Turbulence and New Directions in Global Political Economy

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Turbulence and New Directions in Global Political Economy Edited by

James Busumtwi-Sam and Laurent Dobuzinskis

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 Title include: Francis Adams, Satya Dev Gupta and Kidane Mengisteab (eds) GLOBALIZATION AND THE DILEMMAS OF THE STATE IN THE SOUTH Preet S. Aulakh and Michael G. Schechter (eds) RETHINKING GLOBALIZATION(S) From Corporate Transnationalism to Local Interventions James Busumtwi-Sam and Laurent Dobuzinskis (eds) TURBULENCE AND NEW DIRECTIONS IN GLOBAL POLITICAL ECONOMY Elizabeth De Boer-Ashworth THE GLOBAL POLITICAL ECONOMY AND POST-1989 CHANGE The Place of the Central European Transition Edward A. Comor (ed.) THE GLOBAL POLITICAL ECONOMY OF COMMUNICATION Helen A. Garten US FINANCIAL REGULATION AND THE LEVEL PLAYING FIELD Randall D. Germain (ed.) GLOBALIZATION AND ITS CRITICS Perspectives from Political Economy Barry K. Gills (ed.) GLOBALIZATION AND THE POLITICS OF RESISTANCE Richard Grant and John Rennie Short (eds) GLOBALIZATION AND THE MARGINS Takashi Inoguchi GLOBAL CHANGE A Japanese Perspective Jomo K.S. and Shyamala Nagaraj (eds) GLOBALIZATION VERSUS DEVELOPMENT Stephen D. McDowell GLOBALIZATION, LIBERALIZATION AND POLICY CHANGE A Political Economy of India’s Communications Sector Ronaldo Munck and Peter Waterman (eds) LABOUR WORLDWIDE IN THE ERA OF GLOBALIZATION Alternative Union Models in the New World Order Craig N. Murphy (ed.) EGALITARIAN POLITICS IN THE AGE OF GLOBALIZATION

Michael Niemann A SPATIAL APPROACH TO REGIONALISM IN THE GLOBAL ECONOMY Markus Perkmann and Ngai-Ling Sum GLOBALIZATION, REGIONALIZATION AND CROSS-BORDER REGIONS Ted Schrecker (ed.) SURVIVING GLOBALISM The Social and Environmental Challenges Leonard Seabrooke US POWER IN INTERNATIONAL FINANCE The Victory of Dividends Timothy J. Sinclair and Kenneth P. Thomas (eds) STRUCTURE AND AGENCY IN INTERNATIONAL CAPITAL MOBILITY Kendall Stiles (ed.) GLOBAL INSTITUTIONS AND LOCAL EMPOWERMENT Competing Theoretical Perspectives Caroline Thomas and Peter Wilkin (eds) GLOBALIZATION AND THE SOUTH Kenneth P. Thomas CAPITAL BEYOND BORDERS States and Firms in the Auto Industry, 1960–94 Geoffrey R.D. Underhill (ed.) THE NEW WORLD ORDER IN INTERNATIONAL FINANCE Amy Verdun EUROPEAN RESPONSES TO GLOBALIZATION AND FINANCIAL MARKET INTEGRATION Perceptions of Economic and Monetary Union in Britain, France and Germany Robert Wolfe FARM WARS The Political Economy of Agriculture and the International Trade Regime

International Political Economy Series Series Standing Order ISBN 0–333–71708–2 (outside North America only) You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and one of the ISBNs quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England

Turbulence and New Directions in Global Political Economy Edited by

James Busumtwi-Sam Associate Professor Department of Political Science Simon Fraser University, Canada

and

Laurent Dobuzinskis Associate Professor Department of Political Science Simon Fraser University, Canada

Editorial matter and selection © James Busumtwi-Sam and Laurent Dobuzinskis 2003 Chapter 5 © James Busumtwi-Sam 2003 Chapter 6 © Laurent Dobuzinskis 2003 Chapter 7 © Jacqueline Best 2003 Chapters 1–4, 8–11 © Palgrave Macmillan 2003 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 2003 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 1–4039–0362–X 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 Turbulence and new directions in global political economy / edited by James Busumtwi-Sam and Laurent Dobuzinskis. p. cm. — (International political economy series) Includes bibliographical references and index. ISBN 1–4039–0362–X (cloth) 1. Economic development—Congresses. 2. Economic policy— Congresses. 3. Globalization—Congresses. 4. Political stability— Congresses. I. Busumtwi-Sam, James, 1961– II. Dobuzinskis, Laurent. III. Series. HD75 .T87 2002 337—dc21 2002075489 10 9 12 11

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

Contents

List of Tables

vii

Notes on the Contributors

viii xi

Preface

xiii

List of Abbreviations

Introduction

1

James Busumtwi-Sam and Laurent Dobuzinskis

Part I Contextualizing Turbulence

11

Introduction James Busumtwi-Sam and Laurent Dobuzinskis

13

1

Globalization as Politics Philip G. Cerny

15

2

Rethinking Development Inside Political Economy Anthony Payne

33

3

States and World Order Andrew Gamble

49

4

Towards a Poststructuralist Development Agenda Trevor Parfitt

67

Part II

Ideas, Institutions, and Policy

Introduction James Busumtwi-Sam and Laurent Dobuzinskis 5

6

81 83

Rethinking Development: Governance, Participation, and Ownership James Busumtwi-Sam

85

Social Norms in Transition: Gift-giving and Reciprocity in the Global Era Laurent Dobuzinskis

107

v

vi

Contents

7 The Politics of Transparency: Ambiguity and the Liberalization of International Finance Jacqueline Best 8 Stock Markets and States Kathryn C. Lavelle

Part III

126 145

Regional and National Contexts

165


167

9 Globalization and Currency Convergence: What do the Regions Tell Us? Paul Bowles, Osvaldo Croci and Brian MacLean 10

The Political Economy of the ‘Third Way’ Simon Lee

11

Phases of Capitalism, Globalizations and the Japanese Economic Crisis Richard Westra

Index

169 186

209

228

List of Tables 8.1 8.2

Frontier stock exchanges Frontier market companies cross-listed on the London stock exchange, May 2001 8.3 Methods of privatization for medium-size and large enterprises in seven transition economies (percentages of total) 11.1 World-historic stages of capitalism

vii

153 154

157 213

Notes on the Contributors Jacqueline Best is a doctoral candidate in Political Science at Johns Hopkins University. Her dissertation, ‘Economics of Uncertainty: The Constitutive Role of Ambiguity in International Financial Governance’, works at the intersection of international relations, political economy and political theory, examining the role of ambiguity in international financial governance since Second World War. Paul Bowles is the Chair of Economics at the University of Northern British Columbia. His recent research focuses on the issue of globalization – how the increasing integrated global economy is affecting the ability of governments to implement policies which may differ from their neighbours. James Busumtwi-Sam is Associate Professor of Political Science, Simon Fraser University. His research focuses on the institutional and normative bases of collective action. He has published on the political economy of economic policy reform and financial liberalization in developing countries, international financial institutions, and the political economy of development and security in Africa. Philip G. Cerny is Professor of Government at the University of Manchester, and is currently the Chair of the International Political Economy Section of the International Studies Association. He also taught at the University of York, and the University of Leeds. Professor Cerny is the author of The Changing Architecture of Politics (1990), The Politics of Grandeur (1984), and has edited or co-edited six other books. Osvaldo Croci holds a Ph.D. from McGill University and is currently Associate Professor in the Department of Political Science at Memorial University of Newfoundland (St John’s, NF, Canada) where he teaches courses in IR, IPE and the EU. He is currently investigating the political economy of international sport organizations. Laurent Dobuzinskis is Associate Professor of Political Science at Simon Fraser University. His current research interests concern classical and contemporary political economy, normative economics and modern viii


ix

political philosophy. His recent publications include ‘Serge Kolm on Social Justice and the Social Contract: A Contextual Analysis and a Critique’, The European Legacy 5, no. 5 (2000): 687–702; and ‘Global Discord: The Confusing Discourse of Think Tanks’, in T. Cohn, S. McBride and J. Wiseman (eds), Power in the Global Era: Grounding Globalization (London: Macmillan, 2000). Andrew Gamble is Professor of Politics and Director of the Political Economy Research Centre (PERC) at Sheffield University. He is a joint editor of New Political Economy and Political Quarterly. He won the Isaac Deutscher Memorial Prize (1972) and Mitchell Prize (1977). Kathryn C. Lavelle is a visiting Assistant Professor in the Department of Political Science at Case Western Reserve University. Her current research focuses on international political economy and the role of international financial institutions in constructing equity markets in the global south. She received her Ph.D. from Northwestern University in 1996. Simon Lee is Lecturer in Politics at the Department of Politics and International Studies, Hull University. His published work includes (with A. Cox and J. Sanderson) The Political Economy of Modern Britain (Cheltenham: Edward Elgar, 1997). He is also a major contributor to the B. Jones (ed.), Routledge Encyclopedia of International Political Economy (London: Routledge, 2001). Brian MacLean is an economist at Laurentian University in Sudbury, Ontario, who studies Canadian and Japanese economic policies. His latest book is an edited volume on international finance called Out of Control. He is currently working on an introductory economics textbook and writing a monthly column for the National Post. Trevor Parfitt specializes in studying aid to Africa, and matters pertaining to Third World debt. Currently, Dr Parfitt is working on a book provisionally entitled The End of Development: From Post-Modernism to PostDevelopment, which examines how far post-modern theory can be used to solve the problems of theoretical impasse that currently bedevil development theory. This book will be published by Pluto Press. He also serves on the editorial board of The Review of African Political Economy. Dr Parfitt has lectured at a variety of institutions, mainly in the United Kingdom, and is currently working at The American University in Cairo.

x


Anthony Payne is Professor of Politics at the University of Sheffield in the United Kingdom. He is the author of a number of books and articles on political economy, development and regionalism. He is also the Managing Editor of the journal New Political Economy. Richard Westra has taught at The College of The Bahamas in Nassau, the International Study Center, Herstmonceau Castle, UK and the Royal Military College of Canada, Kingston, Ontario. His most recent publication is the co-edited volume, Phases of Capitalist Development: Booms, Crises and Globalizations, Palgrave, 2001.

Preface The chapters in this book were originally presented at a conference on Global Turbulence: Instability in National and International Political Economy held at Simon Fraser University (SFU) in July 2001, sponsored by the Department of Political Science at SFU. The conference brought together scholars from four continents with diverse disciplinary backgrounds to examine some of the key theoretical and policy issues arising from the study and practice of political economy, with a central focus on the theme of ‘turbulence’. This collection publishes a selection of the best papers from this conference, which have since been extensively reviewed and revised. We would like to thank all those who made the conference possible, as well as those who assisted in the preparation of the book. The conference organizing committee consisted of James Busumtwi-Sam, Daniel Cohn, Theodore Cohn, Laurent Dobuzinskis, Marjorie Griffin Cohen, Anil Hira, Michael Howlett, Stephen McBride and Russell Williams. The poster for the conference was designed by Jen Chang. Special thanks are due to Sherry Lloyd for creating the web page and communications links for the conference. Special thanks are also due to our student volunteers at the conference, Libardo Amaya, Tim Came, Scott Matthews, Fiona MacDonald, Johanna Montgomery and Paul Weaver. Financial support was received from the Boag Foundation, the Social Sciences and Humanities Research Council of Canada, and also the Offices of the President (Michael Stevenson), Vice-President Academic (John Waterhouse), and the Dean of Arts (John Pierce) at SFU. Michael Stevenson, President of SFU, was kind enough to present the opening remarks at the conference. Our thanks go out to all. Special thanks are due to staff members at SFU’s Department of Political Science, Sherry Lloyd, Roxanne Jantzi, Marlie Murphy and Eliza So, whose skill and efficiency was a key factor in the success of the conference. We would also like to thank SFU graduate students Nicole Ludwig, Anthony Maragna and Pavilina Vagnerova for their secretarial assistance in preparing this volume. We also acknowledge the assistance of the other members of our editorial team, Marjorie Griffin Cohen and Stephen McBride in the preparation of this volume. Finally, we would like to thank Nicola Viinikka the Senior Commissioning Editor, and Guy Edwards the editorial assistant Politics and xi

xii

Preface

Economics Division at Palgrave, as well Timothy M. Shaw the General Editor of the International Political Economy Series at Palgrave, for their support and assistance in the completion of this project. James Busumtwi-Sam Laurent Dobuzinskis

List of Abbreviations ADR AGC ASEAN BIS CHST CSR DAC EC EU EMS EMU GDR GOR IBRD ICB IDA IDR IFC IFI IMF IPO LDP LLDC NAFTA NAMU NDPB NGO NNPC ODA OECD PCF PSA RDA SAP

American Depository Receipt Ashanti Goldfields Corporation Association of South-East Asian Nations Bank for International Settlements Canada Health and Social Transfer Programme Comprehensive Spending Review Development Assistance Committee (OECD) European Community European Union European Monetary System European Monetary Union Global Depository Receipt Government Offices of the Regions International Bank for Reconstruction and Development (WB) Investment Corporation of Bangladesh International Development Association (WB) International Depository Receipt International Finance Corporation (WB) International Financial Institution International Monetary Fund Initial Public Offering Liberal Democratic Party (Japan) Least Less Developed Country North American Free Trade Agreement North American Monetary Unit Non-Departmental Public Body Non-Governmental Organization Nigeria National Petroleum Corporation Official Development Assistance Organization for Economic Cooperation and Development Private Capital Flows Public Service Agreement Regional Development Agency Structural Adjustment Programme xiii

xiv

List of Abbreviations

SDA UN UNDP WB WTO

Special Delivery Arrangement United Nations United Nations Development Programme World Bank (IBRD, IDA, IFC) World Trade Organization


After an initial period of conflict over the very idea of globalization, scholars, policy makers, businesses and political activists have all begun the more arduous task of confronting the complexities of this multidimensional process. That globalization is not a passing fad is by now abundantly clear. It does take many forms, however, and affects countries, regions, economic sectors and groups of people in different ways. Globalization means different things to poor and rich nations, to progressives and conservatives, to social scientists and moral philosophers, to technocrats and citizens. All these distinct dimensions and differentiated meanings must be carefully distinguished and analysed. And yet, they also overlap and interact in puzzling ways, challenging established norms and theories, and giving rise to emergent structures and values. This book brings together a collection of essays that have been written for the purpose of undertaking this sort of theoretical and analytical rethinking and reassessment of political economy, in light of changes brought about by globalization.1 The purpose is to shed light on how phenomena associated with globalization, including growing pressures for currency convergence and financial liberalization; changing patterns of investment and aid; and changes in domestic political and socio-economic organization both from ‘above’ and ‘below’, impact on political economy in theory and in practice. The focus is thus on achieving greater understanding of contemporary political economy – the interplay and reciprocal connections between economics and politics – at the global, regional, national or sub-national levels. The central theme that unites the book is that of turbulence. This theme draws attention to the state of flux that characterizes contemporary political economy, both in its academic study, and in practice. With respect to the study of political economy, turbulence draws attention 1

2 Introduction

to disappearing disciplinary boundaries as certain traditionally-held distinctions, including the very notion of two separate domains, the political and the economic, are increasingly being called into question. And while the levels of analysis (sub-national, national, regional and global) continues to be a useful device for ordering information and simplifying complex relationships, it remains wholly artificial. Not only do international factors strongly influence events and outcomes at the domestic level, domestic factors also strongly shape political-economic events and outcomes internationally. These suggest the need for newer theoretical lenses and analytical tools to make sense of changes occurring around the globe. In terms of policy and practice, turbulence draws attention to key actors and events, and to the kinds of contestation that occur as societies and actors endeavour to manage the flow of goods, money, people, ideas, and problems within and across borders, define agendas, create new identities and spaces, and shape policy and outcomes. The chapters, written by established and younger scholars, have a very strong theoretical and analytical component, and examine a wide range of issues arising from on-going changes in global, regional, and national political economies. The book does not aim for an overarching theoretical synthesis that attempts to map out the precise contours of the on-going changes. Instead, the essays individually examine various aspects of turbulence in different political-economic contexts and set out to identify important sources of the on-going changes and their significance for reassessing the analyses of global, regional and national political economies. Taken together, the chapters reveal that these turbulent issues and events may represent important turning points in the evolution of various political economies. However, their precise direction and implications remain unclear. The essays are grouped into three parts. Rather than adopting an arrangement that would simply group chapters according to levels of analysis and/or by issue-area, the three parts are defined so as to illustrate the varying contexts of turbulence in contemporary political economy – theoretical, or perhaps more accurately, epistemological and paradigmatic; normative/ideational/institutional; and regional and national. To an extent, this arrangement reflects the different levels of theoretical abstraction and the empirical bases of the essays (with the essays in Part I having a broader theoretical content). It also reflects the nature and scope of their subject matter. In essence, we argue that one has to go from paradigms to institutions and norms to specific regional/national contexts in order to appreciate the on-going changes.

Introduction

3

The first part contains a collection of essays that provide the context for thinking about turbulence through an examination of some broader disciplinary, theoretical and paradigmatic debates in contemporary political economy. More traditional texts tend to adopt a three-fold classification of the major theories that have influenced the evolution of political economy: liberal (or neoclassical); economic nationalist (or mercantilist), and Marxist. This traditional presentation, however, in establishing mutually-exclusive and apparently irreconcilable categories, generally fails to recognize the diversity within each school as well as the ways in which they have influenced each other. The emergent trends in various political-economic contexts globally defy traditional disciplinary and analytical categories/boundaries, and are resistant to neat theoretical compartmentalization. The four essays in Part I focus attention on this dimension of disciplinary and theoretical turbulence in political economy. Although each has a different focus, together they reinforce the need to rethink political economy in light of globalization’s challenges. The chapter by Philip Cerny examines how globalization has contributed to a crisis within political science. The discipline has been embedded in a conception of the nation state as the essence of politics. This traditional focus on national or domestic politics, however, is challenged by a process widely understood as rendering the national obsolete. At the same time global is generally considered beyond politics and political control. Cerny challenges these received ‘truths’ and argues that the global is political – involving fundamental issues of identities and values, and reflexive attempts by individuals and groups to design, maintain, and change institutions and processes. Recognizing it as such, surely partly the task of political science, may eventually enable individuals and groups to control and shape globalization according to consciously applied human values – that is, politically. Like Cerny, Anthony Payne questions the continued relevance of traditional disciplinary approaches and divisions. Payne focuses on the relationship between development studies and international political economy – two fields that share much in common but have, to a large extent, remained separate. He offers the rather provocative argument that the study of development needs to be ‘rescued’ from its traditional home in development studies and rethought within the field of political economy. Development could then be understood as the building by a country of a particular political economy characterized by distinctive, domestic attributes and an appropriate, viable location within a globalizing world order. For Payne, this would help to avoid the irresolvable debate

4 Introduction

about the moral content of development, and allow for many types and forms of actual development. This provocative thesis is sure to spark considerable debate. While the essays by Cerny and Payne challenge established ways of thinking about some key issues in the study of political economy and the way in which they are studied, the two remaining essays in Part I help to shed new light on how existing theories and ideologies have shaped the evolving global political economy, and provide alternative theoretical and analytical lenses to help make sense of on-going issues. They are set in the context of turbulence that has arisen from the fact that actual processes of globalization which have occurred world-wide have been unstable, uneven and unequal, and have produced ‘winners’ and ‘losers’. Andrew Gamble’s essay questions the validity of some widely-held theoretical categories in political economy, and offers an alternative set of lenses that link theories/ideologies of the nature of the global economy to broader conceptions of the nature of world order – ‘territorial’, ‘cosmopolitan’ and ‘hegemonic’. The essay explores the relationship among the three conceptions of world order and the different models of capitalism that have evolved, and assesses their implications for the way in which financial crises are understood, and on-going debates over regional integration and governing the global economy. Gamble argues that underlying the debate over the desirability of regulating the global economy is a much deeper and older question: whether regulation of a capitalist economy is feasible at all. He shows that responses to this question cut across the conventional left–right ideological divide. Trevor Parfitt examines the contributions of post-structuralist approaches to political economy. He notes that although these approaches have enjoyed a certain vogue, partly due to the eclipse of Dependency and neo-Marxist analyses of international political economy and development, their relativist stance tends to undermine their own validity claims. Parfitt’s chapter looks at the way the deconstructivist theory of Jacques Derrida avoids the Charybdis of foundationalism and the Scylla of relativism, thus providing the basis for an emancipatory development agenda involving such forces as new social movements. In this way, the essay makes a valuable theoretical contribution to the growing literature on what has been termed ‘globalization from below’ – focusing on alternative sources of agency and locations of resistance to neo-liberalism – in contemporary political economy. 2

Introduction

5

The four essays in Part II shift from the analysis of broader questions of theoretical and disciplinary turbulence to the analysis of specific ideational, normative, and institutional contexts as key sites of contestation and turbulence. They examine the evolution and effects of ideas, norms, and values on agents, institutions, political processes, and policy outcomes in a variety of global and state-societal settings. The chapters share the premise that ideational and normative phenomena do matter in shaping evolving political economies. In so doing, the essays adopt a broader view of institutional phenomena, not simply as instrumental or regulative mechanisms, but also as constitutive of actors identities, interests and powers. For institutions come to embody particular ideas, norms and values, and thus may be seen as the key mediations that enhance or diminish the identities and interests of particular groups of actors and thereby effect or impede realization of certain outcomes. Each of the chapters, in different ways, reinforces the centrality of the ‘political’ in political economy and questions the tendency to view what are essentially political issues in technical terms and as wholly amenable to the discipline of the market. James Busumtwi-Sam examines critically the evolution and institutionalization of a new political economy of development espoused by the major bilateral and multilateral donors, encapsulated in the policy metaphors ‘good governance’ (democracy and a market based economy) ‘participation’ (civil society) and ‘ownership’ (commitment to reform). Using insights from critical theories, Busumtwi-Sam assesses this new political economy revealing flaws and inconsistencies, both in theory and practice. He argues that at the core of this discrepancy, evident in the gap between the rhetoric espoused by donors and the reality of development outcomes in recipients, is the failure to understand political structures, institutions and processes in aid recipients. And speaking directly to evolving discourses on globalization from below that see in civil society the emergence of a potentially transformative political economy of development, Busumtwi-Sam cautions against the romanticization of the civil sector. The role of nascent civil societies in the political economy of development must be qualified in several ways. Laurent Dobuzinskis critically examines a range of intellectual and empirical developments that have accompanied the retrenchment of the public sector. If the public sector is retrenching, could at least some of its responsibilities be switched over to the voluntary sector and satisfied through spontaneous gift-giving (of time, money, and other resources)? Could reciprocity turn out to be the key to the evolution of new forms of economic behaviours and to the emergence of local, national or

6 Introduction

transnational formal and informal institutions? Interestingly, many economists are busy revising their models to make room for altruism. These could be instrumental in designing mechanisms for transferring some social policy functions to the voluntary sector. Economists are also finding out that social capital contributes to economic growth. In the end, however, Dobuzinskis suggests that the questions of how such a restructuration is to take place, and whether it is just or not, remain essentially political ones. Jacqueline Best addresses a more specific, yet critical problem in contemporary political economy: the role of information. Financial crises are often seen as a problem of information. From that angle, ambiguity as a function of insufficient information is seen as the problem, and greater transparency is proposed as the solution. Speaking directly to constructivist concerns, Best argues that current reform efforts in finance overestimate the importance of such technical issues as transparency and informational uncertainty, and underestimate the constructive (and inherently political) role of intersubjective ambiguity. The emphasis placed on transparency in the wake of the East Asian crisis may prove counterproductive as it may create ‘too-fragile’ institutional mechanisms. Far from being destructive, ambiguity plays a constructive role in supporting international economic and political stability, and may in fact be at the very core of explaining institutional change. In sum, the chapter marks an attempt to bridge the gap between the concerns of constructivists and more traditional International Political Economy theorists in reformulating traditional categories. The chapter by Kathryn Lavelle questions the link between national stock exchanges and states. While the connection between the two may be loosening in some examples, Lavelle explores evidence from ‘frontier exchanges’ to argue that the connection has tightened in others. European stock exchanges provided an infrastructure for successful, ongoing enterprises to transfer ownership to diverse groups of investors during the industrial revolution. Conversely, contemporary frontier exchanges appear in states with dramatically different levels of industrialization. They provide an infrastructure for the state to sell its enterprises as part of a broader pattern of state disengagement from active management of some economic activities. Corporate governance in these cases results from the privatization deal itself wherein the state may retain a certain degree of control. Political factors, including the degree of state capacity and the existence a ‘domestic consensus on privatization’, appear to be key in shaping the formation and evolution of these frontier exchanges.

Introduction

7

Finally, Part III contains three chapters that examine various regional and national contexts of turbulence. They provide an interesting range of differentiated responses to pressures for currency convergence in the Americas, Asia, and Europe; examine efforts to find a balance between conflicting global and national demands in the United Kingdom; and develop a framework for understanding the structural crisis affecting Japan. While these chapters were not written with a view to apply or illustrate the theoretical and analytical positions advanced in the two previous Parts, they can perhaps be read as sources of questions that more purely theoretical investigations should be able to grapple with at some point. These three chapters suggest that it would be unwise to try to develop a coherent and one-size-fits-all political economy of globalization. Paul Bowles, Osvaldo Croci and Brian MacLean offer an incisive analysis of the future of national currencies in the face of the birth of the Euro, the debate over ‘dollarization’ in the Americas, and the promotion of the yen as an international currency in Asia. It has been argued that globalization is leading to currency convergence. The authors analyse exactly how globalization is argued to be leading to ‘one world, one currency’. They then consider currency debates and policies in the three regions of Europe, the Americas and Asia and assess the extent to which the experience of the past decade in each of these regions is consistent with the globalization-causing currency convergence hypothesis. They conclude that regional differences characterize the approaches followed in these three regions as well as the pace at which these reforms are (or are not) proceeding, and that it is not possible to identify a single cause behind all these varying experiences. In his chapter, Simon Lee seeks to show how the ‘New Labour’ Blair Government has sought to surmount the problems which its ‘Old Labour’ predecessors encountered when macroeconomic policy was destabilized by the conflicting demands for fiscal expansion arising from domestic modernization programmes and fiscal restraint from global financial markets. New Labour has implemented a prudential fiscal strategy designed both to maximize investor confidence among the City of London’s volatile financial markets and facilitate domestic modernization. A paradigm of negotiated discretion in the control and planning of public spending has been replaced by a paradigm of central prescription over policy and resources. Despite the extension of devolution to other parts of the United Kingdom polity, the resulting pattern of governance for England and its regions has been one characterized by a further centralization of political authority.

8 Introduction

Richard Westra makes a strong case that producing a clear and accurate understanding of the meteoric post-war rise of Japan in the world economy as well as the recent tendency of the Japanese economy towards crisis and stagnation must necessarily proceed through the periodization of capitalism. Westra uses the approach developed by the Japanese Marxist, Kozo Uno in order to undertake this periodization. The case of Japan illustrates a mode of political economic analysis that studies the architecture of capital accumulation, including the global dimension of capital, in its dominant world-historic phases of development.

Conclusion To summarize, various political economies at the global, regional, national and sub-national levels appear to be at a crossroads. Events and issues are unfolding, producing turbulence and unforeseen consequences, the precise directions and implications of which remain unclear. It would be premature to propose some grand synthesis of these dialectical trends. Too many questions need to be posed, some fundamental ontological and epistemological issues need to be worked out, and problems that were thought to have been settled must be revisited. Political economy as a whole, however, remains a fundamentally important research program, to use a Lakatosian phrase. The collection of essays in this volume, assembled for the purpose of undertaking this sort of theoretical and analytical rethinking and reassessment, represents an attempt to capture important aspects of this turbulence. While readers will draw their own conclusions from these essays, we would like to conclude by pointing out a few themes that run through them. While globalization is not necessarily a new phenomenon, what the authors of these essays show is that the complexity of current trends and therefore the uncertainty attendant to them is unprecedented. Admittedly, one has to be on guard against rhetorical excesses that would imply that all existing structures and processes have given way to new global ones. It is clear that state institutions are not going to disappear any time soon, as Gamble reminds us. And as Westra argues, conceptual categories that were useful in the past may well continue to be useful in the foreseeable future. At the same time, it is hard to deny that many boundaries – tangible ones but also, and especially, imagined or conceptual distinctions between categories of discourse or domains of analysis (see Best’s chapter for example) – are becoming ever more porous. Strictly domestic, international, transnational and truly global dimensions of intervention and reflection routinely overlap in what

Introduction

9

state and non-state actors undertake. On this count, one of the most interesting threads running though the chapters (see in particular those by Cerny, Busumtwi-Sam and Dobuzinskis) is the extent to which both state and non-state actors, sometimes but not always in the context of deliberately cooperative processes, contribute to the design and implementation of new ways of addressing the problems of the day. In other words, civil society is being rediscovered as an increasingly central focus of analysis for contemporary political economy. Whether the meshing of the public and private domains is leading to depolicization or to new forms of public life is a question that several authors address here, notably Cerny, Payne, Lavelle and Lee. This ambiguity however does not free us from the burden of making moral decisions, as Parfitt aptly reminds us.

Notes 1 In this regard, this is ‘not another book on globalization’ to borrow Jan Scholte’s phrase; it is not intended to provide a comprehensive exploration of all the myriad meanings, dimensions and manifestations of globalization. See Jan Aart Scholte, Globalization: A Critical Introduction (Basingstoke: Macmillan, 2000), p. xiii. 2 For more on globalization from below, see Barry K Gills (ed.), Globalization and the Politics of Resistance (Basingstoke: Macmillan, 2000); and James H. Mittleman, The Globalization Syndrome: Transformation and Resistance (Princeton, NJ: Princeton University Press, 2000).

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Part I Contextualizing Turbulence



That the contemporary global political economy is characterized by turbulence and change is abundantly clear. What is not so clear however are the particular conceptions of, and approaches to order and governance that provide the context within which such turbulence occurs. This notion of order in turbulence is brought out most centrally in the chapters by Cerny and Gamble, but also informs the chapters by Payne and Parfitt. Together they show that globalization is not driven entirely by inexorable economic processes, but in large measure also by political, and ideational/normative factors – the latter expressed in the form of discourses, theories and ideologies, or specific sets of norms and rules. As Cerny argues, key changes in the contemporary global political economy have been effected by the actions of agents (whether intended or not) in response to challenges to post-war embedded liberalism. Globalization produces a variety of apparently contradictory trends. These include pressures for convergence and the homogenization of economic, political and cultural systems. It also includes trends towards fragmentation and decentralization in various political-economic contexts. These trends present challenges both for academic analysis and for different groups of actors. The chapters by Cerny and Payne focus on the challenges posed for academic analysis, while the chapters by Gamble and Parfitt examine challenges posed for smaller industrialized states and countries in the developing world respectively. The convergence of norms and standards in the global political economy is in part effected through the medium of international institutions and agencies such as the World Trade Organization (WTO) and the Organization for Economic Cooperation and Development (OECD), and spread throughout the developing world through the conditional lending programmes of the International Monetary Fund (IMF), World 13

14 Contextualizing Turbulence

Bank (WB), and major bilateral doors. This convergence serves to construct a new structural context for political-economic activity and interaction that legitimizes certain types of agency while simultaneously excluding others. Thus as Parfitt reminds us, discourses by their very nature attempt to impose truth by exclusion and closure. For the champions of what Gamble terms a neo-liberal cosmopolitan view of world order, the discourse on globalization is used to exclude any alternative that might challenge the liberal consensus and the Anglo-American model of capitalism. A key manifestation of this has been the construction of a new kind of ‘stateness’ – whether described as the ‘third way’ in western democracies or expressed in the metaphor of ‘good governance’ in the context of developing countries – that attempts to extend norms of neo-liberal economic rationality into the political and social spheres and impose a certain kind of discipline on agents. This has not only effected changes in the relationship between the public and private sectors, but also in the non-profit sector or ‘civil society’. New forms of regionalisms have emerged as states strive to cope with these challenges. Thus, as Payne notes, the analysis of state–society relations within context of the opportunities and constraints afforded by the external environment, remains central to any explanation of political economy.

1 Globalization as Politics* Philip G. Cerny

Globalization as a political project Globalization is usually presented as an economic reality to which politics – politicians, bureaucrats, political parties, pressure groups and mass public alike – must adjust. In the third edition of Peter Dicken’s book Global Shift, at the beginning of the preface he quotes from budget speeches by two national finance ministers in 1997: 1 . . .we have no choice but to open and to compete in the world market to survive and prosper. We can grow faster by taking advantage of global markets and advanced technology .. . our openness exposes us inevitably to the fluctuation of global business and demand cycles . . .Adapting nimbly to changes in the environment and staying relevant to global demand remains fundamental to Singapore’s survival. (Dr Richard Hu, Singapore Finance Minister, 10 July 1997) . . . the central purpose of this budget is to ensure that Britain is equipped to rise to the challenge of the new and fast-growing global economy . . . The impact of the global market in goods and services, and of rapidly advancing technology, is now being felt in every home and every community in our country . . . This new global economy, driven by skills, creativity and adaptability, offers an historic opportunity . . . In a global economy, long-term investment will come to those countries that demonstrate stability in their monetary and fiscal policies, and in their trading relationships . . . (Gordon Brown, UK Chancellor of the Exchequer, 7 July 1997) However, this appearance of necessity obscures two aspects of globalization that qualify the overall picture considerably. In the first place, 15


those economic trends that are associated with globalization – the rapid growth of trade, accompanied by the lowering of barriers to trade; mushrooming international capital flows, accompanied by rapid structural innovations in global financial markets; the internationalization of production, accompanied by rapid technological change, especially in information and communications technology; and the like – do not necessarily dictate a single, unidimensional, linear political response. Mrs Thatcher argued that ‘There is no alternative’, but within the parameters of change there actually are significant choices to be made. Which kind of globalization we eventually get will be the product of what political actors actually do, and how they decide, directly or indirectly, consciously or unconsciously, to adapt their ways of doing things – their ‘practices’, their perceptions, their goals, their actions – to what they think of as the ‘realities’ of globalization. And secondly, globalization is itself a political project. As perceptive, historically aware political scientists like Herman Schwartz and Hendrik Spruyt have pointed out, the making of the modern international political economy has always involved the complex interaction and interdependence of politics and economics, of states and markets. These are not exclusive categories; on the contrary, they are inextricably intertwined and mutually constituted historically. Market actors have needed politics to establish property rights, enforce contracts, defend the territory, and maintain social stability. State actors have needed economics to develop a tax base for pursuing those very same ends, for promoting economic security and growth in an internationally competitive environment, and for attaining political legitimacy from the various interest groups and classes from which they drew their power and authority. The (originally European) system of nation-states that superseded the feudal system was itself an embryonic global political economy, but the actors that shaped the process of institutionalization and the political world they represented, from absolutist monarchies to modern liberal democracies, were dominated by the need to establish stable collective decisionmaking processes that could capture the benefits of the economic changes of the day. 2 Today, academic international relations scholars of the realist and neorealist schools assume that nation-states are somehow a given of history. On the contrary, they are a modern construction by political, social and economic actors, especially what Schwartz calls the combination of lawyers, guns and money. The modern world – that is, modern in the way historians use the term, the period from the seventeenth century – has always been a global world, especially since the voyages of discovery

Globalization as Politics

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and European imperialism. The most effective way of capturing the benefits of those changes was the competition of national economies along lines of comparative advantage. Strong states, whether relatively liberal in the British mould or absolutist in the continental European mould, were the most effective way not so much to realize pure economic efficiency but rather to achieve the most productive mix of politics and markets through the development of national markets and productive national economies in a competitive world. This mix became even more important in the late nineteenth and early twentieth centuries as the Second Industrial Revolution required late industrializing countries to make huge investments, 3 often behind new protectionist barriers – in order to catch up with, and surpass the first mover, Britain, whose position as the ‘workshop of the world’ had begun seriously to decline. 4 The rapid expansion of state interventionism between the First and Second World Wars, from industrial planning to the welfare state, represented the high point – and, indeed, the low point, given the role of war as a strategy of growth and expansion in this period – of state capitalism. The lesson for both business and politics after the Second World War, and the project pursued by the main victorious capitalist powers, the United States and Britain, was to attempt to combine the domestic benefits of domestic state capitalism, pro-business intervention, and the welfare state, on the one hand, with the international benefits of free trade – what John Ruggie has called ‘embedded liberalism’.5 This political settlement however faced new crises in the 1960s and 1970s, as domestic stagnation and inflation, a combination dubbed ‘stagflation’, was paralleled by new forms of trade protectionism and international cartellization, especially in oil. The result was the deepest recession since the Great Depression of the 1930s, and the political reaction, both at élite level and among voters, was the formation of a new political coalition that identified the problem as the post-war industrial welfare state itself. Only a further freeing of trade and capital movements, along with domestic liberalization, deregulation, and the restructuring of the state itself along pro-free market lines, would, it was believed, effectively address the problem. This programme, championed by neoconservative politicians like Margaret Thatcher in Britain and Ronald Reagan in the United States (who would be called ‘neo-liberals’ in Europe), saw the future of capitalism in states promoting globalization – a recently coined term, which became the dominant buzz word of the 1980s and 1990s – and their policy prescriptions have been widely, if unevenly, followed elsewhere. A new mix of state and market emerged.


