlates with the decline in the level of real wages paid to Caribbean workers; has been associated with extremely competitive bidding wars between neighbouring EPZs, leading to a drastic decline in the level of fiscal revenue available to the host government; and, as yet, has shown little real evidence of promoting technology transfer to the domestic economy or facilitating industrial upgrading to higher value added export activities. Against the backdrop of these problems, it remains unclear how the offshore development model can facilitate the type of industrial transformation of the region that it is allegedly designed to promote. Measured in broader terms, the case examined in this chapter offers a number of insights into the nature of neo-liberal modes of regulation that are discussed elsewhere in this book. As has been suggested, the Caribbean offshore development model very much provided the means by which elites in the region could put the principles of neo-liberal, exportorientated growth into practice. Nonetheless, the central argument advanced in this chapter has rested not solely – or even primarily – on a critique of neo-liberalism. Rather, what we have shown is that, while many of the pitfalls described above can indeed be attributed to the competitive logic of the EPZ-led development model, a more important factor has been the acute dependency of the Caribbean on the US market. As we have seen, Caribbean offshore industries have been historically and persistently predicated on a series of unilateral trading preferences offered by the US government which – at least in the first instance – are designed to strengthen the competitive position of American rather than Caribbean firms. It is for this reason that we must conclude that, whatever merits EPZs as the basis of a long-term development strategy may or may not possess, it is within the context of highly asymmetrical political and economic relations that this model must ultimately be judged. Notes 1 Personal interviews with Peter King, Chairman of the Textiles and Apparel Institute, Kingston, Jamaica, November 10–12, 2001. 2 The general literature on the role of female workers in EPZ factories is now enormous. See, among the many possible sources, Elson and Pearson (1981); Fernández-Kelly (1983); and Safa (1995). 3 Personal interview with Ambassador Richard Bernal, Embassy of Jamaica, Washington DC, 5 October, 2000. 4 Personal interview with Ambassador Richard Bernal, Embassy of Jamaica, Washington DC, 5 October, 2000.

13 Backwaters, Currents and the ‘Competitive State’ in the Caribbean: The Imperative of Public Sector Reform Paul Sutton

Introduction In 1989 the then Prime Minister of Trinidad and Tobago, A. N. R. Robinson, presented a paper to the Heads of Government of the Caribbean Community (CARICOM), entitled ‘The West Indies Beyond 1992’.1 In it he drew attention to the major changes then sweeping the world such as the winding down of the Cold War and the movement toward regional trading blocs in Europe and North America and concluded that: ‘against this background of historic change and historic appraisal, the Caribbean could be in danger of becoming a backwater, separated from the main current of advance into the twenty-first century’ (West Indian Commission 1992: 3). The forecast of marginality set out in the paper proved persuasive enough for the Heads of Government to move with uncharacteristic speed to establish a commission of eminent West Indians, under the Chairmanship of Sir Shridath Ramphal, to determine how CARICOM could meet this and other threats to the future well-being of the region. The West Indian Commission reported in 1992. Among its many recommendations were proposals to reverse the development strategy from one of import substitution to export-propelled growth at the core of which were policies ‘to increase the adaptability, resilience, innovation, and international competitiveness’ (ibid.: 95) of the CARICOM countries. This chapter examines some of the means proposed and implemented to achieve the ‘competitive state’ in the region. It begins with a review of recent work undertaken by major international organizations to improve the competitive position of small states in the global system. It then examines the emergence of the concept of ‘strategic global repositioning’, which has guided and influenced recent policy positions among the most 229

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dynamic of the CARICOM states. Next it examines the contribution a reformed public sector can make to improving and sustaining the competitive position of small states in the Caribbean. This last element is often mentioned in passing in policy documents as essential to the development of small states in general and the Caribbean in particular, but is rarely considered in depth. Finally, some thoughts are presented on the relationship of globalization and governance in the Caribbean as part of a wider understanding of their inter-relationship.

Small states in the global economy The impact of economic globalization on small states was subject to intensive study from 1998 to 2000. The impetus to examine their position came from the decision of the Commonwealth Heads of Government in October 1997 to recommend the appointment of a ministerial group representative of small states to visit and discuss their particular vulnerabilities with major international organizations. The group, under the chairmanship of Owen Arthur, Prime Minister of Barbados, visited the US State Department, World Bank, IMF, WTO, UNCTAD, EU Commission and the UK Foreign and Commonwealth Office in July 1998. They stressed the vulnerability of small states and emphasized the impact on small states of the progressive liberalization of international trade, access to official and private capital flows, and the devastating consequences of natural disasters (Commonwealth Secretariat 1998). The arguments were persuasive enough in some venues (but not all) to persuade the World Bank to set up a joint task force with the Commonwealth Secretariat to determine how issues of particular concern to small states could be addressed more effectively. The Task Force submitted its Final Report in March 2000. The Report began by identifying the special development challenges facing 44 small developing states defined as states with a population of 1.5 million or less. These included remoteness and isolation, which imposed high transport costs; exposure and openness to global markets, leaving them vulnerable to external economic and environmental shocks; a greater susceptibility than larger states to natural disasters and environmental change; limited diversification in production and exports; higher levels of poverty and more uneven distribution of income than in larger states; greater difficulty in accessing external capital than other states; and higher costs in providing public services in a situation of already limited institutional capacity (Commonwealth Secretariat/World Bank 2000). In respect to the public sector, the costs of public services were much greater in small states, given indivisibilities in their provision. Unit costs for basic services such as education, health and welfare were higher as also was the cost for the provision of central government functions such as tax administration, the judicial system and various regulatory authorities.

