MONEY, POWER AND THE STATE: CAPITAL NEEDS CONTROL

The Influence of Financial Markets on Democracy

By Peter Wahl

[This article is translated from the German on the World Wide Web, www.attac.de/tobin/broschveren/kbk6.pdf. Peter Wahl is a director of the research organization WEED, World Economy, Environment and Development.]

The international financial markets are not only economically important. Their effects extend to the relation of economics and politics, the role of the state, democracy and questions of political power and rule.

IS THE WORLD MARKET A PRACTICAL NECESSITY?

The historical changes that occurred with the formation of the international financial order and the globalization process must be publicly legitimated. This is particularly true when they produce crises, crashes and other “side-effects”. The claim that there is no alternative to liberalization and deregulation is central. The globalization of markets is presented as a practical necessity and criticism is automatically suspected of being an ideology. The practical necessity argument of Margaret Thatcher was preached as the TINA-principle (“There is No Alternative”). Since then this principle has become an ideological leitmotif in the mainstream of the globalization discourse.

The World Market as a Practical Necessity is the title of a book by Elmar Altvater who criticized neoliberalism and globalization in the 1980s (Altvater 1987). When that system collapsed that understood itself as an alternative to capitalism in 1989 with the fall of the Berlin Wall and the dissolution of the Soviet Union, the argument of lack of alternatives seemed empirically confirmed. The conservative US theoretician Fukuyama even proclaimed the “end of history” (Fukuyama 1989).

Practical necessity and lack of alternatives in social development contradict basic democratic principles. Freedom of choice, the choice between alternatives, is a constitutive element of democracy. “The paralyzing prospect that national policy in the future will be reduced to the more or less intelligent management of a forced adjustment to imperatives of “positional security” takes away the last remnant of substance from political discussions” (Habermas 1998, 95). When one does not have a choice any more because the same policy is made irrespective of one’s choice, this is the end of democracy.

Changes in the relation of politics and the economy are usually seen as the state’s loss of importance. The impression arises that the state is powerless toward the financial markets. However the governments themselves – in the US, Great Britain and also in the other industrial countries – brought about this development and give free rein to the laissez-faire of the markets. Therefore the state has changed its function from a social- and redistribution state to a competition state. The state is assigned the role of making the whole society fit for the international positional competition (cf. Brand et.al. 2000).

How governments give away control possibilities is clear in the increasing independence of the central banks (for example, the General Central Bank and the European Central Bank, EZB). The statute of the EZB declares that the main function of the bank is guaranteeing the internal stability of currency value in the Euro zone. While the old German banking law obligated the German bank to support the general economic policy of the German government, the new regulation underscores the economic independence of the EZB. The German Central Bank is now explicitly independent of directives of the German government.

With the claim of lack of alternatives, globalization is presented as a process that evades democratic decisions. The original authors of the neoliberal concept knew this. They solved the problem with an elitist theoretical approach in elevating the “free market economy” into the only legitimate economic order that “should be defended even against majorities” (Hayek 1944). Or they urged the “de-politization of the state” (Friedman 1962) as a prerequisite for increasing efficiency and international competitiveness. For Friedman, the central problem is that a democratic state dependent on mass legitimation can only be inefficient. That the neoliberalism of the Friedman school had no problems testing its concept for the first time in practice in the Chile of the dictator Pinochet is not surprising.

But if the state is “de-politicized” – the Greek word politeia means community -, it avoids the grasp of the sovereign of democracies, the citizens. This breaks with the foundations of civil democratic theory with its philosophical presuppositions in the European enlightenment and its emancipatory goals.

According to its idea, the democratic constitutional state is an order willed by the people and legitimated by the free popular opinion and will enabling the addressants of the law to understand themselves as its authors. However a capitalist economy cannot easily correspond to these demanding premises since this economy follows its own logic. Rather politics must be concerned that the original social conditions of private and public autonomy are adequately fulfilled. In any case, the essential legitimating condition of democracy is endangered” (Habermas 1998).

The emphasis on the lack of alternatives is heard in everyday political discourse in statements like “There is no leftwing or rightwing economic policy, only a true and a false policy” (Gerhard Schroeder). Actually there were and are always alternatives. These alternatives were articulated again and again in the past in strategic forks in the road. For example, Jorg Huffschmid described the alternatives with which the problems and contradictions of the Bretton Woods system could have been solved differently than through its dissolution. The reform option existed, accentuating the positive beginnings of this order and making them dynamic with innovative elements. Strengthening the domestic economic demand through higher wages and state investments in innovative sectors and the material and immaterial infrastructure (research, education, health care etc) and development of the public sector could have occurred in the crisis phase at the end of the sixties. In foreign trade, monetary cooperation could have been intensified and the Keynesian idea of a world currency taken up. The special rights of the IMF that were created in 1969 were based on the conception of an artificial international currency and could have offered a beginning to a world currency (cf. Huffschmid 1999).

That these alternatives did not prevail was not because they were practically unsound. Rather the powers and interests assembled behind the banner of neoliberalism were politically stronger. However the social pecking orders are not identifiable realities but rather are subject to constant change. Power questions rather than practical questions were always primary in the conflict over historical alternatives that always exist.

