Opinion pieces and speeches by EPI staff and associates.

THIS BOOK REVEIW FIRST APPEARED IN THE FALL 2002 ISSUE OF DISSENT MAGAZINE.

Global Economic Classes (book review)

by Jeff Faux

The Politics of Freeing Markets in Latin America: Chile, Argentina, and Mexico
by Judith A. Teichman
University of North Carolina Press, 2001, 288 pp, $55 cloth $19.95 paper

Managing Mexico
by Sarah Babb
Princeton University Press, 2001, 320 pp $35

At the end of a debate over congressional ratification of the North American Free Trade Agreement in 1994, a lobbyist for a multinational corporation, exasperated by my opposition to NAFTA, shouted at me: “Don’t you understand? We have to help Salinas [Carlos Salinas, then president of Mexico]. He’s been to Harvard. He’s one of us!”

It struck me as an odd remark. She and I were clearly not on the same political team. A year’s fellowship at the Kennedy Institute of Politics hardly made me a Harvard man, and she hadn’t gone to Harvard at all. It took me a little while to understand her point, which was that all of us were members of an increasingly global “policy class.”

The Politics of Freeing Markets in Latin America and Managing Mexico are about the role of the policy class in bringing neoliberal economics to Mexico, Argentina, and Chile. They raise the intriguing possibility that had it not been for a conscious, business-financed political strategy to change the ruling economic paradigm, the history of the last twenty years in these three countries—and perhaps elsewhere—might have been different. Both books also bring important information and insights into the evolving cross-border class politics that lies under the radar screen of the debate over globalization.

Because all markets run on an accepted set of rules, all markets generate a politics over the setting and enforcement of those rules. Indeed, politics has been famously defined as “who gets what.” The global marketplace is no different. Yet, although it is widely understood that the major actors in the global drama are companies, banks, and workers busy obliterating national boundaries, the analysis of the international political economy—both popular and academic—is largely focused on the relationships among nation-states.

This framework simply cannot capture the cross-border realities of the global market. To give one concrete example, asking whether Canada, Mexico, or the United States “won” or “lost” from NAFTA cannot give you a useful answer, because the benefits were captured and the costs were borne by similar groups throughout the continent. Investors in all three countries largely gained, and workers in all three countries largely lost. Even if you do not agree with that particular assessment, it is hard to argue that the determination of winners and losers from the creation of a continental economy does not have to be examined through a continental, as well as a national, lens.

Building an intellectually coherent framework of cross-border class relationships is a big job, and neither of these books attempts it. Indeed, their focus is the rise of technocratic elites within each country that they study. For this reader’s taste, both books—especially Babb’s—are too constrained by the language and research techniques of their disciplines. Teichman is a political scientist, Babb is a sociologist. Nevertheless both books are quite accessible to the nonspecialist, and the implicit drama of their stories drives the reader forward.

Not the least of their contributions is that they are a corrective to a common globalization narrative on the left, which explains global poverty and inequality as simply something imposed on third world societies from the outside. As the late Michael Harrington once reminded me, there are rich people in poor countries.

Teichman’s book explores the most territory—Argentina and Chile as well as Mexico. And her analysis is the more broadbrushed-illuminating political, social, and cultural trends that support her analysis. Babb is focused almost exclusively on the development of economics as a profession in Mexico and the way in which economists were the agents of change that favored the investor class. Teichman analyzes the many differences in the chronicle of neoliberalism among the three countries. But it is the similarities that stand out-in particular the business cultivation and nurturing of conservative economic ideas among a young generation of economists and bureaucrats by the business community in the decades leading to the debt crisis of the early 1980s. With a big assist from U.S. universities and conservative think tanks, these networks worked through a critique of the developmentalist and Keynesian visions of the early postwar economists—such as Raul Prebish, Albert Hirschman, and Gunnar Myrdal—that dominated the theory and practice of economic development. In their place—as Babb shows in an analysis of doctoral theses at Mexican universities—they substituted Milton Friedman, Gary Becker, and Robert Barro.

