Democracy & instability: Nation-state, Democracy and ...

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Democracy & instability: Nation-state, Democracy and globalized economy José Luís Bizelli State University of São Paulo/UNESP Introduction This paper is centered on an analysis of the world economic movement regarding the globalization process of capitalist markets which affects the internal dynamics of nationstates, thus keeping in check their capacity of economic regulation. This is not meant to be a judgment of the current process but an analysis of its mechanisms to manage interests of political national agents. Globalization is, therefore, economic phenomena with a political reflection for it points to a modern capitalist model settled in the institutional image of the nation-state. After the fall of the real socialism, many political scientists have looked closely to democracy as a way to consolidate civilizing rules which could offer the lower classes the right to a citizenship. If the nation-state is dependent upon stronger forces beyond its boundaries, is there any chance of this State to prove its own identity through democracy? Examples of this situation can be seen in international news every day: Mexican case is far from being solved and who can guarantee that Argentina and Brazil are not following in its footsteps? On the economic aspect, productive relationships have crossed frontiers causing surprise to national agents unable to face world issues. As a consequence, the fall of Mexican Stock Market has endangered America's political-financial stability. What is actually at stake? What is the destiny of emerging countries? What does a globalized capitalist society really means? These are the points to be discussed next. Capitalism and globalization In order to better understand the globalization process of modern capitalism we have to go back to Bretton Woods, New Hampshire, by the time of the end of the World War II. There, Eastern world economical leaders proposed the establishment of an international system to control exchange rates and to adjust the balance of payments and monetary reserves. The International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) were then established as an attempt to control the world financial system through loans of resources managed by these organisms and incomes ruled by Central Banks of each participating country. Both Keynes and Dexter White stood up for the establishment of organisms strong enough to control internal monetary adjusts thus facilitating credit to deficient countries and punishing countries presenting surplus, keeping national economy on the way of total employment.

This system weakened because of American interests that guide IMF action as liquidity regulator and lender of Federal Reserve (Fed). By the end of the 60s, loan operations and deposits started to escape Central Banks' control. Due to the oil shock occurred in 1973 their capacity of intervention diminished considerably and in 1979 the United Stated raised interest rates which strongly unbalanced exchange rates thus generating instability in the international monetary system. The environment in which globalization speeds up is that of deregulation of international organisms open up for extremely volatile private capitals to operate in international markets. IMF politics could not protect monetary systems of countries participating in the fund from speculative capital, but tried to implement economic measures to emerging countries. In the 80s, these countries faced a development based: a) on exchange devaluation generating commercial surplus; b) on market deregulation - with commercial and financial opening of national economies; and c) on deflation - centered on fiscal and monetary adjusts and in the balance of payments. The 90s brought up changes in the system of emerging markets. Due to the fall of interest rates in the US, short-term foreign incentives sought for investments in such countries as Mexico and Argentina, contributing to the balance of payments of these countries. Investments of smart money and loans of emerging economies are different in the late 70s and early 80s - the former may be easily removed from market due to negative symptoms in national conjuncture. The Mexican case The Mexican case represents the results observed from the implementation of an adequate policy to emerging countries. The 82 Mexican crisis was due to the escape of speculative capital and resulted in the surrender of the country to IMF guidelines in such a way that Mexican government has already sent IMF 11 letters of intent this year. In 1987 Mexico adjusted its exchange rate reaching a US$ 8 billion surplus in its balance of payments. From 82 to 92 public deficit was shortened from 15% to 0.5% reducing public expenses in 32%. State direct investments were reduced in 50%. Gross national product (GNP) which had remained stagnant between 82 and 87 started growing gradually. Important sectors such as telecommunications and the financial system were privatized and the State opened up for partnerships in its rail systems and oil and speculative capitals. At the same time, there was an overvaluation of peso in terms of dollar. The year of 1994 seemed to be a great year for Mexican efforts, strengthen by its participation in NAFTA. But the first signal that things would not be so easy came with NAFTA: Chiapas region. Zapatists showed a shy Mexico to find solutions to include impoverished sectors of population in the civilized game of democratic nations. Chiapas was only the tip of a social and political iceberg revealing the price of adjusts carried out in the country until 1994. Mexican economy was dependent upon: a) foreign capitals; b) a US$ 22 billion commercial debt; c) a US$ 28,9 billion Tesobonos debt to be

