Political regulation in the ''great crisis''

Werner

Vath (ed.)

Political Regulation in the

»Great Crisis«

Werner Vath (ed.)

Political Regulation in the »Great Crisis«

edition sigma

Zover Illustration: "Der Tod als Weichensteller" [The Death as a Points nan] by Tobias Weiss [1840-1929]. Sheet No. X of the cycle "Ein noderner Totentanz. Zwanzig Blatter aus dem Bilderbuche des Todes [A vlodern Danse Macabre. Twenty Sheets from the Death's Picture-book], >ezeichnet von Tobias Weiss. Mit Vorwort und Spriichlein von P.W. iCreiten S.J.", B. Kiihlens Kunstverlag, Monchengladbach, 3. Aufl. 1905

The publisher expresses thanks to Dipl.-Soz. Tomas Steffens for considerate co-operation.

CIP - Titelaufnahme der Deutschen Bibliothek Political regulation in the "great crisis" Berlin Ed. Sigma, 1989

/ Werner Vath (ed.).

ISBN 3 - 8 9 4 0 4 - 3 0 1 - 6 NE: VSth, Werner [Hrsg.]

® Copyright 1989 by edition sigma rainer bohn verlag, Berlin. All rights reserved. No part of this book may be reproduced or copied in any form or by any means graphic, electronic, or mechanical, including photocopying, recording, taping, or information and retrieval systems without prior written permission from the publisher. Printing and binding: WZB, Berlin

Printed in Germany

Contents

Werner Vath Political Regulation in the 'Great Crisis' Introduction

Hegemony Crisis in the World Economy

Burkart Lutz Normality, Crisis, or Stagnation

Reflections on the Current State of the Capitalist Economies

Susan Strange Toward a Theory of Transnational Empire Elmar Altvater

Kurt Hubner

The End Of The U.S. American Empire? Monetary and Real Aspects of the United States' Hegemonial Crisis

Robert Guttmann World Money and International Economic Relations

lansjorg Herr )n Post - Keynesian Crisis Theory: The Meaning of 'inancial Instability

91

Crisis of the World Economy Differentiation of the 'eriphery and Development Chances of Newly Industrialized Countries

orge Schvarzer

Challenges and Perspectives of the Economy in Argentina

^eopoldo Marmora

113

Dirk Messner

31d Development Theories New Concepts of Internationalism \ Comparison of Argentina and South Korea

131

iiugenio Rivera Urrutia The Latin American Debate About Development Strategies Based On the Experience of Some Latin American Countries md South Korea

173

rhomas Hurtienne rheories of Development, Differentiation of the Periphery and Development Strategies of the NIC's

191

The Failure of the "Saar- Model" of Crisis Regulation in Steel Industry

Angelo Pichierri Diagnosis and Strategy in the Decline of the European Steel Industry

Udo Gerhardt

Hans-Henning Kramer

The Effects of the European Steel Crisis on German Industry

Susanne Reising

237

261

Walter Bohnert

The World Steel Market: Structural Crisis and Discretionary Mismanagement

265

Patrick A. Messerlin

Recent Developments in the World Steel Market

277

Economic Crisis and the Perspectives of the Welfare State

Michael Kratke Does Social Security Create a New Class? On the Restructuring of Social Inequality by Welfare State Arrangements

285

Klaus Fritz

Michael Wolf

Towards an Institutionalization of Mass Unemployment? Some remarks on the logic of collective action in the current welfare state

Heiner Ganfimann

317

Rolf Weggler

Interests in the Welfare State

321

Bruno Th6ret Interests and Risks of the Analysis of Interests in the Welfare State A comment of H. Ganssmann and R. Weggler

347

Robert E. Goodin Interests in the Welfare State: A Comment

357

The Contributors to this Volume

367

Werner Vath Political Regulation in the 'Great Crisis' Introduction

This volume documents the results of a conference held in November 1988 at the invitation of the research group "Political Regulation in the 'Great Crisis,!l. This interdisciplinary group of researchers belongs to the Department of Political Science of the Free University Berlin. The members of this group have been analyzing the processes of restructuring and transformation whose critical development can be observed worldwide and within society. This will be exemplified by choosing four thematic fields. The common starting point of the four projects is the hypothesis that new economic constellations of problems arise in this situation of radical change, and that accordingly new political models are being tested which also have to include the important old topic of social sciences namely, the relationship between economy and politics. For one and a half years, the research group has been contributing to the problem, as it is formulated, in the topic of the conference. Reflections that have been made so far are to be subject of discussion, whereby the results of research were complemented productively by host speeches. The topic of the conference is based on the fact that since the seventies there has been an inevitable radical change within the socioeconomic development both on the national and international level. The upheaval in the dynamics of development has embraced the entire world system, though not at the same time nor in the same way. Outside the centres of capitalist world economy the rapid process of "backlog industrialization" in some countries and groups of countries has come to a halt, under the influence of the global crisis in economy: at the end of the eighties, the model of an "indebted industrialization", which at the beginning of the seventies was still looked upon as a promising developmental-political option, changed into a "mutilated industrialization". As much as the key-notes of political - development in Third World Countries were overrun by the disasterous indebtedness to foreign countries, the central doctrines of economic politics have changed abruptly in

the capitalist industrialized nations during the last decade. In place of a Keynesian regulating policy that, for instance, has also proven inadequate in dealing with the crisis of early industrialized branches, various varieties of a Neoliberalism arose which promised improvement. With this change of paradigm the Keynesian welfare state, being itself a historical result of power constellations within society after World War II, was undermined and questioned in many ways. But not only historical institutions of "capitalist democracies" have become fragile during the seventies. Under the effect of economic processes, also political institutions and forms of o r ganization of capitalist world economy have become obsolete. The collapse of the system of Bretton Woods exemplifies this development. In this context a change in the way of regulating economic processes can be regarded as a symbolic manifestation: from political to economic regulation. The temporal coincidence of such changes can be regarded as mainly responsible for the fact that the category of "crisis" has become the key metaphor of the seventies and eighties. Too often the trivial analytical understanding, that not every change can be equated with a crisis, has not been mentioned. Taking a detailed look at the processes, one could even get the impression that the image that has been projected so far, describes the real processes in a too one-sided way. Isn't it correct to say, one could ask, that a country like South Korea, with its model of indebted industrialization, has very successfully taken the "big jump" forward? And isn't it also true that a project of a supply-side policy, pursued energetically, such as Ronald Reagan practised it in the USA, lead to the creation of millions of jobs? And shouldn't one also consider that the end of the Keynesian regulation of economy was only the beginning of new and other forms, especially of political regulation? Already these urgent questions provoked by empirical experience, point to the rejection of quick descriptions of condition and the precise use of analytical categories. This is even more valid, taking into account beyond that, that the interferring processes between the economic crisis and the restructuring of the relationship between economy and politics nationally and internationally - have hit social sciences in a rather unprepared way. The theoretical offer of analytical penetration of these processes crassly contrasts with the real dynamics of global restructuring. The r e conditioning of such empirical - historical as well as analytical research assignments are only conceivable within the framework of interdisciplinary cooperation. Individual disciplinary analyses are no longer sufficient to come even close to being suitable for complex dynamics of radical changes. With regard to this recognition, the studies of the research group and the presentation of topics during the conference were conceptualized.

Correlating the scientific approach of the group, Burkart Lutz makes comments which extend over and beyond, in which primary definitions such as "normalization", "crisis", "accumulation", "regulation", etc. are taken up and discussed in context. They also structualize the individual fields of study, starting with the topic of the crisis of the existing global system of hegemony under the leadership of the USA. Elmar Altvater and his study group are responsible for this field of research. Global perspectives will be resumed in the following section which deals with the theme of changes within the international division of labour, with its implications on the status of especially the Newly Industrializing Countries; Thomas Hurtienne and his study group are responsible for this section. Innersocial forms considering terms of restructuring processes will then be discussed with regard to the crisis-prone branch of the steel - industry, where throughout Europe as well as especially in the Federal Republic of Germany, interesting variations in the relationship between economy and politics are mentioned. Werner Vath and his study group are in charge of this field. The relationship of welfare state development and social stability is ultimately a central problem of the fourth section, in which maybe only the most prominent paradoxical phenomenom is pursued which in spite of the to some extent severe cuts in the social security system of industrialized countries, this still was not able to impair their social coherence. This topic is dealt with by Heiner Ganpmann and his study group. Special thanks go to the many people who organized this conference and completed this volume; first we want to thank our foreign guests who came to Berlin to discuss with us and who gave us their manuscripts for use. The editiorship was held by Tomas Steffens. Without the social competence of Eva - Maria Kenngott and Heike Wessels - Schild the pleasant and productive course of the symposium would not have been possible and behind the curtains Kurt Hiibner was the inevitably supportive force. The conference was made possible financially by a support of the Volkswagen - Fund, as well as by the research commission of the Free University; we want to thank them.

Burkart Lutz Normality, Crisis, or Stagnation Reflections on the Current State of the Capitalist Economies*

I. The alternatives "normality or crisis" do not do justice to the variety of interpretations which are offered for the present situation of the Western industrialized nations. I see rather four interpretations, which I would like to consider in more detail. 1. One seldom comes across an explicit defense of the "thesis of normality", and then usually in passing, as in Abelhauser's 1983 Economic History of the Federal Republic [of Germany], for example. For a few years now, however, this thesis has been, in a more implicit sense, quite present in the public consciousness and in the discussions among economists. Its essential argument is that a sort of "natural" growth path exists in industrial free - enterprise economies, which more or less corresponds to the growth of productivity in the economy as a whole, and which has accordingly leveled out over the past decades at an annual growth rate of 2%. Schumpeter had already spoken of this figure in 1940, in the context of a thoroughly optimistic prognosis of the future, "with, however, the disturbingly contemporary hypothesis of a permanent unemployment rate of 10%. The much more rapid growth in the 1950's and 1960's was the manifestation of a recovery effect resulting from economically exogenous, politically and militarily generated interruptions and delays of growth in the 1920's, 1930's, and 1940's. Thus what can be observed, since the early 1970's, is the settling of a very stable long-term trend, which we can reliably expect to continue; society must reconcile itself to the consequences of this, such as the underutilization of the economic potential of the labor force.

*

Revised text of the tape transcript. For details of the position presented here see: Burkart Lutz, Der kurze Traum immerwahrender Prosperitat, Frankfurt/New York, 2nd edition, 1989.

This interpretation seems to me to be hardly plausible and, due to its implicit political repurcussions, most inopportune. Another group of interpretations has its theoretical basis in the idea of crisis. If we exclude from the category of serious arguments the expectation that the current crisis of capitalism will sooner or later lead to its inevitable collapse, there remain two interpretations which view the present situation as a crisis. 2. One of the crisis - oriented interpretations includes all the approaches which assume the existence of long waves in the economic cycle. According to these approaches, we are currently going through the low point of a "long wave". The basic innovations of the last wave have exhausted their growth potential. At the same time, however, new basic technologies are close at hand - the field of microelectronics naturally comes to mind here - whose wide application will create and sustain the next upturn, the next long-lasting economic boom. 3. The other crisis - oriented position is associated with the concept of the "Great Crisis", which is advocated by the "regulationists" According to this interpretation, we are currently experiencing the end of one regime of accumulation* which had been stable for decades but has been exhausting its potential since the 1970's, and the transition to a new regime of accumulation. This transformation is a "Great Crisis" because the institutions, norms and values of the regulatory system are also being questioned. 4. I myself support another interpretation, one which does not need to resort either to the concept of normality or to that of crisis. Like the regulationists, I am convinced that one can identify, within the course of the development of capitalism, phases of growth which are relatively long-lasting and internally quite stable. These phases take a cyclical course, with a period of rapidly increasing growth followed by a period of diminishing growth. One can probably plot this course quite well on the basis of the development of profit rates, not in the sense of a tendential fall, but as a real movement, in which each "prosperity constellation", as I call them, possesses a certain growth and accumulation potential, which is then at some point depleted. Unlike the regulationists, however, I do not believe that the depletion of the growth or accumulation potential of such a development phase must necessarily in and of itself bring forth a new regime of accumulation. On the contrary, I am convinced that each of these phases of accumulation is unique, a singular historical adventure based on very particular, unique opportunities and accomplishments. When these potentials are depleted, capitalist economies and societies enter a phase of (increasingly) stagnant tendencies, in which they are more and mare susceptible to crises and increasingly unable to solve their problems. The question of when this

stagnation period comes to an end (it can last a very long time), and how this occurs, has very little to do with the characteristics of the preceding regime of accumulation. In other words: as far as the conceptual pair destructuring/restructuring is concerned, I accept the term destructuring, but I refuse categorially and conceptually, as well as in terms of concrete historical analysis, to make "restructuring" a logical consequence or a derivative of "destructuring". The significance of this for the present situation is this: the developed capitalist economies stagger along, so to speak, as long as everything is going well. The increasing pressure caused by the various problems does lead to increasingly hectic and dramatic attempts to break out of the growth blockage and to produce a new surge of growth, to create a renewed prosperity constellation. But so far, no new durable prosperity constellation is in sight. II. If one attempts a comparative evaluation of these four interpretations of the current state of affairs moderate growth, with considerable underemployment, as capitalist normality; slowing down of growth and increasing susceptibility to crisis as the unavoidable price for the coming boom in the next long wave; the Great Crisis at the crossroads between two regimes of accumulation, as argued by the regulationists; and the beginning of an historical phase of stagnation then various criteria must be brought to bear. Some of these criteria are, strictly speaking, of a scientific nature. In keeping with them, each interpretation must meet at least three requirements. It must: be to a certain extent internally consistent in its logic; correspond to the actual course of developments and to the circumstances which characteristize them; be based in the prior history of industrial - capitalist economies and societies in such a way that either suitable analogies can be cited, or explicit reasons can be given for any disparities between the course of events this time around and previous instances where the conditions were identical. These requirements call on the one hand for a wide-ranging and complex research program. On the other hand, one must come to terms with the fact that for various reasons, even if such a comprehensive research program is undertaken, no conclusive truth can be found. Statements about fundamental tendencies of social development are never simply a

matter of scientific perception; along with them one always adopts a position relative to the actual historical process. Therefore the question as to which of these interpretive models should be given preference must also be posed on another, existential - political level, and as a question of perceptive and active strategic appropriateness at the same time. If one applies these criteria of a political - practical nature to the above-mentioned interpretive models, it becomes clear very quickly that they can be arranged in order of mounting difficulties and demands. The thesis of normality implies that there is no need for political action. The existing instruments of political regulation are completely sufficient for overcoming the pending problems; it may in fact be time to withdraw one or other of them. For this reason there is no particular need for scientific innovation. New economic theories would more likely contribute to feelings of insecurity. The long-wave theory also implies in effect a merely marginal or subsidiary need for political action. Under certain circumstances, at the lowest point in the long wave, politics can be called upon to accelerate the innovation process already in progress and to help new basic technologies make their breakthrough. If one accepts the version of the longwave theory expounded by Schumpeter or Mandel, the purpose of politics is above all to remove obstacles to innovation and to clear the way for the new basic technologies which can sustain the next boom. The Great Crisis theory of the regulationists attests to a far greater need for political management. There is a general consensus among the various representatives of the regulation theory that a new regime of accumulation can only be called into being by more or less consciously achieved political - institutional innovations. Thus the central task of politics is to initiate, safeguard and direct the process of restructuring, accompanied by a considerable demand for scientific arguments and advice. The heaviest demands on politics (and derivatively also on the sciences) arise in my opinion out of the stagnation model which I support. For in this case it is not clear if and how the two tasks which accrue to politics can be reconciled with one another. On the one hand it is a matter of crisis management, e.g. of a range of measures, policies and strategies, with which one must first ensure that the stagnation does not develop into a cumulatively more critical depression or even into the form of violent eruption which we experienced in the most dreadful way in the 1930's and 1940's. Yet politics must simultaneously ensure that a new regime of prosperity is gradually able to emerge and stabilize.

If one takes these scientific and political - practical criteria as a basis, it becomes, in my opinion, immediately clear why neither the normality premise nor the long-wave theory can be of particular interest. In a theoretical sense, everything points against the assumption implicit in the thesis of normality of a course of industrial free - enterprise growth and capitalist accumulation which is stable in the long term and largely free of conflict and tension. No enduring period can be found in history in which such moderate and steady growth predominated without the simultaneous build-up of conflicts and tensions which sooner or later put an end to this prosperity. Current developments are also incompatible with this interpretation. The locomotive function of the vulgar Keynesian budget deficits (and corresponding trade deficits) of the U.S., for instance, are certainly not reconcilable with the concept of a natural path of development. The criteria of perceptive and active strategic appropriateness also lead to the same result: if one follows this interpretive model, there exists neither a need for political action nor any sort of compulsion to undertake larger and riskier scientific innovations. This way of thinking leads to policy recommendations which if the theory proved to be incorrect could have catastrophic consequences similar to those resulting around 1930 from the blindness with which the attempt was made to overcome the cumulative depression trends by means of deflationary measures. The results of an evaluation of the long-wave theory are, all things considered, much the same. The theoretical key to Schumpeter's version of the long-wave theory, which was subsequently also adopted by Ernest Mandel, rests in the claim that worsening conditions of growth and realization (put" in terms of value theory, a real decline in profit rates) by themselves release forces of technological innovation, which especially in Schumpeter's view take the form of a new generation of pioneering enterprises, which then create, at the low point of the long wave, the conditions necessary for the next long-lasting boom. I have yet to hear a single conclusive argument why this phenomenon, even if it may have happened at some point in the past, should with any probability materialize again in the future. The advocates of the long-wave theory also have considerable difficulties with concrete periodization, for the same reasons which cause so much trouble for the regulationists, since the growth cycles of the various parts of the industrial - capitalist world in the 20th century have occured at irregular intervals, a fact which can by no means be explained solely by exogenous events of a political - military nature.

Above all, the role which is assigned to the process of technological innovation by the long-wave theory cannot possibly be reconciled with the current state of knowledge about socio - historical and socio - scientific technological research. This research emphasizes in particular the social and economic control and selection mechanisms of the process of technological innovation, and thus views the causal relationship between prosperity and technological innovation tendentially exactly the other way around. In this respect, every attempt to define the role of technology in the initial phase of the German or West European post-war economic boom leads to identical results: the especially advantageous conditions for extensive growth or extensive accumulation, which are commonly emphasized for this period, were characterized in particular by negligible innovation pressure. In addition, the product and process engineering which distinguished the "Fordist boom" of the 1950's and 1960's in Europe had already been tried and tested in all significant respects, whereas new technologies such as nuclear energy and electronics, which now are retrospectively referred to as growth impulses, only began to play an appreciable part on the industrial spectrum after the boom had already reached full swing. The appropriateness argument also runs quite emphatically against the long-wave interpretive model, which likewise proclaims no fundamental need for action, but at most the necessity of innovation - promoting policy, and therefore gives no significant incentives to scientific innovation. IV. Thus only the two remaining interpretive models, namely the regulationist thesis of the "Great Crisis" and the thesis which I advocate of a longlasting phase of stagnation, can in my opinion lay serious claim to validity. The main difference between these interpretive models seems to me to be the fact that the regulationists place great confidence in the Great Crisis, which is already supposed to be bringing forth a new, stable regime of accumulation on its own, whereas I, doubting this, have significantly more pessimistic expectations for the future. I would like to mention three arguments for this position: 1. Those who spoke of a "crisis" in 1975 or 1980 could still assume in good faith the legitimacy of the expectation associated with this concept of a relatively brief process. But in the meantime* this crisis has been going on for 15 years and we have by no means reached the end of it; there is no light at the end of the tunnel, but we have not fallen into the deep hole which many had feared in 1975.

1K

We must therefore ask ourselves what a crisis actually is. Can we accurately apply the concept of crisis to the present situation in its e n tirety, when it repeatedly produces definite, albeit moderate, surges of growth? In 1966/67 to recall the first major post-war recession - an unemployment level of barely 5%, over a period of a few months, was enough to completely reshape the West German political landscape: the extreme right-wing NPD entered the parliament for the first time; the FDP, in order to assure its survival, had to withdraw from its seemingly eternal coalition with the CDU; and the SPD came to power for the first time since the war in the Great Coalition. No one could have imagined at that time that we could ever live for years with unemployment rates of 8 - 1 0 % without dramatic conflicts or crises of legitimacy. 2. Another argument for the dubiousness of both the concept of crisis and this subjective sense of crisis should be mentioned: I still have yet to see a stable model for the restructuring of European or international capitalism. None of the policies proposed today or in the past, by the right or by the left, has had enough impact to have a lasting influence on the actual economic processes. This applies to monetarism as well as to supply-side economics, to deregulation and to flexibilization, and even to neo - Keynesian policies. Quite the contrary new sets of problems are constantly arising, new contradictions are coming to a head, and new conflicts are emerging which are tendentially larger and potentially even more severe than those which have been solved. How can one then, in view of these circumstances, maintain that restructuring has already begun, that a new regime of accumulation is evolving before our eyes? 3. This leads me to one final point: Do any analogies to the present situation exist in the history of capitalism? If we disregard for now the capitalism of the U.S., since it has a different temporal developmental logic than European capitalism (which might have to do with its parasitic - hegemonic status relative to European capitalism), then we see that the penultimate phase of prosperity - and this means the last stable regime of accumulation which is more or less comparable to the phase of prosperity after World War II - took place before World War I. If that is so, then our situation since the middle of the 1970's must be considered to be analogous to the period which began together with World War I and only came to an end after World War II. This period was characterized on the one hand by a tendential economic stagnation, on the other hand by increasingly dramatic political turmoil - as if the economic and political powers of the European industrialized countries had been trying, with increasing brutality, to find a way out of the blockage of accumulation and economic growth. The great world economic crisis, the First World War, Fascism, and the Second World War must then be understood as parts of a gigantic process of trial

and error, by which European capitalism attempted to break out of its cage, like an ever more furious wild animal. Only after World War II did fundamental political reforms open the gate and clear the way for a prosperity constellation which is referred to by the regulationists, using a very misleading term, as a Fordist regime of accumulation; it can much better be called a welfare - state regime, since the accelerated accumulation of capital and the high growth rates of the national product were clearly only made possible by the welfare - state effects (obstruction of the wage law, stabilization of aggregate demand, etc.). The new regime of accumulation, which in the 1950's liberated us from a seemingly - even in 1950/51! hopeless growth blockage, had however, in practically all its constituent elements, been examined, dis^ cussed, and developed in scientific and political discussions dating back to before World War I. Elements of this model had, on a large scale, already been tested in the Weimar Republic, which was in effect a huge laboratory of progress; its tragedy lay, however, in the fact that it was not able to control the extraordinary demographic dynamism of the German Reich. Every attempt to set in motion a self-supporting domestic growth dynamic through higher wages was thus thwarted by a precipitous increase of the supply of labor, How can one, in the light of this evidence, speak today of an a N legedly emerging restructuring process, when this would presuppose that the concepts, contours and structural patterns of such a restructuring could easily be discerned? If this restructuring had really begun, then a gathering such as ours here today would be discussing at most technical details, and not the basic questions of crisis or restructuring, V. Now the idea of a more or less automatic movement of the dialectics of destructuring and restructuring is admittedly very appealing, and the idea has spread as a result explicitly or implicitly - far beyond the circle of regulationists. This can be explained less by its cognitive plausibility than by its political and epistemological implications. If one adheres to the concept of a regular succession of destructuring and restructuring, the aim of the politically committed scientist will be to look ahead and, amid the seemingly erratic diversity of observable phenomena, to determine the contours of the future through bold insight (as Kern and Schumann have attempted, for instance, with their idea of "new production concepts"). The scientist then finds himself in a quite comfortable position. The irksome questions about alternative tendencies and

about what else is occuring in society, the search for possibly contradictory development impulses, the uncovering of problems which have been at best partially solved and otherwise merely suppressed and deferred the scientist can do without all this, since it only results in unnecessary work and confusion of the political decision - makers. What is called^ for is rather a bold blueprint for the future, a convincing policy conception directed toward the elimination of unemployment, the rehabilitation of the welfare state, and the restoration of stable, qualitative, environmentally acceptable growth. If my interpretive model is correct, we must obviously take a c o m pletely different approach. In this case, we must ask ourselves above all the fundamental question of how industrial - capitalist economies and societies can survive at all e.g. how they will be able to guarantee their material and social reproduction in the future, when the civilizatory achievements inherited from earlier generations have been used up, and when, as a result of the total capitalization of society, the law of the rational maximalization of utility has become the highest behavioral premise. We can then no longer assume our historical inheritance from previous social formations to be obvious and self-evident. We can thus by no means assume the availability of intelligent and qualified workers, for instance, simply because the corresponding training has been provided. On the contrary, the decision to become a worker is only rational and utility - maximalizing under very specific socio-economic conditions. Such conditions existed historically in most industrialized countries. Yet none of us is in a position to specify how the same effects can be produced under completely different historical conditions. We have likewise no answer whatsoever to the question of how a society can guarantee its biological reproduction when reproductive b e havior is dominated by considerations of economic utility - since under current conditions the marginal costs of fertility are rising rapidly with the decreasing number of children, which must inevitably, from an economic point of view, prompt a growing share of the population to forego children altogether. There is every indication that the time to come will not be dominated by more or less independent restructuring tendencies, but rather by an increasing destabilization of the basic functions and basic institutions of our society. And we scientists will be judged primarily by the extent to which we are able to provide at least preliminary answers to the question of what is actually taking place, and what is to be done about it.

Allow me now to conclude my remarks. Some of the phraseology of the regulationist suggests the idea that a universal logic can be determined behind the historically consecutive regimes of accumulation, an idea which fascinates me immensely; this would be the logic of an increasing interpenetration of the political and economic spheres, as if capitalism were in need of ever more government control and discipline, or - to argue optimistically for once - as if socialism were already surreptitiously on its way. If this logic is correct, then in the future no new regime of accumulation will be able to prevail in such a natural manner as was ostensibly the case after World War II. There is rather every indication that a new prosperity in our old European industrialized countries can now only be brought about by a comprehensive, conscious and planned political effort. This is, however, certainly not possible without scientific substantiation, guidance, and support. It will nevertheless be extremely difficult to meet the demands associated with this, because each regime of accumulation seems to bring forth its own particular paradigm. Yet we scientists can not, without raising challenges to our productivity and to our membership in the scientific community, simply break with the dominant paradigm, one which after all is made up of an entire cluster of mutually compatible theories. The theory of growth economy, modernization theory, theories of the Industrial Society and of Late Capitalism are all parts of the paradigm which corresponded to the prosperity constellation which lies behind us. Thus if scientists seriously want to begin laying the foundation for a new, stable system of regulation, it is imperative that they liberate themselves from the currently accepted paradigm. Everyone who has once attempted this knows how full of risks it is. It is not only our scientific truths which are lost here. We must also question the methods on which we have depended, and the mastery of which has been one of the bases of our professional competence. For instance, the current primitive faith of economists in the authority of statistics will fall apart, since statistics are also the product of a paradigm associated with a specific regime of accumulation. Another victim will be the forms of the division of labor, both within our profession and in interdisciplinary work, in which we have all become established and which we attempt to defend, to the extent that the work and livelihood of critical scientists are not becoming easier. Everything thus seems to advise staying with the familiar paradigm, postponing the paradigmatic revolution as long as possible, holding back and hoping that it just might turn out to be unnecessary. This explains quite well why so many critical scientists although sometimes perhaps

not without uneasiness continue to rely on interpretations of the present situation which are based somewhere between the long-wave theory and the regulationist theory of the "Great Crisis", and which are as such just barely compatible with our conventional, familiar scientific establishment. Some of you will undoubtedly be saying that it is easy to talk like this at my age, just before my retirement from professional life. Yet who else than someone in my position should be the one to say, loud and clear, what is historically demanded of critical and politically active scientists such as ourselves? I ask you therefore to consider seriously what I have said to you today, and not to disregard it too quickly, even if you believe that you have sufficiently good counter - arguments. (translated by John Conyers)

Susan Strange Toward a Theory of Transnational Empire*

The American Empire is one of the most successful inventions in history, and all the more remarkable because no one knows its there. Gore Vidal In any discussion among academics about the theory, or theories, underpinning their field of study, it is important that each participant should make explicit his or her assumptions about the nature of theory; about how these assumptions are justified. He or she should also give some general indication of his or her general opinions about past theorizing and about desirable directions for future theorizing. Without such preliminary clarification, discussion can easily become confused and incomprehensible to the outsider. I shall start therefore by making my own position on each of these four points as explicit as I can. There is a great deal of confusion about the nature of theory concerning the working of the international system, political and economic. This has resulted in a lot of "theoretical" work that is not really theory at all, in the sense in which that word should be used and is defined in dictionaries (for example, "a supposition explaining something, especially one based on principles independent of the phenomenon to be explained" - Concise Oxford Dictionary). Because of this, we cannot proceed to discuss future directions for theoretical work nor can we assess recent contributions to it, whether real or imagined, until we have made some judgment about what is real theory and what is phoney theory. *

Reprinted by permission of the publisher from Global Changes and Theoretical Challenges, edited by Ernst-Otto Czempiel and James N. Rosenau (Lexington, Mass.: Lexington Books, D.C. Heath and Company, copyright 1989 Lexington Books).

I make four negative assumptions about what is not theory and three positive assumptions about what is theory. Both are necessary to explain my general pessimism about the current state of theory in international studies, and my own rather tentative explanatory supposition with regard to the current state of the international political economy (which will constitute the second part of this chapter). Negative Assumptions Concerning Theory in Social Science First, a great deal of social theory is really no more than description, often using new terms and words to describe known phenomena, or to narrate old stories without attempting theoretical explanations. Putting one event after another without explaining the causal connection, if any, cannot count as theory. Sometimes, though, there are indeed implicit theories underlying the narrative that are so taken for granted that they are not even mentioned. Second, some so-called theory in international studies merely rearranges and describes known facts or well-chronicled events in new taxonomies. This is not to say that a fresh taxonomy may not be necessaiy to the elaboration of a new theory. But the taxonomy by itself does not constitute an explanation and therefore does not qualify per se as a theory. The same is true of using new terms or words to describe known phenomena. Third, simplifying devices or concepts borrowed from other social sciences or fields of knowledge often have their pedagogic uses in teaching; they can help get across to students or readers a certain aspect of individual social behavior. Examples are the story of the prisoners' dilemma, or a demand curve, or the graphic presentation of the concept of marginal utility. But none of these by themselves explains the paradoxes or puzzles of the international system. Their current appeal to some teachers, I suspect, is that they offer a politically and morally neutral explanation (indeed, an exculpation) for the recent failures and inadequacies of the international organizations dominated by the United States in which postwar America put so much faith. Their appeal to students lies in their simplicity; it confirms what their common sense already tells them - that individuals are apt to act selfishly. But these are simplifying devices, not theories of social behavior. They do not help to explain the actions of corporations, of political parties, or of states in a global political economy. They do not even constitute evidence that would be relevant to a theory - in the way in which a map of the world might be relevant evidence for, say, a theory of continental drift and the existence of Old Gondwanaland. Moreover, those in the other disciplines

who have developed such pedagogic devices are usually under no illusion as to their usefulness to policymakers or the possibilities of their practical application to real-life situations. Fourth, the development of quantitative techniques applied to international studies has not advanced theory. The choice of what is to be counted is too arbitrary and the determination of what is causal and what is coincidental is too subjective to provide a basis for explanation. For the most part such methods have been used only to substantiate platitudes and to reinforce conventional wisdom concerning historical patterns of state behavior in relation to other states. Positive Assumptions Concerning Theory in Social Science First, theory must seek to explain some aspect of the international system that is not easily explained by common sense. It must serve to explain a puzzle or a paradox where there is some aspect of the behavior of individuals, groups, or social institutions for which a simple explanation is not apparent. It is not necessary to look for a theory to explain why people try and leave a burning building. It is necessary to find a theory to explain why they patronize shops on one side of the street more than another. International relations started with the puzzling question why did nation - states continue to go to war when it was already clear that the economic gains made in war would never exceed the economic costs of doing so (Miller 1986; Aron 1958, 1978). Theories resulted. International political economy today addresses another puzzling question: Why do states fail to act to regulate and stabilize an international financial system which is known to be vitally necessary to the "real economy" but which all the experts in and out of government now agree is in- dangerous need of more regulation for its own safety? Theories result. By contrast, the common use of the term "information revolution" does not usually reflect good theory. Although it notes rapid technological change, it does not postulate a clear causal connection, supported by logic or evidence, between that technological change and social change - change in political or economic relationships so great as to result in a redistribution of power and/or wealth. It does not,, therefore, advance our understanding or add anything to our capacity to make causal connections and to see the consequential effects of certain phenomena. Second, the theory need not necessarily aspire to predict or to prescribe. This is where social science differs from natural science. Natural science can aspire to predict though it does not always nor necessarily do so. Much science, from astronomy to microbiology, enlarges understanding of what happens without being able to offer conclusive expla-

nations of why it happens. Social science can never confidently predict because the irrational factors involved in human relations are too numerous, and the permutations and combinations of them are probably countless. The one social science that has most notably aspired to predict is economics. But its record of success is so abysmal that it should make all those that seek to emulate the economists and to borrow from them try something else. (I think I can explain why their record of success in prediction is so bad but that it is not necessary to my argument.) They are particularly bad at prediction when it comes to the world economy because many of the basic theories regarding international trade and exchange rates are based on assumptions that no longer hold good in the present state of the integrated world market economy. As to prescription, that is a matter of choice. Whether the theorist chooses to proceed from explanatory theory to policy prescription is up to him or her. He or she need not necessarily apply theory to policymaking, because policy-making necessarily involves value judgments and risk assessments that are exogenous to theory and that are better made by practical policymakers than by irresponsible academic theorists. And third, theory should be scientific only in the sense that the theorist respects the scientific virtues of rationality and impartiality and aspires to the systematic formulation of explanatory propositions . The title of "social science" is only justifiably used to remind us that, although our subject lies closer to our emotions than the origin of rocks or the compositions of molecules, and although it has to do with subjectively i m portant questions concerning power and wealth, we must nevertheless still try to preserve a "scientific" attitude in our studies. Indeed, many of the problems regarding theory and social science stem ultimately from the inferiority complex of social scientists towards natural scientists and, more specifically for us, the inferiority complex of political economists towards the apparent rigor of economic "science". A Basic Proposition This is that structural power is more important to an understanding of the international system than relational power; and consequently, that because the United States has more actual and potential structural power than any other political authority in the international system, its power in the system is undiminished. This runs against hegemonic stability theory and the many theoretical (and often conflicting) conclusions about the functioning of the inter-, national political economy and of international economic organizations that derive from it. I have explained elsewhere why I think these are wrong

and also why they have been so popular in recent years (Strange 1987; 1988). The important point here is as I shall argue more extensively later - that the failure to understand and appreciate the extent of U.S. structural power has led too many writers and teachers to compose premature epitaphs on the American Century and American hegemony (cf. Russett, 1985). This conventional - but in my view quite unwarranted - conclusion has foreclosed any debate on how an American empire (which is very different from the empires of the past because it is based on structural power in the world economy and world society) might be improved, maintained, and prolonged. My concluding proposal for further thought and research is that we should reopen such a debate, more particularly because the alternatives to prolonging American hegemony are either demonstrably impracticable, or unattractive, or both. But first I have to explain why I think the assumption of hegemonic decline is wrong and why we have to look for a new point of departure for theory concerning the international system and the management of the world economy. In short, I am like the man in the story the English like to tell about yokels from parts of the country other than their own. "Can you tell me the way to get to Norwich (or Dorchester, Wigan, Maidstone or wherever)?" asks the bewildered stranger, lost in a maze of country lanes. "Ah well," replies the local, "if I were you, I wouldn't start from here!" My starting point in this discussion is that although there is disorder in the world economy and some disintegration of "regimes" so-called, the reason for this is not to be found in the decline of U.S. power. Rather, the explanation lies in the misuse of American hegemonic power in a unilateralist manner and in pursuit of national interests far too narrowly and shortsightedly conceived. Asymmetric structural power has allowed the United States to break the rules with impunity and to pass the consequent risks and pains of adjustment on to others. This has damaged the stability and prosperity of the whole world economy and has not been in the long-term best interests of the United States itself. But to persuade the reader to get to that alternative starting point, or even to consider it as a possibility, I must first elaborate a little the outline of a structural analysis that leads me to it. I propose to show that, in the four structures basic to an integrated world economy in an international society with diffuse p o litical authorities, the underlying assumptions of much contemporary t h e o rizing are false. False points of departure have therefore led to false theory.

Structural Power The concept of relational power is clear and consists in the ability of A to get B by coercion or persuasion to do what B would not otherwise do. The concept of structural power is less clear and requires some definition. It consists in the ability of A to determine the way in which certain basic social needs are provided. One is a lever; the other is a framework. The target of relational power, B, if it should decide not to do what is required of it by A, has to suffer the consequences determined by the other. For the target or object of structural power, the price of resistance is determined more by the system than by any other political authority. Structural power comes closest to the outside (that is, broadest) definition of "regimes" in the debate that proceeded the Krasner collection of essays on the subject (Krasner 1983). In short, it embraces customs, usages, and modes of operation rather than the more narrow definition that stays closer to state-state agreements and state - centered institutions. There are, in my view, four basic structures of the international political economy and each is interrelated with, and inseparable from, the other three. Although they can be described separately, it is hardly practical to disassociate any one from the other three, or to treat it in isolation from them. Power in one will tend to reinforce (though it does not always exactly coincide with) power in the others. The four societal needs for a modern world economy are security, knowledge, production, and credit. Who or what provides for these needs in a society enjoys structural power through the capacity to determine the terms on which those needs are satisfied and to whom they are made available. Production is the basis of life and therefore the fundamental essential. But production (or wealth) cannot be enjoyed, or even produced, without order; and order requires the provision of security. Credit supplied by the financial structure is a necessary condition for all but the most basic production structures. In the highly developed, highly capitalized production structure of any industrialized economy, a decisive role is played by the provision of credit through the financial structure. But the choice of social goals and the means of reaching them is determined by the knowledge structure. The power exercised over the nature of the knowledge to be acquired, and over the means used for its storage and communication, is a necessary complement to power exercised through the other three structures. Only by considering all four can the study of economic power and political power be treated together; and only by considering all four can power exercised by the primarily economic entities be seen in the context of power exercised by the primarily political authorities. Only by structural analysis is it possible to develop theoretical propositions r e -

garding the impact of political authority (for example, states) on economic transactions in markets, and conversely of the impact of transactions in markets upon states (Strange 1988). The concept of a production structure is the most familiar because it is central to a marxist analysis of the capitalist system. Marx pointed out long ago that power in society is exercised through the relations of p r o duction. That is to say, whoever determines what shall be produced by what means and modes, and who shall work at producing on what terms, exercises structural power irrespective of the political system. It follows that a production structure can, conceptually and actually, be market based; or it can be market - managed by monopolies, oligopolies, or v e r tically integrated enterprises that "internalize" a market; or it can be commandbased, in which case some political authority "plans" the market and determines what shall be produced by what means and modes, and who shall work at producing what and on what terms. If we analyze the world system as a production structure, we find the following features. First, that part of the world economy responding directly to political command (which might be described as socialist if that word were not so badly abused) is the smaller part and is shrinking. Even in the avowedly socialist countries more and more production of goods and services is designed for and sold on a world market, over which the political a u thorities of the socialist states have little influence, even if they wished to exert it. (Gold and shipping are two exceptions.) Second, that part of the world economy that responds entirely to market signals, and obeys the laws of supply and demand with the absolute minimum of interference by governments and other authorities, is also shrinking. Trade in primary products food and unprocessed raw materials - is more often conducted in markets over which individual buyers and sellers have little or no capacity to determine price than is trade in manufactures and services where more prices are "administered" in Galbraith's words. But trade in primary products constitutes a shrinking proportion of total world trade. Third, that part of the production structure geared to purely national markets over which national authorities may if they wish exercise a choice of policies to influence the preferred combination of factors of production, the price and terms for the employment of labor, land, and capital, and the rules incumbent on employers, banks, landlords, buyers, sellers, brokers, and other intermediaries, is also shrinking. The technological imperative to sell on a world market reduces the area common to all states over which national governments are able to exercise exclusive regulatory power.

Fourth, the largest part of the global production structure in raw materials, in manufacturing, and in service industries is dominated by large transnational corporations (TNCs). The TNCs account for an ever growing proportion of world trade. This is intrafirm trade that is not subject either to the market and not necessarily affected by the trade barriers imposed by states. In this largest and fastest - growing section of the world production structure, TNCs based in the United States, plus TNCs based elsewhere but having a large part of their profit - making operations in the United States, play a dominant role. Any TNC, whatever its nationality, that hopes to keep a substantial share of the world market now finds it indispensable to operate in the territorial United States. The political authority, therefore, that most TNC executives are likely to heed( and most anxious to avoid offending is that based in Washington. Some Japanese executives will still respond more readily and out of habit to Japanese political authority, but if they wish to operate on a global market, even they will find it increasingly necessary in the future to pay close attention to what goes on in Washington. The combined effect of the above dynamic features of the contemporary production structure is to increase the asymmetric influence of some governments compared with others over what is produced, where, by whom, and on what terms. All the decisions about the regulation of market operators and intermediaries that used predominantly to be the prerogative of each national government are now shared unevenly between a few governments of the largest and richest countries of which the government of the United States is by far the most important. It follows that the structural power of the United States is not to be measured by the value of the goods and services produced within the territorial United States (that is, the U.S. GNP). Nor yet is it to be measured by the value of such goods sold on (exported to) the world market. If it can be estimated at all, it is the total value of goods and services produced by large companies responsive to policy decisions taken by the U.S. government. A good example of this is the power of the United States to restrict trade between the world market economy and the Soviet bloc. This is not exercised primarily, as recent experience shows, by bludgeoning the governments of NATO allies to conform to the COCOM list. It is exercised by the implicit (and occasionally explicit) threat of the U.S. government to make life hard for any non-U.S. corporation that flouts its will. Another example is the influence of U.S. policy on the corporate strategies of major oil companies, including those like Shell or BP that are not themselves U.S.-based. The dominance of the U.S. government over the financial structure of the world economy - what Peter Drucker has called the "flywheel" of the real economy and the enormous leverage that is exercised through this

particular form of structural power is even more evident (Drucker 1986). How much credit is provided by governments, by international organizations, and by banks, and to whom, and on what terms is more important than what they produce or sell on the world markets. Whether the U.S. decides to let loose the hounds of inflation or to bang the door of de flation is something over which the rest of the world has little control. Yet it is the world economy that is the anvil and the United States the hammer, in Lenin's apposite metaphor. The story of deregulation of banking and financial services is too long and complex to go into here but there is absolutely no disagreement today among the experts who have researched its progress over the last decade that the initial steps were ,every time first taken in Washington. And because of the worldwide integration of financial and money markets, because of the competition of banks in an integrated global financial system, and because of the c o m petition of governments as hosts for financial and capital markets, it has proved impossible for any country involved in this financial structure to resist the magnetic pull of U.S. policy. Whether its good effects (opening new opportunities for borrowing and hedging for instance) are worth the bad effects and the risks involved is beside the point. The point is that policy-making power has rested - as it has done throughout the postwar period with the United States. The perception that the United States has lost power to the banks or to the foreign exchange markets is only correct in the short term. As the experience of the Roosevelt administration in the 1930s showed clearly, bankers like everyone else (even insider traders) are subject to the law, and the law can be changed to bring them back under the control of the states. The knowledge structure is the least familiar concept to scholars in international relations, even though all are familiar with the adage that ^knowledge is power". In this short chapter there is hardly space to explain the concept in full. But just as the power to determine what shall be produced by whom and on what terms constitutes structural power in production, so the power to determine what knowledge shall be sought; how it shall be accumulated and applied; how and where knowledge once ^accumulated shall be stored; and to whom it shall be communicated and ,on what terms, constitutes another kind of structural power in world society and in the world economy (Strange 1988). Some of the illustrations of American dominance in the global knowledge structure that may be cited are the continued dominance of U.S. corporations in most of the high - technology industries; the dominance of .U.S. banks in transborder data flows; the dominance of U.S. media o r ganizations in news and entertainment; the outward spread from the United States to the rest of the world of management, marketing, and advertising techniques; the dominance of U.S. banks and consultancy

enterprises in debt management; the dominant position of U.S. government and U.S. corporations in satellite communications; and the ability of U.S. universities to attract and use scientists and academics from the rest of the world, drawing them not simply by better salaries but by better opportunities for research and exchange of information and ideas with their peers. Above all, perhaps, it is evident in the use of the American version of the English language as the world's lingua franca even for the French, the Russians, and the Chinese. Finally, there is the structural power exercised in matters of security. It is the United States, in response only to the Soviet Union, that has determined the world's dependence for its security on the balance of nuclear deterrence conveyed by an armory of intercontinental, intermediate, and short-range missiles. This is the only global structure of them all where the United States shares power with the Soviet Union. In all the other three, Soviet structural power extends only as far as the reach of the Red Army; U.S. structural power reaches deeply into the developing continents of Africa and South America, into Asia and the Middle East, and relentlessly even into Eastern Europe and China. This structural power over who is assured security and by what means, at what costs, and at what risk is, however, reinforced by the United States* structural power over the world's productive system, over its financial structure and the credit institutions and markets that function in it, and over the producers and communicators of knowledge in the knowledge structure. The conclusion to be drawn from this structural analysis is that the decline of U.S. hegemony is a myth - powerful, no doubt, but still a myth. In every important respect the United States still has the predominant power to shape frameworks and thus to influence outcomes. This implies that it can draw the limits within which others can choose from a restricted list of options, the restrictions being in large part a result of U.S. decisions. As Wallerstein emphasizes, hegemony does not mean total power to command. It means predominance; and predominance conveys the ability to change the range within which it is reasonably possible for others to choose among various courses of actionAll that happened in the late 1970s in the aftermath of Vietnam, of Watergate, of the fall of the Shah and of the partly self-inflictedhumiliation over the Tehran hostages, is that American self-confidence^ faltered under the leadership of a weak, tired, and shallow - minded president. The academics of the 1980s have been living in the past and figuring out theories of hegemonic stability to account for the public mood of the late 1970s. This is not, however, the first time that social scientists have behaved like generals who, overtaken by events, make elaborate preparations to fight the last war.

The other thing that has happened, and not only to the United States, is that structural change has at last severed the connection between the power of the state and its control over territory. The territorial frontiers of the state are now important only inasmuch as there is a consensus among existing, mutually recognized political authorities that regulatory power over the consumers living within its frontiers rests with the authorities of the territorial state. The power over the producers, and over the security, credit, and ideas available to both producers and consumers may be exercised by other authorities beyond the territory. This structural change has perforated the borders that define national societies, national defensive systems, national monetary and economic systems, and to a large extent national cultures. But the perforations operate unevenly, and c e r tainly asymmetrically, so that the borders of the United States are far less perforated by structural change than those of others, and the United States has had more influence than others over the nature and direction of the structural change. What is emerging therefore is a nonterritorial empire with its imperial capital in Washington, D.C. Where imperial capitals used once to draw courtiers from outlying provinces, Washington draws lobbyists from outlying enterprises, outlying minorities, and globally organized pressure groups. Authority in this nonterritorial empire is exercised directly on people not on land. It is exercised on bankers and corporate executives, on savers and investors, on journalists and teachers. It is also of course exercised on the heads of allied and associated governments, as successive summit conferences have clearly shown. Moreover, all the major policy trends of the 1980s that have commonly afflicted most of the developed and semideveloped countries and that have appeared to be of a national and internal character deregulation, deflation, privatization, and so on have been set off in the United States and have been followed by others who felt unable to resist. In all these policy areas, frontiers have been no defense against pressures emanating from the United States. This is the major difference between the American and .Soviet empires. The Soviet empire is more old-fashioned. It remains much more firmly territorial, much more dependent, like the empires of old, on a clearly defended perimeter frontier all around it, marking off those inside the empire from those outside./ The American nonterritorial empire is different. To start with, the perimeter fence around those American client states corresponding to the Soviet client states of Eastern Europe is not a rigid containing wall, preventing movement outside and enforcing conformity inside. Canada and Mexico both live in the shadow of the United States but their degree of freedom to choose is very substantially greater than that of Poland or even Hungary. Moreover, beyond the U.S. "backyard" of

^Jorth and Central America and the Pacific and Caribbean islands, there is mother American empire that really is nonterritorial and in some respects s more like the Roman empire than the French or British empires. As in Rome, citizenship is not limited to a master race and the empire contains* a mix of citizens with full legal and political rights, semicitizens and n o n - 7 citizens like Rome's slave population. Many of the semicitizens walk the* streets of Rio or of Bonn, of London or Madrid, shoulder to shoulder! with the noncitizens; no one can necessarily tell them apart by color or1 race or even dress. The semicitizens of the empire are many and * widespread. They live for the most part in the great cities of the non - ; communist world. They include many people employed by the large transnational corporations operating in the transnational production structure and serving, as they are all very well aware, a global market. They ' include the people employed in transnational banks. They often include' members of "national" armed forces, those that are trained, armed by, and; dependent on the armed forces of the United States. They include many' academics in medicine, natural sciences, and social studies like manage - ' ment and economics who look to U.S. professional associations and to U.S. universities as the peer group in whose eyes they wish to shine and to excel. They include people in the press and media for whom U.S.* technology and U.S. examples have shown the way, changing established7 organizations and institutions. ^ Because the Americans once fought a war of independence to be free of British domination, they have ever since counted themselves as among the world's anti - imperialists. They think of empire building as a peculiarly European foible in which they themselves do not indulge. They think of empires as if they were all like European empires. For this reason they find it particularly hard to abandon their embedded image of themselves as inveterate liberals and anti - imperialists, or to recognize U.S. foreign and economic policies as in any sense the policies of an imperial power H (Strange 1986; Dale 1986; Nunnenkamp 1986). Americans are not, of course, the only ones to nurture a delusion about themselves or to suffer the myopic inability, as Robert Burns put it, "to see ourselves as others see us!" But in their particular case the myopia has had the side effect that it has shut scholarly inquiry off from a whole range of questions that could be of great significance for the future of the; world. It has made most U.S. scholars temperamentally rather indifferent to theoretical analysis of all aspects of the phenomenon of empire. Recent exceptions are Doyle (1986), Olson (1982) and Kennedy (1987). But even these studies have addressed the question of what it is that makes some* empires decline, rather than what it is that makes other empires last. Interest in imperialism as a phenomenon of world society already hasa bias toward the negative aspects rather than the positive aspects of the

subject, for which Hobson and Lenin and much subsequent marxist writing are chiefly responsible. This has emphasized the negative causes reasons such as the falling rate of profit on capital - for the acquisition of empires, and the negative consequences of imperialism for the inhabitants of empires and for international relations generally. The major ; divergence of interpretation was that between Lenin and Kautsky as to whether competition between capitalist states for imperial possessions was apt to increase the chances of war between them or, alternatively, whether their shared interest in the exploitation of human and natural resources of less economically developed parts of the world would lead them to form an implicit cooperative structure that would make it more difficult for dependent peoples to throw off their inferior, disadvantaged role in the world economy. The presumption of most writers on imperialism has been that imperialism was undesirable, so that the main policy - related issue was how to get rid of it. , Standing back a little from the literature on imperialism, it is at once ; apparent that it has been very narrowly based upon European experience. [Certain characteristics of imperial power have been taken for granted that iin fact need not apply universally, but that were characteristic of the European empires of the sixteenth to twentieth centuries. For example, it is often assumed that empires are overseas empires, and that they are not •usually contiguous to the territory of the metropolitan power - even though it is clear that in the Russian case (under the tsars and under the soviets), and in the case of China, this is not so. Prevailing theories also assume that the imperial power is more advanced in its economic development and in its command of technology than the areas it dominates. Again, Soviet domination of Eastern Europe, and especially of East Germany, Czechoslovakia, and Hungary contests this assumption. Soviet technology is more advanced in defense - related i n dustry, but not in other sectors. This suggests that some U.S. writers may be wrong who assume that the United States must lead the world in every .sector of economic life or else resign itself to total loss of hegemonial :power. ^ Prevailing theory also assumes that the advanced country surrounds its | territorial empire with protective barriers in order to give itself a market Sheltered from foreign competition. As a consequence, the prices of many J'goods sold to the local inhabitants are higher than they would otherwise •be. Furthermore, it extracts minerals and other raw materials at low ;prices, thus doubly exploiting the inhabitants. By focusing exclusively on 'this exploitative character of territorial empires, a theory of imperialism has naturally been inclined to ask only a limited range of questions. It seems to me that what is needed now is some fundamental reconsideration of the nature of empires; about the benefits they may confer,

the risks they may modify, and the opportunities they may open up as well as the costs they may impose on which so much attention in past theories of imperialism has concentrated. Secondly, we need some serious reexamination of the policy options open to imperial powers. (You may call them "hegemonic powers" or "states exercising leadership in an alliance" if labels bother you.) The justification for pushing theoretical work in these directions is' twofold. One is that imperial decline is a common source of instability and conflict in international systems. The other is that if the alternative to a power vacuum in the wake of an American empire is either a Soviet, a Japanese, or even an Chinese or (less likely) a collective European empire - or else a collective, multipolar system, none of these would be as acceptable to the constituents as is the present American empire. * On the first point, it is a fact that the major destabilizing developments in the international system of the last hundred years have all been* associated with the decline and breakup of old territorial empires. The fall of the tsarist Russian empire, of the Turkish Ottoman empire, of the Manchu Chinese empire, of the British Raj, of the French empire and even of the Belgian and Dutch empires have all been followed by quite serious conflict between the successor states or would-be states. As Denis Brogan once wrote in a book titled The Price of Revolution (1948), revolutionaries always overestimate the fruits of revolution and grossly underestimate the costs. There is therefore much to be said in politics and in political economy for gradualist solutions, and for gentle and gradual rather than violent change. Systematic study devoted to the development of a theory of nonterritorial empires would seem to serve just this purpose. On the second point, that an American nonterritorial empire is much" to be preferred to either a Soviet or a Japanese one, it seems obvious that most Europeans, Asians, and Latin Americans associate an unacceptable restriction of both political freedom and of economic freedom and enterprise with what they know of the present Soviet empire and are not1 keen to see it extended. Similarly, the corresponding suspicion of and resistance to a second Japanese empire in East Asia is not just a matter of bitter memories from the early 1940s. The big difference between the Japanese and the Americans is that it is very easy to become an American and very hard to become a Japanese. Koreans who were born in Japan and have lived there all their lives are still not accepted by the native Japanese not even as much as Turks who have lived far less long in West Germany are accepted by the native West Germans. Such is the cultural obsession with national purity that Japanese companies in Latin America do not even trust second-generation Brazilian Japanese to take managerial responsibility in running their

Brazilian subsidiaries. As the British would have put it in the days of the Raj, they are considered to have "gone native", to have lost their pure Japanese cultural status. By contrast, as American semicitizens are aware, it is not difficult for foreigners to merge into the American melting pot. And once in it, the American free enterprise culture emphasizes the opportunities of upward mobility, economically, and afterward socially. It is much easier in the United States for foreign students to work their way through college or for foreigners to buy property and establish rights of residence in the United States than in most other countries of the world. As European and especially British imperial experience showed, racial discrimination is a major handicap in running and maintaining a stable and successful empire. The Americans have less of it than most. The absence of an alternative that is both stable and acceptable is .therefore the rationale for pushing theory building in international studies toward some reexamination of those policies for governing an empire that are essential and ineluctable and those that are less essential or even counterproductive. There is no lack of historical material here to draw on. For example, it suggests that direct rule is not necessary for stable i m perial government. Direct British rule in India coexisted with indirect control over the Indian princely states. They were only taken over or interfered with as in Oudh - in cases of grossest incompetence or the most extreme strategic necessity. Even in Africa, the British managed a dual system, governing indirectly through tribal chiefs and directly through district commissioners who were sometimes almost beardless former public schoolboys given authority over hundreds of square miles of territory. Experiences suggests that one of the recurrent problems for imperial powers and one of the most difficult - has always been how much support and in what form to give to the local rulers and how much to interfere in their decision making. The United States currently faces p r e cisely this problem both in South Korea and in the Philippines, s The evidence of history also suggests that among the policy areas requiring close imperial control are defense and communications. How the imperial armed forces protecting the empire are to be recruited, equipped, commanded, and paid for has always been a major policy question - as it is now for the United States and its NATO allies (Calleo 1987). In communications so vital to the cohesion and control of any empire from Rome and ancient China to the U.S. - dominated financial system of today - the question who shall have access to the means of communication, how these shall be paid for, and what they may be used for in addition to the messages of state remains a crucial one. Students of international organizations familiar with the history of INTELSAT and MARISAT will readily appreciate the similarities of U.S. policies to those of the Roman and Chinese empires, with their roads and

pony express systems, and the British and French empires with their steamship routes, their air routes, and telegraph and telephone cable links. Not every state is well suited to an imperial role nor to act as leader of an affluent alliance of protected states taking collective responsibility for managing the world's monetary, financial, and other economic affairs. It would seem from historical experience that two variables will make for good imperial government. One is a political philosophy that has some universal appeal to fundamental ethical principles, and which will therefore find an echo in the hearts and minds of affluent associates and less affluent "subjects". The other is a political system, whether formally run according to a written constitution or not, that allows the coordination of policy directed at the imperial state with other policies directed at the government of the empire. (The semi - independent status of the India Office in nineteenth - century Britain is one good example of this.) The United States is more fortunate on the first count than on the second. It was a state inaugurated with a formal Declaration of Independence that embodied universal principles of liberty, equality, and democratic control. It does still pay lip service to these ideals though there is a persistent conflict between those who believe that the principles apply primarily within the United States (and that therefore the United States is an exceptional country), and those that see the principles broadly described as political human rights as having universal validity - or at least as ultimate goals. In recent years there have been signs of growing awareness in Washington of the long-term U.S. interest in a more stable and growing world economy and of the need to adapt U.S. policies (for example, on development finance to the Third World) to this imperative. There are therefore some grounds here for optimism. The outlook for change in the U.S. political system is less favorable. The Constitution (whose bicentenary was recently celebrated with such piety and devotion) was obviously admirably adapted to prevent tyranny and ensure freedom for a developing country on the periphery of the world system. A matter for serious consideration now is how it could be adapted and improved for the future in such a way as to enable the United States to avoid the blind unilateralism, the violent changes of foreign and financial policy, and the short-sighted selfishness of its commercial policies that have marked recent years. Even more difficult are the central political questions of legitimacy and hegemonial power as understood by Gramsci. A common weakness of most territorial empires is the risk of allowing rivalry to develop between military and civil authority. Dependence on the military for the defense of the territorial frontier has always threatened the political stability of constitutional empires as the example of Julius Caesar in the early Roman empire showed. It seems

that concentrated military power corrupts more quickly to the detriment of civil society within an empire. The American nonterritorial empire c e r tainly has the strength of an efficient communications system. The very fact that it is nonterritorial ought to make it possible to curb the power of the military within it because, although power in the security structure is one source of strength for the United States, it is not by any means the only one. The military interest is balanced by industrial and financial interests, as in Britain's nineteenth - century empire, and this may well be a source of strength. A reasonable hypothesis for such a theory might be that a nonterritorial empire will remain strong and stable as long as there are shared interests between the dominant center and important sections of society in the peripheral parts of the empire. These shared interests would maintain a sort of internal balance of power preventing disintegration. This at least seems to be a conclusion that could be drawn from the history of federal states in recent times. In all of these there is a latent danger of secession, jeopardizing the cohesion of the state. Think of Bavaria in the Federal Republic of Germany, of Quebec in Canada, or the deep South in the United States. Earlier on, there were other examples, like Bohemia in the Habsburg empire. In each case, coercive power was more effective when it was tempered with placatory concessions. But equally, coercive power has sometimes to be used to prevent secession or unilateralist revolt. An instance was when the Australian Commonwealth government had to act forcefully in the 1930s to prevent New South Wales the largest and richest of the states of the Australian federation from defaulting on its foreign debt. Or when the Indian government more recently has had to use force to prevent secession by the Sikhs. The result of a lack of such coercive authority can be seen in the failed East African federation and possibly in the future in Yugoslavia after Tito. A theory of nonterritorial empire would seek to ask the political questions of which problems were the same as in territorial empires, and which are likely to be different. And it would ask though from a totally different point of departure some of the same economic questions as those posed by students of "interdependence". How, for instance, can an international banking system be effectively managed without the risk of panic or collapse? Or, how can a Keynesian policy of demand management be effectively developed to stabilize a flagging world economy? These are questions that will find no answers so long as they are approached from a state - centric point of view. Only by assuming the existence of a nonterritorial empire may we be able to find the way in which policy could be moved. It would seem to me that the recognition by U.S. scholars of the full implications of the structural power of the United States would lead in

nany interesting new directions and would produce many more construct ;ive and creative ideas for policymakers than the present obsolete, state:entric, territory - bound debates that ignore some of the fundamental :hanges that have taken place in the world political economy in the last ,wenty-five years.

References Aaron, R. (1958): War and Industrial Society. $tevenson Lecture, London School
Elmar Altvater

Kurt Hiibner

The End of The U.S. American Empire? Monetary and Real Aspects of the United States' Hegemonial Crisis

The Crash of October, 1987 shocked the financial world and quickly taught many politicians the meaning of fear. A pessimistic scenario a p peared on the horizon, one which envisioned a repeat of the events of 1929. The "financial" meltdown spoken of by New York stock exchange president Phelan, however, was indeed prevented by an immediate and massive intervention by the Federal Reserve System; many billions of U.S. dollars were quickly infused into the desperate banking system, just as Alan Greenspan had promised in a speech following the events of Black Monday: "The Federal Reserve System today confirms its responsibility as the Central Bank of the U.S. and as such is prepared to provide enough liquidity to support the economic and financial system". Because, in addi tion, the Central Banks of other developed capitalist countries intervened in the currency markets to the tune of $140 billion U.S. dollars, a sharp decline in the exchange rate of the dollar was prevented. This use of the "lender of last resort" - function guaranteed that the continuity of the phase of economic growth beginning in 1983, was not disrupted even by the deepest stock market crash in the history of the US. On the contrary, at year-end 1988, the best economic year of this decade was happily reported. Was, then, the Crash of October 1987 only a false alarm to be quickly forgotten? Or was it an early warning which should be taken more seriously than has been until this time? Should one believe those who attest to the robust health of the U.S. economy and therefore see no need for political crisis management? Or should one heed those who warn of a recession in the near future, and with it the collapse of the massive pyramids of credit and towers of debt built within the past few years? Has this example of crisis management forcibly proven that existing management and intervention capacities are able to grasp control of unstable world economic processes, or was a crisis postponed alone at the cost of greater instabilities in the future?

The answers to these questions are disputed heavily within public debate as well as within economic literature. Those, like Milton Friedman, who exhibit unshaking trust in the self - regulating powers of the market will recognize no problems, and above all will reject the need for political action. On the contrary, for the United States, the constantly growing trade and fiscal deficits are more like a "blessing", and the only "real problems threatening growth and prosperity are excessive and wasteful government expenditures and tax burdens, especially the real time bomb of social expenditures..." (Wall Street Journal, 12/15/88). Others, however, like Hyman P. Minsky, fear that this trust in the powers of the market will not carry far once a recession has set in and the rumblings of a financial crisis threaten to commence. In spite of the long economic boom, the U.S. American financial system is perceived as being an extremely shaky structure built upon a fragile structural basis. Even trust, in the international "lender of last resort" capacities of the hegemoniai power USA is shaken. That the development of a "scissors effect" between the potential need for interference in the economy and the capacity for political intervention has been confirmed, gives more credence to the pessimistic rather than optimistic scenario. The development of the discrepancy between the need for interference, and the capacity for the same has a lengthy history which embraces; economic and political relationships and national and international con-* texts: in the beginning of the 1970s, the international currency systemsbased on the U.S. dollar as world money, collapsed. Soon after, the U«S,? lost its war against the small country of Vietnam. Watergate undermined, the trust in the moral integrity of the political leaders of the superpower^ at approximately the same time. The fall of the dollar's exchange rate in* the seventies indicated a decline in the U.S. economy's international, competitiveness. The appreciation of the dollar in the 80's, aided by^ extremely high interest rates, set off the Third World' debt crisis. The^ growing U.S. trade and services balance deficits was financed through enormous debt, so that the U.S. developed into the world's largest debtor.! The competitiveness of important U.S. economic sectors suffered in the^ world market - too little is productively invested, too much is behjj| consumed. All of these phenomena point to more than a sheer economic crisisy the regulation - and above all the political management of the cap-j| italist world economy no longer functions. The post-war international^ regime of accumulation and with it, the closely connected mode of reg-aj ulation, are in a process of serious erosion. Instabilities have increased especially within financial markets further endangering the financial system. Moreover, nation states are trying to close of national markets^ through protectionist measures. Not all nations continue to experience thel

positive effects of world market integration on domestic welfare, but must pay a bitter price for this integration. This is foremost the case for the debt - ridden countries of the "Third World" whose populations sink deeper into poverty and misery, and whose attempts at industrialization have failed, save few exeptions which serve only to confirm the rule. Those who assert that the market is the only necessary and efficient instance of regulation, see no problem in these phenomena. For them, state intervention in the economy is the culprit because it prevents the market from self-regulation. As a result, a comprehensive retreat of the state out of the economy is prescribed. However, there are many solid arguments for why this neo-liberal/supply-side position is theoretically false and politically dangerous, even though it is widely accepted. Keynesian and Institutional economists have proven why the market mechanism is principially unstable and tends to bring forth crises (see Davidson 1987, Minsky 1986). They have also shown why, as a result of this instability, political regulation of the economic system is a necessity. Historical experiences from the last great crisis of this century are introduced to support these arguments: Charles P. Kindleberger (1973), for example, sees one decisive factor contributing to the length and depth of the Depression as the lack of a hegemonial power in the international system which could exercise the regulatory and stabilizator functions needed to overcome the crisis. Other such functional stabilizing achievements may be added to Kindleberger's: The institutional maintenance of free trade against overbearing protectionist tendencies; the finance of balance of payments deficits in the face of massive import restrictions; the maintenance of international monetary circulation at fixed parities through world money; finally, the coordination of national fiscal .and monetary policies, (government deficit spending and the central bank icy of lower interest rates), guaranteeed through the hegemonial power, order to stimulate economic growth and therefore ameliorate the s o cially and politically destabilizing effects of unemployment. W Since Kindleberger, a wider range of publications along these lines has [appeared, which may be grouped under the label of "theories of hegemonial stability" (see Snidal 1985, for example). These works use the theory |of public goods as their common analytical focus: When one understands tworld economic stability as a- public good, it may be demonstrated how jlhe rational actions of economic actors which serve individual interests systematically prevent the public good of world economic stability from |being produced. In conclusion, it is argued, these "rationality trap" may 5-only be broken when a nation is able and willing to employ its economic r-and political resources for the purpose of world economic management, following this line of interpretation, the current crises and processes of

r

tructural change within the capitalist world economy are viewed as xpressions of a crisis of the U.S. American hegemonial system. Ire there hegemonial cycles? i look at the full history of the modern capitalist world system spanning lmost 500 years, provides insights into the need for political regulation of narkets and powers - at the national level as well as in the global ontext. Since the end of the 1970s, theorists of the so-called "hegem>nial cycle" have studied the problem of regulation of the international ystem within the framework of a "hegemonial order" (interpreted in the jramscian sense as "consent protected by the armour of coercion")1. The dea underlying these works may be outlined as follows: Since the birth of he capitalist world system that is, since the great discoveries at the lose of the fifteenth century - the economy has been internationalized, iowever, the expansion of world trade has paradoxically been accom>anied by the emergence of modern nation - states (see Amin 1989): the levelopment of national policy and the internationalization of the economy is well as the drawing of political borders against the economic challenge o such borders can not peacefully co-exist in the long term. In each :ase, this dilemma was solved by one nation - state's use of its superior nilitary, political and economic powers in securing both an international 3rder of economic expansion and a political "equilibrium of power." Other national powers were severely limited by the hegemonial nation. At the seginning of the history of the capitalist world system whose place of :ommencement was Europe - the hegemonial powers were Portugal, then Spain, and in the seventeenth century, the Netherlands. During the eighteenth century, Great Britain emerged as the hegemonial power. She defended this position in the early nineteenth century through the Napoleonic Wars, and proceeded to define world history through the "Pax Brittanica" up until the 1920s. Although the United States had already emerged as the new great industrial power during the final third of the nineteenth century, it was only in the 1930s that the U.S. began to depart from the policy of "splendid isolation" and take seriously the role of economic leadership appropriate to her economic power. This aspect of global history is not further exciting up until this point as the representation of the development of the capitalist world system is so general, that it is simultaneously correct and incorrect. The former applies to longterm tendencies, while the latter refers to that which becomes evident

1

(Various types of authors belong to this group: Wallerstein 1984; Modelski 1981; Thompson 1983; Kennedy 1987, etc.).

after a closer inspection of individual phases, and the socio-economic tendencies upon which they are based. However, some authors (e.g. Modelski 1983) develop the abstraction one fascinating step further. TTiey argue that one can depict political cycles, each split into four phases, which run approximately parallel to the 3 0 - 5 0 year "long waves of economic growth" named after Kondratieff. Each of these political cycles corresponds to the rise and fall of a hegemonial power and its corresponding hegemonial order. The epoch of uncontested world power (phase one) is followed by the "delegitimation" stage, meaning the phase in which the hegemonial power is challenged at the international level. Thereafter comes the phase of "deconcentration". Here, the means through which hegemony is exercised begin to erode and other competing powers begin to emerge. These rivalries culminate in a world war (cycle four), in the course of which the defeat of the old hegemonial power enables a victo rious power to proclaim itself the new hegemonial power. These phases of the hegemonial cycle correspond to the phases of the long economic cycles: The rise of the hegemonial power is connected to a prosperous, expansive world economy, while the decline of the same takes place against a background of a long wave "with fundamental stagnative characteristics" (Mandel 1972; 1980). What remains unclear and debatable, however, is whether causal relationships exist between these "cycles." This question will not be further explored here. We wish to limit ourselves to the phenomena of the U.S. - American "hegemonial cycle." A cyclical model suggests something like historical inevitability that is, an unavoidable and inexorable sequence of phases of the hegemonial cycle. In the face of this historical "logic", the political, economic and military decision - makers have, at most, a very limited effect. When one uses this model as a basis, the following question immmediately arises: in which phase of the "U.S. American hegemonial cycle" do we presently find ourselves? Are we in the phase of delegitimation, of deconcentration, shortly before a World War - or more appropriately a War of World Destruction which would close the final hegemonial cycle of humanity, since no living being would be able to survive, no less a nation which would be able to come forth with hegemonial expectations? Although this cyclical model seems plausible for the purpose of retrospective analyses, there are good reasons why it is not especially applicable to an understanding of the current state of the world. This can be explained through a summarizing look at the short history of the "U.S. American empire." It cannot be contested that the USA has been an aspiring economic and political power in the world economy since the end of the last century. According to the research of Angus Maddison (1987), in 1890 the average productivity of the U.S. economy had already surpassed that of Great Britain, the leader at that time. After the first World

War, the USA became the uncontested strongest industrial nation, overshadowing all european powers. The industry of the "new world" was at the leading edge of technologigical progress and economic rationalization: there, on the other side of the Atlantic, the principle of "Fordism" was developed (see Aglietta 1979). This refers to the social rules of fully rationalized mass production in the factories, together with economic and political methods of stimulating effective demand, plus a mass consumption norm founded on specific wage policies. These norms and rules were valid and imitated throughout the world well into the nineteen seventies. In the course of the World War I the United States transformed into a "Supercreditor" within the global financial system (Polanyi 1978). All European nations became debtors to the United States. Wall Street kept the financial system afloat with short and long-term credit. The systemr collapsed, however, in Europe (especially in Germany) when U.S. firms and banks began to liquidate and repatriate their European and Latin American investments after the Crash of 1929. Germany was only able to pay its reparations for a time due to a harsh austerity program associated above all with the name Briining- which reduced imports and increased exports. However, the pyramids of credit which were built upon short-term debt began to crumble. The depression followed, bringing with it mass unemployment (1929) and a postponed financial crash (1931). In this period of sinking raw material prices and shrinking markets, many Latin American nations also lost the capacity to service their debts. They were forced to halt interest payments (as would reoccur 50 years later), try to restructure non-payable debts, or, as in the case of Bolivia on January 1, 1931, declare State bankruptcy. In the thirties, the USA already defined the conditions within a western Alliance developing in response to the fascist axis. In the forties, a global institutional system was created over which the USA undisputedly presided as it expanded during the 1950s. Perhaps the USA would have ripened into the hegemonial power of the twentieth century in any case, just as Toqueville (and Marx) pre-' dieted in their nineteenth century works. But, it cannot be disputed that "God's own Country" became a hegemonial power as a result of two World Wars. Through these wars the USA legitimized itself for the hegemonial role as well as concentrated the economic, military and polit-*' ical power with which it would later secure hegemonial order. So far, the historical process seems to conform to the theory of hegemonial cycles. Dominance and Hegemony in a Bipolar World

V

However, for the first time in history, the hegemonial order of the Tax Americana" applied only to the "western" half of the world and not few*

the world as a totality. The "eastern" half integrated to the "socialist camp" under the hegemony of the Soviet Union. The superpowers became rivals in a bipolar world which tended towards tripolarity after China seperated itself from the real - socialist block. The U.S.'s function o r maintaining hegemonial order became split; on the one hand it had to deal with the issue of the "enemy" camp which must be contained, above all by the expansion of military power. On the other hand, the USA had to stabilize the economic, political, military, and cultural relations within the Western Alliance itself. Within the East-West confrontation, the USA and the "Allies" to which former wartime enemies also belonged could only achieve an "equilibrium of deterrence". The reciprocal threat of atomic destruction stabilized two camps, and only on the "edges" did conflicts of war erupt. Since 1945, nevertheless, 160 wars have been waged, and of these, a p proximately 100 have been intervention wars in which one of the superpowers has openly participated. In this sense, it seems as if something only changed insofar as the level of reciprocal deterrence was able to be downwardly revised through a partial disarmament, but also upwardly revised through new armamant competitions. In this situation a conflict was conceiveable when an unmanageble independent technology succeeds the "logic of extermination" (E.P. Thompson) of the system of deterrence (an atomic war is begun accidentally, or because of misinterpretation, or "human failure") or, the continual conflicts provoked on the edges of the block-system transcend the border into the center, despite all containment efforts in the form of disarmament and peace initiatives. The USA has been the dominant nation since the Second World War within the western capitalist system the "holy alliance of anticommunism" of "the free west". As such the U.S. was also the guarantor of the hegemonial order. As Susan Strange (1988) describes, the USA has had "relational power" within bilateral and multilateral relationships among nations (this could be named dominance), as well as "structural power", exercised on the basis of shared norms, institutions, and forms of c o operation; that is, on the basis of consent ( this corresponds to the definition of hegemony). The most important conditions enabling one nation's (economic) dominance in the world market are: comparative advantages in the production of first quality - products; the ability to provide for the strategic raw material needs of the hegemonial economy and its allies (oil, for example, due to the energy - intensive industrial model); the ability to regulate the international currency and financial markets so that the national money functions as world money and the national financial system as the anchor of the world financial system. The national economy must also be large enough to act as a "locomotive" in stimulating the development of the world economy. Furthermore, an economically dominant

land is also militarily superior. Finally, the dominant nation must culturally and ideologically influence the entire global society. This so described relational power, however, can only form the basis of a hegemonial order (structural power), when the mentioned conditions become anchored in an international institutional system, and all other nations accept the rules developed by the dominant nation. Hegemony always includes dominance, yet a dominant nation does not automatically develop into a hegemonial power. As long as the world economy expands, the monetary system functions and international credit relations finance productive and commercial loans, all involved parties take part in the gratifications of the system. The benefits, however, are never simul taneously, and always unevenly dispersed, and the system itself is never free of conflict. The costs of integration into the hegemonial order, and the recognition of its demands, are in any case less painful than those tied to the option of a "seperation" from the world market or as a strategy of selfcentered development. The dominant nation can exercise economic pressures and make political demands, yet these become - as Gramsci said armoured by the more powerful lever of consent which is inscribed into international structures, promoted by international institutions, and whitewashed with the ideology of freedom and the market. As a hegemonial nation, the USA is in a more exposed position than any other in the history of the capitalist world system. This is because of the double - dimensioned need to secure the hegemonial order within the order itself, and without, in reference to the Soviet Union. Theorists of hegemonial cycles generally argue that economic superiority within the global society is the crucial basis for political and military supremacy. This, in turn, enables the establishment of an international political order tapered to the rules of the game set by the hegemonial power (structural power). Because the political and economic structures of the world system are not congruent, a leading national power can, and must emerge (see Schmidt 1988, p. 384ff.). Although all nations within the system profit from the political and ideological regulation, and especially from economic expansion, the hegemonial nation profits most. It is able to pocket a "Seignorage", exemplified by the role played by the national money (the dollar) as world money (see Kindleberger 1984, p. 30). This double function of the dollar allows the USA to create money and credit, and thus lay claim on the value produced by other economies: The USA is able to finance the export of capital and thus the transnationalization of U.S. firms (as was done into the nineteen seventies), or it can afford an enormous trade deficit without fearing an inability to pay (as is being done in the eighties.) Naturally, this only holds as long as the dollar is accepted as world money - meaning as long as international contracts are denominated in dollars. This acceptance is not least dependent on the

economic security of the world money (i.e. the stability of its value) and especially on its rate of appreciation (i.e. the interest rate in the USA). In this manner economic supremacy, - that is, the prerequisite for dominance and hegemony can be expanded further in relation to the hegemon's competitors. The hegemonial order sets in motion a positive feedback mechanism for the superpower itself. This is certainly neither stable nor set up for the long term, because options are available to the competitors which will call the relative competitiveness of the hegemonial power into question. Such a catch-up process has defined world e c o nomic development since the middle of the nineteenfifties. The Western European nations unexpectedly succeeded in quickly closing, for the most part, the "technological gap" with the USA, and as long as they lagged behind the USA in the field of labor productivity they remained competitive by keeping unit labor costs and therefore prices correspondingly competitive (Altvater/Hubner/Stanger 1983, p. 38). Japan followed with principally the same strategy one decade later. In such a situation, the seignorage enjoyed by the leading power can not only disappear, but may also transform into a disadvantage. The exercise of hegemony - that is, assuming the responsibility for the system's function as a whole - becomes an economic burden. This was especially the case in the decades following the Second World War. Then, the USA was not only responsible for the maintenance of military supremacy within its own block, but also for the extension of the "military umbrella" over the western system against the Soviet Block. Because of these double burdens, the U.S. had comparatively high military expenses. While the U.S. spends more than 6% of its GNP on armaments in the 1980s, West Germany spends only 3.4%, Great Britain close to 5%, and Japan spends less than 1% on the non-productive (or better, nonreproductive) arms industry (see Schmidt 1988, p. 395). Because of their comparitatively lower military expenditures (measured against GNP), competitors of the U.S. were especially able to invest more public resources into the area of infrastructure. With the use of these resources the "productivity gap" in relation to the USA was largely overcome (see Cuomo Report 1988). The fact that the U.S.'s economic competitors did not have to compete militarily with the dominant power for the first time in the history of hegemonial order, proved advantageous to the U.S.' competitors. The hegemonial power was, however, tied to an arms race with the enemy hegemonial system. w The economic conditions upon which the dominance of the USA was built became undermined, due to the fact that the USA raised the e c o nomically costly military stake in its armament competition with the "socialist camp." Relying on what seemed to be superior economic resources, the U.S. attempted to turn the "equilibrium of deterrence" to its

advantage by "arming the Soviet Union into economic bankruptcy". It is well known that this strategy had a high price. But with the help of this strategy, the relationships within the capitalist world system have transformed so fundamentally, that the notion of a U.S. hegemonial crisis is fully plausible. The decreasing competitiveness of many branches of U.S. industry is confirmed; the "productivity slow down" is the theme of many books. In Mario Cuomo's Report of the Commission of the Governor of the State of New York, 'Trade and Competitiveness", he expresses deep concern over findings which prove that on the average, Western European and Japanese productivity has almost caught up to that of the U.S. In 1970, in comparison, these countries' productivity rates remained 30% behind the U.S. (Cuomo Report 1988). The decline of the dollar is interpreted as an expression of crisis as well as its temporary and unprecedented peak is seen as a symptom of crisis, although due to different reasons. In addition, the United State's slide from a strong creditor's position into a debtor economy of unprecedented proportion, plus the increasinng "financial instabilities" which fail to stabilize - all of these are strong indications of a hegemonial crisis. The opposing viewpoint argues that to speak of a hegemonial crisis is to highly overdramatize the facts of the situation. To speak of a crisis, some say, one falls directly into the rhetorical traps of liberal economists and politicians, who throughout the world complain of lost, or endangered competitiveness, and thus attack the "costly" welfare state and unions with the argument "The World Market made me do it". One must furthermore take into account, they continue, that no other competing nation - neither from Western Europe nor from Asia approaches the United State's financial superiority. Neither are there true competitors in certain high technology sectors (electronics, space travel, armaments). Additionally, the counter-argument holds, the indicators commonly used to support the thesis of a hegemonial crisis are not entirely relevant. For example, one cannot infer declining U.S. competitiveness from a declining share of U-S. exports in the world market, because especially in the case of the US, - a large portion of foreign economic activity is transacted by VJSL American transnational corporations whose products are not encompassed by the national US statistical indicators. It follows, therefore, that talk of a hegemonial crisis is simply an ideological smokescreen stoked by statistical methods. Without doubt, there are good reasons for such objections. They should not, however, be read as if economic, ideological, political and military structures have not fundamentally changed. To us, these change^ seem to be consistent with the previously developed concepts of dom^ inance and hegemony. Dominance and hegemony may not only diveige from each other, they may very well contradict each other. The dominance

of the superpower within the world economy can be maintained precisely in that the material bases of consent and therefore of the hegemonial system are undermined. This occurs when the hegemonial power loses its industrial superiority, employs "unfair means" to protect themself, and potent competitors appear. And it also occurs when the national money of 'the superpower is no more accepted as the uncontested world money. As • a result, a currency crisis is brought about, resulting in a devaluation of fthe national money and consequently, of the stock of world liquidity. LCurrency reserves decline in value and central banks must book c o r responding losses. When the financial system does not continue primarily to perform the function of securing productive credits, but becomes entwined in speculative capital movements, the system enters into a zerosum, or even negative-sum game. While productive credits spur the expansion of the world economy and thus enable all participants to reap the rewards of expansion (positive sum game), speculative finance only produces winners at the expense of the losers. In the game of "Casino Capitalism" (Strange 1986), only the bank 'can win in every case, in this case the financial system of the US which -mediats the great bulk of international commerce. Furthermore, when the c ideological evocations of the "american way of life" is satirized in the most |hip of Hollywood TV series, then the consensual basis of U.S. hegemony lis really endangered. "Structural power" can then be instrumentalized at |the expense of the hegemonial system's functional mode; that is, to the disadvantage of other nations. The existing hegemonial system does not further mediate gratification for all participants, but mediates advantages for the hegemonial power and disadvantages for many others. During such a systemic process of transformation, the former hegemonial nation [becomes reduced to a dominant nation. Susan Strange. (1988) named the ttype of nation which assumes this position in the world market a "predagtory hegemon". jp Leaving aside its overwhelming military power, the dominance of the IVSA today is essentially based on monetary and financial relations and | not, as previously was the case, on real economic superiority. The fatal | aspect of this is that these monetary links sap the hegemonial consensus, Ifinancially strangle a number of countries ( the Third World debt crisis) land bring forth financial instibilities which hold the potential of a global |economic crisis. The U.S. "hegemonial crisis" can not be understood solely las the inability of the U.S to achieve specific forms of economic mangagement in the world economy, as the literature on hegemonic instability •argues. The hegemonial system will be undermined above all when the Iformer hegemonial nation unilaterally attempts to instrumentalize the ^Structures of the world economy and, in doing so, heightens the potential ^for world economic conflict.