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There were also inefficiencies generated by a public service in which administration was often multifunctional and where personal preferences and values infused working practices and influenced decision-making. The skills available to government were also limited, especially in relation to management, technology and institutional development. Scarce negotiating skills and high costs of representation also prevented small states from full engagement in international trade negotiations while high transaction costs for small projects reduced the effectiveness of development assistance and rendered it less attractive to major donors (ibid.: paragraphs 32–6). In short, the problem of scale limited institutional capacity and handicapped the government’s ability to provide support for stronger private sector development to meet the rise of global competition. In the light of this analysis it is not surprising to find that capacity building emerged as one of the major themes identified by the Task Force as essential if small states were to take advantage of economic globalization. The thrust of its recommendations were directed to action that could be taken in the public sector which included the promotion of good governance and the strengthening of regional capacity, including joint representation in international organizations and the creation of regional single markets to encourage the formation of stronger local businesses. Other measures were tax reform to eliminate anti-export bias (many small states derive a large proportion of government revenue from tariffs), a transparent and effective regulatory environment for business (to reduce personalism and limit the power of local firms which could often be monopolies or oligopolies in the local market), providing information to facilitate business decision-making, and encouraging the formation of networks and associations of entrepreneurs within countries and regions (in chambers of commerce and in overseas missions for trade and investment) (ibid.: paragraphs 77–84). The other major themes identified in the Report were how best to tackle volatility, vulnerability and natural disasters; issues of transition to the changing global trade regime; key challenges and new opportunities arising from globalization; and external assistance. While all had some bearing on the competitiveness of small states, the sections on trade and on globalization were the most immediately relevant. The former examined three areas. The first, the erosion of preference, was of particular concern as many small states had benefited from preferential trade regimes such as the Lomé Convention and the Multifibre Arrangement. The phasing out of these schemes would impact negatively on the economies of many small states, especially those that were relatively undiversified and essentially uncompetitive. Second, the Task Force noted the difficulties small states faced in dealing with the WTO. Those who were not already members of the GATT faced complicated and protracted negotiations to join the WTO and high costs of membership. They also lacked trade negotiating skills and most did

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not have sufficient resources to service and maintain a permanent presence in the WTO. Lastly, the Task Force drew attention to the fiscal consequences for small states of trade liberalization. Many small states rely on import tariffs as a major source of government revenue as well as protection for their own economic producers. The reduction of tariff barriers and the increased competition would put them at a disadvantage. Although the Task Force acknowledged the challenges facing small states from globalization its Report emphasized the opportunities. It argued that to take advantage of them small states would need to promote the global strategic repositioning (see below) of their economies. This would require small states to be pro-active in creating an enabling environment and the right kind of public policy support (ibid.: paragraph 87) to encourage new activities, many of which would be in the service sectors. As an example it gave the development of onshore and offshore financial services. These have mushroomed in recent years taking advantage of the loosening (and abolition) of government controls on flows of capital and the growth of transnational production and service activities. Small states have become major providers of such services and the Caribbean is a major offshore financial centre. While much of the activity is legal and directly beneficial to small states, the Task Force noted the concerns that have grown in recent years among the G7 countries on the use of such centres for money laundering, tax evasion and as conduits for global financial instability (Chapter 11). It therefore recommended that small states improve their financial operating practices and regulatory standards, in order to safeguard the international banking and financial system, and meet concerns about financial crime and harmful tax competition. At the same time, it argued that if greater regulation is to be adopted internationally, small states must be included in any discussion on proposed action to ensure their interests are heard and acted upon (ibid.: paragraphs 89–90). The other example was information technology and electronic commerce. The development of new electronic information technologies have shrunk the globe and reduced the isolation of small states. They provide opportunities for small states to become part of global supply and demand chains, to reform and reshape government services and to create new businesses. The Report encouraged small states, especially those with a welleducated and computer literate workforce, to actively engage with the new technologies. It noted that a requirement is high-quality/low-cost telecommunication services and that their provision can be an expensive matter for small states – especially when monopoly supply agreements charge very high rates. It therefore commended initiatives, such as the one undertaken to liberalize telecommunications among five countries in the Eastern Caribbean, which resulted in successful challenges to the monopoly and created a regional regulatory body to harmonize rules of member states (ibid.: paragraphs 91–4; Chapter 10).

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The Task Force was clearly breaking new ground in focussing on small states. At the same time, its composition and procedures meant that much that was current orthodoxy in development thinking was reproduced in its recommendations and analysis. This first emerged in the preparation of an interim draft of the report in the summer of 1999. Largely written by the World Bank, it attracted immediate criticism from small states who felt their particular difficulties were being overlooked. For example, the focus of its recommendations was on what small states could do for themselves to improve their position. While this was an essential part of any strategy, the vital need for complementary and supportive action at regional and especially international levels was much reduced or neatly sidestepped. Another bone of contention was its failure fully to address the vulnerability of small states and their consequent need for some form of special and differential treatment. There was also concern that countries that the Commonwealth habitually included as small states – Jamaica, Lesotho and Papua New Guinea – were excluded on the grounds of relatively larger size. In the light of such criticisms Owen Arthur, as Chairman of the Advisory Group to the Task Force, sought and gained the withdrawal of the draft Interim Report and the replacement of the World Bank co-chairman by another. Thereafter a series on meetings were held to more fully engage and reflect the views of small states. The new Interim Report, released in October 1999, met some of these criticisms and as such was welcomed by most Commonwealth small states when they met to review it at the Commonwealth Heads of Government Meeting in Durban in November 1999. However, they added a rider that in completing the Report there should be ‘a continuation of the process of consultation with governments, key multilateral agencies and regional organizations to ensure the final report is broadly acceptable to all stake-holders’ (Commonwealth Secretariat 1999). The Final Report of the Task Force was considered by the Development Committee of the World Bank at its April 2000 meeting (World Bank Development Committee 2000). It broadly accepted its recommendations, but did not support the creation of a new category for small states that would give them ‘special and differential’ treatment analogous to that given to least developed countries which some small states had argued was essential (World Bank/IMF 2000). At the same time, the Committee did acknowledge the need for longer time periods to adjust to the liberalization of trade, and promised to examine new ways to cope with environmental challenges and support strengthening the capacity of small states to manage globalization more effectively. This last aspect was singled out by the Chairman as one particular area where the World Bank could be especially engaged, underlining the importance generally given to it throughout the Report. Indeed, it is not stretching the point too far to argue that it is the core recommendation of the Report, underpinning the need for action on all the other issues the Task Force identified, and confirming the