Globalization was thus a political project from the start. It was of course developed in reaction to real challenges, economic and political, to the post-war regime of embedded liberalism. However, it also permitted political entrepreneurs such as Thatcher and Reagan on the right, and eventually Bill Clinton, Tony Blair, Gerhard Schröder, and others on the centre-left, to build new coalitions out of the remnants of their older power bases plus newer groups among lower middle class swing voters, business groups that favoured close government-business collaboration around the globalization project and the like. They all seek to capture the benefits of globalization for their constituents. Globalization thereby became the dominant discourse of politics across the spectrum, and not only in Western liberal democracies. It has spread through Asia, Latin America, Africa and other parts of the world, leading developing nations to try, often only half-heartedly, to replace creaking, inefficient and corrupt development projects based on foreign aid, import substitution, and bureaucratic authoritarianism with various forms of liberalization. And it is increasingly spread through international economic institutions such as the International Monetary Fund, the World Bank and the World Trade Organization. Their political sophistication is growing too, as they move from simple versions of the so-called ‘Washington Consensus’ – implying a basic similarity of approach between these institutions, located in Washington, DC, and United States official policies – to more nuanced policies that permit greater local variation. They even legitimate their approach by claiming to help reduce poverty. Globalization, then, brings together a wide range of state and political actors, business and market actors, and, increasingly, actors in international institutions. While they all believe ‘there is no alternative’, they are also in fact engaged in debates about what policies are most appropriate. Trade, for example, is still high on the agenda – but not so high as it was from the 1940s to the 1980s. Protectionism can still be a priority where particular groups are hurt or where special interests are at work, as with the steel, textile and agricultural lobbies in the United States. Liberalizing capital controls and deregulating financial markets are still central to the agenda, especially of developing countries seeking foreign private capital to replace their failed attempts to develop through state capitalism. But regulatory arbitrage in financial regulation now no longer leads to a ‘race to the bottom’ but rather to strengthening pro-market regulations along the lines of the American model and to attempts to design new approaches to capital controls that permit developing countries to protect themselves against crises like the Asian


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crisis of 1997–98. And the welfare state has not withered away. Spending on public and social services in the United States and Europe has not significantly declined, although they have been restructured through the adoption of business-style practices, financial performance indicators and internal markets. The state has not declined, but it is being reformed along the lines of a ‘competition state’.6 This political project is reflected in the increasing hegemony of globalization discourse, despite the attempts of anti-globalization demonstrators to counteract it. Politics and economic policy, business school paradigms and company strategies, the lingua franca of the internet and contemporary communications and information technology, theories of social and cultural change, all are increasingly addressing the problems of globalization – dissecting it, extrapolating it, forming opinions as to whether it really is happening or not, whether it is inevitable or not, or whether it is a good thing or a bad thing. So while academics, politicians, and bureaucrats, business people and the chattering classes are all trying to classify globalization, ordinary people – the middle classes, the workers, those who have slipped into the underclass or are living in what the author Robert Kaplan in his influential book has called The Ends of the Earth7 – are trying to ask: ‘What does it mean for us?’ It is always difficult when the landmarks of history, culture and socialization do not seem so clear any more – when the narratives through which we have come to understand the world do not seem to ‘follow’ any longer. What happens if we are – and feel – American, or British, or whatever, but we do not know what that is going to mean in 10, 20, or 50 years from now? If our identity is no longer formed by wars, or by the perception of outsiders who give us a reason for solidarity and common identity (what Aristotle called friendship, just as important to society as justice), but instead by firms and market sectors that stretch unevenly across borders, by cultural icons and brand images that are usually Western (often American, of course) but which expand through transnational markets and communications, and by political challenges that cannot easily be confronted through the institutions and processes of the nation-state? Marx, and many others, to be sure, have thought that our experiences of work – our identities as producers – would come increasingly to dominate our perceptions of ourselves; only when workers came to experience the collective disciplines of the factory could they transcend the primitive limits of religion, ethnicity, geographical parochialism and subservience to dominant classes, and take charge of their destinies. But work in


capitalist society has always been a fragmenting force too, and in a globalizing world in which both technology and business ideology call for increasingly flexible production, where ballooning international capital flows and the internationalization of markets, firms and industrial sectors spell increasing change, and where everyone is finally having to come to terms with what Alvin Toffler so long ago called ‘future shock’,8 it is not merely our vocations that no longer fit the pattern, but the very idea that we can create stable identities – collective or individual – from our experience as producers is increasingly fragile. Neo-liberals suggest that a globalized consumer-led world will be a more pluralistic place, where many different groups and identities will find new and improved niches in which to expand and thrive, partly insulated from the homogenizing authority of the state. But will such groups and identities end up merely giving up wider autonomy and power to larger and more powerful economic and political forces that have the resources and the ambition to take advantage of expanded opportunities for control in a global economy and polity? Indeed, will the search for such niche identities lead to greater pluralistic stability – or to growing and endemic conflict, in a world where the state no longer constitutes the only playing field for the biggest game in town? In a world where secularization has long been seen by social theorists to be a long-term, underlying trend, can we reinvent religion, increasingly the root of a new ‘clash of civilizations’?9 Of course, conflicts within supposedly solidaristic religious groups are often as violent as those between religious traditions. Ethnic identities too, may flourish, but we are all aware of the murderous potential of new tribal-type conflicts, like that in Rwanda, where the concept of total war is no longer between states but between ethnic groups in ways many of us thought (or at least hoped) would be eradicated after the defeat of Hitler and his Final Solution. And in economic terms, if our identities are no longer those of ‘producers’, have we become merely consumers? If so, where does all this lead us? Globalization will not go away. Stanley Hoffmann has made a crucial distinction between ‘theory as a set of answers’ and ‘theory as a set of questions’.10 We may not yet have the answers to main questions about globalization, but we are now beginning to identify and pose crucial questions.

Political dimensions of the global For what is the essence of politics as a social phenomenon, but the conscious – or, as social theorists would say, the reflexive – attempt by


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individuals and groups to actively design, operate, maintain and continually adapt and improve those institutions and processes which enable people to live together, and, indeed, which embody the fact that ‘no man is an island’. Just as ‘the personal is political’, so ‘the global is political’. This is not just a matter of advancing the process of wealth creation or improving the quality of life. Nor does it mean some crude empirical process of predicting the future. Instead, understanding globalization in a political way means furthering knowledge about the diverse and complex ways in which globalization may develop and the substantive choices which lie ahead – so that when people have to make decisions (or get the chance to participate in one way or another in collective decisions) about what directions of change should be facilitated and promoted, and what perhaps blocked or diverted, they will know as best they can what the alternatives, the problems and possibilities, are. This means fostering and nurturing intellectual and political debates, with intense cross-fertilization between the two. It means challenging orthodoxies, of course – but not only challenging orthodoxies. It also means rethinking political theory and political philosophy. It means breaking globalization and ideas about globalization down into their component parts and seeing how they might be put back together again. But it is not like taking a watch apart and trying to put it back together. Neither is it like breaking down genetic material and rearranging it in a laboratory. For the nearest we get to a laboratory of politics is out there in the real world. There are no controlled experiments, no chance to go back and replicate a decision or an action. Nevertheless, choices will be made and ideas have consequences. Thus we must not merely politicize the global, but also globalize our own understandings as political scientists. This is not an easy thing to do. Academic disciplines are institutionalized, embedded structures. In this sense, political science has been embedded in a conception of the nation-state as the essence of politics, a notion which is perhaps not so different from that of General de Gaulle. As de Gaulle wrote in the 1930s: Human passions, insofar as they remain diffused, realize nothing ordered, nor in consequence effective. It is necessary that they be crystallized in well-defined circumscriptions. That is why patriotism has always been something local, each religion builds temples, and the cult of arms postulates an ésprit de corps.11 For de Gaulle, history evolved the nation-state as the highest form of social and political circumscription.


Once a nation is formed, once there are fundamental geographic, ethnic, economic, social and moral elements within it that are the texture of its life, and once, on the outside, it comes into contact with foreign influences and ambitions, there exists for that nation, despite and above its diversities, a group of conditions vital to its actions, and ultimately, to its existence, and that is the general interest. It is, moreover, the instinct it has of this general interest which cements its unity and it is the fact that the state conforms to [the general interest] or not that makes its political endeavours worthwhile or incoherent. In a modern democracy, oriented towards effectiveness, and threatened as well, it is therefore vital that the nation’s will be expressed globally when it concerns destiny. 12 However, the nature of globalization today is to challenge the capacity of nations to embody this notion of the general interest. This is in turn a major challenge to the academic discipline of political science. Political science first emerged as a separate discipline in France and the United States in the late nineteenth century, emanating from sociology in the former (Durkheim was the founder there 13) and from constitutional law in the latter (around the writings of A. Lawrence Lowell and Woodrow Wilson in particular). But from the start it has been sundered by a Manichean split between the study of domestic politics and that of international relations, between an ‘inside’ world of the pursuit of a better society by political means, on the one hand, and a dark ‘outside’ world of war and anarchy, stabilized only by short-lived balances of power and the arts of diplomacy, on the other.

Globalizing the political For this reason, we must not merely put politics back into globalization. We must also globalize the political. Globalizing the political might seem to mean restricting choice to what fits with what the markets want rather than with the traditional democratic notion of what the people want. In order to break free from these restrictions, and to facilitate a process where people can once again take command of their political destinies, to reintroduce a genuine reflexivity to political life, I believe requires the reinvention of the discipline itself. In fact globalization presents a number of quite specific problems for political science, in addition to the problems of embeddedness referred to above. This is because the various trends, processes and structures usually lumped together under the heading of globalization are not linear or commensurate. They are


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asymmetric conglomerations of a range of quite distinct processes, with different structural characteristics and different dynamics, which intersect and interact in complex and circular ways. In this sense, it is always possible to deny that globalization exists, by merely showing that some trends point in the opposite direction – such as localization and fragmentation – or that some pre-existing structures and processes are enduring in the midst of other changes – like national-cultural models of society, political culture, corporatist relationships between state and economy and so on – or that these different processes do not blend either empirically or normatively into a coherent whole. Three sets of questions will therefore be posed here. First, what is globalization as an intellectual problem? Does it ‘exist’? And, if so, is it fundamentally an economic phenomenon, or is it inherently political? Second, what impact is globalization likely to have on how people approach politics as a human activity? What sort of agents are involved in the globalization process, and to what extent do their actions merely involve a series of discrete, adaptive changes, on the one hand, or a far-reaching paradigm shift, on the other? And finally, what are the potential normative consequences of globalization? My view is that globalization does exist but is driven not primarily by some inexorable economic process, but rather by politics: by ideology; by the actions, interactions and decisions of state actors, their private sector interlocutors and wider publics; and by the fact that the nationstate as a structural framework for politics is poorly adapted to cope with the choices faced in an unevenly globalizing polity. Therefore it requires a qualitatively new kind of normative political philosophy, involving not only a rereading of the history of political thought but also a far-reaching attempt to derive a new set of normative understandings necessary in order to confront an increasingly global future. This is where international political economy comes in. IPE began life as a minor subdiscipline of international relations, concerned with foreign economic policy, international economic institutions, the politics of trade, and the international monetary system. It drew from economic theory as well as international relations and political science, it had to consider the development over the past couple of centuries of an international economy, and it had to analyse those phenomena in political terms. At a time when economists, in line with Smith’s and Ricardo’s concept of comparative advantage, generally continued to see the world economy as composed of the interactions of discrete national economies, IPE did not challenge the dominant paradigm. But once questions of globalization began to be more and more widely posed, IPE rapidly


came to occupy a strategic structural location, challenging existing nation-state-based paradigms in practical politics as well as in economics and the other social sciences. The new professional assertiveness of IPE, therefore, is inextricably intertwined with its capacity to ask the big paradigmatic questions and even to suggest provisional answers.

What is globalization? Globalization is a remarkably elusive concept, especially in political terms. There are several candidates for the role of independent variable. Three are essentially economic: the interpenetration of national markets for various goods and assets; the advent of new technology which, in contrast to the hierarchical technological forms of the Second Industrial Revolution, is structurally amorphous and rapidly diffused; and the development of private and public economic institutions, from multinational enterprises to strategic alliances to public and even private regulatory regimes. Sociological hypotheses, of course, give pride of place to cultural globalization, rooted in expanding global images and identities; for post-modernists, however, the global village is not so much a unified culture per se but an intensely speeded-up world where cultural fragmentation undermines all grand narratives and socio-political projects from underneath rather than from above. The debate about globalization as a political phenomenon usually takes it to mean that the shape of the playing field of politics, and the outcome of political processes, are increasingly determined not within relatively autonomous or insulated states, but at some sort of global level. The problem however is that it is not clear just where this global level lies, how it is structured, or how tight its constraints are. On the one hand, for some proponents of globalization, both liberal and Marxist, the global level involves a convergence or homogenization of the world, whether markets, technologies, or ideologies and cultures – a homogenization which alters the stakes, the rules, and the outcomes of political games. In order to deal with capital flows or multinational corporations with global strategies, the state needs to drop the pretence of being able to pursue a domestically generated general will or common good and adapt itself to global imperatives. For critics of globalization, on the other hand, such a global level is just too amorphous. Indeed, it is malleable, and if we are to recapture politics from a runaway international capitalism that has been promoted by neo-liberal political forces at home, then globalization must be counteracted by changing the direction of domestic politics and recapturing the state for


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progressive forces. The intellectual debate about globalization within political science has thus become polarized between those who think it is inevitable and those who think it can, and should, be resisted. However, both sides of this debate present oversimplified, one-sided and unrealistic interpretations of globalization. In fact, even those who support both positions admit that the reality of globalization is more complex. Those who accept that globalization is a reality increasingly point out that rather than leading to simple convergence or homogenization, it also promotes divergence and heterogeneity. And those who argue that globalization is an overblown idea also accept that there are numerous important trends towards the internationalization and transnationalization of economic and cultural structures and processes – trends which at the very least require the state to learn new ways of cooperating and refashioning itself in both domestic and foreign policy.14 For these reasons, rather than adopting an essentialist or teleological definition of globalization, I prefer what I call an ‘additive’ definition: that globalization is quite simply the sum total of the wide range of political, economic and social processes of internationalization and transnationalization taking place in the world today. ‘Internationalization’ means the development of formal and informal mechanisms of cooperation and integration among states, whether rooted in treaties, formal institutions, international regimes, common norms and cultural responses amongst state actors, or regularized social or institutional practices. ‘Transnationalization’ refers to the development of an analogous range of formal and informal structures and processes amongst ‘behindthe-border actors’, including private sector economic institutions (firms, trade associations, private regimes and so on) and market structures, socio-political organizations and associations (pressure groups, non-governmental organizations, transnational advocacy networks and so on), and socio-cultural linkages (from MacLuhan’s ‘global village’ from above to the intensification of various forms of cross-border ethnic, religious and other social identity structures). Strategically located between internationalization and transnationalization, of course, are what have been called ‘transgovernmental networks’ of state actors who link the concerns of different (and often competing) parts of the state apparatus both with analogous parts of foreign state apparatuses and with private sector or other non-state transnational (and subnational) actors.15 Thus the ‘global level’ is that structural level (or complex of structural levels) at which those processes of transnationalization and internationalization intersect and interact. In this context, real people are faced with real choices about how to organize and regulate these processes,


how to navigate and negotiate amongst them – in other words, how to make individual and collective decisions about how to react to and how to deal with globalization. In engaging in such actions and making such political choices, they have to devise new and evolving roles and rules of the game, to face the issue of whether embedded arenas of politics and government (that is, the state and the relations between states) ought to change or be changed. As with so many aspects of human life, these decisions can be contradictory. People want more consumer goods provided relatively cheaply by the international marketplace, and therefore more imports; yet at the same time they want to protect jobs at home. People want to vote for their political leaders and have those leaders act effectively on the basis of domestic welfare; yet at the same time, they are unwilling to pay the costs involved in a world where political choices are increasingly constrained by transnational and international linkages. And people want to identify with a social nation; yet local and global interests, ethnic particularisms, and transnational cultural trends often intersect to undermine the social nation, to create new and multiple levels of identity which undermine the project of cultural nation-building which dominated the great social transformations of the nineteenth and early twentieth centuries. In this context, globalization is not a self-evident product of ineluctable forces. It is a coming together of a new crossroads of competing, conflicting and intersecting forces, much as the nation-state was itself 100–200 years ago. In this context, state actors in advanced industrial countries have pursued freer markets, liberalized, deregulated. The result has been to accelerate transnational and international economic forces and processes – especially the geometric increase in international capital flows and the increasing political as well as economic weight of international financial markets. International competitiveness has become the totem of policy-making and implementation, of bureaucratic structures once mired in domestic corporatism. More obvious processes of intergovernmental cooperation, from trade agreements to environmental negotiations, have become inextricably intertwined with domestic politics, while transnational interest groups and advocacy networks have taken causes out of the hands of both domestic politicians and international institutions and confronted international business directly. In this context, the state is neither autonomous nor obsolete per se, but rather has been caught up in a web of new constraints and opportunities and has become the primary terrain of conflict between social forces promoting globalization (or accepting it as inevitable) and those seeking to resist or reassert domestic control over globalization trends.


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Globalization: adaptation or paradigm shift? Over the past 400 years, states have been the structural lynchpin of the modern world order. Nevertheless, significant structural pressures on the state have opened up serious fault lines both within nation-states domestically and in the states system. Probably the most significant variable in recent versions of this debate has been the advent of the so-called Third Industrial Revolution. What is perhaps most important about the Third Industrial Revolution in this context is its transnational character. Key sets of economic agents which in the past have been closely bound up with the territorial nation-state are increasingly experimenting with new forms of quasi-private regulation of their activities. Government enterprise is being split up, devolved, privatized. In this environment, the notion of the public interest is itself being questioned. Rather than seeking, as in the ‘modern’ Welfare State or Industrial State, to take certain key economic and social activities out of the market in the name of the general welfare, so-called ‘competition states’ are increasingly privileging the marketization and commodification of those activities in the name of international competitiveness. Furthermore, states are also marketizing and flexibilizing themselves internally, replacing the notion of public service by financial performance indicators and the so-called ‘New Public Management’ – what Bob Jessop has called ‘the hollowing out of the state’ and David Osborne and Ted Gaebler have called ‘reinventing government’. 16 Indeed, the role of democracy itself is under challenge, not only in terms of what actors expect of governments, but as to whether national, territorially-based institutional structures can be expected in the future to effectively aggregate and reconcile divergent individual and sectoral demands at all.17 At one level, these changes may be seen as part of a wider transnational restructuring of domestic political systems; transnationalization is a profoundly domestic political process, not just an ‘international’ one. But they also challenge the states system from without. The central mechanism of stabilization and ordering in the states system has usually been seen to be the operation of balances of power to counteract the ‘security dilemma’ – that is, the tendency of particular states, in order to increase their own security, to engage in activities which directly or indirectly threaten the security of other states, leading to a vicious circle or negative-sum game and reducing security all round. But the end of the Cold War did not result so much from the end of a particular balance of power – the bipolar relationship between the two post-war superpowers – as from the increasing ineffectiveness of interstate


balances of power generally to regulate the international system. This has not entailed a simple replacement of competition for military security by a new competition for ‘economic security’, but rather a realization that the kind of security that could be based on the simple interaction of unitary nation-states was itself a cause of even greater insecurity. This sense of insecurity – symbolized not only from above, by the general threat of nuclear annihilation, but also from below, by the rise of civil wars, tribal and religious conflicts, terrorism, civil violence in developed countries, the international drugs trade and so on – has led to a growing belief that security itself, the raison d’être of the states system, can no longer be guaranteed by that system, and that alternative means must be found. New incentives are being created for political, social and economic groups to defect from the interstate system rather than looking to that system for stability and relative peace.18 Although specific changes may take place, of course, the problem of whether change overall is fundamental and far-reaching enough to be paradigmatic – that is transformative change – will depend upon the balance of forces between two types of actors or agents: on the one hand, those who routinely reinforce existing structural forms and practices, at best engaging in adaptive behaviour; and on the other hand, those who have the strategic consciousness and structural potential to generate and reinforce new forms and practices – the institutional entrepreneurs of a globalizing world. Of course, although institutional entrepreneurs might be expected to act in ways which challenge the structure, they also may for various reasons, including cultural and ideological motives as well as calculations of short-term gains, not be able, or not choose, to act in such ways. Finally, of course, pursuing structural alternatives which may in theory be possible may prove either too ambitious, on the one hand, or too amorphous and fragmented, on the other, to form an effective foundation for those agents’ strategic or tactical calculations. In other words, the most strategically situated actors may not in fact end up acting in such a way as to instigate or shape real political change. Do particular (individual and/or group) agents have the potential to become genuine institutional entrepreneurs, and are they likely to actualize that potential? In this context, economic agents as such are not likely to be the main drivers of systemic change. Despite their own key strategic location in a context of rapid economic change, it is unlikely that the more powerful among them will seek to promote a wider political paradigm shift. The reason is, of course, because economic agents depend on the existence of a stable political order to


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provide security, establish property rights, enforce contracts and the like. Thus economic agents themselves are most likely to continue to adopt adaptive forms of behaviour, for example, promoting a dialectic of regulatory competition and cooperation in the financial market sector, supporting the continuing reduction of trade barriers and the consolidation of international regimes such as the World Trade Organization and fora like the G-7 and so on. They are always crucial actors, however, in promoting the discourse of globalization and in pressuring state actors to adapt their policies too. In this context, pressures on political agents to act as institutional entrepreneurs are likely to increase. Politicians and bureaucrats are still expected to act as institutional entrepreneurs. Their authority and legitimacy have depended upon their role as upholders (and designers) of constitutions and institutional systems, their capacity to use what neo-Marxist analysis calls ‘non-economic coercion’ to achieve collective action, their role in protecting and furthering the national interest vis-à-vis foreigners (even to the point of expecting citizens to go to their deaths in its name), and their manipulation of the symbols of elemental social bonds, belonging, loyalty and so on. Political agents are expected to combine carrots and sticks in the pursuit of, ideally, collective goals (or at least the goals of dominant groups) while minimizing threats of ‘exit’ or ‘free-riding’. At the same time, that very authority and legitimacy are inextricably intertwined with the sovereign character of state power. Of course, they suffer from the growing disillusionment with governments, politicians and bureaucrats generally resulting from the increasing political immobilisme and poverty of public policy which transnational constraints impose on publicly visible, formal officials. Furthermore, traditional interest groups, especially sectoral pressure groups, are increasingly divided amongst themselves along transnationallyrooted fault lines. Many domestically-oriented interest and pressure groups are increasingly ‘out of the loop’, condemned to pursue politically problematic goals such as protectionism and open to marginalization as obsolete representatives of the old left or the populist right. Transnationallylinked interest groups, on the other hand, are better able to use their influence on a number of different domestic and transnational levels at the same time. It is at this level where political agents do play a key entreprenurial role, by acting as intermediaries between transnational pressures and interests and domestic pressures and interests. Probably the most important single category of political actors in this respect includes those state actors who are increasingly involved with and


bound up in transgovernmental networks. But the capacity of particular political agents to act is still inextricably intertwined with the maintenance of state institutions and national discourses. State actors, in particular, are not about to deconstruct the state itself and design transnational constitutional processes to replace it. Indeed, as globalization develops the weight of state interventionism actually increases, often significantly. Whether enacting and enforcing new insider trading laws, imposing welfare-to-work schemes, giving greater independence to central banks, or whatever, the competition state does not merely deregulate or liberalize; it becomes the chief policeman on behalf of the international markets. Therefore while the form and functions of the state are being dramatically challenged the state as a set of authoritative institutions will not as such be fundamentally left behind.

Conclusions: taking the wheel? Thus globalization involves many diverse levels of internationalization and transnationalization, without an overall shape or logic of its own, and without a readily identifiable or wholly credible set of institutional entrepreneurs to give it coherence or stable values. Its very complexity makes it a volatile and unpredictable process, inchoate and difficult to assess in normative terms, much less to steer in practice. Thus it is altogether possible that no short-term solution will be forthcoming. Pressures on the nation-state/states system will cause that system to erode and weaken without providing enough in the way of structural resources to any category of agents (or coalition of categories) to effectively shape the political globalization process. In other words, no group or coalition of groups will be at the steering wheel of change either in domestic politics or in the international system, and competition between groups will in turn undermine the capacity of any one of them to exercise such control. Perhaps globalization is leading not to a coherent political project but to an amorphous, multilayered, multiple-identitied world more analogous to the medieval era. To avoid that eventuality, it will be crucial for political scientists not to bury our heads in the sand, but actually to invent a more humane political project for a globalizing world. At one level, as the New York Times columnist Thomas L. Friedman has written (14 November 1997), it will be crucial to translate values such as the provision of welfare from the national to the global level – ‘a politics that can show people the power and potential of global integration while taking seriously their need for safety nets to protect them along the way.’ Another


31

dimension may be the reconstruction at a transnational level of a capacity to regulate capitalism not merely in the interests of capitalists, but in the interests of ordinary people. In both cases, what is required is a reconstitution and revivification of the concept of the public interest, without limiting the capacity to pursue that interest to the governments of states. We must neither meekly surrender to globalization nor blindly resist it. Ultimately we must return to where we started from in this chapter – we must politicize the global in new and intellectually creative ways. What we need above all is a new understanding of political philosophy freed from the restrictions of the national frame of reference – an understanding that will eventually enable us to control globalization and shape it according to consciously applied human values, that is, politically. Only then we can globalize the political.

Notes *An earlier version of this chapter appeared in New Political Economy, 4, no. 1, 1999. 1 Peter Dicken, Global Shift: Transforming the World Economy (London: Paul Chapman, 3rd edition 1998), p. xiii. 2 Herman M. Schwartz, States versus Markets: The Emergence of a Global Economy (London: Macmillan, 2nd edition 2000); Hendrik Spruyt, The Sovereign State and Its Competitors: An Analysis of Systems Change (Princeton, NJ: Princeton University Press, 1994). 3 Alfred D. Chandler Jr, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, MA: Harvard University Press, 1990). 4 Eric J. Hobsbawm, Industry and Empire (Harmondsworth, Mddx.: Penguin, 1969). 5 John Gerard Ruggie, ‘International Regimes, Transactions, and Change: Embedded Liberalism in the Post-war Economic Order’, in Stephen D. Krasner (ed.), International Regimes (Ithaca, NY: Cornell University Press, 1982), pp. 195–231. 6 Philip G. Cerny, ‘Restructuring the Political Arena: Globalization and the Paradoxes of the Competition State’, in Randall D. Germain (ed.), Globalization and Its Critics: Perspectives from Political Economy (London: Macmillan, 2000), pp. 117–38. 7 Robert D. Kaplan, The Ends of the Earth: A Journey at the Dawn of the 21st Century (London: Macmillan, 1997). 8 Alvin Toffler, Future Shock (London: Pan Books, 1971). See also Ian R. Douglas, ‘Globalization as Governance: Toward and Archaeology of Contemporary Political Reason’, in Aseem Prakash and Jeffrey A. Hart (eds), Globalization and Governance (London: Routledge, 1999), pp. 134–60. 9 Samuel P. Huntington, ‘The Clash of Civilizations’, Foreign Affairs, 72(1), no. 1 (Summer 1993) 22–47.

32 Contextualizing Turbulence 10 Stanley H. Hoffmann, ‘Commentary’, in Hoffmann (ed.), Contemporary Theories in International Relations (Englewood Cliffs, NJ: Prentice-Hall, 1960). 11 Charles de Gaulle, Vers l’armée de métier (Paris: Berger Levrault, 1934). 12 Charles de Gaulle, press conference, 9 September 1965. 13 Pierre Favre, Naissances de la science politique en France (1870–1914) (Paris: Fayard, 1989). 14 See Paul Hirst and Grahame Thompson, Globalization in Question? The International Economy and the Possibilities of Governance (Oxford: Polity Press, 2nd edition 1999). 15 Robert O. Keohane and Joseph S. Nye Jr, Power and Interdependence (Boston: Little Brown, 1977). 16 Bob Jessop, ‘The Future of the National State: Erosion or Reorganization? Reflections on the West European Case’, paper presented to the conference on Globalization: Critical Perspectives, University of Birmingham, 14–16 March 1997; David Osborne and Ted Gaebler, Reinventing Government: How the Entrepreneurial Spirit is Transforming the Public Sector, from Schoolhouse to Statehouse, City Hall to the Pentagon (Reading, MA: Addison-Wesley, 1992). 17 Philip G. Cerny, ‘Globalization and the Erosion of Democracy’, European Journal of Political Research, 26 (no. 1) (August 1999) 1–26; Mary Ann Haley, Freedom and Finance: Democratization and Institutional Investors in Developing Countries (London: Palgrave, 2001). 18 Philip G. Cerny, ‘The New Security Dilemma: Divisibility, Defection and Disorder in the Global Era’, Review of International Studies, 26 (no. 4) (October 2000) 623–46.

2 Rethinking Development Inside Political Economy Anthony Payne

This chapter seeks to offer a way of rethinking the concept of development. It advances the sweeping, and no doubt somewhat controversial, thesis that the study of development within the academy needs to be rescued from its traditional home in development studies and rethought within another branch of the social sciences, namely, the field of political economy. I hasten to add that I advance this argument in full acknowledgement that the making and unmaking of theory in the field of what one might call ‘old’ or ‘classical’ development studies has had a heroic history. Indeed in its heyday development studies was, in my view, an exemplar of all that was best about the social sciences – interdisciplinary, focused on big questions, engaged with them, political in the most generous sense of that word. As Björn Hettne has shown more elegantly than anyone else, classical development theory unfolded historically in dialectical fashion, oscillating between ‘mainstream’ and ‘counterpoint’ paradigms.1 As we all know, in the most dramatic phase of that history modernization theory and dependency theory fought each other to a virtual standstill. By the time that moment was reached we could see that each body of theory had the reverse defect of the other: an excessive endogenism in the case of the modernization school, an excessive exogenism in the case of the dependentistas. There was created, in short, an ‘awkward theoretical vacuum’ in the field. 2 This sense that development studies had lost its way, became the academic orthodoxy of the 1980s and was persuasively captured by David Booth’s suggestion that an ‘impasse’ had been reached.3 In response to the impasse, some analysts (of which I was one, albeit as a relatively new entrant) in effect withdrew from the field and transferred their intellectual energies to wider questions of (international) political economy. Within the field, as again is well known, mainstream 33


neo-liberal thinkers seized the moment to proclaim that development was attainable all over the world, provided that the ‘market’ was allowed to assert itself over the ‘state’. 4 In very different style, representing the counterpoint, postmodernists advanced what was, to all intents and purposes, an anti-development position, turning towards culture and dismissing existing notions of development as ‘Eurocentric’ in their approval of technology, innovation and growth. 5 I do not intend to say much at all about these lines of argument, other than simply to observe that neither, in my judgement, offers a very subtle purchase on the complexities of the real world. Clearly, and in contrast to past debates within the field, these two schools of thought (the contemporary successors, if you like, of the mainstream and radical traditions in development theory) did not, and still do not, talk creatively to each other and in that sense there manifestly now exists no central terrain of debate within development studies. So what went wrong? Deeper reflection suggests that classical development theory was undone, not so much by theoretical failures, but rather by fundamental changes in the world order, namely, the ending of the era of United States hegemony and the attendant disintegration of the Bretton Woods system of regulated capital movements and international trade. As Colin Leys put it, ‘if the end of the Bretton Woods system spelled the end of national Keynesianism, it also spelled the end of national development as it had hitherto been conceived’. 6 Although this new phase in the world order affected all states, arguably it proved particularly destabilizing for what we still then tended to call Third World states seeking to establish whatever limited room for manoeuvre they could in the international economy. The consequences for the well-being of these states and their peoples were largely what development studies spent the 1980s and 1990s studying and writing about, often, let it be quickly said, with great force and understanding. However, the key organizing insight to be drawn from all of this is surely very obvious: if development theory was undermined by seismic shifts in the world order within which it had to argue its case, then the necessary starting point for rethinking could only be found in a better grasp of the essential features of the new order. At root this is what pushes us towards (international) political economy, which as a field of study not only takes as its raison d’être that very task but has also derived much of its intellectual energy from the sheer extent of the ramifications of the post-Bretton Woods crisis in the international economy. The next part of this Chapter will therefore review – and take up positions in respect of – two of the most important debates to have

Development Inside Political Economy

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been conducted within political economy over the last few years. These are the debates about, first, the extent to which we can sensibly now talk of globalization and the meaning that we might attach to that term, and, second, the consequences that globalization allegedly has had for the role of states within a putatively globalizing world order. On the basis of these areas of discussion, and only on that basis, it will be possible in the final section to return to the concept of development and endeavour to set out how we might henceforth redeploy the term and continue to research the issue.

Globalization (International) political economy’s current preoccupation with the notion of globalization was preceded by a founding concern with the rise and fall of hegemonic state power, understood both generally as a matter to be theorized and specifically in relation to the particular position of the United States before and after the 1970s. It is important to mention this because the debate about globalization does not come out of nowhere, either historically or conceptually. However, the point has now probably been reached where globalization has been overdefined, with the term now used to launch a myriad of popular and academic analyses of the current global order. But it is too important to be set aside and is best understood, therefore, as a social process unfolding at the global level and driven forward by a mixture of forces (public and private, political and non-political) of which states (the traditional leading actors in international relations) are only one and by no means necessarily always the most important or influential. This sense of globalization as a very wide-ranging process is well captured in the initial working definition adopted by David Held, Anthony McGrew, David Goldblatt and Jonathan Perraton in their overview (the best to date) of the globalization debate. They say, specifically, that ‘globalization may be thought of initially as the widening, deepening and speeding up of world-wide interconnectedness in all aspects of contemporary social life, from the cultural to the criminal, the financial to the spiritual’. 7 From this conceptual starting point they then went on to identify and distinguish three broad schools of thought within the debate which they refer to as the ‘hyperglobalizers’, the ‘sceptics’ and the ‘transformationalists’. The latter ‘transformationalist’ account of globalization, which they derive particularly from the works of such as Anthony Giddens and James Rosenau, is much the most nuanced and persuasive and can be


set out briefly as follows. It begins from the assumption that globalization as a concept draws attention to the recent emergence of what Held and his co-authors describe as ‘a powerful transformative force which is responsible for a “massive shake-out” of societies, economies, institutions of governance and world order’. 8 Importantly, the direction of the shake-out remains uncertain, since globalization is understood as a long-term historical process characterized by contradictions, shaped by conjunctures and contested by increasingly aware and hostile political forces. There is thus no defined end-game, no single ideal-type of what a ‘fully globalized’ world would look like. Of course, certain trends can be picked out, at least up to the present point of analysis. ‘Transformationalists’ do generally argue that there now exist historically unprecedented levels of global interconnectedness in trade, finance, production, culture and much else. They believe that virtually all parts of the world are functionally part of a global system in one or more respects, although they do not suggest that this is bringing about global convergence or a single world society since they are struck by the force of new, emerging patterns of stratification in which some states and societies, or rather parts of some states and societies, are becoming enmeshed in the globalizing order whilst others are being marginalized. 9 In the same uneven way the spread of global cultural forms is also having the paradoxical effect of revitalizing various highly local values and ways of living. Any sense of a clear distinction between international and domestic, external or internal affairs also collapses in this vision of the process of change. As Rosenau puts it, politics takes place more and more ‘along the domestic–foreign frontier’.10 In short, we are offered by these various writers ‘a dynamic and open–ended conception of where globalization might be leading and the kind of world order which it might prefigure’.11 This is an attractive way of proceeding in its own right. But in adopting this particular formulation of globalization as the basis on which to take forward our overall argument, it is useful too to survey quickly the essential elements of the other two widely-articulated accounts of globalization identified by Held et al. and to note why each offers too rigid a view of the process. The problem with the ‘hyperglobalist’ account is that it exaggerates, both in the form offered by neo-liberals who effusively welcome the triumph of the market over states and by radicals or Marxists who bemoan what they see from their perspective as the ultimate victory of an oppressive capitalist system. 12 For all the difference of mood, they are agreed that globalization signals the arrival


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of a new era in human affairs which they see as largely created by a technological revolution in communications which has massively accelerated the exchange of people, ideas and money. A ‘borderless world’ has thus been brought into being, characterized by the establishment of proliferating transnational networks of production, trade and finance which operate according to a genuinely global dynamic. More generally, the ‘hyperglobalizers’ share ‘a conviction that economic globalization is constructing new forms of social organization that are supplanting, or that will eventually supplant, traditional nation-states as the primary economic and political units of world society’. 13 They thus foresee the inexorable rise and the rise of global governance, global civil society and global cultural motifs. There is no doubt that there are trends in these directions which need to be taken seriously. But they are not problematized sufficiently by the ‘hyperglobalizers’ and that is par for their course. The ‘hyperglobalist’ account of globalization is too determinist, too sweeping, too apolitical. The ‘sceptical’ thesis has different faults. It is associated particularly with the critique of Paul Hirst and Grahame Thompson and has been designed explicitly to bring globalization into ‘question’. 14 Their analytical way into this debate (their ‘trick’, if you like) has been to propose a highly demanding definition of the end-state of globalization, namely, a perfectly integrated global economy, against which evidence relating to the contemporary period, unsurprizingly perhaps, falls short. What it suggests, according to the ‘sceptics’, is no more than ‘heightened internationalization’ – in other words, intensified interactions between predominantly national economies, the conventional units of economic analysis. Even these, it is argued, do not significantly exceed the levels of economic interdependence witnessed historically at the end of the nineteenth century. In other words, globalization is more myth than new reality. The true ‘global corporation’ is still a rarity; national governments are far from immobilized, although they may have experienced a loss of nerve in the face of the powerful ideology of globalization. Global governance, if it is anything, is a façade behind which the most powerful western states continue to dominate the traditional international economic and political system. The line of argument is fairly trenchant and sufficed as a counter to some of the hyperbolic (and populist) early claims about globalization. However, the globalization debate has itself unfolded in a series of waves and the ‘sceptical’ account has, to a considerable extent, been overtaken by events and is now in real danger of appearing as if it has an irredeemably closed mind on the matter, regardless of how much or


how fast economic and political events still seem to move in a globalizing direction. In sum it is better, as indicated, to proceed on ‘transformationalist’ terrain. What this account offers is a strong sense of the main contours of the new structural context in which all economic, social and political actors have now unavoidably to operate. As we have seen, it insists methodologically on their capacity to alter that structure by their actions and, in so doing, to influence the process of globalization. To paraphrase Alexander Wendt (1992), as many have done, globalization is indeed ‘what we make of it’ and, of itself, cannot be said to cause anything. Nevertheless, an appreciation of the new reality of a globalizing (but not yet fully globalized) political economy is the first key building block towards a contemporary reconceptualization of development.