I

On the way toward Casino Capitalism? This perspective can be sketched as a type of vicious circle (see chart) which exhibits a number of stations. These, along with the means by which the vicious, circle may be broken, shall be explored in the following sections. First: The "hegemonial crisis" of the USA was initiated in the late 1960s as U.S. firms lost their competitive edge, and European andi Asian competitors began to catch up to their U.S. counterparts- However,, it must be recognized that U.S. firms themselves promoted this process* Since the introduction of European currency convertibility in the late 1950s, the U.S. has increased its direct investment in Europe (and Asia) compared with its engagement in Latin America for instance. In effect, U.S. corporations imposed new technologies and management techniques onto the competition, thus raising the competitor's productivity. Had these investments been placed within the U.S., greater productivity gains, would have been realized within U.S. borders. Therefore* when one speaks of a decline in U,S. competitiveness, it applies, only to the territorial economy of the U.S., not to the transnational corporations; which continue to operate competitively throughout the world. However: both the investment rate and the investment quota measured as the share of investment to profits, and to the national p r o duct respectively - have declined in the U.S. more than in any other developed nation. This tendency is responsible for the fact that since the late 1960s, modernization and innovation within American industry has lagged behind its competitors. One resulting consequence has. been the so-called "productivity slew down": the average growth rate per year in the US manufacturing industry amounts to 25 % in the interval! ISfifl 1980; the repective rates of Japan und FRG were 7.4 resp. 4.9 One other consequence has been the erosion of the "fordist equiMbriuna", which was based upon wage increases (demand) at the approximate pace of productivity increases (supply). When productivity gains slow and individual wages stagnate (the ease since the 1970s), the social wage and consequently the unit labor costs increase. The effecting price pressures cm then only be dampened in the world market through currency depreciation. Second: This is obviously not a sufficient solution. The U.S. trade balance in the 1970s was negative. It was not a coincidence that the repeal of the gold convertibility of the dollar also wrested the crucial support from the post-war currency system: for the first time since 18S1» in 1971 the U.S. trade balance became deficitary. This did not dkectfy result in problems for the U.S. or for the world economy, due to the fact that the balance of current account, which includes services, capital yields

The Vicious Circle of the U.S. Hegemony Crisis

1 Declining — • 5 Deterioration £ Comptetltive of the trade ness of the balance S- U.S.A. (Real Economy) (causes

• 3 Declining - h * 4 Crisis of h -Attempts to stabilize the the world exchange rate exchange rate money as a of the $ by monetary means of cirmeans culation

y not to be con • sidered here)

a

13

a

Rising inflation

5 Loss of real value of all $ denominated contracts

Attempts to rise prices

12 Slow down of technological innovation and | Implementation f Tertlarlzatlon of the economy Decrease of p r o - ductive investment

Oil shock •

Declining prices of raw materials

Transition to a multy currency standard Growing value of collateral

Incentives for Increasing Indebtedness ^

Rising In terest rates

\

7 Growing instability of currency markets; emergence of an international credit system Incentives for speculative c u r rency movements

.

J

» Recycling 8 Growing debts of PetroI and M e t r o - $ T Increasing debt burden

Changing strategies • of corporations: Interest oriented Instead of profit seeking

Expansion of the international credit system, based in the U.S.A.

Loss of the sovereignty of economic policy

Growing M volatility, Instability of financial markets

10 Increasing attractiveness of the $ as a means of payment Financial Innovations

and revenues, remained positive. As long as this was the case, the U.S. continued to export capital and supply the world economy with sufficient international liquidity. Since WWI the U.S. has played the uninterrupted role of creditor to foreign debtors, and was even able to build on its position of creditor. Only since the early 1980s the balance of current account has become deficitary. As a result, the U.S. has transformed itself into a country which must import short and long term capital, constantly moving towards the status of a debitor nation. This has been accompanied by a complete restructuring of international creditor - debtor relationships, and by a dismantling of the post-war credit regime. The post - WWII U.S. balance of payments has developed in the following manner (divided generally into decades): THE US BALANCE OF PAYMENT AFTER WORLD WAR II - in bio. of $; aggregated balances Period trade balance current account

1950/59

1970/79

1980/89

29.3

40.8

-103.8

-919.3

6.0

33.3

4.3

-808.3

-27.8

- 35.4

363.6

(1952)

(1962)

(1982)

50.0

27.4

capital balance (longterm) exchange and gold reserves (as % of world reserves)

1960/69

8.3

(1987) 6.7

In Trade balance and current account; + means a surplus while - means a deficit. In capital balance; is net capital export and + is net capital import. Sources: Economic Report of the President 1988; OECD 1988. Datas for 1988 and 1989 are preliminaiy. Datas for the capital balance embrace 1980 to third quarter 198/. On the one hand, the deterioration of the U.S. balance of payments may be viewed as a symptom of the 'Triffin Dilemma" which has been discussed since the late 1950s. This holds that a hegemonial power which supplies the world economy with liquidity in the form of its national money necessarily must accept a balance of payments deficit: that is, either a deficit of current account, a deficit in the capital balance, or a reduction in currency reserves. Precisely this, however, undermines the strength of the national money of the hegemonial power. This is fully acceptable as long as no other world money which is simultaneously

national money is available. Because the distribution of world money is dependent upon the existence of a "World Government (State)", it is highly unlikely that a situation such as this would arise. The drama of the "Dollar Crisis" stems less from the Triffin Dilemma within global, monetary relations, than from real economic developments within the U.S. economy which severely weakened the dollar. If the dollar were a "normal" currency without the additional function of world money, a devaluation would be a prerequisite for improved U.S. competitiveness. But the dollar is the internationally recognized contractual currency. Changes in the dollar's value therefore have destabilizing effects not only on the U.S. economy, but on the global economy as a whole. Those who do not recognize the balance of payments deficit and sharp changes in the dollar's value as a problem, but see these merely as innocent and non- biased effects of market mechanisms, obviously do not take the above-mentioned phenomena into consideration. Third: A weakening of the dollar signifies nothing more than permanent pressure for devaluation. Within the fixed-rate system which existed until 1973, exchange rates - set in the 1960s when the dollar was already overvalued - had to be defended; adjustments were only possible within the framework of complicated negotiations within the IMF. A network of international institutions was constructed in order to defend the dollar against market tendencies. This included the General Agreement to B o r row; Swap agreements, the Gold Pool, Special Drawing Rights, etc. However, even this network was not strong enough to control movements of private capital speculating on the dollar's devaluation. The dollar's descent began in spring of 1973 when the system of fixed exchange rates was forced to be definitively abandoned. From 1972 until 1980, the dollar lost 44% of its value against the German Mark, while during this same time period it's weighted value in relation to the currencies of the industrial nations as a whole declined 17%. A currency which loses its value over time becomes far less attractive as an investment currency to financial investors. It is no wonder, then, that currencies such as the German Mark or Swiss Frank in part replaced the dollar as a reserve, trade, or intervention currency. A market - regulated, oligopolistic "multi - currency standard" was created on the ruins of the post-war politically regulated, international monetary system (single currency standard or Gold - Dollar Standard). The dollar remains as the most important and dominant currency, but it has become "deconcentrated" by competing currencies. Above all, the dollar is no more the medium of political regulation oriented towards the goal of full employment, but has become the medium of capital investors seeking short-term speculative profits from exchange rate developments and interest rate movements. Robert Triffin (1988), therefore redefines the logo of the IMF as the

"International Monetary Scandal." John Williamson (1988, p. 213) sums it up in the following manner: "Since 1973 the world has lived within an international monetary ,nonsystem\" Fourth: The external devaluations of the dollar in the 1970's corresponded to internal U.S. inflation which then spread throughout the, world economy. (From 1970 1981, the average yearly increase in c o n - ' sumer prices was 7.7%.) When high inflation rates tend to devalue dollar,, denominated contracts in the world economy, it becomes a rational r e action to either close these contracts in other, more stable currencies,; and/or to adjust the price of goods to the inflation rate. In order to, realize this option, however, two prerequisites must exist: First, the inter-< national supply of money and credit must grow substantially faster thaXL "real economic" dimensions such as productive potential, GNP and worl<£ trade. This was the case in the 1970s following the internationalization of. the credit system; from 1973 (the first oil shock) until 1982 (the explosion' of the debt crisis), the amount of international loans granted increased at a yearly average of 24.4%, while the average yearly growth rate of the industrialized nation's GNP was only 2.8% in the period 1973-1980 (Sources: IMF and World Bank data.). Even when the inflation rate is, subtracted from these figures the growth of international credit remains, enormous. Second, the suppliers of strategic goods must posess enough' market power to be able to significantly raise their prices, especially if the price increase is to be abrupt, and not follow the general inflation rate. The Yom-Kippur War between Israel and Egypt in 1973 (and later, the Iranian Revolution in 1979) provided the opportunity for a more than tripling of the price of petroleum. For the countries which use oil, this actually was a "shock". The industrial model had been based upon the use> of cheap oil, and now had to be restructured. Short-term, flexible a d justments were practically impossible, and thus oil - importing countries in general and particularly those of the Third World were forced to cover' their trade deficits with foreign credits. The external indebtedness of these nations, financed by the private banking system abruptly increased. In a world economy weakened by falling profits and rising inflation (8.2% yearly rate of price increase of the social product in the industrialized countries from 1973 - 1980) the oil shock set off a world-wide recession. Due to declining investment tendencies but silmultaneous high profit masses existing in the industrialized countries, the world supply of investable funds grew, greatly increasing the ratio of the global supply of credit to the global demand for credit. Low interest rates enabled many countries to finance trade balance deficits resulting from the oil-price explosion. Between 1973-1980 the real interest rate - defined as the interest rate on 6-month Eurodollars deflated by the GNP price index of

the U.S. was 1.3% (World Bank), that is, lower than the growth rate of the national product. "Recycling" of the Petro Dollar (and "Metro - Dollar) initiated one sided Creditor - Debtor relationships, aided by the now established international banking system. Creditors were comprised of internationally operating banks whose depositors were principally oil producers and transnational corporations from the industrialized nations. The debtors were countries with trade balance deficits stemming from the high price of oil, and countries which initiated and/or forced through a strategy of "indebted industrialization" in the 1970s. Fifth: High inflation rates contributed to a growth in the value of assets (higher real estate prices; real stocks are repreciated, etc.). The result is an increase in the value of collateral for those who wished to take out credit: firms, consumers, farmers, or house owners were able to go into debt more easily. For example, when the value of buildings increases, higher mortgages can be taken out. The rise of mortgage debt in the U.S. from 1970 to 1979 was 180%, while during the previous decade the growth rate was 113% (Economic Report of the President 1988). In this way, the demand for credit in the industrialized countries in general grew with the supply of liquidity. However, the demand for credit was less for the purpose of productive investment than for financial i n vestment. One characteristic of the 1970s was therefore the transition to a debtor economy at the international level, the rules of which began more and more to dominate international economic relations. "Financial innovations" were developed within private credit markets in order to make sure that the risks associated with the new loans were transferred onto the debtors. These included the introduction of roll-over credits, future markets, securitization, etc. The financial innovations themselves became speculative objects (the creation of the futures market), and thus partially lost their function as guarantor against the risks of credit. The international monetary and credit system became destabilized. The prices for money capital (interest rates) and for currencies (exchange rates) were based less and less upon "real" transactions such as production, investment and world trade, and more and more upon extremely "volatile", "mobile" and therefore extremely speculative money and capital markets (see Gleske 1988; p. 239). The rapid tempo of the internationalization of financial markets exerted pressures upon productive sectors of the economy to adapt, which also limited the options for economic policy (see Suzuki 1988, p. 115). Sixth: At the end of the 1970s and beginning of the 1980s, the U.S. implemented monetary stabilization measures to counter tendencies such as: the external depreciation of the dollar (which was forced by the restrictive policies of other Central Banks, especially the West German);

internal inflation; growing indebtedness, and therefore heightened instability within the financial system. The need for stabilizator measures was apparent: the USA would have had to either succumb to the delegitimation and deconcentration tendencies, or stop the depreciation of the dollar in relation to other currencies and radically reduce the internal inflation rate. The restrictive monetary measures were so effective that they even compensated for the effects of expansive fiscal policy (budget deficit in, order to finance an arms build up) in any case, expansive fiscal policies did not result in the dollar's depreciation - as text books predict - but, with the help of monetary policy, resulted in a short term, albeit meaningful, appreciation at the beginning of the 1980s. The world economic conditions affecting the long - term realization of these options have, however, fundamentally changed: The U.S. had already lost its real economic head-start - its industrial superiority. The government was at the end of the 1970s therefore left with the sole option of using monetary policy in order to strenghten the dollar. Interest rate policy was the favorite choice. Already under the Carter Administration (and under the new head of the Fed, Paul Volker), since autumn 1979 the heavy cannon of massive interest rate increases was rolled in against the threat of capital transfers out of the USA and into other currencies (which was also politically promoted by the Iranian Hostage Crisis). The high interest rate, policy was pursued even more rigourously by the Reagan Administration. The superpower can only maintain its dominance through monetary measures since its productive superiority in important sectors of the real economy has been lost. The price of this, however, is high: these options worsen the conditions upon which the reaquisition of long-term compet-> itiveness are dependent. Seventh: At the beginning of the 1980s, nominal interest rates were raised to an extremely high level. In 1981, average interest rates on short term and long term credit within the seven great industrial powers were 14.2 and 13.2 percent respectively. Because the inflation rate decreased within the industrial nations, real interest rates increased. According to the World Bank, between 1980 and 1987 average real interest rates were 5.6% more than double the growth rate of the national product. This is. without doubt an absurd economic situation. The debt economy created in the 1970s was pushed to the verge of collapse by the "interest rate shock.* This is because flexible interest rate clauses of debt contracts forced debtors suddenly to pay extremely high real interest on loans taken out under low, or in some cases negative real interest rates. When the LIBOR or Prime Rate climbs, then, after a short time, so does the interest rate on outstanding loans. As Hyman P. Minsky described it, they went from "hedge" to "ponzi financing units." The creditor banks transferred interest rate risks onto the debtors.

The effect of this increased real debt burden was intensified by the fact that higher interest rates raise the costs of storage and therefore lead to a decline in the demand for raw materials. For indebted raw material exporters, this resulted in a "pincers" effect: climbing interest rates and falling prices for the most important export goods, meaning a higher debt service burden with a simultanous decrease in export earnings. This was reminiscent of the case of the 1930s. Demand from the industrialized nations declined first and foremost due to tepid economies and technologically based substitution effects of replacing raw materials with synthetic, or other materials. When the debtors - especially the NICs - began to compete with the "old" industrial nations in industrial products, they found themselves up against a protectionist wall. They either verged on being unable to service their debts at all, or were forced to take out new loans in order to meet payments. The amount of renegotiated debt from J a n uary, 1980 - September, 1987 reached $389.8 billion. Although the World Bank calculates that the most indebted countries alone transferred $135 billion to their creditors, external debts rose. The debt crisis, then, was set off by further debts in that the burdens were rolled over into the future. TTie tragic problem of the Third World debt crisis is well known, and all of its facets need not be explored here. (See the summary by Altvater/Hiibner 1987). In any case, the debt crisis, and the immobilizing monetary burden it created are clear demonstrations that the positive sum game of the U.S. hegemonial system's high days is over. Some nations (or classes within them) have now lost an entire decade of development. It is no wonder that the option of a politically controlled separation from the capitalist dominated world market once again becomes more attractive against the option of integration. The internal causes of national debt crises may very well vary from country to country, but the international debt crisis is a direct product of the transformation of the U.S. American hegemonial system. Eighth: The international money and credit markets expanded with the growing debt. This is because in many countries at various time periods, extremely high interest rates which remained above real returns on productive capital investments drew liquidity from available investment funds into the "casino capitalism" of the financial world. This was the case for Great Britain in the second half of the 1970s, and for the U.S. at the beginning of the 1980s. In addition, the net profit rate for the seven large industrialized countries (the rate of return on capital minus long term real interest rates) fell from an average of 10.1% in the 1970s to 4.9% b e tween 1981 - 1985. After the external debt incurred by the Third World and the internal debt incurred by the governments of the industrial nations enabled a demand-based expansion of the credit system in the 1980s, the dominant

power U.S.A. took over the essential role of debt riding within "casino capitalism": where creditors wish to earn interest, debtors must be willing and able to pay. When credit is to be used for investment, or for the finance of trade, interest must come out of real earnings out of profits. If profits are higher than interest rates, after a certain period of time debtors are able to pay off their debts and stand on the side of the creditors. But credits can also be used for debt - restructuring (the current rule for the Third World) or for private or state consumption. In this case interest selfevidently cannot be paid out of earnings on investment p r o jects, but must be financed from current private income and from the government's receipts. The number of this type of debtor has increased enormously in the U.S. At the end of 1987, consumer debt reached $756 billion, or 24% of disposable personal income. Mortgage debts in the U.S. grew between 1980 and 1987 from 41% of 1970 income to 60% of household income. Total U.S. household debts in the meantime have reached 97% of disposable income, an extremely worrisome figure according to an OECD observation (Economic Outlook, December 1988, p. 14). U.S. firms send more than half of their profits to banks or other financial institutions in the form of interest payments (in the 1950s this figure was about 15%). Gross public debt in 1988 reached $2582 billion, more than 50% of the U.S. GNP. Net public interest payments reached $138.6 billion in 1987, 13.8% of all public expenditures, or approximately $14 billion more than public health expenditures, which Milton Freedman had described as the "real time bomb of the U.S. budget." The total debtincurred in the U.S. runs at more than $10,000 billion (compared to 1987' a U.S. GNP which was approximately $4486 billion). The share of external debt consistently grew during this period. In* 1981 the U.S. had a positive external balance of $141.14 billion. At the* end of September, 1988, the figure had transformed into a negative* balance of $648.87 billion. The interst burden of private and public enti-^ ties grew correspondingly. In 1987 alone $24 billion of the federal budget1) were sent beyond American borders as interest payments. The OECD : estimates that as a result, net positive earnings from investment, which* was $20.4 billion in 1987, will turn into net external transfers of approx-* imately $20 billion in 1990. Debts are not problematic because of their size, but rather because of their dynamics. Because real interest rates have remained high in com-4*, parison to real returns on productive capital investments and to thd growth rate of GNP even despite a nominal decline in interest rates within the past few years it is still extremely attractive for investors td pursue short-term, fast money. This is no new tendency specific to U.S.* capitalism, but the tendency has become greatly strengthened in the 1980s. While net profits (calculated as gross profits less depreciation and value

corrections in stocks) of U.S. firms reached $722.5 billion in the 1960s, and outshined net interest payments of $210.3 billion by $512 billion, in the 1970s $1312.4 billion worth of profits were still greater than $836.1 billion of interest obligations. In the period 1980 1987, total net profits reached $1867.1 billion, and interest obligations of $2285.2 billion outweighed profits by $418.1 billion (Economic Report of the President 1988, p. 273). In the words of Paul M. Sweezy and Harry Magdoff: "What is essentially new in present economic situation is that the center and focus of the capitalist economy has shifted from the production of goods and services to the buying, selling, and multiplication of financial assets. The traditional imperative to accumulate capital geared to providing plants and equipment that yield a future stream of income and jobs has been replaced by the drive to accumulate money capital per se in a world far removed from productive activity. Real wealth in capitalism grows from an expansion of the mass of surplus value created in the process of production. But in today's world ruled by finance, the underlying growth of surplus value falls increasingly short of the rate of accumulation of money capital. In the absence of a base in surplus value the money capital amassed becomes more and more nominal, indeed fictitious." (Magdoff/Sweezy,1988, p 9 )

The money and credit system becomes necessarily unstable, however, when the monetary demands in the form of interest grows substantially faster than the profits from which they must ultimately be financed. More generally: when the real economic growth of the social product remains below real interest rates for long periods, the risk of a financial crash increases. The risks for financial investors grow correpondingly, and interest rates therefore can not substantially sink. This is because investors will only be prepared to invest their funds in high-risk investments when the interest rates are high enough. A once-created situation of financial instability has the characteristic of reproducing its own prerequisite, that is, high real interest rates. jf Ninth: The high interest rate level in the U.S. also held a risk premium for foreign investors, and was therefore necessarily higher than interest rates in countries with "strong" currencies. This guaranteed that the U.S. remained the potter's wheel of the international monetary and ^credit markets. This was true for New York as well as for Chicago, where by far the largest options and futures markets emerged in the 1980s. The ^"centrality" of the U.S. is not based anymore on the superior productive power of the U.S. economy, but on comparatively high interest rates and on investment opportunities offered to monetary investors in the U.S. or [in other credit markets. The current dominance of the US is therefore ^primarily a monetary dominance, and can become endangered through every financial crash. Any financial crisis which would bring the U.S.

credit system with it would simultaneously be a hegemonial crisis, because the decisive medium the U.S. dollar and the institutions which regulate the system, would be knocked out of action. Tenth: In comparison to the 1960s or 1970s, entrepeneurial activities are shifting from the production of goods and services to financial i n vestments. This changes the "entrepeneurial culture." Short term orientation takes precedence over long term planning; the tendency to liquidate as much fixed capital as possible gains momentum; rather than accumulate productive capital through productive investments, existing assets of firms become centralized. Enormous amounts of credit enter the game here because the takeover of firms is financed with debt for which the purchased firm must be responsible (Leveraged Buy-Out or LBO). The rules of this game can not be any different than they are. The investment firm Kohlberg Kravis Roberts & Co (KKR), which became famous for the largest takeover in economic history, has acquired corporations since 1984 valued at a total of $52.3 billion. The takeover of RJR Nabisco in 1988 alone accounted for $25 million. The purchase price was financed up to 93.1% (or $48.7 billion) with credits. The high liquidity level of the U.S. financial system obviously makes raising this amount of credit n o n - p r o blematic. As long as the loans are serviced, the amounts can be channeled time and again back into the LBO market. But in order for the interest and capital to be repayed, sections of the corporation must be liquidified. As a rule, the cash flow alone will not suffice. A firm transforms from a productive unit with fixed capital and (thousands) of employees into a medley of sellable pieces, all in the name of monetary earnings. Short term profitability has become the priority over long term development of the productive apparatus. Productivity is no more the goal; profitability and liquidity are. The fact that this is problematic becomes immediately apparent. When the productive basis of the economy disintegrates, or even becomes destroyed through the frenzy of financial speculation, and at the same time industrial jobs are destroyed, then the branches from which the fruits of capital should ripen (interest) are sawed off. The firms which pay homage to this "nouvelle philosophy" (or which must surrender to it as victims of speculation), not only encounter difficulties keeping long-term pace with the international competition, but also destroy the productive basis of their monetary castles in the air and thus the stability of the entire economy. Eleventh: The displacement of the economic process into the financial system currently bolsters the U.S.'s strength because nothing runs without Wall Street. But at the very same time, the world economic system becomes more unstable and susceptible to crisis. An objection would be appropriate at this point. The external indebtedness of the U.S. has helped finance the trade deficit with other Third World countries and has there-

fore generated export earnings for these countries which can be used to service their debts. The U.S. has also helped to undervalue the currencies of competitors through the overvaluation of the dollar. The dollar has also been strengthened as a means of payment, because world-wide financial transactions are still primarily made through the U.S. financial system. As a result of the foreign - financed trade deficit, however, internal protectionist coalitions have emerged, which may very well be dangerous for the future development of world trade. And: while the U.S. dollar is undoubtedly strong as a means of payment in the credit system, as a currency in international markets the dollar is overvalued and therefore structurally weak. The monetary strength of the dollar can only periodically cover its real weakness. The paradox is perfect: The U.S. dollar is strong as credit money, because it is weak as a currency. As a result, the fall of the dollar (like that of the 1970s) is as much a sign of weakness as its boisterous climb (the first half of the 1980s). This ambivalance is also responsible for the hefty swings in the U.S. dollar's exchange rate, although those adept in the flexible rate system assume that after a short exploratory process the rates would remain stable at the "right" level. The exchange rate fluctuations themselves necessitate financial transactions, alone to provide security against high currency risks as well as to stimulate speculation. This is one further cause of financial instability in the world economy. Twelfth: The dollar paradox mentioned above becomes a political dilemma which is difficult to solve. The U.S. has lost the hegemonial position. Therefore, the possibility of stabilizing the dollar as a currency through an improvement in its competitive position is limited. The stakes involved in a policy of strengthening the dollar in "Casino Capitalism" through higher interest rates are high, and are easy to lose. Sure, the other large industrial countries share in this responsibility. Aquiesence to the sirens of easy money in often shaky financial manoeuvers has hit the heavy cruiser of the U.S. economy in the foamy waters of the world economy. Perhaps it will be possible to steer between Scylla of the f i nancial crash and Charybdis of the trade war, without sinking. But probably only when ballast is thrown overboard: that is, when financial contracts are devalued. The October 1987 crash was the beginning. The real devaluation of credits and other financial investments of a lesser quality are next in line. A Way Out of the Vicious Circle Unlike the nature of previous hegemonial orders, financial markets today a re thoroughly internationalized and "national" economies are therefore

highly interdependent. This means that the crisis of the U.S. financial system is simultaneously a crisis of international financial markets. As a result, competing nations can no more economically, financially and politically avoid a crisis of the hegemonial power. It is especially impossible for any of these countries to detach from its axis and ascend as the new phoenix, as the "hegemonial cycle" theorists purport. After the first indication of a U.S. hegemonial crisis in the 1970s, the* informal but influential "Trilateral Commission" represented an attempt a t j international crisis management. Its participants included Jimmy Carter^ Raymond Barre, Kiichi Miyazawa, Kurt Biedenkopf and Horst Ehmke,representatives of the big multinational corporations with Rockerfeller^ Toyota and Sohl and not least the "corporatist" union leaders of DGBS (H.O. Vetter, Eugen Loderer) and IBFG. This represents an attempt at^ spreading the burden of the political regulation of the global system over; the Western European - U . S . - Japanese - triangle, or, an attempt the strategy of burden sharing. ^ The diagnosis reads that the U.S. is not able to perform the hegem-; onial role alone anymore. Yet no other similarly potent, national hegemonial power has appeared on the historical horizon. The well known, experiment fails; not a sound is heard from the Trilateral Commission.^ The following Reagan - Thatcher Kohl generation of neoconservative, politicians find the political regulation of economic relationships funda-^ mentally wrong, and place their faith instead in the self - regulating mechanisms of the market. Yet after almost ten years of the neoliberal> experiment, global disequilibriums are larger than ever. From the ddHj crisis to impoverishment; from balance of payments deficits to structuralj unemployment; these disequilibriums cannot be ignored under the rulers^ whitewash claims of comparatively high economic growth rates in the^ industrialized nations. One plausible analysis is that the system could-' function if "structural power" were to be established again - that is, if^ the regulatory competence anchored within international institutions weicj reestablished, and the dominance structure of "relational power" could be^ dismantled. But one must take into account that economic and political^ interests of, and in, Casino Capitalism have already begun to exeicise* political resistence against fundamental change. Wide sectors of the U-SL^ population are able to live very well under high debts which guarantee an^ "unearned" high standard of living, as long as creditors in the industrial^ countries voluntarily grant them credit, and the plundering of Third Woiid debtors meets no real resistence. But it is not only the U.S. who holds the Black Peter. It lies within the rational self-interest of all industrialized nations to curtail the financial system's instabilities: j

National, and above all international financial transactions must be controlled; the Basle Agreement between twelve industrialized nations of July, 1988 was a first step. This requires banks' minimum capital requirements to be dependent upon the calculated riks of loans. This does not yet signify control over the Euromarket, but it is a beginning; a relatively painless method of limiting risk. A more effective method of economic policy would be to vary the treatment of different types of international capital transactions. This could be based on Stackelbergs differentiation of whether they are "induced" by real transactions, or follow autonomously from them. Finally, similar to the proposal offered by Rudiger Dornbusch (1988, p. 1041), a unified tax system should be introduced which increases the costs of speculative (short term) capital movements and correspondingly enhances productive investments. Exchange rates must be stabilized. The Plaza Agreement (from New York) and Louvre Agreement, and the accompanying coordinated central bank intervention by the G - 5 nations, pulled the dollar down from its dizzying heights and shielded it from a free fall. But these measures are in no way sufficient. Central Banks, however, are presented with few alternatives due to the relatively small amount of reserves available for intervention purposes in comparison to the amount of private liquidity available within international currency markets. Even the billions of dollars already infused by Central Banks are more of a psychological signal than a materially effective market power. In order to expand upon the possibilities for political intervention, (real) interest rates must be lowered. This can only take place when the double U.S. deficit is reduced and the qualitatively bad loans (within the U.S. and with the Third World) are written off. Of course U.S. economic policy has just achieved the opposite, namely changed the regulations such that bad and nonperforming credits may be carried on banks' books. This prevents the collapse of banks and other financial institutions, and holds off crises in the short term. Lower interest rates would increase the options open to national economic policymakers - for example, options which could stimulate investment. Pressures on labor costs would decrease. These costs are currently so important due to the high cost of fixed capital resulting from high interest rate burdens. But the goal of curing structural unemployment is not only irrelevant to the interests of financial capital, it is actually structurally in opposition to them. Every time a small decrease in the unemployment rate is announced, interest rates sink. The money investors and speculators fear inflationary impulses and with them, an increase in interest rates, which in turn would lower the rates of

return on stocks. The international financial system as it functions today, so it seems, needs unemployment: a modern variation of class struggle from above at the end of the twentieth century. In a functioning hegemonial order, it is the hegemonial power which manages money and credit relationships. When such an order does not exist, concentrated international efforts must be undertaken. Realists even those satiated from the experiences of the Trilateral Commission correctly work from the assumption that the prerequisites for effective international political action do not exist. They therefore prefer national political variations, which certainly can only function within the tight marginal space defined by the conditions of international markets. Because capital costs (primarily interest rates) are international givens, the variables which remain to be manipulated are wage costs (wages and indirect wages) and strategies to increase productivity (technolocial promotion and modernization). Conservatives attempt to reach the operative goal of cost reduction within a context of high interest rates through strategies which increase the flexibility of labor; lengthen the period in which machines operate to shorten the depreciation period of invested capital; raise productivity through modernization of the national economy. Social Democrats prefer more of a "solidarist" solution: the high income groups should part with'a certain amount of their income for the benefit of the low income groups; they should also work less in order to enable the creation of employment opportunites and financial opportunities leading to new jobs - especially in the state controlled public sector. Social Democrats and Conservatives are therfore in agreement over the fundaments of the political options which should be pursued, although there are more than superficial differ ences exist in regards to surrounding measures directed at securing the consensus and dealing with compensation for the Unions. > Both cases opt for neomercantilist strategies based upon given world economic structures and processes, each of which attempts to optimize th* conditions of production for national capital. Global economic processes will be further destructed further in this way. They will also become the field in which national interests play out economic and political conflicts* Until the vicious circle is broken, not only will much water flow down the rivers Main, Rhein and Hudson; not only will many political attempts at coordination fail; but most likely a substantial amount of inflated financial claims (on the side of the money investors) and of debts (on the side of the debtors) will have to be flushed away in the stream...

References Aglietta, M. (1979): Theory of Capitalist Regulation The US Experience, London Altvater, E . / Hiibner, K. (1987): Ursachen und Verlauf der internationalen Schuldenkrise, in: Altvater, E . / Hubner, K./ Lorentzen, J./ Rojas, R.(eds.): Die Armut der Nationen. Handbuch zur Schuldenkrise von Argentinien bis Zaire, Berlin Altvater, E . / Hubner, K./ Stanger, M. (1983): Alternative Wirtschaftspolitik jenseits des Keynesianismus, Opladen Amin, S. (1989): Ansatze zu einer nicht - eurozentrischen Kulturtheorie, in: PROKLA, 75, Berlin Cuomo Commission on Trade and Competitiveness (1988): The Cuomo Commission Report. A New American Formula for a Strong Economy, New York Davidson, P.(1987): Finanzmarkte, Investitionen und Beschaftigung, in: E. Matzner et.al. (Hrsg.): Arbeit fur alle ist moglich. Uber okonomische und institutionelle Bedingungen erfolgreicher Beschaftigungs - und Arbeitsmarktpolitik, Berlin Dornbusch, R.(1988): The Dollar and the Deficit, in: Drager, Ch. /Spath, L. (eds.): The International Monetary System and Economic Development, Baden-Baden Economic Report of the President 1988 Gleske, L. (1988): The International Monetary System Today Between Claim and Reality, in: Drager, Ch./Spath, L. (eds.): The International Monetary System and Economic Development, Baden-Baden Kennedy, P. (1987): The Rise and Fall of the Great Powers, New York Kindleberger, C.P.(1973): The World in Depression 1929-1939, Berkeley Kindleberger, C.P. (1984): A Financial History of Western Europe, London Maddison, A. (1987): Growth and Slow Down in Advanced Capitalist Economies: T e c h < niques of Quantitative Assessment, in: Journal of Economic Literature, Vol. XXV Magdoff, H./ Sweezy, P.M. (1988): The Stock Market Crash and its Aftermath, in: Monthly Review, March 1988 Mandel, E. (1972): Der Spatkapitalismus, Frankfurt Mandel, E. (1980): Long Waves of Capitalist Development, Cambridge Minsky, H.P. (1986): Stabilizing an Unstable Economy, New Haven Modelski, G. (1981): Long Cycles. Kondratiefs, and Alternating Innovations: Implications for > U.S. Foreign Policy, in: Kegley, Ch. W./McGowan,P. (eds.): The Political Economy of Foreign Policy Behaviour, Beverly Hills Modelski, G. (1983): Long Cycles of World Leadership, in: Thompson, W.R. (ed.): C o n tending Approaches to World System Analysis, Beverly Hills OECD (1988): Economic Outlook, December, Paris Polanyi, K.(1978): The Great Transformation. Politische und okonomische Urspriinge von Gesellschaften und Wirtschaftssystemen, Frankfurt Schmidt, H. (1988): The Role of the Federal Republic of Germany in the Context of International Economic and Monetary Relations, in: Drager, Ch./Spath, L. (eds.): The

International Monetary System and Economic Development. A challenge to the International Economic Cooperation, Baden-Baden Snidal, D.(1985): The Limits of Hegemonic Stability Theory, in: International Organization, Vol. 39, 4 Strange, S. (1986): Casino Capitalism, London Strange, S. (1988): States and Markets. An Introduction to International Political Economy, London Suzuki, Y. (1988): The World Economy under Floating Exchange Rates, in: Drager, Ch./Spath, L. (eds.): The International Monetary System and Economic Development, Baden - Baden Thompson, W.R. (1983): The World - Economy, the Long Cycle, and the Question of World-System Time, in: McGowan, P./Kegley, Ch. W. (eds.): Foreign Policy and the Modern World - System, Beverly Hills Wall Street Journal 1 2 / 1 5 / 1988 Wallerstein, 1.(1984): The Politics of the World - Economy. The State, the Movements and the Civilizations, Cambridge Williamson, J. (1988): The Case for International Monetary Reform, in: Drager, Ch./Spath, L. (eds.): The International Monetary System and Economic Development, BadenBaden

Robert Guttmann World Money and International Economic Relations

One crucial aspect in the post-war evolution of the international monetary system is the relation between the use of the dollar as world money and the position of the United States (USA) in the global economy. The erosion of U.S. hegemony since the late 1960s has subjected that system to repeated incidences of instability. These have been followed by new policy initiatives of crisis - management which in turn have shaped underlying structural changes in the growth pattern of the world economy. In this paper I want to analyze this particular connection chronologically in order to identify its essential dynamics over the last two decades. That approach leads us inevitably to a key problem in the global economy today, how to manage the international monetary system when the principal issuer of world money, the USA, has become the world's largest net debtor. This contradiction contains a large potential for instability and is one of the crucial policy challenges of our time. We shall explore this particular point in greater detail. The Bretton Woods System

1944-71

In 1944 senior financial officials from the allied nations met in Bretton Woods (New Hampshire, USA) to create a new international monetary system for the post-war period. - Under this new system the US-dollar became the principal form of world money. The USA, then the absolutely dominant economic power, agreed to exchange dollars in the hands of foreigners on demand with gold from its reserves at a fixed price of $ 35 per ounce. This convertibility guarantee made dollars in international circulation as good as gold. - In addition, the official dollar-price of gold formed the basis with which to define fixed exchange rates between different national currencies.

Finally, Bretton Woods introduced new international monetary authorities to regulate the system. The International Monetary Fund (IMF) helped member countries with balance - of - payments difficulties to undertake appropriate adjustment programs by offering them shortterm loans in return for accepting tough austerity measures. And the International Bank for Reconstruction and Development (World Bank) offered developing countries long-term loans at concessionary terms for strategically important investments. These features bolstered global economic relations. The return to full convertibility of key currencies in the late 1950s, made easier by the new system of fixed exchange rates, encouraged trade between the USA, Japan, and Western Europe. The IMF and World Bank played an important role as catalyst for capital transfers to the developing countries (LDCs), thereby smoothing the transition from their colonization to political independence. Stable currency prices reduced uncertainty in foreign investment decisions and thus helped to spur the global expansion of multinational corporations (MNCs) and transnational banks (TNBs). In general, the extraordinary growth of world trade and capital flows in the 1950s and 1960s was a principal force responsible for the long post-war boom. Besides providing the institutional framework for stable and effective monetary arrangements between nations, the Bretton Woods system gave the issuer of world money, in this case the USA, a new form of seigniorage. Previously, in the era of commodity - money ("gold - standard"), this benefit was the profit a government could make on the coinage of money. In the modern era seigniorage has taken on a different meaning. When a national currency functions as world money, it has to be transferred from the place of issue, the domestic banking system, into international circulation. This can only be done by having the issuing country run balance - of - payments deficits with the rest of the world. Foreigners willing to hold that currency as international medium of exchange and reserve are then in fact financing the issuing country's external deficits on a revolving basis. This seigniorage benefit allows the national issuer of world money to run continuous deficits without having to face the normal external constraint of deficit - cutting adjustments1. Given chronic trade surpluses of the USA as the absolutely dominant global power, the only way dollars could flow into international circulation 1

Most mainstream economists consider money a "neutral" instrument and therefore tend to ignore this seigniorage benefit. And the few exceptions often have too narrow a view of seigniorage. For example, according to Charles KINDLEBERGER (1985) the United States operates like a bank v i s - a - v i s the rest of the world. This view ignores that countries are also market participants in international exchange and thus quite different from banks.

was through U.S. capital exports. The dollar - shortage abroad in the late 1940s required the conscious organization of such capital outflows. Those took the form of major military spending commitments overseas (e.g. NATO), foreign aid assistance (e.g. Marshall plan), and opening foreign markets for the investments of U.S. corporations and banks2. Bretton Woods thus offered the world community a "social contract" between nations. The USA was allowed to satisfy the global demand for its capital by means which strengthened its own power, while the other countries received in the process ample supplies of dollars needed for their participation in the global economy. However, Bretton Woods did not survive. It collapsed in August 1971 when the Nixon Administration ended the convertibility between dollars and gold. The realignment of exchange rates under the Smithsonian Agreement in December 1971 lasted only a little more than a year, and in early 1973 the major industrialized countries (ICs) began to let their currencies float freely in the foreign exchange markets. The demise of Bretton Woods was caused by several interrelated imbalances building in the system over years. - The limited gold supply was soon incapable of supporting the strong demand for global liquidity in the wake of rapidly expanding world trade. In addition, that supply was increasingly redistributed, with the USA facing a steady decline of its gold reserves due to redemptions and occasional speculative runs. Already by the late 1950s its reserves were inadequate to back all dollars in international circulation. That imbalance grew worse each year, with more and more international dollars becoming de facto inconvertible. In that situation the system could only survive as long as foreigners continued to have confidence in the dollar3. - That confidence began to erode in the late 1960s when the overvaluation of the dollar became increasingly evident. For one, U.S. inflation suddenly began to accelerate above the rates experienced elsewhere, without adequate compensation through sufficiently higher interest rates. In addition, other ICs had finally managed to catch up with the USA in terms of international competitiveness, most notably 2

3

The analysis of these capital exports as expressions of U.S. seigniorage by Harry MAGDOFF (1968) is a classic. U.S. gold reserves declined from $22.7 billion (equal to 68% of the non - Communist world's total gold reserves) in 1951 to $17 billion ( = 44%) in 1961 and $11.8 billion ( = 30%) in 1970. On the other hand total currency reserves of the capitalist world (except the US), which were all supposed to be potentially convertible with US goldreserves, rose from $13.8 billion in 1951 to $21.3 billion in 1961 and $49.7 billion in 1970.

West Germany and Japan. The overvalued dollar only reinforced this "catching up" process by making U.S. imports cheaper and its exports' more expensive. These forces began after 1968 to trigger downward, speculative pressure on the dollar4. Such currency speculation was greatly facilitated by the emergence o£f the Euromarkets in the 1960s. With growing supplies of dollars circulating overseas, it was only a question of time before foreign banks, and subsidiaries of U.S. banks accepted dealing in dollar - denominated; instruments abroad. In the absence of any regulatory costs banks could' affqrd to offer better rates on Eurodeposits and -loans while at the* same time avoiding the reach of their domestic monetary authorities/ This unregulated credit and payments system, operating parallel to the' official transactions between central banks, made it easy to shift funds* in and out of different currencies and countries. It thus became a very' efficient conduit for speculation against the dollar. Between 1968 and 1971 this speculation was mostly absorbed by foreign central bank' purchases of dollars, but that process broke down after the first trade deficit in nearly a century5. U.S. Strategies During the 1970s The underlying causes of this crisis in the international monetary system, the inconvertibility and overvaluation of the dollar, reflected the gradual erosion of the U.S. position in the world economy. Under Bretton Woods the USA had used its absolute dominance to reconstruct the world economy by means (i.e. capital exports, military expenditures overseas) which assured the expansion of its industrial and financial capital across the globe. The collapse of this institutional arrangement in 1971 marked correspondingly the end of the post-war Pax Americana. U.S. policy-makers suddenly faced a new challenge, namely how to assure at least relative dominance v i s - a - v i s the other advanced capitalist economies- Detente Between 1967 and 1971 the U.S. balance - of - payments deficit widened from $3.5 billion to $29.8 billion while its trade balance, the most direct indicator of a country's international competitiveness, moved from a surplus of $4.1 billion to a deficit of $2 billion. Rising inflation (with the consumer price index increasing from 2.9% in 1967 to 5.9% in 1970) and the sharp decline of interest rates in the recession 1969/70 further undermined the strength of the dollar. Between end-1969 and end-1971 private overseas investors reduced their dollar ~ holdings from $28.2 billion to $15.1 billion in a series of speculative "runs" out of the dollar. At the same time foreign central banks increased their official dollar holdings from $16 billion to $50.6 billion.

with the Soviet Union and the historic opening towards China in the early 1970s freed the USA to initiate a more aggressive strategy against its most important allies and trading partners in Western Europe and the Far East. A central aspect of U.S. strategy in the 1970s was to help domestic industry defend its market share against foreign competition. For example, Nixon's "New Economic Policy" in August 1971, which abolished the gold-dollar link, also included a 10% surcharge on imports. In addition, the USA used the deregulation of exchange rates in the early 1970s as an opportune moment to let the value of the dollar fall in foreign exchange markets. The cheaper dollar raised the costs of imports, while making exports more price - competitive. This gave U.S. industry some breathing room both at home and abroad. Normally, countries with large balance-of-payments deficits are forced (by speculators or the IMF) to combine currency devaluation with restrictive policies aimed at reducing domestic demand. In other words, they have to cut trade and budget deficits. Not so the United States! As the sole beneficiary of seigniorage it could escape such an external c o n straint. Its currency devaluation, rather than being part of a larger austerity package, was actually tied to precisely the opposite policy course. In 1971-3 both U.S. budget deficits and money supply expanded rapidly. These stimulative policies triggered lower U.S. interest rates and higher trade deficits which in turn caused the dollar to depreciate. That policy strategy, while helping to improve the U.S. trade p e r formance in 1973, also fuelled inflationary pressures. The rising external deficit in 1972 meant that the USA had pumped a lot of extra liquidity into the global economy. This led to a rapid expansion of world trade, with especially strong demand for raw materials. At the same time the suppliers of these commodities, paid across the globe, in dollars, suffered eroding profit margins because of the decline in the value of that c u r rency. Helped by strong demand and mounting speculation incommodities, they responded with massive price hikes. This process culminated in OPEC's quadrupling of oil prices in October 1973 in the wake of supply disruptions from the "Yom Kippur" war. Following the recession of 1973-5, the USA resumed more stimulative fiscal and monetary policies in 1976 to revive economic growth. Once again that policy reflation was accompanied by continued dollar devaluation (with its trade-weighted index declining from 105.6 in 1976 to 88.1 in 1979). Moreover, the USA undertook several measures to defend the near - monopoly status of the (constantly weakening) dollar as world money. These included gold sales from its specie reserves, the official demonetization of gold by amending the IMF-statutes in 1976, and using its veto power at the IMF to block new issues of Special

iwing Rights6. Finally, under U.S. leadership the ICs blocked longn investments by OPEC in their own domestic economies and encourd Eurobanks to lend out these surplus funds to debtor countries. This ^cling of "petro - dollars" expanded world trade and thereby supported global recovery. r Crash of 1979 rting in early 1978, the decline of the dollar began to accelerate for fl iety of interrelated reasons. U.S. trade performance relative to other ICs had worsened significantly, with its trade deficit moving from $ 9,5 billion in 1976 to $ 33.9 billion in 1978. That deterioration reflected in part a further erosion of U.S. competitiveness, with import penetration of U.S. markets growing despite a falling dollar. In addition, the depreciating currency made U.S. imports more expensive and exports cheaper. But these price effects tend to operate more rapidly than corresponding volume adjustments in trade. It simply takes a while before either import quantities are cut back or export volumes can grow enough to compensate for those price changes, fa the meantime a country's import bill increases (the price rises, white the quantity is slow to fall) and export earnings decline, the socalled J-curve effect. This deterioration in the trade balance, coupled wilth rising domestic inflation fuelled by more expensive imports, added the downward pressure on the currency. The continuous dollar decline after mid -1916 prevented the USA from reaching the upward leg of the J - curve, since volume adjustment lagged constantly behind devaluation - induced changes in ihc terms of trade. During the 1970s currency speculation grew in importance, attracted toy the price volatility in foreign exchange markets and facilitated by tfre global mobility of financial capital in the Euromarkets. This activity has a self-feeding dynamic. For example, market sentiments towards depreciation may spark a sell- off which drives down $ae price of particular currency. Confirmation of expectations and capital losses fox those holding on to the devaluing currency prompt additional currency sales, explaining the often observed "bandwagon" effect among -speculators. This is precisely what began to 'happen vis-a—vis the foliar in early 1978. Those IMF-issued SDRs were introduced -in 1968 to (Complement the dollar &s reserve unit and for official transactions between central banks.

In November 1978 the USA and other ICs agreed to support the dollar through a $ 30 billion package of currency swaps and U.S. bonds d e nominated in foreign currencies ("Carter bonds"). But by that time the expectational bias against the dollar had already grown so strong in the foreign exchange markets that the dollar - support program was simply "too little, too late" to stop the speculation against the dollar. Soon thereafter the global economy experienced its second "oil shock" when the same combination of accelerating inflation, dollar devaluation, and supply disruption at a time of high demand allowed oil producers once again to drive the price of oil sharply higher. This shock spilled rapidly into the foreign exchange markets, not least because OPEC members decided to diversify out of the dollar. Facing a combination of exploding inflation and a collapsing dollar, the Federal Reserve shifted its operating targets from keeping interest rates low to restricting the money creation process in the banking system7. This dramatic policy switch in early October 1979 caused interest rates to double within three months. Reinforced by selective credit controls on consumer debt in March 1980, that policy - induced squeeze plunged the global economy into its worst crisis since the early 1930s. The downturn 1979-82 was more than just a normal cyclical phenomenon. Instead it marked a historic turning-point in a structural crisis (i.e. stagflation) which had been building gradually since the late 1960s. Profit-rates in U.S. industry had peaked in 1966 and declined ever since. That profit erosion was accompanied by much slower U.S. productivity growth which made it harder for firms to keep costs under control and maintain their competitive position in the global marketplace. Throughout the 1970s U.S. firms had tried to counteract their profit erosion by pushing up prices. Those capable of charging extra-high prices without proportionate decline in sales volume could earn additional revenues. Moreover, rising inflation allowed firms to measure current i n vestment outlays and operating costs at a higher money-value (and thus as a smaller quantity of money) than later sales revenues. This created accounting - based "paper" - profits which masked actually falling profitability in U.S. industry.

After 1976 the Federal Reserve (the U.S. central bank) kept money-market (i.e. short-term) interest rates below inflation by pegging the socalled Federal funds rate on short-term inter-bank loans below a certain target level, refusing to raise its rate ceilings on bank deposits, and making lagging adjustments in its discount rate. In October 1979 this policy gave way to one which stressed tight restrictions on bank reserves (the "raw material" of private bank money creation) and less interest rise to whatever levels the credit markets would bear.

But accelerating inflation carried with it the seeds of spreading stag-^ nation, as "real" (i.e. inflation - adjusted) incomes of many economic agentq declined. The resulting shortfall in cash flows was often covered abj increased borrowing. Rising debt servicing burdens could then be relieve through continued inflation which devalued the principal of the debt. TM debt - inflation spiral became increasingly self-propelled, as incoig indexation spread, purchases were sped up to beat expected future hikes, and negative "real" interest rates encouraged further debt financings The dollar - devaluation strategy of the USA in 1971-3 and 1976*! was an essential part of this spiral. A lower dollar made it easier for U i industry to raise prices at a time when its dismal productivity performano actually eroded its competitive position in global markeks. As alreadj mentioned above, those two devaluation phases were tied to expansionar economic policies of the USA made possible by its seigniorage benefit The resulting increase in U.S. balance - of - payments deficits, besides pumping additional liquidity into the global economy, were then de-£act financed by all those foreigners willing to hold dollars. This debt - inflation spiral collapsed in the crash of 1979 and sub.* sequent mini - depression. The underlying reason for this collapse stagflation - induced financial instability. The gradual trend towards mot debt eroded balance sheets of many U.S. firms. With debt growing fastt than income, its burden on borrowers rose. Once borrowers becom heavily indebted, they often end up requiring additional funds just£t service their old debt. Such a situation can soon become a vicious cy<4 especially when interest rates rise and the share of short-term grows. tfj Creditors responded to this balance-sheet erosion of debtors^ tightening their credit terms to compensate for growing lending risks, reaction was most pronounced with regard to bonds and stocks, becai holders of these long-term financial instruments suffered large capil losses (i.e. price declines) in the wake of accelerating inflation8. The re suiting shift to short-term funding, besides further weakening the financii position of borrowers, tended to feed spreading speculation for capil gains from volatile price movements. This clash between the growing borrowing needs of already heavilyj leveraged debtors and creditors' revolts created after 1966 repeated "credit During inflationary periods interest rates will gradually rise. Older financial originally issued at lower coupon rates, will then have to be discounted at the nawj higher market rates. This leads to a decline in their present value (i.e.price) allows them to stay competitive with newer financial assets of the same type those higher rates. Holders of these older instruments experience however in devaluation process a capital loss.

crunches" near the cyclical peak (e.g. 1966, 1969, 1973, 1979). These grew bfforse with each business cycle, indicating a gradual intensification of the *Hagflation crisis. The process reached its historic peak in 1979. The m a s •liye speculative flight out of the dollar during that year gave the credit lovnch an especially dramatic international dimension. The dominant role fo|| the dollar as world money was now being openly questioned. OPEC ^Considered plans to require a basket of currencies for payment, and the p|EC introduced the DM-dominated European Monetary System. The policy reversal by the Federal Reserve in October 1979 must be understood not least as a response to this challenge, a dramatic step aimed at Jlistoring the strength of the dollar9. alp* JqUmational Crisis Management and Global

Recovery

The collapse of the debt - inflation spiral in 1979 - 82 left the world eco [Homy exposed to massive industrial overproduction and credit overextenjfion. By mid - 1 9 8 2 these classic crisis conditions threatened to get out of ^hand, as illustrated by several large financial failures in the USA (e.g. [^enn Square, Drysdale) and Mexico's default. This situation required Immediate policy responses in order to prevent a depression. The USA jjmpt this challenge in two different ways. One was the creation of a new [mechanism to deal with the debt crisis of developing economies (LDCs). She other was a dramatic switch to reflationary fiscal and monetary p o i s e s which managed to trigger a global recovery. ffi; 1) The international lender of last resort: The global debt crisis threat :ened the solvency of the U.S. banking system10. Monetary authorities had 30 react immediately or face a potentially serious banking crisis. The s u c ^Cessful bail-out of Mexico in August 1982 gave birth to a new lenderlast-resort mechanism which has been in active use ever since. Countries with debt servicing problems are first given short-term "bridging loans" by central banks of creditor nations or the Bank for International Settlements until a longer - term solution can be worked X out. >71 It should be noted that this monetary policy switch came during an annual IMF ajj*: meeting (in Belgrade) where Federal Reserve Chairman Volcker faced massive pres| sure from other ICs and OPEC to take action against the collapsing dollar. In 1982 U.S. bank claims on non-OPEC LDCs amounted to $ 1 0 3 - 2 billion or 154% of their capital. The 9 largest U.S. banks had lent an astonishing 227% of their capital I to LDCs.

The second step usually involves an agreement with the IMF. In return for accepting austerity programs to reduce deficits and bor- ; rowing needs, the country in question gets a small IMF loan. This agreement provides the "green light" for debt reschedulings by private banks which delay repayment and in certain cases may even'* J provide new loans to assure proper servicing loans of old debt. That multi-step crisis management was very much a U.S. initiative- It^ represented an informal coalition between the leading creditor nations*** international monetary authorities, and private Eurobanks. Its case-by case approach aimed at preventing the formation of a "debtors* carteP^I which would have given LDCs more bargaining power and made a debt*! moratorium more likely. It also had a clear bias in favor of the banks?? Defaulting LDCs received just enough cash to make interest payments^ which then flowed right back into bank income statements. In the process; the repayment of maturing LDC-debt was continuously delayed and/or* funded out of additional credit. This "rollover," often at higher interest, rates and with additional fee income, enabled U.S. banks to avoid clas-* sifying most LDC-loans as non - performing and even increase their1 profits11. | This international lender of last resort, while protecting the banks, ha$£ actually deepened the global debt crisis. For oner it subjected LDCs tof brutal austerity programs whose negative effects on economic growth made! it even harder to generate the income gains for continued debt servicing.^ Moreover, its reliance on continuous reschedulings only added to the debt| burden of LDCs while depriving those countries from long-term invest-J ment funds. As a matter of fact, many LDCs actually experienced net| outflows of capital, because their interest payments to the ICs exceeded! new investments and loans from ICs 12 . With the global debt crisis increasingly a problem of long-tena| insolvency rather than temporary illiquidity, the crisis management had tin be adjusted in the last couple of years. In 1987 U.S. and British bankSj finally bit the bullet and set aside $ 23 billion in reserves to coved LDC-debt losses. Certain large debtor nations, such as Mexico, Brazil*! Nigeria, have been given longer-term funds in exchange for committing! themselves to structural reforms (e.g. relaxing restrictions on foreign vestments, privatizing the public sector, removing price controls)The ICM have even forgiven some of their official loans to countries in sub-| Saharan Africa. Most importantly, several innovative approaches have 11

12

U.S. regulators also gave banks great flexibility in deciding how to apply accounting rules for problem loans, loss - reserves, and reschedulings. ^ Laurie TARSHIS (1987) presented a concise analysis of these detrimental and oftca; perverse effects of the current international lender - of - last - resort mechanism.

introduced recently to allow debt retirement and burden - sharing between debtors and banks (e.g. discounted loan sales, exit bonds, debt-swaps). Irrespective of these recent developments, the deepening of the global debt crisis threatens a serious rift among the creditors. Japan, the EEC, and the IMF all agree that more debt relief is necessary to help the LDCs out of their economic depression and political turmoil. Towards this objective they want the IMF to introduce a "debt facility" which would buy up LDC debt at a discount and guarantee new LDC loans. The [Reagan Administration has resisted this more lenient approach, not least [because it does not want to burden American taxpayers and abandon its country-by-country approach. Instead the USA wants to continue current : policies, emphasizing especially wider use of socalled debt-equity swaps. "Besides retiring old debt at a discount, these swaps allow multinationals to acquire LDC assets at very low prices. 2) "Reaganomics" as a form of global Keynesianism: The cornerstone of what is now commonly referred to as the "Reagan Revolution" were radical changes in fiscal policy in mid-1981. Massive reductions in both personal and corporate income taxes combined with large, multi-year -increases in military spending and selective cuts in anti-poverty programs. . As a result U.S. budget deficits, already made larger by lower tax rev^enues and rising outlays for entitlement programs in response to recession [("automatic stabilizers"), grew rapidly after 1982. jV The neo - conservative supply - siders advising Reagan predicted that ^the reduction in marginal tax rates (from 70% to 50% for the top rate) I would act as a powerful incentive for increased savings and investments. jjBut these predictions failed to materialize. High-income groups use their ^windfall gains from the tax cuts mostly for additional consumption. The [proportion of disposable income put into savings actually declined, [reaching a record low of 2.9% in 1987 (compared to a long-term trend [average of 6%). Corporate investment, after an initial surge to make for ^project delays and cancellations during the recession, did not grow much [after 1984 because of continued excess capacity in many industries. The limpact of Reagan's fiscal policy changes, rather than following the supply-side blueprint, gave us instead old-fashioned Keynesian stimulation. |The result was a deficit - driven and consumer-led recovery. Once the recovery had safely gotten under way in 1983, its precise t course was increasingly shaped by monetary policy. After mid-1982 the I Federal Reserve switched to a more accommodating course. Much of the jrapid growth in the U.S. money supply between 1983 and 1986 was ^required to compensate for the decline in money's velocity, a highly u n H,

it

uration of dollar - holdings by foreigners. Should this occur, capital inflows^ slow down, interest rates shoot up, and the recovery is aborted. ^ Such a recession is precisely how the market mechanism forces needed^ adjustments in response to untenable imbalances. In its wake U.S. excessg spending is eliminated, and its trade deficit is lowered. But this markeffl "solution" carries major dangers. U.S. budget deficit would increase due toj fiscal stabilizers, thus making it more difficult to lower American dependence on foreign savings. Moreover, given the importance of U.S markets for other economies, its downturn is bound to spread abro Such a globalized recession would undermine the ability of the USAjk shift into trade supluses. For these reasons U.S. policy - makers decided to initiate a gradual adjustment process as a better alternative. - In September 1985 the Reagan Administration abandoned its ' market" approach to currency prices in favor of active exchange -rate^ management in cooperation with other industrial nations. The socaltaj^ Plaza Agreement committed the "Group of Seven" ( G - 7 : USA, Japan** West Germany, Britain, France, Italy, and Canada) to manage a&jj orderly and gradual decline of the dollar. For the first time since the* collapse of Bretton Woods the leading central banks cor themselves to coordinate their interventions in the foreign exc markets. After Years of stalemate over budgetary priorities,. Congress and White House decided finally in December 1985 to tackle the record^ high budget deficit (of $220 billion in 1985) through passage ofGramm - Rudman - Holtings (GRH) Act. This law set annual reduction targets to reach a balanced budget within 6 years. Failure"! pass a budget within $10 billion of the specified deficit target f o r j t year would trigger automatic across-the-board spending cuts. ~~ were to be evenly divided between military and social exper except for nine welfare and entitlement programs already cut earlier**! Together these two steps aimed at a gradual and simultaneous of the twin deficits, thereby balancing fiscal restraint with stimulation lower interest rates and an improving trade performance. If this str succeeds, the U.S. economy could manage the transition from cansumpr tion-driven to export-led growth without causing the dollar to cc~ or pushing the world economy into recession. The timing and magnitudesT of the underlying shifts required for this transition are of key importance*To use an apt metaphor, this deficit - reduction strategy is akin to driviM , « 14

For an excellent discussion of the GRH Act and its far-reaching implications $m Henry AARON et alii (1986).

a^not so new car (the U.S. economy) on an icy road and trying to use the brakes and the accelerator at the same time. •f At first the dangers of this policy course were obscured by promising signs of progress. Spending cuts under GRH in March 1986 initiated a llow decline in the budget deficit which accelerated after passage of the Tax Reform Act six months later. Moreover, the G - 7 managed to keep Jhe dollar - decline under control and reinforced their Plaza Agreement by two rounds of coordinated interest - rate reductions in 1986. These p r o vided monetary stimulus to keep the global recovery rolling, while at the same time maintaining the interest - rate differential required to keep foreign capital flowing into the USA. And Japan allowed larger budget deficits to increase domestic consumption and thereby reduce its trade surplus. But by early 1987 the situation began to deteriorate. The decline of the dollar did not have the desired effect. The U.S. trade deficit actually widened from a monthly total of $11.4 billion in January 1986 to a peak of $15.6 billion in September 1987. This deterioration was due to the aforementioned "J-curve effect", aggressive price strategies and advantages fa product quality by foreign competitors, and the failure of the dollar to depreciate against some currencies of countries with large surpluses (e.g. South Korea, Taiwan, Mexico). By late 1986 reports of worsening trade figures triggered repeated speculative runs out of the dollar. To counter the accelerating dollar - decline, the G - 7 decided in February 1987 to stabilize currency prices within flexibly defined target ames. That socalled Louvre Aqreements came right after private foreign Investors had finally stopped their net acquisitions of U.S. debt instruments. It succeeded because of massive central bank interventions (with European and Asian central banks buying $115 billion in 1987), coupled $ith higher U.S. interest rates. These, however, destabilized domestic capital markets which culminated in the stock market crash of October 198715. ^ That crash was contained through a successful combination of lenderof-last-resort intervention and market manipulation (i.e. stock buybacks by corporations, selective trading suspensions, using specialist traders to mark up prices of key stocks, and targeting a strategic stock-index futures contract for an artificial rally at a crucial moment). In its i m mediate aftermath the Federal Reserve drove both U.S. interest and ^ Higher interest rates depress stock prices for several reasons. They make long-term jZ debt instruments more attractive, thus causing investors to shift out of equities and ^ into bonds. Causing higher debt servicing costs, they reduce expected corporate profits - the basis of stock valuation. Finally, they raise the cost of credit (e.g. broker loans, t junk bonds) used to finance stock purchases.

exchange rates down. A budget summit between Congress and White House agreed to a 2-year deficit reduction plan. In December 1987 the, G - 7 reaffirmed their exchange - rate stabilization agreement within new" target zones. Those measures have so far prevented a recession. >l>. The Challenge of International Policy Coordination

^

One crucial point in our discussion of the international monetary system isj the tension between the dollar as primary form of world money and the; gradual erosion of U.S. hegemony. Repeatedly, in 1971, 1973, 1979, and 1987, this problem led to dramatic sequences of monetary instability which^ required major changes in institutional arrangements and policy. Gradual^ adjustments based on continuous dollar devaluation (e.g. 1971-3, 1976-9, 1985-7) have not worked. Each time this strategy eroded confidence in^ the dollar before it managed to improve underlying trade imbalances. ^ These failures of adjustment are no coincidence. They express serious flaws in the system of flexible exchange rates and competing key curren-^ cies. Historically such a system has arisen whenever the leading economic' power loses its absolute dominance and therefore can no longer maintain^ its currency as world money within established institutional arrangement^ (see the collapse of the gold-pound standard in 1931 and of the gold-^ dollar standard in 1971). In both instances, during 1931-44 and 1973-87, L flexible exchange rates encouraged competitive devaluations. This form of? monetary protectionism contributed in turn to the disintegration of the., world economy into separate and increasingly adversarial power blocs,'a^ can now be seen by U.S. emphasis on bilateral agreements (e.g. Canada^ Israel, Carribean Basin Initiative) and a tougher trade policy v i s - a - v i s ft(t; main competitors, Japans's aggressive efforts to increase its influence ,;fll; the Pacific Basin, and the EEC's preparation for a new level of economtt integration by 1992. The deregulation of exchange rates (in 1973) and of interest rates (in 1979/80) made those two key prices of money much more volatile. This attracted a lot of speculators hoping for rapid capital gains from correct guesses about short-term price movements. Helped by financial innova^ tion (e.g. Euromarkets, financial futures), this activity became the dominant force in the world economy16. Currency speculation tends to exacerbate underlying imbalances in trade and capital flows which in turn may feed y 16

According to official estimates (see Michael ANDREWS, 1984; BANK OF ENGLAND, 1986), the daily volume in foreign exchange transactions now absorbs lp to $200 billion of which about 80% constitute short-term capital movements for speculative gains.

the instability in currency markets. Moreover, no single country has enough reserves to defend its currency against a determined speculative attack, as found out by Britain's Labour Party in 1975, Carter in 1979, the SPD in 1980, or France's Socialists in 1983. The Louvre Agreement of February 1987 must in this context be seen as an important change in the management of world money. Its immediate objective, the stabilization of currency prices within flexibly managed target zones, discourages speculation by providing for coordinated central bank interventions and reducing exchange - rate volacility. Moreover, Louvre marks a first step towards a new institutional framework of international policy coordination. No amount of central bank intervention can keep exchange rates stable over time, unless the leading ICs bring their respective policy mixes into better balance to remove underlying imbalances in trade and capital flows. First examples of this process were the simultaneous interest - rate reductions in the USA, West Germany, and Japan during 1986 and current efforts of these leading powers to address their fiscal policy mismatch. Under the Louvre Agreement the G - 7 countries have also agreed to introduce an economic surveillance system, including country-bycountry forecasts and commodity prices (e.g. gold, oil), as the basis for their regular reviews and policy decisions. In an effort to move this pro:cess along U.S. Treasury Secretary James BAKER suggested in May 1988 that the G - 7 countries begin coordinating "structural reforms," such as tax Revision and financial deregulation, as well as macroeconomic policy. In ^addition, he also proposed to strengthen the surveillance apparatus by [establishing "monitoring zones" for key economic performance indicators. |Under this new review system countries would have to consult other G - 7 [members about possible remedial action if their indicators fell out of the nones. P^ This gradual movement towards international policy coordination is a Jjyproduct of an increasingly interdependent and polycentric world e c o iomy. Dramatic advances in computer and telecommunication technologies Jiave accelerated the trend towards globally integrated production networks £Uid financial markets. This has been accompanied by a growing dependjpnce of all national economies on trade, as stagnating markets have forced producers to expand abroad. Even more importantly, the post -1982 Recovery has depended above all on managing the LDC debt crisis, pport-led growth strategies, and the huge U.S. budget and trade deficits r8S the engine of worldwide stimulation. This global growth pattern, forcing jthe USA into an open economy, requires very different stabilization p o ftcies than the essentially closed U.S. economy of yesteryear. But this growing influence of international policy-making is by no itneans a smooth process. While the internationalization of capital accu-

mulation and resource mobility has obviously reached a qualitatively new level in the 1980s, the world economy is still very much dominated by its institutional organization in nation - states and their pursuit of national interests. Capital is at once both international (in its expansion drive) and national (as social organizations operating within country - specific institutional settings). This double - existence means that multinational corporations and transnational banks compete with each other also as natumoi, capitals whose conflicting interests are defended by their respective nation - states. That complicates international policy coordination, especially today when the leading economic powers (i.e. USA, EEC, Japan) face each other as relatively equal rivals battling for global domination. This problem is clearly reflected in the Louvre Agreement as well' The USA is pushing Germany and Japan to reduce their surpluses by reflating their domestic economies, while those two powers insist on stronger U.S. efforts to bring its twin deficits under control. This struggle over the distribution of adjustment burdens is accompanied by a plethora of conflicts over trade issues and military burden - sharing. ConsequentJy, efforts to institute more formal mechanisms for coordinated policy ad-, justments have been hampered by the resistance of governments to see their power over domestic policy-making subjugated to an international body. In this context it is important to understand that the primary objective of recent U.S. proposals for coordination of "structural reforms'! and "monitoring zones* was not so much to strengthen Louvre's policy apparatus, but to prevent more ambitious initiatives by the EEC or Japan for international monetary reform. ^ Under Louvre, the U.S. still enjoys its seigniorage benefit at (he expense of the other powers. First of all most official interventions in the foreign exchange markets come from the other G - 7 countries, with the European and Asian central banks buying about $125 billion in 1987 akme to keep the dollar stable. These central bank purchases of dollars are then immediately reinvested in U.S. government securities. A major portion of America's twin deficits has thus been financed by foreign central banks. But their loans do not appear as a U.S. liability in its official accounts1** In other words, these loans do not require the USA to collect a corrresponding sum from American disposable incomes through borrowing 17

In 1976 the U.S. Treasury reformed its balance - of - payments accounts to .avoid acknowledging that holdings belonging to foreign central banks were a liability for the USA. This move, a dramatic expression of seigniorage, was justified on the grounds that after the closing of the gold window in August 1971 foreign monetary authorities no longer had any claim on U.S. official reserves. At the same time dollar - purchase* of central hanks expand their domestic money supplies by creating additional powered money" (i.e. bank reserves).

and/or taxation. Consequently, these incomes remain available to be spent on imports. Once again the USA can escape the burden of adjustment, while the other countries have had to neutralize their dollar purchases by restricting domestic money creation. It borders on hypocrisy for U.S. policy - makers then to accuse Germany and Japan of conducting overly restrictive monetary policies. What would the level of U.S. interest rates have been without this support from foreign central banks? The Louvre Agreement is therefore incapable of dealing with the structural imbalances between the G - 7 through properly balanced a d justments. It does not address the fundamental problem of having the dollar as world money when its issuer, the USA, has become the world's largest debtor nation. On the contrary, it actually aggravates that problem, since it allows the USA to avoid necessary adjustments by abusing its seigniorage. Ultimately, the problem can only be dealt with by replacing national currencies as world money with a global payments system based on supra-national credit-money (e.g. an extended version of European Currency Units or Special Drawing Rights)18. Voluntary creation of such a system is unlikely, given today's dominance of clashing national interests in a polycentric world economy. This next stage in the historic evolution of world money will only occur, if and when policy - makers respond to global crisis and deepening conflicts by increased cooperation. 4 References Aaron, H. et al. (1986): Economic choices 1987 (Brookings Institution: Washington D.C.) Andrews, M. (1984): Recent Trends in the U.S. Foreign Exchange Market, in: Federal • Reserve Bank of New York Quarterly Review, 9 (2), pp. 3 9 - 4 7 . Bank of England (1986): The Market in Foreign Exchange in London, in: Quarterly i Review, September, pp. 379 - 382. Guttmann, R. (1985): Crisis and Reform of the International Monetary System, (Thames Papers in Political Economy: London, U.K.) Kindleberger, C. (1985): The Dollar Yesterday, Today, and Tomorrow, in: Banca Nazionale del Lavoro Quarterly Review, pp. 295 - 308. Magdoff, H. (1968): The Age of Imperialism (Monthly Review: New York) Tarshid, L. (1987): Disarming the Debt Bomb, in: Challenge, May-June, pp. 1 8 - 2 3 .

h

Editor's note: For reasons of space-saving some tables which are not necessary for understanding have been omitted in this contribution.

18

See Robert GUTTMANN (1985) for a detailed discussion of such a proposal for supra - national credit - money.

y Hansjorg Herr On Post - Keynesian Crisis Theory: The Meaning of [Financial Instability k *

P V £Since the seventies the world market is experiencing a deep transformation that can be characterized by the breakdown of the system of Bretton 'Woods, monetary and exchange - rates instability, the extreme increase in [international indebtedness etc. These developments are mutually connected r,with the decline of the USA as a hegemonic power and the extreme [mercantilism by medium and small countries. Often it is put forward that Jthe main reasons for instability can be found in the decline of profit•fates and productivity growth especially in the United States, the evolution Of new financial instruments and the growth of external unregulated capital markets (cf. Altvater, Hubner and Guttmann in this book). I would like to stress some other theoretical points which lead to some differences in explaining the instability of the world economy and in the interpretation ;of the economic history as well. F "

L" World Money and Hegemony W' Within an international production economy with integrated goods and ^capital markets a (stable) world money is needed. This is not even p r i marily the case because a common clearing standard a numeraire - is required. Rather, there is a need to hold world liquidity and financial Assets in an adequate form. In other words, there must be a medium for the payment of international trade flows, a medium in which world l i quidity can be held and international debt agreements be concluded. In a taoney economy, international individual and institutional actors - central J^anks etc. thus have a desire to hold their monetary hoardings as well p other assets in a globally recognized form. The national currency which |crves as an international standard of credit contracts and international de, as an international store of wealth etc. becomes world money. It is

the result of the portfolio decisions of internationally acting property owners and institutions.1 International wealth owners have not only to decide whether to hold their portfolio in real capital or financial assets, they have also to decide in which currency they want to hold their wealth. Of course, they willt hold their portfolio in the currency with the highest expected profitability. This is especially important for financial assets as money is easily transferable from one currency to another. Contrary to the view maintained by orthodox theory, international capital movements are not exclusively determined by interest and profit rate differentials and short - term exchange rate expectations. The Keynesian theory assumes that the "state of confidence" is a central determinant of capital flows which may over-> compensate impulses such as interest rates. Each currency has a certaiaj property protection quality which depends on the expected long-termprice stability of the currency, its long-term likelihood to depreciate or, appreciate, its share of the world capital market, the expected political; stability of the country and so on. Formally, the property protection quality of a currency - the "state of confidence" in a currency - may be| expressed in terms of a non - pecuniary rate of return or a liquidity^ premium which, combined with the pecuniary rate of return, determines^ the total value of an investment in a given currency. The idea of a "state of confidence" and "liquidity premium" was established by Keynes (1936)* to transform the uncertainty of the future into a calculus that explains the5 portfolio decisions of wealth owners. In Keynesian thinking the "state ofconfidence" cannot be seen as a mechanical outcome of certain economic^ indicators such as current account deficits, growth rates etc. It is a cat- ' egory that must be filled by historical, political and sociological facts and it shows that economics is on the edge of science and on the edge of history (cf. Hicks 1979, p. 38). Hence it is not the equality of pecuniary

i'**: 1

Marx, who in his time stressed more than anyone else the character of money as"lB' expression of abstract social property, has a suprisingly clear conception of woHd money. "World money functions as a general means of payment, a general means' 'of buying, and the absolute social material of wealth in general (universal wealth). Thi^ function as a means of payment for equalizing international balances is predominatf*' Thus the motto of the mercantilist system trade balance" (Marx 1890, p. 159 fy Marx 1894, p. 330 ff.). Marx failed to recognize that gold does not generally havrtft function as world money. Rather, its appearance indicates the erosion of a nartohll world money. At the same time, however, he recognized that the money function* cannot be suppressed by a national currency, but rather that gold as "universal weaJthT will always emerge as the ultimate security for property owners.

rates that sets the norm for market equilibrium between nations. Rather, an equilibrium requires unequal national pecuniary rates.2 The property protection qualities of the different moneys create a hierarchy of the different world currencies with large and stable currencies at the top and small and instable currencies at the bottom. Large currencies have a high liquidity premium because they are especially useful for international transactions and have a large and deep capital market. Certainly there are economies of scale with the growth of a currency. Large currencies must not be the most stable ones, and they might not be the best ones as an international store of wealth. Medium currencies like the German Mark - or even small currencies like the Swiss Franc - are able to challenge a large currency like the Dollar in certain functions. Of course, a large and stable money is at the very top of such hierarchy, which means that world money must always be a large and stable currency. In general, world money is the national money of the hegemonic nation. In Keynesian theory a (relatively) stable price level is an important precondition for functioning money economies since only a medium with a stable value can fulfil property protection functions (cf. Keynes 1936, p. 212, Kregel 1980, Davidson 1980). Fluctuations in the value of money are damaging to various money functions and lead to cumulative processes (cf. Riese 1986). Thus inflation has a destructive effect on the liquidity premium for money and ultimately results in a massive exit from financial assets and the erosion of the monetary system. Deflation increases the benefits of holding money and leads to a "flight into money". In addition, movements in the price level alter real debts and in this way induce .cumulative processes e.g. when during a deflation a growing real debt results in debt crisis and the insolvency of debtors (cf. Fisher 1933, Minsky 1975). World money as well will be unfavorably affected if its value is constantly fluctuating. The erosion in the value of a world money vis-a-vis other currencies will, like inflation, sooner or later lead to the erosion of the world money. Depreciation does not necessarily result in an immediate massive flight out of the currency - it is offset by the fear of ^realizing depreciation losses. In the long run, however, it will undermine the property protection function of a currency. Appreciation, on the other jjuuid, will stabilize the property protection function of world money. Since [Jfc For example, the equilibrium between two countries in respect to credit contract can be put forward in the following way. If i a is the interest rate and l a the (marginal) liquidity premium of credit contracts in one country and i b and l b in another country the portfolio equilibrium between the two countries is i a + l a i b + lb* The f t country with the higher liquidity premium can in equilibrium afford a lower interest I h rate (cf. Riese 1986,p. 234).

in addition to non - pecuniary rates of return additional pecuniary yields in the form of appreciation gains can be realized, there will be a movement into world money. An appreciation in world money will increase the real international indebtedness of debtor countries and will, like deflation, create the danger of international debt crises. Within a regime of integrated international capital markets fluctuating exchange rates are dysfunctional and have a destabilizing effect on the world economy. If exchange rates are fluctuating, an international portfolio holder must be constantly on guard not to have assets invested in a depreciating currency. Within unregulated international capital markets flexible exchange rates thus fundamentally increase the insecurity of international investments. "It is evident that a monetary theory that places the disposition over assets at the center of economic analysis will derive the necessity of stable exchange rates thus offering a counterproposal to neoclassical monetary theory which, based on real flow, regards the fluctuation of exchange rates, as more generally the fluctuation of prices, as a result of altered allocative conditions." (Riese 1986, p. 283) Particularly relevant in this context is the stability in the value of the hegemonic currency. If fluctuations in the exchange rate of world money are strong and recurring, the international monetary system will necesssarily be destabilized through the uncertainty of exchange rate developments and extensive liquidity shifts from one currency into another. The stability in the value of a hegemonic currency is thus a desideratum of an international money economy fully analogous to the desideratum of a stable price level within nations. The stability in the value of world money does not primarily require a framework of institutionally fixed exchange rates. The most important factor is stable market conditions in the world economy. Legally fixed exchange rates may at best reflect such stable market conditions and constitute an additional stabilizing element. The desideratum of a stable internal and external value of world money leads to a further basic requirement. World money as any money accepted by wealth holders - must be in short supply, i.e. the monetary policy of a world money producing nation must be restrictive u its currency is in danger to depreciate. If a world money producing nation violates this requirement, it will destabilize its hegemony at least in the area of international financial relations. World money has a "real" and a "monetary" basis. The "real" basis means that the producer of world money must be an important economic, political and military nation a wor 1 power. It is hard to find a general theory of the rise and fall of won power. At least Keynesian economic theory must take the "real" basis of a world money producer as exogenous. But the "real" basis of hegemony 1 not enough to become the producer of world money. The hegemony nation has to keep its money short in supply to establish its money

world money. Of course, if there is an extreme economic, political etc. dominance and even not a limited competition between different national currencies, the national currency of the hegemonic country becomes the "natural" world money. But even in this case an inflationary policy of the hegemonic nation destabilizes the world economy. But this case is not very interesting as in history there are always second or third countries which challenge the hegemonic force at least partially. In this context it can be assumed that an undue expansion in world money supply will lead more rapidly to the erosion of a world money than a "real" economic decline of hegemony. Thus an erosion of world money is possible even under a stable "real" hegemony. By contrast, a world money producing nation can conceal a declining "real" basis for a long time by keeping its money tight. Obviously, a world monetary system will be destabilized in a particularly fatal way if both the "real" basis of hegemony is weakened and world money is not kept in short supply. A stable hegemonic position is connected with the role of creditor in any case Britain before World War I and the United States after World War II were net-creditor nations. There are a number of theoretical arguments that can account for this fact. A creditor nation is in a much better situation than a debtor nation to attract capital inflow and restrict capital outflow, thus stabilizing the exchange rate. It is obviously easier to provide fewer loans than it is to secure additional loans (cf. Keynes 1913, p. 15 f.f.). Moreover, payments of interest and principal stabilize the exchange rate of a creditor nation. Thus a creditor nation may very well have both a negative trade balance and a positive current account, and still further expand its creditor position. This constellation was typical for Britain under the gold standard (cf. Ford 1962, Bloomfield 1959). There is, however, a more fundamental argument for the necessary concurrence of hegemonic position, world money, and creditor role. It is the logic of debt agreements that they are always honored in the "credrtors money". If the debtor could pay his debts with money he has Produced himself, the debt agreement would be worthless to the creditor since he would be dependent on the goodwill of the debtor. In short, ebt agreements will imply a real obligation only if the debtor cannot rbitrarily dispose of his debt by increasing and depreciating the "debtor's °ney". Applied to the world economy, this means that international jedit agreements can only be concluded in the creditor's currency. If nat a g r e e m e n t s c o u l d b e honored in the debtor's currency, the debtor 0 n would be in a position to dispose of its debt by promoting inflation an(J bee 3 m a s s * v e devaluation. If the world money producing nation itself mes a debtor nation, international credit agreements will be subject to a ..° ral h . a z a r d " s i n c e it will be easy and tempting for the hegemonic n atio° n to dispose of its debts by printing money.

The world money producing country can be considered as functioning as a bank (cf. Minsky 1979). It realizes high short term capital imports and high long term capital exports. This means that a reserve currencyv country earns the income of a banker. But much more important is that' the hegemonic banker can act as a world economic trend-setter via international credit expansion - analogous to a national credit - accumu - * lation mechanism (cf. Herr 1986). A hegemonic nation in any case is able' to impose globally a common macroeconomic policy and prevent theJ erection of (economic) blockades between nations. If the hegemonic nation1 keeps its money stable, generally second and third nations will passively' follow its economic leadership. To resist against a stable hegemonic country would only be damaging to smaller nations themselves. For s m a l ler countries it might even be advantageous to follow the economic course' of the hegemonic power and profit as free rider. Of course, not all' countries must benefit within a hegemonic system, but there are "peer groups" likely which gain from the regime. The situation just described can clearly be seen under the gold standard during the last century. An expansion of international credits in pound stimulated the world economy,' which in Britain manifested itself in an increase in both exports and imports (cf. Ford 1962, p. 73 ff.). The United States assumed this role^ after World War II. In the fifties and sixties, the USA clearly were the^j locomotive for the world economy since nationally as well as internation-^ ally they were able to keep the world economy on an expansionary coursed through credit expansion. y^K Unfortunately the role of an international banker makes it necessary tc^ remain like any banker liquid. That means that a world money producing^ nation must be able to influence easily international capital flows manage its cash flow. A very good measure for the stability of a hegem«£| onic nation is its ability to create a positive cash flow without high inter est rates. A stable hegemonic leader can influence its cash flow by small^ interest rate variations on the basis of a high liquidity premium of its' money, a weak hegemonic power which has lost the confidence in its" money is forced to use high interest rates which are damaging to itself and the world economy to control its cash flow. Again this argument points out that a creditor position is a vital element of a stable monetary hegemony. It can be argued that a positive current account is a vital sign of the creditworthiness of an international banker and property owner are only fond of holding "deposits" in a country that has a current account surplus (cf. Padoan 1986).

