Markets in the Post-Cold War Era; A. Sherman

Markets in the Post-Cold War Era: Controlled or Free? by Amy L. Sherman A CapitalistRevolution? T he fall of the Berlin Wall in November 1989 sent tremors rippling further than those of the most powerful earthquakes. Across the globe, ideologies of state control were shaken at their foundations. Even before Novem ber, "perestroika" had begun to move south. Pres ident Salinas of Mexico had adopted an economic reform program dubbed "Thatcherismo," Carlos Menem was pursuing a decidedly un-Peronist bat tIe against inflation in Argentina, and Fernando Collor de Mello of Brazil had explained that his red-tape slashing and bureaucracy-pruning cam paign was "based on the fact that the state cannot remain with the power of interference that it has today in the Brazilian economy ... The state is inefficient, the state is corrupt, the state is incom petent, and the state is gigantic."1 The rhetoric was less enthusiastic in the African less developed countries (LDCs), but nonetheless encouraging. The example of Botswana seemed to be sinking in: its open economy and relatively plu ralistic political system had made it the fastest growing economy in black Africa.

In Eastern Europe, many democratic party spokesmen, former dissidents, and religious and human rights activists were revolutionary in their Amy L. Sherman is author of Preferential Option: A Christian and Neoliberal Strategy for Latin America's Poor (Eerdmans, 1992) and editor of Stewardship Jour nal. This paper was prepared for the 1992 General Meet ing of the Mont Pelerin Society in Vancouver, B.C. calls for a complete overthrow of the Communist economy and thoroughgoing reform efforts toward the legalization of private property, priva tization of state-owned enterprises, openness to international trade and private foreign investment, and decontrol of state authority over pricing, pro duction, and distribution decisions. All in all, a capitalist revolution appears under way throughout much of the globe-with the exception of a few recalcitrant holdovers such as China, Cuba, and North Korea. Though enthusi asm for the free market is only lukewarm among some regimes, the stubborn facts of socialism's demise and the bankruptcy-both moral and eco nomic-of statist ideology have taken their toll.

Sensible leaders accept matter-of-factly the need to restructure radically their state-strangled economies. StatistHoldovers Of course, there are a few quarters where the lessons learned from the last forty years of devel opment experience and from the collapse of the statist model in the last few years have not, appar ently, registered. Academia seems to provide a fallout shelter immune from the tremors of the Communist crash. At a recent conference I was challenged vehemently by several professors for asserting that the Sandinistas' political and eco nomic model in Nicaragua had been carried out at grave human cost. 462 Moreover, many in the religious community who had apologized for Marxist ideologies of vary ing stripes remain unrepentant. Radical publica tions, such as Sojourners, tried to salvage the socialist dream by arguing that it was "undeniably true" that the socialist ideal in the Soviet Union and Eastern Europe had been "severely handi capped" by the two world wars and the Cold War.

It warned the citizens of the East emerging from under the rubble not to rush headlong toward democratic capitalism, which was full of contra dictions.2 Voicesfrom the environmental fringe also seem disturbed by the new enthusiasm for democracy and capitalism (despite the fact that the formerly Communist world was home to the worst environ mental degradations). Prophets of an ecological apocalypse see the transnational problems of glob al warming, deforestation, and desertification as requiring new, powerful international institutions with authority to mandate the details of individu als' livesin the name of environmental protection. Green police governments must protect Mother Earth from what nasty humans, given too much latitude (and longitude), might do to her. The fall of Communism, in other words, has not brought us the happy "end of history" where democratic-capitalism will inevitably triumph.

