“SERVING WHOSE INTERESTS?
The Political Economy Of Trade In Services Agreements”
by Jane Kelsey, Routledge-Cavendish, Abingdon
UK and NY, 2008, $89.95

There was a time, several decades back, when you’d hear talk about the gnomes of Zurich. We weren’t all that clear about who they were or what they did, but we did know that a lot of big money sloshed around Swiss banks. We don’t hear about the gnomes these days, perhaps because gnomes are friendly creatures. It’s hard to get cuddly about their successors, the still mostly anonymous officials who devise the world’s economic rules, the subject of Jane Kelsey’s sharp scrutiny.

First, a warning. This book is hard going. That’s not because it’s about money, because it isn’t about money. It’s about politics, but it’s a political world in which motives and policies are more than usually convoluted. It’s not Kelsey’s fault that the topic can be elusive. We’re dealing with layers of obfuscation, and Kelsey is always clear in interpreting real meanings. 

According to their champions, free trade agreements exist to allow the world’s peoples access to each other’s products. Let freedom roll. So why does it have to be so complicated? How many acronyms does it take to describe the act of buying and selling? Before she starts, as programme notes to her cast of characters, Jane Kelsey lists 152 acronyms. Some of them you might even have heard of. The U’s are easy : there’s UN, UNESCO, UK and US and not many more. That leaves 147 more between A and Z. All the acronyms, all the jargon. Analyses of trade agreements aren’t going to make the bestseller lists any time soon. 

Translating The Jargon Into Plain English

There are good and bad reasons for this. When all the world’s countries and their regional organisations are trying to stitch up a contract, the lawyers are going to inspect the clauses. But there’s a less benign motive involved. As Jane Kelsey has shown in previous studies, the trade bureaucrats want to fly under the radar. New Zealand’s MPs have been asked to ratify commitments that they haven’t had any part in forming. It’s unlikely that many people are sure about the details of what the World Trade Organisation (WTO) does because it’s gone unmentioned by the main political parties. Obscurity is a tactic because the business of the traders is not considered our business. Kelsey’s doing us a favour by interpreting the bureaucrats’ language into accessible English. Her clean narrative style overcomes the problem this arcane language deliberately creates.

So two big questions must be asked : Why not let the politicians in on the secret of what’s happening to their country? And why are the politicians so ready to endorse stuff that they don’t know? Kelsey has thought a lot about these things. For some time now she has been fulfilling a vital function in our national life as a researcher of this unsympathetic world. In fact she’s got it nailed. Kelsey’s a law professor, writing for a “policy analyst” audience, so her book necessarily follows academic conventions. It’s scholarly but it’s mindful of the needs of the general reader, while her 22 pages of bibliography will satisfy the most demanding researcher. 

Six years ago, when free trade mania was peaking, Kelsey published an analysis with the same title as the present work. The first version dealt with New Zealand; this one is intended for an international readership, and NZ features no more and no less than it would had the author lived elsewhere. This is significant. Kelsey is always rigorously factual and precise; she’s also highly critical. To be objective is not the same as being neutral (I reviewed “Serving Whose Interests?” in Watchdog 102, May 2003, online at www.converge.org.nz/watchdog/02/03.htm. Also see my reviews of “Free Trade At Any Price? The World Trade Organisation And the Doha Round”, Jane Kelsey editor, in Watchdog 104, December 2003, online at www.converge.org.nz/watchdog/04/04.htm; and her “At The Crossroads : Three Essays”, in Watchdog 100, August 2002, online at www.converge.org.nz/watchdog/00/07.htm. See also the review of Bryan Gould’s “Rescuing The New Zealand Economy” below).

As the titles hint, the new talks are to do with services, a trickier proposition than traditional goods. Services can be elusive to define (a reason for at least some of the acronyms). Kelsey shows how a deal to free up their trade has the potential to affect all sorts of activities which we are accustomed to suppose are not the business of gnomes in Zurich - or of anyone overseas. She looks, for instance, at the police, regional and local governments, and licensing and professional bodies.

Announced after Kelsey’s book went to press, the P4 links NZ to virulent traders (Pacific 4, formally known as the Trans-Pacific Strategic Economic Partnership. See Bill Rosenberg’s cover article in this issue for details. Ed.). True believers, New Zealand’s governments are always close to the action. It’s sobering to note that two of the countries involved in the original P4 deal ( Chile and Singapore, the fourth member being Brunei) are identified, along with the US and the EU, as notably “aggressive service liberalisers”. Since then again, one of the first actions of the incoming Key government has been to validate Kelsey’s warning that the P4 was regarded as a bridge to link NZ to the US in a Free Trade Agreement (FTA).. 