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central proposition argued throughout: that with correct policies small states could gain significant benefits from full participation in the process of globalization.

Globalization and the Commonwealth Caribbean The Caribbean is no stranger to globalization. It has a longer and more direct relationship with the modern world economy than almost any other part of the developing world. Its distinctive characteristics as a region derive in large part from the extensity, intensity, velocity and impact of its interactions with core countries in the international system over the last 500 years. One of the most influential theories of development in the region – the school of plantation economy – places the ‘external’ connection at the heart of its analysis of historical and contemporary change (Beckford 1975) and the West Indian Commission made external relations one of its major lines of enquiry. It is therefore not the fact but the form of globalization that is distinctive to time and place. In the present period the 1980s constitute a significant watershed. They saw the introduction of neoliberal political economy and the embrace of the market as the dominant philosophy of development in the Commonwealth Caribbean, leading to the even greater impact and intensity of globalization in the 1990s (Payne and Sutton 2001: 11–20). The effect that this has had on the development of the region, as well as its likely effect in the future, has been the subject of a growing number of studies and the emergence of opposing views. The mainstream view is held by most political leaders and technocrats. It sees globalization as an opportunity as well as a risk, with an emphasis on the former. The second is held by an increasing number of academics who acknowledge globalization as a fact but are doubtful as to the benefits, if any, it brings the region. Finally, a third view has emerged which sees globalization as a multifaceted process that is redefining the place of the Caribbean in the Americas and reconfiguring its relationship to the old metropolitan cores of Europe and North America. Unfortunately space precludes consideration of any but the first, but it does, however, have the distinction of being the most pervasive and is the one most focussed on our concerns with public sector reform. The origins of the mainstream view once again lie in the West Indian Commision Report. As noted earlier, this was driven in part by a fear of Caribbean marginalization. The Commission expressed it thus: ‘Developing countries, more particularly our small and vulnerable West Indies, are on their own. Their, and our, salvation will reside simply in how successfully we can harness what assets we have and how skilfully we can deploy those assets in whichever sectors of the world we can best find a useful and acceptable place’ (West Indian Commission 1992: 65). The economic strategy proposed by the Commission expressed this in two ways: closer

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economic integration in the Caribbean and closer integration into the emerging global economy. Caribbean integration Caribbean integration has been concentrated in a variety of regional institutions, with CARICOM at the core. CARICOM was established in 1973 as two institutions: the Caribbean Community and the Caribbean Common Market. These had three objectives: (i) the economic integration of member states through a common market; (ii) foreign policy coordination; and (iii) functional cooperation through the operation of common services. The first of these objectives ran into considerable difficulties (Payne and Sutton 2001: Chapter 7) and in 1989 CARICOM Heads of Government took a decision to reinvigorate the integration process through the goal of creating a CARICOM Single Market and Economy (CSME). This was to include a fully functioning common market, the harmonization of macro-economic policies and eventually monetary integration. Once again progress was slower than anticipated and the CSME is still not fully in place. The reasons for this were similar to those of the earlier period, including a lack of political will or a sense of urgency. These, in turn, pointed to the need for institutional reform. In 1997 there was some restructuring to provide clearer direction and decision-making through the creation of four ministerial councils and in 1999 the concept of a quasicabinet was established giving individual Heads of Government specific responsibility in key areas. However, as a report by the CARICOM Secretariat to the Commonwealth Secretariat/World Bank Task Force noted: ‘The resources to provide the technical capacity to support the new institutional structure have been difficult to mobilize. Further, the arrangements for the sharing of sovereignty which is required for optimal operation of the new structures have not yet been developed’ (CARICOM Secretariat 2000: 9). Notwithstanding these difficulties, CARICOM remains of major significance to the process of managing globalization to the benefit of the region, within which the question of enhancing governance and strengthening administrative capacity is a central concern. The CARICOM Secretariat therefore drew the attention of the international community to the need to support efforts at regional integration ‘as a legitimate and important part of the strategy for development and global repositioning of small states’ (ibid.: 26) and proposed ways and means by which they could provide practical assistance, including support for regional institutional structures in the public, private and non-governmental sectors to build and strengthen capacity (ibid.: 26–7). Global integration In many ways global integration had already begun with the adoption of structural adjustment programmes by many countries in the Caribbean in