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The Instability of a Multi-currency Standard

A crisis of a world money will cause considerable disruptions in the world economy. This is the case because capital flows become instable, cumulative processes are triggered off and generally the uncertainty of economic developments intensify. The erosion of a world money can be the result of a substantial reduction of the "real" power of a hegemonic force and the appearance of strong competitors in the economic, political and military field. The erosion might as well be the result of an inflationary policy of the world money producing nation which destroys the property protection quality of the world money. In the last case the hegemonic nation is no longer willing to provide the international public good of a stable world monetary system (cf. Kindleberger 1986). But to give a sketch of the working of a multi - currency system a substantial "real" erosion of hegemony is assumed. If there is no longer a dominant world money or no country that from its "real" power is determined to become the producer of world money, the world economy will slide towards a multi - currency standard since now the national currencies of a (few) number of strong economies can assume world money functions. If there are several potential world moneys, then in the eyes of portfolio holders several currencies will have potentially high non - pecuniary rates of return. Up to this point the •situation is not serious yet since, even under the stable hegemony of one (currency, subordinate currencies have (lower) non - pecuniary yields. The Specific character of a multi - currency standard consists in the fact that [even a minor impulse may quickly and erratically reverse the order of non-pecuniary rates and change the hierarchy of the different national [currencies. As a result, estimates of a currency's adequacy as world money [will become unstable, leading to equally unstable and cumulative capital [movements, a diversification in the holding of world liquidity, and radical [exchange rate fluctuations. There is no longer a safe place for interna[tional liquidity. Portfolio holders constantly have to guard against losing 'their assets through the sudden erosion of a world money. As a whole, uncertainty about global economic and monetary developments will increase. If there is a clearly dominant world money, the massive pulling out of this currency, given the lack of alternatives, is conceivable only if the confidence in this currency has been seriously upset. Under a multicurrency standard, however, there are alternatives. Slight impulses that may be exogenous to the economy and would have remained insignificant in a hegemonic system, under a multi - currency standard will lead to destabilization. In addition, fluctuating exchange rates under a multi - currency standard open the doors to currency speculation, which in itself becomes a destabilizing factor.

A multi - currency standard is characterized by a "merciless competition n the provision of central bank notes for the credit market" (Stadermann 1986, p. 199). International portfolio holders can force central banks into^ :ompetition with each other with the aim of creating a stable money since :hey have a choice between different currencies. The means of sanctioning ^ :entral banks consists in pulling capital out of currencies that, in the eyes jf portfolio holders, have lost their property protection function and investing it in currencies that better serve their future interests. As a ° result, national autonomy will usually be severely restricted under an expansionary macroeconomic policy. If one pole expands under a multi - ~ currency standard, the global expansionary mechanism of multiplying world economic activity characteristic for a hegemonic system will be destroyed. The expansionary pole is incapable of imposing its own economic policy : on other nations. Instead, it will move into an external imbalance with import surpluses. Virtually as free riders, other currency poles can pick up: export surpluses at home and expand their creditor position. If the: expanding pole loses its property protection function because of continuous import surpluses, a high inflation rate relative to other poles, etc., ther! currency will abruptly break down as a result of capital outflow or insufficient inflow. An economy is sucked into a depreciation cycle when the import quota is relatively high, increases in the price level promptly bringabout movements in money wages - an extreme case here is the indexing" of nominal incomes - and monetary policy takes into account the employment situation, financing the rise of money wages by expanding the money supply. Ultimately, the central bank of such a nation must stop the erosion of the internal and external value of its currency, otherwise the cumulative process will move towards the erosion of the national monetary system or a pulling out of the national currency in all its forms - into"* other currencies, gold, real assets, etc. The only market solution in order7 to stop a depreciation - inflation spiral is a high interest policy and a* r1t ; reduction in domestic production and employment. The competition between a few leading currencies will lead to an^ internationally relatively high level of interest rates. Here it becomes^ evident that there is no longer a hegemonic nation with globally relatively1 low interest rates in the long run. More important, however, is that under^f a multi - currency standard currency sieges are preprogrammed. If a nationr is confronted with the danger of losing its reserve currency function and is* confronted with massive capital outflows and depreciation, the only way to* defend its own currency will be through high interest rates. A high inter est policy aimed at offsetting a currency's deteriorating liquidity premium1 or to build up confidence in its currency are the distinguishing marks of ai* multi - currency standard. This means that a restrictive economic policy* becomes the instrument to save the stability of a currency with inter--

national functions. In such a regime the anticipation of the economic policy of nations - it can be spoken from Keynesian rational expectations - becomes a vital part of the state of confidence of a currency. A system with several potential world money producers has a striking political characteristic. As real economic factors do not decide which of the nations becomes the leader, monetary factors become a vital base of dominance. In such a system, generally the nation with the most restrictive economic policy, the lowest wage - increases, highest productivity gains, most stable internal political situation etc. becomes the producer of world money and the leading nation. The role of the DM within the European Monetary System is a good example for leadership which, to a large extent, is based on the resrictive monetary and fiscal policy of Germany and not on its real power in respect to industrial, military etc. strength (cf. Herr, Voy 1989, Herr, Westphal 1989). Countries experience the regime of a multi - currency system as a high uncertainty in respect to international monetary affairs. For a country a permanent positive current account and even better a positive trade balance - is an ideal instrument to protect itself against international monetary disturbances. This means that (trade) mercantilism is an instrument to save or build up confidence in a currency. Mercantilism is not an instrument to stimulate growth and employment in spite of the fact that a positive trade balance is identical with an export of internal unemployment. It is the reflection of a generally cautious attitude towards growth and a high preference for price stability (cf. Vines 1980). A rapidly growing country will not achieve current account surpluses as generally its growth will be restricted by occurring current accounts deficits. In any case, a surplus in the current account indicates external room for manoeuvre for internal growth. During the fifties and sixties the West German surpluses combined with high internal accumulation only show the extreme undervaluation of the DM during that period and must be judged as an exception. During the first two decades after World War II Japan realized an even larger real growth than Germany and was, in respect to growth, restricted by its current account. It used all its room for m a noeuvres for internal expansion. Last but not least, a permanent surplus in the current account leads to a net creditor position improving ultimately the economic and political power of a country. In fact, generally the net creditor or net debtor position of a country must be interpreted as a sign of its international strength or weakness. In the light of these arguments it is evident that a persistent current account surplus increases the prestige of a government and its international political influence. At the same time a successful mercantile country can diminish internal political and social conflicts as there exists a common political goal or ideology (cf. Frey

If many or even only a few important countries follow a mercantilist strategy the world market turns ultimately into a world-wide zero sum' game. The likelihood of such a disastrous game is quite different in a' hegemonic and in a multi - currency system (cf. Guerrieri, Padoan 1986), It is likely that in a hegemonic system the leading nation can control the, mercantilist strategies of the different countries. As the hegemonic nationj acts as an economic trend-setter and coordinator of world macroeco-. nomic policies a harmonious development of the world economy is likely. In a multi - currency system, there is no institution to control the mer- ^ cantilist strategies of countries. It is much more likely that the uncertain^ of such a regime provides an additional stimulus to save the quality of ^ currency and to follow imperialistic ambitions by current account surpluses.' The result is a generally restrictive economic regime. But it can even lea4 to a disastrous competition of restrictive economic policies resulting in a' great depression. The more countries turn to a mercantilist strategy and' the more there exists an asymmetric adjustment process for deficit coiin-^ tries via private capital movements and a lack of international institutions, the more depressed will the world economy become (cf. Vendenbroucke; 1985, Johansen 1982, Vines 1980). Ill.

An Interpretation of the Economic Developments in Respect to Monetary Matters since World War 11

J*

In the light of these few theoretical remarks the economic development since World War II can be discussed. My general explanation of the economic and monetary problems since the seventies is the transformation of the world economy from a hegemonic system to a oligopolistic multi-* currency standard. The Dollar still is the leading currency, but it has got serious competitors, mainly the Mark and the Yen. The instability of the Dollar has "real" and "monetary" reasons. But in my opinion the certainly' reduced "real" position of the USA is not the most important or even; only argument for the erosion of the Dollar as world money. Even the reduced "real" power of the USA would be sufficient to create a stable world money and a much more stable world economy. The main reason for the instability of the world economy must be found in an undue expansion of the supply of Dollar and in a radical mercantilist orientation of second and third western powers especially West Germany and Japan. This proposition can be elucidated by discussing a few historical key-events and economic debates. ^ -f

a) The development of the oversupply of the Dollar until the late seventies After World War II, an extensive debate was initiated on the role of the United States as world money producer (cf., for example, Triffin 1960, Aliber 1974). The debate may be summarized under the heading of the Triffin dilemma" which discussed the role of the Dollar as world reserve currency. It was emphasized that gold which is inelastic due to the nature of its production and foreign exchange reserves - which depend on the hegemonic nation's current account - do not have the elasticity required for adjusting to global liquidity needs. This entailed the danger of periodic shortages and overabundance in world liquidity. A further danger that was noted was a crisis of confidence in the Dollar, which under the system of Bretton Woods was the only currency convertible by central banks into gold. If the Dollar was to satisfy a rapidly growing demand for world liquidity as a result of increased world trade, then the volume of U.S. currency in circulation would soon go far beyond U.S. gold reserves, thus making the convertibility of the Dollar into gold illusory.3 The debate of that time has limitations as the role of gold is overestimated. There is no loss of confidence because U.S. gold reserves are too low analogously there is no loss of confidence in banks if their cash reserves do not match the volume of deposits. Before World War I Britain had very low gold reserves, indeed lower than some developing countries at that time and there existed no confidence problem (cf. Ford 1962). However, a loss of confidence in world money will come about if there are doubts regarding its future stability. Gold will only come to play a role if confidence has been shaken (for other reasons) and gold is becoming a better store of wealth than a national currency. By emphasizing the external economic constraints on the world reserve currency preserving its own hegemony and being responsible for the international monetary system the debate on the 'Triffin dilemma" implicitly brought out an important aspect of a hegemonic monetary system. The problem, however, is not a lack of elasticity in world liquidity - and even less an undue shortage. Rather, it is the necessity for a world money producing nation to preserve the stability of its own currency and for this purpose it has to impose restrictive domestic policies in certain circumstances. Thus in the 1960s the United States should have imposed restrictive policies to stabilize the Dollar in response to an oversupply of world liquidity. This,

3

I

r

The so-called Triffin Plan saw the solution of the problem in the creation of an international artificial money. In 1969 the debate resulted in the creation of the Special Drawing Rights, which however to this day have not played any significant role.

however, would have been at odds with their domestic economic as well as with (short-term) global economic and political objectives. The early seventies were characterized by a set of problems that make^ it possible to speak of a turning point in world economic development^ The United States "abused" their privileges as world money producer an(T in this way brought about a weakening of its hegemony. From the mid- ? * sixties, the USA extensively pursued a Keynesian policy of expansionary demand management. The macroeconomic policy initiated under* President Kennedy and continued under President Johnson - may be' summarized under the heading of "full - employment budget". Internally^ the welfare state was enormously expanded while externally the United States became entangled in the Vietnam War. This resulted in an expan-*J sionary fiscal policy with a simultaneously accommodating monetary policy,* which in 1969 for the first time since the fifties brought about a rise ofj the inflation rate to more than 5 percent. On the whole, there was air excessive quantitative expansion of the Dollar supply globally. As a result* of the deterioration of the trade balance the U.S. current account waSj sliding into a deficit in 1971/72 and the inflationary Dollar came under, permanent depreciation pressure. This deterioration of the current account was not primarily due to a general lack of productivity growth within the' United States, it was simply the result of macroeconomic circumstances.4 ^ Since the late sixties until the late seventies the U.S. domestic economic policy did not reflect the international role of the Dollar. In? spite of the external weakness of the currency an extreme expansiveeconomic policy was practiced that increased the inflation rate and created* a permanent problem to balance the current account. In fact, the United^ States withdrew from its responsibility for the system of Bretton Woods, accepting the depreciation of the Dollar in order to reestablish a positive trade balance. The unilateral opting out of its obligation to maintain the: gold convertibility of the Dollar in 1971 was actually celebrated as a great4 success by the Nixon administration (cf. Calleo 1980, p. 787 f.). Thej; Dollar had lost its confidence and frequently it came to Dollar crises. At the same time other countries especially West Germany were notj prepared to accept the inflationary effect of the U.S. domestic policy. The; 4

V ti The expansionary fiscal policies of the United States initiated in the sixties and still existing today are partly related to the country's role as a hegemonic power. The United States is forced to spend extensive public resources in order to preserve its' hegemony ranging from enormous military expenditures and the funding of international institutions to development aid. It has been suggested that for political reasons the resources necessary for the preservation of hegemony cannot be adequately covered by taxes. The United States is therefore constantly forced to adopt expansionary fiscal policies (cf. Calleo, Cleveland, Silk 1988).

monetary order of the post-war period could thus no longer be preserved. In 1973 the system of Bretton Woods finally collapsed. After the collapse of the system of Bretton Woods the USA followed a moderate depreciation policy with the aim to combine a balanced current account with an expansive (mainly monetary) economic policy. During the last years of the system of Bretton Woods this policy was more or less successful as the deficit of the current account in 1971/72 turned back into surpluses. In 1977, the U.S. current account became negative again. This time the deficit was much bigger than during 1971/72 and the USA pressed other western nations for expansive economic policy and a controlled depreciation of the Dollar (see below). Thus the policy of the world money producing nation was solely related towards internal needs. President Carter like his predecessors - was not prepared to create an internal crisis to stabilize the Dollar. A depreciation policy can only work, if higher import prices do not spill over to internal nominal income - mainly money wages and if the depreciation does not trigger off destabilizing capital exports. Especially the last point is very difficult to achieve for a reserve currency country. Without tough capital controls for the producer of world money it is nearly impossible as already a small portfolio shift against the depreciating country will create extreme exchange rate turbulences. Volcker, the later president of the U.S. central bank, puts this dilemma like this: "A nation, most of all a great power, does not want to be hampered in its domestic policies, or in its international security or political objectives, by external economic constraints, and specifically by the need to guard against a breakdown of the monetary system. In other words, we wanted an open system, but like others had a taste for autonomy too. (...) In an open system, the external c o n straint is there. If ignored for long, a crisis will develop." (Volcker 1978, p. 7) The crisis of the Dollar came in the late seventies. In sum: The instability of the world monetary system until the late seventies was mainly the result of the oversupply of the Dollar in relation to other western currencies. This Dollar superfluity was the outcome of the completely internal economic orientation of the U.S. - monetary and fiscal policy - the result of the (understandable) refusal to create an internal crisis to stabilize the Dollar as world money. "Real" factors as the slowdown of productivity growth, the fall of the U.S. profit rate etc. are not really important in these developments. Of course, the world in "real" terms had become more pluralistic and the United States had lost complete dominance Kindleberger (1981) sees the loss of dominance as early as 1960. This implied that the USA could not dictate the economic policy of other leading western nations which judged the U.S. policy harmful for themselves. Likewise it is true that during the sixties new currencies developed which had built up property protection qualities and

became limited competitors for the Dollar. In spite of these facts a shortening of the supply of the Dollar would easily have preserved the' acceptance of the Dollar as world money and the economic leadership of3 the USA. The erosion of the Dollar, the refusal of the USA to stabilize it, the pulling out of the weak Dollar by property owners and the unwil-* lingness to accept these developments by medium and smaller western^ states made the flexibilization and deregulation of international monetaiyj matters to the only realistic outcome. Thus the breakdown of the system** of Bretton Woods was the result of a lack of international responsibility;! and a lack of international cooperation. ^f? Frequently, financial innovations and deregulations are made responsible for the instability of the world economy since the seventies. As1 a general proposition this is not true. Euro-markets which can stand fort financial innovations are a good example. They are external segments o r the different national internal capital markets. Euro-banks are not subject^ to cost - escalating domestic regulations and fees (such as minimum*' reserve obligations), so they are able to offer higher interest rates on" deposits while maintaining lower interest rates on loans than it is the case? with domestic financial institutions. In this way they can expand thenf business volume and can grow faster than the internal segments of the* capital markets. In respect to monetary policy the euro-banks create no^ substantial problems for central banks. The restrictive power of central* banks is in no way broken by external markets as an expansion of euro-v banks does not eliminate the liquidity problem of these banks. Of course*; the credit expansion in unregulated markets needs less central bank moaey* than an internal credit expansion. But even in completely unregulated^; capital markets there is always a maximum of credits that can be given tq^ the banking system. Financial innovations can increase the maximum credjl| volume but they cannot eliminate it (cf. Tobin, Brainard 1963). Moreover, a central bank can move directly, through interest - m i l policy, to affect the interest on the euro-segment of its currency. Sincr interest rates for the domestic money market within banks and interest rates for the euro-market are closely linked through the arbitratfojjf process of banks (an arbitration tunnel), the central bank can control thflf euro - interest rates directly by influencing the interest rates on internal* money market. The theoretical argument can also put forward generally^ Financial innovations can make the credit multiplier larger and more* instable but credit multipliers have never been stable and the power of central banks was always mainly reduced to set the maximum of the credit multiplier. Financial innovations do not reduce the restrictive power'of central banks and they do not increase their weakness in stimulating the* economy. The instability is found in the breakdown of the system''dR Bretton Woods, in the instability of capital movements and the wild fluc^ i'M

tuations of exchange rates. These processes are the result of the interaction between different currency areas and not the result of interactions within them. The division of currency areas in internal and external segments is rather secondary (cf. Herr 1987). Nevertheless, certain institutional changes can lead to instability. The deregulation in the form of the breakdown of the system of Bretton Woods led to two institutional changes which increased instability. First, flexible exchange rates became, as pointed out, a factor of instability on its own, second the breakdown of the system of Bretton Woods led to a general decrease of capital controls and in this way to more integrated international capital markets. b) The defence of the Dollar as world money 1979 was a crucial year in the world economic development. The strategy of the United States fell apart in nearly every respect. The Dollar began to collapse starting in 1977. Mainly as a result of the depreciation, the U.S. inflation rate again started to rise from under 6 per cent 1976 to over 13 per cent 1980. There was the danger of a cumulative depreciation inflation - spiral. Even raw material prices were no longer based on the Dollar. The Mark (together with other European currencies and a r e newed attempt to establish the European Monetary System) as well as the Yen had become potential alternative investment currencies. It was evident that without a change in policy, the erosion of U.S. monetary hegemony that had started in the late sixties would induce an increased restructuring in world liquidity and financial assets towards a multi - currency standard. At the political level as well, the strategy of the United States collapsed. This was particularly obvious in the Middle East: Iran was lost as an American base with the Islamic revolution, the second oil price hike in 1979 could not be stopped, etc. In addition, bilateral disarmament negotiations entered a period of crisis since Europe articulated its own interests vis-a-vis the United States. In 1979, for the first time since World War II, the United States massively felt the dictate of the balance of payment. Already under President Carter, the United States began the Struggle to reestablish monetary hegemony and to stabilize the Dollar as world money through a high - interest policy. i The main occurence in this period was the clash between the USA and West Germany. After 1975, Germany turned to an extreme restrictive fiscal policy and created a huge current account surplus. In the so-called locomotive discussion President Carter pressed Germany and Japan for expansive policies. Japan already implemented expansive measures but Germany continued its restrictive economic strategy which made the Mark for international wealth owners even more attractive as an alternative to the Dollar. Finally, after intensive political pressure, in 1978 the German

Schmidt - Administration followed a moderate expansive fiscal policy but the Bundesbank rejected any cooperation with the USA. In 1978, the* U.S. - monetary and fiscal policy became more restrictive. But any rise in* the U.S. - interest rate was followed by an increase in German rates. Thatff means that the policy of the Bundesbank prevented an early recovery oP the Dollar. Even Paul Volcker who, in 1979, became president of the$ FED tried to cooperate with the Bundesbank, but failed. Why did the| Bundesbank prevent an early recovery of the Dollar? At that time the! Bundesbank was not fond of becoming a world reserve currency becausM (realistically) the Mark is too small to fulfil the role of a world money* The "ideal" role of the Mark was seen as a regional hegemonic power l i n Europe in the background of a stable Dollar as world money. Obviously*! the Bundesbank tried to push the Dollar to a complete recovery as world! money and prevent an only partial regeneration under President Carter! (cf. Spahn 1988). It is well known that at the end of 1979 the USA gave up any co-Pj operation and fought alone for the recovery of the Dollar with disastrous effects. In the early eighties as a result of the extreme restrictive mone-3j tary policy of the USA the world economy went into a deep recession* resulting in a global rise in unemployment and a debt crisis in the Thirds World. However, it also had the effect of rapidly reducing inflation ratesfi in the industrial nations. Obviously the huge euro-market in Dollar could^ not substantially reduce the restrictive power of the Federal Reserve^ System. On the basis of the U.S. change in policy, the Dollar began to(j regain its stability. But it is important that its general appreciation started^ not until late 1980 the success of Reagan in the American election^ Under President Reagan the restrictive policy initiated by President Carteft was continued, giving rise to the danger of a cumulative downward spiral! in the world economy. The worsening debt crisis in the Third World a^ well as within the United States was the immediate reason for the Federal! Reserve Board's shift - towards a less restrictive monetary policy in the fall| of 1982. The combination of a strong nominal expansion in the moneys supply, low nominal interest rates, large budget deficits under "Reagan*® omics" as well as a general improvement in the investment climate asva^ result of Reagan's new presidency produced an economic upswing in the^ United States starting in 1983. The rapid success in the struggle againsti inflation as well as the largely non - inflationary boom in the Unitedj States were strongly favored by the appreciation of the Dollar (cf. Sachsj 1985). The, by international comparison, relatively favorable employment^ record and the dynamic performance of the U.S. economy were in largcfe part due to an enormously expansionary fiscal policy (cf. Dornbusch 1986)j| In 1982 and the following years the USA acted as a hegemoni
the acceptance of a deficit in the U.S. - trade balance. This is also true in respect to the Third World. Germany and Japan, in comparison, acted as free-riders of the expansive policy of the USA, consolidated its budgets and built up huge current account surpluses. Especially these two countries had been extremely successful in following their mercantilist strategies. If the USA had followed the same mercantilist policy, a disaster for the world economy would have resulted. To stabilize the world economy and [act as a responsible hegemonic force, the USA had not needed to accept fsuch a high appreciation and such a high budget deficit both resulting in jthe huge current account deficit. This policy must rather be judged as a master - piece in political economy to stabilize the position of the Dollar ,without the costs that usually accompany such an aim. After 1982, the iUSA showed one of the best employment records in the Western World and could realize substantial welfare gains by appreciation and import surpluses. The costs of this policy in respect to a long-term stability of 4the world economy and the hegemonic monetary power of the USA seem extremely high, because the USA lost the creditor position and became the largest world debtor country. In the medium term this fact must be judged as an absolutely untenable situation for a hegemonic nation as a stable hegemonic position is connected with the role of creditor. The Dollar boom lasted until early 1985 when it became clear that the U.S. administration and the western central banks would try to bring the Dollar moderately down. The landing of the Dollar was rather hard and resulted in a world-wide stock - exchange crash in October 1987. The crash had only limited repercussions on the economic development as icentral banks acted as lender of last resort and stabilized the banking ^system. This episode shows that the stock exchange is not the nucleus of Ihe instability since the seventies. If central banks save the banking system fty creating sufficient liquidity any turbulence of the stock exchange can be 'isolated. Movements in the stock exchange must be judged as largely secondary for "real" investment decisions. Much more important are the Expectations of the entrepreneurs and the credit expansion of the banking "system. ^ Without massive support of central banks in 1986/87 most of the U.S. deficit was financed by official exchange market interventions - the Dollar would have fallen even further. After 1985 again the USA tried to 'push West Germany and Japan to change their restrictive fiscal policy to ^stabilize the U.S. current account. The USA failed and West Germany and this time Japan as well followed restrictive policy and stabilized their employment largely by export surpluses. After that the Dollar stabilized itself on a lower level and in 1988/89 showed again some strength. Insofar the regeneration of the Dollar as world money - after an overshooting until 1985 seems more or less successful. But behind the present

stability of the Dollar exchange rate exists the instability of many unsolved , international economic problems. ^ c) The future of the Dollar and the international monetary system

^

This is not the place to speculate about an undetermined future. The best^ that can be done is to list a few basic problems of the present inter national economic constellation. ^ The period since 1982 shows that the USA is no longer able an
future must be judged as a purely internal welfare strategy of the USA with ultimately destabilizing effects. It would be false to blame the USA alone for the instability of the :world economy. Especially West Germany (since the fifties) and Japan (since the seventies) are following an extreme mercantilist strategy - to tone part certainly the unintended result of a high preference for price ptability and an extreme cautious attitude to demand management and [depreciations. In the light of the generally asymmetric adjustment mechanism between surplus and deficit countries, the mercantilism of a few [Important countries must create a deflationary bias as the aim of current account surplus is a worldwide zero sum game that can lead to a c o m petition of restrictive economic policies. One aspect of this zero sum game 3s the debt crisis of the Third World. The policies of Western Europe and [japan prevent developing countries to realize enough exports to pay their •debts without strangulating the national economies. Again a look at the gold standard before World War II is interesting. During that time d e veloping countries were allowed to have exports which allowed them to pay interest and principals and to realize certain internal developments.5 In sum, the policies of West Germany and Japan are even more destabi lizing for the world economy than the policy of the USA. " In respect to force other countries to a certain economic policy there is a clear decline in the U.S. hegemony in comparison to the sixties and seventies. The USA has lost the strength to prevent competing nations from exploiting their policies to a destabilizing extent. The present worldwide situation is rather dangerous. If the USA wants to reduce their current account deficit or private property owners refuse to finance the U.S. deficit any longer this can like after 1985 always be the case the world economy is in an extreme deadlock. This scenario is rather gloomy because it implies the danger of a great depression or at least a world economic regime with generally restrictive orientation. There is certainly a challenge of international policy coordination and the Louvre Agreement 1987 can be seen as a start of establishing suitable institutions. But I am sceptical about the possible success of a stable cooperation between the USA, Europe and Japan (cf. Herr 1989). There is no tendency in sight that the leading Western countries are prepared to subordinate their internal economic policy to external and international needs. But this is a precondition of a stable world economy with integrated capital markets. In the light of this fact it seems rather sensible to 6

It should be clear that the existing debt of the Third World cannot be payed back. A precondition of a new development in these countries is the cancellation of the debt. But then developing countries should be given export opportunities in the developed world and not the other way round.

disassociate the links between the national capital markets (Tobin 1978, Dornbusch 1986a). This would be the logical consequence of the preference of countries to have more national autonomy in respect to economic affairs without destabilizing the world economy.

•tz References m Aliber, R.Z. (1964): The Costs and Benefits of the U.S. Role as a Reserve Currency1'5 Country. In: Quarterly Journal of Economics Bloomfield, A.J. (1959): Monetary Policy under the International Gold Standard, New York ^ Calleo, D.P./Cleveland, V.H.S./Silk, L. (1988): The Dollar and the Defence of the WesC J In: Foreign Affairs, Vol. 66 ^ Davidson, P. (1980): The Dual Faceted Keynesian Revolution. In: Journal of Post-'^ Keynesian Economics, Vol. 3 Dornbusch, R. (1986): Unemployment: Europe's Challenge of the '80s. In: Challenge,^ September-October 1986 ^ Dornbusch, R. (1986a): Flexible Exchange Rates and Excess Capital Mobility. In: Brookings Papers on Economic Activity Emminger, O. (1986): D-Mark, Dollar, Wahrungskrisen. Die Erinnerungen eines Bundes-. i bankprasidenten, Stuttgart ^f Fisher, I. (1933): The Debt Deflation Theory of Great Depressions. In: Econometrica, VoLl* Ford, A.G. (1962): The Goldstandard 1880-1914. Britain and Argentina, Oxford ^ Frey, B. (1984): The Public Choice View of International Political Economy. In: Inter-!® national Organisation, Vol. 38 '^Sgj Herr, H. (1986): Geld, Kredit und okonomische Dynamik in marktvermittelten Okonomi«ra die Vision einer Geldwirtschaft, Miinchen Herr, H. (1986a): Geld - Storfaktor oder Systemmerkmal. In: Prokla 63, Vol. 16 Herr, H. (1987): Der Euro - DM - Markt: Theoretische Erfassung, empirische Entwic und EinfluP auf die nationale Geldpolitik. Discussion Paper IIM/LMP 8 7 - 7 , Wi&seo^ 1,1 schaftszentrum Berlin fiir Sozialforschung Herr, H. (1989): Mercantilistic Strategies, Cooperation and the Option of the EuropCI®^ Monetary System. Discussion Paper FS I 8 9 - 2 , Wissenschaftszentrum Berlin fiir S o ? ^ zialforschung 7?r v Herr, H./Voy, K. (1989): Wahrungskonkurrenz und Deregulierung der Weltwirtschaft. wicklung und Alternativen der Wahrungspolitik der Bundesrepublik und der Europlipl schen Gemeinschaften, Marburg Hess, H./Westphal, A. (1989): Zum Verhaltnis von realwirtschaftlicher und raonetircg* Integration Westeuropas. In: Prokla 75, Vol. 19 Hicks, J. (1979): Causality in Economics, Oxford

Johansen, L. (1982): A Note on the Possibility of an International Equilibrium with Low Levels of Activity. In: Journal of International Economics, Vol. 13 Keynes, J.M. (1913): Indian Currency and Finance, London Keynes, J.M. (1936): The General Theory of Employment, Interest and Money, London Kindleberger, L.P. (1981), Dominance and Leadership in the International Economy. In: International Studies Quarterly, Vol. 25 Kindleberger, L.P. (1986): International Public Goods without International Government. In: American Economic Review, Vol. 76 Kregel, J.A. (1980): Market and Institution as Features of a Capitalistic Production System. In: Journal of Post - Keynesian Economics, Vol. 3 Marx, K. (1890): Das Kapital, Erster Band. In: Marx - Engels - Werke, vol. 23, Berlin 1973 Marx, K. (1894): Das Kapital, Dritter Band. In: Marx - Engels - Werke, vol. 25, Berlin 1971 Minsky, H.P. (1975): John Maynard Keynes, New York Minsky, H.P. (1979): Financial Interrelations, the Balance of Payments, and the Dollar Crisis. In: J.D. Aronson (ed.), Debt and the Less Developed Countries, Baulder Padoan, P.C. (1986): International Financial Instability, London Riese, H. (1986): Theorie der Inflation, Tubingen Sachs, J. (1985): The Dollar and the Policy Mix: 1985. In: Brookings Papers on Economic V Activity 1985 Spahn, H . - P . (1988): Bundesbank und Wirtschaftskrise, Geldpolitik, gesamtwirtschaftliche ^ Finanzierung und Vermogensakkumulation der Unternehmen 1970 -1987, Regensburg Stadermann, HJ. (1986): Verteidigung und Verlust monetarer Autonomic in einem Multiwahrungssystem mit Leitwahrung. In: Okonomie und Gesellschaft, Jahrbuch 4: E n t \f wicklungslander und Weltmarkt, Frankfurt, New York Tobin, J. (1978): A Proposal for International Monetary Reform. In: The Eastern Economy ;« Journal, Vol. 4 -Jobin, J./Brainard, W.C. (1963): Financial Intermediaries and the Effectiveness of Monetary jiS Controls. In: American Economic Review, Papers and Proceedings Jriffin, R. (1960): Gold and the Dollar Crisis: The Future of Convertibility, New Haven: % Yale University Press •Vandenbroucke, F. (1985): Conflicts in International Economic Policy and the World ^ Recession: A Theoretical Analysis. In: Cambridge Journal of Economics, Vol. 9 Vines, D. (1980): Competitiveness, Technical Progress and Balance of Trade Surpluses. In: fy The Manchester School, Vol. 48

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Jorge Schvarzer

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Challenges and Perspectives of the Economy in Argentina

P;

oduction crisis which Argentina is going through right now may be observed fibm many different angles. In this paper we will treat it as part (and apparently as a condition) of a process of structural change in its forms of economic activities. The crisis demands brutal austerity with public funds, j^solid redistribution of revenue between social groups (from the workers jfij.the entrepreneurs) as well as between sectors (from those who work * if'the internal market to those who work for exports and also from the luctive to the financial sectors) and an abrupt contraction in the rate ^economic growth with regard to those registered in the decade of the 'enties. The crisis, in short, presents socially negative conditions while it irs courses of change whose characteristics must be evaluated in depth. These changes have singular causes. If one were to summarize in one gle word the root and essence of these causes, one would have to lignate the opening of the economy, as the fundamental factor. The ining modifies when it does not drastically reduce - the regulatory Capacity of the national state, tends to influence the distribution of beneficiary income in general to the privileged sectors, and in one way or another, affects the conditions which determine the dynamism of production. ^ In emphasizing the effects which generate the opening of the economy pne must insist upon the form in which this is being accomplished. Apparently it is not the same - in cause or outcome - a process of jipening the economy by consolidation of a productive structure which gradually adjusts itself to the exterior (as in the case of the European countries or Japan), as the same phenomenon produced by the close Interelationship between the finance sector and the world market. In the |rst case, the opening is the consequence of a maturely productive e c o nomy, while in the second it is an effect which thoroughly impinges upon

the orientation and growth capacity of the economic system conditioned this process. ^ The foreign debt can not be separated from this question. The differ ence in our treatment will be that instead of assuming the debt as * cause of the crisis, we will incorporate it into the global phenomenon economic transformation. In the first stage, the foreign debt was a resi of the policy of financially opening the economy, however in the secoi stage, subsequent to the explosion of the problem in 1982, it served " consolidate this same process. Because of its characteristics, this paper strives to be more refit than assertive, and tries to offer a vision of the overall problem. For this] reason, it opts for a schematic presentation of the relevant econoi aspects which allow it to focus on those aspects which are political and social. The economy is nothing other than a social relationship between mei through markets, human beings distribute wealth, and in a certain foni^ prestige and power. Because of this, the analysis of the economy which will present aims to serve as a basis for a socio - political reflection moi than an accumulation of statistical information about purely economic data? Finally, this would be the proper place to mention the reason for 'iHri selection of Argentina as a "model"; this is merely due to the author^ own specialization on this subject, enabling the summarized presentation a few dispersed ideas in other more detailed analyses about this counl At the same time, this example appears suitable to the extent that it serve as a point of reference for the description of other cases. In ce: aspects, Argentina seems to be a "model" country for understanding^! problematics of the crisis even though it is not representative of ] whole; in comparison with other countries it would better serve as?ri contrast for studying the particular evolution of these economies. Last>JoU all, if the crisis is worldwide, then it is certain that in every country there? are structured economic and socially distinct conditions which indicated different results in the state of the economy. The Argentine Crisis

:*

^{IQJ

The point of departure of the Argentine crisis can be set in 1975. All th^ economic indicators allow one to observe that, after a long period ' ora growth, in that year there appeared a break in trend. From then till todayf( the gross national product remained stagnant and the fluctuation in the| economic cycle produced, in turn, a value practically stable to the amounffl of wealth produced. The stagnation of worldwide production is the clearest! indicator of the crisis whose gravity can be most deeply appreciated whetfi

combined with social indicators. The population growth, for example, was [•round 15% in the 14-year period since 1974; this development implies at the yield per inhabitant fell in proportional magnitude during the me period of time. On the other hand, the real income deteriorated ren more, due to the fact that a part of the then present funds were istined to pay service on the foreign debt, which in turn was used to ilance net capital inflows for the same reason during the decade of the venties. Finally, the redistribution of income during those years had been aerating against the most disadvantaged sectors, which saw their particiition being reduced in the already dwindling total national income; for em the crisis is even more evident and painful than that suggested by e previous statistical figures.

I

The structure of the economy remained relatively constant in view of the value of world production but not static in terms of its composition. In these years one observes an appreciable growth in the agrarian sector pf the Pampa, an intense restructuring of the industrial apparatus, an .exponential growth in certain services - above all in those which attend jto the demands of the highest income groups and a notable hyperjfltophy in financial operations. In other words, the crisis is not occurring in ja?r< total stagnation. On the contrary, its intensity and duration can be Regarded as accompanied - and facilitated by worldwide transformations related directly or indirectly to the opening of the economy, fc^ The macroeconomic tendencies registered starting from 1974 do not [reflect a significant change corresponding to the explosion of the debt in jj.982. The worldwide stagnation and the changes in the composition of .world production started before and continued after that moment; and the same can be said about other key variables. Inflation, for example, one of the most peculiar phenomena in modern Argentina, has remained the same at more than 100% annually since June of 1975 with an average of around 300% during the last 14 years. The only important variable which changed its behavior since the debt crisis is the rate of investment with respect to world production, which has registered a sharp drop since then; this phenomenon is caused partly (although not only) by the necessity of alloting a portion of the national savings to pay debt service. In a medium - term perspective, the drop in investment suggests that the stagnation produced will continue for several years, granting that no substantial growth of installed capacity is possible until this phenomenon has been reversed. Moreover, there appears to be a significant restriction on public expenditure (one of whose consequences is the fall of investment carried on by the state); with the closing of sources of foreign credit and the inception of the period of effectively paying debt service, the public sector finds itself met with a notable limitation in its budgetary capacities.

But these phenomena do not qualitatively transform, rather, they make the > context of the crisis initiated in 1975 become more acute. 4 The Argentine crisis is persistent, profound, and significant. Its social;? and political consequences are too obvious to be related in detail but for^ this they are none the less serious. The trend of investment does notj offer any immediate perspectives for an escape from the problem ofg productivity, while applied policies tend to consolidate the process of<j change already initiated in the middle of the decade of the seventies. ^ How did the problem start ? What are the reasons which hinder its^ solution ? The historical perspective is indispensible in seeking answers. q t»

i.%-

The Pattern at the Beginning of the Seventies

-rii ••ii

The industrial production of Argentina at the beginning of the seventies^ operated in a closed market which defined the patterns of its behavior.^ Final demand was locked into supply, which imposed its conditions; even^ though demand fluctuated in accordance with variations in income (and,$ other characteristics of the world conjunctural cycle),its relationship witi^ supply was formed on the basis of its capacity to absorb it. j A complex tariff system with high tariffs (Berlinsky 1978), accompanied by prohibitions on importing a whole series of goods, protected the local; business sector from possible foreign competition. The buying of industrial goods from the exterior was limited to intermediate goods and productive equipment necessary for local production; on the other hand, exports of industrial products were practically insignificant. The exception consisted certain by-products of primary products (meats and oils) based on the^ comparative advantages of agriculture in the country; these productSJ needed scarcely little processing and their export can not be considered aq| indicator of industrial competition. m The industrial exports were minimal in terms of value added by the| sector and insignificant in proportion to the total sales of the country tOfj the world market. Industry, however, was dependent on the importing ofjj intermediate goods, which did not compete with local production. Thj^g sector was therefore closed and dependent. The supplier of foreign currency for the national economy was the| agriculture of the Pampa, whose natural advantages allowed it to produce^ at very internationally competitive prices. Agriculture exported, allowing* industry and other sectors to satisfy their demand for imported goods b)(g means of the currency the Pampa obtained; curiously, this peculiarity was* presented as a merit. In the debates of the epoch the possibility practically dismissed that industry could export in sufficient quantities and^ values to satisfy its requirements for foreign currency. The system func-

tioned with a clear division of labor which regarded agriculture as efficient , and competitive, and industry as necessary but limited and conditioned by the internal market. The same notion of the term "industrialization subj stituted by import" implied that this sector generated foreign currency by [; means of resorting to substituting imports, but not through its access to | the world market. i The system was described in various analyses of the period (see I Canitrot, 1980; S£bato and Schvarzer, 1983), and its logic lead to a con £ stant fight over the surplus derived from the difference in value of agri ? cultural production between international and domestic prices. The relative efficiency of agriculture from the Pampa offered "a revenue comparative to < the world scale", which generated a marked dispute from within the s? national economy. By way of differential exchange rates for various goods and deductions - or duties directed towards exports, part of that ^ revenue was seized by the state or social sectors distinct from the agri I cultural sector, which in turn, claimed it as its own. m This contention implied the possibility that the "urban" sectors, that is, ^the entrepreneurs and the workers, operated collusively to seize part of ;the surplus. This factor seems to be the key to understanding the dy•namics of the industrial entrepreneurs because the potential competition ? between them and the workers involving the sums of salaries to be paid [was not resolved in the normal way, by direct conflict or by changes in ^technological norms. The possibility of a concerted action between workers 'and capitalist industrialists against the agricultural class created important .economic and social consequences. Firstly, it reduced the so-called c o n flict of the classes to minor and occasional confrontations, permitting the [Collaboration between both at such levels as which would surprise o b ; servers from developed countries; it can even be assumed, that the growth ; and prestige of parties who expounded "alliances between the classes" for ^development relied to a certain degree on that objective fact, more than on the potential political advantages offered by that type of a solution. Secondly, and equally important, we notice that the displacement of this conflict reduced the social pressure on the industrialists to modernize their industrial enterprises the normal process in other economies, in which ^economic development is the logical consequence of "defensive" investments by industrialists who Seek to counteract trade-union pressure, something which never played a significant role in Argentina. • This pattern of production significantly reduced the objective pressures [of the overall economy on the managerial decisions which could have ;consolidated technological progress, and consequently worldwide competitive development. Industry in general never sensed pressures from the •side of demand because it was predisposed to a closed market. Neither was it confronted by internal competition since it was predominated by

>ligopolistic structures and price strategies which protected the most i n efficient producers; several studies point out the presence of "umbrella" jrices which permitted large profits to the most efficient producers, while 5 limultaneously encouraging the survival of those operating at increased 3 ;osts (Mallon and Sourrouille, 1976). Finally, the possibility of acqui-^ jscence with the workers to seize surpluses derived from the comparative^ advantages of agriculture eliminated another impulsive factor of techno-" logical progress. In other words, various processes which determine ^ techno - economic development of the industrial sector were not present in e Argentina or operated with very little noticable effect during that period. ^ That is not to say that industry had been at a standstill. On the contrary, the beginning of the seventies marked the maturity of a long? cycle of quantitative and qualitative growth in its production. But this, growth did not incorporate technological progress to a point sufficient to.. promote development for boosting the Argentine economy. The newly^ installed factories improved the average local technology, yet put it on a.^ new level, to the extent that the already existing factories maintained obsolete technologies and processes and the new ones were not always t installed incorporating the most appropriate technologies available on the; world market; the industrial sector as a whole continued to lag behind, { caught up in and incapable of resolving the problems facing the national^ economy. 'J. These phenomena projected the process of redistribution in a hori-^ zontal direction (between sectors) rather than in a vertical one (from theft privileged to the disadvantaged) and encouraged an inflationary process^ which even at that time was significant in terms of the global experience^ The possibility of gaining additional revenue by means of some successful^ decision, in the middle of the uninterrupted flow of transference of, wealth, resulted in being much more important than the by-product of^ potential increase of productivity; the position of the economic decision - J makers was conveniently and preferentially orientated towards the short term and the speculative. >> The system offered scarse possibilities for modification. Moreover, it„ could be said that the dream of each and every one of the interest^ groups was on the whole inclined towards maintaining, or improving, theii^ position, rather than changing the rules of the game. The state was seeking a way out of this state of affairs by means of£ various experiments which could be defined, a posteriori, as rough ; estimates through which they tried to modify the system, overcoming o^ evading the distinct sectors' resistence to change. During those years,^ starting in the middle of the seventies, there was a policy directed towards^ the perfecting of technology in agricultural production, which had impor-^ tant effects on the supply of food grains and oils: through subsidies fo£

the purchase of equipment and the propagation of new technologies, the state managed to transform the productive system of the Pampa, until there was a noticable increase in the volume of production (see S6bato 1979-1981, Obschatko - Pineiro, 1983). Paralleling this, an incentive policy was implemented for the installation of new industrial plants in basic sectors, with modern technologies and in size large enough to utilize economies of scale, imposed by the new conditions of world manufacturing output; even though these plants absorbed considerable sums of subsidies, were slow in their realization and their results did not always live up to original expectations, they tended to modify the industrial panorama towards the beginning of the eighties (see Schvarzer, 1978 and 1987). In the middle of the decade of the seventies, these processes were incorporated into a new official strategy, prone to opening as rapidly as possible the financial system in Argentina to the world market. This policy was integrated with the decision of drawing massive foreign credits, which generated the current foreign debt of the country, and gave way to a new form of relationship between the national economy and the world financial system,one which seems difficult to modify under present conditions (see Schvarzer, 1987). The Pattern at the End of the Eighties The greater part of the new industrial plants, decided around the b e ginning of the seventies, had entered into production during the second half of the eighties but for a market that no longer had the dimensions originally prognosticated prior to their construction. The scheme of c o n tinuous growth of domestic consumption originally projected was displaced by the reality of shrinking demand due to the crisis; as a consequence, all of these plants were predisposed to a surplus capacity which could only be channelled into the world market. That requisite was vehemently c o n spicuous in those productions of "progress", which demand non-stop operation of the plant, be it for technical reasons or for the convenience of some amortization, in that way writing off some of the enormous costs of capital incurred during its installation. That is the way an exporting experiment started, for those industrial goods which were taking force throughout the eighties. 1- A study by CEPAL (1987) points out that the "fiscal volume" of exports of industrial origin reached over 100 in 1973 to 207 in 1985; during the same period, exports of agricultural products rose from 100 to 164. These values are distorted by the development of world market prices, when they are measured in dollar currency, and depict erratic

cyclical imbalances in the short term, but still are representative of the., trend in the long term. The statistical figures show that the relationship between exports and,, industrial production made an upward swing of 8.5% in 1973 to 9.4% in," 1986 (CEPAL, 1987) in the middle of violent conjunctural fluctuation. ^ An important part of these exports were derived from processed goodr flowing from agriculture, which were sustained by the intense growth of* the supply from the Pampa region. In paticular, food oils were converted^ into one of the principal items of sale from Argentina to the world^ market, thanks to the doubling of the volume of the local supply of foodr oil products; in 1986 this product represented in itself alone 31% of the.? total of all processed goods exported to the world market. Another part' of these exports consisted of the supply from the new basic industrial^ installations, even though at times this phenomenon was imperceptible iirt the total evolution of exports of manufactured goods coming from indus-^ try. The chemical branch, for example, which exported 112 million dollars,, in 1973, reached a sum of 524 million dollars in 1986; coinciding, basic* metals jumped from 116 million to 432 million dollars, while other areas^ of industry remained stagnate at the same levels or declined during* this same period. By the end of the eighties, an industrial exporting sector had emerged, characterized by several new conditions. First, it was made up of enter n , prises capable of competing in the world market thanks to various comparative advantages, not always technological but for this none the less^ important. Second, we are dealing with industrial enterprises which bavj^ discovered, in practise, if not in theory, that turning to the world marteft can help to overcome the problems caused by the squeeze on local* demand, after such a point, this fact has been converted into one of thet basic criteria of their strategies for survival. Third, this deals in general ; with very large industrial enterprises which in themselves represent c o n ^ siderably powerful potential, a phenomenon which can be observed ...«S accomplished by the membership of various of them to economic groups which count as among the greatest in the country. \ Consequently, in Argentina there has emerged an industrial sector; interested in the opening to foreign markets, at least in the direction towards the exterior, and which visualizes the world market in a different' way than it did in the beginning of the seventies, and which presses fOC the continuity of an incentive policy towards industrial exports. The ex~v perience of other countries leads one to believe that this process* of opening to exportation will necessitate its correlative in importation, ^due to pressure from the surrounding countries affected and supplied by local products. This pressure, which has already started to be felt, arises almost automatically from these conditions created, independently from other

reasons which could cause pressure, and will surely continue to be felt in ithe future. These phenomena are related and mutually reinforced by various d e tCisions of economic strategy. In the last few years, for example, the official policy has tried to sustain high and stable exchange rates for the export of manufactured goods, in contrast to that which occurred in the previous decades; it might be added that this is giving the signal to other industrial sectors to experiment with the latent possibilities of the world market. k The pressure towards industrial exports also stems from the demands |of those creditors looking to recover the foreign debt; but we prefer to drop the subject along these lines in order to emphasize domestic factors ;and highlight the appearance of internal actors interested in exporting, and ,who even if reinforced by other motives, happen to be the principal instigators and beneficiaries. kt. It is possible that some of the local sectors affected negatively by foreign competition will resist the opening of the market. In spite of that, an assessment of the relationship of forces between the distinct groups Jeads one to assume that this policy will continue on, although perhaps accepting sectorial restrictions or limitations for fixed periods. Con sequently, everything indicates that the policy of industrial exports will be maintained, incorporating new entrepreneurs to its defense, until it is Converted into a fact for the policy - makers. & The previous evolution is accompanied by another which is decisive in Outlining the new macroeconomic panorama of Argentina. This consists of jpie worsening trend of the drop in prices of the agricultural products ivhich the country offers on the world market. This is dealing with a phenomenon which has been observed since at least the beginning of the century (and which has led to many long debates concerning the s o -called deterioration of the terms of trade) but which is reaching a decisive point: it is evident already that international prices might become such as to eliminate the margin of suplus that differential revenue on the worldwide scale generates and of which the country has hitherto been taking itfvantage. (f The sudden jump of international prices of cereals in the first few years of the seventies lead some observers to suppose that the trend towards the downswing could reverse itself. It was no coincidence, therefore, that in Argentina at the end of that decade there was talk about •agropower" as the alternative to "petropower", attributed to those countries producing oil for the world market. But experience of the eighties Underlined anew, and reinforced, the renewal of the tendency towards the ^downswing, which reached a minimum level of prices towards the end of |1987 (see El Bimestre No. 33 and 35). At that time international prices

practically did not permit a real profit gain from differential revenue from t the production in Argentina and the government even felt obliged to'1 apply compensatory measures. The sudden upward swing of those prices" on the world market in 1988 signals that the downward process will CQn*v tinue in a sinuous but inexorable manner. For the first time, we are not.^ disappointed: the economic trend did not contradict the generalized0 certainty of the future, namely the continuation of the downward tendeW* of prices. If that phenomenon is maintained, as it seems to be doing, there witfi be two very clear effects on the domestic policies of Argentina. In thcE* first place, with the disappearance of the surplus in agriculture, generated by differential revenue on the worldwide scale, you eliminate the proba^l* bility of contention concerning its distribution, and its transference betw sectors will become more difficult - especially from the agricultural jtQ* the urban sectors. Not necessarily will the policy - makers react sponta-v neously or swiftly facing the new state of affairs; it can be assumed that5 this fight will continue for some time until the futility of its results -'Qfv the resistance of those who have the most to lose - modifies the conduCP of the participants, Another decisive aspect is the possibility that w * exporting industrial sector could concur with the producers of the Paropan to the defense of a high and flat exchange rate to sustain their acUyitioft once convinced that the surplus has disappeared. This industrial - landowner block* which in itself is very powerfulwflre feel itself boosted by the pressure of the financial sectors which nee^i^W?. strengthen their ties to the world market by means of a flat Qxchaojjr* rate. Considering observations at the beginning of the decade (rf 'the seventies, the economic, political and social presence of these, tbflMr sectors, at times entwined into very large economic groups* suggests UtfC there will be internal pressure in order to consolidate a pattern of which will thoroughly modify the conditions of production of the eCQJ in Argentina. Pending Problems The problem of the foreign debt is one of the most critical whkh Argentina is encountering, as are the majority of the countries ia Latin America. The characteristics of the debt crisis have already been Mpty discussed and diffused and the only thing left in this paper is to preMffll ft brief summary of the principal restrictions, which it imposes,. Q&^tfcft economic development of Argentina. ' The interests on the debt amount to 5,0Q0 million doUars aMUflfr which are paid to the exterior and which represent the equivalent of^W

of the gross domestic product of Argentina. It is evident that a permanent capital transfer to the exterior of this magnitude can only be accomplished at the cost of enormous national sacrifice. Worse than that, even when 1 those payments are realized, they do not solve the problem of the foreign $ebt, since the pending obligations to capital will continue. | Because almost the whole foreign debt was assumed by the state, the [service payments on the interest is a public expenditure which has to be met by the taxpayers through the payment of additional taxes; the alternative to this would be that this obligation be balanced by a cut in other [expenditures or public investments. The resistance of the community to pay new taxes forecloses the first option, while the demands with respect to public spending make the possibility of the second option gravely difficult. The government remains cornered on both accounts and sees its capacity for budgetary operations continually diminished. In other words, the pressure generated by the debt considerably reduces the margins of maneuverability of the public sector and the state. K The most well-known recourse applied in the region towards confronting these problems consist of the inflationary financing of the deficit, concurrently, the international markets are being exhausted of capital for reasons that coincide. At the same time, in order to restrict ^expenditures, the state is resorting to the cutting of salaries of public employees and to the limiting of investments. None of these measures can be applied indefinitely due to social resistance and the demands of development respectively; for these reasons it could be said that all of Jhese recourses have lead to an extreme situation of socio-political strife, without having resolved the problems created by the debt. The monetary Issue for covering the deficit of the treasury can not be realized anymore without brutally pushing up inflation,due to its relative impact on a monetary base which is notably shrunken. The capital markets for local currency have been limited in still greater proportion to the fall of the ponetary base, decreasing the margin of maneuverability of the government: minor demands for capital provoke significant rises in interest rates, generating prohibitive costs for the treasury and those private individuals gwho need credits. ft: The problems which arise on the part of public expenditure are not fiewer. The cut in salaries of public employees is running up against a wall •Of social conflict and political resistance, at the same time that it is inducing the efficiency of the administration.The reduction in public Bending is encountering resistance from the contractors who realize public Korks and from the social demand for more and better public services. R ! In a medium - term perspective, one can imagine that the mechanisms K r collecting revenue will be improved, but nothing suggests that the •greater returns will be sufficient to cover the demands of the budget,

generated by the sum of public expenditures and the payment of debt^ service. It is evident that economic growth could offer an alleviation to^ the problem: at the same time that production increases, the burden^ would decrease proportional to the services of the debt and facilitate^ collection of tax-revenue. As is well-known, this solution requires that^ the growth rate of production supersede the rate of interest prevailing on * the wprld financial market (which determines the service of the debt). lag other words, this is dealing with a possibility which is very difficult t03 materialize and which, in the best of cases, offers a solution in the long^ term, granted that the conceivable growth rates of production would not^ resolve the predicament in a span of less than one or two decades. Consequently, this simplified presentation allows us to show that there^? are no perceptible solutions to the general problem introduced by the4j debt within topical parameters. The demands of the creditors is applying an excessive amount of pressure on public expenditure and the whole of? the national economy which is prone to check growth, decrease invest-"^ ment, encourage capital flight, and consolidate the inflationary process. ; Momentary relief may be on the way in one or several of these aspects, but its totality powerfully limits the possibility of a structural solution. An^ improvement in the terms - of - trade, for example, could offer a greater^ possibility of payment concerning the availability of foreign currencies; thejj corresponding reverse would be public spending which requires affecting^ budgetary control and the deficit of the government (since currencies^ would have to be bought in domestic currency by the government to pa the creditors). The possible options of a long-term solution offer three differen alternatives. The first would be a return to "voluntary" credits on the pai$J of the creditors so that debt services would be refinanced. This does deal with a "real" solution to the problem but rather a postponement to| the future, which however could be very long-term, given the financial! experiences of the twentieth century. Neither are we dealing with a Hpos-^p sible" solution; for various reasons, this alternative seems a difficult one^ and can be ruled out in general, even though conceivable would be a^system of credits offered by public organizations from the developed^ countries which would, in this sense, offer a partial solution. Another alternative could arise as a consequence of a drop to negative real values,^ the rates of interest on the world financial market, either by a nominal drop in the interest rates or by an acceleration in the inflationary pro—^ cesses in the economies of developed countries which would diminish/* the cost of the debt services and gradually tend to cut the total value ol^ the debt by means of capital. Neither are there any reasons to imagine ' this a viable solution in the next few years, at least on a scale significaig£ enough to have any influence on the evolution of the debtor countries. J

*>i

The third alternative, then, would consist of some form of reduction in the sum of the debt and/or its servicing. This option could be feasible for different reasons. Any moment the pressures of the debtor countries could succeed, above all because their demands coincide with decisions of a unilateral moratorium, which are preparing the way towards a solution by consensus or by confrontation. It could also happen that the requirements ,of macroeconomic balance will coerce the great powers into seeking a solution to this problem. Beyond its causes, and the form which it actually adopts, this would be the only true solution even though opportunity for its realization has not yet presented itself. f The solution to this predicament, the debt crisis, will however not resolve itself of its own accord; another problem which we have not yet mentioned: this concerns the aspects which refer to the problematic of the supervision of economic decisions of debtor countries by the representative organizations of the creditors. A remarkable part of the problems of the economic policies implemented in the debtor countries stem from the external demands generated by payment requirements of the debt; it is well-known that some of these relate more to the will and targets of the creditors, than to the necessities for development and the well-being of the debtor countries. I The criticisms concerning "conditionality" range from a discussion about their content, to a plain and simple rejection a demand to totally abolish them. Nevertheless, whatever the solution to the problem of the debt may be, the pressures will continue through certain types of structural adjustments, such as the budgetary restriction, the necessity of maintaining a trade surplus or at least a balance of foreign trade - , stc. Whether these pressures result as a consequence from the demands of the creditors or out of necessity to reorganize the local economy c o n fronted with the new conditions on the world market, is relatively u n interesting to us, compared to the form of vigilant enforcement this could take in the foreseeable future. < The restrictions objective to production in debtor economies in g e n eral, and for Argentina in particular, will not evaporate into thin air if the problem of the debt is solved. In particular, the pressure from the opening of the economy strengthens the tendencies mentioned above and .limits the likely alternatives open to Argentina. The problem of inflation is another decisive aspect which must be jegulated, if one imagines a process of growth in the long term. Inflation .in Argentina presents a top world record in the sense that there is no other known case in contemporary world history of a leap in prices so .steep and persistent: in the thirteen years elapsing from June of 1975 till June of 1988, prices rose six million times and their rate of increase did not fall below practically 100% annually. There were only few months in

which an inflation rate of less than 100% annually was registered, rapidly surpassed by the subsequent acceleration of prices: the period from October 1980 to March 1981 in which inflation was controlled by aa' overvaluation of exchange rates, which provoked serious distortions in theJ economy and the period from June till November 1986, after the* implementation of the Austral Plan. An intense and continuous inflationary process such as this one! prompts to mind two distinct problems for analysis: one referring to its; causes, and the other which inquires into the conditions which it imposes] on the actual functioning of the economic system. The economic theories propagated in textbooks have in general tended to concentrate on the? methods of stabilization, based on the idea that this is an adverse evil, a, phenomenon which must be overcome. Proposals have evolved from the' most well-known, orthodox policies to heterodox programs such as the Austral Plan or the Cruzado Plan without any sign of success. A lot less attention was given, on the other hand, to the consequences which an1 inflationary process of this magnitude and persistance has on the be haviour of the economic acteurs and on productive dynamism. ^ In synthesis, some aspects can be mentioned which appear to be keyi* Firstly, the intense fluctuation in relative prices - inevitable in a phe- 7 nomenon with these characteristics - significantly reduces, if not totally1 eliminates, the possibility for giving the proper adequate signals for profit and investment in the long term. All the indicators suggest that even in' the oligopolitical sectors, prices and profits are not maintained in the* medium term; consequently they drastically reduce the incentive toward* productive investment. For these same reasons, given the erratic fluctua*^ tions of all the economic variables, a second aspect arises, namely f a strong preference for the short term. Businessmen opt for the manipula-' tion of stocks, currency and other easily solvent variables, available fee cashing in or other transactions at a moment's notice; this in preference to fixed investments, which run serious risks in the medium term. Thirdly the demand of currency is significantly reduced, tending to reduce leveli to a minimum; the M 1 in Argentina has reached a "bottom - level* on the order of 3 % in production lately; and a similar evolution has beea seen in other monetary aggregates. The economic acteurs opt for the possession of foreign currencies, to preserve the value of their assets* which is equivalent to "dollarizing" the economy and is part of the so 4 called capital flight; the assets in foreign currencies can be situated physically in the country, but represent a variable of the external sector of the economy. On the other hand, the squeeze on the monetary base signify icantly reduces the margins of maneuverability of economic policy and the total amount of savings in local currency. •rt

The whole of these phenomena, which require an exhaustive study not yet realized, implies a squeeze on savings and investment, the stimulus towards speculative activities with respect to productive ones and finally, the flight of capital and the restriction of the capacity of maneuverability in the economic policy. It is evident that under these conditions the possibilities for real growth of the economy in the medium term are susceptibly diminished. Bringing down inflation to "manageable" levels represents a challenge which must be met in order to imagine the economic possibilities of the country in the decade of the 1990s. < It was demonstrated above that the solution to the problem of the foreign debt is an inexcusable condition for containing inflation; it can not be arrested if the payment of the debt service to the exterior continues in the magnitude and with the characteristics of the last few years. We are dealing, nevertheless, with a condition which is necessary but not sufficient. The experience of thirteen years of elevated inflation in Argentina has created a whole series of practices which will continue to perform even if the problem of the debt is solved. This is because the phenomenon of inflation is not neutral in either the economy or the society; it benefits certain social groups which will defend their earned positions in the distribution of the national wealth. It is not easy to establish how this problem is to be solved, above all in the middle of intense debate on its fundamental aspects. But it is evident that the opening of the economy, on transmitting more and more indicators of prices from the exterior, will contribute to stabilizing the relative prices, reinforcing the tendencies already mentioned about this. >,

Socio - economic Consequences If the previous hypotheses are correct, Argentina will enter the decade of the nineties with a pattern of production that allows us to predict various decisive characteristics. The exporting tendency of big - industrialist leadership coupled with a correlative opening to imports of goods similar to those produced locally, could generate a new dynamism between the industrial sectors. One can suppose that competition will increase and that there will be those who are disposed to seeking additional benefits on the world market. In that case, the capitalist - industrialist sector will have to control salaries according to the relationships of cost/productivity of local and international labor respectively. When the former possibility of transferring the great cost of salaries to other internal sectors is exhausted, the implicit alliance which joined the entrepreneurs and the workers will fall apart. The confrontation between both sides will be tough and one might hope

that one of the responses from the former will be to accelerate productive investments that raise work productivity. This internal split in the industrial sector will be accompanied by a^ reinforcement of the cohesion between capitalist - industrialists and tbeijj agricultural class based on a strategy of placing goods on the worid^, market. In other words, one could imagine an alliance of the "classic* typc^ between the capitalist - industrialist class, confronted with that of Ae^ workers. The disappearance of the surplus would be another ef which would fortify this realignment of implicit alliances. On entering the world market the local economy will tend to opei more with " r i p - o f f prices from the exterior rather than with internally established - whether it be by price - fixers, by the state, orJljL agreements between social sectors. This phenomenon was coined q L Canitrot (1980) as the "disciplining" of producers, in an analysis of first? rate, which was apparently written with the years 1 9 7 9 - 8 0 in mind. It fat based on ideological concepts which should not be ignored, even though they have scarcely been circulated. Elsewhere (Schvarzer, 1987), we have* cited the opinion of observers who termed the integration with other' markets as a "principle of irreversible economic discipline", a point that* concerns the system of prices as well as the management of the financial f and monetary system. ' The discipline generated by the opening to the world market, accofl!-^ panied by the pressure in the same sense as that derived from the debt?1 can be observed already in the budgetary and financial policies of thej^ public sector. These policies have not been able to escape the evideijr effects of any one transgression of certain "objective" requirements dictated* by the state of the economy. The effects of this disciplining will be strongly sensed in the industrial sector, on entrepreneurs and workers, it the hypotheses mentioned above are verified by practice. It is necessary to caution that nothing will allow converting these^ processes into magic solutions to the problems of the economy and society' in Argentina. One should carefully observe the reactions of capitalists "and workers confronted with the new indicators of world market conditions before prognosticating the possibility of positive results in terms of growth and supply of goods. It is evident that if the entrepreneurs limit themselves to the speculative reflex actions acquired during the last few yean* or even worse, opt for a path which is simply liable to lead to reducing salaries in order to sustain profits, macroeconomic results will be negative;' In the same way it can be said that a total resistance without concessioai on the part of the workers towards a working model which requires game rules distinct to those traditionally applied could generate perverse results in the predictable near future.

The new model offers certain possibilities of positive evolution if the socio-economic acteurs discover the way to adapt themselves adequately to its working rules. But, evidently, working routinely against each other are, the tendency to repeat the reflex actions of the past and the lack of clarity over the new orientation, whose route is still not clear. The medium term perspective is clouded over by the problematics of economic conditions, especially those brought on by the foreign debt and Inflation. Even if it is partially true that those problems can be seen as resolved by economic development, it is none the less certain that they function as instigators and stumbling blocks to it. That is why the p e r spectives appear so simple and complex at the same time. For the time being we can only explore the first signs of a possibility of structural change, which to be certain, will have profound political and social repercussions. At this point, the "ifs" and " buts" about the immediate tconomic prospects commence, and for obvious reasons, our paper concludes. K

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(translated by Sandra Louise Harrington and David Sanchez)

r Ii References v Berlinsky, Julio (1978): "Protecci6n arancelaria de actividades seleccionadas en la industria k manufacturer argentina". Ministerio de Economfa, Buenos Aires. Canitrot, Adolfo (1980): "La disciplina como objeto de la polftica econ6mica. Un ensayo p sobre el programa econ6mico del gobierao argentino desde 1976" en Desarrollo f Econ6mico, No. 76, Buenos Aires. CEPAL (1987): "Industrializaci6n y exportaci6n de manufacturas en la Argentina. Evoluci6n 't estructural y apertura exportadora". Mimeo, Octubre. Mallon, Richard/Sourrouille, Juan (1970): La polftica econ6mica en una sociedad conflicfr tiva. El caso argentino. Amorrortu, Buenos Aires. Obschatko, E.S. de/Pineiro, M. (1983): Agricultura pampeana: cambio tecnol6gico y sector P: privado. CISEA, Buenos Aires. S&bato, Jorge (1979): "Las polfticas frente al estancamiento y la transformaci6n del agro £ pampeano". Mimeo, CISEA, Buenos Aires. tobato, Jorge (1981): La pampa pr6diga: claves de una frustraci6n. CISEA, Buenos Aires, ato, Jorge/Schvarzer, Jorge (1983): "Funcionamiento de la economfa y poder politico en la Argentina: trabas para la democracia", reproducido en Sabato, Jorge: La clase ^ dominante en la Argentina moderaa. Formaci6n y caracteristicas. CISEA - GEL, : Buenos Aires, 1988.

Schvarzer, Jorge (1978): "Estrategia industrial y grandes empresas: el caso argentino" en Desarrollo Econ6mico, No. 71, Buenos Aires. Schvarzer, Jorge (1987): Promotion industrial en la Argentina. Caracterfsticas, evoluci6n y resultados. CISEA, Buenos Aires.

Leopoldo Marmora

Dirk Messner

.Old Development Theories loi Internationalism

New Concepts

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[A Comparison of Argentina and South Korea

f

L The Long Boom in the World Economy The Marginilization of the V Periphery h The most expansive phase of development in the history of capitalism, between 1950 and 1971, coincided with a progressive loss of economic significance for the periphery in the capitalist world economy. The long boom in the world economy did not by any means generate in the d e veloping countries the positive "spill - over" effects or even the "trickling down" processes that one could have expected according to the various estimates of modernization theory. The dynamism of the economies in the ^lorth seemed rather to directly block the development potential of the pations on the periphery. Str- The developing countries' share of world exports decreased from 31.1% in 1950 to 18.4% in 1970. Only the oil - exporting developing countries retained a stable share during this period (7.2% in 1950; 7.1% in 1970). The downward trend applied for the "Least Developed Countries" (from 1.9% to 1.2%), the large group of "Remaining Countries" (from 14.7% to 8.2%), and the "Major Exporters of Manufactures" (from 73% to 3.7%) (World Bank 1987). The standing of the developing countries has diminished not only as producers for the world market, however, but also as markets for goods from the industrialized countries. Even multinational corporations have been investing less and less in developing countries since 1945, preferring locations in industrialized countries. W: At the beginning of the 20th century Marxists were still emphasizing the functional position of the developing countries as necessary markets for the goods and surplus capital of the industrialized capitalist nations (cf. jLenin, 1972, Luxemburg, 1981, p. 397 ff.). The imperialist war from 51914 —1918 over the division of the world, and the crises of underconsumption in the most important industrialized countries during the "Great

i-

131

Crisis" of the 1930's, seemed to confirm these classic theories of impe- ^ rialism. The Third World fulfilled a "thermostat function" for the worldj economy (cf. Lipietz 1982, p.36). Surplus capital, in the form of com- , modities and money, could be put to use here in exchange for rawflj materials and cheap labor. After World War II the periphery lost even "j much of this subordinate function in the world economy; whereas the^ industrialized countries were still sending 33% of their industrial exportij goods to the developing countries in 1955, by 1970 this had decreased to^j 19%. Even the multinational corporations have lost interest in the devel- : j oping countries: before World War II they transfered 50% of their direct; investments to the poorer regions; in 1950 the figure was still 40%; but,i by 1980 it was a mere 25% and still declining. Contrary to the theoretical-^ assumptions about imperialism, the dynamics of accumulation in the i industrialized world have been based since 1945 less and less on the exploitation of and economic exchange with the Third World, but ratharj on a self-supporting constellation of growth in the industrialized nations^ themselves. The "disengagement from the world economy", considered by^j the dependency theorists to be an active development strategy, was able assert itself independently through the mechanisms of the world market, ^ "It would appear that capitalism grew out of imperialism, and not tb^j other way around!" was Lipietz' appropriate summary of the development tendencies of the capitalist world economy during this period. Not only^ the classic theories of imperialism were refuted by real development^ however. The optimistic expectations of the modernization theorists werel also proven wrong. The simultaneity of economic prosperity at the c e n ^ | and loss of global economic significance for the nations on the periphery empirically contradicted the optimistic modernization theorists (Rostov^ 1960). ^ Real developments seemed rather to confirm the various estimates.ofi the dependency theorists and the theory of "unequal exchange", which,* despite the differences in-detail, agreed that "underdevelopment is ran integral component of the historical process of the international system underdevelopment and development represent therefore only the two sides of a common, universal process" (Sunkel 1972, p. 262; similarly Senghaat* 1974/1977). The formula of an irreversible "development of under.--, development" (Frank) was considered, precisely in the leftist debate^on blocked development in the developing countries and the possibilities of overcoming it, to be common sense. tr i*-

LI

The Crisis of the World Economy Periphery

The Differentiation of the

The collapse of Bretton Woods' system in 1971/73 marked a clear break in the history of the world economy since 1945. The internationalization of capital, which had led to a standardization of the conditions of production and accumulation in the industrialized countries, formed the foundation for the synchronization and reciprocal reinforcement of crisis tendencies in the capitalist centers, and for the fact that all the industrialized countries fell virtually simultaneously (1973-75) into the whirlpool of economic crisis (cf. Altvater 1983). The Great Crisis in the world economy was thus characterized by processes of homogeneity and equalization in the industrialized countries. On the periphery, however, this period was marked by a manifold differentiation. Adjoining the sudden rise of a few oil - exporting nations in the world economy as a result of the explosion in oil prices (the share of world exports of this group of developing countries rose from 6.7% in 1972 to 17.1% in 1980), a distinct group of developing countries formed during the course of the 1970's which was distinguished by especially dynamic progress in industrialization. The phenomenon of the "Newly Industrializing Countries", the rise of the "NICs", has also been reflected in the work of development theorists since the end of the 1970's (OECD 1979, Eickenberg 1983, Menzel/Senghaas 1984, Menzel 1983). % This dynamic industrialization is limited, however, to only a few of the nations on the periphery. 73% of the growth in industrial production among developing countries between 1966 and 1975 was achieved by only ten national economies1; Argentina, Brazil, Mexico and South Korea alone accounted for 52.2% of this growth in industrial production, r The dynamic industrialization in the "NICs" is supported by a relatively high growth in investment and manifests itself in economic profiles which are already more similar to those of industrialized countries than to those pf most developing countries (cf. Menzel/Senghaas 1984). ;<: This surge of industrialization has led, since the beginning of the 1970's, to a partial reversal of the "disintegration trend" which had characterized the 1950's and 1960's. The developing countries' share of World exports of industrial goods rose from a global point of view from .f7% (1955) to 11.9% (1983). But again, only a few developing countries succeeded in participating in world industrial trade on an increased scale, in 1981, 60.5% of the Third World's industrial exports came from the Ssian "Four Tigers" alone (Hong Kong, Singapore, Taiwan and South

W

% t

UNIDO; World Industry Since 1960, New York, 1979; the ten nations were Brazil, Mexico, Argentina, South Korea, India, Turkey, Iran, Indonesia, Hong Kong, Thailand.

133

Korea). In 1963 their share had only been 23.8%. South Korea alone accounted for 18.1% of all industrial exports by developing countries in 1984 (1963: 1.1%: 1973: 11%), which already exceeded the share (1984: 15.2%) of all Latin American nations put together (Frobel et al 1985, p. 39 ff.). These diverging development patterns manifest themselves from a global economic perspective in an increasing integration of the EANICdominated2 group of "Major Exporters of Manufactures" (according to UNCTAD: Argentina, Brazil, Hong Kong, Singapore, South Korea, Taiwan) into the world trade system, alongside a simultaneous continuation of the marginalization of the large majority of developing countries in the world economy. The share of world exports of the "Major Exporters" rose from 3.7% in 1965 to 8.2% in 1985, while that of the Remaining Countries and the Least Developed Countries (in which 70% of the world's population lives!) continually decreased (1950: 16.6%; 1970: 7.7%; 1986: 5.2%; UNCTAD 1988). With all the differences in the paths and levels of development within this majority of developing countries, their economies are together steadily losing significance for the world economy. World society has become a "one-third" society. To summarize briefly, the surge of industrialization on the periphery has been concentrated in the group of "NICs", while exports of industrial goods have largely come from the EANICs. The contrasting economic performances among the group of NICs say little at first glance, however, about the efficiency, productive capacity or accumulative strength of the economies of the developing countries concerned; they reveal rather differing development strategies. While the LANICs have primarily concentrated their industrial development on the domestic market, the industrial dynamism of the EANICs has been mainly based on the rapid expansion of the share of exports of GDP and on the increasing attachment to world trade. In view of the processes of differentiation occuring on the periphery and the evolution of the "NIC phenomenon", the "departure from the convenient notion" (Eikenberg 1983) of unity and homogeneity on the periphery seems to be imperative. 1.2

Differentiation Among the Group of Newly Industrializing Countries

But even as the first phase of differentiation in the 1970's and the phenomenon of the Newly Industrializing Countries had not nearly been 2

EANIC = East Asian Newly Industrializing Country; LANIC Newly Industrializing Country.

=

Latin American

assimilated into development theory, a second phase of differentiation, now concerning the NICs themselves, began to emerge in the middle of the 1980's.

This renewed differentiation divides the NICs into the seemingly successful, dynamically growing export - oriented Southeast Asian economies, and those Latin American nations, oriented to the domestic market, which have fallen into the whirlpool of the debt crisis. These divergent development tendencies have already led to premature and/or reductionist conclusions on the theoretical level. Some see here the confirmation of Marx's prediction of a secular growth in the significance of the Pacific region (Marx, MEW 7, p. 221) and view the Pacific Basin as the new center of the world economy (Menzel 1987). Other, neo-liberal economists emphasize rather the success of the exporting economies and see therein the confirmation of their theories of the "world market as a force of productivity" (Balassa 1985, Krueger 1985). The dependency theorists have reduced the problem to the processes of crisis in the heavily - indebted developing countries. The second phase of differentiation can be empirically outlined as follows: While the growth rates for the EANICs continued almost uninterrupted (South Korea: annual GNP growth 1981-87: 8.7%), the international financial crisis was developing into a deep recession in Latin America. Between 1980 and 1986 the average yearly growth of GNP fell in Brazil to a rate of 2.7% (1965-1980: 9.0%), in Mexico to 0.4% (1965-1980: 6.5%), and in Argentina an actual contraction took place with a negative rate of - 0 . 8 % (1965-1980: 3.4%). Continually rising foreign debts and the obligation to serve them have evidently led in Latin America to drastically lower rates of private consumption and to a constriction of investment activity. Gross domestic investment decreased throughout the LANICs between 1980 and 1986; in Brazil at an annual rate of 2.7%, in Mexico 7.6% and in Argentina fully 12.6%. The expansion of the industrial sectors of these economies has come to a complete halt as a result. Moreover, the recessions have been accompanied by extremely high r a t e s of inflation. While rates of inflation in the EANICs have not exceeded the 10% mark in the 1980's, they climbed to several thousand Percent in some Latin American countries. Development in the East Asian region presents exactly the opposite Scenario. Taiwan is the country with the second largest foreign currency reserves in the world economy (its foreign currency reserves totaled 76 oiihon U.S. dollars in April 1989, exceeded only by Japan; the Federal ePubli of Germany occupied third place) and has therefore been able c 0 escape the debt crisis altogether.

