Bill Totten's Weblog

Sunday, August 24, 2008

The Party of Davos

by Jeff Faux

This article appeared in the February 13 2006 edition of The Nation. (January 26 2006)

The world's movers and shakers are convening once again in January at the annual World Economic Forum in Davos, the posh ski resort nestled in the Swiss Alps. Attendance is invitation-only, enforced by police barricades, razor wire and the latest high-tech military hardware to guard against terrorists, protesters and curious local citizens.

Some 2,000 people will show up to discuss the world's problems as defined by those who own and manage the great global concentrations of wealth (Microsoft, Citigroup, Siemens, Nestlé, Nomura Holdings, Saudi Basic Industries, et cetera.). Their guests include prominent political leaders, international bureaucrats, academics, consultants and media pundits - with a few NGO and labor union officials sprinkled along the edges to demonstrate diversity.

Davos is not the place for secret conspiracies. More than 200 hovering journalists will dispatch to the world's citizens breathless accounts of the chatter and charm of the masters of the economic universe. Davos is rather the most visible symbol of the virtual political network that governs the global market in the absence of a world government. It is more like a political convention, where elites get to sniff one another out, identify which ideas and people are "sound" and come away with increased chances that their phone calls will be returned by those one notch above them in the global pecking order.

Americans are of course prominent members of this "Party of Davos", which relies on the financial and military might of the US superpower to support its agenda. In exchange, the American members of the Party of Davos get a privileged place for their projects - and themselves. Whether it's at Davos, at NATO headquarters or in the boardroom of the International Monetary Fund, heads turn and people listen more carefully when the American speaks.

"Davos Man", a term coined by nationalist scholar Samuel Huntington, is bipartisan. To be sure, Democrats tend to be more comfortable with the forum's informal seminar-style and big-think topics like global poverty, cultural diversity and executive stress. Bill Clinton goes often, and Al Gore, John Kerry, Robert Rubin, Madeleine Albright, Joe Biden and other prominent Democrats are familiar faces. Republicans generally prefer more private venues. George W Bush, of course, doesn't do anything unscripted. But people like Dick Cheney, Newt Gingrich, John McCain and Condoleezza Rice have all worked the Davos circuit.

That the global economy is developing a global ruling class should come as no shock. All markets generate economic class differences. In stable, self-contained national economies, where capital and labor need each other, political bargaining produces a social contract that allows enough wealth to trickle down from the top to keep the majority loyal. "What's good for General Motors is good for America", Dwight Eisenhower's Defense Secretary famously said in the 1950s. The United Auto Workers agreed, which at the time seemed to toss the notion of class warfare into the dustbin of history.

But as domestic markets become global, investors increasingly find workers, customers and business partners almost anywhere. Not surprisingly, they have come to share more economic interests with their peers in other countries than with people who simply have the same nationality. They also share a common interest in escaping the restrictions of their domestic social contracts.

The class politics of this new world economic order is obscured by the confused language that filters the globalization debate from talk radio to Congressional hearings to university seminars. On the one hand, we are told that the flow of money and goods across borders is making nation-states obsolete. On the other, global economic competition is almost always defined as conflict among national interests. Thus, for example, the US press warns us of a dire economic threat from China. Yet much of the "Chinese" menace is a business partnership between China's commissars, who supply the cheap labor, and America's (and Japan's and Europe's) capitalists, who supply the technology and capital. "World poverty" is likewise framed as an issue of the distribution of wealth between rich and poor countries, ignoring the existence of rich people in poor countries and poor people in rich countries.

The conventional wisdom makes globalization synonymous with "free trade" among autonomous nations. Yet as Renato Ruggiero, the first director-general of the World Trade Organization, noted in a rare moment of candor, "We are no longer writing the rules of interaction among separate national economies. We are writing the constitution of a single global economy." (Emphasis added.)

On the board of many transnational companies, Ruggiero has been both trade and foreign minister in the Italian government of right-wing businessman Silvio Berlusconi. He is now the chair of Citigroup's Swiss subsidiary. His fellow authors of the Davosian constitution have similar résumés, tracking careers that flow easily across borders and between public and private sectors. After just stepping down as German chancellor, Gerhard Schröder has become board chair of a Russian company building a gas pipeline that Schröder himself had negotiated while in office. And so it goes.

In the absence of global democracy, the forces that act as counterweights to the power of the investor class in national economies - labor, civil society and progressive political parties - are too weak and unorganized to create a global social contract. What might be called the "Party of Porto Alegre" - the NGO activists of the World Social Forum, who also meet annually (usually in Brazil, this year in Venezuela, Mali and Pakistan) in January - is hardly a match for Davos. It is therefore no surprise that the constitution of the world economy protects just one class of global citizen - the corporate investor.

