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Free trade forever? On the imminent demise of the hyper-globalization project

In the 1930s a group of neoliberal thinkers embarked on a quest to establish a liberal world order. A quest that in the 1990s has led to what Dani Rodrik dubbed “hyper globalization”. However, this quest may now become a victim of its own success. Against the emergence of nationalist geopolitics, we face a new challenge: a challenge to reconstruct international relations on the basis of solidarity and cooperation.

Werner Raza (ÖFSE)

The dream of the one global economy

Critics of hyper-globalization often identify the liberation of market forces from the shackles of the regulatory state as the essential element of neoliberalism. While not untrue, it is only half the answer. Equally important is the insight that the necessary corollary to this consists of the construction of a global “Ordnungspolitik” enforced by international institutions.

As Canadian historian Quinn Slobodian has meticulously recounted in his recent seminal book, the ideas for constructing a global economic order above and beyond the powers of the nation state date back to the 1930s. Ever since, the objective of “encasing” the market order from democratic politics has been a central tenet of the globalist project pioneered by economic thinkers in the liberal tradition, such as Ludwig von Mises, Friedrich A. Hayek, and Wilhelm Röpke. Faced with the end of empires after World War I, the great depression and the disintegration of the world economy in the 1930s, these scholar-activists realized that the global economy needed a strong legal framework for its sustenance. Market forces alone would not guarantee its integrity or automatic reconstruction. The prefix neo-liberal was precisely chosen to indicate this departure from 19th-century laissez-faire liberalism. Neoliberals emphasized that the free workings of the market and the international division of labor needed a legal framework instituted and guaranteed by what Hayek referred to as a global federation. It was the explicit objective that under this framework the hands not only of nation states, but of all political authorities with respect to economic planning and interventionism would be tied.

So, was the Bretton Woods system of international economic governance that rose from the ashes of World War II welcomed by the neoliberals? Unsurprisingly not, for it retained considerable policy space for nation states to restrict financial markets, conduct Keynesian-style economic management, and expand the welfare state. That situation started only to change with the dissolution of the Bretton Woods monetary arrangement in 1971, and the ensuing economic crisis. As a consequence, conservative governments came into power in the UK (1979) and the US (1980) with a distinctly neoliberal agenda, including on international politics. The tight monetary policies of the Reagan administration drastically curtailed the policy space of other countries, particularly in the Global South, which during the 1980s suffered a series of severe debt crises. Crisis resolution was predicated on draconian structural adjustment policies imposed on debtor countries by the IMF and the World Bank, the latter now increasingly under the influence of monetarist doctrine.

From dream to reality: the hyper-globalization project of the 1990s

The decisive moment for the globalist project came with the dissolution of the Soviet bloc in 1990/91. What followed was the phase of hyper-globalization. Centered on the trinity of “liberalization-privatization-deregulation”, efforts to promote a global institutional framework were greatly intensified. The resulting institutions, in particular the WTO, founded in 1995, enshrined the progressive liberalization of trade and capital flows into international law, promoted the removal of national regulations (now dubbed “non-tariff barriers”), guaranteed intellectual property rights, and otherwise curtailed national economic powers by imposing all kinds of so-called “disciplines”. International investment agreements codified the rights of investors, including the enforcement of their property rights against states via private international investment arbitration. Indeed, as early as the 1930s, Hayek and others had already anticipated that, by unleashing market forces, competition between nation states for investment would reduce (corporate) taxation levels and exert pressure on governments to cut down on welfare spending. Similarly, the power of trade unions to press for wage increases would be eroded, given the offshoring threat available to corporations.

Clearly, in this period, many of the objectives of the neoliberal masterminds had been achieved. Global governance mechanisms largely severed economic activity from the realm of national politics, and thus constrained governments’ ability for discretionary policies. To make matters worse, third-way social democrats like Bill Clinton, Tony Blair or Gerhard Schröder turned into zealous disciples of the new gospel, thus sealing neoliberal hegemony across the political spectrum. Regardless of which political ideology had its foot in the corridors of powers, economic policies hardly differed. British sociologist Colin Crouch aptly described this as a state of “Post-democracy”.

The dream bust: back to 21st century geopolitics

Given this success story, how can the emergence of nationalist leaders like Donald Trump and his economic nationalism then be explained? The neoliberals have not much to offer in this respect. Though they could not but accept the democratic nation state as a fact of political life, their explicit aim was to constrain its policy space to cultural issues in the hope that this would suffice to calm popular instincts for identification and community. But if national governments were to actively intervene into economic affairs on the back of popular pressure, neoliberals would insist that the liberal order had to be maintained. They considered it inevitable that the social costs associated with the free operation of market forces had to be borne by workers – and capitalists, to the extent that they did not succeed in the marketplace. Restraining democracy – either through outright support for a dictatorial regime (e.g. the Pinochet regime in Chile) or by resort to technocratic government (e.g. the recent governments of Mario Monti in Italy and of Loukas Papadimos in Greece) – was accepted as a necessary, if only temporary side effect of good economic governance.

In this respect, re-reading Karl Polanyi’s opus magnum “The great transformation”, written roughly at the same time Hayek et al. developed their hyper-globalization project, is enlightening. For Polanyi, it was precisely the dis-embedding of 19th century liberal capitalism from society that led us into the cataclysm of the two world wars and the horrors of fascism. If the economy became a detached system remodeling society according to its own demands, while externalizing the social costs of private enterprise upon the former, society would eventually strike back. Seen from this light, does Donald Trump not resemble a déjà-vu phenomenon reminiscent of European politics in the 1930s? Indeed, US voters from the working middle-classes, who have seen their prosperity eroded, the career perspectives of their offspring undermined, and their moral values denigrated by political correctness, have become disenchanted with established politics. Instead, they supported an extravagant political outsider claiming to put popular interests on top of his political agenda. Needless to say, this “populist moment” (©Chantal Mouffe) also resonates with the rise of far-right parties in Europe and their neo-nationalist projects.

A Polanyian perspective thus suggests that hyper-globalization has produced the very demons the Liberal mainstream conveniently deplores as the enemies of the open society. If the geopolitical agendas of Donald Trump and his likes eventually put an end to the hyper-globalization project, given its profound internal contradictions, this demise was ultimately unavoidable. The repercussions of nationalist geopolitics on international relations might be severe, but Karl Polanyi reminds us that counter-movements can also be progressive in orientation. In the 1930s and 1940s, effectively combatting fascism required abandoning the utopia of economic liberalism. Today, unleashing society from the globalist straitjacket is a key challenge. It is on us to live up to this challenge and reconstruct international relations on the basis of solidarity and cooperation, as well as to re-create spaces of manoeuver for democratic politics at the local, national and macro-regional levels.