Before the event, Kelsey had commented : “For states that dominate at a regional level, such as Singapore, South Africa and Chile, bilaterals offer a means to establish their credentials as a regional hub and the entry point for foreign investors. Ideologically driven free traders, such as NZ, initially embraced bilaterals for their ‘demonstration effect’ in bolstering trade liberalisation. As the number of FTAs grew, they, along with developing countries such as Indonesia and Thailand, have courted agreements with their main export partners from fear that their competitors were securing privileged access to important markets” (the only FTA negotiated this century between developed countries has been the US-Australia one).

Addicted To P(rivate)

We’ve heard of PPPs (that’s a Public Private Partnership). Less familiar are PFIs (Private Finance Initiatives), described by Kelsey as “second stage privatisations” in that they follow the first-stage “crude” asset sales of the 80s and 90’s. A PFI is a contract awarded to a private interest to develop something for public use. The constant erosion of the once clear demarcation between the public and private modes means that there will be increased doubt over which services are covered by which public and administrative law, who the beneficiaries are, and what underpins their entitlement. Beyond generating acronyms and work for lawyers, this will make the case against privatisation harder to make, not because privatisation as a policy has proved itself, but because the goal posts keep shifting.

Kelsey argues that PPPs and PFIs have never been clearly explained. Politicians have no mandate for them, and their history, which Kelsey traces to 1992, is a tale of deception. Tony Blair’s “ Third Way” * has been the clearest expression of the ideology they express. Originally the UK needed corporate finance as it was bound by European Economic Community (EEC) rules which disallowed the degree of public debt that would have been created by the investments Blair wanted to make. Kelsey notes the convenient need that British finance capital had for State aid. Having made it hard for the Government to raise investment capital, the corporate interests pushing the agenda stepped in to help out. In other words, what the bankers said was good for the British public just happened to be what was good for the bankers. Blair preferred to claim that PPs and PFIs were “efficient” in a way that governments never are. Yes, we’ve heard that one a thousand times - but not so much since some of the biggest bankers went bankrupt and the State, guided by Blair’s successor, Gordon Brown, bailed them out once more (*see my review, below, of Bryan Gould’s “Rescuing The New Zealand Economy” for more on “Third Way” ideology. The latest annual World Investment Report, also reviewed by me, below, summarises PPP policy and activity). 

No matter how vigorously the consultants and the acronyms flourish, the level playing field they bang on about is never level. If the score mounts against them, privateers can take their bat and ball home, but governments have to provide infrastructure. They can’t quit. As Kelsey puts it, in a PPP there are “implicit guarantees” of government support for the corporates. And lots of the support is as explicit as pornography. Blair’s deals have allowed the privates to generate income from third parties. The privateers have been awarded 25-35 year maintenance contracts. They’ve been allowed to cut, casualise and deskill staff. But because the enabling contracts are said to be commercially confidential, the dealers are not accountable to the public. Except in the broadest terms (expressed in soothing acronyms) the voters don’t know what’s happening.

The corporate risk-takers are well protected from risk : “Because the contracts also guarantee payment for their entire term, or require compensation for early termination, the private provider is protected against the risk that hospital or schools become redundant if people move or policies change.... The claim that private infrastructure providers are cheaper than the state is also misleading. The rent paid over the life of PFI contracts in Britain is estimated at four or five times the cost of construction. This reflects higher interest rates for private sector borrowing, even when backed by guaranteed income, and the payment of dividends. Contracts that commit public bodies to payments from Government revenue for 25 to 35 years create new inter-generational burdens that do not appear in the public accounts. What do figure prominently in the balance sheets are ‘management fees’, claims of ‘massive operating expenditure’ and tax losses”.

A characteristic UK example is road construction (the PPP activity most likely to inspire the National government). According to Kelsey, a 2006 study revealed a PPP boost of P (as in Private) Profits of three to ten times. These taxpayer gifts are topped up by the “profits of subsidiaries, intra-firm financing, third party income from user charges for car parking, canteens and TV/telephones, and the gains for refinancing, land sales, disposal of equity stakes investments and unrealised increases in investment value”.

“Moral Hazard” : An Elastic Concept

The integrity of universities has been undermined by commercial need. In the UK a university refinancing deal allowed $160 million P Profit. Another uni paid out ten separate accountancy consultants. This is “efficient”? This is the way to fight “bureaucratic waste”? Does this keep down taxes? Are there any aspects of State privatisation that benefit the public or are all the hackneyed cliches false? A favourite nostrum of the free marketeers has been something they call “moral hazard”. This is routinely invoked by neo-liberals to stop the bad habit of governments carrying out their responsibilities. The theory is that a country’s resources can’t be administered by and for the country’s wage earners because they’re a greedy bunch who’ll raid the Treasury to fund selfish enterprises like public hospitals, schools and pensions. And now roads are morally hazardous. Profit seeking transnationals, on the other hand, seek only to protect those hapless citizens from themselves.

