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From Labour Focus on Eastern Europe, No. 58, 1997.

Ken Livingstone

Democracy versus the free market in the globalised economy


I never supported the previous regimes in eastern Europe. So it is without the slightest nostalgia that I can tell you I believe the IMF's brand of free market capitalism is, on the social and economic level, considerably worse. That is why I consider democratic socialism to be the only way forward in both the eastern and the western halves of our continent.
At the end of the 20th century all attempts to create either `socialism in one country' or `capitalism in one country' have failed. This is because all of the most modern branches of the economy require a scale of production, and a market, which exceeds that of even the largest national economy. There is room for only one fully competitive producer of microprocessors in the world - Intel. Only two competitive producers of long range civilian aircraft - Boeing and Airbus Industry - exist in today's global economy. The $50 billion cost of producing the next generation of West European combat aircraft, the `Eurofighter', is impossible for any single West European country to finance. A producer of mass volume cars with an output of a  million a year is too small to be competitive in the world today.
The primarily `national' model of economic development has crumbled in the market economies which previously pursued it - the United States, India, Argentina and Mexico, for example. Equally, the model of economic development of the USSR from the 1920s, the attempt to construct `socialism in one country', although yielding significant results when the world market broke up in the inter-war period, also collapsed with the re-integration of the international economy at the end of the twentieth century.

Political democracy and the international economy
This failure of both market and centrally planned `national' models of economic development poses anew the basic problem of the relationship between political democracy and the international economy. There now exists a fundamental disproportion between world economic and political structures.
While the economy functions internationally, the only effective forms of political organisation, with a few partial exceptions, are purely national states. The United Nations is, at best, a consortium of large states. A body such as the Commonwealth of Independent States, which succeeded the Soviet Union, is powerless. Only the European Union has shown a minimum potential of international organisation - and this is being sorely tested by the attempt to implement the monetarist terms of the Treaty of Maastricht.Two fundamental, contradictory, and clashing models exist of political relations in this new international economy - the `free market' and the `democratic' models.

The free market model
The free market model states that no specifically political institutions are necessary to organise the globalised economy. Instead it argues that this will be accomplished by the market. On this model, the role of the state should be substantially reduced, and national economies opened to international market forces. This became the `conventional wisdom' of the early 1990s - promoted globally by the International Monetary Fund, in the United States by Newt Gingrich and the Republican Party and in Europe by the Treaty of Maastricht. There are considerable reasons to doubt whether this model can function even economically. Politically, it has profoundly anti-democratic implications.
First, there is no evidence that the state is reducing its economic role - and much evidence in the opposite direction. Contrary to free market rhetoric, the IMF reported last year that state expenditure as a proportion of GDP has continued to expand in all major economies - including those, such as the UK under Thatcher or the US under Reagan, in which `privatisation' was official policy. According to the IMF, state income as a proportion of GDP has risen from an average of 28 per cent in 1960 to 44 per cent in 1994. Recent attempts to restrain the expansion of the role of the state in the economy - for example the previous French government's attempt to meet the criteria of the Maastricht Treaty - have met strong popular and electoral opposition. In practice, there is no electoral consensus for the effects of a reduction of the role of the state in the economy. The Economist magazine noted this fact in its annual survey of the world economy this year and suggested, characteristically, that the only solution was to reduce democracy.
Second, most of the successful economies of the last decade did not use a free market model, but boosted internationalisation through huge intervention of the state oriented in that direction. This is particularly clear in Japan, China and South Korea.
Third, `globalisation' was not truly a multilateral, equal, development of economic flows. The entire recent `liberalisation' of the international economy was characterised by a huge net outflow of capital from other countries into the United States - to a sum of more than $1 trillion, that is one thousand billion dollars, since the beginning of the 1980s. Given the reality of these capital flows, the US is a strong supporter of `globalisation.' Had Russia, Hungary or any other economy, received an inflow of capital on this scale its economic prospects would have been transformed. If, however, there were any reversal of direction, that is if `globalisation' were to create a flow of capital out of the US, the United States would inevitably demand intervention to control this aspect of the free market.
Reduced to essentials, therefore, there is no evidence that the purely free market framework for the globalised economy is stable. The last attempt to create one, prior to 1914, culminated in a World War. The present attempt, so far, is contingent upon other countries continuing to accept that they should supply large amounts of capital to the US. This system is increasingly opposed by electorates because it undermines the quality of their lives. Finally, there is no evidence that it is the most efficient economic model - an entirely viable alternative has been shown to be large scale state intervention accompanying an international orientation of the economy. On that basis China, for example, has experienced nearly twenty years of unprecedented economic growth.

