By Saliem Fakir · 27 Sep 2009
The recent G20 meeting is prescient. It reinforces the idea, despite scepticism about state intervention, that only the state can bring back balance. The G20 statement is full of measures that speak to a throng of interventions that demonstrate the state’s capacity is not nascent, but real.
The financial crisis like the “War or Terror” legitimises state activism within the economy. If you thought the state was dead you cannot help but feel that its strident zest for life is making a public presence.
But the G20 meeting was not a politico-economic revolution; just a reshaping and sharing of power with other emerging states and their elites, once jealously guarded by the G8.
Providence seems to favour those now who have a larger share of the world’s income because of prudence and they’re having to be brought in to save those who have allowed excess to go on, unfettered, for too long. The global economic system is in a precarious situation so even one’s enemies must be made friends if the world is to be saved.
The most pertinent parts of the G20 statement involve the expansion of the G-8 into a permanent G-20, the expansion of voting rights for China and perhaps other emerging economies on the IMF and then a focus on rebalancing the global economy involving stronger measures from states through the formulation of a ‘Framework for Strong, Sustainable and Balanced Growth’.
Then there were a whole flotilla of proposals on what to do with corporate bonuses and the necessary reforms of the financial architecture – including finance Ministers having to consider the practicality of implementing the Tobin Tax longed mooted as a way to curtail risky speculations. Not a peep about privatization, liberalisation or free-marketism.
All the free-market ideological paraphernalia that was so characteristic of the G7 and G8 meetings in the hey-day of the Washington Consensus falls on deaf ears these days.
Crisis forces a focus of mind and states are in the throes of reinvention as they seek to bring balance back to the global economy.
They can’t chance things on the ethereal workings of the market anyway.
Excesses that go unchecked have to be corrected because of inherent systemic failures. US President, Barack Obama, prior to the G20 meeting gave a speech in Wall Street on 15 September 2009, saying Wall Street has to accept that major reforms are on the cards and that a proposed statutory body called the Consumer Financial Protection Agency will enforce these reforms.
His speech was received with disbelief and a few smirk from certain quarters within the financial sector.
Obama, though, was insistent and poignantly noted that ‘...one of the main reasons this crisis took place is that many agencies and regulators were responsible for oversight of individual financial firms and their subsidiaries, but no one was responsible for protecting the whole system’.
As Mancur Olson, an institutional economist, once wrote, “If members of a large group rationally seek to maximise their personal welfare, they will not act to advance their common or group objectives unless there is coercion to force them to do so…”
Mancur meant that often coercion, in the good sense of the word, to bring back balance itself, is the necessary bitter potion to enhance economic freedom.
This is what Obama and the G20 are applying and everybody understands that state ‘coercion’ against the unruly markets is necessary.
The state – in a very generalised form of the notion – from the US, China and Russia to many far corners of the world is beginning to shape new terms of engagement within national and global economies. Indeed, the very relation between state, corporations and citizens is undergoing a transformation.
For now, the state speaks in the name of public interest and public power. However, it is still to be seen whether this transfer of power brings about real benefits to ordinary people. But this scintillating ascendance comes at a moment when the public demands more accountability and their demands are being met by a more willing state to take action.
There is still talk down here too - at the tip of Africa - of a greater role for the state. The rhetoric describes a seeming ascendance. The scope of activities speak to a new mood of state-driven goals as far as we can see from the publishing of the recent duplex of Green Papers on planning, and monitoring and evaluation.
Our faith in the market delivering the development dividend has waned.
Our country though has seen many a White and Green Papers, as well as a host of inquiries, commissions and plans. Hopefully, we will have something to be cheerful about as the ‘new regime’ ploughs its way through paper and process to delivery.
There is some action though. Think of the force of will that is coming through with the implementation of the Bus Rapid Transit system against the resistance of some within the tax industry. Think of the national health insurance scheme plans, then the state’s bulk infrastructure programme and its attempts to remodel the way public enterprises work.
But, what about the nature of this ascendant state redefining the economic world? Two cases bring to mind a new mode and mood by which states hope to assert their authority and provide a micro-window view of what the G20 will attempt to do on a larger scale as it wrestles with the financial markets, wayward corporations and law flouting rich citizens.
The two cases describe different ways in which states are acting but for no other reason than either to protect an existing system or enhance state power.
The first, the US Internal Revenue Services’ (IRS) subpoena of Swiss-based UBS has already influenced the G20’s view on tax havens and tax transparency.
