BEYOND MARKET VERSUS STATE
A feature of the People-Centered Development Forum, Release Date April 3, 1992
by David C. Korten and Paul Ekins
It is rare to open a serious daily newspaper or news weekly without being faced with articles predicting dire economic consequences if the current international negotiations under the General Agreement on Trade and Tariffs (GATT) fail to remove the world's last remaining trade barriers. Bountiful employment and prosperity are promised if they do. Opponents of free trade are dismissed as "protectionists" advocates of narrow special interests and economic illiterates who lack concern for the plight of the poor and seek to block human progress. We are reminded of the failure of state planning in Eastern Europe, the economic achievements of the competitive market, and theories demonstrating that trade benefits all parties. By implication we are asked to accept that an integrated global market in which the institutions of the market are allowed to work without restraint will create an economic miracle. The poor will be lifted from their misery and the environment will be preserved.
ECONOMIC MIRACLES FOR WHOM?
While some opponents of free trade are indeed narrow minded isolationists concerned only with the protection of special interests, the reality is far more complex than most free trade advocates admit. Furthermore, the evident failure of command and control economic planning does not itself remove the critical defects of the unregulated market including its tendency to accentuate divisions between rich and poor, neglect the environmental consequences of economic growth, erode the basis of its legitimacy and undermine democratic governance processes.
Since the earliest days of the industrial revolution the market based economic order has in broad terms divided the national population into three distinct groups: 1) a beneficiary class consisting of industrialists, elite workers and professional middle classes who benefit from the order; 2) a class of dependent workers who have accepted their inferior power and remuneration as a price of avoiding the ranks of; 3) those who are surplus to the industrial system's requirements the market's "disposable people."
In the Northern industrial countries, development's presumed model for universal prosperity, the visibility of these divisions, until recently, has been obscured by the success of the collective bargaining of the labor union movement and the social safety net of public welfare programs. Throughout the 1980s, however, restraints on market forces were reduced, competition among the economic classes for a shrinking ecological resource base intensified, labor unions particularly in North America saw their bargaining power eroded by industrial migration to low wage countries, and social services for all but the wealthy seriously deteriorated. As a consequence, the social divisions of market societies have come into sharper relief as income gaps and the numbers of economically dispossessed grow alarmingly.
For example, in 1950 people in rich nations could, on average, buy about ten times as much as those in poor nations; by 1988 it was nearly 30 times as much. The income gap can be nearly as great within as between countries. In Brazil the richest 20 percent earn 28 times as much as the poorest 20 percent. In the United States the differential is 12 times and growing.
London, founding city of the industrial revolution, experienced a fourfold increase in the number of homeless families with children, to a total of 400,000 people. Adding London's 120,000 homeless single people brings the total to 520,000 just short of Calcutta's 600,000 street dwellers. Meanwhile, government leaders boasted of an "economic miracle."
In Southern countries the dynamics of human disposal are particularly stark. Often the multilateral development banks are key players. For example, 70 "development" projects of the World Bank ongoing in 1990 would forcibly displace 1.5 million people from their homes and livelihoods to make their lands and resources available to benefit persons in most instances already better off economically than those displaced. In almost every case the oustees would end up impoverished by the "resettlement and rehabilitation" process.
With regard to the ecology, the consumer society has long depended on the capture of an ever larger share of earth's available ecological resource base to support the extravagance of the market's favored people. The fact that the 20 percent of the world's people who live in the Northern industrial countries account for well over half the world's natural resource consumption and generate a comparable share of wastes is often cited as evidence of the free market's economic superiority. This might be a plausible interpretation in a world of limitless resources. Unfortunately, a growing body of evidence suggests that in the aggregate the global economy is expropriating ecological resources at a rate that already exceeds sustainable limits. Consequently, what these high levels of Northern consumption really demonstrate is the ability of the current market system to concentrate economic power to the benefit of the few at the expense of the many.
Affluence has historically been built, in part, on the ability of the powerful to extract from the poor their rightful share of earth's ecological surplus. In an earlier era this was the function of colonial empires. Now that function has been passed to an international trading system sharply biased to Northern interests.
The social legitimacy of the market system is grounded in arguments relating to the economic efficiency of competitive markets and the rights of private ownership. Unfortunately, as amply demonstrated by current experience, the natural processes of the unregulated market tend to erode both. Unless constrained by public policy, winners tend to drive losers from the market, gradually concentrating market share in fewer and fewer corporate units until the ultimate victors gain oligopolistic control of the market and insulate themselves from normal competitive market forces.