paid off in 1995; d) a US$ 9,8 billion debt service ratio with US$ 6,1 billion redemptions, and e) a 7% deficit in the balance of payments of the GNP. When, after election period, President Ernesto Zedillo decided to devaluate peso revealing a disorder in the Mexican monetary system, the speculative capital that flooded Stock Market1 disappeared, thus collapsing Mexican economy and placing the country in a situation similar to that of 1982. Recessive measures adopted by Mexican government in March reveal the social cost to be paid by the country to recover internal funds. On December 19th - one day before the crisis - one dollar was rated 3,46 new pesos, and 8,2 new pesos by March 12th. Economy Ministry - Guillermo Ortiz - projected a 2% fall in the GNP and a 42% inflation six times the rate registered in 1994. Santiago Oñate, Labor and Social Security Ministry, estimates 700,000 unemployed workers in six months' time. There was a raise in prices of fuel, public tariffs and other supplies. All enterprises dollar-indebted suffer now from lack of liquidity (because of high interest rates and the depreciation of peso) and will have to pay more taxes - a perfect context for the return of the inflationary spiral. All Mexican effort is based on a US$ 53 billion2 foreign loan led by the US. This agreement establishes that American importers of Mexican oil will deposit their payments in an account at Fed - which Mexico will access only if it meets its liabilities to foreign creditors. Mexico insolvency, anyway, could be harmful to the US. The tequila effect The effects of the Mexican crisis reflected in whole Latin America although the Mexican stabilization model is closely associated with the Argentinian program. Argentina and Mexico have got used very rapidly to the influx of volatile capitals in Latin America in the 90s without any strong structure of production for export. Argentinian crisis by the end of the 80s was featured by hyperinflation and general dollarization of economy. Domingos Cavallo's Convertibility Scheme brought about the peso/dollar par of exchange leading the country to resign the sovereignty over its own currency. This was followed by privatizations and commercial opening, which attracted US$ 35 billion of foreign capital. In 92 Argentina had an 8% rise in GNP, releasing a consumption restrained for 20 years. The three-folded basis of this politics was: a) the fiscal balance; b) the equilibrium of accounts with high reserves; and c) the credibility of economic agents. But this tripod starts to present some problems: the country faces a US$ 16,5 billion estimated deficit made up of US$ 8,5 in debt service ratio, US$ 6 billion in commercial deficit and US$ 2 billion in other services.


According to data from Salomon Brothers Bank, Mexico received US$ 34,4 billion of US$ 69,21 billion of the foreign capital invested in the Stock Market. 2 This amount appraises the Mexican crisis. In 1982 the same partners helped the country at a US$ 5 billion cost.