The debt crisis of the early 1980s was in large part a result of the borrowing binge of the 1970s. Major first world banks, needing to recycle Middle Eastern oil revenue surpluses, made economically unjustified loans to third world nations on the assumption that authoritarian governments could always be depended on to squeeze repayments out of their populations. When the debt crisis came, those governments, some of which were now at least nominally democratic governments, appealed to the International Monetary Fund and the World Bank for help. The response, by institutions increasingly inspired by the Reaganite and Thatcherite models of how the world is supposed to work, was a demand for deregulation of business, privatization of government, and the dismantling of the social contract as a condition of their loans. But the outside financial institutions could not have succeeded alone. Having honed their arguments and worked their way into influential positions, third world neoliberal technocrats insisted that their countries had no choice but to accept such “conditionality.” They often collaborated with international lenders who were willing to play “bad cop” in front of the domestic audience in order to gain their own ideological agendas. Indeed, Teichman argues that the conditionality demands of the outside institutions were not nearly as decisive as these institutions’ role in nurturing the rise of a class of domestic technocrats with whom they were ideologically and socially linked. She quotes a senior IMF official about the connections between people at the IMF, the World Bank, and the people who run the finance and economics ministries in Latin America: “We are all the same-people who come and go through the Bank, the Fund, and Finance Ministries and Central Banks of Latin American countries. We all studied at the same universities; we all attend the same seminars, conferences . . . we all know each other very well. We keep in touch with each other on a daily basis. There are some differences, such as between those who studied at Harvard and those who studied at the University of Chicago, but these are minor things.”

Babb’s story of the way it worked in Mexico begins with a decision by business leaders who were dissatisfied with the leftist, development-oriented economics department at the country’s major university, the Autonomous National University (UNAM) in Mexico City. To counter the UNAM’s influence, they built a rival university—the Autonomous Mexican Technological Institute (ITAM)— centered on a conservative and more mathematically rigorous American-style economics program. Instead of doing graduate work in Europe, the ITAM students went on
to the University of Chicago and Yale and were favored in the allocations of scholarships, grants, and contracts by U.S. government agencies and foundations.

The showdown between Mexican economists trained at Cambridge University in England-the home of Keynesian economics-and those trained at Yale came in 1982. Because of its own oil, Mexico had been a prime borrower in the 1970s. But when world markets turned down and oil prices tanked, Mexico slid into recession and could not make its debt payments. The Cambridge group wanted capital controls, spending to stimulate the economy, and, if need be, suspension of payments on the debt until full employment was restored. They argued for joining like-minded policymakers in other debtor countries to form a debtors’ cartel that could collectively negotiate with the financiers. In contrast, the Yale trained crowd wanted to make a deal for yet more loans from the United States and the IMF so that Mexico could make its loan payments on time even though the net result would be prolonged austerity, unemployment, and more debt. In the end, President Miguel de la Madrid turned to the Yalies, in part because they had personal connections with the officials at the IMF and U.S. Treasury with whom Mexico had to negotiate.

In all three countries, the neoliberals’ strategic objective was control over the finance ministries (the Economy Ministry in Argentina), which were responsible for macro economic policies and the critical relationship with the IMF, the World Bank, and similar outside institutions. Indeed, once that stronghold was taken over by Mexican neoliberals, they secured it by forbidding representatives from the IMF and the World Bank to initiate contacts with any of the other Mexican government agencies without the permission of the Finance Ministry. At the same time, candidates for important jobs within the Mexican government were vetted with the international financiers.

The technocrats and the domestic business community would, on a purely ideological dimension, seem strange bedfellows. At the heart of the technocratic agenda was trade liberalization, which threatened the protectionist policies that had coddled the native oligarchs. But, the two groups were allied by hostility toward labor, contempt for democracy, and—especially in Chile—a rabid anticommunism. Moreover, while some of the enterprises of the old oligarchical families were jeopardized by free trade, their personal fortunes were generally not. Deregulation, privatization, and financial liberalization imposed by the technocrats gave their business allies vast new opportunities that allowed them to shed their old holdings, abandoning their workers and campesinos in the declining sectors to the brutalities of laissez-faire.

This history undercuts a key moral defense of neoliberalism: that it is opposed only by entrenched special interests who hold hostage poorer masses who would benefit from the entrepreneurial opportunities and lower prices that free markets bring. Instead, Teichman concludes, “The evidence from this study contradicts the notion that market reform generates opposition from privileged vested interests while its beneficiaries, a diffuse cross section of the public, remain silent. In fact, the biggest winners of the initial period of reform [covered by the book] were the powerful conglomerate owners who bought up public firms, took advantage of the new export opportunities, and acquired privileged
and personal access to the highest reaches of political power.” The biggest losers, she goes on to say, were the rank-and-file workers and peasants who lost their jobs and saw real wages drop.

The other moral defense of neoliberalism describes it as the road to democracy. The mantra of neoliberals in Latin America has been that political freedom will follow economic freedom. There is certainly some logic in the proposition that free markets produce diverse centers of power and therefore are a counterweight to the centralizing political power of the state. But both Teichman and Babb conclude that, in fact, democracy was a casualty of market reform. In all three countries the policy elites used their power over government to deliberately exclude labor, small farmers, and small business people who at least had some role in the old “corporatist” system.