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the 1980s. What the West Indian Commission was recommending was the intensification of this process with new priorities to be adopted to facilitate it. These were to be directed toward attaining international competitiveness through further reforms in the public sector and greater encouragement of the private sector. In its chapter on export-led growth it therefore proposed measures governments could take to improve the business environment and reduce anti-export bias. These were dovetailed with recommendations elsewhere in the Report to provide a comprehensive set of macro and microeconomic proposals to underpin the new approach (West Indian Commission 1992: 93–104 and ff). The vision behind this strategy was largely technocratic. It built on studies of the Caribbean undertaken by international and regional organizations such as the Commonwealth Secretariat, the World Bank and the UN Economic Commission for Latin America and the Caribbean that had promoted outward looking development strategies. But it was also the position shared by many of the region’s foremost technocrats and embodied in studies the Commission itself had set in train. It thus represented an emerging consensus that was consolidated throughout the remaining years of the decade. Its principal focus has been policy detail. The questions it has posed relate not to whether countries should be seeking greater integration into the global economy but how they can best do it. It is in this context that policies such as ‘strategic global repositioning’ (SGR) advanced by Richard Bernal, the former long-standing Jamaican ambassador to the USA and now head of the Caribbean Regional Negotiating Machinery, have come to the fore. He defines it as: a process of repositioning a country in the global economy by implementing a strategic plan. Such a plan is designed to consolidate and improve existing production while reorienting the economy by creating new types of economic activities. In most small developing countries, this means structural transformation, not structural adjustment, to achieve economic diversification. Strategic global repositioning must be accompanied by policies which improve the competitiveness and efficiency of companies, by creating a stimulating environment. Selective trade, fiscal and credit policies supported by medium-term education, technology policies focussed on ‘strategic sectors’, and close cooperation between government and the business sector contribute to the targeted development of internationally competitive industries. Market-oriented and strategic state management, combined with the cooperation of companies, government agencies, research institutions, and funding institutions can create dynamic competitive advantages. These kinds of policies must be directed to long-term strategies to mobilize market forces, build up world-market standard firms, and systematically develop efficient economic locations (in Benn and Hall 2000: 107–8).

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The strategy then is one of active and pro-active government intervention in support of the private sector and of an enabling environment for new economic activities to be encouraged in, and attracted to, the country. It echoes conventional management and development doctrines and seeks neither to confront nor challenge globalization, but rather to channel and harness it for individual national economic development. The concept of SGR is now firmly established throughout CARICOM. It is backed up by a steady flow of studies on Caribbean trade negotiations and further structural reform as exemplified by recent books by Gonzales (1998), Ramsaran and Dookeran (1998), Benn and Hall (2000), Hall and Benn (2000) and Ramsaran (2002). The status of the latter two are particularly important since they report the views of leading figures throughout the region (prime ministers, senior officials, academics and influential policy makers) as set out in conferences at the University of the West Indies in September 1999 and March 2000. SGR is a guiding principle in important regional organizations such as the Caribbean Development Bank, and it enjoys the support of business associations in the region and in core metropolitan countries who have been active in forums such as the annual Miami Conference on Latin America and the Caribbean and the various Caribbean-European Union conferences. Most importantly, Caribbean political leaders of every political persuasion have fully embraced the globalization agenda. Most prominent and forceful among them is Owen Arthur. In a powerful and insightful lecture given in Trinidad in 1996 on ‘The New Realities of Caribbean International Economic Relations’ he set out some of the essential elements for a strategy for the region ‘to effectively relate to the new and evolving global order’. These included the need to accept the reality of globalization, recognize that the era of trade preferences had passed, create mechanisms to exploit new market opportunities, concentrate on those activities in which the Caribbean could compete internationally (tourism and financial services), focus Caribbean integration on enhancing the region’s international competitiveness and creditworthiness, promote the technological development of human resources, and create an environment supportive of business development (Arthur 1996). None of this is to suggest that politicians and technocrats do not have strong reservations. Globalization is clearly seen as having its dangers and drawbacks (Benn and Hall 2000; Ramsaran 2002), but the calculation remains that: ‘Our best hope lies in the most effective integration of the Caribbean economy into the global economy; a process that requires the choice of the best niches for specialization, the forging of the correct relationship with global capital, production systems, trading regimes and the multilateral institutions’ (Arthur 1999). In this sense it is possible to speak of a new development paradigm increasingly informing government action which is as prescriptive in its strategic vision and policy recommendations as

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once was the region-wide belief in ‘industrialization by invitation’ (Payne and Sutton 2001: 2–6). The globalization agenda in the Caribbean under the dominant development paradigm therefore coincides with and reinforces the larger concerns with the competitive position of small states in the global economy. The need to facilitate and further public sector reform and institutional development as a means to enhance competitiveness is an essential element of the paradigm, setting the public sector on a new trajectory and defining new tasks for it.

The imperative of public sector reform The most recent phase of public sector reform in the Caribbean has taken place in two stages. The first stage was associated with stabilization and structural adjustment programmes which were implemented by a number of countries in the 1980s and early 1990s. These followed practices elsewhere and involved measures to reduce budget deficits, devalue currencies, liberalize trade and foreign investment, and deregulate the economy. Their impact on the public sector as a whole was considerable and led to a general reduction of state activity in the economy and to some extent the provision of services (LaGuerre 1994). It also led to job losses in the public sector and increasing unemployment, poverty and inequality in most countries that applied the programmes, leading some commentators to challenge the rationale and wisdom of the policies that were being adopted (McAfee 1991). While this critique attracted a measure of support among academics and non-governmental development organizations in the region there was a growing realization among the political directorate that economic development demanded comprehensive modernization of the public sector. This found its most insistent voice in the ministerial Roundtable on Public Management in the Caribbean held in Jamaica in February 1992. In both the background paper prepared for the conference (Rajana et al. 1992) and in the Kingston Declaration on Public Management issued at the end of the conference (Kingston Declaration 1992) Caribbean governments were urged to acknowledge the need for fundamental and far-reaching reform. Recommendations included the need to become more pro-active in macroeconomic policy and financial management, implement a new managerial orientation and strengthen public sector management, and encourage responsiveness, efficiency and creativity in the delivery of public services. In order to do so governments were urged to ‘confront structural inefficiencies and determine the proper dimensions of their administrative machinery’ (ibid.) implying a programme of significant institutional change. The second phase has been concerned with translating these aspirations into reality. The broad guidelines on how to proceed were mapped out by a Working Group on Public Sector Reform and Administrative Restructuring estab-