States In a related but equally relevant debate political economy has also devoted great attention to the matter of the vitality and capacity of states in just such a globalizing order. Many of the arguments mounted here have, to say the least, been rather crudely made – as either the ‘retreat or the return’ of the state, as Amoore et al. put it in a useful recent review of this literature.15 They set out three different schools of thought analogous to the three positions identified by Held et al. in relation to globalization. As they suggest, the initially dominant conceptualization viewed globalization as ‘seriously undermining the basis of the nation-state as a territorially bounded economic, political and social unit’.16 State authority was seen to have been variously diffused: ‘upwards’ to international institutions and transnational corporations, ‘sideways’ to global financial markets and global social movements, and ‘downwards’ to sub-national bodies of all shapes and sizes. In particular, states were deemed to have lost their old economic policy-making sovereignty and to have been reduced to competing with each other in the provision of the human and physical infrastructure that is now needed to attract footloose global capital. In the strongest, ‘hyperglobalist’ form in which this has been put, the nation-state has become irrelevant and is no longer, in the context of post-globalization, an appropriate unit of political analysis. 17 Against this interpretation, others have insisted, sceptically but every bit as firmly, that the decline of the state has been exaggerated. They have based their reading on the notion of ‘heightened internationalization’, rather than globalization, and assert accordingly that such global restructuring as has taken place has been driven


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by the interaction of national capitalisms. Moreover, these capitalisms, rather than necessarily converging in type, are marked, as they always have been, by different institutions, processes and cultures.18 As a consequence, states are held to continue to exercise considerable authority over their respective national economies and to contribute substantially still to the overall management of the global economy. Neither of these sets of arguments is very convincing when expressed in full-blown fashion. What is required is a more perceptive grasp of what has lately happened to the state in relation to the process of globalization. Fortunately a third, more nuanced, position has now been widely advanced and is much the most subtle and interesting. In the words of Amoore et al. again, this suggests that ‘the usual understanding of a dichotomy between the state and globalization is an illusion, as the processes of global restructuring are largely embedded within state structures and institutions, politically contingent on state policies and actions, and primarily about the reorganization of the state’.19 This last phrase is the most significant, for the point being made here was precisely that the changing nature of the state is at the very heart of the process of globalization. The state is neither transcended nor unaltered in some overarching, all-encompassing fashion: instead each state is finding that its relationship to key social forces both inside and outside of its national space is being restructured as part and parcel of all the other shifts to which globalization as a concept draws attention. As indicated, the claim that the state has been reorganized has now been taken forward in a variety of forms. Robert Cox initially described the process as the ‘internationalization of the state’, understood as a process that ‘gives precedence to certain state agencies – notably ministries of finance and prime ministers’ offices – which are key points in the adjustment of domestic to international economic policy’. 20 Jan Aart Scholte has lately suggested that globalization has yielded ‘a different kind of state... [which has]...on the whole lost sovereignty, acquired supraterritorial constituents, retreated from interstate warfare (for the moment), frozen or reduced social security provisions...and lost considerable democratic potential’.21 From the left, Peter Burnham has highlighted the widespread shift in the politics of economic management in advanced capitalist societies from ‘politicized management (discretion-based)’ to ‘depoliticized management (rules-based)’,22 the latter being characterized by attempts to reduce the former political nature of economic decision making and reposition it as far as possible at one remove from government. Peter Evans, reflecting on ‘stateness’ in an era of globalization, has stressed the centrality of the hegemony of


Anglo-American liberal ideology in limiting belief in the efficacy of state action and charted the ‘project of constructing a leaner, meaner kind of stateness’23 which has lately become associated with the ‘Third Way’ thinking of the Clinton, Blair and Schröder administrations in the United States, the United Kingdom and Germany respectively. Linda Weiss in her work has similarly insisted on the variety of ‘state capacities’ and argued that ‘adaptation is the very essence of the modern state by virtue of the fact that it is embedded in a dynamic economic and inter-state system’. 24 Although in some states certain policy instruments, particularly those associated with macroeconomic adjustment strategies, may be enfeebled by globalization, others, such as those related to industrial policy, may and do change in all manners of creative ways. One should therefore always look to a country’s governing institutions and expect differences according to national orientation and capability. The latter cautionary point is especially well taken. In his survey of what he called ‘the rise and rise of the nation-state’, Michael Mann rightly insisted that states have always varied greatly in their degree of democracy, level of development, infrastructural power, national indebtedness and regional location. He has asked: ‘can contemporary capitalism, even if reinforced by environmental limits, “cultural postmodernity” and demilitarization, render all this variation irrelevant, and have the same effects on all countries?’.25 His answer – emphatically in the negative – provides a warning against over-generalization, even about the thesis of the reorganization of the state. The patterns of change and continuity are simply ‘too varied and contradictory, and the future too murky, to permit us to argue simply that the nation-state and the nation-state system are either strengthening or weakening’.26 Nevertheless, what one can see through the gloom described by Mann is that the state remains crucial to contemporary economic and political practice and that one of the key future tasks for political economy must be the comparative analysis of state forms and the way they are being reorganized in different ways in different parts of the globe in response to the differing impacts of globalization on their modes of operation. To say this should not be thought to presume a simplistic statism or an over-preoccupation with states, a failing with which (international) political economy has long taxed traditional international relations analysis. On the contrary: it is only to note the obvious, which is that what is better described as the state–society relationship still remains central to any explanation in political economy. It is also the case, conveniently, that state theory in political analysis (if not in much


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international relations analysis) has always sought to embrace a view of the relationships between non-state actors and states, rendering it an attractively broad-based literature. I have also drawn attention in an earlier article in Millennium to the extent to which arguments in all three of the main traditions of state–society theory, namely, pluralism, elitism and Marxism, have lately converged in their thinking.27 This should not be taken to imply the creation of a theoretical consensus in this sub-field. But it does unquestionably suggest that political (and, by extension, political economy) analysis can now draw profitably upon a significant measure of intellectual agreement about how to think about the state. Pluralist, elitist and Marxist schools of thought all agree that the state needs to be located socially and disaggregated institutionally. They all also accept that the interests and/or social forces which limit the autonomy of the state, and the policy networks and communities through which state and other actors exercise their relative autonomy, are as likely to be transnational as national. All strands of state–society theory further acknowledge that the structural constraints imposed on state behaviour reflect both ideological and material sources of power. In sum, then, there is new common ground in contemporary theoretical trends in state–society theory and hence a wealth of intellectual tools with which to set about the dissection of particular state strategies and the general relationship of states to social and other forces at work within national political economies as well as within the global political economy as a whole. There is every reason to believe too that the notion of the state, necessarily understood as widely being reorganized, restructured, reengineered in conjunction with the current global shift, should remain at the centre of political economy enquiries, viewed still as a key political actor on the global stage. With this point duly made, we have in place the second building block of the required rethinking of development and can now return to the consideration of that very issue.

Development The task before us is thus to rethink the notion of development in the light of the interpretations of the globalization and state debates already offered. Here the good news is that, for some time now, useful insights – which can perhaps be built up into a new approach to development – have begun to be thrown up in the literature. It is true that no scholar or group of scholars has yet had the self-confidence, or


self-consciousness, to declare the birth of such a ‘new’ development studies in the title of a book, although Frans Schuurman did edit a collection as long ago as 1993 deliberately called Beyond the Impasse.28 Indeed, in the most important chapter in the book, David Booth indicated that he saw signs of a ‘new agenda’ emerging from the enormous expansion of actual field research undertaken in different development contexts.29 The cumulation of this work served, in his view, to reveal the thin empirical foundations on which much of the early dependency theory (in particular) rested. It was all too general, too dogmatic, too pessimistic and too class-reductionist. Put the other way round, it neglected gender, ethnicity, religion and culture; de-emphasized the local; and in a whole range of ways was insufficiently sensitive to the great diversity of situations in the so-called Third World. Leys subsequently criticized Booth and his colleagues for viewing the transcendence of the ‘impasse’ in essentially idealist terms – for substituting ‘development studies’ for ‘development theory’, as he put it. 30 However, good studies are a necessary prelude to good theory, which in turn is a necessary prelude to good practice, and so it was an important first step to have returned to the political economy of development, a stronger sense of variety and situation. It was on this basis that Björn Hettne thereafter moved the agenda a stage further. He argued in the mid-1990s that the problem for the field of development studies was that it had become ‘trapped somewhere between an obsolete “nation-state” approach and a premature “world” approach’. 31 A stance needed to be taken, he suggested, at a mid-point between these two extreme positions, thereby constituting a synthesis that would transcend the dichotomy of the successive endogenism and exogenism of previous modernization and dependency analyses. In his words, there were ‘no countries that are completely autonomous and self-reliant, and no countries that develop (or underdevelop) merely as a reflection of what goes on beyond their national borders’. 32 The key task for the future was ‘to analyse development predicaments stemming from the fact that most decision makers operate in a national space but react on problems emerging in a global space over which they have only partial and often marginal control.’33 In undertaking this analysis it was also necessary to appreciate that the decision makers in question had to react to forms of power that were ideological as well as materialist. Development studies has in fact always been better at grasping this than some other mainstream areas of political economy – dependency theory long ago incorporated discussion of cultural dependency or ‘colonialism of the mind’ – but it was important to acknowledge this


43

other form of power, especially given the many emerging new means of communication and knowledge dissemination by which the battle of world development ideologies was being conducted by the end of the 1980s. From these beginnings, the main features of a new or critical political economy of development can now be identified. It can be assembled, as it were, in four stages. First, it rejects the ‘exceptionalism’ of a special category of countries deemed to be in particular need of development and endeavours to recast the whole question of development as a universal question, as ‘a transnational problematic’ grounded in the notion that ‘all societies are developing as part of a global process’.34 Second, it focuses attention on development strategy, principally as still pursued by a national economy, society and/or polity, albeit within a global environment. Hettne himself can thus describe development as no more (but also no less) than ‘societal problem solving’, implying that ‘a society develops as it succeeds in dealing with predicaments of a structural nature, many of them emerging from the global context’.35 Third, it recognizes that such strategy necessarily involves the interaction, and appropriate meshing, of internal and external elements, even if in many cases the latter do seem to be increasingly overbearing. In this vein Philip McMichael has lately noted that ‘states still pursue development goals, but these goals have more to do with global positioning than with management of the national “household” ’.36 Fourth, it insists upon due recognition of variations of time, place and history in development predicaments, something which Stuart Corbridge called for a decade or more ago 37 and which, as pointed out earlier, was not characteristic of a lot of old development theory in both its modernization and dependency guises. To sum up these claims, then, development can be redefined for the contemporary era as the building by a country of a particular political economy, characterized by distinctive, domestic attributes and an appropriate, viable location within a globalizing world order. It is not necessary in this conceptualization to define the moral or ethical content of development, for this will always be contested ideologically, precisely in the way that competing notions of the ‘good society’ have always been debated over the centuries. The point is to allow for many types or forms of actual development. As again Hettne has reminded us, ‘the “three worlds” are disintegrating and development is becoming a global and universal problem ...too important to be left to a special discipline [development studies] with low academic status.’38 As redefined in this way, development is thus just as much a problem for the ex-hegemon


as the smallest ex-colonial territory, for the new industrializer as much as the former communist country in ‘transition’. As the editorial in the first issue of Progress in Development Studies, the newest academic journal to be devoted to these questions, put it in a simple and attractive formulation, ‘development is everywhere’.39 Definitions are not unduly difficult. The harder task, which still remains, is to specify how we are in practice to set about researching development when conceived in this way as the building by a country of a particular political economy. As it happens, however, there is already a substantial amount of good work on which we can draw. Interestingly, and perhaps revealingly, it comes from both sides of the old divide between study of the ‘developing’ and the ‘developed’ worlds. Now I refer to the relatively old ‘models of development’ literature and the much newer ‘models of capitalism’ literature. In its day the former strand was central to political economy. It reaches right back to studies of the various state-led strategies of importsubstitution industrialization pursued in Latin America in the 1960s and 1970s. Some studies emphasized institutional variation from an explicitly historicist perspective;40 others, notably the highly influential work of Cardoso and Falletto, operated within a dependency tradition, but sensitively so, seeking to deploy the concept of dependence ‘to make empirical situations understandable in terms of the way internal and external structural components are linked’ and yet still trying ‘to demonstrate that the historical situation in which the economic transformations occur must be taken into account.’41 Similar analytical themes, notably the character of state institutions and their degree of autonomy vis-à-vis the relative strengths of domestic and external class forces, were also subsequently addressed in the African context, particularly in discussion of Tanzanian socialism and Kenyan capitalism, 42 and then reinterpreted yet again in relation to the economic successes enjoyed by the ‘newly industrializing countries’ of East Asia during the 1980s. These achievements were aggressively claimed by the neoliberals as evidence of the virtues of a market-led strategy until the research of Clive Hamilton, Gordon White, Alice Amsden, Robert Wade and others served cumulatively to undermine such an assertion.43 In fact, these studies demonstrated the opposite of the neo-liberal argument, namely, that forceful and focused economic intervention by a strong state over a sustained period of time and in the context of a supportive social structure and a growing international economy was a necessary developmental ingredient. All in all, what this rich, but now largely quiescent, literature showed was the considerable merits of analyses of


45

particular development strategies, in whatever preferred mode, whether institutionalist or Marxist, which sought to integrate an understanding of the domestic state–society context with a grasp of the constraints and opportunities posed by the external environment. The latter strand of writing, that which has addressed ‘models of capitalism’ in the developed, industrial world and which has been much more fashionable of late within political economy, can in fact be dissected along much the same lines. In particular, it too is marked by a tension between its (dominant) institutionalist and (critical) Marxist wings. For most contributors to this literature institutions are seen as both socially embedded and nationally constrained. They are not produced randomly but reflect a ‘logic in each society [which] leads institutions to coalesce into a complex social configuration.’44 By its nature such a configuration is not easy to specify precisely, although most interpretations have lately stressed the importance of variables such as labour skills and management, systems of industrial relations, financial markets, industrial structures and political system. 45 An interesting variation on the general theme is provided by Peter Evans’s concept of ‘embedded autonomy’ which he identifies as the defining variable in patterns of industrial transformation in a study which focused on the computer industries of three countries conventionally deemed to be ‘developing’, namely, India, Brazil and South Korea.46 He characterized the ‘developmental states’ of these countries as constituted by the coexistence of a certain kind of autonomy and yet at the same time embeddedness in a set of social ties which allow for continual renegotiation of policy. These institutionalist perspectives have, however, recently been subjected to powerful criticism from a Marxist direction by David Coates who argues that, for the most part, they lack a conception of the class underpinnings of all institutional arrangements under the capitalist system. Accordingly, in his view, ‘the pattern of different performance between national capitalist economies . . . is best respecified as a set of shifting national trajectories on a map of combined but uneven development.’47 Even so, his actual account of contemporary models of capitalism, which focuses on the United States, the United Kingdom, West Germany, Japan and Sweden, gives only passing consideration to the way that the national basis for capitalist organization may have been affected seriously by recent globalizing trends. In this respect at least his approach is no advance upon institutionalist writing. Nevertheless, from our perspective concerned with rethinking development in the context of globalization the argument to emphasize here


is what Nicola Phillips has referred to as ‘the striking similarity between the research agendas laid out in influential strands of the development literature and the agenda associated with the comparative capitalsims literature.’48 What can be drawn from them is surely a strong sense of the key foundational components of a development strategy upon which analysis must necessarily focus. These must include, as core areas of enquiry, the nature of the institutions of the state within the country pursuing the strategy; the economic and social basis of the state and the domestic forces which either sustain it or challenge it; and the positioning, actual and intended, of the national political economy within the wider global order. An additional important consideration may, or may not, be the ideological claims made, or not made, on behalf of the particular strategy in question. These matters constitute the strategic framework within which specific policies (and so on macroeconomic, industrial, educational, foreign) are then pursued. As indicated in the earlier discussion, these are also all universal questions that can be applied to all types of strategy and country. They offer what Hettne (again) has described as ‘an authentic universalism’ in contradistinction to the putative universalism of modernization or neo-liberalism – in other words, a universalism derived from the commonality of the problem, rather than the proposed solution.49

Conclusion I suggest in brief conclusion that this is a viable way forward. The approach re-embeds development, conceived essentially as strategy, within an integrated analysis of structure (globalization) and agency (states, or states–societies). In that sense it constitutes what I like to call a ‘new political economy’ of development. It can be carried into research practice in two complementary ways, one emphasizing the comparative, the other emphasizing the international. The former would explore further the ‘models’ mode of analysis, going beyond the false dichotomies that have hitherto separated study of the shape and form of the multiple national political economies that exist on both sides of the old developing/developed line. The latter would investigate the international political tensions and conflicts which derive from the pursuit of different national development strategies and which then get played out in arenas such as international financial, trade and environmental negotiations. What we would be doing would not be ‘development studies’, as we used to know it, but rather ‘comparative’ and ‘international’ political economy respectively. But we would


47

still be learning about development and conceivably to greater effect than of late.

Notes 1 B. Hettne, Development Theory and the Three Worlds: Towards an International Political Economy of Development (Harlow: Longman, 1995), p. 30. 2 Ibid., p. 104. 3 D. Booth, ‘Marxism and Development Sociology: Interpreting the Impasse’, World Development, 13, no. 7 (1985), 761–87. 4 See J. Toye, Dilemmas of Development: Reflections on the Counter-revolution in Development Theory and Policy (Oxford: Basil Blackwell, 1987). 5 W. Sachs (ed.), The Development Dictionary: A Guide to Knowledge (London: Zed Books, 1992). 6 C. Leys, ‘The Crisis in “Development Theory”’, New Political Economy, 1, no. 1 (1996) 41. 7 D. Held, A. McGrew, D. Goldblatt and J. Perraton, Global Transformations: Politics, Economics and Culture (Cambridge: Polity Press, 1999), p. 2. 8 Ibid., p. 7. 9 See A. Hoogvelt, Globalization and the Postcolonial World: The New Political Economy of Development (London: Macmillan, 1997). 10 See J. Rosenau, Along the Domestic–Foreign Frontier: Exploring Governance in a Turbulent World (Cambridge: Cambridge University Press, 1997). 11 Held et al., Global Transformations, p. 7. 12 K. Ohmae, The End of the Nation State (New York: Free Press, 1995): W. Greider, One World, Ready or Not: The Magic Logic of Global Capitalism (New York: Simon Schuster, 1997). 13 Held et al., Global Transformations, p. 3. 14 P. Hirst and G. Thompson, Globalization in Question: The International Economy and the Possibilities of Governance (Cambridge: Cambridge University Press, 1996). 15 L. Amoore, R. Dodgson, B.K. Gills, P. Langley, D. Marshall and I. Watson, ‘Overturning “Globalization”: Resisting the Technological, Reclaiming the “Political”’, New Political Economy, 2, no. 1 (1997) 184. 16 Ibid., 185. 17 K. Ohmae, The End of the Nation State. 18 J. Zysman, ‘The Myth of the Global Economy: Enduring National Foundations and Emerging Rational Realities’, New Political Economy, 1, no. 2 (1996) 157–84. 19 Amoore et al., p. 186. 20 R.W. Cox, ‘Social Forces, States and World Orders: Beyond International Relations Theory’, Millenium: Journal of International Studies, 10, no. 2 (1981) 146. 21 J.A. Scholte, ‘Global Capitalism and the State’, International Affairs, 73, no. 3 (1997) 452. 22 P. Burnham, ‘The Politics of Economic Management’, New Political Economy, 4, no. 1 (1999) 43–4. 23 P. Evans, ‘The Eclipse of the State? Reflections on Stateness in an Era of Globalization’, World Politics, 50, no. 1 (1997) 85. 24 L. Weiss, ‘Globalization and the Myth of the Powerless State’, New Left Review no. 225 (1997) 17.

48 Contextualizing Turbulence 25 M. Mann, ‘Has Globalization Ended the Rise and Rise of the Nation-state?’, Review of International Political Economy, 4, no. 3 (1997) 474. 26 Ibid., p. 494. 27 A.J. Payne, ‘The New Political Economy of Area Studies’, Millenium: Journal of International Studies, 27, no. 2 (1998) 253–73: D. Marsh, ‘The Convergence Between Theories of the State’, in D. Marsh and G. Stoker, (eds), Theory and Methods in Political Science (London: Macmillan, 1995). 28 F.J. Schuurman, Beyond the Impasse: New Directions in Development Theory (London: Zed Books, 1993). 29 D. Booth, ‘Development Research: From Impasse to New Agenda’ in F.J. Schuurman, (ed.) Beyond the Impasse: New Directions in Development Theory (London: Zed Books, 1993). 30 C. Leys, The Crisis in ‘Development Theory’, p. 44. 31 B. Hettne, Development Theory and the Three Worlds, p. 262. 32 Ibid. 33 Ibid., p. 263. 34 J.N. Pieterse, ‘The Development of Development Theory: Towards Critical Globalism’, Review of International Political Economy, 3, no. 4 (1996) 543. 35 B. Hettne, Development Theory and the Three Worlds, p. 263. 36 P. McMichael, Development and Social Change: A Global Perspective (Thousand Oaks: Pine Forge Press, 2000) p. 150. 37 S. Corbridge, ‘Post-Marxism and Development Studies: Beyond the Impasse’, World Development, 18, no. 5 (1990) 634. 38 B. Hettne, Development Theory and the Three Worlds, p. 266. 39 R.B. Potter, ‘Progress, Development and Change’, Progress in Development Studies, 1, no. 1 (2001) 3. 40 See I. Roxborough Theories of Underdevelopment (London: Macmillan, 1979). 41 F.H. Cardoso and E. Falletto, Dependency and Development in Latin America (translated by M.M. Urquidi) (Berkeley: University of California Press, 1979), pp. 15, 172. 42 V. Randall and R. Theobald, Political Change and Underdevelopment: A Critical Introduction to Third World Politics (London: Macmillan, 1998). 43 C. Hamilton, Capitalist Industrialism in Korea (Boulder: Westview Press, 1986): G. White, Development in East Asia (New York: St. Martin’s Press, 1987): A. Amsden, Asia’s Next Giant: South Korea and Late Industrialism (Oxford: Oxford University Press, 1989): R. Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Princeton: Princeton University Press, 1990). 44 J.R. Hollingsworth and R. Boyer (eds), Contemporary Capitalism: The Embeddedness of Institutions (Cambridge, Cambridge University Press, 1997), p. 2. 45 Ibid. 46 P. Evans, Embedded Autonomy: States and Industrial Transformation (Princeton: Princeton University Press, 1995). 47 D. Coates, Models of Capitalism: Growth and Stagnation in the Modern Era (Cambridge: Cambridge University Press, 2000), p. 227. 48 N.J. Phillips, ‘The Political Economy of Capitalist Development’, unpublished manuscript, (University of Warwick, 2000). 49 B. Hettne, Development Theory and the Three Worlds, p. 15.

3 States and World Order Andrew Gamble

Some of the more enthusiastic proponents of globalization rushed to proclaim in the 1990s that the era of the nation-state was over, and predicted that nation-states would wither away, to be replaced by new non-political forms of economic interdependence.1 Many who do not take this view still concede that something fundamental has changed in the way the global economy is organized in the last 30 years, which has increased the external constraints on national economies and national governments.2 Globalization may not be leading to an instant race to the bottom, but many believe it has increased the pressure for convergence to certain international norms, because the penalties for not conforming have become more severe. In response various forms of new regionalism have begun to emerge, intended both to support globalization and to provide new political capacities to moderate its excesses.3 Others again dispute the notion that globalization is new, arguing instead that it consists of the kind of changes which regularly occur in an international economy. This economy remains fundamentally intergovernmental in the way in which it is organized.4 Of these three perspectives on globalization, the intergovernmental perspective is the one which detects the least threat to the prospects for states of all sizes retaining their independence and authority. Particular states may decline and run into political and economic difficulties, but others will prosper. There will be no general tendency for small states or any other state to be steamrollered by globalization. The other two positions however detect greater dangers for the future of states, particularly small states, since they argue that a more interconnected economy does entail a reduction in the autonomy which states have hitherto enjoyed to pursue policies of their own choosing, although they differ on the degree. The more open the global economy becomes, the more all states 49


are obliged to pursue policies which keep a tight lid on their social costs, and ensure their competitiveness.5 This position however, has long been the lot of states, particularly of smaller states. What precisely has globalization changed? What new pressure has it created which these states can no longer handle? The answer that is usually given focuses on the intensification of competition. Katzenstein noted already in the 1980s that a combination of an export drive from the rapidly industrializing East Asian countries, enjoying much lower unit costs than the small states, and increasing competition from the established large countries, was already threatening many of the successful industries which had been built up over the previous 30 years.6 On this reading small states in particular have been obliged one by one to come to terms with a global economy which is no longer as comfortable for them as it was in the 1960s. Instead they must now accept a significant dilution of their labour market and welfare policies in order to safeguard jobs and profits, and their particular niche in the global market.7 In the new triumphalist era of American resurgence in the 1990s, the superiority of the Anglo-American model of capitalism was once more proclaimed, and the space for alternative forms of capitalism let alone alternatives to capitalism was declared vacant. Globalization however is not a single process boring its way to a single result. It is a bundle of different trends, not all of which are necessarily inimical to the prospects for state autonomy. One tendency is for increasing economic connectedness in the global economy to undermine some of the powers and capacities of existing nation-states. This has the effect of encouraging them to fragment, in the search for more local and therefore more effective jurisdictions. The more closely attuned an administration can be to local conditions and local demands, the more it can hope to provide a better business environment than its rivals, and so be more prosperous through its ability to attract skilled labour and investment capital. This tendency appears to support the continued existence of small states, which seem well suited to this more decentralized and flexible environment required by business. Since they are small already small states do not need to get much smaller to be effective players in the global economy. It is the large states which need to fragment, either by devolution, or a more effective federalism, or by break-up altogether.8 Here the spirit of the age seems entirely to be with small states. It is the lumbering colossi of the old international state system which appear too clumsy for the new world of globalization. A second tendency, however, is for convergence on norms, standards and institutions to regulate the global economy, pursued through

States and World Order 51

a multitude of different international agencies. The intention is to create rules to which all nations sign-up and which therefore become a common framework for all economic agents. The aim is to create the widest possible economic space to which everyone in principle has access and where everyone plays by the same rules. This homogenization is already far advanced and is one of the most important aspects of globalization which threatens the existence of all states. It is creating a complex structure of overlapping jurisdictions in which all states are to a greater or lesser extent enmeshed, a new medievalism. 9 Once international accounting standards have been agreed, for example, they are no longer subject to determination by nation-states, and jurisdictions grow larger not smaller. A third tendency, of still greater significance for the future of states, is that globalization has also been accompanied by a pronounced regionalization of economic activity, and has encouraged the formation of regionalist projects, or given a spur to those that already exist, such as the European Union.10 This trend seems a major threat to states everywhere, since these regionalist projects are either organized around one very dominant large state, which becomes a regional hegemon, as with the United States in NAFTA, or in East Asia around Japan, and possibly in the future around China. Europe in the post-war period has lacked a regional hegemon, which may have been one of the crucial conditions for the survival of the distinctive corporatist model of some states. What Europe does have, however, is a very special regionalist project, the process of European integration, which has slowly created the conditions for European unity, whose end-point is uncertain, but which many see as the creation of a new large state, a federation, a United States of Europe, or at least a federation of nation states. Where there is a regional hegemon, states are exposed to direct political and economic pressure to conform to its will. In the case of European integration, they risk being absorbed stage by stage into a new political entity over whose policies they only have very limited control.

Conceptions of world order The possibilities confronting states in the present era can be illuminated by looking first at different conceptions of the nature of the capitalist economy and the manner in which it operates, which are expressed in different conceptions of world order and how dislocations of that order which take the form of economic crises should be handled, and then assessing the nature of globalization as a political discourse, and the


different perspectives within it. Three conceptions of world order have been of particular importance in framing the political economic choices which confront states in the world capitalist economy, territorial, cosmopolitan and hegemonic, and these will be briefly outlined. Territorial order The territorial conception of world order is centred on sovereign states as the basic building block of the international system. The world economy is not a global economy but an international economy, one mediated through the separate and independent jurisdictions of nation-states. If there is order in this world it comes about through the calculations of mutual benefit to be derived from cooperation between sovereign states. In this way a balance of power arises which ensures reasonable stability, but it is a stability which is always fragile and capable of being undermined, if states review their interests and decide that they are not being served by existing arrangements. Intergovernmental cooperation can be extensive, provided it is seen as in the interests of each independent government taking part in it. From the perspective of territorial order economic crises, particularly when these take a financial form, are the result of a loss of control by sovereign states over markets. The problem is invariably seen as one of inadequate regulation, the failure of governments either individually or in concert with others to exert sufficient control over the international economy. Economic agents have created patterns of activity which have escaped the control of governments. The response to these problems is to find ways of restoring the control of each sovereign state over these activities, by increasing regulation. This may involve enforcing existing powers, or creating new institutions, either intergovernmental or national in their scope. The most common response has therefore been to reassert the powers of the sovereign state and increase regulation, for example by imposing exchange controls, seeking to draw a tight circle around the national economy to allow internal solutions to the crisis to be found. In the past such policies have generally been associated with national protectionism, and with the emergence of closed economies, either at a national or regional level. Crises are interpreted as threats to national sovereignty, which are best dealt with by a reassertion of that sovereignty over the offending markets. If this involves retreating from international agreements and regimes, and reducing openness to the international economy, that is considered a necessary price to pay. In the 1930s this response to the financial crises of 1929–31 brought down the gold standard and the liberal trading order, and in its place


arose a system of regional blocs and regional currencies, characterized by higher tariffs and the imposition of other obstacles to open trade. National control was reasserted over financial markets, and an era of national protectionism was inaugurated in which the national economy became the central focus of economic policy. New doctrines such as Keynesianism arose which legitimated this policy turn and provided a rationale for economic management and an active state, making the national economy the main object of policy and the strengthening of its productive base, the main priority. Since the re-emergence of crises in the 1970s there has been a revival in national protectionism, but in a much weaker form than in the 1930s. In general the territorial conception of world order has been less influential than in some earlier periods. Although there was a rise in protectionism during the 1970s it remained modest, and there was no general breakdown in the global economy. There was a general refusal by all states, particularly small states, to embrace protectionism as a solution to their problems of adjustment in the 1970s and 1980s. 11 Large states were more prone to succumb. Protectionism does remain in the armoury of states, however, large or small, and can be used in extremis. A recent example was the recent Asian financial crisis, when states such as Malaysia responded to the serious situation facing them by reasserting their national sovereignty and sought to insulate their national economies from external pressures, imposing exchange controls amongst other measures. But despite the extreme nature of the financial crisis which engulfed many economies in East Asia as well as subsequently in Latin America, there was no general retreat to protectionism, and the crisis measures have proved temporary; even with such a severe crisis there has been no attempt by states as there was in the 1930s to attempt to cut themselves off from the global economy; instead they have kept their channels open and negotiated their way back at the first opportunity. This has indeed been the pattern of response in every financial crisis since the generalized recession of 1974–75. The contrast with the 1930s could not be starker. Many have continued to predict the eruption of a major financial crisis which will finally destroy the political basis for the continuance of the post-1945 liberal economic order in the same way that the 1929–31 crisis finally destroyed the nineteenth century liberal economic order. But it has not so far happened, and the liberal economic order has survived its greatest test so far. Territorial order however remains an indispensable characteristic of the contemporary world order, because of the continuing importance and relevance of national jurisdictions within it. In moments of extreme crisis in the


system the possibility of a resort to national jurisdictions and national sovereignty to seal national economies from the global market remains a possibility. That it has not so far happened is testament to the material, institutional and ideological strength of the other two conceptions of world order.

Cosmopolitan order Cosmopolitan order, in marked contrast to territorial order, emphasises not state sovereignty but either market sovereignty, or the sovereignty of capital accumulation. There are many different variants of the cosmopolitan conception of world order – including neo-liberal, Marxist, and Austrian strands – but what all of them share is the assumption that the state and politics are subordinate to the way in which the economy is organized, whether this is the spontaneous market order of Hayek or the system of production relations of Marx. These structures determine how the society as a whole evolves and they supply its ordering principles. This means that states have to operate within fairly tight constraints, imposed by the way in which markets and accumulation work. They do not have much discretion in determining their responses. The growth of a global system of production and exchange from the very first tended to run ahead of states and national jurisdictions. It ended up undermining and circumscribing them. It has not destroyed them, but it has created powers, resources, networks and institutions which go far beyond them, and which it is impossible for states to control without destroying the conditions for economic growth and prosperity, and with them the fiscal basis for their own existence. World order is cosmopolitan rather than national in this sense. It is based not on states and intergovernmental cooperation, but on the logic of markets and capital accumulation. Economic and financial crises are understood in a number of ways within this perspective. There is firstly the neo-liberal position, which is perhaps the dominant political economy perspective of the present period. At one extreme, neo-liberals are hyper-globalists, believing that globalization is sweeping away all obstacles to free competition and frictionless markets. The main obstacles that remain are nation-states and their attempts to safeguard and police their territorial jurisdictions. For these neo-liberals the cause of crises is to be sought in the powers and activities of governments, which by intervening in inappropriate ways in international and domestic markets, prevent them from working as they should and precipitate frictions and breakdown. In completely free markets, crises would not occur, or at least there would be only mild


fluctuations and adjustments. The dramatic collapses of currencies and banking systems which characterized the Asian crisis are regarded as directly due to state interference. The policy response is therefore very clear – abolish all controls and rigidities, and problems will be solved. Neo-liberals, for example, dispute that new forms of financial regulation are either desirable or feasible to cope with financial disorder, since this is due to inappropriate government policies in the countries which have succumbed to financial crisis. Any attempt to regulate the international financial markets in a way which would replicate the regulation of national financial markets, would be doomed to failure, because it would require the creation of a world government. Any agency charged with financial regulation of the global economy which was less than a world government would not be able to ensure that it could enforce its will because of the existence of numerous local jurisdictions which would not accept the authority of the global body.12 A related neo-liberal position shares a similar belief in the benign properties of markets, but also sees an important role for national jurisdictions in a globalizing world. 13 The correct function of national jurisdictions is to enable the economic agents within them to adjust to global competitive pressures and opportunities. Appropriate policies are dictated by an understanding of the needs of the global economy, as interpreted for example through the financial markets. The eruption of a financial crisis is evidence of a misreading of the requirements of transnational financial markets, and the correct policy response is therefore to use sovereign powers to ensure that the right adjustments to domestic policies and institutions are made. A retreat into any kind of protectionism, imposing exchange controls or tariffs, or attempting to restrict the activities of banks and companies, will only delay the process of adjustment and make the recurrence of financial problems more likely. This last sentiment is one shared by the Austrian school, several of whose members in the 1930s, including Hayek and Ludwig von Mises, argued that accepting severe medicine, however great the hardship and pain in the short-term, was the key to a speedy recovery and long-term progress.14 Hayek reiterated this position in his analysis of inflation in the 1970s, and it is a familiar line of criticism of Japanese economic policy in the 1990s. The Austrian account differs from the neo-liberal principally because Austrian economists have always rejected the arguments, whether in the form of equilibrium analysis or rational expectations, which mainstream economic liberalism has used to justify its analysis and policy prescriptions. Their main objection has been to the assumption of a frictionless economy as the starting point for analysis. Austrian


political economists have always seen the economy in broader institutional terms, and have emphasized the necessarily imperfect nature of knowledge, and the importance therefore of the market as a discovery process. Capitalism develops through creative destruction of technologies, occupations, patterns of organization, and geographical location, and therefore necessarily unevenly and erratically. There are bound to be major dislocations and crises; indeed crises are a signal that major adjustments need to be undertaken in order to create the conditions for further expansion. If inappropriate political intervention attempts to suppress the symptoms of the crisis, the recovery will be delayed and future progress put in jeopardy. Austrians agree with neo-liberals that the causes of economic crises are often due to governments, but they also believe that even if governments were entirely blameless crises would still occur, because it is in the nature of capitalism that they should do so. Periodic imbalances between consumer demand and the distribution of productive assets make adjustments necessary. These adjustments are best left to markets to undertake, and crises are the way in which the price system signals that such changes are necessary. The resulting changes in prices and costs, leading to bankruptcies and unemployment is the necessary means within a market economy by which profitability is restored, after which growth can resume, only this time on a more solid foundation than before. The Austrian account of the process of capitalist development and crisis has similarities to classical Marxist accounts, which also emphasize the important functions which periodic crises play in the process of accumulation, and also stresses that they are inseparable from the way in which a capitalist economy is organized. For Marx crises are the visible form in which crises of accumulation manifest themselves. Capital will always overreach itself – this is what makes it so dynamic and revolutionary a mode of production. The fundamental cause of crises from this perspective is an exhaustion of opportunities for profitable investment.15 The eruption of a financial crisis with its attendant bankruptcies and unemployment is the means by which costs are reduced and the conditions for profitable accumulation restored. But Marxists draw very different conclusions from this than do Austrians. The existence of crises undermines the legitimacy of the capitalist order, because of the costs which are loaded on to workers, their families, and their communities. The costs of restructuring capital are always borne by the poorest and weakest sections of society, and the surplus population. States, whether large or small, have very limited capacity to mitigate these effects.