One recent example : in October 2008, when the (former) New Zealand government - and Australia’s - announced bank deposit insurance, there was a business consensus that ordinarily this would have been a “moral hazard”, and thus bad policy, the implication being that all those mum and dad investors would have been tempted to gamble away the lot, knowing that the State would bail them out. In 2008, it was reluctantly agreed, some guarantee had to be offered, lest there had been an old fashioned run on the banks and the global system had collapsed. So in fact There Had Been No Alternative (THBNA)*. Never mind that small depositors have no control over how banks invest. The hazard was all there all right but the immorality was on Wall Street. Who can ignore the trillions of dollars of morally hazardous losses on the world’s financial markets that prompted the guarantee? It was crooks like Bernie Madoff, the biggest scammer in history, who prattled about moral hazard (*for more on THBNA and her mother, There Is No Alternative [TINA], see my review of Gould, below. For a discussion of risk, see my review of the World Investment Report, below. In December 2008, Bernie Madoff, a leading Wall Street figure for decades, confessed to a $US50 billion pyramid scheme fraud which had gone on for years. The repercussions were enormous and are still being played out).

It would help if the experts, the suits who bleat this hypocrisy, dealt with reality. We’ve been through a financial collapse caused by a few rich people playing with people’s deposits. That was the moral hazard. Similarly, PFIs and PPPs offer up mum and dad taxes to reward speculators by guaranteeing private profits and insuring against losses. NZ and Australia had been the only rich world countries that did not offer deposit guarantees, so it’s hard to be confident that the boffins in Wellington will appreciate that the hazardous morality of Blair’s Britain or Bush’s America might not have been the best inspiration. Moral systems rely on a lot of Thou Shall and Thou Shall Not. They rely on regulation.

If roads, Kelsey remarks, were the defining technology of the Roman Empire, their present equivalent is telecommunications. She argues that the industry wants to stop governments from interfering with a new technology. Yet, while telecoms have been a big motive for all those driving the General Agreement on Trade in Services (GATS) they have not in themselves been the motive for deregulation. 

The “trade in people”, Kelsey continues, might be unacceptable if it was defined to be part of labour or immigration policy. The acronym makers know that it’s more happily thought of as to do with “trade” as this “absolves them of any moral responsibility if that results in brain drain, loss of educational investment or stunted economic and social development in the ‘exporting’ countries”. This human trade is “the services equivalent of just-in-time offshore industrial production with the benefit of lower costs, higher profits and quicker delivery”. Firms get “compliant services workers and reduced liability and social security costs”. The free traders pick off both ends of the market. The movement of skilled brain drain professionals, though, is defined as “migration”. Both governments benefit, the “exporters” by relieving unemployment and gaining overseas remittances. 

India ’s information technology (IT) industry is an example Kelsey looks at, an apt choice for several reasons. India is second only to China as the most thrusting of the emerging economies and its computer-related workforce is one of the world’s biggest employers. Kelsey makes the point that information technology is significant not only because it is the characteristic technology of the new century. In addition to the software designers and programmers, rows of the deskilled and lowly paid mass produce industrial parts on “20 th Century” assembly lines.

If, as Kelsey persuasively suggests, IT defines our post-modernity, it’s because it provides the means by which “[k]nowledge is reduced to information that, by necessity, is ubiquitous, sanitised and monolingual. Access is governed by price and technology, while ownership is locked up through intellectual property laws”. In this way, IT is the expression of the new, global, privatised culture. IT provides big corporations with the means to standardise, instantly and irresistibly. We all know about the penetration of movies, DVDs, music, cellphones and IPods, so Kelsey, always on message, doesn’t labour the obvious. She’s concerned with the effect of this global reach, as aided and abetted by “free trade”, on the integrity of the world’s societies.    

Replacing Education With Training

Both for the production and dissemination of the new order, universities are a focal point. Technology and commerce have a common interest in pushing IT, English and business courses at the expense of the physical and social sciences and the humanities, disciplines that are infused with local knowledge and culture. At the same time, market logic forces inequality. Kelsey writes : “National universities in poor countries and regions become ghettoised”

The effect on curriculum is evident in all the chatter about “flexible lifelong learning”, a concept that sounds OK, but Kelsey knows it’s a threat to integrity and quality. “Just-in-time (or just for me) education created a new demand for disaggregated units and fragmented courses....Education to think was replaced by training, ... designed and delivered solely with end-users in mind”

This is an important part of Kelsey’s analysis. Tertiary education is the means by which elites are recruited, so traditionally only a few were encouraged to keep learning beyond the school-leaving age. Governments did not relish the prospect of large numbers of educated workers. These would be more than a waste of taxpayers’ money. They might get ideas above their station as routine labourers. That need hasn’t changed, but technology has, so the trick has been to sideline teachers and lecturers by installing the smart new technology (allowing the “partners” to make a bundle) while keeping students dumb. As the European Roundtable of Industrialists explains the threat posed by quality public schools : “All too often the education process is entrusted to people who appear to have no understanding of industry and the path of progress... The provision of education is a market opportunity and should be treated as such”.