It is rather a crisis in the banking sector than in exchange rate. The devaluation of peso could be avoided but financial institution also faces a bad moment. The movement of volatile capitals invested in Argentina - which Central Bank has a weak intervention power - is causing the bankruptcy of small banks and enterprises. After Mexican crisis, Argentinian account holders withdrew US$ 4 billion and 27 out of the existing 168 banks just disappeared due to privatizations. Results of the recessive measures start to appear in Argentina: a 40% decrease in consumption could be registered in February. Taxes have raised, subsidies to exporters are cut down and the import of unnecessary consumer goods is restricted. This leads to a raise in prices and an increase in unemployment. To control financial crisis, Argentinian government plans to raise US$ 11,4 billion: US$ 5 billion from foreign institutions such as IMF; US$ 2 billion in bonds; US$ 2,4 billion through fiscal measures and US 2 billion in privatizations of state-owned enterprises. These resources will cover the public deficit (US$ 5,2 billion), help the banking system (US$ 4,2 billion) and "reinforce" the exchange reserve of the Central Bank (US$ 2 billion) to guarantee Cavallo Plan's success. Despite these resources some Argentinian political factors are worrisome: the coming president election -- in which President Menen is a candidate -- counts on a government with short margin of negotiation to alter or correct the course of economic politics. Argentina is a partner in Brazilian commerce: we imported US$ 3,1 billion from Argentina (not considering data from December) and US$ 1,5 billion from US during 1994. On the other hand, US$ billion Brazilian products are consumed by Argentinians every year. That resulted in the bilateral trade agreement established last February aiming at the nondepreciation of the currencies of both countries (peso and real). Although Brazil has adopted the exchange-anchored model followed by commercial opening3, the tequila effect has been also a concern among Brazilian economic team. This attitude of concern could be noticed late March when US$ 8 billion of country's reserves were put into market to cease dollar speculation and internal interest rates increased from 4% to 6% per month. We have to remember that Brazilian stabilization plan is made up of three moments: a) Constitution reformation which has not been done yet; b) a struggle against economic idleness (supported by international reserves totaling US$ 40 billion, opening to foreign commerce, adjusts in public expenses and privatizations) and c) the change of currency. The deficit of the Brazilian commercial balance registered late 94 brought into discussion the appreciation of real in relation to dollar, making it possible to change the exchange anchorage. Considering the current situation this policy would answer country's wish to increase exports but it would also mean a rise in inflation and in the escape of capitals. Regarding volatile capitals, it is necessary to point out that Brazil was a minor partner of the investment globalization because it took it longer to control inflationary process and get accustomed to the liberalization of economy. This diminished the effects of the escape of


Due to political hindrance experienced by President Collor's economic politics undermined by corruption.

capitals. Brazil is estimated to have received only 10,9% of private capitals destined to emerging markets in 1993. All countries have suffered the effects of the economic globalization. This brings about the discussion about how capitalism will face these effects by the end of the century. The crisis of the nation-state and the establishment of economic blocs To describe the constitution period of the Western Absolutist State, English marxist historian Perry Anderson (Anderson, 1974) defended the thesis that the economic and social crisis in Europe during 14th and 15th centuries -- which revealed the weakness of the feudal system -- brought into existence a new way of domination, the Absolutist State, which weakened feudal lords' political prestige though keeping their economic power. The model of Nation-state -- established from Absolutism and concentrating and imposing decisions -- would be able to then control the peasants' revolt which endangered feudal system of production. The Absolutist National-state signaled to a modern era for the bourgeois domination in many aspects -- by recovering the principles of Roman Law (defending private property and setting apart individual and public power), counting on troops and professional bureaucrats, charging taxes, implementing rules for commerce (establishing and protecting internal market), and establishing an international society through diplomacy. While capitalism historically gained shape in different countries, Absolutism resigned to other way of domination, keeping the organization principle of Nation-states. Its seems that we live a moment similar to that of the implementation of capitalism. With a heavy tendency to establishing a more and more globalized economy, "sovereign" nations -- like feudal lords -- agree in quitting their political power to participate in Regional Blocs in order to increase their capacity to influence world order. That is the objective of NAFTA, European Economic Community, Eastern Europe, Eastern Asian Bloc and the effort of Cone Sur countries' presidents to strengthen Mercosur attracting new partners such as Chile and other Latin American countries. Regional Blocs represent not only an attempt to speed up the economic globalization process but to prevent the unavoidable. But this weakens the capacity of bloc-participating countries to solve internal problems since the "regionalizing" game groups nations featuring different economic and social personalities. If Latin American countries had envisaged in the 21st century the opportunity to solve their problems favoring their needy population, this dream was certainly destroyed by the Mexican example. The dream of a society managed by a State-engine of social development is abandoned. As frequently stated by neo-liberalists, the Keynesian Welfare State model -- successfully applied in many countries after the World War II -- pointed the capitalist democratic State as a legitimate agent able to regulate liberal competition. The wealth competition generated by social conditions changed from economy to politics (Offe, 1983). This paradigm suffered a profound crisis in the 80s - a crisis featured by attitudes taken by governments Thatcher in Great Britain and Reagan in the US.