There are many reasons for hope and enthusiasm that economies in our post-Cold War era will be , free. The indictments leveled against state control in the last few years have been many and persua sive and real reforms are underway in a variety of contexts. The march of history does seem to be on the side of human freedom. But even if Commu nism, the most obvious expression of anti-capital ist animus, has for the most part withered away, more subtle, but virulent, threats to free markets have emerged. Four are discussed below. The GreenReligion As noted above, one new nest of statist enthusi asm is the environmental movement. To be sure, some of the more responsible thinkers have recog nized the clear evidence suggested by the Eastern European experience: namely, that "public con trol" led to far worse environmental degradation than seen in countries espousing free markets and private property. That controlled economies per mitted worse environmental practices ought to 463 have been expected: without property rights and a strict liability structure, stewards of the public domain are personally removed from the respon sibility for enhancing the value of what they man age. In some accounts of the fall of Communism in the former Soviet Union (e.g., Ecocide in the USSR by Murray Feshbach and Alfred Friendly), the greens were closelyaligned with the democrat ic movement, and even gave rise to it in certain quarters. Many of the "earthkeepers" seem to rec ognize that decentralized regimes and an econom ic and legal system connecting private property rights and responsibilities offer far greater promise for environmental protection than does central ized, bureaucratic regulation. But not all of them.

In a speech at a recent conference on the envi ronment, former Secretary of the Interior Donald Hodel related an incident that had "opened his eyes" to the extremist elements in the environ mental movement. He had been called to testify in front of a Congressional subcommittee on the Department's performance in managing designat ed wilderness areas. He had already been informed that a number of unauthorized and unlawful entries into such areas had been made, but had confirmed that none of them had inflicted any lasting damage· on the environment. Indeed, following revegetation, it was impossible to tell that there had been any entries. Confident that this information would reassure those concerned about such entries, Hodel was shocked at the reac tion he witnessed from the environmentalists. To them it was immaterial that the entries had caused no damage; the point was that the "sacred" lands, the "holy of holies" had been "defiled" and dese crated by human entry.3 The kind of spiritual commitment to "Mother Earth" revealed by this response characterizes a noteworthy segment of the environmental move ment. The so-called "Gaia Hypothesis"-which basicallyimparts divinityto "Mother Earth" -ani mates many environmentalists. Some scholars may be skeptical of the significance of a bunch of "tree-huggers" clinging to strange new quasi-reli gious beliefs, but the phenomenon should not be dismissed.

More than one analyst has noted the "myth generating potency" of socialism.4 Simply put, a society is held together not just by practical needs or interests but "by beliefs that explain and justify its particular institutional arrangements."5 Social464 THE FREEMAN • DECEMBER 1992 ism's mythic power has largely been broken (though some Western academics remain entranced by its apparently hypnotic quality); hence, the way has opened for new "myths" to jus tify statist control. Apart from what one may believe about religion,its persistence into the mod ern world would suggest that individuals, despite the pressures of secularization,continue to long for a sense of the transcendent. Socialism,in its time, provided that sense for some, substituting for reli gious belief. Neo-paganism, the New Age move ment, and the pantheistic tendencies of much of the green movement all suggest that individuals are searching for a substitute for transcendence. Many are now findingit in the environmental movement.

The green religion, much like the socialist one before it, provides justification for state-controlled economies and centralization. If socialism had to restrict individual economic liberty in order to cre ate the workers' paradise, environmentalism requires an expansion of government control to prevent humans from despoiling "the only planet we have" in order to protect life as we know it. The apocalyptic character of environmental alarmism only increases its mythic potentiaf and attraction. After all, if the ozone layer really is depleting, if the globe really is warming and the result really will be untold chaos, destruction, flooding,and famine, then perhaps the recommen dations of the environmental fringe-nationaliza tion of businesses by the green bureaucracy, enforced sterilization for population control, and the establishment of extremely powerful transna tional authorities to regulate polluting activi ties-do not appear so radical. Consequently, the success of this extremist, quasi-religious segment of the environmental movement in attracting a sig nificant following poses a substantial threat to the viability of free markets in the future.