Kelsey’s an academic, but that’s not why she’s emphasising education. It’s because the Government is using the sector as a spear to privatise society. “NZ made the most far-reaching education commitments in the Uruguay Round” (of the former General Agreement on Tariffs and Trade [GATT], now the World Trade Organisation [WTO]. Ed.) and NZ and Australia were the only two Organisation for Economic cooperation and Development (OECD) members “to reduce their per capita spending on tertiary education in the 1990s. Both governments promoted ‘education exports’ as a foreign exchange earner and a substitute for public education funding”.

A depressing example of what’s going on is over the ditch, where the University of Melbourne North set up a company, Melbourne University Private, for “client focused corporate education programmes”. There the ‘client’ might graduate from the School of Enterprise with a Master of Public Private Partnerships, a qualification that was later rebranded as a Master of Public Infrastructure (see my review, below, of the 2008 World Investment Report). But good things happen. After eight years and losses of $A20 million, the School of Enterprise was “merged” back into the old-fashioned university.

Globalisation Destroys Cultural Diversity

To distract attention, a new “inclusive” language has been coined. Kelsey cites the popularity of the “borderless”, a concept which repackages global blandness as international sisterhood.  “Cultural diversity” is a similar repackaging. Our universities - and our schools - are full of such misleading euphemisms. Kelsey is showing that cultural diversity is in fact what is being destroyed. 

The global economy doesn’t treat universities in a different way from how it treats any industry. Africa has been called an “intellectual dumping” ground. Echoing a trendy infrastructure policy, southern governments have taken to branding themselves as intellectual hubs. Our P4 mate Chile, for example, wants to be a “hub” for South American “higher” learning (they would have been smarter propagandists not to borrow such a Fordist term. Named after the assembly line method of mass production invented by Henry Ford in his early 20 th Century US car plants. Ed.).

Unfortunately, the bad news doesn’t end. NZ has been aggressive in touting corporate freedom for cultural and audio-visual products. Among rich-world countries, our media and broadcasting industries are uniquely subservient to outside interests. These examples are well known. Kelsey has provided context for the disasters, and most of what she’s reporting is not as familiar. It would be nice to think the politicians and civil servants, here and in all the hubs, will read her and change direction. Nice, but unlikely.       

“RESCUING THE NEW ZEALAND ECONOMY”
by Bryan Gould, Craig Potton Publishing, Nelson, 2008

Bryan Gould’s biography is instructive. As a postgraduate he went to the UK, where he taught law and became a diplomat. From 1974 Gould was a senior member of British Labour governments. Twenty years later, at the time when NZ was being administered Ruthanasia, he returned from his Overseas Experience (OE). Gould comes from the generation of David Lange and Roger Douglas. And from a sister party. So why does he, a Labour insider if ever there was an insider, think the Lange regime was a disaster from which we are still trying to recover? (I reviewed Gould’s “The Democracy Sham” in Watchdog 114, May 2007, online at www.converge.org.nz/watchdog/14/03.htm, a book which in the light of the recent shenanigans on Wall Street reads as particularly prescient. “The Democracy Sham” looked at the global manifestation of monetarism and neo-liberalism, whereas the present book, subtitled “What Went Wrong And How We Can Fix It”, is a guide to New Zealand economic policy. They’re complementary studies).

Gould remarks that as a young politician he had assumed his political focus would be on law and international relations, but he soon changed his mind. Everyone else was doing it. British MPs, Gould found, “preferred ‘soft’ issues, where it was possible to express opinions without too much fear of being contradicted by the facts, rather than the tougher issues that are the real stuff of politics and economics”. For the ambitious and the lazy it was easier to leave the hard questions to Treasury. Divergent views about how money goes around gets you offside with the power brokers. 

The Ignorance Of The Rogernomes

But if few British politicians thought much about economics, probably fewer did in NZ, where an exciting new fashion was making the rounds. Labour Cabinet leaders saw themselves (as their predecessor Muldoon had) as rebels, but were determined to keep things simple lest facts blocked their clear and empty view. Convenient gaps in the Young Turks’ knowledge were empowering. Back in Wellington, Gould dropped in on Douglas and his Rogernomes : 

“What I remember most about the discussion was how unaware they were that the new measures they appeared so recently to have discovered had by this time been shown to have significant downsides in those countries, like the United States and the United Kingdom, where they had been applied for the better part of a decade. They seemed equally unaware that the revelation that had been vouchsafed to them had a history going back nearly 200 years, and had been subjected to protracted practical experience over several major periods in our economic history”.