In Chile, neoliberalism came to power at the point of Pinochet’s bayonets, having been incubated for a quarter century by the Chicago boys”-the acolytes of Milton Friedman from the University of Chicago. In both Argentina and Mexico, the neoliberal wine was delivered in the old bottles of the corrupted former revolutionary parties-Perónistas in Argentina and the Institutional Revolutionary Party (PRI) in Mexico. In all cases, the key strategic accomplishment was the breaking of labor resistance. In Chile, that was done by the generals. In Mexico, the decades-old client relationship between the PRI and the labor federation had so corrupted the latter that it was easily rolled once the technocrats got control of the PRI. In Argentina, the labor base was stronger and harder to compromise, but knuckle under it did.

For Babb, neoliberalism’s antidemocratic nature flows from the fact that it was driven by the technocratic class. The development of economics as a profession is the symbol and substance of the way the process worked in Mexico. “To flourish,” she says, “professions do not need a majority of citizens to believe in their expertise. Rather, they require a source of payment for their services and/or support for their professional training.” As in the United States, Mexican businesspeople were willing to foot the bills in order to change the way the country’s educational elite thought about economics.

Babb is not optimistic about the future. “Economic policy,” she writes, “is being placed beyond the reach of democratic institutions . . . moving ever further from the ballot box and ever more into the hands of experts.” Her guess is that it will take “an economic upheaval of the scope of the Great Depression for a major change to come about.”

Teichman also stresses that market reform has shrunk, rather than expanded, democracy. But she holds out hope that a second, more democratic stage may lie ahead. The hope hangs on a thin thread. In particular, her honest description of the entrenched power of the elites in Chile seems to undercut her admirable desire to locate a democracy somewhere in the future. In the case of Mexico, she rightly observes that it was not the success of the neoliberal program but its failure to provide stability and growth in the 1990s that led to the election of Vicente Fox and the ouster of the authoritarian PRI regime after seven decades in power. Yet, although the PRI was defeated, the policy class that used it to catapult to power remains firmly in charge. Francisco Gil Diaz—who plays a prominent role in Babb’s story of the rise of the neoliberal bureaucracy under Carlos Salinas and his successor, Ernesto Zedillo—is currently Mexico’s finance minister.

One reason to be skeptical of Teichman’s thesis of a second democratic stage is precisely that neoliberalism has not delivered on its promises. In the last twenty years Latin American growth has slowed, inequality has increased and the debt burden has grown. As I write this, Argentina, which was a few years ago the poster child for neoliberalism, is in chaos. If democracy is defined as the capacity of people to get rid of an unpopular government, Argentina qualifies. But the brutal reality is that the neoliberal failure—from causes both domestic and foreign—has destroyed so much of Argentina’s economy that the prospects for a liberal democracy with a flourishing civil society seem as remote today as they were in the time of the military dictatorship.

Despite some cooing over democracy, the intellectual publicists for neoliberalism show little tolerance for frustrated Latin Americans who attempt peaceful change through the ballot box or the institutions of civil society. This spring the short-lived military-busi
ness coup against an elected president in Venezuela received immediate support from George W. Bush and the New York Times. A few months later the U.S. embassy in La Paz told the Bolivian legislature that if it did not select its preferred candidate as president, the country would get no more U.S. aid. The legislature complied. In Colombia, hundreds of trade union leaders have been murdered by the rightwing paramilitary allies of the U.S.-trained army. And so it goes.

Both of these books support the thesis that the politics of the global economy is a one-party system, dominated by a class of multinational investors and their client policy experts. We might call it the Neoliberal Party—or perhaps the Party of Davos, from the site (until last year) of the annual meeting of the world’s financial and policy elite. In a one-party system, the absence of democracy is hardly a surprise. Although one can see the beginnings of a party in opposition (the Party of Porto Alegre?) in the anti-globalization protests and the efforts of unions and nongovernmental organizations to challenge the neoliberal paradigm, they have a long way to go.

Meanwhile, the effort could be helped along by books like these, which give us a greater understanding of how the current one party system works. I would like to see Teichman and Babb—or other like-minded scholars—connect some more of the dots, such as the relationships among the neoliberal policy networks in various Latin American countries, and between Latin American groups and their U.S. counterparts. We need more such books that shed light on the nexus between transnational capital and transnational ideas. As Babb implicitly advises, follow the money.

[ POSTED TO VIEWPOINTS ON OCTOBER 29, 2002 ]

Jeff Faux is a distinguished fellow of the Economic Policy Institute in Washington, D.C.