International Workshop on ‘Workers, Nation States and the Role of Finance’ at PUCRS, World Social Forum, Porto Alegre, Brazil, 23 - 28 January 2003.

Venue: 1.30 pm at PUCRS (the Catholic University, Porto Alegre), Building: 15, Room: 228

The workshop was chaired by Erinc Yeldan and the panelists were Jomo K.S., Prabhat Patnaik, Ozlem Onaran and Samir Amin. The audience of about a hundred consisted of academics, activists, people involved in policy-making and concerned citizens. The workshop sought to clearly articulate, and therefore to draw the attention of the audience to, the new role of the ‘nation-state’ in the era of globalization and financial liberalization. In recent times the state has emerged, not as a producer and investor and thereby a creator of demand, but, on the contrary, as a controller of inflation and thereby attractor of foreign capital. The workshop also discussed the effects of financial liberalization on workers, and explored possible alternative policies for the future.

In his opening remarks as chairperson, Erinc Yeldan spoke about how ironical it was that all the developing countries had become nothing but ’emerging markets’ for the north. Their people had lost their individual identities and their only role was as ‘market actors’.

Jomo K.S. began his presentation by introducing IDEAs to the audience. He discussed its aspirations, beliefs and commitments and invited the audience to visit the website hosted by IDEAs.

Subsequently, he discussed the role of financial liberalization (FL) that is now associated with the increasing importance of financial capital both by itself and in the development of economic theory and practice. The push for financial liberalization over the last two decades has taken place at two levels. First, at the domestic level, FL was apparently meant to destroy so-called ‘financial repression’. But in reality it did not. Second, FL was meant to stop misallocation of scarce resources. But again, evidence shows that it did not. Not only has there been slower economic growth and slower reduction in poverty in countries that pursued FL with zest, there is evidence that FL was associated with rising income inequalities at both national and international levels.

The intellectual arguments underlying FL have been theoretically weak. The policies that have been pushed through have their theoretical and empirical foundations in the work on South Korea by McKinnon and Shaw, where it was argued that South Korea had a low savings rate because of the financial repression that allowed banks to keep interest rates down. FL, it was argued, would free the financial sector from regulation and raise interest rates. However, the assertions were not borne out even empirically, since Korea actually had a rising savings rate over the sixties and the seventies.

Even if the theoretical argument is accepted, McKinnon himself had argued for a proper sequencing of FL. In reality this was not followed, especially so in the case of capital account. Reckless FL, for example in South Korea, has been a major reason for the crises in many developing countries.

The period following FL has proved false many of the claims forwarded by its proponents. First, it has not resulted in capital flows from the capital-rich to the capital-poor countries, as claimed. Second, the cost of finance has risen steeply instead of coming down, as promised by the proponents of FL. Third, the argument that FL would lead to financial deepening, which in turn would lead to a stable financial system since foreign capital would fill in any movements by domestic capital to stabilize inter-state variations, exchange rate movement, etc., has been proved to be completely false. Now risk has simply been shifted to a counter party; so systemic risk is in fact much more concentrated, leading to a more unstable system. The development of the system and the instruments of control have therefore made risk more concentrated and more intense. This is the reason why currency crises have become so common in today’s world. The risk control instruments that have been developed by the IMF have not addressed the nature of the system itself, and further, any attempt to find a solution have tended to be subverted by the US government.

Finally, Jomo K.S. made two further interesting points. First with the increase in the importance of finance, there has been a pressure to follow deflationary policies – ‘inflation targeting’ has become the new buzzword, New Zealand being its pioneer. But this has been the cause of slower economic growth around the world in the last two decades. Second, for late industrializers, the availability of long-run development finance is crucial. But with the advent of financial liberalization, this possibility has almost been wiped out. Now most regional banks, even those like the Asian Development Bank, in their bid to emulate the World Bank, have stopped disbursing long-term development finance. Considering that development in many countries like Japan, South Korea and Brazil (to name just a few), has heavily depended on such finance, its unavailability will crucially undermine the process of development in today’s developing economies.

