The economic crisis is leading nation-states to retreat inward. Just like the Great Depression, which saw the rise of national economic plans such as the New Deal, the Soviet Union’s five-year plans, and fascist Germany’s reindustrialization, the proliferation of 15 separate national stimulus plans and bailouts today indicates the global economic order is unraveling. The Asian economic model may be finished, with exports declining 33 percent in South Korea (where exports account for a staggering 60 percent of GDP) and 46 percent in Japan. Industrial output has dropped 43 percent in Taiwan. With consumer demand and business investment collapsing worldwide, countries can no longer export their way out of such a severe downturn (a policy known as export-oriented industrialization). These export drops are showing up in China’s economy, which plays a critical intermediary role in the global economy. Walden Bello describes China’s economy as the “overwhelming driver of export growth in Taiwan and the Philippines and the majority buyer of products from Japan, South Korea, Malaysia and Australia.” After adjusting for the recent Chinese New Year, the government said exports dropped only 6.8 percent. Imports dropped far more precipitously, by 26 percent, which indicates China is importing fewer raw materials and industrial goods that are turned into goods for export. To address the crisis, China is dipping into its gargantuan cash reserves to stoke demand with a two-year stimulus plan of $586 billion, which amounts to 14 percent of its annual gross domestic product, versus the Obama plan, which at $797 billion is less than 6 percent of U.S. GDP. Ironically, while free-market dogmatists are attacking the White House for boosting social spending, some of these same neoliberal ideologues, like the Economist and Wall Street Journal, are criticizing China for not raising “rural incomes” or spending more “in health care, education and social welfare, so people have the confidence to spend.” China’s economy is still growing, with the IMF projecting a relatively anemic 6.7 percent growth in 2009, but it may not be enough to absorb the millions of workers who enter the job force every year. Among the 130 million rural migrant workers in China, it’s estimated that 20 million have already lost their jobs due to the global downturn. Boosting domestic consumption may cushion China’s slowdown, but it’s a losing proposition over time. Production cannot survive on internal demand alone, and prioritizing domestic manufacturing over foreign trade will inevitably degenerate into “beggar-thy-neighbor” economic warfare. 
This is precisely what’s happening in the 27-member European Union, where “peripheral states such as Latvia, Bulgaria and even Ireland have been brutally whipsawed from an era of heady growth to shockingly fast decline.” The crisis threatens to unravel the post-Cold War economic order in which the West administered “shock therapy” to former Soviet Bloc countries to restructure them along neoliberal lines. Central and East European (CEE) countries are even more export-dependent than Asian ones, and Western demand has collapsed. Net private capital inflows are expected to drop in the region by almost 90 percent this year to just $30 billion. Remittances, which account for 2.5 percent of Poland’s GDP and 8 percent of Ukraine’s GDP, are evaporating as migrant workers head back home jobless. A credit crisis may drag down CEE economies and Western banks. And Europe’s economic powers are instituting stimulus plans partially aimed at shielding national industries from lower-wage manufacturing in the East. So far, stimulus plans amount to $85 billion in Germany, $50 billion in Spain, and $35 billion in France. Central and East European governments are crying protectionism in response, particularly after French President Nicolas Sarkozy “hinted that car makers getting large French government subsidies should think of shifting production back to France from low-wage countries” in Europe. An even graver problem is Europe’s credit crisis, where homeowners in CEE countries were encouraged to take loans in foreign currencies. In Hungary and Poland, more than 60 percent of “mortgages and car loans are dominated in foreign currencies” such as the Swiss Franc and the Euro. With housing markets and currencies cratering in the East, home values and incomes are dropping while the cost of servicing foreign-denominated loans is rising rapidly, which could lead to widespread defaults. These loans were part of a borrowing binge of $1.7 trillion by CEE businesses and consumers, mainly from West European banks. On the hook are banks in countries like Austria, Italy, Sweden, and Belgium. Austria is frantically trying to arrange a rescue package for Eastern Europe because its banks’ “exposure to eastern Europe is about 80 percent of Austria’s gross domestic product. If Hungarian households default, it is not Hungary that will go down, but Austria.” A “failure rate of 10 percent would lead to the collapse of the Austrian financial sector.” The bad news for Austria is the European Bank for Reconstruction and Development “says bad debts will