Free market and democracy
At the political level the implications of the free market model are equally profound because it necessitates a radical reduction in democracy. It has always been clear that, in the final analysis, the principles of the free market and the principles of democracy, are in conflict. The organising principle of democracy is that every citizen, regardless of their status, has one equal vote. In the free market, on the other hand, decisions are taken by entirely unequal agents. Different concentrations of capital compete. Within companies, voting is on the basis of the different numbers of shares held, not equal rights of every shareholder.  Within private companies, while `social partnership' is talked about, only those people owning capital, not those who supply labour, may vote - one person supplying capital may decide to dismiss 10,000 supplying labour.
In the final analysis, the organising principles of the free market and democracy are bound to be in conflict. However, a relative balance between the two existed in the post-World War Two period. The exercise of democratic choice at the political level produced significantly different social organisation in the US, Western Europe, or Japan - and between the different west European countries. Although the choices available to voters were made within definite limits, they were nevertheless real.
In the free market approach to globalisation, however, this democratic content is increasingly eliminated. If the fundamental economic decisions are taken at the level of the world economy, and national economies must simply correspond to these imperatives, then national democratic bodies can no longer take decisions which have real content. All fundamental social and political decisions have economic implications. So such decisions are made meaningless if the economic framework which determines them is outside democratic control.
Furthermore, there are virtually no democratic international institutions through which decisions may be taken. The free market model, therefore, if taken to its logical conclusions, would remove all mechanisms of democratic control over the economy. This is indeed what a journal like the Economist now advocates.
As put by some theoreticians of this model, economic and social policy must be confined in a `narrow corridor of realistic possibilities'. That means that democratic elections, and the institutions of civil society, become meaningless or even turn, according to such logic, into an undesirable barrier to `normal development.'
It is highly improbable that citizens will give their democratic assent to the economic implications of this free market model. Opposition in certain cases will take violent forms - such as Islamic Fundamentalism  in the Middle East or communal violence in Africa and India. But the implications of the free market model mean that even democratic opposition - such as parliamentary elections in Europe or democratically expressed public opposition to the Maastricht Treaty - are viewed as unacceptable or futile. In short, the free market model, far from promoting democracy, requires its radical reduction or even elimination.

The democratic alternative
The alternative to the free market model, within this new internationalised economy, is the `democratic' one. As there is now a radical disproportion between the internationalisation of the economy, and the national boundaries of the democratic state therefore democratic functioning must be extended beyond the purely national level. Supporters of the free market model claim that this democratic model is both undesirable and unrealistic. The evidence is the reverse. In fact, only the democratic model is capable of maintaining, in a sustainable way, international economic integration. This because the free market model is not viable in a democratic system, while, on the other hand, the democratic model corresponds to the following facts of contemporary economic and political development.
First, while the free market model stakes its claim as the conventional wisdom, in practice even its supposed proponents are forced to undertake international cooperation at the political and governmental level. The most significant world body of this type is not the United Nations but the economic framework of the G7 industrialised nations. At the regional level there are, of course, bodies for Africa, the Americas, South East Asia, the Asian and Pacific Region, and the `non-aligned countries' - even though these are extremely weak.
The areas where the `democratic' model has the greatest current possibility of development are the European Union and the Commonwealth of Independent States - the former Soviet Union. In both cases, in world terms, relatively developed economies exist - although that of the CIS is more backward than Western Europe. In both instances it is evident that efficient production is only possible on a greater than national scale. Barriers to intra-European trade would have catastrophic consequences in the case of the European Union. Equally, a substantial part of the economic decline in Russia, and the former Soviet Republics, is due to the fragmenting of economic ties following the collapse of the USSR.
In the European Union the clash between the free market and democratic principles is clearly demonstrated around the Treaty of Maastricht. The original European Economic Community was a partial transposition, onto the international field, of the social democratic consensus common to Western Europe until the end of the 1980s. While not overcoming the fundamental incompatibility between the free market and political democracy, this model gave relatively great weight to democratic policy choices. There was state intervention in the economy, controlled by at least partially democratic institutions, redistributive taxation and more extensive welfare provision than in Japan or the United States.
This was transposed onto the international field through relatively large scale regional re-distribution of funds within the community. The international transposition was only partial, however, in that these flows were not subject to control by directly elected bodies, such as the European parliament, but only by those indirectly subject to democratic control - via the national governments which took all crucial decisions. The widely perceived, next logical, democratic step was, therefore, to increase the weight of the directly elected European Parliament.
The Treaty of Maastricht, however, did not have this democratic objective. Rather, it was aimed to reverse the direction of the European Union not merely at the international but national level. No significant extra powers were granted to the European parliament, and the European Central Bank, created by the Treaty, is explicitly placed outside all direct democratic control. The Treaty, also dictated a reduction of democratic control at the national level by transferring key economic powers to unelected national central banks subordinate to the European Central Bank. The limits on budget deficits, and state debt, imposed by the Treaty are designed to prevent Keynesian redistributive policies of the classic West European social democratic type.
The aim is to radically shift the countries of the European Union in the direction of the free market model. For this reason opposition to the Maastricht Treaty and its consequences was strong at its inception, and has subsequently increased - as shown most graphically by the social explosion in France at the end of 1995. The last French election showed this sentiment's impact on the electoral field. There is now increasing doubt throughout Europe that European Monetary Union will hold together within the framework laid down by the Maastricht Treaty. The result has been the most serious  crisis of the European Union for 30 years and this is likely to deepen after the launch of the single currency. The problem is that there is not merely some slight `democratic deficit' in the Treaty of Maastricht but that it constitutes a sustained attempt to destroy any possibility of a democratic model of integration in Western Europe in favour of the `free market' one. That is why the Treaty of Maastricht has been opposed root and branch particularly by those of us, like myself, who favour European integration - which, as the experience of the last 30 years shows, can only be achieved by the `democratic' model.
The democratic model, even if only partially applied, created a prolonged dynamic to integration in Europe. The attempt to apply the free market model has produced deep crisis within the European Union.