The next speaker, Prabhat Patnaik, highlighted the role of cross-border flows of capital as finance vis-a-vis the role of the nation-state. This capital is not meant for creating productive capacity in the form of factories, etc., but operates just as finance that is highly speculative in nature and highly global, in the sense that it is free to move anywhere. So now a new contradiction has emerged between finance that has assumed a global character and the nation-state that is national. Given the pressures from the World Bank-IMF, national governments are committed to look after the interests of global finance and forced to create conditions within their countries that retain the interests of investors, often to their own detriment. This implies a withdrawal from the state’s domestic role as a producer and investor, since private investor confidence seems to get adversely affected by an interventionist state. The nation-state’s capacity to intervene in the economic sphere within its own boundaries therefore gets undermined.

The reasons behind and the implications of this downswing in investor confidence, occurring as a result of an interventionist state, were clearly enunciated by Patnaik. First, the fear that the state will interfere is intensified if a state follows expansionary policies, and this tends to make capital go out. Second, there is an inherent hostility to state activism unless it is for the cause of finance. There is also the fear that it will put up controls and barriers. Third, where the state is inactive and is withdrawing from the role of producer and investor, it will privatize its industries and international enterprises will be free to buy these up very cheap. Fourth, if funds are free to move and interest rates are the same everywhere, finance has a tendency to move to the north rather than the south, since the former is the home base of capitalism. So financiers have to be bribed in the form of a higher real rate of interest, ensuring that the south is never left with a level playing field. Fifth, if the real rate of interest is higher the government debt will actually keep on increasing, and this compounds the problem of public finance for the nation-state. The national government has now emerged as a protector of international finance. Capital has always needed a protector domestically, and since there is no global state, this role has to be performed by nation-states.

The functioning of global financial capital has a recessionary impact on the entire world economy, but even more so in the third world countries. Deflation always has an adverse impact on primary producing countries since the terms of trade always move against agriculture. The whole process is like re-colonization, characterized by a change in the terms of trade, no role for the state to provide welfare or productive services, recessionary policies, etc. It is imperative, therefore, for the developing countries to put up a resistance, to fight back this process. As history has shown, pointed out Prabhat Patnaik, growing oppression has always been followed by growing resistance. Factors like Lula getting elected to power in Brazil point towards this. But to these must be added deliberate resistance. Many types of pressures and arm-twisting tactics are being used by the imperialist powers to subvert such processes, but there is now increasing protest against these.

The role of the nation-state is crucial in the process of moving back from globalization and negating its role as a protector of finance capital. Moving back does not mean a complete reversal but rather an economy with more controls on trade and capital flows, and one that can ensure tangible benefits for large sections of the people, which includes fair terms of trade for the peasantry. The people’s support for their national governments is a must for such a process, and Lula’s victory in Brazil could be a situation to be replicated in all developing countries.

The third speaker, Ozlem Onaran, highlighted the catastrophic impact of neoliberal policies on labour. She argued that the new era of globalization that is so consumed with ‘inflation targeting’ and ensuring the interests of finance capital has changed the power relations between the working class and the capitalist class considerably. There are certain features that this has given rise to. The first is the rise in the power of multinationals vis-à-vis the power of the nation-state. Second, the increase in unemployment. Third, the ability of physical and financial capital to move across borders undermines the bargaining strength of trade unions, since there will always be the threat that capital will move out. Fourth, financial capital makes economies more vulnerable by paving the way for financial crisis in the short run and increasing the long-term rate of interest in the long run. This also means higher accumulation and lower growth, which in turn leads to unemployment. The rise of ‘short term-ism’, led by shareholder capitalism, is also not good for employment.

As major macroeconomic developments across the world have shown, financial liberalization, with its discourse of stability and deregulation, actually brought back a regime of re-regulation, this time in the interests of the capitalists. In countries of Latin America, Turkey and East Asia, where they stuck to policies of re-regulation with market fetishism, there was stagnation in growth and employment, and wages either stagnated or real wages fell. Despite increased exports, manufacturing employment has stagnated or fallen. The crisis in Asia did prove that exports have its constraints. Even strong countries can be victims of overaccumulation and overindustrialization which make them prone to crises. During the East Asian crisis, in the two years following 1997, 2 million jobs were lost. In Turkey, urban unemployment increased from 8 per cent to 13 per cent during the course of the crisis. During these crises, workers ended up suffering while capital conveniently flew out.