top 10 percent and may reach 20 percent.” It’s a double whammy for European banks that also have liabilities tied to the U.S. mortgage crisis. Because Europe lacks a central bank with the tools to salvage ailing financial firms, bigger countries are battening down their economic hatches, leaving more vulnerable neighbors adrift. The Economist notes that France and Italy “support the creation of European industrial champions” at the expense of smaller manufacturers; Germany is refusing to scrap “legal restrictions on workers moving freely in from countries that joined the EU” recently; and Spain, Portugal, and Greece helped kill a $6.4 billion infrastructure plan because they claimed it favored countries in the East. Some European countries are apparently “pressuring their banks to pull back, undercutting subsidiaries in East Europe.” Most tellingly, Western European powers brushed off a proposal by Hungary “for a special European Union fund of up to $241 billion to protect the weakest members” despite the fact that EU countries have shoveled out “$380 billion in bank recapitalizations and put up $3.17 trillion to guarantee banks’ loans and try to get credit moving again.” Germany and France are indicating that “Eastern countries should look elsewhere—to the International Monetary Fund, for instance—for help.” After being sidelined for the last few years, mainly by an oil-rich Venezuela buying up debt, the IMF has returned to center stage and is giving loans for new regimes of shock therapy to countries such as Hungary, Iceland, Latvia, Serbia, and Ukraine. While European institutions give the East the cold shoulder, offering only $30 billion in financing assistance for banks in Eastern Europe, the IMF is “looking to double its war chest for lending to $500 billion.” One writer comments: “The conditions that come with this latest round of IMF lending have been particularly opaque.… Hungary has agreed to cuts in welfare spending, a freeze in salaries and canceling bonuses for public sector workers yet the final details have not been made public. Iceland was required to raise interest rates to 18% with the economy predicted to contract by 10% and inflation reaching 20%.” Twenty years ago, Soviet Bloc populations largely accepted shock therapy with passivity, disoriented by the rapid collapse of Communism. Some also had illusions that capitalism meant Swedish-style social-democratic capitalism. This time, anger and violence are the dominant reactions to the economic collapse, with large-scale protests or riots having occurred in Ireland, Latvia, Lithuania, Bulgaria, Iceland, Ukraine, and Greece. That’s because there is no gain to go with the shock therapy pain. Peter Gowan, writing in The Global Gamble, argues that the shock therapy in the early 1990s bankrupted and privatized East Europe’s industrial enterprises and dismantled the region’s integrated economy, known as Comecon. The West imposed a regime that devastated the East’s social and economic systems and paved the way for unsustainable bubbles in housing and construction, foreign credit and capital flows, low-wage manufacturing and remittances. 
Dependent upon the West as an export market for goods, as a safety valve for surplus labor, and a source of capital, CEE economies are being thrown back into the lions’ den with the IMF, but with few economic options. West Europe is turning inward, responding to internal pressure from labor and capital. In England protests are increasing against foreign investment and the 2.4 million foreign workers in the country. Xenophobia and economic nationalism are increasing with unemployment, which has risen to 6.3 percent in England and is projected to climb as high as 10.5 percent by 2011. France may hit 10.6 percent unemployment in 2010 and Spain could see unemployment approaching 20 percent by 2011. This will stoke demand for protectionist measures ranging from supporting national industries and more stimulus plans to pushing out foreign workers and passing “buy national” provisions. The effect could be a negative feedback loop of more pressure on Europe’s weaker peripheral economies, the growth of radical political movements on the left and right, and even the disintegration of the Europe’s common market and currency. Russia would like to benefit from the turmoil both as a response to 20 years of U.S. policy to encircle it militarily and economically and out of rising nationalism. But its economy has been bloodied over the last year. The ruble, Russian stock market, and oil and gas prices have all tanked, draining away $200 billion in the government’s hard currency reserves. Its ties with Central Asian countries are likely to be put under pressure, as Russia served as an outlet for the region’s surplus workers, who are now also returning home jobless. Nonetheless, the crisis in the Baltic states and Ukraine will give Russia more leverage over these countries. It may eventually lead to stronger regional alliances, as Russia and Venezuela have tried to promote, but this would require deleveraging from the global economy. Russia is casting its eyes east as part of this strategy. President Dmitry Medvedev