Crises themselves become a great levelling force, which imposes uniform solutions on states. Hegemonic order The third conception, hegemonic order, has liberal, Keynesian and Marxist variants. It treats the global economy as an embryonic global polity, and asks what are the political and state functions which need to be provided, and what means exist for providing them. It moves beyond the narrow focus of territorial order with its exclusive focus on sovereign states and national jurisdictions, but also beyond that of cosmopolitan order with its essentially economic understanding of the bases of order within societies and the global economy. The concept of hegemony looks instead at forms of governance within the global economy, and in particular at institutions and rules and regimes which provide solutions to some of the collective action problems which are thrown up by the co-existence of an increasingly integrated global economy with a stubbornly fragmented system of political rule. The concept of hegemony has been developed in various ways, from the hegemonic stability theory of Kindleberger, and the regime theory of Keohane, to the world systems theory of Wallerstein and the Gramscian analysis of Cox.16 What connects these very different approaches is a shared concern with the political conditions for world order. The causes of economic crisis are here seen to result not from excessive regulation or too little regulation at the national state level, but too little regulation at the international level. The problem lies in the fact that the political institutions of global governance are so poorly developed, that there is no effective regulator for transnational financial markets, and little capacity at the global level for intervening successfully to shape outcomes for the whole global economy. Hegemony in the past has been associated with the existence of a hegemon, a sovereign state which by virtue of its economic, financial, and military predominance comes to exercise rule-making functions for the international system as a whole. But such periods of dominance have tended to be short, and hegemons have always found it difficult to reconcile pursuit of the global public interest with pursuit of their own sectional interest. Nevertheless, the existence of a state able and willing to play the part of hegemon has been crucial in particular periods in providing benign conditions for expansion, prosperity and profitability in the global economy. But it is also obvious that in the future it is most unlikely that one state will be able or willing to play the role of hegemon, and that what is emerging instead are forms of collective hegemony,


centred on key transnational institutions such as the WTO, IMF, and the World Bank. From the perspective of hegemonic order economic crises are the result of a mismatch between the development of the global economy and the development of the global polity. The solution is to improve global institutional architecture by putting in place a set of institutions and policies which can avert future crises, and a great deal of ingenuity has gone into devising what these might be. The problem with them is always political feasibility; how to persuade sovereign states to agree to accept the legitimacy of global institutions so that frameworks and arenas can be established within which common problems can be tackled. Major issues of accountability and representativeness constantly arise. The supporters of new forms of regulation believe, however, that the neo-liberal view of regulation and state action, which has been dominant in the last three decades, is far too pessimistic about the possibilities of building on co-operation between states to create transnational regimes which can effectively regulate financial markets and transnational capital. They argue that unless steps are taken to control the effects of deregulated financial markets on employment and investment in those countries most susceptible to financial crisis, the future of a liberal world order will be put at risk, because pressure for protectionist and isolationist economic policies will revive, with grave consequences for world prosperity and world peace. 17

Globalization The three conceptions of world order outlined above all assume a world that is already interconnected. From this perspective globalization is nothing new. Since its advent in the sixteenth century the capitalist world economy has set in motion trends towards cultural, political, ideological, economic and racial homogenization – the creation of One World. Globalization however is not some uncontrollable force of nature; it is a specific set of practices and discourses.18 From the outset is has been constituted and propelled by politics, its most important political agents being the territorial nation-states, and in particular those nationstates which have been economically and political dominant in different periods. The three conceptions of world order are in one sense alternative ways of thinking about the capitalist world economy. But in another sense all three are necessary components of this capitalist world economy, expressing its different, interrelated aspects. At different times one or


other conception may be dominant, as territorial conceptions were in the 1930s. For small states it matters which of these conceptions is in the ascendancy. In a purely territorial vision of world order, small states would fear absorption by large states, through conquest and territorial expansion. This was after all how all the large states were formed, even the two island empires, Britain and Japan, emerging as single states after centuries of internal warfare and territorial aggrandisement; it was the basis of the rapacious European colonial empires, the consolidation of the United States over the landmass of North America, the Napoleonic conquests in Europe, and the German project of MittlelEuropa. Territorial ambitions of states have often known no limit, only checked by the countervailing power of rivals. The territorial principle of world order conceives an order that is inherently fragile, and always liable to break down, since no state can be certain that it is secure in the possession of its territory. 19 Taken to its extreme the territorial principle therefore points to perpetual conflict unless and until it is superseded by the emergence of a single world empire, and the creation of a central world authority. States do well to survive in a world ruled by the territorial principle, but they are also threatened by the cosmopolitan principle. A cosmopolitan order is one which breaks down boundaries and overwhelms separate jurisdictions, and therefore potentially destroys the capacities which small states require to preserve their separate and diverse institutions and policies, and so leads to convergence. A cosmopolitan order is central to the discourse of globalization, with its emphasis on the benefits of free exchange and free movement. It is not possible to imagine the contemporary world system without the cosmopolitan principle, but by itself it is not a sufficient principle of order any more than the territorial principle is. Only the hegemonic principle can ensure a proper balance between the territorial and the cosmopolitan principles, and thus also ensure a future for small states. The hegemonic principle however is easily perverted because if the hegemon is a single large state it will have territorial or other political ambitions of its own, and the nature of the hegemonic institutions that evolve are likely to be highly imperfect, and certainly unrepresentative of most of the states in the world system. Hegemony has been an important part of the world economy for 200 years, however, organized first by Britain and then by the United States. This hegemony of Anglo-America has been a powerful determinant of the way the system has evolved, because these two states have actively encouraged the development of a liberal, cosmopolitan order, and have done so partly by establishing


rules and norms for such an order, and partly by holding in check territorial claims of other states. Britain’s hegemony was marked by the simultaneous pursuit of an informal cosmopolitan empire alongside the formal territorial empire. British policy was always pulled in two directions, but the more important legacy of British hegemony was the cosmopolitan empire, the empire of trade. The opportunity for this to develop to the extent it did owed much to the successful breakaway of the American colonies from Britain’s territorial empire. American hegemony rebuilt the institutions of the liberal world order which Britain had established, only this time the claims have been more universal, less compromised by possession of a territorial empire, or the harbouring of specific territorial claims. What this liberal order has permitted is the creation of conditions for the flourishing of small states; respect for the territorial principle and national self-determination conferred sovereignty and territorial jurisdiction upon these states, while the maintenance of a (relatively) open system of trade and finance offered opportunities for states to adjust their domestic policies to take full advantage of them. The spur which economic openness provided to these states was the result of the conditions which US hegemony established. But territorial sovereignty was also key. It is this favourable constellation which appears threatened with destruction by contemporary globalization. But some historical perspective is necessary. As already argued, globalization is no fatalistic unstoppable force beyond human control. It is a particular discourse and a particular political project, the latest project indeed of Anglo-America for maintaining its 200 year old hegemony and ensuring that the world economy continues to be governed by liberal rules and objectives. Globalization as a doctrine is thus only the latest doctrine that has been used to promote the virtues and advantages of a liberal world order. The international Keynesianism of Bretton Woods, or the free trade doctrines of the nineteenth century are earlier examples. The new policy doctrines in the discourse of globalization emerged in the 1970s, mainly in the United States and Britain, and quickly became established in the main agencies of global governance, the financial markets, and the networks of transnational capital. By the 1980s aided by two like-minded ideological regimes led by Reagan and Thatcher they became crystallized in the Washington consensus. The significance of this for other states is that the globalization discourse first emerged as a means to re-establish control of how states responded to the financial crises and economic recessions of the new era. In particular the international institutions wanted to discourage protectionism and any


retreat to closed blocs or autarchy. At the same time the purpose of globalization was also to take the attack to those countries, particularly Japan, which were seen as free-riding on the liberal world order by not opening their domestic markets sufficiently to goods from the rest of the world. By proposing new trade rules the aim was to recast the basis of the liberal world order in a way which served the interests of the United States rather better than it had in the past, when the United States had been prepared to take more sacrifices in the interests of rebuilding the liberal world order and containing communism.

Nation-states and European integration The doctrines of globalization anticipate the achievement of One World, and the idea that there is a single best practice in institutions and policies which all states should adopt. These doctrines became dominant first in Anglo-America, particularly during the Thatcher/Reagan years, and drew further strength from the collapse of communism in Europe in 1989 and from the vogue for the end of history which followed, with its suggestion that were no longer any viable alternatives to the liberal capitalist model and that ideological contestation was therefore at an end.20 The resurgence of the United States economy through the 1990s and the difficulties encountered by both Japan and Germany appeared to signal that globalization on American terms was inevitable. The triumph of globalization, however, has brought many new forms of resistance to its logic. There have been increasing attempts to slow down or divert the juggernaut, although patterns of resistance vary enormously. For many smaller European states much of globalization can be taken in their stride; it is what they are used to, and they remain better placed to adapt to the challenges of globalization than many of the large states, for all the reasons that Peter Katzenstein set out in the 1980s. The value of their corporatist compromises has not diminished and is still showing its traditional capacity to promote adaptability and change. The main challenge to the small states lies elsewhere. Their key strategic dilemma has been whether the European Union and the process of European integration offers a way of building defences against globalization, or whether it risks losing what has been distinctive about their strategies in the past, their ability to shape their own policies and institutions to meet the challenges of an open global economy. The European Union is a huge continental-sized economy, relatively closed in terms of its dependence on world trade, and a large state in the


making. It offers the security that large states always have, but it is also associated with centralizing and homogenizing tendencies which threaten the autonomy and flexibility that the liberal and democratic corporatism compromises in the small states have secured for so long. This dilemma can be observed in debates over whether states should join the euro, and give up control over key levers of national economic policy, the currency and interest rates. The arguments on globalization and European integration are common to all European states, although the balance of opinion varies considerably between states. For example the perspective on globalization which has been identified as hyper-globalism is found most strongly in Britain, and would be extremely difficult for small states wedded to either a liberal or democratic corporatist compromise to embrace. Much of the more esoteric discourse of hyper-globalism is both anti-political and fatalistic and, in some of its variants, supremely optimistic about the benign opportunities and long-term effects of largely unregulated global markets. Nations and states can wither away with no ill-effects. The state’s only task in a cosmopolitan order is to facilitate the adjustment of the national economy and national institutions to the requirements of global competition, removing regulation, making labour markets flexible, and reducing burdens on industry, especially taxation and social costs, to the absolute minimum. But this task is still an important one, and it offers a way of reconciling attachment to the nation as the key agency in governance, with the economistic and deterministic hyperglobalist perspective.21 For many Eurosceptics throughout Europe, not just Britain, the European Union is viewed as a project designed primarily by large states whose ultimate objective is a federal super-state which would impose unacceptably high levels of taxation, spending and regulation on all its component parts, making national economies uncompetitive in global markets outside the EU. Only if member states regain their sovereignty can they create the de-regulated, privatized, low tax, low welfare, weak union, low public spending, independent jurisdictions which would take full advantage of markets throughout the world, not just in Europe. At the heart of this perspective is the vision of national political and economic independence – seen as crucial for protecting the economic policy which can help the economy adjust best to globalization, while leaving the nation state intact to represent national traditions and ensure proper democratic accountability. The EU with its federalist and protectionist practices and intentions is regarded as a dangerous obstacle to the natural development of the global marketplace.


A hyperglobalist stance would in theory be possible for small states, but would almost certainly break the internal corporatist compromise and political alliances on which their political stability and economic success have been based. Most small states are much more likely to take a different perspective on globalization, either one of intergovernmentalism or democratic regionalism. Both contest the accuracy of hyperglobalism as a depiction of the world in which we now live and defend the continuing viability of social democracy and corporatist alternatives to liberal and statist models. For intergovernmentalists, the world economy is international rather than global.22 Seen from this perspective, the contemporary ‘international’ economy is based on large annual trade and investment flows between three dominant centres – North America, Europe, and Japan. But, these flows, though sizeable, are seen as relatively small in relation to domestic GDP and do not amount to the all-embracing supranational global economy pictured by many theorists of globalization. If certain market-orientated policies are being imposed through the world economy on all states, even the most powerful like the United States, the explanation is to be sought in the policies pursued by the dominant states in the international economy and not in impersonal, structural economic forces operating purely at the global level. Intergovernmentalists argue that different nation-states have different capacities and face different constraints, so in any period some are advancing while others are declining; no universal pattern is discernible. Consequently, opportunities for states to exercise autonomy in economic policy making remain considerable and are shown to be so by the diversity of response and experience which is evident around the world. If the globalization thesis were true, a much more uniform pattern of policy and performance and economic development should already be observable. Sovereign nation-states are therefore not simply obliged to accept a regime of unfettered economic liberalism. Alternatives, including liberal and democratic corporatism continue to be viable. National governments are still able to pursue these aims by promoting growth and full employment and tackling inequalities of power and wealth, without necessarily abandoning participation in the world economy. Indeed, this may strengthen their competitive edge through more investment in education and infrastructure.23 Intergovernmentalism and democratic regionalism both tend, therefore, to be anti-fatalistic and to believe that politics can make a difference. If the architecture of the international economy was changed in the 1970s and 1980s in ways that were unfavourable to alternatives to liberal and democratic corporatism, it can be changed again in the future. Globalization has not created a race


to the bottom, a process of competitive deregulation, in which all the gains of democratic and liberal corporatism have to be sacrificed, nor has it created a general crisis of the welfare state. 24 Democratic regionalists, while denying the claims of hyperglobalists, are more likely than intergovernmentalists to accept that globalization has brought real and enduring changes and has altered the context for national economic policy making in several important respects, not least in the way the financial markets operate. Certain policy stances and policy choices are simply no longer viable, but this is not seen as meaning that national governments are left without any choices at all. For democratic regionalists the development of new forms of regionalism in several parts of the world does not run counter to globalization, but is rather an important step which helps promote it. They regard new regional blocs such as the EU not as prefiguring a return to closed protectionist blocs on the pattern of the 1930s, but part of a wider system of new and essentially healthy forms of governance and regulation of the global economy, involving a complex pattern of overlapping jurisdictions, a new medievalism. 25 They remain open to world trade and subject to its rules. Yet, at the same time, they facilitate the creation of a new political space, a process which has gone furthest in Europe, which allows the discussion of common concerns and the elaboration of new forms of governance, such as economic and monetary union. From the perspective of democratic regionalism traditional goals of national economic management are now best pursued at the collective level of the European Union, rather than left to the nation-state alone. The benefits of cooperation at the EU level outweigh the disadvantages of centralization and homogeneity. Adherents of this approach differ on the kind of economic and monetary union which they seek, on how many powers should be exercised at the European level and about how desirable (or necessary) it is to further democratize EU institutions. However, what unites them, is the belief that a regional framework of governance is an indispensable tier in the search for new and better ways to regulate the economy and deal with the new and insuperable challenges posed by globalization. Membership of the EU has been judged by states on balance to be an aid to sustaining their particular domestic arrangements rather than an obstacle. Democratic regionalists treat globalization as a historical process rather than as an already determined fact. 26 There is a shift towards the increased spatial reach of networks and systems of social relations; to transnational, and transcontinental, patterns of social and economic organization, but this does not mean that there is an inevitable erosion


of institutional diversity in the global economy; nor does it reflect a remorseless drift towards an all-encompassing global market. Indeed increased regionalization of economic activity and continued and even enhanced democratic governance is an integral part of the move towards more interconnected world economic activity. In this kind of environment small states can still master the conditions for success. One of the critical developments for the future however will be whether the European Union can agree upon a proper federal constitution, which will protect the institutional diversity and autonomy of its members from encroachments by the central agencies of the Union which have not been agreed. 27 Europe needs building from the bottom as well as from the top, and it is here that the experience of small states is an invaluable corrective to some of the grand designs still harboured by large states.

Notes 1 Kenichi Ohmae, The End of the Nation-State (London: Harper Collins, 1996). 2 Jonathan Perraton, David Goldblatt, David Held and Anthony McGrew, ‘The Globalization of Economic Activity’, New Political Economy 2, (no. 2) (1997) 257–78; David Held et al., Global Transformations: Politics, Economics and Culture (Cambridge: Polity, 1999). 3 Mario Telo (ed.), European Union and New Regionalism: Regional Actors and Global Governance in a Post-hegemonic Era (Aldershot: Ashgate, 2001); Bjorn Hettne & Fredrik Soderbaum ‘Theorising the Rise of Regionness’, New Political Economy 5, (no. 3) (2000) 457–63. 4 Paul Hirst and Grahame Thompson, Globalization in Question (Cambridge: Polity, 1996). 5 Philip Cerny, The Changing Architecture of Politics: Structure, Agency and the Future of the State (London: Sage, 1990). 6 Peter Katzenstein, Small States in World Markets (Cornell: Cornell University Press, 1985). 7 David Coates, Models of Capitalism (Cambridge: Polity, 2000). 8 Tom Nairn, After Britain (London: Verso, 2000). 9 Robert Cox, ‘Mulitlateralism and World Order’, in Approaches to World Order (Cambridge: CUP, 1996). 10 Andrew Gamble and Anthony Payne (eds), Regionalism and World Order (London: Macmillan, 1996). 11 Katzenstein, Small States in World Markets. 12 Patrick Minford, ‘Why Countries Need to Learn Better Monetary Behaviour’, New Political Economy 4, (no. 3) (1999) 424–7. 13 David Howell, The Edge of Now (London: Macmillan, 2000). 14 Andrew Gamble, Hayek: the Iron Cage of Liberty (Cambridge: Polity, 1996). 15 Ernest Mandel, The Second Slump (London: NLB, 1978). The most important contemporary analysis is Robert Brenner, ‘The Economics of Global Turbulence’, New Left Review 229 (1998) 1–265.

66 Contextualizing Turbulence 16 C.P. Kindleberger, The World in Depression 1929–1939 (Berkeley: University of California Press, 1973); Robert Keohane, After Hegemony: Cooperation and Discord in the World Political Economy (Princeton: Princeton University Press, 1984); Immanuel Wallerstein, The Modern World System (New York: Academic Press, 1974); Robert Cox, Production, Power, and World Order (New York: Columbia University Press, 1987). See also Robert Gilpin, The Political Economy of International Relations (Princeton: Princeton University Press, 1987). 17 John Grieve Smith, Closing the Casino (London: Fabian Society, 2000). 18 Jan Aart Scholte, Globalization (London: Macmillan, 2000). 19 Hedley Bull, The Anarchical Society (London: Macmillan, 1977). 20 Francis Fukuyama, The End of History and the Last Man (London: Hamish Hamilton, 1992); Andrew Gamble, Politics and Fate (Cambridge: Polity, 2000). 21 Indeed this has come to represent the dominant strand of thinking within the British Conservative party over recent decades. See Andrew Gamble and Gavin Kelly, ‘Britain and the Euro’ in Kenneth Dyson (ed.), European States and the Euro (Oxford: OUP, 2002). 22 A global economy is defined as driven by supranational forces and co-ordinated by transnational institutions such as transnational corporations, while an international economy is one which is managed through bilateral and multilateral negotiations between nation-states and in which therefore the sovereign nation-state remains the key administrative and political institution. Hirst and Thompson, Globalization in Question. 23 Linda Weiss, The Myth of the Powerless State (Cambridge: Polity, 1998). 24 Frank Vandenbroucke, Globalisation, Social Democracy, and Inequality (London: IPPR, 1997). 25 Hedley Bull, The Anarchical Society; Mario Telo (ed.), European Union and New Regionalism: Regional Actors and Global Governance in a Post-hegemonic Era (Aldershot: Ashgate, 2001). 26 David Held et al., Global Transformations. 27 Larry Siedentop, Democracy in Europe (London: Allen Lane, 2000).

4 Towards a Poststructuralist Development Agenda Trevor Parfitt

Towards the end of the 1980s a crisis emerged in development theory. Initially, this was referred to as ‘the impasse’. Most of the traditional theories that were used to examine and delineate development, including Modernization Theory, the various forms of Underdevelopment Theory and more recently neo-liberalism, were regarded as having fallen into doubt. Leftist strategies of development were at least partially, if not wholly discredited by the collapse of Communism, whilst theories that advocated a development path based on the Western capitalist model were also seen as having delivered few if any of the benefits that they had seemed to promise. Many parts of the ‘Third World’ had been struggling under the weight of accumulated debts to the industrialized countries for more than a decade, while also attempting to apply the market influenced Structural Adjustment Programmes (SAPs) that had been forced on them by the North, in particular the Washington institutions, the World Bank and the International Monetary Fund (IMF). Structural Adjustment was supposed to create the conditions for economic growth in the Third World by removing obstacles to the efficient operation of the free market. By the end of the 1980s (indeed up to the present day) there was, and still is, little evidence that the ubiquitous SAPs had stimulated any growth, or created conditions conducive to growth.1 Under these circumstances it was hardly surprising that many of those involved in development began to feel that the old theories had failed (a notable exception included those practitioners and academics who were associated with the Washington consensus, and other aid institutions, that had made a considerable intellectual and financial investment in such strategies as SAPs). The question was where to go from that position. Such was the nature of the ‘impasse’. 67


This has led to a response that has mobilized elements of post-modern or poststructuralist thinking, particularly the work of Michel Foucault. Analysts such as Arturo Escobar use Foucaultian discourse theory to critique development as a discourse of power. 2 This tends to lead to an indictment of development as an imposition on the South, a means of imposing discipline over the ‘Third World’ by the neo-imperialist North. A central problem with this line of argument lies in Foucault’s direct association of power with knowledge. In essence Foucault follows the Nietzschian position of regarding knowledge as a product of power. To identify a discourse as ‘true’ simply denotes that it is the account favoured by those with most power to impose their viewpoint. This can be taken as meaning that we cannot know the truth. If the status of a theory is determined by the power of its backers rather than its veracity, how can we know that it is true? This reduces us to the situation where we have no criteria for differentiating between theories on grounds of accuracy. All theories are equal. To give an extreme example, astronomy equates with astrology. Only the power of their various proponents determines their respective statuses. This is a relativism that is analogous to nihilism. However, the attempt to derive foundations to validate our theories is also a risky enterprise. Todd May describes foundationalism as the attempt to provide an exhaustive and indubitable account of a subject of study – exhaustive in that it says all that needs to be said on the topic, and indubitable in that it cannot be surpassed.3 Post-modern theorists argue that foundationalism has been practiced in such a way that it marginalizes/represses difference. A system of ideas is imposed to explain the world and anything that violates its conceptual categories is repressed. In the context of grand theories this can actually lead to repression of actual social, political, or other groupings. Particular examples include the Nazi persecution of the Jews and the Stalinist repression of all those identified as counter-revolutionary. This means that we are caught between the devil and the deep blue sea. If we want to make validity claims we risk making the exclusions associated with foundationalism. However, if we dispense with foundations for validity there is the danger of lapsing into relativism. Many of the critics of development tend to take the second route and indeed fall into a relativist trap. One example may be provided from the work of Gustavo Esteva and Madhu Prakash. Esteva and Prakash openly embrace a cultural relativist position as a cornerstone of their argument against what they see as the depredations of development. They argue that

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To abstract or to classify with each other, we require common cultural backgrounds. These backgrounds constitute horizons of intelligibility of each culture. 4 They go on to assert Cultures are incommensurable – a condition which seems clearly uncomfortable for those accustomed to extrapolating their own perception of reality on others.5 Therefore European analytical frameworks, such as development, are inapplicable to Southern societies because they originate within cultural horizons of intelligibility that are incommensurable with those of the South. However, they seem to overlook the fact that such a cultural relativist position precludes us from condemning such practices as slavery in other cultures, or female genital mutilation. How do we avoid such relativism without recourse to exclusionary foundations? This author would argue that one of the closest approaches to a viable answer to this problem is provided in the work of Jacques Derrida. A viable entry point into Derrida’s theory, and into his approach known as deconstruction, is provided by his analysis of linguistics. Consequently, we shall commence our examination of Derridian theory by briefly surveying his commentaries on the work of Saussure.6 Derrida points out that Saussure, the founder of linguistics, wishes to claim that speech is more fundamental than writing, but that he also stipulates that the relation between a sign (whether it be the spoken or written word) and what it signifies is arbitrary. There is no natural relationship between the tree that we see in a park and the sign ‘tree’. Nothing about the actual tree motivates us to choose the sign ‘tree’ to signify it. This arbitrary relationship suggests that signs are not natural, but are instituted, or imposed. We recognize a sign as denoting what it signifies because the sign can be repeated (it is iterable, as Derrida puts it) and so we learn to associate the sign with what it signifies by convention (this is something that we learn to do as children when we learn to speak). Thus, the sign (a word in our example of the tree) is instituted, whether in its written or spoken form. However, if the sign, whether written or spoken, is instituted rather than being natural, Saussure has no basis for saying that the spoken form is more natural than the written form. He has shown that both are equally unnatural. This contradiction destabilizes Saussure’s hierarchies.


Derrida proposes the category of arche-writing, which includes both written and spoken speech, to denote that both writing and speech have common characteristics – institution, iterability, and the possibility for misinterpretation – all of which are essential for signs to perform their task of conveying meaning. It may seem strange to argue that the possibility for misinterpretation is in some way necessary if signs are to convey meaning. This however is precisely what Derrida argues. He points out that signs have to be iterable, which means that they have to be used in different contexts. The nuances of meaning of a sign will vary from one context to another, and with that comes the structural possibility of misinterpretation. Even if we use exactly the same sign in exactly the same context on two different occasions, there is not absolute identity between the two uses of the sign because it has been used at two different times. In other words, a sign must be iterable to have identity, or meaning, but this same iterability undercuts identity because absolute repetition, that is repetition without any difference from the initial occasion of use (even if one can identify such an occasion), is impossible. Derrida’s point is that the very words we use to communicate incorporate identity, but also manifest alterity in that repetition destabilizes identity. Thus, we have to use instituted signs to denote concepts, phenomena, and build conceptual structures, but the repetition necessary to give those signs meaning, or identity, also destabilizes that identity. This double-edged process informs all our efforts to institute knowledge, to define concepts and categories. For example, Saussure made a decision to follow established philosophical conceptual hierarchies in privileging speech over writing and justified it by asserting that this was a natural decision. Derrida’s demonstration that the exclusion of writing is artificial indicates however that Saussure’s decision involved a loss of meaning, an exclusion of alterity. This exclusion manifests itself as the contradiction that Derrida locates in Saussure’s arguments (he asserts that no signs are natural, but then tells us that speech is more natural than writing). This contradiction is the ‘trace’ of alterity. In a sense the excess of Saussure’s arguments, his exclusions, have returned to haunt his theory, pointing up its inconsistencies. Derrida often uses the metaphor of the spectre to denote the way in which the excess of an argument, its exclusions, return to destabilize, or haunt it. It is worth noting here that Derrida is not trying to say that we must avoid making decisions for fear of imposing exclusions. Decisions like the one that faced Saussure are necessary and unavoidable for there to be meaning and knowledge. No analytical position or decision can avoid


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making exclusions. The signs we use to signify concepts and phenomena are invested with meaning, and simultaneously destabilized, through iteration, thus losing elements of meaning in the same gesture through which their meaning is shaped. All of our knowledge is established through a pattern whereby arguments and proofs that are deemed to be relevant are put forward, whilst other arguments and proofs are excluded (perhaps because they are not available to us at the time that the argument is being formulated, or because they are judged to be irrelevant). For Derrida limits must be instituted and exclusions made for knowledge to be constituted at all. The ever-present possibility that such exclusions may return to destabilize the knowledge that we have won does not undermine the status of knowledge in itself. This means that deconstruction can better explain such phenomena as scientific progress than relativist forms of post-modernism, which would describe a discipline such as Physics as one explanatory structure among many, all of equal validity. A Derridian view can accommodate both the truth claims of science, validated by rigorous analysis and experimental findings, and the inevitability that such truths will make exclusions that will return to force revisions, generating new truth claims. Thus Newtonian physics gives way to Einsteinian physics. At this point we may introduce Derrida’s concept of the trace, which Beardsworth defines as follows: . . . the instituted trace accounts for these three moments; first, the foundation of a disciplinary space; second, its constitutive exclusions; and, third, the return of that which is excluded, within the disciplinary space. All three moments are effects of arche-writing; they together constitute what Derrida calls in ‘Violence and metaphysics’ an ‘economy of violence’. 7 Thus, the trace involves the decision that creates knowledge and in the same movement makes exclusions, which also leads to the return of the excluded to destabilize the constituted knowledge. All this is caused by arche-writing, which institutes signs that then undergo reiteration, a process that simultaneously invests them with identity, whilst also destabilizing that identity. It is important to note that this process involves violence. Any decision that constitutes knowledge is also necessarily a decision that makes exclusions, and in this sense it is violent. As we have already noted, such violence is necessary for us to have knowledge. The extent of the violence however can vary according to the status that we give our decisions – and this is what Derrida is


indicating when he refers to an ‘economy of violence’. If we regard our decisions as absolute, that is if we institute closure, regarding our knowledge as unsurpassable, we maximize violence. As we have seen, iteration establishes and destabilizes identity in the same movement. Consequently, it is impossible to identify a pure concept or to achieve some sort of ultimate society. For example, if a polity claims full democratic sovereignty, it is claiming that nobody is politically excluded and that in this sense there is no other. Any who are in fact excluded (such as new social, or political groupings that emerge over a period of time) will not be recognized and consequently will be repressed. In this sense, the society that attempts to legislate full democracy can never attain that goal. So far we have seen that arche-writing operates to destabilize identity at the same time it establishes it. This process is part of the economy of violence through which arche-writing makes violent exclusions as a part of establishing identity, exclusions that return to destabilize that identity. Consequently, attempts to totalize are bound to fail and, to the extent that we try to disguise this failure, we enhance the violence caused by our theories. This is already suggestive of a particular political and moral stance of openness to change, receptiveness to the other, a course of less violence. It also provides us with an opportunity to bring politics and ethics more overtly into our analysis. Derrida notes that the violence concomitant in judgement concerns politics: . . . once it is granted that violence is in fact irreducible, it becomes necessary – and this is the moment of politics – to have rules, conventions and stabilizations of power.8 It is clear from this statement that politics and ethics are interlinked for Derrida in that politics is about controlling power, stipulating rules and conventions to limit abuse of power. The extent of this co-implication of ethics and politics becomes particularly evident in the following statement: Every time that I hear someone say that ‘I have taken a decision’, or ‘I have assumed my responsibilities’, I am suspicious because if there is responsibility or decision one cannot determine them as such or have certainty or good conscience with regard to them. If I conduct myself particularly well with regard to someone, I know that it is to the detriment of an other; of one nation to the detriment of another


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nation, of one family to the detriment of another family, of my friends to the detriment of other friends or non-friends, and so on. This is the infinitude that inscribes itself within responsibility; otherwise there would be no ethical problems or decisions. 9 A clear political implication of this is that whatever decision one takes, exclusions will be made, some will benefit while others will not. Obviously, this touches on an issue at the heart of politics, distribution of resources. As Derrida clearly indicates this is also, inevitably, an ethical issue. To the extent that all our decisions reward certain groups and ignore or penalize other groups, we bear responsibility for them. And our responsibility is to take the course of least violence, which entails avoiding institution of closure. This principle also provides us with a criterion for judging whether or not others are behaving ethically themselves. It enables us to examine whether the other is instituting an exclusory closure, thus maximizing violence, or maintaining a course of least violence, of openness to others. Thus, our responsibility to take the course of least violence ourselves does not in any way prevent us from criticizing others that are violent, such as terrorist groups, or repressive regimes. Indeed it provides us with a critical tool for examining the extent to which others are deliberately engaging in violence, or seeking to minimize it. In Spectres of Marx, Derrida mobilizes this critical tool to satirise the hubris of neo-liberals such as Fukuyama and his ilk in their declaration of the death of Marxism. He comments as follows: This dominating discourse often has the manic, jubilatory, and incantatory form that Freud assigned to the so-called triumphant phase of the mourning work. The incantation repeats and ritualises itself, it holds forth and holds to formulas, like any animistic magic. To the rhythm of a cadenced march, it proclaims: Marx is dead, communism is dead, very dead, and along with it its hopes, its discourse, its theories, and its practices. It says: long live capitalism, long live the market, here’s to the survival of economic and political liberalism!10 The eagerness with which liberal demagogues stumbled over each other in their efforts to bury Marxism and declare the triumph of capitalism represented a very clear demonstration of a wish to deliberately exclude, to institute closure. However, this closure was not only designed to exclude Marxist theory. It was aimed at any force that might challenge


the liberal consensus, a consensus that underwrites Northern market domination over the South (which might now be defined as including the ex-communist states of Eastern Europe). Henceforth, there would only be one way forward, one path to development so the liberals insisted, and that would be through their holy of holies, the free market. After all, anybody who was excluded through the market was righteously excluded, because they were economically uncompetitive. It was on this basis that the World Bank and the IMF opened up successive Southern economies to competition from the North, and ensured that Southern states paid their debts to Northern financial institutions, whilst the largest economies of that same North continued practicing protectionism on a massive scale (in particular, one might point out the way in which the European Union and the United States protect their respective agrarian sectors). The main burden of Derrida’s analysis is that neither is liberal capitalism as healthy as its advocates like to pretend it is, nor is Marxism as dead as these same liberals would like to suggest. Derrida enumerates ten ‘plagues’ of the liberal new world order, including many that directly affect the South. They include the growth of world unemployment in the face of economic deregulation, the protectionist strategies of the Northern states, the continued problem of international indebtedness, and the domination of the main international institutions, for example the United Nations, the World Bank and the IMF, by the Northern states. All of these deformations of the international political economy make exclusions, whether at the international, or local level, whether in the North or the South. What they all have in common is that the excluded almost invariably seem to be the weakest, whether it be the weaker nations forced to take the IMF’s free market medicine undiluted, or those who lose their jobs due to deregulation. Indeed, the numbers of those who are excluded rather than being up-lifted by the world liberal order show every sign of being on the increase. The liberal capitalist strategy of development seems to be wearing thin within remarkably few years after its supposed triumph. The eagerness of liberal ideologues to bury Marxism is eminently explicable in the face of these numerous exclusions in the name of capitalist development, for, as Derrida perceives, Marx was and remains par excellence a theorist and advocate of emancipation of the excluded. Derrida comments on this as follows: Now, if there is a spirit of Marxism that I will never be ready to renounce, it is not only the critical idea or the questioning stance


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. . . It is even more a certain emancipatory and messianic affirmation, a certain experience of the promise that one can try to liberate from any dogmatics and even from any metaphysico-religious determination, from any messianism. And a promise must promise to be kept, that is, not to remain ‘spiritual’ or ‘abstract’, but to produce events, new effective forms of action, practice, organization, and so forth.11 Derrida is playing on a number of senses of the word, ‘promise’ here. He often uses the word promise to denote the excess, or exclusions of an argument or position. However, he is also playing on the sense of promise as meaning the hope that an idea or argument might seem to hold for the future. One can find references to the promise of democracy throughout Derrida’s work, and it suggests that what is currently excluded from our determinations of democracy will return, but also that this return will help to achieve the promise that democracy holds for a more inclusive society. In the above passage, Derrida is making a similar point about Marxism to the effect that it holds out an emancipatory promise, but also playing on the sense of ‘promise’ as a promise of action, a promise to do something. Here again, Derrida affirms that it is necessary to put theory into practice. It is clear however that Derrida also wants to separate the emancipatory promise of Marxism from what he terms ‘dogmatics’, or ‘metaphysicoreligious determination’. Essentially, Derrida is arguing here for the abandonment of Marxian retention of the Hegelian dialectic. Derrida sees Hegel’s dialectical system as a totalizing system that tries to institute closure. This tendency manifests itself in Marxist theory in the form of the teleology of the dialectical analysis of class struggle, which is seen as leading to a resolution of the dialectic (a closure) with the establishment of the perfect society, communism. It does not seem likely that many Marxists will object fundamentally to the proposition of abandoning this aspect of Marxist theory given that many of them have already quietly jettisoned this nineteenth century leftist version of social Darwinism. It might be wondered what kind of praxis Derrida envisages for any present-day emancipatory movement. Derrida is not as clear as one might ideally wish on this issue, but he does refer to the emergence of a New International, identifying it as follows: The name of new International is given here to what calls to the friendship of an alliance without institution among those who, even if they no longer believe or never believed in the socialistMarxist International, in the dictatorship of the proletariat, in the


messiano-eschatological role of the universal union of the proletarians of all lands, continue to be inspired by at least one of the spirits of Marx or of Marxism (they now know that there is more than one) and in order to ally themselves, in a new, concrete, and real way, even if this alliance no longer takes the form of a party or of a workers’ international, but rather of a kind of counter-conjuration, in the (theoretical and practical) critique of the state of international law, the concepts of State and nation, and so forth; in order to renew this critique, and especially to radicalise it.12 This vision of an alliance of variegated forces, distributed about the world, and united by their opposition to various aspects of liberal hegemony, could well be seen as encompassing the various projects of the new social movements, as well as offering the prospect of a more coordinated resistance to the depredations of the new world order than a post-development agenda of largely separate local emancipatory projects. Perhaps the most obvious evidence of such resistance may be found in the mass protests that have troubled such organs of neoliberalism as the World Trade Organisation, the IMF and the World Bank in recent months. Derrida offers his own views on how the New International might combat the liberal hegemony, suggesting two inter-related strategies based on spirits of Marxism. The first might be viewed as a strategic and/or reformist position. It would entail taking a position of at least apparent acceptance of liberal canons to the effect that the free market is the path to salvation. The point of this being to draw attention to the gap between reality and the liberal ideal in order to challenge the liberal powers to deliver on their promises of development. Derrida argues that ‘even within this idealist hypothesis (for example acceptance of the liberal idealist hypothesis), the recourse to a certain spirit of the Marxist critique remains urgent and will have to remain indefinitely necessary in order to denounce and reduce the gap as much as possible, in order to adjust “reality” to the “ideal” in the course of a necessarily infinite process’. 13 The prime object of this strategy is to win actual gains for the excluded, to campaign for reform of the inegalitarian aspects of the system. It is in this context that arguments for development activity and for aid to the South become central. Such reformism is always worthwhile to the extent that it leads to real gains and improvements in the standard of living for those at the base of world society. The second strategy might be seen as an inevitable radicalization of the first strategy in that ‘it would be a question of putting into question


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again, in certain of its essential predicates, the very concept of the said ideal’.14 In short, this strategy is that of direct critique of capitalism. Amongst other things, such critique would involve ‘the economic analysis of the market, the laws of capital, of types of capital . . . liberal parliamentary democracy, modes of representation and suffrage, the determining content of human rights, women’s and children’s rights, the current concepts of equality, liberty . . . fraternity . . . dignity, the relations between man and citizen’. 15 Much of this (if not all of it) can be recognized as constituting a familiar Marxist agenda – and although Derrida does not explicitly mention it, there is no reason why one would not add analysis of the mechanisms of exploitation to the above list. Again, whilst Derrida does not actually say as much, this second strategy could well be seen not only as the necessary complement of the first strategy, that of reformism, but its inevitable successor. To the extent that the exploitative nature of capitalism limits what can be achieved through reformist tactics, the task of the New International becomes that of direct critique, direct opposition to capitalism. In asking how far this opposition might go in terms combating capitalism, one might think that Derrida would balk at the idea of revolution. After all, Derrida has argued in favour of excising ontologizing elements of Marxist thought and, traditionally, revolution has been thought of in terms of ushering in the ultimate society, communism. However, in response to an accusation of wishing to discredit the idea of revolution, Derrida replied as follows: On more occasions than I care to count . . . I have invested the word ‘revolution’ with a positive, affirmative value, even if the traditional figure and imageries of revolution seem to me to call for certain ‘complications’ . . . 16 Clearly it would be undesirable to posit revolution as a closure, as achievement of the ideal society, for we have already seen the dire results of such attempts to impose closure in reality in the form of the various failed revolutions around the world, and particularly in Eastern Europe. However, this does not discredit the option of revolutionary violence to overcome particular exploitative regimes where it clearly represents the course of least violence. For example, one could justify such violence to oppose a brute such as Somoza or the racist regimes that used to dominate much of Southern Africa. Exactly the same argument however would justify violence against leftist regimes that become violently exclusory, such as Mugabe’s Zimbabwe, the Pol Pot regime in


Cambodia or the Chinese dictatorship, both at home and in Tibet. In this sense the principle of least violence can be seen as more consistent than traditional leftist standpoints, which found themselves embarrassed by the practices of supposedly leftist regimes that continued with policies of repression and violence even when their tenure on power had stabilized. For Derrida, revolutionary violence would have to be aimed at moving towards the promise of democracy, at achieving a more democratic and inclusive (and therefore less violent) post-revolutionary society. It would follow that this revolutionary society itself would have to be bound by this obligation to continue to move towards the promise of democracy in order to avoid lapsing into exclusory, dictatorial practices. This chapter has shown that a deconstructionist approach is eminently compatible with a de-ontologized Marxism. To the extent that Marxism is addressed to combating the exclusory nature of capitalism, its nature is to address the same injustices that deconstruction addresses. Derrida actually delineates the outlines of a political programme on the basis of Marxian influenced strategies, the first consisting of a reformist approach, whilst the second constitutes a more openly oppositional position, culminating in revolutionary violence where such an approach can be seen as the course of least violence. It is this author’s contention that both of these strategies incorporate developmental and emancipatory moments. The first strategy, that of reformism, can clearly be seen as the point at which campaigns for greater amounts of effective development aid become essential to assist the Southern poor in their efforts not only to survive, but to improve their lives. With regard to the second strategy, development consists in the need to assist those who are violently repressed, or excluded, to resist the regime that oppresses them, so that they can take control of their lives, formulating and practicing their own models of development. Consequently, the theoretical approach offered here overcomes the problem posed by the impasse in development theory, that of identifying an analytically sound theoretical basis for action. The deconstructionist approach to Marxism avoids the exclusory pitfalls of foundationalism, whilst also evading the dangers of relativism. Its openness to what Derrida might term ‘the promise’ is indicative of a developmental praxis based on emancipation of the excluded.17

Notes 1 See W. Easterly, ‘The effect of IMF and World Bank Programs on Poverty’, World Bank, Working Paper 2517 (31 October 2000). Paper downloaded from


2

3 4

5 6

7 8 9 10 11 12 13 14 15 16 17

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http://econ.worldbank.org/files/1333_wps2517.pdf. Easterly states in his abstract: ‘I find no evidence for a direct effect of structural adjustment on growth.’ Tony Killick also states that ‘Neither the IMF nor the World Bank have been able to demonstrate a convincing connection, in either direction, between SAPs and economic growth’, in T. Killick, ‘Making Adjustment Work for the Poor’, (ODI Poverty Briefing, 5 May 1999), p. 2. See also South Commission, The Challenge to the South (Oxford: Oxford University Press, 1990), p. 67. A. Escobar, Encountering Development: The Making and Unmaking of the Third World (Princeton, New Jersey: Princeton University Press, 1995). Similar, though somewhat less sophisticated uses of Foucaultian discourse theory can be found in M. Rahnema and V. Bawtree (eds), The Post Development Reader (London: Zed Books, 1997) and W. Sachs (ed.), The Development Dictionary: A Guide to Knowledge as Power (London: Zed Press, 1992). Anybody wishing to investigate Foucaultian theory might consult the following volumes by Foucault: Madness and Civilization, Trans. R. Howard (New York: Pantheon, 1965); The Order of Things, Trans. A. Sheridan (New York: Random House, 1970); The Archaeology of Knowledge, Trans. A. Sheridan (New York: Pantheon, 1972); The Birth of the Clinic, Trans. A. Sheridan (New York: Vintage, 1973); Discipline and Punish, Trans. A. Sheridan (New York: Vintage, 1979). T. May, Reconsidering Difference (University Park: University of Pennsylvania, 1997), p. 3. G. Esteva and M.S. Prakash, Grassroots Post-Modernism: Remaking the Soil of Cultures (London: Zed Books,1998), p. 127. The same authors develop a similar line of thought in ‘Beyond development what?’, Development in Practice, 8, no. 3 (1998) 280–96. Esteva and Prakash, Ibid., p. 128. The exposition of Derrida’s theory on pp. 4–8 is drawn from the following books by Derrida: Of Grammatology. Trans. G. Spivak (Baltimore: Johns Hopkins University Press, 1976); Writing and Difference. Trans. A. Bass (London: Routledge and Kegan Paul, 1978); Dissemination. Trans. B. Johnson (Chicago: University of Chicago Press); Margins of Philosophy. Trans. A. Bass (Chicago; University of Chicago Press, 1982); Limited Inc. Trans. S. Weber (Evanston: Northwestern University Press, 1988). R. Beardsworth, Derrida and the Political (London: Routledge, 1996), p. 13. J. Derrida, ‘Remarks on Deconstruction and Pragmatism’, Trans. S. Critchley, in C. Mouffe (ed.), Deconstruction and Pragmatism (London: Routledge, 1996), p. 83. Ibid., pp. 86–7. J. Derrida, Spectres of Marx: The State of the Debt, the Work of Mourning and the New International, Trans. P. Kamuf (London: Routledge, 1994), pp. 51–2. Ibid., p. 89. Ibid., pp. 85–6. Ibid., p. 86. Ibid., p. 87. Ibid., p. 87. J. Derrida, ‘Marx & Sons’, Trans. G.M. Goshgarian, in M. Sprinker, Ghostly Demarcations (London: Verso, 1999), p. 242. This thesis is developed at greater length in the author’s forthcoming book, The End of Development?, to be published by Pluto Press in 2002.