Although South Korea was, until recently, one of the big-debtor nations according to the nominal level of foreign debt (1985: 48 billion* U.S. dollars), it has been able to reduce its foreign obligations drastically^ since 1986 (to 28.5 billion U.S. dollars by April 1989). And while in Latin1 America financing the servicing of debts has constricted investment and growth, and private consumption has increasingly fallen, the successful^ management of the debt crisis in South Korea has coincided with a| renewed boom, after a short slump in 1980/81. Despite the export oO capital towards the reduction of foreign debt, gross domestic investment^ grew between 1980 and 1986 at an annual rate of 9.6% and led>1tci| average yearly growth of nearly 10% in industrial sectors. The boom ha^J been made possible by an upswing in investment commodities, a sweeping expansion of exports (average annual rate 1980-86: 13.1%), and con-3| siderable rates of increase in private consumption (5.5% 1980-86). ' ^ The patterns discerned in the development of South Korea apply in* essence to Taiwan, Malaysia and Indonesia as well (cf. Sachs 1987). The development scenarios could hardly be more antithetical. The% most devastating economic crisis of this century in Latin America hasfj coincided with dynamic processes of industrialization and a phenomenal^ capacity for crisis management in the EANICs. It is then precisely the^ region which is most fully integrated into the crisis-laden world economy;' which is not only able to escape the "debt trap" but even seems to profit^ from the tendency to crisis in the world economy (Messner 1988). Thi^l distinct differentiation among the group of Newly Industrializing Countries! raises a series of problems for development theory. Above all, the| question of the determining factors which structure processes of develop.^ ment in developing countries and the connected issue of the relationship^ between external and internal factors must be reconsidered in light of thJg divergent paths of development. There exists apparently no generals immutable pattern of development for all developing countries neittieig in the sense of the optimistic modernization theories nor of an irreversiT "development of underdevelopment". 1.3

The Impotence of Development Theory

Even though the "end of global theories" has been proclaimed, and even if a general theoretical helplessness and more or less considered changes of paradigms, with the accompanying "theoretical ruins" (Ziebura 1988, p. 26), dominate the scene, the processes of differentiation on the peripheiy have undoubtedly led to a surge of productivity in the debates on devel-* opment theory and inspired a wealth of empirical studies. ^

The theoretical shortcomings are most evident in the two major postwar schools of development theory: in the (liberal) modernization theory and in the (mainstream) dependency theory. The fact that the EANICs, which are most extensively integrated into the world economy, are least affected by the international crises which plague it, directly contradicts the assumptions of the dependency theory, according to which the restrictive structures of the world market are transformed into corresponding domestic deformities ("structural heterogeneity") which make processes of development impossible (cf. Cordova 1973, Galtung, 1971). f The conclusive thesis of the prominent dependency theorist, Andre Gunder Frank (1969, p. 35f), states that in the "worldwide structure of the relationship of the centers to the satellites, the centers are destined to develop, whereas the satellites become underdeveloped." The process of the "development of underdevelopment" is, according to A.G. Frank, irreversible. These considerations lead to the conclusion that "the satellites undergo their strongest economic development, and particularly their most classic capitalist - industrial development, when and only when their ties to the centers are at their weakest." Whereas the dependency theory seemed to be a suitable framework for explaining the ever larger chasm between the industrialized and developing countries in the 1950's and 1960's, it has been fundamentally called into question by the processes of differentiation in the Third World (cf. also Informationszentrum Dritte Welt 1988/89). The hyper-growth in the EANICs seems to. support the theory of the fundamental possibility of closing the industrialization gap following the ^Capitalist model, which, according to the neo-liberal modernization theorists grouped around the IMF and World Bank (cf. Balassa 1985, Krueger ;1985, Aghevli 1985), can be most rapidly achieved by a resolute integration into the world market. The pillars of the development successes in East Asia are easy to determine for the neo-liberal thinkers Balassa/ Williamson: "More generally, the scope of administrative controls was much more limited in the four East Asian NICs than in Latin America The organization of trade unions has been discouraged in the East Asian NICs ... the effect has been to reinforce the absence of minimum wage legislation in maintaining relatively free labour markets. In contrast, labour unions were powerful and labour markets were extensively regulated in Latin America Capital markets, too, were freer in the East Asian NICs than in Latin America ..." (Balassa/Williamson 1987, p. 14f). From this (as will be demonstrated) completely circumlocutory and reductionist p e r spective, the success of the EANICs is simply the result of the correct [read "(neo - )liberal"] economic policy. Closing the development gap is abridged to a voluntary act (cf. also Milivojevic 1985) while the world

market is seen unconditionally as a development motor, which every country is ultimately free to use. The deficiency common to all "Great Theories" of development consists firstly of a one - dimensional consideration of the processes of industrial-'* ization in developing countries, so that either the endogenous (liberal modernization theory) or exogenous (dependency theory) factors determi-^ ning development are placed at the center of analysis, and the other planed appears as a sort of derivative sphere. Secondly, these global theories are* based on ahistorical premises. Irrespective of the historical context and of** the specific economic and world political circumstances, they assume either*! an irreversible "development of underdevelopment" or the fundamenlafl possibility of closing the industrialization gap. '^sl It is true that there have been analyses from the big schools of d e - ® velopment theory which have attempted to mediate between external andj internal factors determining development, but they all have assumed 'tW§ j '^m primacy of the one or other plane in advance. Moreover, although there is no shortage of historical analyses of theacjl processes of development (Frank 1978, Wallerstein 1983 , Menzel/ Seng*£| haas 1986, Rostow 1980), they are with few exceptions (Cardoso/FalettO& 1976) dependent on a paradigm of continuity. This impedes the perception® of the variable specific world economic constellations which predetermine* the conditions for the paths and options of national development. ^ Studies of the processes of development in developing countries rau$t> therefore take into account internal socio - structural, economic and polit-^ ical barriers as well as development potential, and always against the* background of the capitalist world economy. At the same time, one should" also consider the changes in the form of the world system which ^cantotally alter the conditions and possibilities of national development The' South Korean development model of rapid integration into the wodd market would, for instance, surely have failed during the Great Crisis^; the 1930's, whereas the specific form of the global economic crisis of the ' 1970's and 1980's created paradoxically favorable conditions for "South' Korea's strategy of integration (cf. Messner 1988). ' ^ f This short sketch of the "impotence of development theory" and the complexity of the processes of development should suffice for now. In^tht following, the markedly divergent development paths of South Korea*and Argentina will be outlined with respect to the overlapping external and internal factors affecting development in the historical context, in order'to then take up once again the theme of development strategy. **

2. The Contrasting Cases of Argentina and South Korea A comparison of the South Korean and Argentinian development models is very useful for our analysis of the NIC phenomenon, since they r e present two extreme cases within the group of Newly Industrializing Countries. Industrialization had already begun in Argentina by the beginning of this century, at a time when Korea was still a Japanese colony (1910 — |1945). Argentina experienced its heyday between 1880 and 1930 and was considered during that period to have the most successful economy in Latin America. It seemed to be on the way to becoming a "Western" Industrialized power. Wage levels and the standard of living even among [the lower classes were distinctly higher than those in Southern Europe, in ;Some cases even than those in Western Europe. Argentinian prosperity was based on a rich agricultural sector and on dynamically developing [import - substitution branches in the industrial sphere. Argentina represents in this respect the attempts to close the industrialization gap via the Massic import - substituting road, which today can be said to have failed, p The situation in South Korea was exactly the opposite: it was one of She poorest countries in the world at the end of the Korean War (1953), [possessed no raw materials worthy of mention, and was handicapped by ithe division of the country, which had cut off the South from the important metal deposits in the North. p Since the 1950's, however, Argentina has been in a phase of c o n tinuous stagnation, has exhibited, in comparison with the other NICs, extraordinarily low rates of growth of GDP, investments and exports, and has been accurately called a "perpetual Newly Industrializing Country" fWaldmann 1985) in the academic literature. p South Korea, on the other hand, is a newcomer to the group of Newly Industrializing Countries. Its position on the periphery up to the J960's was not at all outstanding, yet at the end of the 1980's it seems to ||e on the verge of becoming a developed country. Per capita income in Bouth Korea was only about a fourth of that of Argentina in 1960, yet it lextupled between 1950 and 1985 (Argentina's per capita income increased Billy by a factor of 1.45), so that in 1986 per capita GNP in South Korea (12370 U.S. dollars) was higher than in Argentina (2350 U.S. dollars) for the first time. And while the significance of South Korea as an exporter 6f industrial goods from the periphery has been steadily increasing (South Korea's share of industrial exports by developing countries in 1963: 1.1%; 1973: 11.0%; 1984: 18.1%), the opposite process has been taking place in Argentina (1963: 2.3%; 1973: 3.0%; 1984: 1.1%). K The different paths of development of Argentina and South Korea are also reflected in their foreign trade figures. Argentina's trade is still to a £ r

large degree of a complementary nature. Despite decades of industrializa-JJ tion, raw materials made up 77% of Argentinian exports in 1986. The " industrial imports necessary for the maintenance and expansion of tbefe import - substituting branches have to be financed through agricultUllL| exports. yj South Korea's exports, in contrast, consist of 91% industrial gooddj (World Bank 1988). 33% of South Korean export products come from thej sectors of machine-building, electrical engineering, and motor veMdefSj more than 15% is classified under the rubric "High-Tech Productfoiji (Fajnzylber 1988). On the whole we have here a panorama of contiastd with Argentina on the one hand, as a success story in the world econoagj until 1950 and suffering a steady decline thereafter during the phase
The Exogenous Conditions

2.1.1

The Historical Constellations of the World Economy and Their Significance for the Periphery

,» yjjm

The South Korean economy, lacking raw materials, had at the end of t & S colonial period (1945) a light - industrial complex, which was rebuilt ailjyj expanded after the Korean War with the help of U.S. financial aid, and u modernized agricultural base which, with its concentration on basic food J a stuffs, was hardly able to produce an exportable surplus for the w q d 9 market. A U.N. economic commission nevertheless advised South Kore^ j f l 1954 to expand agricultural production and exports, in order to be able^^fl finance the import of industrial goods and the introduction of i m p o r t t j substituting industrialization. The IWF, for its part, also supported development strategy. These policy proposals were based on the success&u experiences with import - substituting industrialization of a few Latid American countries. The countries which had instituted this strategy aftera the world economic crisis of 1930 (for example Argentina and Uruguay)| were precisely the ones which at this time exhibited some of the higbeatl growth rates on the periphery and had the most developed industrfafi capacities in the Third World (Ground 1988). These pre-war recipes forj success were supposed to be made to bear fruit again in the newly coqyjfi "" i

Stituted world economy. Ignoring this advice, however, South Korea started an export offensive at the beginning of the 1960's in the area of nondurable consumer goods (clothing, textiles), which was expanded at the beginning of the 1970's to include durable consumer goods and even heavy-industrial products. Contrary to expectations, this strategy set into motion a rapid dynamics of accumulation. The thesis we intend to prove is that the restructuring in the world economy after World War II impeded the development opportunities of most of the countries and regions of the Third World (or at least forced them to adapt to the new order), whereas South Korea and a few other economies, by virtue of their specific national development resources, became beneficiaries of the newly developing forms of the international ^division of labor. ^ During its phase of prosperity between 1880 and 1930, Argentina, as an exporter of primary goods (wheat/meat), had profited from the international division of labor, which was mainly characterized by structures of complementary exchange. Two thirds of the foreign trade of the industrialized countries before World War II was with the countries on the periphery, to which industrial goods (in this case mostly investment goods) were sent and from which raw materials and agricultural goods were procured. Trade in industrially manufactured consumer goods played basically no part in this phase of the international capitalist system. This form of the international division of labor "favored" the regions on the periphery which possessed special natural resources, the export of which guaranteed foreign currency revenues which could be used to build up industrial capacities. For South Korea, as a country poor in raw materials wd with very limited areas available for agricultural use, a successful export strategy would have been unthinkable under these conditions. f In the course of the post-war boom in the industrialized countries, the focus of world trade shifted from complementary exchange between tiie centers and the periphery to intra - industrial and inter - industrial fexchange among the industrialized nations. The share of primary goods in jvorld trade declined from about half in the period 1913 -1937 to only fane fifth in 1970, while the share of finished goods climbed from 37% to £5%. I? As a result of this process, the developing countries' share of world trade decreased from 30.8% (1950) to 17.9% (1970). The periphery as a sWhole thus did not participate in the dynamic expansion of world trade 'after World War II; as an exporter of primary goods it became rather a jVictim of the restructuring in the international division of labor. This rearrangement of the structure and dynamics of world trade must be interpreted as the reverse side of the developments in the industrialized countries, as the formation of a new model of accumulation which

has at least the tendency to rob the developing countries of their strategic function within the world economy as suppliers of raw materials and(i agricultural goods. Thomas Hurtienne (1986, p. 89) summarizes the connection between., the development dynamics of the industrialized countries and the loss of global economic significance for the periphery as follows: "The technological modernization of agriculture (in the industrialized countries, M./M.) raised the level of self-sufficiency and therefore lowered the demand in, Western Europe for imports of many foodstuffs; the replacement of natural raw ^ materials by synthetic ones, facilitated by low oil prices, stimulated the chemical industry and simultaneously limited the demand for agricultural raw materials from j the developing countries; the enormous increase in levels of real income dynamized r above all the demand for durable consumer goods, and less the demand for tropical luxury items and 'colonial goods' such as coffee, cocoa, tea and tobacco..." ^

Whereas the majority of the developing exporters of raw materials and* agricultural goods were negatively affected by these changes in the form ofu the world capitalist system, South Korea, as a supplier of nondurable^ consumer goods, profited from the newly emerging structures of accumu-jJ lation in the industrialized countries. , One of the major characteristics of the "Fordist" development model inr the industrialized countries is the predominance of mass production of^ consumer goods on the basis of the Taylor system" of scientific man-^ agement and semi-automatic "Fordist" assembly - line production. The^ problem of realization, of the full utilization of the capacities of the massj consumer - goods industries, is solved by the linking of wage increases tgd the general economic development of prices and productivity. In the^ course of this development the consumption of wage-earners is .increasingly integrated into the process of capitalist accumulation. ^ Until 1945 80% of all goods and services consumed by wage-earnig^ households in the German Reich were still being produced by n o n - c a p j ^ italist sectors. The purchases of the working class, 90% of which w e ^ made up of basic consumer goods such as food, clothing and housing, benefited up to 1945 mainly non - capitalist producers of goods aiw^ services, which were only indirectly connected to the capitalist sector! through the demand for primary products and investment goods ( H i u ^ tienne 1986, p.76/Lutz 1984, p. 101 ff.). ^ The South Korean export offensive in the area of nondurable cons, sumer goods would thus necessarily have failed under the conditions to£ the "pre - Fordist" models of accumulation and the old internatipnal division of labor, since the consumer demand of wage-earners in the, industrialized countries before 1945 was aimed at non - capitalist sectors.

Especially in the area of textiles and clothing (the most important export goods of South Korea during the first phase), the bulk of the population's demand in the industrialized countries was met by small craftsmen and by production within the households themselves. Generally, only fabrics and cloth were bought from industry. Only the displacement of the non - capitalist sectors in the "Fordist period", the generalization and expansion of capitalist markets for "wage goods", the dynamic development of real wages and the emergence of a "supermarket culture" in the centers created the demand for products which South Korea was in a condition to produce, and which were being traded on the world market for the first time. Whereas the bulk of the periphery fell victim to these unforeseeable developments and must now adapt to the new conditions (cf. Argentina) whose dynamics can only be discerned in ex-post analyses - the new demand structures in the industrialized countries, which are also reflected in the international division of labor, correspond well to the productive possibilities and development potential of South Korea. The poor supplies of raw materials and the limited agricultural capacity had made a repeat of the Latin American variation of import - substitution based on agricultural exports impossible; yet for South Korea, under the conditions of the post -1945 world economic dynamics, they paradoxically turned out to be nothing less than a force of production. Argentina, in contrast, failed precisely because of its national resources and economic structures, which had been the basis of its economic success before World War II: "The replacement of the agricultural export model of economic development proved all the more difficult the more successful it was, and the lower therefore the general willingness is to exchange it for another development model, that of industrialization." (Waldmann 1985, pp. 131-32). [ The comparison Argentina - South Korea makes clear how, under changed world economic conditions, formerly advantageous national development potential can become a disadvantageous endowment of resources and vice versa. r The successful articulation by ex-post analysis of the export - oriented development strategy of the South Korean development planners, based on the resources of the world market, is evidently dependent on the respective national resources and development potentials and strategies, as yell as on the dynamics and structure of the world economy. The dependency and neo-liberal modernization theorists' concept of the world economy as a resource or obstacle per se for development proves to be [erroneous: first of all, the same world economic context produces development obstacles for one group of developing countries as well as development potential for other nations on the periphery (which means that development in the world economy always proceeds asymmetrically); and

secondly, apparently divergent world economic constellations and separate , international contexts can be localized which completely restructure the conditions for successful development. The significance of external factors, estimated by Menzel/Senghaas in their latest works to be rather small, continues to be relevant. The interpretation of the world economy as a general context of essentially similar conditions, restrictions and/or potentials (cf. dependency theory and neoliberal modernization theory) becomes empirically obsolete. We have now covered the various world economic constellations and* their effects on the regional division of development obstacles and opportunities. In the following we will extend the analysis through the con- sf sideration of the world political and military constellations and thenr examine how they in turn condition and structure the regionally diverse^ distribution of autonomy and dependence. ^ 2.2.2 Political and Military Constellations and Their Fluctuations After 1945 * The traditionally strong Latin American economic nationalism has been* permeated and conditioned by military and geo-political considerations. ^ The starting point in the struggle for more autonomy in Latin America" has always been the security of strategic industrial raw materials and,4 above all, sources of energy for the build-up of an indigenous armament^ industry.3 ^ This strategy may have made sense before the Second World War, when overt colonialism and imperialistic military intervention were still the/ rule worldwide and still being practiced in Latin America in the Carib-' bean. But this strategy of the defense of national sovereignty lived on fr the post-war period, especially in nationalistic circles, although the forms^ of international domination were becoming subtler and taking on a multilateral, neo-colonial character, meaning that there was no longer, automatically a direct connection between economic and military - political * relationships of domination and dependence. Comparing and contrasting the relationship of the U.S. to South Kofca after World War II with its relationship to Latin America can be veijL instructive and illustrative for the elucidation of the problem of depen-jg dence and its consequences for national development. 3

cf. the role of General Savio in Argentina during the nationalization of oil resentil and the formation of Argentinian heavy and armaments industries. This industrial structure has been retained up to today and is still characterized by the influence of this nationalistic military figure. 20 of the 100 largest enterprises of the country WW© state - owned at the beginning of the 1980's, and two thirds of these were under dirCCST military control.

Short-term interests of economic profit have always predominated in U.S. policy towards Latin America. Except for the short period under President John F. Kennedy at the beginning of the 1960's, the U.S. has never had a clear political concept concerning Latin America. In East Asia the situation was completely different after World War II. Global strategic considerations predominated here, which called for coherent coordination of the various actors among one another and their subordination to the security and systemic interests of the U.S., as defined at the highest political, not just military, level. From the point of view of the U.S. this signified that there was a strong interest in the economic development of this region for g e o strategic considerations. This meant for East Asia that economic success, based on greater national autonomy, corresponded with the long-term interests of the U.S. towards the military stabilization of the region. Behind the security screen of U.S. hegemony, the aspirations to autonomy in these countries could be concentrated on economic development and on increasing productivity and competetiveness in the world market. Military - strategic dependence paradoxically gave the South Korean government economic independence, which was denied Latin America precisely because of the geo - strategic indifference of the foreign policy centers in the White House and State Department, and given over instead to the purely economic interests of private corporations and other lobbies. Among these lobbies were not only multinational concerns, which like 11 1 decisively contributed to the overthrow of the Allende government in Chile, or which like the United Fruit Company determined for decades the entire U.S. policy in Central America, but also governmental lobbies like the CIA or military groupings residing in the Pentagon. For lack of a comprehensive, conceptually consistent and coherent U.S. foreign policy towards Latin America, these economic and governmental interests took control. They could install governments or help to overthrow them, as 11 1 [did in Chile in 1973 and United Fruit did in Guatemala in 1954, and set the standards for official U.S. foreign policy. The U.S. actors who intervened in Latin America were thus part of the social structures which impeded development. k". We note here the inadequacy of conventional dependency theory and its analysis of the Latin American experience. A glance beyond the region ;itself demonstrates that the extreme economic dependence of Latin [America, where the slightest violation of the interests of U.S. corporations 'has led to internal political destabilization and even military intervention, is due less to any global U.S. strategy of imperialist domination than to a - slightly overstated geo - political indifference. The opposite is the

case in East Asia, where a global security strategy and extreme d e pendence and limitation of national sovereignty in military - strategic j questions have brought with them latitude in instituting an autonomous^ national economic strategy of development. The U.S. demands of South^ Korea a path of development, oriented to national economic interests,' which it has either obstructed or militarily terminated in many Latin ^ American nations. In East Asia, regional security and development since World War H^ have been closely connected to the global strategy of the U.S., whereas m^ Latin America a sharp division existed up to the beginning of the 196ffs" between the global security interests of the West and the national development interests of the region. ^ Since the leading industrialized nations were not willing to discuss international economic relationships, the geopolitically directed economic^ nationalism of the 1930's and 1940's remained dominant among significant^ sections of the influential elite in Latin America. The concepts of a more or less radical disengagement, which CEPAL had taken up and introduced^ to the new class of technocratic civil servants, became more popular awL: were intensified and radicalized by the dependency theory. "'IS The Cuban revolution led to a turning point in the relations between | Latin America and the U.S. in the 1960,s. The U.S. increasingly turned to^ nationalist military officers as partners in its dealings with the region, emphasis also began to shift in the theoretical discussions on moderniza-| tion in the U.S., away from the previous linking of development and^ democracy. Instead, the idea of a link between development and security^ gained credence and access to the highest circles in the U.S. administra-^ tion via the Pentagon. "Development" became, in the framework of the* doctrine of national security, a question of security interests from the U.S.\ point of view (Moniz Bandeira 1987). The military received a new role in "development policy". Many formerly apolitical or liberal officers began to be interested in this role. The "professional" Argentinian military of 1962' with General Ongania at the top became the putsch generals of 1966' (Rouquie, 1978). Other formerly nationalistic officers and populist politi-^ cians were won over to this new inter - American "doctrine of national^ security", and their "anti - Americanism" was defused. The particularly strong role played by lobbies in U.S. policy towards! Latin America certainly did not change because of this; the Pentagon^just* became the strongest lobby and superseded the traditional oligarchies, and> concerns based on raw materials. The result: from 1962 to 1976 an in-^ creasing militarization of the sub - continent took place. The militai^ steadily took power until there were only two civilian governments left J g South America. :;

2.2

Endogenous Social Structures and the Political System

2.2.1 Argentina's Self - Obstruction Through a Stalemate of Hegemony The crisis of 1930 was followed neither by a reorientation of the form of incorporation in the international division of labor or of the foreign policy priorities of Argentina, nor by a thorough reform of the internal relations of ownership and production in the countryside. No agrarian reform was enacted. Not even the penalization of uncultivated land relative to productive real estate could be implemented, since taxes were assessed according not to acreage but to agricultural production. In spite of the onset of industrialization and the emergence of the populist state, the agricultural structures and the power base of the rural oligarchy remained untouched. The fraction of the ruling class which had been dominant up to then was not removed from power. f The state began to intervene increasingly in the redistribution of land Tents. Unable to realize these rents on the world market, the dominant [classes had to accept regulatory government intervention. But this intervention did not have as its purpose the bringing about of an adaptation to jthe new world economic conditions, but rather the maintenance of the old border and the prevention of fundamental change. The land rents, i.e. the ^natural productive advantage in international terms of Argentinian agri<culture, remained the major source of social wealth, which could only be [realized by the export of traditional agricultural products on the world imarket. To be sure, even before the emergence of Peronism the traditional agrarian oligarchy could no longer rule directly and independently as before, but it maintained in fact - despite the participation of other ;social forces in government affairs, mainly the industrial bourgeoisie and 'the urban masses an enormous power share and a practical veto right [within the framework of the newly adopted model of industrialization ^through import - substitution. The intervention was directed on the one hand outwards, to save what could still be rescued of the special relationship to Great Britain. The former world power felt that, due to its internal economic crisis, it was no longer in a position to purchase Argentinian agricultural products, or father that it had to give preference to suppliers from within the jCommonwealth, namely Argentina's competitors Canada and Australia. As previously stated, instead of slowly loosening the ties and working towards self-reliance, the agrarian oligarchy tried to maintain the special relationship between Argentina and Great Britain by granting attractive economic conditions. On the other hand, the intervention was directed inwards, aimed at stabilizing the political domination of the rural oligarchy

and at maintaining the prevailing internal market and consumption structures. An industrialization drive was launched, based on the substitution o f ' domestically produced consumer goods for the imports which were now lacking. This industrialization for the domestic market created a great demand , for imports of industrial primary products and capital goods, which could* obviously not be financed by an expansion of industrial exports, but rather'* only by the revenues of traditional agricultural production. The industri-^ alization program and the social groups connected with it remained as a^ result dependent on the old agrarian oligarchy which controlled this* production. Only agricultural products were competitive on the world market. Industrial production for the domestic market could only develop; thanks to state subsidies and protectionism, and its production costsA remain to this day with the exception of a few segments and branches above the international level. Whereas around 40% of GDP during the last two decades ( 1 9 6 4 - . 1986) was produced by industry, its share of exports averaged only 20% * during this period. The share of exports made up by industrial goods even decreased between 1976 and 1983 from 23.4% to 16.1%, although it could* be raised to 29% by 1987 (World Bank 1986, Kurzinger 1988). Thus* agriculture, with its very low level of processing, achieved 80% of foreign* currency earnings between 1964 and 1986, even though the contribution of* the primary sector to GDP fell during this peiod from 17% to 12%. What is concealed behind these data is an enormous transfer afi resources from agriculture to the industrial sector. Jeffrey Sachs (1987) argues for this reason that the agrarian sector in* Latin America and consequently the export orientation as well are wealth and that exactly the opposite is the case in East Asia. We cannot, however, agree with this thesis. For it is not the weakness of the agrarian sector, but rather the tenacity of the traditional agrarian* oligarchy and the resulting division of Argentina's ruling class (which still* retains its rent - oriented character) into an export - oriented agrarian fraction and a domestically oriented industrial fraction, which is the cause' of the increasing weakness of the export sector and its productive capacity, of the powerlessness and lack of autonomy of the state in its dealing!1 with important social groups, of the structural blockages of the industri-^ alization process and of its characteristic s t o p - a n d - g o cycles. - This1 stalemate of hegemony, which continued into the second half of the1 1970's, has been described by Marxist (Portantiero 1978), leftist - liberal (Di Telia 1968; O'Donnell 1978) and liberal - conservative authors alike.? This stalemate seems to have been overcome as a result of the last military dictator—' ship. Jorge Schvarzer has taken up this question in detail (cf. article in this volume).
The question we must ask at this point is why no agrarian reform could be enacted. The most plausible reason is that the established structures of ownership and production in agriculture and mining and this applies not only to Argentina, but to all of Latin America were apparently at first not dysfunctional relative to the initiated process of industrialization. This process was dependent on the import of capital goods and semi - finished products which either were not available or could not be produced within the country. These imports could only be financed through the traditional exports from the agricultural and mining sectors, since the nascent industrial production was not competitive on the world market. A radical readjustment of the structures of ownership and production in the primary sector, in order to link it to the development of the domestic market, did not even have the undivided support of the industrial bourgeoisie. For even where the pressure of the rural population did lead to radical agrarian reform (Mexico and Bolivia), the functional necessity of selling the production of primary goods on the world market brought about the restoration of the conventional, monopolistic relations of ownership, production and commercialization, i.e. relations which were very similar to those which had just been abolished. One other point will be relevant for the comparison with the East Asian countries in the 1950's: although the classic international division of labor came to an end in 1930, Latin America never found another basis for an active reintegration. The new import - substituting industries were not competitive on the world market. They were not connected to the national riches, the established technologies or the patterns of mass c o n sumption of the population, but were rather oriented in these three respects to the highest standards of the capitalist West. It was incidentally not necessary during the first phase of industrial.ization to create a domestic market for industry through the inclusion of the impoverished classes of the rural population, since there already existed an extensive market for the elevated tastes of the middle and upper classes, which had always been culturally completely oriented to the West. The supply of consumer goods for these strata, which had their origin in the colonial past and in the traditional international division of labor, had previously been covered by imports from the industrialized countries and could, after the loss of these imports, now be taken care of by domestic industrial production. The fact that this industrial production was very expensive was no ^obstacle for the time being. The need to economize on foreign currency, caused by the crisis, called forth protectionism, state intervention und •eventually political populism. The intervention of the populist state was purely limited to redirecting a part of the land rents to the development of industry and the domestic

market. Since the rural relations of ownership and production dating from the period of the classic division of labor remained in force, the extensive methods of production did not undergo any change. Capitalization and modernization of agricultural production were not introduced. The entire production apparatus remained therefore dependent on these land rents. Protectionism covered in effect the entire industrial production, including the modern Fordist sectors.5 The Argentinian model of development can^ without exaggeration be called rent - directed industrialization. '5 This model of industrialization, with its orientation to the domestic , market, is also characterized by the corporate alliance of the organized (i trade-union movement and the bourgeoisie from the import- substitution * sectors. Up to the 1970's, the unions managed to slow the introduction of new technology and simultaneously achieve relatively high wages. The wage,, increases were mainly financed through redistribution of the land rents, while increases in industrial productivity remained small. The enterprises! were able to meet the demands of the trade unions, since they were producing for the domestic market under basically oligopolistic conditions and could easily pass on higher production costs through higher prices. The trade-union movement was thus a part of the costly and inefficient import - substitution model which obstructed productivity growth. The "successes" of the trade unions turned out to be illusory in the* long term, in that the costs of the relatively high wages and of the| retardation of modernization and productivity growth were reflected in} prices for consumer goods well above the world level and in steac(yr inflation. ,rfj The populist state, which had established itself in the 1940's as ^ reaction to the crisis of 1930, merely performed the function of recon-^ ciling various societal interests through the redistribution of the differential rents, without overcoming their fundamental contradictions. As long asworld economic conditions were advantageous from the Argentinian per^y spective, this could be accomplished without any major disruptions. Bu^ the long-term deterioration of its foundation revealed itself in the^ recurring, secular worsening of price relations for Argentina's foreign tradj^ after the Korean War. The apparent strength of the corporate - populist state in Latin' America has always been based on the huge agrarian profit, based on land, rents, which could be obtained on the world market and redistributed^ internally by government intervention to the benefit of the urban sectors. 5

It should be noted here that protectionism refers in theory to the so-called "inftflf industries'1. However, automobile production by modern multinational concerns, for example, can hardly be called an infant industry. ^ ^

As long as this profit could be obtained, the state could fulfill its function of arbitrage. But in the course of the long-term deterioration of agricultural export prices for Argentina, the level of profit diminished and with it the ability of the state to mediate in distributional conflicts. Thus the corporatepopulist state entered a crisis without having overcome the old split within the dominant class. Peron was overthrown in 1955, after which a long period began in which the lack of hegemony and unity within the ruling class expressed itself in stop-and-go politics. The breakdown of a government representing one fraction automatically resulted in the takeover of power by the other fraction. Political instability, the colonialization of the state by particular social groups and the loss of governmental autonomy and national planning capacity thus became the main characteristics of the Argentinian political system. This model lasted from 1955 to 1976. In 1976 a period of revolutionary change began, the outcome of which still remains open.6 Some tendencies and prognoses can be found in the article by Jorge Schvarzer in this volume. 2.2.2 The Case of South Korea of Development

The Endogenous Pillars of The Processes

South Korea entered independence after 1945, following 40 years of colonial rule by Japan, as the poorer half (in terms of raw materials) of a divided nation. Its not insignificant colonial inheritance consisted of a considerable infrastructure (ports, roads, railroads) and a modernized agricultural base with emphasis on the production of foodstuffs, as well as a light - industrial complex. Moreover, colonial rule had caused the dissolution of the previously dominant subsistence structures on the Korean peninsula and led to the establishment of capitalist market structures (cf. Cummings 1981; Messner 1988; Suh 1978). The U.S. liberation of South Korea from Japanese colonial rule in September 1945 led to the installation of a U.S. military government in Seoul. This government, less out of concern for economic development in the East Asian country than out of fear of a social revolution (which was strengthened by peasant unrest and a general strike in 1946), forced through an agrarian reform which was to be of decisive significance for A quantitative decrease in the significance of the land rents; reduction of the conflict of purpose between import - substitution and export - orientation; disintegration of the heterogenous social block interested in developing import - substitution, along with an increasing export - orientation of industry, etc.

South Korean development. According to the land reform law of 1950, the maximum cultivated area was limited to 3 hectares per family; the expropriated land was sold to the small farmers, with compensation going to the former owners. The percentage of tenant farmers among agrarian households decreased as a result of the land reform from 70% (1950) to 14% (1965) (Ban 1980, p. 286). This land reform had six dimensions which encouraged the execution of a model of industrialization. First of all, the expropriations meant the end of political and economic domination by the traditional agrarian oligarchy. The elimination of this development - hampering class saved South Korea in the time to come from the perpetual conflicts within the state apparatus over the diverging interests of the oligarchic landlords and ^ the emerging industrial bourgoisie, which in Argentina were to paralyzeJ the intervention capacity of the state up to the middle of the 1970's^ Secondly, speculation in land became completely unprofitable as a result' of the land reform and at the same time tight limits were set on the establishment of land rents in the agrarian sector. The agrarian sector no longer offered lucrative investment opportunities. Moreover, the sweeping elimination of leaseholds and the subsequent direct state taxation of agricultural households led to the redirection of these levies from the pockets of the oligarchs to the state treasury. The state then directed these funds, into the creation of industrial capacities. A not insignificant portion of the * former oligarchy was transformed directly into industrial entrepeneurs through the state compensation payments, which could be exchanged for, industrial capacities left behind by the Japanese. Thirdly, the land reform resulted in a relatively homogeneous distri- * bution of income, although at a very low income level, which supported' the first phase of import - substitution in the area of nondurable consumer goods which was implemented in the 1950's. The prerequisites for indus- { trialization in this area also existed due to the light - industrial capacities4 left over from the colonial period. At this point, however, the impression of an idyllic transformation from" an agrarian to an industrial society in the course of the land reform must be discouraged. In addition to the oligarchs as "victims" of the land reform, the rural masses were also tragically affected. They did receive land, but they had to pay for it and as a rule went deeply into debt. An impoverishment of the smallest farmers set in, which led to a wave of migration to the cities. This rural exodus was reinforced from the b e - 1 ginning of the 1960's by extremely low state-fixed prices for agricultural products. Thus the result of the restructuring in the agrarian sector was fourthly that, due to the low agricultural prices, the costs of reproduction of industrial workers, i.e. wages, could be kept low. Moreover, a large

reservoir of workers formed in the cities as a consequence of the rural exodus, which put even more downward pressure on wages. The fifth dimension was the emerging class structure marked by the absence of an urban bourgeoisie oriented to Western consumer norms, the virtual elimination as a class of the agrarian oligarchy, and a politically and economically weak industrial bourgeoisie which was just in the process of formation. This specific social structure prevented the rise of the premature "Fordization" of society, from the standpoint of both production and consumption, which took place in Latin America in the 1950's b e cause of the orientation of the upper and middle classes to Western consumption patterns. There simply was no class in South Korea which could have imposed either a disproportionate, extravagant and technically unreasonable industrialization in the area of durable consumer goods (as in Latin America), or as the alternative to this the importation of luxury consumer goods on the basis of foreign currency revenues achieved through agricultural exports (as was the case in many African nations).7 Sixthly, the high degree of autonomy of the state relative to society derived from the power vacuum in South Korean society. The "colonial — ization" of the state in Argentina is contrasted by the high intervention capacity of the South Korean government as the only strong actor within that society. The agrarian oligarchy had disappeared, and the industrial bourgeoisie only came into being at all in the course of the stateorganized industrialization process (cf. Hwang 1989). The state was the owner of the former Japanese enterprises after the end of U.S. military rule, and could therefore "create" the new industrial entrepeneurs itself. Moreover, the state also had a financial monopoly, since the entire banking sector had been nationalized; furthermore, the considerable U.S. financial aid was distributed through government agencies. So the state stood virtually above society after decolonization, and in the center of the process of development. The industrialization of the 1950's was thus an extension of the already existing labor-intensive production capacities and, in addition, corresponded to the demand profile of society (nondurable consumer goods). 7

"Of the four motive forces behind ISI balance of payments difficulties, wars, gradual growth of income, and deliberate development policy only the first leads to a bias in favor of nonessential industries. The last, deliberate development policy, is likely to produce exactly the opposite bias; and the remaining two causes are neutral with respect to the luxury character of the industry" (Hirschmann, Albert, The Political Economy of Import - Substituting Industrialization in Latin America, 1968, p. 91). Hirschmann could not have known as he wrote these lines that, twenty years later, they would once again prove to be absolutely correct in the analysis of the South Korean model of development.

Imports were restricted to the machinery and intermediate products necessary for the import - substituting branches; luxury consumer goods played virtually no part in these areas because of high customs duties. To that extent we can speak of an "appropriate industrialization" ("angepapte" Entwicklung) in the 1950's. There was, however, a drawback: after the end of the Korean War in 1953, South Korean industry found itself in a phase of (re - Construction and could hardly earn the foreign currency needed to carry out the necessary imports of investment goods. The agrarian sector, > with its emphasis on the production of foodstuffs, could manage to guarantee the reproduction of the population, but it was only able to realize meager export revenues. The realization of the first phase of J import - substitution in South Korea was, as in Latin America, dependent on the influx of foreign capital. The demand for capital imports which arose in the 1950's for the construction and expansion of a nondurable consumer goods industry was met by U.S. financial aid. 80% (!) of imports, 70% of investments ( i n vestment ratios in the 1950's stood at 10%) and 50% of the state budget were financed directly by the U.S. during this phase (cf. Cummings, B. 1981, p. 24; Menzel 1985, p. 73f.). The limits of import - substitution had been reached by the beginning of the 1960's. In addition, the U.S. began to cut economic aid, which necessitated an increase of foreign currency revenues in order to maintain' accumulation. Conditions seemed to be very unfavorable for a dynamization of exports; a major expansion of agricultural exports was unthinkable' due to the limited supply of arable land, and hardly any exportable raw materials were available. In 1962 the export quota of the country stood at 6%, and 80% of the export package consisted of foodstuffs and raw* materials. The poor supply of primary goods proved to be an altogether productive resource for South Korean development. There was no alternative' to attempting to increase exports in the area of labor-intensive consumergoods, which had up to then been produced almost exclusively for the domestic market. We know after the fact that the path taken here set* into motion one of the most dynamic processes of industrialization on thek periphery since 1945. The next question is that of the internal conditions which were essential for this economic success story, along with the already mentioned factors of specific social structure, profiles of income distribution and demand resulting from the land reform, and the directly connected dominant position of the state. Contrary to the interpretive models of a neo-liberal shade (Balassa 1985, Krueger 1985, Aghevli 1985), the state performed the function of a sort of coordinating center in South Korean development. The difference to Argentina consists not in the quantity, but in the higher quality and

efficiency of state intervention. The government development agencies, based on an elaborate and efficient institutional system which had been set up under Japanese colonial rule, derived their relative autonomy from the class structures outlined above and from the relatively broad autonomy in economic matters (in comparison to Latin America) granted by South Korea's specific position v i s - a - v i s the U.S. The point which fundamentally differentiates the South Korean development path from the Latin American import - substituting models is the specific form of the relationship between selective import - substitution and selective export - orientation. Contrary to the misleading terminology such as "export model" and "export - oriented development" used to characterize South Korean development as if a complete reorganization of the economy towards exports had taken place, the import - substitution of selected sectors has actually been continued up to the present and in fact only supplemented by the orientation of some segments of industry towards exports. In the middle of the 1970's 14 out of 25 industrial sectors were still distinctly import - substituting branches. If one traces the development of the industrial sector over the past 30 years, various industrialization sequences are ascertainable with continually repeating configurations. After a phase of import - substitution lasting on average 5 years, a boosting of exports begins gradually in the respective sectors. Import - substitution is simultaneously launched in new sectors, which then, after this initial build-up, likewise turn to the world market as an outlet for exports. The (re - Construction of the textile, clothing and shoe industries in the 1950's was followed beginning in 1962 by the orientation of these sectors to the world market. In the course of the 1970's, industrial complexes producing durable consumer goods were then erected behind high customs barriers and the chemical industry was expanded, in order to substitute for the imports (textile fibers, dyes, etc.) which had up to then been necessary for the already export - oriented sectors. Beginning in the middle of the 1970's, products from these new sectors were also being sold on world markets. In the middle of the 1970's the upsurge of industrialization in the steel, automobile and electronic sectors began. After an initial buildup these sectors were then likewise redirected towards the world market. These industrialization sequences are not based on the dynamics of market forces; they are "organized" on the basis of governmental development plans and safeguarded by selectively introduced elements of trade policy, intervention in industrial policy and a differentiated system of credits and subsidies. South Korean capitalism turns out to be "guided" capitalism. In the course of this process of the successive, active integration of former import - substituting branches into the world market, internationally

competitive sectors have arisen in South Korea. In Latin America, on the other hand, under the protection of high tariffs, oligarchic, inefficient industrial structures have formed, which in addition have often been dominated by multinational corporations. A differential treatment of the forms of state intervention is beyond the range of our analysis (see: Menzel 1985, Hillebrand 1989, DattaChaudhuri 1981, Dornbusch/ Park 1987), so let it suffice here to clarify the "coordinating function" of the state in the development process. One field of intervention has certainly been the labor market, where the state has worked to ensure the profitability of national capital. The persecution of independent trade unions and the fixing of wages have always been part of the repertoire of South Korean government intervention. The low-wage policy cannot explain the dynamics of development in the last three decades, however; first of all, because low wages have been the rule throughout the Third World without being accompanied by high rates of growth; and secondly, because capital- and technology - intensive industries have been increasing in importance since 1970, which has meant that the portion of production costs made up by wages has been steadily decreasing. Furthermore, real wages increased during the period from 1971 to 1985 at an average annual rate of 7.7%, much higher than the levels in most Latin American countries. This rise in wages was based on average yearly increases in industrial productivity of l i % during the same period, so that on the whole an upward redistribution took place. What is noteworthy, however, is that by the end of the 1980's wages had reached a level which induced South Korean enterprises to transfer labor-intensive production to other parts of Asia (Indonesia, Thailand). Just as decisive as the regulation of wages is the government - sanctioned exploitation of the work force; weekly and yearly working hours in South Korean industry are unmatched anywhere in the world, and official accident statistics show that in no other country in the world are as many factory workers fatally injured as in South Korea. Let us now look at the other levels on which the state operates: The trade policy of South Korea is characterized above all by classic elements of import - substitution policy to protect the domestic market (duties, quotas, etc.), which are often applied even after the initial buildup phase of the individual sectors is over, in order to guarantee the dynamics of accumulation of national industry. Alongside these mercantile policy elements oriented to Listian development options, a wide assortment of measures is used to support the exporting enterprises (duty-free importation of primary products, tax breaks, etc.) and to help younger branches make their way onto the world market (short-term subsidies,' 1 advice on technology and marketing, etc.).

The center of government intervention in the 1970's lay in the credit allocation policy of the state financial institutions. In order to make optimal use of limited monetary and technological resources, credit was concentrated on only a few sectors. The execution of the industrialization sequences anticipated in the government economic plans was directed mainly through this system of "strategic financing". This managed distribution of credit, which directly limited the investment autonomy of enterprises, also applied to foreign credits, which could only be obtained through the state. The unproductive utilization of capital imports, which could be observed in Latin America, was thus prevented. The decisive significance of the control by the state of the flow of capital, and thereby of the fields of investment, becomes clear when we take into account that South Korean industrialization was a case of "indebted" industrialization. 25% of investments between 1963 and 1981 were financed by foreign credits; in the 1970's this share even exceeded 40%. Here we see the "exposed flank" of South Korean development: without the favorable borrowing conditions of the 1970's on world financial markets, the dynamic process of accumulation could not have been realized. That it was achieved was not only the result of the deliberate measures taken to promote exports and of coherent industrial policy; South Korea also profited from the specific crisis conditions in the world economy in the 1970's and 1980's (cf. Messner 1988), which had a negative influence on development in other regions of the periphery. The dependence of this model of development on a constant influx of foreign capital is also demonstrated by the fact that South Korea had continually compiled foreign trade deficits until 1985, and only began to accumulate relatively high surpluses in 1986. Only since the middle of the 1980's has the need for imports to maintain the dynamics of industrialization been decreasing and the import - substitution policy of the 1960's and 1970's begun to show results; South Korea has only recently become a country of trade balance surpluses. As opposed to most Latin American Newly I n dustrializing Countries, the export boom of the 1980's has not been accompanied by internal recession, but has rather coincided with an expansion of private domestic demand and investment ratios of over 30%, along with a simultaneous reduction of foreign debt since 1986. It is apparent that the selective combination of import - substitution policies and export - orientation only begins to solve the problem of dependence on the influx of foreign capital after a long period of time. As opposed to Latin American import - substitution, however, the growthinhibiting limitations of the domestic market for the Fordist mass-production sectors can be overcome, and industry does not remain forever dependent on increases in exports by the agrarian sector. Furthermore the

attachment to the world market prevents the establishment of inefficient and costly industries, and forces the creation of modern, internationally competitive sectors (which would however be unthinkable without government coordination, the construction of industrial complexes and the influx of foreign capital). What is also striking in comparison with the Latin American Newly Industrializing Countries is the strictly subordinate role of multinational corporations in the South Korean economy. "In 1967 stock of direct foreign investment totaled only 78 million U.S. dollars, or about 2% of the Brazilian total" (Evans 1987, p. 207). The low significance of direct investments has continued up to the present. Whereas the currency and technology gaps in many Latin American countries were supposed to be closed by the efforts of foreign enterprises, only 6.6% of South Korean capital imports between 1962 and 1986 consisted of direct investments. It is striking that 94% of the capital of multinational corporations was tied up in joint ventures, whereas this applied to only 40% of the capital of international concerns in Brazil and 50% in Mexico (Evans, p. 207). The concentration of foreign credits made the utilization of capital imports in accordance with national development planning much easier, while the technology gaps were closed through the importation of modern production facilities from Japan. As opposed to Latin America, the South Korean government functioned as a mediator between foreign creditors and private domestic borrowers. This state control of the credit system prevented the concentration of the power of the multinationals in the 1960's and 1970's and the emergence of a strong private financial oligarchy in the 1970's and' 1980's. rt 2.3

The Comparison Argentina - South Korea: Conclusions and Perspectives

i.

The South Korean scenario was on the whole one of compatibility: b e - 1 tween the spheres of production and consumption, and between the' selective creation of industrial complexes and their carefully directed' integration by phases into the world market. This compatibility was not*a' product of the market, but was generated by the state, whose relative" autonomy was on the other hand the product of specific social - structural constellations. The process of development in South Korea can in the final' analysis not be understood outside the international context, as our c o n ^ sideration of the significance of this plane has made clear. Argentina' stands in sharp contrast to this: industrialization was not self-supporting' in the sense of the industrial sector being able to finance imports through'

its own exports. On the contrary, industry remained deeply dependent on imports and, as a result of the customs protection given its production for the domestic market, did not become internationally competitive. Fajnzylber (1983), referring to the trade regimes in the Latin American Newly Industrializing Countries, speaks of a "proteccionismo frivolo" which led to the formation of inefficient oligopolies, which then supplied the domestic market at excessive prices. Combining import - substitution and export - orientation was not successful in Argentina. The export - orientation of the agrarian sector and the concentration of industry on the domestic market only obstructed each other in the long run. This led to political instability and restricted the autonomy of the state, both internally in terms of the powerful social groupings (the military, trade unions and business associations), and externally in terms of the adjustment constraints of the international economic system. In addition, the selective integration into the world market and the class conflict which has been escalating in the last two decades have forced increases in productivity and technological innovation in South Korea. Conversely, the development of productivity was not promoted in Argentina either in terms of demand through the world market, or in terms of supply through class conflicts, which were avoided due to the retardation of modernization in the production apparatus and to the relatively high wages made possible by the functional alliance between the trade unions and the bourgeoisie from the import - substitution branches. The specific models of accumulation and the respective socio - structural relationships led therefore in South Korea to a productivity - driven development, but in Argentina, in contrast, to a rent - directed, inefficient and ultimately socially unjust model of development. What perspectives can be derived from the foregoing? South Korea will probably be able to continue its recent export strategy without having to alter the basic patterns of relations with the U.S. and Japan. It will also be able to reduce its foreign debt and open its frontiers to private capital and goods from the U.S. without forfeiting state control over the internal accumulation process (this opening to foreign capital has already begun in certain key industries: telecommunications, motor vehicles, agricultural machinery, etc.). But for the Latin American NICs it will be much more difficult to push liberalization without running the risk of completely losing control of the national economy. Trapped by the debt crisis, they will inevitably be forced to: 1) continue the urgent and desperate search for the appropriate combi* nation of export promotion and import - substitution for the foreseeable future and with no guarantees of success;

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i

2) control and combine world-market and regional - market orientation; and 3) conduct confrontational and regionally - coordinated action against the prevailing international financial system. 3. Development and Internationalism Theories The most common reactions to the current impotence of development theory are the neo-liberal flight to the promise of the free market, the academic flight into comparative analysis, and the political flight to the pragmatic concept of the autonomy of politically endogenous factors. From the outset, only one version of the dependency theory has been popularized in West Germany: the one represented mainly by Andre Gunder Frank. Part of the current helplessness of development theory has certainly been engendered by the fact that Senghaas and Menzel, after having contributed greatly to the popularity of the dependency theory (while disregarding the other much, more differentiated viewpoint of Cardoso/Falleto), subsequently and without differentiation denounced this theory with the same vehemence and radicalism.0 The opportunities which existed for a self-critical development of dependency theory were not seized. The new empirical knowledge could therefore not be integrated into a cumulative process of understanding. The discovery by dependency theory of the unequal power structures in North-South relations was wasted once again. Senghaas, abruptly and without making the metamorphosis comprehensible through self - criticism, replaced his former one - sidedness, in which he had seen "identical depth structures" (Tiefenstrukturen) everywhere in the Third World (Senghaas 1977:12), with a reversed one - sidedness; now he sees only the "varying transformational and innovative capabilities of individual societies" (Senghaas 1982:219). "The theoretical development discussion (has) apparently been moving in a circle: from the modernization theory to the 'Dependencia' and the 'theory of peripheral capitalism' and then back to the modernization theory" (Boeckh 1988:4f). The paradigmatic absolutization of development theories commented Andreas Boeckh accurately causes one to "throw pretty much everything that one has just believed in out the window. This sort of theoretical correction has in many respects the

There have always been authors and viewpoints which have transcended the simple5 categories of dependency and modernization. In addition to Cardoso - Faletto for dependency theory, one could mention Albert Hirschmann for modernization theory. CEPAL itself was a combination of modernization and disengagement concepts.

character of a religious conversion, and evidently causes just as much suffering and agony as leaving the church." (Boeckh 1988:17). But even such cautious and discerning authors as Andreas Boeckh have not been able to elude the trend towards a renaissance of modernization theory. In a manner also characteristic of many others (e.g. Peltzer 1989:448f), he at first criticizes the paradigmatic absolutization of the external and internal causes of development and underdevelopment, and calls for research into the complex bond between these factors. But then he recommends the following approach: "What is needed are theoretically reflective, comparative case studies which make it possible to develop a typology of development paths, and which elaborate the respective internal and external development conditions, which would in turn make possible prognoses of the development chances of individual countries." (Boeckh 1989:17f).

It is then the development chances of individual countries which concern him after all. Problems and solutions of a global nature (debt, ecology) and in this connection changes in the industrialized North are not the point in question here, at least they are not an integral part of a development - political outlook. The policy recommendations derived from this approach remain disconnected, fragmentary and caught in a pragmatism without prospects, as a loose collection of isolated "development paths", which are at best related to each other as an abstract - formalist "typology" in the mind of some social scientist. The question remains: why did Boeckh get caught up in the very dilemma which he himself had recognized and criticized? Why do authors, who aspire to a combination of external and internal factors obstructing and promoting development, after this declaration of purpose then abstract from the external framework? Why do they seek this combination in the final analysis in the individual societies and concentrate on the study of endogenous factors? Boeckh implicitly answers this question himself: "Since the world market cannot simultaneously be made responsible for development, stagnation and underdevelopment he writes the sources of these processes must eventually be sought in the internal structures of the countries themselves" (Boeckh 1988:8).

Boeckh does criticize the traditional global theories because of their lack of differentiation, but he shares with them the concept of a uniform world market which behaves identically everywhere and for everyone. He then makes the logical conclusion that the process of differentiation on the periphery can only be explained by the differing internal reactions and

assimilative capacities of the individual national societies. This concept of globality is too undifferentiated and ignores the real empirical fragmentations and possibilities for action which exist in the historical and structural dimension. It is no coincidence that such lack of differentiation is common to all great global theories, including the Dependencia. 3.1

Fragmented Globality

World economic research is still very much dominated by paradigms of continuity. The world market and thereby also the relationship between the center and the periphery are certainly conceived of as historically changing formations, but ones which however do not fundamentally alter the conditions for the development of national societies. A.G. Frank speaks in this context of "continuity in change" (Frank 1969, p. 30), and means by this the constant reproduction of the centerperiphery model and the perpetuation of the processes of underdevelopment, regardless of the respective concrete historical configurations in world society. Exactly the opposite is argued from the neo - liberal perspective, namely the fundamental possibility of closing the development gap on the basis of the market - creating integration in the world economy. Menzel/Senghaas, with their roots in dependency theory, have also given priority to internal factors and neglected the world economic context and its changes in form. The internal conditions for export - oriented development paths are discussed in a vacuum (Menzel/Senghaas 1986, p. 38 ff.); Uruguay, Portugal, Finland, Switzerland and South Korea are mentioned in one breath, without adjusting for the fact that the respective' processes of development took place under completely different world economic constellations. On the other hand, it is not sufficient to treat the world economy as if it were a constant factor, identical for all, a sort of game board for the movements of the various actors, and thus not worthy of the analysist's attention. National economies are not simply incorporated into the world economy as such, but in segmensts, in special "functional areas"; and conversely, the national economies, branches and raw material deposits are themselves segments of a global framework. The decline of prices for raw materials has ruined the suppliers of primary goods while at the same time dynamizing the development of the, economies dependent on raw materials; the high interest policy of the' U.S. in the first half of the 1980's burdened the debtor nations integrated; into world monetary markets, yet simultaneously induced via the "soaring of the dollar" an explosion of U.S. imports, which became a source of

profits for those developing countries which were already present on the U.S. market or which could adjust their export flow to the abrupt dislocations in the flow of world trade, which on the other hand affected only some and not all groups of products, and so on. Neo - classicism assumes that the world market performs the function of an objective, irrevocable authority through which "natural prices" are fixed. Like some West German analyses of the world market in the 1970's (Busch 1974), it also finds the possibilities for political action to be limited for national governments, which can at most mitigate, through manipulation of exchange rates, the adjustment constraints of the world market. In dependency theory one also finds this opposition between the world market representing the economic sphere and the nation state representing the political sphere (Evers 1977). An alternative definition to these theoretical constructions of the relationship between nation state and world market attempts to dissolve this sharp opposition (Mdrmora 1983). Elmar Altvater's concept of "functional areas" also points in this direction. The point here is first of all to understand the world market as an internal constitutive element of the functional area of nation states, and to recognize the overlapping of the world market and national markets (Altvater 1987). The second point is that the world market is politically regulated and closely connected to the formation of a hegemonic system. In other words: the world market is not an apolitical, unchanging force; and furthermore, the alternative long assumed to exist for the countries on the periphery between passive a d justment (neo - classicism) and (relative or radical) disengagement (CEPAL, dependency theories), which for a long time determined the stop-and-go cycles of many countries, can no longer be said to apply with this exclusivity. An active integration into the world market and alteration of the political circumstances - especially considering the existing regionalization tendencies is possible or at any rate desirable (F. Fajnzylber 1983/ 1986; Marmora, 1988). A progressive, promising alternative to this does not exist: the disengagement of individual nations from the world economic context has failed as a strategy, as past experience has shown. The question is, however, how the integration into the international context should be arranged and how the world system could be thoroughly restructured in order to minimize power differences. The discussion of the structures of a "New World Order" must be reconsidered from this point of view. Along with the globality of the world market, the globality of environmental problems, which is not treated by Boeckh, can also be observed. Ecological problems appear in various forms. Globality operates as in the case of the world market, but in a fragmented rather than direct

manner. The problems have become global, but to the same extent the answers and counteracting forces have become differentiated and diffuse. In contrast to the traditional conception of the globality of the world market as a game board or an historical continuum, and in contrast to the simple opposition of the world market on the one side and individual national societies on the other, we have tried to demonstrate by our comparison of Argentina and South Korea the following points: 1) There exists on the historical axis a discontinuity between the various world economic configurations. 2) There is no automatic compatibility between dependence and autonomy relationships in the economic area on the one hand and in the political-military sector on the other. 3) The world market is in addition geographically fragmented; it has at its disposal blockages for some regions of the periphery and d e velopment potential for others. 4) There is moreover no sharp division between the world market and the individual national societies: a) the world market is present in the individual national societies, and b) the world market is politically regulated (since World War II by the hegemonic power of the U.S.) and is subject to the same fragmentation as this political regulation itself. The world market is thus structurally fragmented into functional areas. 5) In addition to the world market and nation states there exists a range of territorial and, increasingly, non - territorially defined planes of structure and activity, which together form a quite complex and differentiated network. One of the new actors on the world stage, in addition to the multinational economic enterprises, is international public opinion, which concerns itself worldwide with questions of ecological destruction, human rights violations, the maintenance of peace, problems of North-South relations and increasingly also with the worldwide debt crisis. A wealth of actors ethnic - cultural, ecological movements have developed on the local, sub-national level simultaneously with this internationalization process. The nation state has difficulties maintaining its central position as political authority among all these competing planes of activity. 3.2

From a Fragmented to a Catastrophic Globality or to a New Internationalism?

The globality of the post-war world order was created by the political^ hegemonic power of the United States. This order stabilized and insti —

tutionalized an unequal distribution of the benefits and costs of integration into capitalist world society. A number of changes have taken place along with the crisis of U.S. hegemony. It is no longer possible for the industrialized North to unilaterally ward off the costs and dangers of the worldwide development model of post-war capitalism and to single-handedly delegate them to the underprivileged countries of the South. This did seem to have been accomplished in the 1980's in the context of the debt crisis; yet this unequal distribution of costs has called forth new, previously unknown dangers for the industrialized countries themselves. The neo - conservative and neo-liberal attempts to use the debt crisis for a restoration of the old order and to eliminate the autonomy won by the developing countries in the 1970's have had ambiguous, double-edged results. Heavy international indebtedness, the destruction of the rain forests, the flow of refugees and mass migrations from the South to the North, nuclear proliferation, the spread and the use of chemical and biological weapons; these problems threaten to destabilize the political and social order in the industrialized countries and destroy their natural environment. Out of the fragmented, unequal globality of the post-war era, a real, equally divided, catastrophic globality threatens to emerge. None of the parties concerned can escape the danger zone of potential general catastrophe on its own. As in East-West relations, this situation creates the possibility, or even the necessity, of reaching a positive globality. "Everything has become possible the abolition of material poverty, alienation and subjugation just as much as the intensification of repression, alienation and privation, and even the nuclear self-destruction of the species" (Helmut Dubiel 1985).

Out of the fragmented globality can arise a real but catastrophic globality, or a new internationalism. Just as the problem of peace and the danger of war forced a new thinking in East-West relations, ecological e n dangerment and the debt crisis, which already form the essence of North-South relations, could in the future set these deadlocked relations into motion. 3.3

Suggestions For a New Internationalism

33d

Active Integration and Reciprocal Interference

Both the classic theories of imperialism, which located the causes (colonialism, the export of capital) and the solution (proletarian revolution) of the problems of the periphery exclusively in the centers, and the

disengagement strategy of the dependency theories have become obsolete; and with them the resulting reliance on either development aid or revolutionary assistance. Ever since the crisis of the traditional belief in progress, the goal and historical purpose of modern societies have been open to question, meaning development can no longer be understood as a problem for developing countries alone (closing the industrialization gap). The impotence of development theory is the manifestation of a global crisis. A new internationalism demands the recognition of the globality of the problems and the means of solving them. This is why developing countries are demanding changes in the internal structure of the centers themselves and finding potential allies there in the form of numerous new social movements outside of the traditional Third World groups. Unlike its predecessor, the new internationalism is not based on one - sidedness and asymmetry, whether in the form of intervention, exploitation, responsibility, or obligation, but on the principles of reciprocity and symmetry. In the 1970's, the Trilateral Commission, the North-South Commission and the "Group of 77" had taken as their motto the phrase "we are all in the same boat." This was before the neo - conservative turn of the 1980's with its slogan "the boat is full." The theories of interdependence of the 1970's ignored the existing inequitable power structures and the resulting lines of structrural confrontation, however, and regarded the symmetry of international relations not only as a normative goal, but as a given fact. The nation states of the North and South were the main actors in all these "interdependence" schemes. The alternative to the passive adjustment to the world market of the 1980's, the disengagement of the 1960's or the world social plan of the 1970's is a new, positive world order, which includes the problems of ecology, debt and peace in the industrialized countries. The task today is, to organize a mutual process of conflict resolution between the industrialized and developing countries through reciprocal and symmetrical interference, based on the understanding that neither absolute, undivided sovereignty nor "basic contradiction" (Hauptwiderspruch) are possible any more; the reality is rather many fragmented lines of confrontation. For all concerned - but especially for the industrialized countries the new internationalism could thus be described above all as internationalism within one's own borders. For the developing countries, the new internationalism means that they must recognize the various planes of their autonomy of action, and combine them in a mixture of cooperative and confrontational strategies with the goal of an active integration into the world economy. Here a new distinction seems necessary, between active and passive - dependent integration into the world market (cf. Fajnzylber 1981). The debt crisis and IMF crisis management are not problematic

because they promote integration into the world economy, but because they promote a passive integration not oriented to the interests of the national economies and societies, which in the long run leads to margin alization in the world economy (cf. also Fajnzylber 1988). 3.3.2 The Forces Behind the New Internationalism Before World War I, leftist internationalism was inspired by the idea of a social class, the proletariat, whose historical and economic interests would make of it a homogenous (according to its middle and long-term interests) worldwide social movement. After World War II, leftist internationalism continued to rely on the idea of a relatively uniform international entity, only this was no longer seen to be the proletariat, but rather the emerging Third World. These ideas are today no longer valid. The new internationalism has no pre-formed entity as its target or center, but exists rather as a "potential process" for the articulation and combination of divided sovereignty and fragmented actors and planes of action: regions, nations, social and cultural movements, ethnic groups, etc. The Amazon region provides a good illustration of our conception of fragmented globality or new internationalism. The potential for catastrophe here has been r e cognized by the international community, but the governments of Brazil and the industrialized countries still maintain their fragmented arguments within the framework of the traditional categories of international law, national sovereignty, and absolute, substantial identities. Brazil emphasizes the alleged objective restraints of its own national development needs and prohibits any imperialist interference; the industrialized countries want to avoid the dangers of a climatic catastrophe by assigning the costs exclusively to the developing countries. The Brazilian government does not recognize the range of parties involved: rubber dealers, cabaclos, Indians on their own territory and the non - governmental organizations on the international level; and it refuses, with reference to imperialist interference, to contribute to the solution of this international problem. The governments of the industrialized nations, for their part, do not recognize that the destruction of the Amazon region is directly connected to Brazil's foreign debt and the need to earn the necessary foreign currency through exports. They thereby deny their own responsibility for the looming catastrophe and draw attention from the fact that the climatic changes are not only the result of deforestation in distant Brazil, but above all of the prevalent industrialization and civilazition models in the countries of the

North.9 The economic and ecological problems are closely connected and transcend national borders. The only credible and meaningful political suggestions toward a solution of these problems are therefore those with a global scope. In conclusion, without ignoring the difficulties still to be overcome, we are of the opinion that in the long term the only approach can be one which, recognizing the global nature of the challenges facing us, aims towards a combination and integration of the problem areas and parties involved, above all in the realm of ecology and debt-related problems. In this process, the various planes of action: governmental, non-governmental, regional, national, international, transnational - should be taken into consideration and synthesized, without any of them being able to claim obsolete rights of exclusivity. (translated by John Conyers)

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Eugenio Rivera Urrutia The Latin American Debate about Development Strategies Based on the Experience of Some Latin American Countries and South Korea

The neoliberal questioning of the development model proposed by the ECLA (Economic Commission for Latin America) has placed the way of development of the Asian countries on the Latin American discussion agenda. In his famous work "Money And Capital In Economic Development", Ronald McKinnon proposed a new way of conceptualizing the problem of underdevelopment and a growth strategy based on economic liberalization. In this context, McKinnon analysed the case of South Korea which according to him - had liberalized its capital markets as a first step towards liberalization and opening to the exterior. First, the South Korean case would be used in Latin America in arguing for undiscriminating liberalization processes and then, due to the serious difficulties resulting, in favor of a policy promoting exports. Since the beginning of the 1980s, economists and other social scientists connected with structuralism in Latin America have started to pay attention to the experiences of the newly industrialized countries in Asia. One of the pioneers in this context was Fernando Fajnzylber with his article "Reflexiones sobre la industrializaci6n exportadora del sudeste asi£tico", published in 1981. In this article, the author shows clearly that the Asian model far from serving as an argument in favor of processes of liberalization and undiscriminating opening of the economies and of deindustrialization favored industrialization possibilities as well as active state intervention and a selective foreign trade policy. The present article describes some aspects of the debate about the South Korean model in contrast to the experiences of some selected countries in Latin America. After the first section compares the economic behavior in the four countries included in this analysis, the second section evaluates the situation in these countries since the beginning of the 1950s. In the third section, we study the ways in which the policies of import substitution and export promotion were connected or confronted with each other. The fourth section analyses the role played by the state through this period. In the fifth section we discuss the effects of economic liber-

ization - which is defined as the elimination of state interventionism 1 the different cases. Finally, we present some aspects of the actual ebate about the proposals for further development in Latin America. Economic Performance in South Korea, Brazil, Argentina and Chile Over the Period I960 1985 The economic performance in South Korea and, to a lesser extent, in Brazil is very impressive compared to the cases of Argentina and Chile. If ve look at Table 1 it is evident in the first place that, at the starting )oint, the gross domestic products (GDP) per capita are extremely low in :he first two countries while they are relatively acceptable in Argentina and Chile. On the other hand, it can be observed that South Korea shows very dynamic economic growth over the whole period. The situation is similar in Brazil except for the period between 1980 and 1985. Argentina and Chile show a scarcely dynamic economic growth in the beginning and then a tendency towards stagnation. For Chile, the period 1973-85 presents total stagnation, while for Argentina it shows a significant recession. In both cases it can be asserted that these 12 years are lost years with regard to development. It should be underlined that in Argentina and Chile the analysed period corresponds more or less exactly with the period in which the monetarist model undiscriminating opening to the exterior, elimination of government participation in the development effort, and complete economic liberalization and privatization - was put into effect. The argument that the international crises would be responsible for this situation is refuted at least as a general argument - when we take into account the strong dynamism of the South Korean economy and the significant growth in Brazil. Table 1:

Argentina Brazil Chile South Korea

Evolution of the Gross Domestic Product per capita 1950 1985 (Dollar 1975) 1950 1960 1966 1973 1980 1877 2124 2359 3045 3209 637 912 985 1624 2152 1416 1664 1984 2108 2372 450 631 798 1356 2007

From Balassa et. al. (1986)

1985 2719 2072 2135 2648

1985/1950 1.45 3.25 1.51 5.88

Table 2:

Rate of Gross Domestic Savings, Gross Domestic Investment, and Foreign Savings (FS) % GDP

Argentina

Savings FS Investment Savings FS Investment Savings FS Investment Savings FS Investment

Brazil Chile S. Korea

1960-66 19.4 0.2 19.6 24.8 -0.4 24.4 13.2 1.3 14.5 5.4 9.5 15.2

1967-73 21.2 -1 20.2 24.8 0.8 25.6 13.9 0.2 14.1 16 9 25.1

1974-80 26.4 -1.5 24.9 23.9 2.6 26.5 15.6 1.3 16.9 24.3 6.1 30.4

1981-84 19 -3 16 20.5 -1.7 18.8 10 3 13 25.8 2 27.8

From Balassa et. al. (1986) In the course of this article we will expound the explanation which is given within the Latin American debate with respect to these different economic performances. In this section, however, we should extract some hypotheses, parting from certain key variables (see Table 2). In the case of Chile, the low level of gross investment over the whole period is striking. It never comes up to 20%, remaining below 15% on several occasions. This explains the lack of dynamism in the country's economy. By contrast, the high growth rates in South Korea and Brazil are based on the high investment ratio as percentage of GDP. Except for the years 1970-73, in South Korea it surpasses 25% and on two occasions even amounts to more than 30%. In Brazil, the investment ratio generally surpasses 20%, coming up to more than 30% in the years 1973-75. Only in the period 1982-85, the investment drops to 17% on the average as a result of the international crisis and the debt problem. The case of Argentina brings up special questions since except for the 1980s its investment rate lies substantially above 20%. With regard to savings, it is again Chile which shows the most striking patterns. In comparison with the other three countries, domestic savings are insignificant. During the dictatorship, the country hardly obtains better results than between 1970 and 1973, when Chile was immersed in serious political conflicts.

In South Korea it is an outstanding fact that, beyond certain fluctuations, there is a long-term tendency towards an increasing savings ratio as percentage of GDP; the figures for 1982-85 have doubled the corresponding amount over the period 1965-70. When we compare domestic savings and investment rate it becomes obvious that in South Korea the contribution of foreign savings has been decisive over the whole period. Recently its importance seemed to decrease although it should be remembered that, due to high debt service obligations, South Korea required external contributions in order to finance investment. This situation shows clearly that external debts are an enormous obstacle for the development efforts which Latin America still has to face. 2. Initial Situation We should now compare the situation of the countries included in this analysis at the moments of important changes of their economic orientation. The first turning-point can be dated between the end of the 1940s and the beginning of the 1950s. In the four cases included in this analysis, we find the existence of industrial sectors at different stages of development. In South Korea, a land reform which weakens the oligarchy is put into effect; along with specific public policies, this contributes to modernizing the agricultural sector. By contrast, the Latin American countries have strong oligarchic agrarian structures which obstruct modernization. As a consequence, South Korea "had the fundamental advantage that its income distribution and demand patterns in that period.... were considerably less unequal than in Latin America, up to a point where its standards of income distribution per familiy unit were more analogous to the standards of advanced capitalist countries than to those of Third, World countries." (Anglade and Fortin, 1987, p. 221). At the same time^ the surprising redistribution of agricultural property has a very positive, impact on agricultural productivity, thus "causing a favorable effect on accumulation as it releases surplus labor which was then absorbed by the industrial sector where it helped to maintain the wages at a low level. At the same time, the benefits of increased productivity were spread rather,, evenly among the rural familiy units. Despite the fact that the income levels were still low in absolute terms, the resulting income distribution standard contributed to increasing the rural population's consumption, thus leading to a growing demand for labor-intensive goods. The bigger market which had been created thereby also promoted an increasingly massive, demand for similar goods. This phase can certainly be described as an

'industrialization by means of primary import substitution'" (id., pp. 2 2 2 223). In the 1950s, the income distribution was still significantly less equal in Latin America and was associated with an export model which was based on an unequal structure in landownership. As a consequence, industrialization would take a different course: "The demand for locally produced consumer goods does not increase 'horizontally', that is by means of a social extension of the popular demand for basic manufactured goods, but 'vertically' by means of a constant diversification of demand by the upper sections of the market" (id., p. 223). By the end of the 1950s, the efforts to develop the industrial sector are exhausted in South Korea as well as in the Latin American countries. According to Anglade and Fortfn, however, this is a matter of very distinct phenomena which are going to influence the future industrialization processes. In fact, in South Korea "the tightness of the internal markets was due to a relative saturation of popular demand for nondurable goods, and the answer was expanded exportation of labor-intensive goods which had been the backbone of the industrialization process. The 'industrialization by means of primary import substitution' submitted to 'primary export substitution'. This allowed for a still vigorous overall domestic demand and helped East Asian exports given their low added value - to penetrate into the European and US markets" (id., p. 226). In the case of the Latin American countries, the insufficiency of the domestic markets was a consequence of "the increasing income concentration which had led in the 1950s to a supply pattern typical of an 'industrialization by means of secondary import substitution' accompanied by an increasing capital density" (id.). In order to stand up to this situation, the Latin American countries resorted to foreign capital which adopted itself to the existing structures and made good use of the benefits provided by the protected market. 3. Import Substitution Versus Export Promotion A merely technical analysis of the relation between import substitution and export promotion leads to the conclusion that there are no contradictions between both policies. In spite of this, in Latin America much of the discussion about development strategies was related to their supposed incompatibility. In South Korea, however, it was possible to establish efficient connections between protectionist policies which tended to promote the import - substituting industry and highly interventionist policies of export promotion.

If we sum up the cases of South Korea and Brazil on the one hand and the ones of Chile and Argentina on the other hand, it becomes evident that in the first group both elements are complementary whereas this is not the case in the second group. In Argentina and Chile, export expansion seems possible only after dismantling the model of import substitution. Likewise, the creation of conditions suited to significantly improve efficiency are considered to be feasible only after eliminating state interventionism and replacing it by a free enterprise economy. In South Korea and Brazil, these subjects are being discussed as well, but'' the achievement of their goals is based on obtaining compatibility between import substitution and export promotion and on combining state interventionism with private initiative. The decision to stimulate an export promotion policy which is reflected in the first five-year plan is paralleled in the 1960s and 1970s by a protectionist policy with regard to South Korean industry and' agriculture. According to Fajnzilber, the level of protectionism even1 increased between 1967 and 1978 (1981, pp. 123-124). As we remember; the serious conflicts which accompanied this discussion in Latin America * we should ask for the reasons which permitted a fundamentally harmonious connection between both policies. The first element to be considered in this context is the nature of the1 respective political regimes. The Korean War, the military presence of the* US and the authoritarian regimes generated an overall repressive atmo - sphere which obstructed the development of a strong labor-union movement and, along with this, a democratization process. In this context,' the existence of a certain paradox should be pointed out. Despite the? repressive atmosphere and the lack of political democracy both of which accompanied South Korea's insertion into the centre of the East-West conflict, important social changes are going to take place. We refer to the1 above-mentioned land reform which would have significant ^distributive* impacts. By contrast, Argentina, Brazil, and Chile are characterized by the upsurge of powerful labor-union movements supporting populist governments and thereby of significant democratization processes. However, these' processes did not lead to any redistribution of income which would have radically modified demand patterns. By contrast, a highly imbalanced= structure was maintained, thus stimulating an industrial development which^ is aimed at the wealthy classes. This situation results from the establish-* ment of more or less implicit agreements between industrial employers,* workers of the mayor companies and the agrarian oligarchy who is assuredthat there will not be any intervention in the rural situation. ^ The relatively small size of South Korea, along with the lack of a sufficient quantity of natural resources, made an export strategy based on

the primary sector not very practicable. In contrast to the newly industrialized countries in Asia, the Latin American countries with their vast territories and their abundance in natural resources were able to insist on traditional export expansion in the primary sector. The power structure in the agrarian sector permitted exports based on static comparative advantages and on maintaining the general level of misery in agriculture. The urban sector enjoyed the access to cheap agricultural products. In South Korea, the economic reorientation towards exportation did not constitute a breaking-off with its former development strategy. The lack of a primary sector with export potential permitted the establishment of a consent between the relevant social forces with regard to industrial export promotion. Along with the exhaustion of dynamic development of export products based on cheap labor - which is mainly due to a relative increase in the cost of labor caused by the upsurge of other newly industrialized countries - it became necessary to switch over to a phase of exports based on technological innovation. In this context, import substitution did not only not contradict export promotion but, quite the contrary, allowed the latter to obtain great flexibility in order to respond to changes in international demand. Therefore, and compared to the respective observations made in Latin America, it is not possible to speak of a temporal succession of those two models in South Korea. By contrast, we can observe a development pattern which simultaneously connects measures usually associated with different development strategies. According to Anglade and Fortin, therefore, government policy favored the most efficient export companies and permitted that "the key industries for import substitution benefitted from actually higher protective duties a fact which shows the government's concern for linking import substitution and export promotion and thus the compatibility of both strategies" (1987, p. 227). In Brazil, the stimulation of exportation efforts seems to be related to the development of those industries which aim at the giant domestic market. The military coup d'6tat in 1964 allows for the "disciplination" of the labor-union movement in terms of a reorientation towards exportation with regard to important industrial sectors without seriously affecting the domestic market due to the enormous size of the country. Besides, industrial exports are also encouraged by a military project which intends to attain a predominant position in relation to other Latin American and African countries. In fact, Brazil's aspiration to establish special bilateral relationships with the indicated countries required a commercial association to which Brazil would contribute its industrial products. In contrast to the economists who are ideologically connected with the World Bank, a number of authors have insisted on the fact that - by contrast to Argentina and Chile the economic dynamism in South

lorea and Brazil stems from the importance given to industrial develop lent in the framework of exportation efforts. In South Korea, we can ientify a first phase up to 1968 when the emphasis was laid on develping light industry. In the second phase, the plans are going to c o n entrate all efforts in the development of the heavy and chemical idustries, "including the production of chemicals, mineral oil, coal, rubber, lastics, nonmetallic mining products and base metals as well as the abrication of metallic products, machinery and equipment... Between 1965 nd 1980, the percentage of the chemical and heavy industries with regard o the total output of the manufacturing industry rose from 34.2% to i3.2%; its contribution to exports increased from 15.3% to 47.6%" (Sung, 988, p. 150, see also Giacomdn, 1988, pp. 276-277). With respect to Brazil, Ominami points out that after a first phase the option in favor of durable consumer goods was replaced by the pri)rity given to a number of intermediate inputs stemming from the netallurgical and petrochemical industries and to capital goods" (1988, p. >5). In addition, this policy caused an increase in the export contribution )f products from the heavy and chemical industries which added to the iynamism of Brazilian exports in the 1970s. In this context, Brazil's possibility to transform itself into an industrial 30wer requires simultaneously just as in South Korea the stimulation of export promotion measures and the creation of new comparative advantages by means of continuing a discriminating import substitution policy. According to Carlos Ominami, the axis of the Second Development Plan was consistent with this aim a policy directed towards attaining new comparative advantages by investing in new technologies. This explains to some extent that in Brazil, "in contrast to the other Latin American countries, after the first oil shock, the level of opening to the exterior, measured by means of the importation coefficient, decreased systematically, dropping from 8.6% in 1975 to 7.1% in 1980 and then to 4.4% in 1984" (Ominami, 1988, p. 94). By contrast, the development of the export promotion strategy in Chile is quite different. After having tried to put into effect a reorientation towards the exterior through the development of the regional markets, the export policy is elaborated on the basis of breaking off with the former industrial development strategy. As a consequence, significant connections between export production and the other economical sectors are not e s tablished, thereby restricting the possiblities of attaining flexible responses mth regard to changes in the world economy. In South Korea and Brazil, the connection between exporting and mport - substituting industries creates an export economy with a better' :apacity to adapt itself to fluctuations in the world economy. This is shown clearly by the fact that the percentage of Brazilian and South

Korean exports with regard to the world economy has significantly increased whereas it remains stagnant in the case of Chile. Therefore, compared to Chile and Argentina, "Brazil had the advantage of disposing of a more integrated industry in view of the development in the production of capital goods in the 1970s, an excellent leading position in this sector based on the primacy of chemistry and machine - made metal, high-grade quality in certain branches of trade as for example in transportation equipment and arms, thus being able to conquer new foreign markets and to become relatively less dependent on imported inputs" (Ominami, 1988, p. 104). In South Korea, the rapid growth of the export - oriented light industry, which is intensive in cheap labor, generated a huge demand for intermediate products. In this respect Sung shows that "during the first half of the 1960s, South Korea imported the major part of its intermediate products. However, between 1968 and 1971, some of the heavy and chemical industries (such as for example spinning, textile, rubber, chemicals, iron and steel) started to produce intermediate goods in order to substitute the imports. The major part of the investments in this area went to medium-scale factories" (Sung, 1988, p. 151). The diversification of the industrial structure, which had thereby been attained, played an important role in the recovery of the South Korean economy during the 1980s after the crisis of 1979-1981. In contrast to the Latin American countries, the reduction of imports was not accompanied by a significant drop in business activity (Messner, 1988, p. 159; Arellano, 1986, pp. 8 9 90; Ominami, 1988, pp. 103-104). Something similar seems to have happened in Brazil, where the reduction of imports had less negative repercussions on the national business activity than in Argentina and Chile. (See Ominami, 1988, p. 90). 4. State, Planning, And Development Process The World Bank insists on its assertion that the reasons which explain the success of the Asian countries are rooted in their orientation towards exports, but, above all, in the liberalization process which would characterize their development strategy. However, our studies show that the export strategy of these countries is closely linked with strong state interventionism. If we compare Latin America where - maybe except for Brazil - it was not possible to consolidate any efficient planning system to South Korea, we might find - at least at first sight that the different development is not based on the existence of differing concepts. From the very beginning, the ECLA approach has emphasized the fact that

within the rigid framework of individual interests and a market segmented due to its heterogeneous structure private initiative alone was not able to master the challenges of underdevelopment and external vulnerability. Proceeding on this assumption, according to Gurrieri, the CEPAL insisted in the necessity of three areas of public intervention. The first is based on the government's overall and long-term vision and consists in directing the economic activity by means of planning in order to transform the export economy into a modern industrial society; the second area is related to direct action such as instigating capital accumulation, raising and canalization of external funds, protection and promotion of the industrialization process, directing and stimulating technological change; the third area implies the control of macroeconomic imbalances (1987, p. 202). In Ferrer's lecture on the South Korean case, there is a striking similarity with the above-mentioned approach: "South Korea is a r e markable case of intentional development. The state elaborates a model of growth and uses multiple instruments in order to direct the economic forces towards its objectives. A close link between the state and private enterprise can be observed. The country pursues an industrialization policy which has been decided by political power in terms of the conditions in the country and on the world market. All the rest is determined by market forces, that is after the. government's regulation with regard to the, allocation of funds and income distribution" (Ferrer, 1983, p. 631). The obvious question is as to why the experiences are so dissimilar. In South Korea, the government policies are actually unified and concentrated on the objectives outlined by the plan. From the state machinery's point of view this is possible due to the existence of authoritarian governments. The connection between state and civil society is based on continuous agreements between the government and private initiative, especially the big companies, at the expense of the popular movement's political marginatum and the high level of ownership concentration. By contrast, in Latin America the state devotes itself to organizing relatively extensive democratization processes without disposing of institutionalized mechanisms that could constructively canalize the particular conflicts of these processes. The conditions in South Korea permitted a quick and flexible adjustment of its government policy to the changes on the world market. With regard to the specific way of government intervention, Giacom£n points ' out that the development process in South Korea and other Asian countries was based "on the intentional definition and efficient execution of well-connected government policies. The government also participated actively in different productive processes." (1988, p. 278). As to the state's concrete forms of participation, the same author indicates that "during the first stages the (state's) efforts were concentrated on infrastructural development and on the base industries; the govern-

merit's promotion was then gradually directed towards sectors and activities which garanteed a major penetration into world trade and the consolidation of an integrated industrial system. In the course of this process there was a switch from the promotion of light industry to an increasingly solid support of industry for capital goods." (id., p. 279). The increase in Soutb Korean exports begins in 1962, the year in which the first five-year plan was formulated. This plan defined the long-term strategic objectives and included a great number of discretionary political measures for different branches of industry (id.). Public control of almost 90% of the financial system achieved in 1960 and of the flow of foreign capital permitted the state to grant subsidized credits in terms of the programs for export promotion. The power which the state had obtained by controlling the financial system allowed for the government to exercise a strong influence on the companies' decisions, thus enabling the companies to adhere to its export program. (Bekerman, 1986, p. 717). With regard to export promotion as well as to the above-mentioned situation, a system of direct and indirect incentives was established. According to Bekerman, there was automatic access to subsidized bank credits, exemption from duty for imported inputs which were required for exports, exemption from indirect taxation for domestic as well as for imported goods, tax reduction for export - derived income, and preferential energy tariffs. Over the period 1965 - 1985, the exchange rate policy maintained the exchange rate high in real terms. (Ching, 1988, p. 184). It seems that a very important role was played by the system of export objectives which "consists in fixing an annual limit for each company, industrial sector, product, and foreign market." (Bekerman, 1988, p. 718). Initially it was the government itself who fixed these limits; later on, they were determined by the companies while the government provided for their coordination. The compliance with the objectives indicated was evaluated each month in meetings between government and company representatives (id.). The extensive state intervention in South Korea and in other Asian countries becomes evident when we look at the high incidence of government expenditure as percentage of GDP. According to Giacomdn, over the period 1965 1985 the average government share in GDP in the Asian countries was higher than in Argentina and Brazil (Giacomdn, 1988, p. 279). On the whole, it becomes evident that the success of the South Korean productive and exportation efforts is associated with the definition of an overall program to which the different companies can then adhere their activities and apply the different instruments mentioned above. In the case of Brazil, a similar situation is described: "The Brazilian government showed a strong persistence in its determination for industrialization. In

this area, its action was aimed at three different directions: constitution of industrial sectors, especially for intermediate capital goods and for energy infrastructure; direct incentives for industrial modernization by means of export promotion; creation of high - tech industries such as computer science, telecommunications, aeronautics and nuclear technologies. The main instruments for the execution of these directives were public enterprises and the National Bank for Economic Development which raised the necessary funds to finance an ambitious investment program." (Ominami, 1988, pp. 108-109). In contrast to the experiences mentioned above, up to 1982, under the dictatorship, Chile hoped that increasing exports would be induced by the free interplay of market forces. In fact, the ex-secretary of the treasury indicated that the fundamental option of Pinochet's export promotion policy could be "denominated 'estrategia de primer 6ptimo\ This term includes the idea of designing general policies with regard to customs duties and tariffs, exchange rates, taxes, employment etc. which would not contain clear and definite trends against exportation and which would have the necessary flexibility to allow for the export items to develop with the agility and efficiency required." (Buchi, 1988, p. 250). Based on the Chilean experience, in the 1970s the role of the State is synthesized in a negative action: eliminating the anti - exportation trend in the economy. As we could see in the first section, the results of this policy up to 1983 have been poor. Only as a consequence of important rectifications after 1984 will the Chilean economy experience a strong increase in exports. 5. The Problem Of Economic Liberalization The evaluation of the cases of South Korea and Brazil shows clearly that their success in terms of dynamic economic growth and an accelerated increase in exports cannot be attributed to the elimination of state interventionism. With regard to South Korea, liberalization measures just started to be introduced at a slow pace in the 1980s, and they were by no means spectacular; consequently, they cannot explain the repeated increase in economic growth and exports (Messner, 1988). Something similar happens in Brazil. Up to the present, the country, has maintained a complex protectionist structure and strict control of the/? fundamental economic variables; at the same time, the state has a strong r influence on the productive system. It is not the existence or lack of a T protectionist policy which differentiates the cases of South Korea and the^ Latin American countries. According to Anglade and Fortin, it is funda-' mental that "there is a sharp contrast between the highly selective features of the protectionist policies in East Asia, on the one hand, and Latin

America, where already at an early stage consumer goods were granted an undiscriminating protection whereas the government allowed free entrance of intermediate goods. By contrast, the political strategies applied in East Asia discriminated not only between different industrial sectors, ... but also between industries within one sector, selecting certain industries which would receive protection while others would not." (1987, p. 227). Even more important was the fact that "the selective criteria seem to have been conceived in order to promote efficiency between the local producers - who thereby were subjected to competition and to favor the most efficient industries as well as those with the strongest tendency towards exportation." (id.). Whereas up to 1973 an undiscriminating protection system had been applied in Chile, an undiscriminating liberalization policy was pursued under the authoritarian regime. With regard to the latter, first and second generation neoliberal models should be distinguished. Both are characterized by the application of radical privatization policies but the first model also includes a general economic liberalization policy and undiscriminating opening processes towards the exterior in the commercial and financial sector. The interest rate fluctuates free of any government interferences; the macroeconomic policy becomes less important due to the predominance of automatic adjustment mechanisms after establishing a fixed rate of exchange. In this situation, the enormous inflow of foreign capital induced by the liquidity of the world economy in the 1970s - and the existence of extensive differentials between the interest rates in Chile and abroad are going to generate a rapid overvaluation of the Chilean currency from 1979 onward, thus discouraging all the export efforts that had been made. By contrast, the second generation model is characterized by the reversion of a whole number of liberalization measures and by the government's active participation in regulating the economy. In fact, as a consequence of the crisis in 1982 and 1983, the state takes control of large parts of the financial system, establishes strict regulations with regard to the interest rate and to capital movements (which are, in addition, restricted by the debt problem), puts into effect policies which tend to assure a high rate of exchange in real terms, takes a number of interventionist measures in order to promote exportation, and interferes in the agricultural market. It is only in the context of these policies that the country's exports increase significantly. 6. The Debate About A New Development Strategy The South Korean experience has some connotations which make it difficult to use it as a general model. Beyond the fact that it is not possible

• reproduce either the international environment from which it started or he specific connection of these economies with Japan (Fajnzilber, 1981) >r the ample access to external financing, the main difficulty is that the ^atin American countries are facing a radically different challenge. Whereas the Asian countries set out on their economic take-off with luthoritarian regimes, in Latin America the challenge of economic growth )resents itself in the framework of democratization processes. It is even more important to take into consideration that the Latin American countries have just gotten over their military dictatorships which suppressed popular demand. In these circumstances it seems neither plausible nor acceptable to pursue a policy based on restricting the consumption in favor of promoting the necessary investment efforts. As a consequence, in the different Latin American countries the problem consists of encouraging a strategy that would join together the promotion of exports, the great effort for domestic savings, social justice, political democratization, and the creation of conditions which would allow for coherent government action. In the discussion on Latin America there is a strong emphasis on building up a national determination which should support the intentional development strategy. In the opinion of Alejandro Foxley, "the state organizes the process of mobilizing the determination and funds in those sectors where comparative advantages are to be generated." (Foxley, 1987, p. 81). However, the debate about the problems of state interventionism in Latin America has to evaluate thoroughly the experiences of the region. Extremely impressive in this context is Gurrieri's thesis which indicates that the ECLA "at that time clearly saw the most important points on the list of tasks which the Latin American states had to handle... (but) then it did not ask itself whether the Latin American countries were able to cope with these tasks, whether they could solve them successfully" (1987, p. 204). The ECLA analysis implied the idea of a government with the capacity to place itself above the social groups and "convince them" by force of operational reasons to join a development project which would be profitable for everybody. The idea that social agreements are necessary implies the recognition of the fact that a state may not ignore the interests of its citizens. As a consequence, the state can only take the lead in a development process if the civil society accepts it and on this basis entrusts it with the corresponding assignments. Besides, it is necessary to take into consideration that the fragmentation of the state machinery, the technical and political problems with regard to information transmission, the resulting delays in identifying the problems, including those on the "political agenda", and taking the corresponding decisions hamper the possibility to dispose of a general view

which would be appropriate and operative for government action. These problems become especially important in the context of open economies as for example the ones in Latin America. In the actual debate on Latin America it is hard to find recommendations as extreme as the ones which guided the economic policy in Chile over the period 1979 - 1981. The presently prevailing model accepts extensive deregulation, but still insists on adopting a strategy for export promotion which can be described as "the total of all economic policies causing the national returns from exports compared to the returns from imports - to be at least on a par or even higher than the returns under free trade conditions." (Kruger, 1978, cit. by Arriagada, 1988, p. 266). Therefore, even the right wing of the ideological and economic spectrum in Latin America defines concepts which modify the initial first generation neoliberal paradigm. This is the case with the recommendation of Balassa et. al. who with regard to the subject discussed in this section and explicitly taking the Asian countries as models emphasize that an economy must necessarily be directed towards the exterior, laying particular stress on exports and efficient import substitution. The neostructuralist discussion in Latin America recognizes the i m portance of directing a substantial part of the economy towards exportation. However, still taking the Asian countries as models, it is pointed out that a substantial part of these exports must necessarily consist in industrial products (Foxley, 1987, p. 80). In this context, new terms have appeared in the Latin American debate. In the case of Chile, there is talk of a difficult phase in export promotion which would require strong government participation because the exports stemming from the primary sector have just started to encounter difficulties as they represent i n creasingly substantial shares of the market. Structuralist circles point out that - in order to attain the indicated objective export promotion has to be accompanied by selective import substitution "in the key sectors as for example in agriculture, energy supply, production of certain intermediate industrial goods, and even of investment goods" (id.). The main idea is the creation of "endogeneous centres of development" in the terms of Fajnzylber, or real industrial or agro - industrial complexes which allow for generating comparative advantages, that is "to aim at developing adjustment capacity and technological creativity in selected sectors as well as - eventually - undertaking the design of equipment and processes within the country and obtaining permanent improvements in product quality and the constant opening of new domestic and foreign markets" (id., p. 81). The concept of selectivity in economic measures has gained great importance in connection with the protection of the import - substituting industry as well as with export promotion. As we have shown above, this

is an important lesson to learn from the case of South Korea. It is difficult to deal with this subject for mistakes have been made in the application of discriminatory policies which led to a heterogeneous and heavily dispersed protectionist structure as well as in the nonselective policies of import substitution and, more recently, of export promotion. The above-mentioned approach elaborated by Balassa et. al. does not pay any attention either to the necessity of an intentional policy in order to create endogeneous centres or to a stronger government participation. The main instrument of this strategy is the maintenance of a competitive rate of exchange which requires the establishment of rules for automatic modification of the exchange rate in accordance with the relative national and foreign inflation rates as well as additional adjustments in case of structural changes in the balance of payments (Balassa et. al., 1986, p. 82). A competitive rate of exchange has the additional function of facilitating a relaxation of the protectionist structure which, on the other hand, appears to be the second fundamental instrument for the policies of export promotion and efficient import substitution (id., p. 86). The final objective recommended is a standardized customs duty with a maximum rate of 15 to 20%. With regard to measures which tend to encourage exportation, strong emphasis is laid on the remission of import taxes and duties i n curring from inputs which were needed in the elaboration of export products. Along with the preceeding measures, the authors recommend the establishment of importation services, credit lines for exports, and, in general, the encouragement of construction projects in the infrastructural sector, as for example harbors and highways (id., pp. 8 4 - 8 6 ) . All the above-mentioned recommendations make sense in the framework of the general elimination of price control, accompanied by an opening process towards the exterior in order to prevent monopolistic influences. In contrast to the neostructuralist assertion that selectivity is an essential feature of any policy, and in opposition to the analysed experiences, the above - described approach suggests the necessity of designing overall p o licies.