In the months since Gould published, in 2008, stock markets have melted, and global finance has become the topic of popular conversation for the first time in decades. Casual observers have glimpsed the parallel universe that is Wall Street, they’ve heard talk of derivatives and hedge funds, seen that the numbers didn’t add up but that Bernie Madoff’s number was up. They’ve wondered how it came about that they were delivered into such an odd theology. One essential problem has been that a generation of policy makers have been long on scriptural theory but short on economics and history. They’ve put their faith in “gurus” like Madoff rather than probity. The essential change has been that before the Rogernomes, before the fundamentalists smashed their icons, citizens were accustomed to speak of a “political economy”. The Rogernomes, as narrow and intolerant as mullahs, banished that sort of integrated understanding.

Inevitably, after 2008’s collapse, the very experts who had written the holy texts which delivered deregulation, the experts who preached its gospel, claimed to have seen it coming. Their self-serving reverses reality. In offering his analysis of the New Zealand economy, Gould emphasises that for two decades the neo-libs have banged on about how There Had Been No Alternative to the policies that created the carnage. Some are still in denial. In the crisis month of October 08 Don Brash, the former Reserve Bank Governor and National Party Leader, whose authority in such enclaves is papal, appeared on television (the former Agenda on TV1) to declare that it had been the most regulated American institutions that had gone bust, dragging into the flames the helpless free marketeers.

One way Gould differs from the Brash ideologists is that he prefers to look at facts. Another difference is that Gould is informed by more than fundamentalist tracts or the latest get-poor-quick motivational seminar. He suggests that the first Labour government of 1935 set a global pattern of how to recover from the Depression by a pragmatic and humane investment in social infrastructure. That was once a consensus view. Then came the amnesia of the 1984 Labour government. Again, Gould’s timing is unerring. Post-October 2008, even the former Bush White House was forced into conceding that the Government had to inject cash into the American economy to stop it seizing up. For Bush, the idea was as old as capitalism : to use public money to rescue private interests, but this time the attempted exploitation would have been too overt. Bush and Henry Paulson (the US multimillionaire ex-speculator and Bush’s Treasurer) had to bend to the popular wind and allow some potential public benefit. In a choice turn of phrase the Establishment economists insisted that they had no alternative to adopting such Keynesian* heresy (though John McCain, flailing for a maverick brand to distinguish himself from the emerging consensus, spent the last weeks of his unsuccessful 2008 Republican Presidential campaign denouncing Barack Obama’s “socialism”. And a hostile Florida TV interviewer followed suit by quoting Karl Marx to a horrified and bewildered Joe Biden, now the US Vice-President). *John Maynard Keynes, the highly influential 20 th Century British economist, whose followers in governments throughout the West practised a mixed economy of the State and private sector. Ed.

Gould’s other concentration is on Rob Muldoon’s National government (1975-1984). Muldoon (who doubled as Prime Minister and Finance Minister) made three essential errors of financial judgement. He envisaged farm subsidies as a necessary bridge until sensible folk annulled the shock of the UK’s having joined the EEC, seen by National’s empire loyalists as an unseemly cutting of the historic colonial ties to NZ. Then (as now) there was little understanding that the world economy and its balance of powers had forever shifted. Second, Muldoon campaigned against compulsory superannuation, something now seen as a no-brainer need, but deemed by Muldoon to be evidence of Communist Russian sabotage (just as, in July 08, John Key deemed Working For Families to be Communism-by-stealth). The third key error was Think Big. When it came to a strategic understanding of historic trends, Muldoon’s National government was almost as barren as the Lange government that replaced it. 

Continuity Between Muldoon & Key

As he opened the door for the Lange Government, which legitimised itself as being his antithesis, Muldoon is an obvious and conventional focus. But what, six months ago, might not have been so evident is this continuity between Muldoon in 1975 and Key in 2008. Like Muldoon, Key has bribed the electorate with a facile promise to boost consumption at the expense of saving by proposing to cut taxes for those who least need relief and are least likely to inject the money back into the economy. And, sharing Muldoon’s distaste for boosting domestic saving and investment, Key seems to want to erode Kiwisaver. Further, Key has echoed Muldoon’s Think Big schemes by threatening to overturn the Resource Management Act’s already flimsy protections against the whims of Big Thinkers, and he’s done so for the same reasons. An earlier National government wanted to raise Lake Manapouri for the benefit of Comalco’s Bluff smelter; Key has the same impatience with those who would stand in front of the energy bulldozers. 

Gould’s explanation of monetarism, the creed that sustains the Rogernomes and their disciples, is as clear and accessible for the general reader as any that has been offered. The bottom line (as the monetarists might say) has been a generation of high interest rates, an overvalued dollar, a deeper current account deficit, uncompetitive industries and struggling exports. Gould differentiates between GDP (Gross National Product, the usual economic indicator we read about) and Gross National Income (GNI). Until the year of the revolution, 1984, GDP and GDI were similar, near the OECD average. By 1991 GDP had fallen to 80% of the average; GNI was at 76% of the average. GNI measures what New Zealanders have, so it’s the more accurate reflection of living standards. Our incomes have fallen even more than has total output, the difference in the numbers being all those profits flying overseas. The former Clark government claimed agnosticism. It might have been more responsible than its two predecessors, but, as Gould shows, without decisive action, it’s hard to reverse a trend. By 2005 GNI had fallen to a mere 70% of the OECD average.