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lished by the CARICOM Heads of Government in 1993 and reporting to them in 1995. This indentified principles and practices under four heads: redefining the role of the state, under which ‘those in authority be prepared to examine all our institutions, procedures and systems of decisionmaking in the light of new paradigms and understanding of human behaviour and the need for personal satisfaction and creativity in the discharge of professional obligations’; the primacy of human resource development, which would entail introducing in the public service the principles of promotion by merit not seniority, training at all levels, remuneration according to skills and responsibilities, and delegation of authority; greater dedication to service provision under which public employees would be customer focussed and ‘more responsive, timely and business-like in dealing with the public’; and lastly, a strong commitment by the political directorate and senior public servants to public reform in a clearly articulated public sector reform programme, institutionalized in government and involving as ‘stakeholders’ public employees at all levels and their staff associations and trade unions (CARICAD 1995). The Report was approved by the CARICOM Heads signalling a major shift in the direction and priorities of public sector reform. The traditional public sector in the Caribbean was closely modelled on the Westminster-Whitehall system of government. The new system that was being proposed followed the ‘model’ of New Public Management (NPM) then being promoted by some OECD governments including the UK, USA, Canada, Australia and New Zealand. While it is difficult to arrive at a universally agreed set of features unique to NPM it is generally held to have the following defining characteristics: ‘its entrepreneurial dynamic, its reinstatement of the market as a potentially more proficient provider of public services than the state, and its proclaimed intention to transform managerial behaviour’ (Minogue 2001: 6). In more specific terms the common elements it proposes in most public sector reform programmes, the Caribbean included, are the introduction of output and performance indicators (benchmarking); devolution/decentralization of decision-making lower down the hierarchy, monitoring and greater emphasis on management as opposed to administration; contracting out; strategic planning; customer orientation; and transforming the workforce (through rightsizing, downsizing, capacity building, etc.). While it has many affinities with the public sector reform proposals emanating from the World Bank (the socalled ‘Washington Model’) it is conceptually and operationally distinct from it (McCourt 2001) although elements of the ‘Washington Model’ have had and continue to influence the public sector debate in the Caribbean (World Bank 1996). The NPM package, or more accurately elements of it, have informed major public sector reform exercises in Barbados, Jamaica, St Lucia and Trinidad and Tobago and have been applied to piecemeal reform efforts in many other countries in the region. Of these Jamaica has gone the furthest

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in implementing NPM and may therefore stand as an example of how it has worked out in practice. Public sector reform in Jamaica The current phase of reform began with the Administrative Reform Programme in 1984 and gathered pace with the Public Sector Modernization Programme (PSMP), established in 1996. The PSMP has attracted a good deal of attention in Jamaica and abroad and has involved inter alia the privatization (or contracting out) of some public sector entities and services; strengthening policy capacity in selected ministries through decentralization and corporatization; improving accountability, efficiency and transparency in areas such as government procurement and service provision; human resource development; and delivering better quality and more prompt services through the creation of executive agencies. In all, these and other associated reforms represent the most sweeping changes introduced in the public sector since independence (Davis 2001). The philosophy behind such reforms is essentially that of the ‘enabling’ and ‘effective’ state which has been promoted by the World Bank (World Bank 1997). In this scenario the primary function of the state is to provide policies and infrastructure conducive to private sector development while the private sector provides inter alia entrepreneurship, capital and skills to improve economic growth. The link between public sector reform and improved economic performance is implicit rather than explicit. An efficient and effective public sector is expected to provide better macroeconomic policy making, better implementation and delivery of services, and better value for money, contributing to better governance and improved training and skills, leading ultimately to increased incentives for domestic and foreign investment and greater competitiveness in the global economy. In many areas there is tangible evidence that the reforms have delivered or are delivering much of what is expected. In simple terms there have been substantial reductions in government expenditure and increases in government income through service provision which have contributed to the goal of improving government finances (Cabinet Office 1999/2000; 2000/2001). The Cabinet Office has initiated proposals that have led to a deepening and widening of public sector reform and has doubled the number of executive agencies from four to eight with nine more in the pipe line. There have also been intangible benefits including the beginning of a change in administrative culture, with the reformed elements of the public service being more entrepreneurial, dynamic, and service-oriented compared to the unreformed ministries (Interviews 2002). Last but not least, the public at large have increased expectations and have been the beneficiaries of improved service delivery. In all, the indications are that the process of reform has, as the government argues, ‘taken root’ (Cabinet Office 2000/2001) promising further and faster change.