References Anglade, C./Fortfn, C. (1987): El papel del Estado en las opciones estrat6gicas de Amdrica Latina, Revista de la Cepal Nr.31, April, Santiago Arellano, J.P. (1986): La literatura econ6mica y los costos de equilibrar la balanza de pagos en Am6rica Latina, en Cortazar (Ed.) (1986) Arriagada, P. (1988): El papel del Estado en una estrategia de promoci6n de exportaciones: el caso chileno, en Caceres, C., et. al. (1988) Asche, H./Ramalho, L. (1984): Die Schwellenlander in der Weltwirtschaftskrise, Peripherie Nr. 1 5 - 1 6 , July, Miinster Balassa, B. et al. (1986): Toward Renewed Economic Growth in Latin America, Institute for International Economics, Washington Bekerman, M. (1986): Promoci6n de exportaciones, Reflexiones sobre la experiencia coreana, Comercio Exterior, Vol. 36, Nr.8, August, M6xico Bitar, S. (1988): Chile para todos, Planeta, Santiago Bitar, S./Edwards, E./Ominami, C. (1988): Cambiar la vida, Melqufades, Santiago Biichi, H. (1988): Hacia una economia exportadora, in Caceres et.al. (1988) Caceres, C. et.al. (1988): Exportar un gran desafio para Chile, Santiago Cortazar, R. (ed.) (1986): Poh'ticas Macroecon6micas. Una perspective latinaoamericana, Santiago Ching-Yuan, Lin (1988): East Asia and Latin America as Contrasting Models, Economic Development and Cultural Change,Vol. 36, Nr.3, April, Chicago Ferrer, A. (1983): Reflexiones sobre las industrializaciones sustitutivas y exportadoras: Corea y la Am6rica Latina, El Trimestre Econ6mico, Vol. L(2), April-June, Mexico Giacom£n, E. M. (1988): Las exportaciones como factor de arrastre del desarrollo i n dustrial. La experiencia del Sudeste de Asia y sus ensenanzas para M6xico, Comercio Exterior, Vol. 38, Nr.4, April, Mdxico Gurrieri, A. (1987): Vigencia del Estado planificador en la crisis actual, Revista de la Cepal, Nr.31, April, Santiago Hurtienne, Th. (1987): Gibt es fiir den verschuldeten Kapitalismus einen Weg aus der Krise, in: Altvater, E. et al., Die Armut der Nationen, Rotbuch Verlag, Berlin Messner, D. (1988): Siidkorea: Kontrastfall in der Verschuldungskrise, in: Peripherie No. 33/34, August, Berlin Ominami, C. (1988): Desindustrializaci6n y reestructuraci6n industrial en Am6rica Latina. Los ejemplos de Argentina, Brasil y Chile, Colecci6n Estudios Cieplan Nr. 23, March, Santiago Sung, D u - Y u l (1984): Siidkorea: Auf den Spuren der Japaner?, Peripherie Nr. 1 5 - 1 5 , July, Miinster

Thomas Hurtienne Theories of Development, Differentiation of the Periphery and Development Strategies of the NICs

1. Global development theories at a

dead-end

Since 1945 the discussion on the development problems of the Third World has been dominated by two competing paradigms, both global approaches, whose international popularity followed a long wave remarkably similar to that of the capitalist world economy. The long expansionary growth phase of the world economy up to 1973 was marked by the almost total predominance of the optimistic modernization and growth theories, while in the first part of the long recessionary phase which followed, it was the pessimism of dependency theories which prevailed. The restructuring processes in the industrialized countries, the fundamental nature of which became clear by the end of the 1970's, together with the growing differentiation of the periphery symbolized by the rise of East-Asian NICs to important exporters of industrial goods, led to the steady erosion of global models for explaining development processes, a situation analogous to the crisis of economic policy and theory in the developed countries. In their eurocentric developmental optimism, orthodox modernization and growth theories generalized the positive experience of the rapid reconstruction of West European economies after the Second World War to an overall model of development for the Third World, thereby confusing construction with reconstruction, a view that was critized by the more heterodox modernizes like Hirschmann (1958 and 1981). Under the influence of the Marshall Plan, increasing foreign trade, technological modernization resulting from US direct investment, low wages and high unemployment, "efficient" economic policies were apparently able to induce a rapid process of economic modernization and structural change. This brought the unemployed and the under - employed from the "traditional" sector into the modern capitalist sector and led to full - employment. By analogy the West European success story also seemed possible in the periphery of the capitalist world system if the state could provide the

appropriate institutional conditions for the national entrepreneurial class to begin profit - oriented business, if the "vicious circle" of poverty could be broken by employing domestic and foreign capital to fund complementary development projects, each creating demand for the others' products, and if the beneficial effects of foreign trade on growth could be harnessed for development. The advantages of the "late - comers" a combination of modern production technologies without development costs and cheap labour from the agricultural sector - would, via the high rate of profit, accelerate the growth dynamics of the modern capitalist sector to such an extent that the inertia of the traditional sectors could be overcome by a self-sustaining growth process with positive development effects and (later) a tendency towards a more equal distribution of income (Rostow 1960 and 1971; Lewis 1958). It was conceded that initially the absorption of "under - employed" labour from traditional agriculture into the urban - industrial sector would, on the one hand, tend to raise the share of profits in national income and therefore the opportunities for saving and accumulation, while on the other, total demand would also increase, despite stagnating wage-levels, due to the increase in the number of urban wage and salary earners, the growing monetarization of agriculture and the intraindustrial - infrastructural investment demand. However, later rapid industrial accumulation would lead to a shortage of labour in the traditional sector, an increase in urban wages and the negotiating strength of trade unions, and so to growth with welfare effects for all. In the 1950's and 1960's this scenario for modernization, as unreal as it may seem to us today and although it was a generalization from West European post-war development, also dominated the thinking of structuralist development economists in Latin America (Hurtienne 1974). However, in contrast to the majority of North American development theoreticians they emphasized the structural limits to the internal growth process posed by the unequal exchange between manufactured and primary products on the world market, mainly due to unequal wage levels. Paradoxically this increased their acceptance of an endogenous modernization paradigm. Whatever the costs, only a forced industrialization oriented towards the growth - industries of the developed countries - and c o n sequent neglect of agriculture and exports could achieve the "take-off' of capitalist development. In the mid sixties, this development model, based on imitative modernization by the national bourgeosies of the big Latin American countries and within the framework of a populist - democratic system, entered a deep crisis, which was reflected in the growing dominance of foreign corporations, large balance of payments deficits, rapidly increasing inflation and the political mobilization of the marginalized and "modernized" mass

of population. This deep-rooted crisis of imitative modernization led on one hand to the continuation of modernization policies by authoritarian, military dictatorships, and on the other hand also to the radicalization of development thinking in Latin America and elsewere. In the resulting more "orthodox" version of dependency theory, which became predominant in the discussion, the mere blocking of internal development by external dependence began to be seen as the "structural dependence" of the periphery on the industrial core. In this view despite all the passing variations in form, this led necessarily to the deformation of internal e c o nomic and social structures which, together with the permanent transfer of value from the periphery to the core, prevented social and economic development in the sense of the integration of the majority of the population into productive employment. The view of the world economy and of development put forward by the modernization theory was stood on its head: Foreign trade, direct investment and international credit relations were no longer conceived of as being necessary "external c o n tributions" to overcome the inadequate internal rate of savings and the backward level of technology with benefits for all concerned. They now appeared as a one-sided exploitative relationship, a mercantilist zerosum game in which the gains of the core must be based on the losses of the periphery (Frank 1968). The supposed advantage of the "late - comers" of building up modern industries without development costs was now seen as the systematic disadvantage of artificially - erected industrial enclaves with only marginal diffusion effects. The mobilization of those "underemployed" in agriculture for urban industry was not a form of progress, but rather of destructive urban marginalization. The imitation of successive stages of metropolitan capitalist development gave way to the structural specificity of peripheral capitalism, marked by long-term structural heterogeneity and the blocking of primitive accumulation. The role of the state was reduced to that of a reflex response to the (externally determined) "requirements of the core countries". Thus it was concluded that the only way to achieve self-reliant development was by selective "de - coupling" from the world market, radical internal structural reforms, and the balanced (non - capitalist) development of all sectors of the economy with the emphasis on meeting domestic demand. This pessimism regarding the development possibilities under capitalist conditions expressed by the orthodox dependency theory a view not shared by Cardoso/Faletto in their approach of dependent development (1969) - was complemented by the theory of peripheral capitalism put forward by S. Amin (1975), which generalized the relations of dependence experienced by neo-colonial African states to a model based on enclave production and imports of luxury goods. These ideas were later expanded

to the level of the capitalist world system as a whole by Wallerstein. (1974). Although the dependency paradigm as the "southern" version of "northern" theories on imperialism, had exerted considerable influence on both reformist and revolutionary movements in Latin America from as early as the late 1960,s its reception in the industrialized world came later (Cardoso 1977; Palma 1981). In the North this was a consequence of the growing disenchantment with official development policy, of the demands of Third World countries after 1973 for a new international economic order, the worsening crisis of the post-war capitalist development model and the rapid increase in the transfer of production to low-wage countries (Frobel et al 1977). Thus dependency theory achieved acceptance in the international academic community exactly at a time when the global applicability of the hypothesis of "growth without development" was effectively being called into question by the success of some NICs and the resulting differentiation within the periphery (Browett 1985). By the mid-1970's criticism of orthodox dependency theory as a global paradigm was developing on the Left in numerous debates about its theoretical and methodological inadequacies and the indisputable (economic) success of Latin American NICs (Laclau 1971, Cordova 1974, Cardoso 1974, Hurtienne 1974). But it was not until the end of the 1970's that the rapid rise of East Asian NIC's to important exporters of industrial goods and the threatened decline of the established industrialized countries forced even its most convinced supporters to question some of the central claims made by orthodox dependency theory (Senghaas 1982, Evans 1987). Despite all attempts to rescue both paradigms as global theories or to replace them with a new theory of the international division of labour, it is obvious that global development theories have now reached a deadend. They may remain as partial theories, applicable to particular groups of countries or specific problems, but they can no longer claim to offer global explanations for all processes of development and underdevelopment in all countries of the Third World. The consequence of this is the opening of a huge theoretical gap which neither of the two closed orthodox theories can adequately bridge: First, the exact relationship between the internal and external conditions for development processes in the Third World remains unclear. This is best shown by the work of many scholars like Senghaas/Menzel where the analytical focus has moved steadily from external to internal determinants of development, without ever achieving a satisfactory link and mediation. Second, the question of an adequate theoretical framework for conceptualizing modern development processes remains unanswered: The

macro - economic (Marx, Keynes) and macro - sociological (Weber, Parsons, Habermas) theories on offer relate to fully developed, industrialized societies and the debate on the modes of production and has not developed a coherent general theory of the social and economic transformation of pre-capitalist, rural societies into capitalist, industrial societies. Of course, this begs the fundamental question to what extent a general socio-economic theory of development with a global explanatory pretension can ever be formulated. Third, the necessary structural conditions for a successful process of industrialization require a more precise mediation between the sociocultural, socio - structural and political dimensions and the more economic growth and development factors, including the long term phases of capital accumulation. Whereas orthodox global development theories cannot answer these questions sufficiently, there are still some old and new approaches providing at least a methodological framework for dealing with these questions in a more fruitful "heterodox" way: Besides Hirschman's heterodox modernization approach the Cardoso version of dependency theory and the French regulation approach. Although the two former approaches have a high, not sufficiently utilized explanatory potential, even for the shocking cases of successful East Asian NICs (Evans 1987, Lim 1985, Menzel 1985), I, myself, will concentrate in this paper more on the last approach using their new analysis of the long-term dynamics of industrial capitalism, first, for a brief critique of demand-side explanations of late industrialization of today's industrialized countries; second, for a preliminary view of the different development conditions of late late industrialization in Third World countries and especially in the Newly Industrializing Countries (NICs); third, illustrating that with the case of Brazil and, fourth, making some preliminary reflections on a comparison with the diverging case of South Korea. 2. "Autocentric" Development and Late Industrialization French Regulation approach

a new view of

In my view, a central weakness of dependency theory, and the theory of autocentric development to which it gave rise, is that both its conceptualization of misdirected growth without broad-based development and its strategy of stimulating mass demand in a balanced, autocentric development model remained tied to the view of development processes in metropolitan capitalism taken by modernization theory. Both the structural deficits diagnosed as inherent in peripheral capitalism and the resultant development strategies proposed are the result of a comparison with the

specific development profile of post-war metropolitan capitalism, whose essential characteristics are assumed to have been the structural conditions for its successful development since the middle of the 19th century (Hurtienne 1981, Simonis 1981). The "autocentric" industrialization of Western Europe, taken as the yard-stick for a successful development process, can be explained according to Amin (1975), Elsenhans (1981,) and Senghaas (1977) by the following structural characteristics: First, from the beginning, dynamic industrial growth was based primarily on the mass demand of urban wage and salary earners and of the self-employed for manufactured consumer and investment goods. This produced a balanced industrialization although in the initial stages the emphasis was on industries producing mass consumer goods. Second, mass demand was the result of a fundamental modernization of agriculture which both preceded and accompanied industrialization involving the "de - feudalization" of the structure of agriculture, a rapid increase in agricultural output, leading to an early bond between industry and agriculture. Third, changes in social structure, brought on by rapid industrialization and urbanization, led to an absorption of surplus labour from the agricultural sector. The shortage of agricultural labour which followed (after 1880), together with trade union action led to a significant rise in rural incomes and urban wages to levels considerably above subsistence. Fourth, after 1880, wages tended to rise in line with the increase in labour productivity. This led not only to the transfer of mass demand to new products but also to the expansion and modernization of the capitalgoods industries, due to process innovations in the consumer - goods and agricultural sector aimed at reducing wage costs. Fifth, by the outbreak of the First World War, the dynamic interaction of all branches of the economy based on the link between increases in mass purchasing power and labour productivity had led to the spread of the capitalist mode of production, the equalization of productivity, income and consumption levels and so to the predominance of an autocentric developmental logic, which was only partly dependent on external markets. At first sight, this analysis of development success appears consistent and a good approximation to reality, all the more so because it is in basic agreement with the model of economic development put forward by the modernization theory (see above). They do indeed differ in that d e pendency theories emphasize the necessity of an egalitarian land reform and early increases in real wages in order to expand the internal market - Elsenhans even dates these two developments back to the initial stages of the industrial revolution - while attaching little importance to the first 50 to 100 years of the industrial revolution, characterized as it was by

increasing inequality of income distribution and falling real wages, for profit - oriented capital accumulation (Elsenhans 1981, p. 35). It is therefore easy to understand why, when it comes to transforming | analytical theories into development strategies, the modernization approach / sees an increase in savings and profits rather than a "premature" distribution of a "cake", which is still too small, as a precondition of capital accumulation, whereas at the forefront of dependency theory is the belief in an egalitarian income distribution in order to stimulate mass demand. The debate over this central question, which dominates the literature on the subject but which takes into account only one side (respectively) of the contradictory process of capital accumulation, must not be allowed to obscure the great degree of agreement between both theories; particularly their explanation of successful development by the absorption of the "traditional" non - capitalist into the (industrial) capitalist sector, and the ' dynamics of mass purchasing power and its link to productivity increases. The "Hoffmann Paradigm" The model of phased capitalist industrialization - based on the dynamics of mass purchasing power and the successive shift from consumer goods to investment goods and finally to consumer durables - which forms the core of both theories can be termed the Hoffmann Paradigm. W.G. Hoffmann was the first (1931) to show an empirical regularity in the shift of industrial production from consumer - goods industries which dominate in the early stages, to the capital - goods industries, which grew in importance due to the increasing capital - intensity of both production and consumption. According to his calculations, the ratio of consumergoods to capital - goods industries shifted from 4.5:1 to 0.5:1 in the course of the industrialization process (Hoffmann 1931, p. 58). Despite considerable flaws in methodology (the ratio between the two departments remains almost constant if intermediate products are taken into account; the data used include artisans), his conclusion that the phases of industrialization were primarily determined by the demand of private households, has become so firmly embedded in the post-war theoretical common sense that it must qualify as a paradigm with a high "falsification-immunity" (Kuhn) and a selective problem structuring. This explains why such different theoreticians as Rostow (1960), Amin (1975) and Senghaas (1977) can refer to him in their analyses. Against the background of the unchallenged Hoffmann or "continuity"paradigm, the acceleration of industrial growth, productivity and social and structural change appeared to be the continuation of an overall industrial - capitalist development logic, which, since the middle of the 19th century, had been interupted only by the external effects of two World

Wars and an incorrect economic policy during the inter-war period (Lutz 1984, pp. 30ff.;Hurtienne 1988). With the exception of the Lenin - Narodiki discussion on the possibility of industrialization despite mass - impoverishment due to increasing proletarization and the priority of expanding intra - industrial demand within the means of production department, it was not until the world economic crisis of 1974/75, when the search was on for the fundamental causes of the crisis, that the Hoffmann paradigm was seriously questioned. A New Analysis by French Regulation Theory This search was pioneered by French marxists who, influenced by structuralism, formulated a theory of capitalist regulation which has become known in the international discussion as the "Theory of Fordism". The most important impetus for this reformulation of a theory of long-term capitalist development came from Aglietta (1979) with his analysis of long-term capitalist development in the USA, Boyer (1979) in his long essay on French development, Palloix (1976) in his study of Fordism and Neofordism, together with Coriat (1979) and Lipietz (1979, 1985). Although this theory has yet to be presented in a consistent and homogenous form (perhaps with the exception of Aglietta's regulation theory), and although the different writers have differing concepts and methods of analysis, French regulation theory can be seen as an attempt to combine the Marxian theory of accumulation with the history of accumulation in metropolitan capitalism (Hurtienne 1988). It therefore is also an attempt to overcome the contradiction between an ahistoric economism (the logic of capitalist development unfolds in homogenous social space, always following the same "iron laws") and an uneconomic historicism (there is no link between the general theory of accumulation and the diverging histories of accumulation in different countries) (Aglietta 1979, pp. 65f.; Boyer 1979, pp. 8f.; Lipietz 1985, p. 114). In this view the history of the development of capitalist societies progresses on the basis of the laws and social relations of the capitalist mode of production, but the form in which it manifests itself are subject to fundamental changes in response to the quantitative extension and the qualitative intensification of the capital-wage relation. The basic contradiction of the capitalist mode of production do not merely take on different forms during the various phases of capitalist development; their relative importance can change as well. The models of reproduction developed by Marx with the consumergoods and means of production departments were set in the theoretical "space" of a "pure" capitalist mode of production (excluding non - capitalist classes, the state and foreign trade) in order to show the theoretical con-

ditions of an equilibrium between production and the realization of surplus value with a given distribution of income and an constant rate of accumulation. They must not be confused with the historical development of capital accumulation which, after all, is based on changes in the dominant mode of production. The "intermediate" concept of the "regime of accumulation", which reflects the structure of the most important historical phases of development, is defined by the CEPREMAC researchers (Lipietz, Boyer etc.) as "a mode of systematic distribution and re - allocation of domestic product which, over a long period, produces a certain relationship between changes in the structure of production (the volume of capital invested, the distribution between branches and production norms) and changes in final consumption (the consumption norms of wage and salary earners and other social classes, collective expenditure etc. ...)." (Lipietz 1985, p. 20). The skeleton of an accumulation regime, its formal coherence, is p r o vided by a regime - specific model of reproduction. However, this is inadequate in lending an accumulation regime the social cohesion necessary for the reproduction of the fuhdamental social relations of the capitalist mode of production, especially in heterogenous societies containing other modes of production. This is only possible if the accumulation regime and its specific economic mode of reproduction are linked with appropriate political, social, an ideological structures, which in their entirety (structural forms, institutions and internalized norms) "persuade" (by force and consensus) the majority of actors (groups and individuals) to adopt behavioural patterns, expectations and ideologies which are c o n sistent with the reproduction of the accumulation regime (Lipietz 1985, pp. lllf.). It is therefore only due to the existence of a specific mode of regulation that an accumulation regime can reproduce the fundamental social relations and economic structures of the capitalist mode of production in historically specific structural forms: the wage relation, the form of c o m petition between capitals, the form of the monetary system, the specific relationship with non - capitalist modes of production and with the world market. From the point of view of regulation theory the central factor structuring the modes of accumulation is the wage relation, its quantitative extension and qualitative changes. It is on the basis of the wage relation that the different forms of competition and the link to the world market are developed. This presupposes economic and ideological forms of state intervention as a necessary condition for the transformation of the c o n crete forms of basic social relationships into their specific social forms. These complex social relationships - which become institutionalized are the result of class conflict.

The forms of regulation cannot be unambiguously deduced from e c o nomic relations; they are social innovations arising out of a complex process of trial and error during periods of crisis, which can only be analyzed ex post as functional for an accumulation regime (Boyer 1979, p. 56). Regulation theory is therefore to be contrasted within a functionalist p e r spective a system whose functions were created for this purpose as a "social project" - and a structuralist view - the requirements of capital accumulation demand and so create certain forms of regulation because both approaches lead to an untenable fetichization and subjectivization of economic and social structures and to an economistic reduction of history (Lipietz 1985, p. 114). At the same time, voluntarism is also rejected, as it reduces everything to the struggle between social classes without specifying their economic conditions, limits and transmission mechanisms (Boyer 1975, p. 50). Although the fundamental relations of the capitalist mode of production can vary greatly in form, it is possible to reconstruct at least two relatively stable typological constellations: the "extensive" accumulation regime with "competitive" forms of regulation and the "intensive" accumulation regime with a tendency towards "monopolistic" forms of regulation (Hurtienne 1988). The extensive accumulation regime covers the period from the industrial revolution to the First World War and is dominated by the development of the basic infrastructure of industrialization within the producer-goods department in an environment characterized by n o n - c a p i talist modes of production. The intensive accumulation regime refers to the period which followed, marked by the intensification of the industrial structure through the mass production of consumer goods and fundamental changes in the labour process. According to Lipietz/Boyer, extensive accumulation was based on the expansion of production involving the diffusion of the unchanging production techniques of large industry within the producer - goods department; the production of absolute surplus value was therefore dominant. Intensive accumulation, on the other hand, was founded on the intensification of production, which was also included the consumer - goods industries, involving the long-term acceleration of product and process innovations with rapid increases in labour productivity and the predominance of the production of relative surplus value, i.e. the reduction of the costs of wage labour. The extensive accumulation regime obtains its social cohesion from the "competitive" mode of regulation, i.e. the largely unregulated effects of competition, which exclude the possibility of a long - term increase in real-wages, increasing profit income, which accumulates in the capitalgood department while remaining dependent on external markets not

subject to capitalist relations. The intensive accumulation regime can only reproduce itself in the long term with a "monopolistic" mode of regulation, which limits the competition between wage earners and the ruinous price competition between capitalists to such an extent that both a rise in real wages parallel to gains in productivity and a temporal shift in the process of capital depreciation through inflation are possible. While the extensive accumulation regime together with the competitive mode of regulation remains structurally dependent on non - capitalist markets, the intensive accumulation regime with a "monopolistic" mode of regulation leads to a domestic - market dynamic. However, between these "relatively stable" constellations before the First and after the Second World War, lay the long transitional phase during which the intensive form of accumulation was adopted without a corresponding mode of regulation. According to Lipietz, the crisis during the 1930's can therefore be seen as the first crisis of the intensive form of accumulation and the last crisis of the competitive mode of regulation (Lipietz 1985, p. 123). Based on this conceptual framework, which still leaves many doubts with respect to the consistency of its categories and the role of the determinating factors, I will (now develop some global lines of a new interpretation of the long-rim process of late industrialization in the larger West European countries like Germany and France, which contrasts sharply with the mainstream demand-led explanations (for data and details see Lutz 1985, Mazier 1984, Hurtienne 1984a/1986). Unlike the dependency theory, where primarily significant structural reforms in the agrarian sector paved the way to continuous dynamics of mass demand, and to modernization theories, where institutional reforms set free the market mechanism and the profit - oriented "animal spirits" of entrepreneurs to make use of mass demand by investing in consumergoods industries, the regulation approach stresses more the primacy of heavy industries producing for infrastructural and intraindustrial demand as a starting point of late industrialization, at least in the larger capitalist countries (for different conditions in small countries see Menzel 1988). During the long phase of predominant extensive accumulation until the First World War, industrial capital accumulation in profit - oriented enterprises (with wage labour as the dominant form of employment) seems to be confined largely to industries producing intermediate and investment goods, whereas the bulk of finished consumer goods tended to be p r o duced more by non - capitalist small enterprises, craft and "cottage" industries with the predominant use of unpaid family labour. This highly polarized production structure was the result of the c o m petitive mode of regulation, restricted mainly to the statist control of legal and monetary order. The unregulated form of competition in the labour market and the huge size of the non - capitalist sector of small producers

of goods and services, accounting for more than half of the working population and acting as an "industrial reserve army", prevented a longterm "sharing of the fruits" of the (limited) growth in industrial productivity by increasing real wages of industrial workers. Because of the low absolute level of urban wages - food accounted for over 50% of household expenditure - working-class households remained highly dependent on female and child labour in order to process industrial intermediate goods and agricultural products bought on local markets for familiy consumption. Even slightly rising wages of male workers strengthened more the family subsistence production by allowing women to produce at home. Although this raised the level of reproduction of working-class families, the cheapness of household production based on unpaid labour prevented the earlier development of capitalist consumer - goods industries to a large extent, thus leaving room for the astonishing vitality of the non - capitalist production, likewise exploiting unpaid family labour. Therefore some 80% of working-class expenditures were purchased from this sector in Western Europe, which made up more than half of total employment until the Second World War (Lutz 1984, p. 161). Although the production of finished consumer - goods was largely dominated by non - capitalist household and small market - production, based on unpaid family labour and low technological levels, thereby blocking the production of relative surplus value, there had been i m portant indirect productivity effects of capital accumulation in non capitalist wage-goods production: falling relative prices for industrial intermediate goods like textiles and iron materials, drastically falling transport costs due to the development of railways, falling import prices for products of highly - mechanized American agriculture (Hurtienne 1984a.,. p 85 ff) Nevertheless, the production of relative surplus value remainedconstrained by the fact that the improved means and methods of production in the capital - goods sector were only marginally applied to noncapitalist wage-goods production: in 1907 in Germany a mere 8.7% of* employees in the engineering industries were building agricultural^ machines, only 6.5% textiles machinery (Fischer 1976, p. 551; Hurtienne ^ 1984a, pp. 85 ff). Therefore the dynamics of late industrialization, as sectorally, socially^ and regionally limited as it was within the framework of the competitive^ forms of regulation and a dualistic structure of economic reproduction,^ depended crucially on the huge infrastructural and intra - industrial^ investment demand following long technological waves (railway construction^ and metal industry, electrification and electrotechnical industry). Each time^ the initial dynamics of intra - industrial growth effects began to wane after^ the expansionary phases of new types of industries and infrastructures, thep realization problems of intermediate and capital - goods industries could

only be partially overcome by subsidized exports, cartels, armament and imperialistic races for privileged colonial markets. It was these structural imbalances and growing problems in realization of the "extensive" accumulation regime which were at the root of the "deepening" of the industrial structure through the mass production of standardized consumer goods, gradually developing in the USA since the end of the 19th century and forming the core of a new intensive "Fordist" accumulation regime by the 1920's (Aglietta 1979; Piore/Sabel 1984; Hurtienne 1984a, pp. 265-315). This new accumulation regime had to solve two main problems: On one hand it was only through a significant increase of labour productivity that the new industrial mass production of old consumer goods could successfully compete against craft and household production which p r o cessed standardized inputs with unpaid family labour and low-wage female labour (often "subcontracted " and performed at home) into nonstandardized finished products. And on the other hand it was only through similar drastic cost and price reductions that new durable consumer goods, like cars, could be transformed from high-value craft products of highwage male labour into cheaper mass consumer products The solution, found for these problems in a complex search process, was the introduction of standardized serial production with exchangeable parts and corresponding alterations in the labour process, particularly in the final ("assembly") stages of production (Landes 1973, p. 290). The change in the labour process necessary for profitable mass production of standardized parts were brought about by Scientific Management of the division of labour into the simplest sub - operations, as developed by Taylor, and semi-automatic assembly on conveyor belts, as developed by Ford (Aglietta 1979,pp. I l l ff). The enormous increase in the intensity of work - the filling of the "pores" of the working day was as important as the subordination of the specialized worker under the authoritative control of foreman and machine - based systems (Gordon et al-1982). The teal subsumption of labour under capital and the radical separation between intellectual and manual aspects of labour was thereby made possible (Braverman 1974). The industrial mass production of standardized simple and durable Consumer goods based on fundamental changes in both production technology and the labour process led, for the first time in the history of Capitalism, to an intensive linkage with the (increasingly specialized) capital - goods industries, and, together with the intensification of the working day, to an enormous increase in labour productivity by stagnating industrial employment in the 1920,s(Boyer 1979, p. 25; Hurtienne 1984, p. 303).

The macro - economic effects of the increased efficiency of industrial mass production under the Fordist accumulation regime resulted, due to the unchanged forms of regulation, primarily in increases of the industrial profit rate, the differentiation of income and wages and the first, middle class-led restructuring of consumption patterns, urbanization forms and living conditions. It was only with the massive human costs of the Great Depression (1929/32), resulting from the contradiction between the rise of industrial mass production and the lack of the corresponding mass consumption, that the way for the painful search for a new mode of regulation was paved. Despite early welfare - state innovations of the Weimarer Republic this search process was largely concentrated in the USA, where the spread of Fordist mass production was much more advanced than in other industrial countries. During the 30's and the 40's, the main forms of regulation compatible with mass production of consumer - goods arose in a complex process of political conflicts between competing social - economic projects of different social classes and groups (Aglietta 1979, Piore/Sabel 1984). The bitter opposition of liberal business community to these new forms of regulation represented by the New Deal was not broken until it was empirically demonstrated that productivity - oriented rising wages with collective bargaining contracts were in the long run compatible with rising profits and that the social security system was functional for long-term capital investments in the war economy and the post-war boom of automobile production and housing construction (Aglietta 1979, pp. 190 f; Piore/Sabel 1984, p. 100). The combination of the Fordist accumulation regime with a coherent mode of regulation which stimulated and regulated mass purchasing power was thus anything but a well thought-out strategy on the part of the capitalists, but rather a lucky "find" in the immediate post-war period. This was particularly true for Western Europe where even Schumpeter expected more a deflationary spiral, weak long-term growth rates and structural mass unemployment (Schumpeter 1972, p. 110). The astonishing fact that the majority of West European countries were able to avoid this predictable danger and to overcome rapidly the huge ecomomic, social and political problems of the immediate post-war period by imitating mass production techniques and regulation forms of the hegemonic development and civilization model of the USA is still due to controversies over the explanatory factors and especially the important national differences. Notwithstanding, these unsolved interpretation problems, there is a general consensus that the international diffusion of mass production techniques and the most important forms of regulation (collective bargaining, social security, unemployment insurance, activist role of state, etc) was a decisive factor for the "catching up" processes of

industrialization, fundamental social change and dynamic coupling of productivity and real-wage increases in Western Europe and Japan (CEPII 1983; Mazier et al. 1984). The unprecedented high and relatively stable dynamics of workingclass purchasing power, together with the cheapening of mass production consumer goods due to high increases in productivity, led to a fundamental change in the mode of consumption of the vast majority of wage and salary earners. Consumer goods, produced primarily in household and non - capitalist production, were gradually replaced by mass production products. The share of consumer - expenditure by working-class families spent on food and clothing fell drastically from about one half to under 30%, thus freeing monetary resources for consumer durables. For the first time in the history of capitalism the differentiated reproduction of labour-power in private households with an increasing level of household machines became the most important sphere of valorization of manufactured capital. The non - capitalist sector fell in proportion to the working population from almost 50% before World War II to under 10%. Due to a rapid rise in capital intensity of small-scale craft, agricultural and household production these sectors developed into an important market for specialized capital - goods industries. The dualistic macro - economic structure of reproduction was replaced by the intensification of exchange relations within the generalized capitalist economy and the growing share of capital - goods industries reflected more the i n creasing importance of the production of consumer durables. It was therefore only with this generalization of capital and commodity relations, that the intensification of exchange relations between the consumer - goods and capital - goods industries and the integration of working class into a capitalist mode of consumption that industrial capitalism began to stand on its own two "autocentric" feet. The inherent tendency towards crisis then shifted from the problem of realization, which had been overcome by the Fordist mode of regulation, to the valorization problem. By the end of the 1960's the scope for increasing the productivity of the Fordist production process had been largely exhausted so that the rate of increase of labour productivity was falling, while real wages continued to rise and capital intensity was accelerating (CEPII 1983). Initially the recessionary effects of the resultant fall in the industrial profit rate on production and employment were restricted by the institutional forms of the Fordist mode of regulation. The growth of the "indirect wage" limited the fall in purchasing power, while the elasticity of the credit - systems prevented the wide-spread devaluation of industrial capital. In contrast to 1929/32 "the crisis took the form of stagnation (and not a collapse of production) and simultaneous inflation (and not a price collapse)" (Lipietz 1985, p. 127).

Because it was not possible to overcome the crisis endogenously, within the Fordist mode of regulation, since the end of the 1970's recourse has increasingly been taken to competitive capitalist forms of regulation. This has been accompanied by a break in the link between growth and employment. Particularly in the USA and Great Britain, this new form of regulation led to the marginalization of the old Fordist industrial centres, the rise of de-regulated centres of production, the polarization of income distribution and the new "over - consumption" of those whose source of income was profits, interest or management salaries. Although the outline of a possible new structure of accumulation is gradually emerging, it is still unclear what form an appropriate mode of regulation might take (Davis 1986). The new view of long-term capitalist development contained in these hypotheses turns the analyses of world development provided by the theory of autocentric development upside-down: autocentric capitalism is the product of a phase in the history of industrialization lasting 100 to 180 years; the producer - goods, rather than the consumer - goods industries were (at least in Europe until the 1950's) at the centre of the industrialization process; mass consumer demand was not directly integrated into the industrial growth dynamics until 1950; before then it supported more the non - capitalist sector. 3. Fordism, peripheral capitalism and new industrializing countries As I have shown, the "autocentric" form of capitalism based on the dynamic coupling of mass production and rising mass consumption is a relatively recent consequence of the spread of the Fordist form of accumulation and regulation in the post-war period. For the first time in the long history of capitalism it became possible to "solve" endogenously the problem of finding markets for the products of dynamic industrial growth, by linking the growth of productivity to the development of real wages, intensifying the exchange relationships between the capital goods and consumer goods industries and increasing the capital intensity of agriculture. High growth rates in metropolitan markets for mass consumption goods led to a new role for external markets. Whereas before the Second W o r l d War, two thirds of the foreign trade of the industrialized countries were carried out with countries exporting agricultural products and raw m a t e r i a l s (complementary exchange), during the Fordist boom which followed the war, trade became largely substitutive trade between industrial c o u n t r i e s (1965: 75% of commodities and 73% of industrial goods, Roth 1984, p173). As a result, the proportion of agricultural primary products fell from

almost half (1913/37) to a fifth (1970) of world trade, that of minerals, fossil fuels, rose from 16 to 22%, while the share of finished

including

goods increased

from

37

to

55%

(UNCTAD

1984,

p.

74).

Of

these

finished products, the proportion of machines and vehicles increased from a quarter to a half (Kenwood 1983, p. 303). These developments which revolutionized the structure and dynamics of world trade, were no more than a reflection of the growing "autocentricity" of metropolitan capitalism: the technological modernization of agriculture raised the degree of self sufficiency and thus reduced the need for Western Europe to import food-stuffs, later on even causing great surpluses and dumping practices on the world market; the substitution of synthetic for natural products, aided by the low price of oil, both stimulated the chemical industry and at the same time restricted the demand for agricultural raw materials from the developing countries; the enormous increase in real wages caused a particularly strong growth in demand for consumer durables, proportionally less so for tropical luxuries and "colonial products", such as coffee, cocoa, tea, and tobacco; the high capital intensity of agricultural and industrial mass production, together with rapidly rising demand for specialized capital goods, led to increasing specialization of production within Western Europe (Fajnzylber 1983, pp. 53 f). In contrast to the initial impression of industrial growth based, as it had been before 1913, on exports, the primary impulse behind the phase of expanding Fordist mass production in Western Europe up to 1965 (in France until 1973) was the endogenous dynamics of the internal market. Despite a high level of exports, with the exception of West Germany, their share of industrial production increased only slightly before 1965 (Maizels 1970, p. 233; Roth 1984, p. 157; Svennilson 1954, Appendix). It was not until after 1965 and the beginnings of the crisis of the Fordist growth model and the equalization of productivity levels in the industrial countries that the degree of internationalization of industrial production increased drastically with the growth in intra - industrial trade and direct investment (Ominami/Hausmann 1983). The overall consequences of the relatively autocentric development of the industrialized countries and the delayed "competition for i n t e r n a t i o n alization" which set in after 1965, for the periphery of the capitalist world system were ambivalent. On the one hand, the growing autocentricity of Fordist accumulation and the structural changes in world trade led to a relative d e - c o u p l i n g or disintegration from the world economy, while o n the other hand bringing about an all the more intensive linkage with the Fordist consumption and growth models of the industrial centres.

The proportion of world exports produced by the non - European Periphery fell from 31 to 18% between 1950 and 1970, from 24 to 11% if foe oil exporting countries are excluded (UNCTAD 1984, p. 26). During

the 1970's, OPEC's share rose from 1.7 to 17%, while that of the r e maining developing countries stagnated at 11%. At the same time, the importance of the periphery for the industrial exports of the developed countries also declined between 1955 and 1970: its share fell from 33 to 19% (from 28 to 16%, excluding OPEC), although it recovered to 29% by 1981 (but only to 18% without OPEC) (UNCTAD 1984, p. 74, Bairoch 1975, p. 105). This amounted to ca. 5.3% of manufacturing output in the industrialized countries (World Bank 1979; my calculation). The periphery's share of capital goods' exports from the developed countries was only 2% higher than that of manufactured products (UNCTAD 1984, p. A 10). The increasing insignificance of the periphery to the core countries becomes even clearer if we turn our attention to the development of overseas investment. Before the Second World War, the peripheral countries in the broadest sense of non - industrialized countries, accounted for almost half the overseas investment carried out by the industrialized countries (Roth 1984, p. 274). After the war, this proportion fell to a similar degree to that for imports of capital goods; from 40% in 1950 to 25% in 1980. It must be noted that this relative loss of importance of the periphery in international trade and foreign investment was accompanied by a decline of the share in world industrial production 1948-66, resulting from the drastic increase of central - planned economies (Gordon 1988). Comparing developing countries only with world market economies, there was no drop but an increase of the share in industrial production, r e flecting the more inward looking import substitution process (OECD 1988). Despite the fact that the majority of developing countries grew more rapidly in manufacturing in the 1970's, there can be no doubt that the major part of this increase can be explained by the NIC's (Mexico, Brazil, South Korea, Taiwan, Singapore, Hongkong), which more than doubled their share in market economies 1964-80 from 3.1% to 6.8%. This explains more than half of the rise - from 9.8% to 15.2% - of all development market economies (OECD 1988). The same thing happened with the manufacturing exports of market economies, where the share rose from 6.7% to 8% (NIC's from 1.9% to 4.3%) between 1965 and 1973, reaching 1980 10.5% (6.6%) and 1983 13.3% (8.7%). The growing differentiation of the periphery becomes even clearer looking at the shares in world GNP (including non-market economies). Whereas between 1955 and 1980 the share of all of the developing countries rose slightly from 20.7% to 21.5%, this was due to a drastic decline of low income developing countries (8.1% to 4.8%), a stagnation of "other oil importers" (3.8% to 4%), an increase of the major exporters

of manufactured goods from 5.1% to 7.7% and OPEC countries from 3.7% to 5% (World Bank 1982 p. 22). The diverging growth dynamics were reflected in growing differences of GDP per capita within the periphery. The relative income difference in 1980 between the middle and low income developing countries (1:6) was almost as great as that between the former and the industrialized countries. The difference between the finished goods exporters and the r e maining 10 countries of the upper segment of middle - income developing countries and the low-income countries (1:10) was much greater than that between the former and the industrialized countries (1:4), while the absolute differences of $1320 and $2930 respectively were only a seventh and a third of the gap between the two groups and the industrialized countries (World Bank 1982, my calculation). The income differences within the periphery correspond to the clear, if not quite so extreme, differences in the other economic and social development indicators: degree of industrialization and urbanization, literacy, life expectancy and infant mortality, energy intake per head, proportion of the population living in absolute poverty, etc. (World Bank 1983b, pp. 218f.). However, the clear link between the level of income and the s o c i o - e c o nomic level of development should not obscure the fact that individual low - income developing countries, such as Sri Lanka and China, can achieve values for indicators such as life - expectancy and infant mortality equal to the average values for the 21 highest - income developing countries, whose per capita income is ten times greater. Correspondingly, in countries, such as Brazil and Mexico, with a relatively high level of e c o nomic output, but an extremely unequal social and regional income distribution, the social development indicators are very poor, although it is to be noted that it is only in regions of absolute poverty, such as the North-East of Brazil, that the figures are as bad as for the poorest developing countries. On the basis of these World Bank statistics which should however be treated with caution, especially for the highest and lowest income groups, it is possible to establish only a weak link between the level of income and the inequality of its distribution. The low-income developing countries do indeed tend towards an egalitarian income distribution, but both the upper and lower middle - income groups contain countries with a relatively equal distribution (South Korea, Taiwan, Argentina) and those where wealth is much more unequally divided (Kenya, Ivory Coast, Brazil, Mexiko). On the other hand, in all these developing countries which exhibited high capital growth dynamics (South Korea, Taiwan, Brazil), the income distribution was becoming more unequal, whereas in countries with (or in periods of) low growth, there was a trend towards greater equality (Sen 1985, Fields 1989).

How can these extreme quantitative differences in the economic and social level of development within the periphery of the capitalist world system be represented qualitatively? In contrast to autocentric capitalism with its tendency to homogenize production structures, consumption patterns and income levels among the industrialized metropolitan economies, capitalist development in the periphery has been characterized by the increasing heterogeneity of socio-economic development processes, the development path taken, and the level of development in the various countries, regions and economic sectors. This growing heterogeneity was the result of the different historical conditions and the different forms and structures, by which the Fordist consumption and accumulation model has penetrated the various countries since 1945 via the world market. First, at the time of their recent decolonization and political independence, the majority of Black African states could be characterized as follows: Over 70% of the population worked on the land, less than 20% lived in the cities, less than 8% of GDP was produced by industry, the dependent labour force made up less than 20% of the population. Here the Fordist consumption model usually led to the "Amin"-case of a peripheral capitalist articulation of exports of primary goods and imports of luxury products (cars, television, etc.). More recently the latter were replaced by increasing imports of capital goods to establish Fordist consumer good industries which tend to involve the assembly of semifinished products and which, despite a high rate of growth of employment and output, do not form an integral part of the national economy. In spite of low wages and long working hours, they are characterized by low productivity, a small contribution to value added and reduced socioeconomic development effects (Amin 1973; Arighi 1973, p. 117, Amin. 1975, pp. 253ff.) The Fordist consumption mode usually remains restricted^ to urban elites whose consumption pattern of luxury goods can only be^ financed through high rents from oil or mining or from the high rate of^ exploitation of small-scale agriculture where the majority of the popu-i; lation are still employed. This "urban-bias" leads almost without exception to a developmental "dead-end": a worsening agricultural crisis, absolute^ poverty for over half the population, the spread of the informal sector in^ the cities and in "industry", the preservation of social structures inimical tc> development, political instability and a widening gap between the poorest countries and the industrialized and newly industrializing countries (Lipton 1977). n Second, in the former colonies of North Africa, the Middle East and South, and South-East Asia as well as in the small- and medium -g sized, export - oriented countries of Latin America the figures for urban ization and industrial development are much higher than for the first|j group of countries (Fajnzylber 1983, pp. 149ff.). By 1950, the capitalist^

mode of production was fairly wide-spread in this group of countries, albeit in the form of an export - oriented, agrarian capitalism with a dominant urban merchant class (Amin 1970). Industrialization based on import - substitution which except in India, Egypt and Turkey - began only after independence or, as in Latin America, after the end of the primary - product export boom, remained to a large degree in the hands of foreign enterprises, even for simple consumer goods, while in the case of consumer durables, production was confined to assembly, with high imports of inputs. The Fordist mode of consumption was adopted by a relatively larger proportion of the urban population, but the inefficiency of the industries assembling consumer durables, prevented a radical change in the consumption patterns of urban workers due to high relative prices. On the other hand, the traditional consumer - goods industries experienced dynamic growth, a development reinforced by the reallocation of production from the industrialized countries during the 1970,s. In spite of the oil price increase and industrial reexport from "free production zones", the effects of industry on development remained limited. The informal sector consisting of non - capitalist producers of goods and services accounts for a correspondingly large proportion of non - agricultural employment. The dramatic shortage of foreign exchange, particularly since the onset of the debt crisis, led to the ruin of a large number of consumer good industries dependent on imports, and to a boom in simple commodity production, combining local raw materials, simple means of production and cheap family labour. Third, an extensive transfer of the Fordist mode of accumulation o c curred only in large Latin American countries (Argentina, Mexico, Brazil) which had enjoyed political independence and whereby 1950 the national bourgeoisie had completed the industrialization of simple consumer goods •production. In these countries, industrial production as a proportion of iGDP reached between 19% (Mexico) and 24% (Argentina), the degree of [urbanization between 36% (Brazil) and 65% (Argentina), the percentage LOf- wage and salary earners from 43% (Mexico) to 73% (Argentina) [(Fajnzylber 1983, CEPAL 1985; Lambert/Martin 1976). Fordist consumer[goods industries were built up behind defensive customs barriers mainly by foreign enterprises, in conjunction with the development of heavy industry fbyr' state - owned companies and the expansion of a complementary •material infrastructure. The import of capital goods which this entailed was "financed" out of the export of primary products from a modernized export - oriented agricultural sector, from mining and also from the transfer of productive plants from the industrialized countries which had been written off, were still serviceable, and could be declared as direct investment.

The extremely high growth of industrial production and employment, characteristic of the early stages of Fordist development, together with the growing inter - industrial linkages during the 1970's due to the completion of capital - goods industries led, especially in Brazil, to a lesser extent in Mexico and only marginally in Argentina, to a relatively high growth of labour productivity and thus to a long-term fall in the relative prices of Fordist consumer - goods. The lack of an overall Fordist mode of regulation meant in Brazil and Argentina that average industrial wages increased, roughly, half as quickly as productivity, wage differentials exploded and minimum wages stagnated or even fell, while in Mexico occurred 1955/70 the opposite: a homogeneization of industrial wage levels, a doubling of the real minimum wage and a closer link between productivity and real wage increases (Gutierrez Garza 1988, pp. 145 ff). In any case, the relative cheapening of Fordist consumer goods and consumer credits revolutionized the consumption structure of urban workers. As the concentration of the population in the cities was increasing, urban workers made up almost half the labour force. As in the industrialized countries, the vast majority of consumptive spending went on manufactured goods produced by large-scale industry, while expenditure on food fell from 50% to 33% (1950-1980). Similarly the proportion of workers in the non - capitalist sector fell to between 10% (Brazil) and 20% (Argentina) in industry, and between 24% (Brazil) and 35% (Mexico) in the whole non - agricultural sector (Garcia/Tokman 1984, p. 105). Because of the comparatively low level of incomes and wages, the partial Fordist integration of consumption patterns by urban workers into the valorization process of the capitalist manufacturing and service companies was accompanied by high wage and income differentials and a reduction in the consumption of goods for primary needs. The income difference between the cities and agricultural and underdeveloped regions amounted to at least 1:2. Growing income differentials and the increasing unequal distribution of income led to the problem of finding suitable markets once the initial expansionary phases of the Fordist consumer - goods industries had been completed. In Argentina the situation was made worse by the neo-liberal experiment conducted by the military dictatorship, which led to a process of de - industrialization. In Mexico a huge oil rent and in Brazil the increase in exports of manufactured goods, the growing external debt, mammoth state-run infrastructural projects and the development of capital and basic goods industries enabled these problems to be covered up until the start of the debt crisis in 1982. The recession which followed, comparable only with that of 1929-31, and the transformation of the largest debtor countries into net exporters of capital, finally revealed the development dead - end of a purely imitative Fordist industrialization,

lacking the necessary mode of regulation, the development of national technological capabilities and the modernization of agriculture for the internal market. Fourth, in contrast to the Fordist industrialization based on the internal market in the large Latin American countries and the "peripheral capitalist", export - oriented mode of development increased exports of primary goods, industrial re-export from free production zones, and the import dependent, non - integrative industrialization of the production of consumer goods - in Africa and part of South-East Asia, the industrialization of South Korea and Taiwan more or less followed the Japanese model. This involved the development of consumer goods, intermediate products and investment - goods industries, by alternating phases of import substitution, protected by tariffs, and selected export - oriented industrialization (Menzel 1985a; Asche 1984). Their successful imitation of the Japanese development model was, however, only possible due to the existence of a set of conditions favourable to development. These include the colonial modernization of agriculture and an embryonic heavy industrial base of Japanese imperialism; the high level of initial support comparable to the Marshall Plan, from the USA; the imperatives of reform and modernization for the authoritarian ruling classes caused by East-West competition in the region; and the mobilization of the Confucian tradition of diligence and the collective "self-reliance of traditional paddy rice cultures as a free productive force" (Hurtienne 1982, Barone 1983). The export success of these countries was initially based on Taylorist production of simple consumer - goods which was dependent on extensive imports of inputs, highly intensive labour with long-working hours and low wages. The Fordist mass production of consumer durables developed in the 1970's, was in the beginning primarily export - oriented and caused only in the 1980's a huge internal demand boom. High restrictions on imports, the ban on the sale of colour televisions produced for export by South Korea in the domestic market in the 70's, a low percentage of private vehicles and a relatively egalitarian income distribution, prevented the Fordist mode of consumption from establishing too early (Fajnzylber 1989). Although average real wages grew rapidly during the 1970's and the expenditure on food fell from 58% (1964) to under 40% (1980) of employees' budgets, as in Brazil and Mexico, expenditure on consumer durables increased only marginally until the end of the 70's, but exploded afterwards. In contrast to the Latin American NICs, the proportion of non - agricultural employment accounted for by non - capitalist production remained high at between 40% (Taiwan) and 55% to 65% (South Korea), while for industry the figure of 20% was double that in Brazil (Asche 1984, Amsden 1987).

This rough classification of different effects of the international diffusion of hegemonic Fordist consumption norms, mass production techniques and accumulation structures on the development in the periphery revealed that the vast majority of these countries was in such a way negatively affected by this process that the resulting development profiles can adequately be described as "peripheral capitalism". In this sense the thesis of dependency theory that underdevelopment was and is the reversal of the development trends in the industrialized countries and the international division of labour, is still valid. But the problems of interpretation arise, when it comes to nonreductionist explanations instead of descriptions of multi - dimensional development processes. How could the overwhelming "stale - mates" possibly be explained, taking into account, that against the background of the same global conditions of the world market, some countries of the Third World succeeded in the sense of dynamic capitalist development? E x ploring the reasons of success of these countries more systematically may provide contractually also some insights into the reasons of development failures of the other Third World countries. Unfortunately, in this field the problems of interpretation are enormous and cannot be easily solved, given the actual state of art of development theories. This is true even for the few explanatory attempts by authors linked to the regulation approach (Lipietz 1982, 1985; Ominami 1986). Lipietz tried to explain in a brillant but in many ways superficial and unsatisfactory way, the complex development stories of Latin American NIC's and South Korea as "peripheral Fordism", growing out of import substitution policies in Latin America or "bloody Taylorization" in East Asia. This "peripheral Fordism" is considered by him on one hand as a "true Fordism", involving a combination of intensive accumulation and growing market for consumer durables. On the other hand this remains peripheral because production is "limited to unskilled assembly and execution which in theory requires no skill" and growth in social demand for consumer durables is not institutionally regulated or adjusted to productivity gains in local Fordist branches (Lipietz 1987 pp. 71, 79). The markets for this Fordist mass production represent therefore "a specific combination of internal consumption by local middle classes, with workers in the Fordist sector having limited access to consumption durables, and massive exports to the centre", financing partly the imports of technology and skill intensive capital goods (Lipietz 1987, p. 78). As we will see, this development profile of peripheral Fordism is far too schematic and cannot capture some of the most important features of late industrialization of these countries: the rapid development of skill — intensive capital goods industries in the case of Brazil and the upgrading of skill intensive manufacturing in South Korea. In the last parts of this

article I will try to explore the contradictory effects of a premature partial Fordism in Brazil and then compare this case of apparent development process until 1980 and the failure afterwards with the contrasting case of export - oriented industrialization of South Korea. 4. Inward oriented Fordist accumulation without an integrated welfare - state regulation - the case of Brazil The Brasilian development since the 50's can be viewed as a special case of late industrialization, which like western Europe, tried to follow the model of Fordist mass production of the US within a heterogeneous economy and society. The reasons why Brazilian populist - democratic governments in the 50's reached a fairly broad consensus of urban social classes for the acceleration of late industrialization by developing mass production of consumer durables and related intermediate goods as a cornerstone of growth dynamics, can only be explained by the peculiar internal and external development conditions at the time of the Korean crisis (Hurtienne 1983). After a long history of import - substituting industrialization, which started at the end of the 19th century and became predominant since the 30's, Brazil had reached a fairly high degree of manufacturing (20% of the GDP), statistically comparable with western Europe (Fajnzylber 1983). The internal demand for simple consumer goods could almost completely be satisfied by the production of family - owned enterprises located mainly in the south-east. The degree of urbanization (36%) was still low, but the share of wage - labour in the total urban employment had reached the level of southern European countries (Hurtienne 1985). Social policies of the populist governments benefited urban wage-labour, but excluded the 60% of economically active population working and living in the countryside under the harsh control of agrarian oligarchies (Singer 1981). Whereas urban working class consumption patterns sustained the simple consumer goods industries, upper and urban middle classes were heavily dependent on a premature Fordist consumption pattern. This reflected the traditional outward orientation of these classes and was reinforced by the import boom of consumer durables immediately after the war. In 1953, the density of automobiles (10 per 1,000 inh.) was similar to Italy and was reached by Japan only in the 60's and South Korea in the 80's (Hurtienne 1985; Hwang 1989). In the same year, the stock of cars accounted for the sixth greatest in the world and three times that of Japan and half that of West Germany. The same was true for buses and trucks, that played an increasingly important role in transportation. This was due to the continental dimensions of Brazil and the neglect

of railways. The impact of the imports of parts for the assembly in Brazil was felt heavily when the terms of trade declined after the end of the Korean boom. Because of a lack of foreign exchange and high custom barriers the prices for consumer durables rose drastically. It is therefore not so astonishing that upper and urban middle classe elites looked at the complete transfer of the consumer durable production to Brazil as the most c o n venient way to accelerate industrialization, to satisfy the repressed urban demand and to alleviate the balance of trade. This option for a second phase of import substitution was reinforced by a lack of interest of the industrial bourgeoisie to launch like in the Second World War an export offensive in simple consumer goods, because profit rates and wage levels in the protected internal market were high, world-market conditions adverse, Brazilian currency overvaluated and economic experts looking on with fascination at the high growth effects of consumer - durables complexes in industrialized countries. Even the strategic decision to use the know-how of foreign investors to build up assembly lines, was only marginally challenged by local capitalists. Not mastering sufficient technological capabilities, many of them were satisfied to take advantage of the planned high degree of backward linkages by producing components for the TNC controlled assembly. The implementation of the new Fordist accumulation regime by the Kubitschek regime since 1956, led to an extremely high growth of industrial production and employment until 1961. This was as in the cases of late industrialization of western Europe primarily due to the high intraindustrial and infrastructural demand effects of the development of these new industrial complexes and related infrastructures. The lack of a sufficiently high private demand for consumer durables was only felt, when these interindustrial demand effects of the first construction period came to an end (Tavares 1981). The resulting problems in realization, the exploding inflation and the increasing social mobilization of the urban and rural working class led to a deep crisis of the new accumulation regime and, especially, its populist - democratic character (Serra 1979; Hurtienne 1983). The military coming into power in 1964, "solved" these contradictions by eliminating the populist social policies, suppressing trade unions and popular movements, realizing far - reaching financial reforms, promoting manufacturing exports, stabilizing inflation and since 1966 activating the demand for consumer durables by increasing the inequality of income distribution in favour of the middle classes. In spite of the stagnation of average industrial wages and the decline of urban remunerations, the demands of the upper and middle classes were sufficient to cause a new boom.

Because of the rapid exhaustion of productive capacities, this led once more to an investment boom with high backward - linkages and productivity increases. Formal employment in Fordist industries and complementary productive services were increasing annually by 10%, while productivity increases led to a decline of relative prices of consumer durables (Tavares/Souza 1983; World Bank 1983b). Together with a yearly increase of consumer credits by 50% and a doubling of the average employed persons per household, this meant that even less qualified labour could be partially integrated into Fordist consumption patterns (Wells 1977; Tavares 1984). Even after the outbreak of the over - accumulation crisis and the oil — shock in 1974, this growth pattern continued, albeit at a reduced rate, until 1980. This time it was a debt financed deepening of the industrial structure by a third phase of import substitution of capital - goods, intermediate products and oil production, which sustained increasing investment rates by high interindustrial demand dynamics. Until 1980, this briefly described pattern of successive industrial spurts seemed to be fairly successful in a capitalist sense of growth dynamics and social change. As opposed to peripheral capitalism, the capitalist mode of production was well established in the Brazilian economy. Wage labour accounted 1980 for 63% of the total employment, and 74% of those in non - agricultural employment, which meant that Brazil had already reached the values of 6 0 - 8 0 % put forward by Amin for metropolitan, autocentric capitalism (Amin 1975, p. 176; Hurtienne 1984, p. 385). In contrast to the development profile of peripheral capitalism, urban wage and salary incomes played a central role in determining urbanindustrial demand, making up 66% of private consumer expenditure in urban areas in 1970, a figure which had increased since then (Bacha 1982, p. 38, my calculation). Unlike in pre-Fordist capitalism in industrialized countries and peripheral capitalism in many parts of the Third World, domestically produced capitalist goods and services determined the consumption structure of the urban work force. The mass production of consumer goods by a highly integrated industrial structure with a low dependence on imports (even compared to the industrialized countries) forced the non - capitalist informal sector into providing complementary services and finding small niches in the market. Employment in the informal sector (in 1980) made up a mere 16.5% of non - agricultural employment, and only 10% of industrial and craft employment (Garcia/Tokman 1984, p. 105; CEPAL 1985, p. 179). Even in urban employment sectors such as construction, trade and services which are dominated by informal employment relations in most Third World countries, the wage and salary earners made up 6 2 - 7 3 % of the total (FIBGE 1983, p. 146, my calculation).

This is conformed by new calculations based on census data from 1970 for the poorest districts of Rio de Janeiro: the labour-force participation rate at 47.4% was higher than the urban average, of which 80% were wage labourers: 18% in industry, 17% in transport and services, 12% in construction, 13% in domestic service, 9% public employees, but only 7% in trade and 13% "self-employed" (Oliveira et al. 1983, p. 61). Even if Qne were to view these data sceptically, they would still be enough to support a qualitative statement: in contrast to the peripheral capitalist countries, the problem of poverty in Brazil seemed 1980 to be more the result of the highly unequal distribution of wage incomes, social security rights, the tax burden and living conditions within the class of wage and salary earners, rather than of mass marginalization in the sense of a long - term exclusion from "formal" employment relations in the modern sector (Singer 1981). Thus, in 1980, the highest 10% of wage and salary earners received 50% of total wage and salary incomes, whereas the lowest 50% received only 13%, with the result that the difference between the highest and lowest 10% amounted to 1:12, which explains to a large extent the high income inequality of the society as a whole (Bresser Pereira 1982, p. 79). In 1982, only 15% of agricultural, 66% of non - agricultural and 85% of industrial workers had a formal employment contract, and so a legal right to health care and other social security provisions; whereby these figures were much higher in the South and South-East, and much lower in the North and North-East (PNAD 1983, my calculation). In 1979, the total tax burden imposed on the lowest 50% of wage earners was 36%, 10% above the average (Serra 1983, p. 10). The large differences in income levels are reflected in the highly differentiated structure of consumption. Expenditure on food accounted for 45% (large cities) and 55% (small- and medium-sized cities) of the consumer spending of urban households with an income below twice the minimum wage (1974/75), whereas for those families with five times the minimum wage, the figure was only 32% (FIBGE 1981, p. 56, my calculation). Only a small proportion of foodstuffs came via local markets direct from agricultural producers, most are sold in supermarkets and are produced by agro - business (Graziano da Silva/Quede 1977; Souza 1980, p. 48). Although the lowest social groups suffered from inadequate provision of basic foodproducts, some 60% of urban working class households were already at least partially integrated into a Fordist mode of consumption (Hurtienne 1984; Wells 1977; Knight 1981).Despite this important qualitative change of urban consumption patterns due to comparatively high diffusion rates of consumer durables among households, quantitatively urban consumption expenditures for high-value consumer durables like cars were highly concentrated in the upper 20% of households (Sadoulet 1985).

Thus, the economic structure of reproduction differs from that of both peripheral and pre-Fordist metropolitan capitalism. As a result of its dynamic industrialization, strongly oriented to the domestic market, Brazil exhibits a developed Fordist industrial structure in the South East, which is closely linked to the consumption structure of urban wage and salary earners and their households. However, in contrast to autocentric metropolitan capitalism, the industrial mass production of consumer goods developed without a comprehensive regulation of the labour market by the welfare state. Bearing in mind that Brazil's per capita income is five times less than that of the industrialized countries, such a policy, incorporating the entire work-force with the aim of equalizing consumption levels, would scarcely have been possible and taking into account overcrowded megalopolis not at all desirable from an ecological point of view. High wage differentials increasing during the 60's and 70's, partly due to the development of industry - specific "internal" labour markets for skilled workers, can therefore best be interpreted in a similar way to the USA in the 20's as a form of market adjustment of the purchasing power of the upper wage earner groups to the problem of finding markets for increasingly differentiated Fordist consumer goods industries (Tavares/ Souza 1983). The core problem of development of domestic - market - oriented, Fordist industrialization in a peripheral country such as Brazil, lies in the structural imbalance between the rapid process of industrial modernization, which has led to the establishment of a relatively complete Fordist industrial structure approximating that of the industrialized countries, and with socio-economic structural changes, which lag a long way behind. For example, the proportion of agricultural workers to the total, dropped from 60 to 30% between 1950 and 1980, while the share of wage and salary earners rose from 50 to 65%; these figures correspond to those for G e r many in the first two decades of this century (Sost 1978; Hurtienne 1984). The relative modernity of the industrial structure had reduced the level of non - capitalist, urban production until 1980 to a level perhaps c o m parable with that of the autocentric capitalist countries, but it has also destroyed the buffer - function of this sector during phases of rapid structural change, with heavy migration from the countryside into the cities. The majority of those leaving the land can no longer - as in Europe in the last century ensure their reproduction in an extensive urban sector, where the family is the economic unit which produces most consumer goods itself (Tavares 1981). At the same time, the Fordist structure of accumulation and consumption in the cities provides only limited and selective incentives for the development of the domestic agricultural sector. Although the demand for high-value food products, which has increased more than proportionately, has benefited large-scale livestock production

and small-scale intensive horticulture close to large concentrations of consumers, the demand for traditional basic foods (beans, rice and manioc) has risen less than proportionately which has hindered the dynamic development of most of the small-scale peasant agriculture (Melo 1983). The positive feedback effects of industrial growth and small-scale agriculture, which were felt in the nineteenth century in Germany due to migration from the land into the cities, accompanied by a rapidly increasing demand from the urban working class for basic food products sold in local markets and produced by small farmers, had only a marginal importance. The stagnation of productivity in the production of basic food products led to the paradoxical situation that the prices for food products in the cities were too high (and thus inflationary) compared with the more efficiently produced industrial consumer goods. At the same time, they were due to stagnant -productivity, the lack of cheap credit and extension services and high margins for mercantile capital too low to enable small farmers to make sufficient investments. The resultant stagnation of the majority of small farms favoured the process of concentration of landownership in the oldest agricultural areas; small farmers were forced to move to the "free" land of the frontiers in the interior or into the cities. The problems which arose from the r e sultant reproduction of informal forms of employment and subsistence in the slums and ghettos of the large cities should be obvious from the description above. Because of the modern and efficient nature of the mass production consumer goods industries, those arriving in the cities have little chance of making a living by producing (in "cottage - industries") consumer goods for urban workers, as was the case in pre-Fordist and peripheral capitalist economies. Thus they are dependent for their survival on integration in the lowest segments of the urban labour market, at starvation wages, with next to no legal rights, and to a large extent, in subsistence production. The informal sector does not "subsidize" a small inefficient industrial sector as in peripheral capitalism, rather it provides for itself from a fund of surplus value produced by highly efficient industrial labour (Tavares 1981, p. 24). Compared with the "time - is - money" approach in Fordist industries with their high intensity of work, their long working - hours, and large distances between home and work, for a comparatively low wage, many badly-paid wage-earners may see the i n formal sector, precisely because it is not subject to such rigid and exploitative conditions, as offering the chance of "a better life", particularly in times of crisis (Souza 1980). The characteristic contradictions of Brazil's industrialization between the modernity of the capitalist industrial sector and the relative backwardness of domestic agriculture, between the dominant role played by

formal, urban wage-labour and the reproduction of the surplus rural population in subsistence production within a dependent, informal sector, between the dominance of Fordist norms of consumption and the inadequate supply of basic goods for large sections of the urban population, all result from the imitative nature of Fordist industrialization. Despite a low per capita income, industrialization has been relatively successful, although little attempt was made at a balanced development of independent technological skills, and a mode of regulations based on a welfare state (Coriat/Saboia 1987). It seems clear that both the neglect of domestic agriculture and the lack of independent technological development were the reversal side of the astonishingly successful development of capitalism by the extensive transfer of Fordist industrial structures in a peripheral country. However, the neglect of traditional production of basic food products in the expansionary stages of Fordist industrial structure was only possible because of the existence of adequate supply to the cities, coming from the dynamic agrarian frontiers of small scale peasants in the interior of Brazil. The lack of development of a technological infrastructure can be explained in a similar way. The logic of import substitution was, from the very beginning, based on the uncontrolled adoption of the technology available on the world market via the know-how of the multinational concerns, which had only a small "learn - effect" on the recipient country. Only with the later development of skill - intensive capital - goods industries and the increasing technological capabilities of state enterprises, together with the challenge posed by the third technological revolution in the metropolitan countries, did it become imperative to develop a d i f ferentiated technological infrastructure in order to consolidate the already developed industrial structure. The dynamic initiative improvements of private and state companies and research institutions exhibited during the programme to develop a new information - technology sector surprised even the sceptics and may be interpreted as exemplary for possible changes in the capabilities to adapt to new technologies (Moura Castro 1984; Evans 1986). It was only since 1981 with the acceleration of inflation, the outbreak of the debt crisis and the IMF-oriented stabilization policies that the apparent success story converted into a case of development failure. The stabilization policies of the military regime led on one hand to a deep recession, a decline of wages, a growing informalization of labour relations and a drastic loss of purchasing power of the middle classes, thereby slightly reducing the income inequality. But on the other hand these p o licies were not able to reduce inflation even by sharply cutting down government expenditures. On the contrary, inflation dynamics was strengthened. The only "positive" effects, that could be reached, were a

sharp rise of manufacturing exports and huge trade balance surpluses, which had to be spent almost totally for interest payments. The new democratic regime since 1985, tried to solve these problems with heterodox stabilization policies and first attempts to realize some of the urgent structural reforms. Notwithstanding the initially surprising success of the Cruzado Plan, 1986, these policies were not able to solve the short-term economic problems either, not to speak of the necessary long-term structural reforms. 5. Brazil and South Korea: preliminary remarks for a comparison We have now come to the point of raising the fundamental question why the Brazilian government and the political and economical elites were so unsuccessful in overcoming the deep structural development crisis, which in my view, cannot only be explained by the high level of indebtedness. Especially, if one compares Brazil with the case of South Korea, whose foreign savings and growing indebtedness played an even more important role in the development process, and where apparently similar problems such as high budget deficits, growing inflation rates, high trade balance deficits and problems with the payments of interests were rapidly solved after the economic crisis of 1980 (see Marmora/Messner and Rivera in this volume). In contrast to Argentina, in the Brazilian case it is much more complicated to answer the question why there are existing such huge differences in the capabilities of adapting to changes in world market' conditions and to internal structural deficits. Comparing Brazil with South Korea one can exclude some of those factors explaining long - term decline in Argentina: there was no huge capital flight until recently; the political stability and the relative autonomy of the state until the debt crisis was far greater; the agrarian oligarchy was not as rent-seeking and agrarian modernization of export production was developed much earlier; external credits were used to a greater extent for productive investment; the productivity effect of Fordist consumer durable industries was more significant; the international competitiveness of manufacturing exports was more well - developed and the link between import substitution and export, promotion was also more developed. Comparing the more enduring development success in South Korea; with Brazil, one can also exclude some of those factors normally cited, as; specific conditions of success in South Korea. First, I have many doubts concerning the effectiveness of the first stage; of import substitution and structural reforms until 1962. The enormous. ; American aid made possible the (re)construction of light industries espe-

daily textiles and apparel. But the investment rate remained in the 1950's much lower (at 10% of GDP) than that of Brazil in the first phase of import substitution, and real gross capital stock grew only at an average annual rate of 5% in 1953 /1962 (Hamilton 1986, p. 33} The heavy d e pendency of granted aid ensured only the economic survival at a low level (Hillebrand 1987, p. 10). When aid declined after 1958, especially the textile industry showed a real decrease in production (Amsden 1987, p. 6). But what was more important, aid was only partially used for imports of capital goods and productive investments. Much of the US aid dollars were sold to selected importers of raw materials and consumer goods at the official exchange rate, which was about half of the estimated parity rate in 1953/1961 thus causing high windfall profits (Hong cited by Hamilton 1986, p. 37). Given the scarcity of these products, they were simply resold at a premium with a high mark-up. Getting access to scarce foreign exchange and US Army supplies through political connections and corruption helped to build up big "illicit" fortunes from "zerosum activities" (Jones/Sakong 1980, p. 272). Much of the money capital of former landowners was therefore going more to commercial accumulation and inofficial money-lending than to productive investments. For Hamilton (1986), therefore, this period was much more characterized by the transformation of rentier - capital into commercial- and money- rather than into industrial capital. The widely spread corruption and insufficiency of the Rhee government, its policy of political favouritism, the cheap agricultural imports from the US and the low investment rate were perhaps much more typical for the development profile of a "peripheral capitalism" than a new emerging NIC. Apparently, there was no strong, enlightened state conducted to longterm development and pursuing well - conceived structural reforms. The educational reform seemed to be more linked with anti - communist ^indoctrination, had to be paid largely by the families and caused a huge I unemployment of secondary and college students between 30 - 4 0 % (Hil|>brand 1986, p. 8). Ironically, this helped at least to get rid of the c o r fc rupt Rhee regime by a student revolt in 1960. ;*' The often-cited agrarian reform began by the US military government ^because of the fear of agrarian unrest, was initially blocked by the landowner - dominated congress and later on* more a consequence of cheap [food imports and the sale of lands (Ban 1980). The effects of this half|hearted agrarian reform were therefore not primarily increasing agrarian ^productivity and rapid growth of rural demand for consumer goods, as ^many dependency theory oriented authors presume (Anglade/Fortin 1982, £but also Rivera in this volume). On the contrary, cheap food imports, t controlled agrarian prices and the heavy indebtedness of land-buying

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farmers led to increasing impoverishment of small landowners and a flow of migrants into the cities, where they filled up the marginalized masses. This background of a highly inefficient and distorted peripheral capitalism with generalized corruption and speculative gains of only few commercial capitalists and money-lenders explains, in the case of South Korea, the easy seizure to power of a group of "Young Turks" of the military led by Park Chung-Hee and their highly Confucianistic posture, "denouncing conspicuous consumption of the rich, attacking degenerate Western influence, purging the army and bureaucracy of the corrupt and dishonest, confiscating "illicit fortunes", accumulated by wealthy business" and changing agrarian policies Hamilton 1986, p. 27). Despite all the repressions which happened afterwards to the popular movement, one has to take into account that only with the Park government, state became "relatively autonomous", long-term oriented and developmentalist. Second, the rapid switch of the industrialization strategy to exports of consumer goods was intially not so much the outcome of a deliberate strategy (as many authors argue) but rather more a combination of external pressure (rapidly declining US aid), lack of exportable primary goods, the pressure of textile entrepreneurs and favourable world market conditions. Whereas the Park government dreamed of more Japanese - like heavy industrialization, there was simply no other way to finance the necessary capital goods imports. In the same sense, one can argue that the long-term development success of export - oriented industrialization was less due to "bloody Taylorism", combining light - equipment with badly - paid female labor in fragmented labor-intensive export production of simple consumer goods (Lipietz 1987, p. 74). On the contrary it was more related to the delayed realization of the development dreams of the "Young Turks" from 1962, in "catching up" development by heavy industrialization following the Japanese example. Without that extremely important linkage between import substitution and export orientation and the rapid up-grading of exports to more skill- and technology - intensive products, the Korean miracle would never have occurred. In the same sense one might argue that the Brazilian development success until 1980 was not so much due to a development of the consumer durables industries as such, but rather more to the planned and state-guided high backward linkage effects (Serra 1983). Third, comparing the main instruments of economic state intervention, their application and effects, one comes to the astonishing conclusion, that they were, at least in the 70's, on a macro-level not so very different. In both countries credit - allocation was organized and controlled by state development financial agencies with explicit aim to channel subsidized credits into priority sectors according to development plans.