Rising"Fair"Trade A second sobering reality reining in our confi dence in the "inevitability" of free markets is con tinued protectionism in the industrial countries. This threat is subtle in two ways.First, average tar iff rates among the developed nations have gener ally declined, giving the impression of reduced protectionism. Second, talk about the need to address the problem of protectionism has gone on for so long-witness the seemingly endless Uruguay Round of the General Agreement on Tariffs and Trade (GATI)-that people's ears are not as sensitive to it as they ought to be. Protectionism remains a serious problem, despite the progress made in tariff reduction. Non tariff barriers' and so-called voluntary export restraint agreements have proliferated. The Unit ed States has its own favorite protectionist prac tices-such as "anti-dumping laws" and import quotas-revealing that even the loudest defender of free trade ought not cast the first stone against other offenders such as Japan. 6 The notorious MultiFibre Arrangement-which applies strin gent restrictions on exports of Third World textiles to the developed nations-began as a "temporary"

measure in 1962 and is still on the books. Then there is the European Economic Community's coordinated agricultural policythat shuts out com petition in various agricultural commodities. All of these arrangements make little economic sense. Australian and New Zealand farmers produce cheese substantially cheaper than do their French counterparts, but they cannot sell their less expen sive goods to Western European consumers. Pro tectionist barriers are erected in response to polit ical pressures on domestic governments by the protected industries and individuals. If the Uruguay Round is unsuccessful in con cluding some new agreements to deal with these kinds of blatant violations of the spirit of free trade, at least two sobering consequences are like ly. World economic growth will suffer, perhaps leading to recessions that will give even further impetus to protectionism, fueling a vicious cycle.

Underdeveloped countries will grow increasingly frustrated with the trade barriers they face and may abandon the market-oriented reforms they have started that emphasize-drawing on the suc cessfulmodel of the East Asian newlyindustrializ ing countries (NICs)-production for export. Nei ther of these possible outcomes is heartening for free market enthusiasts. Reactionsto Structural Adjustment A third factor conducive to the persistence of controlled markets relates to the prospects for structural adjustment in many LDCs. Structural adjustment-the attempt to transform state-cen tered economies into market-centered ones MARKETS IN THE POST-COLD WAR ERA: CONTROLLED OR FREE? 465 through monetary reform, lowering tariff barriers, rationalizing the exchange rate, decontrolling of domestic prices, privatization, and reducing gov ernment spending-is never an easy or uncontro versial process. Its potential for success resides largely in a widely shared perception that the costs of adjustment are worth bearing, that the bitter medicine of austerity willprove a healing balm for criticallyill economies and usher in a better future.

The historical and empirical evidence of the last forty-some years in development experience in the Third World provides an adequate basis for opti mism. The divergent experiences of Latin Ameri ca and East Asia, for example, suggest a few, easily accessible lessons about which development mod els work and which do not. At the risk of oversim plification, one can argue that LDCs that opened their economies to the rigors of international com petition through outward-looking trade regimes; that allowed market mechanisms to guide invest ment' production, and pricing decisions; and that provided a legal structure securing property rights performed better, on a variety of economic indica tors, than countries that hid behind protectionist barriers, strictly regulated foreign investment and domestic businesses (for example, through import licensing bureaucracies and government market ing boards for agricultural goods), and created an atmosphere of unpredictability through national izations and expropriations. Simply put, these "lessons," and others concerning the importance of fiscalprudence, restrained monetary policy,and a competitive exchange rate, are embodied in the best-designed structural adjustment programs.