Part II Ideas, Institutions, and Policy



Turbulence in the contemporary global political economy raises important questions about the kinds of institutional frameworks and policy approaches most conducive to the management of issues and problems in various political-economic contexts. The way these issues are framed influences how problems are diagnosed and the solutions proposed. The four chapters in this section pick up on some key themes introduced in the previous section, moving from the analysis of broader questions of governance and institutional reform to the examination of more specific instances of change and adaptation. The chapters by BusumtwiSam and Best examine specific instances of the convergence of norms and standards that attempt to impose a certain kind of discipline and rationality onto politics via international aid and finance. The chapters by Dobuzinskis and Lavelle examine the emergence of new forms of association and exchange, and state responses to changes in the external environment. Although each has a different theoretical focus, the chapters adopt approaches situated at what might be called a ‘meso-level’ of analysis, focusing primarily on institutional dynamics. A key question is whether the transformations that are occurring could bring about new configurations (for example, new roles for state and non-state actors) which would result in significant improvements in the welfare of most people without sacrificing political and moral values to economic imperatives. A range of new options are now available. They involve potential benefits as well as significant risks and costs. The authors start from the premise that these risks are worth taking insofar as trying to turn the clock back and refusing to consider the potential benefits of on-going changes and trends in international political economy would be a counsel of despair. 83

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Thus Busumtwi-Sam, picking up on development themes introduced in the previous section, suggests that the market-oriented reforms advocated by the International Financial Institutions (IFIs) could bring about desirable results if they were implemented in ways that allowed recipients a greater say in the definition of concepts like ‘good governance’, increased ‘social participation’ and enhanced perception of ‘ownership’ of the reform programmes. Dobuzinskis points out that in many instances, but within limits that need to be better understood, a ‘gifteconomy’ parallel to the formal market economy could draw upon more or less altruistic motivations to produce some of the public goods that fiscally constrained state institutions may no longer be able to provide in advanced economies or are not yet capable of providing in developing and transition economies. Best reminds us that ambiguities abound in financial and other markets; one way out of this predicament would be for economic actors around the world to internalize the standards of a liberal market order – another would be to recognize that this is only one of many possible strategies. Finally, Lavelle notes that in a number of countries a shift away from the direct control of certain industries, through privatization for example, could be accompanied by ‘a re-engagement with the economy through new financial processes’.

5 Rethinking Development: Governance, Participation, and Ownership James Busumtwi-Sam

Introduction ‘Good governance’, ‘participation’, and ‘ownership’ are three policy metaphors that have come to define the new foreign aid agenda and priorities.1 Their apparent convergence in the latter part of the 1990s may be indicative of the institutionalization of a new orthodoxy in the political economy of international development. Here, the effectiveness of aid in enhancing economic performance in poorer countries is seen to depend on the management of sound macroeconomic policies, the rule of law and respect for private property rights (good governance); on a functioning civil society (participation); and on the commitment on the part of aid recipients to reform programmes (ownership). This convergence has been expressed institutionally in increased aid selectivity and conditionality, and in the formation of new partnerships between the major bilateral and multilateral aid donors and non-governmental organizations (NGOs). It has also been accompanied by changes in the content, pattern, and volume of financial flows from developed to developing countries. This chapter explores the sources of this convergence and assesses its implications for development in the world’s poorest countries. While the long-term implications of the new aid agendas are as yet unclear, the existence of a sizeable gap between the rhetoric espoused by donors and actual development policy processes and outcomes in the so-called ‘Least Less Developing Countries’ (LLDCs) is already evident.2 On the surface promoting good governance, the perception of local ownership, and the active participation of civil society in the design and implementation of development programmes and projects certainly seem like laudable goals. However, beneath the surface, fundamental flaws and 85


contradictions characterize the new policy discourses, especially in their diagnoses of the development challenges in, and aid requirements of LLDCs. At the core of this divergence lies an analytical and theoretical shallowness that fails to recognize the nature and role of the state in development – as a structure of authority and rule and as an agent of such rule in the mobilization of collective identity and shared social purposes in pursuit of development goals. The argument is developed in three parts. The first section provides a brief overview of the evolution of international development assistance. Section two examines the new development policy discourses. The third section assesses their implications using illustrative evidence from selected LLDCs in Africa.

Theory and practice in international development assistance Foreign aid (also known as official development assistance – ODA) may be defined as the administered transfer of resources from donors to recipient countries for the ostensible purpose of promoting the latter’s welfare and development.3 Such aid comes in one or a combination of forms – project or investment lending to finance specific development projects (for infrastructural projects such as building roads, schools, and so on); technical assistance, where in lieu of money, skilled personnel are transferred to assist in capacity building; and programme lending (also known as policy-based or adjustment lending) much of it in the form of balance of payments finance. The practice of developing countries through foreign aid became a distinct international issue in the late 1940s and early 1950s. It has since evolved into a complex international network of official bilateral and multilateral donors, NGOs, and aid recipients. Aside from a few minor changes, this system remained essentially intact until the 1980s. The historical context The notion that resources should be used to promote development of countries and societies is largely a post-Second World War phenomenon. Indeed, at the Bretton Woods conference in 1944, assistance for the purposes of promoting development was not a central concern. Regulating economic activity and transactions within and among states in order to maintain post-war peace and stability was the central issue. 4 By the 1950s, the idea of providing aid for development purposes emerged as a distinct pattern of activity. Two objectives characterized this early period, driven by a mixture of self-interest and altruism. First,

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aid was used to counter the spread of communism and promote the strategic interests of western donors in the context of the evolving Cold War contest. Second, aid was seen a means to promote long-term growth in developing countries, which in turn would be beneficial to economic growth and stability for donors.5 A particular view of development processes and strategy provided the theoretical and normative justifications for this goal. Development was seen in holistic terms to involve broad historical processes of structural transformation of whole societies. This was true both of the ‘modernization’ thesis that underpinned conventional development thinking and practice, and the structuralist/dependency antithesis. 6 There were, of course, major differences within and between these two paradigms, over the relative weights accorded external and internal factors in the explanation of development and underdevelopment, over the priority accorded particular development goals, and the specific means of attaining those goals. But in both cases, development was seen to involve processes of structural change with a key role for the state and government in overcoming obstacles to development. 7 For the evolving culture of conventional development as reflected in the practices of the major official donors, the main obstacles to development lay in domestic market failures evident in the existence of two key ‘resource gaps’ – the absence of appreciable levels of domestic savings and investment, and the existence of a foreign exchange constraint. Government intervention was seen as the solution to these market failures. The economic rationale was fairly simple: an increase in the rate of GDP growth was essential to economic growth, which in turn was dependent on an increase in the rate of investment. Inflows of foreign aid (and private capital investment) into developing countries were thus necessary to help close these resource gaps and thereby enable economic growth. 8 In practice, this entailed the transfer of investible foreign exchange to be used by aid recipients for the development of physical capital and infrastructure. From the 1960s onwards, concern over the development of ‘human capital’ was included as another key resource gap that foreign aid would help to close. This led to the emergence of the technical assistance component of foreign aid. The premise was that a skilled and educated population was central to the development of indigenous capacities to help countries move from aid dependency to self-sufficiency. In practice, this meant a transfer of skilled personnel from donors to recipients.9 The 1970s saw some brief flirtations with concerns such as


‘basic needs’ satisfaction, employment generation, income distribution, and poverty alleviation, but these were largely debates over the phasing and sequencing of particular measures.10 The overall emphasis on achieving growth and structural transformation via investment in physical and human capital remained intact. The state was still seen as the key agent in overcoming domestic market failures and fostering development. Changes in the 1980s and 1990s From the mid-1980s onwards, a number of key changes occurred in the composition of development assistance, in the pattern of its disbursements, and the terms upon which it was made available. 11 The first was the growth in programme lending. With this came an expansion of the conditionalities attached to loans, as well as the growth in donor coordination through the formation of various donor consortia. Another important consequence was the elevation of the International Financial Institutions (IFIs) – the International Monetary Fund (IMF) and World Bank (WB) – as ‘gatekeepers’ between donors and recipients.12 Although bilateral donors provide much larger sums to LLDCs (about three-quarters) in all components of development assistance than do the IFIs, the influence of the latter is considerable. This influence stems from the key signalling role performed by the IMF and to a lesser extent by the WB. The IMF’s ‘good housekeeping’ seal of approval strongly influences bilateral donor commitments and disbursements, both individually and in consortia with other donors such as in the WB-led consultative groups, the ‘round tables’ led by the United Nations Development Programme (UNDP), and the ‘Paris Club’ of debt rescheduling. This key signalling role is performed whether or not the IMF itself provides finance. The early 1990s saw a marked decline in overall levels of development assistance after over 30 years of steady increases. Between 1992 and 1998, gross disbursements of aid from the major bilateral donors of the Development Assistance Committee of the Organization for Economic Cooperation and Development (DAC-OECD) fell by 15 per cent, from about US$60.8 billion to U$51.5 billion. 13 The decline in ODA was also evident in the proportion of donor GNP devoted to aid. Sixteen of the twenty-one DAC members devoted a smaller portion of their GNPs to development assistance in 1997–98 than in 1988–92. Over the same period, private capital flows (PCF) to the developing world increased dramatically, peaking at US$282.6 billion in 1996 – a figure that outstripped ODA by a factor of six. However, although the decline in ODA


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did coincide with an increase in PCF to the developing world, very little of this capital went to the poorest LLDCs.14 The 1990s saw other significant changes in the form of increased participation of NGOs in the delivery of aid. Private foreign aid increased steadily from the 1960s, and by the middle of the 1990s over 4600 NGOs based in developed countries were transmitting aid to support various projects in the developing world. While precise data on the amounts transferred annually by NGOs is difficult to obtain, one estimate puts the figure between US$12–15 billion with about 50 per cent of that amount directly coming from donor governments. 15 Between 1990 and 1997 the share of total ODA channelled through NGOs nearly doubled, from 6.4 per cent to 12.2 per cent.16 The increased role of NGOs in international aid was influenced in part by broader trends in global political and economic restructuring. The withdrawal of states from the public domain and the advance of communications technologies served to open up new spaces for various private groups and new social movements to engage in social, cultural and economic interaction across national boundaries. The end of the Cold War also opened up space for the emergence of issues onto the international agenda such as environmental protection, human rights, women’s rights and so on that were spearheaded by various types of NGOs. 17 However, the increased role of NGOs as aid donors also resulted from deliberate policy among official donors, which funded these agencies and integrated them into aspects of conventional aid planning and delivery. For example, by 1996, 10 per cent of Canada’s overall ODA was channelled through NGOs; the figure was around 20 per cent for the United States.18 World Bank funding of NGOs also increased, in large part a result of the growing portfolio (48 per cent in 1996) of the Bank’s development projects in which such organizations were involved. Nongovernmental Organizations are regularly consulted by bilateral donors, the EU and agencies within the UN system on a wide range of aid issues.19 Since 1992 the United States has directed most of its development aid in Africa, estimated at US$711.3 million in 1998, through NGOs rather than directly to recipient governments. This shift to public funding of NGOs allowed the aid budgets of official donors to remain stagnant and/or decline throughout the post-Cold War era, even in the face of increases in levels of absolute poverty and inequality in many regions of the developing world.20 This produced a further uncoupling between the level and distribution of aid, and actual development achievement in recipients, as LLDCs received a smaller share of the


shrinking aid pie. Aid to these countries fell from a total of 28 per cent of collective DAC GNP in 1985–86 to 23 per cent in 1997.21 It remains to be seen whether recent anti-poverty initiatives such as the UN’s Millennium Declaration and the March 2002 Monterrey declaration in which the major donors pledged to increase aid by 15 per cent, will indeed produce results. 22 Explaining changes in the conventional aid system A number of factors combined to produce the changes described above. These include structural changes, domestic factors within developing countries, and ideational factors. The end of the Cold War altered the political context and rationale for aid. It ended the strategic value of certain states in the developing world that had received aid irrespective of the character of their governments. The collapse of centrally planned economies plus China’s move to a market economy served to further vindicate western models of economic organization. The so-called ‘third wave’ of democratization that swept through Latin America, Eastern Europe, and then into parts of Africa and Asia, provided further vindication. Another important systemic factor was the expansion and integration of global financial markets and expansion in private capital flows. 23 A key domestic factor was the failure of the state-led import-substitution industrialization adopted by the majority of countries in the developing world. While the model of development adopted by the South-east Asian Newly Industrializing Countries (NICs) was export-led and outward-oriented, it also involved extensive state interventions into the economy. Beginning in the early 1980s, however, a marked retreat of the state from the economy occurred. These changes were in part a response to policy failures and domestic changes within these countries, and in part due to the debt crisis that emerged in 1982 and the subsequent collapse in commodity prices, which enhanced the leverage of the IFIs through their conditional loans to debtor countries in need of financial assistance.24 The intellectual and normative bases for the changes in the conventional aid system can be traced to the emergence of a variant of neoliberalism known as the ‘Washington consensus’.25 This view endorsed neoclassical economic principles, placing emphasis on market forces. Market instruments supposedly encouraged greater allocative efficiency, increased investment and hence faster economic growth and increased standard of living in developing countries. Government intervention in the economy was to be minimal and was to focus, not on managing demand, creating employment, and pursuing social welfare


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goals as was the case under Keynesian economic principles, but on supply through the use of monetary and fiscal macroeconomic instruments to stimulate savings, investment and production by the private sector. From this perspective, the obstacles to development lay in government interventions into the market, which resulted in an inefficient allocation of resources. A parallel but related intellectual development was the renewed attention to ‘civil society’ in development. 26 While some see in civil society a locus of a potentially transformative political economy of development, 27 as prominent critics have noted, for the major donors civil society is seen as an agency for stabilizing the political and economic status quo.28 Where foreign aid was once based on serving the Cold War interests of donors, it was now to be used to service the development of market economies and accelerate processes of market penetration by private economic agents, by engendering the social and political stability deemed necessary for these to occur.29 Whether by accident or by design, the contemporary discourse on civil society in development became fused with aspects of the Washington consensus to produce a brand of ‘neo-liberal populism’. 30 The integration of NGOs into the aid delivery system is the institutional manifestation of this fusion. And where NGOs once stood apart from the major bilateral and multilateral donors as critics and watchdogs, they have increasingly been brought into the conventional aid system. With these changes came a new view of development and the role of foreign aid. This entailed a shift from what had been a longer-term view of development to an ahistorical approach that emphasized policy and institutional change and short-term improvements in the performance of selected political, economic and social indicators of development. It also entailed a further devaluation of the state or public sector as the key agent in fostering development, and the elevation of private actors – both in the second or for profit sector, and in the third or non-profit/ civil sector. 31 Development assistance was now more about supporting ‘good’ policies and ‘good’ domestic institutions as defined by donors and as indicated by the performance of key sectors of an economy, and creating the space for private enterprise and civil society, than about providing capital and know-how for longer-term growth, structural transformation, and poverty alleviation.32 While providing capital to close resource gaps remains important, ‘effective aid’ is now seen to depend on domestic institutional and policy change (governance), greater participation of civil society in the design and implementation of development programmes and projects (participation),


and demonstrated commitment on the part of recipients to the policy prescriptions of the Washington consensus (ownership). These would be supported and reinforced by a broader package of conditional project and programme finance tied to macroeconomic reforms and new forms of technical assistance. Hence the convergence of the three policy metaphors that have come to define the new aid agenda and priorities. In the process, new discourses on the political economy of development have surfaced in which the emergence of democracy, private enterprise and markets, and civil society are taken to be synonymous with ‘development’. However, as with all policy discourses quite a gap exists between the rhetorical articulation and representation on one hand, and the empirical reality on the other.

The new development policy discourses The emergence of the governance agenda, and the subsequent attention to issues of participation and ownership, represent an attempt by donors to ensure that recipient countries were truly implementing the kinds of policies called for.33 These issues became central because of mounting evidence of the lack of success in the sustained implementation of aid-supported reforms and the failure to realize targets specified in such programmes – especially the kinds of structural reforms prescribed under IMF and WB supported adjustment programmes.34 At the core of the controversy surrounding these agendas is the attempt to define and effect the content and direction of domestic policy and institutional/political change in aid recipients through conditionality. Two interrelated levels or spheres are involved: the sphere of external bargaining and negotiation between recipients and donors in the design and implementation of programmes and projects supported by foreign aid; and the sphere of internal consultation between state policy makers and domestic non-governmental actors in policy formulation, implementation and accountability. The sphere of external bargaining The sphere of external bargaining is characterized by the attempt to leverage external finance into domestic policy and institutional change through conditionality. All forms of external assistance (except emergency relief funds) are subject to some form of conditions, even grants. However, the type of conditional lending that generates the greatest debate is the kind of programme finance relating to conventional macroeconomic adjustment as prescribed by the IMF and WB where


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formal conditionality is embodied in performance criteria that tie disbursements to specific targets. Since the early 1980s and the widespread adoption of structural reforms, conditionality practices of donors have expanded in two ways – the scope of issues covered, and in the depth of ‘reach’ into particular policy areas and the kind of explicit and detailed changes called for. 35 This has occurred in the practices of the multilateral agencies as well as bilateral donors. The economic crises that swept the developing world in the late 1970s and early 1980s affected the evolution of adjustment lending to produce ‘three generations’ of reforms. The first generation, roughly from the late 1970s and into the early 1980s, placed emphasis short-term macroeconomic stabilization. The focus was on reducing internal and external deficits through demandrestraint and other deflationary measures, with little attention to supply problems. The second generation reforms, introduced in the early 1980s, attempted to address supply problems through medium-term ‘structural adjustment’ or ‘adjustment with growth’. With this came an expanded set of reforms linked to conditionality, including the realignment of domestic incentive structures as well as internal and external trade liberalization. In response to criticism of the social effects of adjustment, some attention was directed towards poverty alleviation. The third generation reforms emerged in the late 1980s and early 1990s. They involved more detailed conditions and moved well beyond macroeconomic policy reform to address broader institutional and political variables, including public sector reforms (retrenchment and divestment), privatization and deregulation, and financial sector liberalization. 36 This expansion in the scope and depth of conditionality into nontraditional areas inevitably led donors into the political realm. While the IMF and WB had previously made some timid incursions into non-traditional areas (such as the labelling of apartheid in South Africa an ‘inefficient’ labour practice by the IMF in the 1980s) the scale of the inclusion of political variables in the 1990s was unprecedented. And although both institutions have fallen short of making explicit calls for specific types of political changes or forms of government, and have attempted to define governance issues in ways that are ostensibly technical (and therefore apolitical), 37 that ‘good governance’ is taken to be synonymous with some type of democratic-type government is abundantly clear. 38 The WB, for example, defines good governance as the ‘management of public resources on behalf of all citizens with fairness and openness’


based on four central themes – ‘transparency’, the ‘rule of law’, ‘legal reform’, and ‘accountability’ in public life. 39 The IMF has similarly embraced the good governance agenda. A new set of guidelines issued by the Fund’s Executive Board in August 1997 instructs staff to assist member countries create systems that ‘limit the scope of ad hoc decision making’. It also specified that it was ‘legitimate to seek advice about the political situation in member countries as an essential element in judging the prospects for policy implementation’.40 In addition, a stable and transparent regulatory environment for private sector activity is prescribed as the solution to problems such as corruption and other forms of government inefficiency. The sphere of external bargaining is further reduced by conditionality practices of bilateral donors. A high proportion of technical assistance is provided as a condition for other types of finance. In effect, as Helleiner has argued, technical assistance appears to have become a device for monitoring and enforcing conditionality and/or for the creation of employment for the nationals and firms of donor countries. 41 Currently, significant bilateral assistance (beyond emergency relief) is negotiated via a consortium of donors – a multilateral fund-raising or ‘pledging’ conference is called that brings together the IFIs, bilateral donors, some UN agencies, and representatives of a recipient country. 42 The most important pledging conferences are the WB-led Consultative Groups. To a degree, pledging conferences allow donors to shape aid programmes and priorities to the needs of recipients, and also provide a forum for recipients to articulate their particular needs and priorities to donors. 43 However, donor consortia also help to ensure a degree of coordination among donors and uniformity (of conditions) across cases. Furthermore, the type of aid pledged at donor conferences is dictated not necessarily by the needs of recipient countries, but by the national or organizational interests of donors. Aid invariably serves the interests of donors, and within aid-granting agencies, organizational interests factor into any calculation. Aid recipients confront powerful organizational cultures and interests that help to ensure that programmes are essentially the same across countries. In the IMF and WB, for example, the standard procedure for advancing a loan is the preparation of a ‘letter of intent’ and a ‘policy framework paper’ drafted by the staff of these agencies and signed by the relevant agent of the recipient state. In drafting these, Fund and Bank staff are usually more interested in what is likely to be accepted and approved by their executive boards and senior management than in designing programmes that actually


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reflect the economic, political and institutional realities of recipient countries.44 Within bilateral donor agencies and departments, similar organizational dynamics are present. Aid bureaucracies tend to develop their own country strategies or programmes intended for recipients, which emanate from within the agencies themselves. These programmes are used in domestic parliamentary debates and public discussions. Donor agencies and departments are accountable to their domestic constituencies, and are subject to various constitutional, parliamentary and administrative oversight requirements designed to ensure proper accountability. These help to create pressures on aid agencies to spend budgets in order to meet targets, even if this means railroading their way through negotiations with recipients. In effect, the aid system among bilateral donors is result-driven where pressure exists to show quick results and short-term efficiencies. It is also supply-driven, based on criteria that emanate from donors, rather than demand-driven according to the needs of the recipients. 45 The sphere of domestic bargaining The inclusion of the participation agenda represents an attempt by donors to deal with the contradictions brought about by expanded conditionality. The policy process in traditional development assistance was essentially a dialogue between recipient governments and donors, enforced by conditionality. The participation agenda assumes that the formation of increased partnerships between governments and NGOs (also through conditionality) would help resolve conflicts between the two levels. Participatory development thus involves greater collaboration between donor agencies, NGOs and individuals and groups that supposedly make up civil society.46 The inclusion of the participatory agenda, through such notions as ‘civil society empowerment’ has served to reinforce the governance agenda: NGO participation and civil society empowerment require a particular type of government that is open to such participation, and responsive to the needs of its population. From the perspective of donors, lack of dialogue and accountability between policy makers and the larger population plays a large role in the inability or unwillingness to implement reform programmes, and poor economic performance. Lack of participation is also to blame for problems of societal disengagement and exit that plague many countries in sub-Saharan Africa, as well as the explosion of parallel market activity, tax evasion and other forms of ‘corruption’. In short, enhancing


societal participation in development policy making is seen as a way to enhance the responsiveness and legitimacy of government. Increased participation is supposed to promote local ownership, introduce flexibility in responding to changing conditions by reducing obstacles to institutional innovation, and ensuring economic responsibility through a socially-vetted management system. 47 Furthermore, NGOs (as donors) are said to possess several comparative advantages that make them important partners to official aid donors. These include their relative speed and efficiency in delivery of aid; their ability to mobilize resources at local levels; and their role in the creation of alternative means of economic and social exchange and reproduction at the local level in recipient countries, thereby helping to facilitate local ownership of programmes from the ‘bottom-up’. And the existence of such forms of local association and organization is taken to be evidence of a domestic civil society in aid recipients, which in turn is seen as playing key political and economic roles. Politically, civil society is viewed as a key ingredient in the consolidation of democracy. A dynamic civil sector is seen as one way of addressing the lack of accountability and transparency in government. It plays a major role in the deepening of democratic reforms and practices beyond representation by political parties and periodic electoral competition. Economically, civil society is understood to play an equally important function in generating long-term conditions for marketbased economic development. 48 In the account favoured by donors, civil society performs a ‘generative function’ by ‘standing in’ for the state in large areas of public responsibility thus helping to ensure against regulatory encroachments by the public sector over the private. Its key role lies in socializing people to the market by promoting the acquisition of certain behavioural patterns and decision-making preferences, and by supporting the functional social networks (social capital) needed for the smooth operation of markets. 49

The reality On the surface, promoting good governance, increased societal participation, and national–local ownership of development programmes certainly seem like laudable goals. However, beneath the surface, fundamental flaws and contradictions characterize the new development policy discourses that raise questions about the ability of the new externally-sourced aid agendas to achieve development goals in recipients.


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Governance While no one can quibble with democracy as an ideal, the real issue is the analytical shallowness of the new orthodoxy. Various studies have shown no correlation between type of government and the ability to implement policy reform.50 Other institutional and political variables rather than type of government, particularly the character of state–society relations and the government’s statecraft appear to be more important to the effective implementation of economic reform programmes.51 In sub-Saharan Africa, for example, a 1999 WB assessment found that of ten cases of adjustment programmes between 1980 and 1996, only two (Ghana and Uganda) could be considered ‘successes’ in terms of sustained implementation, and in terms of achieving two key targets – growth in GDP, and some reduction in poverty levels (and even Ghana and Uganda cannot be considered unqualified successes). 52 However, neither Ghana nor Uganda had governments that could be considered democratic in the usual sense of the term during the core period when adjustment measures were undertaken (1983–92 and 1986–96 respectively).53 Evidence from these and other cases suggests that effective statecraft involves: the ability to respond to changing signals and resource availabilities; the ability to recognize the different political challenges and requirements of the different phases of adjustment and to make the corresponding changes; the ability to distribute costs and benefits more evenly; and the ability to negotiate concessions and flexible implementation schedules that more accurately reflect domestic political and economic realities. This indicates that a degree of autonomy from particularistic social interests is a key factor in sustaining reform. This is essential to widening the ‘political space’ within which a government could manoeuvre to shift its basis of support at various stages in the adjustment process to cultivate the support of the winners and minimize the influence of the losers. In the case of Ghana, although the government was not able to cultivate widespread public support for the adjustment programmes, it was able to win acceptance by distributing costs in a way consistent with public perceptions of equity.54 In this regard, donor conceptions of good governance tend to overlook important substantive and distributive political issues and outcomes that are important variables affecting governmental legitimacy and authority. In keeping with the liberal premises on which it is based, the donor discourse on governance focuses almost exclusively on the means and procedures through which power is acquired and exercised (procedural legitimacy). Hence the tendency to view democratization


rather narrowly in terms of its formal procedural and institutional dimensions – free elections, the rule of law, accountability and transparency; and the tendency to exaggerate the ability of formal institutional and procedural mechanisms to effect changes in the way a polity is governed. However, good governance is also a function of the ability of state institutions to mediate effectively in the provision of public goods and in the distribution of values and resources (especially in regards to such issues as poverty reduction and inequality). These interventions are key elements in the kinds of legitimation needed to effectively institutionalize public authority in the context of weak states in Africa.55 The substantive and performance dimensions of legitimacy, not just the formal and procedural, are constitutive elements in transforming individuals from private citizens into cohesive groups with shared collective identities and social purposes. 56 Thus, the ability of democracy (or any other form of government) to be a vehicle for development is as much a function of the kinds of social relations that support it as of the formal character of its institutions and procedures. Widespread poverty and inequality subvert democracy. They not only foster the kind of corruption and rent-seeking activities that the good governance agenda hopes to eradicate, they also allow extra-democratic corporate and clientelistic forms of authority to emerge that reinforce hierarchical modes of differentiation.57 This undermines the participation agenda. Participation The implications of the participatory agenda are ambiguous at best, both in terms of donor conceptions of the nature of civil society and of its role in the development process. With respect to the nature of civil society, the donor discourse tends to equate the emergence of westernstyle NGOs in aid recipients with the existence of civil society, and to see the latter as a category that can be created from the outside. Based on liberal-pluralist premises, civil society is taken to be the realm of organized private social life represented by non-governmental actors and associations, which emerges spontaneously as individuals and groups in society organize and form associations to pursue their interests. This attempt at homogenization that attempts to impose a particular conception of civil society onto non-western forms of social and political organization fails to acknowledge that different types of civil societies exist, and to recognize the interdependence of state and civil society. 58 The particular type of civil society varies according to the particular type of state and the history of state–society relations in particular societies. Hence, as numerous observers have noted, the extensively documented


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proliferation of private associations, and the patterns of societal exit and disengagement that have occurred in response to economic decline and political decay and conflict in Africa are not by themselves indicative of western-style civil societies, despite assumptions to the contrary by some of the major international NGOs and their supporters within donor governments and multilateral agencies.59 The role of nascent civil societies in the political economy of development must also be qualified in several ways. Recent studies suggest that rather than responding to needs of local populations and facilitating a transformative political economy of development from the ‘bottom-up’ the proliferation of domestic NGOs in Africa represents a local form of adjustment to changing international aid priorities. 61 Domestic and international NGOs have partially replaced the state as a key mechanism for gaining access to resources and opportunities, and for determining their redistribution within the broader society, and have thus become an avenue for the emergence of new forms of clientelism. Non-governmental organizations-directed aid, as with all types of aid, is not neutral politically, socially and economically in its effects. It invariably goes to some groups and not others, and thus affects distributional issues – income, status, wealth and power. Thus, uncritical international funding of local organizations and initiatives may accentuate power imbalances within existing social structures, or as noted above, reinforce social hierarchies not historically inclined towards progressive development. 61 The participatory agenda also creates problems for the building of state capacity and authority over the longer-term. The diversion of aid to parallel NGO delivery systems may further reduce already weak state capacities in Africa, by producing a dramatic decline in direct transfers of knowledge and funds to public sector institutions, and by attracting valuable human resources away from public sector employment. NGO aid has the potential to ‘fragment’ national public services into large numbers of ‘projects’. 62 The assumption by NGOs of growing areas of public responsibility also potentially erodes states’ ability to build legitimacy. For example, in parts of Africa, the financial magnitude of NGO projects has served to highlight the shortcomings of the state as a provider of public goods, and thereby weaken its credibility among local communities. 63 This further reduces the mediatory and distributive capacities of state institutions. Ownership Quite a gap exists between the rhetoric of ‘ownership’ and the reality of the expanded scope and intrusive depth of conditionality practices. The


evidence about the limited efficacy of external conditionality in achieving desired outcomes is now fairly extensive. Studies have shown that expanded conditionality has had little effect on policy reform. 64 Governments accept unrealistic targets even though they have neither the intention nor capability and willingness to implement them. Not only has conditional aid failed to foster development on a sustainable basis in Africa, purely imported reforms entail significant supervision costs for donors.65 Despite the poor empirical record, donors have managed to convince themselves that if conditional lending fails to achieve objectives, the problem is not with the programmes themselves, but with the failure on the part of recipients to implement them properly. Hence problems of implementation stem not from the intrusiveness of conditionality per se but from a lack of ‘commitment’ to the programme on the part of recipients. But where does this commitment come from? The answer, from the perspective of donors, is ‘credible reformers’.66 Credible reformers are governments which demonstrate commitment to reforms by undertaking sweeping institutional and political reforms, and by making efforts towards inclusion of non-state actors in the formulation and implementation of policy and projects. In essence, ‘good governance’ and ‘participation’ make for committed governments; and together, they enhance local ownership even in the presence expanded conditionality. In this way donors are able to justify increased selectivity when giving aid. Since the benefits of aid can only be realized in countries that have good governance and have shown good past performance in implementing reforms, aid should be allocated by selecting recipients according to these criteria.67 In other words, ‘commitment’ (and hence ownership) is to be demonstrated before aid will be given. Increased selectivity and the conditionalities that come along with it have thus emerged as a way for donors to rationalize aid programmes according to cost-effective and result-oriented criteria. 68 While donors are correct in identifying commitment as a key to the perception of ownership, the reality is that such commitment has little to do with conditionality. The ability of a government to sustain major economic reforms lies in the extent to which that government recognizes the necessity or desirability of the reforms, and is able to reshape domestic political structures, both within the state and in the relationship between state and society, in order to contain political costs and reduce risk.69 Evidence from successful reformers such as Ghana and Uganda indicates that sustainability of aid-supported policy reforms begins at the stage

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where the decision is made to adjust and at the negotiations for the programme. Where policy makers have not recognized the need for domestic policy adjustment, where the decision to adjust is made reluctantly or under external pressures, there will be little perception of ownership of the programme and little commitment to its objectives. In addition, the evidence suggests the power, cohesion and ideological orientation of technocrats is an important variable in explaining the implementation of adjustment programmes. The acceptance and implementation of the policies rests on the compliance, if not support, of a ‘stabilizing cadre’ of technocrats sympathetic to policy reform. The core of this cadre forms the domestic half of a ‘transnational coalition’ with technocrats within donor agencies. 70 Hence, the existence of a cadre within the state apparatuses that ideationally is sympathetic to the prescriptions of the Washington Consensus, appears be a prerequisite for programme success. Thus, far from enhancing ownership, conditionality may actually reduce commitment to programmes. In Ghana, the perception of ownership was strongest during the period when conditions were fewer (1983–87). This was also the period of rigorous implementation and adherence to targets. However, when the number of conditions proliferated (1987–92), the perception of ownership declined, the pace of reform slowed considerably, and the adherence to targets declined. 71

Conclusion The arguments and examples presented in this chapter raise serious questions about the ability of the new externally-sourced development agendas to effect desired changes in recipient countries. Good governance, increased societal participation, and enhanced perceptions of ownership may indeed be necessary to the successful implementation of aid-supported reforms, but not necessarily in the way these concepts are articulated in new donor discourses on the political economy of development. Good governance entails more than the creation of formal institutional and procedural mechanisms of democracy. Important substantive and performance (distributive) issues and outcomes are involved, conditioned by the internal relations within the state and the character of state–society relations. The same applies to civil society. So-called civil societies in many parts of Africa are themselves largely generated from external sources, and cannot therefore be taken as mechanisms for ‘nationalizing’ long-term development initiatives. With respect to


ownership, the issue is not the need for some type of policy conditionality. The real issues revolve around the content of conditionality, and the rigidity and intrusiveness in the policy prescriptions and targets of conditional lending, which are unnecessary and misguided. Existing forms of conditionality reduce rather than enhance local ownership. They also limit the space for local participation in policy making. The irony is that while there might have been a genuine demand for some kind of change in policy by organized interests in African and other LLDCs, the specific types of changes that have occurred have not in most instances emanated from these local interests.