In both countries export promotion worked with quite a similiar set of fiscal and financial incentives. The amount of export subsidies were 1980 roughly the same: the gross values (including exemptions from indirect taxes and tariffs) were 21.3% in South Korea and 20.8% in Brazil (Dornbusch/Park 1987, p. 407; World Bank 1983b, p. 67). Even the development of real exchange rates were not so much different (Balassa, et al. 1986, p. 78).Whereas in Brazil comparatively effective protection from manufacturing was in general higher, a fact often mentioned by the apologists of the Korean model like the World Bank (1987, p. 76), it was much lower in the heavy industries (World Bank 1983, p. 76; Nam 1981, p. 206). Concerning the highly politicized question of government budget and current account deficits, one comes at first sight to the astonishing conclusion that, until 1982, they tend to be higher in South Korea than in Brazil (Dornbusch/Park 1987, p. 441; Lozardo 1987, p. 236). Therefore, it is not surprising that South Korea had, in the 70's, relatively high inflation rates, compared to the indexation system in Brazil. Fourth, the often - mentioned problem of high concentration ratios and oligopolistic price -fixing behind high duty tariffs of import substitution policies in Latin America was also a problem in many of the highlyprotected economic sectors of South Korea. In Korea, the concentration ratio was even higher and "chaebols" (diversified economic conglomerates), tried to utilize frequently their oligopolistic power to gain in the internal market, what they often lost in the external one. Like in Brazil, the South Korean government therefore used price - controls to compensate for this (Amsden 1987a). Fifth, the famous more egalitarian distribution of income, which can be explained by special historical conditions (expropriation of Japanese colonial property and the effect of two wars) and the agrarian reform, was linked with some features of the labor market, which in most of the cases (not in the educational level) are even worse than in Brazil: the longest work-week in the world; a highly - segmented work-force with a male labour aristocracy in the large-scale heavy industries and badly-paid female labour in the tradition sectors; therefore one of the highest gender-wage gaps in the world; and a statistically, not documented, huge informal sector between 5 5 - 6 5 % of non - agricultural employment, with earnings estimated at 20% below the lowest paid industrial wages in textiles (Asche 1984, p. 257; Lindauer 1984, p. 72; Amsden 1987a, p. 4). Even using official data one must conclude that despite a much higher growth rate, the average industrial wage level was lower than in Brazil in 1985 (Dornbusch/Park 1987, p. 401; Picht 1987, p. 16). The same can be said concerning the productivity figures. Whereas it seems clear that South Korea performed better, I found astonishingly

broad variations in the average rates (apparently calculated in different ways and this with diverging deflators). Comparing the more realistic rates with estimates for Brazil, one can only conclude that the large differences normally presented, are disappearing (Corbo/Nam 1988, p. 38; Unido 1987, p. 21; Mason 1980, p. I l l ; Dornbusch/Park 1987, p. 440; Tavares/ Souza 1983, p. 206; Carneiro 1986 pp. 32, 122). What, then explains the differences between South Korea and Brazil? Without having a complete answer, I can only mention several central factors which have to be studied more in depth. First, there can be no doubt that the specificity of the cultural and historical background has to be taken into careful account (Barone 1983; Evans 1987; Hwang 1989; Hurtienne 1982). In South Korea, the Park government could mobilize the Confucianistic traditions for fostering industrial discipline and obedience, not only on the part of the working class, but also - what was perhaps more important - the industrialists as well. Even the long work-day is explained by many authors as a prolongation of Japanese - colonial harsh factory systems (Amsden 1987b). Brazil's cultural heterogenity and outwardly - looking urban middleclass traditions, did not preclude industrial discipline and workers' obedience, but it made difficult the development of cultural identities necessary for institution - building, social - cohesion and especially long-term development coalitions. But even on these points, one has to be cautious: Korean workers have demonstrated several times, and especially since the democratization process started, that they were indeed willing to stand up for their rights. And the Brazilian state demonstrated several times its ability to fornr long-term development coalitions, especially in the Kubischek and GeiseL Administration. Additionally, the differing cultural backgrounds explains together with, the differing income distribution patterns, why in Brazil the premature Fordist consumption pattern of upper and urban middle classes was much stronger and impelled an implementation of a Fordist accumulation struc- } ture, whereas in South Korea the government did everything possible to/ prevent the development of this, even exporting many of these Fordisti, consumer durables. Second, what seems to be fundamental for the understanding of the| developmental differences is the specific relation between the state and! the power-bloc, and "the degree of autonomy from foreign and domestics groups, sufficient to permit elites and politically insulated technocrats t(J formulate coherent development strategies"(Deyo 1987, p. 232). In Soutlffl Korea the developmentalist state and its planning agencies was formed before industrialists were sufficiently strong enough to impose their inter ests, or at least bloc-state actions. As I have mentioned before, it was| not the peripheral capitalist Rhee Regime, linked intimately with urbau|

non - industrial capitalists, but rather the military - bureaucratic Park Regime, growing out of a deep crisis of peripheral capitalist structures, which were, due to a specific historical class constellation, able to subcoordinate submerging economic elites and especially the new industrial conglomerates (chaebols) to an authoritarian statist guidance of the development process. The same was true of foreign direct investments, which although they only played a minor role, were heavily controlled and guided in their activities. This rather specific constellation was reinforced by selective risk adverse credit allocation policies, which strengthened the chaebols and neglected other enterprises, including the major ones in the light industries. This close link between the state and its agencies and a rather small group of only forty -six diversified chaebols, of which the ten largest reached in the early eighties as much as 30% of shipments and 67% of sales, made planning and state guidance easier and more effective (Amsden 1987b, p. 138). According to Amsden, one can explain the special relation between the state and the chaebols as a "reciprocal relationship", which functioned as the main mechanism to exert discipline over firm behaviour. This does not mean simply close cooperation, but that in exchange for subsidies, the state exacts certain performancy standards. Even big enterprises had therefore to except that the state could impose stern discipline on them: even "most politically favoured firms have had to produce rather than speculate, to train their workers rather than exploit them, to invest in R & D, as well as to rely on foreign expertise, and to export as well as savor demand in a protected home market. Exports represent perhaps the most important disciplinarian and objective, opaque criterion by which firm performance is easily judged." (Amsden 1987b, p. 150) This reciprocal relationship could only be sustained because the state controlled the financial system and the debt mangement to a degree not imaginable in other capitalist economies. So investors were subject to ^ harsh controls on capital flight, with maximum sentence of death, and on ^ heavy controls of their export performance. In Brazil the class constellation was rather different: the traditional ^industrial bourgeoisie of the first stage of import substitution remained (locked in the traditional sectors of light industry, component production, ^banking and commerce, while the transnational corporations dominated the |Fordist growth industries and the state companies controlled the interImediate goods sector. This famous "triple alliance" of private national, ^governmental and foreign enterprises, together with the still important role '"of the agrarian capitalists, made the power-play much more difficult and the capability of the state to conduct the economy much more vulnerable. This is specifically true in the more democratic periods, when personalistic

policy structures make coherent formulation of long-term development strategies more difficult, tx If one can learn something from the both cases, it is that the old I story of the strategic importance of national bourgeoisies in exportoriented heavy industries, which are exposed to the fierce struggle of international competition and therefore forced to build up long - term development strategies and coalitions, is still important (Hirschman 1971, p. 97). It was no coincidence that in the South Korean case, the entrepreneurs of light industries did not play an important role in long-term development coalition building, aiming at achieving not only economic success but also economic power in the world market. In this sense, the Korean experience has much to do with some of the main features of late industrialization in the 19th century, described by Gerschenkron (1962) and stressed by Hirschman (1971) in his still important article on Latin American importsubstitution: stress on a great sudden spurt, on bigness of both plant and enterprises, upon producer's goods, on special institutional factors (like supply of capital to nascent industries and enterpreneurial guidance), on pressure upon the level of consumption, on a passive agriculture and on an export drive, which linked the social prestige of entrepreneurs with the strength of the nation. Whereas Hirschman was claiming some of these features for the case of Brazil as different from the rest of Latin America, in my opinion they do fit in much more with the case of Korea. Perhaps with the important qualification made by Amsden, that successful late industrialization today has much more to do with state, guided adoption of foreign technology through investing in foreign licences* and technical assistance and competition on the basis of modern skills,," given whatever labour costs, than with invention and innovations orj competition on the basis of cheap labour (Amsden 1987b). ' Third, this specific relationship between state and the power-bloc was reflected in the tremendous differences in the effectiveness of industrial policies. Despite the same instruments and at first glance, similar global j effects, the Korean planning agencies were much more able to link thet macro- with the micro-level, differentiating not only between industries, ••! but within industries between firms and specific projects (see Rivera is.; this volume). An extremely favourable outcome of these flexible policies^ of state guidance was a far greater upgrading of technological capabilities:^ first by "learning by exporting", then by huge state investments in tluy educational system (especially vocational training) and research and de-^ velopment, and at the end of this process a rise in private R & D ex-^J penditures to a level only comparable to industrial countries (Fransmajfr 1985; Westphal et al 1985). Fourth, even in the field of debt and monetary policies, the Korean.-government proved to be much stronger in managing external dependency^

L

effectively and lowering inflation without harsh austerity policies. Against conventional advice, they began with orthodox stabilization and liberalization policies only after the problems of overplanning, inflation, and budget deficits were solved in a rather heterodox way (Casse 1985). On the contrary Brazilian military government tried to follow the advice of the IMF and only after the failure of this policy, the new democratic government tried, too late, to find its own heterodox forms of problem — solving. Fifth, besides the differences in development sequences, both countries were exposed to the influence of the Fordist consumption norms and ' accumulation structures of the industrial countries, but in a very different way, and at different times. In Brazil the predominance of the premature Fordist consumption structure of upper and urban middle classes led to the imitative implantation of inward oriented Fordist accumulation structure, through high-linkage effects, at least during the high growth periods, to an upgrading of consumption patterns of urban working classes at the expense of basic needs and only in the 1980's to a delayed export boom of consumer durables. In contrast to that, South Korea started from a very low and homogeneous consumption level (with some luxury consumption in the 50's and afterwards) utilized cheap well-educated and disciplined labour for the production of standardized mass - consumer products for the world market, prohibited or restrained until the end of the 70's the internal consumption of many of these goods, and only after a long period of successful growth, ended up in a Fordist consumption . structure in the cities and the countryside, which (if one excludes cars) I was more generalized than in Brazil (Hwang 1989). -J & Some conclusions reached in this paper First, "autocentric" capitalism, as the yardstick for successful development, :was the result of the post-war mode of regulation based on the welfare •State. Late industrialization in the developing countries referred generally .more to this Fordist development model but nevertheless reproduced many [features of the extensive accumulation regime and specially its competitve .mode of regulation. The specific combination of these various forms of production and regulation is until today not very well understood. Mr Second, as shown by dependency theories, development trends in the [periphery of the capitalist world system can be seen as the reverse image [Of the dynamic growth of the industrialized countries and the structures of mle capitalist world economy determined by them. The increasing autoSCentricity of Fordist accumulation in the metropolitan countries led, on the |bne hand, to a relative d e - coupling from the periphery from the world

economy, but on the other hand, to an all the more intensive link with the Fordist growth and consumption model of the metropolitan countries. Third, in contrast to both dependency and modernization theories, development trends in the periphery cannot be reduced to a homogeneous development profile. The increasing heterogeneity of the development paths of the so-called Third World is a result of the interaction between the different effects of Fordist mode of accumulation and consumption, as transferred by the world market, and the widely divergent socio-economic development conditions prevailing after the Second World War in these countries. Fourth, the theory of peripheral capitalism can therefore only be applied to those countries where the capitalist wage - relation is not wide-spread, where integrated industrial structures are lacking and where the Fordist mode of consumption is restricted to the urban elite. Fifth, the development of the Latin American NICs and especially Brazil differs from both peripheral capitalist countries and pre-Fordist metropolitan capitalism in the following ways: industrialization of consumer goods production without fundamental agrarian reform; the post-war development of Fordist accumulation structures, orientated primarily towards the domestic market; the high generalization of the capitalist wage - relation; the partial change in the mode of consumption of urban wage - earners, and the lack of an adequate mode of regulation by the welfare state. The specific problems of late industrialization in these countries, reflected in the deep structural crisis of the 80's, thus requires a specific theoretical approach, which, at best, can make only partial r e f - erence to dependency and modernization theories. Sixth, the extraordinary success of the South-East Asian NICs, especially South Korea, with their rapid structural changes and their ; orientation towards the world market since the 60's, does at first sights seem to fit into the paradigms of the modernization and growth theories: j However, a closer analysis of the interaction of internal and external^ development factors reveals clear deviations from the text-book version/1 of modernization theory. The export - oriented industrialization wasJ founded on earlier agrarian reforms, the import substitution of consumer goods and the upgrading of techonlogical capabilities in the heavy indus-jl tries. Furthermore, competitive forms of labour-market regulation wereg combined with a high level of authoritarian state planning and guidance tog regulate the economy by a coercive reciprocal relationship with bigj national enterprises. Seventh, apart from these rather general insights there is still much ^ do to get to a better understanding of the concrete significance and rolCrj; of the main factors in multidimensional development processes with mote complex interaction structures than was normally thougt, causing success^OT

failure even under apparently adverse conditions by mobilizing hidden development potentials through creative learning. In this sense development theories have to concentrate much more on the conditions of interacting social, political and economic learning processes of actors, groups and classes under the constraints of internal and external system Structures.

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Angelo Pichierri Diagnosis and Strategy in the Decline of the European Steel Industry

0. The problem and the analytical frame of reference1 In a previous article (Pichierri, 1986) I discussed in general terms the problems of industrial crisis and decline. From the literature I reviewed 77ie sources. Most of the empirical material I use in this article can be found in the books and articles listed in the bibliography. Statistical data are generally straightforward and uncontroversial. I normally quote texts that use these statistics for their own analyses, and the reader interested in the original sources is referred to these texts. In May 1985 in Paris I had a number of conversations with leading experts that c a n not be quoted here, and I had access to the documentation service of the Chambre Syndicate de la Siderurgie francaise. My knowledge of the Italian steel industry is of a more direct nature. In 1963 I c o n ducted my first empirical research, on Nazionale Cogne, Aosta. Between 1969 and 1971 I carried out research in the Italsider plants at Cornigliano and Taranto. Between 1980 and 1984 I was a member of an advising commission on the problems of the Lombard steel industry, in Sesto San Giovanni. Information, stimuli and questions originating in these different experiences were the starting point for the present article. Acbiowledgrnents. This article was first published as Discussion Paper IIM/LMP 8 6 22, Wissenschaftszentrum Berlin fiir Sozialforschung 1986. The paper was begun in Paris in May 1985, during a period spent at the Ecole des Hautes Etudes en Sciences Sociales as directeur d'etudes invite. For reading and commenting on a first draft, thanks are due to Alberto Baldissera, Alessandro Fantoli, Luca Lanzalaco, Vittorio Rieser and Jonathan Zeitlin. The present draft was completed in Berlin in July 1986, during a period spent at the Wissenschaftszentrum Berlin, Research Unit Labour Market and Emplomenty, as visiting fellow (Gastwissenschaftler), and discussed there in a seminar. I would like to thank Hans-Peter Spahn for his careful reading of the final version.

(references can be found in the quoted article) I drew some analytical categories that I will summarize here. a) Crisis and decline are two forms of a process that can be defined as the inability of an actor or system to attain his/its goals. The two may be distinguished by criteria of intensity and duration. b) Important theoretical contributions to the analysis of industrial crisis and decline have been: the product life cycle theory; the longitudinal analysis of organizations; the behavioural theory of the firm; and the concept of barriers to exit. c) The analyst of industrial crisis and decline must clearly single out his unit of analysis at one of three possible levels: the micro-level, i.e. the level of the firms; the meso-level, i.e. the level of groups of firms with significant common features (often, but not always, these groups are industries); the macro-level, i.e. the level of regional, national, and supranational industrial systems. d) The possibility of early diagnosis of a process of decline depends on the availability and use of both hard indicators (e.g. the state of the budget of the firm) and soft indicators (e.g. exit modalities of different groups of members of the declining organization). A reduction in the size of the system observed is an important but by no means unequivocal indicator of decline. A smaller system, indeed, may at times attain some of its goals in a more efficient and effective way than a larger one. e) Generally speaking, decline is an unintended consequence, or perverse effect, of actions having completely different goals. The goal of these actions even may have been that of opposing a process of decline. f) Strategies to counteract decline are possible and empirically o b servable. There may be, and indeed there have been, also strategies aimed at the management of decline, i.e. at the reduction in size and the distribution of costs of a process considered to be irreversible and/or desirable, depending on the actors beliefs and values. The Perception of decline is a prerequisite for the starting of counteracting strategies. Diagnosis based on reliable indicators is only one of the factors that can activate the perception of decline on the part of the actors involved. A correct and timely diagnosis may be available, yet] without having the slightest practical effect, as historians of the decline of 3 empires have observed (Cipolla, 1971). Sometimes both perception andl strategy are the result of a more or less violent crisis. However, crises asl part of a process of long term decline are not always acknowledged asi such and dealt with accordingly. Moreover, once the process has been] acknowledged, there is still a choice between strategies assuming its irre- * versibility which aim at reducing the social and economic costs of decline, $ and strategies assuming the reversibility of the process which consequently I attempt to counteract it.

The evolution of the European steel industry since World War II is an excellent field for the study of the problem of decline. I will very briefly review this evolution in the first part of this article. As a matter of fact, its main features are well-known and the subject of a growing body of literature. In the second part, I will deal with the problem of the dramatic delay in recognizing the decline of the steel industry and in launching suitable counter - strategies. This delay may at first sight seem surprising, since already in the 1960s reliable indicators and forecasts were available. The explanation I will propose attributes this delay to an exceptionally u n fortunate combination of technological and economic characteristics of the sector with attitudes of the actors that can be interpreted in terms of ideology, rationalization, false consciousness and self-deception. In the third part of the article I will deal with strategies preceding the crisis, as well as strategies that are presently employed based on a diagnosis of the state of the industry that is broadly shared by different actors. Although perceptions as well as technological and economic c o n straints in the steel - producing European countries were usually quite similar, strategies remained in many cases different. Even when the measures adopted were apparently the same, they varied considerably as to their timing and the specific combination of technological constraints and ideologies by which they were affected. Still another avenue for research is suggested by the presence of a ^peculiar actor in the European political arena, namely a supranational [authority. Since the 1970s this supranational authority has apparently been [the actor most capable of providing reasonably consistent diagnoses and ^strategies. Increasingly, the strategies of national governments and firms |can be understood as responses to the strategy of the supranational actor. \L The events fThe world production of steel amounted to 212 million tons in 1952; it fcwas 626 million in 1972 (the peak of 709 million was reached in 1974). In fthis period, output increased in the Federal Republic of Germany from 18 |to 43 million, in the United Kingdom from 16 to 25 million, in France |from 10 to 24 million and in Italy from 3 to 19 millions (Hayward, 1974; eHogan, 1983). The factors accounting for this unprecedented growth are "well-known. Post-war reconstruction and the industrialization of socialist |and third-world countries produced a tremendous increase in the demand i for steel. The growth industries of the time, such as the car industry, were r typically steel - consuming. These facts might lead one to conclude that

maturity and decline of the steel industry are both relativly recent trends. This, however, is not the case. At least since World War II, the steel industry, in both economic and political terms, can no longer be counted as a leading industrial sector. In none of the advanced industrialized countries were steel industrialists able to maintain the preeminent position in the coalition of dominant classes which they had held at the beginning of the century. Economic growth and the consequent demand for steel in the postwar period have long obscured two fundamental facts. First, no really innovative use of steel has been made comparable, for instance, to the introduction of reinforced concrete. Second, in many products the content of steel has decreased in favour of other materials, such as plastics or aluminium. Steel was considered as a mature product primarily by its producers. The managers of "big steel", looking for incremental im provements in the traditional product, did not show much interest in really new products. R & D expenditure of American steel firms in the 1960s, for example, was 0.7 percent of their sales (0.5 percent in the late 1970s) (Hirschorn, 1986). American big steel was also exceptionally late in introducing well-known process innovations (Adams and Dirlan, 1966). Moreover, the distribution of the benefits of post-war growth in the world steel industry has been unequal. In the ten years under consideration, absolute growth was remarkable in all producing countries, in relative terms, however, there was a radical change. The relative share of world production strongly increased for the Soviet Union and even more for Japan. It drastically declined for the United States and also for Europe, with the exception of Italy. Just before the crisis of 1974, the worldmap of steel producers was completely transformed. The relative positions in terms of productive capacity, but also in terms of productivity and competitiveness, had become very different, and these differences became more pronounced in the following years. In the early 1980s, the production per employee of the biggest Japanese firms exceeded by 180 percent that of American firms, and by 225 percent that of French and Italian firms of comparable size (Moro, 1984). As far as the strategies of steel producers up to the early 1970s are concerned, three variables are particularly important: plant size, plant location and technological innovation. The biggest producers directed their efforts at exploiting economies of scale. Steel plants reached an unprecedented size, and the same applies to their equipment. The efficient average productive size of a blast furnace more than doubled between 1970 and 1975. In 1955, the crucible diameter regarded as efficient was 8.5 m; it was 9.7 m in 1965; 12.2 m in 1970; the crucible diameter of the giant blast furnaces going into operation in the 1970s exceeded 14 m (Paoli, 1974).

The availability of high quality and low price raw materials in regions far from those where steel plants were located, and the diminishing cost of sea transportation, were the reasons for the coastal location of new plants. Accordingly, the competitiveness of European plants that for historical reasons were located near deposits of raw materials deteriorated. A number of technological innovations were introduced in the steel industry, although in an uneven fashion. Some of these innovations came from outside, such as electronic data processing, while others originated inside the sector. As is characteristic of mature industries, these are p r o cess rather than product innovations. The most significant innovations, in order of importance were the oxygen converter, continuous casting and direct reduction of mineral ore. The share of steel produced by continuous casting globally rose from 0.1 percent in 1955 to 9.6 percent in 1970 and 21.5 percent in 1975; in 1973, however, the share was 6.8 percent in the US, 9.4 percent in the ECC and 20.7 percent in Japan (Paoli, 1984). The typical scenario at the time was one of increasing plant size and of producing with increasing technological efficiency a product that had changed little and the demand for which was steadily increasing. As far as the size of plants is concerned, the most important innovation, typically in Northern Italy, came in the form of mini-mills using scrap iron as raw material and electric furnaces as equipment. These relatively small and flexible firms are more competitive than large firms for certain products. The range of their products, however, remains narrow, even if with a tendency to become broader. In the period under consideration the market for steel expanded and, what is perhaps still more important, it did so consistently. Between 1946 and 1974, there were only three years of slight drops in the world p r o duction of steel (Hogan, 1983). The 1974 crisis, characterized by the impact of the sudden increase of oil prices on steel - consuming industries, took European producers by surprise, at a time when they were expanding existing plants as well as building new ones. This was the case for Taranto, Gioia Tauro, Fos, Dunkerque, Bremen, and a number of sites in the UK. In the following years there was a series of increasingly violent crises, successively affecting all national steel industries. In 1974 the share of EEC countries in the world production of steel was 22 percent, but their share of the 1975 drop in world production was 50 percent. Between 1974 and 1979 the number of employees declined by 16 percent (in absolute terms, between 120,000 and 125,000) (Davignon, 1980). Between 1974 and 1984, 245,000 workers (more than 30 percent of the total) lost their jobs (Tsoukalis and Strauss, 1985). The effects of the crisis, however, differed from country to country. In the United Kingdom the number of employees decreased from

196,000 in 1973 to 112,000 in 1980; in Italy the number increased until 1980 and began to fall only in the 1980s (Longhi, 1983). The EEC Commission, heir of the powers of the European Coal and Steel Community (founded in 1951 to foster industrial rationalization in times of reconstruction and development), is the supranational actor attempting to manage the decline of the steel sector. The goal to be attained, formally stated in the Davignon plan, is a more efficient, more competitive, and smaller European steel industry. The main measures that have been adopted are: fixing of prices and setting of production quotas; plant closures (voluntary at the time of the first Davignon plan, they became compulsory when Article 58 of the treaty on "manifest crisis" was enforced); and financing of measures concerning redundant workers. The main features of this strategy, and the responses of national actors to it, will be discussed in the third part of this article. It can already be said, however, that, given the large presence in the EEC of state owned enterprises, whose number increased in the 1970s with the nationalization of the French steel industry, an important dividing line is that between public and private steel producers. The distinction between private and public partially coincides with national boundaries: the strongest national industry, namely that of West Germany, is made up of private firms, with the only important exception of Salzgitter. 2. The missing - diagnosis 2.1

The possibility of early diagnosis

The economic events of 1973-74 are not the subject of this article. For the purpose of our analysis, it may be sufficient to recall that these events took most economic actors by surprise. What is really striking in the case of steel, however, is the fact that, well after the beginning of the crisis, forecasts for the 1970s were exactly the reverse of current trends. These forecasts, coming from the holders of the "monopoly of legitimate expertise" (Cohen and Bauer, 1985), remained unquestionable for a l°n§ time; only in the late 1970s did the monopoly dissolve. In 1973 p r o m i n e n t representatives of the industry had denounced what they r e g a r d e d as deficit of production capacity. As late as 1974, forecasts of market tren were still very favourable (Hogan, 1983; Meny and Wright, 1985). & This kind of optimism is especially difficult to understand in the ca of the European steel industry, whose competitive position in the wo market had constantly deteriorated for years, reaching a state that co hardly be considered as reversible. The problem then is the how could it happen that, for a product in the maturity stage of i ts

cycle* in countries whose position in the world market was increasingly weak, the behaviour of the actors involves generally resulted in an indiscriminate increase of production capacity. To ask this question seems appropriate, given that: a) at least since the 1960s, some of the indicators we mentioned had already been available; b) some prudent, if not pessimistic, forecasts on the future of the (European) steel industry had come from authoritative sources; c) some firms had implemented strategies apparently not assuming a continuous growth in the demand for steel. Information concerning the deteriorating position of the European v i s - a - v i s the Japanese steel industry had been available long before the crisis; the tremendous increase in Japanese productivity and the diverging productivity trends in different European countries were well-known - facts; the same applies to the growth in steel supply from newly industrializing countries, and the related banalisation of certain segments of the production cycle of steel. The average utilization of the equipment was around 94 percent in 1953-55 and 84 percent ten years later (Stora, 1979). These trends were emphasized in the 1960s in at least one important report of the OECD (OCDE, 1966; Stora, 1979). But as early as 1949 the Economic Commission of the United Nations had forecast excess capacity in Europe starting in 1953 (UNO, 1949; Balconi, 1986). There were cautious voices just before the crisis: in 1972, a Mckinsey's report suggested lower capacity targets than those planned by the British Steel Corporation (Richardson and Dudley, 1986). In the late 1960s, when trips to Japan by European experts and managers were becoming routine, reports written for the management of the Italian state owned steel industry illustrated not only the technological and organizational superiority of Japanese firms (this was already becoming f commonplace) but also the fact that in some major Japanese firms long-term economic planners were seriously considering options for Versification. Such warnings and reports were generally not even discussed. In Europe, only a few West German companies during these years implemented strategies involving both rationalization (with considerable cuts in labour force) in steel, and efforts to diversify into other sectors. These I Regies will be discussed in the last part of this article. We might condjCtUre a t t h i s P o i n t t h a t started from a different and more realistic ^gnosis of prevailing trends. j following pages I will try to identify the reasons for the ^dequate decisions made by most European steel industrialists. The ct°rs I win take into consideration are the cyclical character of the steel

industry; its technological constraints in terms of response times and barriers to exit; and the influence of ideologies. The same factors were at work in other industries, in the steel industry, however, they had a p e culiar character and intensity. Moreover, in the case of the European steel industry these factors had cumulative effects, concentrating in a relatively short time. Last but not least, these factors affected firms that, being strongly protected or state - owned, were less sensitive to market indicators and sanctions. 2.2

The cyclical character of the steel industry

As a producer of investment goods, the steel industry is strongly affected by business cycles (Golzio, 1942; Stora, 1979). A historical familiarity with business cycles affected the diagnostic ability of steel industrialists in two apparently contradictory ways. First, the almost unbroken post-war growth produced a diffuse euphoria, dispelling traditional worries and caution (Davignon, 1980). Second, when the crisis appeared, the idea of the cycle was rediscovered. In this light, the crisis was interpreted as a phase in a process of a business cycle, and not as a phase of long-term decline. This interpretation was supported by the fact that even in the 1970s the industry performed well during some years, as for example in 1978 (Meny and Wright, 1985). An external observer may find it surprising that explanations in terms of business cycles could survive in the presence of production drops of a magnitude like those of the 1970s. One should bear in mind, however, that even in the period of continuous growth, strong local ups and downs were not uncommon. In the Saar region, for instance, production went down by 16 percent in 1970/71, to go up by the same percentage the following year (Esser/Fach/Vath, 1983). The fact that in the past down periods were regularly followed by upswings led to underestimating the symptoms of decline brought to light by the crisis. This is especially true for minor crises preceding the major crisis of the 1970s. The 1963 crisis, indeed, had already made evident the existence of excess capacity. The European steel industrialists, after all, in the past had often been confronted with situations in which the attainment of the goals of the firm was impossible. But these situations of inability had always been temporary and reversible. 23

Technological constraints: reaction times and barriers to exit

In the steel industry the implementation of new strategies normally takes a long time. The time needed to set up new plants and make equipment operational is the most important delaying factor. Basic resturation of this kind, despite some time saving gains made in the past, is still a matter of

years (Stora, 1979 and 1980). The investment, moreover, is so huge that it becomes a barrier to the exit of the firm from the market, even in case of subsequent persistent losses. The magnitude of the assets, together with their specificity and durability (Caves and Porter, 1976) makes them hardly disposable. The influence of time and economic constraints on diagnostic and forecasting ability is twofold. First, the amount of the investment required for strategies aimed at improving of the market position of the firm points to the need for highly reliable forecasts. Indeed, most large firms in the 1960s developed huge marketing and planning departments. At the time, however, extrapolation from current trends was the typical tool of longterm planning (Faccipieri, 1984). Second, social psychologists have drawn attention to self-deception and wishful thinking as mechanisms likely to be activated in order not to be forced to acknowledge errors (Elster, 1979 and 1983). This is accomplished through different types of selective scanning of information (Elster, 1979): scanning is interrupted when s e lected evidence fits one's wishes; scanning goes on indefinitely if the evidence is unfavourable; cheating is possible concerning the weight assigned to different factors (Elster, 1983). Another powerful factor for the activation of the mechanism of self-deception is the presence of managerial (Caves and Porter, 1976) and "political" barriers to exit. Unlike other industries, it is quite common in the steel industry, even at relatively high levels in the hierarchy, to find managers whose interfirm, but especially inter - industry mobility, is very low. (As far as the Italian industry is concerned, my evidence comes from about 130 interviews with Italsider and Finsider managers). This type of personnel, whose identification with the industry is strong and whose skills are not easy to sell to other industries, will normally do anything to avoid the closure of the plant, or even of some of its organizational units. Indeed, identification is likely to occur not only with the industry in general, but also with subsectors such as cast iron steel and sheet. Mutatis mutandis, the same applies to shop-floor workers, whose resistance to retraining and mobility is normally a constraint on plant closures. The European steel plants are normally located in areas with difficult economic and social problems. The old plants are usually found in regions where obsolete industrial equipment is in the process of being updated or dismantled. More recent plant construction has frequently occurred in backward regions in order to foster development and provide employment. In both cases, the social and political barriers to exit are high. In the case of new green field plants, the reluctance to acknowledge past errors was particularly important. Taranto, Gioia Tauro and Fos-sur-mer are cases in point.

The decisions to build a new integrated plant at Fos, and to double the already existing capacity of Taranto, were made when constant growth in the steel market was taken for granted. Construction of the new facilities however, was completed on the eve of or even during the crisis. As the new equipment was technically the most up-to-date, the need for disinvestment affected older plants of the same industrial groups. Gioia Tauro was an intermediate case. Huge investments had been made for the purchase of land and the construction of a harbour, but the very construction of the plant had not yet begun. In the face of the crisis and after many delays and imaginative proposals, it was finally decided not to build the plant. The time needed and the difficult problems that had to be solved before such a sensible decision could be taken, serve to illustrate a number of political, social, but also psychological constraints. The construction of the new plants had been proposed as an essential contribution to the industrialization of backward areas. Neither the Fos nor the Taranto region, however, were particularly backward in comparison with the rest of Midi and Mezzogiorno, nor was Gioia Tauro in comparison with the rest of Calabria. The decision to build and then to double the plant in Taranto was taken against the will of an important section of Finsider management (Meny and Wright, 1985). The intended contribution to the creation of new local entrepreneurship either did not materiailze or had the opposite effect (Pichierri, 1976). In the case of both Taranto and Fos many temporary jobs were created, and a considerable share of the new skilled jobs had to be filled by workers from outside the region. This may be sufficient to indicate that ideology had a decisive influence on the political decisions to plan and build the new plants (Tarrow, 1978). 2.4

The ideologies of steel

As historians and anthropologists have observed (Stora, 1979), in the history of mankind iron and steel have often been an eminent symbol of power. The symbolic value became all the greater after the first industrial revolution, when a national steel industry was regarded as a pre - requisite for industrialization and development. Given the relationship between political and economic power as well as the fact that the steel industry has traditionally played a decisive role in arms production, it is easy to understand why a strong steel industry was considered a pre - requisite for national independence. As the conditions in which this belief had its origin changed, it became increasingly ideological. Today, it can be said that it reflects group interests rather than industrial and political reality.

Ideological arguments are generally addressed to governments by firms and trade-unions asking for some kind of support. Governments can use the same arguments to legitimate measures difficult to justify in purely economic terms. The argument concerning "national interest" is a cornerstone in the ideology of steel. In no other western country has this ideology been as rethorically formulated and the notion of national interest as liberally employed as in France. According to the analysis of Padioleau (1981), ideology is at the base of the following syllogism: a) steel is an attribute of modern power; b) France is a modern power; c) a steel industry equal to the stature of France is needed. Moreover, until very recently French industrialists strongly believed in the permanent growth of the steel market, regardless of cyclical disturbances. Thus another basic belief concerned the need to invest much, soon, and at any price (Padioleau, 1981). The French steel ideology has another characteristic cornerstone: Germany was and still is the main enemy. An obsession with the danger posed by German superiority is a recurring theme in the documents of entrepreneurial associations, the government, unions, and the communist party (Chambre Syndicale, 1978; Stoffaes and Gadonneix, 1980; Padioleau, 1981). The national interest ideology, however, has been and continues to be influential in other industries and other countries as well. In France, it was used extensively to legitimate expensive and repeated state interventions in sectors such as machine tools that were clearly not competitive in the international market (Cohen and Bauer, 1985). Out of France, the notions of national interest, independence, security, and power, were appealed to whenever steel industrialists called for state support that was difficult to justify in economic terms. This is the case of the Italian i n dustry at the time of its "big spurt" (Gerschenkron, 1962); or, more recently, the case of the United States (Crandall, 1981) where according to authoritative sources national security is at stake West of the Rocky Mountains as a result of growing steel imports (Vanick, 1980). Others, however, have argued that at present it is possible to buy steel from a number of independent and geographically diverse sources (Goldberg, 1986). In extreme cases, ideology can make any diagnostic ability appear superfluous. If self-sufficiency is a primary goal as a precondition for military security and economic development, the concern for market indicators is likely to be low. In combination with erroneous beliefs and other ideologies, the destructive influence of the ideology of national interest on diagnostic and forecasting ability will be exacerbated. As far as steel is concerned, the

dominant erroneous belief has concerned market trends; the most prevalent ideology has been the ideology of regional development. Making regional development a primary goal is likely to adversely affect economic rationality. My argument is not that this is necessarily wrong, or that economic initiative must always be left to the market. In the cases I mentioned, however, the lack of concern for economic indicators produced results that were counterintuitive in terms of the original goal. The regional ideology is not typically espoused by management, but rather by government and by political parties. As the case of Taranto clearly demonstrates, location decisions are one of the few subjects on which a conflict arose between management and government. It is also one of the few subjects on which the management's monopoly of legitimate expertise was contested. In 1959, a technical consulting committee appointed by IRI advised against immediately starting construction of the new Taranto plant. Only a few days later the decision to start was taken by the ministerial committee in charge of state owned industry (Balconi, 1986). The opposition of Finsider management, however, did not concern market prospects. Rather, there were technological and organizational reservations. The scenario was the same a few years later when the decision was made to double the capacity of Taranto and to build a new plant in Gioia. In the case of Gioia, the opposition of Finsider and Italsider management was even more convincing, since the growth of Taranto had brought to light that managerial and organizational slack was e x hausted. 3. Strategies 3.1

Actors

In the first part of the article, I referred to actors in general and undifferentiated terms. This was at least partly justified by the fact that most of . • these actors were involved in producing, and were being affected by what • I described as the erroneous diagnosis of the situation, in a very simliar way. I already mentioned, however, that the perception and behaviour of * some firms and certain supranational organizations at least in part deviated from this pattern. {*> As far as strategies, and especially strategies of response to the crisis, ^ are concerned, the relevant actors are firms, employers' associations, and&j trade-unions as well as governmental and supranational organizations,.;^ These are the actors directly involved in the problems of ,the industry, apd;?^

only rarely, at my present level of analysis, will I actually further specify them. In a more detailed analysis, one should distinguish, for example, between different actors and coalitions inside the same organization. Moreover, there are actors who formally have nothing to do with the industry, but occasionally do intervene, typically in local responses to the crisis. Such actors are especially local governments, political parties and churches. A further complication arises from the fact that, at the local level and/or when EEC measures are in question, responses are generally communitarian, with all the features of union sacree (Meny and Wright, 1985). That is different and even traditionally opposed actors join forces against an outside enemy, identified in turn with national governments, the EEC Commission, and firms and workers of other regions or countries. 3.2

The missing strategy

Maintaining a standard course af action in a changing environment is a behavioural pattern that has often been observed in research on organizations, especially economic organizations. According to the behavioural theory of the firm, behaviour that has been successful in the past is generally not altered until repeated failures induce the firm to adopt a different course of action (Cyert and March, 1963). The same kind of behaviour has also been studied using the concept of "parametric" versus "strategic" rationality (Elster, 1979). A variant relevant to our analysis is "overcompensatory response" (Miller, 1955), i.e. increasing the quantity of the same prescription instead of trying a new one. Such behaviour is likely to occur when, in the face of radical and accelerated environmental changes, reliable indicators are not available or, if they are, the firm is unable to interprete them correctly The lack of strategy is thus a function of a missing or erroneous diagnosis. The case of a firm not correcting an erroneous diagnosis and following exactly the same course of action until it final collapses is extremely unlikely. Once the diagnosis and the course of action have been corrected, however, the time becomes a crucial factor since the new behaviour may have been adopted too late to become effective. A lack of strategy was apparently characteristic for most European steel producers when in the 1970s they were confronted with a sudden and profound change in their environment. Traditional behaviour patterns became ineffective in the new situation. The market was becoming smaller while the fiscal crisis of the state made the traditional resort to public subsidies increasingly difficult. Illuminating examples for both parametric rationality and overcompensatory response can be drawn from recent French and Italian industrial

history. In France, production capacity was increased while maintaining in operation most obsolete plants. The industry regularly called on the state for financial aid, by appealing to the country's national interest. In Italy, parametric rationality can be seen at work in the persistent practice of state-owned firms to accumulate an increasing debt load and in their failure to recognize the growing competitive strength of minimills in the market segment of long products (Balconi, 1986). After 1974, the heavy investment activity of these firms had some characteristic features of overcompensatory response. Considering investment in technology as a factor speeding up the process of decline may sound paradoxical. As a matter of fact, technological and organizational innovation can have counter - intuitive effects when, as in the Italian steel industry, it allows firms to produce in a more and more efficient and effective way a product for which there is less and less demand (Pichierri, 1984). Process innovation is only one of the c o n ditions enabling a firm to implement successful growth strategies ill a declining industry (Harrigan, 1980). Governments have been decisive actors in the history of the European I steel, although in different ways and at different times. After the English industrial revolution, the evolutionary pattern is generally that of the state playing a decisive role in the stage of infant industry which is protected for political, economic and military reasons; withdrawing when the industry is able to stand of its own feet in an expanding market; intervening again when the industry's decline becomes evident and crises must be managed. The European countries have passed through these stages at different times. In Italy, where an already strongly protected steel industry was nationalized in the 1930s, managerial autonomy reached an unprecedented \ level between the late 1940s and late 1960s. The fact that state intervention is generally a response to demands by management must be kept in mind so as not to confuse cause and effect. The budgets of French firms are not disastrous because they are stateowned; indeed, they were nationalized because their budgets were a disaster. During the long growth period preceding the crisis, however, most European governments were not very active in the steel industry, and the autonomy of management was considerable. Even when, as in France, the government did intervene to keep steel prices low, this occurred on a solid basis of mutual consent and political exchange, never calling into question the monopoly of legitimate expertise of managers, owners and especially of their Chambre Syndicale. In the French case, the most studied in this respect, the government was completely dependent on private firms and the Chambre Syndicale for any information needed to make decisions concerning steel (Padioleau, 1981). Some governments occasionally resorted to high level advisers and experts; but they never

had groups of experts regularly studying and evaluating steel policies (Meny and Wright, 1985). As far as governments are concerned, lack of strategy was a function of the lack of diagnosis. In this context, however, a few important exceptions do exist. From the national point of view, the United Kingdom is one of these exceptions. Since World War II the British government has been heavily i n volved in the steel industry, with measures including successive nationalizations and privatizations, and almost completely falling to reach the rationalization goals that seemd to have motivated these policies. Another important exception can be found in the decisions taken directly by governments for the location of steel plants in depressed areas. As has already been mentioned, the grounds for these decisions were largely non - economic, and their economic effects have generally been poor. In this case, however, the government's motivations were strong enough to induce them to ignore the management's monopoly of legitimate expertise. It is this very issue that resulted in some top managers leaving the industry because they were opposed to the strategy of the government (e.g. in Finsider). That the trade-unions were not able to foresee the decline and impending crisis of the industry is hardly surprising, given that their cognitive tools were certainly less sophisticated than those of management. However, it is more difficult to understand why for such a long time they stubbornly demanded the continuation of behaviour patterns that the crisis had made impracticable. Of course, not only the diagnostic ability of the unions is in question here, but also their interests. Opposing plant restructuring and closures, union leaders are defending, or believe they are defending, the interests of the workers and/or of their organization. The lack of strategy on the part of the trade-unions is a function of their acceptance of the erroneous diagnosis of management and employers' associations, at a time when the latter are correcting or abandoning it. The position of the unions is apparently the same as that of the local actors. Meny and Wright (1985) speak of union sacree against plant c l o sures. When layoffs or shutdown have clearly become inescapable, aid and compensation are demanded and negotiated, accepting the logic of the management of decline. Before this final stage, the reactions of workers and unions are normally perceived by management and governments as constraint, especially affecting the timing of restructuring measures. This applies both to those cases in which actions actually take the extreme form of rioting (Lorraine is the most relevant case) and to those in which such actions are only considered as a possibility. Very often, then, the expectations of possible responses by workers and unions were a factor contributing to a delay in the implementation of

managerial and governmental strategies. In the United Kingdom, however, what happened was probably the reverse: the same expectations gave rise to exceptionally severe and swift actions. The success of Ian McGregor in breaking the resistance of steel workers and unions with Blitzkrieg tactics was probably one of the reasons for the attempt less successful, even in terms of time to follow the same course of action in the coal industry. 3.3

The response to decline

In an interesting study of strategies employed by firms in the steel industry, Stora (1979) has indicated four different types: the growth and market domination strategy (Nippon Steel), sometimes coupled with downstream diversification (Armco Steel); the defensive strategy (Mannesmann) aimed at preserving market shares, which sometimes includes diversifying (Cockerill); the upstream diversification strategy (US Steel); and the survival strategy which appeals to the state for aid (Finsider, Usinor, Sacilor). The first two strategies have been relatively successful in an increasingly difficult market. In some important cases, however, attempts to diversify have failed; Meny and Wright (1985) mention, among others, Creusot - Loire and Korf. Among the conditions for the success of a strategy, the timing of the process of implementation is crucial. Looking at the recent history of the European steel, it is striking that almost all firms took measures for rationalization including job cutbacks. Their implications and effects, however, depend on when they were implemented. The strong position of West German firms in the European market is largely due to their early diversification, and to cutbacks in the workforce prior to the 1974 crisis (Esser/Fach/Vath, 1983; Moro, 1984). To consider this as evidence of an early diagnosis of decline may be going too far, since American and German diversification strategies prior to the crisis of the 1970s still pursued the goals of overall growth. Rationalization and employee cutbacks were aimed at reorganizing rather than reducing output (Rispoli, 1984). When diversification and reorganization had been completed, the firms found themselves in a better position for dealing with industrial decline the extent of which they had not anticipated. It is a fact, however, that West German firms perceived before other European firms (at least since 1966) that world competition was i n tensifying and responded with attempts at modernizing and rationalizing the industry, such as first the Walzstahlkontore and subsequently the Rationalisierungsgruppen (Bochum, 1984; Schroter, 1986). Moreover, the goal of diversification was pursued in the 1970s, as a conscious response to the crisis. By 1979 Hoesch remained the only large West German firm

where steel accounted for more than 50 percent of total sales. Successful diversification may stop or reverse the decline of a firm without stopping or reversing the downward trend for the steel industry as a whole. In the case of West German firms, this is producing interesting effects in the field of industrial relations. The steel and coal industries since the late 1940s have instituted a system of workers' participation in management called paritatische Mitbestimmung. This sort of codetermination gives exceptional powers to union representatives and has had legal applicability to the whole of the diversifying Konzerne. However, it will eventually apply only to the shrinking steel companies within these conglomerates. With the exception of the survival strategy, Stora's strategies are defined in terms of their relationship to the market. No steel firm, however, could formulate and implement any of these strategies without taking into account the state. In the recent history of the steel industry, all national governments intervened in the 1970s, while in the preceding period they often contributed to decline through their passive acceptance of managerial decisions, as in France, or made things worse through their incoherent actions, as in Britain. The positive exception is once again the Federal Republic of Germany, where moderate forms of governmental action had on the whole positive effects on the evolution of the industry (Quaden, 1980; Ollig, 1980; Esser/Fach/Vath, 1983). 3.4

The management of decline

Management of decline is the strategy likely to be formulated when the actor makes the reduction in the size of a given system e.g. an industry his goal, or when he believes that this reduction is bound to happen anyway. More so than others, the success of this strategy depends on a sound diagnosis. Rational arguments are not likely to persuade those concerned that cutback and reduction are necessary. They are indispensable, however, for justifying unpopular measures. The question of the economic, social and political costs of reducing the size of an industry and the way they must be faced and distributed is more likely to be raised when there is a public actor involved. This is usually the case when the crisis concerns large corporations or groups of firms. European governments in the 1970s have devised a relatively broad range of measures such as subsidies to firms; retraining, severance pay and early retirement schemes as well as job creation programs. These activities were managed both by central and local government agencies as well as by ad hoc agencies. In a few cases, organizations for alternative job creation were established by steel firms. The most relevant - and comparatively successful - example is probably that of BSC - Industry, established in 1975 by the British Steel Corporation (Villiers, 1980; Young,

1986). In the Italian Riconversider (Lombardy), steel firms are represented, together with other private and public organizations. The most successful - or, what amounts to the same, the least unsuccessful examples of the management of decline are to be found in a neo - corporatist political context. In West Germany, where neocorporatist arrangements have been in place for a long time, the "soft management" of the decline of the coal industry was possible. The functioning of the "crisis cartel" in the Saar is another case in point (Esser/ Fach/Vath, 1983), although it did not achieve any permanent solution. The worsening state of Arbed has again called into question the neo-corporatist style of crisis management that had been successful a few years earlier (Streeck, 1984; Vath, 1985). An economic crisis can weaken the neo - corporatist model at the industrial and national level. At the same time, a growing identification of the workers with "their" firm can develop, even to the detriment of centralized agreements (Streeck, 1984). In West Germany, however, the management of the Ruhr steel crisis, following that in the Saar region, seems on the whole to attest to the stability of the neo - corporatist model (Vath, 1985). The West German neo - corporatist solution is not the only one that has worked effectively. The British case is exactly the opposite. A rapid and radical contraction of the industry was reached without bargaining for the consent of trade-unions whose power had been radically curtained. The process of contraction was eventually followed by initiatives aimed at creating alternative jobs. This attempt, although not quite as successful as its promoters claim, certainly has had results not easily matched by other European countries. As far as the question of the unions' inability to face cutbacks and closures is concerned, one interesting explanation calls its questions the fragmentation of trade unions: geographical fragmentation, as in Italy, or geographical and organizational fragmentation, as in the United Kingdom (Meny and Wright, 1985). Most actions characterizing the strategy of decline management cannot be understood without reference to the actions of the supranational actor,, one that progressively assumed a decisive role in the restructuring processin the European steel industry. 3.5

The delegated strategy )

Since the 1974 crisis, the influence of the Commission of the European. Communities has constantly increased. The main features of its strategy: had become fairly clear by about 1978, and obvious in 1980 when a state, of manifest crisis was officially declared (Grunert, 1985). The Commission has considerable powers, and the organization of the steel industry, highly

concentrated and them relatively transparent, makes controlling the implementation of these measures relatively easy. Well before the crisis, the ECSC and the Commission had become a renowned centre for the collection and processing of Information concerning the European steel industry. It had developed a degree of expertise that contrasted sharply with the typical amateurisme of national governments (Meny and Wright, 1985), who normally relied for information on management and employers' associations. This expertise allowed the Commission, particularly in the so-called Davignon plan, to present a diagnosis and formulate a strategy concerning the unavoidable scaling down of the European steel industry and the distribution of the related costs. In the process of formulating and implementating these strategies, the Commission had to come to terms with and propose a compromise for reconciling different national interests. During the years of the crisis this aspect became clear and sufficiently institutionalized to suggest an interpretation of the activities of the Commission along the lines of the n e o corporatist model. Neo - corporatis elements are especially evident in the Consultative Committee where the interest groups are represented. It is, however, a weak version of neo - corporatism since the influence of trade unions has always been minimal in the Community (Grunert, 1985). The different national positions are well-known. According to official statements, the West German government does not have any policies for Steel, i.e. measures giving the steel industry special status or privileges. Accordingly, West German representatives in the Community have been advocates of the free market, opposing the system of Community and State aid. Given the weakness of their industry, French representatives supported the opposite position. In practice, however, the difference is not so clearcut. At least in one important instance, namely the Saar crisis, the West German government had to moderate its free trade enthusiasm (Esser/Fach/Vath, 1983), and this made less credible its subsequent orthodox exhortations to other Community members. Within one country, moreover, affected groups may have opposing interests. In Italy, for example, the position of Bresciani was very different from that of the State-owned industry. The former strongly contributed to the establishment of a new association representing "small" electric furnace producers '(EISPA), taking a position in the Community against the large producers' ^association (Eurofer). i'S In any event, it is difficult to imagine that European governments with the possible but only partial exception of the Federal Republic of ^Germany - would have been able to manage the crisis and the restructuring of their industries without falling back on the Community for support. The financial aid provided by the Community made plant closures

easier. Moreover, the Commission (for years personified by Mr. Davignon) was a convenient scapegoat offering the opportunity to attribute unpopular measures to remote powers more difficult to influence than local decision makers. In this respect as well as in respect to carrying some of the economic costs, did the Community significantly lower the level of barriers to exit. In this context, the present managerial strategies are often the result of bargaining with the organs of the Communitly (Faccipieri, 1984). Bargaining, however, concerns procedures and intermediate goals rather than ultimate goals. At the European level, the latter should be seen in terms of cutback and decline management. In order to reduce the social costs of such a strategy, a certain amount of protectionism is necessary, at least in the short term, which is likely to bring out neo - corporatist aspects at the Community level. Protectionism is also likely to discriminate against the more efficient firms. The danger is inherent in the mechanism of production quotas (Goldberg, 1986), and it may be one of the perverse effects of the Davignon plans (Messerlin, 1985). 4. Concluding remarks Starting from the last remarks concerning the actions of the Community in the management of the steel industry's decline, some conclusions can now be drawn concerning the conditions under the early diagnosis of decline becomes possible and strategies can be adopted to deal with it. a) Historical analysis has shown that an early diagnosis is more likely to be formulated by actors other than those threatened by decline that have the necessary "power basis for pessimism" (Richardson and Dudley, 1986). This was the case for international and supranational organizations, whose expertise and power permitted them to escape the managerial monopoly of legitimate expertise. b) Barriers to exit are a constraint not only on strategy, but also on diagnosis. High barriers to exit are likely to favour ideology and selfdeception over realism. c) Activist strategies as a response to decline are typical of the management of (certain) firms. The strategies of decline management are typically initiated by (political) actors different from those doomed to decline. It is very unlikely that disinvestment will be proposed by those responsible for the organizational unit to be dismantled (Porter, 1982, Rispoli, 1984). d) The management of decline is likely to be more effective in the presence of consolidated neo - corporatist arrangements. This was the case of the Federal Republic of Germany. The management of industrial

crisis and decline by the European Community can also be interpreted in neo - corporatist terms (Grunert, 1985). e) Preventive strategies are possible even in rapidly declining sectors. In a declining industry, there may even be successful entry of new firms. This was the case with Italian and American minimills, a somewhat neglected aspect of this article which has focused on integrated steelworks. The last point does not necessarily contradict product life cycle theories. The survival or even growth of certain firms or groups of firms is compatible with the global decline of the (regional, industrial, etc.) system to which they belong. Once again, the unit of analysis must be clearly specified. In a recent book by Goldberg (1986), world market, region, state, industry, firm, and plant, are considered as relevant units of analysis. The market segment is becoming an increasingly relevant dimension (Moro, 1984). Detailed analyses and flexible strategies are all the more important now that, after years of blindly defending the industry as a whole, the propensity to calling indiscriminately for the complete dismantling of what remains of the industry can be seen. There may also be unintended effects of otherwise successful decline management. An industry perceived to be hopelessly declining is unlikely to attract people with great management talents. The problems that some reorganized firms are already encountering trying to recruit new personnel are a prime example of possible vicious circles of decline that should be closely monitored in the future.

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Udo Gerhardt • Hans - Henning Kramer The Effects of the European Steel Crisis on German Industry

Since the beginning of the steel crisis in 1975, there have been three phases of regulation at European Community (EC) level. Each phase is demarcated on the basis of three main issues: To what extent did supranational institutions and committees intervene in the reproduction process? What instruments did the EC employ? What role was played by the steel concerns in the course of attempted adjustment? During the first phase of regulation which came to a close in 1980, the degree of supranational intervention particularly from the Commission of the European Communities (CEC) can be classified as minimal. The majority of measures concerned intensifying the information system and system of control, as well as statistical supervision of steel imports. C o n crete regulatory measures were initially aimed more in the direction of external security than towards individual European steel concerns. Even the mandatory price floors agreed upon in 1977 for individual product groups in the steel industry were less the result of the EC officials' ability to push that regulation through than of an overriding interest on the part of private sector organized steel concerns (in the Federal Republic of Germany, the Netherlands, Luxemburg, and Belgium) to prevent supranational control. At the same time these enterprises wanted to avoid an intensified price war through agreements at corporate and trade federation level.The federation of commercial enterprises, EUROFER, played an essential role in this. The CECs proposals effectively did not go beyond EUROFER's formulation of those interests expressed by private sector European steel companies. The deciding factor underlying the relative congruence of interests between EUROFER and the EC officials was favorable economic development in 1978-79. Thus, the fact that there was not a cosensus among individual EC member states and the EC Commission - for instance, France, Italy, and the United Kingdom insisted upon substantially more market interference than the remaining steel - producing countries - was obscured by favorable economic conditions. However, by the beginning of

the 1980s the economic precondition insisting that agreed price floors at least assure the liquidity of enterprises had changed. As a result of a sudden fall in demand followed by a dramatic decline in the price of steel and the withdrawal of two firms from the voluntary agreements, all of the steel concerns were prepared to introduce production and supply quotas. These instruments were complemented by price agreements within EUROFER II and further rounded out in 1984 by mandatory price floors. As a result of this, EC steel policy shifted so that preservation and short-term guarantees that the European steel industry remains operative were no longer the focus of regulation. The aim of policy became much more to assure long-term restructuring of the steel industry into a strong, modern industrial core capable of achievement and able to compete internationally. Thus, the subsidy code passed at that time foresaw an end to those subsidies still in effect by the end of 1985 and intended that future subsidies be coupled with concrete restructuring concepts. The code also foresaw further massive cutbacks in production capacity and jobs. Therefore, EC funds set aside for adjustment allowances and the creation of replacement jobs were intended to ease the situation politically. In this second phase of European steel policy which came to a close at the end of 1985, the CEC was able for the most part to push through its proposals successfully.lt was able to do so because at that time all the European steel concern and the national governments were banking on stronger directional measures. The intention was, from an economic standpoint, to prevent an open competitive struggle and, from a political standpoint, to flank the cutbacks in production capacity and buffer implications for employment policy. The third phase in regulation began in 1986. This phase is characterized by a step-by-step liberalizing of policy, that is, by the gradual lifting of production and supply quotas. Since 1986 subsidies have been restricted to environmental measures, research, and compensatory allowances for factory shut-downs. The CEC's proposal to delete more product groups from the list of those falling under quota regulations failed because of intervention from all the European steel - producing nations. Nevertheless, the likelihood that further liberalization would occur increased to the extent that various economic factors influenced the conditions under which quota regulations could be lifted. Thus, from the beginning of 1988 to mid -1988 a number of liberalizing steps with regard to various prouct groups had been taken in accordance with corresponding positions on individual submarkets. The main economic factors influencing changes in the regulation can be outlined as follows. First of all, there was extensive external protection of the EC against imports from the so-called low-price countries (Argentina, Mexico, and Algeria) beause of rising import pressure. Above

all, European steel concerns have profited from the resulting economic up-turn in all the important steel - producing countries. In addition to a more advantageous economic situation the conditions for profitability have decidedly improved as a result of various adjustment measures such as the cutbacks in production capacity, concentration and centralization of steel capital (see the summary by Sacilor & Usinor in France), job and p e r sonnel cutbacks, modernization, and diversification. In the UK, for example, more than 110,000 jobs out of a total of 166,000 have been cut since 1980; more than 40 plants were shut down, steel production and processing was essentially concentrated in 5 major plants out of a total of 28, and capacities were reduced by more than 25%. Similar streamlining of steel industries can be observed in France, FRG, Belgium, and Luxemburg. Italy remains an exception as adjustment measures in that country have yet to be implemented. The formal legal set-up of Italy's national steel holding does, however, leave room for circumventing liberalization moves at EC level. The liberalization process is part of a general process of de-regulation at EC level, the goal of which is to see a European internal market with free flow of goods, services, labor, and capital by 1993. Against this backdrop, it appears at least questionable whether national production quotas can be maintained on a "bound(ary)less" internal market. Further cutbacks in the European steel industry workforce were to be accompanied by a newly conceived CEC program in an attempt to link sociopoltical and regional economic instruments. It was originally intended that the RESIDER program, a result of this new approach, with some 600 million DM at its disposal, be funded through contributions from the steel concerns. But after the steel concerns opposed the initial plan, the present concept envisages a reshuffling of money from other sources such as regional and social funds. The aim of this program is to improve regional competitiveness and to provide financial support for adjustment measures affecting personnel in those regions affected by the restructuring process. For the West German steel industry, more than 12 years of European steel politics have paid off, despite statements to the contrary. In the first phase of EC steel policy regulation up to 1980, the West German steel industry was able to push through a joint private enterprise solution in the form of Benelux and after 1978 EUROFER. At the center of this solution were the voluntary delivery restraints and price floors set for various product groups. The deepening of the economic recession in 1980 accompanied by a shake down in prices on the EC steel market plus subsidies paid by various European countries to support their national steel industries combined to cause the West German steel industry to agree to fixed quotas and fixed minimum prices. In so doing, the FRG was granted a market share of over 32% of total EC on steel production.

Moreover, FRG enterprises succeeded in pushing through a number of regulations exempting them from quotas for various product groups. Nevertheless, the West German steel industry was in a position to claim that the state subsidies it was enjoying were still temporally and qualitatively limited. With a qualitative limit placed on subsidies for research, techology, and environmental protection, the FRG was ultimately able to improve its competitive position in specific market segments. Against this backdrop, the West German steel industry's competitive position was more than advantageous. The 1988 prouction figures will be nearly equal to those for 1971, and that with a workforce numbering only 160,000 - less than half the 350,000 employed in 1971. Production plants have been centralized and modernized. Since 1985 approximately 4 million tonnes of rolled steel capacity was shut down in Leverkusen, Hattingen, and Maxhiitte. Compared to 1987 West German steel concerns show a 20% increase in orders from the EC while domestic sales have grown by^ 10%. The complete liberalizing of the EC steel market after mid - 1988 \ has not been the result of CEC strategic efforts alone after the lifting of all directional measures; rather, it corresponds to the economic and p o litical estimates of European steel concerns and the present governments. In general it must be stressed that the ability of supranational organizations like the EC Commission to push through proposals and regulations is less the result of institutional possibilities than of economic and political interests of steel concerns, national steel associations, and national governments.

Susanne Reising

Walter Bohnert

The World Steel Market: Structural Crisis and Discretionary Mismanagement*

This contribution will consider the international steel market as one example in our ongoing discussion of the restructuring processes related to the worldwide economic crisis. The steel market is a good example because the appparent structural changes this market has undergone since the mid-1970s in fact did not result in the kind of economic restructuring in the industrialized countries that might have successfully defused the crisis. Instead, on both the national and international level, the result has been discretionary, reactive mismanagement of the steel industry. We should like, first, to give a brief description of the present situation on the world steel market and present a survey of the relative positions of the industrialized and newly industrialized countries. We shall then consider the impacts on steel trade and the resulting inadequacies of foreign trade policy. Since the beginning of the 1980s some important regional changes have occurred with respect to the world steel market. While the volume in worldwide steel production has stagnated (experts attribute the current steel boom to temporary economic recovery), traditional supply and demand relations have shifted away from the western industrialized countries (the European Community and the United States) and Japan towards a new group of newly industrialized and developing countries, particularly the Southeast Asian nations, China, and North Korea. In 1979 the western industrialized countries accounted for 59.3% of total raw steel production. By 1987 their share had dropped to 48.9%. During the same timespan, however, raw steel production in newly industrialized and developing countries increased from 12.7% to 20.8% of the world total. Steel conThis paper is a short version of a study written earlier in the course of the research project "Political Regulation in the 'Great Crisis'". For further discussion and references see therefore: Zur aktuellen Lage auf dem Weltstahlmarkt. Strukturelle Krise und diskretionares Mipmanagement". Freie Universitat Berlin, Fachbereich Politische Wissenschaften, occasional paper, forthcomming

sumption trends from 1979 to 1987 show the same pattern of development. This counter - course shift has profound implications concerning the international steel trade. The key factor underlying the changes is a shift within the newly industrialized and developing countries away from import substitution to targeted export promotion. Hence the industrialized countries have not been able to capitalize very much on the accelerated demand for steel from newly industrialized and developing countries. Although only a relatively small number of new steel producing n a tions have exceeded the 2 - million - tonne per annum mark in raw steel production, the number of steel producing countries overall has increased from 36 in 1950 to more than 100 at the present day. The reasons for this lie in the technical development of small, highly efficient steel works. Having one's own national steel industry is seen as a prerequisite condition of the industrialization process. The capital intensity of operating one's own integrated iron and steel works implies a huge domestic r e quirement for steel; and, next to China and North Korea, above all nations such as Brazil, South Korea, India, Mexico, Taiwan, Venezuela, and Argentina have just such a demand. Steel consumption is increasing very rapidly in these countries. Growth, on the other hand, has been clearly concentrated in Southeast Asia. The economies of these countries have grown at a rate nearly twice those of the developing countries. The full extent of these shifts becomes apparent in long-term comparison: in 1980 steel consumption in Asian countries was equal to that in Latin American countries; by 1987 it was nearly twice that for Latin America. Of the developing countries, only China and North Korea show similarly strong patterns of growth. The decline in the demand for steel in Latin America between 1981 and 1983 (by nearly one-third) coincided with the beginning of the e c o nomic crisis and the drastic decline in industrial production. But because steel production continued to increase as a result of expansion of plant facilities and improved technology (continuous casting), exports also grew. Between 1980 and 1985, steel exports increased from 2.2 million tonnes to 10.2 million tonnes. In the same timespan, Latin America became for the first time a net exporter reaching a figure of almost 7 million tonnes by 1986. The most important steel producers suffering a decline in exports during this period were the United States (despite extensive protectionist measures) followed by China and other Asian countries. The Latin American Iron and Steel Institute predicted a 25% increase by 1990 over 1986 raw steel production levels, if Latin America continued to be a positive net exporter.

An examination of the most important individual steel producers in Latin America does reveal, however, that only Brazil and Venezuela sustain a continued climb in net exports through increased steel production. Within the group of newly industrialized and developing countries Brazil is the second largest producer of raw steel after China. It is the eighth largest steel exporter in the world, selling some 7.2 million tonnes primarily to China, Japan, and Italy. Since the recession in the early 1980s Brazil, the country with the largest state-owned steel production industry, has hoped for a bustling foreign demand with a planned export volume of 20% of its total steel production. Despite its huge foreign debt, Brasil has undertaken further expansion of plant facilities. In contrast to Latin America the most important steel producers in Asia, excluding Japan, are also net importers. The levels of consumption in China, North Korea, and India in particular far outstrip their levels of domestic production. The only net exporters in the Asian sphere are Taiwan and South Korea. As newly industrialized countries, their respective steel industries are undergoing some remarkable developments. A high rate of growth in general forced an increase in production that accelerated more rapidly than the increase in consumption. In 1985 5.2 million tonnes of steel were exported mainly to Japan, Southeast Asia and the United States. The biggest steel producer in South Korea, a stateowned enterprise, is now the fifth largest steel producer in the world. After the planned expansion of industrial facilities, it will become the third largest producer in the world. Capital outlays in the South Korean steel industry are substantially lower, comparatively speaking, to those in Brazil and Taiwan (and even Japan). The Korean Iron and Steel Association predicts an expansion in South Korean steel production of 6 million tonnes by 1990. Because of the high international competitiveness of the South Korean steel industry - a result of comparatively low labor costs, modern facilities, a high load factor, and low cost of capital a clear increase in exports is expected. In sum, steel production and consumption in the newly industrialized and developing countries demonstrate steady growth. Even though there are relatively few newly industrialized countries, they are still able to meet the rapidly increasing market demand for steel through domestic production, so that the classic steel producers among the industrialized countries are losing important marketing areas. Moreover, with increasing tendency the newly industrialized countries have been able to build up their own export - oriented production in such a way that they may continue to fetch an additional export share of 20 to 30 percent of worldwide raw steel production. At the same time, on a long-term view, steel consumption in the western industrialized countries is decreasing because of declining rates of growth of national products. According to the International Iron and

Steel Institute in Seoul in October 1988, the present upward trend in economic activity is due above all to a strong increase in consumption in Japan and the US less so in the EC countries and is expected to be on the decline again by 1989 (falling by more than this year's growth). All of these structural changes on the steel market will have still more profound impacts on the already conflict - laden trade in steel products. To the extent that the newly industrialized countries are still able to increase exports of mass steels (and foreseeably special steels) to the US, the EC, and Japan, trade distortions will increase. The basic pattern of economic policy reactions to "home-made" distortions of the market will nevertheless remain the same. Most of the ammunition for conflict is still to be found among the traditional bidders: the US, the EC countries, and Japan. The EC and Japanese export drives are concentrated on the US, the classic importing country for steel products. Since 1959 the US has been a net importer of steel. The reasons of this are to be found in the oligopolistic structure of this branch. The 1960s saw rising steel imports from Japan which emerged as an unforeseen competitor on the international steel market. Since the 1960s new capital investment has been restricted to risk-free expansion of older, but at that time still efficient plant facilities. The American banks and the American government functioned neither as lender nor as investor, so the only remaining instrument available to the US branch was price policy. And, in fact, an essential feature of the American steel market has been high prices. American steel price levels hover from 20 to 30 percent above foreign price levels and, even in times of recession, fail to drop significantly. High prices are fetched through protectionism. Since the end of the 1960s, in the knowledge that losses in productivity could no longer be recouped, the American steel industry has taken up the argumentation that foreign suppliers should not be allowed to dominate the domestic market because this would mean growing dependence in terms of quantity and prices as well as losses in domestic jobs. In contrast to the US, the Japanese steel industry underwent an initial rationalization process in the 1960s. Technological innovations were planned for new steel works, laying the cornerstone for Japan's later world market share. Integrated iron and steel works in Japan have large capac-v ities, highly developed technologies, high capital and locational concentration, and high labor productivity at their disposal. Moreover, there has always been exceptionally close cooperation between the government authorities and the Japanese banking system. We should like to turn now to the EC steel industry, which lies somewhere between Japan and the US on the scale of competitiveness. To begin, I shall leave the details of the EC steel industry aside as these shall be covered thoroughly in the second report. Instead, I should like to

consider protectionist trade policy with regard to steel. Protectionism can be seen as an attempt to compensate for internal economic weakness by restricting market access for foreign competitors. In the meantime there exists a whole collection of so-called voluntary export restraints, whose Subtile arrangement has resulted from a "learning process" undergone by various participating actors in the US, the EC, and Japan since the end of the 1960s. The discussions in the US on protectionist measures in the foreign trade branch of the steel sector are always staged by the domestic industry, its closely linked associations, and sympathetic members of the Senate and the House of Representatives. Nevertheless the present administration has managed each time to put the breaks on these discussions by drawing attention to the negative implications of multilateral negotiations and trade deals. In fact, autonomously fixed international quotas supported by the Steel lobby in conjunction with antidumping levies as the main instrument of control would indeed have had complicated repercussions in the form of increased international consultations because of the rules embodied in the General Agreement on Tariffs and Trade (GATT). Voluntary export restraints, whereby the exporting country "voluntarily" cuts its exports, avoid this process. In contrast to import duties or global non-tariff barriers, voluntary export restraints are discriminatory in that they reduce the export share of selected exporters and not all exporters. They also incur only minimal political costs for all those involved because they can be flexibly negotiated by governments and administrations, thus circumventing the European Parliament. Another advantage of voluntary export restraints is that the domestic industry will not be held responsible for market distortions. Thus there need be no fear of retaliation by other suppliers. Voluntary export restraints allow the affected exporting country to demonstrate a degree of autonomy precisely because the arrangement is a bilateral. Empirical findings after the first voluntary export restraints went into effect at the beginning of the 1970s, show, first of all, that the agreements did not enhance the competitiveness of the American steel industry as intended. This was due in part to implicit price hikes for steel products On the domestic market. Secondly, the position of foreign competitors did not worsen as expected. Although the quantitative import share in the US dropped, its qualitative component grew because more high-grade and Other special steels were being imported. The impacts on the US steel industry consisted of improved profits for suppliers of simple mass steels, however, these proceeds were all but devoured by losses suffered by domestic producers of special steels. In addition, the restrictive effects of the voluntary export restraints were in part counteracted by a growth in exports from European suppliers to third countries not bound by such

contractural arrangements. Producers in these third countries, responding to increased competitive pressures on their own domestic markets, in turn increased their exports to an "unsaturated" American market made all the more attractive by the promise of big profits. In order to circumvent the negative implications of voluntary import restraints which in this form would render such arrangements practically useless the US administration attempted in 1978 to install a trigger price system in place of restricting quantities of steel. This was a form of the reference price system whereby imports below the trigger price were to be immediately punished with an anti-dumping suit. An essential advantage of this policy was that an overall valid price system in the steel sector also included imports from the newly industrialized countries. After all, South Korea was still the fourth largest exporter of steel to the US in 1977. This flexible arrangement, deliberately oriented to the Japanese cost structure, was made to permit a differentiated approach to individual competitors and offer European producers an advantage over the Japanese steel industry. The anti-dumping suits of early 1980 proved, however, that the trigger price system did not work. Investigations into alleged cases of dumping below the trigger price turned out to be tedious, protracted, cumbersome affairs which in part contained false calculations. In addition, the trigger price system caused a jump in the price of imported steel by around 10%. Because of the poor substitutability of US and imported steel, American domestic prices rose on an average of only around 1%. European suppliers were therefore able to increase sales compared to Japan which, due to the appreciation of the yen, was disadvantaged. Pressure grew on EC producers whose import share in the US continued to climb even throughout the duration of the modified trigger price system. Although the American government intended import controls only as a means to discourage unfair foreign practices and not as a restriction on the free flow of trade, the Commission of the European Communities saw import controls as a temporary hindrance to free trade but a necessary evil in order to minimize international structural problems. (Japan, on the other hand, felt that comprehensive market sharing would prevent foreign trade conflicts.) The EC Commission, from a normative free trade standpoint less burdened than the US administration, was quick to react to the inadequacies of a reference price system and thus entered into a series of voluntary export restraint agreements. The Americans followed suit in 1982. In the meantime, international foreign trade policy in the area of steel has become increasingly complicated and nebulous without defusing the

situation. There is a whole body of bilateral agreements whose contents will not automatically be brought to light. Significant features of such deals are, however, detailed agreements about products and supply quotas often coupled with the possibility for making modifications, thus creating an even thicker web of bilateral consultations. At the same time there appears to be a growing consensus that two essential problems cannot be solved. First, as it can be clearly observed in the case of Japan, restrictive quotas and reference prices can be circumvented through increased exports of e n d - products. Because the endproducts are made from more moderately priced steel inputs, the end price for foreign competitors and retail price for consumers is lower than for comparable goods on the domestic market. The second problem, to which every trade policy measure is geared, will not be eliminated in this way. Domestic trade and industry has not adjusted or adjusted only very slightly to the level of international c o m petition. Thus foreign competitors benefited a great deal because of fixed market shares and the tendency for prices to rise. The clear losers under this sort of policy have been domestic consumers. A study by the Washington Institute for International Economies calculated additional costs resulting from trade barriers against mass steel to amount to 6.8 billion US dollars. Attempts by the affected steel producing countries to eliminate c o n tinually growing trade conflicts through a common policy of anticipation resulted in the drawing up of only a few discretionary measures rather than the desired worldwide long-term management. The impetus behind this move came from the US Senate in 1978. It called for an international steel monitoring agreement under the framework of the Tokyo round of negotiations. The US administration, on the other hand, preferred the establishment of a permanent steel committee under the framework of the Organization for Economic Cooperation and Development (OECD). The choice of this organization can be explained in the perceived necessity to take stronger action than merely attempting to steer trade policy which, in any case, only took part of the problems of the steel sector into account. These problems were still largely perceived to be economically determined. Negotiations under the framework of the OECD are nevertheless geared to an increasing steadiness of trilateral consultations between the US, the EC, and Japan. The new steel p r o ducing countries and the Comecon countries are excluded at this level. In 1978 the OECD Steel Committee was founded, whose primary aim was to prevent national adjustment costs from being shifted over to third nations. Adjustment policy itself is to be seen as an effective means for alleviating the pressure on international steel trade. (At the same time, however, "unjustified" expansion investment is to be stopped.) The aim of

free and fair trade implies at the same time a ban on quantitative r e strictions. It does, however, permit anti - dumping measures and in so doing implicitly gives importing countries the right to restrict imports. The responsibilities of the OECD Steel Committee consist of providing production and consumption prognoses as well as analyzing the effects of national policies on trade in general and national export credit for steel works and factories in particular. The original aim to include the four most important non-OECD steel producing countries, India, South Korea, Mexico, and Brazil, in the Steel Committee proved very soon to be untenable. The reason for this was to be found in the deep distrust of these countries who feared that the OECD countries could interfere with their national development plans. They were particularly suspicious of the ban on "unjustified" investment which was not elucidated in any further detail in the Committee's program. Representatives of the steel concerns and the trades unions are not represented on the OECD Steel Committee. This is probably out of fear that the Committee could come under pressure from some steel cartels. Thus the representatives from individual countries consult only among themselves. The resulting recommendations of the Steel Committee are not legally binding, even if discussions are clearly geared to exercising particular influence on the behavior of the politicians. One suggestion for reducing conflict primarily in the area of steel trade points in the direction of a GATT Steel Committee along the lines of the multi-fibre agreements in the textile sector. But textile politics provides a good illustration of maldevelopment in supply structure, a feature shared by the steel sector. The innovation process was not i n tended for the declining industrial branches upon which the developing countries have come to depend in the course of industrialization. If capital had been invested in "new" high technology branches, the effect on the world economy division of labor would have been more positive. Thus national revitalization efforts were directed in the wrong place. The GATT contract article 19 "escape clause" permitted sectoral dispensation from the obligations originally accepted by the contracting parties, making a variety of measures possible from increased duties to quantitative restrictions. The steel sector could also make use of this clause but there is a "snag". Within the framework of GATTs principle of non - discrimination, no pointed measures against individual countries for trade infractions are permitted. Levying an emergency duty on "unfair" imports would affect all the exporters of a given product category and would punish those not responsible as well. Moreover, the real "problem child" would hardly be affected by such measures because next to the protected national producers it would still be the most attractive supplier.

Thus article 19 of the GATT contract results in discrimination and distortion of competitive positions, if those responsible for the injury gain a competitive advantage from, for example, autonomous export promoting measures such as subsidies. Another basic principle of the GATT insists upon prior consultation between all affected states, should one contracting partner resort to protectionist measures. The other parties to the contract could demand compensation or, if they fail to reach an agreement, use retaliatory measures. Thus, a state wishing to claim article 19 must be prepared to pay compensation which can affect goods other than those intended. Moreover, the principle of most - favored - nation treatment implies paying compensation to countries not affected a rather expensive proposition. The GATT's "soft" competitive policy, which is geared to maintaining the status quo of global economic integration instead of tackling the world's growing problems of international competition, leads to a flood of bilateral regulations like those discussed above outside the GATT policy framework - for example, voluntary export restraints. These are not to be judged on the basis of some "ideal free trade case", but rather on a comparative analysis of alternative protection measures. These examples are designed to show that the attempts of nations to find a stragegy for resolving conflicts at OECD and GATT level does not support the popular contention that progressive integration provides a minimal degree of protection. If attempts at international cooperation and integration do not obviously lead to a dismantling of protectionism, then other factors must play an important role. Thus American economist Victoria Curzon Price stated: "It is fruitless to organize diplomatic c o n ference after diplomatic conference to mend a creaky international e c o nomic order unless government intervention retreats on the home front first." Trade and industrial policy are so closely linked that it is reasonable to say that they are two sides of the same coin. The steel example shows that it is still a matter of dispute whether an adjustment process failed to occur at all (as in the US) or whether it did occur but was still insufficient (as in the EC). Industrial policy designed to force this process nevertheless gave clear advantages to those steel producers who tried to claim it for themselves and who had powerful lobbies backing them. Moreover* supporting protectionist trade policy brought advantages to the whole steel industry because "the free-rider problem raises the cost and/or reduces the benefit of lobbying for trade restrictions, making this particular rent-seeking activity altogether less rewarding, more cumbersome and perhaps even directly disadvantageous as compared with neatly targeted industrial policies."

The reason for protection is to be found on the present national steel markets in the form of rent-seeking by individual steel producers. This behavior is in turn accepted and made possible by the respective national governments. The relationship to trade protectionism is established through the creation of artificial rents aided by duties, non-tariff barriers, and voluntary export restraints. This dimension of protectionism is however not taken into account in international contexts. Individuals are not represented in GATT; rather, their interests are dealt with locally at the level of individual countries. It is also clear from this that measures leading to the effective dismantling of protectionism must occur at this level. Thus the necessity for a shift in the restructuring processes of industrialized countries is apparent. Instead of trying to maintain present levels of production through further injections of capital, the steel industry should concentrate more on the production of technology intensive special steels. A major proportion of the needed steel inputs could be covered by imports from the newly industrialized and developing countries. The consumers, a group whose requirements have until now not been taken into account at all, would gain a clear advantage in the form of falling prices. Newly industrialized and developing countries would be in a position to purchase the necessary technologies from the industrialized countries for building up their domestic markets with the foreign exchange earnings acquired from the sale of steel. The necessary impetus for such a structural shift will nevertheless not come from the affected steel enterprises whose defensive instruments in reaction to the crisis range from flat out refusal to adjust, as in the US, to radical rationalization as in Japan. Generally characteristic of this branch is a decline in the workforce and a decline in productivity gains accompanied by stagnating consumption with no increase in the sales volume. Enterprises point to this situation to show the necessity of protectionist measures to defend their market shares, and they make full use of it. A decline in protectionism is therefore not to be expected because the primary reason for it, rent-seeking from industry, does not disappear. The steel industry provides a classic example of mixing politics and economics. It was never an industrial branch like any other. Tied to the existence of the steel industry is still the idea of a guaranteed prosperous economy, the problem of regional monostructures in the coal, iron and steel sector, and the accompanying danger of increased unemployment through massive job cut-backs. These factors form the basis of the steel industry's successful stragegy of attracting artificial rents. A precondition for this is having a strong lobby. For example, in the US lobbying goes all the way to the level of Congress; in the EC it reaches the level of the EC administration in

Brussels. The achievements of the steel lobby can be measured in fixed production quotas and guaranteed prices. The market has only a subordinate steering function. The point of this is not to adopt a neoclassical view, but steering of policy alone is not adequate. It is the responsibility of policy to initiate long-term planned structural change with clear aims. There are no major differences of opinion within the individual political camps over the negative effects of protectionist measures and market controls, but they find all too little resonance in political organizations. Enterprises, associations, the workforce, and the trades unions together make up a large voter potential. They have a common "bogeyman", foreign competitors. Policy reacts to this with discretionary measures. Protectionism has short-term advantages for the country which uses it, but political planning does not extend beyond a government's term in office. Only sound management can effect a break with the defensive attitude towards adjustment to changing world market conditions. Without it, the present conflicts can only become more acute.

Patrick A. Messerlin Recent Developments in the World Steel Market

In October 1988, the International Institute of Iron and Steel (IISI) announced a strong increase of the world steel demand for 1988. The US consumption is expected to increase by 4%, the EC one by 6%, the Japanese one by 13% and the Industrialized Countries one by 7% a p proximatively. Few days later, in Europe, British Steel announced it forecasted a 31% profits increase for 1988. Do these recent developments in the world steel markets mean that the steel crisis is over? Two reasons suggest a negative answer. First, the steel consumption in the Industrialized Countries is still artificially depressed at the level of the mid-70s by too high relative prices of steel products. Second, to maintain artificially high relative prices has required the use of strongly protectionist policies. These policies which have erased two decades of trade liberalization are now well entrenched in the steel sector. 1. The stagnation of the steel consumption Table 1 rearranges the data provided by Table 3 of the paper presented by Reising and Bohnert1. In addition, it gives the GDP growth rates for some crucial Industrialized Countries. Table 1 suggests two groups of observations, one for the EC and US, the other for the Developing Countries. First, the EC and US growth rates of the steel consumption over the 1977-86 period are negative, while the GDP growth rates for the same countries are positive. This comparison could suggest that steel would have been an "inferior" good during the considered decade. Although studies have clearly shown that income elasticities of steel products in the highly Industrialized Countries are low, negative income elasticities do not seem likely. 1

cf. Reising/Bohnert, forthcoming.

1. 1.

8 7

3.4 4. 0 6.0 1. 7 -1. 6 2.7 3.2 3.3 1. 4 -0.5 0. 2 o.8 1. 4 2.4 2. 5 2. 6 2,.9 2,.7

2,.8 5,.0 5,.2 -0,.6 - 1 , .2 4,.8 4,.7 5,.3 2,.5 - 0 , .1 1 , .9 -2,.6 3,.6 6,.4 2,.7 2,.5 4.,3 4..2

4..3 8..6 7,,9 - 1 . .5 2..7 4..8 5..3 5..2 5..3 4.,3 3..7 3..1 3..2 5.,1 4..7 2.,5

USA Japan

1 . .5 - 0 . .4

20..6 -9..8 -1..8 8..3 - 3 ..4 - 5 ..3 -4..6 - 2 ..9 5..0 8..6 1 . .8

EC10

Sources: Reising & Bohnert, Eurostat, IMF.

76-86 77-86

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986

EC10

GDP growth rates

0 . .1 - 0 . .9

11,.0 3,.8 9..6 - 3 ..4 - 1 8 ..1 12..7 - 3 3 ..8 12..5 20..2 - 5 ..0 - 8 ..0

USA

- 1 . .6

- 2 ..0

- 6 ..1 - 3 ..2 - 1 ..7 10..2 0 . .0 1 . .5 - 1 0 ..6 0 . .0 5..1 - 8 ..1 - 8 ..8

2..2

1 . .6

- 4 ..3 - 1 ..5 7..6 18..3 2..4 - 8 ..1 0 . .0 - 5 ..1 14..7 - 1 . .2 - 4 ..7

Other ICs J a p a n

3..0

1 , .8

- 1 0 ..0 14,.8 3,.2 9..4 11,.4 - 5 ..1 - 1 6 ..2 - 1 6 ..1 15,.4 3,.3 9,.7

Latin America

7 7 6..7

18..2 15..4 16..7 5..7 0 . .0 10..8 2..4 2..4 2..3 4..5 6..5

1.5 1.2

5.3 0.3 6.7 3.9 -3.4 -0.3 -8.5 2.7 8.0 2.5 -0.3

Other LDCs TOTAL

Steel growth rates

Table 1: Comparison between GDP and steel growths, 1 9 7 5 - 8 6

An alternative hypothesis consists in explaining the depressed c o n sumption by price movements. In other words, the price stabilization of the steel products was conducted in such a way that it led to a de facto increase in relative prices, i.e. in the prices of the steel products relatively to the prices of all the other manufactured goods. In a period of slow growth, every industry is induced to reduce its prices as much as possible. In such circumstances, the simple fact to stabilize prices may quickly and inadvertently generate changes in relative prices. This alternative assumption is supported by the evidence provided by Table 2 which gives crude estimates of the relative prices of steel p r o ducts in France during the period considered. Four different periods may be observed. Before 1974, steel prices are more or less in line with the prices of all manufactured goods. In 1975-76, there is a strong increase in the relative prices which corresponds to the strong increase in c o n sumption. After 1976, relative steel prices remain high whereas the steel Table 2: Relative price index evolutions, France, 1974-87 1

Raw steel (1)

Special steel (2)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

125.1 131.2 138.3 155.6 201.9 208.2 221.0 238.7 258.6 285.3 299.6 309.2 393.8 425.7 450.7 467.4

129.2 135.7 139.7 153.4 206.2 218.4 244.0 258.0 289.5 327.0 340.8 361.7 444.4 490.5 534.6 557.2

127.8 130.5 136,5 156.6 202.2 190.7 204.8 216.2 225.6 255.6 278.1 308.6 342.8 380.8 431.3 448.7

97.9 100.5 101.3 99.4 99.9 109.2 107.9 110.4 114.6 111.6 107.7 100.2 114.9 111.8 104.5 104.2

101.1 104.0 102.3 98.0 102.0 114.5 119.1 119.3 128.3 127.9 122.5 117.2 129.6 128.8 124.0 124.2

1986 1987

155.3 146.6

indexes 162.8 163.1

149.5 149.6

103.9 98.0

108.9 109.0

New

Manufact d goods Ratios (3) (1/3)

Source: INSEE, Bulletins Mensuels, various issues.