Consequently, countries that persevere in reforms of this nature should have some confidence about their efficacy. Political realities, though, often force reform implementing regimes to backtrack. In some instances, fragile democracies fear that adjustment programs will endanger their new political experi ments by creating levels of social protest that encourage a military coup "to restore order." We need not, however, be long delayed by this con tention. Professor Karen Remmer has conducted perhaps the most thorough study of the possible connection between austerity and the breakdown of democratic regimes. After analyzing 114 stabi "lizationattempts by regimes in nine Latin Ameri can countries, Remmer concluded that democratic governments proved no more vulnerable to breakdown than authoritarian ones. Indeed, the break down rate for the latter was slightly higher. On the basis of this research, Remmer asserts that "the political risks of stabilization have been over drawn."7 The more significant political problem is the maintenance of adjustment in the face of the real social dislocations-and hence grumbling-it pro duces. Typically,the "losers" under adjustment are politically vocal and well organized: they include unionized urban labor, previously protected do mestic industries, and the bureaucrats who amassed personal fortunes by virtue of their con trol of various economic "goodies" under the mer cantilist red-tape jungle that prevailed before the reforms. The "winners" under adjustment-usual ly rural farmers who see food prices rise to market levels, small entrepreneurs in the informal econo my who benefit from deregulation, and labor intensive export sectors who thrive under new free trade practices-are less politically powerful and more geographically dispersed. The reform-imple menting government must consolidate a pro reform coalition to back structural adjustment, and, while not impossible, this is a difficult under taking.

Meanwhile, often well intentioned non-govern mental organizations (NGOs) raise loud criticisms against adjustment measures, putting pressures on local governments and international actors (such as the WorldBank and the IMF). These NGOs are located at the "grassroots" and witness firsthand the painful initial consequences of adjustment -higher food prices, rising unemployment in industry, and cutbacks in government social ser vices. Lacking a broader macroeconomic (and longer-term) perspective, these groups sometimes assert that the adjustment medicine is killing the patient. A consortium of NGOs calling themselves the "NGO Working Group on the World Bank," for example, issued a policy paper in late 1989criticiz ing the Bank's support of structural adjustment. It argued that the dismantling of state-owned enter prises in the developing countries should be slowed and that the Bank's emphasis on export promotion should be diminished.8 These groups unfortunately have failed to distinguish between the suffering caused by the deep recessions created by populist excesses that made adjustment reforms necessary in the first place; the suffering 466 THE FREEMAN • DECEMBER 1992 arising from the dislocations of austerity itself; and the suffering rooted in the abandonment, delay, or distortion of adjustment programs. Their position paper is marred by disturbing arguments that appear to call for a return to the protectionist and populist policies that brought so many LDCs to their current ruinous state.

The need is great, therefore, for a loud reaffir mation by development practitioners of what the empirical record demonstrates: namely, that the costs of not adjusting are far worse than those of adjusting. Nonetheless, though important and nec essary,such declarations are of little practical com fort to the individuals bearing the painful burdens of adjustment. Some creative policy responses to lighten those burdens (such as the Bolivian Emer gency Social Fund), in ways that do not conflict with the aims of adjustment, are helpful. To sum up, if adequate steps are taken by re form implementing regimes to alleviate some of the costs of adjustment, popular support for reform will be more likely. The developed coun tries can help further by reducing their protection ist barriers against LDC exports and generally pursuing market-oriented policies to encourage global economic growth. Structural adjustment reforms will be more likely to be sustained and successful in the context of a growing world econ omy that provides markets for LDC' exports.

When formerly statist, protectionist LDCs see it is in their best interests to persevere in market-ori ented reforms, the chances are obviously greater that they will. But their enthusiasm for free mar ketsis likely to wane if the sacrificesof adjustment do not lead to improved economic health because the developed world is shutting its doors to increased exports. MoralDecay The final factor checking an "inevitable" tri umph of free markets may appear tangential, but it is central. It is, for lack of a better term, "moral decay" in the industrialized world and particularly in the United States. The American Founding Fathers and latter-day philosophers of freedom have long recognized a connection between virtue and freedom. Even Thomas Jefferson, who was not so influenced by orthodox Christianity as, say, James Madison and George Washington, affirmed that "the practice of morality" was vital "for the wellbeing of society."9 A sense of "internal constraints" was necessary for life together in a free society if liberty were not to become license.