When the economy was based on exporting meat, wool and wood - and, a topical connection, milk - it was easy to suppose that you have to sweat to make a buck, but we’re not falling behind because we’re lazy. On the contrary. In 1990 the average work week in NZ was close to the rich world average. By 2005 it was 113% of the average. We’re working longer hours for less reward. When politicians talk about labour productivity they often imply that it’s an indicator of virtue, as though our increasingly uncompetitive economy is the fault of workers leaning on their shovels. But the only OECD country where people work longer hours is Iceland, and it went bankrupt in the Great Crash of 2008. So we have to look for other causes. In reality the level of productivity is an indication of a society’s technology and management, and productivity has declined throughout the Rogernomic era because we don’t invest in being smarter. According to Gould’s stats from four years ago, NZ’s productivity is now 79% of the OECD average. We are the only rich world country whose overseas trade and investment has declined as a percentage of GDP.

If you’ve been reading Watchdog the grim news won’t surprise, but, with a new Government in power, it’s as good a time as any to review some more numbers : per capita foreign debt soared from 49% of GDP in 1984 to 89% in 2006; manufacturing output as % of GDP keeps falling, from 19% in the early 1990s to 15% in 2006; from 1989 to 2006 the value of foreign ownership climbed from $9.7 billion to $82.7 billion. That’s up 700%. It would be solace if the profits were ploughed back in (as the cliche has it), but foreign corporations aren’t in the welfare business. In the last decade, 1997-2006, of $50.3 billion creamed off, a mere 32% was reinvested in NZ. Gould’s example : in a typical year “our” Australian banks repatriate $2.5 billion in profits.

You’d think that a country that works harder for less, the fruits of its labour fattening transnationals, would want to invest in its labour force so that we all work productively in our own interests. Yet Key kicked off his election campaign with a commitment to removing an incentive for research and development (R and D), thus ensuring that the already miniscule sums we spend on science would shrink. It’s not surprising. Market mania guarantees that wealth producing research will occur near HQ. Any R and D farmed off to places like NZ is that for which costs are likely to be higher than immediate earnings. Foreign private outfits won’t waste cash on research which is likely to benefit the country but can’t be captured by profiteers. That spending is typically awarded to the taxpayers of the “host” country - who can’t find the money.

NZ A World Leader : In Social Decay

Inevitably, but, sadly, unnecessarily, the OECD has come out with a leading indicator of inefficiency, social decay and exploitation that shows that NZ is yet again a world leader. Over the last 20 years we are one of only two OECD countries to show a big increase in income inequality, and one of five in which absolute poverty has increased. Most have done badly, because most have gone neo-liberal. As a rule of thumb, the more neo-lib the government, the worse the failure. 

In international terms Australia is seen as solidly “Anglo-Saxon”, or extreme, in its devotion to market mania, but everything’s relative. Compared to NZ, Oz has been pragmatic, its moderation being a reason its economy has performed better. Another factor, the explanation preferred by Clark and Cullen, is its mineral wealth.  Labour must have been put out by  National’s notion that the best way to pay your bills is by emigrating, especially as the big dip in comparative wealth happened in, after, and as a consequence of, the Douglas-Richardson era. So the insinuation that NZ should be more like Oz, a staple of Keynote electioneering, is more than misleading. Gould points out that the National-Act call for NZ to abandon our currency would remove yet another means for running our country by ourselves in our own interests while doing nothing to improve the economy. A revaluation upwards of the dollar, to a level reflecting the Aussie dollar and Aussie needs, would not help.

Gould reminds us that between 1984 and 2004 the incomes of the top 10% of Kiwis increased by 21%, the dwindling middle earners stayed roughly level, while the bottom 30% became poorer in real terms. There are at least two ways of assessing this. There’s what Gould might call the “soft”, or moral, thought that rewarding speculators and their ilk, while punishing the rest of the workforce, who create wealth, is unfair. Gould prefers the “hard” explanation. Inequality is inefficient. It’s not coincidental that the world’s miserable places are those with a few very rich people and a lot of very poor people. It’s not a coincidence that the places where people want to live tend to have a more equal, and higher, spread of wealth. Societies work better that way.     

New Zealand ’s increased rate of inequality is comparable to the ratio in the US (that’s pre-market meltdown). Over two decades the extremes have spread till, in 2008, they looked like the numbers from 1929 (that’s pre-Depression). Here Gould makes his essential point. The polarities are not the inevitable, if regretted, fruit of neo-liberalism. They were its purpose :  “The whole point of ‘free market’ economics is that it does produce inequality; that is its purpose. It is not only designed to produce disparities in wealth and income as a primary outcome; it is constructed to influence the political process so that the dice are allowed to lie where they fall”.