Notes 1 This new convergence is aptly summarized in the World Bank report, Assessing Aid: What Works, What Doesn’t and Why (New York: Oxford University Press, 1998). 2 These countries are, on a per capita basis, the largest recipients of development assistance. 3 The terms ‘foreign aid’ and ‘development assistance’ are used interchangeably. Development assistance includes grants, concessional loans and technical assistance (official development assistance, ODA) as well as non-concessional official development finance (ODF). In the subsequent discussion, ODA is used to include both official development assistance and official development finance. The major bilateral donors of ODA/ODF include the member states of the Development Assistance Committee of the Organization for Economic Cooperation and Development (DAC/OECD). The major multilateral donors include the World Bank (WB), the International Monetary Fund (IMF), the various regional development banks, and development agencies within the UN system. See World Bank, Assessing Aid. 4 See Robert E. Wood, From Marshall Plan to Debt Crisis: Foreign Aid and Development Choices in the World Economy (Berkeley: University of California Press, 1986). 5 World Bank Assessing Aid; A. Escobar, Encountering Development: The Making and Unmaking of the Third World (Princeton: Princeton University Press, 1995), p. 34; and L. Pettiford and M. Curly, Changing Security Agendas and the Third World (London: Pinter 1999), pp. 28–32. 6 For an overview, see Charles Gore, ‘The Rise and Fall of the Washington Consensus as a Paradigm for Developing Countries’, World Development, 28 no. 5 (2000) 789–804. 7 Frans Schurman, ‘Paradigms Lost, Paradigms Regained? Development Studies in the Twenty-first Century’, Third World Quarterly, 21, no. 1 (2000) 7–20; Charles Gore, ‘The Rise and Fall’. 8 Richard Jolly, ‘The Myth of Declining Aid’, in R. Cupleper, A. Berry and F. Stewart (eds), Global Development Fifty Years After Bretton Woods (London: Macmillan, 1997), pp. 121–36 (1995); World Bank Assessing Aid. 9 Richard Jolly, ‘The Myth of Declining Aid’.

Governance, Participation, and Ownership 103 10 Gore, ‘The Rise and Fall’, 2000. 11 Jean-Phillipe Therien and C. Lloyd, ‘Development Assistance on the Brink’, Third World Quarterly, 21, no. 1 (2000) 21–38. 12 Gerald Helleiner, ‘External Conditionality, Local Ownership, and Development’, in Jim Freedman (ed.), Transforming Development: Foreign Aid For a Changing World (Toronto: University of Toronto Press, 2000), pp. 82–97; and N. Hermes and R. Lesnik, ‘Changing the Conditions for Development Aid: A New Paradigm?’, Journal of Development Studies, 37 no. 6 (2001) 9. 13 OECD/DAC, Annual Cooperation Reports (Brussels, OECD: 1999 and 2000). 14 See World Bank, World Development Report 2000/01: Attacking Poverty (New York Oxford University Press, 2001), p. 190. Prior to the 1997 financial crises in East Asia, 83 per cent of private capital flows went to only 15 countries, primarily in East Asia and Latin America. 15 Alan Folwer, ‘NGO Futures: Beyond Aid: NGDO values and the Fourth Position’, Third World Quarterly, 21, no. 4 (2000) 9. 16 OECD, Annual Cooperation Reports 1999 and 2000. 17 Kendal W. Stiles, ‘Civil Society Empowerment and Multilateral Donors: International Institutions and New International Norms’, Global Governance, 4 (1998) 199–216. 18 Ian Smilie, ‘NGOs: Crisis and Opportunity in the New World Order’, in Jim Freedman (ed.), Transforming Development (2000), pp. 114–343. 19 Ian Smillie ‘The World Bank’, in I. Smillie and H. Helmich (eds), Stakeholders: Government NGO Partnerships for Development (London Earthscan, 1999), pp. 278–338. 20 Craig N. Murphy, ‘Global Governance: Poorly Done and Poorly Understood’, International Affairs, 76(4) (2000), 796. Between 1987 and 1998, the total number of the world’s poor (an income of less than $US 1 per day) increased from 1.18 to 1.2 billion. Figures from World Bank, World Development Report 2000/01, pp. 21–4 and Table 1.1. 21 OECD, Developoment Cooperation: 1998. p. A66. 22 See United Nations General Assembly, United Nations Millenium Declaration. Resolution A/RES/55/2, New York, 18 September 2000. 23 World Bank, Assessing Aid. 24 J. Busumtwi-Sam, ‘The Role of the IMF and World Bank in International Development’, in E. Fawcett and H. Newcombe (eds), United Nations Reform (Toronto: Dundurn Press, 1995), pp. 248–66. 25 For more on the Washington consensus, see John Williamson, ‘What Washington Means by Policy Reform’, in John Williamson (ed.), Latin American Adjustment: How Much Has Happened? (Washington DC: Institute for International Economics, 1990); Moises Naim, ‘Washington Consensus or Washinton Confusion?’, Foreign Policy, 118 (Spring 2000) 87–103; and Gore, ‘The Rise and Fall’. 26 For an overview, see Goran Hyden, ‘Civil Society, Social Capital, and Development: Dissection of a Complex Discourse’, Studies in Comparative International Development, 32, no. 1 (1997) 3–30; and Alison Van Rooy (ed.), Civil Society and the Aid Industry (London: Earthscan 1998). 27 See, for example, T. Weiss and L. Gordenker (eds), NGOs, The UN, & Global Governance (Boulder, Colo: Lynne Reinner, 1996). 28 Robert Cox, ‘Civil Society at the Turn of the Millennium: Prospects for an Alternative World Order’, Review of International Studies, 25, no. 3 (1999) 3–28.

104 Ideas, Institutions, and Policy 29 Fowler, ‘NGO Futures’. 30 J. Nederveen Pierterse, ‘My Paradigm or Yours? Alternative Development, Post-Development, Reflexive Development’, Development and Change, 29 (1998): 343–73. 31 Schurman ‘Paradigms Lost, Paradigms Regained?’; Gore ‘The Rise and Fall’. 32 World Bank Assessing Aid, p. 13. 33 M. Miller-Adams, The World Bank: New Agendas in a Changing World (London and New York: Routledge, 1999). In practice, some variation occurs in the weight accorded the three agendas. 34 Joan M. Nelson, ‘Beyond Conditionality and the Changing International Agenda’, Harvard International Review, 61 (Fall 1992) 4–7. 35 Miles Kahler, ‘Orthodoxy and its Alternatives: Explaining Approaches to Stabilization and Structural Adjustment’, in Joan Nelson (ed.), Economic Crisis and Policy Choice: The Politics of Adjustment in the Third World (Princeton: Princeton University Press, 1990); Ishan Kapur, ‘The New Conditionalities of the IFIs’, International Monetary and Financial Issues for the 1990s, Vol. 8 (New York: United Nations, 1997). 36 Kapur, ‘The New Conditionalities’. 37 This is largely due to restrictions on explicit involvement in the internal politics of member states in their Articles of Agreement. 38 Martin Doornbos, ‘Good Governance: The Rise of a Policy Metaphor?’, Journal of Development Studies, 37, no. 6 (2001) 93–107; Thomas G. Weiss, ‘Governance, Good Governance and Global Governance: A Conceptual Overview’, Third World Quarterly, 21, no. 5 (2000) 795–814; Paul Nelson, ‘Whose Civil Society? Whose Governance? Decision making Practice and the New Agenda at the Inter-American Development Bank and the World Bank’, Global Governance, 6, no. 4 (2000) 405–32. 39 World Bank, World Development Report 1997: The State in a Changing World (New York: Oxford University Press, 1997). 40 See Harold James ‘From Grandmotherliness to Governance: The Evolution of IMF Conditionality’, Finance and Development, 35, no. 4 (December 1998) 44–7. 41 Of the US$12 billion spent annually on technical assistance in Africa, for example, about 90 per cent is spent on the salaries and living expenses of foreign ‘experts’. See Helleiner ‘External Conditionality and Local Ownership’. 42 NGOs are increasingly being included in such conferences. 43 Stewart Patrick, ‘The Donor Community and the Challenge of Postconflict Reconstruction’, in S. Forman and S. Patrick (eds), Good Intentions: Pledges of Aid for Post-Conflict Recovery (Boulder, Colo: Lynne Reinner, 2000), pp. 35–65. 44 Nguyuru H.I. Lipumba, ‘Financing Development in sub-Saharan Africa’, in Roy Culpeper and C. Pestieau (eds), Development and Global Finance (Ottawa: North-South Institute, 1996) pp. 85–102. 45 Helliener, ‘External Conditionality and Local Ownership’. 46 Benno J. Ndulu, ‘International Governance and Implications for Development Policy in Africa’, in R. Culpeper et al., Global Development Fifty years After Bretton Woods (1997), pp. 330–55; Stiles ‘Civil Society Empowerment’. 47 Ndulu, ‘International Governance’.

Governance, Participation, and Ownership 105 48 See Michael Edwards and David Hulme (eds), Non-Governmental Organizations: Performance and Accountability (London: Earthscan 1996); Smillie ‘NGOs: Crisis and Opportunity’. 49 The requirements of self-regulation and individual initiative, which are considered necessary to the development and consolidation of civil society, are identical to the requirements of a market economy. See G. Hyden ‘Civil Society, Social Capital and Development’; Sheelagh Stewart, ‘Happy Ever After in the Market Place: Non-government Organizations and Uncivil Society’, Review of African Political Economy, 71(1997) 11–34; Van Rooy (ed.), Civil Society and the Aid Industry; and Cathy McIlwaine, ‘Contesting Civil Society: Reflections From El Salvador’, Third World Quarterly, 19, no. 4 (1998). 50 Joan M. Nelson (ed.), Economic Crisis and Policy Choice; S. Devarajan, D. Dollar and T. Holmgren, Aid and Reform in Africa: Lessons From 10 Cases, Draft Summary (Development Research Group, World Bank, 1999) available at http://www.worldbank.org/research/aid/africa/. 51 Adrian Leftwich, ‘On the Primacy of Politics in Development’, in Adrian Leftwich (ed.), Democracy and Development (Cambridge, UK: Polity Press 1996), pp. 3–24. 52 The remaining eight cases are Côte d’Ivoire, Democratic Republic of Congo (DRC), Ethiopia, Kenya, Mali, Nigeria, Tanzania, and Zambia. 53 Both countries had governments led by charismatic military officers – Jerry Rawlings in Ghana, and Yoweri Museveni in Uganda. For more on Ghana, see J. Busumtwi-Sam, ‘Models of Economic Development in Africa: Lessons from the Experiences of Ghana,’ Journal of Commonwealth and Comparative Politics, 34, no. 3 (1996) 174–98. On Uganda, see John Loxley, ‘The IMF, the World Bank and Reconstruction in Uganda’, in B.K. Campbell and J. Loxley (eds), Structural Adjustment in Africa (Houndmills, Basingstoke: Macmillan, 1990), pp. 67–91. 54 Busumtwi-Sam, ‘Models of Economic Development’. 55 On problems of institutionalizing political authority in Africa, see Christopher Clapham, Africa and the International System: The Politics of State Survival (Cambridge: Cambridge University Press, 1996); and P. Chabal and J.P. Daloz, Africa Works: Disorder as Political Instrument (Oxford: James Currey, 1997). 56 G.M. Khadiagala, ‘State Collapse and Reconstruction in Uganda’, in I.W. Zartman (ed.), Collapsed States: The Disintegration and Restoration of Legitimate Authority (Boulder Colorado: Lynne Rienner, 1995), pp. 33–47; Zaki Ergas (ed.), The African State in Transition (London: Macmillan, 1987). 57 See Patrick Heller, ‘Degrees of Democracy: Some Comparative Lessons From India’, World Politics, 52 (2000) 484–519. 58 McIlwaine, ‘Contesting Civil Society’. 59 See for example, Peter M. Lewis, ‘Political Transition and the Dilemma of Civil Society in Africa’, Journal of International Affairs,46 (Summer 1992) 31–54; Rene Lemarchand, ‘Uncivil States and Civil Societies: How Illusion became Reality’, Journal of Modern African Studies, 30 (1992); Eboe Hutchful, ‘The Civil Society Debate in Africa’, International Journal, 51 (1995/96), 54–77; J. OkolaOnyango and J.J. Barya, ‘Civil Society and the Political Economy of Foreign Aid in Uganda’, Democratization, 7 (1997) 113–138; and Chabal and Daloz, Africa Works, pp. 17–30.

106 Ideas, Institutions, and Policy 60 Chabal and Daloz Africa Works, pp. 22–3. 61 See Mary B. Anderson, Do No Harm: How Aid Can Support Peace or War (Boulder, Colo: Lynne Reinner, 1999); Okola-Onyango and Barya ‘Civil Society and the Political Economy of Foreign Aid in Uganda’; McIlwaine ‘Contesting Civil Society’. 62 J. Busumtwi-Sam, A. Costy and B. Jones, ‘Structural Deficits and Institutional Adaptations to Peacebuilding in Africa’, in T. Ali and R.O. Matthews (eds), Peacebuilding In Africa: Cases and Themes (Toronto: University of Toronto Press, forthcoming). 63 See, for example, the statement by South African Minister of Public Works in ‘Donors Shift More Aid to NGOs’, Africa Recovery, UN Department of Public Information (June 1999). 64 Stephan Haggard, ‘The Politics of Adjustment: Lessons From the IMF’s Extended Fund Facility’, International Organization, 39, no. 3 (1985) 504–34; G. Helleiner and G. Corina (eds), From Adjustment to Development in subSaharan Africa (London: Macmillan, 1994); and Devarajan et al., Aid and Reform in Africa. 65 Ndulu, ‘International Governance’. 66 World Bank, Assessing Aid. 67 N. Hermes and R. Lesnik, ‘Changing the Conditions for Development Aid’. 68 Charles Gore, ‘The Rise and Fall’; M. Doornbos, ‘Good Governance’. 69 Busumtwi-Sam, ‘Models of Economic Development’. 70 Joan M. Nelson (ed.), Economic Crisis and Policy Choice. 71 The conditionalities in Ghana’s programme increased from 20 in 1983 to between 40–50 in 1988–89.

6 Social Norms in Transition: Gift-giving and Reciprocity in the Global Era Laurent Dobuzinskis

Give as much as you receive and all is for the best.1 Much attention has been paid recently to the notions of social cohesion and ‘social capital’. This is happening in the context of the re-definition of the respective roles of the state and the voluntary or ‘third sector’. From a neo-liberal perspective, a sharing of social responsibilities between the public and the private sectors contributes to global competitiveness. But is this likely to happen if homo economicus is fundamentally selfish? As I explain below, economists are re-assessing the economic significance of altruism and gift-giving. Pure altruism still remains something of a mystery to them, but partial altruism can be instrumental in the production of public goods, thereby justifying a reduced role for the state. Yet one must be prepared to ask questions about the extent to which reciprocity and philanthropy can offer efficient as well as just solutions to the challenge of global competitiveness. Homo economicus – that fictional character made up by John Stuart Mill – is ‘activated solely by self-interest’.2 Today, however, economists are waking up to the idea that they must consider a wider range of motivations and behaviours, spanning the continuum between pure selfinterest and disinterested altruism. I deal with this paradigmatic shift in the next section. In rediscovering altruism, however they are also forced to confront the many ambiguities inherent in that notion. Some of these ambiguities can be clarified by taking a closer look at reciprocal gift-giving and rational cooperation. This is the object of section two. In section three, I relate these theoretical developments to globalizing trends. While global markets now influence a wide range of economic and social processes, there is a growing realization that economic 107


growth is dependent on the domestic social capital created and sustained by non-market institutions whose very existence presupposes altruistic motivations. But the dialectical interplay between market and nonmarket institutions also undermines existing social policies. The challenge for analysts and policy-makers is to channel these dialectical tensions toward just ends.

Rational altruism: homo economicus meets homo sociologicus Social norms and conventions transmitted from generation to generation are the means by which groups and societal systems ensure coordination and survival. Homo sociologicus – the idealized social actor studied by sociologists – is both the product of these norms and the vector through which they are reproduced. 3 Contemporary norms of compassion for the plight of sick and dying people can foster cooperation even among members of very distant cultures.4 The contrast between homo economicus and homo sociologicus appears to be quite stark. As Jon Elster notes, the former is supposed to be guided by instrumental rationality, while the behavior of the latter is dictated by social norms. The former is ‘pulled’ by the prospect of future rewards, whereas the latter is ‘pushed’ from behind by quasi-inertial forces . . . . The former adapts to changing circumstances, always on the lookout for improvements. The latter is insensitive to circumstances, sticking to the prescribed behavior even if new and apparently better options become available.5 Ever since Adam Smith wrote ‘It is not from the benevolence of the butcher. ..that we expect our dinner but from his regard to his own self-interest’, altruism has been a neglected issue in economic theory. The modern economic concept of ‘revealed preferences’ can accommodate idiosyncratic cases in which an agent’s goal is not self-regarding. But as a rule consumers entering the market for goods and services are supposed to have a set of preferences that rest on an evaluation of their own material well-being; the only place where until relatively recently altruism was assumed to be more common was the household.6 That simple, if not simplistic picture is changing. There is no doubt that we can identify pure forms of altruism, defined in Kirsten Monroe’s term as ‘behavior intended to benefit another, even

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when doing so may risk or entail some sacrifice to the welfare of the actor.’7 Perfect altruism is averse to any kind of instrumental or utilitarian considerations.8 In some cases, such as the heroic acts of people who protected Jews from Nazi persecution during the Second World War, pure altruism is better understood as a kind of spontaneous moral outrage. The sense of duty that often motivates such choices does not make room for any sort of careful weighing of the costs and benefits of various options. 9 In other cases, altruism may be the outcome of more careful deliberations. When cultural and personal norms are in conflict, individuals have to think carefully about the reasons for choosing one end over the other. Still, such dilemmas are not always posed in utilitarian terms. In the public arena, abnegation sometimes is the only honourable choice. Nevertheless, contemporary political theory pays far more attention to the notion of rights than to the notion of political obligation and that is partly because it has become rather uncommon to demand that citizens place the common good far above their own welfare. As for economists, even when they are interested in altruism, they rarely have pure altruism in mind. At the other end of the spectrum, pure self-interest reduced to the calculation of one’s own material advantages, often amounts to selfishness or even greed. This is not a perfect correspondence and it would be wrong to pretend economic models imply such an equivalence. Selfinterest certainly implies self-centredness, but insofar as my personal enjoyment is not objectionable because it in no way interferes with someone else’s plans or needs, it may sometimes be praiseworthy. 10 Moreover, egotism does not necessarily boil down to egoism. The ego is a complex notion. There may be room in it for a variety of distinct ‘selves’.11 Neither Homo economicus nor homo sociologicus can be located at either end of that spectrum, even if the latter is closer to the altruistic end than the former. They both display various degrees of partial altruism. This is indeed the direction in which much contemporary theorizing seems to be headed. Having surveyed much of the economics literature on altruism, Teresa Lunati12 came to the conclusion, supported by other such surveys,13 that such contributions roughly fall into two categories:

•

models in which altruism is conceptualized as an additional factor in a conventional utility equation, that is instead of merely positing that an agent i will maximize Ui = ui(ci), that is the utility assigned by i to his or her consumption, we now take into account his contribution to the welfare of j, so that his utility functions becomes


•

Ui = ui(ci) + ku j(cj), where 0 < k< 1 (a simpler version of this equation could look something like this: Ui = ui(xi,z) where x is the vector of all of i’s self-regarding purchases and z stands for i’s share of his resources devoted to other-directed purposes other than his or her own);14 and models in which players cooperate in most situations (in other words, the one-shot Prisoner’s Dilemma becomes atypical and repeated PDs the norm).

I have two comments to offer on this typology. The first concerns the assumption that preferences are fixed and exogenous. Robert Frank has raised doubts about its usefulness and veracity. He has shown that adjusting preferences under certain circumstances actually improves the chances of successfully cooperating to bring about improved pay offs. These preference revisions can be influenced by moral considerations and/or by strong emotions, such as those that unfairness can evoke. Although Frank’s views on endogenous preferences have still not had much effect on economic theory, his insistence on the role of emotions finds parallels in the works of other researchers (for example M. Rabin, C. Meidinger). 15 My second comment has to do with cooperation. As Monroe has found, the economists’ outlook on this issue is paralleled and, in some cases, influenced by many studies in psychology and evolutionary biology.16 These models stress that either evolutionary pressures, learning processes through positive reinforcements, or the make up of one complex personality must be taken into account as constraints on, or modifiers of, a basic tendency toward selfishness. In other words, cooperation cannot be assumed but evolutionary or developmental processes channel our selfish impulses toward cooperative outcomes. Economics and sociology have not achieved a comparable rapprochement. Sociologists pay relatively little attention to instrumental rationality. Therefore when sociologists approach the subject of altruism they are more prone to look at structural determinants of social interactions and to posit that these are internalized by social actors. Altruism, from that perspective, is not a problem at all. The lack of it is more puzzling. However, ever since Durkheim we know that modern societies face difficult problems in reconciling immensely complex coordination requirements with the individualism they also generate. But even if individualism is itself a societal product rather than a given, it remains that social actors immersed in individualistic cultures sometimes manipulate norms to their own advantage to ‘free ride’; inversely, they will follow norms all


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the more easily when they perceive them to be in their (more or less enlightened) self-interest. This is precisely the point made by Elster: both norms and self-interest enter into the proximate explanation of action. To some extent, the selection of the norm to which one subscribes can also be explained by self-interest. Even if the belief in the norm is sincere, the choice of one norm among the many that could be relevant may be an unconscious act dictated by self-interest.17 Elster continues by saying that self-interest does not provide a full explanation of such choices and that one must also take emotions into account. The point here however is that in modern societies, where individualism is deeply embedded in the culture, homo sociologicus and homo economicus have more in common with each other than the textbook picture of their opposite natures would suggest. The mainstream response to the challenge of altruism is not entirely convincing, however. For one thing, it does not adequately deal with the free-rider problem. Why is it that many individuals, at least some of the time, contribute to the production of public goods?18 After all, even altruists (in the sense of being interested in the welfare of others) would prefer to freely enjoy such goods, whose benefits would include seeing an improvement in the welfare of others, without having to pay for them. Robert Sugden claims that a minimum condition for addressing that objection consists in a commitment of the following sort: ‘[you do not always have to] contribute towards public goods, but you must not take a free ride when other people are contributing.’19 The idea that true altruism entails not only sympathy toward the needs of others but a commitment to improving their welfare is recognized by several authors; Lunati, in particular, insists that altruism and rationality are inextricably linked and that rationality is understood in terms of the goals that are being pursued and not merely the means of achieving them. Serge Kolm (whom Lunati quotes extensively) has shown that when such commitments are buttressed by widespread adherence to a moral code founded on religion or a coherent philosophical doctrine (Kantian deontology for example), the problem of the relative efficiency of a market equilibrium based on egoistical preferences as compared to the risk of achieving only inefficient cooperation can be resolved.20 On the problem of how such shifts in preferences can be achieved, Kolm is less clear. He does insist however that in spite of their apparent differences, most religious and secular moral traditions greatly value altruism. People will be all the more likely to follow these precepts


if they can give each other reciprocal support. Thus, the generalization throughout society of such reciprocal relations can bring about conditions under which self-interest mutates into something else.21 While it would be a grave error to define altruism as nothing but an additional factor in someone’s utility function, we have to avoid the other extreme of insisting that only the most demanding definition of it is acceptable. Only exceptional individuals could live up to such standards. Besides post-modern pluralistic societies may find it impossible to arrive at a consensus on a strong definition of moral goodness. Thus I concur with Serge Kolm that it would be a serious mistake to discard strategic considerations altogether.22 I have outlined the increasingly visible but still problematic place of altruism in economic theory. Obviously, many questions remain. To move away from abstraction, I now want to focus more specifically on the phenomena of gift-giving and reciprocity.

Gift-giving and reciprocity: necessary complements to market-based transactions There is ample evidence that the exchange of gifts played a central role in the life of aboriginal and pre-modern traditional societies. The anthropological literature on this subject is rich and includes some remarkable works.23 In fact anthropological theorizing about economic phenomena is almost entirely focused on the exchange of gifts. But the picture of gift-giving that emerges from that literature is rather perplexing. Ever since Smith, it has often been assumed that barter was the most common form of exchange before the emergence of (single purpose) money 24 and market economies. What is wrong with this picture is that it merely substitutes non-monetary exchanges for monetary ones but neglects their socio-cultural contexts. Anthropologists have shown that there existed – and still exist in some cultures like Papua New Guinea – separate networks of socio-economic activities, some of which were characterized by the prevalence of gift-giving. However, as Marcel Mauss recognized, these gifts and the manner in which they were distributed differed from what we call gifts in modern, market-based societies. Gifts that are constitutive of the gift economy are not spontaneous but are situated within an unbreakable chain of gifts and counter-gifts; givers and recipients alike feel bound by strongly enforced norms of gift-giving and reciprocity. Mauss even found a religious origin for the obligation to return gifts (that is the Maori notion of hau). This strong reciprocity often led to agonistic forms of exchanges whereby


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competing gift-givers tried to acquire the superior status granted to the most generous among them. 25 The best example of rivalrous gift-giving is the potlatch ceremony among the Pacific coast First Nations (for example the Kwakiutl, the Haida people). Thus Mauss and other anthropologists have established with irrefutable evidence that a gift economy is an actual possibility. Mauss used this evidence in support of what was, for his time, a new idea: the welfare state. 26 More recently some (mostly French) economists and sociologists have pleaded for a serious examination of the possibility of re-instituting a gift economy as a means to promote economic justice. 27 They claim that not only it is a more just option since generalized gifts can be made accessible to all, but it makes sense because it is inspired by historical practice instead of appealing to abstract (usually Kantian) principles. The fact that there have been socio-economic systems in which reciprocal gift-giving played a major role should not blind us to the compelling reason why modernity has moved away from such practices. Mauss and his contemporary epigones conveniently forgot that gift-giving in pre-modern gift economies was hardly freely or spontaneously practiced and, as Mauss himself so clearly showed, was often a means of wielding power by humiliating one’s rivals. The obligations to give, receive and reciprocate cannot simply be transposed in modern times. 28 Market transactions progressively displace gifts since the former are more efficient in allocating scarce resources once a threshold is reached in terms of the size of the market and the number of participants.29 This has been a universal trend; it can only accelerate with globalization. Gift-giving and reciprocal exchanges have not disappeared nor have they become merely insignificant however. In many developing economies, they continue to compete with (sometimes in rather dysfunctional ways30), or complement, market processes. And as I explain in the next section, gift-giving, philanthropy and the rise of voluntary nongovernment organizations are important aspects of a rebirth of civil society and a redefinition of the role of the state in the global era. Deliberate attempts at re-establishing traditional aboriginal economies on a more sustainable basis are under way in North America. The Polynesian cultures studied by Mauss, Malinowski and many other anthropologists continue to engage in the kind of non-market based exchanges they have inherited from a distant past. More importantly, it is possible to observe an almost infinite variety of community-based networks of reciprocal exchanges in Africa and Asia. Some of these are used as insurance schemes where the state capacities are weak and


where private insurance companies are absent (for example, in some African villages, fishermen informally extend credit to each other 31). As long as market structures remain fragmented, that is, highly developed in some areas such as export of commodities, and underdeveloped at the local level, personal ties and family- or clan-based forms of gifts and counter-gifts will continue to prove more efficient.32 One must also take into account the growing intervention of international NonGovernmental Organizations (NGOs) whose role often serves to sustain or reinforce traditional networks. In advanced economies, extended family-based, religious or ethnic networks of personalized relations have become rather marginal – which is not to say that they are non-existent.33 In some cases they have been replaced by work-based relations of (more or less reciprocal) exchanges among employees and between employees and employers. But other forms of gift-giving, characterized often by the absence of direct or visible reciprocity, for example donations to charities, medical research, or international aid, as well as contributions in time through volunteering have either gone up or, when and where they have not, have become the focus of deliberate attention by policy-makers and researchers. One of the reasons that can explain the importance of giftgiving in advanced economies is the need for identity affirmation as a reaction to the anonymity of complex socio-economic institutions; volunteering one’s time, for example, is a way of asserting one’s individuality and self-worth. J. van de Ven has identified two essential characteristics of gift-giving.34 These are: reciprocity and adequacy (or lack thereof). The former alludes to the fact that gifts are usually one link in a long chain of gifts and counter-gifts, although in modern societies gift-giving is not always manifestly reciprocal. Adequacy refers to the match between the recipient’s preferences and the marginal utility of the gift he or she receives; it is often the case that a gift is not an acceptable gift if its adequacy is too obvious (for example cash) or, to put it another way, the functional adequacy of the gift is often inversely related to its social adequacy. Van de Ven then summarizes the most common ways of modeling the motivations that explain gift-giving in the microeconomic literature. These include:

• •

altruism defined, as in the previous section, in terms of a supplementary factor included in the utility function of the giver; egoism, particularly in situations where reciprocal relations turn out to be more efficient than anonymous market exchanges (for example


• • • •

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in societies where market transaction costs may be very high) and therefore more advantageous to the giver or receiver; social approval: the so-called ‘warm glow’ effect: there is a positive return from being known as a person who is generous with his or her time or money; strategic considerations: gift-giving can serve as a signal that the giver can be trusted to act in a cooperative manner (cooperators interacting among themselves do better than egoists); fairness; and reproductive fitness in evolutionary competition.

None of these motivations alone can explain gift-giving but some, and social approval in particular, fare better than others in providing a rationale for both reciprocity and adequacy. 35 The importance of social approval again suggests that, in part at least, social norms may ‘bite’ all the better when they correspond to an individual’s sense of enlightened self-interest. (This is precisely what Smith had shown in his Theory of Moral Sentiments with his use of the metaphor, ‘impartial spectator’.) It would be foolish to believe that, simply because homo economicus likes to make occasional gifts, the production of public goods no longer needs to be approached in Hobbesian terms. Partial altruists face many of the same problems that purely selfish individuals face and, for that reason, the provision of public goods by governments remains indispensable. But gift-giving and reciprocity can advantageously complement both markets and the public provision of essential services. The example of blood donations, rendered famous by Titmuss’ seminal inquiry, is a case in point.36 In other words, an economic system in which only market transactions were possible would not be Pareto-efficient if economic agents would prefer to also have opportunities for gift-giving. The next issue that must be examined is how the propensity to give and the prospects for achieving more generalized forms of reciprocity have been or can be institutionalized. This linkage ought to be obvious. To a large extent however we are dealing here with separate bodies of literature.

Globalization and the rediscovery of civil society Globalization has often been singled out as, if not the cause, at least the context within which the recent restructuring and trimming down of state institutions has occurred in most countries. The welfare state has


not been dismantled. But because competitive pressures on taxation and other policy instruments place severe limits on the capacity of the state to do more than to keep existing programmes like pensions, health care afloat, as it were, the so-called ‘third sector’ composed of non-profit organizations, often staffed by volunteers, has taken over some of the social policy responsibilities of the state, either alone or more typically in partnership with state agencies. This is perhaps most evident in North America 37 or the United Kingdom38 but it is occurring elsewhere too. 39 We can also point to the formation of new non-state-centred social movements that have spawned many NGOs, some of which have become global organizations of their own, Greenpeace for example. And the political economy of humanitarian aid is increasingly reliant on the voluntary sector. Indeed we are dealing here with a form of altruism that has a more specifically political content. Florence Passy calls the movements that mobilize around such causes ‘solidarity movements’ and she notes that while self-interest seems to predominate in western societies, the strength of these movements suggests otherwise. 40 While these developments do not foretell the emergence of a new gift economy, they could eventually lead to something like it. (The best example perhaps of an emerging gift economy is the Internet on which millions of programmes, music recordings, movies, as well scientific and journalistic information is shared daily;41 some new forms of software, that is ‘open source’ software, is in fact designed to be distributed and re-written freely.) Beyond the gift economy, we are witnessing the renewal or, in some cases, emergence of civil society – something which is close to becoming the cliché of our era. Today civil society can be defined, in Ralf Dahrendorf’s words, as ‘the associations in which we conduct our lives, and that owe their existence to our needs and initiatives, rather than to the state.’42 The limits separating state and civil society are being redrawn everywhere but this realignment has perhaps nowhere been as dramatic as in the ‘transition economies’ of Central and Eastern Europe. In western democracies, critics of globalization claim that these transformations are driven by transnational corporations and must in the weakening of the countervailing power of state institutions. From that angle, NGOs, foundations and the ‘faith based charities’ dear to Marvin Olasky43 and George W. Bush, are mere band-aids whose intervention would be rendered unnecessary by a return of the social policy funding of past decades. Yet fewer and fewer people on both the left and the right of the political spectrum share this nostalgic longing for


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an idealized welfare state which, in practice, has proven to be not only bureaucratic but often paternalistic as well. It is simply too early to determine what kind of new balance between state, market and civil society institutions will be achieved. In much of the world outside of North America, Europe or Japan, the future is even more indeterminate. As F. Fukuyama remarks, Globalization has been the bearer not just of capital but of ideas and culture as well. Everyone is well aware of the ways in which globalization injures indigenous cultures and threatens longstanding traditions. But it also leaves new ideas, habits and practices in its wake [including] NGO activities.44 There is a circular relationship between these empirical observations and the evolution of research agendas in economics and other social sciences, as Ilana Silber notes. I concur with her suggestion that the recent explosion of studies on philanthropy is not due to chance but reflects a deep disillusionment with the welfare state which has prompted economists and social theorists to reflect on gift-giving.45 The burgeoning literature on altruism, gift-giving and reciprocity is only one aspect of the recent fascination with what has variously been called the crisis of social cohesion, and/or, depending on the diagnosis one chooses, the rebirth and growth of the ‘voluntary’ or ‘third sector’. Economists are concerned with what they define as ‘non-profit’ organizations and nonmarket structures and are actively adding new instruments to their proverbial tool kit;46 political scientists and sociologists pose the problem in terms of the relationship between the state and civil society. But these perspectives seem to converge around the notions of ‘social cohesion’ (or lack thereof) and (a possible deficit of) ‘social capital’; the latter can be defined as the various resources that individuals, groups, or firms can draw from the existence of rich networks of reciprocal interactions. The tone of the literature on social cohesion and social capital is often pessimistic. The reason is perhaps that social scientists instinctively look for ‘problems’ that need to be addressed; in the eyes of most researchers ‘the concept of social cohesion assumes that there are certain societal-level conditions...that characterize a well-functioning society and that at this time these conditions may no longer be satisfied.’ 47 Robert Putnam’s much discussed research on associational life in the United States is emblematic in this regard. Putnam provides evidence that donations to the non-profit sector have increased significantly over


the last decades (albeit not any more – less, in fact – than spending on consumer goods) and that many organizations have been created to address a wide range of new human rights or environmental issues. He famously observes however that today ‘Americans are bowling alone.’ This metaphor is meant to convey the findings that membership and active participation in routine and on-going activities of most associations have gone down steadily since the early to mid-1960s. Americans may give more money and may occasionally volunteer in large numbers but they have less and less to do with the sustained activities that over time generate social capital. If this could be viewed as a possibly universal trend, the consequences for democracy would not be encouraging. All the more so because economists, having distanced themselves from the model of homo economicus, are now also discovering the importance of social capital. The traditional view, once articulated by Arthur Okun, 48 was that equalitarian goals can be achieved only at the expense of economic efficiency. But a growing amount of research suggests that economic performance can suffer from excessive inequalities and declining social capital. This literature does not speak with a single voice and addresses a variety of not always directly related forms of cooperation at the level of the firm, industry or at the national level, but there clearly is a new trend.49 Innovation and competition paradoxically depend upon trust and spontaneous cooperation. 50 Now, a few qualifications need to be added here. As Putnam acknowledges, the United States is still very much a nation of joiners; it is still ahead of most nations in terms of the degree of its citizens’ involvement in associations and the level of their financial contributions. E.C. Ladd points out that precisely because Americans have always been joiners and have always recognized the advantage they derive from this paradoxical individualistic collectivism, they have always worried about an imminent decline of civic engagement. Ladd cites many instances in which the degree of civic engagement in America has actually increased in recent years.51 A French researcher has pointed out that while it may be true that there has been a decline since the 1960s, civic engagement along several dimensions is only moving back to where it was in the first three decades of the twentieth century in America.52 It would be wrong to take Putnam’s observations as a report on the postmodern condition everywhere; in several countries, France or Spain53 for example, the trend is actually toward the building up of more rather than less social capital. Furthermore Putnam, as others do too, uses this diagnosis as a basis for prescriptive recommendations that are predicated on the notion the trends are not irreversible.


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Thus a great deal of uncertainty remains. It is possible that such studies and the attention they have received are the ripple effects of more profound though still inchoate evolutionary transformations. One of the possible outcomes of the dialectical tension between privatization and the concomitant reinvestment in social capital would be a new balance between market exchanges and domestic as well as international networks of volunteering and gift-giving. Social movements, political parties and individual citizens who have tried in vain to shore up institutional settings and policies that may not be sustainable in the global era could seize the opportunities that the current upheavals are creating. Economic studies of altruism and the effects of social capital provide useful insights in that respect. However, the problem at hand here clearly goes beyond the confines of economic theory. At some point, we also want to know how this new balance can be achieved in ways that are not only conducive to economic growth and social harmony but also are in accordance with standards of justice. Gift-giving, reciprocity and social cohesion can produce unjust outcomes if certain individuals or groups are systematically excluded from the networks through which such interactions occur. Theorists and political actors have a role to play in ensuring that the non-profit sector and the informal gift economy do not perpetuate discriminatory practices. What a liberal democratic order requires is not just social cohesion, but also guarantees against the imposition of the altruistic preferences of some over the rights of others. I can offer only two brief remarks to that effect here. First, public policy must ensure that the basic needs of all citizens are met appropriately. If and when gains can be made from public–private partnerships or purely private initiatives complementing public programmes, these gains must be pursued; but given the fact that social cohesion and the production of social capital can be skewed in favour of sectarian interests, public institutions have an important role to play in upholding the fundamental tenets of the liberal social contract. My second comment is that altruism needs to be nurtured. Altruistic motivations and a concomitant sense of fairness and moral indebtedness cannot be created by force. One of the best ways to nurture these values is civic education. This ought to remain a fundamental responsibility for public institutions in the global era.

Conclusion The economics literature reflects on-going trends and societal transformations. It reflects these changes in the two senses of the word. In one


sense it projects back to us an image of political and economic systems as they adapt to changing circumstances. Economists have come to realize that altruism, gift-giving, and reciprocity constitute an integral part of economic life and have learned to include these concepts in their models. One of the factors that has forced them to do so is the institutionalization of these practices in a variety of non-market structures that play an increasingly central role in the political economy of advanced and developing countries. There is no doubt that globalization entails an extension of the logic of market transactions into most corners of society. At the same time, any trend produces more or less unexpected and paradoxical counter-effects creating opportunities for social policy innovations. If homo economicus is after all a partial altruist motivated by a more or less ‘enlightened’ perception of his or her interest, there are good reasons to believe that public goods will continue to be produced by a variety of means that will complement the now more restricted domain of the state. The fact that the strength of the voluntary sector and social cohesion look like indispensable ingredients of the formula for economic success has compelled economists to revise their understanding of the conventional definition of self-interested utility maximization. And yet a reflection is also necessarily a distortion. No mirror is perfect and economics is certainly not a perfectly objective means of analysis – no social science is. Economic liberalism is not necessarily unconcerned with the production of public goods and recognizes that some minimal restraints on economic liberty are necessary. But it has no need for any conception of political freedom or just distribution of political rights. The partial altruism that seems to guide the behavior of economic agents opens up promising civil society-based solutions to the challenges of the global era. However, an assessment of their merits and applicability can only be undertaken within a political economy perspective that looks beyond the relatively narrow range of concepts and values characteristic of contemporary economic theory.