FINANCIAL MARKETS UNDERMINE THE PARLIAMENTARY SYSTEM

Even if the claim that there are no alternatives is extremely ideological, this does not mean that no pressures rise from the existing economic structures. The financial markets or the actors on the international financial markets exercise so much power that the system of parliamentary democracy is undermined.

One decisive cause for this development is that economic processes and structures are sifted out of the framework of the nation state and transferred to the transnational area. The identity between voters and the elected increasingly dissolves since essential points elude the grasp of the elected. “A congruence between participants and afflicted becomes increasingly rare since the nation state has to organize its decisions on a territorial foundation” (Habermas 1998). As long as economics occurred essentially with the nation state, it was subject to nation-state regulations of workers’-, women’s- and environmental or social-movements attained in long social struggles to curb Manchester capitalism and subject it to some democratic controls.

Such an ordering framework does not exist for the globalized economy. No world state exists. The following statements also refer to the World Bank and the international investor order, that is to all economic aspects of globalization. Financial markets are the most important sector. Creating a world state may hardly be desirable. A hardly imaginable degree of centralization and bureaucratization would be necessary for establishing a world state and a world government that is scarcely possible without negative side effects as for example a further leveling of diversity, non-transparency and problems of minority protection.

The regulatory initiatives through international institutions and agreements lag hopelessly behind the dynamic shown by the global players. International institutions like the IMF, the BIZ and the WTO are instruments of a neoliberal-inspired globalization. In its framework, fund managers, bankers, stock jobbers and boards of directors of transnational corporations make decisions without any democratic legitimacy that are fatefully important for millions of people.

The so-called exit-option is a very effective potential threat and power of actors on the financial markets. With the threat of suddenly withdrawing their capital, these actors put governments worldwide under pressure to keep or make their country attractive as a location. Governments react with tax relief from compulsory flexibilization of the factor labor to the free availability of the infrastructure. Important instruments of macro-economic control like sovereignty over interests and rates of exchange and thus also possibilities for economic- and labor market policy are taken away from smaller and medium-sized economies.

“The politics of governments have now become the hostages of financial markets as a result of the expanded exit-option enjoyed by capital”, the chief economist of UNCTAD declared (Akyuz 2000). A permanent pressure guaranteeing optimal exploitation conditions of capital to the financial actors arises in the mammoth economies. The profiteers of this constellation obviously regard this as positive, as for example Josef Ackermann, member of the board of directors of the German Central Bank: “The capital markets are beginning to discipline the political powers because inadequate political and structural framing conditions lead mobile capital to seek more profitable places of investment” (Frankfurter Allgemeiner Zeitung, September 4, 1999).

However when the markets, the real sovereign of democracy, discipline governments the citizen, is disciplined since these governments are democratically elected. The voting act in which he or she expresses sovereignty is devalued. In other words, the power of the financial markets is incompatible with parliamentary democracy. Therefore regaining the primacy of politics over the financial markets is “a question of survival of democracy” (Edzard Reuter, head of Daimler, DIE ZEIT, December 9, 1999).

SOCIAL POLARIZATION AND CRISES – DEMOCRACY ENDANGERED

For the architects of the Bretton Woods system, the destabilizing effect of the world economic crisis on democracy in Europe was an important motive in developing the international post-war order. The lessons that they draw from the rise of fascism are ignored in the neoliberal turn. Thus the social polarization increasing both within the societies in the North and South and also between industrial- and developing countries has become a destabilizing factor while a distribution policy aiming at social balance and justice loses ground more and more.

The UNDP in its Human Development Report estimated that “the income gap in 1997 between the fifth of the world population living in the richest countries and the poorest fifth was 74:1. In 1990 the disparity was 60:1 and in 1960 it was 30:1” (UNDP 1999). A study of the World Bank concluded that the worldwide GINI-coefficient, the indicator for income distribution, rose between 1988 and 1993 from 0.63 to 0.68. Inequality has increased (cf. World Bank 1999). In an address titled “Democratic Development as the Fruits of Labor”, Joseph Stiglitz, the chief economist at the World Bank until February 2000, declared with regard to the effects of the crash in Southeast Asia “workers had to bear the costs – in the form of high unemployment and falling wages. Workers had to hear the sermon on the “readiness to make sacrifices” after the same preachers had proclaimed shortly before that globalization and the opening of capital markets would give them unparalleled growth” (Stiglitz 2000).

Under these conditions, globalization produces a few winners and many losers. Such developments leave their mark on political conditions in the long run. The apathy of citizens, retreat into the private, the increase of racism and prosperity chauvinism (for example, the Northern League in Italy) and the success of populist leaders like Haider in Austria are signs that social polarization has a destabilizing effect on democracy. In industrial countries “the ethnocentric reactions of natives against everything foreign multiply – hatred and violence against foreigners, against persons of a different faith and persons of a different color and also against marginal groups, the disabled and once again Jews” (Habermas 1998).

This is true where crises shatter the development efforts of many years and hand over millions of people to social descent. The increase of civil war conflicts, mostly in the form of ethnic or religious conflicts, fundamentalist currents of different colors in developing countries and in the European periphery (Balkans) is undeniable. Authoritarian demagoguery and undemocratic politics fall on fertile ground among the losers of liberalization and deregulation and those who feel threatened by liberalization and deregulation.