Globalization and its Discontents | Study Guide

Joseph Stiglitz

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Globalization and its Discontents | Chapter 6 : Unfair Trade Laws and Other Mischief | Summary

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Summary

The IMF and the U.S. Treasury turned a blind eye to corrupt Russian practices such as the "loans-for-share" program because they felt it kept President Boris Yeltsin in power, and he was willing to go along with shock therapy policies. Western financial institutions supported Yeltsin as a bulwark against a communist resurgence. They undermined other Russian political and economic leaders who sought an open debate on shock therapy, which had impoverished so many Russians. The U.S. Treasury and the IMF quashed any attempts to moderate the market fundamentalism embodied in shock therapy. To this end, they were willing to overlook Russian corruption. The Treasury supported the oligarchs and their political power in Russia and dismissed an alternative economic strategy that might have produced real economic growth.

What Should Have Been Done

Instead of supporting oligarchs, the West "would have been far better served had [it sought] ... broad-based support [for] democratic processes" in Russia. The West should have encouraged open debate on the best way to create economic growth and to reduce poverty in Russia. But the U.S. Treasury considered the issue "too important to let [President Bill Clinton] have an important role in making the decisions" about it. The Treasury feared that Clinton (b. 1946) would approve dialogue and debate, so he was kept out of the loop.

U.S. Interests and Russian Reform

The economic policies implemented in Russia by the IMF and the U.S. Treasury reflected "U.S. financial and commercial market interests." The July 1998 bailout of Russian banks largely benefited U.S. banks, which got the bailout money as repayment for their loans to Russia. Trade policies were even more blatantly one-sided. American "fair trade laws" were used to build barriers to imports that threatened important domestic industries. Anti-dumping laws encouraged U.S. industries that faced competition from abroad to petition the U.S. government to impose stiff tariffs on these imports. The tariffs made the American product more competitive but were a gross violation of Washington Consensus policies.

The Aluminum Case

In 1994 lower demand and a global economic slowdown depressed aluminum prices. Russia, an important exporter of aluminum, was selling this commodity "at the international price," or the going rate worldwide. Alcoa, a large U.S. aluminum company, accused Russia of dumping its aluminum at an unfairly low price. It petitioned the U.S. government to create a cartel that would restrict output and therefore raise the price of aluminum. Even though cartels are illegal in the United States, the U.S. government acceded to Alcoa's demands. The resulting cartel limited competition that might have hurt Alcoa's profits. With a cartel, every "country would be given certain quotas, amounts of aluminum they could produce or export," and the quotas were determined by the United States. Instead of learning how to create a fair and well-run free-market economy, Russia learned that the way to succeed "in market economics was to go to the government" and engage in "crony capitalism," or protection of domestic industries.

National Security for Sale

U.S. special interests also dominated aspects of national security policy. A U.S.-Russian agreement commonly known as "swords to plowshares" stated that the United States would buy used uranium from Russia's deactivated nuclear warheads through a U.S. government enterprise called the United States Enrichment Corporation (USEC). The benefits were clear: fewer nuclear bombs in the world and an influx of cash into the Russian economy. Incredibly, "fair trade laws were again invoked to impede this transfer" of Russian uranium to the United States. American uranium mining interests claimed that the deal was a form of dumping by Russia that would harm the U.S. industry. The charge of dumping was so preposterous that the Department of Commerce and the U.S. Trade Representative urged Congress to change the dumping law. But the Trade Representative ultimately undermined the effort, and the law was never changed.

After this defeat, it was proposed that the USEC be privatized to become a monopoly company in the buying and selling of uranium to U.S. nuclear power plants but also to the Department of Defense for use in atomic bombs. Many economists vehemently opposed such privatization, pointing out that a privatized USEC would most likely refuse to take in depleted Russian uranium in order to protect the American uranium industry. If that happened, Russian uranium might be sold off to rogue states, terrorist organizations, or other unsavory actors who offered to pay Russia the cash it sorely needed. Although the USEC swore that it would never refuse to take Russian uranium, a secret document came to light showing that the USEC had already turned down shipments of Russian uranium and had paid a handsome amount of "hush money" to keep the refusal under wraps. Despite these alarming disclosures, the U.S. Treasury continued to support the privatization of the USEC. The privatized company was beset with problems in its importation of Russian uranium.

Lessons For Russia

What the Russians learned from all this was that "shock therapy" liberalization was fine for them as long as it turned their economy into one that adhered to free-market fundamentalism. But when it came to Western economies, protectionism was the rule in any situation that might challenge an American industry with unwanted competition. The nonsensical operative principle for the United States seemed to be "trade is good, but imports are bad." Competition is prescribed for weaker economies but not for dominant ones with the power to block it. The IMF and U.S. Treasury used their power and influence to force liberalization on Russia and then used this same power to ensure protectionism for U.S. industries.

Analysis

The IMF's policies were biased toward Western interests and resulted in inequity. The self-interested double standard that Western nations used to protect their domestic industries is explained here in light of U.S. engagement in Russia's transition economy. Hypocrisy seems too often to be the guiding principle when the IMF and the U.S. Treasury demand liberalization in transitional economies, as in Russia, while using distinctly anti-liberal protectionist policies, such as high tariffs on imports, to protect domestic industries.

Liberalization meant Russia was forced to open its markets to free trade and abolish all barriers to trade, such as tariffs and quotas. Yet, at the same time that the U.S. Treasury imposed these onerous and economically detrimental conditions on Russia, it used anti-liberal policies to protect its own important domestic industries.

Counter to the dictates of the Washington Consensus, the U.S. government instituted protectionist policies to shield the interests of the American aluminum industry. To achieve this, Russia was wrongfully accused of dumping its aluminum on the global market at below-cost prices, even though it was clear that its aluminum was priced above cost and in line with global prices. The United States broke its own law against creating cartels in order to protect Alcoa Aluminum. Although the U.S. Treasury had been at the forefront in demanding liberalization in Russia, it hypocritically abandoned liberalization principles when it came to limiting competition from Russia that might put a dent in the profits of the U.S. aluminum industry. The Treasury preached liberalization for weak economies but practiced protectionism for powerful U.S. industries.

The same type of hypocrisy was evident when the U.S. government privatized the USEC. In this case, privatization not only undermined a peace agreement with Russia (swords to plowshares) but also exposed the entire planet to the potential terrorist deployment of nuclear weapons. The USEC was privatized after the American uranium mining industry complained that importing Russia's spent nuclear fuel might nip at its bottom line. In fact, once it was privatized, the USEC tried (secretly) to refuse to accept Russia's spent uranium. It must even be considered that the United States gave little or no thought to the possibility that cash-strapped Russia might sell its spent uranium to questionable or dangerous entities. The USEC even engaged in corruption—paying hush money to cover up its refusal to take Russian uranium—to protect the U.S. uranium industry.

The IMF and U.S. Treasury remained deaf to pleas to allow the Russians to debate alternatives to shock therapy and liberalization. Their commitment to the Washington Consensus was so absolute that they feared that open and democratic debate might yield a compromised alternative economic development strategy. That is why the IMF and the Treasury tolerated, perhaps even encouraged, the corruption that arose from rapid privatization in Russia. The resistance to open debate clearly undermined the democratic process in Russia. Although the IMF and the Treasury were motivated to enact shock therapy by fear of a communist resurgence, they worked nearly as fervently to suppress democratic dialogue and other types of democratic engagement among Russians concerned about their faltering economy.

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