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What, however, appears to be missing from the current reform programme is any real consideration of how any of this will contribute to improved competitiveness. The drive for competitiveness continues to be cited by the government of Jamaica as one of its five key considerations in promoting public sector reform (Davis 2001). It was part of the ‘National Industrial Policy’ adopted in 1996 and featured in the National Round Table Consultation on growth, investment, productivity and competitiveness held in 1999. It is therefore interesting to note that competitiveness in the context of globalization is not directly addressed in any of the chapters in the comprehensive White Paper on public sector modernization approved by the Cabinet in September 2002 (Cabinet Office 2002). Indeed the word ‘competitiveness’ appears only once in its 64 pages, and that in connection with the corporate governance of the private sector (ibid.: 18). The context of public sector reform has thus become detached from the wider concerns of international competitiveness or SGR. Instead, the visions, objectives and priorities expressed in the White Paper invoke a domestic agenda in which public sector reform is now a process driven by its own dynamics of change. This suggests that while the original impetus for public sector reform may have come in part from a concern with globalization the process of public sector reform in Jamaica is now localized with the only visible global element being the financial support for the programme of reform provided by international donors such as the World Bank and the UK’s Department for International Development and the dominance within the consultation document of ideas and policies associated with NPM. The public sector reform programme embarked upon in Jamaica will undoubtedly yield further fiscal savings and greater efficiencies. It may also transform the public service. There are already signs that the public sector is in some aspects more dynamic than the private sector and that the private sector has failed to live up to its tasks in delivering competitiveness. In recent years the Jamaican government has had to intervene to stave off the collapse of the financial sector; provide support to the troubled sugar and coffee industries; and bankroll the national airline. Government support to establish a dynamic information technology sector has also met with a poor response from the private sector. All this is suggestive of a greater role than the government has so far set itself in directing the economy. The irony thus becomes that despite the absence of an explicit strategy to deliver competitiveness to the Jamaican economy via public sector reform the government’s programme of public sector reform is repositioning the Jamaican state to take the lead in modernizing the local economy by example and, perhaps, by more direct intervention in economic affairs. This is something neither the World Bank nor the current Jamaican government would welcome – but it is by no means a scenario that can be ruled out entirely should Jamaica fail to improve its long record

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of poor economic performance and low productivity (between 1960–90 its productivity grew by only 18.8 per cent as against 118.9 per cent for Barbados and 386.6 per cent for Singapore) (Latin American Caribbean and Central America Report December 2002). The Jamaican case illustrates the difficulty in linking public sector reform to competitiveness in any direct manner. Competitiveness is a notoriously slippery concept. At its core is the concept of ‘dynamic comparative advantage’ but it is by no means clear how countries should realize it, particularly developing countries. It is also important to bear in mind that ultimately it is firms that compete, not nations. The enabling environment provided by government to promote competitiveness is a necessary but not a sufficient condition to ensure that ‘nations’ become competitive. The private sector has to be factored in the process as well. In short, it is not only a matter of public sector reform but also private sector reform. The original argument for SGR was very insistent on this point (Bernal 1996) but until very recently it has not been followed through with any sense of urgency or vision in the private sector, whether in Jamaica or the region at large. Jamaica also calls into question the relevant balance between the private and public sector in Caribbean development and the direction of future public sector reform. The Caribbean has by and large implemented the neo-liberal agenda with the accompanying concept of the regulatory state. The principles guiding public sector reform have sought to give effect to such a strategy. However, as the Jamaican example appears to suggest, this may not be a sustainable course of action. The state may need to be more pro-active, closer to the model of the developmental state. In such a case the public sector would need to be entrepreneurial as well as efficient and effective. The current programmes of public sector reform in Jamaica (and some other parts of the Commonwealth Caribbean) meet this in part with their managerial emphasis, particularly in respect of human resource development, but fall short in other ways, for example in respect of contracting out public services which reduces capacity, and the lack of strategic planning which inhibits executive development in senior public service managers. These weaknesses and others reduce the competence of the public sector to take on a more direct role when the private sector fails to deliver. It is therefore in the interests of Caribbean states to revisit the principles governing public sector reform to ensure a continuing capacity for enterprise development, particularly since recent conferences on competitiveness have either ignored this subject or buried it within the concept of public-private partnerships (Caribbean Development Bank/Caribbean Association of Industry and Commerce 2002). Lastly, fresh thinking is also needed on the concept of competitiveness and SGR. The case has been neatly put by André-Vincent Henry, Director of the International Labour Office in the Caribbean, in an address on ‘Competitiveness and Economic Governance in the Caribbean’ (CARICAD 2001) where he points out that:

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Unfortunately, of late Caribbean policy makers have fallen victim to the latest imported intellectual fad. Many countries are now pursuing the concept of ‘national competitiveness’. To accomplish this ‘goal’ there have been attempts at the wholesale importation and application of models taken out of their historical, cultural and political contexts. Fundamental social and natural science investigations and experimentation principles teach that models must be appropriate to the phenomena to which they are applied. Inappropriate models almost invariably lead to poor results. The pursuit of national competitiveness could lead to a focus on the wrong variables to the neglect of those which require attention. Moreover, even if attention is paid to the right variable, inappropriate stimuli might be applied leading to less than efficient results at best (ibid.: 20). Although he does not specifically cite SGR in his address, the comments very much apply to it, particularly since there has been little if any critical appraisal of SGR within the academic or technocratic community. It is now time to remedy such a lacuna and link it more specifically to public sector and private sector capacity building, with the Caribbean environment very much in mind.