This process is vividly demonstrated in the global economy by the rapid growth of intra-corporate trade now estimated to account for 30 percent of reported international trade. Intra-corporate trade, which is internal to an individual corporation and governed by hierarchical dictate rather than competitive market forces, of course, is not "trade" at all as no market transaction is involved.
Free traders enthusiastically malign the former command-and-control economies of Eastern Europe and the USSR. They prefer to ignore the fact that the command-and-control economies internal to the 100 largest global corporations exceed the GNP of more than half of the world's nation-states. In economic terms General Motors (USA) is roughly equivalent to Austria, Royal Dutch Shell (UK/Netherlands) to South Africa, Toyota (Japan) to Yugoslavia, and Siemans (Germany) to Malaysia. The 91,000 employees of Daewoo (Korea) form a corporate economy roughly equal to the GNP of the national economy of the 166 million people of Bangladesh. These giant corporations, to a large extent creations of policies advanced in the name of the "free" market, represent great islands of unaccountable central planning within the global market. This allows them to wield enormous economic power when dealing with consumers, smaller business units, or even countries external to their own managed economies managing transactions with less powerful actors in the external market economy to accumulate ever more economic power within their corporate borders.
Just as the processes of market consolidation work to reduce market competition, they also tend to shift control of capital away from its real owners including countless small investors and pensioners to the managers and investment bankers who control capital's use. Largely insulated from accountability to the actual investors, these managers and bankers have proven adept at manipulating the system to transfer the legal ownership of massive amounts of capital into their own hands, far out of proportion to any value they create. Unrestrained, the free market inexorably erodes the foundations of its own legitimacy.
As disparate economies become integrated with one another, capital becomes increasingly free to flow to the locality where production costs are lowest for export to localities where incomes are highest. Losing its national identity, capital transnationalizes and loses its attachment to place. If there is a surplus of labor in the integrated economy, the balance of power between labor and capital tilts sharply toward capital. Wages are bid down toward subsistence, while the returns to the firm increase. Governments desperate to attract investors find themselves bidding against one another to offer investors the cheapest and most compliant labor; the weakest environmental, health, and safety standards; the lowest taxes; and the most fully developed infrastructure. The consequences can be devastating for community standards.
The argument for freeing markets of regulatory constraints must be built on more than the failure of socialism and the proven ability of the unrestrained market to enrich the few at the expense of the many. In fact the key to prosperity lies in a balance of the forces of market, state, and civil society. Long term trends have been in a contrary direction.
THE GROWTH OF STATE AND MARKET POWER
For most of the world's people, the pervasive influence of state and market is a relatively recent phenomenon. The great majority of the "sovereign" nation-states that now comprise the United Nations date only from the post Second World War period. Prior to expansion of the nation-state, most of humanity's people lived in the rural areas of non-industrial countries and built their economic lives around resources controlled by community structures and production for self-consumption. In other words, most human needs including cultural, spiritual, and social needs were met by non-market institutions of what we might now refer to as civil society. Economic self-interest was only one of the forces at play in mediating human relationships.
The family or household was the primary economic and social unit, linked to other such units and to place through complex webs of non-market relationships. Then as now, those within the well functioning family unit whether nuclear, extended, or clan shared resources among their members feeding, clothing, sheltering, and caring for one another free of charge. When called for they made real sacrifices for one another. More broadly, the social fabric of all functioning human communities has incorporated mutual help mechanisms that represent an extension of the non-market values and relationships of the functioning family.
The point here is not to idealize traditional communities, which invariably featured their own forms of injustice and brutality. Rather it is to point out that imperfect as their function may be, non-market values and relationships have long played a central role in human society and indeed are essential elements of a healthy, prosperous community. This point is so obvious as to scarcely merit mention, were it not for the fact that the theory of the free market that dominates current policy thinking denies their existence and dismisses their validity as a basis for social organization.
It is true that many modern wealth creation processes are inhibited in settings in which non-economic values are strongly embedded for the very reason that they inhibit unrestrained economic competition and the natural advantage it conveys on the economically powerful. This has given the economically powerful a substantial interest in extending the market's reach often at the cost of sacrificing non-economic family and community ties.
Markets alone would probably have corroded the structures of community self-reliance and mutual assistance in due course. So attractive is the carrot proffered by the images and artifacts of the consumer society that even those who have no objective chance whatever of benefiting tend to capitulate to its perception of reality.