The free market model in the ex-USSR
A worse crisis, with different origins, has been created by the attempt to apply the free market model in the former USSR. In the USSR, while no democratic system existed, there were large flows of resources between the Republics directed at an all Union level - mechanisms which could, in principle, have been subject to democratic control. In 1991 it was argued that the break-up of the Union, and the substitution of market mechanisms between independent states, would lead to improved economic conditions for the citizens. It was, in essence, claimed that while the rest of the world was advancing to larger economic units, Russia and other former Soviet states would gain from a regression to a smaller economic space.
As would be expected from the fundamental trend of internationalisation of production, such predictions turned out to be entirely false. In Russia, for example, industries, outside the energy sector, were driven back from a market the size of the USSR, which was already too small for the most advanced sectors of production, to a purely Russian one. Their production collapsed - because in such a narrow framework it is impossible to achieve the scale of production necessary to be internationally competitive. It is for these objective reasons, therefore, that almost every significant Russian political party now has on its agenda strengthening links between the former Soviet republics. The purely free market approach between the CIS states has, implicitly, already been admitted to have failed.

The crisis of the free market model
In the early 1990s the free market model appeared to sweep all before it - producing a deep crisis of progressive political parties and social movements. But now the free market model faces increasing obstacles and crisis -
* with gyrations on stock markets throughout the world in recent weeks,
* deepening opposition to the effects of the Treaty of Maastricht in western Europe,
* a revival of the left in western Europe symbolised by the election Jospin in France, increasing influence of left wing parties in national parliaments like Italy's and even the removal of the Tory government in Britain,
* a shift to the left at the top of the trade union movement in the United States,
* revival of support for economic integration in the former Soviet Union,
* the emergence of militant mass trade unionism in some of the so-called tiger economies, notably South Korea,
* and a deep crisis of the `Mexican' model in the developing world.
With the very real likelihood of a new collapse on Wall Street such opposition is likely to increase.
In conclusion, Democratic Socialists cannot turn their backs on the global economy, but we can, and must, open the debate on how to bring its functioning under democratic control. That is why I believe there are few tasks more important in the world today than international cooperation between democratic socialists. In Europe such cooperation, particularly between socialists in the East and the West, is now long overdue. International capital has had a long head start on us. I saw the billboards heralding its advance all over Budapest.
The agenda we need to address is equally clear.
* To cooperate across the continent to prevent welfare provision and employment rights being reduced to American, Japanese or still lower levels.
* To oppose an expansion of NATO, and the economic burden this will entail, when the enemy it was created to fight no longer exists.
* To prevent the European Union cutting agricultural and regional support, as a condition of EU membership, to the countries of Eastern Europe which are precisely those in most need of them?
* To help democratic socialists in Russia end the humiliation of that country at the hands of the IMF?
* To support the international campaign for the cancellation of third world debt.
* To mount worldwide opposition next time the United States and NATO send their armies into the Middle East or Latin America or Africa to maintain their monopolies of the world's resources.
* To organise global solidarity with trade unionists like the South Korea workers last year, or the Liverpool dockers or the American teamsters when they take on the employers.
* And to continue to meet and exchange ideas at conferences like this so that the aspirations of the hundreds of millions today turning against the free market model of the global economy are given voice by the growing international unity of democratic socialists with a radically different agenda.
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