The Market Entrenches Inequality

Gould discusses how the Gold Standard was once a handy tool devised by the elites “as a means of preventing governments from spending too much; if they overspent, the foreign exchange markets would lose confidence, the currency would weaken, and governments would be forced to deflate in order to keep the currency in line with the Gold Standard”. As with the neo-liberal version of financial theory, monetarism, the champions of the Gold Standard claimed to be acting in the interests of one and all. The real motive was the wish of rich people to stay rich. The talk was of innovation, of market gurus leading us to a promised land of infinite plenty. In fact, like the Gold Standardisers, neo-libs have been “hostile to ... creators of new wealth”. In NZ the high cost of money and the financial bubble boosted idle wealth, but high interest rates depressed the rest of the economy. “The market can easily become, in other words, a powerful mechanism for entrenching and increasing inequality.... The logical outcome of that process is monopoly, the very antithesis of the freedom, competition and stimulus to innovation that are so often touted as the hallmarks of a market economy”.

Now, post-crash, that we’ve peeked into the world of Lehman Brothers, AIG and Merrill Lynch, we’re unsurprised that in 2006 the US Federal government as represented by Hank Paulson dished out subsidies to business of $US92 billion, and a further $US20 billion a year in subsidising executive pay. We appreciate that the snouts in the trough are not the snouts of hungry piglets. On the contrary, “technologies that are ‘pre-competitive’ or ‘high risk’ have instead been captured by big business flogging proven products (George Monbiot, citing the Cato Institute, Sunday Star-Times, 5/10/08).

It’s good to read Gould’s withering contempt. If anything his critique is stronger than his previous one. He has a healthy contempt for the ideological contortions of his erstwhile mates like Tony Blair (and the successors of the Rogernomes) trying to explain how a neo-lib economy somehow wasn’t a neo-lib economy.  The conceit that there exists a possible “ Third Way” which can deliver both the market and social justice is “seriously deluded”.

In a brisk polemic, there might not have been space to elaborate on a Canadian concept that Gould rightly praises. The Index of Wellbeing attempts to measure what matters (CWI, which can never be measured in crude quantitative terms). “It encompasses”, Gould writes, “seven domains of measurement : living standards, time allocation, healthy populations, ecosystem health, an educated populace, community vitality and civic engagement”. An analysis of an NZWI could unite “soft” and “hard” aspects of our political economy. That would be a great project, a pointer to a future politics, one Gould could do as well as anyone.   

“WORLD INVESTMENT REPORT:
Transnational Corporations And The Infrastructure Challenge”
United Nations Conference On Trade And Development
New York, 2008

In 2007, the year under review, at the high tide of those rogue wave financial markets, global FDI soared by 30%. The largest recipients were among the largest economies, the top five being the US, UK, France, Canada and the Netherlands. In the developing world FDI went up by 21%, with most going into China, Hong Kong (which is also China) and Russia. Total transnational corporations’ [TNC] sales, at $US31 trillion, were up 21%. That’s the big picture. The other sign of the times, also noted by Kelsey, is the trade in services. The upward trend is clear. In 1997 seven of the top 100 TNCs traded in services; in 2007, 20 did. The increasing rate is likely to steepen.

UNCTAD introduces what a few months ago was a “new feature” of world trade, the sovereign wealth fund (SWF). SWFs are “government investment vehicles that are funded by the accumulation of foreign exchange assets and managed separately from the official reserves of the monetary authorities. Investments by SWFs in the banking industry were generally welcomed”, UNCTAD reckons, “owing to their stabilising effect on financial markets (sic). However, they also prompted some negative public sentiment... notably on national security grounds”. There were other grounds for that bearish sentiment. They sound dodgy. Are they run by public authorities with an accountable mandate? Or are they another manifestation of the deregulation mania?

Sub-Prime Mortgage Crisis? Nothing To Worry About

When this Report was compiled the sub-prime mortgage crisis was bubbling in the background, not yet having boiled over. UNCTAD wasn’t too worried. A few individuals would have trouble making ends meet. “However”, in UNCTAD’s view, “both micro- and macroeconomic impacts affecting the capacity of firms to invest abroad appear to have been relatively limited so far. As TNCs in most industries had ample liquidity to finance their investments, reflected in high corporate profits, the impact was smaller than expected”.

Well, of course, everyone’s wise after the event, and few really anticipated the extent of the market meltdown, but UNCTAD should have had a clue that things weren’t great. They shouldn’t have assumed that the sub-prime mess was being cleaned up when it hadn’t yet spilled over. After all, the UN is meant to be the world’s government, and it employs whole highrises of bureaucrats and consultants in New York and Geneva to tap into databases. Kelsey remarks that UNCTAD serves as the world’s balance to the irrational exuberance of the private marketeers, so they need to have a good grip.