The free market functions only when it is embedded in a public legal order aimed at ensur ing justice, open and equal access, and equality before the law. But beyond the formal structure, it is also necessary that the actors participating in the market system have some inclination toward char ity and that they embrace ideals of integrity, hon esty, and fairness. Some level of social trust and cooperation is necessary if market exchange is to flourish;likewise,some sense of future-orientation and self-restraint is necessary if capital is to be saved and reinvested. Now, men are not angels (as The Federalist reminds us) and free markets work in spite of this. But markets work less well when men act like indulgent, materialistic, selfish devils:the result of such behavior is often risinglevelsof indebtedness, economic stagnation due to lack of investment, and growing disillusionment (especially among the impressionable young) about capitalism, which becomes exclusivelyidentified with "greedy capitalists" like Ivan Boesky. Once again, we return to Peter Berger's observation that capital ism is "singularly devoid of plausible myths": it seems to lack the ability to enliven its own passion ate defense. Moreover, it can quickly become the object of scorn when it is "disfigured" by the morally reprehensible actions of participants "cut loose" from ethical moorings. Problems that are really "moral-cultural" in nature come to be iden tified as economic in nature, and calls for greater regulation and state control follow.

Conclusion:SomeReasons for Optimism The discussion above is not meant to discourage enthusiasts of democratic-capitalism, only to note that challenges to economic liberty remain even in a world where its principal antagonist has been defeated. Although we may wish it were other wise,continued vigilanceby the defenders of polit ical and economic freedom is required in the post Cold War period. But, to close on a brighter note, several factors conducive to the sustenance and growth of free markets worldwide can be briefly mentioned.

MARKETS IN THE POST-COLD WAR ERA: CONTROLLED OR FREE? 467 Clearly, the economic miracle of the East Asian "tigers" (Hong Kong, Singapore, Taiwan, and South Korea), and the impressive performances of a trio of newly industrialized countries-Chile, Indonesia, Malaysia -have had a far-reaching impact throughout the developing world. In 1989, MexicanForeign Minister Fernando Solana stated: For more than five years now,we have been shifting toward an export strategy and open ing the economy to foreign capital ... the success of the Pacific Basin countries has influenced our strategy.1O Even LDCs previously committed to statist agen das cannot help but reconsider their approach in light of the successful East Asian model.ll Moreover, the international development agen cies are playing a more constructive role now than they had in the 1970s,when they contended that Third World governments had to be the primary actors in development. Massive governmentto government foreign aid transfers were implement ed, with money often spent on huge, capital-inten sive, prestige projects. Many World Bank officials seemed to believe bigger was necessarily better; they appeared skeptical of the potential for indige nous entrepreneurship; and they seemed to assume that industrialization could be achieved regardless of how badly the agricultural sector was squeezed. Now, the rhetoric is far more encourag ing: there is intense interest in the phenomenon of the informal sector (though it took the publication of Hernando de Soto's landmark book, The Other Path, to jumpstart this discussion in the broader policy community); there is a new emphasis on labor-intensive, export-oriented production, a reaffirmation of the doctrine of comparative advantage, and a subsequent concern to free agri cultural prices and marketing and otherwise take more seriously the conditions of farmers; and there is increasing stress on the importance of non468 THE FREEMAN • DECEMBER 1992 state economic actors as more efficientchannels of foreign aid funds. Though one would not want to overstate the case, the World Bank today does seem more committed to free market principles and liberal economics than it did a few decades ago.12 The collapse of Communism also means an end to the Kremlin's funding of Communist satel lite states, and it is not unreasonable to hope that this signals the death knell of such regimes. Fidel Castro continues to cling to power in Cuba, but with the economy imploding and nobody in Moscow to rescue him, a new Cuban revolution of some sort seems inevitable. One only hopes it will be more like the Velvet Revolution than the Romanian one, to spare Cubans further suffering after what they have already endured for over three decades.