predicted last November that “the high human and technological potential” of Asian-Pacific countries “will become the locomotive of sustainable world economic development in the future.” Recently, China inked a $25 billion deal to aid Russia’s state-controlled energy industry in exchange for about 100 million barrels of oil a year for 20 years. But this pact points to the dilemma Russia faces. It serves an important but limited role to China’s economy, as a supplier of commodities and military hardware, while China exports more valuable consumer and industrial goods to Russia. Rising Powers This period harkens back to the time between the two world wars when the United States was the industrial and financial powerhouse, but not the political or military superpower. The United States remains an historically unprecedented global military power, but it is unable to transform organized violence into political gain, as evidenced by the Iraq and Afghanistan-Pakistan wars. The Bush administration launched the Iraq War to grab control of the region’s oil; it was a rational if audacious gambit. A century of Anglo-American policy toward the Middle East has been based on controlling access to its oil. While the planet is a long way from running out of hydrocarbon energy, the Middle East contains the largest and most productive reserves of oil. Establishing a military presence in the region was also an important factor, but, again, only because of the oil. The war was initially supported by most foreign policy heavyweights, Democratic Party leaders, opinion makers, and the corporate media. It was an attempt to turn U.S. military and political power into economic power by seizing control of the global spigot of oil. According to retired General Wesley Clark, Iraq was to be the first of seven countries in the region toppled, with three other significant oil producers on the list: Iran, Libya, and Sudan. And the war was launched less than a year after two separate attempts to topple Hugo Chavez’s Venezuelan government. If the Bush administration successfully turned Iraq and Iran into client states (like Kuwait and Saudi Arabia already are), the United States would have gained effective control over the global economy and its real rivals: West Europe, Japan, and, most of all, China. While the United States is still the dominant power in Iraq, and Obama looks set to keep the occupation going for many years to come with a “residual force” of 50,000 U.S. troops (and unknown numbers of mercenaries), U.S. military power has diminished significantly because it is unable to turn it into economic or political gain. Elites in secondary powers—Japan, India, West Europe, Brazil, the Middle East—are willing to let the United States take the lead in geopolitics, but decades of U.S. unilateralism has degraded the international bodies, treaties, and norms it ultimately needs to use as a political-force multiplier. Take Israel’s near-genocidal assault on Gaza. It was endorsed across the U.S. political spectrum as well as by many “responsible” states in the world. But the revulsion generated by a hi-tech military butchering innocents did little to weaken Hamas’s rule and further widened the gulf between ruling elites and the ruled internationally. This political polarization is intertwined with the economic divide of the last 30 years and is a major reason why liberal democracies are increasingly dependent upon sophisticated apparatuses of policing and surveillance to repress their populations. U.S. industrial power has long since waned; recent data puts the number of manufacturing workers at 12.7 million, the lowest number since 1946. China is now an industrial and financial behemoth, and it is better placed to weather the global depression than an ailing Japan and a fraying European Union. Assuming it has the political goals and will to do so, China is still decades from imposing the type of post-WWII system of governance that saw the United States forge the Bretton Woods Agreement to manage the world economy, establish the United Nations to enshrine big-power rule, wield the Cold War military and nuclear weapons as global instruments of violence, unleash the transnational corporation as the vanguard of capital, and enforce a social compact to tame organized labor and repress anti-capitalist movements. The Neoliberal Turn The post-WWII system collapsed in the early 1970s. Monetary policy was undone by outflows of U.S. dollars starting in the late 1950s that accelerated with the huge outlays on the Vietnam War. The corporate rate of profit was depressed by overcapacity resulting from the reindustrialization of Japan and Western Europe and the emergence of newly industrialized countries. (Corporate dividends dried up and the “real” interest rate was low or even negative at times, thus draining the wealth of shareholders and bondholders.) The era of decolonization and the U.S. defeat in Indochina blunted state violence as a tool and energized radical democrats across the world, including in the UN General Assembly. And 1960s social movements started making economic as well as political demands that put further pressure on elites. 