Ratios (2/3)

consumption decreases. That suggests the severe depression of the steel consumption was due to the increase or rigidity of the relative prices of steel. Since 1984, relative prices are lower. Although the indexes available for the two last years are new and require some additional caution in their interpretation, there is a clear correlation between the decrease in relative prices and the relative improvement in consumption. Second, concerning the Developing Countries, two different stories emerged. In the case of the Latin American highly indebted countries, the debt constraint has imposed macroeconomic policies which have reduced the domestic consumption and transformed these countries into net exporters. In other Developing Countries either little indebted like India, or highly indebted but having efficiently used this debt like the Asian NICs - domestic consumption has remained among the highest of the world consumptions observed, with little change in the net capacity of exports. 2.

The entrenched protection

Although the EC and US protectionist measures required for "stabilizing" steel prices are wellknown by many, few have realized the three crucial characteristics of these measures: they tend to become permanent, they have erased the trade liberalization made during the early 60s and they tend to create trade disputes. First, protectionist measures in the steel sector which are enforced since the mid-60s by the US, since the mid-70s by the EC tend to become permanent, new measures being continuously piled up on old ones. There are first the "safeguard" measures under GATT Article XIX. Over a total of 26 taken since 1950 and still in force, two recent actions concern steel products. The first one was taken in 1983 by the US. It concerns special steels exported by the EC, Brazil, Korea, Austria, A r gentina, Canada, Japan, Poland and Spain, and consists in additional tariffs and quotas. The second safeguard action was taken by the EC against all countries and consists in quotas on certain steel products. These actions are only the small part of the iceberg. Article XIX actions are costly ; they are non - discriminatory and give rise to compensation or retaliation. As a result, countries prefer to use what the GATT calls the "other measures which appear to serve the same purpose", i.e. "grey area" limitations on imports consisting in "voluntary export restraints" or "agreements on price monitoring systems". These "grey areas" measures concern 12 countries in the EC case and 21 in case of the US.

All of them were initiated or renewed in 1987 and, in the US case, they will be in force for the four forthcoming years. Apparently, all these measures are still not sufficient. The EC and US highly protected markets are extremely sensitive to any competitive pressure. This is the reason why the EC and the US regularly use antidumping and countervailing procedures in order to monitor the "maverick"
3.

Conclusion

Relative price rigidities and protection are locked together. To maintain relative prices require protection. The protection granted stops even minor decreases in relative prices the only way to increase consumption. The. best illustration of the blockage was given one year ago by the incapacity of the steel firms to get rid off the production quotas: even a minute, dose of competition would have immediately led to major problems for some firms. In these circumstances, the profit forecast of British Steel is illusory ; it totally depends from the current conditions under which the steel markets are working. It does not mirror a real improvement. Indeed, it has probably its counterpart in the deterioration of the situation of another EC firm(s). Table 3:

Years 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 75-85 75-86

Actual investment expenditure in selected countries, 1975-1986, (a) (1) EC10 26. 1 24. 6 18.7 15.3 15.0 18.6 19.4 23.1 22.3 18.7 23.1 nd

(2) USA 30.,4 28,,0 25.,1 20.,8 27.,2 33..4 31..5 62.,4 42..1 28..9 20.,5 11.,7

(3) Japan (b)

Ratio (1/3)

Ratio (2/3)

%

%

36..3 32..1 37..3 47..5 26..1 25,.7 35,.4 38,.5 38,.5 25,.3 27..5 41,.8

71.9 76.6 50.1 32.2 57.5 72.4 54.8 60.0 57.9 73.9 84.0 nd

83.7 87.2 67.3 43.8 104.2 130.0 89.0 162.1 109.4 114.2 74.5 28.0

62.9 nd

96.9 nd

Source: OECD, The Iron & Steel Industry, various years. Notes: (a) US dollars per tonne of crude steel production. (b) In the case of Japan, investment expenditure during the fiscal year has been related to production in the calendar year.

Depressed consumption can only slow down investment, and therefore the catching up process. Table 3 shows the EC and US actual investment expenditures per ton of steel. The ratios of these expenditures to the corresponding ones for Japan may be interpretated as a crude measure of

the capacity of EC and US steelmakers to catch up. The US firms invest approximatively the same amount per ton than the Japanese firms, the EC firms only two-third. In both cases, these ratios do not support the hypothesis of a catching up process for a constant EC and US level of production. If the EC and US firms are modernizing, it can be only for a fraction of their current outputs. In the EC case, that means that each EC national industry is trying to shrink by the same factor of proportion. A more economically sound policy would have been to allow the bankruptcy of the most inefficient firms or parts of firms to happen.

References de Melo, J. and Tarr, D. (1988): Welfare Costs of U.S. Quotas on Textiles, Steel and Autos, The World Bank, PPR Working Paper Series, WPS83 Reising,S. and Bohnert, W., forthcoming. Zur aktuellen Lage auf dem Weltstahlmarkt. Strukturelle Krise und diskretionares Mipmanagement. Freie Universitat Berlin, F a c h bereich Politische Wissenschaften, occasional paper

Michael Kratke Does Social Security Create a New Class? On the Restructuring of Social Inequality by Welfare State Arrangements

L Introduction If we review the recent history of social policy in advanced welfare states we can easily determine two different and complementary failures: On the one hand, the dismantling and demolition of the welfare state feared by many of its votaries did not occur. In spite of all the ardent attacks by neoconservative/neoliberal ideologists and in spite of the manifold attempts to cut back social expenditure and to "restructure" the welfare state by neoconservative/- liberal governments of all shades, the core structures of welfare states have remained (nearly) intact (nearly) everywhere. With social expenditures still growing and welfare state dependency still e x panding throughout this decade, welfare state arrangements have turned out to be rather irreversible elements of the politics of democratic - capi talist societies. International comparisons show, that welfare state developments have not been restrained most effectively in the advanced welfare States, but just the opposite: the weak and highly fragmented welfare states (low degree of coverage; low degree of "inclusiveness") have suffered the most severe set-backs in the eighties while the highest developed welfare states with the highest burden of (social security) taxes have kept up their levels of social security costs and benefits (nearly) undiminished. On the other hand, the "new class war" in defence of the welfare State, the rebellion of welfare state clients against governments and a d ministrations cutting back on their vested rights has not occurred either. There have been serious cutbacks in many sectors of social security and social services, millions of people - more than 25% and up to 34% of the total population in the most advanced welfare states of North-West Europe - have become dependent on transfer incomes and welfare state benefits and have thus been more or less seriously harmed in some of their vital economic interests by the cuts policies. Nonetheless, no signs of any major social and political movements among this large (and still growing) population of welfare state clients have come into sight. Mal-

treated as they - or at least large parts of them have been by neoconservative/- liberal governments, their level of political mobilization and especially mobilization on their own behalf has not significantly increased. Nothing like a "welfare right's" or "social right's" movement, not even a "poor people's" or "unemployed" movement has come into sight so far. Hence, we have a rather puzzling situation to confront: The "welfare backlash", predicted by many social scientists in the seventies (cf. f.i. the seminal contribution by Wilensky 1975), did eventually occur, but was no succes at all welfare state structures coming out of heavy attacks (nearly) undamaged and even the legitimacy of welfare state arrangements (at least regarding the core institutions of social security) as vivid as ever. The "welfare client's backlash" did not occur either. It seems as if welfare state institutions did survive the neoconservative attacks thanks to their institutional weight, to the inertia of the politics of social policies. Not thanks to some strong political movement of welfare state clients or others in their defence. 2. Setting the problem Political economists, from the Physiocrats onwards, used to determine the place of the inactive and/or non-productive members of society with reference to society's system of production and exchange classifying the unemployed, the disabled, the old, the singles and anybody living on some kind or other of welfare benefit as part of the "merely consuming, nonworking, unproductive" classes. Unlike the decent and respectable members of the working class, they were not only poor, but parasites, living on other people's labour, and unlike the honourable members of the moneyed rentier class, they were not only parasites, but also poor. Contemporary social scientists, when trying to assess the role and position of welfare state clients in modern bourgeois societies, argue just the same way. Welfare state clients are for instance defined as members of a specific property class the class of the people holding transfer entitlements in contrast to the class of people holding all other sorts of property rights pertinent to the economic process (cf. Sen 1981). Welfare state clients, especially the economically inactives who merely receive transfer incomes and are spending them on consumer goods, are contrasted as classes of their own with several classes of economically active members of society so the (chronically) unemployed to workers in the private sector, workers in the public sector and capital owners (cf. van Winden 1985). They are subdivided into different classes of their own for instance the pensionists and the unemployed (cf. idem) or more broadly into non-actives and unemployed (cf. Offe 1985) - but still

contrasted to the economically actives, workers and self-employed, and the economically functional, though non-working members of the p r o pertied classes. Such approaches share two tacit assumptions at least: A. The assumption that present social security systems under the regimen of "democratic capitalism" have changed the structure of social i n equalities in bourgeois societies. They have created new inequalities of their own, inequalities which could and should be interpreted as class inequalities. They have created new class positions for large groups of inactives. The welfare state clients of today, at least large and inactive categories of them, could and should not be subsumed under traditional class positions derived from the economic system of capitalism. They even stay besides the traditionally recognized positions of inactives as paupers or rentiers. B. Those new class positions and the new dimensions of class inequality they introduce into the system of class relations, are socially and p o litically relevant. The new "social security classes" (Lepsius 1979), the cleavages between those classes and other class positions are sufficiently relevant to collective behaviour^ to habits, life-styles and eventually to collective political action so that a traditional class theory still does make sense: In one way or another these classes of people can and will become distinctive political actors of their own, possible opponents and/or allies in class struggles - and nobody could afford to ignore them both theoretically and politically. If we pass from tacit assumptions to explicit statements of hypothesis, we run into trouble. To admit that (state) social policy is not just a c o n tinuous struggle about contributions, benefits and entitlements but also in fact a battle over forms and principles of social inequality is especially hard to bear for votaries of a Marxist class theory. The inability to come to grips with possible effects of state action on the structure of social inequality has long enough been part and parcel of this very tradition. Unfortunately, Marxists have been unable to locate the large and growing groups of public employees and welfare state clients into the 1'class structure" of bourgeois society. In a more or less Weberian tradition it has been much easier to deal with new complexities of structured social inequality simply by adding some new "dimension" of social inequality the unequal distribution of or access to social benefits and public goods - to the traditional picture (cf. Lepsius 1979, Alber 1984, Kratke 1985). Politics do matter in these matters - that is what causes the head ache. If we are inclined to accept the hypothesis that state social policies anight have an impact upon the structure of social inequalities as strong as even to alter the (class)structure of economic (and politically relevant) inequalities in bourgeois societies, we cannot help of thinking of a recent

adagio by Adam Przeworski: 'The ideological (political MK) struggle is a struggle about class before it is a struggle among classes." (1985:70) To some extent and for some people, the trouble is due to the traditional sin of taking Marx's (or any other grand theorist's) word for his theory. It has been shown that even class positions as that of the "free, worker" or the "capitalist" which seem to be as "purely economic" as possible at first glance, cannot be conceived of without some reference to politics at least. The relational concept of class does imply not only class-class relationships but also class-state or state-class relationships.' Class positions in bourgeois society are beset with political institutions proper and/or with market institutions which do in turn depend upon political institutions (such as property rights and personal rights) (cf. Kratke 1984, 1985; Bowles/Gintis 1986). Referring to class positions which are derived from welfare state arrangements we may even go so far as to suppose that those positions are politically determined in all respects. Take, for instance the social - economic position of children and juveniles which we can easily enough relate and even oppose to the position of adults and/or old people. From the very beginnings of state social policy in the 19th century, their position as a part of the inactive population in' bourgeois society was and is determined by at least two purely political institutions: First, the legal restriction and/or prohibition of child labour, and second, the complementary compulsory school attendance for all children and juveniles up to a certain age. Or, take the position of the so-called "underclass", the contemporary version of the vagabonds, the "gens sans feu ni aveu". Their position can be described referring to several forms of exclusion from different forms of economic activity. In positive terms, it consists of a bundle of residual rights and claims within the framework of modern social security systems - claims to social assistance, liabilities to submit to some sort or other of public controls by those agencies which have their principal means of subsistence at their disposal and even are entitled to withhold them. Their only property consists of legal entitlements to some sort of transfer income distributed by public authorities, their market chances depend upon mobility rules imposed by those very authorities. Hence, in this and similar cases, it is obviously enough the practice of political classifications and regulations which determine class positions and may therefore determine the unequal chances for political mobilization of welfare state clients as well. 5. The Transformation of Class Structures by Social Policies A market economy and society is founded on private property. To establish private property and, consequently, market exchange as the general

[mode of appropriation in European societies was not feasible before the (large bulk of the so-called "commons", that is the vast and highly dif— ierentiated traditional rights to make use of a lot of "common goods" for the sake of one's own subsistence, had been destroyed by turning these goods into "private goods", redefining all the property rights (rights of use and abuse, usufruct and so on). With the decay of common goods and common property rights, the modern cleavages between (private) property classes came into existence. The formerly undisputed right to subsistence for everyone withered away to a mere moral notion as no single private owner could be hold responsible for it. Classical economists rejected the reintroduction of some kind or other of a "right to subsistence" for the labourers or the poor into the framework of a market society. Such rights and the kind of elementary "social security" that would ensue from them Iwere regarded as incompatible with the freedom of the labour market and *the individual freedom of the labourer himself. The "dangerous opinion" .that the poor had a right to subsistence regardless of the actual market Rvalue of their labour (power) would lead to placing the free labourer "in the condition physically and morally of a slave" (Nassau Senior cit. in Rimlinger 1971: 43). Classical economists were quite right. The appearance of modern (systems of social security did change the capital - labour relationship a good deal. Due to some basic income security and a comparatively much steadier flow of money income, the way of life of working class people has been thoroughly changed. The overall threat of pauperism once diminished, large parts of the working class became respectable members of the market society, people owning durable consumer goods like cars and houses, having a bank account, writing out cheques and even carrying credit cards. New cleavages within the working population have been ripped open and old ones widened, others diminished like the cleavage between white- and blue-collar workers. Class boundaries between the working class proper and parts of the middle classes old and new have been shifted and blurred, working class people getting private p r o perty and social security of their own. What is more, a new and distinctive class position of welfare state clients - people who are dependent on some form or other of transfer income from the public purse for their living has emerged. In order to outline the changes in the class structure of bourgeois society brought about by welfare state arrangements, let us follow the development of state social insurance (and allied services) in Western Europe for a while. Social security has been institutionalized in most countries as a special arrangement for members of the traditional working class, a typical class device and a prototype of class (directed) policy. Thus the state became involved into social policies, forced to engage in social

policies permanently and to regulate and coordinate the social policies of companies, trade unions, churches, friendly societies and the like. State social policies became two-pronged: policies for the paupers and policies for (respectable) workers as well and in the long run not only for the working poor but for the whole working class population and beyond. As the new devices and institutions of social security were established especially the new institutions of "social insurance", those "impossible" and "inconceivable" constructions to insure "uninsurable" people and/or risks (as many contemporaries regarded them) state social policy became a highly specialized field of policies. Bulky and highly specialized legal procedures within the framework of large and specialized bureaucratic organizations social insurance schemes of various kinds and some social assistance schemes determined what one may call the art of regulating the poor, the working poor and the working class as a whole. The further development of state social security in Western Europe can be easily characterized by three items: fragmentation, inclusiveness, and integration. New categories of risks, new groups of people at risks have been found, acknowledged and admitted to social insurance; new forms of social insurance, complementary and supplementary ones, have been developed. The already highly fragmented world of social security became further complicated and partly eclipsed by the policies of other specialized welfare state agencies - public health care, public housing, public education, personal social services of various kinds. At the same time, social insurance lost its exclusiveness. Starting with a rather small minority of comparatively w e l l - t o - d o workers in core industries it grew more and more inclusive, admitting little by little workers in small industries, workers in special trades like farmhands and seamen, seasonal and homeworkers and was eventually even opened for the self-employed. With growing inclusiveness and the appearance of new forms national or people's insurance social insurance has lost its distinct working class character. As the complexity of social insurance (and allied services) increased, efforts for systemic reforms and restructuring were made alongside with efforts to close coverage gaps and to get the vartous schemes in tune with each other. With the introduction of minimum norms for transfer incomes some degree of integration crf : ^ still different schemes has been achieved. What is more, social assists**? has gradually lost its distinct underclass character as an institution for drop-outs and misfits of all kinds. It has turned out to work as ifat respectable basis under the superstructure of social insurance, a '-tote* serving as the one and only source of income for all those people who have no sufficient claims to social insurance proper (cf. for details pi these developments in several countries Kratke 1988a).

In the beginning social security was meant for and actually dealt with only a part, a core group of the industrial working class. The chance to live on transfer incomes from the state and the right to do so had to be earned by work performance. In order to qualify for benefits, one had to perform wage labour and pay contributions for a minimum period. If we review the various qualifying conditions for most of today's social insurance schemes, even for the people's pensions schemes in some countries, this coupling of social security claims to wage labour p e r formance is still in force. In the case of company schemes which allow to live upon deferred wages or what the company has been able to make of them, this connection is even more obvious. Workers themselves pay in form of contributions and/or deferred wages for what they get back in the form of pensions, unemployment benefits, sickness benefits, and the like. But that does not imply that any kind of equivalence between contributions paid and benefits received actually exists for individuals or groups included in social insurance schemes. It is only by mere chance, that someone or some group will ever exactly get back what he or they have actually paid. There are at least two reasons for the de facto n o n - e q u i valence of contributions paid and benefits received in social insurance schemes: First and foremost, pooling of good and bad and average risks alike will ensure that. As every member of a social insurance scheme is forced to contribute to a common pool, and as individual contributions are deliberately not differentiated according to individual risks, it follows that there will always be net losers and net profiteers. Second, n o n - e q u i valence follows simply from the general principle of aggregate probability of risk resulting from the law of large numbers which is at the base of each insurance scheme. Under insurance, uncertainty does continue to exist for each individual taken apart, but for the community (a community of forced riders in the case of social insurance) approximate certainty r e garding costs and outcomes does exist. If non - equivalence prevails, there can and must always be profiteers and losers in social insurance. There may even be exploitation - workers actually inactive and living on some kind of transfer income from social insurance schemes exploiting workers who actually are engaged in the workforce and paying contributions, one generation of workers exploiting the other, male workers exploiting female workers and so on. This might even affect the core of capitalist exploitation as it does in the case of Pure company schemes where workers are actually forced to allow the transformation of deferred wages into working capital in the hands of their employers. Let us assume a clear-cut exploitative situation. Those who pay and those who receive benefits from transfer income schemes are and remain Hon - identical. One party bears all the burden and the other gets all the

benefits. None of the contributors will ever be able to become a beneficiary and no beneficiary will ever be forced to contribute. We can imagine such a situation, but we cannot explain how exploitation is pos - 1 sible and does work in this case. The beneficiaries in this unfair game do; not have any control over productive resources nor do they control the* access to markets or could they withhold or withdraw anything indis-* pensable for the work that others have to perform in order to earn living for themselves and for their exploiters. So the beneficiaries who are"; nothing but recipients of transfer incomes with no other assets than some* kind or other of a "right to transfer income", would not be able to forced workers to perform (a surplus of) surplus - labour. Nor would they be able • to force propertied non-workers to transfer some part of their property*! to them. Neither would they be able to force anybody on a marketplace^ to accept or give non - equivalents in exchange, because they have nothing; to withhold and nothing to exchange at hand until they receive their5? transfer income. Hence, in order to explain the mere possibility of:; exploitation between contributors and beneficiaries within transfer income5; schemes, someone else, a third party has to be involved. A party which is),; in a position to compel workers to work and pay, and propertied non-'J workers to pay for the sake of the inactives having no possessions but; claims to transfer income. The only party known which has such a capac-'i ity is the modern state. The state and only the state has a "power to taxV^ that is the monopoly of a specific non-market mode of appropriation the appropriation of the products and possessions of everyone without any*J form of exchange and without any specific service in return. Hence, in] order to make use of the state's power to tax or just to prevent its use/ both parties in the exploitative game sketched above, have to do oncf thing first and foremost: They have to gain power in the state, at least access to and influence on the state power. At least, one has to have sft much power in the state as it is necessary in order to make it impotent where one's own interests are concerned. As welfare recipients could onljl be exploiters if they accomplish a regimen of tax exploitation, exploitation totally depends upon the balance of political powers between weMaffl recipients and taxpayers. V The state's power to tax is the economic base and final guarantee social security on the scale of the working class or even the whole popu-^ lation. The state is the only one able to impose compulsory social insurance (and allied services), to collect social security taxes from workers and employers, to manage social funds and to deal with the inactives'j transfer income claims. The state's power to tax is the prerequisite of *ny( stable, long-term social security scheme, because it is "its power to meet] the obligations of social security to future beneficiaries" (Feldstein 1975:i 78). Within the modern tax state, the financial possibility to meet future! •A

| claims is not enough. It has to be supported by the political will to spend I tax money and/or accumulated funds for social security and not for other ^purposes. Social insurance is a construction which has the double effect of ;not only using the state's power to tax but also earmarking some taxes *and public funds, thus confining the state's power to spend. Taxes are transformed into "social security taxes", that is special contributions to ffsocial insurance schemes". That is why fiscal illusion is weak or even absent in these matters. Everybody knows or thinks he knows what he is [paying and which benefits he is entitled to receive in return (cf. Kratke •1986b). p> Compulsory social insurance, organized and controlled bythe state, does affect the relations of control between workers and capitalists, even if it •does not change form and degree of capitalist exploitation proper. In pure ^Capitalism, it is the individual worker himself who bears all the risks of [both employment and unemployment. In historical capitalism, workers have (always tried to shift those risks from individual workers to one sort of community or other - mostly to a collective organiza - tion of workers of [the same trade and/or occupation and/or neigh - bourhood. The common 'funds built up and run by voluntary associa - tions in order to ensure the ^members some compensation for the loss of wages did never cover more Itban a small minority, mostly a worker's aristocracy. Worker's mutualism & operated on a small scale and excluded the "bad risks" quite effectively, j l l e bulk of the irregularly employed, of seasonal and homeworkers, of Lunskilled and low-wage workers simply could not afford regular payment Of the flat rate contributions which most burial societies, sick funds, and friendly societies demanded (cf. Gilbert 1966, Hatzfeld 1971, Gosden 1973). Nevertheless, employers were bitterly opposed to even this partial modification of wage dependency for small groups of workers. What is pore, they promoted social security schemes for workers which were not to by workers themselves but remained within the company, that is c o r K>rate or company welfarism. Company pension schemes, company sick )&nds, financed by compulsory deductions from wages and run by the company itself, could and actually did grow out to paternalistic miniyelfare states in a single company (f.i. Krupp in Essen, Philips in Eindhoven). Compulsory savings schemes for a company pension or sickness benefit considerably enhanced the company's control over its workers. Jhey reduced the mobility of workers for a good deal, as any job change taeant the loss of some amount of deferred wages and/or pension rights. They provided an additional incentive for workers to conform to a regular Working life according to company rules, ra^ There are several reasons why the state should become the main rorganizer of social security in capitalist societies instead of the workers r-and/or the employers themselves:

1. The state is the largest and most permanent and trustworthy financial institution of capitalist society. The modern tax state has the financial and personal resources to set up and run large funds and whole systems of funding schemes. Its power to tax is also the power to meet the obligations of social security towards future beneficiaries. 2. The state and only the state has the power to enforce a pooling of risks, bad and good alike, in large compulsory insurance schemes upon contributors and beneficiaries. It is the state and only the state which can make an insurance scheme for uninsurable risks and bad risks compulsory. Compulsory insurance is the only means to side-step the well-known problems of adverse selection and moral hazard which do impinge on the working of voluntary, private insurance (cf. Barr 1987: ^ 115 ff). J 3. From the point of view of workers at least two arguments count in^ favour of compulsory social insurance: a) Nobody knows for sure if, ) when, how much and how long he/she belongs to the "bad risks" or i not. b) If they are "bad risks" or regarded as such, they simply cannot j get insurance from private companies or they cannot afford it, if they-1 might get it. Of course, there is at least one good reason too why the state should not \ interfere with social security at all: If it does, it will change the balance of power between workers and their employers and it will alter the forms of control which employers do exert on their workers. Employers, large and small, of course resisted social insurance, because it meant another tax. Employers, large and small, were not only opposed to state social ^ insurance because they were afraid of losing their class privilege of social ] security. They were opposed to a change in the system of control which jj was imminent. That was just what state officials were striving for by j establishing and implementing compulsory social insurance schemes - ( j getting access to the regulation of work relations, especially in the realms ^ of big industrialists and large factories. Social insurance - once enacted became the field of anotherl battle. True, the battle on voluntary versus state regulation of social s e - 1 curity raged on. But the issues changed. Who was to gain and maintain^ control over those insurance schemes, who was in charge of those enor —; mous funds, who was to handle the new "rights to subsistence" ? Workers : (or their organizations), employers or state officials? Control over social] insurance meant not only control over large funds and money flows. It I meant control over entitlement decisions, too. Who was to be eligible and; under what conditions? The people who became entitled to take entitle - 1 ment decisions actually got the power to define and redefine "normal" or "standard" conditions of wage labour. They got the power to set up the rules for and arbitrate the ongoing struggles about work conditions and

work disciplines everywhere. For instance, in state social insurance schemes legal norms have to be defined for what should be considered as "rightful absence from work", what as "sickness", what as a "professional disease", what as "rightful dismissal" and so on. The implementation of social insurance entailed a long series of such entitlement decisions which paved the way for the extensive social and work legislation in today's welfare States. Compulsory social insurance changed much more than the form of industrial conflicts, it modified the way how issues were defined and gains and losses had to be assessed. It changed the overall balance of forces in the struggle about control over the workforce. The ultimate threat and sanction in this struggle is the loss of job and wages for the worker, whereas workers do not have any equivalent sanction towards their employers. Social insurance offers compensation for wages lost or denied f- at least to some degree and for some time. So it can reduce the omnipresent fear of penury among workers. That is why some influence on the regulation of social insurance (or social security at large) is so important to employers. Regulating social insurance means regulating not the poor but the work discipline of workers who are afraid of pauperism. The state and only the state is able not only to pool the risks but to include the greatest possible collectivity say all people, or the whole working population or even all taxpayers in last resort - into the pooling of social risks. The state and only the state is able to fill up the gaps, to complete the system of social security and to enlarge its scope. With growing inclusiveness social insurance can afford to offer a better c o m pensation for the loss of job and wages transfer incomes on a level far above any social minimum, derived from the salary or wages last earned, inflation - proof and even coupled to the overall developments of real wage income. The state can not only develop social insurance towards inclusiveness, it has an interest of its own to do so, because it has an [•interest in itself'. The more inclusive a social insurance scheme, the more effective the pooling of risks, the larger the common pool and the smaller the risk for the state to have to act as general reinsurance and last resort guarantee for all social insurance schemes. The more inclusive a system of social insurance, the larger the stake in the country which workers have won. If most workers have to expect quite a lot from social insurance, they and their organizations acquire a genuine interest of their own in the country's "financial stability" and "prosperity". A large social insurance network comprising the majority of the working population will create a strong incentive to take part in and support government's economic and fiscal policies. The more inclusive the social insurance system is, the better the chance government obtains to drag the workers and workers' organ-

izations into official economic policies, transforming them into beneficiaries, and accomplices or even partners. This overall change of the balance of forces has behavioural effects as well. By state social insurance and due to the very form of social; insurance workers get clear-cut and uniform entitlements to transfer incomes. Entitlements which are independent from individual employers or companies. As soon as state social insurance does cover the most important risks of employment and unemployment alike for the vast majority of workers, individual workers get something new: Some real choices and a chance to behave as "rational economic actors". They do not gain any kind of surrogate for private property, as transfer income entitlements are not heritable or transferable or marketable in any sense. i Nonetheless, they earn their claims and hold them for a life-time,' while constantly building up new claims and enlarging old ones. Although they can still lose their wages and expect no more than a partial compensation for it, the great majority of workers simply can expect a rather* steady life-long flow of money income from wages and wage - related/ transfer incomes. Hence, the parameters for individual workers' action are* changed: They get a long-run perspective of their own, they get a family; and family responsibilities, they can make mobility decisions of their own," change jobs, trades, professions as they prefer or choose for a work-tf career within one company. They can behave as rational proprietors of a,' valuable commodity, since they do no longer have to accept any. employment at any price, and they have to, since they have now got a, group of economic dependents they have to care for. They can afford to wait and see or to look for a change. So due to social insurance, the) individual mobility of workers together with "strategic" behaviour is very; likely to increase, while the power of individual employers to impose their* conditions upon the workforce is fading away. / What is still more important for the politics of advanced welfare, states: Social insurance changes the form of the rule of capital over* labour. It forces employers into some kind of general (class) solidarity! with each other. Accident insurance, the historical first social insurance,?, already forced employers into a collective responsibility for the way in^ which they treated their workers and organized production in their* respective plants. As social insurance developed, it became a first-rate/ concern of employers to mind each other's business as they were con-j stantly reminded of their duties as forced riders on these insurance* schemes. It was inevitable that employers responded collectively to this* challenge that is to say, they engaged in social policies with a common*; (class) concern. The more inclusive social insurance grows, the more cap-^ italists, those "hostile brothers" as Marx called them, recognize and accept;

their solidarity as members of one class against another (cf. Ewald 1986:333 et passim). With the coming of social security the forms of the rule of capital are transformed from industrial despotism proper via some sort of e n lightened paternalism to political hegemonic forms of rule. To use Hirschman's distinction, social insurance does not only change the conditions of "exit" for workers, it does change the forms of "voice" and loyalty" as well (cf. Hirschman 1970). Workers, who have become used to elements of full citizenship, who have acquired rights and assets in the state, who have the experience of some health and security standards at work and of some kind of social security outside of the plant such workers must be treated differently. Social citizenship, to use T.H. Marshall's term (1950), has its consequences for industrial citizenship, too. As worker becomes an official status defined by a specific set of rights and claims towards special public authorities, the whole garb of "class Struggle" is bound to change. For a good deal, it becomes transformed into struggles between different groups of citizens or claimants and the state or different public and semi-public authorities. It changes into a series of highly formalized struggles for rights and material benefits which have the form of conditional rights. Those struggles are fought by official representatives of the different "vested interests" involved. The politics of state social policies, once established, have an effect on the issues and the conflicting parties which social policy originally was all about. Due to social rights and due to new forms of voice, the once silent "force of economic relations" has become rather eloquent in welfare state capitalism. As class struggles have become formally politicized within the welfare state, bourgeois rule has gradually turned into the art of conceiving and implementing various "hegemonic projects of control". Such projects always did combine elements of "rights" with elements of "welfare", trying to legitimate (welfare state) capitalism as the legal and the good (or even the best) order at once. After the establishment of social s e curity, such projects can no longer do without at least two legitimatory claims: That is the concept of vested (social) rights and the concept of welfare and social security for all citizens or for all "good" citizens (cf. in some detail Kratke 1988b). A right to social security is a nearly perfect ;formula to accomodate personal liberties and property rights within the framework of the welfare state (cf. Bowles/Gintis 1986). It can do such a job, as long as some element of discrimination is included, that is the old Benthamite distinction between the working poor and the destitute or the 'even older distinction between the "deserving" and the "undeserving" poor invested with full discriminatory power as to social benefits (cf. Kratke 1988b). Social rights (to transfer incomes) are no match to real private property, as long as they are discriminating both qualitatively and quan-

titatively according to claimants' work performance and/or (labour) market behaviour. In this way, they are not left to the claimant's discretion, but depend on the judgement of others on the claimant's behaviour as a member of social security schemes. 4. Welfare State Clients as Political Actors In today's advanced welfare states more than 50% of all income recipients get their primary income from the state (including income from public employment), more than 30% live as official inactives and get their primary income from an income - maintenance grant. Up to 45% of the disposable income of all households is provided by some sort of social benefit in money (cf. for the exact data for several countries: Kratke 1988a). In the Netherlands, the biggest welfare spender and highest developed welfare state in the EC, more than 5 million people of a population of 14,5 million are welfare state clients in the full sense of the word: Without the benefits received from welfare state agencies they would not have sufficient means of subsistence, many would be doomed to pauperism proper. The core of this population consists of those people who have no viable alternative to dependency on benefits and grants from the welfare state: the handicapped, the unskilled and long - term unemployed, the single parents, the old people, the chronically sick, the misfits, the jobless youth, the junkies and all sorts of drop-outs. As far as they resort to some kind or other of informal economy they can only afford to do so because they still have their transfer incomes and are rather free as to how and where to spend them. The informal economy may appear as a refuge from the dole for many individuals. In fact, the welfare state is constantly subsidizing the informal economy by all kinds of t r a n s f e r incomes which allow a lot of people to live, work and consume within "alternative circuits". This is even true for parts of the black economy of moonlighting and double jobs. But the category of welfare state clients is much larger than that. In the Dutch welfare state nearly all inhabitants are potential clients of and actual contributors to the welfare state. This high degree of i n c l u s i v e n e s s more than 90% of the working population being covered by the full range of compulsory social insurance, and everybody being covered by people's insurance and/or social assistance is achieved within and thanks to a highly fragmented network of social security. Within this framework, cleavages arise between what one may call latent "social se curity classes". These cleavages are the effect of the politics of s o c i a l policies, as the great majority of the population actually are forced r i d e r s ,

not free riders in all insurance schemes both as tax payers/contributors and as beneficiaries. As far as "real transfers", that is the more or less extensive and intensive use of collective goods and services provided by the welfare state, are regarded, there is a lot of inequality, too. Strong minorities from both the active and the inactive population profit greatly. Especially in the fields of health care and public education, both members of the middle classes and affluent workers are profiteers, though no free riders at all (cf. Goodin/LeGrand 1987). Even where administrative and financial thresholds are generally low and/or removed for the hard core of the inactives, the use of collective goods and services still does display a middle class bias (cf. for Holland Kobben/Godschalk 1985). Let us look in more detail at the cleavages arising from social security schemes. Even a highly inclusive and fairly well integrated social security system such as the Dutch displays a variety of horizontal and vertical cleavage lines (cf. figure 1): Figure 1: Social Security Schemes in the Dutch Welfare state Sick

Old Age

Disabled

Private insurance

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+

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Company schemes

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+

+

+

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Worker's insurance People's insurance Social assistance

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Unemployed

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+ All categories

It is within such an institutional framework that cleavages between "social security classes" have to be identified. Even from such a rough sketch we can easily grasp that there are quite a lot of inequalities indeed. If we took into account the quality and level of benefits and the coverage as well, we would arrive at the well-known pyramid picture: The better schemes which offer the best benefits and cover the smallest group of people at the top and the poorer and poorest schemes people's insurance and social assistance - which offer the benefits only at the level of the official social minimum and cover the largest groups of People at the bottom. Moreover, there are risks which are apparently well, even abundantly covered, such as sickness, and others which get but a niinimal coverage, such as (long term) unemployment. Regarding the

financing, there is also a clear-cut division between those schemes which are auto - financed by contributions (and/or deferred wages) of future beneficiaries and those schemes which are financed by all (income) tax., payers and have a certain redistributive effect (people's insurance and* social assistance). In the first case, contributors and beneficiaries belong to{ the same (social) class, though not always to the same generation, whereas in the second case, contributors and beneficiaries are mostly belonging to, different groups and classes. Hence, as social security has lessened the old. cleavage between the propertied and the propertyless, it has created newt cleavages between people possessing different sorts of social security assets^ by the same token. Still, there is a class of people who do not need any: social security assets because of the security offered by the private fortunes they hold. Within that much larger class of people who do need^ social security claims and whose property does for the most part (more, than 60% for the "average workers'" household in the advanced welfare * states) consist of claims to social security benefits in the future, we can distinguish between two extreme positions. On the one hand, we findf people (waged and salaried workers, but also civil servants) who enjoy the full range and scope of social securities - and especially the highest levels of auto - financed benefits derived from private and company schemes. To this group, compulsory social insurance is nothing more than; a base upon which the framework of full income security is erected. For these people, who are typically to enjoy more than one pension or benefit in any case of need, "fiscal welfare", that is the various forms of tax allowances, are much more important than contributions and benefits to workers' insurance. Tax allowances subsidizing contributions to private and/or company schemes are their favorites - alongside the allowances, promoting private property in houses, estates and the like. On the other hand and extreme, we meet a group of people who do never own more than a claim to the residual forms of social security - people's pensions and social assistance. Within the framework of social security, they will never be able to rise above the level of social minimum proper. Typically,> those people have never been able to attain the official "workers'" status, within social insurance not for long at least or they have never^ succeeded to rise considerably above the minimum wage level or to cross^ the social security tax threshold. The level of social minimum is the one^j and only issue to them. In between these extremes we can identify a) group of "average workers". Roughly speaking, these are the people fiilly; integrated into the system of workers' insurance, sharing in the people's^ insurance system and having some access in the margin to moderate^ company schemes, but still are excluded from private schemes proper. As; they are profiting from a variety of schemes, they have a variety of interests, both as contributors and (future) beneficiaries. That does not

preclude some common interest in "good" pensions and "good" health care - as everybody within this group can be supposed to have the same chance of growing old and falling ill. Any step further, and inequality prevails. Inequality of unemployment risks, inequality of accident and professional disease risks depending on different trades and industries. Members of this vast group are divided between those whose employers can afford the substantial expenditures for special employee benefits and those whose employers can not. Of course, social security has not created the differences between workers in large and small companies, workers in flourishing and workers in decaying industries, workers in national and multinational companies. But it certainly did aggravate and emphasize these differences - and especially where company schemes occupy an important place in the country's social security system (such as it is the case in the U.S.A. f.i, but also in the highly developed Dutch welfare state with its •dual" pension system). Social insurance can not abolish or even diminish all the social and economic inequalities which are attached to the system of wage labour. Inequalities between full time and part time workers, inequalities between stable and regular and seasonal and irregular employment, inequalities between high-wage and low-wage sectors are just accentuated, and not made less crass by the system of company schemes and workers'insurances. The respective chances to have an accident, to become chronically sick and/or disabled, and to become unemployed determine the different careers as welfare state clients and form different categories of workers. These chances are known to be quite unequally distributed - and not at random. The inequality of unemployment chances has a lot to do with labour market strategies of both employer and employees; there are, even at the level of the single plant, cleavages between a core and a peripheral workforce. Social security does just translate the inequalities of job security between those workers who manage to gain and maintain seniority rights and the others, who always have to do with second-class rights in the firm* into inequalities of social rights and benefits. The importance of this Cleavage between regular members of staff and the irregularly employed peripheral workers changes and especially so under the pressure of fong- term mass unemployment. When "flexible" forms of employment Increase (short-term, part-time employment) a group of flexible, j o b .hopping workers is bound to increase accordingly. To those workers, living ;on the dole or some other transfer income will increasingly become just a normal transition from one short-time job to another, and vice versa. So, in the long run, a cross between workers and welfare state clients, c o m bining both ways of life as an integral part of their specific life-style, ©ay come into existence. But even such a group of permanent j o b - w e l -

fare-hoppers will be torn apart as long as there are escape routes to follow - either to job security or to long - term welfare state dependency.' Social security thus leaves us with a classic example of cross-cutting, cleavages. What is more, involvements are constantly shifting, too. For the^ great majority of welfare state clients especially for those who belong to the active population or are busy to escape from inactivity being a? client, paying (social security) taxes, receiving benefits is just one issue^ among others. The relative importance of these issues changes during the» life-cycle. Accordingly, welfare state clients do not see themselves nor act3 as members of one category of people who share some vital or the mos^ vital interests. In fact, they do not. In terms of interests, the great m a - j jority of welfare state clients, that is contributors and beneficiaries to-^ gether, is a non-class, comprising the whole (working) population. The^ whole population is divided into several, mostly latent interest groups like tax payers, parents of children required to attend school, car drivers,? users of public libraries and, of course, welfare recipients, pensioners and* so on. People do only incidently, in some cases and as far as they are^ personally concerned, and temporarily, for just a phase in their lifes, share^ such partial interests. It turns out that social rights, both rights to transferf incomes and rights to use collective goods and services, are no genuine^ property rights. On the one hand, they always belong to someone - to| identifiable individuals, households or groups. But on the other hand, nOjj individual or group really has these rights at his or their disposal. Theyjj may argue, but they cannot really negotiate about them. TTiey cannoy transfer nor transform them, as they like it; and, most important within^ the framework of a market economy, they can never sell them offo Because of this formal feature, most people do only realize that they havej many stakes in the welfare state, when some part of it actually is at stake^ So, most of the latent groups of interested persons only come into col — lective (political) action as negative coalitions around one issue coalir^ tions to fight against higher (property) taxes, to fight against road tolls^ school fees, to fight against the closing down of public libraries, schools,* hospitals and so on. In some cases, there are subgroups within the larger latent groups of interested persons, that is groups of people who will wii^ much more from any collective action than the rest. This inequality doej^ explain for a good deal, why there are more and more efficient negative^ coalitions around one issue than there are around another for instan^ej more (property or income) tax revolts than riots of welfare recipients. ^ Still, there is one cleavage between the core of the permanendjj unemployed and inactive welfare state clients and the rest of them. Thei former share a genuine class position, while the latter have no common denominator of class. For the vast majority of welfare state clients their class position is overdetermined, that is to say certainly not determined byj j

their relationship to welfare state agencies alone. Children live on their parents or wards, house-wives on their husbands. If they receive transfer •incomes of their own, these are simply added to the family or household [budget. But for those who are on their own and have to live permanently on transfer incomes by some welfare state agency or other because they have no other source of income, no (labour) market chances left and no viable alternative to this kind of state dependeny, the matter is different. fThey can be regarded as occupying a class position sui generis - the [position of state clients proper. They are non-workers, neither productive nor unproductive. Hence, they cannot be subject to capitalist exploitation proper, except on the marketplace. They own or control no productive ^assets indispensable for members of the economically active population nor I do they control the access to certain markets or hold a monopoly of any 'asset which might be economically or politically relevant to the active population, so they cannot be exploiters in any sense. Still, they might [enjoy the benefits of some kind of exploitation. But then, others - the [State - would have to do the exploitation for them. They are no slaves ;or state wards. They retain their personal freedom and legal competence, [though somewhat restricted by their lack of income and credit. Unless ^they belong to a discriminated minority group, they are not even excluded ^but remain fully integrated into civil society. They are not oppressed but ifceep their full civil rights. They are not locked up, placed into ghettos or jjwork camps or work houses of one sort or another or placed under ^tutelage. They are not even prevented from running from state depend[ency, though most of the traditional escape routes from both wage labour [and state tutelage such as the crime economy, self-employment, ^informal economies, emigration, subsistence economy - are guarded by [state agencies. Even if those escape routes are not formally blocked off, | for the great majority of permanent welfare state clients it is no matter of [discretion at all, but a matter of chance to get out into some part of the formal or informal economy. Though welfare state clients can make some .mobility decisions of their own and carry their claims with them, the great •majority has no viable alternative to permanently living on welfare state grants and benefits. Bp The group of permanent welfare state clients does share a common Sate - dependency on welfare state agencies and a common interest f - high levels and steady flow of transfer incomes. Still, they do not act res one collective political actor on their own behalf. If they do not, fiieither will others, actives or inactives, do. Nor will they even regard [them as allies within possible coalitions of contributors and/or beneficiparies for or against some welfare state arrangement or other, jf It has been demonstrated again and again that there is no straight way from class position to collective political action, neither in theory, nor in

practice. The classical example has been provided by the working class who has rather seldom manifested itself politically as one class and for some good reasons (cf. Przeworski 1985). What about the class of welfare state clients? Three hypotheses are presented by social scientists in order to explain the lack or even the impossibility of political mobilization of these people - the underclass thesis (cf. Auletta 1982), the division of society thesis (cf. Leibfried/Tennstedt 1985; Kobben/Godschalk 1985), and, last not least, the fragmentation thesis. The underclass thesis says that at least parts of the permanently inactive welfare state clients become involved into a specific "culture of poverty" which separates them from the rest of civil and political society, if not from the world. So, those welfare state clients living on or under the social minimum, are cut off and are isolating themselves from the bulk of both the active and the inactive population. Existing patterns of religious and/or ethnic and/or racial discrimination will intensify this tendency leading to a separate "social class" within the economic class of welfare state clients. The political consequences are quite evident. If large parts of the welfare state clients are for instance black, or catholic, or Turkish, the rest will not be easily inclined to close ranks with the discriminated but prefer to take part in and contribute to the general discrimination pattern. Discriminating the already discriminated has the one advantage of preserving a still higher social status for all the non-blacks, non-catholic natives among welfare state clients. Even if it not defined by skin, belief or nationality, to cast out a part of the welfare state clients as an "underclass" has the effect of moralizing and even regulating the poor. A social and cultural demarcation line between the underground economy (drugs, prostitution and all other sorts of crime included) of the underclass and the respectable transfer economy of the respectable welfare state clients is thus defined. However, this would not imply more than a rather undisputed statement: You will never succeed in mobilizing 100% of an economic class for collective action. The division of society thesis (in the German context: two thirds against one third of the population) is not more than a description of the growing social and economic inequalities within the welfare state. Itj explanatory power simply depends on the tacit assumption that workers,1 actives and inactives alike, should and could act together on behalf of^ their common interests, as long as inequalities of income, life chances and life styles do not grow too large. In most accounts, it is assumed, that the (political) action is where the actives are. So the one and real question is whether the active working class population would still be inclined to come into action on behalf of their inactive brothers and sisters. And the suggested answer is no, because of the increasing inequalities between active and inactive members of the working class. Still, that would not

explain why the inactives - the permanent welfare state clients would :or could not act collectively at their own behalf and even start an political argument with and fight against (parts of) the active population. At this point the fragmentation thesis enters. It says that the institutional fragmentation of the social security system, the coexistence of different systems of social insurance and social assistance, and, last not least, the administrative practice of classifying and sub - classifying client groups altogether lead to just as many cleavages among welfare state clients. Take for example the Dutch social security system once again. Its clients are officially put into a whole string of subsystems and categorized accordingly as AOWers, WAOers, WWers, WWVers, RWWers, IOAWers, ZWers, WBPers, ABWers, AWWers and so on. No doubt, European social politics have been and still are obsessed with such classifications of client groups as they were in vogue for centuries. Such classifications of inactives are | part and parcel of any social security system which is built upon the [principle of specific and conditional rights to specific benefits. Only under & regime of an unconditional and universal grant for all citizens such [classifications would be unnecessary. ft But the important question here is whether welfare state clients under ;a regimen of highly particularistic social security schemes and conditional rights to specific benefits are socially fragmented according to such classifications or not. This is an empirical question and an important one. It [refers to some indispensable political resources for any collective action of [such people - that is organizational resources, links with government ; agencies and officials, communication networks. Welfare state clients are ;not only classified in political and administrative discourses. They find ;themselves already incorporated into the fragmented organizational structure of social insurance schemes, their links with governmental agencies and officials already occupied by social insurance officials. Such officials >are expected to define and defend the interests of their organiza - tion; they and they alone have the competence to deal with the highly compli[cated matters of social insurance and defy both claimants' and government {0fficials, if necessary. The fragmented structure of social insurance gives Work and administrative power to many thousands of officials in the advanced welfare states. It urges both politicians and officials to specialize. Political claims to social security whatsoever have to be translated into the bureaucratic codes of that branch of social insurance or welfare where they belong to; and they have to belong to somewhere in order to be 'admitted to social policy. There are many empirical hints to support the conjecture that the core 'of welfare state clients do define themselves in terms of the official clas (sifications instead of perceiving themselves as members of one class apart. Such a perception and behaviour as specific claimants' groups not only

suggests itself to welfare state clients. It is also rational within thej framework of today's fragmented welfare states and goes perfectly well, with the prevalent "moral economy" of the welfare state. Clients are] referring to rights which have the status of civil rights but always the form of special, conditional rights. Any claims they make have to be specialized* claims in order to get through to the right agency; they have to take the^ form of claims to specific benefits - contributory or non - contributory - j geared to specific situations of need unemployment, sickness, disability,, retirement,destitution. Strategic behaviour of both clients and officials will; just enforce the policies of classification. Officials have to try to contain, moral hazard problems - that is clients influencing either the likelihood^ or the duration of their dependence on transfer incomes. They have to try to prevent abuse that is people from outside an official target group entering he scheme (workers avoiding "unemployment" by applying for; disability pensions). To do so they have to intensify control over their^ clients' backgrounds and actual behaviour and so they will inevitably? end up increasing the complexity of classifications (both schemes ani procedures). On the other hand, and partly due to the growing inclu-* siveness and complexity of the social security schemes, groups of people,: pop up which do not fit into the existing framework of schemes Hence& new schemes have to be invented and/or existing schemes have to bej further differentiated for new categories from both the active and the> inactive population. The self-employed and the housewives are the most^ striking examples in the recent history of European welfare states. Now; we have groups of claimants who do not pay contributions but will none-; theless receive benefits - due to some kind of "social wage" for house-V wives' and especially mothers' work and we have groups of claimants who are voluntary members in fact buyers of "social insurance" under^ special conditions. $ All these classifications bear moral overtones and are burdened with notions of "decency" and "respectability". In moral terms, social security* classes are certainly divided in an upper, a middle and an underclass retired people occupying the ranks of the most respectable upper clas$»j| the sick, the handicapped and the disabled occupying the less respected] but still deserving middle class, and the (long-term and young) uaqg employed filling the ranks of the least respected, more or less "undeserving ing" underclass. (School)children, students, apprentices should be ranked some kind of a "upper middle class", as they are doing some useful worlfl preparing themselves to become part of the working population in thc| future. Members of the upper and especially the middle class can define^ themselves in terms of a special profession of trade the profession trade they once belonged to or they will belong to in the near future^ And they have links with the groups of the working population they ;

belonged to or will belong to - apprentices and students much stronger ones than the retired and disabled. But the latter still know to which group they will belong and try to stay in touch with their former colleagues, their trade unions and their clubs and associations. Maintaining some kind of a professional group identity certainly works as a means to keep the less deserving welfare state clients, the people on the dole and the mass of wretches living on social assistance at some social distance at least. Pensioners of various kinds - the largest group of welfare state clients - thus keep in touch with official politics, too; they are still included to some degree in professional organizations trade unions in the first place which they expect to represent their interests. 5. The Politics of Social Policies In several longitudinal studies of the history of social policy in different countries the political actors who shaped the modern system of state social security have been brought to light. In view of some prevailing myths such jas the tale of the welfare state as an hard-won achievement of the •labour movement and/or ruse which the ruling class resorted to, these studies have shown the crucial role of state actors proper - politicians, [political parties but in the first place government officials and bureaucrats [{cf. f.i. Rimlinger 1971, Heclo 1974, Hatzfeld 1971, Gilbert 1966, Thane Opposition against social insurance came from the large entrepreneurs, the petty bourgeosie and the working class or their respective political representatives alike. The bulk of the petty bourgeoisie farmers, [shopkeepers, small entrepreneurs and their political representatives [were uncompromisingly opposed to any form of compulsory social [insurance for workers and in favour of savings banks and voluntary a s sociations (such as the famous mutuality or friendly societies) (cf. Hatzifeld 1971, Ferrera 1984, Ewald 1986). Large entrepreneurs, industrial, commercial and financial capitalists alike, and their political representatives were as divided as the working class and their political representatives. Insurance companies, savings banks and friendly societies were opposed |>ecause they were simply afraid of losing a lot of clients. Large entrepreneurs were opposed because of the expected costs and the danger of faring control over their workers' life with some state agency. Trade anions were opposed because of the costs - the expected burden of (Contributions on wages and the danger of state bureaucratic agencies Occupying control over workers' funds, weakening the unions both financially and politically. The outcome of this struggle, the shape and scope of file first social insurances to come in Western Europe, can be explained in terms of the political coalitions which the originally opposing groups u

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entered into. All coalition formations involved state officials and they all revolved around the interlinked issues of cost and control: Hence, social insurance is to be explained in terms of positive and negative tax- and control - coalitions (see for a first attempt in this direction: de Swaan 1989). Pension insurance for instance was the outcome of a new coalition built up after the original plans for a non - contributory state pension ,s financed by a capital levy and/or income tax had been defeated (cf. Gilbert 1966, Ritter 1983). The splitting of both contributions and control between employers and employees as in the case of German health insurance provides a striking example of a compromise formula which helped state officials to gain support and even lasting commitments to a form of state social security from its most prominent opponents (cf. Baron 1979). The tax state is the prerequisite to the social insurance state, both logically and historically. But the shape and scope of the tax state is thoroughly altered by social insurance. Hence, the tax coalitions that were involved in the coming of social insurance (and allied services) are and can not be the same as the tax coalitions that are formed on the very , base of a social insurance state. As they are forced into social insurance,^ workers can be and in fact are for the first time fully integrated into the* modern tax state, too. They become ordinary citizens paying income tax just as everybody. They begin even to pay property levies (for instance as., house - owners). Thanks to social insurance, the progressive income tax{ can change from a tax for the rich or well - to - do to a tax for the average worker (see for details: Kratke 1984). In mass democracies, the financial latitude of the welfare state depends on tax coalitions among voters. Positive and negative, high- and low-tax coalitions, coalitions for or against some kinds of welfare state expenditure or other. A crisis in political terms does occur, when a majority of people, is changing sides, going over from a high-tax to a low-tax coalition or vice versa. Who is likely to leave or join which tax coalition, that is the ; question. Any analysis of welfare state clients (mostly voters) in terms of] class and other cleavages is only useful, as far as it enables us to assess the likeliness with which groups of welfare state clients are going to form, coalitions with or against others. > Coalition formation is of course strongly affected by politics. And thef formation of coalitions with or against (some parts of the) welfare state; clients is strongly affected by the politics of social policies. Let us just" sum up some of its major characteristics which are valid for all advanced welfare states: a. A large and increasing proportion of voters has an interest in stable social benefits some as actual recipients, others as future beneficiaries.

b. A large proportion of voters, excluding only the actual beneficiaries, has an interest in low costs of social benefits. c. A large and increasing proportion of state officials and bureaucrats has an interest in stable social security schemes, as "social" bureaucracies have become the single largest bureaucratic force in all advanced welfare states, surpassing all traditional state bureaucracies. d. Politicians have an interest in flexible social security schemes, as by manipulating transfer incomes and transfer costs they are able to improve the economic well-being of large groups of voters and to do so at the right time - compared to other policies.Within a framework of highly differentiated transfer income schemes they are even able to influence the economic well-being of selected interest groups, like veterans or the retired. e. Depending on how the social security system is constructed, additional political actors enter the scene or existing political actors like trade unions and business associations get a say in (some parts of the) social and economic policy. Social security funds (public, semi-public, company) are nearly as important for savings and investment policy as they are for transfer policy. Pension funds have the power to invest and transfer large parts of the national capital. Sick funds have the power to regulate both supply and demand of health care on a national scale. As far as social insurances are set up as corporatist and self-governing bodies, both trade unions and business associations have the power to pursue transfer and tax policies of their own. f. Social security has a rather strong political base compared to other parts of the welfare state. But not all schemes are supported equally. Pension schemes, especially of a company or worker's insurance type, are broadly supported by the better off, stably employed workers and the broad "middle class". Unemployment schemes notoriously meet with much less approval. Welfare and social assistance can only win broad support as long as they are and stay restricted to specific, residual categories of poor people who can not easily be blamed for being poor. Even then, special subsidy schemes - say for instance rent subsidies for low-income single parents are much preferred to general grant schemes. g. It is not true that welfare state clients are politically inactive. Many of them, especially the younger, better educated and the women, are participating in a large variety of self-help organizations; many of them are active members of the so-called "new social movements" (cf. for Holland: Kobben/Godschalk 1985). There is a multitude of welfare state clients' associations, too. But, as a rule, these are associations of and for special interest groups with specific needs and demands - such as the handicapped, the veterans, single - parents and so on. Welfare state clients have not been able to organize as such. They were and still are a "latent

group" which has "no tendency voluntarily to act to further their common interests" as Olson (1971:165) has called it. As far as social security is' organized in the form of workers' insurance, trade unions are the "natural, representatives" of welfare state clients living on such schemes. But this isi only a part of the welfare state clients and trade unions do not only gain} (members and influence) by that. The specific problem of politicals mobilization, as it exists for all working class movements, increases, too.> They have even more difficulties to meet in finding and defining "commons interests" and they will be even more handicapped in their strategic b e haviour as they will have to consider the interests of contributors - and? that means the interests of employers as contributors, too and bene-u ficiaries in addition (cf. for the general problem: Offe/Wiesenthal 1981).; As they are bound to deal with the conflicting interests of contributors » and beneficiaries within their own ranks, the groups of pure recipients,who have no potential for industrial conflict whatsoever, not even as allies,; are very likely to lose. Of course, there are political parties. Althoughthey have never become as "catch-all" and all-embracing as Kirchheimer; (1966) did expect at least in the advanced welfare states they could nowhere afford not to compete for competence in social policy and sup-* port by large groups of welfare state clients. In West - Germany, for, instance, the Social - Democratic Party and the Christian - Democratic; Party used to quarrel about their respective competence in social and/on financial and economic policies. u Ascribed competence in these fields still plays a major role in party, competition. But social policy has lost much of its discri - minating value because of two interlinked developments: As social policy arrangements expanded, the boundaries between policy areas became blurred. Social policy dimensions, social policy effects have been discovered on many an area, and the effects of other policies on social policy have not slipped the public attention either. As the advanced welfare states ran into trouble, in the seventies, people became aware of social policy as a problem for the state and the society and no longer regarded it as the one and only, response to all social problems. To deal with social policy now meant to 1 deal with its fiscal, its macroeconomic and even its unintended social; effects. Regulating the welfare state became a problem of financial and. (macro)economic policy (cf. for the FRG: Michalsky 1985). When parties} can no longer successfully distinguish themselves by claiming competence^ in social policy and when real welfare state clients are a (low - status) \ minority in the electorate, the only way to deal with social policy in; democratic politics is to look for the support of the largest possible tax-,! control coalition in the electorate. And that is what the "crisis of the" welfare state" is all about (in terms of politics): the struggle about the formation of a majority coalition of welfare state citizens.

If such a majority coalition is possible and that is not self-evident regarding the many cleavages within the welfare state what would it look like? Let us review some combinations. A. The anti-welfare state / low-tax coalition. B. The pro-welfare state / high-tax coalition. C The anti-poor / low-tax coalition. The choices are quite clear in this simple presentation: reduce welfare state transfers and services in order to reduce the tax burden for all members of the working population versus keep welfare state transfers and services up even at the cost of increasing the tax burden for everyone versus reducing welfare state transfers and services for a special group of beneficiaries who have never been and/or are no longer contributors in order to keep up the transfers and services for everybody else and to reduce the tax burden for the working population. It is realistic to assume that average wage and salaried workers will play a decisive role in all cases. No majority coalition is possible when their interests in social s e curity are neglected. If we play the game of conventional modelling for a while, we can easily assess the net gains and net losses workers will enjoy or suffer in the different cases. Let us assume that the structure of t a x ation which is typical for all advanced welfare states (cf. Kratke 1986a, 1986b, 1988a) remains unchanged by and large; total tax burdens are increased or reduced without major shiftings. Then the average worker would have to expect considerable losses in terms of future benefits cut down or missed and only small gains in terms of present disposable income if coalition A was to win. Hence, only a minority of highly paid and heavily taxed employees would be inclined to join such a coalition. On the other hand, if workers were to join a coalition B, the better paid would suffer some losses in terms of higher taxes and lower disposable incomes. But all of them would have to bear the high political and e c o nomic costs ensuing from employers' efforts to avoid and/or repel higher taxes and especially higher labour costs. So, if there would be a majority of workers ready to join such a coalition, it would have to be a majority of workers ready to make sacrifices now in exchange with stable benefits in the future. Which is to say, that it would be a rather small majority, if any. Joining a coalition C, however, would be advantageous for a much larger majority of workers. As those, who would have to suffer the losses in terms of benefits cut or refused, would not be able to strike back, a vast majority of workers could enjoy net gains in terms of higher disposable incomes now and undiminished social benefits in the future. So, if workers were to enter a low-tax coalition at all, they or at least a

majority of workers would prefer a coalition at the expense not of all, but of a low-status minority of welfare state clients. Of course, this is speculation on simple utilitaristic assumptions. But, if we introduce some strategic variables, such as working class norms and/or habits of "solidarity" or different forms of tax reform schemes, what difference would that make? Solidarity does at least require some communal spirit, some kind of a feeling of collective identity. One is not likely to feel obliged to solidarity towards total strangers. Solidarity depends on some kind of collective action test - like one for all and all for one. One is not likely to feel obliged to solidarity to others who do not join in collective action for common ends. The welfare state has had its impact on solidarity as on other parts of the "moral economy of the working class". On the one hand, it has suppressed the element of action. Everybody is forced into solidarity by the state and the only thing one is expected to do is to contribute one's mite - that is to say let oneself be taxed. What is more, it is becoming quite difficult for average workers to support welfare state clients, since it's true these people are in urgent need of some allies who would be able to give the battles they cannot give, but are rather unlikely to come into political action on their own behalf. Without a chance for active solidarity with them and without any political action from welfare state clients themselves, they will not stir solidarity actions. On the other hand, the welfare state did a lot to destroy any idea of common interests and any sense of community between members of the working class and welfare state clients. The great majority of workers do not see welfare state clients as people of their own kind nor their own dependents. They accept dependency on transfer incomes from some welfare state agency only as a temporary solution, for some periods of their lifes, but never as a permanent alternative to earning a living by one's own labour. Being retired is a different and respectable matter, but in all other cases long - term dependency on welfare or any other transfer income which has not been "earned" by former contributions is at odds with dominant working class morals. The social distance between ordinary, but respectable workers and the "poor", the people permanently living on welfare, is maintained and even accentuated by the very working of today's social security systems. Such a scenario where the majority of the working class does enter a coalition with the rest of the economically strong people against the permanently i inactives and unemployed is much more likely to occur than the opposite, ; one. If we regard the second strategic variable, tax reform, the picture is ' not much altered after all. Tax reform in this context means nothing else * but an operation to shift the burden of taxation between (income) classes. < According to the tax reform plan adopted, there may be various low-tax

coalitions, smaller and larger ones. Just let the poor pay more, and the rest of us pay less it looks as simple as that at first glance to rally the largest possible low-tax coalition. But it is not and that is due to some structural features of modern tax states. There is no poor tax any more; there are social security taxes which the poor do not pay. There is no special set of taxes affecting the poor and only or in the first place the poor; as far as the poor are taxpayers they pay the taxes which everybody else does pay, too - that is excises and turnover taxes (taxes on value added) (cf. Kratke 1984 for details). So, if we try to let the poor pay more, we will all pay more - unless we do not alter the distribution of the burden of those taxes which the poor in general do not pay (social security, income and property taxes). But any step in this second direction is bound to scatter the low-tax coalition. In a nutshell, that is why the Reaganian (and many other) neoconservative tax reforms of the eighties were no real success and why coalitions of the type C did so often prevail.

References Aglietta, M./Brender, A. (1984): Les metamorphoses de la soci6t6 salariale, Paris Alber, J. (1984): Versorgungsklassen im Wohlfahrtsstaat, in: Kolner Zeitschrift fiir Soziologie und Sozialpolitik, 36, pp. 225 - 251 Auletta, K. (1982): The underclass, New York Bader, V.M/Benschop, A. (1988): Ongelijkheden, Groningen Baron, R. (1979): Weder Zuckerbrot noch Peitsche. Historische Konstitutionsbedingungen des Sozialstaats in Deutschland, in: Gesellschaft. Beitrage zur Marxschen Theorie, 12, pp. 13 55 Barr, N. (1987): The Economics of the Welfare State, London Bliim, N. (1983): Die Arbeit geht weiter, Miinchen Bowles, S./Gintis, H. (1986): Democracy and Capitalism, New York de Swaan, A. (1988): In Care of the State, Oxford Ewald, F. (1986): L'Etat providence, Paris Feldstein, M. (1975): Toward a Reform of Social Security, in: Public Interest, 40, pp. 75 > 95 Ferrera, M. (1984): II welfare state in Italia. Sviluppo e crisi in prospettiva comparata, Bologna Flora, P. (1986ff): Growth to Limits. The Western European Welfare States Since World War II, 6 vols., Berlin New York

Fraser, D. (1982): Das Armengesetz und die Urspriinge des britischen Wohlfahrtsstaates, in: Mommsen, W./Mock, W. (eds.): Die Entstehung des Wohlfahrtsstaates in Gropbritannien und Deutschland, Stuttgart. Geipier, H. (1976): Die Neue Soziale Frage, Freiburg Gilbert, B.B. (1966): The Evolution of National Insurance in Great Britain: The Origins of the Welfare State, London Goodin, R.E./LeGrand, J. (1987): (eds.): Not Only the Poor. The Middle Classes and the Welfare State, London Gosden, P.H. (1973): Self-Help. Voluntary Associations in the 19th Century, London Hatzfeld, H. (1971): Du paup6risme k la s6curit6 sociale. Essai sur les origines de la sdcuritd sociale en France 1850 1940, Paris Heclo, H. (1974): Modern Social Politics in Britain and Sweden, New Haven Hirschman, A. (1970): Exit, Voice, Loyalty, Cambridge Mass. Kirchheimer, O. (1966): Der Wandel des westeuropaischen Parteiensystems, in: Politische Vierteljahresschrift, 6. Jg. Kobben, AJ.F./Godschalk, J.J. (1985): Een tweedeling van de samenleving?, 's - Gravenhage Kratke, M. (1984): Kritik der Staatsfinanzen. Zur Politischen Okonomie des Steuerstaats, Hamburg Kratke, M. (1985): Klassen im Sozialstaat, in: PROKLA, 58, pp. 89 109 Kratke, M. (1986a): Die Steuera der Armen. Uberlegungen zu einer Steuer- und Sozialversicherungsreform, in: Projektgruppe Griiner Morgentau (ed.): Perspektiven okologi-' scher Wirtschaftspolitik, Frankfurt New York, pp. 351 381 Kratke, M. (1986b): Sozialistische Steuerpolitik gestern und morgen, in: PROKLA, Nr. 65, pp. 34 70 Kratke, M. (1988a): On the Transformation of the Wage Labour Relationship by Social. Insurance (and Allied Services): unpubl. paper. Universidad Autonoma de Barcelona Kratke, M. (1988b): Over morele economie en de economie van de moraal, in: S. Koenis/ L. Nauta (eds.): Een toekomst voor het socialisme?, Rotterdam Amsterdam, pp. 208 - 229 Kratke, M. (forthcoming): Staat und Geld. Zur politischen Okonomie des offentlichen Kredits, Hamburg Leibfried, S./Tennstedt, F. (1985): Die Spaltung des Sozialstaats und die Politik der Armut, in: idem (eds.): Politik der Armut und die Spaltung des Sozialstaats, Frankfurt a.M, pp. 13 37 rl Lepsius, M.R. (1979): Soziale Ungleichheit und Klassenstrukturen in der Bundesrepublik, im H.U. Wehler (ed.): Klassen in der europaischen Sozialgeschichte, Gottingen, pp. 166 .3 209 Lessmann, S. (1985): Electoral Politics as Determinants of Policy Outputs: An Empirical; Investigation of the West - German Case, Ph.D. European University Institute ] Florence \ Marshall, T.H. (1950): Citizenship and Social Class, Cambridge j Michalsky, H. (1985): The Politics of Social Policy, in: K.v.Beyme/M.G. Schmidt (eds.):j Policy and Politics in the Federal Republic of Germany, Aldershot, pp. 56 81 * $

Offe, C. (1985): Disorganized Capitalism, Cambridge Offe, C./Wiesenthal, H. (1980): Two Logics of Collective Action. Theoretical Notes on Social Class and Organizational Form, in: Political Power and Social Theory, 1, pp. 67-115 Olson, M. (1971): The Logic of Collective Action, Cambridge Mass. Piven, F.F./Cloward, R.A. (1979): Poor People's Movements. Why They Succeed, How They Fail, New York Piven, F.F./Cloward, R.A. (1981): The New Class War. Reagan's Attack on the Welfare State and Its Consequences, New York Poulantzas, N. (1978a): Political Power and Social Classes, London Poulantzas, N. (1978b): Classes in Contemporary Capitalism, London Przeworski, A. (1985): Capitalism and Social Democracy, Cambridge Rimlinger, G.V. (1971): Welfare Policy and Industrialization in Europe, America and Russia, New York Ritter, G.A. (1983): Sozialversicherung in Deutschland und England. Entstehung und Grundziige im Vergleich, Miinchen Sen, A. (1981): Poverty and Famines, Oxford Thane, P. (1982): Foundations of the Welfare State, London New York Therbora, G./Roebroek, J. (1986): The Irreversible Welfare State, in: Albeda, W. (ed.): The Future of the Welfare State, Maastricht, van Winden, F. (1985): On the Interaction Between State and Private Sector, Deventer Wilensky, H.M. (1975): The Welfare State and Equality, Berkeley Wright, E.O. (1978): Class, Crisis and the State, London Wright, E.O. (1979): Class Structure and Income Determination, New York London Wright, E.O. (1985): Classes, London

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I IP Mtor's note: For reasons of space-saving some footnotes which are not necessary for understanding have been omitted in this contribution.

Klaus Fritz • Michael Wolf Towards an Institutionalization of Mass Unemployment?* Some Remarks on the Logic of Collective Action in the Current Welfare State

"(Es) stellt sich die Frage, wieviel an Different welche Unterschiede und welches Map an Ungleichheit die Politik als unabanderlich, als gpttgewollt oder naturgegeben hinzunehnten bereit ist." (FAZ, 31.10.1988)

We wish to present some thoughts concerning relations of power and possible solidarity within the current welfare state. Our paper ist not so much a comment on Kratke's, but rather a sort of continuation of Kratke's main problem of cleavage within the welfare state. We c o n centrate on the problem of unemployment and the question of solidarity with the unemployed. Let us start with the main point set out by Przeworski (1985) in "Capitalism and Social Democracy". There is a material basis for workers to accept capitalism: Workers see their interests bound up with the profit - interests of capitalists. We'll call this premise (1) for the following. At first hand this is true as long as capitalism is a positive sum game from the perspective of the actors. But is this also true when capitalism is a negative sum game ("crisis") and at least one part of the actors involved are losing? In this case the question of an alternative to capitalism as a mode of production of material wealth arises at least for the unemployed and marginalized and for those who see their chances diminished within this game. This alternative would be some form of socialism. Now, our century has shown and the latest developments in the socialist countries currently show that an alternative to capitalism in terms of more material wealth (consumption) for the majority of the labor force is not at hand in the near future. Let's call this statement premise (2). This does not mean that socialism is not preferable for other than i m mediate material interests or even necessary for long-term survival and that actors do not have knowledge of this sort. It only means that short*

Comment on Michael Kratke: Does Social Security Create a New Class?

term material motives are dominant. This is an empirical statement for. the sake of analysis of present-day relations of force no appeal for "non - material" motives. V The relative success of capitalism compared to socialism for the majority of the labor force of the advanced capitalist countries is, we; think, not only the key to "class compromise" or, as Przeworski calls it, consent into exploitation. It is also a key for fundamental issues in the: current debate on the welfare state. The main question Przeworski and others try to answer is: Why should workers opt for socialism on rational grounds? With the main premise stated above, the material basis of consent as the background, we'd like to transform this question into the following one: Why should there be solidarity between those who are still integrated into capitalist production and those who are almost or entirely out? Or, centered around the key problem: Why should the employed be solidaric on rational grounds with those unemployed? This question concerns the 'New Age' of mass unemployment in most, but not all advanced capitalist countries since the mid - seventies. , The term "solidarity on rational grounds" leads to a first problem: Solidarity here is understood as a way of rational action in the material interest of one self and of others which includes the possibility of neg-f lecting short-term interests in favour of longer-term interests. Within this frame of reference we don't have to qualify action on moral grounds, of "justice" as irrational. In fact they can be named for lack of better' terms symbolically rational, if for the sake of materialism we maintain that moral action is oriented to some kind of symbolic pay-off. Presuming that the solidaric actions sociologists are concerned with fall under these two analytically distinct categories, and that real acts of solidarity within the capitalist labor force will mostly represent a mixture of these two rationalities but with the material motive dominating, we only discuss material rationality. Back to the question of solidarity between those "in" and those "out". Let us start with the classic socialist answer: Because unemployment is a normal symptom of an economic crisis of the capitalist system and solidarity with the unemployed is one step on the way towards socialism for which we have to combine our forces. This was the exit-option for both the employed and the unemployed. Now, with premises (1) and (2) material basis of consent and lack of alternative - this answer is hard to maintain on purely material reasons and we maintain that not only the majority of the labor force, but even that of the unemployed and marginalized are taking these premises for granted. So, a realistic answer has to deal with the demand that the majority of the unemployed have to be reincluded into capitalist production or into

public services of the capitalist state. One answer compatible with these premises could be the one we can call the socialdemocratic promise: Mass unemployment is a symptom of capitalism, but only of mismanaged capitalism. We cannot abolish capitalism, but we can control it so as to cope with this problem (and others). A socialdemocratic government could take short - term measures which are expensive, but in the long run the reinclusion of the unemployed will not or only positively - affect overall efficiency of wealth production. We think the problem of solidarity "problem" only for those concerned with unemployment - lies within this demand to connect efficiency with full employment. Unemployment today seems no longer to be bound up with a notion of inefficiency or irrationality of capitalism but in contrary with its efficiency. Let's take the West German case. There is mass unemployment, to be sure, but there is no real questioning of capitalism in the public or within the opposition parties or the trade unions for reasons of efficiency of wealth production. Mass unemployment has not become a central topic of discussion and social conflict. For many reasons. First of all, the unemployed cannot organize because they have no power with the exception of immediate and illegal violence. They can vote but voting results until today show that this voting has no decisive consequences at least for a conservative government dedicated to permanent non-decision concerning the problem of unemployment. On the other hand there is the capitalist welfare state who is at least guaranteeing survival on a minimum level. There is another reason, why the foundations of capitalist rationality aren't touched, insofar as unemployment is discussed in the public and why, on the contrary, this rationality is being connected with efficiency. The recent 'Lafontaine - Debate' was a striking example for this social democratic dilemma. The capitalist economy in West-Germany is growing considerably even given unemployment. At the same time no one really believes anymore that unemployment will be substantially reduced by economic growth alone. So, as the Lafontaine - Debate has shown, there is an underlying consensus, that the profitability Verwertungsbedingungen of capital must not be impaired by any measures reducing unemployment. Maintaining efficiency of wealth production seems to be naturally linked with maintaining profits of capitalists. If this is true, or rather if capitalists are in the position to make this true, there is one answer left: To consider unemployment as a problem of distribution within the working class, (cf. Scharpf 1987) The arguments for this sort of solution are mainly centered around the semantics of "sacrifice". There is no argument circulating in the public that would maintain

that reducing unemployment here and now would increase material wealth for every individual. And it is true that decisive steps to reduce already existing mass unemployment would presuppose other than immediate material interests. But at least sociologists should keep in mind that, as comparative studies show, the extent of unemployment is not only determined by economic circumstances, (cf. Schmidt 1982; Therborn 1985) While the capitalist mode of production produces the tendency towards "surplus labor", this surplus labor does not necessarily acquire the form of mass unemployment, (cf. Przeworski 1985, p. 88) There is a wide range for regulating employment even under conditions of economic crisis. The extent of unemployment is in fact an outcome of actual and institution-.1 alized relations of force. t Reconsidering the dominant motive of immediate material rationality and the lack of institutionalized political pressure towards an active labor market policy, mass unemployment in West-Germany will probably not be substantially reduced within the next years. The considerable struggle of unions towards reduction of labor-time will not be sufficient alone. On the contrary, there is a trend within West-German society towards a latent institutionalization of mass unemployment. } There are some indicators for this institutionalization. t Political actors (governing parties) are not only getting used to mass unemployment but are using it as a means to enforce other endv mainly "flexibilization" of production. * There are steps towards statistical "differentiation" of unemployment numbers, justified with processes of dequalification and demotivation that have to be considered as a "result" of political non - decisions. Mass unemployment as a feature of the social system has turned into a normal problem in the social expectations of the population. As an experiment of thought one should consider what would happen if there was a rate of inflation of 8 per cent. All these processes will probably never lead to an explicit recognition of mass unemployment as a permanent feature of society. But under the given relations of interest it seems to remain a so-called "problem". * References

4 $ $

Przeworski, Adam (1985): Capitalism and Social Democracy, Cambridge: University Press 9 Scharpf, Fritz W. (1987): Sozialdemokratische Krisenpolitik in Europa, Frankfurt/New York* Schmidt, Manfred G. (1982): Wohlfahrtsstaatliche Politik unter biirgerlichen und sozial-} demokratischen Regierungen. Ein international Vergleich, Frankfurt/New York D Therborn, Goran (1985): Arbeitslosigkeit. Strategien und Politikansatze in den OECD?*? Landern, Hamburg

Heiner Ganpmann

Rolf Weggler

Interests in the Welfare State

1 >v'

What is society if not a stock company in which every one has more or fewer shares? (Thiers)

*

We may think of human society as a more or less self-sufficient association regelated by a common conception of justice and aimed at advancing the good of its members. (Rawls)

i. *

I

Introduction

The following attempt to explore interests in the welfare state is undertaken to gain insight into its potential for change. On the one hand, the welfare state seems to develop more or less spontaneously, along with changes in its economic and social environment. On the other hand, political decisions determine welfare state development and interests enter into these decisions. They do so in two ways, as the interests of those making the decisions and as taking into account the interests of others. In this respect, a sort of "neutral" path of development of the welfare state can be imagined, namely, the one which results if well-known and given constellations of interests are left in their given balance. Obviously, the more probable course of development is a different one in which changes favor or discriminate some groups relative to others. Whether such Changes will continue in the direction once taken will depend on the formation of new constellations of interests, of new coalitions, which can Once again bring the welfare state onto a new path of development. r

X

A. Problem - setting

*

Since about 1975, a trend characterizes the development of the welfare State in West Germany which involves the harsh discrimination of the

clients of smaller welfare - state programs, mostly the unemployed and the, recipients of welfare. Whereas those programs which involve the overwhelming majority of the (employed) population: o l d - a g e - , health- andj accident insurance, have been sufficiently financed to keep clients' incomes* despite some losses in touch with the general development of wages, the gap between unemployment and welfare benefits on the. one ; hand and wages on the other hand has grown. If current government] plans to solve the expected financial problems of the unemployment insurance system are realized and if the reallocation of tax receipts between the federal, state and local levels of government will take place i as part of the tax reform, this gap will continue to grow. For welfare: incomes, because the increase in the number of clients (mostly due tolong-term unemployment) will coincide with increased financial pressured on communities (who are responsible for welfare administration and' finance). For unemployment compensations, because the federal govern-? ment has already announced that it will not fully cover the expected sub-J stantial deficit of the unemployment agency. While the German welfare state has never been as poverty - centered^ as, say, the US welfare state, one of its main functions has nonetheless] been seen in (and officially declared to be) the prevention of massj poverty. Currently, however, it seems as if the welfare state itself acts toj increase the cleavage between the poorest members of society and the? rest. It is not too difficult to give a plausible explanation of the political! process leading to such a result: problems and burdens are shifted unti^ they rest with the weakest, on the one hand, and divide et impera- strat^ egies lead to marginalization, on the other hand. It is more difficult to^ assess this situation in terms of likely and potential changes. ^ II. Interests For the purposes of such an assessment, we rely on the concept o£ interests. Presupposing rational actors with a sufficiently long time horizory (say, a life-time perspective), we use the term "interests" to attribute tol agents rather obvious preferences: For example, that having more money^j is better than having less; that more security is better than less; that morejj possibilities for making one's own choices are better than less, et&| Interests are interesting because they involve conflicts, as is well described] in the following statement: |

I

"As a cooperative venture for mutual advantage, (society) is characterized by al conflict as well as an identity of interests. There is an identity of interests since; social cooperation makes possible a better life for all than any would have if

•> ' SlT

\V

everyone were not indifferent distributed, for share." (Rawls,

to try to live by his own efforts; yet at the same time persons are as to how the greater benefits produced by their joint labours are in order to further their own aims each prefers a larger to a lesser 1973, p.319)

rTo consider interests in the welfare state, we start on an abstract level in order to discern those interests which are independent of existing particular welfare state structures. This implies that we neglect the complexities involved in the fact that interests are not independent of structures and Jheir observation. What we do presuppose, however, are a capitalist economy (i.e. private enterprises, employed labor, decentralized decision making) and a democratic state. One can identify two quite different principles and aims behind existing welfare state regulations (and welfare State semantics) as they have developed historically. For purposes of clarification, we present them separately as pure principles. I As one polar case, we have the contribution - oriented insurance-principle and as the other, the need-oriented redistribution-principle. Both have different names in the literature, for example, the equivalenceprinciple is contrasted with the principle of social equalization (Eisen, R. |1988, p. 117); or with the solidarity - principle ("according to which c o n tributions are not calculated following actuarial rules, but according to economic ability of members" (Schulenburg, 1988)). It is not clear whether both principles refer to a common problem. Possible candidates for such a ijommon reference problem would be: Safeguarding against the risks of income loss; securing a social minimum standard of living; reducing differences in living conditions. We will return to this issue below. First, let's consider both principles separately in more detail. r

L Contribution - oriented insurance t !What kind of problem is solved with the help of an insurance? It serves to provide now for protection against damaging events which may happen jn the future. Damaging events will not happen necessarily and not Necessarily to everybody. Insurance solves this problem, because, given a sufficient number of individuals (and a sufficient time - span), the occurence of the damaging event will be calculable. It will happen with an expectable frequency. Insurance is a bit like a lottery. In a lottery, everybody throws something into a common pool - and the winner takes all. The motive for participating is that all have the same chance to win. In insurance against risks, the analogy is that all have the same chance, but of damage, and instead of winning, the insurance will compensate the loss due to damage. As in the lottery, higher chances have to be paid, by

buying more tickets in the lottery or by paying increased premiums in insurance. Thus, the basic rule in insurance is: equal chances for all. -$ Equality of chances helps explain another characteristic feature ot insurance schemes: Voluntary participation. To induce people to partid-l pate, it is sufficient to rely on their self-interestedness. When is it in one's own interest to participate? Whenever the damaging event is botl|; grave and rare, because then it is possible to protect oneself against, £ rather improbable, but large loss by accepting a relatively small, certaiiy loss. An additional motive might consist in the possibility to cheat thee insurance (moral hazard, where the damage occurs because one is insured against it). jjg What are the redistributional effects of insurance? Ex ante, np^ premiums paid and the expected value of damage compensation should .te equal for each single risk (Eisen, R. 1988, p. 122), so in this sense there, no redistribution. Ex post, any insurance results in redistribution in favod of those individuals who experienced the damages against which all werS insured, but redistribution is restricted to compensation for the damaged So insurance preserves a given distribution by restoring it after a disturbjJ ance on the individual level. That the redistributional effects necessarily operate on an individiuj level means that their incidence cannot be described by referring to groin membership characteristics (women - men, young - old, rich - poojcJ If that were the case (and if it could be observed), those who experience^ losses would cease membership in the insurance. To put it in anothei way: any relevant difference between groups will constitute a separate {isl class. By varying contributions according to these risks, differences can.ljj compensated such that all participate in the same "game". The most uuj portant consequence of premium variation according to risk differentials that all differences between groups are preserved, for example all differences in wealth. Changes take place at the individual level only. Since pure insurance schemes preserve the relevant social difference^ between groups, they are ethically indifferent, in the sense of not beiMJ suitable tools for any normatively inspired social reform programs.. VA| moral issue exists, at best, concerning participation (for example, if — lfl case of damage - others have to be compensated to an extent whij those not insured are not able to pay). Finally, looking at things from the viewpoint of the insurer, only which are statistically measurable can be insured (Eisen, R., 1988), othetj wise insurance turns into an uncalculable risk for the insurer.