Given the influence of American elites, the model for this constitution is the North American Free Trade Agreement, conceived under Ronald Reagan, nurtured by George H W Bush and delivered by Bill Clinton. Among other things, NAFTA's 1,000-plus pages give international investors extraordinary rights to override government protections of workers and the environment. It sets up secret panels, rife with conflicts of interest, to judge disputes from which there is no appeal. It makes virtually all nonmilitary government services subject to privatization and systematically undercuts the public sector's ability to regulate business. Jorge Castañeda, later Mexico's foreign secretary, observed that NAFTA was "an agreement for the rich and powerful in the United States, Mexico and Canada, an agreement effectively excluding ordinary people in all three societies".

In the fall of 1993 a corporate lobbyist, exasperated by my opposition to NAFTA, stopped me in the corridor of the Capitol. "Don't you understand?" she demanded. "We have to help [then-Mexican President Carlos] Salinas. He's been to Harvard. He's one of us."

Her reference to "us" seemed odd. Neither she nor I was a Harvard graduate. So it took me a while to get her point: "We" internationally mobile professionals had a shared interest in liberating similarly mobile global investors from regulations imposed by national governments on behalf of people who were, well, not like "us". Despite the considerable social distance between Salinas and both of us, she was appealing to class solidarity.

It's impossible to understand why Democratic Party leaders collaborated with Republicans to establish NAFTA unless reference is made to cross-border class interests. There was no compelling economic or political reason for Bill Clinton to make NAFTA a priority in his first year as President. In economic terms, nothing was broken that needed fixing. Politically, NAFTA and the WTO that followed traded away the interests of the Democratic Party's blue-collar electoral base while creating a bonanza for Republican constituencies on Wall Street and in red-state agribusiness.

But Clinton was more Davos than Democrat. Tutored by financier Robert Rubin, a prodigious fundraiser who became his Treasury Secretary, Clinton embraced a reactionary, pre-New Deal vision of a global future in which corporate investors were unregulated and the social contract was history. Indeed, in all three countries it was the leaders of the political parties that had historically claimed to represent ordinary people - the Democrats' Clinton, the Liberal Party's Jean Chrétien and the Institutional Revolutionary Party's Salinas - who delivered NAFTA to their global corporate clients, undercutting their own constituencies. "NAFTA happened", said the then-chairman of American Express, "because of the drive Bill Clinton gave it. He stood up against his two prime constituents, labor and environment, to drive it home over their dead bodies."

A year later, in November 1994, enough angry Democratic voters stayed away from the polls to give the Republicans control of the House. Since then, many working-class Americans, feeling abandoned by the Democrats, have responded to the Republican definition of class struggle as a fight over gun control, school prayer and abortion. The Democrats have still not recovered.

Consistent with a deal among the rich and powerful, NAFTA made the distribution of income, wealth and political power more unequal throughout the continent. In all three countries, wages in manufacturing fell behind productivity increases, shifting income from labor to capital. Ordinary Mexicans especially went through the economic wringer - to which the willingness of hundreds of thousands of them to risk their lives each year crossing the border continues to be tragic testimony.

On the other hand, opportunities blossomed for the rich and powerful in all three nations. American and Canadian investors got access to cheaper labor and privatized Mexican companies, while Mexican oligarchs got to broker the deals. One example was the way NAFTA was used to open up Mexico's banking system to foreign ownership, profiting elites on both sides of the border.

The governments of Carlos Salinas and his successor, Ernesto Zedillo - hailed in Washington as great free-market reformers - privatized government-owned banks, turning them over to business cronies, and, through NAFTA, revoked the legal ban on foreign ownership. When the banks started to fail, they were given huge government subsidies to make them attractive to transnational buyers. At the same time, the "reform" government was slashing subsidies to the poor for food and medicine.

Banamex, the country's second-largest bank, was bought by a Mexican syndicate, owned by Salinas pal Roberto Hernandez Rodriguez, for $3.2 billion and when, thanks to NAFTA, foreigners were allowed to own Mexican banks, it was resold to Citigroup for $12.5 billion. Robert Rubin negotiated the deal for Citigroup, where he had gone after leaving the Treasury Department. The Mexican government's welfare program for Citigroup and other foreign investors continues: In 2003 government subsidies to private banks (more than 85 percent of them now owned by foreigners) were almost three times those spent on roads, schools and other infrastructure.

NAFTA was only the beginning. The Clinton/Republican alliance then pushed through the WTO agreement and the subsequent deal with China that traded off more US industrial jobs in exchange for protections for US investors in that huge Asian market. Not only has this produced a massive trade deficit with China and further downward pressure on US wages, it has also sent some 250,000 jobs from Mexico to China. The ubiquitous Citigroup, with banking operations in 100 countries, is now busy building its Chinese banking empire - with Chinese partners.

That well-connected people who move in and out of government and business act in ways that benefit their class and take advantage of their contacts to further their own interests is neither illegal nor new. That's the way class privilege works. Thus, it is unlikely that Dick Cheney ever ordered anyone at the Pentagon to give a huge sole-source contract to Halliburton. He did not have to. Procurement officers already knew the relationship between the company and the Vice President. And Cheney's promotion of more funds for the military and for the war in Iraq in particular was bound to benefit the world to which he belonged - his circle of rich and powerful people who would always be there for him and his projects.