Finally, the best hope for the future of free markets may be the flowering spirit of liberty around the globe. Inclinations toward the cen tralization of political and economic power do remain in the post-Cold War world and can be seen in the Islamic regimes, the geriatric elite in the People's Republic of China, the military despots of Africa, and among small pro-Commu nist movements surviving in Eastern Europe and the former USSR. Nevertheless, in the last few historic years, the world has witnessed numerous brave acts of individuals fighting for freedom the students in Tiananmen Square, Solidarity workers in Poland, artists and intellectuals in Czechoslovakia, Lutheran human rights activists in what was East Germany. Their example both breathes new life into the "freedom dream" and reminds us that man does not live by bread alone. Citizens of the East who took their lives in their hands by rushing the streets fought for much more than the fancy washing machines, designer jeans, and VCRs enjoyed by their Western Euro pean neighbors. The Revolutions of 1989,though indisputably protest movements against political and economic repression, were fundamentally revolutions of the "spirit." As the idea of liber ty-that man was created to be free and that freedom is not only practical, in terms of facilitating economic prosperity, but normative, as the only condition befitting man's dignity-gains more and more adherents worldwide, the institutions of liberty, democratic governance, and free mar kets will find fertile soil. D 1. Quoted in James Brooke, "Bad Times, Bold Plans for Brazil,"

New York Times (January 7,1990), section III, pA. 2. See Gar Alperovitz, "Building a Living Democracy," Sojourn ers(July 1990), pp.11-23. 3. Donald Hodel, Address at the World Vision Washington Forum on "The Stewardship of Creation: The Effect of Environ mental Change on the Poor," May 2, 1992,Washington, D.C. 4. The phrase is Peter Berger's, from his remarkable work, The CapitalistRevolution:Fifty PropositionsAbout Prosperity,Equality & Liberty(New York: Basic Books, 1986), p. 195. 5. Berger, p. 194. 6. See James Bovard, "Toxic Dumping," The New Republic (December 9,1991), p.18; and "Bush Protection," The New Repub lic (January 20,1992), p. 9. In fairness, it should be noted thatJapan's levels of protection are worse than the United States'. 7. See Karen Remmer, "The Politics of Economic Stabilization: IMF Standby Programs in Latin America, 1954-1984,"Comparative Politics(October 1986), pp. 8-9. Remmer's findings would be even more persuasive if her study included stabilization attempts made after 1984. Since that time, austerity and liberal economic reforms have been sustained in Chile, and even produced economic growth that led to pressures for political liberalization. Bolivia's civilian gov ernment has managed to persevere in its reform program, though the political pressures have been significant, and President Jaime Paz Zamora has hinted at his willingness to employ "the Peruvian solu tion" if continued deadlocks between his executive branch and the legislature continue. Alberto Fujimori's "auto-coup" in Peru pro vides some fodder for those critical of economic reforms-to wit, that they cannot be successful unless implemented by an authoritar ian regime. Fujimori's actions, however, cannot be easily explained by economic factors alone. He seems to have become extremely con cerned about the political machinations of former President Alan Garcia, including Garcia's corrupt relations with much of the Peru vian judicial system and his alleged gathering of an armed political force. In this interpretation, the coup resulted more from Fujimori's desire to purge the judiciary of Garcia's influence and address the possible armed threat from Aprista extremists than from a belief that market-oriented reform could continue only if democratic processes were suspended.

8. "Position Paper of the NGO Working Group on the World Bank," (December 1989). 9. See Edward Boykin, ed., The Wisdom of Thomas Jefferson (New York: Doubleday, Doran & Co., 1941), p.128. 10. Quoted in "Mexico's Move to the Market," New Perspectives Quarterly(Fall 1989), p. 42. 11.The policies of these newly industrializing countries were not "laissez faire" in a strict sense, but they did appreciate the central role of the free market. 12. Skeptics are correct to point out that the Bank's free market rhetoric is ahead of the reality of its lending practices. Most aid is still channelled through governments, and the enforcement of condition ality (making continued aid contingent on the recipient's adherence to market-friendly reforms) leaves much to be desired. Nonetheless, the Bank has opened conversations with the private and NGO sec tors about the channelling of aid through such institutions and its recent major policy statements (e.g., the annual World Development Report) reveal a markedly more favorable disposition toward liberal economics than those of the 19708.