Globalization and governance in small Caribbean states Development policy in the Commonwealth Caribbean is now firmly wedded to new paradigms. SGR is driving its bid to attain international competitiveness and NPM its programme of public sector reform in several modernizing Caribbean states. Together they exemplify the close relationship between globalization and governance in the Caribbean, with the business of the state directed towards meeting the challenges and capturing the opportunities afforded by globalization. SGR and NPM are leading simultaneously to a restructuring of the state and a repositioning of the state in economy and society. The former (restructuring) has been expressed in part by the process of public sector reform and the latter (repositioning) is a direct outcome of the reform process. The ‘core’ state in the Caribbean may be shrinking in scale and scope as a result of this process but it is arguably as, or even more, crucial to development than it was in the past when it had a more direct role in the economy. Globalization in the Caribbean (if the Jamaican state may be taken as a model) is leading not to the weakening of the state but its renewal in a context in which the state remains essential to enterprise development and competitiveness. The experience in the Caribbean therefore supports the thesis advanced in the newly launched (World Public Sector Report) (which had as its theme ‘globalization and the state’) that state capabilities will matter more rather than less in delivering wealth and well-being to developing countries

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(United Nations 2001). It argues, convincingly and at length, on the need to strengthen the administrative capacity of the state to take advantage of globalization (ibid.: 97–120) and sets out a comprehensive programme as to how to achieve it. It also presents empirical evidence that increased globalization goes hand in hand with higher government expenditure and that there are economies of scale in the provision of public services in favour of larger states (ibid.: 139–84), inviting the conclusion that for small states in general governments play a greater role than in larger countries and that governments will remain very important in small states in the immediate future in the delivery of services and the effective management of globalization. It follows that the quality of government in such states is a matter of real concern. The Commonwealth Secretariat/World Bank study, with its emphasis on capacity building, picks up on this theme. Our Caribbean case study reinforces it. The need for good governance is an essential element, perhaps the key element, in ensuring prosperity and viability in small states. The scope and scale of the state is a vital question of fundamental importance as is its efficiency and effectiveness in managing the global, regional and domestic agendas. The imperative of quality public sector reform flows from such considerations, placing it at the core of the future development of the Caribbean. Without such reforms to strengthen the state the Caribbean (and other small developing states) risk becoming increasingly disadvantaged and ultimately uncompetitive in the global economy. Note 1

This paper reports work undertaken under the title of ‘Globalization and the Governance Agenda in small States: The Case of the Commonwealth Caribbean’ as part of the ESRC-funded programme on Future Governance. The support of the ESRC is acknowledged in the preparation of this paper.

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Index accumulation, 9, 10, 12, 36, 45, 47, 49, 60, 83, 99, 100, 101, 103, 104, 107, 117, 118, 119, 120, 121, 122, 123, 124, 128, 136, 163 agricultural, 33, 34, 57, 60, 76, 127, 128, 164 Amsden, Alice 97, 98, 99, 101, 102, 103, 106, 109, 113 Argentina, 76, 98 authoritarian, 7, 32, 33, 66, 136, 158 BDP, 42, 45, 47, 48, 50, 51, 52, 60 Brazil, 13, 14, 21, 32, 76, 86, 98, 99, 102, 154, 157, 159, 161, 163, 165, 167, 168 capacity building, 16, 231, 239, 243, 244 CARICOM, 174, 214, 229, 230, 235, 237, 239 Cerny, Phil, 11, 84, 92, 93, 134 chaebol, 12, 109 Chang, Ha-Joon, 11, 42, 96, 99, 102, 112 Chile, 75, 76, 98, 102 China, 75, 76, 98, 113, 140, 225 citizen, 26, 27, 55, 56 civil society, 9, 10, 12, 63, 65, 67, 69, 70, 98, 133, 134, 135, 136, 137, 138, 139, 140, 141, 144, 149, 150, 151, 152, 153, 155, 166 Cold War, 24, 25, 32, 192, 229 commodity chain, 6, 119 Commonwealth, 65, 177, 192, 195, 208, 212, 230, 233, 234, 235, 236, 242, 243, 244 corporatist, 64, 80, 156, 158, 161 corruption, 21, 30, 64, 72, 96, 109, 150 Cox, Robert, 3, 63, 64, 65, 94, 134 currency, 2, 9, 95, 99, 100, 112, 113, 159, 173, 217, 218, 219, 220 deindustrialization, 118 demographic, 127, 141 Department for International Development, 241

diaspora, 144, 145 diversification, 50, 56, 60, 120, 177, 195, 230, 236 embedded, 9, 12, 48, 81, 82, 85, 91, 92, 98, 108, 110, 135, 175, 187, 188 embeddedness, 4, 14, 81, 85, 119, 184, 187, 188, 189 employment, 49, 55, 57, 60, 88, 90, 93, 118, 126, 127, 128, 130, 131, 132, 154, 156, 159, 160, 161, 162, 166, 208, 214, 219, 223, 224, 225, 226, 228 EPZ, 15, 213, 214, 215, 216, 217, 218, 219, 220, 221, 222, 223, 224, 225, 226, 227, 228 ethnicity, 66, 136, 140, 143, 144 Europe, 2, 5, 7, 24, 26, 27, 29, 31, 37, 43, 64, 90, 142, 144, 145, 229, 234 European Union, 77, 125, 167, 212, 237 Evans, Peter, 3, 11, 48, 60, 61, 85, 86, 91, 98, 106, 110, 173, 174, 175, 187 exploitation, 43, 128 FDI, 2, 56, 76, 77, 78, 81, 87, 92, 97, 99, 107, 112 fiscal, 8, 15, 54, 77, 93, 128, 137, 199, 200, 201, 202, 205, 208, 209, 210, 211, 214, 215, 216, 217, 218, 228, 232, 236, 241 Fordist, 81, 82 G7, 204, 232 Gereffi, Garry, 6, 123, 219, 221, 223, 226, 227 Gramsci, Antonio, 4, 10, 45, 47, 50, 51 guerrilla, 27, 35, 68 hegemony, 10, 38, 42, 46, 47, 50, 60, 165 Herbst, Jeffrey, 29, 40 HIPC, 63, 64, 67, 68, 70, 72 household, 88, 102, 226 human rights, 133, 134, 135, 137, 140, 143, 144, 145, 148, 149, 151, 152, 153, 166