Notes 1 Maori proverb cited by M. Mauss, The Gift: Forms and Functions of Exchange in Archaic Societies, I. Cunnison transl. (London: Cohen & West, 1969 [1925]), p. 69. 2 These were E.Y. Edgeworth’s exact words, see his Mathematical Psychics (London: Kegan Paul, 1881), p. 16. 3 On the importance of norms in the way in which social actors perceive, and relate to, the world, see P. Bourdieu, Outline of a Theory of Practice, transl. R. Nice (Cambridge: Cambridge University Press, 1977).


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4 As Natan Sznaider notes, this is a relatively modern development; see N. Sznaider, The Compassionate Temperament (Lanham: Rowman & Littlefield, 2000). 5 J. Elster, ‘Social Norms and Economic Theory’, Journal of Economic Perspectives, 3, no. 4 (1989) 99. 6 These situations have been studied by Gary Becker: G.S. Becker, ‘A theory of Social Interactions’, Journal of Political Economy, 82, no. 6 (1974) 1063–93; ‘Altruism in the Family and Selfishness in the Market Place’, Economica 48 (February 1981) 1–15; and A Treatise on the Family, 2nd edn (Cambridge, Mass.: Harvard University Press, 1993 [1981]). Becker’s work does little to illuminate more generalized forms of altruism but he must be credited for having placed the question of altruism on the research agenda of contemporary microeconomics. Note however that Nancy Folbre has painted a far more complex picture of household activities in which asymmetrical relations of power, self-interest, as well as altruism and selflessness, all play a significant part; see N. Folbre, ‘Hearts and Spades: Paradigms of Household Economics’, World Development, 14, no. 2 (1986) 245–55, and ‘Cleaning House: New Perspectives on Households and Economic Development’, Journal of Development Economics, 22 (1986) 5–40. 7 See K. Monroe, ‘A Fat Lady in a Corset: Altruism and Social Theory’, American Political Science Review, 38, no. 4 (1994) 862. 8 This is the way in which C. Arnsperger (in ‘Gift-Giving and Altruism: Deconstructing and Reconstructing the Rationale for Individual Optimization’. DOCH # 46 [1998], Chaire d’éthique économique et sociale, Université Catholique de Louvain) reads Emmanuel Levinas who relates altruism to a radical orientation toward ‘otherness’, see E. Levinas, Otherwise than Being: Or Beyond the Essence. A. Lingis transl. (Boston: Martin Nijhoff, 1981 [1974]). 9 Kirsten Monroe reports that individuals who reminisced these troubled times felt as if ‘they had no choice’ but to act; see K. Monroe, ‘Altruism and the Theory of Rational Action: Rescuers of Jews in Nazi-Europe’, Ethics, 101 (1990) 103–22. 10 One of the most objectionable aspects of a deontological approach is that it downplays morally positive self-centred achievements. Morritz Schlick and Henry Hazlitt have written on this prejudice against pleasure which is rooted in ordinary views about moral behaviour as something that has to be ascetic; see L.B. Yeager, Ethics as Social Science: The Moral Philosophy of Social Cooperation (Cheltenham, UK: Edward Elgar, 2001), p. 85. 11 On the complexity of the self, see G.H. Mead, Mind, Self and Society from the Standpoint of a Social Behaviorist (Chicago: University of Chicago Press, 1934); J. Elster (ed.), The Multiple Self (New York: Cambridge University Press, 1985); S.C. Kolm, Le bonheur-liberté: Bouddhisme profond et modernité (Paris: P.U.F., 1985); C. Taylor, Sources of the Self (Cambridge, Mass.: Harvard University Press, 1989). 12 See T. Lunati, Ethical Issues in Economics (London: Macmillan, 1997), Chapter 2. 13 See also Monroe, ‘A Fat Lady in a Corset’. 14 On this point, see also P.J. Hammond, ‘Altruism’, The New Palgrave: A Dictionary of Economics, 1 (London: Macmillan, 1987), pp. 85–7. 15 See M. Rabin, ‘Incorporating Fairness Into Game Theory and Economics’, American Economic Review, 83 (1993) 1281–302; and C. Meidinger, ‘Equity,


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Fairness Equilibria and Coordination in the Ultimatum Game’, in L.-A. Gérard-Varet et al. (eds), The Economics of Reciprocity, Giving and Altruism (London: Macmillan, 2000). Monroe, ‘A Fat Lady in a Corset’, pp. 870–83; in this paper, Monroe relies heavily on Chapter 3 of H. Margolis’, Selfishness, Altruism and Rationality (Cambridge: Cambridge University Press, 1982); for an other example of the impact of socio-biology on economics, see P.A. Samuelson, ‘Altruism as a Problem Involving Group Selection in Economics and Biology’, American Economic Review, Papers and Proceedings, 83, no. 2 (1993) 143–8. Elster, ‘Social Norms and Economic Theory’, p. 115. ‘The essential problem is to provide a model of choice capable of accounting for the observation that people make contributions to what they perceive as the public interest.. .in contexts where the return to the individual appears inconsequential’, Margolis, Selfishness, Altruism and Rationality, 1. R. Sugden, ‘Reciprocity: The Supply of Public Goods Through Voluntary Contributions’, The Economic Journal, 94 (1984) 775. The notion of commitment was first proposed by Sen in his ‘Rational Fools’. S. Kolm, ‘Altruism and Efficiency’, Ethics, 94 (1983) 18–95. See S. Kolm, ‘The Logic of Good Social Relations’, Annals of Public and Cooperative Economics, 71, no. 2 (2000) 171–89. S. Kolm, ‘Introduction: The Economics of Reciprocity, Giving, and Altruism’, in Gérard-Varet et al. (eds), The Economics of Reciprocity, Giving and Altruism, p. 3. See L. Hyde, The Gift: Imagination and the Erotic Life of Property (New York: Vintage Books, 1979); B. Malinowski, Argonauts of the Western Pacific: An Account of Native Enterprise and Adventure in the archipelagoes of Melanesian New Guinea (London: Routledge, 1964); M. Mauss, The Gift: Forms and Functions of Exchange in Archaic Societies. I. Cunnison transl. (London: Cohen & West, 1969 [1925]). For a recent re-evaluation of that classical literature and for some interesting notes about the survival of the practices described by Mauss and Malinowski, see M. Godelier, The Enigma of the Gift, transl. N. Scott (Cambridge: Polity Press, 1999). One must distinguish the use of money in modern societies (or even premodern empires) from shell money and other instruments of exchange available in a variety of tribal settings; while in the former gold or silver have been used to purchase almost anything, in the latter complex rules dictate what kind of valued shells can be used for specific purposes (funeral rites, weddings and so on). The rival nature of these ‘gifts’ is evident in the fact that, on occasion, they consisted of the ostentatious destruction of certain valued objects like emblazoned coppers. Mauss, The Gift, pp. 63–81. See A. Caillé, Don, intérêt et désintéressement (Paris: La Découverte, 1994); J. Godbout, L’esprit du don (Paris: La Découverte, 1992), and ‘Notes pour défendre le futur paradigme du don’, Transdisciplines, 1 (1997) 109–15; S. Kolm, La bonne économie: La réciprocité générale (Paris: P.U.F., 1984). Kolm is less directly influenced by Mauss than the other authors cited here. The point is well argued by C. Arnsperger in his ‘Pratique du don et habitus non contextuel: Comment (ne pas) se leurrer sur Mauss’, DOCH 41 (March


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1998), Chaire d’éthique économique et sociale, Université Catholique de Louvain. See R. Kranton, ‘Reciprocal Exchange: A Self-Sustaining System’, American Economic Review, 86, no. 4 (1996) 830–51. On some of the excesses of the patrimonial patterns of decision-making in Africa, see L.C. Phillips, ‘The Political Economy of Policy Making in Africa’, African Economic Policy, Discussion paper no. 4 (May 1999) EAGER project, http://www.eagerproject.com/discussion4.shtml See J.P. Thomas and T. Worrall, ‘Gift-Giving, Quasi-Credit and Reciprocity’, Department of Economics, University of St Andrews, unpublished manuscript (February 2000). While Kranton argues that the trend is toward achieving greater efficiency by switching to anonymous market transactions, in some cases (Egypt), the networks to which individuals and their families belong may be so efficient – even if not optimally efficient – that they can resist encroachment by anonymous market transactions; see Kranton, ‘Reciprocal Exchange’. It is also important to remember that unless gift-giving is motivated by moral standards and/or takes place among participants whose equal rights to redistribution are well protected, it can be the source of less than desirable practices like nepotism, corruption, racism and so on. Van de Ven, ‘The Economics of the Gift’, CentER Discussion paper 2000–68, Tilburg University http://greywww.kub.nl:2080/greyfiles/center/2000/68.html The warm-glow factor explains why people would want to make expensive but functionally inadequate gifts: the receiver’s marginal utility remains almost the same and, therefore, he or she may not have the resources necessary to match the gift, thereby leaving the giver in the advantageous position of appearing to be more generous. See R.M. Titmuss, The Gift Relationship: From Human Blood to Social Policy (London: George Allen and Unwin, 1971). Titmuss observed that countries like the UK where the blood supply was provided by voluntary donors experienced less shortages than countries (for example the US or Japan) where there was a market for blood and the incidence of diseases was higher in the latter group of countries; but blood collection in the US is no longer managed on a commercial basis and far more rigorous tests are now applied routinely. See K. Healy, ‘Embedded Altruism: Blood Collection Regimes and the European Union’s Donor Population’, American Journal of Sociology 105, no. 6 (2000) 1633–57 for a slightly different perspective that underlines the influence of the organizational setting on the incentives and opportunities to donate. If ‘altruists’ respond as dramatically to such factors as Healy suggests, the altruism evidenced by blood donors is, again, a complex alloy of other-regarding and self-regarding considerations . According to Robert Wuthnow, something like ‘45 per cent of the adult population in the United States and almost as many in Europe are engaged in voluntary associations to help other people’ (cited by F. Passy, ‘Political Altruism and the Solidarity Movement’, in Giugni and Passy (eds), Political Altruism?, p. 7). Merril Lynch executives report that charitable gift-giving in the United States, given the present rate of growth (about 7 per cent), could reach $500 billion in 2015 (‘Annual Charitable Gift-Giving Could Surpass $500 Billion by 2015’, Fund Raising Management [Aug. 2000] 34). In Canada,


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a number of public and private initiatives have been put in place to learn more about, and strengthen, the third sector which the governing Liberals described as ‘the third pillar of Canadian society’ in their 1997 electoral campaign; see S. Phillips, ‘From Charity to Clarity: Reinventing Federal Government-Voluntary Sector Relationships’, in L.A. Pal (ed.), How Ottawa Spends, 2001–2002: Power in Transition (Don Mills, Ont.: Oxford University Press, 2001). J. Kendall and M. Knapp mention that in just a few years, from 1990 to 1995, the third sector grew rapidly in Britain; see ‘The Third Sector and Welfare State Modernisation: Inputs, Activities and Comparative Performance’, Civil Society Working Paper 14 (Dec. 2000), London School of Economics and Political Science (originally published as ‘Modernizacion del tercer sector y del Estado de Bienestar: aportaciones, actividades y rendimiento comparativo’, in S.M. Machado et al. (eds), Las Estructuras del Bienestar en Europa [Madrid: Fundaciones ONCE, 2000]). Even in Russia where private charities are a new phenomenon and have received most of their funding from western sources until now, rich business people are beginning to make significant contributions. See ‘Europe: Good Works’, The Economist (24 March 2001) 61–2. F. Passy, ‘Political Altruism and the Solidarity Movement’, in Giugni and Passy (eds), Political Altruism?, p. 13. See R. Barbrook, ‘The Hi-Tech Gift Economy’, First Monday, 3, no. 12 (1998) http://www.firstmonday.dk/issues/issue3_12/barbrook/index.html R. Dahrendorf, ‘A precarious Balance: Economic Opportunity, Civil Society, and Political Liberty’, The Responsive Community: Rights and Responsibilities, 5, no. 3 (1995) 23. See his Compassionate Conservatism: What it is, What it Does, and How it Can Transform America (New York: Free Press, 2000). F. Fukuyama, ‘Social Capital and Civil Society’, paper presented to the IMF Conference on Second Generation Reforms. I. Silber, ‘Modern Philanthropy: Reassessing the Viability of a Maussian Perspective’, in W. James and N.J. Allen (eds), Marcel Mauss: A Centenary Tribute (New York: Berghan Books), p. 134. Susan Rose-Ackerman notes that Altruism and nonprofit entrepreneurship cannot be understood within the standard economic framework. . . . The economics of organizational form is producing new models of institutional behavior. Research on the voluntary or nonprofit sector is part of this on-going effort.

S. Rose-Ackerman, ‘Altruism, Nonprofits, and Economic Theory’, Journal of Economic Literature XXXIV (1996) 701. 47 J. Jensen, Mapping Social Cohesion: The State of Canadian Research (Ottawa: Canadian Policy Research Networks, 1998), p. 3. 48 See A. Okun, Equality and Efficiency: The Big Tradeoff (Washington, DC: Brookings Institution, 1975). 49 This literature is conveniently summarized and discussed in J. DaytonJohnson, Social Cohesion and Economic Prosperity (Toronto: Lorimer, 2001). See also F. Fukuyama, Trust: The Social Virtues and the Creation of Prosperity (New York: Free Press, 1995).


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50 The central importance of trust has been insistently underlined by F. Fukuyama in ibid., and The Great Disruption: Human Nature and the Reconstitution of Social Order (New York: Free Press, 1999). 51 See E.C. Ladd, The Ladd Report (New York: Free Press, 1999). 52 See H. Mendras, ‘Le lien social en Amérique et en Europe’, Revue de l’OFCE, 76 (January 2001) 179–87. 53 On France, see M. Forsé, ‘Social Capital and Status Attainment in Contemporary France’, The Tocqueville Review, XX, no. 1 (1999) 59–81; and L. Dirn, La société française en tendances 1975–1995 (Paris: P.U.F., 1998). Among the profound social and political transformations that Spain has gone through since Franco’s death, the rise of social movements and the creation of many new groups is perhaps the most significant for the long-term stability of democracy in that country; interestingly the move toward European integration has facilitated and accelerated the consolidation of Spanish civil society; the same can be said of Portugal.

7 The Politics of Transparency: Ambiguity and the Liberalization of International Finance* Jacqueline Best

The second lesson [of the financial crisis in Asia] is that transparency and free trade are more necessary than ever . . . Rigging the markets – through corruption or denying them transparency – can only bring short-term relief. The markets always know, and they impose a heavy penalty. The discipline of the market is not always welcome, but it is a powerful ally of truth, efficiency and transparency. Robin Cook, British foreign secretary, 15 May 1998.1

Introduction The recent call for transparency is the latest in a series of policy prescriptions which insist that the solution to our international financial ills is more and better information. The markets are not to blame for recent instabilities, the policymakers insist; investors simply did not have enough information to make the right decisions. This is a powerful rhetorical move: the language of transparency represents recent problems as technical – therefore above politics – at the same time as it invokes a rich set of moral and political connotations which contrast transparency with secrecy, corruption and dishonesty. If we want to question the transparency of this argument, we must begin by taking a step back. We must place this contemporary turn to the politics of transparency within the context of the broader move to liberalize global finance, and we must examine the theoretical terms through which it has been articulated and justified. Theorists and policymakers alike have turned to transparency as yet another means of resolving the uncertainties of a liberalized international financial system. Yet, I will argue, the neo-liberal focus on 126

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uncertainty is just one, rather narrow, attempt to solve a far more pervasive problem in international finance – that of ambiguity. This chapter begins from the premise that every mode of financial governance must come to terms with the problems of economic ambiguity, whether in the form of informational uncertainty, contestation over economic concepts, the vagaries of confidence, or the complexities of mutual interpretation. For neo-liberal theorists and policymakers, the solution to the problems of ambiguity rest in the market itself. Free the market from the uncertainties of political decision-making, they suggest, and you will create a stable and efficient international economy. This chapter examines the pursuit of financial liberalization over the past two decades and considers the transformations that this process has wrought in the definition and management of political economic ambiguity. I will begin with a brief discussion of the central problem of ambiguity in international political economy and examine the ways in which new-classical economic theory has sought to foster and to justify a particular means of managing them. I will then consider several major trends in contemporary financial governance, and suggest that the move to financial liberalization has created as many new ambiguities as it has resolved, and has proven particularly vulnerable to crisis. Current trends in international financial governance in general, and the Asian crisis in particular, demonstrate the destabilizing consequences of the neo-liberal failure to come to terms with the full force of economic ambiguity. The new emphasis on transparency represents both an attempt to shore up the neo-liberal project in the face of these instabilities and a logical extension of that strategy through political and normative means. We are witnessing a new attempt to instill a global ‘spirit of transparency’ and thus to create the universal economic subjects which new-classical economics purports to describe.

Theorizing ambiguity Ambiguity plays a perverse but pervasive role in modern economic thinking. It is ruled out by definition in pure classical and neoclassical equilibrium models: in such an economic universe agents are fully rational, information is perfect, exchanges are frictionless and hence the market always clears. Yet, considerable scholarly attention in the past few decades has focused instead on the problems of informational imperfection, market failure and uncertainty, thus implicitly tackling the problem of ambiguity. 2


In this chapter, I will focus on three forms which ambiguity takes in the international political economy, which I am calling technical, contested and intersubjective ambiguity. In its simplest form, ambiguity is caused by insufficient information. This first form is a technical ambiguity for which one can develop functionalist solutions of the kind proposed by institutionalist economists: more information, more precise information, more transparent institutions. Ambiguities may also be produced when there is more than one explanation, definition or model for a given economic problem: the optimal level of inflation, for example, while often taken by orthodox economists as a given (zero, or as close to it as one can get), is in fact subject to considerable disagreement – and has changed historically. 3 Moreover, the impact of a given level of inflation is experienced very differently by the wealthy and the poor.4 The optimal level of inflation is thus essentially contested – there exists a multiplicity of overlapping definitions, each of which depends on a particular point of view;5 this second kind of contested ambiguity cannot be resolved technically, simply by providing more information, but must instead be resolved politically. This second form of ambiguity, however, implicitly rests upon a third form – intersubjective ambiguity. Debates over economic explanations do not rest only upon different objective interests; in many cases they represent different beliefs about the way in which the economy can and should function. Such beliefs form the basis of the shifting forces of market confidence, providing the lenses through which market participants interpret economic events. While investors’ perceptions are derived from economic ‘fundamentals’ such as interest rates or inflation levels, they are filtered through a particular set of norms which distinguish good from bad economic practice. These norms are often based on concepts which are both open and complex: the freedom of the market, for example, is a principle which is not entirely reducible to a set of discrete policies. The act of interpretation – whether performed by an investor, policymaker or scholar – thus plays a crucial role in shaping the international financial realm.6 This intersubjective dimension to economic interaction represents a third form of ambiguity. None of these forms of ambiguity is inherently constructive or destructive to regime stability. Some forms of institutional ambiguity can be stabilizing, facilitating agreement and adaptation; others may be destabilizing, precipitating volatile changes in market confidence. Their effects depend on the way in which they are managed. All systems of financial governance must therefore find ways of accommodating and controlling these political-economic ambiguities. Yet, this analysis


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suggests that not all regimes will be equally successful in doing so. The most effective regimes will recognize all three forms of ambiguity and respond accordingly – reducing informational ambiguities, providing a means for negotiating contested ambiguities and building the shared norms needed to stabilize intersubjective ambiguities. The least successful regimes will be those which underestimate the force of ambiguity, treating it as a purely technical problem which can be eliminated once and for all – rather than managed on an ongoing basis.

Economic theory and financial governance I have suggested that financial governance is in part a process of managing ambiguities; how a regime manages ambiguities depends in part on how it defines them. Different financial institutions and ideas have historically defined and managed those ambiguities very differently. Classical theory and the gold standard In the late nineteenth and early twentieth centuries international finance was governed by a gold standard regime. Countries pegged their currencies to gold at a particular rate and allowed the free movement of gold across their borders for the settlement of international debts. This was the ultimate laissez-faire system, in which states had little control over the movement of gold, and thus of capital, in or out of their economies. This financial regime was inspired by the tenets of classical economic theory, which assumed that, when left to its own devices, the market was essentially self-equilibrating.7 Several of the principle assumptions behind the classical conception of the market were eventually formalized as the Fundamental Welfare Theorem and the Efficient Markets Hypothesis. Together, the Fundamental Theorem of Welfare Economics and the Efficient Markets Hypothesis predict that an unregulated market will produce the most efficient and socially optimal allocation of resources. The Fundamental Theorem states that, given the usual long list of assumptions, competitive markets will produce Pareto-optimal equilibria, ensuring that the rising tide of an economy will lift all boats. 8 The Efficient Markets Hypothesis, on the other hand, states that competitive markets gather and use information efficiently. This ensures that market prices accurately reflect the ‘true state’ of the economy, allowing rational agents to make the best possible decisions. According to these two theories, therefore, free markets are both true and good, remaining unburdened by either moral or interpretive ambiguities.


Keynesian theory and the post-war regime The gold standard was suspended during the First World War and staggered through the difficult inter-war years until Britain suspended convertibility in 1931. As the Second World War drew to a close, those seeking to develop a new post-war international monetary system overwhelmingly rejected the gold standard system, arguing that the speculative capital movements which the regime had facilitated were in fact disequilibrating – not self-equilibrating – and had contributed to the instabilities which precipitated the Great Depression and Second World War. John Maynard Keynes, one of the architects of the post-war order, argued that this speculative dynamic was driven by intersubjective nature of investment decisions and the destabilizing role of expectations. Left to its own devices, he argued, the market was prone to volatile shifts in confidence because of the self-fulfilling dynamic of expectations: ‘We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.’9 Keynes thus disputed the two central postulates of the classical theorists: if all investment is driven by volatile and often inaccurate expectations, as he suggested, market prices may not reflect economic reality, and any equilibrium arrived at without government intervention may in fact be far from optimal, as it was during the Great Depression. The solution he proposed, which was at least partly implemented through the institutions of the Bretton Woods regime, was government management of investment, sustained by an international economic order in which capital movements were constrained by government and international institutional practices. 10 New-classical theory and the liberalization of finance This approach to international financial governance was dealt severe blows by the stagflation of the 1970s, and has come to be replaced by a far more orthodox set of economic ideas and policies. In challenging Keynesian theory, new-classical economists11 developed an alternative theory of economic expectations, initiating what has been called the ‘rational expectations counter-revolution’.12 These theorists argued that Keynes was right to focus on expectations – but wrong to focus on their inaccuracy. If we accept that economic agents are rational, they argued, then why do we ascribe them irrational expectations? It is irrational for people to continue making inaccurate predictions; eventually they will converge towards a correct model of the economy. The rational expectations hypothesis paints a picture of a market economy which inevitably tends towards an optimal and efficient


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equilibrium – as long as it remains undistorted by outside intervention. This is a classic recipe for limiting the role of the state, and has served as a crucial theoretical justification for the progressive deregulation of international finance. 13 The rational expectations hypothesis predicts that any government which seeks to stray from the ‘correct’ model of the economy – by, for example, pursuing an expansionary fiscal policy – is doomed to failure, since rational economic agents will ‘know’ that this action will be inflationary (based on the new-classical model) and will therefore build inflation into their expectations, thus producing the very inflation that they fear and obviating the positive effects of the government policy. The market is always right, while government is frequently wrong. The rational expectations revolution points towards the possibility of an unambiguous economic universe – a feat that it can only achieve by assuming away every kind of political economic ambiguity. Technical ambiguities are brushed aside in the assumption of costless information necessary for economic agents to maintain an accurate model of the economy. That model, moreover, must be singular; it cannot be complicated by the kind of ambiguity produced through multiple, conflicting economic models. Finally, while the new-classical emphasis on expectations recognizes the intersubjective nature of human economic interaction, it cannot leave any room for the ambiguity of mutual interpretation. 14 This new-classical literature seems to hint at the end of history in its vision of a world where politics and policy can be finally separated and the world economy will finally work as it should. Such hopes are evident in many contemporary strategies for international financial governance, which treat ambiguity as a temporary aberration – more often than not caused by political interference – which can be resolved by giving the market free reign. Yet the fragility of these hopes, balanced as they are on a set of rather tenuous assumptions, is also evident in the growing instability of contemporary financial patterns.

International financial liberalization We can see the principles of new-classical theory at work in three central trends in the liberalization of finance: the liberalization of capital movements, the increasing influence of speculation on exchange rates, and the privatization of risk. These policies have brought with them new tools for managing ambiguities at the same time as they have generated their own challenges for financial governance.


Liberalizing capital flows: quarantining politics Why liberalize? The immediate goal of financial liberalization is to allow capital to move freely across national boundaries, which it certainly has been doing, with daily foreign exchange trading levels reaching US$1260 billion by 1995, 70 times the level of world trade.15 Following the Fundamental Theorem and Efficient Markets Hypothesis, advocates of capital liberalization argue that free capital movement will produce a more efficient global economy: it will result in a more productive allocation of investment, with capital moving to the best opportunities regardless of national boundaries – most likely from developed to emerging markets – and it will provide healthy discipline for government policy. 16 Implicit in these arguments for the advantages of liberalization is a particular set of assumptions about the problem of ambiguity: first, that it is only by removing the boundaries created by states and their governments that the economy will reach a global equilibrium (thus separating politics from economics); and second, that the newly freed global market will then work to curb the interference of government by punishing inappropriate behaviour (thus subordinating politics to economics). The process of liberalizing global capital movements is thus seen as a means to the end of creating a more perfect, less political and thus less ambiguous, global financial system. Has the experience of more liberal capital markets borne out these expectations? In a discussion paper for the United Nations Development Programme, John Eatwell suggests that the evidence is far less encouraging: in spite of the massive gross flows of capital, net flows have been relatively small, with the majority of investment flows moving towards developed countries, while the only real flow into emerging markets has remained volatile.17 Overall, the long-term global effect of financial liberalization has been deflationary, slowing rather than increasing levels of investment and growth.18 It has also been destabilizing, contributing to significant crises in both developed and developing countries, as speculative capital movements both inward and outward have distorted and damaged economies.19

Floating and fixed exchange rate regimes: volatility and market discipline The liberalization of capital movements has placed exchange rate regimes under considerable pressure: the more capital available for currency speculation, the more difficult it is for states to maintain a stable exchange rate. Since the collapse of the Bretton Woods exchange rate


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regime in the early 1970s, there has been a gradual movement in two directions: many larger developed economies have moved towards floating exchange rates, while many developing economies have opted for fixed rates. In spite of their considerable differences, both regimes continue to be subject to considerable speculative pressure. As its name suggests, a floating exchange rate regime is one which allows a currency’s value to float at whatever rate the market will bear; if there is great demand for a currency, its value will rise; if there is little demand, its value will decline. Before the collapse of the Bretton Woods regime, there had been considerable debate about the effects of a floating exchange rate system. Some pointed towards the troubled inter-war years as an indication of the instability of a floating system. 20 Others argued that a flexible rate system would actually be stabilizing, as the market would set the value of a currency according to an economy’s soundness.21 In the end, floating exchange rates have in fact proven to be unusually volatile, while the patterns of their movement strongly suggest that speculative pressures have been the dominant force in their determination.22 Both the day-to-day volatility and the more persistent misalignments which come with a floating exchange rate policy can pose real problems for affected countries.23 A government that pursues a fixed exchange rate, on the other hand, generally sets that currency at a particular value relative to a powerful currency, such as the US dollar. In so doing, it commits itself to maintain that exchange rate, either by buying up or selling off its currency to maintain its price level, or by taking any fiscal or monetary steps necessary to regain market confidence. If demand for a currency drops, for example, a state might either buy up the unwanted currency, expending its own foreign currency reserves in the process, or it might raise interest rates in order to attract foreign capital. Of course, both actions have costs attached. If the demand for that currency does not rebound quickly enough, a state’s reserves can be depleted. On the other hand, raising interest rates will tend to exert a deflationary pressure on the economy, eventually increasing unemployment. If either measure is taken too far, it can actually have the opposite effect than intended, as the market loses confidence in a government’s ability to continue defending its currency in the first case, and in its willingness to force its economy into recession in the second. These pressures can become particularly destabilizing in the context of a liberalized financial market. As financial markets have grown, they have been able to bring larger and larger sums of money to their speculative pursuits – enough that they can ultimately deplete virtually any


state’s reserves if they try hard enough. If the market loses faith in a country’s willingness to sustain its exchange rate, it can actually force the very change that it fears, by selling the currency so relentlessly that it forces a devaluation. Thus, while a government may chose a fixed exchange rate policy in the hopes of reducing the destabilizing effects of exchange rate fluctuations, it is nonetheless far from immune from the pressures of financial markets. When driven by speculation, these markets may set the value of a currency at a rate that bears little resemblance to anything other than investors’ own self-fulfilling hopes or fears. These intersubjective dynamics thus contribute to a profound kind of ambiguity where financial and ‘fundamental’ valuations of an economy’s health are at odds with one another. While such slippages may be creatively exploited by state policymakers when the market is more optimistic than warranted, such self-fulfilling expectations can be devastating once the market loses confidence. Privatizing risk, producing ambiguity We are also witnessing a process which John Eatwell has described as ‘the privatization of risk’, as ever new financial instruments are developed to help investors cope with the increasing uncertainties of a world of liberalized capital and volatile exchange rates. 24 Derivatives, as these new instruments are generically called, derive their value from that of an underlying reference security; for example, they may involve an option to buy or sell a particular security before a set date at an agreed exchange rate. Derivatives enable investors to ‘hedge’ against potential changes in international markets such as a sudden shift in currency, equity or interest rate values. Much like hedging a bet, an investor can reduce the risk of a particular investment by making a counterbalancing investment.25 Derivatives in general and hedge funds in particular have since come in for considerable critical scrutiny, after the failure and expensive rescue of the Long-Term Capital Management hedge fund in 1998.26 Why this concern with a set of instruments designed to manage risk, and thus to contain some of the technical ambiguities which have been introduced by the process of liberalization? For one thing, while derivatives may reduce the risks taken by an individual investor, they cannot reduce the overall level of risk in the financial system but instead, in the words of an International Monetary Fund (IMF) report, can ‘only transform and reallocate risk.’27 Moreover, these new instruments have greatly increased the number of opportunities for speculation, allowing investors to profit from small changes in the relative prices of certain


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securities or to make large bets on the likely direction of macroeconomic conditions. While derivatives thus feed into the general increase in speculative trading, they also pose their own particular challenges to international financial stability. Derivatives create complex linkages between market segments, and can precipitate spill-over effects from one market into another.28 At the same time, derivatives can increase overall market volatility by exaggerating the changes in the underlying securities upon which derivative contracts are based.29 Given the enormous size of some hedge funds, they are particularly capable of self-fulfilling behaviours, as they sell short on a currency thus precipitating the decline that they have betted on. The intersubjective logic of derivatives speculation thus creates new ambiguities at the very same time as it seeks to resolve others. Together, the liberalization of capital, the speculative pressure on exchange rates, and the proliferation of derivatives reveal a significant shift in the governance of political economic ambiguity towards a strategy which seeks to limit the role of governmental discretion by turning control over to financial markets. Such policies assume that economics is fundamentally unambiguous, and only becomes prone to ambiguity when subject to political decision-making. Yet as this discussion has revealed, these policies are also producing their own ambiguities, whether in the form of volatile capital and exchange rate movements, unquantifiable risk, or self-fulfilling speculative panics. In each case, these new ambiguities bear considerable resemblances to the intersubjective ambiguities which Keynes blamed much of the Great Depression on. The failure of neo-liberal theory and practice to come to terms with intersubjective ambiguity has thus rendered the international monetary system particularly vulnerable to instability and, as we will see in the case of Asia, to crisis.

The Asian financial crisis The Asian crisis began with a speculative attack on the Thai bhat in May of 1997 and rapidly spread throughout the region, hitting South Korea, Indonesia, Malaysia and the Philippines, and eventually contaminating even the strongholds of Japan, Hong Kong and Singapore. 30 The crisis came at a time when the momentum of liberalization seemed unstoppable and the euphoria of globalization incontestable. Suddenly, what had been obvious to so many proved far less certain; what had been secure, surprisingly fragile. To understand the Asian crisis, we must place it within the context of the global movement towards financial


liberalization. In doing so, we are able to see each of the various aspects of liberalization at work: the liberalization of capital markets ultimately proved destabilizing as it limited the government’s ability to regulate speculative investment. The prevalence of derivatives increased the volatility of capital movements while impairing the ability of regulators to assess the level of risk. Asian governments’ attempts to either fix or float their exchange rates both proved disastrous in the face of market panic. In each case, neo-liberal financial policies ultimately proved destabilizing – as did the IMF’s attempts to respond to the crisis in those terms. Throughout the 1980s and early 1990s, the Asian economies had followed the global trend, liberalizing both domestic and international capital, a move which accelerated the already considerable flow of foreign investment into these booming economies. Yet these inflows proved exceedingly volatile, as once eager investors rushed to pull out across the region at the first sign of trouble; Asian economies suffered enormously as a net inflow of US$93 billion to the region in 1996 turned into a net outflow of US$12 billion in 1997. 31 Some analysts have blamed much of the crisis on the excesses of financial liberalization, arguing that such policies were implemented too rapidly, without the necessary regulatory safeguards, and without any real attention to the particular needs of individual economies. Among the more prominent voices on this side of the debate is Joseph Stiglitz, who was then Chief Economist of the World Bank. 32 Stiglitz and others contend that the deregulation of domestic and international financial flows actually contributed to the increase in unproductive investment before the crisis occurred, including riskier lending and more real-estate speculation. Thailand, for example, eliminated its restrictions on bank lending to real estate, partly in response to those favouring financial liberalization, only to produce a predictable real-estate bubble.33 Financial liberalization thus left the Asian economies vulnerable to crisis, precipitating large influxes of capital while constraining the ability of government to regulate those flows. If capital liberalization created the stage for a financial crisis in these Asian economies, foreign exchange speculation and derivatives trading sealed their fate. We can see each of these factors at work in the individual case of Thailand, where the region’s troubles first began in May 1997. The crisis started out as a speculative attack on the bhat, following the release of economic news which fuelled already existing fears that the Thai economy’s bubble was about to burst. 34 The markets concluded that the Thai government would be unable to maintain the bhat’s peg to the dollar and began to sell both the currency and stocks denominated


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in bhat. The violence of financial markets’ response to the building crisis was exacerbated by the extensive use of derivatives contracts to provide lending in Asia; in Thailand, a majority of the short-term bank funds that entered the economy were linked to derivatives contracts of one form or another, making currency and asset markets particularly vulnerable to one another’s crises. 35 After trying to stem speculation by increasing interest rates, buying up bhat and implementing selective capital controls, the Thai central bank finally gave up its attempts to defend the currency’s parity and allowed the bhat to float. The currency quickly lost 20 per cent of its value. Yet this devaluation did not satisfy the markets. At this point, the Thai government came face to face with the perversity of market confidence: the stronger their corrective actions, the more they convinced the market of the seriousness of their economic problems, the further their currency depreciated. Paul Krugman has suggested that there is a new unofficial slogan governing such currency crises: ‘For developing countries, there are no small devaluations.’36 The IMF quickly entered the picture at this point, but its actions ultimately proved counterproductive. In August, a $17 billion IMF bailout package was finalized; the package required the Thai government to reduce government spending, raise taxes, reduce public support for ailing firms and banks and remove the capital controls that it had imposed at the beginning of the crisis. The IMF thus responded to the Thai crisis as if it had been caused by the usual macroeconomic problems – when, in fact, this was not a classic fundamentals-driven currency crisis. In doing so, it not only implemented a ‘cure’ which did not match the disease, but it also reinforced investors’ fears that the crisis was severe and structural. The high interest rates that the Fund demanded both depressed domestic economic activity and failed to regain international investor confidence, only reinforcing the perception among investors that the economy was in trouble. By diagnosing the crisis in the terms that it did, the Fund further spooked investors, effectively transforming a short-term crisis of liquidity into a long-term crisis of insolvency, condemning the Thai economy to long years of hardship and recovery.37 The Asian crisis provides us with a microcosm within which we can see the various forces of liberalization at work – and witness the potential dangers which attend their unchecked progress. The crisis also provides us with a powerful lesson on the perils of ignoring intersubjective ambiguity and treating a crisis in purely technical terms. The logic which shaped both the boom and the bust of these economies was driven by mutually fulfilling hopes, fears and expectations; as the IMF belatedly


discovered, what one says about a crisis can be as important as what one does. This evidence reveals that intersubjective ambiguities matter, and that they cannot be effectively managed by a system of governance which assumes that they do not exist. Not surprisingly, the Asian crisis has been interpreted by some as a significant challenge to the neo-liberal insistence on liberalization for all. Yet some of the most influential responses to the crisis have resisted such challenges, and have sought to find in the lessons of the crisis a new solution to global economic instability – financial transparency.