Z Need - oriented redistribution Jlirning now to the alternative principle of need - oriented redistribution, the first difficulty encountered when contrasting it to insurance is to determine a common reference problem for both principles. The following possibilities come to mind: There are some life - problems which indi — jriduals cannot solve on their own, or only in a suboptimal way. Protecting oneself against damaging negative events which probably will occur in the future is one of these problems (to which insurance will be at least a partial solution, as we have seen above). But there are also current or future problems which already exist or will occur with some certainty. To ^answer to these problems, need - oriented redistribution may be appropri Ite, meaning that it has a wider scope of applicability than insurance, jfcr Need -oriented redistribution operates roughly in the following manner. If such and such is the case, person so and so will get such and such [or that much from other persons. One issue is: Who are those other persons? They will have to pay for the benefits to be distributed to those p need. Normally, benefits and burdens will not be related by any prin aple of equivalence. Rather (and this would be the rule most radically mfferent from insurance), benefits will be distributed according to needs, mile burdens will be imposed according to ability to pay. p This raises the issue of participation. It is clear why those who can ppect to benefit from a redistribution scheme will participate. But why would anybody else participate? There seems to be only one type of iteration in which participation will be rational: If there is extreme u n certainty with regard to everybody's future, that is, if it is impossible to predict the future distribution of income and wealth from the present ^distribution. Then it will be rational for all to participate in a redistribution scheme favouring the poor at the expense of the non-poor, because fte current non-poor have no way of knowing whether they will be poor »r not (Goodin/Dryzek, 1987, p. 45). (Thus, one can recognize an psurance motive even in a need - oriented redistribution scheme, insurance iken in the loose sense of buying security now for a contingent future.) it The question is whether there are such "moments of deep and wi fcspread uncertainty" (ibid, p.66) which lead to the postulated institutional esponses. Rawls has used the fiction of such an extreme situation, in his irms the "original position", to introduce the possibility of everybody bstracting from their own interests, solely judging according to universal ffinciples. But how can one realistically assume the "veil of ignorance" to dde one's own interests? And if agents know (part of) their interests, why Should they act as if they didn't know them? It is not clear (even in Aose fleeting moments of extreme uncertainty) why the non-poor should ftoluntarily accept redistribution in favor of the poor. It seems equally f

f

f

325

possible that such extreme uncertainty leads to changes in time preferences: If the future is completely uncalculable, it may be prefered to indulge in currently available pleasures and leave all worries about the I future behind ("the dance on the vulcano" - motive). 'tf However that may be, there remains, if the non-poor do not par-b ticipate voluntarily in paying redistributive transfers, the possibility that aj majority can force a minority to accept rules of redistribution on which* the majority has agreed. This would be one way to explain why mem bership in any redistribution schemes which are not organized strictly* according to the insurance principle is compulsory.1 But it is not clear; how such a majority coalition comes about (a point to which we will re turn below). The problem is whether or not the rich can always form protective, blocking coalition against the aspirations of the poor, for: example by offering some upward mobility to the requisite share of the poor. 3. Which principle for which aspect of social security? •jj

Having stated the two abstract, opposing principles of organizing social^ security, the question is how they are applied. Apparently, there can be*2 different responses to different risks, discriminations or social divisions in J terms of mixing the two principles in different degrees. The example o£$j old - age - pension schemes can demonstrate that it is possible to simul-Ji taneously pursue different goals by applying the two different principles! while responding to one and the same "risk" (Kohl, J. 1987):

1

Another explanation is given by Goodin and Dryzek (1987, p.45, p.69): "under condi-^d tions of profound uncertainty, actuaries will be unable to assess risks with any con-fj fidence, and hence prudent private brokers will refuse to supply insurance. The stat6j| alone is capable of filling this gap." But the state will have to protect itself agains^i "adverse selection" (the good risks opting out of the insurance pool, leaving onlj^ high-risk individuals), which it can do by making membership compulsory for alLj Both explanations are weak when it comes to taking into account a characteristkyj feature of, at least, the West German social security system: Membership in m a y programs is compulsory only for low and middle income earners. The majority v u j minority argument seems implausible: Why would the majority leave out the minori^ of the rich? The adverse selection argument would imply that the really good risk).^ never entered the insurance pool.

Goals:

Means:

prevention or abolition of poverty

basic state pensions assuring minimum of subsistence and p r o tecting against poverty

maintenance of standard of living f

occupational pensions providing earningsrelated supplements for those in gainful employment

additional (income) security

private voluntary insurance

Further goals are conceivable, for example, the goal of maintaining a Stable division of income between those working and those retired. Is there a rule saying which principle to apply inherent in the type of goal? A possible candidate would involve the distinction between public and private goods (cf. Krupp 1988, Spahn/Kaiser 1988): If a public good is provided, it should be paid for according to the redistribution - principle. Jf'a private good is provided, it should be financed via private insurance. ^ But to what extent does the distinction between public and private goods apply to components or aspects of the social security system? O b (yiously, if some have public good properties, they should be financed out Of general taxation. In mixed cases, one can conceive of mixed forms of financing. So different modes of financing should correspond to the difference between public/private goods. The following ordering has been suggested by Schmahl (1988, p. 477): type of good

mode of financing

function of financing mode

' blic

taxation

distribution of burden according to ability — to - pay

lerit

forced contributions

price (if equivalence is maintained)

ivate

voluntary contributions

price

Analytical problems start as soon as we leave the extreme polar cases ofr the public/private distinction and turn to mixed cases (For example, hoVT can a forced contribution have the same function as a price if there is noj market mechanism to guarantee the proper adjustments?) And it is also] clear that it is difficult to allocate given, empirical social security! arrangements in the range between the polar cases. According to Schm&hU a tax-transfer system should be financed according to ability- to -payj and it should be need - oriented, whereas an insurance system shoujS maintain equivalence of contributions and benefits. Since equivalence best guaranteed by voluntary participation, i.e. by leaving to members (tfj the insurance scheme the exit option and to the insurer the refusal option,! it follows that individual insurance should be privately organized. While sol much is clear, it does not follow that the public/private goods distinction] captures the relevant properties of publicly provided social security. Jiy what sense would redistribution according to needs involve provision of a] public good? If it doesn't, one cannot use the familiar market - failure^ argument of welfare economics to justify welfare state intervention. Doe^ this mean that redistribution according to needs must (or should) not be state organized as a matter of social efficiency? While it may meai| exactly this in the framework of welfare economics, we would draw thft conclusion that this framework may be too narrow to consider welfare^ state practices. The alternative left by welfare economics would be toj leave those problems currently handled by welfare state institutions tra private, voluntary, but non-market redistribution (within families, groups,| cooperative organizations, charity organizations, etc.). Can a modern society with an advanced capitalist economy and a democratic state really affon' that solution? % Empirically, the public/private distinction has more aspects than thj concerning the nature of the goods provided. What about the reliability o^ private insurance in terms of a life-time perspective? To what extent andy with what means is it possible to provide in the present for a contingent] future? Which institutional arrangements establish links between the^ present and the future, such as to provide for more or less "security"? Toj what extent can the degree of "security" be defined independently of sub-v jective factors, such as risk aversion, etc.? Has it become a common^ perception that the state, just as the central bank is the "lender of lastj| resort", has become the "insurer of last resort"? ^

3

[III.

Organizing principles of the current social security system in the FRG

Turning to a more empirical level, we will attempt to identify the organizing principles of the various components of the current social security jjystem in West Germany. Et Welfare [Qearly, welfare is organized according to the principle of need - oriented redistribution. The main reason for applying this principle seems to be Fthat only those not (or insufficiently) covered by the other social security institutions (which are organized more or less according to the insurance principle) will receive welfare. Welfare recipients thus form a sort of [residual social category. While this does not mean that they have not [contributed or will not contribute to the financing of welfare with their ;tax payments, presently they must be found to be poor (according to a |means test). In other words, welfare is provided uno actu with social stigmatization and the exercise of control. Depending on local regulations, jt can take the form of workfare. In the latter cases, the dominant principle of exchange takes over: work for pay, even if the pay is so low that work has the function of punishment.

rA r

Old-Age

Pensions

-The West German public pension system operates so as to maintain a specific proportionality between contributions and benefits. The result is a kind of equivalence between burdens and benefits for each member, not in terms of monetary units, but in terms of mapping positions in the income stratification system during active employment into the income Stratification system formed by pensioners. Equivalence means that the acquired income position within the relevant age cohort is preserved. The realization of equivalence, even in this modified sense, seems to point to a case of the insurance principle. '(. However, there are some modifications. First of all, it is not clear in what sense reaching retirement age would constitute a risk against which one would seek insurance. Certainly, (almost) everybody hopes to reach that age and to collect pensions as long as possible. If all this is to be understood as insurance, nonetheless, the relevant risk must be that of income loss due to the inability to continue employed work. However, this risk has been redefined and transformed into an entitlement. If a legally defined age-limit is reached, one is entitled to receive a pension r e gardless of ability to work. The only condition is that one has contributed to the scheme, which one is forced to do during active employment.

Given this institutional arrangement, a new risk has emerged: that of not reaching the age-limit and thus not being able to realize the benefits to which one is entitled. By contrast, if the pension systems were strictly organized according to the insurance principle, we would expect a differentiation of contributions according to differences in life expectancy:., For example, if a considerable share of miners rarely reaches the retirement age, their contributions should be adjusted to reflect the fact that they are less likely to claim benefits or will claim them for a shorter than average time. Instead, contributions are proportional to income. But there are further deviations from the insurance principle: In the . West German system, periods of sickness, unemployment, vocational training, etc., are counted as insurance years; the same holds for periods of child rearing or caring for family members without remuneration; p e r - * haps most importantly, survivor's protection is granted without additional' contributions. Last not least, there is the deviation with respect to the mode of r financing. Whereas a private pension scheme would have to secure its ^ ability to meet claims by building up a trust fund, the public pension ^ scheme operates in a p a y - a s - y o u - g o manner: Contributions are trans-..' fered as pensions to the retired. The system's continuous ability to pay is), secured by the state's power to raise contributions, i.e. to adapt the* volume of contributions to the volume of claims, regardless of the ways in which these claims were acquired in the past. ^ All this raises the issue of explaining the deviations from the insurance • principle, an issue which seems to blend into the issue of explaining why; r the old - age pension system is state - and not privately organizedf, (neglecting the small share of private pension schemes for the moment).^ In other words, if the insurance principle can be realized by private e n - ^ terprises with voluntary participation/membership, any deviation from the^ insurance principle could be a reason for the old - age - pension system to/ be run by the state. But it is not very helpful to consider the deviations of the existingf| pension system from the insurance principle simply as so many expressions^ of "the public interest" (Kohl 1987, p 6) which opposes the private inter ests expressed in the insurance principle. Refering to the "public interest^ does not explain much. At least, it should be possible to disaggregate thej| "public interest" into its private components or to indicate why the "publicS interest" is not simply the same as the summation of all private interests.^3 2

Summation will not do, of course. As Marx put it (Grundrisse, p. 156): The geneiiaH interest is the generality of selfish interests. Krause (1984, p. 161) has suggested thar|S the only sensible form of the "general interest" in a market society is the stalemate of | 4 ^ individual interests.

As a rule, one should not appeal to interests if one can't identify the corresponding agents who are supposed to have these interests. Consider the mode of financing of the old-age pension scheme: On the one hand, a private pension scheme would be technically bankrupt if it were run on a pay-as-you-go basis (Feldstein, p. 423f.). On the other hand, it has been calculated that building a trust fund sufficiently large to pay benefits from the interest earned on the accumulated capital would require an amount of capital far exceeding the currently available total capital stock (Schafer 1986, p. 225). So given the p a y - a s - y o u - g o mode of financing, it is clear that only the state can administer a pension scheme thus financed. As Feldstein (1977, p. 424) put it, "the social s e curity program can continue to compel future generations of workers to pay social security taxes. These future tax rates can be set so that tax revenues are sufficient to meet the claims of the beneficiaries. The g o vernment's power to tax is its power to meet the obligations of social security to future beneficiaries. As long as the voters support the social security system, it will be able to pay the benefits that it promises But the fact that only the state can administer it does not explain why the state has actually created such a system. What are the interests behind the corresponding legislation? Further, recognizing that the p a y - a s - y o u - g o mode of financing is inevitable does not imply that it is necessary or desirable to deviate from the equivalence principle (as described above). These deviations, insofar as they involve the redistribution of income, can (and must) be argued for by appealing to norms other than equivalence. Insofar as political decisions on the grounds of such (egalitarian, redistributive) norms are generally accepted, why should only the members of the social security system carry the burden of paying for redistributive measures beyond insurance, why not citizens (tax-payers) in general? (Schmahl's recurring question, for example 1982, p. 285). But it is not very promising to point to all deviations from the equivalence principle and to demand their separate treatment (in terms of financing, cf. Schmahl 1988, p. 488) if one does not have a theory (beyond the assumption of opportunistic policy-making) about how these deviations came to be built into the system and what their significance is for its stability. After all, it may be that what appears as an inadequate, inconsistent mix of applying distinct principles to realize divergent goals is, as a whole, functionally adequate and, so to speak, well-tested even in its inconsistency. For example, it may be that the semantic of insurance is descriptively misleading, but nonetheless constitutive for the popular support necessary to maintain the system. It may be that the image of the State as the "insurer of last resort" is important in generating the mass loyalty needed.

We will (perhaps) return to this issue below, when we discuss possible^ trajectories of change of the welfare state. For now, it should suffice sum up: The public pension system represents a mix of the two principle but with a clear dominance of the insurance principle. • *>•!

C. Health

Insurance

Public health insurance seems to be dominantly organized according to4be need - oriented redistribution principle, although it also incorporate! insurance elements. It is financed by contributions proportional to (wage or salary) income (in the relevant brackets), not proportional to risksi Family members are covered without extra costs. "Benefits" are granted according to need, that is, in the case of sickness, disease, disability^ where covering the costs of individual treatment is not dependent on the| individual's contributions. While this is quite in line with the insurance® principle, insofar as its idea is to compensate for damages, not varying? contributions according to risks is not. V^B At first glance, it is astonishing that health "insurance" is not organized! more strictly according to the insurance principle. After all, as a rule| people do not get sick voluntarily, so it is justified to speak of healthj risks. So why are there such extensive redistributive elements as th& coverage of family members/dependents and contributions proportional ttoi income, not to risk built into the system? Actually, coverage of family: members is describable as just one aspect of the principle of raising contributions proportional to income. Clearly, the larger a family, >the| higher the risks. So if family members are covered without additional^ costs, this is analyzable as another deviation from the rule of fixingj premiums according to risks. What would happen if health insurance costs for each individual were; fixed according to individual risks? For example, those who hold healthy impairing jobs would have to pay higher contributions, whereas those withj low-risk jobs and high health "consciousness" would pay less. Old people^ would pay more than young people. Those with a family would pay more, than those without one, etc. While it is rather vain to speculate about details, one global change seems to be predictable. The income structure would have to change to compensate for the different distribution of health costs. For example, if higher risks connected with a job are sig-^3 nailed ex ante in the form of higher health insurance costs (rather than, ex post in the form of a higher incidence of diseases etc.), it will require higher wages to fill bad risk jobs. $ Given that presently most bad risk jobs are also among the worst paid jobs, the redistributive components built into the public health insurance: system look much like a partial ex post compensation for the discriminarrl

tion taking place on the labour market. Similar considerations hold for family size. Since income is geared to job performance and job performMce is (largely) independent of family size, those with lower incomes Could (cet.par.) afford smaller families only. Family allowances in health Insurance are a way of loosening that constraint somewhat, whereas canCelling those allowances, in strictly sticking to the insurance principle, vould aggravate it. f But why would those with good, low risk jobs and small or no families pe willing to accept the redistribution involved in the public health Insurance system? Some trends in the development of membership, in the relative importance of private vs. public insurance, indicate that there is Indeed less willingness to accept this redistribution by those who currently pay more than their risks would demand. But as a consequence of less [(egalitarian) redistribution one would perhaps have to expect a change in jthe primary distribution compensating for the increased costs of health frisks. f Current politically induced changes in the public health insurance system seem to operate in the direction indicated, insofar as the share of jthe costs of illness which are not covered by insurance increases for those Individuals who are unfortunate enough to need medication, enter a hospital, need dental work or eye glasses. As the public insurance system [covers less of the actual costs of medical care, the exposure of individuals to health risks increases. The justification for these changes is that the expanding overall costs of medical care may be dampened (or may increase less fast) only by forcing part of these costs on individuals. It remains to be seen whether such cost shifting will result in (relative) cost reduction or whether people will attempt to recover some of those costs by demanding compensation, be it in terms of higher primary income or in terms of transfers. £). Unemployment insurance V

The West German unemployment insurance system has a dual nature. One component operates according to the insurance, the other according to the need - oriented redistribution principle. Both components are linked in that somebody who is unemployed will, given sufficient time of prior employment, first receive "Arbeitslosengeld", but will be shifted to receive "Arbeitslosenhilfe" if unemployment lasts too long and if a means test is passed. Arbeitslosengeld is paid proportional to previous contributions (i.e. proportional to previous income, from which contributions (currently 4.3%) are deducted), but for a limited time only. Arbeitslosenhilfe is financed from the federal budget. It is also paid (at a lower level) proportional to 1

previous income, but only to the extent that one does not have access to other sources of income, for example the income of spouses, etc. , There is one property which characteristically distinguishes unem-^ ployment insurance from other parts of the social security system: both it^, components are organized such as to control and preserve the willingness^ of the unemployed to find employment again. Availability for the lab market is the condition subject to which unemployment benefits granted. In this way, unemployment insurance deviates both from the pu insurance principle (where the relevant condition is the occurrence ofi damage) and from pure need - oriented redistribution (where the relevang condition is need). /^S What are the reasons for the dual nature of unemployment insurances Could it be organized as a strict insurance system? ^ Basically, this would involve two problems. First, it is in many case$ not obvious who is responsible for the event of losing a job, the employe^ or the employee. So there is the problem of moral hazard. Second, sinccy the probability of losing a job and the length of unemployment are not otjj not easily predictable, it is not possible to gear contributions to risks^ (And if it were possible, the result would be analogous to the problem jt| health insurance: Those with the highest risks of unemployment are nor? mally those with the poorest jobs and the lowest income, such that tho with the least ability to pay would have to pay the highest insura contributions. Again, one would expect repercussions on the labour mark and on wage demands.) This unpredictability of the costs of losing onc^ job, in turn, makes it necessary to introduce a second tier into scheme: Those not, or no longer, covered by the insurance will be pro tected according to need - oriented redistribution (financed out of taxes)^j IV.

Interests in the present social security system

We turn to discerning interests in the given structure of the social security system and its components, as far as these are not yet evident. First, wej have to distinguish those affected by the system from those not affected^ The distinction is easy to make in one respect: Affected is everybody whQj either pays for the system or receives benefits through it in the form ofj transfers (in kind or in money). The distinction is more difficult to mak^ if we try to take into account expectations about the future. For example^ is the fact that welfare presently guarantees a minimum income for thosftj in need important for everybody, because it enters everybody's expecta-^ tions? Is the interest in such minimal protection against poverty the sam^ for someone rich from a traditionally rich family and for someone who^jj] about to lose his job? U

Yet there are even further complications in distinguishing those a f fected by the welfare state and those not affected, since there are indirect or even hidden costs and benefits of the welfare state.3 For example, it is possible to construct a link between labour productivity and the welfare State, since performance oriented wage - formation can be realized in potentially pure form on the shop floor as long and as far as the welfare State takes care of legitimate non-average reproduction costs (due to family size, disability, etc.) of individual workers. If relatively higher labour productivity is an indirect beneficial effect of the welfare state, there is practically nobody in a given population who is not affected by it. H o w ever, the problem with such hidden, roundabout effects is that they may limply be unknown, so they cannot become relevant for interests and their articulation unless they are made known. As a rule, it seems safe to say that the more the welfare state p r o vides for public goods the more inclusive is the set of those positively affected by it. (However, one can argue that the rich have relatively less Interest in public goods: You don't need a public park if you can afford a private one around your mansion; you don't need police protection if you Can afford body-guards, doormen, private security patrols, etc.). But to ^hat extent does the welfare state provide for public goods? The public |ood - character of such abstract items as social security or non-poverty pi a given society is, at best, a second order property of processes whose Srimaty significance is to distribute money or goods to those in need. Of purse, one can identify interests in general characteristics of a given s o ciety (that it minimizes discrimination, guarantees material security, offers pances of political participation) with a demand for the respective "public floods" insofar as the full realization of these characteristics succeeds only Jf nobody is excluded from their "consumption". But this reverses the original distinction between public and private goods, according to which no one can be excluded from the consumption of public goods, to a (distinction in which the public good characteristic applies if nobody is Excluded from its consumption, despite the fact that this is easily possible. Sn that way, Athenian democracy was a public good for the members of the polisy but not for the slaves. All this merely shows that the application Of the market - failure - public - goods framework to welfare state problems ft' tricky and not very helpful in the determination of interests in the welfare state. F Things are somewhat easier holds on the side of financing, were there | an obvious rule: The more the welfare state is financed by general

P r

Of Course, hidden costs and benefits will not enter into the constitution of interests as long as they are hidden for all. In that case one could speak of latent functions which will become relevant for interests as soon as they are made manifest.

taxation, the more inclusive is the set of those negatively affected by it?.; To put it the other way: The more the welfare state is financed by c o n - j tributions of members in specific programs, the more limited is the set of^ those directly burdened by its costs. (But of course, there are all the* problems of incidence analysis involved here.) Taking into account both the cost and the benefit side, there < Stilu seems to be a rather obvious way of attributing interests (on a group GT^ individual level), despite the difficulties noted above in distinguishing thOH& affected by welfare state programs from those not affected. If aget] maximize benefits and minimize costs this means v i s v i s the state it is in their interest to minimize tax or contribution burdens wl maximizing their consumption possibilities provided by the state. r In the case of (true) public goods, this will lead straight into well-known problem that it is rational for agents not to reveal thel^I preferences. As Samuelson (1954, p. 182 f.) put it: "now it is in the selfis^. interest of each person to give false signals, to pretend to have less^ interest in a given collective consumption activity than he really has, etc^j To give false signals is the way to become the by now proverbial free rider, to have others pay for the benefits provided as free goods the state, at least, as long as the state attempts to distribute burdeitt^ according to benefits. V However, in contrast to Offe's (1987) construction of an oppositionbetween democracy and the welfare state, we think that the relevance q£ this problem is limited for two reasons: First, the extent to which the^ welfare state provides for public goods (with non-rival consumption) iif^ limited. To be sure, many of the benefits distributed by the welfare stat^ in the form of transfers (monetary or in kind) to individuals have be^jjp neficial secondary effects of the non-rival consumption kind. (An obviouf^ example is vaccination against small pox: it protects the person vaccinated^ but it also lowers the probability of wide spread epidemics.) But the/; primary beneficial effects are those on the individual level in the forra.pj^l private consumption possibilities, whether these are allocated via monetanfc transfers or through state organized services (But note that the primacy individual consumption effects and corresponding interests does not mea^?that there would not be further - reaching interests connected with polir^;; tically organizing such effects). Secondly, the free -rider -public-goodlk problem exists only if the state does try to establish an equivalence of burdens and benefits (as a rule of fairness?). However, empirically, it easy to see that in many instances, the attempt is made to distribute , burdens (roughly) according to ability to pay. This may be viewed as anjj anticipating reaction to the unsolvable problem of allocating costs accord ing to benefits when false signals are sent. But it may also indicate that*? the benefit or voluntary - exchange theories of taxation are beside the

'point; either because a different rule of fairness holds which does not aim jor equivalence or because the real problem is one of power: The power [to make others pay for you. jp Taken together, these limitations of the free - rider - public - good problem lead to a quite different question, namely whether the relevant problem is not better described as a public - costs - private benefits[problem: If most (or many) of the primary benefits distributed by the Welfare state are privately consumable, but are not paid (in a quid-profashion) by those who benefit - as would be the case given market Exchanges the real problem seems to be that of the public provision Ut private goods. k In other words, the reasons for public provision are not predominantly found in the nature of the goods, at least not in terms of the publicprivate distinction. But where else? Perhaps the quotation from Samuelson feove contains a hint. How is the demand for state provision of goods Signalled"? What is the nature of the signal given? It is not a want Combined with a signal of willingness to pay (as on markets). It is a want directed to the state {to the state agencies, bureaucracies, politicians, parties, pressure groups, etc.) which is backed not by a money offer but by a promise of political support (or the threat of withdrawal of such Jdpport). Jpr It is up to the political system to find - via taxation {or contribution financing) - the means necessary to respond to such offers
t

A. A survey of interests Although we take into account available empirical knowledge the following is still more of an ideal-type model of interests in the social security system. Our broad hypothesis is that wage and salary earners do not have a general interest in welfare state expansion, notwithstanding their high; acceptance of the present system (Zapf 1988). Let's start with a simple constellation, in which those who pay for social security are not identical with those who benefit from it. The latter, will obviously have an interest in further welfare state expansion, whereas* the former will opt for shrinkage. Under the assumption that a change of* roles is improbable, there will be a clear opposition of interests. But what are the chances of promoting those interests? £ We believe that welfare state clients have less chances to pursue their| interests successfully precisely because they are welfare state clients. Theirs potential for organizing is weak. Their only "weapon" is - apart \ from' illegal disorganizing potentials - the threat to withdraw political support: (as voters). By contrast, those who pay for the welfare state can organizer quite effectively (because they are already organized to a significant extent for reasons other than dealing with the welfare state). Their threatening potential is much more important because they can attempt to withholdthe material support for the welfare state. Only social norms (solidarity, sympathy) dampen the opposition of interests. The second constellation to be analyzed is the one in which the class of welfare state payers is the same as that of welfare state clients in the sense of an expectable change from the one class into the other. In thatft constellation, the dominating interest (of current payers) would not be .in;? welfare state expansion but in individually improving their cost-benefitsrelation. However, weighing costs and benefits is complicated because it is normally uncertain at which time one changes from payer to client. It is also complicated because much of what happens in terms of transfers and redistribution is not easily observable. If redistributive effects are observed, their acceptance by payers seems to be quite low (Mackscheidt, K. 1985). More specifically, acceptance ,Js dependent on the volume of the tax burden, the fairness (or impression of fairness) of tax incidence, administrative procedure, the perception ^of government as efficient or wasteful, the fairness of expenditure in terms i i specific group benefits. < The government can increase acceptance by separating social security institutions from the rest of the government apparatus. This explains their establishment as parafiscal organizations. Acceptance is further increased when they are run according to the equivalence principle (Mackscheidt, X 1985, p.46f.). Apparently, there seems to be little propensity on the part

of the rich to accept above average tax burdens as a redistributive c o n tribution in favor of the poor. Rather, redistributive propensities are restricted to activities within the family or in the form of charity. In general, people are more willing to pay social security contributions the tighter they perceive the link between their own contributions and their own benefits to be. In this sense, perceived equivalence is the foundation of the comparatively high acceptance of welfare state burdens. Old-age

pensions

However, equivalence is not realized in any strict sense of the term. As we have noted with respect to old age pensions, there are several well known exceptions from the rule of equivalence, even if one accepts as equivalence the idea of preserving a rank ordering in an income stratification, as the respective age cohort moves from active employment into retirement. So one would expect welfare state payers to insist on a stricter realization of the equivalence principle. This may go as far as demanding the consideration of risk differentials when contributions are determined. For example, if you are a male smoker and couch potato, your life expectancy is relatively low. So you should pay lower contributions to the pension system. You may prefer not to admit your unhealthy life-style to yourself. But surely, a private insurance company could classify you a c cordingly and offer you the same pensions for lower rates than the present public pension system. The example illustrates that for interests Sand their articulation, it is extremely important how the pension system is perceived, whether equivalence is expected, whether exceptions to it are noticed, etc. on the one hand, and whether there is any competition to the public system which would push in the direction of a stricter realization of the insurance principle on the other hand. p- Currently, the problem in the focus of public debate is the changing Sge structure of the population which threatens to impair the realization [of equivalence in another respect, namely that each economically active [generation should bear roughly the same burden in sharing its income frith the non-active. The increasing average age and the increasing Slumber of retired people have already induced some observers to compare Rhe old-age pension system to a chain-letter-game: Those who get in fearly profit, those who get in late lose. •v Again, this raises the issue of alternatives to the public pension (ystem: Can the younger generations be forced to participate? Are there tlevant competitors who offer private pension schemes? Politically, this Koblem, which is predominantly a problem for the current (or near iiture) receivers of pensions, seems to have a surprisingly simple solution: (ince the excess burden for the young results from the overproportional

increase of the old, the old are always in a position to force the young to, participate (as long as we have a one wo/man, one vote system). (The old? in this context include those who have already contributed to the system* for some time, even if they are not yet retired: People have built upj claims which they do not want to endanger.) Health Insurance

^

n

While the idea of a private alternative to the public pension system may^ seem quite farfetched (although at least complementary private pensioaj schemes do exist in large companies), the health insurance system offern an example of the coexistence of private and public insurance and the| pressures pointing in the direction of increased private provision. Thc| basic problems (and corresponding interests) are quite simple. Health risk&jj increase with age. The age structure of the population is shifting toward ; ^ larger share of old people. So the cost-benefit situation changes: ThCfi actively employed pay more and more without corresponding increases :-iqjj benefits. This puts pressure on the egalitarian components built into the* public health insurance, on the one hand because income - proportional contributions appear less and less fair (as Engels, Hamm et.al. 1988 hav$j pointed out, pensioners pay less than the actively employed but claim; benefits 2.6 times as high); on the other hand because private alternatives^ become more and more visible and attractive: The income ceiling forj compulsory membership in the public health insurance system is more^ within reach even of workers4. So the younger, well - earning parts of th& employed, as good risks, are attracted by private insurance companies^ whereas public insurance is stuck with bad risks. Since adverse selection* increases costs, the division has a self - enforcing quality: The more the| good risks opt out, the more expensive will public insurance turn out < to] be for those left, the more it will be worthwhile even for less good risks| to choose the private alternative, while the public insurance will be stu&s with those uninsurable on private terms. The current political reaction to this destabilization process of the| public health insurance system is to support the better off (in terms of] both income and health, which mostly go together) by opening the ways| to opt out, while aiming for a public system of basic, minimal insurance* for all which would retain the egalitarian components of the traditional] system. If realized, the result would be a clear split between the poor and| the non-poor in terms of exposure to health risks. Those with little risks^ At an income of 4200 DM (in 1986), it is also significantly lower than the incon*| limit for compulsory membership in the o l d - a g e pensions system (5600 DM). It would^ be interesting to know the reasons for this difference. I

will be offered (comparatively) low cost private insurance with good coverage, whereas those with high risks will be offered minimal coverage at relatively high costs. The political legitimation for aiming in that direction is that the state should withdraw wherever private provision and Initiative can take over and should restrict its activities to guaranteeing a minimum of medical care. Those who "want" more can provide for it on their own. The problem is that there are a lot of people who "need" more and cannot provide for it (presently) unless they are the beneficiaries of some redistribution. Unemployment insurance If one looks at the present organization of unemployment insurance with the eyes of the selfish rational agent (as we propose to do as a first step to reconstruct interests), the problem does not lie in the proportionality of benefits and contributions (which is maintained in the insurance component of the system). Rather, it lies in the unequal distribution of the unemployment risk. Estimates have it that two thirds of the actively employed have never experienced unemployment (Buhbe, M. 1986, p.16). Those who were unemployed, were so 2.64 times and for a year, on the average. Of those who were not unemployed, the great majority believes that it will never come into the position to have to claim unemployment benefits. £ Given that the majority of contributors will - according to e x pectations - not belong to the beneficiaries, interests point to demands for a change. The majority could lower its contributions if they were proportional to risks (or if benefits were reduced). Whether pressure is really exercised in that direction depends, on the one hand, on the image Of the unemployed. (Are they seen as innocent victims or as parasites?) On the other hand, labour movement organizations use the semantics of Solidarity to counteract the "selfish" tendencies of privileged groups of Workers. t B. The internal dynamic of the political system I Turning to the political system, we want to know to what extent it generates own, specific interests (on the part of the agents constituting it). The general idea is that the political system is not a passive respondent to demands articulated "outside", by needy individuals, economic agents, voters, etc. Rather, we do suppose that parties (their leaders and members), bureaucrats, governments operate according to the internal rules of the political system. They have to do with power. For a first approach, we can rely on the Schumpeter - Downs tradition: Politicians compete for

political support (votes, etc.) in their quest for power. To the extent that they need political support, they will be (or will present themselves to be) responsive to the interests of those who can give such support. This means that the inside/outside differentiation for the political system can be described as a matter of pursuing one's own interests (directed towards holding or obtaining power) inside, while acting as if one pursued the "general" or "public" interest outside, when one really is and has to be responsive to specific group interests. (So one aspect of the job of the politician is the continuous translation (presentation) of particular into (as) general interests.) Similar considerations hold for public bureaucrats and bureaucratic organizations. While pursuing their own interests, they have to. respond to politicians, on the one, the public on the other hand. D e pending on their position in the organizational hierarchies, they implement political decisions and provide the requisite expert knowledge in preparing them. The first thing to note when using this rough conceptual scheme is the difference in time horizons: Social security, especially in terms of its most weighty part, the pension system, has to do with the life-time perspective of its current or future clients. Bureaucratic organizations are to guarantee the requisite stability for such a long time perspective, for example by keeping track of each individual's contributions and claims over a whole life. By contrast, politics in democratic states is bound to the rhythm of elections. This means that politicians, unless otherwise forced, will have^ the tendency to delay those decisions which may cost them support into^ the next term and to look for those decisions which may gain them sup port before elections (and worry about the long-term costs of imple-gi mentation later). Maybe this difference in time horizons lies at the roots of the rathet| chaotic and intransparent structure of the (West German) social security! system. Whatever its causes, its main effect (in terms of interests) is clean| The organizational diversity5, the different modes of financing and pro-%1 viding for benefits make it enormously difficult to calculate and pursue^ one's interests rationally. This is especially true with respect to the loosej links between issues of expanding or shrinking programs (and therewith^ expenditure) and the respective changes in taxes or contributions. J While it makes it difficult for welfare state payers and clients to even^ define their interests, this organizational intransparency leaves some rooml for politicians and bureaucrats to pursue their own interests: They canj organize support even from those which stand to lose if planned changes! are carried through. But the opposite may be true to: They may lose| 5

In 1979, 24.5 million members were insured in 1338 separate public health insurance J organizations (Paquet, 1987, p.64). v .

support even from those who stand to gain. On the other hand, the lack of a clear, visible linkage between burdens and benefits has the disadvantage of admitting much more expansive demands for benefits than those that would emerge if benefits and burdens were closely and obviously linked. So one can identify an interest of politicians in strengthening such links (and therewith the insurance and equivalence principles) so as to limit demands for additional welfare state provisions, thus p r e venting the "overcharge" of the political system. Since this interest converges with that of well-to-do tax payers to reduce their extra income tax burdens due to progressive taxation, it is likely that strong pressures exist to re-"form" the welfare state in the direction already t a ken: Let the poor carry the burdens of their own problems, whether they are responsible for them or not, by strengthening the insurance principle and restricting redistribution to intergenerational transfers. K Conclusion What one should expect as the overall result of the constellation we have surveyed is not clear. The interests which we have reconstructed have, for the most part, not been clearly articulated by those to whom we have attributed them, especially not on the (only relevant?) level of political or economic organizations. What one can expect ex negativo, however, is that the pursuit of these interests and the operative logic of the political system will not lead to helping those who are currently most underprivileged and discriminated against in and by the welfare state. In terms of the self-proclaimed aims of the welfare state this c o n clusion is rather disappointing. As far as we can see, one can arrive at a different one only by either counting on forces counteracting the selfish interests of rational agents, for example in terms of moral and ethical considerations; or by identifying what we, for lack of a better name, call Mpull-down effects". What we are looking for (not in this paper but in a future one) are linkages between the discrimination of given minority groups (the u n employed, welfare recipients) and negative impacts, possibly mediated by the welfare state, on the living conditions of other, larger social groups. Well known examples for this type of linkage are, for example, the mechanism of the industrial reserve army or the deterrence effects of Welfare provisions. Here, one can argue: tua res agitur. The unemployed are important for those who have a job, because they make that job more Uncertain. The employed are replaceable by the unemployed, insofar as the latter are sufficiently qualified and at the same time willing to accept work under relatively worse conditions or with lower pay. So there is

effective pressure on the employed to accept worsening work conditions, and lower pay. The deterring way in which welfare is provided has &j similar effect: in order to avoid the stigma of being on welfare, bad jobSj with bad working conditions are accepted. What the examples point 10/ and the name is to suggest are something like reversed "trickle - down"} effects. Trickle-down effects describe a distribution pattern in which the^ table for the rich is overflowing, so that something is passed on to th6| poor sitting underneath the table. Pull-down effects operate in the othei^j direction: If you let the situation of the poor deteriorate, you will suffer^ yourself, although you are not (yet) poor. Thus, the issue to be explored is whether there exists a class ofij "pull-down" effects: The worst social positions have a negative impact,! describable in terms of determinable linkages, on even relatively removed,better social positions. If such "pull-down" effects are specifiable, one^ could with their help determine interest identities or convergences between individuals or groups in relatively far apart social positions. The observation and communication of such (partial) interest identities or conver-< gences could lead to politically relevant coalition forming, which in turn could influence welfare state development in the direction opposite to the one we have to expect so far.

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Goodin, R.E., Le Grand, J. (1987): Not only the poor. The middle classes and the welfare state, London. Heine, W. (1988): Zur Verlapiichkeit von Versicherungsregelungen bei langen Zeitraumen Aus juristischer Sicht, in: Rolf, G. et.al. (1988), pp.431 -452. Kohl, J. (1987): Which guarantees can the system of social security offer? A concept for old age security, mimeo. Krause, U. (1984): Recht und Gerechtigkeit, in: Gijsel, P. de et al. (eds.): Wohlfahrt und Gerechtigkeit, Jahrbuch Okonomie und Gesellschaft 2, Frankfurt, pp.158-172. Krupp, H J . (1988): Zur Begriindung und Praxis des Wohlfahrtsstaats, in: Rolf, G. et.al. (1988), pp. 491-514. Mackscheidt, K. (1985): Uber die Belastbarkeit mit Sozialversicherungsbeitragen aus der Sicht der Steuerwiderstandsforschung, in: Schmahl, W. (1985), pp. 27 - 54. Offe, C. (1987): Democracy against the welfare state, in: Political theory, vol.15, no.4, pp.501-537. Paquet, R. (1987): Umverteilung und Wettbewerb in der GKV, Berlin. Rawls, J. (1973): Distributive Justice, in: Phelps, E.S. (1973) (ed.): Economic Justice, Harmondsworth, pp.319 - 362. Rolf, G., Spahn, P.B., Wagner, G. (1988) (eds.): Sozialvertrag und Sicherung, Frankfurt. Samuelson, P.A. (1954): The pure theory of public expenditure, in: Houghton, R.W. (1970) (ed.): Public finance, Harmondsworth, pp. 179-183. Schafer, D. (1980): Worm unterscheidet sich die sozialpolitische Leistungsfahigkeit beitragsgedeckter und nicht beitragsgedeckter Systeme ...? in: Zacher, H.F. (1980), S.331 - 350. Schafer, D. (1986): Funktion, Fortentwicklung upd Grenzen der Beitragsfinanzierung der Sozialversicherungssysteme, in: Bieback, K J . (ed.): Die Sozialversicherung und ihre Finanzierung, Frankfurt, pp. 222 - 252. Schmahl, W. (1982): Konzeptionen sozialer Sicherung: Versicherungs - und Steuer - Transfer-System, in: Vierteljahresschrift fur Sozialrecht, H.3/4, S.251-296. Schmahl, W. (1985) (ed.): Versicherungsprinzip und soziale Sicherung, TUbingen. Schmahl, W. (1988): Die Finanzierungsstruktur der Sozialversicherung, in: Rolf, G. et.al. (1988), pp.465 - 490. Schulenburg, J.M.G. v.d. (1988): Zur Verlapiichkeit von Versicherungsregelungen bei langen Zeitraumen Eine okonomische Analyse, in: Rolf, G. et.al. (1988), pp. 453 - 464. Spahn, P.B., Kaiser, H. (1988): Soziale Sicherheit als offentliches Gut? in: Rolf, G. et.al. (1988), pp. 195 - 220. Zacher, H.F. (1980) (ed.): Die Rolle des Beitrags in der sozialen Sicherung, Berlin. Zapf, W. (1988): Individualisierung und Sicherheit Einige Anmerkungen aus soziologischer Sicht, in: Rolf, G. et.al. (1988), pp. 371-380.

Bruno Theret Interests and Risks of the Analysis of Interests in the Welfare State1 A Comment of H. Ganssmann and R. Weggler

The Ganssmann and Weggler paper attempts to utilize the analysis of individual interests still largely monopolised by the liberals (in the French meaning of conservatives) - in order to draw bases to reconstruct an argument contesting the liberal statements on the Welfare State from such an analysis* This paradoxical approach is very interesting but also very risky. So my comment will try to point out both the interest and the risk of such an approach.In that perspective, I shall first make a brief remark on the empirical evidence as it is presented by Ganssmann and Weggler. Then, I will point to the theoretical issues of the problem of individual interests in the Welfare State raised by the authors. Last, I will Show the empirical risks of their approach, risks which, however, may be avoided by enlarging the notion of interests itself and of their underlying rationality. About the empirical evidence of the "pull-down effectw The paper starts with the empirical evidence demonstrating that the German Welfare State is presently enlarging the gap between a minority of unemployed and welfare clients, and a majority of others who suffer only small losses. As the authors say, "the Welfare State itself acts to increase the cleavage between the poorest members of society and the rest". And the paper ends with the need to show the existence of a "pull-down effect" by which the discrimination and marginalization of the poorest would negatively affect the interests of the majority of w a g e earners. This "pull-down effect" would create the basis of a new c o n I thank Caren Addis for her help in translating this paper.

sensus and "politically relevant coalition" capable of changing the present development of the Welfare State. The analysis entails, therefore, a preliminary discussion setting out the need to realign interests such as to fight the present tendancy of Welfare State self-decomposition. Ganssmann and Weggler, nonetheless, do not develop this "pull-down effect". It is more a starting point for further investigation than a conclusion emerging from the analysis. We can perhaps ask ourselves if the author's narrow definition of utilitarian and selfish interests can explain why the "pull - down - effect" does not follow from their analysis. We shall discuss this methodological point later. But first, let me take a look at the formulation of the problem. The discrimination and marginalization of the poor is one of the main problems of Welfare States because it relates to a fundamental contradiction with the principles of the Welfare State itself. The discrimination conflicts with the political principles of universality and equity which underpin the legitimacy of democratic Welfare States. In my opinion, however, this issue cannot be isolated from another, the general shift in the sharing of national income between firms and households, and espe-. daily the redistribution of the burden of social security system from the former to the latter. I believe the debate on new poverty cannot be understood as only involving a general weakening of solidaristic commitments, but must also take into account more general class interests. In other words, the dynamics of competition, division and inequality between oppressed classes are empirically connected to the evolution of the general relationships of domination. Ganssmann and Weggler neglect, in their formulation of the problem, that employers pay a large share of the compulsory contributions to social security schemes. They also neglect that some industrial capitalists and/or professional interests (for example, teachers, doctors, social workers) are alike involved in those schemes as suppliers of production factors. In other words, reducing the constellation of interests to two groups, the poorest and the not so poor, they cannot deal with the so-called "pull-down effect". Let us now turn to the theoretical issues. General interest of micro - analysis I shall emphasize first, with Ganssmann and Weggler, the need for an approach to the Welfare State crisis based on the structure of microinterests. Taking into account both the macro-logic of reproduction of structures, and micro - decisions which determine their development is necessary for the social scientist who wants to understand changes in a constant social matrix. In a structural crisis period in fact, a key problem

is the analytical articulation between macro and micro-levels of socioeconomic phenomenons. As Claus Offe asserts, we have to "rethink the macro - sociology of the Welfare State" because "structures do not directly translate into outcomes and developments: they do so by virtue of the responses, interpretations, memories and expectations, beliefs and p r e ferences of actors who mediate the link between structure and outcomes. What is missing in the analytical design is the role, of individual actors and their style of rational responses"2. We need a systematic analysis of the interests in conflicts which structure individual behaviour, especially inside systems which are structured by specific non-productive relationships such as social security schemes. In other words, we no longer have to reduce the analysis of the Welfare State crisis to general interests thought of only in terms of production and merchant relationships. We must recognize that acts which occur in the reproduction - distribution sphere determine specific individual interests and conflicts which are very important to understand not only political, but also economical problems. The internal strength of a State is dependent on the social cohesion of the "community" as a precondition of its international hegemonic power or dominance,which is mutually dependent on economical arrangements. To link micro and macro-levels of analysis, it is moreover important to think how rationality of individual behaviour may be combined with global irrationality of the system. This problem is well ~ known in the Marxist theory of capitalism and in theories of financial markets, but it is worth examining it in the context of the State. So, one has to find the right path between methodological individualism and pure holism. In other words, even if we recognize the impor tance and specificity of real - abstract objects, we must also focus on individual behaviour. And to do that, we need either an inductive theory of production of individual behaviour, or an hypothesis from which we can deduce analytical consequences, or perhaps both* Ganssmann and Weggler pose this problem of the articulation between the macro and micro- levels in the following way: - on the one hand, they show a mechanism of reproduction by which the Welfare State develops more or less spontaneaously, and in which people are only objectified agents; - on the other, they attempt to identify individual actors whose decisions reflect different interests. Eventual transformations in the system will be mediated by individual actors' decisions. 4

Offe 1987. - These concerns affect the gamut of social and political theoiy. On the one hand, there is a "softening'' of hyper - objectifying marxism, on the other, the neo - classicals try to introduce in their framework institutions as quality or structural rigidities (See, for example, Stiglitz 1987).

As a result, a neutral direction of development of the Welfare State corresponds to a given constellation of interests. Everything which destroys, the equilibrium of that constellation in a permanent and cumulative: manner drives the Welfare State on a new path, but may not necessarily destroy its underpinnings. All this sounds very Weberian, or more precisely, reminiscent of the Norbert Ettas' sociology, with its key concepts of "formation" and "equilibrium of tensions". I am not bringing up this c o m - ' parison innocently, but rather because it allows me to question the Ganssmann - Weggler approach in the following way: Doesn't the idea of, an constellation (or configuration) of interests contradict the privilege they; grant to the selfish - utilitarian interests ? It is well known, for instance,, that Elias gives a more general definition of interests and rationality, and' that he is a very rough critic of the atomistic representation of society. Before exploring this question further, let me point out another interesting dimension of the paper I am commenting on. It attempts to analyse, the German Welfare State using the two pure principles which are the; bases of traditional normative literature: on the one hand, the contribu-" tion - oriented insurance principle, also called equivalence principle or, benefit - approach (in fiscal theory), and on the other, the need - oriented; redistribution principle, otherwise named solidarity principle or abilityto-pay approach (in fiscal theory ). Ganssmann and Weggler provide an extended discussion of the logical and empirical problems in the analysis% of the current social security system based on these traditional principles. My understanding of their argument which I agree with is that neither the pure economic principles,nor, in connection with these, the classical theory of public goods, are very useful to understand the state of the system, The real schemes of social insurance are never derived from the insurance principle nor the ability - to - pay principle. As Jens Alber has stated3, there are no general principles of rationality underpinning the social s e - } . curity system and I cite him "the persistently low and even de-, creasing systemness of the programs might be explained by the opposition of powerful vested interests that prevented comprehensive and systematic reforms, allowing only piecemeal modification of single provision".* Or yet, "the virtual lack of "systemness" in the schemes suggests that they have primarily been the outcome of a series of compromises that blurred any; coherent conception that might have existed at the outset". And all that draws along "a strong persistence of the original institutions". In my opinion then, and I believe that I don't differ much fromt Ganssmann - Weggler on this point, although I probably solidify their positions, the pure principles are dependent on economic discourses about the Welfare State rather than its practises. Properly speaking, the pure 3

Alber 1981.

principles depend on discursive practices which, correspond to the behaviour of some actors, but do not concern all actors. That is why the forms of the social security schemes cannot be understood from economic or methodological individual principles alone. As Ganssmann and Weggler say, in starting with the public good paradigm, we are "led to a quite different question" which concerns the "public provision of private goods", a question whose answer cannot be found in traditional economic rationality. Risks of a too narrow conception of the individual interest Let us now examine more precisely how these authors set up the problem of individual interests. First they define interest in a very broad way, presupposing only "rational actors with a sufficiently long time horizon" and they attribute to these actors "obvious preferences" such as a preference for more rather than less. But at once, they simplify and only consider - I would say paradoxically - those interests which are defined by the aforementioned principles of social fairness, the equivalence and solidarity principles. In doing so, they only worry about the selfish atomised rational agent and considerably reduce, in my opinion, the interest of the concept of interests. They also study, therefore, abstract though classical - constellations of such interests, those which are only and formally conceptualized from the pure principles: on the side of the capitalist economy, the selfish economic rational agents; on the side of the democratic State, the selfish politicians and bureaucrats. These constellations do not represent the diversity of interests in society. My task as a critic is to focus on the narrowness of their definition which renders, in my opinion, this type of public choice analysis inadequate. The fact that the authors cannot conclude the existence of the "pull-down effect" from their analysis presents yet another argument to support my critique. In the following, I would like to examine only two aspects of this problem. First, according to Offe4, who develops his analysis of the political crisis of the Welfare State with the same premises as Ganssmann and Weggler, there is no compatibility between the utilitarian calculus hypothesis and the existence of the democratic Welfare State. With such an hypothesis, we cannot "understand why among rational actors, collective goods (and he means there as well social security schemes) occurs at all in a democracy. If there is a democratic Welfare State, it is not because pf democracy, but in spite of democracy".

4

In Offe 1987.

To Offe, "the only alternative seems to be to hypothesize that actors produce collective goods not because of the rational capacity to maximize utility and to avoid punishment, but because of their normative disposition to do so, or because of the relationship of trust, reciprocity, sympathy, and. fairness that they have experienced between themselves and their fellow contributors". And he deduces from this last hypothesis that there is presently a structural crisis of the Welfare State because of the weakening of these normative dispositions which correlate with a destructuring of collectivities. The democratic institutions permit such a weakening. As a result, the individualist paradigm as well as the rational choice theory become good tools to capture and predict the behavioural consequences of. such a development of individualism. I do not agree with this pessimistic view on the Welfare State crisis,, because it seems to be supported, on the one side, by a very fragile empirical evidence, and, on the other, by a very narrow conception of rationality and therefore too strong a contrast between behaviour dictated by scientific and interest rationalities and those dictated by norms. On the empirical side, it is difficult to accept the statement concerning the "new poor" which asserts "there is little reason, either for the propertied middle classes and capital or for the core working class, to adopt the material interests of this "surplus class" as their own. Such a reason (is inapplicable) for the core working class because there is little empirical reason to fear that the surplus class could function as a "reserve army"; that depress wages and undermine employment security in highly fragmented and stratified labor markets"5. In other words, Offe denies the existence of Ganssmann's and Weggler's "pull-down effect". This affirmation of the political crisis of the Welfare State is unsubstantiated by general economic or political events. The case of France is an example where there is: 1) no extended legitimacy crisis of the Welfare State6; 2) a real "pull - down effect" especially for the youngest and the eldest • members of the labour force, and 3) a large consensus on the "shocking" ! feature of new poverty which has led to the recent creation of th^ "revenu minimum d'insertion". I On the more theoretical side, let me just say first that Offe bases his ^ argument on a normative definition of (direct) democracy (the voting rights U* 5

6

Offe also argues that "similarly, there is little reason for the middle class and * employers to fear that the existence of a growing 'surplus class' could lead to dis- ^ ruptive forms of social unrest and conflict, the prevention of which could be 'worth' a.; major investment in welfare policies or even the full maintenance of those that ^ exist" (ibid). On this point, see Schnapper/Brody/Kastoryano 1986 and, for more recent public \ opinion polls Ysmal 1987.

of equal people) and does not take into account the reality of "democratic corporatism". Only this corporatism can explain "the puzzle that countries sharing these problems (of the Welfare State crisis B.T.), as well as similar levels of taxing and social spending, vary greatly in the political protest they generate"7. Based on his normative definition of democracy, Offe attempts to demonstrate that democracy and Welfare State are contradictory. In fact, due to his normative assumptions, he manages only to show that they are independent. Once more, normative assumptions fail to "unpack" the State and to explain the different outcomes in different Welfare States8. In Tocquevillian terms, Welfare seems to me dependent on the level of "administrative constitution" of the State more than on "political constitution". Secondly, one cannot oppose "diametrically", as Offe does, individual interests and social norms. Both interest and norms have their underpinnings in beliefs and trust9. The real question is: what are the relationships between rationality and interests on the one side, and norms and rules of behaviour on the other ?If the rational choice theory is unable to explain the Welfare norms as shows Offe - , this proves only the r e stricted feature of the interest emphasized in this theory. This is the second aspect of the problem that I would like to emphasize now. Towards macro - foundations of

micro-analysis

Is it possible to consider as a good initial hypothesis an analysis of i n dividual interests whose main features are: - the atomization of individuals a priori independent of another, the breaking down of the individual into several disconnected interests and norms, - the independence of elementary individual interests from the concrete spheres of insertion of these individuals? According to Elias' interpretation, I believe, on the contrary, that we can assume the following: " Firstly, the isolated individual does not generally exist, and where he does exist, he is the product of a social process of exclusion pulling him out of the society of the "others" who are socially defined by a network of interdependences. I 7 8

•

As stated especially Harold L. Wilensky in Wilensky 1981. On this point, for an empirical and historical perspective, see Flora/Alber 1981. As Alain Caill6 asserted, "Sociological attitude at least consists in setting that the reality of interests is not basic but is in itself instituted", in Caill6 1981.

Secondly, the breaking down of the individual personality into separate dimensions drives the subject to mental problems, not to rationality of. behaviour. It is, as much as the former isolation effect, an impediment to social life. The rational individual is looking for non - contradictory and: hierarchical management of what we might call a "basket" of severalt interests. ) Thirdly, there are different kind of interests and correlative rationality, principles. Concerning the concept of interest itself, I would like to refer* to Jean Piaget10 who suggests that there is a double meaning of interest that utilitarian analysis does not distinguish. The first meaning refers to finality values (instrumental values as means and aims), while the second meaning refers to return values (such as costs and benefits). With respect to that larger sense, I cite Piaget "every rational behaviour is led by an interest in the general qualitative meaning, for it pursues an aim which has a value because it is desired, but this aim may be disinterested (i% the second meaning) though very interesting (in the first meaning)" (my?j translation)11. One ideal type of rational behaviour which does not refer^ to economic cost-benefit analysis is the aristocratic behaviour studied Elias 12 , which consists in accumulating to spend in order to maintaiil^ hierarchical social status instead of spending to accumulate as in the*; capitalist ethos. This kind of rationality and interest continues to underpin^ several standards of behaviour: why not as well the political behaviour,.^ and other consumption and reproduction behaviour which are very im-/ portant in fields such as education and social security? Another example is the rentier rationality. Here again, interest is not to maximize short-range' income, but rather to assure an income level appropriate to maintain the:

10

12

Piaget 1970. See also the Weberian distinction between "wertrational" and "zweckrational" actions. Aij In my opinion, but I have no time now to develop this idea, his larger acceptance o f j individual interest is close to the concept of "desire" emphasized by Deleuze, Foucauty Veyne and others in the framework of "relationship dynamic" "The notion of desif^ means there is no human nature, or rather that this nature is a form without content* It means also that the opposition individual and society is a wrong problem (because) the society already require the participation of individuals: the social "objective reality* require the fact that individuals are interested in it and do it functioning; or if one prefers, the only potentialities individual may realise are those which are stippled designed in his environment and that individual turns into reality by the fact he takes an interest in them ; the individual fulfill hollows the society (i.e. others or collectives) throw into relief' (Veyne 1978). t\ Elias 1985. *

long-range reproduction of property rights13. From the rentier to the financial market, there is only one more step. Let me take it and then look at situations of radical uncertainty in which the utilitarian selfish interest does not also imply a maximizing rationality. In such conditions of uncertainty where risks are incalculable, the rational behaviour is to do like others, like anyone who acts.. According to Andre OrlSan, for instance, mimetism is the rational attitude of someone who must suppose that if another decides something, it is because this other has information about the future he himself does not have14. This type of rationality is predominant in financial or other speculative (intellectual included) markets and is a good example of the interdependence of interests and norms. ^ Without any doubt, we could further the concepts of interest and rationality, but it is time to conclude. In fact, there is already enough evidence to reduce the epistemic and tragic uncertainty of the usual utilitarian concept of interest, as well as the risk of its misuse. In my Opinion, a comprehensive analysis of the Welfare State must first c o n ceptualize the main networks of interdependence in which individuals are ^involved, so as to subsequently reconstruct at two levels the empirical .Constellation of interests: b- determination of individual "baskets" of interests depending on their I different roles (in production as wage-earners or capitalowner, in ^ consumption as market consumers and/or public service users, in fiscal \ system as tax payers and Welfare clients, in political system as voters f or, in financial system in education system and so on). In this manner, ^ one could sort out a few predominant standards of composite individj ual rationality, and take into account the interdependence and incii dence of the various social insertions of individuals; r determination of the external configuration of interests between i n i dividuals so as to allow an understanding of conflicts that goes beyond V opposition and competition in a sole field of rationality in an hypost tasis situation, but also from the confrontation of different types of rationalities and individual interests. * E.

i

W In this case, one sometimes talks about limited rationality looking for satisfaction more I than optimization. M See, for instance, Origan 1985.

References Alber, Jens (1981): Government Responses to the Challenge of Unemployment: T h e de*"" velopment of Unemployment Insurance in Western Europe, in: Flora/HeidenhefaMT (eds.) (1981), pp. 151-183. Caiile, Alain (1981): La sociologie de Tinteret est-elle intdressante? (h p r o p o s e d * Tutilisation du paradigme dconomique en sociologie), Sociologie du Travail, n o . 3 , ppL 257 - 274, Seuil, Paris. Elias, Norbert (1975): La dynamique de l'Occident, Paris, Calmann - L6vy. Elias, Norbert (1985): La soci6t6 de cour, Champs, Flammarion. Flora, Peter/Alber, Jens (1981): Modernization, Democratization and the D e v e l o p m e n t ' o f Welfare States in Western Europe, in: Flora/Heidenheimer (eds.) (1981), pp. 3 7 - 8 0 . Flora, Peter/Heidenheimer, Arnold (eds.) (1981): The development of Welfare S t a t e * * ! * Europe and America, Transaction Books, New Brunswick/London, 3rd ed. Offe, Claus (1987): Democracy against the welfare State? Structural foundations o f Deo|$ conservative political opportunities, Political Theory, Vol. 15, no. 4, N o v e m b e r , - S ^ l K Publications, pp. 501-537. Orlean, Andr6 (1985), H6t6rodoxie et incertitude, Cahiers du CREA, no. 5, juin, CREA$ Paris. _ Piaget, Jean (1970): Epistdmologie des sciences de Thomme, Gallimard, CoUection~Id«£ Paris. Schnapper, Dominique/Brody, J./Kastoryano, R. (1986): Les Francais et la S6curit6 sodafc.; Sondages d'opinion, 1945-1982, Vingtifcme Si6cle, no. 10, avril-juin, pp. 67-81, F.N.S.P. Stiglitz, Joseph E. (1987): The Causes and Consequences of the dependence of quality^t. Price, Journal of Economic Literature, Vol. XXV, March, pp. 1 - 4 8 , A.E.A. Veyne, Paul (1971): Comment on 6crit Thistoire, Rdedition, Seuil, 1978. Veyne, Paul (1978): Foucault r6volutionne Thistoire, in: Comment on 6crit Thistoire, Partly :?T Seuil. Wilenski, Harold L. (1981): Leftism, Catholicism, and Democratic Corporatism: T h e Rok^. of Political Parties in Recent Welfare State Development, in: Flora/Heidenheimcf(eds.) (1981), pp. 345 - 382. Ysmal, Colette (1987): Les Francais sont-ils liberaux?, in: Un an de libdralisme, m y t h e t ' a t ; rdalitds, Actes du colloque de la Feddration CFDT des Finances et des dconomiques, Paris, Editions Crise.

Robert E.

Goodin

Interests in the Welfare State: A Comment

All actually existing welfare states are undeniably composites of pro grammes of "social insurance" (Briggs 1961, Furniss/Tilton 1977, Heclo 1974). The former's benefits are allocates on the basis of needs, and have a frankly redistributive intent. The latter's are allocated on the basis of past contributions and, at root, are not redistributive at all 1 . Faced with this jumble of policy, anyone trying to explain the welfare state, sociologically, or to justify it, morally, has avaiable two clear options. Either you can take the principle of n e e d s - b a s e d redistribution as c o n stituting the core of welfare state principles, and try to explain insurance - like programmes somehow in terms of that. Or else you can take the principle of contribution - based insurance as paradigmatic, and explain redistribution in term of that. Or — for a third and much messier option - you can admit that both of these are independent principles that are in play in welfare states, and proceed to explain sociologically ( or to justufy morally ) how this juggling act shoul have come about in the first place, and how it should be managed now. It may well be true that the wold is genuinely messy, and that the drive for parsimonious models reflect the analyst's aesthetics rather than reality's nature. Still, even if we have to complicate the model in the end, it seems worth seeing how far we can get with simple models at the start. As between the two clean models, I am genuinely torn. My moralizing instincts tempt me toward the n e e d s - b a s e d argument (Goodin 1988). But my political sociological bent pushes me toward the insurance principle. Historically, those prorammes came first. Politically, they seem safest even in today's climate of cutbacks (Goodin/Le Grand 1987). Rhetorically, this style of argument seems the most decisive, showing opponents of the

Or at least they would not be redistributive, if the programmes were organized along genuinely insurance principles of an actuarial sort - which of sort they are not. More of that later.

welfare state that there are good reasons even in terms of their own values for supporting some such institutions. For purposes of this discussion, therefore, I shall simply be trying to see how far we can get with the assumption that the interests at work in welfare state debates are all essentially 'insurance interests'. The great political advantage of this claim,if it can be sustained, is that everyone will turn out to be on the same side. Ex post, some peope will end up r e ceiving more than they paid in, while others will end up paying in more than they receive - just as, in the case of private fire insurance, those, unlucky enough to have their houses burn down end up making claims, while most of us lucky enough to avoid the disaster end up making insurance payments without ever claiming against the policy. The point is that ex ante we all benefit (and ex post we all have benefited) from the. insurance and the security that it provides, whether or not we ever need to make a claim against the policy (Zeckhauser 1974). Hence, on the insurance model, an anti-welfare state coalition of net contributors versus net beneficiaries (of the sort Ganssmann and Weggler have in mind), would simply make no sense. Everyone, in insurance terms, is a net beneficiary. ^ Ai

1

There are many possible points of entry into this argument. Perhaps tbfi^ best is to meet head-on the argument famliar from Titmuss, Hayek| and Friedman and reiterated by Ganssmann and Weggler (Hayek 1960w chap. 19; Titmuss 1968, pp. 1 7 3 - 8 7 ; Friedman 1962, pp. 1 8 2 - 8 9 ) - tha| even where they are organized on an ostensibly social - insurance basis,^ welfare state programmes do not respect the fundamental actuarial 'equi- * valence' principles of genuine (i.e., private) insurance. There is in social insurance programmes broader risk - pooling,and more resistance to risk-T^| rating of premia, than actuaries would ever allow in private insurance^ markets. A private pension fund organized on p a y - a s - y o u - g o principles:; (as is the state's old age pension, typically) would be born bankrupt. And,, so on. Now, those facts in themselves are indisputable. The question is whatl we should make of them. Not much, I would argue. It is, I submit, simply^ an error to take private insurance as the paradigm of insurance, and, to, judge the 'genuineness' of the insurance component of social insurance by that standard. My argument at this point is perfectly straightforward. Consider what it is we want insurance for. Then consider to what extent private insurance is capable of providing it. I shall show that,in various ways, private

insurance is capable of protecting us only against moderately trivial risks; the really big risks, against which we would most want to be insured, are uninsurable on private markets. I conclude, therefore, that social insurance precisely where, and precisely because, it deviates from standard principles of private insurance is better at doing for us what we want insurance to do. So where is it that the market for private insurance must necessarily fail (Goodin 1988, pp. 157-60; Barr 1987, chap. 5)? Well, first of all, you cannot insure against the risk of becoming uninsurable. The worst thing that can happen to you, in a world where your welfare depends crucially upon the quality of your private insurance coverage, is being dropped as a bad risk by your underwriter. Then, in the parlance of the insurance industry, you are forced to 'go naked', whether you want to or not and precisely when you are most at risk of something bad happening to you. (That is why your original underwriter dropped your policy, after all.) Even the moderately risk-averse would want coverage against that risk. But insurance against becoming uninsurable, by its nature, is unavailable on a free market2. Related to that is the way in which, secondly, private insurance is conventionally available to cover only moderate - sized risks. Consider, for example, the lack of 'catastrophic coverage' in private US health insurance ^policies. You can get a policy to cover you for, say, 75% of health care [expenditures after the first $100 and up to $100,000; but after that jtoaximum sum has been reached, you are on your won. Actuaries insist Jlpon those maxima, on the grounds that they cannot calculate the proper premium to charge people unless they know the maximum amount they pght have to pay out3. So, in the absence of state action, such maxima are a virtually universal feature of private health insurance. The upshot, however, is that you can buy insurance only where you need it least, and you simply cannot get it where you want it most. Faced with the prospect pi really hyperexpensive treatment, you are again forced to 'go naked' in rivate insurance markets.

S

The fact that actuaries must be able to calculate probabilities in order b calculate premia means, thirdly, that private insurance will be unavail }ble to protect against life's greatest uncertainties. That is not to say that (hose disasters are necessarily likely to befall you. But it is to say,that \ | P J2 P

A system of 'assigned risks' is possible only with state intervention, compelling underwriters to carry their fair share of 'bad risks'. Strictly speaking, they need only know what they will be required to pay out overall, hot what they will have to pay each individual; so knowing the probability distribution of claims, large and small, should be enough. But, following from my third point below, that condition is often not satisfied either.

their very unpredictability makes them the greatest sources of insecurity for you. Acts of God are uninsurable, because fundamentally unpredictable, in this way. So too would be risks of unfamiliar illnesses (e.g.fi AIDS) or risks of unemployment in particularly fluid (e.g., sunrise or sunset) industries. Finally, the logic of mutual insurance in the private market presup-^ poses that the risk of each insured party is statistically independent of the risk of each other c o - insured. That assumption is necessary to guarantee; the financial integrity of the insurance scheme, which depends upon the* premia of those not making claims to pay the claims of those who do. suffer the insured - against contingency. In standard social policy contexts, though, risks often are instead interdependent. In an epidemic, the risk oft my catching a disease is a positive function of your risk of catching it. In; a collapse of the banking system, the probability of my bank's failing is a, positive function of the probability of yours failing. In an economic down-turn, my risk of unemployment is a positive function of your risk., In such circumstances, private mutual insurance funds would be bankrupt-j ed by everyone making claims at once. Reinsurance tapping the private fortunes of Lloyds style 'names' or, better yet, access to the general fund revenue of government is required to protect against those sorts of risk. A All of that is merely designed to show that social insurance is just a. better form of insurance than is private insurance. It provides protection, against really big and really unpredictable risks, in a way that private, insurance simply cannot.So if you want insurance at all, you should want: (at least some of) that insurance to be public rather than private iir form4. J

IL -

Now, all that of course leaves the problem of why everyone should necessarily want insurance at all. Much is made both in the Ganss-< mann/Weggler paper, and in the larger literature from which it borrows of the desire of 'better - than - average risks' to opt out of the public > insurance pool. They may be doing so with a view to trying get private^ insurance at the lower rates that their lower risk-rating would warranty they may even be prepared, given how very low risks they really run, to^ 'self-insure', i.e., to go without insurance coverage at all. All that makes 4

In passing, I would add that 'social assistance' might be just the limiting case of that?phenomenon. There, the risks are so unpredictable and widespread that there is n o * basis for assessing contributory 'premia' against anyone in particular. Those premia a r c ' instead paid through general taxation.

a good deal of sense, provided people really can be all that sure that they are (and will remain) 'good risks'. My strategy in refuting that claim turns on the proposition that no one - or, anyway, not very many people at all can know for sure that they are and will remain good risks and hence not need the services of social insurance. First of all, as Dryzek and I argued elsewhere, there are some situations (total war, global depression, and such like) in which virtually everyone must live with very substantial uncertainties about their own future (Dryzek and Goodin 1986; Titmuss 1958, p. 85). That was historically perhaps the most important factor in the growth of welfare state spending in the postwar world. Beyond that, it can also be argued, secondly, that similar uncertainty pervades each person's life, seen from a 'whole lifetime perspective'. No one, aged 18, can be all that certain not to need the welfare state before retirement, whatever that person's race, sex or occupational class5. Even miners often live long enough to collect the old age pension, and so on. Probabilities may differ somewhat between groups, it is true. But it would be wrong to make too much of that fact, for those probabilities themselves shift in unpredictable ways over the course of a person's lifetime. Suppose an 18-year-old were establishing an annuity to provide a private pension come age 70. There would be no way of that youngster (of the insurancence company) knowing what the monthly premium should be to generate a monthly income, in old age, of say $500 a month because there is no way of knowing how longevity rates will alter over the intervening 52 years. Either the insurance company will go bankrupt or the private pensioner will risk starving after the funds run out, depending Upon exactly how the policy contract is written. A third way of making the case, inspired by the last and by John Rawls, points to the longevity not of individuals but rather of 'basic institutions' of society once they are in place (Rawls 1977). Constitutions and other sorts of basic institutions, by their nature, are hard to alter once they are established. So people choosing, now, whether to set up a welfare state cannot realistically expect to reverse their choice should they turn out to need one later. Hence, even if people are not naturally p r e disposed to take that 'whole lifetime' perspective in making their ordinary choices, there is something about the nature of 'constitutional' choice that forces a longer-term focus upon them. 8

l I i4

For example, the US Panel Study of Income Dynamics found that 'one out of every four Americans lived in a household that received income from one of the major welfare programs at least once' in the course of the decade 1969 to 1978, and that 'no broad demographic group appears immune from shocks to their usual standard of living' precipitating welfare receipt (Duncan 1984, p. 90).

All of that is just to say that everyone benefits from social insurance schemes. The next point to make is that their need for the insurance protection is ex ante so unpredictable that the statistically expected value that each derives from the protection is virtually the same as that derived by everyone else. That unpredictability and hence presumptive equality - of benefiting is greatest in precisely those cases in which the need for public rather than private insurance is greatest. Hence, the same theoretical argument I gave for social rather than private insurance is also an, argument for supposiny that everyone's interest in social insurance is. equally strong. Ill Empirically, it must be admitted that those who regard themselves as 'good risks' nonetheless do press to be allowed to opt out of the system that, according to my analysis, benefits all alike. One explanation might be irrationality. We must not discount that possibility, of course. It may well be in people's interests to suport programmes that they shun. If so, there, may well be much political work to be done merely to make people seeh their own interests clearly. ^ Analytically, however, irrationality is most interesting when it is not, just random aberration but rather is somehow systematic. One source of. systematic error is what economists call 'pure time preference' - pre-^ ferring the present to the future, for no more reason than that the present payoff comes sooner. And one interesting fact about such errors is^ that people can sometimes be brought to appreciate the fallacy even while" falling for it, and to support compulsory old-age pensions as a matter of public policy precisely to prevent their weak wills from leading them to. spend all they have today, rather than save for tomorrow (Marglin 1963,, p. 98). Another source of systematic error is associated with the temptation to^ 'free ride' - generically, the assumption that you can realistically expect to be the only one to defect from some cooperative scheme (Olson 1965)^ The advantages that you would gain from defecting are typically swammecb by the costs to you of everyone else's similarly defecting; and if the onlj| real alternatives are for everyonee to obey or for everyone to defect, yoiu would be better off under a system where everyone (yourself included)! was forced to comply. Supposing you can be the one exception to thel universal rule is, again, a dangerous delusion that you might like to bei protected against. m Politically, it might be useful to present the package of programmes^ we know as the welfare state as a sort of Wicksell package (Wickselij

1897). The problem he discussed, recall, arose in public finance: how to ensure that taxes will be high enough to pay for all the expenditure programmes people want, when everyone votes for expenditures but against taxes? His solution was to bundle tax and expenditure policies together in inspearable packages, so you had to vote for them both at the same time. Welfare state programmes might be similarly packaged into a l l - o r nothing units, so no one can have the programmes that benefit him or her without paying the price, in terms of accepting at the same time all the other bits of the package that benefit others similarly. And there is good political sense to that package - style analysis. It is precisely such inseparable packages that political 'logrolling' generates: you accept others' favourite programmes as the price to be paid for their support of your own. The trouble with political logrolling and coalition - building is, of course, that superflous members are always at risk of being squeezed out of majority coalitions. Here, uncertainty can come to the rescue, once again. One of the main things we wanted social insurance to do for us and one of the main things private insurance could not do for us was to provide protection against becoming uninsurable. You might be in the majority coalition of net contributors to the scheme today; but you may become one of the minority who is a net liability to the scheme tomorrow, and you are anxious for some guarantee that you will not be dropped from the insurance scheme if that happens. The price of securing that guarantee is to establish a rule forbidding anyone from ever being dropped, even when it would be convenient for you to drop them. ^ (That logic, perhaps, explains why the state old-age pension was set up on a p a y - a s - y o u - g o basis from the start. That was the only way of paying pensions to those already old at the time of the programme's |iiiception; and not cutting existing elders out of the scheme was the price .that had to be paid for establishing firmly the rule that no one, subsequently, could be cut out of it.) £ By the same token, perhaps, the price we pay for not allowing anyone tto opt out of the scheme (which we must do, if we are to avoid adverse [selection and the collapse of the insurance scheme [Barr 1987, chap. 5]) is adopting a rule forbidding us to expel anyone, either. Let me just concede ii passing, here, that it is a very curious fact indeed that the West G e r man social security system makes membership compulsory only for low md middle - income earners, exempting high earners. On the face of it, hat looks like letting the best risks opt out6. !

That may be an illusion, of course. High earners might have more fluctuating fortunes, and might since benefits are earnings - related constitute a larger drain on the w insurance funds when they fall on hard times. I do not know whether that is empiri-

There are further paradoxes I should acknowledge in testing this theory against recent history. My model traces support for social insurance to growing uncerainty. But as unemployment in Britain grew to unprecedented numbers, support for the unemployed in various respects d e clined dramatically (Atkinson 1990). That is contrary to the naive expectation that the more of something there is going around, the more everyone should fear catching it themselves. One explanation for declining support for the unemployment benefit is simply that the more people there are unemployed, the more expensive it is to pay them all a reasonable benefit and, not incidentally,the fewer people there are in work to finance it7 There must be some truth in that analysis. Happily, I am free to admit the truth of it, in terms of my insurance model. After all, the higher the premium the less insurance you will buy, ceteris paribus. And what those sort of analysis suggest is, in effect, that you will be forced to pay more and more for the same level of protection against the same risks. So all that fits fine with the insurance model.The problem, insofar as there is one, is simply that, while consistent with the insurance model, that analysis is not itself directly implied by it. The source of higher premia is outside the model. All the modes does is say that the higher the premia, for whatever reason they are higher, the fewer buyers. Another explanation, derived more directly from my insurance model, is this. The growt of unemployment clarified uncertanties about who would; suffer. Suppose we asked people in 1960, when unemployment was running at 1%, who would suffer if unemployment grew to 8%. Presumably it would have been sufficiently hard to forsee the shape of the catastrophe that would lead to that outcome that everyone, in 1960, would have expressed some fear that they would themselves be among those out of work in that event. But now the catastrophe has occurred, it has become clearer roughly what sorts of people are likely to fall victims of unemployment at this level. Optimists would say that if you are not out of work now, you never will be. But even pessimists who suppose things will get worse before they get better would agree that at least we now have a fair idea who is next to go if there is further unemployment in the offing.Increasing the number of persons affected has, paradoxically, cally plausible, given the German case, or not. If not, the only explanation I can offer is a crassly political one: allowing high - earners to opt out was the price that had to be paid for preventing them from using their extraordinary political power to block the scheme altogether. The same story is standardly told about pressure on old - age pensions as the 'dependency ratio' - the ratio of pensioners to people in the workforce increases.

decreased the number at risk and with it, the political support born of uncertainty and the insurance motive for generous programmes of support for the unemployed. IV. In a way, the real challenge lies not in explaining why the support for the welfare state is declining - there are plenty of explanations for that but in why support for the welfare state is holding up as well as it is. Here, I am particularly struck by what Ganssmann and Weggler call "pull down effects". In essence, this argument says that it is in the interests of everyone behind the lines to make sure that the front line holds, or else the next battle may be fought on their own doorsteps. Put that way, it looks like a variant on my uncertainty - based logic. It need not be so far-reaching uncertainty as to imply that everyone is equally at risk, of course. For this argument to work, there need merely to be many more people prepared to defend the welfare state because of what will happen two steps down the track, should the defence fail, than there are prepared to defend it for fear of the direct, immediate consequences of its failing. That there are many more at risk in the second wave of attack than the first is a politically important insight, and one broadly in the spirit of the arguments I have been developing here.

References Atkinson, A. B. (1990): Income maintenance for the unemployed in Britain and the response to high unemployment. Ethics 100: forthcoming. 3arr, N. B. (1987): The Economics of the Welfare State. Stanford CA: Stanford University Press. Bfiggs, A. (1961): The welfare state in historical perspective, Archives Europeennes de Sociologie 2: 2 2 1 - 5 8 . Pryzek, J./Goodin, R. E. (1986): Risk-sharing and social justice: the motivational foundations of the post-war welfare state, British Journal of Politial Science 16: 1 - 3 4 . Reprinted in: Goodin/Le Grand 1987, chap. 3. Puncan, G. J. (1984): Years of poverty, years of plenty. Ann Arbor MI: Survey Research Center, Institute for Social Research, University of Michigan. Friedman, M. (1962): Capitalism and freedom. Chicago IL: University of Chicago Press.

Furniss, N./Tilton, T. (1977): The case for the welfare state. Bloomington IN: Indiana University Press. Goodin, R. E. (1988): Reasons for welfare: the political theory of the welfare state. Princeton NJ: Princeton University Press. Goodin, R. E . / L e Grand, J. (eds.): Not only the poor: the middle and the welfare state. London: Allen & Unwin. Hayek, F. A. (1960): The constitution of liberty. London: Routledge & Kegan Paul Heclo, H. (1974): Modern social policies in Britain and Sweden. New Haven CT: Yale University Press. Marglin, S. A. (1963): The social rate of discount and the optimal rate of investment, Quarterly Journal of Economics 77: 9 5 - 1 1 1 Olson, M. Jr. (1965): The logic of collective action. Cambridge MA: Harvard University Press. Rawls, J. (1977): The basic structure as subject, American Philosophical Quarterly 14: 15965. Titmuss, R. M. (1958): Essays on 'the welfare state' London: Allen & Unwin. Wicksell, K. (1897): A new principle of just taxation. In: R. A. Musgrave/A. T. Peacock^ (eds.): Classics in the theory of public finance, pp. 72-118, London: Collier-Macmillan, 1958. Zeckhauser, R. (1974): Risk spreading and distribution. In: H. M. Hochman/G. E. Peterson (eds.): Redistribution through public choice, pp. 206 - 28. New York: Columbia University Press, 1974.

* *

The Contributors to this Volume Altvater, Elmar Professor of Political Economy at the Department of Political Sciences, Freie Universitat Berlin; latest book publication: "Sachzwang Weltmarkt", Hamburg 1987 Bohnert, Walter political scientist, researcher in the sub-project T h e Crisis of the Steel Industry" Fritz, Klaus sociologist, researcher in the sub-project "Crisis of the Welfare State" Ganpmann, Heiner Professor at the Department of Sociology, Freie Universitat Berlin; several publications on socio-economic questions and the development of the welfare state Gerhardt, Udo researcher in the sub-project "The Crisis of the Steel Industry" r

iGoodin, Robert E. [Professor at the Department of Government, University of Essex; several publications on problems of the welfare state t [Guttmann, Robert Professor of Economy at the Hofstra University in New York; several publications on economic questions Herr, Hansjorg .economist, research fellow at the Wissenschaftszentrum Berlin fiir S o izialforschung, publications on money-theory and questions of international ^exchange arrangements [Hurtienne, Thomas [economist and sociologist at the Latein Amerika Institut, Freie Universitat Berlin; publications on problems of development theory

Hubner, Kurt economist at the Department of Political Science, Freie Universitat Berlin; latest book publication: "Theorie der Regulation", Berlin 1989 Kramer, Hans-Henning political scientist, researcher in the sub-project "The Crisis of the Steel Industry" Kratke, Michael lecturer and research fellow at the University of Amsterdam; several publications on problems of the welfare state Lutz, Burkart Professor of Sociology, Director of the Institut fur Sozialwissenschaftliche Forschung, Munich; several publications in the area of industrial sociology and the development of modern societies M&rmora, Leopoldo political scientist at the Lateinamerika Institut, Freie Universitat Berlin; several publications on problems of development theory Messerlin, Patrick A. Professor, Senor Economist, International Trade Division, International Economics Department, The World Bank, Washington Messner, Dirk political scientist at the Deutsches Institut fur Entwicklungspolitik; several publications on problems of development in South Korea Picchierri, Angelo Professor of Sociology at the University Torino; several publications on problems of the steel industry Reising, Susanne political scientist, researcher in the sub-project "The Crisis of the Steel Industry" Rivera, Eugenio sociologist and economist in Santiago de Chile

Schvarzer, Jorge economist and political scientist at the Centro de Investigaciones Sociales Sobre el Estado y la Administracion, Santiago de Chile Strange, Susan Professor of International Politics at the London School of Economics; latest book publication: "Market and State", London 1988 TMret, Bruno Professor at CNRS/IRIS, University Paris - Dauphine Vath, Werner Professor of Political Science, Freie Universitat Berlin; several publications on questions of the international steel industry and politics of modernization Weggler, Rolf lecturer at the Department of Sociology, Freie Universitat Berlin; publications on problems of the welfare state Wolf, Michael researcher in the sub-project 'The Crisis of the Welfare State", several publications on problems of the welfare state

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