The future agenda has to come to term with these problems. For this, both domestic and international policies have to be pressurized away from exploitation of labour. The policy agenda must include central bank targeting of inflation and not of unemployment, deregulation of labour markets, regulation of financial markets, and getting states to formulate effective welfare, industrial and trade policies that could ensure a redistribution.

Finally, Ozlem Onaran stressed the fact that higher profits could not lead to higher growth in output and employment. Since the propensity to consume out of wages is higher than to consume out of profits, the global economy is more wage-driven than profit-driven. A wage-favouring distribution is therefore the key to higher demand, and higher growth. The problem is that policies like this cannot be formulated unless workers are empowered, but this is difficult with so much unemployment. However, the need of the people must necessarily be placed before that of profits.

Samir Amin, the final speaker, spoke about the political issues in front of us with very fundamental economic considerations. He drew the attention of the audience to the challenges that a new large popular alliance, if it is sought to be built, would face in the world today.

The fact is that no economy can grow or develop by itself independently of the social set-up. So even within capitalism, a change in the balance of forces is crucial. Earlier, the alliance between the workers and peasants had worked. In today’s world, half of the 6 billion people are peasants. So the question of land and food are crucial at this juncture. Obviously, producing more food will give a boost to this section of the world population. But even when more food could be produced, it is the farmers in the US, and the European Union that have benefited, and most farmers in the world have not. It is a fact, Amin stressed, that no poor farmer can survive free competition without subsidies. Any policy that eliminates such subsidies is therefore obviously planned to benefit developed country peasants and destroy the others.

The other alternative before the world is not socialism, he argued, but to have the right of access to land as equal, or at least as little unequal as possible, for all peasants. This should form the basis for development and should be a continuous strategy to be pursued even in the future. Prof. Amin suggested that the earlier commitment to the peasantry has largely been forgotten, even by left-wing political groups across the world. Now, even the declaration of human rights does not include any provision on the right of access to land. This situation needs to be remedied at once.

Of the other half of the population, two-thirds are the popular classes, who are not owners of minimum education and minimum resources. These people are negated in other productive systems. Fifty years ago, they constituted 70 per cent of the world population, and today this proportion is still high, about 50-60 per cent. This proportion is high even in the north and is massive in the south.

The change in the attitudes towards these people created the space for neoliberal economics. The forms of organizational struggle that were effective earlier have lost their effectiveness now. The need today is for a unified struggle of labour – both peasant and industrial. Only after that is there need for articulation in terms of planning, in terms of prices and incomes, management of balance of payments, tax policies, etc. More difficult than the economics of such planning is the difficulty of achieving and converging on that planning and its implementation. But first, the task before economists is to build a strong worker–peasant alliance.

The audience seemed to be concerned about the economic policy choices facing President Lula in Brazil today, and this was reflected in the many questions that were asked. The panelists suggested that Lula needed to broaden and strengthen his support base among the people (Jomo K.S., Patnaik), and maybe find some slack from where to give some immediate relief to his people (Patnaik). All of them agreed that the situation was very complicated and that Lula had to tread extremely carefully.

Another question asked whether freeing labour mobility could counter the negative impact of free capital mobility that the speakers had discussed. The panelists, especially Prabhat Patnaik, answered that it is true that labour has not been free and this was the major reason for the divide between the north and the south. But even if it was, labour by its very nature could not be completely free in a practical sense, since it is not possible for a labourer in a backward developing country to just go and settle down in a developed country if he so chose. So that dichotomy is likely to remain.

Answering questions, including one on Africa, on how to find the resources and the slack, Ozlem Onaran suggested that the debt of the south needs to be cancelled, while Prabhat Patnaik suggested a squeezing of foreign creditors rather than squeezing of people to service debts.

The discussion ended on a note of optimism, but also with recognition of the new and dangerous threat posed by financial capital to the economic well-being of developing countries and their peoples.