274

Index 275 IMF, 6, 7, 49, 133, 137, 138, 141, 199, 201, 215, 230, 233 Import Substitution Industrialization, 5, 76 India, 21, 32, 38, 81, 86, 98, 111, 113, 140 inequality, 51, 60, 82, 83, 87, 88, 89, 91, 137, 149, 153, 158, 238 Iraq, 24, 140, 153 Italy, 17, 21, 141, 146, 151

NICs, 75, 215, 220, 222, 223, 224 NPM, 239, 240, 241, 243

Japan, 2, 21, 31, 85, 89, 96, 97, 98, 103, 104, 112

Parliament, 179, 181 patronage, 8, 25 Plano Real, 159, 160, 168 poverty, 43, 60, 67, 68, 88, 89, 124, 131, 132, 139, 140, 158, 166, 195, 230, 238 privatization, 39, 64, 70, 71, 99, 157, 158, 173, 175, 188, 240 PRSP, 67, 70 public sector reform, 16, 188, 191, 193, 234, 238, 239, 240, 241, 242, 243

Kaplinsky, R, 217, 219, 221, 223, 224, 225, 227 Keynesian, 5, 102, 103 Korea, 32, 76, 98, 99, 100, 101, 102, 103, 104, 107, 108, 109, 110, 112, 113, 221 Leftwich, Andrian, 4, 5, 9, 53, 61, 98, 111, 137 liberalization, 2, 3, 4, 5, 6, 14, 15, 16, 34, 42, 70, 79, 80, 96, 100, 102, 106, 107, 111, 112, 141, 153, 158, 159, 163, 164, 166, 178, 179, 180, 181, 182, 183, 188, 189, 190, 194, 201, 230, 232, 233 living standards, 78, 85, 87, 88 maquila, 219, 220 Marx, Karl, 120 Mercosur, 166, 169 Mexico, 76, 98, 102, 125, 126, 138, 167, 219 Ministry of Finance, 49, 53, 54, 55 Mkandawire, Thandika, 40, 44, 52, 53, 64, 66 NAFTA, 125, 166, 167, 227 narcotic, 30 neoliberalism, 3 network, 13, 67, 81, 82, 85, 97, 135, 144, 145, 150, 151, 167, 168, 175, 177, 178, 179, 182, 184, 192, 194 New Social Movements, 13, 135, 152, 153 new unionism, 155, 156, 157, 168 newly industrialized countries, 75 NGO, 63, 67, 146

OECD, 6, 15, 21, 26, 27, 38, 39, 76, 77, 78, 90, 100, 107, 138, 195, 197, 199, 201, 202, 203, 204, 205, 206, 207, 208, 209, 210, 211, 212, 239 offshore finance, 14, 199, 200, 206, 211 oil, 23, 33, 34, 35, 36, 37, 39, 40, 190 ownership, 43, 89, 142, 182, 190, 206

Reno, William, 24 rent-seeking, 108, 110, 111 revenue, 25, 30, 31, 36, 37, 44, 49, 60, 201, 202, 203, 228, 231, 232 Rodrik, Dani, 5, 14, 102, 112 SGR, 16, 236, 237, 241, 242, 243 Skocpol, Theda, 31, 99 South Africa, 36, 40, 62, 113, 167 South Korea, 11, 12, 57, 223 subsidy, 80, 182 Taiwan, 11, 32, 57, 61, 98, 100, 101, 103, 107, 110, 112, 113, 220, 221, 223 tariff, 76, 105, 166, 178, 213, 216, 221, 222, 223, 232 tax, 24, 28, 30, 31, 38, 40, 55, 78, 90, 91, 92, 93, 96, 97, 99, 102, 103, 104, 124, 125, 128, 131, 178, 195, 197, 199, 200, 201, 202, 203, 204, 205, 206, 207, 208, 209, 210, 211, 212, 214, 215, 217, 218, 230, 231, 232 think tanks, 15, 65, 68, 70, 208 tradables, 101 UNCTAD, 67, 70, 107, 230 underdevelopment, 8, 24, 25, 38, 39, 61 UNDP, 42, 43, 71, 72, 76, 85

276 Index unemployment, 57, 60, 76, 87, 157, 160, 161, 162, 164, 166, 225, 226, 238 US Treasury, 204 wages, 15, 89, 90, 96, 103, 113, 122, 123, 124, 128, 131, 160, 161, 162, 163, 165, 168, 218, 219, 220, 226, 227, 228 Washington consensus, 3, 41, 96, 134 Weiss, Linda, 30, 40, 41, 98, 104, 105, 107, 110, 111

Woo-Cumings, Meredith, 41, 44, 102, 105, 110, 112, 137 Working class, 134 World Bank, 3, 4, 6, 15, 16, 42, 63, 73, 75, 102, 133, 137, 139, 141, 153, 173, 186, 195, 212, 215, 230, 233, 235, 236, 239, 240, 241, 244 WTO, 6, 7, 65, 105, 106, 112, 177, 180, 182, 183, 194, 210, 230, 231, 232