Efficient infrastructure is a pre-condition for a sturdy and sustainable future in developing countries. Few will argue with that. The debate has to do with who funds it, and who benefits from its construction. Presently around 3-4% of developing world GDP is devoted to infrastructure investment, but UNCTAD reckons they need investment of around 7-9%. Few poor countries can manage that, and even fewer can do so without risking other commitments. Others could but won’t, because the money is creamed off by corrupt leaders. For any and all of these reasons, developing governments look to TNCs.

THE TNCs look for profits. “Until the 1980s”, UNCTAD remarks, the building of infrastructure was “the purview of the State”. Then, between 1990 and 2006, infrastructure funded by FDI went up 31 fold. Electricity and telecommunications have led (for a discussion of the political economy of electricity see my review of “Power Play” by Sharon Beder, in Watchdog 104, December 2003, online at www.converge.org.nz/watchdog/04/12.htm). This is a massive jump. It would be nice to report that the poor world is 31 times better served than in the deprived old days of State investment, but it’s not doing better at all. UNCTAD points to the obvious cause : “The majority of infrastructure TNCs invest abroad in order to access the markets of host countries. They aim at benefitting from market opportunities arising from a number of sources, including the liberalisation and deregulation in host economies”.

When TNCs were surveyed, UNCTAD continues, “most frequently mentioned that liberalisation in the home country led them to further exploit their competitive advantage.... because the home market offered few opportunities....Second, a few TNCs also opted to internationalise as competition had started to cut into their home market share after government liberalisation policies encouraged market entry by domestic and foreign companies”.

Who Knew? TNCs Want To Make Money

Often they’re companies that have exhausted local opportunities and look for easier pickings from offshore cash strapped governments. Hungry for quick returns, they prefer to let their “hosts” pay for compliance costs : “Since the scale of infrastructure projects can be extremely large, and the payback long term, in many cases the potential risks necessitate modalities involving partnerships”.

Modalites in partnerships? That’s another way of saying that the money’s not rolling in fast enough and the free marketeers want “host” taxpayers to bail them out. “TNCs are adept at securing financing from a wide variety of sources....., as well as entering into partnerships”. The TNCs are for ever whinging about “huge capital outlays, while the stream of returns on capital is spread over many years. Thus the risks to investors are typically high”. Their solution is to get governments to “ensure revenue streams for the investors by making up the difference between user demand and previously agreed company revenues. Such subsidies are generally funded through taxes. The risk is again that the subsidy could become a disincentive for companies to produce efficiently” (for an analysis of TNC risk insurance, see my review of “The Risks We Run”, by Roger Moody, in Watchdog 111, April 2006, online at www.converge.org.nz/watchdog/11/10.htm).

In its deadpan style UNCTAD concludes that the end result is “reduced costs and delivery times and, in some cases, improved quality standards”, but ‘these successes are found mainly in relatively high income or larger developing countries”. This might be because rich countries are better able to defend their interests and are less likely to have to bribe TNCs to do a half decent job. Richer countries also impose stricter restrictions against foreign ownership over whatever could be connected to national strategy or security, most obviously their main communications networks and their airports and seaports. Of course they do.   

When it comes to quality, who owns the enterprise, whether it’s a TNC or a government, is, in itself, insignificant. How the business operates matters more. Here TNCs have a patchy record. UNCTAD’s collation of trends shows that many countries are wary of allowing rail or energy transmission to go to a TNC, but few restrict foreign investment in roads. This is a reflection of worries about “security” - however that’s defined. Governments also usually want to make special rules for “strategic” infrastructure, though “there is no common agreement as to what is to be regarded as ‘strategic’”. The trouble with abstract nouns and their adjectives is that they’re defined by those who write the agendas. In NZ, for instance, when Big Thinking governments want to dam a river or raise a lake, “strategy” is a license to bully the country into acceptance. But when the Clark-Cullen Government, with its tentative understandings of matters strategic, saw the weathercock over Auckland Airport shifting in a rising breeze, it found that the airport was strategic because it was discovered to be on strategic land. 

The concepts are slippery because they serve as justifications rather than as guides. Take the US, the one government that can (so far) do what it wants. The US knows what it regards as a security matter. It knows what’s strategic. All infrastructure could be, so the Government vets any deals with foreigners. Russia is interesting. Despite being a zealous deregulator, it’s also sensitively nationalistic. It does not allow natural monopolies - most ports and airports can be defined as natural monopolies - to be foreign-owned. 

You have to read the footnotes and between the lines. UNCTAD quotes all the soothing words and notes all the acronyms that are crafted to assure us that all the “partnerships” are motivated by the needs of the “hosts”, but their narrative makes clear that the TNCs are in it for the money. That hasn’t usually helped the world’s peoples attain their potential. As Kelsey and Gould explain, the TNCs are more often serving their own selfish interests.