Enter neoliberalism to address falling profit rates (and to counter radical political movements). The aim was to reconstruct national economies and the world system with the tools of privatization, deregulation, and liberalizing capital flows and the ideology of personal responsibility. The United Nations was defunded and stripped of power, labor was forced back into competition with itself through repression and deregulation, and the Global South was crippled by “structural adjustment” programs. Wealth flowed upwards as wages and benefits were choked. Americans adjusted by working more hours and sending more household members into the workforce, while consumer debt was used to buoy consumption. Debt has also been critical to “financialization,” the leveraging of speculative capital to increase profits. This worked because the financial sector increased its debt from about 10 percent of the gross domestic product in 1970 to nearly 120 percent by the time it burned down the house in 2007. It was dependent on the creation of one asset bubble after another, which governments would then bail out when they burst, such as with the Savings and Loan bubble in the 1980s. Social programs were starved, but police, prisons, surveillance, and military were put on steroids. While the post-WWII state was a warfare-social welfare state, the Reagan-Thatcher model is a warfare-corporate welfare state—which the Obama administration fully supports. There is a perception that because neoliberalism has been discredited, its time has passed. But laissez-faire ideology has been thoroughly discredited many times before. The Obama stimulus is not a return to activist government; it’s weak medicine to counter the real deflationary threat. Of the $787 billion plan about 40 percent is for tax cuts. The “investments” mainly boost programs deprived of funds for years. There is a lot of talk about creating a hi-tech green economy, but little money has been appropriated. The plan will transfer about $140 billion to the states, but economist Robert Kuttner contends the local government shortfall over the next two years could be up to $500 billion, which means the cycle of job cuts, rising unemployment, Medicaid costs, declining tax revenues, widening budget deficits, and further job cuts will accelerate. The Congressional Budget Office estimates the stimulus plan will produce 3.9 million jobs at most by the end of 2010, but the actual job deficit by then could be 12 million or more from the start of the decline in December 2007. Obama’s overall economic policy is still cut from the neoliberal cloth. He supports increased military spending, as well as an escalation of the war in Afghanistan; he reneged on his campaign pledge to eliminate the Bush tax cuts right away and he wants to stick the middle class with the tab for the crisis by cutting Social Security and Medicare. The reason some may think the neoliberal era is history stems from confusing its tools, such as deregulation and liberalizing capital flows, with its goal of reconstructing ruling-class power. This is evident in how wealth was redistributed upwards. By the late 1970s, the share of national wealth held by the top 1 percent in the United States was at a low, barely over 20 percent. A few years later, Federal Reserve Chair Paul Volcker—now back in the White House—jacked interest rates, boosting the wealth and income of creditors (triggering the Global South’s debt crisis). By the late 1980s, the top 1 percent held more than 35 percent of the wealth. Rescuing The Rich At this moment, policies are being rigged to ensure shareholder and bondholder wealth is salvaged, while homeowners are tossed pennies. The plan to spend $275 billion to help all homeowners in trouble nationwide is dwarfed by the government’s asset guarantees and bailouts to Citigroup alone, which tops $300 billion. Washington has pumped more than $45 billion of taxpayer money directly into Citigroup, despite the fact that its market value is about $13 billion. Bankrupt insurance giant AIG has received more than $150 billion, but the government has yet to take over its operations, which are being sold off cheaply to other investors. Bailing out the auto sector may eventually top $100 billion, but GM and Chrysler are worth perhaps a few billion combined. 
In terms of the auto sector there is massive overcapacity as U.S. vehicle demand has slumped to less than 10 million this year. While much of the overcapacity in capital (factories, infrastructure, and inventory) is being sustained by bailout money, labor is being forced to pay for the crisis through attacks on the wages and benefits of autoworkers and retirees. As for the banks, Paul Krugman writes that the Obama administration favors “lemon socialism” because it keeps proposing plans that “involve huge handouts to bank stockholders” by having taxpayers get stuck with worthless assets while private investors get to realize the gains from the bailouts. Nationalization would save the banking sector, but corporate management, shareholders, and bondholders would be wiped out. Nationalizing one sector might also open the door to nationalizing the automobile and energy sectors and strengthen the push for universal single-payer healthcare. That’s the problem for the Obama administration. These measures would hardly mean the end of capitalism, but they would mean the rich would pay for the three-decade-long orgy they enjoyed at the world’s expense. It would signal the end of the neoliberal project.
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Arun Gupta is an investigative journalist and an editor with the New York Indypendent newspaper.
