The reality of the last few weeks - in the collapse of the ambitious parts of the
Doha Trade round and
a landslide in Boliva is that the reverse is going to happen. The cracks are from below, because there is a vavst mass of poverty, the people from whom profits are extracted in the current trade order, who gain little. With the return of high rreource prices and a weak dollar, as I predicted because it was predictable - there is the return of leftism and instability in Latin America.
[Two other diaries which touch on Bolivia in greater depth from Chris and Soj]
Many people have openly worried about the possibility of a US fiscal or moenatary crisis because of our continued debt and deficits - eergy deficit, trade deficit and budget deficit. Each one leads to the next. However, many people looking for the signals of this crumbling have looked at the relationship of the major lenders to the Unitned States. It seems difficult to see how Europe, the OPEC nations or China will halt this process, since their own assets are stored in the US. It may be dysfunctional for them, but it is better than a world with no safe haven for assets. Particularly for the very privileged elites. Most of the world subscribes to the theory that the rich create all the jobs and we just rent our air from them.
The obvious costs of the Bushconomy are going to start appeaing on every street in America, a legalized coca culture means a fresh new source of supply. This supply side economics will mean that when the demographics of the US reach the appropriate configuration, there willbe a return of crack and cocaine. But this is a marginal effect economically - despite the suffering it will bring to individuals.
The really important question is this - the US stays afloat by being a giant risk management engine. We take investment from the world at lower interest rates, and send it out into the developing world to collect higher real interest rates. Often we do so because the mechanism, such as the IMF or World Bank, can lower its risk by threat of force. This is "development arbitrage". This is why the US can run persistent deficits beyond what other nations could, because some of those deficits are a service fee, a fee for the stability that the US military creates, and a fee for managing development risk in ways that Europe and OPEC cannot.
With Argentina pulling the plug, this game is soon to be over. What happens to "or else", when the answer is "what are you going to do, invade me?" The falling apart of this whole system of development arbitrage - which is the flip side of labor arbitrage between the US and neo-mercantilist countries - will, however, accelerate.
The reason for this goes beyond the obvious. The obvious being that resources, particularly oil, are now scarce, and the developing countries have greater leverage. At the very moment that buying up resource producers during the "Great Commodities Depression" is about to pay off, the resources are about to be nationalized. This is not an unusual event in history.
But Bolivia merely confirms a long trend - Argentina, Brazil, Venezuela are already leading the trend against "liberalisme", meaning trade with low restrictions and a free market internal economy. Ultimately these nations would be better off with free trade and free markets - but that is not the deal they are being offered. Instead they were offered triangular trade - they sell resources to the US, they buy manufactured goods from the US and from nations that get their IP from the US, and pay a fee in both directions. The US rebelled against such trading arrangements - twice - and there is no reason to believe that any other nation likes them any more. Thus the internal markets of these nations were being interfered with - in order to pay the costs on debt service and profits for foreign nationals. Given a choice between two unfree systems, with a concentration of wealth which is the surplus on the table, nations are, understandably, choosing to keep that surplus at home.
In otherwords, given a choice between being run by local corruption, or foreign corruption, people will go with the home grown product if they have a choice. That this is the case is supported by hard numbers - in Latin America, a shift towards exporting lowers GDP within the horizon of economic statistics. That is, by the time GDP improves, it is impossible to tell whether it was because of going to exports, or some other set of effects. This shouldn't happen under free trade.
The neo-liberal hypothesis was that internal friction in these markets was creating rigidities. That is, what should have happened was that as some people shifted to trade, then others would start taking over the more profitable things that the capital and labor now devoted to trade used to do. This would raise their wages, and lower the prices of internally produced goods. If that didn't happen, it was because something was stopping people from going where the action was.
Hence, the perscription was shock therapy, because the logical culprit was government supporting the demand for labor of certain kinds. No government spending, the demand for labor would "snap" to its proper configuration. This never happened. Instead, the countries that had the most general prosperity, for a time, under neo-liberalism, were among the most corrupt. Corruption helped because it spread the benefits of the profits of trade more widely more quickly, increasing internal buying power. Over and over again, shock therapy sledgehammered fragile economies.
This is not to say that I support corruption or illiberal systems, merely that when faced with an obliberal trading order, local arrangements would promote inefficiencies to match the size of the inefficiencies outside.
What was going on then was not that government deficits were leading to rigidities, it is the reverse cycle: paying off excessive debt led to the need for trade, trade was started that was less efficient, in order to get hard currency, these distortions made the internal market less efficient, as people shifted from doing things that were more desirable to trade, because that is where the government placed the rewards. The government then subsidized, not to get people to enter into the more productive areas of the economy, but to deal with inflation, and support real wages in the face of internally rising prices.
The government subsidy process was horribly misguided, but then, given a choice of stupid things to do, governments will choose the one that gets them the highest chance of staying in power.
Which brings us now to the converse side. One of the most lucrative activities that one can engage in in agriculture is supply psychoactives. The US is a psychoactive exporter - tobacco. In fact, it was this crop that was one of the major reasons for development of the US. But there are others - cannabis, opiates and coca. Of these opiates and cannabis grow happily in the US. But coca does not, like coffee, it is a product of geography that most of the US does not have.
The "War on Drugs" in Latin America was a series of real wars. These wars have left tens of thousands dead, and left large chunks of Latin America in the hands of criminal gangs. The connundrum is this. A mechanized society has to keep people from operating machines while intoxicated. We already have tens of thousands of dead from alcohol, but we can't restrict that except on the margins. However, other intoxicants, less a part of the Anglo-European cultural base, and harder to detect, could be, and were, banned during the early 20th century. The best way of dealing with the huge black market for drugs is legalization, or at least decriminalization. This comes at the cost of having people who are intoxicated operating motor vehicles and other machinery. Small nations that don't require individual mechanized transport - such as Holland - can legalize.
However, with technology, it is possible to solve the backside problem of detection and even prevention of operation. As this technology is developed, at a lower marginal cost than throwing people in prison for the rest of their natural lives, it will be possible to incrementally legalize without the cost of fatalities.
Legalization will benefit both the intoxicant producers, and the intoxicant consumers. There will be a marginal increase in crime, and there will be attendent health effects - these things are still not good for you, particularly if "you" are the fetus inside an addicted mother's womb. However, the economics are about to become compelling, as the volume of supply is soon to spike and the cost of interdiction will be unbearably high. The Republicans are going to try it - why not, they are the ones getting the corrupt profits - but it won't work much better than the last time.
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In summary:
- The current trade order isn't liberal, it is obliberal.
- Developing nations accepted it, not because it was "better" but because they had no choice.
- Because it was not liberal, it did not deliver the benefits of liberalization. Because it was obliberal, it did deliver the costs.
- With the shift in power to resource producers, nations are opting out from below.
- This is going to hammer the development arbitrage profits which support the US consumption habit, and endanger the world monetary order.
- An examination of a test case shows that militarily forcing obliberalization will probably not work, and will certainly be more costly than some form of real liberalization.