The central point of the neo-liberal criticism is the State as an agent of income distribution through social policies. Public sector is charged with undermining the "ethics of work", intervening in the market, subduing middle class with taxes and inflationary processes, establishing an unproductive bureaucracy which worsen problems when trying to solve them. Nation-state is first attacked in its economic sector, thus having diminished its capacity of implementing economic policies. On the other hand, it loses its social function with a criticized large apparatus necessary for the maintenance of its state functions. But it is necessary to keep on pointing - though theoretically - party competition as an arbitrator in conflicts between social sectors, upgrading Democracy the civilizing formula in Politics4. But would the democratic paradigm be able to stop the harmful effects -- mainly those resulting from unemployment and poverty -- of the current globalization process? The democratic paradigm in question As pointed out by Bizelli (Bizelli, 1994), if Democracy can be revealed as a civilizing way to stop capitalist accumulation, it is expected to be able to: 1) establish rules so as countries can cope with the worse periods of instability caused by political and/or economic crisis; 2) reveal itself as a process which gradual settlement in each real society gives raise to an educational system that provides each system learning and internal institutional improvement; 3) strengthen the actors performing in decision-making arenas by setting up an institutional engineering permeable to the interests of internal social groups; 4) gradually emancipate nations, either individually or in regional blocs, answering to interests established by other countries (or blocs) in the international contention. Let us analyze these points more deeply. Considering the first point above listed, we can say that Latin American countries faced the 90s sure that Democracy would be the best way to manage conflicts generated by labor exploitation. Latin American democracy offered two good examples of delicate situations solved democratically: the impeachment processes of Brazil's and Venezuela's presidents. On the other hand, Mexican crisis brought up structural problems received as a legacy -- a social debt impossible to be paid within its boundaries. Even US President Clinton avoided to confront the Congress when he decided to help his economic partner - Mexico. Considering the second point, it is difficult to evaluate the paths followed by modern societies to build democracy as a process. Undoubtedly, our past experience with military governments was not a good one. We have, though, witnessed in Latin America the rebirth of nationalist postures of identification of foreign opponents as could be observed in such fragile relationships as between Peru and Ecuador or Venezuela and Colombia. This situation is worsen by internal conflicts - like Chiapas - which raises doubts about the educational feature of the democratic paradigm. 4

On democracy in Latin American countries see Bizelli, 1993.

Third and fourth points of the list refer to problems discussed so far, that is, the institutional engineering based on the Nation-state weakened due to the economic game. This tightens the internal fight for policies that benefits better organized groups of interests excluding groups without any power to negotiate: unemployed, marginal and retired people, poor children, etc. Furthermore, in the international scenario, more and more emerging countries have to quit their own interests for general interests of the movement of private capitals which could collapse the international monetary balance. We could, therefore, state that the democratic paradigm has its critical crisis in a impoverished society -- which is not a privilege of our society. Robert Castel (Castel, 1995) declares that the "salary society" -- a society that associates the concepts of work and protection -- is collapsing. We have lived the crisis of a reformation view in a capitalist context which, in some developed countries, represented the possibility to guaranteeing citizenship rights and tried to level out strong differences (though without changing relations of production). The crisis we face today is neither a Latin American crisis, nor a crisis of democracy, nor a socio-political crisis, but all these crises joined to the crisis of the Western capitalism which demolished its Berlin Wall. Moments of crisis, though, are challenging moments for new ideas, new solutions! Bibliography ANDERSON, P. Lineages of the Absolutist State. Londres: Verso/New Left Books, 1974. BIZELLI, J.L. Democracia e instabilidad: estudio del caso brasileño. In: Abstracts and selected papers of Second biennial Conference on Culture, Society and Change in the Americas. Merida, Venezuela, 1993. BIZELLI, J.L. Democracy and instability in South America. (Paper presented at LASA XVIII International Congress). Atlanta, USA. 1994. CASTEL, R. Les metamorphoses de la Question Sociale. Paris: Fayard, 1994. OFFE, C. Competitive Party Democracy and the Keynesian Welfare State - some reflections upon their historical limits. Policy Sciences. IS, 1983: 225-246.