There are of course important differences between the ways the elites of the different parties promote the Davos agenda. The preferred instruments of Rubin Democrats are the economic levers of the US Treasury, the IMF, the World Bank and other international financial institutions. Rumsfeld/Cheney Republicans prefer the Defense and Energy departments. The Rubin mode is certainly less lethal and probably more effective. Still, Davos relies on the Pentagon to protect its class privileges with a worldwide web of military bases, training schools and the always-present threat to send in the Marines. It's worth remembering that virtually the only section of Saddam Hussein's law still untouched by the US occupation is its oppressive labor code.

But the twin pillars of the US superpower - the Pentagon and Wall Street - are slipping into their own crises and soon may not be able to provide the military and economic muscle for the Davos agenda.

The crisis on the military side involves blowback from the overreach in Iraq. Bush, Cheney and Rumsfeld - despite their thick transnational corporate connections - have created a disaster for Davos. The war has unleashed an army of enemies of Western modernization that is making global corporations nervous. Two years ago the wiser heads at Davos were appalled at Cheney's delusional report on the Bush Administration's progress in turning the Middle East into a shopping mall - however much they might have sympathized with the objective. Today the mess in Iraq has revealed to Davos both the incompetence of the American governing class and the unwillingness of the American electorate to make the sacrifices necessary to act as security police for the world's rich and powerful.

The looming economic crisis comes from the unsustainable US external debt. For more than a quarter-century, we Americans have been buying more from the rest of the world than we have been selling it, and borrowing from abroad to make up the difference. The resulting trade deficit has been a major engine of global growth under Davos's management. But common sense and simple arithmetic tell us that even the United States cannot go on much longer spending more than it is earning.

When the day of reckoning comes, high interest rates and a falling dollar will force us Americans to rebalance our trade by cutting the price of what we sell and raising the price of what we buy, lowering real incomes. The crisis in the nation's trade sector will be transmitted to the rest of the economy, made vulnerable by overindebted consumers, overleveraged pension funds and overpriced houses. Thanks to George W Bush's reckless fiscal deficits, the government will have less ability to overcome an economic crisis through borrow-and-spend, as it did in the last economic downturn. With the appetite for America's IOUs diminishing, US politicians will have their hands full dealing with rising energy costs and the tottering finances of healthcare, education and pensions.

The basics of a harder-times scenario are not much in dispute. The debate is between those who foresee a hard landing and those who believe that the world's central bankers will somehow figure out a way to avoid a global financial meltdown. But hard landing or soft, even the staunchest supporters of globalization admit that lower living standards are already in the cards. N Gregory Mankiw, who as Bush's chief economist famously praised the offshoring of American jobs, recently acknowledged that US reliance on foreign savings to support its consumption means a "less prosperous future".

Financier Warren Buffett reaches the obvious conclusion: We are headed for "significant political unrest". Democratic Senator Max Baucus, a staunch free-trader, recently told Chinese business executives that unless they cut their country's trade deficit with America "US politics will become unmanageable". New York Times columnist and Davos champion Thomas Friedman, who also sees the writing on the wall, suggests dividing political parties by economic class, with Republican Wall Street joining with Democratic Hollywood against disgruntled working-class "populists" in both red and blue states.

But working-class disgruntlement is likely to go beyond Freidman's stereotype of uneducated losers. The outsourcing and downsizing of opportunities is already adding to the insecurity of people much further up the skill ladder. There are signs that the anxiety is spreading to the business class as well; within organizations such as the National Association of Manufacturers, the owners of smaller and medium-sized businesses, who still depend on an American workforce, are beginning to dissent from the once united front in favor of globalization.

Resistance to Davos is also growing in our own hemispheric neighborhood. Latin American oligarchs who prospered by selling their countries' assets and people to transnational investors have been ousted in Brazil, Argentina, Venezuela, Uruguay and Bolivia. In Mexico, which is having a presidential election this July, a leftist critic of NAFTA leads in the polls. The Party of Davos may not be over, but the rest of the world seems less willing to foot the bill.

Here in America, the coming unrest could turn right as well as left. The Republican Party is hopelessly tied to the multinational priorities of the US business elite, but its managers are skilled at stoking nationalist resentment among the working-class victims.

In the two-party system the burden therefore rests on the Democrats' ability to produce leaders who are not co-opted by the Party of Davos. Given the current crop, our chances may not seem great. But leaders are often produced by the times. As globalization's squeeze on ordinary Americans continues, the political price will rise for those who continue to give priority to bringing Burger King to Baghdad over healthcare to Baltimore. It's worth remembering that Franklin Roosevelt, who was as elite and privileged as one could get, responded to the economic crisis of his time by becoming - as they muttered in the best clubs - "a traitor to his class".


Jeff Faux was the founder of, and is now distinguished fellow at, the Economic Policy Institute. His latest book is The Global Class War (2006).

Bill Totten


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