It almost serves as a test case for subsequent work that is to follow under the Global Forum on Transparency and Exchange of Information. The UBS case also provides an interesting precedent on how states can deal with what the G20 statement calls non-cooperative jurisdictions (NCJs) and the institution of countermeasures against states who don’t oblige to disclose information about secret stashes of money.
About two months ago the US government came to a settlement with the Swiss UBS about secret accounts that the bank refused to disclose to protect its clients -- all were US citizens dodging the taxman.
The IRS brought a class action suit against the UBS for flouting the Double Taxation Treaty that existed between the US and Switzerland.
The UBS held the names of 4,450 account holders and was alleged to have helped these rich clients establish fake companies and other schemes as they went about hiding their money from the IRS. US clients comprise a small share of UBS’ 55,000 odd offshore clients. UBS will also come under pressure from other governments, to disclose these account holders’ assets and make them cough up the tax they have been hiding for so long.
For a long time both countries ignored what was going on until the financial crisis hit. The Swiss conveniently protected US clients under Swiss banking secrecy provisions and the US government cast a blind eye when a coterie of rich citizens played hide and seek with the IRS.
A settlement was reached and UBS has agreed to disclose clients’ names and accounts for IRS scrutiny.
The second involves the way the world steel market operates. China, which is now the biggest producer of steel, refused to accept a long established industry and market system for steel -- the benchmark system put in place in the 1960s where the first price agreed by a miner and steelmaker becomes a benchmark followed by the rest of the industry for 12 months.
This market is dominated by giant mining companies whose earnings are larger than several poor states, all put together.
Early in the year Anglo-Australia’s Rio Tinto, one of the world’s largest mining companies and Nippon Steel signed a deal. Rio offered a 33% discount to Nippon Steel, but China wanted a 40-45% discount. The disagreement led to a conflict between China and Rio. China imports 80% of Australia’s iron-ore.
Rio Tinto also happens to dominate the supply of Pilbara Steel – much needed by China’s massive infrastructure projects, which has led Chinese steel makers to accuse Rio Tinto of using market dominance and advantage to extract excessive profits.
The Chinese authorities resorted to trumping up charges against Rio Tinto employees for spying and obtaining data illegally on Chinese steel inventories, which the Chinese say was used to manipulate steel price negotiations.
The arrest of four Rio Tinto employees was no doubt calculated to put pressure on Rio Tinto and Australia, the home base of the mining company.
But the arrests may have also coincided with China vying for lucrative mining assets in Australia. This caused unease with the Australian government, as they were worried that their national assets were being sold off to a foreign power threatening Australia’s national security.
One of those deals involved the failed bid by China’s Chinalco - a state-owned company - to buy into Rio. China’s response may have been fuelled, too, by the Australian government’s reluctance to give up ownership of some of its prized assets.
For now the steel price talks have broken off. But a major buyer of steel has given the markets something to think about. It seems that the steel price dispute is part of a larger play of politics between China, Australia and its major mining companies such as Rio and BHP Billiton.
This tension is unlikely to disappear soon and these private firms also seem to be caught up in the messy Aussie-Chinese geopolitical battle over national interests and assets.
Both cases and the aftermath of the G20 meeting tell us that this ascendance of state intervention - some may call it ‘interference’ - is a creature of circumstance. In the US, the financial crisis has forced the hand of the state to claw-back liberties and ensure its coffers are not further depleted by all the risk taking and waste that has gone on for the last two decades.
In China, things are viewed differently. State enterprises exist seamlessly between the political establishment and their march into the global market. Both the state and its phalanx of national enterprises are fiercely nationalistic.
China brought head-to-head the issue between market monopoly and national economic sustainability and took umbrage to a single private firm dictating the shots to a big state.
China sees itself as a global economic power and has used the Rio case as a way of testing state involvement in shaping market price and rebalancing the relation between private monopoly and state monopoly.
On the other side of the world, America too seeks desperately to rebalance the relation between state, corporations and market. It hasn’t transformed the model, as state/corporate relations have always been an intricate and cosy part of the American political system and so with many of the liberal economies within the G8.
The rectification of excess will strengthen the public hand. But the public hand can only be as vigilant as the public is willing to be. Cycles come and go. We must always be wary of the churn of time. Before long, it may be possible that the market and corporations can be on the ascendance again.
And then we will be back to the question: where is the state, community and the rest of the sleeping public?
Besides, state and corporate relations tend to be incestuous. Nonetheless, we must be on our guard.
Should we always be the reapers of accidental good luck as the result of a cycle that comes with the boom and bust of economic life or should we not be the force that helps ensure a consistent fate and not just rely on cycles that make life a kind of lottery of good or bad economic omens.
The G20 seems to promise us this, but will it?