But the processes of marketization would have been far slower without the wholesale redefinition of property rights made possible by using the powers of sovereignty of the modern state to transfer productive assets from those who engaged in subsistence production to those who were prepared to bring these assets into the market system. Asset holders who resisted the carrot of consumerism found themselves confronted by the stick of the state's confiscatory powers as the state lay claim to untitled ancestral lands, imposed taxes that forced subsistence producers into the market, and exercised the right of eminent domain to claim even the titled land, water and forest resources of predominantly subsistence producers for development projects "in the public interest." Through such means the resources and social structures that once gave people independence or relief from the market were ruthlessly assaulted or sequestered; families and communities were ruptured; and water and biomass expropriated in the name of economic efficiency and growth.
CONSOLIDATING MARKET POWER WEAKENING THE STATE
The strong state has been an important instrument for extending the market and building a global economic elite. Now, however, the processes of market penetration are nearly complete and the emergent global elite has become increasingly transnationalized beyond concern for any given geographical territory and the people contained therein. For the members of this elite the strong state is becoming an increasingly burdensome institution.
In democratic societies the state is presumed to be accountable to and responsible for the well-being of all its citizens many of whom may have substantial unmet needs they are likely to demand the state meet through its ability to reallocate the use of society's resources through non-market means. Transnational corporations are for most practical purposes accountable to no one, have limited responsibility for the common good, and can freely discard tens of thousands of employees with minimal obligation. As institutional power passes from the state to the transnational corporation the potential demand on resources controlled by elites to care for needs of the market's casualties is greatly reduced, if not eliminated. The elites increasingly align their interests with those of the corporation, falling back when challenged on hollow theoretical arguments that the trickle down of benefits from an unconstrained market will ultimately benefit everyone.
These dynamics, now being played out on a global scale, work so clearly in the interests of power holders that it is tempting to suggest that they are the products of a global conspiracy. In reality the vast majority of elite power holders have never been educated in the existence and nature of such dynamics and for all practical purposes are largely unaware of them. They are simply making rational short-term responses to the economic and political pressures bearing on them according to the rules of appropriate market behavior to which prevailing societal values have conditioned them. They are instruments of deeper forces imbedded in the institutional structures within which they work.
For example, under pressures to show growth in profits corporate executives seek expanded markets, a task that is eased in the short-term by the elimination of trade barriers. The elimination of trade barriers, however, leaves them increasingly vulnerable to competition from other large corporations that gain significant cost advantages from basing their facilities in localities that offer low wages, tax holidays, friendly labor unions, and weak social and environmental legislation. They begin to demand removal of restrictions on the free movement of investment so they may remain "competitive" by relocating their own facilities to the more "competitive" locations, thus gradually bidding down social and environmental standards to the lowest common denominator.
Through this process the ability of the state to regulate either trade or investment flows and its ability to tax corporate profits are all seriously eroded. The state becomes increasingly unable to manage the national economy, provide basic social services, and discharge its responsibilities to protect environmental resources for future generations. Political leaders of the weakened state apparatus, increasingly dependent on corporate contributions to finance their election campaigns, come to see the public interest as equivalent with the corporate interest and abet even applaud the erosion of their own functions. The consolidation of power in the institutions of transnational capital proceeds seemingly unrestrained.
Still another consequence of the systematic erosion of the state's powers to regulate, tax, and confiscate property is to reduce the prospect that an awakened populace might launch a successful democratic movement to use those powers to break up non-competitive command-and-control corporate economies and restore competitive structures and regulatory frameworks in the name of economic justice and market accountability. Intended or not, this is another consequence of the application by the G-7 governments and the Bretton Woods institutions (the World Bank, IMF, and GATT) of the instruments at their command, including international treaty mechanisms such as the GATT, to advance policies that weaken the state's ability to manage and regulate national economies in the broader public interest. The agreements being pressed by the G7 countries would embed the rights of transnational corporations vis a vis local economies into international treaties, effectively abrogating the rights of the people of an individual nation to govern the functioning of their own economies in their self-defined interest. The fact that most of the negotiations involved are carried out in secret and so much effort is expended to avoid public debate such as the fast-track authority George Bush obtained from the U.S. Congress does lend weight to those inclined to argue that a conscious conspiracy against the broader public interest is involved.