The politics of transparency Rather than accepting the arguments of those who blamed the crisis on the instabilities created by excessive liberalization, many analysts insist instead that the problem was one of too little rather than too much liberalization. These scholars and policymakers argue that these Asian economies never fully embraced the goals of liberalization, but instead remained too committed to the ‘Asian model’ of capitalism which relies on substantial state involvement in the economy and strong state–society ties.38 Such analysts charge that the financial crisis was an inevitable, if excessive, reaction by international financial markets to longstanding structural weaknesses in the Asian economies – including a pervasive lack of economic transparency.39 There just was not enough information available about the health of these economies – about the riskiness of bank investments, the indebtedness of corporations, or the likely policy response of government, they argue. This lack of information, moreover, was a direct product of the form of Asian economic relations: the close ties between governments and corporations obscured certain economic decisions from view, while the heavy reliance of firms on bank borrowing rather than share offerings increased the subjectivity of credit decisions.40 By focusing on transparency, analysts both effectively deflect responsibility for the Asian crisis from the international system onto individual states, and characterize the response of international institutions such as the IMF as a call for political and economic openness. We can also understand the current emphasis on transparency as part of the ongoing neo-liberal attempt to define and contain politicaleconomic ambiguity. Current economic theories of transparency rely on a rational expectations model of economic actors. If all market participants are perfectly rational and possess an accurate model of the economy, then any attempt by institutions to conceal information from the public is by definition going to be counterproductive. In many


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ways, a policy of transparency is the perfect functionalist solution to the problem of informational ambiguity. Such a policy acknowledges the increase in technical ambiguity which has come with the growing complexity of a liberalized financial system, at the same time as it seeks to resolve such ambiguities by increasing the information available – through more thorough reporting of derivatives transactions, standardized accounting practices, or greater scrutiny of bank’s risk management strategies. Yet such theories rely on what Bernhard Winkler describes as a ‘one-dimensional notion of transparency’ which assumes away the more complex problems of filtering and interpreting information, thus ignoring the central role of intersubjective ambiguity.41 The pursuit of transparency is a project which is rhetorically very difficult to challenge. What could be wrong, after all, with seeking the truth? The word transparency carries with it a powerful array of moral and political associations: honesty, guilelessness and openness. Transparency has a democratic ring to it. It speaks to our suspicions about the secrecy of bankers and claims a moral right to know what they are doing with our money. Yet the language of transparency is somewhat deceptive, for while the word suggests a lack of mediation – simply opening certain areas to the gaze of the international community – achieving transparency in fact requires considerable active intervention. To make a particular financial practice transparent, we must be able to measure and interpret it in a way that is quantifiable. For example, we might want to assess the riskiness of a particular bank’s investment. What information do we include, and what do we exclude? We may find it difficult to quantify certain factors that went into that decision, particularly if it was based on a longstanding business relationship. Because that information is difficult to render transparent, we might favour decision-making that avoids the kinds of discretion that attend relationship-based banking. The demand for transparency thus feeds into the broader neo-liberal effort to replace discretionary decision-making with rule-based processes. It also supports the ongoing effort of agencies such as the World Bank to encourage the securitization of international credit.42 Once we have established such standardized practices (using, more often than not, standards derived from the Anglo-American system), we need to determine whether they have indeed been followed. The collection of information thus necessitates the development of new forms of surveillance and monitoring. In the aftermath of the Asian crisis, there were indeed calls by the G-7 among others for a new ‘architecture’ to strengthen surveillance of the world monetary system.43


This new emphasis on financial transparency is thus not so much a call for less governmental involvement in the global economy, but rather a demand for a different kind of governance. As Michel Foucault argued in some of his later writings, liberalism is a paradoxical mode of governance; its advocates insist that on gouverne toujours trop (we always govern too much) even as it extends its norms into new aspects of social life. 44 While Foucault was certainly not alone in his concern with the rationalizing tendency of modernity, his analysis was particularly acute in its perception of its normative force. He insisted that this liberalizing move could only succeed by defining its standards in normative terms. To be effective, the movement for economic liberalization must succeed in internalizing its standards around the world – in instilling the ‘spirit’ of transparency, and not simply its law. In spite of its claims to rule-based neutrality, the movement to liberalize is therefore best understood in normative and discursive terms. Hence the powerfully moralistic overtones of many arguments in favour of financial transparency, and the common slippage from treating transparency as a solution to the problems of uncertainty to invoking it as a weapon against endemic secrecy and corruption. Yet when someone like Robin Cook, the British foreign secretary, links transparency, free markets and free ideas, he is not pointing to the necessarily political nature of economic practices, but is rather suggesting that political liberty must be responsive to the dictates of the market, that ‘powerful ally of truth, efficiency and transparency’. 45 This is the paradox of new-classical economic theory: while it represents itself as a solution to the problems of technical ambiguity, it in fact works on political and intersubjective levels – by making a strong normative claim to the virtues of its own mode of governance, and by working to universalize the intersubjective norms of a liberal market order. The call for a spirit of transparency is not so much an attempt to bare the economy’s true face to the world, as it is an attempt to create that face the world over – to transform every individual subject into perfectly rational economic agents, and thus create the unambiguous economic universe that their models so depend on by imposing new financial norms and institutions.

Notes * This chapter is based on the penultimate chapter of my doctoral dissertation, Economies of Uncertainty: The Politics of Ambiguity in International Financial Governance. The research for this chapter was supported by the Woodrow Wilson Fellowship Foundation, the Institute for the Study of World Politics, the Canadian Federation of University Women and the Department of Political


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Science at Johns Hopkins University. Many thanks are due to those who have commented on the various incarnations of this project, including Mark Blyth, William Connolly, Alex Cooley, Michael Webb, Robert Aitken, Rob Walker, Vicki Hsueh, Benjamin Ginsberg, Andrew Ross, Ronen Palan, Paul Tyler and the editors of this collection. 1 R. Cook, ‘Commentary: Perspectives on the Asian Economies; The Need for Transparency is Clear; Economy: The Asian Crisis Highlights the Importance of Openness, Free Trade and Free Ideas in Today’s Global Market,’ Los Angeles Times (15 May 1998) p. B9. 2 In fact the 2001 Nobel Laureates in Economics, Joseph Stiglitz, George Akerlof and Michael Spence, were recognized for their work on asymmetrical information. 3 On the contested history of inflation, see J. Kirshner, ‘The Study of Money’, World Politics, 52 (2000) 407–36; and M. Watson, ‘The Institutional Paradoxes of Orthodox Economic Theory: Reflections on the Political Economy of Central Bank Independence’, Review of International Political Economy (forthcoming). 4 D. Hibbs, ‘Political Parties and Macroeconomic Policies’, American Political Science Review, 71, no. 4 (1977) 1467–80. 5 W. Connolly, ‘Essentially Contested Concepts in Politics’, The Terms of Political Discourse. 2nd edn (Princeton: Princeton University Press, 1983) pp. 9–45. I have drawn on Connolly’s conception of the contestability of concepts to develop my definitions of both contested and intersubjective ambiguity. 6 Anyone who has listened to US Federal Reserve Board Chairman Alan Greenspan’s strategically ambiguous statements realizes that finance rests on a considerable measure of faith. 7 The original gold standard was based on the self-equilibrating price-specieflow mechanism first described by David Hume. In practice, however, the gold standard depended on a significant level of intervention from the nascent central banks of the era. I.M. Drummond, The Gold Standard and the International Monetary System 1900–1939 (London: Macmillan, 1987). 8 A Pareto-optimal equilibrium is reached when no one can be made better off without making someone else worse off. This formulation does not however deal particularly well with questions of distribution; a situation in which Bill Gates gains an extra billion dollars while the rest of the population gains nothing can still be Pareto-optimal, for the welfare of the population has not, at least in absolute terms, been reduced. On the Fundamental Theorum see J. de V. Graaf, Theoretical Welfare Economics (Cambridge: Cambridge University Press, 1957). For an overview of the Efficient Markets Hypothesis, see: B. Malkiel, ‘Efficient Market Hypothesis’, in J. Eatwell, M. Milgate and P. Newman (eds), The New Palgrave: A Dictionary of Economics (London: Macmillan, 1987). 9 J.M. Keynes, The General Theory of Employment Interest and Money (New York: Harcourt Brace, 1964), p. 156. 10 Keynes, The General Theory; and ‘Proposals for an International Clearing Union (April 1943)’, in J. Keith Horsefield (ed.), The International Monetary Fund 1945–1965: Documents Vol. III (Washington, D.C: International Monetary Fund, 1969), pp. 19–36.

142 Ideas, Institutions, and Policy 11 I am borrowing the phrase ‘new-classical economics’ from Ilene Grabel, who defines it as ‘the extension of neoclassical (or orthodox economic) theory that emerged in the 1970s and 1980s. It combines the ‘rational expectations’ hypothesis with a presumption of instantaneous market adjustment.’ I. Grabel, ‘Ideology and Power in Monetary Reform: Explaining the Rise of Central Banks and Currency Boards in Emerging Economies’, Global Studies Fall General Seminar, n. 2 (Baltimore: Johns Hopkins University, 2000). 12 This is the title of an article by Mark Willes, ‘Rational Expectations as Counter-Revolution’, in D. Bell and I. Kristol (eds), The Crisis in Economic Theory (New York: Basic Books, 1981) pp. 81–97. On rational expectations theory, see: J. Muth, ‘Rational Expectations and the Neutrality of Money’, Econometrica 29 (1961) 315–35; and R.E. Lucas Jr, ‘Expectations and the Neutrality of Money’, Journal of Economic Theory, 4 (1972) 103–24. 13 J. Eatwell, International Financial Liberalization: The Impact on World Development (New York: United Nations Development Program; Office of Development Studies, 1996) Part 2. 14 Like game theoretic models, this conception of interactive economic agents relies on a billiard-ball conception of intersubjectivity, and might be better termed inter-objectivity. 15 Bank for International Settlements, ‘Central Bank Survey of Foreign Exchange and Derivatives Market Activity, 1995’ (BIS: Basle, 1996) cited in Eatwell, International Financial Liberalization, p. 4. 16 Eatwell, International Financial Liberalization, p. 11. 17 Similar arguments have been made by Robert Boyer and Robert Wade in their chapters in S. Berger and R. Dore (eds), National Diversity and Global Capitalism (Ithaca: Cornell University Press, 1996) pp. 29–59 and 60–88; and by L. Weiss, The Myth of the Powerless State: Governing the Economy in a Global Era (Cambridge: Polity Press, 1998). 18 Eatwell, International Financial Liberalization, pp. 9–26. 19 Williamson and Mahar conclude that financial liberalization was a contributing factor in many cases of financial crisis, including crises in Argentina (1980), Chile (1981), Mexico (1994), the Philippines (1981), Thailand (1997), Turkey (1991 and 1994), the United States (1980) and Venezuela (1994). J. Williamson and M. Mahar, ‘A Survey of Financial Liberalization,’ Essays in International Finance 211 (1998) 53–5. Also see Y. Akyüz, ‘Taming International Finance’, in J. Michie and J. Grieve Smith (eds), Managing the Global Economy (Oxford: Oxford University Press, 1995) pp. 55–90. 20 The experience of the 1930s raised concerns about the potentially destabilizing consequences of a floating exchange rate, given its susceptibility to speculation. For a classic statement of the problems of floating exchange rates, see R. Nurske, International Currency Experience (Geneva: League of Nations, 1944). 21 Milton Friedman was among the most prominent economists to make this argument, insisting that the volatility of the 1930s was caused by the market’s rational response to changing economic fundamentals and not by any self-fulfilling speculative forces. M. Friedman, ‘The Case for Flexible Exchange Rates’, Essays in Positive Economics (Chicago: University of Chicago Press, 1953). 22 Akyüz, ‘Taming International Finance’, p. 69.


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23 A. Crockett, ‘The Theory and Practice of Financial Stability’, Essays in International Finance 203 (1997) 16–17. 24 Eatwell, International Financial Liberalization, p. 6. 25 For a brief history of derivatives trading, see B. Eichengreen and D. Mathieson, ‘Hedge Funds: What Do We Really Know?’ (Washington, D.C.: IMF, 1999). 26 ‘Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management’, Report of the President’s Working Group on Financial Markets (Washington, D.C., April 1999). 27 IMF, Survey (Washington, D.C., 21 February 1994). 28 IMF, International Capital Markets, Part I. Exchange Rate Management and International Capital Flows (Washington, D.C., 1993). 29 R. Kelly, ‘Derivatives: A Growing Threat to the International Financial System’, Managing the Global Economy, pp. 222–23. 30 In this chapter, I am interested in tracing the influence of the various forces of liberalization on the crisis, and will therefore only be touching lightly on a very complex set of events. 31 Figures from: R. Wade, ‘From “Miracle” to “Cronyism”: Explaining the Great Asian Slump’, Cambridge Journal of Economics 22 (1998) 695. 32 J. Stiglitz, ‘Sound Finance and Sustainable Development in Asia’, Keynote Address to the Asia Development Fund (Manila, 12 March 1998). 33 India, in contrast, which has only liberalized its capital account to a very limited extent, weathered the tumult while showing few signs of the difficulties faced by its Asian neighbours – in spite of a less healthy domestic economy. A. Singh, ‘“Asian Capitalism” and the Financial Crisis’, in J. Michie and J. Grieve Smith (eds), Global Instability: The Political Economy of World Economic Governance (London: Routledge, 1999), p. 28. 34 This account of the Thai crisis is taken from Ilene Grabel’s ‘Rejecting Exceptionalism’, pp. 46–8. 35 Based on data on the exposure of US money-centre banks to loans and derivatives provided by the Federal Financial Institutions Examination Council, 31 December 1997. Cited in J.A. Kregel, ‘Derivatives and Capital Flows: Applications to Asia’, Cambridge Journal of Economics 22 (1998) Table 1. 36 P. Krugman, ‘The Return of Depression Economics’, Foreign Affairs 78, no. 1 (1999) 64–5. 37 For critical assessments of the IMF’s role in the crisis, see: A. Singh, ‘Asian Capitalism and the Financial Crisis’, M. Feldstein, ‘Trying to do Too Much’, Financial Times, 3 March 1998; and ‘Refocusing the IMF’, Foreign Affairs March/April (1998); J. Sachs, ‘A Power Unto Itself’, Financial Times, 11 December 1997. 38 For discussion of the developmentalist model of economic development favoured by Asian states, see: P. Evans, ‘Predatory, Developmental and Other State Apparatuses’, Sociological Forum 4, no. 4 (1989). 39 Prominent individuals who accepted this diagnosis included Alan Greenspan, Chairman of the US Federal Reserve Board and Michel Camdessus, IMF Managing Director. A. Greenspan, ‘Testimony of Chairman of the Reserve Board’, Committee on Banking and Financial Services, U.S. House of Representatives. (Washington, D.C., 30 January 1998); M. Camdessus, ‘Economic and Financial Situation in Asia: Latest Developments’, Background paper prepared for presentation to the Asia–Europe Finance Ministers Meeting (Frankfurt: IMF, 1999).

144 Ideas, Institutions, and Policy 40 Critics have responded that there was in fact considerable information available to investors before the crisis, some of which pointed towards a number of key macroeconomic weaknesses; the problem was not the lack of information but the disinterest of investors in considering it. See Bank of International Settlements, 66th Annual Report (Basle, 1996). 41 B. Winkler, ‘Which Kind of Transparency? On the Need for Clarity in Monetary Policy-Making’, European Central Bank Working Paper Series 26 (2000) 7. For a different perspective on the politics of transparency, see M. Webb, ‘The G-7 and Political Management of the Global Economy’, Political Economy and the Changing Global Order, R. Stubbs and G. Underhill (eds), 2nd edn (Toronto: Oxford University Press, 1999). 42 Advocates of this shift argue that the anonymous nature of security market transactions avoid the problems of subjectivity introduced by bank lending. What they ignore is the considerable evidence that bank-based systems are often better at allocating investment wisely. Eatwell, International Financial Liberalization, pp. 43–4. For data on the size of the shift from banking to securities, see Akyüz, ‘Taming International Finance’, Table 3.2. 43 A. McCabe, ‘G-7 Boosts Financial Surveillance: Canadian Initiative Aims to Avert Further Economic Crises’, Business. Ottawa Citizen, 16 May 1998, Final (ed.), sec. E: 1. 44 M. Foucault, Résumés des cours (Paris: Collège de France, 1989), p. 111. 45 Cook, ‘Commentary’, p. B9.

8 Stock Markets and States Kathryn C. Lavelle

A recent opinion piece in the Economist arguing the merits of turning stock exchanges into public companies noted that as the exchanges compete with each other and with electronic rivals they have become, in essence, little more than rival platforms for trading securities. The Economist argued that ‘the old notion of a national stock exchange as a natural monopoly-cum-utility has become not just antiquated but actively harmful.’1 The broader phenomenon that the piece refers to, that is, the cross-listings of equities across exchanges and cross-border trading of equities, would seem to be yet another dimension to the rapidly integrating global financial scene wherein nation states are increasingly less significant actors, and private economic actors are increasingly more significant. Yet the connection between stock markets and states is not so easily broken. During the same years international equity trading grew exponentially, this type of activity was limited to firms in a certain key group of states. Some other states moved to create exchanges and regulatory agencies de novo, and others developed existing ones with enhanced regulatory agencies, resulting in an entirely new International Finance Corporation (IFC) classification, the ‘frontier exchange’. According to this classification scheme, an emerging market is located in a low to middle-income country as defined by the World Bank; moreover, its investable market capitalization is low relative to its most recent GDP figures.2 Frontier markets are small and illiquid, even by emerging market standards. Stocks listed on these exchanges were rarely crosslisted and many had restrictions on the owner’s nationality. Reserving the weightier question of whether or not the individual exchanges are ‘good’ or ‘bad’ for an individual economy to more extensive case studies, 145


this essay specifically questions the connection between the frontier stock exchange and the broader financial institutional structure of the state in question to get at the question of the link between stock markets and states. The connection between stock market creation and lower income states is a significant one for understanding the political economy of international finance despite the fact that activity on the frontier exchanges is minuscule when compared with the volume of those of either the OECD exchanges, or the more established ‘emerging market’ exchanges. The birth of these exchanges throws light on the activities of smaller, more vulnerable economies to deal with the pressures of the integrating global economy, as well as the potential for these markets either to contribute to, or to buffer states from, global turbulence in the future. Their birth calls for a reconsideration of the theoretical question of whether or not states, particularly vulnerable ones, are losing their grip in the face of rapidly integrating financial market forces?3 This essay explores the proposition that these new exchanges differ from the more established exchanges with respect to their political origins in the high percentage of government firms listed on them, and subsequently with respect to the part they have the potential to play in industrialization, given their insertion at a different moment in capitalist development. The first of four sections considers the functions stock markets perform with respect to industrialization and corporate governance. The second examines how the structure of privatization deals affect these functions. The third explores evidence from case studies of the frontier exchanges and the final section offers some conclusions about state capacity in the rapidly integrating global economy.

Stock market institution functions: broadening ownership and deepening liquidity ‘Ownership’ of an asset generally includes the ability to control that asset in the term’s fullest, most liberal understanding.4 Yet the modern corporate form separates the two functions of ownership and control wherein ownership of the corporate assets is parceled out in fractions to stockholders, and control of the assets rests with professional managers. Stocks, therefore, are securities representing a fraction of the ownership element of the corporation. As the number of individuals or banks that own stock of a given corporation grows, the fraction they possess declines, and ownership is even more distant from control because any voting rights attached to the stock become negligible.

Stock Markets and States

147

Stocks can be traded across national borders in four main ways. An individual in one country can purchase stock on a stock exchange in another country by engaging in a ‘cross-border’ transaction. Or an individual can trade on the exchange of the country where he or she lives, but trade shares of a foreign company listed there. However, a firm generally does not list the shares themselves, but rather lists an International Depository Receipt (IDR), Global Depository Receipt (GDR), or American Depository Receipt (ADR) which is a tradable receipt for a stock outside the country from which it originates. 5 These receipts can trade on or off major exchanges and corporate governance rights attached to them vary depending on the security. Finally, an investor can trade shares of collective investments, or funds, which are bundled and sold together. Although firms have considerable choice in terms of where and how to list shares, a true ‘world market’ for stocks does not exist. What does exist is a composite of distinct national markets where valuation and reporting requirements vary, and an alternative transnational market dominated by large firms and investors. Although a comparison of the price of these securities, if offered in different markets, would be difficult to effect because accounting and valuation standards vary so widely, evidence does exist that transaction costs for equity issues in developing markets are significantly higher.6 Hence, international equity markets fail, in what Van Zandt terms the ‘test of one price’ wherein a borrower or its underwriters could approach all potential investors regardless of their residence, and a truly integrated market for equity securities would exist. 7 Without having any real, effective control over his or her asset, the investor owning stock of a corporation nonetheless realizes two significant benefits: the expectation of dividends, and the liquidity of stock as an asset. That is, the stock generates a stream of income and can be sold for ready cash within days or even hours. By bringing together potential buyers and sellers, stock exchanges in developed, industrial democracies ensure the liquidity of previously issued shares, and allow investors of dramatically different time-frames to participate in owning the same assets since stocks can be bought and held for a week, a month, or a year or longer. The diversity of owners taken together with their number further separates the functions of ownership and control because any sort of generic ‘interest of shareholders’ ceases to exist when management must choose, for example, between the interests of short-term and long-term investors, or between the interests of local vs. distant shareholders.8


Literature on the political economy of international finance generally uses functionalist arguments for stock exchange creation by situating a state’s financial market institution structure within the broader historical context of the manner in which, and when, the state experienced industrialization. Stock exchanges evolved to meet the needs of the state and economy in question. For example, English capital markets evolved in the context of gradual English industrialization wherein the English private sector had accumulated a considerable amount of capital from earnings in trade and modernized agriculture. Hence, English banks were sources of short-term capital in a state that did not need banks for long-term investment purposes. The London Stock Exchange of the nineteenth century was not a market of new issues, but was a market for transferable securities as liquidity improved and first-time investors knew their money would not be tied-up permanently.9 It evolved as a mechanism to enable many investors to share the large-scale risks inherent in business ventures associated with the industrial revolution such as railroads, canals, banks and manufacturing concerns. The form limited shareholders’ liability for the firm’s debts and obligations, unlike proprietorships or partnerships which left owners open to unlimited exposure. Conversely, German industrialization was more rapid, and the state played a more interventionist role than it had in Great Britain. The German banking system solved the problems of late industrial development because it allowed greater leeway for the state to mobilize capital for development and influence resource allocation among competing sectors. Therefore, German universal banks which combined capital market functions allowed the German state to eliminate fratricidal struggles among competing elements, and to mobilize scarce capital for specific industrial purposes. 10 The involvement of the banks diminished the need for the role the stock market had played in Great Britain. Even more pluralist and less functional explanations for capital market development stress the importance of history. For example, Roe’s study of managerial power in the United States argues that interest groups attached to industrialization consciously restricted the dominant financial institutions from the end of the nineteenth century onward in the Unites States.11 The interest groups had large voices in Congress and their views resonated with public opinion in the United States which mistrusted large accumulations of financial (among other types of ) power. Hence, Congress passed laws fragmenting financial institutions and in the process separated capital markets as they formed. Writers considering more contemporary, less industrialized examples also stress


149

the importance of historical patterns. Woo, for example, points to the lingering effects of Japanese colonialism in Korea to understand the state’s relationship to business and finance. 12 Therefore in sum, the corporate form itself did not evolve as a method of sharing control because the form separated the functions of ownership and control. Nor did stock markets mobilize capital for industrial development. Rather, they allowed for broad, anonymous ownership, liquid assets, provided for stores of wealth and streams of income. Nonetheless the financial institution structure that resulted from industrialization, particularly the separation of the banking industry from the securities industry and the range of activities that banks can engage in, does figure prominently in the model of corporate governance of a particular state. And corporate governance amounts to control.13 Analysts commonly consider two main models of existing corporate governance systems: a market-oriented model and a bank-oriented model. The United States is the universal example of the former wherein security issues (that is stocks and bonds) are the predominant source of long-term industrial funds. Ownership of shares is fragmented and freely transferable, thus shareholders can exit the corporation at will, often called the ‘Wall Street Rule’. If owners are unhappy with management’s performance, they sell shares, the price of the stock drops, and management becomes vulnerable to a takeover wherein new managers will attempt to improve on the performance. Thus, the stock market disciplines managers through the Wall Street Rule. Banks do not act as owner-managers and do not hold substantial shares of the stock of any particular firms; contracts set employee, supplier, creditor and customer rights.14 Alternately, banks do play a significant role in channeling capital from households to companies with the bank-oriented model as it exists in Germany, continental Europe and Japan. With the bank-oriented model, corporations collect capital from banks and banks in turn own stock in the corporations. Hence, these firms have a much higher percentage of bank debt on their balance sheets, and have major shareholders in their ownership structure. 15 Together with the small and powerful body of shareholders and debt holders, labor operates as a third key participant in the leadership of most European firms. German corporations, for example, operate with worker councils which management must consult on a variety of matters concerning policy.16 Therefore a different set of stakeholders controls corporate activity and the ‘Wall Street Rule’ does not operate as it does in the market-oriented model.


The allocation of managerial discretion is complicated beyond these market and bank models however, when previously state-owned, and particularly when state-regulated, enterprises enter the mix. This is the case even in the United Kingdom where there are fewer restrictions on hostile takeovers than any other country and the market would seem to exert the most discipline. A large proportion of privatized firms in the United Kingdom have issued special, or ‘golden,’ shares conferring certain rights on the government to restrict either takeover, or the building of a significant stake in the companies. Some of the special shares were time-limited and in other cases the government chose not to exercise its rights, for example, the government did not intervene when Ford sought to purchase Jaguar. Nonetheless, the UK government did use its special share to bloc a proposed hostile takeover bid for the largest UK electricity generator (National Power) from a United States firm. 17 Therefore, even in market-oriented financial structures such as the United Kingdom, shareholders cannot expose management to the same kind of vulnerability to a hostile takeover as with private firms which have gone public. As the next section makes clear, concentrated corporate control often clashes with the chief political objectives of privatization, that is, encouraging wide share ownership, raising government credibility that further sales will follow successfully, and maximizing revenue in government privatizations. Whereas the exchanges of the nineteenth century did not evolve as a means of sharing control, the exchanges of the late twentieth century must address directly the issue of pushing control to private managers, when political pressures pull the direction of that control back at the state which remains a significant stakeholder.

The politics of privatization and corporate governance Unlike the earlier examples where a financial institutional structure evolved as part and parcel of industrialization, and the financial structure disciplined or did not discipline corporations through the price mechanism (that is Wall Street Rule), corporate governance of many of the newly listed equities of the 1980s and 1990s can be traced to the politics of how an individual privatization deal was structured. Hence, corporate governance is not always so clearly linked to the financial institutional structure. A stock exchange in this setting provides the necessary infrastructure for the privatization to occur, but the market does not necessarily perform the same function after the privatization occurs. In some cases the exchange can indeed be an


151

anonymous international platform for selling shares, and many of the Western European stock markets are increasingly integrated through the shares of privatized enterprises offered internationally. Nonetheless, as the number of privatized firms increase on an exchange, and in the absence of liquidity, the connection between state and stock market can also tighten. The term ‘privatization’ is analogous to ‘globalization’ insofar as both terms are used so widely and generally as to render them nearly meaningless. Any transfer of ownership or control from the public to the private sector could be considered privatization. For purposes of this essay, however, privatization refers to transactions where the government (as vendor) transfers enough ownership or control of an enterprise that private operators or owners gain substantive independent power over it, although they will not always gain majority ownership. 18 The treasury of the state is usually the main beneficiary of the privatization rather than the enterprise itself, even when the privatization is accompanied by a financial restructuring. Governments involved in selling assets publicly generally seek four main objectives, the most obvious among them being to raise revenue.19 The proceeds from privatization sales allow governments to reduce public borrowing, in theory meaning less future taxation. Less taxation is not always the result, however, since governments also lose a claim on the cash flow of privatized firms. A second objective of privatization is wide share ownership which encourages participation in the stock market by individual investors. Thirdly, governments seek more effective control of companies through privatization which neo-liberal economists argue arises when investors and analysts monitor management’s performance. (This goal is of course complicated when governments retain ‘golden shares’ as in the United Kingdom, or ‘noyeaux durs’ in France.) Finally, a private firm can only issue an ‘initial public offering’ or IPO once. Governments however can issue ‘initial’ offerings on more than one occasion; and they generally indeed do just that. Privatizations generally take place when a range of assets are sold sequentially. Hence the government, unlike a firm, has a goal of earning a good reputation, for example, with pricing of the deal, in privatization IPOs to ensure future successes. To effect these four main goals, governments have a variety of options for how to transfer the assets. Most entail some public offering of shares. Public offers can promote wide share ownership, but can complicate pricing. Some, albeit few, have been conducted by means of a tender. A growing number are conducted with book-building


techniques wherein the privatization coordinators invite investors to submit price/quantity shares according to a price range. This exercise is primarily targeted at institutional investors. When not offering public shares, governments can privatize by selling the enterprise to outside investors, facilitating a management–employee buyout, distributing equal-access vouchers, or by immediately transferring assets to a private owner/manager. 20 Since the goal of wide ownership is usually one of the more significant for governments, the allocation of shares generally reflects the political leverage of three main groups of political constituents. First among these are existing domestic entrepreneurs, second are management and workers of the enterprise in question, and third is the general public. In comparison, management, workers and the general public were far more successful in acquiring ownership in Eastern Europe and the former Soviet Union than in the Mexican privatizations where shares were primarily allocated to strategic investors who bought the enterprise for the highest possible price.21 Many of the Mexican firms are cross-listed in the United States rendering these shares far more liquid than many Eastern European firms’ shares. 22 The upshot of this political activity in transferring shares is that in many (but not all) instances the government wants to privatize, but also to retain a degree of control. The government can regulate share ownership or takeovers. Or it can retain shares itself to provide a conduit for participation in corporate governance. For example, government representatives can be appointed as members of the board of directors. They are then in an ambivalent position with respect to the interests of the government or the firm. 23 The tension between ceding corporate control and privatization is particularly pronounced with respect to enterprises listed on many frontier exchanges because they comprise such a large volume (as much as 100 per cent) of market capitalization.

Privatization, corporate governance and frontier stock exchanges The two most immediate and notable differences between frontier exchanges and exchanges in the ‘emerging’ or ‘developed’ world are their lack of liquidity and almost complete lack of cross-listed firms on major world exchanges. To give a more complete picture of these differences, if we take turnover ratio (value of shares traded as a percentage of capitalization) as a measure of liquidity, by 1998 high income countries averaged 74.9 per cent while frontier markets averaged 2.5 per cent. Of

Stock Markets and States Table 8.1

Frontier stock exchanges

Country

Year Region Established

Bangladesh Botswana Bulgaria Côte d’Ivoire Croatia* Ecuador Estonia* Ghana Jamaica Kenya Latvia* Lithuania* Mauritius Romania Slovenia* Trinidad/ Tobago Tunisia Ukraine

Number of companies listed

153

Market capitalization in millions of US$ (September 1998)

Turnover ratio (in %)

1956 1989 1991 1976

AS AF EE AF

204 12 15 35

1132.5 713.1 2.3 1594.4

14.2 0.7 0.0 0.2

1991 1969 1995 1990 1968 1954 1995 1993 1989 1995 1990 1981

EE LA EE AF LA AF EE EE AF EE EE LA

49 38 26 21 49 58 63 64 40 5719 27 24

2889.0 1603.4 489.2 1273.9 2466.0 1873.8 241.3 1037.4 1835.6 1263.6 2298.0 4062.5

0.3 0.9 15.3 0.1 0.1 0.4 3.1 2.5 0.5 2.3 2.9 0.4

1969 1992

AF EE

38 155

2295.6 495.4

0.5 0.4

* State had an active stock exchange prior to the imposition of communist rule. Source: International Finance Corporation, Frontier Stock Markets Review: Performance, Valuations and Constituents. (Washington, DC: International Finance Corporation, 1998) and individual stock exchanges.

the 18 frontier markets, only six had a turnover ratio percentage greater than 1 per cent (see Table 8.1). 24 To fill out the picture of cross-listings, Table 8.2 describes the firms from frontier markets listed on the London Stock Exchange, the world’s largest market for listing and trading international securities. As Table 8.2 shows, of the 15 companies which are listed in London, only ten have a market capitalization greater than zero. One of these ten, Ashanti Goldfields is cross-listed, but has been an international firm whose shares were traded in London as early as the late nineteenth century. 25 Of course, this lack of listing does not preclude over the counter trades in the US and elsewhere. Nor does it mean that the

154

Table 8.2

Frontier market companies cross-listed on the London stock exchange, May 2001

Company

Sector

Country

Pliva D.D. Zagrebacka Banka Eesti telekom

Pharmaceuticals Other financial Fixed-line telecommunication services Gold mining Food processors Banks Wireless telecommunication services Off-shore investment trusts Off-shore investment trusts Off-shore investment trusts Off-shore investment trusts Banks Property agencies Banks Banks

Ashanti Goldfields Kakuzi Latvijas unibanka AB Lietuvos Telekomas India Access India IT Fund India Public Sector Fund Mauritius Fund Banca Turco Romana SA Blagovno Trgovinski Center (BTC) SKB Banka D.D. Banque Inter Arabe Tunisie Source:

London Stock Exchange.

Ordinary shares?

Depository receipts?

Market Capitalization (in £m as of 31 May 2001)

Croatia Croatia Estonia

Yes No No

Yes Yes Yes

1176.156 172.700 113.648

Ghana Kenya Latvia Lithuania

Yes Yes No No

Yes No Yes Yes

187.947 4.312 7.364 0.000

Mauritius Mauritius Mauritius Mauritius Romania Slovenia

Yes Yes Yes Yes No No

No No No No Yes Yes

0.000 0.000 0.000 0.000 0.000 14.058

Slovenia Tunisia

No No

Yes Yes

7.420 18.580


155

markets did not attract international portfolio equity flows during these years. In 1995, for example, Bangladesh attracted US$33 million in private capital flows. Likewise Côte d’Ivoire attracted U$3 million in portfolio equity flows in 1995. However, firms in these countries did not participate in transnational issues. Africa The vast majority of frontier markets are located in Africa and Eastern Europe. Of the African exchanges, the stock exchange of Ghana is representative of many on the continent in that it is relatively new (1990), has relatively few firms listed (21), and only one firm (Ashanti Goldfields Company) cross-listed on major world exchanges. Ashanti Goldfields itself is representative of African privatizations because it represents 55 per cent of market capitalization on the current stock exchange in Accra. Its sale, taken together with the privatization of Nigeria’s NNPC oil field, accounts for nearly 40 per cent of total subSaharan African privatization. 26 As mentioned earlier, the Ashanti Goldfields Company was listed on the London Stock Market in 1897. The London Rhodesia Mining and Land Company (Lonhro) bought the firm in 1967 at which time the government acquired a 20 per cent interest with an option to acquire 20 per cent additional. At that time, the firm was de-listed in London. In 1972, the military government acquired a 55 per cent equity interest in all mining companies by legislative fiat. The headquarters then moved from London to Accra.27 Gold production declined in the following years and did not resume until the Rawlings regime launched the IMF/World Bank structural adjustment programme in 1983. Export promotion of gold was a main feature of this programme, along with the privatization of state interests in the economy. Despite a court challenge by some Ghanaian citizens, the government sold more than one-half of its 55 per cent equity interest to the private sector at which time the firm was listed in New York, London, Toronto, Australia and Ghana.28 Prior to the state’s sell-off, the government appointed the CEO of Ashanti Goldfield’s Company which in turn served on the board of the Minerals Commission and other boards. Since privatization, the CEO is the representative of Lommin (which inherited Lonhro’s shares). The President of Ghana no longer has the legal authority to fire the CEO. Nonetheless, the government retains golden shares and can rebuff takeover bids if it so desires. Tensions over labour and environmental issues have called for new government activity with respect to the firm. 29


Therefore, the managerial power of the President was mitigated with privatization, but a true ‘market-oriented’ system of corporate governance did not result despite the fact that shares are now freely traded globally. Other African markets are similarly dominated by a few major privatizations and have extensive lending arrangements with international financial institutions. The market capitalization of the Abidjan bourse grew 26 per cent in one day from the introduction of Sonatel shares in October of 1991 which was a major (Senegalese) government privatization.30 The Botswana Stock Exchange was created from an expressed need of the Botswana Development Corporation to sell its investments in 1989. Kenya Airways had a prominent public issue in March 1996 and entered into an alliance with KLM. In these cases as well, the government has retained a degree of equity holdings and involvement even when it lists the company publicly and promotes wide, and sometimes international, share ownership. Eastern Europe The Eastern European frontier exchanges differ from the African ones in three major areas. First of all, their historical origins are dramatically different in that most states had stock exchanges prior to the imposition of communist rule. Hence, the communist era represents an interruption in market activity that in some cases had been quite active prior to World War II. For example, the first Lithuanian exchange opened in Klaipeda in 1775, and the Vilnius Stock Exchange operated from 1926 to 1936 (see Table 8.1). Secondly, as products of the transition from communist rule, the privatized firms emerged from situations where more domestic political pressure called for increased privatization activity, albeit both regions were acting in concert with the international financial institutions. Whereas the Africans were addressing an international debt crisis, the Eastern Europeans were addressing internal appeals for reform as well as acute financial crises. Thirdly, and related to the above political configurations, the transition economies as a group experimented with a wider variety of methods of transferring ownership, for example vouchers and management–employee buyouts, than did the Africans. Table 8.3 shows the dramatically different methods of transferring ownership among transition economies. The initial form of transfer in most transition economies (and the form favored in Estonia) was by sale to outsiders on a case-by-case basis. This method was thought to promote good corporate governance since ‘strategic’ or ‘core’ investors


157

Table 8.3 Methods of privatization for medium-size and large enterprises in seven transition economies (percentages of total) Country

Sale to outside owners

Managementemployee buyout

Equal access voucher privatization

Czech Republic By number b By value d

32 5

0 0

22c 50

Estoniae By number By value

64 60

30 12

Hungary By number By value

38 40

Lithuania By number By value

Restitution Othersa Still in state hands

9 2

28 3

10 40

0 3

0 10

2 0

4 15

7 2

0 0

0 4

33 12

22 42

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New Dialectics and Political Economy

New Political Economy

Modern Political Economy: Old Topics, New Directions (Political Economy of Institutions and Decisions)

Analyzing the Global Political Economy

Political Economy of Global Remittances

security in the Global Political Economy

RIPE Studies in Global Political Economy)

Political Economy and the Changing Global Order

Political Economy and the Changing Global Order

Rethinking Global Political Economy: Emerging Issues, Unfolding Odysseys (Routledge Ripe Studies in Global Political Economy, 11)

Discipline in the Global Economy?: International Finance and the End of Liberalism (New Political Economy)

Institutional Competition (New Thinking in Political Economy)

Key Debates in New Political Economy

Financialization and the US Economy (New Directions in Modern Economics)

Central Asia and the New Global Economy

New Directions In Counselling

New Directions in Knitting

Global Finance and Social Europe (New Directions in Modern Economics)

The Political Economy of Democratic Decentralization (Directions in Development)

New Directions in Chenille

New Directions in American Political Parties (New Directions in American Politics)

Chapters in political economy

Global Political Economy in the Information Age: Power and Inequality

Technology, Culture and Competitiveness: Change and the World Political Economy (Technology and the Global Political Economy)

The Global Political Economy of Israel

New Dialectics and Political Economy (Political Science & International Relations)

New Regionalism in the Global Political Economy: Theories and Cases (Routledge Warwick Studies in Globalisation)

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