INSTITUTIONAL PLURALISM GROUNDED IN A STRONG CIVIL SOCIETY
Free trade advocates seldom call attention to the difference between the competitive-regulated market economies that produced the West's success and free-unregulated markets such as those that have left U.S. tax payers with a $500 billion bill for bailing out a plundered savings and loan industry. Similarly neglected is the difference between fair and balanced trade between strong national economies, and trade that is merely free within a global system. What free traders are advocating is in both instances the latter dismissing the very concept of a national economy and further weakening the remaining constraints on political, military and economic forces that already seriously distort market mechanisms in favor of the economically powerful.
While the market is often touted as the necessary companion of democracy, this claim holds true only for the competitive-regulated market. Unbridled power, whether that of the unaccountable state or the unregulated market, is the enemy of democratic accountability, justice, peace, and ecological sustainability. The unregulated market leads to unbridled market power. The human interest is poorly served by a tyranny of either the state or the market.
Unfortunately, too much of the contemporary economic debate centers on a choice between extremes the state or the market as though these were society's only options. Almost wholly neglected in the current debate is the fairly obvious reality that a well functioning modern society depends on the countervailing powers of a strong accountable government and a strong competitive market each serving its distinctive role in the service of the public good.
Maintaining this balance in the public interest, however, depends on a third force that both socialist and capitalist economic theory have neglected. A strong and dynamic civil society must bring the citizenry into direct and active involvement in the continuing political process of articulating the public interest and demanding accountability to itself.
So long as the development debate centers on the question of whether the state or the market is best able to deliver development to the people, society will be the worse for the prescriptions offered. A wrongly defined question seldom produces a useful answer. The locus of development action must reside with the people. The roles of state and the market must both be subordinated to the power and initiative of civil society the people in whom the only legitimate sovereignty resides.
The recent movement from authoritarian to democratic structures of governance is justly applauded. However, it tends to mask counter trends of equal or possibly even greater importance: the growing strength of unregulated market forces, a shifting allegiance of democratic political systems from the people's interest to corporate interests, and a weaken of the state as an effective instrument for managing society's affairs in the public interest. When well intentioned people herald this process as a harbinger of democracy's growing hegemony they confuse market freedom, which is a freedom of the rich and powerful, with democratic freedom, which is the freedom of all people.
The current assault on the instruments that make meaningful market regulation possible is an assault on the earth's ecology and human society's social fabric that runs increasingly out of human control and threatens the very survival of human life and civilization. So far the institutions of the state and the market have demonstrated little propensity or capacity for appropriate and effective corrective action. To the contrary, their "leaders" have become captives of the market driven reward structures of the organizations they head and of the simplistic theories that legitimate these structures.
Negotiations such as those of the GATT must be based on a framework grounded in a recognition of the finite nature of the world's ecological resources, the priority claim of the disenfranchised for resources to meet their basic needs, the need for local economic control and accountability, the importance of anti-trust action to maintain conditions of market competition, the essential role of market regulation, and the importance of fairness and balance in trade relationships. These are hardly radical concepts, yet they seem radical within the current context because they are so alien to the ill-conceived ideologies that currently dominate the global policy process including the GATT negotiations.
A "successful" outcome to the GATT negotiations based on a self-destructive ideological framework is likely to significantly worsen and already rapidly deepening global crisis. Better that these negotiations be placed on hold until progress is made toward a more suitable framework.
Because of the current incapacity of the institutions of both state and market, constructive action toward placing the GATT negotiations on hold and forging viable alternatives to the prevailing framework depends on what is currently the weakest of the institutional sectors, civil society. The human future depends on the ability of this neglected sector to energize and coalesce its energies into a massive social movement to end the current war of humanity against itself.
Such a movement is now emerging out of a consolidation of the forces of the environmental, human rights, social justice, peace, feminist, and other constructive social movements. It seeks a life-centered transformation of human values and institutions consistent with economic justice, ecological sustainability, and social inclusiveness in part through establishing the accountability of both state and market. It is demonstrating a growing power to meld social forces that transcend class, race, and national boundaries.
Some maintain that a transnationalizing civil society is in the early stages of birth with a potential to become society's dominant institutional force. They see it as humanity's primary hope. We agree.
David C. Korten is a fellow of the PCDForum and a visiting professor of the Asian Institute of Management. Paul Ekins is a research fellow, Department of Economics, Birkbeck College, University of London, and a contributing editor of the People-Centered Development Forum.